Phillips 66’s SWOT analysis: midstream growth fuels stock potential

Phillips 66 (NYSE:PSX), a prominent player in the U.S. downstream energy sector with a market capitalization of $51 billion, is navigating a complex landscape of opportunities and challenges as it pursues a strategic transformation. The company’s diverse portfolio, spanning refining, marketing, midstream, chemicals, and renewable fuels, positions it uniquely in the market. According to InvestingPro analysis, PSX currently appears undervalued based on its comprehensive Fair Value model, suggesting potential upside for investors. Recent underperformance in certain segments and pressure from activist investors have put the spotlight on Phillips 66’s future direction, though the company maintains a FAIR financial health score of 2.35 out of 5 according to InvestingPro’s comprehensive assessment framework.

Company Overview and Recent Performance

Phillips 66, incorporated in Delaware in 2011 following a restructuring of ConocoPhillips (NYSE:COP), has established itself as a major force in the U.S. energy sector. The company’s operations are divided into several segments: Refining (29% of capital employed), Marketing and Specialties (14%), Midstream (41%), Chemicals (11%), and Renewable Fuels (5%).

In recent quarters, Phillips 66 has faced a mixed operating environment, generating substantial revenue of $137.77 billion in the last twelve months. The company’s refining segment is expected to see improvements in the second quarter of 2025, driven by better fundamentals. With the next earnings announcement scheduled for July 25, 2025, investors following InvestingPro will have access to detailed analysis and earnings forecasts to better navigate this crucial period. Analysts project an increase in adjusted EPS for Q2 2025 to $1.75, up from previous estimates of $1.54. This cautious optimism reflects the potential for stronger performance in the company’s core refining operations.

However, challenges persist in other segments. The chemicals division has been grappling with weak margins, which could dampen overall earnings. Additionally, the renewable fuels sector faces regulatory uncertainty, potentially impacting its performance in the near term.

Midstream Strategy and Acquisitions

A key focus of Phillips 66’s growth strategy has been the expansion of its midstream business. The company has made significant moves in this direction, including the acquisitions of DCP and EPIC, which enhance its midstream integration and support wellhead-to-market participation.

On January 6, 2025, Phillips 66 announced the acquisition of EPIC NGL, a strategic move that further solidifies its position in the midstream sector. The success of this strategy hinges on the company’s ability to compete for y-grade volumes in the face of increasing Permian NGL pipeline capacity.

Analysts project that these strategic moves could drive substantial growth in the midstream segment. Midstream adjusted EBITDA is expected to rise to $4 billion following the integration of the EPIC system. This expansion is part of a broader trend of growth for Phillips 66, with mid-cycle EBITDA projected to increase from $10 billion in 2022 to $15 billion in 2027.

Refining and Chemicals Segments

While the refining segment shows signs of improvement, it has faced challenges in recent quarters. Heavy refining turnaround activity and higher operating expenses, including increased natural gas costs, have offset some of the gains from improved refining indicators.

The chemicals segment, particularly the CPChem joint venture, has been a source of concern due to weak margins. Analysts note that deteriorating expectations for margin normalization in both chemicals and refining could impact investors’ outlook on the pace of improvement for Phillips 66.

Despite these challenges, the company is actively working to enhance its operational efficiency. Phillips 66 aims to reduce controllable costs per barrel from over $6.98/bbl in 2022 to $5.50/bbl by 2027. These cost-control measures, combined with improvements in refining capture rates, are expected to contribute to the projected doubling of EPS from 2025 to 2027.

Renewable Fuels and Sustainability

Phillips 66’s renewable fuels segment, while currently the smallest portion of its portfolio at 5% of capital employed, represents a growing area of focus for the company. However, this segment faces its own set of challenges, primarily related to regulatory uncertainty.

The renewable diesel (RD) market, in particular, has experienced headwinds that have impacted Phillips 66’s performance in this area. As the regulatory landscape continues to evolve, the company will need to navigate these challenges carefully to capitalize on the long-term potential of the renewable fuels market.

Investor Relations and Activist Involvement

Phillips 66 has recently found itself in the spotlight due to involvement from activist investor Elliott Management. In February 2025, Elliott addressed an open letter to Phillips 66’s board, advocating for the sale or spin-off of its midstream business to align its valuation with that of its integrated natural gas liquids (NGL) peers. The stock has shown resilience amid these developments, posting a year-to-date return of 11.93% while maintaining an attractive dividend yield of 3.83%.

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This activist pressure has added a layer of complexity to Phillips 66’s strategic decisions. While the potential for value unlocking through restructuring exists, analysts note that achieving a midstream valuation comparable to integrated NGL peers could be challenging given PSX’s current asset mix.

