Q3 2021 Phillips 66 Earnings Call
Welcome to the to the third quarter 2021, Philips 66 earnings Conference call. My name is Thea and I will be your operator for today's call. At this time all participants are in a listen only mode. Later, we will conduct a question and answer session.
Note that 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 morning, and welcome to Philips 66 third quarter earnings Conference call participants on today's call will include Greg Garland, Chairman and CEO, Mark laser President and CEO, Kevin Mitchell EVP and CFO.
Bob Herman EVP refining, Brian Mandel, EVP, marketing and commercial and Tim Roberts EVP midstream.
Today's presentation material can be found on the Investor Relations section of the Philips 66 website, along with supplemental financial and operating information.
Slide two 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.
Filings with that I will turn the call over to Greg.
Thanks, Jeff Good morning, everyone and thank you for joining us today.
The third quarter, we had adjusted earnings of $1 4 billion.
We generated operating cash flow of $2 2 billion, which meaningfully exceeded our capital spending and dividends during the quarter.
We returned $394 million to shareholders through dividends and in October we increased the quarterly dividend to <unk> 92 per share.
We believe in a secure competitive and growing dividend.
Since we formed as a company we've returned approximately $29 billion to shareholders and we remain committed to disciplined capital allocation.
We're seeing signs of sustainable cash generation improvement.
Made good progress on debt repayment, reducing our debt balance by $1 billion. So far this year.
While on a path.
And then like levels debt strengthening our balance sheet and supporting our strong investment grade credit ratings.
Earlier this week, we announced an agreement to acquire all of the publicly held units totaled 66 partners.
The all equity transaction simplifies, our corporate structure and positions us to drive greater value for both sold 66 shareholders and Phillips 66 partners unit holders.
We continue to advance a companywide transformation efforts that we began in 2019.
We believe that strengthening our cost position as necessary for our long term competitiveness.
Recently, initially initiated an effort to identify opportunities to significantly reduce costs across our portfolio.
Or in the process of scoping these reductions and look forward to updating you early next year on our progress.
Recently, we announced greenhouse gas targets to reduce carbon emissions emissions intensity from our operations by 2030 or.
Our targets demonstrate our commitment to sustainability and to meeting the world's energy needs today and in the future.
Now I'll turn the call over to Mark to provide some additional comments. Thanks, Greg good morning in.
In the third quarter, we saw significant improvement in earnings and cash generation.
In refining we captured a meaningful improvement in realized margins.
Midstream had strong earnings in the quarter and chemicals, the olefins <unk> Polyolefin business reported record quarterly earnings and marketing and specialties had its second best quarter ever.
In midstream, we continue to advance Frac four the sweeny hub with construction approximately one third complete and about 70% of the capital already spent additionally.
Additionally, we recently completed construction of Philips 66 partners CTG pipeline.
CP Chem continues to pursue development of two world scale petrochemical facilities on the U S Gulf Coast and in Rasp upon Qatar and.
In addition, <unk> is expanding its alpha olefins business with a world scale unit to produce one hexane.
The alliance refinery sustained significant impacts from hurricane either and will remain shut down through the end of this year.
We continue to assess future strategic options for the refinery.
We continue to progress through they are renewed which is expected to be completed in early 2024 subject to permitting and approvals.
Upon completion <unk> will have over 50000 barrels per day of renewable fuel production capacity.
The conversion will reduce emissions from the facility and produce lower carbon transportation fuels.
And marketing, we're converting 600 branded retail sites in California to sell renewable diesel produced by the rodeo facility.
Our emerging energy group is advancing opportunities in renewable fuels batteries carbon capture and hydrogen.
With our recent investment in nobody X, we're expanding our presence in the battery value chain. Additionally.
Additionally, we recently announced the collaboration with plug power to identify and advance green hydrogen opportunities.
We will continue to focus on lower carbon initiatives that generate strong returns.
We're excited about our participation in this dynamic energy transition and combined with our commitment to disciplined capital allocation and strong returns we are well positioned for the future.
Now I'll turn the call over to Kevin to review the financial results. Thank.
Thank you Mark Hello, everyone.
Starting with an overview on slide four we summarize our third quarter results.
We reported earnings of $402 million.
Special items during the quarter amounted to an after tax loss of $1 billion, which.
Which was largely comprised of an impairment of the alliance refinery.
Excluding special items, we had adjusted earnings of $1 4 billion or $3 18 per share.
We generated operating cash flow of $2 2 billion, including a working capital benefit of $776 million.
And cash distributions from equity affiliates of $905 million.
Capital spending for the quarter was $552 million.
$311 million was for growth projects, including a $150 million investment in <unk> we.
We paid $394 million in dividends.
Moving to slide five.
This slide shows the change in adjusted results from the second quarter to the third quarter, an increase of $1 1 billion.
With a substantial improvement in refining and continued strong contributions from midstream chemicals and marketing and specialties.
Our adjusted effective income tax rate was 16%.
Slide six shows our midstream results third.
Third quarter adjusted pretax income was $642 million, an increase of $326 million from the previous quarter.
Transportation contributed adjusted pretax income of $254 million up $13 million from the prior quarter.
The increase was driven by higher equity earnings from the Bakken and Gray oak pipelines.
NGL and other adjusted pre tax income was $357 million.
Compared with $83 million in the second quarter.
