Phillips 66 (NYSE:PSX) Shale Oil Profits

Written By Jason Stutman

Posted May 28, 2013

The holding company announced first-quarter earnings of $1.4 billion on Wednesday. Its first quarter earnings last year were less than half of that. Shares are currently up 108% from one year ago.

Phillips 66 is composed of three divisions including a refining division, a chemical division, and a midstream unit. Both refining and chemical divisions have seen an increase in earnings from the first-quarter of 2012.

The refining division has been the most profitable by far, earning $909 million in the first quarter of 2013. That’s an increase of $455 million in just twelve months. The chemical division is also thriving with earnings up to $282 million from $217 million in a year.

The major components driving these numbers are shale oil and shale gas. Low cost oil and gas have had a positive impact on gasoline refineries and petrochemical plants. Phillips 66 has seen increased earnings in these two divisions as a result.

The oil gap is closing

Development in the Bakken, Eagle Ford, and Marcellus formations has allowed Phillips 66 to ween itself off foreign crude by providing a cheap domestic alternative.

In 2011, Phillips 66 refined 48 percent of its oil from Brent, a crude oil produced in the North Sea. Today, Brent only accounts for 32 percent of the oil at the company’s refineries.

The remaining oil being refined today is composed mainly of West Texas Intermediate. This domestic alternative has in recent years become cheaper than Brent (up to $25 dollars less a barrel).

And the cost could get lower.

The growth of East Coast refineries has been limited, because oil production in the Mid-West has drastically outpaced the ability to transport it. However, the industry has begun to work out the logistics, allowing the East Coast to import at higher rates.

Currently, the East Coast receives 300 thousand barrels a day from the Bakken. That number is predicted to multiply to 800 thousand.

Phillips 66 currently imports between 80 and 90 thousand barrels from the Bakken to the East Coast daily, as opposed to none last year. The company recently signed a five year deal with Global Partners LP (NYSE: GLP) in January, adding 50 thousand barrels of Bakken oil every day. It is also building an offloading facility that would accommodate 100 rail cars per day, each holding 750 barrels,

In addition to changes in transport, Phillips 66 has also responded to the need of increased storage. The company recently added two large coke drums to the New Jersey Bayway refinery and announced its intent to add domestic shale oil.

Cheap LNG

Phillips 66 also directly benefits from the shale boom because of its chemical division. Shale formations contain liquefied natural gases (LNG) that are used in the production of petrochemically produced plastics.

The abundance of shale gas in the U.S. has driven down production costs and companies like Phillips 66 are reaping the benefits.

If you would like to learn more about the connection between the chemical and shale gas industries, I talk a little more about that here.

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