Q4 2020 Phillips 66 Earnings Call
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Welcome to the fourth quarter 2020, Phillips 66 earnings Conference call. My name is David and I will be your operator for today's call at.
At this time all participants are in a listen only mode.
Later, we will conduct a question and answer session.
Please note that this conference is being recorded.
I will now turn the call over to Jeff Dieter Vice President Investor Relations, Jeff you may begin.
Good morning, and welcome to Phillips 66 fourth quarter earnings Conference call.
Participants on today's call will include Greg Garland, Chairman and CEO, Kevin Mitchell, EVP and CFO Bob Herman.
E V P refining.
Mendell EVP of marketing and commercial and Tim Roberts EVP 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 and our Q&A session. Actual results may differ materially from today's comments factors that could cause actual results to differ are included here as well as in our SEC filings with that I will turn over the call.
Paul to Greg for opening remarks, Okay. Thanks, Jeff Good morning, everyone and thank you for joining us today.
At the start of this last year, we could not of envision the unprecedented challenges that we face in 2020.
We're proud of and grateful to the many people who have worked diligently and tirelessly to dwell on the COVID-19 vaccines for.
We are optimistic about the positive impact of vaccines will have on economic recovery in the months ahead.
In the fourth quarter, we had an adjusted loss of $507 million of $1 16 per share.
Market conditions remained challenged alright.
The final business continued to be affected by demand destruction associated with the pandemic.
For the year, we had an adjusted loss of $382 million for 89 per share.
We operated well and completed major growth projects in our midstream segment, including the Gray Oak pipeline, our largest pipeline project to date.
And the Sweeny hub phase II expansion.
We took early decisive steps to reduce cost and capital spending.
The additional liquidity and suspend our share repurchases.
We exceeded $500 million from cost reductions the cut capital spending by more than $700 million.
These actions combined with cash flow generation from our diversified portfolio.
Provided us with financial flexibility to maintain our strong investment grade credit ratings sustaining the dividend and to navigate the crisis.
Our focus continues to be on the wellbeing of our company our employees and our communities.
In 2020, we contributed $32 million to charitable organizations, including $6 million toward COVID-19 and disaster relief.
Even with the distractions and the challenges of the pandemic our people remain focused on safe reliable operations and execution of our strategy.
2020 was the safest year in the history of our company.
Our total recordable injury rate of zero point of one one was 30% better than our industry leading rate in 2019.
Our process safety improved by 660% and our environmental performance was our best ever.
2020 will generate $2 1 billion of operating cash flow and returned $2 billion for shareholders.
Since we formed the company, we've returned approximately $28 billion to shareholders through dividends share repurchases and exchanges.
We remain committed to a secure competitive and growing dividend.
Entering 2021, there is still uncertainty in the market.
We will continue to maintain a strong balance sheet and.
On a disciplined capital allocation.
In December we announced our 2021 capital budget of $1 7 billion and that includes Phillips 66 partners. This is the <unk>.
Reduction compared to recent years.
The re up capital for debt repayment.
In 2020, we added approximately $4 billion of debt.
We plan to reduce debt the pre COVID-19 levels as cash generation improves.
Our 2021 capital budget includes $1 $1 billion of sustaining capital for reliability safety and environmental projects. In addition, $600 million of growth capital is directed towards in flight projects and investments in renewable fuels.
During the quarter, we advanced our growth program.
At the Sweeny hub crack to commenced operations in September the factory started operations on October.
We plan to resume construction of our fourth fractionator in the second half of 2021.
Upon completion, the sweeny hub will have 550000 barrels a day of fractionation capacity supported by long term customer commitments.
At the South, Texas Gateway terminal the second dock commenced crude oil export operations in the fourth quarter.
On expected completion in the first quarter of 2021, the terminal will have $8 6 million barrels of storage capacity and up to 800000 barrels per day of dock throughput capacity.
So all of the 66 partners owns a 25% interest in the terminal.
Phillips 66 partners continued construction of the CTG pipeline connecting its clemens storage caverns, the petrochemical facilities on the Corpus Christi area.
Project is backed by long term commitments and expected to be completed in mid 2021.
At the Beaumont terminal, we completed the for stock, bringing total dock capacity to 800000 barrels per day.
The terminal has the total crude and products storage capacity of $16 8 million barrels.
Since acquiring the terminal in 2014, we doubled the dock capacity and more than doubled its storage capacity.
And chemicals.
The <unk> advancing optimization of the Debottleneck opportunities.
This includes recently approved products projects at Cedar Bayou facility that will increase production of ethylene and polyethylene.
In addition, <unk> is developing an expansion of its normal alpha olefins production.
During the quarter <unk> announced its first production of polyethylene from recycled plastics at at Cedar Bayou facility and received <unk> plus certification.
<unk> remains committed to finding sustainable solutions, including the elimination of plastic waste in the environment.
We're advancing our rodeo renewed project at the San Francisco refinery.
We expect to complete the diesel hydro treater conversion in mid 2021, which will produce 8000 barrels per day for.
The conversion of the facility in early 2024 to produce over 50000 barrels a day of renewable fuels.
This capital efficient investment is expected to deliver strong returns and we will reduce the plant's greenhouse gas emissions by 50%.
This project helps California to meet its low carbon objectives.
The marketing, we recently acquired 106 retail sites in the central region through a joint venture.
This aligns with our strategy of securing long term placement of Phillips 66 refinery production and extending our participation in the value chain of retail.
