菲利普斯66 (PSX) 2014 Q3 法說會逐字稿

Welcome to the Third-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 Kevin Mitchell, Vice President, Investor Relations.

You may begin.

Thank you, Christine.

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

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

The presentation material we'll be using this morning can be found on the Investor Relations section of the Phillips 66 website.

Along with supplemental, financial, and operating information.

Slide 2 contains our Safe Harbor statement.

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

Actual results may differ materially from today's comments.

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

So that said, I'll turn the call over to Greg Garland for some opening comments.

Greg?

Thanks, Kevin.

Good morning, everyone.

Thanks for joining us today.

The third quarter was a good quarter for us.

In Refining and Marketing, we operated well, and were able to capitalize on the strong market environment.

We executed our scheduled turnarounds, and we did so safely.

And as you know, that's very important to us.

In our Chemicals business, despite downtime at the CPChem Port Arthur facility, earnings were strong, also reflecting favorable market conditions.

We're delivering on our commitment to grow our Midstream business.

On the picture in front of you, that's a picture of the Sweeny frac one, it's progressing nicely as is the LPG export facility at Freeport.

We look forward to giving you frequent updates on these important projects.

We're also evaluating the opportunity for a second frac, to have the capacity of 110,000 barrels a day.

We expect to reach a final investment decision mid-2015.

It will be up and operational mid- 2017.

We're continuing to build on our Midstream momentum.

We have plans for a 200,000 barrel a day crude and condensate line that will connect the Eagle Ford to our Sweeny Refinery, and our Freeport terminal.

The pipeline will have the capability to expand to over 400,000 barrels a day.

We're also considering condensate processing options.

Yesterday, we announced the formation of two joint ventures with Energy Transfer to develop the Dakota Access Pipeline, and the Energy Transfer Crude Oil Pipeline, or DAPL and ETCOP.

We'll have a 25% interest in these JVs, and our proportional share of the construction costs is approximately $1.2 billion.

Collectively, DAPL and ETCOP will have the capacity to move around 450,000 barrels a day of crude from North Dakota to market centers in the Midwest and the Gulf Coast.

ETCOP will connect directly to our Beaumont Terminal that we recently acquired.

We did close on the Beaumont Terminal this quarter.

We bought this asset for what it can be.

It has a great footprint, it has a great location, great employees, and in our view, tremendous value creation opportunity.

So we're very excited about this asset.

Currently, it has over 7 million barrels of storage capability.

We see the opportunity to expand this to 12 million barrels, so I think you'll see us move soon to start expansion of this facility.

Beaumont gives us deepwater access, and the capability to export crude and products of 600,000 barrels a day, that more than doubles our current capacity.

We think this terminal integrates nicely with our Midstream growth plans, and also provides our Louisiana refineries increased access to advantaged crudes.

Last September, we said that by 2018 we expect to have assets capable of generating about $2.3 billion of EBITDA that could be dropped into our master limited Partnership.

This estimate did not include EBITDA, which we expect from the newly announced DAPL or ETCOP projects.

We are confident that as we continue to execute our Midstream strategy of growth, EBITDA destined for our master limited partnership, PSXP will continue to expand as well.

We will utilize Phillips 66 partners as a source of funds to grow Midstream.

Last week's announced $340 million drop further demonstrates our commitment to PSXP, and our desire to grow it.

The rail unloading facilities at our Bayway and Ferndale refineries and the Cross-Channel Connector Pipeline are great assets, they tie into and they support our operations.

Also with Cross Channel Connector, PSXP will grow organically.

And we anticipate PSXP's ability to continue to execute additional Midstream growth projects will increase.

Integrated with our Midstream growth plans is our focus on enhancing Refining returns by accessing advantaged crudes.

We see crude by rail continuing, delivering domestic crudes to the East and West Coast.

By early 2015, we'll have 3,700 rail cars dedicated to crude oil movement.

We're constructing a rail loading facility with up to 200,000 barrels a day of capacity in North Dakota.

In August, our Company began operations at its 75,000 barrel a day rail rack at the Bayway Refinery, and the 30,000 barrel a day rail rack at our Ferndale Refinery is in the commissioning phase.

This quarter, we improved our advantaged crude capture to 95%.

So we're working on a great portfolio of Midstream projects.

Our Board recently approved the $1.2 billion additional capital for DAPL and ETCOP pipelines, and we expect that this spend will occur over the next two years.

This is in addition to our prior guidance, around 2015, and we do not plan on slowing down our investments in NGL and LPG projects.

We will provide you with an update of our 2015 capital program in December, once we've reviewed it with our Board.

As a management team, we remain focused on capital allocation.

You should expect double-digit increases in dividends for the next couple of years.

Our view is that our dividends are secure, they need to be growing, and they need to be competitive.

We've increased the dividend 28% this year.

Of the $7 billion share repurchases that have been authorized by our Board, we've repurchased $4.4 billion.

During the quarter, we repurchased 6 million shares, and at quarter end we had 554 million shares outstanding.

We'll continue to buy our shares as long as they trade below the intrinsic value.

We believe doing so creates value for the shareholders of Phillips 66.

And finally, I'd say we feel comfortable that we have the capacity to fund an aggressive capital program, and still maintain a strong approach to shareholder distributions.

We're committed to sharing our success with the owners of our company.

We have multiple sources of funds, including cash from operations, our balance sheet, cash on hand, our master limited partnership.

We're at the low end of our debt-to-cap ratio.

And that provided with other sources, provides us with optionality and also the capacity to continue to grow and grow our distributions.

