菲利普斯66 (PSX) 2014 Q2 法說會逐字稿

Welcome to the second-quarter 2014 Phillips 66 earnings conference call.

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

(Operator Instructions)

Please note that this conference is being recorded.

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

You may begin.

Thanks, Christine.

Good morning, everybody.

Welcome to Phillips 66 second-quarter earnings conference call.

With me this morning are our Chairman and CEO Greg Garland; President Tim Taylor; and Chief Financial Officer, Greg Maxwell.

The presentation material we'll be using this morning can be found in the investor relations section of the Philips 66 website, along with supplemental financial and operating information we think you'll find helpful.

On slide 2 you can see 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 these 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 comments.

Greg?

Good morning, everyone.

Thanks for joining us.

Second-quarter earnings were solid, reflecting that we ran well and that our Chemical segment had record earnings.

However, market factors negatively impacted results in our Refining and Midstream businesses.

And corporate costs were higher, mainly due to increased environmental accruals, as well as tax impacts.

In Refining we ran near record utilization rates for the quarter.

However, our realized margins were lower than last quarter, largely due to weaker distillate margins, along with fewer commercial opportunities.

Our Midstream business was negatively impacted by lower propane prices and less demand, driven by seasonal factors.

We think our disciplined approach to capital allocation is appropriate given the volatility in our financial results.

We are expanding our shareholder distributions while investing in the business, with a focus on growing our higher-valued segments.

We will continue to increase shareholder distributions.

Our Board approved an additional $2 billion of share repurchases.

And during the quarter we paid an increased dividend of $0.50 per share, which is up 28% from the previous quarter.

At the end of the second quarter, if you look at dividends, share repurchases, and share exchange from the last quarter, we have returned nearly $7 billion to investors.

At quarter end our share count was less than 560 million shares, down 11% since formation.

We approved a $1.2 billion increase to our 2014 capital budget, bringing it to $3.9 billion in total.

This increased spending will primarily fund the previously announced acquisitions of a crude oil and refined products terminal in the U.S. Gulf coast and a specialties lubricants company.

In addition, the capital will be directed towards midstream growth projects such as the Sweeny frac and Freeport LPG export facilities.

You can see the progress we're making on the frac from the picture on the slide.

Our focus continues to be on midstream organic growth.

While we all would like to have more certainty around condensate exports, we continue to evaluate options for condensate infrastructure and additional fractionation capacity.

Our MLP, Phillips 66 Partners, provides low cost of capital for additional investing.

PSXP had a good quarter, realizing the full impact of its first acquisition.

EBITDA during the second quarter was twice the amount generated at the time of the IPO.

We continue to look for opportunities within Phillips 66, externally and organically, to grow PSXP and contribute to our midstream growth strategy.

Our joint ventures continue to grow.

In June CPChem successfully started up the world's largest on-purpose 1-hexene plant at its Cedar Bayou facility in Baytown, Texas.

Also, during the quarter CPChem approved expansion of its normal alpha olefins production capacity at Cedar Bayou by 220 million pounds per year.

At DCP Midstream work continues on the Zia II plant, which is located in the Permian Basin, anticipated startup, first half of 2015.

And DCP Partners is constructing the Lucerne 2 plant in the DJ Basin, and also expects operations to begin in mid-2015.

We're executing our plans, we're continuing with our commitments we laid out two years ago.

We have a strong balance sheet, $5 billion of cash, and a debt-to-capital ratio at the low end of our targeted range.

We have confidence that we have the resources and the opportunities to deliver on our plans to grow our higher-valued businesses, while rewarding the owners of our companies with secure and growing distributions.

So with that, I'm going to hand it over to Greg Maxwell to review the quarter results.

Thanks, Greg.

Good morning.

Starting on slide 4, first-quarter earnings were $863 million, or $1.51 per share.

We had no special items this quarter.

Cash from operations excluding working capital for the quarter was $937 million.

And for the quarter we paid $281 million in dividends and we purchased 7.5 million shares of common stock for $616 million.

Our debt-to-capital ratio was 22%.

And after taking into consideration our ending cash balance of $5 billion, our net debt-to-capital ratio was 5% at the end of the second quarter.

And, finally, our annualized adjusted year-to-date return on capital employed for 2014 was 13% as of June 30.

Slide 5 provides a comparison of our second-quarter adjusted earnings with that of the first quarter.

This is based on a segment basis.

Compared to last quarter, second-quarter earnings were down $3 million, driven by lower results in Midstream as well as higher Corporate segment expenses.

The increased earnings in Refining were primarily attributable to higher volumes following the completion of planned turnaround and maintenance activities.

I will cover each of these segments in more detail as we move forward.

The Midstream segment was negatively impacted in the second quarter by lower gains associated with DCP Midstream Partners, or DPM unit issuances, and weaker NGL prices and demand.

The annualized 2014 year-to-date return on capital employed for Midstream was 17%.

And this is based on an average capital employed of $3.6 billion.

Slide 7 shows Midstream second-quarter earnings of $108 million, a decrease of $80 million from last quarter.

