Q1 2020 Earnings Call
Welcome to the first quarter 2020 looks 66 earnings conference call.
My name is David and I will be or operator for today's call.
This time, all participants are in listen only mode.
Later, we'll conduct a question and answer session.
Please note that this conference is being recorded.
I will now turn the call over to Jeff Dietert, Vice President Investor Relations.
You may begin.
Good morning, and welcome to Phillips 66 first quarter earnings Conference call.
Participants on today's call will include Greg Garland, Chairman and CEO, Kevin Mitchell Executive Vice President and CFO.
Bob Herman Executive Vice President refining.
Ryan Mendell Executive Vice President marketing in commercial and Tim Roberts Executive Vice President Midstream.
Today's presentation material can be found on the Investor Relations section of the Phillips 66 website, along with supplemental financial and operating information.
Slide two contains our safe Harbor statement, we will be making forward looking statements. During the presentation in our Q1 a session actual results may differ materially from today's comments factors that could cause actual results to differ included here as well as interest she she filings with that I'll turn the call over to.
For opening remarks.
Thanks, Jeff Good morning, everyone and thank you for joining us today.
For addressing a quarter, we want to comment on the current environment first and foremost our focus continues to be on the wellbeing of our employees and their families our communities maintaining safe and reliable operations.
During the financial and operational strength of our company.
Business is a central and we're focused on providing critical energy products and services for customers.
Safety and health of our workforce is our top priority.
66 is implemented appropriate steps to protect our workforce that are consistent with CDC natural state and local directors.
Limited, our operating facilities to business critical staff and implemented strict protocols for bit introduction and spread the crown bars.
And our Houston and Bartlesville offices over 95% of our employees are working remotely.
I'm poised to stepped up to the challenge during these impressive times in are adopting new ways of working to ensure business continuity.
Our plan.
Today for a company we have done in place to ensure a safe return to our normal operations.
We contributed $3 million Cobot 19 relief efforts in the communities, where we live and operate.
The funds with a body central support for first responders.
Good Thanks health care and other critical organizations serving vulnerable populations.
We recently announced actions in response to the challenging business environment.
We're focused on conserving cash and maintaining strong liquidity to manage through this unprecedented down cycle.
We secured a 2 billion dollar term loan facility and issued $1 billion of senior unsecured notes.
We suspended share repurchases in March.
We've taken action to reduce cost by $500 million this year.
Organization is doing a great job of identifying opportunities inefficiencies and we're leveraging our baby 66 initiatives to achieve these cost savings.
We are reducing consolidated capital spending by $700 million. This reduction will be partly offset by 400 million dollar increase as DCP midstream will not be exercising its option to participate and Sweeney fracs to entry this year.
In midstream.
We have deferred the red oak pipeline and sweeny Frac for projects.
66 partners is also the for Liberty pipeline and postpone it and final.
Investment decision on the age pipeline.
In refining we're deferring canceling certain discretionary projects, we continue to find sustaining capital to ensure safe and reliable operations.
We're executing in flight projects that are nearing completion.
We deferred some turnarounds until later this year and also into 2021.
We reduced refinery runs across the system response to lower product demand and margins.
In April our crude capacity utilization was in the high 60% range.
These steps provide additional liquidity and flexibility as we navigate this global crisis by doing so we're protecting the company.
Security the dividend.
Our strong investment grade credit rating.
We remain focused on disciplined capital allocation and creating long term value for our shareholders.
And the first quarter total adjusted earnings were $450 million or one dollar two cents per share.
We generated 217 million.
Operating cash flow for $736 million, excluding working capital.
We returned $839 million to our shareholders.
During the quarter, we achieved strong safety performance would continue to strive towards zero incident zero accident workplace.
We're executing our strategy and progressing major growth projects. The grant pipeline commenced full operations of West, Texas Service on April 1st.
More recently Eagleford segment of the pipeline starting operations marketing completion of the project.
At the Beaumont terminal, we added 2.2 million barrels, but fully contracted crude oil storage, increasing the terminals total crude and product storage capacity to 16.8 million barrels.
We continue to advance midstream growth projects scheduled for completion this year, including 20 Fracs to entry.
Beaumont dot for as well its PS Xps, Clemens caverns expansion and the South Texas Gateway terminal. These projects are produce dressing well that's plan.
The chemicals, CP, Chem, and Qatar petroleum or jointly pursuing development of petrochemical facilities on the U.S. Gulf coast and in Qatar.
CP Chem continued front end engineering design, which us Gulf Coast project and advanced joint venture discussions with this partner.
CP Chem has suffered a final investment decision on the Gulf Coast project.
In refining we completed the FCC unit upgrades. This when you refinery to increase production of higher valued petrochemical products and higher octane gasoline.
The project was completed on time and within budget.
In marketing our West Coast retail joint venture is expected to close on the acquisition of approximately 100 site in the second quarter 2020, as previously announced.
The joint venture enables increased long term placement of our refinery production increases exposure to retail margins.
