Q2 2022 Phillips 66 Earnings Call
San Francisco refinery, where he oversaw the rodeo renewed project.
Our second quarter results reflect the strong market environment, driven by a tight global supply and demand balance.
We're focused on reliably providing critical energy products, including transportation fuels to meet demand.
We've maintained strong operations since successfully completing our spring turnaround activities early in the second quarter.
Even with global refineries running near Max capacities gasoline and distillate inventories remain low supporting elevated refining margins.
In the second quarter, we had adjusted earnings of $3 3 billion or.
Our $6 77 per share.
We generated $1 8 billion in operating cash flow.
Working capital operating cash flow was $3 6 billion.
We returned $533 million to our shareholders through dividends and share repurchases.
We resumed our share repurchase program in the second quarter and remain committed to a secure competitive and growing dividend.
In May we raised our dividend, 5%, 5% to <unk> 97 per share we've increased the dividend 11 times since our inception in 2012, resulting in an 18% compound annual growth rate.
Our strategy remains consistent supported by a strong foundation of operating excellence and a high performing organization.
We're focused on strategic return enhancing growth investments in midstream chemicals, and emerging energy, while selectively investing to increase returns in refining and marketing and specialties.
We continue to target a long term capital allocation framework of 60% reinvestment in the business and 40% cash return to shareholders in the form of dividends and share repurchases.
We've been successful in reducing pandemic debt, including paying down $1 5 billion of debt during the second quarter and.
In addition, we believe higher cash levels are prudent given the current uncertain economic environment.
We're executing an enterprise wide business transformation to achieve sustained annual cost savings of at least $700 million.
David referred senior Vice President and Chief Transformation Officer has been leading the effort across our organization with engagement from over 1000 employees.
Initiatives are being implemented to position us for the future and ensure we remain competitive in any economic scenario.
We look forward to sharing more details on our business transformation at our Investor day in November .
During the quarter, we continued to focus on operating excellence and advancing our strategic initiatives.
In midstream at the Sweeny hub, we expect <unk> to start up late this quarter.
The total project cost per 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.
As for growth projects with average expected returns above 20%.
This includes growing its normal alpha olefins business with a second world scale unit to produce one hexane a critical a critical component of high performance polyethylene.
Construction is underway on the 586 million pounds per year unit, located and old Ocean, Texas.
<unk> is also building a new propylene splitter at Cedar Bayou facility, which will expand its capacity by 1 billion pounds per year.
Both the <unk> and propylene splitter projects are expected to startup in the second half of 2023.
Recently, <unk> announced plans to double its polyethylene capacity in Belgium to approximately 265 million pounds per year with startup expected in 2024.
CP Chem continues to develop two world scale petrochemical facilities on the U S Gulf Coast and in Rosslyn <unk> Katana, a final investment decision for the U S. Gulf Coast project is expected this year.
In refining we made a final investment decision to move forward with our rodeo renewed project to convert our San Francisco refinery into one of the world's largest renewable fuels facilities.
The project is expected to cost approximately $850 million and began commercial operations in the first quarter of 2024.
One completion rodeo will have over 50000 barrels per day of renewable fuels production capacity.
In addition, the conversion is projected to reduce lifestyle lifecycle carbon emissions by approximately 65% or the equivalent of permanently removing $1 4 million cars from California roads.
In July we formed jet <unk> energy, Austria, a 50 50 joint venture with <unk> energy Europe to develop up to 250 retail hydrogen refueling stations across Germany, Austria, and Denmark by 2026.
Recently, we published our 2022 sustainability report, providing a comprehensive look at our actions to both prepare Phillips 66 to thrive in the energy future.
And deliver on our commitment to being one of the industry's best operators.
The report includes a detailed analysis of the company's climate related risks and opportunities as well as performance data on various environmental social and governance matters.
Before we review the financial results, we'd like to recognize our employees commitment to operating excellence.
We're honored that our midstream business was awarded the American Petroleum institutes.
Stinker pipeline Safety award for large operators for the second consecutive year.
In addition, midstream received the platinum Safety award in the large company Division from the International liquid terminals Association <unk>.
Congratulations to all the people working at these facilities well done now I will turn the call over to Kevin to review the financial results. Thank.
Thank you Mark and Hello, everyone.
Starting with an overview on slide four we summarize our financial results for the second quarter.
Adjusted earnings were $3 3 billion.
Our $6 77 per share.
The $240 million decrease in the fair value of our investment in <unk> reduced earnings per share by 38.
We generated $1 8 billion of operating cash flow, including a working capital use of $1 8 billion.
Cash distributions from equity affiliates were $527 million.
Capital spending for the quarter was $376 million, including $167 million for growth projects.
We returned $533 million to shareholders through $406 million of dividends and $66 million of share repurchases.
We ended the quarter with 481 million shares outstanding.
Moving to slide five.
