Q1 2022 Phillips 66 Earnings Call
<unk> filings with that I'll turn the call over to Greg.
Okay, Jeff. Thanks, Good morning, everyone and thank you for joining us today.
First quarter, we had adjusted earnings of $595 million or $1 32 per share.
Our results were impacted by seasonally lower margins across our businesses and.
In March we saw substantially improved operating earnings.
<unk> March provided the majority of our first quarter earnings.
Low gasoline and distillate inventories coupled with strong demand will provide momentum as we head into the summer driving season.
We generated strong operating cash flow of $1 $1 billion during the first quarter and returned $404 million to shareholders in dividends.
In April we repaid $1 $45 billion of debt and earlier today, we announced that we will restart our share repurchases under our existing $2 5 billion authorization.
In addition, we remain committed to a secure competitive and growing dividend and plan to resume our cadence of annual dividend increases.
Earlier this month, we announced that Mark laser will become president and CEO Philip 66 effective July one.
Mark will lead a company that has a solid strategy strong leadership and outstanding employees. We're all confident that Mark will serve Phillips 66, our employees communities and shareholders as well as the right leader to position the company to thrive in the years ahead.
That I will turn the call over to Mark to provide additional comments.
Thank you Greg I am excited to embark on this new role building on the talents of our team and the strength of our assets as we continued to deliver shareholder value.
We remain focused on operating excellence and advancing our strategic initiatives, we're committed to improving our competitive position across our business segments to drive future performance in any market environment.
Business transformation efforts were initiated last year and a cross functional team is focused on opportunities to sustainably optimize our cost and organizational structure across the enterprise.
We're targeting a sustainable cost reduction of at least $700 million per year, which equates to about a $1 per barrel we plan to provide.
Provide regular updates on our efforts over the coming year.
In midstream, we completed the buy in of Phillips 66 partners and at the Sweeny hub, we expect <unk> to start up in the third quarter.
The total project cost for Frac four is expected to be approximately $525 million.
CP Chem is pursuing a portfolio of high return projects enhancing its asset base as well as optimizing its existing operations.
<unk> total capital budget for 2022 is $1 4 billion.
Of which $1 billion is for growth projects with an average expected return above 20%.
This includes growing its normal alpha olefins business with a second world scale unit to produce one hexane, a critical component and high performance polyethylene.
<unk> 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.
CP Chem continues to develop two world scale petrochemical facilities on the U S Gulf Coast and in Roswell fond Qatar.
Final investment decision for the U S. Gulf Coast project is expected this year.
We continue to progress rodeo renewed and expect to complete the final steps of the permitting process. This quarter completion of the conversion project is expected in early 2024.
Our data will initially have over 50000 barrels per day of renewable fuel production capacity. In addition, the conversion will reduce emissions from the facility. The total project cost is anticipated to be approximately $850 million.
Our emerging energy group continues to advance opportunities in renewable fuels batteries carbon capture and hydrogen.
In March our Humber refinery made its first delivery of sustainable aviation fuel in the U K under our supply agreement with British Airways.
Also during the quarter, we entered into an agreement with <unk> energy Europe to form a joint venture to develop up to 250 retail hydrogen refueling stations across Germany, Austria, and Denmark by 2026.
During the first quarter, we added 2050 targets to reduce scope, one and two greenhouse gas emissions intensity by 50% compared with 2019 levels.
The new target builds on our 2030 target announced last year.
Our targets reflect our commitment to sustainability, while meeting the world's energy needs today and in the future.
Before we review financial results, we'd like to recognize our employees commitment to operating excellence.
We are honored that our refining and chemicals businesses were recently recognized for the 2021 safety performance.
<unk> recognized three of our refineries, including Sweeny Billings and Bay away. The Sweeny refinery received the Distinguished Safety Award, which is the highest annual award the industry recognizes.
In chemicals CP Chem received two <unk> awards for its sites and Borger and Conroe, Texas.
Congratulations to all the people working at these facilities well done now.
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 quarter.
Adjusted earnings were $595 million or $1 32 per share.
The $158 million decrease in the fair value of our investment in <unk> reduced earnings per share by 27.
We generated $1 1 billion of operating cash flow, including a working capital use of $115 million.
We received distributions from equity affiliates of $585 million.
Capital spending for the quarter was $370 million, including $221 million for growth projects, we paid $404 million in dividends.
We ended the quarter with 481 million shares outstanding, including the 42 million shares issued for the <unk> merger.
Moving to slide five.
This slide highlights the change in adjusted results by segment from the fourth quarter to the first quarter.
During the period adjusted earnings decreased $703 million driven by lower results across all segments.
Slide six shows our midstream results first.
First quarter adjusted pretax income was $242 million, a decrease of $426 million from the previous quarter.
<unk> contributed adjusted pretax income of $278 million in line with the previous quarter.
NGL and other adjusted pre tax income was $91 million.
Compared with $138 million in the fourth quarter.
