Phillips 66 (PSX) — Q3 2015 Earnings Call Transcript

Thank you, Mike. Good morning and welcome to the Phillips 66 third quarter earnings conference call. With me today are Chairman and CEO, Greg Garland; President, Tim Taylor; EVP and Chief Financial Officer, Greg Maxwell; and EVP, Clayton Reasor. The presentation material we’ll be using during the call can be found on the Investor Relations section of the Phillips 66 website along with supplemental, financial and operating information. Slide 2 contains our Safe Harbor statement. It’s a reminder that we will be making forward-looking statements during the presentation and our question-and-answer session. Actual results may differ materially from today’s comments. Factors that could cause actual results to differ are included here on the second page as well as in our filings with the SEC. With that, I’ll turn the call over to Greg Garland for some opening remarks.

Thanks, Kevin. Good morning everyone and thanks for joining us today. We had a strong quarter across all of our business segments. Adjusted earnings were over $1.6 billion or $3.02 per share. This represents a second best earnings quarter since our formation. Our global refining business ran well, increasing utilization to 96% and capturing the benefit of strong market cracks. Our U.S. Gulf Coast refineries ran at 100% for the quarter. Refining also had its second best earnings quarter. Marketing earnings increased in the quarter reflecting continued strong gasoline demand. In midstream, we are approaching the period when our growth projects start to come online. Sweeny Fractionator One is almost complete and should start up by the end of the year. Our Freeport LPP export terminal is 60% complete, on budget and we expect to start up in the second half of 2016. The Dakota Access and ETCOP pipeline projects continue to make good progress and remain on schedule. Our master limited partnership, Phillips 66 Partners, remains an important part of our midstream growth strategy that we believe will create value for both PSX shareholders and also PSXP unitholders. As we announced this morning, our interest in the Bayou Bridge Pipeline project will be acquired by Phillips 66 Partners. Once complete, this project is expected to provide consistent fee-based earnings and support PSXP's stated growth objective of a five-year 30% distribution CAGR through 2018. In September, we announced our plan to contribute capital to DCP Midstream to provide additional support to the business during the current low commodity price environment. We expect this cash infusion along with additional asset contributions will allow DCP to bring its credit metrics back in line and to support its growth objectives through the commodity cycle. We anticipate that DCP will be self-funding going forward. In chemicals, CPChem offset lower cash chain margins by running at higher utilization rates during the quarter. Development continues on the CPChem U.S. Gulf Coast Petrochemicals project, which is now about 60% complete with a startup planned in mid-2017; this project remains on track. We had another strong cash flow quarter generating over $1.4 billion in cash from operations. We used $1 billion of that cash flow on capital primarily to support midstream growth and maintain our refining system's integrity. We recently announced our 2016 capital budget of $3.6 billion, including $314 million. PSX plans to spend our combined capital budget for 2016 will be $3.9 billion. As with this year, the majority of growth capital will be spent on developing our major midstream growth projects. In addition, almost $400 million is being allocated to capture high-return, quick-payout opportunities in our refining business. We also continue to return capital to shareholders. During the third quarter, we returned nearly $700 million to shareholders in the form of dividends and share repurchases. In addition, we announced an incremental $2 billion share repurchase authorization. To date, we’ve completed $6 billion of the $9 billion in share repurchases authorized by our board and we’ve increased our dividend by 180% since May 2012. Before I turn the call over to Greg Maxwell to review this quarter’s results, I think it’s appropriate that we pause for just a minute and thank Greg Maxwell for 35 great years. He will be retiring at the end of this year; he’s been a terrific CFO. He’s been a leader; he’s been a mentor to so many people in our company. He’s been a valuable part of our executive leadership team, helping us to stand up a new company flawlessly, and importantly to me, he’s been a great friend for 35 years. So, Greg, thanks for all you’ve done for the company and for helping to make this a great place to work. Now, Greg, please take us through the numbers.

