Q1 2021 Phillips 66 Earnings Call
In 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 ill turn over the call to Greg.
Thanks, Jeff.
Everyone and thanks for joining us today first I'd like to welcome Mark Glazer on a president and Chief operating Officer I think many of you know mark from his previous role as President and CEO of <unk> Mark It's great to have you here with us at Phillips 66.
For the first quarter, we had an adjusted loss of $509 million or $1 16 for sure.
Our results reflect the impact of the severe winter storms in the U S Gulf Coast and central regions were experienced reduced volumes increased utility cost and maintenance and repair costs.
For us safely resumed operations across our businesses following the storm related downtime.
We're proud of our employees and their commitment to operating excellence, particularly during these challenging times.
Gasoline diesel demand continues to recover and product inventories have normalized supporting higher refining margins and utilization rates.
We expect continued recovery as we wrap up spring turnarounds and head into the summer driving season.
Also chemicals facilities are back to normal operations with continued strong demand and margins.
We remain optimistic about the impact COVID-19, vaccines and monetary stimulus will have on economic recovery in the back half of the year.
Leading indicators suggest economic growth is accelerating.
Which supports demand for our products.
For the first quarter, we returned $394 million for shareholders in dividends.
We remain committed to a secure competitive and growing dividend.
In February we repaid $500 million of maturing debt.
We will continue with a disciplined approach to capital allocation, including debt repayment as cash generation improves.
We will maintain a conservative balance sheet and a strong investment grade credit rating.
On the South, Texas Gateway terminal commissioned additional storage, bringing the total capacity to eight 6 million barrels.
This completes the final construction phase for this project and.
In addition, the terminal has up to 800000 barrels per day of export capacity.
Phillips 66 partners owns a 25% interest in the terminal.
Phillips 66 partners continued construction of the CTG pipeline connecting its clemens storage caverns to petrochemical facilities and the Corpus Christi area.
The project is backed by long term commitments and is expected to be completed in mid 2021.
At the Sweeny hub, we plan to resume construction of Frac for in the second half of 2021, which will add 150000 barrels per day.
Fund completion, the Sweeny hub will have 550000 barrels per day of fractionation capacity supported by long term customer commitments.
In chemicals, <unk> is advancing optimization and debottlenecking opportunities.
This includes improved projects at Cedar Bayou facility that will increase production of ethylene and polyethylene and.
In addition, <unk> is developing an expansion on this normal alpha olefins capacity.
We are advancing on rodeo renewed project at the San Francisco refinery.
Earlier this month.
We began renewable diesel production from our hydro treater conversion.
Which will ramp up to 8000 barrels per day on the third quarter.
Subject to permitting and approvals full conversion of the facility is expected in early 2024.
On completion the facility will have over 50000 barrels per day of renewable fuel production capacity.
This capital efficient investment is expected to deliver strong returns and reduce the facilities for greenhouse gas emissions by 50%.
This project will help California meet its for carbon objectives.
For increasing our focus on lower carbon initiatives across the company.
This includes the creation of emerging energy group earlier this year.
<unk> ongoing research and development by our energy research and innovation organization.
We've invested in shell rock soy processing joint venture that plants are constructed new soybean facility in Iowa.
We expect the project to be completed in late 2022, and we will purchase 100% of the soybean oil production.
We signed an Mou with southwest Airlines to commercialize sustainable aviation fuel.
We launched a technical collaboration with <unk>, a leader in sodium ion battery technology develop lower cost higher performing animal materials for sodium ion batteries.
These activities further our commitment to addressing the global climate challenge, while delivering attractive shareholder returns.
Finally, we'd like to comment on our company's operating excellence.
We're honored that our refining midstream and chemicals businesses were recently recognized for 2020 safety performance.
Six of our refineries were recognized by FTM, including Mike Charles Ponca City, and Santa Maria of refineries, which received distinguished Safety Award.
This is the highest annual safety award in our industry and the fifth year in a row that our refineries have received this honor.
Our midstream businesses was awarded for API distinguish pipeline safety award for large operators.
This is the highest recognition by API for the midstream industry. In addition, we were recognized by the gas processors Association for our state outstanding safety performance in midstream.
In chemicals <unk>.
<unk> selected <unk>, Conroe, Orange and Port Arthur facilities as recipients of the LEED Silver Safety Award. So congratulations to all of these facilities well done we're really proud of you.
So with that I'm going to turn the call over to Kevin to review the financial results. Thank.
Thank you, Greg Hello, everyone, starting with an overview on slide four we summarize our first quarter results, we reported a loss of $654 million.
Special items. This quarter included an impairment, resulting from Phillips 66 partners' decision to exit for Liberty pipeline project.
As well as well as winter storm related maintenance and repair costs.
Excluding these special items, we had an adjusted loss of $509 million.
