Q2 2019 Earnings Call
Welcome to the second quarter 2019, Phillips 66 earnings Conference call.
My name is Julie and I will be your operator for today's call.
At this time all participants are in a listen only mode.
Later, we will conduct a question and answer session.
Please note that this conference is being recorded.
I will now turn the call over to Jeff Dietert, Vice President Investor Relations.
Jeff you may begin.
Good morning, and welcome to Phillips 66 second quarter earnings Conference call.
Participating on todays call will include Greg Garland, Chairman, and CEO , and Kevin Mitchell Executive Vice President and CFO .
The presentation material, we will be using during the call 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. It is a reminder, that we will be making forward looking statements during the presentation and our Q and a session.
Actual results may differ materially from todays comments.
Factors that could cause actual results to differ are included here as well as in our SEC filings.
In order to allow everyone. The opportunity to ask a question. We ask that you limit yourself to one question and a follow up if you have additional questions. We ask that you review join the queue with that I'll turn the call over to Greg Garland for opening remarks.
Thanks, Jeff Good morning, everyone and thank you for joining us today.
Adjusted earnings for the second quarter were $1.4 billion or $3 in two cents per share.
We generated $1.9 billion of operating cash flow.
We delivered solid operating performance and strong earnings during the quarter refining operated at 97% utilization in captured favorable margins driven by improved gasoline cracks.
In midstream growth projects completed over the past two years contributed to record segment earnings.
During the quarter, we distributed $861 million to shareholders through dividends and share repurchases.
We are dedicated to a secure competitive and growing dividend and this quarter, we increased the dividend by 12 and a half or so.
This is the ninth increase since our inception, resulting in a 25% compound annual growth rate.
Discipline disciplined capital allocation remains fundamental to our strategy and we know that creates value for our shareholders.
Our long term objective is to reinvest 60% of our operating cash flow back into the business and returned 40% to our shareholders through dividends and share repurchases.
Well buy our shares back when we trade below intrinsic value and were buying shares today.
Consistent with our strategy, we are executing a robust portfolio of midstream growth projects with attractive returns.
These new projects will provide us with continued future earnings growth.
During the quarter, we announced joint venture to construct the Liberty and Red Oak crude oil pipeline systems.
These projects are backed by long term volume commitments.
The Liberty pipeline will provide transportation from the growing Rockies and Bakken production areas to Cushing, Oklahoma.
Liberty will have access to the Gulf coast via the Red Oak pipeline.
We own a 50% interest and will construct and operate liberty.
The Red Oak pipeline system will connect Cushing in the Permian basin to multiple locations along the Gulf Coast.
Including Corpus Christi, Ingleside, Houston, and Beaumont, we own a 50% interest and will operate red oak.
Both pipelines are in supplemental open season sick seeking additional commitments, who limited remaining capacity.
The pipelines are targeted to begin initial service in the first quarter of 2021.
Phillips 66 partners continues to construct the Grail pipeline.
The 900000 barrel per day pipeline will transport crude oil from the Permian and Eagle Ford to the Texas Gulf Coast, including our Sweeny refinery.
We received all major permits acquired all right away and installed 80% of the pipe.
The project remains on track to start up in the fourth quarter of this year.
Phillips 66 partners owns 42.25% interest in the joint venture.
Great Hope will connect with multiple refineries and export facilities in the Corpus Christi area, including the South, Texas Gateway terminal and which PSP owns a 25% ownership.
The terminal will have two deepwater marine docs 7 million barrels of storage capacity and up to 800000 barrels per day of throughput capacity.
Coast refineries as well as our Beaumont and South, Texas Gateway export terminals.
We believe this in a great integration is a competitive advantage that further enhances the value across our portfolio.
We continue to expand the sweeny hub to meet increasing domestic NGL production and global market demand. We're moving forward with construction of a fourth fractionator that we will have 150000 barrels per day of capacity and is expected to cost approximately $500 million.
Frank for its backed by customer commitments and is expected to be completed in the second quarter of 2021.
Construction of Fracs, two and three is progressing well and we're on track to start up in the fourth quarter of 2020.
Upon completion of Frac for the Sweeny hub will have 550000 barrels per day of fractionation capacity.
In connection with our expansion at the Sweeny hub PS XP is increasing storage capacity Clemens caverns from 9 million barrels to 15 million barrels.
Completion of the expansion is expected in the fourth quarter of 2020.
Also as the Sweeny hub PS XP will construct a 16 inch ethane pipeline from Clemens caverns to Gregory Texas.
The CTG pipeline will serve petrochemical customers in the Corpus Christi area.
The pipeline will have 240000 barrels per day of capacity and is expected to be complete in mid 2021.
In chemicals, CP Chem is expanding its strategic partnership with Qatar petroleum to develop petrochemical assets in the us Gulf coast and in Qatar.
Pending final investment decisions. These projects will add worldscale ethylene and high density polyethylene and advantage feedstock locations with access to global markets. This further enhances CV kims, leading polyethylene position despite the world's growing demand for polymers.