Thank you, Greg. Good morning everyone. Starting on Slide 4, third quarter adjusted earnings were $1.6 billion or $3.02 per share; reported net income was also $1.6 billion but does include several special items that we excluded from adjusted earnings. These special items negatively impacted earnings by $69 million and include $46 million in pension settlement expense, $22 million in assets and goodwill impairments, and a $19 million contingency accrual. These items were partially offset by an $18 million gain on an asset sale. Excluding negative working capital changes of $33 million, cash from operations was $1.5 billion. Capital spending for the quarter was $1 billion, with approximately $700 million being spent in Midstream on growth projects and $200 million in refining. Dividends and share repurchases in the third quarter totaled $673 million which brings our total shareholder distributions for the year to nearly $2 billion. At the end of the third quarter, our adjusted debt-to-capital ratio excluding Phillips 66 Partners was 25%. Taking into account our ending cash balance, our adjusted net debt-to-capital ratio was 12%. The annualized adjusted return on capital employed through the third quarter was 15%, and excluding special items, our adjusted effective income tax rate was 32%. Slide 5 compares third quarter adjusted earnings with the second quarter by segment. Overall, quarter-over-quarter adjusted earnings were up $645 million, mainly driven by increased earnings in refining and marketing and specialties. Next, we’ll cover each of the segments. I’ll start with midstream on Slide 6, where businesses within midstream improved their performance in the third quarter. Transportation benefited from higher volumes and lower costs, while NGL margins improved due in part to propane and butane margins and seasonal storage. Included in the transportation and NGL results is the contribution from Phillips 66 Partners. During the quarter, PSXP contributed earnings of $31 million to the midstream segment. DCP Midstream continues to work on self-help initiatives to reduce costs, manage portfolio, and restructure contracts. Results this quarter were improved largely due to better marketing margins and higher volumes despite lower NGL and crude prices. In addition, we completed the announced $1.5 billion capital contribution to DCP earlier this morning. The annualized 2015 year-to-date adjusted return on capital employed for this segment was 5%, reflecting the impact of lower commodity prices on DCP Midstream results, as well as increased capital employed driven by the significant growth investments we are making in our Midstream segment. Moving on to Slide 7, Midstream’s third quarter adjusted earnings were $91 million, up $43 million from the second quarter. Transportation earnings for the quarter were $77 million, up $12 million from the prior quarter. Transportation benefited from increased equity earnings from the Explorer and REX pipelines due primarily to increased volumes. Transportation also benefited from lower costs. Increased earnings from our NGL business were driven by higher margins and inventory impacts. Adjusted losses for DCP Midstream were lower in the third quarter mainly due to improved marketing margins and a second quarter loss on the Benedum asset sale offset partially by lower commodity prices. Now turning to chemicals on Slide 8. The Global Olefins & Polyolefins capacity utilization rate for the quarter was 94% and for SA&S they were negatively impacted by lower margins and lower volumes. The 2015 annualized year-to-date adjusted return on capital employed for our Chemicals segment remained at 21%, based on an average capital employed of $4.9 billion. As shown on Slide 9, third quarter adjusted earnings per chemicals were $272 million, down from $295 million. In Olefins & Polyolefins, the decrease of $6 million was largely due to second quarter insurance proceeds of $28 million and lower cash chain margins in the third quarter. This was partially offset by higher volumes and lower operating costs. Equity affiliate earnings improved as a result of higher margins. Specialties, Aromatics, and Styrenics earnings declined to $17 million on lower equity earnings and lower volumes. That equity earnings decrease was partially due to lower margins. Next, we turn to refining. Realized margins were $13.96 per barrel for the quarter driven by strong market conditions. Market capture increased from 62% to 72% in the quarter due to improved clean product differentials and lower losses on secondary products. This was partially offset by tighter crude differentials and our clean product configuration which yields less gasoline and more distillates than implied in the 321 crack spread. Refining crude utilization increased to 96%, up from 90% in the second quarter and clean product yields were 84%, consistent with our average system configuration. Pre-tax turnaround costs were $69 million as compared to guidance of approximately $120 million, primarily due to the deferral of some plant maintenance to future periods. The annualized 2015 year-to-date adjusted return on capital employed for refining was 21%, based on an average capital employed of $13.6 billion. Moving to the next slide, the refining segment had adjusted earnings of $1.1 billion, up $448 million from the last quarter. Overall, the