Phillips 66 Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
October 27, 2023

There are 16 speakers on the call.

Operator

Welcome to the Third Quarter 2023 Phillips 66 Earnings Conference Call. My name is Carla, 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 Third Quarter Earnings Conference Call. Participants on today's call will include Mark Lasier, President and CEO Kevin Mitchell, CFO Tim Roberts, Midstream and Chemicals Rich Harvison, Refining and Brian Mandel, Marketing and Commercial. Today's presentation material can be found on the Investor Relations section of the Phillips 66 website along with supplemental, financial and operating information. Slide 2 contains our Safe Harbor statement. We will be making forward looking statements during today's 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. We're pleased to report another quarter of strong financial and operating results, And we continue to execute on our strategic priorities to increase shareholder value. Our achievements to date have enabled us to make significant progress call. For the commitments we made to shareholders a year ago at Investor Day.

Speaker 2

We're confident in our ability to exceed these commitments and we'll provide an update today. Slide 4 shows the evolution of our portfolio. We're much more than a refining company. We are differentiated by an integrated and diversified midstream, chemicals, refining, marketing and specialties portfolio That generates free cash flow through the economic cycles. Our global commercial supply and trading organization leverages our assets to generate incremental value.

Speaker 2

We continue to execute our strategy to increase more stable cash flows in midstream. We see more growth opportunities as U. S. Natural gas and natural gas liquids production is expected to outpace crude oil. The demand fundamentals are strong as NGLs Strengthened our competitive position by integrating our NGL wellhead to market value chain and adds over $1,000,000,000 to mid cycle adjusted EBITDA.

Speaker 2

Our current synergy run rate is on pace to deliver more than $400,000,000 Midstream stable cash generation covers the company's dividend And our sustaining capital. We'll continue to capitalize on our integrated and diversified portfolio to deliver results. Moving to Slide 5. At our Investor Day in November 2022, We targeted $3,000,000,000 in mid cycle EBITDA growth by 2025. This included NGL well hit to market, Rodeo renewed, Business Transformation and CPChem Growth Projects.

Speaker 2

Given the substantial progress employees across the company have made, We are raising the bar. We now expect to grow mid cycle adjusted EBITDA by $4,000,000,000 between 2022 2025, Reflecting a $1,000,000,000 increase from our original target. This includes additional value from business transformation, Midstream synergies and commercial contributions. We're increasing the business transformation target to $1,400,000,000 from $1,000,000,000 We're enhancing our commercial capabilities to extract additional value, maximizing return on capital employed and increasing Refining market capture. We're committing to higher shareholder distributions.

Speaker 2

Our new target is $13,000,000,000 to $15,000,000,000 Between July 2022 year end 2024. This is an increase from our original target of $10,000,000,000 to $12,000,000,000 We will return over 50% of our operating cash flow to shareholders. Lastly, we plan to monetize assets We'll deploy the proceeds to advance strategic priorities including accelerating cash return to shareholders. Slide 6 shows progress on distributions to shareholders and improving refining performance. We returned $6,700,000,000 through share repurchases and dividends since July 2022, Representing over 50% of operating cash flow during the same time period.

Speaker 2

Strong cash generation and disciplined capital allocation Enabled us to exceed the pace to achieve the original $10,000,000,000 to $12,000,000,000 target before year end 2024. The increased target of $13,000,000,000 to $15,000,000,000 equates to 25% to 30% of current market cap. Our Board of Directors approved a $5,000,000,000 increase to our share repurchase authorization. This is in addition to the previous authorization, Which had approximately $3,100,000,000 remaining as of September 30. Since 2012, The Board has authorized $25,000,000,000 in share repurchases.

Speaker 2

These higher distributions to shareholders We'll be supported by $4,000,000,000 of mid cycle adjusted EBITDA growth between 2022 2025. We are laser focused on improving refining performance. 3rd quarter crude utilization of 95% was the highest utilization call. Our refining system ran above industry average utilization rates for the 3rd straight quarter. We continue to advance high return, low capital projects to improve reliability and market capture.

Speaker 2

We're executing 10 to 15 projects a year to improve market capture by 5%. Last year, we completed several projects that added 2% to market capture and we expect the 2023 projects to add a further 1.3%. We reduced costs by $0.40 per barrel And we'll achieve a $0.75 per barrel run rate by the end of 2023. Our people have fully embraced business transformation Slide 7 provides an overview of the business transformation program. We're increasing our business transformation target to $1,400,000,000 Comprised of $1,100,000,000 of cost reductions and $300,000,000 of sustaining capital efficiencies.

Speaker 2

The incremental reductions are $300,000,000 in costs, over half of which benefits refining and $100,000,000 of sustaining capital. We're on track to achieve the targets this year and next. Slide 8 summarizes our strategic priorities and enhancements. Last November, we announced 6 priorities to increase shareholder value. These were ambitious and consistent with investor feedback.

