Phillips 66 (PSX) — Q4 2021 Earnings Call Transcript

Good morning, and welcome to Phillips 66's fourth quarter earnings conference call. Participants on today’s call will include Greg Garland, Chairman and CEO; Mark Lashier, President and COO; 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 two 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, Jeff. Thank you. Hey, good morning, everyone, and thanks for joining the call today. In the fourth quarter, we had adjusted earnings of $1.3 billion or $2.94 per share. For the year, adjusted earnings were $2.5 billion or $5.70 per share. We delivered record results in Midstream, Chemicals, and Marketing and Specialties, demonstrating the strength of our diversified portfolio. For the third quarter in a row, we saw improved Refining performance. Looking ahead, we are optimistic about the outlook for our business. In 2021, our employees exemplified the company’s values of safety, honor, and commitment. Our 2021 combined workforce total recordable rate of 0.12 was more than 25 times better than the U.S. manufacturing average. Last year, our strong cash flow generation allowed us to invest $1.9 billion back into the business, return $1.6 billion to shareholders, and pay down $1.5 billion of debt. The 2022 capital program of $1.9 billion reflects our commitment to capital discipline. Approximately 45% of our growth capital this year will support lower carbon opportunities, including Rodeo Renewed. As cash flow improves further, we will prioritize shareholder returns and debt repayment. In October, we increased the quarterly dividend to $0.92 per share. We remain committed to a secure, competitive, and growing dividend. We would like to resume share repurchases this year and are on our path towards getting back to pre-COVID debt levels over the next couple of years. We are taking steps to position Phillips 66 for long-term competitiveness. Across our businesses, we are assessing opportunities for permanent cost reductions. Mark and Kevin are leading this initiative, and we will provide additional details on the first quarter call in April. We are committed to a lower carbon future while continuing to deliver our vision of providing energy and improving lives around the globe. We announced targets to reduce greenhouse gas emissions intensity last year. By 2030, we plan to reduce Scope 1 and Scope 2 emissions by 30%, and Scope 3 emissions by 15% compared to 2019 levels. So, with that, I will turn the call over to Mark to provide some more details.

Thanks, Greg. Good morning, everyone. In the fourth quarter, we had strong earnings from Midstream, Chemicals, and Marketing and Specialties, and we saw continued recovery in Refining profitability. We made progress advancing our growth projects, as well as taking strategic actions to position Phillips 66 for the future. In Midstream, we began commercial operations of Phillips 66 Partners, C2G Pipeline at the Sweeny Hub; construction of Frac 4 is 50% complete, and we expect to begin operations in the fourth quarter of this year. CPChem is investing in a portfolio of high-return projects, growing its asset base, as well as optimizing its existing operations. This includes growing its normal alpha olefins business with a second world-scale unit to produce 1-hexene, a critical component in high-performance polyethylene. CPChem is also expanding its propylene splitting capacity by 1 billion pounds per year with a new unit located at its Cedar Bayou facility; both projects are expected to start up in 2023. CPChem continues to develop two world-scale petrochemical facilities on the U.S. Gulf Coast and in Ras Laffan, Qatar. In addition, CPChem completed its first commercial sales of Marlex Anew Circular Polyethylene, which uses advanced recycling technology to convert difficult-to-recycle plastic waste into high-quality raw materials. CPChem successfully processed pyrolysis oil in a certified commercial-scale trial and is targeting annual production of 1 billion pounds of circular polyethylene by 2030. During the year, we began renewable diesel production at the San Francisco Refinery and continued to progress Rodeo Renewed, which is expected to be completed in early 2024, subject to permitting and approvals. Upon completion, Rodeo will initially 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 acquired a commercial fleet fueling business in California, providing further placement opportunities for Rodeo renewable diesel production to end-use customers. Additionally, our retail marketing joint venture in the Central region acquired 85 sites in December, bringing the total to approximately 200 sites acquired in 2021. These sites support long-term product placement and extend our participation in the retail value chain. Our Emerging Energy Group is advancing opportunities in renewable fuels, batteries, carbon capture, and hydrogen. We recently signed a technical development agreement with NOVONIX to accelerate the development of next-generation materials for the U.S. battery supply chain. We own a 16% stake in the company, extending our presence in the battery value chain. In December, we entered into a multiyear agreement with British Airways to supply sustainable aviation fuel produced by our Humber Refinery beginning this year. For 2022, we will execute our strategy with a focus on operating excellence and cost management. We will do our part to advance the lower carbon future while maintaining disciplined capital allocation and an emphasis on returns. Now, I will turn the call over to Kevin to review the financial results.

