Phillips 66 Q4 2024 Earnings Call Transcript

The following is excerpted from the question-and-answer section of the transcript.

Question: Neil Mehta - Goldman Sachs Group, Inc. - Analyst : Thank you. Good morning, Mark and team. I want 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 what's 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 fast can this business grow? Any parameters around that would be helpful? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. JANUARY 31, 2025 / 5:00PM, PSX.N - Q4 2024 Phillips 66 Earnings Call

Question: Neil Mehta - Goldman Sachs Group, Inc. - Analyst : That's very helpful. And then the follow up is just as Midstream becomes a bigger part of the business, how do you think about the optimal capital structure? You provide new disclosure today about being less than three times net debt to Midstream and Marketing. So why is that the right number? And there's an argument that the business can run a little bit more levered as it has more fee-based earnings.

Question: Douglas Leggate - Wolfe Research. - Analyst : Thank you. I appreciate the chance to ask your question guys. Thanks so much. Mark, I don't want to put words in your mouth, I think I heard you say something along the lines of our new disposal targets. I don't think I actually heard of this new disposal target. So I realize you hit a lot of your targets early for 2025. But what is the scope of the scale? And I guess the way I heard it was you know, drop your debt and $17 billion clearly with additional disposals. And I wanted to ask specifically about where you are with the rest of the retail system in Europe. That's my first question. My follow up is really a follow up to Neils. We hear this a lot about the embedded value in so specifically around the Midstream and where the Midstream companies are trading. And obviously Epic is a terrific bolt on. But do you ever see a situation where Midstream is somehow separated or as a standalone business? I know it's a bit of a curveball question, but just in terms of the scale, the importance and maybe the failure of the market to recognize the value in your structure versus what you see for the standalone Midstream players.

Question: Douglas Leggate - Wolfe Research. - Analyst : I appreciate it. If I may, I risk a quick follow up at the risk of jets last year. But the example obviously I was thinking about was [Zempi LX] because clearly there's a marker there. But I take your point. My follow up really quick Mark is just remind us what the EBITDA is on the German, Austria business because we can all put multiple on that, I guess.

Question: Douglas Leggate - Wolfe Research. - Analyst : Great, thanks so much.

Question: Theresa Chen - Barclays Bank - Analyst : Hi. 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 [SSL] including the German, Austrian assets earmarked for that? How should we think about the path forward there?

Question: Theresa Chen - Barclays Bank - Analyst : Thank you. And then going back to the topic of additional Midstream growth. When thinking about other M&A opportunities here, totally understanding Don's comments about doing what's right from both a strategic and economic perspective. When we think about the Midstream assets that have been in the market, there are some that seem more obvious acquisition candidates for you, considering potential synergies in both Permian and DJ. And then coupling that with who the bigger shippers on both Sand Hills and Epic as well as the visible need for incremental Permian processing. Is FTC also a major concern here. Do you think that would preclude some of the more obvious opportunities along your mystery footprint?

Question: Manav Gupta - UBS Investment Bank - Analyst : 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 [ethane] chain margins and chemicals? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. JANUARY 31, 2025 / 5:00PM, PSX.N - Q4 2024 Phillips 66 Earnings Call

Question: Manav Gupta - UBS Investment Bank - Analyst : Perfect. My quick follow-up here is a very big improvement in renewable fuels, congratulations, breaking even. Help us understand quarter-over-quarter, some of the dynamics that went your way, which allowed you to almost raise earnings in renewable, feels, by like $150 million.

Question: Jean Ann Salisbury - BofA Securities - Analyst : I wanted to follow up on Theresa's question about the Epic acquisition. I think most midstream investors I talked to were a little surprised by the moves to add more NGL pipeline capacity without getting more processing to fill those pipelines. Given that you were already kind of under-indexed to processing before the deal compared to peers, I know the pipes are contracted medium term but does this put pressure on you to get more processing either organically or inorganically in the next few years as those contracts start to roll off? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. JANUARY 31, 2025 / 5:00PM, PSX.N - Q4 2024 Phillips 66 Earnings Call

Question: Roger Read - Wells Fargo Securities - Analyst : Maybe shift gears a little bit to Refining, if that's all right. Kind of two main questions. One, just as you look at the overall fundamentals, kind of how do you see the market here? And then the second part of that, digging in a little deeper on crude supply, crude availability. You've got, obviously, a lot of moving parts on the policy side, tariffs, sanctions on countries that have been supplying crude here, that sort of thing. Just kind of a broad question, but how do you see things?

Question: Roger Read - Wells Fargo Securities - Analyst : Very comprehensive. I'll turn it back.

