Phillips 66 (PSX) — Q3 2021 Earnings Call Transcript

Good morning, and welcome to Phillips 66's third quarter earnings conference call. Participants on today's call will include Greg Garland, Chairman and CEO; Mark Lashier, President and CEO; Kevin Mitchell, EVP and CFO; Bob Herman, EVP refining; Brian Mandell, EVP marketing and commercial; and Tim Roberts, EVP midstream. Today's presentation material 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. We will be making forward-looking statements during today's presentation and our Q&A session. Actual results may differ materially from today's comments. Factors that could cause actual results to differ are included here, as well as in our SEC filings. With that, I will turn the call over to Greg.

Okay. Thanks, Jeff. Good morning, everyone. And thank you for joining us today. In the third quarter, we had adjusted earnings of $1.4 billion. We generated operating cash flow of $2.2 billion, which meaningfully exceeded our capital spending and dividends during the quarter. We returned $394 million to shareholders through dividends, and in October, we increased the quarterly dividend to $0.92 per share. We believe in a secure, competitive, and growing dividend. Since we formed as a company, we've returned approximately $29 billion to shareholders and we remain committed to disciplined capital allocation. We're seeing signs of sustainable cash generation improvement. We've made good progress on debt repayment, reducing our debt balance by $1 billion so far this year. We're on a path to pre-pandemic levels of debt, strengthening our balance sheet and supporting our strong investment-grade credit ratings. Earlier this week, we announced an agreement to acquire all the publicly held units of Phillips 66 Partners. This equity transaction simplifies our corporate structure and positions us to drive greater value for Phillips 66 shareholders and Phillips 66 partners unit holders. We continue to advance the company-wide transformation efforts that we began in 2019. We believe that strengthening our cost position is necessary for long-term competitiveness. We recently initiated an effort to identify opportunities to significantly reduce costs across our portfolio. We're in the process of scoping these reductions and look forward to updating you early next year on our progress. Recently, we announced greenhouse gas targets to reduce the carbon emissions intensity from our operations by 2030. Our targets demonstrate our commitment to sustainability and to meeting the world's energy needs today and in the future. With that, I'll turn the call over to Mark to provide some additional comments.

Thanks, Greg. Good morning. In the third quarter, we saw significant improvement in earnings and cash generation. In refining, we captured a meaningful improvement in realized margins. Midstream had strong earnings in the quarter, and chemicals, the Olefins and Polyolefins business reported record quarterly earnings. Marketing and specialties had its second-best quarter ever. In Midstream, we continue to advance Frac 4 at the Sweeny hub, with construction approximately one-third complete and about 70% of the capital already spent. Additionally, we recently completed construction of Phillips 66 Partners' C2G Pipeline. CP Chem continues to pursue development of two world-class petrochemical facilities on the U.S. Gulf Coast and in Ras Laffan, Qatar. In addition, CP Chem is expanding its Olefins business with a world-scale unit to produce 1-hexene. The Alliance Refineries sustained significant impacts from Hurricane Ida and will remain shut down through the end of this year. We continue to assess future strategic options for the refinery. We continue to progress Rodeo Renewed, which is expected to be completed in early 2024, subject to permitting and approvals. Upon completion, Rodeo will have over 50,000 barrels per day of renewable fuel production capacity. The conversion will reduce emissions from the facility and produce lower-carbon transportation fuels. In marketing, we're converting 600 branded retail sites in California to sell renewable diesel produced by the Rodeo facility. Our emerging energy group is advancing opportunities in renewable fuels, batteries, carbon capture, and hydrogen. With our recent investment in Novonix, we're expanding our presence in the battery value chain. Additionally, we recently announced a collaboration with Plug Power to identify and advance green hydrogen opportunities. We'll continue to focus on lower-carbon initiatives that generate strong returns. We're excited about our participation in this dynamic energy transition, and combined with our commitment to disciplined capital allocation and strong returns, we’re well-positioned for the future. Now, I'll turn the call over to Kevin to review the financial results.

