Phillips 66 (NYSE:PSX)

The period under review demonstrates a consistent pattern of negative economic profit, although the magnitude of the loss appears to be decreasing. Net operating profit after taxes (NOPAT) exhibits an upward trend, while the cost of capital fluctuates and invested capital generally increases. These factors combine to produce the observed economic profit results.

NOPAT Trend

Net operating profit after taxes increased steadily from US$3,281 million in 2015 to US$5,344 million in 2019. This represents a substantial improvement in operational profitability over the five-year period. The largest year-over-year increase occurred between 2015 and 2016.

Cost of Capital Trend

The cost of capital experienced a slight decrease from 13.50% in 2015 to 12.69% in 2019. While there were minor fluctuations in intervening years (13.09% in 2016, 13.26% in 2017, and 13.35% in 2018), the overall trend indicates a modest reduction in the required rate of return.

Invested Capital Trend

Invested capital generally increased over the period, rising from US$42,469 million in 2015 to US$50,827 million in 2019. There was a slight decrease between 2017 and 2018, but the overall trajectory is upward, suggesting continued investment in the business. The largest increase occurred between 2018 and 2019.

Economic Profit Trend

Economic profit remained negative throughout the analyzed period, ranging from a loss of US$2,454 million in 2015 to a loss of US$1,105 million in 2019. However, the magnitude of the loss diminished each year, indicating that the company’s operational performance is gradually approaching the level required to cover its cost of capital. The largest reduction in the economic loss occurred between 2015 and 2016.

Despite the increasing NOPAT, the substantial invested capital base and the relatively high cost of capital continue to result in negative economic profit. The decreasing trend in economic loss suggests improving efficiency in capital allocation or enhanced operational performance, but further improvement is needed to generate positive economic profit.

The financial data reveals distinct trends in net income and net operating profit after taxes (NOPAT) over the five-year period.

Net Income Attributable to Phillips 66

Net income experienced significant volatility throughout the period. Starting at US$4,227 million in 2015, net income decreased sharply to US$1,555 million in 2016, representing a notable decline. However, in the following years, net income rebounded strongly, rising to US$5,106 million in 2017 and further increasing to US$5,595 million in 2018. In 2019, net income declined again to US$3,076 million. This pattern indicates fluctuating profitability with considerable short-term variations.

Net Operating Profit After Taxes (NOPAT)

NOPAT shows a more consistent upward trend over the same period. Beginning at US$3,281 million in 2015, NOPAT increased steadily to US$4,480 million in 2016, US$4,664 million in 2017, US$5,129 million in 2018, and finally US$5,344 million in 2019. This gradual growth suggests improving core operational efficiency and profitability despite the fluctuations in net income.

In summary, while net income experienced notable fluctuations, particularly with a steep drop in 2016 followed by a peak in 2018, NOPAT demonstrated a steady and gradual improvement throughout the period. This contrast may indicate effects from non-operational factors influencing net income, whereas operating performance exhibited consistent enhancement.

The financial data reveals considerable fluctuations in both income tax expense (benefit) and cash operating taxes over the five-year period.

Income Tax Expense (Benefit)

There is a notable volatility in income tax expense figures, beginning with a high expense of 1,764 million USD in 2015, dropping sharply to 547 million USD in 2016. In 2017, the data shows a significant income tax benefit reflected by a negative value of -1,693 million USD. This is followed by a rebound to a positive expense of 1,572 million USD in 2018, before declining again to 801 million USD in 2019. This pattern indicates substantial variability, which could be due to changes in taxable income, tax rate adjustments, or extraordinary tax items within the company’s operational framework.

Cash Operating Taxes

The cash operating taxes also display considerable variation. The taxes paid almost drop from 1,407 million USD in 2015 to just 70 million USD in 2016, then rise to 363 million USD in 2017. A sharp increase occurs in 2018 to 1,429 million USD, followed by a decrease to 716 million USD in 2019. This trend, although somewhat aligned with the income tax expense, suggests fluctuating cash outflows related to tax operations, potentially reflecting changes in operational profitability, deferred tax payments, or differences between cash and accounting tax treatments.

