Phillips 66 (NYSE:PSX)

The period under review demonstrates a consistent pattern of negative economic profit. While net operating profit after taxes (NOPAT) increased over the five years, it has not been sufficient to overcome the cost of capital applied to the invested capital base.

NOPAT Trend

Net operating profit after taxes exhibited an upward trend, increasing from US$3,281 million in 2015 to US$5,344 million in 2019. The largest year-over-year increase occurred between 2015 and 2016, with a gain of US$1,199 million. Subsequent increases were more moderate.

Cost of Capital Trend

The cost of capital fluctuated modestly over the period. It began at 15.48% in 2015, decreased to 14.99% in 2016, and then generally increased to 15.27% in 2018 before declining to 14.49% in 2019. The variations were relatively small, suggesting a stable capital market environment for the company during this timeframe.

Invested Capital Trend

Invested capital generally increased throughout the period, rising from US$42,469 million in 2015 to US$50,827 million in 2019. A slight decrease was observed between 2017 and 2018, from US$49,009 million to US$48,544 million, but it resumed its upward trajectory in the final year.

Economic Profit Trend

Economic profit remained negative throughout the entire period, ranging from -US$3,293 million in 2015 to -US$2,020 million in 2019. Although the magnitude of the negative economic profit decreased each year, indicating improved performance relative to the cost of capital, the company consistently failed to generate returns exceeding its cost of capital. The largest reduction in negative economic profit occurred between 2015 and 2016, mirroring the substantial increase in NOPAT.

In summary, the company experienced growth in both NOPAT and invested capital. However, the cost of capital remained substantial enough to result in a consistent economic loss, despite the improvements in operational profitability. The narrowing of the economic loss suggests increasing efficiency in capital deployment, but further improvement is needed to achieve 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 with a notable trend towards improvement.

Economic Profit

Economic profit consistently registers as negative across all five years. The magnitude of the loss decreases over time, moving from a loss of US$3,293 million in 2015 to a loss of US$2,020 million in 2019. This indicates a reduction in the difference between the company’s return on invested capital and its cost of capital, though the company still destroys economic value each year.

Invested Capital

Invested capital exhibits a general upward trend, increasing from US$42,469 million in 2015 to US$50,827 million in 2019. There is a slight decrease observed between 2017 and 2018, but the overall trajectory is one of growth. This suggests continued investment in the business, despite the negative economic profit.

Economic Spread Ratio

The economic spread ratio is negative for each year, confirming that the company’s returns are not exceeding its cost of capital. However, the ratio improves steadily, moving from -7.75% in 2015 to -3.98% in 2019. This improvement aligns with the decreasing magnitude of the economic profit loss, suggesting that the company is becoming more efficient in its capital allocation or is benefiting from external factors that reduce its cost of capital relative to its returns.

In summary, while the company consistently generates negative economic profit, the trend indicates a gradual improvement in its economic spread ratio, driven by a reduction in the size of the economic loss and an increase in invested capital. Further investigation would be needed to determine the underlying drivers of these trends and assess the sustainability of the improving economic spread.

The period between 2015 and 2019 demonstrates a consistent pattern of negative economic profit, although the magnitude of the loss decreased over time. Simultaneously, sales and other operating revenues exhibited fluctuations, impacting the economic profit margin.

Economic Profit

Economic profit remained negative throughout the observed period, ranging from a loss of US$3,293 million in 2015 to a loss of US$2,020 million in 2019. The largest decrease in the loss occurred between 2016 and 2017, followed by a more moderate reduction between 2018 and 2019. This suggests improving efficiency in generating returns above the cost of capital, but continued underperformance relative to capital costs.

Sales and Other Operating Revenues

Sales experienced a decline from US$98,975 million in 2015 to US$84,279 million in 2016. A subsequent recovery was observed in 2017, with revenues reaching US$102,354 million. Revenues peaked in 2018 at US$111,461 million before decreasing slightly to US$107,293 million in 2019. These fluctuations in revenue likely influenced the economic profit figures.

Economic Profit Margin

The economic profit margin consistently registered as a negative percentage, indicating that the company’s returns were insufficient to cover its cost of capital. The margin improved from -3.33% in 2015 to -1.88% in 2019. This improvement aligns with the decreasing magnitude of the economic profit loss, suggesting a gradual increase in the efficiency of capital utilization. The most significant improvement in the margin occurred between 2015 and 2016, and again between 2017 and 2018, mirroring the trends in economic profit.

Overall, the trend indicates a gradual improvement in economic profitability, as evidenced by the decreasing economic profit and the increasing economic profit margin. However, the continued negative values suggest that the company still faces challenges in generating returns that exceed its cost of capital.