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spk00: Welcome to the second quarter 2021 Phillips 66 earnings conference call. My name is Hillary 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. I will now turn the call over to Jeff Dietert, Vice President, Investor Relations. Jeff, you may begin.
spk16: Good afternoon and welcome to Phillips 66 second quarter earnings conference call. Participants on today's call will include Greg Garland, Chairman and CEO, Mark Lazor, 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 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&A session. 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 Greg.
spk05: Thanks, Jeff. Good afternoon, everyone, and thank you for joining us today. In the second quarter, we had adjusted earnings of $329 million. We generated operating cash flow of $1.7 billion. Excluding working capital, operating cash flow was $910 million. With the benefit of our diversified portfolio, we generated cash flow in excess of capital spending and dividends during the quarter. We returned $394 million to shareholders through dividends in the quarter. Since we formed as a company, we've returned over $28 billion to shareholders. A secure, competitive dividend will continue to be a top priority for our company, and we anticipate a return to dividend growth as cash flow recovers. We're committed to disciplined capital allocation, focusing on debt repayment in the near term to support a conservative balance sheet and maintain our strong investment grade credit ratings. In July, the Phillips 66 Board of Directors appointed Denise Cade and Doug Tarrison to serve as independent directors. We continue to work on board refreshment, recognizing the value of diversity in terms of gender, age, race, ethnicity, tenure, professional experiences, and perspectives. We'd like to highlight our recent 2021 sustainability report that can be accessed on our website. We think it's one of our best ones yet. Our commitment to sustainability is based on operating excellence, environmental stewardship, social responsibility, and financial performance led by strong corporate governance. We expanded our commitment to environmental responsibility, setting goal for all of our refineries to achieve top third energy efficiency by 2030. We modified our compensation program to add additional environmental goals. As previously communicated, we will establish meaningful and achievable greenhouse gas emission reduction targets later this year. So with that, I'll turn the call over to Mark to provide some additional comments.
spk04: Thanks, Greg. Good afternoon, and thanks to everyone on the call for joining us today. Continue to improve demand across CP Chem's product lines and resilient operating recovery from the first quarter winter storms contributed record quarterly earnings in our chemical segment. Marketing and specialties reported strong results as demand increased in many of our key domestic regions. Our midstream segment recovered well from the first quarter winter storms to report solid results. Headwinds continued in our refining segment as rent-adjusted refined product cracks only improved modestly, and historically low market capture contributed to continued losses. As more people across the globe are vaccinated, we expect continued economic recovery and further improvement in global refined product demand. In addition, permanent refinery closure announcements have increased to over 3.7 million barrels per day globally, with additional closure announcements expected. In midstream, Phillips 66 Partners continued construction of the C2G pipeline. The project is backed by long-term commitments and is expected to be operational in the fourth quarter of this year. At the Sweeney Hub, we recently resumed construction of Frac 4, which will add 150,000 barrels per day of capacity. Upon completion, which is expected in the fourth quarter of 2022, total Sweeney Hub fractionation capacity will increase to 550,000 barrels per day. The fracts are all supported by long-term commitments. CP Chem continues to develop two world-scale petrochemical facilities on the U.S. Gulf Coast and in Ras Lufan, Qatar. We expect a final investment decision for the U.S. Gulf Coast project next year. The Ras Lufan petrochemical project is progressing with front-end engineering and design as planned. Both projects are in partnership with Qatar Petroleum. In addition, CP Chem began construction of its second world-scale unit to produce 1-hexene, utilizing CP Chem's proprietary technology. 1-hexene is used for high-performance polyethylene manufacturing and is common in a variety of everyday products, including packaging for food, consumer products, and pharmaceuticals. The unit, located in Old Ocean, Texas, will have a capacity of 266,000 metric tons per year and is expected to start up in 2023. In May, CP Chem was recognized by the Plastic Industry Association for being among the top 2021 industry innovators in sustainability. The award recognizes CP Chem's launch of Marlexa New Circular Polyethylene, which uses advanced recycling technology to convert plastic waste into high-quality raw materials. We continue to advance our Rodeo Renewed project at the San Francisco refinery. In July, we reached full production rates of 8,000 barrels per day of renewable diesel from the Hydrocreator conversion. Subject to permitting and approvals, full conversion of the facility is expected in early 2024. Upon completion, Rodeo will 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. Rodeo, combined with our portfolio of other renewable fuels projects, has the potential to supply 1 billion gallons of renewable fuels per year. In marketing, we're converting 600 Brandtel retail sites in California to sell renewable diesel produced by the Rodeo facility. In Switzerland, our co-op retail joint venture continues to add hydrogen fueling stations. Through our joint venture, we're exploring hydrogen as a fuel option for heavy-duty vehicles to support European low-carbon goals and growing demand for sustainable fuels. We're moving forward and preparing for the future while maintaining our focus on safe, reliable operations and attractive shareholder returns. Now, I'll turn the call over to Kevin to review the financial results. Thank you, Mark.