Thank you, Mark, and hello, everyone. Starting with an overview on Slide 4, we summarize our financial results for the year. Adjusted earnings were $2.5 billion or $5.70 per share. We generated $6 billion of operating cash flow or $3.9 billion, excluding working capital. These results reflect our highest annual earnings for the Midstream, Chemicals, and Marketing and Specialties segments. Cash distributions from equity affiliates totaled $3 billion, including a record $1.6 billion from CPChem. We ended 2021 with a net debt to capital ratio of 34%. Our adjusted after-tax return on capital employed for the year was 9%. Slide 5 shows the change in cash during the year. We started the year with $2.5 billion in cash. Cash from operations was $6 billion. This included a working capital benefit of $2.1 billion, mainly due to the receipt of tax refunds, as well as the impact of rising prices on our net payable position. During the year, we paid down $1.5 billion of debt. In November, both S&P and Moody’s revised their outlooks from negative to stable. We are committed to further deleveraging as we continue to prioritize our strong investment-grade credit ratings. We funded $1.9 billion of capital spending and returned $1.6 billion to shareholders through dividends. Our ending cash balance increased to $3.1 billion. Slide 6 summarizes our fourth quarter results. Adjusted earnings were $1.3 billion or $2.94 per share. We generated operating cash flow of $1.8 billion, including a working capital benefit of $412 million and cash distributions from equity affiliates of $757 million. Capital spending for the quarter was $597 million; $265 million was for growth projects, which included approximately $100 million for retail investments in the Marketing business. We paid $403 million in dividends. Moving to Slide 7, this slide highlights the change in adjusted results from the third quarter to the fourth quarter, a decrease of $105 million. Our adjusted effective income tax rate was 20% for the fourth quarter. Slide 8 shows our Midstream results. Fourth quarter adjusted pretax income was $668 million, an increase of $26 million from the previous quarter. Transportation contributed adjusted pretax income of $273 million, up $19 million from the prior quarter. The increase mainly reflects the recognition of deferred revenue. NGL and other adjusted pretax income was $284 million, compared with $357 million in the third quarter. The decrease was primarily due to lower unrealized investment gains related to NOVONIX, partially offset by higher volumes at Sweeny Hub and favorable inventory impacts. Our investment in NOVONIX is mark-to-market at the end of each reporting period. The total value of the investment, including foreign exchange impacts, increased by $146 million in the fourth quarter, compared to an increase of $224 million in the third quarter. The fractionators at the Sweeny Hub averaged a record 417,000 barrels per day, and the Freeport LPG export facility loaded a record 45 cargoes in the fourth quarter. DCP Midstream's adjusted pretax income of $111 million was up $80 million from the previous quarter, mainly due to favorable hedging impacts in the fourth quarter compared to negative hedge results in the third quarter. The actual hedge benefit recognized in the fourth quarter amounted to approximately $50 million. Turning to Chemicals on Slide 9, Chemicals' fourth quarter adjusted pretax income of $424 million was down $210 million from the third quarter. Olefins and Polyolefins adjusted pretax income was $405 million. The $208 million decrease from the previous quarter was primarily due to lower polyethylene margins, reduced sales volumes, as well as increased utility costs. Global O&P utilization was 97% for the quarter. Adjusted pretax income for SA&S was $37 million, compared with $36 million in the third quarter. During the fourth quarter, we received $479 million in cash distributions from CPChem. Turning to Refining on Slide 10, Refining's fourth quarter adjusted pretax income was $404 million, an improvement of $220 million from the third quarter, driven by higher realized margins and improved volumes. This was partially offset by higher costs. Realized margins for the quarter increased by 35% to $11.60 per barrel. Impacts from lower market crack spreads were more than offset by lower RIN costs from a reduction in our estimated 2021 compliance year obligation and lower RIN prices. In addition, we had favorable inventory impacts and improved clean product differentials. Refining adjusted results reflect approximately $230 million related to the EPA’s proposed reduction of the RVO, of which about 75% applies to the first three quarters of the year. Pretax turnaround costs were $106 million, up from $81 million in the prior quarter. Crude utilization was 90% in the fourth quarter, and clean product yield was 86%. Slide 11 covers market capture. The 3:2:1 market crack for the fourth quarter was $17.93 per barrel, compared to $19.44 per barrel in the third quarter. Realized margin was $11.60 per barrel and resulted in an overall market capture of 65%. Market capture in the previous quarter was 44%. Market capture is impacted by the configuration of our refineries. Our refineries are more heavily weighted toward distillate production and the market indicator. During the quarter, the distillate crack increased by $3.10 per barrel, and the gasoline crack decreased by $3.76 per barrel. Losses from secondary products of $1.88 per barrel improved by $0.10 per barrel from the previous quarter due to increased butane blending into gasoline. Our feedstock advantage of $0.18 per barrel improved by $0.17 per barrel from the prior quarter. The other category reduced realized margins by $2.02 per barrel. This category includes RINs, freight costs, clean product realizations, and inventory impacts. Moving to Marketing and Specialties on Slide 12, adjusted fourth quarter pretax income was $499 million, compared with $547 million in the prior quarter. Marketing and other decreased by $52 million from the prior quarter. This was primarily due to lower marketing fuel margins and volumes, as well as higher costs. Specialties generated fourth quarter adjusted pretax income of $97 million, up from $93 million in the prior quarter. On Slide 13, the Corporate and Other segment had adjusted pretax costs of $245 million, an increase of $15 million from the prior quarter. This was primarily due to higher employee-related costs and net interest expense. Slide 14 shows the change in cash during the fourth quarter. We had another strong quarter for cash. This is the third consecutive quarter that our operating cash flow enabled us to return cash to shareholders, invest in the business, pay down debt, while increasing our cash balance. This concludes my review of the financial and operating results. Next, I will cover a few outlook items for the first quarter and the full year. In Chemicals, we expect the first quarter Global O&P utilization rate to be in the mid-90s. In Refining, we expect the first quarter worldwide crude utilization rate to be in the high-80s and pretax turnaround expenses to be between $120 million and $150 million. We anticipate first quarter Corporate and Other costs to come in between $230 million and $250 million pretax. For 2022, we plan full year turnaround expenses to be between $800 million and $900 million pretax. We expect Corporate and Other costs to be in the range of $900 million to $950 million pretax for the year. We anticipate full year D&A of about $1.4 billion, and finally, we expect the effective income tax rate to be in the 20% to 25% range. Now, we will open the line for questions.

