Phillips 66 (PSX) Earnings Call Transcript & Summary

Well, good afternoon, everybody. Thank you for joining us the next corporate session at the Bank of America Global Energy Conference. We run our refinery focused event in the spring. At this event, we're really trying to get a diversified view as to the key players across all elements of the value chain. And with that in mind, I'm really delighted to introduce Phillips 66 is our next set of speakers. So guys, thanks very much indeed for joining us. I'll just introduce very quickly who we have today. Mark Lashier, who's the President and COO of the company; Kevin Mitchell, my countrymen, CFO of Phillips 66. I will not mention his address at the weekend, but we can take that some other time. And Jeff Dietert, Vice President of Investor Relations. Guys, in all situations, thank you so much for spending some time with us today. It's a very, very interesting time for the sector for a number of reasons.

But I want to kick off the question in, however, at a fairly high level. Mark, if we look at the generic strategy, I'm going back to the separation from the ConocoPhillips, there was an expectation that EBITDA would be diversified by building out using the cash flows or the free cash flows in the refining business to build the other parts of the portfolio. So where do you think we are in that process? And as you came in as President of the company, how do you think the strategy shifts after the experiences of the last year?

Well, thanks, Doug. I think that's a great question. If you look back over the time since spin that there has been a shift in the allocation of capital investments. The refining business has done quite well, generating cash and PSX has grown pretty aggressively in the Midstream business. So we've grown the Midstream business through the MLP structures from a business generated $500 million EBITDA to about $2 billion in EBITDA. And outside of PSX capital budget, CPChem has grown their chemical presence quite aggressively. They self-fund their capital, so it doesn't show up in our capital budget, but certainly, there's the interplay between distributions from CPChem back to owner companies and that impact. So it really has in effect been a redeployment of capital into Midstream chemicals. And now you see our emerging energy segment. So we are -- we've introduced a new -- what will eventually be a new standalone segment. We stood up an emerging energy business development group about a year ago. And we're identifying opportunities to grow that to another $2 billion standalone EBITDA kind of business by 2030. And we should be halfway there by the middle of the decade. The cornerstone of that is our investments in renewable diesel. And so we're well on our way to capture that. But we consistently had a very underlying strong commitment to financial strength, disciplined capital allocation and returning distributions to our shareholders. So part of that refining cash has been returned to our shareholders, we've had a policy of reinvesting 60% of our cash back in the business, 40% return back to our shareholders. So that, over the long term, has been very consistent. And we're really glad to be coming out of the COVID turmoil, the challenges we face there. And in the third quarter, as you know, we generated enough cash flow to cover our capital spending and to cover our dividends and our debt repayment in October, we increased the dividend just as a signal to the markets that we feel like we're back on track that kind of mid-cycle cash generation. Our balance sheet is strong and getting stronger. We've been able to pay down debt, and we are on path to get it back to pre-COVID levels. We took about $4 billion in debt to just kind of as an insurance policy during COVID, during all that time of uncertainty, and we're well down the path of paying that off, and Kevin can provide those details. But if you think about the way we're allocating capital, the first piece goes to sustaining capital. So while we may be taking cash from -- that's generated by Refining and redeploying it in other business segments, we've got to keep that Refining getting good shape, efficient, save, reliable operations and we spend about $1 billion a year doing that across Refining, Midstream and other business segments. And then we -- the next bit of cash goes to dividends, safe, secure, growing dividend. It's at about $1.6 billion today. And as we pay down that debt and as we return to mid-cycle cash generation, then we've got more options where we can do with that. We can look at more growth opportunities, but we're going to be very disciplined around capital for the next couple of years. So the next 2 years, you'll see a capital budget that's at or less than $2 billion. And so that excess generation either goes towards paying down more debt or returning more cash to our shareholders either through increased dividends or through share repurchases. So we feel like we're very constructive around that. We're cautiously optimistic about things returning. There's still some noise out there around COVID, but the global population seems to be -- with each wave that comes, they seem to deal with it a little better. And in countries that are talking about lockdowns, they're talking about lockdowns focused on the unvaccinated and things like that, and the population seems to be poised to move beyond COVID. So that's kind of where we are. Kevin, maybe you want to go into the balance sheet, what we've got on our debt.

