菲利普斯66 (PSX) 2016 Q3 法說會逐字稿

Welcome to the Third Quarter 2016 Phillips 66 Earnings Conference Call. My name is Julie and I will be the operator for today's call.

(Operator Instructions)

Please note this conference is being recorded. I will now turn the call over to Rosy Zuklic, General Manager, Investor Relations. Rosy, you may begin.

Thank you, Julie. Good morning, and welcome to the Phillips 66 third quarter earnings conference call. With me today are Greg Garland, Chairman and CEO; Tim Taylor, President; and Kevin Mitchell, Executive Vice President and CFO.

The presentation material, we will 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 is 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 differ are included here as well as in our filings with the SEC. With that, I'll turn the call to Greg Garland for some opening remarks. Greg?

Thanks, Rosy. Good morning, everyone, thank you for joining us today. Third quarter results reflect the benefit of our diversified downstream portfolio and our continued strong operating performance in the challenging market. Our refining was again impacted by difficult market conditions, marketing and specialties and chemicals performed well and we delivered total adjusted earnings of $556 million or $1.05 per share.

During the quarter market cracks narrowed further, crude differentials tightened and crude and NGL prices remain depressed. We operated safely, we ran our assets well and our industry leading safety metrics for the year are the best we have ever achieved for holding our costs flat.

We continue to execute on our disciplined capital allocation strategy. We recently lowered capital guidance to approximately $3 billion for 2016. We expect our 2017 capital budget to be below $3 billion. We are growing our higher value businesses and are focused on high return value enhancing projects. We are executing well on our projects under construction and we remain confident that our growth strategy will create value for our shareholders.

We target a long term 60/40 split between reinvestment and distributions. We expect the free cash flow generated from operations and proceeds from Phillips 66 partners, capital market access to be sufficient to fund our growth program and distribution to our shareholders. We remain committed to our growing, secure and competitive dividend as well as $1 billion to $2 billion per year of share repurchases.

In midstream lower energy prices and narrowed differentials have reduced the need for major infrastructure projects. We're pivoted to investing in projects to build value around our extensive asset portfolio of refineries and logistics infrastructure. As we think about long term global crude demand we believe that US shale will be called upon to balance the market which will provide additional opportunities to create values in midstream. We are finishing construction on several of our major projects at Freeport commissioning on 150,000 barrel per day, LPG export terminal is underway with our first cargoes expected to be shipped before year end. Shipments will be mix of term and spot cargoes.

The Dakota Access Pipeline is nearing completion. While the project awaits the issuance of an easement from the US army core of engineers to complete work beneath the Missouri river, construction continues on the remaining segment of the pipeline. DAPL and adjoining ETCOP pipeline which is complete and ready for commissioning are expected to provide the most economic option for moving Bakken crude to the Gulf Coast.

Phillips 66 has a 25% interest in each of these joint ventures. In the Gulf Coast the Beaumont Terminal expansion is ongoing. We have 3.2 million barrels, a new storage capacity under construction, 2 million of which are expected to be in service by year end. The Beaumont terminal continues to be a viable asset and we have plans to ultimately expand this facility to 16 million barrels.

Phillips 66 partners remain an important part of our midstream growth strategy. So far this year the partnership has raised more than $2 billion in the capital market through debt and equity issuances which it is used to (inaudible) grow through asset acquisition and the evolvement of organic projects. Partners remains on track to achieve its growth objective of a five year 30% distribution compound annual growth rate through 2018.

DCP midstream has made good progress on its strategic initiatives. DCP has reduced its cost structure, decrease its capital spending, and continues to convert commodity expose contracts to a fee basis. We are pleased to see the improvements in our financial results and we expect that DCP will be self funded going further.

In chemicals, global demand remains healthy. CPChem is advancing in US Gulf Coast Petrochemical Project which is about 85% complete. We expect the polyethylene business to start by mid 2017 and the ethane cracker in the second half of 2017. Once these new facilities are in operation, CPChem global ethane and polyethylene capacity will increase by approximately one-third. As capital spending will be reduced following the completion of projects, we expect to see increased distributions with CPChem starting next year.

In refining this quarter we completed the sale of the Whitegate Refinery in Ireland and advanced several returning [hands] in projects. At the Wood River refinery, the bottleneck in yield improvement projects were completed this quarter and increase is available heavy oil processing capability. At the Billings Refinery we are increasing the amount of heavy Canadian crude we can run to 100%. And at Bayway work on the FCC modernization progressing on schedule.

During the quarter we generated nearly 1.2 billion in cash from operations and from the Phillips 66 Partners equity offering. We have returned more than $500 million of capital to our shareholders through dividends and share repurchases in the third quarter. Since the Company's formation we have returned $12.8 billion to shareholders through dividends and the repurchase or exchange of 120 million shares. So with that I would like to turn the call over to Kevin Mitchell to review the quarter results.

Thanks, Greg. Good morning. Starting on Slide 4, third-quarter net income was $511 million, we had several special items that netted to a loss of $45 million. In chemicals we had $89 million impairment of CPChem equity affiliate. We also received a legal award in the third quarter but increased refining net income by $43 million. After removing these items adjusted earnings were $556 million or $1.05 per share.

