The ROIC Illusion: Why PSX's 21% vs VLO's 4.5% Tells the Wrong Story About Refiner Quality

PSX 21% ROIC vs VLO 4.5%? The numbers lie. VLO's Cash ROIC is 23.3%—actually the highest. One-time California impairments distort the picture. Here's the analytical framework that matters.

TL;DR

The surface story: Phillips 66 (PSX) generates 21% ROIC vs Valero's (VLO) 4.5%—a 4.7x advantage. Most analysts stop here.

The real story:

Cash ROIC flips the narrative: VLO 23.3% vs PSX 7.4%—VLO actually generates more cash per dollar invested
VLO's 4.5% is distorted: $1.1B one-time California refinery impairment (non-cash) crushes accounting ROIC
PSX's 21% is inflated: Equity method income from Midstream JVs boosts earnings without generating cash
MPC is most "real": 11.3% accounting ROIC tracks 14.8% Cash ROIC—what you see is what you get

The analytical framework matters more than the headline number.

The Misleading Headline

When screeners show PSX at 21% ROIC and VLO at 4.5%, the conclusion seems obvious: Phillips 66 is 4.7x more capital efficient than Valero.

This surface-level analysis is wrong.

Both companies are exiting California refineries due to regulatory burden. Both face margin compression from renewable diesel struggles. Both operate in the same commodity environment.

So why the 17-point ROIC gap?

The answer lies in accounting mechanics, not operational quality. And understanding the difference is critical for making informed investment decisions.

What the Numbers Actually Show

The Surface Story: Accounting ROIC

Company	Accounting ROIC (TTM)	Narrative
PSX	21.04%	"Industry leader"
MPC	11.33%	"Solid performer"
VLO	4.46%	"Laggard"

If you stopped here, you'd buy PSX and avoid VLO. That's what most screeners tell you.

The Real Story: Cash ROIC

Cash ROIC measures actual cash generation per dollar of invested capital—stripping out non-cash accounting items like impairments, equity method income, and depreciation timing differences. Formula: Operating Cash Flow ÷ Invested Capital.

Company	Accounting ROIC	Cash ROIC (TTM)	Gap	What It Means
PSX	21.04%	7.38%	-13.7pp	INFLATED by non-cash items
VLO	4.46%	23.33%	+18.9pp	DEFLATED by non-cash charges
MPC	11.33%	14.76%	+3.4pp	Most aligned—"real" returns

VLO's Cash ROIC (23.3%) is 3.2x PSX's (7.4%). The company generating the worst accounting returns actually generates the best cash returns.

This isn't a minor discrepancy. It's a complete inversion of the surface narrative.

VLO's Distortion: The California Impairment

Valero's 4.5% accounting ROIC is crushed by a $1.1 billion non-cash impairment charge.

What Happened

In March 2025, Valero approved plans to cease operations at its Benicia Refinery by April 2026. The company also evaluated strategic alternatives for its Wilmington refinery. From VLO's Q3 2025 10-Q:

"The State of California adopted legislation that has subjected our refining and marketing operations to potential increased operational restrictions and new reporting requirements. The considerable uncertainty and potential adverse effects on our operations and financial performance resulted in the evaluation of strategic alternatives for our operations in California."

The result: a combined $1.1 billion impairment—$722 million for Benicia and $847 million for Wilmington, written down to fair values.

Why This Distorts ROIC

Impairments flow through the income statement, reducing net income. But they're non-cash—VLO didn't write a check for $1.1 billion. The cash was spent years ago when the refineries were built.

Impact on metrics:

$1.1B impairment hit NOPAT (numerator of ROIC)
Invested capital (denominator) was already reduced by prior depreciation
Result: ROIC collapses from ~12% to 4.5%

But VLO's underlying cash generation remained healthy. Operating cash flow exceeded net income by 3.25x (cash conversion ratio), indicating the impairment's non-cash nature.

Additional California Exit Costs

Beyond the impairment:

$337M ARO (asset retirement obligations) for decommissioning
$200M accelerated depreciation (9M 2025)
$50M severance liability for affected employees

All of these hit accounting earnings. None required immediate cash outflows.

PSX's Inflation: Equity Method Income

Phillips 66's 21% ROIC looks impressive—until you examine how the income is generated.

The Midstream JV Structure

PSX owns significant stakes in midstream joint ventures that it doesn't consolidate. These JVs (pipelines, storage, processing facilities) generate income that PSX records as "equity in earnings of affiliates"—a single line item on the income statement.