Good morning, team. Greg, good morning. Greg and Kevin, first question for you on how you are thinking about normalized cash flow? If I look at the back half of 2021, excluding working capital, you put up almost $3 billion of cash flow, so annualized, close to $6 billion. I think a lot of us use $5 billion to $6 billion of sort of that normalized cash flow range. But Greg, you have been clear that you think it’s kind of closer to $6 billion to $7 billion. And so just your thoughts on whether that’s still how you are thinking about mid-cycle and the underlying buildup to that $6 billion to $7 billion, if you can kind of walk through the world of your different segments of how you get there would be great.

I will be happy to do that. I mean, I don’t think we really changed from our view of $6 billion to $7 billion. Of course, it’s nice to see $6 billion of cash last year. It just happened to occur in different buckets that you might expect from a traditional cycle. So I think we have been signaling in the last couple of months. We are pretty constructive on the Refining business coming into 2022. And if you think about the rest of the businesses, they have actually performed at or better than mid-cycle all through the pandemic in 2020 and into 2021. We remain pretty constructive on those businesses coming into 2022 at all. So really, for us, a wildcard has really been Refining and when has Refining recovered back to something approaching a mid-cycle. But just to remember how it all builds up on an EBITDA basis kind of $4-ish billion in Refining, kind of $2 billion in Midstream, $2 billion in Chemicals and $1.5 billion, $1.6 billion in Marketing and Specialties, it pushes you to something like $9-ish billion of EBITDA, which translates to $6 billion to $7 billion of cash. And so I think we are pretty comfortable that we are kind of still in that range. Obviously, we have had some outperformance. I mean, last year, all driven by great operations, fundamentally good control of their costs and then super margins. Our Marketing and Specialties businesses, which we typically would say is a $1.5 billion, $1.6 billion business was $2 billion. And of course, we have been investing in adding retail to our joint ventures. But I think it’s really great execution on the operations side, particularly in the U.S., but also in our European operations, where we saw good volumes, good margins across that. And so I would say that we are probably on the upside of that. So given $6 billion to $7 billion of cash flow, our first dollar is always going to go to sustaining capital that’s $1 billion, dividend is $1.6 billion, and then that leaves room for us. We can signal that the capital budget is going to be $2 billion or less, so we are $1.9 billion for this year. That’s a deliberate signaling that for this year or next year, we are going to be very constrained on capital, that frees us up to pursue some debt repayment and get back to share repurchases, while doing a little bit of growth. And so I think we make that all balance as we think about that. Now Kevin or Jeff, if you want to add to that, please step in or more…

No. I think you covered it all.

Okay. Good.

Thanks, Greg. And that’s the logical follow-up for me, which is how you are thinking about share repurchases, again the focus has been to get the debt level lower. Looks like the ratings agencies are giving you the – all clear at least that things are moving in the right direction. So what are the gating factors for you to begin a share repurchase program, and how do you think about sizing it?

Well, we have always said the gating factor is getting cash flows back to something approaching a mid-cycle and making a dent in the debt repayment. So I think coming into April, we are going to pay another $1.5 billion-ish of debt off in April as it comes due. So that’s $3 billion of the $4 billion. We have made a big dent in that. So I think that kind of post-April, that’s why I said that I would be disappointed if by midyear, we are not back in a share repurchase mode at our company.

Perfect. Thanks, Greg.

Sure.

Yes. Hello. My first question, just on one of the guidance items here on the Refining maintenance, $800 million to $900 million, just looking back, it looks like it’s the highest in the history of the company. And I was just curious, I mean, is there anything unique we should be thinking about there? I didn’t think 2020 or 2021 were too far below the historical norms. And then I guess bigger picture, when I think about your maintenance and what others have said, it seems like the industry might be kind of capped in terms of what utilization can be this year. So is this an environment where we are just going to see margins get pressured higher to keep up with demand?