Cash from operations for the quarter was $883 million and was reduced by a pension plan contribution of over $300 million. Excluding $339 million of working capital benefit operating cash flow was $544 million. In addition PSXT raised nearly $300 million from an equity offering during the third quarter. Capital spending for the quarter was $661 million with $365 million spent on growth mostly in midstream.

Distribution to shareholders in the third quarter totaled $508 million including $329 million in dividends and $179 million in share repurchases. At the end of the third quarter our debt-to-capital ratio was 27% and after taking into account our ending cash balance our net-debt-to-capital ratio was 21%. Year-to-date annualized adjusted return on capital employed was 7%, our adjusted effective income tax rate for the third quarter was 30%.

Slide five compares third quarter and second quarter adjusted earnings by segment. Quarter-over-quarter adjusted earnings were up by $57 million driven by improvements in midstream and marketing and specialties. Next we will cover each of the segments individually.

I'll start with Midstream on slide 6. After removing the non-controlling interest of $28 million, Midstream's third- quarter adjusted earnings were $75 million, $36 million higher than in the second quarter. Transportation adjusted earnings for the quarter were $63 million down $2 million from the prior quarter driven by higher operating cost associated with seasonal maintenance and low volumes due to refinery downtime. This was partially offset by higher equity earnings from Rockies Express Pipeline which included the receipt of a $10 million settlement net to us.

In NGL, adjusted earnings were $3 million for the quarter, this represented a $20 million increase from the prior quarter and was largely driven by higher earnings on seasonal trading and storage activity. Our share of adjusted earnings from DCP midstream was $9 million in the third quarter, an $18 million improvement compared to the previous quarter. This was primarily due to favorable contract restructuring efforts, lower costs, improved asset performance and higher natural gas prices.

Turning to chemicals on slide 7. Third quarter adjusted earnings for the segment were $190 million the same as in second quarter. In Olefins and Polyolefins adjusted earnings decreased by $5 million from the prior quarter reflecting unplanned downtime. This was mostly offset by higher polyethylene chain margins. Global O&P utilization was 91%. Adjusted earnings for SA&S increased by $6 million on higher benzene margins.

In Refining, we operated well with 97% crude utilization for the quarter. Clean product yield was constant at 84% with gasoline yield at 44% for the quarter. Pre-tax turnaround costs were $117 million in line with guidance. Realized margin was $7.23 per barrel roughly the same as in the second quarter.

The chart on slide 8 provides a regional view of the change in adjusted earnings compared to the previous quarter. In total, the Refining segment had adjusted earnings of $134 million, down [$18] (sic - "$80) million from last quarter.

Regionally, the Atlantic Basin of West Coast had lower earnings than last quarter primarily due to lower market cracks. The Central Corridor had adjusted earnings that were $87 million higher than the second quarter resulting from an improved [distilate] cracks and benefits from higher margins on Canadian crude. And in the Gulf Coast earnings were slightly lower than the second quarter due to increased cost related to plant maintenance activity.

Next, we'll cover market capture on slide 9. Our worldwide realized margin for the third quarter was $7.23 per barrel versus the [3.2.1] market crack of $12.96 per barrel, resulting in an overall market capture of 56% compared to [62]% (sic - "52%) in the second quarter. Market capture is impacted in part by the configuration of our refineries and our production relative to the market crack calculation. With 84% clean product yield for the quarter, we made less gasoline and slightly more distillate than premised in the 3.2.1 market crack.

Losses from secondary products of $2.94 per barrel were $0.47 per barrel lower this quarter as the price differential between crude oil and lower valued products such as coke and NGLs increased. Feedstock advantage was approximately $1 per barrel lower than the second quarter, as crude differentials tightened further especially the LLS [mia] spread.

The other category mainly includes costs associated with RINs, outgoing freight, product differentials, and inventory impacts. These costs were lower than the second quarter due to improved product differential and crude purchasing timing partially offset by higher RINs prices.

Let's move to Marketing and Specialties, where we posted a strong third quarter. Adjusted earnings for M&S in the third quarter were $267 million, up $38 million from the second quarter. In Marketing and Other, the $29 million increase was largely due to increased margins in both the US and Europe. The Ireland wholesale business was sold in September as part of the Whitegate Refinery disposition. Specialties' adjusted earnings increased by $9 million, primarily as a result of improved base oil margins, and higher volumes at the XL joint venture.

On slide 11, the Corporate and Other segment had adjusted after-tax net costs of $110 million this quarter, an improvement of $1 million from the second quarter. Slide 12 shows year to-date cash flow. We began the year with a cash balance of $3.1 billion. Excluding working capital impacts, cash from operations for the first three quarters $1.8 billion.

Working capital changes increased cash flow by $500 million. Phillips 66 Partners has raised $1 billion in a public equity offering through the third quarter. We have funded $2 billion of capital expenditures on investments and year-to-date we've distributed nearly $1.8 billion to shareholders in dividends and share repurchases. We ended the third quarter with $521 million shares expanding.

At the end of September our cash balance stood at $2.3 billion up slightly from $2.2 billion at the end of the second quarter. Earlier this month PSXP raised $1.1 billion in the debt capital markets that will positively impact the fourth-quarter cash balance.

