Welcome, everyone to the First Quarter 2023 Phillips 66 Earnings Conference Call. My name is Sierra, and I will be your operator for today's call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Please note that this conference is being recorded. I will now turn the call over to Jeff Dietert, Vice President of Investor Relations. Jeff, you may begin.

Good morning, and welcome to Phillips 66 First Quarter Earnings Conference Call. Participants on today's call will include Mark Lashier, President, CEO; Kevin Mitchell, CFO; Brian Mandell, Marketing and Commercial; Tim Roberts, Midstream and Chemicals; and Rich Harbison, Refining. Today's presentation material 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. We will be making forward-looking statements during today's call. Actual results may differ materially from today's comments. Factors that could cause actual results to differ are included here as well as in our SEC filings. With that, I'll turn the call over to Mark.

Thanks, Jeff. Good morning, and thank you for joining us today. During the first quarter, we delivered strong financial and operating results. We had adjusted earnings of $2 billion or $4.21 per share, a record for the first quarter. In Refining, we successfully executed major planned maintenance and ran above industry average rates. Currently, our refineries are running at high utilization to meet demand and capture market opportunities as we enter the summer driving season. We returned $1.3 billion to shareholders through dividends and share repurchases. In February, we raised our dividend by 8% to $1.05 per share, demonstrating our ongoing commitment to a secure, competitive, and growing dividend. Our integrated diversified portfolio provides us with the ability to generate strong cash flow, return substantial cash to shareholders, and invest in the most attractive projects. We remain committed to operating excellence and disciplined capital allocation as we execute our strategy. Recently, our Midstream, Refining, and Chemicals businesses were recognized for their exemplary safety performance in 2022. For the third consecutive year, Midstream was awarded the American Petroleum Institute's Distinguished Pipeline Safety Award for Large Operators. This is the highest recognition by API for the midstream industry. The American Fuel and Petrochemical Manufacturers recognized five of our refineries for outstanding safety performance. Sweeny Refinery received the Distinguished Safety Award for the second year in a row. Bayway, Borger, Santa Maria, and Ponca City refineries also earned safety awards. In Chemicals, four CPChem facilities were recognized with AFPM Safety Awards. We're honored to receive these awards and would like to recognize our employees' commitment to operating excellence. Congratulations to all the people working at these facilities. Well done. We started the year off well and continue to advance strategic priorities from our Investor Day late last year. Slide 4 summarizes progress toward our targets to create value and increase shareholder distributions. Since July of 2022, we've returned $3.7 billion to shareholders through share repurchases and dividends. We're on track to meet our target to return $10 billion to $12 billion over the 10-quarter period between July 2022 and year-end 2024. We had strong refining operational performance in the first quarter and market capture increased to 93%. In Midstream, we're advancing our NGL wellhead to market strategy. We recently achieved an integration milestone with the transition of DCP Midstream employees to Phillips 66, enabling continued synergy capture. In anticipation of the DCP buy-in, we issued bonds and executed a delayed draw term loan. We expect to close on the transaction by the end of the second quarter. We're advancing our business transformation initiatives, and we're on track to deliver $1 billion of annual run rate savings by year-end. Next quarter, we'll provide a more detailed update on the cost savings achieved through the first half of the year. In Refining, we're converting our San Francisco refinery into one of the world's largest renewable fuels facilities. The conversion will substantially reduce emissions from the facility and produce lower carbon intensity transportation fuels. In February, we safely shut down the Santa Maria facility, as we continued to advance the project. We expect to begin commercial operations in the first quarter of 2024. Upon completion, Rodeo will have over 50,000 barrels per day of renewable fuels production capacity. In Chemicals, CPChem is pursuing a portfolio of high-return projects, enhancing its asset base and optimizing its existing operations. This includes construction of a second world-scale 1-hexene unit in Old Ocean, Texas, and the expansion of propylene splitting capacity at its Cedar Bayou facility. Both projects are expected to start up in the second half of 2023. CPChem and Qatar Energy are jointly building world-scale petrochemical facilities on the US Gulf Coast and in Ras Laffan, Qatar, with start-up at each facility expected in 2026. We look forward to continuing to update you on our strategic priorities. Now I'll turn the call over to Kevin to review the financial results.

