菲利普斯66 (PSX) 2012 Q3 法說會逐字稿

Welcome to the third quarter 2012 Phillips 66 earnings conference call.

My name is Kim, and I will 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 Mr. Clayton Reasor, Senior Vice President, Investor Relations, Strategy and Corporate Affairs.

Mr. Reasor, you may again.

Thank you, Kim.

Good morning, and welcome to Phillips 66 third-quarter conference call.

We appreciate your interest in our Company.

Before we get started we wanted to share our concern about those hurt by Hurricane Sandy.

Many of our employees, shareholders, customers, and friends were impacted by this devastating storm.

And we're supportive of efforts being made to help get lives back to normal.

Our thoughts and prayers are with you all.

Joining me this morning are Tim Taylor, EVP Commercial Transportation, Business Development and Marketing.

As well as Greg Maxwell, Executive Vice President, Finance, and our CFO.

We'll give you details about our third-quarter financial results, provide some guidance about the fourth quarter, and communicate our plans for growth and enhancing returns which allow us to increase future distributions to shareholders.

The presentation material we will use this morning 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.

It's a reminder that we'll be making forward-looking statements during the presentation and our question-and-answer session.

Actual results may differ materially from today's comments.

And factors that could cause our actual results to differ are included here on the second page, as well as in our filings with the SEC.

So that said, I'll turn the call to our CFO, Greg Maxwell, to take you through our third-quarter results.

Greg?

Thanks, Clayton.

Good morning, everyone.

I'll start on slide 3 with some highlights for the third quarter.

Our reported earnings were $1.6 billion or $2.51 per share.

Excluding approximately $300 million in special items, largely related to impairments, our adjusted earnings were $1.9 billion, or $2.97 a share.

Excluding special items, our year-to-date annualized return on capital employed is 21%, which is up from 18% in the second quarter.

With cash from operations coming in at $1.9 billion.

Consistent with our stated intent to return capital to our shareholders, we commenced our share repurchase plan in August, purchasing over $100 million of common stock during the quarter.

And we also paid $125 million in dividends.

Now let's turn to slide 4 for a high-level look at our third-quarter adjusted earnings.

Compared to the third quarter of 2011, our adjusted earnings increased by $369 million.

Starting from the left side of the slide, Refining and Marketing generated $1.7 billion in earnings.

With the majority of the $400 million improvement driven by much stronger refining margins due largely by improved crack spreads.

Midstream earnings were $56 million, which excludes the $133 million special item related to the impairment of our 25% ownership interest in the Rockies Express Pipeline.

On an adjusted basis, Midstream earnings were approximately $60 million lower than last year.

And this decline in earnings reflects a reduction in equity earnings from DCP Midstream, driven primarily by lower NGL prices.

Chemicals earnings of $275 million, which excludes $122 million of special items primarily associated with CPChem's early retirement of $400 million of debt, along with some asset impairments.

Adjusted earnings were approximately $80 million higher than the corresponding quarter of 2011.

And this was mainly due to higher margins and lower utility costs.

I will cover each of these operating segments in more detail later in the presentation.

Excluding $13 million of repositioning costs, Corporate and Other costs this quarter were $112 million.

The negative $65 million variance is largely due to higher interest expense on debt that was not in place last year prior to the spin.

Now let's take a look at the cash flow for the third quarter, as shown on slide 5. During the quarter, we generated $1.9 billion in cash from operations, including $200 million of positive impacts from networking capital changes.

As noted on the slide, we funded $300 million of our capital program, primarily Refining and Marketing related.

And returned more than $200 million to the shareholders in the form of share buy backs and dividends.

Our cash balance increased by $1.3 billion, resulting in $4.4 billion in cash and cash equivalents at the end of the third quarter.

Now let's turn to slide 6 for a look at our capital structure and our returns.

We ended the third quarter with $21 billion in equity and $8 billion of debt, resulting in a debt to capital ratio of 28%, which is 2% lower than last quarter.

Taking into account our $4.4 billion ending cash balance, our net debt to capital ratio was 15%.

On an adjusted basis, our year-to-date annualized return on capital employed was 21%.

This is up from 14% in 2011.

This improvement was driven primarily by higher earnings in our Refining and Marketing and Chemicals segments.

We ended the quarter with $29 billion in capital employed, up $2 billion compared to the second quarter.

74% of our capital employed was R&M related, down from 76% in the second quarter.

Next we'll cover each of our operating segments in more detail, starting with Refining and Marketing on slide 7. In R&M we ran very well in a strong margin environment.

Globally we ran at a 96% utilization rate despite our Alliance refinery being down for approximately three weeks related to the impact of Hurricane Isaac.

And our clean product yield was 83%.

As part of our ongoing strategy to enhance returns, we are taking steps to process more North American advantaged crudes.

During the third quarter 63% of our US crude slate was advantaged.

And this is up from an average of 61% for the first three quarters of the year.

Marketing margins were lower this quarter, and we'll cover this in more detail later in the webcast.

Our refining realized margin was $17.05 per barrel.

And our year-to-date annualized return on capital employed improved to 22%.

Let's now turn to slide 8 where we'll cover adjusted earnings for Refining and Marketing.

Earnings for R&M were $1.7 billion this quarter.

