Phillips 66 (PSX) — Q2 2025 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. Welcome, everyone, to our second quarter earnings call. We had strong financial and operating results this quarter. They are a reflection of our focused strategy, disciplined execution, and meaningful progress toward achieving our 2027 strategic priorities. Coming off our large spring turnaround program, we said we were positioned to capture a strengthening market, and we delivered. Our refining assets ran at 98% utilization, the highest since 2018. Clean product yield was over 86%, we captured 99% of our market indicator and achieved our lowest adjusted cost per barrel since 2021. Along with refining, the other parts of our integrated business delivered Midstream, generating adjusted EBITDA of approximately $1 billion. We are on track to achieve the $4.5 billion annual EBITDA target in Midstream by 2027. Marketing and Specialties reported its strongest quarter since 2022. The combination of stable contributions from Midstream and Marketing and Specialties provides a robust platform for our capital allocation framework. We returned over $900 million to shareholders this quarter. The resilience of our integrated business model drives results delivering consistent returns to shareholders. Slide 4 shows the progress we've made in our refining business from targeted low capital, high-return investments and a dedication to operating excellence. The results are clear. Utilization is improving, and we're consistently above industry average. We've been setting new clean product yield records. Year-to-date, our yield is 2% higher than the previous record for the same period set in 2024. These factors have contributed to market capture improving to 99% of our published refining indicator this quarter. Year-to-date, market capture has increased 5% compared to the first half of last year. Our goal is to drive performance in any market environment while running our assets safely and reliably. The second quarter PSX market indicator was just over $11 a barrel. As a reminder, for every dollar per barrel that the indicator increases, EBITDA increases by roughly $170 million per quarter. In the second quarter, we achieved the lowest refining adjusted cost per barrel since 2021. The organization has done a fantastic job embracing a culture of continuous improvement, enabling us to more than offset inflation. By 2027, we expect to see the adjusted cost per barrel number below $5.50 per barrel on an annual basis. Midstream is a key growth driver for our company and creates ongoing value for our shareholders through reliable, long-term cash generation. Slide 5 shows the increase in quarterly average adjusted EBITDA from $500 million in 2021 to $1 billion this quarter. We reached significant milestones in the second quarter as we continue to enhance our integrated wellhead to market strategy. We acquired EPIC NGL, now renamed Coastal Bend at the beginning of the quarter. We're also near completion on the capacity expansion pipeline project from 175,000 to 225,000 barrels per day. The Dos Picos II gas processing plant came online ahead of schedule and on budget at the end of the second quarter. This plant and the previously announced Iron Mesa plant are great examples of highly strategic and selective investments that enhance Midstream's return on capital employed. These projects contribute to our plan to organically grow Midstream EBITDA to $4.5 billion by 2027. Midstream is an important part of the Phillips 66 story. We're executing on our wellhead to market strategy and the results are coming through. Over the past several months, we've had the opportunity to extensively engage with shareholders leading up to and following the Annual Shareholder Meeting. These conversations provided valuable constructive feedback on our strategic direction along with the support of our priorities. We will remain focused on 4 key areas: enhancing our refining competitiveness, driving organic growth in Midstream, reducing debt and returning over 50% of net operating cash flow to shareholders through share repurchases and a secure, competitive, and growing dividend. We've made substantial progress and remain committed to maintaining safe and reliable operations as we execute on achieving these initiatives by 2027. In the second quarter, we welcomed the addition of 3 new Board members. As we do with all new directors, each new Board member participated in a comprehensive multi-day onboarding process with a broad group of our senior leadership team, equipping them to contribute meaningfully and immediately. The extensive industry experience of our Board members continues to promote thoughtful discussion and thorough evaluation of all opportunities for maximizing shareholder value. Now I'll turn the call over to Kevin to cover the results for the quarter.

