Phillips 66 Q4 2022 Earnings Call Transcript

Quartr
Provided by Quartr
January 31, 2023

There are 15 speakers on the call.

Operator

Welcome to the 4th Quarter 2022 Phillips 66 Earnings Conference Call. My name is Emily, and I'll be your operator for today's call. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session. Please note that this conference is being recorded.

Operator

I will now turn the call over to Jeff Dieter, Vice President of 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 Mark Lasier, President and CEO Kevin Mitchell, CFO Brian Mandel, Marketing and Commercial Tim Roberts, Midstream and Chemicals and Rich Harbison, Refining. Today's presentation material can be found on the Investor Relations section The Phillips 66 website, along with supplemental financial and operating information. Slide 2 contains our Safe Harbor statement. We will be making forward looking statements during today's call.

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 filings. With that, I'll turn the call over to Mark.

Speaker 2

Thanks, Jeff. Good morning and thank you for joining us today. In the Q4, we had adjusted earnings of $1,900,000,000 or $4 per share. We generated $4,800,000,000 in operating cash flow. For the year, adjusted earnings were $8,900,000,000 Or $18.79 per share.

Speaker 2

Our diversified integrated portfolio generated strong earnings and cash flow in 2022 Supported by a favorable market environment and solid operations. Our cash flow generation allowed us to strengthen our financial position by repaying debt And resuming our share repurchase program. We returned $3,300,000,000 to shareholders through share repurchases and dividends. We continue to focus on operating excellence and advancing our strategic priorities to deliver on our vision of Providing energy and improving lives as we meet global demand. In midstream, we continued integrating DCP Midstream to unlock Significant synergies and growth opportunities across our NGL wellhead to market value chain.

Speaker 2

Additionally, we completed frac 4 at the Sweeny Hub Adding 150,000 barrels per day. Our total Sweeny Hub fractionation capacity is 550,000 barrels per day, Making it the largest fraction or the 2nd largest fractionation hub in the U. S. In chemicals, CPChem is pursuing a portfolio of high return projects, Enhancing its asset base as well as optimizing its existing operations. This includes construction of a second world scale unit To produce 1 hexene in Old Ocean, Texas and the expansion of propylene splitting capacity at its cedar buying facility.

Speaker 2

Both projects are expected to start up In the second half of twenty twenty three, CPChem and Qatar Energy announced final investment decisions To construct petrochemical facilities on the U. S. Gulf Coast and in Ross Laffan, Qatar. CPChem will have a 51% interest And the $8,500,000,000 integrated polymers facility on the U. S.

Speaker 2

Gulf Coast. The Golden Triangle Polymers will include a £4,600,000,000 per year ethane cracker and 2 high density polyethylene units with a combined capacity of 4.4 £1,000,000,000 per year. Operations are expected to begin in 2026. In January, The Ross Lafont petrochemical project was approved. CPChem will own a 30% interest in the $6,000,000,000 integrated polymers complex.

Speaker 2

The plant will include a £4,600,000,000 per year ethane cracker and 2 high density polyethylene units with a total capacity Of £3,700,000,000 per year, start up is expected in late 2026. In refining, we're converting our San Francisco refinery into one of the world's largest renewable fuels facilities. The Rodeo renewed project is on track To begin commercial operations in the Q1 of 2024. Upon completion, Rodeo will have over 50,000 barrels per day Renewable fuels production capacity. At our Investor Day, we announced priorities to reward Phillips 66 shareholders now and in the future.

Speaker 2

We're holding ourselves accountable, and we know that you are as well. Slide 4 summarizes our progress. We are delivering returns to shareholders. Since July 2022, we've returned $2,400,000,000 to shareholders through share repurchases And dividends. We're on track to meet our target return of $10,000,000,000 to $12,000,000,000 by year end 2024.

Speaker 2

In January, we reached an agreement to acquire all of the publicly held common units of DCP Midstream. We expect the transaction to close in the Q2 of 1023, at which point we will have an 87% economic interest in DCP Midstream. The increase in our economic interest from 28% prior to the Q3 transaction is expected to generate an incremental $1,300,000,000 adjusted EBITDA including commercial and operating synergies. We're executing our business transformation. The team achieved savings in excess of $500,000,000 on an annualized basis at the end of 2022, Setting us up well for 2023.