improvement this quarter was primarily due to higher clean product differentials and increased volumes. Adjusted earnings were higher than the second quarter in every region except for the Western Pacific. Atlantic Basin adjusted earnings benefited from lower controllable costs, better realized European margins and higher volumes resulting from the completion of the Humber turnaround early in the third quarter. The Gulf Coast region adjusted earnings were up from last quarter due to higher clean product differentials as well as increased volumes. The capacity utilization for this region was 100% in the third quarter. For the Central Corridor, we showed significant improvement due largely to higher margins from gasoline and secondary products, as well as wider differentials on Canadian crudes. This was partially offset by lower volumes due to turnaround activities at Ponca City and Wood River. For the Western Region, we had a slight decrease in adjusted earnings due to lower margins and inventory effects. This was mostly offset by higher volumes. The lower margins are due in part from the continued supply impacts on our San Francisco refinery as a result of the plant’s pipeline outage. Next, we will cover market capture on Slide 12. Our worldwide realized margin was $13.96 per barrel versus the 321 market crack of $19.51, resulting in an overall market capture of 72% compared to a market capture rate of 62% last quarter. Our configuration allows us to produce roughly equal amounts of distillate and gasoline, which reduced our realized margin relative to market as the gasoline crack was significantly higher than the distillate crack. Benefits from feedstock advantages were not high enough to fully offset the impact of secondary product losses despite falling crude prices relative to coke and other secondary product prices. This was due primarily to tighter crude differentials this quarter. The other category mainly includes costs associated with RINs, ongoing freight, product differentials, and inventory impacts. The $2.71 per barrel increase versus the second quarter was driven primarily by stronger product differentials and lower RIN prices. Moving on to marketing and specialties. This segment posted another strong quarter thanks to higher global marketing margins, record marketing volumes, and continued strong margins in our lubricants business. Annualized 2015 year-to-date adjusted return on capital employed for M&S was 33% on an average capital employed of $2.9 billion. Slide 14 shows adjusted earnings for M&S in the third quarter of $344 million, up $162 million from the second quarter. In marketing and other, the $157 million increase was largely due to higher margins in both domestic and international marketing. Specialties adjusted earnings increased $5 million due to widening basal DGO spread. Moving on to corporate and other. This segment had after-tax net costs of $112 million this quarter, an improvement of $15 million from the second quarter. Net interest expense and corporate overhead decreased while other improved largely due to fixed asset write-offs that occurred in the second quarter. Next I’ll talk about our capital structure. Consistent with prior quarters, we’re showing our capital structure both with and without Phillips 66 Partners. As shown on the graph on the right, excluding partners, we ended the quarter with an adjusted debt balance of $7.9 billion, an adjusted debt-to-capital ratio of 25%, and a net-to-capital ratio of 12%. Slide 17 shows our year-to-date cash flow for 2015. We began the year with a cash balance of $5.2 billion, and excluding working capital impacts, cash from operations was $4.1 billion. Working capital changes resulted in a net positive impact of $100 million. In the quarter, we issued $1.1 billion in debt and approximately $400 million in equity at the PSXP level. We also retired $800 million in debt. We funded $3.3 billion of capital expenditures and investments with $2.4 billion spent in midstream and nearly $800 million in refining. We also distributed $2 billion to our shareholders in the form of dividends and the repurchase of 14.5 million shares, resulting in 533 million shares outstanding at the end of the quarter. We ended the quarter with a cash balance of $4.8 billion. This concludes my discussion of the financial and operational results. Next I’ll cover a few outlook items. For the fourth quarter in chemicals, we expect the global O&P utilization rate to be in the mid-90s. In refining, we expect the worldwide crude utilization rate to also be in the mid-90s and pre-tax turnaround expenses to be approximately $150 million, which includes the impact of maintenance activity that was delayed from the third quarter. This brings our full-year guidance on turnaround expense to approximately $550 million, down from our original full-year guidance of $624 million to $675 million. In corporate and other, we expect this segment’s after-tax costs to be between $110 million and $120 million as we previously guided. And company-wide, we expect the effective income tax rate to be in the mid-30s. We are revising our 2015 capital expenditure guidance to $5.8 billion; this is up from $4.6 billion to reflect our expected capital spending of $4.3 billion plus we announced a $1.5 billion cash contribution to DCP. With that, we’ll now open the line for questions.

