Q1 2023 Phillips 66 Earnings Call

At this time all participants are in a listen only mode.

Later, we will conduct a question and answer session.

Please note that this conference is being recorded.

I will now turn the call over to Jeff Theater, Vice President of Investor Relations.

You may begin.

Good morning, and welcome to Phillips 66 first quarter earnings conference call participants.

Participants on today's call will include Mark laser President CEO, Kevin Mitchell, CFO, Brian Mendell, marketing and commercial Tim Roberts, midstream and chemicals and rich Harvison refining.

Today's presentation material can be found on the Investor Relations section of the Phillips 66 website, along with supplemental financial and operating information.

Slide two contains our safe Harbor statement, we will be making forward looking statements. During today's call actual results may differ materially from today's comments.

<unk> that could cause actual results to differ are included here as well as in our SEC filings with that I will turn the call over to Mark. Thanks.

Thanks, Jeff.

Morning, and thank you for joining us today.

During the first quarter, we delivered strong financial and operating results. We had adjusted earnings of $2 billion or $4 21 per share a record first quarter.

In refining we successfully executed major plant maintenance and ran above industry average rates.

Currently our refineries are running at high utilization to meet demand and capture market opportunities as we enter summer driving season.

We returned $1 3 billion to shareholders through dividends and share repurchases.

In February we raised our dividend, 8% to $1 five per share demonstrating our ongoing commitment to a secure competitive and growing dividend.

Our integrated diversified portfolio provides us with the ability to generate strong cash flow returned substantial cash to shareholders and invest in the most attractive projects.

We remain committed to operating excellence and disciplined capital allocation as we execute our strategy.

Recently, our midstream refining and chemicals business were recognized for their exemplary safety performance in 2022.

For the third consecutive year midstream was awarded the American Petroleum Institutes Distinguished pipeline Safety award for large operators.

This is the highest recognition by API for the midstream industry.

Speaker 1: In February , we raised our dividend 8% to $1.05 per share demonstrating our ongoing commitment to a secure, competitive, and growing dividend.

The American fuel and petrochemical manufacturers recognized five of our refineries for outstanding safety performance.

Refinery received the Distinguished Safety award for the second year in a row.

Speaker 1: Our integrated diversified portfolio provides us with the ability to generate strong cash flow, return substantial cash to shareholders, and invest in the most attractive projects.

Anyway, Borger, Santa Maria in Ponca City refineries also earn safety awards.

In chemicals for CP Chem facilities were recognized with <unk> Safety Awards.

Speaker 1: We remain committed to operating excellence and disciplined capital allocation as we execute our strategy.

We're honored to receive these awards and we'd like to recognize our employees commitment to operating excellence congratulations to all the people working at these facilities well done.

Speaker 1: Recently, our Midstream Refining and Chemicals business were recognized for their exemplary safety performance in 2022.

Speaker 1: For the third consecutive year, Midstream was awarded the American Petroleum Institute's Distinguished Pipeline Safely Award for Large Operators.

We started the year off well and continued to advance strategic priorities from our Investor day late last year.

Slide four summarizes progress toward our targets to create value and increase shareholder distributions.

Speaker 1: This is the highest recognition by API for the midstream industry.

Speaker 1: The American fuel and petrochemical manufacturers recognized five of our refineries for outstanding safety performance. Swinney Refinery received a Distinguished Safety Award for the second year in a row. Bayway, Hoerger, Santa Maria, and Ponca City Refineries also earned safety awards.

Since July of 2022, we've returned $3 7 billion to shareholders through share repurchases and dividends.

We're on track to meet our target to returned $10 to $12 billion over the 10 quarter period between July 2022 through year end 2024.

Speaker 1: In chemicals, four CP-Chem facilities were recognized with AFPM Safety Awards.

We had strong refining operational performance in the first quarter and market capture increased to 93%.

Speaker 1: We're honored to receive these awards and would like to recognize our employees' commitment to operating excellence.

In midstream, we are advancing our NGL wellhead to market strategy. We recently achieved an integration milestone with the transition of DCP midstream employees to Phillips 66, enabling continued synergy capture.

Speaker 1: Congratulations to all the people working at these facilities. Well done.

Speaker 1: We started the year off well and continue to advance strategic priorities from our investor day late last year.

In anticipation of the DCP by and we issued bonds and executed a delayed draw term loan we expect to close on the transaction by the end of the second quarter.

Speaker 1: Slide four summarizes progress toward our targets to create value and increase shareholder distributions.

Speaker 1: Since July of 2022, we've returned $3.7 billion to shareholders through share repurchases and dividends.

We're advancing our business transformation initiatives and we're on track to deliver $1 billion of annual run rate savings by year end.

Speaker 1: We're on track to meet our target to return $10 to $12 billion over the 10-quarter period between July 2022 through year-end 2024.

Next quarter, we'll provide a more detailed update on the cost savings achieved through the first half of the year.

In refining we're converting our San Francisco refinery into one of the world's largest renewables fuels facilities.

Speaker 1: We had strong refining operational performance in the first quarter and market capture increased to 93 percent.

The conversion will substantially reduce emissions from the facility and produce lower carbon intensity transportation fuels.

Speaker 1: In midstream, we're advancing our NGO wellhead to market strategy. We recently achieved an integration milestone with the transition of DCP midstream employees to Phillips 66, enabling continued synergy capture.

In February we safely shut down the Santa Maria facility as we continued to advance the project.

We expect to begin commercial operations in the first quarter of 2024.

Speaker 1: In anticipation of the DCP buy-in, we issued bonds and executed a delayed draw term loan. We expect a close on the transaction by the end of the second quarter.

On completion rodeo will have over 50000 barrels per day of renewable fuels production capacity.

In chemicals, CP Chem is pursuing a portfolio of high return projects enhancing its asset base and optimizing its existing operations.

Speaker 1: We're advancing our business transformation initiatives and we're on track to deliver $1 billion of annual run rate savings by year end.

Speaker 1: Next quarter, we'll provide a more detailed update on the cost savings achieved through the first half of the year.

This includes construction of a second world scale, one hexane unit and old Ocean, Texas, and the expansion of propylene splitting capacity at Cedar Bayou facility.

Speaker 1: In refining, we're converting our San Francisco refinery into one of the world's largest renewables fuel facilities.

Both projects are expected to startup in the second half of 2023.

Speaker 1: The conversion will substantially reduce emissions from the facility and produce lower carbon-intensity transportation fuels.

CP Chem and Qatar energy are jointly building world scale petrochemical facilities on the U S Gulf Coast and in RASK upon Qatar with startup at each facility expected in 2026.

Speaker 1: In February , we safely shut down the Santa Maria facility as we continued to advance the project.

Speaker 1: We expect to begin commercial operations in the first quarter of 2024. Upon completion, Rodeo will have over 50,000 barrels per day of renewable fuels production capacity. In chemicals, CP-Chem is pursuing a portfolio of high-return projects, enhancing its asset base and optimizing its existing operations.

We look forward to continuing to update you on our strategic priorities now.

Now I'll turn the call over to Kevin to review the financial results. Thank.

Thank you Mark and Hello, everyone, starting with an overview on slide five we summarize our financial results for the first quarter.

Adjusted earnings were $2 billion or $4 21 per share to.

Speaker 1: This includes construction of a second world-scale 1-hexene unit in Old Ocean, Texas, and the expansion of propylene splitting capacity at its Cedar Bayou facility. Both projects are expected to start up in the second half of 2023.

The $12 million decrease in the fair value of our investment in Nevada, <unk> reduced earnings per share by <unk> <unk>.

We generated operating cash flow of $1 2 billion.

Including a working capital use of $1 3 billion.

Speaker 1: CP Chem and Qatar Energy are jointly building world-scale petrochemical facilities on the U.S. Gulf Coast and in Ras Lappan, Qatar, with startup at each facility expected in 2026.

And cash distributions from equity affiliates of $369 million.

Capital spending for the quarter was $378 million, including $228 million for growth projects.

Speaker 1: We look forward to continuing to update you on our strategic priorities.

We returned $1 3 billion to shareholders through $486 million of dividends and $800 million of share repurchases.

Speaker 1: Now, I'll turn the call over to Kevin to review the financial results.

Speaker 2: Thank you, Mark, and hello everyone. Starting with an overview on slide 5, we summarize our financial results for the first quarter.

We ended the quarter with 459 million shares outstanding.

Moving to slide six.

Speaker 2: Adjusted earnings were $2 billion or $4.21 per share.