Thank you, Mark. On Slide 7, second quarter reported earnings were $877 million or $2.15 per share. Adjusted earnings were $973 million or $2.38 per share. Both the reported and adjusted earnings include the $239 million pretax impact of accelerated depreciation due to our plan to cease operations at the Los Angeles refinery in the fourth quarter. We generated $845 million of operating cash flow. Operating cash flow, excluding working capital, was $1.9 billion. We returned $906 million to shareholders including $419 million of share repurchases. Net debt to capital was 41% and reflects the impact of the acquisition of the Coastal Bend assets. We plan to reduce debt with operating cash flow and proceeds from the announced Germany and Austria retail marketing disposition, which we expect to close in the fourth quarter. I will now cover the segment results on Slide 8. Total company adjusted earnings increased $1.3 billion to $973 million compared with prior quarter's adjusted loss of $368 million. Midstream results increased mainly due to higher volumes, primarily due to the acquisition of the Coastal Bend assets. In Chemicals, results decreased mainly due to lower polyethylene margins driven by lower sales prices. Refining results increased mainly due to higher realized margins. We came out of a high turnaround season in the first quarter, well positioned to capture improved crack spreads. Market capture was 99% and crude utilization was 98%. In addition, costs were lower primarily due to the absence of first quarter turnaround impacts. Marketing and Specialties results improved due to seasonally higher margins and volumes. In renewable fuels, results improved primarily due to higher realized margins, including inventory impacts. Slide 9 shows cash flow for the second quarter. Cash from operations, excluding working capital, was $1.9 billion. Working capital was a use of $1.1 billion, primarily due to an increase in accounts receivable from higher refined product sales in the quarter following the spring turnaround program. Debt increased primarily due to the acquisition of the Coastal Bend assets for $2.2 billion. We funded $587 million of capital spending and returned $906 million to shareholders through share repurchases and dividends. Our ending cash balance was $1.1 billion. Looking ahead to the third quarter on Slide 10. In Chemicals, we expect the global O&P utilization rate to be in the mid-90s. In Refining, we expect the worldwide crude utilization rate to be in the low to mid-90s and turnaround expense to be between $50 million and $60 million. We continue to optimize turnarounds and improve performance. We are reducing the full year turnaround guidance by $100 million. The new guidance is $400 million to $450 million compared to the previous guidance of $500 million to $550 million. We anticipate corporate and other costs to be between $350 million and $370 million. Now we will move to Slide 11 and open the line for questions, after which Mark will wrap up the call.

Mark, after all the drama of the last 6 months, you delivered a strong quarter. It's great to see that. However, in your prepared remarks, you mentioned engaging with shareholders and reviewing opportunities to maximize value. I have a strategic question: after everything that has transpired in the last 6 months, are you still confident in the forward strategy of the integrated company, or do you foresee any changes based on the challenges you've faced in the past few months?

Yes, Doug, it's a good solid question. Thank you for asking that. And we've been quite encouraged, frankly, by the constructive engagement we've had with all of our shareholders over the last several months. The results of the vote, we believe reflect what's been a consistent theme in the conversations that we've had with shareholders. They understand the value inherent in the business, and they recognize that our plans can provide upside as we continue to execute against them. We're fully aligned and the shareholders agree that there's significant value in Phillips 66, and we've got to go out and capture that upside. So as we always do, we continue to evaluate a wide range of strategic alternatives. Our Board is very engaged in the process, constantly questioning us, is the strategy effective? Do we need to tweak it? Do we need to make major changes to it? And we have a wealth of experience and talent on our Board. We've got retired Chairmen, CEOs, CFOs, corporate executives that are well established and Wall Street veterans. And so they constructively challenge our strategy every step of the way. And as I mentioned, we've got the 3 new members that have been deeply immersed in an onboarding process that gives them access to all the data that they didn't have access to during the proxy season. And so they have a clear understanding of where we're headed, why we're headed that way and how we can unlock value. As I've said before, there are no sacred cows. We're not ideological about anything. We're ideological about one thing, and that's shareholder value creation. So let me correct myself. But at the right price, and for the creation of long-term value, we'll consider any alternatives, but we always, always are focused on the long-term value creation opportunities. And so I think our shareholders agree with us in that regard.

I appreciate the thorough response, Mark. My follow-up is somewhat different in the context of the macroeconomic environment. We had a strong quarter with $2.5 billion of EBITDA, but you're not where you want to be in Midstream. If I annualize that based on the recent margin environment, we still fall short of the $15 billion target. So, my question is, if you were to normalize for today's environment, what would that $15 billion look like? How far away are you from that? And if it's less than $15 billion, how does Kevin view the appropriate level of debt for the combined company at this point?

Yes, we've mentioned that the debate focuses on establishing a clear perspective on mid-cycle conditions in refining. According to our indicators, we assess this at $14 per barrel, and we are currently several dollars per barrel below that. This is a significant factor influencing refining alongside Chemicals. We are at the low end of the cycle for Chemicals, which presents substantial potential for growth in that area. While there is still a considerable distance to cover to reach those levels, I would note that this quarter has seen a significant reduction in the gap for refining, although Chemicals may still require a couple of years to recover. Kevin, I'll hand it over to you regarding debt.