So let me just take a high level and then I will let Bob come in and talk about it since it’s his business. But if you look at 2012 through 2019, we kind of averaged about $5.25 billion in terms of total turnaround expense. And we did push some of 2020 and 2021 into 2022. I think probably a lot of the people did that in the industry as we were trying to conserve cash and protect the balance sheet. So it’s a big number, Phil, there’s no question. But I will let Bob speak to the specifics and what we are doing there.

I think Greg addressed it well. The past couple of years were naturally expected to have lower turnaround numbers, and 2022 was meant to be a larger turnaround year. We have two refineries, Ferndale and Billings, and when they undergo maintenance, the entire facility is affected, which means we need to look back about five years to understand their cycles. This creates some variability. Regarding your second question, we agree that many in the industry postponed their turnarounds and maintenance from 2020 and 2021, resulting in lower utilization rates. We improved our catalysts in hydro-traders and hydrocrackers to extend their lifespan, and we focused on maintaining mechanical integrity. However, those components are now due for maintenance, and we can’t defer it indefinitely. This year presents a significant challenge for us across the system, and I believe others in the industry will face similar issues.

Okay. Great. Thanks for that color. Just one more on the Refining business, Needle Coke is a unique business to Phillips 66 versus the other refiners. I was curious, it’s a bit of an opaque market, but could you talk about what you are seeing in the fundamentals of that business, kind of how it finished out 2021 and how you see it progressing in 2022 and beyond? Thanks.

Sure. So, as you may know, Needle Coke is used to make graphite electrodes, which internally is used for the production of steel in electric arc furnaces, which are actually a cleaner technology than blast furnaces. We use Needle Coke also to make anodes for lithium-ion batteries. The past two years, we have seen a weaker Needle Coke market with steel producers running off high inventories. But we do see some slow strengthening at the end of last year and this year as well. If you listen to steel production, which is a leading indicator, they had a record year last year, even as Needle Coke markets lagged, because of the high inventories. The market seems to have mixed opinions about steel production this year. Some steel producers think it will continue to increase, some think it will come off. Either way, we have seen good demand from both steel producers and anode producers, and we expect that market to continue to gradually increase. We think with the refinery utilization coming back up and lower graphite electrodes, that it will be a slightly strengthening market.

Great. Thank you.

Yeah. Thank you and good morning.

Good morning, Roger.

Hi, Roger.

Good morning. I’d like to start off kind of on your comments about getting back to share repurchases. Maybe what are some of the markers you would want to see and kind of tagging on with Phil’s question about maybe a little higher spending on the turnaround side? Is there a timing issue with those turnarounds where you would want to get past a certain level, or is it bigger picture on the balance sheet for overall cash flows when you will feel comfortable?

I believe we are revisiting the issue of Refining and when it will reach mid-cycle crack levels. In the fourth quarter, we recorded realized cracks of 11.60, which is the highest quarterly figure we've seen in Refining since the fourth quarter of 2018. There are several factors contributing to that number. Looking ahead to 2022, we are optimistic about supply and demand. A significant amount of supply has exited the market, while new supply is expected, although it will come on gradually rather than all at once, as it typically takes longer to materialize. On the demand side, we observe that the impact of each new COVID wave on demand continues to lessen. Although I cannot predict exactly when we will shift from pandemic to endemic status, that transition could occur next year. Regardless, we are seeing diminishing demand impacts with each COVID wave. Before the current variant, gasoline demand was approaching 2019 levels, and we noted disciplined demand above those levels. Jet fuel was showing strong recovery. As we enter 2022, we remain optimistic about demand. We also discussed turnaround activities and their potential effects on utilization rates, which lead us to believe everything is aligning for a return to more mid-cycle cracks in Refining. Once we achieve that, we are confident we will generate enough cash flow to cover our sustaining capital, maintain our dividend, reduce some debt, resume share repurchases, and fund our growth program, which is approximately $900 million this year. Kevin, would you like to add anything?

No, I believe that's very thorough. Regarding the details of our debt repayment, we have a $450 million term loan due in April and $1 billion in notes also maturing in April, and we plan to address both of these at their respective maturities. After that, we will have flexibility as we still have other callable debt options if needed. Once those are managed and if cash flows return to mid-cycle levels, we would have significant flexibility.

I think we paid $3 billion of the $4 billion that we borrowed during 2020 down. I think that demonstrates our commitment to paying down debt and returning the balance sheet over a couple of year period to something that resembles kind of pre-COVID levels, let’s say, $12 billion on a consolidated basis. So, I think we are pretty comfortable in that construct, Roger.

Okay. Appreciate it. Other question I had sort of the unrelated follow-up. As you look at setting everything up on the renewable diesel side, any progress or increased comfort level in terms of the feedstock side of that, I mean, that seems to be one of the biggest questions we get coming in is, what is our comfort level that each of the companies will be able to supply what you need to maintain a healthy margin in that business and the returns that you are targeting?

