菲利普斯66 (PSX) 2014 Q4 法說會逐字稿

Welcome to the fourth-quarter 2014 Phillips 66 earnings conference 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. Kevin Mitchell, you may begin.

Thank you, Paulette. Good morning and welcome to the Phillips 66 fourth-quarter earnings call. With me this morning are 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. With that, I'll turn the call over to Greg Garland for some opening remarks.

Thanks, Kevin. Good morning, everyone and thanks for being with us today. We ended 2014 with a strong quarter. Adjusted earnings were $913 million and we generated more than $1 billion of cash. Full-year 2014 adjusted earnings were $3.8 billion. We accomplished a lot this year, starting with operating excellence. We spent just over $1 billion in maintenance capital and from an operating reliability perspective, our businesses ran well.

2014 was our safest year so far. Refining, Midstream and Chemicals were all top performers in recordable injury rates. We also made progress in our environmental performance. The strategy we shared first three years ago remains unchanged. Enhancing returns continues to be a key strategic objective. During 2014, total Company adjusted return on capital employed was 14%. Chemicals and Marketing and Specialties both increased returns over 2013 at 27% and 32% respectively.

Refining's adjusted return on capital employed was 12%. We continue to take steps in Refining to enhance capital efficiency. From a portfolio perspective, we sold our interest in the Melaka refinery. We continue to limit growth in capital employed in our Refining business. We completed several projects to access advantaged crudes. We've doubled Eagle Ford and Bakken lease volumes. Around the Ponca City refinery, we've built out infrastructure for direct access to Mississippian Lime crude.

With Alliance Refinery, we modified the crude unit increasing our ability to run shale crudes from 45,000 to 90,000 barrels a day. In addition, at Sweeny and Lake Charles refineries, we completed upgrades to the FCC units, improving yields. All these actions were taken to increase the returns of the business with relatively small investments.

We continue to shift our portfolio into higher valued businesses. In 2014, we made significant advances on our growth plans. We reinvested $2.7 billion on growth projects. In Midstream, we made good progress on the NGL frac 1 project. It's now over 50% complete. The picture on the slide is a recent one of the site. We look forward to sharing with you updates as we near completion of this project later this year.

We also advanced the LPG export terminal due to startup in 2016. Execution is going well and both of these projects are on schedule and on budget. Last year, we acquired the Beaumont terminal, adding 7 million barrels of storage capacity and 600,000 barrels a day of export capacity to our system. We formed a joint venture with Energy Transfer to move crude oil via pipeline from North Dakota to Illinois and then on to the Gulf Coast in our terminal in Beaumont, Texas. We believe these pipelines will be one of the lowest-cost options to transport Bakken crude directly to the Gulf Coast.

We also increased our ownership in the Explorer Pipeline to 19.5% adding to our portfolio of MLP qualifying assets. We continue to grow Phillips 66 Partners. EBITDA increased over 100% versus last year. PSXP has an excellent asset base to grow from with multiple investment opportunities. We dropped assets valued at over $1 billion into PSXP in 2014, including the Gold Line System, the Medford Spheres, as well as the rail racks at Ferndale and Bayway. Distributions are up over 50% and Phillips 66 as a general partner is now in the high RDR splits.

In Chemicals, CPChem spent $1.4 billion in growth capital last year as construction continued at CPChem's world-scale US Gulf Coast petrochemical project. Startup of this facility is anticipated in mid-2017. CPChem also completed the 550 million-pound-per-year 1-hexane plant at Cedar Bayou and added a 10th ethylene furnace at unit 33 at the Sweeny complex.

In Marketing and Specialties, we acquired Spectrum, a specialty lubricants business. This was a solid addition to our portfolio as it extended the lubricants value chain in the packaged business. It also provides for a growth platform in international markets.

We believe that capital allocation is a key factor in the future success of our Company. During 2014, we distributed $3.8 billion in the form of dividends and share repurchases. We increased the annual dividend rate for the fourth time to $2.00 per share and through repurchases and exchange, we've reduced the share count by 91 million shares, or 14% since August of 2012.

Our financial strength and flexibility allows us to maintain a consistent approach to allocating capital in spite of volatile commodity markets. Excluding working capital impacts, we generated $4.5 billion of cash. We issued $2.5 billion of notes, locking in an attractively priced 20- and 30-year debt and we ended the year with cash of $5.2 billion and a net debt to cap ratio of 14%.

As we look to 2015, we know we have to deal with a challenging commodity price environment. We understand the risk and the opportunities these changes create and believe that we have the right strategy to grow value at our Company. In 2015, we have a $4.6 billion capital plan, 65% of which is dedicated to growing our Midstream businesses. Most of the projects in this plan are in-flight and are largely anchored by fee-based contracts. You should expect regular updates from us regarding the progress made in expanding our Midstream footprint, growing our Chemicals business while enhancing returns in Refining and returning capital to our shareholders. So with that, I'm going to turn the call over to Greg Maxwell to review the quarter results.

