Phillips 66 (NYSE:PSX) Q4 2022 Earnings Call Transcript

Phillips 66 (NYSE:PSX) Q4 2022 Earnings Call Transcript January 31, 2023

Operator: Welcome to the Fourth Quarter 2022 Phillips 66 Earnings Conference Call. My name is Emily, and I’ll be your operator for today’s call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Please note that this conference is being recorded. I will now turn the call over to Jeff Dieter, Vice President of Investor Relations. Jeff, you may begin.

Jeff Dietert: Good morning, and welcome to Phillips 66 Fourth Quarter Earnings Conference Call. Participants on today’s call will include Mark Lashier, President and CEO; Kevin Mitchell, CFO; and Brian Mandell, Marketing and Commercial; Tim Roberts, Midstream and Chemicals; and Rich Harbison, Refining. 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’ll turn the call over to Mark.

Mark Lashier: Thanks, Jeff. Good morning, and thank you for joining us today. In the fourth quarter, we had adjusted earnings of $1.9 billion or $4 per share. We generated $4.8 billion in operating cash flow. For the year, adjusted earnings were $8.9 billion or $18.79 per share. Our diversified integrated portfolio generated strong earnings and cash flow in 2022, supported by a favorable market environment and solid operations. Our cash flow generation allowed us to strengthen our financial position by repaying debt and resuming our share repurchase program. We returned $3.3 billion to shareholders through share repurchases and dividends. We continue to focus on operating excellence and advancing our strategic priorities to deliver on our vision of providing energy and improving lives as we meet global demand.

In Midstream, we continue integrating DCP Midstream to unlock significant synergies and growth opportunities across our NGL wellhead to market value chain. Additionally, we completed Frac 4 at the Sweeny Hub, adding 150,000 barrels per day. Our total Sweeny Hub fractionation capacity is 550,000 barrels per day, making it the largest fraction — or the second largest fractionation hub in the U.S. In Chemicals, CPChem is pursuing a portfolio of high-return projects, enhancing its asset base as well as optimizing its existing operations. This includes construction of a second world scale unit to produce one hexene in Old Ocean, Texas, and the expansion of propylene splitting capacity at its Cedar buying facility. Both projects are expected to start up in the second half of 2023.

CPChem and Qatar Energy announced final investment decisions to construct petrochemical facilities on the U.S. Gulf Coast Ras Laffan, Qatar. CPChem will have a 51% interest in the $8.5 billion integrated polymers facility on the U.S. Gulf Coast. The Golden Triangle Polymers facility will include a 4.6 billion pounds per year ethane cracker and two high-density polyethylene units with a combined capacity of 4.4 billion pounds per year. Operations are expected to begin in 2026. In January, the Ras Laffan petrochemical project was approved. CPChem will own a 30% interest in the $6 billion integrated Polymers complex. The plant will include a 4.6 billion pounds per year ethane cracker and two high-density polyethylene units with a total capacity of 3.7 billion pounds per year.

Start-up is expected in late 2026. In Refining, we’re converting our San Francisco refinery into one of the world’s largest renewable fuels facilities. The Rodeo Renewed project is on track to begin commercial operations in the first quarter of 2024. Upon completion, Rodeo will have over 50,000 barrels per day of renewable fuels production capacity. At our Investor Day, we announced priorities to reward Phillips 66 shareholders now and in the future. We’re holding ourselves accountable, and we know that you are as well. Slide 4 summarizes our progress. We are delivering returns to shareholders. Since July 2022, we’ve returned $2.4 billion to shareholders through share repurchases and dividends. We’re on track to meet our target return of $10 billion to $12 billion by year-end 2024.

In January, we reached an agreement to acquire all of the publicly held common units of DCP Midstream. We expect the transaction to close in the second quarter of 2023, at which point, we will have an 87% economic interest in DCP Midstream. The increase in our economic interest from 28%, prior to the third quarter transaction, is expected to generate an incremental $1.3 billion of adjusted EBITDA, including commercial and operating synergies. We’re executing our business transformation. The team achieved savings in excess of $500 million on an annualized basis at the end of 2022, setting us up well for 2023. This includes cost reductions of over $300 million, mostly related to reducing headcount by over 1,100 positions during the year as we redesigned and streamlined our organization.

In addition, our 2023 capital program includes a $200 million reduction of sustaining capital. We’re transforming to a sustainable lower cost business model and expect to deliver $1 billion of annualized savings by year-end 2023. We’re laser-focused on executing these strategic priorities to deliver returns and increase distributions in a competitive and sustainable way. We look forward to updating you on our progress. Now I’ll turn the call over to Kevin to review the financial results.