In refining Phillips 66 partners recently completed construction of the 25000 barrel per day, the summarization unit at the Lake Charles refinery that will increase production of higher octane gasoline blend components.
This unit is expected to reach full production in the third quarter.
At the Sweeny refinery, we are upgrading FCC to increase production of higher valued petrochemical feedstocks and higher octane gasoline. This project is on track to complete in the second quarter of 2020.
This morning, we announced the elimination of incentive distribution rights at PS XP.
This transaction in crude.
Proves vsx fees cost of capital simplifies its capital structure and further aligns the GP and LP economic interest.
Our ownership and PS exposure increased to 75% after the transaction closes.
We believe in transaction is attractive for both Phillips 66 shareholders MPS XP unitholders.
PSP as a premier MLP and remains a key component of our midstream growth strategy.
So before I turn the call over to Kevin We'd ask that you hold the date of November six for an analyst and Investor day will be hosting in New York City with that Kevin you go through the roof.
Financials. Thank you, Greg Hello, everyone, starting with an overview on slide four we summarize our second quarter financial results.
Adjusted earnings were $1.4 billion or $3 or two cents per share.
Operating cash flow, including working capital was $1.9 billion.
Capital spending for the quarter was $631 million, including $408 million on growth projects.
We returned $861 million to shareholders through $406 million of dividends and $455 million of share repurchases.
We ended the quarter with 449 million shares outstanding.
Moving to slide five this slide highlights the change in pre tax income by segment from the first quarter to the second quarter.
During the period adjusted earnings increased $1.2 billion, mostly driven by refining.
All segments had improved results.
The second quarter adjusted effective tax rate was 20%.
Slide six shows our midstream results.
Second quarter adjusted pre tax income was $423 million, an increase of $107 million from the previous quarter.
This quarter, we achieved strong results in the midstream segment driven by record pre tax income in both the transportation and NGL businesses.
Transportation adjusted pre tax income was $245 million up $42 million from the previous quarter due to higher volumes on our wholly owned and joint venture pipelines and terminals.
NGL and other adjusted pre tax income increased $53 million, driven by higher margins and volumes at the sweeny hub as well as improved butane trading results.
The Sweeny hub had record earnings and strong operations during the quarter. The LPG export facility closed a record number of cargoes and the sweeny fractionator achieve utilization to 118%.
DCP midstream adjusted pre tax income of $35 million in the second quarter is up $12 million from the previous quarter due to favorable hedging impacts.
Turning to chemicals on slide seven.
Second quarter adjusted pre tax income for the segment was $275 million $48 million higher than the first quarter.
Orphans and Polyolefins adjusted pre tax income was $260 million up $41 million from the previous quarter.
The increase reflects higher polyethylene margins driven by lower NGL feedstock costs as well as lower utility costs related to falling natural gas prices.
Global RMP utilization was 95%.
Adjusted pre tax income for CNS increased $8 million following first quarter turnaround activity.
During the second quarter, we received $190 million of cash distributions from CP Chem.
Moving to refining the chart on slide eight provides a regional view of the change and change in Refinings adjusted pre tax income.
Refining second quarter adjusted pre tax income was $983 million up $1.2 billion from last quarter.
The increase was mostly due to higher realized margins and volumes.
Realized margins for the quarter increased 57% from $7.23 per barrel to $11.37 per barrel driven by higher gasoline cracks.
Crude utilization was 97% compared with 84% in the first quarter.
The first quarter was impacted by significant turnaround activity as well as unplanned downtime.
The second quarter clean product yield was 84% and pre tax turnaround costs were $67 million.
Slide nine covers market capture.
The three to one market crack for the second quarter was $15.24 per barrel compared to $9.77 per barrel in the first quarter.
Our realized margin was $11.37 per barrel and resulted in an overall market capture of 75%.
Market capture was impacted by the configuration of our refineries.
We make less gasoline and more distillate than premised in the three to one market crack.
During the quarter, the gasoline crack increased 169%, while the distillate crack decreased 8%.
Losses from secondary products of a $1.35 cents per barrel increased 72 cents per barrel from the previous quarter due to declining NGL prices relative to crude.
Partially offset by improved Coke margins.
Our feedstock advantage of one cents per barrel declined $2 or seven cents per barrel from the prior quarter due to narrowing crude differentials.
The other category reduced realized margins by 21 cents per barrel in the second quarter.
This was improved $3.52 per barrel from the prior quarter with the largest driver being clean product realizations.
Moving to marketing and specialties on slide 10.
Adjusted second quarter pre tax income was $353 million $148 million higher than the first quarter.
Marketing and other increased $156 million from higher domestic and international margins associated with falling spot prices during the quarter.
Specialties decreased $8 million, primarily due to lower lubricant margins.
Refined product exports in the second quarter were 187000 barrels per day.
We reimaged approximately 400 domestic branded sites during the second quarter, bringing the total to approximately 3300 since the start of our program.
Slide 11 shows the change in cash during the quarter.
We started the quarter with $1.3 billion in cash on our balance sheet.
Cash from operations was $1.9 billion, which included a 251 million dollar working capital benefit primarily related to inventory draws.
