Phillips 66 Q2 2021 Earnings Call Transcript

Quartr
Provided by Quartr
August 3, 2021

There are 17 speakers on the call.

Operator

Welcome to the Second Quarter 2021 Phillips 66 Earnings Conference Call. My name is Hillary, and I will 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 will now turn the call over to Jeff Dietert, Vice President, Investor Relations. Jeff, you may begin.

Speaker 1

Good afternoon, And welcome to Phillips 66 Second Quarter Earnings Conference Call. Participants on today's call will include Greg Garland, Chairman and CEO Mark Lascher, President and COO Kevin Mitchell, EVP and CFO Bob Herman, EVP, Refining Brian Mandel, EVP, Marketing and Commercial and Tim Roberts, EVP, Midstream. Today's presentation material 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 presentation and our Q and A session.

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 With that, I'll turn the call over to Greg.

Speaker 2

Thanks, Jeff. Good afternoon, everyone, and thank you for joining us today. In the Q2, we had adjusted earnings of $329,000,000 We generated operating cash flow of 1,700,000,000 Excluding working capital, operating cash flow was $910,000,000 With the benefit of our diversified portfolio, We generated cash flow in excess of capital spending and dividends during the quarter. We returned $394,000,000 to shareholders through dividends in the quarter. Since we formed as a company, we've returned over $28,000,000,000 to shareholders.

Speaker 2

A secure Competitive dividend will continue to be a top priority for our company, and we anticipate a return to dividend growth as cash flow recovers. We're committed to disciplined capital allocation, focusing on debt repayment in the near term to support a conservative balance sheet And maintain our strong investment grade credit ratings. In July, the Phillips 66 Board of Directors appointed Denise Cade And Doug Terreson to serve as independent directors. We continue to work on Board refreshment, recognizing the value Diversity in terms of gender, age, race, ethnicity, tenure, professional experiences And perspectives. We'd like to highlight our recent 2021 sustainability report that can be accessed on our website.

Speaker 2

We think it's one of our best ones yet. Our commitment to sustainability is based on operating excellence, environmental stewardship, social responsibility and financial performance Led by strong corporate governance. We expanded our commitment to environmental responsibility, setting goal for all of our refineries to achieve top third Energy efficiency by 2,030. We modified our compensation program to add additional environmental goals. As previously communicated, we will establish meaningful and achievable greenhouse gas emission reduction targets later this year.

Speaker 2

So with that, I'll turn the call over to Mark to provide some additional comments.

Speaker 3

Thanks, Greg. Good afternoon, and thanks to everyone on the call for joining us today. Continued improved demand across CPChem's product lines and resilient operating recovery from the Q1 winter storms contributed record quarterly earnings in our Chemicals segment. Marketing and Specialties reported strong results as demand increased in many of our key domestic regions. Our midstream Segment recovered well from the Q1 winter storms to report solid results.

Speaker 3

Headwinds continued in our refining segment as rent adjusted refined product cracks Only improved modestly and historically low market capture contributed to continued losses. As more people across The global vaccinated, we expect continued economic recovery and further improvement in global refined product demand. In addition, Permanent refinery closure announcements have increased to over 3,700,000 barrels per day globally with additional closure announcements expected. In midstream, Phillips 66 Partners continued construction of the C2G pipeline. The project is backed by long term commitments And is expected to be operational in the Q4 of this year.

Speaker 3

At the Sweeny Hub, we recently resumed construction of Frac 4, Which will add 150,000 barrels per day of capacity. Upon completion, which is expected in the Q4 of 2022, Total Sweeny Hoe fractionation capacity will increase to 550,000 barrels per day. The fracs are all supported by long term commitments. CPChem continues to develop 2 world scale petrochemical facilities on the U. S.

Speaker 3

Gulf Coast and in Rostefan, Qatar. We expect a final investment decision for the U. S. Gulf Coast project next year. The Ross Laffon petrochemical project is progressing with front end engineering and design as planned.

Speaker 3

Both projects are in partnership with Qatar Petroleum. In addition, CPChem began construction of its 2nd world scale unit to produce 1 hexene, Utilizing CPChem's proprietary technology. One hexene is used for high performance polyethylene manufacturing and is common in a variety of everyday products, including packaging for food, consumer products and pharmaceuticals. The unit located in Old Ocean, Texas We'll have a capacity of 266,000 metric tons per year and is expected to start up in 2023. In May, CPChem was recognized by the Plastic Industry Association for being among the top 2021 industry innovators in sustainability.

Speaker 3

The award recognizes CPChem's launch of Marlex's new circular polyethylene, which uses advanced recycling technology to convert plastic waste And the high quality raw materials. We continue to advance our Rodeo renewed project at the San Francisco refinery. In July, we reached full production rates of 8,000 barrels per day of renewable diesel from the hydrocreter conversion. Subject to permitting and approvals, full conversion of the facility is expected in early 2024. Upon completion, Rodeo will have over 50,000 barrels per day of renewable fuel production capacity.

Speaker 3

The conversion will reduce emissions from the facility and produce lower carbon transportation fuels. Rodeo combined with our portfolio of other renewable fuels projects has the potential to supply 1,000,000,000 gallons of renewable fuels per year. In marketing, we're converting 600 Brantail retail sites in California to sell renewable diesel produced by the Rodeo facility. In Switzerland, Our co op retail joint venture continues to add hydrogen fueling stations. Through our joint venture, we're exploring hydrogen as a fuel option for heavy duty vehicles To support European low carbon goals and growing demand for sustainable fuels, we're moving forward and preparing for the future while maintaining our focus on safe, reliable operations and attractive shareholder returns.

