菲利普斯66 (PSX) 2013 Q3 法說會逐字稿

Welcome to the third quarter 2013 Phillips 66 earnings conference call.

My name is Christine, and I will be your operator for today's call.

(Operator Instructions)

I will now turn the call over to Clayton Reasor, Senior Vice President, Investor Relations, Strategy, and Corporate Affairs.

You may begin.

Thank you.

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

With me this morning are Chairman and CEO, Greg Garland; CFO, Greg Maxwell; and EVP, Tim Taylor.

This morning's presentation material can be found on the Investor Relations section of the Phillips 66 website, along with supplemental financial and operating information.

Slide 2 contains our Safe Harbor statement.

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

Actual results may differ materially from today's comments, and factors that could cause actual results to differ are included here on the second page of the presentation as well as in our filings with the SEC.

That said, I'll turn the call over to Greg Garland for some opening remarks.

Thanks, Clayton.

Good morning, everyone.

Thanks for joining us today.

During the third quarter, the refining marketing environment became more challenging than what we've experienced over the past two years.

Market cracks declined over 20% compared to the last quarter, and from an earnings perspective, our refining business broke even this quarter.

On a positive note, we ran better, and this improved reliability allowed our Chemicals and Midstream businesses to contribute the majority of our earnings this quarter.

Also, our marketing specialties businesses had another solid quarter, generating over $200 million in earnings.

We generated $1.9 billion in operating cash flow, almost $900 million if you exclude the impact of working capital.

We also received over $1 billion in proceeds from asset sales.

The ability to generate cash when refining market conditions are poor gives us the confidence that we continue to grow and sustain shareholder distributions.

Since August of last year, we've repurchased over 34 million shares, completing our initial $2 billion program.

In October, we began repurchasing shares under our additional $1 billion program.

Also, we've almost doubled our dividend.

Earlier this month, we announced our latest dividend increase raising it 25% to $0.39 per share.

We've also used our strong operating cash flows to strengthen our balance sheet.

In total, we've reduced debt by $2 billion since the spin from ConocoPhillips about a year and a half ago.

Our capital structure, our strategic positioning enables us to increase capital spending and distributions in spite of our exposure to highly volatile crack spreads and crude diffs.

Our financial flexibility is an important differentiator.

We have the balance sheet.

We have the capacity to increase our leverage if needed throughout the market cycles.

Given our exposure to refining margins, we think our debt level's appropriate for now, and we don't plan any further reduction of debt.

We believe that important use of our cash is funding expansion of our higher valued businesses.

Our platform for growth is unmatched by any other company in the refining space.

We're committed to growing our Midstream and Chemicals businesses, and on a more selective basis our marketing and specialties businesses.

In Midstream, we intend to use our MLP to grow and create value.

Until our MLP is large enough to fund projects of the scale and scope we envision, we expect that first we'll incubate the projects at Phillips 66 and eventually drop them in to Phillips 66 Partners.

Potential candidates for this approach would include the 100,000-barrel a day NGL fractionator at our Sweeny complex along with the associated infrastructure.

In addition, we're developing an LPG export terminal project at Freeport, Texas.

The LPG export facility is expected to enable us to take advantage of the Company's existing Midstream transportation and storage infrastructure.

Combining these two projects represent a $2 billion to $3 billion investment over the next two to three years.

Ultimately, once we're up and running at full capacity, we expect these projects to generate on the order of $400 million to $500 million of EBITDA annually.

The start of the frack is expected in 2015 with the export facility following close behind in mid-2016.

We've seen increasing number of opportunities to participate in the NGL market, and we'll use our Midstream business to supply petrochemical, heating and transportation markets globally.

The combination of refining free cash flow and our MLP provides us with a unique position and options to accelerate our growth in the Midstream space.

Our joint venture at DCP Midstream also has growth projects in place.

Over the next couple of years, it expects to spend $2 billion to $4 billion in capital.

We would expect that DCP Midstream will use its MLP as a funding vehicle for most of these projects.

Our Chemicals business is focused on growing in the feed stock advantaged U.S. Gulf Coast.

This region is second only to the Middle East for low cost feed stock availability.

Earlier this month, CPChem announced FID for its world-scale Gulf Coast ethane cracker and two new polyethylene facilities.

CPChem now has the necessary approvals to begin construction.

In addition to the petrochemicals project, CPChem is also completing a 1-hexane unit which is expected to be operational in the first half of 2014, as well as a Sweeny ethylene furnace expansion in 2014.

All in, CPChem on a 100% basis is expected to spend between $6 billion and $8 billion on self-funded capital between now and 2017.

It is expected to add about $1.5 billion of EBITDA in 2017 once all these growth projects are online.

In marketing specialties, we will grow selectively.

Over the next five years, we plan to add about 200 retail sites in Europe and expect these high efficiency assets to generate returns in excess of 25%.

With regard to refining for us, it's about enhancing returns through operating excellence and optimization across our system.

The largest lever to improve return on capital employed is getting advantaged feed stocks to the front of our facilities.

We continue to look for opportunities.

At present, our largest one is to get advantaged crudes to our East Coast and West Coast refineries.

In addition, as U.S. demand for refined products declines, we believe that increasing export capability is going to be important to keep our refineries running at high utilization rates.

We have seven coastal refineries in the U.S. We currently have 340,000 barrels a day of export capability, and we plan on growing this to 500,000 barrels a day over the next several years.

Our exports increased again this past quarter.

During the third quarter, we exported 190,000 barrels a day.

That's the fourth consecutive quarterly increase in exports for us.

As we start thinking about 2014, we would expect that our 2014 capital spending to be in the range of $2.5 billion to $3 billion.

