Phillips 66 Q4 2021 Earnings Call Transcript

Quartr
Provided by Quartr
January 28, 2022

There are 17 speakers on the call.

Operator

Good morning, and welcome to the Q4 2021 Phillips 66 Earnings Conference Call. My name is Sia, and I will be your operator for today's call. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session. Please note that this conference is being recorded.

Operator

I will now turn the call over to Jeff Dieter, Vice President, Investor Relations. Jeff, you may begin.

Speaker 1

Good morning, And welcome to Phillips 66 4th quarter earnings conference call. Participants on today's call will include Greg Garland, Chairman and CEO Mark Lasier, President and COO Kevin Mitchell, EVP and CFO Bob Herman, EVP, Refining Brian Mandel, EVP, Marketing and Commercial and Tim Roberts, EVP, Midstream. Today's presentation material can be found on the Investor Relations section of the Phillips 66 website, along with supplemental financial and operating information. Slide 2 contains our Safe Harbor statement. We will be making forward looking statements during today's presentation and our Q and A session.

Speaker 1

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 filing. With that, I'll turn the call over to Greg.

Speaker 2

Okay, Jeff. Thank you. Hey, good morning, everyone, and thanks for joining the call today. In the Q4, we had adjusted earnings of $1,300,000,000 or $2.94 per share. For the year, Adjusted earnings were $2,500,000,000 or $5.70 per share.

Speaker 2

We delivered record results in midstream, chemicals Marketing and Specialties demonstrating the strength of our diversified portfolio. For the Q3 in a row, we saw improved refining performance. Looking ahead, we're optimistic about the outlook for our business. In 2021, our employees exemplified the company's values of safety, Honor and commitment. Our 2021 combined workforce total recoverable rate of 0.12 was more than 25 times better than U.

Speaker 2

S. Manufacturing average. Last year, our strong cash flow generation allowed us to invest 1 $900,000,000 back into the business, returned $1,600,000,000 to shareholders and pay down $1,500,000,000 of debt. The 2022 capital program of $1,900,000,000 reflects our commitment to capital discipline. Approximately 45% of our growth capital this year will support lower carbon opportunities, including Rodeo renewed.

Speaker 2

As cash flow improves further, we will prioritize shareholder returns and debt repayment. In October, we increased the quarterly dividend to $0.92 per share. We remain committed to a secure, competitive and growing dividend. We'd like to resume share repurchases And on our path towards getting back to pre COVID debt levels over the next couple of years. We're taking steps to position Phillips 66 for the long term competitiveness.

Speaker 2

Across our businesses, we're assessing opportunities for permanent cost reductions. Mark and Kevin are leading this initiative and will provide additional details on the Q1 call in April. We're committed to a lower carbon future, while continuing to deliver our vision of providing energy and improving lives around the globe. We announced targets to reduce greenhouse gas emissions intensity Last year, by 2,030, we plan to reduce Scope 1 and Scope 2 emissions by 30% and Scope 3 emissions by 15% compared to 2019 levels. So with that, I'll turn the call over to Mark to provide some more details.

Speaker 3

Thanks, Greg. Good morning, everyone. In the Q4, we had strong earnings from Midstream Chemicals and Marketing and Specialties, We saw continued recovery in refining profitability. We made progress advancing our growth projects as well as taking strategic actions to position Phillips 66 for the future. In midstream, we began commercial operations of Phillips 66 Partners C2G pipeline.

Speaker 3

At the Sweeny Hub, construction of Frac IV is 50% complete and we expect to begin operations in the Q4 of this year. CPChem is investing in a portfolio of high return projects growing its asset base as well as optimizing its existing operations. This includes growing its normal alpha olefins business with a second world scale unit to produce 1 hexene, a critical component in high performance polyethylene. CPChem is also expanding its propylene splitting capacity by £1,000,000,000 per year with a new unit located at its Cedar Bayou facility. Both projects are expected to start up in 2023.

Speaker 3

CPChem continues to develop 2 world scale petrochemical facilities on the U. S. Gulf Coast and in Ross Lofan, Qatar. In addition, CPChem completed its first commercial sales of Marlex's new circular polyethylene, which uses advanced recycling technology to convert difficult to recycle plastic waste into high quality raw materials. CPChem has successfully processed pyrolysis oil in a certified commercial scale trial and is targeting annual production of £1,000,000,000 of Circular Polyethylene by 2,030.

Speaker 3

During the year, we began renewable diesel production at the San Francisco refinery and continue to progress Rodeo renewed, which is expected to be completed in early 2024 subject to permitting and approvals. Upon completion, Rodeo will initially have over 50,000 barrels per day of renewable fuel production capacity. The conversion will reduce emissions from the facility and produce lower carbon transportation fuels. In marketing, we acquired a commercial fleet fueling business Providing further placement opportunities for Odeo renewable diesel production to end use customers. Additionally, our retail marketing joint venture in the central region acquired 85 sites in December, bringing the total to approximately 200 sites acquired in 2021.

Speaker 3

These sites support long term product placement extend our participation in the retail value chain. Our emerging energy group is advancing opportunities in renewable fuels, Batteries, Carbon Capture and Hydrogen. We recently signed a technical development agreement with NOVONIX to accelerate the development of next generation materials for the U. S. Battery supply chain.

Speaker 3

We own a 16% stake in the company, extending our presence in the battery value chain. In December, we entered into a multi year agreement with British Airways to supply sustainable aviation fuel produced by our Humber Refinery beginning this year. For 2022, we'll execute our strategy with a focus on operating excellence and cost management. We will do our part to advance the lower carbon future while maintaining disciplined capital allocation

Speaker 4

and an emphasis on returns. Now, I'll turn the call over to Kevin to review the financial results. Thank you, Mark, and hello, everyone. Starting with an overview on Slide 4, we summarize our financial results for the year. Adjusted earnings were $2,500,000,000 or $5.70 per share.

