Phillips 66 (PSX) — Q1 2024 Earnings Call Transcript

Welcome to Phillips 66 First Quarter Earnings Conference Call. Participants on today's call will include Mark Lashier, President and CEO; Kevin Mitchell, the CFO; Tim Roberts, Midstream and Chemicals; Rich Harbison, Refining; and Brian Mandell, Marketing and Commercial. 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 2 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'll turn the call over to Mark.

Thanks, Jeff. Welcome, everyone, to our first quarter earnings call. We continued to progress our strategic priorities and we returned significant cash to our shareholders. While our crude utilization rates were strong during the quarter, our results were affected by maintenance that limited our ability to make higher-value products. We were also impacted by the renewable fuels conversion at Rodeo as well as the effect of rising commodity prices on our inventory hedge positions. Currently, our assets are running near historical highs, and we are ready to meet peak summer demand. Before we provide an update on our strategic priorities, we want to recognize our Midstream, Refining and Chemicals businesses, which have all received honors for their exemplary safety performance in 2023. Our Midstream gathering and processing business received the Top 2023 GPA Safety Award in the large operator division. In Refining, the Rodeo and Sweeny facilities both received the AFPM Distinguished Safety Award, which is the highest annual safety award in the industry. This was Sweeny refinery's third straight year to receive the honor. The Ponca City Refinery earned the Elite Platinum Award and the Lake Charles Refinery secured the Elite Gold Award. In Chemicals, CPChem received 2 AFPM Safety Awards. I'm very proud of our employees and the employees of CPChem for their commitment to safety. I would like to congratulate them on a job well done. Today, beginning on Slide 4, we'll highlight the progress we've made on our strategic priorities. Next, we'll discuss our first-quarter financial results. Then we look forward to your questions. We previously announced plans to monetize assets that no longer meet our long-term objectives, and we set a target to generate over $3 billion in proceeds. The expected proceeds will support our strategic priorities, including returns to shareholders. This quarter, we launched a process to divest our retail marketing business in Germany and Austria and communicated the plans to employees. Completion of the dispositions is subject to satisfactory market conditions and customary approvals. We have distributed almost $10 billion through share repurchases and dividends since July of 2022. Over the remaining 3 quarters of 2024, we expect to achieve our $13 billion to $15 billion target. Share repurchases will continue to be an important component of our capital allocation. We're committed to return over 50% of our operating cash flows to shareholders. Recently, we announced a 10% increase in our quarterly dividend, contributing to a 16% compound annual growth rate since 2012. The dividend increase reflects the confidence we have in our growing mid-cycle cash flow generation and our disciplined approach to capital allocation, including a secure, competitive and growing dividend. In Refining, we continue to run at crude utilization rates above the industry average for the fifth consecutive quarter. We remain focused on improving performance, increasing market capture and reducing costs to enhance our earnings per barrel. We have achieved over $560 million or more than $0.80 per barrel in run rate cost reductions from business transformation. We expect to achieve our full $1 per barrel run rate target by the end of the year. In Midstream, our NGL wellhead-to-market business is focused on capturing operating and commercial synergies of over $400 million by year-end 2024. Midstream's estimated 2024 mid-cycle adjusted EBITDA is $3.6 billion, providing stable cash generation that covers the company's top capital priorities: funding sustaining capital and the dividend. During the first quarter, we achieved a major milestone with the start-up of our Rodeo Renewable Energy Complex. Slide 5 summarizes our journey to transform the San Francisco refinery into one of the world's largest renewable fuels facilities. The facility benefits from a superior location to secure renewable feedstocks and market renewable fuels. The project leverages existing assets and is expected to generate strong returns. We began producing renewable diesel from our Unit 250 hydrotreater in April of 2021. We have gained valuable operational experience and market knowledge that positions us for success in our expanding renewable fuels business. Unit 250 continues to exceed expectations and has increased production to approximately 10,000 barrels per day. Our Rodeo Renewable Energy Complex is producing 30,000 barrels per day of renewable fuels. We're on track to increase production capability to full rates of approximately 50,000 barrels per day by the end of the second quarter. Once complete, we'll have the ability to produce renewable jet, a key component of sustainable aviation fuel. We're proud of the team's strong project execution and appreciate their commitment to operating excellence in achieving this significant milestone. The Rodeo Renewable Energy Complex positions Phillips 66 as a world leader in renewable fuels. Slide 6 provides an update on business transformation progress. Our run rate savings were $1.24 billion at the end of the first quarter, comprised of $940 million of cost reductions and $300 million of sustaining capital efficiencies. Through the first quarter, we've achieved $750 million in annualized cost reductions. The majority of these cost reductions relate to refining operating and SG&A expenses as well as benefits to equity earnings and gross margin. We are on track to realize $1 billion of cost reductions in 2024 to sustain higher cash generation. Before I turn the call over to Kevin to review the financial results, I want to stress that the market fundamentals are good, our assets are running well, and we have a clear path to achieving our strategic priorities and growing cash flows.

