Q3 2019 Earnings Call
Welcome to the third quarter 2019, Phillips 66 earnings conference call.
My name is Julie and I will be or operator for today's call.
At this time, all participants are in listen only mode.
Later, we will conduct a question and answer session.
Please note that this conference is being recorded.
I'll now turn the call over to Jeff Dietert, Vice President Investor Relations just you may begin.
Good morning, and welcome to Phillips 66 third quarter earnings Conference call.
Participants on today's call will include Greg Garland, Chairman, and CEO , and Kevin Mitchell Executive Vice President and CFO .
Today's presentation material can be found on the Investor Relations section of the Phillips 66 web site.
Along with supplemental financial and operating information.
Slide Slide two contains our safe Harbor statement, we will be making forward looking statements during todays presentation in the Q and a recession actual results may differ materially from today's comments factors that could cause actual results to differ included here as well as in or SPC filings.
In order to allow everyone. The opportunity to ask a question. We ask that you limit yourself to one question in a follow up if you have additional questions. Please rejoin the queue with that I'll turn the call over to Greg Garland for opening remarks.
Thanks, Jeff Good morning, everyone and thanks for joining us today.
Adjusted earnings for the third quarter $1.4 billion or $3, an 11 cents per share we generated $1.7 billion of operating cash flow.
We continue to operate safely and reliably successfully executing our strategy and delivering another quarter strong performance.
Midstream achieved record adjusted earnings and its transportation NGL businesses and continue to progress its portfolio growth projects.
We captured favorable margins in our refining and marketing businesses.
See became also operated well and contributed to our strong cash generation.
During the quarter, we distributed $841 million to shareholders through dividends and share repurchases.
We recently announced a new 3 billion dollar share repurchase program further demonstrating our commitment to return capital to our shareholders.
Disciplined capital allocation is fundamental to our strategy and it creates value for our shareholders over the long term, we'll reinvest 60% of our operating cash flow back into the business and returned 40% to our shareholders through dividends and share repurchases.
We are dedicated to a secure competitive and growing dividend.
We buyback or shares when they trade below intrinsic value we're buying shares today.
During the quarter, we advanced our portfolio of midstream growth projects.
These projects will contribute to future earnings growth, creating additional value for our shareholders.
Phillips 66 partners, who started line fill and commissioning activities on the Grail pipeline.
The 900000 barrel per day pipeline will transport crude oil from the Korean in the Eagle Ford to the Texas Gulf Coast, including our Sweeney refinery.
We expect to began initial service in November and anticipate full service in the first quarter of 2020.
Phillips 66 partners owns a 42 in a quarter percent interest and the joint venture.
Great well connect with multiple refineries and export facilities in the Corpus Christi area, including the South, Texas Gateway terminal in which P.S. XP has a 25% ownership.
The terminal will have to deepwater marine docs over 7 million barrels of storage capacity and up to 800000 barrels per day and throughput capacity. The terminal is expected to start up in mid 2020.
The Liberty pipeline will provide transportation from the growing Rockies and Bakken production areas to Cushing, Oklahoma.
Liberty will have access to the Gulf coast via the Red Oak pipeline.
We own a 50% interest and will construct and operate liberty.
The Red Oak pipeline system will connect Cushing and the Permian basin into multiple locations, along the Gulf coast, including Corpus Christi, Ingleside, Houston, and Beaumont, we own a 50% interest and will operate red oak.
Well Liberty in Red Oak pipelines are backed by long term volume commitments and are targeted to began initial service and the first half 2021.
With these new pipelines, along with our existing crude system. This positions us to serve the key shell oil producing regions and provide connectivity the major Gulf coast market centers.
We're adding three fractionators at the sweeny hub, each with the capacity of 150000 barrels per day.
Our next two and three are on track to start up in the fourth quarter of 2020.
The recently sanctioned Frac for is expected to be completed in the second quarter 2021.
The fracs are backed by customer commitments.
Upon completion of Frac for the Sweeny hub will have 550000 barrels per day of fractionation capacity.
In connection with our expansion at this we have PS XP is increasing storage capacity at claimants caverns from 9 million barrels of 15 million barrels.
The project is expected to be completed in the fourth quarter 2020.
Also at this when you have PS xps constructing the CTG pipeline 16 ends ethane pipeline from Clemens caverns, and petrochemical customers and the Corpus Christi area.
Pipeline will have 240000 barrels per day of capacity and expected to be complete in mid 2021.
And chemicals CP Chem is expanding its strategic partnership with Qatar petroleum developed petrochemical assets in the U.S. Gulf Coast and in Qatar.
Pending final investment decisions. These world scale projects, what ethylene and high density polyethylene capacity and advantaged feedstock locations.
This further enhances cbms, leading polyethylene position to supply the world's growing demand for polymers.
