Phillips 66 (NYSE:PSX)

Between 2015 and 2019, the financial trajectory is characterized by a consistent growth in operational profitability, although the entity failed to achieve a positive economic profit throughout the period. While net operating profit increased steadily, the returns remained insufficient to cover the cost of the capital employed.

Net Operating Profit After Taxes (NOPAT)

A sustained upward trend is observed in NOPAT, which grew from 3,281 million US$ in 2015 to 5,344 million US$ in 2019. This represents a significant increase in the absolute operational earnings generated by the business over the five-year period.

Invested Capital and Cost of Capital

Invested capital experienced a general increase, rising from 42,469 million US$ in 2015 to 50,827 million US$ in 2019, despite a slight contraction in 2018. During this time, the cost of capital remained relatively stable, fluctuating within a narrow range between 14.46% and 15.45%. The stability of the cost of capital indicates a consistent hurdle rate that the company was required to exceed to create value.

Economic Profit Performance

Economic profit remained negative for the entire duration of the analysis, indicating that the company did not generate sufficient returns to cover its weighted average cost of capital. However, a trend of gradual improvement is evident; the economic loss narrowed from -3,280 million US$ in 2015 to -2,006 million US$ in 2019. This improvement is primarily attributed to the growth in NOPAT outpacing the growth in the capital charge.

The overall analysis indicates that while operational efficiency and profitability improved, the company continued to destroy shareholder value in economic terms. The narrowing of the economic profit deficit suggests a positive trajectory toward reaching a break-even point where operating returns equal the cost of capital.

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 financial performance from 2015 to 2019 is characterized by a consistent state of negative economic value added, although a clear trend toward improvement is evident across all primary metrics. While the company did not generate positive economic profit during this period, the magnitude of the losses decreased and the efficiency of capital utilization showed progressive recovery.

Economic Profit Trend

Economic profit remained negative throughout the five-year period, indicating that returns were insufficient to cover the cost of capital. However, a general reduction in losses is observed, moving from -3,280 million USD in 2015 to -2,006 million USD in 2019. A temporary fluctuation occurred in 2017, where losses widened to -2,765 million USD from the prior year's -2,435 million USD, before continuing to diminish through 2019.

Invested Capital Growth

Invested capital exhibited a general upward trajectory, expanding from 42,469 million USD in 2015 to 50,827 million USD in 2019. This growth was steady through 2017, followed by a slight contraction to 48,544 million USD in 2018, and a subsequent increase in the final year of the period.

Economic Spread Ratio Analysis

The economic spread ratio remained negative throughout the analyzed timeframe, confirming that the cost of capital consistently exceeded the return on invested capital. Despite this, a steady improvement is noted, as the ratio moved from -7.72% in 2015 to -3.95% in 2019. The narrowing of this negative spread indicates a gradual increase in the operational efficiency of the invested capital relative to its cost.

Economic profit remained consistently negative throughout the period from 2015 to 2019, indicating that the entity did not generate returns in excess of its cost of capital. However, a gradual recovery is evident as the annual economic loss narrowed from US$ 3,280 million in 2015 to US$ 2,006 million by the end of 2019.

Economic Profit Margin Analysis

A consistent upward trajectory is observed in the economic profit margin, which improved from -3.31% in 2015 to -1.87% in 2019. This steady progression suggests an incremental improvement in capital efficiency and a reduction in the rate of value destruction over the five-year duration.

Revenue Correlation

Sales and other operating revenues experienced significant volatility, decreasing to a period low of US$ 84,279 million in 2016 before peaking at US$ 111,461 million in 2018. Notably, the economic profit margin continued to improve even during years of revenue decline, such as 2016 and 2019, indicating that the margin recovery was driven by factors beyond simple top-line growth.

Value Generation Trend

Although the company failed to achieve a positive economic profit, the narrowing of the deficit demonstrates a trend toward economic break-even. The reduction of the negative margin by approximately 144 basis points between 2015 and 2019 reflects an ongoing optimization of the relationship between operating performance and the cost of invested capital.