Yes, good two questions. Firstly on the broader macro picture on demand, I mean chemicals margins have been doing pretty well. Dow was saying that they think actually utilization is going to get tighter over the next few years despite everything we hear out of China and fears about the global economy. So maybe just some comments on what you see on chemicals then I’ve got a follow-on midstream?

This is Tim. I think we look at chemicals and the utilization rates continue to be fairly good. We don't see excessive inventories at the converter level, and we’re continuing to see good demand in Asia and across the system globally. So I think our view is demand is good. China is of particular interest, I think largely because of the reported numbers that what we see on both fuels and chemicals tells us that the consumer side of China is doing very well. So our view is supply and demand on basic petrochemicals will likely continue to tighten. But offset somewhat with the narrow differential spread between ethane and naphtha, which keeps the cost advantage in the Middle East and the U.S. still there, but narrower than it was a year or two ago.

Thanks, very clear. And then obviously NGL fracs are awful. You've got a big frac export complex coming up next year with I think guidance of $400 million to $500 million, which I think that the frac is the smaller part and then the export. So are you still comfortable with that sort of a reasonable range or do you need to see some commodity price improvement to hit that kind of number?

Our guidance is still the $400 million to $500 million. The frac should start up later this year with the LPG terminal hitting in the third and fourth quarter of next year. These, again, are our fee-based commitments in large part on both the terminal and the frac that are supported by TNB agreements, so it gives us some assurance around that piece. The variable piece really comes in terms of the market capture between the U.S. export price and the international markets on the export that are still open today. And so I think that's the one piece of the - that's why we give guidance of the $400 million or $500 million.

Thanks, very clear.

Hey, guys, good morning.

Good morning.

First of all, just want to say thank you to Greg. We appreciate having you over the last several years. Congratulations on retirement. I hope you have a lot of fun.

Thank you, Paul.

And I think I have two questions. On the MLP sector, it’s no secret that evaluations have dropped a lot over the last several months. Also, U.S. onshore production has been in decline since probably April. Some of your peers in the MLP space start to suggest that the industry may have over-invested in some areas of infrastructure. I guess the question is, do you agree with those assessments and has the recent change in the market environment in any shape or form altered your view about your pace of the investment in the area of the dropdown pace, what are the M&A opportunities?

Yes, I think we agree broadly that yield structure has moved in the MLP space. We kind of reiterate our guidance and stand by $1.1 billion of EBITDA by 2018 will be at the MLP level; we feel pretty comfortable with the $2.3 billion of EBITDA we gave at your conference earlier this year, Paul, as you think about it, but $1.9 billion of that is either existing or projects under construction. So the additional $400 million, half of that probably comes from frac, which we’re going to FID in 2016; we feel really good about that. The balance of that’s going to come from other NGL refined projects that we have in the portfolio. So I’d say, first of all, we feel good about the $1.1 billion getting into the MLP by 2018. The other thing I think about is I think high-quality MLPs, I think of the pairing of PSX and PSXP, have a strong balance sheet, strong portfolio, existing EBITDA can be dropped. We have a great suite of organic projects that we think are really good projects that we’ll bring forward and execute well on. So we think investors will like that story and continue to want to be part of that story going down the road. And then we look at our cost of capital; PSXP today is trading at 3%, let’s say, and we look at the returns on the projects we have in the portfolio, that’s a very attractive spread enabling us to create substantial shareholder value. So I would say we are watching what’s going on in the MLP space with interest, but we think we have a strong story that investors are going to like.

How about the pace of the dropdown? I think you’ve been talking about $2 billion a year given the market condition. Do you still think that that's doable or that at least for the immediate future that you probably go for it at a slower pace?

I think we are on track; we are on pace. I mean to achieve the one you’ve kind of nailed the number that we need to do. We said it’s going to be lumpy as we go through the period, but on average that’s about what it will be.

Okay. And final one from me. Have you seen any slowdown in the export market for gasoline and diesel and also based on your network, your wholesale network in the U.S., what kind of gasoline or diesel growth rate are you seeing? Thank you.

Kevin, why don’t you take that?

Paul, I maybe address the market question first. I think as we look out to the year that 3% or so growth in gasoline is very consistent with what we see. The global demand is up as well, with particularly strong growth in Asia on the gasoline side. We’ve had good placement opportunities in the U.S. in the last several quarters, and I’d say that the export markets are there, particularly on the distillates side for the U.S., so that presents a nice option for us as we think about how we optimize product values in our system.

