Phillips 66 (PSX) — Q1 2022 Earnings Call Transcript

Good morning. And welcome to Phillips 66 first 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 materials can be found on the Investor Relations section of the Phillips 66 website, along with supplemental financial and operating information. Slide two contains our Safe Harbor statement. We will be making forward-looking statements during today’s call. Actual results may differ materially from today’s comments. Factors that could cause actual results to differ are included here, as well as in our SEC filings. With that, I will turn the call over to Greg.

Okay, Jeff. Thanks. Good morning, everyone, and thank you for joining us today. In the first quarter, we had adjusted earnings of $595 million or $1.32 per share. Our results were impacted by seasonally lower margins across our businesses. In March, we saw substantially improved operating earnings. In fact, March provided the majority of our first quarter earnings. Well, gasoline and distillate inventories coupled with strong demand will provide momentum as we head into the summer driving season. We generated strong operating cash flow of $1.1 billion during the first quarter and returned $404 million to shareholders in dividends. In April, we repaid $1.45 billion of debt, and earlier today, we announced that we will restart our share repurchases under our existing $2.5 billion authorization. In addition, we remain committed to a secure, competitive and growing dividend, and plan to resume our cadence of annual dividend increases. Earlier this month, we announced that Mark Lashier will become President and CEO of Phillips 66 effective July 1. Mark will lead a company that has a solid strategy, strong leadership and outstanding employees. We are all confident that Mark will serve Phillips 66, our employees, communities and shareholders well as the right leader to position the company to thrive in the years ahead. And with that, I will turn the call over to Mark to provide additional comments.

