Executive Summary
Every effort is made to pinpoint value-adding opportunities for MBA Fpx 5014 Assessment 3 Financial Engineering to Enhance Shareholder Value. The same approach is taken with the publicly listed company Phillips 66 (PSX) and its potential impacts on stock prices and capital structures. Phillips 66 is a global company active across 65 countries with more than 140 years of experience (About Phillips 66, 2020).
There is a vital need for Phillips 66 to adopt aggressive, innovative, and long-term approaches to maximize shareholder returns. Selecting strategies with high ROI opportunities will also be essential. ESG or Sustainability as a part of business is always a decision criterion for Phillips 66. It has been shown that multiples of earnings respond to many drivers, such as growth, leverage, business model risk, and ESG performance (Nassos, 2014).
The examination focused on the financial records of Phillips 66, a the geographical, operational, products and services oriented thesis, and a competitor analysis. Financial ratios were calculated from the income statement, balance sheet, cash flow statement, and other secondary data collected through market research. Reff: Capella MBA 5014
After the assessment of the selected strategies, the decision that seems most rational is to proceed with the modification of the existing refinery at Rodeo California to produce renewable fuel. This is estimated to be a capital expenditure project valued around 750 to 800 million dollars. There many factors supporting this project cause it is expected to generate returns of magnitude greater than 30 percent (Event Details, 2020). Reff:
Company Background
Initially known as the Continental Oil and Transportation Co., Conoco became one of the early petroleum marketers in the West in 1875. In 1917, brothers Frank and L.E. Phillips established the Phillips Petroleum Company, which was based in Bartlesville, Oklahoma. The 76 brand, well known in the western US, was established by Union Oil Company of California and later Unocal in 1932. During WW2 Phillips Petroleum, and Conoco facilitated the production of aviation gasoline with high octane rating, which powered allied planes (About Phillips 66, 2020).
During the 50s, 60s, and 70s, Conoco and Phillips Petroleum increased their activities and ventured into new economies. Conoco set up a new refinery in Billings, Mont, and started expanding internationally. Phillips had patented polyethylene plastics and so ventured into the plastics industry, where they also started producing polyolefin plastics under the trademark Marlex. Hula Hoops were produced using Marlex by Wham-O Manufacturing (About Phillips 66, 2020).
MBA Fpx 5014 Assessment 3 Financial Engineering
In 1981, DuPont won the bidding war for Conoco, and DuPont became a wholly owned subsidiary of Pittsburgh, marking the largest merger in America at that time. In the 80s, Phillips Petroleum struggled with various attempted takeovers as well. In 2002, Conoco and Phillips Petroleum decided to merge and trade as ConocoPhillips, the sixth-largest publicly traded company globally and the third-largest in America. In 2012, ConocoPhillips split off its midstream and downstream businesses to form a publicly traded company under the name Phillips 66 and began trading as PSX on the NYSE in May (About Phillips 66, 2020).
Phillips 66’s global workforce, which exceeds 14,000 employees, is dedicated to safety and operational excellence. In 2016, Phillips 66 opened its new world headquarters in Houston and completed a multibillion-dollar midstream project and export on the Texas Gulf Coast (About Phillips 66, 2020).
Financial Analysis
MBA Fpx 5014 Assessment 3 Shareholder analysis was done on a six-quarter basis using data that was available from the release of financial statements from Phillips 66. Additional data for consideration include the corporate history, geographic area, product and service offerings, and basic comparisons to Marathon Petroleum Company (MPC). The calculation of financial ratios was done based on the income statement, balance sheet, and cash flow statement, as detailed in Appendix A.
Ratios as demonstrated below, five sets of financial ratio analyses were performed: profitability, liquidity, asset management, debt management, and market value. The first ratio is the profitability ratio, which was earned with the investment and as a result of the company’s operational activities.
Table 1.0 – Profitability Ratios – 2019- Phillips 66 (PSX) vs. Marathon Petroleum (MPC)
| Profitability | Phillips 66 (PSX) | Marathon (MPC) |
| Gross Profit Margin | 6.24% | 11.54% |
| Operating Profit Margin | 2.21% | 6.52% |
| Return on Assets | 5.24% | 3.34% |
| Return on Equity | 12.35% | 9.6% |
Table 2.0 – Liquidity Ratios – 2019- Phillips 66 (PSX) vs. Marathon Petroleum (MPC)
| Liquidity | Phillips 66 (PSX) | Marathon (MPC) |
| Current Ratio | 1.24 | 1.27 |
| Quick Ratio | 0.87 | 0.58 |
| Cash Ratio | 0.14 | 0.09 |
Table 3.0 demonstrates that Marathon’s asset turnover is weaker than that of Phillips. Marathon’s overall picture is bolstered by a stronger receivable turnover. Regarding the measure of ROE, Phillip seems to be the clear leader compared to Marathon. In this analysis, it is possible to assert that Phillip has a greater potential for improving his revenues by bettering his asset turnover ratio.