Transportation was in line with last quarter as improved volume throughput was largely offset by increased planned maintenance activity.

DCP Midstream's earnings decreased by $50 million compared with the first quarter.

The decrease reflects lower gains associated with DPM's unit issuances that were recognized by Phillips 66, along with lower NGL prices, specifically propane.

In addition DCP had turnaround activity at several of its gathering and processing plants, resulting in higher operating costs during the second quarter.

And, finally, our NGL business line also had lower earnings in the second quarter, driven by weaker propane prices and lower demand due to warmer weather.

In Chemicals, the global olefins and polyolefins capacity utilization rate for the quarter was 95%.

The O&P business benefited from strong margins while SA&S had impacts due to turnaround activity.

The annualized 2014 year-to-date return on capital employed for our Chemicals segment was 29%.

And this is based on average capital employed of $4.3 billion.

As shown on slide 9, second-quarter earnings for Chemicals were $324 million, representing a record earnings quarter for our Chemicals business.

In olefins and polyolefins earnings were up, mainly due to improved realized O&P chain margins.

And this was slightly offset by higher maintenance costs as some of the planned first-quarter maintenance activities shifted into the second quarter.

The $17 million decrease in specialties, aromatics and styrenics was primarily due to lower equity earnings as a result of planned turnaround activity during the second quarter.

Next I will cover Refining.

We ran our refineries well this quarter.

The crude utilization rate was 96% and our clean product yield was 83%.

The annualized 2014 year-to-date return on capital employed for Refining was a little over 10%, with an average capital employed of $13.3 billion.

The Refining segment had earnings of $390 million.

This is up from last quarter's earnings of $306 million.

The increase was mainly due to higher utilization rates across all of our regions, slightly offset by weaker realized refining margins.

Realized refining margins decreased in all of our regions except for the Western/Pacific region.

The decrease was driven by weaker distillate market cracks, reduced seasonal blending activity, gasoline activity, and also lower secondary product realizations.

In addition, narrowing crude differentials negatively impacted our realized margins.

In the Gulf coast, the LLS Maya differential narrowed by $5.32 per barrel, impacting our Sweeny and our Lake Charles refineries.

And on the East Coast the Bakken Brent differential narrowed by $1.43 per barrel, impacting our Bayway refinery.

Other refining was down $50 million compared to last quarter, mainly due to less location arbitrage and product blending upgrade opportunities available in the market compared to the first quarter, and also as well as narrowing WTI/WCS crude differentials.

Next let's look at our market capture on slide 12.

Our worldwide realized margin in the second quarter was $9.66 per barrel.

This resulted in a market capture of 61% and compares with 79% in the first quarter.

On a regional level the biggest movements were in the Atlantic Basin/ Europe and Gulf Coast regions.

You can find the regional slides in the appendix of this presentation.

Our refinery configuration negatively impacted our capture this quarter by $2.73 per barrel.

The decrease is a result of our configuration being weighted toward less gasoline and more distillate production than the marker implies.

Secondary products were more of a hurt this quarter than in the past quarter due to NGL prices decreasing, along with crude prices increasing.

And, finally, our feedstock advantage was $1 per barrel lower than last quarter due to narrower crude differentials.

Slide 13 shows the comparison of advantaged crude runs at our US refineries, by quarter on the left, and by year on the right.

During the second quarter, 93% of the Company's U.S. crude slate was advantaged, and this compares with 91% in the first quarter.

This increase was largely due to less turnaround activity in the second quarter.

In addition, refining processed a record 305,000 barrels per day of tight oil in the second quarter.

This represents a 48,000 barrel per day improvement over the previous high.

This next slide covers our Marketing and Specialties segment.

Both our marketing and our specialties businesses had higher volumes this quarter.

The annualized 2014 year-to-date return on capital employed for M&S was 25% on an average capital employed of $2.4 billion.

Slide 15 provides some additional detail on our M&S segment.

Adjusted earnings for M&S in the second quarter were $162 million, representing a $25 million increase from the first quarter.

The improvement in marketing earnings primarily reflects higher volumes due to seasonal demand, and also increased exports.

We exported 181,000 barrels per day this quarter, up from last quarter's exports of 139,000 barrels per day.

Specialties earnings were $43 million for the quarter and in line with the first-quarter results.

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

Corporate and other costs were $121 million after-tax for the second quarter compared with $81 million last quarter.

The increase in costs with largely due to change in effective tax rates, as well as higher environmental accruals.

This brings us to the second-quarter cash flow.

Starting on the left, excluding working capital cash from operations was $937 million.

Cash from operations funded $561 million in capital expenditures and $281 million in dividends.

In addition, we repurchased $616 million of our shares through our share repurchase program.

The $150 million for proceeds from asset dispositions is largely related to distributions from WRB, which is our 50-50 joint venture with Cenovus Energy.

During the first quarter Cenovus prepaid its partnership contribution payable to the joint venture.

When WRB distributed these funds our accumulative undistributed equity earnings were reduced to zero.

This resulted in any additional distributions in excess of current earnings being accounted for as a return of investment.

And, finally, we ended the quarter with a cash balance of $5 billion.

