Phillips 66 Business Policy and Strategy Report

Phillips 66: Business Policy and Strategy

Authors: Deven Alves, Mitch McAvoy, Morgan Metro, Brandon Thomson

ABSTRACT

A Strategic Plan for Phillips 66, a leading energy manufacturing and logistics company.

2

Table of Contents

Table of Contents.................................................................................................................................. 2

Table of Figures..................................................................................................................................... 4

1. Section 1 – Historical Analysis .................................................................................................... 7

History of Phillips 66...................................................................................................................... 7

History of the Industry ................................................................................................................14

History of Competitors and Environmental Factors ......................................................19

2. Section 2 – Current Analysis ................................................................................................. 2-‐28

Subsection 1: Company Profile................................................................................................ 2-‐28

Discussion of Company’s Current Overall Strategy ................................................... 2-‐28

Discussion of Company’s Current Competitive Advantage in the Industry .... 2-‐30

Discussion of Company’s Current Strategy Relevant to the 3 Tests of a Winning

Strategy ......................................................................................................................................... 2-‐33

Discussion of Company’s Current Strategic Vision / Mission ............................... 2-‐34

Identification of Company Core / Distinctive Competencies................................. 2-‐38

Current SWOT Analysis (2013 / 2014)........................................................................... 2-‐40

General Discussion of Current State of the Following Components................... 2-‐48

Subsection 2: Industry Profile.................................................................................................. 2-‐79

Identification and Discussion of Relevant Competitors........................................... 2-‐79

Economic Factors Affecting the Industry .....................................................................2-‐105

Energy Industry’s Dominant Economic Features .....................................................2-‐107

Key Competitive Forces in the Industry .......................................................................2-‐112

PHILLIPS 66: BUSINESS POLICY AND STRATEGY 3

Current Driving Forces in the Industry.........................................................................2-‐115

Strategic Group Map..............................................................................................................2-‐120

Industry Key Success Factors ............................................................................................2-‐124

3. Section 3 – Strategic Plan .....................................................................................................3-‐130

Discussion of Likely Strategic Maneuvers from Relevant Competitors...............3-‐130

Valero...........................................................................................................................................3-‐130

Chevron.......................................................................................................................................3-‐132

Exxon............................................................................................................................................3-‐134

Competitive Three-‐Year Strategy for Phillips 66...........................................................3-‐136

Generic Competitive Strategy............................................................................................3-‐136

Offensive Strategies ...............................................................................................................3-‐139

Defensive Strategies ..............................................................................................................3-‐141

Timeline to Implement Offensive / Defensive Strategies .....................................3-‐143

Potential Supplemental Strategies ..................................................................................3-‐144

Identification of Relevant Issues Concerning International Markets / Suppliers ...3-‐

146

Discussion of Functional Policy to Accommodate Strategic Plan...........................3-‐152

Strategic Policy Relative to Finance / Accounting....................................................3-‐152

Strategic Policy Relative to Marketing Strategy ........................................................3-‐154

Strategic Policy Relative to Management Strategy ..................................................3-‐156

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Table of Figures

Figure 1-‐1....................................................................................................................................................18

Figure 1-‐2....................................................................................................................................................19

Figure 1-‐3....................................................................................................................................................21

Figure 1-‐4....................................................................................................................................................23

Figure 2-‐1............................................................................................................................................... 2-‐28

Figure 2-‐2............................................................................................................................................... 2-‐29

Figure 2-‐3............................................................................................................................................... 2-‐31

Figure 2-‐4............................................................................................................................................... 2-‐40

Figure 2-‐5............................................................................................................................................... 2-‐46

Figure 2-‐6............................................................................................................................................... 2-‐54

Figure 2-‐7............................................................................................................................................... 2-‐55

Figure 2-‐8............................................................................................................................................... 2-‐56

Figure 2-‐9............................................................................................................................................... 2-‐56

Figure 2-‐10............................................................................................................................................ 2-‐57

Figure 2-‐11............................................................................................................................................ 2-‐58

Figure 2-‐12............................................................................................................................................ 2-‐59

Figure 2-‐13............................................................................................................................................ 2-‐59

Figure 2-‐14............................................................................................................................................ 2-‐60

Figure 2-‐15............................................................................................................................................ 2-‐61

Figure 2-‐16............................................................................................................................................ 2-‐61

Figure 2-‐17............................................................................................................................................ 2-‐62

Figure 2-‐19............................................................................................................................................ 2-‐63

Figure 2-‐18............................................................................................................................................ 2-‐63

Figure 2-‐20............................................................................................................................................ 2-‐64

Figure 2-‐21............................................................................................................................................ 2-‐66

Figure 2-‐22............................................................................................................................................ 2-‐67

Figure 2-‐23............................................................................................................................................ 2-‐67

Figure 2-‐24............................................................................................................................................ 2-‐72

Figure 2-‐25............................................................................................................................................ 2-‐73

PHILLIPS 66: BUSINESS POLICY AND STRATEGY 5 Figure 2-‐26............................................................................................................................................ 2-‐73

Figure 2-‐27............................................................................................................................................ 2-‐74

Figure 2-‐28............................................................................................................................................ 2-‐74

Figure 2-‐29............................................................................................................................................ 2-‐75

Figure 2-‐30............................................................................................................................................ 2-‐76

Figure 2-‐31............................................................................................................................................ 2-‐76

Figure 2-‐32............................................................................................................................................ 2-‐77

Figure 2-‐33............................................................................................................................................ 2-‐78

Figure 2-‐34............................................................................................................................................ 2-‐94

Figure 2-‐35............................................................................................................................................ 2-‐94

Figure 2-‐36............................................................................................................................................ 2-‐96

Figure 2-‐37............................................................................................................................................ 2-‐96

Figure 2-‐38............................................................................................................................................ 2-‐97

Figure 2-‐39............................................................................................................................................ 2-‐98

Figure 2-‐40..........................................................................................................................................2-‐100

Figure 2-‐41..........................................................................................................................................2-‐110

Figure 2-‐42..........................................................................................................................................2-‐112

Figure 2-‐43..........................................................................................................................................2-‐117

Figure 2-‐44..........................................................................................................................................2-‐120

Figure 3-‐1.............................................................................................................................................3-‐131

Figure 3-‐2.............................................................................................................................................3-‐135

Figure 3-‐3.............................................................................................................................................3-‐147

Figure 3-‐4.............................................................................................................................................3-‐148

Figure 3-‐5.............................................................................................................................................3-‐150

Figure 3-‐6.............................................................................................................................................3-‐150

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DISCLAIMER

This strategic plan is in no way affiliated with the Phillips 66 Company. This report was

researched and prepared by students of Mercyhurst University for educational purposes

only.

PHILLIPS 66: BUSINESS POLICY AND STRATEGY 7 1. Section 1 – Historical Analysis

History of Phillips 66

While Phillips 66 is still a relatively new company, they come from very strong roots in

the oil business. Prior to becoming their own entity, Phillips 66 was part of the merger

ConocoPhillips which included Phillips Petroleum Company and Conoco Inc. Phillips 66

may be new but the company that they stemmed from has a vast and ever changing

history.

On June 3, 1917, brothers L.E. and Frank Phillips founded the Phillips Petroleum

Company. The brothers started their small but modest business in Bartlesville, Oklahoma.

Before entering the oil business both brothers were a part of the banking business but

with the start of World War I, both decided to liquidate their banking funds and enter the

oil production business. By the end of 1917, the company was able to expand to Kansas

with 27 employees and assets of about three million. However, it was not until 1918 that

the brothers and the company made significant strides.1

In 1918, the Phillips Petroleum Company took part in setting up a refinery in the Texas

Panhandle gas field. The field is defined as “a giant gas and oil producing area that draws

production from several horizons of Pennsylvanian and Permian age granite wash and

dolomite, covering 200,000 surface acres in Hartley, Potter, Moore, Hutchinson, Carson,

Gray, Wheeler, and Collingsworth counties of the Panhandle”.2 It was during this time

that Phillips Petroleum solidified their interest in the oil business and decided to

specialize in extracting liquids from natural gas.3

8

By 1925, Phillips Petroleum was the nation’s largest producer of natural gas liquids.4

Feeling confident with their standings in the oil business, the brothers decided to once

again expand their company. Phillips Petroleum decided to enter the retail side of the

gasoline business where they saw immediate profits. By 1927, the company had made

enough money to expand yet again by opening their first refinery in Borger, Texas. The

year 1927 would prove to be a monumental time for Phillips Petroleum as the company

made strides in their retail endeavors by opening their first gasoline service station in

Wichita, Kansas. To stand out, the company decided to incorporate “66” into their logo

because it was near the famous U.S. Highway 66. The company wanted the logo to be

used as the company’s primary means of brand recognition so they even took to the logo

a step further when deciding to make it look like a route sign.5

Like most companies during the Great Depression, in 1932, Phillips Petroleum suffered

from their first loss in profit for the fiscal year. During that year alone, the company

reported a loss on profits totaling 5.7 million dollars.6 However, the company would

soon see a gain on earnings once again with the start of World War II. The war was able

to hold oil companies as a whole from falling apart during war time for the simple reason

of there being a significant need for oil. Phillips Petroleum was able to stand strong

during the war times even more so because of their war contributions in the form of

innovations in the process of “cold” synthetic rubber as well as the development of the

HF alkylation process for high-octane aviation gas.7

PHILLIPS 66: BUSINESS POLICY AND STRATEGY 9 Once the war was coming to an end, Phillips Petroleum moved their company into a new

direction while still remaining extremely active in their prior fields. By 1948, Phillips

Petroleum had made the jump into the chemical business, forming the Phillips Chemical

company. This would become the company’s first wholly owned subsidiary.8

By 1942, the company would again make strides in its original roots of extracting liquids

from natural gas by purchasing interest in 25% of the Panhandle Eastern Pipe Line

Company. This purchase included more than 250,000 acres of the Panhandle field for the

company. However, by 1954, the Supreme Court would take action against Phillips

Petroleum hold on the Panhandle and order them to divest their share in the Phillips

Petroleum vs. Wisconsin case. The court rules that the Federal Power Commission not

the gas company, would have the authority to regulate the price and manufacturing of the

gas.9

The court ruling and loss of power gains was something the company worked hard to

overcome. Phillips Petroleum decided the best thing to do to make more money was then

to expand their company once again. By the late 1950s, the gas company had begun to

expanded both national and internationally. Phillips Petroleum was exploring for natural

gas in Venezuela, Canada, Columbia, and some Middle East countries.10

However, the company’s expansion on a national scale would prove to be more profitable

by 1962, when Phillips Petroleum took part in an exploration project in Prudhoe Bay,

Alaska. While it took some time, by 1969, the company had found what is now known as

10

the Ekofisk and Natural Gas Field.11 The company used the fields to work on pipeline

projects that would serve as the “hub” when transporting the liquefied gas from Alaska to

Japan.12

By the early 1980s, Phillips Petroleum was once again suffering from profit losses.

During this time, the company was offered to make a merge with the T. Boone Pickens

and Carl Icahn but the company declined. Instead, the company coped with their losses

by restructuring their company and its forthcoming goals. Phillips Petroleum decided to

sell off their synthetic rubber plants which had been of much help to the company in the

1950s. The company also sold off their fertilizer and carbon black plants and focused

once again on expanding internationally. At the time the company was in a debt totaling 4

billion but once selling off their assets they narrowed the debt margin to under 2 billion

and were able to stay away from deal makings with Pickens and Icahn.13

In 1989, the Phillips’s company suffered major profit loss and media backlash when a

plant explosion occurred taking the lives of 23 Phillips employees. The explosion took

place at Phillips’s plastics plant in Pasadena, Texas. The outcome of the tragedy included

500 million dollars in repairs and fees. Even more upsetting to the company financially

was the loss of,”Phillips's U.S. capacity to manufacture polyethylene, which is used to

make blow-molded containers and other products”.14

In 2000, Phillips Petroleum announced that they would be taking a step back into

chemical productions by creating a joint venture with Chevron Corporations. Phillips

PHILLIPS 66: BUSINESS POLICY AND STRATEGY 11 Petroleum would work closely with Chevron’s Chemicals and Plastics Division in their

Ekofisk fields in Alaska. The joint business enterprise would set the company to soon

share 37 manufacturing and research centers where the production over 70,000 consumer

and industrial products would take place.15

Phillips Petroleum made another large change to their company when announcing that

they would be responsible for acquiring the Tosco Corporation. This new purchase took

place in 2001 and proved to be a major gain for the company as the acquisition involved

Phillips Petroleum now being involved in maintaining the brand and image for the 76

Brand Gasoline and Circle K.16

One of the biggest changes for the Phillips Petroleum Company would emerge in 2002

when the company announced their merge with Conoco Corporation. By late August of

that year, the company forwent their former enterprise name and became ConocoPhillips.

The merge was quite significant to not only both merging companies but to the oil

industry as a whole. The 15.17 billion dollar stock merge marked the new company as the

sixth largest oil and natural gas company in the world. With the company now owning

over 20,000 gas stations and various refineries and subsidiaries, it also pushed

ConocoPhillips into becoming one of the top 5 U.S. retailers.17

While in the past Phillips Petroleum had declined various mergers and acquisitions, the

company sought after the merge to promote future growth. While Conoco was currently

facing massive debts, Phillips Petroleum saw the major advantages to the merge. During

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2002, Phillips was described as the current profit provider but would soon grow in the

future with the help of the Conoco side and their explorations overseas. Phillips allowed

the merge and transfer of monies to allow the new ConocoPhillips to combine their

research efforts and become one large competitive force in the oil industry. The merge

marked the newly established company as the third largest publicly traded oil company in

the U.S.18 Just one year into the major merge, ConocoPhillips was making significant

strides in their future growth. The company approved two major projects which included

the Surmont Oil Sands project in Canada as well as their plans for their first offshore oil

project in Vietnam.

ConocoPhillips wanted to continue their expansion and growth and by 2004, they did just

that. On September 29, 2004, the company would form a strategic alliance with Lukoil.

The alliance would, “creat(e) a joint venture to develop resources in the northern part of

Russia’s Timan-Pechora oil and gas province and their intention (was) to jointly seek the

right to develop the giant West Qurna oil field in Iraq”.19

ConocoPhillips furthered their growth just 2 years later by acquiring yet another

company. This time the company that was being bought out was oil and gas producer

Burlington Resources. The acquisition which took place on December 21, 2005, involved

a payout of 35.6 billion dollars by ConocoPhillips. ConocoPhillips sought for the oil and

gas producer as a means to build, “operations in gas fields in North America, which have

gained in value as strong demand pushed prices higher”.20 It was simply easier for

PHILLIPS 66: BUSINESS POLICY AND STRATEGY 13 ConocoPhillips to buy up another company and receive their assets and land than to

search and set up a new refinery on their own.

ConocoPhillips made another purchase in 2006. This time it was the Wilhelmshaven

Refinery in Wilhelmshaven, Germany. The purchase allowed ConocoPhillips access to

one of the largest independent oil refineries in Europe that average the production of

about 260,000 barrels per day.21 Along with the purchase of the Wilhelmshaven

Refinery, ConocoPhillips also purchased the Dreyfus Refinery and Marketing Limited in

the UK in the same year.

2007 marked the year of another strategic alliance for the growing ConocoPhillips

Company. The company announced its alliance with Tyson Foods stating that the two

businesses would work together to find new ways of creating renewable diesel fuels from

various animal byproduct fat. Both companies saw the endeavor as a way to find the

“next generation” of renewable diesel fuels. ConocoPhillips explained that, “to make the

fuel, the animal fats will be processed with hydrocarbon feedstocks to improve its storage

stability and handling characteristics (and) the fuel will meet all federal standards for

ultra-low-sulfur diesel”.22

Major changes occurred for the ConocoPhillips Company in 2011. During the fiscal year,

board directors of the company met and sought plans to break down or separate the ever-

growing company. The board members decided upon breaking the business down into

two separate categories. The first would be composed of the company’s Refining and

14

Marketing business aspects and the second would include the Exploration and Production

business. By the end of the year the board had concluded that two categories would serve

as two separate standalone corporations. The first would remain as ConocoPhillips

serving the production aspect and the new corporation would be Phillips66 as the sole

entity for the marketing and refinery side.23

On May 1, 2012 Phillips66 began trading as a separate company from ConocoPhillips.24

Since the company has been separated from the Conoco name, Phillips 66 has emerged as

a company with great amounts of potential. At the end of 2013, Phillips 66 took the #4

spot on the desired Fortune 500 top performing companies list.25 With a new

management team and new aim for future ventures and investments, Phillips 66 appears

to be a company on the rise.

History of the Industry

The petroleum industry is one of the largest industries in the world. In short the

petroleum industry is based off of extracting raw crude oil from the ground and refining it

into usable resources such as oil and gasoline. Crude oil is believed to be created from

organic waster residue, mainly microscopic plankton and land plants. This organic

matter has accumulated over millions of years creating deposits of decaying matter far

beneath the surface. Being so far underneath the earth the pressure building on top of the

matter caused it to be heated which turned it into hydrocarbons such as oil and natural

gas. This liquid form of oil slowly permeated through rocks and was trapped by shale

rocks on top and heavier salt water on the bottom.26

PHILLIPS 66: BUSINESS POLICY AND STRATEGY 15

There are many different ways to extract the raw crude oil from the ground. Drilling for

oil is the most common used method today. Also there is offshore drilling which is when

there are underwater wells in the ocean of large lakes that cannot be accessed on land.

There are the oil sands in northwestern Canada, which is almost like a mining operation

to extract the crude oil from an almost sand like substance. As well there is a recently

new technology that is controversial but very beneficial and that is called hydraulic

fracking. The technology uses a horizontally drilled shaft and puts high pressure sand

and chemical mixture into the shaft creating cracks in the ground releasing the petroleum.

The first way and the first time we see oil put to use for humans was 1854 in Oil Creek,

Pennsylvania. George Bissell founded the Pennsylvania Rock Oil Company and used it

to capture oil that had made its way to the surface. At first the oil was used primarily for

medical treatments but a chemist from Yale University saw prosperity in the refining of

the oil. Bissell teamed up with former railroad conductor Edwin L. Drake who had

studied salt-water artesian well to become the first to drill for oil. August 27, 1859 was

the first oil well to be drilled in North America and strike a pool of oil; its depth was 69

feet. 27

Soon after the first oil well was drilled John D. Rockefeller founded Standard Oil of

Ohio, which at the time is the largest corporation in America. It focuses on refining the

crude oil and natural gas into usable resources. By 1878 Standard Oil hold a 90 percent

market share in the refining of oil and natural gas. Once companies realized that oil was

not only on land but beneath water as well they began the process of figuring out how to

16

plan and drill for off shore wells. In 1896 the first off shore well was drilled at the end of

a 300-foot wharf in Summerland California.28

Soon after the discovery of oil and all the possibilities it brings to striking it rich and

creating jobs, oil boomtowns started popping up. These towns are solely based on

working around the oil industry. Beaumont, Texas was the first to become known as oil

fueled boomtown in 1901 after a “gusher” flowing 100,000 barrels of oil a day was

found. A lot of these towns do unfortunately dry up after oil wells dry up but they are

very profitable in the short run and whoever strikes the oil or owns the land became very

wealthy.

One of the biggest inventions to happen in the oil industry was when Henry Ford

incorporated The Ford Motor Company and created the first gasoline powered

automobile, the Model T. Before automobiles were invented gasoline was a little used

byproduct of the refining process and now with these new machines they can use it

increasing the demand of oil and gasoline.

By 1911 the United States Supreme Court rules that Standard Oil is to be broken up into

34 smaller companies. They rule that the company is an unreasonable monopoly under

the Sherman Antitrust Act. 29

When World War I started the fight for oil and the supplies it created fueled the war.

Planes, ships and tanks were fueled by oil and gasoline. This is the first time in history

PHILLIPS 66: BUSINESS POLICY AND STRATEGY 17 where a war has been aided by the oil supply and who had control of it. Whoever

controls the oil supply and blocks it off to their enemies ultimately has a better chance at

winning the war. Ultimately though this would lead into the Great Depression where

many people suffered through ten long years of financial crisis and hopelessness.

The Great Depression caused Americans and the oil industry to look other places to drill

for oil. In 1933 Standard Oil was allowed by Saudi Arabia to prospect for oil. Going

abroad in search of oil is one of the biggest moments in the oil industry. Today Saudi

Arabia is one of the world leaders in the oil industry and produces mass amounts of

petroleum. In 1939 the control of the oil industry hit an all time high with the start of the

Second World War. With even more automobiles, tanks and planes relying on oil and

gas to function the control of who has what was very evident. The fight for the Middle

East and their huge oil reserves were very important to the Allied forces. The United

States realized that the oil supply is very limited and recognized that creating an oil

policy should be a concern for the future of the nation. Ultimately when the Allied forces

put a blockade on Japan and no oil could be brought in considerably weakened the

Japanese forces and was their downfall.

“September 14, 1960 the Organization of the Petroleum Exporting Countries (OPEC) is

formed for the purpose of negotiating with oil companies on matters of petroleum

production, prices, and concession rights. The first member nations of the cartel are Iran,

Iraq, Kuwait, Saudi Arabia and Venezuela”.30 This organization is still running today

and has 12 members countries. The goal of OPEC is to unify the petroleum policies of its

18

member countries and ensure stabilization of oil markets in order to secure an efficient,

economic and regular supply of petroleum to consumers. 31

The Great Canadian Oil Sands

Ltd was founded in 1967,

which is a production process

in which oil is extracted from a

rocky material, almost like a

mining operation. This was

found to be one of the largest

oil resources in the world and

has made Alberta Canada one of the most desirable places to find work.

The oil and gas industry can be unstable at times and the price of a barrel of oil is always

changing. At points in time the price of a barrel of oil has been as low as $10, as of right

now the price of oil is $100. The amount of wealth that can be garnered from the oil and

gas industry is immense. In 2008 crude oil hits a record high of $147.27 per barrel.

Months later the price of oil drops below $50 as the global recession hits.

Figure 1-1

PHILLIPS 66: BUSINESS POLICY AND STRATEGY 19 History of Competitors and Environmental Factors

Valero Energy Corporation

Figure 1-2

1980

• Valero Begins • Born as the corporate successfor of LoVaca Gathering Co., a natural-‐gas gathering subsidary of the Coast States Gas Corp.

1990 • Valero Grows As a Diversiaied Company • Began operating in reaining and marketing and natural-‐gas-‐related services.

1997 • Acquires Basis Petroleum Inc • Becomes the Largest Independent Reainery on the Gulf Coast

2000 • Valero Acquires Benicia Reainery, one of the most complex reaineries in the nation. • Valero Enters West Coast Market and Establishes Retail Presence

2001 • Valero Acquires Ultramar Diamond Shamrock • Became one of the nation's top three reaining and marketing companies.

2004 • Valero's International Reach Expands • Purchases El Paso Corp's 315,000 barrel-‐per-‐day reainery in Aruba.

2005

• Valero Becomes Largest Independent North American Reainery • Acquired Premcor Inc, an $8 billion transaction, one of the largest and most strategic in the compnay's history.

2006

• Valero's Branded Wholesale Division Grows and Earns Honors • Became the No. 1 rack fuel marketer in Texas, signed an 11-‐year agreement with Susser Petroleum.

2009

• Valero Enters Renewable Fuels Business • Purchased seven ethanol plants from VeraSun Energy Corp. Formeda new subsidiary, Valero Renewable Fuels Company LLC.

2011

• Valero Enters Western Europe, Continues Strategic Acquisitions • Purchased the Pembroke Reainery in Wales, also purchased ownership interests in four major pipelines and 11 fuel terminals. Fall 2011, acquired Meraux Reainery in Meraux, LA.

2013

• Valero Spins off Retail to CST Brands Inc. • Became one of North America's largest independent retailers of transportation fuels and convenience merchandise.