Speaker 4

We generated $6,000,000,000 of operating cash flow or $3,900,000,000 excluding working capital. These results reflect our highest annual earnings for the Midstream, Chemicals and Marketing and Specialty segments. Cash distributions from equity affiliates totaled $3,000,000,000 including a record $1,600,000,000 from CPChem. We ended 2021 with a net debt to capital ratio of 34%. Our adjusted after tax return on capital employed for the year was 9%.

Speaker 4

Slide 5 shows the change in cash during the year. We started the year with $2,500,000,000 in cash. Cash from operations was $6,000,000,000 This included a working capital benefit of During the year, we paid down $1,500,000,000 of debt. In November, both S and P and Moody's revised their outlooks from negative to stable. We are committed to further deleveraging as we continue to prioritize our strong investment grade credit ratings.

Speaker 4

We funded $1,900,000,000 of capital spending and returned $1,600,000,000 to shareholders through dividends. Our ending cash balance increased to $3,100,000,000 Slide 6 summarizes our 4th quarter results. Adjusted earnings were $1,300,000,000 or $2.94 per share. We generated operating cash flow of $1,800,000,000 including a working capital benefit of $412,000,000 and cash distributions from equity affiliates of 7 $57,000,000 Capital spending for the quarter was $597,000,000 $265,000,000 was for growth projects, which included approximately $100,000,000 for retail investments in the marketing business. We paid $403,000,000 in dividends.

Speaker 4

Moving to Slide 7. This slide highlights the change in adjusted results from the Q3 to the 4th quarter, a decrease of $105,000,000 Our adjusted effective income tax rate was 20% for the 4th quarter. Slide 8 shows our midstream results. 4th quarter adjusted pretax income was $668,000,000 an increase of $26,000,000 from the previous quarter. Transportation contributed adjusted pretax income of $273,000,000 up $19,000,000 from the prior quarter.

Speaker 4

The increase mainly reflects the recognition of deferred revenue. NGL and other adjusted Pretax income was $284,000,000 compared with $357,000,000 in the 3rd quarter. The decrease was primarily due to lower unrealized investment gains related to NOVONIX, partially offset by higher volumes at Sweeny Hub and favorable inventory impacts. Our investment in Novonix is mark to market at the end of each reporting period. The total value of the investment, including foreign exchange increased $146,000,000 in the 4th quarter compared to an increase of $224,000,000 in the 3rd quarter.

Speaker 4

The fractionators at the Sweeny Hub averaged a record 417,000 barrels per day and the Freeport LPG $80,000,000 from the previous quarter, mainly due to favorable hedging impacts in the 4th quarter compared to negative hedge results in the 3rd quarter. The actual hedge benefit recognized in the 4th quarter amounts to approximately $50,000,000 Turning to Chemicals on Slide 9. Chemicals 4th quarter adjusted pretax income of $424,000,000 was down $210,000,000 from the 3rd quarter. Ophins and polyolefins adjusted pretax income was $405,000,000 The $208,000,000 decrease from the previous quarter was primarily due to lower polyethylene margins, reduced sales volumes as well as increased utility costs. Global O and P utilization was 97 Adjusted pretax income for SA and S was $37,000,000 compared with $36,000,000 in the 3rd quarter.

Speaker 4

During the Q4, we received $479,000,000 in cash distributions from CPChem. Turning to refining on Slide 10. Refining 4th quarter adjusted pretax income was $404,000,000 an improvement of $220,000,000 from the 3rd quarter, driven by higher realized margins and improved volumes. This was partially offset by higher costs. Realized margins for the quarter increased by 35% to $11.60 per barrel.

Speaker 4

Impacts from lower market crack spreads were more than offset by lower from a reduction in our estimated 2021 compliance year obligation and lower RIN prices. In addition, we had favorable inventory impacts and improved clean product differentials. Refining adjusted results reflect approximately $230,000,000 related to the EPA's Proposed reduction of the RVO, of which about 75% applies to the 1st 3 quarters of the year. Pretax turnaround costs were $106,000,000 up from $81,000,000 in the prior quarter. Crude utilization was 90% in the 4th quarter and clean product yield was 86%.

Speaker 4

Slide 11 covers market capture. The 321 market crack for the Q4 was $17.93 per barrel compared to $19.44 per barrel in the 3rd quarter. Realized margin was $11.60 per barrel and resulted in an overall market capture of 65%. Market capture in the previous quarter was 44%. Market capture is impacted by the configuration of our refineries.

Speaker 4

Our refineries are more heavily weighted toward distillate production than the market indicator. During the quarter, the distillate crack increased $3.10 per barrel and the gasoline crack decreased $3.76 per barrel. Losses from secondary products of $1.88 per barrel improved $0.10 per barrel from the previous quarter due to increased butane blending into gasoline. Our feedstock advantage of $0.18 per barrel improved by $0.17 per barrel from the prior quarter. The other category reduced realized margins by 2 point $2 per barrel.

Speaker 4

This category includes RINs, freight costs, clean product realizations and inventory impacts. Moving to Marketing and Specialties on Slide 12. Adjusted 4th quarter pretax income was $499,000,000 compared $547,000,000 in the prior quarter. Marketing and Other decreased $52,000,000 from the prior quarter. This was primarily due to lower marketing fuel margins and volumes as well as higher costs.

Speaker 4

Specialties generated 4th quarter adjusted Pretax income of $97,000,000 up from $93,000,000 in the prior quarter. On Slide 13, The Corporate and Other segment had adjusted pretax costs of $245,000,000 an increase of $15,000,000 from the prior quarter. This was primarily due to higher employee related costs and net interest expense. Slide 14 shows the change in cash during the Q4. We had another strong quarter for cash.