Thanks, Greg. Good morning. Starting on slide 4, fourth-quarter adjusted earnings were $913 million, or $1.63 per share. We had several special items this quarter that impacted earnings in all of our segments primarily related to the sale of our interest in the Melaka refinery and impairments. Excluding special items, our adjusted effective income tax rate was 32%. Cash from operations, excluding working capital, for the quarter was $1.1 billion.

From a capital allocation perspective, we reinvested $1.1 billion in the business and we returned over $800 million to shareholders in the form of dividends and share repurchases. For the year, our adjusted return on capital employed was 14%. In the next slide, I'll cover earnings for the full year compared to 2013 prior to focusing on the results for the quarter.

2014 adjusted earnings were higher than 2013 as lower earnings from Refining were more than offset by improvements from our Chemicals and our Midstream businesses. We had a 4% increase in adjusted earnings while adjusted earnings per share increased over 12%. This reflects the progress that we've made in reducing our share count. We ended the year with 546 million shares outstanding, down 44 million shares from year-end 2013.

Slide 6 compares fourth-quarter adjusted earnings with the third quarter on a segment basis. Overall, adjusted earnings were down $227 million, mainly driven by lower results in Refining, partially offset by continued strong earnings in our Marketing and in our Specialties segment. I'll cover each of these segments in more detail as we move forward.

Starting with Midstream, our NGL business had a good quarter, partially offsetting the lower earnings from DCP and Transportation. The 2014 adjusted return on capital employed for this segment was 13% and this is based on an average capital employed of $4.2 billion.

Moving on to the next slide, Midstream's fourth-quarter adjusted earnings were $97 million, down $18 million from the third quarter. Transportation's earnings for the quarter were $53 million, which includes $26 million from our ownership interest in PSXP. The overall decrease of $5 million compared with the prior quarter is primarily due to the write-off of a deferred tax asset, partially offset by improved throughput volumes in the fourth quarter.

DCP Midstream had losses this quarter largely due to lower liquid prices with our portion of the loss being $11 million. During the quarter, both NGL and WTI prices decreased by about 25%. More than 70% of the volumes of gas they gather and process are under percentage of proceeds or POP contracts, which expose them to falling commodity prices that we saw during the fourth quarter. Our NGL business had higher earnings related to improved margins on seasonal propane and butane storage activities. This was partly offset by higher project development costs.

Moving on to slide 9, in Chemicals, the global olefins and polyolefins capacity utilization rate for the quarter was 83% with the Port Arthur ethylene plant restarting in November. Results for SA&S were impacted by lower margins and lower volumes. And the 2014 adjusted return on capital employed for our Chemicals segment was 27% based on an average capital employed of $4.5 billion.

As shown on slide 10, fourth-quarter adjusted earnings for Chemicals were $270 million, down from $299 million. In olefins and polyolefins, the decrease of $11 million is largely due to higher planned maintenance activities as the impacts from Port Arthur being down were offset by the partial settlement of business interruption insurance claims. Fourth-quarter domestic ethylene to polyethylene margins were in line with what we saw in the third quarter. Specialties, Aromatics & Styrenics had a $19 million decrease due to lower realized margins and volumes from CPChem's Middle East joint ventures.

Moving on to the next slide, Refining had a good quarter despite a challenging market environment. We operate our refineries well and although the fourth quarter was a heavy turnaround period, we had a 95% crude utilization rate as we were able to service the conversion units at our Lake Charles and Sweeny refineries without significantly impacting our crude runs. During the quarter, we ran 95% advantaged crude in line with the third quarter. The 2014 adjusted return on capital employed for Refining was 12% based on an average capital employed of $13.4 billion.

The Refining segment had adjusted earnings of $322 million, down $236 million from last quarter. Overall, Refining was down due to lower crack spreads and narrower crude differentials. This was partially offset by lower impacts from secondary products resulting from the decrease in crude prices. Regionally, Atlantic Basin/Europe had good margins as distillate crack spreads remained strong. Although gasoline cracks fell about 45%, distillate cracks improved by over 30% during the quarter. We benefited from these movements as our refineries ran well and are configured to produce more distillates.

Market capture for Atlantic Basin/Europe region during the fourth quarter was 84% representing its highest capture rate over the past three years. And although the earnings of the Gulf Coast, Central Corridor and Western Pacific regions were lower compared to the third quarter, market capture for these regions also benefited from a high distillate yield with the Gulf Coast and Central Corridor each having a market capture above 100%.

Finally, the large swing in other refining is a result of $93 million of adjusted earnings in the third quarter compared with a $32 million net loss in the fourth quarter. The loss this quarter is largely driven by negative timing impacts associated with crude purchases.

Let's move to the next slide on market capture. Our worldwide realized margin was $9.30 per barrel compared to $10.89 last quarter with our market capture improving from 73% to 89%. The market capture improved mainly as a result of our high distillate yield configuration, coupled with stronger distillate cracks, as well as improved secondary product margins. Partly offsetting these benefits was less feedstock advantage as crude differentials narrowed significantly this quarter. A regional view of our market capture is available in the appendix.

