Q1 2025 Phillips 66 Earnings Call
Welcome to the first quarter 2025 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.
Today's presentation can be found on the Investor Relations section of the Phillips 66 website, along with supplemental financial and operating information.
Slide 2 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 RSEC filings.
with that I'll turn the call over to Mark.
Thanks Jeff.
Mark: Welcome everyone to our first quarter earnings call. During the quarter we continue to execute on our transformational strategy and deliver returns to our shareholders.
Mark: By staying focused on what we can control, we made important progress across our 2027 priorities, improving refining operations, enhancing our NGO value chain, and executing on our growth opportunities.
Mark: Underpinned by the strength of cash flow contributions from our midstream business, we return $716 million to shareholders this quarter.
Mark: We did this in a challenged macroenvironment in refining renewables and chemicals. We also executed one of the largest spring turnaround programs in the history of Phillips 66 that impacted volumes and margins. These important investments position us well for the future.
Mark: Slide 4 shows how we continue to improve refining operations through targeted, low-capital, high-return projects.
These recent investments lead to greater feedstock flexibility and yield.
Mark: Before I touch on some of these projects, I want to highlight the success of our Spring Turnaround program, which was completed safely, on time, and under budget.
Mark: Furthermore, our refineries not intern around this quarter ran well. These accomplishments would not have been possible without our employees unwavering dedication to operating excellence and safety. Thank you to the refining team. Well done!
Mark: The bulk of the annual turnaround activity and associated costs are largely behind us, which you will see reflected in our guidance going forward. We are well positioned to capture upside in the market for the remainder of the year.
Mark: During this quarter's turnaround, we achieved meaningful project milestones. At the Sweeney refinery, we removed constraints and enhanced crude flexibility. We now have an additional 40,000 barrels per day of heavy-light crude switching capability. We now have an additional 40,000 barrels per day of heavy-light crude switching capability.
Mark: Depending on market conditions, we will run additional Permian barrels, displacing imported heavy crews. We expect this flexibility in a rapidly changing price environment will enhance long-term margins at this strategic refinery.
Mark: Also, at our Bayway facility, we completed a project that increases our FCC native beach dot capabilities, reducing the need for VGO imports.
Mark: Both of these low capital and high return projects are enabling us to enhance market capture.
Mark: We're committed to our refining business. We have a clear path to increase operational runtime, improve yields, and reduce costs per barrel.
Mark: Moving to slide 5, midstream is critical to our integrated strategy.
Mark: It's a key growth driver and creates ongoing value for shareholders.
Mark: We've made discipline investments to build out our integrated well-head to market strategy, a strategy that allows us to efficiently move products from the well-head to high-value end markets.
Mark: This strategy provides significant stability to our financial results and has material benefits to other segments.
Mark: Our value chain creates optionality in product placement and supports reliable, long-term cast generation.
Mark: We acquired Epic NGL on April 1st, which is immediately accretive and expands our take away capacity from the Permian. [inaudible]
Mark: Dequired assets are highly integrated with the existing Phillips 66 asset base and provide long-term, D-based earnings growth.
Mark: This acquisition enhances our ability to offer producers unmatched flow assurance while expanding connectivity to end-market.
Mark: We also continue to expand our natural gas gathering and processing footprint in the Permian Basin. Ardose Pico's two expansion plant, which was part of our pinnacle acquisition strategy, is expected to come online in the third quarter of 2025.
Mark: Today, we are announcing the construction of another gas processing plant in the Permian. The Iron Mesa plant will serve Delaware and Midland Basin production and will be funded within our existing capital budget. The facilities expected to come online in the first quarter of 2027.
Mark: Both of these projects are great examples of our highly strategic and selective investments at low-boiled multiples.
Mark: They contribute to our plan to organically grow midstream run rate adjusted Yibbida to $4.5 billion by
Mark: At Phillips 66, we've embraced the culture of continuous improvement and have taken decisive actions create long-term value for our shareholders.
Mark: Slide 6 shows some of the achievements over the past three years. We have divested more than $3.5 billion of non-core assets at high multiples while making strategic acquisitions within midstream at attractive multiples to build a world-class NGL value chain.
Mark: We've made operational improvements throughout the portfolio and we've rationalized our footprint with the sale of alliance, conversion of rodeo and plan to cease operations and repurpose the land at Los Angeles.
Mark: We have taken steps to execute on our transformational strategy and we will do more.
Mark: We remain committed to maintaining safe and reliable operations, investing in high return growth opportunities, and capturing integration benefits.
Mark: We will return over 50% of net operating cash flow to shareholders through sherry purchases and a secure, competitive, and growing dividend.
Mark: Demonstrating this commitment, we recently announced a five cents per share increase in our quarterly dividend.
Mark: Since our formation in 2012, the annual dividend has increased every year, resulting in a significant 15% compounded annual growth rate.
Mark: We have delivered over $14 billion to shareholders since July 2022.
Mark: We will continue to create long-term value for shareholders as we execute on our 2027 strategic priorities, maintaining operational excellence, pursuing discipline growth, returning capital, and ensuring financial strength.
Kevin: Now, over to Kevin to cover the results for the quarter. [inaudible]
Kevin: Thank you, Mark. First quarter reported earnings were $487 million or $1.18 per share.
The adjusted loss was $368 million or $0.90 per share.
Kevin: Both the reported earnings and adjusted loss include the $246 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: The adjusted loss excludes the $1 billion pre-tax gain on disposition of our non-operated interest in co-op.
Kevin: We generated $187 million of operating cash flow and returned $716 million to shareholders, including $247 million of sharey purchases.
I will now cover the segment results on slide 8.
Kevin: Total company adjusted loss increased $307 million, compared with a prior quarter
Kevin: Midstream results decreased mainly due to lower volumes because of the turnaround activity in refining. The issue was partly offset by the impact of higher commodity prices benefiting gathering and processing results.