During the quarter, we funded $631 million of capital spending and returned $861 million to shareholders through 400 $600 million of dividends and $455 million for share repurchases.
Our ending cash balance was $1.8 billion.
This concludes my review of the financial and operating results next I'll cover a few outlook items for the third quarter.
In chemicals, we expect the global I wouldn't be utilization rates to be in the mid nineties.
In refining we expect the third quarter crude utilization rate to be in the mid ninetys and pre tax turnaround expenses to be between 150 and $180 million.
We anticipate corporate and other costs to come in between 210 and $240 million pretax with that we'll now open the line for questions.
Thank you we will now begin the question and answer session.
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Neil Mehta from Goldman Sachs. Please go ahead your line is open.
Good morning team.
Good morning, Neil.
Lauren and then the first question I had was I think about your CP Chem business.
Historically, you've been you've grown this business organically add.
Now a couple of really good projects year, one in Qatar when the Gulf coast that kind of reinforces that historical strategy.
There's been some press reports that.
The potential for you guys to do a large.
Step out type of transaction here, which I guess would be in consistent with historical where you have grown this business. So without asking you to kind of speculate here anything you can do to sort of.
Clarified the way you think about.
Building this business would be helpful for for investors. So we think about it.
Okay.
Well first of all for as a practice, we just don't comment on market rumors or speculation and even outside of chemicals, you step back you think across our entire portfolio.
We followed an organic path for the last seven years.
Where we've done things inorganically, it's been on the asset side, and so think about the Beaumont terminal or the river Perisher Scoop stack with claims those so we have been our opportunistic on the inorganic side from from time to time for us.
Anything we were doing it inorganically would have to.
Since we compete with the returns we can generate on the organic side and as you.
You've read the reports this morning, we have early strong portfolio of organic opportunities and so I'll just leave it at that I think we're like everyone. We look at everything that's out there we've struggled to find things that we think that are accretive to returns.
But we'll continue to work.
All right fair enough and then the follow up question is just Ngls.
Yeah have certainly come under a lot of pressure when we think about TSX at a consolidated level with all the moving pieces recognizing yet BCP and there are some some element of product NGL product deal that comes off your refiners that you have a large.
Business.
I think assuming business and your chemicals business, how should we think about the company on a consolidated basis do you do better if NGL prices are lower.
Well I think we start we're a net buyer of ethane at CP Chem, So ami low ethane prices definitely benefit.
Our chemicals business, the lower propane prices.
Given our export position and a strong arps, we're seeing particularly to Asia today Thats. It thats a benefit for us on the LPG export side, yes, there is impacted DCP across the DCP portfolio to lower NGL prices.
So, but but on balance.
We have offsetting.
Across the portfolio.
I would say within the PSC Nexsan MPSX PE portfolio.
Many of those pipes in Fractionators are fee based so we benefit from growing volumes about not really exposed.
On the commodity side.
With regard to DCP, they've been successful converting some of their historical commodity priced contracts to more fee based contracts and they're hedged against the majority of their remaining exposure.
Doug Terreson from Evercore ISI. Please go ahead your line is open.
Congratulations on your results guys.
Thanks, Doug.
And refining and marketing built 66 seems to be consistently outperforming peers due to several factors one of which may be higher volume and on this 0.1 of your peers suggested recently the U.S. product demand, maybe exceeding government estimates and net positive revisions to demand may be forthcoming.
So I wanted to see whether you share that view and to get your overall outlook for products demand, the U.S. and export markets too.
Please.
Yes, I think when you look at the us consumer.
He is in pretty good shape low unemployment healthy wage growth consumer confidence is in good shape.
We saw good gasoline demand maybe down slightly in the first quarter, but it rallied and was up in the second quarter.
The vehicle miles traveled up strong in in April and up again in May.
And so I think demand we are seeing is kind of flattish.
On on the gasoline side year to date and what we expect in the back half of the year.
On the diesel demand side.
We see it.
Flat to slightly up and that's compared to very tough comps with 2018 diesel demand being up 6% year on year.
So still very healthy demand on the diesel side as well.
I think as we went through the quarter and some of the flooding in the Mississippi River delayed.
And some of the planting.
There was the industry did finish strong and and so what we thought was going to be a loss of 70 or 83000 barrels a day of demand in the planting season, maybe it was closer to 30 or 40000 barrels a day so.
That's been a little bit better than.
It was feared.
Okay. Good summary, Jeff and then in midstream it seems like there are a lot of shale related takeaway export and processing projects planned by the industry, even though she will output growth is decelerating and future spending by up to decline further in phase one to sustain current returns valuation and share prices.
And of course, if we were to ever have consolidation and be spending an output would be pressured over the medium term too. So my question is how does the company think about and manage the risk for scenarios such as this one such that prospective returns on.
Investment in midstream are protected.
Well I mean, we start with with partnering Cc. These these big pipes, we've got partners in these five strong partners secondly.
When you look at the volume commitments throughput commitments. These are seven to 10 year commitment.
With strong investment grade parties, and so thats the way, we try to mitigate the risks Doug Okay.
