Phillips 66 (NYSE:PSX) Q4 2023 Earnings Call Transcript

Phillips 66 (NYSE:PSX) Q4 2023 Earnings Call Transcript January 31, 2024

Phillips 66 beats earnings expectations. Reported EPS is $3.09, expectations were $2.37. PSX isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Hello. And welcome to the Fourth Quarter and Full Year 2023 Philips 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 Dietert, Vice President, Investor Relations. Jeff, you may begin.

Jeff Dietert: Thank you. Welcome to Philips 66 fourth quarter earnings 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 can be found on the Investor Relations section of the Philips 66 website along with supplemental financial and operating information. Slide two 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 it over to Mark.

Mark Lashier: Thanks, Jeff. Welcome, everyone, to our fourth quarter earnings call. We delivered a strong quarter and a strong year. In 2023, our total shareholder return was 33% and we increased our quarterly dividend by 8%. Today we’re going to cover a few major items, including the reasons why Philips 66 is an attractive investment opportunity and we’ll highlight the progress we’ve made on our strategic priorities. Next, we’ll discuss our fourth quarter financial results. Then we look forward to your questions. On slide three, we summarize the attributes that make us a differentiated and attracted value proposition. Our diversified and integrated portfolio delivers strong returns on capital employed and a high payout ratio supported by dividend growth.

We’re on a path to increase mid-cycle adjusted EBITDA by 40% to $14 billion by 2030. In addition, 75% of this growth will be outside of Refining. We expect this growth and more stable cash flow to support our valuation going forward and contribute to attractive total shareholder returns. Our disciplined approach to capital allocation across our portfolio has contributed to an average return on capital employed of 13% since our formation in 2012, almost double our cost of capital. We’re committed to financial flexibility and our strong investment grade credit rating remains differentiated relative to our peers. We expect to return in excess of 50% of our growing operating cash flow to shareholders. All of these attributes will support a secure, competitive and growing dividend, strong share repurchases, as well as debt reduction at mid-cycle margins.

Slide four summarizes our achievements to-date on our strategic priorities. On our last call, we raised our targets and continue to successfully execute our plan to increase mid-cycle adjusted EBITDA and grow shareholder distributions. Since July of 2022, we’ve distributed $8.3 billion through share repurchases and dividends. We’re on track to achieve our $13 billion to $15 billion target by the end of 2024. The execution of our plan to enhance Refining operating performance has resulted in crude utilization rates above the industry average for four consecutive quarters. In fact, we operated at our highest annual rate since 2019. We remain focused on improving performance, increasing market capture and reducing costs to enhance our earnings per barrel.

In Midstream, our NGO wellhead to market business continues to exceed our expectations. The team has done a remarkable job of integrating DCP Midstream and captured run rate synergies of $250 million as of year-end and we expect over $400 million of synergies by 2025. Since increasing our ownership of DCP, the Midstream annual run rate for adjusted EBITDA has been $3.6 billion. The stable cash generation from our Midstream business has grown to a level that covers the company’s top capital priorities, funding sustaining capital and the dividend. We’re delivering on business transformation targets and remain laser focused on further reducing our cost structure in 2024. Kevin will be providing more details. In addition, we plan to monetize assets that no longer fit our long-term strategy.

These asset dispositions are expected to generate over $3 billion in proceeds that will support our strategic priorities, including returns to shareholders. Timing of these dispositions will be subject to satisfactory market conditions and any necessary regulatory approvals. Our total adjusted EBITDA in 2023 was $12.7 billion, reflecting above mid-cycle margins in Refining and nearly $6 billion contributed by our more stable Midstream and Marketing and Specialties businesses. We’re focused on disciplined capital allocation, only funding attractive, high-return projects across our portfolio. The Rodeo Renewed Project to convert our San Francisco Refinery into one of the world’s largest renewable fuels facilities is expected to generate strong returns.

The project’s progressing well and we expect to start up later this quarter. Looking forward, we’re well positioned to achieve our targets by capitalizing on the strengths of our diversified and integrated portfolio. We’ll do this through continued operating and commercial excellence to deliver significant shareholder value through the economic cycles as demonstrated by our total shareholder return of 33% in 2023. Our commitment to a secure, competitive and growing dividend has resulted in a 16% compound annual growth rate since 2012. Before I turn the call over to Kevin to review the financial results, I’d like to thank the Phillips 66 team for their continued dedication to safe and reliable operations. Our employees enable us to execute on our strategic priorities and deliver on our mission to provide energy and improve lives.

Kevin, over to you.

Kevin Mitchell: Thank you, Mark. I’ll start on slide five with an update on our business transformation progress and how we are reducing costs to sustain higher cash generation. We achieved $1.2 billion in run rate savings as of year-end 2023, comprised of $900 million of cost reductions and $300 million of sustaining capital efficiencies. Sustaining capital is one of our business transformation success stories. Our sustaining capital historically averaged about $1 billion per year and we added approximately $200 million with the consolidation of DCP Midstream. Despite the additional sustaining capital requirements from DCP, we reduced our sustaining capital spend to under $900 million in 2023. This $300 million benefit is also reflected in our 2024 capital plan.