Thank you, Mark, and hello, everyone. Starting with an overview on Slide 5, we summarized our financial results for the first quarter. Adjusted earnings were $2 billion or $4.21 per share. The $12 million decrease in the fair value of our investment in NOVONIX reduced earnings per share by $0.02. We generated operating cash flow of $1.2 billion, including a working capital use of $1.3 billion and cash distributions from equity affiliates of $369 million. Capital spending for the quarter was $378 million, including $228 million for growth projects. We returned $1.3 billion to shareholders through $486 million of dividends and $800 million of share repurchases. We ended the quarter with 459 million shares outstanding. Moving to Slide 6, this slide highlights the change in adjusted results by segment from the fourth quarter to the first quarter. During the period, adjusted earnings increased by $66 million, mostly due to higher results in Chemicals and lower corporate costs, partially offset by a decrease in Marketing and Specialties. Slide 7 shows our Midstream results. First quarter adjusted pre-tax income was $678 million compared with $674 million in the previous quarter. Transportation contributed adjusted pre-tax income of $270 million, up $33 million from the prior quarter. The increase was primarily driven by seasonally lower operating costs. NGL and Other adjusted pre-tax income was $420 million compared to $448 million in the fourth quarter. The decrease was mainly due to the impact of declining commodity prices in the gathering and processing business. The fractionators at the Sweeny Hub continued to run above nameplate capacity, averaging 554,000 barrels per day. The Freeport LPG Export facility loaded a record 282,000 barrels per day in the first quarter. Turning to Chemicals on Slide 8, Chemicals had first quarter adjusted pre-tax income of $198 million compared with $52 million in the previous quarter. The increase was mainly due to improved margins from lower feedstock costs, higher sales volumes, and decreased utility costs. The industry polyethylene margin increased by $0.10 to $0.17 per pound during the quarter. Global O&P utilization was 94% for the quarter. Turning to Refining on Slide 9, Refining first quarter adjusted pre-tax income was $1.6 billion, down $18 million from the fourth quarter. The impact of lower volumes from turnaround activities was mostly offset by higher realized margins and lower utility costs. Our realized margins increased by 5% to $20.72 per barrel, while the composite 3:2:1 market crack decreased by 5%. In the first quarter, turnaround costs were $234 million, crude utilization was 90%, and clean product yield was 83%. Slide 10 covers market capture. The market crack for the first quarter was $22.39 per barrel compared to $23.58 per barrel in the fourth quarter. Realized margin was $20.72 per barrel and resulted in an overall market capture of 93%, up from 84% in the previous quarter. Market capture is impacted by the configuration of our refineries. We have a higher distillate yield and a lower gasoline yield than the 3:2:1 market indicator. During the first quarter, the distillate crack decreased by $19 per barrel and the gasoline crack increased by $7 per barrel. Losses from secondary products of $2.56 per barrel were $1.03 per barrel lower than the previous quarter due to falling crude prices. Our feedstock advantage of $2.34 per barrel was $2.37 per barrel improved compared to the fourth quarter, primarily due to running more advantaged crudes. The Other category improved realized margins by $2.19 per barrel. This category includes freight costs, clean product realizations, and inventory impacts. The first quarter was $1.73 per barrel higher than the previous quarter, primarily due to improved clean product realizations. Moving to Slide 11, Marketing and Specialties had a solid quarter, reflecting stronger-than-typical first quarter margins. Adjusted first quarter pre-tax income was $426 million compared with $539 million in the prior quarter, mainly due to lower international marketing margins. On Slide 12, the Corporate and Other segment had adjusted pre-tax costs of $248 million; $32 million lower than the prior quarter. The improvement was mainly due to higher interest income and recognition of a transfer tax on a foreign entity reorganization in the fourth quarter of 2022. Slide 13 shows the change in cash during the first quarter. We started the quarter with a $6.1 billion cash balance. Cash from operations was $2.5 billion, excluding working capital. There was a working capital use of $1.3 billion, mainly reflecting an increase in inventory, partially offset by a decrease in our net accounts receivable position. During the quarter, we issued $1.25 billion of senior unsecured notes in support of the pending buy-in of DCP Midstream's publicly held common units. We funded $378 million of capital spending and returned $1.3 billion to shareholders through dividends and share repurchases. Our ending cash balance was $7 billion. This concludes my review of the financial and operating results. Next, I'll cover a few outlook items for the second quarter. In Chemicals, we expect the second quarter global O&P utilization rate to be in the mid-90s. In Refining, we expect the second quarter worldwide crude utilization rate to be in the mid-90s, and turnaround expenses to be between $100 million and $120 million. We anticipate second quarter Corporate and Other costs coming between $260 million and $290 million, reflecting higher interest costs. In March, we issued senior unsecured notes of $1.25 billion and entered into a delayed draw term loan of up to $1.5 billion in support of the DCP Midstream buy-in transaction, which is expected to close during the second quarter.

