Phillips 66 Q1 2024 Earnings Call Transcript

Quartr
Provided by Quartr
April 26, 2024

There are 16 speakers on the call.

Operator

Welcome to the Q1 2024 Phillips 66 Earnings Conference Call. My name is Lydia, 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 Dieter, Vice President, Investor Relations. Jeff, you may begin.

Speaker 1

Welcome to Phillips 66 First Quarter Earnings Conference Call. Participants on today's call will include Mark Lascher, President and CEO Kevin Mitchell, CFO Tim Roberts, Midstream and Chemicals Rich Harbison, Refining and Brian Mandel, Marketing and Commercial. Today's presentation materials can be found on the Investor Relations section of 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.

Speaker 2

With that, I'll turn the call over to Mark. Thanks, Jeff. Welcome everyone to our Q1 earnings call. We continued to progress our strategic priorities and we returned significant cash to our shareholders. While our crude utilization rates were strong during the quarter, our results were affected by maintenance that limited our ability to make higher value products.

Speaker 2

We were also impacted by the renewable fuels conversion at Rodeo as well as the effect of rising commodity prices on our inventory hedge positions. Currently, our assets are running near historical highs and we are ready to meet peak summer demand. Before we provide an update on our strategic priorities, we want to recognize our midstream, refining and chemicals businesses, which have all received honors for their exemplary safety performance in 2023. Our midstream gathering and processing business received the top 2023 GPA safety award in the large operator division. In refining, the Rodeo and Sweeny facilities both received the AFPM Distinguished Safety Award, which is the highest annual safety award in the industry.

Speaker 2

This was Sweeny Refinery's 3rd straight year to receive the honor. The Ponca City Refinery earned the Elite Platinum Award and the Lake Charles Refinery secured the Elite Gold Award. In Chemicals, CPChem received 2 AFPM Safety Awards. I'm very proud of our employees and the employees of CPChem for their commitment to safety. I would like to congratulate them on a job well done.

Speaker 2

Today, beginning on Slide 4, we'll highlight the progress we've made on our strategic priorities. Next, we'll discuss our Q1 financial results. Then we look forward to your questions. We previously announced plans to monetize assets that no longer meet our long term objectives and we set a target to generate over $3,000,000,000 in proceeds. The expected proceeds will support our strategic priorities, including returns to shareholders.

Speaker 2

This quarter, we launched a process to divest our retail marketing business in Germany and Austria and communicated the plans to employees. Completion of the dispositions is subject to satisfactory market conditions and customary approvals. We have distributed almost $10,000,000,000 through share repurchases and dividends since July of 2022. Over the remaining 3 quarters of 2024, we expect to achieve our $13,000,000,000 to $15,000,000,000 target. Share repurchases will continue to be an important component of our capital allocation.

Speaker 2

We're committed to return over 50% of our operating cash flows to shareholders. Recently, we announced a 10% increase in our quarterly dividend contributing to a 16% compound annual growth rate since 2012. The dividend increase reflects the confidence we have in our growing mid cycle cash flow generation and our disciplined approach to capital allocation, including a secure, competitive and growing dividend. In refining, we continue to run at crude utilization rates above the industry average for the 5th consecutive quarter. We remain focused on improving performance, increasing market capture and reducing costs to enhance our earnings per barrel.

Speaker 2

We have achieved over $560,000,000 or more than $0.80 per barrel in run rate cost reductions from business transformation. We expect to achieve our full $1 per barrel run rate target by the end of the year. In Midstream, our NGL wellhead to market business is focused on capturing operating and commercial synergies of over $400,000,000 by year end 2024. Midstream's estimated 2024 mid cycle adjusted EBITDA is $3,600,000,000 providing stable cash generation that covers the company's top capital priorities, funding sustaining capital and the dividend. During the Q1, we achieved a major milestone with the start up of our Rodeo Renewable Energy Complex.

Speaker 2

Slide 5 summarizes our journey to transform the San Francisco refinery into one of the world's largest renewable fuels facilities. The facility benefits as a superior location to secure renewable feedstocks and market renewable fuels. The project leverages existing assets and is expected to generate strong returns. We began producing renewable diesel from our Unit 250 hydrotreater in April of 2021. We have gained valuable operational experience and market knowledge that positions us for success in our expanding renewable fuels business.

Speaker 2

Unit 250 continues to exceed expectations and has increased production to approximately 10,000 barrels per day. Our Rodeo Renewable Energy Complex is producing 30,000 barrels per day of renewable fuels. We're on track to increase production capability to full rates of approximately 50,000 barrels per day by the end of the second quarter. Once complete, we'll have the ability to produce renewable jet, a key component of sustainable aviation fuel. We're proud of the team's strong project execution and appreciate their commitment to operating excellence in achieving the significant milestones.

Speaker 2

The Rodeo Renewable Energy Complex positions Phillips 66 as a world leader in renewable fuels. Slide 6 provides an update on business transformation progress. Our run rate savings were $1,240,000,000 at the end of the Q1 comprised of $940,000,000 of cost reductions and $300,000,000 of sustaining capital efficiencies. Through the Q1, we've achieved $750,000,000 in annualized cost reductions. The majority of these cost reductions relate to refining operating and SG and A expenses as well as benefits to equity earnings and gross margin.

