菲利普斯66 (PSX) 2015 Q3 法說會逐字稿

Welcome to the third quarter 2015 Phillips 66 earnings conference call. My name is Mike 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. Kevin, you may begin.

Thank you, Mike. Good morning and welcome to the Phillips 66 third quarter earnings conference call. With me today 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 during the call 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 we will be using 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 will turn the call over to Greg Garland for some opening remarks.

Thanks, Kevin. Good morning, everyone, and thanks for joining us today. We had a strong quarter across all of our business segments. Adjusted earnings were over $1.6 billion or $3.02 per share. This represents the second-best earnings quarter since our formation.

Our global refining business ran well, increasing utilization to 96% and capturing the benefit of strong market cracks. The US Gulf Coast refineries ran at a 100% for the quarter. Refining also had its second-best earnings quarter. Marketing earnings increased in the quarter reflecting continued strong gasoline demand.

In Midstream we're approaching the period where our growth projects start to come online. Sweeny Fractionator One is almost complete and should start up by the end of the year. Our Freeport LPG export terminal is 60% complete. It's on track, on budget and we expect it to start up in the second half of 2016.

The Dakota Access and ETCOP pipeline projects continue to make good progress and remain on schedule. Our Master Limited Partnership, Phillips 66 Partners, remains an important part of our Midstream growth strategy that we believe will create value for both PSX shareholders and also PSXP unitholders.

As we announced this morning, our interest in the Bayou Bridge pipeline project will be acquired by Phillips 66 Partners. Once complete, this project is expected to provide consistent, fee-based earnings in support of PSXP's stated growth objective of a five-year 30% distribution CAGR through 2018. In September, we announced our plan to contribute capital to DCP Midstream to provide additional support to the business during the current low commodity price environment. We expect that this cash infusion, along with Spectra's asset contribution, will allow DCP to bring its credit metrics back in line and to support its growth objectives through the commodity cycle. We anticipate that DCP will be self-funding going forward.

In Chemicals, CPChem offset lower cash chain margins by running at higher utilization rates during the quarter. Development continues on CPChem's US Gulf Coast petrochemicals project which is now about 60% complete with startup planned in mid-2017. This project remains on track.

We had another strong cash flow quarter generating over $1.4 billion in cash from operations. We used $1 billion of that cash flow on capital, primarily to support Midstream growth and maintain operating integrity in our refining system. We recently announced our 2016 capital budget of $3.6 billion. Including the $314 million PSXP plans to spend, our combined capital budget for 2016 will be $3.9 billion. As with this year, the majority of growth capital will be spent on developing our major Midstream growth projects. In addition, almost $400 million is being allocated to capturing high-return, quick-payout opportunities in our refining business.

We also continue to return capital to our shareholders. During the third quarter, we returned nearly $700 million to shareholders in the form of dividends and share repurchases. In addition, we announced an incremental $2 billion of share repurchase authorization. To date, we have completed $6 billion of the $9 billion in share repurchases authorized by our Board and we've increased our dividend 180% since May 2012.

Before I turn the call over to Greg Maxwell to review this quarter's results, I think it's appropriate that we pause for just a minute and thank Greg Maxwell for 35 great years. He'll be retiring at the end of this year. He's been a terrific CFO. He's been a leader. He's been a mentor to just so many people in our Company. He's been a valuable part of our executive leadership team, helping us to stand up a new company flawlessly. And, importantly, to me he has been a great friend for 35 years.

So, Greg, thanks for all you've done for the Company and helping make this a great place to work. And maybe, just one more time, take us through the numbers.

Thank you, Greg. Good morning, everyone. Starting on slide 4, third-quarter adjusted earnings were $1.6 billion or $3.02 per share. Reported net income was also $1.6 billion, but does include several special items that we excluded from adjusted earnings. These special items negatively impacted earnings by $69 million and include $46 million in pension settlement expense, $22 million in asset and goodwill impairments, and a $19 million contingency accrual. These items were partially offset by an $18 million gain on an asset sale.

Excluding negative working capital changes of $33 million, cash from operations was $1.5 billion. Capital spending for the quarter was $1 billion with approximately $700 million being spent in Midstream on growth projects and $200 million in refining. Dividends and share repurchases in the third quarter totaled $673 million, which brings our total shareholder distributions for the year to nearly $2 billion.

At the end of the third quarter, our adjusted debt-to-capital ratio, excluding Phillips 66 Partners, was 25%. And after taking into account our ending cash balance, our adjusted net-debt-to-capital ratio was 12%. The annualized adjusted return on capital employed through the third quarter was 15% and, excluding special items, our adjusted effective income tax rate was 32%.

