Q4 2024 Phillips 66 Earnings Call
Welcome to the fourth quarter 2020 for Phillips 66 earnings Conference call. My name is Emily and I'll 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.
Please note that this conference is being recorded.
Speaker Change: I will now turn the call I put to Jeff D Touch Vice President Investor Relations.
Speaker Change: You may begin.
Welcome to Phillips 66 earnings Conference call.
Speaker Change: <unk> on today's call will include Mark laser Chairman and CEO, Kevin Mitchell, CFO, Don Baldrige midstream and chemicals.
Speaker Change: Rich harbison refining and Brian Mendell marketing and commercial.
Speaker Change: Today's presentation can be found on the Investor Relations section of the Phillips 66 website along.
Speaker Change: Loan with supplemental financial and operating information.
Mark: 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 the call over to Mark.
Mark: Thanks, Jeff.
Speaker Change: Our results reflect strong operating performance in a challenging margin environment.
Speaker Change: The strength and stability of our midstream results provided a resilient platform demonstrating the advantages of the breadth of our integrated portfolio.
Speaker Change: In the fourth quarter, we achieved our shareholder distribution target.
Speaker Change: With $13 6 billion distributed through share repurchases and dividends since July 2022.
Speaker Change: In refining we set goals to improve performance lower costs and capture more of the market.
Speaker Change: This year was our second consecutive year of above industry average crude utilization.
Speaker Change: We also set record clean product yields both this quarter and for the full year, while reducing our costs by $1 per barrel.
Speaker Change: These results are a testament to the hard work commitment and dedication to excellence by the people enriches organization.
Speaker Change: We exceeded our $400 million synergy target on the DCP midstream acquisition by capturing $500 million of run rate synergies.
Speaker Change: In total the DCP transaction has increased mid streams mid cycle adjusted EBITDA by $1 5 billion.
Speaker Change: We set an ambitious goal of $1 4 billion in run rate business transformation savings.
Speaker Change: We positioned the company for success through these cost reductions and exceeded our goal of achieving $1 $5 billion of savings.
Speaker Change: As part of the enhanced priorities in 2023, we committed to at least $3 billion of noncore asset dispositions.
Speaker Change: We have high graded the portfolio and are currently at $3 $5 billion of announced asset divestitures.
Speaker Change: Although our net debt to capital ratio ended higher than our target level. We continue to have a strong balance sheet and we are making debt reduction a key component of our new commitments.
Speaker Change: We've completed the strategic priorities that we laid out in 2022 enhanced in 2023 and committed to achieving by the end of 2024.
Speaker Change: I'm proud of the work our employees have done to accomplish these important priorities and deliver on our commitments to shareholders, while maintaining industry, leading safety performance.
Speaker Change: Slide four shows the progress of the asset disposition program and.
Speaker Change: In January 2025, we received $2 $1 billion of cash proceeds for the co op and Gulf Coast Express dispositions.
Speaker Change: This brings the cash proceeds to $3 $5 billion, which we're using to advance our new strategic priorities.
Speaker Change: We continue to evaluate our assets as part of our ongoing portfolio optimization.
Speaker Change: Slide five shows the growth of our midstream business, including the recent announcement of the epic NGL transaction.
Speaker Change: We've advanced our wellhead to market strategy through organic projects and strategic transactions that provided significant synergies and strong returns.
Speaker Change: This nearly doubles EBITDA between 2021 and the anticipated transaction close later this year.
Speaker Change: Similar to the Pinnacle acquisition last year, we saw an opportunity to acquire high quality assets, which are complementary to our existing footprint and provide a platform for further growth opportunities at attractive returns.
Speaker Change: The transaction furthers, our vision of being the leading integrated downstream energy provider and upon closing increases midstream mid cycle adjusted EBITDA, two 4 billion.
Speaker Change: We will continue to capitalize on our growth platform to generate strong returns and significant free cash flow in 2025 and beyond.
Speaker Change: Slide six outlines our new strategic priorities for 2025 through 2027.
Speaker Change: Supported by our World Class operations, we are committed to returning over 50% of operating cash flow to shareholders.
Speaker Change: We've set challenging yet achievable operational targets for our refining and midstream businesses. We have developed a culture of continuous improvement in refining and are targeting $5 50 per barrel adjusted controllable cost excluding turnarounds over the next two years.
Speaker Change: We will grow midstream and chemicals mid cycle adjusted EBITDA by an additional $1 billion in total by 2027.
Speaker Change: In midstream we have plans in place to continue to expand our wellhead to market strategy with high return opportunities in.
Speaker Change: In chemicals, the Mega projects in the U S Gulf Coast, and Qatar are expected to startup in late 2026.
Speaker Change: These milestones are expected to bring our non refining mid cycle EBITDA to $10 billion by 2027, which we expect will represent two thirds of our total company EBITDA.
Speaker Change: We also plan to reduce total debt to $17 billion as early as the end of this year, depending on the margin environment and the timing of planned dispositions.
Speaker Change: We will continue to increase shareholder value through strong operating performance and disciplined capital allocation as we deliver on our new strategic priorities.
Speaker Change: Now over to Kevin to cover our quarterly results. Thank you Mark.
Kevin: Reported earnings were $8 million or.
Speaker Change: <unk> per share.
Kevin: The adjusted loss was $61 million or <unk> 15 per share.
Kevin: Both the reported earnings and adjusted loss include a $230 million pre tax impact of accelerated depreciation due to our plan to cease operations at the Los Angeles refinery at the end of 2025.
Kevin: This reduced earnings per share by 43.
Kevin: We generated operating cash flow of $1 2 billion.
Kevin: And returned $1 1 billion to shareholders, including $647 million of share repurchases.
Kevin: I will now move to slide eight to cover the segment results.
Total company adjusted earnings decreased $920 million compared with the prior quarter.
Kevin: Midstream results increased mostly due to record fractionation and LPG export volumes. In addition to higher margins on LPG exports.
Kevin: In chemicals results decreased mainly due to lower polyethylene chain margins and higher costs related to turnarounds and maintenance.
Kevin: Lower refining results, primarily reflect weaker crack spreads and a full quarter of accelerated depreciation the Los Angeles refinery.