Thank you, Greg. I am excited to embark on this new role, building on the talents of our team and the strength of our assets as we continue to deliver shareholder value. We remain focused on operating excellence and advancing our strategic initiatives. We are committed to improving our competitive position across our business segments to drive future performance in any market environment. Business transformation efforts were initiated last year and a cross-functional team is focused on opportunities to sustainably optimize our costs and organizational structure across the enterprise. We are targeting a sustainable cost reduction of at least $700 million per year, which equates to about $1 per barrel. We plan to provide regular updates on our efforts over the coming year. In Midstream, we completed the buy-in of Phillips 66 Partners and at the Sweeny Hub, we expect Frac 4 to start up in the third quarter. The total project cost Frac 4 is expected to be approximately $525 million. CPChem is pursuing a portfolio of high return projects, enhancing its asset base, as well as optimizing its existing operations. CPChem’s total capital budget for 2022 is $1.4 billion, of which $1 billion is for growth projects with an average expected return above 20%. 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. A final investment decision for the U.S. Gulf Coast project is expected this year. We continue to progress Rodeo Renewed and expect to complete the final steps of the permitting process this quarter. Completion of the conversion project is expected in early 2024. Rodeo will initially have over 50,000 barrels per day of renewable fuel production capacity. In addition, the conversion will reduce emissions from the facility. The total project cost is anticipated to be approximately $850 million. Our Emerging Energy Group continues to advance opportunities in renewable fuels, batteries, carbon capture and hydrogen. In March, our Humber Refinery made its first delivery of sustainable aviation fuel in the U.K. under a supply agreement with British Airways. Also during the quarter, we entered into an agreement with H2 Energy Europe to form a joint venture to develop up to 250 retail hydrogen refueling stations across Germany, Austria and Denmark by 2026. During the first quarter, we added a 2050 target to reduce Scope 1 and 2 greenhouse gas emissions intensity by 50% compared with 2019 levels. The new target builds on our 2030 target announced last year. Our targets reflect our commitment to sustainability while meeting the world’s energy needs today and in the future. Before we review financial results, we would like to recognize our employees’ commitment to operating excellence. We are honored that our Refining and Chemicals businesses were recently recognized for their 2021 safety performance. The AFPM recognized three of our refineries, including Sweeny, Billings and Bayway. The Sweeny Refinery received the Distinguished Safety Award, which is the highest annual award the industry recognizes. In Chemicals, CPChem received two AFPM awards for its sites in Borger and Conroe, Texas. Congratulations to all the people working at these facilities. Well done. 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 four, we summarize our financial results for the quarter. Adjusted earnings were $595 million or $1.32 per share. The $158 million decrease in the fair value of our investment in NOVONIX reduced earnings per share by $0.27. We generated $1.1 billion of operating cash flow, including a working capital use of $115 million. We received distributions from equity affiliates of $585 million. Capital spending for the quarter was $370 million, including $221 million for growth projects. We paid $404 million in dividends. We ended the quarter with 481 million shares outstanding, including the 42 million shares issued for the PSXP merger. Moving to slide five, this slide highlights the change in adjusted results by segment from the fourth quarter to the first quarter. During the period, adjusted earnings decreased $703 million, driven by lower results across all segments. Slide six shows our Midstream results. First quarter adjusted pretax income was $242 million, a decrease of $426 million from the previous quarter. Transportation contributed adjusted pretax income of $278 million, in line with the previous quarter. NGL and other adjusted pretax income was $91 million, compared with $138 million in the fourth quarter. The decrease was primarily due to the impact of rising prices on inventory, partially offset by improved butane and propane trading results. The fractionators at the Sweeny Hub averaged a record 423,000 barrels per day and the Freeport LPG export facility loaded 43 cargoes in the first quarter. Frac 4 is ahead of schedule and we expect startup in the third quarter. DCP Midstream adjusted pretax income of $31 million was down $80 million from the previous quarter, mainly driven by unfavorable hedging impacts partially offset by lower operating costs. The hedge loss recognized in the first quarter was approximately $50 million compared with a hedging gain of approximately $50 million in the fourth quarter. Beginning this quarter, we are showing our investment in NOVONIX at its own sub-segment to separate it from our core Midstream businesses. This investment is mark-to-market at the end of each reporting period. The fair value of the investment, including foreign exchange impacts decreased $158 million in the first quarter, compared with an increase of $146 million in the fourth quarter. Our initial investment in the NOVONIX of $150 million had a fair value of $363 million at the end of the first quarter. Turning to Chemicals on slide seven. Chemicals’ first quarter adjusted pretax income of $396 million was down $28 million from the fourth quarter. Olefins and Polyolefins adjusted pretax income was $377 million. The $28 million decrease from the previous quarter was primarily due to lower polyethylene margins as inventories normalized, following supply disruptions last year. This was partially offset by higher sales volumes. Global O&P utilization was 99% for the quarter. Adjusted pre-tax income for SA&S was $32 million, in line with the previous quarter. During the first quarter, we received $299 million in cash distributions from CPChem. Turning to Refining slide eight. Refining first quarter adjusted pretax income was $140 million, down from $404 million in the fourth quarter. The decrease was mainly due to lower realized margins, as well as lower clean product volumes driven by planned maintenance. Realized margins for the quarter decreased by 9% to $10.55 per barrel. Favorable impacts from higher market cracks were more than offset by higher RIN costs, lower Gulf Coast clean product realizations and secondary product margins, as well as inventory impacts. The higher RIN costs were primarily due to the fourth quarter recognition of the reduction in the 2021 compliance year obligation of approximately $230 million. Pretax turnaround costs were $102 million, down from $106 million in the prior quarter. Crude utilization was 89% in the first quarter and clean product yield was 84%. Slide nine covers market capture. The 3:2:1 market crack for the first quarter was $21.93 per barrel, compared to $17.93 per barrel in the fourth quarter. Realized margin was $10.55 per barrel and resulted in an overall market capture of 48%. Market capture in the previous quarter was 65%. Market capture is impacted by the configuration of our refineries. Our refineries are more heavily weighted toward distillate production than the market indicator. The configuration impact was relatively flat quarter-on-quarter as lower clean product yield offset higher distillate cracks. Losses from secondary products of $3.05 per barrel were $1.17 per barrel higher than the previous quarter due to rising crude prices. Our feedstock advantage of $1.01 per barrel improved by $0.83 per barrel from the prior quarter. The other category reduced realized margins by $6.42 per barrel. Moving to Marketing and Specialties on slide 10. Adjusted first quarter pretax income was $316 million, compared with $499 million in the prior quarter. Marketing and other decreased $199 million from the prior quarter this was primarily due to lower marketing margins, mainly resulting from rising spot prices as well as seasonally lower demand. Refined product exports in the first quarter were 134,000 barrels per day. Specialties generated first quarter adjusted pretax income of $113 million, up from $97 million in the prior quarter, mainly due to higher finished lubricant margins. Slide 11 shows the change in cash during the first quarter. We had another strong quarter for cash generation. This was the fourth quarter in a row that cash flow from operations allowed us to return cash to shareholders, invest in our business and strengthen the balance sheet. We started the quarter with a $3.1 billion cash balance. Cash from operations grew $1.1 billion, which covered $370 million of capital spend and $404 million for the dividend, while also increasing our cash balance by $188 million. Our ending cash balance was $3.3 billion. In early April, we repaid $1.45 billion of maturing debt. This concludes my review of the financial and operating results. Next, I will cover a few outlook items. In Chemicals, we expect the second quarter global O&P utilization rate to be in the mid-90s. In Refining, we expect the second quarter worldwide crude utilization rate to be in the low 90s and pretax turnaround expenses to be between $230 million and $250 million. We anticipate second quarter corporate and other costs to come in between $230 million and $250 million pretax.

