Phillips 66 Looking Beyond Refining

NEW YORK (TheStreet) -- For Phillips 66  (PSX), will higher margins mean a higher stock price?

The energy company, which has seen a profit decline in its core refining business, is diversifying by investing more in its higher-margin midstream and chemical businesses.

This year, Phillips 66 and its joint ventures will spend $4.6 billion in capital expenditures, primarily to expand the company's midstream and chemical businesses, both of which posted higher earnings last year. Midstream is the business of transporting and processing oil.

Phillips 66's expansion in the higher margin operations will likely boost the company's profits, and investors are optimistic, as the company's shares have rise 25% over the past 52 weeks. They were recently trading at $77.82, up 26 cents.

The stock trades at 13.1 times trailing earnings, close to its highest level ever. But then again, this stock comes with just two years of trading history and is priced much lower than the industry average of 30.6 times trailing earnings, according to data compiled by Thomson Reuters.

Phillips 66 operates 15 refineries, including 11 in the U.S. About 55% of the company's refining capacity lies in the Mid-Continent and the U.S. Gulf Coast, where the refineries can tap into unconventional fuels. Seven refineries are located in coastal areas that allows the company to capture higher prices in the international markets.

But Phillips 66's refining segment has lagged its other businesses, which is why it is investing more in its chemical and midstream segments. Last year, chemical earnings rose 19% to $986 million and midstream earnings rose nine-fold to $469 million. Earnings in the much larger refining segment fell 43% to $1.8 billion. Phillips also has a marketing segment.

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