Core Viewpoint - The Zacks Oil and Gas - Refining & Marketing industry is evolving to balance reliable fossil fuel output with investments in cleaner, lower-carbon solutions, driven by government incentives and corporate demand, while U.S. refiners are increasing exports to capture margins and diversify revenue streams [1][3][4]. Industry Overview - The industry includes companies that sell refined petroleum products and non-energy materials, operating terminals, storage facilities, and transportation services. Refining margins are volatile and influenced by various factors including inventory levels, demand, and capacity utilization [2]. Trends Defining the Future - **Growing Role of Low-Carbon Solutions**: Refiners are investing in renewable diesel and sustainable aviation fuel, supported by government incentives and corporate demand, which positions them for long-term relevance in a decarbonizing economy [3]. - **Advantaged Export Opportunities**: U.S. refiners are leveraging strong international demand, particularly from Latin America and Europe, to export refined products, enhancing profitability and providing a hedge against domestic market fluctuations [4]. - **Margin Pressure from Volatile Prices**: The industry faces risks from fluctuating crude oil prices and inflationary cost pressures, which could impact earnings stability and shareholder returns [5]. Industry Outlook - The Zacks Oil and Gas - Refining & Marketing industry holds a Zacks Industry Rank of 56, placing it in the top 23% of 246 Zacks industries, indicating strong near-term prospects [6][7]. Performance Comparison - Over the past year, the industry has underperformed compared to the broader Zacks Oil - Energy Sector and the S&P 500, with a decline of 10.1% versus a decrease of 0.6% for the sector and a gain of 15.9% for the S&P 500 [9]. Current Valuation - The industry is currently trading at an EV/EBITDA ratio of 4.24X, significantly lower than the S&P 500's 17.60X and the sector's 4.92X, indicating a potential undervaluation [12]. Stocks in Focus - **Par Pacific Holdings**: Operates an integrated energy platform with a refining capacity of 219,000 barrels per day and a market cap of $1.5 billion, showing a projected earnings growth of 394.6% for 2025 [15][16]. - **Galp Energia**: A Portuguese company with a market cap of $13.1 billion, producing over 100,000 barrels of oil equivalent per day, and a four-quarter average earnings surprise of 47.2% [18][19]. - **Marathon Petroleum**: A leading independent refiner with a market cap of $50 billion, known for strong cash flow generation and shareholder returns, with a recent earnings estimate increase of 8.5% for 2025 [21][22]. - **Phillips 66**: One of the largest independent refiners with nearly 2 million barrels per day of refining capacity, expected EPS growth rate of 15.5% over three to five years [24][25].

Company Overview - Phillips 66 (PSX) is a leading U.S.-based refining company that has reduced gasoline production at its Bayway refinery in Linden, NJ due to a fire incident [1][8] - The Bayway refinery has a production capacity of 258,000 barrels per day and is one of the largest fuel suppliers on the U.S. East Coast [1] Incident Details - A fire broke out in ancillary equipment of the fluid catalytic cracking unit (FCCU) at the Bayway refinery, which is essential for converting heavy crude oil into lighter products like gasoline [2] - The exact cause of the fire is currently unknown, but it has led to a production outage at the refinery [2] - The refinery plans to address the issue and restore full production in the coming days [2][8] Historical Context - The Bayway refinery experienced production disruptions last month due to a power outage caused by heavy rainstorms, which temporarily increased prices for refined products at the New York Harbor [3] - Given the refinery's significant role in the U.S. East Coast fuel supply, the current outage may similarly lead to a temporary spike in prices, depending on the duration of the production disruption [3]

Company Overview - Phillips 66 is a large refining company with a market capitalization of $50 billion [2] Recent Developments - The company has successfully navigated a contentious battle with Elliot Management, which was advised to be ignored by analysts [2] Investment Strategy - The Value Portfolio focuses on building retirement portfolios using a fact-based research strategy that includes extensive analysis of 10Ks, analyst commentary, market reports, and investor presentations [2]

Core Viewpoint - Phillips 66 has underperformed in the stock market over the past year due to challenges in its refining cycle and difficulties in its chemicals unit, resulting in a significant decline in share value [1]. Company Performance - Shares of Phillips 66 are down significantly over the past year, indicating poor performance in the market [1]. Industry Challenges - The company is facing a difficult refining cycle, which has negatively impacted its operations and financial performance [1]. - Challenges in the chemicals unit have also contributed to the overall decline in share value [1].