Speaker 3

Now, I'll turn the call over to Kevin to review the financial results. Thank you, Mark. Hello, everyone. Starting with an overview on Slide 4, we summarize our 2nd quarter results. We reported earnings of $296,000,000

Speaker 4

Excluding special items, we had adjusted earnings of $329,000,000 or $0.74 per share. We generated operating cash flow of $1,700,000,000 including a working capital benefit of $833,000,000 and cash distributions from equity affiliates $612,000,000 Capital spending for the quarter was $380,000,000 including $179,000,000 for growth projects. We paid $394,000,000 in dividends. Moving to Slide 5. This slide shows the change in adjusted results From the Q1 to the Q2, an increase of $838,000,000 Pretax income improved across all segments, With the largest contribution from chemicals, our adjusted effective income tax rate was 19%.

Speaker 4

Slide 6 shows our midstream results. 2nd quarter adjusted pretax income was $316,000,000 an increase of $40,000,000 from the previous Quarter. Transportation contributed adjusted pretax income of $224,000,000 up $18,000,000 from the previous quarter. The increase was due to improved volumes from higher refinery utilization, partially offset by higher costs due to the timing of maintenance and asset integrity work. NGL and other adjusted pre tax income was $83,000,000 The $47,000,000 increase from the prior quarter was mainly due to lower operating costs And higher volumes, reflecting recovery from the winter storms.

Speaker 4

The Sweeny fractionation complex averaged 380,000 barrels per day And the Freeport LPG export facility loaded a record 42 cargoes in the 2nd quarter. DCP Midstream adjusted pretax income of $9,000,000 It was down $25,000,000 from the previous quarter, mainly due to lower mark to market hedging results from higher natural gas and NGL prices. Turning to chemicals on Slide 7. 2nd quarter adjusted pre tax income was $657,000,000 Up $473,000,000 from the Q1. This is the highest quarterly earnings for chemicals since the joint venture was formed in 2000.

Speaker 4

Olefins and polyolefins adjusted pretax income was $593,000,000 The $419,000,000 increase from the previous quarter was driven by The industry chain margin increased over $0.17 per pound to a record $0.62 per pound. Global O and P utilization was 102% for the quarter. Adjusted pretax income for SA and S increased $55,000,000 The increase primarily reflects improved margins Due to tight industry supplies following the winter storms as well as lower turnaround costs. During the Q2, we received $322,000,000 in Turning to Refining on Slide 8. Refining's 2nd quarter adjusted pretax loss $706,000,000 an improvement of $320,000,000 from the Q1.

Speaker 4

The improvement was driven by lower utility and turnaround costs And higher volumes. This was partially offset by lower realized margins. Improved market crack spreads were more than offset by higher RIN costs, Lower electricity sales in the Texas market decreased secondary product margins, lower clean product differentials and inventory impacts. Pre tax turnaround costs were $118,000,000 down from $192,000,000 in the prior quarter. Crude utilization was 88 percent compared with 74% last quarter.

Speaker 4

The 2nd quarter clean product yield was 82%. Slide 9 covers market capture. The three-two-one market crack for the 2nd quarter was $17.76 per barrel compared to $13.23 per barrel in the 1st quarter. Realized margin was $3.92 per barrel and resulted in an overall market capture of 22%. Market capture in the previous During the quarter, the gasoline crack improved $5.68 per barrel, while the distillate crack increased $2.20 per barrel.

Speaker 4

Losses from secondary products of $2.38 per barrel were $1.09 per barrel higher than the previous quarter As crude prices strengthened, feedstock costs improved $0.36 per barrel compared to the prior quarter. The other category reduced realized margins by $7.84 per barrel. This category includes RINs, freight costs, Product Realizations and Inventory Impacts. Moving to Marketing and Specialties on Slide 10. Adjusted second quarter pretax income was $479,000,000 compared with $290,000,000 in the prior quarter.

Speaker 4

Marketing and other increased $181,000,000 due to higher domestic margins and volumes, reflecting strong demand in key markets. Defined product exports in the Q2 were 216,000 barrels per day. Specialties generated 2nd quarter adjusted pretax income of $87,000,000 up from $79,000,000 in the prior quarter. Slide 11 shows the change in cash for the quarter. We started the quarter with a $1,400,000,000 cash balance.

Speaker 4

Cash from operations was $1,700,000,000 This included a working capital benefit of $833,000,000 In June, we received a $1,100,000,000 U. S. Federal income tax refund, Which is reflected in working capital. Cash from operations, excluding working capital, was $910,000,000 Which more than covered $380,000,000 of capital spend and $394,000,000 for the dividend. The other category includes a $90,000,000 loan to our WRP joint venture.

Speaker 4

Our ending cash balance was $2,200,000,000 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, Crude utilization will be adjusted according to market conditions. In July, utilization averaged around 90%.

Speaker 4

We expect Q3 pretax turnaround expenses to be between $120,000,000 $150,000,000 We anticipate Q3 corporate and other costs Between $240,000,000 $250,000,000 pretax. Now we will open the line for questions.

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. Your first question comes from the line of Neil Mehta with Goldman Sachs.

Speaker 5

Good morning team. Thanks for taking the questions. The first one is just on chemicals. And Mark, this might be for you. Kevin indicated that the indicator was $0.62 which is very robust and above mid cycle In Q2, how do you see it playing out in July August so far?

Speaker 5

And just any thoughts on what the Mid cycle number has been I think you guys have been in the $0.25 camp if I remember. Is that view changed in light of

Speaker 3

Yes. Thanks, Neil. It's a great question. We're still consistent on our mid cycle margin projection. And of course, we're well above that today.

