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spk10: Welcome to the first quarter 2024 Phillips 66 earnings conference call. My name is Lydia and I'll be your operator for today's call. At this time, all participants are in the listen-only mode. Later, we will conduct a question and answer session. Please note that this conference is being recorded. I'll now turn the call over to Jeff Dieter, Vice President, Investor Relations. Jeff, you may begin.
spk12: Welcome to Phillips 66 first quarter earnings conference call. Participants on today's call will include Mark Glazier, President and CEO, Kevin Mitchell, CFO, Tim Roberts, Midstream and Chemicals, Rich Harbison, Refining, and Brian Mandel, Marketing and Commercial. Today's presentation materials can be found on the investor relations section of the Phillips 66 website. along with supplemental financial and operating information. Slide two contains our safe harbor statement. We will be making forward-looking statements during today's call. Actual results may differ materially from today's comments. Factors that could cause actual results to differ are included here, as well as in our SEC filings. With that, I'll turn the call over to Mark. Thanks, Jeff.
spk16: Welcome, everyone, to our first quarter earnings call. We continued to progress our strategic priorities, and we returned significant cash to our shareholders. While our crude utilization rates were strong during the quarter, our results were affected by maintenance that limited our ability to make higher value products. We were also impacted by the renewable fuels conversion at Rodeo, as well as the effect of rising commodity prices on our inventory hedge positions. Currently, our assets are running near historical highs and we are ready to meet peak summer demand. Before we provide an update on our strategic priorities, we want to recognize our midstream, refining, and chemicals businesses, which have all received honors for their exemplary safety performance in 2023. Our midstream gathering and processing business received the top 2023 GPA safety award in the large operator division. In refining, The Rodeo and Sweeney facilities both received the AFPM Distinguished Safety Award, which is the highest annual safety award in the industry. This was Sweeney Refinery's third straight year to receive the honor. The Ponca City Refinery earned the Elite Platinum Award and the Lake Charles Refinery secured the Elite Gold Award. In chemicals, CP Chem received two AFPM Safety Awards. I'm very proud of our employees and the employees of CP Chem for their commitment to safety. I would like to congratulate them on a job well done. Today, beginning on slide four, we'll highlight the progress we've made on our strategic priorities. Next, we'll discuss our first quarter financial results. Then, we look forward to your questions. We previously announced plans to monetize assets that no longer meet our long-term objectives. and we set a target to generate over $3 billion in proceeds. The expected proceeds will support our strategic priorities, including returns to shareholders. This quarter, we launched a process to divest our retail marketing business in Germany and Austria and communicated the plans to employees. Completion of the dispositions is subject to satisfactory market conditions and customary approvals. We have distributed almost $10 billion through share repurchases and dividends since July of 2022. Over the remaining three quarters of 2024, we expect to achieve our $13 to $15 billion target. Share repurchases will continue to be an important component of our capital allocation. We're committed to return over 50% of our operating cash flows to shareholders. Recently, we announced a 10% increase in our quarterly dividend, contributing to a 16% compound annual growth rate since 2012. The dividend increase reflects the confidence we have in our growing mid-cycle cash flow generation and our disciplined approach to capital allocation, including a secure, competitive, and growing dividend. In refining, we continue to run at crude utilization rates above the industry average for the fifth consecutive quarter. We remain focused on improving performance, increasing market capture, and reducing costs to enhance our earnings per barrel. We have achieved over $560 million or more than 80 cents per barrel in run rate cost reductions from business transformation. We expect to achieve our full $1 per barrel run rate target by the end of the year. In midstream, our NGO wellhead-to-market business is focused on capturing operating and commercial synergies of over $400 million by year-end 2024. Midstream's estimated 2024 mid-cycle adjusted EBITDA is $3.6 billion, providing stable cash generation that covers the company's top capital priorities, funding sustaining capital, and the dividends. During the first quarter, we achieved a major milestone with the startup of our Rodeo Renewable Energy Complex. Slide five summarizes our journey to transform the San Francisco refinery into one of the world's largest renewable fuels facilities. The facility benefits as a superior location to secure renewable feedstocks and market renewable fuels. The project leverages existing assets and is expected to generate strong returns. We began producing renewable diesel from our Unit 250 hydrotreater in April of 2021. We have gained valuable operational experience and market knowledge that positions us for success in our expanding renewable fuels business. Unit 250 continues to exceed expectations and has increased production to approximately 10,000 barrels per day. Our Rodeo Renewable Energy Complex is producing 30,000 barrels per day of renewable fuels. We're on track to increase production capability to full rates of approximately 50,000 barrels per day by the end of the second quarter. Once complete, we'll have the ability to produce renewable jet, a key component of sustainable aviation fuel. We're proud of the team's strong project execution and appreciate their commitment to operating excellence in achieving this significant milestone. The Rodeo Renewable Energy Complex positions Phillips 66 as a world leader in renewable fuels. Slide 6 provides an update on business transformation progress. Our run rate savings were $1.24 billion at the end of the first quarter, comprised of $940 million of cost reductions and $300 million of sustaining capital efficiencies. Through the first quarter, we've achieved $750 million in annualized cost reductions. The majority of these cost reductions relate to refining operating and SG&A expenses, as well as benefits to equity earnings and gross margin. We're on track to realize $1 billion of cost reductions in 2024 to sustain higher cash generation. Before I turn the call over to Kevin to review the financial results, I want to stress that the market fundamentals are good, our assets are running well, and we have a clear path to achieving our strategic priorities and growing cash flows.