Through the end of 2023, we realized $630 million in cost reductions. The majority of these cost reductions relate to Refining, operating and SG&A expenses, as well as benefits to equity earnings and gross margin. On slide six, we provide more detail on the cost reductions at the total company level. Adjusted controllable costs were $8.4 billion in 2023, compared with $8.1 billion in 2022. The chart illustrates the main cost drivers year-over-year, including the impact of a full year of DCP consolidation. We continue to realize cost synergies from the DCP acquisition and subsequent integration. Our successful business transformation has already reduced costs, including our share of WRB costs, by approximately $500 million and this work continues.

Slide seven provides a breakdown of Refining costs. Refining adjusted controllable costs, including turnaround expense and our proportionate share of WRB and MiRO controllable costs, decreased over $550 million to $5.2 billion in 2023. Business transformation savings reduced Refining costs by approximately $300 million. Additionally, lower turnaround expense and market impacts, primarily from lower utility prices, further reduced costs. These cost reductions more than offset inflationary impacts. On a $1 per barrel basis, adjusted controllable costs were $7.56 per barrel or $6.57 per barrel, excluding turnaround expense. This is a fully burdened cost that includes about $1 per barrel for Refining share of corporate allocations and SG&A expenses.

The business transformation savings reduced our 2023 adjusted costs by over $0.40 per barrel. We expect to achieve our full $1 per barrel run rate target by the end of 2024. Additional details can be referenced in the appendix to this presentation. Slide eight summarizes our fourth quarter results. Adjusted earnings were $1.4 billion or $3.09 per share. We generated operating cash flow of $2.2 billion, including cash distributions from equity affiliates of $226 million. Capital spending for the quarter was $634 million. We distributed $1.6 billion to shareholders through $1.2 billion of share repurchases and $457 million of dividends. Net debt to capital ratio was 34% at year-end 2023 and return on capital employed was 16% for the year. Slide nine highlights the change in results by segment from the third quarter to the fourth quarter.

During the period, adjusted earnings decreased $708 million, mostly due to lower results in Refining and Marketing and Specialties, partially offset by improved results in Midstream. In Midstream, fourth quarter adjusted pre-tax income of $754 million was a record, up $185 million from the prior quarter, reflecting improvements in both NGL and transportation. The NGL business increased primarily due to higher margins and record volumes at the Sweeney Hub, as well as lower operating costs. Transportation results were also higher, mainly reflecting the recognition of deferred revenue related to throughput and deficiency agreements. Chemicals adjusted pre-tax income increased $2 million to $106 million in the fourth quarter. This increase was mainly due to higher margins, mostly offset by lower equity earnings from CPChem’s affiliates and decreased sales volumes from lower seasonal demand.

Global O&P utilization was 94%. Refining fourth quarter adjusted pre-tax income was $797 million, down $943 million from the third quarter. The decrease was primarily due to lower realized margins. Realized margins decreased due to lower market crack spreads, partially offset by inventory hedge impacts, higher Gulf Coast clean product realizations, wider heavy crude discounts and strong commercial results. Market capture increased from 66% to 107%. Marketing and Specialties adjusted fourth quarter pre-tax income was $432 million, a decrease of $201 million from the previous quarter. The decrease was mainly due to a seasonal decline in domestic wholesale fuel margins, primarily in the Mid-Continent. Our adjusted effective tax rate was 23%. Slide 10 shows the change in cash during the fourth quarter.

We started the quarter with a $3.5 billion cash balance. Cash from operations excluding working capital was $2 billion. There was a working capital benefit of $207 million, mainly reflecting a reduction in inventory that was mostly offset by movements in accounts receivables and payables, which included the impact of declining commodity prices. We funded $634 million of capital spending and repaid approximately $100 million of debt. Additionally, we returned $1.6 billion to shareholders through share repurchases and dividends. Our ending cash balance was $3.3 billion. This concludes my review of the financial and operating results. Next, I’ll cover a few outlook items for the first quarter. 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 low 90s and turnaround expense to be between $110 million and $130 million. Our turnaround expense guidance excludes costs associated with the conversion and start-up of the Rodeo Renewable Fuels Facility. At our San Francisco Refinery, we are executing the Rodeo Renewed Project. The facility operated as a crude oil refinery in January. [Audio Gap]

Operator: Thank you. [Operator Instructions] [Audio Gap] Apologies, everyone. We have lost connection to the speakers. Please stand by while we reconnect them.

Kevin Mitchell: … refinery, we are executing the Rodeo Renewed Project. The facility operated as a crude oil refinery in January and we will shut down crude operations in February, as we are prepared to start up renewable fuels production by the end of the quarter. We anticipate $100 million of decommissioning and start-up costs in the first quarter. We anticipate first quarter, corporate and other costs to come in between $290 million and $310 million. Full year guidance for 2024 is provided on slide 11 of this presentation. Now we will open the line for questions, after which Mark will make closing comments.