Slide 5 compares third-quarter adjusted earnings with the second quarter by segment. Overall, quarter-over-quarter adjusted earnings were up $645 million, mainly driven by increased earnings in Refining and Marketing and Specialties.

Next we'll cover each of the segments. I'll start with Midstream on slide 6. All three businesses within Midstream improved their performance in the third quarter. Transportation benefited from higher volumes and lower costs while NGL margins improved due in part to propane and butane margins and seasonal storage. Included in the transportation and NGL results is the contribution from Phillips 66 Partners.

During the quarter, PSXP contributed earnings of $31 million to the Midstream segment. DCP Midstream continues to work on its self-help initiatives to reduce costs, manage its portfolio, and restructure contracts. Results this quarter were improved largely due to better marketing margins and higher volumes, despite lower NGL and crude prices.

In addition, we completed the announced $1.5 billion capital contribution to DCP earlier this morning. Annualized 2015 year-to-date adjusted return on capital employed for this segment was 5% based on an average capital employed of $6.1 billion. The return for this segment continues to reflect the impact of lower commodity prices on DCP Midstream's results, as well as increased capital employed, driven by the significant growth investments we are making in our Midstream segment.

Moving on to slide 7. Midstream's third-quarter adjusted earnings were $91 million, up $43 million from the second quarter. Transportation earnings for the quarter were $77 million, up $12 million from the prior quarter. Transportation benefited from increased equity earnings from the Explorer and Rex pipelines due primarily to increased volumes. Transportation also benefited from lower costs.

Increased earnings from our NGL business were driven by higher margins and inventory impacts. Adjusted losses for DCP Midstream were lower in the third quarter, mainly due to improved marketing margins and a second-quarter loss on the Benedum asset sale, offset partially by lower commodity prices.

Now turning to Chemicals on slide 8. The global olefins and polyolefins capacity utilization rate for the quarter was 94% and for SA&S they were negatively impacted by lower margins and lower volumes. The 2015 annualized year-to-date adjusted return on capital employed for our Chemicals segment remained at 21% and this is based on an average capital employed of $4.9 billion.

As shown on slide 9, third-quarter adjusted earnings for Chemicals were $272 million, down from $295 million. In Olefins and Polyolefins, the decrease of $6 million was largely due to second quarter insurance proceeds of $28 million and lower cash chain margins in the third quarter. This was partially offset by higher volumes and lower operating costs. Equity affiliate earnings improved as a result of higher margins. Specialties, Aromatics and Styrenics earnings declined to $17 million on lower equity earnings and lower volumes. The equity earnings decrease was partially due to lower margins.

Next we turn to Refining. Realized margins were $13.96 per barrel for the quarter driven by strong market conditions. Market capture increased from 62% to 72% in the quarter due to improved clean product differentials and lower losses on secondary products. This was partially offset by tighter crude differentials and our clean product configuration which yields less gasoline and more distillate than is implied in the 3:2:1 crack spread.

Refining crude utilization increased to 96%, up from 90% in the second quarter and clean product yields were 84%, consistent with our average system configuration. Pretax turnaround costs were $69 million as compared to guidance of approximately $120 million, due primarily to the deferral of some planned maintenance into future periods. The annualized 2015 year-to-date adjusted return on capital employed for Refining was 21% and this is based on an average capital employed of $13.6 billion.

Moving to the next slide. The Refining segment had adjusted earnings of $1.1 billion, up $448 million from the last quarter. Overall, the improvement this quarter was primarily due to higher clean product differentials and increased volumes. Adjusted earnings were higher than the second quarter in every region except for the Western/Pacific.

Atlantic Basin adjusted earnings benefited from lower controllable costs, better realized European margins, and higher volumes resulting from the completion of the Humber turnaround early in the third quarter.

The Gulf Coast region adjusted earnings were up from last quarter due to higher clean product differentials as well as increased volumes. The capacity utilization for this region was 100% in the third quarter.

For the Central Corridor, we showed significant improvement due largely to higher margins from gasoline and secondary products as well as wider differentials on Canadian crudes. This was partially offset by lower volumes due to turnaround activities at Ponca City and Wood River.

And for the Western region we had a slight decrease in adjusted earnings due to lower margins and inventory effects. This was mostly offset by higher volumes. The lower margins were due in part from the continued supply impacts on our San Francisco refinery as a result of the Plains pipeline outage.

Next we'll cover market capture on slide 12. Our worldwide realized margin was $13.96 per barrel versus the 3:2:1 market crack of $19.51, resulting in an overall market capture of 72% compared to a market capture rate of 62% last quarter. Our configuration allows us to produce roughly equal amounts of distillate and gasoline, which reduced our realized margin relative to market as the gasoline crack was significantly higher than the distillate crack.