We have also advanced our digital transformation efforts fostered innovation across our company and implemented new technologies, including digital systems for work processes artificial intelligence to predict maintenance requirements and optimize processing unit performance.
Our company is making investments to competitively position us for a low carbon future.
Earlier this month, we announced our emerging energy organization.
This group is charged with establishing a lower carbon business platform.
We will pursue opportunities within our portfolio such as renewable fuels and work with our companies.
Energy research and innovation group, the commercialized emerging energy technologies.
For example on collaboration with Georgia Tech Gold 66 received a grant from the U S Department of energy that will support the development of electrolysis technology that has the potential to convert <unk> and the clean fuels.
Our company is committed to addressing the global climate challenge.
At the same time deliver shareholder returns so with that I'll turn the call over to Kevin to review the financial results. Thank you, Greg Hello, everyone, starting with an overview on slide four we summarize our fourth quarter results, we reported a loss of $539 million.
Excluding special items, we had an adjusted loss of $507 million of $1 16 per share.
We generated operating cash flow of $639 million <unk>.
Including distributions from equity affiliates of $400 million.
Capital spending for the quarter was $506 million <unk>.
Including $239 million for growth projects, we paid $393 million in dividends during the fourth quarter.
Moving to slide five the.
This slide shows the $506 million reduction in adjusted results from the third quarter two of the fourth quarter cash.
<unk> adjusted pre tax income increased quarter over quarter, while the other segments declined.
The income tax variance relates to favorable tax impacts we had in the third quarter related to our ability under the cares act to carry back net operating losses to previous periods.
Slide six shows our midstream results.
The fourth quarter adjusted pre tax income was $323 million the.
The decrease of $31 million from the previous quarter.
Transportation contributed adjusted pre tax income of $196 million down $6 million from the previous quarter.
The decrease was due to low of pipeline and terminal volumes driven by lower refinery utilization.
This was partially offset by higher equity earnings on the Bakken pipeline.
NGL and other adjusted pre tax income was $86 million the.
The $16 million decrease from the prior quarter was due to lower equity earnings as well as reduced propane and butane trading results.
This was partially offset by higher fractionation volumes, reflecting the ramp up of Sweeny, Fracs, two and three which demonstrated the operations above design capacity.
The Sweeny fractionation complex average 376000 barrels per day during the fourth quarter.
Also at the Sweeny hub, the Freeport LPG export facility loaded a record 39 cargoes in the fourth quarter.
DCP midstream adjusted pre tax income of $41 million was down $9 million from the previous quarter, reflecting lower sand hills pipeline equity earnings and timing of maintenance costs.
Turning to chemicals on slide seven.
Fourth quarter adjusted pre tax income was $203 million.
Up $71 million from the third quarter.
All kinds of polyolefin <unk> adjusted pretax income was $216 million.
The $68 million increase from the previous quarter is due to higher polyethylene margins, partially offset by higher turnaround and maintenance costs.
Global <unk> utilization was 101% supported by global consumer demand, including food packaging and medical supplies.
The <unk> polyethylene sales volumes set of new records in 2020.
Adjusted pre tax income for CNS increased $8 million, primarily due to higher earnings from international equity affiliates driven by improved margins.
During the fourth quarter, we received $215 million in cash distributions from CP Chem.
Turning to refining on slide eight.
Refining fourth quarter adjusted pre tax loss was $1 1 billion.
Compared to an adjusted pretax loss of $970 million last quarter.
Both periods reflect the continued impact of challenging market conditions.
The decrease results from the fourth quarter were largely driven by higher turnaround and maintenance activity.
The pretax pre tax turnaround costs were $76 million up from $41 million in the prior quarter.
Maintenance cost increased primarily at the alliance refinery.
We shut down the lines in mid September in preparation for Hurricane Sally and it remained down for planned turnaround and maintenance activities during the fourth quarter. The refinery safely resumed operations earlier this month.
Crude utilization was 69% compared with 77% last quarter the for.
The quarter clean product yield was 86%.
Slide nine covers market capture.
The 321 market crack for the fourth quarter was $7 84 per barrel compared to $8 17 per barrel in the third quarter.
Realized margin was $2 18 per barrel and resulted in an overall market capture of 28%.
The market capture in the previous quarter was 22%.
Market capture is impacted by the configuration of our refineries.
We make less gasoline and more distillate than premised in the 321 market crack.
During the quarter, the distillate crack improved $2 48 per barrel, while the gasoline crack decreased $1 74 per barrel, resulting in a modest improvement of our capture from the prior quarter.
Losses from secondary products of $1 20 per barrel was <unk> 60 per barrel improved from the previous quarter due to improved NGL prices relative to crude.
Losses from feedstock for <unk> 46 per barrel compared to 35 per barrel of last quarter.
The other category reduced realized margins by $3 eight per barrel. This.
Of this category includes rens freight costs clean product realizations and the inventory impacts.
Moving to marketing and specialties on slide 10 <unk>.
Adjusted the fourth quarter of pretax income was $221 million compared with $417 million in the prior quarter.
Marketing and other decreased $185 million due.
Due to lower realized margins, reflecting rising prices during the quarter we.
We were also impacted by lower volumes related to COVID-19.
And while marketing on the other results were lower in the fourth quarter full year 2020, adjusted pre tax income of $1 billion to $4 billion.
Was the highest since the spinoff in 2012.
