Q1 2023 Phillips 66 Earnings Call
Speaker 1: We're honored to receive these awards and would like to recognize our employees' commitment to operating excellence.
Speaker 1: Congratulations to all the people working at these facilities. Well done.
Speaker 1: We started the year off well and continued to advance strategic priorities from our investor day late last year.
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.
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.
Speaker 1: We had strong refining operational performance in the first quarter and market capture increased to 93 percent.
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.
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.
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.
Speaker 1: In refining, we're converting our San Francisco refinery into one of the world's largest renewables fuel facilities.
Speaker 1: The conversion will substantially reduce emissions from the facility and produce lower carbon-intensity transportation fuels.
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.
Speaker 1: In chemicals, CP-Chem is pursuing a portfolio of high-return projects, enhancing its asset base and optimizing its existing operations.
Speaker 1: This includes construction of a second world scale 1-hexane 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.
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.
Speaker 1: We look forward to continuing to update you on our strategic priorities.
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.
Speaker 2: Adjusted earnings were $2 billion or $4.21 per share.
Speaker 2: The $12 million decrease in the fair value of our investment in the BONIX reduced earnings per share by 2 cents.
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.
Speaker 2: Capital spending for the quarter was 378 million dollars including 228 million dollars for growth projects.
Speaker 2: We returned $1.3 billion to shareholders through $486 million of dividends and $800 million of share repartices.
Speaker 2: We ended the quarter with 459 million shares outstanding.
Speaker 2: Moving to slide six.
Speaker 2: This slide highlights the change in adjusted results by segment from the fourth quarter to the first quarter.
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.
Speaker 2: Slide seven shows our midstream results.
Speaker 2: First quarter, adjusted pre-tax income was $678 million, compared with $674 million in the previous quarter.
Speaker 2: Transportation contributed adjusted pre-tax income of $270 million up to $33 million from the prior quarter.
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.
Speaker 2: The decrease was mainly due to the impact of declining commodity prices in the gathering and processing business.
Speaker 2: The fractionators at the Sweeny Hub continue to run above nameplate capacity, averaging 554,000 barrels per day.
Speaker 2: The Freeport LPG Export Facility loaded a record 282,000 barrels per day in the first quarter.
Speaker 2: Turn to chemicals on slide 8.
Speaker 2: Chemicals had first quarter adjusted pre-tax income of $198 million compared with $52 million in the previous quarter.
Speaker 2: The increase was mainly due to improved margins from lower feedstock costs, higher sales volumes, and decreased utility costs.
Speaker 2: The industry polyethylene chain margin increased by 10 cents to 17 cents per pound during the quarter.
Speaker 2: Global O&P utilization was 94% for the quarter.
Speaker 2: Turning to refining on slide 9.
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 low volumes from turnaround activities was mostly offset by higher realized margins and lower utility costs.
Speaker 2: Our real-life margins increased by 5% to $20.72 per barrel, while the composite 321 market crack decreased by 5%.
Speaker 2: In the first quarter, turnaround costs were $234 million, crude utilization was 90%, and clean product yield was 83%.
Speaker 2: 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: Realized margin was $20.72 per barrel and resulted in overall market capture of 93%, up from 84% in the previous quarter. Market capture is impacted by the configuration of our refineries.
Speaker 2: we have a higher distillate yield and a lower gasoline yield than the 321 market indicator.
Speaker 2: During the first quarter the distillate crack decreased $19 per barrel and the gasoline crack increased $7 per barrel.
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.
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.
Speaker 2: The other category improved realized margins by $2.19 per barrel.
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.
Speaker 2: Moving to slide 11.
Speaker 2: Marketing and Specialties had a solid quarter reflecting stronger than typical first quarter margins.
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.
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.
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.
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. Slide 13 shows the change in cash during the first quarter.
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.
Speaker 2: 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: 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.
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.
Speaker 2: This concludes my review of the financial and operating results.
Speaker 2: Next, I'll cover a few outlook items for the second quarter.
Speaker 2: In chemicals, we expect the second quarter global O&P utilization rate to be in the mid-90s.
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.
Speaker 2: We anticipate second quarter corporate and other costs come in between 260 and 290 million dollars, reflecting higher interest costs.
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.
Speaker 2: Now we will open the line for questions.
Speaker 3: 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.
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Speaker 3: Once again, if you have a question, please press star, then one on your touchtone phone. No matter what Goldman Sachs.
Speaker 3: 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? It's been a choppy 18 months in refining from a utilization standpoint.
Speaker 5: performance. One of them was asset availability. Optimizing our turnaround durations, 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
It's really executing those turnarounds.
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. What you saw as well, the refining market capture rate of 93% was very good for the quarter as well.
The key assets there are running the assets, focusing on what we can control in our business, Neil, and that is executing our turnaround as well.
And we were able to do that coming in below guidance this year, or this first quarter, continuing a trend that started last year with the coming in below guidance.
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 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 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 in turnaround, starting to impact the the operational
effectiveness of the plants, as well as they're seeing it in the cost. And that's just been a very virtuous cycle for our employees. There's a stronger competitive edge out there and they really want to own their future now.
Rich, you want to talk about some of the projects that were completed last year? Yeah, I think that plays into the refining capture rate of 93% for the quarter force. Last year we actually implemented 12 projects focused on market capture.
The result of the impact of those projects is a 1.2 percent improvement in market capture with mid-cycle pricing assumptions. We implemented $225 million worth of projects and the net return on those, or the EBITDA generation for that investment was $158 million.
mid-cycle pricing. 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 you know 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
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, 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. Well, let me start, Neil. This is Brian talking about marketing.
Probably noticed 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, and other industries.
What we've been doing is trying to focus our sales on the higher margin parts of our business, particularly in retail. We purchased retail in the past few years. In fact, in mid 2019, we had 50 retail JV stores in the US. Now we have 1,000 retail JV stores in the US. We also spend some time re-imaging all of our stores.
to get higher margins in business. And 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 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 dropping accrued does reduce usually the secondary product's losses. 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. 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.
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 happening to inventories and so on but as a rule of thumb simple rule of thumb you can use that 40 to 50 million dollars
per $1 movement in price. Okay, that's really helpful. Thanks everyone. Thanks Neil.
Thank you. Thank you. Doug, we have with Bank of America. 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.
So should we now think about this level of capture rate? Should we anticipate that 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. That 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.
Great questions Doug. I'll let Rich address the capture and I'll come back in on the cost cutting progress.
Yeah, so, you know, 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, you know, back to focusing on what we can control in our business.
Doug is you know, we're seeing continued maturity in our reliability programs and these saves are coming on a regular basis We're catching issues early and preventing larger events from occurring and also under asset availability As I mentioned earlier that turnaround execution is 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
And then as you mentioned, the cost side of it is a big component of this as well. We have a clear path that we've identified reducing our cost 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 comments are coming out of refining.
And that's good news for us. And probably more importantly as
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.
Yeah, thanks Rich. Yeah, we've we've really come a long way on business transformation efforts. It was a heavy lift and major focus really for the last 18 months or so and 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 hitting
more than $600 million in the first quarter. And as I mentioned in our comments, we'll take you on a tour of those realized savings at the second quarter call. And, you know, we're,
We're excited, the organization is 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 savings are real and that they're sustainable. 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 the benefits of the organization.
what we think we're capturing and delivering those results to the bottom line. So, you know, 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.