Thanks, a lot Greg you bet.
Phil Gresh from JP Morgan. Please go ahead your line is open.
Yes, Hello, Greg spend Clinton active couple of months here for CSX is all these projects announcements and midstream and chemicals. So I can certainly see why assigned for another analyst day to dive into that but in advance of the event.
I was hoping you could talk about what looks like a reaccelerated growth philosophy.
Especially given where we are in economic cycle, obviously were bit late in the site.
Hi, Brad.
Kevin if if if you could help maybe detail out some of the financing plans behind these projects and you know kind of help us think through how that how it fits with the 60 40 band over the next couple of years. Thank you.
Yeah, I'll just start a high level, Phil you know.
Mid cycle.
Cash.
We move from kind of four to five to $6 billion to $7 billion.
If you just take the low end of the range.
Six and 60% reinvested you're kind of his threesix capital budget. So I think that we're going to.
Within that in any given year, we could probably be owned balance above or below that.
Certainly you've seen in the past, where we didnt have investable opportunities, we pull capex way down.
We like this suite of projects that we have they are all very attractive returns, we think build value across the portfolio.
So just from that standpoint, I think were consistent with what we've been saying for the past seven years in terms of kind of a 60 40 investment.
The return to shareholders time to kind of.
Paradigm that we've been in and we're comfortable with that we think it's about right for the company.
As we've talked in the and Doug's.
Question, we've tried to mitigate the risk on these projects certainly by taking on partners.
Looking at volume commitments with good Counterparties on the other end of that Kevin will speak to the project financing Thats. Another way, we used to de risk. These.
These projects so on balance I think what we're positive about the organic.
Profile that we have we're positive about the cash generation of the company.
We still think that the first dollar cash we generate is going to go to sustaining capital. It's $1 billion a year second dollar is going to go to our dividend as a billion six.
And then then we have options, but certainly we can be within.
Billion five to two and a half billion in terms of our growth and billing and a half to two and a half billion in terms of our share repurchases and we can make that all fit within the existing cash flow and Kevin I'll, Let you talk to the project financing yep. Thanks, So just walking through a couple of these projects Graham as we've talked about in the past, we communicate with our intention to finance that and we closed on the financing in the second quarter. So Thats 1.3 billion dollar facility is in place and should.
Effectively cover most of the remaining Capex spend this year on on that project, the Liberty and Red Oak pipelines. So on a gross basis. The numbers. We've combined those two projects. That's just over $4.1 billion of Capex, we are 50% in each of them and while we havent.
Gone down the full project financing path, yet we've structured those projects to where they will be financeable and it would be our intention to put project level financing in place on those joint ventures also.
And then the other one I'll just comment on is.
Well actually two more so also in midstream so we're constructing the fracs two and three under construction, we just sanction frac for those are all being funded.
By Us so no financing in place on those projects and that spend comfortably fits within the overall capital allocation framework as Greg just outlined and then just lastly on chemicals. So the two projects that were announced bear in mind that these are not f. I'd level, yet so there's still a ways to go but given the structure with these being partnerships at the CP Chem level.
They should be amenable to financing now the reality is you got four parties need to align around those those funding plan. So in Q PCB Cam.
US and chevron need to align around that but they should be structured in a way that if the owners are in alignment then there's potential for financing around those so overall when you put all this together they are still very much works in the context of our overall capital allocation framework.
That's very helpful. Just to clarify Kevin when you say project financing at the CP Chem level should we be thinking at some combination of.
Free cash flow at the entity plus maybe raising some debt there plus maybe even project financing at the CP Chem level well. The reality is it could be any or all of the above so you have the potential at the project level. So if you take the cut their projects or you take the Gulf Coast project, you have the potential to do to to sort of project level financing at at that point.
But theres also the potential for CP Chem at the CP Chem entity level too.
To take on debt they have a very strong balance sheet and so they have that capability as well. So all of these things require the so.
Owner alignment around path forward on funding.
Okay, Great and then just my follow up.
We'll be the Neil's question, maybe more specifically on the refining business. It helps.
So additional disclosure you can provide around your exposure.
Tim.
Products, and Ngls naphtha propylene and alike.
I know others have been talking about it and.
Unless I've missed it I haven't seen any specific disclosure with your exposures there to help kind of think through the moving pieces. Thanks.
Yeah, So as we go through our.
Secondary products.
Kevin summarized it in the opening remarks, but.
When you when you look at the products that are there really a NAFTA is de minimus within.
Our refining products NGL yield is about 4%.
Coke yield about 4% and fuel oil yield between two and 3%.
So those are the primary products there are a lot of smaller products that are included in there as well.
But that would give you a high level of.
Of our exposures to individual products within the secondary product category.
Doug Leggate from Bank of America Merrill Lynch. Please go ahead your line is open.
Oh. Thank you good morning, everybody I'm, Greg I don't want to front run the November analyst day too much here, but it seems that.
The the EBITDA mix of the company is going through another bit of a fairly rapid evolution as it relates to de emphasizing refining.
I'm just wondering if out read is correct how should we think about.