Capture of the new market indicator was 105%.
Kevin: The increase in market capture was partly the result of record clean product yield for the quarter, which included the benefit from butane blending.
Kevin: Marketing and specialties results were mostly lower due to seasonally lower margins.
Kevin: And renewable fuels results increased due to higher margins of the rodeo complex as well as stronger international results.
Kevin: Slide nine shows the change in cash flow for the fourth quarter.
Kevin: Cash from operations, excluding working capital was $901 million.
Kevin: There was a working capital benefit of $297 million.
Kevin: Mainly reflecting a reduction in inventories.
Kevin: We returned $1 $1 billion to shareholders through share repurchases and dividends and we funded $506 million of capital spending.
Kevin: Our ending cash balance was $1 7 billion.
Kevin: Looking ahead to the first quarter of 2025.
Kevin: In chemicals, we expect the global <unk> utilization rate to be in the mid nineties.
Kevin: In refining we have a heavy turnaround quarter and expect the worldwide crude utilization rate to be in the low eighties and turnaround expense to be between 290 $310 million.
Kevin: We anticipate corporate and other costs to be between 310 $330 million.
Kevin: For the full year, we expect turnaround expenses to be between 500 and $550 million.
Kevin: Depreciation and amortization will be approximately $3 3 billion.
Kevin: This includes $230 million per quarter of accelerated depreciation at the Los Angeles refinery.
Mark: 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 asked a question to all participants please limit yourself to one question and a follow up.
Speaker Change: If you have a question. Please press Star then one on your Touchtone phone.
Speaker Change: If you wish to be removed from the queue. Please press Star then Kay.
Speaker Change: You are using a speakerphone you may need to pick up the handset first before pressing the numbers.
Speaker Change: Once again, if you have a question. Please press Star then one on your touch time fine.
Neil Mehta: Our first question today comes from the line of Neil Mehta with Goldman Sachs.
Speaker Change: Please go ahead, yes, good morning, Martin Thank you and good morning Mark.
Neil Mehta: Team.
Neil Mehta: Wanted to kick off on the midstream transformation it does feel.
Neil Mehta: That the business is evolving to where midstream is becoming a major focus and much more important part of the business and what your perspective on what's the debt.
Neil Mehta: That is true.
Neil Mehta: What's the best way to get there to get there organically or to get there.
Neil Mehta: To get there through M&A and how fast can this business grow.
Neil Mehta: Any parameters around that would be helpful.
Speaker Change: Hey, good morning, Neil Thanks for your question.
Speaker Change: Talk about the high level view, and then Don can dive into the details but.
Don: Several years ago, we rolled up ECP got control of those assets to align with.
Don: The wholly owned assets that Phillips 66 had with fractionation capacity and that allowed us to consolidate into a full wellhead to market strategy that we've been talking about but we knew that we had opportunities to fill out that strategy and to really leverage that position and thats, what <unk> been seeing both from an organic perspective and in the <unk>.
Don: Organic perspective, and as you look at the inorganic things that we've done the acquisitions, we've done they've been very focused on getting the right assets for the right value that can be accretive to us immediately based on the inorganic piece, but allow us to also have a footprint to grow organically and to capture more of the volumes coming out of out of the Perm.
Don: So both the pinnacle and epic acquisitions really are prime examples of that so we believe there are opportunities to do both but I'll let.
Don: I'll, let don dive into more of the details.
Neal: Sure Neal I think what you'll see is we've.
Neal: We've put together a midstream platform now and NGL value chain that we believe we can grow organically at mid single digits growth rate on an annual basis. That's what you see in the slide deck here growing to $500 million of EBITDA.
Neal: And being able to do that because we have clear line of sight to organic growth opportunities that we can execute within our $2 billion annual capital.
Neal: Program. So I think it's really a testament to the strength.
Neal: Platform that we have certainly.
Neal: From an acquisition standpoint, if there are opportunities that makes sense that are attractive from a strategic standpoint, and evaluation will take a hard look at it.
Neal: But our growth program here.
Premised on executing return enhancing organic opportunities within our footprint and.
Neal: And not dependent on or acquire.
Speaker Change: Future M&A activity, yes, Neil as you saw in our our strategic priorities that we laid out everything that we do whether its in refining are in midstream we're focused on enhancing the return on capital employed and each of those businesses as we make.
Speaker Change: These capital allocation choices. So we're very returns focused.
Speaker Change: Value focused.
Speaker Change: That's very helpful. And then the follow up is just as midstream becomes a bigger part of the business. How do you think about the optimal capital structure you, providing your disclosure today about being less than three times net debt to midstream and marketing. So why is that the right number.
Speaker Change: There is an argument that the business can run a little bit more levered as it has more fee based earnings.
Speaker Change: Yes.
Kevin: Yes, Neil it's Kevin.
Speaker Change: Youre exactly right now as you will recall we had.
Speaker Change: Object objectives to reduce leverage over the course of last year, which we were not able to deliver on partly because we've leaned pretty heavy into cash returns to shareholders and so while we have set a target.
Speaker Change: Of a getting the debt balance back to $17 billion in a sub 30% debt to cap level. We also like to think of the balance sheet almost on a sum of the parts basis.
Speaker Change: So the midstream and <unk> segments bring the more stable earnings and cash generation approximately $2 billion, sorry $6 billion.
Speaker Change: At the mid cycle.
Speaker Change: Three times or maybe even less than three times that.
Speaker Change: That level, we can think of ourselves as having a strong balance sheet in the context of those two segments.
Speaker Change: Net zero.
Speaker Change: For the refining business. So in effect the refining cash flows are all upside in the context of how you look at US look at the company from a balance sheet standpoint.
Speaker Change: Thank you Ken.
Speaker Change: Okay.
Speaker Change: Our next question comes from Doug Leggate with Wolfe Research. Please go ahead.
Doug Leggate: Thank you I appreciate the chance to ask a question guys. Thanks, so much.
Speaker Change: Mark I think I don't want to put words in your mouth I think I heard you say.
Speaker Change: Something along the lines of our Nu.
Speaker Change: Disposal targets I don't think I actually held this fall in your disposal target. So I realize you had a lot of your your target salary for 2025, but what is the scope of the yield the scale.