spk15: Thank you, Mark. Slide 7 summarizes our first quarter results. Adjusted earnings were $822 million, or $1.90 per share. Operating cash flow excluding working capital was $1.2 billion. We received distributions from equity affiliates of $348 million. Capital spending for the quarter was $628 million, including $171 million for a midstream joint venture debt repayment. We distributed $1.6 billion to shareholders through $1.2 billion of share repurchases and $448 million of dividends. Net debt to capital ratio was 38%. Slide 8 highlights the change in results by segment from the fourth quarter to the first quarter. During the period, adjusted earnings decreased $540 million, mostly due to lower results in refining, midstream, and marketing and specialties, partially offset by improved results in chemicals. In midstream, first quarter adjusted pretax income of $613 million was down $141 million from the prior quarter, reflecting lower results in transportation and NGL. Transportation results were down mainly due to a decrease in throughput and efficiency revenues, partially offset by seasonally lower maintenance costs. The NGL business decreased primarily due to a decline in margins, as well as lower volumes reflecting impacts from winter storms. Chemicals adjusted pre-tax income increased $99 million to $205 million in the first quarter. This increase was mostly due to higher polyethylene margins driven by improved sales prices and the decline in feedstock costs, as well as lower turnaround costs. Global ONP utilization was 96%. Refining first quarter adjusted pre-tax income was $228 million, down $569 million from the fourth quarter. The decrease was primarily due to lower realized margins. Our commercial results were less favorable than the previous quarter, in part due to inventory hedging impacts in a rising price environment and less advantageous pipeline ARBs. In addition, realized margins decreased due to lower Gulf Coast clean product realizations. Our refining results and market capture of 69% were also negatively impacted by maintenance activities on downstream conversion units, as well as the renewable fuels conversion at Rodeo. Marketing and Specialties adjusted first quarter pre-tax income was $345 million, a decrease of $87 million from the previous quarter. The decrease was mainly due to lower domestic marketing and lubricant margins. Our adjusted effective tax rate was 21%. Slide 9 shows the change in cash during the first quarter. We started the quarter with a $3.3 billion cash balance. Cash from operations, excluding working capital, was $1.2 billion. There was a working capital use of $1.4 billion, mainly reflecting a $2.6 billion increase in inventory, partially offset by benefits and accounts payables and receivables, which included the impact of rising commodity prices. Net debt issuances were $802 million. We returned $1.6 billion to shareholders through share repurchases and dividends. Additionally, we funded $628 million of capital spending. Our ending cash balance was $1.6 billion. This concludes my review of the financial and operating results. Next, I'll cover a few outlook items for the second quarter. In chemicals, we expect the second quarter global O&P utilization rate to be in the mid-90s. In refining, we expect the second quarter worldwide crude utilization rate to be in the mid-90s. Turnaround expense is expected to be between $100 and $120 million, excluding Rodeo. We anticipate second quarter, corporate and other costs to come in between $330 and $350 million, reflecting higher net interest expense. Now we will open the line for questions, after which Mark will make closing comments.
spk10: Thank you. We'll 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 touchtone phone. If you wish to be removed from the queue, please press star, then 2. If you're 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 touchtone phone. Our first question comes from Neil Mehta of Goldman Sachs. Your line is open. Please go ahead.
spk07: Yeah, good morning, Mark and team. I guess the first question was just refining in the quarter. The capture rates were really noisy in 69%. I know you guys target 75%. It looks like a lot of that was on the West Coast because of Rodeo and then also secondary products. So you alluded to some of this in the prepared remarks, but Maybe you can just talk a little bit about what happened there and your confidence about the progression as we work our way through the year.
spk16: Yeah, good morning, Neil. That's a great question. Thank you for asking that. The way I'm looking at this is those first quarter headwinds that you mentioned in refining are all related to activities that will position us to deliver medium and long-term tailwinds in support of our strategic priorities. And so it's Some of the fundamental work going on around Rodeo and some of the work around our turnarounds are critically important. And Rich and Kevin can drive into that a little bit more, and including some of the activities in commercial that we underwent over the last several quarters that will contribute to our long-term success. So, Rich, do you want to dive in?