The increase was primarily due to a $224 million unrealized investment gain related to <unk> as well as inventory impacts.
In September we acquired a 16% interest in <unk>, our investment will be mark to market at the end of each reporting period.
The sweeny fractionation complex averaged a record 383000 barrels per day, and the Freeport LPG export facility loaded 41 cargoes in the third quarter.
DCP midstream adjusted pre tax income of $31 million was up $22 million from the previous quarter, mainly due to improved margins and hedging impacts.
Turning to chemicals on slide seven.
We delivered another strong quarter in chemicals with adjusted pre tax income of $634 million down $23 million from the second quarter.
Orphans in polyolefin had record adjusted pretax income of 630 <unk> $13 million.
$20 million increase from the previous quarter was primarily due to higher polyethylene sales volumes driven by continued strong demand, partially offset by higher utility costs.
Global <unk> utilization was 102% for the quarter.
Adjusted pretax income for CNS decreased $45 million compared to the second quarter, driven by lower margins, which began to normalize following tight market conditions.
During the third quarter, we received $632 million in cash distributions from CP Chem.
Turning to refining on slide eight.
Refining third quarter, adjusted pretax income was $184 million and.
An improvement of $890 million from the second quarter, driven by higher realized margins across all regions.
Realized margins for the quarter increased by 119% to $8 57 per barrel, primarily due to higher market crack spreads lower rent costs and improved product differentials.
Pre tax turnaround costs were $81 million down.
Down from $118 million in the prior quarter.
Crude utilization was 86% compared with 88% in the second quarter.
Lower utilization reflects downtime at the alliance refinery, which was safely shutdown on August 28th in advance of Hurricane either.
Third quarter clean product yield was 84% up 2% from last quarter supported by improved FCC operations.
Slide nine covers market capture.
Three to one market crack for the third quarter was $19 44 per barrel compared to $17 76 per barrel in the second quarter.
Realized margin was $8 57 per barrel and resulted in an overall market capture of 44%.
Market capture in the previous quarter was 22%.
Market capture is impacted by the configuration of our refineries our refineries are more heavily weighted toward distillate production then the market indicator during the quarter. The distillate crack increased $1 55 per barrel and the gasoline crack improved $1 92 per barrel.
Losses from secondary products of $1 98 per barrel improved 40 per barrel from the previous quarter as NGL prices strengthened.
Our feedstock advantage of <unk> per barrel declined by 26 cents per barrel from the prior quarter.
The other category reduced realized margins by $5 one per barrel. This category includes rens freight costs clean product realizations and inventory impacts.
Moving to marketing and specialties on slide 10.
Adjusted third quarter pretax income was $547 million compared with $479 million in the prior quarter.
Our marketing business realized continued strong margins and saw increasing demand for products.
Marketing and other increased $62 million from the prior quarter.
This was primarily due to higher international margins and volumes driven by the easy easing of COVID-19 restrictions.
Refined product exports in the third quarter were 290000 barrels per day.
Specialties generated third quarter adjusted pre tax income of $93 million up from $87 million in the prior quarter largely due to improved base oil margins.
On slide 11, the corporate and other segment had adjusted pre tax cost of $230 million, an improvement of $14 million from the prior quarter.
This was primarily due to lower costs related to the timing of environmental and employee related expenses, partially offset by higher net interest expense.
Slide 12 shows the change in cash for the quarter.
We started the quarter with a $2 $2 billion cash balance.
Cash from operations was $2 2 billion.
Excluding a working capital benefit of $776 million or cash from operations was $1 4 billion.
Which covered $552 million of capital spend $394 million for the dividend and $500 million of early debt repayment, our ending cash balance was $2 9 billion.
This concludes my review of the financial and operating results next I'll cover a few outlook items.
In chemicals, we expect the fourth quarter global <unk> utilization rate to be in the mid nineties.
In refining we expect the fourth quarter worldwide crude utilization rate to be in the low eighties, we expect the alliance refinery to remain shut down for the full quarter.
We expect fourth quarter pre tax turnaround expenses to be between 110 $140 million.
We anticipate fourth 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 and a follow up.
You have a question. Please press Star then the number one on your Touchtone phone if you wish to be removed from the queue. Please press the pound key if youre 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 and the number one on your Touchtone phone.
Your first question will come from Roger read with Wells Fargo. Please go ahead with your question.
Yes, good morning.
Good morning.
I guess, let's let's take the first one just as the decision to buy NPS XP.
I don't think it should be a huge shock.
One of the questions. We've gotten is why now so maybe kind of help us on that and then I'm just curious.
At least at a high level, how it might change how the company reports going forward.
Okay, well I'll take a stab at that and then Kevin.
Mark Tim can help us first of all I think.
We are the acknowledged that second.
Pete.
<unk> role in growing our midstream business. If you look back kind of pre PSX P. So pre 2013 to our midstream business generated about $500 million of EBITDA and today, it's $2 1 billion and more than half of that is at the MLP. So.
Yes.
Did a nice job in helping us build and grow a substantial midstream business.
One thing we're looking at today is that the market just doesn't value kind of dropdown growth fueled MLP at this point in time consider trading.
Trading at a 9% yield we've seen institutional ownership dropped from the <unk> into the low seventies, and then from our perspective on our cost of capital is relative high versus PSX and so it doesn't really provide an attractive vehicle to fund our growth midstream investments and then I'll also say at the very beginning we felt like the MLP.