Kevin: Also, during the quarter, the Sweeney Hub had record fractionation volumes of 650,000 barrels per day.
Kevin: In chemicals, results increased mainly due to higher volumes and lower costs, driven by turnaround activity in the prior quarter.
Kevin: Lower refining results reflect the impact of lower volumes and higher costs driven by turnaround activity and higher utility prices.
Kevin: This is partly offset by increased realized margins from higher market cracks.
Kevin: marketing and specialties results improved due to lower depreciation and higher margins in the international business
Kevin: Inrenewable fuels, results decreased mainly due to the transition from blenders tax credits to production tax credits, inventory impacts and lower international results.
Slide 9 shows cashflow for the first quarter.
Cash from operations, including working capital, was $187 million.
Kevin: We received two billion dollars from the sales of the non-operated equity interests in co-op and the Gulf Coast Express pipeline.
Kevin: We paid down $1.3 billion of debt and returned $760 million to shareholders through Sherry Purchases and dividends. We funded $423 million of capital spending. Our ending cash balance was $1.5 billion.
Kevin: Looking ahead to the second quarter of 2025 on slide 10. In both chemicals and refining, we expect utilization rates to be in the mid 90s.
Kevin: In refining, we expect turnaround expense to be between $65 and $75 million.
Kevin: We anticipate corporate and other costs to be between $340 and $360 million.
Kevin: Now we will move to slide 11 and open the line for questions, after which Mark will wrap up the call.
Kevin: Thank you. We will now begin the question and answer session.
Kevin: As we open the call for questions, as a courtesy to all participants please limit yourself to one question and a follow-up.
Kevin: If you have a question, please press start then one on your touchstone phone.
Kevin: If you wish to be removed from the queue, please press start, then two. If you are using a speaker phone, you may need to pick up the handset first before pressing the numbers.
Kevin: Once again, if you have a question, please press store then one on your touchstone phone.
Doug Leggett: Our first question today comes from Doug Leggate with Wall-Free Search [inaudible]
Please go ahead, Doug, your line is open. Thank you very much.
Doug Leggett: I guess my question is, I had an opportunity to chat to you about this a month or so ago.
Doug Leggett: And I'm understanding at least as you guys have looked at a lot of these proposals before and made decisions that are perhaps different.
Doug Leggett: I wonder if you could share the extent of which you did look at some of these ideas that they're putting forward, for example, separate in the midstream and can rationalize why you came to a different outcome. I think everyone that would probably like to hear your perspectives on that quick follow-up, please.
Speaker Change: Sure, Doug, I welcome that question, and I think when we're talking about-
Speaker Change: Strategic Alternatives, or the strategy that drives the company forward, it really is important to understand.
Speaker Change: The mindset of our board, and we've got a strong board, we've got talented board members that have deep experience, many of them have deep experience in refining and energy.
Speaker Change: And they have high expectations for us when it comes to preparing and delivering strategic alternatives for them. And they expect a very detailed indulgence.
Review of All the Options Available.
Speaker Change: and they want to fully understand the risks and the unintended consequences of any strategic actions that we might recommend. In fact,
Speaker Change: They want to understand the risks and unintended consequences of not making strategic actions as well. So it's very comprehensive and it's not just some simple high level
Speaker Change: Spreadsheet that they might rubber stamp. They are, I would probably put them in the classification of brilliant. They ask tough questions and they are deeply accountable.
Speaker Change: Deep Dive into strategy and what we did is we took the board through scenario planning because if you remember back in 21
Speaker Change: All the rage was net 0, 2050 and so we we span the whole spectrum from net 0, 2050 to a scenario where the world realized that there was a strong need over the long term for hydrocarbons and we established milestones to track and
Speaker Change: This analysis informed our strategic alternatives that then we did a deep dive on with the board members. And we've reviewed all of those options and refreshed our views and those options in the subsequent years. And I would say every board meeting.
Speaker Change: The board asks us strong questions around the strategy and the implementation of the strategy. What's changed? What's new?
Speaker Change: Should we move this way or that way? And we talk about our stock valuation and the evolving market conditions and the strategic alternatives and we do this every board meeting.
Speaker Change: and then in the fall again we'll take him into another deep dive to review what's changed since the prior year, what is our most recent view of where we stand in those scenarios. And I'll tell you that one of the underlying principles of every discussion is that
Speaker Change: Everything in our portfolio is for sale at the right price.
Speaker Change: But the board expects us to understand the full consequences if we should dispose of an asset or spin out at part of our company that they want to understand what's the impact on the remaining assets, what's the impact on the remaining company, what are the unintended consequences, where are all the financial impacts?
Speaker Change: and I'd say that some of the parts is a part of that discussion, but it's not always the total driver that discussion. One thing that we've learned, and I believe many of you observe this as well, is that
Speaker Change: And that's why the midstream business has become such an important part of our business. It generates very steady earnings and we've grown those earnings.
Speaker Change: Quite quickly from right around $2 billion of EBITDA year to $4 billion in increasing, and so, you know...
Speaker Change: If there was a spin-off opportunity for that business, I will tell you that our board would be the first ones to challenge us to take a look at that. And they have challenges to take a look at that. When you step back and look at our board, you know, the people that we have on our board and the two new nominees that we have.
Speaker Change: amongst them, they've overseen more than $300 billion in major separation transactions during their careers.
Speaker Change: Yeah, this includes sales and spin-offs, so 366 itself. [inaudible]
Speaker Change: was the result of a spin-off. John Low, one of our key members, was involved in that and he was one of the architects of the spin-off. You've got the Dow DuPont, three-way break-up into Dow DuPont and Cortiva, our nominee Howard Underleader. He was one of the architects of that and was right in the middle of all that and the decision-making there.
