Q3 2024 Phillips 66 Earnings Call
Emily: Welcome to the third quarter, 2020 for Philip 66 earnings conference call. My name is Emily and I will be your operator for today's call. At this time all participants are in a listen only mode. Later we will conduct a question and answer session.
Emily: Please note that this conference is being recorded.
Speaker Change: Oh now turn the call over to Jeff Dietert, Vice President and Vester Relations. Jeff you may begin.
Jeff Dietert: Welcome to Phillips 66 earnings conference call. Participants on today's call will include Mark Lashier, Chairman and CEO, Kevin Mitchell, CFL, John Baldridge, Midstream and Chemicals, Rich Harveston, Refinning, and Brian Mandel, Marketing and Commercial.
Jeff Dietert: Today's presentation can be found on the Investor Relations section of the Philip 66 website, along with supplemental financial and operating information.
Jeff Dietert: So I too contains our safe harbor statement. We will be making forward-looking statements during today's call. Actual results made different materialies from today's comments.
Jeff Dietert: Factors that could cause actual results to differ are included here as well as in our SEC violence. With that, I'll turn the call over to Mark.
Mark Lashier: Thanks Jeff. Welcome everyone to our third quarter earnings call.
Mark Lashier: The strength of our results in a challenging refining market demonstrates the benefits of our differentiated downstream portfolio.
Mark Lashier: During the quarter, we continue to execute under strategic priorities and deliver strong operating performance.
Mark Lashier: Since July 2022, we have returned $12.5 billion to shareholders through Sherry purchases and dividends. We're approaching our $13 to $15 billion target.
Mark Lashier: In refining, we've reduced our cost by a dollar per barrel, and we continue to run our system well. The improvement in clean product yield reflects our investments in high return, low capital projects.
Mark Lashier: We continue to evaluate all of our assets as part of our strategic priorities and ongoing portfolio optimization. We recently agreed to sell our 49% interest in a Switzerland-based retail joint venture for approximately $1.24 billion.
Mark Lashier: Our asset dispositions are now expected to exceed the $3 billion target.
Mark Lashier: We plan to use the cash proceeds to support our strategic priorities, including returns to shareholders and debt reduction.
Mark Lashier: During the quarter we achieved the targets on two of the six priorities ahead of schedule.
Mark Lashier: First, we have accomplished our $1.4 billion business transformation cost reduction target. We've driven a permanent shift in the way we work and we remain diligent with a culture of continuous improvement.
Mark Lashier: Our employees have done an incredible job delivering on this commitment and the results are clear as Kevin will cover later.
Mark Lashier: Secondly, we achieved our $400 million synergy target across our NGO wellhead to market value chain. This brings the total uplift in mid-cycle adjusted EBITDA to $1.4 billion, from acquiring and successfully integrating DCP midstream.
Mark Lashier: Flight Force shows the growth of our midstream business.
Mark Lashier: We have advanced our well-head-demarched strategy through organic projects and strategic transactions that provided significant synergies and strong returns.
Mark Lashier: Our Swimmy Hub became the second largest NGO Fractionation Hub in the US, with a completion of Fract 4 in 2022. The DCP Transactions strengthened this competitive position by fully integrating our value chain.
Mark Lashier: In the third quarter of 2024, we further expanded the business with the acquisition of pinnacle mid-strating. We also approved the construction of an adjacent processing plant with startup expected in mid-2020.
Mark Lashier: On a trailing 12 month basis, midstreams adjusted EBITDA has increased to $3.7 billion from $2.1 billion three years ago.
Mark Lashier: In addition, midstream adjusted EVIDA is ahead of 2024 guidance despite weaker natural gas and NGO prices.
Mark Lashier: The Stablecast Generation from this business covers the company's dividend and our sustaining capital.
Mark Lashier: We continue to high-grade our portfolio and capitalize on our growth platform to generate strong returns and significant free cash flow.
Mark Lashier: Before I wrap up my opening comments, I want to acknowledge our previously announced plans to cease operations at the Los Angeles Refinery in the fourth quarter of 2025. The uncertainty of the long-term sustainability of the refinery and market dynamics were key factors in this decision.
Mark Lashier: We are evaluating the future use of the property and will work with the State of California to continue to supply transportation fuels to meet customer demand.
Mark Lashier: As we work towards decommissioning, we're grateful for our employees continued focus on safety and operating excellence. We are committed to treating all of our employees and contractors fairly and respectfully throughout the process.
Mark Lashier: We continue to deliver on our strategic priorities and targets. I look forward to providing an update on the next earnings call now over to Kevin.
Kevin Mitchell: Thank you Mark. Slide 5 provides cost detail at the total company level through the end of the third quarter, compared to the same period of 2022.
Kevin Mitchell: We have supported growth while mitigating inflationary impacts through business transformation and synergy capture. Through the first nine months of the year, we have realized approximately $700 million in cost reductions, including our share of WRB costs.
Kevin Mitchell: In addition, we have reduced logistics spend by $200 million, these costs flow through gross margin. We lowered sustaining capital spend and continue to prioritize safe and reliable operations.
Kevin Mitchell: Slide 6 shows the business transformation reduction to refining cost per barrel. Adjusted controllable costs, excluding tone-or-ions, are $5.84 per barrel year-to-date. We have eliminated $1 per barrel of costs, achieving our target ahead of schedule.
Kevin Mitchell: Flight 7 covers key financial metrics.
Kevin Mitchell: earnings were $346 million.