Thank you, Mark. Hello, everyone. Starting with an overview on Slide four, we summarize our third quarter results. We reported earnings of $402 million. Special items during the quarter amounted to an after-tax loss of $1 billion, which was largely comprised of an impairment of the Alliance Refinery. Excluding special items, we had adjusted earnings of $1.4 billion or $3.18 per share. We generated operating cash flow of $2.2 billion, including a working capital benefit of $776 million and cash distributions from equity affiliates of $905 million. Capital spending for the quarter was $552 million—$311 million was for growth projects, including a $150 million investment in Novonix. We paid $394 million in dividends. Moving to Slide 5, this slide shows the change in adjusted results from the second quarter to the third quarter, with an increase of $1.1 billion, reflecting substantial improvement in refining and continued strong contributions from Midstream, Chemicals, and Marketing and Specialties. Our adjusted effective income tax rate was 16%. Slide 6 shows our midstream results. Third quarter adjusted pre-tax income was $642 million, an increase of $326 million from the previous quarter. Transportation contributed adjusted pre-tax income of $254 million, up $30 million from the prior quarter. The increase was driven by higher equity earnings from the Bakken and Gray Oak pipelines. NGL and other adjusted pre-tax income was $357 million, compared with $83 million in the second quarter. The increase was primarily due to a $224 million unrealized investment gain related to Novonix, as well as inventory impacts. In September, we acquired a 16% interest in Novonix. Our investment will be marked-to-market at the end of each reporting period. The Sweeny Fractionation Complex averaged a record 383,000 barrels per day in the Freeport LPG Export facility, loading 41 cargoes in the third quarter. DCP Midstream adjusted pre-tax income of $31 million was up $22 million from the previous quarter, mainly due to improved margins and hedging impacts. Turning to chemicals on Slide 7, we delivered another strong quarter in chemicals with adjusted pre-tax income of $634 million, down $23 million from the second quarter. Olefins and Polyolefins had record adjusted pre-tax income of $613 million. The $20 million increase from the previous quarter was primarily due to higher polyethylene sales volumes driven by continued strong demand, partially offset by higher utility costs. Global O&P utilization was 102% for the quarter. Adjusted pre-tax income for SA&S decreased $45 million compared to the second quarter, driven by lower margins, which began to normalize following tight market conditions. During the third quarter, we received $632 million in cash distributions from CPChem. Turning to refining on Slide eight, refining third quarter adjusted pre-tax income was $184 million, an improvement of $890 million from the second quarter, driven by higher realized margins across all regions. Realized margins for the quarter increased by 119% to $8.57 per barrel, primarily due to higher market crack spreads, lower costs, and improved product differentials. Pre-tax turnaround costs were $81 million, down from $118 million in the prior quarter. Crude utilization was 86% compared with 88% in the second quarter. Lower utilization reflects downtime at the Alliance Refinery, which was safely shutdown on August 28th in advance of Hurricane Ida. The third quarter clean product yield was 84%, up 2% from last quarter, supported by improved FCC operations. Slide 9 covers market capture. The 3:2:1 market crack for the third quarter was $19.44 per barrel compared to $17.76 per barrel in the second quarter. Realized margin was $8.57 per barrel and resulted in an overall market capture of 44%. Market capture in the previous quarter was 22%. Market capture is impacted by the configuration of our refineries. Our refineries are more heavily weighted toward distillate production than the market indicator. During the quarter, the distillate crack increased $1.55 per barrel, and the gasoline crack improved $1.92 per barrel. Losses from secondary products of $1.98 per barrel improved by $0.40 per barrel from the previous quarter as NGL prices strengthened. Our feedstock advantage of $0.01 per barrel declined by $0.26 per barrel from the prior quarter. The other category reduced realized margins by $5.01 per barrel. This category includes RINs, freight costs, lean product realizations, and inventory impacts. Moving to marketing and specialties on Slide 10, adjusted third quarter pre-tax income was $547 million compared with $479 million in the prior quarter. Our marketing business realized continued strong margins and increasing demand for products. Marketing and other increased $62 million from the prior quarter, primarily due to higher international margins and volumes driven by the easing of COVID-19 restrictions. Refined product exports in the third quarter were 209,000 barrels per day. Specialties generated third quarter adjusted pre-tax income of $93 million, up from $87 million in the prior quarter, largely due to improved base oil margins. On Slide 11, the corporate and other segment had adjusted pre-tax costs of $230 million, an improvement of $14 million from the prior quarter. This was primarily due to lower costs related to the timing of environmental and employee-related expenses, partially offset by higher net interest expense. Slide 12 shows the change in cash for the quarter. We started the quarter with a $2.2 billion cash balance. Cash from operations was $2.2 billion. Excluding a working capital benefit of $776 million, our cash from operations was $1.4 billion, which covered $552 million of capital spend, $394 million for the dividend, and $500 million of early debt repayment. Our ending cash balance was $2.9 billion. This concludes my review of the financial and operating results. Next, I will cover a few outlook items. In chemicals, we expect the fourth-quarter global O&P utilization rate to be in the mid-90s. In refining, we expect the fourth quarter worldwide crude utilization rate to be in the low-80s. We expect the Alliance Refinery to remain shut down for the full quarter. We expect fourth-quarter pre-tax turnaround expenses to be between $110 and $140 million. We anticipate fourth-quarter corporate and other costs to come in between $240 and $250 million pre-tax. Now we will open the line for questions.