This concludes my discussion of the financial and operational results.

I will next cover a few outlook items.

For Chemicals, in early July there was a localized fire at CPChem's Port Arthur plant.

Our thoughts and our prayers are with the injured employees and their families.

CPChem continues to evaluate the events of Port Arthur.

And at this point it is still too early for us to provide some specifics regarding how long the facility will be down or the total financial impact.

We do, however, expect global utilization rates for olefins and polyolefins to be in the low 80%'s during the third quarter.

Also for the third quarter, in refining, we expect the worldwide crude utilization rate to be in a low- to mid-90%'s, and pretax turnaround expense to be about $90 million.

Turning to corporate and other, we expect this segment's after-tax costs to run about $110 million per quarter for the remainder of the year.

And from a tax perspective our overall effective income tax rate is expected to be in the mid-30%'s for the third quarter.

With that we will now open the line for questions.

(Operator Instructions)

Doug Leggate, Bank of America Merrill Lynch.

I appreciate you taking my questions.

I've got a couple of big picture issues, if I may.

You started your prepared remarks, Greg, talking about higher utilization rates and lower capture.

And it seems to be a trend that we're seeing across a number of your peers.

I'm just curious, is the higher utilization rate and the higher use of a lighter slate of crude impacting your yield to the point where your secondary units are not as efficient as they used to be?

I'm just trying to understand the deterioration in the capture rate.

It seems to be an industry issue, not necessarily a PSX issue.

And I've got a follow-up, please.

We've spent a lot of time trying to buy at the wellhead for consistency of crude.

One of our objectives is to avoid the more blended barrel if we can within PSX operations.

So, I'm not sure that we're constrained in terms of any of our operations given the crude slates that we're running today.

But the market capture question, more broadly around the industries, is a good one.

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

I think, Doug, when you look at secondary products, your coke price is relatively flat, and actually declined a bit this quarter.

So, you've got that dynamic of coke and the fuel grade competing in situ with coal.

And then the LPG prices came down versus the first quarter, so that was a piece of that.

We haven't really seen that the yield structure, other than the value of the light components, has really impacted our selection on crude slates.

And I would say that the abundance of light sweet crude didn't translate into wider crude differentials in the second quarter.

That reduced our capture rate, as well.

Thanks, guys.

My follow-up, every quarter we tend to revisit the West Coast system.

The reason I'd like to bring up it again, if I may, fellows, is, my follow-up is, we saw Tesoro announce this petrochemical project.

And our understanding is that there could be more to come, which ultimately has the impact of tightening up the gasoline market, I expect, over time on the West Coast.

I'm just wondering, first of all, are you thinking along similar lines?

Or have you given thought to how Phillips could perhaps contribute to tightening the gasoline market or perhaps exporting petrochemical feedstock?

Or, if the market did tighten up, what would it mean for the strategic positioning of your West Coast system?

Could it improve enough to become back to the core part of the portfolio?

And I'll leave it there, thanks.

I don't think that we're looking at any chemicals investments on the West Coast.

As we think about the West Coast, fundamentally we want to run well and optimize.

And that's around getting advantaged crude to the front of those refineries.

We don't have any big investments in front of us on the West Coast.

Obviously quarter over quarter West Coast was better second quarter than first quarter.

We think it remains a challenged environment.

But given the position we have, and the cost structure of our refineries and where they sit relative to the peers, I think we're in pretty good position on the West Coast.

All right.

Thanks for taking the questions, guys.

Evan Calio, Morgan Stanley

I know you recently raised 2014 CapEx and the buyback authorization simultaneously.

Maybe a general question on how you think about forward midstream CapEx.

Given the percentage of midstream spending, additional attractive organic opportunities, how does your MLP and the potential to monetize your midstream spending at a much faster rate than the typical long-lived asset affect your view on future midstream spending?

And I have a follow-up, please.

I think at our analyst day we laid out 2014, 2015 and 2016, and we laid out $12 billion of growth opportunities, essentially $7 billion of it at the PSX level.

And most of that was directed at midstream.

I think we see many opportunities in midstream and we will be opportunistic.

I think our recent announcement of the acquisition of the Gulf Coast crude oil and products terminal is an example of that.

So, when we see an opportunity we will certainly move on that.

And then specifically around the MLP, we view that as a tool in the toolbox that we could use to execute our midstream growth program, and/or accelerate the growth at midstream with that MLP.

And certainly I think you'll see us do that.

And maybe a similar question.

I think it's what you just showed us, to put a finer point on it.

But as you effect the portfolio shift that you and I believe will drive a rerating in your EBITDA, your CapEx also rises.

Do you see your balance sheet liquidity, essential MLP liquidity, speaking of drop downs, as a method for maintaining or increasing distributions despite a rising CapEx number?

Absolutely.

When we think about executing the plan, we think about our balance sheet and the capability of our balance sheet.

We think we have $4 billion to $5 billion of capacity on the balance sheet we could use.

We have $5 billion of cash that we could use.

And then, certainly, we have continued asset sales and/or going to the MLP.

And, so, I think we have a robust funding mechanism to move this midstream transformation forward with our Company.