This is up from $1.3 billion a year ago, reflecting significant improvements in our Atlantic Basin Europe and Central Corridor regions.

Partially offset by lower earnings from marketing, specialties and other, or as we refer to as MSO.

In the Atlantic Basin region, earnings increased due to improved refining margins and lower controllable costs.

Margins improved largely as a result of higher crack spreads, while controllable costs were lower, primarily due to the Trainer and Wilhelmshaven refineries no longer being in our portfolio.

Gulf Coast earnings were up slightly due to higher refining margins, as market cracks were partially offset by lower product differentials and lower secondary product realizations.

The Central Corridor improved significantly this quarter due to higher refining margins, reflecting our advantaged feedstock position in the region as the WTI-WCS differential widened.

And we increased the amount of our sour crude processed at the Wood River and Ponca City refineries.

The Western Pacific region's earnings were higher this quarter compared to a year ago, primarily due to higher refining margins.

US Marketing Specialties and Other was down by $95 million.

This was primarily due to lower margins and the negative impact associated with Hurricane Isaac.

And internationally, MSO was down $60 million, mainly as a result of lower margins.

The next few slides highlight our performance in refining and provide more detail on MSO.

So now turning to slide 9. Refining's adjusted earnings increased over $500 million compared to a year ago.

Improved margins were the key driver, with higher market cracks and higher feedstock advantages.

Being partially offset by less favorable product differentials and secondary products.

Earnings were up $55 million as a result of higher volumes, mainly in the Central Corridor where we were able to take advantage of lower-cost crudes.

We also had lower operating costs, largely due to no longer having the Trainer and Wilhelmshaven refineries in our portfolio.

Let's now take a look at our market capture shown on slide 10.

Here we look at our global market and realized crack spreads.

The market crack was very strong this quarter, and we captured nearly 80% of the market crack, up nearly 10% from the second quarter.

Our realized margin for the quarter was over $17 per barrel.

And we capitalized on these favorable margins by operating well with a 96% utilization rate.

As I mentioned earlier, our actual clean product yield for the quarter was 83%, which results in the $3.42 adjustment shown on the slide.

The $5.39 per barrel reduction related to secondary products reflects the fact that the non-clean products we produce attracted a sales price which, on average, was lower than the cost of our benchmark crudes.

The positive $4.82 per barrel for feedstocks stems from running crudes and other feedstocks that are priced lower than our benchmark crudes.

Our feedstock advantage this quarter was primarily related to the Canadian heavy and foreign sour crudes that we process.

As well as increased shale and WTI-based crudes on the Gulf Coast.

Finally, the Other category primarily reflects the impacts of product differentials.

You'll see in the appendix that we have also included updated market indicator crack spreads for each of our regions.

Moving on to slide 11.

This slide shows that during the year we have increased advantaged crude runs at our refineries, while also improving our clean product yield.

Many of our refineries have the complexity to run advantaged Canadian crudes.

And we have access to multiple transportation systems to reliably deliver these crudes to our US refineries, resulting in an overall competitive advantage.

US advantaged crudes increased from 52% last year to 61% year to date in 2012.

This was primarily driven by an increase in Canadian heavy crudes, as well as domestic WTI price-linked stream, including an increase in the amount of shale crudes that we processed.

Please note that the bar graph on the left has been updated from what we shared with you last quarter, as we are now providing additional detail on the different types of US crude slates that we run.

Now moving on to slide 12.

Marketing, Specialties and Other generated earnings of $95 million.

That's $154 million lower than the same quarter last year.

As shown on the slide, lower margins were the main driver for the decrease, accounting for approximately $130 million of the variance.

We saw large swings quarter versus quarter as we had gains last year related to inventory management compared with losses this year.

Also impacting margins were product prices rising more sharply this year compared to last year, tied mainly to the impacts from Hurricane Isaac and lower gasoline exports.

Volumes decreased over $30 million quarter-over-quarter, primarily due to reduced volumes resulting from a weaker power market, planned maintenance internationally and from Hurricane Isaac domestically.

Other includes favorable foreign exchange impacts.

Year to date MSO has generated earnings of over $500 million, which is in line with year-to-date earnings that we showed for 2011.

Slide 13 shows our per barrel metrics.

Refining and Marketing's income per barrel improved this quarter to $6.37 per barrel.

With cash contributions of $7.21 per barrel.

This now completes our review of the Refining and Marketing business segment.

Next we move to the Midstream segment, beginning on slide 14.

Our Midstream segment was impacted this quarter by reduced equity earnings from DCP Midstream, largely driven by depressed NGL prices as quarter-over-quarter prices were down 42%.

Year-to-date our annualized return on capital employed was 28%, down slightly from the high of 30% in 2011.

We ended the quarter with $800 million in capital employed in our Midstream segment.

As mentioned earlier, during the quarter reported earnings were negatively impacted by approximately $133 million associated with the after-tax non-cash impairment of our equity investment in the Rockies Express Pipeline.

As we move to slide 15, Midstream's adjusted earnings of $56 million were comprised of $39 million in earnings associated with our interest in DCP Midstream and $17 million from our other midstream businesses.

The next slide provides additional [variance] explanations for both DCP Midstream and other midstream earnings.