Speaker 2

We're on track to realize $1,000,000,000 of cost reductions in 2024 to sustain higher cash generation. Before I turn the call over to Kevin to review the financial results, I want to stress that the market fundamentals are good. Our assets are running well and we have a clear path to achieving our strategic priorities and growing cash flows.

Speaker 3

Thank you, Mark. Slide 7 summarizes our Q1 results. Adjusted earnings were $822,000,000 or $1.90 per share. Operating cash flow, excluding working capital, was $1,200,000,000 We received distributions from equity affiliates of $348,000,000 Capital spending for the quarter was $628,000,000 including $171,000,000 for a midstream joint venture debt repayment. We distributed $1,600,000,000 to shareholders through $1,200,000,000 of share repurchases and $448,000,000 of dividends.

Speaker 3

Net debt to capital ratio was 38%. Slide 8 highlights the change in results by segment from the Q4 to the Q1. During the period, adjusted earnings decreased $540,000,000 mostly due to lower results in refining, midstream and marketing and specialties, partially offset by improved results in chemicals. In midstream, 1st quarter adjusted pre tax income of $613,000,000 was down $141,000,000 from the prior quarter, reflecting lower results in transportation and NGL. Transportation results were down mainly due to a decrease in throughput and efficiency revenues, partially offset by seasonally lower maintenance costs.

Speaker 3

The NGL business decreased primarily due to a decline in margins, as well as lower volumes reflecting impacts from winter storms. Chemicals adjusted pre tax income increased $99,000,000 to $205,000,000 in the Q1. This increase was mostly due to higher polyethylene margins driven by improved sales prices and the decline in feedstock costs as well as lower turnaround costs. Global ONUP utilization was 96%. Refining 1st quarter adjusted pre tax income was $228,000,000 down $569,000,000 from the 4th quarter.

Speaker 3

The decrease was primarily due to lower realized margins. Our commercial results were less favorable than the previous quarter, in part due to inventory hedging impacts in a rising price environment and less advantageous pipeline ARBs. In addition, realized margins decreased due to lower Gulf Coast clean product realizations. Our refining results and market capture of 69% were also negatively impacted by maintenance activities on downstream conversion units as well as the renewable fuels conversion at Rodeo. Marketing and Specialty's adjusted first quarter pretax income was $345,000,000 a decrease of $87,000,000 from the previous quarter.

Speaker 3

The decrease was mainly due to lower domestic marketing and lubricant margins. Our adjusted effective tax rate was 21%. Slide 9 shows the change in cash during the Q1. We started the quarter with a $3,300,000,000 cash balance. Cash from operations, excluding working capital was $1,200,000,000 There was a working capital use of $1,400,000,000 mainly reflecting a $2,600,000,000 increase in inventory, partially offset by benefits in accounts payables and receivables, which included the impact of rising commodity prices.

Speaker 3

Net debt issuances were $802,000,000 We returned $1,600,000,000 to shareholders through share repurchases and dividends. Additionally, we funded $628,000,000 of capital spending. Our ending cash balance was $1,600,000,000 This concludes my review of the financial and operating results. Next, I'll cover a few outlook items for the Q2. In Chemicals, we expect the Q2 global O and P utilization rate to be in the mid-90s.

Speaker 3

In refining, we expect the 2nd quarter worldwide crude utilization rate to be in the mid-90s. Turnaround expense is expected to be between 100 $1,000,000 $120,000,000 excluding Rodeo. We anticipate 2nd quarter corporate and other costs to come in between $330,000,000 $350,000,000 reflecting higher net interest expense. Now we will open the line for questions, after which Mark will make closing comments.

Operator

Thank you. We'll 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 comes from Neil Mehta of Goldman Sachs. Your line is open.

Operator

Please go ahead.

Speaker 4

Yes. Good morning, Mark and team. Yes, the first question was just refining in the quarter. The capture rates were really noisy in 69%. I know you guys target 75%.

Speaker 4

It looks like a lot of that was on the West Coast because of Rodeo and then also secondary products.

Speaker 5

So you alluded to some of

Speaker 4

this in the prepared remarks, but maybe you can just talk a little bit about what happened there and your confidence about the progression as we work our way through the year?

Speaker 2

Yes. Good morning, Neil. That's a great question. Thank you for asking that. The way I'm looking at this is those Q1 headwinds that you mentioned in refining are all related to activities that will position us to deliver medium and long term tailwinds in support of our strategic priorities.

Speaker 2

And so it's some of the fundamental work going on around Rodeo and some of the work around our turnarounds are critically important. And Rich and Kevin can drive into that a little bit more and including some of the activities in commercial that we underwent over the last several quarters that will contribute to our long term success. So Rich,

Speaker 6

do you want to dive in? Yes, Mark. And Neil, when I reflect back on the quarter, I look at the metrics and we ran pretty well, but the market capture obviously was challenged. And it was primarily driven by activity in the Gulf Coast and the West Coast. We achieved about an 84% clean product yield, which where our assets is pretty good.

