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spk06: Welcome to the Fourth Quarter 2020 Phillips 66 Earnings Conference Call. My name is David, 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.
spk09: Good morning, and welcome to Phillips 66 Fourth Quarter Earnings Conference Call. Participants on today's call will include Greg Garland, Chairman and CEO, 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 Slide two contains our safe harbor statement. We will be making forward-looking statements during the 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 over the call to Greg for opening remarks.
spk14: Okay, thanks, Jeff. Good morning, everyone, and thank you for joining us today. At the start of this last year, we could not have envisioned the unprecedented challenges that we face in 2020. We're proud of and grateful to the many people who have worked diligently and tirelessly to develop the COVID-19 vaccines. We're optimistic about the positive impact the vaccines will have on economic recovery in the months ahead. In the fourth quarter, we had an adjusted loss of $507 million, or $1.16 per share. Market conditions remain challenged. Our refining business continues to be affected by demand destruction associated with the pandemic. For the year, we had an adjusted loss of $382 million, or 89 cents per share. We operated well and completed major growth projects in our midstream segment, including the Gray Oak Pipeline, our largest pipeline project to date, and the Sweeney Hub Phase II expansions. We took early, decisive steps to reduce costs and capital spending, secure additional liquidity, and suspend our share repurchases. We exceeded $500 million in cost reductions and cut capital spending by more than $700 million. These actions, combined with cash flow generation from our diversified portfolio, provided us with financial flexibility to maintain our strong investment-grade credit ratings, sustain the dividends, and to navigate the crisis. Our focus continues to be on the wellbeing of our company, our employees, and our communities. In 2020, we contributed $32 million to charitable organizations, including $6 million toward COVID-19 and disaster relief. Even with the distractions and the challenges of the pandemic, our people remain focused on safe, reliable operations and execution of our strategy. 2020 was the safest year in the history of our company. Our total recordable injury rate of 0.11 was 30% better than our industry-leading rate in 2019. Our process safety improved by 60%, and our environmental performance was our best ever. In 2020, we generated $2.1 billion of operating cash flow and returned $2 billion to shareholders. Since we formed the company, we've returned approximately $28 billion to shareholders through dividends, share repurchases, and exchanges. We remain committed to a secure, competitive, and growing dividend. Entering 2021, there's still uncertainty in the market. We'll continue to maintain a strong balance sheet and disciplined capital allocation. In December, We announced our 2021 capital budget of $1.7 billion, and that includes full 66 partners. This is a reduction compared to recent years. This will free up capital for debt repayment. In 2020, we added approximately $4 billion of debt. We plan to reduce debt to pre-COVID levels as cash generation improves. Our 2021 capital budget includes $1.1 billion of sustaining capital for reliability, safety, and environmental projects. In addition, $600 million of growth capital is directed towards in-flight projects and investments in renewable fuels. During the quarter, we advance our growth program. At the Sweeney Hub, Fract 2 commenced operations in September, and Fract 3 started operations in October. we plan to resume construction of our fourth fractionator in the second half of 2021. Upon completion, the Sweeney Hub will have 550,000 barrels a day of fractionation capacity supported by long-term customer commitments. At the South Texas Gateway Terminal, the second dock commenced crude oil export operations in the fourth quarter. Upon expected completion in the first quarter of 2021, The terminal will have 8.6 million barrels of storage capacity and up to 800,000 barrels per day of docked throughput capacity. Phillips 66 Partners owns a 25% interest in the terminal. Phillips 66 Partners continued the construction of the CDG pipeline, connecting its clean and storage caverns to petrochemical facilities in the Corpus Christi area. Project is backed by long-term commitments and expected to be completed in mid-2021. At the Beaumont terminal, we completed the fourth dock, bringing total dock capacity to 800,000 barrels per day. The terminal has a total crude and product storage capacity of 16.8 million barrels. Since acquiring the terminal in 2014, we've doubled the dock's capacity and more than doubled its storage capacity. and chemicals. CPChem is advancing optimization and deep bottleneck opportunities. This includes recently approved projects at its Cedar Bayou facility that will increase production of ethylene and polyethylene. In addition, CPChem is developing an expansion of its normal alpha-olefins production. During the quarter, CPKM announced its first production of polyethylene from recycled plastics at its Cedar Bayou facility and received ISCC Plus certification. CPKM remains committed to finding sustainable solutions, including the elimination of plastic waste in the environment. We're advancing our Rodeo Renewed project at the San Francisco Refinery. We expect to complete the diesel-hydro-treater conversion in mid-2021, which will reduce 8,000 barrels per day. Full conversion of the facility in early 2024 could reduce over 50,000 barrels a day of renewable fuels. This capital-efficient investment is expected to deliver strong returns and will reduce the plant's greenhouse gas emissions by 50%. This project helps California to meet its low-carbon objectives. In marketing, we recently acquired 106 retail sites in the central region through a joint venture. This aligns with our strategy of securing long-term placement of Phillips 66 refinery production and extending participation in the value chain of retail. We've also advanced our digital transformation efforts, fostered innovation across our company, and implemented new technologies, including digital systems for work processes, artificial intelligence for maintenance requirements, and optimize processing unit performance. Our company is making investments to competitively position us for a low-carbon future. Earlier this month, we announced our emerging energy organization. This group is charged with establishing a lower-carbon business platform. We will pursue opportunities within our portfolio, such as renewable fuels, and work with our company's energy research and innovation group to commercialize emerging energy technologies. For example, in collaboration with Georgia Tech, Gold 66 received a grant from the U.S. Department of Energy that will support development of electrolysis technology that has the potential to convert CO2 into clean fuels. Our company is committed to addressing the global climate challenge at the same time to deliver shareholder returns. So with that, I'll turn the call over to Kevin to review the financial results.
