Phillips 66 FY 2021 Earnings Call Transcript

Participants

Corporate Executives

• Mark Lashier, President and Chief Operating Officer
• Kevin J. Mitchell, Executive Vice President, Finance and Chief Financial Officer
• Jeff Dietert, Vice President, Investor Relations

Analysts

• Doug Leggate, Bank of America Securities
• Dan Lungo, Bank of America Securities
• Kalei Akamine, Bank of America Securities

Presentation

[Doug Leggate, Analyst at Bank of America Securities]

Well, good afternoon, everybody, thank you for joining us, the next corporate session at the Bank of America Global Energy Conference. We run a refinery-focused event in the spring. At this event we're really trying to get a diversified view as the key players across all elements of the value chain. And with that in mind, I'm really delighted to introduce Phillips 66 as our next set of speakers. So, guys, thanks very much indeed for joining us. I'll just introduce very quickly whom we have today. Mark Lashier who is the President -- new-in-store President and COO of the Company. Kevin Mitchell, my countrymen, CFO of Phillips 66. I will not mention his address at the weekend, but we can take that some other time. And Jeff Dietert, Vice President of Investor Relations.

Questions and Answers

[Doug Leggate, Analyst at Bank of America Securities]

Guys, in all seriousness, thank you so much for spending some time with us today. So very, very interesting time for the sector for a number of reasons. But I wanted to kick-off the question however, at a fairly high level. Mark, if we look at the generic strategy, I'm going back to the separation from the ConocoPhillips. There was an expectation that EBITDA would be diversified by building or using the cash flows of the free cash flows in the refining business to build the other parts of the portfolio. So, where do you think we are in that process? And as you come in as President of the Company, how do you think the strategy shifts after the experience of the last year?

[Mark Lashier, President and Chief Operating Officer at Phillips 66]

Thanks, Doug, that's a great question. If you look back over the time since the spin, there has been a shift in the allocation of capital investments. The refining business has done quite well, generating cash, and PSX has grown pretty aggressively in the Midstream business. We've grown Midstream business through the MLP structures from a business generating $500 million in EBITDA to about $2 billion in EBITDA. And outside of PSX capital budget, CPChem has grown their chemical presence quite aggressively. They self-fund their capital, so it doesn't show up in our capital budget. But certainly, there is the interplay between distributions from CPChem back to owner companies and that impact. So it really has, in effect, been a redeployment of capital into Midstream, Chemicals and now you see our Emerging Energy segment. So we've introduced a new -- will eventually be a new standalone segment, which should have been Emerging Energy business development group about a year ago.

We're identifying opportunities to grow that to another $2 billion standalone EBITDA kind of business by 2030. And we should be halfway thereby by the middle of the decade. The cornerstone of that is our investments in renewable diesel. And so, we're well on our way to capture that. But we consistently have a very underlying strong commitment, financial strength, disciplined capital allocation and returning distributions to our shareholders. So -- a lot of that refining cash has been returned to our shareholders. We've had a policy of reinvesting 60% of our cash back in the business, 40% return back to our shareholders, and that over the long term has been very consistent and we're really glad to be coming out of the COVID turmoil. The challenges we face there and in third quarter as you know, we generated enough cash flow to cover our capital spending and to cover our dividends and our debt repayment in October. We increased the dividends, just as a signal to the markets that we feel like we're back on track, that kind of mid-cycle cash generation.

Our balance sheet is strong and getting stronger. We've been able to pay down debt and we are on a path to get it back to pre-COVID levels. We took about $4 billion in debt to just kind of as an insurance policy during COVID, during all that time of uncertainty. And we're well down the path of paying that off and Kevin can provide those details. But yeah, if you think about the way we're allocating capital, first piece goes to sustaining capital. So while we may be taking cash from -- this generated by refining and redeploying in other business segments, we got to keep their refining kit in good shape, efficient, safe, reliable operations, and we spend about $1 billion a year, doing that across refining Midstream in other business segments.

And then we -- the next bit of cash goes to dividends, safe secure growing dividend, it's at about $1.6 billion today. And as we paid on that debt and as we return to mid-cycle cash generation, then we've got more options where we can do it that way. We can look at more growth opportunities, although we're going to be very disciplined around capital for the next couple of years. So the next two years, you'll see a capital budget that's at or less than $2 billion. And so, that excess generation either goes towards paying down more debt or returning more cash to our shareholders either through increased dividends or through share repurchases. So we feel like we're very constructive around that. We're cautiously optimistic about things returning, there is still some noise out there around COVID, but the whole population seems to be -- with each way that comes, they seem to deal with that a little better. And in countries that are talking about lockdowns or talking about lockdowns focused on the unvaccinated and things like that, and the population seems to be poised to move beyond COVID. So that's kind of where we are.

Kevin, maybe you want to go into the balance sheet and a little bit on our debt?