This slide highlights the change in adjusted results by segment from the first quarter to the second quarter. During the period adjusted earnings increased $2 7 billion with a substantial improvement in refining.
Slide six shows our midstream results.
Second quarter, adjusted pre tax income was $292 million compared with $242 million in the previous quarter.
Transportation contributed adjusted pre tax income of $250 million down $28 million from the prior quarter.
The decrease was mainly due to lower equity earnings driven by reduced Bakken crude volumes associated with winter storm impacts.
NGL and other adjusted pre tax income was $152 million compared with $91 million in the first quarter.
The increase was primarily due to improved margins and volumes at the sweeny hub.
The margin improvement includes unfavorable inventory impacts in the previous quarter.
In addition, we had higher sand hills pipeline equity earnings in the second quarter.
The fraction acres at the Sweeny hub averaged a record 441000 barrels per day and the Freeport LPG export facility loaded 240000 barrels per day in the second quarter.
DCP midstream adjusted pre tax income of $130 million was up $99 million from the previous quarter, mainly driven by improved gathering and processing results and hedging impacts.
Hedge gain recognized in the second quarter was approximately $30 million.
Compared with a hedge loss of approximately $50 million in the first quarter.
On the <unk> investment as Mark to market at the end of each reporting period.
A fair value of the investment, including foreign exchange impacts decreased $240 million in the second quarter compared to a decrease of $158 million in the first quarter.
Turning to chemicals on slide seven.
Chemicals second quarter, adjusted pre tax income of $273 million was down $123 million from the prior quarter.
<unk> and <unk> adjusted pre tax income was $216 million.
$161 million decrease from the previous quarter was primarily due to lower margins, resulting from higher feedstock costs as well as increased utility and turnaround costs.
Global <unk> utilization was 94% for the quarter.
Adjusted pre tax income for CNS was $59 million up.
Up $27 million from the prior quarter.
The increase was mainly due to improved margins on benzene and specialty chemicals as well as improved styrene results.
The $11 million improvement in other mainly reflects lower employee related expenses and higher capitalized interest related to growth projects.
During the second quarter, we received $260 million in cash distributions from CP Chem.
Turning to refining on slide eight.
Refining second quarter adjusted pretax income was $3 1 billion.
Up from $140 million in the first quarter.
The improvement was primarily due to higher realized margins across all regions.
We like margins increased by 168% to $28 31 per barrel.
Pre tax turnaround costs were $223 million up from $102 million in the prior quarter.
Crude utilization was 90% in the second quarter and clean product yield was 83%.
Slide nine covers market capture.
Our composite global 321 market crack for the second quarter was $46 72 per barrel compared to $21 93 per barrel in the first quarter.
We like the margin was $28 31 per barrel and resulted in an overall market capture of 61%.
Market capture in the previous quarter was 48%.
Market capture is impacted by the configuration of our refineries.
We have a higher distillate yield and a lower gasoline yield in the market indicator.
During the quarter the distillate crack was $61 38 per GAAP barrel and the gasoline crack was $39 52 per barrel.
Configuration impact as a percentage of the market crack with similar to first quarter.
Losses from secondary products of $3 <unk> per barrel were in line with the prior quarter.
Our feedstock loss of $1 46 per barrel declined $2 47 per barrel from the previous quarter due to narrowing Canadian crude differentials.
The other category reduced realized margins by $7 48 per barrel. This category includes remains clean product realizations freight costs and inventory impacts.
Moving to marketing and specialties on slide 10.
<unk> second quarter pretax income was $765 million.
Compared with $316 million in the prior quarter.
Marketing and other increased $453 million from the first quarter.
This was primarily due to higher realized fuel margins, including inventory impacts.
Refined product exports in the second quarter were 153000 barrels per day.
Specialties generated second quarter, adjusted pre tax income of $109 million.
In line with the previous quarter.
Slide 11 shows the change in cash during the second quarter we.
We started the quarter with a $3 3 billion cash balance.
Cash from operations was $3 6 billion, excluding working capital.
There was a working capital use of $1 8 billion.
Mainly reflecting an increase in accounts receivable due to higher product prices and timing of sales.
We repaid $1 5 billion of debt lowering our net debt to capital ratio to below 30%. The lowest it has been since the fourth quarter of 2019.
In addition, we funded $376 million of capital spending and returned $533 million to shareholders, our ending cash balance was $2 8 billion.
This concludes my review of the financial and operating results next I'll cover a few outlook items in chemicals, we expect the third quarter of global <unk> utilization rate to be in the mid nineties.
In refining we expect the third quarter worldwide crude utilization rate to be in the low to mid <unk> and pre tax turnaround expenses to be between 260 and $290 million we.
We expect full year pre tax turnaround expenses to be at the lower end of our $800 million to $900 million guidance.
We anticipate third quarter corporate and other costs to come in between 210 and $230 million pretax.
