Current market state & Phillips 66 equity research 🛢🛢
The market sell-off on growth stocks and bonds continues, and most likely will continue till the end of the week. To many, especially new traders, this seems like a full blown market crash.
Well, it’s not… a market crash needs a catalyst. Think back to every single crash, whether it was the dot com bubble, the housing bubble in 08, and even the flash crash on black Monday in 87' they all had a catalyst, if not many.
But bonds prices are crashing!
I appreciate that bond yield outlooks have shifted which are causing sell-offs, but holistically, that’s because of improving economic outlooks.
My portfolio is tech and it’s all red!
What you are seeing is a shift away from growth stocks (which rely on future earnings) and into value and recovery stocks, if you are losing on all your positions, I suggest you use this as lesson to stay diversified in the future.
Can I take advantage of this sell-off?
There are 3 options:
- As with all sell-offs, some stocks will recover quickly after, smart investors are using this as an opportunity to enter positions for discounted prices (this is step of one of the “buy low, sell high” method)
- Some investors use patience, switch off the news and ride this out. Like Warren Buffett famously says “The stock market is a device for transferring money from the impatient to the patient.”
- You use this as a learning opportunity to appreciate when to take profits and stay diversified in the future.
Without further ado, here is my research on a stock that could be interesting in current market conditions.
🛢🛢 Phillips 66 (PSX)
First off, let me give some market context.
Cyclicals and value stocks generally outperform in a market recovery and I expect a rotation at some point (which we are likely seeing now), strengthened by a combination of inventory drops making headlines, covid cases going down, and a general outlook on resumption of normal. Any stimulus updates would be big news as well.
One of the stocks likely to take advantage of this recovery is Phillips 66 (ticker: PSX).
Phillips 66 is an energy manufacturing and logistics company operating through four main segments: Midstream, Chemicals, Refining, and Marketing and Specialties (M&S). The Midstream segment gathers, processes, transports and markets natural gas, and natural gas liquids (NGLs) in the United States. The Chemicals segment consists of its equity investment in Chevron Phillips Chemical Company LLC (CPChem), which manufactures and markets petrochemicals and plastics. The Refining segment buys, sells and refines crude oil and other feedstocks at refineries in the United States and Europe. The M&S segment purchases for resale and markets refined petroleum products, such as gasolines, distillates and aviation fuels, primarily in the United States and Europe, as well as includes the manufacturing and marketing of specialty products, and power generation operations.
Revenue and cash flow
Last year was a torrid time for oil companies and refineries, as lockdown meant very low demand for oil and petrochemical products. This got so bad, that at one point oil prices turned negative (https://www.bbc.co.uk/news/business-52350082).
During that time, PSX managed to increase its cash reserves by 56%, or $900m.
It also sustained a solid debt-to-equity ratio of 0.83 (the lower the better, lower than 1 is positive).
Year on year, Phillips 66’s revenues fell -40% from $107.44bn to $64.13bn, which was an expected drop due to COVID. Analyst estimates are generally for revenues to recover this year to ~$80–90bn.
Given the rally on oil prices recently, and pre-COVID prices, I expect oil to have further upside, some news sources are suggesting $100 a barrel, for me that’s hefty, $75–80 is likely the right level. While this sustained price means higher input costs for PSX, it shows rallying demand for both oil and underlying products, which will only increase further if this “Supercycle“ talk is anything to go by.
Furthermore, it’s worth noting that while is demand is picking up, the big Texas freeze over the last weeks has meant that supply has not been able to catch up to demand, which will drive oil prices even further in the short term.
Sodium-ion Batteries
PSX has recently announced a technical partnership with UK company Faradion to develop a lower cost sodium-ion battery solution. Sodium-ion batteries can become a game changer due to their lower costs and increased sustainability, meaning a likelihood that electric car manufacturers will switch over to this technology once fully fleshed out (especially with news we’re seeing around Nickel shortages and Tesla’s struggles with battery component sourcing).
While still in early stages, this could prove to be a big income stream for PSX in the long term.
Possible downsides
PSX has a higher than market average dividend yield (4.4%) which amounts to a roughly $1.6bn bill this year, this will require a very quick recovery on net income to fulfill this. If not, dividend suspension or lowering news could affect the stock price.
Furthermore, the US Democratic administration platform calls out removing tax breaks for oil and gas companies while adding environmental regulations. This could have a negative impact on the long-term outlook for PSX, so this is possible not a multi-year hold.
Summary
This is an interesting stock to put on your radar as the economic recovery ramps up, and growth stocks take a bigger battering. While I don’t expect this stock to “pop“, there are some gains to be had.
As always, and especially during times like this, it’s vitally important that you are being sensible and ensuring you are only entering positions you have done your own research on, and with an amount of money you are comfortable with (will not need for a while).
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