Benefits from feedstock advantages were not high enough to fully offset the impact of secondary product losses, despite falling crude prices relative to coke and other secondary product prices. This was due primarily to tighter crude differentials this quarter. The other category mainly includes costs associated with RINs, outgoing freight, product differentials and inventory impacts. The $2.71 per barrel increase versus the second quarter was driven primarily by stronger product differentials and lower RIN prices.

Moving on to Marketing and Specialties. This segment posted another strong quarter thanks to higher global marketing margins, record marketing volumes and continued strong margins in our lubricants business. Annualized 2015 year-to-date adjusted return on capital employed for M&S was 33% on an average capital employed of $2.9 billion.

Slide 14 shows adjusted earnings for M&S in the third quarter of $344 million, up $162 million from the second quarter. In marketing and other, the $157 million increase was largely due to higher margins in both domestic and international marketing. Specialties adjusted earnings increased $5 million due to a widening base oil/VGO spread.

Moving on to Corporate and Other. This segment had after-tax net costs of $112 million this quarter, an improvement of $15 million from the second quarter. Net interest expense and corporate overhead decreased while other improved largely due to fixed asset write-offs that occurred in the second quarter.

Next I'll talk about our capital structure. Consistent with prior quarters, we are showing our capital structure both with and without Phillips 66 Partners. As shown on the graph on the right, excluding Partners, we ended the quarter with an adjusted debt balance of $7.9 billion, an adjusted debt-to-capital ratio of 25%, and a net debt-to-capital ratio of 12%.

Slide 17 shows our year-to-date cash flow for 2015. We began the year with a cash balance of $5.2 billion and, excluding working capital impacts, cash from operations was $4.1 billion. Working capital changes resulted in a net positive impact of $100 million. In the first quarter, we issued $1.1 billion in debt and approximately $400 million in equity at the PSXP level. We also retired $800 million in debt.

We've funded $3.3 billion of capital expenditures and investments with $2.4 billion spent in Midstream and nearly $800 million in Refining. We also distributed $2 billion to our shareholders in the form of dividends and the repurchase of 14.5 million shares resulting in 533 million shares outstanding at the end of the quarter. And we ended the quarter with a cash balance of $4.8 billion.

This concludes my discussion of the financial and operational results. Next I'll cover a few outlook items. For the fourth quarter in Chemicals, we expect the global O&P utilization rate to be in the mid 90%s. In Refining, we expect the worldwide crude utilization rate to also be in the mid 90%s and pretax turnaround expense to be approximately $150 million, which includes the impact to maintenance activity that was delayed from the third quarter. This brings our full-year guidance on turnaround expense to approximately $550 million, down from our original full-year guidance of $625 million to $675 million.

In Corporate and Other, we expect this segment's after-tax cost to be between $110 million and $120 million, as we previously guided. And Companywide we expect the effective income tax rate to be in the mid 30%s.

We are revising our 2015 capital expenditure guidance to $5.8 billion. This is up from $4.6 billion to reflect our expected capital spending of $4.3 billion plus the announced $1.5 billion cash contribution to DCP.

With that, we will now open the line for questions.

(Operator Instructions)

Edward Westlake, Credit Suisse.

Two questions. Firstly on the broader macro picture on demand, chemicals margins have been doing pretty well. Dow was saying that they think actually utilization is going to get tighter over the next few years despite everything we hear out of China and fears about the global economy. So maybe just some comments on what you see on chemicals and then I've got a follow-on on Midstream.

This is Tim. I think we look at chemicals and the utilization rates continue to be fairly good. We don't see excessive inventories at the converter level. And we're continuing to see good demand in Asia and across the system globally. So I think our view is demand is good. China is a particular interest I think largely because of the reported numbers. But what we see on both fuels and chemicals tells us that the consumer side of China still is doing very well.

So our view is supply/demand on basic petrochemicals will probably likely continue to tighten. But offset somewhat with the narrow differential spread between ethane and naphtha which keeps the cost advantage in the Middle East and the US still there but narrower than it was a year or two ago.

Thanks; very clear. Obviously NGL fracs are awful. You've got a big frac/export complex coming up next year with I think guidance of $400 million to $500, which I think the frac is the smaller part and then the export. Are you still comfortable with that as a reasonable range or do you need to see some commodity price improvement to hit that number?