20

Valero Energy Corporation, founded by Bill Greehey, was created on January 1, 1980, as

the corporate successor to LoVaca Gathering Company, a subsidiary of the Coastal States

Gas Corporation. After six years of litigation between Coastal and it’s municipal gas

customers due to claims of being overcharged, a $1.6 billion settlement was reached and

as a result Valero was created. Headquartered in San Antonio, Texas, Valero originally

operated as a natural-gas transportation business. As early as the mid 1980s Valero

began to diversify and expand its operations into other fields in the energy industry with a

50 percent interest in a Corpus Christi, Texas, refinery owned by Saber Energy. The

years following Valero invested more than $1 billion in this refinery, converting it into a

cutting-edge technological refinery that was able to produce eco-friendly fuel; and by

1997 started adding more refineries through their subsidiaries.32 33 In 1997 Valero

purchased Basis Petroleum Inc. and as a result became the largest independent refinery in

the Gulf Coast. In 2000, Valero purchased Benicia Refinery and begins to establish their

presence in the west coast markets, as well as establishes their retail presence. By 2005

Valero had purchased several other refineries and became the largest independent North

American refinery. In 2009 Valero purchased seven ethanol plants from VeraSun Energy

Corporation, establishing their presence in the renewable fuels business. In 2011 Valero

purchased the Pembroke refinery in Wales, as well as ownership interests in four major

pipelines and 11 fuel terminals.

Valero’s strategic history shows that they placed a high emphasis on refinery technology

as well as refinery acquisitions within North America. One of Valero’s initial

investments was a $1 billion investment into their original refinery plant that allowed

PHILLIPS 66: BUSINESS POLICY AND STRATEGY 21 them to create eco-friendly fuel from mere cut-rate feedstocks. This shows an early

emphasis on being environmentally friendly, as well as working to reduce costs within

their value chain. Following their initial investment, Valero has continued to acquire

high-tech oil refineries all over North America. This shows their ongoing commitment to

expand their company as well as operate cutting-edge technological refineries. Valero

has proven through their past financial success as well as their aggressive acquisition

strategy that they will like be a major competitor in the petroleum refining industry.

Their commitment to operating high-tech oil refineries allows them to remain flexible in

the oil industry as well as reduce their overall costs and improve their profits.

Chevron

Figure 1-3

In 1876, Petroleum pioneers Demetrius Scofield and Feederick Star of the California Star

Oil Works began drilling in the Pico Canyon, a remote portion of the Santa Susana

Mountains. Lacking the capital it needed to seize marketing opportunities, California

Star was acquired by the Pacific Coast Oil Co. on Sept. 10, 1879. In 1895, the company

initiated its enduring marine history with the launch of California’s first steel tanker,

22

which could ship 6,500 barrels of crude between Ventura and San Francisco. In 1885 the

Iowa Standard purchased the company; Iowa Standard proceeded to gain a presence in

the production, transportation, and refining businesses. In 1906 the Iowa Standard

created a new entity, the Standard Oil Corporation of California. Throughout the early

1900s the Standard Oil Corporation of California began purchasing other refineries and

expanding their operations. Following World War I, U.S. crude oil supplies were

depleted, and Standard Oil decided it was time to seek oil beyond the U.S. shores. At this

point, Standard Oil expanded their operations internationally to the Philippines as well as

Saudi Arabia. During World War II, the Standard Oil Corporation of California (Socal)

was the main supplier of crude oil to the Allied forces. In 1945, Socal expanded their

portfolio into petrochemicals with the development of synthetic detergents and plastics.

In 1977 the company decided to make a major organizational change, and as a result

formed Chevron U.S.A. Inc., merging six domestic oil and gas operations into one. This

nationwide organization and consolidated organization positioned Chevron to flourish in

the coming years. In the 1990s Chevron began their involvement in mega-projects,

including developing allies with other corporations. These alliances positioned Chevron

to be involved in the industry’s best opportunities. In 2000 Chevron merged with

Texaco, creating the ChevronTexaco company. In 2005 they decided to drop the Texaco

and proceed with the Chevron name. By 2006 Chevron had displayed their expertise in

deepwater drilling, allowing them to access oil reserves that other companies weren’t

capable of accessing. Chevrons long history in the oil industry has allowed them to

become one of the supermajor oil companies today.34

PHILLIPS 66: BUSINESS POLICY AND STRATEGY 23 ExxonMobil

Figure 1-4

ExxonMobil was started in 1859 when Colonel Edwin Drake and Billy Smith drilled the

first successful oil well in Titusville, Pennsylvania. In 1870, Rockefeller and his

associates formed the Standard Oil Company (Ohio), constituting the largest refining

capacities in the world. Standard continued with their kerosene production and saw great

success, until 1911 when gasoline surpassed kerosene for the first time. After the

acquisition of many different companies, Standard oil had stake in the oil and chemicals

industry by 1920; including the first production of the petrochemical isopropyl alcohol.

By 1963 Standard Oil had adopted 3-D seismic technology which would soon allow them

to search for oil and gas in a whole new way. In 1966 the Vacuum Oil Company

changed its name to the Mobil Oil Corporation. In 1972 Jersey Standard changed their

name to the Exxon Corporation. Throughout the 70’s, Mobil began releasing their Mobil

1 oil, which would soon become the leading synthetic motor oil. In November of 1999

Exxon and Mobil officially combined creating the ExxonMobil Corporation, a move said

to enhance their ability to be an effective global competitor. In 2011 ExxonMobil

became the first oil company to utilize deepwater drilling, this is one of the largest

discoveries in the Gulf of Mexico in the last decade.35

24

Environmental Factors

The oil Industry is responsible for the majority of the world’s energy generation. Most

people don’t fully realize the incredible stress the industry is under and the risk factors

affecting it. Over the years there have been very many environmental factors that have

affected the decision making of the industry, how the companies do business, and the

direction the industry has moved over the years.

The first major problem that the oil industry has been battling over the years is the

unstable oil and gas prices. The constant spikes in oil prices resulting from supply issues

and ongoing regulatory battles are the issues weighing heavily on the minds of oil and

gas executives throughout the industry. These issues have long been prevalent in the

industry, but are handled with more urgency as significant tax and environmental

regulations come closer to fruition and turmoil in the Middle East continues to drive up

prices as well.36

The next major problem that the oil industry must deal with is regulatory and legislative

and increased cost of compliance. Over the years government interference has enforced

tighter safety and environmental guidelines requiring oil companies to massively invest

in preventive measures. After the BP oil spill in the Gulf of Mexico, the standstill placed

on offshore drilling in the region crippled the oil and gas industry. Causing the regulatory

and legislative changes that are affecting the industry today.37

PHILLIPS 66: BUSINESS POLICY AND STRATEGY 25 Continuing on with regulatory and legislative involvement in the oil industry. Since the

BP oil spill there has been a big focus on preventing operational hazards including

blowouts as well as personal injuries. The Deepwater Horizon incident was a game

changer for the industry as a whole. The explosion that led to the oil spill left 11 men

dead and more injured. This forced the industry to invest heavily in safety precautions

and more skilled training so something that would not happen again. 38

Environmental restrictions and regulations have also had a huge impact on the oil

industry. The problems surrounding climate change and greenhouse gas emissions have

become common knowledge in society. Also the more recent concerns over the future of

hydraulic fracturing, poses major problems to the oil and gas industry.

When it comes to economic concerns, over the past years we have faced a global

recession. This has forced more households and businesses to tighten up their belts to

make every penny count. The oil and gas companies are no different; they must address

many of the same concerns. Whenever there is an economic slowdown it leads to lower

oil demand, as consumers scale back their gasoline consumption and businesses cut

travel.39

In an industry that is driven by constant innovation and advancements, technology could

possibly be the most important part of the key environmental factors of the oil industry.

Technology is what started the oil industry; it has been and well continues to be the main

driving force in the industry until oil no longer exists. over the last century it has been the

26

key factor in decision making, shaped the companies do business, and determined the

direction in which the oil industry went and will continue to go.

1 http://www.referenceforbusiness.com/history2/65/ConocoPhillips.html

2 http://www.tshaonline.org/handbook/online/articles/dop01

3 http://digital.library.okstate.edu/encyclopedia/entries/p/ph004.html


5 http://www.cspnet.com/fuels-news-prices-analysis/fuels-news/articles/phillips-66-rises-again

6 http://www.encyclopedia.com/topic/Phillips_Petroleum_Company.aspx


8 http://www.phillips66.com/EN/about/history/Pages/index.aspx

9 http://en.wikipedia.org/wiki/Phillips_Petroleum_Co._v._Wisconsin



12 http://www.conocophillips.no/EN/our-norway-operations/greater-ekofisk-area/ekofisk/Pages/default.aspx

13 http://money.cnn.com/magazines/fortune/fortune_archive/1985/03/04/65693/index.htm

14 http://www.referenceforbusiness.com/history2/74/Phillips-Petroleum-Company.html

15 http://www.cpchem.com/en-us/company/Pages/default.aspx

16 http://en.wikipedia.org/wiki/Circle_K

17 http://money.cnn.com/2002/03/12/news/deals/phillips/

18 http://www.reuters.com/article/2011/07/14/conocophillips-mergers-idUSN1E76D0MC20110714

19 http://www.lukoil.com/press.asp?div_id=1&id=2265

20 http://www.nbcnews.com/id/10448863/ns/business-oil_and_energy/t/conocophillips-buy-burlington-resources/

21 http://www.hydrocarbons-technology.com/projects/wilhelmshaven-refine/

22 http://www.nbcnews.com/id/18136194/ns/business-oil_and_energy/t/conocophillips-tyson-make-diesel-fats/

23 http://www.chron.com/business/article/ConocoPhillips-split-becomes-official-as-company-3522914.php

24 http://www.phillips66.com/EN/about/history/Pages/index.aspx

25 http://money.cnn.com/magazines/fortune/fortune500/2013/snapshots/11773.html?iid=F500_lp_arrow2

26 http://www.usoilandgas.net/learnaboutoil.htm

27 http://www.britannica.com/blogs/2009/08/the-first-oil-well/

28 http://www.pbs.org/wnet/extremeoil/history/



PHILLIPS 66: BUSINESS POLICY AND STRATEGY 27 31 http://www.opec.org/opec_web/en/about_us/25.htm

32 http://www.thehistoryofcorporate.com/companies-by-industry/energy/valero-energy-corporation-companies-history-corporations-

history/

33 http://www.valero.com/ourbusiness/pages/companyhistory.aspx

34 http://www.chevron.com/about/history/2002/

35 http://corporate.exxonmobil.com/en/company/about-us/history/overview

36 http://www.bdo.com/news/pr/1706

37 http://democrats.naturalresources.house.gov/issue/bp-oil-spill

38 http://www.bdo.com/news/pr/1706

39 http://www.nytimes.com/2008/01/24/business/worldbusiness/24iht-oil.1.9467777.html?_r=0

2-‐28

2. Section 2 – Current Analysis

Subsection 1: Company Profile

Discussion of Company’s Current Overall Strategy

On April 9, 2012, Greg Garland, the designated CEO of Phillips 66, presented an

overview for the new company and his plans for Phillips 66. Garland mentioned that

there would be three leading operating segments for Phillips 66: Chemicals, Midstream,

and Refining and Marketing.40 The most basic of strategies for Phillips 66 is to focus on

the business segments that have the highest return on capital invested.

The two segments that have produced the highest return on capital invested are the

Chemicals business segment and the Midstream business segment. The Chemicals

Figure 2-1

PHILLIPS 66: BUSINESS POLICY AND STRATEGY 2-‐29 business segment for Phillips 66 boasts a 28 percent return on capital employed (ROCE),

and the Midstream business segment boasts a 30 percent ROCE.41 This means that the

Refining and Marketing business segment will likely be de-emphasized due to the low

profitability. Capital allocation in the Chemicals business segment as well as the

Midstream business segment will likely increase.

Garland also states that Phillips 66 will benefit from being an independent company.

Compared to their predecessor ConocoPhillips, Phillips 66 is smaller in size and more

likely to see accelerated growth.42 Furthermore, the three pieces of the Phillips 66

business are more valuable together. According to Garland, this value is created through

lower risk, lower cost of capital, and the ability to see through the entire value chain.43

Phillips 66 differentiated

portfolio would prove to be a

competitive advantage for

them. With 40 percent of their

adjusted earnings coming from

Refining and Marketing, and

the other 60 percent from

Chemicals and Midstream,

Phillips 66 has successfully

spread their earnings across

their business segments.44

This lowers the risk for Phillips 66 if one of their specific segments drops off

Figure 2-2

2-‐30

significantly. They will be able to rebound with the help of their other business

segments.

According to Garland, the long-term vision for Phillips 66 is that Refining and Marketing

will see 50 percent of capital employed, where as Midstream and Chemicals will make up

the other 50 percent via a 25/25 split (see figure 2-3). Garland also indicated that they

will likely invest in their higher return business and “will be very selective in how we

invest in the lower return businesses.”45 Molly Ryan reported in the Houston Business

Journal on February 11, 2014 that Phillips' decision to move forward with more than $3

billion worth of projects reflects the company’s strategic decision to chase higher-margin

markets. "Midstream spending is expected to pick up in 2014 since energy companies are

increasingly realizing the profits that can be found in moving the massive amount of oil

and gas coming from U.S. shale plays," writes Ryan. "Phillips 66 specifically hopes to

cash in on this through its new liquefied petroleum gas terminal, which will store and

transport fluids, and its new fractionator facility, which will supply and transport natural

gas liquid products to petrochemical companies."46

Discussion of Company’s Current Competitive Advantage in the Industry

Diverse Portfolio

Phillips 66’ greatest competitive advantage is their diverse portfolio. Phillips 66 is the

only independent company that provides leading Midstream, Chemicals, Refining and

Marketing, and Specialties businesses. By operating with such a diverse portfolio,

Phillips 66 is positioned to capture opportunities of the changing energy landscape. With

PHILLIPS 66: BUSINESS POLICY AND STRATEGY 2-‐31 40 percent of their adjusted earnings coming from their Refining and Marketing segment,

and the other 60 percent from their Midstream and Chemicals segments, Phillips 66 is

effectively creating balance among their business portfolio.47 By earning profits from

many different business segments in a balanced way, Phillips 66 is effectively able to

lower their risk and earn profits in an ever-changing energy landscape.

Natural Gas in the US

Figure 2-3

In the United States today, Phillips 66 is enjoying a competitive advantage due to

increased production of crude oil, natural gas liquids, and natural gas. These are

feedstocks that Phillips 66 uses for their refineries in their midstream and chemicals

2-‐32

businesses.48 Though Refining and Marketing brings in the most profit for Phillips 66,

they also have a majority of their capital allocated into this segment. When it comes to

ROCE, Phillips 66 has a competitive advantage in the Midstream and Chemicals

segments. NGL productions are expected to increase from 200,000 to 400,000 barrels a

day every year through 2015. Crude production is expected to increase from 500,000 to

600,000 barrels a day every year through 2015. And finally, natural gas is expected to

increase from 150 billion cubic feet to 200 billion cubic feet every year through 2015.

An estimated $100 billion is expected to be invested to get these products to the market,

and it is fundamental for Phillips 66 to exploit the increase in demand for these

resources.49

Joint Ventures

Phillips 66’ joint ventures with DCP Midstream as well as Spectra Energy Corporation,

which is the largest NGL producer in the United States, is proving to be a competitive

advantage in the Midstream business segment.50 In the Chemicals business segment,

Phillips 66’ 50/50 joint venture with Chevron, named the ChevronPhillips Chemical

Company (CPChem), is one of the largest producers of olefins and poly olefins.

Furthermore, CPChem has significant assets that are advantaged from the NGLs from the

North American shale.51

Financial Strength and Flexibility (see Current Financial Analysis)

Phillips 66 also has a competitive advantage in their financial strength and flexibility.

Phillips 66 holds an investment grade credit rating on their long-term debt, and they

PHILLIPS 66: BUSINESS POLICY AND STRATEGY 2-‐33 maintain sufficient cash and liquidity to enable them to invest in high-return projects (see

Current Financial Analysis). Phillips 66 current strategy to allocate capital into their

higher ROCE business segments (Midstream, Chemicals) is designed to fund

sustainability investments and growth projects, while increasing shareholder distributions

and strengthening their balance sheet. This approach will enable Phillips 66 to remain

financially flexible throughout the business cycle.

Discussion of Company’s Current Strategy Relevant to the 3 Tests of a Winning

Strategy

Does Phillips 66’ Strategy Fit Their Current Situation?

Phillips 66 spun off from ConocoPhillips in order to integrate their downstream business

into one company. Since their separation, Phillips 66 has placed a significant emphasis

on their Chemicals and Midstream business segments. Furthermore, because of their

decrease in size, as compared to ConocoPhillips, Phillips 66 is more capable of reducing

their risk, lowering their cost of capital, and creating greater transparency through their

value chain. The combination of these three factors allows Phillips 66 the better allocate

their resources to their Chemicals and Midstream segments.

Is Phillips 66’ Strategy Helping the Company Achieve a Sustainable Competitive

Advantage?

Phillips 66’ strategy of allocating more of their resources into Chemicals and Midstream

is allowing them to achieve a sustainable competitive advantage. In the midstream

segment, NGL production is expected to increase from 200,000 barrels-a-day to 400,000

2-‐34

barrels-a-day per year through 2015. Natural gas production is expected to increase from

150 billion cubic square feet to 200 billion cubic square feet per year through 2015 (see

Discussion of Phillips 66 Competitive Advantage). If these estimates are accurate,

Phillips 66 is placing themselves into a highly competitive position in the next two years.

Beyond the next two years, the ever-changing energy landscape in the United States is

constantly evolving. By focusing their efforts on Chemicals and Midstream, Phillips 66

believes that they are placing themselves into a situation that works with the changing

landscape. Their diverse portfolio allows them to adapt and exploit whichever energy

markets may emerge (see Phillips 66 Overall Strategy).

Is Phillips 66’ Strategy Producing Good Company Performance?

Discussion of Company’s Current Strategic Vision / Mission

Phillips 66’ mission statement is as follows:

“We are Phillips 66, and our employees, suppliers, and partners share a vision to provide

energy and improve lives. We manufacture energy and are shaping the U.S. energy

revolution with products such as gasoline, diesel, jet fuel and lubricants for

transportation, natural gas and natural gas liquids for powering businesses and heating

homes, and petrochemicals, polymers and plastics found in cars, electronics and everyday

goods. We provide high quality jobs and deliver value to our shareholders.”52

In their mission statement, Phillips 66 says that their goal is to do a service to the

community in order to improve the quality of living. They mention that they are shaping

the U.S. energy revolution, a claim that is very powerful considering the demand for

PHILLIPS 66: BUSINESS POLICY AND STRATEGY 2-‐35 energy today. Also, their mission statement lists their broad product offerings in a sense

that allows the reader to understand that Phillips 66 products are a part of our day-to-day

life. Their last statement refers to the quality of their work as well as the value of their

shareholders. This mission statement is sufficient because it describes what Phillips 66

does as a company, what products they offer in a general sense, as well as their

commitments as a company.

Phillips 66’ strategic priorities as a business are as follows:

• Enhance Returns on Capital

• Deliver Profitable Growth

• Grow Shareholder Distributions

• Build a high-performing organization

• Maintain Strong Operating Excellence

In order to enhance their returns on capital, Phillips 66 plans to increase ROCE and

capital efficiency through greater use of advantaged feedstocks, a disciplined capital

allocation process and portfolio optimization. Processing lower-cost crude oil and NGL

feedstocks allow Phillips 66 to increase their gross margins as well as their return on

capital in Refining and Chemicals. In order to achieve higher returns, Phillips 66 is

selling finished products to higher-margin export markets. Furthermore, Phillip 66’

disciplined allocation process ensures that investments into projects with generate

competitive ROCE throughout the business cycle. Capital directed towards Chemicals,

Midstream, and Marketing and Specialties is expected to see higher growth and returns.

2-‐36

In regions that generate below-average returns, Phillips 66 plans to reduce Refining

exposure.

There is a high potential for profitable growth in the Chemicals and Midstream segments.

Phillips 66’ Chemicals joint venture company, CPChem, plans to reinvest the majority of

its net income to build additional processing capacity that benefit from lower-cost NGL

feedstocks. The increase in demand for unconventional crude oil, NGL and natural gas

production, is creating capital investment opportunities in Phillips 66’ Midstream

business.

Phillips 66 believes that consistent and ongoing growth of regular dividends,

supplemented by share repurchases, creates shareholder value within their company.

Phillips 66’ plans to increase dividends annually and fund a share repurchase program

while continuing to invest in the growth of their business.

In order to create a high-performing organization, Phillips 66 has worked towards

providing a great place to work where employees can reach their fullest potential, thrive

on delivering results, and create shareholder value through individual and team success.

Phillips 66 fosters an achievement-based culture that promotes accountability and

meritocracy, while investing in learning as well as development.

Phillips 66 is committed to maintaining strong operating excellence by continually

improving safety, environmental stewardship, as well as improving cost efficiency.

PHILLIPS 66: BUSINESS POLICY AND STRATEGY 2-‐37 Rigorous training and audit programs drive ongoing improvement in both personal and

process safety. A large part of Phillips 66 strategic vision is the commitment to

protecting the environment and continually seeking to reduce their environmental

footprint throughout their operations.53

Along side their business strategies, Phillips 66 also has several core values that it

bases their company on:

• Safety

• Honor

• Commitment

Phillips 66’ highest value is that of safety. They are dedicated to providing safety to their

employees, the environment, as well as to the community. In a business that operates

large facilities with dangerous chemicals and heavy equipment, it is extremely important

for Phillips 66 to take a great amount of pride in their safety. Furthermore, the petroleum

refining industry is known to cause a damaging environmental footprint. Phillips 66’

commitment to providing safety for the environment shows that they are aware of the

damages, and a continually working to improve them. Lastly, by valuing the safety of the

community Phillips 66 is trying to gain a good image with their consumers.

Their next highest value is honor. Phillips 66 wants their customers as well as the

community to honor their word, and to believe that they will always do the right thing.

This is extremely important to building confidence with the community as well as their

2-‐38

customers. If they are able to abide by their values and honor their word, then they are

able to gain a good position with the community.

Lastly, Phillips 66 places value in their commitment to achieve the highest levels of

performance in everything that they do. This ode of commitment is especially important

in the energy industry. By committing to achieving high levels of performance, they are

able to produce the highest quality energy as well as generate the most profit possible.54

Identification of Company Core / Distinctive Competencies

Core Competencies

Joint Venture with DCP Midstream

Phillips 66’ joint venture with DCP Midstream gives them a great advantage in their

midstream sector. DCP Midstream leads the midstream industry as one of the nation's

largest natural gas gatherers and processors, and one of the largest producers and

marketers of NGL in the United States. Because Phillips 66 is the only company with

stake in DCP Midstream, combined with DCP midstream’s massive success in the

midstream sector, this is a core competency for Phillips 66 that other companies aren’t

capable of replicating.

Joint venture with Chevron, Chevron Phillips Chemical Company LLC, CPChem

Phillips 66’ joint venture with Chevron Phillips lead to the creation of CPChem, or the

ChevronPhillips Chemical Company. CPChem is the largest producer of high-density

polyethylene (HDPE) in the world. CPChem is also the fourth largest ethylene producer

in North America. Furthemore, CPChem is the second-largest cyclohexane producer and

the largest cyclohexane marketer in the world. Their chemicals company CPChem is a

PHILLIPS 66: BUSINESS POLICY AND STRATEGY 2-‐39 competency because they are not only extremely successful in North America, but they

have the joint venture with Chevron Phillips which gives them greater access to resources

as well as the ability to spread their risk.