So with that, I'll turn it over to Greg to go through the quarter's results.

Thanks, Greg.

Good morning.

Starting on slide 4, third-quarter adjusted earnings were $1.1 billion, or $2.02 per share.

We had two special items this quarter that impacted our Chemicals and our Marketing and Specialties segments.

In Chemicals, there were impairments at CPChem mainly related to the Specialties, Aromatics and Styrenics business.

And in Marketing, we recognized a portion of the deferred gain from the sale of a power plant last year.

Adjusting for these special items, the effective tax rate was 33% for the third quarter.

Cash from operations, excluding working capital, for the quarter was $1.3 billion.

We funded $1.5 billion in investments, and we paid $771 million in shareholder distributions.

Our debt to capital ratio was 22%.

And after taking into consideration our ending cash balance of $3.1 billion, our net debt to capital ratio was 12% at the end of the third quarter.

And finally, our annualized adjusted year-to-date return on capital employed was 14%.

Slide 5 compares third-quarter adjusted earnings with the second quarter on a segment basis.

Overall, third-quarter adjusted earnings were up $277 million.

Mainly driven by higher results in Refining, as well as in our Marketing and Specialties segment.

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

Starting with Midstream, during the quarter we saw increased volumes across all of our business lines.

And in Transportation we closed on the Beaumont Terminal acquisition.

The annualized year-to-date return on capital employed for Midstream was 14%, and this is based on an average capital employed of $4.1 billion.

Slide 7 shows Midstream's third-quarter earnings of $115 million, up slightly from the $108 million last quarter.

Transportation and DCP Midstream earnings were in line with the prior quarter.

In Transportation, higher volumes and throughput fees were more than offset by increased operating costs, mainly due to higher maintenance activity.

And at DCP, the increased volume activity from the various projects that have come online was mostly offset by a decline in commodity prices.

In our NGL business, we had gains on seasonal propane and butane storage, as well as higher overall volumes on the Sand Hills and the Southern Hills pipelines.

In Chemicals, CPChem's global Olefins and Polyolefins capacity utilization rate for the quarter was 83%.

This reflects downtime at the Port Arthur facility, resulting from the fire the impacted their ethylene furnaces early in the third quarter.

SA&S had higher equity earnings this quarter, coming off turnaround activity in the prior quarter.

The annualized adjusted year-to-date return on capital employed for our Chemicals segment was 29%, on an average capital employed of $4.4 billion.

As shown on slide 9, third-quarter adjusted earnings for Chemicals were $299 million, down from last quarter's record earnings of $324 million.

In Olefins and Polyolefins, the decrease of $51 million is largely due to the CPChem's Port Arthur ethylene cracker being down.

Although Port Arthur represents approximately 11% of CPChem's total O&P production capacity, the impacts from it being off-line were lessened as CPChem was able to pull down inventory.

In Specialties, Aromatics and Styrenics, the $25 million increase in earnings was primarily due to less turnaround activity during the third quarter.

Moving on, Refining had a good quarter.

We operated our refineries well, and we safely worked through several turnarounds.

The annualized year-to-date return on capital employed for Refining was 12% on average capital employed of $13.5 billion.

Moving on to the next slide, the Refining segment had earnings of $558 million.

This is up over 40% from last quarter.

Although market crack spreads were down in all regions except for the Atlantic Basin/Europe region, we were able to benefit from higher realizations on clean products.

We also benefited from our configuration, as we produced more distillate than what is implied in the 3:2:1 market crack, and distillate cracks improved this quarter.

In addition, secondary product margins increased, primarily due to the decline in crude prices.

The Atlantic Basin/Europe and Central corridor regions had the benefit of an improved feedstock advantage compared to last quarter.

Whereas the Gulf Coast and the Western/Pacific regions were impaired on feedstock advantage, as well as by the build of inventory during the quarter.

Refining and Other was improved this quarter, due to successfully capturing additional location arbitrage and product blending opportunities.

This improvement also reflects gains associated with the timing of crude purchases.

Let's move to the next slide on market capture.

Our worldwide realized margin was $10.89 per barrel, compared to $9.66 per barrel last quarter.

With our market capture improving from 61% to 73%.

Relative to the market crack of $14.85 per barrel, configuration, which represents our clean product yield and also our secondary products, were a negative impact on our realized margins.

Partly offsetting this was the capture of crude advantage opportunities in feedstock, as well as product differentials which represents the largest driver in the other bar.

Compared to the second quarter, the largest movements were in the secondary products and the other categories, as secondary product margins and product differentials improved.

Moving next to slide 13.

This slide shows the comparison of advantaged crude runs at our U.S. refineries by quarter on the left, and by year on the right.

During the quarter, 95% of our U.S. crude slate was advantaged, and this compares with 93% last quarter.

This represents a record quarter for us.

The improvement was tied to increased crude runs at our Alliance Refinery after their second-quarter turnaround, and was also due to certain crudes becoming advantaged relative to Brent.

Moving on to Marketing and Specialties, or M&S.

M&S had a great quarter.

Driven mainly by higher margins in marketing, and in Specialties we closed on the Spectrum acquisition in our lubricants business.

The annualized adjusted year-to-date return on capital employed for M&S was 27% on an average capital employed of $2.8 billion.

Capital employed in M&S increased this quarter, mainly due to the Spectrum acquisition which was completed in July.

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

Earnings for M&S in the third quarter were $259 million, representing a $97 million increase.

The improvement in Marketing's earnings primarily reflects higher global marketing margins, due to the steady decrease in product costs during the quarter.

