Q2 2023 Phillips 66 Earnings Call
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Hello, and welcome to the second quarter 'twenty to 'twenty three Phillips 66 earnings Conference call. My name is Alex mobile operator stays cool.
This time, all participants are in a listen only mode.
We will conduct a question and answer session.
Please note that this conference is being recorded.
I'll now turn the call over to Jeff that VITAS, Vice President Investor Relations, Jeff you may begin.
Good morning, and welcome to Phillips 66 second quarter earnings Conference call.
Our disciplined so on today's call will include Mark Glazer, President and CEO , Kevin Mitchell, CFO , Tim Roberts midstream and chemicals.
Rich harbison refining and Brian Mendell marketing and commercial today.
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 factors that could cause actual results to differ are included here as well as in our SEC filings with that ill turn it over to Mark Thanks, Jeff.
Good morning, and thank you for joining us today.
In the second quarter, we had adjusted earnings of $1 8 billion or $3 87 per share.
We continued to execute on our strategic priorities and returned $1 8 billion to shareholders through share repurchases and dividends.
Our results reflect strong operating performance across our portfolio demonstrating the commitment of our employees to maintain safe and reliable operations.
We want to thank them for their dedication to operating excellence and delivering on our mission to provide energy and improve lives.
In refining we continue to run above industry average rates and in midstream, we had record NGL frac volumes we.
We continue to run our sweeny hub Fracs and export terminal at above nameplate capacities to meet strong demand.
We remain committed to operating excellence and continue to focus on our strategic priorities to create value and return cash to shareholders.
Slide four summarizes progress toward our strategic priorities.
Over the last 12 months, we've returned 14% of our market cap or $5 4 billion to shareholders through share repurchases and dividends.
We're on track to return $10 billion to $12 billion over the 10 quarter period between July 2022 through year end 2024.
In refining we had another quarter of strong operating performance with crude utilization of 93% and lower operating costs.
As at the end of the quarter more than $300 million of the $550 million run rate cost savings are attributable to refining.
Kevin will provide an update on our business transformation progress in a moment.
We're executing our NGL wellhead to market strategy, and capturing DCP integration synergies faster than expected.
Our current synergy run rate is over $200 million.
We've been successful in identifying additional opportunities to increase our target from $300 million.
To more than $400 million by 2025.
In June we completed the acquisition of DCP midstream public common units for $3 8 billion.
Increasing our economic interest from 43% to 87%.
We ended the quarter with a net debt to capital ratio of 35%, we expect leverage to be within our target range by year end.
In refining we're converting our San Francisco refinery into one of the world's largest renewable fuels facilities.
The capital to convert the facility to over 50000 barrels per day of renewable fuels production is anticipated to be approximately $1 5 billion.
This is an increase from our original premise due to higher than anticipated material and labor costs as well as impacts related to weather and permitted.
The revised capital cost of around $1 60 per gallon remains well below similar announced projects and the expected returns are significantly above our refining hurdle rates.
The overall project timing and scope remains unchanged.
We expect to begin commercial operations in the first quarter of 2024.
In chemicals, CP Chem completed construction of the one hexane unit and old Ocean, Texas and expects to begin operations by the end of the third quarter.
The new propylene splitter at Cedar Bayou facility is expected to startup in the fourth quarter.
CP Chem and Qatar energy are jointly building world scale petrochemical facilities on the U S Gulf Coast and in Rosslyn Bond Qatar.
On the U S Gulf Coast, the Golden Triangle polymers joint venture as project financing in place.
The Rosler fund petrochemical joint venture expects to complete project financing later this year.
Both projects remain on schedule to start up in 2026 now.
Now I'll turn the call over to Kevin to review the business transformation savings and second quarter financial results.
Marc starting on slide five with an update on our business transformation progress.
Our $1 billion business transformation target includes $800 million of cost savings and $200 million of sustaining capital reductions.
We have identified over 2700 initiatives to permanently reduce costs with employees across the organization actively engaged in the transformation process.
We have completed 200 initiatives generating value today.
The chart on the left shows our progress towards the $800 million cost reduction target.
With $550 million of run rate cost savings at the end of the second quarter.
The stacked bar shows our actual cumulative cost reductions for the year by category.
Over the first half of 2023, we realized $260 million in cost savings the.
The majority of these cost reductions relate to refining which is benefited by about 40 per barrel.
Business transformation initiatives range from optimizing services across our portfolio of assets to establishing new tools to improve use of steam and energy.
Organizationally, we strengthened our centralized model for core functions to drive consistency and deficiencies.
We continue implementing cost savings initiatives and are on track to achieve our run rate target by year end 2023.
We expect to realize the full $800 million of cost savings in 2024, which will include refining cost reductions of $79 75 per barrel.
Now I'll move to slide six to cover the second quarter financial results.
Adjusted earnings were $1 8 billion.
Our $3 87 per share.
$15 million decrease in the fair value of our investment in Gabon ex reduced earnings per share by <unk> <unk>.
We generated operating cash flow of $1 billion.
