Q2 2021 Phillips 66 Earnings Call
My name is Hillary and that 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.
Note that this conference is being recorded.
I will now turn the call over to Jeff <unk>, Vice President Investor Relations, Jeff you may begin.
Good afternoon, and welcome to Phillips 66 second quarter earnings Conference call.
Participants on today's call will include Greg Garland, Chairman and CEO, Mark Glaser, President and CEO, Kevin Mitchell, EVP, and CFO, Bob Herman Pvp refining, Brian Mendell, EVP marketing and commercial and Tim Roberts EVP.
<unk> midstream.
Today's presentation materials can be found on the Investor Relations section of the Phillips 66 website, along with supplemental financial and operating information.
Slide 2 contains our safe Harbor statement, we will be making forward looking statements during today's presentation and our Q&A session. Actual results may differ materially from today's comments factors that could cause actual results to differ are included here as well as in our SEC filings with that I will turn the call.
Over to Greg.
Thanks, Jeff Good afternoon, everyone and thank you for joining us today.
Second quarter, we had adjusted earnings for $329 million.
We generated operating cash flow of $1.7 billion.
Excluding working capital operating cash flow was $910 million.
With the benefit of our diversified portfolio and we generated cash flow in excess of capital spending and dividends during the quarter.
We returned $394 million to shareholders through dividends in the quarter.
Since we formed as a company we've returned over $28 billion for shareholders.
For secure competitiveness for the dividend, we will continue to be a top priority for our company and we anticipate a return to dividend growth as cash flow recovers.
We're committed to disciplined capital allocation for.
And on debt repayment in the near term to support our conservative balance sheet and maintain our strong investment grade credit ratings.
The July for Phillips 66 Board of directors appointed Nice Cade and Doug Harrison to serve as independent directors.
We continue to work on board refreshment recognizing.
Recognizing the value diversity in terms of gender.
Age race ethnicity tenure professional experiences and perspectives.
We'd like to highlight our recent 2021 sustainability report that can be accessed on our website. We think it's 1 of our best point yet.
Our commitment to sustainability, it's based on operating excellence environmental stewardship, social responsibility and financial performance.
Ed by strong corporate governance.
We expanded our commitment to environmental responsibility setting goal for all of our refineries to achieve top third energy efficiency by 2030, we.
We modified our compensation program to add additional environmental goals.
As previously communicated we will establish meaningful and achievable greenhouse gas emission reduction targets. Later this year, so with that I'll turn the call over to Mark to provide some additional comments. Thanks, Greg good afternoon, and thanks to everyone on the call for joining us today.
Continuing to improved demand across <unk> product lines, and a resilient operating recovery from the first quarter winter storms contributed to record quarterly earnings in our chemical segment.
Marketing and specialties reported strong results as demand increased in many of our key domestic regions.
Our midstream segment recovered well from the first quarter winter storms to reported solid results.
Headwinds continued in our refining segment as RIN adjusted refined product crack only improved modestly and historically low market capture contributed to continued losses.
As more people across the globe for vaccinated, we expect continued economic recovery and further improvement in global refined product demand. In addition, permanent refinery closure announcements have increased to over $3.7 million barrels per day globally with additional closure announcements expected.
In Midstream Phillips 66 partners continued construction of the <unk> pipeline.
The project is backed by long term commitments and is expected to be operational in the fourth quarter of this year.
At the Sweeny hub, we recently resumed construction of Frac for which will add 150000 barrels per day of capacity.
Upon completion, which is expected in the fourth quarter of 2022 total sweeny hub fractionation capacity will increase to 550000 barrels per day for.
For Fracs are all supported by long term commitments.
CP Chem continues to develop 2 world scale petrochemical facilities on the U S Gulf Coast and in Ross The fund Qatar we.
We expect a final investment decision for the U S. Gulf Coast project next year the.
<unk> petrochemical project is progressing with front end engineering and design as planned.
Both projects are in partnership with Qatar Petroleum.
In addition, <unk> began construction of its second world scale unit to produce 1 hexane utilizing <unk> proprietary technology.
When <unk> is used for high performance polyethylene manufacturing and it's common in a variety of everyday products, including packaging for food consumer products and pharmaceuticals.
Units located in old Ocean, Texas will have a capacity of 266000 metric tons per year and this is expected to startup in 2023.
In May <unk> was recognized by the plastic industry Association for being among the top 2021 industry innovators in sustainability.
The award recognizes <unk> launch of <unk>, new circular polyethylene, which uses advanced recycling technology to convert plastic waste into high quality raw materials.
We continue to advance our rodeo renewed project at the San Francisco refinery in July we reached full production rates of 8000 barrels per day of renewable diesel from the hydro treater conversion.
Subject to permitting and approvals full conversion of the facility is expected in early 2020 for.
Upon completion rodeo, we will have over 50000 barrels per day of renewable fuel production capacity there.
The conversion will reduce emissions from the facility and produced lower carbon transportation fuels.
<unk> combined with our portfolio of other renewable fuels project has the potential for supply 1 billion gallons of renewable fuels per year.
In marketing, we are converting 600 brand sales retail site in California to sell renewable diesel produced by the rodeo facility.
And Switzerland are co op retail joint venture continues to add hydrogen fueling stations through our joint venture, we're exploring hydrogen as a fuel option for heavy duty vehicles to support European low carbon goals and growing demand for sustainable fuels.