Speaker 4

This is the 3rd consecutive quarter that our operating cash flow enabled us to return cash to shareholders, Next, I'll cover a few outlook items for the Q1 and the full year. In Chemicals, we expect the Q1 global O and P utilization rate to be in the mid In refining, we expect the Q1 worldwide crude utilization rate to be in the high 80s and pretax turnaround expenses to be between $120,000,000 $150,000,000 We anticipate 1st quarter Corporate and other costs to come in between $230,000,000 $250,000,000 pretax. For 2022, we plan full year turnaround expenses to be between $800,000,000 $900,000,000 pretax. We expect corporate and other costs to be in the range of $900,000,000 to $950,000,000 pretax for the year. We anticipate full year D and A of about $1,400,000,000 And finally, we expect the effective income tax rate to be in the 20% to 25% range.

Speaker 4

Now we will open the line for questions.

Operator

Thank you. We will now begin the question and answer session. As we open the call for questions, as a courtesy to all participants, please limit yourself to one question and a follow-up. Your first question will come from Neil Mehta with Goldman Sachs. Please go ahead.

Speaker 5

Good morning, team. Greg, good morning. Greg and Kevin, first question for you on how you're thinking about normalized cash flow.

Operator

If I look at the back half

Speaker 5

Of 2021 ex working capital, you put up almost $3,000,000,000 of cash flow, so annualized close to $6,000,000,000 I think a lot of us use $5,000,000,000 to $6,000,000,000 Sort of that normalized cash flow range. Greg, you've been clear that you think it's kind of closer to $6,000,000,000 to $7,000,000,000 And so just your thoughts on Whether that's still how you're thinking about mid cycle and the underlying build up to that $6,000,000,000 to $7,000,000,000 if you can kind of walk through the world of your different segments of how you get there would be great.

Speaker 2

I'd be happy to do that. I mean, I don't think we really changed from our view of $6,000,000,000 to 7,000,000,000 Of course, it's nice to see $6,000,000,000 of cash last year. It just happened to occur in different buckets that you might expect from the traditional cycle. So I think we've been signaling in the last couple of months, we're pretty constructive, the refining business coming into 2022. And If you think about the rest of the businesses, they've actually performed at or better than mid cycle all through the pandemic in '20 and into 'twenty one, and we remain pretty constructive on those businesses coming into 'twenty two at all.

Speaker 2

So really, for us, a wildcard has really been refining and when this Refining recover back is something approaching a mid cycle. But just to remember how it all builds up on an EBITDA basis, kind of $4 ish,000,000,000 in refining, kind of $2,000,000,000 in midstream, dollars 2,000,000,000 in chemicals and $1,500,000,000 in marketing Specialties pushes you to something like $9,000,000,000 of EBITDA, which translates to $6,000,000,000 to $7,000,000,000 And so I think we're pretty comfortable that we're kind of still in that range. Obviously, we've had some outperformance. I mean, CPChem had a blowout year Last year, all driven by great operations, fundamentally good control of their costs and then super margins. Our Marketing and Specialty businesses, which we typically would say it's a 516 business was $2,000,000,000 And of course, we've been investing in adding retail through our joint ventures.

Speaker 2

But I think it's really great execution on the operations side, Particularly in the U. S, but also in our European operations, we saw good volumes, good margins across that. And so I would say that you're probably on the upside of that. So given $6,000,000,000 to $7,000,000,000 of cash flow, our first dollar is always going to go to sustaining capital, that's $1,000,000,000 Dividends of $1,600,000,000 and then that leaves room for us. We can signal that the capital budget is going to be $2,000,000,000 or less, so we're $1,900,000,000 for this year.

Speaker 2

That's a deliberate signaling that for this year and next year, we're going to be very constrained on capital that frees us up to Pursue some debt repayment and get back to share repurchases while doing a little bit of growth. And so I think we make that all balanced As we think about that, Kevin or Jeff, if you want to add to that, please step in or Mark?

Speaker 4

I think you covered all.

Speaker 5

Thanks, Greg. And that's the logical follow-up for me, which is how you're thinking about share Again, the focus has been to get the debt level lower. It looks like the ratings agencies are giving you the all clear, at least, that Things are moving in the right direction. So what are the gating factors for you to begin a share repurchase program and how do

Speaker 6

you think about sizing it?

Speaker 2

Well, We've always said the gating factor is getting cash flows back to something approaching a mid cycle and make it a dent in the debt repayment. So I think coming into April, You're going to pay another $1,500,000,000 ish of debt off in April as it comes due. So That's $3,000,000,000 of the $4,000,000,000 We made a big dent in that. So I think that kind of post April, that's why I said that I would be disappointed if by mid year we're not back in a share repurchase mode at our company.

Speaker 5

Perfect. Thanks, Craig.

Speaker 2

Yes, sir.

Operator

The next question will come from Phil Gresh with JPMorgan. Please go ahead.

Speaker 7

Yes, hello. My first question just on one of the guidance items here on the refining maintenance $800,000,000 to $900,000,000 Just looking back, it looks like It's the highest in the history of the company. And I was just curious, I mean, is there anything unique we should be thinking about there? I didn't think 2020 or 2021 were too far below the historical norms. And then I guess bigger picture, when I think about your maintenance and what others have said, It seems like the industry might be kind of capped in terms of what utilization can be this year.

Speaker 7

So is this an environment where we're just going to see margins get pressured higher to keep up with demand?

Speaker 8

So let me just take

Speaker 2

a high level and then I'll let Bob come in and talk about it since it's his business. But if you look 12 through 2019, we kind of average About 5.25 in terms of total turnaround expense. And we did push some of 202021 Into 2022, I think probably a lot of the people did that in the industry as we're trying to conserve cash and protecting the balance sheet. So it's a big number, Phil, there's no question, but I'll let Bob speak to the specifics and what we're doing there.