spk17: Yeah, Mark. And, Neil, you know, when I reflect back on the quarter, you know, I look at the metrics, and we ran pretty well overall. But the market capture obviously was challenged and it was primarily driven by activity in the Gulf Coast and the West Coast. We achieved about an 84% clean product yield, which where our assets is pretty good. It's actually 1% higher year over year. So it is a sign that our margin projects are actually playing into the bottom line here as we move forward. However, quarter over quarter, we were 3% lower than the fourth quarter. 1% of that's very clearly it's seasonal, it's butane blending related to our conversion as we move towards summer gasoline over the quarter. Another 2% is really related to our turnaround activity, and this was principally focused in the downstream catalytic units across our system, and it was concentrated in the Gulf Coast area area. This has really two effects when it comes to market capture and clean product yield. It reduces our ability to produce higher-value products, and it increases our intermediate inventories over the period. Now, on the West Coast, we have the conversion of the Rodeo facility, which is a compounding event. Essentially, it effectively had a $180 million loss. and adjusted pre-tax income in the quarter as we transform the business. And if you think about the business, it went from active to idle to reactive across this first quarter. The good news is we're near completion of the Rodeo conversion, and I actually would say we're well into the wind-up phase now. So to summarize, I guess the Rodeo startup's on schedule, ramping up production. Approximately 50,000 barrels a day of renewable fuels will be achieved out of that facility in the second quarter. And we've positioned our units across the system to run full conversion rates with fresh catalysts and ample intermediate inventories for the upcoming driving season.
spk15: Kevin, did you want to add anything? Yeah, let me just put a couple of numbers to some of these items. So in terms of commercial impacts that we talk about, On Gulf Coast, product pricing, differentials, in absolute terms, that was a $50 million headwind in the first quarter. The inventory hedges that I referenced in the earlier comments, which primarily impact Central Corridor, that was a $100 million headwind in the first quarter. These are not variances. These are absolutes in the quarter. And then on the West Coast, Rodeo
spk16: in uh overall terms was a 100 million 180 million dollar negative uh or loss for the quarter so the west coast results are bearing that drag from the impact of the rodeo conversion yeah and i think just to put that in context we're taking a disadvantaged refinery and converting it into one of the world's largest renewable fuels facilities and so to to bridge to that we we took the heavy lift this quarter And now we're well positioned to start delivering value again from the Rodale facility as we continue to push it to full rates through the second quarter. And then on the Gulf Coast, the way you have to think about that is we're still maximizing our crude utilization throughput, but that crude turned into intermediates instead of clean products by design because of the turnaround work we had underway. So now we've got that inventory of intermediates poised to be converted into clean products as we continue to ramp back up into the summer season. So we're well-positioned going forward.
spk07: Thanks, Tim. That's a lot of good color. The follow-up is just on balance sheet. Tim, one's always a noisy order for working capital, and that cash flow bridge, Kevin, is really helpful. But just your perspective on where do you want to get your net debt to capital over time? What's the path to get there, including potential asset sales? And then how do we think about working capital in that equation? So big picture question around that metric.
spk15: Yeah, Neil. So let me hit on the working capital piece first. So negative $1.4 billion in aggregate, but $2.6 of that is a function of inventory build. And so we did have some partial offsetting benefit in payables and receivables. And that was driven by two items. One, the rising price, the absolute rising price environment generally is positive for net APAR. So we saw some benefit there. But we also benefited on receivables by collecting in the first quarter cash from fourth quarter inventory drawdown. And that was several hundred million dollars that showed up in there. But on the inventory build, it's a sizable build. And I would say it's really a function of both commercial opportunity inventory and as well as some operational driven inventory. And the way to think about that is the operational barrels will turn into margin at a future point in time, like the intermediates that we've talked about. The commercial inventory bill, those will generate a return that will be in excess of anything we will realize on cash balances. And fundamentally, it's all still sitting in a liquid asset on the balance sheet. That kind of talks to the working capital. And consistent with normal practice, you'd expect that inventory to come back down towards the end of the year, and you'll see some of that cash coming back to us. In terms of balance sheet and leverage levels, we are above our targeted range, so 25% to 30% target range. Still comfortable with that target. You'll notice that we've been leaning into the share repurchases quite heavily, and that's a function of our confidence in the business, in the outlook, our growth that we see coming in terms of the $14 billion of mid-cycle adjusted EBITDA. And so it feels like still a pretty compelling opportunity for us to be buying shares back, even if in the near term it's at the expense of that leverage metric. So still expect to get there to that level. That's still our objective. And the other comment I'd make on leverage, the other metric, the other way we look at this is the non or the much less commodity sensitive, sensitive businesses, the midstream and the marketing specialties business is our ability for those businesses to basically be able to bear the debt that the company has. So at, on a combined basis, that's circa $6 billion of EBITDA generation. And you think of a typical leverage multiple for businesses like that, call it three times. That's $18 billion of net debt, which is roughly where we are. And so that's the other measure we look at. And that keeps the refining business, avoids that volatility being part of that, the way we look at that debt level. So it keeps us very comfortable from a balance sheet standpoint.
spk07: Thanks, Kevin.
spk10: Our next question comes from Roger Reed of Wells Fargo Securities. Your line is open.