Speaker 3

And as we look out into the Q3, we're seeing the strength continue in the Q3. We've got And we think that, that can carry into Q3. There's a lot of strength in the marketplace, particularly in North America and in Europe. Asia is still kind of lagging, but starting to perk up a little bit. So the real story is the fundamental economic resurgence in the U.

Speaker 3

S, in North America and in Europe. And we believe that there's some upside that will offset some headwinds out in the future as the rest of the global economy kicks in. We're at record margins. Nobody believes those are sustainable for the long term. However, I think we can go from something At the record level, this is something that's still pretty robust.

Speaker 3

We see seasonal downturn typically in the 4th quarter, But we've also seen conditions where we can kind of carry through when there's strong enough marketing momentum, and there may be those kind of conditions now. We're particularly focused on high density polyethylene, And that's still pretty tight in the marketplace. The inventories have not recovered to where CPChem would be comfortable operating, and it's unusual to Be there this time of year with hurricane season. We typically want to be a little higher in inventories going into hurricane season. So there's a number of factors that could lead to Sustain this momentum into the Q3 and beyond into the Q4.

Speaker 3

And then we see the world economy kicking in about the same

Speaker 6

time additional capacity is coming

Speaker 4

on, say, first

Speaker 3

half of next year. So there's is coming on, say, first half of next year. So there's some good fundamentals out there, and I think it's still got some legs Based on the demand that will come to bear as the world economy fully recovers from COVID.

Speaker 1

Neil, we talk about mid cycle kind of being the 2012 to 2019 average. And if you look at the IHS Polyethylene full chain margin, it's averaged about $0.30 per pound.

Speaker 5

Okay. $0.30 per ton. Okay, that's all great. And then the follow-up, Greg and Jeff, this is for you, is just thoughts on the refining side of the equation. If the refining system if you told me the refining system was running at these type of levels, I would have thought that Phillips 66 Would have been making pretax profit in the refining system.

Speaker 5

And so, is the U. S. Refining system running too hard. And how are you guys thinking about your own utilization as you get into the fall?

Speaker 3

Yes. Neil, this is Bob. I'll take the question. I think when you look back over the last quarter, right, I think there were plenty of market signals there For us to run at the utilization rates we're at. There's a lot of moving parts, in particular the Costa RINs that just continued to increase throughout The quarter, right, and we take a pretty good hit in refining for the full cost of those I think we would have all expected maybe on a global basis, Europe and Asia Demand ticked back a little better than it did.

Speaker 3

I think the margins, the rent adjusted margins that we saw in the second quarter Really across our system are very representative of a global market. So until we start seeing recovery, particularly in Europe, Because we seem to see product flowing out of Europe into North America and South America, we won't really see RINs get back to where We would like to, Tim. I think the second piece for us in particular is our kit is more geared towards heavy crudes making diesel. And certainly for the Q2, it was a gasoline driven market without much differential On heavy crude, we've seen those widen out here now in July to a much more respectable level. So we think it's headed in the right direction.

Speaker 3

But I think all of that added up to being challenged in the Q2 to turn a 90% type utilization number Into a profit.

Speaker 2

Brian, you want to comment on what we're seeing today in the market?

Speaker 7

I think in terms of the heavy dips and Sourdips, we've seen them start to expand LLS to Mars is 2 L's wider since the beginning of the year, WTI to Maya is 2 L's wider Since the beginning of the year, so I think we have some tailwinds that are going to help us in the Q2. We expect distillate cracks To perform as we get toward winter time. So all in all, I think we've also seen actually markets overseas come back. We have marketing in Europe and we've seen Europe, Germany where we market 90% to 95% of demand, Austria where we market 100 percent of demand, so we've seen those markets come back as well. So as Bob said, if the overseas markets start to come back, That will help the U.

Speaker 7

S. Cracks and we should see some profitability in Q3.

Speaker 1

One thing I might add is if you look at the IEA, EIA, OPEC

Speaker 5

projections, we were kind of shy of 95,000,000

Speaker 1

barrels a day in Objections. We were kind of shy of 95,000,000 barrels a day in 2Q, projected to get to 99,500,000 barrels a day by the end of the year. So expectations for demand to continue to improve in

Speaker 5

the back half of the year. Great, guys. Thank you.

Operator

Your next question comes from the line of Roger Read with Wells Fargo.

Speaker 8

Good morning or afternoon as the case may be, I guess now. Jumping back to Feining here.

Speaker 2

I guess one of the

Speaker 8

questions is, it's obvious that things should improve, but is there anything internally that Philips Has done or would plan to do to kind of help out on the margin front, just thinking of Any additional changes within your own system or anything else that might be there part of the 12th Advantage Program that was laid out almost 2 years ago now.

Speaker 3

Yes, Roger. I think there's a couple of answers to that question. One internally right. We expected Tough operating conditions for a good part of this year. Recovery has been slower than we expected, but we went into this year trying to reduce some of our heavy maintenance expenses and Adjusting turnarounds and all that.

Speaker 3

And so the guidance Kevin just gave, right, for the Q3 is fairly light for us. So I think that helps heading into the 3rd quarter profitability. You can translate that as we're available to run. So if the cracks are there, We're going to be able to run pretty hard in the Q3 and make money. Around the Advantage 66 program that we laid out, So a lot of that is built around margin enhancement, margin improvement.