Speaker 3

Yes, I think Greg hit on it pretty good. The last couple of years We're going to be lower turnaround years anyway with this 2022 always going to be a bit of a larger turnaround. We got 2 refineries, both Ferndale and Billings, and when they take their turnarounds, they're an entire facility turnaround, and they're coming due. So You kind of got to go back 5 years to find them in the cycle. So there's that causes a little bit of lumpiness in it.

Speaker 3

And then To your second question, I really we would agree that a lot of people managed their turnarounds and maintenance work out of 2020 2021. Some of that's Lower utilizations, we made our catalyst in the hydrotreaters and hydrotracters last longer, so we were able to stretch those runs. We put a lot of work into Making sure we could do it from a mechanical integrity standpoint. But now those things are coming due, right? You can't do that forever.

Speaker 3

And for us this year, It's pretty heavy lift across the system and I suspect we're not the only ones that are going to see that.

Speaker 7

Okay, great. Thanks for that color. Just one more on the refining business. Needle Coke is a unique business to Phillips 66 versus the other refiners. I was curious, it's a bit of an opaque market, but could you talk about what you're seeing in the fundamentals of that business, kind of how it finished out 2021 and how you see

Speaker 8

So as you may know, needle coke is used to make graphite electrodes, which in turn are used in production of steel, Electric arc furnaces, which are actually cleaner technology than blast furnaces, and we use needle coke also to make anode for lithium ion batteries. The past 2 years, we've seen a weaker needle coke market with steel producers running off high inventories, But we do see some slow strengthening, last end of this year, last year and this year as well. If you listen to steel production, which is a leading indicator, they had a record year last year even as needle coke markets lag because of the high inventories. The market seems to have mixed opinions about steel production this year. Some steel producers think it will continue to increase, some think it will come off.

Speaker 8

Either way, we've seen good demand from both steel producers and hemp producers, and we expect that market to continue to gradually increase. We think with our refinery utilization coming back up and lower graphite electrodes that it will be a slightly strengthening market.

Speaker 5

Great. Thank you.

Operator

The next question will come from Roger Read with Wells Fargo. Please go ahead.

Speaker 9

Yes. Thank you. Good morning.

Speaker 10

Good morning, Roger. Good morning.

Speaker 9

I'd like to start off kind of on your comments About the getting back to share repos, maybe what are some of the markers you'd want to see and Kind of tagging on with Phil's question about maybe a little higher spending on the turnaround side. Is there Timing issue with those turnarounds, were you going to get past a certain level or is it bigger picture on the balance And overall cash flows when you'll feel comfortable.

Speaker 2

Yes. Well, I think we're kind of back to the Question on refining and when does refining get to mid cycle type cracks. I mean in 4Q, we're 11.60 realized cracks. So I mean that's the highest quarterly crack that We've seen in refining since the Q4 of 2018. So there's some things that are in that number obviously, but as we look Coming into 2022, we're constructive of supply and demand.

Speaker 2

There's been a lot of supply that's come off the market. We think there's new supply coming on, But it's going to be staged. It's not all going to hit when people think it's going to hit because it always takes longer for it to come on. So from that standpoint, We're constructive on the demand side. What we see with each successive wave of COVID, the impacts demand are less and less.

Speaker 2

And so I'm not sure when that moment in time as we transition from pandemic to endemic, but that could happen next year. But regardless, we see the demand impacts less and less from each successive wave of COVID. Prior to the current variant, We were seeing gasoline demand kind of back at 2019 levels. There's distillate demand above 2019 levels. Jet was recovering nicely.

Speaker 2

So as we move into 2022, we're constructive around the demand side. We talked about the turnaround activity and what impact that could have Only on utilizations and so we just see everything balancing out towards we get back towards more of a mid cycle crack and refining. And so once we get refining there, I We feel pretty comfortable that we're going to have sufficient cash flow, cover our sustaining capital, our dividend, Pay down some debt, give back share repurchases and fund the growth program that we have this year, which is about $900,000,000 in growth. Kevin, if you want to add anything to that.

Speaker 4

No, I think that's very complete. Just in terms of the debt paydown detail, we have a $450,000,000 Term loan maturity in April, we have $1,000,000,000 notes maturing in April, and we intend to take care of both of those at maturity. And then what happens after that, we just have flexibility. We still have other callable debt available if we need to, but we'll with that taken care of and if cash flow is back at mid cycle levels, we don't have a lot of flexibility.

Speaker 2

I think if we paid $3,000,000,000 of the $4,000,000,000 that we borrowed during 2020 down, I think that demonstrates our commitment To paying down debt and returning the balance sheet over a couple of year periods is something that resembles kind of pre COVID levels of say $12,000,000,000 on a consolidated basis. So We're pretty comfortable in that construct, Roger.

Speaker 9

Okay. Appreciate it. Other Question I had sort of the unrelated follow-up. As you look at setting everything up on the renewable diesel side, any Progress or increased comfort level in terms of the feedstock side of that? I mean, that seems to be one of the biggest questions we get coming in is, What is our comfort level that each of the companies will be able to supply what you need to maintain a healthy margin in that business and the returns that

Speaker 8

Hey, Roger, it's Brian. We don't see any issue with the feedstock availability, although it may be challenging For those that maybe are less commercial or have less logistics experience, we think between increased acreage and yields, switching from biodiesel, Aggregation of used cooking oil will have plenty of feedstock to produce renewable diesel. Prices may vary over time and that's to be expected at Bodeo. We're on the So we have access to both domestic and foreign feedstock. And we also sit on the U.