spk11: Thank you, Greg. Hello, everyone. Starting with an overview on slide four, we summarize our fourth quarter results. We reported a loss of $539 million. Excluding special items, we had an adjusted loss of $507 million, or $1.16 per share. We generated operating cash flow of $639 million, including distributions from equity affiliates of $400 million. million for growth projects. We paid $393 million in dividends during the fourth quarter. Moving to slide five. This slide shows the $506 million reduction in adjusted results from the third quarter to the fourth quarter. Chemicals adjusted pre-tax income increased quarter over quarter, while the other segments declined. The income tax variance relates to favorable tax impacts we had in the third quarter related to our ability under the CARES Act to carry back net operating losses to previous periods. Slide six shows our midstream results. Fourth quarter adjusted pre-tax income was $323 million, a decrease of $31 million from the previous quarter. Transportation contributed adjusted pre-tax income of $196 million down $6 million from the previous quarter. The decrease was due to lower pipeline and terminal volumes driven by lower refinery utilization. This was partially offset by higher equity earnings on the pipeline. NGL and other adjusted pre-tax income was $86 million. The $16 million decrease from the prior quarter was due to lower equity earnings as well as reduced propane and butane trading results. This was partially offset by higher fractionation volumes, reflecting the ramp-up of Sweeney Frax 2 and 3, which demonstrated operations above design capacity. The Sweeney fractionation complex averaged 376,000 barrels per day during the fourth quarter. Also at the Sweeney hub, the Freeport LPG export facility loaded a record 39 cargoes in the fourth quarter. DCP midstream adjusted pre-tax income of $41 million was down $9 million from the previous quarter, reflecting lower Sandhills pipeline equity earnings and timing of maintenance costs. Turning to chemicals on slide seven. Fourth quarter adjusted pre-tax income was $203 million, up $71 million from the third quarter. Olphans and polyolefins adjusted pre-tax income was $216 million, The $68 million increase from the previous quarter is due to higher polyethylene margins, partially offset by higher turnaround and maintenance costs. Global O&P utilization was 101%, supported by global consumer demand, including food packaging and medical supplies. CP Chem polyethylene sales volumes set a new record in 2020. Adjusted pre-tax income for SANS increased $8 million, primarily due to higher earnings from international equity affiliates driven by improved margins. During the fourth quarter, we received $215 million in cash distributions from CP Chem. Turning to refining on slide eight. Refining fourth quarter adjusted pre-tax loss was $1.1 billion compared to an adjusted pre-tax loss of $970 million last quarter. Both periods reflect the continued impact of challenging market conditions. The decreased results in the fourth quarter were largely driven by higher turnaround and maintenance activity. Pre-tax turnaround costs were $76 million, up from $41 million in the prior quarter. Maintenance costs increased, primarily at the Alliance refinery. We shut down Alliance in mid-September in preparation for Hurricane Sally, and it remained down for planned turnaround and maintenance activities during the fourth quarter. The refinery safely resumed operations earlier this month. Crude utilization was 69% compared with 77% last quarter. The fourth quarter clean product yield was 86%. Slide nine covers market capture. The 3-2-1 market crack for the fourth quarter was $7.84 per barrel compared to $8.17 per barrel in the third quarter. Real life margin was $2.18 per barrel and resulted in an overall market capture of 28%. Market capture in the previous quarter was 22%. Market capture is impacted by the configuration of our refineries. We make less gasoline and more distillate than premised in the 321 market crack. During the quarter, the distillate crack improved $2.48 per barrel while the gasoline crack decreased $1.74 per barrel. resulting in a modest improvement of our capture from the prior quarter. Losses from secondary products of $1.20 per barrel were $0.60 per barrel improved from the previous quarter due to improved NGL prices relative to crude. Losses from feedstock were $0.46 per barrel compared to $0.35 per barrel last quarter. The other category reduced realized margins by $3.08 per barrel. This category includes RENs, freight costs, clean product realizations, and inventory impacts. Moving to marketing and specialties on slide 10. Adjusted fourth quarter pre-tax income was $221 million compared with $417 million in the prior quarter. Marketing and other decreased $185 million due to lower realized margins reflecting rising prices during the quarter. We were also impacted by lower volumes related to COVID-19. And while marketing and other results were lower in the fourth quarter, full-year 2020 adjusted pre-tax income of $1.24 billion was the highest since spinoff in 2012. Specialties decreased $11 million largely due to lower finished lubricant margins. Refined product exports in the fourth quarter were 103,000 barrels per day. On slide 11, the corporate and other segment had adjusted pre-tax costs of $235 million, an increase of $22 million from the prior quarter. This was primarily due to lower capitalized interest and higher employee-related expenses. Slide 12 shows the change in cash for the quarter. We started the quarter with a $1.5 billion cash balance. Cash from operations was $639 million, This included a working capital benefit of $403 million, primarily due to the year-end drawdown of inventory. Net debt issuances were $1.4 billion. This included $1.75 billion in senior notes and repayment of $500 million on the term loan. Phillips 66 Partners drew $125 million on its revolver. Capital spending was $506 million. we paid $393 million in dividends. Our ending cash balance was $2.5 billion. At December 31st, we had $7.8 billion of committed liquidity, reflecting $2.5 billion of consolidated cash, plus available capacity on our credit facilities of $5 billion at Phillips 66 and $300 million at Phillips 66 Partners. On slide 13, we summarize our financial results for the year. In 2020, we had an adjusted loss of $382 million, or 89 cents per share. We generated $2.1 billion of operating cash flow. Distributions from equity affiliates totaled $1.7 billion, including $632 million from CP Chem. At the end of the fourth quarter, our net debt-to-capital ratio was 38%. Slide 14 shows full-year cash flow. We began 2020 with a cash balance of $1.6 billion. Cash from operations was $2.4 billion, excluding working capital. There was a working capital use of approximately $300 million. We received a net $4.1 billion from our