Phillips 66

Phillips 66’s second-quarter 2026 earnings easily surpassed expectations on a combination of favorable market and strong operating performance. Results were strong across all segments, with meaningful sequential and year-over-year improvements, except in marketing.

Why it matters: Phillips 66's more diversified model means it has less leverage to strong refining markets like the current one than pure-play peers. However, it was still able to benefit while capitalizing further through strong operating performance. Strong cash flow will also help it achieve its debt targets ahead of schedule. Operating performance with utilization at 96% and operating cost of $5.57/bbl, nearing the $5.50/bbl 2027 target, and both trending in the right direction. Capture rates remained high at 98% during the quarter. Net debt fell to $16.5 billion, achieving its $17 billion target, for a net debt ratio of 33%. It is projected to fall below $16 billion by year-end, with a new potential target of $13.5-$14 billion.

The bottom line: Our fair value estimate of $160 and our narrow moat view are unchanged, leaving shares overvalued in our view. We think the currently strong margins will likely persist next year, but still see an eventual reversion to midcycle levels. Continued performance improvement and achievement of earnings growth targets outside refining should benefit Phillips 66 further, but that's baked into our valuation.

 

Bulls say: Currently high margins, driven by a supply shock due to global refining outages through Asia, the Middle East and Russia, paired with high turnarounds in 2027 and 2028, will persist for longer than thought. Furthermore, midcycle margins will be structurally higher as well given reliance on higher-cost refiners going forward and a bullish outlook for heavy sour crude discounts and persistently low global product inventories relative to resilient transportation fuel demand.

Combined with efforts to improve operations, lower costs, and increase nonrefining segment earnings, Phillips 66's will earn more at midcycle levels than the market expects, lifting share prices.

We are increasing our fair value estimate to $188 per share from $160 after updating our near-term crack spread deck with the latest market values, reflecting recent increases from disruptions related to the wars in Iran and between Russia and Ukraine. Our valuation remains anchored to a return to midcycle conditions from currently elevated levels by the end of our forecast, leaving our fair value well below current share prices.

Our fair value estimate corresponds to a forward enterprise value/EBITDA multiple of 5.3 times our 2026 EBITDA forecast of $19.2 billion. We derived it from a discounted cash flow analysis that values each segment's cash flows separately.

Our fair value estimate reflects our updated refining margin deck, which incorporates our long-term outlook for crude differentials. Our long-term outlook for the West Texas Intermediate/Brent differential is $5, and the Light Louisiana Sweet/Brent differential is $2. We assume long-term Gulf Coast refining margins of $15 and adjust capture rates to reflect asset quality and investment.

Given growth investments and recent acquisitions in the midstream segment, we expect earnings to increase over our forecast period.

For the chemical segment, we expect modest earnings growth over our forecast period from currently weak levels as market conditions improve to midcycle levels and as expansion projects are added. Stronger-than-midcycle market conditions could drive outperformance, while CPChem should benefit from continued relatively low-cost feedstock in the US.

Phillips 66 has one of the most geographically diverse portfolios among independent refiners. As a result, it can only partially capitalize on US crude discounts. However, it still maintains a sufficient feedstock advantage and benefits from relatively low US natural gas prices, which confer a cost advantage. Its chemical and midstream segments also hold competitive advantages and contribute to its moat. We forecast midcycle returns on capital of 12%, comfortably above its cost of capital. Thus, we assign Phillips 66 a Narrow Morningstar Economic Moat Rating.

The company's overall refining complexity of 10.6 is on par with its two larger peers. Its most complex facilities are in the Gulf Coast and Montana. Its midcontinent refineries can capitalize on discounted light domestic crude and discounted heavy Canadian crude. Its Gulf Coast facilities benefit from the increasing flow of light and heavy crude to the region, giving it greater flexibility and the opportunity to capture crude differentials in changing market conditions.