Provide a clear line of sight to valuation of our midstream business.
Some of the parts basis I'm not certain that really applies today so.
You think about these are high quality midstream assets, we know them really well, we're able to acquire them for essentially a nine ish multiple and trade it up into a 10 times multiple it should be accretive from a sum of the parts basis, and then I think as we think about the future of midstream and potential consolidation in midstream and growth.
The <unk> gives us more degrees of freedom to create value with those assets.
For a long time allowed to strengthen and that was the MLP was the diversity of the assets you think about crude oil pipelines and terminals and product pipelines and NGL assets, and we think that by banker <unk> being able to take those apart and discrete.
Assets that we can create more value with those as we move into the future Kevin or Mark if you want to add onto that you are certainly welcome to do that.
I think you've covered at all Greg.
Roger that follow up around <unk>.
Reporting on a go forward basis.
No as a fully consolidated entity, what you see today in our midstream results reflects all of the MLP anyway. So that's fully reflected in our midstream segment results, but we have to cut back down below and Noncontrolling interest for the <unk>.
Third party public ownership and so on once the transaction is closed you will.
We'll eliminate that noncontrolling interest deduct.
From our bottom line results. So that's really how it's going to impact the reporting.
Okay. Thanks for that.
And then I think my next question is for Bob.
With me John.
And then plug in Jeff about what's going on with the renewable diesel conversion.
Rodeo and some of the I don't know if I call. It pushback, but let's say some of the regulatory issues. There. So I was hoping we could get a little clarity on some of the things we've seen in the press in terms of the size of the project may be being scaled back or whether or not that is.
As an accurate depiction.
Okay, yes, thanks for that question Roger I think so critical.
Critical path on the whole project right as a land use permit and Contra Costa County, and that's okay.
In California, you get the opportunity to apply for lots of permits to build something but this is the big one.
And the most difficult path through so we've been working it since we announced the project and I would say overall, it's going really well.
The environmental impact statement that as part of obtaining that land use permit was released for public comment about the middle of October So Thats, a 60 day comment period. So that's what you saw in there.
Hey identified.
An opportunity to reduce the environmental impact of the project is to make the projects smaller.
We actually took that as a good sign because baidu.
By law that the planning Commission staff has to identify lower impact alternatives to the project and the fact that the only thing that was put in there was whether you could just make it smaller to reduce the environmental impact.
<unk>.
Reflected to us that they agreed with US we have taken kind of every environmental step around reduction.
A reduction of emissions from the plant.
The shutting down of the carbon flat everything we can do to reduce the emissions and the greenhouse gas footprint.
The future project and Thats really all that philosophy, we take that is by no means that they are advocating or that anyone will advocate.
For a smaller project being built there. This is the project that makes sense, it's the one that that.
Uses the equipment thats on the ground.
Cost efficient.
To go and convert so we're in the middle of that public comment period at some point the county will start releasing the comments to us and we'll respond to those.
<unk> will close in mid December it'll take planning staff.
Probably part of the first quarter to work its way through those and we'll be responsive to those.
And we still anticipate getting this thing permitted.
Some time, probably late <unk>, and then that frees us up to go start construction.
Very clear and I'm glad you did that for us because I don't speak government is but with good tailwind.
Are you still on the right direction. Thank you you bet.
The next question will come from Neil Mehta with Goldman Sachs. Please go ahead.
Good morning team.
Greg I guess the first question is on 22 capital spending typically we get that update here over the next couple of weeks, but you've been in relative maintenance spend mode outside of renewables just how should we think about the cadence of 'twenty to Capex. It is it is the focus still on deleveraging the business and therefore, we should assume.
Capex close to sustaining levels or are you thinking about toggling some growth into the business.
Yes.
We've come to.
Big period of build and midstream I would say.
Finished up CTG backfill will finish up essentially.
This year going into next year. So there's no big spend in front of us in midstream, obviously, we have the rodeo renewed project.
And we are.
Just to get started on that next year, but I think that all fits within the guidance, we've kind of consistently given here over the last couple of quarters of $2 billion or less for 2020 to actually go to our board for approval the capital budget in.
In December timeframe.
But that's in round numbers, that's kind of the numbers that we're looking at for 2022 I think that.
Certainly cash generation is improving as you can see the results from this quarter I think we're probably more optimistic today that we're moving towards more of a mid cycle earnings profile and our refining business. Our marketing specialties has been performing really really strong this whole year Kim has been really strong.
This year midstream has been really strong this year, so as we get refining back to something approaching more mid cycle and I think it creates more optionality around the.
The cash in what we do with the cash but clearly.
We're on a glide slope to.
Pay down debt, we want to get back to that $12 billion pre pandemic level and as we mentioned in the opening comments, we paid $1 billion down so far this.
This year of that so we're on a glide slope to do that but I think the rule milepost for us as we start thinking about capital allocation.
That first dollar is always going to go to our dividend.
Our sustaining capital and XR goes to dividend and then when we think about debt reduction and then hopefully we will get to a point, we start working share repurchases back in.
So Kevin if you want to add anything to that no I think you covered it all I would say on debt reduction.
Anticipating doing another reduction between now and the end of the year, probably in the order of another $5 billion.
That will get in before the end of the year.
Great. Thanks, Greg and Kevin that the follow up is just on the refining environment strong setup refining results. This quarter can you just talk about how youre seeing the momentum going into Q4, we've seen distillate start to perform a little bit WCS wide now could that translate into numbers.
