Q4 2021 Phillips 66 Earnings Call

January 28, 2022

Okay.

Good morning, and welcome to the fourth quarter 2021, Phillips 66 earnings conference call. My name is Sia and I will be your operator for today's call. At this time all participants are in a listen-only mode. Later, we will conduct a question and answer session. Please note that this conference is being recorded. I will now turn the call over to Jeff [Dietert.].

Vice President Investor Relations. Jeff, you may begin.

Good morning, and welcome to Phillips 66 for our fourth quarter earnings Conference call. Participants on today's call will include Greg Garland, Chairman and CEO, Mark Glazer, President and COO, 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 Phillips 66 website, along with supplemental financial and operating information.

Slide two contains our safe Harbor statement, we will be making forward-looking statements during 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'll turn the call over to Greg.

Okay, Jeff. Thank you. Hey, good morning, everyone and thanks for joining the call today. For the fourth quarter, we had adjusted earnings of $1.3 billion for $2.94 per share

For the year adjusted earnings were $2.5 billion.

Or $5.70 per share.

We delivered record results in midstream chemicals, and marketing and specialties, demonstrating the strength of our diversified portfolio.

For the third quarter in a row, we saw improved refining performance. Looking ahead, we are optimistic about the outlook for our business.

In 2021, our employees exemplify the company's values of safety.

Honor and commitment.

Our 2021 combined workforce total recordable rate of 0.12 with more than 25 times better than the US manufacturing average.

Last year, our strong cash flow generation allowed us to invest $1.9 billion back into the business.

Returned 1.6 billion to shareholders and paid down $1.5 billion of debt.

The 2022 capital program of $1.9 billion.

It reflects our commitment to capital discipline.

Approximately 45% of our growth capital this year will support lower carbon opportunities, including rodeo renewed.

As cash flow improves further, we will prioritize shareholder returns and debt repayment.

In October we increased the quarterly dividend to 92 cents per share.

We remain committed to a secure competitive and growing dividend.

We'd like to resume share repurchases this year.

And on our path towards getting back to pre COVID-19 debt levels over the next couple of years.

We're taking steps to position Phillips 66 for the long term competitiveness.

Across our businesses, we're assessing opportunities for permanent cost reductions.

Mark and Kevin are leading this initiative and will provide additional details on our first-quarter call in April.

We're committed to a lower carbon future while continuing to deliver our vision of providing energy and improving lives around the globe.

We announced targets to reduce greenhouse gas emissions intensity last year.

By 2030, we plan to reduce scope, one and scope two emissions by 30% and scope three emissions by 15% compared to 2019 levels. So with that, I'll turn the call over to Mark provide some more details.

Thanks, Greg. Good morning, everyone.

In the fourth quarter, we had strong earnings from midstream chemicals, and marketing and specialties and we saw continued recovery in refining profitability.

We made progress advancing our growth projects as well as taking strategic actions to position Phillips 66 for the future.

In Midstream, we began commercial operations at Phillips 66 partners CTG pipeline. At the Sweeny hub construction of Frac four is 50% complete and we expect to begin operations in the fourth quarter of this year.

CPChem is investing in a portfolio of high return projects growing its asset base as well as optimizing its existing operations.

This includes growing its normal alpha olefins business with a second world-scale unit to produce 1-hexene, a critical component in high-performance polyethylene.

CPChem is also expanding its propylene splitting capacity by 1 billion pounds per year with a new unit located at Cedar Bayou facility.

Both projects are expected to startup in 2023.

CPChem continues to develop two world-scale petrochemical facilities on the US Gulf Coast and in [inaudible] Qatar.

In addition, CPChem completed its first commercial sales of [inaudible] circular polyethylene, which uses advanced recycling technology to convert difficult to recycle plastic waste into high-quality raw materials.

CPChem has successfully processed pyrolysis oil and a certified commercial scale trial and is targeting annual production of 1 billion pounds of circular polyethylene by 2030.

During the year, we began renewable diesel production at the San Francisco refinery and continued to progress rodeo renewed which is expected to be completed in early 2024 subject to permitting and approvals.

Upon completion, Rodeo will initially 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.

In marketing, we acquired a commercial fleet fueling business in California, providing further placement opportunities for rodeo renewable diesel production to end-use customers.

Additionally, our retail marketing joint venture in the Central region acquired 85 sites in December bringing the total to approximately 200 sites acquired in 2021.

These sites support long term product placement and extend our participation in the retail value chain.

Our emerging energy group is advancing opportunities in renewable fuels, batteries, carbon capture and hydrogen.

We recently signed a technical development agreement with Novartis to accelerate the development of next-generation materials for the US battery supply chain.

We own a 16% stake in the company extending our presence in the battery value chain.

In December we entered into a multi-year agreement with British Airways to supply sustainable aviation fuel produced by our Humber refinery beginning this year.