Distinctive Competencies

Diverse Portfolio and Management Team

Phillips 66 is the only independent company that combines leading Midstream,

Chemicals, Refining, and Marketing and Specialties businesses. Their differentiated

portfolio allows them to add value to their investments as well as spread risk across their

value chain. Also, being a spinoff from ConocoPhillips, Phillips 66 has a management

team that has been in the energy industry for decades. In an time where supply for

quality management is decreasing, the ability to have a management team as well as a

highly-skilled workforce is a distinctive competency for Phillips 66.

2-‐40

Current SWOT Analysis (2013 / 2014)

SWOT

Strengths • Brand recognition • Joint business ventures • Ability to balance cash

flow

Weaknesses • Profit slump • Competitive

Marketplace

Opportunities • Expanding US shale gas

market • Sustainable energy

initiatives • Alternative energy

sources

Phillips 66 should take advantage of their joint ventures with DCP Midstream as well as CPChem to further expand on their natural gas producing capabilities; this is also considered an alternative fuel source that is seeing a rise in demand today.

In a highly competitive marketplace, it is crucial for Phillips 66 to be able to differentiate their products, specifically in their midstream. Differentiating among NGLs and natural gas will allow them to gain market standing and turn a profit.

Threats • Split from

ConocoPhillips into a less profitable market

• Unstable market • Health, safety, and

environmental risks

Though the downstream industry isn’t as profitable as the upstream industry, Phillips 66 is able to rely on their brand recognition as well as their resources in the upstream industry in order to increase profit margins in the downstream industry.

It is clear that the spinoff from ConocoPhillips has resulted in a decrease in profits for Phillips 66, specifically in their refining segment. Phillips 66 should work to invest their resources into high-profit markets with fewer environmental risks.

Figure 2-4

Strengths

Phillips 66 is a relevantly new company but, that does not mean the company lacks in

having various strengths. While Phillips 66 has only become their own separate

corporation since May of 2012, the company has made several strides and tactical moves

to stay relevant in the oil industry. The company may be new but still also benefits from

past roots and uses those to their advantage as well. Phillips 66 is a company that excels

and it shows through their strengths denoted in any SWOT analysis.

PHILLIPS 66: BUSINESS POLICY AND STRATEGY 2-‐41

Brand Recognition

As previously stated, Phillips 66 is a newer company in the oil industry but still, they

have dated origins that they use now to help strengthen their business. The Phillips 66

logo is a major strength that the company remains to hold on to. The red, white and black

state highway route shaped sign has remained the same with only a few minor changes

since first being introduced as Phillips Petroleum‘s logo in 1930.55 It has instant brand

recognition to consumers therefore giving Phillips 66 a more family friendly and safe

feeling. When asking Phillips 66 CEO Greg Garland about the logo and reasons for

keeping it he stated, “Phillips 66 has strong brand recognition and value, and it provides a

link between our rich history and our exciting future. Our name reflects an independent

spirit and drive - two attributes of our future company “.56

Joint Business Ventures

Another strength that Phillips 66 has relates to their holdings in the oil industry’s

midstream and chemical business. Phillips 66 takes part in a 50/50 venture with Spectra

Energy for DCP Midstream. This venture includes over 50,000 miles of natural gas

pipeline as well as 62 gas processing plants and 12 fractionation facilities.57 Another huge

midstream asset that Phillips 66 holds is having a 25 percent stake in the Rockies Express

natural gas pipeline.58

2-‐42

Ability to Balance Cash Flow

One last significant strength for Phillips 66 is their ability to balance their cash flow.

When ConocoPhillips split in 2012, there was debate as to whether or not Phillips 66

would be able to survive as they were becoming a much smaller entity. However, being

smaller worked to the advantage of the company. When the company split, it allowed for

Phillips to invest their money more strategically. This had proven to be beneficial

because investors felt a sense of better or more accurate predications because Phillips was

smaller so their ventures and spending habits were more narrow. Having more tapered

investments with their cash had proven to be successful as the company saw stocks rise

by 86 percent by the end of 2013.59

While Phillips 66 may still be a newer company to the oil industry, they have strong roots

and ties to keep them successful and pertinent. Between their joint ventures and strategic

investing, the company has shown great strides since splitting from ConocoPhillips. As

the company matures, they should go on to show even more strengths as a competitor to

others within the oil industry.

PHILLIPS 66: BUSINESS POLICY AND STRATEGY 2-‐43 Weaknesses

Even though Phillips 66 is a profitable company with a decent number of strengths. The

company still does have some weakness. Though their weaknesses are outweighed by

the strengths, they still have things that they can improve on and other companies could

take advantage of.

Declining Profits

For instance, a profit slump from year to year is something you don’t want to see as a

company. Since their split from ConocoPhillips, Phillips 66 Profit Margin ratios as well

as earnings per share have been on the decline for the past couple of years. In October of

2013, a report came out that Phillips 66's third-quarter earnings declined 67% as the

company posted a loss in its refining segment as a result of weaker refining margins.

Though this is due to market conditions, it is still something that needs to be improved.60

Competitive Market Place

Another weakness for Phillips 66 is that they are in a very competitive market with little

differentiation between the products that they offer and the product that their competitors

offer. Marketing is something that they could improve on in order to make the name

Phillips 66 better known. Phillips 66 has deep roots in the industry through

ConocoPhillips, but that being said, “Phillips 66” is still a new and young company

competing against companies that have been the leaders of the industry for decades.

2-‐44

Opportunities

Expanding US Shale Gas Market

The expanding US Shale Gas market will directly lead to an increase in natural gas

production, as well as the production of NGLs, in the United States. Before natural gas

can be transported efficiently, its impurities must be extracted. The byproduct of this

extraction process creates NGLs. Therefore, an increase in natural gas production leads

to a direct increase in NGL production. It is expected that NGL production will increase

by 40 percent heading into 2016.61 The NGLs from shale gas production can also be

used by Phillips 66’ Chemicals segment to produce a variety of derivatives and products

that ultimately become raw materials. If Phillips 66 is able to increase their production

capacities of NGLs they will likely see a direct increase in their product of certain

chemicals such as ethane, methane, propane, and butane. In turn, these chemicals can be

purchased by manufacturers to produce goods to sell to the general public.62 Ethane,

which produces ethylene, is the most significant single chemical in terms of volume and

value. Also, ethylene prices in the US are the lowest out of any other ethylene producing

country.63 Phillips 66 already has the capabilities to produce large amounts of NGLs and

in turn is capable of producing large amounts of ethylene. In order to exploit opportunity

in the US Shale Gas Market, Phillips 66 should focus a significant amount of their

attention to the US Shale Gas Market and specifically the production of NGLs and the

byproduct ethylene.

PHILLIPS 66: BUSINESS POLICY AND STRATEGY 2-‐45 Sustainable Energy Initiatives

By improving the efficiency of core operations, chemical companies are able to reduce

costs significantly. Since 1974, US chemicals companies have reduced its fuel and

power energy usage by nearly 50 percent.64 Furthermore, chemical companies play an

important role in the global sustainable energy initiative. Products created by chemical

companies have the capabilities of reducing energy usage and minimizing the production

of greenhouse gases. Chemical companies themselves are researching the production of

renewable feedstocks. This would allow the replacement of existing petrochemical raw

materials as well as new building blocks for chemical production.65 In the oil and gas

industry, consumer demand for energy is expected to increase by 35 percent by 2035; an

increase likely to be met predominantly by fossil fuels.66 Between 2005 and 2010 flaring

of gas associate with oil production decreased by 22 percent.67 If Phillips 66 can further

reduce these flares they can expect to save billions of cubic meters (bcm) of gas each

year, further reducing their operating costs. In order to take advantage of sustainable

energy initiatives, Phillips 66 must be willing to allocate resources to reducing their own

energy costs, as well as producing products that will help lower the energy costs of

companies and consumers worldwide. This in turn will help to lower their production

costs, reducing the costs of their value chain, increasing their margins, and helping their

CSR initiatives in regards to reducing their environmental footprint.

Alternative Fuel Sources

This rising demand for energy in combination with a high emphasis on renewable clean

energy is causing energy companies to begin examining alternative fuel sources.

2-‐46

According to the U.S. Energy Information Administration (EIA), renewable energy,

along with nuclear energy, are the fastest growing sources of energy consumption (see

figure 2-4).68 Currently, Phillips 66 is experimenting with several different ways to

produce crude oil, most notably the production of crude oil from algae.69 This renewable

crude oil named “Green Crude” is in progress of becoming commercialized and is

expected to yield promising results. If Phillips 66 can continue to pioneer in the

alternative fuel source market, especially alternatives for crude oil, than they can expect

to see a dramatic rise in demand in the next 5-10 years. In order to exploit this

opportunity, Phillips 66 will likely have to allocate more resources into their research and

development of alternative fuel sources.

Figure 2-5

PHILLIPS 66: BUSINESS POLICY AND STRATEGY 2-‐47 Threats

Split from ConocoPhillips, downstream isn’t as profitable

On April 4, 2012 the ConocoPhillips Board of Directors approved the separation of its

downstream business into an independent, publicly traded company named Phillips 66.

The downstream business consisted of ConocoPhillips refining, marketing and

transportation operations; its natural gas gathering, processing, transmission and market

operations, primarily conducted through its equity investment in DCP Midstream, LLC

(DCP Midstream); its petrochemical operations, conducted through its equity investment

in Chevron Phillips Chemical Company LLC (CPChem); its power generation

operations; and an allocable portion of its corporate costs. The downstream portion that

is now Phillips 66 is not nearly as profitable as what ConocoPhillips had before. The

refining, transportation and retail end of Phillips 66 will focus on high growth sectors

such as chemicals and pipelines. Phillips 66 will also look to reduce its exposure to the

refining business. Refining margins have been hit by high crude prices and weak retail

demand.70

Unstable market

The industry and the market can be very unstable because of a number of conditions.

First off, new technologies are being invented to counter act the use of oil and gas

technologies. These new technologies such as electric hybrid cars have an impact on the

market and a demand for oil and gas. The more these cars are made and are demanded

the higher the chance the oil and gas market can take a turn for the worse. Secondly

natural disasters such as hurricanes and tsunamis can have an impact on the industry.

2-‐48

Hurricane Katrina shut down multiple operations in Texas, Oklahoma and Louisiana that

moves large volumes of cargo with high production. This in turn affected the price at

which crude oil, gasoline and diesel traded at because companies were unsure how long

this affect would take place. As a result, rationing began and fuel distributors would not

buy until the supply returned, causing and increase in price.71

Health, Safety and Environmental risks

Health, safety and environmental issues have risen on the oil and gas industry’s agenda

ever since major oil spills such as the BP spill in the Gulf of Mexico. These spill cause

major environmental problems and environmental organizations, such as World Wildlife

Foundation, are trying to shut down the operations that have caused these. The damage

that the remote drilling process can have on the industry are immense. Many if not all oil

spills that occur directly affect animal habitats and the development of the oil and gas

exploration causes disruption of migratory pathways for animals. Although companies

are taking precautions to prevent such spills, they are inevitable. As long as these spill

keep happening, environmental organizations are going to try shutting down these

operation posing a threat to the industry.72

General Discussion of Current State of the Following Components

Finance / Accounting Analysis

As of December 31, 2013 Phillips 66 holds a total of 510 active patents in 44 countries

worldwide, including 216 active patents in the United States. Their products and

processes generated licensing revenues of $17 million in 2013. Phillips 66 has a goal to

PHILLIPS 66: BUSINESS POLICY AND STRATEGY 2-‐49 achieve zero incidents and thus have implemented a comprehensive Health, Safety and

Environmental (HSE) management system to supports their business units in achieving

consistent management of HSE risks across their enterprise. The management system

requires periodic audits to ensure compliance with government regulations, as well as

internal requirements.

Phillips 66 has many risk factors that should be carefully considered when looking over

their 10-K. These include their operating results and future rate of growth that’s are

exposed to the effects of changing commodity price and refining, petrochemical and

plastics margins. Changes in the global economy and the level of foreign and domestic

production of crude oil, natural gas and NGLs and refined, petrochemical and plastics

products. Local factors including market conditions, the level of operations of other

facilities in the markets and the volume of products imported and exported. As well as

weather conditions such as hurricanes or other natural disasters along with government

regulations. Uncertainty and illiquidity in credit and capital markets can impair the

ability to obtain credit and financing on acceptable terms and can adversely affect the

financial strength of business partners. The ability to obtains credit and capital depends

largely on the measure of the credit and capital markets, which is completely out of

Phillips 66’s hands. In addition, the cost and availability of debt and equity financing

may be adversely impacted by unstable or illiquid market conditions.

Phillips 66 expects to continue to incur substantial capital expenditures and operating

costs as a result of their compliance with existing and future environmental laws and

2-‐50

regulations. Likewise, future environmental laws and regulations may impact or limit

their current business plans and reduce demand for their products. These laws and

regulations continue to increase in both number and complexity, which as a result directly

impact their operations.

Phillips 66’s stock is traded on the New York Stock Exchange (NYSE) under the symbol

“PSX”. Phillips 66’s common stock has been on a stead rise since September 2013,

going from about $57 per share all the way up to $81 dollars per share. As of April 8th,

2014 PSX common stock is trading at $77.56.

In 2013 Phillips 66 reported earnings of $3.7 billion, while generating $6 billion in cash

from operating activities and received $1.2 billion from asset dispositions. Cash

available was used to fund capital expenditures and investments of $1.8 billion, pay

dividends of $800 million, repurchase $2.2 billion of their common stock and repay $1

billion of debt. They ended 2013 with $5.4 billion of cash and cash equivalents and

approximately $5.4 billion of total capacity under their available liquidity facilities.

Phillips 66 wants to continue to focus on the following financial strategic priorities:

• Maintain Strong-operating excellence

o Safety and reliability are their first priority, and they are committed to

protecting the health and safety of everyone who has a role in their

operations and the communities in which they operate. They are

committed to protecting the environment and strive to reduce our


environmental footprint throughout their operations. Optimizing rates at

their refineries through reliable and safe operation enables them to capture

the value available in the market in terms of prices and margins. In 2012

and 2013 their worldwide refining crude oil capacity utilization rate was

93%.

• Deliver profitable growth and enhance returns.

o Phillips 66 has budgeted $2.7 billion in capital expenditures and

investments for 2014, approximately 40% higher than the 2013 budget.

The program is designed primarily to grow their Midstream and

Chemicals segments, which have planned expansions for manufacturing

and logistics capacity. The need for additional new gathering and

processing, pipeline, storage, and distribution infrastructure- driven by

growing domestic unconventional crude oil, natural gas liquids and natural

gas production- is creating capital investment opportunities in their

Midstream business.

• Grow shareholders distributions

o Phillips 66 believes shareholder value is enhanced through, among other

things, consistent and ongoing growth of regular dividends, supplemented

by share repurchases. They increased their dividend rate by 56% during

2013 and it has almost doubled since the separation. Regular dividends

demonstrate the confidence their management has in their capital structure

and its capability to generate free cash flow throughout the business cycle.

As of December 31, 2013, they have repurchased $2.6 billion, or

2-‐52

approximately 44.1 million shares, of their common stock. At the

discretion of their Board of Directors, they plan to increase dividends

annually and fun their share repurchase program while continuing to

invest in the growth of their business.

• Build a high-performing organization

o Phillips 66 strives to attract, train, develop and retain individuals with the

knowledge and skills to implement their business strategy and who

supports their values and ethics. Throughout the company, they focus on

getting results in the right way and believe success is both what they do

and how they do it. They encourage collaboration throughout the

company, while valuing differences, respecting diversity of thought and

creating a great place to work. They foster an environment of learning and

development through structured programs focused on building functional

and technical skills where employees are engaged in their business and

committed to their own success, as well as to the company’s success.

PHILLIPS 66: BUSINESS POLICY AND STRATEGY 2-‐53 Phillips 66 Financial Ratios Desired 2011 Change 2012 Change 2013

Asset Turnover Ratio Higher 4.53 0.80 3.73 0.29 3.44

Accounts Receivable

Turnover Higher 19.55 1.66 17.89 0.76 17.13

Working Capital Turnover Higher 125.27 92.55 32.72 5.51 27.21

Debt to Equity Lower -‐0.85 (2.16) 1.31 0.04 1.27

Debt to Assets Lower 0.009 0.13 0.14 0.02 0.12

Current Ratio Higher 1.13 0.31 1.44 0.05 1.49

Acid-‐test Ratio Higher -‐0.81 1.92 1.11 0.05 1.16

Return on Assets Higher 0.11 0.02 0.09 0.02 0.07

Return on Equity Higher 0.21 0.01 0.2 0.03 0.17

Net Profit Margin Ratio Higher 0.024 0.001 0.023 0.001 0.022

EPS Higher 7.61 1.06 6.55 0.48 6.07

P/E Ratio Higher Pre-‐

separation -‐ 8.11 4.60 12.71

Table 2-1

Executive Summary:

Phillips 66 is currently very stable with regards to the financials. Although the ratios

indicate they have slightly dropped in a few categories they make up for it in the amount

of capital they have as well as the substantial amount of cash on hand they have. Their

current ratio is very stable as well as their acid test ratio is on the up rise, which is very

essential. Although their net profit ratio is going down slightly they are still making a

profit, which is the ultimate goal of any company.

2-‐54

Activity and Efficiency

Asset Turnover Ratio – This ratio shows how much money the business has tied up in

assets

For each dollar of sales revenue. A higher ratio is better, as it indicates that the

business is effectively using its assets to generate sales.

Phillips 66’s asset turnover ratio has decreased slightly each year from 2011 to

2013. The company’s asset turnover ration was 4.53 in 2011, which was decreased

in the next year to 3.73 in 2012 and slightly more in 2013 at 3.44. Even with the

slight decrease from year to year Phillips 66 still has a very respectable asset

turnover ratio.

Accounts Receivable Turnover-

The accounts receivable turnover

ratio is used to show how effective a

company is at extending credit and

collecting debt. A higher ratio is

better because it indicates that the

business is efficient at extending

credit.

Phillips 66’s accounts receivable

turnover ratio has decreased each year since 2011. That year the ratio was 19.55, which

dropped sharply to 17.89 in 2012 and slightly to 17.13 in 2013. Again, although it is

14 16

18

20

2011 2012 2013

19.55 17.89

17.13

Accounts Receivable Turnover Ratio

Accounts Receivable Turnover Ratio

Figure 2-6

PHILLIPS 66: BUSINESS POLICY AND STRATEGY 2-‐55 dropping slightly Phillips 66 is still in a very stable financial situation and this slight

decrease should not be a major worry at this point.

Working Capital Turnover Ratio-‐

This ratio shows the relationship between

the money used to fund operations and the

Money generated from those operations. A

Higher ratio is better, as a higher ratio

Means that the business is generating a

Higher amount of sales from the money

used to fund those sales. Phillips 66’s

working capital turnover ratio has

remained positive over the last three years

although it took a huge hit from 2011 to 2012 going from 125.27 to 32.73 in one year.

This was because in the year 2011 the working capital (current assets-current liabilities)

was very small as compared to other years. In 2012 the ratio was down slightly from

2012 to 27.21, a more suitable decrease than from 2011 to 2012.

Implications: Although some of Phillips 66’s activity and efficiency ratios have

decreased in the past three years, the overall financial stability of the company is not in

question. The company is still making huge profits along with maintaining a stable and

substantial amount of cash on hand to provide for new technologies and new business

ventures. The only time of concern that was evident in these ratios was the working

capital ratio from 2011 to 2012 and this sharp decrease was caused because we had

0

50

100

150

2011 2012 2013

125.27

32.73 27.21

Working Capital Turnover Ratio

Working Capital Turnover Ratio

Figure 2-7

2-‐56

obtained more current assets than current liabilities in 2012 then we had in 2011 thus

creating a larger denominator which makes for a smaller ratio, having more current assets

than current liabilities is obviously a good thing and this decrease means nothing to them.

Leverage and Solvency

Debt to Equity- The debt to equity ratio

Compares how many funds creditors

provide and how many funds are

provided by owners. A low debt to equity

ratio is good, as a high ratio indicates

increases in debt. Phillips 66’s debt to

equity ratio was negative in 2011 at -

0.85. Although they want a low ratio a negative ratio is not desirable. It rose up to 1.31

in 2012 and then back down slightly in 2013 to 1.27, which is a good decrease.

Debt to Assets- The debt to

assets ratio shows how many

assets are funded by creditors

and how many are funded by

owners. A low ratio is better, as

this indicates that the company

-‐1

0

1

2

2011 2012 2013 -‐0.85

1.31 1.27

Debt to Equity Ratio

Debt to Equity Ratio

0

0.05

0.1

0.15

2011 2012 2013

0.009

0.14 0.12

Debt to Assets Ratio

Debt to Assets Ratio

Figure 2-8

Figure 2-9

PHILLIPS 66: BUSINESS POLICY AND STRATEGY 2-‐57 did not have to take on much debt to purchase their assets.

Phillips 66’s debt to assets ratio increased from 0.009 in 2011 to 0.14 in 2012. This

indicates the increase in debt from 2011 to 2012. From 2012 to 2013 the ratio went down

from 0.14 to 0.12 which means they were able to pay back some of their debts acquired

in 2012.

Implications: Both of the leverage and solvency ratios illustrate Phillips 66’s stable

financial position. Although they took a large hit from 2011 to 2012 they both recovered

nicely from 2012 to 2013 and brought both ratios back down from the previous year.

Liquidity

Current Ratio- The current

ratio compares a company’s

current assets and their current

liabilities. A higher ratio is

better, as a company with more

liabilities than assets is a higher

financial risk. Ratios greater or

equal to 2 indicate that a

company is able to meet its short-

term obligations.

Phillips 66’s current ratio is steadily increasing from 1.13 in 2011 to 1.44 in 2012 and to

1.49 in 2013. This trend is good for the company because it shows they are able to pay

off their short terms debts without any problems.

0

0.5

1

1.5

2011 2012 2013

1.13 1.44 1.49

Current Ratio

Current Ratio

Figure 2-10

2-‐58

Acid-Test Ratio- This ratio is

similar to the current ratio,

however, instead of using all

current assets, it only uses cash,

short-term investments, and

current receivables, a company’s

most liquid assets. A higher ratio is

better and any ratio higher than 1

is considered good.

Like the current ratio, the acid-test ratio has consistently been on the rise since 2011

when it was -0.85. In 2012 it rose to 1.11 and in 2013 it again rose to 1.16

Implications: Both of Phillips 66’s liquidity ratios are on par with the industry standard.

They are both on the up rise which is always a plus when it comes to these ratios. If

Phillips 66 can continue this trend along with their current business plan they will have a

very prosperous future.

-‐1

0

1

2

2011 2012 2013 -‐0.81

1.11 1.16

Acid-Test Ratio

Acid-‐Test Ratio

Figure 2-11

PHILLIPS 66: BUSINESS POLICY AND STRATEGY 2-‐59 Profitability

Return on Assets- This ratio

indicates how well a business is

using its assets to produce income.

A higher ratio indicates that the

company is using its assets well.

Phillips 66 has had a positive

return on assets ratio for the years

on 2011, 2012 and 2013. Although

it has slightly decreased each year

it is still stable and the return they have on assets is still creating profit for the company.

With the amount of assets they hold even a little profit on a singular asset can mean a

large profit company wide. In 2011 the ratio was 0.11, in 2012 the ratio was 0.09 and in

2013 the ratio was 0.07.

Return on Equity- The return on

equity ratio compares a company’s

net income to the company’s

stockholder’s equity to determine

what return that company is

providing. A higher ratio is better,

as it indicates that the company is

0

0.05

0.1

0.15

2011 2012 2013

0.11 0.09

0.07

Return on Assets

Return on Assets

0

0.1

0.2

0.3

2011 2012 2013

0.21 0.2 0.17

Return on Equity

Return on Equity

Figure 2-12

Figure 2-13

2-‐60

producing more income with less stockholder’s equity.