This slide highlights the change in adjusted results by segment from the fourth quarter to the first quarter.

Speaker 2: The $12 million decrease in the fair value of our investment in the Vonix reduced earnings per share by 2 cents.

During the period adjusted earnings increased $66 million.

Mostly due to higher results in chemicals, and lower corporate costs, partially offset by a decrease in marketing and specialties.

Speaker 2: We generated operating cash flow of $1.2 billion, including a working capital use of $1.3 billion, and cash distributions from equity affiliates of $369 million.

Slide seven shows our midstream results.

First quarter adjusted pretax income was $678 million.

Speaker 2: Capital spending for the quarter was 378 million dollars including 228 million dollars for growth projects. We returned 1.3 billion dollars to shareholders through 486 million dollars of dividends and 800 million dollars of share repurchases.

With $674 million in the previous quarter.

Transportation contributed adjusted pre tax income of $270 million up $33 million from the prior quarter.

The increase was primarily driven by seasonally lower operating costs.

Speaker 2: We ended the quarter with 459 million shares outstanding.

Speaker 2: ended the quarter with 459 million shares outstanding. Moving to slide 6.

NGL and other adjusted pre tax income was $420 million compared to $448 million in the fourth quarter.

Speaker 2: This slide highlights the change in adjusted results by segment from the fourth quarter to the first quarter.

The decrease was mainly due to the impact of declining commodity prices and the gathering and processing business.

Speaker 2: During the period, adjusted earnings increased $66 million, mostly due to higher results in chemicals and lower corporate costs, partially offset by a decrease in marketing and specialties.

The fractionator at the Sweeny hub continued to run above nameplate capacity, averaging 554000 barrels per day.

The Freeport LPG export facility loaded a record 282000 barrels per day in the first quarter.

Speaker 2: Slide 7 shows our midstream results. First quarter adjusted pre-tax income was $678 million, compared with $674 million in the previous quarter.

Turning to chemicals on slide eight.

Chemicals at first quarter, adjusted pre tax income of $198 million compared.

Speaker 2: Transportation contributed adjusted pre-tax income of $270 million up to $33 million from the prior quarter.

Compared with $52 million in the previous quarter.

The increase was mainly due to improved margins from lower feedstock costs higher sales volumes and decreased utility costs. The.

Speaker 2: The increase was primarily driven by seasonally lower operating costs.

Speaker 2: NGL and other adjusted pre-tax income was $420 million compared to $448 million in the fourth quarter.

The industry polyethylene chain margin increased by 10 to <unk> 17 per pound during the quarter.

Global <unk> utilization was 94% for the quarter.

Speaker 2: The decrease was mainly due to the impact of declining commodity prices in the gathering and processing business.

Turning to refining on slide nine.

Speaker 2: The fractionators at the SWEENEY hub continue to run above nameplate capacity, averaging 554,000 barrels per day.

Refining first quarter adjusted pre tax income was $1 6 billion.

Down $18 million from the fourth quarter.

Speaker 2: The Freeport LPG Export Facility loaded a record 282,000 barrels per day in the first quarter.

The impact of lower volumes from turnaround activities was mostly offset by higher realized margins and lower utility costs.

Speaker 2: Turning to chemicals on slide 8.

Our realized margins increased by 5% to $20 72 per barrel, while the composite 321 market crack decreased by 5%.

Speaker 2: Chemicals had first quarter adjusted pre-tax income of $198 million compared with $52 million in the previous quarter.

In the first quarter turnaround costs were $234 million crude utilization.

Speaker 2: The increase was mainly due to improved margins from lower feedstock costs, higher sales volumes and decreased utility costs.

<unk> was 90% and clean product yield was 83%.

Speaker 2: The industry polyethylene chain margin increased by 10 cents to 17 cents per pound during the quarter.

Slide 10 covers market capture.

The market crack for the first quarter was $22 39 per barrel compared to $23 58 per barrel in the fourth quarter.

Speaker 2: Global O&P utilization was 94% for the quarter.

Speaker 2: Turning to refining on slide 9.

Realized margin was $20 72 per barrel and resulted in the overall market capture of 93% up from 84% in the previous quarter.

Speaker 2: Refining first quarter adjusted pre-tax income was $1.6 billion, down $18 million from the fourth quarter.

Speaker 2: The impact of lower volumes from turnaround activities was mostly offset by higher realized margins and lower utility costs.

Market capture is impacted by the configuration of our refineries we.

We have a higher distillate yield in a lower gasoline yield in the 321 market indicator.

Speaker 2: Our real-life margins increased by 5% to $20.72 per barrel, while the composite 321 market crack decreased by 5%. In the first quarter, turnaround costs were $234 million, crude utilization was 90%, and production product yield was 83%.

During the first quarter of the distillate crack decreased $19 per barrel and the gasoline crack increased $77 per barrel.

Losses from secondary products of $2 56 per barrel were $1 <unk> per barrel lower than the previous quarter due to falling crude prices.

Speaker 2: Slide 10 covers market capture.

Our feedstock advantage of $2 34 per barrel was $2 37 per barrel improved compared to the fourth quarter, primarily due to running more advantaged crudes.

Speaker 2: The market crack for the first quarter was $22.39 per barrel compared to $23.58 per barrel in the fourth quarter.

Speaker 2: Realized margin was $20.72 per barrel and resulted in overall market capture of 93% up from 84% in the previous quarter.

The other category improved realized margins by $2 19 per barrel.

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

Speaker 2: Market capture is impacted by the configuration of our refineries.

First quarter was $1 73 per barrel higher than the previous quarter, primarily due to improved clean product realizations.

Speaker 2: we have a higher distillate yield and a lower gasoline yield than the 321 market indicator.

Speaker 2: During the first quarter of the distillate crack decreased $19 per barrel and the gasoline crack increased $7 per barrel.

Moving to slide 11.

Marketing and specialties had a solid quarter, reflecting stronger than typical first quarter margins adjust.

Adjusted first quarter pre tax income was $426 million compared.

Speaker 2: Losses from secondary products of $2.56 per barrel were $1.03 per barrel lower than the previous quarter due to falling crude prices.

Compared with $539 million in the prior quarter, mainly due to lower international marketing margins.

Speaker 2: Our feedstock advantage of $2.34 per barrel was $2.37 per barrel improved compared to the fourth quarter primarily due to running more advantage crudes.

On slide 12, the corporate and other segment had adjusted pre tax costs of $248 million.

$32 million lower than the prior quarter.

Speaker 2: The other category improved realized margins by $2.19 per barrel.

The improvement was mainly due to higher interest income and recognition of a transfer tax on a foreign entity reorganization in the fourth quarter of 2022.

Speaker 2: This category includes break costs, clean product realizations, and inventory impacts.

Speaker 2: First quarter was $1.73 per barrel higher than the previous quarter, primarily due to improved clean product realizations.

Slide 13 shows the change in cash during the first quarter.

We started the quarter with a $6 1 billion cash balance.

Speaker 2: Moving to slide 11.

Cash from operations was $2 5 billion, excluding working capital.

Speaker 2: Marketing and Specialties had a solid quarter reflecting stronger than typical first quarter margins.

There was a working capital use of $1 3 billion.

Mainly reflecting an increase in inventory, partially offset by a decrease in our net accounts receivable position.

Speaker 2: Adjusted first quarter pre-tax income was 426 million dollars compared with 539 million dollars in the prior quarter, mainly due to lower international marketing margins.

During the quarter, we issued $1 25 billion of senior unsecured notes in support of the pending buy in of DCP Midstream has publicly held common units.

Speaker 2: On slide 12, the corporate and other segment had adjusted pre-tax costs of $248 million, $32 million lower than the prior quarter.

We funded $378 million of capital spending and returned $1 3 billion to shareholders through dividends and share repurchases, our ending cash balance was $7 billion.

Speaker 2: The improvement was mainly due to higher interest income and recognition of a transfer tax on a foreign entity reorganization in the fourth quarter of 2022.

This concludes my review of the financial and operating results next I'll cover a few outlook items for the second quarter.

Speaker 2: Slide 13 shows the change in cash during the first quarter.

In chemicals, we expect the second quarter global <unk> utilization rate to be in the mid nineties.

Speaker 2: We started the quarter with a $6.1 billion cash balance.

Speaker 2: Cash from operations was $2.5 billion, excluding working capital.

In refining we expect the second quarter worldwide crude utilization rate to be in the mid nineties and turnaround expenses to be between 101 hundred $20 million.

