Phillips 66 — 2024 Q1

Yes, Neil, that's a great question. Thank you for asking that. The way I'm looking at this is those first quarter headwinds that you mentioned in Refining are all related to activities that will position us to deliver medium- and long-term tailwinds in support of our strategic priorities. And so it's some of the fundamental work going on around Rodeo and some of the work around our turnarounds are critically important.

Yes, Mark. And Neil, when I reflect back on the quarter, I look at the metrics, and we ran pretty well. But the market capture, obviously, was challenged, and it was primarily driven by activity in the Gulf Coast and the West Coast. We achieved about an 84% clean product yield, which, for our assets, is pretty good. It's actually 1% higher year-over-year.

Yes. Let me just put a couple of numbers to some of these items. So in terms of some commercial impacts that we talk about, on Gulf Coast product pricing differentials, in absolute terms, that was a $50 million headwind in the first quarter. The inventory hedges that I referenced in the earlier comments, which primarily impacts Central Corridor, that was a $100 million headwind in the first quarter. These are not variances, these are absolutes in the quarter.

Yes. And I think, just to put that in context, we're taking a disadvantaged refinery and converting it into one of the world's largest renewable fuels facilities. And so to bridge to that, we took the heavy lift this quarter, and now we're well positioned to start delivering value again from the Rodeo facility as we continue to push it to full rates through the second quarter.

Yes, Neil, so let me hit on the working capital piece first. So negative $1.4 billion in aggregate, about $2.6 million of that is a function of inventory build. And so we did have some partial offsetting benefit in payables and receivables, and that was driven by 2 items.

Yes. I think that, certainly, the majority of our business transformation cost impact is showing up in Refining, and we've been out delivering our targets, overdelivering against our targets and certainly continue that into 2024. There's always a lag, and we talk about run rate and then we talk about realized, and we're going to make sure that you keep track, too.

Yes. So the end of last year, Roger, we, on a run rate basis, passed the $500 million or $0.75 -- roughly $0.75 a barrel number on run rate last year and realized about $0.41 of that last year. As we fast forward now into -- through the first quarter here, we see that realized number creeping up to the $500 million -- actually, slightly over the $500 million number. So it's coming in at that $0.75. And it's roughly that delay that Mark's talking about, roughly a 90-day delay in achieving that.

Yes, Roger, and I really want to drive home what Rich just said, that the cultural impact on the organization has been impressive, particularly out in the field, whether it's Midstream, Refining, wherever you are. And we have a workforce that has bought into it, and it's committed to driving higher levels of performance. They understand right out at the front lines, they understand what our strategic priorities are and how they can contribute to us getting there. And so they're digging in, and they're looking at those opportunities every day.

Yes, Roger, it's Kevin. So we're selling the Germany and Austria retail assets, like we said. That's a company-owned, dealer-operated model, primarily almost 1,000 sites across those 2 countries. That's a high-performing business, top-rated many years in a row, 10% of market share in each country. A great business, but doesn't really integrate with the sort of core strategic focus areas that we have as a company. So just a little bit of background as to why those assets.

Sure, Ryan. I got that. This is Rich here. So maybe first, I'll start with a time line of the Rodeo facility. As you know, we've been ramping this facility down and hit a milestone in February of this year, with a complete shutdown of the facility after 128 years of legacy of running as a crude processing site. That first transition occurred on the first hydrocracker, and they went into renewable fuels feedstock production in March of this year.

Yes. Ryan, when we get up to full rates, we'll be able to produce something on the order of 10,000 barrels a day of renewable jet fuel, which gets blended up then to sustainable aviation fuel in the marketplace. And this kit is going to be designed for continuous optimization, whether it's the split between jet and diesel fuel or the feedstocks coming in.

I think it's supplemented as well by the last-mile strategy that Brian's team has put in place. That prevents leakage of value as we deliver the product to the end user there, and that should play out nicely as we increase production from the facility.

We're concurrently in negotiations with partners. We've seen a lot of interest in SAF.

Yes. Ryan, this is Tim Roberts, and I'll chat about that. I'll cover 3 things because I think there'll be other questions around it. First one I wanted to talk about is actually more on the leadership side. I just wanted to recognize Bruce Chinn, who was the recently retired CEO at CPChem. He did a really good job there, great leadership, great drive for excellence, and he'll be missed.

Yes. Ryan, you're seeing live the last almost 25 years of what CPChem has done to position themselves to be able to run flat out at the bottom of the cycle. And they did that, and they did that profitably. And you're seeing rationalization of assets in Europe while they're running at flat-out rates.