We exported 129,000 barrels per day this quarter, down from last quarter's exports of 181,000 barrels per day.

This was primarily driven by domestic markets being more favorable for product placement.

Specialties earnings were in line with the second quarter, as increases in earnings from the Spectrum acquisition offset reductions in our Excel Paralubes JV business due to turnaround activity.

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 after-tax costs were $91 million for the third quarter, and this compares with $121 million last quarter.

The decrease was largely due to the effective tax rate, as well as timing of contributions and lower environmental costs.

And this brings us to the third-quarter cash flow.

Starting on the left, excluding working capital, cash from operations was $1.3 billion.

Working capital changes were a negative impact of $828 million, largely due to builds in inventories.

We expect this inventory build to reverse in the fourth quarter.

We spent $700 million in capital for the Beaumont Terminal and the Spectrum acquisitions.

We also funded $800 million of capital expenditures and investments, mainly associated with NGL projects.

And we made shareholder distributions of nearly $800 million this quarter in the form of dividends and share repurchases.

And we ended the quarter with a cash balance of $3.1 billion, this is down $1.9 billion from the beginning of the quarter.

This concludes my discussion on the financial and operational results.

Next I'll cover a few outlook items.

In Chemicals, CPChem continues to ramp up its 250,000 metric ton per year 1-hexene facility at Cedar Bayou, which began operations in the second quarter.

The global O&P utilization rate in the fourth quarter is expected to be in the low-80%s, as we anticipate CPChem's Port Arthur facility to begin the process of restarting its olefins units in November, with some portions of the plant remaining down until year-end.

For the fourth quarter in Refining, we expect the worldwide crude utilization rate to be in the mid-90%s and pretax turnaround expense to be about $130 million.

In Corporate and Other, we expect this segment's after-tax costs to run about $110 million for the fourth quarter.

And the overall effective income tax rate for the coming quarter is expected to be in the mid-30%s.

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

Thank you.

(Operator Instructions)

Evan Calio, Morgan Stanley.

Thank you.

Good morning, guys.

Morning.

Yes, first question, and maybe to a few questions around the same topic.

I'm trying to zero in on the potential gains embedded in your organic Midstream program built to drop.

So first, on the drop-down last week, $340 million, what was the cost to build the rail terminals?

I don't think we've put out a number in terms of the rail terminals.

But I would say that it's probably typical Midstream type multiples is the returns that we would expect out of those.

So a 7 times to -- building at 7, and then you sold it at around 10, I thought?

Yes, sir.

So if I extend that thought into your $2.3 billion, [then I'll be able to] EBITDA that's probably as you've mentioned growing maybe $2.5 billion after yesterday's JV build to drop.

Is there -- can you quantify -- should we expect a similar relationship to that EBITDA?

Or maybe more explicitly, how much of that infrastructure exists today versus what was what your spending on to add?

If that makes sense.

I think it's kind of $500 million is what exists today in terms of the EBITDA and balance is growth, Evan.

I would say those are fairly typical type Midstream projects and returns.

There's some that better than others in that.

But the other thing that you need to be thinking about too is, is when we get the MLP to scale it can co-invest.

And it can do some of these projects on its own also.

So I don't know that I would necessarily think that all $2.3 billion of that ultimately would be built at PSX and initially dropped into the MLPs.

There will be some combination of that going forward in the future.

But our challenge today is really get the MLP to scale, have a balance sheet so they can access the debt and equity markets.

Right.

No, I just think it's less appreciated if you did that [1.7] times that three turn difference, $5.4 billion recurring gain on that portfolio.

Assuming it was all at the Philips level.

Let me switch gears on our second question to Chemicals.

Just trying to get some color on the margin compression of the ethylene side.

The Brent prices determine polyethylene price, and maybe you could help determine the impact of the oil move on your ethylene chain margins.

And longer term, if oil prices remain lower, do you think that risks investment for additional Gulf Coast ethylene capacity expansions in the US?

Evan, this is Tim.

So roughly I would say for every $10 movement in TI on just a cost basis versus ethane today, you can think about $0.05 a pound compression on the margin, on the cost side.

Market factors impact that as well.

But long-term, that's the structural difference.

So it's quite large today.

We've anticipated that that would come in with ethane rising a bit more than crude.

I think structurally we still feel that the gas to crude ratio stays in the ballpark.

So I think that it has some compression, but I think we planned for some of that, and we still fundamentally believe that crude will be relatively expensive to a gas-based feedstock.

Is there anything on the macro that you look for, whether it be some stabilization on ethylene cents per pound advantage before you would proceed to FID a second cracker?

How do you think about the risks to the macro, and making additional investment there?

I think crude has got to fall substantially to take away that advantage.

So you would look across that value chain.

But today, where it is, there's still, I think, incentive to do that.

I probably -- I'd think more about it just in terms of the availability of the feedstock.

But we've always had a strategy at CPChem around ethane-based cracking, and that's been a very good place to be.

So we've looked in the Middle East, we looked in North America.

And I think fundamentally we would say that crude would have to go quite a bit lower before we'd see that advantage dissipating.

But that is a factor that we'll think about in terms of additional investments wherever they are.

That's great.

Appreciate it, guys.

Thank you.

Jeff Dietert, Simmons.

Good morning.

Morning, Jeff.

I'm following along on the Chemical sector.

You provided some update on the Port Arthur partial restart in November, a full restart by the end of the year, if I heard it correctly.

I was wondering if you could talk about the opportunity lost and the facility being down in the third quarter?

What would Chemical earnings have looked like if it had been operating in a margin environment that was available?