Speaker 2: There was a working capital use of 1.3 billion dollars, mainly reflecting an increase in inventory partially offset by a decrease in our net accounts receivable position.

We anticipate second quarter, corporate and other costs come in between $260 $290 million, reflecting higher interest costs.

Speaker 2: During the quarter, we issued $1.25 billion of senior unsecured notes in support of the pending buy-in of DCP midstreams publicly held common units.

In March we issued senior unsecured notes of $1 billion to $5 billion.

Speaker 2: We funded $378 million of capital spending and returned $1.3 billion to shareholders through dividends and share repurchases. Our ending cash balance was $7 billion.

<unk> entered into a delayed draw term loan of up to $1 $5 billion in support of the DCP midstream buy in transaction, which is expected to close during the second quarter now.

Speaker 2: This concludes my review of the financial and operating results.

Now we will open the line for questions.

Speaker 2: Next, I'll cover a few outlook items for the second quarter.

Thank you.

Speaker 2: In chemicals, we expect the second quarter global O&P utilization rate to be in the mid-90s.

We will now begin the question answer session as we open the call for questions and the currency to all participants please limit yourself to one question and a follow up.

Speaker 2: In refining, we expect the second quarter worldwide crude utilization rate to be in the mid 90s and turnaround expenses to be between $100 and $120 million.

If you have a question. Please press Star then one on your Touchtone phone.

Any way to be removed from the queue. Please press the pound key.

Speaker 2: We anticipate second quarter corporate and other costs come in between 260 and 290 million dollars, reflecting higher interest costs.

If youre using a speakerphone you may need to pick up your handset before pressing the numbers.

Speaker 2: In March, we issued senior unsecured notes of $1.25 billion and entered into a delayed draw term loan of up to $1.5 billion in support of the DCP midstream buy-in transaction, which is expected to close during the second quarter.

Once again, if you have a question. Please press Star then one on your Touchtone phone.

Speaker 2: senior unsecured notes of 1.25 billion dollars and entered into a delayed draw term loan of up to 1.5 billion dollars in support of the DCP midstream buy-in transaction which is expected to close during the second quarter. Now we will open the line for questions.

No Mehta with Goldman Sachs.

Line is open. Please go ahead.

Good morning team. The first question is around refining utilization it was better than expected in the quarter and the guide for Q2 also looks a little bit better. So can you.

Speaker 3: 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.

Can you talk about what improvements that youre, making on the ground and it's been a choppy.

Choppy 18 months in refining from a utilization standpoint so.

Speaker 3: If you have a question, please press star then one on your touch tone phone.

Conviction can you.

Speaker 3: If you wish to be removed from the queue, please press the pound key.

Provide the market that.

We've turned the corner here. Thank you.

Speaker 3: If you're using your speakerphone, you may need to pick up your handset first before pressing the numbers. Once again, if you have a question, please press star then 1 on your touchtone phone.

Yes. Thanks, Neil this is rich good question.

There's a number of things coming together here for us back in November we outlined a number of opportunities to improve refineries performance one of them was asset availability optimizing our turnaround durations.

Speaker 3: No metal with Goldman Sachs. Your line is open. Please go ahead.

Speaker 4: Good morning, team. The first question is around refining utilization. It was better than expected in the quarter and the guide for Q2 also looks a little bit better. So, can you talk about what improvements that you're making on the ground and – –

We've done a really good job executing those in a pretty heavy.

Turnaround quarter for us and that's a big component of allowing us to operate at that 90% crude unit utilization.

Executing those turnarounds.

Speaker 4: It's been a choppy 18 months in refining from a utilization standpoint. So what conviction can you provide the market that we've turned the corner here? Thank you. You've made a great talk, Barbara.

And a very.

High performing status on the Gulf Coast, our assets performed very well they increased their crude flexibility that also allowed us to open up the utilization window and also allowed us to capture additional.

Speaker 1: Yeah, thanks Neil. This is Rich. Good question. And it's a number of things coming together here for us. You know, back in November we outlined a number of opportunities to improve refining performance. One of them was asset availability. Optimizing our turnaround durations,

Market as well.

You saw as well as the refining market capture rate of 93% was very good for the quarter as well.

The key the key assets there.

Are running the assets focusing on what we can control in our business nail and that is executing our turnaround as well.

Speaker 1: We've done a really good job executing those in a pretty heavy turnaround quarter for us and that's a big component of allowing us to operate at that 90% crude unit utilization. It's really executing those turnarounds.

And we were able to do that coming in below guidance. This year. This first quarter continuing a trend that started last year with us coming in below guidance. Yes. Neal. This is mark I'll just come over with a little bit relating that back to the investor day commitments that we made those commitments based on the groundwork that had been.

Speaker 1: in a very high performing status. On the Gulf Coast, our assets performed very well. They increased their crude flexibility. That also allowed us to open up the utilization window and also allowed us to capture additional market as well, which you saw as well, the refining market capture rate of 93% was.

Underway for some time the fairly small projects that we were going through the blocking and tackling that we were taking on and we're really starting to see.

Those come to fruition now and we're pleased with what we're seeing out there and really I think the biggest impact of business transformation has been the hearts and minds of our employees. They are all in.

It wasn't that way a year ago. We first started the initiative, but now they see the things that they're doing the hard work that they're doing are starting to impact their results and turnaround starting to impact the operational.

Speaker 1: continuing a trend that started last year with the coming in below guidance.

Effectiveness of the plants as well as we're seeing it in the cost and Thats just been a very virtuous cycle for our employees. There is a stronger competitive edge out there and they really want to own their future now.

Speaker 1: Yeah, Neil, this is Mark. I just come over with a little bit relating that back to the investor day commitments that we we made those commitments based on the groundwork that had been underway for some time the fairly small projects that we were going through the blocking and tackling that we were taking on and and we're really starting to see

Rich you want to talk about some of the projects that were completed last year.

That plays into the refined.

Final capture rate of 93%.

Speaker 1: those come to fruition now. And we're pleased with what we're seeing out there. And really, I think the biggest impact of business transformation has been the hearts and minds of our employees. They are all in. Wasn't that way a year ago when we first started the initiative, but now they see the things that they're doing, the hard work that they're doing are starting to impact their results and turnarounds, starting to impact the operational...

The quarter for us.

And our last year, we actually implemented 12 projects focused on market capture.

The result is a result of the impact of those projects is a one 2% improvement in market capture with mid cycle pricing assumptions.

We implemented $225 million worth of projects in the net return on those or the EBITDA generation for the for that investment was $158 million at mid cycle pricing too.

<unk> 2023, we actually have additional 18 projects identified that are in flight and the estimate is a one 4% improvement in market capture so I think what youre seeing here.

Speaker 5: refining capture rate of 93% for the quarter force. Last year we actually implemented 12 projects focused on market capture.

Is the plan we laid out in November is starting to really come to the bottom line of the performance of the provider.

Thanks Thats good color there. The second question is around the.

Speaker 5: The result of the impact of those projects is a 1.2 percent improvement in market capture with mid-cycle pricing assumptions.

The decline we've seen in crude prices.

That should manifest itself in different parts across the business, So I would love.

Any perspective on how we can think about it from a modeling perspective, specifically around marketing, which tends to be a tailwind our capture rates declining crude prices tends to help secondary products, but also it can be a headwind for working capital.

Speaker 5: We implemented $225 million worth of projects and the net return on those, or the EBITDA generation for that investment was $158 million at mid-cycle pricing.

Speaker 5: 2023, we actually have additional 18 projects identified that are in flight, and the estimate is a 1.4% improvement in market capture. So I think what you're seeing here is the plan we laid out in November is starting to really come to the bottom line of the performance of the refining.

The crude price declines sustains how should we think about that in terms of Q2 Q2 movement. Thank you.

Well, let me let me start Neel. This is Brian talking about marketing probably noticed we had very strong marketing earnings in Q1.

Speaker 4: Thanks, and that's a lot of good color there. The second question is around the decline we've seen in crude prices, and that should manifest itself in different parts across the business. So I would love any perspective on how we can think about it from a modeling perspective, specifically around marketing, which tends to be a tailwind.

Happy about that you know that we have a geographic diverse portfolio with assets. Both here in the U S and Western Europe, which is great, but we also market through a number of channels wholesale branded and retail and what we've been doing is trying to focus our sales on the higher margin parts of our business, particularly in retail.