Moving on to Marketing and Specialties. M&S had another great quarter as it continued to benefit from strong margins. The 2014 adjusted return on capital employed for M&S was 32% and this is based on an average capital employed of $2.7 billion.

Moving on to slide 15, adjusted earnings for M&S in the fourth quarter were $324 million, a $65 million increase. In Marketing, both the third and fourth quarters were great quarters backed by strong margins. The improvement over the third quarter is mainly due to the reinstatement of biodiesel blending tax credits for 2014. Also, during the fourth quarter, we exported 143,000 barrels per day of clean products representing an increase of 14,000 barrels per day from the prior quarter. Specialties earnings were $68 million, an increase of $25 million from the third quarter. This increase is mainly due to improved lubricant and base oil margins.

Moving on to Corporate and Other, this segment had after-tax costs of $100 million compared with $91 million last quarter. The increase was largely due to higher interest expense associated with the debt we issued during the quarter.

Next, I'll talk about our capital structure. During the fourth quarter, we issued $2.5 billion of notes. We ended 2014 with a debt-to-cap ratio of 28% and after taking into consideration our ending cash balance of $5.2 billion, our net debt to capital ratio was 14%.

Next, we will cover cash flow for the fourth quarter and also for the year. Starting on the left, excluding working capital, cash from operations was $1.1 billion. Working capital changes were a negative impact of $200 million, largely due to a reduction in payables driven by lower crude prices. As mentioned earlier, we issued $2.5 billion of notes and we had proceeds from asset dispositions of almost $600 million, mainly from the sale of our interest in the Melaka refinery. We funded $1.1 billion of capital expenditures and investments and we made distributions of $800 million in the form of dividends and share repurchases. We ended the quarter with a cash balance of $5.2 billion. This is up $2.1 billion from the prior period.

Switching now to a full-year view on cash flow. During 2014, we've generated over $7 billion of cash from operations, debt issuances and noncore asset sales. From a capital allocation perspective, 50% of the proceeds were directed towards reinvesting in the Company and 50% for shareholder distributions.

This concludes my discussion of the financial and operational results. I'll now cover a few outlook items, starting with full-year guidance for 2015. In Refining, we expect pretax turnaround costs to be $625 million to $675 million. Corporate and Other expenses for the year will be $425 million to $450 million after tax. Our total DD&A will be in the $1.1 billion range.

Moving now to the first quarter, in Chemicals, we expect the global O&P utilization rate to be in the high 80s. In Refining, we expect the worldwide crude utilization rate to also be in the high 80s as pretax turnaround expense will be approximately $170 million. Both Chemicals and Refining are expecting high turnaround activity in the first quarter and this is reflected in their respective utilization rates. In Corporate and Other, we expect this segment's after-tax cost to run about $110 million for the first quarter. And companywide, we expect the effective income tax rate to be in the mid-30%s. With that, we will now open the line for questions.

(Operator Instructions). Evan Calio, Morgan Stanley.

Hey, good morning, guys. My first question is on Refining and I was wondering if you could discuss the developing and steepening contango and how that may benefit Phillips, especially given the structural way in which the crude markets are being forced to balance with the US as a new swing producer. And I have a follow-up.

Evan, I'd look at it from a commercial standpoint. It creates some opportunities around that, so it's one of the things that have opened up opportunities with that. I think longer term it just speaks to still a lot of expected recovery and with the inventory building, it seems like that's going to be something that keeps the market in a bit of a flux and with this much contango, I think we still look for a fairly, I'd say, fluid and soft market for crude going forward.

Right, makes sense. My second question is on DCP and given the current results and the commodity price environment and the recent Moody's downgrade at DCP Midstream LLC, do you see any opportunity there to consolidate or may you have to inject any liquidity into DCP? Any thoughts or color on what I appreciate is an evolving situation?

Sure. So first of all, we like DCP; we think it's a great asset. We continue to think that the NGL value chain is going to be a very attractive chain to us. This venture is going on 15 years. We value the partnership with Spectra that we have here and by the way, this isn't the first time we've seen commodity prices go down in this business. So we've weathered these crises before if you want to call it that.

I think that if you start with just self-help, first of all, the DCP team is doing a great job. They are focusing on running the assets safely and reliably and that builds value by doing that. I think Wouter and his team are doing a great job in terms of pulling the levers they can pull. Aggressive cost reductions, aggressive reductions in capital -- in 2014, DCP level, we're somewhere around $1.6 billion. We'll probably cut $800 million out of that in 2015, so significant reductions in capital spending. The owners have agreed to forgo distributions coming out of DCP in this low commodity price environment. That said, if NGLs stay at $0.55, that probably doesn't fix DCP for 2015 and the owners are -- I would say we've had ongoing and we're still talking about restructuring options for DCP, but clearly an important asset, it's one that will get fixed and it will weather the storm.

Great, I appreciate that. Thank you.

Jeff Dietert, Simmons.