As shown on the top portion of this slide, earnings associated with our interest in DCP Midstream decreased by $48 million this quarter, mainly due to DCP's exposure to NGL prices.

This was partially offset by a reduction in depreciation expense that is attributable to an overall increase in the remaining useful lives of DCP's assets that was implemented last quarter.

Our other midstream businesses were down $14 million, driven in part due to inventory impacts.

Shifting now to a discussion of our Chemicals segment, please turn to slide 17.

Our Chemicals segment consists of our 50% equity interest in Chevron Phillips Chemical Company, or CPChem.

CPChem had another great quarter, providing equity earnings of $275 million.

CPChem achieved 97% capacity utilization rate in its Olefins and Polyolefins segment, allowing it to capture the cost advantages in the North American and Middle Eastern ethylene and derivatives markets.

Year-to-date annualized after-tax return on capital employed for our Chemicals segment increased from 31%.

This is up from 28% last year.

And we ended the quarter with $3.6 billion in capital employed.

Special items for the quarter included $122 million for losses associated with CPChem's early debt retirement and impairment of fixed assets.

Along with an increase in deferred tax liabilities related to the Phillips 66 spin from ConocoPhillips.

The next couple of slides provide more detail on the Chemicals segment earnings.

Turning to slide 18, this quarter adjusted earnings increased by $82 million compared to the same period last year.

The increase in earnings was primarily in Olefins and Polyolefins due to stronger chain margins.

This was primarily attributed to reduced feedstock costs due to higher industry ethane inventories.

As well as continued strong demand for derivatives.

Additionally, CPChem's operations continued to benefit from lower utility costs stemming from low natural gas prices.

Slide 19 provides additional details on CPChem's operating segments.

In the top part of the chart, Olefins and Polyolefins generated equity earnings of $225 million in the third quarter.

As previously mentioned, the $63 million increase was due primarily from higher Olefins, Polyolefins chain margins and lower utility costs as a result of reduced natural gas prices.

Equity earnings from Specialties, Aromatics and Styrenics increased by $4 million compared to the same period last year.

This was mainly due to higher equity earnings from Saudi Chevron Phillips, driven primarily by higher sales volumes and margins.

This concludes our discussion of the financial and operating results for the quarter.

Next I will provide you with some outlook items for the fourth quarter.

As shown on slide 20, I wanted to start by providing an update on our Northeast operations where we have the Bayway refinery located in Linden, New Jersey.

And three storage terminals in the New York-New Jersey area.

As you know, Hurricane Sandy made landfall in the Northeast on Monday evening.

Prior to the storm, we safely idled the refinery and shut down the terminals as a precautionary measure.

There was some flooding in low-lying areas of the refinery but flood waters have since receded.

And as of this morning power has been restored at Bayway.

We are currently assessing the condition of the assets.

And a decision on resuming operations will be made once this assessment is complete.

So, from an outlook perspective, for the fourth quarter in Refining and Marketing, assuming Bayway is running, we expect our global utilization rate to be in the low 90%s.

And our pre-tax turnaround expenses to be approximately $100 million.

The scheduled maintenance turnarounds at the Wood River, Borger, and LA refineries are currently underway and are proceeding as planned.

With return to normal operations expected in November.

In Midstream, as we noted in our earnings release, we expect to acquire an interest in two NGL pipelines currently being constructed by DCP Midstream.

Tim will talk about this more later in his remarks.

This investment will increase our total capital investments by an estimated $700 million to $800 million over the 2012 and 2013 time periods.

Excluding the pipeline expenditures, total capital expense for the year is estimated at $1.2 billion to $1.4 billion.

In Chemicals, distributions resumed in the fourth quarter after the completion of CPChem's debt repayment program.

Corporate and Other is expected to be a cost of about $40 million per month, or approximately $120 million for the quarter.

And this includes after-tax net interest expense of about $50 million.

In October, our Board of Directors declared a $0.25 per share dividend payable in the fourth quarter.

This 25% dividend increase, along with our $1 billion share repurchase plan, is part of our strategy to return capital to our shareholders.

We expect to complete the share repurchase program by the end of 2013.

We can now turn to slide 21.

And I'll hand the call over to Tim Taylor to take you through an update on how we are advancing our strategic initiatives.

Tim.

Thanks, Greg.

We continued to execute our strategy of enhancing returns, delivering growth, and increasing shareholder distributions.

In Refining and Marketing, we are improving margins, enhancing returns by increasing runs of advantaged feedstocks, and increasing refined product export capability.

In order to supply higher quality, lower cost crude to our refineries, we are improving our logistics infrastructure and developing new sources of crude supply.

For example, we are delivering 30,000 to 40,000 barrels per day of advantaged crude to our Bayway refinery by rail.

We are also ramping up deliveries of locally produced Mississippian lime crude into our Ponca City refinery via pipeline and truck.

We expect to receive up to an additional 50,000 barrels per day of this high-quality crude into Ponca City by the end of 2013.

We've also reached agreement with Kinder Morgan to deliver up to 30,000 barrels per day of Eagle Ford crude via a new pipeline connection to our Sweeney refinery in early 2014.

