Phillips 66 Q1 2023 Earnings Call Transcript

Quartr
Provided by Quartr
May 3, 2023

There are 15 speakers on the call.

Operator

Welcome everyone to the First Quarter 2023 Phillips 66 Earnings Conference Call. My name is Sierra, 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 Dieter, Vice President of Investor Relations. Jeff, you may begin.

Speaker 1

Good morning, and welcome to Phillips 66 Q1 earnings conference call. Participants on today's call will include Mark Lasier, President, CEO Kevin Mitchell, CFO Brian Mandel, Marketing and Commercial Tim Roberts, Midstream and Chemicals and Rich Harbison, Refining. Today's presentation material can Found on the Investor Relations section of the Phillips 66 website, along with supplemental financial and operating information. Slide 2 contains our Safe Harbor statement. We will be making forward looking statements during today's call.

Speaker 1

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

Speaker 2

Thanks, Jeff. Good morning and thank you for joining us today. During the Q1, we delivered strong financial and operating results. We had adjusted earnings of $2,000,000,000 For $4.21 per share, a record Q1. In refining, we successfully executed major planned maintenance and ran above industry average rates.

Speaker 2

Currently, our refineries are running at high utilization to meet demand and capture market opportunities as we enter summer driving season. We returned $1,300,000,000 to shareholders through dividends and share repurchases. In February, we raised our dividend 8% To $1.05 per share demonstrating our ongoing commitment to a secure, competitive and growing dividend. Our integrated diversified portfolio provides us with the ability to generate strong cash flow, return substantial cash to shareholders And invest in the most attractive projects. We remain committed to operating excellence and disciplined capital allocation as we execute our strategy.

Speaker 2

Recently, our Midstream Refining and Chemicals business were recognized for their exemplary safety performance in 2022. For the 3rd consecutive year, Midstream was awarded the American Petroleum Institute's Distinguished Pipeline Safety Award for large operators. This is the highest recognition by API for the midstream industry. The American Fuel and Petrochemical Manufacturers recognized 5 of our refineries for outstanding safety performance. Sweeny Refinery received the Distinguished Safety Award for the 2nd year in a row.

Speaker 2

Bayway, Borger, Santa Maria and Ponca City refineries also earned safety awards. In chemicals, 4 CPChem facilities were recognized AFPM Safety Awards. We're honored to receive these awards and would like to recognize our employees' commitment to operating excellence. Congratulations to all the people working at these facilities. Well done.

Speaker 2

We started the year off well and continue to advance strategic priorities Our Investor Day late last year. Slide 4 summarizes progress toward our targets to create value and increase shareholder distributions. Since July of 2022, we've returned $3,700,000,000 to shareholders through share repurchases and dividends. We're on track to meet our target to return $10,000,000,000 to $12,000,000,000 over the 10 quarter period between July 2022 To year end 2024, we had strong refining operational performance in the Q1 and market capture increased to 93%. In midstream, we're advancing our NGL wellhead to market strategy.

Speaker 2

We recently achieved an integration milestone with the transition of DCP Midstream employees to Phillips Enabling Continued Synergy Capture. In anticipation of the DCP buy in, we issued bonds and executed a delayed Draw a term loan. We expect to close on the transaction by the end of the second quarter. We're advancing our business transformation initiatives We're on track to deliver $1,000,000,000 of annual run rate savings by year end. Next quarter, we'll provide a more detailed update The cost savings achieved through the first half of the year.

Speaker 2

In refining, we're converting our San Francisco refinery into one of the world's largest renewable fuels facilities. The conversion will substantially reduce emissions from the facility and produce lower carbon intensity transportation fuels. In February, we safely shut down the Santa Maria facility as we continued to advance the project. We expect to begin commercial operations in the first Quarter of 2024. Upon completion, Rodeo will have over 50,000 barrels per day of renewable fuels production capacity.

Speaker 2

In Chemicals, CPChem is pursuing a portfolio of high return projects, enhancing its asset base and optimizing its existing operations. This includes construction of a second world scale 1 hexane unit in Old Ocean, Texas and the expansion of propylene splitting capacity at its Cedar Bayou facility. Both projects are expected to start up in the second half of twenty twenty three. CPChem and Qatar Energy are jointly building world scale At the chemical facilities on the U. S.

Speaker 2

Gulf Coast and in Ross Laffan, Qatar with start up at each facility expected in 2026. We look forward to continuing to update you on our strategic priorities. Now I'll turn the call over to Kevin to review the financial results.

Speaker 3

Thank you, Mark, and hello, everyone. Starting with an overview on Slide 5, we summarize our financial results for the Q1. Adjusted earnings were $2,000,000,000 or $4.21 per share. The $12,000,000 decrease in the fair value of our investment in Novonix Reduced earnings per share by $0.02 We generated operating cash flow of $1,200,000,000 including a working capital use of $1,300,000,000 And cash distributions from equity affiliates of $369,000,000 Capital spending for the quarter was $378,000,000 including two $28,000,000 for growth projects. We returned $1,300,000,000 to shareholders through $486,000,000 of dividends $800,000,000 of share repurchases.