And we purchased retail in the past few years in fact in mid 2019, we had 50 retail JV stores in the U S. Now we have a thousand.

Speaker 4: capture rates declining, crude prices tends to help secondary products, but also can be a headwind for working capital. So if the crude price decline sustains, how should we think about that in terms of Q2 movement? Thank you.upbeat music

Retail JV stores in the U S and we also spend some some time re imaging all of our stores to get to get higher margins in business and I would also say that in our lubes business that it's also performing quite strongly in both base oils and finished products. So as you mentioned.

Speaker 5: Well, let me start, Neil. This is Brian talking about marketing and probably notice we had very strong marketing earnings in Q1. Pretty happy about that. You know that we have a geographic diverse portfolio with assets both here in the US and Western Europe , which is great. But we also market through a number of channels wholesale branded.

Spot prices come off that generally benefits.

The marketing business, because marketing margins generally are marketing prices generally fall slower.

Yes on the refining side as you framed up the question Neil.

Speaker 5: and retail. What we've been doing is trying to focus our sales on the higher margin parts of our business, particularly in retail. We've purchased retail in the past few years. In fact, in mid-2019, we had 50 retail JV stores in the U.S. Now we have 1,000 retail JV stores in the U.S. And we also spent some

The.

The flat price dropping accrued it does reduce.

Usually the secondary products losses, so they tend to tighten up a little bit there. So that that has a positive impact for us in refining.

Really in refining it's for US it's the differential that we make our money off of on the light heavy sweet differential in.

Speaker 5: some time re-imaging all of our stores to get higher margins in business. I would also say that in the lube's business that it's also performing quite strongly in both base oils and finished products. So as you mentioned, as spot prices come up, that generally benefits

That's what we keep a close eye on Kevin any additional color to add.

Just on the working capital impact as you've highlighted with declining prices, we will have a working capital hurt because we're in a net payables position.

Speaker 5: the marketing business because marketing margins generally, marketing prices generally fall slower. On the refining side, as you framed up the question, Dale, it's the the flat price drop in a crude does reduce usually the secondary products losses.

So you think about a system, that's essentially 2 million barrels per day.

And a longer duration on the payables outstanding but on the receivables. So the approximate rule of thumb is somewhere in the order of $40 million to $50 million of working capital.

Speaker 6: So they tend to tighten up a little bit there so that has a positive impact for us in refining. But really in refining, for us it's the differential that we make our money off of on the light, heavy, sweet differential. And that's what we keep a close eye on.

Per dollar of price reduction and that assumes that the crude and the products move together in the crack stays at the same level.

But as you know also theres a lot of other moving parts in working capital, what's having to inventories and so on but as a rule of thumb simple rule of thumb, you can use that $40 million to $50 million per $1 movement in price.

Speaker 2: Kevin, any additional color to add there? Yeah, Neil, just on the working capital impact, as you highlighted with the declining prices we will have a working capital hurt because we're in a net payables position. So you think about a system that's essentially two million barrels per day and a longer duration on the payables outstanding than on the receivables so the

Okay. That's really helpful. Thanks, everyone.

Thanks Neil.

<unk> with bank of America.

Your line is now open you May proceed.

Well thanks, everyone for getting me on guys I wanted to ask.

Follow up to Neal's question on the capture rate.

Speaker 2: the approximate rule of thumb is somewhere in the order of 40 to 50 million dollars of working capital hurt per dollar of price reduction and that assumes that the crude and the products move together and the crack stays at the same level but as you know also there's a lot of other moving parts in working capital what's happened to inventories and so on but as a rule of thumb simple rule of thumb

So I mean, obviously reliability was a bit of a question mark over the past year. So should we now think about this level of capture rates should be anticipate but that's kind of a new normal.

If I could risk it just a bolt onto the same kind of seems to be true of the cost cutting progress. It looks like you had a little bit ahead of schedule. There. So as we wrap altogether the earnings power of the business overall, it looks like Youre kind of past the <unk> fund.

Speaker 2: you can use that $40 to $50 million per $1 movement in price.

Speaker 4: Okay, that's really helpful. Thanks, everyone. Thanks, Neil.

Trending higher so I just wonder if you could kind of characterize whether we're thinking about that the right way.

Speaker 4: Okay, that's really helpful. Thanks, everyone. Thanks, Neil.

Yeah, great questions, Doug I'll, let rich address the capture rate and I'll come back in on the cost cutting progress.

Speaker 3: So we have with Bank of America.

Speaker 2: Your line is now open, you may proceed. Thanks everyone for getting me on. Guys, I want to ask a follow-up to Neil's question on the capture rate. Obviously, reliability was a bit of a question mark over the past year. Should we now think about this level of capture rate? Should we anticipate that...

Yes, so capture rate has a lot of moving parts to it. So it is very difficult to predict that.

Configuration component of its secondary products feedstock costs, others, but back to back to focusing on what we can control in our business Doug.

Doug is.

Speaker 2: that's kind of a new normal. And if I could risk just a bolt on to that, the same kind of seems to be true of the cost cutting progress. It looks like you're a little bit ahead of schedule there. So as we wrap it all together, the earnings power of the business overall, it looks like you're kind of past the hump and trending higher. So I just wonder if you could characterize whether we're thinking about that the right way.

We can see continued maturity in our reliability programs and these saves or comment on a regular basis, where we're catching issues early and preventing larger events from occurring and now also under asset availability as I mentioned earlier that turnaround execution.

<unk> is going very well for us we've significantly improved our predictability on this takes a lot of a lot of leg work over time to improve those processes.

Speaker 6: Great questions, Doug. I'll let Rich address the capture rate and I'll come back in on the cost-cutting progress. Yeah, so capture rate has a lot of moving parts to it, so it's very difficult to predict that, you know, the configuration component of it, secondary products, feedstock costs, others, but...

And most importantly, even though we're hitting our turnaround execution goals.

Continuing to complete all the necessary work to operate the equipment safely and reliably over time. So so that program is continuing to mature and we'll continue to see that and that will allow our utilization rates to be available to operate in the market. If the market is there.

Speaker 6: Back to focusing on what we can control in our business, Doug, is we're seeing continued maturity in our reliability programs, and these saves are coming on a regular basis where we're catching issues early and preventing larger events from occurring.

And then as you mentioned the cost the cost side of it is a big component of this as well we have a clear path that we've identified reducing our costs by $500 million by the end of this year on a run rate basis over half of the 400 million run rate cost savings that Kevin mentioned in his <unk>.

Speaker 6: And also under asset availability, as I mentioned earlier, the turnaround execution is going very well for us. We've significantly improved our predictability on this. That takes a lot of legwork over time to improve those processes.

Comments are coming out of refining.

And that's that's that's good news for us and probably more importantly is as Mark has indicated our entire organization and covering uncovering opportunities to lower costs are being much more efficient in how we work and accepting the challenge to improve the business, which all should directionally some.

Speaker 6: And most importantly, even though we're hitting our turnaround execution goals, we are continuing to complete all the necessary work to operate the equipment safely and reliably over time. So that program is continuing to mature. We're continuing to see that, and that will allow our utilization rates to be available.

<unk> improved market capture and utilization, yes, thanks, rich yet that we've we've really come a long way on business transformation efforts. It was a heavy lift a major focus really for the last 18 months or so and we're seeing great progress.

Speaker 6: rate basis. Yeah.

We beat our goal of $500 million by year end of 'twenty, two and we're accelerating right into 'twenty, three hitting more than $600 million in the first quarter and as I mentioned in our comments, we will take you on a tour of those those realized savings.

Speaker 6: Over half of the 400 million run rate cost savings that Kevin mentioned in his comments are coming out of refining.

Speaker 6: And that's good news for us. And probably more importantly as

Speaker 6: As Mark has indicated, our entire organization is uncovering opportunities to lower costs. We're being much more efficient in how we work and accepting the challenge to improve the business, which all should directionally support improved market capture and utilization.

At the second quarter call.

We are.

We're excited the organization's excited we've made major changes in the structure of the organization that eliminates a lot of inefficiencies. We've got feedback loops that we put in place to make sure that these these savings are real and that they are sustainable and we're seeing it and people have bought and we're using some really really state of the art tools to make sure.

Speaker 1: Yeah, thanks Rich. Yeah, we've really come a long way on business transformation efforts. It was a heavy lift, a major focus really for the last 18 months or so and we're seeing great progress. We we beat our goal of 500 million dollars by year end of 22 and we're accelerating right into 23.