Yes. Additionally, Doug, refining EBITDA reached $867 million this quarter. When annualized, that equates to about $3.5 billion, which translates to an $11 market indicator. If we consider a $14 market indicator, that could push us slightly above $5 billion. There is room for debate about whether $14 per barrel is the appropriate mid-cycle benchmark, but that is our current stance. I should also mention that this quarter experienced minimal turnaround activity, and we performed exceptionally well. Typically, it's unlikely to see four quarters like this in a single calendar year, so adjustments will be necessary. However, we are fundamentally aligned with our mid-cycle projections. Regarding debt, we continue to assert that our $17 billion of consolidated debt places us in a comfortable position concerning our mid-cycle expectations and even in a below mid-cycle scenario like the one we are facing now. While we don't currently operate at that debt level, we aim to achieve it over the next few years, and we anticipate doing so through a combination of cash generated from operations and the proceeds from asset sales. Importantly, this approach will not hinder our ability to return cash to shareholders, as we plan to allocate 50% or more of our operating cash flow toward share repurchases and dividends.

I wanted to focus a little bit on the refining results, 99% capture, 98% crude utilization. I understand some of those things would be tough to replicate, but even quarter-over-quarter or year-over-year, these are remarkable achievements. So can you help us understand what helped you drive close to $1.3 billion in quarter-over-quarter improvement in refining? I know the cracks were higher, but help us walk through some of the stuff which you were able to achieve here. I think you probably were working on it for some time, but it all came together in the second quarter.

Yes, Manav, thank you. We appreciate that. As the data shows and as we've said for the last several years in refining, we had full intention to improve refining performance, and we were with a focus on the things that we can control. And that's most evident in things like the clean product yield and the utilization rate. Market capture is going to have more variability in it because of the movements in the market and crude dips and all those variables that we have less control over. But we absolutely will continue to drive costs down in the areas that we can control, things like natural gas costs may go up and down, but where we're looking at the things that we can control, we will continue to drive those costs down where it's responsible to do so. And so we'll continue to fight that fight and position refining for whatever the market conditions are, we're going to be out there to capture the market that's available. And I think that's what we saw in the second quarter. It's a combination of very disciplined focus over the last 3 years of preparing and implementing projects and executing to be able to capture that market when it's available to us. So Rich can drive into more detail.

Yes, let me elaborate on this. Our goal in refining is to operate our assets safely and reliably while achieving top-tier performance. We accomplish this by managing the aspects we can control and implementing sustainable changes over time. The cornerstone of all our efforts is ensuring safe and reliable operations, and we pride ourselves on being an industry leader in safety, fostering a culture that continuously pushes us to excel. We have also put in place a thorough reliability program across all our assets, measuring success through mechanical availability. Ultimately, asset utilization will be the definitive metric. Regarding market capture, we had an outstanding quarter with a 99% market capture rate. Moreover, when we analyze the data further, we observe a 5% improvement year-over-year, reflecting the sustainable enhancements we aim for. Our achievements stem from our reliability program and its positive impact on asset utilization, which was at 98% for the quarter. For 9 out of the last 10 quarters, we have consistently exceeded the industry average in utilization, with only a brief interruption due to scheduled maintenance in the first quarter. We've also achieved record clean product yields at 87% for our assets, and we are on track to meet or surpass that this quarter. This success reflects the execution of our small capital, high-return projects over the last three years, which have enhanced both our clean product yield and flexibility. We have improved our capacity to produce gasoline, diesel, and jet fuel, seamlessly transitioning between these three products. Additionally, we can process both light and heavy crudes without sacrificing overall system capacity. A prime example is the recent sour crude Flex project at our Sweeny complex, which has tripled our ability to process light crude at the largest crude unit on-site, reducing reliance on waterborne crudes and leveraging the integration with midstream NGLs and CPChem feedstock, leading to increased light ends production and improved market capture. We've also focused on eliminating inefficiencies in the business, which is crucial for refining performance. A significant change has been managing our assets as a fleet rather than as individual operations, enabling us to remove over $1 per barrel from the system. We recorded an impressive $5.46 in the second quarter, and our aim is to maintain an annual cost below $5.50. The notable improvement quarter-over-quarter was due to increased asset utilization; despite a set of turnarounds in the first quarter, we experienced a 17% volume increase in the second quarter, which contributed to lowering dollar per barrel costs. However, the operating costs for our assets remained stable quarter-over-quarter, barring the impact from turnarounds. This base cost is fixed and allows us to operate the assets effectively. It's also somewhat influenced by fluctuating natural gas prices, which affect dollar per barrel costs. We're making some portfolio management adjustments with the Los Angeles refinery. In summary, we have made significant progress, but our work isn't finished. We'll continue to pursue and implement these strategies. Over time, you can see a consistent trend of improvement in our refining system, indicating that our changes are sustainable. Most importantly, our team has demonstrated a commitment to the necessary hard work of implementing change and seizing opportunities as they arise.