Speaker 3

We ended the quarter with 459,000,000 shares outstanding. Moving to Slide 6. This slide highlights the change in adjusted results by segment from the Q4 to the Q1. During the period, adjusted earnings increased $66,000,000 mostly due to higher results in chemicals and lower corporate costs, Partially offset by a decrease in Marketing and Specialties. Slide 7 shows our midstream results.

Speaker 3

1st quarter adjusted pretax income was $678,000,000 compared with $674,000,000 in the previous quarter. Transportation contributed adjusted pretax income of $270,000,000 up $33,000,000 from the prior quarter. The increase was primarily driven by seasonally lower operating costs. NGL and other adjusted pretax income was $420,000,000 Compared to $448,000,000 in the 4th quarter. The decrease was mainly due to the impact of declining commodity prices in the gathering and processing business.

Speaker 3

The fractionators at the Sweeny Hub continue to run above nameplate capacity, averaging 554,000 barrels per day. The Freeport LPG export facility loaded a record 282,000 barrels per day in the Q1. Turning to Chemicals on Slide 8. Chemicals had 1st quarter adjusted pretax income of $198,000,000 Compared with $52,000,000 in the previous quarter. The increase was mainly due to improved margins from lower feedstock costs, Higher sales volumes and decreased utility costs.

Speaker 3

The industry polyethylene chain margin increased by $0.10 to $0.17 per pound during the quarter. Global O and P utilization was 94% for the quarter. Turning to Refining on Slide 9. Refining 1st quarter adjusted pretax income was $1,600,000,000 down $18,000,000 from the 4th quarter. The impact of lower volumes from turnaround activities was mostly offset by higher realized margins and lower utility costs.

Speaker 3

Our realized margins increased by 5% to $20.72 per barrel, while the composite 321 market crack decreased by 5%. In the Q1, turnaround costs were $234,000,000 crude utilization was 90% and clean product yield was 83%. Slide 10 covers market capture. The market crack for the Q1 was $22.39 per barrel Compared to $23.58 per barrel in the 4th quarter. Realized margin was $20.72 per barrel and resulted in overall market capture 93%, up from 84% in the previous quarter.

Speaker 3

Market capture is impacted by the configuration of our refineries. We have a higher distillate yield and a lower gasoline yield than the 321 market indicator. During the Q1, the distillate crack Decreased $19 per barrel and the gasoline crack increased $7 per barrel. Losses from secondary products $2.56 per barrel were $1.03 per barrel lower than the previous quarter due to falling crude prices. Our feedstock advantage of $2.34 per barrel was $2.37 per barrel improved compared to the 4th quarter, Primarily due to running more advantaged crudes.

Speaker 3

The other category improved realized margins by $2.19 per barrel. This category includes freight costs, clean product realizations and inventory impacts. 1st quarter was 1.7 $0.03 per barrel higher than the previous quarter, primarily due to improved clean product realizations. Moving to Slide 11. Marketing and Specialties had a solid quarter reflecting stronger than typical Q1 margins.

Speaker 3

Adjusted Q1 pretax income was $426,000,000 Compared with $539,000,000 in the prior quarter, mainly due to lower international marketing margins. On Slide 12, the corporate and other segment had adjusted pretax costs of $248,000,000 $32,000,000 lower than the prior quarter. The improvement was mainly due to higher interest income and recognition of a transfer tax on a foreign entity reorganization in the Q4 of 2022. Slide 13 shows the change in cash during the Q1. We started the quarter with a $6,100,000,000 cash balance.

Speaker 3

Cash from operations was $2,500,000,000 excluding working capital. There was a working capital use of $1,300,000,000 Mainly reflecting an increase in inventory, partially offset by a decrease in our net accounts receivable position. During the quarter, we issued $1,250,000,000 of senior unsecured notes in support of the pending buy in of DCP Midstream's publicly held common units. We funded $378,000,000 of capital spending and returned $1,300,000,000 to shareholders through dividends and share repurchases. Our ending cash balance was $7,000,000,000 This concludes my review of the financial and operating results.

Speaker 3

Next, I'll cover a few outlook items for the Q2. In Chemicals, we expect the Q2 global O and P utilization rate to be in the mid-90s. In refining, we expect the Q2 worldwide crude utilization rate to be in the mid-90s and turnaround expenses to be between $100,000,000 $120,000,000 We anticipate 2nd quarter corporate and other costs coming between $260,000,000 $290,000,000 reflecting higher interest costs. In March, we issued senior unsecured notes of $1,250,000,000 and entered into a delayed draw term loan Of up to $1,500,000,000 in support of the DCP Midstream buy in transaction, which is expected to close during the Q2. 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. Noametta with Goldman Sachs. Your line is open.

Operator

Please go ahead.

