Phillips 66 Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
August 2, 2023

There are 17 speakers on the call.

Operator

And welcome to the Second Quarter 2023 Phillips 66 Earnings Conference Call. My name is Alex, and I'll be your operator for today's call. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session. Please note that this conference is being recorded.

Operator

I'll now turn the call over to Jeff Dieterdt, Vice President, Investor Relations. Jeff, you may begin.

Speaker 1

Good morning, and welcome to Phillips 66 Second Quarter Earnings Conference Call. Participants on today's call will include Mark Lasier, President and CEO Kevin Mitchell, CFO Tim Roberts, Midstream and Chemicals Rich Harbison, Refining and Brian Mandel, Marketing and Commercial. Today's presentation material can be found on the Investor Relations section The Phillips 66 website along with supplemental financial and operating information. Slide 2 contains our Safe Harbor statement. We will be making forward looking statements during today's call.

Speaker 1

Actual results may differ materially from today's comments. Factors that could cause actual results to differ are included here as well as in our SEC filings. With that, I'll turn it over to Mark.

Speaker 2

Thanks, Jeff. Good morning, and thank you for joining us today. In the second quarter, we had adjusted earnings of $1,800,000,000 or $3.87 per share. We continue to execute on our strategic priorities And returned $1,800,000,000 to shareholders through share repurchases and dividends. Our results reflect strong operating performance across our portfolio, Demonstrating the commitment of our employees to maintain safe and reliable operations.

Speaker 2

We want to thank them for their dedication to operating excellence and delivering on our mission In refining, we continue to run above industry average rates and in midstream, We had record NGL frac volumes. We continue to run our Sweeny Hub fracs and export terminal at above nameplate capacities to meet strong demand. We remain committed to operating excellence and continue to focus on our strategic priorities to create value and return cash to shareholders. Slide 4 summarizes progress toward our strategic priorities. Over the last 12 months, we've returned 14% of our market cap Or $5,400,000,000 to shareholders through share repurchases and dividends.

Speaker 2

We're on track to return $10,000,000,000 to $12,000,000,000 over the 10 quarter period Between July 2022 through year end 2024. In refining, we had another quarter of strong operating performance With crude utilization of 93% and lower operating costs. As of the end of the quarter, more than $300,000,000 of the $550,000,000 run rate cost savings are attributable to refining. Kevin will provide an update on our business transformation progress in a moment. We're executing our NGL wellhead to market strategy and capturing DCP integration synergies faster than expected.

Speaker 2

Our current synergy run rate is over $200,000,000 We've been successful in identifying additional opportunities to increase our target from $300,000,000 To more than $400,000,000 by 2025. In June, we completed the acquisition of DCP Midstream's public common units For $3,800,000,000 increasing our economic interest from 43% to 87%. We ended the quarter with a net debt to capital ratio of 35%. We expect leverage to be within our target range by year end. In refining, we're converting our San Francisco refinery into one of the world's largest renewable fuels facilities.

Speaker 2

The capital to convert the to over 50,000 barrels per day of renewable fuels production is anticipated to be approximately 1,250,000,000 This is an increase from our original premise due to higher than anticipated material and labor costs as well as impacts related to weather and permitting. The revised capital cost of around $1.60 per gallon remains well below similar announced projects and the expected returns Are significantly above our refining hurdle rates. The overall project timing and scope remains unchanged. We expect to begin commercial operations in the Q1 of 2024. In Chemicals, CPChem completed construction of the 1 hexing unit in Old Ocean, Texas and expects to begin operations by the end of Q3.

Speaker 2

The new propylene splitter at its Cedar Bayou facility is expected to start up in the Q4. CPChem and Qatar Energy are jointly building world scale petrochemical facilities on the U. S. Gulf Coast and in Ras Laffan, Qatar. On the U.

Speaker 2

S. Gulf Coast, the Golden Triangle Polymers joint venture has project financing in place. The Ross Laffan petrochemical joint venture expects to complete project financing later this year. Both projects remain on schedule to start up in 2026. Now, I'll turn the call over to Kevin to review the business transformation savings and second quarter financial results.

Speaker 3

Thank you, Mark. Starting on Slide 5 with an update on our business transformation progress. Our $1,000,000,000 business transformation target includes $800,000,000 of cost savings and $200,000,000 of sustaining capital reductions. We have identified over 2,700 initiatives To permanently reduce costs, with employees across the organization actively engaged in the transformation process, we have completed 1200 initiatives generating value today. The chart on the left shows our progress toward the $800,000,000 cost reduction target With $550,000,000 of run rate cost savings at the end of the second quarter, the stacked bar shows our actual cumulative cost reductions for the year By category, over the first half of twenty twenty three, we realized $260,000,000 in cost savings.

Speaker 3

The majority of these cost reductions relate to refining, which has benefited by about $0.40 per barrel. Business transformation initiatives range from optimizing services across our portfolio of assets to establishing new tools to improve use of steam and energy. Organizationally, we strengthened our centralized model for core functions to drive consistency and efficiencies. We continue implementing cost savings initiatives and are on track to achieve our run rate target by year end 2023. We expect to realize the full $800,000,000 of cost savings in 2024, which will include refining cost reductions of $0.79 per barrel.