For 2022, we will execute our strategy with a focus on operating excellence and cost management. We will do our part to advance the lower-carbon future while maintaining disciplined capital allocation and an emphasis on returns. Now I'll turn the call over to Kevin to review the financial results.

Thank you Mark and hello, everyone, starting with an overview on slide four we summarize our financial results for the year.

Adjusted earnings were $2.5 billion or $5.70 per share.

We generated $6 billion of operating cash flow or $3.9 billion, excluding working capital.

These results reflect our highest annual earnings for the midstream, chemicals, and marketing and specialties segments.

Cash distributions from equity affiliates totaled $3 billion.

Including a record $1.6 billion from CPChem.

We ended 2021 with a net debt to capital ratio of 34%.

Our adjusted after tax return on capital employed for the year was 9%.

Slide five shows the change in cash during the year.

We started the year with $2.5 billion in cash.

Cash from operations was $6 billion.

This includes a working capital benefit of $2.1 billion.

Mainly due to the receipt of tax refunds as well as the impact of rising prices on a net payable position.

During the year, we paid down $1.5 billion of debt.

In November, both S&P and Moody's revised their outlook from negative to stable.

We are committed to further deleveraging as we continue to prioritize our strong investment grade credit ratings.

We funded $1.9 billion of capital spending and returned $1.6 billion to shareholders through dividends.

Our ending cash balance increased to $3.1 billion.

Slide six summarizes our fourth quarter results.

Adjusted earnings were $1.3 billion or $2.94 per share.

We generated operating cash flow of $1.8 billion.

Including a working capital benefit of $412 million and cash distributions from equity affiliates of $757 million.

Capital spending for the quarter was $597 million.

$265 million was for growth projects, which included approximately 100 million for retail investments in the marketing business.

We paid $403 million in dividends.

Moving to slide seven.

This slide highlights the change in adjusted results from the third quarter to the fourth quarter, a decrease of $105 million.

Our adjusted effective income tax rate was 20% for the fourth quarter.

Slide eight shows our midstream results. Fourth-quarter adjusted pretax income was $668 million, an increase of $26 million from the previous quarter.

Transportation contributed adjusted pre tax income of $273 million.

Up $19 million from the prior quarter.

The increase mainly reflects the recognition of deferred revenue.

NGL and other adjusted pre-tax income was $284 million compared with $357 million in the third quarter.

The decrease was primarily due to lower unrealized investment gains related to NOVONIX. Partially offset by higher volumes at Sweeny Hub and favorable inventory impacts.

Our investment in NOVONIX is mark to market at the end of each reporting period.

Total value of the investments, including foreign exchange impacts increased $146 million in the fourth quarter compared with an increase of $224 million in the third quarter.

The fractionated at the Sweeny Hub averaged a record 417,000 barrels per day and the Freeport LPG export facility loaded a record 45 cargos in the fourth quarter.

DCP midstream adjusted pre-tax income of $111 million was up $80 million from the previous quarter, mainly due to favorable hedging impacts in the fourth quarter compared to negative hedge results in the third quarter.

The actual hedge benefit recognized in the fourth quarter amounts to approximately $50 million.

Turning to chemicals on slide nine.

Chemicals fourth quarter, adjusted pre tax income of $424 million.

Was down $210 million from the third quarter.

Olefins and polyolefins adjusted pre tax income was $405 million.

A $208 million decrease from the previous quarter was primarily due to lower polyethylene margins reduced sales volumes as well as increased utility costs.

Global OMP utilization was 97%.

For the quarter.

Adjusted pretax income for SA&S was $37 million compared with $36 million in the third quarter.

During the fourth quarter, we received $479 million.

From the third quarter driven

By higher realized margins and improved volumes.

And by higher costs.

Realized margins for the quarter increased by 35% to $11.

60 cents per barrel.

Impacts from lower market crack spreads were more.

More than offset by lower RIN costs from our reduction in our estimated 2021 compliance here obligation and lower RIN prices.

In addition, we had favorable inventory impacts and improved clean product.

percent applies to the first three quarters of the year.

of the year.

Tax turnaround costs were $106 million, up from $81 million in the prior quarter.

Tax turnaround costs were $106 million up from $81 million in the prior quarter.

Crude utilization was 90% in the fourth quarter and clean product yield was 86%.

Slide 11 covers market capture.

The 321 market crack for the fourth quarter was $17.93 per barrel compared to $19.44 per barrel in the third quarter.

Realized margin.

Previous quarter was 44%.

Market capture.

[inaudible] Our refineries are more heavily weighted toward distillate production in the market indicator.

Our refineries are more heavily weighted toward distillate production in the market indicator.

[inaudible].

The quarter, the distillate crack increased $3.10 per barrel and the gasoline crack decreased $3.76 per barrel.

Losses from second.

[inaudible] due to increased butane [inaudible].

[inaudible] into gasoline.

Our feedstock advantage of 18 cents per barrel improved by 17 cents per barrel from the prior quarter.