The decrease was primarily due to the impact of rising prices on inventory, partially offset by improved butane and propane trading results.
The fractionator at the Sweeny hub averaged a record 423000 barrels per day and the Freeport LPG export facility loaded 43 cargos in the first quarter.
Frac four is ahead of schedule and we expect startup in the third quarter.
DCP midstream adjusted pre tax income of $31 million was down $80 million from the previous quarter, mainly driven by unfavorable hedging impacts partially offset by lower operating costs.
The hedge loss recognized in the first quarter was approximately $50 million compared with a hedging gain of approximately $50 million in the fourth quarter.
Beginning this quarter, we are showing our investment in <unk> and its own sub segment to separate it from our core midstream businesses.
This investment is mark to market at the end of each reporting period.
The fair value of the investments, including foreign exchange impacts decreased $158 million in the first quarter compared with an increase of $146 million in the fourth quarter.
Our initial investment in <unk> of $150 million had a fair value of 363 million $62 million at the end of the first quarter.
Turning to chemicals on slide seven.
Chemicals first quarter adjusted pretax income of $396 million was down $28 million from the fourth quarter.
<unk> and <unk> adjusted pre tax income was $377 million.
The $28 million decrease from the previous quarter was primarily due to lower polyethylene margins as inventories normalized following supply disruptions last year.
This was partially offset by higher sales volumes.
Global <unk> utilization was 99% for the quarter.
Adjusted pretax income for <unk> was $32 million in.
In line with the previous quarter.
During the first quarter, we received $299 million in cash distributions from CP Chem.
Turning to refining on slide eight.
Refining first quarter adjusted pre tax income was $140 million down from $404 million in the fourth quarter.
The decrease was mainly due to lower realized margins as well as lower clean product volumes driven by plant maintenance.
Realized margins for the quarter decreased by 9% to $10 55 per barrel.
Favorable impacts from higher market cracks were more than offset by higher rent costs lower Gulf coast clean product realizations and secondary product margins as well as inventory impacts the.
The higher RIN costs were primarily due to the fourth quarter recognition of the reduction in the 2021 compliance year obligation of approximately $230 million.
Pre tax turnaround costs were $102 million.
Down from $106 million in the prior quarter.
Crude utilization was 89% in the first quarter and clean product yield was 84%.
Slide nine covers market capture.
The 321 market crack for the first quarter was $21 93 per barrel compared to $17 93 per barrel in the fourth quarter.
Realized margin was $10 55 per barrel and resulted in an overall market capture of 48%.
Market capture in the previous quarter was 65%.
Market capture is impacted by the configuration of our refineries a.
Our refineries are more heavily weighted towards distillate production then the market indicator.
The configuration impact was relatively flat quarter on quarter as lower clean product yield offset higher distillate cracks.
Losses from secondary products of $3 five per barrel or $1 17 per barrel higher than the previous quarter due to rising crude prices.
Our feedstock advantage of $1 <unk> per barrel improved by 83 per barrel from the prior quarter.
The other category reduced realized margins by $6 42 per barrel.
This category includes brands clean product realizations freight costs and inventory impacts.
Moving to marketing and specialties on slide 10.
Adjusted first quarter pretax income was $316 million compared with $499 million in the prior quarter.
Marketing and other decreased $199 million from the prior quarter.
This was primarily due to lower marketing margins, mainly resulting from rising spot prices as well as seasonally lower demand.
Refined product exports in the first quarter were 134000 barrels per day.
Specialties generated first quarter adjusted pretax income of $113 million up from $97 million in the prior quarter, mainly due to higher finished lubricant margins.
Slide 11 shows the change in cash during the first quarter.
We had another strong quarter for cash generation.
This was the fourth quarter in a row the cash flow from operations allowed us to return cash to shareholders invest in our business and strengthen the balance sheet.
We started the quarter with a $3 $1 billion cash balance.
Cash from operations was $1 1 billion, which covered $370 million of capital spend and $404 million for the dividend, while also increasing our cash balance by $188 million.
Our ending cash balance was $3 3 billion.
In early April we repaid $1 5 billion of maturing debt.
This concludes my review of the financial and operating results next I'll cover a few outlook items.
In chemicals, we expect the second quarter global <unk> utilization rate to be in the mid nineties.
In refining we expect the second quarter worldwide crude utilization rate to be in the low nineties and pre tax turnaround expenses to be between 230 and $250 million we.
We anticipate second quarter corporate and other costs to come in between $230 million to $250 million pretax 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 Star then one on your Touchtone phone.
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Okay.
Neil Matta from Goldman Sachs. Please go ahead your line is open.
Good morning team and Greg you will be missed and congratulations on your retirement and Mark.
Congratulations on the new role.
Thank you Neal Thanks Neal.
I wanted to pick up on the cost point that you talked about the business transformation can you put more meat on the bones around this point.
And help us quantify what the upside potentially could be.
Me either on a dollar a barrel basis or across the fleet.