Good morning. The global market is oversupplied by something like 1 million to 2 million barrels a day depending on whose forecast you look at over the first half of the year and we've seen some weakness in Brent in some of the West African crudes that I assume are being offered attractively into Bayway and even into the US Gulf Coast. I was hoping you could talk a little bit about what you're seeing there. Are you seeing escalating competition among your suppliers? Do you expect further deterioration in the Atlantic Basin crude market or is floating storage starting to stabilize it?

Jeff, this is Tim. I think, fundamentally, we're looking at the options now on the East Coast of what's the right value, so we're still bringing in inland crudes via rail, but clearly the advantage has narrowed. So I look at the East Coast and think that's a logical place that you'll start to see perhaps some adjustment to values sit there. And as far as the Gulf Coast, probably not quite as much incentive there with all the inland crude showing up there, but I think, fundamentally, this increased supply in terms of import options will put pressure on the inland US crudes and that's why we would expect the diffs on the US piece to come back out from where they've been. So I think that's more the fundamental, but you're right. That did oversupply, but it's yet to still work its way through the system.

On the storage piece, with the forward markets, there's a lot of incentive on that and so that's occurring, but, at some point, that becomes something that's got to be corrected. So that's why the inventory overhang still portends some weakness I think on the flat price.

I think given the forward curve our view though is that storage continues to fill up till it's full. And I guess the other complicating issue that's always hard to get your arms around is how much refinery maintenance is really going to happen, but it looks like we're headed into a fairly heavy spring refinery turnaround season, which is going to put its own pressures on prices and diffs.

Secondly, I was hoping you could talk a little bit about Chemical margins for CPChem. They've got a large component of ethane exposure and internationally, I think simplistically the markets set more on naphtha crackers, which naphtha prices have softened with crude and yet you had a pretty strong fourth quarter. I was hoping you could comment on first quarter or current outlook and what you see happening in 2015, ways we might be able to track it and appreciate those changes.

Yes, Jeff, when you look at the fourth quarter, clearly feedstock prices continued to fall faster than product prices, so you've got to look both at demand side, as well as the feedstock costs. I think product prices are likely to respond a bit more as we go forward, but still fairly good operating rates and pretty good demand in the Chemicals business, particularly in the US. So a pretty strong market here, but we would expect that, as you go forward, that the feedstock, the ultimate derivative price would narrow somewhat. We still expect a pretty good year in Chemicals from a historical perspective.

In terms of the cost curve, it's actually -- simplistically, yes, the gap between naphtha and ethane has narrowed, but fundamentally because of the total chain margin, ethane is still very preferred for us in the US as we maximize the value of the cracking slate. So I think that has a longer-term impact, which helps bring those margins in, but again we look at the demand side and still see a lot of upside with that in the US and if you look at what could happen in the world economy with lower crude prices, we think that's a good boost for demand on the Chemical side as well. So I think there's a lot of demand side support with that, so again, we're still expecting a pretty good year out of Chemicals.

Thank you for your comments.

Doug Leggate, Bank of America Merrill Lynch.

Thanks. Good morning, everybody. I wonder if I could have two quick ones, please. First of all, just away from the operational businesses for a second, and just looking at the chart you have on your net-debt range, which nudges up towards about 30%, but the debt issuances that you said you did recently, you're sitting about 28%. Is there any read through from that in terms of how you deal with buybacks, particularly given where your share price is and just overall capital allocation? Does that put any constraints on you or is it something you expect to manage through with not too much concern?

I don't think it puts any constraints on us at all, Doug. I think that we did delever coming out of the gate by $2 billion and we did that to create capacity. We saw an opportunity to lock in some long-term debt at what we think is very attractive prices and so we took it. We also have some notes coming due in 2015; I think about $800 million or so, Greg. So we'll look at that when that comes, but we're committed to our 40/60 distribution capital allocation policy that we laid out a year ago or two years ago. We've got a big capital program in front of us in 2015, mostly in-flight projects that we think are going to add a lot of value to our Midstream business and so we're going to execute that. At the same time continue with a pretty aggressive distribution program to shareholders.

Okay, thanks for that. Maybe just back to the operations for a second then on my follow-up. So obviously, the capture rate pretty strong. I wanted to follow up on Evan's question. How much of the capture rate outlook or I guess the fourth quarter, but also the outlook is transitory as a result of the bottom of the barrel lag, if you like? But more importantly on the contango issue, is that something that you think would have a meaningful durable benefit to you or something which is more transitory? I'm trying to get a measure of how big of an appetite you guys have to really try and exploit that contango, if it's material or if it's something that is incremental. I'll leave it there. Thanks.

Well, on the secondary products, I mean clearly as the crude price falls, the losses on the secondary products, those product prices don't move, so we've got quite a bit more value uplift, so to speak, on the secondary products and that was a big factor in the capture rate improvement. So that's kind of that dynamic that worked. So just lower feedstock prices help that typically.

On the contango, I look at it really as it's going to be part of our normal course of business. We're not changing where we go in terms of our commercial activity. It does create more opportunity for that and I look at it more in that line, but we're not fundamentally shifting our business model to work off that contango.

Got it. Thanks, fellas.

Paul Cheng, Barclays.