We're moving forward and preparing for the future, while maintaining our focus on safe reliable operations and attractive shareholder returns now I'll turn the call over to Kevin to review the financial results. Thank you Mark Hello, everyone, starting with an overview on slide 4 we summarize our second quarter results, we reported earnings of 296.
Excluding special items, we had adjusted earnings of $329 million or <unk> 74 per share.
We generated operating cash flow of $1.7 billion.
Including a working capital benefit of $833 million and cash.
Distributions from equity affiliates of $612 million.
Capital spending for the quarter was $380 million, including $179 million for growth projects.
We paid $394 million in dividends.
Moving to slide 5.
This slide shows the change in adjusted results from the first quarter to the second quarter, an increase of $838 million.
Pretax income improved across all segments with the largest contribution from chemicals.
Our adjusted effective income tax rate was 19%.
Slide 6 shows our midstream results.
Second quarter adjusted pre tax income was $316 million.
An increase of $40 million from the previous quarter.
Transportation contributed adjusted pre tax income of $224 million up.
Up $18 million from the previous quarter.
The increase was due to improved volumes from higher refinery utilization, partially offset by higher costs due to the timing of maintenance and asset integrity work.
NGL and other adjusted pre tax income was $83 million for.
<unk> $47 million increase from the prior quarter was mainly due to low operating costs and higher volumes, reflecting recovery from the winter storms.
The Sweeny fractionation complex average 380000 barrels per day, and the Freeport LPG export facility loads a day record 42 cargos in the second quarter.
DCP midstream adjusted pre tax income of $9 million.
$25 million from the previous quarter, mainly due to lower mark to market hedging results from higher natural gas and NGL prices.
Turning to chemicals on slide 7.
Second quarter, adjusted pretax income was $657 million up $473 million from the first quarter.
This is the highest quarterly earnings for chemicals since the joint venture was formed in 2000.
Often in polyolefin adjusted pretax income was $593 million.
$419 million increase from the previous quarter was driven by strong demand tight supplies and recovery from the winter storms that contributed to higher margins and lower utility costs. The.
For the industry chain margin increased over 17 per climbed to a record 62 per pound.
Global <unk> utilization was 102% for the quarter.
Adjusted pre tax income for <unk> increased $55 million the.
The increase primarily reflects improved margins due to tight industry supply is following the winter storms as well as lower turnaround costs.
During the second quarter, we received $322 million in cash distributions from CP Chem.
Turning to refining on slide 8.
Refining second quarter, adjusted pretax loss was $706 million an.
An improvement of $320 million from the first quarter.
The improvement was driven by lower utility and turnaround costs and higher volumes.
This was partially offset by lower realized margins.
Improved market crack spreads for more than offset by higher RIN costs lower electricity sales in the Texas market decreased secondary product margins lower clean product differentials and inventory impacts.
Pre tax turnaround costs for $118 million down from $192 million in the prior quarter.
Crude utilization was 88% compared with 74% last quarter the.
The second quarter clean product yield was 82%.
Slide 9 covers market capture.
The 321 market crack for the second quarter was $17.76 per barrel compared to $13.23 per barrel in the first quarter.
Realized margin was $3.92 per barrel and resulted in an overall market capture of 22%.
Market capture in the previous quarter was 33%.
Market capture is impacted by the configuration of our refineries.
Our refineries are more heavily weighted toward distillate production in the market indicator during the quarter for gasoline crack improved $5.68 per barrel, while the distillate crack increased $2.20 per barrel.
Losses from secondary products of $2.38 per barrel for $1.9 per barrel higher than the previous quarter at cruise price as crude prices strengthened.
Feedstock costs improved 36 per barrel compared to the prior quarter.
The other category reduced realized margins by $7.84 per barrel. This category includes brands freight costs clean product realizations and inventory impacts.
Moving to marketing and specialties on slide 10.
Adjusted second quarter pretax income was $479 million.
Compared with $219 million in the prior quarter.
And other increased $181 million due to higher domestic margins and volumes, reflecting strong demand in key markets.
Refined product exports in the second quarter with 216000 barrels per day.
Specialties generated second quarter, adjusted pretax income of $87 million up from $79 million in the prior quarter.
Slide 11 shows the change in cash for the quarter.
We started the quarter with a $1.4 billion cash balance.
Cash from operations was $1.7 billion.
This included a working capital benefit of $833 million.
In June we received a $1.1 billion U S. Federal income tax refund, which is reflected in working capital.
Cash from operations, excluding working capital was $910 million, which more than covered for $380 million of capital spend and $394 million for the dividend.
The other category includes a $90 million loan to our <unk> joint venture.
Our ending cash balance was $2.2 billion.
This concludes my review of the financial and operating results next I'll cover a few outlook items and.
In chemicals, we expect the third quarter global <unk> utilization rate to be in the mid nineties.
In refining crude utilization will be adjusted according to market conditions.
In July utilization averaged around 90%.
We expect third quarter pre tax turnaround expenses to be between 120 and $150 million.
We anticipate third quarter corporate and other costs to come in between 240 and $250 million pretax net.
Now we will open the line for questions.
Okay.
Thank you we will now begin the question and answer session.
Open the call for questions as a courtesy to all participants please limit yourself to 1 question and a follow up.
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Yeah.
Your first question comes from the line of Neil Mehta with Goldman Sachs.