In closing we're honored that five of our refineries were recently recognized in 2019 safety performance, our Ferndale, Santa Maria Borger Lake Charles Bayway refinery received distinguish safety awards. This is the highest annual safety award in our industry and the fourth year in a row at our refined.
We have received this honor.
And also recognized see becomes borger conroe orange import author facilities for temporary 2019 safety performance. So congratulations to all those facilities. We're proud of you really well done and with that I'm in turn the call over to Kevin go through the financials.
Thank you, Greg Hello, everyone, starting with an overview on slide four we summarize our financial results.
We reported a first quarter loss of $2.5 billion.
We had special items amounting to an after tax loss of $2.9 billion. This includes a 1.8 billion dollar impairment of refining segment goodwill and a 1.2 billion dollar pretax impairment of the company's investment can DCP midstream.
After excluding special items adjusted earnings were $450 million a $1.02 per share.
Operating cash flow was $736 million, excluding working capital.
Adjusted capital spending for the quarter was $900 million, including $644 million for growth projects.
We returned $839 million to shareholders through $396 million of dividends and $443 million of share repurchases. We ended the quarter with 437 million shares outstanding.
Moving to slide five this slide highlights the change in pre tax income by segment from the fourth quarter to the first quarter. During the period adjusted earnings decreased $239 million driven by lower results in refining.
The first quarter adjusted effective tax rate was 4%.
The lower rate was primarily due to a higher proportion of income attributable to non controlling interests and foreign operations relative to domestic results in a low earnings environment.
It was further reduced by impacts from state taxes, and recent tax changes under the cares Act.
Slide six shows our midstream results first quarter adjusted pretax income was $460 million, an increase of $55 million from the previous quarter.
Transportation adjusted pretax income was $200 million down $50 million from the previous quarter.
The decrease was due to lower equity affiliate earnings largely reflecting reduced volume commitments on the Rex pipeline.
In addition decreased refinery utilization impacted volumes on our pipelines and terminals.
On April 1st the growth pipeline began the full operation of West, Texas Service and later in April the Eagle Ford segment came online pipeline is now fully operational.
NGL and other delivered record adjusted pretax income of $179 million 59 million dollar increase from the prior quarter was due to propane and butane trading activity as well as record margins at the Sweeny hub.
The people LPG export facility averaged 13 cargos per month, and the fractionator ran at 114% utilization.
DCP midstream adjusted pretax income of $81 million was up $46 million from the previous quarter.
The increase reflects hedging gains driven by lower commodity prices as well as lower operating costs.
In response to the challenging environment, DCP midstream is reducing costs, reducing gross capital by 75% and recently cut the quarterly distribution by 50%.
Turning to chemicals on slide seven.
First quarter adjusted pretax income was $193 million up $20 million from the fourth quarter.
Olefins and Polyolefins adjusted pre tax income was $193 million.
39 million dollar increase from the previous quarter due to higher polyethylene sales volumes, reflecting increased demand in the first quarter, primarily for food packaging and medical supplies following lower seasonal fourth quarter demand.
I wouldn't be utilization was 98%.
Adjusted pre tax income per se in ASP decreased $23 million due to low margins and higher turnaround activity.
During the first quarter, we received $33 million in cash distributions from CP Chem.
She became is taking steps through June 2020 capital by $600 million and operating costs by $300 million.
Turning to refining on slide eight.
Refining first quarter adjusted pre tax loss was $401 million. Thank from adjusted pretax income of $345 million last quarter.
Across our system the weaker results were largely due to lower realized margins and volumes as well as high a turnaround costs.
Realized margins for the quarter decreased by 25% to $7.11 per barrel.
Good utilization was 83% compared with 97% last quarter.
First quarter was impacted by significant turnaround activity economic run cuts as well as unplanned downtime.
We completed turnarounds at the alliance Sweeny and Los Angeles' refineries. In addition, we had outages at the Bayway and bunker city refineries.
Pre tax turnaround costs were $329 million, an increase of $97 million from the previous quarter.
The first quarter clean product yield was 82% DKI decreased from the prior quarter due to downtime on secondary units.
Slide nine covers market capture.
The three to one market crack for the first quarter was $9.82 per barrel compared to $12.45 per barrel in the fourth quarter.
Realized margin was $7 11, 11 cents per barrel and resulted in overall market capture or 72%.
Market capture in the previous quarter was 76%.
Market capture is impacted by refining refinery configuration, we make less gasoline and more distillate and premised in three to one market crack.
During the quarter distillate crack decreased approximately $4 per barrel and the gasoline crack declined by almost $2 per barrel.
Losses from secondary products of $1.32 cents per barrel improved $1.30 cents per barrel from the previous quarter due to falling crude prices.
Losses from feedstock for 21 cents per barrel.
Feedstock advantage declined $1.23 cents per barrel from the prior quarter. The decrease is primarily due to timing of crude purchases relative to crude runs.
The other category reduced realized margins by 17 cents per barrel. This was an improvement of 37 cents per barrel from the prior quarter driven by clean product price realizations.
Moving to marketing and specialties on slide 10.
Adjusted first quarter pretax income was $488 million $201 million high of in the fourth quarter.