financing activities. We added $3.75 billion of debt at Phillips 66 and approximately $400 million at Phillips 66 Partners. As cash generation recovers, we will prioritize debt repayment we remain committed to a conservative balance sheet and strong investment-grade credit ratings. Capital spending was $2.9 billion. We returned $2 billion to shareholders through $1.6 billion of dividends and $443 million of share repurchases. We suspended our share repurchase program in March. This concludes my review of the financial and operating results. Next, I'll cover a few outlook items. In chemicals, we expect the first quarter global O&P utilization rate to be in the mid-90s. In refining, crude utilization will be adjusted according to market conditions. In January, utilization has been in the low 70% range. We expect first quarter pre-tax turnaround expenses to be between $200 and $230 million. We anticipate first quarter corporate and other costs to come in between $240 and $250 million pre-tax. For 2021, we plan full-year turnaround expenses to be between $550 and $600 million pre-tax. We expect corporate and other costs to be between $950 million and $1 billion pre-tax for the year. We anticipate full-year DNA of about $1.5 billion. And finally, we expect the effective income tax rate to be in the low 20% range. With that, we will now open the line for questions.
spk06: 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 speakerphone, 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-tone phone. Doug Terrison with Evercore ISI. Please go ahead. Your line is open.
spk07: Good morning, everybody. Good morning, Doug. Good morning. Greg, a notable feature of performance last year was that the company not only executed on its operating and capital cost reduction plans, but you guys also completed four to five major projects in what was one of the most tumultuous years in recent decades. So first, kudos to the team on strong performance. Simultaneously, while the benefits of diversification and taking care of business like you did last year were clear, the pace of change in the industry seems to be quickening, not only as it relates to energy policy and likely future energy mix, but also that which investors expect from their investments in the sector. So I've got a couple of questions. One, how do you think or how do you guys think about how to navigate this evolving and changing environment? Are tactical and strategic dexterity likely to be needed maybe more than in the past, or do you think it's about the same? And then three, are there obvious implications for financial strategy for Phillips 66 along the way? So three questions.
spk14: Okay, you gave me a lot to unpack there, Doug. Thanks. Let's start at the top with kind of the overview. I think that, you know, for us, Capital discipline, capital allocation remains core to our strategy and what we do. That's returning capital to shareholders. It's earning returns above our weighted average cost of capital on what we choose to invest in as a company. So those are our guiding lights or our guiding stars as we think about this and we think about energy transition. I tend to think about it in three buckets, you know, near-term, mid-term, and longer-term, Doug, in terms of our response and how we're going to navigate through it. Clearly, in the near term, we're building a renewable fuels pathway. What we're doing, so this year, mid-year, we'll start up the first part of Rodeo, 8,000 barrels a day, and by 2024, we'll have a full facility conversion, more than 50,000 barrels a day there. We're working with Bryce Renewables for 11,000 barrels a day of renewables Coming out of that facility, we're kind of co-processing about 3,000 barrels a day at Humber today in the U.K., moving to 5,000 barrels a day. And so, you know, as we think about, you know, as we approach the middle point of the decade, you know, we should have a billion-ish dollars of EBITDA out of our renewable fuels business. So that's certainly one pathway we think about. The second bucket is kind of more the medium term. And as you know, we supply our specialty graphites and we go into the anode production lithium ion batteries and we continue to work to improve that. to help improve battery performance, but also lower costs. And so I think, you know, as we see EVs grow, and they're going to grow, EV sales globally are going to grow, that portion of the business is also going to grow. And I think we can make nice contributions there in terms of what we bring to batteries and battery technologies. And then maybe the third one is around hydrogen, and that's longer term. Certainly today we're building hydrogen fueling stations in Europe, so that's a first step. We're working in the United Kingdom with the Gigastat Consortium, which is taking offshore wind electrolysis to make green hydrogen. We're using that in our Humber refinery to reduce the carbon content of our fuels produced at Humber. And so, you know, as I think about hydrogen, Our industry is big consumers and producers of hydrogen, and we really understand it. I think that hydrogen moving into transportation fuels in a big way is probably decades out, but we'll continue to build a pathway around hydrogen for the longer term. You may have seen that we got a grant from the DOE, and we talked about it in the opening comments today, but that's really around our solid oxide fuel cell technology and taking CO2 and running through the fuel cell then to produce clean fuels. And so there's probably a pathway there for us too. So our idea is we want to participate in energy transition. We want to do it where we can invest and earn returns that are above our weighted average cost of capital. We certainly want to exploit the technology base we have. use existing equipment where we can and, you know, convert it if we need to, like what we're doing at Rodeo, but try to find capital-efficient solutions where we can earn great returns. I think the other thing I want to point out here, Doug, is, you know, you think about the challenges that we have before us of providing reliable, affordable, abundant energy at the same time addressing the climate is – something that's gonna take a whole approach of industry, but I think about the 10 million people that work in industry today, They're problem solvers. They're engineers. They're scientists. They're marketing people. They're people that understand the complexity of the energy business today. And I think they're some of the best people on the planet that are positioned to help, you know, solve this dual challenge that we have. And so I'm an optimist always, and I think that this industry and our company certainly will have big roles to play in the energy transition if we move forward. And I know you asked three questions, and I don't know if I answered three, but I did the best I could with that. Go ahead if you want to follow up.
