Phillips 66 Q3 2022 Earnings Call Transcript

Quartr
Provided by Quartr
November 1, 2022

There are 15 speakers on the call.

Operator

Quarter 2022 Phillips 66 Earnings Conference Call. My name is Sylvie, 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 Third Quarter Earnings Conference Call. Participants on today's call include Mark Lasier, President and CEO Kevin Mitchell, EVP and CFO Brian Mandel, EVP, Marketing and Commercial Tim Roberts, EVP, Midstream and Chemicals and Rich Harbison, SVP, Refining. Today's presentation material can be found on the Investor Relations section of the Phillips 66 website, Along with supplemental financial and operating information. We provided supplemental information this morning for chemicals, refining And Marketing and Midstream. The remaining supplemental information will be available with the 10 Q filing.

Speaker 1

We'll return to the normal supplemental release next quarter. 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 our SEC filings.

Speaker 1

Before we begin our discussion, I would like to highlight that we will be hosting an Investor Day in New York on November 9. With that, I'll turn the call over to Mark.

Speaker 2

Thanks, Jeff. Our Q3 results reflect the continued favorable market environment and our strong operating performance. We ran at high rates during the summer driving season to meet peak demand for critical transportation fuel. Our refining business delivered improved market capture this supported by strong distillate cracks and wider discounts for heavy sour crudes. In the Q3, we had adjusted earnings of $3,100,000,000 Or $6.46 per share.

Speaker 2

We generated $3,100,000,000 in operating cash flow. We're committed to strong shareholder distributions. During the quarter, we ramped up share repurchases in a meaningful way, Purchasing almost $700,000,000 of common stock. Including dividends, we returned $1,200,000,000 to shareholders. During the quarter, we continued to focus on operating excellence and advancing our strategic priorities.

Speaker 2

Our enterprise wide business transformation is underway. The team is implementing key initiatives to deliver results. We look forward to providing more details at our Investor Day next week. In Midstream, we realigned our economic and governance interest in DCP Midstream LP and Gray Oak Pipeline LLC. Our economic interest in DCP Midstream increased to 43% and our economic interest in Gray Oak Pipeline decreased to 6.5%.

Speaker 2

At the same time, we made an offer to acquire all publicly held common units of DCP Midstream LP. Our increased interest in DCP Midstream allows for further integration and optimization across our NGL business. The wellhead to market value chain structure will allow us to capture new commercial opportunities and optimize costs. Additionally, we started up Frac 4 at the Sweeny Hub On time and under budget. In October, Frac 4 achieved full run rates, bringing our total swinging hub fractionation capacity To 550,000 barrels per day, CPChem is pursuing a portfolio of high return projects, enhancing its asset base As well as optimizing its existing operations.

Speaker 2

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. The unit is being constructed at CPChem's Old Ocean, Texas facility And we'll produce £586,000,000 per year. CPChem is also building a new propylene splitter at its cedar body facility, which will expand its capacity by £1,000,000,000 per year. Both the And propylene splitter projects are expected to start up in the second half of twenty twenty three. TP Chem continues to develop 2 world scale petrochemical facilities on the U.

Speaker 2

S. Gulf Coast and in Ross Laffan, Qatar. A final investment decision for the U. S. Gulf Coast project is expected before the end of this year.

Speaker 2

In refining, We're converting our San Francisco refinery into one of the world's largest renewable fuels facilities. The Rodeo renewed project is expected to cost approximately $850,000,000 And begin commercial operations in the Q1 of 2024. Upon completion, Rodeo will have over 50,000 barrels per day of Renewable Fuels production capacity. Now I'll turn the call over to Kevin to review the financial results.

Speaker 3

Thank you, Mark, and hello, everyone. Before I talk about the financials, let me begin by summarizing the accounting impacts of DCP Midstream. On August 17, We completed the merger of DCP Midstream LLC and Gray Oak Pipeline LLC. In connection with the transaction, we were delegated governance rights Over DCP Midstream LP and its general partner entities as well as DCP Sand Hills Pipeline LLC and DCP Southern Hills Pipeline LLC. Effective August 18, our financial results reflect the consolidation of these entities.