Sure. I mean we -- as you know, we added $4 billion of debt last year to see us through the pandemic period, just to put that into context debt provided 2/3 of the cash we needed to run the company last year. So now we're on an aggressive debt pay down strategy, cash flow, cash generation is returning. We paid off $1 billion through the first 9 months of the year. We have another $0.5 billion we will take care of before the end of the year. We have a $1 billion maturity -- it's actually $2 billion maturity in April were early calling half of that in using the proceeds from last week's bond offering to finance that. That will leave $1 billion in April that we will pay down, and we have other options or other flexibility around debt that we can reduce next year. So we see a nice trajectory to getting the balance sheet back to where we want it to be. And as we get to that point and the cash generation there gives us a lot more flexibility in how we think about other options like returning more cash to shareholders.

Well, guys, I appreciate the intro comments. I know that Daniel -- sorry, I should have introduced my colleagues. So Dan Lungo, our credit and investment grade analyst, who's joining us on the call. I'm sure he's going to want to delve into in a bit more detail, Kevin. And Kalei Akamine, is still big topic nowadays, Jeff, is renewable diesel. So we now are going to get into that a bit as well. But before we do that, I just want to ask you about maybe Kevin to pick up on your comments. Post the PSXP decision, what is the right level of debt? And if I can put it in context, after the, let's say, the COVID shock from last year, as a perception of what the right level of debt shifted now that we've seen just how deep some of these downturns going to be?

Well, I really don't think our view on absolute debt level has changed. So we were at on a consolidated basis, which is how we always look at it, i.e., including all the debt at PSXP, we were at $12 billion pre-pandemic. We added $4 billion, that was dramatic and it was painful having to do that. But if you step back and you look back and we went into the pandemic with A3 BBB+ credit ratings. And here we are now 18 months later, we had negative outlooks on both the ratings. Those have both been lifted. We're back to stable ratings. We're on a trajectory to reduce debt. So I actually think it validates that the balance sheet as we were gives us sufficient flexibility, enough financial strength to be able to deal with the downturns, the cyclical moves in the market. I would also say the pandemic, I don't think that falls in the category of the normal down cycles. That was something very unique. And the fact that we were able to weather that without any -- or ultimately any adverse rating actions is I view that as a positive sign. One thing we have done is we've sort of reassessed what we think minimum cash balances need to be. And so the one shift, and if you think on a net basis, this is a form of balance sheet strengthening is we probably need to carry a bit more cash than we had been just to provide a little bit of added buffer and flexibility around that, but that's not dramatic. We're not going to be inefficient with the balance sheet that have unnecessarily excess amounts of cash because that's a very inefficient use of capital. But nonetheless, we still think that we can probably be okay, carrying a bit more cash just gives us a bit of flexibility.

Well, I just say I know Daniel is going to want to dig into that a little bit. But if I may, you did increase the dividend recently, and we were actually -- we had a session with Marathon Petroleum earlier. And my observation was that their yield right now is about 3.6%. Yours is north of 5%. So it seems the dividend increase has just led to a higher yield that hasn't actually translated to a market recognition of value. So how do you think about that? How do you think about what the market needs to see and how you respond accordingly? And obviously, it's a kind of a buyback question, I guess. And I've got a follow up on the same kind of topic.

Yes. So the dividend increase was very much a function of we have had -- we've increased the dividend every year since our formation in 2012, year-over-year increases in the dividend. And while in 2020, we did not increase the quarterly dividend. If you do at 2020 versus 2019, you still saw an increase because of the timing of the 2019 dividend increase. And we have a significant number of dividend-focused investors. One of their screening checks is year-over-year increase in the dividend. And so this final fourth quarter of 2021 dividend was our final opportunity to get -- keep that year-over-year street going. And we felt it was important to acknowledge those investors that have been consistent with us. It's a very modest increase. It enables us to keep that streak alive without really putting any -- financially, it's pretty insignificant in terms of the overall impact. And so we felt it was appropriate to do that. And obviously, the yield is a function of where the share prices are trading. But fundamentally, we see value in the shares as they are now, and I think this is partly where you're heading is we'd like to get back to share repurchases because we think our share price represents a terrific value. We need to get further down the debt pay down path. We need to see that we're at somewhere around about mid-cycle cash generation, the more progress on debt pay down before we get back into share repurchases.