Jeff, I think when we look at it, I like to think about it that we've probably got about a five-month outage when we think about Port Arthur.

So that's roughly in the range of say 750 million, 800 million pounds of lost production, and then you can put the margin on that.

I think the third quarter was mitigated somewhat by coming out of inventory.

So that will continue to be an impact over the next two quarters.

But in macro, we just think about in terms of the lost pounds.

And that's how I'd think about that opportunity, then you can put the margin assumption on their that you'd like.

But that's the best way to come up with that estimate.

Got you.

And as far as 2014 capital budget, no changes to the $3.9 billion presented last quarter.

I think the new projects are more $15 billion plus type investments.

Is that fair?

That's fair.

Our guidance is still around $3.9 billion for 2014.

Thanks for your comments.

You bet.

Appreciate it.

Phil Gresh, JPMorgan.

Hey, good morning.

Morning.

First question.

You talked about the working capital build in the quarter.

I was wondering if you could talk about the impact that that had on the profit line, particularly for Refining the Gulf Coast?

I think you called that out.

Any quantification you could give there?

Phil, this is Greg Maxwell.

I think as we look at, we've got the large system and we trade around that.

And so we end up having both crude and product impacting our inventory builds, that was the case in the third quarter.

As far as regionally, we would expect that to reverse itself largely in the fourth quarter from an inventory working capital perspective.

But other than that, we don't have any real guidance down to the particular regions.

Okay.

But you would say it was a particularly large drag on Gulf Coast profits in the quarter?

That's correct.

We saw a negative or a positive in the second quarter, and then a bit of a negative in the third quarter.

So it's sort of a double-dip when you compare quarter versus quarter.

Got it, okay.

With respect to the balance sheet and the uses of cash, obviously you have a lot of growth investments you're focused on.

You've also talked about doing significant buybacks, which I would assume means continuing along the current run rate of what you did in the third quarter.

So I guess what I'm just wondering is, if you put all those things together and we look ahead say two years from now, where do you want your leverage to be on the balance sheet?

Well I think we've consistently said we're going to target a 20% to 30% debt-to-cap, and we're certainly wanting to float in there as necessary.

I think we've purposely structured the company to be successful, to continue its growth investments, continue strong shareholder distributions in a volatile commodity environment.

And so, we don't see any change to our strategy.

Okay.

Last question just with respect to all the Midstream projects.

Obviously, you increased the target again in September, and now you've layered in this other JV.

Is there any -- realistically, is there any financial or operational path in terms of how you're thinking about the opportunities ahead given what's already in the pipeline right now?

No, I think that I would say we're on track.

Our strategy is a transformational change into a Midstream logistics company, with great refining assets and great chemical assets.

I think we're on the path.

We've laid out more than $2.3 billion worth of EBITDA growth between now and 2018 in our Midstream segment.

I would say we're pleased with the project portfolio we have.

We're executing well in terms of delivering on those commitments.

Okay.

All right.

Thanks.

Roger Read, Wells Fargo.

Good morning.

Morning.

Two things.

I guess first off, the Bakken pipeline announcements, could you give us an idea of what sort of commitment on the shipping those have?

Is it 100%, is it 80%, just what backs up the volumes there?

We're in the middle of an extended open season on that, and we really don't disclose the just commercial details.

But I think the capacity we've talked about, that 450,000 barrels a day.

Okay.

So we'll go at that for right now.

Yes, I think that you've got to let that process work itself out.

And we would obviously, with the extended open season, I think the prospects are that that may increase.

Okay.

Second question, switching gears here to the Refining side.

Comments on the call, and if I'm looking at the numbers correctly, exports were 129,000 barrels I think.

And then down from 181,000, if I wrote that correctly in Q2.

And the comment was along the lines of better domestic demand.

Could you give us an idea today as you look at the market and you're thinking about domestic pricing versus international product pricing that would drive the desire to export more?

And the changes we've certainly seen in between various crude differentials along the Gulf Coast and elsewhere, where we stand on that export volume today?

Why don't I take a stab start, and then Tim can fill in the details.

First of all, the export markets were there, they were available to us.

We just made a decision to place them in a higher-valued market domestically.

I think the barrels we did export were somewhere between $1 and $2 a barrel better than the alternative placement that we had available to us in the domestic market.

But in general, you're going to see us flex up and flex down to follow the market opportunity.

You want to add on that?

I think structurally, pretty good demand if you look at gasoline demand and distillate demand in the U.S. So that was the opportunity.

But longer-term, we still know that exports are going to happen as we continue to run incentive to run.

So I think that we'll continue to flex, as Greg said, but you should continue to expect exports to be a significant part of the U.S. Refining business.

Okay.

And one follow-up on that if I could.

Any change into where your exported barrels up have been going?

Europe, Latin America, West Africa, any changes in sort of (multiple speakers) volumes?

I'm sorry.

On a U.S. perspective, no.

And so, I think those are still markets that are there, and those are a logical markets to access from the U.S.

Okay.

Thank you.

You bet.

Doug Terreson, ISI.

Good morning, everybody.

Hey, Doug.

Greg, since the spinoff a few years ago, your team has been pretty focused on delivering growth but in a capital disciplined way.

And because you're returns continue to be pretty strong and lead the peer group in many of the businesses, you're obviously demonstrating proficiency on value creation.

But also on this transformational growth that you talked about a few minutes ago.

So my question is whether or not we could get a progress report on the core components of the return enhancement plan and Refining specifically?

And then also, any updated strategic thoughts that you might have on the West Coast and European parts of the Refining portfolio?