Speaker 2

This includes cost reductions of over $300,000,000 mostly related to reducing headcount Over 1100 positions during the year as we redesigned and streamlined our organization. In addition, Our 2023 capital program includes a $200,000,000 reduction of sustaining capital. We're transforming to a sustainable lower cost business model And expect to deliver $1,000,000,000 of annualized savings by year end 2023. We're laser focused on executing the strategic priorities to deliver returns and increase distributions in a competitive and sustainable way. We look forward to updating you on our progress.

Speaker 2

Now, I'll turn the call over to Kevin to review the financial results.

Speaker 3

Thank you, Mark. Starting with an overview on Slide 5, We summarize our financial results for the year. Adjusted earnings were $8,900,000,000 or 18 point $0.79 per share. The $442,000,000 decrease in the fair value of our investment in Novonix reduced earnings per share By $0.71 we generated $10,800,000,000 of operating cash flow. Cash distributions from equity affiliates were 1,700,000,000 including $574,000,000 from CPChem.

Speaker 3

We ended 2022 with a net debt to capital ratio of 24%. Our adjusted after tax return on capital employed for the year was 22%. Slide 6 shows the change in cash during the year. We started the year with $3,100,000,000 in cash and generated record cash flow during the year. Cash from operations was $10,800,000,000 We received net loan repayments from Equity Affiliates of $590,000,000 During the year, we paid down $2,400,000,000 of debt.

Speaker 3

This includes $430,000,000 of debt paid down by DCP Midstream Since we began consolidating effective August 18, we funded $2,200,000,000 of capital spending And returned $3,300,000,000 to shareholders, including $1,500,000,000 of share repurchases. The other category includes the redemption of DCP Midstream's Series A preferred units of $500,000,000 Our ending cash balance increased by $3,000,000,000 to $6,100,000,000 Slide 7 summarizes our 4th quarter results. Adjusted earnings were $1,900,000,000 or $4 per share. The $11,000,000 decrease in the fair value of our investment in Novonix reduced earnings per share by $0.02 We generated operating cash flow of $4,800,000,000 including a working capital benefit of $2,100,000,000 And cash distributions from equity affiliates of $261,000,000 Capital spending for the quarter $713,000,000 including $410,000,000 for growth projects. We returned $1,200,000,000 to shareholders Through $456,000,000 of dividends and $753,000,000 of share repurchases.

Speaker 3

We ended the quarter with 466,000,000 shares Moving to Slide 8. This slide highlights the change in adjusted results by segment from the Q3 to the Q4. During the period, adjusted earnings decreased $1,200,000,000 mostly due to lower results in refining and Marketing and Specialties. In the Q4, we made certain changes to the composition and reporting of our operating segment results. Our slides reflect these changes, and prior period results have been recast for comparative purposes.

Speaker 3

The 2022 2021 quarterly information Has been recast and is included in our supplemental information. Slide 9 shows our midstream results. 4th quarter adjusted pretax income was $674,000,000 compared with $608,000,000 in the previous quarter. Transportation contributed adjusted pretax income of $237,000,000 up $8,000,000 from the prior quarter. NGL and other adjusted pretax income was $448,000,000 compared to $412,000,000 in the 3rd quarter.

Speaker 3

The increase was primarily due to record fractionation volumes as well as a full quarter of consolidating DCP Midstream, Sand Hills Pipeline and Southern Hills Pipeline. The fractionators at the Sweeny Hub averaged a record 565,000 barrels per day, reflecting the start up of Frac 4 at the end of the 3rd quarter. The Freeport LPG export facility loaded a record 271,000 barrels per day in the 4th quarter. Our Novonix investment is mark to market each quarter. The fair value of the investment, including foreign exchange impacts, Decreased $11,000,000 in the 4th quarter compared with a decrease of $33,000,000 in the 3rd quarter.

Speaker 3

Turning to Chemicals on Slide 10. Chemicals had 4th quarter adjusted pretax income of $52,000,000 Compared with $135,000,000 in the previous quarter. The decrease was mainly due to lower margins and volumes, Partially offset by decreased utility costs and the impact of legal accruals in the Q3. Global Olefins and Polyolefins utilization was 83% for the quarter, Reflecting planned turnaround activities and the impact of the winter storm in December. Turning to refining on Slide 11.