At the Lake Charles Refinery, we started up the Phillips 66 partners 25000 barrel per day isomerization unit, increasing our production of higher octane gasoline blend components.
At this Sweeney refinery, we're upgrading the FCC to increase production of higher valued petrochemical feedstock and higher octane gasoline. This project is on track to complete and the second quarter of 2020, So before I turn the call over to Kevin I'd like to invite you to join US on November six foreign Investor Day in New York City, but for.
<unk>, providing an update our strategy. However is positioned to deliver superior returns to our shareholders will see members from our management team and the lets discuss their businesses, including projects, we're executing to grow midstream and chemicals as well as improved returns in refining and marketing with that Kevin will take us through the financial results. Thank you Greg.
Hello, everyone, starting with an overview on slide four we summarize our financial results.
Our earnings were $712 million.
We had special items that netted to an after tax loss of $690 million, mostly due to an impairment of our DCP midstream investment, reflecting continued deterioration of the DCP unit price and lower GP valuations.
After excluding special items adjusted earnings were $1.4 billion or $3.11 per share.
Operating cash flow was $1.8 billion, excluding working capital impact.
Capital spending for the quarter was $867 million, including $569 million growth projects.
We returned $841 million to shareholders through $402 million of dividends and $439 million of share repurchases.
We ended the quarter with 444 million shares outstanding.
Moving to slide five this slide highlights the change in pretax income by segment from the second quarter to the third quarter.
Adjusted earnings of $1.4 billion were up slightly from the prior quarter.
Increased results in marketing and specialties were offset by lower earnings in refining.
The third quarter adjusted effective tax rate was 21%.
Slide six shows our midstream results.
Third quarter adjusted pretax income was $440 million, an increase of $17 million from the previous quarter.
This quarter, we achieved record adjusted pre tax income in the transportation and NGL businesses.
Transportation adjusted pretax income was $248 million up $3 million from the previous quarter due to higher pipeline volumes.
NGL and other adjusted pre tax income increased $26 million, driven by improved butane and propane trading activity.
At the Sweeny hub the export facility averaged 11 cars, a month and the fractionator ran at 108% utilization.
The Lake Charles and Summarization unit reaches full production in September and the initial operating performance is inline with expectations.
DCP midstream adjusted pretax income of $23 million was down $12 million from the previous quarter due to hedging impacts.
During the quarter the Gulf Coast Express pipeline in which DCP has a 25% interest began commercial operations.
The pipeline transports approximately 2 billion cubic feet per day of natural gas from the Permian to Gulf Coast markets.
Turning to chemicals on slide seven.
Third quarter adjusted pretax income for the segment was two 206 $9 million $6 million lower than the second quarter.
Olefins and Polyolefins adjusted pretax income was $251 million down $9 million from the previous quarter.
The decrease reflects lower margins, partially offset by higher polyethylene sales volumes.
Global own P. utilization was 97%.
Adjusted pretax income for essay Ns increased $2 million.
During the third quarter, we received approximately $300 million cash distributions from CP Chem.
Next on slide eight we will cover refining.
The third quarter crude utilization rate was 97% and clean product yield was 84% both consistent with the prior quarter.
Turnaround costs were $120 million up from $67 million in the second quarter.
In addition, our share of W.R. be turnaround expenses amounted to $46 million.
Refining third quarter, adjusted pretax income was $839 million down $144 million from last quarter.
The chart provides a regional view of the change from the prior period.
The decrease was driven largely by the central corridor.
Atlantic Basin, adjusted pretax income improved to $21 million due to the higher distillate crack partially offset by lower volumes.
In the Gulf Coast decrease was driven by turnaround costs and lower margins from narrowing WCS WTI LLS crude differentials.
In the Central corridor. The decrease was mainly due to a decline in the market crack that was partially offset by widening WCS differentials.
Additionally, there were high turnaround costs Adobe RB.
In the West Coast, the decrease was driven by turnaround costs.
Slide nine covers market capture.
The three to one market crack for the third quarter was $14.60 per barrel compared to $15.24 per barrel in the second quarter.
Our realized margin was $11.18 per barrel and resulted in overall market capture of 77%.
Market capture was impacted by the configuration of our refineries.
We make less gasoline and more distillate and premise in the three to one market Craig.
During the quarter distillate crack increased 6% and the gasoline crack decreased 11%.
Losses from secondary products have a dollar seven cents per barrel improved 28 cents per barrel from the previous quarter due to increased butane blending into gasoline.
Our feedstock advantage of three cents per barrel was in line with the prior quarter as the impact from widening Canadian crude differentials was offset by narrowing Gulf coast differentials.
The other category, mainly includes costs associated with Rins at going freight product differentials and inventory impacts the other category reduced realized margins by 38 cents per barrel.
Moving to marketing and specialties on slide 10.
Adjusted third quarter pretax income was $498 million $145 million higher than the second quarter.