The the mix shift as we go forward and with a list of projects you've got right now in a mid cycle basis, where do you see refining stacking up relative to the rest of the portfolio.
Well, if you just kind of look at averages.
Kind of 12 to 18 refinanced about $4 billion of EBITDA, our midstream business is now about two.
Our marketing specialties that one for our distributions from CP Chem.
About one too.
So when you think about $800 million corporate and interest billion or so of taxes that they get you kind of that six and a half billion of cash flow that we've been talking about so that's kind of how we think about the portfolio certainly we've made investments.
On.
And the refining business, but they have been.
Quick payout kind of lower.
Capital.
Items that we've chosen to invest in for instance, upgrading the fccs upgrading.
Our billings the vacuum tower, and but we generate a couple hundred million dollars of EBITDA in our refining business. These investments and we still have probably in the next three years. Another three to 400 million of EBITDA coming our way from from the investments we're making in refining.
On the midstream side, if you want to look all the way through 2021, there's by $8 million to $900 million of EBITDA coming in on the midstream business. So the strategy around growing our midstream growing our chemicals business.
Investing smartly in our refining business has been the strategy for the last seven years, and we're really not departing from that.
Just this week.
Well the timing.
Go ahead, Jeff.
Jeff gave me in a on that yes. It was a good summary go ahead.
I was just going to say so it looks to us at least with the list of projects you've got right now before we consider further dropdowns or moving well under 50% of the portfolio for refining on a mid cycle basis is unreasonable.
Once these projects are complete I mean, once you've moved through.
I mean, obviously, we haven't got definition on the chemicals joint venture is yes, but before you have going on in the midstream would it be fair to assume that refining is trending towards under 50%.
The corporate mid cycle EBITDA, yes, if you're excluding our marketing specialties business from refining I think thats, probably true statement, yes, im some separate additionally, right.
Especially as you think 2020 2021 timeframe.
Okay. Thank you for that color. Thanks, a lot my follow up is actually a little I want to I want to kind of.
I guess go back a couple of years to some of the questions that used to come up around tier three gasoline.
Gasoline has obviously been certainly was as you know it was that was our primary basis for being pretty cautious on the space last couple of years, but it seems to us that.
With the chatter about potential video swing towards bunkers from next year.
On the three year runway for tier three gasoline, Ken if I guess coming to an end at the beginning of next year.
Our other grounds for a little bit more optimism that gasoline actually has some structural positives.
Supporting maybe offsetting a little bit the lightening of the crude slate has.
Lifted supply here I'm, just curious on your broader perspective as to whether to your three in video issues.
Amongst perhaps lower utilization rates across the industry can to finally put a little bit of support on the spot market and I'll leave it there.
Yeah, I think tier three is.
As an excellent point with.
The average.
Sulfur content last year at over 20 parts per million.
And moving to 10 parts per million at the start of next year.
The credits that are available credit tier two credits are swelling the gasoline pool somewhat currently.
I think as you look at.
The.
The IMO situation, it's still.
I think the challenge to figure out exactly how that's going to play out it doesn't look to us as though there's going to be 2 million barrels a day of incremental diesel production to meet that incremental marine fuel market and Soma is going to have to come from other products and certainly some of that could be video.
We're struggling to.
To really predict what that percentage would be or how much that total will be but it should take some gasoline out of the.
Out of the gasoline pool.
I think.
With regard to.
Phillips 66, we're currently producing.
Gasoline with the sulfur content comfortably below where the overall industry is.
We are.
In good shape to meet.
The tier three standards the vast majority of the capital spending has already occurred and what little tier three spending is left will fall within the normal range of our sustaining capital spend.
When we look at.
Premium gasoline for example, we're upgrading more gasoline into the premium grade than than the industry average.
And we will benefit from a couple of growth projects one.
The 25000 barrel a day Lake Charles Isom unit, which is scheduled to come up this quarter as well as next year Sweeney FCC optimization, both of them will allow us to increase premium gasoline production.
Roger read from Wells Fargo. Please go ahead your line is open.
Yes. Good morning, Thank you.
Yes, thanks for the explanation on the gasoline side there Jeff.
Got some nice work on the tier three Roger.
Thank you. Thank you.
Opened maybe to change gears, a little bit back to the midstream side, great performance here in the quarter.
I think back to when the Sweeny fractionator in the LPG export docks were first talked about.
The numbers were pretty big I'm wondering when we go back to that then is that what we're now seeing I mean, 118%.
Utilization of the fractionator, obviously is a little bit beyond the typical budget and then with LPG volume exports at a record did we get maximum there I guess, what I'm kind of getting at is was Q2 in that particular area as good as it gets or is there something else in the tank and then as a little extra to that.
Did we see operating leverage come through here with the additional Throughputs and that's what really drove the margins.
So I think in terms of the export facility in the Frac. Both are running well above design rates were kind of 200000 barrels a day across the dock.