You look at United Technologies
Speaker Change: That was a conglomerate that was broken. It went through a three-way breakup into carrier, Otis and R.K.X. great haze.
Speaker Change: was the architect of that, and Abbott Laboratories spin off into Abbey, Glenn Tillton was right in the middle of that as well. So I would say that few...
Speaker Change: If any boards in this country have more experience in executing such transformational transactions than the Phillips 66 board, they know how to do it.
Speaker Change: when it makes sense. And they're challenging us every step of the way to explain to them what makes sense and what doesn't make sense. And, you know, and I mentioned the the the split up of United
Speaker Change: And the first time I heard that, I thought, well, I thought I knew what a conglomerate was, but I better look it up to be sure when I looked it up.
Speaker Change: We are a hydrocarbon transporter and processor. We gather and transport hydrocarbons from the oilfields or from the imports.
Speaker Change: and we move those through our transportation assets and we convert those materials in the high value products that you use every day.
Speaker Change: And where there's the crude value chain or the NGO value chain, it's very synergistic and we're in the business of mutton managing molecules optimizing them every day.
Speaker Change: And if you look at what we have, down at our sweetie complex, all of those value chains come together.
Speaker Change: in a deeply integrated way, whether it's the fractionators where we've got, we've got massive fractionation capacity, we've got, we've got 260,000 barrel per day refinery, 550,000 barrel per day fractionation capacity, there's three ethane crackers on that site.
Speaker Change: owned and operated by CP Chem. We've got 37 million barrels of capacity and 23 salt dome caverns that are Clemens Dome, and we've got direct access to free-port
Speaker Change: We leverage that infrastructure. We leverage it in an integrated way every day, moving the molecules where they can create the most value. And we've got a commercial organization that trades around that information every day. So there is no hint of conglomerate.
In What We Do You
Speaker Change: and if you look at the potential to spin off businesses.
Speaker Change: The board also asks us to bring in third parties to get a cold eyes review of what we do and we've hired the best investment banks out there to look at strategic alternatives and when you look at the midstream organization specifically
Speaker Change: The third party independent analysis will tell you that there are incredible disenergies based on that deep physical integration.
that there's massive tax burden that any spin would realize.
Speaker Change: and that there are economies of scale. We've got a very strong balance sheet as an integrated company. The balance sheets of remain co and spin co would be, would be impaired compared to what we have today. You throw additional S-G-N-A on those remaining businesses in the public company cost.
Speaker Change: You know, none of these things are fully reflected in a simple sum of the parts analysis and so we take that into account and we make sure that our board understands every step of the way and is verified by independent parties.
Speaker Change: And then if you look at just, you know, you just heard in our narrative that, you know, the accomplishments we've had over the last three years, the board was front and center in all those decisions. We took bold actions to make sure that we were in position to be successful over the long term, the three and a half billion dollars of non-core assets.
Speaker Change: The only way we could define non-corassants is to have a well-defined strategy that was blessed by our board. That's how we define...
Speaker Change: What is core and what is non-core? We expanded our NGO, well head to market strategy with the pinnacle and epic acquisition.
fully supported by our board. We sold the Alliance Refinery, we converted Rodeo and we have planned to cease the Los Angeles Refinery, every one of those major...
Speaker Change: Strategic Actions have been deeply considered, vetted and approved by our board and refining operations.
Speaker Change: We've improved utilization, we've raised clean product yield and reduced operating costs over the last three years and we have plans for further progress. Again, part and parcel of our conversations with our board every time that we meet every action that we take.
Speaker Change: And because of all these actions that we put in place with the blessing of our board, we believe there's substantial upside to our stock as we implement our 2027 strategic priorities and we're going to maintain operational excellence. We're pursuing discipline growth and we're returning capital and sharing financial strength.
Speaker Change: and I just finally, the final point I want to make.
Speaker Change: Be crystal clear on is we're making these strategic decisions at the board level as we're making operational decisions at the operating and the management level we are focused on data.
Speaker Change: We are focused on facts. We don't act out of fear or short-term trends.
Speaker Change: We act on what we believe will create the most long-term value for our shareholders each and every time and I will tell you that...
Speaker Change: Since the activist launched their campaign in February , the investor's sentiment around their thesis has become more and more negative, and they become more and more positive around the process or the progress that we've made in our refining in all of our businesses.
Speaker Change: and so we believe we're in a strong position, we're committed to it and we're going to base it on data and facts going forward. So Doug, thank you for that question and I look forward to your follow-up.
Speaker Change: Well, I think, first of all, thanks for the thorough answer. I think I've taken enough time. I want to be respectful to my fellow psych colleagues. I did have a follow up, but I'll pass it back. Thanks so much for the answer.
Thanks, Doug.
Speaker Change: Thank you. The next question comes from John Royall with JP Morgan. John , please go ahead.
Hi, good morning. Thanks for taking my question.
Tough to follow that back and forth, but maybe I'll... [inaudible]
Speaker Change: Maybe I'll go with a balance sheet question. So, you're remaining well above your target at 38%.
Speaker Change: You got the big turnaround quarter for the year and the rear view, and you also have a potential asset sale coming, which is good, but also the macro environment remains uncertain, so my question is, what do you view as your path to getting back to 30%
Speaker Change: and does the path include maybe buying back a little less stock than your framework would otherwise imply?
Yet, John is Kevin, let me heard...
Speaker Change: We have targets on leverage to the 30%. The real target that I focus on is the $17 billion absolute debt level. That's where I'm, and the 30% becomes an output because it's a measure of debt and equity as you know.
Speaker Change: and so our expectation is that between the cash that comes in from this position of assets.