Speaker 8

S. Greatest demand center, California. So Feel good there. Our commercial organization has been working on feedstock for quite a while. We have offices around the world.

Speaker 8

We have storage in Asia and Europe and in the U. S. We have good relationships with vegetable oil producers. You heard our announcement and our investment in Shell Rock soy processing. For the start up of Rodeo, we purchased soybean oil, canola oil, distilled corn oil since last April.

Speaker 8

We have Strong relationship to tallow producers and aggregators of used cooking oil. In fact, with the used cooking oil, we've been in that market for Over 4 years supplying Humber used cooking oil from around the world, currently 12 different countries. So I I think Rene Renewed will have a maximum optionality in its system and then we'll use a linear program to decide what the best Most cost effective feedstock is based on not just CI, but price, credit generation to the sales market and logistics.

Operator

The next question will come from Ryan Todd with Piper Sandler. Please go ahead.

Speaker 8

Good. Thanks. Maybe

Speaker 10

1 on European refining, as a refiner with some exposure to European refining, can you talk about The impact of high nat gas prices that you're seeing on refining economics over there and in a broader sense in that Do you expect high net gas prices to impact European utilization rates to the benefit of U. S. Refiners this year?

Speaker 3

Yes. This is Bob. I think that's absolutely right. We look at what goes on in our operations and we've got a very complex and strong Refinery over there and the impact of high natural gas prices on us and then if we translate that to some of the simpler Refineries in Central Europe, it's got to be really tough for them to be making money right now and I'm sure we're going to see that. We know that clean product yields out of a bunch of those refineries is down because they're not buying hydrogen are buying natural gas to make hydrogen to hydrotreat because we see the high sulfur stuff showing up in the market, which It's somewhat good for us.

Speaker 3

It's putting pressure on the sour crudes, which will be good for us in the long term. So I think High natural gas prices, they're going to continue for a while in Europe and it is really going to strain kind of that bottom quartile of refiners that are left.

Speaker 8

As Bob pointed out, if the Europeans are running more sweet crude, it kind of widens that sour sweet dip, which is beneficial to us. The utilization comes off on those refineries because they can't afford to run, that's good for the U. S. As well because we have to export products to Europe

Speaker 10

And then maybe a follow-up on The last question before this, I mean, you now have a couple of quarters under your belt producing renewable diesel there in California at a pretty decent level. I mean, can you talk about what you've learned from your operations, both in product placement as well as feedstock acquisition there As you think about preparation for the full project completion later on and then As we've seen feedstock spreads narrow in the back half of the year and headline hobo spreads have improved, any comment on what you've seen in the profitability of your Production

Speaker 8

there? The profitability between Q3 and Q4 has strengthened. There's a lot of things to think about when you're thinking about the renewable diesel margins. You have to think about feedstock, the renewable diesel price, the credits. You have to think about logistics.

Speaker 8

So there's a lot of pieces to it. We'll have a linear program for renewables as well. The key to renewable Production is finding as many feedstocks, as many suppliers as you can and having the logistics to get it to the plant, which is what we've been working on. We've set up A global organization to do that and we're working hard. And in renewable diesel, the key for us is getting the renewable diesel to the end user, that's the key.

Speaker 8

To keep more of the margin that way, so in part our purchase of our commercial fleet fueling business was enabled that to for us to get some of that To end users, you'll continue to see those type of things. We've taken all the stores in California that we have and we've converted those renewable diesel as well. So We're going to have as much renewable diesel as we can to the end user and we're going to have as big a feedstock slate as we can for the plant and we'll optimize through our linear program.

Speaker 3

I might add to that that being able to operate 250 out there on renewable feedstocks instead of Hydrocarbon based feedstocks has really given us a good opportunity to for the operators and staff to Because it is very different and it runs different and there are different characteristics to handling it and getting it in the unit And dealing with it. So it's been a great warm up for us for the Rodeo renewed project that's yet to come and just think raises our confidence level and our ability to be able to run really hard right out of the gate with that unit.

Speaker 2

You want to talk about the pathways, the CI approval, etcetera?

Speaker 3

Yes. So we started up the unit after the last turnaround on basically clean soybean oil and since and Brian mentioned it earlier, we've been able to establish pathways. So in California, you run new feedstocks, you get a provisional CI Number 4 of them and then you have to go through, I'd say, a pretty lengthy bureaucratic process to qualify your other feedstock. So Since we've done that, we've been able to qualify not only the soybean oil, but the distillers, corn oil we're working on. We've gotten a pathway on canola oil.

Speaker 3

I think that's it. That process will keep repeating itself as we find more and more feedstocks ahead of Rodeo renewed coming up in 2024, early 2024 that really allow us to take advantage of the lower CI material right away.

Speaker 2

Hey, it's just another key learning is how you get through that process and navigate that process in California.

Speaker 3

Like everything else, you get better at it the second time.

Speaker 10

Perfect. Thanks guys.

Operator

The next question will come from Doug Leggate with Bank of America. Please go ahead.

Speaker 11

Thanks, Velez. I've got 2 questions that I hope can add some color for everybody. I guess my first one Kevin is on the balance sheet. I was looking back at your share price, it seems like a horrible memory now, but Your share price pretty much got cut in half twice during the 2020 period. And obviously, you did not buy back Stock when that happened given the circumstances.

Speaker 11

So my question is why carry $10,000,000,000 of net debt Rather than work the balance sheet down to a level where we know these corrections

Speaker 4

are going

Speaker 11

to happen occasionally in this business To allow you to take advantage of that, what's the philosophy behind the buybacks and the recovery versus building the balance sheet during the recovery and buying back during corrections.