Thank you, Mark. Slide 7 summarizes our first quarter results. Adjusted earnings were $822 million or $1.90 per share. Operating cash flow, excluding working capital, was $1.2 billion. We received distributions from equity affiliates of $348 million. Capital spending for the quarter was $628 million, including $171 million for a Midstream joint venture debt repayment. We distributed $1.6 billion to shareholders through $1.2 billion of share repurchases and $448 million of dividends. Net debt-to-capital ratio was 38%. Slide 8 highlights the change in results by segment from the fourth quarter to the first quarter. During the period, adjusted earnings decreased $540 million, mostly due to lower results in Refining, Midstream and Marketing and Specialties, partially offset by improved results in Chemicals. In Midstream, first quarter adjusted pretax income of $613 million was down $141 million from the prior quarter, reflecting lower results in transportation and NGL. Transportation results were down mainly due to a decrease in throughput and deficiency revenues, partially offset by seasonally lower maintenance costs. The NGL business decreased primarily due to a decline in margins as well as lower volumes, reflecting impacts from winter storms. Chemicals adjusted pretax income increased $99 million to $205 million in the first quarter. This increase was mostly due to higher polyethylene margins, driven by improved sales prices and the decline in feedstock costs as well as lower turnaround costs. Global O&P utilization was 96%. Refining first quarter adjusted pretax income was $228 million, down $569 million from the fourth quarter. The decrease was primarily due to lower realized margins. Our commercial results were less favorable than the previous quarter, in part due to inventory hedging impacts in a rising price environment and less advantageous pipeline arbs. In addition, realized margins decreased due to lower Gulf Coast clean product realizations. Our Refining results and market capture of 69% were also negatively impacted by maintenance activities on downstream conversion units as well as the renewable fuels conversion at Rodeo. Marketing and Specialties adjusted first quarter pretax income was $345 million, a decrease of $87 million from the previous quarter. The decrease was mainly due to lower domestic marketing and lubricant margins. Our adjusted effective tax rate was 21%. Slide 9 shows the change in cash during the first quarter. We started the quarter with a $3.3 billion cash balance. Cash from operations, excluding working capital, was $1.2 billion. There was a working capital use of $1.4 billion, mainly reflecting a $2.6 billion increase in inventory, partially offset by benefits and accounts payables and receivables, which included the impact of rising commodity prices. Net debt issuances were $802 million. We returned $1.6 billion to shareholders through share repurchases and dividends. Additionally, we funded $628 million of capital spending. Our ending cash balance was $1.6 billion. This concludes my review of the financial and operating results. Next, I'll cover a few outlook items for the second quarter. 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 mid-90s. Turnaround expense is expected to be between $100 million and $120 million, excluding Rodeo. We anticipate second quarter Corporate and Other costs to come in between $330 million and $350 million, reflecting higher net interest expense. Now we will open the line for questions, after which Mark will make closing comments.

I guess the first question was just Refining in the quarter. The capture rates were really noisy at 69%. I know you guys target 75%. It looks like a lot of that was on the West Coast because of Rodeo and then also secondary products. So you alluded to some of this in the prepared remarks, but maybe you can just talk a little bit about what happened there and your confidence about the progression as we work our way through the year.

Yes, Neil, that's a great question. Thank you for asking that. The way I'm looking at this is those first quarter headwinds that you mentioned in Refining are all related to activities that will position us to deliver medium- and long-term tailwinds in support of our strategic priorities. And so it's some of the fundamental work going on around Rodeo and some of the work around our turnarounds are critically important. And Rich and Kevin can dive into that a little bit more. And including some of the activities in commercial that we underwent over the last several quarters, that will contribute to our long-term success. So Rich, do you want to dive in?