Speaker 2

Our achievements to date provide us with the confidence that we will not only meet these targets, but we'll exceed them. So with the support of our Board, We're increasing our commitments to shareholders. Delivering on the commitments will generate additional free cash flow from our integrated and diversified portfolio, Positioning us to increase cash returns to shareholders now and in the future. Now, I'll turn the call over to Kevin to review the Q3 financial results.

Speaker 3

Thank you, Mark. Adjusted earnings were $2,100,000,000 or $4.63 per share. The $9,000,000 decrease in the fair value of our investment in Novonix reduced earnings per share by 0 point 0 $2 We generated operating cash flow of $2,700,000,000 including a working capital benefit of $285,000,000 Cash distributions from equity affiliates of $361,000,000 Capital spending for the quarter was $855,000,000 We returned $1,200,000,000 to shareholders through $752,000,000 of share repurchases And $465,000,000 of dividends. We ended the quarter with a net debt to capital ratio of 33%. Annualized adjusted return on capital employed was 17%.

Speaker 3

I'll cover the segment results on Slide 10. Additional details can be referenced in the appendix to this presentation. This slide highlights the change in adjusted results by segment From the Q2 to the Q3. During the period, adjusted earnings increased $304,000,000 Mostly due to improved results in refining, partially offset by lower results in Chemicals and Midstream as well as higher corporate costs. In midstream, 3rd quarter adjusted pre tax income was $569,000,000 down $57,000,000 from the prior quarter.

Speaker 3

The decrease related to our NGL business and was mainly due to the timing of cargo freight costs as well as higher utility, integration and employee costs. These impacts were partially offset by higher margins from increasing commodity prices. Chemicals adjusted pre tax income decreased $88,000,000 call. $104,000,000 in the 3rd quarter. This decrease was mainly due to lower margins.

Speaker 3

Global O and P utilization was 99%. Refining 3rd quarter adjusted pretax income was $1,700,000,000 up $592,000,000 from the 2nd quarter. The increase was primarily due to higher realized margins and strong utilization. Realized margins increased due to higher market crack spreads, offset by inventory hedge impacts, lower secondary product margins and lower Gulf Coast Clean Product Realizations. Inventory hedges and losses from secondary products mainly reflect the impact of rising crude prices during the quarter.

Speaker 3

These market factors negatively impacted capture rate, which was 66% in the quarter. Marketing and Specialty's adjusted 3rd quarter pre tax income was call. $833,000,000 a slight decrease of $11,000,000 from the previous quarter, reflecting continued strong margins. The corporate and other segments adjusted pre tax costs were $59,000,000 higher than the previous quarter. The increase was mainly due to higher net interest expense related to acquiring DCP Midstream's public common units on June 15, as well as employee related expenses.

Speaker 3

Our adjusted effective tax rate was 24%. The impact of non controlling interest Slide 11 shows the change in cash during the Q3. We started the quarter with a $3,000,000,000 cash balance. Cash from operations was $2,400,000,000 excluding working capital. During the quarter, we funded $358,000,000 of pension plan contributions, Which comes out of cash from operations.

Speaker 3

There was a working capital benefit of $285,000,000 Year to date working capital is a use of around $2,000,000,000 primarily related to inventory that we expect to mostly reverse by year end. We received $280,000,000 from asset dispositions, mainly reflecting the sale of our interest in South Texas Gateway Terminal. Total proceeds from asset dispositions are $370,000,000 through the Q3 of 2023. We funded $855,000,000 of capital spending. This includes $260,000,000 For the acquisition of a U.

Speaker 3

S. West Coast Marketing Business. We repaid approximately $500,000,000 of debt, Mostly reflecting lower borrowings on DCP Midstream's credit facilities. Additionally, we returned $1,200,000,000 to shareholders Through share repurchases and dividends. Our ending cash balance was $3,500,000,000 This concludes my review of the financial and operating results.

Speaker 3

Next, I'll cover a few outlook items. In Chemicals, we expect the Q4 global O and P utilization rate to be in the mid-90s. In refining, we expect the 4th quarter worldwide crude utilization rate to be in the low 90s and turnaround expenses to be between $90,000,000 $110,000,000 We anticipate Q4 corporate and other costs to come in between $280,000,000 $300,000,000 Now we will open the line for questions, After which Mark will make closing comments.

Operator

Thank you. We will now begin the question and answer session. As we open the call for questions, As a courtesy to all participants, please limit yourself to one question and a follow-up. If you wish to be removed from the queue, please press star then the number 2 key. If you are using a speakerphone, you may need Neil Mehta from Goldman Sachs.