Speaker 3

So starting with an overview on Slide 4, We summarize these financial results. We reported 3rd quarter earnings of $5,400,000,000 We had special items Remaining to an after tax gain of $2,300,000,000 including the net gain related to the consolidation of BCP Midstream, Sand Hills Pipeline and Sun Hills Pipeline and the transfer of interest in Gray Oak Pipeline. Excluding special items, Adjusted earnings were $3,100,000,000 or $6.46 per share. The $33,000,000 decrease in the fair value of our investment in Novonix Reduced earnings per share by $0.05 We generated $3,100,000,000 of operating cash flow. Capital spending for the quarter was $735,000,000 including the company's $306,000,000 investment in DCP Midstream LLC We returned $1,200,000,000 to shareholders through $466,000,000 of dividends $694,000,000 of share repurchases.

Speaker 3

We ended the quarter with 473,000,000 shares outstanding. Moving to Slide 5. This slide highlights the change in adjusted results by segment from the Q2 to the 3rd quarter, Including the impacts of consolidating DCP Midstream, Sand Hills Pipeline and Southern Hills Pipeline effective August 18. The Midstream segment, corporate and other, income taxes and non controlling interests are impacted by the consolidations. The higher non controlling interest reflects the portion of these entities not owned by Phillips 66.

Speaker 3

During the period, adjusted earnings decreased $163,000,000 mostly due to lower results in refining and chemicals, Partially offset by higher Midstream and Marketing and Specialties results. Slide 6 shows our Midstream results. 3rd quarter adjusted pre tax income was $645,000,000 compared with $292,000,000 in the previous quarter. The consolidation of DCP Midstream results are now reported within NGL and other. Transportation contributed adjusted pre tax income of $229,000,000 down $21,000,000 from the prior quarter.

Speaker 3

The decrease was mainly due to lower equity earnings from the Gray Oak pipeline resulting from the merger. NGL and other adjusted pre tax income was $449,000,000 compared with $282,000,000 in the 2nd quarter. The increase was primarily due to the consolidation of BCP Midstream, Sand Hills Pipeline and Southern Hills Pipeline effective August 18. The fractionators at the Sweeny Hub averaged 429,000 barrels per day and the Freeport LPG export facility loaded 249,000 barrels per day In the Q3, our Novonix investment is mark to market at the end of each reporting period. The fair value of the investment, Including foreign exchange impacts, decreased $33,000,000 in the 3rd quarter compared with a decrease of $240,000,000 in the 2nd quarter.

Speaker 3

Turning to Chemicals on Slide 7. Chemicals had 3rd quarter adjusted pretax income of $135,000,000 Compared with $273,000,000 in the previous quarter. Olefins and polyolefins adjusted pretax income was $105,000,000 The $111,000,000 decrease from the previous quarter was primarily due to lower margins resulting from a sharp decline in polyethylene prices. This was partially offset by lower turnaround costs. Global O and P utilization was 90% for the quarter.

Speaker 3

Adjusted pretax income for SA and S was $60,000,000 in line with the 2nd quarter. The higher cost in other mainly reflect legal contingencies. During the Q3, we received $41,000,000 in cash distributions from CPChem. Turning to refining on Slide 8. Refining 3rd quarter adjusted pretax income was $2,800,000,000 down from $3,100,000,000 in the 2nd quarter.

Speaker 3

The decrease was primarily due to lower realized margins, partially offset by higher volumes. Our realized margins decreased by 6% to $26.58 per barrel, while the composite global 321 market crack decreased by 22%. Pre tax turnaround costs were $225,000,000 in line with the previous quarter. Fuel utilization was 91% in the 3rd quarter and clean product yield was 85%. Slide 9 covers market capture.