Including a working capital use of $1 billion.
And cash distributions from equity affiliates of $239 million.
Capital spending for the quarter was $551 million, including $339 million for growth projects.
We returned $1 8 billion to shareholders through $1 3 billion of share repurchases and $474 million of dividends.
We ended the quarter with 445 million shares outstanding.
I'll cover the segment results on slide seven.
Additional details can be referenced in the appendix to this presentation.
This slide highlights the change in adjusted results by segment from the first quarter to the second quarter.
During the period adjusted earnings decreased $199 million, mostly due to lower results in refining and midstream, partially offset by an improvement in marketing and specialties.
And midstream second quarter, adjusted pretax income was $626 million down.
Down $52 million from the prior quarter.
The decrease was driven by the impact of declining commodity prices in our NGL business.
This was partially offset by higher volumes in transportation.
Chemicals, adjusted pre tax income decreased $6 million to 100.
Third $92 million in the second quarter.
The industry polyethylene chain margins increased by three to.
To <unk> 20 per pound. However, this was offset by higher maintenance and turnaround costs in the quarter.
Global <unk> utilization was 98%.
Refining second quarter adjusted pretax income was $1 1 billion down.
<unk> $460 million from the first quarter.
The decrease was due to a decline in margins, partially offset by higher volumes and lower operating expenses.
Realized margins decreased primarily due to the decline in distillate crack spreads and narrowing heavy crude differentials, partially offset by improved gasoline cracks.
In addition realized margins reflect the impact of losses from secondary products due to declining NGL and coke prices.
Marketing and specialties adjusted second quarter pretax income was $644 million, an increase of $218 million from the previous quarter, mainly due to seasonally higher global marketing margins on continued strong demand.
The corporate and other segments adjusted pretax costs with $12 million lower than the prior quarter.
The adjusted effective tax rate was 22% consistent with the previous quarter.
The impact of Noncontrolling interests was improved compared to the prior quarter and also reflects our acquisition of DCP units on June 15th.
Slide 13 shows the change in cash during the second quarter.
We started the quarter with a $7 billion cash balance.
Cash from operations was $2 billion <unk>.
Excluding working capital.
There was a working capital use of 1 billion, mainly reflecting an increase in inventory, which included the impact of unplanned downtime at the <unk> refinery and seasonal storage opportunities.
Year to date working capital as a use of around $2 billion, primarily related to inventory that we expect to mostly reverse by year end.
We funded $551 million of capital spending.
In June we drew $1 $25 billion on a single draw term loan to partially fund the acquisition of the DCP units for $3 8 billion.
This transaction and the redemption of Dcp's series B preferred units of $161 million.
Ah represented as repurchase of Noncontrolling interests.
Additionally, we returned $1 8 billion to shareholders through share repurchases and dividends, our ending cash balance was $3 billion.
This concludes my review of the financial and operating results next I'll cover a few outlook items.
In chemicals, we expect the third quarter global <unk> utilization rate to be in the mid nineties.
In refining we expect the third quarter worldwide crude utilization rate to be in the mid nineties and turnaround expenses to be between 110 and $130 million.
We anticipate third quarter corporate and other costs to come in between 280 and $300 million.
Reflecting higher net interest expense from funding the purchase of DCP units during the second quarter.
In 2023, we expect our full year capital spend to be above the $2 billion budget, reflecting approximately $200 million of additional additional spending on rodeo renewed.
In addition, we just closed on a $260 million acquisition of West Coast marketing assets.
This acquisition supports the high return rodeo renewed project by optimizing the full value of our renewable fuel sales to end customers.
We continue to review our portfolio to determine if assets meet our strategic long term objectives are if they provide more value to third parties.
Earlier this year, we divested the Bell Chase terminal and very recently, we sold our interest in the South Texas Gateway terminal.
Total proceeds from the two transactions for approximately $350 million.
Now we will open the line for questions after which mark will make closing comments.
Thank you we will now begin the question and answer session.
We open the call for questions as a courtesy to all participants please limit yourself to one question and a follow up thank.
If you have a question. Please press Star then the number one on the telephone keypad.
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Again, if you have a question. Please press Star then the number one on your telephone keypad.
Our first question for today comes from Doug Leggate of Bank of America. Doug. Your line is now open. Please go ahead.
Thank you I appreciate you all taking my questions.
I'm not sure who wants to answer this maybe Kevin but.
Yes.
We've obviously talked AD nauseum about what we think.
Could be a new mid cycle refinance, but what we haven't taken into account is the continued.
Upgrade to your synergy targets faster delivery of your cost reductions and more importantly.
Continued appearance of deferred taxes in your fleet.
And your operating cash flow, so Kevin I guess, Mike Mike somewhat convoluted question is what are you using your sustainable mid cycle.
Free cash flow looks like for the company cost. These recent series of changes that you've introduced.
Yeah, Doug so.
We had guided to $7 billion, increasing to $10 billion at Investor day of cash flow and the reality is some of the actions that bridges from $7 billion to $10 billion, we have executed on and so at this point in time on a traditional.