Refiners Investment Strategy - The company is increasing exposure to refiners due to a seasonally strong period and the outperformance of reformulated gasoline and heating oil relative to crude oil [1][2] - Investment is spread across three refiner names: Phillips (PSX), Marathon Petroleum (MPC), and Valero (VLOO) to avoid isolating risk to a single company [3] Market Performance - Crude oil is down 5% year-to-date, while reformulated gasoline and heating oil prices are higher [2] - Baker Hughes' target price was raised by Morgan Stanley by $10, from $45 to $55 [3] - Baker Hughes is up 11% year-to-date [3] Baker Hughes' Strategy - Baker Hughes made an acquisition with Chart Industries to increase exposure to data centers and LNG [4] - Baker Hughes is diversifying away from oil and moving towards electricity [4]

[Part I – Financial Information](index=3&type=section&id=Part%20I%20%E2%80%93%20Financial%20Information) This section provides a comprehensive overview of the company's financial performance, position, and cash flows [Financial Statements](index=3&type=section&id=Item%201.%20Financial%20Statements) The company's financial statements for Q2 2025 show decreased net income and revenues, increased assets, and reduced operating cash flow Consolidated Income Statement Highlights (Q2 2025 vs Q2 2024) | Metric | Q2 2025 (Millions) | Q2 2024 (Millions) | Change (%) | | :--- | :--- | :--- | :--- | | Sales and other operating revenues | $33,323 | $38,129 | -12.6 | | Net Income Attributable to Phillips 66 | $877 | $1,015 | -13.6 | | Diluted EPS | $2.15 | $2.38 | -9.7 | Consolidated Balance Sheet Highlights (As of June 30, 2025) | Metric | June 30, 2025 (Millions) | Dec 31, 2024 (Millions) | Change (%) | | :--- | :--- | :--- | :--- | | Total Current Assets | $21,076 | $17,910 | +17.7 | | Total Assets | $75,942 | $72,582 | +4.6 | | Total Current Liabilities | $19,685 | $15,087 | +30.5 | | Long-term debt | $17,200 | $18,231 | -5.7 | | Total Equity | $28,627 | $28,463 | +0.6 | Consolidated Cash Flow Highlights (Six Months Ended June 30) | Metric | 2025 (Millions) | 2024 (Millions) | Change (%) | | :--- | :--- | :--- | :--- | | Net Cash Provided by Operating Activities | $1,032 | $1,861 | -44.5 | | Net Cash Used in Investing Activities | ($1,143) | ($338) | +238.2 | | Net Cash Used in Financing Activities | ($523) | ($2,389) | -78.1 | [Notes to Consolidated Financial Statements](index=11&type=section&id=Notes%20to%20Consolidated%20Financial%20Statements) Notes detail significant events including refinery idling, major acquisitions and divestitures, and a substantial litigation accrual - The company announced the intention to cease operations at its Los Angeles Refinery in Q4 2025, resulting in accelerated depreciation of **$239 million** and **$485 million** for the three and six months ended June 30, 2025, respectively[23](index=23&type=chunk) - On April 1, 2025, the company acquired Coastal Bend, a midstream business, for **$2.2 billion**, net of cash acquired[24](index=24&type=chunk) - On January 31, 2025, the company sold its 49% interest in Coop Mineraloel AG, receiving cash proceeds of **$1.2 billion** and recognizing a before-tax gain of **$1 billion**[48](index=48&type=chunk) - A definitive agreement was signed to divest a 65% equity interest in the Germany and Austria retail marketing business for expected pre-tax cash proceeds of approximately **$1.6 billion**[140](index=140&type=chunk)[141](index=141&type=chunk) - As a result of a jury verdict in the Propel Fuels litigation, the company recorded an accrual of **$604.9 million** in Q3 2024[83](index=83&type=chunk) [Management's Discussion and Analysis of Financial Condition and Results of Operations](index=43&type=section&id=Item%202.