Speaker 4

Call. And so I want to on the bullet about maintaining financial strength and flexibility, you talk about Moving from $3,000,000,000 to $4,000,000,000 of EBITDA growth and greater than $3,000,000,000 of non core asset dispositions. So Wondering if you could take some time to talk about what are the key drivers of the move from $3,000,000,000 to $4,000,000,000 And then as you identify call. Non core asset sales, what are some of the parameters that you're evaluating as we think about what assets can be part of that Got you.

Speaker 2

Hi, Neil. Good morning. This is Mark. When you think about the additional $1,000,000,000 increments in EBITDA That really comes from the enhanced business transformation work that we're going to do as well as the Additional synergies we intend to capture from the DCP roll up supplemented by the Enhanced capability and value creation that we're going to see out of the commercial organization. Regarding asset dispositions, this fundamentally is about creating focus and redeploying capital.

Speaker 2

We're not going to comment on assets today, but we generally have some high performing assets that may be more valuable to Others and maybe more strategic to others and we're going to explore that. And if we can capture value greater than our hold value, we'll do so. But the bottom line is this, that we're committed to managing the portfolio to drive focus that's consistent with our strategy and simplifying our business.

Speaker 4

Okay. All right. Thank you. And then on the quarter itself, the refining capture With crude or is there anything else that we need to keep in mind as we think about what it all means for 4Q and 2024?

Speaker 3

Yes, Neil, it's Kevin. Let me just make a couple of comments on that. So we did have a few things moving around in the quarter that impacted Capture to the negative. And so we saw regional price differentials that differed from the benchmark That we use in terms of the market crack and so those worked against us during the quarter. For example, the Chicago market which became Disconnected from the group and we moved product into that market.

Speaker 3

We also had an impact from the effect Of inventory hedges in a rising price environment, so that component, this is all showed up in the Central Corridor. We expect about $100,000,000 to $150,000,000 of that to come back in the 4th quarter as we see the physical gain on those barrels That offsets the paper loss that we took in the Q3.

Speaker 4

That's really helpful. Thank you, Ken.

Operator

Thank you, Neil. Roger Read from Wells Fargo Securities. Please go ahead. Your line is open.

Speaker 5

Yes. Thank you. Good morning and appreciate the Winding out the changes here, improvements I should say overall. The question I have to start with, you mentioned $3,000,000,000 of Target disposition proceeds, but you've upped your overall EBITDA target. So I'm just curious what EBITDA is associated with those ops, if call.

Speaker 5

And what does that imply about the sort of extra growth in the overall performance of your raised EBITDA target?

Speaker 3

Yes, Roger, it's Kevin. So just for clarity on that point, the growth that we laid out there, the incremental $1,000,000,000 is excluding the impact of dispositions. And so clearly dispositions will reduce EBITDA. We're not giving any guidance on that at this point in time. I mean you can come up with an assumption on where you may call.

Speaker 3

We think we'll be selling assets and make a multiple assumption from that, but we're not giving any specific guidance on The dispositions other than we expect to realize in excess of $3,000,000,000

Speaker 5

Okay. And I assume based on the idea that there's always a larger pool of assets that could be sold. That's why It's unclear right now what the net impact would be.

Speaker 3

That's right. We'll do what makes the most sense for us.

Speaker 5

Okay. And then a follow-up to Neil's question on refining margins, but maybe looking forward rather than back. The shift here where diesel margins are well above gasoline, I think about generally a diesel yield Improvement for you versus industry standards. Is that the right way to think about Q4 here? Or is there anything else that we should be paying attention

Speaker 6

call. Yes, Roger, this is Rich. As we've indicated over the years, our kit has Shifted towards distillate production, there's nothing that's changed on that other than some of our flexibility to move back and forth between gasoline and distillate. So call. We still maintain a kit that is favorable to distillate margins in the market.

Speaker 5

Great. Thank you.

Operator

Thank you, Roger. Manav Gupta from UBS. Your line is now open. Please go ahead.

Speaker 7

Good morning, guys. My question here is and I know kind of answer, most likely you will not answer it, but we get this question a lot, Very strong result on the West Coast again. A weaker D4 in price environment. Is there a Later in 2024, so is there a way you could is there a possibility you could move the timing of start up of Rodeo to better coincide with higher LCFS prices

Speaker 6

Hand it over to Brian here to add a little color on the backside. So at Rodeo, maybe I'll just step back a little bit and level set on everything that's going on at Rodeo here. So Rodeo, there was 2 NGOs that filed Suiting against Contra Costa County alleging that the RIDEA renewed project environmental impact report insufficiently addressed Project impacts. The ruling for this suit was received earlier this year And actually there were several issues in our favor, but there was 3 issues identified as insufficient in the county certified EIR. The judge explicitly allowed construction to continue with the project while Contra Costa County co.

Speaker 6

Works through and addresses the 3 deficiencies that were identified in the EIR. The county actually Posted that revised EIR update on October 24. That initiated a 45 day public comment period. County will respond to the comments and then likely issue a final EIR early 2024. So right now, our project construction remains on track to complete in the Q1 and we're committed to that timeline.