Good morning.

Morning, Roger.

Good morning.

I guess let's take the first one just as the decision to buy in PSXP. I mean, I don't think it should be a huge shock, but I mean one of the questions we've gotten is why now? So maybe you can help us on that and then I'm just curious, at least at a high level, how it might change how the company reports going forward.

Okay. Well, I'll take a stab at that, and then Kevin, Mark, Tim can help. First of all, I think probably, we all acknowledge that this is to grow our Midstream business. If you look back on the pre-PSXP, so pre-2013, the Midstream business generated about $500 million EBITDA. More than half of that is in the AMMO. Did a nice job in helping us build and grow a substantial Midstream. The market just doesn't refuel MLP at this point in time. Consider trading at a 9% yield, we've seen institutional ownership drop from the 90s into the low 70s. And from our perspective, the cost of capital is unattractive so it doesn't really provide an attractive return. And then I will also say it provides a clear line of sight to the valuation of our Midstream business on a sum-of-the-parts basis. I'm not sure if that really applies today. So you think about, these are high-quality Midstream assets. We know them really well. We're able to acquire them for essentially a nine-ish multiple and trade it up into a 10 times multiple as we created from a sum-of-the-parts basis. And then, I think as we think about the future of Midstream and potential consolidation in Midstream. I think rolling up the PSXP gives us more degrees of freedom to create value with those assets. For a long time, a lot of the strength of the MLP was a diversity of assets; you think about crude oil pipelines and terminals and products pipelines as well as NGL assets, and we think that by bifurcating those, we'll be able to take those apart and discrete in the future. Kevin or Mark, if you want to add onto that, you are certainly welcome to do that.

No, I think you've covered it all. Regarding the reporting moving forward: as a fully consolidated entity, the Midstream results you see today include all of the MLP. This is fully incorporated into our Midstream segment results. However, we have a reduction in the non-controlling interest due to the ownership by third-party public entities. Once this transaction is completed, the non-controlling interest deduction will be removed from our bottom line results. This is how it will affect our reporting.

Thank you for that. I would like to direct my next question to Bob if he is available. I have been discussing with Jeff about the renewable diesel conversion and the situation in Rodeo, including some regulatory challenges we may be facing. I am looking for some clarity regarding the recent press reports suggesting that the project's size may be reduced, and whether that portrayal is accurate.

Thank you for the question, Roger. The key factor in the entire project is obtaining a land-use permit in Contra Costa County, which is essential and presents a significant challenge. Since we announced the project, we've been making progress. The environmental impact statement, required for the land-use permit, was made available for public comment around mid-October, and there will be a 60-day comment period. During this time, they noted an option to reduce the environmental impact by decreasing the project's size. We view this as a positive indication since the planning commission is required by law to propose alternatives that have lower environmental impacts. The suggestion to reduce the project's size implies they share our view that we are taking every possible environmental step, including lowering emissions from the plant and shutting down the carbon plant. Ultimately, all we have left to address are these comments. It’s important to clarify that there is no push for a smaller project; this current project is practical, utilizes existing equipment, and is cost-effective for conversion. We are in the public comment phase, and eventually, the county will provide us with the comments, to which we will respond. This period will end in mid-December, and while it will take some time to address everything, we still expect to obtain the necessary permits by late Q1. Once that happens, we can begin construction.

Very clear, and I'm glad you did that for us because I don't speak government ease, but good to know you're still on the right direction. Thank you.

You got it.

The team and Greg, I guess the first question is on 2022 capital spending. Typically we get that update here over the next couple of weeks, but you've been in relative maintenance spend mode outside of renewable. Just how should we think about the cadence of capex? Is the focus still on deleveraging the business, and therefore, we should assume capex close to sustaining levels, or are you thinking about toggling some growth into the business?

Yeah. Well, we've come to a big period of build in Midstream, I'd say. We've finished up C2G, and we'll finish up essentially this year going into next year, so there's no big spend in front of us in Midstream. Obviously, we have the Rodeo Renewed project, and we're anxious to get started on that next year. But I think that all fits within the guidance we've consistently given here over the last couple of quarters of $2 billion or less for 2022. If you actually go to our board for approval of the capital budget in December timeframe, but that's, in my own numbers, that's the number that we're looking at for 2022. I think that certainly, cash generation is improving as you can see the results from this quarter. I think we're probably more optimistic today that we're moving towards more of a mid-cycle earnings profile on our refining business. Our marketing specialties have been performing really, really strong all year. Midstream has been really strong this year. So as we get refining back to something approaching more mid-cycle, then that increases more optionality around the cash. What we do with the cash, but clearly, we're on a glide slope to pay down debt. We want to get back to that $12 billion pre-pandemic level. And as we've mentioned in the opening comments, we paid a billion down so far this year of that. So we're on a glide slope to do that. But I think the rule mileposts for us as we start thinking about capital allocation. That first dollar is always going to go to our sustaining capital, the next dollar goes to dividends, and then when we think about debt reduction, and then hopefully we'll get to a point where we can start working share repurchases back in. So Kevin, if you want to add anything to that.