Speaker 3

Now I'll move to Slide 6 to cover the Q2 financial results. Adjusted earnings were $1,800,000,000 Or $3.87 per share. The $15,000,000 decrease in the fair value of our investment in Evonix reduced earnings per share by $0.03 We generated operating cash flow of $1,000,000,000 including a working capital use of $1,000,000,000 and cash distributions from equity affiliates $239,000,000 Capital spending for the quarter was $551,000,000 including $339,000,000 for growth projects. We returned $1,800,000,000 to shareholders through $1,300,000,000 of share repurchases and $474,000,000 of dividends. We ended the quarter with 445,000,000 shares outstanding.

Speaker 3

I'll cover the segment results on Slide 7. Additional details can be referenced in the appendix to this presentation. This slide highlights the change in adjusted results by segment From the Q1 to the Q2. During the period, adjusted earnings decreased $199,000,000 Mostly due to lower results in Refining and Midstream, partially offset by an improvement in Marketing and Specialties. In Midstream, 2nd quarter adjusted pretax income was $626,000,000 down $52,000,000 from the prior quarter.

Speaker 3

The decrease was driven by the impact of declining commodity prices in our NGL business. This was partially offset by higher volumes in transportation. Chemicals adjusted pretax income decreased $6,000,000 to $192,000,000 in the 2nd quarter. The industry polyethylene chain margin increased by $0.03 to $0.20 per pound. However, this was offset by higher maintenance and turnaround costs in the quarter.

Speaker 3

Global O and P utilization was 98%. Refining 2nd quarter adjusted pretax income was $1,100,000,000 Down $460,000,000 from the Q1. The decrease was due to a decline in margins, partially offset by higher volumes and lower operating expenses. Realized margins decreased primarily due to the decline in distillate crack spreads and narrowing heavy crude differentials, Partially offset by improved gasoline cracks. In addition, realized margins reflect the impact of losses from secondary products Due to declining NGL and coke prices, Marketing and Specialties adjusted second quarter pre tax income With $644,000,000 an increase of $218,000,000 from the previous quarter, mainly due to seasonally higher global marketing margins On continued strong demand.

Speaker 3

The corporate and other segments adjusted pretax costs were $12,000,000 lower than the prior quarter. The adjusted effective tax rate was 22% consistent with the previous quarter. The impact of non controlling interests was improved compared to the prior quarter And also reflects our acquisition of DCP units on June 15. Slide 13 shows the change in cash during the Q2. We started the quarter with a $7,000,000,000 cash balance.

Speaker 3

Cash from operations was $2,000,000,000 excluding working capital. There was a working capital use of $1,000,000,000 mainly reflecting an increase in inventory, which included the impact of unplanned downtime at the Bayway refinery And seasonal storage opportunities. Year to date working capital is a use of around $2,000,000,000 primarily related to inventory That we expect to mostly reverse by year end. We funded $551,000,000 of capital spending. In June, we drew $1,250,000,000 on a single draw term loan to partially fund the acquisition of the DCP units for $3,800,000,000 This transaction and the redemption of DCP's Series B preferred units of $161,000,000 Are represented as repurchase of non controlling interests.

Speaker 3

Additionally, we returned $1,800,000,000 to shareholders through share repurchases and dividends. Our ending cash balance was $3,000,000,000 This concludes my review of the financial and operating results. Next, I'll cover a few outlook items. In Chemicals, we expect the Q3 global O and P utilization rate to be in the mid-90s. In Refining, we expect the Q3 worldwide crude utilization rate to be in the mid-90s and turnaround expenses to be between $110,000,000 $130,000,000 We anticipate Q3 corporate and other costs Come in between $280,000,000 $300,000,000 reflecting higher net interest expense from funding the purchase of DCP units during the Q2.

Speaker 3

In 2023, we expect our full year capital spend to be above the $2,000,000,000 budget, Reflecting approximately $200,000,000 of additional spending on Rodeo renewed. In addition, we just closed on a $260,000,000 acquisition West Coast Marketing Assets. This acquisition supports the high return Rodeo renewed project by optimizing the full value of our renewable fuel We continue to review our portfolio to determine if assets meet our strategic long term objectives Or if they provide more value to 3rd parties. Earlier this year, we divested the Bellechase terminal, and very recently, we sold our interest in the South Texas Gateway Terminal. Total proceeds from the 2 transactions are approximately $350,000,000 Now we will open the line for questions, after which Mark will make closing comments.

Operator

Thank you. We will now begin the question and answer session. As we open the call for questions, as a courtesy to all participants, Please limit yourself to one question and a follow-up. Our first question for today comes from Doug Leggate of Bank of America. Doug, your line is now open.

Operator

Please go ahead.

Speaker 4

Thank you. I appreciate you all taking my questions.

Speaker 5

I'm not sure who wants

Speaker 4

to answer this, maybe Kevin, but We've obviously talked ad nauseam about what we think could be a new mid cycle refinery outlook. But What we haven't taken into account is the continued upgrade to your synergy targets, the faster delivery of your cost reductions, and more importantly, Continued appearance of deferred taxes in your free in your operating cash flow. So Kevin, I guess my somewhat convoluted question is, What do you think your sustainable mid cycle free cash flow looks like for the company post these recent series of changes that you've introduced?

Speaker 3

Yes, Doug. So we had guided to $7,000,000,000 increasing to $10,000,000,000 At Investor Day of cash flow. And the reality is some of the actions that bridge us From $7,000,000,000 to $10,000,000,000 we have executed on. And so at this point in time, on a traditional our view of refining mid cycle, We're probably somewhere in the $8,000,000,000 range, maybe a little bit higher than that, but we're not all the way to $10,000,000 because there are still other things we need to But we're certainly making good progress from the 7% to 10%. Your comment on Deferred taxes is a relevant one.