Speaker 3

So I would tell them, I think we ran pretty well in the second quarter, and we're Using all those tools that are in our toolkit, the value chain optimization activities that went on in the second quarter We're pretty robust. We did a lot of things that we haven't done before or needed to do before, such as we ran a lot of resid Down into our squina refinery, where typically we'd be running Maya or some of the heavy Canadians, The profitability really wasn't there, and so optimizing around high sulfur resides into our system is just one example about Well, we're kind of running the circuit. So we're pretty happy with the results we're seeing on the operating front. A lot of our initiatives in refining are around being able to operate well, operate better, operate safer with a smaller environment And we're seeing value come out of all of those initiatives. They don't necessarily translate directly to the bottom line where you can see them, But over time, they're paying dividends.

Speaker 2

Roger, I think when I think about kind of Q2 and maybe even Q1, We've had quite a bit of planned FCC downtime this year. So if you look at our yields Relative to historical year, we're probably down 2%. And so we're just simply going to run better in the Q3 and Q4. I think Bob said things tuned up that we're ready to do that. So I think that's one of the things that we're focusing on right now also.

Speaker 8

Okay, great. Thanks. And then one thing that was definitely nice this quarter generating enough cash flow to Cover all the outflows. I don't know, Kevin, this question is for you, but as you kind of look budgeting for the back half of the year, things Are as they are today, think that we've pretty much turned the corner on the COVID world and

Speaker 7

Phillips will be in

Speaker 8

a position to improve the balance sheet, start taking some of the debt down as we go through the next, say, 2 to 4 quarters?

Speaker 4

Yes, Roger, certainly would expect to be able to do that. I mean, obviously, we're not back at mid cycle cash generation yet, which is really going to be our sort of key So the marker in terms of truly being able to get the balance sheet back to where we need it to be, but it's certainly Nice improvement from where we've been. And with the cash balance and if we continue to build that over the course of the year, we should be able to start making some inroads into that next year. And as you know, as we've talked about before, we have a lot of flexibility around debt reduction Given the profile of the maturities that we have starting next year and some of the callable debt that we have in place, so a lot of flexibility on that front.

Speaker 8

Great. Thank you.

Speaker 4

Thanks, Roger.

Operator

Your next question comes from the line of Doug Leggate with Bank of America.

Speaker 9

Thank you. Good afternoon, everybody. James, I wonder if I could ask you how when you go through a cycle like this, And obviously, a downturn. What one imagine is that you're stress testing all the assets in the portfolio. So I guess it's kind of a follow-up to Roger's question.

Speaker 9

Do you see any weak lates in the portfolio today that you think might be revisited in Chinese portfolio structure, specifically on the Chinese side? I'm mostly thinking specifically about the Atlantic basin.

Speaker 3

Yes, Doug, this is Bob. Yes, I guess I would say that We spend a fair amount of time every year stress testing and looking at every one of our assets and where do we think the future of that asset lies. And in a bigger picture context to not just the refining asset, but the rest of our value chain around it, right? How much marketing are we supplying in the area? We've got mid Commercial is trading around many of our assets, particularly on the coast.

Speaker 3

So we look at a much more holistic And quite frankly, we have a deck that we think is a long term deck, considering what we think the future And we look at our assets in that context. So they are assets at the end of the day, and so we're always looking Upgrade or find more ways to make money on any given asset from year to year?

Speaker 9

We will watch with interest as that evolves. I guess, my follow-up maybe for Kevin. Slide 9, you gave a fairly clear description of how you realize margin has evolved this quarter. 784 Delta, can you maybe walk us through how much of that maybe you can dig into a little bit

Speaker 10

more detail as to How much

Speaker 9

of that is truly transitory that we should expect to address?

Speaker 11

And I'll leave it there. Thanks.

Speaker 4

Yes. Doug, so the largest single element within that 784 other Is the RIN cost that as Bob referenced earlier is that that expense is borne by refining and so it is Half or slightly more than half of the total within that other. Most of the other items in there Well, RINs is always in there. Obviously, RINs costs were particularly high during the quarter. Product differentials, which is the difference between the market Indicator and actual product realizations, that one can move around and go both directions on us.

Speaker 4

During the quarter, we those differentials, we were not getting Seeing the value for some of those premium products that often can be a benefit to us in the quarter. So that's one that can Move around and come back the other direction. And then the other component that's also in there, again, it can go both directions, is inventory impacts. And so inventory was a hurt to earnings in refining in this particular quarter, but that can move in both directions.

Speaker 9

So Tim, just to be clear, the configuration, so your different slate And product mix, that's not in configuration, that's in other or how should we think about that? I'll start with the configuration.

Speaker 4

No, the configuration reflects The 321, so 2 thirds gasoline, 1 third distillate in the market indicator versus what we actually produce by way of gasoline And distillate. In other, you've got the actual pricing for those products, including whether it's Premium gasoline and other premium products that can often be an uplift relative to the standard market indicator, but in this period, they were not.

Speaker 9

Great stuff. Appreciate the explanation. Thank you.

Operator

Your next question comes from the line of Phil Gretsch with JPMorgan.

Speaker 12

Yes. Hey, good afternoon. Greg, in the past you always have normalized earnings potential across the various areas of the portfolio. And I'm curious how you think about Refining's normalized EBITDA potential now that we've kind of gone through this COVID cycle. Is there anything that haven't gone through this That has changed your view.

Speaker 12

I think there's a $4,000,000,000 EBITDA number that you've thought about in the past.

Speaker 2

Yes. No, I think in 2019, we laid out kind of a $4,000,000,000 EBITDA number and that at the time was kind of a 12 to 19 Average EBITDA for our refining business. I don't think we're ready to sound a retreat yet on mid cycle and refining. So it's been if you go back All the way back to the Q1 of 2020, that's the last time we actually made money as a company. It's been a long haul as we've kind of come through this.