And we started this initiative.
Last year, we are looking at the entire organization really it's it's more than just the cost reduction.
That's the primary focus but.
We want to focus on recurring cost reduction, we want that to be a run rate so that $700 million number. That's that's what we view as kind of a bare minimum that we have line of sight on.
And we are focused on transforming the organization to ensure that that cost reduction is sustainable and and we've got about 800 people.
Employees and contractors working on that we're looking at over 1000 initiatives. So it's broad it's deep we're looking at simplifying structure simplifying ways of working to ensure that that number sustainable so theres upside to it I don't know that we want to quantify any particular upside, but I guarantee you that we're relentlessly pursuing <unk>.
The opportunity across the organization.
And Mark is if that is not just in refining that.
That's across the organization.
Thats correct Neal.
Okay.
Alright, and then the follow up is around return of capital congratulations on being able to execute the share repurchase program again, just talk about your strategy around this.
Do you think about executing it going forward.
When do you feel like you should be in the market and so on.
Well I think I'll take a stab and then Kevin Mark can come in Neal I think as we think about capital allocation. We think it's important to get back to a regular cadence in terms of the dividend and increasing the dividend. So that point was made I think in the opening comments.
Certainly share repurchases.
We laid those down in 2020 as a result of the pandemic to preserve cash in.
I think it's just time to get back to that one of the great things I think that our opportunities. We have of this tailwind we see in our our base business and refining that.
We're going to have excess cash and I think that's going to give us the opportunity to increase the dividend by shares back pay down some more debt at the same time build some cash on the balance sheet.
But I would I would say we are as a team our board of directors were laser focused on improving total shareholder return for our company.
Yeah.
Thanks, guys.
Thanks Neil.
Phil Gresh from Jpmorgan. Please go ahead your line is open.
Good afternoon, Greg also wanted to say congratulations on a fantastic career.
We've always been cultural balance spokesman and visionary for the energy sector.
We will definitely be.
I think so.
Okay.
If I can follow up I guess.
Overall shareholder returns.
How do we think about like the pacing.
Are you ready to move back to the 60 40.
You've talked about.
Kevin I think you've talked about $12 billion gross debt target.
Is that right.
Are you still kind of eyeballing at this point and how much cash do you want to maintain.
On a regular basis. Thank you.
Yes, Neal so the $12 billion gross debt target puts us back to where we were before the pandemic.
And while that target is still out there we feel that we are now.
Pace to where we've taken care of $3 billion of the $4 billion. We added cash generation is strong the outlook at least in the near term as is very optimistic and so we feel comfortable that we can get back into share repurchases, while still meaning some maintaining some line of sight to getting back to a $12 billion or thereabouts level on the <unk>.
Balance sheet I'll, just remind you that as we look at our debt maturity profile, we have a lot of flexibility over the next year or 12 year to two years with maturities and actually each of the next four years. The right. There. So we're going to have a lot of optionality around that I will say in theory, if debt reduction is part of.
The use of excess cash flow then it becomes another component in the 60 40, and so we're going to be we will have some balance between reinvesting in the business through the capital program, which we've said about $2 billion in aggregate for the next couple of years, returning funds to shareholders through the.
Dividends were back in share repurchases, but also working on the balance sheet with a continued some form of cadence to debt reduction and increased cash as you as you as you highlighted.
Look over the last year and our quarterly cash balance I think has increased every quarter on quarter and trend will not necessarily continue.
Forever, we do feel comfortable that having a cash balance that we used to say so the one to $1 5 billion.
So at a minimum cash level, we're probably looking more at a two to three level that we feel more comfortable with on an ongoing basis and it's not that we need that much cash really just provides us more flexibility.
I think maybe what's also been let them set here. This morning is we've kind of given guidance about being very disciplined around our capital investments at our company and that we've kind of guided to $2 billion or less for this year and next year and I would say that guidance is still on the table. This morning.
Okay, great. Thank you.
Follow up question on refining.
<unk>.
Interesting comment.
The money was made in March it makes sense.
Relative to outlet peers have said.
Okay.
You do have some higher maintenance I guess in the second quarter.
As you look at the full year.
Are you still sticking with the $8 million to $900 million of maintenance and.
If you could just elaborate a bit on the central corridor performance.
There was a loss in the quarter. Thank you.
Okay.
Take a shot at it I think theres three questions here.
So I think.
We had.
It primarily maintenance activity in the month of May.
March and really the back half of March as the weather warmed up in the north of us to get into turnaround mode.
Again, primarily in the Central corridor. So we were we entered into that we will have.
Most of our turnaround activity wrapped up by mid May and certainly all of our conversion units will be back online.
Middle of the month, it really positions US well then to run very strong throughout the summer driving season, and we won't come back to any significant turnaround activity until until after labor day.
I think on total activity for the year, we're really looking at.
We've executed our first half plan.