Well, I'd like to give you a pivot on that topic then about mid-cycle cash generation. Jeff, is definition of mid-cycle changed? And whether this is an ESG question on a longer-term demand question. And look, it's not an issue, I particularly think about. But the question that comes up a lot is what is the terminal value of a hydrocarbon business, which ultimately is where you are? So Has the perception of mid-cycle cash flow changed in your mind?

I think as we look at mid-cycle, when we look at Midstream, and I'll compare this to the November -- or excuse me, it was November 2019 Investor Day, we looked at Midstream as kind of a $2 billion a year EBITDA contributor. Now it's $2.3 billion, maybe a little bit better. And so Midstream is continuing to increase. When we look at our marketing segment, it's gone from $1.4 billion, $1.5 billion and $1.5 billion, $1.6 billion. So we've seen that business improve. As we look at chemicals, we're showing some of the earnings power there. We think that's a $2 billion mid-cycle contribution. On Refining, I think that's where we get a lot of the questions. And we look at the 2012 to 2019 period is kind of the mid-cycle period, we were at about $3.7 billion of EBITDA on average during that period of time. Now what we do see in Refining is it comes from different components. And we're looking now at 2022 being similar to 2019 from a demand and refining capacity perspective. So we think we've got the potential to get there on a gasoline diesel crack perspective. On the crude differentials, we're seeing or expecting to see and have already seen some increase in OPEC volumes coming into the market. And so a wider heavy sour discount, we think, is a good bet for next year. We've seen some widening in the Canadian heavy discount, which will also be influenced there. And so we see it coming from different components, but moving towards that mid-cycle environment. As we think about longer term with renewable diesel, with the Rodeo Renewed, with the emerging energy contributions as well, we see meaningful contributions from those segments. So that's kind of the way we would circle it and talk about it at this point.

Yes. If I could, a terminal value question, Doug, the way we're thinking about that is, if we look at our refineries today is these are assets that manage carbon, hydrogen, electrons and the assets that will have a terminal value are the ones that are very good at that. Was is that figure out how to lower the carbon intensity, to figure out how to provide solutions, to figure out how to leverage carbon capture make more petrochemicals, things like that. So there's a lot that can go on with those technologies that we have in the refineries. And I think that the more complex the refinery, the more optionality you have and the greater likelihood that you'll have a robust terminal value around that, and those are the assets we're going to focus on going forward.

Well, I realize you did. If I can kind of take what you just said and one with that a little bit. You mentioned the $3.7 billion mid-cycle EBITDA or at least the average over that period, Jeff. The weak links in your portfolio, I guess, you've addressed Rodeo with Rodeo Renewed, but now you've shut Alliance. Can you just kind of -- is there anything left in the portfolio that is vulnerable to those down cycles? I know Alliance with a special situation.

Yes. I think as we go through our strategic planning efforts every year, we review all the assets in the portfolio, and that's really where the idea to convert Rodeo Renewed came from. As you know, we had started a process to divest the Alliance Refinery. We had determined that it would likely be worth more to a third party than it was to us. We had a number of bidders interested and then the hurricane hit, and there became some cost in bringing it back to a refinery. We went through all our alternatives and determined that the terminal option was the best option. There are a number of pipelines that come into Alliance and out of Alliance. It's right on the river, so we can ship up the river domestically, we can export. So it makes a lot of sense as a terminal, but we'll continue to reassess and assess our assets on a regular basis and try to optimize our portfolio over time.

I appreciate the answer because at the end of the day, what I'm really trying to get at is when we think about valuation rightly or wrongly for your business, we think about a stacked series of annuities essentially my kind of working assumption is gas is going to -- hydrocarbon demand is going to be around for a while. As long as you look after it, the assets are going to last pretty much as an annuity. That's how we think about it. So I appreciate those answers. I do want to ask you about the 40%-60% split. I don't think I've ever actually tried this on. How did you come up with a ratio? What's -- how do you come up with that as the right mix?

Go ahead, Kevin.