Okay.

The other category reduced realized margins by 2 dollars and 2 cents per barrel.

This category includes rens, freight costs, clean product realizations and inventory impacts.

Moving to marketing and specialties on slide 12.

Adjusted fourth quarter pre-tax income was $499 million compared with $547 million in the prior quarter.

Marketing and other decreased $52 million from the prior quarter.

This was primarily due to lower marketing fuel margins and volumes as well as higher costs.

Specialties generated fourth quarter, adjusted pre-tax income of $97 million.

Up from $93 million in the prior quarter.

On slide 13, the corporate and other segment had adjusted pre-tax cost of $245 million, an increase of $15 million from the prior quarter.

This was primarily due to higher employee-related costs and net interest expense.

Slide 14 shows the change in cash during the fourth quarter, we had another strong quarter for cash.

This is the third consecutive quarter that our operating cash flow enabled us to return cash to shareholders, invest in the business, pay down debt while increasing our cash balance.

This concludes my review of the financial and operating [inaudible] and the full year.

In chemicals, we expect the first quarter global [inaudible].

[inaudible] utilization rate to be in the mid nineties.

In refining, we expect the first quarter worldwide crude utilization rate to be in the high 80s and pre-tax turnaround expenses to be between 120 and $150 million.

We anticipate first-quarter corporate and other costs to come in between 230 and $250 million pre-tax.

For 2022, we plan full-year turnaround expenses to be between 800 $900 million pre-tax.

We expect corporate and other costs to be in the range of 900 to [inaudible]. We anticipate full-year D&A of about $1.4 billion.

And finally, we expect the effective income tax rate to be in the 20% to 25% range. 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. If you have a question, please press the star and the number one on your touchtone phone. If you wish to be handset first before pressing the numbers.

Star one on your touchtone phone.

Your first question will come from Neil Mehta with Goldman Sachs. Please go ahead.

Good morning, team.

And now, Greg.

Good morning, Greg and Kevin for cash flow, if I look at the [back half]

Okay.

Of 2021, ex working capital. You put up almost $3 billion of cash loss annualized close to 6 billion.

I think a lot of us use $5 billion to $6 billion that sort of that normalized cash flow range. Greg, you've been clear that you think it gets kind of closer to 6% to $7 billion. So just your thoughts on.

Whether that's still.

How you're thinking about mid cycle.

The underlying buildup to that $6 billion to $7 billion. If you can kind of walk through the world of your different segments of how you get there $7 billion of course is nicely $6 billion of cash last year. It just happened to occur at different buckets that you might expect.

From the traditional mid cycle. So I think we've been signaling in the last couple of months, we're pretty constructive.

If you think about.

[inaudible] actually performed at or better than mid cycle, all through the pandemic in '20 and into '21 and we remain pretty constructive on those businesses coming into '22. So really for us, a wildcard is really been refining.

And when this refining recovers back to something approaching our mid-cycle, but just to remember how.

It all [builds].

It was up on an EBITDA basis kind of four ish billion.

In refining kind of $2 billion in midstream $2 billion in chemicals, and $1 5 billion, six in marketing and specialties pushes you to something like $90ish billion of EBITDA, which translates to.

We're kind of still in that range. Obviously, we've had some outperformance I mean CPChem had a blowout year.

Last year.

All driven by great operations fundamentally good control of their cost and then super margins, our marketing specialty businesses, which we.

Typically we'd say, it's a 1516 business was $2 billion.

Of course, we have been investing and adding retail through our joint ventures, but I think it was really great execution on the operation side, particularly in the US. But also in our European operations, where we saw good volumes good margins across that and so I would say that we're probably on the upside of that so given 6% to $7 billion.

Of cash flow. Our first dollar is always going to go to sustaining capital, that's $1 billion dividend.

Dividends of $1,000,000,006 and then that leaves room.

For us we've.

That's a deliberate signaling that for this year next year, we're going to be very constrained.

And so I think we make that all.

About that. Now, Kevin or Jeff if you want to add.

To that, please step in.

I think.

Thanks, Greg.

That's the logical follow up for me, which is how you are thinking about share repurchases. Again, the focus has been to get to that level lower. It looks like the ratings agencies or given you.

The all clear at least that things are moving in the right direction.

Factors for you to begin the share repurchase program and how do you think about sizing it? Well, we've always had the gating factor is getting cash flows back to something approaching our mid-cycle and make it a dent in the debt repayment. So I think coming into April what you're going to pay another $1.5 billion ish of debt off in April as it comes due so.

That's 3 of the $4 billion.

We've made a big dent in that so I think that kind of post April.

So that's why I said that I would.

I'd be disappointed by midyear, we're not back into share repurchase.

[Purchase] mode at our company.

Perfect. Thanks, Craig.

Sure.

The next question will come from Phil Gresh with JPMorgan. Please go ahead.

Yes. Hello.