Speaker 4

Yes, Doug, I think it's really a it is a bit of a balancing Trying to meet multiple priorities, so we think about an optimum capital structure in terms of cost of capital, right? So Too little debt is increasing cost of capital. And so you've got that component to it. We've got other opportunities that we want to be able to fund. And bear in mind also that As we are growing the business and we're seeing that in the non refining segments as we're growing the business, We are actually we're effectively strengthening our overall financial condition because on a debt to EBITDA basis, We're continuing to improve from that standpoint.

Speaker 4

And obviously, we don't like the fact We weren't buying shares at $40 but that was it's what we were not in a position to do so and so we had to just accept that. So it's really around finding that optimum capital structure that will give us sufficient flexibility through the cycle, Albeit, you've always got more flexibility. The lower the debt balance, obviously, that provides added flexibility, but at what cost is that. And so it's having the optimum structure to where we've got adequate flexibility, we can be stick with our sort of capital allocation framework. 60% reinvestment in the business, 40% cash returns to shareholders between the dividend and buybacks over an extended time period recognizing that year over year That will fluctuate.

Speaker 4

So it's really just trying to balance through all of that. I'm not sure going too much further down on debt Then our sort of stated objectives is going to bias a whole lot in that context. So I still feel pretty good With how we're laying out our objectives.

Speaker 11

I appreciate the answer. I guess it's more of a net debt question because obviously it's 2020 hindsight is perfect, but It's kind of gets back to this. I wonder if COVID has reset everybody's view of what volatility looks like. So but I appreciate the answer. My follow-up is something I really value from you guys periodically is your view on the net capacity outlook.

Speaker 11

And I guess my question is, are we getting to a point now where the mid cycle refining outlook has been reset Higher much like it did in the mid-2000s. I don't want to say golden age, but something of that nature. And here's my point, gas prices are up, that's probably For international players, net additions disclosures, light demand at IMO. I'm just wondering, are you guys thinking along those lines? How do you see the net additions, Past additions and subtractions in terms of impacting that mid cycle view?

Speaker 1

Yes, Doug, I think we've seen a A total of about 4,500,000 barrels a day of refining rationalization that's been announced and much of that has already occurred. When you look at last year, it was the 1st year in at least 30 years where there was more capacity rationalized Out of the global fleet, then there was capacity added. And so we are seeing that benefit. As we look forward, there's still pressure with higher natural gas prices in Europe on that those units profitability. So we see that continuing to occur.

Speaker 1

We've also COVID delays, challenges getting labor in to execute new capacity additions, so they're getting We've seen a reduction of capital spending and concerns over energy transition. So it's definitely impacting The supply side of the equation and we are seeing demand come back. As Greg mentioned, gasoline Was above 19 levels before this recent COVID hit, diesel comfortably above, jets been coming back aggressively. And so we think jet demand by late this year could be back at 2019 levels as well. So The demand is still in the system and the supply is more constrained than what we have seen historically.

Operator

The next question is from Theresa Chen with Barclays. Please go ahead.

Speaker 12

Hi there. Thank you for taking my questions. First, Kevin, I just wanted to follow-up on your comment about the adjustments from the lower RVO for 2021 out of refining results. So just to be clear, the $404,000,000 of adjusted EBT, did that include the $230,000,000

Speaker 4

Yes, It does, Teresa. So the $404,000,000 includes the $230,000,000 It applies to the full year. And so if you think about my additional comment was, if you think about that in terms of Quarters, you could say 3 quarters of that 230 would apply to the 1st 3 quarters of the year, and if you're doing any kind of normalization around that.

Speaker 12

Okay. So but you presumably would not get that revaluation over and over again. So the clean number for the quarter, would it be 170

Speaker 4

Yes, if you back out the full $230,000,000

Speaker 12

Yes. Okay, great. Thank you. And then, I also wanted to follow-up on one of Brian's comments about The fuel fleet that you bought in California as you seek to plate barrels to the end user for all of your renewable diesel production. Is this something that you expect to grow in terms of your footprint and the vertical integration as Incremental renewable diesel will hit the state over time to insulate your position there or is it something that you were thinking of doing all along?

Speaker 12

Would love to understand Your strategy more here?

Speaker 8

Yes. Therese, that's exactly right. Our goal is to be able at some point to get the entire 50 barrels of diesel that we make to the end user. That may not be possible, but we'll see. We may export some of that depending on markets, but This is just one step.

Speaker 8

As I said, we upgraded all the stores to renewable diesel. We're looking at a lot of different opportunities to also get diesel to the end user. But the goal is to get it to the end user. That way, we keep all of the margin and we think that's the best bet.

Operator

Thank you so much. The next question is from Manav Gupta with Credit Suisse. Please go ahead.

Speaker 13

Hey, guys. This is a question which we get a lot of investors. So don't shoot the messenger. Your partner has gone ahead and made a statement that they don't really want We'll be in the business of JV Refining. You have a very profitable JV, which has worked very well for you over the years.

Speaker 13

And that has resulted in a lot of speculation. If you keep 1 refinery, they keep 1, they sell you both, you sell them both.

Speaker 2

Take that, Bob. Okay. And then you can shoot him.

Speaker 3

Yes. Next time we see him. All I can tell you is we continue to work really well with On our joint venture WRB for Wood River and Borger. As you pointed out, it's been a very good partnership Since 2007, stood the test of time. They seem to like us as an operator.

Speaker 3

They've been a great partner to work with and give us good insights on things and their world has changed. But For now, we continue to work together to run WRB and invest in those two facilities as needed to Extract more value out of both of them.

Speaker 13

Perfect. And my follow-up quick question is when you look at the segments The Gulf Coast operating cost was a little higher and so was the DD and A. I'm assuming these are just like one times and as the refinery closes, your Op costs will actually trend down sequentially, not up and so for the DD and A. If you could just comment on that one times, which I mean, they look like one times from the alliance on the Gulf Coast results.