If you include our non-consolidation portion of capital from DCP, CPChem, and WRB, we expect that the total capital program to be in the order of $4 billion to $5 billion.

Half of that's going to be in Midstream, a quarter of that will be in Chemicals, and the balance will be primarily in Refining Marketing and Specialties.

We'll give you a more comprehensive review of our capital program in December following our Board approval.

I can't think of a more exciting time to be in this business.

Refining was, it is, it's always going to be a very volatile business.

What's changed is the American energy landscape, the technology driven access to tight oils and natural gas NGLs.

As integrated downstream energy manufacturing logistics Company, we believe that we are uniquely positioned to participate in the American energy revolution that's going on today.

With that as opening comments, I'm going to turn over to Greg to go through the quarter results.

Thanks, Greg.

Good morning, everyone.

Before I get started, I wanted to take a moment to point out a couple of items in today's presentation.

First, the presentation today will focus on a sequential quarter basis, rather than a year-over-year basis.

Given the differences in the refining markets between 2012 and 2013, a comparison of this quarter's results with those of the previous quarter provides more insight into the drivers of our earnings variances.

However, we continue to supply year-over-year comparisons, and these can be found in the appendix on our website.

Second, as disclosed in May, we entered into an agreement to sell the Immingham Combined Heat and Power Plant, or ICHP.

During the third quarter, we completed that sale.

However, I should note that we have signed a confidentiality agreement with the buyer of ICHP, and as such, we are not allowed to provide any additional information on this transaction.

We will not be able to address any questions that have not already been addressed or disclosed in our previous SEC filings.

Starting now with slide 4, third quarter earnings were $535 million or $0.87 per share.

There were no adjustments to our reported earnings for the third quarter.

Excluding changes in working capital, cash from operations for the quarter were $873 million.

We paid $189 million in dividends.

We repurchased $674 million or 11.6 million shares of our common stock during the quarter, and we also repaid the remaining $500 million outstanding under our term loan.

On an adjusted basis, our annualized year-to-date return on capital employed was 14%.

Slide 5 provides a comparison of our third quarter adjusted earnings with the second quarter on a segment basis.

As you can see, compared to last quarter, earnings decreased primarily due to lower refining margins or refining earnings.

Partially offsetting this decrease, however, are increases in earnings from our Chemicals and Midstream businesses.

I'll cover each of these segments in more detail later on.

Moving on to our third quarter cash flow, cash from operations excluding working capital was nearly $900 million.

This was sufficient to fund our dividends as well as our capital program.

In addition, we generated cash from working capital as well as asset sales, and then we also had the proceeds from the IPO of our MLP.

The positive changes in working capital were largely due to the impacts of higher prices driving an increase in accounts payable, along with changes in inventories.

For the fourth quarter, we currently expect a $500 million to $600 million use of working capital, and this will primarily be tied to a reduction in taxes payable.

We continue to buy back shares under our share repurchase program while continuing our efforts to strengthen our balance sheet.

During the quarter, we repurchased nearly $700 million in shares, and we repaid the remaining $500 million outstanding under our three-year term loan.

We ended the quarter with $5.9 billion in cash and cash equivalents.

This includes the consolidation of about $420 million of cash held by PSXP.

Looking forward, we expect capital spending in the fourth quarter to be heavier than the previous quarters of 2013, as we progress towards completion of our $1.9 billion capital target.

In addition, as previously mentioned, we expect an overall use of working capital in the fourth quarter, and we also expect to continue our share repurchase program along with our dividend payments.

Together, we expect these items to reduce our year-end cash balance compared to this quarter.

As far as capital structure depicted on the next slide, at the end of the third quarter, we had equity of $22 billion.

On the debt slide, as previously mentioned, we paid down the remaining $500 million outstanding under our term loan.

However, during the quarter, we also entered into approximately $200 million in capital leases, resulting in an overall ending debt balance of $6.2 billion.

Our debt-to-capital ratio was 22%, which is at the lower end of our targeted range.

Next we'll cover each of our segments in more detail starting with Midstream on slide 8. The Midstream segment includes three business lines.

It includes transportation.

It includes our equity investment in DCP Midstream, and it also includes NGL Operations and Other.

This segment posted strong earnings this quarter, with earnings up more than 60% compared to last quarter.

The annualized year-to-date return adjusted return on capital employed for Midstream was 15%, and this is based on an average capital employed of $3.2 billion.

Slide 9 shows Midstream's earnings of $148 million representing an increase of $58 million from the prior quarter.

Transportation was up $4 million, mainly driven by higher volumes, which includes increases from refinery utilization as well as new rates.

Earnings from DCP Midstream increased by $57 million this quarter.

This is primarily due to the impacts of hedges associated with asset drop-downs to DCP Midstream Partners, equity gains resulting from DPM's unit issuances to the public, and also higher margins and volumes.

There were no significant earnings variances for NGL Operations and Other compared with the second quarter.

On the next slide, we'll move on to a discussion of our Chemicals segment.

Sequentially, our Chemicals segment results improved 45%, and this was primarily due to less down time in the United States.

Global capacity utilization for olefins and polyolefins was 87% for the quarter, and it was over 90% in the U.S. The annualized year-to-date return on capital employed from our Chemicals segment was 26%, and this is based on an average capital employed of $3.7 billion.

As shown on slide 11, third quarter earnings for Chemicals increased by $81 million compared to last quarter.

CPChem continues to focus on operating excellence and they reduced their down time in olefins and polyolefins compared with last quarter.

This was a large contributor to the increase in their earnings as CPChem was able to capitalize on the strong petrochemicals margin environment.

Specialties aromatics and styrenics earnings were flat compared with the prior quarter as higher volumes and lower costs were offset by lower benzene and specialty chemicals margins.