Speaker 3

Our composite global 321 market crack for the Q3 was $36.29 per barrel compared to 46 point $0.72 per barrel in the 2nd quarter. Realized margin was $26.58 per barrel and resulted in an overall market capture of 73%. Market capture in the previous quarter was 61%. Market capture is impacted by the configuration of our refineries. We have a higher distillate yield and lower gasoline yield than the 3.2.1 market indicator.

Speaker 3

During the Q3, the distillate crack decreased $8.14 per barrel and The gasoline crack decreased $11.84 per barrel. Losses from secondary products of $3.50 per barrel We're $0.47 per barrel higher than the previous quarter. Our feedstock loss of $1.48 per barrel was in line with the previous quarter. Feedstock advantage from widening heavy sour crude differentials was offset by the impact of higher feedstock costs relative to dated Brent in the Atlantic Basin. The other category reduced realized margins by $1.29 per barrel.

Speaker 3

This category includes RINs, freight costs, Moving to Marketing and Specialties on Slide 10. Adjusted Q3 pretax income was $847,000,000 compared with $765,000,000 in the prior quarter. Marketing and other adjusted pre tax income was $717,000,000 up $61,000,000 from the 2nd quarter. The improvement reflects higher international margins, partially offset by lower domestic results, including inventory impacts. Specialties generated 3rd quarter adjusted pre tax income of $130,000,000 The $21,000,000 increase This was largely due to improved base oil margins.

Speaker 3

On Slide 12, the Corporate and Other segment had adjusted pretax cost of $246,000,000 $11,000,000 higher than the prior quarter. The increase was mainly due to consolidating BCP Midstream interest expense of $34,000,000 partially offset by higher interest income. Slide 12 shows the change in cash during the Q3. We started the quarter with a $2,800,000,000 cash balance. Cash from operations was $3,100,000,000 During the quarter, we funded $735,000,000 of capital spending, including the company's $306,000,000 investment in DCP Midstream associated with the merger, net of cash acquired.

Speaker 3

We returned $1,200,000,000 to shareholders through dividends and share repurchases. Our ending cash balance was $3,700,000,000 We ended the quarter with a net debt to capital ratio of 29%, Including the consolidation of DCP Midstream. This concludes my review of the financial and operating results. Next, I'll cover a few outlook items. In Chemicals, we expect the Q4 global O and P utilization rate to be in the mid-90s.

Speaker 3

In Refining, we expect the Q4 worldwide crude utilization rate to be in the low to mid-90s and pretax turnaround expenses to be between $180,000,000 $220,000,000 As a result of strong turnaround execution and timing, we expect full year turnaround expenses to be lower than our original $800,000,000 to $900,000,000 of guidance. We anticipate Q4 corporate and other costs to come in between $300,000,000 $325,000,000 pretax, reflecting a full quarter of DCP Midstream interest expense. Now we will open the line for questions.

Operator

Thank you, sir. We will now begin the question and answer session. As we open the call for questions, And your first question will be from Doug Leggate at Bank of America. Please go ahead.

Speaker 4

Thanks. Good morning, everyone. Thanks for taking my questions. Kevin, I wonder if I could just ask you about your thoughts So on the balance sheet going forward, I mean, clearly, you're back to, I guess, on a capitalization basis, you're back to pre COVID levels pretty much. But the absolute debt, now you have DCP, is still about 30% up on where it was before the downturn.

Speaker 4

So how are you thinking about Where you want the balance sheet to be going forward and how that might play into your cash return strategy?

Speaker 3

Yes. Doug, thanks. It's a good question. So we feel pretty good that even with consolidation of DCP, the debt to capital ratio, net of cash is Sub 30%. So we feel good about the metric from that standpoint.

Speaker 3

And also if you just look at the debt to EBITDA metrics, they're still very strong. But the reality is it's $17,800,000,000 of debt on a fully consolidated basis. And so I think given the overall financial position we're in, the cash generation that we have, You'll see us continue to do some debt reduction. Bear in mind, we haven't yet funded the buy in of the public. So that puts more Pressure on the balance sheet regardless of how we actually execute on that funding between debt and cash.