Hey, good afternoon guys. I wanted to congratulate Kevin as well and wish Greg the best; it sounds like more time for the Green Ag in 2015, Greg.

Thank you, Evan.

My first question on refining, your earnings were over $1 billion or $400 million quarter-over-quarter. The last time over $1 billion in refining was in Q3 of 2012 when differentials were meaningfully higher. Can you elaborate on the factors that contributed to the quarter besides lower turnaround activity? Because I know that over the past two years you had every turnaround and reliability issues.

We ran very well; we are up 130,000 barrels a day on the crude side, so a six-point improvement in utilization rate, and I think that speaks to the fundamentals on that. And I would say that the product side has been the part that really helps the refining complex, so it’s really a view I think for the demand side and the strength of that and then that support staff. I would say gasoline, our view would be - will continue to be strong obviously with some seasonal effects, but literally from our perspective, a strengthening market with this kind of price structure on the crude side. Distillate remains weaker, but still able to capture that. So I think the story has been around market improvement, running well, and those two combine to do that. We’ve also had an investment program to structure improved refining with some of the high-return projects with the billings crude, optimization project, increasing the capability of our FCC at Bayway and other kinds of projects like that that will structurally add to our target of another $850 million of EBITDA growth through 2018. So it’s a combination of self-help, running well in good market conditions. So I think that’s our view of how we continue to contribute to our higher structure.

Thank you. Good morning, and congratulations to everybody on the - I guess we’ll call them future roles, even for you, Greg. Just like to get a little bit of a follow-up on a couple of the questions have been asked. On the MLP side, obviously the question about dropdowns and some challenges in that space. Do you look at it as something you would be willing to do more on the acquisition side? I wasn't clear from the answer earlier if that was a possibility. And I'm thinking more of the traditional fee-based assets, not some of the more exotic assets we’ve seen.

Well, I think in terms of acquisitions at the PSXP level, we look at everything that’s out there. I think we feel pretty strongly that our organic profile that we have, where we can essentially build something for seven and trade up into a higher value, creates more value for both unitholders and for shareholders of PSX. But if we saw something out there we thought added value for both PSX and PSXP unitholders, then I think we would be one to consider that.

Okay, that helps. And then on the refining side of the business, as you’ve mentioned in prior calls and in this one, you have a higher distillate yield in what a typical crack spread would indicate. Gasoline demand is clearly growing faster than diesel demand as we look at the recent past and I think kind of the expectations here in the near-term future. Is there anything you would do to change your gasoline diesel yields as we look into the summer of 2016 or maybe another way of asking it: What is it that you can change on the yield side in that kind of short timeframe?

First of all, we're running max gasoline; we’ve been all year. I think we're about 41% gasoline and 38% distillate. So typically we would run it the other way around, 41% distillate. So we’re running max gasoline today. Some of the projects that Tim mentioned, that both Billings and also Bayway are around yield improvements, so we are prioritizing to make more gasoline and more distillates out of those projects, but at the margin that’s what we will do; we are not going to make just big investments to try to chase that at this point in time, given we think we have better opportunities in midstream and chemicals.

Okay, so near-term no particular additional flexibility on the gasoline volumes or diesel.

No.

Okay, thank you.

You bet.

Guys, good morning and nice results today. Also, congratulations to both Greg and Kevin. I had a question on DCP. I think the comment was made that you believe it will be self-funding going forward. I am just curious if you can offer - did that contemplate the current environment? Or is that just an anticipation that the current cash infusion and the more stable revenue stream should kind of get you through this difficult pattern and move to a more normalized market.

I think that’s the answer that we would give you. Clearly, you know, as we’re delivering the balance sheet, interest expenses are going to go down. DCP has done a great job in terms of reducing costs, you know, reducing capital spend there also. I would say they are working hard to cover further third of the equity linked and from proceeds essentially to fixed fee. And so you kind of roll all that together and it kind of moves their breakeven from say mid-65% range down about where we are today. So I think we feel pretty good about that.

Okay, thanks. And then one follow-up, if I think you pretty much tackled the midstream outlook, and I understand fully that you’ve got the dropdown potential. But I guess what I am wondering is, as you kind of digest the current assets that are being constructed, is there potential to maybe reduce the amount of capital spending there on a go forward basis? I guess what I am asking is, does the total CapEx of $3.6 billion move down as we progress toward 2017, 2018, and 2019?