Speaker Change: And I guess the way I heard it was.
Speaker Change: Drop your debt on $17 billion <unk> additional disposals and I wanted to ask specifically about where you are with the.
The rest of the retail system.
Speaker Change: In Europe. That's my first question my follow up is really a follow up to neil's.
Speaker Change: We hear this a lot about the embedded value in film specifically around the midstream the midstream companies are creating.
Speaker Change: Obviously <unk> is a terrific bolt on but do you ever see a situation where.
Speaker Change: Midstream.
Speaker Change: Somehow separated out as a standalone business and it was a bit of a curve ball question, but just in terms of the scale of the importance of maybe.
Speaker Change: The failure of the market to recognize the value in Europe structure versus what you see for the Standalone midstream players.
Mark: Okay. Thanks for your question Doug This is mark.
Mark: On dispositions, we did not put.
Mark: Another target out there I think that.
Mark: We achieved our targets with what we've actually closed and received the cash for to date, we still have things that we're working on out there and one of them is.
Mark: As the retail opportunity in Europe in Austria, and Germany that we're still in active discussion to there. We think we can we can strike a deal around that but where we found it a little bit counterproductive to put firm numbers out there. When you are out negotiating these deals.
Mark: We'll always be looking at our portfolio to determine if we've got assets that have higher value to others and sometimes we get inbound calls that people want to talk about things and we will entertain those calls as well, but it's always about value creation and how we can unlock value of what we view as trapped capital and some assets and redeploy those.
Mark: Those proceeds into our strategic priorities, whether it's returning it to shareholders.
Mark: Augmenting our balance sheet or investing in our businesses and so we're going to be doing that ongoing but youre not going to see firm targets put out there.
Mark: You can think about it as continuous improvement in our portfolio just like we're focused on continuous improvement in our operations.
Mark: Then.
Mark: From the embedded value of midstream.
Mark: We agree that we're not seeing the full value of the things that we've done in midstream, but we're really just getting started I think that there is since our epic acquisition. We've gotten great response from the market. Good questions understanding people are showing some interest and excitement around that.
Mark: We've got some great long only in the market and our shares because of what we're doing in midstream. So we think that that story is still evolving and we're going to lean into that story going forward yes.
Mark: Yes, there is always the question when you have an integrated business like we do is it better to separate those businesses somehow we believe we can create more shareholder value by keeping the midstream business integrated with our refining.
Mark: Our NGL midstream business out to the petrochemical businesses and you'll hear more about that as we as we move on through the year.
Mark: Doug It's Kevin just to add on to Mark's comments.
Mark: Part of the question was more around would we create a vehicle that has a public marker on it nor the complete separation, but helps provide exactly this shakes out.
Mark: Nation.
Mark: We went down that path the poor.
Mark: That's a.
Mark: A major decision to make.
Mark: Over time, you look back over history, there are times, where we've traded at full sum of the parts There've been times, where we haven't and we feel we're probably in that phase right now and I don't think thats. The immediate response to that I think is the way Mark described it really leaning in and providing the <unk>.
Mark: Appropriate messaging messaging in the investor disclosures around the midstream business the integration value that comes from the value of the two primary value chain that we have and focus on that at this point in time that what you suggested.
Mark: That option is always there and so we would never say never but.
Mark: But it's not going to be the near term plan.
Speaker Change: I appreciate it I'll ask a quick follow up.
Mark: <unk>.
Jetson: Jetson loss here.
Mark: <unk>.
Doug Leggate: The example of what I was thinking about was MPLX because clearly there is a market there, but I take your point my follow up really quick Mark is just remind us what the EBITDA is on the German Austrian business.
Mark: Because we can alter a multiple on that yes.
Yes, Doug it's about $300 million.
Speaker Change: Great. Thanks, so much.
Speaker Change: Thanks, Doug.
Speaker Change: The next question comes from Theresa Chen with Barclays. Please go ahead.
Theresa Chen: Hi, Thank you for taking my questions.
First on <unk>.
Theresa Chen: The leverage update can you think about can you help us think about the path forward to achieve.
Theresa Chen: And below 30% net debt to capital.
Theresa Chen: What timeframe would you expect to get to that end our.
Theresa Chen: Future asset sales, including the German Austrian assets earmarked for that how should we think about the path forward there.
Theresa Chen: Okay.
Neil Mehta: Yeah Theresa it's a.
Neil Mehta: The path forward to the sub 30% and I think if you look at the absolute $17 billion debt level and in the same way because one I'm not saying that one will definitely enable the other but they wont be too far apart.
Neil Mehta: Context, and in fact, those are kind of neat symmetry between all of those metrics that we put out the 17 billion less than 30% and the less than three times midstream and M&A.
Neil Mehta: <unk> EBITDA, all kind of come together reason.
Neil Mehta: Reasonably well, but it's really a combination of you look at our capital allocation.
Neil Mehta: Model with 50% plus distributed to shareholders, so dividend plus buybacks, our sustaining capital is $1 billion.
Neil Mehta: <unk> capital program is a $1 billion and if you if you do the math based on a mid cycle set of assumptions and I know, we're not in mid cycle right now on mid cycle, you've got about $10 billion of cash generation and so 5 billion goes to shareholders. That's the 50%.
Neil Mehta: $1 billion 2 billion of capital budget, so that $7 billion at least $3 billion, that's a lot of flexibility to even do that.
Neil Mehta: Debt reduction incremental buybacks.
Neil Mehta: Or.
Neil Mehta: Bolt on acquisitions that makes sense like some of the things you've seen us do in addition.
Neil Mehta: We are still working on the Germany, Austria retail business and so there is a fair amount of flexibility there in terms of how we how do we get there. So we feel pretty comfortable that those targets are all achievable, including our ongoing commitment to returning cash to shareholders.
Neil Mehta: Thank you and then going back to the topic of additional midstream growth.
Neil Mehta: Thinking about it.
Neil Mehta: Other M&A opportunity here.
Neil Mehta: Italy understanding dons comments about doing whats right from both a strategic and economic perspective.