Specialties decreased $11 million largely due to lower finished lubricant margins.
Refined product exports in the fourth quarter for 103 buyers of the barrels per day.
On slide 11, the corporate and other segment had adjusted pre tax costs of $235 million, an increase of $22 million from the prior quarter.
This was primarily due to lower capitalized interest and higher employee related expenses.
Slide 12 shows the change in cash for the quarter we.
We started the quarter with of one $5 billion cash balance.
Cash from operations was $639 million.
This included a working capital benefit of $403 million.
Primarily due to the yearend drawdown of inventory.
Net debt issuances were $1 4 billion.
This includes the 175 billion in senior notes and repayment of $500 million on the term loan.
Phillips 66 partners grew $125 million on its revolver.
Capital spending was $506 million.
We paid $393 million in dividends, our ending cash balance was $2 5 billion.
At December 31, we had $7 8 billion of committed liquidity, reflecting $2 5 billion of consolidated cash plus available capacity on our credit facilities of $5 billion at Phillips 66, and $300 million.
Phillips 66 partners.
On slide 13, we summarize our financial results for the year in.
In 2020, we had an adjusted loss of $382 million or <unk> 89 per share.
We generated $2 1 billion of operating cash flow.
Distributions from equity affiliates totaled $1 7 billion include.
Including $632 million from CP Chem.
At the end of the fourth quarter on net debt to capital ratio was 38%.
Slide 14 shows full year cash flow.
We began 2020 with the cash balance of $1 6 billion.
Cash from operations was $2 4 billion.
Excluding working capital there was of working capital use of approximately $300 million.
We received a net $4 1 billion from our financing activities.
We added $3 $75 billion of debt of Phillips 66, and approximately $400 million at Phillips 66 partners.
As cash generation recovers, we will prioritize debt repayment.
We remain committed to a conservative balance sheet and strong investment grade credit ratings.
<unk> spending was $2 9 billion.
We returned $2 billion to shareholders through $1 $6 billion of dividends and $443 million of share repurchases, we suspended our share repurchase program in March.
This concludes my review of the financial and operating results next I'll cover a few outlook items.
In chemicals, we expect for the first quarter global <unk> utilization rate to be in the mid nineties.
In refining crude utilization will be adjusted according to market conditions.
In January utilization has been in the low 70% range.
We expect first quarter pre tax turnaround expenses to be between 202 hundred $30 million.
We anticipate the first quarter corporate on other costs to come in between 240% of $250 million pre tax.
For 2021, we plan full year of turnaround expenses to be between $550 of $600 million pre tax.
We expect corporate and other costs to be between $950 million and $1 billion pre tax for the year.
We anticipate full year DNA of about $1 5 billion.
And finally, we expect the effective income tax rate to be in the low 20% range.
With that we will now open the line for questions.
Thank you we will now begin the question and answer session.
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Doug <unk> with Evercore ISI. Please go ahead your line is open.
Good morning, everybody.
Good morning.
Greg a notable feature of performance last year was that the company not only execute on its operating and capital cost reduction plans, but you guys also completed the four to five major projects and what what was one of the most tumultuous years in recent decades. So far is kudos to the team on strong performance.
Simultaneously, while the benefits of diversification and taking care of business like you did last year were clear.
The pace of change on the industry seems to be quickening, not only as it relates the energy policy and likely future energy mix, but also that which investors expect from their investments in the sector. So.
I've got a couple of questions. One how do you think how do you guys think about how to navigate this evolving and changing environment too.
Tactical and strategic dexterity likely to be needed maybe more than in the past or do you think it's about the same and then three other obvious implications for financial strategy for Phillips 66, along the way so three questions.
Okay. You gave me a lot to unpack there Doug banks.
Maybe I'll start with sorry at the top of what's kind of the overview I think that.
For us.
Capital disciplined capital allocation remains core to our strategy from what we do that's returning capital to shareholders is earning returns above our weighted average cost of capital on what we choose to invest soon as the company. So that those of our guiding lights of our guiding stars as we think about this and we think about energy transition.
I tend to think about it in three buckets.
Near term midterm and longer term Doug in terms of our response on how we're going to navigate through it.
Clearly in the near term.
We're building a renewable fuels pathway.
We're doing so this year mid year, we will start up the for.
Part of Rodeo 8000 barrels a day by 2024 will have a full facility conversion 50 more than 50000 barrels a day there we're working with <unk> renewables for 11000 barrels a day of renewables.
Coming out of the facility, where kind of co processing of about 3000 barrels a day at Humber today in the UK move into of 5000 barrels a day and so.
As we think about as we approach of the middle point of the decade, and we should have a billion of installers of EBITDA out of our renewable fuels business. So that's certainly one pathway. We think about the second bucket is kind of more of the medium term and as you know we're supplier of specialty graphite.
We go into the anode production with the mind batteries and we continue to work to improve that to.
To help improve battery performance, but also lower cost and so I think.
As we see EV evs grow and they are going to grow <unk> sales globally, we're going to grow that portion of the business is also going to grow and I think we can make a nice contribution there in terms of what we bring to batteries and battery technologies and then maybe the third one.
Is around hydrogen and that's longer term certainly today, we're building hydrogen fueling stations in Europe. So that's the first step we're working in the United Kingdom with the Giga stack consortium, which has taken offshore win electrolysis to make green hydrogen we're using that in our Humber refinery to reduce the.
The carbon content of our fuels produced at Humber and so.