Speaker 3

This year, we actually expect to have a slightly larger than normal deferred tax Benefit on cash flow. So I think I had previously guided to about $400,000,000 to $500,000,000 of benefit for the year. We expect that to be More like $700,000,000 to $800,000,000 and that's mainly because of the impact of DCP buy in on that. And after that, we should revert To a more traditional sort of $400,000,000 to $500,000,000 level.

Speaker 4

Just to be clear, you have not Changed your view of mid cycle margins, is that right?

Speaker 3

That is correct. We have not changed our view of mid cycle, but we would acknowledge that We are in a stronger than mid cycle margin environment currently. We have been for the last year plus year and a half. And barring any major economic downturn, we actually think that will Continue for a reasonable period of time, just given the overall supply demand balances that exist globally.

Operator

Okay.

Speaker 4

Thank you for that. My follow-up, just a quick one. The step up in the buyback pace, is that a transitory Perhaps as a consequence of the DCP process, I'm not quite sure what other things might have delayed you. But I guess my point is that if I look to the $5,000,000,000 to $7,000,000,000 buyback guidance you gave through 2024, Two things come to mind, which is, well, it seems to us you could maintain an elevated pace and certainly a pace well beyond 2024. So I

Operator

could just I wonder if

Speaker 4

you could just touch on the cash return strategy, and I'll leave it there. Thanks.

Speaker 3

Yes, I think that's right. I mean, as you know, we have been Other than during the COVID period, we've been consistently buying back shares since really 2012 when we started The program, the elevated pace in the Q2 was not so much an impact of the DCP transaction, more it was a function of We recognize that relative to our share price at the time and our outlook, which was quite positive in terms of the overall business Fundamentals, it seemed like a good opportunity to up the pace from where we had been. And based on where things sit today, it looks like Good decision on our part. The $5,000,000,000 to $7,000,000,000 that we guided at Investor Day, That's a sort of minimum threshold that we expect to meet. It doesn't mean to say we can't either hit that Total return $10,000,000,000 to $12,000,000,000 before the end of 2024, and it certainly does not mean that we stop once we hit that threshold either.

Speaker 3

And so I'd go back to our normal traditional sort of guidance of at least 40% of cash flow return to shareholders through the dividend and buybacks.

Speaker 4

Helpful. Thanks. I appreciate the answers.

Operator

Thank you. Our next question comes from Neil Mehta of Goldman Sachs. Your line is now open. Please go ahead.

Speaker 6

Yes. Thank you. I want to stay on the topic of capital structure. The net debt to capital, as you guys indicated, kind of picked up The 35%, but you indicated that you expect it to move lower by year end. Talk about some of the Things that are moving back into your favor in addition to the strong margin environment, working capital or other items that we need to keep in mind?

Speaker 6

And How should we think about exit rate for that metric?

Speaker 3

Yes, Neil, and I think we had given guidance that we expected our Debt to cap to increase once we completed the buy in of the DCP units. And so it wasn't a surprise to us where we landed on that number. The 2 big drivers that will bring that back between now and the end of the year are what you pointed to working capital. So that's about $2,000,000,000 Inflow in cash that we expect to see between now and the end of the year and then also just the ongoing ability to generate earnings, generate strong earnings and build to equity. So on our math, we think we end the year at right around the 30% level.

Speaker 3

So the top end of the range, but nonetheless, Still within that overall target range. Obviously, this thing will move around quarter over quarter depending on what's going on In terms of market environment and cash items like working capital, but fundamentally, we think we're on a reasonable trajectory to be able to sustain In that target range.

Speaker 6

Yes. Thanks, Kevin. And then the follow-up is just on Rodeo renewed. Some change, it sounds like, in the capital scope here. Just can you walk us through the drivers of those changes?

Speaker 6

And then as we think about against The capital, the type of EBITDA that you can generate from the asset, how has your view of mid cycle from that asset Evolved as you spend more time on the project. Thank you.

Speaker 2

Yes, Neil, it's Mark. I'll cover it at a high level, and then Rich Can drill in a little bit, but essentially what we've experienced there as we commenced the project execution, we had a lot of Heavy rainfall, and of course, even the start of the project was deferred a little bit because of permitting challenges. And We believe we recognize that the earnings from this are going to far exceed the earnings we realized today from the San Francisco refinery. We wanted to stick to the schedule, so we incurred some more cost to compensate for the productivity loss during bad weather and delays around permitting. We also saw some inflation when this project was sanctioned.

Speaker 2

The big run up inflationary pressures hadn't hit yet. And so we realized that really is the only project in our purview where we're seeing that kind of impact or haven't accounted for the inflation at sanction. So We're having to take care of that. So we still look at that $1.60 a gallon as incredibly competitive. The overall competitiveness of the asset It's strong.

Speaker 2

The location, we've got competitive advantage. The pull through with our retail presence is a competitive advantage. And if you look at As we bring this facility online, we're taking off almost as much traditional diesel as we're bringing in Renewable diesel to the market, so the market disruption will be minimal. So we really are bullish around this project and we see that The economics are still very robust in spite of the cost increases. Rich, do you want to drill that deeper?

Speaker 5

Yes, we've covered most of that Mark. Maybe I can add a little bit of color to it. As we talked about, the primary drivers for the increase were material and labor costs. And when you think about the timing of this project, it was estimated and approved prior to the heavy inflationary period. So we're realizing that the inflationary pressure that's occurred over the duration of the development of the project.