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Kevin Mitchell: Thank you, Mark. Starting with an overview on Slide 5, we summarize our financial results for the year. Adjusted earnings were $8.9 billion or $18.79 per share. The $442 million decrease in the fair value of our investment in NOVONIX reduced earnings per share by $0.71. We generated $10.8 billion of operating cash flow. Cash distributions from equity affiliates were $1.7 billion, including $574 million from CPChem. We ended 2022 with a net debt-to-capital ratio of 24%. Our adjusted after-tax return on capital employed for the year was 22%. Slide 6 shows the change in cash during the year. We started the year with $3.1 billion in cash and generated record cash flow during the year. Cash from operations was $10.8 billion.

We received net loan repayments from equity affiliates, $590 million. During the year, we paid down $2.4 billion of debt. This includes $430 million of debt paid down by DCP Midstream since we began consolidating effective August ’18. We funded $2.2 billion of capital spending and returned $3.3 billion to shareholders, including $1.5 billion of share repurchases. The other category includes the redemption of DCP Midstream’s Series A preferred units of $500 million. Our ending cash balance increased by $3 billion to $6.1 billion. Slide 7 summarizes our fourth quarter results. Adjusted earnings were $1.9 billion or $4 per share. The $11 million decrease in the fair value of our investment in NOVONIX reduced earnings per share by $0.02. We generated operating cash flow of $4.8 billion, including a working capital benefit of $2.1 billion and cash distributions from equity affiliates of $261 million.

Capital spending for the quarter was $713 million, including $310 million for growth projects. We returned $1.2 billion to shareholders through $456 million of dividends and $753 million of share repurchases. We ended the quarter with 466 million shares outstanding. Moving to Slide 8. This slide highlights the change in adjusted results by segment from the third quarter to the fourth quarter. During the period, adjusted earnings decreased $1.2 billion mostly due to lower results in Refining and Marketing and Specialties. In the fourth quarter, we made certain changes to the composition and reporting of our operating segment results. Our slides reflect these changes and prior period results have been recast for comparative purposes. The 2022 and 2021 quarterly information has been recast and is included in our supplemental information.

Slide 9 shows our Midstream results. Fourth quarter adjusted pretax income was $674 million compared with $608 million in the previous quarter. Transportation contributed to adjusted pretax income of $237 million, up $8 million from the prior quarter. NGL and Other adjusted pretax income was $448 million compared to $412 million in the third quarter. The decrease — the increase was primarily due to record fractionation volumes as well as a full quarter of consolidating DCP Midstream, Sand Hills Pipeline and Southern Hills pipeline. The fractionators at the Sweeny Hub averaged a record 565,000 barrels per day, reflecting the start-up of Frac 4 at the end of the third quarter. The Freeport LPG export facility loaded a record 271,000 barrels per day in the fourth quarter.

Our NOVONIX investment is mark-to-market each quarter. The fair value of the investment, including foreign exchange impacts, decreased $11 million in the fourth quarter compared with a decrease of $33 million in the third quarter. Turning to Chemicals on Slide 10. Chemicals at fourth quarter adjusted pretax income of $52 million compared with $135 million in the previous quarter. The decrease was mainly due to lower margins and volumes partially offset by decreased utility costs and the impact of legal accruals in the third quarter. Global olefins and polyolefins utilization was 83% for the quarter, reflecting planned turnaround activities and the impact of the winter storm in December. Turning to Refining on Slide 11. Refining fourth quarter adjusted pretax income was $1.6 billion, down from $2.9 billion in the third quarter.

The decrease was primarily due to lower realized margins. Our realized margins decreased by 27% to $19.73 per barrel, while the composite 3 to 1 re-adjusted market crack decreased by 16%. Turnaround costs were $236 million. Crude utilization was 91% in the fourth quarter and clean product yield was 86%. Slide 12 covers market capture. We are now using a composite 3 to 1 in adjusted market crack to be more consistent with peers and more comparable to our realized margin. The 3 to 1 rent-adjusted market crack for the fourth quarter was $23.50 per barrel compared to $28.18 per barrel in the third quarter. Realized margin was $19.73 per barrel and resulted in an overall market capture of 84%. Market capture in the previous quarter was 95%. Market capture is impacted by the configuration of our refineries.

We have a higher distillate yield and lower gasoline yield than the 3 to 1 market indicator. During the fourth quarter, the distillate crack increased $8 per barrel, and the gasoline crack decreased $10 per barrel. Losses from secondary products of $3.59 per barrel were $0.09 per barrel higher than the previous quarter. Our feedstock loss of $0.03 per barrel was $1.45 per barrel improved compared to the third quarter due to more favorable crude differentials. The other category improved realized margins by $0.46 per barrel. This category includes freight costs, clean product realizations and inventory impacts. Fourth quarter was $6.66 per barrel less than the previous quarter, primarily due to lower clean product realizations and inventory timing.