Great.

And then one last one for me, if I could.

The economics are really fantastic for your LPG facility project, given the cost at over a 6 turn cap rate, a potential sale of the MLP to 10 turn cap rate, and a recapture of a portion of the EBITDA for the GP and LP units, which will also improve your returns.

Any thoughts here, can you can scope out any potential second stage here or just market depth of expansion?

And I'll leave it there, thanks.

Tim, why don't you take that?

Evan, we continued to see solid demand around the export piece for propane, butane and pentanes.

And that's all part of that LPG facility.

So, we've been encouraged on the market.

We have said that we're looking at 8 VLGC carriers per month as our original initial thinking.

But, clearly, being able to go to 12.

I think as the market demand continues to grow, and the options develop, I think that's something that we look forward to expanding.

As we look down the road, that's a key piece of where we would like to continue to grow.

Great, thank you.

Paul Sankey, Wolfe Research

The first one is a bit of a follow-up, as regards throughputs.

You ran at 96% utilization overall, but I think you had quite a few refineries that weren't running full capacity.

That would imply that some of your refineries were at over 100% utilization.

Is that a function of the light sweet throughput?

And can we expect you to go even higher in utilization, for example, in Q3 now?

That's part one.

To answer the last one first, I think we just guided to low 90%'s to mid 90%'s in utilization on the third quarter, Paul.

I don't think it's a function of running more light sweet crude, necessarily.

We did do, at the Alliance turnaround, some work that allowed us to run more Eagle Ford at Alliance.

But it didn't really necessarily increase overall throughput at Alliance.

It was just avoiding some of the issues we had when we run the Eagle Ford.

You're absolutely right, there were refineries that ran above 100% utilization.

And the way we manage that internally, once we demonstrate a higher utilization rate for a period of time, we will increase that effective capacity of that refinery in our numbers.

But we need to be able to demonstrate that.

Across the system the refineries ran well in the quarter.

We expected that coming out of the turnarounds in the first quarter.

And, generally, you will see that performance coming out of turnarounds.

But generally they ran well.

I think you're always going to have some ups and downs, and in and outs.

And we did during the quarter.

We had some issues.

We had a small fire at Billings and so we saw some reduced capacity and throughput at our Billings facility.

But in general I would say across the system solid operations.

But you're implying that your capacity will go up.

I don't quite understand.

If it's not more light sweet crude, what's causing that to happen?

If you're running at over 100%, it implies you're going to a higher capacity.

But it's not the light sweet crude that's allowing us to run it over 100%.

I guess that's what we're saying.

Go ahead, Tim.

I think there's two things, Paul.

Specifically, maybe Ponca City is an example, a more consistent crude slate leads to more consistent operations.

So, we've made great strides there.

And then we continue to focus on how to improve reliability, and I think that shows up, as well.

It's really the two-pronged approach.

Relatively minor, I would say, capacity creep.

But really driven off of those two things versus significant investment in terms of distillation capacity or other types of ways to do that.

Great.

Thanks.

And then just for the MLP outlet, you mentioned you made an acquisition.

Are you finding that there's plenty more stuff out there for you to buy?

And could you just talk about the framework of what the asset market looks like to keep that growth going?

Thanks very much.

And I will leave it there, thank you.

Just, generally, Paul, we don't comment a lot on M&A.

Assets are pretty fully valued today And, so, I think you have to look into that deeper value question about where do you see the opportunity to expand around your system and drive the synergies to make that work.

So, we are always looking, and we had a couple of opportunities this last quarter and we were able to do that.

So I think we will continue to look at that as we go forward.

Okay.

Thanks, guys.

Ed Westlake, Credit Suisse

Good morning.

A couple of quick ones, firstly on cash flow.

$937 million before working capital, I think, was the number.

Obviously that's a bit lower than what you have been doing recently.

Obviously earnings could be part of that.

But two of the line items in the cash flow statement, one is deferred tax, which last year was running sort of at a positive.

And, forget the first quarter because I think was some one-offs.

But in the second a slight negative.

Maybe talk a little bit about deferred tax.

And then the other line item is the associates or equity investments seem to be investing a little bit above DD&A.

And obviously we're expecting them to, in order to drive some of the growth when we think about the chemicals and midstream associates, but it felt like that was a little earlier than at least I had in the plan.

I thought that was more going to be 2015.

So, maybe just if you could help us walk through those particular line items in the cash flow statement.

Thank you.

Ed, this is Greg.

With regard to the deferred tax, we had some one-off things that hit that.

I don't have all the details with me right now.

We can call you and give you that additional detail.

With regard to the undistributed equity earnings and the cash flows that are coming out of our JVs, we had a bit of an anomaly, as I talked about in the first quarter, with regard to WRB paying out the dividend from the prepayment of the loan outstanding to Cenovus.

That was a bit of an anomaly, cash flow coming out from that perspective.

And then, as we've talked about, with CPChem and embarking on their large project, building the cracker and the two polyethylene units down on the Gulf Coast, we expect them to be fully funded from a cash from operating activities.