Speaker 6

It's actually 1% higher year over year. So it is a sign that our margin projects are actually playing into the bottom line here as we move forward. However, quarter over quarter, we were 3% lower than the 4th quarter. 1% of that's very clearly, it's seasonal, it's butane blending related to our conversion as we move towards summer gasoline over the quarter. Another 2% is really related to our turnaround activity, and this was principally focused in the downstream catalytic units across our system, and it was concentrated in the Gulf Coast area.

Speaker 6

This has really two effects when it comes to market capture and clean product yield. It reduces our ability to produce higher value products and it increases our intermediate inventories over the period. Now on the West Coast, we have the conversion of the Rodeo facility, which is a compounding event. Essentially, it effectively had an one $180,000,000 loss and adjusted pretax income in the quarter as we transformed the business. And if you think about the business, it went from active to idle to reactive across this Q1.

Speaker 6

The good news is we're near completion of the Renevo conversion, and that actually would say we're well into the wind up phase now. So to summarize, I guess, the Rodeo startup is on schedule, ramping up production, approximately 50,000 barrels a day of renewable fuels will be achieved out of that facility in the Q2. And we've positioned our units across the system to run full conversion rates with fresh catalyst and ample intermediate inventories for the upcoming driving season. Kevin, did you want to add anything to that? Yes.

Speaker 3

Let me just put a couple of numbers to some of these items. So in terms of some commercial impacts that we talk about, on Gulf Coast product pricing differentials in absolute terms that was a $50,000,000 headwind in the Q1. The inventory hedges that I referenced in the earlier comments, which primarily impact Central Corridor, that was a $100,000,000 headwind in the Q1. These are not variances. These are absolutes in the quarter.

Speaker 3

And then on the West Coast, Rodeo in overall terms was a $180,000,000 negative or loss for the quarter. So the West Coast results are bearing that drag from the impact of the Rodeo conversion.

Speaker 2

Yes. And I think just to put that in context, we're taking a disadvantaged refinery and converting it into one of the world's largest renewable fuels facilities. And so to bridge to that, we took the heavy lift this quarter and now we're well positioned to start delivering value again from the Rodeo facility as we continue to push it to full rates through the Q2. And then on the Gulf Coast, way

Speaker 6

you have

Speaker 2

to think about that is we're still maximizing our crude utilization throughput, but that crude turned into intermediates instead of clean products by design because of the turnaround work we had underway. So now we've got that inventory of intermediates poised to be converted into clean products as we continue to ramp back up into the summer season. So we're well positioned going forward.

Speaker 4

Thanks, Tim. That's a lot of good color. The follow-up is just on balance sheet. Timon is always a noisy order for working capital and that cash flow bridge, Kevin, is really helpful. But just your perspective on where you want to get your net debt to capital over time?

Speaker 4

What's the path to get there, including potential asset sales? And then how do we think about working capital fit in that equation? So big picture question around that metric.

Speaker 3

Yes, Neil. So let me hit on the working capital piece first. So negative $1,400,000,000 in aggregate, but $2,600,000,000 of that is a function of inventory build. And so we did have some partial offsetting benefit in payables and receivables and that was driven by 2 items. 1, the rising price, the absolute rising price environment generally is positive for net APAR.

Speaker 3

So we saw some benefit there, but we also benefited on receivables by collecting in the Q1 cash from 4th quarter inventory drawdown and that was several $100,000,000 that showed up in there. But on the inventory build, it's a sizable build and I would say it's really a function of both commercial opportunity inventory as well as some operational driven inventory. And the way to think about that is the operational barrels will turn into margin at a future point in time like the intermediates that we've talked about. The commercial inventory build, those will generate a return that will be in excess of anything we will realize on cash balances. And fundamentally, it's all still sitting in a liquid asset on the balance sheet.

Speaker 3

So that kind of talks to the working capital and consistent with normal practice, you would expect that inventory to come back down towards the end of the year and you will see some of that cash coming back to us. In terms of balance sheet and leverage levels, we are above our targeted range, so 25% to 30% target range, still comfortable with that target. You'll notice that we've been leaning into the share repurchases quite heavily and that's a function of our confidence in the business and the outlook, our growth that we see coming in terms of the $14,000,000,000 of mid cycle adjusted EBITDA. And so it feels like still a pretty compelling opportunity for us to be buying shares back even if in the near term it's at the expense of that leverage metric. So still expect to get there to that level, that's still our objective.

Speaker 3

And the other comment I'd make on leverage, the other metric, the other way we look at this is the non or the much less commodity sensitive businesses, the midstream and the marketing specialties business is our ability for those businesses to basically be able to bear the debt that the company has. So on a combined basis, that's circa $6,000,000,000 of EBITDA generation. And you think of a typical leverage And that keeps the refining business, And that keeps the refining business, the avoids that volatility being part of that the way we look at that debt level. So it was very comfortable from a balance sheet standpoint.

Speaker 4

Thanks, Kevin.

Operator

Our next question comes from Roger Read of Wells Fargo Securities. Your line is open.

Speaker 7

Yes. Thank you. Good morning, everybody. I'd like to if we could maybe look at I guess it's a combination of the OpEx that we're seeing in refining and I guess, let's say, juxtaposed against progress you're making in overall cost reduction. So during the Q1 going from $6.30 to $7.15 on a cumulative basis, I look at cash OpEx, it's kind of stable over the last three quarters.