No, I think you covered it all. I would say on debt reduction, we are anticipating doing another reduction between now and the end of the year, probably in the order of another $500 million that we'll get in before the end of the year.

Thanks, Greg and Kevin. The follow-up is just on the refining environment, a strong set of refining results this quarter. Can you just talk about how you're seeing the momentum going into Q4? We've seen distillate start to perform a little bit WCS widen now. Could that translate into numbers? And then if you could take a moment to talk about differentials, one of the things that has surprised, I think market participants as how tight the spread between Brent and WTI is which matters for Mid-Con refining. Do you think that's structural, or do you think this widens out as U.S. production comes back?

I'll take a stab at that. So we're optimistic going forward, and the market's setting up well, setting up for our kit as well too, as you know, we're distillate heavy versus gasoline in the U.S. distillate is over gasoline in every market now, but Chicago. We think better will continue through the winter. You've seen a WCS diffs come off. A few reasons why we are finding problems in the Mid-Con barrels; WCS barrels got to the Gulf Coast, weaken the dip, and the Canadian dips followed. And also there were some pipeline issues just this past weekend in Canada, which also helped weaken the dip. We think that dip will strengthen a bit going forward, but we're happy where it is now. In terms of Brent-WTI, the Brent-WTI needs to stay relatively tight as you've seen. When that happens, we need to keep crude in the U.S. and the best way to do that is to tighten the WTI-Brent differential. So we think it will stay in the $2 to $3 range going forward. So, we think by and large the market's setting up for a good Q4 and is certainly a good 2022. I think I would add that as OPEC puts more barrels into the market, those are going to be medium and heavy sour barrels and should result in a wider heavy sour discount, from which our kit disproportionately benefits.

Hi, thank you for taking my questions. First, just on the PSXP transaction itself. Just out of curiosity, will PSXP elect to take a step-up in PSXP's tax basis? And do you have an expectation of what that step-up will be? More generally speaking, what will be the net tax effect for PSX, once taking into account the fact that all of your Midstream earnings will be subject to tax post MLP rolling?

Yes, Theresa, it's Kevin. Phillips 66 will adjust its tax basis, resulting in additional tax depreciation. We will also benefit from bonus depreciation. The net cash effect will be approximately $300 million in 2022 due to reduced cash taxes paid, with an additional $100 million the following year. Overall, this provides about a $400 million cash benefit to Phillips 66. From a long-term perspective, the main tax impact, aside from the basis adjustment, will come from the tax we recognize on the non-controlling interest, which will now be our earnings and taxable to us. We will incur taxes on those earnings from the units that were previously owned by the public.

Thank you for your thorough answer. Could you discuss your short-term outlook for your European assets, considering both marketing and refining? Demand is clearly recovering as mobility restrictions lift, which benefits certain sectors, but there are also challenges related to energy costs, particularly for hydrocrackers. How do you foresee this evolving, and what implications does this have for your European assets as well as potential effects on the U.S. and the costs for U.S. Gulf Coast assets that export products?

I'll begin with the marketing assets, and Bob can cover the refining assets. Regarding marketing, we are continuing to expand our retail presence in Europe. As Kevin mentioned, this has contributed to marketing achieving its second-best quarter ever. As international travel resumes, we are seeing demand returning to 2019 levels, which is encouraging. Additionally, our efforts to refurbish and modernize our stores are resulting in a 2% increase in demand. We are also exploring emerging energy opportunities, including building hydrogen stations in Switzerland and seeking additional chances to install electric pumps and other innovations in the near future.

On the refining side, the Humber Refinery is our most efficient facility. It features a large catalytic cracker and three cokers, all of which are fuel gas generating units. As a result, the Humber Refinery doesn't require a significant amount of natural gas for its operations. We do experience some additional costs from power purchases and steam generated by a third-party operation nearby. While there is a cost impact, when considering the entire refining complex in Europe, margins need to improve, or else the highest cost producers will be affected. This situation generally benefits all refineries, including Humber, and we have already seen some positive outcomes there. So, while it presents a challenge, it's not a significant one for Humber.