Hey, Roger. It’s Brian. We don’t see any issue with the feedstock availability. Although it may be challenging for those that are less commercial and have less logistics experience. We think between increased acreage and yield, switching from biodiesel, better aggregation of used cooking oil, we will have plenty of feedstock to produce renewable diesel. Prices may vary over time, and that’s to be expected. At Rodeo, we are on the water, so we have access to both domestic and foreign feedstock. We also sit on the U.S.’ greatest demand center in California. So we feel good there. Our commercial organization has been working on feedstock for quite a while. We have offices around the world. We have storage in Asia and Europe and in the U.S. We have good relationships with vegetable oil producers. You heard our announcement in our investment in Shell Rock Soy processing. We purchased for the startup of Rodeo. We purchased soybean oil, canola oil, distilled corn oil since last April. We have strong relationships with producers and aggregators of used cooking oil. In fact, with used cooking oil, we have been in that market for over four years, supplying Humber used cooking oil from around the world, currently 12 different countries. So I think Rodeo Renewed will have a maximum optionality in its system and then we will use a linear program to decide what the best and most cost-effective feedstock is based on not just CI, but price, credit generation to the sales market and logistics.

It sounds like it’s open for an MLP there. All right. Thank you.

Hi. Thanks. Maybe one on European Refining, as a refiner with some exposure to European refining, can you talk about the impact of high nat gas prices that you are seeing on Refining economics over there and in a broader sense in that part of the world? Do you expect high nat gas prices to impact European utilization rates to the benefit of U.S. refiners this year?

Yeah. This is Bob. I think that’s absolutely right. We look at what goes on in our operations, and we have got a very complex and strong refinery over there, and the impact of high natural gas prices on us and then we translate that to some of the simpler refineries in Central Europe. It’s got to be really tough for them to be making money right now, and I am sure we are going to see that. We know that clean product yield out of a bunch of those refineries is down, because they are not buying hydrogen or buying natural gas to make hydrogen to hydrotreat, because we see the high sulfur stuff showing up in the market, which is somewhat good for us. It’s putting pressure on the sour crudes, which will be good for us in the long term. So I think high natural gas prices are going to continue for a while in Europe, and it is really going to strain kind of that bottom quartile of refiners that are left.

As Bob pointed out, if the Europeans are running more sweet crude, it kind of widens that sour sweet dip, which is beneficial to us. The utilization comes off on those refineries because they can’t afford to run. That’s good for the U.S. as well because we will be able to export products to Europe. So it would be good for our businesses as well.

Great. Thanks. And then maybe a follow-up on the last question before this, I mean, you now have a couple of quarters under your belt producing renewables you saw there in California at a pretty decent level. I mean, can you talk about what you have learned from your operations, both in product placement as well as feedstock acquisition there, as you think about preparation for the full project completion later on? And then as we have seen feedstock spreads narrow in the back half of the year, any comment on what you have seen in the profitability of your production there?

The profitability between Q3 and Q4 has improved. There are many factors to consider regarding renewable diesel margins, including feedstock, the price of renewable diesel, and credits, along with logistics. We are developing a linear program for renewables. The essential aspect of renewable production is to identify as many feedstock suppliers as possible and ensure the logistics for transportation to the plant, which we have been focusing on. We have established a global organization for this purpose and are dedicated to the effort. In renewable diesel, our priority is to deliver the product to the end-user, which helps us retain more of the margin. Our acquisition of the commercial fleet fueling business has facilitated this process. We have converted all our stores in California to renewable diesel, and we are committed to maximizing our supply to end-users while expanding our feedstock options for the plant and optimizing through our linear program.

I might add to that that being able to operate 250 out there on renewable feedstocks instead of hydrocarbon-based feedstocks has really given us a good opportunity for the operators and staff to learn because it is very different and it runs differently. There are different characteristics to handling it and getting it in the unit and dealing with it. So it’s been a great warm-up for us for the Rodeo Renewed project that’s yet to come and just, I think, raises our confidence level and our ability to be able to run really hard right out of the gate with that unit.

You want to talk about the pathways, the CI approval, et cetera?

Yeah. So we started up the unit after the last turnaround on basically clean soybean oil. Since then, and Brian mentioned it earlier, we have been able to establish pathways. So in California, you run new feedstocks, you get provisional CI number for them and then you have to go through, I’d say, a pretty lengthy bureaucratic process to qualify your other feedstock. So since we have done that, we have been able to qualify not only the soybean oil, but the distillers corn oil; we are working on. We have gotten a pathway on canola oil. I think that process will keep repeating itself as we find more and more feedstocks ahead of Rodeo Renewed coming up in early 2024, that really allow us to take advantage of the lower CI material right away.

I guess, just another key learning is how you get through that process and navigate that process in California.

Like everything else, you get better at it the second time.

Perfect. Thanks, guys.

Thanks, guys. I have got two questions that I hope can add some color for everybody. I guess my first one, Kevin, is on the balance sheet. I was looking back at your share price; it seems like a horrible memory now. But your share price pretty much got cut in half twice last year and during the 2020 period, and obviously, you did not buy back stock when that happened, given the circumstances. So my question is why carry $10 billion of net debt rather than work the balance sheet down to a level where we know these corrections are going to happen occasionally in this business to allow you to take advantage of that? What’s the philosophy behind the buybacks in the recovery versus building the balance sheet during the recovery and buying back during corrections?