Our view of refining mid cycle, we're probably somewhere in the.
$8 billion range, maybe a little bit higher than that but we're not all the way to 10, because there are still other things we need to execute on but we're certainly making good progress from the seven to 10.
Our comment on deferred taxes is a relevant one.
This year, we actually expect to have a.
A slightly larger than normal deferred tax benefit on cash flow. So I think I had previously guided to about $4 million to $500 million of benefit for the year, we expect that to be more like 7% to $800 million and thats, mainly because of the impacts of DCP buy in.
On that and after that we should revert to a more traditional sort of $4 million to $500 million level.
Just to be clear you have not changed your view of mid cycle margins as outright.
That is correct, we have not changed our view of mid cycle, but we would acknowledge that we are in a stronger than mid cycle margin environment. Currently we have been for the last year and the year plus year and a half.
And barring any major economic downturn, we actually think that will continue for a reasonable period of time, just given the overall supply demand balances that exist globally.
Okay. Thank you for that my follow up just a quick one the the step up in the buyback pace.
A transitory.
Perhaps as a consequence of the DCP process I'm not quite sure what other things might have delayed you, but I guess my point is if I look to the 5% to $7 billion buyback guidance you gave through 2024.
Two things come to mind, which is while it seems to US you could maintain an elevated pace and certainly a pace well beyond 2024. So I just wonder if you could just touch on the cash return strategy and I'll leave it there. Thanks.
Yes, I think that's right.
You know we have been other than the during the Covid period, we've been consistently buying back shares since really 2012, when we started the program the.
The elevated pace in the second quarter was not so much an impact.
Of the DCP transaction more it was a function of we recognize that relative to our share price at the time in our outlook, which was quite positive in terms of the overall business fundamentals.
It seemed like a good opportunity to up the pace from where we had been in and based on where things sit today. It looks like a good decision on our part.
The 5% to $7 billion that we guided at Investor day, that's a sort of minimum threshold that we expect to meet it doesn't mean to say we can either hit that total return 10 to 12 billion before the end of 2024 and it certainly does not mean that we stop once we hit that threshold either.
And so I'd go back to a normal traditional sort of guidance of at least 40% of cash flow returned to shareholders through the dividend and buybacks.
Helpful. Thanks, I appreciate the answers.
Thank you.
Our next question comes from Neil Mehta of Goldman Sachs.
Line is now open. Please go ahead.
Yes. Thank you I want to say on the topic of capital structure, the net debt to capitalize.
Indicated.
The 35% that you indicated that you expect it to.
To move lower by year end to talk about things that are moving back into your favor. In addition to the strong margin environment working capital or other items that we need to keep in mind.
How should we think about exit rate for that metric.
Yes Neil.
I think we had given guidance that we expected our debt to cap to increase once we completed the buy in of the DCP units and so it wasn't a surprise to us where we landed on that number.
Two big drivers that will bring that back between now and the end of the year or what you pointed to working capital. So that's about $2 billion.
Inflow and cash that we expect to see between now and the end of the year and then also just the ongoing ability to generate earnings generate strong earnings and built to equity so on our math.
We ended the year at right around the 30% level. So the top end of the range, but nonetheless still within that overall.
Target range, obviously, this thing will move around quarter over quarter, depending on what's going on in terms of market environment and cash items like working capital, but fundamentally we think we're on a reasonable trajectory to be able to sustain it.
That target range.
Yeah. Thanks, Thanks, Kevin and then the follow up is just on rodeo renewed some.
Some change it sounds like in the capital scope here just can you walk us through the drivers of those changes and then as we think about against the capital that type of EBITDA.
Generate from the asset how has has your view of mid cycle from that asset evolved.
As you spend more time on the project. Thank you.
Yes, Neal this is mark.
I'll cover it at a high level and rich can drill in a little bit, but essentially what we've experienced there as we commenced the project execution, we had a lot of heavy.
Heavy rainfall and of course, even the start of the project was.
Was deferred a little bit because of permitting challenges and we believe.
We recognize that the earnings from this are going to far exceed the earnings we realized today from the San Francisco refinery. So we wanted to stick to the schedule. So we incur some more cost.
Two <unk>.
Compensate for the productivity lost during bad weather and delays around permitting we also saw some inflation. When this project was sanctioned.
The the big run up inflationary pressures had hit yet and so we realize that really is the only project in our per view, where we're seeing that kind of impact or having accounted for the inflation at sanction. So we're having to take care of that so we still we still look at that $1 60, a gallon as incredibly competitive to the <unk>.
Overall competitiveness of the asset is as strong the location, we've got a competitive advantage the pull through with our retail presence as a competitive advantage and as you look at that.
As we bring this facility online.
We're taking off almost as much traditional diesel as we're bringing in.
Renewable diesel to the market. So the market disruption will be will be minimal. So we really are bullish on this project and we see that.
The economics are still very robust in spite of the cost increases rich do you want to cover most of that Mark maybe I can add just a little bit of color to it.
As we've talked about the primary drivers for the increase or material and labor costs.