Speaker 3

Refining 4th quarter adjusted pretax income was $1,600,000,000 down from $2,900,000,000 in the 3rd quarter. The decrease was primarily due to lower realized margins. Our realized margins decreased by 27% to $19.73 per barrel, While the composite 321 run adjusted market crack decreased by 16%. Turnaround costs were $236,000,000 Good utilization was 91% in the 4th quarter and clean product yield was 86%. Slide 12 covers market capture.

Speaker 3

We are now using a composite 321 RIN adjusted market crack to be more consistent with peers and more comparable to our realized margin. The 321 RIN adjusted market crack for the Q4 was $23.58 per barrel compared to $28.18 per barrel in the 3rd quarter. Realized margin was $19.73 per barrel and resulted in an overall market capture of 84%. Market capture in the previous quarter was 95%. Market capture is impacted by the configuration of our refineries.

Speaker 3

We have a higher distillate yield and lower gasoline yield than the 321 market indicator. During the Q4, the distillate crack increased $8 per barrel The gasoline crack decreased $10 per barrel. Losses from secondary products of $3.59 per barrel We're $0.09 per barrel higher than the previous quarter. Our feedstock loss of $0.03 per barrel was $1.45 per barrel improved The other category improved realized margins by $0.46 per barrel. This category includes freight costs, clean product realizations and inventory impacts.

Speaker 3

4th quarter was $6.66 per barrel less than the previous quarter, primarily due to lower clean product realizations and inventory timing. Moving to Marketing and Specialties on Slide 13. Adjusted Q4 pretax income was $539,000,000 compared with $828,000,000 in the prior quarter, Mainly due to lower domestic and international marketing margins. On Slide 14, the Corporate and Other segment had adjusted pretax costs $280,000,000 $34,000,000 higher than the prior quarter. The increase was mainly due to higher net interest expense, As well as a transfer tax related to a foreign entity reorganization and higher employee related expenses.

Speaker 3

Slide 15 shows the change in cash during the Q4. We had another strong quarter of cash generation. We started the quarter with a $3,700,000,000 cash balance. Cash from operations was $2,700,000,000 excluding working capital. There was a working capital benefit of $2,100,000,000 mainly reflecting a reduction in inventory and a decrease in our net accounts receivable position.

Speaker 3

We received a loan repayment from an equity affiliate of $426,000,000 During the quarter, we repaid $500,000,000 senior notes due April 2023 and funded $713,000,000 of capital spending. We returned $1,200,000,000 shareholders through dividends and share repurchases. Additionally, the other category includes the redemption of DCP Midstream's Series A preferred units $500,000,000 Our ending cash balance was $6,100,000,000 This concludes my review of the financial and operating results. 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-90s.

Speaker 3

In refining, we expect the Q1 worldwide crude utilization rate to be in the mid-80s and turnaround expenses to be between 240 $270,000,000 We anticipate 1st quarter corporate and other costs to come in between $230,000,000 $260,000,000 For 2023, refining turnaround expenses are expected to be between $550,000,000 $600,000,000 We expect corporate and other costs to be in the range of $1,000,000,000 to $1,100,000,000 for the year. We anticipate full year D and A of about $2,000,000,000 And finally, we expect the effective income tax rate to be between 20% 25%. 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 Our first question today comes from Neil Mehta of Goldman Sachs. Please go ahead, Neil. Your line is open.

Speaker 4

Yes. Good morning, good afternoon, guys. I guess the first question I have is around refining. And if I try to isolate what the market is reacting to today, I think it's the capture rate Surprised folks relative to a lot of your large cap peers. And so maybe you can simplify it for us and talk about What you're seeing in the system, is there anything that you feel was more temporary versus structural?

Speaker 4

And give us confidence that That capture rate is going to continue to improve as we think about the progression through the year.

Speaker 5

Hey, Neil, Rich here. Yes, that's a really good question. When I look at the capture rate for the Q4, The three simple things that stand out to me are really the impact of our turnaround activity. That's the first one. It was Centric in the Gulf Coast and the Pacific Northwest.

Speaker 5

And the Pacific Northwest was an actual entire refinery shutdown that Shouldered the 3rd Q4 of the year.