Or that we're capturing what we think we are capturing and delivering those results to the bottom line.

It's just an incredible change in the organization that we've witnessed over the last.

Six or eight months as things start to be realized.

And a lot of progress in a short period of time, Mark I guess my follow up is fairly predictable and I apologize for this demand.

Youre largely one of your large competitors talked about big increases in diesel demand year over year.

A healthy outlook for gasoline market doesn't seem to believe that right now.

Speaker 1: We've made major changes in the structure of the organization that eliminates a lot of inefficiencies. We've got feedback loops that we put in place to make sure that these savings are real and that they're sustainable. And we're seeing it and people have bought in. We're using some really state-of-the-art tools to make sure that we're capturing what we think we're capturing and delivering those results to the bottom line. And if we don't know how we get it through, we quickly start creating new Lookers resources. And then, we'll move to the next Comscoring Hawaiians put-in place. Grado Maya,fire kind of implemented on the connect Control panel, but now we're very Temporeal and looking at some individual products, not just our climate change, but going to see it throughout the fiscal year.

I just wonder through your marketing channels that you could share what youre seeing on both of those trends.

Yes.

Yes, Doug This is Brian maybe I'll talk about kind of what we're seeing in the market.

Kind of what we're seeing in our business as well, although our volumes are somewhat off because of California flooding and because of some maintenance, but generally for U S. Gasoline, we're seeing demand better than last year, and we're seeing global demand about 3% better than last year, where we're now head into gasoline driving season as was mentioned with kind of a <unk>.

With U S gasoline inventories in almost 10 years.

We're also seeing very strong octane spreads are about a third larger than they were.

First quarter of last year 2007.

Speaker 2: a healthy outlook for gasoline and market doesn't seem to believe that right now. I just wonder through your marketing channels if you could share what you're seeing on both of those trends.

We would expect demand to hold better than last year, particularly given that.

We have lower retail prices versus last year as well on the diesel side year did start off weaker early in the year with a warmer winter, but has begun to firm with mid continent planning season. Currently we are seeing a USPS will demand about three 5% under last year, but that said global distillate demand is a bit stronger.

Speaker 5: Yeah, Doug, this is Brian . Maybe I'll talk about kind of what we're seeing in the market and that's kind of what we're seeing in our business as well, although our volumes are somewhat off because of California flooding and because of some maintenance. But generally for US gasoline, we're seeing demand better than last year and we're seeing global demand about 3%.

Longer than last year in some countries are seeing particularly strong diesel demand in Latin America, we're seeing demand at 10% over last year in China, 4% over last year, and finally, I would say that in the U S. It's been bouncing back and forth between Max diesel and Max gasoline pad fives <unk> been in Max gasoline since mid February pretty much.

Pad, one signaled Max gasoline in mid April and so this bodes well for helping the firm up distillate throughout the summer.

Speaker 5: year, 27 cents. We would expect demand to hold better than last year, particularly given that we have lower retail prices versus last year as well. On the diesel side, the year did start off weaker early in the year with a warmer winter but has begun to firm with mid-continental planting season. Currently we're seeing US diesel demand about three and a half percent under last year.

Interesting color, we'll watch with interest guys. Thanks, so much for your question I'm sorry.

Thanks, Doug.

Ryan Todd from Piper Sandler. Please go ahead your line is open.

Great. Thanks, maybe.

Maybe you basically said that youre not going to talk about this until next quarter, but was wondering on the cost reduction side I mean, you've made great progress there.

Yeah.

Can you can you talk a little bit about.

Speaker 5: Pad 5s had been in max gasoline since mid-February pretty much. Pad 1 signaled max gasoline in mid-April. And so this bodes well for helping the firm up this lit throughout the summer.

Where.

You have been ahead of schedule, where you've had some success there and whether you've already hit the 200 million dollar kind of sustaining capital reduction target is there further upside.

Speaker 7: Interesting color. We'll watch with interest guys. Thanks so much for your answers.

To that versus your prior target and as you continue to trend ahead of ahead of schedule.

Speaker 3: Thanks Doug. Ryan Todd from Piper Sandler, please go ahead your line is open.

Have your expectations changed at all in terms of the ultimate amount of cost savings that you might find available.

I'll touch a couple of those things right at a high level and then Kevin can can drill into how the how the savings are distributed.

Speaker 8: Great, thanks.

Speaker 8: Maybe you basically said that you were not going to talk about this until next quarter, but was wondering on the cost reduction side, I mean, you've made great progress there. I mean, can you talk a little bit about

Really refining has performed very well with respect business transformation, we're seeing that on the sustaining capital I just want to make it clear that that that's really not an outright reduction in sustaining capital opportunities, it's becoming more efficient and more productive and how we're spending that and we're going to continue to do that youll see.

Speaker 8: where you've been ahead of schedule, where you've had some success there, and whether, I mean, you've already hit the $200 million kind of sustaining capital reduction target. Is there further upside to that versus your prior target? And as you continue to trend ahead of schedule.

Really that impact in any of our capital projects that we look at going forward and we're not really capturing that.

Going to be a continuous process to look at how to get more and more efficient around sustaining capital.

Speaker 8: Does it have your expectations changed at all in terms of the ultimate amount of cost savings that you might find available?

And we're not going to end.

This adventure when we get to the end of the defined program at the end of next year that we have outlined goals. We expect to continue to generate more savings on into 2024 and beyond there are some things that we arent even talking about today that require modest capital that will further enhance cost savings so.

Speaker 1: I'll touch a couple of those things, Ryan, at a high level, and then Kevin can drill into how the savings are distributed. Really refining has performed very well with respect to business transformation. We're seeing that. On the sustaining capital, I just want to make it clear that that's really not an outright reduction in supply and demand for the

<unk>.

We're instilling this as part of our culture, Ryan and this is just going to be an ongoing.

Speaker 1: sustaining capital opportunities, it's becoming more efficient and more productive in how we're spending that and we're going to continue to do that. You'll see really that impact in any of our capital projects that we look at going forward and we're not really capturing that. So it's going to be a continuous process to look at how to get more and more efficient around sustaining capital.

March of continuous improvement greater competitive edge, we've got 14000 employees that want to win out there every day and they're highly motivated not Kevin can give you a little insight to where youre going to see these numbers.

Yeah. Thanks, Mark So as we said over 600 million run rate at the end of the quarter. When you adjust for the fact some of that capital from the from an EBITDA standpoint, it's north of $400 million run rate and as we look at the detail in the quarter. We are seeing the proportionate share of that show up it is not.

Speaker 1: And we're not going to end this adventure when we get to the end of the Define program at the end of next year, that we have outlined goals. We expect to continue to generate more savings on into 2024 and beyond. There's some things that... We agree that future initiatives.

Fairly obvious from the externally reported data just because of the other things happening like consolidations BCP into our results.

We aren't even talking about today that require modest capital that will further enhance cost savings. So we're instilling this as part of our culture, Ryan, and this is just going to be an ongoing march of continuous improvement, greater competitive edge. We've got 14,000 employees that want to win out there every day, and they're highly motivated. Now Kevin can give you a little insight to where you're going to see these numbers.

And so on.

But of that.

400 million plus run rate half of that or even a little bit more is showing up in refining which is where you would expect it to be given that's the largest spend area and the company anyway.

We're doing this through a combination of.

Yeah, thanks Mark. So as we said over 600 million run rate at the end of the quarter. When you adjust for the fact some of that's capital from an EBITDA standpoint it's north of 400 million dollar run rate and as we look at the detail in the quarter we are seeing the proportionate share of that show up.

Organization work, we completed that last year, and we've seen that benefit flowed through this quarter between the.

So the centralization of some of our activities across the organization. We've done a lot of work around our processes, where we've been looking for ways to standardize and simplify the way we do work and in some cases just eliminate.

It's not necessarily obvious from the externally reported data just because of the other things happening like consolidation of ECP into our results and so on. But of that 400 million plus run rate, half of that or even a little bit more is showing up in refining, which is where you would expect it to be given that that's the largest spend area in the company anyway.

Work.

And so we've optimized the sort of the overall business support model around all of those activities and then we continue to work on our external spend the third party sourcing.

Activities in leveraging leveraging the technologies that we really put the foundation in place with advantage, 66% in terms of the digital.

Progress we have made in those areas so a lot of different.

We're doing this through a combination of organization work. We completed that last year and we've seen that benefit flow through this quarter between the centralization of some of our activities across the organization. We've done a lot of work around our processes where we've been looking for ways to standardize.

