Phillips 66 (PSX) — Q4 2024 Earnings Call Transcript

Welcome to Phillips 66 earnings conference call. Participants on today's call will include Mark Lashier, Chairman and CEO; Kevin Mitchell, CFO; Don Baldridge, Midstream and Chemicals; Rich Harbison, Refining; and Brian Mandell, Marketing and Commercial. Today's presentation 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. Our results reflect strong operating performance in a challenging margin environment. The strength and stability of our midstream results provided a resilient platform demonstrating the advantages of the breadth of our integrated portfolio. In the fourth quarter we achieved our shareholder distribution target with $13.6 billion distributed through share repurchases and dividends since July 2022. In refining, we set goals to improve performance, lower costs and capture more of the market. This year was our second consecutive year of above industry average crude utilization. We also set record clean product yields both this quarter and for the full year while reducing our costs by a dollar per barrel. These results are a testament to the hard work, commitment and dedication to excellence by the people in Rich's organization. We exceeded our $400 million synergy target on the DCP midstream acquisition by capturing $500 million of run rate synergies. In total, the DCP transaction has increased Midstream's mid cycle adjusted EBITDA by $1.5 billion. We set an ambitious goal of $1.4 billion in run rate business transformation savings. We positioned the company for success through these cost reductions and exceeded our goal achieving $1.5 billion of savings. As part of the enhanced priorities, in 2023 we committed to at least $3 billion of non-core asset dispositions. We have high graded the portfolio and are currently at $3.5 billion of announced asset divestitures. Although our net debt to capital ratio ended higher than our target level, we continue to have a strong balance sheet and we are making debt reduction a key component of our new commitments. We've completed the strategic priorities that we laid out in 2022, enhanced in 2023 and committed to achieving by the end of 2024. I am proud of the work our employees have done to accomplish these important priorities and deliver on our commitments to shareholders while maintaining industry-leading safety performance. Slide 4 shows the progress of the asset disposition program. In January 2025 we received $2.1 billion of cash proceeds for the Co-op and Gulf Coast Express Dispositions. This brings the cash proceeds to $3.5 billion which we're using to advance our new strategic priorities. We continue to evaluate our assets as part of our ongoing portfolio optimization. Slide 5 shows the growth of our midstream business including the recent announcement of the EPIC NGL transaction. We've advanced our wellhead to market strategy through organic projects and strategic transactions that provided significant synergies and strong returns. This nearly doubles EBITDA between 2021 and the anticipated transaction close later this year. Similar to the Pinnacle acquisition last year, we saw an opportunity to acquire high-quality assets which are complementary to our existing footprint and provide a platform for further growth opportunities at attractive returns. The transaction furthers our vision of being the leading integrated downstream energy provider and upon closing increases Midstream's mid cycle adjusted EBITDA to $4 billion. We'll continue to capitalize on our growth platform to generate strong returns and significant free cash flow in 2025 and beyond. Slide 6 outlines our new strategic priorities for 2025 through 2027. Supported by our world-class operations, we are committed to returning over 50% of operating cash flow to shareholders. We've set challenging yet achievable operational targets for our refining and midstream businesses. We have developed a culture of continuous improvement in refining and are targeting $5.50 per barrel adjusted controllable cost excluding turnarounds over the next two years. We will grow Midstream and chemicals mid cycle adjusted EBITDA by an additional $1 billion in total by 2027. In Midstream, we have plans in place to continue to expand our Wellhead to market strategy with high-return opportunities. In chemicals, the megaprojects in the U.S. Gulf Coast and Qatar are expected to start up in late 2026. These milestones are expected to bring our non-refining mid cycle EBITDA to $10 billion by 2027, which we expect will represent two-thirds of our total company EBITDA. We also plan to reduce total debt to $17 billion as early as the end of this year depending on the margin environment and the timing of planned dispositions. We will continue to increase shareholder value through strong operating performance and disciplined capital allocation as we deliver on our new strategic priorities. Now over to Kevin to cover our quarterly results.