spk07: Well, I was just going to say, no, it sounds like a responsible shareholder-oriented strategy, but I didn't want to interrupt you, so go ahead and finish, Greg.
spk14: Oh, well, I was just going to tie it up with I know my buddy Joe made a point yesterday, and we'd be remiss also if we didn't say we recognize you're coming on a transition point. You've made some great calls. You've been at the top of your game for a very long period of time, and that's really hard to do in the business that you're in, Doug. You've been a friend of the industry and our company, but yet you've had the courage to challenge us when we need to be challenged, and you've always had shareholder interest in it. So I would tell you really well done. We're going to miss you, and we wish the very best for you, and hopefully we'll see you around the energy patch in the future.
spk07: Well, thanks, Greg. Those are kind comments, and I appreciate them. You guys have been really easy to support because you've had a model for success, and you've executed, and so you've positioned this company very well for the future, you and the team, and best of luck, and thanks again for your example. Thanks, Doug.
spk06: Neil Mehta with Goldman Sachs. Please go ahead. Your line is open.
spk04: Good morning, team. I guess the first question I had is going back to the analyst day from a couple of years ago. It feels like an eternity ago. It doesn't mean a pandemic ago, but the company laid out a $6 to $7 billion long-term cash flow target. And obviously, 2020 is hard to capitalize going forward. But if you think about all the different pieces that went into that $6 to $7 billion, recognizing it's a moving target, but Craig, you can just share your perspective on, one, do you still think that's the right anchor? And what are the pluses and minuses as far as you can tell right now at this point?
spk14: Yeah, I think that I'll start off and then, you know, Jeff and other folks can help me. I don't think we're ready to make a call that mid-cycle has changed yet. I think that it's early to do that. You know, in terms of how we've reoriented kind of the capital plan here, the response to COVID, but also I think as the industry itself has, you know, kind of paused in terms of the upstream and the midstream opportunities available to us, Certainly, we're probably going to run $200 million to $300 million under the growth plans we announced at that day, simply because we're not going to do Red Oak pipeline. We're not going to do ACE pipeline and some of the other things that we had laid into the plan that we just stopped working on. But we may well find other opportunities. So you have Rodeo Renew that's going to come in. It's going to be a big, big EBITDA generator that wasn't in those numbers. Bandage 66, we continue to prosecute that. If you remember, somewhere $600 million or so of that was around our value chain strategy optimization work we're going to do. All that's mid-cycle predicated. We've done a lot of work around there. We haven't been in mid-cycle conditions. In 2020, we're not achieving the results we thought we achieved there, but I think if we We move into 2021 and into 2022, we're pretty optimistic that we get back to a recovery to mid-cycle conditions around that part of the portfolio. So, Jeff, I don't know if you want to tag on there or add anything to that, but I think that would be my views.
spk09: Yeah, I think within the marketing segment, we had $1.4 billion of EVDA kind of baked in, and they generated $1.6 billion of EVDA in a market where we had some demand hits in 2020. It was supported by the JV retail acquisition that we made early last year. You know, the midstream contributions have held up nicely with the fee-based approach that we've had there, $2.1 billion of EBITDA this year in tough market conditions, obviously strong with, you know, Sweeney-Frax 2 and 3, Clements, South Texas Gateway all contributing a full year in 2021. CP Chem, we've not really changed the outlook there, and there's a potential for future contributions from Gulf Coast II and the Roswell Farm Project. So I think there's still a lot to be encouraged about as we look forward.
spk04: Thanks, guys. And the follow-up is just on refining. Obviously, it was a tough fourth quarter. And utilization was called system-wide, I think, Ken, just 69%. And you're running... low 70s in January. Do you have a view on sort of the trajectory of utilization for the industry, recognizing in the near term it's going to be very much demand dependent? And is there a good rule of thumb of refining utilization when it gets to a certain level, you think the business is back to generating pre-tax profits?