But as a result of that spending, we will end up seeing less distributions coming out of CPChem during this period of time of heavy spending, really, in 2015 and 2016.

Okay, that's helpful.

And then on the small bolt-on acquisitions, any idea of rough range of acquisition multiples?

Ed, roughly I would say they are in the comparables in the specialty lubricants area of what you see things.

Like I said, they're fully valued.

And then I think as we've looked, just look at the terminal, we just see a great opportunity.

We think that's a really key acquisition in terms of the pivot points around the Gulf Coast, both in refined products and crude oil.

And so we see a lot of forward opportunity given our logistics infrastructure, as well as our refining, LPG and products distribution on the Gulf Coast.

I think that we feel that there's going to be very positive developments on both fronts from an earnings perspective and a good value.

So, if I understood correctly, typically the EBITDA multiple, say, year one, but Phillips has ways to add value to the assets that it's purchased over time.

Absolutely.

Okay.

Great.

And then just a question, obviously with the BIS discussing the fact that -- I was down there last week, met those folks -- if you distill oil, and if it looks like it's a product on Schedule B, then it doesn't appear that they might stand in the way of that type of activity going on, which makes sense to me.

Now, some of the things that would then fit into that condensate exports.

But as you going into deeper API crudes, obviously you could top API crudes down in the Gulf and then sell the intermediate products.

Have you looked at any that topping type capacity and whether it would meet your hurdle requirements?

Or does that fall under Greg's 40% IRR required because it's a refining investment?

(laughter) We all like those.

We're looking at a range of opportunities there in terms of just general condensate infrastructure, Ed.

It could be gathering, it could be pipelines, it could be export facilities, it could be topping, it could be full-range splitting into the more complex product slates.

As you know, at our LPG facility we're putting 350,000-barrel -- essentially condensate -- tanks in.

They're under construction.

Certainly that's a piece of the equation that we're looking at.

I think there is some uncertainty around condensates and exports that may be giving some people some pause around speculative splitters.

We'll see.

But regardless of what happens there, there's four things you need to do, and three of them are right down the fairway of what we like to do in our midstream business.

Great.

Thanks very much.

Jeff Dietert, Simmons

One broad question, a strategic question, and one more detailed question, if I could.

You've talked about capital allocation being 60% reinvest, and 40% generously back to shareholders through dividends and buybacks.

How rigid or flexible is this guideline?

I guess it's dependent on a number of considerations, including level of cash flow, attractiveness of investment opportunities, and level of the stock price relative to your view of intrinsic value.

But could you talk about how you see this evolving over time?

Jeff, that was a broad statement in terms of how we think about cash.

And cash could be funds from operations, it could be cash from the balance sheet, it could be raised through debt, it could be dropping assets in the MLP.

I think we have consistently said that we would use all of those vehicles for cash generation, if you will, or sources of cash, to fund our forward program.

It's a pretty aggressive program in terms of organic growth.

But it's also rewarding our shareholders with secured growing distributions, that's growing the dividend.

We talked about minimal 10% type double-digit dividend increases, plus continuing our share repurchases as long as our share price trades below our view of intrinsic value.

So, that's what we look at, as we're thinking about that.

Thanks.

Secondly, Borger, you had some downtime, major turnaround in March, and then there was a lot in the press about 30-day-plus outage in July.

Could you talk about what was down in July?

Was it planned?

Unplanned?

What activity was going on there?

I would just say that Borger hasn't run well this year.

And, so, we're working on improving operational reliability at Borger, really to meet our expectations.

But the July event -- by the way, Borger's back up and running today -- but the July event was an unplanned outage.

Thank you.

Paul Cheng, Barclays

Greg, I presume -- I know the answer, but any, just to confirm -- Citgo, seems like that they were trying to sell their refining asset in the U.S. We should assume that you guys would have absolutely no interest to further expand your U.S. refining capacity?

I think we have consistently said we have better opportunities to invest in our Midstream and our Chemicals business, Paul.

Right.

On the PSXP, any more internal prediction or forecast how quickly you could reach the high split for the GP?

Paul, with this last distribution increase, we're close.

So I think reasonable growth in EBITDA in that MLP would put us there.

I think we're very close to that goal.

We've doubled the EBITDA in the MLP with this last acquisition.

And that started to push us towards that.

So, as the earnings and distributions grow, we're getting much more close to being to the maximum high split on the IDR.

And maybe that this is more for Greg, just as a request.

Going forward, as you're reaching the high split, if you can actually somewhere in your press release -- just I want to tell everyone-- what is your GP cash flow for the quarter, I think that would be really helpful in terms of highlighting the value of what is that GP may be.

And also in your chemical for CPC, thank you very much for the information that you give out, the DD&A and all that.

But I believe that is not including the corresponding share of CPC on some of the chemical joint ventures.

In that, you would be able to also put that, so we can get a full picture of what is the full depreciation related to that business, that would be great.

Okay.

First of all, on the first suggestion, great suggestion.

We will do that in terms of the GP cash.

On CPC, we're working that.

That's a little more difficult.

But we recognize that that's a deficiency in terms of people seeing that, look through EBITDA that's embedded down at the joint ventures within the joint venture.