Speaker 4

Good morning, team. The first question is around refining utilization. It was better than expected in the quarter and the guide for Q2 also looks a little bit better. So can you talk about what Improvements that you're making on the ground, and it's been a choppy 18 months in refining from a utilization standpoint. So What conviction can you provide the market that we've turned the corner here?

Speaker 4

Thank you.

Speaker 5

Yes. Thanks, Neil. This is Rich. Good question. And it's a number of things coming together here for us.

Speaker 5

Back in November, we outlined a number of opportunities to improve Refining's performance. One of them was asset availability. Optimizing our turnaround durations, we've done a really good job executing those in a pretty heavy Turnaround quarter for us and that's a big component of allowing us to operate at that 90% crude unit utilization. It's really executing those turnarounds in a very high performing status. On the Gulf Coast, our assets performed very well.

Speaker 5

They increased their crude flexibility that also allowed us To open up the utilization window and also allowed us to capture additional market as well, which you saw as well, the refining Market capture rate of 93% was very good for the quarter as well. The key assets there Running the assets, focusing on what we can control in our business, Neil, and that is executing our turnarounds well. And we were able to do that coming in below guidance this year or this Q1 continuing a trend that started last year with us coming in below guidance.

Speaker 2

Yes, Neil, this is Mark. I just come over with a little bit relating that back to the Investor Day commitments that we made those commitments based on The groundwork that had been underway for some time, the fairly small projects that we were going through, the blocking and tackling that we were taking on and we're really starting See those come to fruition now and we're pleased with what we're seeing out there and really I think the biggest impact of business transformation has been the hearts and minds of our employees. They are all in. It Wasn't that way a year ago when we first started the initiative, but now they see the things that they're doing, the hard work that they're doing are starting to impact their results

Speaker 6

and turnarounds, starting to impact the

Speaker 2

operational, Starting to impact the operational effectiveness of the plants as well as you're seeing it in the cost And that's just been a very virtuous cycle for our employees. There's a stronger competitive edge out there and they really want to own their future now.

Speaker 1

Rich, you want to talk about some of the projects that were completed last year?

Speaker 5

Yes. I think that plays into the refining capture rate of 93 For the quarter for us. Last year, we actually implemented 12 projects Focused on market capture. The result of the impact of those projects is a 1.2% Improvement in market capture with mid cycle pricing assumptions. We implemented $225,000,000 worth of Projects and the net return on those or the EBITDA generation for that investment was $158,000,000 at mid cycle pricing.

Speaker 5

2023, we actually have additional 18 projects identified that are in flight and the estimate is a 1.4% improvement in market Capture. So I think what you're seeing here is the plan we laid out in November is starting to really come to the bottom line of the performance of the refining.

Speaker 4

Thanks. And that's a lot of good color there. The second question is around the decline we've seen in crude prices. And That should manifest itself in different parts across the business. So I would love any perspective on how we can think about it from a modeling perspective, Specifically around marketing, which tends to be a tailwind, capture rates, declining crude prices tends to help secondary products, But also can be a headwind for working capital.

Speaker 4

So if the crude price decline, sustains, how should we think about that In terms of Q2 movements. Thank you.

Speaker 7

Well, let me start, Neil, this is Brian, talking about marketing and Probably noticed we had very strong marketing earnings in Q1, pretty happy about that. You know that we have a geographic diverse portfolio with That's both here in the U. S. And Western Europe, which is great. But we also market through a number of channels, wholesale, branded And retail.

Speaker 7

And what we've been doing is trying to focus our sales on the higher margin parts of our business, particularly in retail. And we purchased retail in the past few years. In fact, in mid-twenty 19, we had 50 retail JV stores in the U. S. Now we have 1,000 Retail JV stores in the U.

Speaker 7

S. And we also spent some time reimaging all of our stores to get higher margins in business. And I would also say that in the lubes business that it's also performing quite strongly in both base oils and finished products. So as you mentioned, As spot prices come off that generally benefits the marketing business because marketing margins generally and marketing prices generally fall slower.

Speaker 5

On the refining side, as you framed up the question, Neal, it's The flat price drop in accrued does reduce usually the secondary products losses. So They tend to tighten up a little bit there, so that has a positive impact for us in refining. But really in refining, it's For us, it's the differential that we make our money off of on the light, heavy, sweet differential and that's what we keep a close eye on. Kevin, any additional color to add there?

Speaker 3

Yes. Neil, just on the working capital impact, as you highlighted with the declining prices, we will have a working capital Because we're in a net payables position. So you think about a system that's essentially 2,000,000 barrels per day and a Longer duration on the payables outstanding than on the receivables. So the approximate rule of thumb is Somewhere in the order of $40,000,000 to $50,000,000 of working capital hurt per dollar of price reduction and that assumes that the Crude and the products move together and the crack stays at the same level. But as you know, also there's a lot of other moving parts in working capital, what's happened to inventories and so on.

Speaker 3

But as a And so on, but as a rule of thumb, simple rule of thumb, you can use that $40,000,000 to $50,000,000 per $1 movement in price.

