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PSX is up about 30% for the year. It might not be done

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Leading into the fourth quarter of the year, and through most of it, the search for value has led me to put a lot of attention on the Energy sector. There are a lot of different aspects of the sector, including the Oil, Gas and Consumable Fuels industry that present a number of different, interesting opportunities to target oil & energy exploration, production, refining and distribution operations.

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As with any sector or industry, some stocks hold up to scrutiny better than others. Some show extremely strong fundamental numbers, while others don’t, and some appear to offer a better bargain opportunity. The catch for me is being able to find a stock that offers the right kind of combination of fundamental strength and value. The stocks that present a convergence of those two major elements of my method are the stocks that tend to make it into my long-term watchlist.

One of the stocks that recently crossed my desk is a familiar name, and that at first blush would not have passed my earliest, quick-glance review. That’s because Phillips 66 (PSX) has already seen a big push higher throughout the year, from a low right before Christmas 2018 at around $79 to a high about a month ago near $120 per share. Stocks trading at 52-week highs, more often than not have passed the point that a contrarian-minded, value-oriented investor like me have interest in. That performance is great for the people that bought the stock late last year, or even earlier this year; but at this point the risk that a new investor runs is chasing the rally at or very near the end of the run.

PSX might be an interesting exception to the rule. Despite its impressive performance, this is a stock with some interesting strengths, including ongoing infrastructure projects that are expected to help alleviate congestion in U.S. shale takeaway capacity. These include the Gray Oak Pipeline for the Permian Basin and Eagle Ford Shale areas, and fractionators and crude oil terminal capacity at Sweeney, TX. Between the end of 2019 and 2020, these projects are expected to be completed, which should help increase distribution capacity to the Persian Gulf – a benefit to the entire industry and something that puts PSX in a strong position moving into the new year. That’s why I think there could be room to move even higher than the stock’s mid-July 2018, all-time high at around $124 per share.

Fundamental and Value Profile

Phillips 66 is an energy manufacturing and logistics company with midstream, chemicals, refining, and marketing and specialties businesses. The Company operates through four segments: Midstream, Chemicals, Refining, and Marketing and Specialties (M&S). The Midstream segment gathers, processes, transports and markets natural gas, and transports, stores, fractionates and markets natural gas liquids (NGLs) in the United States. The Chemicals segment consists of its equity investment in Chevron Phillips Chemical Company LLC (CPChem), which manufactures and markets petrochemicals and plastics. The Refining segment buys, sells and refines crude oil and other feedstocks at refineries in the United States and Europe. The M&S segment purchases for resale and markets refined petroleum products, such as gasolines, distillates and aviation fuels, primarily in the United States and Europe, as well as includes the manufacturing and marketing of specialty products, and power generation operations. PSX’s current market cap is $50.3 billion.

Earnings and Sales Growth: Over the last twelve months, earnings were flat, but positive by just 0.32%, while sales declined -9.22%. In the last quarter, earnings improved by about 3% while sales declined -2.62%. PSX’s margin profile is narrow, and getting even narrower, with Net Income over the last twelve months that was just 4.17% of Revenues, and 2.61% in the last quarter.

Free Cash Flow: PSX’s free cash flow is healthy, at a little over $3.66 billion for the trailing twelve month period. That translates to a Free Cash Flow yield of 7.32%.

Debt to Equity: PSX has a debt/equity ratio of .41, a low number that indicates the company operates with a conservative philosophy about leverage. Their balance sheet shows 2.26 billion in cash and liquid assets versus $11 billion in long-term debt.

Dividend: PSX pays an annual dividend of $3.60 per share, which translates to a yield of 3.2% at the stock’s current price.

Price/Book Ratio: there are a lot of ways to measure how much a stock should be worth; but one of the simplest methods that I like uses the stock’s Book Value, which for PSX is $60.97 per share and translates to a Price/Book ratio of 1.84 at the stock’s current price. Their historical Price/Book average is 1.92, which suggests that the stock is trading at a discount right now of only about 4%. Their Price/Cash Flow ratio, however offers an even more optimistic perspective, since it is currently running 67.5% below its historical average. That number offers a long-term target price above $188 per share. That might be overly optimistic, but along with the shale infrastructure projects I mentioned earlier, I do take it as an indication that the long-term prospects for the stock remain very attractive even with the stock’s big move in the past year.

Technical Profile

Here’s a look at the stock’s latest technical chart.

Current Price Action/Trends and Pivots: The chart above shows the upward trend over the past year, as defined by the red line that also provides the calculations for the Fibonacci retracement lines on the right side fo the chart. The stock has dropped back off of its 52-week high around $120 over the past month and is currently showing strong bearish momentum. Support could be somewhere between $104, where the 38.2% Fibonacci retracement line sits, and $107. If the stock can find support anywhere above that range, the stock has good near-term upside between $117 and $120 per share. If the stock’s current momentum continues, the stock is about $5 away from its nearest likely support point.

Near-term Keys: The value proposition on PSX looks compelling, and I think there is a strong case to be made for the stock’s long-term prospects. In the near-term, however, the probabilities are on the bearish side. If the stock’s current momentum continues on the downside, which means the best trade right now is by shorting the stock or working with put options, with an eye on $107 to $104 as a profit target. If the stock can find support and pivot higher, it could offer an interesting opportunity to buy the stock or work with call options, with an eye on $117 or even $120 as a near-term target price.

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