I think as we look at the impact on demand, it's the high natural gas prices, especially in New York and Asia, are an incremental half a million barrels a day demand to perhaps as much as a million barrels a day of incremental demand globally. So nice increase on the product side as well.

Thank you.

Good afternoon. Cash flow before working capital may be a little bit less than I would have expected relative to the strength of the earnings, and there's some deferred tax and other things in there. Kevin, is there anything unique in the quarter around that, that drove that?

Yeah, Phil, there is. There is actually an offset between working capital, accounts receivable, and that deferred tax. So there's a re-classification on tax receivables, either short-term and into deferred. And so in effect, we've inflated the working capital benefits at the expense of reducing the pre-working capital cash flow. That's in the order of $500 million, and so you can do the math on what that really looks like. Because in my mind, I think about the working capital benefit being inventory of about $300 million, and then the rest is offset within the Cash Flow Statement.

Got it. That's helpful. I have a question regarding refining. If I examine the Central Corridor results, the improvements in the bridges you mentioned are significant, especially the other part of the bridge which showed a strong sequential improvement. I was just wondering about the sustainability of the third quarter results there.

I think one of the significant challenges from the second quarter to the third quarter was the impact of freezing conditions and the subsequent turnaround. We experienced downtime in Ponca for about three weeks due to the freeze, which was a major setback for us. Additionally, the outage at Wood River further affected our performance. A lot of these issues have now been resolved. When you calculate the numbers, running fewer barrels in the previous quarter tends to have lingering effects. There was also the RIN effect at play, among other factors. All these challenges came together in the second quarter in the Mid-Con region, but we didn't face those in the third quarter. I would describe our performance in the Mid-Con during the third quarter as strong and normal.

I would say, also, the market really set up for us in the third quarter. We had an early harvest season. It started early September, which is atypical, with no weather delays. Some of our competitors had issues during the third quarter to help us out. We had low distillate inventories as well, and that favors our kit. And we talked about the WCS steps, which were also wider. So all those things helped us.

Good morning, everyone. I would like to start by discussing the write-down related to Alliance. I'm particularly interested in the utilization guidance for the fourth quarter. Are we beginning to see a recovery trend in refining? If that's the case, is the low utilization rate still partly due to including Alliance in the calculations? I would appreciate your insights on how this situation is unfolding and what the next steps might be.

Okay. I'll take the first part; I'll let Kevin talk about the write-down, so your two-part question there. As we said, we don't anticipate with Alliance running in the fourth quarter. So you can think about that as about a 10% utilization on a normal basis if we would have been running during the quarter, so we would've been guiding. A little bit of turnaround activity in Q4, not too heavy. So I would characterize it. We're kind of back to running our system in normal condition. And so we'll run as the economics dictate and particularly with heavy crude coming, the diffs coming wider, that usually incenses us to run several of our assets harder. But yes, we keep Alliance in the denominator until it's not in the denominator.

Yeah, Doug, specifically on the impairment. So with the hurricane and the damage sustained by the hurricane that gave us the basis due a fair value analysis around that. And so as a result of that work and that analysis, we took a $1.3 billion pre-tax resulting carrying value of about $200 once we have taken that impairment; and that reflects the mission that is in today.

I don't want to dwell on this, Kevin. What is required for repairs? Do you see a future for the alliance, or is it more in someone else's control at this point? Is it going to operate again, or is it too far gone at this stage? Is it less likely to restart than you think?

Yeah. I think on their point, we continue to assess particularly significant electrical system that hit it, and we have been painstakingly working our way through the assessment of how do you restore operations there. So that will continue as we continue to, as we announced before, seek buyers for the facility. And then we continue to work with those third parties to see what the actual outcome of the Alliance Refinery is. It is too soon to make that call as to whether it will operate as a refinery again or in some other capacity, either for us or somebody else.

Thank you. My follow-up, guys, is just a quick one on PSXP. I don't know the numbers are going to be terribly meaningful here. But just wonder if you could talk us through, are there any incremental synergies coming out of the consolidation of bringing it back? And obviously, you don't have the accounting function and so on. And I wonder if I could just tag on to that? Again, not a big number, but how should we think about the targets for the combined or consolidated company leverage targets going forward now that you've fully got my consent. Thanks.

How many questions was that? In terms of the synergies associated with the roll-up, they're relatively minor in the grand scheme. It's important to note that we will incur some corporate costs, and the costs tied to PSXP as a public entity will no longer apply. This will have a modest impact, but it won’t significantly affect our consolidated financial results. Regarding leverage and debt levels, we've already incorporated all of that MLP debt into our consolidated balance sheet. As Greg mentioned, the pre-pandemic debt levels included PSXP, and this won't fundamentally alter our approach to future leverage objectives. However, the roll-up does provide us with some additional flexibility. For instance, we can now access all of the cash that was previously distributed to the LP or held as excess coverage for debt reduction. Additionally, we’ll also consider PSXP debt in this context, giving us more options for managing our debt.