Speaker 4

Okay. That's really helpful. Thanks, everyone.

Speaker 2

Thanks, Neil.

Operator

With Bank of America. Your line is now open. You may proceed.

Speaker 8

Thanks, everyone, for getting me on. Guys, I want to ask a follow-up to Neil's question on the capture rate. So should I mean, obviously, reliability was a bit of a question mark over the past year. So should we now think about this level of capture rate? Should we anticipate that that's kind of a new normal?

Speaker 8

If I could risk just a bolt on to that, the same kind of seems to be true of the cost cutting progress. It looks like you're a little bit ahead of schedule there. So as we wrap it all together, The earnings power of the business overall, it looks like you're kind of past the hump and trending higher. So I just wonder if you could characterize whether we're thinking about that the right way.

Speaker 2

Great questions, Doug. I'll let Rich address the capture rate. I'll come back in on

Speaker 5

the cost cutting progress. Yes. So capture rate has a lot of moving parts to it. So it's very difficult to predict that the configuration component of it, secondary products, Feedstock costs, others. But back to focusing on what we can control in our business, Doug, we're seeing continued maturity in our reliability programs and these saves are coming on a regular basis where we're catching issues early And preventing larger events from occurring.

Speaker 5

And also under asset availability, as I mentioned earlier, the turnaround execution It's going very well for us. We've significantly improved our predictability on this. This takes a lot of legwork over time to improve those And most importantly, even though we're hitting our turnaround execution goals, We are continuing to complete all the necessary work to operate the equipment safely and reliably over time. So that program is continuing to mature. We're continuing to see that, and that will allow our utilization rates to be available to operate in the market if the market is there.

Speaker 5

And then as you mentioned, the cost side of it is a big component of this as well. We have a clear path that we've identified Reducing our costs by $500,000,000 by the end of this year on a run rate basis, over half of the $400,000,000 run rate Cost savings that Kevin mentioned in his comments are coming out of refining and that's good news for us. And probably more importantly as Mark has indicated, our entire organization is uncovering opportunities to lower cost. We're being much more efficient in how we work and accepting the challenge to improve the business, which all should directionally support Improved market capture and utilization.

Speaker 2

Yes. Thanks, Rich. Doug, we've really come a long way on business transformation efforts. It was a heavy lift, a major focus really for the last 18 months or so and we're seeing great progress. We beat our goal of $500,000,000 by year end of 2022 and we're accelerating right into 2023 hitting More than $600,000,000 in the Q1.

Speaker 2

And as I mentioned in our comments, we'll take you on a tour of those realized savings At the Q2 call, Ed, we're excited. The organization is excited. We've made major Changes in the structure of the organization that eliminates a lot of inefficiencies. We've got feedback loops that we put in place to make sure that these savings are real And that they're sustainable and we're seeing it and people have bought in. We're using some really, really state of the art tools to make sure that we're capturing What we think we're capturing and delivering those results to the bottom line.

Speaker 2

So it's just an incredible change in the organization that we've witnessed over the last 6 or 8 months as things start to be realized.

Speaker 8

A lot of progress in a short period of time, Mark. I guess my follow-up is Fairly predictable, and I apologize for this demand. Your large one of your large competitors talked about big increases in deal demand year over year and A healthy outlook for gasoline and market doesn't seem to believe that right now. I just wonder through your marketing channels if you could share what you're seeing on both of those trends?

Speaker 7

Yes, Doug, this is Brian. Maybe I'll talk about kind of what we're seeing in the market and that's kind of what we're seeing in our business as well, although Our volumes are somewhat off because of California flooding and because of sub maintenance. But generally, for U. S. Gasoline, we're seeing demand better than last year, and we're Seeing global demand about 3% better than last year.

Speaker 7

We're now heading to gasoline driving season, as was mentioned, with The lowest U. S. Gasoline inventories in almost 10 years. We're also seeing very strong octane spreads. They're about a third larger than they were Q1 of last year, dollars 0.27 We would expect demand to hold better than last year, particularly given that the We have lower retail prices versus last year as well.

Speaker 7

On the diesel side, the year did start off weaker early in the year with a warmer winter, It has begun to firm with midcontinent planting season. Currently, we're seeing U. S. Diesel demand about 3.5% under last year. But that said, global distillate demand is a bit stronger than last year, and some countries are seeing particularly strong diesel demand.

Speaker 7

In Latin America, we're seeing demand at 10% over last year, in China 4% over last year. And finally, I'd say that in the U. S, it's been bouncing back and forth We Max Diesel and Max Gasoline, PADD 5s have been in Max Gasoline since mid February pretty much. PADD 1 signaled Max Gasoline in mid April. And so this bodes well for helping the firm up distillate throughout the summer.

Speaker 8

Interesting color. We'll watch with interest, guys. Thanks so much for your answers.

Speaker 2

Thanks, Doug.

Operator

Ryan Todd from Piper Sandler. Please go ahead. Your line is open.

