Rating Action: Moody's affirms Phillips 66's ratings; stable outlookGlobal Credit Research - 18 Aug 2022New York, August 18, 2022 -- Moody's Investors Service ("Moody's") affirmed Phillips 66's existing ratings, including its A3 long-term issuer rating, A3 senior unsecured rating and P-2 commercial paper rating. Phillips 66 Company's A3 long-term issuer rating and senior unsecured rating were also affirmed. The stable outlook is unchanged for both companies.The affirmation of Phillips 66's ratings follows announcements by the company that it has increased its interest in DCP Midstream, LLC through a transaction with its joint venture partner, Enbridge Inc. (Baa1 stable), and separately has made an offer to buy the outstanding common units of DCP Midstream, LP (DCP) currently held by the public. The transaction with Enbridge, which has been completed, increased Phillips 66's economic interest in DCP Midstream, LP for which Enbridge received cash and an increased economic interest in Gray Oak Pipeline, LLC. The offer to purchase the publicly held common units of DCP is subject to an agreement with the conflicts committee of the board of directors of DCP and customary closing conditions."Phillips 66's transactions will provide strategic benefits for its midstream business and increase the proportion of the company's earnings derived from stable midstream revenues," commented James Wilkins, Moody's Vice President -- Senior Analyst. "Moody's expects that any debt used to finance the purchase of publicly held DCP Midstream, LP common units will not meaningfully increase Phillips 66's leverage for an extended period."The following lists the ratings activity:Affirmations:..Issuer: Phillips 66.... Issuer Rating, Affirmed A3.... Gtd.Senior Unsecured Commercial Paper, Affirmed P-2.... Gtd. Senior Unsecured Regular Bond/Debenture, Affirmed A3Affirmations:..Issuer: Phillips 66 Company.... Issuer Rating, Affirmed A3.... Gtd. Senior Unsecured Regular Bond/Debenture, Affirmed A3 Outlook Actions: ..Issuer: Phillips 66 ....Outlook, Remains Stable Outlook Actions: ..Issuer: Phillips 66 Company ....Outlook, Remains Stable RATINGS RATIONALE The affirmation of Phillips 66's ratings reflect the strategic benefits of the DCP transactions and anticipated limited impact on the company's credit metrics from any debt financing and increased attribution of DCP's debt. Moody's expects the company's robust free cash flow generation and ability to reduce debt will limit the impact on credit metrics, which will remain supportive of the A3 issuer rating. Phillips 66's increased stake in DCP will add scale to Phillips 66's midstream business that rivals the size of other major independent midstream companies, and is a source of stable cash flow. This transaction furthers the simplification and expanded ownership of the midstream segment achieved in 2021 by purchasing the one-quarter of Phillips 66 Partners LP that was publicly owned. Phillips 66's portfolio of businesses will be more balanced, with the refining business no longer as dominant a contributor to the company's cash flow under mid-cycle industry conditions. The new ownership structure will be less complex to operate under and Phillips 66 will have the flexibility to integrate the DCP assets with its own operations, which have been a growth engine for the company. The transactions increase exposure to natural gas and natural gas liquids processing, where Phillips 66 sees greater growth opportunities and away from transporting crude oil, which is a more mature business.The strengthening of Phillips 66's financial profile as it repays debt with free cash flow will bolster its capacity to withstand negative credit impacts from carbon transition risks. While financial performance of Phillips 66 will continue to be influenced by industry cycles, compared to historical experience we expect future profitability and cash flow in this sector to be less robust at the cycle peak and worse at the cycle trough because global initiatives to limit adverse impacts of climate change will constrain the use of hydrocarbons and accelerate the shift to less environmentally damaging energy sources. The increased exposure to natural gas and natural gas liquids, in addition to its chemicals business, provides diversification from its refining business that is under the greatest pressure from efforts to reduce consumption of refined products. Phillips 66's A3 senior unsecured rating is supported by the large scale and diversity of its refining business, as well as meaningful, diverse cash flow provided by its midstream, marketing and specialties and chemicals businesses. Investments in emerging energy (e.g., the NOVONIX investment) could add more diversification to the portfolio and meaningful growth opportunities over the next five to ten years. The refining business has historically represented approximately one-half of the firm's proportionately consolidated EBITDA on a mid-cycle basis, but will be closer to one-third of earnings following the DCP transactions. However, refining earnings, which Moody's believes are in secular decline, can experience significant volatility and, in 2022, have surged to more than double 2019 levels.The company's other businesses (Marketing & Specialties, Midstream and Chemicals) have posted solid results in 2021-2022, demonstrating the benefits of having a diversified portfolio of businesses. The Chemicals Segment, which is comprised of the 50% interest in Chevron Phillips Chemical Company LLC (CPChem, A2 stable), boasts a diverse portfolio of petrochemical businesses, low cost joint ventures with non-recourse debt, and strong credit metrics. Debt at Phillips 66 is structurally subordinated to debt at equity investments with respect to distributions received from those entities.Phillips 66's P-2 commercial paper (CP) rating (no CP outstanding as of June 30, 2022) reflects its excellent liquidity supported by cash balances ($2.8 billion as of June 30, 2022), and full availability under its $5 billion revolving credit facility maturing in July 2024. Moody's expects the company to generate positive free cash flow through 2023, even as refining earnings moderate. The Phillips 66 revolver has no material adverse change conditionality on drawings, and a financial covenant of maximum net debt to capital of 65%, with ample headroom.The stable outlook reflects the strong performance of Phillips 66's businesses and Moody's expectation that the company will continue to apply available cash flow to reduce debt to offset the impact of the DCP transactions.FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGSAn upgrade is unlikely, but could be considered if retained cash flow to debt is sustainable above 40% in a refining industry down cycle, the company reduces balance sheet debt and generates strong free cash flow such that it manages shareholder returns within free cash flow and self-funds principal equity investments. The ratings could be downgraded if retained cash flow to debt falls below 20%, the company does not generate sufficient positive free cash flow to reduce debt to year-end 2019 or the company pursues less conservative financial policies that do not support the A3 rating.Phillips 66, headquartered in Houston, Texas, is a diversified energy, manufacturing and logistics company with a portfolio of Midstream, Chemicals, Refining, and Marketing and Specialties businesses, including key investments in DCP Midstream, LLC and Chevron Phillips Chemical Company LLC.The principal methodology used in these ratings was Refining and Marketing published in August 2021 and available at https://ratings.moodys.com/api/rmc-documents/74331. 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