Thank you. We will now begin the question-and-answer session. Neil Mehta with Goldman Sachs, your line is open. Please go ahead.

Good morning team. The first question is around refining utilization. It was better than expected in the quarter, and the guide for Q2 also looks a little bit better. So you talked about what improvements that you're making on the ground and it's been a choppy 18 months in Refining from a utilization standpoint. So what conviction can you provide the market that we've turned the corner here? Thank you.

Yes, thanks, Neil. This is Rich. That's a good question, and several factors are coming together for us. In November, we identified various opportunities to enhance refining performance. One key aspect was asset availability. We have optimized our turnaround durations and executed those effectively during a particularly busy quarter for turnarounds, which has significantly contributed to our ability to operate at 90% crude unit utilization. The high performance in executing turnarounds has been crucial. Our Gulf Coast assets performed exceptionally well, increasing their crude flexibility, which expanded our utilization window and allowed us to capture more market share. The refining market capture rate of 93% this quarter reflects that success. The focus has been on managing our assets effectively and executing turnarounds proficiently. We managed to do that this first quarter, continuing the trend of coming in below guidance, which started last year.

Yes, Neil, this is Mark. I'll just come over with a little bit relating that back to the Investor Day commitments that we made those commitments based on the groundwork that had been underway for some time, the fairly small projects that we were going through, the blocking and tackling that we were taking on, and we're really starting to see those come to fruition now. And we're pleased with what we're seeing out there. And really, I think the biggest impact of business transformation has been the hearts and minds of our employees. They are all in. Wasn't that way a year ago when first started the initiative, but now they see the things that they're doing, the hard work that they're doing are starting to impact their results and turnarounds, starting to impact the operational effectiveness of the plants as well as they're seeing it in the cost. And that's just been a very virtuous cycle for our employees. There's a stronger competitive edge out there and they really want to own their future now.

Rich, you want to talk about some of the projects that were completed last year?

Yes, I think that plays into the Refining capture rate of 93% for us. Last year, we actually implemented 12 projects focused on market capture. The result of the impact of those projects is a 1.2% improvement in market capture with mid-cycle pricing assumptions. We implemented $225 million worth of projects, and the net return on those, or the EBITDA generation for that investment was $158 million at mid-cycle pricing. In 2023, we actually have an additional 18 projects identified that are in flight, and the estimate is a 1.4% improvement in market capture. So, I think what you're seeing here is the plan we laid out in November is starting to really come to the bottom line of the performance of the Refining.

Thanks. That's a lot of good color there. The second question is around the decline we've seen in crude prices. And that should manifest itself in different parts across the business, so I would love any perspective on how we can think about it from a modeling perspective. Specifically around Marketing, which tends to be a tailwind, capture rates, declining crude prices tends to help secondary products but also can be a headwind for working capital. So, if the crude price decline sustains, how should we think about that in terms of Q2 movements? Thank you.