Good morning, team. And Greg, you will be missed. Congratulations on your retirement and Mark congratulations on the new role.

Thank you, Neil.

Thanks, Neil.

I wanted to pick up on the cost point that you talked about, the business transformation. Can you put more meat on the bones around this point and help us quantify what the upside potentially could be either on a dollar barrel basis or across the fleet?

We started this initiative last year. We are looking at the entire organization and really it’s more than just the cost reduction. That’s the primary focus. But we want to focus on recurring cost reduction. We want that to be a run rate. So that $700 million number, that’s what we view as kind of the bare minimum that we have line of sight on and we are focused on transforming the organization to ensure that, that cost reduction is sustainable, and we have got about 800 people, employees and contractors working on that. We are looking at over 1,000 initiatives. So it’s broad, it’s deep. We are looking at simplifying structures, simplifying ways of working to ensure that, that number is sustainable. So there’s upside to it. I don’t know that we want to quantify any particular upside, but I guarantee you that we are relentlessly pursuing every opportunity across the organization.

And Mark, that’s not just in Refining, that’s across the organization?

That’s correct, Neil.

Okay. All right. And then the follow-up is around return of capital. Congratulations on being able to execute the share repurchase program. Again, just talk about your strategy around this, how you think about market and so on?

I believe it's important for us to discuss capital allocation. We want to return to a regular schedule for the dividend, including increases. This was highlighted in the opening comments. We initiated share repurchases in 2020 to preserve cash during the pandemic, and now it's time to resume those efforts. One significant advantage we have is the growth we're experiencing in our Refining business, which will lead to excess cash. This excess will allow us to raise the dividend, buy back shares, reduce debt, and maintain a healthy cash reserve on our balance sheet. As a team and with our Board of Directors, we are fully committed to enhancing total shareholder return for our company.

Thanks, guys.

Thank you.

Good afternoon, Greg, I also wanted to say congratulations on a fantastic career. You have always been such a balanced spokesman and visionary for the energy sector and you will definitely be missed.

Thanks, Phil.

If I could follow up, how do you view the pacing of shareholder returns? Are you prepared to return to the 60-40 split? Kevin, I believe you mentioned a $12 billion gross debt target. Is that still your aim, and how much cash do you plan to keep on hand regularly? Thank you.

The $12 billion gross debt target brings us back to pre-pandemic levels. While that target remains in place, we are making good progress, having addressed $3 billion of the $4 billion we added. Cash generation is strong, and our near-term outlook is very positive. We believe we can resume share repurchases while maintaining the 60-40 balance. We plan to strike a balance between reinvesting in the business, with a capital program totaling about $2 billion over the next couple of years, and returning funds to shareholders through dividends. We are back in share repurchases and are also focusing on debt reduction and increasing cash reserves. Our quarterly cash balance has shown consistent growth over the past year. While this trend may not continue indefinitely, we are comfortable setting our minimum cash level at about $2 billion to $3 billion, rather than the previous $1 billion to $1.5 billion, as this provides us with greater flexibility.

I think maybe what’s also been left unsaid here this morning is, we have kind of given guidance about being very disciplined around our capital investments at our company. And then we have kind of guided to $2 billion or less for this year and next year, and I would say, that guidance is still on the table this morning.

Okay. Great. Thank you. A follow-up question on Refining, I guess, interesting comment that most of the money was made in March, it makes sense relative to what peers have said. You do have some higher maintenance, I guess, in the second quarter. As you look at the full year, are you still sticking with the $800 million to $900 million of maintenance, and if you could just elaborate a bit on the central corridor performance where there was a loss in the quarter. Thank you.

