Phillips 66 Takes Action to Ensure Security of Its Dividend
On March 24, Phillips 66 (PSX) announced its response to the challenging business environment caused by extreme volatility in energy markets and the coronavirus pandemic. Despite facing industry conditions that are worse than the last down cycle in 2016, the firm's dividend remains a priority:
"We are taking action to maintain our financial strength to ensure security of our dividend..." – CEO Greg Garland
Management expects EBITDA to be in a range of $3 billion to $4 billion this year, below the $4 billion trough it experienced in 2016. In response, the company plans to reduce its capital spending by $700 million to $3.1 billion, and $500 million of cost savings initiatives are planned.
Free cash flow still won't cover the $1.6 billion dividend commitment, but the shortfall could be worse. Phillips 66 is content using some of its balance sheet capacity to plug the hole until industry conditions improve.
"We've got adequate capacity to be able to [add debt] without having a detrimental impact around our credit ratings. Our typical leverage target that we talk about, that sort of 30% debt-to-cap ratio, we will go beyond that...But it never was a hard target. It's a level we're very comfortable being at. And we'd expect that once we come through the other side of this, we'd get the balance sheet back to the kind of condition that it was before the start, and we'd be back at our sort of targeted leverage levels."
Phillips 66's refining operations face the most pressure right now. In the U.S., management says gasoline demand has already fallen 20% to 30%, and in certain European countries demand destruction is running as high as 70% due to government isolation procedures. Diesel fuel is holding up better with all of the trucks rushing to deliver goods for grocery stores and online retailers.
The company's gas stations and midstream businesses have provided some stability to Phillips 66's overall cash flow and credit quality during this volatile period. The firm also maintains over $5.5 billion of borrowing capacity to go along with its $900 million of cash, making for a strong liquidity position.
Phillips 66 will wrap up most of its big projects this year as well, providing additional financial flexibility next year if adverse industry conditions persist.
Overall, as we wrote in our note on March 21, Phillips 66's diversified operations and balance sheet seem likely to continue supporting its dividend.