spk02: Hello, everyone. Starting with an overview on slide four, we summarize our second quarter results. We reported earnings of $296 million. Excluding special items, we had adjusted earnings of $329 million, or 74 cents per share. We generated operating cash flow of $1.7 billion, including a working capital benefit of $833 million, and cash distributions from equity affiliates of $612 million. Capital spending for the quarter was $380 million, including $179 million for growth projects. We paid $394 million in dividends. Moving to slide five. This slide shows the change in adjusted results from the first quarter to the second quarter, an increase of $838 million. Pre-tax income improved across all segments with the largest contribution from chemicals. Our adjusted effective income tax rate was 19%. Slide six shows our midstream results. Second quarter adjusted pre-tax income was $316 million, an increase of $40 million from the previous quarter. Transportation contributed adjusted pre-tax income of $224 million, up $18 million from the previous quarter. The increase was due to improved volumes from higher refinery utilization, partially offset by higher costs due to the timing of maintenance and asset integrity work. NGL and other adjusted pre-tax income was $83 million. The $47 million increase from the prior quarter was mainly due to low operating costs and higher volumes, reflecting recovery from the winter storms. The Sweeney Fractionation Complex averaged 380,000 barrels per day, and the Freeport LPG export facility loaded a record 42 cargoes in the second quarter. DCP midstream adjusted pre-tax income of $9 million was down $25 million from the previous quarter, mainly due to lower mark-to-market hedging results from higher natural gas and NGL prices. Turning to chemicals on slide 7. Second quarter adjusted pre-tax income was $657 million, up $473 million from the first quarter. This is the highest quarterly earnings for chemicals since the joint venture was formed in 2000. Orphans and polyolefins adjusted pre-tax income was $593 million. The $419 million increase from the previous quarter was driven by strong demand, tight supplies, and recovery from the winter storms that contributed to higher margins and lower utility costs. The industry chain margin increased over 17 cents per pound to a record 62 cents per pound. Global O&P utilization was 102% for the quarter. Adjusted pre-tax income for SANS increased $55 million. The increase primarily reflects improved margins due to tight industry supplies following the winter storms, as well as lower turnaround costs. During the second quarter, we received $322 million in cash distributions from CP Chem. Turning to refining on slide eight. Refining second quarter adjusted pre-tax loss was $706 million, an improvement of $320 million from the first quarter The improvement was driven by lower utility and turnaround costs and higher volumes. This was partially offset by lower realized margins. Improved market crack spreads were more than offset by higher RIN costs, lower electricity sales in the Texas market, decreased secondary product margins, lower clean product differentials, and inventory impacts. Pre-tax turnaround costs were $118 million, down from $192 million in the prior quarter. crude utilization was 88% compared with 74% last quarter. The second quarter clean product yield was 82%. Slide 9 covers market capture. The 3-2-1 market crack for the second quarter was $17.76 per barrel compared to $13.23 per barrel in the first quarter. Realized margin was $3.92 per barrel and resulted in an overall market capture of 22%. Market capture in the previous quarter was 33%. Market capture is impacted by the configuration of our refineries. Our refineries are more heavily weighted toward distillate production than the market indicator. During the quarter, the gasoline crack improved $5.68 per barrel, while the distillate crack increased $2.20 per barrel. Losses from secondary products of $2.38 per barrel were $1.09 per barrel higher than the previous quarter as crude prices strengthened. Feedstock costs improved $0.36 per barrel compared to the prior quarter. The other category reduced realized margins by $7.84 per barrel. This category includes RINs, freight costs, lean product realizations, and inventory impacts. Moving to marketing and specialties on slide 10. Adjusted second quarter pre-tax income was $479 million compared with $290 million in the prior quarter. Marketing and other increased $181 million due to higher domestic margins and volumes reflecting strong demand in key markets. Refined product exports in the second quarter were 216,000 barrels per day. Specialties generated second quarter adjusted pre-tax income of $87 million up from $79 million in the prior quarter. Slide 11 shows the change in cash for the quarter. We started the quarter with a $1.4 billion cash balance. Cash from operations was $1.7 billion. This included a working capital benefit of $833 million. In June, we received a $1.1 billion U.S. federal income tax refund, which is reflected in working capital. cash from operations excluding working capital was $910 million, which more than covered $380 million of capital spend and $394 million for the dividend. The other category includes a $90 million loan to our WRP joint venture. Our ending cash balance was $2.2 billion. This concludes my review of the financial and operating results. Next, I'll cover a few outlook items. In chemicals, we expect the third quarter global O&P utilization rate to be in the mid-90s. In refining, crude utilization will be adjusted according to market conditions. In July, utilization averaged around 90%. We expect third quarter pre-tax turnaround expenses to be between $120 and $150 million. We anticipate third quarter corporate and other costs to come in between $240 and $250 million pre-tax. Now we will open the line for questions.
spk00: 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. If you have a question, please press star, then 1 on your touch-tone phone. If you wish to be removed from the queue, please press the pound key. If you are using a speaker phone, you may need to pick up the handset first before pressing the numbers. Once again, if you have a question, please press star then 1 on your touch-on phone. Your first question comes from the line of Neil Mehta with Goldman Sachs.
spk15: Good morning, team. Thanks for taking the questions. The first one is just on chemicals. And Mark, this might be for you. Kevin indicated that the indicator was 62 cents, which is very robust and above mid-cycle. In Q2, how do you see it playing out in July and August so far? And just any thoughts on what the mid-cycle number has been? I think you guys have been in the 25-cent camp, if I remember. Is that view changed in light of recent margin strength?