Elements to that and we'll give more specifics at this time next quarter as we have the half year results available.

Great. Thanks.

And then maybe I mean.

You mentioned the importance of crude differentials to refining profitability can you can you talk a little bit I mean, we've seen some pretty big moves on crude differentials.

Maya widening and then coming in some Canadian heavy differentials narrowing.

Can you talk about what Youre seeing out there what your outlook is for some of these crude differentials over the remainder of this year.

Sure Ryan this is Brian.

I think overall as you pointed out sours gained strength since the beginning of the year.

And this strength was a number of factors you have.

Now, it's starting to weaken but you have new refinery capacity in China and in Kuwait, you have new U S refinery additions on the Gulf Coast at Port Arthur in Galveston Bay, We had an unexpected OPEC cut $1 1 million barrels don't know how much of that cut will actually happen, but that's that's a large cut.

Chinese economy has been very strong and you can see that the economy coming back with more people driving more people flying and then lack of <unk>.

Sour barrels on the market so combination of things firmed. It initially and then the market started to weaken I will point out that even though the market has come off since Q1, when you think about the sours its useful to remember that while the week there is still weak but relative to historical perspective, so if you're looking at.

Sure.

Latin American Sours like Steve Meyer, this still about 4% to $6 weaker than five year averages. So those so those differentials are still weaker than historical although they firmed up some since Q1.

Okay. Thank you.

Thanks, Ron.

Now, let's start with UBS you May proceed your line is now open.

Okay, I guess I wanted to first touch base, a little bit on the chemicals earnings seen a strong rebound in <unk>.

And if you will.

<unk> margin. So just trying to understand from you from the demand point on the chemical side. What are you seeing in and should we expect a further recovery in chemical margins given the strong global demand.

Yes, Manav. This is Tim Roberts on the chemicals front, what you got really arent, yes, we did benefit the benefit was really related to lower advantage feedstocks ethane propane butane name.

Namely here in the United States. So you saw that advantage as those prices dropped.

They became advantaged in the crack and subsequently that shown up in the margin the other side of that as well as lower natural gas prices, which of course is driving that whole structure.

Also help with regard to utility cost. So you had lower utility costs better feedstock advantage. So it really helped in the quarter.

You still got a supply issue and you have a demand issue on the supply side fundamentally you've got more capacity that's coming on board in the here in the United States.

So you're going to have to work through that new capacity the demand side is coming around.

We're still trying to work off a lot of inventory that happened is you had the supply chain disruptions out there in the marketplace. So you've got to work through that inventory and you also need to see China coming back stronger and as Brian mentioned, there are some strength there in travel driving so some good things there needs to also show up in consumption on that side.

As well as production to meet global demand for <unk>.

Products made out of polymers. So fundamentally I think it's still going to take us a little bit of time to work through those two imbalances, we're not expecting anything to happen by the end of the year, that's going to be a significant bump, but I would throw one caveat is China is a significant impact in the market. If they are clicking on all cylinders.

As you can see things change rapidly.

But at this point in time, we've got an inventory to work off and were need to see some additional demand come back, especially from Asia, Yes. The only thing I would add it manav is <unk>.

Operations have been very strong.

And I think their ability to.

Our produce their competitors as based on their strong operations and solid cost position and they are delivering in a tough environment theyre delivering and outperforming.

And I do think mark exactly on that point, though is that also their product slate is geared towards consumables durables are a little bit you are seeing it slow up a little bit on the durables front and they don't have as much exposure to that.

Perfect. Thanks, Mike My quick follow up is if we can get some updates on the progress you are making on your renewable diesel project can hope feedstocks up by early 2024.

Yes.

We're making good progress on the project out at Rodeo you heard me mentioned, we shut down the Santa Maria facility, which is basically a feed prep unit four the rodeo facility.

Project.

<unk> is moving along and then lots of weather challenges out there, but the team has fought through it and dealt with it.

And we're looking forward to having that on in the first quarter of next year.

And I'll remind you that we've had a unit there operating and producing renewable diesel at what we call unit $2 50 since April 2021, and I'll tell you what it's exceeded both our operating expectations in our commercial expectations and frankly, we are ready for more we've got a great strategy out there.

There and and we are implementing and executing and I'll, let Bryan touch on more of those details.

Just.

To follow up on Mark's point, the margins that we've seen at unit $2 50. Since we started the unit in Q1 of 2021 have been better than we'd premise every single quarter.

And if you remember we premise June to $2 51, running a soybean oil feedstock only but we've also run distillers corn oil canola oil and pretreated used cooking oil and we're actively lending feedstocks at the plant now and in General just general comment we're seeing three times the volumes of low Ci imports into the U S. Now.

Last year, and we're also seeing more crushing capacity for vegetable oils.

And then on the marketing side of the business, we're selling almost all of our production to our branded and retail outlets directly to the end consumer and we've also sold volumes to geographic locations that offer higher credit incentives than California for some of the feedstocks and then finally on the credit side. The CFS programs are currently available in.

California, Oregon, and Washington in Canada, as you know, but we're seeing other states proposing these programs and in fact, Minnesota and Pennsylvania are two states that recently proposed now CFS program and then that's the kind of commercial side Mark mentioned, the operating side too on the operating side, we're seeing higher than premise yields of Rd at greater than 95.

5% and we're also making 30% more renewable diesel production at the plant than we originally thought so as Mark pointed out we're looking forward to a day, a renewed and where they renewed will also have the flexibility of producing up to 10000 barrels of renewable jet fuel with very little capital.

Those are all very encouraging update thank you guys.

Thanks, Bob.

John Royall with Jpmorgan. Please proceed your line is open.

Okay.

Hi, good morning, Thanks for taking my questions.

So my first one is on Opex can you talk about opex trends in refining into the second quarter.

Item that you don't guide to but <unk>.

<unk> ticked down presumably on lower natural gas prices.

Quite higher maintenance.

<unk> you will have an even lower price, presumably in west maintenance and of course your efforts around cost so any color on expectations on the refining opex side in <unk> and going forward.

John This is Kevin I would just say I mean.

Points are valid, we'll see will benefit from lower maintenance turnaround costs.

And the natural gas prices are settling in at a.

Pretty low level and so you.

You would expect to see a drop <unk>, we're not giving specific guidance on the number and then the other side of that as utilization will be higher so some of the variable costs youll see a small impact from.

That's a.

That's a good thing, but net net I think you should see yet small a modest sequential decline.

Great. Thanks, Kevin and then just on the share buyback in <unk> you placed a bit ahead of your quarterly pace that you need to hit your longer term guidance.

But <unk> does have an outflow from the acquisition. So how should we be expecting a slowing in <unk> and then further if the environment.

To continue to deteriorate from a crack perspective could that impact your pacing as well.

Yes.

John I wouldn't be too concerned about buyback pace being <unk>.

Driven by the funding the buyback because.

We are the $7 billion cash balance at the end of the first quarter.

Had drawn we had issued one in a quarter $1 billion of notes, but we have the <unk>.

Great. Thanks, Kevin and then just on the share buyback in <unk> you placed a bit ahead of your quarterly pace that you need to hit your longer term guidance, but.

Term loan facility, which has not been drawn yet and so we will draw on that as we fund the buy in so even.

<unk> does have an outflow from the acquisitions, so how should we be expecting a slowing in <unk> and then further if the environment.

All other things.

<unk> will still have a healthy cash balance at that point in time, we're still generating cash.

To continue to deteriorate from a cracks perspective could that impact your pacing as well.

So I think that.

Our buyback pace should still be at a very respectable level in the second quarter.

Yes.

John I wouldn't be too concerned about buyback pace being <unk>.

The balance sheets in a good position the operating cash flow is still strong we've seen some weakening in refining margins, but relative to our mid cycle assumptions. The business is still looking really good so I'm not too concerned about the buyback pace.

Driven by the funding the buyback because.

We are at a $7 billion cash balance at the end of the first quarter.

Had drawn we had issued the one in the quarter $1 billion of notes, but we have the <unk>.

Being impacted by the DCP by it.

Term loan facility, which has not been drawn yet and so we will draw on that as we fund the buy in so even.

Thank you.

Matthew plan with Tpa. Please proceed your line is open.

All other things.

<unk> will still have a healthy cash balance at that point in time, we're still generating cash.

Hey, good morning, I was hoping you could expand a little bit on the dynamics in the central corridor in Q1, and then heading into Q2 as well I think you ran at 89% utilization in Q1.