Yeah. Doug, I think it’s really a bit of a balancing act, trying to meet multiple priorities. So we think about an optimum capital structure in terms of the cost of capital, right? So too little debt increases the cost of capital, and so you have got that component to it. We have got other opportunities that we want to be able to fund. And bear in mind also that, as we are growing the business, and we are seeing that in the non-Refining segments, as we are growing the business, we are actually strengthening our overall financial condition because on a debt-to-EBITDA basis, we are continuing to improve from that standpoint. Obviously, we don’t like the fact that we weren’t buying shares at $40, but we were not in a position to do so, and so we had to just accept that. And so it’s really around finding that optimum capital structure that will give us sufficient flexibility through the cycle, albeit you have always got more flexibility. The lower the debt balance, obviously, that provides added flexibility. But at what cost is that? It’s having the optimum structure to where we have got adequate flexibility. We can stick with our sort of capital allocation framework, so 60% reinvestment in the business, 40% cash returns to shareholders between the dividend and buybacks over an extended time period, recognizing that year-over-year that will fluctuate. So it’s really just trying to balance through all of that. I am not sure going too much further down on debt than our sort of stated objectives is going to bias a whole lot in that context. So I still feel pretty good with how we are laying out our objectives.

I appreciate the answer. I guess it’s more of a net debt question, because obviously, it’s 2020 hindsight is perfect, but it kind of gets back to this. I wonder if COVID has reset everybody’s view of what volatility looks like. So, but I appreciate the answer. My follow-up is, something I really value from you guys periodically is your view on the net capacity outlook. And I guess, my question is, are we getting to a point now where the mid-cycle Refining outlook has been reset higher, much like it did in the mid-2000s? I don’t want to say golden age, but something of that nature. And here’s my point, gas prices are up, that’s probably structural for international players, net additions disclosures like demand with IMO. I am just wondering, are you guys thinking along those lines? How do you see the net additions, price additions and subtractions in terms of impacting that mid-cycle view?

Yeah. Doug, I think we have seen a total of about 4.5 million barrels a day of Refining rationalization that’s been announced, and much of that has already occurred. When you look at last year, it was the first year in at least 30 years where there was more capacity rationalized out of the global fleet than there was capacity added, and so we are seeing that benefit. As we look forward, there’s still pressure with higher natural gas prices in Europe on those units’ profitability. So we see that continuing to occur. We have also seen COVID delays, challenges getting labor in to execute new capacity additions, so they are getting spread out. We have seen a reduction of capital spending and concerns over energy transition. So it’s definitely impacting the supply side of the equation and we are seeing demand come back. As Greg mentioned, gasoline was above 2019 levels before this recent COVID hit, diesel comfortably above, jet’s been coming back aggressively and so we think jet demand by late this year could be back at 2019 levels as well. So the demand’s still in the system and the supply is more constrained than what we have seen historically.

Hi, there. Thanks for taking my question. First, Kevin, I just wanted to follow up on your comment about the inventory benefit in NGL and also the refining that helped the quarter. So just to be clear, the $404 million of adjusted EBT, did that include the $230 million?

Yes. It does, Theresa. So the $404 million includes the $230 million. It applies to the full year. And so if you think about my additional comment, if you think about that in terms of the quarter, you could say three quarters of that $230 million would apply to the first three quarters of the year and if you are doing any kind of normalization around that.

Okay. So, that you presumably would not get that revaluation over and over again, so the clean number for the quarter would be $174 million?

If you back out the full $230 million, yeah.

Okay. Great. Thank you. And then, I also wanted to follow up on one of Brian’s comments about the fuel fleet that you bought in California as you seek to place barrels to the end user for all of your renewable diesel production. Is this something that you expect to grow in terms of your footprint and the vertical integration as incremental renewable diesel will hit the state over time to insulate your position there, or is it something that you were thinking of doing all along? I would love to understand your strategy more here.

Yeah. Theresa, that’s exactly right. Our goal is to be able, at some point, to get the entire 50,000 barrels of diesel that we make to the end-user. That may not be possible, but we will see. We may export some of that depending on markets, but this is just one step. As I said, we upgraded all the stores to renewable diesel. We are looking at a lot of different opportunities to also get diesel to the end-user. But the goal is to get it to the end-user that way. We keep all of the margin and we think that’s the best path.

Hi guys. This is a question which we get a lot of investors, so don’t shoot the messenger. Your partner has gone ahead and made a statement that they don’t really want to be in the business of JV Refining. You have a very profitable JV, which has worked very well for you over the years, and that has resulted in a lot of speculation. If you keep one refinery, they keep one, they sell you both, you sell them both. There are multiple scenarios there, or just keep the status quo, if you could comment a little on that situation?