Speaker Change: I just did earnings were $859 million or $2.4 per share. We adjusted results, exclude special items, which include a legal accrual in the third quarter.
Speaker Change: We generated operating cash flow of $1.1 billion and returned $1.3 billion to shareholders. I will now move to slide 8 to cover the segment results.
Speaker Change: Adjusted earnings decreased $125 million, compared with the prior quarter.
Speaker Change: Mitch Riemresault's decreased, mostly due to seasonal maintenance costs and lower equity earnings, reflecting the sale of our interest in the Rockies Express pipeline. These decreases were partially offset by higher margins on LPG exports.
Speaker Change: In chemicals, results increased, mainly due to higher polyethylene chain margins and lower costs.
Speaker Change: The World Refining Results Primarily Reflect Week of Crack Spreds
Speaker Change: Capture of the new indicator was 92% in line with the previous quarter.
Speaker Change: In addition, the plan to cease operations at our Los Angeles refinery resulted in the acceleration of depreciation.
Speaker Change: The impact in the third quarter was $25 million. Going forward, we expect approximately $230 million per quarter of additional depreciation through the fourth quarter of 2025.
Speaker Change: Mark Lashier and Specialties results were higher, mostly due to seasonally stronger margins.
Speaker Change: In renewable fuels results decreased due to lower-realized margins. The Rodeo Renewable Energy Complex produced 44,000 barrels per day of renewable fuels during the third quarter.
Speaker Change: Slide 9 shows the change in cash flow.
Speaker Change: Cash from Operations, excluding working capital, was $1.5 billion, supported by the stability of our midstream and marketing and specialties businesses. Working capital was a use of $381 million, mainly reflecting the impact of falling commodity prices.
Speaker Change: and July, we acquired the nickel mystery in for $567 million. Also, during the quarter, we received cash proceeds of approximately $200 million from the sale of non-core in the mainstream assets.
Speaker Change: Looking ahead to the fourth quarter. In chemicals we expect the global O&P utilization rate to be in the mid 90s.
Speaker Change: In refining, we expect the worldwide crude utilization rate to be in the low to mid-90s and turnaround expense to be between $125 and $135 million.
Speaker Change: Full-year turnaround expense is now expected to be $485 to $495 million. This is a reduction of more than $100 million from our original guidance.
Speaker Change: We anticipate corporate and other costs to come in between $300 and $330 million. Now we will open the line for questions, after which Mark will wrap up the call.
Speaker Change: Thank you. We will now begin the question and answer session.
Speaker Change: As we open the call for questions, as a courtesy to all participants, please limit yourself to one question and a follow-up.
Speaker Change: If you have a question, please press star then 1 on your touchtone phone. If you wish to be removed from the queue, please press star then 2. If you are using a speakerphone, you may need to pick up the handset before pressing the numbers.
Speaker Change: Once again, if you have a question, please press star then 1 on your touchtone phone.
Speaker Change: Thank you.
Speaker Change: Our first question comes from John Royal with JP Morgan. Please go ahead, your line is now open.
John Royal: Hi, good morning. Thanks for taking my question.
John Royal: So my first question is just on your decision to shutter your remaining conventional capacity in California. Can you just...
John Royal: talk about what went into that decision, and how much did recent regulatory changes play into that decision, or was it something that you had planned even after that?
Speaker Change: Good morning, John. As we've stated in our strategic priorities, that we will do an ongoing evaluation of all of our assets, and so the LA decision really was part of that and
Speaker Change: The Los Angeles...
Speaker Change: Refinery has been under significant market pressure and the refinery if you think back historically was originally designed to process in-state California crude production and that's declined by about 75 percent so the continued outlook
Speaker Change: in California in the face of declining diesel and gasoline demand was a pretty tough one.
Speaker Change: And so when we took that given outlook for the markets and also factor in, you know, California's stated policy to move away from fossil fuels.
Speaker Change: We expected California to be a pretty challenging, refining market going forward. And we also have the typical maintenance and regulatory spending that we face, and that's only going up. And so.
Speaker Change: And that exhaustive review led us to idle the refinery as we announced earlier this month. And so it wasn't any kind of knee-jerk reaction in the face of any policy changes in California. This has been a long-term analysis.
Speaker Change: For more information visit www.FEMA.gov
Speaker Change: Great. Thank you, Mark. And then, my follow-up is on the balance sheet, and maybe you could...
Speaker Change: just talk about your outlook for the balance sheet and perhaps where you think you could.
Speaker Change: finish the year on leverage following the sale of the Swiss business and
Speaker Change: and potentially the Germany and Austria business, you know, recognizing there are a lot of moving pieces around working capital and some other things, but just any guidance on where you could finish the year on the balance sheet.
Kevin Mitchell: Yeah John, it's Kevin. So certainly expect to finish the year with a stronger cash or net debt position than where we are currently and that will be partly reflected by
Kevin Mitchell: proceeds from asset dispositions, but the bulk of that is going to be 2025.
Kevin Mitchell: So, we expect the Swiss business, that transaction to close in the first quarter of next year. And the Germany-Austria retail business, we're still in active negotiations around that. And so, that will be a 2025 item as well. But nonetheless, the proceeds from dispositions
Kevin Mitchell: give us a lot more added flexibility as we think about balance sheet priorities.
Kevin Mitchell: continuing to return cash to shareholders and also investment in the business. And just as a reminder from a capital allocation standpoint,
Kevin Mitchell: The first priority is sustaining capital. That's about a billion dollars per year. The second priority is the dividend. That's approximately two billion dollars per year. And everything after that is available for investing in the company and growth.