Yes, I just want to echo Rich's closing comments there, whether it's refining, marketing, commercial, midstream or back office, across the board, we've got a company full of people that are humble enough to know we can always do it better, and we're driven to do it better. We've got the competitive mindset to do it better and to get up and do it better each and every day. And that's what's going to make this sustainable, and that's going to continue to improve those metrics that you've seen across the board. So thanks for the question.

A quick follow-up. Very strong results from M&S, better than our expectations, even if you deduct the $89 million onetime. Help us understand some of the dynamics there. And now that you have sold these assets, what would be a good run rate of EBITDA normalized for this business?

Yes, Manav, it's Kevin. We achieved very strong results this quarter with $660 million, as you pointed out. We experienced roughly a $100 million benefit this quarter due to timing, which offset the first quarter. Looking at the results, higher volumes contributed as the refining system came out of turnarounds, alongside the seasonal demand effect and stronger margins. The seasonal factors influenced margins, but the price movements during the quarter, especially the falling prices, also helped. For the third quarter, we anticipate earnings to return to a more normal range of about $450 million to $500 million. Regarding your question about the disposition, we have not finalized it yet, but we expect to do so in the fourth quarter. This will decrease EBITDA by about $50 million per quarter following the sale of our 65% interest in the Germany and Austria business.

It was great to see Mark on CNBC today morning.

Thanks, Manav.

Yes. I've been spending some time chatting with Mr. Dietert about global refining balances, and there's a healthy debate in the market over the next couple of years about how you guys are thinking about net capacity adds? And then also the swing factor of China, which obviously has excess export capacity but has been pretty disciplined about product quotas. And so would just love your bottoms-up view of how you think about those net adds over the next couple of years?

Neil, this is Brian. I would say that net refinery additions are below what we expect for the foreseeable future, certainly through the end of the decade. This is even before considering any unplanned shutdowns. Recently, the Lindsey U.K. refinery announced that it is shutting down, and we anticipate more closures to come. Additionally, some of the refineries, particularly in Asia, are focused on petrochemicals, which means you must consider clean product yields when thinking about crude; those yields are quite low, ranging from 30% to 35%. In summary, with net additions falling short of demand expectations, we anticipate a very strong margin environment.

Just follow-up on the cash flow to Doug's question about just debt levels being about 10, 11 points higher than where you want it to be. I mean just talk about 2 dynamics, working capital, there was a $1.1 billion outflow, but I would think that swings back in the back half. So you could just talk about what drove that and how you think that evolves. And then the jet sale because between those 2 nuts, I think you can close a lot of the gap that you need to get to the $17 billion level.

Yes, Neil, it's Kevin. You're right on both fronts. So the working capital, $1.1 billion use of cash, as you highlighted, that was predominantly due to increased accounts receivables. If you think about the end of the first quarter where utilization was much lower, we're still just wrapping up the heavy turnaround activity versus the end of June where we're running full product production and sales are significantly higher. And so that creates a build in accounts receivable. That's the biggest single component to the move in working capital. There's also some inventory impact on the NGLs as we build for the seasonal trade on that. And so over the course of the year, we would expect a benefit of working capital, probably more of a fourth quarter item than a third quarter item because the receivables component that I mentioned, you'd expect that to continue at the same sort of levels through the third quarter, but come fourth quarter, you'll see the normal inventory reductions that will take place and probably some modest benefit on the receivables payables front. So we do expect that to come back, expect the cash proceeds in the fourth quarter, EUR 1.5 billion, $1.6 billion. And so you put that together, and we'll make some significant inroads towards the debt target.