This concludes my review of the financial and operational results. Next I'll cover a few outlook items. In the fourth quarter in chemicals we expect the global O&P utilization rate to be in the mid 80s due to planned turnaround activity.

In refining we expect the worldwide crude utilization rate to be in the low 90s and before tax turnaround expenses to be $170 million to $200 million. We expect corporate and other costs to come in between $130 million and $140 million after tax due in part to increased interest expense from the recently issued PSXP notes and companywide we expect the effective income tax rate to be in the mid 30s. With that we will now open the lines for questions.

(Operator Instructions)

Your first question comes from the line of Ed Westlake from Credit Suisse, your line is open.

Good morning, everyone. Just on the cash generation I mean obviously, cash generation this year has been a lot lower than last year and part of that is the margin environment, part of that investing in CPChem; but may be just talk a little bit about whether you're concerned about the cash flow drop and obviously you got some lead as to improve it, what those big ones are?

Well, we always tell you this wasn't -- always be a very volatile business and I think we plan for that, Ed, we think through mid cycles we should generate $4 billion to $5 billion of cash and $1 billion to $2 billion coming out of the MLP and we think that's sufficient to fund $1.3 billion dividend growing and to fund it $3 billion-ish capital program and $1 billion to $2 billion-ish share repurchase. I think we feel pretty comfortable within that context.

If I could just add onto that, so as we move into 2017 I think there is a couple of things. One is, capital certainly has come down this year. We are guiding to something under $3 billion in 2017. At CPChem as we finished up the cracker in these big projects we get the benefit of that. You get the incremental earnings coming off from these projects. So we think crude cash flow actually starts to build into 2017.

Okay, and then back in September 2015 as you talk about this not pivot but sort of emphasis on improvement refining tool. You did give some self help actual numbers by region obviously margin outlook may have changed since then. Do you feel comfortable those ranges are still reasonable for sort of planning purposes?

Yes, I think they are still fairly reasonable. I think that returns are going to be just a little lower but as we went back and we back half season with these projects we would still make these investments in refining.

Okay. Thank you.

Your next question comes from Jeffery Dietert from Simmons, your line is open.

Good morning. I would like to ask question on the Freeport LNG terminal, obviously LNG or LPG exports have been rising in the US broadly and you are coming on with inventories relatively high and opportunity to export. Could you talk about what you are seeing demand wise what the arbitrage looks like in exporting LPGs and kind of how that's evolved this year?

Yes, Jeff, this is Tim. Yes, I would say that from a demand standpoint still strong when you look at the numbers on the export side because the length in the US for particularly propane coming out of the US to international markets, so propane [dehydro] plants for instance require a propane pick stock in the Asia, the heating markets and -- but the challenges has been as energy prices have dips and they're really around the world; the arbs on those have come in substantially. From the short term I think we still see good demand.

We feel good about that but we look at it and say commercial side, the arb between the US net-back price and the destination price in Europe and Asia is lower than what we would expect long term. So I think when we startup we would expect to see that. That said, we are still good underlying demand for the cargoes and the terminal.

And seeing new construction of new facilities that are going to increase LPG demand in Asia in the years ahead as well?

Yes, I mean there is infrastructure, there is European interest, Latin American as well and the other thing that is out there of course, are the flexibility of crackers to run more LPG in place of NAFTA on top of new petrochemical projects for instance that the propane dehydro that are very specific to propane and then there is continuing growth in the thermal market, the heating market, for that as well.

Thanks Tim.

Doug Leggate from Bank of America is online with a question. Your line is open.

Thanks everybody. Greg I want to take two quick ones. First of all it looks like your NGL business, DCP quarter looks like it's started to improve a little bit, I don't know if that's macro on the higher oil price, if now feels as if you have got that thing stabilized and turning to the right direction. I just wanted to know if you can characterize, you think this is not bottomed out?

No. I am happy to do that. I think couple of things, first of all I think that the work that DCP has done to reduce our cost structure, cash breakeven, they've dropped it from kind of $0.60 per gallon NGL somewhere below $0.35 gallon NGL. So you see in that benefit show up.

NGL prices quarter on quarter actually just a little bit lower but natural gas prices were up about $0.80 or so $0.89, I think. And so that was the benefit to DCP. So you had a combination effect of [lower] cost plus good through put volumes and then kind of neutral on NGL prices little better on gas prices.

The other thing I would add maybe to that is that there has also been progress, continued progress converting some of the commodity based contracts to fee base and that's helped that a bit as well. So this is really about the 3 points that Greg talked about that helped drive that improvement.

I appreciate it, I do have more of a housekeeping issue. Just more topic -- given one of your competitors the other day is how you feel about your embedded GP value drag. I know you have talked about this periodically but yield on your MLP obviously is much more constructive, perhaps. I am just curious do you have any similar feelings around the market under recognizing the value of your midstream business in particularly? Any steps you might think about taking to improve the GP monetization or whatever. Just general thoughts around what you thought of -- you're thinking about going forward?