First question just on the guidance items here on the refining maintenance $8 million to $900 million.

Just looking back it looks like it's the highest in the history of the company.

And I was just curious I mean is there anything unique we should be thinking about '21, we're too far below their historical norms. And then I guess bigger picture. When you think about your maintenance and what others have said, it seems like the industry might be kind of capped in terms of what utilization can be this year.

So is this an environment, we're just going to see margins get pressured higher too to keep up with demand?

So let me just take a high level and then I'll let Bob come in and talk about it since it's his business, but if you look 12 through 19, we kind of average about five and a quarter in terms of total turnaround expense.

We did push some of 2020 and 2021.

Into 2022, I think are probably a lot of people did that in the industries. We are trying to conserve cash and protecting the balance sheet. So it's a big number. There is no question, but I'll let Bob speak to the specifics and what we're doing there. Yes, I think Greg had a pretty good.

Anyway with this. 2022 always going to be.

2022 always going to be.

We got two refineries, both Ferndale and

[inaudible] facility turnaround in there are coming due.

Our facility turnaround in there are coming due.

To find them in the cycle.

[no sooner than two years.]

Second question.

We would agree that a lot of people managed their turnarounds and maintenance work out of 2020 and 2021. Some of that is running lower utilizations. We mean, our catalyst in the hydro treaters and hydro crackers last longer so we were able to district.

Those runs. We put a lot of work in making sure we can do it from a mechanical integrity standpoint.

But now those things are coming to you can't do that forever and for us this year.

It's a pretty, it's pretty heavy [inaudible].

The cost of the system and I suspect we're not the only ones that are going to see that.

Okay, great. Thanks for that color. Just one more on the refining business needle Coke is a unique business to Phillips 66 versus the other refiners I was curious it's a bit of an opaque market, but could you talk about what you're seeing in the fundamentals of that business.

Kind of how efficient finished out 2021, and how you see it progressing in 2022 and beyond, thanks.

Sure. So as you may know needle coke is used to make graphite electrodes, which in turn are used in production of steel, electric arc furnaces, which are actually a cleaner technology than blast furnaces. And we use needle coke also to make a note of lithium-ion batteries. The past two years, we've seen there is running off high inventories.

But we do see some slow strengthening.

At the end of this year last year and this year as well.

If you listen to steel production, which is a leading indicator they had a record year last year, even as needle coke markets lag because of the high inventories.

The market seems to have mixed opinions about steel production. This year. Some steel producers think you'll continue to increase I think it will come off.

Either way, we've seen good demand.

From both steel producers and [inaudible] producers and we expect that market to continue to gradually increase. We think.

With a final utilization coming back up and lower graphite electrodes that it'll be.

A slightly strengthening market.

Great. Thank you.

The next question will come from Roger Read with Wells Fargo. Please go ahead.

Thank you and good morning.

Good morning, Roger.

I'd like to start off kind of on your comments about the

Getting back to share repos, maybe what are some of the markers you would want to see in

Kind of tagging along with Bill's question about maybe a little higher spending on the turnaround side.

Is there timing issue with those turnarounds, where you'd want to get past a certain level? Or is it bigger picture on the balance sheet?

And overall cash flows when you will feel comfortable.

Yes.

I think we're kind of back to the question on refining and when does refining get to mid-cycle type cracks and in 4Q were $11.60 realized crack.

So I mean, that's our highest quarterly crack that we've seen in refining since the fourth quarter of 2018.

There is some.

There are some things that are in that number obviously, but as we look coming into 2022 were constructive supply and demand. There's been a lot of supply that has come off the market. We think there's new supply coming on but it's going to be staged and it's not all going to hit when people think it's going to hit because always takes longer for it to come on so.

From that standpoint, we're constructive on the demand side.

What we see with each successive wave of COVID, the impacts demand are less and less and so I'm not sure when that moment in time as we transition from pandemic to endemic.

With each successive wave of Covid, the impacts demand are less and less and so I'm not sure when that moment in time as we transition from pandemic to endemic but.

But that could happen next year, but regardless, we see the demand impacts less and less from each successive waves of COVID-19.

Prior to the current variant, we're seeing gasoline demand kind of back at 2019 levels.

[inaudible] about 2019 levels jet was recovering nicely. So as we move into 2022, we're constructive around the demand side, we've talked about the turnaround activity and what impact that could have ultimately on utilizations and so we just see everything balancing out towards, we'd get back towards more of a mid-cycle crack and refining.

And so once we get refining there I think we feel pretty comfortable that we're going to have.

Sufficient cash flow.

Cover our sustaining capital or dividend.

Pay down some debt back share repurchases and fund the growth program that we have this year, which is about $900 million in growth. Kevin, if you want to add anything to that. No, I think that's very very complete and just in terms of the debt paydown detail, we have a $450 million term loan maturity in April and we have a $1 billion notes maturing in April.