Yes, Mark. And Neil, when I reflect back on the quarter, I look at the metrics, and we ran pretty well. But the market capture, obviously, was challenged, and it was primarily driven by activity in the Gulf Coast and the West Coast. We achieved about an 84% clean product yield, which, for our assets, is pretty good. It's actually 1% higher year-over-year. So it is a sign that our margin projects are actually playing into the bottom line here as we move forward. However, quarter-over-quarter, we were 3% lower than the fourth quarter. 1% of that very clearly is seasonal. It's related to butane blending as we move towards summer gasoline over the quarter. Another 2% is really related to our turnaround activity, and this was principally focused in the downstream catalytic units across our system, and it was concentrated in the Gulf Coast area. This has really 2 effects when it comes to market capture and clean product yield. It reduces our ability to produce higher-value products, and it increases our intermediate inventories over the period. Now on the West Coast, we have the conversion of the Rodeo facility, which is a compounding event. Essentially, it effectively had a $180 million loss in adjusted pretax income in the quarter as we transformed the business. And if you think about the business, it went from active to idle to reactive across this first quarter. The good news is we're near completion of the Rodeo conversion, and I actually would say we're well into the wind-up phase now. So to summarize, I guess, the Rodeo start-up is on schedule, ramping up production. Approximately 50,000 barrels a day of renewable fuels will be achieved out of that facility in the second quarter. And we positioned our units across the system to run full conversion rates with fresh catalysts and ample intermediate inventories for the upcoming driving season.

Yes. Let me just put a couple of numbers to some of these items. So in terms of some commercial impacts that we talk about, on Gulf Coast product pricing differentials, in absolute terms, that was a $50 million headwind in the first quarter. The inventory hedges that I referenced in the earlier comments, which primarily impacts Central Corridor, that was a $100 million headwind in the first quarter. These are not variances; these are absolutes in the quarter. And then on the West Coast, Rodeo, in overall terms, was a $180 million negative or loss for the quarter. So the West Coast results are bearing that drag from the impact of the Rodeo conversion.

Yes. And I think, just to put that in context, we're taking a disadvantaged refinery and converting it into one of the world's largest renewable fuels facilities. And so to bridge to that, we took the heavy lift this quarter, and now we're well positioned to start delivering value again from the Rodeo facility as we continue to push it to full rates through the second quarter. And then on the Gulf Coast, the way you have to think about that is we're still maximizing our crude utilization throughput, but that crude turned into intermediates instead of clean products by design because of the turnaround work we had underway. So now we've got that inventory of intermediates poised to be converted into clean products as we continue to ramp back up into the summer season. So we're well positioned going forward.

That's a lot of good color. The follow-up is just on balance sheet. Q1 is always a noisy quarter for working capital. And that cash flow bridge, Kevin, is really helpful. But just your perspective on where you want to get your net debt to capital over time, what's the path to get there, including potential asset sales? And then how do we think about working capital getting into that equation? So big picture question around that metric.

Yes, Neil, so let me hit on the working capital piece first. So negative $1.4 billion in aggregate, about $2.6 million of that is a function of inventory build. And so we did have some partial offsetting benefit in payables and receivables, and that was driven by 2 items. One, the rising price, the absolute rising price environment generally is positive for net AP/AR. So we saw some benefit there. But we also benefited on receivables by collecting, in the first quarter, cash from the fourth quarter inventory drawdown, and that was several hundred million dollars that showed up in there. But on the inventory build, it's a sizable build, and I would say, it's really a function of both commercial opportunity inventory as well as some operational-driven inventory. And the way to think about that is the operational barrels will turn into margin at a future point in time, like the intermediates that we've talked about. The commercial inventory build, those will generate a return that will be in excess of anything we will realize on cash balances. And fundamentally, it's all still sitting in a liquid asset on the balance sheet. So that kind of talks to the working capital. And consistent with normal practice, you would expect that inventory to come back down towards the end of the year, and you'll see some of that cash coming back to us. In terms of balance sheet and the leverage levels, we are above our targeted range, so 25% to 30% target range. Still comfortable with that target. You'll notice that we've been leaning into the share repurchases quite heavily, and that's a function of our confidence in the business, in the outlook, our growth that we see coming in terms of the $14 billion of mid-cycle adjusted EBITDA. And so it feels like still a pretty compelling opportunity for us to be buying shares back even if, in the near term, it's at the expense of that leverage metric. So still expect to get there to that level. That's still our objective. And the other comment I'd make on leverage, the other metric, the other way we look at this is the non- or the much less commodity-sensitive businesses, the Midstream and the Marketing and Specialties business, is our ability for those businesses to bear the debt that the company has. So on a combined basis, that's circa $6 billion of EBITDA generation. And if you think of a typical leverage multiple for businesses like that, call it 3x, that's $18 billion of net debt, which is roughly where we are. And so that's the other measure we look at. And that keeps the Refining business avoid that volatility being part of that, the way we look at that debt level. So it keeps us very comfortable from a balance sheet standpoint.