Hey, guys, good morning. I have several hopefully quick questions. On page 25 of your presentation, when you're looking at the Gulf Coast capture rate, the last bar, (inaudible) other, around 3.60, what are the major drivers behind?

We're trying to catch up with you here. On Gulf Coast, right?

That's correct. Page 25.

It's really product differential was the biggest piece of that.

That's the product differential?

Yes, the distillate gasoline crack and then -- that really drove that and it's widening based on our opportunities that we had in the fourth quarter.

I thought that's being captured in the configuration, is it?

No, so that actually -- Paul, this is Clayton. It's the difference between the market and our actual product netback. So to the extent that we get a higher price for gasoline or distillate compared to the Gulf Coast marker, so it would reflect -- if we moved product out of the Gulf Coast into Florida, for example or other locations or export it, that gain is captured in that bar.

Okay. So I presume that the wholesale (inaudible) already into that bar then?

That's right.

Any kind of value added that we get above that market price.

Now that does not include the uplift in marketing. So let's say the wholesale margin, between the wholesale to rack differential is really captured in the Marketing segment, not captured there.

Okay. But up to the rack is captured in here?

That's correct.

Okay. And Tim, maybe this is for you. I think that there's a couple companies that now are trying to directly bring oil through pipeline into Louisiana. You guys having one proposed and I think that just went through the open season. Can you give us an update how is the response and whether you actually think that will be moving ahead?

Yes, so the DAPL/ETCOP line from the Bakken to the Gulf Coast, that piece is going forward. The terms still aren't disclosed. (inaudible). That project's moving forward, so in terms of construction engineering and still looking at the end of 2016 and we're currently in an extension on that system from Beaumont Terminal East into Louisiana and so that process is ongoing. And so it's really too early to comment, but we think that project has still got some good potential as well.

Tim, what kind of timeline -- I know that it is still early from bringing into Louisiana. Are we talking about a little bit more clear whether the project going forward or not in another year or what kind of timeline we may be looking?

In the eastbound piece of that, is that what you're referring to, Paul?

That's correct.

I think we'll have the opportunity to have that decision on investment this year.

Okay. That early? And two final ones. One, on the NGL MLP'able (inaudible) asset that you guys are talking about, $1 billion EBITDA, can you tell us what is the percentage of that expected $1 billion EBITDA has been under long-term take-or-pay and fixed-price contracts? The last question is that I think some of your peers that have come out, including one just this morning, with a new maybe more transparent pace and higher pace of asset dropdown to the MLP and also with a quite direct target of EBITDA on their MLP, wondering is that something you guys currently review and may be coming up with a new target also?

So I think we've said in the past of the MLP'able EBITDA in our Midstream segment both today and what we're building is roughly 80% fee-based if you look at that in its entirety. And as far as drops, look, we dropped $1 billion of assets in 2014. We increased the distributions by 50%. I think as you think about 2015, we're going to remain aggressive in terms of how we utilize the MLP really to help fund the growth of our Midstream program. I don't know, Tim, if you want to add anything on there.

No, so, Paul, I think that, on the contract question, the supply side and the frac, we're in good shape. We've got the offtake on the terminal. We have not disclosed the percentages, but we made the comment that the in-flight capital, that these are large independent contracts, so we feel very good about the success of that frac 1 and the LPG terminal. So that's kind of in line with Greg's comments around the fee-based. We've got the commercial pieces coming together on that pretty nicely.

All right. Thank you.

Edward Westlake, Credit Suisse.

Yes, good morning and obviously some good downstream results from the sector this morning. I wanted to come back to Doug's line of questioning on the 28% gearing. Obviously, you've said that you're going to try and help DCP and obviously, you've got a heavy capital investment program. And then, obviously, you've said you want to be committed to shareholder distributions. If for some reason lets say Midstream and Chemicals is tougher this year and feel free to disagree with that statement and maybe cash flow is a bit short, how would you square the circle? What is the priority list?

Well, I would start with 14% net-debt-to-cap. We've got $5.2 billion of cash on the balance sheet. We thought about this; we've planned for this moment, Ed. And so we've positioned the Company to successfully execute its plans in 2015 and 2016. So I don't think that we're concerned about it. Our view is that the Chemicals business is going to be pretty good in 2015 and that it will continue to be self-funding in 2015. DCP is going to be under some stress and we're talking about what potential solutions we can do for DCP with the partners. So I'm not really concerned about 2015 in cash. We've always said we're going to operate between 20% to 30% debt-to-cap ratio. We're certainly in line with that. We'll protect and defend our investment-grade rating at PSX; that's important to us as we've said many times in the past.

Okay, and then that was my second question around demand. Obviously, everyone focuses on ethylene prices, which get linked to oil. You guys make polyethylene, which has lagged the decline in oil, but people expect it to fall. But maybe give us some of the rationale why you think Chemicals will still be good in 2015 with the oil price having fallen?

Well, first of all, let me back up and kind of finish your first question. One important piece I missed was around distributions to shareholders and so we've been out there consistently saying expect double-digit increases in dividends. That's still good, 40/60 capital allocation that we've talked a lot about. We remain committed to that.

