Phillips 66 to ramp up capital spending next year

Houston-based Phillips 66 plans to give its capital budget a hefty bump next year as it expands its oil pipeline network, invests in its refineries and grows its petrochemical business.

The energy company, along with its midstream and storage terminal subsidiary Philips 66 Partners, has budgeted $2.9 billion on capital projects next year — a 26 percent jump from this year’s capital budget of $2.3 billion, according to its recently released budget.

When factoring in spending for its own operations plus its joint ventures, the company has budgeted $4.1 billion for capital projects next year — about a 28 percent increase from this year’s $3.2 billion. Many of those capital projects will funnel new money and jobs into Texas.

Here are some takeaways from the capital budget:

• A lot of money will go toward expanding its pipeline network and terminals. Spending on its midstream business, including pipeline and terminals, will grow to $1.6 billion, up from $1.2 billion this year. That includes an ongoing expansion of its Beaumont Terminal; South Texas Gateway Terminal growth; an expansion Clemens Caverns near Brazoria; an isomerization unit at its Lake Charles Refinery in Louisiana; and a Lake Charles products pipeline.

• Construction on the Gray Oak Pipeline will wrap up next year. Phillips 66 also is one of several companies building the Gray Oak Pipeline — which will extend from West Texas to Corpus Christi and the Sweeny/Freeport markets. It will be in service by the end of 2019. Phillips 66 Partners could eventually hold a 42.25 percent stake in the project if all its partners exercise their

rights to boost their stake in it.

• The company appears to be getting more serious about expanding its Gulf Coast petrochemical business, called Chevron Phillips Chemical Co., which it owns in a joint venture with Chevron. Company executives previously have said they have put together a team to explore growth opportunities for Chevron Phillips. Now its budget next year includes $290 million toward expanding Chevron Phillips Chemical, which could include “a second U.S. Gulf Coast petrochemicals project for additional ethylene and derivative capacity,” the company said in a release. Total capital spending on Chevron Phillips Chemical is budgeted at $572 million. That doesn’t include Chevron’s portion.

• Construction on a 42-inch Colorado-to-Gulf Coast pipeline will finish late next year. Phillips 66 will contribute $505 million into its joint venture with Enbridge called DCP Midstream. DCP Midstream has a 25 percent stake in the Gulf Coast Express pipeline — a 500-mile project extending from Colorado to the Gulf Coast. Targa Resources and Kinder Morgan are also involved in the pipeline that will be in service late next year. Other DCP Midstream projects include natural gas liquid pipeline expansions and Delaware-Julesburg Basin gas processing plant.

• Phillips 66’s Sweeny Hub in Old Ocean will continue to see upgrades — that includes adding a fluid catalytic cracking unit at the Sweeny Refinery. Overall, Phillips 66 has budgeted $923 million on refining, up from $827 million this year.

“The 2019 capital program reflects our strong portfolio of growth projects aligned with our long-term strategy,” Chairman and CEO Greg Garland said in a statement.

While it is a big jump from last year’s budget, capital spending is still significantly lower than Phillips 66’s capital budget in 2015, which included $6.8 billion for major pipeline and chemicals projects that came online in 2016 through 2018 from the company and its subsidiaries.

Matthew Blair, refining analyst for the research and investment banking firm Tudor, Pickering, Holt & Co., said the Phillips 66 spending increase is in line with his expectations and recent comments from Phillips 66 executives.

“Investors are largely comfortable with this increase given the quality of the management team and the high allocation to steadier midstream projects,” Blair said in an email.

However, from 2012 to 2017, Phillips 66’s return on capital in its pipeline and terminal business was just 7 percent, lagging behind its returns from its chemical business (20 percent), refining (13 percent) and gas stations (27 percent), Blair said.

The 2019 capital spending increase is “steeper than what Marathon Petroleum has laid out and what Valero is likely to do,” Blair noted.

Last week Conoco-Phillips, the oil exploration and production company that Phillips 66 broke from in 2012, announced that its capital spending would be flat for next year amid lackluster oil prices.