I would like to discuss the combination of operating expenses in Refining alongside the progress being made in overall cost reduction. In the first quarter, cash operating expenses rose from $630 million to $715 million cumulatively, and they have remained relatively stable over the last three quarters. While there are many factors at play, could you help clarify the relationship between these two elements and where you see the impact on cash operating expenses? Additionally, are the cost savings reflected in the Refining margin, and where specifically are we seeing those savings in Refining?

Yes. I think that certainly, the majority of our business transformation cost impact is showing up in Refining, and we've been out delivering our targets, overdelivering against our targets and certainly continue that into 2024. There's always a lag, and we talk about run rate and then we talk about realized, and we're going to make sure that you keep track, too. The run rate is where the speedometer is at this point in time. The realized is what we're actually seeing show up in the numbers, and we've seen good progress in Refining. And we'll continue to see that throughout this year as we rise up to our forecasted $1.1 billion in cost and $300 million in capital synergies, capital savings. And so Rich can drive into those cost numbers for you, Roger, and give you some color around that.

At the end of last year, we achieved a run rate exceeding $500 million, or about $0.75 per barrel, and realized approximately $0.41 of that. As we move through the first quarter, we see the realized number approaching and slightly exceeding $500 million, maintaining that $0.75 mark. This is primarily due to a roughly 90-day delay in reaching those levels. When we revisit and validate our expenditures across more than 900 initiatives completed organization-wide, we recognize that these investments are starting to positively impact Refining's bottom line. Year-over-year, our operating expenses are notably lower, even amidst significant inflation challenges. We're pleased with this progress. By the end of the first quarter, we reached a run rate of $560 million, translating to about $0.80. We're on track to hit our year-end target of $1 per barrel, which corresponds to approximately $650 million by year-end. We're making great strides toward this goal, and our initiatives continue to push forward. This involves hundreds, if not thousands, of projects aimed at improving our processes and efficiencies. As we implement these changes, we aim to enhance our work methods and decision-making, ensuring that safety, reliability, and earnings power remain uncompromised.

Yes, Roger, and I really want to drive home what Rich just said, that the cultural impact on the organization has been impressive, particularly out in the field, whether it's Midstream, Refining, wherever you are. And we have a workforce that has bought into it, and it's committed to driving higher levels of performance. They understand right out at the front lines, they understand what our strategic priorities are and how they can contribute to us getting there. And so they're digging in, and they're looking at those opportunities every day. And across the organization, we continue to simplify work, to make work easier for people to get done. So get people the right digital opportunity so they can make better decisions faster, whether it's commercial or whether it's an operator on the front line. And the organization, we're also simplifying. And we want to ensure that we've got a streamlined organization that will support sustainable success around both cost and performance, and we're seeing that live as we move forward.

No, I appreciate the detail there, everybody. I guess, just a follow-up question. On the announcement of the potential sale of the European retail assets, how does that affect the partial ownership you have in Refining assets on mainland Europe, MiRO, specifically?

Yes, Roger, it's Kevin. So we're selling the Germany and Austria retail assets, like we said. That's a company-owned, dealer-operated model, primarily almost 1,000 sites across those 2 countries. That's a high-performing business, top-rated many years in a row, with 10% of market share in each country. A great business, but it doesn't really integrate with the core strategic focus areas that we have as a company. So just a little bit of background as to why those assets. It does not include our ownership in the MiRO Refinery in Germany. And the reason for that is the majority of buyers for those types of retail assets would not be interested in refinery ownership. If there's a buyer that is interested, then that's a separate conversation, and we'll handle that separately. But this package right now is focused on those marketing assets.