Speaker 6

I want to add, we have options. We've talked a little bit about this, but let me be a little bit more explicit on it on this one. There is flexibility to continue crude operation in the event that circumstances beyond our control prevent the start up of the project. I want to say we are committed to the start up

Speaker 2

of the project. But if

Speaker 6

for some reason we don't have that authority, we will continue to operate and crude operation. This is a staggered conversion process. In the past, we've called this a ramp up plan. So that creates natural flexibility for us. It allows us to continue process crude Or it allows us to start up the Reneo renewed project, which I want to remind people that's equivalent to removing the emissions of 1,000,000 cars from the roads.

Speaker 6

So we remain pretty confident. We remain confident, I should say, that we will start up call. The operations of Reneo renewed at the end of the Q1. And we're focused on executing that conversion plan. But we have this planned flexibility and we'll continue to process the crude oil if necessary.

Speaker 6

Now the outlook on the market and what your the other part of your question is really this outlook of LCFS and its relationship. I'm going to hand that over to Brian who can explain that relationship a little bit more. It's more complicated than just the LCFS credit program.

Speaker 8

Hi, Manav, it's Brian. So when you think about the RD margins, you have to think about not just the credits, but the price The feedstock, the price of the RD when it comes to market. So even though we've had lower LCFS and RINs, we've had deep distillate prices that have co. Outrun soybean prices, in fact soybean prices are off. We have more low CI beef stocks that are making their way into the U.

Speaker 8

S. Kinder Morgan pipeline is allowing RD on their pipelines now. So that means more reach of RD into the California market for consumption. We've had domestic demand is expected to continue to grow. We've converted all our stations.

Speaker 8

We're seeing RD Demand in Oregon and Washington continue to mature as those programs mature. We've been seeing RD moving to states like Texas and Illinois and Colorado where they have Tax abatement and tax reduction programs. I think traders believe that the U. S. Harvest is looking good.

Speaker 8

And if you remember last year In Argentina, they had a drought and this year we expect a more normal crop level condition. And then finally, what a lot of traders and call. Folks have on their minds is SAF or renewable jet and as those incentives make it make more sense to produce renewable jet, You'll see some of this R and D that's being produced move away and become SAF. So we're expecting about 200,000 barrels a day of R and D at the end of this year, But we'll see some of that, RD, in the future become renewable jet.

Speaker 7

Thank you. That was very detailed. And I think The key is the flexibility part which you expressed. My quick follow-up here is in your opening comments you said you are more than a refiner And yes, you have a very strong marketing and specialty business. Can we have some visibility on the near and medium term how that business is looking Both in Europe and in the U.

Speaker 7

S, if you could elaborate a little bit on the near term outlook for that business. Thank you.

Speaker 8

Hey Manav, it's Brian again. So I'll say we had a really strong quarter in the Q3. In fact, it was our 4th best Quarter on record. Q2 and Q3 are usually stronger seasonally than Q1 and Q4. And as you remember, starting 2019, we've added a lot of retail We're also focused on what we've called the last mile strategy internally, which is getting Rodeo Complex RD to the market, directly to the market and Getting that value chain value at Phillips 66.

Speaker 8

We've seen product volumes in our businesses relatively flat, but we continue to Optimize those volumes through a higher value distribution channels. So as a reminder, we have a wholesale business, co.

Speaker 5

We have a branded or

Speaker 8

franchise business and then we have a retail business. And the branded or franchise business and the retail business, those margins are significantly higher than the Wholesale Margins. And then finally on the lubricants base oil business, it continues to perform really well. So I'd say for Q4, call. We think that earnings will be in line with our normal Q4 mid cycle expectations.

Speaker 2

Yes. Manav, I would just add over the top that Brian and his team have been just quietly and consistently executing their last mile strategy and This opportunity to invest fairly small amounts of capital to get very high returns and to enhance our exposure to retail margins In a very creative way and it's you're seeing the value show up and you're seeing a consistent performance there that we really appreciate.

Speaker 7

Thank you.

Operator

Thank you, Manav. Doug Leggate from Bank of America, Please go ahead. Your line is open.

Speaker 9

Thanks. Good morning, everybody, and appreciate all the updates this morning. Mark, I wonder if I could try the disposal question again. I just want to be clear where you guys are in this process. Have you internally identified the assets for sale?

Speaker 9

I just wanted to be clear on that. And maybe What your expectations are of time line? I don't think that's been touched on. And I've got a quick follow-up on the timing.

Speaker 2

The answer to the first question is yes. The answer to the second question is it really is a function of the market appetite. We Understand the value that these assets provide us and they provide good value. So we've got to find willing buyers that co. Have a greater affinity for those assets than we do.

