Phillips 66 Spinoff to Bring Increased Retail Ops Spending

HOUSTON -- Phillips 66 will invest more money than before into its retail marketing segment -- parent to its convenience store and gas station operations -- once it becomes an independent company on May 1, according to designated CEO Greg Garland.

Phillips 66 is being spun off from parent company ConocoPhillips Inc. The new downstream company, which Garland remarked will be "simple and less complex," will begin trading on the New Stock Exchange on a "when-issued basis" under the symbol PSX beginning on April 12.

Speaking for the first time about Phillips 66 as an independent company, Garland said during an investor update held today that the company will spend more on its retail marketing division, as it represents a high-margin business. Phillips 66 will continue to have c-stores and gas stations under the Conoco and 76 banners, as well as its eponymous brand name, in 49 states.

"It's a source of income and a good return on capital employed," he said of the marketing segment.

Speaking about the company as a whole, Garland said Phillips 66 has an "unparalleled foundation for success," due to "excellent cash on hand and cash flow for growth." The soon-to-be chief executive added that financial ratings agencies agree that Phillips 66 is healthy. Standard & Poor's has affixed a BBB rating on the company, while Moody's has assigned a Baa1 rating.

"We're very pleased with those ratings," he said. "It's difficult to get the ratings much higher [in our industry]."

As for the future, Garland foresees tremendous growth in natural gas demand. "We expect more than a 50-percent increase in natural gas production, and it will be aggressively priced," he said. "Natural gas is one of the largest potentials we have for an economic resurgence in the U.S. With [natural gas], we're talking about creating American energy and American jobs."

Phillips 66 will institute an 80-cent dividend to shareholders shortly, according to Garland. He noted the company plans to increase that dividend by about 5 percent annually and will also make share repurchases as company economics dictate.

"The 80-cent annual dividend represents about 20 percent of our cash flow during the past few years, so paying the dividend will be very affordable," he said.

Phillips 66 will also consider turning some of its divisions into a master limited partnership in the future, but Garland indicated that management has only just begun considering such an idea. Phillips 66 is not alone regarding MLP talk. As CSNewspreviously reported, MAPCO Express parent Delek US Holdings Inc., Sunoco Inc. and Speedway LLC parent Marathon Petroleum Corp. are also considering MLP moves.

To become a MLP, a company must generate at least 90 percent of its income from what the Internal Revenue Service calls "qualifying" assets. The production, processing or transportation of oil are three things deemed as qualifying assets.

Phillips 66 will also aim to reduce costs by about $200 million beginning on May 1. Garland did not offer a timeframe for when that goal will be accomplished.