And we intend to take care of both of those at maturity and then what happens is after that we just have flexibility we still have other callable debt available if we need to but we will with that taken care of and if cash flows back at mid-cycle levels, we wouldn't have a lot of flexibility.

I think we paid three of the $4 billion that we borrowed during 2020 down. I think that demonstrates our commitment to paying down debt and returning the balance sheet over a couple year periods as something that resembles kind of pre-COVID-19 levels of say $12 billion on a consolidated basis. So we're pretty comfortable in that construct.

Roger.

Okay, appreciate it.

Other question I had sort of the unrelated follow up.

As you look at setting everything up on the renewable diesel side. Any progress or increased comfort level in terms of the feedstock side of that? I mean, that seems to be one of the biggest questions, we get coming in as well as our comfort level that each of the companies will be able to supply.

What you need to maintain a healthy margin in that business and the returns your targeting.

Hey, Roger, it's Brian. We don't see any issue with our feedstock availability, although it may be challenging.

For those that maybe are less commercial, have less logistics experience, we think between increased acreage and yields switching from biodiesel better aggregation of used cooking oil, we'll have plenty of feedstock to produce renewable diesel.

Prices may vary over time, and that's to be expected Ecmo data. We're on the water. So we have access to both domestic and foreign feedstock.

And we also sit on the US' greatest demand center in California. So feel good there our commercial organization has been working on feedstock for quite a while. We have offices around the world. We have storage in Asia in Europe and in the US. We have good relationships with vegetable oil producers you heard our announcement and in our investment in shell rock soy processing.

We also sit on the U S is greatest demand center in California. So feel good there our commercial organization has been working on feedstock for quite a while we have offices around the world. We have storage in Asia in Europe and in the U S. We have good relationships with vegetable oil producers you heard our announcement and in our investment in shell rock soy processing.

We've purchased for the startup of Rodeo, we purchased soybean oil canola oil distiller corn oil since last April. We have strong relationships with tallo producers and aggregators of used cooking oil. In fact, with the used cooking oil we've been in that market for over four years supplying Humber used cooking oil from around the world.

Currently 12 different countries. So I think they are renewed we will have a maximum optionality in its system and then we will use the linear program to decide what the best and most cost-effective feedstock is based on not just ci, but price credit generation sales market in logistics.

It sounds like something for an MLP there. Alright. Thank you.

Yes.

Yeah.

The next question will come from Ryan Todd with Piper Sandler. Please go ahead.

Hey. Thanks, maybe.

One on European refining.

As a refiner with some exposure to European refining, can you talk about.

The impact of high Nat gas prices that you are seeing a refining economics over there and then in a broader sense.

In that part of the world. Do you expect higher nat gas prices to impact

European utilization rates.

To the benefit of US refineries this year.

Yes. I think that's absolutely right. We look at what goes on in our operations and we've got a very complex and strong refinery over there and the impact of high natural gas prices on us and then we translate that to some of the simpler.

Refineries in Central Europe. It's got to be really tough for them to be making money right now and I'm sure we're going to see that. We know that clean product yields out a bunch of these refineries is down because they're not buying hydrogen.

Or buying natural gas to make hydrogen to hydro treat because we see the high sulfur stuffs shown up in the market.

Which is somewhat good for us. It's putting pressure.

On the sour crudes, which will be good for us in the long term. So I think high natural gas prices are going to continue for a while in Europe.

Are it is really going to strain kind of that bottom quartile refiners that are left. As Bob pointed out if the Europeans are running more sweet crude it kind of widens that sour-sweet diff, which is beneficial to us.

Kind of that bottom quartile refiners that are left as Bob pointed out if the Europeans are running more sweet crude it kind of widens that sour sweet diff, which is beneficial to us.

The utilization comes off on those refineries because they can't afford to run. That's good for the US as well because we'll be able to export products to Europe to be good for our businesses as well.

Great. Thanks, and then maybe.

A follow up on thelast question before this. I mean, you now have a couple of quarters under your belt producing renewable as you saw there in California.

The last question before this I mean, you now have a couple of quarters under your belt producing renewable as you saw there in California.

At a pretty decent level. Can you talk about what you've learned from the operation?

Both in product placement as well as feedstock acquisition there.

As you think about preparation for the sort of kind of the full project completion later on and then.

As we've seen feedstock spreads narrow in the back half of the year and [headline hobo] spread has improved, any comment on what you've seen in the profitability of your production there.

The profitability between Q3 and Q4 is strengthened. There's a lot of things to think about when you're thinking about the renewable diesel margins you have to think about feedstock. The renewable diesel price credits. You have to think about logistics. So there's a lot of pieces to it will have a linear program for

Renewables as well.

The key to renewable production is finding as many feedstocks as many suppliers as you can and having the logistics to get it to the plant, which is what we've been working on. We've set up a global organization to do that and we're working hard and in renewable diesel, the key for us is getting the renewable diesel to the end-user that's the key to keep more of the margin that way.