Our guidance is still the $400 million to $500 million. The frac should start up later this year with the LPG terminal hitting in the third or fourth quarter of next year. And these again are fee-based commitments in large part on both the terminal and the frac that are supported by T&D agreements, so it gives us some assurance around that piece. The variable piece really comes in in terms of the market capture between the US export price and the international markets on the export. That arb is still open today and so I think that's the one piece that -- why we give guidance in the $400 million to $500 million.

Paul Cheng, Barclays,

First of all, I wanted to say thank you to Greg. We appreciate the help over the last several years. Congratulations on the retirement. I hope you have a lot of fun.

Thank you, Paul.

I have two questions. On the MLP sector, it's no secret that the valuation have drop a lot over the last several months. Also US onshore production has been in decline since probably April. Some of your peer in the MLP side start to suggest the industry may have overinvest in some area of infrastructure.

The question is, do you agree with those assessment? And does the recent change in the market environment that in any shape or form alter your view about your pace of the investment in the area of the dropdown pace or about the M&A opportunities?

I think we agree broadly that yield structure has moved in the MLP space. We reiterate our guidance and stand by $1.1 billion of EBITDA by 2018 will be at the MLP level. We feel pretty comfortable with the $2.3 billion of EBITDA we gave at your conference earlier this year, Paul, as you think about it. About $1.9 billion of that is either existing or projects under construction, so the addition of $400 million, half of that will probably come from Frac Two, which we're going to FID in 2016. We feel really good about that.

The balance of that is going to come from other NGL refined projects that we have in the portfolio. I'd say, first of all, we feel good about the $1.1 billion getting into the MLP by 2018. The other thing I think about, too, is I think high-quality MLPs, you think of the pairing of PSX and PSXP, strong balance sheet, strong portfolio of existing EBITDA can be dropped. We have a great suite of organic projects that we think are really good projects that we will bring forward and execute well on. So we think investors will like that story and continue to want to be part of that story going down the road.

And then we look at our cost of capital PSXP today. It's trading sub 3%, let's say, and we look at the returns on the projects we have in the portfolio. That's a very attractive spread, enabling us to create substantial shareholder value. So I would say we're watching what's going on in the MLP space with interest, but we think we have a strong story that investors are going to like.

How about the pace of the dropdown? I think that you've been talking about $2 billion a year? Given the market condition, do you still think that that's doable or that, at least for the immediate future, that you probably go for a slower pace?

I think we are on track. We are on pace. I mean toachieve $1.1B you kind of nailed the number we need to do. We said it is going to be lumpy, and as we go through the period, but on average that's about what it will be.

A final one from me. Have you seen any slowdown in the export market for gasoline and diesel? Also, based on your network, your wholesale network in the US, what kind of a gasoline or diesel growth rate that you may be seeing? Thank you.

Tim, why don't you take that.

Paul, maybe address the market question first. I think as we look on through the year, that 3% or so growth in gasoline is very consistent with what we see. The global demand is up as well with particularly strong growth in Asia on the gasoline side. We've had good placement opportunities in the US in the last several quarters. And I would say that the export markets are there, particularly in the distillate side, for the US to export to and so that presents a nice option for us as we think about how we optimize the product values in our system.

[Evan Calio], Morgan Stanley.

Before I go, I wanted to congratulate Kevin as well and wish Greg the best. It sounds like more time for the green egg in 2016, Greg.

Thank you, Evan.

Thank you, Evan.

My first question is on Refining. Earnings were over $1 billion, up $400 million Q-over-Q. Last time made over $1 billion in Refining was in the 3Q of 2012 when differentials were meaningfully higher. Can you elaborate on the factors that contributed to the quarter besides lower turnaround activity? Because I know that over the past two years you have had turnarounds and reliability issues at Borger and Alliance. Just wondering if we should assume that these results indicate some of those problems are behind you?

We ran very well, so we're up 130,000 barrels a day on the crude side, Evan. So 6-point improvement in utilization rate. I think that speaks to the fundamentals on that. I would say that the product side has been the part that's really helped the refining complex. So it's really a view, I think, forward of the demand side and the strength of that. And then that supports that. I would say with gasoline, our view would be we'll continue to be strong, obviously with some seasonal effects. But literally from our perspective, a strengthening market with this kind of price structure on the crude side.

Distillate remains weaker but still able to capture that. So I think the story has been around the market improvement, running well and those two combined do that. We've also, though, have an investment program to structurally improve refining with some of the high return projects with the Billings crude optimization project, increasing the capability of our FCC at Bayway, and other kinds of projects like that that will structurally add to our target of another $850 million of EBITDA growth through 2018.

So it's a combination of self-help, running well and then good market conditions. So I think that's our view of how we continue to contribute to a higher structure.

Did we cover the question for you, or was that too distracting with that noise in the background? Hello? Hello?