Marketing and other increased $146 million from higher margins.
During the quarter, we were able to optimize product supply across our integrated logistics network in multiple regions. The caps are favorable more market conditions.
Specialties was inline with the prior quarter.
We remain approximately 400 domestic branded sites during the third quarter, bringing the total to approximately 3700 since the start of the program.
Refined product exports in the third quarter with 220000 barrels per day.
On slide 11, the corporate and other segment had adjusted pre tax costs $178 million improved $27 million from the prior quarter.
Lower net interest expense was due to increased capitalized interest.
The decrease in corporate overhead costs was primarily due to lower environmental expenses.
Slide 12 shows the change in cash during the quarter.
We started the quarter with $1.8 billion in cash on our balance sheet.
Cash from operations was $1.8 billion, excluding working capital.
There was a slight working capital use primarily from inventory associated with cargos in transit at quarter end.
Yes, XP issued $900 million of unsecured notes and a portion of the proceeds were used to repay the remaining $400 million outstanding under a term loan facility.
During the quarter, we funded $867 million of capital spending and returned $841 million to shareholders through $402 million of dividends and $439 million of share repurchases are ending cash balance was $2.3 billion.
In October Phillips 66 partners also repaid $300 million of senior notes due February 2020.
This concludes my review of the financial and operating results next I'll cover a few outlook items for the fourth quarter.
In chemicals, we expect the global I wouldnt be utilization rate to be in the mid nineties.
In refining we expect the fourth quarter crude utilization rate to be in the mid ninetys and pretax turnaround expenses to be between 170 and $200 million.
We anticipate corporate and other costs to come in between 210 and $230 million pre tax.
One additional item is not reflected on the slide we expect 2019 adjusted capital spend to come in between 3.3 and $3.6 billion. This is broadly consistent with prior guidance and we look forward to providing you more detail on our capital program at the upcoming Investor Day.
With that we'll now open the line for questions.
Thank you we will now begin the question and answer session.
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Doug Terreson from Evercore ISI. Please go ahead your line is open.
Good morning, everybody congratulations on your results.
Thanks, Good morning.
So during the past three or four years profits and return on capital in refining and really midstream to seem to have been stronger at 56, and most of the peers illness point I want to see why do you think thats been the case, meaning do you think it's because one you have competitive advantage and the operational financial.
Our strategic realms are too does it start with better governance, and specifically that you're one of the few energy companies in which management performance has benchmarked against the overall market rather than only against energy peers, which obviously is a lower bar so broad array of potential reasons for the outperformance, but just wanted to see why you guys.
Thanks, Al performance seems to recur or be sustained at filled 66.
Well first of all.
I think we have a great set of integrated assets and we've been thoughtful about how we invested around the assets and weve been careful and our refining business to pursue investments that are certainly high high return quick payout investments that creates access to advantaged crude or yield structure.
On midstream, we leveraged our investments around our existing infrastructure around our refining footprint as we create more value by doing that at the end of the day I think our chemicals businesses differentiating we think about the Kim's business.
When we think about our competitors and who we compare ourselves too we have a pretty broad peer group, we're looking at peers in midstream and refining and chemicals also look at our performance versus the S&P 100, and so we're looking at that on a total shareholder return basis, but we also half of all our long term comp is a return on capital.
What return still matter Doug is as you know you're you're the teacher of us for that.
So we're we're always watching the returns and we're investing and then as you think about we've returned $25 billion back to our investors you know over this period of time, we know that.
Strong competitive secure growing Devin then is important to people and we know that binary shares back only trade below intrinsic value creates value. So.
That would be.
Yeah impressive results over the years I speak for themselves and then and another question too and this is about refining and specifically, we're getting obviously closer to crunch time on IMO 2020, and just so.
I just wanted to get your updated views on the your market outlook for spreads between comply Noncompliant fields and also light heavy differentials how you guys are.
Thinking about that as we get closer to go on.
Okay.
Yeah, I think that continuing to watch you know we've consistently talked about the forward curve not not because it's an accurate predictor bit because it's an indication of where.
Consensus views are at least some people are willing to trade in and we have seen the Cal 20.
Market move a wider on distillate cracks.
10 year average distillate crack versus Brent.
As about $13 a barrel Cal 20 is is out about $18 a barrel. So that has strengthened as we.
Moving closer to the implementation date.
Similarly for high sulfur fuel discounts. The 10 year average is about $12 below Brent and the cow 20 is currently at $24 a barrel wider.
We've seen high sulfur fuel discounts start to to widen as we've moved towards implementation and.
For FERC refineries that continue to produce faisel from fuel there's there's not.
Theres a rapidly declining market for that product. So those discounts are starting to widen out.
And we think we'll see a above mid cycle margins as we look into 2020 driven by this IMO impact.
Great Congratulations again everybody.
Thanks, Doug Thanks.