Phillips 66’s return on equity ratio for 2011 was 0.21, which went slightly down in 2012

to 0.20 and even more down in 2013 to 0.17. Although theses ratios are declining, they

are not threatening. As long as the ratio is positive they are proving that their net income

is higher than the company’s stockholder equity.

Profit Margin Ratio- The profit

margin ratio determines how

much income a company makes

for every dollar of sales. A

higher ratio is better, as this

means that a company is making

more income off of its sales.

Again, although Phillips 66’s

profit margin ratio is decreasing

it is still in good shape because it is still positive and they are still making a profit. In

2011 their profit margin ratio was 0.024, which then declined slightly to 0.023 in 2012

and again to 0.022 in 2013.

Implications: Phillips 66’s profitability ratios are all positive which is a good indicator at

how well the company is running and how efficiently they are making a profit. Although

all three have slightly declined since 2011 that is expected because of the separation that

occurred and not quite as much profit is being made.

0.021

0.022

0.023

0.024

2011 2012 2013

0.024

0.023

0.022

ProIit Margin Ratio

Proait Margin Ratio

Figure 2-14

PHILLIPS 66: BUSINESS POLICY AND STRATEGY 2-‐61 Valuation

Earnings per Share- Earnings

per share is a measure of how

much income a company makes

for each share of stock it has

issued. A high earnings per share

ratio is better than a low one.

Phillips 66’s earning per share

has once again been in a decline

since 2011which was at 7.61. In

2012 it dropped to 6.55 and then again to 6.07. These drops could because of the market

that has been in a decline in those years.

P/E Ratio- The P/E ratio is a measure

of the projected earnings of a

company. It is calculated by dividing

the current market value per share by

the earnings per share. The ratio

indicates the market price of $1 of

earnings, with a high ratio indicating

high projected earnings.

0

2

4

6

8

2011 2012 2013

7.61 6.55

6.07

Earnings per Share

Earnings per Share

0

5

10

15

2011 2012 2013

0

8.11

12.71

P/E Ratio

P/E Ratio

Figure 2-15

Figure 2-16

2-‐62

Phillips 66’s projected earning ratio has gone up since 2012 from 8.11 to 12.71. There

were no stock prices available in 2011 because of the separation that occurred. Having a

projected earning ratio that is on the rise is beneficial to the company because it shows

that they are expected to have better results in the up coming years.

Marketing Analysis

Phillips 66 markets through branded wholesale stations in the US. There are about 8,000

branded stations that are marketed under the Phillips 66, the Conoco, or the 76 Brand.

About half of their marketing margin is actually moved through unbranded wholesale. In

Europe, Phillips 66 does sell direct. They have about 900 stations in Germany and

Austria, another 250 stations in Switzerland in a joint venture with Coop and JET brand.

73

Sponsorships

This year Phillips 66 sponsored both the Men’s and

Women’s Big 12 basketball championships. The

Phillips 66 sponsorship of the Big 12 Basketball

Championships is one of the longest standing title

sponsorships in college sports. Phillips 66 tipped off

its 26th year of conference tournament sponsorship

this year. When watching the tournament you are guaranteed to see the Phillips 66 shield,

whether it’s on the court, in a television graphic or on an announcer’s microphone. It’s an

excellent, high-visibility opportunity to showcase the Phillips 66 iconic Brand.74

Figure 2-17

PHILLIPS 66: BUSINESS POLICY AND STRATEGY 2-‐63 Taking full advantage of sponsoring the tournament Phillips 66 came up with a

promotional idea called, “Phillips 66 Basket Pong and KickBack Points Program .”

Allowing people to enter for a chance to win a home

entertainment package which includes a 65" LED

HDTV with tilting wall mount, Blu-ray Player, 5.1-

Channel Home Theater Speaker System with

Subwoofer, and installation, and the Basket Pong

Home Game or instantly win 1 of 350 $50 Phillips

66 Gift Cards.75

Phillips 66 also sponsors sports events and teams that

are not on as big of a stage as the Big 12 tournament. They give back to the community

by sponsoring the Phillips 66ers, an Amateur Athletic Union (AAU) in Bartlesville,

Oklahoma. On top of that they also sponsor the Phillips 66 Gymnastics club, which may

be the oldest club in the country and is noted for hosting the longest on-going age-group

gymnastics invitational in the United States. 76 77

Figure 2-19

Figure 2-18

2-‐64

On June 5, 2012, Gregg Garland,

Chairman and CEO claimed that

Phillips has an average performer

in terms of returns on Refining

and Marketing with a 12% ROCE

in this business, but the

expectation is that this can be

improved to a 15% ROCE

business over the cycle. "The R&M business for us is a well run, optimized business.

You won’t see us adding capacity. You will see us investing around the infrastructure to

put more advantaged crude to the front end of the refineries and to be able to export."

Phillips 66 does not break out the marketing earnings separately for the Refining and

Marketing Business Segment in their reports. However, for the years 2009 to 2011

marketing contributed 24% to Phillips 66 total earnings while Refining contributed 40%

to Phillips 66 total cumulative earnings for those years. The total adjusted earnings for

the Refining and Marketing Business Segment for 2009, 2010, and 2011 was $ 4,057

million. 78

Marketing’s contribution to the R&M bottom line would be 37.5% that translates to

$1,521 million. Assuming that marketing profitability was relatively stable across that

Figure 2-20

PHILLIPS 66: BUSINESS POLICY AND STRATEGY 2-‐65 three-year period would means that they brought in $507 million for each of the three

years. 79

Phillips 66 Marketing and Specialties segment includes marketing of gasoline, diesel and

jet fuel in the United States, as well as marketing of gasoline and diesel in Europe. The

segment also includes the company’s lubricants, flow improver and power generation

businesses. 80

United States

Throughout the United States, Phillips 66 markets gasoline, diesel fuel and aviation fuels.

The marketing outlets are owned and operated by independent dealers and wholesale

marketers. The majority of these outlets are branded with Phillips 66®, Conoco or 76 and

other feature gasoline’s that have been recognized as TOP TIER™ by leading

automakers. The company’s refineries and transportation systems strategically serve

2-‐66

these operations. 81

Figure 2-21

Phillips 66 utilizes a network of branded marketers and dealers operating at

approximately 6,875 outlets. Refined products are sold on both a branded and unbranded

basis. The company emphasizes the wholesale channel of trade. Phillips 66 also holds

brand-licensing agreements with approximately 500 sites. Being the largest branded

network in the U.S. general aviation industry. The company produces aviation fuels and

markets them through independent marketers and dealers at approximately 875 fixed-

base operations. 82


Europe

Phillips 66 markets motor fuels under JET® through company-owned outlets in Germany

and Austria and dealer-owned outlets in the United Kingdom. The company also has an

equity interest in a joint venture that markets products in Switzerland under Coop. 83

Phillips 66 markets aviation fuels, LPG, heating oils, transportation fuels, marine bunker

fuels, fuel coke and bitumen to commercial customers and into the bulk or spot market.

In addition, total Irish refinery production is sold to local and international oil companies

and independent resellers in the inland Irish market. 84

As of Dec. 31, 2011,

R&M had

approximately 1,430

marketing outlets in its

European operations, of

which approximately

900 were company-

owned and 330 were

dealer-owned. The

company also held brand-licensing agreements with approximately 200 sites. Through

joint venture operations

in Switzerland, Phillips 66 has interests in 250 additional sites. 85

Figure 2-22

Figure 2-23

2-‐68

Finished Lubrications

Phillips 66 is one of the largest finished lubricants suppliers in the United States. It

manufactures and markets four major lubricant brands: Phillips 66, Conoco, 76 and

Kendall motor oil. The combination of these diverse brands, along with supplying a

number of private-label and original-equipment manufacturers in North America, gives

Phillips 66 a position in all key lubricants markets. Nationwide, the distribution network

consists of marketers; mass merchandise stores, fast lube stores, tire stores and

automotive dealers. 86

Base Oil

The base oil marketing activities of Phillips 66 include the sale of Pure Performance®

hydrocracked base oils to an extensive list of customers throughout the world and

purchase of a wide range of base oils from several North American refiners that fulfill the

manufacturing needs of the finished lubricants product lines. Additionally, Phillips 66 has

an exclusive agreement with Korea’s S-Oil Corporation to distribute and market their

high-viscosity-index base oils in North America. 87

Pricing Strategies

Phillips 66 is focused on generating stable and predictable cash flows by providing fee-

based transportation and midstream services to Phillips 66 and third parties. They have

multiple long-term, fee-based commercial agreements that include minimum volume

commitments and inflation escalators. They believe these agreements mitigate volatility

in their cash flows by reducing their direct exposure to commodity price fluctuations. 88


Future Modifications

Phillips 66 will seek to enhance the profitability of their existing assets by pursuing

opportunities to increase throughput and storage volumes, as well as by managing costs

and improving operating efficiencies. They also intend to consider opportunities to

increase revenue on their pipeline, terminal and storage systems by evaluating and

capitalizing on organic expansion projects that may arise in the markets we serve. 89

Ad Campaign

In May of 2011, ConocoPhillips launched a new brand advertising campaign and 28-

week consumer promotion for its Phillips 66 brand gasoline. The campaign highlights

what Phillip 66 says is its longstanding commitment to produce the best in performance

gasoline; that commitment is brought to life through the campaign tagline, "Experts in

Gas Since 1927." A central part of the campaign is the Local Legends contest, which

engaged consumers through an online user-generated video contest. Consumers would

upload videos of their talents and friends could vote for their favorites. Phillips 66 would

reward Local Legends by giving away prizes including free gasoline for a year. In this

campaign, they not only reminded consumers of their excellent gasoline, but also

celebrated what their local consumers do really well too. This was a great opportunity to

spread the name of their brand by involving the community in a positive way, all while

getting customers excited by giving away monthly and grand prizes to. 90

2-‐70

Marketing Conference

More recently in May of 2013, Phillips 66 had their first Marketing Conference & Trade

Show. The event brought together Phillips 66 Lubricants, Phillips 66 Motor Fuels

Marketing and Phillips 66 Aviation for the first time ever. They chose the theme "New

Energy, New Possibilities" to celebrate the establishment and spirit as a new separate

company from ConocoPhillips. The Conference featured more than 75 exhibitors

intended to provide resources to help marketers and retailers. Featured categories of

exhibitors included business services; imaging; signage and construction; loss prevention;

finance; technology and more. Informed company representatives from the fuels,

lubricants and aviation division manned internal booths. 91

Moving Forward

On December 6, 2013 Phillips 66 announced that the company plans to invest about $140

million of growth and sustaining capital in Marketing and Specialties. The growth

investment reflects Phillips 66’s intent to expand its international fuel marketing

business. The company plans to add approximately 200 new retail sites in Europe over

the next five years. 92

PHILLIPS 66: BUSINESS POLICY AND STRATEGY 2-‐71 Management Analysis

Phillips 66 has a relatively new management composition since becoming a separate

entity of ConocoPhillips in May of 2012. The spilt determined that the Conoco side of the

spilt would hold the upstream entities of the oil industry and the newly created Phillips 66

would be exclusive to the downstream side of the industry.93

The executive leadership team consists of Phillips 66 CEO and several Senior Vice

Presidents that monitor various sectors of the company. Among with their leadership

team, the company also has several board member which include the various Vice

Presidents and other Phillips 66 team members.94

The company strives to excel in their industry and enforces a management philosophy

that claims to use strong underlying forces to provide the company with the power they

need to succeed. The company website states that to have great leadership Phillips 66

hirer management team members with diverse backgrounds and the ability to have

continuous development in their business roles.95 Being versatile is something that is key

to the management style of the company. Besides pushing for a determined management

team, Phillips also seeks management that will be able to lend a helping hand and offer

talent development to any worker in search of additional support. Management is able to

stay strong as the company makes it a point to offer leadership programs so members of

the management team stay alert and up to date on industry trends and new demands.

Lastly, Phillips 66 acknowledges the fact that the management staff they presently have

will not be the same twenty years from now. The company implements the philosophy of

2-‐72

continually developing and seeking new future management talent. Phillips 66 states,

“We place a strong emphasis on learning, performance management and succession

planning to accelerate targeted talent development, ensure the sustainability of our

business and enable us to execute our business strategy.”96

Phillips 66 chairman and company CEO is Greg Garland.

Garland has been with the Phillips Company since

graduating in 1980 with a Bachelor of Science in chemical

engineering from Texas A&M University. While he currently

serves as CEO, Garland started in the company as a project

engineer for the Plastics Technical Center. After holding his

first position with the company, he worked his way through

several other management chains within the company

serving as a sales engineer, business service manager for advanced materials and olefins

manager for chemicals. In 1997, Garland made significant strides in his career with

Phillips as he served as the general manager of Qatar/Middle East for the company.97 In

2008, Garland took on the position of President and CEO of ChevronPhillips Chemical

Company, a joint venture of the Phillips and Chevron Companies. By October 2010,

Garland again moved into another managerial position with Phillips aiding as the Senior

Vice President of Exploration and Production for the Americas for ConocoPhillips. He

held that position until April of 2012 when he was then appointed as the CEO of Philips

66 as Phillips and Conoco split.98

Figure 2-24


Along with Garland serving as CEO, Phillips 66 has several

Vice Presidents that take lead roles in the various aspects of

the company. The first of the nine specialized Vice

Presidents is Phillip Brady. An honors graduate from the

University of Norte Dame as well as Loyola University

School of Law, Brady serves as Phillips 66 Senior Vice

President of Government Affairs. Phillips 66 recognizes

Brady as their body responsible for the federal, state and

international governmental affairs associated with the company.99 Before joining the

Phillips 66 company in August of 2012, Brady was a strong force in the automobile

industry serving as President of the National Automobile Dealers Association since

2001.100

The next management staff member in the Phillips 66

company is Robert Herman. Herman serves as Senior Vice

President of Health, Safety & Environment (HSE), and

Projects & Procurement for the company. Before serving as a

Vice President for Phillips 66, Herman held the same

position of HSE for the ConocoPhillips merger. Just as

Garland, Herman held several different positions within the

Phillips Company before the merger split in 2012. Herman is

known for his work focusing on the refining side of the industry as he served as President

of Refining, Marketing & Transportation- Europe for ConocoPhillips since 2008 but

Figure 2-25

Figure 2-26

2-‐74

switched managerial roles as the ConocoPhillips Company transitioned into two stand-

alone entities.101

Paula Johnson is another key member of management for the

Phillips 66 Company. She is the Executive Vice President for

Legal and General Counsel as well as Corporate Secretary

for the company. Johnson has been with Phillips since 2002

where she started as a senior counsel member in the

company’s litigation group. Johnson transitioned from her

council member role to managing the counsel for litigation

and claims. She held that role with ConocoPhillips from

2006 to 2009 until her was given the new title of Deputy General Counsel and Chief

Compliance Officer with Conoco. When Phillips 66 separated from ConocoPhillips in

2012, Johnson remained within her same roles but now only covering the Phillips 66 side

of business.102

Merl Lindstrom currently serves as Phillips 66 Vice

President of Technology. Phillips prides Lindstrom on his

research and development roles in the downstreaming side of

their business. Lindstrom began his career with Phillips in

1978 after achieving his doctorate in chemistry from North

Dakota State University. He started as a research chemist for

Figure 2-27

Figure 2-28

PHILLIPS 66: BUSINESS POLICY AND STRATEGY 2-‐75 the Phillips Company and by 1984 he was promoted within the company to section

supervisor for the R&D of polymers and materials area. From 1987 to 88 Lindstrom

became the director of industry analysis in planning and budgeting for Phillips 66, which

at the time was only one division of the Phillips 66 Company known to the public now.

By 1988, Lindstrom reverted back to his R&D days and became manager of the

engineering material branch for the Phillips Company. Lindstrom went on to work as the

general manager of the Woods Cross Refinery for Phillips Petroleum from 1998 to 2001.

He would then go on to serve as Vice President of Technology for ConocoPhillips until

the two spilt bringing him to his current role in the Phillips 66 Company.103

Greg Maxwell is another current member of Phillips 66

management team. Maxwell is the company’s Chief

Financial Officer. Starting with the Phillips Petroleum

Company in 1978 as a staff accountant in the comptrollers

group, Maxwell was able to work his way to various

managerial positions before his current role in the company.

In 1989, Maxwell became a senior planning specialist for the

company until 1991 when he was promoted to senior

financial analyst in Phillip’s treasury department. From 1992 until 1994, Maxwell moved

to the Phillips chemical division where he served as the division finance manager.

Between 1994 until 1998, Maxwell again moved to a different division, this time being

Phillips plastics division where he still remained in the finance manager position. From

1998 to 2000, Maxwell took on the role of general auditor for Phillips Petroleum

Figure 2-29

2-‐76

Company before joining Chevron Phillips Chemical and serving as CFO and controller

until transitioning to his present role with Phillips 66.104

C. C. Reasor is yet another top management official at

Phillips 66. Reasor serves as the company’s Senior Vice

President of Investor Relations as well as Strategy and

Corporate Relations. Just as many other Phillips 66 top

management, Reasor has been with the company in some

form for quite some time. Starting his career with Phillips in

1979, Reasor served within the petrochemicals division until

1987. In 1987, Reasor then took on the role of crude oil

trader in Phillips Petroleum Company in their transportation division. In 1992, Reasor

received a new role in the company and was named Sweeny Refinery supply manager for

Phillips. Reasor then moved into Phillips marketing sector and was the company’s

president of U.S. Marketing from 2006 until 2009 when he accepted the position of Vice

President of Corporate and Investor Relations for ConocoPhillips.105

Tim Taylor serves as Phillips 66 Executive Vice President of

Commercial, Marketing, Transportation, & Business

Development. Graduating from Kansas State University in

1975 with a Bachelor of Science degree in chemical

engineering, Taylor took his first position with Phillips in

1980. His first job with the company was serving within

Figure 2-30

Figure 2-31

PHILLIPS 66: BUSINESS POLICY AND STRATEGY 2-‐77 Philips Petroleum Company’s Plastics Division. In 1990, Taylor was given the title of

President of Phillips Recycling Company where he served under that title until 1992

when he went on to manage K-Resin Marketing. By 1993, Taylor was already under a

new title within the company now providing his services as President of Phillips Pipeline

Company until 1995 when he would return to Phillips chemical and plastics division in

various managerial roles. Taylor then served as Chief Operating Officer of Chevron

Phillips Chemical Company until his current position came in at the spilt of

ConocoPhillips in May of 2012.106

Chantal Veevaete provides her managerial backing to the

Phillips 66 Company serving as Senior Vice President of

Human Resources. Veevaete worked with Phillips Petroleum

early in her HR career first in Belgium serving in various

employee and government relation positions in 1981. From

1983 to 1987, she continued working for Phillips under their

US subsidiary, Applied Automation in various R&D and

public relation positions. Veevaete moved more into the sole

HR sector in 1989 when she worked for Phillips Petroleum in their Corporate Human

Resources Division. She left the Phillips Company in 1998 and began working as

President of Human Resources for the Accredo division of Metro Health Solutions until

2009 when she came back to work for Phillips once again. From 2009 until her current

role with Phillips 66, Veevaete was the Vice President of Human Resources for Chevron

Phillips Chemical Company.107

Figure 2-32

2-‐78

The final member in Phillips 66 executive leadership team is

Lawrence Ziemba. Ziemba serves as the company’s

Executive Vice President of Refining. Holding positions with

Phillips only as recent as 2001, he is still a valuable asset to

the company with his 35 years of previous experience in the

oil and gas industry. Ziemba’s first position with Phillips was

leading in the handling of refining operations during Philips

merge with Conoco. He then took on the role of President of

Global Refining in 2003 where he remained until his present day position with Phillips

66.108

Figure 2-33

PHILLIPS 66: BUSINESS POLICY AND STRATEGY 2-‐79 Subsection 2: Industry Profile

Identification and Discussion of Relevant Competitors

Financial Position of Key Competitors

Valero Energy

One of the three main competitors of Phillips 66 is Valero Energy Corporation. Valero,

through its subsidiaries, is an international manufacturer and marketer of transportation

fuels, other petrochemical products and power. Valero subsidiaries employ

approximately 10,000 people, and assets include 16 petroleum refineries with a combined

throughput capacity of approximately 3 million barrels per day, 11 ethanol plants with a

combined production capacity of 1.3 billion gallons per year, and a 50-megawatt wind

farm. More than 7,400 outlets carry the Valero, Diamond Shamrock, Shamrock and

beacon brands in the United States and the Caribbean; Ultramar in Canada; and Texaco in

the United Kingdom and Ireland109

2-‐80

Ratio Desired

Valero

Energy Trend

Activity/Efficiency 2011 2012 2013

Asset Turnover higher 2.94 3.13 2.92 !

A/R Turnover higher 14.72 16.28 16.14 !

Working Capital

Turnover higher 36.8 30.73 27.31 !

Leverage/Solvency

Debt to Equity lower 1.61 1.46 1.43 !

Debt to Assets lower 0.18 0.16 0.14 !

Liquidity

Current Ratio higher 1.26 1.38 1.47 "

Acid-‐Test Ratio higher 0.69 0.69 0.66 !

Profitability

Return on Assets higher 0.05 0.05 0.06 "

Return on Equity higher 0.13 0.12 0.14 "

Profit Margin higher 0.02 0.02 0.02 #

Shareholder return

Earnings per Share higher 3.68 4.77 4.55 !

P/E Ratio higher 5.72 7.15 11.07 "

Table 2-2

PHILLIPS 66: BUSINESS POLICY AND STRATEGY 2-‐81 Activity and Efficiency

Asset turnover ratio- Valero Energy Company has a lower asset turnover ratio than

Phillips 66. Although Valero did increase their ratio in 2012 it dropped back down close

to what it was in 2011. Both companies have seen decreases in these ratios over the past

years. This seems to be a trend in the industry.

Accounts Receivable Turnover- Again Phillips 66 has the edge over Valero in accounts

receivable turnover. Again both companies are declining over the past 3 years but

Phillips has a higher ratio, which is the desired result.

Working Capital Turnover- Both companies have very similar working capital turnover

ratios. Initially, Phillips 66 has a much higher ratio but it drop drastically to the same

level of Valero. Overall both ratios are about the same and they are both declining,

which is not the desired outcome.

Leverage/Solvency

Debt to Equity- Phillips 66 again has a lower debt to equity ratio which is more desired.

Valero’s ratio has gone up over the past three years while Phillips 66’s actually went

down from 2012 to 2013, which is exactly what they want. They are very similar which

is very normal for the industry standard.

Debt to Assets- Both ratios for both companies are very similar. The only difference

being that Phillips 66 went down from 2012 to 2013, which is the desired result. Valero

did go down all three years, which is a desired result.

2-‐82

Liquidity

Current Ratio- Phillips 66 current ratio is slightly higher than Valero’s. Although it

started out lower in 2011 it made a quick recover to top Valero in 2013. Both companies

had a three-year increase in their current ratio, which is good for them.

Acid-Test Ratio- Valero had no change from 2011 to 2012 but then had a slight drop in

2013 in regards to their acid-test ratio. Phillips 66 ratio increased all three years from

2011 to 2013, which again shows better liquidity in their assets compared to Valero.

Profitability

Return on Assets- Phillips 66’s return on assets is higher than Valero’s even though

Phillips has gone through a three year decline and Valero has improved their ratio each of

the three years.

Return on Equity- Again Phillips 66 has a higher return on equity ratio even though they

have been in a three year decline again. Valero is increasing their ratio slightly over the

last three years, which is a step in the right direction.

Profit Margin Ratio- Valero has had no change in their net profit ratio compared to

Phillips 66 had a minimal decrease throughout the last three years. Phillips 66 again has

a very slight advantage over Valero in their ratios.

Shareholder Return

Earnings Per Share- Although Valero did see and increase in 2012 in their earning per

share it has since decreased. Phillips 66 has had a decrease over the last three years.