This is the conference operator. I apologize for the technical difficulties. Roger Read, Wells Fargo.

Congratulations to everybody on their, I guess we will call them future roles, even for you, Greg.

Thank you, Roger.

I would just like to get in a follow-up on a couple of the questions that have been asked. On the MLP side, obviously the question about dropdowns, some challenges in that space. Do you look at it as something you would be willing to do more on the acquisition side?

I wasn't clear from the answer earlier if that was a possibility. And I'm thinking more the traditional fee-based assets, not some of the more esoteric -- or exotic, I think, things we've seen.

I think in terms of acquisitions at the PSXP level, we look at everything that's out there. I think we feel pretty strongly that our organic profile that we have where we can potentially build something for seven and then trade up into a higher value creates more value for both unitholders and for shareholders of PSX. If we saw something out there that we thought added value for both PSX and PSXP unitholders, then I think we would be willing to consider that.

Okay, that helps. In the refining side of the business, as you've mentioned in prior calls and in this one, you have a higher distillate yield than a typical crack spread would indicate. Gasoline demand clearly growing faster than diesel demand as we look at recent past and I think the expectations here in the near-term future.

Is there anything you would do to change your gasoline/diesel yields as we look into the summer of 2016? Or another way of asking it, what is it that you can change on the yield side in that kind of a short time frame?

First of all, we're running max gasoline and have been all year. So I think we're about 41% gasoline and 38% distillate. And typically we would have run it the other way around, 41% distillate. We're running max gasoline today.

Some of the projects that we have that Tim mentioned, at both Billings and also Bayway, are around yields and improvement. And so we will probably make some more gasoline and some more distillates out of those projects, but at the margin that's what we'll do. We're not going to make just big investments to try to chase this at this point in time, given we think we have better opportunities in Midstream and Chemicals.

Near term, no particular additional flexibility on the gasoline volumes or diesel?

No.

Blake Fernandez, Howard Weil.

Nice results today. Also offer congratulations to both Greg and Kevin. I had a question on DCP. I think the comment was made that you believe it will be self-funding going forward. I'm curious if you can offer, does that contemplate the current environment or is that just in anticipation that the current cash infusion and then the more stable revenue stream should kind of get you through this difficult patch and move to a more normalized market?

I think that's the answer that we would give you. Clearly, as we are de-levering the balance sheet, interest expense is going to go down. DCP has done a great job in terms of reducing costs. Reducing capital spend there also. The other thing I would say, they are working hard to cover about a third of their equity length in from percent of proceeds essentially to fixed fee. So you kind of roll all that together and it kind of moves their breakeven from, say, mid $0.65 range down to about where we are today. So I think we feel pretty good about that.

Thanks. And one follow-up, if I could. I think you pretty well tackled the Midstream outlook and I understand fully that you've got the dropdown potential. I guess what I'm wondering is, is there -- as you digest the current assets that are being constructed, is there potential to reduce the amount of capital spending there on a go-forward basis? I guess what I'm asking is, the total CapEx of $3.6 billion, does that have room to move down as we progress toward, say, 2017, 2018, 2019?

We don't like to give guidance quite that far out. But I think we're going to be in the $2 billion a year range in Midstream through that period of time. The things we have in-flight today are pretty clear to see. As you start thinking about 2018, 2019 and 2020, I'd say there's probably a reshuffling of the project deck and you'll see us do more NGL, more refined products, more crude things right around our existing assets as we sort through wherever the drill bits going to go.

Our view consistently remains by 2017 and 2018 that really sorts itself out and we're probably not in $50 crude environment, but we're probably not in $100, but somewhere $60, $70, $80 in that range. And so I think that will incent drilling and we will see a pickup of infrastructure back on that side. I think our base view is to this point we have the juice in our portfolio, so to speak, that's going to push us through that period of time.

Evan Calio, Morgan Stanley.

My second question was on if I look at the 2016 CapEx guidance, I know your Midstream is down as of 9/24 and PSX is up. Can you elaborate on the shift there? I presume as you move forward, you do expect PSX would take on more projects versus building PSX and dropping them down to PSXP.

I will take a stab and Tim can follow-on. There's no question we've said many times that we want to get PSXP to scale so it can start doing its own organic investments. Bayou Bridge was a great opportunity to give PSXP a great organic project. And so I think with time you will see us try to grow that ability to do organic projects at PSXP. There's no question we think that makes a lot of sense.

We're still willing to incubate projects up top and take them down if it makes sense. Frac is a great example. $1 billion-plus investment that's a little big for PSXP today, but in the future, we'll do more and more organic there.