[Kevin J. Mitchell, Executive Vice President, Finance and Chief Financial Officer at Phillips 66]

Sure. I mean, we -- as you know, we added $4 billion of debt last year to see us through the pandemic period, just to put that in the context, that provided two-thirds of the cash we needed to run the company last year. So now we're under the aggressive debt pay down strategy, cash flow, cash generation is returning. We paid off $1 billion through the first nine months of the year. We have another $0.5 billion we will take care of before the end of the year. We have $1 billion maturity -- it's actually a $2 billion maturity in April where early calling half of that and using the proceeds from last week's bond offering to finance that, that will leave $1 billion in April, that we will pay down. And we have other options -- other flexibility around debt that we can reduce next year. So we see a nice trajectory to getting the balance sheet back to where we want it to be. And as we get to that point and the cash generation is there, it gives us a lot more flexibility in how we think about other options like returning more cash to shareholders.

[Doug Leggate, Analyst at Bank of America Securities]

Well, guys, I appreciate the introductory comments. I know that Daniel -- sorry, I should have introduced my colleagues. So Dan Lungo, our credit -- investment-grade credit analyst who is joining us on the call. I'm sure he's going to want to delve into, in a bit more detail, Kevin. And Kalei Akamine is [Indecipherable] renewable diesel, so we know we're going to get into that a bit as well. But before we do that, I just want to ask you about, maybe Kevin, to pick up in your comments, post the PSXP decision, what is the right level of debt? And if I can put it in context after the --let's say the COVID shock from last year has a perception of what the right level of debt shifted, now that we've seen just how deep some of these downturns can be?

[Mark Lashier, President and Chief Operating Officer at Phillips 66]

Well, I really don't think our view on absolute debt level has changed. So we were at on a consolidated basis, which is how we always look at it, i.e. including all the debt at PSXP, we were at $12 billion pre-pandemic, we added $4 billion, that was dramatic and it was painful having to do that. When you step back and you look back and we went into the pandemic with A3 BBB plus credit ratings and here we are now 18 months later, we had negative outlooks on both the ratings. Those are both being lifted. We're back to stable ratings. We're on a trajectory to reduce debt. So I actually think it validates that the balance sheet as we were gives us sufficient flexibility and enough financial strength to be able to deal with the downturns, the cyclical moves in the market. I would also say, the pandemic, I don't think that falls in the category of the normal time cycles that was something very unique. And the fact that we were able to weather that without any -- ultimately any adverse rating actions is a view that has a positive sign.

One thing we have done is we've sort of reassessed what we think minimum cash balances need to be. And so the one shift, and if you think on a net basis, this is form a balance sheet strengthening is, we probably need to carry a bit more cash than we had been just to provide a little bit of added buffer and flexibility around that, but that's not dramatic. We're not going to be inefficient with the balance sheet and have unnecessarily excess amounts of cash, because that's a very inefficient use of capital. But nonetheless, we still think that we can probably be okay carrying a bit more cash, just gives us a bit more flexibility.

[Doug Leggate, Analyst at Bank of America Securities]

And as I said, I know, Daniel is going to want to dig into a little bit. But if I may, you did increase the dividend recently. And we were actually -- we had a session with Marathon Petroleum earlier. And my observation was that, their yield right now is about 3.6%, yours is north of 5%. So it seems a dividend increase, that was just lead to a higher yield, that hasn't actually translated to market recognition of value. So how do you think about that? How do you think about what the market needs to see and how you respond accordingly? Obviously, it's kind of a buyback question, I guess, and I've got a follow-up on the same kind of topic.

[Kevin J. Mitchell, Executive Vice President, Finance and Chief Financial Officer at Phillips 66]

Yeah. So the dividend increase was very much a function of, we have had -- we've increased the dividend every year since our formation in 2012, year-over-year increases in dividend. And while in 2020 we did not increase the quarterly dividend. If you do 2020 versus 2019, you still saw an increase because of the timing of the 2019 dividend increase. And we have a significant number of dividend-focused investors, one of their screening checks is year-over-year increase in the dividend. And so this final fourth quarter 2021 dividend was our final opportunity to get -- keep that year-over-year streak going. And we felt it was important to acknowledge those investors that have been consistent with us. It's a very modest increase. It enables us to keep that streak alive without really putting any -- financially it's pretty insignificant, in terms of the overall impact. And so we felt it was appropriate to do that.

And, obviously, the yield is a function of where the equity -- where the share prices are trading. But fundamentally we see value in the shares as they are now, and I think it's probably where you are heading is, we'd like to get back to share repurchases because we think our share price represents a terrific value. We need to get further down the debt, pave down path. We need to see that we're at somewhere around mid-cycle cash generation, the more progress on debt pay down before we get back into our share repurchases.