Now we will open the line for questions.
Thank you.
We'll now begin the question and answer session.
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Yes.
Neil Mehta from Goldman Sachs. Please go ahead your line is open.
Yes, good morning team.
To kick off a key mark on your perspective, as the new CEO and congratulations.
Again on the role and one of the areas that you've talked about in the past that you think garrison.
Opportunity gap around earnings is to improve the profitability.
The refining segment and some of that came through this quarter for sure. So I just would love to hear how you think youre seeing the business transformation what are the things that youre doing strategically on the ground and how should we as an investment community as evaluate that progress.
Thank you Neal and that's a great question and I appreciate that there is a number of dimensions that we're looking at that you mentioned our business transformation at a high level. We've mentioned, we're targeting over $700 million in expense reduction and we are quite confident in that number there is probably a little upside there but.
We're transfer transitioning from analyzing what we can do identifying what we can do to executing so we're launching into execution as we speak when you think about refining.
Cost is a is a big piece of what we're doing in refining and it's a big piece of that whole $700 million.
We're looking at things like standardizing across our refining fleet, how we do things we're looking at centralizing many of the support functions for our refineries.
All the way out to looking at how we do maintenance how we.
Operate and optimize using digital things that we've implemented to do better maintenance at lower cost to optimize more aggressively to to identify opportunities quicker and when you think about the margin capture it really boils down to utilization yield reliability and things like that and we've got things in flight.
To address reliability things to enhance the yield of what we produce and certainly.
Maximize our ability to utilize those assets all of that has some of that was in flight before our business transformation hit, but all of that will come through in business transformation and beyond the cost element, we're really pushing the organization from the bottom up to identify opportunities.
But folks out on the frontline have a big role in identifying the things that they think are inefficient and what we do and how we can capture those efficiencies and change the way we work and when you layer on that the digital things, we're putting in place from Wi Fi in our facilities to two different kinds of sensors on our on our pumps and different processing equipment. So we can better monitor them in <unk>.
All time, it's all going to add up better utilization pushing that operating envelope, even further and that will enhance our reliability and our yields as we go forward. So there's a number of dimensions that we're pressing on deal and we think they will all contribute to much stronger competitive performance in our refining sector.
Yes. Thanks, so much and then maybe the follow up to that is no.
No.
A little bit more of a near term question is how should we think about the refining market conditions right now impacting your <unk> profitability Youre guiding Q crude utilization, which is pretty good low to mid ninety's diesels trading above gasoline WCS is widening out in theory this should be a good opportunity.
Set for for your refining business.
Yes Neal.
We are in alignment and that we think the fundamentals are strong for for our kit going forward and we need to operate very well, we will see some turnarounds come back into the picture late later in the in the year later in the quarter, but we see an opportunity to run strong our assets are in really good shape.
The crude depths are certainly moving in our favor and our ability to outperform on distillate versus gasoline will be strong. If you look at the fundamentals around the cost curve between the U S and Europe . If you look at the fundamentals around where inventories are we just can't build any inventory with prompt demand where it is.
We're bullish on that outlook as well.
Thanks, Steve.
Doug Leggate from Bank of America. Please go ahead your line is open.
Thank you good morning, everyone and again welcome to the <unk> I guess, it's interesting times.
Sure.
Thanks, Doug.
This morning, I Wonder if I can I can also a micro question on that specific question.
Are you on the quarter.
Relating to the relative profitability of Europe .
Compared to your U S business.
My quick question is excellent mobile this morning kind of laid out their prognosis for.
Capacity additions over the next year or so.
I was just wondering if you can.
Also the Phillips 66, respectively.
Okay.
More.
Okay.
Business.
And then just curious if you could share your thoughts on.
How you see if there is such a thing a new normal for this business going forward.
You broke up a little bit Doug I think the first part of the question was about our view on capacity additions have Jeff address that and then we may have you repeat the second half because you broke up a little bit sure.
Yes, Doug we have <unk>.
One three and $1 5 million barrels a day of capacity growth per year in the 'twenty two 'twenty three 'twenty four time frame.
Yeah, that'll be offset by about half as much capacity, that's announced rationalizations that will be coming out of the market include.
Including our rodeo renewed.
That we're converting to a renewable diesel facility.
So there will be some capacity growth.
But the market's tight as you know from the cracks in the marketplace and the inventories today.
Currently.
Okay Jeff.
Okay.
Okay.
You're breaking up a little bit that come at us again.
Okay I apologize.
I can say.
Thanks.
So my follow up.
Okay.
I am interested in the relative profitability.
Yeah.
Relative to your U S business, so im thinking specifically of thought.
The cost of natural gas in Europe is obviously lifting the cost of European refining.
You've got a unique insight to them I guess, along with oil. So I'm just wondering if you could share your perspective on how <unk> is doing in this environment.
And then also.
Perhaps relative to the other European refiners, yes.