Congratulations on launching the Rodeo Renewed project. You mentioned a loss in the first quarter, and I understand that initial phases can be tough as you work towards full capacity and optimized performance. Could you provide some insight into what we might expect over the next few quarters? When do you expect to reach full production capacity? How do you foresee the feedstock mix evolving in the coming quarters as you utilize more advantageous feeds? Additionally, how should we interpret the negative $180 million in relation to a timeline for moving towards profitability this year?

Sure, Ryan. I got that. This is Rich here. So maybe first, I'll start with a timeline of the Rodeo facility. As you know, we've been ramping this facility down and hit a milestone in February of this year, with a complete shutdown of the facility after 128 years of legacy of running as a crude processing site. That first transition occurred on the first hydrocracker, and they went into renewable fuels feedstock production in March of this year. So that first phase is up and running, and that's, that milestone we're talking about here. And that's allowed the facility, in complement with the Unit 250 operation that Mark mentioned in the earlier comments, with the first hydrocracker to produce about 30,000 barrels a day of renewable fuels. The second hydrocracker and the pretreatment unit will both finish construction in the May timeframe, and we will start those up in the June timeframe. So by the end of the second quarter, the facility will be at full production rates. Now what does that all mean when it comes to margin? So margin in this business is driven a lot by the carbon intensity of the feedstocks. And Brian's team has been actively engaged in that over the last couple of years on aggregating the number of feedstocks. So the way we see this is, we will start with essentially the pre-treated material in the second quarter at a higher CI, roughly 50 CI number. And over the third quarter, we see the carbon intensity of our feedstocks continually ramping down through that third quarter. But by the end of the third quarter, I would expect to see us in the lower to mid-CI range of 30s, in that range. And that's primarily driven by processing more recycled fats, oils and greases that are aggregated throughout the world. And then as a supplement to all of that, we're seeing a growing interest in sustainable aviation fuel as well. So we have positioned the facility to begin production of sustainable aviation fuel, which is a key component is the renewable jet that's blended into that. And that production will be capable starting in the third quarter as well. And we do expect to be a prominent supplier in the market on that. So the good news is Rodeo's through that start-up process, that shutdown/start-up process, and now we're in the ramp-up phase, I'll call it. It's online, and we're ramping up production right now.

Yes. Ryan, when we get up to full rates, we'll be able to produce something on the order of 10,000 barrels a day of renewable jet fuel, which gets blended up then to sustainable aviation fuel in the marketplace. And this kit is going to be designed for continuous optimization, whether it's the split between jet and diesel fuel or the feedstocks coming in. Because of the feed pretreatment unit we'll have, we'll have great flexibility. And so we'll optimize on CI, cost and revenue and as well as the incentives that are out there. So it's going to be an interesting facility to have in our kit, and we're looking forward to getting it fully online and generating cash.

I think it's supplemented as well by the last-mile strategy that Brian's team has put in place. That prevents leakage of value as we deliver the product to the end user there, and that should play out nicely as we increase production from the facility.

Do you have contracts signed for SAF, or are you currently negotiating with partners?

We're concurrently in negotiations with partners. We've seen a lot of interest in SAF.

Yes, this is Tim Roberts, and I’ll discuss a few key points. First, I want to acknowledge Bruce Chinn, who recently retired as CEO of CPChem, for his outstanding leadership and commitment to excellence. He will be missed. We've appointed Steve Prusak, an internal candidate, as the new CEO. Steve has a strong track record in all areas of the chemical business, and we are confident in his ability to lead CPChem to higher levels of performance. Now, regarding the macro environment, the heavy-light spread has greatly benefited those who can process light feedstock, particularly CPChem, which is well positioned in both the U.S. Gulf Coast and the Middle East. This advantage is currently significant. In the U.S., if you’re processing light feed, the conditions are favorable. However, I want to note that we are not yet at mid-cycle margins; while we have moved up from the bottom, which is positive, many of these changes are related to feedstock costs. Natural gas prices have decreased, which has also affected ethane, propane, and butane. This has widened the gap benefiting those operations. Additionally, we see lower feedstock and natural gas costs relative to utility expenses. There has been some modest support in polyethylene pricing, which has helped to improve margin conditions. Though we have seen improvements, we believe it will be challenging to reach mid-cycle conditions before 2025. However, we anticipate that post-2025, as inventory levels decrease, we will see a rebalancing towards a mid-cycle environment. Specifically for CPChem, I want to highlight two mid-cap projects that started operations late last year: the C3 splitter and the 1-hexene unit, along with an additional furnace at one of the larger crackers. Both the 1-hexene and C3 units are contributing to earnings in the first quarter. They have been operating above their nameplate capacity, which is encouraging, and we expect to see further earnings contributions from them. The furnace’s startup process is underway, and we hope to see more significant earnings in the second quarter as that project continues to ramp up.

