Phillips 66 (PSX) Earnings Call Transcript & Summary

All right. We got a full room here for what is always a highlight of the Goldman conference, a conversation with Phillips 66. This is really a diversified conversation. So we want to talk about Refining, we'll talk about Midstream, Chemicals, Renewables. We've got Mark Lashier, President and CEO; Kevin Mitchell, CFO; Jeff Dietert, Investor Relations, longtime friend. Thank you all for being here and -- in Miami, and there's a lot to talk through.

But Mark, maybe we'll kick it off with you here on the macro. So how is Phillips 66 thinking about the refining environment in 2024? What are the key supply and demand factors we should be taking into consideration as we think about the margin environment? And within your own system, what do you see it real time?

You bet, Neil. And first of all, Neil, I want to thank you for having us join you here today. This is just a fantastic way to kick off the new year to knock the rest off from the holiday season and to get back in the gear of everything. But first of all, I just want to talk about Phillips 66 as being a leading integrated energy provider, downstream energy provider. We've got a diversified platform that is an attractive investment opportunity. And part of that attraction is not just the diversification, but it's the integration from Midstream, Chemicals, Refining, Marketing and Specialty products. We can deliver value across the economic cycles. And that's what it's all about. It's really taking advantage of that integration to deliver that incremental value above what -- sum of the parts might indicate that we'd be worth. We're growing our mid-cycle adjusted EBITDA. By 2025, we'll increase it by 20 -- by 40%, and it's not just a refining story. That growth is essentially in all of our non-refining segments. So we're going to see we're going to see that 60% of our mid-cycle EBITDA is outside of our Refining segment. So that's some of the things we want to touch on today. We've got compelling shareholder returns, and we're committed to returning 50% of our cash back to shareholders. And that provides clear evidence of the capital discipline that we do in our capital allocation process. And the macro going forward, we see it continue to be constructive. I'm going to have Jeff chime in on the macro. He's the expert. But from a high level, we've come off of a couple of very strong years. We continue to see in the Refining business, low inventories. The crack spreads have seasonally tightened up a bit, but distillate is still strong. Gasoline is, of course, seasonally impaired a little bit, but we see strength going into next year, barring any major recessionary activity, we think we're going to continue on a good constructive path. Jeff, do you want to chime in on things.

Yes. I think as we look at capacity growth, there was about 1.5 million barrels a day of net capacity added in 2023, that compares to global demand growth of 2.2 million, 2.3 million barrels a day. As we look at 2024, we've got another, call it, net 1.4 million barrels a day of capacity being added. And as you look at the IEA, EIA and OPEC, demand expectations are pretty broad for next year between 1 million barrels a day and 2 million barrels a day. But as we look at 2025, 2026, the capacity growth is relatively modest, and we do have a continuation of rationalization that's occurring Lyondell Houston. We've got Grangemouth U.K. recently announced, Japanese refinery shutting down as well. So only about 1 million barrels a day of growth in 2025, 2026. So not an overwhelming amount of capacity coming into the market.

That's a helpful starting off. Well, let's talk about the EBITDA bridge because in your 3Q update, you indicated a path to $14 billion of normalized EBITDA. And the reaction from a number of the investors is how do we get there? And -- because that's well above where consensus is, which is closer to $10 billion to $11 billion. So can you spend some time bridging what is driving that growth? What do you think we, as a market, underappreciate about the earnings power of the business?