The decrease of $6 million in corporate and other is primarily due to a higher effective tax rate in the current quarter, largely as a result of the mix in foreign and domestic taxable income.

As we move next to Refining, our realized margin was $6.14 per barrel with a global crude utilization rate of 95% and a clean product yield of 84%.

Our advantaged crude slate in the US was 66% this quarter, and that's down from 68% last quarter.

This decrease is mainly tied to Bakken not being economically advantaged during the third quarter and the scheduled turnaround at our Ponca City refinery.

The annualized year-to-date adjusted return on capital employed for the Refining segment was 13%, with an average capital employed for the segment of $14.1 billion.

Slide 13 provides more detail on earnings in our Refining segment.

Our Refining segment reported a loss of $2 million this quarter.

This is down $483 million from the prior quarter, primarily due to lower margins, particularly in the Central Corridor, Western/Pacific, and Other Refining.

Both the Central Corridor and Western/Pacific regions were down due to a decreased market cracks, and Other Refining results were lower this quarter largely driven by lower earnings from utilizing the excess capacity on pipelines that import Canadian crude.

Compared with the second quarter, the Canadian to Mid-Con arb narrowed $4 to $6 per barrel resulting in significantly lower gains in the third quarter.

In addition, the third quarter was further reduced by foreign exchange related impacts.

Let's now take a look at our market capture as shown on slide 14.

Our worldwide realized margin this quarter was $6.14 per barrel with a market capture of 46%.

This compares to $9.88 a barrel and a 56% capture in the second quarter.

Capture was down this quarter compared to the last, primarily due to secondary product prices remaining relatively flat while feed stock prices rose.

Also, the previously mentioned lower earnings related to utilizing excess pipeline capacity further impacted our overall capture.

As discussed on previous calls, we continue to incur RINs costs in our Refining segment.

These costs are reflected in the other bar, along with inventory and product differential impacts.

Moving on to slide 15, slide 15 shows the comparison of advantaged crude runs at our refineries as well as clean product yields for 2011, 2012, and year-to-date 2013.

In the U.S., our advantaged crude slate was increased from 62% in 2012, to 67% in 2013.

The decrease in other heavy crude from 27% to 24% is attributed mainly to the down time at our Lake Charles and Sweeny refineries this year.

As shown on the graph on the right, we continue to focus on improving our clean product yields, achieving an overall 84% yield across our refining system this year.

The decline in distillate yields in 2013 compared with 2012 is primarily the result of the mix of refineries that were down this year compared to last.

This includes scheduled turnarounds which are typically on a five-year cycle.

This next slide covers our Marketing and Specialties segment, or M&S.

Worldwide marketing margins were $0.044 per gallon in the third quarter and while our Refining segment experienced higher RINs costs in the quarter, M&S benefited from higher RINs values created by its renewable fuel blending activities.

The annualized year-to-date adjusted return for M&S was 36%, and this is based on an average capital employed of $2.8 billion.

Slide 17 provides some additional detail about our M&S segment.

Earnings for M&S in the third quarter of 2013 were $240 million.

This is a $69 million decrease from adjusted earnings in the second quarter.

Marketing and Other earnings decreased $60 million, mostly driven by lower product margins.

Partially offsetting this were higher margins on renewable fuel blending.

Specialties decrease over the prior quarter was mainly related to our exit of the composite graphite and e-gas licensing businesses.

This was partially offset by higher volumes.

Moving on to Corporate and Other, this segment includes net interest expense, corporate overhead costs, technology, and other costs not allocated to our operating segments.

Corporate and Other costs were $113 million after tax for the third quarter, compared with $126 million for the previous quarter.

The improvement of $13 million was mainly driven by lower environmental expenses, which are included in the other category.

This concludes my discussion of the financial and operational results for the quarter.

Next, I'll cover a few outlook items.

For Chemicals, for the fourth quarter we expect the global O&P utilization rate to be in the low- to mid-90%.

In Refining, we expect the fourth quarter global utilization rates to be in the low 90%, and looking at turnarounds, our pre-tax turnaround expense is expected to be between $150 million to $170 million in the fourth quarter.

In Corporate and Other, we continue to expect our costs to be in the $105 million to $110 million range on an after-tax basis.

Finally, we expect the company's total effective tax rate to be in the mid-30%.

With that, we'll now open the line for questions.

Thank you.

(Operator Instructions)

Doug Terreson, ISI group.

Good morning everybody.

I have a couple of questions on refining.

First, the Company has significantly increased use advantaged crudes in the past couple of years with significant benefits.

While it may be hard to know, I wanted to see whether Greg can talk a little bit about how much running room that the Company may have in this area in coming years.

Second, the unfavorable delta for secondary products seemed to increase in each of the major regions, especially on the Gulf Coast and Central Corridor.

I think Greg attributed this to rising feed stock costs.

I just wanted to see if there was any additional color on that decline, and also whether or not there was anything specific to those regions that caused them to be affected more than the others?

I'll take a stab, and then Tim and Greg can kind of help answer the question.

If you think about the running room, you know, we plan, Doug, to eventually get to 100% advantaged crude across the refineries.

That's some combination of getting more crude East and West because that's where we still have the opportunities.

When you think about Bayway and you think about the West Coast refineries, rail is a key piece of that.

We're adding capabilities.

We're taking more cars.

By the end of this year, we think we'll have all the 2,000 cars in place that we've purchased.

We're thinking about buying some more rail cars.

We certainly have a large project underway at Bayway to be able to unload at Bayway 75 a day.

We're trying to get Bayway positioned where we can get it on a pretty steady diet of Bakken.

We have the Jones Act vessels where we can run Eagle Ford around to Bayway.

We're working that.