Good morning team. Thanks for taking my question for the first 1 is just on chemicals and Marc this might be for you.
Kevin indicated that indicator in the 62 cents, which is very robust and above mid cycle and in <unk>. How do you see it playing out in that in July and August so far.
And just any thoughts on what the mid cycle number has been I think you guys have been in the 25 that campus.
Campus I remember.
Is that debt is that view changed in light of recent margin strength.
Yeah. Thanks, Neal I would say, it's a great question.
We are still consistent on our mid cycle margin projection and of course, we're well above that today and as we look out into the third quarter.
We're seeing the strength continue in the third quarter, we've got cost increases on the table that are being negotiated as we speak.
Even if things even if things went forward just as they are today, we are still at record margins and we think that that can carry into the third quarter.
There's a lot of strength in the marketplace, particularly in North America, and in Europe, Asia still kind of lagging, but starting to perk up a little bit. So the real story is the fundamental economic resurgence in the U S and North America and in Europe, and we believe that there is some upside that will offset some some headwinds out in the future as the rest of the <unk>.
Global economy kicks in.
We're at record margins nobody nobody believes those are sustainable for the long term. However, I think we can go from something at a record level for something Thats still pretty robust.
See seasonal down.
Down turn typically in the fourth quarter, but we are also seeing conditions, where we can kind of carry through when they're strong enough marketing momentum and there may be those kind of conditions now, we're particularly focused on high density polyethylene.
And that is still pretty tight in the marketplace. The inventories have not recovered to where.
<unk> would be comfortable operating and it's unusual to be there at this time of year with hurricane season, we typically want to be a little higher in inventories going into hurricane season. So there is there is a number of factors that could lead to sustain this momentum into the third quarter and beyond into the fourth quarter and then we see the world economy kicking in about.
Same time additional capacity is coming on.
Let's say first half of next year. So there's some good fundamentals out there and I think it's still got some legs based on the demand that will come.
Come to bear as the world economy fully recovers from Covid Neil the when we talk about mid cycle kind of be in the 2012 to 2019 average and if you look at the IAA IHS.
Polyethylene full chain margin, it's averaged about 30 per pound.
Okay already for Pat Okay. That's all great and then the follow up that Greg Greg and Jeff for you is just thoughts on the refining side of the equation if the refining system, if you're telling me the refining system was running at these type of levels I would have thought that Phillips 66.
Would it making free tax profit in the refining system and so.
Is the U S refining.
Refining system running too hard.
And how are you guys thinking about your own utilization as you get into into the fall.
Yes. This is Bob I'll take that question I think when you look back.
Over the last quarter I think there was there were plenty of market signals there for us to run at the utilization rates, where there is a lot of moving parts and particularly the cost of Rins that just continued to increase throughout the quarter right in and we take a pretty good hit in refining.
For the full cost of those sprint I think.
We would have all expected maybe on a global basis Europe.
In Asia.
Demand tick back a little better than it did I think the margins the RIN adjusted margins that we saw in the second quarter.
Really across our system are very representative of a global market and so until we start seeing.
Recovery, particularly in Europe, because we seem to see product flowing out of the Europe into North America, and South America.
We won't really see returns get back to work.
We would like to him I think the second piece for US in particular is our kit is more geared towards heavy crudes, making diesel.
And certainly for the second quarter.
It was a gasoline driven market without much differential on heavy crudes and we've seen those widen out here now in July to a much more respectable level.
So we think it's headed in the right direction, but I think all of that added up to being challenged in the second quarter.
To turn a 90% type utilization number.
Into a profit.
Finally, I'll comment on what we're seeing today in the market.
In terms of the heavy dips in the sour debt, we've seen them extract to expand LLS tomorrow is $2 waters for the beginning of the year WTO to minus <unk> <unk>.
Beginning of the year, So I think where gas is a tailwind.
To help us in the second quarter, we expect distillate cracks to 2 or for our managed to get towards wintertime.
So although I think we've also seen actually markets overseas cutback, we we have marketing in Europe than we've seen in Europe.
Germany, where we market, 90% to 95% of demand.
Korea, where we market 100% of demand. So we've seen those markets come back as well so as Bob said, if the overseas markets start to come back that will help the U S crafts and we should see some profitability in Q3, 1 for 1 thing I might add is fit for if you look at the IEA EIA OPEC projections, we were kind of shy of 95 million barrel.
Those are day in <unk> projected to get to $99.5 million barrels a day by the end of the year.
So expectations for demand to continue to improve in the back half of the year.
Okay, great guys. Thank you.
Your next question comes from the line of Roger read with Wells Fargo.
Hey, good morning, or afternoon, as the cash might be I guess now.
Ill.
Jumping back to refining here against 1 other question.
For obvious things should improve but is there anything internally that Phillips has done or would plan to do that.
Kind of help out on the margin front, just thinking of any additional.
<unk> changes within your own system or.
Anything else that might be theyre part of a small percentage program that was laid out almost.
Most 2 years ago now.
Yes, Roger I think.
I think theres a couple of answers that question 1 internally.
We expected.
Tough operating conditions for a good part of this year recovery has been slower than we expected, but we went into this year trying to reduce some of our heavy maintenance expenses and adjusted turnarounds.
All of that and so.
<unk>.
The guidance, Kevin just gave Greg for the third quarter is fairly light for us.