Overall, the data suggests a highly dynamic tax position with considerable year-to-year changes. The negative income tax figure in 2017 particularly stands out as an anomaly, indicating either a tax benefit or adjustment that significantly reduced the tax expense for that year. The disparity between cash operating taxes and income tax expense in some years also implies timing differences between recorded tax expense and actual tax payments.

Total reported debt & leases

The total reported debt and leases show a continuous upward trend from 2015 through 2019. The value increased steadily each year from $10,643 million in 2015 to $13,024 million in 2019, indicating a rise in the company’s financial obligations over the period.

Stockholders’ equity

Stockholders' equity experienced fluctuations during the period. It decreased slightly from $23,100 million in 2015 to $22,390 million in 2016, then increased to a peak of $25,085 million in 2017. This was followed by a marginal decline in 2018 and a minor recovery in 2019, ending at $24,910 million. Overall, equity remained relatively stable with modest variations.

Invested capital

Invested capital showed a consistent growth trend over the five years. Beginning at $42,469 million in 2015, it rose each year and reached $50,827 million in 2019. This increase suggests ongoing capital investment and expansion activities.

The period between 2015 and 2019 demonstrates a consistent pattern of negative economic profit, alongside increasing invested capital. This results in a negative economic spread ratio throughout the observed timeframe, though the magnitude of the negative spread diminishes over the years.

Economic Profit

Economic profit consistently registers as negative across all five years. The negative economic profit decreased from US$2,454 million in 2015 to US$1,105 million in 2019. While still representing a loss in economic value creation, the reduction in the absolute value of the loss suggests improving performance relative to the cost of capital.

Invested Capital

Invested capital exhibits an upward trend, increasing from US$42,469 million in 2015 to US$50,827 million in 2019. This indicates a continued investment in the business, despite the consistent negative economic profit. The increase in invested capital may be contributing to the initial larger negative economic profit values, but the decreasing negative economic profit suggests that these investments are becoming more efficient.

Economic Spread Ratio

The economic spread ratio is negative for each year, ranging from -5.78% in 2015 to -2.17% in 2019. This indicates that the company’s return on invested capital is less than its weighted average cost of capital. However, the ratio demonstrates a clear improving trend, moving from -5.78% to -2.17% over the period. This improvement suggests that the company is gradually becoming more efficient at deploying capital and generating returns, narrowing the gap between returns and the cost of capital.

In summary, while the company consistently failed to generate positive economic profit during this period, the trend suggests a gradual improvement in its ability to create value. The increasing invested capital is coupled with a diminishing negative economic spread, indicating a potential positive shift in the efficiency of capital allocation.

The financial performance, as indicated by economic profit and its associated margin, demonstrates a pattern of negative economic profit over the five-year period from 2015 to 2019. However, the magnitude of the economic loss appears to be decreasing over time.

Economic Profit

Economic profit consistently registers as a negative value throughout the observed period, ranging from a loss of US$2,454 million in 2015 to a loss of US$1,105 million in 2019. While negative, the absolute value of the loss diminishes each year, suggesting improving profitability relative to the cost of capital. The largest decrease in the economic loss occurred between 2015 and 2016, followed by a more gradual reduction in subsequent years.

Sales and Other Operating Revenues

Sales and other operating revenues experienced volatility during the period. A decrease is observed from US$98,975 million in 2015 to US$84,279 million in 2016. Revenues then increased to US$102,354 million in 2017 and peaked at US$111,461 million in 2018 before declining slightly to US$107,293 million in 2019. This revenue fluctuation does not directly correlate with the decreasing economic loss, indicating factors beyond revenue volume are influencing economic profit.

Economic Profit Margin

The economic profit margin, expressed as a percentage of sales, mirrors the trend in economic profit. It begins at -2.48% in 2015 and steadily improves to -1.03% in 2019. This upward trend in the margin suggests that the company is becoming more efficient at generating economic profit from each dollar of sales, despite still operating at an overall economic loss. The most significant improvement in the margin occurred between 2015 and 2016, aligning with the largest reduction in absolute economic loss. The rate of improvement in the margin slows in later years.

In summary, while the company consistently reports negative economic profit, the trend indicates a gradual improvement in economic profitability as evidenced by the decreasing economic loss and the increasing economic profit margin. This suggests that management initiatives or external factors are positively impacting the company’s ability to generate returns exceeding its cost of capital, even if absolute economic profit remains negative.