Speaker Change: High Utilization, and you combine that with some margin recovery, which we have seen as you look into April , we're seeing margins that are so that $3 to $4 for a barrel higher than where we were on average in the first quarter.
Speaker Change: then that should position us quite well in terms of being able to make progress on debt reduction.
Speaker Change: I'd love to hit that $17 billion number by the end of this year. I can't guarantee that will happen. It will be dependent on where operating cash flow comes out. But the overlay here is, we're still committed to the 50% or more cash returns to shareholders in terms of operating cash flow. So that's...
Speaker Change: That's the sort of basic criteria around returning cash to shareholders 50% or more of operating cash flow and at the same time through hopefully strong cash generation and proceeds from asset dispositions be able to make progress on their reduction.
Okay, thank you, Kevin, and then-
My next question is on renewables.
Speaker Change: This was a little bit of a noisy quarter with the PTC coming into effect mid-quarter. Can you help us that really as detailed as you're willing to be on what the post-PTC world kind of looks like in your renewables business? If you could give us any kind of sense for maybe the proportion of production that's eligible and how much you expect to receive on a per gallon basis. Thank you very much.
Speaker Change: You know, based on your current feedstocks rate, that would be very helpful. Thank you
Yeah, John , let me first just...
Speaker Change: Clear the first quarter result because that was a, it was somewhat of a messy result to be honest and let me just walk through what drove that and then Brian will give a bit of the sort of forward expectations around it. So we had a significant drop from fourth quarter to first quarter. The transition from BTC was a significant
in fact it was the largest driver of that drop. [inaudible]
Speaker Change: But we also had LIFO inventory impacts from drawing down low CI feed stock inventory where the LIFO rate exceeded market prices. I was about a $60 million hit.
Speaker Change: in the first quarter. And then also in international, the recognition of the UK credits, these are the RTFC credits, it's not rateable. So we recognize about 50 million of those in the fourth quarter. We did not have any credit recognition. [inaudible]
Speaker Change: in the first quarter. And so when you put all those things together, you get back to why the results.
Oliver, was where it sits. [inaudible]
So maybe Brian can give a forward look. [inaudible]
Speaker Change: So I would say it's hard to provide guidance for Q2 and you can tell I'm losing my voice so I'm going to try as hard as I can but with so many outstanding policy issues including the tariffs and the RVO for Rins that hasn't been set yet
Speaker Change: It's difficult, but we believe the RVO will need to strengthen the D4-Rin or the biodiesel-rin to continue to provide incentive for RD production.
Speaker Change: And margins continue to be challenged day, even in April and the current market has us running the plant at reduced rates in terms of tailwinds.
There are some tailwinds we are seeing, biodiesel plans closing.
Speaker Change: A given the tight margins, and we've also seen demand for renewable diesel firmening, and that's a seasonal firming of demand, and finally...
Speaker Change: We look forward to collaborating with the administration to support the U.S. manufacturing by addressing the unintended consequences of tariffs on feed stocks, given international R.D. imports to the U.S. or untaraged with which disadvantages domestic producers like rodeo. [inaudible]
Thank you.
Eiffel, Wendy
Speaker Change: Thank you. Our next question comes from the line of Roger Read with Wells Fargo. Roger, please go ahead.
Roger Reid: Yeah, thank you. Good morning. Maybe just to kick this off, update on where you are on kind of final asset dispositions. I think there's still some stuff in retail, maybe something in the mainstream space.
Roger Reid: Yeah, Roger, it's Kevin. So as you know, we've done three and a half billion of dispositions to date. So we're ahead of the target that we laid out back in.
Roger Reid: A couple of years ago, I guess. The major item we're still working is the Europe Retail, so the Jet, Germany, Austria. That is a very active process. And I know I've said this several times, but we are legitimately in depth negotiations. [inaudible]
on that and hope to have some updates soon.
Speaker Change: Yeah, as far as this mark, as far as other asset dispositions, we have…
Speaker Change: Other assets that we would define as non-core and unoperated assets, many of them are in the midstream, we're not going to name any specific assets but certainly we know what the value of those assets are and we know that there are potential buyers out there.
Speaker Change: And follow up on that. How should we think about the use of cash flows or cash raised, I guess maybe I should say from those asset sales at this point, do you see it Kevin as you were talking earlier in terms of return of capital to shareholders or is most of this targeted for dead reduction. [inaudible]
Speaker Change: I would expect most of this to be debt production and think of the cash returns to share old as being the relative to operating cash generation. So different, you know, different part of the cash flow statement driving the cash returns.
Speaker Change: Okay, and then if I could just toss in one more that didn't count as my follow-up Jeff, I apologize if I'm violating the rules.
Speaker Change: Heavy Maintenance Q1 in refining, very low in Q2, were you essentially wrapped up as we started Q2 or is there a little lingering into Q2 that we should think of within that mid-90s guidance?
Speaker Change: Yeah, this is Rich Roger. Thanks for the question. You know, the Q-1 was the heavy concentration of the turnaround activity, and you can tell by the guidance that we provided for the [inaudible]
Speaker Change: There is a little bit of linger that comes from quarter to quarter but it's certainly winding down in the second quarter and you see that in the overall guidance.
Good. Thank you.
Speaker Change: Thank you. The next question comes from Manav Gupta with UBS.
Please go ahead, your line is now open.
Manav Gupta: Good morning, team. Can you help us better understand how some of these LPG exports will have to reset to accommodate around tariffs because I think you were sending like...
Speaker Change: 28% of our ethans to China and about 22% of propane to China. So how do these NGO exports now reset globally to work around the tariff?
Speaker Change: Hey, man, this is Ryan. I'd say, like you said, the majority of China's LPG supply, which is primarily propane, comes from the US.