And when you think about the timing of this project. It was estimated in approved prior to the heavy inflationary period. So so we're realizing that inflationary pressure. That's that's occurred over the duration of the development of the project half of those costs will experience. This year. The other half will flow into next year's capital.
<unk>.
As Mark indicated the project is still very capital efficient at $1 60, a gallon.
Very happy with that and that is very competitive versus other announced projects and we continue to work full steam ahead on the construction and it remains on track for commercial operation in first quarter 2024, now I know theres been a lot of focus around the lower <unk>.
Credits over over the recent change but.
This.
The economics around this project are centered around four programs as well as the retail.
Rice of diesel in the state of California, and other markets that.
Recognized renewable diesel.
Those programs to our federal and two are at the state level and all of these seem to be working in a relation Lee with each other as well as impacting the feedstock costs as well so.
When we look at the overall momentum and movement of all all of this in a relationship we still see very strong economics for the project and continue to view.
Very optimistic about <unk>.
EBITDA returns on it and when you look at those increases across 23 and 'twenty four.
Require a modest increase in our capital.
Target of $2 billion for this year, but we will manage that additional cost within our $2 billion target going forward in 2024.
Thanks, everyone.
Thank you. Our next question comes from Roger read of Wells Fargo.
Line is now open. Please go ahead.
Yes. Thank you good morning, I was hoping to follow up on the DCP transaction, just how thats gone, so far and while I understand you range the.
I guess with the cost savings.
Other part of those transaction was on the revenue synergy side building a truly integrated model.
Just curious what you've seen to date, what you maybe expect in the near term on that maybe even in the medium term on that in terms of.
How the transaction comes together.
Most organization.
Yes.
Roger This is Tom Thanks for the question Hey.
We started working on this as soon as we close the initial part of the transaction last year. So we got the integration teams together.
At the beginning of this.
Back in the fall of last year.
We thought we had line of sight of $300 million that we could get.
Full value for all the way through the first quarter of 2025 and Thats when some contracts rolling off that were going to third parties and we can bring them into our system.
So, but most of that we felt would be captured.
By 2024, well as we've dug in and we've got the teams involved engage everybody's working together.
Now the employees.
Good job of digging deeper in finding a couple more games in there. So now that's why we were comfortable talking about an increase going to $400 million and I'm actually hoping at some point I can give you more upside to that as we continue to dig because this integration is going to continue through the first quarter of 2024.
Big driver right now the teams are working together commercially and probably worth setting a tone there is that.
Early when we added $300 million number one third was based on cost two thirds commercial we'll call it system optimization, but.
But as we've dug in and we've got to the 400 million number now that is more 50 50 owned costs, we found more in our procurement more and our maintenance, Florida operations.
Then so 50% on cost and now 50% on again system optimization and commercial activities. So that's kind of the breakdown.
And the real driver right now for us through the first quarter of 2024 systems integration. So a lot of good work being done by the team, but it just takes time and you got to get right.
So we are spending the time to do that and will be done by the end of the first quarter NIM will be in what I consider a normal operation steady state mode.
Guard to how we run as a business, yes, I'd just like to come in a little bit on the integration impact this really is.
A clear indication of how well the teams are integrating the DCP team that Phillips 66 teams coming together and as Tim noted once we had operational control of the entity. After the Enbridge transaction, we were able to really hit the ground running and start executing against our targets in getting these teams integrated.
<unk> one team one culture, taking the best of the best and driving this this is really the the biggest visible measure of how successful that's been and we see those numbers move up when we see teams excited about the future and looking at ways to capture more value both from a cost perspective, and a commercial perspective. So this is going to be what they are and what.
They do from this point forward.
Yes, thanks for that and then the unrelated follow up just to come back to the 40 <unk> a barrel refining margin cash opex savings the goal to get to 75 cents.
Can you give us an idea of I mean.
I know you mentioned steel cost reductions things like that but like what is this process, allowing you to do it is it a best practices in one location being expanded and overall centralized look at the cost structure, just it's a very impressive number it's certainly sustainable.
It adds up over time, and so I'm just curious.
Kind of where did you start how did you get here.
How confident are you in the 75 on the timeline that you've set.
Yes, Roger this stretch.
We are well on your way as you indicated to our 75 cent per barrel savings target that.
The announced or committed to during the Investor Day last November .
What's most exciting about this whole process for me has really been how the organization. The entire organization is engaged in this process.
So yes, there is some oversharing a site to site of activity and best practices, but most of this activities opportunities identified by that local organization really accepting the challenge to improve the business and they're uncovering these opportunities to be more efficient in their work process.
And changing and then fundamentally changing how that work processes occurring to drive inefficiencies out of the business, which ultimately reduce cost out of the business. So if you think about.
We talked about 40, a barrel already year to date.
That is.
<unk>, if you take our barrels that we've run.
Year to date.
And calculate to the 40 <unk>. So you can back into the number that we're seeing drive to the bottom line of our financial report, there and and Thats been quite impressive.