One of things that we're attempting to do on that, Paul, you've probably seen the supplemental information, is look at it from a proportionally consolidated perspective, and look past the equity earnings and give you the different components.

And I think that's what you're looking for, right?

That's correct.

Yes.

Because that's a little bit complicated since we have joint venture within joint venture.

So, if you guys can help us to get a better, full picture that would be great in terms of the valuation.

Three other quick question.

First, Greg, do you have the market value of your inventory in excess of the book?

Yes.

Paul, that runs, in the second quarter it stood at about right at $8 billion.

Secondly, I think in your slide, you talking about the secondary quarter related to the configuration or benchmark, there's a drop in the Western/Pacific region by about, say, $8-something.

And that's about $2.50 or $2.40 per barrel worse than that discount in the first quarter.

Can you give us a little bit better understanding of what may have caused that?

Which particular secondary product is causing that substantial deterioration?

I think ANS was up almost $3.50 a barrel, something like that.

What we saw is we actually saw coke prices go down and we saw LPG prices or NGL prices go down.

So, it was just a direct result of higher feedstocks and lower cost for the product, or lower realized values for the products.

Greg, are you talking about the thermal coke or that you guys selling a specialty coke?

Thermal.

Fuel, yes.

It's thermal coke?

Yes.

Okay.

A final one, maybe this is for Tim.

Tim, have you seen any evidence that oil once they truck down to South Texas being trapped in Houston and have not been able to very cost effectively move to Louisiana side?

Or that you guys haven't really seen that?

I think that's continuing to be an issue, that the infrastructure on the Gulf still is not sufficient to move some of these lighter crudes into Louisiana as much as we would like to see.

I think that's what you have seen a little bit with recent LLS moves.

That's still developing.

That will improve.

But, yes, I think we continue to see that disconnect between the Texas and Louisiana side on the light side.

I see.

Thank you.

Roger Read, Wells Fargo

Maybe a specific question, getting back to a combination of things.

Number one, your comments earlier about buying your crude direct as opposed to blended, how that fits in with some of the new pipeline capacity coming from West Texas.

And then also how maybe this recent change in the condensate export rules plays into that in terms of the types of crude you have been buying that have been blended.

I know that's wide ranging but I'm trying to get a feel for what you may or may not see in terms of API and then just how much condensate is blended in at this point.

I would say today the large proportion of condensate is in the crude piece.

And you have certainly seen the blended barrel gravity start to come up.

The value that we see is with, particularly, and you look at the MidCon in Ponca City, Borger being able, on top of the producing fields that go direct, helps.

Similar approach we're taking in the Eagle Ford, expanding that.

And buying in the Bakken where you can with segregated distinct batches all help that consistency.

And we've actually increased that volume, and will continue to look at ways to do that, because we think that adds additional value on the refining side of our business.

So, that's actually a concentrated effort on the commercial side to increase that.

Okay.

Thanks.

And in terms of the change with the rules, what's your expectation on how quickly that can actually have an impact?

We know what the first two were, we know that there's been some sort of a halt placed, at least in the near term.

How are you thinking about, in terms of the ability for the industry to get this out of here, that it will ultimately flow back into the impact on the type of crudes you are seeing running and in your ability to take advantage of that light end?

First, we do expect condensate production to continue to grow.

I think that has to be dealt with.

And then there's still a need, particularly if you're going to export, if you just looked at that to say, you've got to get the infrastructure where you can segregate.

You can't co-mingle.

So, that's still developing.

And that is the opportunity that Greg was talking about earlier, about there's opportunity to bring it from the field into the market center for processing.

I think it's still early, still developing.

I think that's going to evolve.

I think that some type of distillation probably starts to set up that play.

That length in condensate will eventually leave the U.S. in some form or another because that's where the demand is going to be, and that's really what you've got to serve.

The key is to figure out which pieces work right now.

But if it stays in the crude, we're going to continue to find ways to drive that to the refineries.

And there's still probably likely to be a more segregated system that drives it directly.

Okay.

And then just an unrelated follow-up question on the chemicals business.

Greg, getting back to your comments on the cash flow side that overall that's not a segment that's going to deliver a lot of cash flow to the corporate level.

If the Port Arthur facility is going to be off-line for a significant period of time -- and I'm not asking you to predict that, I'm just saying if that turns out to be the case -- does that have a meaningful impact on the cash flows?

Or, another way of asking the question, is there any risk that your CapEx will actually have to increase to make up for any potential shortfalls in the chemicals side next year?

I would say from what we know now, what we see now, we don't think we'll have to put equity into CPChem.

They'll continue to fund their programs and distribute cash back to the owners.

Even with the unit down for a prolonged period of time?

I don't know we know how long the unit is going to be down at this point.

And I think anything we would do might just be speculative and so we're probably not going to go there today.

It was a localized fire.

I think we can probably give you more guidance in a month or so, as we get there.

But certainly our view is that that unit -- there's no reason for that unit to be down for a prolonged period of time.

Okay.

Thank you.

Blake Fernandez, Howard Weil.

I have two for you.