Well, let me start, Neil. This is Brian. Talking about marketing and probably noticed we had very strong marketing earnings in Q1. Pretty happy about that. You know that we have a geographic diverse portfolio with assets both here in the US and Western Europe, which is great. But we also market through a number of channels, wholesale, branded, and retail. And what we've been doing is trying to focus our sales on the higher margin parts of our business, particularly in retail. And we purchased retail in the past few years. In fact, in mid-2019, we had 50 retail JV stores in the US. Now, we have 1,000 retail JV stores in the US, and we also spent some time reimaging all of our stores to get higher margins in business. And I would also say that in the lubes business, that it's also performing quite strongly in both base oils and finished products. So, as you mentioned, as spot prices come off, that generally benefits the marketing business because marketing margins, generally, or marketing prices generally fall slower.

Yes. In refining, the decrease in crude prices typically reduces secondary product losses, which tends to improve our situation. However, our main focus in refining is the differentials, specifically the light heavy sweet differential, which significantly impacts our profitability. Kevin, do you have anything to add?

Yeah. Neil, just on the working capital impact. As you've highlighted, with the declining prices, we will have a working capital hurt because we're in a net payables position. So you think about a system that's essentially 2 million barrels per day and a longer duration on the payables outstanding than on the receivables. So the approximate rule of thumb is somewhere in the order of $40 million to $50 million of working capital hurt per $1 of price reduction. And that assumes that the crude and the products move together, and the crack stays at the same level. But as you know, also, there's a lot of other moving parts in working capital, what's happening to inventories and so on. But as a rule of thumb, a simple rule of thumb, you can use that $40 million to $50 million per $1 movement in price.

Okay. That's really helpful. Thanks, everyone.

Thanks, Neil.

Doug Leggate with Bank of America. Your line is now open. You may proceed.

Thank you, everyone, for having me. I would like to follow up on Neil's question regarding the capture rate. Considering reliability was a concern over the past year, should we now view this level of capture rate as a new normal? Also, it seems that you are progressing ahead of schedule with cost-cutting initiatives. As we look at the overall earnings potential of the business, it appears that you have moved past a challenging phase and are on an upward trend. Could you clarify if we are interpreting this correctly?

Great question, Doug. I'll let Rich address the capture rate, and I'll come back in on the cost-cutting progress.

Yeah. So capture rate has a lot of moving parts to it, so it's very difficult to predict that. The configuration component of it, secondary products, feedstock costs, others. But back to focusing on what we can control in our business, Doug, is we're seeing continued maturity in our reliability programs, and these saves are coming on a regular basis where we're catching issues early and preventing larger events from occurring. And also, under asset availability, as I mentioned earlier, the turnaround execution is going very well for us. We've significantly improved our predictability on this. That takes a lot of leg work over time to improve those processes. And most importantly, even though we're hitting our turnaround execution goals, we are continuing to complete all the necessary work to operate the equipment safely and reliably over time. So that program is continuing to mature. We'll continue to see that. And that will allow our utilization rates to be available to operate in the market if the market is there. And then as you mentioned, the cost side of it is a big component of this as well. We have a clear path that we've identified reducing our costs by $500 million by the end of this year on a run rate basis. Over half of the $400 million run rate cost savings that Kevin mentioned in his comments are coming out of Refining. And that's good news for us. And probably more importantly, as Mark has indicated, our entire organization is uncovering opportunities to lower costs. We're being much more efficient in how we work and accepting the challenge to improve the business, which all should directionally support improved market capture and utilization.

Yes. Thanks, Rich. Doug, we've really come a long way on the business transformation efforts. It was a heavy lift, a major focus really for the last 18 months or so, and we're seeing great progress. We beat our goal of $500 million by year-end of 2022, and we're accelerating right into 2023, hitting more than $600 million in the first quarter. And as I mentioned in our comments, we'll take you on a tour of those realized savings at the second-quarter call. And we're excited; the organization is excited. We've made major changes in the structure of the organization that eliminates a lot of inefficiencies. We've got feedback loops that we've put in place to make sure that these savings are real and that they're sustainable. And we're seeing it, and people have bought in. We're using some really state-of-the-art tools to make sure that we're capturing what we think we're capturing and delivering those results to the bottom line. So it's just an incredible change in the organization that we've witnessed over the last six or eight months as things start to be realized.

You’ve made significant progress in a short time, Mark. My follow-up is somewhat expected, and I apologize for the demand. One of your major competitors mentioned considerable increases in deal demand compared to last year. The market outlook for gasoline appears to differ from that perspective. Could you share what you’re observing regarding these trends through your marketing channels?