And then if you could take a moment to talk about differentials sort of thinks that has surprised I think market participants is how tight the spread between Brent and <unk>, which matters for mid con refining.
Do you think that is a structural or do you think thats widens out as U S production comes back.
Finally, I'll take a stab at that so we are optimistic going forward in the market is setting up well setting up for a kit as well too as you know.
Distillate heavy versus gasoline in the U S. Additionally, theres over gasoline and every market now, but Chicago and we think that will continue through the winter you have seen the WCS <unk> come off.
Few reasons why with some refining problems in the midcon barrels got WCS barrels got to the Gulf coast weakened the.
The Canadian dips, followed and also there were some pipeline issues. Just this past weekend in Canada, which also helped weaken it if we think that dish will strengthen a bit going forward, but we were happy where it is now.
In terms of Brent Ti is the Brent Ti needs to stay relatively tight as you've seen Cushing inventories are up 27 million barrels currently we're getting close to operational men's when that happens we need to keep.
Crude in the United States and the best way to do that is to tighten the WTO.
<unk> differentials. So we think it will stay in the two to $3 range going forward. So we think by and large the markets setting up for a good Q4 and is certainly a good 2022.
I think I would add that as <unk>.
Puts more barrels into the market those are going to be medium and heavy sour barrels.
And should result in a wider heavy sour discount, which our kit is.
Disproportionately benefit from.
Thanks, Tim.
The next question is from Theresa Chen with Barclays. Please go ahead.
Hi, Thank you for taking my questions.
Firstly, just on the PSX Pete transaction itself just out of curiosity will PSX be electing to take a step up in PSX piece tax basis, and do you have an expectation of what that step up will be and just more generally speaking what will be the net net tax effect for PSX wants take.
Into account the fact that all of your midstream earnings will be subject to tax post chipotle.
Yes.
Kevin So PSX will be taking a step up in basis for tax purposes, which will result in additional tax depreciation we actually get to benefit from bonus depreciation on that also and so the net cash effect will be about 300 million.
In 2022 of <unk>.
Think of it as reduced cash taxes paid and then about another $100 million. The following year. So in aggregate, it's about a $400 million cash benefit to Philips 66.
From an ongoing basis, the primary impact from a tax standpoint, excluding the impact of the step up in basis is going to be the tax that we will recognize on that with today is shown as noncontrolling interest that become has become our earnings they are taxable to us and so there'll be tax on that on.
On those earnings that we get from the formerly the units formerly owned by the public.
Thank you for that clear and detailed answer.
Maybe if you could talk about your near term outlook for your European assets, both on the marketing as well as refining front clearly demand continues to rebound at mobility restrictions ease benefiting both the inks, but energy costs are sky high and Youre seeing fuel switching reports of refiners cutting bonds in general.
Or at Hydro crackers, specifically, how do you see this situation evolving and how does impact not only your European assets, but also at the read through to pad one in the U S and.
And the cost finished or U S Gulf coast assets that place product on the water for export.
I'll go ahead and start on the marketing assets to recent and Bob can jump in on the refining assets, but in terms of marketing we continue to build retail.
In Europe.
We've had if you listened to Kevin's comments that was part of the reason why marketing had its second best quarter ever.
As people come back in.
Overseas, we're seeing Austria at 2019 levels of demand, Switzerland, 2019, <unk> UK as well, Germany is still off about 5%, but it's coming back as well. So the business has been really good and we continue to re image and update our stores over there thats, giving us about a two 2% increase in demand as well and they were.
Looking for some emerging energy opportunities, we've been building a hydrogen stores in Switzerland, and we are looking for some more opportunities to put in electric pumps and some other things over there that you'll be hearing about hopefully in the near future.
On the refining side.
And you have to think about our Humber refinery, it's actually the most efficient refinery we have in our fleet and then you add to that the fact that it's got a pretty large cat cracker and then we've got three kocur's there and all of those are fuel gas generating units and so at the end of the day. The Humber refinery does not by a lot of natural gas to run the refinery.
We see additional costs come through in power purchases and steam that we for their host for from co. Gen. That's operated by a third party next door. So.
There is a cost impact I think about though the overall refining complex in Europe right margins have to rise to to keep the lowest.
Are the highest cost producer online and so everybody that floats all boats and Humber will be I think the recipient of that and we've seen that.
With moderating.
<unk>.
Over at Humber So.
It is a headwind, but it's not a large headwind by it by any means for lumber.
I think as we look at.
The impact on demand.
At the high natural gas prices, especially in Europe, Asia, or an incremental half a million barrels a day of demand, perhaps as much as 1 million barrels a day of incremental demand.
Demand globally, so a nice increase.
On the product side as well.
Thank you.
The next question is from Phil Gresh with J P. Morgan. Please go ahead.
Hi, good afternoon.
Just looking at the quarter itself. Obviously the earnings results are strong the cash flow before working capital.
Maybe there's a little less than I would've expected relative to the strength of the earnings.
Deferred tax and other things in there. So Kevin is there anything kind of unique in the quarter around that.
Of that.
Yes, Phil there is there's actually a and offset that between working capital accounts receivable and that deferred tax. So there is a reclassification on tax receivables.
Short term deferred and so in effect we've.