Yes, I think at a high level, we're happy with <unk> performance, there, they're doing a number of things really well theyre profitable I think rich can provide a little more color on our competitive position. There certainly thanks, Mark and Doug Good question and certainly it's on the minds of a lot of folks right now.
The price of natural gas in the European market has gone quite high.
Fortunately for us the Humber facility has a very mature energy stewardship program thats been in place for over 20 years in that marketplace. There are very efficient operation actually the lowest cotwo meter in the U K refining systems.
They are very low consumer purchase natural gas.
And in a high natural gas price environment.
Obviously, there is some impact on their on their business right as far as electricity costs that are externally provided.
And chemical costs, and those those arena, which which are consistent with the broader industry as well, but primarily where <unk> advantages.
And the operation is that fuel efficiency.
By very little to no natural gas or fuel gas supply to the facility.
On on hydrogen for hydro treating.
Yes.
They consume a little bit of hydrogen, but mostly self generated inside the facility.
The hydrogen will be impacted a little bit by the natural gas. So that's right.
But subsequent to your perspective on relative clearing costs for Europe versus the U S. Obviously homeless advantage, but generically how do you see the U S versus European tradeoffs.
As it relates to the incremental cost of supply I guess as well as getting up.
Gentlemen.
Most refiners, we think somewhere in the 10 to $12 range.
We're advantaged versus versus those refiners.
Rich pointed out.
Number and where that stands versus other refiners in the market.
Roger read from Wells Fargo. Please go ahead your line is open.
Yes. Thank you good morning.
Good morning, Mark.
Welcome welcome to the World.
Good Thanks, Roger Cheng.
Yeah.
Maybe to just taking a little bit of a forward look I mean, I know everybody worries about gasoline demand taken ahead, but.
I've mentioned, many times diesels, a bigger part of your kit and as we look towards the fall and winter.
Where do you think we are now in terms of.
Broadly speaking diesel production.
Sensitivity, if any you've seen on price and then between either Max diesel or Max jet or Max distillate first gasoline how that setup looks for you.
Well, thanks, Roger and maybe I'll take that this is Brian .
It's hard to see a solver for distillate coming up in the winter where at low inventories. If you look in the U S. We're at minus 20% versus 2015 to 2019 averages.
Heading into a turnaround season demand is strong we've seen demand better than 2019 currently refiners are running now Max distillate and we have and every pad.
Adjusted over distillate prices.
We're heading into harvest season.
Cost to produce in Europe , as we just talked about is expensive versus the U S.
They are not going to be able to help a much you think theres about 150000 barrels of Russian distillate off the market, which doesn't help much either so I think as you pointed out we're in distillate heavy in our system I think that's going to be a good thing going forward given our view of distillate.
Yes.
Thanks for that and then kind of also leading into the overall European question as you look across all of your different operations. So I'm kind of thinking catalyst and some of the specific maybe metering or valves equipment within the refining segment similar in parts of midstream.
In terms of valves <unk> measurement.
Some of that may be on chemicals do you have any specific exposure.
More than European countries, it could change some.
Some significant power constraints industrial industrial curtailments over the next several quarters in such a way that it could affect any of your operations.
Long lead time items, you might need for turnarounds, just trying to sort of.
Gauge the risk given all of the other supply chain and logistics issues, we've seen over the last year.
So.
But I think the question is Roger are there specific supplier specific manufacturers in Europe that we might have exposure to that could be disrupted as they cut back on natural gas and their ability to manufacturers that the question.
Yes.
Rich do you have a perspective on that.
Certainly seeing supply chain restrictions lead time has taken a little bit longer but there is no specific supplier that we've identified at this point in time that has us concerned about our ability to continue to conduct our business. Some cases, maybe we're splitting and suppliers and.
Moving to others, but.
We don't anticipate inside the refining organization any significant supply chain issues at this point I don't think we have any single points of failure in.
Securing any equipment that we might need to keep our operations going.
Great. Thank you.
Ryan Todd from Piper Sandler. Please go ahead your line is open.
Hey, Thanks, maybe.
A follow up on some earlier questions.
Do you think about.
It kind of capture trends on the refining side. There are various things that have been varying degrees of overhang in the first half of the year as you look into the third quarter.
Think about things like widening crude differentials the trends and secondary product at Amex.
Backwardation et cetera, how would you how would you think about it.
About some of the backdrop in terms of refining capture.
And where we're trending kind of <unk> versus <unk> versus <unk> and <unk>.
Okay.
And this is rich rich harvest in here.
Market capture in refining we had a nice nice bump over the first quarter at 61% market capture certainly improved over the first quarter.
Working to continue this trajectory.
We are will be subject to some planned maintenance on the back side of this of the next quarter.
That has.
It has some potential to impact that market captured but really our key is focused on as mark indicated earlier in his opening comments, it's around the reliability programs that we're implementing and improving our utilization.