PHILLIPS 66: BUSINESS POLICY AND STRATEGY 2-‐83 Even with the decrease over the three years they still have a much higher earnings per

share than Valero.

P/E Ratio- Both companies have seen an increase in their P/E ratio over the past three

years. Again Phillips 66’s ratio has been consistently higher.

Comparison

Valero has seen an increase in their net income over the past three years while Phillips 66

has seen a decrease of almost $1billion. Even with the decrease Phillips 66 has $2 billion

more of net income than Valero does. Valero has $0 tied up in long-term investments

while Phillips 66 has more than $10 billion tied up in long-term investments. This could

be because Valero does not have the capital to engage them in such investing. Phillips 66

has $1 billion more than Valero in cash on hand, which could also be another reason for

not having any investments. Other than those two statistics both companies have very

similar balance sheets, leading me to believe they are Phillips 66’s closest competitor.

2-‐84

Chevron Corporation

Chevron, another of the three competitors to Phillips 66, focuses on the exploration and

production of oil and natural gas as well as manufacturing and transportation. Chevron

has major operations in the worlds most important oil and gas regions. They are leaders

in working in extremely difficult environments such as ultradeep water. They are also

leaders in refining, fuels, lubricants and additives. Chevron interests range from

chemical production and mining to energy research and nanoscience. Along with a range

of power facilities they are also the world’s largest producer of geothermal energy.

Enron currently employs 61,900 workers, which includes more than 3,600 service station

employees. In 2012, Chevron’s average net production was 2.61 million barrels of oil-

equivalent per day. As well they had a global refining capacity of 1.95 million barrels

per day at the end of 2012.110

PHILLIPS 66: BUSINESS POLICY AND STRATEGY 2-‐85 Ratio Desired Chevron

Activity/Efficiency 2011 2012 2013 Trend



Working Capital

Turnover higher 12.45 10.72 12.78 "

Leverage/Solvency


Debt to Assets lower 0.05 0.05 0.08 "

Liquidity

Current Ratio higher 1.58 1.63 1.53 !


Profitability

Return on Assets higher 0.13 0.11 0.08 !

Return on Equity higher 0.22 0.19 0.14 !

Profit Margin higher 0.11 0.11 0.1 !

Shareholder return


P/E Ratio higher 7.89 8.08 11.49 "

Table 2-3

2-‐86

Activity/Efficiency

Asset Turnover Ratio- Both companies are seeing a decline over the last three years of

their asset turnover ratio. Phillips 66 however does have a higher ratio, which is more

desirable.

Accounts Receivable Turnover- Again both companies are seeing a downward trend in

their accounts receivable turnover over the past three years. Again, Phillips 66 has a

higher ratio than Chevron. The downward trend seems to be spread across the industry.

Working Capital Turnover- Chevron saw their working capital turnover decrease from

2011 to 2012 but it regained itself in 2013 to higher than it was in 2011. Still though

Phillips 66 has a higher turnover ratio than Chevron.

Leverage/Solvency

Debt to Equity- Chevron has a lower debt to equity ratio than Phillips 66 does. Although

Phillips has brought down their ratio in 2013 it is still not as desirable as Chevron’s

Debt to Assets- Again Chevron has a lower debt to assets ratio even though it has gone

up in 2013. Phillips 66 has lowered their ratio in 2013, which is again a desired result.

Liquidity

Current Ratio- Chevron again takes the edge over Phillips 66 in their current ratios.

Chevron has seen a decrease over the past three years while Phillips 66 has seen an

increase. Even though Phillips 66 has seen an increase Chevron has a higher ratio even

with the drop over the past years.

PHILLIPS 66: BUSINESS POLICY AND STRATEGY 2-‐87 Acid-Test Ratio- Chevron’s acid-test ratio stayed steady from 2011 to 2012 but dropped

in 2013. Phillips 66’s ratio was much lower from 2011 to 2012 but increased to 1.16 in

2013, which is higher than Chevron.

Profitability

Return on Assets- Both companies have seen a steady decrease in their return on assets

over the past three years. Chevron holds a slight advantage over Phillips 66. This seems

to be a trend for the larger companies in the industry.

Return on Equity- Both companies have again seen a decrease over the past 3 years in

their return on equity. Phillips 66 again holds a slight advantage over Chevron

Profit Margin- Chevron has a much higher profit margin ratio than Phillips 66 does. Both

companies have seen a slight decline over the past three years. Chevron’s higher ratio

could be due to the sheer size of their company and worldwide success.

Shareholder Return

Earnings Per Share- Again Chevron has a much higher earnings per share than Phillips

66. This is due to their profit margin being much higher than Phillips 66. Both

companies have gone down over the past three years; this seems to be a trend for the

larger companies in the industry.

P/E Ratio- Both companies have seen an increase in their P/E ratio over the past three

years. A three-year increase seems to be an industry wide trend. In this case Phillips 66

has the advantage over Chevron.

2-‐88

Comparison

Chevron has seen a decrease of over $5 billion on their net income from 2012 to 2013.

Even with this being the case they still have well over 7 times the amount of net income

compared to Phillips 66. Chevron also has more than doubled the amount of long term

investments at more than $25 billion compared to Phillips 66’s $10 billion. Chevron also

has more than $15 billion in cash on hand, which gives them more leeway to make long-

term investments compared to Phillips 66 who has only about $5 billion. The sheer size

of Chevron makes it difficult for Phillips 66 to compete with them on a monetary scale,

but their ratios are very similar which is good for Phillips being that much smaller. In

2013 Phillips 66 actually has more cash on hand than Exxon does, this is because Exxon

has huge amounts of liabilities and debts.

PHILLIPS 66: BUSINESS POLICY AND STRATEGY 2-‐89 ExxonMobil

Exxon Mobile is the world’s largest publicly traded international oil and gas company.

They hold an industry-leading inventory of global oil and gas resources. They are the

world’s largest refiner and marketer of petroleum products, and their chemical company

ranks among the world’s largest.111

2-‐90

Ratio Desired

Exxon

Mobile

Activity/Efficiency 2011 2012 2013 Trend



Working Capital

Turnover higher -‐102.82 1406.6

-‐

33.89 !

Leverage/Solvency


Debt to Assets lower 0.05 0.04 0.07 "

Liquidity

Current Ratio higher 0.94 1 0.83 !


Profitability

Return on Assets higher 0.12 0.13 0.09 !

Return on Equity higher 0.27 0.27 0.19 !

Profit Margin higher 0.09 0.1 0.08 !

Shareholder return


P/E Ratio higher 10.07 8.92 13.73 "

Table 2-4

PHILLIPS 66: BUSINESS POLICY AND STRATEGY 2-‐91 Activity/Efficiency

Asset Turnover Ratio- Both Phillips 66 and Exxon have seen a decrease in their asset

turnover ratio over the past three years. Phillips 66 does have an advantage over Exxon

by almost three points in this category.

Accounts Receivable Turnover- Again both companies have seen a three-year decline in

their accounts receivable turnover. Phillips 66 does again have an advantage over Exxon

by about 5 points.

Working Capital Turnover- Exxon had a huge increase in their working capital turnover

in 2012 due to their current assets and their current liabilities being almost the same. In

2011 and 2013 they had a negative ratio because current liabilities were greater than

current assets. Phillips 66 had a positive ratio each of the three years giving them the

advantage over Exxon.

Leverage/Solvency

Debt to Equity- Both companies saw a decrease from 2012 to 2013 in their debt to equity

ratios. Exxon does however have a lower ratio than Phillips 66, which is the desired

result, giving Exxon a slight advantage.

Debt to Assets- Exxon saw a three year increase in their debt to assets ratio while Phillips

66 had a decrease from 2012 to 2013 which is the desired result. Even with the increase

for Exxon they still have a lower overall ratio thus giving them the advantage over

Phillips 66.

2-‐92

Liquidity

Current Ratio- Exxon saw an increase from 2011 to 2012 but had a drop back down

below 1.00 in 2013. Most companies want to keep their current ratio around 1.5 in order

to maintain the ability to pay off their liabilities. Phillips 66 has a ratio of 1.49 in 2013,

which is exactly where they want to be.

Acid-Test Ratio- Exxon saw an increase from 2011 to 2012 but then decreased in 2013.

Phillips 66 saw a three-year increase in their acid-test ratio. As well Phillips 66 has a

higher ratio than Exxon in 2012 and 2013.

Profitability

Return on Assets- Exxon saw an increase from 2011 to 2012 with their return on assets

but decreased in 2013 to 0.09. Phillips 66 saw a three-year decrease. Exxon has a slight

advantage over Phillips 66 in their ratio

Return on Equity- Both companies saw a decline in their return on equity ratios from

2011 to 2013. Exxon does however have a slight advantage over Phillips 66.

Profit Margin- Both companies have seen a slight decline in their profit margin over the

past three years. Exxon does however have a sizable advantage over Phillips 66 in their

ratio. This could be in part because Exxon is such a big player in the oil industry

compared to Phillips 66.


Shareholder Return

Earnings Per Share- Exxon saw their earnings per share increase from 2011 to 2012 but

then drop in 2013 significantly. Even with the significant drop they do still have a small

advantage over Phillips 66.

P/E Ratio- From 2011 to 2012 Exxon saw a decrease in their P/E ratio but it regained

itself and rose nearly 5 points in 2013. Phillips 66 also saw a significant increase in 2013

but it is still lower than Exxon.

Comparison

Although Exxon saw a huge decrease in their net income from 2012 to 2013 by almost

$12 billion they still have about $32 billion in net income, ten times as much as Phillips

66. Exxon has double the amount of long-term investments than Phillips 66. With the

amount of net income that Exxon had you would think they would be investing more

long term compared to Phillips 66. Exxon actually has less cash on hand than Phillips 66

does currently because of those long-term investments and the huge amounts of assets

and property, plant and equipment they have. Exxon is the largest of the companies

compared and just like Chevron it is difficult for the smaller company in Phillips 66 to

compete with these two massive companies. Just like Chevron, Phillips 66 is able to

keep up with their ratio compared to Exxon but the huge differences in the monetary

sums again makes it very difficult to compete.

2-‐94

Current Marketing Strategy of Key Competitors

Valero

Valero Marketing And Supply Company

refines and markets crude oil in the United

States and internationally. Its refining

activities include refining operations,

wholesale marketing, product supply and

distribution, and transportation operations

primarily in the Gulf Coast, Mid-Continent, West Coast, and northeast regions. The

company was founded in 1981 and is based in San Antonio, Texas. Valero Marketing

And Supply Company operates as a subsidiary of Valero Energy Corp. 112

Ad Campaign

Valero’s branded campaign focuses on

national television networks, sports

sponsorships, and regional and local

advertising. Their main focus is to position

themselves as an American brand that

is "Keeping America Moving." Using

ABC/ESPN/ESPN2 Networks allows

Valero to reach consumers all across the nation focusing their advertising during the

NASCAR Sprint Series and the Alamo Bowl. 113

Figure 2-35

Figure 2-34


The Valero Alamo Bowl has hosted 24 games have attracted over 1.40 million spectators

(over 50% are out-of-town visitors), generated a direct economic impact in excess of

$415 million, contributed over $84million to higher education, distributed

over $1,200,000 in local scholarship funds. Hosting this bowl game has been huge in

making Valero a household name. 114

Also the Outdoor Channel and MLB Network allow Valero to advertise to an important

segment of fuel consumers during peak driving seasons. Local News and Sports affiliates

provide a loyal audience in the most credible environments giving Valero the ability to

target brand-loyal consumers. Outdoor boards are used in various markets to drive traffic

to nearby stores. Social Media is a viable means of communication with our consumers

and allows us to share promotional efforts in a highly efficient manner. 115

Credit Card Program

Valero’s credit and gift cards support sales and promote customer loyalty. Valero’s

proprietary credit card offers many advantages to consumers, all designed for

convenience and value. Consumers can charge up to $150 per visit for fuel and

merchandise at thousands of branded locations. Valero’s prepaid Gift Card allows

consumers to choose cash limits up to $300 for gas, snacks and more, with several

convenient billing options. Valero Gift Card kit for marketers comes with cards, display

holders and signage, all provided at no cost. 116

2-‐96

Chevron

As a company Chevron has decided to

take a more ethical and environmental

approach to advertising. Chevron’s

core values are these: We meet the

highest ethical standards in all

business dealings. We are honest with

others and ourselves. We do what we

say we will do. To maintain those

values, Chevron holds its workforce to the

highest standards of business honesty and integrity and encourages employees to report

questionable conduct. We believe in being transparent with and responsive to our

stakeholders at all times. And we comply with the letter and the spirit of all applicable

laws when conducting Company business. 117

Ad Campaign

At the end of 2010 Chevron

Corporation launched a brand new

global advertising campaign titled

"We Agree." The campaign

highlights the common ground

Chevron shares with people around

the world on key energy issues. It

Figure 2-36

Figure 2-37

PHILLIPS 66: BUSINESS POLICY AND STRATEGY 2-‐97 also describes the actions the company takes

in producing energy responsibly and in

supporting the communities where it operates.

"We hear what people say about oil

companies – that they should develop

renewables, support communities, create jobs

and protect the environment – and the fact is,

we agree," said Rhonda Zygocki, vice president of Policy, Government and Public

Affairs at Chevron. The campaign includes a series of print ads and 30-second TV spots

that focus on five main themes

• Growth and Jobs – Demonstrating Chevron's strong reinvestment of profits into

energy development, local economies and job creation.

• Renewable Energy – Describing Chevron's leadership in the development of

renewable energy and the promotion of energy efficiency.

• Technology – Showcasing the advanced technologies Chevron is investing in to

find new energy and work cleaner, smarter and safer.

• Small Business – Highlighting Chevron's support of small businesses and supply

chains around the world.

• Community Development – Emphasizing the partnerships and programs

Chevron is involved in to support health, education and socioeconomic

development in the communities where it operates.

Figure 2-38

2-‐98

The ads feature declarative statements about the oil industry that are designed to illustrate

the mutual agreement between Chevron and its partners. They also describe the actions

Chevron is taking to advance these important issues.118

ExxonMobil

ExxonMobil is the largest publicly

traded international oil and gas

company, uses technology and

innovation to help meet the world's

growing energy needs. ExxonMobil

holds an industry leading inventory of

resources, is the largest refiner and

marketer of petroleum products and its chemical company is one of the largest in the

world. ExxonMobil engages in a range of philanthropic activities that advance education,

with a focus on math and science in the United States, promote women as catalysts for

economic development, and combat malaria. In 2013, together with its employees and

retirees, ExxonMobil, its divisions and affiliates, and the ExxonMobil Foundation

provided $269 million in contributions worldwide.119

Ad Campaign

Exxon Mobil as recently started a new campaign to help raise awareness about the state

of math and science achievement in the United States. They are specifically targeting the

Figure 2-39

PHILLIPS 66: BUSINESS POLICY AND STRATEGY 2-‐99 importance of teaching math and science to students across America. Exxon Mobil

believes For the United States to remain competitive in the global economy, this is a

challenge we need to solve. That’s why ExxonMobil is raising awareness about this

important issue in a new series of commercials running during the Masters golf

tournament. 120

A significant program they are involved in is the National Math and Science Initiative

(NMSI), an unprecedented effort to improve both student and teacher performance in the

classroom. ExxonMobil has committed $125 million to this major effort. It’s also clear

that students won’t excel without good teachers to challenge and encourage them. That's

why they support programs such as the Mickelson ExxonMobil Teachers Academy,

which focuses on improving the skills of teachers in math and science classrooms so they

can inspire students to pursue careers in these all-important fields.121

Mickelson Exxon Mobil Teachers Academy

The Mickelson ExxonMobil Teachers Academy is a camp where teachers go and learn

about math and science through fun ways! The camp will be one week long and the

teacher will learn with other teachers from across the country. Best of all, it's free for

them, too. You can nominate any deserving teacher you know.122

2-‐100

Figure 2-40

The academy mission is to conduct a professional development academy for teachers of

grades 3-5 that results in improved learning experiences for their students by:

• Enhancing grade appropriate mathematics and science content knowledge;

• Demonstrating the interrelationships between scientific inquiry and mathematical

problem solving;

• Using the tools of mathematics to build understanding and connections to science

concepts; and

• Modeling "best practices" in teaching and learning.123

Fracking

In March of 2013, Exxon Mobil Corp. spent $2 million on a pro-drilling advertising

campaign en route to becoming New York’s second-highest spender on lobbying last

year, according to a report Thursday from the state’s ethics board. The series of

advertisements appeared in a number of upstate New York newspapers, mostly in the

Southern Tier. The pro-fracking ads displayed the names of a number of groups that were

PHILLIPS 66: BUSINESS POLICY AND STRATEGY 2-‐101 supportive of the message, including IOGA and the Greater Binghamton Chamber of

Commerce, but did not specifically mention Exxon Mobil.124

Current Corporate Structure of Key Competitors

Within the oil industry there are several different companies all competing for the same

thing: profits. Phillips 66 has three main competitors within the industry. These

competitors consist of Valero Energy Corporation, Chevron, and Exxon Mobil. Each

company has their specialized management staff that works in different way to try and

achieve the most profits for their company as well as positive recognition for what they

do in the industry.

Valero

Valero Energy Corporation is described as a company that works in the manufacturing

and marketing of transportation fuels, petrochemical products and power.125 Bill Klesse is

the company’s current Board Chairman and Chief Executive Officer. Klesse has over 40

years experience with the oil industry and was named CEO of Valero in 2006 and then

Board Chairman in the following year.126 Alongside Klesse, are Joe Gorder and Mike

Ciskowski. Gorder serves as the company’s President and Chief Operating Officer while

Ciskowski take part as Executive Vice President and Chief Financial Officer.127

While Valero may have their top executives in order, the company underwent a major

management restructure in 2013 in which the company shifted several of its current Vice

Presidents to new departments. The shuffling of management went into effect January 1,

2-‐102

2013. The management shuffle included 6 of Valero’s Executive Vice Presidents. The

first was Kim Bowers who went from serving as the company’s executive vice president

and general counsel to Executive Vice President of the United States and Canada

Convenience-stores as well as Retail President for the company. Taking Bowers’ past

position of General Counsel was Jay Browning who took on the position but remained

with his previous titles as well which included Company Corporate Senior Vice President

and Corporate Secretary. Among the others who management titles realigned included

Gary Arthur who went from Bower’s new position of Retail President to Corporate

Senior Vice President of Wholesale Marketing. Three others included in the shift were

Jim Gillingham, Martin Parrish, and Gary Simmons. When asked about the realignment

of corporate structure Valero’s CEO Bill Klesse stated, “This realignment is important

for the development and execution of our strategies and for the individual development of

key leaders within Valero as we prepare for a rapidly changing competitive

environment”.128

Chevron

The next major competitor in regards to Phillips 66 placement in the oil industry is

Chevron. ON their site, Chevron states they are a company that work to explore, produce

and market transport oil, natural gas, petrochemical products and various types of

energy.129 Their current Chief Executive Officer is John S. Watson who has only held the

position since 2010.130

PHILLIPS 66: BUSINESS POLICY AND STRATEGY 2-‐103 Much like Valero, Chevron also went through a management restructuring process that

started in 2014 and will continue to see changes until 2015. Changes began to be in effect

January 1, 2014. The first change made was repositioning James Johnson from President

of Chevron’s Europe, Eurasia and Middle East Explorations and Production to Senior

Vice President of Upstream. Johnson’s past title was then filled by Todd Levy. The next

management change that also took effect January 1, 2014 was realigning Joe Geagea

from corporate vice president and president of Chevron Gas and Midstream to his new

position as Senior Vice President of Technology and Projects and Services.131 Pierre

Breber would now take on Geagea previous role of Corporate Vice President and

President of Chevron Gas and Midstream. The final management shift that has not taken

place will simply be the shifting of reporting managers. In 2015, George L. Kirkland,

current Vice Chairman of the Board and Executive Vice President of Upstream will be

set to retire therefore making Johnson and Geagea; now both part of the upstream

department responsible for reporting to Watson, who again serves as the company’s

CEO. When Watson was asked about the reasoning behind the shifts he stated, “These

appointments ensure a smooth transition in our upstream business and simplify the

delivery of technology and services to all of our businesses."132

ExxonMobil

The final major industry competitor for Phillips 66 is Exxon Mobile. Exxon is described

as a company whose main business is the exploration, production and sale of energy,

natural gas, petroleum products and crude oil.133 The company’s current Chief Executive

Office is Rex W. Tillerson. Tillerson has held the position January 1, 2006.134 Under

2-‐104

Tillerson is Stuart R. McGill who serves as senior vice president of Exxon Mobil

Corporation. McGill has held his title since 2004.135

Just as the two companies stated before Exxon has had their changes in management as

well. Exxon went through the transitioning of management in 2010 when A.T. Cejka the

company’s then President of ExxonMobil Exploration decided to retire in August of that

year.136 Exxon elected to replace Cejka with Steve Greenlee and giving his current title

of President of ExxonMobil Upstream Research Company to Sara Ortwein.137

Phillips 66 underwent major management changes in 2012 which may have seemed to be

risky but, when looking at other current industry competitors, shifts in management

appear to be more common. Valero, Chevron, and Exxon all have various management

team and reasoning for transitions that set them apart to all compete for profits in the oil

industry.

PHILLIPS 66: BUSINESS POLICY AND STRATEGY 2-‐105 Economic Factors Affecting the Industry

Global Volatility

According to a 2013 report by BDO USA, LLP, a leading accounting and consulting

organization, 100 percent of the top 100 oil & gas companies from the United States cited

volatile oil and gas prices as a leading risk in 2013.138 In 2008 and 2009 the global oil

demand declined for two straight years. The cumulative impact was a loss of more than

100-million barrels-per-day. This also had an adverse effect of Arab countries, as seen

through many channels including: trade, declines in the value of stock markets, and lower

economic growth.139

Spills and Disasters

Natural disasters such as hurricane, earthquakes, and tornados, along with man-made

disasters can have a profound affect on the energy industry. When hurricane Katrina hit

in 2005 gas prices rose approximately three dollars a barrel, shooting gas prices

skyward.140 Natural disasters can also have a dramatic impact on the midstream sector

through damaged pipelines. Furthermore, man-made disasters such as oil spills can have

serious effects on the energy industry. Oil spills hurt a company’s overall potential profit

through the loss of product, wasted time, and money to fix the spills. With that being

said, oil spills hardly budge the cost of gas. When BP spewed more than 174 million

gallons it did little to effect gas prices in the United States. This is likely because of it

was only a small percentage of the total gas consumed in the U.S. in combination with it

happening over a long period of time.141

2-‐106

Government Regulations

According to the Department of Energy (DOE), the U.S. spends an average annual

amount of 5 billion dollars on fuel.142 With this large chunk of the economy connected to

oil, gas, and coal, it is mandatory for the government to regulate such an industry.

Emissions standards, taxes, market directives and specific fuel guidelines are but some of

the mandates that directly impact fuel sources. Specifically, the DOE seeks to reduce the

U.S. dependence on foreign oil as well as develop energy efficient technologies.143 By

promoting the gathering and refining of oil in our own country we are able to boost the

economy gradually. The DOE also seeks to help mitigate risks and hazards referring to

environmental risks and foreign affairs. Furthermore, the Government is capable of

implementing monetary policies that are capable of shifting the demand of products as

well as consumer confidence.

Environmental Concerns

Climate change and greenhouse gas emissions legislation, along with concern over the

future of hydraulic fracturing, pose major problems to the oil and gas industry.144 For the

midstream sector, greenhouse gas emission legislation is key to the industry’s success.

The process of acquiring and processing natural gas releases a considerably less amount

of greenhouse gases compared to oil refining; approximately 50 percent less carbon-

dioxide production and less than a third as much nitrogen oxides.145 A greater focus on

the natural gas industry will allow companies in the midstream sector to greater benefit

from greenhouse gas emission legislations when compared to the oil industry.