A $1 16 for sure.
We generated operating cash flow of $271 million, including distributions from equity affiliates of $502 million.
Capital spending for the quarter was $331 million, including $174 million for growth projects.
We paid $394 million in dividends.
Moving to slide five.
This slide shows the change in adjusted results from the fourth quarter for the first quarter, a decrease of $2 million.
Improved results in refining and marketing and specialties were offset by lower pre tax income in the other segments.
Our adjusted effective income tax rate was 16%.
The rate is influenced by the proportional mix of pretax income from domestic foreign and MLP sources.
Slide six shows on midstream results.
First quarter adjusted pre tax income was $276 million.
A decrease of $47 million from the previous quarter.
Transportation contributed adjusted pretax income of $206 million.
Up $10 million from the previous quarter.
The increase was due to low operating costs and higher equity earnings partially offset by lower volumes.
NGL and other adjusted pre tax income was $36 million.
For $50 million decrease from the prior quarter was mainly due to higher operating cost associated with the winter storms.
The Sweeny fractionation complex average 330000 barrels per day, and the Freeport LPG export facility loaded a record 41 cargos in the first quarter.
DCP midstream adjusted pre tax income of $34 million was down $7 million from the previous quarter, mainly due to the winter storms.
Turning to chemicals on slide seven.
First quarter adjusted pre tax income was $184 million.
On $19 million from the fourth quarter.
All things in polyolefin adjusted pretax income was $174 million.
The $42 million decrease from the previous quarter was primarily due to winter storm impacts, which resulted in lower production and higher utility costs.
This was partially offset by higher margins, primarily due to tight supplies low inventory levels and continued strong demand.
Global OSV utilization was 79% for the quarter.
All impacted CP chem facilities safely restarted operations by early April.
Adjusted pretax income for <unk> increased $14 million, primarily due to improved margins do.
During the first quarter, we received $205 million in cash distributions from CP Chem.
Turning to refining on slide eight.
Refining first quarter adjusted pre tax loss with $1 billion, an improvement of $68 million from the fourth quarter.
First quarter results reflect the impacts of the winter storms.
The improvement was driven by higher realized margins largely offset by increased turnaround costs as well as higher utilities, resulting from the winter storms.
The increase in realized margins reflects improved crack spreads and the sale of excess electricity to help meet demand in the Texas market.
Partially offset by lower product differentials and higher operating costs.
Pre tax turnaround costs were $192 million up from $76 million in the prior quarter.
We completed the majority of our spring turnaround activity this month.
Crude utilization was 74% compared with 69% last quarter.
The first quarter clean product yield was 82%.
Slide nine covers market capture.
The 321 market crack for the first quarter was $14 23 per barrel compared to $7 84 per barrel in the fourth quarter.
Realized margin was $4 36 per barrel and resulted in an overall market capture of 33%.
Market capture in the previous quarter was 28%.
Market capture is impacted by the configuration of our refineries we.
We make less gasoline and more distillate on premise in the 321 market crack.
During the quarter for gasoline cracks improved $6 38 per barrel, while the distillate crack increased $3 41 per barrel.
In addition, we had a lower clean product yield this quarter as a result of turnaround activity and unplanned downtime, which also contributed to the configuration impact.
Losses from secondary products of $1 29 per barrel for nine cents higher than the previous quarter.
Feedstock costs improved 37 per barrel compared with the prior quarter.
The other category reduced realized margins by $4 78 per barrel.
This category includes brands freight costs clean product realizations and inventory impacts.
It also reflects revenues from the sale of excess electricity and for growth.
Moving to marketing and specialties on slide 10.
Adjusted first quarter pretax income was $290 million compared with $221 million in the prior quarter.
Marketing and other increased $30 million due to higher domestic margins, partially offset by lower international margins.
Specialties improved $39 million largely due to improved base oil and finished lubricant margins.
Refined product exports in the first quarter with 200 for thousands barrels per day.
On slide 11, the corporate and other segment had adjusted pre tax cost of $251 million, an increase of $16 million from the prior quarter.
This was primarily due to the timing of charitable contributions and environmental expenses as well as lower capitalized interest.
Slide 12 shows the change in cash for the quarter.
We started the year with a $2 $5 billion cash balance.
Cash from operations was $271 million.
This includes a working capital benefit of $98 million.
In February we repaid $500 million of floating rate senior notes upon maturity.
Capital spending was $331 million and we paid $394 million in dividends.
The other category includes a $155 million loan to our <unk> joint venture.
Our ending cash balance was $1 4 billion.
At March 31 day at $6 7 billion of committed liquidity, reflecting $1 4 billion of consolidated cash plus available capacity on our credit facilities $5 billion at Phillips 66 on $299 million at Phillips 66 partners.