Brian: tariffs will likely alter those routes for Chinese LPG supply, it's possible that China could get their supply from the HG, from Australia's from Southeast Asia, and then the US will just supply, will backfill the whole left by those reasons, just rerouting trade flows. [inaudible] I've never seen this before, I've never seen this before,
Brian: and maybe bringing it back to our assets. Our free-port LPG is mostly termed up.
We haven't seen any FOP cancellations for cargoes.
Brian: We also have a strong international trading team and that they manage delivered cargoes which allows us to capture additional value and optimize the free port exports when we see changes to fundamentals or when we have market dislocations like those caused by tariffs.
Manav Gupta: My quick follow-up here is on the polyethylene chain margin. It was weaker even before the tariffs were announced and again. Some portion of polyethylene resin definitely moves to China, made into products and sold back into the US. Those flows cannot be sustainable with the tariffs, so your medium-term outlook for the polyethylene chain margin here. [inaudible]
Speaker Change: I think that there certainly is pressure from the terror situation, purchasing decisions, they are going to be impacted.
Speaker Change: I do believe that C.P. Kim has minimized their exposure to China, and they've also got the ability to source material from the Middle East, similar to the propane discussion, and so there would be rebalancing, but no, certainly that clear that tariffs do...
Speaker Change: The uncertainty around tariffs causes people to slow down their decision making and you see that across the economy.
Thank you
. . . .
Speaker Change: Thank you. The next question comes from Neil Mehta with Goldman Sachs.
Please go ahead now. Yes.
Neil Mehta: Yeah, thank you. Appreciate the thorough answer to the question around some of the parts of Kevin. I had a follow-up for you around the midstream side of the equation because that's where there's been a lot of focus around, you know, you built a good business, doesn't make sense to.
Neil Mehta: to try to monetize it. And I think you made a comment that there's significant tax-free picture around monetization.
Neil Mehta: That is in the case of a spin as well and then it can provide a little bit more detail or help us quantify framework for thinking about tax we could just associated with mystery monetization.
Neil Mehta: Yeah, Neil, that the tax hit is in the context of a sale.
Neil Mehta: of the business. A spin-off you would expect would be structured in a tax-free manner, and so I would expect...
Neil Mehta: Minimal tax implications from my spin, but in terms of an actual discussion. [inaudible]
Neil Mehta: The majority of those assets were constructed or acquired during a period where we had accelerated depreciation so the tax basis is extremely low.
So just to put some context around that. [inaudible]
Neil Mehta: You can, you know, depending on what number you use for valuation and there's a $50 billion number that's out there.
Neil Mehta: That would drive a $10 billion tax to quantify what we mean by significant tax impacts.
Neil Mehta: Got it, and there's no clear offsets that you could put against that, it sounds like.
Not that I'm aware of.
Okay.
Neil Mehta: All right, is it that the follow-up for the team is really on the refining side.
Neil Mehta: That's obviously challenging conditions in Q1, but yeah, they're going to be running better here in Q2. You just love your thoughts on the path back to mid-cycle and
Neil Mehta: One of the factors that suppressing profitability has been the tightness of WCS, just how do you guys see that moving from here as we work through turnaround and connect that to the atelon?
Aineo, it's Brian . I'll try to get this out.
Neil Mehta: Just on a market outlook and maybe the caveat is geopolitics and the slowing economy.
Neil Mehta: make everything hard to predict. But what we've seen, Kevin's mentioned this, US margins and April are firming a good bit and you can see that in our market indicator.
Neil Mehta: We're estimating about 1 million barrels worth of the global refining capacity shutting this year and most of that rationalization will be in the US and in Europe .
Neil Mehta: And in fact, if you look out through the end of the decade, we only show about 300,000 barrels a day of net additions per year and we're likely to see that number to continue to decrease.
Neil Mehta: But on gasoline, we're forecasting global gasoline demand to be about half a percent up for the year in U.S. gasoline demand to be up about 1 percent.
Neil Mehta: If you take a look at first quarter, that was 1.1% year-on-year growth in the US.
Noah Pump Price's Good on Employment Numbers Shout-out!
Neil Mehta: Less working from home all contributed to that strength. The US gasoline inventories are now currently at about five of your averages, and our current gasoline supply outlook is for those inventories to continue to tighten, particularly as we get in gasoline season, particularly in the US.
Neil Mehta: on the distillate side. We see demand globally up about 1%.
Neil Mehta: and in the U.S. up about 2% for the year, part of the demand increase will come from a lower biodiesel and a renewable diesel production driven by the weaker renewable margins.
Neil Mehta: and also there's a shift to Mediterranean eco fuel in May which will help US diesel inventories are really sitting at very low five-year seasonal lows in part due to kind of ongoing maintenance both in the Gulf Coast and in the Midcon. .
Neil Mehta: I then filing on jet at a one-two 25-global jet demand was about 2.3% a year and a year we're forecasting
2025 Global Jet Demand to be up 2% and there were a lot of the hairlines have talked about they can't predict for the rest of the year and
Neil Mehta: and in some ways, if you think there's going to be a recession or more tariffs, the bets are off, but this is, if you don't think those things are going to happen, this is kind of our view, and we're starting to see trimming of mere month flights, so it's really hard to tell.
Neil Mehta: U.S. Jeff Demand, 1.4% up. That's from Fleet and Flight Schedule Growth. Again, it's very, very difficult to tell. And then on the, you mentioned on the Canadian Differentials.
Neil Mehta: In Q2, we anticipate about 3158,000 barrels a day off the market, mostly driven by planned maintenance and production facilities.
Neil Mehta: And then, as you kind of look across the year, we see a differential start to whiten out. You'll get the seasonal benefit of doing you in the product.
Neil Mehta: and also you'll get more OPEC barrels on the market which will also help weaken the heavy
That's all great color. Thank you so much.