All in all, by mid 2014, these actions, along with others that we're taking, are expected to increase our access to advantaged crudes by about 165,000 barrels per day across our domestic refining system.

This represents about 9% of our US refining capacity.

We also continue to increase clean product export capability through low-cost capital investments in order to meet growing international demand.

As part of our ongoing portfolio optimization efforts, we've been evaluating the potential disposition of the 1.2-gigawatt Immingham Combined Heat and Power Plant in North Lincolnshire, England, which is adjacent to our Humber Refinery.

The marketing period could last several months and we'll continue to operate the asset as usual during this period.

We remain committed to expanding the midstream business as part of our strategy to deliver long-term profitable and valuable growth.

We have reached agreement in principle to acquire a one-third ownership interest in DCP's Sand Hills and Southern Hills NGL pipelines, representing a total estimated investment of approximately $700 million to $800 million.

This investment will enable DCP to maintain its growth plan through the 2015 time period.

And these pipelines strategically complement our Midstream and Chemicals businesses.

The Sand Hills pipeline is expected to commence deliveries of NGL from the Eagle Ford shale into Mont Bellvieu by year end.

DCP recently started the South Texas segment of its Sand Hills NGL pipeline, initially delivering 10,000 barrels per day of liquids from the Eagle Ford to the DCP Partners Willbreeze pipeline.

The second phase, with service from the Permian Basin, is targeted to be in operation by the second quarter of 2013.

The Southern Hills Pipeline project, which will extend from the Mid-Continent Region to Mont Bellvieu, Texas, remains on schedule for completion in mid 2013.

In Chemicals, CPChem announced in October that the Saudi Polymers Company world-scale petrochemicals facility in Saudi Arabia began commercial production.

CPChem's projects in the US Gulf Coast are progressing as planned, including the proposed ethane cracker and related polyethylene facilities, as well as their 1-hexene plant.

Finally, we'd like to remind you that we'll be hosting our first Phillips 66 Analyst Meeting in New York on December 13.

We look forward to seeing you there or having you listen to our webcast.

This completes our prepared remarks and we'll now open the line for questions.

(Operator Instructions)

Edward Westlake from Credit Suisse.

Congratulations on the earnings.

And I obviously hope everyone at Bayway is safe.

A quick question.

Firstly, you've got very strong free cash generation.

So our thoughts are going to turn to additional opportunities, as well as distributions.

I'm sure you're going to get lots of these questions at the analyst day.

But can I ask you a question about returns?

What sort of hurdle rates do you think are appropriate for, say, volatile chemical cracking or NGL fractionation versus longer-term, more stable logistics contracts?

I think when you look at the midstream and fee-based projects, we see returns in the low double digits to mid teens.

As you think about the Chemicals space, we would plan in the 15% or higher returns for that.

And similar thoughts around the NGL expansions.

Great.

And then when I am talking about -- obviously we can see a lot of logistics growth potential in North America but I'm less familiar with the potential in Chemicals.

You've talked very clearly about the Gulf Coast ethane cracker.

But I'm just wondering, could you give us any thoughts about other opportunities outside of that big project that you could potentially go for?

When you look at the Chemicals business, it's a global business.

The investment, the thesis, really, for CPChem has been the focus on advantaged feedstocks.

And so it's gone from the Middle East in the early 2000s to really now strong positioning in North America.

And so they continue to look at where they can have a competitive advantage in terms of project development on a global basis.

So I think initially still the Middle East, North America rise to the top.

But there is always interest in Asia, as well, because of the growth in the market.

And any opportunities further downstream or just stay pretty much upstream?

As far as downstream from ethylene.

I think really the focus has been on the polyolefins and olefin and ethylene derivatives chain.

And there are other options as you begin to look at other kinds of materials.

There's strong presence in the aromatics business, as well.

But right now the biggest opportunities have been really in the olefins part of the chain.

All right.

Thanks very much.

Doug Terreson from ISI.

Congratulations on your results, everybody.

You guys have been very opportunistic on the use of advantaged feedstock, especially on the West Coast, Mid-Continent and the Gulf Coast, too.

On this point, I wanted to see whether or not you consider there to be significant opportunities on the West Coast, as well, and how you may be thinking about some of those options.

And also on the West Coast, some of your competitors appear to be reconsidering their desire to participate in the California market because of some of the costs that may be associated with the new regulatory plan.

So my question regards your strategic view of the West Coast market and whether you feel that the positions out there are sufficiently advantaged that they warrant continued participation?

Just a strategic update on the position of the West Coast as a whole, as well.

Let me take those a little bit in terms of the market opportunity in the West Coast.

Clearly, when we look at the West Coast, it's been one of the more challenged markets from a recovery standpoint post-recession.

In California, specifically, it's a tough regulatory environment, as well, so costs are higher.

And there is a lot of potential additional costs as new regulations come into effect.

That said, it's still a very significant market and we think it's really important to look at how can we get some of these crudes out of the middle part of the country into the West Coast, particularly California.

So we're working hard on that to try and change that.

The comment I'd make in Washington is that that's got a natural access to the Bakken in North Dakota and Canadian crudes.

We separate the Washington piece from the California piece that way.

But everyone's working hard to look at some crude solutions for the West Coast to improve its competitive position.

Great.

Thanks a lot.