Neil Mehta: When we think about the Michigan Apple to happen in the market. There are some that seemed like more obvious acquisition candidates for you considering potential synergies in both Permian and DJ and then coupling that with the bigger shippers on both sand hills in epic.
Neil Mehta: As well as the vehicle need for incremental Permian processing is FTC also a major concern here do you think that would preclude some a bit more obvious opportunities along a midstream footprint.
Speaker Change: Yeah. So I think that obviously, we always have to take FTC considerations into play, but I don't think thats necessarily what would have a shy away from looking at.
Speaker Change: Any particular assets, but we do we do take into consideration a broad range of assets that are out there and we focus on what provides us the greatest value creation opportunity, we know intimately how easy it is to connect those assets to our system. What it does from a G&P perspective, what it does from a transportation.
Speaker Change: <unk> perspective, and quite importantly, what additional opportunities does it open up for us to grow organically, because we really see.
Speaker Change: The upside in returns and going in and building things at a low book build multiple and realizing that full uptick.
Speaker Change: While adding inorganically things at attractive pricing that also are accretive to our returns and our earnings.
Speaker Change: Yes, I would just add Teresa I think.
Speaker Change: Along that along the lines of that value creation.
Speaker Change: Yes, the M&A, our M&A lens will really be focused on.
Speaker Change: What is the opportunities that we see that are scalable that really enhance our platform and that's really what drives our thought process not not an FTC lands. It's just.
Speaker Change: That's well down that down that path.
Speaker Change: As we evaluate opportunities, but again I think I'd go back to.
Speaker Change: We just see a lot of organic opportunities within our footprint and so we're very focused on executing those and growing our business that way first and foremost, yes, we recognize our capital constraints were not going to grow midstream.
Speaker Change: Midstream just to grow midstream just to get bigger we're going to grow midstream to create more value for our shareholders and we and we're very disciplined around that and we've got capital constraints and we're going to be very picky about what we do.
Speaker Change: Understood. Thank you so much.
Speaker Change: Thanks Teresa.
Speaker Change: Our next question comes from Manav Gupta with UBS.
Speaker Change: Please go ahead.
Manav Gupta: Good morning, switching gears a little.
Manav Gupta: So relatively <unk> ethylene chain margins here and I know, it's a seasonally weaker quarter I'm just trying to understand in managements opinion, when can we start moving towards closer to the mid cycle margins as these as it relates to the ethylene chain margins and chemicals.
Manav Gupta: Yes, that's a great question I think.
Manav Gupta: In the fourth quarter.
Manav Gupta: CP Chem Sol a couple of things going on in their chain margin of course ethane pricing strengthened crude pricing weekend, which.
Manav Gupta: They've got a great advantage with their ethane position, but but when both of those things happened I think their impact.
Manav Gupta: We will show up.
Manav Gupta: I think in the longer term the macro is supportive demand continues to grow.
Manav Gupta: We're seeing.
Manav Gupta: Rationalizations in Europe, you're seeing temporary shutdowns in Europe I think this year.
Manav Gupta: North American producers had record exports that tells you about the strength of.
Manav Gupta: Our economics here in North America versus other locations in the world.
Manav Gupta: I think for the first time ever more than half of the.
Manav Gupta: Polyethylene producer in North America was exported into the world market, So they're playing to CP Chem strengths in the midterm and long term you can see that in their operating rates.
Manav Gupta: And we see continued margin improvement and actually it's a good and healthy that you see slow recovery slow climb out and we see that continuing this year into next year.
Manav Gupta: Really on through 2026 and then.
Manav Gupta: There are new assets will be stepping right into pretty healthy margins by the end of 2026.
Speaker Change: Okay. My quick follow up here.
Speaker Change: Very big improvement in renewable fuels, congratulations breaking even.
Speaker Change: Help us understand quarter over quarter, some of the dynamics that when generally which allowed you to almost screen openings in renewables.
Speaker Change: $150 million.
Brian Mendell: Hey, Manav. This is Brian will start off by saying, yes, we did $28 million in the quarter were happy with that as a start.
Brian Mendell: Ran well in the quarter, we continued to lower our cost profile as we discussed last earnings call. We process, a higher CPI feeding the corner as we ran off less valuable feedstock prior to the implementation of the PTC credit.
Brian Mendell: Additionally, because of the higher <unk> material, we didnt produce.
Brian Mendell: Renewable jet fuel for the quarter, we did announced in Q4, a deal to sell United Airlines 8 million gallons up to 8 million gallons of Saf and we've secured a couple more contracts in Q1 to supply Saf to airlines, but just thinking about looking forward at our renewable diesel margins we.
Brian Mendell: Paid continued weakness mostly on the regulatory uncertainty.
Brian Mendell: It keeps the market.
Brian Mendell: Somewhat weak footing will need to have additional clarity on a number of factors affecting renewable margins, including the PTC the RVO <unk> faster.
Brian Mendell: Fast roles tariffs renewable are small refinery exemptions just to name a few so.
Brian Mendell: We will continue to manage our flexible system.
Brian Mendell: We buy a lot of feedstock, we buy more feedstock in our system needs and so we can move those that feedstock around and manage the optionality in the system, but we will continue to use the LP at the refinery to provide the most favored renewable feedstock.
Speaker Change: Thank you for taking my questions.
Bob: Thanks, Bob.
Speaker Change: Our next question comes from Jean Ann Salisbury with Bank of America. Please go ahead hi.
Speaker Change: Hi, Thank you I wanted to follow up on <unk> question about the epic acquisition I think most midstream investors I talked to were a little surprised by the move to add more NGL pipeline capacity without getting more processing to fill those pipelines.
Speaker Change: Given that you were already kind of under indexed to processing before the deal when compared to peers.
Speaker Change: Pipes are contracted medium term, but does this.
Speaker Change: On you to get more processing, either organically or inorganically in the next few years as those contracts start to LLS.
Speaker Change: Hi, Jean Ann This is Don.
Mark: Do you have for Mark the epic acquisition is very compelling to us and for a variety of reasons.
Mark: But to kind of unpack and address your question regarding kind of capacity and supply because it's certainly a question. We've had a couple of times, but I'll focus on this one key attribute and that is it.
Mark: <unk> provides us and brings us needed Permian pipeline capacity that is.