spk05: Yeah, this is Bob. I think, you know, when we think about the near-term future and, you know, how do we get back to higher utilizations, it all kind of starts with the vaccines that Greg referenced in his opening comments, right? We've got to get people back to a normal life and back out on the road, using their cars, going to school, going to work, going where soccer moms are on the weekend. That's kind of the first step then that leads to, you know, a demand signal for gasoline and and distill it to a lesser extent and starts pulling utilizations up. I think you'll see we'll be following the market to add capacity back. And if you kind of think about the timing, we believe the government will get more efficient at getting people vaccinated as the months go by here. But certainly by summer, we would expect that a good portion of the American public is able to get out and burn the fuels that we make, and that should lead to a more normal type summer level. We don't have a rule of thumb of what we've got to get back to, but obviously running more is better and spreading out our costs over more barrels. Some of our plants get more efficient at higher run rates. The market gets more efficient at higher run rates, and we kind of return. We always think about you've got to have that clean product crack signal to get utilization up, that leads to covering your costs. And then really we need more normalized crude differentials in the market. And those will all play out together because as As utilization rises across the industry, there's going to have to be a pull primarily on Saudi heavy barrels that should help move the crude spreads back out. And that's really how we capture more and more of our crack and kind of get back on the path to high utilization rates and a lot more profitability. Thanks, guys. Good. Thanks, Neal.
spk06: Phil Gresh with J.P. Morgan. Please go ahead. Your line is open.
spk08: Yes. Hi. Good afternoon. First question just on the chemicals business. Wanted to get your thoughts there on the outlook and in particular for your own business. I think margins have been extremely strong and continue to be here in the first quarter. And many of your peers have put up strong results as well. It seems like Your results maybe had a little bit more of a lag effect or some cost headwinds there in the fourth quarter. So I was hoping you might be able to elaborate on that a bit and your outlook here as we enter 2021.
spk14: Well, you know, we're constructive chemicals, Phil. I think that demand is still really strong in that segment, and we see that across all regions, whether it's China, Europe, or North America. You know, CBPMs run really well, head record sales volumes. You know, the other thing we've seen is we've seen delays in the startups of new facilities. Part of that's been economic-related. Part of that's just been COVID-related as people have either slowed construction or paused construction due to the density of workers on these big sites. So it's kind of been balances actually look better to us. at this point in 2021 than they did at the equivalent point last year. And so I think we're pretty optimistic around operating rates. You know, margins are in the delta of the marker margins. It's not unusual to see CQ10 kind of deviate off of IHS marker margins. We've seen that many times in the past. Certainly, it's timing, it's portfolio, it's geography as you think about that. If you think about the fourth quarter, high-density polyethylene contract prices, they're essentially flat. October, November, they go up in December. And then if you think about your contract portfolios, there can be lags of 30 to, you know, 60 days of really fully realizing those price increases through the portfolio. But then part of that is just geography, you know, probably a third of CP Chem cells are export-oriented cells. And so if you think about the U.S. market price, usually your price is higher, and it's usually higher by about the price delta. The Asian price has probably been 20 cents under the North American price. And so you have that geographic mix that also comes into play when you're looking at that. But having said all that, we think that margins are certainly above mid-cycle today. And we have, I think, good line of sight to what we think are above mid-cycle margins for 2021. So we feel confident. And, Tim, you want to talk about propylene and some of the things going on there too?
spk10: Yeah, I think really to summarize and, you know, Greg, to your comments, what's probably important is you had COVID come along and it really had an impact on a lot of different industries with regard to demand. But with regard to chemicals, what we did see is demand didn't wane much, especially in the consumable side. So consumables remained very strong, which benefited CP Chem, which really has a larger exposure to that. Durables really fell off. So what you're seeing now, I think, Phil, is as durables are coming back, some of the other competitors out there have more exposure to durables. So you're just seeing that rebalancing that's going on. But it's a good thing overall because if people are out still buying consumables, which is good, and now they're back out buying durables, which is good. So, again, building to an economy, hopefully they're starting to pivot back towards where it should be.
spk08: Got it. Okay, thank you. My second question, I guess this is probably for Kevin. As you think about 2021 and the progression of cash flow generation and the balance sheet, I think you've talked about in the past a tax refund that will be coming in as one factor. But how do you think about that plus the free cash flow profile, dividend coverage, and balance sheet targets? Thanks.
spk11: Yeah, Phil. So one element of our cash generations in 2021 will certainly be a – it will show up as positive working capital, and it will because receivable. So we have a tax receivable at year end of about $1.5 billion, and we expect about two-thirds of that to come in in the first half of the year, probably second quarter, and then the remainder towards the end of the year. So that's a significant component of cash generation. And so when you step back and think about it, in 2020, as bad as things were in 2020, and we're projecting better conditions in 2021 when for the full year 20. So we had $2.4 billion of pre-working capital cash generation in 2020. So we'd expect a stronger number than that, plus the positive impact from working capital. And so to us, there's pretty clear line of sight to not only covering the capital program, which is $1.7 billion. So we've taken a lot out of the capital program relative to previous years. So $1.7 billion of capital, dividends, $1. $6 billion, and then we'd expect to be able to make some progress on paying down some of the debt. And as we've talked before, we have a lot of flexibility around that. without any penalty to do that. So I think we feel pretty confident that we'll be able to make some good progress, not getting all the way to where we want to get to. Over the next probably couple of years, we'd like to be able to get the debt that we've added over the course of 2021 paid down and have the balance sheet back to where we want it to be. And that's important to us. It's important that we maintain those strong investment grade credit ratings, A3, BBB plus. We feel good about those. We want to be able to maintain that sort of financial flexibility and strength.