Speaker 3

And so we'll continue to want to make some debt reductions. But the difference now between where we were over the last Couple of years, we were trying to get rid of the pandemic debt that we had added is we don't need to Make debt reduction the number one priority for discretionary cash. Cash generation, cash balances are sufficient that we'll be able to do some Gradually chip away at the debt balance and at the same time continue to return healthy amount of cash to shareholders.

Speaker 4

I'm trying hard, Kevin, not to ask anything that I know you won't answer, given that you've got the Analyst Day. So I'm avoiding some of the obvious things, but I do want to try one that really came up in the last the call that's preceded this one With Marathon and that's the issue about the industry or senior management's view of mid cycle. And Marathon were quite Clear to say, look, they think mid cycle has moved up. You guys used to talk about, I guess, dollars 6,000,000,000 to $7,000,000,000 of mid cycle Cash flow, again not preempting next week, but can you maybe offer further Mark or anyone else How you feel about the go forward outlook for mid cycle earnings for this business, so the refining business?

Speaker 2

Yes, Doug, we are going to cover that a bit next week. I think that there's 2 things to take into consideration there. What has the market mid cycle moved? It has our Ability to generate EBITDA move and certainly the piece that we control we know we'll be moving and we'll provide details Next week and as far as the market, we're still watching that to see how that evolves, but we'll be more focused on what we're doing To drive our mid cycle going forward.

Speaker 4

I understand we'll wait until next week. Thank you guys. Thanks. Thanks, Dan.

Operator

Thank you. Next question will be from Neil Mehta at Goldman Sachs. Please go ahead. Your line is open.

Speaker 5

Yes. Good morning, Team, I wanted to start off on the waterfall on Slide 20 of the deck in the Central Corridor, really exceptional Capture rates in that region and I was wondering if there's anything unusual in there, if there's something Structural that we should capitalize, as I know that other bucket can be move around a bunch. And how much did WCS Help this quarter or given the fact that it typically comes in at a lag, is that more of a 4Q tailwind?

Speaker 2

Yes, Neil. We're very pleased with the central quarter performance. There are a number of factors that differentiated the second quarter to the third quarter And a number of things that happened in the Q3. I'll let Rich dive into the details around that.

Speaker 6

Okay, Mark. Hey, Neil. Good question. And yes, MidCon, Central Quarter had a very good quarter. Let me start by resetting the basis for the Q2.

Speaker 6

2nd quarter for us was a heavy turnaround in this region. So a lot of the difference you're seeing is the lack of turnarounds in the 3rd quarter. Our mechanical availability during the Q3 was very good. We had high utilizations sitting at around 93% And strong clean product yields sitting at 88% for the corridor. So good performance on both of those.

Speaker 6

Of Of course, those directly relate to increased volumes and with the lack of turnarounds, we had a lot lower operating expense for the quarter as well. As you indicated as well, Neil, the market conditions were quite favorable for our kit. We saw a widening Canadian spreads, Which are quite favorable for us as well as a very strong distillate crack in the region. And that also plays well for our kit, which is a strong distillate So I think what you're seeing here is a strong operating performance and favorable market conditions playing out for us in the 3rd quarter.

Speaker 5

Yes. And maybe we could stay on that point around Western Canadian crude. It has Been pretty wide here. It's widened out in the curve for 2023 as well. So I would love your guys' perspective on what you think is going on there.

Speaker 5

And given it does tend to come in at a lag, should we see a disproportionate impact of that tailwind in Q4?

Speaker 7

Hey there, Neil. This is Brian. I'll start by saying that WCS started weakening with Part II unplanned maintenance. WCS was forced into the Gulf Coast and then forced to compete with SPR barrels. We've released about 180,000,000 barrels of SPR Crude, most of that has been sour, so we competed with WCS.