Good morning, everyone. I have a question for Bob. While I've heard that Humber doesn't consume much natural gas, could you provide an overview of the situation in the U.S. and Europe? Specifically, how does a $1 per MCF change impact your operations and margin capture on a dollar per barrel basis? Are there any plans to change your approach and take a more active role in owning your own stations, especially considering the ongoing energy transition? Some of your larger customers are becoming more proactive in owning stations and building electric vehicle chargers. Is this something you're looking to replicate in a capital-light model?

Nothing changed.

I'll take that. For every dollar change in million BTU net gas price, about $150 million a year across our fleet. And you can think about that as about $100 million of that is pure natural gas, and the other $50 million comes through in electricity and steam purchases. Of the 100 million, then it's about global cost line and in the third quarter it is in cost of goods sold, primarily natural gas that we buy to turn into hydrogen. So that's without any mitigating steps within the refining system. Obviously, a lot of refineries have the ability to fuel propane and a little bit of butane and really, the economics to the day will drive what we decide to do there. We've also got the novel of turning up severity on cat cracker and making more gas. So there's a lot of moving parts into that sensitivity, but the simplest way to think about it is just one block is a $150 million a year. So we can call that $35 million or so a quarter.

And Paul, on the U.S. retail side, we had a small retail joint venture in Oklahoma City with three dozen stores a few years ago. In 2019, we expressed our intention to expand in the retail market, particularly in areas with fewer export opportunities, such as the Mid-Con. By the end of the year, we expect to have around 800 retail joint venture stores across the U.S. We are actively finding and acquiring stores in Middle America, where we plan to integrate these locations with our refinery complex to ensure we maintain demand as gasoline consumption decreases in the U.S. While retail will continue to represent a small portion of our overall operations in the U.S., it is a market we are actively pursuing.

Hi, everybody. If you could give us some idea of this NVX deal. You're taking a 16% interest in them. How did it come out? Stepping into battery is something we haven't seen you do before or any refiner. What I'm trying to get to is we know you make Melee Corp, you won't tell us how much you make or what the price is, but we know it's there, and I'm trying to understand if there are some synergies between that Melee Corp and NVX deal that you did.

I will take that. Novonix that we've identified four key areas that we want to focus on in renewables to generate strong returns: that's renewables, batteries, hydrogen, and carbon capture. And so this particularly opportunity falls into the battery filler. And as you noted, we've got a very good feedstock that can be used to generate synthetic graphite to go into anodes, and we went through a screening process. These anode producers are looking at ways to provide shorter supply chain options for those that need their services like those that are building electric vehicles and Novonix rose to the top of that screening process in North America, and we liked the team, we liked the technologies they were employing. They've got a low carbon intensity technology to produce synthetic graphite. They're locating in a place where they can get low carbon electricity, and it's a great way for us to move up the value chain in battery manufacturing and supporting the growth in electric vehicles.

I think maybe the other thing I might add is, we know a lot about the specialty coat that goes into the anodes and how to tailor that, and make properties around that. But the further up the value chain we get, the more we can understand how we can make those properties special, right? And so that we can drive more value creation, and at the end of the day, better batteries. And so that's part of what's driving this — it seeks to understand the ultimate customers in this market so we can help drive performance.

I think the other thing I'd add is, there is an increased focus on local content within the U.S. and in Europe. And the advantage of having U.S. facilities serving that market.

Thanks, Jeff, for that. My one quick follow-up here is, look, we understand the chemical margins were off $0.68 of what would not last, but in your opinion, has the pandemic fundamentally changed the demand for disposable plastics, which means the mid-cycle could be 5 or 10 or whatever number, over the standard $0.20 to $0.25 per pound? So just trying to understand your outlook for the mid-cycle margins in the chemical space, maybe before the next two or three years as we see some capacity expansion.

We have a mid-cycle margin that may have been, I think that clearly the plastics industry benefited during the pandemic. I think there may be some residual effects there with respect to personal protective equipment and things like that. But I think as the world moves beyond the pandemic, we see things going back to a more normal supply and demand situation. And I think it contributed to the strong growth that we've seen, and but we don't see it.

Good morning. Thanks for taking my question here. CP Chem, could you share your thin outlook over the next, I don't know, call it a year. So we do have some new crackers starting up and ramping up ethane exports. Do you see that incremental demand being covered by incremental production, or do we need to pull from either, I guess, projection or just overall inventory levels?