For the most part has gone really according to what we plan second half we continue to look at primarily catalyst type change out turnarounds and do we have catalyst life left and we pushed some of those turnarounds into next year. We've got some opportunity there I think in the back half of the year to squeak some of those out into next spring or maybe even next fall. So we are.
Constantly trying to to re optimize.
Around all of that the other thing I would say about the central corridor results is we had a pretty good headwind.
In the central corridor with our lagged Canadian crude buying programs. So that that was a significant impact on.
On a timing basis to what we saw as the results in the central corridor and it all basically lands there for us.
In our system, so that's a timing issue.
It has a lot to do with how quickly the crude ran up particularly in the back couple of weeks of the quarter, we will get that back over time.
As crude prices come off as they seem to always do.
And then we'll see it come back.
Yeah and just.
Phil in terms of the impact of that in the Central corridor, it's about a $3 per barrel on the realized.
Margin impact through that crude timing effect.
Okay, great. Thank you.
Doug Leggate from Bank of America. Please go ahead with your question. Your line is open.
Thank you everyone, Greg Needless to say all signs and.
Congratulations to both you guys and I hope, we get I'm trying to encourage Jeff to do a retirement dinner for the sell side, Greg So hopefully.
No.
You can make.
As long as you are buying Doug.
We'll move mountains to be there, but thanks for all your insights and help over the years Mark look forward to seeing how you steer the company.
I've got two one big picture question also ask I wanted to ask a bit of a philosophical question.
Perhaps for Bob could you guys first of all.
On the industry level look we've obviously I think you're all familiar with our opinion and where we think we stand right now, but you have Humber.
The lateral you have insights to what's happening in Europe and obviously.
You are also responsible for shutting down too.
The facilities in the us by the time, we get to the end of next year. So when you look at the structural shifts that we appear to be going through right now.
I'm just curious what youre thinking in terms of are we seeing the us move to a whole new level tend to mid cycle.
If you like.
Two international did I say European peers, and obviously homebrew gives you some insights to that.
Yes, Doug this is Bob I'll take a shot and others.
Come in or over the top I think the last time, we talked I think it was at the beginning of the year call on the Golden age of refining we're talking about the structural differences.
Refining.
Yes.
And at the time right gas prices were just they were skyrocketing in Europe , and we had insight Humber Humber being by far the strongest refiner in the U K in a very strong refiner in Europe in particular, and one that doesn't use a lot of fuel gas drivers, we're structurally advantaged here with.
Orange coking capacity and generating most of our own needs but.
But it gave us a view and at the time Humber was just kind of in a breakeven position. So.
We talked about the fact that the European refiners had to be under water and that the market would have to move to incent theres marginal refiners to keep running.
Get back to making.
Clean diesel and in fact, that's exactly what we've seen happen right diesel cracks have come up to <unk> <unk> returned to good profitability in the whole market works, sometimes it takes a while for that structure to to kind of get itself right, but again the market work I don't really see this changing anytime right gas prices are up in the U S, but certainly not anywhere near what we're seeing.
Seeing yet in Europe , and it really puts us at a structural advantage if you add in the fact that.
Europe is basically hydro cracker base. They use a lot of hydrogen you got a biologic fuel gas to make hydrogen for the most part it does give us a cost advantage and one that should trend.
All the way back through improved kind of mid cycle margins for U S refining versus the rest of the western hemisphere.
Brian If you got anything you want to add I would just add that in the UK, where we have our large refinery gas prices have come off quite a bit as night settled at $16 in F&B to you versus most of Europe , which is still over $30, but our guesstimate is about 8% to $9 benefit through the U S versus.
The EU given the price of natural gas here in the price of natural gas and you're currently in.
Probably an advantage also on crude feedstock with light sweet crudes, having been traded up in Europe relative to the U S.
Of course, we'll both answer this for everyone listening.
Your insights are extremely valuable as we prepare to talk about thoughts. So thank you for that so.
So guys my philosophical thoughts on Greg and Mark I think when.
When we look back over the last five years the volatility of the challenges that you guys. So Greg in particular have had to navigate.
Your strategy, obviously moved to be more defensive if I say diversify from refining.
And obviously, if we've got this reset going forward youre, perhaps a little less exposed than some of your peers. So when we looked at your relative to the performance of about five year period.
It seems to us you've behaved more like an integrated refiners so I'm.
I'm curious mark as you look forward, how do you think about differentiating the investment case.
Relative to the let's see pure play defining a <unk> group as opposed to the more.
I guess <unk> kind of sure.
By type of situation, where might start to see with some of the majors. How do you think about the relative investment case and I'll leave it there. Thank you.
Yes, I think that.
Doug the relative investment case really revolves around a couple of different things.
First of all we want to make sure that we take care of our refineries that we operate them well they are going to.
Referenced the North American Golden age, we want to make sure that we are able to be a full participant in that.
But then as we generate cash what do we do that I think theres number of things, we want to do around refining to position our refinery for the long term so to drive them more towards the refinery of the future maybe producing more petrochemicals. We will continue to look for growth opportunities through CP Chem, they've got two mega projects.