Speaker 7

High sulfur fuel oil has also been weak and it competes as well, Given weaker bunker demand and the end of summer utility burn and also Generally, the WCS is purchased by Asia and India and they were out buying Urals, Russian crude, so they weren't buying as much. And finally WCS has a high naphtha cut and that naphtha has been very, very weak because of the chemicals business. So That was also caused some pressure. So currently WCS is at about $30 differential. Q4, if you look at the forward curve is at $26 off and next year is about $23 off.

Speaker 7

So We assume that it will continue to be weak and the market players also feel the same way.

Speaker 3

Thanks, guys.

Speaker 1

Thanks, Neil.

Operator

Thank you. Next question is from Roger Read at Wells Fargo. Please go ahead. Your line is open.

Speaker 8

Yes. Thank you. Good morning. I guess I'd like to maybe take a Shot here at the chemical side of things. So obviously, kind of the softer results and coming off what was an impressive sort of 'twenty one, early 'twenty two run.

Speaker 8

You mentioned FID for the Gulf Coast and then also the Ross Laffan opportunity. Does the weakness in chemicals here at all in parallel your Timing on decision of FID or does it have any impact whatsoever?

Speaker 2

Thanks, Roger. That's a great question. I think that CP CKIM has a long history of focusing on the long term fundamentals and they've never tried to time Any particular cycle cyclic movements to drive their growth plans, they've always focused on capturing advantaged feedstocks And maintain their global market presence and that's what they're doing here as well. Frankly, If you look back in history, the projects that have just happened to be countercyclical where the investments made when there was a downturn, they tend to come online when things are turning back up and that's Beneficial to the economics and we it looks like that may be the case here. You can never predict when things will turn around, but it will take about 4 years to execute Each of those projects and so yes, it will be what does the crystal ball say on that in that timeframe.

Speaker 2

But we focus on Those long term fundamentals are what we see as kind of a mid cycle margin for those opportunities.

Speaker 8

That makes sense. And then my other question on the Marketing business, you had an exceptional Q2 and now on an even more exceptional Q3. Any Kind of background on what's going on there and are the fundamentals that created the last two quarters Showing any signs of reversing

Speaker 7

here? Sure, Roger. Brian again. Maybe I'll start by saying that our diverse geographic portfolio with Business both here in the U. S.

Speaker 7

And in Western Europe and our diverse channels of trade, we have unbranded, branded and retail Help us when we think about our marketing business. But Q3, a number of things that we saw that helped the business in Germany, It was a tax holiday starting in January 1 and ending at the end of August. Also overseas, The low Rhine and the 1 Austrian refinery down actually helped us and generally helps us. We have alternative supply at Miro, a refinery there in the south of Germany, which helps us particularly in the south of Germany. And our exchange agreement terms also give us Competitive advantage.

Speaker 7

We had the general falling of spot prices, which helped us shortage of Russian distillate in the market As well helped us internationally. And then I would say conversely in the U. S, we actually saw margins come off in Q3 From Q2, but overall we had a very good quarter.

Speaker 8

Okay, great. Thank you.

Operator

Thank you. Next question will be from Ryan Todd at Piper Sandler. Please go ahead. Your line is open.

Speaker 9

Thanks. Maybe if I could ask one on kind of Atlantic Basin Dynamics. European refining, you're exposed to European refining, there's been a lot of volatility in recent months there with natural gas prices. The systems have had to adjust and have adjusted a decent amount. Looking forward, you've got a crude import ban that's About to go into effect and then potentially a product import ban early next year.

Speaker 9

Any thoughts as you look forward to how these dynamics Play out both for your asset and the region overall and how this may impact Atlantic Basin balances over the next 6 months?

Speaker 2

Yes, this is Mark. I'll come in at a high level, then I'll let Rich and Brian follow-up. But I think generally those are constructive for us. It's I think it could strengthen our position, particularly around distillates and it's going from strength to strength. But I will let Brian and Rich comment on the details.