So I think that helps heading into the third quarter.
Profitability you can translate that were available to run so if the cracks are there we're going to be able to run pretty hard in the third quarter and make money around the <unk>.
Danny 66 program that we laid out right. So a lot of that is built around.
Margin enhancement margin improvement.
I would say, we ran pretty well in the second quarter and we using all of those tools that are that are in our toolkit.
The value chain optimization activities that went on in the second quarter were per.
Pretty robust we did a lot of things that we haven't done before.
Or needed to do before such as we ran a lot of resisted down into our sweeny refinery, where typically we'd be running.
Or some other heavy Canadians.
The profitability really wasn't there and so optimizing around high sulfur <unk> into our system.
Just 1 example, about where where are kind of running the circuits.
We're pretty happy with the results we're seeing on the operating front a lot of a lot of our initiatives in refining are around being able to operate well operate better operate safer for the smaller environmental footprint and we're seeing value come out of all of those initiatives.
Fairly translate directly to the bottom line, where you can see them, but but overtime they are paying dividends.
Roger I think.
I think about kind of Q2, and maybe even for Q1.
We've had quite a bit of planned and planned FCC downtime. This year. So if you look at our yields relative to historical Europes, we're probably down 2%.
We're just simply going to run better in the third quarter and fourth quarter I think Bob said things tuned up that were ready to do that so.
I think thats 1 other things that we're focusing on right now also.
Okay, great. Thanks, and then.
1 thing that was definitely nice this quarter generating enough cash flow to cover all of the outflows.
I don't know Kevin. This question is for you, but as you kind of look budgeting for the back half for the year things are as they are today. Thanks debt.
We pretty much turning a corner on the Covid world.
And.
So we'll be in a position.
We improved the balance sheet start taking some of the debt challenge because through the next day Q4 corners.
Yes, Roger certainly would expect to be able to do that I mean, obviously, we're not back at mid cycle cash generation, yet, which is really going to be key.
Sort of marker in terms of truly being able to get the balance sheet back to where we need it to be but it certainly.
Nice improvement from where we've been and with the cash balance and if we continue to build that over the course of the year, we should be able to start making some inroads into that.
Next year as you know as we've talked about before we had a lot of other flexibility around debt reduction.
Given the debt profile of the maturities that we have starting next year and some of the callable debt that we have in place. So a lot of flexibility on that front.
Great. Thank you.
Okay. Thanks Roger.
Your next question comes from the line of Doug Leggate with Bank of America.
Thank you again off of 1 of your body.
Thanks, I Wonder if I could ask you have you.
Books for a cycle like this and obviously I've done for 1 of the margin that you're stress testing all of the assets in the portfolio. So.
I guess, it's kind of a follow up to Walter's question do you see any.
Weak links in the portfolio today that you think might be visited.
Portfolio structure sustainable refining cycle, I'm, obviously thinking specifically about Atlantic basin.
Yes, you obviously bought a lot.
Yes, I guess I would say that we.
We spend.
A fair amount of time every year stress testing and looking at every 1 of our assets and more do we think that feature of that asset lives and then a bigger picture context too not just the refining asset, but the rest of our value chain around it right. How much marketing are we supplying in the area, we've got midstream assets.
Commercial's trading around many of our assets, particularly on the coast. So we look at a much more holistic picture and quite frankly, we have a debt that we think is a long term debt.
Considering what we think for future holds for liquid fuels and we look at our assets in that context. So.
They are assets at the end of the day and so we're always looking to debt.
Upgrade or find more ways to make money on any given asset from year to year.
We will watch with interest how that evolves I guess.
My follow up maybe for Kevin.
Slide 9.
Gave up fairly well.
Clear description of how you'd realized margin has evolved this quarter.
Indeed for doubtful can you maybe walk us through how much of that maybe you can dig into a little bit more details.
How much of losses truly transitory that and should we expect for the job.
Thanks.
Yes, Doug so the largest single element within that 780 for other is the RIN cost that as Bob referenced earlier is that expenses borne by refining and so it is half for slightly more than half.
Of the total within that other most of the other items in there are oil linked is always in there obviously wind costs were particularly high during the quarter.
Product differentials, which is the difference between the market.
Indicator and actual product realizations that 1 can move around and go both directions on us during the quarter.
Those differentials were not getting.
Seeing the value for some of those premium products that often can be a benefit to us in the quarter. So that's 1 that can move.
Move around and come back the other direction and then the other component. That's also in there the gain that can go both directions as inventory impacts and so inventory was a was a.
Hertz to earnings in refining in this particular quarter, but that can move in both directions.
So Kevin just to be clear the configuration.
So your discipline.
<unk>.
On product mix stops and configuration of our housekeeping and I'll respond.
No.
Configuration reflects the 321 so.
2 thirds gasoline 1 third distillate in the market indicator versus what we actually produce by way of gasoline and distillate.
In other <unk> got the actual pricing for those products, including whether it's premium gasoline and other premium products that can often be a an uplift relative to the standard market indicator, but in this period they went off.
First off appreciate the explanation. Thank you okay.
Your next question comes from the line of Phil Gresh with J P. Morgan.
Yes, Hey, good afternoon.
Greg in the past.
Okay referenced normalized earnings potential across the various areas of the portfolio.
And I'm curious, how you're thinking about refining normalized EBITDA potential now that we've kind of gone through this COVID-19 cycles or anything that.
