(For use by New York Times News Service Clients)

c.2013 Houston Chronicle

Third-quarter refining results dropped from $1.5 billion profit a year ago to a $2 million loss with the flip of market forces that had made refining the company's most lucrative business.

In previous recent quarters, the boom in U.S. oil production had sent domestic crude prices far below the global level, lowering costs for the raw material U.S. refiners use to make their products.

But the industry-wide refining margin, the spread between what refiners spend for oil and what they get for refined products, shrank 40 percent, Phillips 66 said.

Higher U.S. oil prices and a shrinking gasoline price also ate into third-quarter profits at Valero Energy Corp. and BP, where refining income fell 61 percent and 70 percent respectively in the period ended Sept. 30.

''Refining is, was and always will be a volatile landscape," Phillips 66 CEO Greg Garland said during a Wednesday conference call with investors.

But when an analyst asked whether the company would sell some refineries in regions that were hit hardest by margin compression, including on the Gulf and West coasts, Garland said the company expects to keep those assets on the books for a long time.

''The focus is, how do we grow midstream and chemicals rather than how do we shrink refining," Garland said.

Despite the big refining loss, the midstream and chemicals businesses earned Phillips 66 $535 million in net income for the third quarter, compared to $1.6 billion a year ago. The company's quarterly revenue edged up to $44.8 billion from $43.9 billion.

Even though lower crude costs recently could brighten refiners' fortunes, prices for petroleum products remain flat, making it hard to tell which way the wind will blow in the refining sector next year, said Tim Taylor, a Phillips 66 executive vice president.

''You're not seeing product strength," he said.

Meanwhile, the company's chemical segment climbed 71 percent to $262 million on higher sales of olefins and polyolefins, chemicals used in plastics, paints and household appliances.

The company's midstream business climbed to a $148 million profit from a $72 million loss in the same period a year ago.

Because of the growing profits, the chemical and midstream businesses could take the lion's share of the company's $2.5 billion to $3 billion capital spending budget for 2014, said Greg Maxwell, the company's chief financial officer, in an interview.

Garland said Phillips 66 returned more than $800 million to stockholders in dividends and share repurchases. It also took $1.1 billion from asset sales and paid off $510 million in debt during the quarter.

At 87 cents, the company's earnings per share fell below polled analysts' expectation of 94 cents, according to Thompson Reuters.

Phillips 66 received $404 million in proceeds from the July initial public offering of units in a new master limited partnership, Phillips 66 Partners. Investors bought 26.3 percent of the MLP, which owns some of Phillips 66's transportation and terminal assets.

The partnership reported $17.3 million in third-quarter net income on revenue of $29.6 million.

Garland said in a written statement the partnership is looking into the market for merger and acquisition potential.

''With considerable financial flexibility and strong sponsorship from Phillips 66, the partnership is well positioned for significant growth," he said.

Phillips 66 shares closed up 1.7 percent at $65.23 on Wednesday. XXX - End of Story