None of us were here when that was done. But honestly, I don't think there was a particularly scientific approach. It seems like -- and it's -- we characterize a 60%-40% -- 60% reinvestment, 40% return cash to shareholders. And it just -- it felt like a reasonable balance between we knew you going back to 2012 year, we saw that there were going to be good growth opportunities in the Midstream business. We wanted to be able to participate in that build out. Remember where we were 10 years ago, Shell was booming and the need for the Midstream infrastructure and it felt like an appropriate balance that would allow reinvestment in the business. But as we very much appreciate in this business with the commodity volatility, shareholders need to see a regular cash return. We need to show that discipline. And so the 60%-40% felt like an appropriate balance. I'd argue that if you're a -- if all you had is Refining then maybe 60% is too much reinvestment in the business. But given that we were building out other segments and obviously, the exposure to chemicals as well in the marketing business, it felt like 60%-40% was an appropriate balance to make. But it wasn't any detailed scientific analysis we come up with something.

Yes, I talked to Greg about that, frankly, coming on board, and he said the logic really was one of -- not overpromising. So if there's movement, there should be movement to the upside on the 40% back to shareholders and down on reinvestment. Certainly, if we don't have opportunities that can deliver more value than buying our own shares back, we should just take it all to share buybacks. So we do focus on very strong return projects and investments. So we're pretty dogmatic about requiring very high return on these projects to get that growth capital, and there's going to be downside on that capital investment pressure because of the way we do that and upside on the return to shareholder side of that percentage. So it's a bit of under-promise over-deliver with 40%.

So what I wanted to get to is to go kind of go right back to the beginning and say, okay. So let's talk about value recognition. And Kevin, I'm afraid it kind of comes back to you because this 40%-60% split, I look at the dividend, then I think, okay, let's assume that the dividend had perpetual growth. So I think about it as a dividend growth model. There comes a point where the burden of the dividend, obviously, increases in absolute terms, but share buybacks can manage that. So you can have dividend growth by reducing the share count as opposed to increasing the absolute dividend. So within that 40% return, how do we think about the split? Is it a structure dividend growth target, dividend as a promotion of cash flow? How do we think about it?

Well, the way to think about the dividend is, and this is not truly quantitative. There's a qualitative element to it. But secure -- sorry, secure and affordable, right? We don't want the dividend to be at a level where you hit a down cycle and the dividends a threat. So secure affordable competitive, both within our peer set and also with the S&P 500 broader average. And clearly, we're going to exceed those and then growing to be able to check that annual year-over-year dividend growth. You're very correct that with the share buybacks, when you got both going at the same time, and we've actually been able to do this in previous years where the actual cash outlay for the dividend really has barely changed even though we've increased per share dividend because of the impact of the buyback program. And so that sort of plays hand-in-hand there that we can increase the per share dividend with minimal increase in cash outlay as long as we've got the buyback going at a reasonable level. And that's generally played out for us. Obviously, over the pandemic exceptional circumstances, we had to lay down with the share buyback program for a period of time, but expect to get into that.

I'm going to leave that topic there, but I don't want to explain where my head is and asking that question. So we do all our fancy discounted cash flow math to come up with the valuation. But if you look at the rate of dividend growth and you've delivered on a sustainable basis with the current yield, you can kind of make a case that says, that's why the stock is undervalued. So the dividend growth visibility becomes a very simple DDM model for a generalist investor, overcomes a lot of hurdles, and that's why I asked the question that way. But maybe something to think about that. I'm going to just pause for a minute and pass it over to Dan and then to Kalei because they have got a handful of questions they would like to ask you. Dan, do you want to go ahead?

Thanks, Doug. So you guys hit on a bunch of the topic that was going to bring up. I just want to dig a little bit more into the detail. You mentioned that you want to run with a higher cash balance than you had in the past. Just looking back at past years, it looks like you tended to end the year with $2.5 billion to $3 billion of cash in the balance sheet. Is that in the new target for balance sheet cash is in the $3 billion to $3.5 billion range? Or is it closer to $4 billion that you want to leave on the balance sheet?