Speaker 2

There's no question. There's been a lot of stress put on a lot of companies in our industry. So but I think we're constructive quickly as we come in the back half of the year around demand. This has been a story of vaccinations, efficiency, lockdowns and people trying to get back to sun somewhat to normal, And that all translates directly into the demand that we see for our products. And there's no question, I think, the U.

Speaker 2

S. Is probably led in terms of demand recovery through this cycle. And so we've seen the impacts of Europe coming to the U. S. We've seen the impacts of not being able to As much as we'd like to, to South America and places.

Speaker 2

And so I think as that world returns to normal, we've got a good shot at getting back to something that looks More like a mid cycle. I think we said on the last call, we really need to see that 3.2.1% crack On a rent adjusted basis, get back to about $12 And then I think we'll see the appropriate kind of market captures around that. We'll generate something around $4,000,000,000 Jeff, I don't know if you've got it you want to add anything on that.

Speaker 1

Yes, I think you guys have hit on the demand side of the equation. We are seeing refining rationalization, 3,700,000 barrels a day of announced closures, 800,000 barrels a day of Temporary outages that could become more permanent, and we're up to about 1,700,000 barrels a day of capacity that's been Announced as considering either terminals or other types of service or potential shutdown. So That rationalization is a big piece of it as well. And I think we're expecting

Speaker 2

more

Speaker 1

closures to be announced.

Speaker 12

Got it. Okay. In the press release, there's a mention of returning to dividend growth as cash flow recovers. So I was hoping maybe you can lay out the priorities in terms of where you want that balance sheet leverage to get to Before you would reconsider dividend growth and Kevin, just quickly, I think you said $1,100,000,000 for the tax refund In the Q2, is it still $1,500,000,000 for the year?

Speaker 4

So in terms of the tax refund, You're right that it's about $1,500,000,000 total. We received $1,100,000,000 There's another $350,000,000 or thereabouts, But we don't expect the remainder to be a 2021 cash item that will roll into Next year. So for a variety of reasons, that's not going to be cash this year, although it still will realize itself Over time, 1st on that. And then in terms of dividend growth, I think we go back to the earlier comments around As cash generation recovers to something around about mid cycle and we're in a position to pay down debt, we're making progress on pay down debt. We've got sort of clear line of sight to our ability to continue to do that and get the balance sheet back to where we want it to be, Then we should feel comfortable on some of the other capital allocation priorities and increasing the dividend is one of those.

Speaker 4

So I think it's a little bit of a long winded way of saying we don't need to get to all the way we want to all the way we want to get to on the balance sheet before we Make a decision on the dividend. We just need to be very comfortable that the structure is there, the cash generation is there, we're making the progress We need to make, and therefore we'll be able to signal that, in terms of our confidence to shareholders with the dividend.

Speaker 2

Yes, I think it's important. I think overriding, we do want to Protect the BBB plus A3 rating. So we think a lot about that and I think our mono post is Starting to approach mid cycle earnings for our company, as you know, dollars 6,000,000,000 to $7,000,000,000 of cash flow in mid cycle and It gives us plenty of cover to do the things we need to do. I think we've said in previous calls, we kind of expect CapEx The next couple of years will be $2,000,000,000 or less. And so you think in the context of $6,000,000,000 to $7,000,000,000 of cash flow, a Total capital program of $2,000,000,000 $1,600,000 dividend, then I think we'll have plenty of room to do the things we want to do around bringing the balance sheet into order, Thinking about capital return to our shareholders to dividend increases and share repurchases.

Speaker 12

Thanks a lot.

Operator

Your next question comes from the line of Paul Cheng with Scotiabank.

Speaker 11

Hey, guys. Good afternoon. Two questions. Greg, I think if I look at your NGL business, this quarter, Your EBITDA around $135,000,000 In 2019, the average quarterly EBITDA is about $170,000,000 But we have Fashionator 2 and Fashionator 3 come on stream and actually have the full operation, Which probably should at least contribute $30,000,000 $40,000,000 a quarter in the EBITDA, if not more. So China reconcile that if the market condition really changed that much or that gets that much Because NGL price is actually very good in the Q2.

Speaker 11

So maybe that someone can help us on that. The second question will be just a real quick one. On the renewable, the full tank conversion, Just want to see if there's a permit status that you can provide. And also that the last couple of years, you guys have been Trying to rebrand the work process and go forward digitization. And so just want to see if you can give an update Where we are on that is that pretty much that bandwidth what you guys aim from a couple of years ago.

Speaker 11

I think at the time that The cost savings target was pretty high, but with the pandemic, I mean, everything get I think all get messed up. So it's very difficult to reconcile. So maybe that you can give us some update.

Speaker 1

Okay. Let's start with the NGL.

Speaker 6

We got a lot of time left here. Yes.

Speaker 13

Paul, this is Tim. On your NGL question, yes, I'll tell you what, first thing I would say is in 2019, I wish we were back in that macro. That was a good time with regard to the overall supply demand fundamentals. Global demand was where you wanted it to be on really all of our midstream products, Whether it's crude, products and NGLs. So fundamentally, there are big changes in the market.

Speaker 13

But when you look specifically at 2021, Let me just highlight a couple of things for you there that are have reared your head. The biggest one that's had the biggest impact is Winter Storm Yuri. When you look at Yuri, it impacted our frac significantly down there. And mainly not from the standpoint of damaging the units or any issues there, Even though we did have some costs with the units, it was on utilities. Our utility bill was significant.