Yes. I wanted to go back to how you're thinking about the business after the activism campaign that you endured and there was a lot of focus on that Midstream part of the business. And I'm wondering if the company is thinking about doing a deep dive on that segment and the structure that makes sense. In any way, that would be different than how you kind of evaluate that business in normal course through the year?

Absolutely. We've done that in the past. We'll continue to do that. We will look to see if anything has changed. We will engage with industry experts to make sure that we're thinking about it the right way. And certainly, we'll lay it all out for our Board to drive to the right conclusion. So as I said earlier, nothing is off the table, but it's got to create long-term value for our shareholders.

Great. And my follow-up is just on a couple of weaker segments, chems and renewable fuels. And on chems, just want to know if your outlook for when we reach mid-cycle in that industry has changed at all? And then renewable fuels, given margins where they are, do you consider tapering back runs there and just kind of outlook for margins in general would be great.

Yes. I'll grab the chemicals question. Second quarter was particularly problematic when you think about the disruptions that tariffs caused. At one point, the Chinese had imposed punitive tariffs of 100% on polyethylene imports and CPChem has really minimized its exposure to China, but all of that material that was flowing into China got pushed back into the world market. So that was a big challenge this quarter. Our longer-term view is still consistent, you're seeing rationalization in Europe, you're seeing rationalization rumored in Asia. And I think you're starting to see capitulation of those players that need to take assets off the table. That would be constructive, and we continue to see things firming up throughout '26 into '27 and beyond without a lot of new capacity coming on other than what CPChem and Qatar Energy are bringing to the table. And again, CPChem fares relatively well versus their competitors because of the advantaged ethane position they have both on the Gulf Coast and in the Middle East. And the high-density polyethylene volumes continue to be strong. They can run at high rates because demand for that product continues to grow. It's really a very resilient product, and their cost position allows them to continue to operate profitably. And so they've built out a strong competitive position that's passing the test of time as others are showing weakness.

Jason, it's Brian. On the renewable front, renewable margins are indeed weak, and they were weaker in the second quarter slightly than the first quarter. We are running at reduced rates. In the second quarter, we ran at reduced rates, and we continue to run at reduced rates. Maybe I'll give you some color and tailwinds and headwinds in the regulatory and in the Renewable segment in general. As you know, there's been a number of regulatory changes for 2026, and a number of those are headwinds for the plants, including limiting the eligible feedstocks for PTC credits to those from North America and also in reducing the premium for sustainable aviation fuel. while we also have RVO obligations that support Rodeo Renewed, other policies included in the RVO such as that reduced RIN generation for renewable fuels derived from imported feedstocks will present a challenge. We're doing a lot of things in self-help, including talking to state and federal regulators to promote profitability for the plant. Additionally, we're working very hard on lowering the cost of operating the plant, just like Rich has done in the refining segment. We're focused on this plant as well. And we're thinking about how to adjust operations to increase SAF production and also to provide additional optionality for feedstocks. I'd say also there are some tailwinds we see in the market, potentially stronger LCFS and RIN credits with the tighter regulations. European markets are driving greater incentives, including Germany. We've been exporting to Europe almost every month this year. There are stronger biofuels programs in Oregon and Washington and stronger Canadian markets as well. So I would say, just in summary, Rodeo Renewed, as you know, is one of the world's largest RD and SAF plants. And we can also generate up to 15% of the country's D4 and D5 RINs. So ensuring profitability for the plant will be important for energy supply, for affordable energy across the country, given the RIN generation and for energy dominance in the United States.

Yes, I would just add to that, that it's clear that the losses are unacceptable and unsustainable. But this is, as Brian noted, a strategic asset, not just for us, but for the country and for the whole RIN program, it's important as well as the volume of diesel that it produces and its capability to produce sustainable aviation fuel to meet a lot of the policies that are underway. So we are fully engaged at the federal level and fully engaged at the state level in California, to make sure that all the right choices are made to support this strategic asset.

I have a Midstream question. Obviously, the top concern right now across Permian volume, leveraged Midstream is the falling rig count in the Permian and whether growth could materially slow there next year. Can you talk about PSX's exposure to potentially slowing growth in the Permian? And how you might actually be less exposed than some peers in the medium term given your high share of contracted third-party volumes?