No, I wouldn't look at it that way. I think if you look at quarter ending cash balances, we had, at times, gone down as low as $1 billion. In fact, I think there's 1 quarter where we were somewhere in the order of $850 million as our quarter end. So -- and we'd always targeted our quarterly cash balances to be around about $1 billion as a floor, generally speaking. And so that's what I referred to when I say higher cash balances. Cash is often not a good representation just because of timing of working capital, inventory movements that take place over that fourth quarter of the year. So ending year cash is not necessarily a good guide to how we think about sort of operating minimum levels. And if you look through some of the other quarters, you'll get a better representation of that. So it's probably -- instead of $1 billion, it's probably more of a $2 billion kind of threshold that we think about.

Perfect. That's really helpful. Also, you mentioned the $12 billion debt target laid out how you can basically get there by the end of the end of next year, if you wish. Can you kind of just provide some color on the recent refinancing of the April maturity? Obviously, that $2 billion maturity would have gone a long way to immediately get into your target. But can you just kind of describe the rationale behind refinancing a portion of that?

Yes. So a couple of things. One is the $2 billion in one slug is a big -- that's a big maturity to take care of at once. And so we felt that we were probably going to have to do some element of refinancing around that. The second is, as we look at our maturity profile, we have a lot of near-term maturities. So we didn't need all $2 billion in order to be able to get back to where we are targeting from a balance sheet debt standpoint. And as you look broader over that longer time horizon and our maturity profile, we had nothing out there beyond, I think, 20 years. And so this doing a 30-year issuance, very favorable market conditions, both when you look between where the treasuries are, where the credit spreads are, this felt like a great opportunity to lock in some long-term debt at a very attractive interest rate. So just for context, the April maturity, those were 10-year notes that were issued back in 2012, 4.3% interest rate. We just did this 30-year $1 billion at 3.3% coupon, 3.339%, I think, absolute yield on it, but very attractive time to get that done.

Yes. And just week over week, if you look where Valero placed their deal today, you saved about 15 basis points between the treasury move and spread movements. So that really well. So you mentioned the optionality around the upcoming maturities. On your earnings call, you mentioned how the PSXP do that gives you a lot more options in terms of debt reduction. So can you kind of describe the parameters you look at when you're deciding whether to call banks early if the PSXP bonds would make sense to take out early? Also, a follow-up to that, have you decided how you plan to treat the PSXP debt? Do you plan to make it carry? And you don't know how to go into details of how that would be taken that?

Yes. Well, generally speaking, we've been trying to pay down debt that does not require any prepayment penalties or make-whole around it. Obviously, there's a component of make-whole with $1 billion that we're prepaying of the April maturity. But as you look to, for example, PSXP has a term loan that is due in the first quarter of next year. So that's easy -- that's an easy opportunity to do some incremental debt repayment. It's low-cost debt. So it's not as though there's a big arbitrage on that funding cost, but it's available. It's coming due. And the other benefit -- the other sort of incremental flexibility we have with the PSXP roll up is that we have access to all of the cash that's not distribute -- that wasn't being distributed previously, right, effectively, the coverage cash. And so that's another source of flexibility in terms of how we think about that.

And how you want to treat the PSXP debt? And if you don't have an answer yet, that's fine.

Yes. And our intention is to get that PSXP debt through whatever means we decided to go about it by the fact that we have it up at the PSX level to give us complete flexibility to that.

Perfect. Bondholders will be happy to hear that. I'll pass it to Kalei.

Thanks, Dan. I want to hit the Renewable business here a little bit. So the first question is on this $2 billion EBITDA number that was put out for the emerging energy business by 2030. I think there's relatively good visibility around renewable diesel in that we can put on and come up with some figures and some estimates. But I'm curious as to what else contributes to this figure?