So as I think about hydrogen.
Our industry is big consumers and producers of hydrogen and really understand it I think that hydrogen moving into transportation fuels on the big ways, probably decades out, but we will continue to build a pathway around hydrogen for the longer term you may have seen that we got a grant from the Doe and we talked about it in the.
The opening comments today, but thats really around our solid oxide fuel cell technology, and taking <unk> and running it through the fuel cell then produce clean fuels and so there's probably a pathway there for us too. So our idea is we want to participate the energy transition we want to do it.
Where we can invest and earn returns at or above our weighted average cost of capital. We certainly want to exploit the technology base, we have at use existing equipment, where we can and convert it if we need to like what we're doing at rodeo, we try to find capital efficient solutions, where we can earn great returns.
Yes, I think the other thing I want to point out here Doug is.
You think about the challenges that we have before us providing reliable affordable abundant energy of the same time addressing.
On the climate is.
Something that is going to take out of whole approach of industry, but I think about the 10 million people that work in the industry today they are problem solvers.
They are engineers or scientists their marketing people there are people that understand the complexity of the energy business day, and I think there is some of the best people on the planet that are positioned to help solve this dual challenge that we have and so I'm, an optimist always and I think that this industry and our company certainly will have big roles to play.
And the energy transition of we move forward and I know you asked three questions and I don't know if I answered three but I did the best I could with that but maybe you want to ask the ICF.
Yes go ahead, if you want to follow up well I was just kind of I know it sounds like a responsible shareholder oriented strategy, but I did want to interrupt you. So go ahead and finish Greg.
I was just.
It's going to tie it up with the I know my Buddy Joe made the point yesterday and we'd be remiss also if we didn't say.
We recognize you are coming on the transition point you made some great call. So you've been at the top of your game for a very long period of time and Thats really hard to do on the business that you're in Doug you've been a friend of the industry in our on our company, but yet you've had the encourage the challenges when we needed to be challenged and you've always had shareholder interest at heart. So I would tell you really well done we're going.
The Miss you and we wish for the very best for you and hopefully we will see around the energy patch in the future.
Well, thanks, Greg those are kind of comments on I appreciate them.
As have been really.
Z to support because you've had a model for success and you've executed so you've positioned the company very well for the future you on the team and best of luck and thanks again for your example.
Thanks, Doug.
Neil Mehta with Goldman Sachs. Please go ahead your line is open.
Good morning team I guess, the first question I had is.
Going back to the analyst day for them.
A couple of years ago, it feels like an eternity ago pandemic right.
Yes.
Company laid out of $6 billion to $7 billion long term cash flow target.
And obviously 2020, it's hard to capitalize going forward, but as you think about all of the different pieces that went into that $6 billion to $7 billion, recognizing it's a moving target.
Greg you can just share your perspective on why do you still think thats the right anchor and what are the pluses and minuses as far as you can tell right now.
At this point.
Yes, I think the I'll start off and then Jeff and other folks can help me I don't think we are ready to make a call. The mid cycle has changed yet.
It's early to do that.
In terms of how we've re oriented kind of the capital plan here to response to Covid, but also I think is.
At the injuries tree itself has kind of pause in terms of the upstream and the midstream opportunities available to us certainly, we're probably going on around $2 million to $300 million.
The growth plan, we announced at that day simply because we're not going to read out.
The pipeline, we're not going to the <unk> pipeline and some of the other things that we had laid into the plan that we just we just stop working on.
But we may well find other opportunities. So you have rodeo renewed thats going to come in is going to be of big Big EBITDA generator that wasn't in those numbers.
66, we continue to prosecute that.
If you remember.
$600 million or so of that was around our value chain strategy optimization work, we're going to do it all of Thats mid cycle predicated. So all we've done a lot of work around there we haven't been at mid cycle conditions and so in 2020, we're not achieving the results. We thought we achieved there, but I think as we move into 2021 and into 2022 were pretty.
Domestic that we get back to two of recovery the mid cycle conditions around that part of the portfolio. So Jeff I don't know if you want to tag on there add anything to that but I think that'd be my views.
Yes, I think.
Within the marketing segment.
We had $1 4 billion of EBITDA kind of baked in in the generated $1 6 billion of EBITDA and in a market, where we had some demand hits in 2020 and supported by the JV retail acquisition that we made early last year.
The midstream contributions of held up nicely with the fee based approach that we've had there $2 1 billion of the EBITDA. This year in tough market conditions, obviously strong.
With the <unk>.
Sweeny Fracs, two and three climates, South, Texas Gateway, all contributing a full year in 2021.
CP Chem.
We have not really changed the outlook there and there's the potential for future contributions from Gulf coast too in the Roswell find project so.
I think theres still a lot to be encouraged about as we look forward.
Thanks, guys and the follow up is just on refining obviously it was it was a tough fourth quarter.
And the utilization was call it system wide at the kick in.
69% and Youre running low Seventy's in January.
Do you have a view on sort of the trajectory of utilization for the industry recognizing in the near term, it's going to be very much.
The demand dependent.
Is there a good rule of thumb of.
Refining utilization when it gets to a certain level.
Thanks.
The business is back to generating a pre tax profit.
Yes, the pardon me I think when we think about the near term future and how do we get back to higher Utilizations at all kind of starts with the vaccines that Greg referenced in his opening comments right. We've got we've got to get people back.
Back to a normal life and back out on the road using their card go on to school go into work.