So I think that.

Our buyback pace should still be at a very respectable level in the second quarter.

The balance sheets in a good position the operating cash flow is still strong we've seen some weakening in refining margins, but relative to our mid cycle assumptions. The business is still looking really good so I'm not too concerned about the buyback pace.

Wood River and Borger is still impacted by some of the issues from Q.

Q4, and then it looks like your margin capture was actually pretty good in Q1 of 116%.

Was that a function of a wider WCS tips.

Being impacted by the DCP by it.

And then I guess would we expect lower margin capture and central corridor heading into Q2 with narrower WCF gifts.

Thank you.

Matthew plan with Tpa. Please proceed your line is open.

Hey, good morning, I was hoping you could expand a little bit on the dynamics in the central corridor in Q1, and then heading into Q2 as well I think you ran at 89% utilization in Q1.

Yes. This is rich.

The Central corridor I think in the first thing to remember in our quarter over quarter analysis fourth quarter, we had some pretty heavy headwinds with the Keystone shut down in the winter storm effects. So thats kind of sets sets the baseline in.

Wood River and Borger is still impacted by some of the issues from Q4 and then it looks like your margin capture was actually pretty good in Q1, 116%.

In the first quarter, we did see improved feedstock advantage running the heavy heavy crudes and more importantly, we were able to actually increase our crude slate percentage of these crudes that we were able to run that that impacted our market capture there as well now some of that was offset by the <unk>.

Was that a function of wider WCS tips and.

And then I guess would we expect lower margin capture and central corridor heading into Q2 with narrower WCS.

Planned downtime impacts that carried on initiated fourth quarter carried on into the first quarter.

Yes. This is rich.

That unplanned downtime primarily at Wood River was is now repaired and the facilities back up and running we did slide one turnaround from the first quarter to the first half of the second quarter that turnaround is now wrapping up this.

Central corridor I think the first thing to remember in our quarter over quarter analysis fourth quarter, we had some pretty heavy headwinds with the Keystone shut down in the winter storm effects. So thats kind of sets sets the baseline.

In the first quarter, we did see improved feedstock advantage running the heavy heavy crudes and more importantly, we were able to actually increase our crude slate percentage of these crudes that we were able to run that impacted our market capture there as well now some of that was offset by them.

This week here, so we do expect.

<unk> utilization rates to get.

Get back to higher levels for the WR be assets.

They're also as there was other some some slight turnaround impacts as well to that first quarter results in a little bit lower market cracks also that played into that that result.

Planned downtime impacts that carried on initiated fourth quarter carried on into the first quarter.

That unplanned.

That's how we see the central corridor kind of moving forward, we expect our utilization rates too.

Downtime, primarily at Wood River was is now repaired and the facilities back up and running we did slide one turnaround from the first quarter to the first half of the second quarter that turnaround is now wrapping up this.

Turn back upwards.

Okay.

Great. Thanks, and then.

Thanks for the comprehensive R&D update.

I just had one follow up there could you talk about how the process is going for getting <unk> PFS pathways Sameer.

This week here so we do.

<unk>.

<unk> utilization rates too to.

Get back to higher levels for the <unk> assets.

Some of your peers have mentioned that carb is pretty pretty backed up and it's taking longer than expected.

They're also as there was other some some slight turnaround impacts as well to that first quarter results in a little bit lower market cracks also played into that at that result.

As you bring on the full site.

In Q1, 'twenty four would you expect to have all your Lcs pathways at that time or.

Is that a risk to the to the earnings contribution.

That's how we see the central corridor kind of moving forward, we expect our utilization rates too.

Well, we this is rich again.

Turn back upwards.

We anticipated this.

Great. Thanks, and then.

Flood of activity that would occur to get these L. CFS pathways approved and we've been working diligently to get these approved even ahead of the startup of the project any pathway that was approved for the unit 250 operation is also applicable to.

Thanks for the comprehensive R&D update.

Just had one follow up there could you talk about how the process is going for getting <unk> PFS pathways Sameer.

Some of your peers have mentioned that carb is pretty pretty back up and it's taking longer than expected.

Rodeo renewed.

As you bring on the full site.

Project as well so while we are concerned I would say that.

In Q1, 'twenty four would you expect to have all your El CFS pathways at that time or.

There is a flood of applications to pathways.

Is that a risk to the to the earnings contribution.

We think we're in a good position and that should that should meet or into our system consistent with the startup of the project.

Well, we this is rich again, we anticipated this.

Great. Thanks, so much.

Flood of activity that would occur to get these L. CFS pathways approved and we've been working diligently to get these approved even ahead of the startup of the project any pathway that was approved for the unit 250 operation is also applicable to the.

Okay.

Paul Cheng with Scotiabank. Please proceed your line is open.

Hey, guys good morning.

Okay.

Mark just got two questions first.

With the new California wind.

Full path of penalty.

Rodeo renewed.

That being Pos how does that change your view or does it change your view about your California, offset both the refining and marketing.

Project as well so while we are concerned I would say that.

There is a flood of applications to pathways.

Yes, Paul.

We think we're in a good position and that should that should meet or into our system consistent with the startup of the project.

Ben.

Sure.

Taking up a lot of intellectual capacity for for I think the entire industry. Since that was that was rush through before that California is a tough place to manage refining business and I think this just.

Great. Thanks, so much.

Okay.

Paul Cheng with Scotiabank. Please proceed your line is open.

It makes it even a little more difficult.

We're like everyone else is working hard to understand both the intended and unintended consequences of SPX won best too.

Hey, guys good morning.

Okay.

Just two questions first.

With the new California.

And it certainly is.

For half a penalty.

Fundamental level creates more uncertainty and it's going to make it more difficult for people to step up and invest in the supply chain that the consumer's need because.

That being Pos how does that change your view or does it change your view about your California answer both the refining and marketing.

Even though you have got a lot of things.

Yes, Paul.

Ben.

Thanks coming over the hill to reduced demand today demand is strong and you can see what happens when there is disruptions.

Taking up a lot of intellectual capacity for for I think the entire industry. Since that was that was rush through before that California is a tough place to manage the refining business and I think this just.

And.

The supply chain can be pretty tight there. So it's really tough for us to see.

It makes it even a little more difficult.

How this new law is going to benefit the consumers at the end of the day.

We're like everyone else is working hard to understand both the intended and unintended consequences of SPX <unk> II.

Mark do you think the industry is going to challenge them and call because I'm not sure.

And it certainly is.

Fundamental level creates more uncertainty and it's going to make it more difficult for people to step up and invest in the supply chain that the consumer's need because even though <unk> got a lot of things.

Yes, the industry has not been approved.

Anything worldwide.

Lastly, the penalty.

Yes, I think that it is logical to assume that industry associations will defend and protect the interests of the industries and even individual companies may may take action, that's certainly going to be up each company, but from an industry perspective, I think that that's that's it.

Thanks coming over the hill to reduce demand today demand is strong and you can see what happens when there's disruptions.

And.

The supply chain can be pretty tight there. So it's really tough for us to see.

How this new law is going to benefit the consumers at the end of the day.

Angled is obviously being looked at.

Okay does that mean.

Question I think this is Catherine Kevin you mentioned above.

Mark do you think the industry is going to challenge them and call because I'm not sure.

Refining captured in your presentation in the Hopper car loans.

If the industry has not improved.

Terry take policy and I actually went back to that last four five quarters.

<unk> done anything wrong, why that will be snap with a penalty.

Yes, I think that it is logical to assume that industry associations will.

Sure.

I think like all access.

So that column as always any magnitude yes.

Yes, yes.

Defend and protect the interests of all of the industries and even individual companies May may take action, that's certainly going to be up each company, but from an industry perspective, I think that that's that's an angle that's obviously being looked at.

Yes, harping wall module against.

<unk>, what we've seen in this quarter.

Hello, Paul.

In your prepared remarks that Paul and maybe more.

Column.

That is why we have seen for taking in Portland, and what the policy is sustainable.

Okay does that mean.

Question I think that this fall Catherine Kevin you mentioned above.

We are finding captured in your presentation.

Yes, Paul the big driver of the change this quarter, especially comparing to last quarter.

Hopper car loans.

Very big positive.

Is around the product clean product realizations are clean product differentials and that was a particular negative item in the fourth quarter, because the way we do our market.

I actually went back to that last four or five quarters.

Sure.

I think without exception that column as always any magnitude.

Yes, yes, yes.

Just hoping you all module.