<unk> got several mid sized projects and then they've got a lot of debottleneck that build on their advantage. So they've got good high return opportunities to.
To drive down the refining side of things and then we continue to look for where we're going to play and emerging energies and we see some real opportunities to leverage our existing assets and to leverage our technologies to to create sustainable value in emerging energy. So think about it as and then and then theres midst.
That we've got opportunities in midstream to both optimize our midstream asset base as well as drive some consolidation there. So so we've got that leg as well. So we'll continue to drive down those.
Those segments, each a little unique but each delivering value in its own way.
Understood. Thanks, a lot posing congratulations again Greg.
Thanks, Doug.
Roger read from Wells Fargo. Please go ahead your line is open.
Okay. Thank you and good morning, and yes, my congratulations to you Greg in CE, Mark forgetting the takeover and step into a big pair of shoes to fill.
They are big indeed, thanks Ryan.
Just to jump on in here.
I guess the first thing if I look at your presentation, I know I'm going to make Jeff's core arm a little bit here, but.
Yes.
Well the amount that you can earn in terms of guidance on diesel margins, Greg This would be near and Dear to your heart you've talked so many times about Phillips.
It really benefits from diesel or the distillate crack.
Im not even going to throw the numbers out there if I were to calculate off of New York Harbor diesel crack right now but.
What is the right way for us to think about what Philips can do in this environment.
I know you've got turnarounds that everybody always has turnaround and just how we should think about some of that guidance and some of the capture possibilities.
Refining side.
Yes.
I think.
The focus is going to be an operating well.
And being in the market and able to take advantage of the margins that are that are available I think.
We've talked about.
Some of the exposures that we have on diesel on heavy sour deaths on.
Premium Coke.
And all of those environments.
Look favorable as we look into the summer months I think there is there are some moving parts. We were hindered this quarter on timing issues with in the Gulf Coast.
On product timing and in the central corridor on on crude purchasing and timing issues. There. So I think those will normalize out.
And we will see that that profitability show up in later periods.
Okay.
And I guess just to clarify is the.
Should we presume that the broad guidance is still pretty reasonable even at these levels. There is not some sort of deterioration we should think about in capture as we go forward.
I don't think we see that I mean, Brian can speak to what we're seeing in the current market again, it's hard to predict net income, but I watch cash and.
We've seen just cash is strengthening as we can.
Kind of in the back half of March and on into April and so I mean that to me that suggests a capture rates are definitely are improved.
Brian I'll, let you.
I would add that as Jeff said timing is an issue. So prices continue to increase from here it will be a lag in terms of the amount of money that we can capture but we will capture that over time, but in terms of the crack margins.
Absolutely in a position to capture those we do everyday.
I think one thing I would emphasize Roger just the amount of volatility that we're seeing on a daily basis with.
Crude trading in a five to $10 a barrel range on a daily basis and products, especially diesel trading and wide range on a daily basis that average crack you see at the end of the day there was a lot done.
Across that period of time and so.
I think when we see this kind of volatility the indicators are not going to be as accurate as they typically are when volatility is not so high.
That's fair and Theres a lot of room for error, given where cracks are right now.
One follow up question.
$700 million cost savings goal.
Does that fit into what was laid out in the fall of 19, and I know a lot of things happened since the fall 19, but how should we think about that $700 million within the overall framework that we laid out at that point.
Roger This is this is going to build on what we did around advantage 66, there were a lot of things done there a lot of value captured some things removed out into the future. Some things were captured in one off fashion a lot of digital innovation was introduced and we're going to leverage those innovations to simplify what we do to drive.
<unk> sees in the organization. So this is additive to that.
So should we think about it is just a logical next step in the process, it's not irrigated as opposed to like something brand new or radically different.
Well this yes.
It's building on that it's probably getting more into the organization structure as well and how we can capture efficiencies and transform how we drive our business, we're not going to change what we do but how we do it I think will become will become more efficient.
I think it does build on it and is additive to that.
Yes, theres, a substantial incremental effort going in place now.
No I understand I appreciate it thank you.
Ryan Todd from Piper Sandler. Please go ahead your line is open.
Great. Thanks.
Maybe a follow up on chemicals from <unk>.
Some of your comments earlier.
First quarter was a very strong quarter, we came into this year and I think youre messaging had been expecting margins to trend back towards mid cycle levels from from the peaks that we saw last year.
But it seems like they may have affected a little bit higher lately can you talk about how you see the market trending from here.
And how market dynamics in crude and natural gas pricing are driving relative advantages in your portfolio versus the European and Asian plants.
Yes, Thanks, Ryan I think that Youre closing comment really touched on it but since since the last call with crude moving up and ethane to accrued advantage, becoming enhanced that's driven margins wider for CP Chem and the entire industry and we are well positioned to take advantage of ethane.
