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Phillips 66 maintains capital allocation strategy as firm produces more cash


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Phillips 66 maintains capital allocation strategy as firm produces more cash

Despite expected tailwinds, Phillips 66 executives said they would maintain their long-term capital allocation strategy following a quarter during which the company more than doubled earnings year over year to beat Wall Street's expectations.

The company's refining segment was able to capture strong margins during the quarter as it ran its refining fleet at 100% of capacity after exiting a period of heavy scheduled maintenance.

Looking ahead, executives expect the company to benefit from stricter marine fuel sulfur regulations and a growing economy.

"We're really, I think from a portfolio standpoint, turnaround standpoint, well positioned for 2019 and 2020 to run well," Phillips 66 Executive Vice President of Finance and CFO Kevin Mitchell said during a July 27 earnings call.

The company had outlined $2.3 billion of CapEx in 2018, with the company allocating 60% of its capital toward CapEx and the remainder to dividends and share repurchases. Mitchell suggested 2018 CapEx could reach $2.5 billion this year but said it would hover between $2 billion and $3 billion annually over the next several years.

During the second quarter, the company bought back $213 million worth of company shares and paid out $327 million in dividends, bringing total cash returned to shareholders through the first half of 2018 to $4.42 billion when including a Feb. 13 deal to repurchase 35 million shares of Phillips 66 common stock from Berkshire Hathaway Inc. at $93.725 per share.

To fund the share repurchase from Berkshire Hathaway, the company issued $1.5 billion in new debt and tapped into cash reserves.

The company reported $1.7 billion of operating cash flow during the second quarter, excluding working capital.

"I think you'll see, to the extent we continue to have strong cash generation, we'll probably do a bit more debt paydown [which] is running a little higher than we like it to be," Mitchell said.

"I think our fundamental capital allocation strategy, which has served us well for six years, really isn't going to change," Phillips 66 Chairman and CEO Greg Garland said during the call. "Maybe we hold a little higher cash, maybe we pay down a little more debt along the way. But … you're not going to see us change our fundamental allocation strategy."