spk04: Yeah, thanks, Neil. It's a great question. We're still consistent on our mid-cycle margin projection. And, of course, we're well above that today. And as we look out into the third quarter, we're seeing the strength continue in the third quarter. We've got cost increases on the table that are being negotiated as we speak. But even if things went forward just as they are today, we're still at record margins. And we think that that can carry into third quarter. There's a lot of strength in the marketplace, particularly in North America and in Europe. Asia is still kind of lagging but starting to perk up a little bit. So the real story is the fundamental economic resurgence in the U.S., in North America, and in Europe. And we believe that there's some upside that will offset some headwinds out in the future as the rest of the global economy kicks in. We're at record margins. Nobody believes those are sustainable for the long term. However, I think we can go from something at the record level to something that's still pretty robust. We see seasonal downturn typically in the fourth quarter, but we've also seen conditions where we can kind of carry through when there's strong enough marketing momentum, and there may be those kind of conditions now. We're particularly focused on high-density polyethylene, and that's still pretty tight in the marketplace. The inventories have not recovered to where CP Chem would be comfortable operating. And it's unusual to be there this time of year with hurricane season. We typically want to be a little higher in inventories going into hurricane season. So there's a number of factors that could lead to sustain this momentum into the third quarter and beyond into the fourth quarter. We see the world economy kicking in about the same time additional capacity is coming on, say, first half of next year. So there's some good fundamentals out there, and I think it's still got some legs based on the demand that will come to bear as the world economy fully recovers from COVID.
spk16: Neil, we talk about mid-cycle kind of being the 2012 to 2019 average, and if you look at the IHS polyethylene full-chain margin, it's averaged about 30 cents per pound.
spk15: Okay, 30 cents per pound. Okay, that's all great. And then to follow up that, Greg and Jeff, this for you is just thoughts on the refining side of the equation. If the refining system, if you told me the refining system was running at these type of levels, I would have thought that Phillips 66 would have been making free tax profits in the refining system. And so is the U.S. refining system running too hard? And how are you guys thinking about your own utilization of as you get into the fall?
spk04: Yeah, I'll take that question. I think, you know, when you look back over the last quarter, right, I think there were plenty of market signals there for us to run at the utilization rates we were at. There's a lot of moving parts, in particular the cost of RIMS, that just continued to increase throughout the quarter, right? And we take a pretty good hit in refining for the full cost of those RIMS. I think we would have all expected maybe on a global basis Europe and Asia demand to kick back a little better than it did. I think the margins, the rent-adjusted margins that we saw in the second quarter really across our system are very representative of a global market. So until we start seeing recovery, particularly in Europe, because we seem to see product flowing out of Europe into North America and South America, We won't really see RENs get back to where we would like to see them. I think the second piece for us in particular is, you know, our kit is more geared towards heavy crudes making diesel. And certainly for the second quarter, it was a gasoline-driven market without much differential on heavy crudes. We've seen those widen out here now in July to a much more respectable level. So we think it's headed in the right direction. But I think all that added up to being challenged in the second quarter to turn a 90% type utilization number into a profit.
spk05: Brian, you want to comment on what we're seeing today in the market?
spk06: I think in terms of the heavy dips and the sour dips, We've seen them start to expand. LLS to Mars is $2 wider since the beginning of the year. WTI to Maya is $3 wider since the beginning of the year. So I think we have some tailwinds that are going to help us in the second quarter. We expect distillate cracks to perform as we get toward wintertime. So all in all, I think we've also seen actually markets overseas come back. We have marketing in Europe, and we've seen Europe, Germany, where we market 90% to 95% of demand. Austria, where we market 100% of demand. So we've seen those markets come back as well. So as Bob said, if the overseas markets start to come back, that'll help the U.S. cracks, and we should see some profitability in Q3.
spk16: One thing I might add is if you look at the IEA, EIA, OPEC projections, we were kind of shy of 95 million barrels a day, and 2Q projected to get to 99.5 million barrels a day by the end of the year. So expectations for demand to continue to improve in the back half of the year. Great, guys. Thank you.
spk00: Your next question comes from the line of Roger Reed with Wells Fargo.
spk07: Good morning or afternoon as the case may be, I guess now. Jumping back to refining here, I guess one of the questions is, It's obvious that things should improve, but is there anything internally that Phillips has done or would plan to do to, you know, kind of help out on the margin front? Just thinking of any additional changes within your own system or, you know, anything else that might be there, part of the Phillips Advantage program that was laid out almost two years ago now.
spk04: Yeah, Roger, I think – I think there's a couple answers to that question. One, internally, right, we expected tough operating conditions for a good part of this year. You know, recovery's been slower than we expected, but we went into this year trying to reduce some of our heavy maintenance expenses and adjusting turnarounds and all that. And so the guidance Kevin just gave, right, for the third quarter is fairly light for us. So I think that helps heading into the third quarter. profitability, you can translate that as we're available to run. So if the cracks are there, we're going to be able to run pretty hard in the third quarter and make money. Around the Advantage 66 program that we laid out, right, so a lot of that is built around margin enhancement, margin improvement. So I would say we ran pretty well in the second quarter, and using all those tools that are in our toolkit, The value chain optimization activities that went on in the second quarter were pretty robust. We did a lot of things that we haven't done before or needed to do before, such as we ran a lot of resid down into our swinging refinery, where typically we'd be running Maya or some of the heavy Canadians. The profitability really wasn't there, and so optimizing around high-sulfur resids into our system It's just one example of where we're kind of running the circuit. So we're pretty happy with the results we're seeing on the operating front. A lot of our initiatives in refining are around being able to operate well, operate better, operate safer with a smaller environmental footprint, and we're seeing value come out of all of those initiatives. They don't necessarily translate directly to the bottom line where you can see them, but over time they're paying dividends.