Speaker 5

Half of those costs will experience this year, The other half will flow into next year's capital allocation. As Mark indicated, the project is still very capital efficient at 1.6 And we're very happy with that, and that is very competitive versus other announced projects. And we continue to work full steam ahead on the construction, and it remains on track for commercial operation in Q1 2024. Now I know there's been a lot of focus around the lower LCFS credits over the recent change. But the reality of this, the economics around this project are centered around 4 programs As well as the retail price of diesel in the state of California and other markets that Recognize renewable diesel.

Speaker 5

And those programs, 2 are federal and 2 are at the state level. And All of these seem to be working inter relationally with each other as well as impacting the feedstock costs as well. So When we look at the overall momentum and movement of all this interrelationship, we still see very strong economics for the project and continue to be Very optimistic about the EBITDA returns on it.

Speaker 2

And when you look at those increases across 2023 and 24, there will it will require a modest increase in our capital target of $2,000,000,000 For this year, but we will manage that additional cost within our $2,000,000,000 target going forward in 2024.

Speaker 6

Thanks. Thanks everyone.

Operator

Thank you. Our next question comes from Roger Read of Wells Fargo. Your line is now open. Please go ahead.

Speaker 7

Yes. Thank you. Good morning. I was hoping to follow-up on the DCP Transaction, just how that's gone so far. And while I understand you've raised the, I guess, we would call it cost savings, Another part of this transaction was on the revenue synergy side, building a truly integrated model.

Speaker 7

So I was just curious what you've seen to date, what you maybe expect in the near term on that or maybe even the medium term on that in terms of How the transaction comes together as a seamless organization?

Speaker 8

Roger, this is Tim. Thanks for the question. Hey, we started working on this as soon as we closed the initial part of the transaction last year. We got the integration teams together. At the beginning of this, back in the fall of last year, we thought we had line of sight of $300,000,000 That we could get full value for all the way through the Q1 of 2025.

Speaker 8

And that's when some contracts were rolling off that were going to 3rd And we could bring them into our system. So but most of that we felt would be captured by 2024. Well, as we dug in, we've got the teams involved, engaged, everybody's working together. Now the employees have done a really good job of digging deeper and Finding a couple more gems in there. So now that's why we're comfortable talking about an increase going to $400,000,000 And I'm actually hoping at some point I can give you more upside to that As we continue to dig because this integration is going to continue through the Q1 of 2024.

Speaker 8

The big driver right now, the teams are working together commercially and Probably worth setting a tone there is that early when we had a $300,000,000 number, 1 third was based on cost, 2 thirds on commercial, we'll call it system optimization. But as we dug in and we've got to the $400,000,000 number, now that is more fifty-fifty on costs. We found more in our procurement, more in our maintenance, more in our operations. And then so 50% on cost and now 50% on, Again, system optimization and commercial activities. So that's kind of the breakdown.

Speaker 8

And the real driver right now for us through the Q1 of 2024 is systems integration. So a lot of good work being done by the team, but it just So a lot of good work being done by the team, but it just takes time and you got to get it right. So we are spending the time to do that We'll be done by the end of the Q1, and then we'll be in what I consider a normal operation steady state mode with regard to how we run as a business.

Speaker 2

Yes. I'd just like to come in a little bit on that, the integration impact. This really is a clear indication of how well the teams are integrating. The DCP team, the Phillips 66 team is coming together. And as Tim noted, once we had operational control of the entity after the Enbridge transaction, we were able to really hit the ground running and start executing against our targets.

Speaker 2

And getting these teams integrated, One team, one culture taking the best of the best and driving this. This is really the biggest visible measure of how successful that's been. We see those numbers move up and we see teams excited about the future and looking at ways to capture more value both from a cost perspective and a commercial perspective. And so this is going to be What they are and what they do from this point forward?

Speaker 7

Yes. Thanks for that. And then the unrelated follow-up is to come back So the $0.40 a barrel of refining and margin, cash OpEx savings, the goal to get to $0.75 Can you give us an idea of I mean, I know you mentioned seeing cost reductions, things like that. But like what is this Process allowing you to do it, is it a best practices in one location being expanded, an overall centralized Look at the cost structure, just it's a very impressive number. It's certainly sustainable.

Speaker 7

It adds up over time. And so I'm just curious Kind of where did you start? How did you get here? How confident are you in the $0.75 on the timeline that you've set?

Speaker 5

Yes, Roger, this is Rich. We're well on your way, as you indicated, to our $0.75 per barrel savings target that we Announced or committed to during the Investor Day last November. And you know what's most exciting about this whole process For me, it has really been how the organization, the entire organization is engaged in this process. So yes, there is some oversharing site to site of activity and best practices, but most of these activities Opportunities identified by that local organization really accepting the challenge to improve the business and they're uncovering these opportunities to be more And their work process, right, and changing and then fundamentally changing how that work process is occurring To drive inefficiencies out of the business, which ultimately reduce costs out of the business. So if you think about We talked about $0.40 a barrel already year to date.

Speaker 5

If you that's calculated by if you take our barrels that we've run Year to date and calculate to the $0.40 you can back into the number that we're seeing drive to the bottom line Our financial report there, and that's been quite impressive. And we've got a lot more in the queue, As Mark indicated on his comments with the run rate, our target is $550,000,000 over $300,000,000 of that is currently assigned to Refining. And of course, the run rate doesn't mean it's realized, right? But that just means it's identified, it's locked in. And now we got to drive it to the bottom line, and that's what's most impressive about the organization, really pushing to get these identified opportunities pushed to the bottom line.