Sure. Yes. As we look at the opportunities in what we call our emerging energy business, we focused on 4 key pillars. The first and kind of the cornerstone is renewables and renewable fuels, renewable diesel. You'll also see activity around sustainable aviation fuel, that's getting a lot of momentum. We can pretty modestly modify our Rodeo assets once they're up and running to produce more sustainable aviation fuel. We're looking at other opportunities. We've signed an MOU with Southwest Airlines to explore that, to look at opportunities, to have drop in sustainable aviation fuel right now. Most of them have to be blended up to 50%. And so we've got our energy research and innovation group looking at that. We're in contact with jet manufacturers talking to them about optimizing sustainable aviation fuels for their engines. So we're really going at it from a technical perspective and an economic perspective, at the end of the day, have a solution that we can get returns on from sustainable aviation fuel like what we're seeing in renewable diesel. The piece that's missing is what is the regulatory environment around sustainable aviation fuel, what incentives are going to be there, they're going to have to be there. We've had these manufacturers tell us, look, we don't think that hydrogen is a solution for aviation. We certainly don't think batteries are the solution for aviation. We need your help. And we're big in aviation fuel today. We know that business, and we're going to apply our technology and our know-how to get there. We're also -- around the very important dimension of the renewables is the destock access. One of the attractive things about our Rodeo facilities that's sitting on the water on the West Coast, we can access feedstocks from around planet. The front end of that facility is going to have great flexibility. That's where a lot of the investment is, frankly, having the flexibility to bring in a variety of feedstocks. So we can go out and trade around that asset. We've got a commercial group that's doing that today, taking renewable feedstocks into our Humber Refinery in the U.K., producing renewable diesel there. And so they know those markets. We can trade around those markets, and there's going to be play between the carbon intensity of feedstock and the cost of that feedstock. So we will be able to put in front of that asset the best possible mix of feedstocks to drive that and to capture the low carbon fuel standard benefits, the blenders' tax credits and the RIN values that we need to, to make those things pay off and we should see a similar regime around sustainable aviation fuel. So that's that first pillar. And when we have success there, we can scale that across other assets. So we're looking at other assets that can do the same thing that have the same kinds of strategic advantages. I think you mentioned the capital advantage, brownfield investment like that. We're going to invest about $1 -- equivalent of about $1 per barrel and a lot of other -- I'm sorry, gallon -- $1 per gallon and other investments are more like $3 per gallon capital. So it's going to be very capital efficient. It's going to be very competitive from a feedstock access perspective. And we're going to be able to take that diesel all the way to the customer at the pump. We're reconfiguring marketing assets in California to be able to handle renewable diesel. We've already done 600 stations that can take that so we can control that value chain all the way to the customer, and we like that model, and we will look at where we can replicate that model elsewhere in our system. And then you start moving across those pillars. We've also -- we're also looking at things like carbon capture and storage. We've got opportunities around Rodeo again to demonstrate the viability of that to lower the carbon intensity even further of the renewable diesel production there. It takes a lot of hydrogen to hydrotreat these materials to make renewable diesel and hydrogen steam methane reforming produces a lot of carbon dioxide. We'll have, again, an asset on the ground, a pipeline that's delivering crude oil to that asset today. It's not going to be delivering crude oil at some point in time. And so we can repurpose that to take carbon dioxide back to the Central Valley oil fields, and we're in discussions with partners that can sequester that CO2. And if we like how that works and that's economic, we could create a trunk line or we can take and sequester carbon dioxide for other carbon dioxide producers in that region. So really lower the whole carbon footprint of the entire complex, whether it's a power producer or other refineries in the neighborhood. And we've got third parties that are investing in solar installation to provide electricity, solar power to Rodeo facilities. That lowers the carbon intensity of what we're doing, and we can do that across our fleet without investing our capital in wind or solar, but we would certainly like to use solar-based electrons and wind-based electrons to lower the carbon footprint is what we do. And so that's the carbon capture pillar and the hydrogen pillar, where we've got initiatives in the U.K. to look at green hydrogen to take wind power off the North Sea, to reduce that consortium and produce green hydrogen for consumption at our Humber Refinery. In Switzerland, we've got fuel stations that provide hydrogen -- green hydrogen as a transportation fuel for truck fleets. And so we have electrolysis systems that generate the hydrogen from water and provide that in Switzerland. So we're exploring those pillars in a way that we're not going to jump in with both feet until we see line of sight on good solid returns and good solid investments. And then there's batteries. Today, we produce needle coke. Needle coke is -- the needle coke that we produce is the preferred feedstock to produce synthetic graphite for the creation of anodes in lithium-ion batteries. And we want to explore that value chain to see if we can integrate forward in that value chain and capture more of that value. You've seen us make an investment in a company called NOVONIX. We screened a number of companies, and we have criteria to make sure that those companies are solid. They have good technology. They have good sound green technologies for the production of anodes and NOVONIX goes to the top of our list, and we were able to make a 16% investment in NOVONIX. So we can collaborate with them on optimizing the conversion of our needle coke into the best possible anodes that perhaps charge faster have longer life and better life science. And so that's what that investment is about. There's a growth of a whole ecosystem around lithium-ion batteries, both in North America and Europe to get away from the near total dependence on China for the lithium-ion battery supply chain. And so we've got needle coke capacity in the U.S. We've got needle coke capacity in the U.K. And so we're looking at those as 2 centers that we can join that value chain. So those are the kinds of investments that we're going to make. Many of them will be small on this front end, like our small investments that we've made in Shell Rock Soy Processing and I want to understand the dynamics around getting soybean on in front of our renewable diesel or this investment we made in NOVONIX or the kinds of investments that we're making around hydrogen production in the U.K. and Europe. We're going to walk before we run because we believe that the energy transition future is an all of the above kind of portfolio around energies, and we want to be able to position ourselves in those technologies and those energies that are going to create value over the long term. There's going to be winners and there's going to be losers, and there's going to be dead ends. We want to make sure we don't pick the dead end, and we don't take the loser. So we're going to be cautious. We don't have to be out on the leading edge. The leading edge of these technologies, but we believe that we've got the technical know-how and the financial wherewithal to advance projects that look like they will return a solid return for our shareholders for our investments.

