Phillips 66's Q1 Loss Highlights Refining Challenges, But Strategic Moves Offer Hope

Phillips 66’s first-quarter 2025 results underscored the persistent challenges facing the refining sector, as the company reported an adjusted loss of $0.90 per share—far worse than Wall Street’s expectations. While margin pressures and planned turnarounds dominated headlines, strategic moves in midstream, marketing, and renewables suggest the company is positioning itself for a rebound later this year. Here’s what investors need to know.

Key Financials: The Weight of Turnarounds and Tax Credits

Phillips 66’s Q1 net earnings of $487 million ($1.18 per share) marked an improvement from Q4 2024’s $8 million, but adjusted results told a different story. The adjusted loss of $368 million stemmed largely from $246 million in accelerated depreciation tied to the Los Angeles Refinery. This decision, while non-cash, reflects ongoing operational hurdles.

Adjusted EBITDA dropped to $736 million, down from $1.13 billion in Q4 2024, with refining’s $937 million pre-tax loss overshadowing gains elsewhere. The refining segment was hit by lower volumes and higher costs due to extensive planned maintenance—a process the company described as completed “safely, on schedule, and under budget.”

Segment Analysis: Winners and Losers in a Volatile Quarter

• Refining: The $937 million loss here was the single largest drag, driven by turnarounds and weak margins. Management emphasized that most turnarounds are now complete, setting the stage for improved run rates and utilization.
• Midstream: Despite lower volumes, the segment posted $683 million in pre-tax income, with margins holding up. This resilience highlights the reliability of midstream cash flows.
• Chemicals: A bright spot, with income rising to $113 million as volume growth and cost discipline offset macroeconomic headwinds.
• Marketing & Specialties: The $265 million pre-tax income here was fueled by international expansion, particularly in Europe and Asia.
• Renewable Fuels: The $185 million loss here underscored the transition pain from blenders tax credits to production tax credits. International market softness further complicated the picture.

Strategic Moves: Divesting, Investing, and Returning Capital

While the quarter was operationally challenging, Phillips 66 made progress on its “wellhead-to-market” strategy:
- Asset Sales: The $2 billion from divesting non-core assets (e.g., Coop Mineraloel AG and Gulf Coast Express Pipeline) bolsters liquidity and focuses capital on high-return projects.
- New Projects: The $1.7 billion Iron Mesa gas processing plant in the Permian Basin—set to start in 2027—will expand gas processing capacity, aligning with rising Permian production.
- Shareholder Returns: $716 million returned via dividends and buybacks reinforces the company’s commitment to capital discipline.

Management’s Outlook: Turning the Corner?

CEO Mark Lashier framed the Q1 results as a “necessary step” to ensure long-term refinery reliability. With turnarounds largely behind it, the company expects stronger margins in the second half of 2025, particularly in refining and midstream. The Sweeny Refinery’s crude flexibility upgrades—now complete—should also improve feedstock flexibility and profitability.

Risks Ahead: Tax Credits, Competition, and Volatility

The renewable fuels segment’s struggles highlight a key risk: the shift from blenders tax credits to production tax credits may require time to stabilize. Meanwhile, global refining overcapacity and rising competition from low-cost producers like Saudi Arabia could keep margins under pressure.

Conclusion: A Mixed Quarter with Strategic Grit

Phillips 66’s Q1 loss was a product of both self-inflicted operational challenges (turnarounds) and external pressures (tax credit changes). However, the company’s execution on turnarounds, capital discipline, and strategic projects like Iron Mesa suggest it is laying groundwork for a stronger second half.

Investors should focus on two critical metrics:
1. Refining margins: A return to positive EBITDA in refining post-turnarounds could drive a stock rebound.
2. Renewables stabilization: If the renewable fuels segment can adapt to new tax incentives, it could reduce future volatility.

With a robust balance sheet ($2 billion in recent proceeds) and a shareholder-friendly track record, Phillips 66 remains a key player in the energy transition. While Q1 was a stumble, the path forward—anchored in midstream resilience and strategic growth—remains intact. For long-term investors, the current downturn could present a buying opportunity if refining fundamentals improve as management expects.

In short, Phillips 66’s challenges are real but not insurmountable. The company’s ability to execute on its “wellhead-to-market” strategy will determine whether it can turn today’s losses into tomorrow’s gains.