So in part, our purchase of our commercial fleet fueling business was enabled that to for us to get some of that product to end users you'll continue to see those types of things.

We've taken all the storage in California that we have and we've converted those renewable diesel as well. So we're going ahead with much renewable diesel as we can to the end-user and we're going to have as big a feedstock slate as we can for the plant and we'll optimize through a linear program.

I might add to that that being able to operate at $2.50 out there on renewable feedstocks instead of hydrocarbon-based feedstocks has really given us a good opportunity to for the operators.

And staff to learn because it is very different and it runs different and there are different characteristics to handling it and getting it in the unit and dealing with it. So it's been a great warm-up for us for the rodeo renewed project that you have

To come and just I think raises our confidence level in our ability to be able to run really hard right out of the gate with that unit.

To be able to run really hard right out of the gate with that unit.

Cn you talk about the pathways Ci approval et cetera. Yes, so we started up the unit.

After the last turnaround on basically cleaned soybean oil and since and Brian mentioned it earlier, we've been able to establish pathways from California, you run new feedstocks get a provisional Ci number for them and then you have to go through.

I would say a pretty lengthy bureaucratic process to qualify your other feedstock.

Since we've done that, we've been able to quantify not only the soybean oil, but the disorders corn oil we're working on we've gotten pathway on canola oil.

I think thats it.

That process will keep repeating itself as we find more and more feedstocks ahead of rodeo renewed coming up in '24, early '24. That really allow us to take advantage of the lower Ci material right away.

Just another key learning is how you get through that process and navigate that process in California like everything else you get better at it the second time Hudson.

Perfect. Thanks. From Doug Leggate with Bank of America. Please go ahead.

Thanks, fellas.

I have two questions.

That I hope can add some color for everybody.

Can add some color for everybody.

I was looking back at your

The share price, it seems like a horrible memory now but.

Your share price pretty much cut in half twice loss during the 2020 periods and obviously, you did not buy back stock could not happen given the circumstances.

Answers.

So my question is why carry $10 billion of net debt.

$10 billion of net debt.

Rather than the balance sheet down to a level where we knew these.

Corrections are going to happen occasionally in this business.

To allow you to take advantage of building the balance sheet during the recovery and buying back during corrections.

Yes, Doug. I think it's really a, it is a bit of a balancing.

Trying to meet multiple priorities. So we think about an optimum capital structure in terms of cost of capital.

Sure.

Too little debt is increasing cost of capital and so you've got that.

We've got other opportunities that we want to be able to fund.

We are growing the business and we're seeing that in the

Non refining segments as we're growing the business.

We are actually, we are effectively strengthening our overall financial condition because on a debt to EBITDA basis, we're continuing to improve.

From that standpoint, and obviously.

We don't like the fact that we weren't buying shares at $40, but that was.

We were not in a position to do so and so we had.

[inaudible] it's finding that optimum capital.

Sufficient flexibility through the cycle, albeit you've always got more flexibility to lower the debt balance obviously that provides added flexibility, but at what cost.

To where we've got adequate [inaudible].

Flexibility we can be.

Stick with our capital allocation framework, so 60% reinvestment in the business, 40% cash returns to shareholders.

between the dividend and buybacks over an extended time period, recognizing that year over year that will fluctuate. So it's really just trying to balance through all of that. I'm not sure going too much further down on that than our sort of stated objectives is going to bias.

A whole lot.

In that context, so I still feel pretty good with how we're laying out our objectives.

I appreciate the answer. I guess is one

One of the net debt question, because obviously, it's 2020 hindsight is perfect but.

It kind of gets back to this.

I wonder if COVID-19 has reset everybody's view of what volatility looks like but I appreciate the answer my follow up is something that's really volume from you guys periodically is your view on

A net capacity outlook and I guess, Mike. My question is are we getting to a point now where the mid-cycle refining outlook has been reset higher much like it did in the mid-2000s? I don't want to say Golden age but.

Something of that nature, and here's my point gas prices are up by probably structural for international players.

On nature, and here's my point gas prices are up by probably structural for international players.

And that additions disclosures light demand with [IMO].

I'm just wondering are you guys thinking along those lines? How do you see the net additions?

Past additions and subtractions in terms of impacting that mid cycle.

Yes, Doug, I think we've seen a nation that's been announced and much of that has already occurred.

Nation, that's been announced and much of that has already occurred.

When you look at last year.

It was the first year and at least 30 years where there was more capacity rationalized out of

The global fleet than there was capacity added and so.

We look forward. There is still pressure with higher natural gas prices.

In Europe on that, those units profitability.

So we see that continuing to occur. We've also seen COVID delays.

Also obscene.

Covid delays.

<unk>.

To execute new capacity additions, so they're getting spread out. We've seen a reduction of capital spending.

Capital spending.

The supply side. Of the equation.

Of the equation and.

And we are seeing demand come back.

As levels before this recent COVID-19.