Here in the U S and the middle East So that's there and I think that that's.
That's going to persist youre going to see the ethane extraction value.
Given to a point to attract more ethane out as more as more consumption comes online.
That consumption is going to provide a headwind and new capacity as we as we go into seasonally stronger margins. So you kind of see those two things balancing off each other so we see we see kind of.
Kind of a status quo in those margins going going forward into the next quarter.
Great. Thanks.
Helpful. And then maybe can you talk about.
And any update that you have on timing of permits at rodeo.
The next steps in the process, there and maybe what you've seen in terms of the operating environment for the for the renewable diesel volumes that <unk> been able to.
So far year to date.
Yes, Bob.
The permitting process is really moving forward quite well and as we expected.
We've had conditional approval from the.
The planning Commission in Contra Costa County, as usual in that part of the World. It was appealed it goes to the accounting board of Supervisors, who are actually set a special meeting to address our permit on made the third.
Hi.
Coming out of that we would expect the board of Supervisors to grant the permit and allow us to start work. Shortly after after that everything we can see we've got good support in that community realize that.
While there is great driving California to have alternative.
Vehicles and everything else in the marketplace that renewable diesel is a needed fuel now and the quicker we can get going.
The quicker, we can get the unit up and running and starting to provide dose fuels to the California driving public. So we expect that permit to come here just very very shortly.
The unit $2 50 to renewables, we've been running there we continue to see profitability on that unit.
And really what we've come to understand is that the price of soybean oil the price of California diesel the price of low carbon fuel standard credits RIN cap and trade. They all seem to sort of work in concert to incentives to continue to make renewable diesel and put it in the marketplace. So we're very encouraged by what we see there kind of on.
And the commercial side and were.
Very happy with what we've learned on the operating side about how to run.
Bean oil type feedstocks through.
On the units.
We're really looking forward to the next phase and getting rodeo.
<unk> permitted.
Next week, and then get gone and worked through for startup in early 'twenty four.
I would add we are able to get all the volume out of unit $2 50 to the end consumer through our retail and wholesale network in California.
That's great Thanks, and congratulations Greg on the retirement and Mark on the new position, it's been it's been a pleasure with Walgreens.
Thanks.
Manav Gupta with credit Suisse. Please go ahead your line is open.
Oh.
Strategy question here.
A long time.
<unk> was a growth vehicle.
For PSX to grow earnings now you've brought in <unk>, how should we think about midstream growth here is it basically going to be a small growth or are you actually come across a really good opportunity, which is human capital intensive than you would seem to be willing to invest capital.
And grow the midstream business, even though <unk> xb doesn't exist. So help us understand now where does MS teams sit in terms of your overall growth strategy going ahead.
This is Tom Thanks for the question Hey.
When you think about it with the rollout that simplification helps us both commercially as well as takes out some complexities in dealing with reporting in what we do and it takes out some cost in that process.
You roll it out then our strategy really hasn't changed fundamentally.
Fundamentally yes, we were on a very fast growth trajectory a lot of opportunities, we built out the MLP and built out our midstream business, but as we've said before.
We've slowed that down because their pipes appear to be in place infrastructure as well caught up so in our world. We're looking at optimization and how we can best find incremental high return opportunities and optimize our set as well as build out our further NGL integration. So if the right opportunity.
Comes up it's going to compete like all of our projects do and if it meets the right threshold is the right thing to do overall PSX view it would be considered but outside of that we're really optimizing that can't at this point in time.
And then the second is more on the growing the energy transition business. So I think the first part of the question is obviously you have a very good project and ROE deal.
Would you like to do it all alone because some of what Youre seeing out there is people are bringing in partners capital and other expertise. So the first part of the question is would.
Would you like to keep it the renewable diesel project.
You said, if all you're open to our partners and second part is besides this bigger project of ROE deal what else can PSX dual boot.
Dana a few franchise and as you transition business. Thank you.
Well I would say with rodeo we haven't.
Funding through our capital program. This year next so we don't need a partner in that way.
Some folks have gotten a partner because they need a commercial expertise we have a very strong commercial organization, we've been buying used cooking oil a long time as you know we have a deal with the soybean producer.
We are running soybean canola oil distiller corn oil in the Rodeo unit $2 50, we met with tailored producers.
Leads to buy that tallo as well. So we are in a very good position our marketing business is building out our portfolio. So we can sell the renewable diesel to the end users. So we don't really need the expertise that others might need and we don't need the funding.
As far as other other opportunities.
Sure.
Doing things at our Humber refinery today, the rules are a little different in the U K than they are in the U S. So they can co process.
Renewable feedstocks through through their through their facility and they are producing sustainable aviation fuel today that they're supplying to British Airways and so there are British Airways planes flying today using sustainable aviation fuel from from Humber. We can also if the economics drive it we can we can produce sustainable.
Aviation fuel at at Rodeo, when we have the facility fully on stream and so it's going to be what are the economic drivers. We're looking at other opportunities other technical routes to sustainable aviation fuel they are still under development, but ultimately we think that's sustainable aviation fuel has.