Speaker 7

Recognize a lot of stuff is going on, but if you could help us kind of put those 2 together and maybe where you see the impact on cash OpEx or maybe if it's embedded in the actual refining margin, where we're seeing the cost savings manifest in Refining?

Speaker 2

Yes. I think that certainly the majority of our business transformation cost impact is showing up in refining and we've been out delivering our targets over delivering against our targets and certainly continue that into 2024. There's always a lag and we talk about run rate and then we talk about realized and we're going to make sure that you keep track to the run rate is where the speedometer is at this point in time. The realize is what we're actually seeing show up in the numbers. And we've seen good progress in refining and we'll continue to see that throughout this year as we rise up to our forecasted $1,100,000,000 in cost $300,000,000 in capital synergies, capital savings.

Speaker 2

And so Rich can drive into those cost numbers for you, Roger, and give you some color around that.

Speaker 6

Yes. So the end of last year, Roger, we on a run rate basis passed the $500,000,000 or roughly $0.75 a barrel number and run rate last year and realized about $0.41 of that last year. As we fast forward now into through the Q1 here, we see that realized number creeping up to the 500 actually slightly over the $500,000,000 number. So it's coming in at that $0.75 And it's roughly that delay that Mark's talking about, roughly 90 day delay in achieving that. So when we go back and we validate those spends, and remember those spends are over 900 separate initiatives that we've completed across the organization.

Speaker 6

We go back and revalidate these. So we are seeing those start flowing to the bottom line for refining. And if you look at our year over year OpEx, it is noticeably lower even in the face of inflation, pretty heavy inflationary period here that we've faced over the period of time. So we're happy with the progress. On a run rate basis, at the end of the Q1, we've achieved $560,000,000 of run rate, which equates about $0.80 And that's on a trajectory for the year end of $1 a barrel target that set for the organization, which is roughly 650 dollars by the end of the year.

Speaker 6

So we're well on that pace to achieve that. And the program is pressing forward. And like I had mentioned earlier, it's a seriatim of 100, if not 1000 of initiatives to execute and it's really intended to drive work and efficiencies out of our work process. And as that happens, we want to make sure that, that changes how we do our work. It influences how we make decisions, but it should not compromise safety, reliability or earnings power

Speaker 2

for the organization. Yes, Roger, I really want to drive home what Rich just said that the cultural impact on the organization has been impressive, particularly out in the field, whether it's midstream refining, wherever you are. And we have a workforce that has bought into it and it's committed to driving higher levels of performance. They understand right out the front lines, they understand what our strategic priorities are and how they can contribute to us getting there. And so they're digging in and they're looking at those opportunities every day.

Speaker 2

And across the organization, we continue to simplify work to make work easier for people to get done. So get people the right digital opportunities, so they can make better decisions faster, whether it's commercial or whether it's an operator on the front line. And the organization, we're also simplifying and we want to ensure that we've got a streamlined organization that will support sustainable success around both cost and performance and we're seeing that live as we move forward.

Speaker 7

No, I appreciate the detail there everybody. Just a follow-up question on the announcement of the potential sale of the European retail assets. How does that affect the partial ownership you have in refining assets on Mainland Europe,

Speaker 6

Miro specifically?

Speaker 3

Yes, Roger, it's Kevin. So we are selling the Germany and Austria retail assets, like we said, that's a company owned dealer operated model, primarily almost 1,000 sites across those two countries. That's a high performing business, top rated many years in a row, 10% of market share in each country and great business, but doesn't really integrate with the sort of core strategic focus areas that we have as a company. So just a little bit of background as to why those assets. It does not include our ownership in the Miro Refinery in Germany.

Speaker 3

And the reason for that is the majority of buyers for those type of retail assets would not be interested in refinery ownership. If there's a buyer that is interested, then that's a separate conversation and we'll handle that separately. But this package right now is focused on those marketing assets.

Speaker 7

Great. Thank you.

Speaker 2

Thanks, Roger.

Operator

The next question comes from Ryan Todd of Piper Sandler. Your line is open.

Speaker 8

Sorry, getting off mute there. Maybe if I could start with 1 on Rodeo. I mean congrats on getting the project, the Rodeo renewed project up and running. You mentioned that the loss in the Q1, I know like early days are challenging as you ramp towards full capacity and optimize performance. But can you walk through maybe what to expect over the next few quarters there?

Speaker 8

When do you anticipate hitting full production capacity? How do you anticipate the feedstock mix to change over the next few quarters as you run more advantaged feeds? And how should we think about that negative $180,000,000 moving towards profitability from a time line point of view as we look over the course of this year?

Speaker 6

Sure, Ryan. I got that. This is Rich here. So maybe first I'll start with a time line of the Rodeo facility. As you know, we've been ramping this facility down and hit a milestone in February of this year with a complete shutdown of the facility after 128 years of legacy of running as a crude processing site.