You move to the Chemicals business, I think people are discounting the impact of $50 crude globally in terms of economic activity, demand for petrochemical products. In fact, we're seeing increased demand for even refined products. And so I think the demand side of the equation is probably going to be a little better than what people are thinking in terms of 2015. So we're seeing fairly robust demand in the US for pet chems. European kind of moving sideways. Asia, it weakened in the fourth quarter, but it looks like may be coming back to us. So I think that fundamentally demand is going to be good for petrochemical products and there's not a lot of new capacity coming on in 2015, so we're seeing globally marginally higher operating rates, which directionally should be positive for margins.

And we do expect some narrowing on that; it's just really hard to call because you've got this offsetting effect on the demand side. So I think that's why we still say we look at an exceptional year on the margin side with ethane-based cracking in the US and it's probably just going to soften off of that somewhat. So really hard to call how much, but it's unlikely it would fall in unison with the change in the naphtha price.

That's maybe what I was trying to get at. Just one small question then on slide 8. Slide 8 of your recent presentation, you had this $2.3 billion Midstream and Refining logistics EBITDA for 2018. And that was excluding DCP, so I was just wondering, as we think of maybe a tougher environment, how much of that would you put in the sort of at-risk category, if any?

We step back, we look at the crude oil pipe from the Bakken, we look at the LPG terminal, we look at the frac 1. Those are in-flight, we've got some smaller things, underpinned with good contracts. So that's over $1 billion right there in terms of incremental EBITDA. So I would say that it probably pushes out perhaps some of that infrastructure. We still like that target in terms of the EBITDA, but that's a tremendous pool of stuff in-flight that we have plus what's left at PSX. So I guess we looked at $2.3[billion] and said is it 2017 or is it pushed out a bit and I think there's a lot of moving parts. Clearly with the change in the US liquids growth, I think we just want to market clarity around those projects and so I think we're going to defer some of that, but a big chunk of that is still stuff that we've committed to and underpinned with good contracts and frankly good fundamentals.

Thanks, everyone.

Blake Fernandez, Howard Weil.

Hey, guys, good morning. A question for you continuing on the Midstream theme, obviously, you've got an awful lot of dropdown opportunity and organic opportunities there, but it seems like with the collapse in crude prices some of the E&P companies may have some assets coming to market that could be available. I'm just curious if you could talk about M&A opportunities. Is that something that would be of interest or do you have your hands full with the organic opportunity set?

No, I think we have a great currency with PSXP and I think for the right opportunity we might be interested in that. Our focus today remains on executing these organic projects, so I think we'll see how the market unfolds here in 2015, but I don't disagree with the idea that there could be some distressed assets out there in 2015.

Okay, thanks, Greg. The second question, now that that I guess we focus so long on light sweet and it seems like heavy sour spreads are coming back into favor, I'm looking at slide 34 of your slide pack here, but I'm just curious, is there any flexibility that you can provide to us as a percentage of maybe shifting the crude slate away from light sweet back to heavy processing?

I think we've looked at it and we really, if you think about our configuration globally, we are about 65% light, 35% heavy and we've typically optimize the heavy around heavy. So it's a lot harder to make that optimization, takes a lot of dips. So we still focus on the light piece in terms of where we've been getting capability and I think we would believe that that light opportunity is going to reemerge a little bit more strongly as the year develops as we see -- we would expect diffs on US crudes to come back out to reflect more marginal say transportation diffs. So there is not just a tremendous amount of flexibility. You can always do some adjustments, but it's really kind of fixed around that and then we just optimize around that kit.

Got it, thanks.

In the fourth quarter though, we probably did optimize or run more heavy as a percentage of the portfolio.

We got back to where we wanted to be.

Okay, thank you, guys. I appreciate it.

Paul Sankey, Wolfe Research.

Hi, guys. I just had a question on the dollar. How does a strong dollar affect you guys if at all? Thanks.

Certainly, Paul, we look at that from a different -- where our functional currencies are and everything and the dollar strengthening as far as looking at it from a global perspective or international has a slight impact, but I wouldn't say it was an overall significant impact on us.

Yes, I was wondering about (multiple speakers).

Paul, probably the one business where we'd see that would be exports on petrochemicals and the competition for export markets. A lower dollar would increase the competitiveness say of Asian manufacturers. So there can be some effect from the dollar just in terms of exports, more in those materials markets, but not so much I don't believe in the fuels.

Yes, I guess basically because you sell in dollars, right? So from your own sort of internal point of view as a functional currency, it doesn't make any difference to your numbers; it's just a question of whether the market is weaker.

Correct.

As a whole, right?

(multiple speakers) operating costs.

Yes, could you -- forgive me if I missed this, did you talk about your export levels and stuff? I'm not sure if you gave that number, but just I wondered the usual question on how much was exported of what in the quarter regards to petroleum products. Thanks.