Neil Mehta from Goldman Sachs. Please go ahead your line is open.
Good morning, guys and congrats again on the result.
If I want to kick off on marketing, particularly strong said earnings there relative to I think street expectations, how much of that with.
The market environment with crude coming down versus something sustainable and ratable that you can kind of pull forward and just talk about how you think about the outlook for that business.
And and that strength.
Yeah Neel.
Let me address that for you. So as you think about in the third quarter in our marketing business, it's usually a stronger quarter, probably seasonally on average is probably the best quarter anyway, and you combine that with the fact that you had the right sort of set up in terms of the movement in prices as you went through the quarter certainly until you got to the.
Very short list price spike that happened.
Later in the quarter with the Saudi strikes and so you had you had that environment and then we also had the situation of at various locations around the country, where you had sort of product supply.
Issues or upsets that we were able to leverage the.
The network, we have in place to move product into market and capture those opportunities as they were so there's certainly an element of what we saw in the third quarter that I wouldn't consider just normal ratable roll that forward.
It probably a managed to a reasonable portion of the increase when you look at the sequential quarter over quarter increase were up $145 million or so and so it's a reasonable portion of that but certainly not all of it.
Okay. That's that's super helpful. The other places is chemicals, which again.
Performed our mock model and that was felt more like throughput first as margin.
Given the weakness in global chemicals margins any comments about the resiliency of earnings there and then the outlook for for commodity chemicals would be helpful to.
Yes, you're right Neil that margin didn't do anything to help us in the third quarter, we actually were off slightly on margins relative to the prior quarter, but we've made up that on volumes I think we had CP Chem had record polyethylene sales volumes and that was.
The combination of strong operations high utilization.
And I think a little bit of sales out of inventory as well contributors to that.
But fundamentally right now it's still a week, it's still a relatively weak margin environment, where CP Chem is able to do well is really a portfolio.
Factor in terms of you look at the assets they have the feedstocks where their position globally.
They continue to perform very well on a competitive basis relative to the others in their space.
I think as we look at the outlook, we continue to see a robust outlook for ethylene supply.
Ethane rejection.
We're estimating over a million barrels a day it continues to grow.
So very strong ethane availability.
And we're seeing increase in pipeline capacity, new Fractionators coming online.
To.
Creates a positive outlook for for ethane supply going forward.
We continue to expect to see.
Polyethylene demand grow at a faster pace than than global GDP growth, we have seen some softness in the immediate term you will see the I Hs.
Paul.
Pete Foltene margin in our release was 23 cents.
And change for Threeq, you, that's down 19 to 20 cents in October .
So a little bit of continuing softness there.
Okay, well see in two weeks.
Good good.
Paul Cheng from Scotia, Howard Weil. Please go ahead your line is open.
Hey, guys. Good morning morning, Paul.
Couple quick questions.
Just two is that given to why you economic how much is high so what we see or.
We sit component you may be able to recycle full year, we find raise a fit to joke I have you test it to see what they give work for you.
And that's doesn't begin the different what that that you are using DNA cocoa fluid Coca technology.
Yes, so we we have seen with the further discounts or or the rapid discounts in high sulfur fuel oil and other heavy intermediates an opportunity to increase utilization in a number of our refineries.
They are relatively small volumes a thousand to 5000 barrels a day here and there depending on the refinery across our portfolio.
As you know, we do have substantial coking capacity do a upgrade the streams and and expect to benefit from these discounts.
Logistics provide a meaningful limiting factor.
As.
Bringing in large volumes of high sulfur fuel oil or the other intermediates.
Requires infrastructure pipeline capacity storage capable of managing these streams and so I think that a limiting factor.
As we go forward.
Hi, so for fuel has weakened substantially and for the refiners that are producers of high sulfur fuel oil that's going to be a headwind for capacity utilization, we expect a.
Some economic run cuts and stress on refineries that don't have the cokers too.
Process. This this.
Hi, sulfur fuel oil and and so we expect those refineries to run at lower utilization rates.
For the high sulfur fuel oil to result in wider discounts for heavy self.
Heavy high sulfur crudes, and so we expect those differentials to to widen out and see a benefit from high sulfur.
Fuel flowing through to a wider discounts on crudes.
And we're starting to see that in the marketplace with with a little bit of the lag.
Jeff do you have a number that you guys will be willing to shed in terms of what's the technical d. and taking into consideration on the logistics limitation that you can run on if there was why economic is here.
Well I think logistics are going to be a rig big restricting factor.
And that the.
Many many plants are not set up to bring in large volumes of heavy intermediates.
Okay.
Great on the great Okay.
The initial startup in the when but do you have a capacity that you can share with us before that the food startup and also what that that is just going to public Christie and what did that and the extension beyond that when thats going to happen and what is to copy Christie common core export capacity.
You guys, we would estimate.
Yes, so I think.
As you know where a ramping up.