And we've got a lot more in the queue as Mark indicated on his comments with the run rate where target is $5 50.
Over 300 of that is currently assigned to.
Refining and of course that run rate. It doesn't mean, it's realized but that just means it's identified it's locked in and now we got to drive it to the bottom line and that's what's most impressive about the organization really pushing to get these identified opportunities pushed to the bottom line yes.
We see some commonalities between the mindset in our refinery organization in the midstream organization, it's real and it's this business transformation process.
It's easy to talk about the cost impact and it's easy to have those cost targets, but really the most phenomenal thing going on is the mindset change in.
The drive that we see in the employees to get better at what they do every day and Youre seeing that move on from cost focus to just where do we create the most value how do we create the most value together, whether it's the way we've organized and integrated our value chain optimization organization more synergistically across the refineries, having vizio folks.
Sitting on the refinery leadership team everyday searching for ways to optimize and coordinate with other refineries.
It's real and it's that mindset is that drive that's going to make these cost savings and the synergy capture sustainable for the long term and it's just not going to and it's just going to be the way, we do business going forward.
Thank you.
Our next question comes from John Royall of J P. Morgan. Your line is now open. Please go ahead.
Hi, Thanks for taking my question.
So my first question is on the Bay way FCC I think your last official statement was around mid July for the restart.
We saw reports after that that it was end of July I'm not sure if thats been confirmed and so if you can just update us on the status of the unit and when do you expect it up and running full if it's not now.
Hey, John this rich FCC repairs were complete and the unit is up and running as of July 20th.
The actual date that it was back online producing on specification material. The refinery itself is back to normal operations. So all of the all the units in all of the assets there are running.
To our to our plan the Benue team did a phenomenal job getting that repair work done very efficiently very excited about how they they performed to complete that work.
And additionally.
When Mark just talking about.
This mindset activity.
We saw other parts of our organization also really focus to help pick up our teammates that were struggling a little bit in <unk> and we saw phenomenal performance in our refineries and sweeny Ponca city and billings they each had.
Record performance and as well as our assets on the West Coast and it all ended up in our system wide utilization of 93%, which is our highest crude utilization since 2019, so and we're looking forward to building on this momentum and continuing that into the third quarter.
Great. Thanks, Thanks for the update and then I know.
It's early on but maybe sticking with refining.
You could give us.
Possibly some expectations on some puts and takes around captures for <unk> and then Relatedly, maybe you can weave in your view on WCS steps from here.
We've widened out a fair amount of bottoms would still look very tight so any views there into two which would be helpful.
Hey, Barry its Brian maybe I'll just talk about the product demand give you a sense of what we're thinking for Q3.
The strengthened U S products basically starts with low inventories gasoline were under five year averages by 7% distillate wonder averages five year averages by 19%. That's a lot we have a lot of new capacity coming online in the U S. But we've had even more outages than the new capacity for us.
Gasoline demand up about 2% over last year in the U S and up 4% globally. So that's strong demand on distillate, we have the demand down a bit in the U S. Mostly on industrial manufacturing segments, but globally. We have it up we have lots of pockets of really strong distillate demand in Latin America up 9% Asia.
Up 4% and diesel cracks continue to remain strong in fact, they've gotten a lot stronger and we believe that they'll continue to perform throughout the year as we head into higher demand planning season and into winter in the U S where distillate over gasoline and every pad now and then finally on Jeff Jets also strong low inventories increasing.
<unk> International travels global seat demand is essentially flat to 2019 levels TSA throughput numbers in the U S or flat to 2019 levels and interestingly U S jet yields remain a little bit higher so that should add some marginal strength to diesel.
And then on the WCS.
Youre right WCS has started to widen again, which is.
In our best interest here at <unk>, but we buy the most WCS of I think anybody.
There is.
And we've seen the widening mostly because of <unk>.
Heavy crude dips in general have started to widen we also see fall turnarounds in pad two is being very strong and then if you'll remember in September which next month, we'll start to see diluent blending which will swell the volume of Canadian crude so all those things have been putting pressure and widening the dips.
Our advantage.
Thank you.
Thank you. Our next question comes from Brian <unk> of Piper Sandler. Your line is now open. Please go ahead.
Great. Thanks.
I don't know, we don't often talk that much about marketing, but youre marketing business how.
How is it continues to generally kind of exceed expectations on a regular basis first.
First half contributions are.
Fairly in line with last year's first half contributions which was.
Generally a higher than expected year end marketing.
That business, maybe structurally just just structurally stronger than we appreciate it and maybe you have guided to or what do you attribute kind of contribute.
Continued strength in the marketing side.
Hey, Ryan this is Brian .
Exceeding expectations is a good thing we're happy about that we did have a strong quarter in Q2, we've added a bunch of retail jv's. Since 2019 were roughly at two 750 retail stores, which have really performed well since we've added them in certainly in <unk>, we had a higher margins as Kevin mentioned in both the domestic market.
And in our Western European business, we had U S volumes up a bit and finally in our lubricants business. The base oil business has been performing really well as the feedstock prices have been falling more than the base oil prices. So I would tell you for Q3, when you're thinking about Q3, our earnings should be in line with our mid cycle expectations as.