Kevin Mitchell: returning cash to shareholders of which the dividend obviously is a part of that but share repurchases
Kevin Mitchell: and then the balance sheet and debt reduction. So we're a bit off of our target leverage metric and we expect to get closer to that. It'll take a little while when you look at the different components of the debt and the equity.
Kevin Mitchell: on that, but we expect to be moving our way towards that objective.
Kevin Mitchell: Thank you.
Speaker Change: The next question comes from Roger Reid with Wells Fargo. Roger please go ahead.
Roger Reid: Yeah, thank you. Good morning.
Speaker Change: Thank you. Bye-bye.
Roger Reid: Kevin, I have two questions for you here. I'll just throw them together. One, as we think about the stated savings, the $1.4 billion on the Synergies,
Roger Reid: on the overall cost reduction plan, the 0.4 billion from the synergies with DCP offset by the inflation that's in slides five and six, I think, you know, which it sounds like you're using a.
Roger Reid: standard CPI there. I just would like to maybe dig into a little bit of how do we look at those two moving parts? One, you know, pretty substantial savings.
Roger Reid: impacted by seasonality, by maintenance, and so forth.
Roger Reid: But how we should really look at that on a net basis and what's the maybe inflationary pressure going forward.
Speaker Change: You could say those are two versions of similar factors. They're market-driven. They're outside of our control. One of them has been a headwind for the last couple of years. The other one has been a tailwind for us with lower natural gas prices primarily. And so what we're trying to focus on is you would
Speaker Change: control, and that's reflected in that cost reduction.
Speaker Change: are on the chart. On market, I wouldn't be completely dismissive of that being outside of our control because we are also, as part of our cost reduction.
Speaker Change: initiatives focused on energy reduction in terms of from a volume quantity standpoint, and so that is something that we're very focused on as well. It's also consistent with our environmental GHG objectives around that.
Speaker Change: But on a go-forward basis, I think the worst of the inflationary pressures are behind us and we'd expect that that has somewhat normalized on a go-forward basis. So, lesser headwinds than we have experienced over the last couple of years.
Speaker Change: And then just as a follow up on that, the $100 million reduction and the turnaround costs, is any of that related to the L.A. issue, you know, the shutdown, or is that just, you know, outperformance during the year?
Speaker Change: Hey, Roger, this is Rich. There's really two key factors in that $100 million reduction in our outlook. Affovit's attributed
Speaker Change: So, some of that data was coming in this year on some planned turnarounds, and after we had a chance to evaluate it, we were able to defer those turnarounds. That's roughly half of that $100 million.
Speaker Change: And the other half of the $100 million is the organization's execution of the work. We've actually gotten much more efficient at our execution through a number of initiatives that we've put in place.
Speaker Change: with the turnarounds and we're seeing the fruits of that labor come through now.
Speaker Change: Great, thank you.
Speaker Change: Thank you. Thank you.
Speaker Change: The next question comes from Neil Metzer with Goldman Sachs.
Speaker Change: Neil, please go ahead.
Neil Metzer: Good morning, team. I just wanted to follow up on the comments around balance sheet and capital allocation. You guys have made a tremendous amount of progress in returning capital to shareholders via buyback and dividends, but how do you think about the pace of that going forward and what appears to be a softer commodity environment?
Speaker Change: Yeah, Neil, it's ...
Speaker Change: For the last year and a half or longer, we have been very focused on the commitment that we put out there, the $13 to $15 billion.
Speaker Change: target and that is
Speaker Change: Somewhat informed our decisions around the pace of buybacks as we get to the end of that I think we will move to more of a
Speaker Change: in excess of 50% of operating cash flow being the return to shareholder metric. We talked about that, I think, on the last call, that the go-forward assumption around this is 50% or more of cash flow operations being returned to shareholders. I think that's a good way to think about this as you model out.
Speaker Change: into 2025 for that metric.
Speaker Change: Okay, that's helpful. And then we saw very solid strength in the chemicals business relative to some of your peers this quarter, and then marketing picked up, I would imagine some of that's just because of that.
Speaker Change: Thank you.
Speaker Change: Neil, I'll take the chemicals side of that. And we've seen...
Speaker Change: They don't have much operations exposure in Europe, which is beneficial.
Speaker Change: and they've got their advantage feedstock position, low-cost ethane in two locations in the world that they've really been able to lean into.
Speaker Change: You do see some seasonal softness coming in this time of year, which is pretty typical. And that, with lower crude prices, makes naphtha producers, the floor, a little bit impacted there as well. But on the long term, we see continued improvement in the macro for chemicals. They're coming out.
Speaker Change: of that trough of a year or so ago, and they continue to make good progress. They continue to see demand from their perspective and their ability to capture the market increasing, and we see that going forward.
Speaker Change: Hey Neil, this is Brian. On the marketing side, Q3 is typically marketing's strongest quarter.
Speaker Change: During the quarter, marketing had improved margins in the U.S. across both wholesale and franchise channels, driven, as you mentioned, by falling spot prices.
Speaker Change: We also saw some stronger volumes. Additionally, in the lubricants business, base oil margins also improved with falling feedstock prices. But going forward, expectations for the M&S segment Q4 are just a seasonal pullback in earnings consistent with what we call mid-cycle Q4 earnings.
Speaker Change: Thank you both. Appreciate the time.
Speaker Change: All right. Thank you. Thanks, everyone.
