TEXT-S&P rates Phillips 66 Co. 'BBB' with stable outlook
Dec. 3 - Overview
-- U.S.-based downstream energy company Phillips 66 Company (Phillips 66 Co.) is the subsidiary of Phillips 66 (BBB/Stable/A-2) and guarantees its debt.
-- We are assigning our BBB/Stable/A-2 corporate credit rating to Phillips 66 Co. based on a consolidated approach to the Phillips 66 entities.
-- The rating outlook is stable, reflecting our belief that Phillips 66 Co. has considerable resilience to weather difficult industry conditions. Rating Action On Dec. 3, 2012, Standard & Poor's Ratings Services assigned its BBB/Stable/A-2 corporate credit rating to Houston-based Phillips 66 Co. The rating outlook is stable. Rationale The rating on Phillips 66 Co. reflects Standard & Poor's assessment of the company's business risk profile as "satisfactory" and financial risk profile as "intermediate" (as our criteria define these terms), as well as its position as a large oil refining and marketing company with extensive midstream energy and chemical operations. We judge Phillips 66 Co.'s management and governance to be fair. Phillips 66 Co.'s business risk profile gets support from the company's large oil refining and marketingoperations and the resulting economies of scale. The company is geographically diverse in the U.S., and also has a significant presence in Europe. Its refineries have a high degree of complexity (that is, flexibility to process varied crude oil feedstocks) and it produces a relatively high value-added slate of finished products. In addition, Phillips 66 Co. has well-positioned midstream and petrochemicals operations, which it conducts primarily through its 50%-owned DCP Midstream LLC and Chevron Phillips Chemical Co. LLC joint ventures; these entities are pursuing significant organic growth opportunities. However, we view the refining sector as having significantly higher-than-average industry risk, given its exceptional degree of volatility and fixed- and working-capital intensity. Notwithstanding the relatively favorable market conditions at times over the past year, we view long-range industry fundamentals as difficult given persisting excess production capacity globally and a secular decline in demand for some key transportation fuel products in developed markets. While the best positioned of Phillips 66 Co.'s refineries are highly competitive, the overall quality of its operations is mixed, with some facilities being, in our view, candidates for divestiture or closure over the next few years. While we believe that Phillips 66 Co. will be able to further improve the operating performance of its refining assets, we expect opportunities for doing so will be mostly incremental in nature--in contrast to the recently completed coker and refinery expansion project at its Wood River, Ill., joint-venture facility, which should provide significant benefits. Phillips 66 Co.'s financial profile, which we view on a consolidated basis, affords it significant staying power in the face of the business risks, given the company's strong liquidity. We expect the company's initial debt-to-debt-plus-equity ratio will be a moderate 29% for 2012 on an adjusted basis--in line with similarly rated peers. Under the assumption that market conditions for the remainder of 2012 remain robust with a West Texas Intermediate price discount to Brent averaging about $15 per barrel and then moderating into next year as pipeline capacity to the U.S. Gulf Coast continues to ramp up, we anticipate Phillips 66 Co.'s adjusted funds from operations (FFO) to total debt to be about 40%, and debt-to-EBITDA to be less than 3x. While Phillips 66 Co.'s financial performance will likely vary widely over the course of the cycle, we expect the company to maintain positive adjusted net earnings and, at least, to fund capital spending (which we assume to total $1.2 billion to $1.4 billion in 2012 and about $1.5 billion in 2013) mainly through operating cash flow, even in trough-level market conditions. Liquidity We view Phillips 66 Co.'s liquidity as "strong" under our criteria, meaning that we believe liquidity sources will exceed uses by at least 1.5x over the next 12 months, and by at least 1x over the next 24 months. The "strong" descriptor also signifies that we believe liquidity sources would exceed liquidity uses even if forecast EBITDA declined by 30%. We believe cash on hand of about $4.4 billion as of Sept. 30, 2012, coupled with about $5 billion of borrowing availability under Phillips 66's $5.2 billion committed credit facilities, should be more than sufficient to fund working capital requirements, our assumed capital spending of $1.5 billion in 2013, $585 million in debt maturities, and about $625 million in dividends, even assuming little or no FFO. Phillips 66 Co. should have ample leeway under the financial covenants included in its credit agreements (the main such covenant stipulates maximum consolidated net debt-to-capitalization ratio of 60%). $2 billion of the holding company's debt initially is in the form of a three-year amortizing loan (meaning that near-term maturities will be material). If Phillips 66 Co.'s funding were to come under pressure, we assume that it could curtail its share repurchase program and reduce discretionary capital spending. Phillips 66 Co. may also be able to generate significant proceeds from certain possible asset sales, but it has as not yet entered into any such agreements. Outlook Our outlook on the company's rating is stable. Considering Phillips 66 Co.'s lack of a track record as an independent company, and given our concerns regarding its longer-range profit potential amid persisting difficult refining industry fundamentals, we currently view the likelihood of a rating upgrade as limited for the next year. However, we could consider an upgrade if the company can significantly increase the share of revenue contributed by more stable operations in its midstream and chemicals segments while maintaining debt to EBITDA below 2x. We also believe there is significant leeway in the current rating to sustain periods of subpar financial performance owing to cyclical factors, although we could reassess the rating if--contrary to our current expectations--we came to expect that the company's adjusted FFO to total debt would fall below 30%, or its unadjusted debt to EBITDA would rise above 3x for a sustained period. Related Criteria And Research
-- Criteria Methodology: Business Risk/Financial Risk Matrix Expanded, Sept. 18, 2012
-- Key Credit Factors: Criteria For Rating The Global Oil Refining Industry, Nov. 28, 2011
-- Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011
-- Principles Of Credit Ratings, Feb. 16, 2011
-- Corporate Ratings Criteria: Analytical Methodology, April 15, 2008 Ratings List New Rating Phillips 66 Co. Corp. credit rating BBB/Stable/A-2 Complete ratings information is available to subscribers of RatingsDirect on the Global Credit Portal at www.globalcreditportal.com. All ratings affected by this rating action can be found on Standard & Poor's public Web site at www.standardandpoors.com. Use the Ratings search box located in the left column. Primary Credit Analyst: Mark Habib, New York (1) 212-438-1000;
email@example.com Secondary Contact: Michael V Grande, New York (1) 212-438-1000;
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