Were inflated the working capital benefit at the expense of reducing the pre working capital cash flow and that's in the order of half of $1 billion.
And so on you can kind of do the math on what that really looks like because in my mind I think about the working the real working capital benefit being inventory of about $300 million and then the rest is offset within the cash flow statement.
Got it that's helpful.
And just one question on refining.
If I look at the Central corridor results much improved sequentially and when you look at the bridges that you provide.
The other part of the bridge was an area of huge improvement sequentially. I was just wondering if you could delve into that piece of it a little bit more specifically from central corridor. So I can understand the sustainability of the three years out Sir.
Yes, So I think one of the real issue is <unk> in the Central corridor was.
Freeze effects and turnaround effects, so we had ponca.
Down for about three weeks because of the freeze that was a significant hit to us last quarter, we had planned FCC outage at Wood River.
Which was another impairment.
To that so.
A lot of that then kind of when you when you start doing the math when you don't run a lot of barrels last quarter it tends to kind of in flight.
To some extent on the other there is a rent effect obviously in the other also.
All combined.
Kind of all a lot of additive things hit us all at once in the second quarter in the midcon debt that just arent there now and I I would classify our third quarter and midcon as we ran well and we ran normal.
And I would say also the market really set up for us in the third quarter, we had an early harvest season.
Started early September wishes atypical weather delays some of our competitors had issues during the third quarter that helped us out we had low distillate inventories as well as.
That favors our kit and we talked about the WCS pips, which will also wider so all those things helped us in the midcon in Q3.
Very helpful. Thank you.
The next question is from Doug Leggate with Bank of America. Please go ahead.
Hi, good morning, everybody.
Guys I wonder if I could start with refining the alliance right done.
I'm looking specifically at the utilization guidance for the fourth quarter.
I guess for.
People with this full year, but.
Or are we on that.
Point, where we're seeing a recovery trajectory for refining and if so is that utilization rate.
Full moon, because it still including the lines in the denominator.
Curious about.
How you see that playing out and maybe you could give us an update on how you think.
Will the next step software lines at this point I've got a follow up.
Okay.
I'll take the first part I'll, let Kevin talk about the <unk>.
Write down so two part question there.
Yes.
As we've said, we don't anticipate alliance running in the fourth quarter. So you can think about that as about a 10% hit to utilization.
Kind of on a normal basis, if we would've been running during the quarter. So we would have been guiding to a low 90 or so.
For our fourth quarter low nineties.
A little bit of turnaround activity in <unk>.
For Q.
Not too heavy so I would characterize it we're kind of back to running our system.
In a normal condition and so we will run as the economics dictate and particularly with heavy crude.
Coming.
The dip is coming wider that usually incense us to run several of our assets.
Order, but then yeah, we keep alliance in the denominator.
Until until.
It's not in the denominator.
Yes, Doug specifically on the impairment so with the hurricane and the damage sustained by the Hurricane that gave us are indicators of impairment that required us to then do a.
Fair value analysis around that and so as a result of that.
That work in that analysis.
We took a $1 3 billion pretax impairment that put us down to a resulting carrying value of about $200 million on the balance sheet. Once once we have taken that impairment and that reflects the asset as it stands today and the condition that's in today.
I don't want to labor the point, Kevin but.
<unk> wherever it is you're going to do but.
Do you see.
Our future for aligns in your hands or someone else's signs backup.
Is it going to operate again or is it done so much at this point the things Unlikelihood, we sold.
Yes, I think on that front, we continue to explore any and all avenues for the alliance refinery at August everybody knows it suffered significant damage, particularly significant electrical system damage from the floodwaters that hit it.
And we have been paying stapling of working our way through the assessment of how do you restore operations there so.
That work continues we continue to as we announced before seek buyer.
Buyers for the facility.
And we continue to.
Work with those third parties to see what the actual outcome.
The alliance refinery as it is too soon to make that call as to what operators are refinery again.
Or in some other capacity either for us or somebody else.
Thank you my follow up guys just a quick one on <unk>.
I don't have those numbers are going to become a meaningful here just wondering if you could talk us through the outdoor any.
Incremental synergies.
Coming out of.
The consolidation of the Bakken, obviously, you don't have to accounting function for them.
And one more if I could just tag on to that.
Not a big number.
But how should we think about targets.
The combined consolidated company.
Leverage targets going forward.
Before we go to market side. Thanks.
How many questions was that.
So in terms of.
In terms of the synergies associated with the rollout it's pretty small in the big scheme of things Doug I mean, clearly there are some there is some corporate costs. The fact that <unk> is a public entity and all of the associated costs that go with that.
Disappear, so there'll be a modest impact, but its not anything thats going to move the needle when you step back and look at our consolidated financial results from the standpoint of leverage.
Debt levels.
We already had all of that MLP debt on our consolidated balance sheet and so the as Greg talked about our target of $12 billion.
Pre pandemic debt levels that we're trying to get back to that included <unk>.
<unk> debt as well and so it doesn't really change anything in terms of how do we think about our go forward.
Leverage objectives, the roll up does give us a little bit more flexibility, though because one we have access to all of the cash that previously either was distributed to the LP unit holders as distributions or was excess.
Cash excess coverage.
Coverage cash.
Comes available to us for debt reduction and we also have the PSX Pete that available as we think of the options around paying down debt. We have the PSX P debt to consider in that context as well. So it just gives us a bit more flexibility.