Are you sure that one was $2 billion. I think Kalei has got one more. I want to come back to a couple of these. Go ahead, Kalei.

Just 2 real quick follow-ups on all that. So first on [indiscernible]. So there's a credit being considered right now $1.25 plus $0.50 a variable based on CI score. Is that enough for you guys to optimize your renewable diesel plants around sustainable aviation fuel? And the second question is, we've seen a couple of deals for soybean oil in the market, but none for lower CI feedstocks like cooking oil or animal fat. So I'm just wondering what that says about the tightness of that market?

Well I'll address the feedstock market first. We're actively trading out there. The -- It's a matter of concentration. It's easy to go identify a soybean processing facility, making an investment there to secure that, that's a good position. I think that the key is to have the ability to produce or to consume a wide variety of feedstocks, but we're not trading in used cooking oil and animal fats and all of those things. And we're looking at opportunities to secure positions in those, but they're also -- it's more dispersed. If you think about used cooking oil all across Asia, Europe, North America, South America, we've got to have access to those markets, relationships in those markets where our commercial can go out and aggregate those and they're doing that today. And -- but I think longer term, we will have to make more of a direct investment in that network to secure access to those feedstocks. And I think the first question was around the subsidies targeted at sustainable aviation fuels that we think that those need to be more robust, frankly. They're not where they need to be to justify the investment. So we're still working on the technologies. We're still working on potential partnerships. We're looking at the cost structure of those investments, but we don't believe that the incentives are robust enough to generate the kind of investments that you're seeing in renewable diesel.

You recall renewable diesel gets LCFS, RIN and BTC. And so there's more substantial support there than for [indiscernible].

Kalei, I think I'll take it back, if that's okay. We've only got a few minutes left, guys. So I actually wanted to touch on a couple of the renewable energy business questions at a high level. Europe is kind of anti fossil fuel right now, you could argue. So are you seeing more opportunities maybe for building that business or indeed consolidation of the legacy business as other major players exit?

Specifically, in Europe, I think, yes. I think that what the opportunity we see in Europe is because of the regulatory regime and their positioning around fossil fuels is it's kind of an incubator for some of these emerging energy businesses that we want to pursue. And so we're viewing it as an opportunity to accelerate the development around blue and green hydrogen and to accelerate the development around batteries and look at those things in because of the regulatory opportunities that, that affords us. I don't know that we see direct line of sight on aggregating any refining businesses in Europe.