We've said this for a while that we do think that crudes like LLS become an advantaged crude for us on the Gulf Coast.

While today we would lump that in the 500,000 barrels a day of Brent based crude that we're running, ultimately it becomes an advantaged crude.

I do think between what ourselves and others are doing on the West Coast, we're going to pressure ANS prices, and so ANS, rather than being a Brent base type crude, it becomes an advantaged crude.

They're partly the actions we're taking, and the actions others are taking, that put pressure on some of these crudes.

I think we do get to 100% advantaged crude over the next couple of years.

Secondary product.

Secondary products.

Crude prices went up 8% to 12%.

TI was up 12%.

Brent's up 8% this quarter, over the last quarter.

Our prices stayed flat for a lot of the secondary products.

That's where we saw the compression.

Primarily coke and NGL prices did not keep up pace with the crude price.

Okay.

Thanks a lot guys.

Evan Calio, Morgan Stanley.

Hi, good morning guys.

Congrats on the FID, reaching FID, or getting approval by the Board and then reaching FID on your ethane cracker in the Gulf Coast.

Is there any discussion at this stage of what the CapEx or what the cost might be?

How do you see the funding mechanism?

Also, you talked about potentially sequencing a second cracker.

How does that fall into the time line going forward?

This is Tim Taylor.

In terms of the cost, the capital cost of the cracker and derivatives complex in the Gulf Coast, we've said it's approximately $6 billion on that.

In terms of a second cracker project in the Gulf Coast, CPChem they continue to look around the globe at where to build a cost-competitive advantaged feed stock cracker.

That's a key business for them, and frankly the U.S. continues to look good.

It may be a little bit different in terms of feed stock slate.

It provides some flexibility.

As you look around the world, the North American energy market with NGLs continues to be a place where you could say that a second wave of cracker expansions, if those supplies continue to develop, would make sense.

I think that's certainly there.

The time line for that, if you haven't started that, it's six to seven years from the time that you begin conceptual thinking to actually getting in the ground.

You're pushing out probably towards the end of this decade, the very early part of next decade before you'd expect to see, at this point, another significant amount of cracker expansions in the U.S. Gulf Coast.

The second question is on Chemicals.

You guys had a great quarter in Chemicals.

Could you give us any color how the Saudi cracker is performing versus your expectations?

I know while U.S. ethylene chain margins have sustained over $0.40 a pound, due to lower ethane prices, what kind of chain margins are you realizing at the Saudi cracker, and how do they compare globally?

When you look at the Middle East versus North America on an ethane basis, it's generally in the same ballpark, slightly advantaged on that stand point to the Middle East crackers typically.

Chain margins are good.

The real challenge in the Middle East continues to be, for the Saudi cracker specifically, we continue to experience some unplanned down time related to shaking out and getting some technical issues resolved on that.

Margins are strong, demand is good globally for those products.

Really it comes down to the operating rate, and that's been coming up, but we're still not where we'd want to be.

Okay.

Good.

Lastly if I could, just any update on potential refining divestitures, and can you also remind me what working capital release you'd realize, if they were sold?

We continue to always evaluate our portfolio.

We've guided or said publicly that we're looking at selling possibly our Whitegate Refinery in Ireland and our interest in the Melaka Refinery in Malaysia.

Those efforts continue.

We're in the process of evaluating specifically the opportunities around Whitegate.

I think those have been the pieces of the portfolio for us that long-term are really where the strategic interest is.

Any idea what the working cap?

Working capital release would be significant, so that's a piece of what we look at in terms of the valuation.

Okay.

Appreciate it, guys.

Ed Westlake of Credit Suisse.

Yes, good morning.

I just have a small follow-up first on the supplementary products, on the yields of that 15%, that's not clean products, just a rough run through of what the main products are.

Then on NGL pricing, we can obviously track that, but coke pricing, is that market-based, or is there a contract?

Do things reprice over time, given the spike in crude, just to help us model the outlook?

It's primarily LPG that comes out on the other products that comes out on the refining processes, that coke is clearly the by-product so to speak of the coking operations.

LPG are prices linked.

As you know, you can get a public marker on those back to NGL and the supply demand on the LPG market.

Coke, we have a couple of segments there.

We have a specialty coke business which is a high value business, and that's done on a very different basis.

Then we also make both anode coke, as well as fuel grade coke.

Some of the fuel grade coke is related to coal prices.

I think you get some idea of what's happened in the coal market as natural gas continues to penetrate North America in that.

Coke prices tend not to move directly with the crude in the short-term.

It's just a variety of contract structures with that.

Great.

Maybe I've just noticed it for the first time on the export facility and the incremental EBITDA for Chemicals which is very helpful.

Thanks very much.

A broader question on logistics, obviously, you've got PXSP.

You've got your share of the Sands/Southern Hills.

You've got $430 million of EBITDA coming when this Gulf Coast project comes on-stream.

Another big chunk, I guess, was going to be from shifting the logistics in refining and marketing to more market-based tariffs.

Can you talk through how that is progressing, and maybe any other logistics growth drivers that perhaps I haven't mentioned in my question?

We've got just a tremendous set of opportunities in that Midstream space.

The large ones you mentioned were the frack opportunity and the LPG which we're continuing to develop in the engineering stage and committing substantial engineering dollars and long lead equipment items on that as we progress that towards FID which we would hope to be early next year.

Beyond that, there's just a number of pipeline connections and smaller things that we're looking at, smaller projects, that build on our base around both NGL and the refining part of our network, smaller projects that can be executed a little more quickly.

The big driver in that Midstream is that frack and export terminal.

We just continue to see a whole opportunity to develop that logistics infrastructure around the NGL export gas-based opportunity, and then around providing advantaged crude into the front end of our refineries that Greg talked about, as well as some opportunities on the refined products side.