Existing facilities, while we also focus on <unk>.
Turning to our products into.
The highest value, which are generally clean product yield improvements. So we think thats.
Looking directionally.
Good for us in.
In the third quarter and also the early indications of the widening light heavy crude differential.
Are also a good tailwind for us for our kit.
I think one of the things we identified in the first quarter was just some timing issues associated with a rapid increase in crude price crude price continued to increase in <unk>.
So the direction of crude price could have some some influence on market capture dependent on which direction it moves.
Thank you and maybe <unk>.
Shifting gears, a little bit on the chemical side any any comments you can provide on.
Kind of chemicals macro environment, what are you seeing demand at the margin.
They've shut downs in China has been an impact on the margin in terms of demand. There globally are you seeing any signs.
Kind of a slowdown in demand for chemicals product.
And then obviously you have.
You have some potential depends RFID on a major expansion later this year. So do you think about.
The macro backdrop over the next couple of quarters, what does it look like to you and then as you think over the next few years that as a backdrop for potential investments.
Any thoughts on where we are in the chemical cycle, there and how that will inform things going forward.
Yeah, Brian I'll cover the macro then Tim Roberts he sits on the <unk> board of directors.
They'll be looking at.
<unk> opportunities I'll ask him to provide color on the bigger projects, but from a macro perspective, the CP Chem is saying.
Frankly, a really strong demand for most of their their products and particularly polyethylene. The challenge in the polyethylene chain is with what's going on in the energy sector their feedstock costs have gone up.
And in spite of.
Pretty significant increases in demand there is more capacity new capacity coming on in North America, and they continue to face export challenges. So.
North American demand has been strong European demand has been very strong and you see European producers doing quite well because north America is kind of bottled up on logistics getting into Europe to take advantage of that so youre seeing that captured by European producers by Middle East producers Asia is still slow if Asia comes back.
Back that'll that'll add some some upside to things and a number of dimensions. So.
If you look at their specialty chemicals business their performance pipe business, they're having record years.
And even though <unk> business our exposure there I think is benefiting from.
Relative lower abundant naphtha abundant benzene driving better values in some of their some of their aromatics products. So they're seeing pretty robust demand across the board for for now so with that Tim do you want to pick up on the major projects, yes sounds good thanks Mark.
Yes.
From the standpoint of we still anticipate in the fourth quarter, making a decision on the project.
As you probably know we've said before all the permitting is complete.
All of the typical you would consider AFD work, which is before pre sanctioning has been undergraduate.
Been underway. So several work has already started along with long lead items and compressors extruder. Some of those things also in an effort to mitigate any inflationary issues that you may encounter.
So overall big project and moving forward to a decision point here in the fourth quarter. So we feel good about that project.
I will talk about <unk>, just real quick that way, we can cover that too. So there's two biggest items we've got.
Awaiting EPC bids on that particular project another again, thats, a 30%, 70% CP can cut our energy joint venture.
And so that's moving along and we anticipate a 2023 FID decision.
Decision for that particular project, but it's also on advancing as per the stage gates. We have on projects of their size. They are both both of those projects will be.
World scale, if you think about Gulf Coast 1 million tons, plus derivatives. These will be 2 million tonnes.
Plus derivatives and theyre going to both leverage off of considerable advantaged infrastructure on the Gulf Coast and of course, and Rosler fund in Qatar, So they've got a substantial capital advantage, which lowers their exposure to any inflationary pressure.
As Tim referenced things to mitigate that inflationary pressure.
Speaking of along with Qatar energies.
The owners of <unk> have a very diligent deliberate process to go through to ensure that we're mitigating those risks and positioning to take advantage of the best way.
What the market the long term market fundamentals will offer them in both of those projects will be off balance sheet project financed Kevin you've got a perspective, there why don't you talk about that yes, I will because it's an important point to two projects of that scale running obviously thats, a big capital outlay, but when you factor in.
Both joint ventures, So CP Chem is 51% of the Gulf Coast project, 30% of the Middle East Project and then both will be subject to project financing on the Gulf Coast, one sort of Gulf Coast project.
The financing is being actively work at this point to get that ready for <unk>.
But the expectation is if you think of about 50% project financing combined with the fact that <unk> ownership is at 51% and 1% to 30% on the other that dramatically reduces the cash outlay that CP Chem will have as their funding the construction of those projects.
Great. Thank you.
Manav Gupta from Credit Suisse. Please go ahead your line is open.
Hey, guys.
Adding back some data.
Lucas.
Traditionally if you make $100 and yoga hospitalist unique probably 200 to 300 on your central corridor at least so obviously this quarter was seems like.
Have you done on QUADRA for Central corridor.
Just trying to understand was the BCD that Don around because of this the central corridor was below the bottom or is there more delayed because two regions you do make needle coke at Atlantic Basin, and Gulf Coast. So if needed pushing up the openings of those regions related to central Colorado, where you actually.