This concludes my review of the financial and operating results next I'll cover a few outlook items.
In chemicals, we expect the second quarter global <unk> utilization rate to be in the mid nineties.
In refining crude utilization will be adjusted according to market conditions.
On April utilization has been in the mid 80 percentage range.
We expect second quarter pre tax turnaround expenses to be between 110 on $140 million.
We anticipate second quarter, corporate and other costs to come in between $240 million to $250 million pre tax.
Now we will open the line for questions.
Thank you we will now begin the question and answer session as we open the call for questions as a courtesy to all participants. Please limit yourself to one question any follow up. Thank you have a question. Please press Star then one on your Touchtone phone.
<unk> given us.
Thank you please press the pound key.
Using a speakerphone you may need to pick up the handset first before pressing the numbers.
Once again, if you have a question. Please press Star then one on your Touchtone phone.
Your first question comes from the line of Neil Mehta with Goldman Sachs.
Thank you and congratulations Mark on your new role.
Thanks Neil.
Maybe I'll start with your marketing Mark on Greg, Let's spend a lot of time looking at chemicals over the years. We're obviously in a very strong margin environment right now where do you think we are in the polyethylene cycle from a margin perspective, and how you think about the puts and takes and then it sounds like utilization.
<unk> is ramping pretty well here on the second quarter should you be able to run and capture that strong margin all else equal.
Bryan Neil Thanks for the question, Yes, if you look at even back into 2020, <unk> experienced really strong demand.
Outstanding operational excellence.
Margins were suppressed a bit by crude oil pricing frankly, but we saw the record demand record production coming out of CP Chem.
<unk>.
Margins were starting to improve late in 2020, a lot of people have moved turnarounds out into 2021.
Needed to build some inventory for those turnarounds and then.
On winter storm hits, and really decimated the inventory on the system. So we do see strong fundamentals and we do see those margins improving even though we don't we didn't realize it in the first quarter because of the winter storm and so.
We believe for that <unk>.
See the benefit of those margins for on average for the rest of the year. We will continue to see increase into the second and third quarter and then maybe some seasonal weakness in the fourth quarter, but on average we should see <unk> at or above mid cycle margins. This year.
And has your view of those mid cycle margins changed maybe that's a question for Greg I think historically you said at 25.
Through the cycle.
Fully integrated polyethylene margins.
Yes.
On 12 through 19, that's about what on average nail on and I think we're pretty comfortable on a go forward basis, that's going to reference on kind of a mid cycle number.
Kind of look at reinvestment level economics, and what does it take to get you kind of a 12% return and that's what it is.
Great and then the follow up is just on leverage levels going into the pandemic prepaid debit.
Debt levels were around $12 billion consolidated today.
At $15 billion, just can take us into some of the conversations youre having.
With that with hip on told areas on credit agencies with round the appropriate leverage level in your mind.
Until we get that leverage down to those levels are you constrained about what you can do around the share repurchase program.
And Neil it's Kevin Let me make a few comments on that so you are right. We came into the pandemic with $12 billion of debt and we added $4 billion over the course of last year, we paid off $1 billion in the first quarter.
Our primary focus from a leverage standpoint is around the credit ratings that we have in <unk> and triple B plus ratings, so very strong investment grade, but we do have on negative outlook on both and so we want to get back to.
<unk> maintained and maintaining those ratings and with us with a stabilized look and to do that we need to demonstrate that we are getting debt levels back somewhere towards where they were before the pandemic.
Kick then you think about recovery in cash generation and the things we've done in terms of scaling back our capital and.
The suspension of share repurchases as you start to see cash generation improved we should actually have quite a lot of flexibility to make progress on paying down debt and once we're on a nice sort of pathway to getting back to somewhere around about that $12 billion level. I think we'll have a lot more flexibility to start considering other alternatives.
Which could entail.
At some point when we get back to the dividend.
And increase at some point.
For <unk>.
Again.
At the right time, we'd like to be buying our shares back we still think they represent really good value and then potentially growth capital intentionally restrained our growth capital. Our total capital budget. This year is a 1 billion seven only $600 million of growth capital and we're anticipating that for the next couple of years, we will continue to be pretty.
Constrained in terms of how much work.
We're reinvesting in the business and part of that is a function of where the opportunities are as well on the availability of that so.
Then the last thing I'd say is we've got good flexibility with the debt.
Debt maturities, we've got coming up in the sort of callable debt. We have we have easy line of sight to over the next year or two assuming the cash generations. There. We've got $375 billion of debt that we can take care of either because it's callable on its maturing.
And your next question comes from the line of Roger read from Wells Fargo.
Hey, Thank you good morning.
Hi, good morning.
I guess, if you could talk a little bit about the midstream business.
Stay away from from any GAAP, all questions, but specific year commentary about frac for starting up the number.