[Doug Leggate, Analyst at Bank of America Securities]

Well, I'd like to maybe pivot on that topic then about mid-cycle cash generation. Jeff has the definition of mid-cycle change and whether this is an ESG question or longer-term demand question. And look, it's not an issue, I particularly think about. But a question comes up a lot is what is the terminal value of a hydrocarbon business, which ultimately is what you are. So has the perception of mid-cycle cash flow changed in your mind?

[Jeff Dietert, Vice President, Investor Relations at Phillips 66]

I think as we look at mid-cycle, when we look at Midstream and I'll compare this to the November -- excuse me, October -- no, it was November of 2019 Investor Day. We looked at Midstream as kind of $2 billion a year EBITDA contributor, now it's $2.3 billion, maybe a little bit better. And so, Midstream's continuing to increase. When we look at our marketing segment, it's gone from $1.4 billion, $1.5 billion, and $1.6 billion. So we've seen that business improve.

As we look at Chemicals we're showing some of the earnings power there. We think that's a $2 billion mid-cycle contribution. On Refining, I think that's where we get a lot of the questions and we look at the 2012 to 2019 period as kind of the mid-cycle period. We were about $3.7 billion of EBITDA on average during that period of time. Now what we do see in refining, is it comes from different components. And we are looking now at 2022 being similar to 2019 from a demand and refining capacity perspective. So, we think we've got the potential to get there on a gasoline, diesel crack perspective. On the crude differentials, we're seeing or expecting to see and have already seen some increase in opex volumes coming into the market. And so a wider heavy sour discount, we think is a good bet for next year.

We've seen some widening in the Canadian heavy discount, which will also be influenced there. And so, we see it coming from different components, but moving towards that mid-cycle environment. As we think about longer-term with renewable diesel with the Rodeo Renewed, with the emerging energy contributions as well, we see meaningful contributions from those segments. So that's kind of the way we would circle it and talk about it at this point.

[Mark Lashier, President and Chief Operating Officer at Phillips 66]

Yeah. And for your terminal value question, Doug, the way we're thinking about that is we look at our refineries today as -- these are assets that managed carbon, hydrogen, electrons. And the assets that will have a terminal value are the ones that are very good that, ones that figure out how to lower the carbon intensity, that figure out how to provide solutions, that figure out how to leverage carbon capture, make more petrochemicals, things like that. So there is a lot that can go on with those technologies that we have in the refineries. And I think the more complex the refinery, the more optionality that you have and the greater likelihood that you'll have a robust terminal value around that. Those are the assets that we are going to focus on going forward.

[Doug Leggate, Analyst at Bank of America Securities]

I realize you did, if I can kind of take -- what you just said and one with a little bit, you mentioned the $3.7 billion mid-cycle EBITDA or obviously average over that period, Jeff. The weak links in your portfolio, I guess, you've addressed Rodeo with Rodeo Renewed. But now you've shut Alliance. Can you just kind of -- is there anything left in the portfolio that is vulnerable to those downcycles? I know Alliance was a special situation.

[Jeff Dietert, Vice President, Investor Relations at Phillips 66]

Yeah. I think, yes, we go through our strategic planning efforts every year. We review all the assets and the portfolio and that's really where the idea to convert Rodeo Renewed came from. As you know, we had started a process to the West, the Alliance Refinery. We have determined that it would likely be worth more to third-party than it was to us. We had a number of bidders interested and then the hurricane hit and they became some cost in bringing it back to a refinery. We went through all our alternatives and determined that the terminal auction was the best option. There are a number of pipelines, they come into Alliance and out of the Alliance, it's right on the river. So we can ship up the river domestically, we can export, so it makes a lot of sense as a terminal. But we'll continue to re-assess and assess our assets on a regular basis and try to optimize our portfolio over time.

[Doug Leggate, Analyst at Bank of America Securities]

I appreciate the answer, because at the end of the day, what I'm really trying to get out is when we think about valuation rightly or wrongly for your business, we think about a stack series of annuities essentially, my working assumption is gasoline is going to -- hydrocarbon demand is going to be around for a while. As long as you look after the assets, they're going last pretty much as an annuity, as I think about it. So I appreciate those answers. I do want to ask you about the 40:60 split. I don't think I've ever actually tried this on -- how did you come up with a ratio? How did you come up with that as the right mix?

[Kevin J. Mitchell, Executive Vice President, Finance and Chief Financial Officer at Phillips 66]

Well..

[Mark Lashier, President and Chief Operating Officer at Phillips 66]

Go ahead, Kevin.