Thank you, Mark. Reported earnings were $8 million or $0.01 per share. The adjusted loss was $61 million or $0.15 per share. Both the reported earnings and adjusted loss include the $230 million pretax impact of accelerated depreciation due to our plan to cease operations at the Los Angeles refinery at the end of 2025. This reduced earnings per share by $0.43. We generated operating cash flow of $1.2 billion and returned $1.1 billion to shareholders including $647 million of share repurchases. I will now move to slide 8 to cover the segment results. Total company adjusted earnings decreased $920 million compared to the prior quarter. Midstream results increased mostly due to record fractionation and LPG export volumes in addition to higher margins on LPG exports. In chemicals results decreased mainly due to lower polyethylene chain margins and higher costs related to turnarounds and maintenance. Lower refining results primarily reflect weaker crack spreads and a full quarter of accelerated depreciation for the Los Angeles refinery. Capture of the new market indicator was 105%. The increase in market capture was partly the result of record clean product yield for the quarter, which included the benefits of butane blending. Marketing and specialties results were mostly lower due to seasonally lower margins. In renewable fuels results increased due to higher margins at the Rodeo complex as well as stronger international results. Slide 9 shows the change in cash flow for the fourth quarter. Cash from operations, excluding working capital, was $901 million. There was a working capital benefit of $297 million, mainly reflecting a reduction in inventories. We returned $1.1 billion to shareholders through share repurchases and dividends, and we funded $506 million of capital spending. Our ending cash balance was $1.7 billion. Looking ahead to the first quarter of 2025 in chemicals, we expect the global O&P utilization rate to be in the mid-90s. In refining, we have a heavy turnaround quarter and expect the worldwide crude utilization rate to be in the low 80s and turnaround expense to be between $290 million and $310 million. We anticipate corporate and other costs to be between $310 million and $330 million. For the full year, we expect turnaround expenses to be between $500 million and $550 million. Depreciation and amortization will be approximately $3.3 billion. This includes $230 million per quarter of accelerated depreciation at the Los Angeles refinery. Now we will open the line for questions, after which Mark will wrap up the call.

Yes. Good morning, Mark.

Thank you.

Good morning. Mark and the team wanted to start the discussion on the Midstream transformation. It seems that the business is shifting towards making Midstream a major focus and a significantly more important aspect of operations. I would like your thoughts on whether this is the case and what the best approach would be to achieve this—whether organically or through mergers and acquisitions. Additionally, how quickly can this business expand? Any insights on that would be appreciated.

Good morning, Neil. Thanks for your question. I'll talk about the high-level view and then Don can dive into the details. But several years ago we rolled up DCP, got control of those assets to align with the wholly owned assets that Phillips 66 had with fractionation capacity. And that allowed us to consolidate into full, Wellhead to market strategy that we've been talking about. But we knew that we had opportunities to fill out that strategy and to really leverage that position. And that's what you've been seeing both from an organic perspective and an inorganic perspective. And as you look at the inorganic things that we've done, the acquisitions we've done, they've been very focused on getting the right assets for the right value that could be accretive to us immediately based on the inorganic piece, but allow us to also have a footprint to grow organically and to capture more of the volumes coming out of the Permian. So both the Pinnacle and the EPIC acquisitions really are prime examples of that. So we believe there are opportunities to do both. But I'll let Don dive into more of the details.

Sure, Neil. I think what you see is we put together a Midstream platform now, an NGL value chain that we believe we can grow organically at a mid-single digits growth rate on an annual basis. That's what you see in the slide deck here, growing to $500 million of EBITDA and being able to do that because we have clear line of sight to organic growth opportunities that we can execute within our $2 billion annual capital program. So I think it's really a testament to the strength of the platform that we have. Certainly from an acquisition standpoint, if there are opportunities that make sense, that are attractive from a strategic standpoint and evaluation, we'll take a hard look at it. But our growth program here is premised on executing return enhancing organic opportunities within our footprint and not dependent on or require future M&A activity.

Yes, Neil, as you saw in our strategic parties that we laid out, everything that we do, whether it's in refining or, or in Midstream, we're focused on enhancing the return on capital employed in each of those businesses as we make these capital allocation choices. So we're very returns-focused and value-focused.

That's very helpful. And then the follow-up is just as Midstream becomes a bigger part of the business, how do you think about the optimal capital structure? You provide new disclosure today about being less than three times net debt to Midstream in marketing. So why is that the right number? And there's an argument that the business can run a little bit more leveraged as it has more fee based earnings.

Yes, Neil, it's Kevin. I mean, you're exactly right. Now, as you will recall, we had objectives to reduce leverage over the course of last year which we were not able to deliver on partly because we lean pretty heavy into cash returns to shareholders. And so while we have set a target of getting the debt balance back to $17 billion and a sub 30% debt to cap level, we also like to think of the balance sheet almost on a sum of the parts basis. And so the Midstream and M&S segments bring the more stable earnings and cash generation approximately $2 billion, sorry, $6 billion at mid-cycle and at a three times, or maybe even less than three times debt level, we can think of ourselves as having a strong balance sheet in the context of those two segments. Net zero for the refining business. So in effect the refining cash flows are all upside in the context of how you look at us and look at the company from a balance sheet standpoint.