Speaker Change: Thanks, Neil.
Speaker Change: The next question comes from Ryan Todd with Piper Sandler.
Speaker Change: Ryan, your line is now open.
Ryan Todd: Thank you.
Ryan Todd: All right, thanks. Maybe...
Ryan Todd: One for me, I guess on the refining side, you've made a lot of progress in terms of reducing cost structure, improving reliability and utilization rate, and even improving capture rate in your refining business. But refining earnings are still struggling in the current environment. I mean, they're struggling for everybody.
Speaker Change: We're clearly below mid-cycle margins right now, but it still seems like you're a little ways from achieving your target for the refining business, even in a mid-cycle environment. I guess, any thoughts on where do you think you are in terms of progress there? And what should we still be looking for over the next 12 months?
Speaker Change: in order to drive that kind of the next leg of improvement and refining profitability.
Mark Lashier: Yeah, Ryan, this is Mark. I'll just comment at a high level that I do believe that we're still on that journey. We've pretty dramatically increased or enhanced our cost position.
Mark Lashier: and we'll continue to do so. We are focused on being competitive and continuing that journey.
Mark Lashier: We've also been very deliberate in just working away at these small projects that have.
Mark Lashier: Quick Payouts that enhance our ability to capture the markets and we've got in our strategic priorities We've got things that we see in 25 things that we see happening by 26. And so we've got a long
Mark Lashier: A long list of things that we can continue to work away at in refining to enhance our competitive position and increase our ability to capture value from the marketplace.
Speaker Change: Yeah, so maybe I'll just add a little little bit more color to that. This is rich
Speaker Change: So we had three primary improvement focuses in refining. First is the cost reduction. And that's a slog, right? It's getting in the mud pit, digging it out, and pulling out these expenses that are very sticky. It takes a lot of organizational effort to do that. I'm very happy with the organization's performance on this.
Speaker Change: and we've, you know, exceeded our expectations.
Speaker Change: Original expectations, and now we've removed over $600 million of cost out of the cost profile for refining.
Speaker Change: So, we're not declaring infinite success with that. We will move to what I'll call a continuous improvement mode on the cost.
Speaker Change: But I will shift the organization's attention now to the earnings per barrel focus here as we move into the future. And that is taking advantage of what Mark was talking about, which is these small capital projects with high return.
Speaker Change: And we'll continue to execute those. We still have a laundry list of those projects to go. But there's also efforts that we utilize our existing equipment and making sure that we're extracting the highest level of value out of that. We see some opportunities across the system. We're going to focus on that and continue to extract that value out.
Speaker Change: And then, of course, Bryan's organization is working diligently, you know, this integrated model that we have.
Speaker Change: It's really about extracting the value out of the entire value chain. And the commercial organization is the glue that keeps that together. And we've got a lot of number of initiatives that we're working on on that front. You add all these up.
Speaker Change: They're well over a billion dollars of impact to our to our earnings at mid-cycle pricing so
Speaker Change: I'm very confident that when we get back to mid-cycle pricing scenarios that you'll see the performance of the refining organization hit the four to five billion dollar range of earnings.
Speaker Change: All right, thank you. And then maybe...
Speaker Change: One more, as we look at renewable diesel and we think about your...
Speaker Change: said the path to improvement there. Can you maybe walk through how you think about?
Speaker Change: the path to improvement in 2025, both in terms of the broader market, what are some of the levers, or are you kind of moving pieces? Do you think driving improvement in terms of the macro backdrop? And then maybe Rodeo specifically, what are you know, what are things that you're looking to do that will will drive improvement in terms of the profitability there?
Speaker Change: Sure, this is Brian Ryan. Maybe to start kind of where we are today, we're still in startup mode for the renewable segment.
Speaker Change: So I think we've had some startup costs. We're also running higher or lower CI but we're also running some higher CI now in Q4.
Speaker Change: I think if you think about renewable diesel margins going into Q4 and beyond, we think margins are going to strengthen for a number of reasons. Feedstock prices remain depressed.
Speaker Change: There are a number of plants that continue to struggle.
Speaker Change: Some of the RD production is going to be converted into renewable jet production, like some of our competitors on the Gulf Coast.
Speaker Change: And we will do as well. There are less imports into the U.S. Tighter West Coast carb diesel market.
Speaker Change: with our refinery production issues. We've even seen some renewable diesel from our competitors come from the Gulf Coast into the West Coast. And then just the stronger credit markets.
Speaker Change: with the tightening of those credit markets and the disincentivizing of biodiesel production. So all those things together I think will drive renewable diesel margins stronger as we go forward.
Speaker Change: All right, thank you.
Speaker Change: The next question comes from Manav Gupta with UBS.
Speaker Change: Please go ahead, your line is now open.
Speaker Change: Morning, I wanted to focus a little bit on your central corridor earnings.
Manav Gupta: You were up 65 million quarter over quarter or 26 percent quarter over quarter. That is something we haven't seen in the MidCon region. It's a very strong result. Help us understand what were the factors helping you out. And we understand you have very good assets over there, but generally talk us, you know, what really helped you out to deliver such a strong performance in Central Corridor.
Speaker Change: Amenavis Rich
Speaker Change: Thanks for pointing that out. We're very happy with the performance of the Central Corridor operation.
Speaker Change: There's a couple factors here that played into the outperform. One of them, margins were higher, which increased mainly due to a favorable impact on our inventory hedges.
Speaker Change: So, with the WTI price falling quarter over quarter, that hedge was a positive tailwind for us on that. We also had the benefits of the WCS heavy crude dips.