The first, I've always viewed one of the real competitive advantages for PSX is your elevated distillate yield in the refining system.

And just in reviewing your supplemental data here, I was looking at the yield on a worldwide basis.

It looks like it's trended a little bit lower here into 2Q at 38%, which had been trending around 39% or 40%.

I'm just curious, as you begin to increase, or continue to increase the domestic advantaged runs of light sweet, do you expect that to have an impact on your distillate yield going forward?

We're continuing to look for ways that we can increase distillate yield.

Certainly in this quarter that may be the wrong way to go directionally since the gasoline crack was up $7.00 and distillate was down $3.75.

But, as you think about where the world is going, and we think distillate demand continues to grow 2 to 3 times the gasoline demand globally, we think increasing distillate makes sense.

Having said that, we're not going to spend a lot of money to do that.

But we do think we've got a 1% to 2% yield capture in distillate that we can effect over the next year or two in terms of operations.

I think we probably were down in the second quarter on distillate production.

Okay, great.

Thanks, Greg.

The second question, really the underlying question is on the pacing of buybacks.

But, first and foremost, with the upward revision on CapEx in 2014, is it fair to think that there's an upward bias to the 2015 numbers that you provided in April?

And, secondly, obviously that would hurt free cash flow.

Is it fair to think that the pacing of buybacks may slow a bit as you digest some of the M&A and some of the elevated spend here until you get a contribution from those assets going forward?

That's not what we're thinking today.

Yes.

When we look at cash flow generation over the next two or three years, it looks like there is sufficient cash to fund the increase in capital that we've built into 2014, and continue a fairly significant reduction in share count through repurchase.

So, the increase is predicated on just executing the plan that we've got in front of us.

I don't think we have any intention of reducing our share repurchase in order to fund additional CapEx.

Okay.

And just to clarify, is it fair to think of maybe some upward pressure in 2015 compared to what you provided in April?

We gave guidance at the analyst meeting of somewhere around $3.5 billion to $4 billion of capital in 2015 and 2016.

I think those are good numbers to work with right now.

We're just getting indications from the businesses today as far as what they would like to spend.

We still believe that having constrained capital programs makes sense.

It forces the businesses, really, to select the best projects.

But I don't really see us meaningfully increasing the capital spend in 2015 or 2016.

Of course, we will give you updates on that as we get into the fall.

And we'll be talking to our Board about what they're comfortable with, as well.

But there are a lot of things that we're looking at today.

We're really building a nice queue of capital programs in the midstream business that we're interested in pursuing.

But certainly don't want to pull back from our share repurchase program.

Fair enough.

Thank you.

Faisel Khan, Citigroup.

Just a few questions on the midstream side.

With the Beaumont acquisition, is Chevron the only customer, at least the majority of the revenues for that facility?

And how do you envision running that facility for your own refineries and operations?

Faisel, I won't get into the customer, but there are other people in that terminal today.

And, really, as we've looked at it, we want to really expand that terminal and that base.

So, we think about it, A, you've got your own operations -- you've got Lake Charles relatively close, you've got connections into Texas.

And then these new crude lines all come into Beaumont area, and the connections that you can make there.

You got a marine dock with that.

So, I think that we've thought about it that we just see tremendous third-party, as well as PSX activity that can be tied to that terminal on both the crude side, as well as the products side.

I think as we go forward we will continue to develop that asset connectivity, and drive really volumes across our system, but also, importantly, opening that up and having a lot of third-party opportunity there, as well.

Okay.

And just to clarify, that facility would definitely be eligible to be dropped into the MLP, is that right?

Yes, that's correct.

And then on the accelerated development of the LPG export terminal and the Sweeny fractionator, in your analyst day presentation you talked about Sweeny Fractionator One coming on in 2015 and I think the LPG export terminal coming on in 2016.

Does the accelerated capital spending that you guys got Board approval for, does that push the LPG terminal into 2015 and maybe Sweeny the beginning of 2015?

No.

We're really still on our target startup date.

We're still on budget in terms of our total expected cost.

This really reflects a spending curve coming in faster than we expected.

But total labor hours, material costs, all those things are just moving forward from where we were on that piece.

But we have not changed the schedule on that.

But the good news is -- on target, on budget.

Okay.

So, just earlier spending and then in the later years you'll have less spending than what you thought I guess.

Correct.

Okay.

And then just going back to your comments around the splitters, not too long ago you guys had talked about possibly building a splitter around your facilities.

It sounds like that's on hold now, pending what happens with condensate exports.

Is that a fair assumption?

I think we've said there's an infrastructure opportunity beyond just the splitters.

So, we're still very active in looking at both the design on the splitter as an opportunity, as well as the infrastructure.

And I think it's really, for us, the decision is simple.

It's a complex splitter, what do you want to do, and how does it fit the refining operations.

That's still ongoing.

But we still see an opportunity there on the condensate side.

Okay, that's fair.

And then you guys talked about in the past a pipeline solution to move crude oil from west to east on the Gulf Coast.

Have you guys moved that project forward, or is there any more clarity around what the scope of that project could be?