Thank you, Kevin.

Thank you. Appreciate the chance to ask a question, guys. Thanks so much. Mark, I think if I don't want to put words in your mouth, I think I heard you say something along the lines of our new disposal targets. I don't think I actually heard of a new disposal target. So I realize you hit a lot of your targets early for 2025, but what is the scope of the scale? I guess the way I heard it was drop your debt down $17 billion. Clearly there are additional disposals and I wanted to ask specifically about where you are with the rest of the retail system in Europe. That's my first question. My follow-up is really a follow up to Neal’s. We hear this a lot about the embedded value in Philip, specifically around the Midstream and where the Midstream companies are trading. And obviously EPIC is a terrific bolt-on. But do you ever see a situation where Midstream is somehow separated or as a standalone business? I know it's a bit of a curveball question, but just in terms of the scale, the importance and maybe the failure of the market to recognize the value in your structure versus what you see for the standalone Midstream players?

Thanks for your questions, Doug. This is Mark. Regarding dispositions, we haven't set another target. I believe we've met our targets with what we've closed and received cash for so far. We are still actively working on opportunities, particularly in retail in Europe, specifically Austria and Germany, where discussions are ongoing. We feel it's somewhat counterproductive to announce firm numbers during negotiations. We will continually assess our portfolio to identify assets that may hold greater value for others, and we will consider any inbound calls regarding those assets. Our focus is on value creation and unlocking value from what we consider trapped capital, allowing us to reinvest those proceeds into our strategic priorities, whether that involves returning capital to shareholders, enhancing our balance sheet, or funding our businesses. This process will continue, but we won't be providing firm targets, which aligns with our approach of continuous improvement in our portfolio and operations. With respect to the embedded value of Midstream, we acknowledge that we are not fully recognizing the value from our Midstream activities, but we are only at the beginning. Since our EPIC acquisition, the market has responded positively with good engagement and interest. We're seeing strong investment from long-only funds due to our Midstream strategy, and we believe that narrative will continue to develop. There are always discussions about whether separating integrated businesses would be beneficial. However, we feel that maintaining the integration of our Midstream business with our refining and petrochemical operations will create more shareholder value, and we'll provide more updates on this as the year progresses.

Doug, it's Kevin. Just to add on to Mark's comments, if part of the question was more around, would we create a vehicle that has a public marker on it? Not a complete separation, but helps provide some additional valuation, we went down that path before. That's a major decision to make. And over time, you look back over history, there are times where we've traded at full some of the parts, there have been times where we haven't and we feel we're probably in that phase right now. And I don't think that's the immediate response to that. I think as the way Mark described it, really leaning in and providing the appropriate messaging and investor disclosures around the Midstream business, the integration value that comes from the value, the two primary value chains that we have and focus on that at this point in time that what you suggested is that option is always there. And so we would never say never, but it's not going to be the near-term plan.

I appreciate it. I want to follow up quickly, even at the risk of interrupting Jeff, but I was thinking about MPLX since there's a clear marker there. However, I understand your point. My quick follow-up, Mark, is to remind us of the EBITDA for the German Austria business because we can all apply a multiple to that, I suppose.

Yes, Doug, it's about $300 million.

Great stuff. Thanks so much.

Thanks, Doug.

Hi, thank you for taking my questions. First on the leverage update, can you think about, can you help us think about the path forward to achieve the below 30% net debt to capital? What time frame would you expect to get to that? And are future asset sales, including the German Austrian assets earmarked for that? How should we think about that path forward there?

Yes, Theresa, moving towards the less than 30% net debt to capital is our goal, and we also view our $17 billion debt level in a similar light. While I’m not suggesting that one will definitely lead to the other, they are closely related. There is a clear connection between the metrics we’ve shared: the $17 billion debt, the less than 30% debt ratio, and the less than three times Midstream and M&S EBITDA all align fairly well. Looking at our capital allocation strategy, over 50% is returned to shareholders through dividends and buybacks, with sustaining and organic capital both set at $1 billion each. Under mid-cycle assumptions—which I know we are not currently experiencing—we project around $10 billion in cash generation, which means $5 billion would be distributed to shareholders. After accounting for a $2 billion capital budget, this leaves us with at least $3 billion, giving us significant flexibility to reduce debt, increase buybacks, or pursue strategic acquisitions. Additionally, we continue to make progress with our retail business in Germany and Austria, providing us with further flexibility in reaching our targets. Overall, we are confident that we can achieve our goals, including our commitment to returning cash to shareholders.