Having gone through this debt has changed your view I think it's a $4 billion.
EBITDA number that you've thought about in the past.
Yes, no I think as late.
2019, we laid out kind of.
$4 billion EBITDA number.
What's kind of a 12% to 19 average EBITDA for our refining business.
We are ready to sounded retreat, yet non on mid cycle in refining. So it's been if you go back.
The way back to the first quarter.
2020.
That's the last time, we actually made money as a company. So it's been a long haul as we've kind of come through this there's no question. There's been a lot of stress put on a lot of companies in our industry, So but I think we're.
We're constructive, particularly as we come in the back half of the year around around demand.
<unk>.
This has been a story of <unk>.
Vaccinations efficiency Lockdowns and people trying to get back to some someone for normal and that all translates directly into the demand that we see for our products and there is no question I think the U S is probably led in terms of demand recovery through this cycle and so we've seen the impacts of.
Europe coming to the U S. We've seen the impacts of <unk>.
Not being able to export as much as we'd like to to South America in places and so I think as that world returns to normal we've got a good shot at getting back to something that looks more like a mid cycle.
Think we said on the last call, we really need to see that 321 crack on a rent adjusted basis get back to about $12 and then I think we'll see the appropriate kind of market captures around that.
We will generate something around $4 billion, Jeff I don't know if you've got it you want to add anything on that but yes.
I think you guys had hit on the demand side of the equation, we are seeing refining rationalization and $3.7 million barrels a day of announced closures 800000 barrels a day of temporary outages.
Could could become more permanent and we're up to about 1.7 million barrels a day of capacity that's been announced is considering.
Neither.
Terminals or other types of service or potential shutdown, so that rationalization.
Is a big piece of it as well and I think we're expecting.
More.
Closures to be announced.
Got it okay.
In the press release.
I'll mention of.
Returning to dividend growth as cash flow recovers.
So I was hoping maybe you can lay out day.
The priorities in terms of where you want the debt balance sheet leverage to get to.
Before you would reconsider dividend growth and Kevin just quickly.
I think you said $1.1 billion for the tax refund.
In the second quarter or is it still a $1 billion pie for the year.
So in terms of the tax refunds.
Youre right that its about $1.5 total we received $1.1 billion. There is another $350 million or thereabouts, but we don't expect the remainder to be a 2021 cash item that will.
Roll into <unk>.
Next year, so for a variety of reasons thats not going to be cash this year, although it is still.
We will realize itself overtime for us on that and then in terms of.
Dividend growth is.
I think we go back to the earlier comments around cash.
Cash generation recovers to something around about mid cycle and we're in a position to pay down debt, we're making progress on paying down debt. We've got a clear line of sight to our.
Our ability to continue to to do that and get the balance sheet back to where we want it to be then we should feel comfortable on some of the other capital allocation.
Priorities and increasing the dividend is 1 of those so I think it's a little bit of a long winded way of saying, we don't need to get to all the way we want to.
The way, we want to get to on the balance sheets for we make a decision on the dividend, we just need to be very comfortable that.
The structure is there the cash generation is there, we're making the progress we need to make.
Net but we'll be able to signal that in terms of our competence to shareholders with the dividend.
Yes, I think it's important I think overriding we do want to protect the triple B plus phase III rating. So we think a lot about that.
I think I'm all post is starting to approach mid cycle earnings for our company as you know $6 to $7 billion.
Cash flow at mid cycle.
Gives us plenty of cover to do things, we need to do I think we've said in previous calls we kind of expect.
Capex for the next couple of years to be $2 billion or less and so you think in the context of $6 billion to $7 billion of cash flow to total capital program of $2 billion.
Dividend than other.
We will have plenty of room to do the things we wanted to do around bringing the balance sheet into order thinking about capital return to our shareholders for dividend increases and share repurchases.
Excellent.
Yeah.
Your next question comes from the line of Paul Cheng with Scotiabank.
Hey, guys good afternoon.
2 questions.
Greg I think.
If I look at your Ngls with it.
This quarter, yes.
<unk> hundred 35 million.
In 2019, the average portfolio.
For filing at the Gen 17.
But we have for <unk>.
On April 2 and passionate April flow.
Come on stream in the Nat cat for operation.
Poppy <unk> contract.
<unk> for the moment.
Our corporate <unk>, if not more.
So I'm trying to reconcile that.
For market the book at global change that much.
All of that debt that matures because NGL price is actually.
Very good I think the second quarter, while multi debt among Ken.
Can help us on debt.
The second question voltage up on Google.
1 on the renewable.
For full Pan conversion.
Just wanted to see if thats a permanent status that you can pull 1 can also that the last couple of years for you guys. That's been.
Johnson rebranding what Paul SaaS net Gopal Digitization.
So just wanted to see if you can give an update on <unk>.
Pretty much debt funding waveform, what you guys are paying for them.
A couple of years ago, I think thats upon debt.
The cost total PA capital is pretty high but with the pandemic any ethicon everything debt getting all debt and thats.
Difficult to reconcile so maybe if you can give us some update.
Okay, let's start with the Ngls.
Sure.
Yes for this phenomenon for you.
NGL question I'll tell you what the first thing I would say is in 2019 I wish we were back in that macro.