Doug, I would say I think our view continues to be by delivering steady fee base growth. We can maximize the value of the LP and frankly, we think the GP is going to be recognized in that specifically the question to the GP we don't have any immediate plans to do anything with the GP. We are looking at it all the time and we're certainly considering option to create value, I think that we know and we kind of understand the lifecycle of MLPs. And I think that tool on your toolkit being able to adjust the GP to get the optimal capital structure to continue to grow the MLP is very important and it shouldn't be overlooked in that decision process.

You don't feel you are anywhere close to that yet?

I don't even have any immediate plans to IPO the GP if that's the point. It's 100 million, it's relatively small at this point in time.

Yes. I guess, what you're really getting at, you probably got a lot of growth ahead of you on the GP, before it becomes burdensome on the MLP so when I said you are not close to that yet is that fair characterization of it, there is no need to be MLP?

Yes. That's correct. No, we think about that a lot in the cost of capital at the MLP. I mean the IDR do at some point become a the cost of capital burden for the MLP.

All right. Appreciate the answer, Greg. Thank you.

Paul Sankey from Wolfe is online with a question. Your line is open.

Hi, guys. If I could directly follow-up on that we have seen a strategy shift from [American] petroleum, I am sure you are aware of in terms of accelerating dropdowns. Can you talk about the parameters you have to potentially accelerate what you do in terms of dropdowns and remind us what your long term current plans are in terms of guidance for that trade, shall we call it? Thank you.

Yes. First of all, we are not going to be on 2018 today in terms of guidance, Paul. So I think we are committed to the 1.1 billion to 2018 that will represent 30% CAGR in terms of that. I don't know, Tim, if you have got any other comments around it you want to make?

No. I think that we see value in continuing that. We continue to invest in the midstream so I think there is a growth dimension to that. So our view is that we continue to develop the pipeline of projects, grow that business, get the good value from the MLP and whole midstream business, Paul. So it's really that commitment to getting that size and then just looking beyond that is to continue to grow.

Yes, I guess, we have said, if you got 30% CAGR it's probably pretty healthy basically to say the least. If I can totally change subjects, Greg, we have seen in the upstream side across the board costs have fallen dramatically in every aspect of the industry. Your chemical project was [something] it says 85% complete is actually coming somewhat over budget, somewhat delayed, we talked about this years ago in terms of controlling the cost. Could you just remind us or update us on how it is that in this cost environment we still have seen upside to cost in the downstream? Thanks.

Yes. Well, there is quite a bit of downstream activities still going on, Paul. This kind of point that out. There is a lot of construction, lot of crackers under construction. So I think our polyethylene solely will come on kind of within expectations in terms of both the timing and the cost of facility, we have signaled that we think the crackers going to be in the second half of the year.

So the cost of cracker probably will be 5% to 10% more than what we would have expected just due to delays we are seeing in construction. I would tell you that Tim is working that really hard. And I don't know if you want to make a couple of comments what we are seeing on the ground today and some of the things we are doing to try to mitigate that.

Yes, Paul and I think about this really not been equipment and engineering particularly. It's really been on the construction side and productivity. So the labor input to get the work done has gone up as we have seen less skilled crafts. Each contractor has a different set of workforce. We have been, I think the contrast is that polyethylene units pretty much complete on time, on budget as we talked about in the second quarter of next year.

The cracker we struggled a bit more and really the challenge now that we risen to, really as owners, is to reorganize, working with the contractor, the work front for additional resources from the owners, as well as CPChem on that to really improve that productivity. And so we are starting to see better progress here as a result of that; but that's really what's left is to finish the construction.

Understood. Thank you guys.

Neil Mehta from Goldman Sachs is online with a question. Your line is open.

Good morning, guys. I wanted to get your perspective on the refine product macro as we are going into 2017 specifically any differentiation and thinking between gasoline and diesel and then also, crude spreads as you see the market right now?

Yes, Neil, this is Tim. I think fundamentally we just look at the market and I have seen recently we have seen both crude product inventories in the US start to come down. That's encouraging but it's got a long way to go. It would be our view. So we think that fundamentally keeps kind of weaker outlook when you think about the products and the crude spread and the crack margins on the business. And the other comment I would make is, if you look at the forward curves, it's different than last year.

You are seeing less carry and so I think that we readjusted going in the fourth quarter probably not as much incentive as there was last year to continue to produce at higher rates in the northern hemisphere as a seasonally weak time. So I think growing constructively continue to get those inventories down required both on the crude and product side to structurally change that and then I think seasonally you should expect that as the US demand, really you look out, this looks pretty good right now in terms of the carry -- still not a strong crack.

Gasoline weaker than it has been and I think that reflects what we see as the seasonally normal driving season and the real outlet piece of it this is, do you get turns around right now. Those come out and then you got to turn to export markets to absorb the excess or there will be some type of utilization decrease the balance in markets. But that's really what's required is more balancing.

Three year marketing arm, are you able to see what gasoline demand trends are looking like in the US and any change in terms of the pace of demand, Greg?

Yes. We look at our branded piece and we're still seeing at same side. We would say we're seeing that 2% to 3% year-on-year increase. So, and you look at vehicle miles driven all the indicators -- some changes there but generally still a pretty good demand picture on the gasoline side. So, that's another piece that helps balance that long run. As you got to continue to have good demand growth to balance that.