spk13: Yeah, thank you. Good morning, everybody. I'd like to, if we could, maybe look at, I guess it's a combination of the OPEX that we're seeing and we're finding, and I guess let's say juxtaposed against the progress you're making in overall cost reduction. So, you know, during the first quarter going from 630 to 715 on a cumulative basis, I look at cash op-ex, it's kind of stable over the last three quarters. Recognize a lot of stuff's going on, but if you could help us kind of put those two together and maybe where you see the impact on cash op-ex or maybe if it's embedded in the actual refining margin, where we're seeing the cost savings manifest in refining.
spk16: Yeah, I think that certainly the majority of our business transformation cost impact is showing up in refining. And we've been out delivering our targets, over delivering against our targets, and certainly continue that into 2024. There's always a lag. And we talk about run rate, and then we talk about realized. And we want to make sure that you keep track to the run rate is where the speedometer is at this point in time. The realized is what we're actually seeing show up in the numbers. And we've seen good progress in refining, and we'll continue to see that throughout this year as we rise up to our forecasted $1.1 billion in cost and $300 million in capital synergies, capital savings. And so Rich can drive into those cost numbers for you, Roger, and give you some color around that.
spk17: Yeah, so the end of last year, Roger, we, on a run rate basis, passed the $500 million or roughly $0.75 a barrel number in run rate last year and realized about $0.41 of that last year. As we fast forward now through the first quarter here, we see that realized number creeping up to the 500, actually slightly over the 500 million number. So it's coming in at that 75 cents and it's roughly that delay that Mark's talking about, roughly 90 day delay in achieving that. So when we go back and we validate those spends, and remember those spends are over 900 separate initiatives that we've completed across the organization. We go back and revalidate these. So we are seeing those start flowing to the bottom line for refining. And if you look at our year-over-year OPEX, it is noticeably lower, even in the face of inflation, pretty heavy inflationary period here that we've faced over the period of time. So we're happy with the progress. On a run rate basis, at the end of the first quarter, we've achieved $560 million of run rate, which equates to about 80 cents. And that's on a trajectory for the year end of a dollar a barrel target that's set for the organization, which is roughly $650 million by the end of the year. So we're well on that pace to achieve that. And the program is pressing forward. And like I had mentioned earlier, it's a of hundreds, if not thousands, of initiatives to execute. And it's really intended to drive work and efficiencies out of our work process. And as that happens, we want to make sure that that changes how we do our work and influences how we make decisions. But it should not compromise safety. reliability or earnings power for the organization.
spk16: Yeah, Roger, and I really want to drive home what Rich just said, that the cultural impact on the organization has been impressive, particularly out in the field, whether it's midstream, refining, wherever you are. And we have a workforce that has bought into it and it's committed to driving higher levels of performance. They understand right out the front lines. They understand what our strategic priorities are and how they can contribute to us getting there. And so they're digging in and they're looking at those opportunities every day. And across the organization, we continue to simplify work to make work easier for people to get done. So get people the right digital opportunities so they can make better decisions faster, whether it's commercial or whether it's an operator out in the front line and the organization, we're also simplifying, and we want to ensure that we've got a streamlined organization that will support sustainable success around both cost and performance, and we're seeing that live as we move forward.
spk13: I appreciate the detail there, everybody. Just a follow-up question on the announcement of the potential sale of the
spk15: european retail assets how does that affect the partial ownership you have in refining assets on mainland europe miro specifically yeah roger it's kevin so we're we're selling the the jet germany and austria retail assets uh like we said uh that's a uh company-owned dealer operated model primarily almost a thousand sites across those two countries. That's a high performing business. Um, uh, top, uh, top rated, uh, many, uh, many years in a row, uh, 10%. So the market share in each country and great business, but doesn't really integrate, uh, with the sort of core strategic focus areas that we have as a company. So there's a little back, a little bit of background as to why those assets, it does not include our ownership in, the Miro refinery in Germany. And the reason for that is the majority of buyers for those type of retail assets would not be interested in refinery ownership. If there's a buyer that is interested, then that's a separate conversation and we'll handle that separately. But this package right now is focused on those marketing assets.
spk13: Great. Thank you.
spk16: Thanks, Roger.
spk10: The next question comes from Ryan Todd of Piper Sandler. Your line is open.
spk06: Sorry, getting off mute there.
spk05: Maybe if I could start with one on Rodeo. I mean, congrats on getting the project, the Rodeo Renewed project up and running. You mentioned the loss in the first quarter, and I know early days are challenging as you ramp towards full capacity and optimized performances. But can you walk through maybe what to expect over the next few quarters there? When do you anticipate hitting full production capacity? You know, how do you anticipate the feedstock mix to change over the next few quarters as you run more advantage feeds? And how should we think about that, you know, that negative 180 million moving towards profitability, you know, from a timeline point of view as we look over the course of this year?