Marketing on other increased $197 million from higher realized margins, reflecting the impact of falling refined product spot prices, partly offset by lower volumes.
Specialties increased $4 million due to higher finished lubricant margins.
We reimaged 250 domestic branded sites during the first quarter, bringing the total to approximately 4440 since the start of the program.
Our international marketing business, we Reimage 11 European sites, bringing the total to approximately 90 since the program's inception.
Refined product exports in the first quarter were 160000 barrels per day, compared with 157000 barrels per day in the fourth quarter.
On slide 11, the corporate and other segment had adjusted pre tax costs of $197 million, an improvement of $14 million from the prior quarter.
The decrease is primarily due to lower employee related expenses, partially offset by higher charitable contributions.
Slide 12 shows the change in cash during the quarter, we started the year $1.6 billion in cash on our balance sheet.
Cash from operations was $736 million, excluding working capital there was a working capital use of $519 million.
Consolidated debt increased by $1.2 billion.
We funded $900 million of adjusted capital spending and returned $839 million to shareholders, including $443 million through share repurchases on March 18, we suspended our share repurchase program.
Our ending cash balance was $1.2 billion.
We are focused on conserving cash and maintaining strong liquidity in the current environment at March 30, Onest, we had $6.9 billion of liquidity, reflecting $1.2 billion of consolidated cash a $5 billion revolving credit facility at Phillips 66, and the $750 million revolving credit facility at Phillips 66 partners.
Phillips 66 has a commercial paper program for short term funding needs.
In April we paid off $525 million of maturing debt executed $1 billion in bond issuances and secured $1 billion of incremental term loan capacity, which is currently undrawn.
S&P and Moody's reaffirmed Phillips 66 investment grade credit ratings of Triple B, plus an athree respectively.
This concludes my review of the financial and operating results next I'll cover a few outlook items and chemicals, we expect the second quarter global own p. utilization rate to be in the mid ninetys in refining crude utilization will be adjusted according to market conditions in April utilization was in the high 60% range we.
Expect second quarter pretax turnaround expenses to be between 45 and $70 million.
We anticipate second quarter corporate and other costs to come in between 202 hundred $20 million pretax with that we'll now open the line for questions.
Thank you I 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 have a question. Please press Star then one on your Touchtone phone.
If you wish to be removed from the Q. Please press the pound team.
If you are using a speaker phone named pick up the handset first more pressing the numbers.
Once again, if you have a question. Please press Star then one on Touchtone phone.
Your first question comes from the line Neil Mehta from Goldman Sachs. Please go ahead. Your line is open.
Good morning, Thanks, Thanks team for taking the question.
The first one is just around what you guys are seeing real time on demand you have a large marking system. So any.
Any real time data points would be valuable and then if you could tie that into your comments on utilization.
Iran and the high Sixtys in April.
Recognizing theres, probably some commercial Uh huh.
Limitations on in terms of how you you're able to talk about how you expect expect that to go forward any thoughts as you think about planning may June on utilization side.
Hey, Brian.
Thanks for the question, we have line of sight in Western Europe, where we have.
Stores and also in the U.S.. So we'll start with western Europe at the at the worst of the demand destruction, we were down about 70%, we've seen things come back to about 50% now in Germany, and Austria, they're starting to open up those communities a little bit bigger stores can now open if you come over to the U.S., we were seeing 40% to 50%.
Demand destruction, depending on our rural or urban areas now that's up to about 35%. So things are getting better in terms of refinery utilization, we are matching our utilization with demand. So as demand moves up we are we're moving up our utilization as well got down to about 65%.
Utilization.
When demand was at its worst.
So Neil as you.
I think about gasoline demand consumer driven roughly 35% a gasoline demand is driving to and from work and a recent statistics show over 90% of the U.S. population under some form of locked down and the pace or recoveries going to be driven by the impact of CODI 19 in the relief from these policies.
But 16 states is scheduled to lift stay at home policies in public opinion, starting to rally towards restarting the economy.
People come back to work and start driving there'll be greeted with lower gasoline prices down about 40% year on year at retail and support from six trillion dollar stimulus package, which should report support recovery as well.
No I appreciate that the follow up is on the marketing side of the business.
Were.
Earnings came in better than at least our model for the for the first quarter. This any any.
Guidance or the way, we should think about that is going to twoq threeq recognizing volumes would be down but any thoughts in terms of.
How you see the next six months from a from a margin standpoint, and whether that could be an offset.
Thanks, Neil I, certainly marketing speaks to the benefit of diversity in our portfolio and.
Yes, you might know in Europe, where we had very very strong margins, we have about 80% of our stores in western Europe, Our retail company owned stores. So we get the benefit of the retail margin in in that segment and the retail margin was very very strong I'll say for the first quarter until about mid March when Cove. It hit we were ready.
Above volumes budget volumes and I Wouldnt cobot hit we came off but for the quarter, probably about 90% of volumes, but margins two to three times. What we had budgeted for margins are very very strong margins typical of a falling flat price. So really did good job there and in the us where most of our stores.