The next question is from Paul Cheng with Scotia. Please go ahead.
Hey, guys good morning.
Hey, good morning.
Maybe thats the first one yes, Paul Bob.
But can you I know that you're thinking about that yet.
You don't consume a lot of natural gas, but can you give us an ultra Oregon U S and Europe takes and Youre finding margin capture on that on a per barrel basis.
The first question.
And secondly.
That in the U S.
Phillips 66 has always had thought.
Capital lines wholesale brand model.
Any plan to change it and become.
More.
Engaged in an ongoing store given the energy transition that we are seeing.
People with that yet.
I mean, some of your customers become more aggressive in owning the station a few things.
EV charger and all of that yes.
Pat.
And to some degree you are doing it in Europe. So yes, thats something that you will also trying to replicate in the U S. What that the wholesale capital light model, yet the weight that to going into the U S.
Change.
Okay, I'll take a shot at Nat gas.
Brian talked about retail plans. So we've provided sensitivity Paul that for every dollar change in million Btu Nat gas prices.
About $150 million a year across our across our fleet and you can think about that is there's about $100 million of that.
As.
Pure natural gas and the other $50 million comes through and electricity.
<unk>.
<unk> purchases.
Of the $100 million then it's about.
Three quarters hits, our controllable cost line and then the other quarter of it is in cost of goods sold primarily natural gas that we buy it turned into hydrogen.
And that's without any mitigating steps within the refining system, obviously, a lot of refineries have the ability to fuel propane.
And a little bit of butane and really the economics of the day.
We will drive what we decide to do there.
Also got the knob of turning up severity on cat crackers, and making more gas. So there's a lot of moving parts into that that sensitivity, but the simplest way to think about it as just kind of.
One block is $150 million a year. So if we can call that $35 million or so a quarter.
And Paul on the retail U S retail side we.
Had a small retail joint venture in Oklahoma City, three dozen stores two years ago.
2019, we stated that we want to be more in the retail business, especially in markets, where there are less opportunities export markets like the midcon. So we will have by the end of the year about 800, a retail joint venture stores in the U S. We're continuing to find stores and buy stores in Middle America, where we're going to integrate.
Those stores with our refinery complex to make sure we have the pull through particularly as gasoline demand wanes in the U S. So it will still remain retail will remain a small portion of the hole for us in the U S.
A market that we are actively pursuing.
The next question is from Manav Gupta with credit Suisse. Please go ahead.
Hi, guys Lee if you could give us some idea of this and VX D.
16% interest in them, how did it come out stepping into battery something at all.
Haven't seen you do before about any of your final do I know what I'm trying to get these kind of know youll make needle Coke you won't tell us how much you make on what the prices look we kind of know that and I'm trying to understand if thats on synergies between that mediate GUL and N VX deal that you did.
Okay.
<unk> take that.
I'll jump in and I'll jump in.
Alex.
We've identified.
<unk> four key areas that we want to focus on and renewables to generate strong returns that renewables batteries hydrogen and carbon capture and so this particular opportunity falls into the battery.
Pillar.
And as you noted we've got a very good feedstock that can be used to generate synthetic graphite to go into anodes and we went through a screening processes.
Anode producers are looking at ways to provide.
Short or supply chain options for those that need their services like those that are building electric vehicles and ovonics rose to the top of that screening process in North America, and we like the team we like the technologies that we're employing.
Got a low carbon intensity technology to produce.
Synthetic graphite they are locating in.
In a place where they can get low carbon electricity.
And it's a great way for us to move up the value chain.
In battery manufacturing and supporting the growth in electric vehicles.
I think maybe the other thing I might add is that we know a lot about.
Yes.
Specialty Coke that goes into the anodes in how to tailor that and make properties around that.
But to further up the value chain, we get the more we can understand how we can make those properties special alright, and so that we can drive more value creation.
At the end of the day better batteries and so that's part of what's driving this is to seek to understand the ultimate customers in this market. So we can help drive performance.
Other thing I'd add is there is an increased focus on local content within the U S and in Europe, and the advantage of having U S facilities.
Serving that market.
Thanks for that my one quick follow up here is look we believe we understand the chemical margins of 68 cents or whatever would not loss, but in your opinion has pandemic fundamentally changed the demand for disposable plastics, which means the mid cycle could be five or 10 or whatever number.
OLED standard 2025 cents per pound, so just trying to understand your outlook for the.
Mid cycle margins in the chemical space, maybe for the next two or three years.
We see some capacity expansion. Thank you.
Yes.
I think that we're holding with our view of mid cycle margins that there may have been I think that clearly the plastics industry benefited during the pandemic I think is there may be some residual effects there.
With respect to.
Personal protective equipment and things like that but I think as the world moves beyond the pandemic, we see things coming back to a more normal supply and demand situation and then I think it contributed to the strong growth that we've seen.
But we don't see it a multiplier effect on that going forward.
Thank you.
The next question is from Matthew Blair with Tudor Pickering Holt. Please go ahead.
Hey, good morning, Thanks for taking my question here.
<unk> could you share your ethane outlook.
The next I don't know I'll call it year or so we do have new crackers starting up.
Ramp up of ethane exports.
You see that incremental demand being covered by incremental production or do we need to pull from either I guess project sooner just over.
Inventory levels.
Matt This is Tim Roberts and.