Yes. Ryan, you're seeing live the last almost 25 years of what CPChem has done to position themselves to be able to run flat out at the bottom of the cycle. And they did that, and they did that profitably. And you're seeing rationalization of assets in Europe while they're running at flat-out rates. And so that's encouraging from a CPChem perspective. We need to see that in this down cycle to see some of the less competitive assets come out of the system, and that's going to be constructive. And that will help accelerate the industry out of the bottom of the cycle and to greener pastures out in the next couple of years.

And Mark, to add on to that point, I think that's a great point. What you're seeing is that a lot of your higher-cost folks, they're running at reduced rates or they're shut down and extending maintenance or running at reduced rates. And we've even seen some facilities, namely in Europe, 2 announcements of 2 crackers that will be shutting down from some competition there because they're at the wrong place in the cost curve, whereas CPChem is on the right place in the cost curve.

Guys, so you did a good job of explaining the variability in earnings quarter-on-quarter on Refining. Can we go through some of that in the Midstream? We saw a big variation on the NGL and Other side. I mean transportation wasn't off that much, but help us understand what drove the variability in the second part of that business.

Yes, thanks for the question. This is Tim Roberts again. I want to clarify that during the last earnings call, I projected an IBT of $675 million per quarter, and we are maintaining that outlook, targeting $3.6 billion for the year. I just wanted to confirm that this estimate remains unchanged. Looking at the fourth and first quarters, the fourth quarter was strong, although there were some one-time impacts. In the first quarter, we faced challenges primarily due to a winter storm that affected us and others. The impact was mostly on producers rather than our assets; we didn't see significant volume reductions due to freeze-offs, and it took some time for those volumes to recover and move through the system, resulting in about a $30 million impact. Additionally, we dealt with some commercial adjustments from the fourth quarter to the first quarter, including accruals and inventory timing. When you consider both quarters, we are actually above the $675 million figure we had set. We expect to see more normalcy in the second quarter, although some small inventory timing effects will occur as a positive influence. Overall, we still view $675 million as the appropriate figure as we progress through the year.

Perfect. My quick follow-up is on the diesel macro. We have seen some pullback in cracks. Wasn't fully anticipated because we expected Russia volumes to drop, which they did not. So I know Jeff does a lot of detailed work on this, so if you could help us with your crystal ball as to what's going on in the diesel world. And do you expect the cracks to get stronger in the year?

Manav, this is Brian Mandell. I would say that we've had a number of issues. We had a warm northeast U.S. winter, then refineries came back and they were running really well. Prices for diesel are in contango. We have seen about 200,000 barrels a day of Russian distillate off the market. But we are constructive. We do think the market will come back. You're starting to see run cuts in Europe and Asia with hydrocracking and hydroskimming margins at breakeven. As we move into the driving season, we could see more gasoline mode. In fact, you're seeing gasoline over distillate on the coast in the U.S., East and West Coast. And that could drive less distillate moving to more jet production from diesel, particularly fixing ahead into China's Labor Day, Golden Week, and we see real strong jet demand. And then continue to geopolitical issues, if Russia's hit again, that means that diesel exports as well. So we think that things are going to look better coming out of kind of this trough here.

I had a follow-up on the retail sale in Europe. Are there any other assets on the international marketing side that might be less strategic that could shake out there? And on the U.S. Marketing side, is the majority of that business too integrated with the Refining operations to separate? I'm just trying to get a sense of the strategic direction in Marketing in light of this new sales process.

Yes, John. From a Europe standpoint, the other marketing businesses are in Switzerland, where we have a joint venture with Coop, and in the U.K. And the two are very different in that the Switzerland business is somewhat of a standalone retail business, but it's also in a joint venture structure, and so the dynamics are a little bit different around that. The U.K., that marketing business is very integrated with our Refining in the U.K. So it's much more akin to the U.S. model, where the Marketing business serves to help ensure product placement coming out of the Humber Refinery. And that's really the case for the U.S. Marketing business as well. It's very much integrated with the Refining system across the different regions.