In Q3 2025, PSX reported strong results. But a significant portion of reported income comes from JV stakes recorded via equity method accounting. This income:

Boosts NOPAT: Equity method earnings increase the ROIC numerator
Doesn't generate proportional cash: JVs retain cash for debt service and capex
Creates accounting/cash disconnect: High ROIC, lower cash conversion

The LA Refinery Parallel

PSX is also exiting California. From the Q3 2025 10-Q:

"In October 2024, we announced our intention to cease operations and begin idling the facilities at our Los Angeles Refinery in the fourth quarter of 2025."

PSX recorded $800 million in accelerated depreciation (9M 2025) and $288 million in AROs—similar to VLO's California exit. But PSX's Midstream segment income partially offsets these charges, keeping accounting ROIC elevated.

The difference: PSX's Midstream income is real earnings, but it doesn't proportionally translate to cash the parent company can deploy.

MPC: The "Real" Refiner

Marathon Petroleum's metrics tell the most straightforward story.

Metric	MPC Value	Interpretation
Accounting ROIC	11.33%	Moderate returns
Cash ROIC	14.76%	Slightly higher—healthy cash conversion
Gap	+3.4pp	Minimal distortion

Why MPC's metrics align:

No major impairments: MPC has no California refinery exposure to write down
Consolidated Midstream: MPLX is consolidated, so earnings and cash flow align
Clean P&L: Fewer one-time items distorting reported results

MPC isn't the highest on either metric, but it's the most reliable. What you see is approximately what you get.

The DuPont Decomposition

Breaking down ROIC into components reveals additional insights:

Company	Gross Margin	Net Margin	Asset Turnover	FCF Margin
PSX	10.79%	1.13%	1.78x	2.58%
VLO	3.38%	1.21%	2.07x	3.41%
MPC	9.09%	2.16%	1.66x	3.21%

Key observations:

VLO has highest asset turnover (2.07x)—most capital efficient at generating revenue
VLO has lowest gross margin (3.38%)—crushed by impairment flowing through
VLO has highest FCF margin (3.41%)—cash generation is actually healthy

The gross margin gap (PSX 10.79% vs VLO 3.38%) is 3.2x—explaining most of the accounting ROIC divergence. But since VLO's low margin is impairment-driven (non-cash), the FCF margin tells the operational truth.

The California Exodus: Sector-Wide Pressure

Both PSX and VLO are fleeing California. This isn't company-specific weakness—it's sector-wide regulatory pressure.

VLO's Exit

Benicia Refinery: Ceasing operations April 2026
Wilmington Refinery: Evaluating strategic alternatives
Combined capacity: ~300,000 bpd exiting

PSX's Exit

LA Refinery: Idling Q4 2025
Capacity: ~139,000 bpd exiting

The insight: California exit costs are hitting both companies' earnings. VLO took a larger impairment ($1.1B) while PSX spread costs through accelerated depreciation ($800M). Same economic event, different accounting treatment, wildly different ROIC impact.

What I'm Not Claiming

Let me be explicit about limitations:

I'm not claiming VLO is a "buy." Cash ROIC suggests healthy operations, but the company lacks Midstream diversification and faces pure refining margin volatility.

I'm not claiming PSX's Midstream is worthless. Equity method income represents real ownership in valuable assets—even if it doesn't generate proportional parent-level cash flow.

I'm not claiming impairments are irrelevant. VLO's California assets genuinely declined in value. The impairment reflects economic reality—it just doesn't reflect current cash generation.

I'm not claiming accounting ROIC is useless. It measures return on accounting capital, which has validity. But for comparing companies with different accounting treatments, Cash ROIC provides cleaner signal.

What I am claiming: the reflexive assumption that PSX is 4.7x better than VLO deserves challenge. The quantitative evidence suggests VLO's cash-generating engine is healthy despite distressed accounting metrics.