Don mentioned that regarding the Permian outlook, they maintain close communication with their producer customers and currently do not see significant changes in their plans based on pricing and drilling activity. He pointed out that the NGL content in new production is higher than in older production, leading to growth in gas and NGL despite slight reductions in crude volume growth. This creates a buffer against changes in rig counts or producer plans. He added that their volume outlook is reinforced by their G&P processing volumes and a strong portfolio of third-party contracts. Conversations indicate confidence in volumes flowing through their system, with high utilization rates. They are expanding operations at Coastal Bend, and volumes continue to increase, suggesting they are in a good position.

Great, Don. As a broader follow-up, I noticed in the most recent PSX presentation that there were many examples of the $500 million in operating synergies from integration. Could you provide some high-level insights on the factors that led to these operating synergies being higher? For instance, do they tend to increase with refining and chemicals margins, or perhaps in more volatile environments? Or is this more of a steady state figure as you see it?

Sure. I'll take this one. It is fairly steady. I mean, there's some seasonality when you think about butane blending with our refining kit and how that interacts with our NGL business that has some seasonality. But a lot of it is fairly steady when you think about a lot of this is throughput-driven. A lot of this is the operational synergies that we have across the portfolio. And so those tend to get realized on a month-in and month-out basis. So a lot of stability in that regard. I would echo what you heard certainly from Mark and Rich, is that we still see a lot of opportunity to continually improve and even extract more value in the integrated model. So excited for the opportunities that we see the portfolio is presenting us.

Maybe first off, one back on refining. Distillate markets have been very tight with really supportive margins. Can you talk about what you see as the primary drivers in your view? How do you see the outlook over the remainder of the year? And as you think about your operations, is there anything more that you can do to increase distillate yields or are you maxed out given the current crude slate?

Ryan, it's Brian. Well, I'd say, although distillate has been favored over gasoline every month this year, but May, distillate remains very strong, as you pointed out, with lowest U.S. inventories in decades and recent lower clean product yields versus Q2 of 2024. We would expect distillate margins to remain strong through the end of the year with planting season coming up, our hurricane season coming up, fall turnarounds and then winter demand right after that. And so we'd expect tight distillate margins to put also bullish pressure on gasoline margins as refineries move to making more and more distillate through the driving season. I'd say thinking about what would put some pressure on the distillate margins, it will come from additional OPEC crude and the weakening of fuel oil values with heavy crude pressure. Additionally, we have Canadian producers ramping up production to be more heavy crude on the market. And we've seen back and forth some jet moving into the diesel pool. So I'd say that one of the things we're doing is watching the Mid East and India where the global net distillate length exists for potential imports into Europe. And while we don't think China is going to add any more gasoline or diesel exports, this could also take some steam from distillate. And finally, as many people have talked about, we've seen lower biodiesel and our renewable diesel production. It's also bullish for distillate. So we would think that distillate margins will remain strong through the year, eventually coming off some when you get these extra barrels, heavy crude barrels back onto the market.

And then one, I know a big focus of your improvement in refining performance has also been an improvement on the commercial side of the business. Can you talk about how you view your progress in that regard? And particularly in a quarter like this one, what benefits you might be seeing in terms of your efforts on the commercial side?

Yes, we are actively enhancing our commercial business. We've made significant hires and improvements within the organization. Our goal is to create more value through our integrated system and to advance barrels along the value chain. We have offices in Houston, Canada, Calgary, the U.K., Singapore, and a small presence in China. We're consistently striving to create value by directing barrels to the markets with the highest returns. For instance, LPGs or naphthas may be shipped to Asia, where we already have established customers and contacts to understand their needs. I believe we've made notable strides by building a strong origination team, having brought on around two dozen originators globally. These individuals are multilingual, knowledgeable about various commodities, and capable of generating value through collaboration with customers while strategizing on potential buys and sales using our integrated system. I'm truly enthusiastic about the advancements we've made in the commercial sector, and as Don and Mark have highlighted, there remains further potential ahead.

You guys have been pretty active in managing the Midstream portfolio and are now shifting the focus more to organic growth. But wondering if there's more to do on the divestiture side here where there's crude or refined product pipelines that maybe you don't necessarily operate. Are there arguably still integration synergies? Or is maintaining ownership more about just enhancing the cost structure for refining, diversification or just not the right environment to really realize full value?

So Phillip, we have an active list that we review. We have taken a close look at our core assets and identified what we consider noncore assets, and we're addressing that list. This means there are additional opportunities for selling noncore assets, particularly in the Midstream sector with non-operated assets. While we're not ready to disclose specific figures or details about particular assets, we do have a substantial list of items that we could continue to sell off.