We don’t like to give guidance quite that far out; I think we are going to be in the $2 billion a year range in midstream through that period of time. So the things we have in flight today are pretty clear to see. As you start thinking about 2018, 2019, 2020, I would say there is probably reshuffling of the project deck. You will see more NGL, more refined products, more crude things right around our existing assets as we sort through where the drill bits are going to go. But I mean our view consistently remains by 2017 and 2018, that will really sort itself out, and we are probably not in a $50 crude environment, but we are probably not in a $100, but somewhere in the $60, $70, $80 range. And so I think that one sent to drilling and we will see a pickup of infrastructure on that side. I think our base view at this point is we have the juice in our portfolio so to speak that’s going to push us through that period of time.

Got it. Thank you.

Hi, guys, I am back. Sorry, maybe the operator is short.

Welcome back.

So my second question was on - if I look at the 2016 CapEx guidance, I know your midstream is down $924 million and then PSX is up; can you elaborate on the shift there? And I presume as you move forward, you do expect PSX would take on more projects versus kind of building PSX and dropping them down to PSXP?

I'll take a stab and Tim can follow on. There is the question why we said many times and we want to get PSXP to scale so they can start doing its own organic investments. Bayou Bridge was a great opportunity to give PSXP a great organic project, and I think what time you will see us try to grow that ability to do organic products at PSXP; there is no question we think that makes a lot of sense. We’re still willing to incubate projects at the top and take them as it makes sense. Frac is a great example, a $1 billion plus investment that’s a little big for PSXP today. But in the future, we’ll do more and more organic there.

I just think, Evan, that having a sponsored MLP lets us tackle much bigger, stronger projects that ultimately can be tested for the MLP. And as Greg said, we plan to continue to do a nice amount of organic growth at PSXP and as that business grows, hopefully we get more of that spending gap at that level, which is really accretive for the partnership.

Thanks, guys. I’ll leave it there; thank you.

Thanks.

Good afternoon guys, and again, Greg let me add my congratulations. But I do think I am the only analyst - Kevin congrats on flying the flight to the homeland. I got a couple of questions if I may. So, Greg just going back to Paul’s earlier question about MLPs. So the multiple compression we’re seeing on the MLP market I think you said in the past that your investments really need about a seven to eight times; CapEx is about maybe seven plus times back typically, so you need a higher multiple in that to really get the line of sight on the dropdowns. Do you think you can still achieve that in this market or does it maybe slow the pace a little bit until things improve?

No, there’s no reason for us to slow down. I mean we look at the yields where we’re trading today; we feel very comfortable Doug.

Okay, all right, so no change in strategy. I guess the kind of related question is really I wanted to revisit something you said when the Company was separated from Conoco to begin with. And that was that you really had no interest in expanding or building out and you wanted to diversify. But you are clearly doing great. But refining has been very strong. I’m just curious if strategically your views have changed any or if you still very much on the opinion of taking a windfall and moving into these other businesses?

I think there are some great deals that have been done out there by some of our peers. And so for the right opportunity, we would never say never. I would reiterate we look at the portfolio investments that we have both in midstream and chemicals. And we still think there's value and preferentially investing in those higher valued, higher returning businesses over the refining business. And so we’ll continue to watch that, but there is nothing on the horizon today that we look and say we can increment a lot of value for shareholders by doing that in the refining space.

Okay, and then I can squeeze in last one, actually more of a housekeeping issue. You want to take this, but the capture rate in the Mid-Continent, clearly very, very strong this quarter. I am just wondering if you can point to anything in particular that was behind? And I will leave it there. Thank you.

Okay, thanks. Doug, it’s Tim. Really it just reflected our ability to place products in the high-valued markets in the Mid-Continent. So we were able to capture a significant uplift versus the group three averages that we used as a benchmark.

We see a little bit of that as well.

Yes, and we had heavy disk that helped us, yes they were up five bucks, so that was helpful to us and ran pretty good.

Good morning.

Hi, Jeff.

It looks like with some of the most recent capital spending plan, we are going to have the second year of declines in capital spending on the upstream side for the first time since the 80s. U.S. production declined for the fifth month in a row in BOE stats today in the Gulf of Mexico, and Canadian production continues to grow. Could you talk a little bit about how this evolving market is impacting your crude procurement strategy and maybe talk a little bit about how you see differentials playing out going forward?