Speaker 9

Great. Thanks. Maybe you basically said that you were not going to talk about Until next quarter, but was wondering on the cost reduction side. I mean, you've made great progress there. Can you talk a little bit about where you've been ahead of schedule, where you've had some success there and whether I mean, you've already hit the $200,000,000 kind of sustaining capital reduction target.

Speaker 9

Is there further upside To that versus your prior target and as you continue to trend ahead of schedule, does it have your expectations changed at all in terms of the ultimate amount of cost

Speaker 2

I'll touch a couple of those things, Ryan, at a high level and then Kevin can drill into How the savings are distributed, really refining has performed very well with respect to business transformation. We're seeing that. On the sustaining capital, I just want to make it clear that that's really not an outright reduction in Sustaining capital opportunities, it's becoming more efficient and more productive in how we're spending that and we're going to continue to do that. You'll see Really that impact in any of our capital projects that we look at going forward and we're not really capturing that. So it's going to be process to look at how to get more and more efficient around sustaining capital and we're not going to end This adventure when we get to the end of the defined program at the end of next year that we have out Line goals, we expect to continue to generate more savings on into 2024 and beyond.

Speaker 2

There are some things that aren't even talking about today that require modest capital that will further enhance cost savings. So we've we're instilling this as part of our culture, Ryan and this is just going to be an ongoing march of continuous improvement, greater competitive edge. We've got 14,000 employees that want to win out there every day and they're highly motivated. Now Kevin can give you a little insight to where you're going to see these numbers.

Speaker 3

Yes. Thanks, Mark. So as we said, over $600,000,000 run rate at the end of the quarter, when you adjust for the fact some of that Capital from an EBITDA standpoint, it's north of $400,000,000 run rate. And as we look at the detail in the quarter, we are seeing the proportionate That show up. It's not necessarily obvious from the externally reported data just because of the other things happening like consolidation of DCP into our results and So on.

Speaker 3

But of that $400,000,000 plus run rate, half of that or even a little bit more is showing up In refining, which is where you would expect it to be given that that's the largest spend area in the company anyway. We're doing this through a combination of organization work. We completed that last year and we're seeing that benefit flow through this quarter Between the sort of centralization of some of our activities across the organization, we've done a lot of work around our Processes where we've been looking for ways to standardize and simplify the way we do work and in some cases just eliminate work. And so we've optimized the sort of overall business support model around all of those activities and then we continue to work on our external spend, the 3rd party sourcing Activities and leveraging the technologies that we really put the foundation in place with Advantage 66 in terms of the digital Progress we have made in those areas. So a lot of different elements to that, and we'll give more specifics This time next quarter as we have the half year results available.

Speaker 9

Great. Thanks. And then maybe, I mean, you mentioned the importance of crude differentials to refining profitability. Can you talk a little bit, I mean, we've seen some pretty big moves on crude differentials, Maya widening and then coming in some Canadian heavy differentials narrowing. Can you talk about what you're seeing out there?

Speaker 9

What your outlook is for some of these crude differentials over the remainder of this year?

Speaker 7

Sure, Ryan. This is Brian. I think overall, as you pointed out, sour has gained strength since the beginning of the year. And this strength was a number of factors. You have now it's starting to weaken, but you have new refinery capacity in China and in Kuwait.

Speaker 7

You have new U. S. Refinery additions on the Gulf Coast at Port Arthur and Galveston Bay. We had an unexpected OPEC cut, 1,100,000 barrels, don't know how much of that cut will actually happen, but that's a large cut. Chinese economy has been very strong and you can See that the economy coming back with more people driving, more people flying, and then lack of sour barrels on the market.

Speaker 7

So combination of things firmed it initially and then the market started to weaken. I will point out that even though the market has come off since Q1, When you think about the sours, it's useful to remember that while they're weak, they're still weak, but relative to historical perspective, so if you look at Latin American sours like Castillo or Maya, this is still about $4 to $6 weaker than 5 year averages. So those differentials are still weaker than historical, although they firmed up some since Q1.

Speaker 2

Okay. Thank you. Thanks, Ryan.

Operator

Manav Gupta with UBS. You may proceed. Your line is now open.

Speaker 10

Guys, I just wanted to first touch base a little bit on the Chemicals earnings seeing a strong rebound. It really helps you out. I think you have a $0.10 improvement in ethylene chain margin. So just trying to understand from you from the demand point on the chemical side, what are you seeing? And should we expect a further recovery in chemical margins given the strong global demand?

Speaker 11

Yes, Manav, this is Tim Roberts. On the chemicals front, what you've got really are yes, we did benefit. The benefit was really related to Lower advantaged feedstocks, ethane, propane, butane, namely here in the United States. So you saw that advantage as those prices dropped, They became advantaged in the crack and subsequently that showed up in the margin. The other side of that as well is lower natural gas prices, which of course is driving that whole structure, Also help with regard to utility cost.