Couple of things on that one is there's a couple of drivers that are happening in there first of all you still have about 1 million barrels being rejected so you've got a sufficient pool sitting there, that's obviously going to be incentive to come out.
So.
Up to this last quarter it actually was incentive to come out we've seen that flip a little bit here recently.
There'll be a little bit of a pool with couple of new crackers coming on stream here in the next.
Over the next few quarters.
But fundamentally we actually feel that the supply is going to be there and so it'll be sufficient. There is also quite an incentive for people to get out there and make sure they're maximizing gas production.
And then you are seeing folks out there continue to maintain production. So we're seeing NGL is coming off the crude side natural gas side, and then with the rejection that's going on.
It was very sufficient here.
Got it and then.
On the renewable side are there any prospects for using renewable hydrogen.
<unk> for your plant Murdo.
And if so would that be something potentially near term or just take much much further out.
Yes.
There is a possibility to do that and we continue to explore those avenues that is not part of the project today and in fact, we're run mostly third party hydrogen there. So it's really a question for them.
But there are opportunities in California to recover renewable natural gas.
Could find its way to being run by the hydrogen supplier and that would lower the actually the overall carbon intensity.
Of the diesel we will eventually make.
Sounds good thank you.
The next question is from Ryan Todd with Piper Sandler.
Okay. Thanks.
Maybe.
The balance sheet cash flow.
Question I mean in very rough terms youre your ex working capital cash flow this quarter roughly one.
In equal amounts into capex dividend and debt reduction I know you talked about another 500 million debt reduction before.
Our likely drain during the fourth quarter.
As we think about your balance sheet that would have you down to about $14 5 billion versus.
I guess your $12 billion pre pandemic target.
As we think about uses of cash in 2022, you need to get the balance sheet down to about $12 million level before you start thinking about buybacks or at what point does the.
The potential for buybacks.
Some are part of the excess cash flow.
Yes, Brian Kevin So what we're trying to balance here is first priority is to protect the credit rating. So both the <unk> III Triple B plus credit ratings strong investment grade, we want to maintain those ratings and part of getting there is getting the balance sheet back to back to where it was but it's also a.
Function of.
Cash generation at mid cycle or thereabouts levels, and so I think that once we are.
We're already making good progress on debt reduction and when we're in that position, where clearly back in a mid cycle type of environment, we generated mid cycle cash flow Theres, a very clear line of sight to the ability to continue to reduce that down to the levels. We want to get too we should have more flexibility to start thinking about the other.
There are alternatives that we have in terms of use of cash. So maybe that's a long winded way of saying we don't we don't believe we have to get all the way to $12 billion before we think about alternatives as long as the cash generation is there that we can clearly see our ability to delever continue to delever and consider some of the <unk>.
<unk> is around capital allocation.
Thanks, and then maybe on <unk>.
Maybe as a follow up to that.
As you think about mid cycle.
Mid cycle environment for the refining business I mean, one of your.
One of your large peers, who reported earlier talked about.
Prior expectations for 2022 being below mid cycle and now they see it as potentially being an above mid cycle year in refining.
When you look at.
Overall supply demand dynamics.
Various trends in the industry do you see 2022, where do you see it on the refining side in terms of relative to kind of mid cycle expectation.
It's always hard to call.
Thus, we invariably when we make a prediction.
We get it wrong.
But.
Things seem to be shaping up to be somewhere.
At least close to mid cycle and I think the one component of the refining contribution thats not there right now or the crude differentials so were still lagging on.
On heavy crude differentials, but theres some theres some light at the end of the tunnel on that as well as we start to see OPEC, putting more barrels back into the market. So we could see that start to come back in our favor.
But that is probably what's keeping us being a little maybe a little bit behind mid cycle. At this point in time, but opened up to I would say with low inventories across all products with jet fuel is starting to come back the government opening up.
International travel to vaccinated.
<unk> by November eight.
I think.
I think we'll continue to see the light heavy dips expand we've seen.
EMEA each.
Also Dubai, Brent both expand quite a bit from late July to now so I think we'll continue to see that expansion part.
That is the drive to use more sweet crude even overseas where people where hydrogen is costly. So this organization is costly so people when a switch to I'm trying to kind of switch to more more light light crude diet. So I think that things are setting up for a good 2022.
Here, we will call it.
Average year for us, but it may be better than that depending on.
Inventories continue to decrease.
I think we are in the next week.
Realized crack.
Kind of 12 to 19 three to one <unk> adjusted its kind of.
$10 50, a barrel give or take and we're kind of 850 ish.
In this quarter, so we're not quite back to a mid cycle crack but to the point that you raised earlier I think.
Well I don't think were bullish I've never been bullish in refinery. So it's time to grow go horn here, but I do think that.
We're probably more constructive today on 2022, and refining and moving towards mid cycle margins than we were anytime in the past 19 months I would say so.
Yes.
The next question is from Jason <unk> with Cowen. Please go ahead.
Hey, Thanks for taking my questions.
First wanted to ask about this other refining bucket and that margin waterfall chart. It's been volatile the past couple of quarters I think it was as high as $8 a barrel last quarter back down to 5%. This quarter is that difference mostly.
Related to range or are there other things going on in and where do you see that trending.
Over over the next coming quarters, and then secondly, I just wanted to ask about NGL exposure across the business.
NGL prices right now are pretty high propane inventories are low.