As our shopper owner wholesale owned stores.
Still decent volumes in the us at margin and as good as overseas, but we had good margins in the us to with falling prices.
Your next question comes from the line of Doug Terreson with Evercore ISI. Please go ahead. Your line is open.
Good morning, everybody.
Good morning, So Greg you guys had been a originator of the disciplined capital management approach and it's obviously, sorry your shareholders well during the upturn and now the downturn to so kudos to the team for that and while you reiterated your commitment today, we're in an unusual period, if I understood stress, which is.
Usually associated with consolidation if financial and strategic Merit is available. So my question is while you've historically used your internal capital management program to drive value you guys have obviously been successful it appears of often used acquisitions and so I want to see how you frame the strategic.
Opportunity set today, where do you think it's different from prior downturns and also any other notable color or philosophy that that you could share on this topic.
Sure. Thanks.
Hi. This is 40 years for me in the business. That's my first global pandemic, but through several weeks about crisis. So and you know what I always tell people is that single point in time forecast in the middle look prices are always dangerous and often wrong.
That was true crude with 100 and crews 20, and we always view our business through the lens of mid cycle that we think thats appropriate way to do it we've had the 60 40 allocation framework, 60% and reinvested back in our business and 40% return to shareholders. We still think Thats a good framework, obviously, there's times when you're going to be on other side.
That is like in the current prices liquidity is keen you've seen has taken steps to.
It's been liquidity, but in the real purpose of that is protected investment grade credit rating intend to protect the dividends. We go through that we're going to come out of this on the other side of this as I.
Yes, so it's I think about $6 billion to $7 billion of cash flow at mid cycle and I acknowledge we're certainly not mid cycle today.
We always start with the sustaining capital that's the first dollar that's a billion dollars a year in our dividends second it at 1.6 billion and then we've kind of guided to one between two and a happy on active share repurchase one to two and half billion of growth capital, but as I look at all the capex cuts that I'm seeing in the upstream business, 30% in that.
Ranger or higher person.
I think that the midstream investible opportunities are going to be challenged in 2021, and so while we're a long way to December when we would normally set our capital budget today I would tell you we probably guide to the low end of that and just terms of the organic investible opportunities that meet our hurdle rates and then.
[music].
If you think about that if we were we think it was we'd get into 2021, we're back towards more mid cycle conditions for the most part in terms of refining margins chemical markets et cetera. So cash certainly generation will improve so we'll probably pay down some debt.
I have the opportunity to restart the share repurchase program.
So I think about the dividend today at one six it's very affordable for us.
In our normal cycle, we would look at probably increasing the dividend kind of mid year and this is certainly the progress of the board, but as you think about were three times. The 10 year average dividend yield S&P 100, I don't think Theres a necessity for his do something immediately as we get in the back half the year, we'll have a lot opportunities think about what.
What do we do with the dividends in terms of increasing in the back half.
To your question around.
M&A or acquisitions.
So first point is never try to catch a falling knife, obviously and as I think about sex and how we're positioned great diverse portfolio strong balance sheet.
We're well positioned to do what we need to do the best thing is we don't have to do anything on M&A front, we have great opportunities to create value for our shareholders. So we can be highly selective.
There's a lot of examples out there today of folks that have done the M&A side of it and it's really hard to create value doing that and so.
Well I do think that that there will be consolidation that comes both in upstream and midstream through the balances here into 2021, just given the stress levels of people have so there could be opportunity just pick up assets, if not even whole companies and so I think you'll see us looked at everything will be very very careful im very selective about what we might do Doug.
Okay. Good framework, Greg Thanks, a lot.
Thank you.
Your next question comes from the line Doug Leggate from BNP. Please go ahead. Your line is open.
Thanks, everyone.
Im a bit reticent I want to check you can hear me okay.
Yes.
Okay, and the seasonal year to having so much.
I think.
Chevron Cup and writing budget it seems [laughter].
[laughter]. So I just a couple of questions I guess first of all Greg when you look at what's happening to gasoline and distillate, they've got kind of contrasting fortunes right now.
Valero made a comment on their call. The other day that they expect the market or the industry to move quickly to rebalance. The distillate set of the equation I just wonder if you could offer your thoughts as to what Philips things about situation and how you might trying to address it youre level, we can follow up please.
Let me just make some overall arching comments and Brian or Jeff can come in.
I actually think that you think about the energy space the energy sector, Doug actually take refining may well, we that space out of this.
And I suspect in the U.S. is going to be around gasoline people been cooped up they want to drive I think they're going to be reluctant to go get in the middle seat on the airplane at first and I think that will come we saw that certainly after 911 and people it took a while to get back in the space.
I think being quarantine being cooped up and just going crazy on the house people are going to want to get out and that should actually bring gasoline demand back pretty good. Indeed, we've seen gasoline cracks move up and not quite on parity with this split but then as a company starts to pick up my views that this will demand. That's also going to pick up as we get the economy moving again.