I think I look at that and I just see substantial opportunity.

As far as market based tariffs go, we're continuing to progress that.

We're making those adjustments.

You can see that show up this quarter in terms of the improvement that we've made.

I think we're pretty much through in our existing system with that, as we progress that from a cost-based system into a market base, so I think going forward, the real growth in the Midstream comes from our own internal expansion at Phillips 66 and then of course our interest in the DCP Midstream venture that we have with Spectra.

Just to be clear, the step up I guess in Midstream 2Q to 3Q, a lot of that means the repricing is now done and that's a good base from which to add on the cap driven growth projects?

Yes, we still continue to work through all those, but largely that's getting in place.

The real step up in terms of potential comes from new pipeline connections, new opportunities, and then these major capital projects we talked about.

Right.

There may be assets that are currently inside the refining fence, whether it's rail unloading facilities or docks or items that are not in Transportation today that we may carve out of refining and put into the Transportation and Midstream segment.

Okay.

Great.

Thanks very much.

Doug Leggate, Bank of America Merrill Lynch.

Thanks.

Good morning everybody.

The capital guidance for next year, my question was really about what we're seeing some or your peers get involved with to take advantage of some of the weak parts of the [borrow] on NGLs, mainly building [alteration] plants and so on.

You guys have been fairly adverse to putting new capital into refining.

I'm just curious if there's any change of thinking there, given how weak this outlook is on a go-forward basis?

And I have a follow-up, please.

Thanks, Doug.

We're going to continue to restrain capital going into refining.

I tell the guys bring me all the 40% return projects you've got, and we'll fund those.

We'll fund the advantaged crude.

We're going to fund the infrastructure around exports in refining.

But frankly, we just have better opportunities in our higher valued businesses around Midstream and Chemicals.

We take refining free cash, and shove it to those higher value businesses.

I think you'll see us be very consistent around that.

Okay.

My follow-up really relates to the West Coast.

I guess you went through a period where West Coast got a little bit better there for a while, but periodically we've heard yourselves and others talk about the challenges of operating in that market, when you think about the broader portfolio high grading as you move forward, how is the West Coast standing up against the rest of the assets right now?

I'll leave it there, thanks.

We look at the West Coast, and we see average assets in our portfolio.

They're net income positive.

They're cash positive, single-digit return type.

For the most part, if you look over the cycle, I keep telling my guys single point in time forecasts are really dangerous in this business.

You want to be careful with that.

But as we look at those assets, I would say that we're going to consider all options to increase value of those assets.

Clearly for us, getting advantaged crude in the front of those refineries is a big piece of the value equation.

The jury's still out on what happens with the Monterey in California.

If there was something that would happen there that would change our view, and I think we would be open to joint venturing those assets, IPO'ing those assets, and think about alternative structures for those assets.

But first, we're going to put advantaged crude to the front of those and improve the performance of that.

We don't feel pressure that we have to do something quickly on those assets.

We can take our time and evaluate those assets.

If I could bolt-on a follow up on that issue, Valero talked about how a potential environmental study could delay their move to take advantaged crude to the West Coast.

I'm just curious if you could frame for us how you see any time line from a Phillips perspective, as to how quickly you could effectively achieve that?

We're certainly welcoming on our own projects.

We're working on others and I would say that they're progressing.

I think we have a high level of confidence that we're going to be able to address those issues and get those projects completed and underway.

I would also say we're looking at multiple ways of getting crude into California, whether it's unit train unloading or barge into both Rodeo and L.A. have water-borne capabilities.

We'll try to attack it from a couple different directions.

All right.

I'll let someone else jump.

Thank you.

Jeff Dietert, Simmons.

You mentioned this morning that you've taken 1,270 of your 2,000 rail cars and you're expecting the remainder by the end of the year.

Could you talk about the most optimal use of those rail cars in the current environment?

Is that mainly for going to Bayway?

Or how are you planning on utilizing those cars?

I think primarily we still see the rail cars clearing Northern production to the East and the West Coast.

Our current thinking is that those rail cars will be primarily in service to both Ferndale and into Bayway.

As we develop the California options, I think there's some opportunity there as well.

But really it's more around using the rail cars to access either Canadian and/or Bakken crude, to move those into the coastal systems primarily in the East and the West.

Good, thank you.

And secondly with LLS, Mars, Maya discounts as steep as they are on the Gulf Coast, are there things that you're trying to do to lock in some of those benefits, either in the Gulf Coast or perhaps shipping them via barge to Bayway?

How are you looking to take advantage of these discounts?

Yes, I think when we look at the broader system, we continue to increase our use of Eagle Ford and crudes in our system.

The marine opportunities exist for us to bring those crudes into Louisiana, as well as go around to Bayway as Greg referenced earlier.

I think it's just increased the opportunity really around the marine movements to use those crudes in the Gulf Coast now up the East Coast.

Philosophically, as far as locking in margins, we typically don't do that given the optionality of our system.

We think that people own us for that exposure.

It's hard to know whether LLS widens or narrows from where it is today, given all the factors that are on the market.

We typically don't hedge crude diffs or market cracks.

Thank you very much.

Paul Cheng, Barclays.

Hi, guys.

Good morning.

A number of quick questions.

For 2014, CapEx is $2.5 billion to $3 billion.

Given the project that you're currently on, is that a reasonable range for the next three or four years?

Or are you going to come down from there?

Yes, I think it's probably a reasonable range for the infrastructure that we see in front of us that we want to do.

Essentially, we're going to incubate projects at the PSX level that ultimately probably get destined for PXSP, until we can grow the scale of the MLP to the point that it can either co-invest or it can execute projects on its own.