Yes. Doug, this is Brian. Maybe I’ll talk about kind of what we’re seeing in the market. And that it’s kind of what we’re seeing in our business as well. Although our volumes are somewhat off because of California flooding and because of the sub-maintenance. But generally, for US gasoline, we’re seeing demand better than last year, and we’re seeing global demand about 3% better than last year. And we’re now heading to gasoline driving season, as was mentioned, with kind of the lowest US gasoline inventories in almost 10 years. We’re also seeing very strong octane spreads of about a-third larger than they were in the first quarter of last year, $0.27. We would expect demand to hold better than last year, particularly given that we have lower retail prices versus last year as well. On the diesel side, the year did start off weaker early in the year with warmer winter but has become firm with Mid-Continent planning season. Currently, we're seeing US diesel demand about 2.5% under last year. But that said, global distillate demand is a bit stronger than last year, and some countries are seeing particularly strong diesel demand. In Latin America, we’re seeing demand at 10% over last year and China, 4% over last year. And finally, I’d say that, in the US, it's been bouncing back and forth between max diesel and max gasoline pad 5's EBIT and max gasoline since mid-February pretty much. Pad 1 signaled max gasoline in mid-April. And so this bodes well for helping to firm up distillate throughout the summer.

Interesting color. Will watch with interest, guys. Thanks so much for your answers.

Thanks, Doug.

Ryan Todd from Piper Sandler. Please, go ahead. Your line is open.

Great. Thanks. Maybe you basically said that you were not going to talk about this until next quarter, but was wondering on the cost reduction side. I mean, you've made great progress there. I mean, can you talk a little bit about where you've been ahead of schedule where you've had some success there and whether you mean you’ve already hit the $200 million kind of sustaining capital reduction target. Is there further upside to that versus your prior target? And as you continue to trend ahead of schedule, have your expectations changed at all in terms of the ultimate amount of cost savings that you might find available?

I'll touch a couple of those things, Ryan, at a high level, and then Kevin can drill into how the savings are distributed. But really Refining has performed very well. With respect to business transformation, we're seeing that. On the sustaining capital, I just want to make it clear that, that's really not an outright reduction in sustaining capital opportunities. It's becoming more efficient and more productive in how we're spending that, and we're going to continue to do that. You'll see really that impact in any of our capital projects that we look at going forward, and we're not really capturing that. So, it's going to be a continuous process to look at how to get more and more efficient around sustaining capital. And we're not going to end this adventure when we get to the end of the defined program at the end of next year. We have outlined goals. We expect to continue to generate more savings on into 2024 and beyond. There are some things that we aren't even talking about today that require modest capital that will further enhance cost savings. So, we're instilling this as part of our culture, Ryan, and this is just going to be an ongoing march of continuous improvement and greater competitive edge. We've got 14,000 employees that want to win out there every day, and they're highly motivated. Now, Kevin can give you a little insight into where you're going to see these numbers.

Yes. Thanks, Mark. So, as we said, over $600 million run rate at the end of the quarter when you adjust for the fact that some of that's capital from an EBITDA standpoint, it's north of $400 million run rate. And as we look at the detail in the quarter, we are seeing the proportionate share of that show up. It's not necessarily obvious from the externally reported data just because of the other things happening, like the consolidation of DCP into our results and so on. But of that $400 million-plus run rate, half of that or even a little bit more is showing up in Refining, which is where you would expect it to be, given that that's the largest spend area in the company anyway. We're doing this through a combination of organization work. We completed that last year, and we're seeing that benefit flow through this quarter, between the sort of centralization of some of our activities across the organization. We’ve done a lot of work around our processes where we've been looking for ways to standardize and simplify the way we do work, and, in some cases, just eliminate work. And so we've optimized the sort of overall business support model around all of those activities. And then we continue to work on our external spend, the third-party sourcing activities, and leveraging the technologies that we really put the foundation in place with Advantage 66 in terms of the digital progress we have made in those areas. So, a lot of different elements to that, and we'll give more specifics this time next quarter as we have the half-year results available.