Great Elk later this quarter and then in the first quarter. It will probably have full impact by by late first quarter second quarter timeframe are a south Texas Gateway facility is scheduled for a mid summer start up as you look at an industry wide.
Slide Corpus Christi exports had been running about 600000 barrels a day with the startup of cactus and epic pipelines. We saw that rapidly increased a 1.2 million barrels a day and that's actually.
The the maximum throughput that we've seen so far from the facilities in Corpus Christi theoretically there is about 1.7 million barrels a day of potential capacity.
But it's not clear that.
All of that can run it really high utilization rate. So I I think we'll see a corpus Christi continue to.
Increase in probably take market share from other export facilities across the goal.
Especially for Permian barrels.
And so it it may be tight here until the back half of 2020, when when there's more export capacity available in corpus.
I think Paul the early service is obviously going to the corpus area, but producers will be able to hop on the candor system and get to Houston, if they so choose to do that.
Phil Gresh from JP Morgan. Please go ahead your line is open.
Yes, hi, good morning.
First question is just.
But the impact we've seen on freight rates and availability Im curious if you see any potential impact to crude differentials as a result of this moving forward.
Or just in general how do you think it'll impact refineries and product markets in crude markets. Thanks.
Yeah, I think we are seeing those wider tanker rates you know prior to.
Some of these implications.
Could ship Gulf Coast to Asia, VLCC rates around 350, a barrel.
Thats that was has recently a September they jumped to $10 a barrel earlier this month and have risk recently come back end around $6 a barrel a the sanctioning of China's Costco.
Shipping company has had a big influence on that.
So is linked to Venezuelan flows are a factor longer sale times due to the Chinese tariffs are having an influence as well there are number of ships that are in dockyards currently with scrubbers being added.
And then as we think about IMO influences, they're going to be slight changes that we think are going to result in longer.
Routes as well so you've got a mix of short term factors intermediate term factors and I think some long term factors that are contributing.
To to steeper.
Shipping cost.
As we look at this it looks to us is though.
Particularly Brent WT, I and really it's the Gulf coast to Brent spread that is likely to be impacted.
Wider requirements for Houston to Brent spreads. So we expect that'll wide now Debbie T I a bridge a bit perhaps reduce some U.S. imports short term.
We're also seeing a long haul importers in Asia in particular that are being impacted by the higher tanker rates. Many of these refineries are responsible for the tanker portion the tanker expenses there and so we've seen reports of run cuts in Asia.
That will take some product out of the market. So I think those are probably the major influences on balance we view, it's positive for the PS ex portfolio, though.
And I think as we look at our portfolio.
We are dealing mainly in short term spot movements and.
I would expect we don't see it influencing our market capture at this point.
Right. Okay, no. That's that's very helpful.
And second question I think I'll, just stick to cash flow question the quarter, rather than a strategic that will be discussed at the analyst day. So Kevin.
With that the cash flows in the quarter. It looks like there is a slip on deferred taxes, there working capital as a headwind I think you're expected to be a tailwind in the back half. So just any quick updates you'd have there and if you could.
I know you gave the 2019 capex.
Yes, I think you'd given 2020 is there any refresher on that thanks.
Yes, so in terms of let me hit the deferred taxes first so we had a slight.
We had an adjustment on deferred tax this quarter because of the DCP impairment. So the impairment flows through the income statement and is tax affected on the income statement from a tax standpoint, there is no change in basis, and so that gets adjusted back heightened deferred taxes. So you think about 900 million pretax impairment that's about 200.
$1 of deferred tax impacts there so our year to date deferred taxes of 115, if you normalize for that DCP.
Tim would be around about 300, which is about exactly where we'd expect it to be our guidance for the year is 400.
In terms of the broader working capital position I think I did talk to the the slight use of cash in the in the third quarter related to inventories on the water as you look at the full year, we would expect that the majority of the working capital use that Weve recorded to date. So full year working capital has been a use of cash.
$1.3 billion, we'd expect the majority of that to come back in the fourth quarter, which reflects our so the normal.
Seasonal trend as we as we.
Build inventories at the beginning of the year and bring them back down later in the year.
So thats, where we'd expect to be on that.
And then in terms of capital will will defer that to the Investor day.
Okay. Thank you.
Thanks, Phil.
Roger read from Wells Fargo. Please go ahead your line is open.
Yes, good morning.
Roger.
Just wanted to follow up I think maybe on the midstream part of the business.
I guess a couple questions here one have you given any clarity as to what assets were affected by that.
DCP write off and then.
I'll just go ahead and kind of list them out here and you can take them as you want.
The new pipelines coming on both.
From West, Texas through the Eagle Ford to Corpus and then from Cushing down to Houston do you run any risk of sort of cannibalizing. Some of the other option you have going on I'm thinking about valmont, specifically and maybe give us an idea of how that's affected and then my final question at the mid.