Vessels that debt.
During the quarter and as you think about that business going for navin.
Some of the forecast for.
NGL type production in the U S are pretty robust despite maybe a more static oil environment. So I was just wondering if thats, what underpins track for or just.
The volumes are already there and it's just a question of getting past the whole pandemic issues and moving into that unit.
Roger This is Tim.
Thanks for the question actually the fundamentals for for Ngls.
Okay.
Partially driven by and I'll go back to Frac for to answer that question.
It's partly it's driven by global demand clearly for LPG propane and butane and then also growing demand for ethane both here in the U S. Gulf Coast export ethane and just fundamentals in petrochemicals as Mark just mentioned here that it's strong and it's growing so and that capacity Ngls and <unk>.
Actually advantage Ngls will fill that void.
Plaque for we've got commitments on track for so actually we pause while there was some uncertainty in the market last year.
And we pause to kind of okay, let's make sure we're taking care of our liquidity and balance sheet. We pause. The project. So we actually are looking to started up in the second half of this year and get Frac for completed as we continue to build out.
On the hub down at screening and again there is continued demand we've been running our facility noted that on the cargos that was a record level for the corner for us.
But we still see continued demand for LPG, you can see that into the future as well as <unk> becomes a bigger piece of on export pie versus restaurants.
Great. Thanks on that and then my other question follow up and the refining business.
I understand the guidance and all of that was just curious how the brand's elevated brand issue is kind of running through the business. It seems like the outperformance at least relative to the way we were looking forward to marketing and specialties is probably where the rents thats. It came through but I just wanted to make sure.
That you all are more or less balanced on the RIN issue and maybe how you think about that maintain.
Maintain elevated levels hits, the rest of the year on capture for refining.
Yes.
Bob project debt shot at that I think when you look at it right. So we fully burden our refining results with the cost per RIN in the runup in RIN prices, but.
We believed and continue to believe that the RIN.
Just out in the crack so as that moves downstream through our various channels of trade gets blended some of it we get through our own liquids blending at our terminals for Greg.
And generate the rins there for our needs.
It really does pass on downstream to the ultimate consumer.
Some of that goes through other channels of trade, we're not exposed on on the exports.
<unk> hundred thousand barrels a day of exports.
In the quarter so.
We continue to watch that market and.
We really like the fact that push a lot of our barrels through our own branded outlets.
Just to add debt.
In our business, we learned about half so.
We create to generate half of about half of the range, we need for our obligation.
At Phillips 66, and then also in Q1, there was some blend margin.
<unk> was above ethanol. So there was some benefit in brand marketing and marketing as well.
Great. Thank you.
Your next question comes from the line of Doug Leggate with Bank of America.
Hi, good morning, everyone.
I am sorry to beat on net volume quarter and spoke about for Europe.
On the litany total.
I wanted to dig into that more if you don't mind.
So Kevin I am looking at.
I think it's slide.
Cost of losses slide number neither one showing basically the other issue.
And the clock.
And as for 78 this quarter.
This past year for quarters is solidly negative to 2002.
In 2019, obviously run $30 40, <unk> negative and it seems that number has moved up almost lock step with the room.
So I was just wondering if you could offer a little bit of color too I guess just for largest question but.
What's going on here is that the biggest driver of our delta on what should we be thinking on a go forward basis, because obviously renting the capture rate quite a bit.
Yes.
Doug you're exactly right the RIN cost for us as Bob's describing about being burdened in refining that shows up in that other on that chart I think it's slide slide nine.
On the debt and so it's a direct.
To the capture rate so as the as the written pricing increases you will see that day.
You'll see that happening there the other.
Yes.
The other comment that when we over.
Over the last year, or so where we've been in a depressed margin environment capture rates. Just generally are impacted by the fact that you've got costs that flow through here that are on a fixed for a barrel basis. So there's some freight on the.
Like that it's fixed cost per barrel, so proportionately that becomes a bigger impact takes a bigger hit.
Capture than when Youre in a more normalized market environment, but rents in that other is a big element.
I think I would add to that kind of quarter to quarter you look at there.
Couple of additional things that impacted there and in this particular analysis on the market crack.
For the end up another one of them is that is the pricing differentials between Europe.
And New York Harbor, So we capture that.
Europe was particularly weak here in the first quarter, so that accounts for a good part of that Delta off the fourth quarter, and then we always get into the timing issues.
Between the Gulf Coast, and New York Harbor.
Gulf corneal pipeline and so we saw up for.
On the negative hit there that really is timing as prices run up and we'll get it back on the on the other side eventually.
But.
In this analysis, there's no other price to capture that so they end up a net.
Net other category.
Understood guys I don't want to labor this point, but.
Again on Dolby audience question here Kevin.
The needle moving.
If I look elsewhere on the business for the marketing of logo.