spk05: Roger, I think, you know, when I think about kind of Q2 and maybe even Q1, you know, we've had quite a bit of planned FCC downtime this year. So if you look at our yields relative to historical yields, we're probably down 2%. And so we're just simply going to run better in the third quarter and fourth quarter. I think Bob said things tuned up that we're ready to do that. So I think that's one of the things that we're focusing on right now also.
spk07: Okay, great. Thanks. And then one thing that was definitely nice is quarter generating enough cash flow to cover all the outflows. I don't know, Kevin, this question is for you, but as you kind of look, you know, budgeting for the back half of the year, things are as they are today. I think that we've pretty much turned the corner on the COVID world and And Phillips will be in a position to improve the balance sheet, start taking some of the debt down as we go through the next, say, two to four quarters.
spk02: yeah roger certainly would expect to be able to do that i mean obviously we're not back at mid-cycle cash generation yet which is really going to be our sort of key um uh sort of marker in terms of truly being able to get the balance sheet back to where where we need it to be but it's certainly um a nice improvement from where we've been and with the cash balance and if we continue to build that over the course of the year we should be able to start making some inroads into that um And as you know, as we've talked about before, we have a lot of flexibility around debt reduction given the profile of the maturities that we have starting next year and some of the callable debt that we have in place. So a lot of flexibility on that front.
spk07: Great. Thank you. Thanks, Roger.
spk00: Your next question comes from the line of Doug Leggett with Bank of America.
spk03: Thank you. Good afternoon, everybody. James, I wonder if I could ask you how, when you go through a cycle like this, and obviously a downturn, what one imagines is that you're stress testing all the assets in the portfolio. So I guess it's kind of a follow-up to Roger's question. Do you see any weak links in the portfolio today that you think might be revisited in terms of portfolio structure, specifically on the finance side? I'm obviously thinking specifically about the Atlantic Basin.
spk04: Yeah, Doug, I guess I would say that we spend a fair amount of time every year stress testing and looking at every one of our assets and where do we think the future of that asset lies. And in a bigger picture context, too, not just the refining asset, but the rest of our value chain around it, right? How much marketing are we supplying in the area? We've got midstream assets, commercials trading around many of our assets, particularly on the coast. So, we look at a much more holistic picture, and quite frankly, we have a deck that we think is a long-term deck, considering what we think the future holds for liquid fuels, and we look at our assets in that context. They are assets at the end of the day, and so we're always looking to upgrade or find more ways to make money on any given asset from year to year.
spk03: We'll watch with interest how that evolves. I guess my follow-up may be for Kevin. Slide nine, you give up fairly quickly. clear description of how you realise margin has evolved this quarter. The 784 delta, can you maybe walk us through how much of that, maybe dig into a little bit more detail as to how much of that is truly transitory that we should expect to reverse? And I'll leave it there. Thanks.
spk02: Yeah, Doug, so the largest single element within that 784 other is the RIN cost. That, as Bob referenced earlier, is that that expense is borne by refining. And so it is... half or slightly more than half of the total within that other. Most of the other items in there are, well, RINs is always in there. Obviously, RINs costs were particularly high during the quarter. Product differentials, which is the difference between the market indicator and actual product realizations, that one can move around and go both directions on us. During the quarter, those differentials we were not getting, seeing the value for some of those premium products that often can be a benefit to us in the quarter. So that's one that can move around and come back the other direction. And then the other component that's also in there, again, it can go both directions, is inventory impacts. And so inventory was a was a hurt to earnings in refining in this particular quarter, but that can move in both directions.
spk03: So just to be clear, the configuration, so your different slate and product mix, that's not in configuration, that's in other, or how should we think about that? I'll just start with configuration.
spk02: No, the configuration reflects the 3-2-1, so two-thirds gasoline, one-third distillate in the market indicator versus what we actually produce by way of gasoline and distillate. In other, you've got the actual pricing for those products, including whether it's premium gasoline and other premium products that can often be an uplift relative to the standard market indicator. But in this period, they were not.
spk03: Great stuff. Appreciate the explanation. Thank you.
spk00: Your next question comes from the line of Phil Gretch with JP Morgan.
spk11: Yes. Hey, good afternoon. You know, Greg, in the past, you always have referenced normalized earnings potential across the various areas of the portfolio. And I'm curious how you think about refining normalized EBITDA potential now that we've kind of gone through this COVID cycle. Is there anything that you know, having gone through this, that has changed your view? I think there's a $4 billion EBITDA number that you've thought about in the past.