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Q&A Session

Operator: Thank you. [Operator Instructions] Our first question comes from Ryan Todd with Piper Sandler. Please go ahead.

Ryan Todd: Yeah. Thanks. Maybe starting out on margin, very strong margin capture in the quarter. Can you — I know you talked about some of the things, but can you talk about some of the underlying drivers of that performance on the quarter, what might be seasonal or transient and maybe what you would highlight that might be more sustainable going forward in terms of improved performance?

Kevin Mitchell: Yeah. Ryan, it’s Kevin. Let me make some additional comments around that. So a few different drivers to the strong market capture. You’ll recall back in the third quarter, we talked about some inventory hedge impacts that were a negative $100 million to $150 million and that we expected that to reverse in the fourth quarter, and that is in fact what happened. And so you had that benefit, which is a circa close to $300 million swing quarter-over-quarter. We also had improved feedstock, especially in the central corridor on Canadian crude differentials, and obviously, that’s really a market-driven item. In the Gulf Coast, we had benefit from product pricing because of the effect on — sort of lagged effect on product pricing for barrels going up colonial and so that again is a bit of a market-driven factor.

So that item was a bit of a headwind in the third quarter, it was a tailwind in the fourth quarter and what will happen in the first quarter is going to be dependent on where prices end the quarter at. But we also had strong commercial results and this is a result of really being able to take advantage of market opportunities as they present themselves to us. So we were able to capture strong pipeline arbitrage and the commercial optimization around that as we optimized those barrels. So it’s a bit of a combination of there are certain things that you would say were unique to the market dynamics in the quarter, but some of it is a function of strong operations, strong commercial execution by that organization.

Ryan Todd: Great. Thank you. That was helpful. And then maybe a follow-up on Rodeo. I appreciate the update that you gave there in terms of some of the timeline that we can expect over the next couple of months. As we think about starting the renewable diesel plant. Can you maybe walk through, what you would expect in terms of the first three months to six months of operation there in terms of how long does it take the ramp to full operating capacity, how long does it take to you to get up and running? Maybe some of those things in terms of where we go from end of this quarter until you have kind of a full run right there.

Rich Harbison: Yeah. Ryan, this is Rich. I’ll take that question here to kick it off and maybe somebody will fill in for some additional color here. But the way we see the project progression at this point is, as Kevin mentioned in his points that, in February, we’re going to shut down the facility and that will allow us then to tie in the common utilities for one of our hydrocrackers, which is currently in the conversion process. We expect that to start up in March timeframe, which will quickly ramp up to about 50% of the stated capacity of the Rodeo Renewed Project. In April, we will finish up the PTU and continue the conversion of the second reactor hydrocrackers system and finish that up in April and then start the commissioning process, which will roll into the May timeframe and then we’ll continue to optimize performance up and we expect to be up to full rates by the end of the second quarter would be the ramp period for that.

Does that answer your question there, Ryan?

Ryan Todd: Yeah. Yeah. That was great. Thank you.

Operator: Our next question comes from Manav Gupta with UBS. Please go ahead.

Manav Gupta: Guys, congrats on a very strong quarter and a strong start to the year. Looks like everything is coming together. I just quickly want to focus on the NGO part of the Midstream business. There were some concerns that DCP synergies will be delayed or there’s some degradation of earnings. I think you have silenced a lot of critics over there with this earnings release, but help us walk through the sequential improvement we saw in the NGL business in the fourth quarter.

Mark Lashier: Yeah. Manav, thanks for your comments. I’m just going to make some high level comments and then turn it over to Tim. But I appreciate you recognizing that we are delivering on the integration. The integration has been a success. The DCP team is fully integrated into Phillips 66 and performing seamlessly, and we’re seeing great, really synergies across the whole value chain that even down at the level of communications, things happening quicker, things — better decisions being made faster and it’s really been something to behold. As we noted in the comments, we did hit $250 million of synergies captured and we’ve got a line of sight on another or getting that up to $400 million plus. And Tim and his team are hard at work, so I’ll let him give you some more color on that.

Tim Roberts: All right. Thanks, Mark. Yeah. Manav, a couple things. I mean, really, it’s pretty simple. When you put the two — with the transaction, you put the two businesses together, we had improved volumes, costs were down, we executed well operationally, we executed well commercially and then ultimately what that does is allow you to deliver results and we felt this was more representative of what we’re going to see in this business going forward. It really does highlight the strong earnings and free cash flow generation of the Midstream segment. Now, that doesn’t all happen by accident. It’s been a bit of a slog as we’ve slowly got those folks integrated. We’re almost done with the integration completely. We should be done sometime here early in the second quarter, once we get all the ERP and IT systems all under one versus still running two in parallel.