Sure.

Well I think that I would say we're on track in terms of the return enhancement plans that we laid out essentially two years ago and updated this year.

As you know, the biggest component of that is really accessing and advantaged crudes, and we're driving to 95% advantaged crude capture.

But that's not the whole story, as you know, Doug.

Once again, advantaged crude you for the next best advantaged crude to displace that barrel too.

So I think around the infrastructure that we're investing in, it does have the ability to help us liberate higher returns around our integrated Refining assets.

And so, we'll continue down that path, and we'll get to 100% advantaged crude in the next year or so as we continue to move these projects forward around infrastructure.

You think about the portfolio, I think we said this year we'll close on Bantry Bay.

And so we're on track to do that.

Whitegate, really a failed process.

No interest in someone buying the Whitegate Refinery, so that asset is essentially off the market for now.

And we have an ongoing process at Melaka.

And I think our expectation is certainly end of this year, first quarter next year, that we'll complete that process.

Okay, great.

Thanks a lot.

Thanks, Doug.

You're welcome.

Ed Westlake, Credit Suisse.

Good morning.

I simply want to start with the condensate pipeline and the splitters, are they in that $2.3 billion Midstream forecast?

Yes.

Okay.

And then, a $340 million drop, that's great.

I guess you've got an EV of $45 billion, and $2.3 billion of MLP investments that's going to grow.

I was just joking with my team that I'd need to live to 100 to see the entire asset base transfer down into PSXP.

So I guess just the question is really are what are the constraints on you guys going faster?

And I do obviously hope to live to 100.

The first thing I was going to say, we hope you do live to 100.

But you've got to give us credit for the $740 million we've done, so we've done $1.1 billion this year as you think about drops and the MLP.

And I would say, we've consistently said our view is that we'll probably keep our foot on the accelerator (inaudible) in terms of the Master Limited Partnership.

It's a valuable part of our growth program in terms of funding this Midstream growth.

And so I think that clearly, we've stated intentions that long term we'll be top quartile in terms of distribution growth certainly by 2015.

But in the early years, we're going to be quite a bit above that.

Right.

You've seen obviously what's gone on in the space where people have used consolidation to perhaps create a larger MLP.

Obviously there's GP accretion from that, and then potentially that might be a base to then drop further assets in at perhaps a faster pace.

Is that something that would work in your vision?

Ed, we've got a great backlog of projects as they come on, I think it's increased that backlog of droppable EBITDA.

So we're going to, to Greg's point, you're going to grow your MLP in commensurate with that Midstream growth.

And it's always a possibility that we could look at some type of opportunity to expand that.

So I think that's just part of our strategic view that we see a lot of value creation in that segment, and the MLP is just a really key piece to make that happen.

And then two smaller questions.

I appreciate your open season, but any idea what sort of tariff it would take to get Bakken barrels down to Beaumont?

That has not been -- the FERC tariffs have not been filed.

So once that's complete, that will be available.

But we believe, I'll say this, that this will be the most economic pipe solution from the Bakken to the Gulf Coast.

Yes, reconverted gas pipe I think probably is definitely.

And then on the throwaway comment that you made on Refining in the Gulf, you said there were some feedstock restrictions.

Can you walk us through what those might have been in the second quarter, sorry, third quarter?

Yes, so second versus third, we had -- Alliance came back on after turnarounds, so you had more exposure to light and medium grades with that.

And then there was less availability of Maya, the crude, and that was backfilled with more light medium.

So we had a mix - effect that gave more exposure to light medium versus heavy in the third quarter.

Thank you.

Paul Sankey, Wolfe Research.

Hello, guys.

To the extent that you -- you've been asked a lot of questions around this, but obviously arguably we've moved to a new price environment here.

Firstly, I was a bit surprised that your earnings weren't boosted more.

You've tried to break that out, but in the co-products area, would we expect the lag to come through in Q4 from price downturn?

And can you try and strip out how much of that would be sustainable if at all possible if we stayed at this price level?

Secondly, from the current price level, would you expect there to be an inventory or accounting of inventory impact?

And then I've got a follow-up which is a bigger question.

Thanks.

Paul, on the secondary products, clearly as the cost that feedstock has come down, the margin on those products has gone up.

And so that's the direct correlation, versus some price movement maybe on those on the LPG, and the cokes, those kind of things.

But it's really around that feedstock value brings up the value of that secondary product.

And so I think that that really depends on that absolute level of crude.

Maybe in a broader statement, with crude prices coming down, you've got probably on the direct margin, the Chemicals business has probably could have I should say the most exposure as that margin comes in versus naptha cracking.

But generally, it's a margin business, there are just a lot of moving parts to what that really influenced feedstocks and products.

Yes.

I guess what I'm driving at is that you had a negative in secondary products that you show on slide 12.

And part of the question is that I know that you're trying to improve capture in general, but obviously the volatility of the market makes it difficult.

But I would have thought that that number might be better, because we saw a down move, although the majority of it obviously came later.

That's the general idea I'm pushing at.

I think it's probably $5 a barrel better quarter over quarter.

And I think assuming crude stays where it's at, that probably carries forward into the fourth quarter.

But we always seem to have better capture rates in the fourth quarter anyway, historically.

So we'll just have to see where goes, Paul.

And Paul, on your crude inventory question I think you are spot on.

As is prices go down, you do see some float impact between accounts receivable and accounts payable.

We haven't publicly quantified that for anyone, but you will see some impact.

Okay, I'll follow-up on that.

