Phillips 66 (PSX) — Q2 2021 Earnings Call Transcript

Good afternoon and welcome to Phillips 66 Partners Second Quarter Earnings Conference Call. Participants on today's call will include Kevin Mitchell, Vice President and CFO; Tim Roberts, Vice President and COO; and Casey Gorder, General Manager, Operations. Today's presentation materials can be found on the Events section of the Phillips 66 Partners website, along with supplemental financial and operating information. Slide 2 contains our Safe Harbor statement. We will be making forward-looking statements during today's presentations and our Q&A session. Actual results may differ materially from today's comments. Factors that could cause actual results to differ are included here as well as in our SEC filings. With that, I'll turn it over to Kevin.

Thank you, Jeff, and good afternoon, everyone. In the second quarter, Phillips 66 Partners delivered solid financial results and reliable operating performance across the business. Our earnings reflect higher throughput on our wholly owned and joint venture assets. During the quarter, we advanced our capital program to continue construction of the C2G pipeline connecting the Clemens storage caverns to petrochemical facilities in the Corpus Christi area. The pipeline is expected to be operational in the fourth quarter of this year. The Bakken pipeline optimization project continues to progress, with the next phase of incremental capacity commencing service this month. The C2G pipeline and the Bakken pipeline are both supported by long-term commitments. In July, the Board of Directors approved the second quarter distribution of $0.875 per common unit, unchanged from the first quarter of 2021. Phillips 66 Partners remains committed to safe, reliable operations, a strong balance sheet, and disciplined capital allocation. Moving to slide 4 to discuss financial results. Phillips 66 Partners reported second quarter earnings of $225 million compared with a first quarter loss of $18 million. Our first quarter results include a $198 million impairment resulting from the partnership's decision to exit the Liberty pipeline project. Adjusted EBITDA was $337 million this quarter, an increase of $48 million from the prior quarter. The improvement in earnings and adjusted EBITDA reflects higher volumes and lower utility costs following the first quarter winter storms, as well as higher pipeline and terminal volumes due to increased utilization of Phillips 66 operated refineries. Second quarter distributable cash flow was $267 million, up $34 million from the prior quarter. The increase reflects improved earnings, which are partly offset by higher maintenance capital in the second quarter. Slide 5 highlights our financial flexibility and liquidity. We ended the second quarter with $2 million of cash and $734 million available under our revolving credit facility. We funded $44 million of growth capital during the quarter, which included spending on the C2G pipeline and funding for the Bakken pipeline optimization project. The debt to EBITDA ratio on a revolver covenant basis was 3.0, which is consistent with a target to remain below 3.5. Our distribution coverage ratio was 1.34. In April, we repaid $60 million of tax-exempt bonds and borrowed $450 million under a new term loan agreement. Proceeds were primarily used to repay amounts borrowed under the partnership’s revolving credit facility. This concludes our prepared remarks. We will now open the line for questions.

Hey, Anthony and team. Kevin, you're generally not in the practice of providing firm guidance but was hoping maybe to help frame what the second half of the year might look like relative to the first half. It would just be helpful to hear your thoughts on the macro environment. Maybe any specific drivers of performance as we head into the second half?

Yes, Spiro. I think Tim's going to make a few comments on that.

Yes, Spiro. With regard to the macros, obviously the first quarter was impacted by a seasonal element coupled with the fact that you had winter storms. As things began to pick up, we have benefited clearly in 2Q with regard to refining utilization. We have also seen some increasing production out in the basins. Nothing too extreme, but nonetheless, you are seeing a normalization going on as demand is picking up globally. We would expect that to continue through the third quarter. Through the fourth quarter, there are some elements that see seasonality, but generally speaking, moving from the second quarter into the third quarter, we feel very constructive, especially as demand continues to pick up globally.

Great, Kim, thanks for that. My second question is just around capital return. We are seeing some peers now start to recommence distribution growth and formalize buyback programs due to the stabilization in the macro outlook. I'm just curious how you guys are describing your capital return goals as we stand here today. What do you sort of need to see first, either to resume distribution growth or initiate a buyback program? Specifically, we're seeing some peers buy back at ECF levels or yields of around 11%, PSXP, of course, trading north of that right now, it seems attractive, but I'm sure you've got duration there that will be helpful to sort of lay out.

Yes, Spiro. As you look at the overall capital allocation priorities, it really all comes down to how we manage coverage and leverage. In terms of the committed outflows, we've got the maintenance capital, and that's going to continue. This year, I think that maintenance capital budget is about $135 million. I don't anticipate that being dramatically different as you look into future years. The growth capital this year, the budget is $165 million. There are more limited opportunities than we've had historically or in the earlier years of the MLP, and that probably continues to be relatively low compared to historical levels. At the same time, looking at where we are from a coverage standpoint this quarter at 1.34, which for PSXP is quite strong. Overall, the scheme of things does not give you that much flexibility. I think one of the reasons it was strong in the second quarter is that we had lower maintenance capital. You can revert to some more normal maintenance capital in absolute dollar terms, maybe $50 million, a quarter for coverage to basically fund growth capital and any other discretionary uses of capital you may have. So I don't think there is a lot of room to do much for a period of time, at least beyond some modest amounts of growth capital within the overall construct of the available cash that we have.