She will youre getting now.
So this is for you again to quantifying for wins on net neutral on the negative for pork.
For Phillips.
Yes.
Brian covered earlier, we blend for about half.
And then have us as other people blending and we're exposed to.
The commercial market on those risks.
Net net it is a.
A negative to us at the end of the day, we do not capture that ran at a 100% level.
Okay. Thank you for the clarity.
Shlomo.
This is for Mark perhaps in local markets group the view on Paul.
It might not be actually even a few years from you guys. Once on for this to truly more about operational availability I think Kevin mentioned.
You were back in April.
I think I'm not sure about the judgments in refining which will be referenced.
So after the flooding last year or so with downtime and then you had the storm voice should we think about the.
Mechanical availability of year system, both for refining and chemicals.
Yeah.
I can comment on chemicals, I think chemicals is back.
Excluding the normal turnaround activity. They are back they are available and the plan is to run them.
Basically at full capability.
And we guided to 95% filling for utilization for the quarter. So it's pretty much normal.
Normal operations.
On the refining side.
First first part of our first quarter was actually fairly heavy turnaround quarter for some of the carriers and adhere to the first month for the second quarter, but.
We got a couple of FCC's for finishing up as we speak and will really be out of turnaround mode. Here in the next week to 10 days.
We've kind of got core sailings.
For the rest of the second quarter end of the third quarter for the gasoline season. So we feel we feel really good about coming out of the first quarter with with all of our kit and shape ready to run.
We expect gasoline demand to kind of roll back here and there.
Our summer season, we are ready to run.
Your next question comes from the line of Phil Gresh with Jpmorgan.
Hi, good afternoon.
One follow up question on refining recognizing.
Recognizing there are so many one time factors in the first quarter.
Utilization you said was mid eighties here in the second quarter, which sounds pretty similar to year to your peers.
One of your peers commented that day in March they are run rating on a positive operating income.
And I recognize.
The effects of the storms as for longer dated for Phillips, but would.
Would you say that April or as we move into May.
Feel comfortable debt, you're also able to achieve that type of level of profitability.
Yes, I think April we still have a lot of turnaround activity going on within the refining system right in.
It was mostly FCC and alky work, so that depresses our market capture.
And our clean product yield.
There is still a heavy Berger said, where we're coming out of that now.
As the debt.
The market continues to improve our capture rate will improve.
I think we'll see some better current guests this quarter, so that should should help our market capture.
And it's all about kind of where the market moves too, but we're feeling a lot better here as we head into the month of May.
Obviously, we were in the first quarter.
So I think to a lot of our peers report refining and marketing together.
You kind of add both of those together I think we feel pretty good.
Okay, Yeah, no fair enough and you also expense or turnarounds.
On the chemical side.
I mean, I guess, if you look.
The first quarter's airway debt isolate.
For onetime impacts.
The reason I ask it.
On the 45 full chain margin.
And for actually running above that now.
So I'm trying to get a better sense.
For your profitability there.
And in the second quarter.
Considering.
<unk> said many times, Greg that at 25 four.
Full chain margin your annualized EBITDA would be.
The $2 billion, which would be $500 million quarterly so.
Any color on the first quarter or how do you think about the second quarter would be really helpful. Thank you.
Yes, Phil it's Kevin.
There was a significant.
Impact from downtime so the loss production.
<unk> in the first quarter, and we're not going to quantify that and give that number but I think what's fair to say as you look at where the margin environment is today and the projections through the rest of the quarter, where our operations are I think and we.
Touched on this earlier in the discussion I think we feel pretty comfortable saying, we'd expect to see that above mid cycle EBITDA contribution in the second quarter and hopefully some of that sustained into the second half of the year on year you'd normally expect some falloff in margins towards the end of the year. So we feel pretty optimistic that we should have a strong <unk>.
Second quarter in chemicals.
Okay.
Great. Thank you.
Your next question comes from the line of Paul Cheng with Scotiabank.
Hey, guys good morning.
Primarily.
Kevin just Q its debt.
Talk about near term just trying to get the debt back to the pandemic night for a lot of 12, Finland.
And then you would start looking at.
Alternative debt incremental casually time to share with all on that.
<unk>.
And the question is that this 12 tinnitus, we need the right number.
Given the.
On pickup on Lake Charles.
When funding Montana North N.
Should we need them pocket are much lower.
Bad debt.
For the company.
So thats. The first question now that doesn't mean that you should not at the same time too.
Debt increased shareholder we tend to.
Yes.
Non northeast that or that we can concurrently to add for continue a portion of debt free cash flow being drawn down debt that will put on the on shared on the balance sheet low at the end much low what that landfill.
So that's the first question.
The second question is that I think this is Paul may be Bob.
For Green brand, 50% that seems really low given how picky as steel.