spk17: Sure, Ryan. I got that. This is Rich here. So maybe first I'll start with a timeline of the Rodeo facility. As you know, we've been ramping this facility down and hit a milestone in February of this year with a complete shutdown of the facility after 128 years of legacy of running as a crude processing site. That first transition occurred on the first hydrocracker And they went into renewable fuels feedstock production in March of this year. So that first phase is up and running. That's that milestone we're talking about here. And that's allowed the facility in complement with the Unit 250 operation that Mark mentioned in the earlier comments with the first hydrocracker to produce about 30,000 barrels a day of renewable fuels. The second hydrocracker and the pretreatment unit will both finish construction in the May timeframe, and we will start those up in the June timeframe. So by the end of the second quarter, the facility will be at full production rates. Now, what does that all mean when it comes to margin? So margin in this business is driven a lot by the carbon intensity of the feedstocks. Brian's team's been actively engaged in that over the last couple years on aggregating a number of feedstocks. So the way we see this is we will start with essentially the pre-treated material in the second quarter, a higher CI, roughly 50 CI number. And over the third quarter, we see the carbon intensity of our feedstocks continually ramping down through that third quarter. And by the end of the third quarter, I would expect to see us in the lower to mid-CI range of 30s, in that range. And that's primarily driven by processing more recycled fats, oils, and greases that are aggregated throughout the world. And then as a supplement to all of that, we're seeing a growing interest in sustainable aviation fuel as well. So we have positioned the facility to begin production of sustainable aviation fuel, which is a key component is the renewable jet that's blended into that. And that production will be capable of starting in the third quarter as well. And we do expect to be a prominent supplier in the market on that. So the good news is, you know, Rodeo's through that startup process, that shutdown startup process, and now we're in the ramp-up phase, I'll call it. It's online, and we're ramping up production right now.
spk16: Yeah, Ryan, when we get up to full rates, we'll be able to produce something on the order of 10,000 barrels a day of renewable jet fuel, which gets blended up then to sustainable aviation fuel in the marketplace. And this kit is going to be designed for continuous optimization, whether it's the split between jet and diesel fuel or the feedstocks coming in because of the feed pretreatment unit we'll have, we'll have great flexibility. So we'll optimize on CI cost and revenue and as well as the incentives that are out there. So it's going to be an interesting facility to have in our kit and we're looking forward to getting it fully online and generating cash.
spk17: I think it's supplemented as well by the last mile strategy that Brian's team's put in place. That That prevents leakage of value as we deliver the product to the end user there, and that should play out nicely as we increase production from the facility.
spk05: Have you signed contracts on the SAF front? Are you in ongoing negotiations there with partners?
spk02: We're concurrently in negotiations with partners. We've seen a lot of interest in SAF.
spk05: Great. Thanks. That's maybe just one, you know, changing gears, the chems, you know, on the chemical side, better than expected performance at CP Chem. Can you talk about kind of the drivers of improvement there? Is it primarily feedstock related? Are you seeing any signs of underlying improvement in market conditions and maybe how you're looking at the rest of the year?
spk11: Yeah. Ron, this is Tim Roberts, and I'll chat about that. I'll cover three things because I think there'll be other questions around it. First one I wanted to talk about is actually more on the leadership side. I just wanted to recognize Bruce Chen, who is the recently retired CEO at CP Chem. He did a really good job there. Great leadership, great drive for excellence, and he'll be missed. We have an internal candidate, Steve Prusak, who's assumed the role of CEO. Steve's been very successful in all phases of the chemical business, and we are highly confident in his ability to lead and take CP Chem to the next level of industry-leading performance. So that, I want to thank both of those guys. Now, on the macro side, let me talk about that, and then I'll get specific to CP Chem. Macro, clearly the heavy light spread with regard to being light feed versus heavy feed, it's really been a boon to those that can crack the light feed stocks, especially CP Chem, who's well-positioned, not only in the U.S. Gulf Coast, but in the Middle East. And so it's the advantage is pretty wide right now. And so they've been able to take advantage of it. In fact, the industry in the U S if you're cracking light, you like it. Um, however, I will tell you, we are not at mid cycle margins. It has come off the bottom, which is good. A lot of that is really related to, um, more about feedstock. So, you know, natural gas has come off, it's come down, uh, and subsequently ethanes come down with it as, as some propane and butane as well. And so subsequently, that gap has gotten bigger. And anyway, that's showing up. And then also the lower feedstock and natural gas relative to utility cost. So the combination of those two, as well as just a little bit of support on polyethylene pricing, not a lot, but enough to help widen up that chain margin a little bit. So I think that's been good. We still think, though, that Although we're off the bottom, we still think it's hard to see us getting to mid-cycle any time during 2025. But certainly, you know, supply-demand fundamentals, as destocking goes, we do see that, you know, it's sometime after 2025 you can see it rebalance and then get back into a mid-cycle environment. Specifically to CP Chem, though, I do want to highlight as well with them that they've had a couple of their mid-cap projects that did come on stream late last year. C3 splitter, the one hexene unit, and then they also added another furnace to one of the large crackers there. And one hexene and C3, they're adding earnings in the first quarter. So they're up, they're running, they have run it higher than nameplate capacity, which has been really good. And again, generating earnings that are showing up at CP Kim's results. and we're in really a startup mode with the furnace. That works complete. They're starting it up, going through the normal shakedown you will have with those units, and we're hoping in 2Q you'll see something more material on the earnings side there too.