[Kevin J. Mitchell, Executive Vice President, Finance and Chief Financial Officer at Phillips 66]

None of us were here when that was done. But honestly, I don't think it was a particularly scientific approach. It seemed like and it's we -- we characterized the 60:40, 60% reinvestment, 40% return cash to shareholders. And it just -- it felt like a reasonable balance between, we knew you're going back to 2012 here. We saw that there were going to be good growth opportunities in the Midstream business. We wanted to be able to participate in that build out, remember where we were 10 years ago, shale was booming and the need for the Midstream infrastructure. And it felt like an appropriate balance that would allow reinvestment in the business. But as we very much appreciate in this business with the commodity, volatility, shareholders need to see a regular cash return, then we need to show that discipline. And so the 60:40 felt like an appropriate balance.

I'd argue that if you're -- if all you had is refining, then maybe 60% is too much, reinvestment in the business. But given that we were building out other segments and obviously the exposure to chemicals, as well in the marketing business, it felt like the 60:40 wasn't that appropriate balance to make. But it wasn't any detailed scientific analysis like we come up with something.

[Mark Lashier, President and Chief Operating Officer at Phillips 66]

Yeah, I talked to Greg about that frankly coming onboard and he said the logic really was one of -- not overpromising. So if there is movement, there should be movement to the upside on the 40% back to shareholders and down on reinvestment. Certainly if we don't have opportunities that can deliver more value than buying our own shares back, we should just -- we should just take it all to share buybacks. So we do focus on very strong return projects and investments. We're pretty dogmatic about requiring very high return on these projects, they get that growth capital and there is going to be downside on the capital investment pressure because of the way we do that and upside on the written to shareholder side of that percentage. So, it's a bit of under promise, over deliver, with 40%.

[Doug Leggate, Analyst at Bank of America Securities]

So where I wanted to get to is to kind of go right back to the beginning and say, okay, so let's talk about value recognition. And Kevin, I'm afraid it kind of comes back to you, because this 40:60 split, I look at the dividend, and I think, okay, let's assume that the dividend had perpetual growth. So I think about as a dividend growth model. There comes a point where the burden with the dividend, obviously increases in absolute terms, but share buybacks can manage that. So you can have dividend growth by reducing the share count, as opposed to increasing the absolute dividend. So within that 40% return, how do we think about the split? Is it a structure, dividend growth target, dividend as a proportion of cash flow, how do we think about it?

[Kevin J. Mitchell, Executive Vice President, Finance and Chief Financial Officer at Phillips 66]

Well, the way to think about the dividend is -- and this is not truly quantitative, there's a quantitative element to it. But secure -- so it's secure and affordable, right. We don't want the dividend to be a level where you had a downcycle and the dividend's at threat. So secure, affordable competitive -- competitive both within our peer set and also with the S&P 500 [Speech Overlap]. Clearly we're going to exceed those and then growing, to be able to check that annual year-over-year dividend growth.

You're very correct that with the share buybacks, when you got both going at the same time and we've actually been able to do this in previous years, where the actual cash outlay dividend really hasn't really changed, even though we've increased the per share dividend, because of the impact of the buyback program. And so, that sort of plays hand in hand there, that we can increase the per share dividend with minimal increase in cash outlay, as long as we've got the buyback going at a reasonable level. And that's generally played out for us obviously over the pandemic, exceptional circumstances and we have to laid down the share buyback program for a period of time, but expect to get back into that.

[Doug Leggate, Analyst at Bank of America Securities]

Well, I'm going to leave that topic there, but I do want to explain where my head is in asking that question. So we do all our fancy discounted cash flow marks to come out with a valuation. But if you look at the rate of dividend growth you've delivered on a sustainable basis, with the current yield, you can kind of make a case that says, that's why the stock is undervalued. So the dividend growth visibility becomes a very simple DDM model for a generalist investor overcomes a lot of hurdles and that's why I asked the question that way. But maybe something to think about, but I'm going to just pause for a minute and pass it over to Dan and then to then to Kalei, because they've got a handful of questions they would like to ask you.

Dan, you want to go ahead?

[Dan Lungo, Analyst at Bank of America Securities]

Thanks, Doug. So you guys hit on a bunch of the topic I was going to bring up. I just want to dig a little bit more into the detail. You mentioned that you want to run with a higher cash balance we have in the past, just looking back at past years, it looks like you tended to end the year with $2.5 billion to $3 billion of cash in the balance sheet. Does that mean the new target for balance sheet cash is in the $3 billion to $3.5 billion range or is it closer to $4 billion that you want to leave on the balance sheet?

[Kevin J. Mitchell, Executive Vice President, Finance and Chief Financial Officer at Phillips 66]

No, no, I wouldn't look at it that way. I think if you look at quarter ending cash balances, we had at times gone down as low as a $1 billion. In fact I think there's one quarter where we were somewhere in the order of $850 million is our quarter end. So -- and we'd always targeted our quarterly cash balances to be around about $1 billion as a floor, generally speaking. And so that's what I refer to when I say higher cash balances. Cash is often not a good representation just because of timing of working capital, inventory movements that take place over the fourth quarter of the year. So ending year cash is not necessarily a good guide to how we think about sort of operating minimum levels. And if you look through some of the other quarters, you'll get a better representation of that. So it's probably instead of $1 billion, it's probably more of a $2 billion kind of threshold that we think about.