And Mark, to add on to that point, I think that's a great point. What you're seeing is that a lot of your higher-cost folks, they're running at reduced rates or they're shut down and extending maintenance or running at reduced rates. And we've even seen some facilities, namely in Europe, 2 announcements of 2 crackers that will be shutting down from some competition there because they're at the wrong place in the cost curve, whereas CPChem is on the right place in the cost curve.

Yes. Manav, thanks for the question. This is Tim Roberts again, and let me go ahead and address. I mean first thing I want to lay out there is that last quarter on the earnings call, I talked about guiding towards $675 million per quarter IBT, and we're staying with that. I mean that still feels good, $3.6 billion to the year. That's where we're at. So I just wanted to make sure we were -- that hasn't changed. Now if you look at 4Q and 1Q, 4Q was a strong quarter, okay? That was the first thing.

Manav, this is Brian Mandell. I would say that we've had a number of issues. We had a warm northeast U.S. winter, then refineries came back and they were running really well. Prices for diesel are in contango. We have seen about 200,000 barrels a day of Russian distillate off the market. But we are constructive. We do think the market will come back. You're seeing -- starting to see run cuts in Europe and Asia with hydrocracking and hydroskimming margins at breakeven.

Yes, John. From a Europe standpoint, the other marketing businesses are in Switzerland, where we have a joint venture with Coop, and in the U.K. And the two are very different in that the Switzerland business is somewhat of a stand-alone retail business, but it's also in a joint venture structure, and so the dynamics are a little bit different around that.

Well, do you want me to start with that?

Sure.

Come over the top. This is Rich Harbison. So there's a reason, John, we've gone to Rodeo and converted it into a renewable fuels stock. It has not been a meaningful contributor to the earnings profile on the West Coast for quite some time now. So that -- we're looking forward to getting that change fully implemented. And we do think that will have a marked change to the West Coast profitability.

Yes, Matt, this is Kevin. The EBITDA, I'll give you the numbers that are on the information that we're providing to the prospective buyers. It's a -- the range is EUR 300 million to EUR 350 million, which the conversion for that is $325 million to $375 million. If you pick the midpoint, $350 million of EBITDA is probably your best number to go with on that.

So on the first question, we're not going to give that level of asset-specific breakout. And I would say, the $180 million does not include -- the absolute loss on a GAAP basis is a bigger number, again, because we had some impairments related to assets that are taken out of service. So the $180 million is on the -- consistent with the way we report our adjusted earnings. And it does show up in the different areas, but we're not going to provide that level of line item breakout.

Supported by sustainable aviation fuel.

That's right. It's another uplift, yes.

OpEx, excluding Rodeo, yes, Paul, I think the best way to answer that is because we don't give that level of asset level detail out. But we will be providing more reporting transparency on a going-forward basis that will enable you to see the kind of level of information that your -- the questions that you're asking for.

Well, it's probably down a little. There's still going to be an elevated element of that, and there's some what we would classify as turnaround-related costs associated with the conversion as well that will show up at Rodeo. But the trend is downward. We're past the peak spend, I guess, is the way to say it.

Jason, it's Brian Mandell. I'll give you some kind of flavor of our journey for commercial. Our commercial supply and trading organization is, as you know, an integrated global business. We have offices in Houston, Calgary, London and Singapore. And as you mentioned, our focus is now to fully optimize and capture the optionality value embedded in all of the assets and then to capture that kind of integration value between the various business segments to drive additional value for the company.

And Jason, on the cash number, the target cash balance, the same as we've said in the past, $2 billion to $3 billion. We were slightly below that level at the end of the quarter. I'd also say, the first quarter is typically a heavy drain on cash quarter. So as we look ahead, we're still very comfortable with that target level.

I think at a high level, Theresa, we are laser focused on the things we can control, and that's what we focus on, and that's what Rich and Brian focus on. I think that the things out of our control would be speculative. But I think Rich can talk about what we're doing to -- and what we see over the next couple of quarters with respect to market capture potential, and Brian can chime in from a commercial perspective.

Yes. So Theresa, we talked -- this is Rich again. We talked a little bit about some of the headwinds on market capture, which, when I think about market capture from a Refining perspective, it's our clean product yield. So -- and then it's the products that we make. Are we moving up the product value chain on that?

And Theresa, this is Brian Mandell. Just to add some color on the commercial side. I would say, we're seeing, this year, gasoline and diesel roughly flat to last year in terms of demand. Jet fuel, a little bit stronger this year. I talked about our commercial organization, how kind of moving up that curve to take advantage of the optionality in our assets, we'll continue to do that.

Theresa, I'll verify the number, but we're well into, I would say, it's 65% to 70% third parties.

Thank you, all, for your great questions. The market fundamentals that we're looking at are supportive, and our assets are running strong since the completion of seasonal maintenance activities. Our integrated portfolio is well positioned to capture market opportunities and to meet the peak summer demand.