Go on where of soccer moms are on the run on the weekend. That's the kind of the first step then that leads to it.
Demand signal for gasoline in.
And distillate to a lesser extent and we start to pull on Utilizations up I think youll see we will be following the market to add capacity back.
And if you kind of think about the timing.
We believe the government will get more efficient at getting people vaccinated as the months go by here, but certainly by by summer, we would expect that a good portion of the American public is able to get out.
<unk>.
Byrne the fuels that we make and that should should lead to a more normal type of summer of level.
We don't have a rule of thumb of what we've got to get back to but obviously.
Running more is better and spreading out our cost over more barrels.
Some of our clients get more efficient at higher run rates as the market gets more efficient of higher run rates.
And we kind of return we always think about it together you got to have that quick product crack signal to get.
Utilization of that leads to cover your cost and then really we need more normalized crude.
Crude differentials in the market.
Those will all play out together because of as utilization rises across the industry theres going to have to be a poll, primarily on Saudi heavy barrels that should help move the crude spreads back out and that's really how we capture more and more of our crack in and kind of get back on the path to high utilization rates.
And a lot more profitability.
Thanks, guys.
Thanks Neil.
Philip Gresh with J P. Morgan. Please go ahead your line is open.
Yes, hi, good afternoon.
First question just on the chemicals business wanted to get your thoughts there on the outlook and in particular.
For your own business I think margins of an extremely strong and continue to be here in the first quarter.
And many of your peers, who put up strong results as well it seems like your results maybe had a little bit more of a lag effect or some cost headwinds there in the fourth quarter. So I was hoping you might be able to elaborate on that a bit in your outlook here as we enter 2021.
Well.
We're constructive chemicals, Phil I think that demand is still really strong net in that segment and we see that.
Across all regions, where Theres, China, Europe or North America.
<unk> run really well.
Record sales volumes.
Okay.
The other thing we've seen is we've seen delays on the startups of the new facilities.
Part of Thats been economic related part of that's just been COVID-19 related as people have either slowed construction of our cost construction due to the didn't see of workers on these big sites. So.
If the supply and demand balance is actually look better to us.
At this point in 2021, and they did it the equivalent point last year and so I think we're pretty optimistic around operating operating rate margins are.
And the Delta of the <unk>.
Mark on margins, it's not unusual to see cdti of kind of deviate off of the IHS marker margins, we've seen that many times in the past.
Certainly.
It's timing of its portfolio, it's geography as you think about that if you think about the fourth quarter. How do you see polyethylene contract prices for essentially flat October November. They go up in December and then if you think about your contract portfolio as there can be lag to the 30 to 60 day.
As of really fully realizing those price increases through the the portfolio. The other part of that is just geography price third of CP chem sales or for export oriented cells cells and so you think about the U S market price mutually the your price is higher and it's usually higher by about the freight delta.
The Asia price is probably a minimum 20 under the North American price and so you have that geographic mix that also comes into play when Youre looking at the App, but having said all of that we think that margins.
Our are certainly above mid cycle today and.
And we have.
I think good line of sight.
What are what we think are above mid cycle margins for 2021. So we feel confident of Tim you on talk about propylene and some of the things going on there too.
I think really to summarize and Greg Dave to your comments.
Well, it's probably important is you had COVID-19 came along and it really had an impact on a lot of different industries with regard to demand the with regard to chemicals, what we did see is.
The demand didn't wane much, especially in the consumable side.
The consumables remain very strong, which benefited CP chem, which really has a larger exposure to that durables really fell off so what youre seeing now I think Phil is as durables are coming back some of the other competitors out there have more exposure to durable. So youre, just seeing that rebalancing thats going on but it's a good thing overall because of <unk>.
People were still buying consumables, which is good and now they're back out line durables, which is good so again building to a on it.
Economists hopefully that's starting to pivot back towards where it should be.
Got it okay. Thank you.
Second question I guess this is probably for Kevin.
As you think about 2021, and the progression of cash flow generation and the balance sheet.
I think you've talked about in the past tax refund that will be coming in at one factor.
How do you think about that most of the free cash flow profile.
EBITDA coverage and balance sheet targets. Thanks.
Yeah, Phil so.
One element of our cash generation in 2021, we will certainly be.
It will show up as positive working capital and it will because we'll be collecting on the tax receivables. So we have of tax receivable at year end of $1 5 billion and we expect about two thirds of that to come in the first half of the year, probably second quarter and then the remainder towards the end of the year. So that's a significant.
Component of cash generation and so when you step back and think about it in 2020 and as bad as things were in 2020, we are projecting.
Better conditions in 2021, when you think about the full year full year 'twenty one to for the full year 'twenty. So we had $2 $4 billion of pre working capital cash generation in 2020. So we would expect a stronger number than that plus the positive impact from working capital and so to us.
It's pretty clear line of sight to not only covering the capital program, which is $1 $7 billion. So we've taken a lot out of the capital program relative to previous years, so $1 $7 billion of capital the dividends $1.6 billion.
And then we'd expect to be able to make some progress on paying down some of the debt and as we've talked before we have a lot of flexibility around that in terms of that the teams are coming due for debt that is callable without any penalty to do that so I think we feel pretty confident that we'll be able to make some good progress.
Not getting all the way to where we want to get too over the next probably couple of years, we'd like to be able to get the debt that we've added over the course of 2020 paid down and have the balance sheet back to where we want it to be and thats important to us. It's important that we maintain the strong investment grade credit ratings of <unk> III Triple B plus.