Mark: Already in an expansion program that is very capital efficient.
Mark: Cost effective and we see that as being very important to us and the reason that is right now our supply portfolio runs at about 125% of our sand hills capacity. So that means we move a lot of product on third party pipelines.
Mark: And if you kind of look through 'twenty five in and out the years that supply level will continue to grow this year as well as net as we bring on our expansion plans at pinnacle.
Mark: In July of 25% as we bring on a third party plant that's dedicated to us.
Mark: Also.
Mark: <unk> will be in a position to announce.
Mark: Expansion of another plant in the Permian later this year and so when you think about all of that.
Mark: <unk> coming on it really combines very well fits very well with the epic capacity.
Mark: We will be able to move product after third party pipelines as our G&P volumes grow we will be able to fill in.
Mark: The expansion capacity that comes online at the end of 'twenty six with epic. So it's it really gives us room to continue to grow our G&P footprint. So that's what's quite exciting so for us it's really the right size and the right time.
Mark: The time from an expansion and capacity standpoint.
Mark: It's really well with our existing assets, we're already highly connected in a lot of spots with them. So when you think about integration and synergies. It's a very straightforward approach with really minimal integration costs to achieve so very excited to bring this and allow us to continue to grow our.
Speaker Change: Hi, Paul supply off third party lines and put it all in our system provide really good service to them to the Gulf coast for our shippers and our producers.
Speaker Change: Thanks, Don.
Speaker Change: That's very helpful and I appreciate the color there I'll leave it there. Thank you.
Speaker Change: Thanks, Dan.
Roger Read: Our next question comes from Roger read with Wells Fargo. Please.
Speaker Change: Please go ahead.
Speaker Change: Yeah. Thanks, good morning, everybody.
Speaker Change: Shifting gears a little bit.
Speaker Change: <unk> refining if that's all right.
Speaker Change: Two main questions. One just as you look at the overall fundamentals kind of how do you see the market here.
Speaker Change: And then the second part of that digging a little deeper on crude.
Speaker Change: Crude supply crude availability, you've got obviously a lot of moving parts on the policy side tariffs.
Speaker Change: Sanctions on countries that have been supplying crude here that sort of thing just.
Speaker Change: And of a broad question, but how do you see things.
Speaker Change: Hey, Roger Brian, maybe we'll start with kind of product demand and supply and then we will work on on crude.
Speaker Change: Crude and tariffs.
Speaker Change: Gasoline, we saw 2020 for gasoline demand up a bit mostly on lower Asian demand growth. We saw strong vehicle switching in Europe, where demand was up almost 3% U S demand increased a bit too driven by lower retail prices.
Speaker Change: The demand outlook, we think looks stronger for 2025 with stable GDP outlooks in Chinese vehicle fleet, showing a reduction in the growth in EV sales. So our demand forecast for 2025 for gasoline globally is up 8% and up 2% in the U S and on the distillate side 2024 global distillate demand was <unk> nine.
Speaker Change: Percent lower than 2023 <unk>.
Speaker Change: <unk> 24 U S demand was actually up 4% versus <unk> <unk> prior year.
Speaker Change: Currently U S. Distillate inventories are about 8% under five year averages quite a bit we're forecasting global distillate demand for 2025, 1% over 24 with gains, particularly focused across India, Malaysia, and Indonesia, and U S distillate demand up about 2%.
Speaker Change: On the tariff question I think first of all we don't know if we're going to have tariffs, but assuming that there are tariffs in Canada and Mexico, our view is that <unk>.
Speaker Change: Markets will act a little bit differently. So we think tariffs and 10 in the first thing that happens is Tms gets filled second thing that happens is currently the inventories are low the inventories will start to fail, but ultimately the differentials for WCS differential widened to incentive incentivize.
Speaker Change: Through to move into the U S. Because crude actually has to move into the U S.
Speaker Change: A lot of value in Canadian crude before Theres any protection production cuts I think in and pad four and parts of pad, two where there arent as many alternative suppliers.
Speaker Change: This will also have to do some work.
Speaker Change: Then on the Mexico side Mexican tariffs.
Speaker Change: 450000 barrels a day of Mexican crude that comes into the U S. We think that crude will be displaced moved to Europe and Asia.
Speaker Change: The crews will come in we would expect to see the heavy crudes.
Speaker Change: Just on the inefficiency of logistics, but as the year goes on and OPEC puts more barrels back onto the market. We would expect those differentials to widen back out.
Speaker Change: Very comprehensive I'll turn it back thanks.
Roger: Thanks Roger.
Yeah.
Roger: Our next question comes from John Royall with Jpmorgan.
Speaker Change: Please go ahead.
John Royall: Hi, good morning, Thanks for taking my question.
John Royall: So my first question is maybe you can talk about your outlook for your refining business at mid cycle.
Speaker Change: According to your slides you've achieved the $5 billion of EBITDA, but if I remember correctly, you had a number of initiatives that you touched on it at Investor day around capture rates. They werent officially in those targets.
Speaker Change: Thank you also have some ongoing reliability work and work around the Opex side. So I'm just trying to think through if there is some possibility that that $5 billion really been moving up over the next couple of years.
Speaker Change: Because it does feel like there is still some opportunity remaining there.
Speaker Change: Thanks for the question this is rich.
Speaker Change:
Speaker Change: Organization I can't tell you how proud I am of the organization and the work that's been going on inside the organization has been fantastic.
Speaker Change: Our reliability front.
We've operated quite well as a system in a matter of fact eight consecutive quarters over over industry average in the fourth quarter, we were sitting at a very nice 94%.
Speaker Change: It's healthy healthy number for us.
Speaker Change: And the underlying parts of that is really driven by our reliability program, we actually achieved a 98% mechanical availability on the crude units, which for the year actually drove us to a 95% utilization across the entire here. So the reliability programs have been working really really well for us.
Speaker Change: And that's fundamental to being in the market when the market's there right. So that reliability. The other part of the program has really been around increasing our market capture as you indicated and we've been working on a series of of high return low capital projects, there and it's tough.
Speaker Change: To see those in this low margin environment right now.