Question: John Royall - JPMorgan Chase & Co - Analyst : So my first question is maybe you can talk about your outlook for your Refining business at mid-cycle. According to your slides, you've achieved the $5 billion of EBITDA. But if I remember correctly, you had a number of initiatives that you touched on at Investor Day around capture rates that weren't officially in those targets? I think you also have some ongoing reliability work and working around the OpEx side. So I'm just trying to think through if there's some possibility that that $5 billion can really be moving up over the next couple of years. Because it does feel like there's still some opportunity remaining there.

Question: John Royall - JPMorgan Chase & Co - Analyst : Very thorough. and if I could just follow up on RD margins. You've already given some thoughts on margins. But I was hoping to dig in on your thoughts on the 45 Z in particular. And what are the different scenarios for how that could play out this year? And maybe in the extreme where we have no BTC or PTC for a sustained period of time, what would that look like for the industry? Would you expect the RIN to plug the difference? Or will we end up seeing some kind of capacity coming out?

Question: Jason Gabelman - TD Cowen - Analyst : I wanted to ask another one on corporate structure. Phillips has been the -- they've shut down more refining assets since COVID relative to peers. And as you think about the right size of the Refining footprint, not only to kind of optimize the system but to support Midstream and get the right multiple within the company, do you see further potential to rationalize some of your refining assets? Or do you feel like after the LA refining shutdown, you're in a pretty competitive position with your Refining asset base?

Question: Jason Gabelman - TD Cowen - Analyst : And my follow-up is on the marketing business. There was a pretty large decline quarter-over-quarter, larger than what would seasonally be expected. I think you tend to see outside moves in marketing to the downside when crude prices increased rapidly, but we don't really see that in 4Q. So I was wondering if you could elaborate on what drove the marketing weakness in 4Q and if you expect that to continue or not.

Question: Matthew Blair - Tudor, Pickering, Holt & Co. Securities - Analyst : On the new target of $5.50 a barrel of controllable refinery cost, I think you were at $6.71 in 2024, which already reflected some pretty good progress. Could you talk about the additional levers that you can pull? And then of the delta of the new target, how much will the closure of the Los Angeles Refinery to contribute to that further improvement?

Question: Matthew Blair - Tudor, Pickering, Holt & Co. Securities - Analyst : Sounds good. And then you mentioned that there was no SAF production in the fourth quarter. As we turn into 2025, the EU is implementing the 2% SAF blending mandate. So could you talk about what you're seeing in that market? Are you seeing calls for increased SAF demand as a result of this EU mandate? Or has that not really materialized yet? And would you expect to increase your SAF production as we progress through 2025?

Question: Paul Cheng - Scotiabank Global Banking and Markets - Analyst : I think the first question is for Kevin and Mark here. You said a reduction target of $17 billion. So that's about $5 billion lower than your current level. Meanwhile, that -- and you're saying that this is a priority. But meanwhile that you're also looking to grow your EBITDA and through perhaps some accretive bolt-on acquisition, like Epic, I think that is probably a good acquisition. But on the other hand, you add to your leverage. So how -- I mean, how we prioritize between the two? That should the debt reduction take a more priority until that you are at a lower level? Or do you think that, as I think Kevin in his prepared remarks saying, you actually feel already reasonably comfortable. So if there's an inorganic opportunity, you think it's good that you will put it further delay on the debt reduction and go with that acquisition opportunity.

Question: Paul Cheng - Scotiabank Global Banking and Markets - Analyst : I'm sorry, but I'm including Epic.

Question: Paul Cheng - Scotiabank Global Banking and Markets - Analyst : I fully understand on that. I'm just trying to get some better understanding, if you do deal with, say, $2 billion or $3 billion of acquisition opportunity, and you think that it's actually quite accretive, comparing to the objective of deleveraging, I mean how at that point that you will consider or which is going to take the priority?

Question: Paul Cheng - Scotiabank Global Banking and Markets - Analyst : Okay. Kevin, second one is a real short one. We see still a bit of the uncertainty on PTC in the first quarter for your RD business. Do you think you will start recording some of the benefit related to PTC or that you're not going to report any PTC credits until you are 100% certain on everything?

Question: Ryan Todd - Piper Sandler & Co. - Analyst : Maybe a couple of quick ones. I appreciate the comments you gave on Refining capture in the fourth quarter, which is really strong. Any comments on how you would see in the early part of this year the outlook, any moving pieces that might drive capture rate higher or lower on the Refining side? And then maybe just as part of the business transformation process, curious as to where you think you are in terms of progress on the commercial side of things.