I will address that. There are three questions, and I will answer them all. In March, we primarily focused on maintenance activities, especially in the second half of the month as the weather in the north improved, allowing us to enter turnaround mode again, mainly in the central corridor. We plan to complete most of our turnaround activities by mid-May, with all our conversion units back online around the middle of the month. This positions us well for a strong summer driving season, and we will not have any significant turnaround work until after Labor Day. For the year, we have executed our first half plan, which has mostly gone according to our expectations. In the second half, we will mainly focus on catalyst changeouts during turnarounds, assessing whether we have remaining catalyst life. Some of those turnarounds have been postponed until next year, but we see opportunities in the latter part of the year to push some of those into next spring or possibly next fall. We are continually optimizing our operations. Regarding the Central Corridor results, we experienced a notable headwind due to the lagged Canadian crude buying program, which significantly affected the results in that corridor. This timing issue is tied to the rapid increase in crude prices, particularly in the last few weeks of the quarter. We expect to recover from this over time as crude prices typically decline, and then we will see improvements.

Yeah. And just, Phil, in terms of the impact of that in the Central Corridor, it’s about a $3 per barrel on the realized margin impact through that crude timing effect.

Okay. Great. Thank you.

Thanks everyone. Greg, I want to express my gratitude and congratulations to both of you. I'm encouraging Jeff to organize a retirement dinner for the sell-side, Greg. So hopefully, I think…

Okay. I thought you are buying, Doug.

I will do everything I can to be there, and I appreciate your insights and support over the years. Mark, I look forward to seeing how you lead the company. First, I have a big picture question, and I also want to pose a philosophical question for both of you. Concerning the industry, I believe you are aware of our perspective on our current position. However, with Humber and Valero, you have valuable insights into what’s happening in Europe. You're also responsible for closing facilities in the U.S. by the end of next year. Given the structural shift we seem to be experiencing, I'm curious about your thoughts on whether the U.S. is moving toward a new level of mid-cycle advantage compared to international, particularly European peers, and Humber provides you with some insight into that.

Yeah. Doug, this is Bob. I will take a shot and others can come in over the top. I think the last time we talked, I think, it was at the beginning of your call on the golden age of Refining we were talking about the structural differences.

U.S. Refining.

Yeah. U.S. Refining. And at the time, right, gas prices were just, they were skyrocketing in Europe and we had inside Humber. Humber being by far the strongest refiner in the U.K. and a very strong refiner in Europe in particular and one that doesn’t use a lot of fuel gas, right? We are structurally advantaged there with the large coking capacity and generating most of our own needs, but it gave us a view. And at the time, Humber was just kind of in a breakeven position. So we talked about the fact that European refiners had to be underwater and that the market would have to move to incent those marginal refiners to keep running and get back to making diesel. And in fact, that’s exactly what we have seen happen, right? Diesel cracks have come up to incent that Humber’s return to good profitability and the whole market works. Sometimes it takes a while for that structure to kind of get itself right, but again, the market worked. I don’t really see this changing anytime, right? Gas prices are up in the U.S., but certainly not anywhere near what we are seeing yet in Europe, and it really puts us at a structural advantage. If you add in the fact that Europe is basically hydrocracker-based, they use a lot of hydrogen, you got to buy a lot of fuel gas to make hydrogen for the most part, it does give us a cost advantage and one that should translate all the way back through improved kind of mid-cycle margins for U.S. Refining versus the rest of the Western Hemisphere. Brian, if you have got anything you want to add?

Bob, I would just add that in the U.K. where we have our large refinery gas prices have come off quite a bit. Last night settled at $16 an MMBtu versus most of Europe, which is still over $30. But our guesstimate is about $8 to $9 benefit through the U.S. versus the EU, given the price of natural gas here and the price of natural gas in EU currently.

And probably an advantage also on crude feedstock with light sweet crudes having been traded up in Europe relative to the U.S.

Of course, well, Bob, just for everyone listening, your insights were extremely valuable as we prepared that thought. Thank you for that. So, guys, my philosophical thought, and Greg, and Mark, I think, when we look back over the last five years, the volatility of the challenges that you guys, Greg, in particular, have had to navigate, your strategy obviously moved to be more defensive, if I say, diversified from Refining. And obviously, if we have got this reset going forward, you are perhaps a little less exposed than some of your peers. So when we look at your relative share performance over that five-year period, it seems to us you behave more like an integrator than a refiner. So I am curious, Mark, as you look forward, how do you think about differentiating the investment case relative to that, let’s say, pure-play Refining peer group as opposed to the more, I guess, glacial kind of share buyback type of situation we are now starting to see with some of the majors? How do you think about the relative investment case? And I will leave it there. Thank you.