Okay. Great. And then I don't think we've asked about the new M&S allocation slide that you have in the deck here, just to be more apples-to-apples in terms of comparing refining performance. But it was a nice quarter for refining. I mean, typically, PSX tends to really outperform in the central corridor. I assume with the M&S allocation, I mean, the outperformance is even greater there. So just in a quarter where WCS didn't really give you much help, what do you guys look at as far as really attributing and driving that relative outperformance? And then in some of the other regions, maybe like the Gulf Coast, I know you mentioned the Sweeny project, but are there other things you can do there, new projects or otherwise to improve relative margin uplift given that you are pretty vertically integrated in the Gulf Coast also?

Phillip, it's Brian. Maybe I'll start on talking about the Mid-Con strength. Again, we talked about the commercial organization. I think they had a hand in the Mid-Con as well. We were able to increase value in Mid-Con by optimizing the system essentially on both gasoline and diesel, we anticipated strong Mid-Con prices in Q2 with heavy turnarounds and decreasing inventories, and we positioned our system appropriately. And also on the gasoline prior to the emergency RVP waivers, our refineries were able to produce the lower RVP, which received a premium in the market given the limited production. And finally, I think just in general, refineries had minimal maintenance during a heavy Mid-Con turnaround season. So we benefited by running while others were down.

Yes. I would add that in our refining business, particularly in the Gulf Coast and to some extent in the Mid-Con area, there is an opportunity to optimize our secondary units. This could involve utilizing feedstocks that are not primarily sourced from the front end of our facilities. We have focused on this opportunity and believe there is significant potential to enhance the overall utilization of our assets and produce more clean products for the market.

So I wanted to start on the full year turnaround expense guidance, which was reduced by $100 million. Was this due to outperformance or was prior planned maintenance deferred? What I'm getting at and trying to figure out is if the $400 million to $500 million level is a fair run rate to use going forward?

Yes, I'll take that one, Joe. This is Rich. Our guidance for the third quarter was between $50 million and $60 million. Looking at our spending so far this year, we've actually underspent compared to our earlier guidance. Therefore, we decided to adjust our overall yearly guidance. This change is primarily due to two main factors. Firstly, we've maintained a strong focus on execution and planning, which has enabled us to be more efficient and exceed our historical productivity levels while spending less. Secondly, our inspection programs have matured, allowing us to transition from a time-based to a condition-based inspection process. This shift provides two major advantages. It optimizes the time between turnarounds, enabling us to extend intervals, and it decreases the scope of work during turnarounds, simplifying the process and enhancing our execution and planning effectiveness. So far this year, we have performed well, with approximately $320 million spent. Given these figures, we felt it was appropriate to lower our full-year outlook by $100 million.

Good to see the execution. My second question is on the Midstream side. Now that Coastal Bend has been closed for a couple of months, can you talk to how the integration is going, synergy capture and any surprises now that you've had some time with it in the portfolio?

Sure. This is Don. I'd say our Coastal Bend integration work is going quite well. As you heard on the call today, the first phase of our expansion is near complete. We are on schedule for completing the second expansion, which would take us up to 350,000 a day of volume capacity in 2026. We're well on our way capturing the cost synergies as well as the commercial opportunities that we saw that would be associated with bringing Coastal Bend into our broader wellhead to market system. So that's all going quite well. I think you step back, it's a great addition that really supports our organic growth plans that you see us executing in the Permian with our gas gathering and processing plant expansions like Dos Picos II and the Iron Mesa gas plants; all of that is volume that's going to come out of those plants and feed into Coastal Bend and then hit that Gulf Coast market where Coastal Bend plus what we had really creates a great network of purity product lines that hits a lot of markets up and down the Gulf Coast, and we really see robust opportunity there. And the customer feedback, the customer engagement that we've had post-closing Coastal Bend has been robust and very positive. So really excited about what the acquisition has done for us and what the opportunity set looks like.

Brian, can I go back to the renewable diesel? You're saying that you are running at reduced rate. Just curious that if the margin is lower, that means that you're going to reduce further from the second quarter level. In other words, how sensitive you are in your run rate versus the market condition? And also whether you have fully booked the PTC in the second quarter or that there's some incremental benefit that we should assume and expect on that? That's the first question. The second question, I think, is for Mark. Upon the completion of the shutdown of L.A., you have no refinery in California, but you have wholesale and marketing and retail marketing operation there. And also that in Europe, given the market condition is never really that great for the oil and gas business. So in those 2 set of business, it means that in Europe, your refining and marketing business and in California, your marketing business. In the long haul, how you see them fitting into your portfolio? Are they should be part of your portfolio long haul?