Speaker 3

Yes, you're exactly right. There's a lot of noise in 4Q and it is there are We still had all the people in the Q4 because we worked through redeploying some and all of that. So we had costs In the Q4 and obviously no volume to go with it. So we'll see those costs trend off very quickly in the Q1. On a dollar per basis, on a barrel basis in the Gulf Coast, all our refineries are on the base cost.

Speaker 3

X turnarounds are about the same Cost per barrel, so you won't see a big change in our in that metric, but the absolute costs controllable costs in the Gulf Coast will go down.

Speaker 4

Manav, it's Kevin. Just on the D and A, we did, as you suspected, associated with the Alliance conversion, we impaired some assets

Operator

The next question will come from Paul Cheng with Scotiabank. Please go ahead.

Speaker 6

Hey, guys. Good morning. Good morning, Paul. Two questions, please. I think the first one is for Kelvin.

Speaker 6

I think in your prepared remarks, you Can you quantify how big are those number? And also I believe that the deferred tax deferred revenue You recognize in the transportation, if you can quantify that also. Maybe that after that then I ask the second question.

Speaker 4

Yes, Paul. On the deferred revenue, it's basically the variance quarter over quarter equates to the deferred revenue essentially. So that is the way to think about it. But I would say with deferred revenue that is don't think of that as a sort of one time item because the nature of those contracts on the pipelines, we're either going to get the volumes And the revenues recognized as you get the volumes or if there's a shortfall in volumes, we still collect the cash and then there's either makeup rights Or ultimately they close out and we then recognize the deferred revenue. So that's a phenomenon that you see going Period to period.

Speaker 4

So it's not a I don't think of it as a true one time item. We had inventory impacts both in the midstream and in refining, but We have inventory impacts every period and that's not something we typically quantify unless it was excessively Large in terms of the impact, so we typically don't quantify those.

Speaker 6

Okay. That's fine. And can you tell us that at least in refining, which region is the inventory impact?

Speaker 4

No. It's going to show up across all areas.

Speaker 6

Okay. The second question, Greg, just I think before the pandemic, I think in the past that you sort of looking at long term CapEx in the range of 2,500,000,000 to 3,000,000,000 kind of range That talking about $1,000,000,000 to $2,000,000,000 of the maybe the growth CapEx. Since then, of course, that the outlook for the investment opportunity in the midstream has changed, so you're probably not going to spend that much money. So Once that your debt is back to a comfortable level and you start to be more in the growth phase, What is the capital allocation we should look at on a longer term basis? And also maybe on a side Question on DCP, is there any way to restructure that structure?

Speaker 6

I mean, you say $35,000,000 $40,000,000 a quarter business, it seems like Yes. Not causing you a problem, but it's also not adding a lot of value. I mean, does it really fit you into a long term

Speaker 2

Okay, Paul, I think you're up to 5 questions now, but I'll try my best to start. At least all the ones I want to, how about that? So first of all, historically, we've used $1,500,000,000 to $2,500,000,000 as growth CapEx. So I think that for many reasons, pandemic, one of them, the need to be structured around debt repayment and get back share repurchases, This will signal total CapEx budgets of $2,000,000,000 or less for this year and kind of next year. We'll see what happens going forward.

Speaker 2

I do think we want to get the balance sheet back to something over the next 2 years approaching pre COVID, so call it 12,000,000,000 I want to get back to share repurchases. I mean, we've been out of share repurchases and it's time to step back into those. And so I think for all the right reasons, we want to keep capital constrained Across the portfolio for the next couple of years. And to your point, certainly midstream, we just don't think those investable Opportunity, so we'll hit our return hurdles are going to be there in the next 2 years in the midstream business. We'll see where renewables goes and where renewables takes us.

Speaker 2

But right now, the biggest project in front of us is Rodeo renewed circa $850,000,000 project. So I mean that in itself It's almost a mega project by any standard. So I think there's still big things going on around the portfolio in terms of growth. And then you add on CPChem And the 2 mega projects they're looking at. So there's certainly lots of growth still around the portfolio, allows us to be very structured about how we think about Capital allocation, but to your point, the whole idea is to free up more cash for debt repayment and getting back into share repurchases.

Speaker 2

Kevin, if you want to take DCP, I'll let you take it.

Speaker 4

Thanks. So Paul, I mean, you're right that with DCP, we're looking at you, take out all the hedging noise, you're probably a $50,000,000 $60,000,000 per quarter of Earnings generation and a pretty consistent distribution that comes along with that. While you could say we're structurally challenged, it's been a JV we've had in place for over 20 years. It's been a very successful JV. The ownership has changed with as the owners of with the M and A type activity over that time period.

Speaker 4

But nonetheless, it has continued to be successful for us. It does Give us some nice integration through our own midstream business. So DCP volumes, we jointly own the Sand Hills, Southern Hills pipelines with DCP and NGL volumes through that system come into Sweeny and into our fracs. And so we have the benefit of that Integration. So while a different structure might be a more efficient way of looking at that business, It's not something that we have to get done.

Speaker 4

There's nothing compelling that tells us we must have a different solution. And The reality is when you get into these kind of arrangements that have been in place for a long period of time, it can be pretty hard to exit for any party when you look at the tax considerations and all of that. So it's a little bit like the Cenovus question earlier. We actually feel that the JV has been very successful. It does what we I wanted to do and we'll take it from there.

Speaker 4

We're always open to alternatives as we are with most of our portfolio, but it's continued to work well for us.

Operator

The next question is from Matthew Blair with Tudor, Pickering, Holt. Please go ahead.

Speaker 3

Hey, good morning. Could

Speaker 14

Could you shed some more light on this British Airways SAS deal? How should we think about the economic impact to TSX here? Is it like a take or pay arrangement or maybe something else? And then also, why do you think we're seeing these offtake deals in SAS, But not really in RD?