The situation with Elliott is anticipated to escalate leading up to the Annual General Meeting scheduled for May 21, 2025. This activist involvement has the potential to influence Phillips 66’s strategic direction and could be a source of both opportunity and uncertainty for investors.

Bear Case

How might ongoing chemical margin weakness impact PSX’s performance?

The persistent weakness in chemical margins poses a significant risk to Phillips 66’s overall financial performance. The chemicals segment, particularly the CPChem joint venture, has been underperforming due to margin compression. This weakness could continue to weigh on the company’s earnings, potentially offsetting gains made in other segments such as refining and midstream.

Analysts have expressed concerns about the deteriorating expectations for margin normalization in the chemicals sector. If this trend continues, it could delay the projected earnings growth and impact the company’s ability to meet its mid-cycle EBITDA targets. The chemicals segment’s underperformance may also affect investor confidence in Phillips 66’s diversified business model, potentially leading to a valuation discount compared to more focused peers.

What risks does PSX face from regulatory uncertainty in renewable fuels?

The renewable fuels segment, while a small but growing part of Phillips 66’s portfolio, faces significant regulatory challenges. Uncertainty in the regulatory environment could impact the performance and growth potential of this segment, particularly in the renewable diesel (RD) market.

Regulatory changes or delays in policy implementation could affect the demand for renewable fuels and the economics of Phillips 66’s investments in this area. This uncertainty may lead to volatility in the segment’s performance and could require the company to adjust its strategy or capital allocation plans. Additionally, if regulatory headwinds persist, it could slow down the company’s efforts to diversify its portfolio and transition towards more sustainable energy sources, potentially impacting its long-term growth prospects and environmental, social, and governance (ESG) profile.

Bull Case

How could PSX’s midstream expansion strategy drive long-term growth?

Phillips 66’s aggressive expansion in the midstream sector, highlighted by the acquisitions of DCP and EPIC, positions the company for significant long-term growth. This strategy enhances the company’s integration across the energy value chain, from wellhead to market, potentially leading to improved operational efficiency and more stable cash flows.

The projected increase in midstream adjusted EBITDA to $4 billion following the EPIC system integration demonstrates the potential for substantial earnings growth in this segment. This expansion could provide a more balanced and diversified revenue stream, reducing the company’s reliance on more volatile refining margins.

Furthermore, the midstream focus aligns with broader industry trends towards natural gas and natural gas liquids, potentially positioning Phillips 66 to capitalize on the ongoing energy transition. If executed successfully, this strategy could lead to a re-rating of the company’s stock as investors recognize the value of its integrated midstream assets.

What potential benefits could arise from PSX’s operational improvements?

Phillips 66’s commitment to operational improvements, particularly in its refining segment, could yield significant benefits in the coming years. The company’s goal to reduce controllable costs per barrel from over $6.98/bbl in 2022 to $5.50/bbl by 2027 demonstrates a clear focus on efficiency and cost management.

These operational enhancements, combined with improvements in refining capture rates, are expected to contribute to a doubling of EPS from 2025 to 2027. Such significant earnings growth could drive stock appreciation and potentially lead to increased shareholder returns through dividends or share buybacks.

Moreover, improved operational efficiency could enhance Phillips 66’s competitiveness in the challenging refining market, potentially allowing the company to outperform peers during periods of margin pressure. This operational excellence could also provide a buffer against volatility in commodity prices and regulatory changes, contributing to more stable and predictable financial performance over the long term.

SWOT Analysis

Strengths:

• Diverse portfolio across refining, marketing, midstream, chemicals, and renewable fuels
• Strong and growing midstream assets
• Commitment to operational improvements and cost reduction
• Integrated model from wellhead to market

Weaknesses:

• High leverage raising concerns in uncertain macroeconomic environment
• Underperforming chemicals segment due to margin weakness
• Relatively small presence in renewable fuels compared to traditional segments

Opportunities:

• Expansion of midstream business through organic projects and acquisitions
• Potential for unlocking value through strategic restructuring
• Growth in renewable fuels sector as energy transition progresses
• Operational improvements driving significant earnings growth

Threats:

• Regulatory uncertainty in renewable fuels sector
• Pressure from activist investors potentially leading to strategic shifts
• Volatility in refining and chemical markets impacting profitability
• Increasing competition in Permian NGL pipeline capacity

Analysts Targets

• Barclays (LON:BARC): $127.00 (July 9th, 2025)
• Evercore ISI: $130.00 (June 18th, 2025)
• Piper Sandler: $130.00 (April 8th, 2025)
• Barclays: $106.00 (April 10th, 2025)
• Barclays: $115.00 (February 12th, 2025)

This analysis is based on information available up to July 18, 2025.

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