spk16: Yeah, Ryan, you're seeing live the last almost 25 years of what CP Chem has done to position themselves to be able to run flat out at the bottom of the cycle, and they did that, and they did that profitably, and you're seeing, rationalization of assets in Europe while they're running at flat-out rates. And so that's encouraging from a CP Chem perspective. We need to see that in this down cycle to see some of the less competitive assets come out of the system. And that's going to be constructive, and that will help accelerate the industry out of the bottom of the cycle and to greener pastures out in the next couple of years.
spk11: add on to that point, I think that's a great point, is what you're saying is that a lot of your higher cost folks, they're running at reduced rates or they're shut down and extending maintenance or running at reduced rates. And we've even seen some facilities, namely in Europe, two announcements of two crackers that will be shutting down from some competition there because they're at the wrong place in the cost curve, whereas CP Chem is on the right place in the cost curve.
spk06: Great. Thank you very much.
spk10: Our next question comes from Manav Gupta of UBS. Please go ahead, your line is open.
spk08: Hey guys, so you did a good job of explaining the variability in earnings quarter on quarter on refining. Can we go through some of that in the midstream? We saw a big variation on the NGL and other side. I mean, transportation wasn't off that much, but help us understand what drove the variability in the second part of that business.
spk11: Yeah, Manal, thanks for the question. This is Tim Roberts again, and let me go ahead and address. I mean, first thing I want to lay out there is that last quarter on the earnings call, I talked about, you know, guiding towards $675 million per quarter IBT, and we're staying with that. I mean, that still feels good, $3.6 billion to the year. That's where we're at. So I just wanted to make sure we were, you know, that hasn't changed. Now, if you look at 4Q and 1Q, Forky was a strong quarter. Okay. That was the first thing you had some one-time things that showed up in that fourth quarter. And then in the first and in first quarter, what impacted it and especially the variance. Number one, winter storm. So winter storm, uh, it impacted us and impacted other people too. And, and really the impact was, and I think it's worth noting, um, we're really not to our assets. Um, it was to the producers. So we really weren't seeing the volumes come down the pipe due to freeze offs and a variety of other different issues. So it took a while for those volumes to get back up and get running again, and then subsequently start working their way through the system. So about $30 million impact there. And then also we had some commercial true ups from fourth quarter to first quarter, commercial true ups, accruals, and some inventory timing that showed up between fourth quarter to first quarter. And so if you put those two quarters together, you really are getting in somewhere north of that 675 number where we're at. We think we'll be on a more normalized basis as we go into 2Q. And you'll see some inventory timing issues will show up. It's not big, but some will show up in the second quarter as a positive. But generally, that's kind of how we look at it. We're still in that 675 is the right number as we see throughout the year.
spk08: Perfect. My quick follow-up is on the diesel macro. We have seen some pullback in cracks. Wasn't fully anticipated because we expected Russia volumes to drop, which they did not. So I know Jeff does a lot of detailed work on this. So if you could help us with your crystal ball as to what's going on in the diesel world and do you expect the cracks to get stronger in the year?
spk02: This is Brian Mandel. I would say that, you know, we've had a number of issues. We had a warm northeast U.S. winter. Then refiners came back, and they were running really well. Prices for diesel are in contango. We have seen about 200,000 barrels a day of Russian distillate off the market. But we are constructive. We do think the market will come back. You're starting to see run cuts in Europe and Asia with hydrocracking and hydroskimming margins that break even. As we move into driving season, we could see more gasoline mode. In fact, you're seeing gasoline over distillate on the coast in the U.S., east and west coast, and that could drive less distillate. Moving to more jet production from diesel, particularly we're fixing to head into China's Labor Day, Golden Week, and we see real strong jet demand. And then continued issues, geopolitical issues, you know, if Russia's hit again, that means diesel exports as well. We think that things are going to look better coming out of this trough here.
spk08: Thank you.
spk10: Our next question today comes from John Royal of J.P. Morgan. Your line is open.
spk03: Hi. Thanks for taking my question. I had a follow-up on the retail sale in Europe. Are there any other assets on the international marketing side that might be less strategic that could shake out there? And on the U.S. marketing side, is the majority of that business too integrated with the refining operations to separate? I'm just trying to get a sense of the strategic direction in marketing in light of this new sales process.
spk15: Yeah, John, from a Europe standpoint, the other marketing businesses are in Switzerland, where we have a joint venture with Co-op. and in the UK, and the two are very different in that the Switzerland business is somewhat of a standalone retail business, but it's also in a joint venture structure, and so the dynamics are a little bit different around that. The UK, that marketing business is very integrated with our refining in the UK, so it's much more akin to the US model where the marketing business serves to help ensure product placement coming out of the Humber refinery. And that's really the case for the U.S. marketing business as well. It's very much integrated with the refining system across the different regions.
spk03: Great. Thank you. And then my next question is on the West Coast. I think Mark sort of alluded to this a little in his response to Neil, but how should we think about the structural capture rate on the West Coast? How it's going to be different now with the Rodeo, you know, officially an RD unit and not a refinery. Should we expect it to be higher than what we've seen historically as a result?