Head-to-Head: The Complete Picture

Factor	PSX	VLO	MPC	Edge
Accounting ROIC	21.04%	4.46%	11.33%	PSX
Cash ROIC	7.38%	23.33%	14.76%	VLO
FCF Margin	2.58%	3.41%	3.21%	VLO
Asset Turnover	1.78x	2.07x	1.66x	VLO
California Exposure	Exiting	Exiting	None	MPC
Midstream Diversification	Strong	None	Strong	PSX/MPC
One-Time Distortions	Moderate	High	Low	MPC

Investment Implications

When to Use Accounting ROIC

Comparing companies with similar accounting treatments
Evaluating long-term capital allocation efficiency
Screening for consistent performers (low gap between accounting and cash)

When to Use Cash ROIC

Companies with large non-cash charges (impairments, restructuring)
Companies with significant equity method income
Industries with asset write-downs (energy, retail, industrials)

The Practical Framework

Check the gap: If Cash ROIC differs significantly from Accounting ROIC, investigate why
Identify distortions: Impairments, equity method income, accelerated depreciation
Assess persistence: One-time items normalize; structural issues don't
Compare both: Use Accounting ROIC for long-term trends, Cash ROIC for current health

Frequently Asked Questions

What is Cash ROIC and how is it different from accounting ROIC?

Cash ROIC measures actual cash generation per dollar of invested capital, calculated as Operating Cash Flow divided by Invested Capital. Accounting ROIC uses net operating profit (NOPAT), which includes non-cash items like impairments and equity method income. The gap between these metrics reveals how much of reported returns come from cash vs. accounting entries.

Why is VLO's accounting ROIC so low at 4.5%?

Valero recorded a $1.1 billion non-cash impairment charge for its California refineries (Benicia and Wilmington) in 2025. This charge flows through the income statement, crushing reported ROIC, but doesn't represent actual cash spent—that capital was deployed years ago when the refineries were built.

Is PSX's 21% ROIC fake?

PSX's accounting ROIC is real, but inflated by equity method income from Midstream joint ventures. This income boosts reported earnings but doesn't generate proportional cash flow to the parent company. The JVs retain cash for their own debt service and capex.

Which refiner should I invest in based on this analysis?

This analysis doesn't recommend specific investments. The key insight is that surface-level ROIC comparison (PSX 21% vs VLO 4.5%) is misleading. Cash ROIC shows VLO generates more cash per dollar invested. However, PSX's Midstream provides structural stability that pure-refining VLO lacks. MPC offers the most transparent metrics.

When will VLO's accounting ROIC normalize?

VLO's $1.1B impairment is a one-time charge. As it rolls off the trailing twelve month calculation (2-3 quarters), accounting ROIC should recover toward its Cash ROIC reality of ~23%. This represents a potential re-rating catalyst.

Why are both PSX and VLO exiting California?

California adopted legislation imposing operational restrictions and reporting requirements on refiners. Both companies cite regulatory burden as the reason for exit. VLO is closing Benicia (April 2026) and evaluating Wilmington. PSX is idling its LA Refinery in Q4 2025. Combined capacity exiting: ~440,000 barrels per day.

The Contrarian Conclusion

The market narrative is simple: PSX at 21% ROIC is the quality refiner; VLO at 4.5% is the laggard.

The analytical reality is inverted:

VLO generates 23.3% Cash ROIC—highest among the three refiners
PSX generates 7.4% Cash ROIC—lowest among the three refiners
The 17-point accounting gap is mostly non-cash noise
MPC (11.3% / 14.8%) is the most transparent operator

VLO's California impairment is a one-time charge. Once normalized (expected within 2-3 quarters as the charge rolls off TTM calculations), accounting ROIC should recover toward its cash-based reality of ~23%. The company's underlying operations—despite pure refining exposure—generate healthy returns.

PSX's Midstream provides structural stability and diversification benefits. But its headline 21% ROIC overstates the cash reality. Investors attracted by the high number may be disappointed by actual cash flow.

The honest assessment: ROIC is a useful metric. But without understanding what's in the number, it can mislead as easily as it informs.

Explore More

This analysis is part of our Earnings Quality Analysis framework.

Related Analyses:

Refiner ARO Hidden Liabilities — Off-balance sheet obligations in the refining sector
E&P ROIC Rankings: Devon vs Exxon — Broader energy sector capital efficiency
Cash Flow Quality Analysis Framework — Understanding Cash ROIC vs Accounting ROIC

Data sources: SEC 10-Q filings (Q3 2025), company XBRL disclosures, BigQuery filing text analysis. ROIC, Cash ROIC, and margin calculations based on trailing twelve months through Q3 2025. California impairment and restructuring amounts from VLO Q3 2025 10-Q Note 2 (Impairment) and PSX Q3 2025 10-Q Note 4 (Restructuring).

This analysis is for informational purposes only and does not constitute investment advice. MetricDuck holds no positions in securities mentioned. Past performance does not guarantee future results.