Speaker 13

So from that standpoint, And that's going to be hard to call back for the rest of this year. So on a positive note, I'd just tell you, structurally, we like the NGL business. Demand has been very robust, to support chemicals growth both locally and globally. NGL production is ramping up. We still see about 1,000,000 barrels in rejection at this point in time.

Speaker 13

But overall, demand is really good in that space. Our LPG exports So overall, the fundamentals feel good, but it was a big cost hit as well as loss production hit that we had initially In 1Q, which really on a year to date basis stays with us. The last thing I'd just cover in 2Q, the overall Structure in NGLs has jumped up significantly as you probably are well aware. Propanes, butanes and ethane, We're at about $0.86 $0.87 on a gallon basis for NGL on a composite. In 2019, it was $0.37 So it's gone up and with that we've seen an impact on some mark to market we have in some of our inventory.

Speaker 13

So that's there. That usually turns into a timing issue, but just nonetheless, that shows up

Speaker 3

in the results in 2Q.

Speaker 11

How big is that impact on the mark to market in the second quarter?

Speaker 13

I'm going to guesstimate right now. I don't have the number right in front of me. It's around $10,000,000 $11,000,000

Speaker 3

And Paul, it's Bob. I think your second question was around the permitting status that Rodeo renewed and the conversion out there as a refinery You're running renewable fuel. So we continue to develop the environmental impact statement with Contra Costa County. I would characterize that has gone about as well as it could, better than we expected. We're essentially done writing the permit.

Speaker 3

It's In review right now internally with the county and we would expect them to probably sometime this month release the permit to begin the public comment period. So that would be pretty much right on our timeline, maybe a little bit ahead. And so far, it's been a good Cooperative process with the regulators and their permit writers. So we're encouraged and pretty happy Where we are, we continue the outreach with all the other stakeholders in Contra Costa County and Northern California to make sure everybody understands what that project is going to do For the Bay Area and for California in general, so far so good.

Speaker 14

And then Digitization. Yes, 3rd piece,

Speaker 3

I think, was a question around $56,000,000 in cost reductions. And you're right, in a year like

Speaker 1

2020, it's

Speaker 3

hard to see it. But I would say we've been able to deliver Within bounds of the environment on both sides of the equation, so we've had good optimization opportunities Around reduced utilization in our refineries and our ability to get down as low as we did and to make jet go away and all those, I think we're much easier because of some of the efforts we had. The second piece I would say is, at the height of COVID, when we had Social distance and we had to use alternative work approaches and everything. Our early jump into digitalization allowed our people to get a lot more done Without human contact and really was a dividend to us upfront in our ability to keep supporting the operators who were on the unit Minimizing contact with the outside world. And then 3rd piece is we were able to hold the line on cost quite well throughout last year.

Speaker 3

And in fact, we saw cost reductions In many of kind of our bigger cost items, caps and chems and those sorts of things that That are a big piece of our operating budget. We applied some of the learnings that we got through 8,66 to those and I think we got sustainable longer term price reductions there that will continue to pay out throughout this year. So Kind of full steam ahead on all our initiatives there, particularly in refining.

Speaker 2

Yes. Paul, I might just come in and just say, I mean, we're never done on the controllable cost side of our business. There's more work we've got to do in terms of continuing to address costs. That's what you do in a commodity business. When I look at the controllable costs Through the 1st 6 months this year relative to 1st 6 months of last year, we're up about $300,000,000 Almost all that's energy costs in Q1.

Speaker 2

And so if you You adjust for the energy component. We're kind of holding the cost savings we were able to achieve last year, but that's not good enough. There's more work for us to do around the controllable cost So hopefully, you got all those questions answered. Thanks, Paul.

Operator

Your next question comes from the line of Theresa Chen with Barclays.

Speaker 15

Hi, there. Thanks for taking my questions. I guess first, just on the topic of global refining Past the closures going forward, I'm curious to hear about your outlook for the European market in general given your exposure there. And During the quarter, the macro data looked weak for a good portion. Now we're seeing some strengthening there and hearing Same news of operators with starting units and calling back workers.

Speaker 15

Just curious to hear about how you see that evolving in the closures landscape?

Speaker 1

Yes. So I think Europe has been one of the most challenged market in the first half of the year, Lower margins and lower complexity, I think the demand has been slow to recover there. We are seeing some improvement, but it looks like one of the more challenging regions. I think we've seen continued weakness in Latin American Refining utilization as well that could be a challenged area also. And I think there was an expectation for a stronger summer than what we've actually had.

Speaker 1

And as we come into the fall, that's typically where we see more closure announcement I would say the weakness and we pointed this out,

Speaker 7

the weakness in Europe has translated to weakness in the U. S. On our refinery margins. We've seen typically 100,000 barrels of diesel imports into the U. S.

Speaker 7

This year. We've seen 200,000 barrels of diesel imports into the U. S. From Europe. We expect as Europe comes back from COVID lockdown that those increased barrels will stop.

Speaker 7

We saw high imports of gasoline from Europe as well. We believe that that will stop Europe comes back from lockdowns. We've seen it already taper off. So all those things when finally, complex comes back in Europe and The lockdowns decrease, we'll see the U. S.

Speaker 7

Also strengthen.

Speaker 15

Got it. And then just on the crude side, What if can you talk to us about your medium to long term outlook for WCS differentials in light of And Bridge's Line 3 replacement project coming online in the 4th quarter. Should that, I'll ask equal narrow the differentials To the Mid Con, and subsequently when we think about Capline reversal happening later on, can Can there be a situation where you see the St. James market being flooded with incremental heavy barrels, which could actually help your Gulf Coast facilities, While the Mid Con would be a little weaker with narrower structurally narrower WCS present, how do we see That thematic development playing out.

