Phillips 66 (NYSE:PSX) Q3 2023 Earnings Call Transcript

Phillips 66 (NYSE:PSX) Q3 2023 Earnings Call Transcript October 27, 2023

Phillips 66 misses on earnings expectations. Reported EPS is $4.63 EPS, expectations were $4.78.

Operator: Welcome to the Third Quarter 2023 Phillips 66 Earnings Conference Call. My name is Carla and I will be your operator for today’s call. [Operator Instructions] Please note that this conference is being recorded. I will now turn the call over to Jeff Dietert, Vice President of Investor Relations. Jeff, you may begin.

Jeff Dietert: Good morning and welcome to Phillips 66 third quarter earnings conference call. Participants on today’s call will include Mark Lashier, President and CEO; Kevin Mitchell, CFO; Tim Roberts, Midstream and Chemicals; Rich Harbison, Refining; and Brian Mandell, Marketing and Commercial. Today’s presentation material can be found on the Investor Relations section of the Phillips 66 website, along with supplemental financial and operating information. Slide 2 contains our Safe Harbor statement. We will be making forward-looking statements during today’s call. Actual results may differ materially from today’s comments. Factors that could cause actual results to differ are included here as well as in our SEC filings. With that, I will turn the call over to Mark.

Mark Lashier: Thanks, Jeff. Good morning and thank you for joining us today. We are pleased to report another quarter of strong financial and operating results and we continue to execute on our strategic priorities to increase shareholder value. Our achievements to-date have enabled us to make significant progress toward the commitments we made to shareholders a year ago at Investor Day. We are confident in our ability to exceed these commitments and we will provide an update today. Slide 4 shows the evolution of our portfolio. We are much more than a refining company. We are differentiated by an integrated and diversified Midstream, Chemicals, Refining, Marketing and Specialties portfolio that generates free cash flow through the economic cycles.

Our global commercial supply and trading organization leverages our assets to generate incremental value. We continue to execute our strategy to increase more stable cash flows in Midstream. We see more growth opportunities as U.S. natural gas and natural gas liquids production is expected to outpace crude oil. The demand fundamentals are strong as NGLs and petrochemical feedstocks remain the fastest growing segment of liquids demand. The DCP acquisition earlier this year strengthened our competitive position by integrating our NGL wellhead-to-market value chain and adds over $1 billion to mid-cycle adjusted EBITDA. Our current synergy run-rate is on pace to deliver more than $400 million. Midstream’s stable cash generation covers the company’s dividend and our sustaining capital.

We will continue to capitalize on our integrated and diversified portfolio to deliver results. Moving to Slide 5. At our Investor Day in November 2022, we targeted $3 billion in mid-cycle EBITDA growth by 2025. This included NGL wellhead-to-market, Rodeo Renewed, business transformation and CPChem growth projects. Given the substantial progress employees across the company have made, we are raising the bar. We now expect to grow mid-cycle adjusted EBITDA by $4 billion between 2022 and 2025, reflecting a $1 billion increase from our original target. This includes additional value from business transformation, midstream synergies and commercial contributions. We are increasing the business transformation target to $1.4 billion from $1 billion.

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Q&A Session

We are enhancing our commercial capabilities to extract additional value, maximizing return on capital employed and increasing refining market capture. We are committing to higher shareholder distributions. Our new target is $13 billion to $15 billion between July 2022 and year end 2024. This is an increase from our original target of $10 billion to $12 billion. We will return over 50% of our operating cash flow to shareholders. Lastly, we plan to monetize assets that no longer meet strategic long-term objectives. Proceeds from monetizing these non-core assets are expected to be more than $3 billion. We will deploy the proceeds to advance strategic priorities, including accelerating cash return to shareholders. Slide 6 shows progress on distributions to shareholders and improving Refining performance.

We returned $6.7 billion through share repurchases and dividends since July 2022, representing over 50% of operating cash flow during the same time period. Strong cash generation and disciplined capital allocation enabled us to exceed the pace to achieve the original $10 billion to $12 billion target before year end 2024. The increased target of $13 billion to $15 billion equates to 25% to 30% of current market cap. Our Board of Directors approved a $5 billion increase to our share repurchase authorization. This is in addition to the previous authorization, which had approximately $3.1 billion remaining as of September 30. Since 2012, the Board has authorized $25 billion in share repurchases. These higher distributions to shareholders will be supported by $4 billion of mid-cycle adjusted EBITDA growth between 2022 and 2025.

We are laser-focused on improving Refining performance. Third quarter crude utilization of 95% was the highest utilization since 2019. Our refining system ran above industry average utilization rates for the third straight quarter. We continue to advance high return, low capital projects to improve reliability and market capture. We are executing 10 to 15 projects a year to improve market capture by 5%. Last year, we completed several projects that added 2% to market capture and we expect the 2023 projects to add a further 1.3%. We reduced costs by $0.40 per barrel and will achieve a $0.75 per barrel run-rate by the end of 2023. Our people have fully embraced business transformation and we are raising our target to a $1 per barrel run-rate by the end of 2024.

Slide 7 provides an overview of the business transformation program. We are increasing our business transformation target to $1.4 billion, comprised of $1.1 billion of cost reductions and $300 million of sustaining capital efficiencies. The incremental reductions are $300 million in costs, over half of which benefits Refining and $100 million of sustaining capital. We are on track to achieve the targets this year and next. Slide 8 summarizes our strategic priorities and enhancements. Last November, we announced six priorities to increase shareholder value. These were ambitious and consistent with investor feedback. Our achievements to-date provide us with the confidence that we will not only meet these targets, but we’ll exceed them. So with the support of our Board, we are increasing our commitments to shareholders.

Delivering on the commitments will generate additional free cash flow from our integrated and diversified portfolio, positioning us to increase cash returns to shareholders now and in the future. Now I’ll turn the call over to Kevin to review the third quarter financial results.

Kevin Mitchell: Thank you, Mark. Adjusted earnings were $2.1 billion or $4.63 per share. A $9 million decrease in the fair value of our investment in NOVONIX reduced earnings per share by $0.02. We generated operating cash flow of $2.7 billion, including a working capital benefit of $285 million and cash distributions from equity affiliates of $361 million. Capital spending for the quarter was $855 million. We returned $1.2 billion to shareholders through $752 million of share repurchases and $465 million of dividends. We ended the quarter with a net debt-to-capital ratio of 33%. Annualized adjusted return on capital employed was 17%. I’ll cover the segment results on Slide 10. Additional details can be referenced in the appendix to this presentation.