And so I mean, thats the real answer to the dilemma that weve facing today in energy impact for for many companies is we've got to get demand going again, so Brian or Jeff If you want to coming on top of that puts too. So I would say to Doug if you take a look at our refinery yields.
Between January and April into US you could see gasoline was down from 50% to 44% jet was down from 11% to 5% half as much jet made and distillate was up 9%, 29% to 38%. So why did the jet into the distillate refiners move from a gasoline economy to additional economy.
As far as refinery, we continue to watch the cracks as an example, now gasoline is over distillate in the West coast.
We think about that when we think about opportunities to move our refineries and make the products that people people want I think you also see some gasoline come out of storage now and you'll see some dismissed go into storage as demand starts to continue to increase distillate. If you take a look the distillate contango and and accrued contango, it's about the same.
From.
Prompt to December so, there's a incentive to store distillate as well I think you'll see some storage as well.
That's really helpful color. Thank you I guess my follow up is we've all been asking at least and also reported so far.
The NPS Jose respond to price signals in terms of high quickly who go back to.
Putting rigs back to work in all the rest of it I realize that's a longer dated question, but I want to talk to the same question about refinery utilization because the export market has obviously been on Big Singh.
For I guess excess product for a number of years now so given the uncertainty in the global market for the you've got maybe a more specific issue here in the US how do you think about I mean would you when you see margins rebound quickly do you think you'll move your utilization out whether you would you also be a little bit more.
Pistone measures in the way that you respond to a low those margins to maybe.
Get themselves a little Steve stability at a higher level before yourself.
Moving to a higher level just want to think behavioral from behavior standpoint, how you guys are anticipating coming out the other side is this.
Well maybe as much.
First of all the margins will lead us where we'll go I.
Let me tell us where we need to increase rates or not you. Just you want us to increased rates increased rates I think maybe be good Bob if you had talked we really prepared the refineries to bring them back of we need to do you mean, we'll talk a little bit about that and I'll, let Jeff come in over the top and then talk with Bob If you would yes.
As we ramped our refineries down we actually found ways to get down to lower utilization than we would have ever imagined I think going into this Doug.
We've been we've been pretty careful about how we park the units that we've shut down completely and we do have some fccs down.
And reformers to unmet gasoline middle as we've we've kept our subject matter experts and busy making sure that we're ready to run.
When the signals are there I think we're going to be pretty careful though about.
Not bringing capacity back onto quickly because the last thing, we or anybody else wants to starting it up in shut it down a week later or a couple of weeks wider. So I think we're going to look for pretty strong in a pretty stable.
Demand signal from the market before we start ramping up units that might be idled right now.
Yeah, I think because as we think about demand, it's really the combination of domestic demand and.
Exports into the international markets. So it's a combination of both.
And as you know China kind of had the the coated.
First and its recovering we're seeing that 80, 90%.
Back up so strong recovery in China, and Europe and then the are you asked kind of got hit next and those are starting markets are starting to improve Latin America Central America, where the last ones to get hit with the co that impact and and so we're seeing a little bit of weakness there, but it's really a holistic approach.
Gross to demand overall.
That we're using as a guide.
To to run our refineries at the rate that matches that recovery.
Your next question comes from the line of Roger read from Wells Fargo. Please go ahead. Your line is open.
Yeah. Thanks, good morning.
Hi, there.
Just.
Following up a little bit on Doug's question, there about how things come back and all that you have a feeling for what is the inventory overage as you think about it from the refining down to the retail level I mean, obviously, we get to gasoline stats every week, but what's your view b.
That sounds.
Stack full of inventory is everything else, we look at or that that might be a little bit better I'm just trying to think of the timing of recovery here is demand slowly starts to pick backup.
Yep.
I think is as we look at inventories.
As as a percent of shell capacity.
Crude inventories running at a higher percentage then then products.
And especially at Cushing you know, there's about 92 million barrels a day shell capacity. There. If you look historically cushing inventories have kind of maxed out at about 75% a shell so that would be about 70 million barrels.
Cushing and we're currently at 63 million barrels so.
That's an area, where where crude inventories are high relative to the capacity that's available.
Gasoline distillate some the products.
Lower utilization of shell capacity at this point, but obviously regional and local dynamics, sorry extremely important and we're factoring that into how we run the refineries.
To meet demand in the infrastructure that's available there.
We have the addition of a flywheel for gasoline because.
I had one is an important market.
Roger and if you take a look at just last I'd always 160000 barrels of gasoline came into pad. One that's about 25% at this time of year that less or 75% last 25% of what typically comes in PADD. One. So that's kind of the flywheel is we think about gasoline demand in the us I think in the bottom line.
As refiners will produce just what demand is we want overproduce and that will keep us from filling up we're far from filling up now.
Globally, our U.S. wide. So we don't have any concerns on clean products.
Okay, great. Thanks, and then Greg. This question probably for you. The good performance of chemicals utilization in Q1 in the guidance for pretty strong Q2 can you give us an idea what's driving that wide chemicals has been manage juries managing to stay a lot stronger on the ban side and what we're seeing across most.
For the rest of the.
Business ops.