Speaker 2

And so we're not in any rush. We're not performing any fire sale, but we believe there's opportunities out there in the market Today to execute that plan.

Speaker 9

Thank you. My follow-up is on refining and I'm going to ask for a little forgiveness on this one ahead of time. But I think you know where our position has been on the strength of the refining sector, the refining Assuming as the mid cycle sustainable EBITDA for your business. So I'm curious if you could walk us through call. And expeditions are always possible given that we're on this call.

Speaker 9

What the moving parts are behind The contribution of refining to the new mid cycle targets. The capture rate is one part, but you've been running ahead when your facility has been running, you've been running ahead For quite a while now. And similarly, your utilization rates were not great, now they're better. Is that a big factor? I'm just wondering what the key kind of moving parts are in the assumptions And what the contribution is from refining in your new targets?

Speaker 9

Thank you.

Speaker 3

Yes, Doug, let me Try and unpack some of that. So our mid cycle refining EBITDA, as we laid out at Investor Day, was $4,000,000,000 That reflects a historic average assumption around where the market We'll trade. And that's we haven't changed that assumption. What we are doing is Increasing our ability to capture value across that system through lower costs And increased contribution from our commercial organization and the EBITDA uplift They provide that organization provides the system will predominantly show up in refining. It won't all be in refining, but it will predominantly show up in refining.

Speaker 3

We haven't tried to make a call on if we actually think the go forward mid cycle margin environment is Stronger now than it has been historically. Clearly, we've been in above mid cycle conditions For most of this year and last year, and that's all that we view that as upside. So we're still Pretty optimistic for the near term. We're probably above mid cycle in the near term, but our fundamental view of mid cycle hasn't changed. But our belief in terms of what that business can do in a mid cycle environment is going up with the enhancements we're putting in place.

Speaker 9

Kevin, has your utilization assumption changed?

Speaker 3

Well, not really, because If you think back to where we were running for the years prior to the pandemic And then we took a hit during the pandemic. We're really assuming we get back to that kind of level of operations that we were at before. And so some of the things, some of the refining performance priorities that Rich has talked about in the past that were outlined in Investor Day A year ago, we did not include those in as increases to mid cycle. We view that as we have to deliver on these to get back to that level of

Operator

Thank you, Doug. Ryan Todd from Piper Sandler. Please go ahead. Your line is open.

Speaker 10

Thanks. Maybe if I could a question on the shareholder return target. Thanks for the positive update there. I mean, at the midpoint, it implies, I think, roughly $1,000,000,000 a year of buyback, a quarter to year end 2024, Which is a nice step up from what we saw during the Q3, pretty close to the pace that you've had year to date in 2023. And what has been a obviously it's like certainly an above mid cycle environment.

Speaker 10

So can you maybe talk about your confidence call. What drove your confidence in being able to lean into the shareholder return target in that way? Maybe what it implies in your view of the outlook from here? And On the should we think you've been above pace on your prior mid cycle target as you've been above mid cycle. Call.

Speaker 10

Should we think of it the same way or if we continue to stay above mid cycle in 2024 that you'll drive towards the upside or beyond that type of target?

Speaker 2

Yes. Ryan, this is Mark. Glad to answer that question. To answer your last question, the answer is yes. If we're Outperforming our desire is to hit the high end of that target and we've provided the flexibility in the event That there is less cash available because of market conditions, we can pull back a little bit.

Speaker 2

Another thing I would point out is our $3,000,000,000 in asset dispositions. We have not factored that cash into the $13,000,000,000 to $15,000,000,000 So there's another call. As you look at the business transformation, we see those numbers, we see the reality of those numbers and we can capture that and use That value to drive those returns and we also see line of sight to the additional increments of EBITDA, the $4,000,000,000 that's coming into play. And call. Of course, that could be impacted by market as well.

Speaker 2

But when you factor all those things in, the risk of underperforming It's fairly muted. So we've got a high level of confidence that we can deliver.

Speaker 10

Okay. Perfect. That's very helpful. And then maybe just a question on the midstream. You've had a little bit of time now With the consolidated position there DCP under your belt at this point, synergies have moved a little bit higher from 300 to 400.

Speaker 10

Call. Can you talk about how you view the opportunity set there both in terms of what you're seeing in terms of your ability to drive commercial improvements there and maybe co. Incremental growth down the line?

Speaker 11

Yes, sure. Ryan, this is Tim. So yes, great question. Glad you asked. Yes, it's like anything else, business transformation and I'll talk about that because business transformation, we started that process and as we got into it, we just found more.

Speaker 11

We're doing the same thing with the DCP integration. So as we brought this thing together and by the way, we won't be complete with the integration. We'll get all the IT stuff done by the end of the Q1. And I think it's important to say that because once that's done in the end of the Q1, one, we can get some redundancies in people that will move away In supporting 2 different systems, the other is our commercial team and our ops team will all be reading off the same screens, the single source of data. It will all be 1 versus trying to look at 2 different systems and trying to make some decisions there.