[Dan Lungo, Analyst at Bank of America Securities]

Perfect. That's really helpful. Also you mentioned the $12 billion debt target laid out, how you see basically get there by the end of the next year, if you wish? Can you kind of just provide some color on the recent refinancing of the April maturity, obviously, that $2 billion maturity would have gone a long way to immediately get into your target, but can you just kind of describe the rationale behind refinancing a portion of that?

[Kevin J. Mitchell, Executive Vice President, Finance and Chief Financial Officer at Phillips 66]

Yeah. So a couple of things. One is, the $2 billion in one slug is a big -- that's a big maturity to take care of at once. And so, we felt that we were probably going to have to do some element of refinancing around that. The second is, as we look at our maturity profile, we had a lot of near-term maturities. So we didn't need all $2 billion in order to be able to get back to where we are targeting from a balance sheet debt standpoint.

And as you look broader over that longer time horizon and our maturity profile, we had nothing out there beyond, I think 20 years. And so, this -- do in a 30-year issuance very favorable market conditions, both when you look between where the treasuries are, where the credit spreads are, just felt like a great opportunity to lock-in some long-term debt at a very attractive interest rate. So just for context, the April maturity, those were 10 year notes that were issued back in 2012, 4.3% interest rate. We just did this 30-year, $1 billion at 3.3% coupon -- 3.339%, I think absolute yield on it, but very attractive time to get that done.

[Dan Lungo, Analyst at Bank of America Securities]

Yeah. And just week-over-week, if you look where Valero placed their deal today, you saved about 15 basis points between the treasury move and the spread movements. So you timed that really well. So you mentioned the optionality around upcoming maturities. On your earnings call you mentioned how the PSXP debt gives you a lot more options in terms of debt reduction. So can you kind of describe the parameters you look at when you're deciding whether to call the bonds early if the PSXP bonds would make sense to take out early? Also as a follow-up to that, have you decided how you plan to treat the PSXP debt? Do you plan to make it carry and you don't know how to go into the details of how that would -- the mechanics behind that?

[Kevin J. Mitchell, Executive Vice President, Finance and Chief Financial Officer at Phillips 66]

Yeah. Well, generally speaking, we've been trying to pay down debt that does not require any prepayment penalties or make-whole around it. Obviously there is a component of make-whole with $1 billion that we are pre-paying of the April maturity. But as you look to, for example, PSXP has a term loan that is due in the first quarter of next year. So that's easy, that's an easy opportunity to do some incremental debt repayment. It's low-cost debt, so it's not as though there is a big arbitrage on debt funding cost, but it's available, it's coming due. And the other benefit, the other sort of incremental flexibility we have with the PSXP roll-up is that we have access to all of the -- cash does not distribute, that wasn't being distributed previously, right, factored with the coverage cash. And so that's another source of flexibility in terms of how we think about that.

[Dan Lungo, Analyst at Bank of America Securities]

And how you want to treat the PSXP debt? And if you don't have an answer yet, that's fine.

[Kevin J. Mitchell, Executive Vice President, Finance and Chief Financial Officer at Phillips 66]

Yeah. No, our intention is to get that PSXP debt through whatever means we decide to go evaluated, but effectively have it up at the PSX level to give us complete flexibility.

[Dan Lungo, Analyst at Bank of America Securities]

Perfect. Bondholders will be happy to hear that, I'll pass it to Kalei.

[Kalei Akamine, Analyst at Bank of America Securities]

Thanks. Thanks, Dan. I want to hit the renewable business here a little bit. So the first question is, on this $2 billion EBITDA number that was put out for the emerging energy business by 2030, I think, there's relatively good visibility around renewable diesel and that we can put a bend based on and come out with some figures and some estimates. So, I'm curious as to what else contributes to this figure?

[Mark Lashier, President and Chief Operating Officer at Phillips 66]

Sure. Yeah. As we look at the opportunities in what we call our Emerging Energy business, we focused on four key pillars. The first and kind of the cornerstone is renewables, so renewable fuel, renewable diesel. You also see activity around sustainable aviation fuel, that's getting a lot of momentum. We can pretty modestly modify our Rodeo assets once they're up and running, to produce more sustainable aviation fuel. We're looking at other opportunities. We've signed an MoU with Southwest Airlines to explore that, to look at opportunities to kind of drop in sustainable aviation fuel right now, most of them have to be blended up to 50%. And so we've got our Energy Research & Innovation group looking at that. We are in contact with jet manufacturers, talking to them about optimizing sustainable aviation fuels for their engines. So we're really going at it from a technical perspective and an economic perspective. So at the end of the day have a solution that we can get returns on from sustainable aviation fuel like what we're seeing in renewable diesel. The piece that's missing is what is the regulatory environment around sustainable aviation fuel, what incentives are going to be there. They're going to have to be there. We've had engine manufacturers tell us, look, we don't think that hydrogen is the solution for aviation. We certainly don't think batteries are solution for the aviation. We need your help. And we're big in aviation fuel today. We know that business and we're going to apply our technology and our know-how to get there. We are also around the -- a very important dimension of the renewables is the feedstock access.