Stream area.
As you look at the Frac units. It ran above capacity here, we think about the capacity growth so little over half million barrels a day.
Hi, I believe 2021.
Should we think about any limitations on capacity running above capacity out in 2021.
From dock capacity issues.
At Sweeny.
I might take the Beaumont question, and let Kevin do DCP.
The.
With Beaumont, we see substantial mid continent merrells coming into.
The Belmont facility be it from Cushing.
From the Bakken pipeline, and we see that as an excellent.
Option for a exporting storing exporting reaching other facilities in the Houston area. Obviously, we also have Bayou bridge that moves into Lake Charles and provides an advantage for a crude feedstock advantage for lake Charles and ultimately pets.
Actually the Ace pipeline down to alliance, so I see Beaumont being a very strong option for mid continent barrels, whereas at Corpus Christi, It's the lowest transportation cost option.
From the Permian basin to get to to the water.
And the advantages at Corpus Christi with a.
Lower fog days and much less congestion there rather relative to other options. So I think corpus is substantially advantage relative to Permian barrels as you think about our liberty and Red Oak pipelines coming in.
And the flexibility that Red Hills has to deliver to corpus stangel side to Houston to our Sweeney refinery over to Beaumont.
The flexibility of hitting all those export facilities.
It is a substantial advantage that I think was a big reason why shippers, we're willing to commit to it relative to other pipeline options.
And then on the DCP. So there were there were two elements to the impairment write down although the bulk of it all relates to our impairment of our investment in DCP. So there was a small component, which was a DCP level asset impairment, which included impairing some good.
Well, that's relatively small either of the 900 million in aggregate, that's about 45 million of of that flow through to our financials. The bulk of the reduction related to us impairing our investment in DCP. So thats not specific to any one asset thats looking at the carrying value that we had on the balance sheet for investment in DC.
Relative to fair value and the fair value calculation is dominated by the DCP unit price with highlighted this in our two Q1 0-Q that we had a potential impairment that we consider it may be temporary at that point in time, but given that the unit price continued to deteriorate over the third quarter.
It was appropriate to take the impairment in this quarter.
Last question was around the Fracs at 550000 barrels a day and kind of 30, 538% yield propane as 200000 barrels a day, so we'll be imbalance between our LPG export capacity and our fractionation capacity.
Doug Leggate from Bank of America Merrill Lynch. Please go ahead your line is open.
Thank you good morning, guys.
I don't want to get too much ahead of what you might say in a couple of weeks Greg but.
Im just curious as kind of a follow up to.
Roger's question on the midstream.
Have you have you have any different thoughts about the ownership.
The right ownership structure for PS 60.
Thinking specifically off to the simplification you did with the IDR us.
Obviously your ownership is quite significant on the arbitrage, having a midstream business. All the benefits that were there are several years ago, perhaps when you could argue we're not as obvious today Im just think wondering how youre thinking about not going to follow up please.
Yeah, what Starpointe unit prices done nicely since the IDR transaction on on PS XP I think for its firms just straight up cost of capital standpoint, probably still has a cost of capital advantage versus.
Sex and related.
5.56% yield on some of parts basis, we're still advantaged to build our midstream business MPSX piece. So we'll continue to grow organically, yes XP.
Antigen date as you've seen we've done last couple of years and billion plus of kind of organic capital investments, we have a great growth portfolio epic the has great capacity to execute so I think you'll see us continue along those same lines.
Okay. I appreciate the second question I expect we'll give more color.
The analyst day my follow up is it kind of feels if I ask this question I don't know how often you are still keeps dropping to new good levels, but every time. It does I can bosses question.
Buybacks versus dividends strike, what's your latest thinking because obviously you've been very I think my experience of watching you do this over the years as you've been quite sensitive to price changes in terms of when you step on the accelerates and when you pull back.
Yield is obviously not so good reasons, obviously is a little lower than it's been recently in quite some time in probably one of the lowest in fuel group. So are you thinking about the right balance between those two especially as the underlying cash flow capacity of the business has got a pretty good growth trajectory over the next several years now I'll leave it there. Thanks.
Always start kind of mid cycle cash flow six and a half a billion dollars Doug.
We have $4 billion sustaining capital kind of billion 5 billion six dividend and we're going forward a billion and a half to two and a half billion of share repurchase billion a half to half the unit of growth capital I see a healthy tension in there. So we start from the bases that we want the dividend to be competitive with certainly S&P 100 in our peer group.
Look at that.
I think we've had 25% compound annual dividend growth since our first dividends so.
Weve demonstrated good track record of strong dividend growth do you expect that will continue for us.
Certainly billion 5 billion six is very affordable and $6.5 billion of cash flow. So we've got room to grow it no share repurchases were intrinsic value, we look at kind of mid cycle.
The earnings out of our business streams were looking one to two years out in our long range plan.