I think that Beaumont gives us an additional access point, an opportunity, as you think about our system.

So, that's part of our thinking as we go forward, is how do we use that more effectively to really look at connections out of that terminal to get into Louisiana.

We're actively studying marine as well as pipeline options around that.

Okay.

And then last question to me.

With Cushing inventories having been depleted more recently, and another drawdown today, does that have any impact on Ponca and Borger?

Or do you do all your inventory inside the refining fence, or do you look at the Cushing market, the Cushing storage tanks, also, to balance that?

I think actually having the refineries there actually gives us additional flexibly with the storage they have.

It has not impacted the operation.

Clearly Cushing needs to replenish.

It's right at the minimum.

But I think having the operations there actually gives us a degree of flexibility over just having a market center source there.

Because, remember, again, we take a lot of that crude in Ponca and Borger comes from locally gathered systems, as well, particularly at Borger.

So, it's a nice tie but it's not an absolute must that we connect the two together for the operation.

Okay.

Understood.

I appreciate the time.

Thank you.

(Operator Instructions)

Bradley Olsen, Tudor, Pickering

A couple more questions.

I think my questions have been pretty picked over but I did want to follow up on the Beaumont facility.

Obviously we are seeing quite a bit of activity around the Gulf Coast on the storage side.

And storage rates have been reported by some of your midstream competitors as being pretty attractive and improving.

You guys certainly have a lot of storage, both inside and outside the refinery gate on the Gulf Coast.

When you think about the valuations that you have seen in the market, and saw in the Beaumont process, does it really change the way that you think of your already-owned facilities and maybe the values that they could be dropped down into an MLP?

Obviously we are encouraged by the valuation of midstream from our own perspective.

And then we have agreed, we see the opportunity.

I think that's been -- we have talked about that, that that's part of our plan to grow.

And then you layer on top of that organic and the acquisitions piece, and I think we just put it all together and said great midstream opportunity.

But it does highlight the value of our midstream assets that were initially embedded, so to speak, in our transportation refining system.

Okay.

Great.

And the Beaumont facility, which was a combined terminal and dock facility, with all of the increased maritime activity along the Gulf Coast, are you getting to a point where you see the dock portion of that asset as being maybe somewhat of a scarce resource in the Texas Gulf Coast area?

We think the dock is going to be well utilized.

And that was part of the attractiveness for us, another option, either from a products or a crude standpoint, to take advantage and capture that.

But, yes, I think product side, crude side, you're just going to see a lot of logistics moves and that's why we like this particular location and asset.

Okay.

Great.

And as we think about the still uncertain outcomes of the condensate decision, knowing that there is maybe potential for 700,000 barrels a day of condensate maybe hit the water at a lower cost, or more easily than maybe the market previously thought, does that increase opportunities for your existing Jones Act tankers?

Does it make you more interested to get involved further in that market or change the way that you're thinking about the usage of those vessels between Texas and Louisiana, or Texas and the East Coast?

We've continued to optimize that movement based on the relative value in the refining.

So, condensate -- it's a fuzzy definition.

But the light crude utilization still makes a lot of sense.

The condensate, just depending on how that goes, you can actually open up international opportunity with that, perhaps, on some of the product side.

So, I think we've thought about it that way.

But I think we still like our utilization of our marine vessels in that lighter crude fraction.

But just depending on how things develop, we have a lot of flexibility around that.

I'd just add, I think second quarter the MR vessels were fully utilized.

The question is it's just an optimization one and how do you want to use them -- Eagle Ford to Alliance or Eagle Ford to Bayway?

So, I think we will always run those numbers and do the things that generate the most value on that.

I think we've said previously we would have an interest in acquiring an additional Jones Act capability, so we're always looking around that.

Okay.

And just a follow-up on the chemicals side of things.

With the start up of the 1-hexene facility, it's always a little bit difficult to pin down the granular project cost at the JV level.

But is there a good sequential EBITDA uptick number that we should think about?

And will we see full EBITDA contribution reached later this year or early in 2015?

This is a 550 million pound per year 1-hexene plant.

Still see good demand for that.

It's used as a smaller amount of raw material in polyethylene production.

So, that's going to have a ramp-up period.

We have talked about the investment being roughly in the order of $200 million or so.

And I think that long-range return of 15% to 20% on those is the way that I look at that.

It will take a period of time to reach that.

But I would say that we're hitting the market, I think, at a pretty good time.

And that's used to develop polyethylene at CPC facilities?

Or is that going to be marketed to third-party consumers, as well?

Almost all polyethylene will use some type of co-monomer, they call it, and hexane being a big piece, that butane being the smaller piece.

That's a global market and it's used within CPChem, as well as other producers.

Perfect.

Thanks so much, guys.

Thank you.

I will now turn the call back over to Clayton Reasor.

Thank you very much for participating in the call this morning.

We do appreciate your interest in the Company.

You'll be able to find a transcript posted to our website here shortly.

And please feel free to give Rosy or me a call if you've got any follow-up questions.

Thanks again.

Thank you.

And thank you, ladies and gentlemen.

This concludes today's conference.

Thank you for participating.

You may now disconnect.