Yes, this is Tim Roberts. There are still about a million barrels being rejected, which means there is a sufficient amount available that needs to be incentivized to come into the market. Until the last quarter, this has been working, but we have noticed a slight shift recently. There will likely be some demand with new crackers starting up in the next couple of quarters. Fundamentally, we believe supply will meet demand and will be adequate. Additionally, there is a strong incentive for producers to maximize gas output, and we are seeing consistent production levels. We're observing natural gas liquids coming off both the crude and natural gas sides, and given the current rejection, supply appears to be sufficient.

Got it, and then on the renewable side, are there any prospects for using renewable hydrogen for your plant and Rodeo? And if so, would that be something potentially near-term or just like much further out?

Yes. There is a possibility to do that, and we continue to explore those avenues; it is not part of the project today. And in fact, we're running mostly third-party hydrogen there. So it's really a question for them. But there are opportunities in California to recover renewable natural gas that could find its way to being run by the hydrogen supplier and then that would lower that actually the overall carbon intensity of the diesel we will eventually make.

Sounds good. Thank you.

Yeah, thanks. Maybe the Balance Sheet Cash Flow question. I mean, in very rough terms here, you're exporting capital cash flow this quarter, roughly when. In equal amounts in the capex dividend and debt reduction. I know you talked about another $500 million in debt reduction before or likely during the fourth quarter. I mean, as we think about your balance sheet, that would have you down to about $14.5 billion versus I guess your $12 billion pre-pandemic target. As we think about uses of cash in 2022, and you need to get the balance sheet down about $12 billion level before. So at what point does the potential for buybacks kind of become a part of the excess cash flow?

Yeah, Ryan, Kevin. What we're trying to balance here is first priority is to protect the credit ratings of the A3 BBB-plus credit ratings, strong investment grade. We want to maintain those ratings. And part of getting there is, in the balance sheet back to where it was, but it's also a function of cash generation at mid-cycle or thereabouts levels. And so I think that once we are, as we've already made good progress on debt reduction. And when we're in that position of we're clearly back in a mid-cycle type environment. We're generating mid-cycle cash flow. There's a very clear line of sight to the ability to continue to reduce debt down to the levels we want to get to. We should have more flexibility to start thinking about the buybacks. The way to get to $12 billion before we think about alternatives, as long as the cash generation is there that we can clearly see our ability to deliver, and consider some of the alternatives around capital allocation.

Thanks for that. As a follow-up, one of your major competitors mentioned that their previous expectations for 2022 were below mid-cycle, but now they believe it could turn out to be an above mid-cycle year for refining. Considering the overall supply and demand dynamics along with various industry trends, where do you believe 2022 will place us on the refining side in relation to mid-cycle expectations?

It's always hard to call because we invariably, when we make a prediction, we get it wrong. But things seem to be shaping up to be somewhere at least close to mid-cycle. And I think the one composition that's not there right now are the crude differentials. So we're still lagging on heavy crude differentials. But there's some light at the end of the tunnel on that as we start to see OPEC putting more barrels back into the market. So we could see that start to come back in our favor. But that is probably what's keeping us being a little — maybe a little bit behind mid-cycle at this point in time. But I opened up to –

I believe that with low inventories across all products and jet fuel beginning to return, the government will allow vaccinated travelers to resume international travel starting November 8. I expect that we will see further expansion in light and heavy DIBS. Both MEH and Dubai Brent have significantly increased since late July, and I anticipate this trend will continue. A factor contributing to this is the increased demand for sweet crude abroad, where hydrogen and desulfurization costs are high, leading to a preference for lighter crude. Overall, I think the conditions are favorable for a positive 2022. While we may consider it an average year, there is potential for better results if inventories keep decreasing.

Look at the realized crack, 12 to 19, 3, 2, 1 RIN adjusted. It's about $10 to $50 a barrel, give or take. We're around $8.50 this quarter. While we're not quite back to mid-cycle crack levels, I think we're more optimistic about 2022 in refining and moving toward mid-cycle margins than we have been at any point in the last 19 months.

Hey, thanks for taking my questions. First, wanted to ask about this other refining bucket in that margin waterfall chart. It's been volatile the past couple of quarters. I think it was as high as $8 a barrel last quarter, back down to five this quarter. Is that difference mostly related to range or are there other things going on? And where do you see that trending over the next coming quarters? And then secondly, I just wanted to ask about NGL exposure across the business. NGL prices right now are pretty high, propane inventories are low. Do you have an ability to capture some of that price strength in the Midstream business, and conversely, is there an impact to your refining business in the winter due to butane blending and any ability to quantify that would help? Thanks.