Speaker 2

Yes. If you see some commonalities between the mindset in our refinery organization and the midstream organization, It's real. And then it's this business transformation process, it's easy to talk about the cost impact and it's easy to have those cost targets. But Really, the most phenomenal thing going on is the mindset change and the drive that we see in the employees to get better at what they do every day. And you're Seeing that move on from cost focus to just where do we create the most value, how do we create the most value together, whether it's the way we've Organized and integrated our value chain optimization organization more synergistically across the refineries having VCO folks sitting On the refinery leadership team, every day, searching for ways to optimize and coordinate with other refineries, it's real.

Speaker 2

And It's that mindset, it's that drive that's going to make these cost savings and the synergy capture sustainable for the long term and it's just not going to end. It's just going to be the way we do business going forward.

Operator

Thank you. Our next question comes from John Royall of JPMorgan. Your line is now open. Please go ahead.

Speaker 9

Hi. Thanks for taking my question. So my first question is on the Bayway FCC. I think your last official statement was around mid July for the restart. We saw reports after that, that it was end of July.

Speaker 9

I'm not sure if that's been confirmed. And So if you can just update us on the status of the unit and when you expect it up and running full if it's not now?

Speaker 5

Hey, John. This is Rich. FCC repairs were complete and the unit is up and running as of July 20th. That's the actual date that it was back online producing on specification material. The refinery itself is Back to normal operation.

Speaker 5

So all the units and all the assets there are running to our plan. The Bayway team did a phenomenal job getting that Repair work done very efficiently, very excited about how they performed to complete that work. And additionally, When Mark is just talking about this mindset activity, we saw other parts of our organization also really Focus to help pick up our teammates that were struggling a little bit in Bayway, and we saw phenomenal performance in our refineries in Sweeny, Awka City and Billings, they each had record performance as well as our assets on the West Coast, and it all ended up in System wide utilization of 93%, which is our highest crude utilization since 2019. And we're looking forward to building on this momentum and continuing that into the Q3.

Speaker 9

Great. Thanks for the update. And then I know it's early on, but maybe sticking with refining, you could give us Possibly some expectations on some puts and takes around captures for 3Q. And then, relatedly, maybe you can weave in your view on WCS steps from here. We've widened out a fair amount off of bottoms, but still look very tight.

Speaker 9

So any views there into 2H would be helpful.

Speaker 10

Hey there, it's Brian. Maybe I'll just talk about product demand, give you a sense of what we're thinking for Q3. The strength in U. S. Products basically starts with Low inventories, gasoline were under 5 year averages by 7%, distillate were under averages 5 year averages by 19%.

Speaker 10

That's a lot. We have a lot of new capacity coming online in the U. S, but we've had even more outages than the new capacity. For us, we're seeing gasoline demand up about 2% over last year in the U. S.

Speaker 10

And about 4% globally, so that's strong demand. On distillate, we have the demand down a bit in the U. S, mostly on industrial manufacturing segments. But globally, we have it up. We have Lots of pockets of really strong distillate demand.

Speaker 10

Latin America up 9%, Asia up 4%, and diesel cracks continue to remain strong. In fact, they've gotten a lot And we believe that they'll continue to perform throughout the year as we head into higher demand planning season and into winter. In the U. S, we're distillate over gasoline in every pad now. And then finally on Jet, Jet's also strong, low inventories, Increasing domestic and international travels, global seat demand is essentially flat to 2019 levels, TSA throughput numbers in the U.

Speaker 10

S. Are Last of 2019 levels. And interestingly, U. S. Jet yields remain a little bit higher, so that should add some marginal strength To diesel.

Speaker 10

And then on the WCS, you're right, WCS has started to widen again, which is In our best interest here at we buy the most WCS of I think anybody There is. And we've seen the widening mostly because of heavy crude dips in general have started to widen. We also see fall turnarounds in PADD 2 as being very strong. And then if you'll remember in September, which next month, we'll start to The billion blending, which will swell the volume of Canadian crude. So all those things have been putting pressure and widening the dips to our advantage.

Speaker 11

Thank you.

Operator

Thank you. Our next question comes from Ryan Todd of Piper Sandler. Your line is now open. Please go ahead.

Speaker 12

Thanks. I know we don't often talk that much about marketing, but your marketing business, as it continues to generally kind of exceed on a regular basis. I think first half contributions are fairly in line with last year's first half contributions, which was Generally higher than expected year on marketing. Is that business maybe structurally just Stronger than we have appreciated and maybe you've guided to or what do you attribute kind of contribute continued strength in the marketing side?

Speaker 10

Hey Ryan, this is Brian. Exceeding expectations is a good thing. We're happy about that. We did have a strong quarter in Q2. We've added a bunch of retail JVs since 2019.

Speaker 10

We're roughly at 750 retail stores, which have really performed well Since we've added them and certainly in 2Q, we had higher margins, as Kevin mentioned, in both domestic markets and in our Western European business. We had U. S. Volumes up a bit. And finally, in our lubricants business, the base oil business has been performing really well As the feedstock prices have been falling more than the base oil prices.

Speaker 10

So I tell you for Q3, when you're thinking about Q3, our earnings should be in line with our mid cycle Expectations assuming kind of normal seasonal demand.

Speaker 2

Yes, I would just come over again and compliment Brian and his marketing team on the execution of Strategy that they've held for several years is to go in and participate through these joint venture opportunities in markets that Makes sense for us that if we have a competitive advantage that there's strength to capitalize on. And we don't go and do this everywhere. It's very surgical. It's It's very intentional, and it is exceeding expectations, so it's a well executed strategy.