You mean, the kind of normal seasonal demand.
Yes, I would just come over again and compliment Brian and his marketing team on the execution of the strategy that they've held for several years is to go in and participate through these joint venture.
Opportunities in markets.
Makes sense for us that if we have a competitive advantage that theres strength to capitalize on and we don't go and do this everywhere, it's very surgical it's very intentional and it is exceeding expectations. So it's a well executed strategy.
Alright. Thanks.
Maybe just a quick follow up on on rodeo answering your comments from earlier.
As we think about kind of the pathway from here until startup from first quarter of 'twenty four.
Are there any outstanding permits required legal challenges that we should be looking at.
Or any.
How do you view kind of potential risks.
That exists or things you are keeping an eye on.
Between now and commercial startup there.
Yes, Brian .
Permitting to complete any project in California is very challenging projects, even to convert a conventional crude oil facility refinery to a lower carbon intensity of transportation fuels production facility. So so we did recently received news on.
On us.
On an appeal to our environmental impact report that as the supporting document for permits.
This was filed by a couple of Ngos.
In the state.
And.
And.
The good news is the court ruling found several issues in the favor of Phillips 66.
Notably most notably is the construction of the rodeo renewable project can continue.
With the county work to resolve three issues.
So we're working closely with the county, and the courts to provide necessary information to reconsider the open issues and we remain very confident that the rodeo renewed project is on track to start commercial operation in first quarter of 2024.
Great. Thank you.
Thank you. Our next question comes from Jason <unk> of Cowen.
Your line is now open. Please go ahead.
Hey, Thanks for taking my questions.
I wanted to follow up on Ryan's question, just now on marketing and the outlook.
For <unk> there were reports of droughts in the Rhine River and I think typically when that happens youre positioned.
Supply that region, well and take advantage of margin moves there.
Have you seen any.
<unk> and <unk> early <unk> as a result of those outages and would you expect as a result continued outperformance in marketing in <unk> and then.
Conversely.
What youre seeing on cabinets, how we've seen chain margins fall into July .
Just any any views on the outlook there.
And to <unk> and then beyond that.
When do you expect chemical margins to move back to mid cycle.
Yes.
Hey, Jason its Brian Hey, so far in Western Europe on the Ryan we haven't seen water levels low enough to benefit us. It is true if order levels do get low we benefit from that but the water levels haven't gotten there yet I can't really predict where theyre going to go in Q3, but if they get lower then we will have some benefit.
Okay.
Yeah and with regard this is Tim Roberts on this with regard to chemicals to talk about.
Currently where we're at with chain margins.
Yes, it's been it's been an interesting run here, obviously, you've got a supply.
Plenty of supply available on demand they are not matching up. So therefore, you have seen chain margins have been dropping over the last several quarters.
Where you're at right now I think IHS added about 12 chain margins and really the way we would look at this and look at it going forward is that.
The high cost producers, both in Asia, and those and Youre going to set the price.
Those that are in advantaged feedstocks feedstock locations will keep running and probably around hard which is what we're seeing right now in North America and the middle East.
While those are having to shutting capacity or having to manage production.
And the other reasons I mentioned earlier now fundamentally though you have got to get demand and supply to match up and you guys start working off inventory.
Clean inventories here in North America.
Five year average so that's that's got a direction need to start working its way down.
Youre seeing the same thing in polyethylene. So two of the main products that we see with regard to our CP Chem JV.
Never were running really strong year exports are strong as well with regard to North America.
Because youre advantaged on feedstock. So our outlook is is that yes, you got to hit the bottom before you can start working your way back up again.
Candidly. This is the inflection point that cash cost typically will drive where you get to the bottom and announced and you can accelerate and usually as we would say and it goes in a lot of different directions as low cost low prices solve the prices. So.
So fundamentally we do think that the outlook is still going to be constructive.
And constructed and that you still got population growth you still have economies that have not been churning at.
All cylinders, China being one of them and that's not a position of saying they never well not at all we think there are still going to be good solid economic growth Youre, just not seeing it consistent global so we do anticipate that that will happen and that will help soak up some of the capacity that's out there.
Bring the markets back into balance and you get back into more of a mid cycle case.
Great.
Really helpful and my follow up is just on acquisitions and divestments you've mentioned it at the top of the call that you continue to evaluate the portfolio as you look across the various segments you operate in.
Any thoughts on where maybe.
You have noncore positions or you have some portfolio gaps and how you view the broader M&A market. Thanks.
Yes, I think that again as Kevin mentioned earlier, we look across our portfolio and there is different different dimensions across our portfolio, where others may have some interest in our assets and may place a greater value because it's not strategic to us and we'll continue to evaluate that I wouldn't comment on any specific opportunities.
Likewise.
As we did with with marketing in California to make.
<unk> made some relatively small acquisitions too.