Table 3.0 – Efficiency Ratios – 2019- Phillips 66 (PSX) vs. Marathon Petroleum (MPC)
| Efficiency | Phillips 66 (PSX) | Marathon (MPC) |
| Asset Turnover | 1.83 | .18 |
| Receivables Turnover | 14.64 | 16.62 |
| Return on Equity | 11.36 | 7.63 |
Table 4.0 compares several market ratios. Even with the pandemic the industry is facing both companies continue to pay dividends. Phillips averaged earning of 6.77 per share last year compared to Marathon’s 3.97, however Phillips average P/E ratio was higher than Marathons, but it shows that PSX stock is more overvalued than MPC.
Table 4.0 – Market Ratios – 2019- Phillips 66 (PSX) vs. Marathon Petroleum (MPC)
| Market | Phillips 66 (PSX) | Marathon (MPC) |
| Forward Dividend Yeild | 5.90 (as of 12/31/19) | 6.51 (as of 12/31/19) |
| Earnings per Share | 6.77 | 3.97 |
| P/E Ratio | 10.77 | 5.5 |
| Mkt/BK | 26.79 | 24.27 |
Financial Strategies
Increasing shareholder value is a process order that takes time, effort, and predefined decisions to be effective. Among the many decisions that need to be analyzed for optimal value creation, are the capital spending programs, acquisition and mergers of competitors, stock buy backs, changes in policies towards payment of dividends, reduction of debts, expansion into new geographical markets, and development of new products and services.
Capital Expenditures
The expenses made to acquire tangible assets for business operations spanning over a year are termed capital assumptions. The term capex can also be used to refer to these expenses. Capital expenditures are often classified into different account categories, and assets that are at rest under the balance sheet are titled property, plant, and equipment (PPE). When the MBA Fpx 5014 Assessment 3 assets, except the land, are kept in service, they are depreciated uniformly, more often termed as useful lives of the assets. The term accumulated depreciation describes the portion of the PPE that is used up and allocated to the corresponding expense for the accounting period (Averkamp, 2020).
Mergers and Acquisitions of a Competitor
Acronymed as M&A, mergers and acquisitions depict the integration of companies or assets by means of one or more specific transactions like mergers and acquisitions, consolidations and tender offers, etc (Hayes, 2020). Each of these transactions has its own advantages and disadvantages which makes understanding how successful this financial form of movement is very ambiguous until the acquirer company is investigated first.
With this transaction one is looking at how one company combines with another. With an acquisition one company is financially making a purchase of another company. This allows the purchased company to now become a child company to the purchasing company.
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The downfall to mergers and acquisitions is that they can take a long time to market, negotiate, and close. The due diligence involved in these types of transactions take significant time and resources that many companies do not anticipate. There is also a large amount of sensitivity that comes with these types of transactions such as intellectual property as well as the employees and benefits that will be in uproar during transition.
Stock Repurchasing
Stock repurchasing is one way to increase shareholder value. In this method, the company wants to buy back the shares available in the market in a bid to increase the stockholders stake in the company. Typically, companies who do this are looking to self invest, alter their financial ratios (Janssen 2020), or believe that the market has significantly devalued their shares. The companies have a tendency to be very careful when exploring this option due to the market not being favorable and the risk of acquiring the stock at inflated rates for genuinely value worthwhile stocks.
Dividend Policy Adjustments
When looking at maximizing stockholder value, management has an important role in devising the wealth strategies for the stockholders. A company with a declared dividend policy has an established payout policy to be followed regarding the amount and frequency of payments to be made to its shareholders (Baker, 2015). Since shareholders are waiting to claim their portion of the company’s value, management has to calibrate their strategies in a way that is acceptable to shareholders, making the decision increasingly difficult.
When a company starts to look at dividend policy adjustments, looking at stocks that pay dividends as opposed to those that do not is one critical factor. Industry standards are one aspect that management can look at and evaluate to see what they are doing or not doing as opposed to their competitors when making these decisions that will affect the shareholders in the end.
Debt Reduction
Reducing debt can give the appearance that a company is less of a risk. This can be deceptive in many ways. This can also be a short term solution as many companies find themselves back at the back seeking new funding due to eliminating cash to cover those debts. Once debts are paid many companies look to new opportunities and find themselves back in debt so in this case debt reduction is mostly a short term fix.
Geographic Expansion
The most costly and elaborate investment strategy is geographic expansion. It is claimed that expanding to new locations is easier in today’s market, but this is not true for every industry. The oil and gas industry, as well as refining, has so many EPA regulations and restrictions on transactions that expanding into new territories consumes a fortune and a lot of time. The company’s bottom line suffers a lot because the physical assets required for this type of expansion are incredibly expensive.
Along with the provided cost, there are additional risks that correlate with this type of approach. Might there be government top complications? What is the stability like? Some foreign assets may not be as friendly, and they may impose more limitations than benefits. A company should consider geographical expansion carefully, for it is a substantial risk and one for which the company needs to show great promise for Sustainability before making a commitment.
Product or Service Expansion
In order to successfully expand a product line or add a new service, there must existing market demand. MBA Fpx5014 Assessment 3 Shareholder Valuegives the customers a reasonable improvement or enhancement and is also a useful avenue. This selection has to enhance the existing customer value and there needs to be a reason to encourage new customers. Sometimes simple alterations or additions to products can fall under this category. In the same line of business, companies need to either change their existing products or introduce new ones to reduce the chances of losing business to competition.