spk08: Great. Thank you.
spk06: Roger Reed with Wells Fargo. Please go ahead. Your line is open. Thank you.
spk02: Yeah, thank you. Good morning. How are y'all doing?
spk10: Great.
spk02: Maybe to follow a little up on kind of the path that Phil was going down, you talked about issues that hampered CP Chem this quarter, but I was taking a look at all the things that you started up late Q3 through Q4 in the midstream area. So I just wanted to maybe see if you could quantify some of the the issues there, not so much as, I guess, a missed revenue, but more so on the cost and then, you know, the type of expectation on performance in Q1 and maybe in Q2, given the pace of startup.
spk10: Well, Robert, this is Tim Roberts. I'll chime in a little bit here. A couple things. You know, clearly we're down, well, we're up quarter of a quarter, but, you know, our expectation is higher, and with transportation and some of our pipelines being down over what we've projected or have performed at before. It's really related to refinery utilization is one key part of that. So that's driving the piece of that. In the meantime as well, we've also seen some of the producers out there, which has had an impact clearly on people putting volumes through the pipes. So that's shown up. It's shown up a little more on the crude side. The one bright spot we've seen actually has been in the NGL space. And we're anticipating that to continue on here into 2021. But really, it's been a little bit, we've brought this new capacity on. In fact, I would say that, you know, in the fourth quarter, as you go to 3Q to 4Q, we had a plus $30 million improvement in our Sweeney Hub. And that was really related to bringing on the two fracs, two and three, and then subsequently having a record performance with regard to shipments at the LPG export facility, which also contributed to that $30 million increase quarter over quarter. Had a little bit with regard to some trading activity with our propane and butane, which we trade around our business to make sure we optimize our system. It's really to make sure we get the right molecule at the right place. And so we had a little bit of mark-to-market impact there and also on some inventory, which impacted us. But also we saw a little bit of an impact as well in the fourth quarter, if you go from 3Q to 4Q, on ethane rejections. You know, that thing was getting back into the NGL barrel in 3Q, and it's really gone. Now it's going back into rejection. And so that's impacted some NGL volumes. And where does it impact us? A little bit of our equity ownership in Sandhills. And then the other part is we've got two JV fracks as well that had lower volumes and lower margins. Most of it was driven by just cracking a heavier barrel, and there were fewer barrels coming down the pipe.
spk09: You know, Roger, with respect to the new project contributions, I'd point you to the investor update and our midstream project updates. We outline all the capital spending, and they're kind of six to eight multiple of EVDA kind of investments, you know, swinging track. Two and three, $1.4 billion. You know, we've got South Texas Gateway, Clemens, contributing as well. So those were kind of a one-quarter contribution in 2020 that we'll get full-year contributions in 2021. CDG pipeline scheduled to come on mid-year, so we'll get half a year of contribution from that asset there. in 21. So I think those are the increments to be aware of supporting 21 profitability and ultimately 2022 profitability in the midstream.
spk11: I'd just like to make a comment on costs as well, Roger. And we've talked about costs were up quarter over quarter, and we've talked about that. But if you step back and look at the year, we reduced costs. Our full-year costs were $650 million lower than 2019. So we had a $500 million cost reduction target. And as we step back and look at everything we've done, we actually feel extremely good about where where we came in on costs. And you also factor in all of the project activity work that we had and the new assets that came up that came online. So overall, we actually feel very good about where we are.
spk02: Yeah, I wasn't trying to criticize you on the cost side. I was more just trying to understand if you had a full cost impact in Q4 with startups, but not a full volume impact. As you ramped up volumes, things would look better in Q1. That kind of was where I started the question.
spk10: Yeah, that's right. There's an element of that in there, Roger.
spk02: Okay. And then just a follow-up question, also kind of piggybacking on Phil there on the cash flow side. You mentioned in the year with the $2 billion in cash flow, I think about three-quarters of it coming from equity partnerships what would be the expectation for that kind of cash flow performance as we look at 21 is there any of that that has to be paid back or if debt was taken on at those partnerships does that have to get paid down before we would expect additional cash flows to come through in other words 22 will be fine but 21 may be constrained a bit yeah in terms of the distributions from equity affiliates
spk11: yes yeah now i would just think in high level through that i don't see why that number wouldn't um continue at that level in fact it may go up certainly from a cp chem standpoint so we had 632 million from cp chem in 2020 we would expect cp chem to probably come in stronger in 2021 given the trajectory on margins and what they're doing there. So that element, and that's by far the biggest single equity distribution we receive, and the rest of them, no real reason to think they would come off dramatically. So I think, if anything, we would expect a slight positive on that.
spk14: Great. Thank you.
spk06: Doug Luggett with Bank of America. Please go ahead. Your line is open.
spk12: Thanks. Good morning. Good morning, guys. Happy New Year. I wonder if I could, Kevin, just hit the balance sheet question again. It's a real simple question. We've obviously seen a lot different level of volatility than perhaps any of us thought was, you know, through the cycle. How does that change your view of where you want the balance sheet to be medium term? Once we can do the other side of this, do you reset the absolute debt metrics to a lower level is my first question.