And we're planning to historical multiple that more trade below intrinsic value we're buying.
We have a grid, we reset that grid every quarter share price goes up we buy less the share price goes down we buy more and so that's that's the way we've handled that I think we're all in about $77.40 in terms of our our total share repurchases since inception, so given where the share price is trading.
Today, we're pretty happy with that.
Hi, Sean Ral from Citigroup. Please go ahead your line is open.
Good morning, Thanks for taking the question.
Turning to front run every morning domain to front run anything that you will say in couple of weeks, but do you have a question on longer term the midstream ramp in capital decisions, especially given how well to a segment is performing.
On a macro basis, there's concerns on us oil production next year that amounting this rig counts falling and we've had some concerns among investors on global demand growth and being a recession risk is still on some investors minds. So should these factors materialize I was wondering about the potential pressures that could go.
On intermediate demand for some of the longer term midstream projects in your Q and maybe if you could talk about.
We'll lovers at your disposal in terms of the capital commitments deployments and.
How you could could protect and defend the consolidated.
Return on the growth portfolio.
Capital should there be impact and thinking sort of public at Liberty and maybe some of those toward some of those projects that come on late 2020 early 2021.
Well, so I'll start and then and then Kevin and Jeff can kind of filling them going so so first of all agree oak Red Red Oak and Liberty are all backed by long term customer commitments that extend well beyond the timeframe that you just mentioned.
I think that as I as I think about the us upstream industry I think we're going to move into a period of slowing growth in us upstream actually think thats a good thing I don't think we could continue to grow 1.6 million barrels a day in the U.S. against a world demand going at one one I don't think thats, particularly healthy for the for the industry.
For us.
In all of our business segments, we need a strong viable upstream business and the in the U.S. So just from a high level standpoint, I don't view, the slowing growth as as negative.
In terms of the opportunity set Jeff or Kevin you want to hop in on that.
Okay, if they don't okay.
Okay. Thanks, I appreciate that comment and just one quick follow up.
On IMO 2020 are you marketing any of these new York via lesser full blends and if so one of the questions that we get is and there's been a lot speculation around this is sort of engine compatibility along parameters like there's capacity in flashpoints parasitic values.
How validate our these concerns and.
And sort of as a maybe a related question.
You know between if you are doing real Esa FFO is there any technical our operating preference between years, taking like a straight Ron.
Vacuum gas oil sulfur or some blending or is that purely determined by the economics of the commodity market.
Yes, I think one of the advantages of.
Evan and Technology Center is that we have been able to test fuels for Ah compatibility and and we have taken advantage of that we will be offering.
Compliant fuels in the market and.
And we've we've had the ability to test them.
We suspect that early on that the shipping companies will prefer.
Green gas oil and as confident that builds in some of the low sulfur videos that.
Those will gain traction as well.
You know our in our industry blending fuels is kind of a core competency for from Phillips 66, and I think for our industry in total so.
We expect to move forward with with the IMO as planned.
Manav Gupta from Credit Suisse. Please go ahead your line is open.
Hey, Jeff as you.
Shippers and other suppliers.
What's your sense of some level.
Since that we might even before Jan one I'm, assuming you would like to best sellers missile.
So how do you think compliance claimed into the last two months of doing it.
Yeah, I think a you know we're in a transition period now we saw the converting other thanks to a compliance fuels really starting in August and September we are seeing interest in Incompliance deals now and what would guesstimate maybe 15%.
But the fleet is experimenting with compliance fuels today.
Thats going to accelerate as we move into November and maybe it increases to 50% of the of that the use of compliant fuels in the fleet and then.
As you know with.
A number of these voyages going 30 to 45 days, if you're going to be compliant. When you arrive in January youre going to meet need to be compliant. When you depart in late November or December and we think 75% to 90% the.
The fleet will have switched in December .
And so we'll start to get a good view.
What this market starts to look like we are seeing inventory build with.
30, Vlccs reported with compliance fuel in Asia, and so this transition period, there is probably going to be some some price volatility.
And it's going to take us a few months to work through.
This transition and we're expecting to be ready to go once full implementation hits in January .
That's great.
You have one of the highest disease in the industry and I'm just trying to understand how did any.
Projects that you can do which could increase distillate production in 2020, and shameful and AFFO any small kids projects, which will allow you to make Dolby. Thank you 30000 barrels model beneficial.
Yes, we've we've got a number of small capital high return projects.
That will increase our diesel yield quite frankly with the industry trend towards a diesel demand growing more rapidly than gasoline demand. These were projects that we had full intentions of implementing regardless of IMO, but they will benefit from the shift in I know in what we think will be.
Stronger demand and stronger diesel cracks going forward.
It's about 25000 barrels a day in total for our 19 in early 2020 projects.
We also have.
Some high sulfur fuel oil.
Hydrotreater projects that are in going to increase our ability to make low sulfur.