Analysis Summary and Recommendations
Every single strategy above has its own merits and demerits. The easiest and quickest method of improving shareholder value, also known as increased revenue, yields better long-term results. For Phillips 66, a currently declining plant in their refining sector, the best route is reconfiguration. Simultaneously, there is additional market demand for green-aligned products and production, so fostering a capital expenditure is the best strategy.
Selected Strategy
The income earned by Phillips 66 comes from being a top 5 manufactering and Logistics Company in midstream, chemicals, refining, and specialties businesses. Their competitors in the markets include are World Fuel Services, Marathon Petroleum, and Valero Energy. Phillips 66 aims to alter a preexisting structure to pursue a business region that uses have yet to exploit so that they can be used for restructuring and expanding the company further.
This strategy will involve a lot of capital, but the payout greatly overshadows that initial investment. Alongside the anticipated customer reach growth, the surplus profits from this investment will significantly aid in achieving the goals set alongside Sustainability. These goals are key in determining the path taken by Phillips 66.
Sustainability, also known as ESG (in short for Environmental, Social, and Corporate Governance) is always a moving target which accounts to profit and companies have started relying on it more often because of the lack of associated guarantee. Investors could care less about ESG (Nassos, 2014) because perceiving the landscape without the relevant data offered is a futile quest.
MBA Fpx 5014 Assessment 3 Financial Engineering to Enhance Shareholder Value
What is useful is a methodology that links capital cost to bearing ESG importance. It has been established that ESG factors have different relevances for particular economic sectors. When analyzing a particular enterprise, the research is conducted on a selected sample of firms in that industry. With all other things being equal, this fully explains the things that matter for the effectiveness of the company’s discount rate and, consequently, the shareholder value (Nassos, 2014).
Given the business, Phillips 66 needs to continue to excel in the environmental and social aspects of the business. There are so many greenwashing opportunities in oil and gas, as well as in the refining business, that green changes are more or less taken for granted. While the expected set of numbers seems conservative, the expectations are set to take place at the power index of the company and the industry with the $750-800 MM initial investment to have a set of true facts for the 30% index return. With the reallocation of resources, the project is placed in one of the most advantaged regions in the country for marketing and product distribution. The project is innovative since it is moving in the direction of adopting a new sustainable product line. However, taking into consideration the current scope of work, it is the core and the primary implementation change for the project.
Weighted Average Cost of Capital
Phillips claims that her company’s 16.5% ROIC exceeds the company’s WACC of 7% but at the same time, the company currently has a return on invested capital of $750 million. Phillips argues that her business can pay more than $750 million through WACC, enabling her company to use her WACC. By using Phillips 66’s WAAC Phillips hopes to get cash at a lower rate than her company has to pay her personally.
In reviewing the formula for WACC:
WACC = E / (E + D) * Cost of Equity + D / (E + D) * Cost of Debt * (1 – Tax Rate)
| Current WACC for PSX | |||||
| WAC | 8.67 | ||||
| C | 27498.780 | 10.96% | 11461.5 | 3.996% | 1-.2014 % |
| 38960.21 | 38960.21 | ||||
Current Phillips 66 Values:
E = 27498.780
D = 11461.5
CE = 10.96 (using risk free rate of 0.64, a beta of 1.72 and 6% market premium,) CD = 458/11461.5 = 3.996%
Tc = 20.14%
| Current WACC for PSX | |||||
| WAC | 3.19 | ||||
| C | 35748.414 | 10.96% | 12211.5 | 3.996% | 1-.2014 % |
| 47959.914 | 38960.21 | ||||
Projected Phillips 66 Values:
E = 35748.414 (estimated 30% ROI)
D = 12211.5 (adding 750 million in debt)
CE = 10.96 (using risk free rate of 0.64, a beta of 1.72 and 6% market premium,) CD = 458/11461.5 = 3.996%
Tc = 20.14%
In MBA Fpx 5014 Assessment 3 Financial Engineering to Enhance Shareholder Value impact sccording to Phillips 66, the company can increase shareholder value without spending more than the excess return. Her business can bring on capital varying per project more than what is received, leaving the company with lower levels of value. Phillips’s plan will help decrease the chance of spending on projects, which can increase debt on the company rather than waste Phillips increases.
References
About Phillips 66. (n.d.). Retrieved August 21, 2020, from
https://www.phillips66.com/about
Financial Performance and Reports
Phillips 66 Reports Second-Quarter 2020 Financial Results. (n.d.). Retrieved August 21, 2020, from
Phillips 66 WACC %. (2020, August 24). Retrieved August 24, 2020, from
https://www.gurufocus.com/term/wacc/NYSE:PSX/WACC-/Phillips-66
Investments and Capital Expenditures
Averkamp, H. (2020). What are capital expenditures?: AccountingCoach. Retrieved August 21, 2020, from
https://www.accountingcoach.com/blog/what-are-capital-expenditures