Speaker Change: But there are some really good signs signpost, there that are shown showing their way through and one of them is the record for clean product yield that was mentioned in the opening comments.
Speaker Change: 88% in the fourth quarter 2000, and for that that is the highest we've ever achieved as an organization now seasonally that's supported by butane, but that's been going on for years. There is still some underlying clean product yield that's approved improving and that also.
Speaker Change: We achieved 87% clean product yield across the entire year, So a fantastic performance and what's most important about that.
Speaker Change: Is that the gasoline yield stayed pretty flat, which is consistent with our brian's comments on the marketplace, but we've actually increased our distillate yield.
Speaker Change: And through that process, we're actually seeing yield improvements. These aren't just fractionation changes that are occurring inside inside the plant and that's led to a pretty solid market capture here and there.
Speaker Change: <unk> fourth quarter of 100 105.
Speaker Change: The last part of that.
Speaker Change: The mantra that we've been working on is really that cost reduction right that dollar per barrel.
Speaker Change: And Thats, roughly we've moved $650 million out of our operating expense.
Speaker Change: And that includes our share our share of <unk>, our proportionate share of their but we clearly see that hitting the line.
Speaker Change: So with that additional market capture the reliability components.
Speaker Change:
Speaker Change: That mid cycle target that youre talking about is right well within range.
Speaker Change: <unk>.
Speaker Change: We feel that that's very achievable that $5 billion and we're going to continue to strive on that and through that era.
Speaker Change: As the market continues to improve.
Speaker Change: But.
Speaker Change: Let me leave you with the opinion that I think we're done with this whole program right.
Speaker Change: We're going to continue to drive the efficiencies out of the business our reliability journey is never going to be over.
Speaker Change: And we're going to continue our.
Speaker Change: Focus of these small projects with high return on increasing the production of our most valuable products and we're going to do all of that with our industry, leading standards and health safety and environment, Yes, our engineers and operators out of the plants are just hyper focused on taking the reliability journey from the crew.
Speaker Change: Units on throughout the downstream units in the refineries because you get better with the crude units that puts the pressure downstream and they're out there actively pushing and harvesting those opportunities and teeing them up as well. So we're going to we're going to continue to do this each and every day looking for ways to improve drive those inefficiencies out.
Speaker Change: Open up opportunities for more throughput and more reliable throughput.
Speaker Change: Very thorough thank you very much and if I could just follow up.
Speaker Change: On R&D margins, you've already given some thoughts on margins, but.
Speaker Change: I was hoping to dig in on your thoughts on the 45 Z in particular and what are the different scenarios for how that could play out this year and maybe in the extreme where we have no BTC or PTC for a sustained period of time.
Speaker Change: What would that look like for the industry would you expect the room to support the difference or where we end up seeing some kind of capacity would be coming out.
Speaker Change: Hey, Josh Brian, Yes, I think when you think about Rd margins in renewable jet margins you have to think about all the credits to the cost of the feedstock and the value of the product and if there's if theres, a PTC or BTC or theres, none of the above than the other credits the value of the feedback.
Speaker Change: Stock in the final product have to move in tandem to drive a margin and if that doesn't happen. We were gonna see plans start to cut so even now when margins are low for biodiesel, we've seen biodiesel plants cut back their runs so that helps expand the margin as they cut back because there's less and less.
Speaker Change: Renewable diesel on the market. So we will see all those things work in tandem to drive margins for.
Speaker Change: Operations.
Speaker Change: Thank you.
Speaker Change: Yeah.
Speaker Change: Thanks, John.
Speaker Change: The next question comes from Jason gave women with TD Cowen.
Speaker Change: Please go ahead.
Jason: Hey, Thanks for taking my question.
Speaker Change: I wanted to ask another one on corporate structure and Philips has been.
Jason:
Jason: The <unk>.
Jason: They've shut down more refining assets since COVID-19 relative.
Jason: Relative to peers and as you think about the right size of the refining footprint.
Jason:
Jason: Not only top kind of optimize the system, but to support midstream and get the right multiple within the company.
Jason: Do you see further potential to rationalize some of your refining assets or do you feel like after the la refining shutdown.
Jason: You're in you're in a pretty competitive position with your refining asset base.
Speaker Change: Thanks, Jason.
Speaker Change: Exiting law does will have a material impact on our cost structure.
Speaker Change: And Thats part of the story there I think we're always evaluating our assets in each location has different pressures different opportunities and those if those things change and certainly that's what we saw in.
Speaker Change: In California that it moved to a set of conditions, where it was was really not viable to continue we will make those decisions, but really it is an ongoing evaluation of all the assets in our portfolio, but we don't have anything.
Speaker Change: Staring us in the face that would indicate we've got other assets that we need to shut down there may be people that would want to buy some of those assets and we.
Speaker Change: Entertain those conversations we know where we want to focus we know what we need to do to get better in refining.
Speaker Change: We don't necessarily need to get bigger in refining but.
Speaker Change: We're going to focus on getting better every day and again, we're not going to grow midstream just to grow midstream, we're gonna grow midstream because theres opportunities there to grow volumes are growing and we've got some really advantaged positions that we can leverage.
Speaker Change: To enhance the <unk> of our midstream business.
Speaker Change: While we grow the volumes that we process and an open up opportunities for upstream customers to get their materials to a wide array of markets.
Speaker Change: We can facilitate and that's one of the things that epic epic does for us It brings us into Corpus Christi, we can bring corpus Christi volumes to the sweeny hub all the way to Mont Belvieu. It just really affords our customers from the upstream perspective, a wide array of opportunities to monetize their hydrocarbons.
Speaker Change: Mhm.
Speaker Change: Thanks, and my follow ups on the marketing business, there was a pretty large decline quarter over quarter.
Speaker Change: <unk> larger than what would seasonally be expected I think you tend to see outside moves in marketing to the downside when crude prices increased rapidly, but we don't really see that.
Speaker Change: <unk> I was wondering if you could elaborate on what drove no marketing weakness in <unk> and if you expect that to continue or not.
Speaker Change: Hey, Jason its Brian Hey, Youre right marketing margins were off in Q4 with seasonal weakness.
Speaker Change: But the big thing we saw in Q3 <unk> earnings benefited from about a $50 million inventory hedging impact from falling prices.