I believe, Doug, that the investment case depends on several key factors. First, we need to ensure that we maintain our refineries and operate them effectively. You've mentioned the North American golden age, and we aim to fully participate in that growth. As we generate cash, we need to consider our options. There are various strategies we want to pursue regarding Refining to prepare our refineries for the long-term future, potentially increasing petrochemical production. We will also seek growth opportunities through CPChem, which has two significant projects lined up, along with several mid-sized projects and numerous debottlenecking opportunities that will enhance their competitive edge. These initiatives will yield high returns while improving our refining operations. Additionally, we are exploring how we can engage in emerging energies and recognize real opportunities to utilize our current assets and technologies to create sustainable value in this sector. Furthermore, we see potential in Midstream operations to optimize our asset base and pursue consolidation. Each of these segments has its unique aspects but contributes value in different ways.

Understood. Thanks a lot. Congratulations again, Greg.

Thanks, Doug.

Yeah. Thank you. Good morning. And yes, my congratulations to you, Greg, and to you, Mark, for getting to take over and step into a big pair of shoes to fill.

Yeah. They are big indeed. Thanks, Brian.

I want to address something here. Looking at your presentation, I'd like to put Jeff on the spot a bit. Considering the guidance on diesel margins, Greg, this is something you care deeply about, and you've mentioned before how Phillips benefits from the diesel or distillate crack. While I won't mention specific numbers based on the New York harbor diesel crack right now, how should we think about Phillips' potential in this environment? I understand there are turnarounds to consider, but every company faces turnarounds. I'm interested in how we should approach the guidance and the opportunities on the Refining side.

Yeah. I think the focus is going to be on operating well and being in the market and able to take advantage of the margins that are available. I think we have talked about some of the exposures that we have on diesel on heavy sour dips on prem cokes and all of those environments look favorable as we look into the summer months. I think there’s some moving parts. We were hindered this quarter on timing issues in the Gulf Coast on product timing and in the Central Corridor on crude purchasing and timing issues there. So I think those will normalize out and we will see that profitability show up in later periods.

Okay. But to clarify, should we assume that the overall guidance remains reasonable even at these levels? Is there any deterioration we should consider as we move forward?

No. I don’t think we see that. I mean, Brian can speak to what we are seeing in the current market. It’s hard to predict the net income but I watch cash and we have seen just cash just strengthening as we have come in the back half of March and on into April. And so, I mean, to me that suggests that capture rates are definitely have improved. Brian, I will let you comment.

Yeah. I would add that, as Jeff said, timing is an issue so prices continue to increase from here. There will be a lag in terms of the amount of money that we can capture, but we will capture that over time. But in terms of the crack margins, we are absolutely in a position to capture those and we do every day.

I think one thing I would emphasize, Roger, just the amount of volatility that we are seeing on a daily basis with crude trading in a $5 to $10 a barrel range on a daily basis, and products, especially diesel trading in wide range on a daily basis, that average crack you see at the end of the day, there was a lot done across that period of time. And so, I think, when we see this kind of volatility, the indicators are not going to be as accurate as they typically are when volatility is not so high.

That’s fair. There’s a lot of room for error, given where cracks are right now. One follow-up question, the $700 million cost savings goal, how does that fit into what was laid out in the fall of 2019 and I know a lot of things happened since the fall of 2019? But how should we think about that $700 million within the overall framework that was laid out at that point?

Roger, this is going to build on what we did around Advantage 66. There were a lot of things done there, a lot of value capture and some things were moved out into the future, some things were captured in a one-off fashion, a lot of digital innovation was introduced, and we are going to leverage those innovations to simplify what we do to drive efficiencies in the organization. So this is additive to that.

Should we consider this as a logical next step in the process? It’s not iterative, unlike something entirely new or radically different?

It is building on that and getting more into the organizational structure as well as how we can capture efficiencies and transform our business operations. We are not changing what we do, but the way we do it will become more efficient. This is indeed an addition to our efforts.

Yeah. There’s a substantial incremental effort that’s going in place now.

No. Understood. I appreciate it. Thank you.

Hey. Thanks. Maybe a follow-up on Chemicals from some of your comments earlier. First quarter was a very strong quarter. I think we came into this year and I think your messaging had been expecting margins to trend back towards mid-cycle levels from the peaks that we saw last year, but it seems like they may have inflected a little bit higher lately. And can you talk about how you see the market trending from here? And how market dynamics in crude and natural gas pricing are driving relative advantages in your portfolio versus European and Asian plants?