spk05: Yeah, no, I think at the NSA in 2019, we laid out kind of a $4 billion EBITDA number, and that at the time was kind of a 12 to 19 average EBITDA for our refining business. I don't think we're ready to sound a retreat yet on mid-cycle and refining. So it's been, if you go back, you know, all the way back to the first quarter of 2020, that's the last time we actually made money as a company. So it's been a long haul as we've kind of come through this. There's no question it's been a lot of stress. I put on a lot of companies in our industry. But I think we're constructive, particularly as we come in the back half of the year around demand. You know, this has been a story of – vaccinations, efficiency, lockdowns, and people trying to get back to some semblance of normal. And it all translates directly into the demand that we see for our products. And there's no question, I think the U.S. is probably glad terms of demand recovery through this cycle. And so we've seen the impacts of Europe coming to the US. We've seen the impacts of not being able to export as much as we'd like to to South America and places. And so I think as that world returns to normal, we've got a good shot at getting back to something that looks more like a mid-cycle. You know, I think we said on the last call, we really need to see that 321 crack on a rent-adjusted basis get back to about $12. And then I think we'll see the appropriate kind of market captures around that. be able to generate something around $4 billion. Jeff, I don't know if you want to add anything on that.
spk16: Yeah, I think you guys have hit on the demand side of the equation. We are seeing refining rationalization, 3.7 million barrels a day of announced closures, 800,000 barrels a day of temporary outages that could become more permanent. And we're up to about 1.7 million barrels a day of capacity that's been announced as considering either terminals or other types of service or potential shutdown. So that rationalization is a big piece of it as well. And I think we're expecting more closures to be announced.
spk11: Got it. Okay. In the press release, there's a mention of returning to dividend growth as cash flow recovers. So I was hoping maybe you could lay out the priorities in terms of where you want that balance sheet leverage to get to before you would reconsider dividend growth. And Kevin, just quickly, I think you said $1.1 billion for the tax refund in the second quarter. Is it still $1.5 billion for the year?
spk02: So in terms of the tax refund, you're right that it's about $1.5 billion total. We received $1.1 billion. There's another $350 million or thereabouts, but we don't expect the remainder to be a 2021 cash item. That will roll into next year. So, for a variety of reasons, that's not going to be cashed this year, although it still will realize itself over time for us on that. And then in terms of dividend growth, I think we go back to the earlier comments around As cash generation recovers to something around about mid-cycle and we're in a position to pay down debt, we're making progress on pay down debt, we've got sort of clear line of sight to our ability to continue to do that and get the balance sheet back to where we want it to be, then we should feel comfortable on some of the other capital allocation strategies. priorities and increasing the dividend is one of those. So I think it's a little bit of a long-winded way of saying we don't need to get to all the way we want to get to on the balance sheet before we make a decision on the dividend. We just need to be very comfortable that the structure is there, the cash generation is there, we're making the progress we need to make, and therefore we'll be able to signal that in terms of our confidence to shareholders with the dividend.
spk05: I think it's important. I think, you know, overriding, we do want to protect the BBB plus A3 rating. So we think a lot about that. And I think our model post is, you know, starting to approach mid-cycle earnings for our company. As you know, $6 to $7 billion of cash flow at mid-cycle. And that gives us plenty of cover to do the things we need to do. You know, I think we've said in previous calls, we kind of expect CapEx for the next couple of years to be $2 billion or less. And so you think in the context of $67 billion of cash flow, a total capital program of $2 billion and one-sixth dividend, then I think we'll have plenty of room to do the things we want to do around bringing the balance sheet into order, thinking about capital return to our shareholders, the dividend increases, and share repurchases. Excellent.
spk00: Your next question comes from the line of Paul Chang with Scotiabank.
spk13: Hey guys, good afternoon. Two questions. Greg, I think if I look at your NGL business, this quarter your EBITDA is around 135 million. In 2019, the average quarterly EBITDA is about 170. But we have the Fashionator 2 and Fashionator 3 come on stream and actually have the full operation, which probably should at least contribute 30, 40 minutes a quarter in the EBITDA, if not more. So trying to reconcile that if the market conditions really change that much or that get that much worse because NGL price is actually very good in the second quarter. So maybe that someone can help us on that. The second question will be just a real quick one. On the renewable, the full pan conversion, uh just want to see if there's a permit status that you can put one and also that the last couple years you guys have been trying to re-brand the work process and go for digitization. And so just want to see if you can give an update of where we are on that. Is that pretty much done with what you guys aimed from a couple of years ago? I think at the time that the cost saving target was pretty high, but with the pandemic, I mean, everything gets, I think all get messed up. So it's very difficult to reconcile. So maybe that you can give us some update.
spk16: Okay. Let's start with the NGOs. We've got a lot of time left here.