Speaker 6

So I

Speaker 5

look at those as temporaries. There was also some product differentials that played out across our system. The Atlantic, the difference between the European Displate price and the New York Harbor price is reflective in that market capture. There was significant reduction in Diesel price there in Europe as well as the turnaround effect in the Pacific Northwest and also Northern California Product prices were dislocated from the Los Angeles marker as well. And the 3rd influence in 4th quarter capture was really centric around the Keystone shutdown of the pipeline as well as the winter storm events in there.

Speaker 5

So that's when I look at those three effects, there's the majority of the impact associated with the capture rate in the Q4.

Speaker 1

I might just add the turnaround activity occurred in October early November, which was the highest margin part of the quarter.

Speaker 4

The follow-up to that is just as we think about Q1, How do some of these dynamics potentially reverse, especially given it's going to be a pretty heavy turnaround Quarter, it looks like with the utilization guys in the mid-80s or do we really see that improvement materializing potentially more Q2 through balance of the year?

Speaker 5

Well, I'll start with the turnaround guidance part of that and then kick it over to Brian. He can talk about the market outlook a little bit there So our Q1 turnaround, as you can tell by our guidance there that Kevin provided, Our annual guidance is in the $550,000,000 to $600,000,000 range. And our Q1 is a majority of that spend. So we are Heavy centric first quarter on our turnarounds, and those are primarily related in just a couple of sites. So I don't I see that as really impactful to our Atlantic Coastal operations there as the biggest part of that impact on the turnarounds.

Speaker 5

There is also some Gulf Coast Turnaround activity as well that is less impactful. So although there is a heavy spend, it's Centric really in one primary

Speaker 7

And I would add in talking about European to New York distillate prices and Pacific Northwest and Bay prices to LA, They should both normalize. We saw New York is over Europe. That's unusual. Europe imported a lot of Russian distillate Prior to the price cap next week and New York because of the winter storm didn't get all the barrels that So the reason why New York is over Europe now is it's a prompt issue. And if you look at Colonial Pipeline, it's running at full rates now.

Speaker 7

New York will get Fed back and then Europe will be over or under or over New York rather going forward. And in Pacific Northwest and Bay versus LA, That was a that's a temporary issue as well. Pad Refineries ran really well in November December, which saw inventories Really build across the markets and given the oversupply the markets needed to price to incentivize exports And the infrastructure for exports is in the Bay and Pacific Northwest, so that's where the exports came from. And also, we need to aggregate barrels for the So some of the barrels that normally went to LA didn't go to LA at that time. So that increased the LA price, decreased the Pacific Northwest and Bay price.

Speaker 7

But going forward with heavy Pacific Northwest turnarounds and work in the Bay, we'd expect inventories to moderate as we get back to seasonal demand spreads Between the North and South, they'll come back into normal areas.

Speaker 4

Thanks guys. Appreciate

Speaker 2

it. Thanks Neil.

Speaker 8

Thanks Neil.

Operator

Our next question today comes from Doug Leggate with Bank of America. Please go ahead Doug.

Speaker 9

Thank you. Good morning everyone. I wonder if

Speaker 10

you wouldn't mind, I'm going

Speaker 9

to try and hi, good morning. I'd like to build on Neil's question, if I may, but ask it a little differently. Is there any way, Kevin, that you can quantify the lost opportunity cost in the Q4 to help us kind of Reconcile that capture rate question, is that possible?

Speaker 5

Yes, Doug, that's

Speaker 3

We've historically not done that in terms of what we've put out there Into the market, we've talked about the kind of areas where that has shown up and Rich walk you through that. But It is a in any given period, there's invariably some element of LPO component. And certainly, what we saw in the Q4 was quite a bit higher than what I would consider. I mean, ideally, you don't want any of it, but There's usually some degree of that. It was significantly higher than that.

Speaker 3

So not something we've historically given out. But I guess to give you some help, it's probably the number is probably in the order of €100,000,000 to €200,000,000 of LPO in the quarter.

Speaker 9

Okay. I guess my thank you for that. I know

Speaker 8

it's a tough tricky one

Speaker 9

to answer. So my follow-up is really more of a kind of an outlook question, and it Speaks to your comments about Northeast. I realize everyone is probably pushing product up to the Northeast during the winter Because of all the noise around heating oil margins. But it occurs to us that, that was probably the first normal winter Without Philadelphia Energy Solutions, in 2019, it went on fire. It hasn't come back since.