Maybe as an aside, we're actually seeing similar patterns in Europe through our German retail operations or Central Europe operations. So, it does, it has been a response on the price side to demand really across the world.

And then my follow-up is on capital spending. You guys indicated in the release that you're going to target below $3 billion in 2017. Can you provide an early look at what you see is changing 2016 to 2017 from a capital spending perspective, recognizing that come December we're going to get even more clarity?

Yes. So, I think we'll finish this year right around $3 billion in 2016. And we're going to be, we go to our board in December for approval of the capital budget. It's going to be somewhere between 25 and 29 at this point in time, Neil. We differed investment in [frack] 2 and so that's a piece of what we're seeing. And then we're just finishing up the big projects and so there's -- given the uncertainty in the markets and everything that is going on, we're pivoting to a smaller projects.

So, that's actually positive in my view because if we need to make adjustments capital next year, we can. So, we're not, we don't have these long run committed projects we have to follow through and invest in.

So, I think we feel good about the 2017 capital program. We got some good projects in there that we want to execute. And obviously, our full attention right now is on commissioning and starting up this LPG export facility. But you -- we will load cargos next month, actually.

Thanks, guys.

Blake Fernandez from Howard Weil is online with a question. Your line is open.

Hi, folks, good morning. I believe this is the last call before year-end. So, I'm not sure if Clayton's on the line or not but I just like to thank him and wish him and his family well.

Greg, my question on DAPL, I see the commentary about potentially it's still expected first quarter start. Obviously, looking at the news headlines that could prove ambitious. Could you have maybe just some commentary around that and assuming there is a deferral, is it fair to think that there really the only impact is simply differing the EBITDA. I mean, obviously your cost would slow and no other impact on other operations?

No. I think that's accurate. It may slip a little bit. I think we're still optimistic, I would say that we will get this resolved. There is the work is continuing except for about, I don't know, a couple of miles actually.

So, there is not that much left to be finished once we get the easement to go underneath the Missouri River. So, I think that can be wrapped up in a relative short order. Obviously we need to go ahead to get started on that. And we just, we would expect that we'll get that.

Okay. Secondly, buybacks were still healthy but rolled over a bit quarter-to-quarter. And obviously we did have the drop in this quarter. So, I'm just curious for one, should we think about this new liquidity coming in to help kind of support buybacks going into next year? And do you have a net cash amount that you're expecting to receive from the, I think it was, a 1.3 billion total drop?

Well, I think that's buyback. We've always guided to, $1 billion to $2 billion I think. Certainly for this year we'll be towards the lower end of that range and we'll see what happens. But remember we get CapEx from [$3.9 billion] to [$3.0 billion] this year. We were kind of targeting a [$1.5 billion-ish], [$1.6 billion-ish] this year.

And so, if we come in close to lower end of the range, we'll reduce share repurchases not as much but still a significant amount. But, I actually think that $1 billion to $2 billion is good guidance for 2017, is we look at our balances and what we think we are going to do.

Blake, this is Kevin. On the drop, so is a $1.3 billion drop, $200 million of that was take back units. So, no cash effect. The other $1.1 [million] was funded with cash, so debt offering by PSXP, that's 10 years to pay for the bulk of the drop transaction.

But Kevin, there is no tax leakage or anything we need to be aware of there?

No.

Okay. Okay, thanks guys.

Okay.

Ryan Todd from Deutsche Bank is online with a question. Your line is open.

Great, thanks. Maybe if I could, one question on the midstream. I mean, earlier this year you took down the midstream EBITDA guidance for 2018, 10% to 20% driven primarily by current market environment. Can you run through what were the biggest drivers of the reduction, what the assumed commodity environment was and on the flipside relative to that assumption, the potential for any of that to come back as oil price and other commodities potentially recover?

Yes. Ryan, this is Tim Taylor. The primary driver on the, we should get 10% to 20% off than what we had thought originally in the 2018 run rate. Most of that was the commodity and the primary variance would be the orb on the LPG exports that we were expecting at the time when, back when crude was $4 to $100. And so, that's come off that's really narrowed that [arm]. So, that's a piece of that. So, your view on energy going forward, it's really important when you think about what's the LPG price in the US and what's the alternative values around the world.

So, I think that if you're viewing energy, it strengthens in that should widen those arms out. But that's essentially the biggest driver and then that was where most of the commodity exposure came.

Frack 2.

And then the other part of the reduction is we did differ Frack 2, the condensate pipe from the Eagle Ford and those were essentially fee based earnings but that was not commodity exposed; the bulk of that reduction related to that commodity.

Okay. Thank you. And then maybe a follow-up on the last question on the drop, the recent drop with PSXP. It was a very large drop and there was, as you highlighted, the track restructure from your point-of-view in terms of the cash proceeds. Any thoughts as you look forward in terms of just general commentary on ongoing health of the recovery of that market in terms of the ability of PSXP to fund foreseeable, the foreseeable future drop program?

I think we demonstrated we can access the capital markets in 2016. That's kind of the pace we need to be at to achieve the 1.1 level by 2018, at least run rate EBITDA by 2018. So, I think we're confident that we can execute the plan. The markets will be there for us and so just beyond that we like the profile we have with the master limited partnership. We like the backlog of projects that we're constructing. We like the existing EBITDA that's still left that's droppable. So, I just, I look at all that and say 1.1 is really doable.