Yes, I think you kind of just start with it geographically diverse sales mix for CP Chem and the fact that the high density products that they may.
Go into more consumer type markets a lot of the chemical peers have a lot more exposure in automotive and automotive has been hit really hard.
But if you think about detergent bottles and bleach bottles in hand, sanitizer bottle. So things are fine off the shelf and those are the kinds of things that CP Chem makes and then you're seeing a resurgence disposable packaging, it's communities ban reusable bags and go back to the disposable bags and so I mean that.
Thats been Ed and I think that when things. We've seen is really strong demand across all segments of all geography. So good demand in Asia, good demand in Europe and good demand in the U.S.
So it's really product portfolio driven.
Your next question comes from the line fill crash with JP Morgan. Please go ahead, Sir your line is open.
Yes, hi, there.
First question.
First question I had is and probably best for Kevin.
Just want to get some of your thoughts on the moving pieces here in the first quarter on cash flow.
The free cash flow was negative in the quarter. There are some line items and see if so that look to negative.
Hi, there that that didn't have much good descriptions and then but also then as I think about the underlying performance than the refining capture rates.
Pretty Barry just depending on the region. So just any underlying color you could give them.
Formats in the quarter there.
Yeah, Phil I mean, it's so Q1 is usually a week cash generation quarter anyway.
And you're right that on the cash flow statement, if you dig into the details so deferred taxes was a use of cash and normally that's an add back that is specifically associated with the DCP impairment and so if you. If you saw a normalized for that you would have had a showed a modest 200 million.
Inflow on cash.
That particular line item so certain details like that that have an impact on on the overall, but I would say I think we're pretty pleased that are from a working capital standpoint, typically our use of cash in the first quarter. It was this time, but probably less than what we've historically seen some of that's a function of you may remember in four.
First quarter, we did not.
Recover all of our 2019 working capital away, we had anticipated and the reality is below the inventory drawdown in the fourth quarter rolled into Q1 of this year from a cash standpoint, just based on the timing of when those barrels were were sold we've also been pretty aggressive.
And looking at other opportunities to sort of optimize around working capital and then the other coming just from an overall standpoint, and we announced actions to reduce capital reduce costs.
But in the context of the first quarter, our spending really was.
As activities were already sort of set in place and very little ability to directly influence capital. So it's on a on a if you annualize our capital number for Q1, Q, you'll get quite a higher number than what we expect the full year to be.
And and the Theres no doubt, we did consume cash we issued 1 billion to of debt over the quarter and we ended the quarter with less cash that we started so that is the reality of the environment. There is a tough environment and of course, the high refining turnaround costs are a drag us well that typically don't have in a normal steady state quarter.
So I think I'll leave it at that.
Okay. That's helpful.
My second question is.
On chemicals.
Probably three Greg given your experience in this business from a period of time.
We've clearly seen oil prices come down.
Asset feedstocks getting more competitive you announced.
All that you're deferring the decision on the too.
Crackers to 2021, but is there anything about the situation that you seek.
Has structurally changed in any way the feedstock advantage.
[music].
Have you ever facilities.
These are the NAMSA these facilities longer term and as we look at the current environment. How do you think about trough fundamentals for chemicals for your business America Recency there at this point thanks.
Yes.
The first while there's no question as crude prices have come down that spread between let's say natural gas in crude is certainly diminished for LPG.
Crackers, such as CP, Chem, and that's true middle East or Us Gulf Coast.
I would also the $20 crudes not sustainable in our view.
We think crude will will ultimately normalize and it will see that spread opportunity to capture come back to us and.
Today, our view is theres certainly sufficient ngls.
To crack, but when you look the cracks plate today Nath is pretty competitive than that crack space.
The C. C Corps are very competitive Matt crack space one of the things that were seen in chemicals say, though that's that's unusual is given the automotive downturn.
We're not consuming tires, and so making the Buda dying go away is becoming a bigger and bigger issue and as you know NAFTA makes a lot of co products, which we design is one of them and so the industry's looking at the tanks are full industries within it co cracking.
View to dine now just to make it goes away and so that will ultimately start to impact to the economics of knapton that mix because it's so highly dependent on on the value of the co products. So I would suggest that for the balances here you should expect the feedstocks in that chemicals chained to be quite volatile.
But theyve all kind of converse around that same space.
Theres still a million barrels a day probably of ethane rejection and so we were still highly confident that this next wave of crackers coming on there is going to be plenty of LPG feedstocks, albeit that theyre going to be competing head on head with path to at least through the balance of this year into crude.
Gets back to a normal.
Robert you had a lot of experience and chemicals also you want to adding things of that I think you've got to Greg.
We're in a moment I think it's just a moment, yes crude has to I think it's going to work its way backup and you'll get that typical normal delta will come back for an advantage feedstock.
Bill one one thing I'd say I would say is we're starting to see delays in the construction of new capacity, both domestically and in Asia, So pushing out the start up of planned capacity.
Secondly, I'd just say the.
Polyethylene chain margin that we reported in our supplement was 17.8 cents per pound in one Q.