Speaker Change: which are included in our indicator, but that benefit
Speaker Change: So we did see that positive move there, and we did see lower product differentials, though, as a result of that as well.
Speaker Change: Our secondary products also played into this tailwind for the quarter. We saw improved pricing in both the NGLs and the heavy intermediates.
Speaker Change: And this is all, we all pulled this all together really with very good operating performance for the region. We had 100% crude utilization and 89% clean product yields, which are two very, very good performances by the assets.
Speaker Change: Perfect. My quick follow-up here is, you are at 2.7 billion on asset sale of the 3 billion, but you still have a marketing package out there in Europe. So how should we think about, you know, asset sale proceeds for the next 9 or 12 months?
Speaker Change: Thank you.
Speaker Change: I think the way you should think about it, Manav, is we, it's part of that portfolio optimization. It's ongoing. We've defined what we think.
Speaker Change: our non-core
Speaker Change: And I would say that that $3 billion was considered as a
Speaker Change: a floor that we would hit, and we will continue to evaluate non-core assets and move forward with any dispositions that we view as favorable for us.
Manav Gupta: Perfect. So three billion was the floor, not the target. Sorry. Thank you. Thank you so much.
Manav Gupta: Thank you. Thank you.
Speaker Change: The next question comes from Matthew Blair with Tudor Pickering Holt.
Speaker Change: Matthew, please go ahead.
Matthew Blair: Thank you and good morning. Your refining capture held up pretty well in the third quarter at 92% versus 93% in Q2.
Matthew Blair: Typically in the fourth quarter, refiners see some tailwinds here, just from things like higher butane blending volumes. Could you talk about your expectations for capture in the fourth quarter? Do you think it's reasonable to expect a small improvement quarter per quarter, or is it too early to say?
Matthew Blair: Thank you.
Speaker Change: I think it's too early to say, Matthew, just one month into the quarter, there's still opportunity for some volatility as we go through the end of the year.
Matthew Blair: Thank you.
Speaker Change: Sounds good. And then the West Coast seemed pretty challenging for Philips.
Speaker Change: and some of your peers in the third quarter. I think the capture fell to 63% versus strong levels in Q2. You obviously made the decision to close the Los Angeles refinery. Can you talk about the headwinds in the third quarter in the West Coast and whether there's been any improvement so far in the fourth quarter?
Speaker Change: Thank you.
Speaker Change: Yeah, this is Rich. I'll talk about some of the headwinds we saw on the West Coast. There's a lot of moving parts actually. So primarily we saw a weaker market cracks.
Speaker Change: And weaker feedstock advantages. So those were both the keys to driving lower earnings in that region. Margins decreased with our West Coast indicator.
Speaker Change: falling about 46%. So you saw that if you're tracking along on our indicator. Those were primarily driven by Portland and Los Angeles gasoline cracks.
Speaker Change: Crude deliveries also played into this as well. There was a prior month injection of crude delivered by pipeline coming out of the north from Canada. And in a declining price environment, we also see an impact in that as well versus the benchmark.
Speaker Change: Secondary product impacts primarily related to heavy intermediate drawdown of inventory.
Speaker Change: In the second quarter, we built heavy intermediate inventories as a result of maintenance activity at both Los Angeles and Ferndale. And then the drawdown actually occurred in the third quarter, and that happened to occur in a declining price environment as well, impacting the market capture.
Speaker Change: We are also experiencing some continuing costs associated with the wind down of the Rodeo crude operation. Don't want to forget about that. We expect the majority of this work to be complete by year-end as we prepare a number of the assets for demolition.
Speaker Change: The demolition costs are currently reserved in our ARO, but that cost to prepare for that demolition is something that we'll see ongoing through the end of this year.
Speaker Change: And as Kevin indicated in his recap earlier, there was a couple entries into the quarter that impacted earnings as well from the LAR announcement to idle operations. One was the accelerated depreciation, that $25 million in the quarter. The other was a special item of $41 million, recognizing some benefit obligations associated with that announcement.
Speaker Change: That all said, you know, the assets actually operated well for the quarter. They had a 93% clean product yield and a 94% crude utilization for the assets. So, primarily market-driven factors there.
Speaker Change: Great, thanks for the call.
Speaker Change: Thank you.
Speaker Change: Our next question comes from Jason Gabelman with TD Cohen.
Speaker Change: Jason your line is now open.
Jason Gabelman: Hey, thanks for taking my questions. I wanted to ask first on the refining business and back in the 2022 Analyst Day, there was some guidance for 5% margin capture improvement by 2025.
Jason Gabelman: and I think there was some...
Jason Gabelman: kind of optimization across the portfolio involved in that and some discrete projects involved in that.
Jason Gabelman: It sounds like maybe those projects have been a bit delayed. I can't really tell. But, you know, how much has CAPTUR3D improved from 2022? Tough to compare given the change in indicator. And would you say you're on track?
Jason Gabelman: with the projects that underpinned that CAPTCHA improvement.
Speaker Change: Thank you. Thank you.
Speaker Change: Yeah, this is Rich again. Short story is, we're on track.
Speaker Change: and how that's all coming together is a series of small capital projects with high return. I mentioned those a little bit earlier.
Speaker Change: But in 2022 and in 2023, we completed a series of projects, roughly 12 to 15 each year. And these are return projects, and assuming mid-cycle pricing.
Speaker Change: returned about 3% improvement in market capture associated with those projects. In 2024, we have additional 15 projects that we're executing right now.