Great, thanks.

Yes.

Paul Cheng with Barclays is online with a question. Your line is open.

Good afternoon.

Good afternoon, Paul.

Tim. Several question. At the first, Tim. The European Asian refunding margin, we have seen some pretty strong count this season of uptick in margin over the last three months. Question is that what you guys see on the ground in your European operation? Is it demand driven or it is because of some supply outage or anything?

Paul, as I alluded to earlier, we're seeing pretty good demand when we look at Europe. The demand growth there and the crude divs has certainly improved their competitive positions. So, when we look at for instance at Humber, we see, that's it's much more competitive that it was say when a wide dis for in the US. So, I think it reflects opportunities to continue to export out of Europe, more competitive cost basis. And then we've seen relatively good demand there. And in Asia we've seen recent strengthening whether it be in chemicals or even in the fuel's business, so it feels like Asia seems to be on the upswing in the kinds of markets that on the transportation side for instance in consumer markets, we're seeing that same kind of thing is helpful [approve].

And we had a fairly high turnaround season I think in China. And that's coming back. So, I think that supply may impact that. But generally Asia feels better than it did probably, three four months ago.

Yes. Because it feels like maybe the market may be underestimating the demand on the global basis. Secondly, that on -- just curious, with the IMO 2020 bunker fuel switch, is there any in similar form that we changed the way how you run your refinery in Europe, Bayway and the Gulf Coast system?

No. I -- we've looked. It really doesn't feel like that. I mean, I think you always going to think about the incremental values. But really as a system and the way we look to competitiveness, we still see that European North, and Eastern US is one of the most challenged market areas. But I think it fundamentally has not changed the way that we look at the business on that.

So, you will not need to say just because the high sulphur we see the demand will be dramatically lower and you're going to pick up the lower sulphide gas oil demand. So, you don't believe that will lead you to may have to adjust the way how you run it?

Well, I think sulphur continues to tighten overtime. We've seen sufficient markets that take some of the higher sulphur products but that's diminished and people continue to invest that, Paul. But I think that's more gradual conversion. There still seems to be a plenty large enough market sync out there to absorb that. Even as I made the adjustments in the marine part of the business et cetera to manage that through blending or through other markets that can absorb that.

Okay. And based on you're the [curve] in fourth quarter estimate on the turn around so, your full year turn around expense will be probably as maybe below 400, 500. A bit lower than at the beginning of the year when you initially forecast. Is that driven by delay or from activity postpone or activity or just the work has been done more effectively? In other words, I just trying to understand whether that's [buyer] activity that we should expect from you guys in the 2017?

So, it's mostly push of expenditure into future periods both on turnaround, catalyst changeout expense, Paul. I will give an update on where we expect 2017 to be coming in the next call.

So, some of them that we should expect is going to show up in 2017, Kevin?

That's right, yes.

Okay. And then a final one, Kevin, since I got you here. As a company, what is your overall strategy that over the next several years as you continue to top-down and the organic investment in the LP level? So, LP that is going up? So, we assume as the LP that going up, you would want to accommodate it by lower your (inaudible) that so that your overall consolidate that will be more and than flat or even going down? Or that you're saying that okay, [CCORP] is CCORP, LP is LP, so you don't get them together.

No. We do look at them together, Paul. And I think you're right on there in terms of your initial lead in comment that overtime certainly the LP that is going to increase, and of course we've just done the 1.1 billion. And while it won't have an immediately, immediate offset at the see CCORP. Overtime, you can expect that the CCORP should start to de-lever if you look at the CCORP on a standalone basis.

And on that basis, that I mean given, Greg, earlier, talking about volatility in the market uncertainties. Should the Company or the industry [actually] even take a more conservative approach and start (inaudible) yourselves?

Well, this we've always guided that we're going to stay between 20% and 30% at the cap. And so, we may drift over that just a little bit at one point in time. We're going to try to stay very disciplined within that van, Paul. And it's probably not a bad time to build some cash too as you think about that going forward.

Okay. Very good, thank you.

Roger Read from Wells Fargo is online with a question. Your line is open.

Great. Thank you, good morning.

Hi, Roger.

Hey. I guess two things here. One is a follow-up on Blake's question about DAPL. Are there any seasonal concerns if we don't get started sooner rather than later that you can't do the construction work up there?

No. I think they will be able to do the drill and do what we need to do.

Yes, essentially you're preparing, you doing a ditch work now and the [weather is fine]. So, the drill is not really that impacted from a weather standpoint.

Okay. Perfect, thanks. And then a little more on this sort of the midstream with the changing in the overall CapEx structure and total plans and which is say some change in the ownership structure one of your JV partners. How do you think about M&A in the midstream sector, I mean, generally speaking when things start to tighten up and slowdown cash gets a little harder to get than M&A should pick up; and I guess we have seen that somewhat in the MLP sector that controls most of those assets. How do you look at M&A opportunities and what is your appetite for that sort of thing right now?