I just think, Evan, that having a sponsored MLP lets us tackle much bigger, stronger projects that ultimately can be destined for the MLP. And as Greg said, we plan to continue to do a nice amount of organic growth at PSXP and as that business grows, hopefully we get more of that spending down at that level where it's really accretive for the partnership.

Doug Leggate, Bank of America.

Good afternoon, guys. And again, Greg, let me add my congratulations. I do think I'm the only analyst that can say, Kevin, congrats on flying the flag for the homeland. (Laughter)

I've got a couple of questions, fellows, if I may. Greg, just to run down Paul's other question about MLPs. So the multiple compression we're seeing on the MLP market, I think you said in the past that your investments really need about a 7 to 8 times -- CapEx is about 7-plus times the EBITDA typically. So you need a higher multiple in that to really get the line of sight on the dropdowns. Do you think you can still achieve that in this market or does it maybe slow the pace a little bit until things improve?

There's no reason for us to slow down. We look at the yields where we're trading today, we feel very comfortable, Doug.

All right. So no change in strategy. I guess the related question is really -- is really I wanted to revisit something you said when the Company was separated from Conoco to begin with. And that was that you really had no interest in expanding or building out refining and you wanted to diversify, but you are clearly going great. Refining has been very strong. I'm just curious if strategically your views have changed any or if you're still very much on the opinion of taking that as a windfall and moving into these other businesses?

I think there's some great deals that have been done out there by some of our peers. For the right opportunity, we would never say never. But I would reiterate, we look at the portfolio and investments that we have, both in Midstream and Chemicals, and we still think there's value in preferentially investing in those higher valued, higher returning businesses over the refining business.

And so will continue to watch that. But there's nothing on the horizon today that we look at and say, we can increment a lot of value for our shareholders by doing that in the refining space.

If I could squeeze in one last one, it's really more of a housekeeping issue. I don't know who wants to take this, but the capture rate in the MidContinent clearly very, very strong this quarter. I'm just wondering if you can point to anything in particular that was behind that and I will leave it there. Thank you.

It's Tim. Really it just reflected our ability to place products in high-valued markets in the MidCon, so we were able to capture significant uplift versus the group three average that we used for the benchmark. And we had heavy diffs that helped us at Wood River.

They were at $5. That was helpful too. It ran pretty good.

Jeff Dietert, Simmons.

Looks like with some of the most recent capital spending plans we're going to have a second year of declines in capital spending on the upstream side for the first time since the 1980s. US production declined for the fifth month in a row in the DOE stats today, yet Gulf of Mexico and Canadian production continue to grow. Could you talk a little bit about how this evolving market is impacting your crude procurement strategy and maybe talk a little bit about how you see differentials playing out going forward?

Jeff, it's Tim. I would say that we look at this and say, this is a great time for options on crude. So the infrastructure projects that we've talked about that trade options around our refining network have a great deal of value. And obviously we can balance the import versus the inland production and the heavy light. So I just think we're into a period where that optionality is going to be a key value contributor. And that's where some of our Midstream spending is going as well, to really support that and drive commercial value. And Bayou Bridge is a perfect example where we connect the Texas side to Louisiana, offer more crude slate options with a terminal than can import and export.

So just a lot of dynamics, but that's the kind of things that we're doing to capture that. On the diffs side, I think the light heavy diff is likely to stay to the point where that's an attractive option as we think about it. I think the call on lights in the US refining system, light crudes, has increased. And as production falls over, that's going to continue to keep that relatively snug.

So I think that diffs will be volatile as you work in the US, as you work through both the import and the inland production, but I think it speaks to probably a bit narrower WTI-Brent as that shakes out. But clearly a period where I think it's going to move a lot from month to month and quarter to quarter. That's kind of our thesis that we're seeing. And I think if you look at the market today, you see that playing out right now.

Secondly, if I could, you mentioned the product exports were down quarter on quarter because of stronger domestic demand. Are there any specifics you can share with regard to what you're seeing on the demand side? Is it due to any specific actions on your part to access additional markets?

I think, again, it goes to similar to the crude story. You have a lot of options on the placement side with our pipeline network and Marine options in the US. And so we literally try to optimize a net back around each location that we have and so we were able to access some of those higher valued options as we've looked around the system to do that. That said, I think exports will remain an important part dimension to keep high utilization rates in the US.

Congratulations to Greg. Kevin, thanks for your comments.

Neil Mehta, Goldman Sachs.

Greg, congratulations on the announcement. Kevin, congratulations on the new opportunity. On the quarter, the retail segment really stood out to us here. Really outstanding in terms of volumes capture and margins. How sustainable do we think this is? And anything idiosyncratic that you think you should carry forward here in terms of what's happening on the marketing and the specialties business, I should say?