We've had strong arbs and Asia had lower propane prices. That's that's driven our profitability, we've seen doc fees bottom in the kind of 5% to 6% range a couple of years ago and they were they were up in the kind of low double digits in the second quarter. So you kind of had the if you will the sweeny hub running approaching kind of a 300 million annualized EBITDA run rate, which is at the low end of what we had thought when we approve the project. We got there may be some more room to play the arb above that and so we had numbers out there as much as 500 million. So we're still underperforming our expectations there, but certainly this is probably the best quarter, we've ever had across the Frac and LPG export facility. There is some capacity coming on later this year and next year.
But theres also another million for a frac capacity coming on and so our view is that the docs are going to be quite active over the next couple of years needing to clear the propane to the export markets.
Yes, we've seen a healthy demand in Asia, new units coming on.
Widening the arb as well as.
Strong supply domestically as as Greg mentioned.
So that our between the Gulf Coast in Asia, as well as Gulf Coast in Europe has been widening.
The shippers have taken disproportionate share that but were seeing some benefit there.
As well.
The one the one thing I'd add Roger as you think about Fracs, two and three coming on in 2020. So next year that provide some other additional uplift because we'll be able to.
Essentially feel like the export dock with the Lpgs coming off the Fracs and so we're not having to pay to move propane down from Bellevue and so you get some uplift at that point when those assets are complete.
Okay, yes, thanks, that's really helpful.
And then back to one of the questions earlier distributions from CP Chem I think the number was $1.2 billion.
As we look at the build out of the facility and cutter and in the us.
And talked about the different financing, but should we think about that 1.2 billion is a pretty good baseline obviously.
Margins operating levels will impact that but thats a good baseline that will be maintained even through the.
Build out and Capex phase of these next two big projects.
Yes, I think thats, a reasonable base assumption to use I mean, you hit the nail on the head that it's very much subject to what the margin environment looking like exactly what the spend profile of those two projects is remember its two major projects, but it's.
50% of one and 30% of another and so on a cost basis is still less than doing one so the worldscale Gulf Gulf Coast project.
But for planning purposes, it's probably a reasonable assumption, but recognize there is just going to be a lot of moving parts as we get closer to that point in time.
Okay, great. Thanks, and looking forward the analyst day, and wondering Greg if you are going to provide us that intrinsic value at the analyst.
You will just have to come to find out Roger.
All right appreciate it thank you take care.
Per shots Randall from Citigroup. Please go ahead your line is open.
Thank you.
Good morning, Thanks for taking the question.
I wanted to touch back on them.
One of the things that Jeff mentioned in a previous answer about.
You answered your own high much by 20 gets resolved.
Get your views on some indication that we could be seeing.
Commodity spreads and some other I guess some other indicators that we're getting the first.
Moving of an IMO 2020 sort of impact.
Specifically high sulfur fuels that pipe.
We're seeing time spreads in Asia.
To widen out perhaps on the forwards.
Storage rates for low sulfur fuel oil more announcements of blended new combined marine fuels, it's a bit early still but I think we're hitting that window, where we were all expecting something to start to emerge in the coming months, though always appreciate your views on this you tend to do more moderate moderated and measured.
Anything you have to share in terms of color would it would appreciate getting once again.
Yes, I think you're hearing more about the different blends we're taking advantage of our body Bartlesville technology center in testing blends there we're expecting conversion of tanks in the September ish timeframe and expect shippers to be it to be a buying compliant fuels in the fourth quarter.
I think.
There are some early indications of of.
Uh-huh compliant marine fuels.
For Cal 2020 trading at at 12 to $15 a barrel over Brent.
There's not a lot of liquidity in that market, it's still early.
We are starting to see inventories build that I've seen reports of.
Up to 12, Vlccs in Singapore in anticipation of the transition.
So I think things are starting to move in that direction. I think it's still early to have a high degree of confidence exactly what impact it's going to have on on diesel cracks on compliant fuel on a.
Hi, sulfur fuel discount.
But I do see it being a positive for for the industry.
It does just substantially reduce the industrys footprint.
From an emissions perspective as well.
Thanks appreciate that.
Well the question I'll just touch back on.
The.
Agriculture, the AG exposure, given the weather issues in the quarter and it sounds like are strong.
Finishing the quarter, there, which is which was nice to see but.
One of your sense of if you could help us think about total exposure for economic exposure for Philips as a consolidated entity there.
And then as I as we think through the back half of year in 2020.
What's been missing planning this year.
One would assume probably signals there that would be picking up for that and planning next year and so as we look out through the next call. It 612 18 months have you get a sense of how we should be thinking about the cadence of that and maybe how material are not material.
Any upside impacts might be.
I might take.
The first question.
I think with regard to drivers the global economy is a meaningful driver for a product demand in our refining business its a.
Meaningful component to the the chemicals business as well I think with regard to midstream.
The major drivers there are production growth U.S. shale.
Opportunities there so I think I would put those as the as the primary drivers for those three businesses.
Oh, I'm, sorry, just to clarify what specifically with reference to the agricultural exposure, we were hearing that could be a little bit you talked about your thoughts on diesel demand that.
There was a little bit it could have been a little bit of impact on the distillate and fuel fuels like what we're seeing in the U.S. from flooding issues that.
Didnt appear as much as.