Jeff Dietert from Simmons.

You mentioned the $250 million of feedstock advantages in the press release.

And I appreciate the comments also in your lead-in on the 30,000 to 40,000 barrels a day of Bayway rail.

But I was hoping you could put that $250 million in perspective, perhaps discuss which regions it's most impactful and what arbitrages you are capturing.

When we look at that, it's a significant advantage this quarter.

We touched on the East Coast, which is the Bayway, with the ability to bring shale crude into Bayway.

It's got a great appetite for it.

The other place that we're really seeing the change is in the Gulf Coast, where we're seeing the HLS, LLS and the Brent relationships change.

And bringing in more domestic light sweet crudes into that region, as well.

Access and supply of domestic light into that region has improved its competitive position.

And is that primarily Eagle Ford crude going in to replace LLS, HLS?

That's Eagle Ford crude moving in from Texas is doing that, as well.

There is also going to be increasing amounts of WTI moving into that area, as well.

Via rail?

Via rail today and then obviously the pipeline logistics infrastructure is changing now with the Cushing to seaway reversal and Cushing connection.

Very well.

Thanks for your comments.

Blake Fernandez from Howard Weil.

I had a number of questions on the Sand Hills and Southern Hills.

I will just rattle them off here all together and maybe you could respond.

For one, I am trying to understand the nature of the contracts.

Can you remind me, are they fee-based or POP?

I am trying to understand or just confirm that it is, indeed, a one-third outright ownership of PSX outside of DCP.

And if that is indeed the case, ultimately where do you see that ownership landing?

Could it ultimately be moved to DCP?

I know you are considering a new MLP potentially.

Could it be moved there?

Or do you see it just remaining in the PSX umbrella?

And then, finally, on CapEx, I think I heard a $1.2 billion to $1.4 billion.

I am trying to understand.

I thought that was roughly in the range of where we had previous guidance.

Obviously this is an incremental investment.

So I'm trying to make sure I understand the moving pieces of how CapEx is going to change as a result of this.

With regard to the nature of the contracts, still in process.

But they're pushing more DCP Midstream, pushing more towards fee-based contracts.

The intent for DCP, their stated intent is to drop their one-third interest into DPM.

And having fee-based contracts obviously is a very positive thing for an MLP.

I may have spoken too fast with regard to the guidance.

The guidance for capital expenditures for the year is in the $1.2 billion to $1.4 billion range, excluding the investment that we would make in Sand Hills and Southern hills, our one-third share.

We estimate that to be in the $700 million to $800 million range.

With regard to the structure, we're still working on the structure.

We currently anticipate that we would be acquiring a one-third interest in which it would be a JV-related structure.

And so Spectra, as well as DCP at this time, would own a one-third interest in a JV structure.

Okay.

And then just one more detailed follow up, if I could.

Just on the share account, I noticed it actually increased almost 2.7 million shares or so quarter to quarter despite the buybacks.

I am just trying to understand if there was anything we should be aware of going on there?

It's two-fold really, Blake.

We purchased what turns out to be a little bit more ratably over the third quarter.

So from a weighted average perspective, you won't see the full impact of those purchased shares until we get into really the fourth quarter.

On the flip side, the share issuance, you saw that we lost a little ground on a weighted average basis.

But a lot of that was tied to the exercise of options, primarily from non-PSX or Phillips 66 employees.

As well as some additional issuances on our long-term stock savings plan.

So it should be more of a one-time event with regard to that.

A very astute question.

We think from an actual end-of-the-quarter perspective, we basically on a basic share perspective stayed roughly even.

Okay.

Fair enough.

Thanks a lot.

Bye.

Kate Minyard, JPMorgan.

I just wanted to ask a few questions on some of the comments that you have around the export capability and increasing that over time.

You talk in the press release about increasing export capability through some low-cost capital investments.

My questions are, first of all, where do you see the opportunity as being the greatest, whether geographically or product-wise?

And, then, what's the time horizon of this opportunity?

In other words, how soon does Phillips 66 want to recover its capital and generate a return in order to justify these investments?

And then, finally, how much more flexible is your current refining configuration?

So what could you do without additional CapEx in the interim?

We're actually doing a number of projects at our refineries that are located with access to water.

And particularly focused in the Gulf Coast and the West Coast.

So these are typically pipeline connectors, tankage, those kinds of things that can increase the rates or the availability to load export cargos.

From an opportunity standpoint, when we look at that, it's really, when you look at that it's the Atlantic basin, specifically Latin America and West Africa that today have been the primary opportunities that have developed from that standpoint.

And based on supply-demand balances going forward we would expect that to continue.

Okay.

Did we answer all your questions, Kate?

There was something else I think you asked.

Is there a particular time horizon?

You indicate that you think the opportunity would continue.

But is there a time horizon?

Is this a three-year opportunity?

Or do you see it as more extensive?

Or would you like to recover your capital and return a little bit sooner than that?

Our target would be go up to 220,000, 230,000 barrels a day of export capability.

We're looking to get that done by the end of next year.

When we talk about low cost, short term, these are relatively minor projects that we can execute quickly.

All right.

Great.

Thanks very much.

Faisel Khan from Citigroup.