That was a good time with regard to the overall supply demand fundamentals global demand was where you wanted it to be on really all of our midstream products, whether it's crude products and Ngls. So fundamentally there are big changes in the market, but when you look specifically at 2021, let me just highlight a couple of things for you there that debt.
And where are their heads at the biggest 1 that had the biggest impact is winter storm here.
When you look at here at.
It impacted our frac significantly down there and it's mainly not from the standpoint of damaging the units or any issue there even though we did have some cost with the units and it was on utilities or utility Bill was significant so from that standpoint, and thats going to be hard to call back for the rest of this year. So on a positive note I would just tell you.
Structurally we like the NGL business day management very robust.
And just for chemicals growth, both locally and globally.
NGL production is ramping up and we still see about 1 million barrels in rejection at this point in time.
But overall demand is really good in that space. Our LPG exports have been in a record clip. So overall the fundamentals feel good that it was a big cost hit as well as loss production hits that we had initially in <unk>, which really on a year to date basis stays with us for the last thing I'd just covering <unk>.
Overall structure in Ngls as.
Jumped up significantly as you probably are well aware propane butane and ethane.
You are at about 80, 687% on a gallon basis for NGL on a composite and.
In 2019 with 47 taxes, so it's gone up and with that we have seen an impact on some mark to market. We have in some of our inventory. So thats there that usually turns into a timing issue.
But just nonetheless that shows up in the results for <unk>.
Coupled with that <unk>.
On the Mark to market in the second quarter.
This product please.
Im going to guesstimate right now I don't have a number of families around 10 or $11 million.
Alright, thank you.
And Paul It's Bob I think your second question was around the permitting status.
We're now renewed and the conversion out there other refineries.
2 renewable fuel so we continue to develop the environmental impact statement with Contra Costa County.
I would characterize that has gone about as well as it could.
Better than we expected we're essentially done writing the permitted in review right now internally with the county, and we would expect them to probably sometime this month.
We released a permit to begin the public comment period. So.
That would be.
Pretty much right on our timeline, maybe a little bit ahead.
So far it's been it's been a good cooperative process with the debt.
For regulators and their permanent writers. So we're encouraged and pretty happy where we are we continue their outreach with all the other stakeholders in contrast county in Northern California that to make sure everybody understands what that project is going to do for.
For the Bay area and for California in General So so far so good.
Then digitization Yeah third piece I think was the question around the <unk> 66 in cost reductions and Youre right in a year right.
2020, it's hard to say, but I would say we've been able to deliver.
Within bounds of the environment on both sides of the equation. So we've had good optimization opportunities.
<unk> reduced utilization in our refineries and our ability to get down as well as we did in to make that go away and all those I think we're much easier because of some of the efforts. We had the second piece I would say is.
At the height of Covid, when we had to social distance and we had to use alternative work.
Broaches, our early jump into digitalization allowed our people to get a lot more done.
Without human contact and really was a dividend tours upfront in our ability to to keep supporting the operators who were on the unit.
While minimizing contact with the outside World and then third piece is we were able to hold the line on costs quite well throughout last year and in fact, we saw cost reductions.
In many of kind of a bigger cost items cash.
And chems and.
Those sorts of things that that are a big piece of our operating budget.
We applied some of the learnings that we got through a 66 for those and I think we got sustainable longer term price reductions there that will continue to pay out throughout this year. So.
It's kind of full steam ahead on all of our initiatives that are particularly in refining.
Paul I might just come in and just say I mean, we're never done on the controllable cost side of our business. There is more work we've got to do in terms of continuing to address cost. That's what you do in a commodity business.
When I look at the controllable costs for the first 6 months this year relative to <unk> for 6 months of last year for up about $300 million almost all of that synergy costs in Q1, and so if you adjust for the energy component, we're kind of holding the cost savings were able to achieve last year, but that's not good enough. There is more work for us do around the controllable.
Cost side of it.
So hopefully you've got all of those all of those questions answered.
Thanks, Paul.
Your next question comes from the line of Theresa Chen with Barclays.
Hi, Barry Thanks for taking my questions.
First just on the topic of global refining capacity closures going forward.
You hear about.
Outlook for the European market and in general given your exposure there.
During the quarter and the macro data looked weak for a good portion and now we're seeing some strengthening there any hearing news of operators for starting units.
And calling back workers, just curious to hear about how you see that evolving in the closures landscape.
Yes.
Thank you your other pad spin.
1 other most challenged.
Market in the first half of the year.
Lower margins and lower complexity I think.
No.
The demand has been slow to recover there we are seeing some improvement.
But it looks like 1 of the more challenging regions.
I think we've seen.
Continued weakness in Latin American refining.
Refining utilization as well.
Debt.
Could be a challenged area also.
And I think there was an expectation for a stronger summer than what we've actually had.
And as we come into the fall typically where we see.
More closure announcement activity, but I would say the weakness in any form for the fact that we can share in Europe is translated to weakness in the U S on our refining margins.
You've seen typically 100000 barrels of diesel imports into the U S. This year, which is 200000 barrels or eagle unfortunate for the U S. For Europe, we expect as Europe comes back from Covid Lockdown, but there is increased barrels will start we saw high imports of gasoline from Europe as well, we believe that that will start to Europe comes back from Lockdowns.
We've seen it already.
So all those things.
Complex comes back in Europe.
The <unk> decrease we will see in the U S also strengthened.
Got it and then just on the credit side.