Thank you. And then going back to the topic of additional Midstream growth, when thinking about other M&A opportunities here, totally understanding Don's comments about doing what's right from both a strategic and economic perspective. And when we think about the Midstream assets that have been in the market, there are some that seem like more obvious acquisition candidates for you, considering, potential synergies in both Permian and DJ and then coupling that with, who, the bigger shippers on both Sand Hills and EPIC, as well as the visible need for incremental Permian processing. Is FTC also a major concern here? Do you think that would preclude some of the more obvious opportunities along your Midstream footprint?

Yes, Theresa. I think that obviously we always have to take FTC considerations into play, but I don't think that's necessarily what would have us shy away from looking at any particular assets. But we do take into consideration a broad range of assets that are out there and we focus on what provides us the greatest value creation opportunity. And we know intimately how easy it is to connect those assets to our system. What it does from a GNP perspective, what it does from a transportation perspective, and quite importantly, what additional opportunities does it open up for us to grow organically because we really see the upside in returns, in going in and building things at a low build multiple and realizing that full uptick while adding inorganically things at attractive pricing that also are accretive to our returns and our earnings.

Yes, I'd just add. Theresa, I think along the lines of that value creation, just the M&A, our M&A lens will really be focused on what is opportunities that we see that are scalable, that really enhance our platform. And that's really what drives our thought process. Not a FTC lens. It's just that's well down the path as we evaluate opportunities. But again, I think I go back to we just see a lot of organic opportunities within our footprint. And so we're very focused on executing those and growing our business that way, first and foremost.

Yes, we recognize our capital constraints. We're not going to grow Midstream just to grow Midstream just to get bigger. We're going to grow Midstream to create more value for our shareholders. And we're very disciplined around that. We've got capital constraints and we're going to be very picky about what we do.

Understood. Thank you so much.

Thanks, Theresa.

Good morning. Switching gears a little. We saw relatively weaker ethylene chain margins here and I know it's a seasonally weaker quarter. I'm just trying to understand, in management's opinion, when can we start moving towards closer to the mid-cycle margins as it relates to the ethylene chain margins in chemicals?

Yes, Manav, that's a great question. I think in the fourth quarter CPChem saw a couple of things going on in their chain margin. Of course, ethane pricing strengthened, crude pricing weakened, which, they've got a great advantage with their ethane position. But when both of those things happen, I think their impact will show up. I think in the longer term, the macro is supportive. Demand continues to grow. You're seeing rationalizations in Europe, you're seeing temporary shutdowns in Europe. I think this year North American producers had record exports. That tells you about the strength of our economics here in North America versus other locations in the world. I think for the first time ever, more than half of the polyethylene produced in North America was exported into the world market. So they're playing to CPChem strengths in the midterm and long-term. You can see that in their operating rates. And we see continued margin improvement. And actually it's good and healthy that you see slow recovery, slow climb out. And we see that continuing this year into next year, really on through 2026. And then their new assets will be stepping right into pretty healthy margins by the end of 2026.

Perfect. My quick follow up here is a very big improvement in renewable fuels. Congratulations. Breaking even. Help us understand quarter-over-quarter some of the dynamics that went your way which allowed you to almost raise earnings in renewables by like $150 million.

Hey Manav, this is Brian. We'll start off by saying, yes, we did $28 million in the quarter. We're happy with that. As a start, we ran well in the quarter. We continued to lower our cost profile. As we discussed last earnings call, we processed a higher CI feed in the quarter as we ran off less valuable feedstock prior to the implementation of the BTC credit. Additionally, because of the higher CI material, we didn't produce renewable jet fuel for the quarter. We did announce in Q4 a deal to sell United Airlines 8 million gallons up to 8 million gallons of SAF. And we've secured a couple more contracts in Q1 to supply SAF to airlines. But just thinking about looking forward at renewable diesel margins, we anticipate continued weakness, mostly on the regulatory uncertainty that keeps the market on somewhat weak footing. We'll need to have additional clarity on a number of factors affecting renewable margins, including the PTC, the RVO, LCFS rules, tariffs, renewable, our small refinery exemptions, just to name a few. So we'll continue to manage our flexible system. We buy a lot of feedstock. We buy more feedstock than our system needs and so we can move those feedstocks around and manage the optionality in the system. But we'll continue to use the LP at the refinery to provide the most favored renewable feedstock.

Thank you for taking my questions.

Thanks, Bob.