There's some really strong elements to that growth, Neil, and we agree that we've got to prove our ability to deliver that. But we've got line of sight on how we're going to generate that mid-cycle EBITDA. And you really think about the midstream, the wellhead to market value chain, how we've rolled up DCP, PSXP and created this wellhead to market entity that can deliver great value. And just the what I'd call the native EBITDA coming in from the DCP roll-up is it adds $1 billion. We are aggressively pursuing synergies around DCP. We originally had a $300 million target. That's going to be $400 million plus. And then the next biggest increment is just our business transformation focus, our cost control focus, and that's going to contribute another $100 million to that midstream increment. But across the board, we're looking at $1.1 billion by the end of 2024 as a run rate. We hit $800 million by year-end of '23. And so that is baked into our plans going forward. And the beautiful thing about these cost reductions is we control those. We capture those. We have line of sight on those. We know that we have those captured, and that we're going to -- that margin variation isn't going to take that away that that's there. And so we're looking at $1.1 billion there. And then you talk about our renewable fuels business Rodeo, will be starting up in the first quarter. So it will ramp up in the first half of the year. So by the end of this year, we're looking at a contribution of around $700 million a year of EBITDA from Rodeo Renewed. And then we also -- and something new that we haven't talked a lot about is we're enhancing our commercial supply and trading opportunities. We've been very conservative on how we've optimized across our integrated platforms, and we're going to lean into that a bit. And we've already identified the opportunity to capture across the organization, another $600 million in EBITDA out of the commercial supply and trading organization. So -- and then you come down to CPChem, and CPChem has done a number of very attractive mid-cap projects that are already -- a couple of them are already online, the new hexene facility, a new C3 splitter propylene production facility. And then this year, they'll be bringing on another furnace in their U.S. Gulf Coast 1 cracker. So you look at all those things, the EBITDA -- incremental EBITDA that we'll realize in this time frame another couple of hundred million dollars. So we've got line of sight on these things. We believe in these things. And really part of what we've done is we increased from $3 billion increase to $4 billion increase based on the confidence our entire organization has on delivering on those cost elements as well as delivering on market [indiscernible].

What Jeff and Kevin, I'd be curious on you guys' perspective, you spent a lot of time with investors. When you look at Wall Street and our models as an investment community, what do you think we most underappreciate?

So I think there's a couple of elements to that. I think it's worth emphasizing that our $14 billion number is on a normalized mid-cycle basis. I don't think the Street is a mid-cycle for Chemicals in 2025. We're not 100% certain we'll be at mid-cycle in 2025 either. But for consistency purposes, we set that target out on a mid-cycle basis. So it's not a projection that that's where the Chemicals margins will be in 2025. It's what Chemicals will do on a mid-cycle basis. So I think that's one important factor, and it is part of the difference in what you see there. And I think, quite frankly, the other component is a question mark on whether we will actually deliver on the refining improvements. We've laid out a very clear path to address refining performance improvement, both in terms of utilization, market capture, cost. We're very confident that we will deliver on those. I think externally, there's a little bit of, okay, well, let's see, and we'll give credit when we see it.

Yes. That's a great point. And let's talk a little bit Kevin about refining here in a moment. Let's talk about noncore asset sales because Phillips 66 over many years has really been organically building the business, bolt-on transactions and roll-ups, but you're entering into a little bit of a different strategy here of actually starting to prune the portfolio. And how do you go about doing that in a way that's most effective?

Absolutely. Neil, we've taken a step back and really done a deep dive around our strategy. What are the core assets we really need to drive our go-forward strategy and create long-term low volatility earnings that our investors can rely on. And as you noted, we've had a great run in growing the midstream. We've got great midstream assets. We use the MLP model to build assets at a low build multiple and then trade them up in the MLP with a higher multiple. And those assets are all generating great value, but some are less close to our core strategy, maybe we don't operate them or maybe we do operate them, but they're just not key to our go-forward strategy. And if they're worth more to someone else, we're willing to monetize those assets. And I think that -- what I would say is -- like most good companies, every asset you have, there is a value that you would part with it. But the closer you get to our core strategy, the higher the multiple is going to have to be as we look at what we would do. So we're starting off with about a $3 billion look at assets that we know that we'd be interested if someone else sees greater value in them than we do. And we're having active discussions around those. It's not a fire sale. We don't have this great burning platform where we've got to exit these assets. But we do have a plan. We have gone through a process to identify those assets, and we're working that plan. Kevin?

Yes, just to add couple of additional comments. You look at what we did last year, and in fact, even into the prior year, we significantly reduced our position in Gray Oak Pipeline, a great asset, not that strategic to us, though, and it enabled us to take control of the DCP platform. We also sold the South Texas Gateway Terminal. Likewise, good assets. We had [ 20% ] ownership, we did not operate. It was the right thing to do from that standpoint. And so you can look to those as a little bit of a guide as to how we're thinking about this on a go-forward basis. The other point I would [indiscernible] today, we've said in excess of $3 billion [indiscernible] increased financial flexibility in terms of why we think about cash returns to shareholders, balance sheet debt, it just gives us flexibility across the board from a balance sheet standpoint.