PHILLIPS 66: BUSINESS POLICY AND STRATEGY 2-‐107 Energy Industry’s Dominant Economic Features

Market Size and Growth Rate

The global oil & gas market grew by 30.4% in 2010 to reach a value of $2,642.5 billion.

In 2015, the global oil & gas market is forecast to have a value of $3,699.4 billion, an

increase of 40% since 2010. The global oil & gas market grew by 16.3% in 2010 to reach

a volume of 73.8 billion BOE. In 2015, the global oil & gas market is forecast to have a

volume of 91.8 billion BOE, an increase of 24.4% since 2010.146

The oil and gas industry covers the locating, extracting (drilling), refining, delivering and

marketing of oil and gas products. Oil meets much of the world’s demand for energy,

around a third in the EU and Asia and over half in the Middle East. Demand for gas in the

EU is forecast to show 1% annual growth in the long term, according to a 2010 statistical

report from the European gas industry association Eurogas. This marks gas market

recovery after consumption fell about 6% in the EU in 2009, driven down by the global

financial crisis.147

Scope of Competitive Rivalry

For the Upstream petroleum businesses, whether stand alone or part of a vertically

integrated company, are commodity producers. Their products (e.g. crude oil, natural

gas) are produced to an industry standard and consequently there is limited scope for

product differentiation between companies. There may be scope to differentiate on the

basis of factors such as reliability of supply, or the physical characteristics of the

2-‐108

hydrocarbon, but the ability to create value through marketing strategies is far more

limited in the upstream petroleum industry than in, for example, manufacturing or

services. Consequently, competitive advantage in the upstream petroleum industry is

driven largely by the cost of production and the ability to sustain production rates. To

make well-considered valuation decisions, we need to ensure these factors are

incorporated into the valuation process.148

In the downstream petroleum business, the sources of value are entirely different. In the

downstream industry, whether it is refining or petrochemicals, the hydrocarbon input is

just another operating cost. Value is created by the efficiency of the industrial process

that is used to convert the hydrocarbon input into marketable products. In the

downstream, as opposed to the upstream, there is a far greater scope for product

differentiation and product innovation, and therefore the marketing function is

comparatively a far more important source of value creation. Performance is measured

by the value that has been added to the hydrocarbon input and hence we calculate key

performance indicators such as ‘refining margin’ to make judgments about the relative

efficiency and, hence, value of downstream operators.149

Ease of Entry

There are thousands of oil and oil services companies throughout the world, but the

barriers to enter this industry are enough to scare away all but the serious companies.

Barriers can vary depending on the area of the market in which the company is situated.

For example, some types of pumping trucks needed at well sites cost more than $1

PHILLIPS 66: BUSINESS POLICY AND STRATEGY 2-‐109 million each. Other areas of the oil business require highly specialized workers to operate

the equipment and to make key drilling decisions. Companies in industries such as these

have higher barriers to entry than ones that are simply offering drilling services or

support services. Having ample cash is another barrier - a company had better have deep

pockets to take on the existing oil companies.150

Technology/Innovation

Petroleum science has evolved from undeveloped geology to supercomputer- based

calculations and 3D views of the subsurface. It has taken the drilling process from

guessing game to the defined targeting of fields. The 21st century Oil & Gas Industry is

charged by innovation and technology. It has dramatically altered the manner in which oil

and gas reserves are identified, developed, and produced. Advancements in technology

have also improved environmental protection and conservation of natural resources.

Technological advances affect all sectors of the energy market and all other regions in the

world. The competitive petroleum industry promotes the technology transfer worldwide.

Petroleum refining has grown increasingly complex in the last two decades, due to

lower-quality crude oil and environmental regulations that require cleaner manufacturing

processes and higher-performance products.151

2-‐110

The Petroleum Industry has identified research priorities in the following areas:

Figure 2-41

Demand – Supply Conditions

In January of 2014 the International Energy Agency said that oil production in the United

States rose by a record 992,000 barrels a day in 2013. The increase left United States

production at 7.5 million barrels a day, with both November and December production

estimated to have been over eight million barrels a day.

American consumption of oil also rose last year, by 390,000 barrels a day, or 2.1 percent,

to 18.9 million barrels a day. The agency increased its estimate of American oil use in the

final quarter of the year, although it lowered its estimate of the increase in some other

countries, including China. Over all, world consumption rose 1.4 percent, making 2013

the first year since 1999 that the use of oil in the United States rose more rapidly than in

the rest of the world.

The agency said that demand was strong in the petrochemical industry in the United

States, which has benefited from the fact that rising supply has left American crude oil

prices lower than those in many other countries. The agency estimated that demand for

PHILLIPS 66: BUSINESS POLICY AND STRATEGY 2-‐111 gasoline in the United States rose as a result of increasing consumer confidence and more

sales of sport utility vehicles. 152

Product Characteristics/Market Segmentation

Phillips 66 manufactures and markets specialty products designed to support commercial,

industrial and wholesale buyers worldwide. The company’s product line includes

petroleum coke, waxes, solvents and other products. The company’s base oils help

optimize cost and performance of demanding formulations, while the process oils offer

top-quality performance and are ideal for use as extenders in rubber, plastics, adhesives

and numerous other applications. When it come to converting heavy crude oil into higher

value products, delayed coking remains the industry’s leading economical choice. As a

licensor that also designs, owns and operates delayed cokers, Phillips 66 is uniquely

qualified to offer competitive advantages that others cannot match.153

2-‐112

Key Competitive Forces in the Industry

Porters 5 Forces Model

Figure 2-42

New Entrants (low)

Entry barriers to the petroleum industry include: i) political and governmental pressures,

ii) the need for highly trained and specialized workers, iii) the need for large capital

investments, iv) asset specificity, and v) physical hazard and risk. Global political forces

shape the industry and in the U.S., nearly 1/3 of all petroleum is produced from Federal

lands. In addition, the production of oil is extensively regulated by federal, state and

PHILLIPS 66: BUSINESS POLICY AND STRATEGY 2-‐113 local authorities. Environment evaluations and laws regulating processes require an

extensive compliance plan.154

Highly trained and specialized workers are needed to operate equipment and determine

key drilling decisions. Significant capital is required to enter the market, to replace

reserves, and to sustain production. The firm must pay for development prospects and

productive oil properties. A substantial reserve is needed to cover operations during

periods of unproductive drilling and shortages of oil field equipment, services and

qualified personnel.

Economies of scale also act as an entry barrier. Minimum efficient level of production for

the oil and gas industry is high due to up-front costs, requiring a larger market share for

an entrant to be competitive. Oil refining also can be hazardous; exposing the entrant to

financial, regulatory and civil liability for personal injury; damage or destruction of

property, natural resources and equipment; and environmental damage clean up

responsibilities that suspend, limit or prohibit operations.155

Suppliers (Medium)

Suppliers to vertically integrated industries include services from companies such as

Schlumberger and Halliburton for technical hardware. Since there is a limited amount of

suppliers who provide technical equipment and the demand for technical supplies is high,

means the suppliers wield some leverage regarding technical hardware and support.156

The labor pool for experienced managers in this industry is aging. The median age for

2-‐114

managers has risen to 52. Reports indicate that fewer graduates enter the industry due to

poor to fair job opportunities. Managers that do qualify have a generally high bargaining

power.157

Buyers (Low)

Buyers of oil and gas products range from individual users to large corporations and

governments. With the demand of fuel products extremely high at a current global

consumption rate of 31 billion barrels of crude annually, and the price of fuel being

driven by market factors oil industries have little control of demonstrates that customers

have little bargaining power when it comes to the price of fuel.158 Until there is a proven

fuel substitute, customers will continue to pay for the high cost of oil. In addition, as

refining costs increase, oil companies can to pass these rising costs on to consumers who

demand it.

Substitutes (Short-term low, long-term medium)

As of yet, there are very few substitutes for oil. Although technology is moving

extremely fast in the area of renewable energy, no ready replacement for oil has been

discovered as of yet. Bio-fuel is offering some competition to the traditional means of

energy, however, bio-fuel, so far at the least is no real threat to the oil market or industry.

Consequently, there is no immediate threat of substitution.


Competitive Rivalry (High)

There are few vertically integrated gas and oil companies that focus specifically on the

midstream and downstream sectors. Competitive rivalry in the downstream industry is

largely the super major companies such as Exxon Mobil and Chevron. In the midstream

sector there are many independent privately owned companies, many of which are

partially owned by larger companies. The super major companies do have assets in the

midstream sector that directly compete with Phillips 66. Differentiation as well as being

an integrated downstream company allows Phillips 66 to focus on these sectors

specifically, but rivalry with the numerous independent companies as well as the super

major companies creates a high competitive risk.159

Current Driving Forces in the Industry

The current driving forces of global oil demand includes, population trends, supply

availability, economic activity, consumption patterns, efficiency in use as well as

technological advancement. These provide insight to increasing and declining oil

demand in the world’s nations. In aggregate, however, as the emerging economics

mature, oil demand is forecast to increase past current supply capacity.160

The world population of 7.2 billion in mid-2013 is projected to increase by almost one

billion people within the next twelve years, according to official United Nations

population estimates. It is projected to reach 8.1 billion by 2025, and to further increase

to 9.6 billion in 2050 and 10.9 billion by 2100. This assumes a decline of fertility for

countries where large families are still prevalent as well as a slight increase of fertility in

2-‐116

several countries with fewer than two children per women on average.161 With the

growth in population over the years to come, oil demand will be driven by this factor.

The more people that populate the earth will cause oil consumption to rise which in-turn

will cause the oil industry to increase their production.

Consumption patterns will go up because of the population growth. One of the key

components in oil consumption pattern is transportation. Again, because the population

is growing more and more people will have a vehicle of some sort or use some mode of

transportation that involves oil or gas. China and India are expected to have the largest

expansion of their transportation sector. On the other hand, oil demand among OECD

(The Organisation for Economic Co-Operation and Development) countries is expected

to decline over the next two decades, driven mostly by government policies on fuel

efficiency and the fact that rates of vehicle ownership are already high.162

Economic activity and growth is essential in moving forward in the oil industry. Global

growth of Gross Domestic Product, (GDP) adjusted for inflation, will rebound from 2.9

percent in 2013 to 3.5 percent in 2014. Across mature economies, the 2014 gorwth

outlook has slightly improved significantly to 2.2 percent growth in 2014, compared to

1.3 percent in 2013. The world’s major economies still face many structural flaws and

policy constraints that hinder more investment and faster productivity growth, making the

medium-term outlook for significantly faster path of global growth more uncertain. The

upsides for the medium term growth outlook for the global economy are a significant

PHILLIPS 66: BUSINESS POLICY AND STRATEGY 2-‐117 faster increase in public and private investment and an acceleration in the economies

reform agenda to accelerate productivity growth.163

Supply availability is the ultimate rationing agent. When all else fails, the price of oil is

what gives. The 1970s and 1980s have taught societies, countries, and governments to

respect price volatility and avoid counterproductive attempts to protect against it.

Although some accuse players of speculation, the bottom line is that one person’s

speculator is another person’s counterparty in a hedging transaction.164 There is a price

threshold for each country, once the price of a barrel of oil hits this threshold it causes a

point of pain after which changes in behavior, driving patterns and other consumption

patterns will occur. Currently the United States has the highest tolerance. Global oil

prices are getting close to some of those pints of pain, which will be and important

consideration in the next couple of years.

Efficiency has become a leading component to the automobile industry. Many people

have become focused on leaving less of a carbon footprint and as a result are buying

more fuel-efficient

vehicles. The focus on

efficiency in oil use is

greater now than it has

been in the past twenty

Figure 2-43

2-‐118

years.

Figure 2-37 shows the recent trends in automobile miles per gallon and how they are on

the rise. Automobile manufacturers are continuing to improve the average MPG for the

future. As automakers innovate to meet stronger clean car and fuel economy standards

that roughly double fuel efficiency by 2025, we can expect more choices for consumers

in the showroom and less pain at the pump. EPA, (Environmental Protection Agency)

which is the official keeper of automotive fuel economy and emissions data for

regulatory compliance, gathers automaker submission and reports automotive efficiency

trends annually. Overall, the trends show that new cars and trucks are getting better and

better, squeezing more from each drop of gasoline. Clean car and fuel economy

standards are working to push automotive innovations and consumers are getting some

relief from high and volatile gas prices. Even better, in the coming years, we can look

forward to more record-breaking years of high efficiency, less pollution and less oil

consumption.165

As technological innovation improves so does oil production efficiency. Technology will

continue to improve energy production and use, but its contribution should not be

overestimated, panelists at a conference on the US Energy Information Administration’s

final 2012 Annual Energy Outlook agreed. Because the technology advances that have

provided for recent increases in supply are still in the early stages of development, future

US crude production could vary significantly, depending on the outcomes of key

uncertainties related to well placement and recovery rates. Projected increases in gas

PHILLIPS 66: BUSINESS POLICY AND STRATEGY 2-‐119 production could make it exceed demand early in the next decade. The outlook reflects

increased use of LNG in markets outside North America. Strong growth in natural gas

production, reduced pipeline imports and increased pipeline exports, and relatively low

natural gas prices in the US.166

The resumption of robust growth in net global oil demand after the 2008-09 economic

crisis could very well test the ability of the global oil supply system to keep pace as the

decades unfold. The expansion of OPEC supply, particularily Saudi Arabian and Iraqi

production, is going to be tested in coming years. The chance of a shortfall in supplu

availability by 2015 is real and will depend on price as the ultimate rationing agent; the

shortfall will likely trigger and upward oil price response. The world will be lucky is the

expected rationing can be done in a way that does not create a spike in price and a

consequent negative economic feedback.167

2-‐120

Strategic Group Map

Figure 2-44

This strategic map visually compares Phillips 66 against its three major competitors in

the oil industry. Phillips 66 competitors include Valero, Chevron, and Exxon Mobile. The

use of a strategic map is beneficial for companies to analyze where they are in

comparison to other close competitors in their area of market. Phillips 66 can look to the

PHILLIPS 66: BUSINESS POLICY AND STRATEGY 2-‐121 map to distinguish where they may excel or fall short against their three main competitors

mentioned above in the text. This particular map is used in comparing the oil company’s

production of oil barrels per day and the number of refineries they have. When

comparing the two different factors Phillips 66 can assess where they stand in the market

and make arrangements to move towards becoming a top performer in their industry.

When looking at the strategic map, Phillips 66 appears to be in a relatively average spot

versus the competition in means of number of refineries. Currently, Phillips 66 has 15

different refineries across the world.168 Even though Phillips 66 is still seen as a “newer”

company in relation to their competition, they appear to stand as a stable company by

sharing the same amount of refineries as one competitor and even exceeding another

competitor. Phillips 66 reports that they produce up to 2.06 million barrels of crude oil a

day.169 Based on the map, Phillips 66 would appear to rank the lowest in their abilities of

producing crude oil barrels per day. Phillips 66 is still a growing company that is working

hard to find their niche in the industry. With future investments and technological

advances, Phillips 66 has potential to grow in their crude oil barrel per day production

capabilities. As a whole, Phillips would appear to fall as a below average company versus

their competitors given the two factors chosen for the strategic map.

One of Phillips 66 key competitors would be Valero. Valero appears to place themselves

as about an average competitor in comparison to Phillips 66 based off of the strategic

map. Valero does produce a slightly higher amount of crude oil barrels per day than

Phillips at an average of about 3 million.170 In comparison to the number of refineries,

2-‐122

Valero also has 15 just as Phillips 66. Based on the information presented on just the

strategic map, Valero would appear to be on the same level of production as Phillips

66 as an equivalent competitor.171 However, Valero is a much larger company that takes

part in several other sectors of the oil industry. Besides being a crude oil producer, Valero

also takes part in 8 other areas in the oil industry that include asphalt, propane, sulfur,

solvents, Naphthenic Oils, Aromatics, NGL's, and Petroleum Coke.172 Valero is a

company that gains recognition for their broad diversification. This is something that

Phillips must take into account because based on the map, Valero is a competitor but not

seen as an absolute threat. If Phillips 66 looked at Valero has a whole, they would see

that the company is actually more of a threat than the map shows.

The next competitor seen on the strategic map would be Chevron. Chevron also follows

suit with Phillips 66 and Valero in its production output of crude oil barrels per day.

Chevron states that they produce about 3.5 million barrels of crude oil per day.173

However, when looking at the strategic map, Chevron falls behind Phillips 66 and the

other competitors in terms of the number of refineries that they own. Chevron only has 7

listed refineries meaning that they have less than half the amount of Valero and Phillips

66.174 This places them at a significantly lower plot point on the map. Chevron's lower

amount of refineries doesn't necessarily mean that they aren't a threat to Phillips 66.

Chevron is an oil company that is able to produce more crude oil barrels per day than

both Valero and Phillips with fewer refineries. When looking at the number of refineries

in that sense, Chevron would appear to be ahead of Phillips 66.

PHILLIPS 66: BUSINESS POLICY AND STRATEGY 2-‐123 The last competitor listed on the strategic map is Exxon Mobile. This oil competitor is

located on the highest plot point on the map. Exxon Mobile reports that the company

produces 5.3 million barrels of crude oil per day.175 This is over double the amount that

Phillips 66 produces at just 2.06 million barrels per day. However, Exxon Mobile does

own a significantly larger amount of refineries than Phillips and their other close

competitors. Exxon Mobile has 32 different refineries making them a major competitor

on the strategic map not only to Phillips 66 but the other two close compared companies

as well.176

Based on the strategic map alone, Phillips 66 would appear to fall within the average area

region with its oil industry competitors. However, when taking a further and more in

depth look at Phillips 66 and understanding their competitors, there does seem to be a

larger gap in the competition.

2-‐124

Industry Key Success Factors

• Operational Excellence

• Aligned Resources

• Strong Management Team

• Differentiated Portfolio

• Joint Business Ventures

Operational Excellence

A key success factor for the downstream and midstream energy industry is operational

excellence. Operational excellence includes: reducing costs, reducing waste, operating in

a safe environment, and operating with reliable equipment. In an industry with strong

regulations regarding environmental concerns, it is crucial for companies to place a

strong emphasis on operational excellence. Companies that have excellent operations can

typically see a 40 to 50 percent reduction in loss of primary containment and high-

potential incidents. Furthermore, operational excellence can result in more efficient

execution of maintenance activities, with a reduction of emergency and reactive work by

80 to 90 percent.177

Aligned Resources

In order to reduce costs and improve operating efficiency, it is key for companies in the

downstream industry to align their resources. Companies that have the capabilities to

gather, process, refine, market and transport their products see reduce costs in their value

chain, as well as a great return on their capital investments. A company that aligns their

PHILLIPS 66: BUSINESS POLICY AND STRATEGY 2-‐125 resources in a vertically integrated firm is capable of utilizing their resources across their

diverse portfolio. This is especially true for Phillips 66 who relies on their midstream

business sector to transport products from both their chemicals and refining and

marketing divisions.

Management Team

In an industry where less and less graduates are seeking management opportunities, it is

crucial for companies in the energy industry to build a strong management team.

Workers in this industry are high-skilled and well trained, therefore, they are an

extremely important asset to any company. If a company is capable of obtaining a

strong, dedicated workforce in combination with a management team who is willing to

engage their employees to further benefit the company, then the company will likely find

success.

Differentiated Portfolio

A company with a differentiated portfolio is more suited for the every changing energy

landscape. The oil and gas industry is extremely important even today; but with the

landscape changing alternative fuels and renewable energy is on the rise.178 Recent

reports on the expansion of the US shall gas markets offers a competitive strength to

those companies that are able to exploit these resources. Companies with a strong

differentiated portfolio also tend to have efficiency of scale and the technical capability to

operate in the most attractive markets, resulting in increased profit margins and a greater

return on capital.

2-‐126

Joint Business Ventures

A key success factor in the midstream and chemicals sectors is being involved in joint

business ventures. Joint business ventures allow bigger companies to expand their

capabilities across a larger geographical presence and increase their economies of scale.

Furthermore, joint business ventures allow a company to spread the risk as well as the

expenses of the project in which they are working towards. In order to maintain strong

joint business ventures, it is crucial for companies to strategically align. Strategic

misalignment can cause different agendas which can quickly ruin a joint business

venture.179

40 http://seekingalpha.com/article/486131-conocophillips-ceo-hosts-phillips-66-analyst-update-conference-call-transcript 41 http://seekingalpha.com/article/486131-conocophillips-ceo-hosts-phillips-66-analyst-update-conference-call-transcript?page=2 42http://www.tulsaworld.com/business/article.aspx?subjectid=51&articleid=20121003_46_E1_CUTLIN104081&allcom=1 43http://www.phillips66.com/EN/investor/presentations_ccalls/Documents/Phillips66_Barclays_CEO_Energy-Power_Conference_080512_FINAL.pdf 44http://www.phillips66.com/EN/investor/presentations_ccalls/Documents/Phillips66_Barclays_CEO_Energy-Power_Conference_080512_FINAL.pdf 45 http://www.foxbusiness.com/news/2012/06/05/phillips-66-ceo-says-decision-on-louisiana-refinery-will-come-in-summer/ 46 http://www.bizjournals.com/houston/morning_call/2014/02/phillips-66-s-new-investments-represent-shift-from.html 47http://www.phillips66.com/EN/investor/presentations_ccalls/Documents/Phillips66_Barclays_CEO_Energy-Power_Conference_080512_FINAL.pdf 48http://www.phillips66.com/EN/investor/presentations_ccalls/Documents/2013%20PSX%20Stockholder%20MeetingTranscript.pdf 49http://www.phillips66.com/EN/investor/presentations_ccalls/Documents/2013%20PSX%20Stockholder%20MeetingTranscript.pdf 50 http://www.fool.com/investing/general/2012/11/15/phillips-66s-major-competitive-advantage.aspx 51 http://www.businessweek.com/news/2012-05-04/chicago-gasoline-advances-on-marathon-work-phillips-66-flaring 52 http://www.phillips66.com/EN/about/Pages/visionandvalues.aspx 53 http://www.phillips66.com/EN/about/reports/Documents/Phillips-66-Brochure.pdf 54 http://www.phillips66.com/EN/about/Pages/visionandvalues.aspx 55 http://amhistory.si.edu/onthemove/collection/object_103.html 56 http://www.chron.com/business/article/Spun-off-refiner-gets-Phillips-66-name-2263224.php 57 http://www.fool.com/investing/general/2013/12/29/why-phillips-66-has-a-leg-up-on-its-peers.aspx 58 http://www.fool.com/investing/general/2013/12/29/why-phillips-66-has-a-leg-up-on-its-peers.aspx 59 http://beta.fool.com/erinannie/2013/05/14/phillips-66-and-conocophillips-one-year-later/33870/ 60 http://www.marketwatch.com/story/phillips-66-profit-slumps-on-weak-refining-margins-2013-10-30