Speaker 3

So I'll take the shot at the first one. So The Humber Refinery entered into this deal to supply sustainable aviation fuel 2 British Airways, it's a small volume. We don't run a lot of renewable feedstock at Humber yet. We're working on a lot of things in Humber to reduce the carbon intensity of the fuels that come from that plant. So we entered into this with British Airways I really think the partnership going and to understand their needs and they can understand what we can do and we can grow this business over time And be a good supplier, we're a supplier to British Airways anyway.

Speaker 3

So this just kind of extends our reach there. And So it's not large and material yet, but it really signals that in Europe with British Airways that we're going to And that business as we expand our ability to run used cooking oils and other renewable feedstocks in Humber.

Speaker 2

Yes. I think that maybe, Mark, you can add on to this, but as you think about Humber and even once we get Rodeo renewed, There's a certain part of the yield that's going to be sustainable aviation fuel. I think the challenge for us is how do we think about that yield and how we push that yield structure to make more sustainable aviation fuel Yes.

Speaker 3

And I think the big difference is there's not the regulatory incentives there for SAF yet. We think they'll come, but We also see airlines making commitments and so there's a demand pull for SAF out there that we will work To prove to supply, but to shift that optimization wholesale away from renewable diesel in test, there has to be a financial incentive, but it is Sort of a co product at this point that we can make commitments on.

Speaker 8

And the only difference is in overseas in our Humber plant, the reason we were able to make that deal is because that scheme, the European scheme is different from the U. S. Scheme, which treats renewable diesel, renewable gasoline and renewable Jet fuel the same, so that was why that deal was done there and that's why deals haven't been done in the United States yet, but we expect that As part of the Build Back Better plan that we'll get some incentive and over time we'll either get more incentive or airlines will make commitments to pay more for the SAF.

Speaker 3

Yes. I think it's just the nature of how

Speaker 2

the market is going to work. When you think about the airline business, I mean their only option today To decarbonize is a sustainable aviation fuel. We don't think hydrogen is going to work in planes, batteries aren't going to work in long haul planes. And so I think they're anxious to work with the industry in developing aviation fuels. And I think what you're going to see is they're going to be contractual relationships develop so that they have access to the molecules that are going to be there.

Speaker 3

Thanks for all the color. I'll leave it there.

Operator

The next question is from Jason Gabelman with Cowen. Please go ahead.

Speaker 15

Hi. Yes. Hey, thanks for taking my questions. I wanted to ask about the build of earth buy and M and A outlook On the Marketing and Chemicals business segments, midstream Given that you're going to be consolidating PPS XP, do you expect to be selling some of those non core assets or are you In a stronger position to acquire midstream assets value, you have this larger portfolio and the chemicals build versus buy question In light of the fact that you're still evaluating 2 world scale crackers. And then my second question is just, I think you mentioned Rodeo CapEx is going to be 850 1,000,000 if I heard you correctly, which is a bit higher than what you previously guided to.

Speaker 15

I think you had previously said something like $750,000,000 I just want to confirm that's correct. Thanks.

Speaker 3

You want to start? Sure. I think on the build versus buying chemicals, I think that we see at CPChem level, they've always scanned the rise and looking for opportunities to acquire assets, But it's an environment that's tough to acquire. Things are really highly valued and they've had a long history of organic growth Through partnerships and been very successful in doing that and that's what's driving both the U. S.

Speaker 3

Gulf Coast II project and the RLPP project and We're looking forward to an FID on U. S. Gulf Coast 2 midsummer, late summer timeframe this year. We're taking a Tough look at the economics to make sure that it meets the economic hurdles that we have in place, but we're optimistic that it will, but we're working with EPC contractors There's now to develop that whole package to bring forward and then the RLTP project is about a year later. It's already We continue to see opportunities organic that are more attractive than any acquisition opportunities in the chemical space.

Speaker 2

Yes, I might just comment on the marketing specialties. That business is consolidating, particularly the retail marketing in the U. S. And we're seeing many of our long time business partners, they may be 2nd or 3rd generation businesses and for Family estate planning, they want to exit or maybe the current generation doesn't want to take over. And so it's creating those opportunities.

Speaker 2

And we want to ensure that We continue to have access to those markets long term. And so that's what's driving a lot of what we're thinking. I think Brian did a really nice job of talking about Renewable diesel and making sure we're capturing all the value we can. I think one of the things we've been frustrated with RINs is we've never been able to explain what we think is some And so we want to make sure that we're going to capture that full value chain around the renewable diesel side of that. So I think that maybe it's an important point as you think about what we're trying to do in the marketing specialty space around that.

Speaker 2

We always look at buy versus build. I think that certainly is an opportunity to think about that, particularly in businesses that are going to consolidate, instance, like Midstream, I still think Midstream will have some consolidation. And to your point, as we roll out PSXP and we have a full suite of assets kind of Within our control, then I think we have the chance to really think about how we optimize our midstream and particularly our NGL Oriented portfolio around that. Tim, if you want to add anything on that on midstream, please.

Speaker 16

Greg, I mean, you covered it at the high level. We're about creating value. So we're always going to look at the portfolio on how we maximize that value. That can include buying, building or divesting. But that's just part of stewarding the capital that we've got in the business that we're

Operator

We have reached the end of today's conference call. I will now turn the call back over to Jeff.

Speaker 1

Thank you, Thea, and thank all of you for your interest in Phillips 66. If you have further questions on today's call, please call Shannon or me. Thank you.

Operator

Thank you, ladies and gentlemen. This concludes today's conference call. You may now disconnect.

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Earnings Conference Call
Phillips 66 Q4 2021
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