Phillips 66 (PSX) Earnings Call Transcript & Summary

Great. Thanks. Welcome, everybody, to a fireside discussion here. We're lucky enough to have a large chunk of the management team here from Phillips 66. We've got Greg Garland, Chairman and CEO. We've got Kevin, the CFO; Mark, who is -- has been heading up the Chemicals business and President and COO; and Jeff Dietert here with us for Investor Relations. So thanks, everybody, for joining. It's really a pleasure to have you here at the conference. We really appreciate your participation today.

If we could start it off maybe with a couple on the strategy side. Historically, you've been composed of 4 businesses each with, let's call it, mid-cycle EBITDA potential, somewhere in the $1.5 billion to $2.5-plus billion range. I think you've talked about a combined mid-cycle business that was maybe roughly around $9 billion a year in EBITDA or $6 billion to $7 billion a year in cash flow. I mean have you seen anything in the last 12 months that's changed the long-term view of how you view any of those of your core businesses?

Well, first of all, thanks for having us, Ryan. It's great to be here with you today. And I've -- we haven't seen anything mid-cycle in Refining for a year now. So -- but just in terms of our long-term view now, I think let me try and step through each of those businesses, if I can. And then Mark and Kevin and Jeff can tag in here at any point. But as we think about -- when we start Mark's business, $2 billion of EBITDA business, essentially is our 50% share of CPChem. We're constructive, the global outlook for chemicals over the next several decades. We have hundreds of millions of people coming in the middle class. And so that's a business that's going to grow at GDP or better over the next couple of decades, and so we feel good about mid-cycle in that business and that $2 billion of mid-cycle earnings actually growing out into the future as we execute growth those projects like Gulf Coast II and the Cutter project, et cetera. So good there. Midstream. If you think about our Midstream business, you go back to 2012, circa $450 million of EBITDA. It's over $2 billion today. Good, stable, fee-based businesses that we've built in that business. So I think we're still comfortable with that mid-cycle outlook in that business. Our Marketing and Specialties business has just been a perennial stable performer, $1.4 billion, $1.6 billion. And I think we're comfortable with that level. Refining, which, mid-cycle EBITDA, is $4 billion. It's a little harder to call. It's a very volatile business. And as we look at that business, we see the profiles for North America and Europe, probably for gasoline, ultimately, flattening to declining, just given improved auto efficiencies, given bios, given EVs in that space. We think distillate continues to grow with economic growth, and that distillate demand will be heavily levered to economic growth and we're constructive that as we move out in the next couple of years. So Refining is probably the harder one for us to call. When we think about a mid-cycle crack, we're taking the 2012 to 2019 average. And -- but still, I think that as we're coming into the back half of this year, we like the setup we see. We think there's a lot of pent-up demand from consumers. We think the vaccines are getting put out. And certainly, by summer, I think most of the people that want to get a vaccine will be able to get one and then you couple that with the cold weather we had and kind of inventories being normalized or back below the 5-year average. So I think everything is pretty constructive on a go-forward basis. I might have Jeff maybe just touch on what we're seeing globally in terms of shutdowns and how we think that could impact supply and demand balances.

Yes. So we've seen 3 million barrels a day of announced permanent closures; another 1 million barrels a day of temporary closures, some of which we think could go permanent. And then there's another 1 million barrels a day that's considering conversion to a terminal or something other than crude oil refining. And so amongst that group, really offsetting about 3 years' worth of capacity growth. So as we see demand getting back to '19 levels, capacity rationalization, offsetting new capacity adds, 2022 could be a mid-cycle environment.

The other thing I would add, too, is as we're making more investments in renewables like Rodeo Renewed, things we're doing around Humber, Ryze, et cetera, I think by the middle part of this decade, we can certainly have $1 billion EBITDA business in renewables. And by the end of the decade, something maybe $2 billion-ish, approaching something like that. So I think that -- we think about that $6 billion to $7 billion, I expect that, that $6 billion, $7 billion actually grows over time as we make these investments.