We feel good about those we want to be able to maintain that sort of the financial flexibility and strength.
Great. Thank you.
Roger read with Wells Fargo. Please go ahead your line is open.
Yes, Thank you and good morning, how are you all doing.
Alright. Thanks.
Maybe the fall a little up on.
Kind of the path that fill let's go on down.
<unk> talked about issues at hand for CP count this quarter, but I was taking a look at all of the things that you started up late Q3, three two for in the midstream area. So just wanted to maybe see if you could quantify some of the the.
The issues, they're not so much as I guess all of missed revenue, but more so on the cost and then the.
The the type of expectation on performance in Q1, and maybe in Q2, given the pace of startup.
Roger This is Tim Roberts ill chime in a little bit here, a couple of things clearly, we're down well were up quarter over quarter, but our expectations higher in width.
Transportation on some of our pipelines being down for what we've projected for have performed at before truly related to refinery utilization is one key part of that so that's driving the piece of that.
In the meantime, as well we've also seen some of the producers out there.
It has had an impact clearly on people putting volume through the pipes. So that's that's shown on the churn of flow more on the crude side. The one bright spot we've seen actually has been on the NGL space.
And we're anticipating that to continue on year end of 2021.
But really it's been a little bit we brought this new capacity on and in fact, I would say that.
The fourth quarter as you go to <unk>, we had on the plus $30 million.
Improvement in our sweeny hub and that was really related to bringing on the two fracs two and three and then subsequently having a record performance with regard to shipments at the LPG export facility, which also contributed to that $30 million increase quarter over quarter.
Had a little bit with regard to some trading activity with our propane and butane, which we trade around our business to make sure we optimize our system.
It really to make sure we get the right molecule for the right place and so we had a little bit of mark to market impact there and also on some the inventory which impacted us but also we saw a little bit of the.
An impact as well on the fourth quarter. If you go from <unk> to <unk> on ethane rejection.
The thing was getting back into the NGL barrel and <unk> and it's really going on now it's coming back into rejection and so that's impacted some NGL volumes and where did it impact us a little bit of our equity ownership in sand hills and in the other part is we've got two JV fracs.
Will that had lower volumes and lower margins. Most of it was driven by just you are cracking the heavier barrel and there were fewer barrels coming down the pipe.
Roger with respect to the new project contributions.
I'd point, you to the Investor update in our midstream project updates.
We outline all of the capital spending and they are kind of six to eight multiple of EBITDA kind of investments Sweeny Fracs, two and three of one 4 billion.
We've got South, Texas Gateway Clemens.
Contributing as well so those were kind of a one quarter contribution in two.
<unk> 2020 that we will get full year contributions in 2021 CTG.
<unk> pipeline scheduled to come on.
Mid year, so we will get half of year of contribution from that asset.
In 'twenty, one so I think those are the increments to be aware of.
Supporting 'twenty, one profitability and ultimately 2020 to profitability in the midstream.
I'd just like some of your comments on.
Costs as well Roger and we've talked about costs were up quarter over quarter on we've talked about that but if you step back and look at the year, we reduced costs, our full year costs were $650 million lower than 2019. So we had of $500 million cost reduction target and as we step back and look at everything we've done we actually feel extremely.
The good about where we came in on costs. When you also factor in all of the project activity work that we had in the new assets that came up but came on line. So overall, we actually feel very good about where we are.
Yes, it wasn't I wasn't trying to criticize you on the cost side of it was more of just trying to understand if you had a full cost impact in Q4 with startups, but not a full volume impact.
A little bit of as you ramped up volumes things, but look better in Q1, net that's kind of where I started the question.
Yes.
That's right there is an element of that in there Roger.
Okay.
And then just a follow up question also kind of piggybacking on filled there on the cash flow side you mentioned.
The year with the $2 billion of cash flow.
I think about three quarters of it coming from.
Equity partnerships, what would be the expectation for.
For that.
Kind of cash flow performance as we look at 'twenty. One is there any of that that has to be paid back or if that was taken on at those partnerships does that have to get paid down before we would expect additional cash flows to come through the other words, the 22 will be fine, but 'twenty, one may be constrained to bed.
In terms of the the distributions from equity affiliates.
Yeah, No I would.
Just thinking high level through that I don't see why that number wouldnt continue at that level of in fact that May go up certainly from a CP Chem standpoint, So we had $632 million from CP Chem and 2020, we would expect <unk> to probably come in stronger in 2021, given the trajectory on margins.
And what they're doing there so that element and that's why part of the biggest single.
The equity distribution, we receive and the rest of the no real reason to think they would come off dramatically. So I think if anything we would expect a slight positive on that.
Sure.
Great. Thanks.
Doug Leggate with Bank of America. Please go ahead your line is open.
Thanks, Adam good.
Good morning, Good morning, guys happy new year on.
I Wonder if all of <unk> Kevin.
The balance sheet question again sort of a simple question we've.
We've obviously seen a different level of volatility than perhaps any of us.
<unk> was through the cycle, how does that change your view of where you want the balance sheet to the medium term once you consider the other side of this do you reset the obsolete.
Metrics to a lower level. That's my first question.
Yes.
Think of it that Doug if we were a REIT.
The refining only business that may be something that we would need to consider and certainly you would expect from refining only you would you would need to run the lower lower leverage because of the volatility, but as we've been growing all of the non refining segments I think we actually feel pretty good maintaining that same.