So I'll come back for us in the U S.
Are we missing something here.
On that because one we thought.
Given that Philip $66, a day is a combination off.
Phillips and call Nicole both debt debt between its launch.
Sales of network and all of those contract it's still a coating that we allow you to capture volume. So one we've got that.
On brand far more than 50% so are we missing something here.
Kevin Okay, Paul Let me, let me talk on the first question so.
Youre right that I would say $12 billion or thereabouts is that sort of near term objectives. That's when we were pre pandemic and we'd like to be.
<unk> be back on a pathway to that I would say that on a as we get to that level. I think there is a we're continually evaluating what our optimal capital structure looks like and depending on the state of the business the growth opportunities other capital allocation priorities.
Priorities.
We'll optimize in whatever direction makes sense.
I'd also say that.
When you come through a period of extreme volatility and depressed margins like we saw in 2020 that may lead you to conclude that maybe we should just permanently run at a low debt level. I'd also say that there is the business is growing and as you expect the underlying cash generation too.
To increase.
Youre effectively delevering right on a on a.
Debt to EBITDA basis.
As you execute on those growth programs and so I don't know that I get.
To a point of saying we need to have an ongoing debt level on an ongoing debt reduction objection objective I think we want to get back to that.
That's on the $12 billion level or thereabouts in the main priority is to maintain that strong investment grade credit rating.
When you look at the cost of debt.
Driven really to have an efficient capital structure.
And your company and I think that price lands us around that $12 billion. So we won't be on a glide slope to that.
On an absolute target that we're trying to hit here before we get back to increasing our dividend or looking at share repurchases.
I do think that the gating.
The decision for us, it's really mid cycle cash flow, we wanted to get back to a $6 billion to $7 billion of mid cycle cash flow net creates for the optionality for certainly to invest $1 billion and our sustaining capital to fund our dividend of $1 six and grow that dividend and then that leaves us with a lot of.
Optionality, Paul about further paying down debt or.
<unk> more and more on the company and we're still.
Comfortable with the guidance around the 60 40.
The guidance that we've given over the last few years and so we still think that that's good guidance going forward for our company.
Paul on the blending rigs question.
It is true that we have a large marketing business, both here and overseas in Europe.
We also have a large fixed based operator business about 900 of those in the U S. So if you pull out the fixed based operations business for outlet stores in Europe, and you look at how much we plan I don't forget we have 11 refineries in the U S. So we produce a lot of gasoline. So generally we run through our stores about a little over <unk>.
50% to 60% in normal times of the gasoline we produced in our refineries. We went through our stores. So booster gas left for gasoline that we blend and create those rooms.
Your next question comes from the line of Theresa Chen with Barclays.
Hi, Yes, and maybe switching gears for bank too.
Renewable fuels initiatives and can you give us an update on on the renewable diesel strategy from here and have there been any early learnings from the recent hydrogenated conversion Abigail and on.
At this point what are where are you on the permitting for the full conversion what are the other key puts and takes and moving that project forward.
Interesting.
So on unit 250, we started up here early in April after turnaround the convert for unit to run soybean oil and so we're running the clean.
Soybean oil out there and.
Unit came up first time and has run well there are some learnings around how to run the units and its a very actually different process, even though it's the same kit that we had before we shut down that was processing diesel it's very different for the operators to operate it's actually really good for US there is a learning curve around some of the.
Product how to handle the product coming off the unit and everything before we get to the big.
Projects. So we'll continue to ramp that unit up into the third quarter here is some of the logistics to feed day and it get some of those projects get finished.
We were able to get to the 9000 barrels a day have been put out there of the soybean oil.
We've also been able to test our logistics supply chain to bring the soybean oil too.
Rodeo and Thats, all worked out really well and that's key for us as we start learning how to feed a much bigger machine in early 'twenty for permitting process in California is progressing its a very robust process to work our way through the environmental impact statement.
We have a full time team working with a full time team at Contra Costa County, which is the permitting authority, we would expect some time.
In the third quarter to have a draft environmental impact statement.
Out there and available on then you go into the public comment period, and a kind of you've got to work yourself into.
Early next year is that the opportunities for that permit to be issued to us and which really then in California in a permit in hand to do much on site construction work. So in the meantime, we continue to.
The final engineering details for all parts of the unit and for the part of the system for the cleanup. The pretreatment unit all of that is ongoing so we feel really good about our timeline and where we are on.
We continue to optimize our schedule and look for opportunities to pull construction forward.
And get the ended up and running as soon as possible.
Got it.
And then on the sustainable Aviation fuel fund on can you talk about your Mou with southwest how that came about and what kind of economics would this on.
Potentially entail, but it significantly altered the capex for scope of the upfront day a project.
With the project as it stands.