Speaker Change: And those projects will add about 2% of market capture to a mid-cycle price.
Speaker Change: earnings profile. So you know add those all up three years program on this it comes up to the five percent. That five percent number is equivalent to essentially four hundred million dollars of earnings at mid-cycle pricing so
Speaker Change: If you
Speaker Change: If we see that environment, I'm very confident that we will see that impact and that actually hit into the market capture numbers that we're seeing through the existing indicator and we'll have to go back and recreate a bridge to the traditional indicator.
Speaker Change: Okay, thanks. My follow-up question is...
Speaker Change: Going back to some of the commentary on distributions next year and the balance between deleveraging and buying back shares, there's a few targets out there in terms of
Speaker Change: that there's 25-30% net debt to cap, there's $18 billion of net debt. What's kind of...
Speaker Change: The preferred metric investors should look at to determine what the buyback capacity is next year, and how do you feel about
Speaker Change: The balance sheet going into next year given all the concern around the refining market environment. Thanks.
Kevin Mitchell: Yeah, Jason, it's Kevin. Let me make a couple of comments on that.
Kevin Mitchell: Leverage target is the 25 to 30 percent level, but we acknowledge that that may take a while to get there given the current environment and the absolute, not just debt level, but also, you know, it's debt and equity that drive that calculation.
Kevin Mitchell: We also are looking at absolute debt at a...
Kevin Mitchell: sub 18 billion on a net debt basis. So we're at the end of the third quarter, we were at an 18 billion.
Kevin Mitchell: Net debt.
Kevin Mitchell: level and we'd like to be a little bit
Kevin Mitchell: We do think that we're going to have a fair amount of flexibility going into next year
Kevin Mitchell: environment is weaker.
Kevin Mitchell: then we would like.
Kevin Mitchell: The other businesses are performing very well. We have the broader portfolio and you're seeing the benefits of that. And we also have some healthy.
Kevin Mitchell: cash that will become available through the asset disposition. So, while we've announced...
Kevin Mitchell: 2.7
Kevin Mitchell: Less than half of that has actually been realized at this point in time. So we've got a fair amount still to come in and there's other transactions that we're working on. So I think we'll still have a lot of flexibility to be able to meet our cash return objectives and make progress on the balance sheet, which as you know, is one of our strategic priorities as well.
Speaker Change: Great. Thanks for that, Colin.
Speaker Change: Our next question comes from Doug Leggett with Wolf Research.
Speaker Change: Doug, please go ahead.
Doug Leggett: Thanks a lot.
Doug Leggett: Thanks, good morning everyone. Thanks for taking my questions. Mark, I don't know if you want to take this one, but if we go back and look at the
Speaker Change: Thank you. Bye-bye.
Speaker Change: the targets you laid out back in 2022. The disposal program, I guess the acquisition of DCP wasn't in there either, but the disposal program was not
Speaker Change: explicit in your EBITDA targets. Can you give us some idea, I'm guessing it's a small number, but what the EBITDA loss is from the $2.7 billion of disposals so far?
Speaker Change: Thanks for mentioning that, Doug.
Speaker Change: As we step back and look at our earnings capacity at mid-cycle projection at $14 billion by the end of 2025, we also recognize that there's parts that are moving in and out of the portfolio.
Speaker Change: Well, where we're landing is sometime early next year, we're going to look at the gives and takes, puts and takes around that number, and we'll come out with a revised mid-cycle earnings capacity, and just recognizing that that number is...
Speaker Change: is not a projection of our earnings in 2025, but really our mid-cycle earnings capacity in 2025. And we'll be updating everyone on that.
Speaker Change: You can put a number around 2.7 billion at this point.
Speaker Change: We're not prepared to do that right now. We'll revise that early next year.
Speaker Change: up mid-cycle and you've obviously you've been in the press and quite vocal about your view of
Speaker Change: You know what the capacity person takes are globally for the industry, and I'm just curious when you think
Speaker Change: Maybe we need to wait until next year, but if you think forward about...
Speaker Change: what you had historically seen as mid-cycle, what some of us thought might be a better mid-cycle.
Speaker Change: That's obviously been kiboshed by the last couple of quarters, but I'm curious whether you think there is still a case for a higher mid-cycle or whether we're battling to hold on to what was the last 10 years as a mid-cycle average.
Speaker Change: Well, certainly a lot has changed in the last 10 years, and I think part of our review is we will have to step back and see, you know, what has happened in mid-cycle with respect to inflation inside the crack spreads, where all that comes down. I think it's...
Speaker Change: It's very different than it was 10 years ago, but we do see...
Speaker Change: in our ability to capture value in our refining assets
Speaker Change: The long list of things that Rich has talked about and the combination of creating more integration value, our ability of our commercial group to capture more value from the marketplace and a different posture around how we trade around our assets.
Speaker Change: has significantly enhanced our mid-cycle earnings capability in refining. And if you look at 2025, yeah, we don't believe that we'll be...
Speaker Change: cycle in 2025, but we also believe that going forward beyond 2025 that we're going to see global demand growth.
Speaker Change: That will exceed the net impact of capacity additions and rationalizations, and you're seeing more rationalization announcements Coming at us
Speaker Change: and very little beyond the two big refineries that are coming on now, very little capacity addition beyond 2025. So we've got a fairly bullish outlook in the medium term.
Speaker Change: Appreciate your comments, Mark. We'll look forward to that update. Thanks so much.