Construct around how do we think about the balance sheet, both in terms of absolute debt levels and debt to capital ratios and as you know in the past, we've talked about 30% debt capital targets.
That's really more of us on the guideline is an easy kind of easy number to calculate.
And I'd say its a useful indicator, but ultimately we're really focused on the credit ratings, maintaining the strong investment grade credit ratings and I feel that we added $4 billion over the course of last year. If we can take care of that or something very close to that when you factor in the growth in the other parts of the business I think we'll be in a very good position from one of.
Alan sheet perspective.
Okay I appreciate the for Alonso on my <unk>.
Follow up Charles on the show it as a micro question I'm, just hoping you can all for a little bit of color as to what's going on with.
The fairly substantial recovery not anywhere near the mid cycle of course, but nevertheless, substantial recovery in <unk> and.
In trucks and just the losses.
The three weeks demand husband from box inventories are still high on glass.
We're just trying to kind of figure out what's going on with the strong which you could offer some color on what your perspectives on the.
Lots of them. Thank you.
Well I would say that we have seen product inventories.
Inventories come down product inventories are in the five year average gasoline is actually below the five year average by 3%. So we're seeing that and I think as the vaccine gets out there people are optimistic traders. When we think about marketing I think about future markets and the future looks bright zone gasoline cracks have been moving and distillate cracks as well.
Yes, I think I was thinking more of an on demand adjusted basis, we haven't really seen any tightening.
All of the system addresses one of my point.
So on.
I appreciate your contacts I just wondered if there was anything unusual going on right now maybe at the stockpiling ahead of.
Maintenance of unusual maintenance or even with spring maintenance, perhaps some of the wrong of turnarounds blood flow.
But if you think it's just the normalization of inventories and for all of this one.
Make one comment if you think about returns we think range or in the crack. So when you when you think about product prices and crack prices for our products. The range in there. So as the rent goes up you would expect that to show up in the crack margins on both both the gasoline and distillate cracks.
Alright, great. Thanks, guys. Appreciate the time, thanks, so much.
Thank you.
Paul Cheng with Scotiabank. Please go ahead your line is open.
Hey, guys good morning.
Good morning, good morning.
Greg just curious that I mean, you.
The mix some.
Reconfigurations kind of fall on me.
And if we're looking at your in your portfolio, how you Rob will fit into the longer term portfolio.
Odds of a bogey that maybe even the more challenging.
To me it Bob and that we are seeing day, I mean as Dan the meaningful at just the.
Do you need to do in that business. That's the first question.
So the Europe fits into the portfolio how your interest in the portfolio I was going to start with California, Okay, well listen to Europe.
No I think you would say about Europe.
The first of all.
Return on capital employed.
35% plus returns so it's actually one of the stronger businesses on our portfolio from a return standpoint.
The marketing business is business.
The.
We excel at and that part of the World do a really good job with it then you move over to the <unk>.
Humber refinery in the U K, we think it's one of the better refineries in Europe.
It certainly is.
Contributor around our specialty coke needle coke businesses, so we like that value proposition with that asset.
We tend to like the the continental business that we have in Europe, we like the position that the Humber enjoys the not.
Not only from a cost standpoint, but from environmental standpoint, and that European Theater, Bob I don't know if you want to add onto that you can yes. The one thing I would add on too as we were talking about energy transition earlier in the anode.
For the batteries and so Humber Coke, Greg is going to be a player on that and if you. If you look at the even the losses in the UK after Brexit.
And their ambitions to have Evs day want local content produced batteries. So I think that opens up an opportunity for <unk> and we really of like where we're sitting today with with that <unk> also has the advantage of being designated UK is sitting in a cluster that the.
The government there is very interested in developing the green hydrogen and the blue hydrogen schemes and things like that that Greg talked about so we see a lot of opportunity.
Of the medium term I think for Humber and.
Just beyond being a strong fuels provider in the UK.
I would just add on the marketing side, maybe in the United States people less familiar with our brands co op on jet.
The weight of best brand in Switzerland for the second biggest brand in the offshore in the third of Germany. So we are of very very strong breakfast as Greg said.
Very strong return on capital employed.
Okay great.
Second question that I think.
In the past has been the loss on the <unk>.
With the U S.
Dan I mean statistically that you stay on the benefit of having that as a public traded company.
And with that I mean, I think that you guys have been saying that you don't want to rush into that.
The what kind of timeline that you would give me a sound again looking at what the debt structure makes sense for you to maintain.
Yes, Paul it's Kevin I think I would just sort of reiterate what we've said in the past that clearly there is a big the significant dapple overhang on PSX P. That's creating.
Certainty, which is understandable.
The <unk>.
<unk> XP has actually worked extremely well for US you look at the growth and where the entity has come from and where it is today and so on that.
Objective measure you can look at that and we feel very good about it but obviously the unit price.
We don't like and so we've got this uncertainty around the Apple and we just don't feel it would be appropriate to.
Make any rash decisions right now while this is this cloud of uncertainty over it.
And doing something different we just don't think it's the right timing to be considering that.
Hey, Kevin can I, just maybe ask that's fine question.
You mentioned the early at that too that's the question.
On the longer term balance sheet.
That's the way he show.
It really didn't change compared to the pandemic network because you have all of the at the diversified business.
Looking at that other than chemical.
Your other pieces, what the types of patients the Ngls the steel.