spk14: Let's go, Dale. Yeah, follow this scenario. Stay on your NGO question. Yeah, I'll tell you what. The first thing I would say is in 2019, I wish we were back in that macro. That was a good time with regard to the overall supply-demand fundamentals. Global demand was where you wanted it to be on really all of our midstream products, whether it was crude products and NGOs. So fundamentally, there are big changes in the markets. But when you look specifically at 2021, let me just highlight a couple things for you there that have reared your head. The biggest one that's had the biggest impact is winter storm Uri. When you look at Uri, it impacted our frac significantly down there. And mainly not from the standpoint of damaging the units or any issues there, even though we did have some costs with the units, it was on utilities. Our utility bill was significant. So from that standpoint, And that's going to be hard to claw back for the rest of this year. So on a positive note, I'd just tell you, structurally, we like the NGL business. Demand's been very robust to support chemicals growth, both locally and globally. NGL production is ramping up. We still see about a million barrels in rejection at this point in time. But overall, demand is really good in that space. Our LPG exports have been in a record clip. So overall, the fundamentals feel good. But it was a big cost hit as well as loss production hit that we had initially in 1Q, which really on a year-to-date basis stays with us. The last thing I'd just cover in 2Q, the overall structure in NGLs has jumped up significantly, as you probably are well aware. Propane, butanes, and ethane, you're at about 86, 87 cents on a gallon basis for NGL on a composite. In 2019, it was 47 cents. So it's gone up. And with that, we've seen an impact on some mark-to-market we have in some of our inventory. So that's there. That usually turns into a timing issue. But just nonetheless, that shows up in the results of 2Q.
spk13: How big is that impact on the mark-to-market in the second quarter?
spk14: I'm going to guesstimate right now. I don't have the number right in front of me. It's around $10, $11 million. All right.
spk13: Thank you.
spk04: And Paul, it's Bob. I think your second question was around the permitting status that Rodeo renewed and the conversion out there of the refinery to... to running renewable fuels. So we continue to develop the environmental impact statement with Contra Costa County. I would characterize that as gone about as well as it could, better than we expected. We're essentially done writing the permit. It's in review right now internally with the county, and we would expect them to probably sometime this month release the permit to begin the public comment period. That would be pretty much right on our timeline, maybe a little bit ahead. And so far it's been a good cooperative process with the regulators and their permit writers. So we're encouraged and pretty happy where we are. We continue the outreach with all the other stakeholders in Contra Costa County and Northern California to make sure everybody understands what that project is going to do for the Bay Area and for California in general. So far, so good.
spk05: Digitization.
spk04: Yeah, third piece, I think, was a question around the A66 and cost reductions. And you're right, in a year like 2020, it's hard to see it. But I would say we've been able to deliver within bounds of the environment on both sides of the equation. So we've had good optimization opportunities. around reduced utilization in our refineries and our ability to get down as low as we did and to make jet go away. And all those, I think, were much easier because of some of the efforts we had. The second piece I would say is, you know, at the height of COVID when we had to social distance and we had to use alternative work approaches and everything. Our early jump into digitalization allowed our people to get a lot more done without human contact and really was a dividend to us up front in our ability to keep supporting the operators who were on the units while minimizing contact with the outside world. And then third piece is we were able to hold the line on cost quite well throughout last year. And in fact, we saw cost reductions In many of kind of our bigger cost items, caps and chems and those sorts of things that are a big piece of our operating budget, we applied some of the warnings that we got through A66 to those, and I think we got sustainable, longer-term price reductions there that will continue to pay out throughout this year. So kind of full steam ahead on all our initiatives there, particularly in refining.
spk05: I might just come in and just say, I mean, we're never done on the controllable cost side of our business. There's more work we've got to do. in terms of continuing to address costs. That's what you do in a commodity business. When I look at the controllable cost through the first six months of this year relative to the first six months of last year, we're up about $300 million. Almost all that's energy costs in Q1. And so if you adjust to the energy component, we're kind of holding the cost savings we were able to achieve last year. But that's not good enough. There's more work for us to do around the controllable cost side of it. So hopefully you've got all those questions answered. Thanks, Paul.
spk00: Your next question comes from line of Teresa Chen with Barclays.
spk01: Hi there. Thanks for taking my questions. I guess first, you know, just on the topic of global refining capacity and closures going forward, I'm curious to hear about your outlook for the European market in general, given your exposure there and During the quarter, the macro data looked weak for a good portion. Now we're seeing some strengthening there and hearing, seeing news of operators with starting units and calling back workers. Just curious to hear about how you see that evolving in the closures landscape.
spk16: Yeah, so I think Europe has been one of the most challenged markets in the first half of the year, lower margins and lower complexity. I think the demand has been slow to recover there. We are seeing some improvement, but it looks like one of the more challenging regions. I think we've seen continued weakness in Latin American refining utilization as well that could be a challenged area also. And I think there was an expectation for a stronger summer than what we've actually had. And as we come into the fall, that's typically where we see more closure announcement activity.
spk06: I would say the weakness, and we point this out, the weakness in Europe is translated to weakness in the U.S. on our refinery margins. We've seen typically 100,000 barrels of diesel imports into the U.S. this year. We've seen 200,000 barrels of diesel imports into the U.S. from Europe. We expect as Europe comes back from COVID lockdown that those increased barrels will stop. We saw high imports of gasoline from Europe as well. We believe that that will stop too as Europe comes back from lockdowns. We've seen it already take off. So all those things, when the final complex comes back in Europe and COVID lockdowns decrease, we'll see the U.S. also strengthen.
spk01: Got it. And then just on the crude side, can you talk to us about your medium to long-term outlook for WCS differentials in light of Enbridge's Line 3 replacement projects coming online in fourth quarter? Should that, you know, almost equal narrow the differentials to the mid-con? And, you know, subsequently, when we think about cap line reversal happening later on, can there be a situation where, you know, you see the St. James market being flooded with incremental heavy barrels, which could actually help your Gulf Coast facilities, while the mid-con would be a little weaker with narrower, structurally narrower WCS spreads? And how do we see, you know, that thematic development playing out?