Do you have an ability to capture some of that price strength in the midstream business and Conversely.
Is there an impact to your refining business in the winter due.
Due to butane blending.
Any ability to quantify that would help thanks.
Yes, yes.
So I'll take a shot at a couple of pieces of that.
So youre right. The other category is our most volatile category and we call. It other because everything that isn't straightforward is in there. So you've got rent effects in there you've got inventory effects in there. We've also got.
Product differential effects in there so on particularly in the Atlantic Basin when European.
Cracks really disconnect from the Atlantic Coast will see plus or minus in that category.
Inventory accounting can move numbers and they are quite a bit and there's a few steady things in there like freight to get our products to market and those sorts of things are pretty steady, but the volatility really comes product dish and that also includes the timing of our realizations for the products that we move up colonial pipeline.
To the east coast that can be very volatile month to month and quarter to quarter.
The rins.
The inventories and then.
Just overall market structure and between the places that we buy and sell.
Our products.
It's hard to say that the volatility will slow down.
It's kind of always there.
It's just outsized right now because of the severe rain impacted that we show in the other category right.
That accounts for almost half of that bucket here over the last couple of quarters.
On the NGL side.
It does.
<unk> blending into gasoline you run you run a fair amount.
We will only do it if it's economic so if ngls.
Prices run up and it doesn't make sense to put it into gasoline.
Overall in refining.
Part of our secondary products right, we make four 5% Ngls off the refining complex those so the higher the price for Ngls the better off we are and lowers that usually a negative two two are in Congress. So so overall, we store a lot of our own butane every year to bring back and blending and gasoline but.
Franco who will sell it into the market.
Makes more sense.
On the NGL piece with regard to more along the lines of exposure taking advantage of the opportunities you are right in our composite barrel has been pretty active I mean, it's.
Actively tripled in price here in the last year.
But what we do with our system were predominantly we're not exposed significantly the commodity cycle there. So.
We really are a fee based business the way we're structured now what we do do much like we do with the refining it as we have assistant we're managing around so as we are buying and selling barrels to optimize our kit there are opportunities for us to create around those assets and capture clip a couple of the corners in that process.
It is really to manage and optimize our system to make sure our barrels as we buy them from the wellhead all the way to the point they end up in the marketplace.
That's how we try and position those barrels and we play in that so we don't have a lot of commodity exposure and a little bit on our LPG and that was by design LPG export excuse me that was a little bit of that is by design, but most of that business has turned up as well should be considered a fee based business.
The final question is from Connor Lynagh with Morgan Stanley. Please go ahead.
Yes. Thank you.
A couple of questions on federal policy and I know things are early days, but the first is around sustainable aviation fuel.
If the incremental credit or blenders credit.
Discuss right now or it's going to affect how would that alter your thinking around how youre going to configure the Romania plant.
Between renewable diesel and aviation fuel.
Yes, so today that the design is done and the permits and so the the.
<unk> currently to reconfigure, what we plan to do there is really not there at this point, but having said that the refinery itself will make 8% to 10% yield a sustainable aviation fuel that the blenders tax credit as envisioned today may or may not answer.
Let us to do that it's fairly close.
It will depend on the.
Everything else that goes into the margin at that point, whether we actually want to make sustainable aviation fuel renewable diesel.
And like everything else in the commodity business right. The economics dictate I think there is plenty of opportunity as.
Sustainable aviation fuel develops in the market develops for that over time to come back in and.
Do a debottlenecking or add a little bit of kit at rodeo renewed to make more.
Sustainable aviation fuel is there and we will probably make sense, but it is probably going to take more than the dollar and a half.
That the government is anticipating putting out there to make that happen.
Got it that's helpful. The other is on carbon capture and I know you guys have discussed.
Studying and carbon capture and opportunity you've got these new.
Targets out there for reducing your carbon intensity. So how are you thinking about that and certainly it would seem to be it has incentives if passed would increase third party developers willingness to.
To build system. So how are we thinking about it just broadly in terms of the opportunity set for you.
If you were to pursue some larger scale projects would you use your balance sheet would you rely on others. How do you think that was look yes, I think I mean look this is still.
Still evolving as we move forward in this but we do think carbon capture is going to be a key piece of the overall transition of being able to meet some of the targets and goals that have been set out there whether by 2000 32015.
Carbon capture to make key piece of that I mean, it's already implying currently just not in large scale.
But we certainly do believe there is.
<unk> for us to participate in that.
And so the big key piece of that is going to be having a concentration of carbon to capture I mean, you've got to have areas, where there is heavy concentration and you've heard some of the stuff about Houston.
And there are other metro areas or industrialized areas, where there may be opportunities to do that as well, we certainly think with our assets and our structured and the products and process that we do that it does make sense.
Now the next challenge is doesn't make economic sense. So we're going to work both sides of that equation with regard to see what makes sense in what sense, whether it's organic whether its with a partner whether it's equity relationships whether it's.
Technology partnerships I think at this point in time, we're not going to single out on one way, we're going to find out what the opportunity is and what the value is and then determine what's the best path.
Maximize optimize values.
We have reached the end of today's call I will now turn the call back over to Jeff.
Thank you Dan and thank you all for your interest in Philips 66, if you have questions. After today's call. Please contact Shannon or me. Thank you.
Thank you ladies and gentlemen. This concludes today's conference you may now disconnect.
[music].
Yes.
[music].