That's great. You touched on multiple -- you knocked up multiple of my questions I want to answer them, which is extremely efficient. And I want to return to the renewable growth outlook a little bit later. But before we leave, I appreciate some of the macro comments on Refining. I mean, as we think of the near-term refining environment, it's been interesting, right? I mean RIN pricing -- RINs pricing is super high right now. Headline margins have looked really attractive in the first quarter relative to what we've seen any time in the past 12 months. But we've had -- you got noise from RINs. You've had noise from storm impact that you had in the middle of the quarter. As you think about what you're seeing right now in terms of kind of underlying margins or fundamentals, what is the first quarter looking like? What impact is this going to have on -- I don't want to you to say recapture. But like what impact is this going to have kind of an underlying profitability in the first quarter? And what are you seeing in terms of your ability to increase utilization rate in the near term? Are we not quite there yet?

So I'll just take a stab, and Jeff can fill in. So I mean one of the things we saw in January and February, the cracks were moving up. The RINs were moving up almost the same. And so that net margin, for us, on the Refining side, at least, really wasn't moving that much. But what we've seen here in the last couple of weeks is the cracks have actually moved higher than the RINs, and so we're starting to see a little margin open up. But I think first quarter is still really tough in terms of the capture rates and what we're going to see in the first quarter. You think about rising crude prices and our inability to capture that into the marketing business, so we always get compression there in the rising crude price environment. I think you'll see that in the first quarter, certainly. Operates, they're coming up. Certainly, I think, having a lot of refining capacity on the Gulf Coast down due to the weather, clearing out inventories, kind of removing an overhang. Our view is that rates are probably in the high 70s, low 80s right now as an industry. That's probably about where we're functioning right now or operating today, and that probably feels about right given where supply and demand is today. But as we start to approach the summer and the driving season, we think people are going to drive more. They're going to choose, get in the car and take a vacation where they didn't get to last year. And so, Ryan, I think that we're constructive as we think about the ability to move towards more of a mid-cycle crack and a more of a mid-cycle margin capture as we move into the summer driving season in the back half of the year. Jeff, I'll let you catch up on that one.

Yes. I think you're right. With the winter storm and the reduced inventories that have impacted the margins, quarter-to-date, our composite crack is almost double what it was in the fourth quarter. Fourth quarter was $7. We're about $14 quarter-to-date, average. And as you mentioned, RINs has taken -- RINs costs are up substantially. They averaged -- the blended RIN was about $3.50 in the fourth quarter, and it's averaged about $5.50 quarter to date. In real time, it's about $7. So that RIN cost is a headwind relative to market capture. We talk about the 3:2:1 crack. I think other factors that will influence that market capture is, one, the -- we have costs on transportation and freight that's usually charged on a dollar per-barrel basis. And so when you've got a low crack, that can be a larger percentage than when a crack moves up. I think, secondly, we produce about 43% gasoline and 38% diesel relative to the 3:2:1 crack, that's 67% and 33%. So when gasoline cracks are the primary driver, we usually lag that a little bit. But when diesel cracks are the primary driver, then we may outperform a bit. Secondary products are really a -- the biggest variable is the movement of crude price, and we've been in an upwardly rising crude price environment. So that typically squeezes secondary margins. Crude differentials. The Canadian heavy dip is a little bit wider in 4Q than what we saw -- or excuse me, in 1Q than what we saw in 4Q. So that's a benefit. WTI-Brent is pretty flat. When you look at some of our products, the distribution is such that they price with a lag. And so in an environment where crude prices fall, you get a benefit. When crude prices rise, it's a bit of a detriment. That all washes out as crude prices stabilize. Other things, I would say, are important are, one, refining utilization. And as Greg mentioned, our utilization was impacted by the winter storm, similar to the industry as a whole. And the second thing is turnaround expense. We expense turnaround activity, and we've guided to $200 million to $230 million of turnaround expense this quarter, so I think those are the factors that will influence market capture.

Do you still have any lingering operational impacts from the storm?

So on the Refining side, we're really back to normal operations. First quarter is an active turnaround period for us and March, in particular. So we've got some turnaround activity underway, but there's no damage from the storm.