Speaker 11

So you had lower utility costs, the better feedstock advantage. So it really helped in the quarter. You still got a supply issue and you have a demand issue. On the supply side, fundamentally, you've got more capacity that's coming on board here in the United States. So you're going to have to work through that new capacity.

Speaker 11

The demand side is coming around, but you're still trying to work off a lot of inventory that happened as you had Supply chain disruptions out there in the marketplace. So you got to work through that inventory, and you also need to see China coming back stronger. As Brian mentioned, there is some strength there in travel, driving, so some good things there, needs to also show up in Consumption on that side as well as production to meet global demand for products made out of polymers. So fundamentally, I think it's still going to take us a little bit of time to work through those 2 imbalances. We're not expecting anything to happen by the end of the year that's be a significant bump.

Speaker 11

But I would throw one caveat is China is a significant impact in the market. If they're clicking on all cylinders, you can see things change rapidly. But at this point in time, we've got an inventory to work off and we need to see some additional demand come back, Especially from Asia.

Speaker 2

Yes. The only thing I would add Manav is CPChem's operations have been very strong and I think Their ability to out produce their competitors is based on their strong operations and their solid cost And they're delivering in a tough environment, they're delivering and outperforming.

Speaker 11

Yes. And I do think, Mark, exactly on Point though is that also their product slate is geared towards consumables. Durables are a little bit you're seeing it A little bit on the durables front, and they don't have as much exposure to that.

Speaker 10

Perfect, guys. My quick follow-up is if we can get some updates on your the progress you are making on your renewable diesel project and hope it starts up by year end or early 2020

Speaker 2

Yes. Manav, we're making good progress on the project out at Rodeo. You heard me mention we shut down the Santa Maria facility, which is Basically a feed prep unit for the Rodeo facility. The project is moving along And there are lots of weather challenges out there, but the team has fought through it and dealt with it and we're looking forward to having that on in the Q1 Of next year. And I'll remind you that we've had a unit there operating and producing renewable diesel, what we call Unit 250 since April 2021.

Speaker 2

And I'll tell you what, it's exceeded both our operating expectations and our commercial expectations. And frankly, we're ready for more. We've got a great strategy out there and we are implementing and executing. And I'll let Brian touch on more of those details.

Speaker 7

Hi, Manav. Just to follow-up on Mark's point, the margins that we've seen at Unit 250 Since we started the unit in Q1 of 2021 have been better than we premised every single quarter. And if you remember, we premised Unit 251 running a soybean oil feedstock only, but we've also run distillers corn oil, canola oil And pretreated used cooking oil and we're actively blending feedstocks at the plant now. And in general, General comment, we're seeing 3 times the volumes of low CI imports into the U. S.

Speaker 7

Now than last year and we're also seeing more crushing capacity for And then on the marketing side of the business, we're selling almost all of our production through our branded and retail outlets Directly to the end consumer and we've also sold volumes to geographic locations that offer higher credit incentives Then California for some of the feedstocks. And then finally on the credit side, the LCFS programs are currently available in California, Oregon, Washington and Canada as you know. We're seeing other states proposing these programs and in fact Minnesota and Pennsylvania are 2 states that recently proposed LCFS program. And then Mark, that's the kind of commercial side. Mark mentioned the operating side too.

Speaker 7

And on the operating side, we're seeing higher than premised yields of RD at greater than 95%. And we're also making 30% more renewable diesel production at the plant than we originally thought. So as Mark pointed out, we're looking forward to Rodeo renewed. And Rodeo renewed We'll also have the flexibility of producing up to 10,000 barrels of renewable jet fuel with very little capital.

Speaker 10

Those are all very encouraging updates. Thank you guys.

Speaker 2

Thanks, Manav.

Operator

John Royall with JPMorgan. Please proceed. Your line is open.

Speaker 12

Hi, good morning. Thanks for taking my questions. So my first one is on OpEx. Can you talk about OpEx trends in refining into the Q2? It's an item that you don't guide to, but 1Q ticks down presumably on lower natural gas prices and despite higher maintenance.

Speaker 12

In 2Q, you'll have an even lower price presumably And less maintenance and of course your efforts around costs. So any color on expectations on the refining OpEx side in 2Q and going forward?

Speaker 3

John, this is Kevin. I would just say, I mean, your points are valid. We'll see we'll benefit from lower maintenance turnaround costs And the natural gas prices are settling in at a pretty low level. And so You would expect to see a drop 1Q to 2Q. We're not giving specific guidance on the number.

Speaker 3

Now the other side of that is utilization will be higher. So some of the variable You'll see a small impact from, but that's a good thing. But net net, I think you should see a small, a modest sequential decline.

Speaker 12

Great. Thanks, Kevin. And then just on the share buyback, in 1Q, you paced a bit ahead of your Quarterly pace that you need to hit your longer term guidance, but 2Q does have an outflow from the acquisition. So should we be expecting a slowing in 2Q and then Further, if the environment were to continue to deteriorate from a cracks perspective, could that impact your pacing as well?