Percentage of that 800 million gallons do you envision would be dedicated to renewable diesel production in your first for sustainable aviation fuel.
On renewable naphtha and such.
So Theresa this is Brian Mandell just to start off with this as a Mou in agreement with southwest Airlines in terms of.
Jets into and out of California, and just domestically in California. The largest airlines. So we have an opportunity to work with them both on public policymaking kind of educate policymakers and the public on opportunity to work on R&D with Southwest Airlines you May know that we have in energy research and innovation.
I think for the only one on ones of our peers that have that where we work on lots of different things, including solid oxide fuel cells battery technology solar we want to also work on sustainable aviation fuel and development hub that fuel and then think about improving the economics right now if you look at the economics.
Sustainable aviation fuel versus a renewable diesel renewable diesel it makes more sense to produce so we need to think about the economics that can come from thinking about how to make it can come from the credits that could come from the price of the fuel. So we have to think through all of that and then finally, we're exploring whether we want to have a supply agreement with southwest Airlines whether that.
Makes sense.
That's the plant we can produce up to 10000 barrels a day that will take some capital we can produce some without without any capital going forward. So we're taking a look at where do we want to spend capital how much we want to make and how it competes with renewable diesel.
The project is going through this design phase today as it is it'll make about 10% sustainable aviation fuel.
Without doing anything so beyond that we've got a couple of options you can add a little more kit you can work on catalyst formulations, but Brian mixed already point to get there needs to be a pathway all the way to the jet and <unk> need to be a price signal to pull it.
Out of the distillate pool and into the sustainable aviation fuel.
And just just to.
Add to that if you think about the credits on <unk> credit you could get on the CFS credit for sustainable aviation fuel for its predicated on a lower Ci you get <unk> and multiplier is one six instead of $1 7 million on renewable diesel and you get biodiesel tax credit as well the other thing.
When you make SaaS you also make some renewable naphtha and the economics removal on that effort are lower so you have to deal with lower economics associated with naphtha and also the segregation and.
Spending of that naphtha.
Thank you.
Your next question comes from the line of Manav Gupta with credit Suisse.
Hey, guys just wanted to quickly focus on the feedstock deal that you signed.
Again, congrats on getting the feedstock, but my assumption here is this cannot be a majority portion of the feedstock because this is a high feedstock and so.
John is that this coming up was designed for a loss feedstock. So what question page. After feedstock have you actually been able to articulate with this contract.
Hey, Manav. This is Brian so when we think about the plans and ultimately coming up from 24% to 50000 barrels that we'll need for the first 8000 barrels we will meet soybean for the rest of the plant we will need any any form of feedstock for Panther.
It is predicated on mostly low Ci feedstocks will be buying used cooking oil patch, but will also be buying some vegetable oils, some higher some lower feedstock and our LP model will kind of dictate to us, which feedstock to buy and it's not just the CIO for feedstock for US also the transportation the location and the corporate cost.
The feedstock is the different feedstocks will change in price, it's the benefit of having a hydro treater in front of the plant where you can kind of run different feedstocks. So our goal is to buy just like we do in the <unk>.
<unk> in gasoline and diesel market, our commercial group buy as much more than we need as an example in the crude market, we buy twice as much crude as the refineries need and that allows us to optimize the crude so at any given time, we could think about each refinery what crude we have available on what crude optimizer that refinery at that time, we plan to do the same thing in the.
In the feedstock business. So we've been in the feedstock business for a while now.
Incumber, we've been buying used cooking oil now for almost four years and we've set up our commercial organization to do just that we have.
Business, we have an office in China, an office in Singapore, one in London, and one here in Houston, we have tanks for used cooking oil.
In Asia, we have tanks in Europe, and we're moving used cooking oil all around the world optimizing optimizing that business and we'll do the same with the other feedstocks as time goes on.
And don't forget we are also responsible for supplying feedstock for the rise facilitates us on a 10000 barrels a day for feed or responsible for procuring.
Okay quick follow up here is I think last quarter I think Jeff.
And then Colin explained which on the areas where the demand is recovering at the fastest pace. So if you could help us understand where hub and cash flow generation remained weak, but other than that in your system. If you go five wise, where do you think you have achieved for a recovery and language on the EBITDA you guys. Thank you.
<unk> expense will take all of it in the next three to six months.
Maybe optics.
I'll take that one if you take a look at demand for us on the diesel side, we're back to 2019 levels on the gasoline side in the U S for about 5%.
For further off on diesel and gasoline in Europe, where we have business in Germany, 20% off because they're still on the Lockdowns in Australia are about 15% of that coming out of Lockdowns on may 18th So you see some.
Sunlight and the new Switzerland, they were off about 10%. They're open now I think the U S is doing really really well if you look at COVID-19 vaccines, 43% of the population has got at least one dose more than 80% of the population over 65 has got one dose. So we can see a lot of sunlight. Our view going forward is that we expect given the <unk>.