%20Management%27s%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Q2 2025 earnings decreased due to specific factors, while management focuses on strategic priorities including shareholder returns and business growth [Executive Overview and Business Environment](index=43&type=section&id=EXECUTIVE%20OVERVIEW%20AND%20BUSINESS%20ENVIRONMENT) Q2 2025 earnings and cash flow reported, with strategic priorities focusing on shareholder returns and business growth amidst mixed market conditions - The company's financial target aims to return greater than **50%** of net cash provided by operating activities to shareholders through dividends and share repurchases[151](index=151&type=chunk) - Strategic priorities include enhancing Refining segment returns and growing Midstream and Chemicals businesses, with a budgeted 2025 capital expenditure of **$2.1 billion** (excluding acquisitions)[150](index=150&type=chunk)[151](index=151&type=chunk) - Key market conditions in Q2 2025 included a decrease in the benchmark high-density polyethylene chain margin from **18.3** to **7.4 cents per pound** YoY, while the composite 3:2:1 market crack spread increased from **$18.96** to **$21.65 per barrel** YoY[155](index=155&type=chunk)[156](index=156&type=chunk) [Results of Operations](index=47&type=section&id=RESULTS%20OF%20OPERATIONS) Q2 2025 consolidated net income decreased due to lower Chemicals earnings and accelerated depreciation, partially offset by stronger Marketing and Refining results Income (Loss) Before Income Taxes by Segment (Q2 2025 vs Q2 2024) | Segment | Q2 2025 (Millions) | Q2 2024 (Millions) | Change (Millions) | | :--- | :--- | :--- | :--- | | Midstream | $731 | $767 | ($36) | | Chemicals | $20 | $222 | ($202) | | Refining | $359 | $302 | $57 | | Marketing and Specialties | $571 | $415 | $156 | | Renewable Fuels | ($133) | ($55) | ($78) | | Corporate and Other | ($428) | ($340) | ($88) | | **Total** | **$1,120** | **$1,311** | **($191)** | - The Midstream NGL business results increased by **$269 million** in Q2 2025, primarily due to the absence of a 2024 impairment charge and contributions from newly acquired Coastal Bend operations[181](index=181&type=chunk) - The Chemicals segment's income plummeted by **$202 million** in Q2 2025, driven by lower polyethylene margins due to decreased sales prices and higher feedstock costs[184](index=184&type=chunk) - The Refining segment's income increased by **$57 million** in Q2 2025, driven by improved realized margins and higher volumes, despite accelerated depreciation for the Los Angeles Refinery[191](index=191&type=chunk) - The Marketing and Specialties segment's income for the first six months of 2025 increased by **$1,072 million**, primarily due to a **$1 billion** pre-tax gain on the sale of the company's investment in Coop[196](index=196&type=chunk) [Capital Resources and Liquidity](index=57&type=section&id=CAPITAL%20RESOURCES%20AND%20LIQUIDITY) As of June 30, 2025, the company maintained strong liquidity, funding acquisitions and shareholder returns with $1.1 billion cash and $3.7 billion credit Key Financial Indicators | Indicator | June 30, 2025 (Millions) | Dec 31, 2024 (Millions) | | :--- | :--- | :--- | | Cash and cash equivalents | $1,052 | $1,738 | | Total debt | $20,935 | $20,062 | | Total equity | $28,627 | $28,463 | | Percent of total debt to capital | 42% | 41% | - In H1 2025, the company funded a **$2.2 billion** acquisition (Coastal Bend), paid **$956 million** in dividends, and repurchased **$666 million** of common stock[205](index=205&type=chunk)[237](index=237&type=chunk)[239](index=239&type=chunk) - The company amended its Accounts Receivable Securitization Facility, increasing its size from **$500 million** to **$1 billion**, which was fully utilized as of June 30, 2025[211](index=211&type=chunk)[213](index=213&type=chunk) Capital Expenditures and Investments (Six Months Ended June 30, 2025) | Segment | Capital Spending (Millions) | | :--- | :--- | | Midstream | $600 | | Refining | $324 | | Marketing and Specialties | $49 | | Renewable Fuels | $18 | | Corporate and Other | $19 | | **Total** | **$1,010** | [Quantitative and Qualitative Disclosures About Market Risk](index=78&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) The company states that its commodity price risk and interest rate risk at June 30, 2025, have not materially changed from prior disclosures - There were no material changes in commodity price risk or interest rate risk compared to the 2024 Annual Report[280](index=280&type=chunk) [Controls and Procedures](index=78&type=section&id=Item%204.