Speaker 12

Great. Thanks. And maybe just a quick follow-up on Rodeo and some of your comments from earlier. Are there as we think about kind of the pathway from here until start up in Q1 of 2024, are there any outstanding permits required, legal challenges that we be looking at or any how do you view kind of potential risks that exist or things you're Keeping an eye on between now and commercial start up there.

Speaker 5

Yes, Ryan. Permitting to Complete any project in California is very challenging. Projects even to convert a conventional crude oil facility refinery to a lower carbon intensity transportation fuel Production facility. So we did recently receive news On an appeal to our environmental impact report that is the supporting document for permits, this was filed by a couple NGOs In the state,

Speaker 2

and

Speaker 5

the good news is the court ruling found several issues in the favor of Phillips 66. And notably, most notably, the construction of the Rodeo Redeau project can continue With the county work to resolve 3 issues. So we're working closely with the county and the courts to provide necessary information to reconsider The open issues, and we remain very confident that the Rodeo renewed project is on track to start commercial operation in Q1 2024.

Speaker 12

Great. Thank you.

Operator

Thank you. Our next question comes from Jason Gabelman of Cowen. Your line is now open. Please go ahead.

Speaker 13

Hey, thanks for taking my questions. I wanted to follow-up on Ryan's question just now on marketing and the outlook for 3Q. There were Reports of droughts in Rhine River, and I think typically when that happens, you're positioned to supply that region well And take advantage of margin moves there. Have you seen any strength in 3Q, early 3Q as a result Of those outages and would you expect as a result continued outperformance in marketing in 3Q? And then Conversely, what you're seeing on chems, we've seen chain margins fall into July.

Speaker 13

Just any views on the outlook there into 3Q? And then beyond that, when you expect Chemical margins to move back to mid cycle.

Speaker 10

Hey, Jason, it's Brian. Hey, so far in Western Europe On the Rhine, we haven't seen water levels low enough to benefit us. It is true if water levels do get low, we benefit from that, but the water levels haven't gotten there yet. Can't really predict where they're going to go in Q3, but if they get lower, then we'll have some benefit.

Speaker 8

Yes. And with regard this is Tim Roberts on this. With regard to chemicals, talking about the current where we're at with chain margins. Yes, it's been an interesting run here. Obviously, you've got supply plenty of supply available and demand, they're not matching up.

Speaker 8

So therefore, you've seen chain margins have been dropping over the last several quarters. Where you're at right now, I think IHS added about 0.12 Chain margins and really the way we would look at this and look at it going forward is that the high cost producers, both in Asia and those in Europe, they're going to set the price and Those that are in advantaged feedstock locations will keep running and probably run hard, which is what we're seeing right now in North America and the Middle East. While those are having to shut in capacity or having to manage production or any other regions I mentioned earlier. Now fundamentally though, you've got to get demand and supply to match up and you got to start working off inventory. Ethylene inventories here in North America are 5 year average.

Speaker 8

So that's got a direction needs to start working its way down. And you're seeing the same thing in polyethylene. So 2 of the main products that we see with regard to our CPChem JV. However, we're running really strong here. Exports are strong as well with regard to in North America, because your advantage on feedstock.

Speaker 8

So our outlook is that, yes, you got to hit the bottom before you can start working your way back up. I can't say this is the inflection point, but cash costs typically will drive where you get to the bottom and then how soon you can accelerate. And usually, as we would say, and it goes in a lot of different directions is low costs, low prices, all good prices. So fundamentally, we do think that the outlook is still going to be constructive and constructive in that you still got population growth, you still have economies that I've not been churning at their all cylinders, China being one of them and that's not a position of saying they never will, not at all. We think there is still going to be good Economic growth, you're just not seeing a consistent global.

Speaker 8

So we do anticipate that that will happen and that will help soak up some of the capacity that's out there, Bring the markets back into balance and you get back into more of a mid cycle case.

Speaker 13

Great. That's really helpful. And my follow-up is just On acquisitions and divestments, you mentioned it at the top of the call that you continue to evaluate the portfolio. As you look across the various Segments you operate in, any thoughts on where maybe you have non core positions or you have some portfolio gaps? And are you viewing the broader M and A market?

Speaker 13

Thanks.

Speaker 2

Yes. I think that again, as Kevin mentioned earlier, we Look, across our portfolio and there's different dimensions across our portfolio where others may have some interest And our assets and may place a greater value because it's not strategic to us and we'll continue to evaluate that. I wouldn't comment on any specific opportunities. And likewise, As we did with marketing in California to we made some relatively small acquisitions to Enhance the opportunities around Rodeo once it's up and running and we've done a series of those and they're all doing quite well. And so we'll look at Smaller opportunistic things, but you think about where we've come from, we've done some pretty significant transactions in midstream.

Speaker 2

It's Time to digest those and to drive value through those. And if we can find some very accretive Small, midsize kinds of things, we'd look at them, but there's nothing in the queue and nothing that we'd want to comment on. We've got a great backbone there, and History has shown that a strong backbone in that industry can attract smaller investments that are quite attractive. So Think in terms of small, very accretive, high return opportunities like we've done in marketing would be on our scale. But we're going to stick with Our disciplined approach going forward, we've got a commitment around $2,000,000,000 for 2024 And anything around that would be very disciplined and high return.

Speaker 8

Great. Thanks for the color.

Operator

Thank you. Our next question comes from Manav Gupta of UBS. Your line is now open. Please go ahead.