On the economy.
We're seeing lots of container ships.
CDC, Joe said that cruise ships can startup in July we're seeing a lot of strength in the economy. We think these will be up about 2%. We think ultimately gasoline is going to be up about that same amount as people start getting out of the house coming back to work yet we think jets down about 25% here in the U S. We think that will be about 15% as a year ago.
On that 15% represents mostly international travel where people still still needing to quarantine and we think we won't travel as much but if you think about for gasoline and diesel up 2% roughly and Jeff down 15% that whole net net debt means that we will be at 2019 levels.
Back half of 2021, and then on top of that if you think about the refining capacity, we've shut down over 1 million barrels on refinery capacity. Since 2019, we will be back up to demand levels of 2019 with at least 1 million barrels of refining capacity in the U S. Shutdown. So that makes us think we were very very.
A very bullish the second half of this year for that reason.
Mike just add when you look at gasoline demand, we are seeing trips to the grocery store recreational activity has gone back to slightly above pre COVID-19 levels and and so there is strong demand there we're seeing a movement out of some of the big cities.
<unk> into suburban areas, where people drive more consume more gasoline. So I think there are positives and negatives but.
I think the other thing is as you look to the summer.
Hotel reservations are up it looks like it's going to be a robust travel season for for the summer.
Your next question comes from the line of Matthew Blair with Tudor Pickering Holt.
Hey, good morning, everyone on.
Follow up on the renewable diesel a conversation currently I don't see an LCM steel.
Steel pathway for Phillips, So I just wanted to clarify whether you will be capturing.
Now CFS credit on this initial 120 million gallons.
Well, so the way that works.
Is that you have to come up and Rod and demonstrates your capability and what are your feedstock is coming on and actually assign you.
Kind of on average CPI for the first two quarters of operations. So we will capture.
And the difference between.
On a statutory level and that assigns Ci and then as we run and we will demonstrate that the actual feedstock for providing our lower ci than the water side will ramp.
Over the next two quarters.
On larger <unk> benefit than than we're getting today. So it's.
Its processes prescribed by carbon and we don't have any choice for them to fall and so we're in the middle of that analysis for operating and net Ci difference.
Around nine or 10 in Ci point, so we expect low after the first couple of quarters of running that machine that will get Ci about nine or 10 points better than we're currently getting.
We'll capture just to be clear L CFS rens and BTC.
These barrels.
Sounds good and then as a follow up do you have an opinion on why I'll kick offs credit for homes sold off over the past months do you think.
Maybe like a seasonal issue around the annual compliance day to day.
Turning to the overall, California on sandbox market is becoming oversupplied.
So we think it's a utilization with utilization down there is less demand. If you look at the forward curve.
Contango for the forward curve is higher debt.
Expense because the obligation increases every year. So we would expect that to come back up as utilization rises in California.
On California's announced opening up mid June which should support demand we are seeing a correlation with the increase in vaccines and the increase in vehicle miles traveled and you can and demand.
For gasoline.
Great. Thank you.
Your next on kind of think comes from the line of Jason <unk> with Cowen.
Yes, hey, thanks, I'd like to go back to the rent discussions on it seems like an important one.
I'm just trying to understand the.
Ability to I guess pass through the RIN cost to the consumer within your marketing business and.
What im thinking.
Does the ton of net RIN cost of fill ups go up.
During periods of weak demand like during COVID-19.
Just because it's more difficult to passenger cost.
The customer so is that kind of creating some volatility and understanding what youre on exposure is and then my second question is just a simple one I was hoping.
If you could provide the opex impact.
To the refining business from.
Thanks.
So we think that we passed the rins to the customer I think it's true that during times of low demand on marketing margins suffer because we have to compete to sell our barrels but in terms of the RIN, We think Iran gets passed to consume relatively.
Okay.
Second.
Second question was around.
The cost to the refining system.
From storm Yuri.
We saw for significant fuel gas cost electricity cost across our system and it wasn't just the for clients that were on a.
Heavily affected.
And the kind of in the mid con and in the U S Gulf coast, but because of just the way that gas pricing works drivers on which the opex kind of kind of across across our system.
So if you look at the impact to us in.
Kind of our total operations in there right.
Net kind of 175 for $200 million range for increased.
Utility costs, and a low cost increase to fix broken pipes and things, we really didn't have that much damage most of it we saw in the utility sector.
We have reached the end of today's call I will now turn the call back over to Jeff.
Alright. Thank you very much for your time and for your interest in Phillips 66. Please contact me <unk> Shannon with any follow up questions. We're happy to help.
Thank you ladies and gentlemen. This concludes today's conference you may now disconnect.
Okay.
Okay.
Okay.