spk11: Yeah, you know, as I think about that, Doug, if we were a refining-only business, that may be something that we'd need to consider. And certainly you would expect for refining only you would need to run that lower leverage because of the volatility. But as we've been growing all of the non-refining segments, I think we actually feel pretty good maintaining that same construct around how we think about the balance sheet, both in terms of absolute debt levels and debt to capital ratios. And as you know, in the past, we've talked about 30% debt to capital target. That's really more of a sort of guideline. It's an easy number to calculate. And it's a useful indicator. But ultimately, we're really focused on the credit ratings, maintaining the strong investment grade credit ratings. And I feel that We added $4 billion over the course of last year. If we can take care of that or something very close to that, when you factor in the growth in the other parts of the business, I think we'll be in a very good position from a balance sheet perspective. Okay. I appreciate the full answer.
spk12: My follow-up, fellas, is a micro question. I'm just hoping you can offer a little bit of color as to what's going on with the fairly substantial recovery, not anywhere near mid-cycle, of course, but nevertheless substantial recovery in in cracks in just the last two or three weeks demand hasn't come back inventories are still high and um you know we're just trying to kind of figure out what's going on it's funny if you could offer some color and what your perspective is and then i'll pass it on thank you well i would say that we we have seen product uh inventories come down product inventories are in the
spk13: Five-year average gasoline is actually below the five-year average by 3%. So we're seeing that. And I think as the vaccine gets out there, people are optimistic. Traders, when they think about markets, they think about future markets. And the future looks bright. So gasoline cracks have been moving and distillate cracks as well.
spk12: Yeah, I think I was thinking more on a demand-adjusted basis. We haven't really seen any tightening of the system, I guess, is my point. But I appreciate your context. I just wondered if there was anything unusual going on right now, maybe it's stockpiling ahead of maintenance or unusual maintenance or even... with spring maintenance, perhaps another round of terminal runs. But if you think it's just the normalization of the .
spk13: I would make one comment. If you think about RINs, we think RINs are in the cracks. So when you think about product prices and crack prices for products, the RIN is in there. So as the RIN goes up, you would expect that to show up in the crack margins of both gasoline and distilled cracks.
spk12: Great stuff, guys. Appreciate the time. Thanks so much.
spk06: Thank you. Paul Cheng with Scotiabank. Please go ahead. Your line is open.
spk03: Hey, guys. Good morning. Good morning. Great. Just curious. You make some reconfiguration in California. And we're looking at your portfolio. How Europe will fit into the longer-term portfolio given arguably that maybe even a more challenging regulatory environment that we are seeing. Is there any meaningful adjustment you need to do in that process? That's the first question.
spk14: So the type of Europe that's in the portfolio. Oh, how, Europe that's in the portfolio. I was going to start with California. Okay, well, let's do Europe. No, I think, you know, you think about Europe and, I mean, first of all, you know, return on capital employed, it's 35% plus return. So it's actually one of the stronger businesses in our portfolio from a return standpoint. You know, the marketing business is a business that, you know, we excel at in that part of the world and do a really good job with it. Then you move over to our Humber refinery in the UK. We think it's one of the better refineries in Europe. It certainly is a contributor around our specialty coke, needle coke businesses. We like that value proposition with that asset. We tend to like the continental business that we have in Europe. We like the position that Humber enjoys, not only from a cost standpoint, but from an environmental standpoint in that European theater. Bob, I don't know if you want to add on to that. You can.
spk05: Yeah, the one thing I would add on to is, you know, we were talking about energy transition earlier and the anode for the batteries. And so Humber Cope, right, is going to be a player in that. And if you look at even the laws in the U.K. after Brexit, in their ambitions to have EVs, they want local content-produced batteries. So I think that opens up an opportunity for Humber, and we really like where we're sitting today with with that. Humber also has the advantage of being designated UK as sitting in a cluster that the government there is very interested in developing the green hydrogen and the blue hydrogen schemes and things like that that Greg talked about. So we see a lot of opportunity in kind of the medium term, I think, for Humber and just beyond being a strong fuels provider in the UK.
spk13: And I would just say that in the marketing side, maybe in the United States, people are less familiar with our brands, Co-op and Jet, We're the best brand in Switzerland. We're the second biggest brand in Austria and the third in Germany. So we have a very, very strong brand. As Greg said, very strong return on capital employee.
spk03: Okay, great. Second question that I think in the past has been asked on the PS6P with the yield at 13%. I mean, strategically, is there any benefit having that as a public trade company I think that you guys have been saying that you don't want to rush into that, but what kind of timeline that you would give yourself in looking at whether that structure makes sense for you to maintain?
spk11: Yeah, Paul, it's Kevin. I think I would just reiterate what was said in the past, that clearly there's a significant DAPL overhang on PSXP that's creating uncertainty, which is understandable. And, you know, the PSXP has actually worked extremely well for us. You look at the growth and where that entity has come from and where it is today. And so at an objective measure, you look at that, and we feel very good about it, but obviously the unit price we don't like. And so we've got this uncertainty around DAPL, and we just don't feel it would be appropriate to make any rash decisions right now while there's this cloud of uncertainty over it and doing something different. We just don't think it's the right timing to be considering that.
spk03: Hey, Kevin, can I just maybe ask a side question? You mentioned earlier to Doug's question that you think the longer-term balance sheet debt ratio really didn't change compared to pre-pandemic level because you have all the other diversified business. If we're looking at that, other than chemical your other business, whether it's the transportation, the NGL, is still hydrocarbon or fossil fuel related. And if indeed that we're going through the energy transition, those business will also get impact. So from that standpoint, should we still go with a far more conservative partnership?
