BofA Securities has initiated coverage on shares of Phillips 66 (NYSE: NYSE:PSX), assigning a Buy rating to the stock with a price target of $156.00.
The new coverage highlights the company's potential for value that is not immediately apparent from its current operations, which are often associated with refining.
According to the analyst from BofA Securities, less than 30% of Phillips 66's EBITDA comes from its refining segment, with a significant portion derived from its higher multiple third-party midstream, marketing, and chemicals operations.
The analyst's assessment suggests that there is hidden value in Phillips 66's stock, as the sum of the parts (SOTP) valuation indicates. The company is expected to experience catalysts that could unlock this value in the years 2025 and 2026. One of the key developments anticipated is the start of a CPChem cracker, projected to add approximately $400 million to the company's EBITDA.
Furthermore, the midstream business of Phillips 66 is forecasted to grow at a rate of 2% per year while requiring minimal capital expenditures.
The growth is expected to significantly affect the company's free cash flow (FCF), with projections indicating an increase from $9 to $15 per share by the year 2027. This positive outlook on the stock's future performance is based on the company's diversified operations and strategic growth initiatives.
In other recent news, Phillips 66 has faced a significant legal setback with a $604.9 million verdict in a trade secrets case. The company also announced plans to cease operations at its Los Angeles refinery by late 2025, impacting approximately 900 workers. Analysts from Piper Sandler, Barclays, and TD Cowen maintain a positive outlook for Phillips 66, despite adjustments to the company's price targets.
Phillips 66 continues to refine its portfolio, recently selling its 49% stake in Coop Mineraloel AG for approximately $1.24 billion. The company has expanded its board of directors with the appointment of Grace Puma Whiteford, a veteran executive with extensive experience in major corporations like PepsiCo (NASDAQ:PEP).
In financial highlights, Phillips 66 reported strong second-quarter results with adjusted earnings of $984 million. The company also issued $1.8 billion in senior notes as part of its capital structure management strategy.
InvestingPro Insights
Phillips 66's financial metrics and market performance align with BofA Securities' optimistic outlook. The company's P/E ratio of 11.24 suggests it may be undervalued relative to its earnings, supporting the analyst's view of hidden value. This is further reinforced by the InvestingPro Fair Value of $135.58, which is higher than the current stock price.
The company's dividend yield of 3.48% and impressive dividend growth of 9.52% in the last twelve months as of Q2 2024 underscore its ability to return value to shareholders. This aligns with the projected increase in free cash flow mentioned in the article.
InvestingPro Tips highlight that Phillips 66 has raised its dividend for 11 consecutive years, demonstrating a strong commitment to shareholder returns. Additionally, the company's high return on invested capital suggests efficient use of funds, which could contribute to the value unlocking catalysts expected in 2025 and 2026.
For investors seeking a deeper understanding of Phillips 66's potential, InvestingPro offers 15 additional tips that could provide valuable insights into the company's prospects.
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