Penn Wealth Publishing

2020.04.05 Penn Wealth Report Vol 8 Issue 02

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12 penn wealth Report volume 8 issue 02 05 apr 2020 Penn Wealth Report Copyright 2020. All Rights Reserved. investment intelligence Phillips 66 Oil/Gas Refining & Marketing e content of this report reflects the personal views, opinions, and research of Penn Wealth Publishing. While measures are taken to help assure the accuracy of data, no guaran- tees can be made and the firm is not liable for any losses incurred by subscribers. is is not a solicitation to buy. Always consult your investment professional before investing any money. We've caught ourselves using a term over and over during the pandemic (well, at least one we can print): "indiscriminate selling." Americans have been dumping holdings at a record clip, with the proceeds flowing into a money market probably yielding somewhere around 0.01%. If there is one sector that could be labeled the poster child for this fre- netic activity, it is energy. Granted, considering the one-two punch of a global shutdown/recession and an oil feud within OPEC+, the 50% drop in crude prices for the month of March is somewhat warranted. What investors don't seem to understand, however, is that not all energy companies are directly dependent upon the price of fossil fuels to turn a profit. Take Phillips 66 (PSX $40-$45-$120), for example. e $23 billion refining and marketing company was spun-off from inte- grated energy giant ConocoPhillips (COP $20-$30-$68) eight years ago, has a cash flow from operations of $11.47 per share, and an A+ financial strength rating. In other words, it will have no problem weathering the downturn. But the rosy outlook for Phillips 66 goes deeper than a strong balance sheet. e company operates within the lucrative mid- stream refining and downstream marketing and retailing businesses. e refining division owns or has a stake in 13 refineries with an aggregate net crude capacity of 2.1 million bpd. Additionally, that division owns a 50% stake in DCP Midstream, one of the biggest LNG proces- sors in the US. Also adding to the revenue stream is PSX's 50% ownership in Chevron Phillips Chemical. is company makes a plethora of specialty chemical products at its 31 facilities around the world, serving a diverse customer base from automakers to packagers to pharmaceutical companies. e company continues to move full steam ahead on projects such as its Gray Oak pipeline, which will have a capacity of 900,000 bpd when completed, and its Liberty and Red Oak crude oil pipelines, which operate throughout a wide swath of the central US. Downstream, Phillips has over 6,000 Phillips 66, Conoco, and 76 gas stations across the country, each independently owned and operated (PSX gets a cut of the profit, of course). Far from being ignored by the company, most of these stations are getting—or will soon get—fresh new looks to enhance the brand and draw in more consumers. Many of these stations have been owned by the same families for generations—a testament to the good relationship between corporate and the inde- pendent owners. Not only has PSX been friendly to its sta- tion owners and operators, it has also been very shareholder friendly. At the time of pur- chase in the Penn Global Leaders Club, each share of PSX generated a $0.90 quarterly dividend, which equates to (at time of pur- chase) a 7.7% dividend yield. Considering the Fed funds rate is now at zero, that fat— and safe—yield should continue to draw in conservative income investors. Why add PSX to the Global Leaders Club? Of the eleven S&P sectors, energy now accounts for just under a 4% weighting in the S&P 500. at is staggering, consider- ing the sector weight was around 15% as recently as 2008. Nonetheless, the demise of fossil fuels has been greatly exaggerated: as much as we love alternatives, oil and gas still fuel the lion's share of the global economy. e Penn Global Leaders Club, however, is designed to hold companies we want to own for a generation. To that end, we have cut back our sector weighting to just two positions (5%) within the Club: one big integrated (CVX), and one refiner/mar- keter (PSX). Our Strategic Income Portfolio, which is focused on yield, does hold some lower-risk pipeline names from the sector. Regardless of the price of oil, the midstream and downstream businesses owned by Phillips 66 will continue to churn out profits. ...the rosy out- look for Phillips 66 goes deeper than a strong balance sheet. The company operates within the lucrative midstream refining and downstream marketing and retailing businesses. PSX @ $45

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