Speaker 10

Maybe I'll start with

Speaker 7

the macro and Rich can talk more about our assets. But Clearly, the market around the world is tight, particularly on distillates. In the U. S, we're under 2015 to 2019 ranges by 22% inventories. That's that was a very, very weak inventories given that we're starting to go into the winter season.

Speaker 7

Refineries around the world are making diesel over gasoline currently. So there are a lot of things that may take some of the edge off and alleviate some of The stress on the market, first, around the world, we're coming back from turnarounds here in the U. S. And elsewhere. The Chinese have increased their Quotas, so you'll see more gasoline and diesel on the market in Asia.

Speaker 7

The French refinery strikes are coming to an end, so those refineries will be back up. And We're seeing kind of moderate weather forecast for both the U. S. And for Europe. So why would you expect margins to remain strong?

Speaker 7

And I think the ultimate moderator for those margins will be demand.

Speaker 6

Yes, I don't this is Rich. I really don't have much to add to that other than from a refining perspective, of course, the natural gas Price will drive up our operating expenses and we will see higher feedstock cost as this market evolves here into the future and these Sanctions go into play. So how that all spells out will be interesting.

Speaker 9

Okay. Thanks. And then This may step into what you plan on talking about next week. But regarding The buy in of the remainder of DCP, I don't know if you have any comment on potential Timing for closure deal there, but beyond that, maybe a reminder how you're thinking about the incremental benefits of The kind of the consolidated position there, either from a financial free cash flow point of view or operational synergies that come along with closure of that deal And how that may impact your ability to buy back stock in the near term

Speaker 2

and the longer term? At a high level, Ryan, the process is underway. We are negotiating with independent Directors represent the unitholders and I would just say that we need to let that process play out. It's better to get the right number than to get a quick number. And as far as the strategic Dynamics, Tim can talk more about that, but it really is about driving this wellhead to market strategy that we really believe That will create a lot of long term value and opportunity for Phillips 66.

Speaker 2

Tim, do you want to comment on

Speaker 9

that? Yes.

Speaker 11

I think that's right. Mark, thanks. Exactly right. I think there's a couple of things that I wanted to make a point is that we do believe in integration, no different than what we see in our integration, our refining, marketing, Commercial Business and Midstream, we see the same thing in the NGL natural gas space. So this allows us to set up that framework to do that, Especially in key basins, namely the Permian and DJ.

Speaker 11

So we really like that, but I think it's probably also worth commenting on that, Yes, we want to get the buy in done and get that behind us and really capture that full value. But really the important part for us and we've already started the integration. So we are starting the integration and we are pushing down the road as well to identify what the opportunities are going to be that really are going to position us both from Cost standpoint as well as the ability to compete and create more value, which we're as soon as we get the buy in done, we can talk a lot more about what that Gentle is going to be.

Speaker 2

Great. Thank you.

Operator

Thank you. Next question will be from John Royall at JPMorgan. Please go ahead. Your line is open.

Speaker 10

Hey, guys. Good morning. Thanks for taking my question. So on the buyback, I think we'll probably have to wait until post DCP to have a real kind of go forward framework. But for now, you did have a pretty big number in 3Q that I think surprised some people.

Speaker 10

And so can you talk about the short term kind of push pull between the buyback and then Maybe conserving cash for the upcoming deal with DCP and how you think about that?

Speaker 2

At a high level, John, we are committed to Buybacks, we had to hold back in the Q2 due to blackout period and so that kind of held us back for a bit. What you saw last quarter is just a signal that we are serious about buybacks and I'll let Kevin Talk about the balance between what will require to execute the roll up of DCP versus share repurchases, but we have got a Solid plan and like a broken record, I'll say you'll hear more about it at Investor Day.