Speaker Change: That got reversed out in Q4, when the physical barrels were actually sold so that created a $100 million negative sequential impact a couple of other little things. We had a 20 day turnaround at our base oil plant and lower base oil spreads but.
Speaker Change: Overall, the marketing volumes remained strong for the quarter. So I'd say looking forward to your question. We expect Q1 to follow our historical trend in January we did see about 3% marketing volume impact from the winter storms and from the California fires. Although the addition of new business should should close that gap.
Speaker Change: We didn't see any operational volume effects from the fires of a cold.
Speaker Change: In this business.
Speaker Change: Great Thanks for that.
Speaker Change: Yes.
Speaker Change: The next question comes from Matthew Blair with Tudor Pickering Holt. Please go ahead.
Matthew Blair: Thank you good morning, everyone on the new target of $5 50, a barrel controllable refinery costs. I think you were at 671 in 2024, which already reflected some pretty good progress.
Speaker Change: Talk about the additional levers that you can pull and then the delta of the new target how much will the closure of the Los Angeles refinery to contribute to that further improvement.
Rich Harbison: Hey, Matt this is rich.
Speaker Change: Good question.
Speaker Change: So how do we plan to achieve the $5 50 per barrel. So.
Speaker Change: First of all the base is pretty important to talk about this is $5 50 X turnaround cost too.
Speaker Change: So our 2024, we ended approximately about $5 90, a barrel and operating.
Speaker Change: <unk> expense, excluding turnarounds, so there's about a 40 <unk> delta there in that.
Speaker Change: We do we do see the the ceasing of operations at Los Angeles are occurring in the fourth quarter. This historically has been one of our higher cost operations. So there'll be a net deduction across the system impact and that's roughly 50% of the gap.
Speaker Change: And the balance of that we will we will look at closing using the momentum of the organization that's already been built up through our business transformation.
Speaker Change: Opportunities in exercises.
Speaker Change: We continually challenging ourselves to reduce the inefficiencies I've talked a lot about the reliability programs and that continued reliability actually drives down your operating expense.
Speaker Change: As you become more reliable and then of course, there's the there's the denominator on this equation as well and continuing to push the barrel the barrel numbers in the clean product yield up on the on the backside of that number.
Speaker Change: So we see this as a pretty clear path.
Speaker Change: Is it a stretch it's a bit of a stretch yes is it achievable absolutely we will achieve this.
Speaker Change: And.
Speaker Change: I'm very confident by 26 will have to have that number down there on a routine basis.
Speaker Change: Matthew just.
Speaker Change: For you and for others listening in on page 17 of our supplemental it's the second to the last line there refining adjusted controllable costs, excluding turnaround expense. So that's where the $5 50 number is comparable.
Speaker Change: Sounds good. Thank you and then you mentioned that there was no staff production in the fourth quarter as.
Speaker Change: As we turn into 2025, the EU is implementing the 2% SaaS blending mandate.
Speaker Change: Could you talk about what.
Speaker Change: Are you seeing in that market or are you seeing calls for increased staff demand as a result, you mandates.
Speaker Change: Or is that not really materialized, yet and when would you expect to increase your staff production as we progress through 2025.
Speaker Change: Yes, we think we think our renewable jet SaaS are going to be important products. We made a we made renewable jet in January we will make it again in February if you look at renewable jet versus part D. Right now, it's pretty tight market, but we continue to use our linear program out of refineries to determine what we should.
Speaker Change: Make what makes the most sense in terms of a netback of valued in the market. So we'll continue to do that going forward.
Speaker Change: Great. Thank you.
Speaker Change: The next question comes from Paul Cheng with Scotiabank. Please.
Speaker Change: Please go ahead.
Paul Cheng: Hey, guys good morning.
Paul Cheng: The first question yes.
Paul Cheng: Catherine Dan and Mark Yes.
Paul Cheng: You sign up.
Paul Cheng: Toxin palm kernel of 17, but.
Paul Cheng: 17 billion. So that's about 5 billion lower than your current nacco, Meanwhile, that and you're saying that this is a priority, but meanwhile that you're also.
Paul Cheng: Looking to grow your EBITDA.
Paul Cheng: EBITA and fool, perhaps that some equity.
Paul Cheng: Both on the acquisition.
Paul Cheng: It happened to happen I think that you're pumping a good acquisition, but on the other hand, it out to you on that.
Page.
Paul Cheng: So how.
Paul Cheng: Halloween.
Paul Cheng: It all ties between the two.
Paul Cheng: Sure.
Speaker Change: The debt reduction take a more <unk> at a lower level or that you think that it's I think Katherine in his prepared remarks, a new active few already reasonably comfortable so.
Speaker Change: GMO pending opportunity do you think thats. Good that you will put further delay on the debt reduction and go with that acquisition opportunity.
Yes, Paul.
Speaker Change: So just to be clear the $17 billion debt level would be a $3 billion reduction from where we are I think you said $5 3 million, which is still not insignificant.
Speaker Change: But thats how we are we are looking at this.
Speaker Change: And.
Speaker Change: The reality is that that.
Speaker Change: Including FX.
Speaker Change: Catherine.
Speaker Change: Okay.
Speaker Change: Perfect.
Speaker Change: Oh, you are including the purchase of epic Okay. Okay, but you also have to look at we've also been selling assets and so.
Speaker Change: In January of this year, we've collected.
Speaker Change: Just north of $2 billion on proceeds from asset dispositions.
Speaker Change: Talked about the jet.
Speaker Change: <unk> retail assets in Germany, and Austria that we are in active negotiations on and so there was more inflow then just thinking about the operating cash flow of the company. So when you look at all these pieces together, we actually think we're going to have a fair amount of flexibility to be able to accomplish everything we want to do now.
Speaker Change: Granted when I say bolt on naturally think of something that looks more like pinnacle.
Speaker Change: Then epic.
Speaker Change: $500 million acquisitions, or something like that is obviously a lot easier to digest than doing a string of $2 billion acquisition in that instance, we would have to think.
Speaker Change: Differently about.