Speaker 9

So now we think about what does the Northeast look like In a normal summer driving season without Philadelphia Energy Solutions. And I'm just curious if you have given that any thought, Given that you did push product up to the Northeast, how you're thinking about what the gasoline market could look like in the summertime in the U. S?

Speaker 7

Yes, I think it's always an import market for gasoline, typically up to 800,000 barrels a day. We do expect that to continue Being an import market, the imports may come from different locations in the future, but we would expect that we still need to import gasoline About that level.

Speaker 9

I guess, what I'm asking is, do you see the risk of an outside spike in gasoline the way we I know so speaking, Kitty Moyle in the Northeast.

Speaker 7

I would say any market that is short and needs resupply and the resupply comes from some distance away has that opportunity for Supply comes from some distance away, has that opportunity for volatility, same thing that happens on the West Coast. West Coast resupply is further away, 4 weeks away And then on the PADD 1, but anytime resupply isn't close, you have that opportunity of volatility.

Speaker 11

I think the other thing I'd

Speaker 1

add is you look at gasoline, diesel and jet inventories, they're all below 5 year ranges. And It looks to us as though we've got an above average industry refining turnaround period planned for the spring. So It looks tight from our vantage point.

Speaker 9

That's kind of what we're thinking. Thanks so much, guys. I know it's a tricky one to answer. I appreciate your perspective.

Speaker 2

Thank you, Doug. Our

Operator

next question today comes from Roger Read with Wells Fargo. Please go ahead, Roger.

Speaker 12

Yes. Good morning, everybody. I guess I'll continue with the theme of Hammering on capture and expectations of capture. Just curious why this quarter to change The index that you're using and then, I know you've explained the gasoline and the diesel aspects of configuration, I guess, makes sense. What Maybe went on with secondary products and is that something that we might see Carry through to 23 here.

Speaker 3

So Roger, when you say index, you're referring to the market crack, The RIN adjusted market crack change?

Speaker 12

Yes, your market indicator, yes.

Speaker 3

Yes, yes. Really, it's we're setting up for We've talked about this for a while, and we're setting up for 2023. And the cleanest way to make that Change is to do it in the Q4, and that enables us to restate and or recast in our supplemental information the prior 2021 2022 all on that same basis. And then the first results we report for 2023 will be on that same basis. And so it's just the cleanest timing To make a change like that, it's something we've considered for a little while, but we thought it was the appropriate thing to do.

Speaker 5

Yes. And then the secondary products, I'll kick that off and then turn it over to Brian maybe for some outlook on it. But Q3 to Q4 In Refinery, we still have those relatively flat actually. There are some puts and takes associated with that. The asphalts and fuel oils Drop off in price and volume, but butane picks up and offsets a lot of that.

Speaker 5

So the overall impact of our secondary products is relatively flat Quarter over

Speaker 7

quarter. I'd say we continue to think that high sulfur fuel oil will remain weak just with all the Russian cargoes coming on the market And heavy crude cargoes coming out in the market. So I think we'll continue to see that in the market.

Operator

Our next question comes from John Royall of JPMorgan. Please go ahead, John.

Speaker 6

Hey, guys. Good morning. Thanks for taking my questions. So just hoping for a little more color on the DCP synergies You called out in your press release, I think $300,000,000 I think you've probably been pretty anxious to speak about those numbers. And so any buckets you can speak to anything on timing and how that should plays in?

Speaker 2

Yes. I think, John, the $300,000,000 really falls in Two categories, operating synergies that we're actively pursuing upfront now even before the close of the roll up of the Publicly held units. And then there's I think even more prolific commercial synergies that we can capture As we combine or as we roll the business into our own, Tim, you can provide a little more color there. Yes. At this point, Mark is correct.

Speaker 13

Look, we're looking at this. It's going to probably over a timeframe, we came out with $300,000,000 I think it's probably about a third regard to cost, you got 2 thirds on the commercial side. We're anticipating this is going to take us around 2 years to fully capture this. Like anything else, once you get into it further and deeper, we're hoping there's more there and initial indications are that they're likely are. Hopefully, I can update you in another call later to validate or confirm that.

Speaker 13

But we do see the commercial is probably driving that. It just makes sense. When you look at an integrated value chain, you put these two entities together. We, in effect, now have Gas processing in the key regions, we now have fractionation capacity at Conway, Mount Bellevue, also at Sweeny And long haul pipelines coming in out of the DJ and coming out of the Permian, when you look at those, there are tremendous opportunities to make sure that the barrel gets to the right place. And in our world, the right place means where it creates the most value.