Speaker 6

That first transition occurred on the first hydrocracker and they went into renewable fuels feedstock production in March of this year. So that first phase is up and running and that's that milestone we're talking about here. And that's allowed the facility in complement with the Unit 250 operation that Mark mentioned in the earlier comments with the first hydrocracker to produce about 30,000 barrels a day of renewable fuels. The second hydrocracker and the pretreatment unit will both finish construction in the May timeframe, and we will start those up in the June timeframe. So by the end of the Q2, the facility will be at full production rates.

Speaker 6

Now what does that all mean when it comes to margin? So margin in this business is driven a lot by the carbon intensity of the feedstocks. And Brian's team has been actively engaged in that over the last couple of years on aggregating the number of feedstocks. So the way we see this is, we will start with essentially the pretreated material in the second quarter, a higher CI, roughly 50 CI number. And over the Q3, we see the carbon intensity of our feedstocks continually ramping down through that Q3.

Speaker 6

But by the end of the Q3, I would expect to see us in the lower to mid CI range of 30s in that range. And that's primarily driven by as a supplement to all of that, we're seeing a growing interest in sustainable aviation fuel as well. So we have positioned the facility to begin production of sustainable aviation fuel or which is a key component is the renewable jet that's blended into that. And that production will be capable of starting in the Q3 as well. And we do expect to be a prominent supplier in the market on that.

Speaker 6

So the good news is RIDEO is through that startup process, that shutdown startup process and now we're in the ramp up phase, I'll call it. It's online and we're ramping up production

Speaker 8

right now.

Speaker 2

Yes, Ryan. When we get up to full rates, we'll be able to produce something on the order of 10,000 barrels a day of renewable jet fuel, which gets blended up then to sustainable aviation fuel, in the marketplace. And it's this kit is going to be designed for continuous optimization, whether it's the split between jet and diesel fuel or the feedstocks coming in because of the feed pretreatment unit we'll have, we'll have great flexibility. So we'll optimize on CI, cost and revenue and as well as the incentives that are out there. So it's going to be an interesting facility to have in our kits and we're looking forward to getting it fully online and generating cash.

Speaker 6

I think it's supplemented as well by the last mile strategy that Brian's team has put in place. That prevents leakage of value as we deliver the product to the end user there and that should play out nicely as we increase production from the facility.

Speaker 8

And do you have have you signed contracts on the staff front or are you in ongoing negotiations there with partners?

Speaker 9

We're concurrently in negotiations with partners. We've seen a lot of interest in SAP.

Speaker 8

Great. Thanks. That's maybe just one changing gears to chems on the chemical side better than expected performance at CPChem. Can you talk about kind of the drivers of improvement there? Is it primarily feedstock related?

Speaker 8

Are you seeing signs of underlying improvement in market conditions? And maybe how you're looking at the rest of the year?

Speaker 10

Yes. Ryan, this is Tim Roberts, and I'll chat about that. I'll cover 3 things because I think there'll be other questions around it. First one I wanted to talk about is actually more on the leadership side. I just wanted to recognize Bruce Chen, who is the recently retired CEO at CPChem.

Speaker 10

He did a really good job there, great leadership, great drive for excellence and he'll be missed. We have internal candidate, Steve Pruzak, who's assumed the role of CEO. Steve has been very successful in all phases of the chemical business, and we are highly confident in his ability to lead and take CPChem to the level of industry leading performance. So that I want to thank both of those guys. Now on the macro side, let me talk about that and then I'll get specific to CPChem.

Speaker 10

Macro, clearly the heavy light spread with regard to being light feed versus heavy feed, it's really been a boon to those that can crack the light feedstock, especially CPChem, who's well positioned, not only in the U. S. Gulf Coast, but in the Middle East. And so it's the advantage is pretty wide right now. And so they've been able to take advantage of it.

Speaker 10

In fact, the industry in the U. S, if you're cracking light, you like it. However, I will tell you, we are not at mid cycle margins. It has come off the bottom, which is good. A lot of that is really related to more about feedstock.

Speaker 10

So natural gas has come off, it's come down and subsequently ethane has come down with it as has some propane and butane as well. And so subsequently that gap has gotten bigger. And then anyway that's showing up. And then also the lower feedstock and natural gas relative to utility cost. So the combination of those 2 as well as just a little bit of support on polyethylene pricing, not a lot, but enough to help widen up that chain margin a little bit.

Speaker 10

So I think that's been good. We still think though that although we're off the bottom, we still think it's hard to see us getting to mid cycle anytime during 2025. But certainly, supply demand fundamentals as destocking goes, we do see that it's sometime after 2025, you can see it rebalance and then get back into a mid cycle environment. Specifically to CP chem though, I do want to highlight as well with them that they've had a couple of their mid cap projects that did come on stream late last year, C3 splitter, the 1 hexene unit and then they also added another furnace to one of the large crackers there. And 1 Hexene and C3, they're adding earnings in the Q1.

Speaker 10

So they're up, they're running, they have run at higher than nameplate capacity, which has been really good. And again, generating earnings that are showing up in CPChem's results. And we're in really a startup mode with furnace. That work is complete. They're starting it up, going through the normal shakedown you will have with those units.

Speaker 10

And we're hoping in 2Q you'll see something more material on the earnings side there too.