Paul, it's Brian. I'll start by saying that we will likely operate Rodeo at reduced rates in Q3 compared to Q2, but this will depend on market conditions, which could improve or remain the same. We are closely monitoring various factors affecting the margins for renewable diesel and renewable jet, including credits, the price of renewable diesel compared to CARB diesel, and feedstock prices, all of which are interconnected. Based on market trends, we will decide how we run the plant.

Yes, Paul, on your second question regarding L.A. shutdown, you're right. We'll have no traditional refining capacity in California. I would point you to what we did when we converted to Rodeo to renewable feedstocks. In essence, we were neutral on diesel production. It just happened to be renewable diesel versus traditional diesel, but we had to backfill gasoline. We did that, and other market participants did that by importing. We also have the ability to import from our Ferndale refinery in Washington. So it's a good position there. And then as we shut down L.A., again, it's primarily a gasoline import opportunity, and the California authorities have been very proactive in helping us address the import opportunities from the water, whether it's international or other domestic sources. And so we've got a great plan that's been well received by California.

And I'd also add to Mark's comments. I think what's interesting is we believe that the volatility in California gasoline prices will actually be reduced with more gasoline imports because if you think about having mature supply chains, which are similar to other markets like PADD 1, which is also a gasoline import market, you're going to have barrels coming in large ships, 300,000 barrels to 700,000 barrels, and those barrels will come off the ship and be stored and ready for market dislocations. You also have many more destinations that can produce now CARB gasoline than in the past. And also, as Mark pointed out, destinations that are very close to California, like our Ferndale refinery. And in fact, gasoline imports into California versus a 5-year average, we're up 70,000 barrels a day already. So we really don't see any constraints on getting the CARB gasoline. We see a lot more gasoline coming into the market. The steady stream will help put a lid on volatility to a certain degree. The only issue is infrastructure. That's a potential issue. But what we've seen is the state is aware of this and seems poised to continue to help us on that infrastructure. So we think California is in a very good position.

Yes. And regarding Europe, we've already exited co-op. We are exiting 65% of our jet position in Germany and Austria. So clearly, that's not strategic for us. We like the deal that we did for jet. It was a solid offer from a high-quality buyer. They wanted us to come along for some period of time as they adjust to that market, and we still have exposure to the upside there with clear exit provisions. And so we're comfortable with where we are there in Europe. Around Humber and the integrated position in the U.K. Humber is really the leading refinery in the U.K., perhaps in all of Europe. It's a strong position there. It has good optionality. And as you see others rationalizing assets, it's only going to strengthen this position.

I want to check in on the refining guide for Q3. I think it was for utilization in the low to mid-90% range versus the 98% in Q2. Your turnaround expense is flat quarter-over-quarter. The indicator in July, at least, should be higher than the Q2 average. So I guess we're a little surprised that utilization might be coming down significantly in Q3. Is there anything to read into that? Or what's going on there?

I'll take that one. There are a couple of factors to consider, Matt. First, our Bayway facility experienced a power outage during the recent storms, which caused the entire plant to go offline. The plant is now back up and running smoothly, but this will affect utilization. Additionally, regarding our Los Angeles refinery, we've stated that we will halt operations in the fourth quarter. However, during the latter part of the third quarter, you will notice some reduction in operations, which will also impact utilization.

That's helpful. And then on the renewables business, I'm wondering if it would make sense to seek out a partner here. There's a lot of other examples in the space where your competitors are working with partners to provide help on feedstocks. We saw a deal earlier this week where a partner came in and valued SAF capacity at about $4.50 a gallon, which seems like a pretty attractive number. So is that on the table for PSX bringing in a partner on the renewable diesel side?

With assets like this, we always evaluate the best options to create value. I agree that was a very attractive number. However, everything is being considered.

Thanks for all your questions. And before we wrap up, I want to emphasize 3 points from the call. The strong financial and operating results this quarter show that we're executing well on a proven strategy. Our integrated business model generates competitive returns through disciplined investments and synergy capture along our crude and NGL value chains. And we're committed to returning over 50% of net operating cash flow to shareholders through share repurchases and a secure, competitive, and growing dividend. Thank you for your interest in Phillips 66. If you have questions or feedback after today's call, please contact Jeff or Owen.