Phillips 66 Q4 FY2024 earnings call

• Strong operating performance in a challenging margin environment, with midstream results providing a resilient platform.
• Achieved shareholder distribution target with $13.6 billion distributed since July 2022.
• Refining set goals to improve performance, lower costs, record clean product yields, and reduced costs by $1 per barrel.
• Exceeded $400 million synergy target on DCP midstream acquisition, increasing Midstream's mid cycle adjusted EBITDA by $1.5 billion.
• Exceeded $1.4 billion run rate business transformation savings goal, achieving $1.5 billion.
• Completed strategic priorities laid out in 2022-2024, with $3.5 billion of announced asset divestitures and $2.1 billion received in January 2025 from Co-op and Gulf Coast Express Dispositions.
• Midstream business growth: EPIC NGL transaction nearly doubles EBITDA between 2021 and anticipated close, furthering the vision of being the leading integrated downstream energy provider.
• New strategic priorities for 2025-2027: Return over 50% of operating cash flow to shareholders, refining targeting $5.50 per barrel adjusted controllable cost excluding turnarounds over next two years, Midstream and chemicals mid cycle adjusted EBITDA to grow by $1 billion by 2027, non-refining mid cycle EBITDA to $10 billion by 2027, and reduce total debt to $17 billion.

Total company adjusted earnings decreased $920 million compared to the prior quarter. Midstream results increased mostly due to record fractionation and LPG export volumes in addition to higher margins on LPG exports. In chemicals results decreased mainly due to lower polyethylene chain margins and higher costs related to turnarounds and maintenance. Lower refining results primarily reflect weaker crack spreads and a full quarter of accelerated depreciation for the Los Angeles refinery. Capture of the new market indicator was 105%. The increase in market capture was partly the result of record clean product yield for the quarter, which included the benefits of butane blending. Marketing and specialties results were mostly lower due to seasonally lower margins. In renewable fuels results increased due to higher margins at the Rodeo complex as well as stronger international results.

• Reported earnings $8 million or $0.01 per share, adjusted loss $61 million or $0.15 per share, including $230 million pretax impact of accelerated depreciation for Los Angeles refinery.
• First quarter 2025 chemicals: global O&P utilization rate mid-90s; refining: heavy turnaround quarter, worldwide crude utilization rate low 80s, turnaround expense $290-$310 million; corporate and other costs $310-$330 million; full year turnaround expenses $500-$550 million, depreciation and amortization ~$3.3 billion including $230 million per quarter for Los Angeles refinery.
• New strategic priorities: Return over 50% of operating cash flow to shareholders, refining targeting $5.50 per barrel adjusted controllable cost excluding turnarounds, Midstream and chemicals EBITDA growth, non-refining EBITDA to $10 billion by 2027, debt to $17 billion.

• Regulatory uncertainty affecting renewable fuels margins.
• FTC considerations for potential M&A opportunities.
• Uncertainty around PTC, RVO, LCFS rules, tariffs, small refinery exemptions affecting renewable margins.
• Potential impact of tariffs on crude supply and market differentials.

Q: Good morning, Mark. Wanted to kick off on the Midstream transformation. It does feel that the business is evolving to where Midstream is becoming a major focus and a much more important part of the business and want your perspective on -- to the extent that is true, what's the best way to get there? To get there organically or to get there through M&A? And how, how fast can this business grow? Any parameters around that would be helpful.

A: Good morning, Neil. I'll talk about the high level view and then Don can dive into the details. But several years ago we rolled up DCP, got control of those assets to align with the wholly owned assets that Phillips 66 had with fractionation capacity. And that allowed us to consolidate into full, Wellhead to market strategy that we've been talking about. But we knew that we had opportunities to fill out that strategy and to really leverage that position. And that's what you've been seeing both from an organic perspective and an inorganic perspective. And as you look at the inorganic things that we've done, the acquisitions we've done, they've been very focused on getting the right assets for the right value that could be accretive to us immediately based on the inorganic piece, but allow us to also have a footprint to grow organically and to capture more of the volumes coming out of the Permian. So both the Pinnacle and the EPIC acquisitions really are prime examples of that. So we believe there are opportunities to do both. But I'll let Don dive into more of the details.

Q: Thank you for taking my questions. First on the leverage update, can you think about, can you help us think about the path forward to achieve the below 30% net debt to capital? What time frame would you expect to get to that? And are future asset sales, including the German Austrian assets earmarked for that? How should we think about that path forward there?

A: Yes, Theresa, it's a -- the path forward to the sub 30%. And I think you look at the absolute $17 billion debt level in, in the same way because one, I'm not saying that one will definitely enable the other, but they won't be too far apart in that context. And in fact, there's a kind of neat symmetry between all of those metrics that we put out. The 17 billion, the less than 30% and the less than three times Midstream and M&S EBITDA all kind of come together reasonably well. But it's really a combination of you look at our capital allocation model with 50% plus distributed to shareholders, so dividend plus buybacks, our sustaining capital is $1 billion. The organic capital program is a billion dollars. And if you do the math based on a mid-cycle set of assumptions, and I know we're not in mid cycle right now, but on mid cycle you've got about $10 billion of cash generation and so 5 billion goes to shareholders. That's the 50%, 2 billion of capital budget. So that's 7 billion, at least $3 billion. That's a lot of flexibility to either do debt reduction, incremental buybacks and/or bolt on acquisitions that make sense like some of the things you've seen us do. In addition, we are still working on the Germany Austria retail business. And so there's a fair amount of flexibility there in terms of how we get there. So we feel pretty comfortable that those targets are all achievable, including our ongoing commitment to returning cash to shareholders.

Q: Good morning. Switching gears a little. We saw relatively weaker ethylene chain margins here and I know it's a seasonally weaker quarter. I'm just trying to understand, in management's opinion, when can we start moving towards closer to the mid cycle margins as it relates to the ethylene chain margins in chemicals?

A: Yes, Manav, that's a great question. I think in the fourth quarter CPChem saw a couple of things going on in their chain margin. Of course, ethane pricing strengthened, crude pricing weakened, which, they've got a great advantage with their ethane position. But when both of those things happen, I think their impact will show up. I think in the longer term, the macro is supportive. Demand continues to grow. You're seeing rationalizations in Europe, you're seeing temporary shutdowns in Europe. I think this year North American producers had record exports. That tells you about the strength of our economics here in North America versus other locations in the world. I think for the first time ever, more than half of the polyethylene produced in North America was exported into the world market. So they're playing to CPChem strengths in the midterm and long-term. You can see that in their operating rates. And we see continued margin improvement. And actually it's good and healthy that you see slow recovery, slow climb out. And we see that continuing this year into next year, really on through 2026. And then their new assets will be stepping right into pretty healthy margins by the end of 2026.