%20Controls%20and%20Procedures) Management concluded that the company's disclosure controls and procedures were effective as of June 30, 2025, with no material changes in internal control over financial reporting - The Chairman and CEO, along with the EVP and CFO, concluded that the company's disclosure controls and procedures were effective as of June 30, 2025[281](index=281&type=chunk) - No changes in internal control over financial reporting occurred during the quarter that have materially affected, or are reasonably likely to materially affect, these controls[282](index=282&type=chunk) [Part II – Other Information](index=79&type=section&id=Part%20II%20%E2%80%93%20Other%20Information) This section provides updates on legal proceedings, risk factors, equity repurchases, and other general corporate information [Legal Proceedings](index=79&type=section&id=Item%201.%20Legal%20Proceedings) The company reported a new environmental enforcement action and material developments in the Propel Fuels litigation, including a significant jury verdict - A new enforcement action was commenced by the New Mexico Environment Department against DCP Operating Company, L.P. alleging violations at multiple gas plants and seeking a civil penalty over **$1 million**[287](index=287&type=chunk) - An update on the Propel Fuels litigation confirms a **$604.9 million** jury verdict and notes that motions for exemplary (treble) damages and for a new trial are expected to be ruled on in 2025[288](index=288&type=chunk) [Risk Factors](index=80&type=section&id=Item%201A.%20Risk%20Factors) The company reports that there have been no material changes from the risk factors previously disclosed in its 2024 Annual Report on Form 10-K - No material changes to risk factors were reported since the 2024 Annual Report on Form 10-K[291](index=291&type=chunk) [Issuer Purchases of Equity Securities](index=80&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) In Q2 2025, the company repurchased approximately 3.55 million shares for $395 million, with $2.85 billion remaining in the program Share Repurchases (Q2 2025) | Period | Total Shares Purchased | Average Price Paid per Share ($) | Total Cost (Approx. Millions) | | :--- | :--- | :--- | :--- | | April 2025 | 1,422,753 | $102.46 | $145.8 | | May 2025 | 1,136,882 | $114.89 | $130.6 | | June 2025 | 985,777 | $120.51 | $118.8 | | **Total** | **3,545,412** | **$111.46** | **$395.2** | - The company's share repurchase program, initiated in 2012, has an aggregate authorization of **$25 billion** and does not expire; as of June 30, 2025, approximately **$2.85 billion** remained available[292](index=292&type=chunk)[294](index=294&type=chunk) [Other Information](index=80&type=section&id=Item%205.%20Other%20Information) No directors or Section 16 officers adopted, modified, or terminated Rule 10b5-1 trading arrangements, and annual advisory votes on executive compensation will continue - No director or Section 16 officer entered into or modified a Rule 10b5-1 trading plan during the quarter ended June 30, 2025[295](index=295&type=chunk) - Following the 2025 Annual Meeting, the company will hold advisory votes on named executive compensation annually[296](index=296&type=chunk)

Core Viewpoint - Phillips 66 is maximizing its diesel production capacity to meet strong demand [1] Group 1 - The company may consider investing in multiple projects to enhance the flexibility of its refineries in adapting to changes in consumption patterns [1]

Core Insights - Phillips 66 (PSX) reported second-quarter 2025 adjusted earnings of $2.38 per share, exceeding the Zacks Consensus Estimate of $1.66, and improved from $2.31 in the same quarter last year [1] - Total quarterly revenues reached $33.5 billion, surpassing the Zacks Consensus Estimate of $30.5 billion, although this represents a decline from $38.9 billion year-over-year [1] Financial Performance - The better-than-expected quarterly results were primarily driven by increased refining volumes and higher realized refining margins globally, despite lower contributions from the chemicals and midstream segments [2] - Total costs and expenses decreased to $32.4 billion from $37.6 billion in the prior year, while the projection was $27.3 billion [10] - The company generated $845 million of net cash from operations, down from $2,097 million in the year-ago period, with capital expenditures totaling $587 million and dividends paid out amounting