Neil Mehta: Thank you. The next question comes from Theresa Chen with Barclays. Please go ahead Theresa.
Teresa Chen: Hi, I wanted to go back to the NGL conversation. There are some material circulating about a carve-out for NGLs within the Chinese Recipital.
The Reciprocal Terror
Speaker Change: Do you have an early view on this, especially for FN, and in the event of additional downside volatility for NGO crisis in the Gulf Coast, how to business positions within the backdrop of potentially lower LPG Arb, Stratx Breads, and POP margins in processing?
Speaker Change: Well, I think first of all, most of our businesses turned up at the Freedport facility and as I mentioned we're not seeing anybody canceling your those term contracts.
Speaker Change: I think that, you know, a lot of the or most of the effane for China comes from the US and we would we've seen that still moving we expected to continue to move so I don't think that would really have an impact on our business.
Going forward.
Speaker Change: Yeah, I think preset a high level. There's a few other options for the Chinese that are consuming ethane. And so I think that it's clear that they're at least...
Possibly some rational discussions going on around tariffs. It's all-
Speaker Change: Maybe rumor and speculation at this point, but hopefully those discussions move in a rational direction because the Chinese need access to US propane and ethane and so it's in their best interest to seek that accommodation.
Got it.
Speaker Change: The first of maybe several plans to increase the wide grade under your control, especially in light of a competitor building out their own track and dock infrastructure later this decade that maybe creates a volume shortfall in screening and report.
Hydrae, so this is done.
Yeah, I mean, it continues, I think, really just...
Speaker Change: Demonstrate the progress we're making in building out our NGO value chain, and it does support our Caribbean G&B growth and position in terms of barrels coming out of our own gas plants.
Speaker Change: From an investment standpoint, it's a typical midstream return from a build multiple kind of a sub five times type size.
Speaker Change: A little bit, maybe to unpack, Iron Mesa, it's going to be located near a Goldsmith facility.
Speaker Change: And so that really provides us with several benefits. We'll be able to retire portions of our Goldsmith facility, upgrade the processing.
Speaker Change: That's going to improve our operational efficiencies, our reliability, reduces our environmental footprint, improves our cost structure in that area. So we'll get an immediate uplift on the existing throughput that we have there as we'll load this plant first. We'll get an immediate uplift on the existing throughput that we have there as we'll load this plant first.
Speaker Change: and then from a location perspective, you know, given our pipeline network in that area, we'll be able to process and bring gas from both the Midland and the Delaware Basins to this facility.
Speaker Change: 100000 barrels a day of Ngls to feed our system, so really making good progress as we grow out the system.
Speaker Change: We feel good about where our.
Speaker Change: Footprint is going and again, what our supply outlook for four sweeny is.
Speaker Change: Thank you.
Unidentified Moderator: Thank you. Our next question comes from Jean Ann Salisbury with Bank of America.
Speaker Change: Please go ahead. Your line is now open.
Speaker Change: Hey, good morning, I think many midstream investors Danone PSX stack because of the volatility of the earnings of the other segment is that your view as well and given your answer to this question, which I think you suggested you were not that interested in the spend and what other things can PSX data to get full credit for that stability at the midstream earnings and your stock.
Speaker Change: Yes Gena that's.
Speaker Change: That's a great question and I think I touched on that earlier that.
Speaker Change: Yes.
Speaker Change: We are in the process of growing those earnings I think really.
Speaker Change: We werent have recognized as a strong midstream player per se until earlier this year, when we announced the epic transaction and so as those stable earnings become a bigger and bigger part of our portfolio I think those seeking.
Speaker Change: That.
Speaker Change: Multiple from stable earnings will take note and.
Speaker Change: Ross the spectrum of investors, we're getting solid feedback and support for that.
Speaker Change: John.
Speaker Change: Yes, I was just going to add on a little bit there in terms of we will continue to look at our disclosures in the information we've provided around the midstream the midstream segment enhance.
Speaker Change: Are appropriate and as the midstream business grows the part of the narrative is that the refining business, yes as volatility, but it also provides a lot of nice upside from a cash generation standpoint, and returns to shareholders and so that's where I see that value proposition that you've cut that.
Speaker Change: Large stable midstream business supplemented by the upside that comes with the refining and marketing business.
Speaker Change: Great I'll leave it there thank you.
Speaker Change: Thanks Shannon.
Speaker Change: Thank you. Our next question comes from James <unk> with Morgan Stanley. Please go ahead Jay.
James: Hey team. Thanks for taking my questions I just wanted to ask on shareholder returns with the dividend increase a few days ago. The stock is yielding just north of four 5%, which is above our refining peers could you just talk through the balance between raising the dividend and leaning into buybacks given where shares are trading.
James: Yes, Joe.
James: The dividend our principles, there are secure competitive and growing and.
James: The reason for the growing is we do have investors that are clearly dividend investors in one of our criteria is a dividend that increases.
James: Increases on an annual basis, and so you can expect to see us increase the dividend every year. It was a relatively modest increases <unk>, 4%.
James: Smaller than some of our more recent increases have been but we felt appropriate in the overall context of the business environment that we're in today and and so therefore, the real upside from a shareholder return standpoint is going to be in share repurchases.
James: Operating cash flow increase then that increases.
James: I'll go back to the 50% of operating cash flow returned to shareholders. The dividend is easy to get to compute but so is the share repurchases.
James: At the 50% and potentially above level, depending on where we are in other priorities, including balance sheet and Joe when you look at the combination of share repurchases and our dividend that the the gross dividend outlay has remained pretty stable because the shares are declining and so it's it.
James: Really it's almost needed to catch up.
And we're taking advantage of that and so think about that gross debt overall.
James: Dividend outlay is relatively constant and then share repurchases.