Speaker 2

Yes, Ryan, you're seeing live the last almost 25 years of what CPChem has done to position themselves to be able to run flat out at the bottom of the cycle and they did that and they did that profitably And so you're seeing rationalization of assets in Europe while they're running at flat out rates. And so that's encouraging from a CPChem perspective. We need to see that in this down cycle to see some of the less competitive assets come out of the system and that's going to be constructive and that will help accelerate the industry out of the bottom of the cycle and to greener pastures out in the next couple of years. And Mark to add on

Speaker 10

to that point, I think that's a great point is what you're saying is that a lot of your higher cost folks, they're running at reduced rates or they're shut down and extending maintenance or running at reduced rates. And we've even seen some facilities namely in Europe to announcements of 2 crackers that will be shutting down from some competition there because they're at the wrong place in the cost curve where CPChem is on the right place in the cost curve.

Speaker 8

Okay. Thank you very much.

Operator

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

Speaker 5

Hey guys, so you did a good job of explaining the variability in earnings quarter on quarter on refining. Can we go through some of that in the midstream? We saw a big variation on the NGL and other side. I mean transportation wasn't off that much, but help us understand what drove the variability in the second part of that business?

Speaker 10

Yes. Manav, thanks for the question. This is Tim Roberts again. And let me go ahead and address. I mean, first thing I want to lay out there is that last quarter on the earnings call, I talked about guiding towards $675,000,000 per quarter IBT and we're staying with that.

Speaker 10

I mean that still feels good, dollars 3,600,000,000 to the year. That's where we're at. So I just wanted to make sure we were that hasn't changed. Now if you look at 4Q and 1Q, 4Q was a strong quarter, okay? That was the first thing.

Speaker 10

You had some one time things that showed up in that Q4. And then in the first and in Q1, what impacted it and especially the variance, number 1, winter storm. So winter storm, it impacted us and impacted other people too. And really the impact was and I think it's worth noting, we're really not to our assets, it was to the producers. So we really weren't seeing the volumes come down the pipe due to freeze offs and a variety of other different issues.

Speaker 10

So it took a while for those volumes to get back up and get running again and then subsequently start working their way through the system. So about $30,000,000 impact there. And then also we had some commercial true ups from Q4 to Q1 commercial true ups, accruals and some inventory timing that showed up between Q4 to Q1. And so if you put those two quarters together, you really are getting in somewhere north of that $675,000,000 number where we're at. We think we'll be on a more normalized basis as we go into 2Q and you'll see some inventory timing issues will show up.

Speaker 10

It's not big, but some will show up in the Q2 as a positive. But generally, that's kind of how we look at it. We're still in that $675,000,000 is the right number as we see throughout the year.

Speaker 5

Perfect. My quick follow-up is on the diesel macro. We have seen some pullback in cracks. Wasn't fully anticipated because you expected Russia volumes to drop, which they did not. So I know Jeff does a lot of detailed work on this.

Speaker 5

So if you could help us with your crystal ball as to what's going on in the diesel world and do you expect the cracks to get stronger in the year?

Speaker 9

Hey, Rob. This is Brian Mandel. I would say that we've had a number of issues. We had a warm Northeast U. S.

Speaker 9

Winter then refiners came back and they were running really well from prices for diesel in contango. We have seen about 2 100,000 barrels a day of Russian distillate off the market. But we are constructive. We do think the market will come back. You're seeing starting to see run cuts in Europe and Asia with hydrocracking and hydro skimming margins at breakeven.

Speaker 9

As we move into driving season, we could see more gasoline mode and factor seeing gasoline over distillate on the coast in the U. S, East and West Coast that could drive less distillate moving to more jet production from diesel, particularly we're fixing to head into China's Labor Day golden week and we see real strong jet demand. And then continued issues, geopolitical issues, if Russia is hit again, that means diesel exports as well. So we think that things are going to look better coming out of kind of this trough here.

Operator

Thank you. Our next question today comes from John Royall of JPMorgan. Your line is open.

Speaker 11

Hi, thanks for taking my question. I had a follow-up on the retail sale in Europe. Are there any other assets on the international marketing side that might be less strategic that could shake out there? And on the U. S.

Speaker 11

Marketing side, is the majority of that business too integrated with the refining operations to separate? I'm just trying to get a sense of the strategic direction in marketing in light of this new sales process.

Speaker 3

Yes, John. From a Europe standpoint, the other marketing businesses are in Switzerland, where we have a joint venture with Coop and in the UK. And the 2 are very different in that the Switzerland business is somewhat of a standalone retail business, but it's also in a joint venture structure and so the dynamics are a little bit different around that. The UK, that marketing business is very integrated with our refining in the UK. So it's much more akin to the U.

Speaker 3

S. Model where the marketing business serves to help ensure product placement coming out of the Humber Refinery. And that's really the case for the U. S. Marketing business as well.

Speaker 3

It's very much integrated with the refining system across the different regions.

Speaker 11

Great. Thank you. And then my next question is on the West Coast. I think Mark sort of alluded to this a little in his response to Neil, but how should we think about the structural capture rate on the West Coast and how it's going to be different now with the Rodeo officially an RD unit and not a refinery? Should we expect it to be higher than what we've seen historically as a result?