Speaker 13

So as we dig further on that, like I said, we're looking forward to giving you more details going forward.

Speaker 6

Okay. Thank you. That's helpful. And then just looking at the chemicals market, do you expect that we've seen a bottom there? And How does China reopening impact the future of that market?

Speaker 6

And then let's just say hypothetically, the market doesn't improve from here. Is there any risk of CPChem's ability to self fund the 2 growth projects?

Speaker 2

Yes. I think John that you've seen at the ethane and at

Speaker 4

the full

Speaker 2

polyethylene value chain margins kind of hit bottom. Those producers that were really squeezed pulled back on production, so you can see that clearly We've hit a point where there's great discipline and nobody's going to operate while they're bleeding cash and we've kind of passed through that period. Margins have modestly ticked up. And you'll continue to see as the Capacity that's coming online in North America gets digested. We'll be at that bottom for some time, but then start to work our way out because demand Globally continues to increase and China is certainly an upside and there are a number of signs that China is coming back.

Speaker 2

We're not going to call that they're back. I think it could come in fits and starts, but certainly the noise coming out of China is productive Directionally.

Operator

Our next question comes from Ryan Todd with Piper Sandler. Please go ahead, Ryan.

Speaker 5

Great. Thanks. Maybe starting out

Speaker 11

with 1 on shareholder returns. The buyback was strong this quarter. We think about 2023 going forward, you've provided guidance at the recent Analyst Day that would suggest something on the order of $500,000,000 to $700,000,000 a quarter of buyback in a mid cycle environment. We're clearly above the mid cycle environment. You're at the high end of the guided pace this quarter.

Speaker 11

How should we think about the use of that excess cash? Should the backdrop remain very How aggressive might you look to be on shareholder returns versus building more cash on the balance sheet?

Speaker 3

Yes, Ryan, it's Kevin. So you're right, we did the high end of the range in the Q4, and I think it's reasonable to assume that we would continue somewhere roundabout that level. We're also we're sitting on a Decent healthy cash, ended the year just over $6,000,000,000 And just to give some context to The overall balance sheet condition relative to where we were before the pandemic, over the pandemic, we added $4,000,000,000 and I'm ignoring the impact of BCP Debt consolidation here, we added $4,000,000,000 over the pandemic. We subsequently paid off $3,500,000,000 of that, but we've improved our cash position by 4,500,000,000 dollars since the end of 2019. So net net, we've enhanced the balance sheet by $4,000,000,000 from where we were going Into the pandemic.

Speaker 3

And so that gives us all that flexibility. But we've also got the DCP roll up to take care of, which we expect be sometime in the Q2. So that's a $3,800,000,000 transaction. And while we won't use all cash for that, we want to make sure that we retain plenty of As we go into that and close on that rollout. But I do think what it all speaks to, if we continue to see these above Mid cycle conditions, we will have some good flexibility to I would say really do a bit of all of it.

Speaker 3

We'll want to Pay off some incremental debt, especially as we think about the impact of the DCP roll up, but we should also be positioned to look at The cash returns to shareholders, both in the context of the dividend, we would expect to increase the dividend. This year, we remain committed to a And we'll look at the buyback pace. We're clearly at a very healthy level today, But there is potential flexibility on that. And so we'll it's something that we'll prioritize and keep very focused On, but in the near term, we're probably pretty comfortable with where we are given that we've got the DCP transaction out there ahead of us.

Speaker 11

Thanks, Kevin. And then maybe shifting gears somewhere else. I wonder if you could Discuss a little bit about what you're seeing and what you expect going forward in European refining. There's some big moving pieces In recent months, the natural gas spread between Europe and the U. S.

Speaker 11

Has declined significantly and you've got an upcoming Russian product ban going into effect. What are you seeing in the market right now and any thoughts on expectations in the coming months?

Speaker 7

I think with natural gas coming off some, we're not Maybe Rich can talk about the natural gas issues

Speaker 5

at the plant. So natural gas for us certainly has some impact on our operations, Primarily for the purchase of electricity, but we see that really not as a disadvantage to our peers either. So The competitive nature of refining will continue to be there with some cost impacts associated with higher natural gas And that's numbers we've put out in the past that are still in play today as well. The challenge For that will be the continued impact of the Russian supply scenarios and then the resupply Arb, that will set the really the minimum price for those marketplaces and we'll see how that shapes up here as the market moves forward.