The frack and export facility, if you think it's $2 billion to $3 billion over the next two to three years, you get another billion dollars a year of capital spend on what we're doing now, that $2 billion level.

That's how we got to the guidance, and we're still working that and we still need go through an approval process with our Board, but at least we're kind of exposing our thinking here, Paul.

Okay.

That's good.

Greg, will you be your RINs benefit in your marketing in the quarter?

Same answer as last time, Paul, but thanks for asking.

All right.

I'll try another one.

Can you tell us, in the third quarter, the volume of oil that you railed to your refinery in the East, the West, and the Gulf?

I'm sorry, the volume of oil that?

That is being railed to the East Coast, or down to the Gulf Coast?

Oh, rail.

I know our rail capacity in third quarter is probably lower because of the Bakken.

We made less rail shipments of the Bakken to Bayway in response to the closing arb there.

That's opening back up, and so we're ramping back up.

Today, rail movements for us in total are probably a little less than 100,000 barrels a day or so.

Clearly, we're ramping up our capacity, so it's roughly in that ballpark.

I think at one point we were railing around 100,000 a day in the Bayway.

We cut that to 30,000 barrels a day I think in August or September.

Obviously 70,000 barrels a day of rail capacity, we took off and just put those cars on the siding and started importing West African or North Sea crudes.

Tim and Clayton, should we assume that the fourth quarter average is going to be at least 50,000 to 75,000 barrels a day higher, in terms of the rail (inaudible), given how --

We look at the differentials, that's our driver.

We're returning to it, much more likely, in the second quarter.

You should expect those wheels will start turning.

Right.

Is there any rough idea then how much is the increase we may be talking?

Are we talking about incrementally from the third quarter say 50,000 barrels per day, or incrementally 100,000 barrels per day?

Any rough number you can share?

You've got more cars and you've got wider diffs.

I think we're always a little reluctant to talk about how much more we're buying from any specific field because we don't think it necessarily helps our commercial guys that are out there buying the crude.

I think we're comfortable in saying it's going to be higher in the fourth quarter than the third quarter.

But I don't think we want to quantify how much of an increase that will be.

I don't know Tim if you feel --

Paul, it's not a huge step change, but it's getting back more in line, like I said, with the second quarter.

Can you remind me what's the second quarter's running?

I think when you look at those charts, you get some idea in the light tight oil.

It's going back, and we're trying to grow that.

That's what we're talking about.

We're going to utilize that logistics capacity more fully to do that, than we did.

That's where I'd like to refer you to, is to take a look at that.

Tim, when you buy the Bakken, or the WCS, you buy one month out, right?

Essentially, by now we pretty much know two and a half months of the discount that you're going to receive in the fourth quarter.

Is that how you guys do it?

Yes, we buy out.

Our commercial group looks at the market fundamentals and makes that call.

They were clearly on the opportunity list here in the fourth quarter pretty early.

I think they were ahead of our plan from our perspective on that.

A final one, just out of curiosity, in October, it looked with the lower RIN price that the wholesale margin seemed to be improving.

Should we assume that from a refining margin capturing standpoint third quarter, you hit the low point, and fourth quarter should be substantially better than that?

We're reluctant to give guidance on capture rates.

Given where the prices are today, you'd come to that conclusion.

It's hard for us to make a call on what fourth quarter capture would be.

In October, so far have you seen it is much better than the third quarter?

Diffs are definitely better, but I would say the market cracks are down month to date.

It's a tough one to sort your way through on that one, Paul.

We're not going to give any guidance.

I would just say, if you look at the month of October what's out there in terms of the market cracks they're down versus third quarter, but diffs are much better.

Okay.

Very good.

Thank you.

Paul Sankey, Deutsche Bank.

Hi, good morning everyone.

There's been plenty of bits and pieces about your long-term strategy, individual components I guess I should say with the FID and the ethane cracker and talking about rationalizing refining.

Can you give us an overarching target for 2017, in terms of whether you have a number or an idea of the balance of the business, in terms of capital employed?

How should we expect you to be managing this variety of strategic initiatives that you've talked about?

Thanks.

Yes, our presentations that we've been giving to investors that you've seen clearly with the pie charts, if you'll remember, we want to see refining under 50% of our income.

Capital employed is a little difficult for a measure because of the JVs and the way you account for joint ventures.

Clearly, when we think about income, we want to see it 30% to 40% in Refining.

We want to see Marketing Specialties, Midstream, Chemicals, the other 60%, 70% of our earnings, Paul.

What we're trying to do is rather than be a five-year plan, how do we get there in three years?

Right.

Okay.

That's good.

We've had various questions that are addressing this.

I just wanted to remind everyone of the overarching strategy.

Also, I wanted to ask a high level question before I ask a really nerdy one.

On working capital, is there a shift here with the U.S. unconventional revolution that we should think about?

The items that you gave, you have a big working capital number in this past quarter, a billion dollars shift.

It seems the reasons for that were fairly mundane.

You mentioned inventory and other fairly usual items.

I wondered if there's a bigger theme here in terms of the greater use of rail, maybe the greater use of pipes, and so on, that might be a theme, in terms of how working capital is going to shift, offset obviously by potential disposals and that theme in terms of working capital?

Thanks.

Paul, this is Greg Maxwell.

As far as a fundamental shift, I don't see a big trend out there as far as the way our business is running.

We did, as we mentioned in our notes and as you saw in the chart, we did have about a billion dollars source in working capital in the third quarter.

As I mentioned in my notes, we think that will turn a bit in the fourth quarter, $500 million, $600 million, primarily is related to some tax payments.

If you look at the components of what drove that billion dollars, it was pretty much across all elements of working capital.