Speaker 11

So we think the real catalyst for optimization is going to happen call. Further optimization will happen in that 1Q. It's probably worth me giving you an example here on a commercial side. So we're really excited about what This venture and putting it together, really excited about it. And we also think the as we've gotten into it, as I mentioned, we've We really felt like we're finding more and more as we go.

Speaker 11

And the example I want to give you is one that just came up a couple of weeks ago for us, Where commercially we were able to move barrels, I won't put any names in here, we were able to move barrels off one pipe, put it onto another pipe And allow more volume to go on the pipe we moved off of and that net impacts an additional $10,000,000 a year for us. So we could not have done that if we were 2 separate entities. So yes, are we believers? Yes. And do we think there's more there?

Speaker 11

Yes. And are we encouraged once we get past the Q1 about there being more opportunity? Absolutely.

Speaker 2

Yes. And I'd like to put another example out there, Ryan, last week a group of us visited the Sweeny Complex and we got to stop by the control room that operates all of our fractionators. And I asked A couple of frontline operators how they felt the integration was going and they were ecstatic because they see The ability to improve their ability to perform, they see it in real time. They said we can run at harder rates because we get better information, there's greater collaboration, They can run without concern of surprises coming at them. And so the whole mindset around business transformation, synergy capture, Being more competitive has evolved all the way to the frontline.

Speaker 2

These folks want

Speaker 12

to win and they want

Speaker 2

to figure out every day how to do better and how to drive more

Speaker 8

Thank

Speaker 5

you.

Operator

Thank you, Ryan. Poo Chang from Scotiabank. Please go ahead. Your line is open.

Speaker 13

Thank you. Good morning, guys. Call.

Speaker 12

Good morning, Paul.

Speaker 2

A couple of

Speaker 13

questions. Marketing, The business seems like it continued to do better than expected in a number of quarters. You've been adding retail station and everything. So should we look at that, your baseline what considered mid cycle have a structural improvement because of call. The way that how you guys are maybe changing the way how you run your add into the asset?

Speaker 13

And if that is the case, what is the New good baseline that we can assume?

Speaker 2

Yes. Paul, what I think you're asking is You're applauding the good performance you've seen in the marketing group, and it continues to increase as Brian and his team execute their And you're asking is there a reset in the mid cycle performance of the marketing business, is that the question?

Speaker 13

That's correct. That's correct. Because I mean that I think historically that is sort of like mid cycle, yes, dollars 400,000,000 a quarter, But you certainly have done much better than that in the past 2 years. I think that one quarter you can say, oh, maybe The wine ripper, but it seems like it's pretty consistent that you guys been performing better. I'm just curious that, is it Structurally that the business is stronger today as you add more retail station and everything or that business truly that you think It's just the market condition is better much better than average.

Speaker 8

Paul, this is Brian. I would say we did raise the mid cycle A couple of years ago and we'll continue to watch it and if we need to raise it again we will. But obviously the business is performing better and call. We're proud of the business performing better. We're going to continue to look for opportunities to add to the last mile strategy and some of other initiatives.

Speaker 8

So as we see that value hitting the bottom line, Well, indeed at some point raise the mid cycle.

Speaker 13

So, Brian, that you don't feel Comfortable that we have seen enough of the improvement saying that mid cycle is that indeed that is now even better than what You had me in mind say a couple of years ago?

Speaker 8

I'd say keep watching the bottom line and you'll see the dollars there. And when we feel comfortable, we'll move the mid cycle up.

Speaker 2

Yes, Brian never lacks confidence.

Speaker 13

Okay. Fair enough. And that maybe this one is for Rich. Rich, can you share with us that what's the Phillips 66 call. Turnaround activity looks like for next year, is it comparing to this year, whether it's going to be higher, lower call.

Speaker 13

And also what's your view about the industry turnaround activity for next year? Thank you.

Speaker 6

Yes, Paul. Appreciate the question. We generally give that guidance out 4th quarter. And so standby

Operator

John Royall from JPMorgan. Please go ahead. Your line is open.

Speaker 14

Hi, good afternoon. Thanks for taking my question. So my first question is on the net debt target. You had guided to hitting the top end of your range on leverage by year end. It's a pretty modest tailwind from working capital in 3Q and Kevin mentioned you'll catch it up and get most of that 1H build back in 4Q.

Speaker 14

Do you need any help from price to hit that working capital number or could price conversely be a headwind that prevents you from getting it all back? And then Does the worsening environment that we've seen here in 4Q in refining potentially impact your ability to hit that target? Yes.