Doug Leggett: Thanks, Doug.
Speaker Change: The next question comes from Teresa Chen with Barclays. Please go ahead.
Teresa Chen: Hi, thank you for taking my questions. First, on the cost side for the chem business,
Teresa Chen: How do you see that impacting CHEM margins from a macro perspective through 2025? And related to that, you know, just given your processing footprint and your option to project or extract ethane for at least some of your volumes, could that maybe a way to bolster earnings across the integrated value chain midstream and CHEM in a way that competitors cannot?
Teresa Chen: Hi Teresa, this is Don. I think from an ethane standpoint, as it relates to C.P. Kim, I think the advantage of ethane will continue to be there near term and long term. So I feel good about that outlook and how that will continue to be beneficial for C.P. Kim's position in the chemical market.
Teresa Chen: With regard to our assets and how we think about it We do have obviously with our gas processing assets You know a lot of flexibility in terms of ethane recovery and rejection and we we make those decisions
Teresa Chen: on a day-by-day basis based on market conditions and what our downstream infrastructure is associated with those assets and how to maximize both the throughput as well as the profitability as we push those barrels downstream. So we think we've got, as an integrated player, a really good play kit to utilize and optimize across that.
Teresa Chen: gas to ethane and then ethane as a feedstock into the pet cam industry. So we think it's gonna be an opportunity set that we'll be able to execute on here in the near term as well as on down through the future.
Speaker Change: Got it. And turning to the residue side in the Permian, I'd love to get a sense of, you know, how you view your exposure there and
Speaker Change: You've sold a gas transmission asset outside of the Permian. Do you view your interest in GCX as core to your business, keeping in mind that the two other interests in GCX have consistently transacted with a double-digit multiple? And
Speaker Change: The Pipe also recently FID'd an expansion that's going to cost nearly half a billion dollars on a hundred percent basis. Is that, you know, the best use of your capital? Love to hear your thoughts there.
Speaker Change: Well, first, I'd say, you know, we are very excited to see the customer support behind the GCX expansion. We do think that's a big vote of confidence as to the, you know, the productivity and the outlook of volume growth in the Permian, which obviously we're a beneficiary of given our footprint there.
Speaker Change: out of that basin.
Speaker Change: So we're pleased with where things situate from that standpoint. And then I may probably just reiterate what Mark had said. I mean, we regularly evaluate our portfolio and look for opportunities to high grade where it makes sense.
Speaker Change: We think that's just the right way to ensure our capital is allocated to the best opportunities.
Speaker Change: So, you know, it'll just be part of, in terms of our GCX interest, it'll be no different than the other assets in our portfolio. We'll, you know, we'll continually evaluate and make a decision when the time and the opportunities make sense.
Speaker Change: Thank you.
Speaker Change: The next question comes from Paul Cheng with Scotiabank.
Speaker Change: Paul, please go ahead, your line is now open.
Paul Cheng: Hey guys, good morning.
Paul Cheng: Good morning, Mark. The first question is for Calvin. I think in the past you have talked about a $4 to $5 billion on the cash balance. I don't know whether that is still the longer
Paul Cheng: And also I'm just curious that given the volatility in the market we are seeing and you're today you already saying that that that level is a bit higher than what you prefer in the longer term?
Paul Cheng: Should we still pay out more than 50% of the cash flow, or that at least we should say maybe the payout will be lesser after you finish 13 to 15 billion of the commitment?
Paul Cheng: So that's the first question.
Speaker Change: The same question is for Rich. You mentioned the Central Corridor.
Speaker Change: You benefit from the WTI hedges.
Speaker Change: derivative that you get into. Is that just you need for your central corridor operation or that you're doing other kind of hedges in the rest of your operation? Thank you.
Speaker Change: Yeah, Paul, it's Kevin. I'll hit your first question. I think the
Speaker Change: The $4 to $5 billion, it sounds like one of our competitors uses that number for cash. We've said $2 to $3 billion as our sort of ideal cash level, which gives us adequate flexibility. And of course, we've also got plenty of other liquidity available to us. So $2 to $3 is the number that we've been saying in terms of cash balance. And as you can see, we were slightly lower than that at the end of the third quarter. On a go forward basis on cash returns, 50%
Speaker Change: still feels pretty reasonable as an objective, 50% or more. The dividend is $2 billion, and so that's, while in theory there's flexibility on that, that's not how we think about it. We view that as very much a commitment.
Speaker Change: and the 50% still leaves adequate room for the other things we want to accomplish. I would also emphasize that we continue to be very disciplined around our capital program, our growth capital. So back.
Speaker Change: Two years ago, we said for the next couple of years, 22 and 23, we'd have a $2 billion
Speaker Change: $1 capital budget, well, we haven't laid out.
Speaker Change: Our capital budget for 2025 yet, we expect that we'll, you know, we're going to continue to have that discipline around how we make those decisions. So I think when you put all that together, the 50% is still a reasonable number.
Speaker Change: Hey Paul, this is Brian. Just on the accounting, for GAAP accounting you have to mark your hedges and you don't mark your physical until it's sold or moved. And so in a falling market, the hedges make money and the physical doesn't get marked. So that'll get marked in the following quarter.
Paul Cheng: Yeah, but Brian, is it only for the Central Corridor that you have that or that in other business or in other region you also have hedges?
Paul Cheng: Yeah, we have it in all regions.
Paul Cheng: So you have it in all regions.
Paul Cheng: It's just much more significant. Correct. The volume's higher. Yeah, yeah, yeah. And there was a big move on WTI on this last one. So, yes, only the WTI you had just...
