Phillips 66 Partners LP PSXP is likely to underperform the market in the near future. Lower throughput volumes and balance sheet weakness are weighing on the stock. The stock, currently carrying a Zacks Rank #5 (Strong Sell), has been witnessing downward earnings estimate revisions by analysts.
Downward Estimate Revisions
The Zacks Consensus Estimate for the partnership’s bottom line for third-quarter 2019 has been revised downward to 96 cents from $1.20 in the past 60 days. Notably, two analysts have made downward revisions during this time period. The estimated figure indicates a 13.2% year-over-year decrease.
Phillips 66 Partners LP Price and Consensus
Phillips 66 Partners LP price-consensus-chart | Phillips 66 Partners LP Quote
Here we take a peek at the major issues plaguing Phillips 66 Partners.
Factors Affecting the Stock:
Compared with only $18 million in long-term debt as of 2014-end, the partnership’s long-term debt load was recorded at $3.3 billion on Jun 30, 2019, reflecting a massive increase over the years. Also, compared with $185 million in cash and cash equivalents as of 2017-end, its cash balance plunged to only $130 million. Surging debt load and declining cash balance reflect weakness in balance sheet, which can hamper its financial flexibility.
Phillips 66 Partners earlier projected 2019 capital spending to be $1.2 billion. However, the partnership halved its capital budget through 2019 to $601 million for financing part of the $2.2-billion Gray Oak pipeline project. The significant reduction in capital spending may hurt the partnership’s pipeline and terminal throughput volumes.
Through 2018, Phillips 66 Partner’s free cash flow plunged 47.4%. Moreover, in the trailing 12-month period, the partnership’s free cash flow was recorded at negative $287 million, reflecting weakness in operations.
It will continue to lose the opportunity of transporting excess oil production volumes from the prolific Permian to the Texas Gulf Coast markets, unless the Gray Oak pipeline project is completed by the December quarter of 2019. Some other pipeline operators in the region have already brought their pipelines online, which is enabling them to earn handsomely. For example, Plains All American Pipeline, L.P.’s (PAA) Cactus II pipeline recently commenced operations, which led to an increase in earnings estimates for 2019.
In terms of EV/EBITDA ratio — which is one of the best multiples for valuing oil and gas-related companies because energy firms have a large amount of debt and EV (Enterprise Value) including debt for valuing company or industry — Phillips 66 Partnersseems overvalued. The partnership currently has a trailing 12-month EV/EBITDA ratio of 11.6, which is way above the Zacks Oils-Energy sector’s 4.8.
Stocks to Consider
Some better-ranked players in the energy space are National Oilwell Varco, Inc. NOV, Dril-Quip, Inc. DRQ and NuStar Energy L.P. NS. All these firms have a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
National Oilwell’s 2019 earnings per share are expected to rise 137.5% year over year.
Dril-Quip’s 2019 earnings per share are expected to rise 131.8% year over year.
NuStar Energy’s third-quarter 2019 earnings per share are expected to gain more than 108% year over year.
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Phillips 66 Partners LP (PSXP) : Free Stock Analysis Report
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