The April index is about 14 cents of pounds, so thats kind of where we are today.
It could go single digit so we've seen it there before.
So I think we'll just have to watch as we go through the year. The fortunate thing is that demand is really held up well across that chain and that that should be good.
Your next question comes from the law lineup, Paul Cheng from Scotia Bank. Please go ahead, Sir your line is open.
Hey, guys good morning.
Good morning.
Two questions quick give I will not beyond just this year next year, so going into will say 2020 to 2023.
In the polls cope with world.
And then she bought pump that change your investment quite TV and your outlook for very much I.
And then one the onto that.
That being put to cut some downstream company poppy Pat.
They are going to see at least 2 million Deputy Paul.
Production job, except to access the tree in late last year tool and off next year, and we probably won't get back to early this year.
Production that will entail maybe 2024 or even 2025, so has that changed in your view about that business that goal.
Yes. So you know, we probably look at exit over exit in a two to 3 million barrel range call, we're probably maybe a little north of view on too.
Where we see to exit rates.
We do think that we're in a.
In a recovery phase, it's probably less investible opportunities in midstream.
And I think that forces us to rethink.
Our midstream growth opportunities, but you've seen us through this before June 15, we were circuit $6 billion of consolidated capital and and 17, we've got that 1.8 billion and so we're certainly willing to do that.
Again, if thats what the market tells US do we can't find investible opportunities ball, but no longer term I think we get we keep coming back.
Thats been Emmett will be over there could be another win in the future. We just don't know about the last one was 917, so though I mean, the odds are good that.
We're going to get back on a on a growth trajectory here, there's still literally hundreds of millions of people that are coming into the middle class that are going to be consumers, they're going to be petrochemicals, there can be consumers of energy.
I think directionally that should be positive for for a return to growth and what we don't know as.
There is a growth go back to where it was hard we start growing from where we're at today. So I think thats. The real question that that is to be answered in front of us Jeff I don't know if you want to come in as you're thinking about out in 23, and 24 Youre seeing different now I think that was will said okay.
I've got the second question is Paul Thompson.
That you guys always have a conservative balance sheet.
Off that they posted Keith we looking out it's not so much of this little mix.
Longer term.
Nope on land, so pardon me to what they use on that that last so that's a capital lease or anything or even thats, how you view.
The P. ethics pool at same vehicle for you.
How are those initial pharmacy chain.
Yes, Paul I don't think.
Long term, we would change our view on expectations around the balance sheet and leverage we have historically talked about at the PS X level, a leverage ratio I sort of 30% debt to cap ratio, 25% to 30% and.
Obviously were higher than that right now and we've been working both sides of that equation between the write downs has had an impact on the denominator and obviously we've added some tax and so we're sitting above that but one of the reasons why we target what a lot would consider very conservative leverage is so that when we come into times like this.
We have the ability the capacity to issue some incremental debt weather the storm come through that the other end and not have a detrimental impact on credit ratings and our ability to access that markets and so I think we feel very good that our financial strategy has really played out the way just.
Correct and if in times like this I do think that as cash flow improves we will have short term debt coming out of this Greg mentioned earlier, we will put priority on eliminating.
That debt and we would expect the overtime, we would get leverage back to within its our so that target level range.
Your next question comes from the line that line of content from credit Suisse.
Go ahead your line is open.
Hey, guys.
Im back maybe four or five years, you sold to refining asset on the East Coast, which was then that's the second reconfigured to produce jets feeling on final understand what happens to these assets across from all the catalyst specifically designed to produce jet fuel and the cotton than bottoming in which we are.
Yeah, we're all looking at each other as he wants to answer that question.
I guess I'll lead off I'm glad we sold it when we did.
[laughter] side.
It's really hard.
And Bob May want to comment, but it's really hard to move that configuration alot produce Jeff I'm not sure that that refineries running that much different terms of its output today, our yield structure than at least at the margin. Yes. I think if you just look at it overtime, they have prioritized, making jet fuel.
Even one maybe the margin didnt drive them to do that because of their their ownership structure. So theres only so many piercing molecules in a barrel of oil and it's hard to get anything else them that down and they trade away. The rest of the products for jet fuel and Thats kind of their business model. So.
Yeah.
We don't have any.
Insight to what Theyre doing today, when when nobody when they don't want the jet fuel their parent company doesn't want to jet fuel and nobody wants to trade them for jet fuel.
Okay quick follow up is the we want monitoring global capacity additions on the next two three years I think Jeff mentioned this on the chemical side is then a probability that some of these.
Finally expansions also get believe postpone dog just completely scrapped off because of the credits cancian other issues that we're seeing on the refining side.
Yeah, I think thats right typically even in a profitable market with open a financial markets those projects new projects tend to get delayed.
In startup periods tend to be longer than anticipated.
But thats, especially the case with covert activities.
Impacting labor forces and construction.
In the financial markets.
Not quite as generous is what they have been so we would definitely expect to see refining projects get pushed out.
This year, we're expecting something.
Comfortably under a million barrels a day of capacity adds.
And and probably trending lower at this point.