Speaker 7

So I would say on the WCS, we have seen differentials come off Quite a bit. We've got 4,500,000 barrels on each leave Canada currently. We have about 4,400,000 barrels of pipeline Egress of another 100,000 barrels on rail. What we've seen, which is something a little different from what we've seen in the past couple of years, we've seen the WCS Differential on the Gulf Coast weakened. It's weakened about $2.5 over the past couple of quarters.

Speaker 7

And when that weakened, so does hardest in WCS differential is you have to have an arb to get the barrels to the Gulf Coast. And one of the reasons the Gulf Coast is weakening It's because low exports means that you have to have a weaker differential on WCS to get that WCS exported out of the U. S. So as you said, Teresa, we have Enbridge coming online in next quarter or quarter 4. We would think that, that would firm up differentials a bit, but don't forget, in the wintertime, we add diluent To the crude, and that also increases the volume of crude that has to move.

Speaker 7

So our view, our forecast That you'll see a differential somewhere between $12.5 $13.5 off of WTI

Speaker 6

Going forward.

Operator

Thank you. Your next question comes from the line of Manav Gupta with Credit Suisse.

Speaker 10

Hey, guys. I wanted to focus on the rodeo conversion. We're seeing 2 trends out there. One, our guys who are not building a pretreat and their cost is varying between 1 to 1.50 a gallon. And then there are guys who are building the pretreat and their cost is varying between $3,000,000 to about $3.50 a gallon.

Speaker 10

You make 5 standard deviations from it. You are the only one who's building your pretreat and your cost is $1 a gallon. So help us understand what is special about this I'm not trying to question. I'm sure you'll get there. But why is it so unique that you can pull this off and nobody else can?

Speaker 3

So, Savan, Bob, I agree with you. We will get there. So what really sets up our day out completely differently, one is Full plant conversion, so we have all the kit available. And we have 2 very high pressure hydro crackers that we can put into service. And to convert those units from where they are today to being able to run renewable diesel is actually a very low cost Part of the project.

Speaker 3

So most of the cost of that project is in either the logistics piece and then the big chunk is the free treaters So I think that's what allows us to be able to have a unique position of building a project that's going to be at an installed cost of about $1 a gallon, which You're right. It's lower than anybody else, but it is because if there was a refinery that was custom built to be able to Be converted to renewable feedstocks for Rodeo is it since it's very, very unusual to have 2 hydrocrackers and excess hydrogen capacity on-site between our own hydrogen plant and And that of our 3rd party supplier that is built at the site. So we've kind of got a perfect storm there. So we're spending money to get all the logistics right, A little bit of meddling up in the hydrocrackers and in the pretreatment unit, and we'll be ready to go.

Speaker 10

Perfect, sir. I have just one quick follow-up. I think the pandemic somewhere changed the nature of people as when it comes to the use of plastics, and that could somewhere be permanent. I'm just trying to understand, you have these 2 crackers, which were kind of put on a back burner. You can bring them forward, FID them.

Speaker 10

I'm just trying to understand, let's say, you do decide that. From the point of FID, how long will it take to get the first one and the second one? So If this change is permanent and the demand for plastics is in an upcycle, you can capture a part of it.

Speaker 3

Bob, we agree that the fundamentals have improved dramatically since we initiated these projects. And as I noted earlier, The U. S. Gulf Coast 1, we're looking at FID next year and the Qatar project is about a year behind that. And You can target about 4 years from FID to start up.

Speaker 3

And as we believe though we don't try to market time these investments We do believe that window is a particularly good window to pursue something. So we've got our foot forward on these. We are ready to move and we're working with Contractors to make sure that we're getting the capital cost right. Clearly, the global markets are improving, but There's still some disruption in the world economy. We'd like to see a little clearer path to a fully resolved economic recovery from COVID, Yes, we get the Delta variant and any other variants behind us, but we are leaning in and ready to move with FID on that project next year.

Speaker 10

Thank you so much for taking my questions.

Operator

Your next question comes from the line of Matthew Blair with Tudor, Pickering, Holt.

Speaker 6

Hey, good morning. Thanks for taking my questions here. First is on chems. Could you share some color on the PE inventory picture? The industry data shows that PE inventories have really ballooned up to new highs, but in your release talked about tight Slides, Lyondell and Dow also say the inventory is pretty tight.

Speaker 6

So if something you could just explain the disconnect there?

Speaker 3

Well, one of the disconnects, Matthew, is the looking at just the gross inventories versus the days of sales of inventories because demand has increased Almost 6% in North America, and so that's important. And then you also have to parse it out by kind of polyethylene because High density, linear low density, low density all have different inventory levels and different applications. And we're Heavily exposed to high density and high density is particularly tight supply now and uncomfortably tight. It's been building. CPChem ran at 102% of their capacity in the 2nd quarter, so they really delivered From an operational excellence perspective, but much of that went into rebuilding those inventories.

Speaker 3

So even though they had such a strong quarter, a lot of those A lot of production went into inventory, and they're still not where they would comfortably be heading into a hurricane season. They like to be prepared for that. They don't Plan to have a hurricane, but they're prepared if there are hurricanes to impact that. So I think that's where you're seeing the tightness. It's really from a day of sales perspective With the high growth in demand in North America as well as where we are in the weather cycles in North America.