spk11: They're hydrocarbon-based businesses, but you don't have the margin volatility that you have in the traditional fuels refining business. And so our assets are fundamentally supported by long-term contracts, committed volumes, minimum volume commitments. And so I don't think it – I think your question is maybe a – maybe you get far enough out there, and there's a different point on that, but within a reasonable stable generation of earnings and cash, and therefore can support the debt that we would have on the balance sheet.
spk06: Jason Gabelman with Cowen. Please go ahead. Your line is open.
spk01: Yeah. Hey, guys. Thanks for taking my questions. On the first ask in the refining business, and it's been, I think, a little weaker the entire year than we had expected it to be. And this other bucket has been a big headwind. It looks like You know, it's been the past couple quarters around $3 a barrel headwind versus the base crack. I think last year it was under $1.50. So can you just talk about what is exactly going on there? I know winds are a part of it and there's timing impacts, but why is that headwind expanded this year? And do you see that reversing next year and out of follow-up tanks?
spk05: Yes, Bob, you're right. It is a headwind, but that is the category where we kind of put the cats and dogs. So Rins is a big piece of it, right? If you just look at the fourth quarter, And we draw the box just around refining. So we're not talking about what we recover downstream on the rent or anything, but on the refining per barrel basis in the fourth quarter, it was $2 of that $3.08. So it is a big part of that other category. The other big one in there is what we spend to get our products from the refinery gate to market. So there's distribution costs that come back in there and And some of those are per barrel, but some of those kind of fall into the fixed category. So if we've got tankies rented downstream or we've got taker pays on pipelines that we need to pay on minimum volumes, that all kind of comes back that those costs then elevate when you've got less volume or pushing through there. So by definition, those costs will come back down and get smaller as we ramp volumes up here through the first part of 2021. And that really kind of accounts for the two big drivers in that other category.
spk01: Got it. And just on the RINs, technically the headwind in refining should be a tailwind in the marketing business. Is that the right way to think about it?
spk05: That's correct. We recover a portion of those costs downstream of the refineries.
spk13: We blend the majority of the gasoline produced by our refineries in our marketing business, and as we add retail for the integration of our refining business, particularly in middle America, where it's much more difficult to export, we'll get more capture of that rent.
spk01: Got it. Great. And then I just wanted to ask about Baffle, which was, just mentioned um and the litigation process can you just discuss the path forward um i believe there's a case being heard in the lower court um about the ability to keep the pipeline shut down while um this uh permit process is ongoing in terms of trying to get the new eis in place to support the permit so just one wondering what the next steps are in that litigation process Can Biden step in and shut down the pipeline without kind of going through the adjudication process and any other thoughts on that? Thanks.
spk09: Yeah, I think as we look at the Bakken pipeline, it's operated extremely well. We think it should continue to operate as we're working through the environmental impact statement. I think it's hard to... speculate on how the legal proceedings are going to play out. We review and analyze many scenarios and how we will react depending on how this plays out. But, you know, the courts are going to have to continue to work through the process and will react accordingly.
spk01: Great. Thanks a lot, guys.
spk06: Manav Gupta with Credit Suisse. Please go ahead. Your line is open.
spk00: Hey guys, first a quick question. I think your Gulf Coast operations got hit pretty hard on the hurricane and then you decided to move forward some turnaround. So for two quarters your Gulf Coast refineries have been in a kind of a turnaround. I'm just trying to understand from here on how do you stabilize those operations and when do you get the refineries back to let's say even 70-75% utilization versus where they have been operating for the last two quarters?
spk05: Yeah, Manav, you're absolutely right. So if you kind of look at the three refineries that we've got in there, we've got Sweeney, which really operated per the market conditions the entire quarter. Alliance, we chose to have down for the entire quarter. So back in September, second half of September, we came down because we had a hurricane pointed straight at us. Hurricane moved at the last minute. But while we were down, since we were only a couple of weeks away from shutting down for some reform or catalyst change work. We decided to stay down. We executed that work. And then, you know, usually the market conditions in the fourth quarter in U.S. Gulf Coast are pretty tough. So we took advantage of that and kept the refinery down and pulled some difficult-to-do turnaround work that we would have done late this year, early next year. We pulled it forward and got it out of the way. So that was a conscious decision to keep all that down. That's a line before it came down was in 180,000 barrel a day range from an operating standpoint. And in Lake Charles with the two hurricanes that came running through there, we were just about back up and running. uh after the first one and then we came back down for the second one waited on electricity again for a few days and then came back up and we've had a couple of uh operating issues coming back out of that that we're dealing with but for the most part like charles is up and running and processing crude we restarted uh alliance in early january and and they're up and running at the kind of for the market rate that we want them to be at so Other than kind of normal turnaround work and stuff we've got going on, we don't anticipate any other issues in this quarter or next in the Gulf Coast.
spk06: And we have reached the end of today's call. I will now turn the call back over to Jeff.
spk09: Thank you, David, and thank all of you for your interest in Phillips 66. If there are additional questions, please call Shannon or me. Thank you.
spk06: Thank you, ladies and gentlemen. This concludes today's conference. You may now disconnect.
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