So yeah, I think you've got to get point that both on the refining side in the chemical side, new capacity additions are getting pushed out.
Your next question comes from the line, Brad Heffern from RBC capital markets. Please go ahead, Sir your line is open.
Hey, good morning, everyone.
Obviously April was a crazy month in the crude markets.
The plan the physical side I was just curious if you could talk about.
How Philips how much you guys were able to sort of capture those discounts both in terms of you know.
The sort of regional basis stats and then also in terms of the contango that we've seen and then how long you think that that's sort of that can go on par.
Well I'll say that so one of the great things, we did and we talked about it at Investor day as part of advantage 66, we hear that group called the value chain strategy, an optimization group 36 employees best in the brightest from around or different segments and they were able to really during this period of time. It was very fortuitous that we had them in place think about.
How to optimize the entire system. So I'll give you. An example, when prices for crude really fell we were able to push barrels around into the refinery use storage in the refinery that we might not have used to storage third party storage and take advantage of.
Really strong contango in the market. So contango is good for refiners.
Are the things that are in play when you're when you're analyzing value for refiners, but we were able to take advantage of a lot of the opportunities. We also have midstream assets, where we can store product when there's a large contango. So it was it was good for us.
Right I might just add contango is typically a benefit for refiners on crude purchases, but we do have a number of different domestic crude contracts.
And then impact or reflect the impact of contango in backwardation, but theres a number of other variables that impact pricing and margins the timing of crude purchases versus product sales location and transportation differentials quality differentials and product placement off options.
All influenced market capture relative to the three to one benchmark cracks that you guys followed so there are number a complexities to consider.
Okay got it thank you.
And then you guys touched some.
Oil export barrels I'm just curious on.
How you think the outlook for that looks.
Both in terms of.
The demand for you asked for given.
Obviously weakness and global product demand.
But also sort of what happens.
You know if we see significant shut in volumes. Thanks.
Well, obviously, if we see a lot of shut it and we're seeing probably 30% shut in right now there'll be less exports. We think there will be less exports probably in the two and a half million barrels a day range going forward, but our crude still needed and as Jeff mentioned Asia, starting to come back and particularly China, South Korea, Japan and Tyler.
So I.
I think you'll see you'll see barrels continue to be export we export some of our light crudes Bakken crude and others overseas and I think you'll see that continue.
Your next question comes from the line Matthew Blair from Tudor Pickering. Please go ahead, Sir your line is open.
Yeah.
Turning back to you.
Matthew Blair Your line is open.
Your next question comes from the line of Jason gave woman from Cowen. Please go ahead, Sir your line is open.
Morning, How's everyone doing.
Well. Thank you good morning.
Great I wanted ask your question first about.
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The potential recovery and refinery margins as investors trying to figure out how long that takes I think a useful corollary.
As prior recessions in downturns and then the past few recessions, it's taking a couple years for for refining margins global margins.
So really come off the lows based off the data were looking at so can you just discuss some of maybe the similarities and differences between the current situation where in past recessions and how that's going to impact.
No recovery and refining margins. Thanks.
Yes, so I think it'll be a factor of demand recovery and how rapidly demand recovers.
A number of previous cycles, there has been an oil price spike.
In front of the recessionary period, that's really had it.
A big and long lasting impact on demand.
Whereas this has been much more around the covert impact and so I think as a businesses get back to work and consumers drive to and from work in that we'll see demand recover and that that will really drive the margin environment.
We are likely to be in in a supply long environment for a period of time, which is.
Supportive of positive demand elasticity as well as as low cost of goods sold for for refiners. So I think there are.
Some reasons for optimism in this cycle relative to previous cycles.
Okay, one thing I understood yes.
Maybe one thing I'd add on that too just wondering if you think about refining margins in a 30 dollar crude environment. A 15 dollar margin, there's a lot more advantageous to refiners than it was maybe in past times. When we came out and we had $80 recruiter $100 occurred just because of the co product impacts.
I think you can see.
Refining margins rebound.
Quickly.
Fair.
Thanks, and then just moving out of the marketing business. It was such a upon earlier in the culinary, but we don't really have good visibility into low margin is doing right now clearly.
The first quarter was very strong given the rapid decline in crude prices, but how our refining margins trending now as oil prices have stabilized.
And also if you can extend the comments to how volumes are doing relevance to well you discussed in terms of overall demand destruction. Thanks.
So what's your question on marketing margins are refining margins.
Marketing margins, yes, so so I'd tomorrow margins in.
In our Western Europe are still very very strong.
We expect them to remain relatively strong in the U.S. the margins starting to stabilize some but we still see them as being relatively good now remember in the US a lot of our volume is wholesale volume and wholesale margins are smaller than the retail margins overseas, but we would expect demand to continue to increase in the margins to come.
Off in the U.S.
And.
Sure.
David do we have anyone else in the Q.
We have no further questions at this time I will now turn the call back over to Jeff.
Alright. Thank you very much for your interest in Phillips 66, we appreciate your time in interest if you have further questions. Please contact Brent or me. Thank you.
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