Yeah. Thanks, Ryan. I think that your closing comment really touched on it that since the last call, with crude moving up and ethane to a crude advantage becoming enhanced, that’s driven margins wider for CPChem and the entire industry and we are well-positioned to take advantage of ethane both here in the U.S. and in the Middle East. So that’s there and I think that that’s going to persist. You are going to see the ethane extraction value driven to a point to attract more ethane out as more consumption comes online. That consumption is going to provide a headwind in new capacity as we go into seasonally stronger margins. So you kind of see those two things balancing off each other. So we see kind of a status quo in those margins going forward into the next quarter.

Great. That’s helpful. That’s helpful. And then maybe can you talk about any update that you have on timing of permits at Rodeo, the next steps in the process there and maybe what you have seen in terms of the operating environment for the renewable diesel volumes that you have been able to produce so far year-to-date?

Yeah. It’s Bob. The permitting process is really moving forward quite well and as we expected. We have had conditional approval from the Planning Commission in Contra Costa County. As usual in that part of the world, it was appealed. It goes to the County Board of supervisors who have actually set a special meeting to address our permit on May 3rd. Coming out of that, we would expect the Board of Supervisors to grant the permit and allow us to start work shortly after that. Everything we can see, we have got good support in that community. Realize that while there’s a great drive in California to have alternative vehicles and everything else in the marketplace, that renewable diesel is a needed fuel now and the quicker we can get going, the quicker we can get the unit up and running and starting to provide those fuels to the California driving public. So we expect that permit to come here just very, very shortly. On the Unit 250, the renewables we have been running there, we continue to see profitability on that unit. And really what we have come to understand is that the price of soybean oil, the price of California diesel, the price of low carbon fuel standard, credits, RINs, cap and trade, they all seem to sort of work in concert to incent us to continue to make renewable diesel and put it in the marketplace. So, we are very encouraged by what we see there kind of on the commercial side and we are very happy with what we have learned on the operating side about how to run bean oil type feedstocks through the units. So we are really looking forward to the next phase and getting Rodeo Renewed permitted hopefully next week and then get going and looking for startup in early 2024.

And I would add, we are able to get all the volume out of Unit 250 to the end consumer through our retail and wholesale network in California.

I have more of a strategy question here. For a long time Midstream was a growth vehicle for PSX to grow earnings. Now you have brought in PSXP. How should we think about Midstream growth here? Is it basically going to be a small growth or if you actually come across a really good opportunity which is even capital-intensive, then you would still be willing to invest capital and grow the Midstream business, even though PSXP doesn’t exist? So, help us understand now, where does Midstream sit in terms of your overall growth strategy going ahead?

Manav, this is Tim. Thanks for the question. Hey. When you think about it with the roll-up, that simplification helps us both commercially, as well as takes out some complexities in dealing with reporting and what we do and takes out some cost in that process. So you roll it out, but our strategy really hasn’t changed. Fundamentally, yes, we were on a very fast growth trajectory, a lot of opportunities, we built out the MLP and built out our Midstream business. But as we have said before, we have slowed that down because the pipes appear to be in place. Infrastructure is well caught up. So in our world, we are looking at optimization and how we can best find incremental high return opportunities and optimize our set, as well as build out our further NGL integration. So, if the right opportunity comes up, it’s going to compete like all our projects do and if it meets the right threshold and it’s the right thing to do overall from PSXP, it would be considered. But outside of that, we are really optimizing the kit at this point in time.

And then the second is more on the growing the energy transition business. So, I think, the first part of the question is obviously, you have a very good project in Rodeo. Would you like to do it all alone, because some of what you are seeing out there is people bringing in partners for capital and other expertise? So the first part of the question is, would you like to keep it the renewable diesel project on to yourself or you are open to a partner? And second part is, besides this bigger project of Rodeo, what else can PSX do to grow its cleaner fuel franchise or energy transition business? Thank you.

Well, I would say with Rodeo, we have it funded through our capital program this year and next so we don’t need a partner in that way. Some folks have gotten a partner because they need a commercial expertise. We have a very strong commercial organization. We have been buying used cooking oil for a long time. As you know, we have a deal with a soybean producer. We have soybean, canola oil, distilled corn oil in the Rodeo Unit 250. We met with tallow producers and have leads to buy tallow as well. So we are in a very good position. Our marketing business is building out portfolio, so we can sell the renewable diesel to the end users. So we don’t really need the expertise that others might need and we don’t need the funding.