Speaker 3

Yes, John. So in terms of the DCP rollout, our expectation is That will be a combination of debt issuance and cash on hand we will use to fund that. And to my earlier comments, I feel pretty confident that with where the balance sheet sits, with the cash position we have, with the cash generation we have, We will be able to manage that in terms of, yes, we will want to subsequently reduce debt, but With the overall cash position, we should be in a position to continue to return significant amounts of cash to shareholders. So I'm not too concerned That the DCP transaction is going to negatively impact our ability to buy back shares.

Speaker 10

Okay. Thank you. And then apologies to repeat a prior question, but I was just thinking through your commentary on The strength in Central Corridor and correct me if I'm wrong, but I'm not sure if the things you guys talked about necessarily address the other bar Flipping from negative 8 to positive 4.50 going from 2Q to 3Q. So apologies if I missed this, but if you could go through the dynamics in that other bar Okay.

Speaker 6

Let's see. In the other bar in the Atlantic or in the Central Coast area, We're really looking at some rent costs in there and some inventory timing Issues are the 2 primary drivers of that bar there,

Speaker 3

Sean. Okay. Thank you.

Operator

Thank you. Next question will be from Matthew Blair at PPH. Please go ahead. Your line is open.

Speaker 12

Hey, good morning. Thanks for taking my question. The chem's results came down, but they really outperformed peers in the 3rd quarter. Is this just as simple as you don't have Europe exposure and pretty much all your peers do? Was there anything else that we should look out?

Speaker 12

And I guess what's your outlook for Q4?

Speaker 2

Yes. Thanks, Matt. That's a great question. We've talked to the folks at CPChem about that. I think part of it is that Lack of European capacity though, though we do the Middle East assets do supply a lot of volume into Europe, They continue to perform well.

Speaker 2

The interesting thing is others have had to cut back production in North America. CPChem continues strong production. They had some unplanned outage, but no intentional cutbacks. And I think that reflects Their cost position, they didn't have to cut back to contain inventory, they didn't have to cut back due to economics, they ran strong and were profitable. And part of that is they're heavy into high density polyethylene and the dynamics there are a little different than linear low Dense polyethylene and those that were cutting back are more exposed to that segment of the market.

Speaker 2

So I think there While no one is having any fun in that environment right now, they are positioned a little to be a little more Productive during this difficult time. And then as far as the Q4, Q4 Yes. It's typically soft and we continue to see this new capacity that's coming online being digested. Margins have gone down. Marker margins have gone down to just about The breakpoint.

Speaker 2

So I think as you see people that have cut back, as you see them signaling to the market that They need prices to go up in polyethylene to continue to provide what is needed in the marketplace. It's sounding feeling like It's kind of hit bottom. We'll probably see it hit bottom in the Q4 and then slowly recover. It will take a couple more quarters to really To see a lot of movement upward, but I think you're seeing those signs of bottoming out.

Speaker 12

Sounds good. And then could you talk about octane spreads? They've been really quite strong recently. Is this just a function of Tier 3 impacts rolling through the market? And could you also remind me on what Phillips' Exposure to premium gasoline is?

Speaker 12

Thanks.

Speaker 7

Yes. Generally when you have weak naphtha, Matt, You have high or large octane spreads and that has been very, very weak. So gasoline blenders need the octane to blend into the gasoline To make a finish grade. And I would say that like most marketers, we're about 11% or 12% on our premium in our marketing business.

Speaker 2

Great. Thank you.

Operator

Thank you. Next question will be from Paul Cheng at Scotiabank. Please go ahead. Your line is open.

Speaker 13

Hi, good morning.

Speaker 1

Good morning. Two questions, please.

Speaker 13

First, With the latest news from Biden talking about to punish the oil industry with the windfall of attack, just Wondering that your people in D. C, when they talk to the Senator, What's your guess is whether that, there will be sufficient vote in the Senate for them to have to pass that If the President does propose 1. The second question is that, I want to see what is your RD strategy, Renewable diesel strategy beyond the Rideau conversion that you're currently doing. I mean that The first phase will come on stream soon and then full completion probably in 2024. And so that I wanted to see that beyond that, is that is going to be one off or that's And more maybe that strategy going forward on that.