Yes, that's a great point, Kevin. We've made the cash return to shareholders commitment. We upped it to $12 billion to $13 billion by the end of 2024. That's all premise based on operating cash flows. So this additional increment that we might realize from these asset sales, that's somewhat of an insurance policy to -- if there is an economic downturn or if there's something that mitigates that cash flow, we've got the revenue from asset sales to either help our balance sheet out or to supplement what we plan to do, returning cash to shareholders.

Now that makes sense. Is there a time line associated with the $3 billion?

We're not putting any fixed time line on it. Again, we don't [indiscernible] sense of urgency. We are focused on simplifying our business, focusing on our core assets, focusing on our go-forward strategy. It's really going to be a function of whether someone puts a greater value on these assets than we do.

Great. Well, let's talk about return of capital because that was the other important update here on the 3Q call that the market responded very favorably too, which is the Board raised their total returns target from $10 billion to $12 billion to $13 billion to $15 billion and another $5 billion share authorization. So walk us through the capital allocation framework. And why is now the time to be leaning into the stock?

Yes. We see upside to the stock. We see our growth opportunities. We talked about how we're going to grow the earnings over the next several years, and we're -- we've been delivering greater than 50% of our cash back to our shareholders. And we just have line of sight on what our cash generation capabilities are going to be, and that's what really drove us to elevate that. It's the level of confidence we have in our ability to capture the cost savings, to simplify our business, to focus on value creation, to enhance our refining performance, all of those things combined to create a situation where we have full confidence that we can generate the cash and return it to our shareholders. Kevin?

Yes. And I would just supplement that the $10 billion to $12 billion original target, we laid that out at our Investor Day, we're 5 quarters through that, and we've done $6.7 billion. So if you just extrapolate that, it already puts us to within that new target range that we laid out. So we feel very confident between the strength of the balance sheet, the overall business environment that we see, we feel very confident in the increased target range. And also at the same time, we increased the percent of available cash flow to shareholders to 50% or greater, and we're currently comfortably in excess of that in terms of how we're looking at that.

Yes. And Kevin, that does send an important signal around capital discipline as well. And in December, you came out with a CapEx budget, $2.2 billion, $900 million sustaining, $1.3 billion in terms of growth. Can you talk about the different components of capital allocation spend and provide progress on some of the key projects, whether it's Rodeo or the -- or your NGL well-to-market strategy?

Yes. Before I let Kevin dive into that, there's just 1 clarification on that $2.2 billion because we've been publicly stating we're going to constrain capital to $2 billion. And additional increment, you got the $900 million and the $1.3 billion for growth, but out of that growth, there's $250 million that's going to our 25% interest of debt repayment for the Bakken pipeline. And so the owner and the way it's structured, there's a cash call for debt repayments. And so that flows through our growth capital budget. So that's a unique piece that we exclude from our $2 billion in capital. It just happens to show up there. There are other methodologies we could use, but that's the way we choose to let it show up. So Kevin, you can...

Yes. So just to break down that capital number, the growth capital of $1.3 billion. Mark already talked about the $250 million of debt repayment. There is about $350 million of midstream growth capital, excluding that debt repayment. $350 million, that is primarily focused on our NGL wellhead-to-water strategy. And so that's pursuing incremental opportunities that we see to invest around that system. Now we have that full [indiscernible] in Refining, we have about $600 million of growth capital, and that funds the completion of Rodeo Renewed. That's the largest single project that we're investing in, in 2024. So you got the completion of Rodeo Renewed. And then you also have the smaller high-margin, high return, quick payout projects that are helping us in our performance improvement plan around increasing market capture, sustaining higher utilization rates, improving that overall EBITDA per barrel contribution from Refining. That really accounts for the growth capital. The sustaining capital of $900 million, it's probably worth just clarifying, historically, we've been at about $1 billion. We're saying it's a $300 million reduction from history, but you have to recognize that we've added in the DCP asset base, which is about $200 million of sustaining capital. And so the $1 billion becomes $1.2 billion. And then with our reductions, you get to about $900 million sustaining capital budget.

And your message is this too is effective [ governor ]. It would take a lot for you to move above?

Right. Correct. Yes.

Let's pivot to refining and the operations. It's -- the company has come out and indicated it's looking to increase its market capture by 1% to 2% a year through the implementation of a lot of little projects, right, 10 to 15 projects. Can you talk about the execution of these projects? And -- how do you see it -- how should we, as an investment community evaluate whether you're tracking and progressing because Jeff and I talked a lot about this capture rate as a metric. It's a noisy metric.

It's a very noisy measure.