For example, we had a draw in inventories in the third quarter, but more than offsetting that was an increase in our accounts payable.

A lot of that was the result of, as we saw the crude prices going up, that increased our payables slightly in the third quarter.

Overall, I don't see a real fundamental shift with regard to the levels of our working capital as we change our business processes.

Yes, that's interesting.

I think one theme is the idea that trains require less working capital than pipes?

That is true.

You'd be more incentive to develop more train transport than pipe transport as a general rule?

It's a fairly small percentage.

If you look at that compared to what we have in the pipes though, so you're right as far as directionally which way it'd go, but I don't think it's a huge needle-mover.

Okay.

That's interesting.

Thank you.

I was just going to say, if you think about the 2,000 rail cars, we can move 120 a day.

We have a global deal.

We can move 75 a day.

With existing assets and infrastructure we have, we can maybe move 200, 250 a day.

If you think about it all, we're moving 3 million barrels a day in our whole system.

Yes, and then of course there's the whole MLP thing as well to think about.

Thanks a lot.

Bradley Olsen, Tudor Pickering.

Hi, good morning guys.

You guys have done a great job articulating a consistent strategy whereby you become larger in Midstream and Chemicals, with Refining staying flat or even potentially shrinking.

Now, just based on your comments earlier, it sounds as though this could be more of a three- to four-year target, referring to the pie chart that you put in your corporate presentations, rather than a five-plus year target.

Do the volatile capture rates that we've been seeing recently, and some of the softness in gasoline, and maybe the bearish view on refining as an industry that you've expressed pretty consistently over the last couple of years, lead you to start thinking about different assets as potentially being non-core, maybe even assets that are North American refining assets and maybe even some assets that are in the Mid-continent or the Gulf Coast regions?

What I would say is we do like the refining business, as you think about it.

We got there this quarter, but we got there because we didn't make any money in Refining.

That's not the way we want to get there.

When we look at our assets around the Mid-Con and the Gulf Coast, we think those are pretty good assets.

Long-term, those assets will probably be in our portfolio.

When we think about West Coast and East Coast U.S., that's not necessarily true.

Atlantic Basin is a very challenging place as you know.

We think Bayway is a great asset in a challenged market.

If you think around the rest of the portfolio, our Humber asset is great asset.

It makes a special grade needle coke.

We get good returns out of that.

If you draw a circle around our European operations, it's excess of 30% return on capital employed.

That's a good solid business for us.

The issue we look at is from 30,000 feet, the markets that we're in North America and Europe aren't going to be growing markets.

In fact, they're probably declining markets.

The opportunity to employ capital and make a good return on that, it's more difficult.

I'd rather move into the higher valued businesses in Midstream and Chemicals, and we've been pretty consistent about that.

We're always going to look at our portfolio and optimize the portfolio.

Okay.

Great.

Maybe just a quick follow up on the East and West Coast comments that you made.

Given the fact, and I appreciate that you intended it in a tongue in cheek way, but when we're in the margin environment we're in today, you made the point that the earnings contribution is not so meaningful.

My question is on the East and the West Coast, where you have assets that are maybe non-core long-term, is it easier to let those assets go in a market that you think will be challenged?

Or does it make you more inclined to hold on to those assets for however long it takes until we're back in a margin environment where you can maybe get a higher price for those assets?

I think in anytime we look at an asset, and we're going to let an asset go, we've got to get value for it for PSX shareholders.

It has to be tax efficient in terms of the transaction itself.

We look at these assets, East and West Coast, we're putting advantaged crudes to the front.

We think we can make them better and drive more value ultimately in optionality.

We look at these assets both east and west, we don't have to put a lot of money into these assets.

The option value to hold on it is not high for us, and again, they're generating positive cash.

They're generating maybe single-digit returns.

But they're adding value to the portfolio overall.

We don't feel like they're distressed assets that we have to move today.

We'll hold them for some option value.

We'll consider multiple ways to create values with these assets.

But in the meantime we're going to work to make them better.

I think the focus, Brad, getting to this portfolio where less than half of our income is coming from Refining, the focus is how do we grow Midstream and Chemicals, rather than how do we shrink Refining.

I think that's the refining capacity may be lower in the future than it is right now.

There's a lot of work going into growing our Midstream business more quickly, while competing in the Refining sector as well.

Maybe just one more thing.

We see opportunity to improve the base Refining.

We've been out there saying we think there's 400 basis points of improvement in ROCE by getting advantaged crude, managing our costs, and pushing our yields.

We still have room to improve our base refining business.

Okay.

Great.

That serves as a pretty good segue into my second question, which is more on the Midstream side.

You've spoken quite a bit about the organic project slate that you're looking at and the significant CapEx outlays over the next few years on the Midstream side.

The project, at least to date, between large projects like the export facilities and smaller projects like the Galena Park pipeline that you recently announced, they tend to leverage off of the existing downstream footprint.

Do you think, or when do you think, we'll see PSX Midstream start looking more at projects that step outside of the downstream footprint?

Would you be willing to look at developing or even potentially acquiring significant midstream assets that are outside that footprint?

I think the answer is yes.

I think ultimately you have to look at that.

One of the things we're really blessed with, if we have a portfolio of great projects that touch the existing assets and infrastructure and those are going to be the best returns, we'll move on those first.

If you look around the midstream space today, things look a little expensive to us.

As you look at valuations, we would never say we would never do something in that space.

Clearly, we look at that opportunity side of the existing portfolio.

There's lots to do.

Okay.

Great, and just one quick follow up on the Midstream side.

There was recently a transaction where a large C-corp basically almost recapitalized an existing midstream company with an asset contribution, and so maybe found a way around some of the high valuations of some of the assets that are out there in the market.