Speaker 2

I'd like to circle back. I didn't I don't think I covered one of the questions that John asked around CHEMs and that's the risk The market risk of CPChem generating enough cash to self fund these two projects, both of those projects, they own 30% of The Ross Lofan project, 51 percent of the U. S.-based project, both will be off balance sheet project finance mitigating their cash outflows, So mitigating our exposure there. So you can never predict that there is no risk, but I think It's highly mitigated because of the debt structuring they're going to undertake to support those projects.

Operator

The next question comes from Paul Chan with Scotiabank. Paul, please go ahead. Your line is open.

Speaker 8

Hi, guys. Good morning.

Speaker 1

Good morning.

Speaker 8

Can I or maybe for Kelvin, we go back into the CPC with the 2 major crackers is going to be under construction? How is the CPC distribution to Terence for the next several years, we should assume. Should we assume that Yes, it's going to be quite minimum and that they will fill up their own financing and also some cash Given that there's a heavy spending ahead or that you think that the decision is that they will just Use more of that capacity and continue to pay out?

Speaker 2

Well, if you look again, if you look at those projects If you look at the assumptions on project financing, I think we had talked about earlier, maybe even at Investor Day, that our exposure To foregone dividends is really probably about 10% of the aggregate capital spend if you look at those 2 projects combined and that's spread out Over 4 years. So it's not a major impact on our ability to generate cash overall. Kevin, do you want

Speaker 5

to add on that?

Speaker 3

Yes. So just to expand on that a little bit, when Mark talks about off balance sheet financing, Yes, specifically referring to project level financing. So financing those projects at the Russell Fund Petrochemical project level and at the Golden Triangle Polymers project level, so that's not on CPChem's balance sheet. And we're not anticipating that TPChem would have to go to its own balance sheet to fund its equity contributions into those joint ventures to fund Those projects and in fact, we'll still be able to do that and continue making distributions to the owners. Obviously, there is a dependency on what the overall market Environment looks like, but based on what we're seeing, we still expect to be receiving distributions from CPChem through this period.

Speaker 3

Clearly, there's an impact. Anything, any discretionary spend by CPChem into a capital investment is Cash is not available for distribution out, but it's all pretty manageable within the overall expectation of where their cash flows will be.

Speaker 8

Kevin, do you have any rough estimate whether you expect CPC to essentially pay out their earning 100% or 50% or 75% or any estimate that you have?

Speaker 3

Yes. Well, you would expect it to be less than 100%, because they do have the capital Projects underway. So there's the 2 big ones that we've been talking about, and then there's a slate of smaller projects, several of which will actually finish This year, so it's going to be less than 100%. We've never given specific guidance on what we expect the distributions to be. And our history has actually been pretty strong with regard to cash coming back from CPChem.

Operator

Our next question comes from Jason Gabelman with Cowen. Please go ahead, Jason. Your line is open.

Speaker 14

Hey, good afternoon. I wanted to first ask on M and A and midstream and I know when you rolled up PSXP, part of the rationale was to have more flexibility across the whole Portfolio and you've obviously brought in DCP. So I wonder on the other side, is there Any desire to re optimize some of the midstream assets that you have in the portfolio that may not be core at this point? And then my second question is just on the marketing business, which has continued to perform pretty well. I was wondering if there were Any dynamics in your markets that continue to support margins?

Speaker 14

And is there an outlook that margins Can maybe be above mid cycle in that business for 2023? Thanks.

Speaker 13

Yes. Jason, this is Tim Roberts. I'll handle that front end and hand it off to Brian.

Speaker 2

I think it's important, you're right.

Speaker 13

We did talk about simplifying our overall structure And you got PSXP done in the process of completing DCP. We do think we'll be in a much cleaner position with Regards to ownership levels and just have a cleaner slate to work from. We do recognize as well that this market is evolving. There's consolidation going on in the industry. Producers are consolidating.

Speaker 13

You'll see some of the midstream infrastructure guys doing that too. So we're going to pay attention to that and what's Tapping out there if there's opportunities, but I think it's probably going to be real clear as we've got a task at hand. Our task at hand right now is to get DCP integrated and integrated well. We want to be successful at it. It's going to take us, we believe, somewhere towards the end of the year.