Take that, Bob. Yeah, actually…

Yeah. And we are seeing. All I can tell you is, we continue to work really well with our partner on our joint venture, WRB for Wood River and Border. As you pointed out, it’s been a very good partnership since 2007, stood the test of time. They seem to like us as an operator. They have been a great partner to work with and give us good insights on things, and their world has changed. But for now, we continue to work together to run WRB and invest in those two facilities as needed, both of them.

Perfect. And my follow-up quick question is when you look at the segments here, the Gulf Coast operating cost was a little higher, and so was the DD&A. I am assuming these are just like one-times, and as the refinery closes, your op costs will actually trend down sequentially, not up, and so for the DD&A. If you could just comment on that one-times, I mean, they look like one-times from the alliance on the Gulf Coast results?

You are correct. There’s quite a bit of fluctuation in the fourth quarter, and we still have all our personnel in place from that period due to our redeployment efforts. As a result, we incurred costs in the fourth quarter, and of course, we didn't have volume in the first quarter. We expect those costs to decrease rapidly in the first quarter. In terms of cost per barrel in the Gulf Coast, all our refineries have similar base costs, excluding turnarounds, so you won’t notice a significant change in that measure. However, overall controllable costs in the Gulf Coast will decline.

Hi, Manav. It’s Kevin. Just on the D&A, we did, as you suspected, associated with the alliance conversion, we impaired some assets that flow through the D&A line. So that is one-time in nature.

Thank you so much for taking my questions, and a great quarter.

Hey, guys. Good morning.

Good morning, Paul.

Good morning.

I have two questions for you. The first one is for Kevin. In your prepared remarks, you mentioned the inventory benefit in NGL and refining that contributed to the quarter. Can you provide a quantification of those numbers? Additionally, I would like to know about the deferred revenue you recognized in transportation and its quantification as well. After that, I will ask my second question.

Paul, regarding the deferred revenue, the change we see from one quarter to the next directly reflects the deferred revenue. That’s an important way to consider it. I don't view deferred revenue as a one-time occurrence because of the nature of our contracts. As we process volumes, we recognize the revenues associated with those volumes. If there’s a decrease in volumes, we still receive the cash and then either use our makeup rights or eventually recognize the deferred revenue. This is a recurring situation that is consistent from period to period. I also don’t see it as a direct impact on inventory. We experience inventory impacts regularly, but we typically don't quantify them unless they're significantly large.

Okay. That’s fine. And that at least that in Refining, which region is the inventory impact?

No. It’s going to show up across all areas.

Okay. The second question, Greg, before the pandemic, you were considering long-term capital expenditures in the range of $2.5 billion to $3 billion, which included about $1 billion to $2 billion for growth capital expenditures. Since then, the investment opportunities in the Midstream have changed, so you will probably not spend that much. Once your debt returns to a manageable level and you enter a growth phase, what should we expect for long-term capital allocation? Also, on a side note regarding PCP, is there a way to restructure that business? You mentioned it's a $35 million to $40 million per quarter operation. It seems like it's not causing significant issues, but it also isn't adding much value. Does it really fit into your long-term portfolio?

Okay, Paul, I believe you have asked five questions, but I will do my best to answer them one by one. First, we have historically allocated between $1.5 billion and $2.5 billion for growth capital expenditures. For various reasons, we need to focus on debt repayment and returning to share repurchases. This year and likely next year, we have intentionally set total capital expenditure budgets of $2 billion or less. We will see how things progress, but we aim to restore our balance sheet to around $12 billion over the next two years, approaching pre-COVID levels. We are planning to resume share repurchases, as we have been paused on that front, and it’s time to re-engage. For the next couple of years, we want to maintain a constrained approach to capital across our portfolio. Regarding your question on PCP, we believe there won’t be sufficient investable opportunities that meet our return requirements in the Midstream sector over the next two years. We will monitor developments in renewables, but currently, our primary focus is on the Rodeo Renewed project, which has an estimated cost of about $850 million. That alone qualifies as a significant project by any measure. There are still many significant growth opportunities within our portfolio, including CPChem and the two megaprojects they are exploring. This allows us to approach capital allocation strategically while also working to free up more cash for debt repayment and resuming share repurchases. Kevin, if you would like to address DCP, the floor is yours.

Thanks. Paul, you are correct that without considering hedging, DCP generates approximately $50 million to $60 million in earnings each quarter along with a consistent distribution. Although we may face structural challenges, this joint venture has been in place for over 20 years and has proven to be very successful. Ownership has changed due to M&A activities during this time, yet the JV continues to thrive for us. It provides good integration with our Midstream business. We jointly own the Santel SunHills pipelines with DCP, and NGL volumes from that system reach Sweeny and our fracs, benefiting from this integration. While a different structure might offer a more efficient approach, it's not something we urgently need to pursue. There is no pressing reason for a different solution. In longstanding arrangements like this, it can be quite challenging for any party to exit due to tax considerations and other factors. Similar to the previous Synovus question, we believe the JV has been very effective. It meets our needs, and we will continue from there. We remain open to alternatives, as we do with most of our portfolio, but it continues to serve us well.