The market crack for Atlantic Basin, we use a new York Harbor based crack.

During stops eight benefiting like what we've seen in this quarter I think it was.

And the.

Paul.

Distillate crack of the jet crack because particularly strong in New York Harbor. It was weaker in Europe and our capacity is approximately 50 50 between New York Northeast and Europe, and so our Europe distillate production is causing a negative relative to that market.

In your prepared remark can you elaborate a bit more of a column we did what they said.

And why we have seen for taking it globally and what the policy is sustainable.

Yes, Paul the big driver of the change this quarter, especially comparing to last quarter.

Is around the product clean product realizations are clean product differentials and that was a particular negative item in the fourth quarter, because the way we do our market.

So that pulls down the overall capture and that shows up in other we had a little bit of a similar phenomenon going on in the west coast as well, where we use an la marker for the entire West coast, which includes northern California, and the Pacific Northwest and so when those markets are out of sync with each other that can drive differentials.

The market crack for Atlantic Basin, we use a new York Harbor based crack and the <unk>.

Our actual product realizations and that will show up in that other that's the biggest single driver in there Paul.

Distillate crack of the jet crack because particularly strong in <unk>.

Harbor It was weaker in Europe , and our capacity is approximately 50 50 between New York Northeast and Europe , and so our Europe distillate production is causing any cause a negative relative to that market and so that pulls down the overall capture and that shows up in other.

And it was really negative impacts from in the fourth quarter.

Jason <unk> with Cowen. Please proceed your line is now open.

Hey, Thanks for taking my questions.

First I wanted to ask was on kind of a global refining margin structure.

It's a little bit of a similar phenomenon going on in the west coast as well, where we use an la marker for the entire West coast, which includes northern California, and the Pacific Northwest and so when those markets are out of sync with each other that can drive differentials.

There are stories out there that Asian plants are cutting runs while U S. Cracks are still really healthy $20 a barrel so the.

Question is.

Does that kind of.

A leading indicator that some of that weakness will ultimately make its way over.

Our actual product realizations and that will show up in that other that's the biggest single driver in there Paul.

The U S via lower margins or is it an indication that the global margin environment could be at a floor because we are cutting runs somewhere.

And it was really negative impacts from in the fourth quarter.

Nathan gambling with Cowen. Please proceed your line is now open.

Hey, Jason This is Brian I'd say that as you know refineries in the U S are advantaged relative to European and Asian refineries and as margins in Asia and Europe have begun to fall. We like like you said, we are beginning to see runs trend, particularly in Korea, Taiwan and Europe also China is heading this month into turnarounds.

Hey, Thanks for taking my questions.

But first I wanted to ask was on kind of a global refining margin structure.

There are stories out there that Asian plants are cutting runs while U S. Cracks are still really healthy $20 a barrel so the.

Season, which should along with the low U S inventories and the fact that we're stepping into summer driver's seat driving season begin to help strengthen in our opinion global margins.

Question is.

Does that kind of.

A leading indicator that some of that weakness will ultimately make its way over.

Okay.

The U S via lower margins or is it an indication that the global margin environment could be at a floor because we're cutting runs somewhere.

Okay great.

Follow up is on ACP and I understand the deal isn't closed yet, but just maybe wanted to get some early indications on progress and specifically I think part of the rationale for the deal was the combined midstream platform of Philips and DCP would attract.

Hey, Jason This is Brian I'd say that as you know refineries in the U S are advantaged relative to European and Asian refineries and as margins in Asia and Europe have begun to fall. We like like you said, we are beginning to see runs trend, particularly in Korea, Taiwan and Europe also China is heading this month into turnarounds.

More.

Hey, Greg Phil.

Midstream assets within that platform and support growth there and so the question is are there any early indications that.

Season, which should along with the low U S inventories and the fact that we're stepping into summer driver's seat driving season begin to help strengthen in our opinion global margins.

Upstream companies do view this combined platform is more favorable to partner with.

Okay.

To support future midterm growth for Philips.

Okay great.

My follow up is on ACP and I understand the deal isn't closed yet, but just maybe wanted to get some early indications on progress and specifically I think part of the rationale for the deal was the combined midstream platform of Phillips from DCP would attract.

Yes, Jason This is Tim Roberts, Yeah, a couple of things first thing on the second part of the deal which is they buying in the public units, we're expecting to get that down here in Q2, probably in latter portion of the second quarter.

To get that completed and get that behind us and increasing our economic interest points to eight 7%. So.

More.

Acreage to Phil.

The next part first rationale of the deal what.

Midstream assets within that platform and support growth there and so the question is are there any early indications that.

What we found is that those that were integrated wellhead, especially in the NGL space wellhead to the market.

Upstream companies do view this combined platform is more favorable to partner with.

More and more advantage to knows that maybe only participated in a portion of the value chain I E G&P.

To support future midterm growth for Philips.

The transportation logistics fractionation.

Yes, Jason This is Tim Roberts, Yeah, a couple of things first thing on the second part of the deal which is the buying and the public units, we're expecting to get that down here in <unk>, probably latter portion of the second quarter.

Exports.

So being able to go into a major.

And being able to sell the ability to get from the wellhead all the way to the market is tough to do if you don't participate all the way there so bringing the GNP portion of DCP together with Philips portion, which was the transportation all the way to the dock.

To get that completed and get that behind us and increasing our economic interest up to 87%. So.

The next part first rationale of the deal but.

We think that created that infrastructure now that can go out and compete now to your question.

What we found is that those that were integrated wellhead, especially in the NGL space wellhead to the market.

Has that shown any interest or we have an interest percolating out there from producers who like that the answer is yes.

We're more advantage to knows that maybe only participated in a portion of the value chain I E G&P.

We've had a lot of activity.

And a lot of engagement as you would expect and people want options and more alternatives and so we're bringing a viable option and alternative as well as the ability to get barrels out of the Houston ship channel and get them down to a less congested area down in the Freeport swing area. So yes, it's been so far so good we just need to make sure we can do.

The transportation logistics fractionation.

Exports.

So being able to go into a major.

And being able to sell the ability to get from the wellhead all the way to the market is tough to do if you don't participate all the way there so bringing the GNP portion of DCP together with Philips portion, which was the transportation all the way to the dock.

Those into bottom line.

Great. That's really helpful. Thank you for the color.

We think that created that infrastructure now that can go out and compete now to your question.

Thank you Jason.

That concludes the question and answer session I will now turn the call back over to Mike laser for closing remarks.

Is that June any interest or we have any interest percolating out there from producers who like that the answer is yes.

Thank you Sarah and I just wanted to recap a few key things we had a strong start to the year.

We've had a lot of activity.

And a lot of engagement as you would expect people want options and more alternatives and so we're bringing a viable option and alternatives as well as the ability to get barrels out of the Houston ship channel and get them down to a less congested area down in the Freeport swing area. So yes, it's been so far so good we just need to make sure we can do.

Our solid first quarter results and we raised the dividend and increased our share repurchases, which are on a pace to deliver our target return of $10 million to $12 million.

From July of 2022 year end 2024.

We made great progress in refining with strong turnaround execution improved market capture and lower costs in midstream. This as Tim mentioned, we advance midstream integration and we remain confident in capturing $300 million of synergies, we expect to close on the buy in this quarter.

Who is in the bottom line.

Great. That's really helpful. Thank you for the color.

Thanks, Jason.

That concludes the question and answer session.

I'll now turn the call back over to Mark laser for closing remarks.

We're progressing our business transformation initiatives and we're on track to achieve a $1 billion of annual run rate savings by year end.

Thank you Sir I just wanted to recap a few key things we had a strong start to the year.

We remain committed to financial strength.

Our solid first quarter results and we raised the dividend and increased our share repurchases, which are on a pace to deliver our target return of $10 million to $12 million from July of 2022 year end 2024, we've.

Disciplined capital allocation and returning distributions to our shareholders.

We look forward to updating you on our progress.

Thank you for all your interest in Phillips 66.

We've made great progress in refining with strong turnaround execution improved market capture and lower cost in midstream. This as Tim mentioned, we advanced midstream integration and we remain confident in capturing $300 million of synergies, we expect to close on the buy in this quarter.

We're progressing our business transformation initiatives and we're on track to achieve a $1 billion of annual run rate savings by year end.

We remain committed to financial strength.

Disciplined capital allocation and returning distributions to our shareholders.

We look forward to updating you on our progress.

Thank you for all your interest in Phillips 66.

[music].