I am wondering if you could elaborate a little bit more on some of the remarks you made in your strategic initiatives section of your press release.

You guys talk about how the PSX has recently entered into several transportation agreements and plans to improve target and logistics infrastructure.

Could you elaborate a little bit more on what these several transportation agreements are and the duration of these agreement?

And then I have a follow up after that.

Thanks.

Faisel, we did talk about the connection to the Kinder Morgan crude condensate line that runs close to the Sweeney refinery.

That's actually a project or a connector pipeline that's relatively short that will be built by Kinder Morgan.

And so that's a throughput pipeline connection agreement that we have specifically for that.

Beyond that, we have talked in the last couple of months about our purchase of rail cars to have a very flexible method of delivering these crudes in the developing plays into our refining system.

So there, it's not only an investment in rail cars but it's also an investment around the infrastructure to unload rail cars and to load those.

Really, when we look at our system, it's the ability to unload the rail cars, when we think about infrastructure or logistics, that we are looking at, for instance at Bayway and other refineries, as a way to increase the amount of rail that we can take into those various refineries.

So that's the capital side.

Then we've got the commitments in terms from time to time with other third-party logistics providers to make that happen, as well.

Faisel, there are probably some other things that we are working on now.

It would be premature for us to disclose because those contracts haven't been finalized, or the agreements with our counterparties haven't been flanged up.

So there is a lot of work that's going on in this area.

You should expect hearing more as time goes forward.

Tim, I don't know if you want to--?

There is a lot of pipeline expansions and opportunities there.

We're just making sure that we're looking at all those opportunities.

Okay.

Understood.

Could you talk a little bit more about -- I believe you said there is major maintenance going on or turnarounds going on Wood River.

And I think you said Ponca and Borger.

But I was wondering if you could elaborate a little bit more on that in terms of what those turnarounds are for and what you guys are doing in your Mid-Continent portfolio.

Wood River and Borger are both in turnarounds today.

We expect those back in operation here in November.

Those are major turnarounds.

Borger is a very significant one.

We do have some operations continuing at Wood River today.

Those are planned turnarounds that we've had.

We've got smaller turnarounds going on at LA that has some minor impacts in terms of its throughput.

I think we talked about $100 million in turnaround expense this quarter.

Right.

Okay, great.

And then last question from me.

The 30,000 to 40,000 barrels a day of advantaged crude that you guys consumed at Bayway, is there any way to give us an idea of what the cost of getting that crude into the refinery was?

What was the advantage of bringing in that crude versus, say, taking a West African barrel?

Was it a $3 advantage, a $5 advantage?

What was the real crude advantage you guys realized into Bayway from that strategy?

I think you can appreciate the prices moved around, but on average we would use $2 to $3 a barrel.

Great.

Thank you very much.

Appreciate the time.

Doug Leggate from Bank of America.

I've got one strategic and a couple housekeeping ones.

As you look at the Gulf Coast, you talked in your remarks about how you started to see Louisiana light, see some benefit relative to imported lights from crude, like Brent for example.

We've obviously been noticing that, as well.

I am curious as to whether you could give us your prognosis as to how this is likely to play out and how you react to it in terms of your ability to ramp up your light sweet crude barrels and maybe substitute your light sweet crude barrels.

Doug, this is a continuing story.

We have seen the imports of offshore light sweet diminished, particularly in the Gulf Coast.

So I think all of us in that area are looking at that.

We're very active in this area.

The increasing supply of these light crudes out of the US, ultimately we believe that will displace that water-borne barrel into particularly the Gulf Coast.

Our view is that when that happens, that puts additional pressure on the LLS price to be competitive.

So I think that we would continue to expect that there could perhaps be some additional widening on the Brent LLS spread.

Do you think what we are seeing right now is indicative that this has already started to happen?

I believe it has started to happen, yes.

Okay.

Have you guys taken any baseline shipping commitments on the seaway expansion?

I'm not sure we have.

If we did, we probably wouldn't want to disclose it.

Right.

Okay.

Fair enough.

The housekeeping ones, just real quick.

The inventory gain -- Clayton, I take it that's included in the gross margins.

Can you break it out by region as to where that gain was realized?

You are talking about the $100 million difference year over year?

Right.

Do we have that, Greg?

As far as the split?

Most of that was in the Gulf region and then the east Atlantic basin area, as I recall.

Doug, the single largest variance was in the Atlantic basin - Europe area, of the $100 million.

Got it.

That's what I was expecting.

The final one, I don't know if you can give me this or not.

But it looks to us, following Valero's results yesterday and yours today, it looks like the Europeans out of the Atlantic basin was very strong.

Is there any way you could give us some kind of indicative split as to how the earnings split between the US and the international piece of that?

And I will leave it at that.

Let's see -- we may have something.

Do you have that, Greg?

I think we'll have to get that for him.

I would just say the European refiners, when you look at the third quarter, that was their best quarter of the year.

I think Whitegate, MiRO and Humber all had good quarters.

But Bayway did, as well.

I would say most of the change probably comes from an improvement in earnings out of Europe rather than an improvement in Bayway.

That's really helpful.

All right guys, thanks for your time.

Paul Cheng from Barclays.

Hopefully there is a number of quick questions.