One of the attractive things about our Rodeo facilities is sitting on the water on the West Coast, and we can access feedstocks from around the planet. The front-end of that facility is going to have great flexibility and that's where a lot of investment is frankly having the flexibility to bring in a variety of feedstocks. So we can go out and trade around that asset, get commercial group, that's doing that today, taking renewable feedstocks into our Humber Refinery in the UK, producing renewable diesel there. And so they know those markets. We can trade around those markets and there is going to be plenty between the carbon intensity of a feedstock and the cost of that feedstock. So we will be able to put in front of that asset the best possible mix of feedstocks to drive that and to capture the low carbon fuel standard benefits, the blender's tax credits and the RIN values that we need to make those things pay-off and we should see a similar regime around sustainable aviation fuel. So that's that first pillar. And when we have success there, we can scale that across other assets. We're looking at other assets that can do the same thing, that have the same kinds of strategic advantages.

And I think you mentioned the capital advantage of a brownfield investment like that. We're going to invest about $1 -- equivalent about $1 per barrel, lot of other -- I'm sorry, gallon -- $1 per gallon and other investments are more like $3 per gallon capital. So it's going to be very capital efficient, it's going to be very competitive from a feedstock access perspective. And we're going to be able to take that diesel all the way to the customer at the pump where we're reconfiguring. Marketing assets in California to be able to handle renewable diesel, we've already done 600 stations that they can take that. So, we can control that value chain all the way to the customer. And we like that model and we will look at where we can replicate that model elsewhere in our system.

Then, you start moving across those pillars. We're also looking at things like carbon capture and storage. We've got opportunities around Rodeo, again to demonstrate the viability of that to lower the carbon intensity even further of the renewable diesel production there. It takes a lot of hydrogen to hydro-treat these materials to make renewable diesel. And hydrogen from steam methane reforming produces a lot of carbon-dioxide, will have, again, an asset on the ground, a pipeline that's delivering crude oil to that asset today. It's not going to be delivering crude oil and while at some point in time, so we can repurpose that to take carbon-dioxide back to the simple valley oil fields and we're in discussions with partners that can sequester that CO2. And if we like how that works and as economic, we could create a trunk line, where we can take and sequester carbon dioxide for other carbon dioxide producers in that region.

So really lower the whole carbon footprint of the entire complex, whether it's a power producer or other refineries in the neighborhood. And we've got third-parties that are investing in solar installation to provide electricity. Solar power throughout the [Phonetic] facility, that lowers the carbon intensity of what we're doing. And we can do that across our fleet without investing our capital in wind or solar, but we would certainly like to use solar-based electrons and wind-based electrons to lower the carbon footprint is what we do. And so, that's the carbon capture pillar and the hydrogen pillar, where we've got initiatives in the UK to look at green hydrogen to take wind power off of North Sea and through our Gigastack consortium and produce green hydrogen for consumption at our Humber Refinery.

In Switzerland, we've got fuel stations that provide hydrogen -- green hydrogen as a transportation fuel for truck fleets. And so, we have electrolysis systems that generate the hydrogen from water and provide that in Switzerland. So we're exploring those pillars in a way that we're not going to jump in with both feet. And so, we see line of sight on good solid returns and good solid investments. And then there's batteries, today we produce needle coke. Needle coke is -- the needle coke that we produce is the preferred feedstock to produce synthetic graphite for the creation of anodes and lithium-ion batteries. And we want to explore that value chain and see if we can integrate forward in that value chain and capture more of that value.

You've seen us make an investment in a company called NOVONIX. We screen a number of companies and we have criteria to make sure that those companies are solid, they have good technology, they have good sound green technologies for the production of anodes. And NOVONIX goes to the top of our first and we are able to make a 16% investment in NOVONIX. So we can collaborate with them on optimizing the conversion of our needle coke into the best possible anodes. Anodes that perhaps charge faster, have longer life, have better life cycles. And so that's what that investment is about. There is a growth of a whole ecosystem around lithium-ion batteries, both in North America and Europe to get away from the near total dependence on China for the lithium-ion battery supply chain.

