Sunday, March 22, 2015

Adding Philips 66 (PSX) to investment portfolio

I am adding Philips 66 (PSX) to the long term investment portfolio. The company is, according to its website, a "diversified energy manufacturing and logistics company. With a portfolio of Midstream, Chemicals, Refining, and Marketing and Specialties businesses, the company processes, transports, stores and markets fuels and products globally."

The company does not produce crude oil. Instead it transports and stores oil, refines oil into various products including fuels and chemicals, and it markets these products. It is a basically a value adder to crude oil. The current crude oil market is a big boon for this company as I will explain. 

The company buys crude oil in the US which is priced substantially below the world price due to the oversupply in the US. It refines the oil and then sells the refined products based on world prices. Because of the stupid policy of the US government to ban crude oil exports US oil sells at a discount to the world price. However, the refined products that Philips sells can be exported and sell for the world price which is higher. The company captures the arbitrage between the US oil price and the world oil price via the export and marketing of its products. Its substantial transportation and storage assets lets the company move feedstocks and products around so as to make the most profit. The company is one of the best companies around for playing the current shale oil expansion in the US. 

The company was spun out of ConocoPhilips in 2012. The company has raised the dividend rate 28% in the last year and has completed stock buybacks that have lowered the share count by 7%. The management is committed to further of returns of capital as the company transforms itself into a logistics and marketing company. I am adding Philips to my long term investment portfolio. This is not a complete analysis so please due your own due diligence. 

Here is an in depth overview of the company on Seeking Alpha

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