We are currently exploring opportunities at our Humber Refinery. The regulations in the U.K. differ from those in the U.S., allowing them to co-process renewable feedstocks, and they are already producing sustainable aviation fuel for British Airways. As a result, some British Airways flights are using this fuel from Humber. Additionally, if it becomes economically viable, we can also produce sustainable aviation fuel at Rodeo once the facility is fully operational, which will depend on the economic factors. We are examining other opportunities and technical pathways to sustainable aviation fuel, although they are still in development. Ultimately, we believe there is a future for sustainable aviation fuel, as it is challenging to operate aircraft with alternatives to hydrocarbons. Several airlines and jet manufacturers have approached us to explore solutions for their future needs. Therefore, we see significant potential in both renewable diesel and sustainable aviation fuel.

Thank you.

Hi. Thanks for taking my questions and I want to offer my congratulations to Greg as well. May your peace of mind go up and your handicap go down, Greg and congratulations, Mark, on the new role.

Thanks.

I wanted to revisit the discussion on Chem. Just because your margin came in a lot stronger than your indicator and sensitivity would have suggested. How much of this is owed to the portion of your sales that are contracted by nature versus sold on a spot basis, and if you can, can you help us break down like the portion of each on a run rate basis?

I think in this context, the contractual commitments are a bit less clear than you might expect in other situations. I'm not sure they're capturing any margin from that. CPChem's margins decreased significantly less than the IHS marker, which I believe is primarily due to product mix. The high-density business, which is their main driver, has grown a bit slower than the market and is now declining more slowly than the market as well. This trend is mainly influenced by that and possibly by their disciplined management of the business. However, I don't think there's a strong factor in their contractual position that can be linked to this situation.

Got it. And on the OpEx reduction side, the $700 million number, just to clarify, does that compare to the state of OpEx where you had alliance within your system or is that pro forma of the line shut down?

That is in addition to the alliance shutdown.

Hey. Thanks for taking my questions. Greg, congrats on a great run. And Mark, congrats on the new role here. Mark, my question is on the Chem side. I think in the past, you have talked about opportunities in hydrogen but more so on the Refining side and so, I was wondering, if CPChem has any hydrogen opportunities, and if so, could you maybe flesh those out?

CPChem is essentially a producer of hydrogen from large steam crackers. They have partnerships that allow them to capitalize on that production, although it needs to be purified. Some of the hydrogen is also used as fuel within the facility. Therefore, there is likely an opportunity for CPChem to expand its hydrogen presence as they enhance their cracking capabilities.

Okay. And then could you talk about the general trend in marketing margins so far in the second quarter, has there been any sort of recovery compared to the low numbers in Q1?

Generally, marketing margins are better in the second quarter due to seasonality. The current headwind for typical marketing margins is that rising prices keep margins from moving as quickly as those prices in the marketplace. We expect to perform slightly better next quarter, but it will depend on the direction of product prices.

Sounds good. Thanks.

Hi. Thanks for taking my questions and congrats, Greg, on your retirement and Mark on the new role. I have two. The first, there’s been some conflicting comments between what the DOE is putting out and what some of your peers are saying in terms of demand, particularly on the gasoline side and so I am wondering if you are seeing demand destruction in your system, consistent with what the DOE has been showing weekly or if demand is holding up? And then my second question is kind of, I guess, a broader longer-term Refining question. Greg, you have probably been more bearish than your peers on the refining margin outlook in the past. This is obviously a pretty insanely strong margin environment that we are in right now. I am just wondering how you expect this all to play out over time and if these higher margins are here for a good while or if you will see some maybe normalization and what would drive that? Thanks.

I will start and then Brian can add his insights. We have the advantage of a diverse portfolio, which allows us to maintain a positive outlook on other areas of our business. Overall, I believe we have made the right decisions in our assessments. For instance, in 2012, we reported $450 million of EBITDA in our Midstream segment, and now we are at about $2.2 billion to $2.3 billion. This reflects our strategy of developing a business with greater value through various perspectives. Looking ahead to this year, we are optimistic about the Refining sector. Over the past two years, we've seen capacity shutdowns, and new builds have either been postponed or are progressing slowly. Considering current global inventory levels and demand, I believe we are entering a phase that will provide a favorable environment for Refining in the next year or two. Brian can share more about our current observations.