Paul Cheng: Yes.
Paul Cheng: We generally hedge with WTI crude, correct.
Speaker Change: The next question comes from Jean Anne Salisbury with Bank of America. Please go ahead, your line is now open.
Speaker Change #100: Hi, I believe that the enterprise TW products pipeline has started up to pad 4. Are you seeing that impact in pad 4 margins yet?
Speaker Change #101: No, not yet.
Speaker Change #101: Okay.
Speaker Change #102: And then my follow-up is, I think you kind of referenced this in the comments, but LPG export ARBs have gotten extremely wide, as I'm sure that you're aware, and I think they're expected to stay that way for a few quarters until more export capacity comes online. How much exposure does PSX have to the ARB, and does that increase over the next few quarters?
Speaker Change #102: Yeah, this is Don, thanks for tuning in. At Freeform, we are experiencing strong demand for LPGs and
Speaker Change #102: I would just say we have a portfolio mix of short and long-term contracts there at Freeport as well as really across our whole NGL value chain, so
Speaker Change #102: Yeah, this portfolio approach, it lets us capitalize on opportunities like we see today across the system. It sort of helps.
Speaker Change #102: navigate or, you know, at any point in time across the NGL value chain you have some positives, you know, from a margin standpoint and some headwinds.
Speaker Change #102: So it really helps kind of level out across that value chain, but we are seeing, you know, real positive, healthy DOC fees given the spread today to international markets, the ample
Speaker Change #102: supply of vessels, and then just a, you know, a tight existing dock capacity across the Gulf Coast.
Speaker Change #102: We'll get a share of that, and we believe it's a pretty healthy outlook, as you mentioned, for the foreseeable quarters.
Speaker Change #103: Great. I'll leave it there. Thanks for taking my questions.
Speaker Change #104: Thank you.
Speaker Change #105: The next question comes from Joe Leitch with Morgan Stanley. Joe, please go ahead.
Joe Leitch: Hey, good morning team and thanks for taking my questions. So, on the macro side, thanks for your comments earlier on the supply outlook. Could you just talk to what you're seeing on the demand side for gasoline, diesel, and jet within your system as well as your outlook from here?
Joe Leitch: Sure. Hey, this is Brian. Starting with gasoline, global gasoline year-to-date, we're seeing about 1% higher than 23.
Joe Leitch: European demand is a bright spot with sales of gasoline powered and gasoline hybrid vehicles supporting.
Joe Leitch: higher growth in 3Q versus prior 3Q, about 4% up.
Joe Leitch: Former 3-2, part of that is the retail prices that were falling considerably with the spot prices.
Joe Leitch: On distillate, year-to-date distillate global demand was about 1.5% lower. In the U.S., we saw in 3Q about 2% lower than 3Q.
Joe Leitch: We're seeing some cautiously optimistic comments from some of the freight companies. UPS, for instance, came out last week and reported positive revenue and profit growth in the third quarter.
Joe Leitch: which followed nearly two years of subpar performance. Also in the global container business, the global container volumes are up. In fact, in August, they hit a record high.
Joe Leitch: So seeing some positive signs there. Jet, year-to-date global jet demand is about 8.5% higher than 23, driven largely by Asia.
Joe Leitch: Europe and U.S. flight demand is back to 2019 levels, but jet demand isn't quite back to those levels, mostly because of the aircraft efficiency and the fleet.
Speaker Change #107: Great, thank you. And then just shifting to renewables, some peers have talked about seeing a premium for SAF over RD. What are you seeing from a commercial demand standpoint for SAF at Rodeo?
Speaker Change #108: We also see a premium for renewable jet production. I'll caution that in Q4 we're likely not to produce renewable jet.
Speaker Change #108: We're currently running off of a higher C.I.
Speaker Change #108: feedstocks for the plant as we prepare for the production tax credit next year, but we expect to be in steady state at the renewable complex by Q1 of next year, and so by then you should see us producing renewable jet.
Speaker Change #109: Great. Thank you all.
Speaker Change #109: Thank you.
Speaker Change #110: Yeah, maybe just to add a little bit to that color there. We did actually produce sustainable aviation fuel in September. So we have
Speaker Change #111: in the past indicated that that was our intention. We did successfully produce the sustainable aviation fuel. There's this market anomaly that Brian's talking about here in the fourth quarter that will limit that production, but we will fully intend to be a supplier of sustainable aviation fuel to the marketplace.
Speaker Change #112: This concludes the question and answer session. I will now turn the call back over to Mark Lashier for closing comments.
Mark Lashier: Thanks for all your questions.
Mark Lashier: We delivered strong performance across our differentiated downstream portfolio.
Mark Lashier: Business Transformation achieved 1.4 billion dollars of run rate cost reductions and lowered our refining costs by a dollar per barrel.
Mark Lashier: Midstream achieved its synergy target and provides stable earnings with attractive growth opportunities.
Mark Lashier: We expect to exceed our $3 billion asset disposition target, having signed agreements to generate $2.7 billion in proceeds to date.
Mark Lashier: We continue to evaluate assets as part of our ongoing portfolio optimization.
Mark Lashier: I'm proud of our employees' significant achievements toward our commitments.
Mark Lashier: We're confident in our strategy and continued execution on the remaining targets.
Mark Lashier: Thank you for your interest in Phillips 66.
Speaker Change #113: Thank you everyone for joining us today. This concludes our call and you may now disconnect your lines.