Have you thought about different structures, either using PSX or PSXP to maybe consolidate with one of the existing players, or even consolidate the remaining 50% of DCP to jump start some of the Midstream growth that you've guided to over the next few years?

I think we look at all those options but clearly we have the MLP we formed today at PSX is small.

The organic growth opportunities are large here, and so I think it's a very synergistic relationship.

But yes, you can use that vehicle to increase your presence over time.

I think as Greg said, we're always looking at that opportunity, but we've got that forward-looking opportunity there, and then we've got a huge portfolio from an organic or drop-down perspective as well.

That's all for me.

Thank you.

Roger Read, Wells Fargo.

Good morning.

Thanks.

I guess to follow up a little bit on the last question line on the clean products.

Some of your competitors are vesting somewhat more aggressively in the ability to get to the distillate side of the barrel, and your split is close to 50/50.

I was wondering within your parameters of the specific ROCE required and obviously a desire not to spend too much money here, is there anything we should expect in terms of further clean product yield increases, or more of a maybe favorable switch to distillate versus gasoline, given where the obvious margin differences are here today?

We look at our portfolio, we're industry leading distillate yield today.

As we look at the investment that would be required to really move the needle a lot on that, it's a lot of money.

I don't think we're willing to make that kind of investment.

We do think and we do have in our plans small changes in operations, optimization, and maybe some very small capital projects.

We think we can push yields another 1% or so within our existing portfolio today, without spending a lot of capital.

I think that's our plan at this point.

Could you refresh us, the contracts you've got on the two Jones Act tankers to move crude from the Gulf Coast up to Bayway, between that and the rail, what is the daily ability to deliver some price advantaged crude, discounted crude, into Bayway at this point?

Or if you haven't actually done it, what's the theoretical daily capacity at this point?

It's around the optimization of refinery.

We pushed up over 100,000 from time to time.

It's at 250,000 barrel a day approximately refinery.

I think it's really about the logistics.

We'll keep pushing north of that as we look at the opportunity, but it really is around the value of the crude slates and we optimize that.

The crudes that we've got from the Bakken and the Eagle Ford are a pretty good fit in Bayway, so we've got a healthy appetite.

Hence, you've seen the investment we've got underway in Bayway in rail unloading.

We certainly have the capability from a marine standpoint to bring a lot of the barrels into the facility that way.

Can you get to the full 250,000?

Or are you always going to be a little dependent on some an imported barrel there?

I think you would just optimize and if the source is developed, then I think you can push that.

It's just a question of what's the right grade.

I think Bayway very likely will have some component of imports for the foreseeable future.

Okay.

Well, that's it for me.

Thank you.

Faisel Kahn, Citigroup.

Thank you.

Good morning.

I wanted to ask you a question on Wood River.

I believe your partner is talking about maybe potentially increasing the amount of heavy crude capacity into that joint venture.

Can you just give us an update of where you guys stand with that project, or if it's a potential project in the future?

It's a potential project and it's really looking at ways to utilize fully that system.

I think we're always interested in those higher returns, the bottlenecks that could make sense there.

I think we're continuing to work that from the engineering side to try and find a way to increase the use of those heavy crudes and the advantage that we see with that.

Would that be a big ticket project?

Or is it a modest capital?

It's not anything at all like the revamp that we went through at Wood River to run heavy crude.

This is much more of an incremental optimization spend.

This is looking at the bottlenecks and thinking about where we can find capacity and ways to handle lights perhaps and the heavy crude.

Okay.

Then I was wondering if you could also give us an idea of how you think maybe butane blending is affecting the seasonality of gasoline margins.

Obviously, as we go into the winter season you increase butane blending.

Are we seeing increased seasonality in the margin because of lower butane prices versus oil prices?

Or is it relatively the same versus last year?

Certainly the winter season's here so butane blending and the lights going in swells the gasoline pool with that.

It is economically attractive to do that now.

I think you're back in a normal pattern where you'll see butane blending being economically driven at this point.

But nothing different from last year in any way?

No.

Okay.

Got it.

Last question from me, on DCP Midstream, given that you guys now have your own MLP, you have your own assets, does it make sense at some point in time to maybe float DCP?

Do you expect float DCP as a separate entity?

It looks like over time you guys might compete with each other within the industry.

I'm just trying to figure out whether that's compatible with DCP's long-term goals and your long-term goals in the midstream sector.

If we look at DCP and we see the premier gas gathering NGL producer in the industry.

They're the largest gas gather, the largest producer of natural gas liquids.

We looked.

This is going on 14 years.

It's been a great relationship.

We've got a great partner with Spectra.

They're talented people.

We like them.

We see lots of runway left at DCP.

We want to continue to have an exposure to DCP and into the future.

There's lots of ways that we can create value at DCP.

I'll just say that those conversations are ongoing between the partners all the time, as we're looking at multiple options and how do we create more value for both SE and PSX.

The only reason I'm asking is because you recently had this general partnership of Plains go public at a very high valuation.

Obviously, DCP fits that, one of those entities that over time could be a pure play GP.

I'm just trying to understand how you're thinking about some of the market dynamics, and how it affects the process here.

I mean we're aware of that transaction, and so I'd say we're considering multiple avenues for value creation at DCP.

Okay.

Great.

Thanks guys.

I appreciate the time.

Christine.

We've gone over the hour here.

I know that there are people still on the line waiting to ask questions.

I'm certainly available.

Rosy is available after the call if you'd like to call in, but I think we need to stop the call right now.

We appreciate everybody's interest, and good questions.

We look forward to seeing and talking to you all very soon.

Thank you.

Thank you.

Thank you.

Thank you, ladies and gentlemen.

This concludes today's conference.

Thank you for participating.

You may now disconnect.