<unk> has legs, it's difficult to fly planes with things other than hydrocarbons and and we've had a number of airlines the number of jet manufacturers approach us and helping to look for solutions for their future. So we see both renewable diesel and sustainable aviation fuel as great opportunities.
Thank you.
Theresa Chen from Barclays. Please go ahead your line is open.
Hi, Thanks for taking my questions and want to offer my congratulations to Greg as well.
It might go up and your Handicap go down Greg.
That makes sense.
So mark on the new role.
I wanted to revisit the discussion on Ken.
Because your margin came in a lot stronger than your indicator and sensitivity would have suggested.
How much of this is owed to the portion of your sales that are contracted by nature versus sold on a spot basis and if you can can you help us break down like the portion of each.
Run rate basis.
Yes, I think that in that.
And that universe, there's the contractual commitments are.
Or a little bit fuzzier than you might be used to in other environments. So I don't know that there is that they are seeing any margin capture do that are <unk> margins contracted substantially less than the IHS marker and I think that that has to do with product mix more than anything.
<unk> the high density.
That is their primary driver.
Yes.
It came up a little slower than the marker now is coming off slower than the marker. So it's really.
Driven by that and perhaps some discipline in how they're managing the business, but but I don't know that there is a great driver and their contractual position.
That you can attribute that to.
Got it.
And on the Opex reduction side, the $700 million number just to clarify does that.
Compared to the state of Opex, where you had lines within your system or is that pro forma lines shut down.
That is in addition to the alliance shutdown.
Thank you.
Matthew Blair from Tpa, which please go ahead your line is open.
Hey, Thanks for taking my questions, Greg Congrats on a great run and Mark Congrats on the new role here.
Mark My question is on the <unk> side I think in the past you've talked about opportunities in hydrogen, but more so on the refining side and so I was wondering if with CP Chem has any hydrogen opportunities then and if so could you maybe flesh those out.
But <unk> really is a.
Technically a producer of hydrogen out of the large steam crackers they've got relationships.
Often that allow them to monetize that.
It has to be cleaned up but or it's some of it is consumed as fuel in the in the facilities. So there probably is an opportunity for CP chem to grow that presence as they grow their cracking capabilities.
Okay and then.
Could you talk about the general trend in marketing margins. So far in the second quarter has there been any any sort of recovery compared to the low numbers in Q1.
Generally marketing margins are better in the second quarter seasonality.
The headwind we have too much crude marketing margins now are they are rising prices keep margins margins don't move as quickly as the rising prices in the marketplace. So we will see we would expect.
To do slightly better next next quarter, but we will see depending on where where the prices of products go.
Good thanks.
Jason Feldman from Cowen. Please go ahead your line is open.
Hey, Thanks for taking my questions and congrats Greg on your retirement and Mark.
On the new role.
I have two.
The first there has been some conflicting comments between what the Doe is putting out and what some of your peers are saying in terms of demand, particularly on the gasoline side and so I'm wondering if you're seeing.
Demand destruction in your <unk>.
System consistent with what the Doe has been showing weekly RF demand is holding up.
And then my second question is kind of I guess, a broader longer term refining question.
Greg you've probably been more bearish than your peers on the refining margin outlook in the past. This is obviously a pretty.
<unk> strong margin environment that we're in right now.
Im just wondering how you expect this all to play out over time and if these higher margins are are here for a good while our RF youll see some maybe.
The normalization.
And what would drive that thanks.
So I'll take a stab and then Brian can kind of add so I mean, we had the luxury of a diversified portfolio.
The opportunity to be bullish about other parts of our business and for the most part I think we're probably right on those calls and you think about.
Started 12 was $450 million of EBITDA midstream and were $2 to $2 $3 billion. Today, So really kind of the strategy of growing our more highly valued business in terms of multiple sum of the parts et cetera.
I would tell you, though that as we're coming into this year on the refining business, where probably it's constructive on refining. So we've been a long time I think thats a combination of the capacity that we've seen shut down over the last 24 months.
The capacity new builds has either been delayed or slowed down thats coming on where we see global inventories today, and where we see global demand. So I think that whole combination together really puts us.
And what I think is going to be mid cycle or a better environment for refining.
For the next 12 to 24 month time, and Brian you can comment on what we're seeing in real time by Jason It's Brian So in terms of demand in the U S. We're seeing everywhere, but on the west coast demand back to 2019 levels on the West coast that got a COVID-19 a little later than the rest of the country and prices have been particularly high so we've seen a bit of demand trimming.
We're a little bit lower but.
Seeing very good demand on the distillate side demand over 2019 globally. So we're pretty happy there as well I think our inventories are really the driver of gasoline inventories are at five year lows and distillate inventories are the lowest they've been since may of 2008 in pad. One is the lowest it's been since April of 1996, so with these low.
Tories, we would expect to see.
