“Armchair Trader Series” Recommendations
- Week Beginning -
Monday, March 11, 2019

by Ian Harvey

IMPORTANT NOTE: This is a recommendation and individual members can use their own discretion as to when to enter or exit!

You may also wish to read Stock Options Made Easy Trading Philosophy


"Trading Capital Management"

Option Trade – Phillips 66 (NYSE: PSX) Calls

Tuesday, March 12, 2019

** OPTION TRADE: Buy the PSX MAY 17 2019 97.500 CALL at approximately $3.30. Place a pre-determined sell at $6.60.

Also include a protective stop loss of $1.35.

American shale oil is so abundant and cheap that it has changed global energy trade flows virtually overnight. It also has another important characteristic: Shale oil is very light and sweet; needs minimal refining, which has actually been a bit of a problem for the country's refining infrastructure, which is tooled to handle heavier crude grades.

While that's created some bottlenecks for producers looking to move product (which has eased somewhat as more and more exporting infrastructure is built), refiners such as Phillips 66 (NYSE: PSX) have simply continued importing heavier crudes. Because it's generally cheaper than all other varieties -- much cheaper -- it's created an awesome arbitrage opportunity.

American refiners have benefited from extremely low raw material costs, but get to sell their refined products at global market prices and pocket the difference for eye-popping profits.

This trend was on full display when Phillips 66 reported fourth-quarter 2018 earnings. The company's refining segment delivered over $2 billion in earnings, versus just $516 million in the year-ago period. Every other segment -- chemicals, midstream, and marketing -- grew quarterly earnings year over year as well.

Public backlash to trans-national pipelines that would allow Canada to export more of its crude to Asia means the United States should have first dibs on its neighbor's heavy and cheap crude for the foreseeable future. That should keep Phillips 66 humming along while providing the opportunity to invest in domestic infrastructure, such as its burgeoning midstream and chemicals units.

About Phillips 66…..

Phillips 66 operates as an energy manufacturing and logistics company. It operates through four segments: Midstream, Chemicals, Refining, and Marketing and Specialties (M&S). The Midstream segment transports crude oil and other feedstocks, delivers refined products to market, and provides terminaling and storage services for crude oil and petroleum products; transports, stores, fractionates, and markets natural gas liquids, exports LPG, and provides other fee-based processing services; and gathers, processes, transports, and markets natural gas.

Past Performance…..

Phillips 66 posted fourth-quarter 2018 adjusted earnings per share of $4.87, which surpassed the Consensus Estimate of $2.76. The bottom line increased from the year-ago quarter's $1.07. The strong earnings performance was backed by significant improvement in realized refining margin. This was partially offset by turnaround activities in Chemicals businesses.

Quarterly revenues totaled $29.8 billion; down from the year-ago quarter's $30.1 billion. The top line also missed the Consensus Estimate of $35.5 billion.

The real needle mover for Phillips 66 this past quarter was its refining segment, which churned out a net earnings result almost four times what we saw this time last year. Refining benefited immensely from high refining margins, specifically for distillate products like diesel and jet fuel. Management helped its own cause by running its facilities at almost maximum capacity the entire quarter -- refinery utilization rates were 99% -- and it geared its facilities to maximize gasoline and diesel output with an 86% clean product yield. The rest of the business performed admirably as well, with record results from its marketing & specialties and midstream businesses, but refining results were just that good.

Moving Forward…..

Over the past few years, much of the company's growth capital spending has been for its midstream segment. It appears the trend will continue in 2019. In the company's capital budget for this year, it expects to spend about $2.9 billion. A little less than half of that will go toward midstream assets that include its investments in subsidiary master limited partnership Phillips 66 Partners (NYSE: PSXP) . Management still believes that the greatest source of returns right now is increasing pipeline access from high-growth shale basins to major demand centers such as the U.S. Gulf Coast.

During the quarter, it announced it was soliciting interest in an open season for two new crude oil pipelines. The Liberty pipeline would transport 350,000 barrels per day of crude from the Bakken and other shale basins in the Rockies to Corpus Christi, Texas, and the Red Oak pipeline would transport 400,000 barrels from major oil hub Cushing, Oklahoma, to points in Corpus Christi, Houston, and Beaumont, Texas.

Phillips 66 also announced it was partnering with Renewable Energy Group (NASDAQ: REGI) to build a large-scale renewable diesel plant in Washington adjacent to Phillips 66's existing facility in the state.

Also, Phillips 66 Partners has quietly grown its dividend up to an attractive 6.6% by steadily expanding its portfolio of cash-flowing energy infrastructure assets. With more projects in progress, that payout should continue growing over the next few years, which is why income-seeking investors will want to take a closer look at this amazing dividend stock.

Influencing Factors…..

In the past month, Phillips 66 stock has likely risen due to the better refining crack environment. The USGC WTI 3-2-1, the benchmark crack, has risen during the stated period. The crack has increased from $11.4 per barrel on February 5 to the current level of $16.7 per barrel.

The US Gulf Coast is a vital refining area for Phillips 66. The company processed 36% of its total oil and feedstock throughput in the region in 2018. The rise in the USGC WTI 3-2-1 crack could indicate a better refining margin and earnings for Phillips 66 during the stated period.

The implied volatility in Phillips 66 has fallen by 11.5 percentage points since January 2, the beginning of the first quarter, to the current level of 20.3%. During the same period, Phillips 66 stock has risen 10.5%. The implied volatility in Phillips 66 and its stock price have moved in the opposite direction in the first quarter.

Considering Phillips 66’s implied volatility of 20.3% and assuming a normal distribution of prices (bell curve model) and standard deviation of one (with a probability of 68.2%), Phillips 66’s stock price could close between $103.5 per share and $91.2 per share for the 35-day period ending March 29.

Analysts Opinions

Tudor Pickering raised Phillips 66 from a “hold” rating to a “buy” rating in a research note on Friday, February 8th.

Several equities analysts have recently commented on the company…..

  • Piper Jaffray Companies restated an “overweight” rating on shares of Phillips 66 in a report on Thursday, January 10th.
  • Raymond James cut their price objective on Phillips 66 from $125.00 to $120.00 and set an “outperform” rating on the stock in a report on Monday, December 31st.
  • Argus dropped their price objective on Phillips 66 to $116.00 and set a “buy” rating on the stock in a research note on Thursday, February 14th.
  • Zacks Investment Research reissued a “buy” rating and issued a $113.00 price objective on shares of Phillips 66 in a research note on Wednesday, November 14th.
  • Jefferies Financial Group raised Phillips 66 from a “hold” rating to a “buy” rating in a research note on Thursday, December 20th.
  • Finally, Morgan Stanley dropped their price objective on Phillips 66 from $140.00 to $120.00 and set a “hold” rating on the stock in a research note on Tuesday, November 20th.

One analyst has rated the stock with a sell rating, seven have assigned a hold rating and seven have issued a buy rating to the stock. Phillips 66 has a consensus rating of “Hold” and a consensus target price of $122.75.


Results like these don't come around often in the refining business. Phillips 66 and the rest of the refining industry have benefited immensely from incredibly high refining margins thanks to cheap domestic and Canadian crude oils compared to other international crude sources.

PSX will open at $96.67 on Tuesday. The company has a current ratio of 1.28, a quick ratio of 0.82 and a debt-to-equity ratio of 0.43. The firm has a market cap of $43.49 billion, a price-to-earnings ratio of 8.26, and a P/E/G ratio of 1.35 and a beta of 0.94. Phillips 66 has a 12-month low of $78.44 and a 12-month high of $123.97.