We had feared before I was thinking more specifically about that I am sorry, if I didn't clarify okay I apologize.
Yeah, so from an industry wide perspective.
We were initially looking maybe 70000 barrels a day of negative impact from the planning season.
As we were looking midway through are partway through the planning seizing and Dan.
The planning activity picked up at the end more than anticipated and so I think the the closer estimate is something like 30, or 40000 barrels a day and that the industry wide not not specific to Phillips 66.
Oh Tang from Scotia, Howard Weil. Please go ahead your line is open.
Hey, guys good afternoon.
Welcome back welcome back Paul Thank a true two questions. If I may one [noise] Greek or Jason on the IMO branding or to the very low sulfur fuel oil.
Philip standpoint are you guys going to use the V.G.O. as the primary ingredient or that you're trying to Brenda high sulfur fuel oil.
So one of the challenges with the industry is is that this is really kind of a refinery by refinery a evaluation.
And I think as we look we we've got a number of different alternatives, where a as you know a high diesel yield portfolio within refining we've got another 25000 barrels a day of diesel coming from projects that are underway. Those projects were justified with economics that didn't include IMO, but but they will benefit from a.
A wider distillate cracks in an IMO environment. So there's definitely a diesel component to the way that we're approaching marine fuels.
I think as we look at the video component.
We see that as being challenging really what you're looking for our heavy barrels resisted or diesel barrels there that are that are low and sulfur.
The NAFTA in light barrels are are not.
Don't perform well in marine engines.
The challenge is that most of your heavy molecules also tend to be so sour and most of your light naphtha based tend to be sweet and so you are really looking for specific.
Flows of video that might make sense in the marine fuel market.
And I think those are are are tough to identify.
And that I presume you guys have looked at the patent and thereby exon then.
And show and ice to assume that you guys believe you will be able to brand the wrong did and not infringing Dan patents.
We have no intention of infringing anyone's patents.
Well, we're looking at our own blends and and we will be able to participate in that market and our commercial Oh people are open for business there.
Final one from me quick on CPC with a cut at that joint venture.
I assume that means.
Youre on the CPC on a Gulf Coast second you think cracker why not property on the whole we paced by that.
Is that a strategic shift in the CPC that's how.
Going forward in terms of the expansion going to look like and what this is really just a one off deal.
You're talking about the strategic partnership with Qatar on the Gulf, Yes, I'm sorry, yes.
It was just angle is an opportunity to do projects and by partnering.
But with a great partner that we've had a long relationship with but were able to reduce risk right and to share and two projects versus doing one and we just we like that.
The balance of risk from that investment opportunity that was given to us so rather than picking one or the other we found a way to do them both.
Manav Gupta from Credit Suisse. Please go ahead your line is open.
Yeah, Hey, guys. A quick question I want to focus on the Gulf Coast, and specifically to capture on the Gulf Coast.
You showed a higher capture quarter over quarter on the golf course, I'm trying to understand what were the drivers of the higher capture as well as if you could talk about how much if at all did Bayou bridge actually play in that higher capture quarter over quarter on the Gulf Coast.
Yeah. So as we look at one Q2 Q. The we did have a fair amount of maintenance activity in the Gulf coast in the first quarter with Lake Charles and Sweeny being down for turnarounds and so that impacted.
Capture rate I think.
With product pricing clean product pricing, we saw improvement in the second quarter.
Relative to one Q as well.
And as we look at Bayou Bridge.
No it connects.
The the or extend the dapple pipeline into Beaumont in our facilities. There and then BOMA Bayou bridge brings barrels up from Beaumont into Lake Charles So it gets access to lake Charles of domestic and Canadian barrels.
That are easily exceptive accessible by pipeline and we do see a benefit there from a.
From a lake Charles refining profitability perspective.
We've completed the expansion of Bayou Bridge from Lake Charles to.
St James which also opens up the Ace project that we've talked about which would connect Saint James.
Two coal Valley, and then into our alliance refinery as well.
So we're.
Looking forward to.
Trying to keep that project moving forward as well Manav, It's Kevin just the big driver in terms of the capture quarter over quarter was the.
Turnaround activity in the in Q1, so a fair amount of activity across the Gulf Coast system in Q1 that you didnt see through nearly the same extent in the second quarter.
Perfect quick follow up is that I think synovus made some comments that would be what would have done even better but because of flooding.
Pipeline outages and other problems Im just trying to understand if there is a number in terms of that you can give us as to how much bigger voted to what would have done had those flooding issues not happened.
Yeah.
That's a true statement would it ever was impacted by flooding in the quarter, but that's not something we're going to give a.
Sort of.
What if type number around.
Justin Jenkins from Raymond James. Please go ahead your line is open.
Great. Thanks morning, everyone had I guess I want to start going back to Doug's question on maybe midstream risks and even beyond whatever might happen and commodity prices. It does seem like it's it's become harder to build pipeline. So maybe just wanted a sense of.
Have your comfort level with the with the routing plans specifically for for Red Oak and Liberty and maybe you might to how you might address any potential construction issues. If there are any.