Hydrocarbon or also feel we laid the and think that we're going through the energy transition.
Those bits that we also get impact so from that standpoint.
Should we still go with a far more conservative balance sheet.
Well the hydrocarbon based businesses, but you don't have the margin volatility that you have in the traditional fuels refining business and so.
Our assets are fundamentally there are supported by long term contracts committed volumes minimum minimum volume commitments and so I don't think I think your question is maybe a maybe you get far enough out there and there's a different the different point on that but within a reasonable time horizon I still think we feel good.
Those businesses are going to provide solid stable generation of earnings and cash and therefore can support the debt that we would have on the balance sheet.
Jason <unk> with Cowen. Please go ahead your line is open.
Yeah, Hey, guys. Thanks for taking my questions on the first ask on a rift.
Finding business and it's been I think all of the weaker the entire year than we had expected it to be and this other bucket.
It's been a big headwind it looks like.
It's been the past couple of quarters went on $3 a barrel of headwind versus the base crack.
Over the last year was on the $1 50. So can you just talk about what is exactly going on there I know rins are a part of it and there is timing impacts.
Why is that headwind expanded this year and do you see that reversing next year on all of a follow on thanks.
Yes, Bob.
You're right. It is a headwind, but that is the category, where we kind of put the cats and dogs. So of Orange is a big piece of it right. If you just look at the fourth quarter and we draw of the box just around refining. So we're not talking about what we recover downstream on the rent or anything on the refining per barrel basis in the per quarter. It was $2 of that three.
And the eight cents. So it is a big part of that other category. The other big one in there as well.
What we spend to get our products from the refinery gate.
Two market. So there's there's distribution costs that come back on there.
And some of those are of per barrel, but some of those kind of fall into the fixed category. So we've got tankage rented downstream or we've got take or pays on on pipelines that we.
We need to pay on minimum volumes that all kind of comes back that those costs on the elevate when you've got less.
Less volume of pushing through there so by definition those costs will come back down and get smaller as we ramp volumes up here through the first part.
2021.
And that really kind of accounting for the two big drivers of net that other category.
Got it and just on the Rins technically the headwind and refining should be a tailwind in the marketing business is that the right way to think about it.
That's correct, we recover a portion of those costs downstream of the refiners.
We blend in the portion of it.
Majority of the gasoline produced by our refineries and our marketing business and as we add retail for the integration of our refining business, particularly in Middle America, where it's much more difficult to export.
We'll get more of capture of that written.
Got it great and then I just wanted to ask about the Apple, which was just mentioned and the other.
Litigation process can you just the.
Discuss the path forward I.
Believe there's the case being hurt on the lower court.
About the ability to keep the pipeline shutdown while.
On this.
Net process is ongoing in terms of trying to get the new Ias in place to support the permit. So just wondering what the next steps on that litigation process can bite and step in and shut down.
The pipeline.
Without kind of going through the adjudication process and any other thoughts on that thanks.
Yes, I think as we look at the Bakken pipeline, it's operated extremely well.
We think it should continue to operate as we're working through the environmental impact statement.
I think it's hard to.
Speculate on.
The legal proceedings are going to play out.
The review and.
And analyzed many scenarios and how we will react as.
Depending on how this plays out.
But.
On the courts are going to have to.
Continue to work through the process and we'll react accordingly.
Great. Thanks, a lot guys.
Yeah.
Manav Gupta with credit Suisse. Please go ahead your line is open.
Hey, guys. Just a quick question I think your Gulf Coast operations got hit pretty hard on the Hot again, and then you decided to move forward sometime around sort of for two.
Two quarters, yet of Gulf Coast refineries have been in the kind of Mcdonald on I'm, just trying to understand from hand on how do you stabilize those operations and.
When do you get the refineries back on lithium in the 70% to 75% utilization versus where they have been operating for the last two quarters.
Yes, my all of your App.
Absolutely right.
On a look at the.
The three refineries that we've got in there, we've got sweeny, which really operated per the market conditions the entire quarter of.
Alliance, we chose to have down for the entire quarter. So back in September of second half of September we came down because we had of hurricane pointed straight out of <unk>.
Hurricane moved at the last minute, but while we were down since we were only a couple of weeks away from <unk>.
<unk> down for some reformer catalyst change for.
We decided to stay down we executed that work and then you usually the market conditions in the fourth quarter newest Gulf coast are pretty tough so we.
We took advantage of that and kept the refinery down and pulled some difficult to do turnaround work that we would've done late this year early next year, we pulled it forward and got it out of the way. So that was a conscious decision to keep all of that down.
Alliance before it came down was in the 180000 barrel a day range from the from an operating standpoint, and then the lake Charles with the two hurricanes that came running through there.
We were just about back up and running.
After the first one and then we came back down for the second one weighted on electricity again for a few days and it came back up and we've had a couple of operating issues coming back out of that that we're dealing with for the most part Lake Charles is up and running in the processing crude we restarted alliance in early January in there.
We're up and running at the kind of for the market rate that we want them to be at so.
The other than kind of normal turnaround work and stuff that we've got going on and we don't anticipate any other issues.
In this quarter of next in the Gulf Coast.
And we have reached the end of today's call I will now turn the call back over to Jeff.
Thank you David and thank all of you for your interest in Phillips 66, if there are additional questions. Please call Shannon or me. Thank you.
Thank you ladies and gentlemen. This concludes today's conference you may now disconnect.
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