And then the bigger question I had, was that you've obviously invested a lot and succeeded in getting a much more what you call advantaged crude slate.

I was wondering how sticky that would be if we saw a situation where, for example, global crude prices were at or below U.S. prices?

I assume that your infrastructure investment would leave you still wanting to use the domestic option.

Can you give us -- I don't know if I'm barking up the wrong tree there, but the idea is that you're incentivized by your infrastructure to use the domestic crudes almost to a much tighter price maybe than other people might think?

That's a safe example -- (multiple speakers)

Paul, I think on the infrastructure, clearly, the location of the Refining asset has a significant impact on the crude slate.

So clearly, the Mid-Con some of the Billings, pretty focused on the inland crudes.

I think it really hinges on the optionality around say the Gulf Coast.

Our infrastructure though, we think about it like this.

That we have access to that, and we'll go to the best value on the Refining slate, and then we've got opportunities with our logistics to move those crudes into whatever market makes sense.

So there's a double-edged drive on the logistics is increased third-party capability, as well as supplying our own system.

And I think that's the balance that we're looking for.

Yes, I guess I'm just trying to get a sense, for example, if we inverted Brent prices went under let's say LLS.

The extent to which you would -- how far that would have to go before you would want to move back to using imported crudes when you've done so much work to do the opposite?

Well I think we keep that option on the table, and my comment would be that I would expect that inland or U.S. prices would probably adjust to be competitive.

But we work around that short-term optimization in our system today.

And so we'll flex as that differential moves, and we drive the best value in our Refining system.

Yes, I guess I'm thinking out loud.

The final question, do have any observations on distillate markets right now?

I know you have a relatively long distillate, anything that you could add?

Thanks a lot.

The distillate market still looks strong.

So I think moving into the season when we're going to elike that exposure on the distillate side.

Thank you, guys.

Thanks, Paul.

Blake Fernandez, Howard Weil.

Guys, good morning.

I was hoping to go back to the product exports.

I know you said you exported 129,000 barrels a day, your progressively building out your capacity.

I'm trying to get an update of where you stand right now in capacity.

And also, if you don't mind, some commentary around some of the new global capacity coming online that's export-oriented.

And just curious if you have any thoughts around how the U.S. is going to be competitive with some of those new facilities in targeting, let's just say, the European market?

I think we're close to 1 million barrels a day with Beaumont, plus the 420,000 that we have in the PSX Refining system.

Our view is that we'll continue to expand that.

I think that the US refiners given an energy price advantage and some crude advantage are going to be well-positioned to compete in export markets globally.

But certainly in those that are most geographically close to us like Latin America, South America, West Africa, to a certain degree Europe.

But there's no question, you've got some big refineries coming up in the Middle East that are targeting Europe and Asia, and they're very, very competitive assets.

And I think they'll run.

Okay.

Just a quick one on Bayway.

With the rail rack coming online, if I'm not mistaken, historically, you've done a bit of barging Gulf Coast crude over to the East Coast.

Does the rail rack basically displace that, or will you continue to do both?

No, I think we'll continue to do both.

We've actually run the Jones Act ship up around the Bayway also, and so I think you'll see us continue to do both.

Okay.

And then the final one for me, I know you addressed Jeff 's CapEx question on 2014.

Any thoughts around -- there's a lot of moving pieces.

So as we progress into 2015, for the time being, do you think it's fair to think flattish type of CapEx into next year?

Well we had given guidance earlier this year on 2015.

And so we'll go to our Board in December and ask for approval of our 2015 budget, but certainly I think that you should view the DAPL and ETCOP investment as incremental to what we've already said.

Right, okay.

All right.

Thanks a lot.

You bet.

Paul Cheng, Barclays.

Hey, guys.

Good morning.

A number of quick questions.

Greg, earlier though or maybe it's Tim talking about some feedstocks limitation on Maya.

Do you know if this is specifically for Phillips 66, or it's actually hitting for the whole industry?

And can you quantify for us in some way that how big a hit for you, and have you seen that situation reverse?

Paul, our view is that it's availability of production on the Latin American crude side.

And so, I can't speak to others.

But currently we've seen that.

And so, in the interim, we are readjusting the supply chain.

Clearly, Canadian crude heavy crude to the Gulf Coast can be a piece of that that's starting to move with more rail infrastructure up there.

So I think new supply options are developing as that changes, but that's our view is that it's really been a reduced availability from -- that certainly we've seen.

Tim, can you quantify helping us to quantify that, how big is that negative hit on you in the third quarter?

I have not done specific around that.

So I could get back to you on that with the sensitivity.

Okay, that would be great.

We typically won't go to a refinery level though, Paul.

We might go through regional level for you.

Okay.

That's good enough.

On the Energy Transfer, the total investment for the two JV is $4.825 billion.

Do we -- is there -- out of that, is that the incremental or that this is including some of the money already being spent?

So that's the total value, and so that will -- we'll have a share of that total capital commitment.

And that's -- it's still -- so you're in open season.

You haven't done a lot of there have been some engineering work, those kinds of things, so you're very early in the formation of the project on that.

Tim, from what I understand, those two projects actually already have some existing pipe in the ground.

So is there an up front payment you guys have to pay in this year related to that project?

So it's really around the contribution of the assets and everything.

And so that is -- the spending really occurs in 2015 and 2016 kind of split between those two years as we go forward, Paul.

Right.

But how about up front investment, the up front as a contribution?

Fairly small spending this year, really the bulk of that spending on that total occurs in that 2015 and 2016 time period.

And -- sorry.

No, go ahead.