Great. And then my next question is on the West Coast. And I think Mark sort of alluded to this a little in his response to Neil. But how should we think about the structural capture rate on the West Coast? And how it's going to be different now with the Rodeo officially an RD unit and not a refinery? Should we expect it to be higher than what we've seen historically as a result?

There’s a reason we've transitioned Rodeo into a renewable fuels facility. It hasn’t significantly contributed to the earnings on the West Coast for some time, and we are eager to see this change fully implemented. We believe this will positively affect West Coast profitability. The Los Angeles and Ferndale facilities will continue to operate and have been reliable contributors. However, the West Coast remains a tough market for refining profits. Our Los Angeles refinery has faced challenges due to a decrease in California domestic crude supply, which has diminished the initial crude advantage of that facility. With the TMX pipeline opening, there may be changes in crude flow dynamics that could benefit the Los Angeles facility, and we’ll observe how this evolves over the next few months. Overall, removing the Rodeo refinery will significantly impact the West Coast market.

Are you able to share the approximate EBITDA contribution of those German and Austrian retail assets up for sale? And then the cash from the sale, would that be earmarked for, like, share buybacks? And if so, would that mean an increase to the $13 billion to $15 billion target?

Yes, Matt, this is Kevin. The EBITDA range we're providing to prospective buyers is between EUR 300 million and EUR 350 million, which converts to approximately $325 million to $375 million. The midpoint of $350 million is likely the best estimate for you. Regarding cash generation, as we have previously mentioned, our target cash return of $13 billion to $15 billion isn’t reliant on asset sale proceeds, so there is potential for that to increase. However, we have not made any final decisions on how that cash will be utilized, and the timing remains uncertain as these processes typically take time. We will determine how to proceed closer to when the cash inflow actually materializes.

That's great. And then the $180 million hit from the Rodeo conversion, I think that's a little bit higher than what we're expecting. What drove that increase? And can you provide any sort of breakout on like how much of that was in gross margins versus OpEx versus depreciation? And then also, is it fair to assume that the current Rodeo plant is EBITDA negative since it's not running the low CI feeds yet?

On the first question, we won’t provide specific details on asset performance. The $180 million figure does not reflect the full GAAP loss, which is higher due to impairments from assets taken out of service. The $180 million aligns with our adjusted earnings reporting, although we won't break it down into more specifics. Regarding the second question on EBITDA during our ramp-up phase, I can say that while we are using higher carbon intensity feedstocks, we haven't achieved full economies of scale yet. This will make EBITDA generation challenging initially. However, as we continue to bring all units online and increase production to 50,000 barrels per day, and transition to lower carbon intensity feedstocks, we expect to see a positive impact on EBITDA.

Supported by sustainable aviation fuel.

That's right. It's another uplift, yes.

I have to apologize, but I want to go back into the West Coast. Can you share what is the OpEx, excluding Rodeo? And also what is Rodeo going to look like once it's fully ramped up in terms of the OpEx? That's the first question.

OpEx, excluding Rodeo, I think the best way to answer that is that we don't disclose that level of asset-specific detail. However, we will be providing more reporting transparency moving forward that will allow you to see the information you’re asking for. In the future, we will offer more clarity regarding the Rodeo renewable fuels business, separate from West Coast Refining. While I understand this may not assist you with your current modeling, we will be increasing transparency in this area.

Right. Kevin, can I ask that, from the first to the second quarter, I understand there's some onetime OpEx related with that transition in the first quarter. So the OpEx, should we assume that it's going to stay at this level as the first quarter or that it is actually going to be down?

Well, it's probably down a little. There's still going to be an elevated element of that, and there's some what we would classify as turnaround-related costs associated with the conversion as well that will show up at Rodeo. But the trend is downward. We're past the peak spend, I guess, is the way to say it.

Yes. The first one is just on commercial performance. And I think you had discussed a desire to integrate different plans in terms of how you buy crude and sell product and try to maximize profitability across the portfolio rather than at a site level. I'm just wondering if you could provide an update on that journey, and if you've seen any of that earnings benefit come through in the results. And then second, just a quick clarification. Can you remind us what your target cash balance is?