Fuel oil as well and those will be implemented early in 2020 late this year in early 2020.
Justin Jenkins from Raymond James. Please go ahead your line is open.
Great. Thanks morning, everyone or about the top of the hour. So I'll keep it to one but I think the one topic. We havent discussed is California here today, and obviously margins have normalized here recently, but just curious on your outlook for for that particular region and maybe some other drivers of the margin volatility that we've seen over the past.
Month, and a half there.
Yes, I think the the fall is is the typical season for planned maintenance and we've had some planned downtime that was planned.
Months months ago at San Francisco that to add some impact on Threeq, you and we'll have some impact on fourth quarter as well we have.
Delayed.
Some maintenance due to.
The strong margins in and just the heavy maintenance that was planned at some of our other refineries but.
But we're probably in close to the peak of maintenance on the West coast.
And expect as facilities come on those Marj margins weren't will normalize as we go into November and December .
Chris Sighinolfi from Jefferies. Please go ahead your line is open.
Good morning, good afternoon guys.
Hey, how are you a lot's been asked and answered and I. Appreciate all the item color I was hoping Kevin.
Roger touched on it but.
You could just circle back quickly to the DCP write down I'm, just trying to better understand some of the mechanics there.
I guess, if I look at the public LP value deterioration net to you guys next year interest versus the magnitude of the write down.
Speaks to a pretty sharp decline in GP value and if I. If I just think about the base $85 million GP payment.
Calculating something around a nine times multiple now.
Hi, how are you September .
September end for the LP stake.
So I guess question one is am I looking at that correctly.
And assuming I am.
Does that suggest to cut in the GP payout or is there something else that led to.
The multiple compression there, obviously coverage and growth differences with TSX, Stephen I know when you guys eliminate the IDR there last quarter it was pricing and around 17 times. So anything you can help me.
On that front would be helpful. Thanks.
Yes, I think high level, you are you're thinking about the the impairment correctly. There is no assumptions of change in distribution or any of that arrived at this this reflects the so.
Ongoing level of distributions that we've seen and so you've got the the.
LP unit price drives a significant portion of the valuation, but then you got the GP valuation in the GP valuation is also linked to the unit price because as the unit price declines than that LP multiple has come down than that translates across the how you look of the GP multiple and so.
When you combine all that together, where we get to where we are not going to get into the details of exactly what multiples we've used but the.
The unit price is a big determining factor across both the LP and GP valuation.
Okay. That's helpful. I guess, one follow up beyond that as it is your fair value estimation and independent PS ex exercise or is this something you do in coordination with Enbridge.
No. This is all TSX. This is based on our book value that we have for our investment in DCP and it's all driven by.
Conventional sort of impairment.
Analysis accounting methodology that drives how we look at that.
Great. Thank you very much.
Jason Gevo men from Cowen and company. Please go ahead your line is open.
Hey, Thanks for taking my question.
Want to ask on the midstream organic growth projects.
You typically talked about those projects.
At EBITDA adult multiple a six to eight times I'm wondering if the pipeline projects that you've announced and that Youve.
Sanctioned over the past couple of years, if those fall within the range and if those of maybe.
Landed at the at the top or bottom and end of the range or any indications would give us.
On the types of multiples you're seeing on those pipeline projects. Thanks.
I would just stay with that six to eight range I think that's a good range to be thinking about four for our midstream projects across the board.
Okay.
And then if I could just sat on Capex. It seems like it's continue to drift higher this year and the implied spend for Fourq you I guess is $1.2 billion.
Which looks like a big step higher from Threeq, you. So what's driving that that move higher on why was the range.
Moved higher once again thanks.
Well what the estimate in the range reflects is so several projects that are in flight now that we're not part of the original capital budget. So that's the primary reason earlier in the year, we had signaled the increase related to grow in addition, but but the other.
Element that creates a little bit of uncertainty into into exactly where the final number lenses several of them at midstream projects at in joint ventures, and the joint ventures. Those capital programs are on a cashcall basis and so we're also subject to the exact timing of when the cash goals hit which sometime it's not always easy to get that too precise and so that.
Also one of the reasons why we've given that in a range that way because there is always some element of uncertainty as to where that goes but bear in mind. We have a lot of projects that were spending on right now between the.
The Fracs and Sweeney the group pipeline, the Red Oak pipeline Liberty, the CTG pipeline and so those those are some of the larger projects a suite of smaller projects as well so the look different moving parts there as we work through that.
Thank you we have now reached the time limit available for questions I will now turn the call back over to Jeff.
Thank you Julie and thank all of you for your interest in Phillips 66, just a reminder, that our Investor day will take place on November six in New York. The event will be webcast on the Phillips 66 investors website. If you have any questions on todays call. Please call Brent or me. Thank you.
Thank you ladies and gentlemen. This concludes today's conference you may now disconnect.