Hey. Good morning. Could you shed some more light on this British Airways SAS deal? How should we think about the economic impact to PSX here? Is it like a take-or-pay arrangement or maybe something else? And then, also, why do you think we are seeing these offtake deals in SAS, but not really in RD?

So I will take the shot at the first one. So the Humber Refinery entered into this deal to supply sustainable aviation fuel to British Airways. It’s a small volume. We don’t run a lot of renewable feedstock at Humber yet. We are working on a lot of things in Humber to reduce the carbon intensity of the fuels that come from that plant. So we entered into this with British Airways really to get the partnership going and to understand their needs and they can understand what we can do, and we can grow this business over time and be a good supplier. We are a supplier to British Airways anyway. So this just kind of extends our reach there. So it’s not large and material yet, but it really signals that in Europe with British Airways that we are going to expand that business as we expand our ability to run used cooking oils and other renewable feedstocks in Humber.

Yeah. I think that maybe, and Mark, if you want to add on to this, but if you think about Humber, and even once we get Rodeo Renewed, there is a certain part of the yield that’s going to be sustainable aviation fuel, and I think the challenge for us is how do we think about that yield, how we push that yield structure to make more sustainable aviation fuel in the future.

Yeah. I think the big difference is there’s not the regulatory incentives there for SAS yet. We think they will come, but we also see airlines making commitments, and so there’s a demand pull for SAS out there that we will work to supply. But to shift that optimization wholesale away from renewable diesel into SAS, there has to be a financial incentive, but it is sort of a co-product at this point that we can make commitments on.

And the only difference is overseas in our Hamburg plant, the reason we were able to make that deal is because that scheme, the European scheme is different from the U.S. scheme, which treats renewable diesel, renewable gasoline, and renewable jet fuel the same. So that was why that deal was done there, and that’s why deals haven’t been done in the United States yet. But we expect that as part of the Build Back Better plan, that we will get some incentive, and over time, we will either get more incentive or airlines will make commitments to pay more for the SAF.

Thanks for all the color. I will leave it there.

Yeah. Hey. Thanks for taking my questions. I wanted to ask about the build diversify and M&A outlook on the Marketing and Chemicals business segments. Midstream, given that you are going to be consolidating PSXP, do you expect to be selling some of those non-core assets or are you in a stronger position to acquire Midstream assets now that you have this larger portfolio? And the Chemicals build versus buy question, in light of the fact that you are still evaluating two world-scale crackers. And then my second question is just, I think you mentioned Rodeo CapEx is going to be $850 million, if I heard you correctly, which is a bit higher than what you previously guided to. I think you had previously said something like $750 million. I just want to confirm that’s correct. Thanks.

Okay. Do you want to start?

Sure. I think on the build versus buy in Chemicals, I think that we at CPChem level, they have always scanned the horizon looking for opportunities to acquire assets, but it’s an environment that’s tough to acquire. Things are really highly valued, and they have got a long history of organic growth through true partnerships and have been very successful in doing that. That’s what’s driving both the U.S. Gulf Coast II project and the ROPP project. We are looking forward to an FID on U.S. Gulf Coast II mid-summer, late summer timeframe this year. We are taking a tough look at the economics to make sure that it meets the economic hurdles that we have in place, but we are optimistic that it will, but we are working with EPC contractors now to develop that whole package to bring forward. The ROPP project is about a year later. It’s already cleared front-end engineering design and so it’s well on its way to an FID sometime next year. So we continue to see opportunities organic that are more attractive than any acquisition opportunities in the Chemical space.

Yeah. I might just comment on the Marketing and Specialties. That business is consolidating, particularly the retail marketing in the U.S. And we are seeing many of our long-time business partners. They may be second generation or third generation businesses, and for family estate planning, they want to exit or maybe the current generation doesn’t want to take over. And so it’s creating those opportunities. So we ensure that we continue to have access to those markets long-term, and so that’s what’s driving a lot of what we are thinking. I think Brian did a really nice job of talking about renewable diesel and making sure we are capturing all the value we can. I think one of the things we have been frustrated with RINs is we have never been able to explain what we think is some value leakage in the RINs, and so we want to make sure that we are going to capture that full value chain around the new diesel side of that. So, I think that may be an important point as you think about what we are trying to do in the Marketing and Specialties space around that. We always look at buy versus build. I think that certainly is an opportunity to think about that, particularly in businesses that are going to consolidate, for instance, like Midstream. I still think Midstream will have some consolidation. And to your point, as we roll out PSXP, we have a full suite of assets kind of within our control, then I think we have the chance to really think about how we optimize our Midstream and particularly our NGL-oriented portfolio around that. Tim, if you want to add anything on that on Midstream, please?

Greg, I mean, you covered it at the high level. We are all about creating value. So we are always going to look at that portfolio and how we maximize that value. That can include buying, building, or divesting. But that’s just part of stewarding the capital that we have got in the business that we are running.

Thank you, Sia. And we thank all of you for your interest in Phillips 66. If you have further questions on today’s call, please call Shannon or me. Thank you.