Speaker 13

It may leak into 2024, But our expectation is to get it done by the end of this year and deliver the synergies.

Speaker 2

You throw multiple on those,

Speaker 13

and that's pretty impactful with regard to the value of the company. So we want to do that, but do rest assure not that we're out on any spending spree. We always have an eye open what's going on out there and what can create value for our shareholders. And if there's something that's really compelling, we'll talk about it and see if it makes sense. But right now, let's get this thing integrated successfully.

Speaker 7

On the marketing business, I'd say that we will continue to perform well, Perhaps not as well as 2022, that was a record year. But with increased volatility in market that generally drives Better Business. We also had a joint venture retail record year last year, and we continue to grow our retail joint venture in the U. S. And That continues to perform.

Speaker 7

Also, there are issues in the European market that have helped us. Even things like Our credit card business has been helpful to growing our business. So I think we'll continue to grow the business. You'll see the earnings strong, Perhaps not quite as strong as 2022.

Speaker 14

Thanks for the answers.

Operator

The next question comes from Matthew Blair of Tudor, Pickering, Holt. Please go ahead.

Speaker 10

Hey, good morning. Thanks for taking my question. I want to ask about these WCS discounts. So they're pretty favorable. Could you talk about what's driving that?

Speaker 10

And will you be able to capitalize on these wide WCS discounts in Q1 In the Central Corridor. And then finally, how do you think the Trans Mountain expansion might affect these discounts? Thanks.

Speaker 7

Well, we'll start with WCS differentials. There were a number of things that were kind of pushing and pulling on supply and demand. Inventories north of the border in Canada have been very high, then you had Keystone off the market for 22 days, which was 10,000,000 barrels off the market. North of the border, you had about 4,000,000 barrels of production off the market in December and another 500,000 barrels off the market in January. And then you had the winter storm where refiners shut down.

Speaker 7

There was 27,000,000 barrels of crude backed out. Not all of that's heavy crude, Refiners weren't pulling as much of the WCS. So all of that is going to add all that up. It meant that WCS dips were weaker than they have been. TMX provided an update in early January that they said that their 75% of the pipe is now in the ground.

Speaker 7

They haven't changed their in service date for Q4 of This year, our internal expectations are that start up will slip into 2024 and full rates won't be achieved immediately. We don't think you need another pipeline to exit the product that's in Canada. So we don't see it Doing much. The first call for those barrels will always be PADD II and PADD III Before they go to China or anywhere overseas, so they'll have to price to get into those markets.

Speaker 10

Great. Thank you.

Speaker 9

Thanks, Matt.

Operator

Next, we have a follow-up question from Paul Cheng from Deutsche Bank. Please go ahead.

Speaker 8

Hey, guys. Just real quick, Because of the Keystone downtime, can you share that how much is the WCS that you run In the Q4? And then what do you expect you're going to run-in the Q1? And also, I believe Wood River after the turnaround actually has been running at a pretty depressed way, I think at one point about 60%, 65%. And where are we in the Wood River?

Speaker 8

Thank you.

Speaker 7

So we generally don't for commercial reasons talk about what we run into refineries and how much we run. But of course Wood River had some hiccups in Q4. We ran less WCS in our system than normally. We are the largest importer of Canadian crude To the U. S, we expect as Wood River comes back up, we'll run more.

Speaker 7

Rich, maybe you can talk about where we are in Wood River?

Speaker 5

Yes. So Wood River, there was an unplanned event incident that occurred at Wood River. And Let me start by saying our thoughts and prayers are out for the affected employees, contractors and their families that were associated with that Avan, but there was an incident there. We are working diligently right now to increase the utilization That was affected by this. And we expect that utilization to continue to increase through the Q1 and return to normal operations in early 2nd quarter What is our current outlook on that, Paul?

Speaker 8

Okay. Can you tell us that what's the current one way of Wood River?

Speaker 5

Do we normally give guidance by plant? Yes. Unfortunately, Paul, we don't give that type of guidance by plant As to what our current run rates are.

Operator

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

Speaker 1

Thanks, Emily. Thank all of you for your interest in Phillips 66. If you have questions after today's call, please call me or Owen Simpson. Thanks for your time.

Operator

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

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Earnings Conference Call
Phillips 66 Q4 2022
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