Speaker 3

Yes. John, I wouldn't be too concerned about buyback pace being driven by the Funding the buyback because we had a $7,000,000,000 cash balance at the end of the Q1. We had drawn we had issued the $1,250,000,000 of notes, but we have the term loan facility, which has not been drawn yet. And so we will draw on that as we fund the buy in. So even all other things unchanged, we'll still have a healthy cash balance at that point in time.

Speaker 3

We're still generating cash. And so I think that our buyback pace Should still be at a very respectable level in the Q2. The balance sheet is in a good position. The operating cash flow It's still strong. We've seen some weakening in refining margins, but relative to our mid cycle assumptions, the business is So looking really good.

Speaker 3

So I'm not too concerned about the buyback pace, being impacted by the DCP buy in.

Speaker 12

Thank you.

Operator

Matthew Blair with TPH. Please proceed. Your line is open.

Speaker 6

Hey, good morning. I was hoping you could expand a little bit on the dynamics in the Central Corridor in Q1 and then heading into Q2 as well. I think you ran at 89% utilization in Q1. Were Wood River and Borger still impacted by some of the issues From Q4. And then it looks like your margin capture was actually pretty good in Q1, 116%.

Speaker 6

Was that a function of wider WCS diffs? And then I guess, would we expect lower margin capture in Central Corridor Heading into Q2 with narrower WCF diffs.

Speaker 5

Yes, this is Rich. So Central Corridor, I think the first thing to remember is a quarter over quarter analysis. 4th quarter, we had some pretty heavy headwinds with the Keystone shutdown and the winter storm Thanks. So that's kind of sets the baseline. In the Q1, we did see improved feedstock advantage Running the heavy crudes.

Speaker 5

And more importantly, we're able to actually increase our crude slate percentage of these Crudes that we were able to run, that impacted our market capture there as well. Now some of that was offset by the unplanned downtime Impacts that carried on initiated in the Q4 carried on into the Q1. That unplanned downtime primarily at Wood River was Is now repaired and the facility is back up and running. We did slide 1 turnaround from the first quarter to the first Half of the second quarter that turnaround is now wrapping up this week here. So we do expect the utilization rates To get back to higher levels for the WRB assets, There also is there was other some slight turnaround impacts as well to that Q1 results A little bit lower market cracks also that played into that result.

Speaker 5

That's how we see the central corridor kind of moving forward. We Our utilization rates to turn back upwards.

Speaker 6

Great. Thanks. And then Thanks for the comprehensive RD update. I just had one follow-up there. Could you talk about how the process is going For getting LCFS pathways, some of your peers have mentioned that CARB is pretty backed up and it's taking longer than expected.

Speaker 6

As you bring on the full site in Q1 'twenty four, would you expect to have all your LCFS pathways at that Time or is that a risk to the earnings contribution?

Speaker 5

Well, we this is Rich again. We anticipated this flood of activity that would occur to get these LCFS pathways Approved and we've been working diligently to get these approved even ahead of the startup of the project. Any pathway that was approved For the Unit 250 operation is also applicable to the Reneo renewed project as well. So while we are concerned, I would say that there is a flood of applications to pathways. We think we're in a good position and that should meter into our system consistent with the start up of the project.

Speaker 6

Great. Thanks so much.

Operator

Paul Cheng with Scotiabank, please proceed. Your line is open.

Speaker 13

Hey, guys. Good morning. Mark, just two questions. First, with the new California windfall profit penalty That being passed, how's that change your view? Or does it change your view about your California asset both in the refining and marketing?

Speaker 2

Yes, Paul. That's been taking up a lot of intellectual capacity for I think the entire industry since That was rushed through. Before that California was a tough place to manage refining business and I think this just Makes it even a little more difficult. We're like everyone else working hard to understand both the intended and unintended consequences of SBX1-two and it certainly at a fundamental level creates more uncertainty And it's going to make it more difficult for people to step up and invest in the supply chain that the consumers need because even though You've got a lot of things coming over the hill to reduce demand. Today demand is strong and you can see what happens when there's Disruptions and the supply chain can be pretty tight there.

Speaker 2

So it's really tough for us to see How this new law is going to benefit the consumers at the end of the day?

Speaker 13

Mark, do you think you or the industry is going to challenge them in court? Because I'm not sure how Yes. The industry has not been proven to have done anything wrong. Why that will be slapped with a penalty?

Speaker 2

Yes. I think that it's logical to assume that industry associations will Defend and protect the interests of the industries and even individual companies may take actions, that's certainly going to be up to each company. But from an industry perspective, I think that that's an angle that's obviously being looked at.

Speaker 13

Okay. The second question, I think this is for Kevin. Kevin, you mentioned about in the refining Captured in your presentation in the upper corners, it's a pretty big positive. And I actually went back To the last, say, 4 or 5 quarters, I think mainly without exception, that column is always a negative. Yes, I bet.