Jason, it's Brian Mandell. I'll give you some kind of flavor of our journey for commercial. Our commercial supply and trading organization is, as you know, an integrated global business. We have offices in Houston, Calgary, London, and Singapore. And as you mentioned, our focus is now to fully optimize and capture the optionality value embedded in all of the assets and then to capture that kind of integration value between the various business segments to drive additional value for the company. Last year, internally, we announced a reorganization of our commercial group, the goal of reducing our back office costs and continuing to advance our capabilities and value generations. We've made some really strong hires this year. We also have a companion organization that we call the value chain optimization group, VCO for short, whose function is to work across the integrated value chain to ensure that we continue to make the best corporate general interest decisions. And ultimately, we're focused on driving increased earnings, maximizing our return on capital employed and increasing the market capture for our Refining segment, and doing all this while thinking about continuous improvement and continually growing the business.

And Jason, on the cash number, the target cash balance, the same as we've said in the past, $2 billion to $3 billion. We were slightly below that level at the end of the quarter. I'd also say, the first quarter is typically a heavy drain on cash quarter. So as we look ahead, we're still very comfortable with that target level.

First, on the near-term outlook for capture in second quarter and maybe third as well. Just thinking about the different moving parts, you have presumably less noise from the onetime items impacting the first quarter, whether it be from turnarounds or Rodeo. But you do have WCS narrowing based on your sensitivity and the magnitude that we've seen to date, that should be a sizable headwind. And then later, maybe with TMX ramping online, to be able to bring barrels to PADD 5 indirectly or directly, that should help your West Coast assets. Just help us think about how to reconcile these variables as we look to capture in the near term, please.

At a high level, we are focused on the aspects we can control, and that is our priority. Rich and Brian are also concentrating on these areas. While certain factors may be outside our control and speculative, Rich can discuss our strategies and the market capture potential we foresee in the coming quarters, and Brian can provide insights from a commercial standpoint.

Yes, Theresa, this is Rich again. We discussed some challenges regarding market capture, particularly from a Refining perspective, which relates to our clean product yield. We also consider the types of products we are producing and whether we're improving our product value. In the first quarter, we faced some hurdles due to the maintenance of downstream conversion units. The positive aspect is that we've now upgraded all the catalysts, and they're prepared for operation. Some of this disruption extended into the second quarter, but as we approach the summer driving season, we expect our clean product yield and product values to be optimized. We continue to invest in these areas and have successfully completed several projects over the last two years. We're maintaining this momentum throughout the year, aiming to increase our market capture by 5% compared to mid-cycle levels. Last year, we implemented projects that improved this figure by 3%, and we plan to finalize the remaining 2% this year with an additional 15 projects currently underway at our sites. Therefore, with our market capture this quarter at 69%, I view this as a baseline with potential for improvement as we progress through the quarter and our facilities resume operations after maintenance.

And Theresa, this is Brian Mandell. Just to add some color on the commercial side. I would say, we're seeing, this year, gasoline and diesel roughly flat to last year in terms of demand. Jet fuel, a little bit stronger this year. I talked about our commercial organization, how kind of moving up that curve to take advantage of the optionality in our assets, we'll continue to do that. And then thinking about WCS, you made a good comment. I would say that WCS will remain volatile. What we have appetite, we can move around different grades. So we can run Canadian heavy, we can run Canadian lights as well. We have an integrated system, a big commercial footprint. And if the WCS is unfavorable, particularly on our Gulf Coast plants or West Coast plants, we can switch to other grades such as Latin American grades and AG grade. So a lot of flexibility in our system.

Got it. And if I could ask a follow-up related to Kevin's earlier comments about what the appropriate leverage is for the company and the commentary related to how some of your more cash flows stable businesses can bear more leverage. Can you just share with us what portion of your Midstream business at this point, what portion of the EBITDA is paid by third-party customers and not Phillips Refining paying those Midstream?

Theresa, I'll verify the number, but we're well into, I would say, it's 65% to 70% third parties.

Thank you, all, for your great questions. The market fundamentals that we're looking at are supportive, and our assets are running strong since the completion of seasonal maintenance activities. Our integrated portfolio is well positioned to capture market opportunities and to meet the peak summer demand. We've got a clear path forward to achieve our strategic priorities that support $4 billion of growth from our 2022 mid-cycle adjusted EBITDA to our $14 billion target by 2025. We're confident in our ability to grow cash flows and create significant long-term value for shareholders. Thank you for your interest in Phillips 66. If you have questions after today's call, please call Jeff or Owen. Thank you.