Speaker 3

I mean, John, the market environment will impact profitability, it will impact cash generation, But the bulk of the working capital benefit we expect to see in the Q4 will be driven by inventory Impacts and that's pretty solid in terms of that impact. So while there will always be other Parts moving around in this equation, I feel pretty confident that the top end of that targeted range call. We'll be around about there at the end of the year. I'm not too concerned by that.

Speaker 14

Okay, great. Thank you. And then I was just Hoping for your latest views on WCS differentials. You should get some tailwind from the widening we've seen here in 4Q. But where do you think the differential goes from here, particularly as we get close to the start up of TMX, although there's some debate over the timing there.

Speaker 14

But Just any thoughts on WCS as we head into next year would be helpful.

Speaker 8

Hey, John, this is Brian. So like you said, the WCS Dips are very wide minus $25 Now that's a benefit to us. We're the largest importer of Canadian crude, call. Nearly 500,000 barrels a day. The reason the barrel the reason that it's ROI is because you have more production than you have pipeline Egress and you also have the diluent blended into starting in September into the crude, which adds or swells volume.

Speaker 8

We would expect to see the dips remain seasonally wide with more barrels than egress as traders also sell barrels to meet the year end inventories. TMX has announced the start up in April. We'll take them at their word. Currently, we don't think the pipeline will run at full capacity. But if you take a look at the forward curves currently Q2, Q3 average is about minus $15 and that's about where We think it might end up.

Speaker 14

Thank you.

Operator

Thank you, John. Jason Gabelman from Cowen and Company, please go ahead. Your line is open.

Speaker 12

Hey, guys. Thanks for taking my questions. The first one is on refining capture and we've seen Co product headwinds continue now for a second quarter. Last quarter was a pretty high headwind and then this quarter was even higher. And the oil price moving up obviously impacts the co product headwind, but was wondering what else is going on In that bucket, if you could give us some visibility into that and if you think any of that is structural in nature?

Speaker 6

Jason, this is Rich. Are you asking about the co product bucket?

Speaker 3

Yes, secondary products. Secondary products, yes.

Speaker 6

So the primary in refining that primary mover there is petroleum coke, Right. That's the product that generally drives that secondary product margin for us. And it generally lags behind crude pricing, Right. And it's tied to the coal markets that can pressure it up or pressure it down based on supply and demand requirements there. Call.

Speaker 6

The other subtle component that plays into secondary products for us is NGL pricing And that's it's bigger in some markets than others for us, but it certainly does play into it. And that's been depressed For some period now and that's our outlook continues to not be real strong on NGL pricing on the forward curves. The balance of the secondary products, which are fuel oil intermediates and some other products that probably are worth co. Those have been relatively flat really over the period. So we don't see so we see those coke and NGLs as the primary movers right now

Speaker 12

call. Got it. Thanks. And my follow-up is on The $3,000,000,000 divestment target and not really where that's going to come from, but use of proceeds. You mentioned in the earnings press release that Those proceeds will be deployed to strategic priorities including returns to shareholders.

Speaker 12

But I was wondering if There's a desire to use some of that cash to continue to grow and just kind of in broad strokes What type of growth you would prioritize? Thanks.

Speaker 2

Yes. Thanks. Jason, the cash that we might receive From those asset dispositions will be allocated consistent with our premise capital allocation process that always Includes a growth element and if there are things that we can accelerate in our growth agenda, we can look at that. But Certainly, also would be a factor is opportunities around our balance sheet and then opportunities to Hit the high end of our cash return to shareholders target. So it's all in play just like any dollar of cash that we would turn over to treasury.

Speaker 12

Got it. Thanks for the color.

Speaker 8

You bet.

Operator

Thank you, Jason. Matthew Blair from Tudor, Pickering, Holt. Your line is now open. Please go ahead.

Speaker 2

Hey, good morning. Thanks for taking my questions. First one is on the chem side. Could you talk about some of the dynamics in the PE? The inquiries have cleaned up a little bit here,

Speaker 8

but what's your margin outlook for both U.

Speaker 2

S. And international heading into Q4? What's driving

Operator

Hi, Matthew. Unfortunately, your line is breaking up, so we'll have to move to the next question. If you'd like to rejoin the queue and potentially try dialing back in.

Speaker 2

Yes, we heard the first part. So Tim is going to take a shot at the first part around PE margins and inventories.

Speaker 13

Yes, call. Let me

Speaker 11

do that. Sorry, Matt, with the breakout there. I got the front end of it. And so I could take a while guess on the back end, but that probably wouldn't go well. So from a can standpoint, look, it feels like a little bit of a broken record.

Speaker 11

We still have a supply demand imbalance. Clearly China, Asia is not where we'd like it to be. Over time, we expect that to come back around, but you're going to have to see correction and the new capacity that's coming on board Coupled with demand picking up. So we do think that's going to be hard to see at least through 2024. But To your point, I mean, when you have things like we've seen a little bit of improvement on polyethylene, seen a couple of price increases, which has been good.