[inaudible] been coming back aggressively.

And so we think [inaudible] late this year could be back at '19 levels as well.

A late this year.

Could be back at 19 levels as well so.

And the supply is more constrained in what we have seen.

Thanks.

Question is from Theresa Chen with Barclays.

Hi, there. Thank you for taking my questions. First Kevin, I just wanted to follow up on your comment about the adjustments.

From the lower RVO for 2021 out of the refining results. So just to be clear the 404 of adjusted EBT did that include the 230?

Yes. It does, Theresa. So the 404 includes the 230, it applies to the full year and so if you think about my additional comment was if you think about that in terms of the quarter.

You could say three quarters of that 230 would apply to the first three quarters of the year.

If you're doing any kind of normalization around that.

Okay.

So you presumably did not get that revaluation.

Over and over again, so the clean number for the quarter would it be 174.

A few, 30, yes. Okay.

<unk>, yes, okay.

Great. Thank you and then.

I also wanted to follow up on one of Brian's comments about the steel [inaudible] barrels. To the end user for all of your renewable diesel production grow.

Sure.

Steel.

<unk> barrels.

To that end user error on for all of your renewable diesel production.

In terms of your

Footprint and vertical integration.

As incremental for renewable diesel will hit the state over time.

The state over time.

To isolate your provision there or something that you were thinking of doing all along. But would love to understand your strategy here.

Theresa, that's exactly right. Our goal is to be able at some point to get the entire 50,000 barrels of diesel that we make to the end user.

We made exports some of that depending on.

Markets, but this is just one step. As I said, we upgraded all the stores to renewable diesel we're looking at.

A lot of different opportunities.

To also get diesel to the end-user but the goal is to get it to the unusual that way, we keep all of the margin and we think that's the best path.

Thank you so much.

The next question is from Manav Gupta with Credit Suisse.

Please go ahead.

Hey, guys. This is a question which we get a lot of investors. So don't shoot the messenger.

Yeah.

Refining, you have a very profitable [theory] which has worked very well for you over the years.

And that has resulted in a lot of speculation if you keep one refinery, they keep one. They sell you both, you sell them both.

There are multiple scenarios there. I'll just keep this data skew if you could comment a little on.

Scenarios had I'll just keep this data skew if you could comment a little lumpy.

I'll take that, Bob you can shoot yeah. Next time, we see you, Manav.

Okay.

I also I can tell you is we continue to work really well with our

[inaudible] Wood River and Borger.

As you pointed out, it's been a very good partnership since 2007.

Stood the test of time. They seem to like us as an operator.

They seem to like as an operator.

To work with and give us good insights.

On things and their world has changed.

But for now we continue to work together to.

To run WRB and invest.

In those two facilities as needed to extract more value out of both of them.

Perfect. And my follow up. The gas cost operating cost was a new hire and so was the DD&A. I'm assuming just like one times and has the refinery closes your op costs will actually trend down sequentially, not up and so far the DD&A. If you could just comment on that one times, I mean, it looked like one time on from their

Alliance on the Gulf Coast results.

Yes, you're exactly right. There is a lot of noise in 4Q and it is there are, we still had all the people in the fourth quarter because we worked through.

Redeploying some.

And all of that so we had costs in the fourth quarter and obviously no volume to go with it. So we will see those costs trend off very quickly.

In the first quarter. On a dollar per basis.

Barrel basis in the Gulf Coast, all our refineries are on the base cost ex turnarounds are about the same cost per barrel. So you won't see a big change in our in that metric with the absolute costs.

Controllable cost and the golf course will go down.

And Manav, it's Kevin just on the D&A, we did as you suspected.

Associated with the alliance conversion, we impaired some assets that flows through the D&A line. So that is onetime in nature.

Thank you so much for taking my questions and great quarters.

Okay.

The next question will come from Paul Cheng with Scotiabank. Please go ahead.

Hey, guys.

Good morning.

Two questions [inaudible].

Two questions can you size.

I think the first one is.

Paul Coulson.

Yes, I think in your NGL and also that we find.

Okay that helps.

Quarter.

Can you quantify how big that those number.

And also I believe.

Hey, Paul.

Yes.

Expectation that you can quantify that also.

Maybe after that then the second question.

Yes, Paul on the deferred revenue.

Basically the variance quarter over quarter equates to.

So the deferred revenue essentially so that is the way to think about it but I would say with deferred revenue that is no I don't think of that as a.

So that one time item because the nature of those contracts on the pipelines, we're either going to get the volumes and the revenues recognized as you get the volumes or if there's a shortfall in volumes, we still collect the cash and then there'll be the makeup rights or ultimately they closed and.

We then recognize the deferred revenue so that's a phenomenon that you see going.

Period to period, so it's not a I don't think of it as a true onetime item, we had inventory impacts both we have inventory impacts every period and thats not something we typically quantify unless it was.

Excessively.

Large in terms of the impact so we typically don't quantify those.