Can you talk to us about your medium to long term outlook for WCS differential in light of Enbridge line 3 replacement project coming online in fourth quarter.
Our equal narrow for.
Charles I'd say the mid con.
And subsequently when we think about cap line per quarter saw happening later on and there'll be a situation, where we see the St James market being flooded with incremental heavy barrels, which could actually help your Gulf coast facilities.
While mid continent would be a little weaker with narrower structurally.
How do we see that dramatic development playing out.
So I would say on the WCS, we have seen differentials come off quite a bit.
At $4.5 million barrels on to leave Canada. Currently we have about $4.4 million barrels of pipeline egress.
Egress of another 100000 barrels on rail.
But we've seen which is something a little different from what we've seen the past couple of years as we've seen the WCS differential in the Gulf Gulf Coast weekend. This weekend to $5 over the past couple of quarters and when that weakened so goes the hardest TWC is differential.
You have to have in order to get the barrels to the Gulf Coast and 1 of the reason for Gulf Coast is weakening.
No exports means that you have to have a weaker differentials on WCS to get that WCS exported out of the U S. So as you said at Teresa you have for Enbridge coming online in the next quarter or for we would think that that would firm up a differentially a bit but don't forget in.
The wintertime, we add diluent to the accrued net also increases the volume of crude that has to move so.
Our view our forecast is that youll see a differential somewhere between 12, 5 and $13.5 off of <unk>.
Going forward.
Thank you.
Your next question comes from the line of Manav Gupta with credit Suisse.
Hey, guys I wanted to focus on the rodeo conversion.
Trends out there 1 other guys who are not building a pre treat and often debating between 1% to $1.50, a gallon and then our guidance for building the peachtree and debt off designating between tier 2 above 50 again youll make 5 standard deviation from Nick you are the only 1 who is building up the street and your cost.
1 other guidance so help us understand what discussion about this plan I am not trying to question I'm sure you'll get debt, but why is it for unique debt you can pull this off and nobody else can.
Bob I agree with you we will get there.
What really sets up our DAU completely differently.
For client conversion until we have all the kit available and we have 2 very high pressure hydro crackers that we can put into service and to convert those units for more they are today to being able to run renewable.
<unk> is actually a very low cost.
Part of their projects. So most of the cost of that project is in.
Either the logistics piece and then the big chunk is the free traders themselves. So I think that's what allows us to be able to have a unique position of building a project that is going to be at an installed cost of about $1 per gallon, which youre right as is lower than anybody else, but it is it is because if there was a refinery that was custom built to be a.
Well to be.
Be converted to renewable feedstocks for a day or is it since it's very very unusual to have.
2 hydro crackers and excess hydrogen capacity onsite between our own hydrogen plant.
And that of our third party supplier that has built after sites.
We've kind of got a perfect storm there so we're spending money to get all the logistics right.
Little bit of meddling in the hydro crackers and in the pretreatment unit and will be ready to go.
Perfect.
I have just 1 quick follow up I.
I think the <unk> changed the nature of people is when it comes to the use of plastics and that could someday be permanent I am just trying to understand you have these 2 crackers, which will have kind of put on the backburner you can bring them followed them I'm just trying to understand let's say you do decide back from the point of <unk>.
How long will it take to get the first 1 and the second 1 so if this thing gets permanent in the demand for plastics is an up cycle you can capture a part of it.
But obviously, we agree that the fundamentals are have improved dramatically since we initiated these projects and as I noted earlier.
The U S Gulf Coast block, we're looking at it next year.
The Qatar project is about a year behind that.
You could target about 4 years from <unk> to.
<unk> startup and we believe though we don't we don't try to market time.
These investments that we do believe that window is a particularly good window to pursue something so we got our foot forward on these we are ready to move and we're working with contractors to make sure that we're getting the capital cost right now clearly the global markets are improving but there's still there's still some disruption in the world.
We'd like to see a little clearer path to a fully resolved economic recovery from Covid.
The Delta variant and any other variance behind us, but we are we are leaning in and ready to move with that idea on that project next year.
Thank you so much for taking my questions.
Your next question comes from the line of Matthew Blair with Tudor Pickering Holt.
Hey, good morning, Thanks for taking my questions here first of all loans, Kent could you share some color on the inventory picture.
The industry data showed that <unk> inventory for a really ballooned up for new highs.
But we're really talking about tight supplies Atlanta Dallas also for the inventory, it's pretty tight. So I was hoping you could just explain that.
A disconnect there.
1 other disconnects Matthews is.
<unk>.
Looking at just the gross inventories versus the days of sales of inventories because demand has increased almost 6%.
In North America.
And so that's important and then you also have to parse it out by kind of polyethylene because <unk> be linear low density low density all have different inventory levels and different applications.
<unk>.
Heavily exposed to high density and high density is particularly tight supply now an uncomfortably tight it's been building CP Chem ran at 102% of their of their capacity in the second quarter. So they really delivered growth for an operational excellence perspective, but much of that went into rebuilding those.
Inventories, though even though they had such a strong quarter a lot of a lot of those a lot of that.
<unk> went into inventory and there is still not where they would comfortably be heading into a hurricane season, they like to be prepared for that they don't.
Planned to have a hurricane but theyre prepared if there are hurricanes to impact that so I think that's where you're seeing the tightness. That's really from a day of sales perspective with with the high growth in demand in North America as well as where we are in the weather cycles in North America.