Most of that increase -- this is Tim. Most of that increase is really in the marketing side of our business, which I would call the wholesale side with, obviously, the -- it's the face to our marketers to the retail side. Strong demand has really translated into some opportunity for a better margin there. And then in a period when you have falling prices, you're able to capture more of that margin because rack prices tend to lag the spot price, so there is an element that as price movements occur that you can go plus-minus on that. But then structurally a stronger demand picture helps that pricing as well.

On the chemical side, is there an opportunity here to take on incremental leverage at CPChem and use that as a dividend up to the parent?

We certainly took that opportunity this last year. We put $1.4 billion of debt against CPChem. That's a decision we take between ourselves and our partner in that. There certainly -- there's more capacity at CPChem if the owners decide that that's warranted.

Congrats again.

Ryan Todd, Deutsche Bank.

I will join in congratulating Greg and Kevin as well. Maybe a couple quick housekeeping-type ones. Turn around outlook? You had a great 3Q run; 4Q looks good. Any thoughts in terms of the first half of 2016 what you look like from a turnaround point of view, I guess both PSX-specific and maybe the industry as well.

I would say for next year, 2016, we go back to a more normal type turnaround load. 2015 was abnormal for us. We had a lot of turnarounds going on this year. It's just the way the schedules hit. More of a historical turnaround year in terms of expense.

Maybe just one last one. You addressed earlier the potential to deploy or questions around deploying additional capital and refining versus other businesses. If you think of the portfolio as well, there was recent news out there, I guess, on the Whitegate Refinery. On the flip side, when you look across your refining portfolio, is there any -- is there the possibility of further rationalizations across the business or are you pretty content with what the portfolio looks like right now?

I don't think our views around the portfolio have changed over what we've been saying. We've always said that Whitegate is probably an asset that we will do something with ultimately. Interesting enough, Atlantic Basin's margin is pretty strong this year and Whitegate's actually been performing quite well in this environment.

Longer term, it's a relatively small refinery in what we think is a challenged market. We continue to think -- although California has been smoking hot. It's just one of those things that, long-term, we think California is a difficult market. We think that certainly our assets are average in that marketplace. But it costs us nothing to hold the option there and we will continue to do that. We are pleased with the performance of those assets this year in 2015. We think about the portfolio, we've done most of the heavy work around the refining portfolio at this point in time I would say.

Phil Gresh, JPMorgan.

First question on CPChem with the projects. Is there wiggle room to come in under budget at this stage, do you think, on the first cracker? And if and when you do the second cracker, when are you trying to make a decision by?

I will let Tim take that one. (Laughter)

Our view is that we're still looking at the cost we talked about from those crackers. We're not seeing any kind of extraordinary inflationary thing, but we're about over 50% complete on that and so we still have some room to go. Our view is it still going to hit about what we expected with over $6 billion investment startup in mid-2017. Still like that project.

As far as the second cracker goes, we're still doing development work, so it's kind of things like site selection, derivatives slate. Those kind of things continue to advance that. I like to think about it, when you look at it today, these are typically six-, seven-year project cycles. So that would say FID, but you still, some period out in the future -- but overall it would be, push 2020, 2021 at the earliest. And we have flexibility in that timing.

But we still like North America, as we think about the NGL supply. We still like the North American site as one of those options. But I will also tell you that we continue to look at cracker sites around the world and we plan to continue to try -- not try, we plan to continue to grow that business to match the market growth that we are seeing.

One question for Greg on cash balances. I think in the past, you've talked about a minimum cash balance in that $2 billion to $3 billion. I was just wondering with lower oil prices, et cetera, if that cash balance, that minimum cash balance requirement has changed at all? And then I'll make sure to ask Kevin next time.

This is Greg. As we looked at -- we initially when we came out of the spin, we said some neighborhood of $2 billion to $3 billion. As we continue to work with our capital structure, I think we could probably easily stay within the $1.5 billion range as long as we have access to the commercial paper markets and use our revolver as the backstop. As we've continued to get our sea legs after the spin and everything, I would say $1.5 billion is probably a decent number to look at.

Nice target for you to leave for Kevin. (Laughter)

I was just going to ask one last question on the $400 million to $500 million EBITDA guidance target for the two Midstream projects. What kind of timeframe do you think you will be able to achieve that, given that there is a market element to that EBITDA? Do you feel confident that you would hit a full run rate in 2017 or just generally how you're thinking about that.