Okay.

Hi.

And can you tell us that that these.

And b, finding which region yet the inventory impact.

Right.

No.

I think before the pandemic.

Okay, and the pause that you saw that looking at long term capex in the range of two and a half to maintain kind of range.

Talking about one to.

2 billion dollar off data.

Maybe the growth Capex.

Dan I will close to that.

So for the investment opportunity in the midstream had changed so you're probably not going to spend that much money. So.

The ones that Youre that.

Back to a comfortable level and you start to be more yet to go.

Thanks.

What is the.

The capital allocation, we should look at the longer pumping.

And also maybe is on the Si question on DCP.

And the way to restructure debt structure I mean, you say.

35 $40 million quarter same.

Same site.

Yes.

Not causing you a problem, but also not adding a lot, but how do you I mean does it will be.

<unk> long term portfolio for you.

Okay, Paul I think you're up to five questions now.

I will try my best.

Early signs are the ones I wanted to know about that so first of all we do.

Historically.

All references growth Capex, but I think that for many reasons.

<unk> pandemic one of them.

The need to be.

And kind of next year, we will see.

What happens going forward, but I do think we want to get the balance sheet back to something over the next two years approaching pre COVID-19 so call it $12 million.

I'm going to get back to share repurchases I mean, we've been out of share repurchases and it's time to step back into those and so I think for all the right reasons, we want to keep capital constrained.

Across the portfolio for the next couple of years in engineering.

We just don't think those investable opportunities. So we will hit our return hurdles are going to be there in the next two years and the midstream business.

Yes.

We'll see where renewables goes and where renewables takes us but right now the biggest project in front of us.

Versus rodeo renewed circa $850 million project. So I mean that in itself is almost a mega project by any standards. So I think there is still big things going on around the portfolio in terms of growth and then you add on <unk> and the two mega projects that we're looking at so there is certainly lots of growth.

Bill around the portfolio allows us to be very structured about how we think about the.

Capital allocation, but to your point the whole idea is to free up more cash for debt repayment and getting back into share repurchases.

Kevin if you want to take DCP I'll, let you take it.

<unk>.

Paul.

You are right that with them.

We're looking at you take out all the hedging noise, youll, probably a $50 million to $60 million per quarter of.

Earnings generation in a kind of pretty consistent distribution that comes along with that.

While you could say, we're structurally challenged it's been a JV we've had in place for over 20 years, it's been a very successful JV the ownership.

Integration through our own midstream business. So DCP volumes, we jointly owned in the sand Hills Southern Hills pipelines.

With DCP and NGL volumes through that system come into sweeny and into our into our Fracs and so we have the benefit of that integration so well.

A different structure might be it might be a more efficient way of of.

Looking at that business, it's not something that we have to get done and there's nothing compelling that tells us we must have a different a different solution and the reality is when you get into these kinds of arrangements in place for a long period of time.

It can be pretty hard to exit for any party. When you look at the tax considerations.

And all of that so.

Like the Synovus question earlier, we actually feel that the JV has been very successful it does what we.

I wanted to do and we'll take it from there we're always open to alternatives as we are with most of our portfolio, but it's continued to work well for us.

The next question is from Matthew Blair with Tudor Pickering Holt. Please go ahead.

Hey, good morning could you shed more light on this British Airways.

Deal how should we think about the economic impact to PSX here isn't like a take or pay arrangement or maybe something else and then also why do you think we are seeing these offtake deals in SaaS, but not really in R&D.

So I'll take a shot at the first one so the Humber refinery entered into this deal to supply.

Stambul aviation fuel.

Two British Airways.

Small volume, we don't run a lot of renewable features.

Extends our reach there and so it's it's not large and material yet, but it really signals.

Yet in Europe .

With British Airways that we're going to expand that business as we expand.

Our ability to run used cooking oils, and other renewable feedstocks and number yes.

Yes, I think that maybe mark you may want to add onto this.

Talking about Humber, even once we get rodeo renewed.

A certain part of the yield that's going to be sustainable aviation fuel I think the challenge for US is how do we think about that yield how we push that yield structure to make more sustainable aviation fuel in the future and I think the big differences there is theres not the regulatory incentives therefore for SaaS, yet, we think they'll come but.

We also see airlines, making commitments and so there is a demand pull for <unk> out there that we will work to two.

Route to supply, but to shift that optimization wholesale away from renewable diesel intesa. If there has to be a financial incentive but it is sort of a co product at this point that we can make commitments on and the only differences in overseas at our Humber plants. The reason we were able to make that deal is because that scheme the European scheme as <unk>.

Different from the U S scheme, which treats renewable diesel renewable gasoline and renewable jet fuel. The same so that was why that deal was done there and thats why deals haven't been done in the United States, yet, but we expect that as part of the build back better plan that we will get some incentive and overtime, but wanted to get more incentive or airlines will make committee.

<unk> to pay more for.

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