Speaker 14

I want to start on the East Coast. That was like a 52% margin capture. That's a significant drop from the last quarter. Was it primarily the outage at Bayway? Can you talk about some of the factors that led to such a significant drop on the East Coast and margin capture?

Speaker 5

Yes. No, this is Rich. Over in that what we Refer to it as the Atlantic Basin. We did have higher volumes and lower costs due to less turnaround activity at Bayway quarter over quarter when you look at those. But a lot of those were offset by lower margins.

Speaker 5

The realized margin was lower primarily due to a weaker market crack. Configuration impacts also played into this with the gasoline cracks increasing by $10 a barrel And then the distillate crack decreasing by $18 a barrel. That played into the market capture quite a bit. And there was lower product differentials there. And then the other one that goes a little bit unnoticed In this market is really the secondary product costs and margins on those secondary products In both the NGLs for both Bayway and Humber were lower, and then the petroleum coke that sold out of Humber also Experience lower product differentials.

Speaker 5

So those are the primary reasons you saw lower market capture there in Atlantic Basin.

Speaker 14

Okay. Can you also talk a little bit about the TMX expansion? There's a lot of capacity coming on And moving the crude to the West Coast starting next year, what would how would that change the WCS, WTI Differential outlook in your opinion.

Speaker 10

Hey Manav, this is Brian. Well, first, I think our view is that TMX will probably come on later in the year, although line fill is Forecasted for early Q1. I think the line will not be filled completely. That's our view. I think those are on the lines.

Speaker 10

I feel like some of those barrels will be exported to Asia. We'll see if that happens. It's hard to get VLCCs In fact, you can't load VLCCs, we have to load them ship to ship outside of LA. So it's we'll see what happens going forward. But certainly, it could be a benefit to the West Coast having more of that crude.

Speaker 14

Thank you, guys.

Operator

Thank you. Our next question comes from Matthew Blair of Tudor, Pickering, Holt. Your line is now open. Please go ahead.

Speaker 11

Hey, good morning. Thanks for taking my questions. On the midstream side, did Phillips To unwind any of the DCP, NGL and natgas hedges, and if so, could you quantify the impact The flow through to midstream EBITDA in Q2?

Speaker 3

Yes, Matt, this is Kevin. We did, kind of, unwind them or if we let them roll off, but we have less of that. We don't have that same Hedging on our exposure to the natgas NGL commodity price that we have the DCP has historically had in our overall portfolio and when you Also factor in our position in refining as a consumer of those products. It felt more appropriate just to let the natural Offsets flow through. And so we have done that.

Speaker 3

I don't think we've given a number either. Well, I know we haven't Given any specific number out there, what we have done is updated the sensitivities for midstream to reflect the fact Those hedges are no longer in place, and so you see a slightly higher midstream sensitivity to the commodity price than before.

Speaker 11

Okay. Sounds good. And then,

Speaker 3

I don't know if

Speaker 11

I missed it, but Did you give out a number for refined product exports in Q2? I think a year ago, it was 153,000 barrels per day. How did it trend this year? And are you seeing a mix shift with more barrels headed to Europe and fewer to Latin America?

Speaker 10

This is Brian. Yes, we exported over 200,000 barrels this quarter, which was up in large part. Our Sween refinery was making some more higher Diesel that we exported to Latin America. Like others have said, we have been exporting more distillate to Europe As trade flows from Russia change and Russia support Russia is importing more barrels particularly into Brazil, 120,000 to 140,000 barrels And we're U. S.

Speaker 10

Exporting more barrels to Europe.

Speaker 11

Sounds good. Thank you.

Operator

Thank you. Our next question comes from Paul Cheng of Scotiabank. Your line is now open. Please go ahead.

Speaker 15

Thank you. Good morning, guys.

Speaker 8

Good morning,

Speaker 15

I think this is for Mark. Mark, if we look at California, you still have the Carson and Wilmington, That combined refinery. Today, probably 60% of the diesel by the renewable and biodiesel and that in several years' time, you may end up that to be 100%. So what's the role of that facility going to look like and how your configuration may need to change?

Speaker 2

Yes, I'll help cover that at a high level. Paul, I think Brian has some views on what's going on there as well. I think Look, at one end of the spectrum, we're well connected to LAX from that facility and Jet is a big Opportunity there and we would certainly look at doing what we could to provide more jets. I think that One mitigant of that is as we take the San Francisco refinery offline, that diesel production will go away and leave the market, and it's almost a gallon for gallon replacement with Renewable diesel, so that is an opportunity there as well. And so we I think that there are exports From California today, and Brian can comment further on that, but that's an opportunity to balance things out.

Speaker 10

And Paul, I would add the best amount of distillate produced at LA is actually exported by pipeline to neighboring states. So we don't make a lot of California distillate at that refinery. So it's for us at least a non issue.

Speaker 15

Okay. So you think that and do you think that on the longer term basis that, that Should be part of your portfolio or given the political environment and everything that that may I mean, Is there any plan that you do something if there are satellite what you have done to Waddell?

Speaker 2

Well, yes, Paul, we're looking at everything we can do to keep the L. A. Refinery competitive in that environment. It is frankly a difficult environment and it's been very publicly, politically challenging there, whether it's EV mandates, but We believe that it's going to be challenging for California to implement their aspirations around EVs. So I think that may be overplayed.

Speaker 2

We're watching the market's environment very carefully and doing everything that's in our control to keep The LA refinery competitive and supplying products in that market.