Speaker 9

Well, you want me to start with that? Sure. You can

Speaker 6

come over the top. This is Rich Harbison. So there's a reason, John. We've gone to Rodeo and converted it into a renewable fuel stock. It has not been a meaning contributor to the earnings profile on the West Coast for quite some time now.

Speaker 6

So that looking forward to getting that change fully implemented. And then we do think that we'll have a marked change to the West Coast profitability. The Los Angeles and the Ferndale facilities will continue to operate and they've been good contributors to the West Coast. But I'll say in general, the West Coast is a challenging market to make money on the refining side of the business. Our Los Angeles refineries been challenged with the declining supply of California domestic crudes, which has taken away a lot of the original crude advantage for that facility when it was originally built.

Speaker 6

Now the TMX pipeline is opening up, so there's a change in the crude flow dynamics, which has a potential to have a positive impact on the Los Angeles facility. And we'll see how that dynamic works out here over the few months as these crude flows change around. But changing and pulling the Rodeo refinery out will have a marked change on the West Coast.

Operator

Our next question comes from Matthew Blair of Tudor, Pickering, Holt. Please go ahead.

Speaker 12

Hey, good morning. Are you able to share the approximate EBITDA contribution of those German and Austrian retail assets up for sale? And then, the cash from the sale, would that be earmarked for, like share buybacks? And if so, would that mean an increase to the $13,000,000,000 to $15,000,000,000 target?

Speaker 3

Yes. Matt, this is Kevin. The EBITDA, I'll give you the numbers that are on the information that we're providing to the prospective buyers. It's the range is €300,000,000 to €350,000,000 which the conversion for that is €325,000,000 to €375,000,000 If you pick the midpoint, dollars 350,000,000 of EBITDA is probably your best number to go with on that. In terms of cash generation, as we've previously stated, our cash return target of $13,000,000,000 to $15,000,000,000 was not dependent on proceeds from asset sales.

Speaker 3

So it does have the potential to increase that. But I would also say we haven't made any definitive decisions on exactly how that cash would be deployed. And also the timing is still quite uncertain at this point anyway. These processes usually take a while to run through. So that will be something that we will make a determination on near the time when that cash inflow becomes real.

Speaker 12

That's great. Thanks. And then the $180,000,000 hit in the Rodeo conversion, I think that's a little bit higher than what we were expecting. What drove that increase? And can you provide any sort of breakout on like how much of that was in gross margins versus OpEx versus depreciation?

Speaker 12

And then also, is it fair to assume that the current Rodeo plant is EBITDA negative since it's not running the low CIPs yet?

Speaker 3

So on the first question, we're not going to give that level of asset specific breakout. And I would say the $180,000,000 does not include the absolute loss on a GAAP basis is bigger number again because we had some impairments related to assets that are taken out of service. So the $180,000,000 is on the consistent with the way we report our adjusted earnings. And it does show up in the different areas, but we're not going to provide that level of line item breakout. The second question was around EBITDA while we're in ramp up mode.

Speaker 3

My observation and others will can supplement this is clearly when we're in ramp up mode, we're running the higher CI feedstocks. We don't yet have the full economies of scale because we're in ramp up mode. EBITDA generation is going to be challenged in the early phases. But as we go through that series of bringing all the units up, production coming up to the 50,000 barrels per day, the feedstocks migrating to the more the lower carbon intensity, we should start to see that transition into positive EBITDA contribution.

Speaker 6

Supported by sustainable aviation fuel.

Speaker 3

That's right. It's another uplift.

Speaker 12

Great. Thanks for your comments.

Operator

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

Speaker 13

Thank you. Hey, good morning, guys. I have to apologize that I want to go back into the West Coast. Can you share that what is the OpEx excluding Wandao? And also what is Wandao going to look like once it's fully ramped up in terms of the OpEx?

Speaker 13

That's the first question.

Speaker 3

OpEx excluding Rodeo, Yes, Paul, I think the best way to answer that is because we don't give that level of asset level detail out, but we will be providing more reporting transparency on a going forward basis that will enable you to see the kind of level of information that you're the questions that you're asking for. We will in future periods, we will be providing more transparency around the Rodeo Renewable Fuels business separate from West Coast Refining. And so I would just say, I know that doesn't help you in terms of modeling right now, but just watch this space because we will be providing more transparency around that.

Speaker 13

Right. And Calvin, can I ask that from the first to the second quarter, I understand that some one time OpEx related to a Dell transition in the Q1? So the OpEx, should we assume that it's going to stay at this level as the Q1 or that it's actually going to be down?

Speaker 3

It's probably down a little. There's still going to be an elevated element of that and there's some what we would classify as turnaround related costs associated with the conversion as well that will show up at Rodeo. So but the trend is downward. We're past the peak span, I guess, is the way to say it.

Operator

Our next question comes from Jason Gabelman of Cowen and Company. Your line is open.

Speaker 14

Yes. Hey, thanks for taking my questions. The first one is just on commercial performance. And I think you had discussed a desire to integrate different plans in terms of how you buy crude and sell product and try to maximize profitability across the portfolio rather than at a site level. I'm just wondering if you could provide an update on that journey and if you've seen any of that earnings benefit come through in the results.

Speaker 14

And then second, just a quick clarification. Can you remind us what your target cash balance is? Thanks.