to $487 million [11] Segmental Results - **Midstream**: Adjusted pre-tax earnings were $731 million, down from $753 million year-over-year but exceeded the estimate of $305.1 million, affected by lower transportation volumes and property taxes [3] - **Chemicals**: Adjusted pre-tax earnings fell to $20 million from $222 million in the prior year, missing the estimate of $198.3 million due to lower margins from decreased sales prices [4] - **Refining**: Adjusted pre-tax earnings increased to $392 million from $302 million year-over-year, surpassing the estimate of $303.2 million, attributed to higher refining margins and volumes [5] - **Marketing & Specialties**: Adjusted pre-tax earnings rose to $660 million from $415 million, beating the projection of $345.6 million, driven by higher marketing fuel margins [7] - **Renewable Fuels**: The segment reported an adjusted pre-tax loss of $133 million, wider than the $55 million loss in the prior year, and missing the projected earnings of $3.4 million [8] Refining Margins - Realized refining margins increased to $11.25 per barrel from $10.01 year-over-year, with notable increases in the Central Corridor and Gulf Coast [6] Financial Condition - As of June 30, 2025, cash and cash equivalents stood at $1.1 billion, with total debt at $20.9 billion, reflecting a debt-to-capitalization ratio of 42% [11]

Financial Data and Key Metrics Changes - The second quarter reported earnings were $877 million or $2.15 per share, with adjusted earnings of $973 million or $2.38 per share, reflecting a significant recovery from a prior quarter's adjusted loss of $368 million [15][17] - Operating cash flow was $845 million, with cash flow excluding working capital at $1.9 billion, indicating strong operational performance [16][18] - Net debt to capital ratio stood at 41%, influenced by the acquisition of Coastal Bend assets for $2.2 billion [16] Business Line Data and Key Metrics Changes - Refining assets operated at 98% utilization, the highest since 2018, with clean product yield exceeding 86% and market capture at 99% [7][9] - Midstream generated adjusted EBITDA of approximately $1 billion, on track to meet the $4.5 billion annual EBITDA target by 2027 [7][12] - Marketing and Specialties reported its strongest quarter since 2022, contributing to a robust capital allocation framework [8][17] Market Data and Key Metrics Changes - Year-to-date market capture improved by 5% compared to the first half of the previous year, with the second quarter PSX market indicator just over $11 per barrel [10][17] - The organization expects the global O&P utilization rate in Chemicals to be in the mid-90s, while worldwide crude utilization is anticipated to be in the low to mid-90s [19] Company Strategy and Development Direction - The company remains focused on enhancing refining competitiveness, driving organic growth in midstream, reducing debt, and returning over 50% of net operating cash flow to shareholders [13][14] - Strategic investments include the acquisition of Coastal Bend and capacity expansion projects, aimed at enhancing midstream returns [12][14] - The management emphasizes a culture of continuous improvement and operational excellence to drive long-term shareholder value [11][13] Management's Comments on Operating Environment and Future Outlook - Management expressed confidence in capturing market opportunities and achieving strategic priorities by 2027, despite challenges in the chemicals segment [6][14] - The company anticipates a strong margin environment in refining, supported by low U.S. inventories and seasonal demand [61][93] - Management acknowledged the need to adapt operations in renewable fuels due to regulatory changes and weak margins, while also exploring opportunities for profitability [78][80] Other Important Information - The company returned over $900 million to shareholders in the quarter, demonstrating a commitment to shareholder returns [8][16] - The addition of three new Board members is expected to enhance strategic discussions and decision-making processes [14] Q&A Session Summary Question: Strategy after recent shareholder engagement - Management remains committed to the integrated company strategy, with ongoing evaluations of strategic alternatives