spk17: Well, you want me to start with that? Sure. You can come over the top. This is Rich Harbison. So, there's a reason. John, we've gone to Rodeo and converted it into a renewable fuel stock. It has not been a meaning contributor to the earnings profile on the West Coast for quite some time now. So we're looking forward to getting that change fully implemented, and then we do think that we'll have a marked change to the West Coast profitability. The Los Angeles and the Ferndale facilities will continue to operate, and they've been Good contributors to the West Coast, but I'll say in general the West Coast is a challenging market to make money on the refining side of the business. Our Los Angeles refinery has been challenged with the declining supply of California domestic crude, which has taken away a lot of the original crude advantage for that facility when it was originally built. Now the TMX pipeline is opening up, so there's a change in the crude flow dynamics, which has a potential to have a positive impact on the Los Angeles facility. And we'll see how that dynamic works out here over the next few months as these crude flows change around. But, you know, changing and pulling the Rodeo Refinery out will have a marked change on the West Coast.
spk10: Our next question comes from Matthew Blair of Tudor Pickering Holt. Please go ahead.
spk04: Hey, good morning. Are you able to share the approximate EBITDA contribution of those German and Austrian retail assets up for sale? And then the cash from the sale, would that be earmarked for like share buybacks? And if so, would that mean an increase to the 13 to 15 billion target?
spk15: Yeah, Matt, this is Kevin. The EBITDA, I'll give you the numbers that are on the information that we're providing to the prospective buyers. The range is 300 to 350 million euros, which the conversion for that is 325 to 375 million dollars. If you pick the midpoint, 350 million dollars of EBITDA is probably your best number to go with on that. In terms of cash generation, as we've previously stated, our cash return target, the $13 to $15 billion, was not dependent on proceeds from asset sales. So it does have the potential to increase that. But I would also say we haven't made any definitive decisions on exactly how that cash would be deployed. And also, the timing is still quite uncertain at this point anyway. These processes usually take a while to run through. So that will be something that we will make a determination on near the time when that cash inflow becomes real.
spk04: That's great. Thanks. And then the $180 million hit from the Rodeo conversion, I think that's a little bit higher than what we were expecting. What drove that increase, and can you provide any sort of breakout on how much of that was in gross margins versus OPEX versus depreciation? And then also, is it fair to assume that the current Rodeo plant is EBITDA negative since it's not running the low CIPs yet?
spk15: So, on the first question, we're not going to give that level of asset-specific breakout. And I would say the 180 does not include – the absolute loss on a GAAP basis is bigger number again because we had some impairments related to assets that are taken out of service. So the 180 is consistent with the way we report our adjusted earnings. And it does show up in the different areas, but we're not going to provide that level of line item breakout. The second question was around EBITDA while we're in ramp-up mode. My observation, and others can supplement this, is clearly when we're in ramp-up mode, we're running the the higher CI feedstocks. We don't yet have the full economies of scale because we're in ramp-up mode. EBITDA generation is going to be challenged in the early phases. But as we go through that series of bringing all the units up, production coming up to the 50,000 barrels per day, the feedstocks migrating to the lower carbon intensity, we should start to see that transition into positive EBITDA contribution.
spk17: Supported by a sustainable aviation fuel. That's right. Another uplift. Yep.
spk04: Great. Thanks for your comments.
spk10: Our next question comes from Paul Cheng of Scotiabank. Please go ahead. Your line is open.
spk14: Thank you. Hey, good morning, guys. I have to apologize, but I want to go back into the West Coast. Can you share what is the OpEx excluding Rodeo and also what is Rodeo going to look like once it's fully ramped up in terms of the OpEx?
spk06: That's the first question. OpEx excluding Rodeo? Yeah.
spk15: Paul, I think the best way to answer that is because we don't give that level of asset level detail out, but we will be providing more reporting transparency on a going forward basis that will enable you to see the kind of level of information that the questions that you're asking for. In future periods, we will be providing more transparency around the Rodeo Renewable Fuels business separate from West Coast refining. And so I would just say, I know that doesn't help you in terms of modeling right now, but just watch this space because we will be providing more transparency around that.
spk14: Kevin, can I ask that from the first to the second quarter, I understand that some one-time OPEX related with their transition in the first quarter. So should we assume that it's going to stay at this level as the first quarter or that it's actually going to be down?
spk15: It's probably down a little. There's still going to be an elevated element of that and there's some what we would classify as turnaround related costs associated with the conversion as well. that will show up at Rodeo. But the trend is downward. We're past the peak spend, I guess is the way to say it.
spk10: Our next question comes from Jason Gabelman of Cowan & Company. Your line is open. Jason Gabelman, Cowan & Your line is open.
spk00: Jason Gabelman, Cowan & Yeah, hey. Thanks for taking my questions. The first one is just on commercial performance. I think you had discussed a desire to integrate different plans in terms of how you buy crude and sell product and try to maximize profitability across the portfolio rather than at a site level. I'm just wondering if you could provide an update on that journey and if you've seen any of that earnings benefit come through in the results. And then second, just a quick clarification, can you remind us what your target cash balance is? Thanks.
