Analyst Insights

Citi Elevates Phillips 66 Price Target Amid Improved EBITDA and Cost Reduction Goals

Citi raises Phillips 66's price target to $153, citing enhanced EBITDA targets and $1.2 billion cost reduction initiatives

By Harrison Wall

7/10, 16:05 EDT


Stock Rating: Buy
Revised Price Target: $153.00
Previous Price Target: N/A
Stock Price (July 9, 2024): $132.81

Summary Points

  • Phillips 66's price target raised to $153, driven by improved EBITDA targets and increased cost reduction goals to $1.2 billion.

  • Midstream growth and improved refinery performance are key catalysts for Phillips 66's future growth and market outperformance.

  • Shareholder activism is positively impacting Phillips 66's strategy, leading to increased scrutiny and operational improvements.

Focus on 2Q24 EPS and Strategic Updates

Citi's latest equity research report on Phillips 66 (PSX.N) centers around the company's 2Q24 earnings per share (EPS) outlook and a comprehensive model update. The report highlights Phillips 66's recent performance improvements, strategic cost reductions, and increased shareholder returns as key elements driving the company's future growth. The main takeaway is that Phillips 66 is on a promising path to outperform its peers, thanks to a combination of operational enhancements and strategic financial maneuvers.

Revised Price Target and Stock Rating

Citi has reaffirmed its Buy rating for Phillips 66, with an updated price target of $153. This valuation is based on a blend of three methodologies: EV/EBITDA, P/E multiples, and a discounted cash flow (DCF) analysis. The price target reflects the company's improved EBITDA targets, increased cost reduction goals, and a higher return of capital target, which has been raised from $10-$12 billion to $13-$15 billion for the period from 3Q22 to 4Q24. According to the Citi analyst, "The downstream business is on the right path and presents upside," indicating a strong belief in the company's strategic direction and financial health.

Strategic Cost Reductions and Shareholder Activism

One of the primary driving factors behind Citi's positive outlook is Phillips 66's aggressive cost reduction strategy. The company has increased its cost reduction targets from $800 million to $1.2 billion, which is expected to significantly enhance its profitability. Additionally, shareholder activism has played a crucial role in holding management accountable, ensuring that the company remains focused on improving its downstream operations. The analyst notes that "increased scrutiny leading to outperformance" is a key element in the company's strategy, suggesting that external pressures are effectively driving internal improvements.

Midstream Growth and Refinery Performance

Phillips 66's focus on growing and improving its midstream presence has also been a significant factor in Citi's investment thesis. The company's midstream segment, which includes transportation and natural gas liquids (NGL) businesses, is expected to benefit from asset sales and share buybacks. Furthermore, the report highlights the potential for improved refinery performance as a catalyst for future growth. The analyst states, "We see multiple catalysts including asset sales, share buybacks coming at the high end, improving refinery performance," indicating a multifaceted approach to driving shareholder value.

Valuation Recap and Financial Outlook

Citi's valuation of Phillips 66 incorporates an average of three methodologies: EV/EBITDA and P/E multiples of 8x and 11x, respectively, applied to the company's 2024 and 2025 EBITDA and EPS estimates. The DCF analysis uses a 5.7% weighted average cost of capital and a 1% terminal growth rate. This comprehensive approach results in a price target of $153. The report also acknowledges several risks, including commodity price volatility and potential declines in ethylene demand. However, the diversified asset base of Phillips 66 provides a more stable earnings profile, mitigating some of these risks.

Citi remains optimistic about Phillips 66's long-term growth potential, driven by strategic cost reductions, improved midstream operations, and enhanced shareholder returns. The analyst concludes, "The downstream business is on the right path and presents upside."