PHILLIPS 66: BUSINESS POLICY AND STRATEGY 2-‐127 61 http://www.bentekenergy.com/GreatNGLSurge.aspx 62 http://www.pwc.com/en_US/us/industrial-products/publications/assets/pwc-shale-gas-chemicals-industry-potential.pdf 63 http://www.pwc.com/en_US/us/industrial-products/publications/assets/pwc-shale-gas-chemicals-industry-potential.pdf 64http://www.unglobalcompact.org/docs/issues_doc/Environment/SEFA/2SEFA_Chemical.pdf 65http://www.unglobalcompact.org/docs/issues_doc/Environment/SEFA/2SEFA_Chemical.pdf 66http://www.iea.org/publications/freepublications/publication/WEO2011_WEB.pdf 67http://www.unglobalcompact.org/docs/issues_doc/Environment/SEFA/12SEFA_Oil_Gas.pdf 68 http://theenergycollective.com/stephenlacey/254021/can-renewables-grow-fast-enough-make-difference 69 http://www.phillips66.com/EN/about/reports/Documents/annual-report-2013.pdf 70 http://www.forbes.com/sites/greatspeculations/2012/04/10/conocophillips-worth-80-downstream-spinoff-will-focus-on-chemicals-transport/ 71 http://deliveryfuel.com/why-are-fuel-prices-so-unstable/ 72 https://worldwildlife.org/threats/oil-and-gas-development 73 http://www.phillips66.com/EN/investor/presentations_ccalls/Documents/Phillips66_Barclays_CEO_Energy-Power_Conference_080512_FINAL.pdf 74 http://www.phillips66.com/EN/newsroom/feature-stories/Pages/AreYouReady.aspx 75 http://bpong.phillips66gas.com/cp13c/p66pong_web/notice 76 http://www.phillips66gymnastics.com/history.html 77 http://www.ionok.com/sports/the-phillips-66ers/ 78 http://seekingalpha.com/article/486131-conocophillips-ceo-hosts-phillips-66-analyst-update-conference-call-transcript 79 http://www.phillips66.com/EN/investor/presentations_ccalls/Documents/April%202012%20PSX%20Investor%20Update%20Transcript.pdf 80 http://www.phillips66.com/EN/about/our-businesses/marketing-specialties/Pages/index.aspx 81 http://www.phillips66.com/EN/about/our-businesses/refining-marketing/marketing/Pages/index.aspx 82 http://www.phillips66.com/EN/about/our-businesses/refining-marketing/marketing/Pages/index.aspx 83 http://www.phillips66.com/EN/about/our-businesses/refining-marketing/marketing/Pages/index.aspx 84 http://www.phillips66.com/EN/about/our-businesses/refining-marketing/marketing/Pages/index.aspx 85 http://www.phillips66.com/EN/about/our-businesses/refining-marketing/marketing/Pages/index.aspx 86 http://www.phillips66.com/EN/about/our-businesses/refining-marketing/marketing/Pages/index.aspx 87 http://www.phillips66.com/EN/about/our-businesses/refining-marketing/marketing/Pages/index.aspx 88 http://www.phillips66partners.com/EN/about/business-strategies/Pages/index.aspx 89 http://www.phillips66partners.com/EN/about/business-strategies/Pages/index.aspx 90 http://www.cspnet.com/fuels-news-prices-analysis/fuels-news/articles/conocophillips-launches-new-phillips-66-ad-campaign 91 http://www.cspnet.com/fuels-news-prices-analysis/fuels-news/articles/phillips-66-celebrate-new-company-during-marketing 92 http://www.businesswire.com/news/home/20131206005779/en/Phillips-66-Announces-2014-Capital-Program#.U0Mxdha2uxI 93 http://www.forbes.com/sites/christopherhelman/2012/04/30/as-conocophillips-spins-off-refining-assets-should-you-own-the-new-phillips-66/ 94 http://www.phillips66.com/EN/about/leadership%20team/Pages/index.aspx 95 http://www.phillips66.com/EN/about/Company_Overview/Pages/high-performing-organization.aspx 96 http://www.phillips66.com/EN/about/Company_Overview/Pages/high-performing-organization.aspx 97 http://www.phillips66.com/EN/about/leadership%20team/Pages/Garland.aspx 98 http://www.forbes.com/profile/greg-garland/ 99 http://www.phillips66.com/EN/about/leadership%20team/Pages/Brady.aspx 100 http://www.thestreet.com/story/11644757/1/phillip-d-brady-has-been-named-senior-vice-president-of-government-affairs-for-phillips-66-photo-business-wire.html 101 http://www.phillips66.com/EN/about/leadership%20team/Pages/Herman.aspx

2-‐128

102 http://www.phillips66.com/EN/about/leadership%20team/Pages/Johnson.aspx 103http://www.phillips66.com/EN/about/leadership%20team/Pages/Lindstrom.aspx 104 http://www.phillips66.com/EN/about/leadership%20team/Pages/Maxwell.aspx 105 http://www.phillips66.com/EN/about/leadership%20team/Pages/Reasor.aspx 106 http://www.phillips66.com/EN/about/leadership%20team/Pages/Taylor.aspx 107http://www.phillips66.com/EN/about/leadership%20team/Pages/Veevaete.aspx 108 http://www.phillips66.com/EN/about/leadership%20team/Pages/Ziemba.aspx 109 http://www.valero.com/OurBusiness/Pages/Home.aspx 110 http://www.chevron.com/about/leadership/ 111 http://corporate.exxonmobil.com/en/company/about-us 112 http://investing.businessweek.com/research/stocks/private/snapshot.asp?privcapId=4318170 113http://www.valero.com/businesspartners/brandeddistributors_dealers/pages/advertisingbrandsupport.aspx 114 http://alamobowl.com/main/bowl_history.php#.U0SlVha2uxI 115http://www.valero.com/businesspartners/brandeddistributors_dealers/pages/advertisingbrandsupport.aspx 116 http://www.valero.com/BusinessPartners/BrandedDistributors_Dealers/Pages/CreditCardProgram.aspx 117 http://www.chevron.com/corporateresponsibility/approach/ethicsgovernance/ 118http://www.chevron.com/chevron/pressreleases/article/10182010_chevronlaunchesnewglobaladvertisingcampaignweagree.news 119 http://online.wsj.com/article/PR-CO-20140411-909669.html 120 http://www.exxonmobilperspectives.com/2012/04/08/lets-solve-our-math-and-science-challenges-3/ 121 http://www.exxonmobilperspectives.com/2012/04/08/lets-solve-our-math-and-science-challenges-3/ 122 http://www.sendmyteacher.com 123 http://mickelson.nsta.org 124 http://www.pressconnects.com/article/20130330/NEWS11/303300030/Exxon-Mobil-spent-2-million-pro-fracking-ad-campaign 125 http://www.marketwatch.com/investing/stock/vlo/profile 126 http://www.valero.com/ourbusiness/pages/executiveteam.aspx 127 http://www.valero.com/ourbusiness/pages/executiveteam.aspx 128 http://www.bizjournals.com/sanantonio/news/2012/12/10/valero-announces-management-changes.html 129 http://www.chevron.com/about/leadership/ 130 http://www.chevron.com/about/leadership/corporateofficers/watson/ 131 http://www.chevron.com/about/leadership/corporateofficers/geagea/ 132 http://www.chevron.com/chevron/pressreleases/article/10072013_chevronannounceskeyseniorleadershipappointments.news 133 http://topics.nytimes.com/top/news/business/companies/exxon_mobil_corporation/index.html 134 http://corporate.exxonmobil.com/en/company/about-us/management/rex-w-tillerson?parentId=663fb338-1f34-4a5a-ac09-26e2cfc2d5ad 135 http://exxonenergy.com.yeslab.org/html/ourcoAboutManagement.htm 136 http://www.ogfj.com/articles/print/volume-7/issue-8/energy-players/exxonmobil-plans_management.html 137 http://news.exxonmobil.com/press-release/tim-cejka-retire-president-exxonmobil-exploration-company-expected-appointment-steve-g 138 http://www.bdo.com/news/pr/2650 139 http://www.opec.org/opec_web/en/1756.htm 140 http://useconomy.about.com/od/commoditiesmarketfaq/f/oil_prices.htm 141 http://useconomy.about.com/od/commoditiesmarketfaq/f/oil_prices.htm 142 http://www.ehow.com/info_8340228_greatest-factors-affecting-energy-sources.html 143 http://energylaw.uslegal.com/government-regulation-and-programs/department-of-energy/ 144 http://www.energydigital.com/oil_gas/top-20-risk-factors-facing-the-oil-gas-industry 145 http://www.epa.gov/cleanenergy/energy-and-you/affect/natural-gas.html 146 http://www.istockanalyst.com/business/news/5492148/companies-markets-in-2015-the-global-oil-gas-market-is-forecast-to-have-a-volume-of-91-8-billion-boe 147 http://www.reportlinker.com/ci01331/Oil-and-Gas-Energy.html

PHILLIPS 66: BUSINESS POLICY AND STRATEGY 2-‐129 148 http://www.ethanhathaway.com/blog/valuation-in-the-petroleum-industry-focusing-on-the-sources-of-competitive-advantage/#axzz2zBoT5SLE 149 http://www.ethanhathaway.com/blog/valuation-in-the-petroleum-industry-focusing-on-the-sources-of-competitive-advantage/#axzz2zBoT5SLE 150 http://www.investopedia.com/features/industryhandbook/oil_services.asp 151 http://youngpetro.org/2013/10/29/technological-advancement-in-oil-industry/ 152 http://www.nytimes.com/2014/01/25/business/us-oil-production-keeps-rising-beyond-the-forecasts.html?_r=0 153 http://www.phillips66.com/EN/products/business/specialty_products/Pages/index.aspx 154 http://www.breitlingenergy.com/wp-content/uploads/2011/06/The-Future-of-the-Oil-and-Gas-Industry.pdf 155 http://www.breitlingenergy.com/wp-content/uploads/2011/06/The-Future-of-the-Oil-and-Gas-Industry.pdf 156http://www.sba.pdx.edu/faculty/johns/jsaccess/0web/573/Sectors/Energy/COP/COP_ConocoPhillips_Buy_MBonfield_Winter2011.pdf 157 http://www.breitlingenergy.com/wp-content/uploads/2011/06/The-Future-of-the-Oil-and-Gas-Industry.pdf 158http://www.sba.pdx.edu/faculty/johns/jsaccess/0web/573/Sectors/Energy/COP/COP_ConocoPhillips_Buy_MBonfield_Winter2011.pdf 159http://www.sba.pdx.edu/faculty/johns/jsaccess/0web/573/Sectors/Energy/COP/COP_ConocoPhillips_Buy_MBonfield_Winter2011.pdf 160http://www.cfainstitute.org/learning/products/publications/cp/Pages/cp.v28.n3.1.aspx?WPID=AlsoViewedProducts 161 https://www.unfpa.org/pds/trends.htm 162 http://www.iea.org/aboutus/faqs/oil/ 163 https://www.conference-board.org/data/globaloutlook.cfm 164http://www.cfainstitute.org/learning/products/publications/cp/Pages/cp.v28.n3.1.aspx?WPID=AlsoViewedProducts 165 http://theenergycollective.com/luketonachel/199146/fuel-economy-continues-rise-epa-report Figure 1 http://theenergycollective.com/luketonachel/199146/fuel-economy-continues-rise-epa-report 166 http://www.ogj.com/articles/2012/06/technology-remains-driving-force-behind-us-energy-gains.html 167http://www.cfainstitute.org/learning/products/publications/cp/Pages/cp.v28.n3.1.aspx?WPID=AlsoViewedProducts 168 http://www.phillips66.com/EN/about/our-businesses/refining-marketing/refining/Pages/index.aspx 169 http://www.phillips66.com/EN/about/our-businesses/refining/Pages/index.aspx 170 http://www.valero.com/ourbusiness/Pages/Home.aspx 171 http://www.wikinvest.com/stock/Valero_Energy_(VLO) 172 http://www.valero.com/Products/Pages/Home.aspx 173 http://www.forbes.com/pictures/mef45glfe/9-chevron-3-5-million-barrels-per-day-3/ 174 http://www.chevron.com/about/ourbusiness/refiningmarketingtransportation/refining/ 175 http://www.energydigital.com/top_ten/top-10-business/top-10-oil-companies-in-the-world 176 http://www.hoovers.com/company-information/cs/company-profile.Exxon_Mobil_Corporation.07cc70931047bfd5.html 177 http://www.bain.com/publications/articles/operational-excellence-the-imperative-for-oil-and-gas-companies.aspx 178 http://www.phillips66.com/EN/about/Company_Overview/Pages/competitive-strengths.aspx 179 http://www.strategyand.pwc.com/global/home/what-we-think/reports-white-papers/article-display/making-energy-industry-joint-ventures

3-‐130

3. Section 3 – Strategic Plan

Discussion of Likely Strategic Maneuvers from Relevant Competitors

Valero

Generic Strategy

Valero Energy targets customers who have very specific needs and with solutions that are

difficult to replicate. Valero is likely to continue their focused differentiation strategy in

the short-term by focusing on light crude oil processing, the purchasing of ethanol plants,

and increasing their production of methanol. In order to combat the changing energy

landscape, Valero energy is likely to rely on alternate forms of fuel specifically designed

for transportation vehicles, such as their E85 ethanol fuel.

Offensive Strategies

In the next three years it is likely that Valero will increase capital expenditures and look

to purchase ethanol plants in North America. Valero’s alternative fuel, E85 is a

combination of ethanol (85 percent) and gas (15 percent).180 By being a oil refiner and a

gas retailer, the purchasing of ethanol plants will uniquely position Valero to distribute

their ethanol based fuel in their gas stations. In the past two years, Valero has purchased

ten ethanol plants.181 It is likely in the next three years that Valero will continue to

purchase ethanol plants in order to expand their distribution of E85 fuel.

PHILLIPS 66: BUSINESS POLICY AND STRATEGY 3-‐131 Valero has also seen recent opportunities in the processing of light crude oil. Domestic

production boom from Bakken in North Dakota as well as Eagle Ford has resulted in a

surplus of light crude oil.182 Valero will likely take advantage of this surplus, as well as

the discounts that come with it for Gulf Coast refineries, and focus their capital into

refining light crude oil. It is also likely that Valero will look into purchasing additional

refineries in order to deal with the rising production of domestic oil.

Figure 3-1

Lastly, Valero is likely to increase focus on methanol production. The U.S. holds

approximately ten-percent of the global ethanol market, making it a highly attractive

market for refineries. Valero has already shown investments of $700 million into their

methanol plant in its St. Charles refinery.183 It is likely that Valero will expend their

capital into existing refineries in order to meet the growing demand for methanol.

3-‐132

Defensive Strategies

In order to keep up with their aggressive expansion strategy, it is likely that Valero will

also continue investments into railroad projects. By transporting their crude through a

railroad system instead of pipelines Valero is able to reduce spill rates by 33 percent.184

Chevron

Generic Competitive Strategy

In the next three years it is likely that Chevron will continue to operate with a focused

differentiation strategy. In an industry where crude oil prices are determined in oil

markets, it is crucial for Chevron to differentiate in order to create greater profit margins.

In a period when downstream revenues aren’t increasing, it is likely that Chevron will

look to differentiate themselves with their upstream sector. Chevron is currently the

leader in the upstream sector and has the financial position as well as the right amount of

assets in order to expand their upstream processes further.


In the upstream sector, it is likely that within the next three years Chevron will expend

capital into their deepwater drilling programs as well as natural gas gathering programs in

the Gulf of Mexico. Following the BP oil spill, the Gulf of Mexico still remains one of

the most promising oil-producing areas in North America. The Gulf of Mexico is

currently responsible for 23 percent of offshore oil production. In addition, the Gulf

holds 30 percent of the total U.S. natural gas processing plant capacity.185 Opportunities

in the U.S. shale market also appeal to Chevron in the short-term. By 2017, Chevron

PHILLIPS 66: BUSINESS POLICY AND STRATEGY 3-‐133 expects to add over 800,000 barrels of oil per-day through exploration projects in U.S.

shale.186

Due to an actively changing energy landscape, it is likely that Chevron will continue to

increase investments in R&D in renewable energy, including bio-fuels, fuel cells, and

hydrogen.187 With the amount of capital and resources that Chevron has, Chevron is

extremely capable of tapping into the renewable energy markets. In the short-term, it is

unlikely that Chevron will expend a large amount of their resources into these markets,

but it is likely that they will continue to research and develop new products for the long-

term.


In a time when several energy companies have decided to spin-off their downstream

sectors from their integrated companies, Chevron will likely not pursue to follow this

strategy. Chevron has stated that they have “no immediate plans to pursue this strategy

and that it was committed to its integrated business model.”188 This strategy allows

Valero to reduce risk in their value chain and increase their bottom line in the near future.

3-‐134

Exxon

Generic Strategy

Exxon’s generic strategy over the next three years will be focused differentiation. The

world is on the cusp of a new age of unconventional energy. It is transforming America’s

energy future, unleashing economic growth and improving the environment. That energy

future will be built on oil and natural gas. U.S proven reserves of natural gas have grown

close to 50 percent since 2005. Unconventional oil production is growing in production

and Exxon sees real prospects for North America transitioning to a net energy exporter by

2025.189


Liquefied natural gas exports will be a part of the big picture for Exxon. An Exxon joint

venture in Texas has proposed a world class LNG export project. This $10 billion

investment would generate and estimated $31 billion in economic gains over the life of

the project. As well, Exxon has said a diverse portfolio is a central part of their

company’s production agenda for 2014. The company plans to start production from 10

separate projects this year, adding approximately 300,000 net barrels of oil equivalent per

day to its portfolio. Combined, Exxons projects in the upcoming years should add 1

million net oil equivalent barrels per day to its portfolio by 2017.190


Figure 3-2


Exxon has had a long-held strategy that keeps a tight hand on the purse strings and

invests in only the safest, highest return projects. This strategy enables them to keep lots

of cash in the company and allows them to give back to their shareholders more than their

competitors. This is a good defensive strategy, which will draw in investors looking for a

modest stock to invest in with modest returns as well. To go along with Exxon’s modest

investing strategy they also do stick with what they know best and that is oil. They rely

on the oil side of their company to bring in the most amounts of cash. This defensive

strategy shows their focus as a business. Exxon will continue to expect their biggest

returns from oil, as their newly acquired investments in shale liquids will gradually

increase.191

3-‐136

Competitive Three-Year Strategy for Phillips 66

Generic Competitive Strategy

The best strategy for Phillips 66 to implement over the course of the next three years is

the focused differentiation strategy. This strategy would give Phillips 66 the opportunity

to branch out into more joint ventures and R&D projects allowing them to become a

stronger and more competitive business in the oil industry. However, in terms of

branching out, Phillips 66 would make strong decisions to remain focused on their

downstream projects. As long as Phillips 66 is willing to push themselves as a still

relatively new company, they can produce new relationships, investments, and projects

that will lead them to the forefront in the focused differentiation strategy.

Phillips 66 needs to take a step back for a moment and simply come to an understanding

of who they are as a company and what measures must be taken to gain a competitive

hold in their industry. While Phillips 66 is branching out with new projects and

PHILLIPS 66: BUSINESS POLICY AND STRATEGY 3-‐137 innovations, they need to keep in mind the image that consumer already have for their

brand. Phillips 66 is seen as the traditional gas company that has been around for

decades. The company has this image thanks to their strong and memorable company

logo that has connected with people since the first Phillips gas station opened in 1927.

Those traditional consumers are the ones that Phillips 66 needs to remain close to.

Phillips 66 should place themselves in the market as reliable to the consumers that

already trust the brand but also persuade new consumers that there must be a reason as to

why the brand is already so easily accepted by others.

In terms of who to attract as business partners and different venture ideas, Phillips 66

should look into more connections overseas. It’s no secret that other companies such as

Conoco or Chevron have seen large profits from their overseas ventures. Phillips 66

should work to place themselves as a new but excelling company that is looking for

strong connections in the work towards better and more efficient downstream projects.

These ties would allow for greater downstream power in the industry as well as bring in

more oil as a whole for the company to them offer to their investors and consumers.

Phillips 66 will face some disadvantages in the focused differentiation strategy by their

competitors but if Phillips markets themselves correctly, they should be able to steer clear

of major backlash. Phillips 66 only formed as a separate entity from ConocoPhillips in

May of 2012 making them a target for competitors to make claims of inexperience.

However, Phillips 66 will need to address their new corporation as they already have

been. Phillips 66 CEO Greg Garland has previously stated when the split first happened,

3-‐138

“We’ll be of similar size to Valero, and twice the size of Marathon. We’ll have

geographic diversity with 11 refineries in the U.S. and 4 internationally… It liberates

downstream to pursue its own growth opportunities”.192 As long as Garland and other top

officials keep a strong head on who they are as a company and how focusing in on certain

aspects of the oil industry are key, backlash should remain minor. Also, Phillips 66 needs

to remind those with doubts in the company that even though Phillips 66 itself may be

new, the businessmen and women running the corporation are not. Garland himself has

been in the oil industry for more than 35 years. The company name may be new but the

Phillips roots are not and that is an angle that Phillips 66 must push to gain a lead in the

downstream market.

While Phillips 66 has prioritized downstream and oil marketing as key factors to

upholding their business strategy, they also do look forward to the future. Phillips 66 has

just begun to enter the midstream side of the oil industry as early as February of 2014

when the company announced their intent to enter a deal with both its Sweeny

Fractionator One and Freeport Liquefied Petroleum Gas Export Terminal.193 The deal

will involve the transportation of natural gas for the corporation. This leap into midstream

has its risks though because Phillips 66 is a company that should be focused on their

downstream efforts as that was said to be the reason behind the ConocoPhillips split.

Phillips needs to remain relevant which is what the midstream investment would do but,

the company cannot lose sight of what sets them apart from their competitors.

PHILLIPS 66: BUSINESS POLICY AND STRATEGY 3-‐139 Over the next three years, Phillips should look into and start to plan on more broad

ventures and investments but they should always remain custom to their focused side of

their strategy which is and should remain as the downstream innovations and marketing.

Phillips 66 is a company with a trusted past and they should use that to their advantage.

The company should remain focused on what they constantly claim is their best asset:

downstreaming. If the company tries to become too broad they will just become what

they broke away from when they shared their partnership with ConocoPhillips. Phillips

66 has the potential to position themselves at the top in the downstream market in the

next few years and once there, the company should then start to look at more new

projects. However, in the meantime, Phillips 66 should stick with the focused

differentiation strategy.


Phillips 66 has multiple offensive strategies they can use to exploit against their

competitors over the next three years. Their biggest offensive strategy is going to be

pursuing continuous product innovation to draw sales and market share away from less

innovative rivals. This is the biggest thing any oil company can do at this point because

the market is so competitive. To go along with being innovative, Phillips 66 can also

start leapfrogging competitors by being the first to the market with next generation

technology. Lastly Phillips 66 can maneuver around competitors to capture unoccupied

or less contested market territory. They have already done this with the ConocoPhillips

split, and they can continue to take market share away from competitors because their

business is focused on the downstream portion.