James: Are the swing item that can that can grow even faster than the dividend when the cash is there.
Speaker Change: Great. Thanks that makes sense and then the other question that I had was around refining utilization in first quarter, which came in a little bit light versus what we I think I'll just have been expecting based on the low 80% guidance is that economic driven or was that always part of the plan.
Rich: Yes. This is rich.
Rich: So our guidance was low <unk> for the quarter. There was certainly a heavy focus of that was of that downturn was related to the turnaround activity and our turnaround activity was heavily focused on crude crude units as well for the quarter. So that that was a big impact.
Rich: Especially in the Atlantic Basin, we had a turnaround at the Baylor facility and the Gulf Coast, both our refineries in the Gulf Coast had turnaround activity at Lake Charles and Sweeny, and then so did wood river and border. So so those Utilizations war.
Rich: On quite a bit.
Rich: That all said those are the majority of the major components of the downturn in the utilization there were some minor market adjustments as well made through the year, primarily in that January and front end of February timeframe. So.
Rich: Those were relatively minor column a point.
Rich: Maybe to point and a half.
Rich: On the overall utilization for the quarter.
Rich: Great. Thanks for taking my questions.
Unidentified Moderator: Thank you. Our next question comes from Matthew Blair with Tudor Pickering Holt.
Speaker Change: Matthew Please go ahead.
Matthew Blair: Thank you and good morning, I have a two parter on M&A.
Speaker Change: So we expect a pretty considerable tailwind.
Speaker Change: To your Q2 <unk> results from the falling crude price environment, we do track and retail indicators looking quite strong in the second quarter I know your wholesale business is a little bit different but.
Speaker Change: What are your expectations on <unk> for the second quarter.
Speaker Change: Is there a big pick up in line and then second.
Speaker Change: Not every company reports things a little differently and I think there's an argument to be made.
Speaker Change: Philips refining result are a little different than your large cap peers, because your U S. Wholesale activities are in <unk> and not in refining. So my question is did.
Speaker Change: Could you help us understand roughly what percent of MMS EBITDA and op costs.
Speaker Change: A related to those wholesale activities. So we can look at things on a little bit more of a apples to apples basis. Thank you.
Speaker Change: Hey, Matthew it's Brian I'll start and then Kevin can take over.
Speaker Change: Youre right when prices are falling it's usually somewhat beneficial for marketing just to give you a little bit of color. We are seeing a stronger April margins and our view is barring anything significant slowdown in the economy or something like that we would expect a seasonal uptick in Q2 earnings and margins consistent with.
Speaker Change: The prior years.
Speaker Change: Yes, Matt Kevin and then just on the <unk>.
Speaker Change: Second question.
Speaker Change: We don't break out our results by channel of trade, which is what youre, referring to our marketing and specialties segment covers the wholesale business is also covers the retail to the extent we have retail.
Speaker Change: But the bulk of that business as a wholesale model.
Speaker Change: And so it's.
Speaker Change: We don't have a breakout of the.
Speaker Change: EBITDA for the costs.
The costs are relatively low when you think about the the company owned retail business is going to have a higher cost structure.
Speaker Change: For sure, but it's not something that we're breaking that channel of trade level.
Speaker Change: Thanks, Paul I'll leave it there.
Speaker Change: Okay.
Speaker Change: Thank you. Our next question comes from Ryan Todd with Piper Sandler Please.
Speaker Change: Please go ahead.
Speaker Change: Okay.
Speaker Change: Great. Thanks, maybe just.
Speaker Change: One follow up on some of your earlier comments on renewable diesel.
Speaker Change: Outside of the macro backdrop, which is obviously very noisy as we think about the first quarter and into the second quarter can you talk about maybe some of the challenges that you had optimizing things from a feedstock point of view in the first quarter because of the timing of some of the.
Speaker Change: Announcements.
Speaker Change: And as you as you look into the second quarter and then maybe.
Speaker Change: I don't know if you said this earlier, but do you have a rough estimate of maybe what percent of the product you were able to book credits on during the quarter and as we think into the second quarter how <unk>.
Speaker Change: Both of those things change it would be a potential tailwind for you.
This quarter.
Speaker Change: Yeah, maybe I'll start and others can join in I would say like everybody. If you don't understand the rules of the game it makes it more and more.
Speaker Change: Difficult to play in the game and the Ptc's, where it was kind of.
Speaker Change: Completely known at that time, we didn't have we at PTC value for imported used cooking oil now we don't.
Speaker Change: So we made some decisions early on between the end of last year and beginning of this year that were sub optimized frankly, given our view of what the.
Speaker Change: Credits would be and how they how they turned out in some of the sanctions.
Speaker Change: I think going forward, we will have.
Speaker Change: It'd be a clearer view, we still don't have a complete view of the PTC is we think that will come in June or July with the tax Bill.
Speaker Change: We talked about the RVO proposal, we expect to come at the second half of May but not for implementation until Q3.
Speaker Change: So we're looking forward to that the good news is I think.
Speaker Change: AG and oil are aligned that we need to increase the RVO to make to make up for some of the credit value that we lost and the Bdcs and then LCI faster is also up for debate. We think by the end of June we'll have some more clarity on that so the more clarity we have on the credit values and how they work better.
Speaker Change: You'll be able to run the plant and more focus will be on finding the right feedstock to make the right product.
Speaker Change: Yeah.
Speaker Change: Great.
Speaker Change: <unk>.
Speaker Change: Thanks Ryan.
Unidentified Moderator: Thank you. Our next question comes from the line of Paul Cheng with Scotiabank.
Speaker Change: Please go ahead.
Speaker Change: Yeah.
Speaker Change: Hey, guys.
Speaker Change: Good morning, or good afternoon.
Speaker Change: Mark.