Hey Jeff, it’s Tim. So I’d say that we look at this and say this is a great time for options on crude. The infrastructure projects that we talked about that trade options around our refined network have a great deal of value. And obviously, we can balance the import versus the inland production and the heavy light. So I just think we are into a period where that optionality is going to be a key value contributor, and that’s where some of our mid-stream spending is going as well to really support that drive commercial value. And Value Bridge is a perfect example where we connect the Texas side to Louisiana to offer more crude options with the terminal that can import and export, so just a lot of dynamics, but that’s the kind of thing that we are going to capture that. On this side, I think the light-heavy dip is likely to stay to a point where that’s an attractive option as we think about it. I think the call on lights in the U.S. refining system like crude has increased, and as production falls over, that’s going to continue to keep that relatively snug. So I think that this will be volatile as you work in the U.S., as you work through both the import and inland production, but I think it speaks to probably a bit narrower WTI-Brent as that shakes up. Clearly a period where I think it’s going to move a lot from a month-to-month and quarter-to-quarter. So that’s kind of the thesis that we are seeing and I think if you look at the market there, you see that playing out right now.

Secondly, if I could, you mentioned the product exports were down quarter-on-quarter due to stronger domestic demand. Are there any specifics you can share with regard to what you're seeing on the demand side? Is it due to any specific actions on your part to access additional markets?

Well, I think again it goes similar to the crude story; we’ve a lot of options on the placement side with our pipeline network and marine options in the U.S. and so we literally try to optimize a net back around each location that we have. So we were able to access some of those higher-valued options as we’ve looked around the system to do that. That said, I think exports will remain an important dimension to keep high utilization rates in the U.S.

Congratulations Greg and Kevin. Thanks for your comments.

Great. Thanks and I'll join in congratulating Greg and Kevin as well. Maybe just a couple of quick housekeeping type ones. Turnaround outlook; you had great 3Q run; 4Q looks good. Any thoughts in terms of kind of the first half of 2016? What does it look like from a turnaround point of view, I guess both PSX specific and maybe the industry as well?

Yes, I would say next year, 2016, we go back to a more normal type turnaround. This is 2015 was abnormal for us. We had a lot of turnarounds going on this year. This is the way the schedule hit, but yes, more of a historical turnaround year in terms of expense.

Okay, thanks. And then maybe just one last one, I guess you addressed earlier the potential to deploy or questions around deploying additional capital in refining versus other businesses. But if you think about the portfolio as well, there was recent out there, I guess on the like refinery. On the flip side, when you look across your refining portfolio, is there the possibility of further rationalizations across the business or are you pretty content with how the portfolio looks right now?

Well, I don’t think our view around portfolio has changed over what we've been saying. So, you know, we always said that Whitegate is probably an asset that we will do something with ultimately. Interesting enough, Atlantic basin margins are very strong this year and Whitegates has actually been performing quite well in this environment. But longer-term, it’s a relatively small refinery and what we think is a challenge market. We continue to think of California as being challenging. Just one of those things that, you know, long-term we think California is a difficult market. We think that certainly our assets are averaging in that marketplace, but it costs us nothing to hold the option there, and we will continue to do that; we are pleased with the performance of those assets this year in 2015. So, you know, you think around the portfolio; we’ve done most of the heavy work around the refining portfolio at this point in time, I would say.

Hi, Greg.

Hi, Phil.

First question on CPChem. With the projects, is there wiggle room to come in under budget at this stage, you think on the first cracker? And when - if and when you do the second cracker, when are you trying to make a decision by?

Let Tim take that one.

I think, Phil, our view is that we’re still looking at the cost we talked about in those crackers. We are not seeing any kind of extraordinary inflation rate thing, but we are about over 50% complete on that. We still have some room to go. So our view is it’s still going to hit about what we expect with over $6 billion investment, startup in mid-2017; still like the project. As far as the second cracker goes, we’re still doing development work. So it’s kind of things like site selection, derivatives play, those kinds of things continue to advance that. And I could think about it; when you look at it today, these were typically six to seven-year project cycles. So I would say FID, but you still have some period out in the future. But overall, it would be looking to push 2020, 2021 at the earliest, and we have flexibility in the timing. But we still like North America as we think about the NGL supply; we still like the North American side as one of those options. But I will also tell you that we continue to look at cracker sites around the world and we plan to continue to try and not try - we plan to continue to grow that business to match the market growth that we are seeing.