Maybe you don't make vehicles. So if you go hypothalamus and those dynamics.
Hi, This is rich harvest and again.
The primary difference between those two regions was driven by turnaround activity.
It's really as simple as that we were we were down for a good part of the quarter.
A couple of facilities in the mid continent area.
So as Jude on Halloween.
<unk> developed this historical ratios roughly.
That would be our hope.
Minds on what the market does.
Yes, yes, yes.
Okay and a quick question Henri I think you guys do want to build on your clean fuel of clean energy in new energy business and you have the balance sheet and I'm just trying to understand if the right opportunities arise would you be open to more deals like that.
<unk> become JV partners, partially Illinois and use your balance sheet to try and growing our green energy business are from this point on <unk>.
B.
Organic investments in that business. Thank you.
That's a great question, we've got four pillars in that business that we're trying to establish ourselves of course, the nearest and most actionable is around renewable diesel sustainable aviation fuel converting assets that we have to produce things that are very very close to us we.
The longer term things around batteries and carbon capture and hydrogen youll see us, making more modest investments to two to learn how to.
To take on those those things across the whole the whole spectrum of these things we're going to take a very disciplined approach around capital investment.
We've got good line of sight on rodeo with it's a high return project, it's going to be the lowest capital cost per gallon of any renewable diesel facility that we're aware of we really like that projected to the REIT marketplace. It's got the right logistics and feedstock access as you as you look further out in time, you look at the <unk>.
Onyx.
Investment it was a modest investment we will invest in a big way in assets and to chase batteries are to chase hydrogen until we see line of sight on good returns returns that our investors will be happy with but we do have to take steps now to understand how you can create value in those value chain.
Where is the right position for us to establish a competitive advantage and bring the right products the right energies to the market that needs them. So.
We are not adverse to doing inorganic things if it makes sense.
As we've demonstrated we've entered into.
Joint ventures to help explore these opportunities or we will go out organically on our own and areas that are very close to our wheelhouse that we believe we can establishing capture advantage and capture real value in.
I think manav as Kevin just to reinforce the point.
We have a balance sheet, but we are going to be very diligent in how we use that balance sheet and so are our expectation is that if we're putting our balance sheet to work. We're expecting returns that meet all of our typical thresholds as we've talked about in the past.
Okay. Thank you.
Yes.
Theresa Chen from Barclays. Please go ahead your line is open.
Hi, there. Thank you for taking my questions first I wanted to touch on the marketing segment, just seeing that we think strong contribution this quarter and the resilient demand reflected in volumes can you talk about what is happening real time in that segment and if this is a new run rate or were there.
Discrete items that boosted contribution in second quarter.
Hey, Theresa this is Brian I would start by saying that marketing did do well in the quarter in large part because of market volatility in all the markets that we market in.
And also because of the seasonality Q2 is typically as you know a better time for marketing in Q1, and we benefit from having a diverse portfolio. Both geographically we have operations here in the U S West.
Western Europe , and by marketing to a number of our customer channels.
<unk> branded and retail, but I would say besides market volatility and seasonality we saw strength in a number of areas across our portfolio our portfolio I'll give you. Some examples in the U S branded business, we sell product to discount retailers, who performed very well given the current market.
In Germany volumes recovered in park.
The benefit of our German tax holiday, which started at the beginning of June and the end of August also Austrian marketing business benefited from a supply constraints related to Austria is only refinery, which is currently running at 20% we supply our marketing from alternative supply destinations.
And I think finally, I'd say across the portfolio retail, which we've been building in the U S and half overseas performed really well, including inside sales of convenience store products. So we saw a number of opportunities to kind.
To help business, including correspond tilda in the seasonality.
Okay curious Kevin I would just also add that in the quarter.
Probably about $80 million of gains that are associated with inventory related.
Movements that we would expect that to come back in the second half of the year realistically third quarter. So those that component that is included in those results.
Yes.
Got it thank you and turning to midstream.
On the heels of a major.
Myra and no one at the mid Con fractionator.
And your <unk> footprint on the Gulf Coast and can you tell us.
Potentially provide a tailwind.
For your Frac volumes in the second half as those Y grade barrels will likely need to be diverted elsewhere for fractionation.
Yes, great question on that Teresa Yeah unfortunate incident up in network.
And.
The Conway.
Probably let me contact it this way.
The answer is yes, but behind that I would say that up in Conway Theres about 600000 barrels of Frac capacity out there currently of that.
<unk> is about 220000 barrels of them, it's a significant piece of that particular hub so with that.
Not operating currently Thats put pressure on Conway. So Conway is effectively tight there's no room for any more barrels there.
So instead of moving <unk> from Conway down to the U S Gulf Coast.
Youre seeing Y grade moved down so the Y grade is looking for a home as well both at Mont Belvieu and I would say our facility that we've been running full out so.