I think certainly there is.
[noise] than many pipelines constructed without an issue and I think that you get out early and you work with all constituents.
Along the route you pick the best route to go there and so that's what our company does you know we'll be obviously executing on liberty planes will actually be executing on red oak in terms of construction.
On grey out you know.
I think that the guys doing that did a great job in terms of where 80% pipes in the ground.
And we really had no no major issues, there along that right away. So.
We're expecting that these will be executed well.
And we'll we'll deal with issues that if they come up when they come up but.
I think part of it is just.
Being.
Living our values every day and working.
Safety honor commitment in mind with all the folks and all concessions along the right away areas, but we believe we'll get it done.
Understood appreciate that Craig and follow up here is on PS 60 here with the with the IDR issue resolved. This change anything in terms of maybe the scope of organic growth that the 60, you can pursue or maybe how you're thinking about dropdowns or it's just that the next step in and evolution here.
I guess the next step in evolution of the MLP.
So thinking back over the past 18 months I don't think I've had a conversation with investors when they havent encouraged us to do something with the IDR.
And just from a simplification standpoint structure or cost of capital et cetera, even though we haven't gone to the equity markets. Since 2017, but if you think about for LP investor. If we do a 10% return project that PS XP, there effectively getting 5% return and so it does impact cost of capital even organic.
For our LP unit holders as we just need to restructure that.
We are trading at 6% to 7% yield and Thats kind of 15 times multiple into the sum of the parts that PS sex, we're going to be incented to grow the master limited partnership to the extent that it can and as you can see we're executing essentially $1.3 billion worth of projects today and this year of course with the project financing that gets cut down towards $700 million in terms of cash out the door, but still will put as much.
Growth as we can into PS XP, where as long as it makes sense in the multiples when incentives to do that.
Matthew Blair from Tudor Pickering Holt. Please go ahead your line is open.
Hey grade your a your comms business outperformed peers in Q2, what do you think the drivers were behind that and then also could you share your near term outlook for U.S. ethane and PE prices, just given all the new Fracs crackers and PE plants on deck.
Well I think that you kind of look at CP comes portfolio. If you want to think about performance relative to the peer so assets primarily in the middle East in the U.S. assets that are primarily LPG or ethane based and so those those margins have certainly been very good relative to say naphtha crackers in Asia or Europe . So it's really the geographic base of the assets see became ran well certainly during the quarter that always helps you on ethane.
Yes, I can't give you a forecast on the pricing for ethane because it'll be wrong. What I would say is we still think there's six 700000 barrels a day of ethane rejection.
Today, you got to 1.4 million barrels a day of Frac capacity coming on this year next year.
So there will be more ethane available you also have some some projects in startup mode. Although some of them are probably slower than what people thought and so we'll just have to put all that together, but our view is that ethane is going to be available.
Out into the next few years that ethane is going to be attractively priced.
Relative to the heavier feeds globally and that the middle east in the us Gulf Coast assets will be very very competitive on the global stage.
Sounds good and then I just showed CP Chem is net long U.S. ethylene.
By about 600 K T could you talk about what you do with your excess ethylene today.
Is that sold on a contract basis into the domestic market are exported on a spot basis and would you consider any sort of ethylene derivative projects to reduce that and that length.
Yes, so we have one of the smaller ethylene units at sweeny shut down today. So that's how we get to the mid mid.
You know ninetys on on operates.
Our intent would be to bring that unit backup at the appropriate time certainly.
CP Chem has the bottleneck opportunities.
To take care of some of that link.
Out in the future and they have plans on deck to make investments and in terms of de bottlenecks or around that olefins Polyolefins Alpha olefins chain.
That CP Chem has today. So we don't look at the length is a big issue. There are some spot bought cells are contractual sales I should say in ethylene business from CP Chem, but primarily our strategy has been to pare the derivatives with the ethylene capacity over the long term.
Jason gable man from Cowen. Please go ahead your line is open.
Yeah, Hey.
Thanks for taking the question it looked like equity affiliate distribution cash was a was a drag.
On the on the quarter event lower at least than we had anticipated.
Was there any timing issues there for a while on the distributions from the affiliates into Q.
Yes, Jason this is Kevin really no I mean, it's.
The.
Equity earnings were 640 million $648 million of distributions were just over $500 million, that's not too far off of what you would normally expect I mean generally speaking the.
You would expect the distributions to be a little bit less than equity earnings given that those equity affiliates have capex their own capital programs to fund this well and so I don't think there's anything.
Significant there I think the.
Yes, it was a little bit different I mean get some disproportionate distributions in the first quarter that had that go the other way and so when we look at this on a year to date basis. It it's all very reasonable.
From how we how we look at the cash.
Cash flow.
Thank you we have now reached the time limit available for questions I will now turn the call back over to Jeff.
Thank you Julie.
I would like to remind you again put a November six.
On your calendars analyst Investor Day in New York City, and with that we thank you for your interest in Phillips 66 and.
Brent and I would be happy to answer any follow up questions. You have thank you.
Thank you ladies and gentlemen. This concludes today's conference you may now disconnect.