On the GP, can you tell us what is in your GP cash flow annualized run rate right now?

Paul, this is Greg.

If you look at the percent of the distributable cash flow that's received by the GP, for this quarter's announced distribution it would be 8%.

Greg, since that -- if you can help me since I don't have the PSXP press release or their 10-Q, do have what is that in millions of dollars that number?

I don't have that right in front of me.

I'll get that for you.

And also just maybe a request.

If possible, in the future, I think it would be very helpful for your shareholders given we're talking about that logistics going to be a big piece of the value creation for the company.

If you can actually list out what is your actual GP cash flow, so that we don't have to go through several different documents in order to find it.

That's a great suggestion, Paul, and we're going to do that.

We talked about that this morning in fact.

We'll plan on putting that in the supplemental information, Paul.

Yes, that would be -- I think that would be really helpful.

And also, along those lines, because we don't know every quarter whether it's going to have a change in your LP unit ownership.

So if you can also list how many LP units, and what is the total LP units.

Those is all available I'm sure in the PSXP, but it's just helps your C corp shareholders that don't have to go through several different documents.

Final question, that along those lines.

Based on the balance sheet of the LP, what is the current maximum ability for them to do M&A?

Whether it's through, or the internal drop-down, or external M&A?

How big is the balance sheet that they can do, is it $1 billion, $2 billion year?

Any rough guidance that you can provide?

With regard to total acquisition at the PSXP level?

That's correct.

How much that they can -- this year that you're doing $1.1 billion of the asset drop-down.

Is that the maximum in terms of the financial balance sheet capability, or that you think that capability is actually bigger than that?

Paul, I guess I look at there's equity, debt component, and we've targeted three times EBITDA on debt.

And I think you look at the MLP access on the equity side, you start to see that $1 billion.

So you're somewhere between $1 billion and $2 billion is kind of roughly in the range of what we think about could be managed from a purchase standpoint.

So without issuing equity in the LP level would be about $1 - $1.2 billion from a debt standpoint?

No.

I think you've got, as you go forward with that you've got to have the equity offering or the debt to purchase the assets.

So I think equity offerings are a natural way to growth that capability.

That doesn't get into acquisition with share exchanges and anything like that.

That's a different issue.

But just in terms of accessing the market and where the cash comes from, it really has to be held back from the distributions or has to come from access to debt or equity.

Right.

Okay.

Perfect.

Thank you.

Paul, I looked up.

You were wanting distributable cash flow for the third quarter?

That's correct.

$33.4 million.

$33.4 million.

That is the total distributable, and 8% is to the GP, or that is the GP?

No, that's total distributable, and so the 8% would apply to that.

I see.

Perfect.

Thank you.

Thanks, Paul.

Doug Leggate, Bank of America.

Thank you.

Good morning, everybody.

Morning.

I guess one of the things that's come up periodically has been how we are I guess as the street trying to put a value on your Chemicals business and structure those in right now.

And what we've been trying to look at is the free cash flow outlook.

So I'm wondering if you could help us with how you see the self-funding Chemicals growth evolving to a free cash position?

And where you are in the decision process for the second cracker, which obviously would defer that free cash move into later in the decade I guess.

And that's my first one, and I have a follow-up please.

So basically, as we've looked at -- we're in the middle of a major project right now.

Our view has been that the project will be funded with the Chemicals business.

There will be distributions for tax payments.

And next year is kind of a peak spending year, so I think a little bit there.

And I think going forward, it's really a question about do they have the right return projects, and the market fundamentals.

And to the extent that they can self-fund and grow, we'd really like to encourage that.

So, I think our expectation is that they will continue to grow.

But to the degree that which they do that really depends on the view of the returns on the project and how much.

But we do expect that to be a self-funding venture, with the payments back to the owners at minimum tax distribution and discretion beyond that.

So -- as things today (multiple speakers).

I think our current view would be that 2015 CPChem is certainly self funding and putting distributions back to Chevron and ourselves.

Can you update us on where you are in the second project in terms of FID?

I think we're at CPChem is certainly looking at all the options, looking specifically in the U.S., at a couple of things.

And so, it really is still very early looking more at I would say conceptual market feasibility of the returns that we expect.

And so, just taking a hard look at that but not really engaged in a lot of engineering work at this point.

So it's really a decision point that they've got to bring forward to the owners for some approval and discussion.

So it's out there a ways in terms of when we would take any kind of investment decision, or if we would go forward.

I think just generically though, as we consider that opportunity universe in the Chemicals business, we still think that the U.S. Gulf Coast is probably the best place to invest.

And I think that at least from our perspective, we wouldn't hesitate to go forward with a second cracker.

I think the real challenge is, is where are you going to put it, and what are you going to feed it.

And that's what we're working through right now.

Thank you.

My follow-up, if I may take you all the way back to the MLP again.

I guess one of the things, a lot of people talked about drop downs and drop it down faster and all this kind of stuff.

But there's no real discussion around time value of money, tax basis, or more importantly the impact in the Refining business.

What I'm really trying to understand is what do you think is a reasonable pace that the MLP could actually handle by way of annual ratable acquisitions or growth if you like?

And I guess in the same vein, do you ever think that the I guess it's about 10% of the $2.5 billion post this deal is Refining within the Refinery gate.

Is there ever a scenario were you envision moving the refinery EBITDA into the MLP given the implications for the volatility of the Refining business?

And I'll leave it there.

Thanks.

So, I think we've said we think the market capacity given the size of this MLP is probably somewhere between $1 billion to $2 billion of what we could do annually.