So we were up slightly from the third quarter to around 144,000 barrels a day. We were down from last year and frankly it just reflected the fact that we had better options for placement in the US. It was not really a lack of access or opportunity; it was more our optimization around where is the best product placement for those products.

Yes, I've heard that one before and it's interesting. So there's no sort of notional limitation on your ability to export; it's just a market function. Would that be -- I mean things have looked pretty rough around the Chicago market. Would that be selling into the Mid-Con or into the East Coast as opposed to exporting? What is the better opportunity that you refer to?

So typically, I think about the Gulf Coast from an export platform as our primary vehicle. Some off the West Coast as well, but really it's the Gulf Coast and we just have better shall we say inland placement opportunities in the US than we've had for exports. So we just always try to add the best value and we just optimize around the highest netback.

Yes, I've got you. Okay, thanks, guys. I think most of the other stuff has been answered. Thank you.

Phil Gresh, JPMorgan.

Hey, good morning. A couple quick ones. One is just on CPChem. Is there any possibility that both partners would agree on a less conservative balance sheet strategy at this stage? I mean I know it's self-funding, but is something like that completely off the table?

I think we have capacity. CPChem has a pristine balance sheet and I think if needed we could certainly go to that.

Okay. And then just on the buyback plan for this year, you talked about a commitment to a double-digit increase in the dividend. Just given the balance sheet positioning and the potential negative free cash flow, etc., would you consider being a bit more conservative on the amount of buybacks that you do this year relative to the run rate we saw in the second half, noting that obviously you had some asset sales that helped in the fourth quarter and things like that?

We always hesitate to get too far out in front, but as long as we're trading below intrinsic value, we're going to buy shares and if the share price is lower, we're going to buy more. We've been pretty consistent about that.

Okay. Last one would just be in terms of the feedstocks that you use in the Chemicals business, I think you have a fair amount of flexibility. Is that something you're looking at? Does that cost any money to make that kind of switch and do you see any kind of meaningful contribution from doing something like that?

Yes, on the Chemicals side, they look at that almost daily and then try to think through the changes, but you've got to consider not only the feedstock costs, but you've got to think about the marginal contribution and the products that you get. So for CPChem, for instance, a lot of ethylene consumption internally and so that factors into the total contribution. So it's really an optimization around which feedstock and then which products and what's the pricing and right now, there's still -- it still favors ethane because of its yield to ethylene versus say a propane, but that's something that's being watched and when that begins to change, you can see that switch in the petrochemical industry. So a lot of flexibility there, but it's still hanging pretty tight in the industry basis to ethane right now. That's a US perspective.

The other thing I would say, I mean CPChem is heavily levered to LPG feeds and we probably would not make the investments to modify facilities to crack more liquids. Mostly in line with our view that LPGs are going to be advantaged over the long term.

Sure. Absolutely. Okay, thanks.

Neil Mehta, Goldman Sachs.

Good morning, guys. So one part of the business you may not be getting full credit for here is the wholesale business and the wholesale segment, especially as you look at wholesale and retail comps, what they've done over the last couple of months and the value increase they've seen. Would you ever consider monetizing wholesale in a MLP or a spinoff and then if so, where would the logical place be? In-house, a place like PSXP or in an independent vehicle?

When I look at the wholesale, it's a business that's typically very solid, so that's something we've not inputted into our thinking because we have all the other projects on that, but it is something we could consider. So MLP for that would be an option and so it's something we'll continue to look at, but it's not really the focus point at this point, but I think as that gets clearer and we see how the opportunity and the market accepts that kind of move and that could be an option for us.

Thanks, Tim. And then on slide 23, you show some sensitivities here to WTI, NGL and then changes in the chain margins. Is there any back of the envelope we could do if you aggregate those three components together and say every $5 change in Brent or every $5 change in crude does this to our net income?

Well, those things aren't really built that way, Neil. This is Clayton. We hold the other commodity prices constant when we apply those sensitivities, so you really can't add those up and come up with an overall sensitivity to movement in Brent price over our WTI price.

Yes, we haven't weighted that.

We have not. We have not. So it may overstate the impact that commodity price movement has on our net income if you just took the approach of adding all those things up.

Fair enough. And the last question is related to global demand. To pick on your point where you said that you expect a sequential pick up here in 2015 versus 2014, is that pickup that you anticipate -- where do you expect it regionally and then specifically in the US as you think about the outlook for diesel demand versus the outlook for gasoline demand, which of those two end markets do you see greater opportunity for growth in 2015?

I think on the distillate in the US, just keeps going with industrial activity, so I think that's been consistent. I think the surprise upside would be the gasoline piece and what is the consumer response to lower prices in driving. We're seeing early signs that demand has picked up and so we anticipate with lower prices that you should see some favorable demand impact, particularly with the gasoline. I would look at distillate to be a bit more of a stable in terms of where it has been versus the gasoline. I think that's where the real variable would be for us.

(inaudible) crude diffs?

On crude diffs?

Yes, what do we see on crude diffs?