Great. If we could turn to Chemicals a little bit. I'm grateful to have -- I really appreciate Mark joining us today and want to make sure we don't leave Chemicals towards the end. So even before the pandemic, I mean, you had talked about a soft spot for polyethylene margins over the next year or 2 given the capacity expansion that we saw over the last few years. Chemical margins, I think, as we look across 2020, have been relatively strong and a reasonable bright spot during the pandemic. I mean can you talk about some of the differences in your business that mitigated some of the pressure during the downturn? And what's your outlook on pricing recovery from here? And are there -- in terms of that PE cycle?

Sure, Ryan. I think you're right. As we wound down 2019, things felt a little long. We got into 2020. And early in 2020, we thought the pandemic may make that even worse. But in fact, it was the opposite. Our portfolio seemed to have particular resilience with the pandemic. Many of the things that we produce go into products that provide hygiene or that are related to medical products, so we actually saw record production, record sales throughout 2020. And that was continuing this year. Late last year, we were trying to build inventory for turnarounds that we're going to have in 2021 because, like much of the industry, we didn't want to perform turnarounds, shut down the plant and have maintenance -- have it open up and have several thousand contractors in and somebody gets COVID, and you're stuck with a plant that's down and everything's opened up. So we deferred those into 2021, and we'll execute those this year. So we've got -- the capacity that got tight because of hurricanes last year drove down inventory. We're trying to build inventory for turnarounds. We got turnarounds that are coming this year. And then Winter Storm Uri hits and takes out 70% of the cracking capacity in the U.S., which just completely wiped out the ethylene inventories and the polyethylene inventory. So we're coming back. I think there are still crackers and the industry coming back online maybe throughout the next quarter. We're pretty well back online, still ramping some things up. The derivatives are ready to go. The crackers are key because when you shut down a steam cracker suddenly like we did -- we had to, like the whole industry had to when we lost power, lost nitrogen, they come down pretty hard and then things get damaged. But we're working our way through that. And we continue to see the price of polyethylene move up, the price of ethylene move up, but the feedstocks are staying fairly stable, particularly ethane. So we're seeing substantial margin growth there. It's going to take several quarters to rebuild that supply chain. We're going to meet the robust demand in the marketplace to continue to grow. So again, the net effect across that 2- or 3-year period is we pulled a lot of inventory out, effectively capacity out because of conditions like the hurricanes and the winter storm that -- while the demand continued to grow throughout the COVID pandemic and into 2021. So that's going to mitigate the softness we were suggesting we'd see in '22 and '23. It's going to take some of the edge off of that. And while that will be happening, some of that capacity will spread out a little bit. It's not all going to come on perhaps as aggressively as we thought it might. And so that's going to take the top off of that demand. It's going to actually increase the supply-demand balance, and it's going to raise the trough a little bit as we go into there. So it's going to be muted somewhat. And it's similar to what we've seen in past cycles. The cycle is still here, but things never play out the way we imagine them. It's a -- this industry has got a very large base of demand, and you have to add 4 or 5 crackers a year to meet the demand growth. And so as these things come on and they don't come on, as everyone planned and they spread out over time, the down cycle is muted. Every time we've seen that over the last 2 or 3 cycles, the down cycle is muted, and we're going to see that again. And then beyond '23 into '24, we don't see a lot of new capacity coming on. So I think we'll see some room to grow margins there as well.

And what does all this mean for your -- if we think about potential for additional capacity growth for you all internally? Is there -- is this -- does this change? Is it pull forward? Does it impact the timing of another potential leg of expansion?

Well, as you know, we've been looking at a couple of projects with our partners in Qatar, one in the U.S., another one down the road a little further in Qatar itself. And we did take a pause as the dynamics were changing, as things felt a little long, as the pandemic struck, as the economy was in turmoil, and we didn't know what our demand was going to look like. Our demand has been more robust. We're seeing the fundamentals improve. We've also taken the opportunity to look at the capital cost of these projects and drive that down because that's one thing we can control on the front end somewhat, and we're working hard with our partners to drive towards an FID. All of these things that we talked about are constructive towards those projects. So we think the fundamentals are improving, and we hope to make an FID some time in the not-too-distant future.