Sounds good and then.
California oil CFO status.
Combined R&D and biodiesel blend rates in the K or about 35% in Q1.
It seems like that number is the only thing with higher going forward.
Wondering are you feeling a pinch on placing our diesel out of the Los Angeles refinery and what is your long term options here.
I know most of our diesel in the Los Angeles refining those added state out of California, So thats a non issue for us there Matthew.
Got it thank you.
Your next question comes from the line of Jason <unk> with Cowen.
Yeah, Hey, thanks for taking my questions I wanted to ask 2.
Specific to the quarter on refining earnings.
Related to rent it.
It seems like marketing earnings increase.
Increased a decent amount this quarter in refining is still kind of in the doldrums in part due to her in and I understand theres some.
Accounting and <unk>.
<unk> split between the RIN benefit and marketing versus the costs in refining.
Can you just talk about maybe.
How rins benefited marketing.
This quarter end.
How much of your RIN exposure is being minimized by blending and passed through to consumers and then the second question. Just also on the quarter quickly co product realizations I know for a rare.
Definitely larger than normal headwind.
How is that looking <unk> quarter to date, so far thanks.
So Matt this is Brian Jason This is Brian I'll start off on the Rins question. Our view is that the rins are in the crack I'd say cost debt refining pays a net.
The crack is passed on.
The value of the credit special onto the consumer who pays for the win at the pump So marketing doesn't see any benefit from the range per se. There may be some leakage in that in that chain, but marketing doesn't really see any any benefit marketing did have a relatively strong quarter.
Q2, and Lafarge part of that was we had kind of the right portfolio. The right places we saw demand jump up in margin and again in June.
We have a strong presence in the Rockies and the mid con.
Yes, Covid lockdowns in more of a movement. We added as you know retail in late 19 and also in 'twenty on the West Coast net retail has done better than premise. We also added retail this year in the mid Con and Rockies net details to embed in premise and finally I would add and we've been re imaging the stores for the past 3 years worth of <unk>.
85% of the stores, we image that we've seen for 2% to 3%.
Jumping volumes and margins in those stores as well so we've done a lot of things to help our portfolio of portfolios in the right spots.
I think thats, where we saw the value in marketing in Q2.
I think on the secondary products within refining.
They typically.
Get squeezed in a rising oil price environment, and an improve in a declining oil price environment, and we're kind of 4 quarters in a row of rising oil prices here. So I think thats the <unk>.
Biggest variable driving that secondary product.
Margin.
Yes, I would agree 100% with Jonathan usually at this time of year, 2 we start seeing a little bit of.
A little help in the secondary products because some of the Coke we make ends up in the asphalt market in this time of year. It is before us fix the roads and bridges.
All of those things and Thats offset a little bit with blending.
Blending butane in the back half of the second quarter comes back again in September.
So theres a lot of moving parts in there.
But I would think we're probably just as kind of a maximum we would see for this type of oil price.
And your next question comes from the line of Ryan Todd with Piper Sandler.
Hey, Thanks, maybe just.
A couple of quick questions on drilling all of you for business.
The rodeo hybrid Peter.
For the near term targeted capacity of 8000 barrels a day.
Can you just get Danny any learnings or takeaways you have from getting to that kind of a critical milestone.
And what Youre seeing from.
Kind of a margin or profitability.
Point of view and then maybe a follow up.
Can you talk about what it entails the convert your marketing location to market renewable diesel what the capital cost is associated with that.
How do you how do you envision kind of the marketing effort of R&D to play out as.
Is there a day of conversion.
Fully ramps up over the next few years.
I'll take the first question there so as we came out of turnaround and started up the rodeo hydro treater and renewable service.
Net.
Actually it came up it ran really well we had almost a full quarter running at low rates, we still have project to get the rail infrastructure for finished.
So that we can supply 9000 barrels a day to make 8000 barrels a day of renewable diesel.
We're learning how the catalyst reaction and.
What the actual kinetics are around running being oil.
It's a little bit of oil learning for.
The ultimate project of converting our refinery and these are really projects earlier, 2 very separate things net there was no real work to do to convert $2.50 debt.
To bean oil it was a matter of changing the catalyst a regularly scheduled turnaround and then being able to run. It. So it's helpful. I think the bigger picture. There is it's very helpful to our commercial organization to learn how to source.
Renewable feedstocks for logistics of getting in there some other procure areas around transporting it.
And those sorts of things all set us up to be a lot more nimble and ready for.
When we go from 8000 barrels a day to 50000 barrels a day with the renewable.
Conversion.
I think probably the best thing to come out of it as we did not see anything net.
Day to stop and think about the project to convert the rest of the refinery that we needed to go back and think about our design pretty much operating as expected.
Bob We got that plant up to 5 months earlier than we thought.
9000 barrels into the plant high conversion rate.
Just kind of a great asset so far we've firmed up over 50% of the feedstock for the plant going forward.
We run soybean, but we've also run other vegetable oils. There. So we've got some experience, bringing other vegetable oils were looking at international feed as well.
We started to bring the stores as you mentioned, it's low capital convert the stores will have all 600 stores converted by the end of the year and that will allow us to run volumes equal to 3 quarters or more of the R&D that we're producing currently.
Alright, thank you.
And this does conclude today's conference call you may now disconnect.
Yeah.
Okay.
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