Okay. One question for Greg on cash balances. I think in the past you’ve talked about like a minimum cash balance in that $2 billion to $3 billion range. I just wondering with lower oil prices, etc., if that cash balance, that minimum cash balance requirement has changed off.

Okay, this is Greg. As we looked at; we initially when we came out of the spend, we said somewhere in the neighborhood of $2 billion to $3 billion. As we continue to work with our capital structure, I think we could probably easily stay within the $1.5 billion range as long as we have access to the commercial paper markets and use our revolvers as the backstops. As we continue to sort of get our feelings after the spend and everything, I would say $1.5 billion is probably a decent number to look at.

Nice target you leave for Kevin.

I just wanted to ask one last question on the $400 million to $500 million EBITDA guidance target for the two midstream projects. What kind of timeframe do you think you'd be able to achieve that, given that there is a market element to that EBITDA? I mean, do you feel confident that you’d achieve a full run rate in 2017 or just generally how you are thinking about that?

Yes, so in 2016, we’ll start, you know, we’ll have the frac that's a fee-based asset with supplies taken care of; the output is placed with that one. On the LPG export terminal that starts up at the end of 2016. So we would expect over toward mid-2017 or so that we should hit that run rate EBITDA with the variable being really the commercial risk contribution piece that’s got some variability, but a large piece of that is fee-based as well. So it’s a 150,000 barrel a day, just a reminder, 150,000 barrel a day of LPG export.

And would you say the commercial piece of that will be somewhere in the $100 million to $200 million range?

Yes, I think that’s a decent kind of number to think about that on the risk side.

Good morning, everyone.

Hi, Brad.

I guess to it’s a beat the dead horse a little bit more on midstream. Obviously you said that the dropdown schedule is still intact; no real change to how you are thinking about that. Has there been a change in terms of how you think about the funding side of it? Is one of the levers that you might pull funding it more internally taking PSXP shares back, maybe doing internal financing rather than PSXP raising capital on its own in order to finance this dropdown?

We don't think that the PSXP’s access to the equity capital markets are going to be impaired. So I think our plan going forward is still kind of half debt, half equity at PSXP to fund it.

Guys, good morning and nice results today also after congratulations to both Greg and Kevin. I had a question on DCP; I think the comment was made that you believe it will be self-funding going forward. I am just curious if you can offer – did that contemplate the current environment or is that just an anticipation that the current cash infusion and the more stable revenue stream should kind of get you through this difficult pattern and move to more normalized market.

I think that’s the answer that we would give you clearly, you know, as we’re delivering the balance sheet, interest expenses are going to go down. DCP has done a great job in terms of reducing costs; you know, reducing capital spend there also. I would say that they are working hard to cover further third of the equity link and from proceeds essentially to fixed fee. And so you kind of roll all that together and it kind of moves their breakeven from say mid-65% range down about where we are today. So I think we feel pretty good about that.

Okay thanks. And then one follow up, if I thinking pretty much tackle the midstream outlook and I understand fully that you got the dropdown potential, but I guess what I am wondering is, as you kind of digest the current assets that are being constructed, is there potential to maybe reduce the amount of capital spending there on a go forward basis? I guess what I am asking is does the total CapEx of $3.6 billion does that – move down as we progress toward 2017, 2018, 2019?

We don’t like to give guidance quite that far out; I think we are going to be in the $2 billion a year range in midstream through that period of time. So the things we have in flight today are pretty clear to see, as you start thinking about 2018, 2019, 2020. I would say there is probably reshuffling of the project deck and you will see is more NGL, more refined products, more crude things right around our existing assets as we sort through where the drill bits are going to go. But I mean our view consistently remains that by 2017 and 2018, that will really sort itself out and we are probably not in a $50 crude environment, but we are probably not in a $100, but somewhere in the $60, $70, $80 range. And so I think that we have the juice in our portfolio so to speak that’s going to push us through that period of time. Thank you very much for participating in the call today. We appreciate your interest in the company. You’ll be able to find a transcript of the call posted on our website shortly, and if you have any additional questions, please feel free to contact Kevin or CW. Thanks again.