Speaker 9

Hey, Jason, it's Brian Mandel. I'll give you some kind of flavor of our journey for commercial. Our commercial supply and trading organization is, as you know, an integrated global business. We have offices in Houston, Calgary, London and Singapore. And as you mentioned, our focus is now to fully optimize and capture the optionality of value embedded in all the assets and then to capture that kind of integration value between the various business segments to drive additional value for the company.

Speaker 9

Last year, internally, we announced a reorganization of our commercial group, the goal of reducing our back office costs and continuing to advance our capabilities and value generations. We've made some really strong hires this year. We also have a companion organization that we call Value Chain Optimization Group, BCO for short, whose function is to work across the integrated value chain to ensure that we ensure that we continue to make the best corporate general interest decisions. And ultimately, we're kind of focused on driving increased earnings, maximizing our return on capital employed and increasing the market capture for our refining segment and doing all this while thinking about continuous improvement and continually growing the business.

Speaker 3

And Jason on the cash number, the target cash balance same as we said in the past $2,000,000,000 to $3,000,000,000 We were slightly below that level at the end of the quarter. I'd also say the Q1 is typically a heavy drain on cash quarter. So as we look ahead, we're still very comfortable with that target level.

Operator

Thanks. And our final question today comes from Theresa Chen of Barclays. Your line is open.

Speaker 15

Thank you for taking my question. First on the near term outlook for capture in Q2 and maybe 3rd as well. Just thinking about the different moving parts, you have presumably less noise from the one time items impacting Q1, whether it be from turnarounds or Rodeo, but you do have WCS narrowing based on your sensitivity and the magnitude that we've seen to date that should be a sizable headwind. And then later, maybe with TMX ramping online delivering barrels to Pass V indirectly or directly, that should help your West Coast assets. Just help us think about how to reconcile these variables as we look to capture in the near term, please?

Speaker 2

I think at a high level, Teresa, we have laser focus on the things we can control and that's what we focus on and that's what Rich and Brian focus on. I think that the things out of our control would be speculative, but I think Rich can talk about what we're doing to and what we see over the next couple of quarters with respect to market capture potential and Brian can chime in from a commercial perspective.

Speaker 6

Yes. So Teresa, we talked this is Rich again. We talked a little bit about some of the headwinds on market capture, which when I think about market capture from a refining perspective, it's our clean product yield. So and then it's the products that we make. Are we moving up the product value chain on that?

Speaker 6

So Q1, certainly some headwinds with some downstream conversion unit turnaround activity. Good news is we've refreshed all that catalyst now and they're ready to run here. Some of that did bleed a little bit into the Q2, but as we roll into the summer driving season, you'll see our clean product yield and product values in about the best place we can put them. Now we continue to invest in these as well. We've seen over the last 2 years that we've completed a number of projects on this front and continue that program through this year as well with a target of increasing our market capture by 5% from a mid cycle basis.

Speaker 6

Through last year, we put projects in that have raised that bar by 3%, and we expect to close the balance of that out of the 5 this year with an additional 15 projects that are currently in construction at the sites. So when we think about the market capture this quarter at 69%, I see that as a lower part of our market and something to build on as we move through the rest of the quarter as the facilities come out of turnaround cycle.

Speaker 9

Andres, this is Brian Mandel. Just to add some color on the commercial side. I would say we're seeing this year gasoline and diesel roughly flat to last year in terms of demand. Jet fuel a little bit stronger this year. I talked about our commercial organization how kind of moving up that curve to take advantage of the optionality in our assets.

Speaker 9

We'll continue to do that. And then thinking about WCS, you made a good comment. I would say that WCS will remain volatile. We have the appetite. We can move around different grades, so we can run Canadian heavy, but we can run Canadian lights as well.

Speaker 9

We have an integrated system, a big commercial footprint. And if the WCS isn't favorable, particularly on our Gulf Coast plants or West Coast plants, we can switch to other grades such as Latin American grades and AG grades. So a lot of flexibility in our system.

Speaker 15

Got it. And if I could ask a follow-up related to Kevin's earlier comments about what the appropriate leverage is for the company and the commentary related to how some of your more cash flow stable businesses can bear more leverage. Can you just share with us what portion of your midstream business at this point? What portion of the EBITDA is paid by 3rd party customers and not Phillips Refining paying Phillips Midstream?

Speaker 10

Theresa, I'll have to go verify the number, but we're well into, I would say, it's 70% 65% to 70% third parties.

Speaker 15

Thank you.

Operator

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

Speaker 2

All right. Thank you all for your great questions. The market fundamentals that we're looking at are supportive and our assets are running strong since the completion of seasonal maintenance activities. Our integrated portfolio is well positioned to capture market opportunities and to meet the peak summer demand. We got a clear path forward to achieve our strategic priorities that support $4,000,000,000 of growth from our 2022 mid cycle adjusted EBITDA to our $14,000,000,000 target by 2025.

Speaker 2

We're confident in our ability to grow cash flows and create significant long term value for shareholders. Thank you for your interest in Phillips 66. If you have questions after today's call, please call Jeff or Owen. Thank you.

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Earnings Conference Call
Phillips 66 Q1 2024
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