Hi. Thank you. I wanted to follow up on Theresa's question about the EPIC acquisition. I think most Midstream investors I talked to were a little surprised by the move to add more NGL pipeline capacity without getting more processing to fill those pipelines, given that you were already kind of under indexed to processing before the deal compared to peers. I know the pipes are contracted medium term, but does this put pressure on you to get more processing either organically or inorganically in the next few years as those contracts start to roll off?

Hi Jean Ann, this is Don. As you heard from Mark, the EPIC acquisition is very compelling to us and for a variety of reasons. But to kind of unpack and address your question regarding kind of capacity and supply, because it's certainly a question we've had a couple of times, but I'll focus on this one key attribute and that is that EPIC provides us and brings us needed Permian pipeline capacity that is already in an expansion program that is very capital efficient, cost effective. And we see that as being very important to us. And the reason that is, is right now our supply portfolio runs at about 125% of our Sand Hills capacity. So that means we move a lot of product on third party pipelines. And if you kind of look through 2025 and out the years, that supply level will continue to grow this year as well as next. As we bring on our expansion plant at Pinnacle in July of 2025 as we bring on a third-party plant that's dedicated to us. I also expect that we'll be in a position to announce expansion of another plant in the Permian later this year. And so when you think about all of that supply coming on, it really combines very well and fits very well with the EPIC capacity. We'll be able to move product off the third-party pipelines. As our G&P volumes grow, we'll be able to fill in the expansion capacity that comes online at the end of 2026 with EPIC. So it really gives us room to continue to grow our G&P footprint. So that's what's quite exciting. So for us, EPIC is really the right size and the right time from an expansion and capacity standpoint. It fits really well with our existing assets. We're already highly connected in a lot of spots with them. So when you think about integration and synergies, it's a very straightforward approach with really minimal integration costs to achieve. So very excited to bring this in, allow us to continue to grow our supply, pull supply of third-party lines and put it all in our system, provide really good service to the Gulf Coast for our shippers and our producers.

Thanks, Don. That’s very helpful. I appreciate the color there. I’ll leave it there. Thank you.

Thanks, Jean Ann.

Yes, thanks good morning everybody. Maybe shift gears a little bit to Refining, if that's all right. Kind of two main questions. One, just as you look at the overall fundamentals, kind of how do you see the market here? And then the second part of that, digging in a little deeper on crude supply, crude availability. You've got, obviously, a lot of moving parts on the policy side, tariffs, sanctions on countries that have been supplying crude here, that sort of thing. Just kind of a broad question, but how do you see things?

Hey Roger, this is Brian. I’ll start with product demand and supply, and then we can discuss crude and tariffs. For gasoline, we observe a slight increase in 2024 demand, mainly due to lower growth in Asia. In Europe, we experienced strong vehicle switching, leading to nearly a 3% rise in demand. The U.S. also saw a small increase in demand thanks to lower retail prices. Looking ahead, we expect a stronger demand outlook for 2025, supported by a stable GDP forecast and a slowdown in the growth of electric vehicle sales in China. Our forecast indicates a 0.8% increase in global gasoline demand for 2025 and a 0.2% rise in the U.S. In contrast, global distillate demand for 2024 is projected to be 0.9% lower than in 2023, while U.S. demand in the fourth quarter of 2024 is up 0.4% compared to the same period last year. Currently, U.S. distillate inventories are about 8% below the five-year average. For 2025, we anticipate global distillate demand to increase by 1% over 2024, particularly in India, Malaysia, and Indonesia, with U.S. demand rising by about 2%. Regarding tariffs, we are unsure if they will be implemented. However, if tariffs are applied in Canada and Mexico, we expect the markets to respond differently. In Canada, we believe the first consequence will be the filling of the TMX, followed by an increase in inventories, although the WCS differential will likely widen to encourage crude flow into the U.S. due to the value of Canadian crude before any production cuts. In PADD 4 and parts of PADD 2, there are limited alternative supplies, so adjustments will need to be made. On the Mexican side, about 450,000 barrels a day of Mexican crude comes into the U.S. We expect this crude to be displaced and rerouted to Europe or possibly Asia, while other crudes will replace it. We anticipate heavy crudes to strengthen slightly due to logistical inefficiencies, but as the year progresses and OPEC increases supply, we expect those differentials to widen again.

Very comprehensive. I'll turn it back. Thanks.

Thanks, Roger.