And so, we've got needle coke capacity in the U.S., and we've got a needle coke capacity in the UK. And so, we're looking at those as two centers that we can join that value chain. So those are the kinds of investments that we're going to make. Many of them will be small on this front-end like our small investments that we made in Shell Rock Soy Processing in Iowa to understand the dynamics around getting soybean oil in front of our renewable diesels. Or this investment we made in NOVONIX, or the kinds of investments that we're making around hydrogen production in the UK and Europe. We're going to walk before we run, because we believe that the energy transition future is all of the above, kind of a portfolio around energies and we want to be able to position ourselves in those technologies and those energies that are going to create value over the long term. There is going to be winners and there is going to be losers and there is going to be dead ends. We want to make sure we don't take the dead end, and we don't take the loser, so we're going to be cautious. We don't have to be out on the leading edge, the leading edge of these technologies, what we believe that we've got the technical know-how and the financial wherewithal to advance projects that look like they will return -- a solid return for our shareholders for our investments.

[Doug Leggate, Analyst at Bank of America Securities]

I think Kalei's has to continue. You're filibustering his nice question. But...

[Mark Lashier, President and Chief Operating Officer at Phillips 66]

I make accounting from Jeff after this.

[Doug Leggate, Analyst at Bank of America Securities]

Are you sure the number was $2 billion? So joking aside, I think Kalei has got one more, I want to come back to a couple of these. Going ahead, Kalei.

[Kalei Akamine, Analyst at Bank of America Securities]

Just two real quick follow-ups on all that. So, first on debt, so there is a credit being considered right now at $1.25 plus the $0.50 variable based on the CI score. Is that enough for you guys to optimize your renewable diesel plant around sustainable aviation fuel. And the second question is, we've seen a couple of deals for soybean oil in the market, but none for lower CI feedstocks like cooking oil or animal fat. So I'm just wondering what that says about the tightness in that market?

[Mark Lashier, President and Chief Operating Officer at Phillips 66]

I'll address the feedstock market first. Yeah, we're actively trading out there, it's a matter of concentration, it's easy to go identify soybean processing facility make an investment there. Secure that, that's a good position, I think the key is to have the ability to produce or to consume a wide variety of feedstocks. But we're upgrading and use cooking oil and animal fats and tallows in all of those things. And we're looking at opportunities to secure positions in those, but there also, it's more dispersed. If you think about used cooking oil all across Asia, Europe, North America, South America, we've got to have access to those markets relationships in those markets where our commercial group can go out and aggregate those, and they are doing that today.

And I think longer-term, we will have to make more of a direct investment in that network to secure access to those feedstocks. And I think the first question was around the subsidies targeted at sustainable aviation fuels. We think that those will be more robust, frankly, that they're not where they need to be to justify the investment. So we're still working on the technologies, we're still working on potential partnerships, we're looking at the cost structure of those investments, but we don't believe that the incentives are robust enough to generate the kind of investments that you're seeing in renewable diesel.

[Jeff Dietert, Vice President, Investor Relations at Phillips 66]

You would call, renewable diesel gets LCFS, RIN and BTC. And so, there is more substantial support there than for SAP.

[Doug Leggate, Analyst at Bank of America Securities]

One thing I want to make it clear. I think, I'll take it back, if that's okay. We've got only a few minutes left, guys. So, I actually wanted to touch on a couple of the renewable energy business questions at a high level. Europe is kind of anti-fossil fuel right now you could argue. So are you seeing more opportunities, maybe for building that business or indeed consolidation of the legacy business as other major players exit?

[Mark Lashier, President and Chief Operating Officer at Phillips 66]

Specifically in Europe, I think, that what the opportunity we see in Europe is because of the regulatory regime and their positioning around fossil fuels is kind of an incubator for some of these emerging energy businesses that we want to pursue. And so we are viewing it as an opportunity to accelerate the development around blue and green hydrogen and to accelerate the development around batteries and look at those things, ionizers, because of the regulatory opportunities that affords us. I don't know that we have seen direct line of sight on aggregating any refining businesses in Europe.

[Doug Leggate, Analyst at Bank of America Securities]

Let me explain my question, Mark. So, we've seen Shell exit a very high quality business in the Permian. And the whole industry seems to be under pressure to their decision, I guess, is to reduce their company carbon footprint and not necessarily reduce the industry's carbon footprint. So if you saw other traditional energy businesses for sale like a refining business or a marketing business or a fuel station business, should we think of the M&A opportunity, which we normally then covers the U.S. shifting to Europe or not something in your future?

[Jeff Dietert, Vice President, Investor Relations at Phillips 66]

Yeah. Doug, one comment I would make and then I'll let Mark come back. We've recently set emission target reductions. And we've done that on a -- rather than an absolute basis on a per barrel basis. Precisely for that reason to allow for growth, it's a substantial reductions that we've established but they're on a per unit basis.

[Mark Lashier, President and Chief Operating Officer at Phillips 66]

Doug, I...