So the crude diffs, again, we think the crude diffs on the US crude should widen. The Brent TI should widen back out to something reflecting more the differential. Cushing inventories are building, inventories are building really in the US. It's going to put pressure on that and then people look at the import options. So I don't think the intercrude competition so to speak has yet played out, so we expect that to widen, which also could have a favorable impact on the business.

Tim, would you be willing to put a point estimate in terms of Brent WTI where you think (inaudible)?

I'm not going to let him do that because he's always wrong.

Certainly been tight. I think it's been tighter than we expect, but I think if you look at that, we've always said something around $6, $10 on TI Brent. That's probably too large I think. --

For 2015.

Yes, for 2015 with where flat prices are. But still something that's got several dollars a barrel advantage. $4 to $5 on TI Brent seems to make sense with some discount we would think around LLS as well.

Perfect, thanks, guys.

Roger Read, Wells Fargo.

Thanks, good morning. Just if we could come back to the Midstream, the DCP issues there. I know there's no way that you'd have to make a commitment at this point, we all know well what's going on in terms of the credit ratings in that business. If you were to find yourself in a situation where you needed to do funding of that, what are the mechanics around that, the partnership? What would you -- do you need both sides to agree? Is it enough for one side to agree? Just sort of trying to understand how that could progress.

Well, I think you go to the governance documents. It takes unanimous consent of the partners to take an action around the financial structure of the Company.

And that would be yourselves and Spectra, correct?

Spectra, that's correct.

Okay. And is there any sort of a put call or anything in that agreement?

There's a roper in terms of an exit by one of the parties, but there's no put call in the agreement.

Okay, that's helpful. And then on a -- I guess just sort of a look back in the fourth quarter here, taking a look at slide 25, and some of these questions were asked before, but the weakness in the secondary products, and I understand how you were saying earlier compares to an index, but a little surprised typically in a falling crude environment that secondary products actually gets an uplift, not a downdraft, as we think about realized margins, particularly I'm talking about on the Gulf Coast here. But then in your Marketing and Specialties business, you talked in the Specialties, the lube and the base oils actually did get a nice uplift as we expected. I'm just wondering what the crosscurrents were in that area and maybe that's something that reverses as we go into the first part of 2015.

So I think taking the secondary products first, as the crude price falls, the other product prices can move. They don't move in unison with crude, so the crude price falls -- so if they sell at less than crude price then your gap between what you realize on the netback and the cost so to speak of the feedstock is narrowed. So it's not -- the prices here aren't -- like LPG prices fell but not by the same absolute amount so you actually get an uplift say on that. Coke, some of the same thing. So it's more the reflection of the feedstock costs moving faster than the product price move and so you have less of a loss on the secondary products. And the second part of the question?

Well my question is the secondary products appear to be a loss if I'm reading this correctly.

Well, they are.

They are.

Compared to the third quarter, it was less of a loss. So it was about $6 in the third quarter and this is about $4.

So it's not really a change; it's what the actual realizations are on those kind of products.

Correct.

All right, so it was more profitable in the fourth quarter on the secondary products. Good, got it.

Correct, better margin.

And then in the base oils and the lubes business, I guess a similar dynamic at work there?

Yes, I think you've got feedstock costs falling faster than the market prices and the finished products and base oil product margins really set off the supply demand on that. So it's a very similar story to a lot of our business. So we benefited from really that falloff versus a unison fall in the product price.

Okay, well, that's it for me. Thank you.

Brad Heffern, RBC Capital Markets.

Good morning, everyone. Just looking at the Western Pacific segment of the Refining business, obviously, Melaka is not going to be in the portfolio anymore starting in 2015 and I suspect that probably had worse margins than the other refineries that are in that segment. Is there any color you can give as to maybe what that segment would have looked like historically without that in the portfolio or maybe how you expect margins to change going forward?

Yes, so I would say that, first of all, we've worked on the denominator, so we have less capital employed and by selling it, our EBITDA actually improves in the West Coast. We can probably get you a better answer than that, but Greg is working on that.

If we normalized out and just basically stripped all the impact of Melaka, our West Coast performance would have been just slightly less than a $30 million loss in the fourth quarter.

Okay, got it. That's perfect. Thanks. And then just thinking about you all having a lot of major projects under construction on the Gulf Coast, is there any chance that the big drop in crude oil here is going to make the labor market a little looser and maybe help you hit those cost targets?

Yes, I think directionally it's helpful to us. Some projects are getting pushed or canceled and that should free up availability. I would say to this point, so we're more than halfway through on the frac 1 and we haven't seen the inflationary pressures that we thought we might see on those projects, particularly around the Freeport Sweeny area where there's a lot of work going on. CPChem has some work going on, we have work, others in that area have work going on -- Dow, Freeport, etc. So I would say that we're executing well in that environment and directionally it should be helpful in terms of, A, schedule and B, cost.

Great, thank you.

I will now turn the call back over to Kevin Mitchell for closing comments.

All right, thank you very much for participating in the call this morning. We do appreciate your interest in the Company. You will be able to find a transcript of the call posted on our website shortly and if you have any additional questions, please feel free to contact me or Rosy. Thanks again.

Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.