Goldman Sachs Upgrades Phillips 66, Removes From Sell List

Following the significant cut to the consensus forecasts for Phillips 66 PSX, Goldman Sachs’ Neil Mehta believes there no longer is risk of any further meaningful cut to the consensus expectations.

Mehta upgraded the rating on the company from Sell to Neutral, while raising the price target from $74 to $85.

Consensus Forecasts Cut

Since November 2015, the consensus EPS forecasts for 2016 and 2017 for Phillips 66 have been negatively revised by 52 percent and 32 percent, respectively, driven by softer benchmark refining margins and lower midstream contribution expectations.

The analyst believes the consensus EPS forecasts for 2016-2018 are unlikely to see a sharp cut going forward and that the expectations are more achievable now.

Capex Down

“One of our historical concerns around PSX has been the elevated levels of capital spending, but the company has reduced capex guidance to levels where we expect modestly positive free cash flow in 2017,” Mehta mentioned.

The analyst has raised the free cash flow estimates based on the lower capex guidance.

Mehta pointed out the valuation assumption for Phillips 66 was higher at midstream and chemicals, saying, “We continue to assume an M&A component in our valuation, with a 15 percent probability of a takeout in our forecasts.”

However, among refineries, the analyst believes there could be greater valuation upside elsewhere among the company’s peers.

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