Greg, can you share with us that in general what is new on your insurance policy in terms of BI and property damage?

You are probably talking specifically with the Bayway incident and the terminals, Paul.

That's right.

From a perspective of that, that falls under named wind storm coverage.

And as a result, other than a smaller piece in our participation in OIO, we do not have any commercial insurance associated with named wind storm coverage.

So as a result, we're basically self-funded.

Okay.

Do you have any BI, business interruption insurance?

Or not really?

Yes, we do carry BI insurance.

But, as you are probably aware, you have to actually take out named wind storm coverage in order to get that associated with any hurricane activity.

So, as a result, given the pricing, as well as our view of the overall total impact that a hurricane or named wind storm could have on our operations, we elected not to take out that coverage.

Okay.

The second question.

Greg, if we assume that the Saudi Arabia chemical plant, the polymer plant, actually was onstream before the third quarter.

Based on the market condition then, what would the earning contribution to you guys would be?

You are talking about SPCo startup?

That's correct.

I think it actually started up in October.

Right.

I was saying that if we assume that it actually proforma'd, it actually run in the third quarter, what type of earning contribution may you have?

Do you guys have a number you can share?

I think it's clearly in the ramp-up phase of their operations today.

But I think in a longer term I might say steady state basis.

We'd look at that to be 10% or so of the CPChem contribution.

Okay.

Greg, can I have some quick balance sheet data?

What is your working capital market value of inventory in excess of the bulk?

And of the total debt, how much is (inaudible) that you're seeing in the long-term debt?

With regard to the replacement cost in excess of LIFO, Paul, I think is what you are after?

Yes.

At the end of September that was about $7.9 billion.

Okay.

Do you have a working capital number you can share?

Yes.

The working capital, we have current assets of about $17 billion excluding cash.

And then on the short-term liability perspective, about $16.4 billion.

And long-term debt component of the total debt?

Long-term debt basically is about $7.5 billion.

You probably are aware that on our term loan it's a three-year term loan and we have about a $570 million payment coming due in April of 2013.

Tim, earlier you are talking about Bayway is about 30,000, 40,000 barrels per day of the domestic advantaged crude that you now run in the third quarter.

From the second to third quarter, did we have that increase or that they have already been running at that rate?

They have increased, Paul.

I can't remember the exact increase but we're increasing that.

As you can guess we're continuing to, so to speak, test the limits.

And we can go substantially higher.

I think the challenge for us is to continue to work logistics and get more and more of that into the Bayway refinery.

Do you have a number then how much is the increase on the WTI link including the Eagle Ford crude runs sequentially from second to third quarter in the Gulf Coast?

Gulf Coast crude run changes.

I'd have to see if I can get back.

It did increase.

Alliance was down so the percentages as a percent of total, it impacted that somewhat.

It probably did not go up because Alliance was down for two or three weeks.

I see.

And then in earlier comment that you say for Bayway, the Op that you realized is about, say, in the $2 range.

Do you have a similar number for the Gulf Coast?

Uplift relative to West African or North Sea crudes.

It's still driven off the LLS, HLS dips.

So it's probably in the same order of magnitude right now in that area, as well.

I see.

Two final one.

One of your competitors is voicing concern about the California market over long-term future given the regulatory environment.

I want to see that what is the view of PSX in terms of California?

Is that still considered as a core market for you or that you also have your own doubt?

Second one I think maybe is for Greg.

On dividend, you guys have a nice increase, 25%, but your payout is still extremely low.

And that your yield is about 2.1%, certainly lower than some of your peers.

I just want to understand, in terms of the criteria, and also the time line, how the Board will determine in terms of when or by how much that.

What kind of criteria they need to see in order for them to raise it in a more significant way on the regular dividend, given that I think a lot of your long- or near-term investors may probably quite appreciate a higher dividend yield.

Paul, I'll address the market question in California.

As I said a little bit earlier, I think we look at the market and say demand continues to struggle out there, as well, post-recession.

And then I think you look more fundamentally at the operating environment and the costs associated with particularly the environmental regulations.

And we think that's going to continue to keep pressure on operations and operating costs out there.

So, yes, I would say that from a California perspective it is one of the more challenged parts of our portfolio in terms of the basic value equation.

So that's why we're still looking at the crude side of it.

And continuing to stay abreast and on top of what it's going to take to comply with things like AB32 to really maintain your operations out there.

But, Tim, do you still view that as a part of your core portfolio, or that you may have doubts?

In the past, California's been a really good in-the-market at times.

But right now it is our lower performing.

So I think that if our assessment would become that it's going to be challenged for some period of time, we've either got to find a way to improve that operation or find some other way to deal with that.

On the dividend question, Paul, that's something that we always look at.

And I think that's evidenced by our 25% increase.

Our objective is to have a dividend that is competitive.

We want it to be also affordable.

And we also want it to grow over time.

I think Greg Garland, our Chairman, his view is he wants to look ten years down the road in the rear view mirror and say every single year he's had a history of Phillips 66 increasing our dividend.

Having said that, though, we also recognize that we're in a highly cyclical business.

And, as such, one of the ways we have tried complementing returning value back to the shareholders is through our share repurchase program.