Got it. That’s a super covered. Thanks for that, Kevin. All right, thanks.

Thanks, Spiro.

Good afternoon. I want to maybe stay on these topics. Can you just maybe expand a little bit on your comments on growth capital? Do you see any either large or small potential projects on the horizon? What is the nature of those? If the answer is not really, then I would love your latest thoughts on just how you view the MLP within the structure of Phillips family if there really isn't a need to finance any growth in midstream. Thanks.

Yes. I think you'll see continued optimization projects around the existing infrastructure. PSXP is a really nice portfolio of assets, and there will continue to be opportunities to invest around those. They tend to be relatively small projects, but they also tend to have very attractive economics. So we'll continue to do that. Given where, if you just step back and look at the sort of macro midstream environment, generally there are major pieces of infrastructure already in place to meet the needs. Therefore, I think it's much less likely that you'll see significant investment in organic growth projects. It will be more a continuation of these smaller optimization projects.

I think you've covered it. To give a little more context on the smaller projects, Michael, you may be at one of our sites, and we may have to add 10 miles of pipe. We may add a storage tank in some of our terminals, or we may add truck racks. But that's the type of scope we're talking about as far as the incremental optimization opportunities.

Great. Thank you very much.

Hey, everyone, thanks for the time. I just wanted to follow up on part of Michael's question that didn't quite get an answer there. I'm just curious if you can spend a minute or two talking about how PSX is looking at PSXP from a strategic standpoint here and what the outlook there could be?

Well, I think given that this is a PSXP call, I think all we can do is iterate what we've said in the past and in reference to the 13-D filing that was done about a year ago. That filing gave PSX the flexibility to consider alternatives around the path forward for the MLP, but it certainly does not obligate any particular decisions or path forward. I think we just leave it at that; those statements still hold true that the 13-D gives PSX flexibility to consider alternatives, but there is really no more to say on that at this point.

I think it feels like a year; that would have been like six months ago. But that's fine. One smaller question, in terms of the smaller projects that could come up, I'm just thinking in terms of messaging. Are these things that you expect to kind of keep talking about in releases or is it the kind of thing where, if we don't start to see something in the next couple of releases, maybe it looks like 2022 CapEx could be a lot lower?

Yes. Look, I think it does depend on the size of the project. It’s hard for us with regard to a release to be talking about maybe a $3 million project. It depends on what the size of the project would be. Some of these are adding a pipeline or some lateral onto an existing pipe with some tanks. You can get up into the tens of millions of dollars, but not hundreds of millions. So depending on where that is, it’s hard for me to give you that cutoff; it feels material that PSXP obviously, we would have some sort of release. During earnings calls or even in our Qs, we will talk about projects that are underway or being completed.

That makes sense. Thank you very much.

Hi, good afternoon.

Hi, Jeremy.

I just want to start with the DAPL expansion there. I wonder if you might be able to provide some color as far as the first expansion coming online, what was the cost for PSXP on that? What type of capacity was that coming online with this first expansion? Are there any regulatory approvals that are needed to put that capacity in service?

Yes, Jeremy, thanks. Good question. So the expansion takes capacity up to around 750,000 barrels a day. The spending relative to PSXP in 2021 is a little bit under $550 million. We think that through next year, we'll be at around $325 million as kind of a capital number. That's where we stand on the capital invested front.

On the regulatory approvals, those have already been received, so nothing outstanding at this point in time.

We're starting up this month.

Yes. The capability and permissioning have started.

That's very helpful. Thanks for that. And then with the C2G pipeline here being perspective tied to the cracker or just any other drivers to that timeline shift?

No, it's really weather-related for the timeline shift. We've stated all along that the commercial in-service date would be year-end, and there may be some potential to flow some barrels northbound between kind of mechanical completion and commercial in-service at the end of the year. With weather delays, that window for kind of northbound volumes has narrowed. But as we mentioned last quarter, we didn't expect those to be material anyway and still wouldn't expect them to be material. So there is no change to the ultimate in-service date of the larger project or the NBCs underpinning that project.

Got it. That’s very helpful. Thanks. And last one, if I could sneak it in. It seems like the midstream landscape has changed a bit, and there has been a little bit more activity on the M&A side, particularly as it relates to liquids, logistics, and terminals. What are PSXP's thoughts on consolidation in the midstream sector and if there's any thought you want to share there?

I think, Jeremy, you've heard us say in the past that we do think that if you take a big-picture view, there are a lot of players out there in midstream. Part of one of the impediments to more consolidation, or at least easier consolidation, is just the capital structure across the midstream space with so many of these MLPs with different governance models, which I think precludes some of that potentially happening. Ultimately, I think for the midstream business to compete well, there needs to be some consolidation to drive efficiencies, shut down idle plants, and leverage the infrastructure that's available to create some value that way.

Thank you for your interest in Phillips 66 Partners. Please give Shannon or me a call if you have any follow-up questions. Thank you.