to maximize shareholder value [22][23] Question: Debt levels and mid-cycle assumptions - Current debt levels are viewed as manageable, with plans to reduce debt through operational cash flow and asset dispositions [33][34] Question: Refining performance improvements - The significant quarter-over-quarter improvement in refining was attributed to disciplined focus on clean product yield and utilization rates [39][40] Question: Chemicals and renewable fuels outlook - Chemicals are expected to recover as market conditions stabilize, while renewable fuels face challenges but are being strategically managed [72][78] Question: Midstream exposure to Permian growth - The company maintains confidence in its midstream volumes, supported by a robust contract portfolio and ongoing expansion projects [86][87] Question: Operating synergies and market conditions - Operating synergies are generally stable, with opportunities for improvement in various market environments [88][90]

Financial Data and Key Metrics Changes - Second quarter reported earnings were $877 million or $2.15 per share, while adjusted earnings were $973 million or $2.38 per share, reflecting a significant recovery from a prior quarter's adjusted loss of $368 million [13][15] - Operating cash flow generated was $845 million, with cash flow excluding working capital at $1.9 billion [14][16] - Net debt to capital ratio stood at 41%, influenced by the acquisition of Coastal Bend assets for $2.2 billion [14] Business Line Data and Key Metrics Changes - Refining assets operated at 98% utilization, the highest since 2018, with clean product yield exceeding 86% [5][7] - Midstream generated adjusted EBITDA of approximately $1 billion, on track to meet the $4.5 billion annual EBITDA target by 2027 [5][10] - Marketing and Specialties reported its strongest quarter since 2022, contributing to a robust capital allocation framework [6][15] Market Data and Key Metrics Changes - Year-to-date market capture improved by 5% compared to the first half of the previous year, reaching 99% in the second quarter [8][15] - The second quarter PSX market indicator was just over $11 per barrel, with an estimated EBITDA increase of approximately $170 million for every dollar per barrel increase [8][15] Company Strategy and Development Direction - The company remains focused on enhancing refining competitiveness, driving organic growth in midstream, reducing debt, and returning over 50% of net operating cash flow to shareholders [11][12] - Strategic investments include the acquisition of Coastal Bend and capacity expansion projects aimed at growing Midstream EBITDA [10][11] Management's Comments on Operating Environment and Future Outlook - Management expressed confidence in the company's ability to capture market opportunities and improve performance despite external challenges [4][22] - The outlook for refining remains positive, with expectations of strong margins driven by tight distillate markets and seasonal demand [90] Other Important Information - The company plans to reduce turnaround expenses by $100 million for the full year, reflecting improved execution and planning [18][110] - New board members have been onboarded to enhance strategic discussions and shareholder value creation [12] Q&A Session Summary Question: Strategy after recent shareholder engagement - Management remains committed to the integrated company strategy, with ongoing evaluations of strategic alternatives to maximize shareholder value [21][24] Question: Debt levels and mid-cycle conditions - Current debt levels are viewed as manageable, with plans to reduce debt through operational cash flow and asset dispositions [31][62] Question: Refining performance drivers - The significant quarter-over-quarter improvement in refining was attributed to higher utilization rates and disciplined operational focus [36][38] Question: Chemicals and renewable fuels outlook - Chemicals faced challenges due to tariffs, but long-term outlook remains positive; renewable fuels are running at reduced rates due to weak margins [70][74] Question: Midstream growth and integration - The company is confident in its midstream growth outlook, supported by contracted third-party volumes and ongoing integration efforts [82][83]