Its other refineries have less access to advantaged feedstocks and realize higher costs. Narrower discounts for inland crude have reduced the East and West Coast opportunities to rail and barge discount light crude to these refineries to offset more expensive foreign imports. As a result, the refineries in these regions are less competitive than those on the Gulf Coast or in the midcontinent. As such, the closure of the Los Angeles refinery and the acquisition from the Cenovus joint venture of the 50% of the WRB refineries (Borger, Texas, and Roxana, Illinois) that Phillip 66 didn't own improves the overall competitive position of its refining portfolio.

Except for its relatively small presence in Europe (UK, Germany), Phillips 66’s refineries benefit from low-cost US natural gas, which results in lower operating costs and higher gross margins than global peers, keeping most US refiners on the lower end of the global cost curve. Higher natural gas prices in Europe help support higher Atlantic Basin margins, which low-cost refineries like Phillips 66 can capitalize on. Phillips 66 is also well positioned given its relatively higher yield of distillate, which has demonstrated higher margins than gasoline and is less threatened by vehicle electrification.

We view the midstream segment as accretive to Phillips 66's narrow moat, given its attractive collection of pipeline, terminal, marine, and NGL assets supported by fee-based take-or-pay contracts. Many of its assets support refinery operations and face little competition. Greater expansion into NGL assets in recent years through acquisition, including the roll-up of DCP, increases the midstream segment’s commodity price exposure. However, while earnings might vary with prices, the integrated network, including fractionation and export, should be able to capture value amid the volatility and deliver excess returns through the cycle.

Additionally, Phillips 66 has a large chemical business, which holds a cost advantage since its assets are located either in the US Gulf Coast or the Middle East, where low-cost natural gas and discounted domestic feedstock (NGLs) are accessible. Despite recent weakness in the global chemical markets, we expect this segment to deliver excess returns on capital through the cycle.

We have incorporated environmental, social, and governance risk into our moat evaluation, but no risk is material or probable enough within the next 10 years to influence our narrow moat rating. Implementing a carbon tax would likely affect demand by increasing the cost of refined products, but it is neither expected nor would it impact demand in the near term. Phillips 66 does disclose its greenhouse gas emissions and carbon intensity, while targeting a 30% reduction in scope 1 and 2 emissions intensity by 2030 and 50% by 2050, and a 15% reduction in scope 3 emissions intensity by 2030.

Phillips 66’s investment in renewable diesel addresses potential petroleum product demand destruction while reducing its carbon intensity. The company has converted its 120 thousand barrels/day petroleum refinery in San Francisco to a renewable fuels production facility that can produce over 50 mb/d of renewable diesel. Refiners are increasingly investing in renewable diesel to reduce carbon intensity, given its 50% lower emissions than petroleum diesel and the increasing number of national and state governments, including California, with blending mandates and credits, which ensures growing demand and attractive margins. Phillips 66 forecasts at least 30% returns for the San Francisco project. Potential additional renewable projects could increase renewable fuel capacity from 800 million gallons to over 1 billion gallons. To facilitate offtake, Phillips 66 also plans to convert 600 retail sites in California to sell renewable diesel produced by Rodeo.

Phillips 66 is expanding its midstream and chemical segments so that refining will represent a smaller portion of earnings over time, mitigate the risk of falling refined product demand and increase the valuation multiple.

Investments and cost-cutting will lead to higher midcycle earnings capacity and greater shareholder returns relative to the past.

With one of the highest distillate yields among its peers, Phillips 66 is well positioned for the long term, where the growth outlook for distillate is more favorable than gasoline.

Efforts to improve refining profitability and create value from an integrated downstream and midstream model might not prove successful, leaving shares and capital returns lagging peers.

Phillips 66's ownership of NGL fractionation assets leaves its midstream earnings reliant on higher crude oil prices and continued domestic volume growth.

Phillips 66’s diversification into midstream could mean that its shares underperform pure-play refining peers if refining margins remain strong for years and its steadier earnings aren't recognized by the market with a higher valuation.