Speaker 15

Okay. A final one, I think this maybe is For either Rich or Calvin, when we look at your margin capture or that your margin Station in Central Corridor. You're actually doing better than we thought. Is there any one off benefit that we see? Or is it just normal market condition And that recovery from the downtime in the Q1.

Speaker 15

Thank you.

Speaker 5

Hey, Paul. This is Rich. I'll start it off here with an answer. The corridor,

Speaker 12

the

Speaker 5

primary reason that you're seeing this is really strong performance From our facilities there, specifically Ponca City and the Billings refinery, both of those facilities have been running Very, very well over the last several quarters and continue to operate exceeding expectations on Utilization as well as clean product yield, which is improving the market capture there.

Speaker 3

And just to clarify, it's not a function of one off Items that are benefiting. It is all operational as Rich described.

Operator

Thank you. Our next question comes from Joe Leach of Morgan Stanley. Your line is now open. Please go ahead.

Speaker 16

Great. Thanks for having me on. So I wanted to go back to a couple of topics we've already hit on, but first on chemicals. So with the 2 CPChem projects starting up in the back half of the year, could you just give us a sense of earnings contribution and uplift, probably in 2024 on a normalized margin environment Those two projects, just how we should think about that?

Speaker 8

Yes. On that, Joe, probably to clarify, those projects are On the hexene units, okay. So with regard to hexene units, yes, that one was completed. We're looking at that, my apologies here. I was thinking of the bigger projects.

Speaker 8

One action has been completed down in Sweeny. They'll be in startup mode through the Q3, and then you should probably start to see some level of earnings start to show up in the Q4. The splitter project, which is up at Cedar Bayou, that project also is in the final completion at this point or they're going to be ready to get everything completed by the end of Sometime in the mid Q4, excuse me. So you're really probably not going to see anything meaningful as they go through shaking out the units, getting them started up. And probably for both of them, you may be probably leaning more towards a early Q1 before something really starts To show up there.

Speaker 2

Yes. And CPChem executed the hexene project, brought it in under budget as well. So I think that's notable in its environment.

Speaker 16

Great. Thanks. And then just going back to RIDEO. I know you all talked about the potential to produce renewable jet fuel out of that facility as well. Could you just talk about any progress you've made there?

Speaker 16

Any thoughts on timing when a decision could be made to produce SAF?

Speaker 5

Yes, this is Rich. The project as it's designed will be able to produce staff. What's really missing from the whole equation is the market The indicator to do that. And as soon as that's in place, we will quickly shift to a renewable jetsustainable aviation fuel production facility will have the capability of producing 20,000 barrels a day of sustainable aviation fuel On the backbone of 10,000 barrels a day of renewable jet that's blended with traditional crude oil based Jet production, so.

Speaker 2

Yes. And that's not saying a negative around SAF. We believe that SAF will be an important part Our path forward to renewable fuels, but today at Rodeo, the economics there are renewable diesel. So we maximize renewable diesel, produce some. There's some that you just will produce just because of the yields, but any additional Investment to produce more SAF would require something that would incent us to divert away from renewable diesel into

Speaker 5

SAF. And there is capability to invest and increase that production level.

Speaker 15

Yes.

Speaker 16

Great. Thank you.

Operator

Thank you. This concludes the question and answer session. I'll now turn the call back over to Mark Lascher for closing remarks.

Speaker 2

Thank you, Alex, and thanks to all of you for your questions. We delivered strong Q2 financial and operating results as we executed on our strategic priorities by focusing on the things we control, most importantly, The commitments we made to our owners in November. We continue at a healthy pace of returning cash to shareholders and in refining, we had another quarter of strong operating performance With above industry average crew utilization and lower operating costs, we're executing our midstream NGL wellhead to market strategy and Completed the buy in of DCP's units and raised our synergy targets

Speaker 11

to over

Speaker 2

$400,000,000 wrapping up a series of foundational transactions To drive value creation in our NGL's business. We're realizing our business transformation initiatives and are on track to achieve at least $1,000,000,000 of annual run rate savings by year end, while driving a transformative mindset across the enterprise. As we deliver on our strategic priorities, we remain committed to financial strength, disciplined capital allocation and returning cash to shareholders. Outstanding operational performance will position us to capture the current strong market environment in the Q3 and we look forward to updating you on our progress. Thank you all for your interest in Phillips 66.

Operator

Thank you for joining today's call. You may now disconnect your

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Key Takeaways

  • In Q2 Phillips 66 reported $1.8 billion of adjusted earnings (or $3.87/share) and returned $1.8 billion to shareholders via buybacks and dividends.
  • Over the past 12 months the company has returned 14% of market cap ($5.4 billion) and remains on track to return $10–12 billion by year-end 2024, while achieving 93% refining crude utilization and $300 million of cost savings.
  • Midstream results benefited from record NGL frac volumes, completion of the DCP unit buy-in (increasing economic interest from 43% to 87%) and a synergy run rate now over $200 million, with targets raised to >$400 million by 2025.
  • The Rodeo Renewed project to convert San Francisco into a renewable fuels refinery remains on schedule for Q1 2024 start-up, now with revised capital of ~$1.6 billion at $1.60/gallon—still well below peers and above hurdle-rate returns.
  • Business transformation efforts have identified 2,700+ initiatives, delivering $550 million of run-rate cost savings (including $300 million in refining) with $800 million savings expected by year-end 2023 and $1 billion by 2024.
A.I. generated. May contain errors.
Earnings Conference Call
Phillips 66 Q2 2023
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