I’ll address a couple of these points. You are correct that the other category is our most volatile section, and we refer to it as "other" because it includes everything that doesn’t fall into straightforward categories. It contains RIN effects and inventory effects, along with product differentials, especially when there is a significant disconnection in the Atlantic basin between European cracks and the Atlantic Coast. The numbers in this category can fluctuate significantly due to inventory accounting, although there are some consistent elements, like the freight costs for transporting our products to market. The volatility primarily arises from product mix, which includes the timing of our realizations for products we transfer through the corneal pipeline to the East Coast. These can vary greatly from month to month and quarter to quarter. RIN inventories and the overall market structure among the locations from which we source our products contribute to this unpredictability. It’s challenging to predict if this volatility will decrease, as it tends to persist. Currently, the impact is more pronounced due to significant RIN effects in the other category this quarter. Regarding NGLs, we integrate butane into gasoline depending on economic feasibility. We will refrain from this blending if NGL prices rise and make it unprofitable. As part of our secondary products in refining, we typically generate about 4% to 5% of NGLs from our refining complexes. Higher NGL prices are advantageous for us, while lower prices generally negatively affect our income. We store a substantial amount of butane annually for blending into gasoline, but we may opt to sell it on the market if that proves more beneficial.

The other piece, with regard to more along the lines of exposure, taking advantage of the opportunity. You're right; composite barrel has been pretty active. I mean, it's effectively tripled in price here in the last year. But what we do with our system, we're predominantly, we're not exposed significantly in commodity cycle there. So we really are a fee-based business the way we are structured. Now, what we do is much like we do with the refining kit is we have a system we're managing around. So as we are buying and selling barrels to optimize our kit, there are opportunities for us to create around this asset and capture and clip a couple of corners in that process. But it's really to manage and optimize our system to ensure our barrels as we buy them from the wellhead, all the way to the point they end up in the marketplace. That's how we try to position those barrels and we play in that. So we don't have a lot of commodity exposure. It a little bit on our LPG, but that was by design. LPG exports, excuse me. Map was a little bit of that's by design, but most of that business has turned up as well, which should be considered a fee-based business.

Thank you. I had a couple of questions on federal policy and I know things are early days, but the first is around sustainable aviation fuel, if the incremental credit at or Blenders Credit as discussed right now or it's going to affect, how would that alter your thinking around how you're going to configure the Rodeo plant between renewable diesel and Aviation fuel?

Yes. So today the design is done, the permit's in, so that the opportunity currently to reconfigure what we plan to do there is really not there at this point. But having said that, the refinery itself will make 8% to 10% yield of sustainable aviation fuel. The blenders tax credit as envisioned today may or may not incent us to do that. It's fairly close. So it will depend on everything else that goes into the margin at that point, whether we actually want to make sustainable aviation fuel or make renewable diesel. And like everything else in the commodity business, we'll let the economics dictate. I think there's plenty of opportunity, as sustainable aviation fuel develops and the market develops for that over time to come back and do a de-bottlenecking or add a little bit of kit at Rodeo Renewed to make more sustainable aviation fuel, and we'll probably make sense, but it's probably going to take more than $1.5 that the government is anticipating putting out there to make that happen.

You mentioned carbon capture, which you have been exploring as an opportunity. With new targets for reducing carbon intensity, how do you view this landscape? It seems like enhanced incentives, if approved, could motivate third-party developers to build systems. What is your overall perspective on the opportunities available? Also, if you were to take on larger Gulf projects, would you use your own funds or partner with others? What would that approach look like?

I mean, look, this is still evolving as we move forward in this. But we do think carbon capture is going to be key to piece of the overall transition and being able to meet some of the targets and goals that have been set out there, whether by 2030 to 2050. Current capture may be key to that. I mean, it's already in play currently, just not in a large scale. But we certainly do participate in that. And so a big key piece of that is going to be having a concentration of carbon to capture. I mean, you've got areas where there's heavy concentration. You've heard some of the stuff about Houston and there are other metro areas or industrialized areas where there may be opportunities to do that as well. We certainly think with our assets and our structure and the products and processes that we do, that it does make sense. Now, the next challenge is, does it make economic sense? We're going to work both sides to that equation with regard to see what makes sense and what fits? Whether it's organic, whether it's with a partner, whether it's equity relationships, whether it's technology partnerships. I think at this point in time, we're not going to single in on one way. We're going to find out what the opportunity is and what value is, and then determine what's the best path to maximize and optimize value.

Thank you Tim. Thank you all for your interest in Phillips 66. If you have questions after today's call, please contact Shannon or me. Thank you.