That gives us an opportunity to basically create a swing, a variable swing that in the event that we hit the low point of the cycle then we are able to maybe pull back a bit on that if our cash requirements required it.

So, I think from a guidance perspective, the intent is for us to look at and get in a pattern of an annual view of our dividend increases.

And probably take an assessment and raise the dividends, if appropriate, on an annual basis.

Thank you.

Evan Calio from Morgan Stanley.

Good morning, guys, great results.

A quick follow-up and then a different question on utilization levels.

How much LLS are you running today and that's not currently considered an advantaged crude in your 63% calculation?

That's primarily Alliance.

So LLS, HLS, Alliance, it's the predominant part of our crude runs at that facility.

Okay.

Good.

Then a different question.

On your aggregate, refined utilizations are high, 96% with some downtime at Alliance.

I know various clean fuel regulations have lowered max utilization from historic highs.

And runs are dependent upon a feed slate.

Yet, is that close to your theoretic maximum?

Could you walk us through your four regions and tell me where you think they could actually run if they had the right incentive to run?

We're seeing in the Mid-Continent, in the central corridor, when I look at that, we have actually seen sustained runs now creeping up a bit.

It does speak to consistency to crude slate and some in some of the Mid-Continent operations.

And continuing improvements in our joint venture refinery at Wood River.

So we have seen that there.

Bayway has run very well with processed inputs.

It's not only crude runs but additional input, as well, in terms of rolling out the units.

So probably I look at the central corridor and say we pretty much ran it about as much as we could.

We'd like to get more because it's got a great margin today.

The California refineries, West Coast, were again close to their capacity, as well.

I would say that's pretty much it for them.

Then the Gulf Coast, with Alliance, is probably our biggest opportunity after the hurricane and the impacts of that to come back up to full rates.

So if we looked around our system, the Atlantic basin, Europe, we are right there, the central corridor.

About the only place where we didn't run pretty close to capacity would be the Gulf Coast.

And I think that's just a matter of getting Alliance line back out.

What would full be for the Gulf?

Would it be in high 90%s?

Yes.

I think when we look at that, 95% and above is pretty high capacity utilization.

Great.

And just maybe one last question, if I could.

I know MLPs have been a real defining element of the cycle.

Inclusion of more and more cyclical assets have grown in popularity as well as IRS permissibility and valuation in the market.

Can you discuss maybe how your consideration has changed?

Or how you think about the suitability of that structure for either refining assets or ethane cracking assets where I know you have a partner that would have equal say?

How do you think about the suitability of the structure for those assets?

I think we certainly see the value that can be created from an MLP, as Greg talked about earlier with the fee-based kinds of assets.

So our transportation logistics assets, we look at that and we say -- Okay, we see the value creation.

It's got some other challenges, so to speak, when you do the MLP structure in terms of diluting ROCE, diluting to earnings.

And so that's the contra piece and it can be, depending on how you view it, relatively expensive from a financial structure.

So that's part of our deliberation.

And, really, where we're focused is on that transportation logistics piece with PSX.

The variable MLPs -- pretty early.

We'll wait and see.

It's a great time right now to have those with distributions.

But clearly they are variable.

I think it will be interesting to see how that works out with the test of time.

I can say that in the petrochemical side, we really don't have any plans to look at that from a cracking standpoint.

Understood.

Thanks, guys.

Cory Garcia from Raymond James.

Great quarter.

I was just hoping, in the petrochem theme, would you guys be able to provide a bit more color into the demand trend you guys are seeing in terms of you polyolefin business?

Clearly the US trends seem a lot stronger than what we are seeing in Europe and elsewhere.

But any more color you guys could have in terms of Asia, Latin America.

And then also refresh me on the amount of export you actually participate in, in that market.

Okay.

Let me break that.

When we look around the world, I would say a great place to be today is in the United States.

The demand has been relatively stable.

It's still not what I would call robust but clearly with the operating rates you've seen, a great place to be.

And I think it speaks to the advantaged feedstock that we have here.

As well as probably decent demand from the industrial or manufacturing sector.

Europe is weak when we look across the globe.

Asia has backed off substantially from what you would have thought a year ago.

And, frankly, part of that stems from the weakness in Europe because they're so heavily dependent upon trade for their manufacturing.

So I don't think there is anything surprising there except that perhaps we look at the base US and say it's a pretty good market.

Latin America is still relatively small but does okay, as well.

And then when we think about the export piece, that does provide some underpinning, if you will, for the petrochemical business in the US.

And so I think as an industry I still think about it in the 20%, 25% range of petrochemicals being able to be exported, or you can do that.

So a lot of optionality there that develops when you've got that kind of cost position.

The other thing I would say on CPChem is it's important to realize that if you think about their production base in the Middle East, and their production base in the United States, positioned well in the two lowest-cost areas in the world in petrochemicals.

I think that shows up in the strength of their earnings.

Absolutely.

I appreciate the time, guys.

Thank you.

This concludes the time that we have for questions.

I'll now turn the call back to Clayton Reasor for closing remarks.

Thank you again for the participation interest in the Company.

You can find a copy of the transcript from the call on our website.

And we look forward to talking with you all soon.

Thank you.

Thank you, ladies and gentlemen.

This concludes today's conference.

Thank you for participating.

You may now disconnect.