Enhance the opportunities around rodeo once it's up and running and we have done a series of those and they are all doing quite well and so we will look at smaller opportunistic things, but you think about where we've come from we've done some pretty significant transactions and midstream, it's time to digest, those and to drive value through those and if we.
You can find some very accretive.
Small and mid sized kinds of things, we'd look at them, but theres nothing nothing in the queue and nothing that we'd want to comment on we've got a great backbone. There Ed history has shown that a strong backbone in that industry can attract smaller investments that are that are quite attractive. So.
I think in terms of small very accretive high return opportunities like we've done in marketing.
It would be it would be on our scale, but we're going to stick with our our disciplined approach going forward.
We've got a commitment around a $2 billion.
For 2024, and anything anything around that would be very disciplined and high return.
Great. Thanks for the color.
Thank you.
Next question comes from Manav Gupta of UBS. Your line is now open. Please go ahead.
I wanted to start on the East coast that was like a 52% margin capture that's a significant drop from the last quarter.
Was it primarily the outage at Danny can you talk about some of the factors that led to such a significant drop on the east coast and margin capture.
Okay.
Yes. This is rich.
Or what.
What we referred to it as the Atlantic Basin, we did have higher volumes and lower costs due to less turnaround activity at bay way quarter over quarter. When you. When you look at those but a lot of those were offset by lower margins. The realized margin was lower primarily due to a weaker market crap crack.
Configuration impacts also played into this with a gasoline cracks increasing by $10 a barrel and then the distillate crack decreasing by $18 a barrel at that played into into the market capture quite a bit.
And there was lower product lower product differentials there.
Then the other one that goes a little bit unnoticed and this and this market is really the secondary product costs and margins on those secondary products.
And both the Ngls for both Bay away and Humber were lower and then the petroleum Coke that sold out of Humber also experienced lower product differentials.
So those are the primary reasons you saw lower market capture there in Atlantic Basin.
Okay.
Can you also talk a little bit about.
<unk> expansion is a lot of capacity coming on and moving the crude the diverse cost starting next year.
How would that change the WCS dominant ti.
Turning to the outlook in your auto opinion.
Hey, Manav. This is Brian well first I think.
Our view is that CMS.
Mix would probably come on later in the year, although line fill is.
Forecasted for early Q1.
I think the line will not be filled completely that's our view I think those are on the lines I feel like some of those barrels will be exported to Asia, we'll see if that happens it's hard to get Vlccs. There in fact, you cant load vlccs upload them ship to ship outside of La So.
We will see we will see what happens going forward, but certainly.
It could be a benefit to the west coast is having more of that crude.
Thank you.
Thank you.
Our next question when it comes from Matthew plan of Tudor Pickering Holt.
Your line is now open. Please go ahead.
Hey, good morning, Thanks for taking my questions on the midstream side.
Philips unwind any of the DCP NGL and Nat gas hedges.
If so could you quantify that impact.
That flowed through the midstream EBITDA in Q2.
Yes, Matt This is Kevin we did.
Okay.
Okay.
We did.
As we unwind them or if we let them roll off but we have less of that we don't have that same hedging on our exposure to the Nat gas NGL commodity price that we have that DCP has historically had in our overall portfolio and when you also factor in our position in refining as a consumer of those.
Products it felt more appropriate just to let the natural.
Offsets flow through and so we have we have done that.
I don't think we've given a number I'd say well I know, we haven't given any specific number right. There what we have done is update of the sensitivities.
For midstream to reflect the fact that those hedges are no longer in place and so youll see a slightly higher midstream sensitivity to the commodity price than before.
Okay. It sounds good and then.
I don't know if I missed it but did you give out a number for refined product exports in Q2, I think a year ago. It was 153000 barrels per day.
How did it trend this year and are you seeing a mix shift with them.
More barrels headed to Europe , and fewer to Latin America.
This is Brian Yeah, we exported over 200000 barrels this quarter, which was up in large part our sweeny refinery was making some more higher sulfur diesel that we export to Latin America.
Others have said, we have been exporting more distillate to Europe as trade flows from Russia change.
And Russia.
Russia is importing more barrels, particularly into Brazil, 120 to 140000 barrels and where U S exporting more barrels to Europe .
Sounds good thank you.
Thank you.
Next question comes from Paul Cheng of Scotia Bank.
<unk> is now open. Please go ahead.
Thank you good morning, guys.
Good morning.
Good morning.
I think this is Paul.
No.
California.
Do you still have the Carson and Wilmington that combined refinery.
Today, probably 60%.
Diesel.
Following that being consumed by renewable biodiesel.
And that in several Years' time, you may end up that should be 100%. So what's the role that <unk> going to look like and how your configuration may need to change.
Yes.
I'll cover that at a high level of pausing, Brian has some views on what's what's going on there as well I think.
At one end of the spectrum, we are well connected to <unk> from that facility and jet is a big opportunity there and we would certainly look at doing what we could to.
Provide more jets I think that.
One mitigate of that is as we take the San Francisco refinery offline that diesel production will go away and leave the market and it's almost a gallon per gallon replacement with renewable diesel so that.
That is an opportunity there as well and so I think that there are exports from California today and.