Speaker 11

I don't know if they're sustainable, but nonetheless they've come through which has helped. And we have seen where inventory is coming off slowly, but coming off. So from that standpoint, there's a little bit of, I'm going to say constructive, but we know that balance has got to get fixed. Now the one thing that I think is really important we stress here is though that CPChem's kit and their assets, 96% of their assets Are utilizing advantaged feedstocks. So while there may be a lot of pain in the chemical space, those that are leveraging advantaged feedstocks Are doing okay.

Speaker 11

We'd love to be doing a lot better, but they're doing okay. Our assets at CPChem are running hard As well as probably other their competition using LightFeet in the U. S. Gulf Coast and in the Middle East. But those that are using naphtha in higher cost regions are call.

Speaker 11

Probably challenged at this point. Our teams are running hard, running well, taking advantage and are well positioned To actually benefit from this low margin environment because of the feedstock we're in. So with that, we still think though there's some more lifting to do With regard to getting the supply demand balance where it needs to be, but if we can continue to see some green shoots like the GDP that we call. Maybe put a couple of those together and we can start moving that forward.

Operator

Thank you. Joe Lage from Morgan Stanley, Please go ahead. Your line is open.

Speaker 15

Hey, team. Thanks for taking my questions. So I wanted to just Start on the demand side. So recognizing the DOE demand data has been really volatile, could you just share what you're seeing in your system across gasoline, diesel and jets? And then if possible just your outlook for the remainder of the year realizing that it's really volatile right now.

Speaker 15

Thank you.

Speaker 8

Hey Joe, this is Brian. Let me take a stab at that. In the U. S. Inventories remain low for distillate 17% under 5 year averages.

Speaker 8

Gasoline has come back up now closer to 5 year averages. Co. So maybe starting on the distillate side, cracks are now in the mid to high $20 range, when adjusted in U. S. Gulf Coast, New York and Europe.

Speaker 8

Call. To be reminded European refiners need distillate cracks at higher levels because of the higher net gas price to incentivize production. We're seeing a distillate demand globally at about 2% higher than last year. In the U. S, we see demand a little bit off, Although, we've been watching the manufacturing sector and we think it's probably bottom truck tonnage index has begun to rebound as an example.

Speaker 8

So on our outlook for diesel, we'd say it's supportive from here with the low inventories and potential shortages in Europe. And as a reminder, This is Europe's 1st year without Russian distillate supplies. So we'll have to watch that as well. And on the gas cracks, Gas has been coming along for a ride as refiners have produced continue to produce diesel with the strong diesel margins. We've also had butane blending start up, which has increased the volume of gasoline and the summer has kind of been devoid of any hurricane call.

Speaker 8

What we have seen is especially on the Gulf Coast, we started to see plants cutting FCC units. So we think that will be a help to clearing up co. Gasoline. On the demand side, we're seeing global gasoline 2% year over year and particularly strong Asia and Middle East, Europe about flat, U. S.

Speaker 8

Demand seems to be about flat too. Latin America has been really strong about 5% over last year. So on the on our outlook for gasoline, we'd say demand relatively flat through the end of the year as the markets work to clean up some of the gasoline supply.

Speaker 15

Got it. Thanks. Appreciate your response on that.

Speaker 5

And I just wanted

Speaker 15

to ask on the dividend. So we've it was good to see the increase in the payout target. We've touched on

Speaker 5

the buyback a bit. But could

Speaker 15

you just remind us how you're thinking on dividend growth from here?

Speaker 2

Yes. Our position there is consistent. The secure growing dividends, we've grown the dividend every year since spin And that's not going to change.

Speaker 15

Great. Thanks. Appreciate it today.

Speaker 2

You bet.

Operator

Thank you, Joe. This concludes the question and answer session. I will now turn the call over to Mark Leja for closing comments.

Speaker 2

Thank you. And thanks to all of you for your questions. Our integrated and diversified portfolio continues to perform extremely well and creates unique competitive advantage. Our strong performance and confidence in execution drives us to increase several of our of the original commitments in our pursuit To achieve superior returns for our shareholders, we will return $13,000,000,000 to $15,000,000,000 to shareholders by year end 2024. We'll reduce refining operating costs by $1 per barrel.

Speaker 2

We'll capture over $400,000,000 in midstream synergies And we'll deliver $1,400,000,000 of cash savings by year end 2024. We'll monetize Over $3,000,000,000 of non core assets and will enhance our commercial capabilities generating additional earnings. Our plans are ambitious. We're raising the bar and continuing to reward shareholders now and well into the future.

Speaker 1

Thanks, Mark. If you have any additional questions, please call Oren or me. We appreciate your participation on the call today. Thank you.

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Earnings Conference Call
Phillips 66 Q3 2023
00:00 / 00:00