3-‐140

From the laboratory to pilot plants, Phillips 66’s in-house research and development

drives new ideas to commercialization. The technology division evaluates opportunities

and finds technical solutions to the challenges facing the industry. Science and

engineering inspiration from the company researchers generates avenues for future

growth and provides cost-reducing processes for existing businesses. Two technologies

Phillips 66 is currently working on are their chemical technologies, which provide

continued technological innovation through its 50 percent interest in Chevron Phillips

Chemical Company LLC (CPChem) As well, they have a selenium removal technology

which is a new sorbent based technology that is very cost-effective, operator friendly

process for removing selenium from water streams. Phillips 66 must continue to innovate

and draw away sales from their larger competitors in any way possible. Focusing on

these two components as well as creating new technologies will be essential to success.194

Phillips 66 is entering into a new research joint development agreement aimed at taking

algal crude oil refining one important step closer to commercialization. Algal crude is, as

the name suggests, crude oil developed from existing algae. Partnering with Sapphire

Energy, one of the world’s leading algae-based Green Crude oil producers, Phillips 66

researchers will work to collect and analyze data that will show whether Green Crude can

be processd in a conventional petroleum refinery and still produce products that meet

EPA requirements under the Clean Air Act. This new technology could be the next big

thing in commercial crude refining. If Phillips 66 and Sapphire can determine the best

operating conditions for processing algal crude they could change the industry. This

PHILLIPS 66: BUSINESS POLICY AND STRATEGY 3-‐141 could significantly lower costs and improve margins for their company and have a

stranglehold on the industry.195

Lastly, Phillips 66 began the process of splitting from ConocoPhillips in 2012 to focus on

the downstream side of the industry. With the market being so competitive

ConocoPhillips decided that it would be more beneficial to split into two companies

focusing on their respective industries. Phillips 66 now became a challenger to Valero as

the nation largest independent refiner, outranking Valero in assets but trailing in refining

capacity. The market in which Phillips 66 entered had less than half of the industry

controlled by independent companies, now that Phillips 66 has entered over 70 percent of

independent refineries will hold the refinery capacity. Phillips 66 was able to maneuver

its way around competitors to become a leader in a less contested market territory. This

is very beneficial to becoming more profitable and they will continue to grow in the

future creating more profit.196


In a competitive market, all firms are subject to offensive challenges from rivals. Phillips

66 has implemented a number of defensive strategies to lower the risk of being attacked,

or weaken the impact of any attack that occurs. Phillips 66 must continue to publicly

announce their managements commitments to maintaining the firms present market share

in their industry. Over the next few years Phillips 66 states that they plan to reinvest the

majority of its net income to build additional processing capacity that benefits from

lower-cost NGL feedstocks. The need for additional new gathering and processing,

3-‐142

pipeline, storage and distribution infrastructure, driven by growing domestic

unconventional crude oil, NGL and natural gas production, is creating capital investment

opportunities in their Midstream business. Stating this openly may scare of smaller

companies such as Valero in attack these Midstream business opportunities because they

can’t afford to invest a majority of their net income into this like Phillips 66 can.197

Phillips 66 also has $5.4 billion of cash on hand which can be used to take advantage of

unexpected opportunities. This war chest of cash maintains their ability to protect

themselves against competitors and their new business venture. It enables Phillips 66 to

invest in new business ventures that other companies have or will invest. Phillips 66

CEO Greg Garland said himself that they want their capital structure to be the best in the

industry. They will not hesitate to use their cash on hand and balance sheet to continue to

push this strategy forward in term of value.198 Having the ability to do this sets them

apart from others in the industry. Maintaining their strong operating excellence is a huge

key to generating this type of operating activity. Having cash on hand to continually

increase the improvements in safety, environmental stewardship and cost efficiency is a

fundamental requirement for the company and its employees. They employ rigorous

training and audit programs to drive ongoing improvement in both personal and process

safety as they strive for zero incidents. They are committed to protecting the

environment and continually seek to reduce their environmental footprint through their

operations. 199

PHILLIPS 66: BUSINESS POLICY AND STRATEGY 3-‐143 Timeline to Implement Offensive / Defensive Strategies

The timeline for Phillips 66’s offensive and defensives strategic moves over the next

three years is very important in gaining a competitive advantage over their competitors.

Being the first company to initiate a strategic move can offer Phillips 66 a very big payoff

as well as move ahead of their competition in certain aspects of the industry.

First, the most important phase of Phillips 66’s offensive strategy is the constant need for

product innovations and advancements. This is something that they can not put a specific

date of completion on, but must attempt to accomplished as soon as possible if they want

to gain a competitive advantage. If they can be the first to market the next generation

technology they will move closer to surpassing the competition. In connection to the

timeline this needs to be done consistently throughout the next three years. With this

industry technological advancements and product innovations are never ending, as a

company Phillips 66 cannot afford to fall behind in the constant never ending battle of

innovation.200

Next it is crucial for Phillips 66 to go on the defensive, to protect themselves from

smaller companies attempting to attack their weaknesses. Like it was stated before,

Phillips 66 must continue over the next three years to publicly announce their

managements commitments to maintaining the firms present market share in their

industry.201

3-‐144

With billions of dollars on hand, Phillips 66 can afford to take advantage of unexpected

opportunities. In the next year they need to start moving into new business ventures that

other companies haven’t. 202

After investing in new business ventures, they need to invest in what they already have.

Endlessly putting money back into what they already have, improving employee training

and audit programs to drive ongoing improvements in both personal and process safety.

Insuring that there are no incidents to people or the environment.203

Unlike most industries, you cannot set in stone a true timeline for implementing offensive

and defensive strategies. It is more about consistently working and trying to stay ahead of

everyone else. In an industry that is continuously advancing in technology it is important

to come up with the next big thing before your competitors do. That being said it is

important to set goals and attempt to achieve those goals as quickly as possible.

Potential Supplemental Strategies

A supplemental strategy that the Phillips 66 Corporation could look into would be to

expand their business ventures as a whole to become more of a broad differentiated

producing company. This strategy would be used for the company on a long-term basis.

If Phillips 66 were to expand from just midstream and chemicals, they could

hypothetically one day become diversified in all aspects of the oil business to become a

major competitor in all fields within their industry.

PHILLIPS 66: BUSINESS POLICY AND STRATEGY 3-‐145 As previously stated within the text, Phillips 66 has recently accepted a 3 billion dollar

deal to solidify themselves more in the midstream aspect of the oil industry. If Phillips 66

does well in that sector they could potentially enter into other oil markets as well. Phillips

could possibly benefit from more interaction with upstream markets in the oil industry as

well. Phillips 66 split from ConocoPhillips to focus more on only certain aspects of the

oil industry but, in the future they could expand back. Their management staff and

workers are already familiar with the upstream side of the oil industry as only recently

separating as a sole stand-alone corporation so it wouldn’t be that hard to facilitate. The

only worry Phillips 66 would have would be making sure they were able to build the right

relationships with the right ventures and businesses. If Phillips 66 touched base with

companies in the upstream sector they could see this as a new side of their strategy plan

to maybe diversify themselves more in the market.

Phillips 66 is a company that split from ConocoPhillips because they wanted to better

focus and excel in particular areas of the oil industry. However, Phillips should keep in

mind that in the long term as they gain on investments and profit in the corporate

portfolio, it may be beneficial to spread themselves out more within their market.

3-‐146

Identification of Relevant Issues Concerning International Markets /

Suppliers

On a global scale, oil consumption continues to rise. However, from region to region

situations differ. In emerging countries, particularly China, India and the Middle East,

oil consumption is rising sharply (up 5.5% in China in 2011). In Europe on the other

hand, demand is constantly falling. European public authorities have been encouraging

energy savings for a number of years, promoting public transport, renewable resources,

etc. The aim is to combat global warming while improving the competitiveness of

European economies. Motor vehicles are becoming more and more efficient and are

using less and less fuel. The refining sector, logically enough, reflects these trends.

Thus, in emerging countries, refining capacity continues to increase and projects for new

refineries are flourishing, with Brazil being particularly dynamic. In Europe on the other

hand, production overcapacity is a growing concern.204

United Kingdom

The UK once had 18 refineries, and is now down to 8. The reduction in the number of

UK refineries is very much progress driven and, reaction to changing market demand.

Refinery capacity has increased due to technological advances. The UK has fewer plants

but the ones remaining are more efficient. With more efficient engines, demand for

refinery products such as petroleum continues to decrease.205

PHILLIPS 66: BUSINESS POLICY AND STRATEGY 3-‐147 The Humber Refinery is located in North Lincolnshire, United Kingdom. Crude oil

processed at the refinery is supplied primarily from the North Sea and includes light, low,

and medium-sulfur and acidic crude oils. Humber is one of the most sophisticated

refineries in Europe, a fully integrated facility that produces a high proportion of

transportation fuels, such as gasoline and diesel fuel. Humber’s fluid catalytic cracking

unit/thermal cracking/ coking configuration means that substantial volumes of other

feedstocks, such as low-sulfur fuel oil and vacuum gas oil, are processed alongside crude

oil to fully utilize Humber’s cracking capability. The refinery also has two coking units

with associated calcining plants that upgrade the heavy bottoms and imported feedstocks

into light oil products and high-value graphite and anode-grade petroleum coke. Humber,

the only coking refinery in the United Kingdom, is the world’s largest producer of

specialty graphite cokes and Europe’s largest anode-grade coke producer. Approximately

60 percent of the light oils produced in the

refinery are marketed in the United Kingdom,

while the other products are exported to the rest

of Europe, West Africa and the United States.206

Germany

In Europe, the refining industry is now

encountering some difficulties: consumption of

petroleum products is falling and margins are

down… On the export side, the American market

is saturated. By contrast, demand in emerging Figure 3-3

3-‐148

countries, particularly in Asia and the Middle East, is growing strongly. Most investment

therefore is taking place in these countries. This trend is set to continue in the coming

years.207

The Mineraloelraffinerie Oberrhein GmbH (MiRO) Refinery, located on the Rhine River

in Karlsruhe in southwest Germany, is a joint venture refinery with Phillips 66 holding an

18.75 percent interest, the other owners being Shell, ExxonMobil and Ruhr Oel GmbH.

Phillips 66 processes mainly medium sweet and medium sour crude oil in its share of the

refinery, sourced from Russia, North Africa, the Caspian Sea and the Middle East, and

delivered to the refinery via two cross-country

pipelines from ports at Trieste in Italy and Lavera

in France. The facilities at the high-conversion

refinery include three crude unit trains, fluid

catalytic cracking, petroleum coking and

calcining, hydrodesulphurization units, reformers,

isomerization and aromatics recovery units, ethyl

tert-butyl ether (ETBE), and alkylation units that

enable it to produce a high percentage of

transportation fuels, such as gasoline and diesel

fuel. Other products include petrochemical feedstocks, home heating oil, bitumen, and

anode- and fuel-grade petroleum coke. Phillips 66 distributes the majority of its share of

Figure 3-4

PHILLIPS 66: BUSINESS POLICY AND STRATEGY 3-‐149 the refined products to customers in southwest Germany, northern Switzerland and

western Austria by truck, railcar, barge and pipeline. 208

Ireland

European refineries are struggling because fuel demand in the region is down amid a

sluggish economy, plus there’s increasing competition from plants in the Middle East,

Asia and even the U.S. After nearly a year of shopping around its Whitegate refinery in

Ireland – the only fuel-making plant on the Emerald Island – it is calling off the search

for a buyer and will just keep running it. Phillips 66’s 71,000 barrel a day refinery in

Ireland will chug along to meet existing customer

contracts even though it doesn’t have the

advantages of the company’s 11 plants in the U.S.

Those refineries have the benefit of close-by,

cheap crude oil from places like North Dakota

and Texas. A surge of low-cost crude in the U.S.

means America no longer needs to import much

gasoline and other fuels – a trend that’s being felt

across the pond.209

The Whitegate Refinery is located in Cork, Ireland. Whitegate is Ireland’s only refinery.

Crude oil processed by the refinery is light, low-sulfur crude oil sourced mostly from the

North Sea, North Africa and West Africa. Refined products are distributed mostly inland,

with some exported to international markets. Phillips 66 also operates a crude oil and

Figure 3-5

3-‐150

products terminal with 7.5 million barrels of

storage facilitated by an offshore mooring buoy in

Bantry Bay, Cork, Ireland.210

Malaysia

Malaysia is the second largest oil and natural gas

producer in Southeast Asia, the second largest

exporter of liquefied natural gas globally, and is

strategically located amid important routes for

seaborne energy trade. Malaysia's position in the

South China Sea makes it a party to the various

disputes among neighboring countries over competing claims to the sea's resources.

Although Malaysia has bilaterally resolved competing claims with Vietnam, Brunei, and

Thailand, a potential problem is the fact that China claims almost all of the South China

Sea, including the Spratly Islands, which are in proximity to oil and gas producing

basins.211 212

The PSR-2 refinery in Melaka, Malaysia, is a joint venture with PETRONAS, the

Malaysian state oil company. Phillips 66 owns a 47 percent interest in the joint venture.

The medium, highsulfur crude oil processed by the refinery is sourced mostly from the

Middle East. The refinery produces a full range of refined petroleum products and

capitalizes on hydrocracking and coking technology to upgrade low-cost feedstocks to

higher-margin products.213

Figure 3-6

3-‐152

Discussion of Functional Policy to Accommodate Strategic Plan

Strategic Policy Relative to Finance / Accounting

When Phillips 66 split from ConocoPhillips in May 2012, the main focus of the split was

to concentrate on the downstream side of the industry. Phillips 66 being relatively new to

the industry and a new company all together should focus on what they know now and

once they have a higher market share, move onto other parts of the industry. Their

current strategy is to remain focused on the downstream and oil marketing aspects of the

industry. Phillips 66 has enough cash on hand to invest start looking to invest overseas.

This should be one of their main focuses moving forward. Many of their competitors

such as Chevron and Exxon have already started investing and have seen large profits

from going overseas. Building these connections overseas will enable them to become

more efficient with their downstream projects. Going overseas will also allow for greater

power and market share in the industry as well as bring more oil and NGL into the

company.

Over the next three years as their research and development and joint venture projects

expand they can look into expanding their company into the midstream side of the

industry. Although they do want to stay focused on their current strategy in downstream,

they do want to expand into other parts of the industry to make them more of a threat to

the larger companies. As of February 2014, Phillips 66 decided to enter the midstream

side of the oil industry when they entered into a deal with Sweeny Fractionator One and

Freeport Liquefied Petroleum Gas Export Terminal. This jump into the industry could

pose initial problems but once they get a grasp of the industry and how it works it could

PHILLIPS 66: BUSINESS POLICY AND STRATEGY 3-‐153 make them much more profitable as well as creating more capital for the company. In

2014 Phillips 66 has budgeted $4.6 billion as a company and plans to use roughly 70% of

this budget towards the midstream side of the industry. Within 5 years, Phillips 66

expects this segment of the business to represent roughly two-thirds of the company’s

enterprise value. Their heavy investments in its midstream and chemicals segments will

continue to provide a major competitive advantage over its downstream peers, as well as

insulation from the traditionally volatile refining business.214

Phillips 66 is also aiming to spend $1.4 billion on its natural gas liquids operations and

transportation lines, an $800 millions climb over 2013’s budget. The company will use

funds to build and NGL fractionator with a capacity of 100,000 barrels per day, as well as

a Gulf Coast liquefied petroleum gas export terminal with a capacity of 4.4 million

barrels per day. They are also planning to build rail offloading facilities and pipeline

expansions, and it has slated $750 million in expenditures for its share in DCP

Midstream, a joint venture with Spectra Energy. This brings their total investment in the

midstream industry up to $2.7 billion.215

Phillips 66 has also been able to strengthen its balance sheet through $1billion of debt

repayments. Paying off these debts allows them to invest in more long-term financial

stability. Phillips 66’s solid capital structure is a key differentiator for the company. It

promotes long-term stability despite market volatility and provides a platform to

accelerate growth and increase shareholder distributions.216

3-‐154

Strategic Policy Relative to Marketing Strategy

Since their split from ConocoPhillips, Phillips 66 has had a great deal of success. Yet

when it comes to marketing their competitors may have the slight advantage. With a good

marketing strategy they could close the gap on their competitors and possibly become a

leader in their industry.

The fact the Phillips 66 is a new company gives them the benefit of having a clean slate

when it comes to people’s image of the company. The truth is that the oil industry tends

to have a poor image because of its past environmental issues. When people think of the

oil industry they think of oil spills, global warming, climate change, and harmful

emissions. If Phillips 66 can raise above all of that and show people that they care about

the environment, then it could lead to an advantage over their competition.

With all that in mind, Phillips 66 should implement corporate social responsibility.

Phillips 66 should be operating in an honorable manner, providing good working

conditions for employees, encouraging workforce diversity, being a good steward of the

environment, and actively working to better the quality of life in the local communities

where they operate and in society as a whole. Doing all of this with a strong emphasis on

caring for the environment well give them the advantage that they need to separate them

from the competition. At the end of 2010 Chevron Corporation attempted to do

something similar by running their advertising campaign titled “We Agree.” They made

an effort to change their company image by focusing on being more ethical and

environmentally friendly. The response to their campaign was positive and they certainly

PHILLIPS 66: BUSINESS POLICY AND STRATEGY 3-‐155 benefited from their efforts. That being said, Chevron was attempting to fix the poor

image that they had before. When it comes to Phillips 66 they are a young company with

an already good image, so implementing CSR could establish Phillips 66 as the ethical

leader of the oil industry.217

Phillips 66 is already involved in social media, but with some improvement they could

spread the world of their company as well as improve the customer experience. Using

social media can increase business exposure; Facebook and Twitter alone reportedly

serve 1.5 billion users globally. Social media allows your business to extend well beyond

the immediate geographic area. With social media you can cross-county, state, and even

national lines. Social media is therefore a very convenient and also cost-efficient way for

augmenting brand visibility. Social media would also allow Phillips 66 to gain insight

from their customers, strengthen customer loyalty, raise search engine rankings, increase

website traffic, as well reduce marketing expenses. In closing taking advantage of social

media is an efficient way to improve brand awareness in a very cheap way. 218

3-‐156

Strategic Policy Relative to Management Strategy

While Phillips 66 is still a relatively new company, their management should be able to

grow and expand with the company in a positive way. Phillips 66 management does face

many pressures being newly held accountable for an entirely separate entity of

ConocoPhillips. However, the management team should prevail as beneficial leaders to

the company given their vast amount of detailed information of the oil industry.

Greg Garland currently serves as Phillips 66 CEO and while his position with Phillips

may be new, his background in the oil industry is just the opposite. Garland has held

management positions in the oil industry in some form for over 30 years. Phillips 66 and

Garland himself, realize that the formation of a new company comes with great risk.

Since taking on his current role as CEO, Garland has been extremely vocal about where

he wants the company to be and why stakeholders should continue to have faith in the

new Phillips 66. Garland stated in a press conference just before the split, “We think we

have an experienced management team in place. We have a talented global workforce.

They are enthusiastic and ready to go, day one”.219

As long as management is willing to put their best foot forward, the company should be

just fine on a management stand point. All of Phillips 66 current management team have

held superior positions in the ConocoPhillips Corp before the split. This will prove to be

beneficial in the future because as Garland was quoted earlier in text, the management

staff isn’t new, they understand the oil industry and the demands of the business. As the

PHILLIPS 66: BUSINESS POLICY AND STRATEGY 3-‐157 company grows older, the already mature management staff will know how to properly

adjust to new or unforeseen issues within Phillips 66.

Even though Phillips 66 is new and the building of their management staff is fresh, the

company sits in the same management pool as their competitors. All three of Phillips 66

major competitors have had several management changes in just the past 5 years which

shows that the oil industry as a whole is continuously making changes in staffing. So,

although Phillips 66 management team is new, the concept of new management members

is nothing that the company should fear.

In the future, it would appear that the management staff will be able to stay current in the

downstream ventures they presently have but also become adaptable to managing new

lines of work as well. Phillips 66 recently accepted a 3 billion dollar deal to expand

themselves further into the midstream market. While the initial deal is only in the first of

its many stages, Phillips 66 management staff has already made strides to assure that the

new investment will be properly handled. Tim Taylor, Executive Vice President of

Commercial, Marketing, Transportation and Business Development stated, “Given the

anticipated growth in natural gas liquids production, we see substantial advantages in

having fractionation and export facilities on the Gulf Coast outside of Mont Belvieu.

These projects allow us to maximize our existing infrastructure and will position us for

further growth”.220 The management team understands the deals they are currently

making and realizes the demands that the new ventures bring. As long as the staff stays

3-‐158

ahead on their new expectations in the midstream operations all future management

decisions should run smoothly.

Phillips 66 management staff appears to have strong leaders who understand the industry

and will continue to excel in their current positions. Again, while the company is still

new, CEO Greg Garland and his management team seem to have a positive outlook on

the company and future business endeavors so the company should be sustainable in the

oil industry for years to come.

PHILLIPS 66: BUSINESS POLICY AND STRATEGY 3-‐159 180 http://www.cbsnews.com/news/valeros-big-ethanol-push-selling-e-85-at-the-company-store-well-gas-station/ 181 http://www.cbsnews.com/news/valeros-big-ethanol-push-selling-e-85-at-the-company-store-well-gas-station/ 182 http://seekingalpha.com/article/1923061-valero-a-growth-investment 183 http://seekingalpha.com/article/1923061-valero-a-growth-investment 184 http://seekingalpha.com/article/1923061-valero-a-growth-investment 185 http://www.fool.com/investing/general/2014/02/28/why-the-gulf-of-mexico-is-crucial-to-chevrons-upst.aspx 186http://www.chevron.com/chevron/pressreleases/article/03112014_chevronreaffirmsstrategieshighlightsperformanceportfolioandfuturegrowth.news 187 http://www.chevron.com/deliveringenergy/biofuels/ 188 http://www.reuters.com/article/2011/08/31/us-chevron-ceo-refineries-idUSTRE77U6JJ20110831 189 http://corporate.exxonmobil.com/en/company/news-and-updates/speeches/strategies-for-a-sustainable-future 190 http://www.upi.com/Business_News/Energy-Resources/2014/03/06/Exxon-stresses-diversity-in-future-growth-agenda/UPI-22331394111783/ 191 http://www.fool.com/investing/general/2014/04/02/exxonmobil-corporations-plans-for-2014-and-beyond.aspx 192 http://www.forbes.com/sites/christopherhelman/2012/04/30/as-conocophillips-spins-off-refining-assets-should-you-own-the-new-phillips-66/ 193 http://www.phillips66.com/EN/newsroom/news_releases/2014NewsReleases/Pages/02-07-2014b.aspx 194 http://www.phillips66.com/EN/tech/Pages/index.aspx 195 http://www.phillips66.com/EN/newsroom/feature-stories/Pages/Sapphire.aspx 196 http://www.chron.com/business/article/ConocoPhillips-split-becomes-official-as-company-3522914.php 197 http://www.phillips66.com/EN/about/Company_Overview/Pages/BusinessStrategies.aspx 198 http://www.phillips66.com/EN/investor/presentations_ccalls/Documents/2014-analyst-mtg-transcript.pdf 199 http://www.phillips66.com/EN/about/Company_Overview/Pages/BusinessStrategies.aspx 200 http://www.phillips66.com/EN/tech/Pages/index.aspx 201 http://www.phillips66.com/EN/investor/presentations_ccalls/Documents/2014-analyst-mtg-transcript.pdf 202 http://www.phillips66.com/EN/about/Company_Overview/Pages/BusinessStrategies.aspx 203 http://www.phillips66.com/EN/about/Company_Overview/Pages/BusinessStrategies.aspx 204 http://www.planete-energies.com/en/energy-sources-/oil-and-gas/oil-refining/refining-background-and-issues-600172.html 205 http://fueloilnews.co.uk/2012/04/uk-refining-hunting-for-answers/ 206 http://www.phillips66.com/EN/about/our-businesses/refining-marketing/refining/Pages/index.aspx 207 http://www.planete-energies.com/en/energy-sources-/oil-and-gas/oil-refining/refining-background-and-issues-600172.html 208 http://www.phillips66.com/EN/about/our-businesses/refining-marketing/refining/Pages/index.aspx 209 http://blogs.wsj.com/corporate-intelligence/2014/04/03/trying-to-sell-an-oil-refinery-in-the-british-isles-good-luck/ 210 http://www.phillips66.com/EN/about/our-businesses/refining-marketing/refining/Pages/index.aspx 211 http://www.eia.gov/countries/country-data.cfm?fips=my 212 http://abarrelfull.wikidot.com/malaysia-oil-and-gas-profile 213 http://www.phillips66.com/EN/about/our-businesses/refining-marketing/refining/Pages/index.aspx 214 http://www.fool.com/investing/general/2014/01/31/phillips-66-fourth-quarter-results-offer-a-preview.aspx 215 http://fuelfix.com/blog/2013/12/06/phillips-66-to-increase-2014-budget-by-40-percent/?cmpid=eefl 216 http://www.phillips66.com/EN/about/reports/Documents/annual-report-2013.pdf 217 http://www.chevron.com/corporateresponsibility/approach/ethicsgovernance/ 218 http://startengaging.com/top-10-benefits-of-using-social-media-to-grow-your-business/

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219 http://seekingalpha.com/article/486131-conocophillips-ceo-hosts-phillips-66-analyst-update-conference-call-transcript?page=1 220 http://www.phillips66.com/EN/newsroom/news_releases/2014NewsReleases/Pages/02-07-2014b.aspx

Phillips 66 Business Policy and Strategy Report

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Transcript of Phillips 66 Business Policy and Strategy Report