The Long and Short
Phillips 66 simplifies its capital structure
This document is intended for institutional investors and is not subject to all of the independence and disclosure standards applicable to debt research reports prepared for retail investors. This material does not constitute research.
Phillips 66 is about to simplify its capital structure. The company, PSX (A3/BBB+), launched an exchange for all Phillips 66 Partners LP (PSXP) debt into Phillips 66 Company debt, a wholly owned subsidiary. It follows the recent acquisition of PSXP’s publicly held common units by PSX. The common units acquired represented limited partner interests that PSX did not already own. Holders of PSXP should participate by the early deadline on April 19.
Exhibit 1. Exchange Details
*Total Consideration includes the Early Participation Premium of $30 if bonds are exchanged by the Early Participation Deadline of 4/19/22 5pm NYC time.
Source: Company Report; APS
The new notes, which are not yet issued, will be unsecured and unsubordinated obligations of Phillips 66 Company. The notes will carry a full and unconditional guarantee by PSX, ranking equally with all other unsecured and unsubordinated debt of PSX. The new bonds will have the same coupon and maturity of the existing bonds to be exchanged. PSX is incentivizing holders to participate in the exchange by offering a cash payment of $1.00, per $1,000 notional bond. Furthermore, PSX has set forth an early participation deadline of 5pm NYC time on April 19, 2022 for holders looking to receive full par on the exchange notes. That said, it behooves holders to participate by the early participation deadline in order to receive total consideration, as shown in Exhibit 1. Holders who participate after the deadline will only receive $970 in notional of new notes.
Debt Reduction Slow and Steady
PSX has been focused on steadily reducing debt from the highs witnessed in 2020 after the company issued $4 billion of debt at the start of the pandemic to shore up liquidity. The debt issuance brought PSX’s total debt level up to $15.9 billion. PSX has repaid $1.5 billion of debt in 2021, bringing its debt/capitalization level down from 42% to 40%. Currently, the company has a sizeable cash position of $3.1 billion which puts net debt at $11.1 billion and brings net debt to capitalization to 34%, down from 38% in 2020, as seen in Exhibit 2. Management noted on its last earnings call that they remain committed to further deleveraging as they continue to prioritize their strong investment grade ratings. PSX has repaid roughly another $1.5 billion of debt already in April, as they had $1.0 billion of debt mature on 4/1/22 and a $450 million term loan mature on 4/5/22. That said, PSX has repaid approximately $3.0 billion of the $4.0 billion issued at the start of the pandemic. Management stated that another $1.0 billion of repayment could be executed via their callable debt, given that no other debt matures until 2023. PSX has $800 million of 0.9% 2024 notes that are currently callable at par.
Exhibit 2. PSX Consolidated Capital Structure
Source: PSX Earnings Presentation; APS
Outlooks Revised to Stable
Both Moody’s and S&P revised PSX’s outlooks to stable from negative after the company posted fiscal 3Q21 results. Moody’s outlook change reflected both the improvement in operating results as performance rebounded in the second half of 2021 as well as its expectation for a stronger credit profile in 2022. The agency noted that PSX returned to positive free cash flow generation in 2021, which will help to support management’s plan of bringing debt back to pre-pandemic levels of roughly $12 billion. Moody’s believes that demand for jet fuel will continue to rise in 2022. Additionally, there is the expectation for improvements in crack spreads which should translate to higher free cash flow generation. The current A3 rating at Moody’s takes into account the volatility associated with the Refining business, which is expected to continue to rebound this year. Moody’s expects PSX to maintain excellent liquidity which consists of both its strong cash position and an untapped $5.0 billion revolver maturing July 2024.
S&P expects adjusted leverage to improve to approximately 2.0x this year, a full turn lower than the 3.0x posted at year-end. The leverage improvement is expected to come from a combination of debt reduction coupled with EBITDA improvement as the Refining segment continues to post improved performance. S&P noted that the outlook change also reflects the company’s diversified business model, which helped to offset the weakness in the Refining unit in 2020 and the first half of 2021. The agency also anticipates that management will remain conservative with respect to both share repurchases and capital spending. Capital spending totaled $1.9 billion in 2021 and is expected to be at a similar level in 2022. Additionally, the company suspended its share buyback program in March 2020, with $2.5 billion remaining under the existing authorization. S&P expects PSX to return debt back to pre-pandemic levels before resuming share repurchases.
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