Let me explain my question, Mark. So we've seen Shell exit a very high-quality business in the Permian. And the whole industry seems to be under pressure to their decision, I guess, is to reduce their company carbon footprint will not necessarily reduce the industry's carbon footprint. So if you saw other traditional energy businesses for Shell like a refining business or a marketing business or a fuel station business, should we think of M&A opportunity, which we normally think of as the U.S. shifting to Europe or not something in your future?

Doug, one comment I would make, and then I'll let Mark come back. We've recently set emission target reductions, and we've done that on a -- rather than an absolute basis on per barrel basis precisely for that reason to allow for growth. It's substantial reductions that we've established, but they're on a per unit basis.

So you would still be able to -- go ahead, Mark.

Yes, if we saw assets -- and it's going to vary by the regulatory environment. But if we saw assets that we felt like we had a technical advantage to bring to the table or we saw a lower carbon opportunity for those assets that could drive in that regulatory environment that someone else concluded they just didn't want to deal with that. And sure, we would look at that. And I think that would be tougher to do in Europe. But I think, certainly, in North America, I think that there may be opportunities. We are focused on lowering the carbon footprint, the carbon intensity of the assets that we operate, we don't think the solution is simply moving those assets into someone else's hands for the purpose of lowering our carbon footprint.

Maybe I clumsily asked the question, what I was really trying to get at was, if other companies chose to exit businesses in Europe to lower their carbon footprint, are you seeing any of that trend evolving, given the pressure that some of those companies are under and would Phillips 66 be prepared to look at those kind of things, expanding into -- expanding that business overseas? Normally -- 5 years ago, we would say is Europe for Shell. Today, I'm asking is Europe an area where Phillips 66 can consolidate?

I think it's got to be kind of an asset-by-asset consideration.

Right. And again, I would come back to the regulatory. We don't want to wander into a regulatory somebody else has walked away from. But if we feel like we understand that situation, we've got technologies that could create value in those assets then sure, we would look at it. But it would be it's not going to be a blanket yes, we would go in and acquire assets in Europe to consolidate because they're low cost. There's got to be some story there around that investment where we've got a technology, we've got an opportunity in that regulatory environment to create value.

[indiscernible] is not an area of where we're highly focused right now.

Out of the Interest. That's what I was really trying to get at. So I've got 2 final questions, guys. I know we're out of time. So just make quick. First of all, maybe also quick. Shell has got an activist arguing that their renewable business should not be part of their old energy business. And you're incubating the new energies business in an old energy business. Are you the right long-term owner of that business? Is that strategically will this -- are you incubating it with a further purpose or incubating it to diversify the existing earnings stream?

I think we're incubating it to diversify it. And I think we've got opportunities. Our view is that we're providing energy and improving lives. And we will provide energy and energy opportunities, and we're not forever married to oil coming into our -- the front end of our assets and delivering the same kind of refined products. We will take feedstocks in whatever form they take, and we will convert those into the materials that people need to have energy improving their lives. And so we take a kind of an agnostic view in the very long term. Today, we believe, in our Refining assets, we believe our Refining assets will be around in a very long time. We're focused on lowering the carbon footprint of those assets. But we will continue to pursue opportunities to provide other kinds of energies as the market requires.

I appreciate the answer. I just wanted to make sure that you guys versus what we're seeing with others. So my last question, hopefully a quick one. President Biden sent a letter to the FTC on fuel pricing. I'm just wondering if you would offer a comment or your perception.

Yes. Our perception is this and just having seen it, but it's an easy political target. He's under pressure around inflation. Everyone drives down the street, sees the price of gasoline on signs. It's -- this is history repeats itself. This has happened many times under similar circumstances, and I don't think the industry has anything to hide. I think it's pure supply and demand economics. You guys know that better than anyone. Inventories are low. We're coming out of just the economic gyrations around COVID, and it's just a situation where supply -- demand is surged in some segments and supply is trying to respond and so there are just market dynamics that take time to work through. So I think it's purely political theatrics at this point.

On that note, gentlemen, I'm just going to remind everybody, we've got a 5% yield with an improving balance sheet and a big buyback potential seems a pretty good setup for us and delighted you guys can be part of our event this year. So thanks for making the time. And Jeff, I really appreciate you slowing us into the energy conference this year. Thanks so much.

All right. Thanks a lot, Doug. Appreciate it. Take care.

Good to be with you.