Phillips 66 Q3 FY2024 earnings call

Management Statement and Operational Highlights

• Strategic Priorities: Since July 2022, $12.5 billion has been returned to shareholders through share repurchases and dividends, approaching the $13 billion to $15 billion target. Refining costs have been reduced by $1 per barrel. Sold a 49% interest in a Switzerland-based retail joint venture for approximately $1.24 billion, with asset dispositions expected to exceed the $3 billion target.
• Business Transformation: Achieved the $1.4 billion business transformation cost reduction target ahead of schedule. DCP Midstream synergy target of $400 million was achieved, with total uplift in mid-cycle adjusted EBITDA to $1.4 billion.
• Midstream Business: Advanced the wellhead-to-market strategy through organic projects and strategic transactions like the acquisition of Pinnacle Midstream. The Sweeny Hub became the second largest NGL fractionation hub in the U.S. with the completion of Frac 4 in 2022.
• Los Angeles Refinery: Plan to cease operations in the fourth quarter of 2025 due to market dynamics and long-term sustainability concerns. The company is evaluating the future use of the property and will work with California to supply transportation fuels during decommissioning.

Segment Performance

• Refining: Results decreased primarily due to weaker crack spreads. Capture was 92% in line with prior quarter. Acceleration of depreciation due to the plan to cease operations at the Los Angeles refinery impacted results. Full year turnaround expense is now expected to be $485 million to $495 million, a reduction of over $100 million from original guidance.
• Midstream: Adjusted EBITDA on a trailing 12-month basis increased to $3.7 billion from $2.1 billion three years ago. Midstream adjusted EBITDA is ahead of 2024 guidance despite weaker natural gas and NGL prices. Seasonal maintenance costs and lower equity earnings were partially offset by higher margins on LPG Exports.
• Chemicals: Results increased mainly due to higher polyethylene chain margins and lower costs. Seasonal softness is expected in Q4, but long-term improvement in the macro environment is seen.
• Marketing and Specialties: Results were higher mostly due to seasonally stronger margins. Renewable fuels results decreased due to lower realized margins. Q4 is expected to see a seasonal pullback in earnings.
• Renewable Fuels: The Rodeo Renewable Energy Complex produced 44,000 barrels per day of renewable fuels during the third quarter.

Guidance

• Refining: Worldwide crude utilization rate expected in the low to mid-90s in Q4, with turnaround expense between $125 million and $135 million in Q4 and full year $485 million to $495 million.
• Balance Sheet: Expect to finish the year with a stronger cash/net debt position due to asset dispositions, with focus on returning cash to shareholders and debt reduction. The Swiss business transaction is expected to close in Q1 2025, and the Germany/Austria retail business is in active negotiations.
• Chemicals: Anticipate seasonal softness in Q4 but long-term improvement in the macro environment for chemicals.
• Marketing and Specialties: Q4 expected to see a seasonal pullback in earnings consistent with mid-cycle Q4 earnings.

Risks

• Refining Market Volatility: Fluctuations in crack spreads and general market conditions impacting refining results.
• Regulatory and Market Uncertainty: Uncertainty around the long-term sustainability of refineries, particularly in regions like California, due to changing regulations and market dynamics.
• Commodity Price Fluctuations: Impact on working capital and margins due to falling commodity prices, affecting various business segments.

Question and Answer

• Q: John Royall asks about the decision to shutter the Los Angeles refinery and balance sheet outlook.

A: Mark Lashier states the decision was part of long-term asset evaluation due to market pressure and California's policy shift away from fossil fuels. Kevin Mitchell mentions expectation of a stronger balance sheet by year-end due to asset dispositions.

• Q: Roger Read inquires about cost savings and inflation.

A: Kevin Mitchell and Rich Harbison discuss cost reduction initiatives achieving $1.4 billion in savings and the impact of inflation on operating costs, with focus on controllable costs within the company's control.

• Q: Neil Mehta asks about balance sheet and chemicals/marketing outlook.

A: Mark Lashier talks about chemicals' long-term improvement despite seasonal softness, and Brian Mandell mentions seasonal pullback in marketing earnings in Q4 consistent with mid-cycle trends.