Speaker 13

Yes, yes, yes, yes, yes, hurting your margin instead of, say, benefiting like what we've seen in this quarter. I think you sort of talked a bit in your prepared remarks. Can you elaborate a little bit more than what that column really represent and why we have Seeing such an improvement and what are those is sustainable?

Speaker 3

Yes, Paul, the big Driver of the change this quarter, especially comparing to last quarter is around the product Clean product realizations or clean product differentials. And that was a particular negative item in the 4th quarter, because the way we do our market the market crack for Atlantic Basin, we use a New York Harbor Based crack and the distillate crack or the jet crack was particularly strong in New York Harbor. It was weaker in Europe And our capacity is approximately fifty-fifty between New York, Northeast and Europe. And so our Europe distillate production It's causing a negative relative to that market, and so that pulls down the overall capture, and that shows up in other. We had a little bit of a similar phenomenon going on in the West Coast as well where we use an LA marker for the entire West Coast, which includes Northern California And the Pacific Northwest.

Speaker 3

And so when those markets are out of sync with each other that can drive differentials in our actual product realizations and that will Show up in that other, that's the biggest single driver in their fault.

Speaker 1

And it was really negative impacts from in the Q4.

Operator

Jason Gabelman with Cowen. Please proceed. Your line is now open.

Speaker 14

Hey, thanks for taking my questions. The first I wanted to ask was on kind of global refining margin structure. There are stories out there that Asian plants are cutting runs while U. S. Cracks are still really healthy, dollars 20 a barrel.

Speaker 14

So the question is, is that kind of a leading indicator that some of that weakness will ultimately make its way over Into the U. S. Via lower margins or is it an indication that the global margin environment could be at a floor because we're cutting around somewhere? Thanks.

Speaker 7

Hey, Jason, this is Brian. I'd say that, as you know, refineries in the U. S. Are advantaged relative to European and Asian refineries. And as margins in Asia and Europe have begun to fall, we like you said, we're beginning to see runs trim, particularly in Korea, Taiwan and Europe.

Speaker 7

Also, China is heading this month into a turnaround season, which should, along with the low U. S. Inventories and the fact that we're stepping into summer driver seat driving season begin to help strengthen in our opinion global margins.

Speaker 14

Okay, great. And my follow-up is on DCP and I understand the deal isn't closed yet, but just maybe wanted to get some Early indications on progress. And specifically, I think part of the rationale for the deal was the combined midstream Platform of fill ups and DCP would attract more acreage to fill midstream assets Within that platform and support growth there. And so the question is, are there any early indications that upstream companies Do you view this combined platform as more favorable to partner with, to support future midstream growth for Phillips? Thanks.

Speaker 11

Yes, Jason, this is Tim Roberts. Yes, a couple of things. First thing on the second part of the deal, which is the buying in the public units, We're expecting to get that done here in Q2, probably the latter portion of Q2 to get that completed and get that behind And increasing our economic interest up close to 87%. So the next part, as far as rationale of the deal, What we found is that those that were integrated wellhead, especially in the NGL space, wellhead to the market, We're more advantaged than those that maybe only participated in a portion of the value chain, I. E.

Speaker 11

G and P Or the transportation logistics fractionation exports. And so being able to go into a major And being able to sell the ability to get from the wellhead all the way to the market is tough to do if you don't participate all the way there. So bringing the G and P portion of DCP together with the FOLT's portion, which was the transportation all the way to the dock, We think that created that infrastructure now that can go out and compete. Now to your question, has that shown any interest or we have Percolating out there from producers who like that? The answer is yes.

Speaker 11

We've had a lot of activity And a lot of engagement, as you would expect. People want options and want alternatives. And so we're bringing a viable option and alternative As well as the ability to get barrels out of the Houston Ship Channel and get them down to a less congested area down in the Freeport swing area. So yes, it's been so far so good. We just need to make sure we convert those into bottom line.

Speaker 14

Great. That's really helpful. Thanks for the color.

Speaker 2

Thank you, Jason.

Operator

That concludes the question and answer session. I will now turn the call back over to Mark Lazier for closing remarks.

Speaker 2

Thank you, Sierra. I just want to recap a few key things. We had a strong start to the year. We had a solid Q1 results and we raised the dividend and increased our share repurchases, which are on a pace to deliver our target return of $10,000,000 to $12,000,000 From July of 2022 to year end 2024. We've made great progress in refining with strong turnaround execution, Improve market capture and lower costs.

Speaker 2

In midstream, just as Tim mentioned, we advanced midstream integration And we remain confident in capturing $300,000,000 of synergies. We expect to close on the buy in this quarter. We're progressing our business transformation initiatives and we're on track to achieve $1,000,000,000 of annual run rate savings by year end. We remain committed to financial strength, disciplined capital allocation and returning distributions to our shareholders. We look forward to updating you on our progress.

Speaker 2

Thank you for all your interest in Phillips 60

Powered by Quartr
Earnings Conference Call
Phillips 66 Q1 2023
00:00 / 00:00