I think, we kind of look like everyone. We look at everything that's out there. I think our assessment is, the values are still relatively high, aspiration levels are high. We did three smaller transactions at PSXP level in the quarter or I guess one will close in this quarter but so, I think that we will look at everything that's out there.

There is nothing big that I see at this point on the horizon for us. We still have a great organic portfolio of opportunities to invest in and this still makes sense for us to invest at 6 or 7 build multiple and trade that up versus paying 15 or 20 times or something out there.

Yes. I guess my question was along the lines, if you are personally a little less interested in scaling into larger projects, are you seeing any change in the value of those larger projects that are already in existence or they just remain at the very high multiples?

No. I don't think our view is, we haven't seen the valuations come down and I think, I am kind of the view right now that I think Permian is going to be more challenging in the future than it has been in the past and that existing assets strictly [pipe] is probably going to be more valuable in the future than it is today.

So wouldn't that argue to make an acquisition today?

Yes probably so, you could try the right acquisition but the same thing, I think we still have the ability to grow our portfolio, to hit our targets that we have laid out there for folks and feel comfortable we have got that opportunity portfolio in front of us well at hand.

Okay. I appreciate it Tom, thank you.

(Inaudible) from UBS Securities is online with a question. Your line is open.

Hey, good afternoon. Thanks for taking the question. Just one follow-up on previous comment, I think you mentioned potentially utilization rates coming down or what sounded like maybe run cuts might be necessary and I think [Bolero] mentioned them earlier in the week that you could see some run cuts down the mid [time] just from the seasonal basis that might actually need to happen. I am curious if you sort of view the same way and maybe see other regions that maybe more risk or run cuts than others running into the end of the year?

I will take a stab at it and Taylor can correct me maybe, but as I think about it inventories are high through the chain and certainly they are coming down in the US which is constructive, but I would say that in turnarounds, we come out of turnarounds typically we tend to run better and so you have got that as an offset. But I do think industry is looking at some run cuts in the fourth quarter and given the carry that's out there we are not going to be incented to run like we did in the fourth quarter of last year.

So I don't think we are going to repeat that problem again. So I think you will see. I think like crude refineries are going to be challenged, I think mid comps is going to be challenged. The crack [stand that] -- are not that great. So I think (inaudible) have to look at that.

Yes. I think it is the [light suite], the heavy shower, medium shower that's really if you have got that capacity, that's the most competitive and then the mid comp it's very seasonal in the summer goes short, winter goes long. So I think that's a place we see a light suite and that the balance comes into play there and you are seeing the market kind of respond to data, the well supplied market, so I think it's the usual things around the Atlantic basin and just that light suite complex that's out there with the crude side with narrow differentials.

Got it. Appreciate that. Second question is modeling bit of a two parter here. So when I think of the month down time at CPChem and third quarter just wondering if that leads into fourth quarter or was it ring fence? And then just along the modeling line of things as far as EBITDA contribution from the LPG terminal it sounds like maybe it will hit the fourth quarter a bit, how should we expect the ramp up to get to that full run rate? Should we - is that all going to be in 1Q or will it be maybe throughout the first half of 2017?

So on chemicals in terms of utilization, we have two major crackers in turnaround right now. One in Saudi Arabia, the [Saudi Palmers] Company and the second is the Cedar [Bayou] cracker and so those continue through roughly half the quarter. So that's the guidance down as primarily the plant turnaround there. And so that was the -- that's big change to the guidance in the mid- 90s or mid- 80s. On the LPG we will begin loading, you got to get through the qualification, the clean out, the start-up and so I think our view is it ramps through the first couple of quarters through next year but hopefully can accelerate that. But I think the volume piece of that comes depends on how quickly the operation stabilizes and we can get that on and running.

Great. I appreciate the color. Have a nice weekend everyone.

You too, thank you.

Brad Heffern from RBC Capital Markets is online with a question. Your line is open.

Hi, everyone. Greg, I was wondering if we can go back to a comment that you made earlier in the call which is, I think you said, you would expect the businesses to generate $5 billion in cash flow sort of on a cycle average basis. I also noted that the commentary around the current refining market hasn't seen particularly bullish to me. So I am wondering how you reconcile those two things and what makes you think that the cash flow picture next year is going to look significant better than this year, if that is what do you think?

I think it will be better next year. I am not sure we are going to get all way back to mid cycle I think it's going to be into the second half of 2017 before you see the kind of inventory corrected even though it's going the right direction today, I think it's going to take a while to work through that. And so I think it will be the back half of the year before we see margin improvement in the refining business.

And there is always a seasonal impact. The fourth and the first quarter typically weaker with the stronger driving season. So if the inventories stay in balance it kind of sets up for that. So there is the inherent seasonality cycle that comes on the rebounding side but I think generally our view would be that probably a bit low mid cycle but hopefully better with the stronger summer season is next year.

Okay. Sure. And I guess maybe ask this slightly different way, have your thoughts on what mid cycle is, changed at all given what we have seen in 2016?

No. Yes and no. I think two years ago we would have told you we thought that mid cycle was probably a $1 barrel better because of the crude dips. I think that's probably gone away. And so I am kind of back to more of normal mid cycle in my own thinking in terms of that. It's just kind of rule of thumb, I kind of use between $2 and $2.5 of barrel net income is a good mid cycle number for us.