Hi, good morning. Thanks for taking my question. So my first question is maybe you can talk about your outlook for your Refining business at mid-cycle. According to your slides, you've achieved the $5 billion of EBITDA. But if I remember correctly, you had a number of initiatives that you touched on at Investor Day around capture rates that weren't officially in those targets? I think you also have some ongoing reliability work and working around the OpEx side. So I'm just trying to think through if there's some possibility that that $5 billion can really be moving up over the next couple of years. Because it does feel like there's still some opportunity remaining there.

I appreciate your question. This is Rich. I'm incredibly proud of our organization and the hard work happening within it. Our performance has been impressive, especially on the reliability front, where we've exceeded the industry average for eight consecutive quarters. In the fourth quarter, we achieved a solid 94%, which is a strong figure for us. This success is largely due to our reliability program, which attained a 98% mechanical availability on our crude units, allowing us to maintain a 95% utilization throughout the year. Our reliability initiatives have been extremely effective, enabling us to take advantage of market conditions. Additionally, we've focused on improving our market capture through a number of high-return, low-capital projects. Although it's challenging to see progress in the current low-margin environment, there are promising indicators emerging. For instance, we recorded a clean product yield of 88% in the fourth quarter of 2024, the highest ever for us. This seasonal uptick was supported by butane, but we have seen consistent improvements in our clean product yield overall, resulting in an impressive 87% for the full year. It's worth noting that while our gasoline yield has remained steady, we have successfully increased our distillate yield, reflecting real progress rather than just minor changes in plant operation. In the fourth quarter, our market capture reached 105. Another critical component of our strategy has been cost reduction. We've effectively reduced our operating expenses by approximately $650 million, which includes our share of WRB. We believe these improvements will have a notable impact on our results. With enhanced market capture and reliability, reaching that mid-cycle target of $5 billion is well within reach. We are committed to achieving this goal as the market evolves. However, I want to emphasize that we are not finished with our improvement efforts. Our journey toward increased reliability will continue, along with our focus on high-return projects aimed at boosting the production of our most valuable products. All of this will be carried out while upholding our industry-leading health, safety, and environmental standards.

Yes. Our engineers and operators out of the plants are just hyper-focused on taking the reliability journey from the crude units on throughout the downstream units in the refineries. Because as you get better with the crude units, that puts the pressure downstream, and they are out there actively pushing and harvesting those opportunities and teeing them up as well. So we're going to continue to do this each and every day, looking for ways to improve, drive those inefficiencies out, and open up opportunities for more throughput and more reliable throughput.

Very thorough. Thank you very much. And if I could just follow up on RD margins. You've already given some thoughts on margins. But I was hoping to dig in on your thoughts on the 45Z in particular. And what are the different scenarios for how that could play out this year? And maybe in the extreme where we have no BTC or PTC for a sustained period of time, what would that look like for the industry? Would you expect the RIN to plug the difference? Or will we end up seeing some kind of capacity coming out?

John, it's Brian. Yes, I think when you think about RD margins and renewable jet margins, you have to think about all the credits, the cost of the feedstock and the value of the product. And if there's a PTC or BTC or there's none of the above, then the other credits, the value of the feedstock and the final product have to move in tandem to drive a margin. And if that doesn't happen, we're going to see plans start to cut. So even now when margins are low for biodiesel, we've seen biodiesel plants cut back their runs, so that helps expand the margin as they cut back because there's less renewable diesel on the market. So we'll see all those things work in tandem to drive margins for the operations.

Thank you.

Thanks, John.

Thank you for taking my question. I wanted to inquire about the corporate structure. Phillips has shut down more refining assets since COVID compared to its peers. As you evaluate the optimal size of the refining footprint to enhance the system and support Midstream, do you see any further opportunities to streamline your refining assets? Or do you believe that after the L.A. refining shutdown, you are in a strong competitive position with your current refining asset base?

Thank you, Jason. Exiting L.A. will significantly affect our cost structure, and that's part of the situation. We are always assessing our assets, which each face different challenges and opportunities. If circumstances change, as we saw in California where it became unfeasible to continue, we will make those decisions. This is an ongoing assessment of all the assets in our portfolio. Currently, there is nothing urgent that suggests we need to shut down other assets. Some may want to purchase those assets, and we are open to those discussions. We are clear on our focus and know what we need to improve in Refining. We don't necessarily need to expand in Refining, but we will concentrate on continuous improvement. Similarly, we won't expand Midstream just for the sake of growth; we will do so when there are genuine opportunities. Volumes are increasing, and we have advantageous positions that can enhance the return on capital employed in our Midstream business while processing more volumes and creating opportunities for upstream customers to distribute their materials across various markets. That is one of the benefits of EPIC for us. It connects us to Corpus Christi, allowing us to transport volumes from Corpus Christi to the Sweeny hub and all the way to Mont Belvieu. This provides our upstream customers with a broad range of options to monetize their hydrocarbons.