We're really not going to get volume, we may get some margin help because it's tightened up in Mont Belvieu and tighten up obviously in down at our shop and at Conway Youll see a tightening of the market will put some pressure on the system itself.
Now what I will tell you is that this.
This is a temporary moment in time.
Because you've got five fracs coming onboard in the next 18 months.
700000 barrels a day of that 150000, as our Frac, four which will be coming onstream here.
Late in the third quarter and so that will.
Relieve some pressure on the system.
We're currently seeing capacity that entered in them.
Thank you.
Yes.
Matthew Blair from Tudor Pickering Holt. Please go ahead your line is open.
Hey, good morning, Mark as you look at the wide range of businesses that are honored the PSX umbrella are there any that stand out as perhaps model long term fit.
Yes, I think as we look at the businesses. We're in there is there is good integration across these businesses, even as we add the emerging energy opportunities. If you think about needle coke going into battery as you think about our ability to produce and market and capture the full value chain around things like renewable diesel.
Sustainable aviation fuel.
The midstream assets that.
Our integrated in many respects into into CP, Chem, and our ability to see through there I think that that we're pretty comfortable with the integration opportunities. There. There's always individual assets that we look at that may may be able to create more value for someone else and we.
Take a critical view at that consistently on our portfolio. If there is if there is opportunities to do things around individual assets were always an optimization mode, but I think at a macro level I think we like the businesses that we're in.
And I think as you know Matthew.
The work done at rodeo and converting it to renewable diesel facility and the conversion of alliance to terminal are are examples of our searching for better opportunities for some of the existing assets.
Okay.
Got it and then maybe sticking on <unk> you mentioned.
<unk> Rd is a big part of your new energy growth strategy.
I think that the capacity there is about 120 million gallons currently could you comment on the performance in the quarter from from Rd, and what kind of utilization are you running at.
With that cash positive in the quarter.
Unit 250 unit $2 50, the unit that we have running now guests yeah. So all this is rich.
Matthew and then I'll turn it over to Brian maybe some marketing color to it but from a from a operating standpoint and utilization.
Of the.
What we call our unit $2 50.
And is currently producing renewable diesel it's performing.
I would say actually above expectations at this point in time, it's performing quite well and the team out there thats running the unit has learned a lot.
Running it but they have also been able to extend our anticipated run lengths.
And so all in all the units are performing above expectations I would say at this time on the market side, Brian I would say on the marketing side, we've been running a more low ci material through 250, which has been helping us.
If you take a look at the bean oil to heating oil spread.
Slowest in the past year and a half in large part because heating oil has risen much quicker than the feedstock into the plant that's a benefit to us in the Rins as you know, we're very highly priced as well. So in terms of margin for $2 50 is very very strong right now and we would expect that to continue for some time.
Great. Thank you.
Thanks Matthew.
John Royall from Jpmorgan. Please go ahead your line is open.
Hey, guys. Thanks for taking my question so.
Sticking with our D.
Can you speak to the potential extension of the BTC that's been in the news this week and how you think about.
Returns on that project, the BTC or with the BTC.
Any thoughts on else BFS price going forward, which has been the weaker side recently, but maybe some catalyst around the scoping process on the Canada program starting next year.
I'll start with BTC and rich can take <unk>, but I would say that we premise the project rodeo renewed without the BTC. So that's an add on to our to our economics I think as you know all the credits move together. So when you expect to see the full dollar, but we would expect to see some value of.
And the economics going forward.
And John this rich as you as you alluded to there.
The California Air Resources Board State Agency Thats.
Responsible for managing the CFS program has been talking about the <unk> program and the scoping planned development in recent conversations in the Sacramento area.
Just the conversation itself seems to have stabilized the CFS credits over the last several weeks.
That seems to be a good signal. However, we're still not clear as to where this whole discussion is going.
There has been some talk about changing the required obligations side.
Which will likely result in increased credit.
But more specifically card spend discussing.
<unk> proposed to discuss.
Some changes to the <unk> reduction.
Carbon intensity reduction that was originally targeted in 2030 is a 20% reduction.
But now carbs, considering increasing that reduction to 25% to 30% by 2030.
But.
This is all in conversation at this time, so let me emphasize that there is no certain path forward at this point.
However, we do think the rodeo renewed project still is quite attractive and that projects premise on lower carbon intensity feedstocks as Brian mentioned, there and with the installation of the pre treatment yet it still puts us in quite a competitive position at the facility.
That's really helpful. Thank you and then.
One back to refining.
Can you talk about the turnarounds coming in at the lower end of full year guidance, if I heard that correctly.
Was there any deferral, there where you're able to execute on any of your turnarounds at lower than expected costs.
Just looking for some color there and then maybe.
I'm not sure if you're going to answer this but any early look into the kind of year you might expect in 2023 relative to this year.