Speaker 13

Thank you.

Speaker 2

Yes. Thanks, Paul. This is Mark. Your first question, we've been Along with the rest of our peers in the industry engaged with the Biden administration around the challenges that they see in the marketplace And yes, it's earnings season. A lot of integrated oils are coming out with very solid results.

Speaker 2

And I think that's The target of the President's latest comments, our view is when we get off of The public rhetoric and engage with them to address the issues of inventories and supply and cost and price, It's been constructive and they know that they have to proceed with caution because things that they try to do Could disrupt the markets even more and they are listening and they are taking into account the advice that we've been giving them along with our peers. You have to remember that there's an election next week and I think that there's going to be a lot of rhetoric right up To that point in

Operator

time. Thank you. Next question will be

Speaker 2

I'm sorry, Paul. I was so focused on that first question, I forgot to answer your second question, Paul. Renewable diesel strategy, obviously, the first step is the Successful execution and commissioning of the Rodeo renewed project. We've put our toe in the water there with a small unit at The San Francisco Refinery, we call it Unit 250, that's been quite successful in the marketplace. We are involved In aggregating feedstocks, both in preparation for Rodeo as well as our Humber facility, We're producing renewable fuels there, including sustainable aviation fuel.

Speaker 2

Rodeo will Provide some sustainable aviation fuel as well. And so we kind of look at that business as renewable fuels, not just renewable diesel. And we're taking a hard look at options around sustainable aviation fuel. Certainly the IRA Act was supportive of SAF And we've got some thoughts there that we're looking at. Bottom line is we're going to whatever we do, we're going to be incredibly And we've got to ensure that we've got a competitive advantage when we go off in these directions, that we've got a line of sight on feedstocks And that we've got the right capital cost when we execute these projects.

Speaker 2

So that's the primary focus, not just getting bigger, but being better in every one of those things that we do.

Operator

Thank you, sir. Our last question is from Jason Gabelman at Cowen. Please go ahead. Your line is open.

Speaker 14

Hey, thanks for taking my questions. I just wanted to ask on the cash flow since you didn't provide Some of the detail that you typically do on the cash flow walk, can you just discuss some of the items that Impacted your cash from operations, working capital and otherwise that could have impacted cash conversion. And then secondly, there were some and this maybe front running something that you may discuss next week, but there were some reports About reducing headcount and optimizing the workforce, Can you just discuss any plans that you have around doing that and improvement in cost as a result? Thanks.

Speaker 3

Yes. Kevin will touch on the cash flow detail. I'll talk about those reports on headcount. Yes. Jason, in terms of operating cash flow, That detail will be available next week at the time early next week when we file the 10 Q.

Speaker 3

But what I would say, I know there's a lot of interest in working capital, And we're still finalizing that level of detail. But what I would say is based on everything we've seen to date, We don't think that working capital was a very significant component of operating cash flow. So There will be a working capital impact, but it will be pretty minor relative to some of the other numbers that you have seen out there. And I'll just leave it at that.

Speaker 2

Yes. Jason, on the headcount issue, yes, we've been focused on our business transformation Well over a year now and this is a facet of that work and we've been executing That portion of the work, it's material. We will provide more details next week at Investor Day. I think though it's a clear signal of our commitment to lower our cost to eliminate unnecessary work To have an optimal organization to go forward in what is a ever changing volatile environment We did execution reduction in force during the best two quarters in our history.

Speaker 3

Great. Thanks.

Operator

Thank you. This does conclude today's conference sorry, question and answer session. At this time, I will turn the call back over to Jeff.

Speaker 1

Thank all of you for your interest in Phillips 66. If you have questions on today's call, please call Shannon and me. And we look forward to seeing many of you at the Investor Day next week. Thank you.

Operator

Thank you. Ladies and gentlemen, this does conclude today's conference. You may now disconnect your lines.

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Earnings Conference Call
Phillips 66 Q3 2022
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