Okay. Thanks for that and then question on DCP. Obviously you are having a partner change there and so I was curious if you see that changing the way partnership runs in any significant way. And also if you like that as being 50/50 JV or is somehow the other half of the partnership fell out as part of that process of you be interested in owning all of it?

This is third or the fourth partner change. I keep, lose track of change so many times in 16 years. But look, I think [Image] is great company we know them. They are going to be a terrific partner. I think we are happy with the model as it is.

This is a longstanding partnership. It's survived a lot of different name changes. We like the assets. We like the footprint that DCP has and the areas that they are offering in and they have had a great year just in terms of getting their house in order in terms of reducing their cost structure, pulling in the capital expenses, and running much better.

And they are actually running well this year from the reliability standpoint. They had just done all the right things, so it's a great asset. So we would be very happy to stay in a 50/50 JV.

Okay. Thanks.

Faisel Khan from Citigroup Global Markets is online with a question. Your line is open.

Thanks. Good afternoon. On the Cedar Bayou project, Tim I only see the start-up sort of second half of the next year, but are there certain parts of the plant that are going to start up before the main cracker comes online or how is the start-up going to be sort of sequenced?

Yes. So just to be clear the crackers at Cedar Bayou the derivative polyethylene units are down at Sweeny and so two existing operations. So the polyethylene plants will be starting up in advance several months in front of the cracker. Now if you get to the cracker you will be starting up utility systems -- steam those kind of things, energizing -- but you really need the furnaces and the whole cracker in operation before you get production. So it's really the issue of derivatives first, then the cracker, but within the cracker there are number of systems that start to come up in advance of the hydro carbon [into] for the feed system.

Okay, got it. The derivatives plant at Sweeny, you said several months ahead if you put that sometime in the first or second, I guess, second quarter?

Second quarter is what we looking at schedule and everything we are seeing. So that's still the good time for mechanical completion.

Okay, makes sense. And on the partnership is the preference to still to build and then drop? I know you have got some organic with projects taking place in the partnership but I am just trying to figure out how you are balancing sort of the build at the parent and then drop at the partnership versus the organic growth of the partnership? Is there enough sort of internal cash flow generation at the partnership to fund all the growth?

Faisel, when you think about the size of MLP today and it would be -- it's hard to carry a multi-year, multi-billion dollar project there even though it makes sense. So I think as the partnership get bigger we are going to shift more and more of the CapEx to the partnership and you have seen that this year with additional acquisitions, organic builds on the Bayou bridge pipe, et cetera. So I think that's a progression overtime.

But we can look at it as a total midstream business and what's the right way to drive the project that creates value for the company and then you can decide if you [will] the financing between the two. But I think longer term we would like to see the partnership doing more and more of that.

Okay. And as you think about the partnership in the long run what percentage of the revenues do you think will come from third parties sort of on that $2.3 billion number that you have out there? I think in the past you talked about sort of number close to 50% or maybe less than that but I am just trying to understand if that number has changed at all?

No, it's still in that range. I mean, a lot of what we have done to-date in the partnership has been existing systems that are really related to our infrastructure and our refining and the existing midstream business. And as you go forward with as Phillips 66 built additional projects, some of the new things like the Bayou bridge pipe, DAPL, if it were to end up there fractionation is true third party. So that's where that shift begins to get where you start to drive it up, where you have a more balanced portfolio between internal PSX and third party income that's in the midstream and the MLP space.

Okay, got you. On the refining side the -- have you gotten any more traction on the rail facility at Santa Maria associated with the pipeline still down? Have you been able to sort of solve the feedstock issue there to sort of get your capture rate so your realization is back to where they should be?

We are still impacted on the west coast with the pipeline outage. It's not -- we have made progress through getting more crude incrementally into Santa Maria via truck but not via rail. That's been a very difficult permitting process, so we continue to work that but it's all over the west coast; any type of rail facility has really struggled from that permitting process. So we are [running] the pipe back in operation and we will continue to work that incrementally but it's still an impact in terms of our west coast operations that reduction that we are seeing, say roughly 10,000 to 15,000 barrels a day of incremental capacity that's still a burden so to speak because we can't fully utilize our [Dayo] Santa Maria system.

Is there a situation where you have to shut down one of the plants or you are still comfortable running the whole system the way it is?

Well, I think longer term we always have to look at that but right now we still think it will eventually get that supply back. It's just the question of when. So we want to run that as a system when we do that.

Got you. Last question from me on M&A related to refineries. Is there ever a situation where you would consider buying a refinery in the lower 48? I just want to ask the question. I know historically it's been no, but since there are few assets for sale I just want to ask the question again?

So, I think historical answer is still a good answer for us. So we are not in a hunt for any ones that are for sale today. Yes, having said that, if we could find the right assets for the right value certainly we would look at it; but none of the ones that are on the market today we are not in a hunt for those.

Got it. Thanks for the time, guys.

You bet. Take care.

We have no further questions at this time. I will now turn the call back over to Rosy Zuklic.

Thank you, Julie, and thank you all for your interest in Phillips 66, if anyone has any additional questions please give C.W. or I a call. Thank you.

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