Speaker Change: We can.
Speaker Change: Yes, I need to eat.
Yes.
Speaker Change: Great Jay.
Speaker Change: Integration then at that point.
Speaker Change: Turning to the rest of the business.
Maybe it's a little bit more difficult on the technical CPE, Ken Yes, John Lynch.
Speaker Change: On the one by the.
Speaker Change: <unk> and <unk>.
Speaker Change: Management and the theory that all 10 session between you and <unk>.
Speaker Change: Tom's opinion I'm, assuming so maybe you can help us understand maybe better.
Speaker Change: Why I mean, even though he has a quick onset why that it's important for them.
Speaker Change: To be part of the portfolio and more top.
Speaker Change: Synergy or integration benefit.
Speaker Change: Yeah.
Speaker Change: Yes, Paul glad to take that on when you look at CP Kim.
Speaker Change: First of all the model has been great.
Speaker Change: For the last 25 years, it's grown faster and more profitably than their competitors. It's been a great return on capital employed.
Speaker Change: Business, it's thrived.
Speaker Change: And done quite well and we've sat across the table from our partners each of us expressing our undying love for the company and interest in owning all of it if the other is interested in and partying from it and so I think that there is.
Speaker Change: Great operational synergy.
Speaker Change: Queen.
Speaker Change: CP Chem and Phillips 66, as an NGL provider and as an asset operator around the sweeny complex, where there's a very heavy presence of CP can whether it's the storage facilities at the Clemens terminal.
Speaker Change: The physical location and streams going back and forth between.
Speaker Change: Tween the assets, yes, there is an arm's length agreement, but all of that happens quite seamlessly now I would say if it Phillips owned.
Speaker Change: Those are 100% it would there would be even greater synergies to capture but being a 50% owner and being deeply co located in physically integrated there are significant advantages there those represent substantial assets you've got three three.
Speaker Change: Three of their Gulf Coast Crackers, right there in the sweeny complex embedded and deeply integrated and so it is real and it happens every day and if it was and if it was truly an independent.
Separate entity, there would be more frictional losses in and making things happen over time.
Speaker Change: And less.
Speaker Change: I think less direct level of financial integration, so theres benefits.
Speaker Change: Both ways.
Speaker Change: Okay great.
Speaker Change: The second question I think it's.
Speaker Change: Just curious that I mean, great quarter about liquidity.
Speaker Change: Given the trauma administration listen all Mccann tablet policy.
Speaker Change: Sure Philip 66, I missed that one.
Speaker Change: Yes.
Speaker Change: Cash balance that you really want to keep on the books as far as what.
Speaker Change: That's the type of laser annual payout ratio.
Speaker Change: To be quite bank debt with higher volatility.
Speaker Change: We'll have an <unk> payout ratio is still going to pay out more than 50% or should you prioritize and get.
Speaker Change: That to be lower than what you see.
Speaker Change: Pocket at 17 billion at least that point on.
Speaker Change: Maybe that clinic.
Speaker Change: What I can become perhaps that may have been lower and the resulting recession become less.
Speaker Change: Yes, Paul it's all about balancing the different priorities.
Speaker Change: And.
Speaker Change: There is a lot of uncertainty.
Speaker Change: Out there right now but the.
Speaker Change: The point is it is uncertainty and we don't know exactly which way. This will play out so we don't want to make any.
Speaker Change: Any dramatic decisions around that and we think that the way we've set our prioritization is very measured and balanced to where it works in a in a low cycle environment or a more volatile environment and it works in a more robust environment as well.
Speaker Change: The 50% payout ratio is relatively.
Speaker Change: Modest we do have cash from asset dispositions and from a balance sheet standpoint cash at the end of the quarter was one of the half billion. We've tended to run the Ryan debate that somewhere between one and a half and two to $2 5 billion at the end of most periods would it be nice.
Speaker Change: To have more yes, but it's it's perfectly adequate.
Speaker Change: Natural cycle over the course of the month anyway. The end of the month at the end of the quarter tends to be a relative relatively low point in that cycle. We have significant liquidity facilities that we can draw on as necessary and when we need to we do.
Speaker Change: We just we look holistically at what that balance sheet needs to look like and feel that at $17 billion level. When you consider that midstream with a pretty stable very stable $4 billion of EBITDA in the marketing business also with stable EBITDA in the order of $2 billion.
Speaker Change: That supports that that that supports the leverage at a modest ratio and so that's how we think about it in terms of leverage ratio leverage ratio is relative to the different business segments. We operate in so we expect to have a debt level that can be supported by the more stable cash generating businesses and think of the.
Speaker Change: The refining business and the chemicals business as being debt free from Phillips 66 balance sheet standpoint.
Speaker Change: Thank you. This concludes the question and answer session I will now turn the call over to Mark <unk> for closing comments.
Speaker Change: Thanks for all of your questions.
Speaker Change: Less than three years ago, we embarked on a transformative strategy.
Speaker Change: We've divested multiple non core assets at attractive multiples strengthened our NGL value chain and rationalized our refining portfolio.
Speaker Change: We improved refining operational reliability and reduced refining controllable costs, all while returning over $14 billion to shareholders.
Speaker Change: Looking forward, we will deliver significant value through our 2027 strategic priorities maintaining operational excellence pursuing disciplined growth.
Speaker Change: Turning capital and ensuring financial strength.
Speaker Change: We value shareholder feedback.
Speaker Change: We're committed to maximizing long term value for our shareholders through operational excellence and disciplined capital allocation.
Speaker Change: Thank you for your interest in Phillips 66.
Speaker Change: If you have questions or feedback after today's call please call Jeff Roe.
Speaker Change: Thank you everyone for joining us today. This concludes your call and you may now disconnect your lines.
Speaker Change: [music].