Presumably I would think you have some catch up.
Yeah. So this is rich again.
One of the things I'll mention them quite honored followed behind some of our previous leaders who instituted some programs here that we're now really taking advantage of it.
And one of those programs has been to improve our predictability of our turnaround execution and we.
Those are really announced starting to take shape.
<unk>.
We've been able to do that.
By improving our planning processes execution Onboarding all of the all the fundamentals of executing a turnaround.
And that's that's paying dividends for us now and so that's the primary reason that we're working towards the lower end of our guidance on the annual spend is really our execution performance has been has been much better.
Then.
Then.
Then we anticipated actually for that part I.
Yes, I think as far as.
This year Youre right. This year has been <unk>.
Catch up year, we caught up on a lot of turnaround activity that was deferred out of.
The heavy COVID-19 season.
Because it was too risky and.
We were able to save some cash outlays during during volatile times.
So I think youll see the turnaround activity much lower.
More typical year in 2023.
Yes, so the guy.
This isn't driven by deferrals of turnarounds.
We've been executing those turnarounds.
Thank you.
Paul Cheng from Scotiabank. Please go ahead your line is open.
Hey, guys good morning.
Alright.
First I want to also welcome then congratulate mark to be cleansed.
Conference call it CEO .
Thank you Paul.
Two questions I think.
The first one is for which in the second Lemme is for Mark.
Which I mean, if market conditions remain very robust by decline come next year.
Dan.
So that you can postpone a softball.
All of that.
That you do need to say you're bound because otherwise you have to do a major maintenance or other we just got behind.
If you can just give us an idea on that.
<unk>.
And.
Second question for Mark Mark will touch on that I think if we look back in last decade.
Strategy for the company is quite clear, yes, more midstream more technical and less finding in that one <unk>.
In the decade think that Ethan may be volatile future, we finding don't need to be part of the portfolio and as you take on the seat.
The new law.
That from you on the longer term.
Given that midstream seems platelets already opened in Boston.
Same comment on those probably will be great. Thank you.
Sure I'll, let rich thick. He is up and then I'll follow up okay. Yes. Thanks for the question Paul.
Early in the second quarter, we received the land use permit.
From Contra Costa County to execute the rodeo renewed project that included also a certified environmental impact report.
That has subsequently initiated pre construction activities.
And we're on a path to significantly reduce.
The onsite criteria pollutants.
And support California's objectives, producing lower lifecycle carbon intensive transportation fuels why we've continued to support family wage jobs there.
So I think we're on a path to execute rodeo renewed I don't see that changing at this point in time per day overdue is very capital efficient project that was as Mark mentioned earlier.
Roughly a dollar a gallon investment versus other projects that are announced that are much higher in the two to three plus range.
We see rodeo renewed project remaining on track for startup in Q1 of.
2024.
And we liked the economics rodale renewed we've talked earlier in the call about the strength in the distillate market in the diesel market.
And so those economics look strong.
<unk> supports that.
Far as the <unk>.
Portfolio and investments I think that we always plan and our strategy around investing where we can create the most value.
I don't think we are.
We're talking about ever exiting refining I think that we see a long term future in refining, but we've got to make sure that we've got the right refining assets.
To deliver what the market needs in the right locations.
And I think that we've done a nice job of selectively investing in retail joint ventures to help capture the kinds of opportunities that you saw in the second quarter midstream certainly as the.
The Permian and West, Texas basins came on strong there were opportunities to put midstream assets and to capitalize on that as.
The growth in production there slowed down as consolidation occurred in upstream players that changes that landscape, but we certainly continue to look for the right opportunities to create value around our midstream assets.
Whether it's whether it's participating in consolidation or finding some pieces here or there we can invest in that's different.
Continued strong fundamentals long term fundamentals in petrochemicals that we want to participate in the above GDP growth, we will do that primarily through <unk>, but if we see opportunities where we can produce chemicals out of out of some of our existing refining assets. We will take a good look at that and then again I mentioned in the opening.
<unk> that if we can find very targeted high return quick payout projects in refining to improve our yield to improve our utilization through enhanced our ability to capture what the market has to offer us we'll make those in a very disciplined way as well so I think that it's at.
Our overarching.
<unk> strategy is driven by disciplined capital investments finding the right way to capture value for the markets that are available to us and then we'll be building out our emerging energy business too and we're not going to invest though in emerging energy opportunities just to fly an emerging energy flag, it's going to be there to create value and capture value. So that's where we're headed.
Yeah.
We have reached the end of today's call I will now turn the call back over to Jeff.
We greatly appreciate your time and interest in Phillips 66, if you have any questions. Following today's call. Please contact Shannon or me. Thank you.
Thank you ladies and gentlemen. This concludes today's conference you may now disconnect.
Okay.
Yes.
Thank you.
Okay.
Okay.
Yes.
Yes.