And so, we could just leave it at that.

We really haven't given forward forecast of what our drops are going to be, other than around just quantify top quartile type growth in distributions.

I still look at the Refining business, and the volatility in the Refining business, and would say we probably would not put that into an MLP at this point in time.

Just given the different yields and access to capital and cost to capital, and using that Midstream business then to tie up or integrate with our Refining assets and improve our Refining assets long term.

That's really helpful.

It's the answer I was looking for.

Because a lot of your -- some of your competitors have a I guess a slightly different view.

But, thanks very much for the answers, guys.

I appreciate it.

You bet.

Brad Olsen, Tudor Pickering.

Hey.

Good morning, guys.

Hey, Brad.

I wanted to walk for a minute, if I could, through the Midstream EBITDA number.

I know the $2.3 billion EBITDA that's now in the presentation, it's certainly a robust number, and assuming $2 billion a year drops at a 10 times multiple it gives you close to a decade of runway.

Does that include the recent Bakken pipeline deal you announced?

And if it doesn't, I'm just trying to think about the $700 million that was announced back in 2012, plus the $500 million or so from the Sweeny complex.

And then trying to get from there, the additional $1 billion if I'm not using the Bakken pipelines.

And I understand there's a lot of small stuff in there.

But just one or two big chunky projects that -- especially in I believe the NGL segment, which will increase much greater than just the Sweeny frac complex alone.

So as you think about it, the first answer the Bakken pipe is not in those numbers.

And so that would be incremental to that, and you should expect typical type Midstream returns out of the Bakken pipe.

What are in the numbers, essentially the frac 1, frac 2, the LPG export, and we've said $700 million to $900 million of EBITDA in there.

One of the things that I think that the organization has done really well in the last year is to queue up a really strong portfolio of growth opportunities for us to invest in.

Around our footprint, if you will.

And we're executing well in terms of getting these projects started, getting them up, getting them running.

And so I feel really comfortable with our portfolio, our capability to fund it, and we like the opportunities that we see.

Yes, Beaumont is in there as well.

That's right.

Got it.

Okay, thank you.

That's really helpful.

And just to jump back to the Bakken pipelines, the crude pipeline investment, if I could.

It looks like a really attractive deal.

Obviously, you pointed out that they are your typical seven times Midstream returns, while also being a long-term regulated cash flow stream.

So when I think about that, you have obviously made it a point to say that strategically, Midstream is driving the bus on a go forward basis.

And Refining is probably less of a focus in terms of growing the business.

And so piggybacking on Paul's question, when you think about which part of the equation is the dog and which part of the equation is the tail to use a clumsy analogy?

On the Bakken deal, is this a deal that you would have done in the absence of your Gulf Coast refiners, refinery footprint?

Or is it something that you view as adding significant value?

Even if you hadn't participated in equity in the pipeline, would it have been something you had looked at from a Refining point of view?

To what extent would this pipeline project maybe have played out differently if you were or were not looking for crude for those Gulf Coast refineries?

So I think, when I look at it, it's not predicated on supply into our system necessarily.

It's a great option, and that's a value that we bring to our Refining system.

We like the fact that it's a long-haul crude pipe from a basin that ties directly to our Beaumont Terminal, and so we've got options across that Gulf Coast system.

You've got Midwest delivery.

So we like that, it can tie into our supply, and it's a factor as we think about that.

But it's not the key driver was not supply, it was really around the Midstream opportunity.

So we think it's a great asset because it's going to continue to enhance our position in the Bakken, our position in the Gulf Coast, great linkage.

Thanks for that color.

And when I think if supply -- supply is maybe not the main driver.

But I assume that you guys are a significant shipper on the pipeline, and does it enhance your position?

I guess you mentioned earlier in the call that this is the lowest cost option out of the Bakken.

And as we see other pipelines facing delays out of the Bakken, that option probably gets more valuable over time.

But as I think about how much volume you guys are going to be directly involved in marketing of this pipe, is there a good number?

Or are you an anchor shipper, or is this more of just an equity investment without a volumetric commitment?

Yes.

So we're in the middle of open season, and we will take a commitment.

But that's all we're going to say on that.

Okay, great.

And just one more housekeeping question.

Greg, you talked about the hexene facility, it's still in ramp-up mode.

As we think about where that facility or when that facility reaches full economic contribution, does the incident at Port Arthur prevent the hexene facility for any reason from being able to sell full volumes, or is the run rate unaffected by that?

And if you wouldn't mind providing a little bit more specificity on the timing, and maybe just a rough EBITDA number on that facility as it does hit 100% or close to 100% utilization?

I don't think that Port Arthur is going to impact the run rate on hexene-1.

As it ramps up into 2015, Port Arthur is going to be back up and running.

And so I don't think Port Arthur is going to enter into the equation in terms of the run rate.

In terms of fully ramping the facility, I don't know, Tim, it will probably ramp over 2015 and 2016 would be my guess.

I think in response to demand.

So we've been very happy with the start up, and been very happy with the customer reception on the product side.

So it's gone very well, but you have the normal ramp up in terms of demand and how that works.

Got it.

That's all for me.

Thanks a lot, guys.

Take care.

Thanks.

Thank you.

And we have reached the allotted time for questions.

I would now turn the call back over to Kevin Mitchell.

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

We do appreciate your interest in the company.

You'll be able to find a transcript of the call posted on our website shortly, and if you have any questions, please contact us.

Thanks again.

Thank you.

And thank you, ladies and gentlemen.

This concludes today's conference.

Thank you for participating.

You may now disconnect.