Thanks. And my follow-up is on the marketing business. There was a pretty large decline quarter-over-quarter, larger than what would seasonally be expected. I think you tend to see outside moves in marketing to the downside when crude prices increased rapidly, but we don't really see that in 4Q. So I was wondering if you could elaborate on what drove the marketing weakness in 4Q and if you expect that to continue or not.

Brian here. You're correct that marketing margins were down in Q4 due to seasonal factors. The significant issue we encountered was that in Q3, M&S earnings benefited from around a $50 million inventory hedging effect from declining prices. This effect reversed in Q4 when the physical barrels were sold, leading to a $100 million negative impact sequentially. There were also a few minor factors, including a 20-day turnaround in our base oil plant and decreased base oil spreads. However, marketing volumes remained strong for the quarter. In response to your question about the future, we anticipate Q1 will follow our historical trends. In January, we did experience about a 3% decline in marketing volumes due to winter storms and the California fires, although the addition of new business should help offset that. Fortunately, we did not encounter any operational volume impacts on our lubricants business due to the fires.

Great. Thanks for that.

Thank you. Good morning, everyone. On the new target of $5.50 a barrel of controllable refinery cost, I think you were at $6.71 in 2024, which already reflected some pretty good progress. Could you talk about the additional levers that you can pull? And then of the delta of the new target, how much will the closure of the Los Angeles Refinery contribute to that further improvement?

Matt, this is Rich. Good question. So how do we plan to achieve the $5.50 per barrel? So first of all, the base is pretty important to talk about. This is $5.50 ex turnaround cost, too. So our 2024, we ended approximately about $5.90 a barrel in operating expense, excluding turnarounds. So there's about a $0.40 delta there in that. We do see the ceasing of operation at Los Angeles occurring in the fourth quarter. This historically has been one of our higher cost operations. So there'll be a net deduction across the system impact, and that's roughly 50% of the gap. And the balance of that, we will look at closing using the momentum of the organization that's already been built up through our business transformation opportunities and exercises. We're continually challenging ourselves to reduce the inefficiencies. I've talked a lot about the reliability programs and that continued reliability actually drives down your operating expense as you become more reliable. And then, of course, there's the denominator on this equation as well and continuing to push the barrel numbers and the clean product yield up on the backside of the number. So we see this as a pretty clear path. Is it a stretch? It's a bit of a stretch, yes. Is it achievable? Absolutely. We will achieve this. And I'm very confident by 2026, we'll have that number down there on a routine basis.

Matthew, just for you and for others listening in, on Page 17 of our supplemental, it's the second to the last line there, refining adjusted controllable cost, excluding turnaround expense. So that's where the $5.50 number is comparable.

Sounds good. And then you mentioned that there was no SAF production in the fourth quarter. As we turn into 2025, the EU is implementing the 2% SAF blending mandate. So could you talk about what you're seeing in that market? Are you seeing calls for increased SAF demand as a result of this EU mandate? Or has that not really materialized yet? And would you expect to increase your SAF production as we progress through 2025?

Yes. We think renewable jet and SAF are going to be important products we made renewable in January. We'll make it again in February. If you look at renewable jet versus RD right now, it's a pretty tight market. But we continue to use our linear program out of refineries to determine what we should make, what makes the most sense in terms of netback or value in the market. So we'll continue to do that going forward.

Great. Thank you.

Good morning. My first question is for Kevin and Mark. You mentioned a reduction target of $17 billion, which is about $5 billion less than your current level. You stated that this is a priority, but you are also looking to grow your EBITDA, possibly through some accretive bolt-on acquisitions like EPIC, which seems like a good acquisition. However, that would increase your leverage. How do you prioritize between these two? Should debt reduction take precedence until you reach a lower level, or, as Kevin mentioned in his prepared remarks, do you feel reasonably comfortable enough to consider inorganic opportunities, potentially delaying debt reduction to pursue an acquisition?

Yes, Paul. So just to be clear, the $17 billion debt level would be a $3 billion reduction from where we are. I think you said $5 billion, it's $3 billion, which is still not insignificant. But that's how we are looking at this. And the reality is...

I'm sorry, but I'm including EPIC, Kevin.