Great. Maybe if we could shift gears a little bit, back to the Renewables business. I mean you talked about -- and you mentioned this earlier, you said, as we talked about those 4 core businesses and that mid-cycle EBITDA, and you talked about how you thought that the Renewables business or the low-carbon solutions business could be $1 billion business 5 years out and a $2 billion business 10 years out or so. I mean can you -- what do you see as the potential growth opportunities, both within renewable diesel as well as within other parts of the energy transition, that could drive that low-carbon business into another one of these core pillars of the company longer term?

Well, certainly, the easiest one to see, Ryan, isthe one right in front of us, which is the renewable diesel with Rodeo Renewed, what we're doing at Humber, what we're doing with Ryze. And I think we probably have a couple of other opportunities across the portfolio where we can utilize -- underutilize hydrocracking equipment to make 5,000 barrels a day here and there. So I think we can continue to grow that piece of the business. I -- when you think about the low-carbon fuel standard, everyone goes to California, and that's the right place to go. But it's also going to, we think, march up the West Coast of the U.S. We think it's going to Washington state, Oregon. There are states on the East Coast, coalition states talking about low-carbon fuel standard. So I do think that we'll see that, that low-carbon fuel standard may migrate with time into more than just the state of California, and so I think that will create an opportunity for additional renewable diesel type of sales. You move beyond that, then we think about the portfolio. And certainly, we have -- especially graphite that goes into lithium-ion batteries and the anodes. We continue to work with battery manufacturers to tweak that to make the performance of the batteries better. We're working next-gen batteries, lithium sulfur, et cetera. So we've got great opportunities in the portfolio, we think, around batteries to continue to move forward. Longer term, we have our solid oxide fuel cells. As you start to approach the 2030 time frame, I think carbon capture storage is going to be one. Hydrogen is very topical today, a lot of interest in hydrogen, and this industry knows hydrogen. We make it. We use it. The Chems business knows it and uses it a lot. We're building hydrogen drilling stations in Europe today. We've got some up and running. We've got -- we'll build 2 or 3 a year over the next few years. We're participating in the Gigastack consortium in the U.K. to use renewable wind energy. Electrolyzers produce hydrogen and then utilize the hydrogen in the Humber side industrial base or the carbon footprint of the fuels we produce at our Humber refinery, but that's a 5-megawatt electrolyzer. We're going to try to scale up to 100. And there's a lot of work that needs to be done and a lot of investment and a lot of technology that's got to happen between now and then to scale up these electrolyzers. So today, the world's largest electrolyzer is 20 megawatts, and so that's 4- or 5-megawatt trains strung together. We actually looked at doing hydrogen, renewable hydrogen at our facility in Rodeo, and we just came to the conclusion that we just -- it wasn't quite ready for prime time. We need about 100-ish million standard cubic feet a day of hydrogen at Rodeo Renewed. And you think about 50,000-barrel-a-day facility, relatively small facility compared to a refinery, a big facility for a renewable diesel plant. But still on the order of 100 million standard cubic feet a day of hydrogen, we would need 750 megawatts of electrolyzer capacity to make that 100 million cubic feet of hydrogen. There's a wind farm next door that's 20,000 acres that makes 500 megawatts, and so we don't think the power is there. But two, you just think about the cost and the scale issues of trying to scale from a 5-megawatt unit to something that's 750 megawatts, and so it's not quite ready for prime time. But I do think an area that's primed for technology development and investment is something we're highly interested in pursuing at Phillips 66.

Maybe -- I mean you talked about some of these other businesses. The European majors have put the retail and marketing arms of their business kind of at the center of their energy transition efforts in a -- that direct contact with customers is a big focus of a lot of their growth plans. I mean what role do you envision your retail and marketing business plan in the transition over time? Is there a chance that we see you expand into EV charging stations or hydrogen stations? Or is this not -- do you not see it playing a material role in terms of an attractive place to put capital going forward?