Strong demand going forward.
Great. Thanks for the answers.
Yeah.
Paul Cheng from Scotiabank. Please go ahead your line is open.
Yes.
Hi.
Good morning <unk>.
Great.
Congratulation courtyard retirement fund 10 year lives.
And Mark congratulations on the new well.
Going forward.
Two questions I think.
<unk> witnessed short one at the beginning of the year I think.
The company currently.
10, a lot of expands accordingly.
Another $100 million.
Based on that comment.
Yes.
A good estimate or that number has been changed because it doesn't look like you had mentioned there's a lot of major tunnel one small cap from this change and the first half of the year the spending only about saying Colgate 300.
And $30 million or 350 million title range.
So wanted to see that how.
Certainly looked at overall spending that fall from the tenant allowance standpoint.
Secondly.
If the cum beneath the energy transition happening and the Ethernet Saturday at some point.
In your midstream business transportation link.
A link directly to the to the gasoline and diesel demand in this country and so from that standpoint.
Paul Paul Ma.
Longer term over the next call.
Yes.
The company's stock to deemphasize or may be that scaled back in that segment.
And trying to we put session and.
The capital into some <unk>.
I'll take a shot at the turnaround again.
We talked we're finishing up.
Turnaround program that we had for the first half and we've guided towards.
About $340 million of spend in the first part of this year.
During the summer during gasoline season, right, we're prepared to run hard and so.
We won't have any turnarounds again until the fall we continue to look at all of our turnarounds that are in the back half of the year catalyst life and can we push those out we expect to push some of those turnarounds out we're not ready to update again, but I think you can expect that we will.
We will spend less money on turnarounds than we originally guided to as we are able to slide some of those out of the back half of 'twenty two into 'twenty three.
Paul on the on the energy transition impact on the midstream assets.
We've got a diversity of of pipelines and our midstream business.
You go from the NGL side, which we think is just tremendous.
Tremendous upside potential for the long term, primarily delivering to petrochemical facilities and exports and.
Things like propane and butane as well and so we see.
Very very long horizon for those.
Those pipes, the crude pipes, bringing crude into our refineries and then taking a refined clean products out of those refineries.
Those will evolve with one of our refineries produce and we believe that liquid hydrocarbons are going to be around for a long time, but we're going to look at ways to lower the carbon intensity of the products lower carbon intensity.
Of the operations.
There may be opportunities to repurpose those assets for other molecules that will emerge from the energy transition. So we're always looking at how we can maximize the value of our midstream assets repurpose them, we do that today and we will do that in the future as well.
Yeah.
Chris <unk> with Citi. Your line is open. Please go ahead.
Hi, Thanks for taking the question and I'd like to Echo Congratulations Greg it's been great getting to know you and hearing your peer.
Your outlook and all of your thoughts on the energy industry at large and Mark look forward to working with you more.
Gratulation.
I'll keep it to one just on chemicals and this is a bit bigger picture.
You talked about incremental projects that are north of 20% return on invested capital and looking back the last time like several years ago. When there was an announced expansion when you have projects in the queue.
The higher margin environment and targeted pretty good returns and since then what happened is we all know the margin environment kind of compressed, but you were still able to hit targets you were at high teens to low <unk>.
Combination of expenses volume increases.
I'm curious because there seems to be in our history, sometimes it doesn't repeat itself, but it sometimes rhymes.
We're coming out of a high margin and drive it in chemicals, right now and it seems to be settling slowly.
So just wondering as you look ahead with the cost takeout, where the margin outlook is.
Volumes.
Can you kind of triangulate you've done it before obviously historically shown up and Youre able to hit those return targets, but as you look forward now just could you help sort of piece together what are the levers to sort of ensure that that's sort of the lower end of the return range we could be.
Like you did I guess post 2014, and I'll leave it with that.
Yes, it's a great question <unk> got a long history of executing Mega projects.
Have really never tried to time them to any particular market conditions. They focus on the fundamentals for long term growth.
Ethylene demand.
Long term growth in polyethylene demand both both at a multiple of GDP as we go forward and so that's what drives the opportunities and then we think about that growth.
Those assets, where we can access to low cost feedstocks and today and for the foreseeable future. We see that as ethane. That's why you see us doing something in the U S around the U S. Gulf Coast II project Thats why you see us looking at another project in Qatar to take advantage of.
A large baseload infrastructure and advantaged feedstocks that we can tap into and I think thats what delivers the long term value of staying focused on those fundamentals and not getting caught up in any short term dislocations.
Then having an outstanding AR.
Ability to take those products into the marketplace and capture value consistently around around the planet.
Thank you for the answer I appreciate that.
We have reached the end of todays call ill now turn the call back over to Jeff.
Thank you Erica and thank all of you for your interest in Phillips 66, if you have further questions. Please contact Shannon or me. Thank you.
Thank you ladies and gentlemen. This concludes today's conference you may now disconnect.
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Yes.
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