Moving to Marketing and Specialties on Slide 13. Adjusted fourth quarter pretax income was $539 million compared with $828 million in the prior quarter, mainly due to lower domestic and international marketing margins. On Slide 14, the Corporate and Other segment had adjusted pretax costs of $280 million, $34 million higher than the prior quarter. The increase was mainly due to higher net interest expense as well as a transfer tax related to a foreign entity reorganization and higher employee-related expenses. Slide 15 shows the change in cash during the fourth quarter. We had another strong quarter of cash generation. We started the quarter with a $3.7 billion cash balance. Cash from operations was $2.7 billion, excluding working capital. There was a working capital benefit of $2.1 billion, mainly reflecting a reduction in inventory and a decrease in our net accounts receivable position.

We received a loan repayment from an equity affiliate of $426 million. During the quarter, we repaid $500 million of senior notes due April 2023 and funded $713 million of capital spending. We returned $1.2 billion to shareholders through dividends and share repurchases. Additionally, the other category includes the redemption of DCP Midstream’s Series A preferred units of $500 million. Our ending cash balance was $6.1 billion. This concludes my review of the financial and operating results. Next, I’ll cover a few outlook items for the first quarter and the full year. In Chemicals, we expect the first quarter global O&P utilization rate to be in the mid-90s. In Refining, we expect the first quarter worldwide crude utilization rate to be in the mid-80s and turnaround expenses to be between $240 million and $270 million.

We anticipate first quarter corporate and other costs to come in between $230 million and $260 million. For 2023, Refining turnaround expenses are expected to be between $550 million and $600 million. We expect Corporate and Other costs to be in the range of $1 billion to $1.1 billion for the year. We anticipate full year D&A of about $2 billion. And finally, we expect the effective income tax rate to be between 20% and 25%. Now we will open the line for questions.

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Q&A Session

Operator: Thank you. We will now begin the question-and-answer session. Our first question today comes from Neil Mehta of Goldman Sachs. Please go ahead, Neil. Your line is open.

Neil Mehta : Yeah. Good morning, good afternoon, guys. I guess the first question I have is around refining. And if I try to isolate what the market is reacting to today, I think it’s the capture rate, surprised folks relative to a lot of your large-cap peers. And so maybe you can simplify it for us and talk about what you’re seeing in the system. Is there anything that you feel was more temporary versus structural? And give us confidence that that capture rate is going to continue to improve as we think about the progression through the year?

Rich Harbison : Hey, Rich here. Yeah, that’s a really good question. When I look at that capture rate for the fourth quarter, the three simple things that stand out to me are really the impact of our turnaround activity. That’s the first one. It was centric in the Gulf Coast and the Pacific Northwest. And the Pacific Northwest was an actual entire refinery shutdown that shouldered the third and fourth quarter of the year. So I look at those as temporaries. There was also some product differentials that played out across our system the Atlantic, the difference between the European distillate price and the New York Harbor price is reflective in that market capture. There was a significant reduction in diesel price there in Europe as well as the turnaround effect in the Pacific Northwest and also Northern California product prices were dislocated from the Los Angeles market as well.

And the third influence in fourth quarter capture was really centric around the Keystone shutdown of the pipeline as well as the winter storm events in there. So that’s — when I look at those three effects, there’s the majority of the impact associated with the capture rate in the fourth quarter.

Jeff Dietert : I might just add, the turnaround activity occurred in October and early November, which was the highest margin part of the quarter.

Neil Mehta : Thanks for that. And the follow-up to that is just as we think about Q1, how some of these dynamics potentially reverse especially given it’s going to be a pretty heavy turnaround quarter, it looks like, with the utilization guides in the mid-80s? Or do we really see that improvement materialize potentially more Q2 through balance of the year?

Mark Lashier : Well, I’ll start with the turnaround guidance part of that and then kick it over to Brian, you can talk about the market outlook a little bit there for the first quarter. So our first quarter turnaround, you can tell by our guidance there that Kevin provided our annual guidance is in the 550 to 600 range. And our first quarter is a majority of that spend. So we are heavy centric first quarter on our turnaround. And those are primarily related in just a couple of sites. So I don’t — I see that as really impactful to our Atlantic coastal operations there as the biggest part of that impact on the turnarounds. There is also some Gulf Coast turnaround activity as well that is less impactful. So although there is a heavy spend, it’s centric really in one primary facility.