In 2016, we'll have the frac. That's a fee-based asset with supplies taking care of output is placed with that one. On the LPG export terminal, that starts up at the end of 2016. So we would expect over toward mid to 2017 or so that we should hit that run rate EBITDA with the variable being really the commercial risk contribution piece that's got some variability. But a large piece of that is fee-based as well. So it's 150,000 barrel a day -- just a reminder, 150,000 barrel a day of LPG export.

Would you say the commercial piece of that would be somewhere [100 to 200] range?

That's a decent kind of number to think about that on the risk side.

Brad Heffern with RBC.

To beat the dead horse a little bit more on Midstream, obviously you said that the drop-down schedule is still intact; no real change to how you're thinking about that. Has there been a change in terms of how you think about the funding side of it? Is one of the levers that you might pull funding it more internally, taking PSXP shares back, maybe doing internal financing rather than PSXP raising capital on its own in order to finance those dropdowns?

We don't think that PSXP's access to the Equity Capital Markets are going to be impaired. I think our plan going forward is still half debt, half equity at PSXP to fund it.

Earlier you mentioned that Frac One at $1 billion was too big for PSXP to tackle. Curious on Frac Two, given that a lot of the spending is pretty far out, is that something that PSXP could take on organically rather than being incubated at PSX?

Probably not. We will do that one up top and drop it.

Faisel Khan with Citigroup.

(Inaudible). Congratulations on your retirement. Our team certainly appreciates your insights into the business since the Company was spun off. Few questions. Just on your prepared remarks you talked about how the Western -- the refining complex on the west sort of underperformed because of an outage on their pipeline.

Can you elaborate a little bit more on that because obviously gasoline margins were high sequentially quarter over quarter. And it seems like maybe there was something on the crude side that I didn't quite get in the prepared remarks.

Maybe a way to answer your question is probably about 20 a day of crude that we just couldn't get into the facility to run and that probably translated to about $20 million -- $22 millionLPO, something in that range. And of course we tried to do the workarounds, but the ultimate solution is for the pipe to get back in service so that we can get the right kind of crudes into Santa Maria. I think that was the biggest impact that we saw in terms of our West Coast operations.

Going back to Marketing. Just want to understand the strong performance in Marketing a little bit too. I believe you guys have some excess capacity on Keystone within that business and then there's the exports, of course. And then I'm not sure also if the issue on the Rhine River had any impact or benefit in the quarter from marketing margins?

Really the Keystone is part of our refining earnings on terms of any excess space we had in the building to capture additional value from that standpoint, so it's not really the sale of clean products. That's a crude system that we put into really the refining piece of the business. And I did not see anything unusual from our perspective with the Rhine except to say European fuel margins were better than New York harbor, so to the extent that had an impact, that may have been the only place where I would've seen the uplift from that.

On the Midstream capital spending, I'm pretty sure the details on 2016. If I look at a lot of those projects, a lot of your assets come online sort of during the course of next year. And so I just want to go back to the remark you made that you still think you'll spend $2 billion even beyond that a year in Midstream. I'm just trying to understand where that will come from? Is that going to be Bayou Bridge or is there something that will be above and beyond the assets you have coming online in 2016?

We plan to FID Frac Two in 2016. And, of course, the LPG export terminal starts rolling off, Frac One rolls off this year. Then we've got quite a bit of work. We've got to finish up DAPL and ETCOP line. We've got the Bayou Bridge that we're looking at, which will be funded at PSXP Partners, of course, now after today. But there's actually quite a bit of other projects we have around Beaumont in terms of access, both crude side and product side, that we're working that you'll hear more about in 2016. Tim, if you want to add anything on that.

There's just a host of projects that support infrastructure around our network as well that are much smaller. There's the large ones there that are coming on. And then as we continue to go, there is a nice steady stream of smaller incremental projects that are good returns that increase both the fee-based nature and the Midstream. And then we capture commercial value in our refining and marketing business.

One last question for me. You talked about the deferral of maintenance during the quarter. When will you see your heavy maintenance schedule over the next several months? Is that going to be sort of into the first quarter or are we going to see that here in the fourth quarter?

I think you will see us seasonally still be first quarter, fourth quarter. Maybe to reiterate on deferral, what we found is we've got much better catalyst performance this year than what we had anticipated. It will allow us to run that longer before we need to come down to change out that catalyst. And that just makes good economic sense. It's not around reliability or other issues in terms of some of the deferrals that we've had from 2015 into 2016.

That was our last question. At this time, I will now turn the call back over to the presenters.

Thank you very much for participating in the call today. We do appreciate your interest in the Company. You will be able to find a transcript of the call posted on our website shortly. If you have any additional questions, please feel free to contact Clayton or C.W. Thanks again.

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