spk06: So I would say on the WCS, we have seen differentials come off quite a bit. We've got 4.5 million barrels on aid to leave Canada currently. We have about 4.4 million barrels of pipeline egress, another 100,000 barrels on rail. What we've seen, which is something a little different from what we've seen the past couple of years, is we've seen the WCS differential on the Gulf Coast weaken. It's weakened about $2.5 over the past couple of quarters. And when that weakens, so does the hardest EWCS differential. You have to have an ARB to get the barrels to the Gulf Coast. One of the reasons the Gulf Coast is weakening is because low exports means that you have to have a weaker differential on WCS to get that WCS exported out of the U.S., So as you said, Teresa, you have Enbridge coming online in next quarter, quarter four. We would think that that would firm up differentials a bit. But don't forget, in the wintertime, we add diluent to crude, and that also increases the volume of crude that has to move. So our view, our forecast is that you'll see a differential somewhere between $12.50 and $13.50 off of WTI going forward.
spk01: Thank you.
spk00: Your next question comes from the line of Manav Gupta with Credit Suisse.
spk09: Hey, guys. I wanted to focus on the rodeo conversion. We're seeing two trends out there. One are guys who are not building a pre-treat, and their cost is varying between $1 to $1.50 a gallon. And then there are guys who are building the pre-treat, and their cost is varying between $3 to about $3.50 a gallon. you like five standard deviations from it you are the only one who's building your pre-treat and your cost is one dollar a gallon so help us understand what is special about this plant i'm not trying to question i'm sure you'll get there but why is it so unique that you can pull this off and nobody else can so so i'm bob i i agree with you we will get there
spk04: So what really sets up Rodeo completely differently, one is it's a full plant conversion, so we have all the kit available, and we have two very high-pressure hydrocrackers that we can put into service. And to convert those units from where they are today to being able to run renewable diesel is actually a very low-cost part of the project. So most of the cost of that project is in uh either the logistics piece and then the big chunk is the the free treaters themselves so i think that's what allows us to be able to have a unique position of building a project that's going to be at an installed cost of about a dollar a gallon which you're right is is lower than anybody else but it is it is because if there was a refinery that was custom built to be able to be converted to renewable feedstocks rodeo is it since it's very very unusual to have two hydrocrackers and excess hydrogen capacity on site between our own hydrogen plant and that of our third-party supplier that is built at the site. So we've kind of got a perfect storm there. So we're spending money to get all the logistics right, a little bit of meddling up in the hydrocrackers and in the pre-treatment unit, and we'll be ready to go.
spk09: Perfect, sir. I have just one quick follow-up. I think the pandemic somewhere changed the nature of people as when it comes to the use of plastics, and that could somewhere be permanent. I'm just trying to understand, you have these two crackers which were kind of put on a back burner. You can bring them forward, FID them. I'm just trying to understand, let's say you do decide that, From the point of FID, how long will it take to get the first one and the second one? So if this change is permanent and the demand for plastics is in an up cycle, you can capture a part of it.
spk04: Well, we agree that the fundamentals have improved dramatically since we initiated these projects. And as I noted earlier, the U.S. Gulf Coast one we're looking at FID next year, and the Qatar project is about a year behind that. And you can target about four years from FID to start up. And we believe, though, we don't try to market time. These investments, we do believe that window is a particularly good window to pursue something. So we've got our foot forward on these. We are ready to move, and we're working with contractors to make sure that we're getting the capital cost right. Clearly, the global markets are improving, but there's still some disruption in the world economy. We'd like to see a little clearer path to a fully resolved economic recovery from COVID, get to get the Delta variant and any other variants behind us. But we are leaning in and ready to move with FID on that project next year.
spk09: Thank you so much for digging my questions.
spk00: Our next question comes from the line of Matthew Blair with Tudor Pickering Holt.
spk04: Hey, good morning. Thanks for taking my questions here. First is on chems. Could you share some color on the PE inventory picture? The industry data shows that PE inventories have really ballooned up, you know, to new highs. But your release talks about tight supplies, you know, Lionbell and Dow also say the inventory is pretty tight. So I was hoping you could just explain the disconnect there. Well, one of the disconnects, Matthew, is looking at just the gross inventories versus the days of sales inventories because demand has increased almost 6% in North America. And so that's important. And then you also have to parse it out by kind of polyethylene because high density, linear low density, low density all have different inventory levels and different applications. And we're heavily exposed to high density. And high density is particularly tight supply now and uncomfortably tight. It's been building. You know, CP Chem ran at 102% of their capacity in the second quarter. So they really delivered from an operational excellence perspective. But much of that went into rebuilding those inventories. So even though they had such a strong quarter, a lot of those A lot of that production went into inventory, and they're still not where they would comfortably be heading into a hurricane season. They like to be prepared for that. They don't plan to have a hurricane, but they're prepared if there are hurricanes to impact that. So I think that's where you're seeing the tightness. It's really from a day-of-sales perspective with the high growth in demand in North America as well as where we are in the weather cycles in North America. Sounds good. And then California LCFS data showed that combined RD and biodiesel blend rates in the state were about 35% in Q1. It seems like that number is only going to get higher going forward. But I was wondering, are you feeling a pinch on placing your diesel out at the Los Angeles refinery? And what are your long-term options here?
