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Rating Action:

Moody's changes Phillips 66's outlook to negative; rates proposed notes A3

16 Nov 2020

New York, November 16, 2020 -- Moody's Investors Service (Moody's) assigned A3 ratings to Phillips 66's proposed offering of senior notes. Proceeds from the new notes will be used to repay up to $500 million of the $1 billion 364-day term loan, repay the $500 million notes due February 2021 and for general corporate purposes. Phillips 66's existing ratings, including the A3 long-term issuer and senior unsecured ratings, were affirmed and the outlook was changed to negative from stable.

"Phillips 66's issuance of notes will weaken its leverage metrics, but also enhance its liquidity at a time of continued low refining industry margins," commented James Wilkins, Moody's Vice President -- Senior Analyst. "The negative outlook reflects the high leverage for the current rating and the uncertainty over the timing of the recovery in Phillips 66's credit metrics."

Assignments:

..Issuer: Phillips 66

....Gtd Senior Unsecured Regular Bond/Debenture, Assigned A3

Affirmations:

..Issuer: Phillips 66

.... Issuer Rating, Affirmed A3

....Senior Unsecured Shelf, Affirmed (P)A3

....Senior Secured Regular Bond/Debenture, Affirmed A3

....Commercial Paper, Affirmed P-2

....Senior Unsecured Regular Bond/Debenture, Affirmed A3

..Issuer: Phillips 66 Company

.... Issuer Rating, Affirmed A3

Outlook Actions:

..Issuer: Phillips 66

....Outlook, Changed to Negative from Stable

..Issuer: Phillips 66 Company

....Outlook, Changed to Negative from Stable

RATINGS RATIONALE

The negative outlook reflects the weak US demand for refined products, low refining industry margins, Phillips 66's negative free cash flow generation in 2020 and uncertainty over when the company's debt balances will revert to year-end 2019 levels. The company raised $3 billion in the first half 2020 through public debt offerings and a $1 billion term loan to fund working capital, growth capital spending, dividends and debt maturities, as well as to maintain excess liquidity. Moody's expects the company to repay debt incurred in 2020 over the next two to three years, but the timing of improvement in industry margins and the company's free cash flow generation is uncertain. The company has also taken measures to conserve cash such as reducing capital spending, lowering operating costs and ceasing share repurchases. The company has $500 million of notes maturing in February 2021, a $1 billion term loan maturing in March 2021, $2 billion of notes maturing in April 2022 and $500 million of notes maturing in 2023.

Phillips 66's A3 senior unsecured rating reflects the company's strong liquidity position and Moody's expectation that Phillips 66 will successfully manage its operations through the industry slowdown brought on by the COVID-19 pandemic. The US refining industry has been facing reduced demand for refined products and poor margins.

The rating is supported by the scope and diversity of Phillips 66's refining business and meaningful cash flow provided by its midstream and chemical businesses. Phillips 66's 50% interest in both Chevron Phillips Chemical Company LLC (CPChem, A2 stable) and DCP Midstream, LLC, as well as its approximate 74% economic interest (as of September 30, 2020) in Phillips 66 Partners LP (PSXP, Baa3 stable), represent both diversity of cash flow and material asset value, and are the growth vehicles for Phillips 66.

The rating considers the volatility and secular decline in the refining segment, which is facing below mid-cycle crack spreads, and the structural subordination of distributions received from Phillips 66's equity investments to debt at those entities. CPChem's A2 rating is supported by a diverse portfolio of petrochemical businesses, low cost joint ventures with declining non-recourse debt, and strong credit metrics. DCP continues to be challenged by high leverage, which may gradually improve as commodity prices increase and the fee-based proportion of revenues increases, and new projects come in to service.

Phillips 66's P-2 commercial paper rating (no borrowings as of September 30, 2020) reflects its excellent liquidity supported by cash balances ($1.5 billion as of September 30, 2020), and full availability under its $5 billion revolving credit facility maturing in July 2024. Moody's expects the company to generate negative free cash flow through the first half 2021 as the refining industry slowly recovers. The Phillips 66 revolver has no material adverse change conditionality on drawings, and a financial covenant of maximum net debt to capital of 65%, with ample headroom.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATING

The ratings could be downgraded if retained cash flow to debt remains below 20% for a sustained period, Moody's does not expect the company to generate sufficient positive free cash flow to reduce debt to year-end 2019 levels by year-end 2022 or the company does not pursue conservative financial policies that support a recovery in credit metrics to levels supportive of the A3 rating. An upgrade is unlikely, but could be considered if retained cash flow to debt is sustainable above 40% in a refining industry down cycle, the company reduces balance sheet debt and generates strong free cash flow such that it manages shareholder returns within free cash flow and self-funds principal equity investments.

The principal methodology used in these ratings was Refining and Marketing Industry published in November 2016 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1040610. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Phillips 66, headquartered in Houston, Texas, is a diversified energy, manufacturing and logistics company with a portfolio of midstream, chemical, refining and marketing and specialties businesses, including key investments in DCP Midstream, LLC, Phillips 66 Partners LP and Chevron Phillips Chemical Company LLC.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure

These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

James Wilkins
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Steven Wood
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
© 2021 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.

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