Speaker 6

Sounds good. And then California LCFS data showed that combined RD and biodiesel blend rates In the state, we're about 35% in Q1. It seems like that number is only going to move higher going forward. But I was wondering, Are you feeling a pinch on placing your diesel out

Speaker 3

of the Los Angeles Refinery?

Speaker 6

And what are your long term options here?

Speaker 7

No. Most of our diesel and the Los Angeles refinery goes out of state, out of California. So that's a non issue for us there, Matthew.

Speaker 5

Got it. Thank you.

Operator

Your next question comes from the line of Jason Gabelman with Cowen.

Speaker 14

Yes. Hey, thanks for taking my questions. I wanted to ask 2 specific to the quarter on refining earnings Related to RINs, it seems like marketing earnings increased a decent amount this quarter and refining is still Kind of in the doldrums in part 2 to RINs. And I understand there's some accounting and value split between The RIN benefit in marketing versus the cost in refining. So can you just talk about maybe how RINs benefited marketing This quarter and how much of your rent exposure is being minimized by blending And pass through consumers.

Speaker 14

And then the second question just also on the quarter quickly, co product realizations I know We're relatively larger than normal headwind. How is that looking 3Q quarter to date so far? Thanks.

Speaker 7

So Matt, this is Brian Jason, this is Brian. I'll start off on the RINs question. Our view is that the RINs are in the crack. It's a cost that refining pays and that The crack is passed on the value of the crack is passed on to the consumer who pays for the RIN at the pump. So marketing doesn't see any benefit From the RINs per se, there may be some leakage in that chain, but marketing doesn't really see any benefit.

Speaker 7

Marketing did have a really very Strong quarter in Q2. And a large part of that was we had kind of the right portfolio in the We saw demand jump up in March and then again in June. We have a strong presence in the Rockies and in the Mid Con where there were less COVID And more movement. We added, as you know, retail in late 'nineteen and also in 'twenty on the West Coast, net retail has done better than premised. We also added retail this year in the Mid Con and Rockies and that retail is doing better than Premise.

Speaker 7

And finally, I'd add that we've been reimaging the stores for the past 3 years, we're up to 85% of the stores reimaged and we've seen the 2% to 3% jump in volumes and margins in those stores as well. So We've done a lot of things to help our portfolio portfolios in the right spots. And so I think that's where we saw the value in marketing in Q2.

Speaker 12

I think on the

Speaker 1

secondary products within refining, they typically Get squeezed in a rising oil price environment and improve in a declining oil price environment, and we're kind of 4 quarters In a row of rising oil prices here. So I think that's the biggest variable driving that secondary product Martin?

Speaker 3

Yes. I would agree 100 percent with Jeff. And usually, we hit this time of year, too, we start seeing a little bit of a little help in those secondary products because of the coke we make ends up in the asphalt market then this time of year, right, as people are up fixing roads and bridges and all those things, and that's offset a little bit. But We quit blinding the UK in the back half of the second quarter, comes back again in September. So there's a lot of moving parts in there.

Speaker 3

But I would think we're probably this is kind of the maximum we

Speaker 4

would see for this type of oil price.

Operator

And your next question comes from the line of Ryan Todd with Piper Sandler.

Speaker 2

Thanks. Maybe just A couple of

Speaker 16

quick questions on the renewable diesel business. I mean having to ramp the Rodeo hybrid heater to the near term target capacity of 8 Can you speak to any learnings or takeaways you have from getting to that kind of critical milestone And what you're seeing from kind of a margin or profitability Point of view and then maybe a follow-up. Can you talk about what it entails to convert your marketing locations to market renewable diesel? What the capital cost is associated with this and how you envision kind of the marketing effort of RD to play out As the Rodeo conversion fully ramps up over the next few years?

Speaker 3

Yes. Well, I'll take the first question there. So as we I came out of turnaround and started up the Rodeo hydrotreater and Renewable Service. Actually, it came up. It ran really well.

Speaker 3

We had almost a full quarter running at low rates. We still have projects to get the rail infrastructure finished So we could supply 9,000 barrels a day to make the 8,000 barrels a day of renewable diesel. So we're learning how the catalyst reacts and What the actual kinetics are around running bean oil, it's a little bit of a warning for the Ultimate project of converting the refinery, and these are really these projects really are 2 very separate things in that there was no real work to do to convert $250,000,000 to bean oil, it was a matter of changing the catalyst at a regular scheduled turnaround and then being able to run it. So it's helpful. I think the bigger picture there is it's very helpful to our commercial organization to learn how to source Renewable feedstocks, the logistics of getting them there, some of the peculiar areas around transporting it, and those sorts of things all Set us up to be a lot more nimble and ready for when we go from 8,000 barrels a day to 50,000 barrels a day with the renewable Conversion.

Speaker 3

I think probably the best thing to come out of it is we did not see anything that made us stop and think about the Project to convert the rest of the refinery that we needed to go back and think about our design, pretty much operating as expected.

Speaker 7

And I would add to Bob. We got that plant up 2.5 months earlier than we thought, 9,000 barrels into plant, high conversion rate, Just kind of a great asset so far. We've firmed up over 50% of the feedstock for the plant going forward. We run soybean, but we've also run other vegetable oils there. So we've got some experience growing other vegetable oils.

Speaker 7

We're looking at international feed as well. We started converting stores as you mentioned. It's low capital convert to stores. We'll have all 600 stores converted by the end of the year And that will allow us to run volumes equal to 3 quarters of more of the R and D that we're producing currently.

Speaker 2

Great. Thank you.

Operator

And this does conclude today's conference call. You may now disconnect.

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Earnings Conference Call
Phillips 66 Q2 2021
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