Hi, Jason. It’s Brian. So in terms of demand in the U.S., we are seeing everywhere but on the West Coast, demand back to 2019 levels. On the West Coast, they got out of COVID a little later than the rest of the country and prices have been particularly high, so we have seen a bit of demand trimming. So they are a little bit lower. But we have seen very good demand. On the distillate side, demand over 2019 globally. So we are pretty happy there as well. I think our inventories are really the driver, gasoline inventories, of five-year lows and distillate inventories are the lowest they have been since May of 2008 and PAD1 the lowest it’s been since April of 1996. So with these low inventories, we would expect to see strong demand going forward.

Great. Thanks for the answers.

Hey, guys. Good morning in your times. Greg, just congratulation for your retirement, has been a fun 10-year ride, and Mark, congratulations on the new role going forward. Two questions, I think, at the one year is a really short one. At the beginning of the year, I think, the company has put out a turnaround expense, call it, $800 million to $900 million. Based on earlier comments, is that still a good estimate or that number has been changed, because it doesn’t look like you have mentioned, there’s a lot of major turnaround? There’s more catalyst change and the first half of the year, the spending is only about, say, probably, $330 million or $350 million kind of range. So I want to see that how certainly look at the overall spending level from the turnaround standpoint?

I think we are in good shape. So we won’t update our guidance at this point.

Secondly, if the company believe the energy transition is happening and may even see at some point. In your Midstream business, your transportation system is linked directly to the gasoline and diesel demand in this country. And so from that standpoint, maybe this is a curve for Mark, longer term over the next three or four years, will the company start to deemphasize or maybe the scale back in that segment and trying to reposition and put the capital into some sales?

I will take a shot. Yeah. We have got a diversity of pipelines in our Midstream business. And you go from the NGL side, which we think has got tremendous upside potential for the long-term, primarily delivering to petrochemical facilities and exports, things like propane and butane as well and so we see a very, very long horizon for those pipes. The crude pipes bringing crude into our refineries and then taking refined clean products out of those refineries, those will evolve with what our refineries produce and we believe that liquid hydrocarbons are going to be around for a long time, but we are going to look at ways to lower the carbon intensity of the products, lower the carbon intensity of the operations. There may be opportunities to repurpose those assets for other molecules that will emerge from the energy transition. So we are always looking at how we can maximize the value of our Midstream assets, repurpose them. We do that today and we will do that in the future as well.

Hi. Thanks for taking the question and I’d like to echo congratulations, Greg. It’s been great getting to know you and hearing your outlook and all your thoughts on the energy industry at large, and Mark, look forward to working with you more and congratulations. I will keep it to one. Just on Chemicals and this is a bit bigger picture. You talked about incremental projects that are north of 20% return on invested capital. And looking back, the last time several years ago when there was an announced expansion and you had projects in the queue, is a higher margin environment and you targeted pretty good returns. And since then, what happened is we all know the margin environment kind of depressed. But you were still able to hit targets. You were at high teens, low 20s ROCEs, combination of expenses, volume increases. I am curious because there seems to be history sometimes doesn’t repeat itself but it sometimes rhymes. We are coming out of a high margin environment in Chemicals right now and it seems to be settling slowly. So just wondering, as you look ahead with the cost takeout, where the margin outlook is on the volumes, can you kind of triangulate? You have done it before, obviously, historically, it’s shown up. You are able to hit those return targets. But as you look forward now, just could you help piece together what are the levers to ensure that, that sort of the lower end of the return range we could be with it just like you did, I guess, post 2014, and I will leave it with that.

Yeah. Thanks guys. It’s a great question. CPChem’s got a long history of executing mega projects and have really never tried to time them to any particular market conditions. They focus on the fundamentals. The long-term growth in ethylene demand, the long-term growth in polyethylene demand, both at a multiple of GDP as we go forward. And so that’s what drives the opportunities. And then we think about that growth, we put those assets where we can access low cost feedstocks. And today and for the foreseeable future, we see that as ethane. That’s why you see us doing something in the U.S. around our U.S. Gulf Coast two project. That’s why you see us looking at another project in Qatar to take advantage of large baseload infrastructure and advantaged feedstocks that we can tap into. And I think that’s what delivers the long-term value, staying focused on those fundamentals and not getting caught up in any short-term dislocations and then having an outstanding ability to take those products into the marketplace and capture value consistently around the planet.

Thank you for your answer. Appreciate that.

Thank you, Erica. And thank all of you for your interest in Phillips 66. If you have further questions, please contact Shannon or me. Thank you.