[Doug Leggate, Analyst at Bank of America Securities]

So you'll be still be able to -- go ahead, Mark.

[Mark Lashier, President and Chief Operating Officer at Phillips 66]

Yeah. If we saw assets and it's going to be vary by the regulatory environment. But if we saw assets that we felt like we had the technical advantage to bring the table or we saw a lower carbon opportunity for those assets that could thrive, in that regulatory environment, that someone else concluded, they just didn't want to deal with that, then sure, we would look at that. And I think that would be tougher to do in Europe, but I think certainly in North America, I think that there maybe opportunities. Since we are focused on lowering the carbon footprint, the carbon intensity of the assets that we operate, we don't think the solution is, simply moving those assets into someone else's hands for the purpose of lowering our carbon footprint.

[Doug Leggate, Analyst at Bank of America Securities]

Maybe I [Indecipherable] ask the question, what I was really trying to get at was, if other companies choose to exit businesses in Europe to lower their carbon footprint, are you seeing any of that trend evolving, given the pressure builds on those companies under and would Phillips 66 be prepared to look at those kinds of things, expanding into -- expanding that business overseas? Normally, five years ago, we would say, is Europe for sale? Today I'm asking is Europe an area where Phillips 66 can consolidate?

[Jeff Dietert, Vice President, Investor Relations at Phillips 66]

I think it's got to be kind of an asset-by-asset consideration.

[Mark Lashier, President and Chief Operating Officer at Phillips 66]

Right. And again, I would come back to the regulatory, we don't want to wander into a regulatory that somebody else has walked away from. But if we feel like we understand that situation we've got technologies that could create value in those assets, then sure, we'll look at it, but it would be -- it's not going to be a blanket, yeah, we will go in and acquire assets in Europe to consolidate because of their low cost. There's got to be some story there around that investment where we've got a technology, we've got an opportunity in that regulatory environment to create value.

[Jeff Dietert, Vice President, Investor Relations at Phillips 66]

Doug, it's certainly not an area of where we're highly focused right now.

[Doug Leggate, Analyst at Bank of America Securities]

Current interest, that's what I was really trying to get at. So two final questions guys, I know we're out of time, so just maybe as quick. First of all, we've been also quick. Shell has got an activist, arguing that their renewable business should not be part of their old energy business. And you're incubating the new energies business in an old energy business. Are you the right long-term owner of that business? Is that strategically this -- are you incubating it with a further purpose or incubating into diversify the existing earning stream?

[Mark Lashier, President and Chief Operating Officer at Phillips 66]

I think we're incubating into diversify, I think we've got opportunities. Our view is -- we're providing energy and improving lives and we will provide energy and energy opportunities. And we are not forever married to oil company to our -- the front end of our assets and delivering the same kinds of refined products. We will take feedstocks in whatever form they take, and we will convert those into the materials that people need to have energy, improving their lives. And so we take a kind of agnostic view in the very long term. Today, we believe in our refining assets, we believe our refining asset. So we are on a very long time, we are focused on lowering the carbon footprint of those assets, but we will continue to pursue opportunities to provide other kinds of energies as the market requires.

[Doug Leggate, Analyst at Bank of America Securities]

Appreciate the answer. I just wanted to make a round out you guys versus what we're seeing with others. So my last question is hopefully a quick one. President Biden sent a letter to the FTC on fuel pricing. I'm just wondering if you would offer a comment or your perception?

[Mark Lashier, President and Chief Operating Officer at Phillips 66]

Yeah, our perception is this, just having seen a...

[Doug Leggate, Analyst at Bank of America Securities]

Perspective on it, sorry, yeah.

[Mark Lashier, President and Chief Operating Officer at Phillips 66]

But -- no, it's an easy political target. He is under pressure around inflation, everyone drives down the street sees the price of gasoline on signs. This is history repeats itself. This has happened many, many times under similar circumstances. And I don't think the industry has anything to hide. I think it's pure supply and demand economics. You guys know that better than anyone. Inventories are low, we're coming out of just the economic gyrations around COVID. And it's just a situation where supply -- demand is surged in some segments and supply is trying to respond. And they are just market dynamics. It will take time to work through. So, I think it's just purely political theatrics at this point.

[Doug Leggate, Analyst at Bank of America Securities]

On that note gentlemen, I'm just going to remind everybody we got 5% yield with an improving balance sheet. And the big buyback potential it seems a pretty good setup for us and delighted you guys could be part of our event this year. So thanks for making the time and Jeff, I really appreciate you showing into the energy conference this year. Thanks so much.

[Jeff Dietert, Vice President, Investor Relations at Phillips 66]

All right.

[Mark Lashier, President and Chief Operating Officer at Phillips 66]

Thanks a lot, Doug. We appreciate it. Take care.

[Jeff Dietert, Vice President, Investor Relations at Phillips 66]

Good to be with you.