Speaker Change: Capital allocation and balance sheet impacts, but in overall terms actually I think we've got a lot of flexibility to be able to accomplish what we want here and I think Brian alluded to this earlier as well as we get into the second half of this year, we've become a lot more bullish on refining margins in the refining.
Speaker Change: Outlook, which will provide further boost on the operating cash flow side. So.
Speaker Change: And there's not a.
Speaker Change: We would love to get to $17 billion of debt by the end of this year.
Speaker Change: That's not a must have we still have some degrees of flexibility around that in terms of how we look at it yes Paul.
Speaker Change: The growth in EBITDA is not premised on any bolt on acquisitions.
Speaker Change: At a billion dollar increment in midstream and chemicals.
Speaker Change: Organic and about half of it would be from the CP Chem growth projects that are outside of our caf.
Speaker Change: Capital budget and so the other half is in Don's business primarily.
Speaker Change: Growing growing the midstream business organically.
Speaker Change: And that's all within the $2 billion ish got a capital budget that we that we're projecting.
Speaker Change: I fully understand on that I'm, just trying to get some better understanding.
Speaker Change: If you do deal with AUC.
Speaker Change: Keep in Angola RP.
Speaker Change: Physician opportunity and you think that your factory plenty of quitting.
Speaker Change: Comparing to the objective of the new fishing.
Speaker Change: How at that point that you would consider.
Speaker Change: It's going to take the pilot launch.
Speaker Change: Yes, we will make that.
Speaker Change: If we're faced with that kind of opportunity, we will make our own assessment on what's how do we need to think about that from a balance sheet and funding standpoint.
Speaker Change: Wouldn't it.
Speaker Change: We wouldn't be in capable of executing on that transaction like that we would have the flexibility to be able to execute well they have to re look at other priorities.
Speaker Change: But we would deal with at a time.
Speaker Change: Okay.
Speaker Change: Second one is that we will.
Speaker Change: One.
Speaker Change: We still have paid off their uncertainty on PTC in the first quarter for your business.
Speaker Change: Thank you with thoughts.
Speaker Change: Some of that benefit to the nature of PTC or that you're not going to.
Paul Cheng: Paul any PTC cut it until.
Speaker Change: You are 100% certain on everything.
Speaker Change: Yeah, Paul the only thing I can say with certainty is theres a lot of uncertainty as you highlighted the.
Speaker Change: The reality is what we have on PTC or notices not proposed rules. There have also been these sweeping executive orders that have put a pause on many forms of rulemaking. We don't know if what's been published on PTC is subject to these executive orders or not.
Speaker Change: And so we're still working through all of this the reality is we will have to.
Speaker Change: Options here one is we just don't record anything in the first quarter or until there's more clarity. The other as we go with the the information that is available which are these.
Speaker Change: Notices and the provisions that are provided in those and this is something that we will we'll work through over the course of the first quarter.
Speaker Change: I wish I could provide more clarity.
Brian Mendell: The next question comes from Brian <unk> with Piper Sandler.
Speaker Change: Brian. Please go ahead.
Brian Mendell: Okay.
Brian Mendell: Great. Thanks.
Brian Mendell: Maybe a couple of quick ones on <unk> I appreciate it.
Brian Mendell: The comments you gave on refining capture in the fourth quarter, which was really strong maybe any any comments on it.
Brian Mendell: How would you would see in the early part of this year the outlook any moving pieces that might drive capture rate higher or lower on the refining side.
Brian Mendell: And then maybe just.
Brian Mendell: Part of the business transformation process is curious as to where you think you are in the.
In terms of progress on the commercial side of things.
Brian Mendell: On the refining capture rate.
Brian Mendell: Of course, we have.
Brian Mendell: Some turnarounds that we've indicated in there so that that will certainly have an impact in those in those markets with those turnarounds are occurring.
Brian Mendell: Overall in the fourth quarter, we saw a benefit from the seasonal butane blending that will continue through the first quarter as well so that impact should should be there and then the balance is really reflected in our our regional.
Brian Mendell: Indicators that are put out there on the <unk>.
Brian Mendell: On the IR website. So I encourage you to run those Ryan if you if you haven't run those we're seeing those but.
Brian Mendell: That will really give you a good insight as to how the market market freed us.
Brian Mendell: 83%.
Brian Mendell: Mid eight low AE is utilization.
Brian Mendell: Also going to have an impact right.
Brian Mendell: It's associated with the turnarounds right, yes, that's correct.
Brian Mendell:
Brian Mendell: We had a goal to grow the organization, we continue to look at opportunities to grow the organization, we're hiring from the outside we're building more expertise.
Brian Mendell: So we continue to look at margin opportunities, we look at cost cutting opportunities as well, we'll continue to do that as we as we grow our returns in our business and continue to grow the size of our business.
Brian Mendell: Great. Thank you.
Speaker Change: This concludes the question and answer session I will now turn the call back over to Mark lasers for closing comments.
Brian Mendell: Thanks for all your questions.
Brian Mendell: Checked off our strategic priorities for Investor Day 2022.
Brian Mendell: With our new 2025 to 2027 priorities, we remain steadfast in pursuing operational excellence.
Brian Mendell: Competitive cost structure and enhancing shareholder value.
Brian Mendell: We're growing the midstream business to $4 billion of stable mid cycle EBITDA with the anticipated close of ethic. Later this year and we have plans in place to add a $1 billion in total mid cycle EBITDA in midstream and chemicals by 2027.
Brian Mendell: We're continuing to make investments to enhance clean product yield and reliability and refining.
Brian Mendell: Our assets are ready to capture the upside as the market returns.
Brian Mendell: The stable cash generation for midstream covers the company's sustaining capital and dividends.
Brian Mendell: And with $2 billion of expected earnings from our marketing and specialties business, we have a strong base before adding contributions from our other segments.
Brian Mendell: The power of integration provides us unique compelling investment opportunity.
Brian Mendell: We will reward shareholders now and in the future as we move forward with our vision to be the leading integrated downstream energy provider.
Speaker Change: Thank you for your interest in Phillips 66, if you have questions. After today's call. Please call Jeff Irwin.
Speaker Change: Thank you everyone for joining us today. This concludes our call and you may now disconnect your lines.
Speaker Change: [music].