spk06: No, most of our diesel in Los Angeles, North Carolina, goes out of state, out of California, so that's a non-issue for us there. Matthew?
spk13: Got it. Thank you.
spk00: Your next question comes from the line of Jason Gableman with Cowan.
spk10: Yeah, hey, thanks for taking my questions. I wanted to ask, too, specific to the quarter on refining earnings related to RINs. It seems like marketing earnings increased a decent amount this quarter, and refining is still kind of in the doldrums. And I understand there's some accounting and value split between the RIN benefit in marketing versus the cost in refining. So can you just talk about maybe how RINs benefited marketing recently this quarter and how much of your rent exposure is being minimized by blending and pass-through consumers? And then the second question, just also on the quarter quickly, co-product realizations. I know we're relatively larger than normal headwind. How's that looking 3Q quarter to date so far? Thanks.
spk06: So, Matt, this is Brian. Jason, this is Brian. I'll start off on the RINs question. Our view is that the RINs are in the crack. It's a cost that refining pays, and the value of the crack is passed on to the consumer who pays for the RIN at the pump. So marketing doesn't see any benefit from the RINs per se. There may be some leakage in that chain, but marketing doesn't really see any benefit. Marketing did have a really very strong quarter in 2020, Q2, and a large part of that was we had kind of the right portfolio in the right places. We saw demand jump up in March and again in June. We have a strong presence in the Rockies and in the MidCon where there were less COVID lockdowns and more movement. We added, as you know, retail in late 19 and also in 20 on the West Coast, and that retail has done better than premised. We also added retail this year in the MidCon and Rockies, and that retail is doing better than premise. And finally, I'd add that we've been re-imaging the stores for the past three years. We're up to 85% of the stores re-imaged, and we've seen a 2% to 3% jump in volumes and margins in those stores as well. So we've done a lot of things to help our portfolios in the right spots, and so I think that's where we saw the value in marketing in Q2. Thank you.
spk16: I think on the secondary products within refining, they typically get squeezed in a rising oil price environment and improve in a declining oil price environment. And we're kind of four quarters in a row of rising oil prices here. So I think that's the biggest variable driving that secondary product margin.
spk04: Yeah, I would agree 100% with Jeff. And, you know, usually we hit this time of year, too. We start seeing a little bit of – a little help in those secondary projects because some of the coke we make ends up in the asphalt market then this time of year, right, as people are out fixing roads and bridges and all those things. And that's offset a little bit, but we quit blending butane in the back half of the second quarter. It comes back again, you know, in September. So there's a lot of moving parts in there – But I would think we're probably – this is kind of the maximum we would see for this type of oil price.
spk00: And your next question comes from the line of Ryan Todd with Piper Sandler.
spk12: Hey, thanks. Maybe just a couple of quick questions on the renewable diesel business. I mean, having ramped the Rodeo hybrid heater to the near-term target capacity of 8,000 barrels a day – Can you speak to any learnings or takeaways you have from getting to that critical milestone and what you're seeing from kind of a margin or profitability point of view and then maybe a follow-up? uh can you talk about what it entails to convert your marketing locations to uh to market renewable diesel what the capital cost is associated with this and um how you how you envision you know kind of the marketing effort of rd to play out as as the rodeo conversion you know fully ramps up over the next few years yes well i'll take the first question there so as we uh came out of turnaround and started up the rodeo hydrotreater in renewable service
spk04: actually came up, it ran really well. We had almost a full quarter running at low rates. We still had a project to get the rail infrastructure finished so that we could supply 9,000 barrels a day to make the 8,000 barrels a day of renewable diesel. So, you know, we're learning how the catalyst reacts and what the actual kinetics are around running bean oil. It's a little bit of a learning for the ultimate project of converting a refinery. And these are really, these projects really are two very separate things in that there was no real work to do to convert 250 to bean oil. It was a matter of changing the catalyst at a regular scheduled turnaround and then being able to run it. So it's helpful. I think the bigger picture there is it's very helpful to our commercial organization to learn how to source renewable feedstocks, the logistics of getting them there, some of the peculiarities around transporting it. Those sorts of things all set us up to be a lot more nimble and ready for when we go from 8,000 barrels a day to 50,000 barrels a day with the renewable feedstock. conversion. I think probably the best thing to come out of it is we did not see anything that made us stop and think about the project to convert the rest of the refinery that we needed to go back and think about our design. Pretty much operating as expected.
spk06: And I would add to Bob, we got that plant up two and a half months earlier than we thought. 9,000 barrels into the plant, high conversion rate. just kind of a great asset so far. We've firmed up over 50% of the feedstock for the plant going forward. We've run soybean, but we've also run other vegetable oils there, so we've got some experience running other vegetable oils. We're looking at international feed as well. We've started converting stores, as you mentioned. It's low-capital convertible stores. We'll have all 600 stores converted by the end of the year and that will allow us to run volumes equal to three quarters of more of the r d that we're producing currently great thank you and this does conclude today's conference call you may now disconnect
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