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
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same series, category/class of debt, security or pursuant
to a program for which the ratings are derived exclusively from existing
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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
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James Wilkins
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
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Client Service: 1 212 553 1653
Steven Wood
MD - Corporate Finance
Corporate Finance Group
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Client Service: 1 212 553 1653
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