You're considering the acquisition of EPIC. However, we also need to acknowledge that we have been selling assets. In January of this year, we generated just over $2 billion from asset sales. We've discussed the retail assets in Germany and Austria, where we are actively negotiating. Therefore, there are additional inflows beyond just the company's operating cash flow. When you piece everything together, we believe we will have substantial flexibility to pursue our goals. When I mention a bolt-on acquisition, I envision something more akin to Pinnacle rather than EPIC. A $500 million acquisition is definitely easier to manage compared to multiple $2 billion acquisitions; in that case, we would need to rethink our capital allocation and balance sheet implications. Overall, I believe we have a lot of flexibility to achieve our objectives. As Brian pointed out earlier, we are becoming increasingly optimistic about refining margins and the refining outlook in the second half of this year, which will enhance our operating cash flow. While we would like to reach $17 billion of debt by the end of this year, this is not an absolute requirement. We maintain some flexibility regarding this matter.

Yes, Paul, the growth in EBITDA is not premised on any bolt-on acquisitions. That $1 billion increment in Midstream and Chemicals is organic, and about half of it would be from the CPChem growth projects that are outside of our capital budget. And so the other half is in Don's business primarily, growing the midstream business organically. And it's all within the $2 billion-ish kind of capital budget that we're projecting.

I fully understand on that. I'm just trying to get some better understanding, if you do deal with, say, $2 billion or $3 billion of acquisition opportunity, and you think that it's actually quite accretive, comparing to the objective of deleveraging, I mean how at that point that you will consider or which is going to take the priority?

Yes, if we encounter such an opportunity, we will evaluate how to approach it from a balance sheet and funding perspective. We would be capable of executing a transaction like that and would have the flexibility to do so. We might need to reassess other priorities, but we would address that at the appropriate time.

Okay. Kevin, second one is a real short one. We see still a bit of the uncertainty on PTC in the first quarter for your RD business. Do you think you will start recording some of the benefit related to PTC or that you're not going to report any PTC credits until you are 100% certain on everything?

Yes. Paul, the only thing I can say with certainty is there's a lot of uncertainty, as you highlighted. The reality is what we have on PTC are notices, not proposed rules. There have also been these sweeping executive orders that have put a pause on many forms of rulemaking. We don't know if what's been published on PTC is subject to these executive orders or not. And so we're still working through all this. The reality is we'll have 2 options here. One is we just don't record anything in the first quarter or until there's more clarity. The other is we go with the information that is available, which are these notices and the provisions that are provided in those. And this is something that we'll work through over the course of the first quarter. I wish I could provide more clarity.

Thanks. Maybe a couple of quick ones. I appreciate the comments you gave on Refining capture in the fourth quarter, which is really strong. Any comments on how you would see in the early part of this year the outlook, any moving pieces that might drive capture rate higher or lower on the Refining side? And then maybe just as part of the business transformation process, curious as to where you think you are in terms of progress on the commercial side of things.

Yes, on the Refining capture rate, of course, we have some turnarounds that we've indicated in there. So that will certainly have an impact in those markets that those turnarounds are occurring. Overall, in the fourth quarter, we saw a benefit from the seasonal butane blending. That will continue through the first quarter as well. So that impact should be there. And then the balance is really reflected in our regional indicators that are put out there on the IR website. So I'd encourage you to run those, Ryan, if you haven't run those or seen those. But that will really give you a good insight as to how the market viewed us.

The 83% or low 80s utilization is also going to have an impact.

Right, that's associated with the turnaround. Right. That's correct.

We had a goal to grow the organization. We continue to look at opportunities to grow the organization. We're hiring from the outside. We're building a lot more expertise. And so we continue to look at margin opportunities. We look at cost-cutting opportunities as well. We'll continue to do that, and as we grow our returns in our business and continue to grow the size of our business.

Thank you.

Thanks for all your questions. We've ticked off our strategic priorities from Investor Day 2022. And with our new 2025 to 2027 priorities, we remain steadfast in pursuing operational excellence with a competitive cost structure and enhancing shareholder value. We're growing the Midstream business to $4 billion of stable mid-cycle EBITDA with the anticipated close of EPIC later this year. And we have plans in place to add $1 billion in total mid-cycle EBITDA in Midstream and Chemicals by 2027. We're continuing to make investments to enhance clean product yield and reliability in Refining. Our assets are ready to capture the upside as the market returns. The stable cash generation for Midstream covers the company's sustaining capital and dividends. Combined with $2 billion of expected earnings from our Marketing and Specialties business, we have a strong base before adding contributions from our other segments. The power of integration provides a unique, compelling investment opportunity. We will reward shareholders now and in the future as we move forward with our vision to be the leading integrated downstream energy provider. Thank you for your interest in Phillips 66. If you have questions after today's call, please call Jeff or Owen.