spk02: Hey, Jason. It's Brian Mandel. I'll give you some kind of flavor of our journey for commercial. Our commercial supply and trading organization is, as you know, an integrated global business. We have offices in Houston, Calgary, London, and Singapore. As you mentioned, our focus is now to fully optimize and capture the optionality value embedded in all the assets, and then to capture that kind of integration value between the various business segments to drive additional value for the company. Last year, internally, we announced a reorganization of our commercial group, the goal of reducing our back office costs and continuing to advance our capabilities and value generations. We've made some really strong hires this year. We also have a companion organization that we call Value Chain Optimization Group, VCO for short, whose function is to work across the integrated value chain to ensure that we continue to make the best corporate general interest decisions. And ultimately, we're kind of focused on driving increased earnings, maximizing our return on capital employed, and increasing the market capture for refining segment, and doing all this while thinking about continuous improvement and continually growing the business.
spk15: And Jason, on the cash number, the target cash balance, same as we've said in the past, $2 to $3 billion. We were slightly below that level at the end of the quarter. I'd also say the first quarter is typically a heavy drain on cash quarter. So as we look ahead, we're still very comfortable with that target level.
spk06: Thanks.
spk10: And our final question today comes from Teresa Chen of Barclays. Your line is open.
spk01: Thank you for taking my question. First, on the near-term outlook for capture in second quarter and maybe third as well, just thinking about the different moving parts, you have presumably less noise from the one-time items impacting first quarter, whether it be from turnarounds or rodeo, but you do have WCS narrowing based on your sensitivity and the magnitude that we've seen to date, that should be a sizable headwind. And then later, maybe with TMX ramping online to delivering barrels to PAT-5 indirectly or directly, that should help your West Coast assets. Just help us think about how to reconcile these variables as we look to capture in the near term, please.
spk16: I think at a high level, Teresa, we have laser focus on the things we can control, and that's what we focus on, and that's what Rich and Brian focus on. I think that the things out of our control would be speculative, but I think Rich can talk about what we're doing and what we see over the next couple of quarters with respect to market capture potential, and Brian can chime in from a commercial perspective.
spk17: This is Rich again. We talked a little bit about some of the headwinds on market capture, which when I think about market capture from a refining perspective, it's our clean product yield. And then it's the products that we make. Are we moving up the product value chain on that? First quarter, certainly some headwinds with some downstream conversion unit turnaround activity. Good news is we've refreshed all that catalyst now, and they're ready to run here. Some of that did bleed a little bit into the second quarter, but as we roll into the summer driving season, you'll see our clean product yield and product values in about the best place we can put them. Now, we continue to invest in these as well. We've seen over the last two years that we've completed a number of projects on this front and continue that program through this year as well with a target of increasing our market capture by 5 percent from a mid-cycle basis. Through last year, we put projects in that have raised that bar by 3%, and we expect to close the balance of that out of the five this year with an additional 15 projects that are currently in construction at the sites. So when we think about the market capture, this quarter at 69%. I see that as a lower part of our market and something to build on that as we move through the rest of the quarter as the facilities come out of turnaround cycle.
spk02: Brian Mandel Just to add some color on the commercial side, I would say we're seeing this year gasoline and diesel roughly flat to last year in terms of demand, jet fuel a little bit stronger this year. I talked about our commercial organization, how kind of moving up that curve to take advantage of the optionality in our assets. We'll continue to do that. And then thinking about WCS, you made a good comment. I would say that, you know, but WCS will remain volatile. We can move around different grades, so we can run Canadian Heavy, but we can run Canadian Lights as well. We have an integrated system, a big commercial footprint. And if the WCS isn't favorable, particularly on our Gulf Coast plans or West Coast plans, we can switch to other grades such as Latin American grades and AG grades. So a lot of flexibility in our system.
spk01: Got it. And if I could ask a follow-up related to Kevin's earlier comments about what the appropriate leverage is for the company and the commentary related to how some of your more cash flow stable businesses can bear more leverage. Um, can you just share with us what portion of your midstream business at this point, what portion of the EBITDA is paid by third party customers and not, uh, Phillips refining paying Phillips midstream?
spk11: It's I, Teresa, I'll have to go verify the number, but we're, we're well into, I would say it's 70, 65 to 70% third parties. Thank you.
spk10: This concludes the question and answer session. I'll now turn the call back over to Mark Glacier for closing remarks.
spk16: Thank you all for your great questions. The market fundamentals that we're looking at are supportive, and our assets are running strong since the completion of seasonal maintenance activities. Our integrated portfolio is well positioned to capture market opportunities and to meet the peak summer demand. We've got a clear path forward to achieve our strategic priorities that support $4 billion of growth from our 2022 mid-cycle adjusted EBITDA to our $14 billion target by 2025. We're confident in our ability to grow cash flows and create significant long-term value for shareholders. Thank you for your interest in Phillips 66. If you have questions after today's call, please call Jeff Rowland. Thank you.
spk10: This concludes today's call. Thank you for joining. You may now disconnect your line.
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