Bryan can comment further on that but that's an opportunity to balance things out and Paul I would add the best amount of distillate producer La is actually exported by pipeline to neighboring states. So we don't make a lot of California distillate at that refinery so.
For us at least a non issue.
Okay. So you think that.
And do you think that on the long term basis.
<unk> should.
Should be portable.
O'neill.
Given the.
Mr Cohen mom and everything.
That means I mean.
Is there any plan to do something with that all said what you what you have done too.
<unk>.
Well, Paul we are looking at everything that we can do to keep the la refinery competitive in that environment. It is frankly, a difficult environment and thats been very publicly.
Politically challenging there.
Whether it's EV mandates.
We.
We believe that it's going to be challenging for California to implement their aspirations around evs. So I think that may be overplayed, but we're watching the market environment very carefully and doing everything thats in our control to keep the la refinery competitive and supply of products in that market.
Okay.
One I think maybe yes, Paul <unk> of Cowen.
Looking at your <unk>.
Margin capture all of that in your margin realization in central quality at all.
That you're doing better than we thought.
Is there any one off benefit that we see on your just normal market condition and that recovery.
Don Kania in the first quarter. Thank you.
Hey, Paul this rich I'll start it off here with an answer the central corridor.
The primary reason that Youre seeing really strong performance from from our facilities there.
Specifically Ponca city and the billings refinery both of those facilities have been running very very well over the last several quarters and continue to operate <unk>.
<unk> expectations on.
Utilization as well as clean product yield, which is improving the market capture there and.
Just to clarify it's not a function of one off items that are benefiting it is all operationalized rich described.
Thank you.
Question comes from Joe <unk> of Morgan Stanley .
It is now open. Please go ahead.
Great. Thanks for having me on.
So I wanted to go back to a couple of topics you've already hit on first on chemicals. So with the two <unk> project starting up in the back half of the year could you just give us a sense of earnings contribution and uplift probably up 2024 on a normalized margin environment from those two projects.
How we should think about that.
Yeah on that Joe probably to clarify this projects are expected to start up till 2026.
So sorry.
Excellent.
The Hexion units, okay. So with regard to actually yes that one was completed we're looking at that my apologies here I was thinking of the bigger projects at <unk> has been completed down at sweeny there'll be in startup mode through the third quarter.
You'd probably start to see some level of earnings start to show up in the fourth quarter.
Splitter project, which is up at Cedar Bayou that project also is in final completion at this point or are there going to be ready to get everything completed by the end of sometime in the mid fourth quarter excuse me, so youre really probably not going to see anything meaningful as they go through shaking out the units getting them started out and probably for both of them.
Maybe probably leaning more toward team clearly first quarter before something really start to show up there and <unk> executed the hexane project brought it in under budget as well so I think thats notable in this environment.
Great. Thanks, and then just going back to <unk> I know you all talked about the potential to produce renewable jet fuel out of that facility as well, but could you just talk about any progress you've made there and any thoughts on timing.
It can be made pretty SaaS.
Yeah.
Yes. This is rich.
The project as it's designed we will be able to produce SaaS, what's really missing from the whole equation as the market indicator to do that and as soon as that's in place we will quickly shift too.
Renewable jet slash sustainable aviation fuel production facility will have the capability of producing 20000 barrels a day of sustainable aviation fuel on the backbone of 10000 barrels a day of renewable jet that's blended with the.
Traditional crude oil based jet.
<unk> production.
Yes.
Saying a negative around SaaS, we believe that <unk> will be an important part of our path forward to renewable fuels, but today.
At Rodale, the economics favor renewable diesel so would maximize renewable diesel produced some.
Yes, there is some that.
We'll produce.
Just because of the yields but any additional investment to produce more saf would require something that would incent us to divert away from renewable diesel and Saf.
And there is the capability to invest and increase that production level, yes.
Great. Thank you.
Thank you. This concludes the question answer session I'll now turn the call back over to Mark <unk> for closing remarks.
Thank you Alex and thanks to all of you for your questions.
<unk> strong second quarter financial and operating results as we executed on our strategic priorities by focusing on the things we control and most importantly, the commitments we made to our owners in November we continue to healthy pace of returning cash to shareholders and then refinery refining we had another quarter of strong operating performance.
With above industry average crew utilization and lower operating costs.
We're executing our midstream NGL wellhead to market strategy completed the buy in of Dcp's units and raised our synergy targets to over $400 million.
Wrapping up a series of foundational transactions to drive value creation in our Ngls business.
We're realizing our business transformation initiatives and are on track to achieve at least a $1 billion of annual run rate savings by year end, while driving a transformative mindset across the enterprise.
As we deliver on our strategic priorities, we remain committed to financial strength disciplined capital allocation.
And returning cash to shareholders.
Outstanding operational performance will position us to capture the current strong market environment in the third quarter and we look forward to operating you updating you on our progress.
Thank you all for your interest in Phillips 66.
Thank you for joining today's call you may now disconnect your lines.
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Yeah.
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Okay.