Thank you. You mentioned the significance of crude differentials for Refining profitability. Could you share your insights on the recent fluctuations we've observed in crude differentials, particularly the widening and subsequent narrowing, as well as the changes in Canadian heavy differentials? What is your outlook for these crude differentials for the remainder of the year?

Sure, Ryan, this is Brian. I think overall, as you pointed out, sours gained strength since the beginning of the year. And this strength was due to a number of factors. You have now it's starting to weaken, but you have new refinery capacity in China and in Kuwait. You have new US refinery additions on the Gulf Coast at Port Arthur and Galveston Bay. We had an unexpected OPEC cut of 1.1 million barrels. I don't know how much of that cut will actually happen, but that's a large cut. The Chinese economy has been very strong. You can see that economy coming back with more people driving and more people flying, and then lack of sour barrels on the market. So, combination of things that firmed initially, and then the market started to weaken. I will point out that, even though the market has come off since Q1, when you think about the sours, it's useful to remember that while they're weak, they're still weak, but relative to historical perspective, so if you look at Latin American sours like Castillo Amaya, they're still about $4 to $6 weaker than five-year averages. So, those differentials are still weaker than historical although they firmed up some since Q1.

Okay, thank you.

Thanks, Ryan.

Manav Gupta with UBS. You may proceed. Your line is now open.

Guys, I just wanted to first touch base a little bit on the chemical earnings seen the strong rebound it really helps you out, I think do you have a $0.10 improvement in ethylene chain margin? So just trying to understand from the demand point on the chemical side? What are you seeing and should we expect a further recovery in chemical margins given the strong global demand?

Yes, Manav. This is Tim Roberts discussing the chemical sector. We did benefit from lower feedstock prices, specifically ethane, propane, and butane in the United States, which provided an advantage as those prices decreased. This lower price environment improved margins. Additionally, lower natural gas prices contributed to decreased utility costs, further enhancing our performance in the quarter. However, we still face supply and demand challenges. On the supply side, there's increased capacity coming online in the United States, which we need to navigate. Demand is beginning to improve, but we still have to work through existing inventory that built up during supply chain disruptions. It’s also critical for China to recover strongly; there are signs of strength in travel, which is positive. Still, we need to see an increase in consumption and production to meet global demand for polymer products. Overall, it will take time to resolve these imbalances, and we don't anticipate significant changes by the end of the year. However, if China does fully recover, we could see rapid changes in the market. For now, we need to manage our inventory and encourage additional demand, particularly from Asia.

Yes. I would like to add that CPChem's operations have been very strong. Their ability to outperform competitors is due to their effective operations and solid cost position. Even in a challenging environment, they are managing to deliver results and exceed expectations.

Yes, I believe that, Mark, their product line is focused on consumables. There is a slight slowdown in the durables sector, and they have less exposure to that market.

My quick follow-up is if you can provide updates on the progress you're making on your renewable diesel project, and hopefully, it starts up by year-end or early 2024.

Yes, Manav, we're making good progress on the project out at Rodeo. You heard me mention we shut down the Santa Maria facility, which is basically a feed prep unit for the Rodeo facility. The project is moving along. And there are lots of weather challenges out there, but the team has fought through it and dealt with it, and we're looking forward to having that on in the first quarter of next year. I'll remind you that we've had a unit there operating and producing renewable diesel, what we call Unit 250, since April 2021. And I'll tell you what, it's exceeded both our operating expectations and our commercial expectations. And frankly, we're ready for more. We've got a great strategy out there, and we are implementing and executing. And I'll let Brian touch on more of those details.

Hi Manav, to follow up on Mark's point, the margins we've experienced at Unit 250 since we launched it in the first quarter of 2021 have consistently exceeded our projections. Initially, we expected to run it on soybean oil feedstock, but we have also utilized distillers corn oil, canola oil, and pretreated used cooking oil, with active blending of feedstocks happening at the plant now. Overall, we are currently seeing three times the volume of low carbon intensity imports into the US compared to last year, along with increased crushing capacity for vegetable oils. On the marketing front, we're selling nearly all of our production through our branded and retail channels directly to consumers, and we've also sold some volumes to regions offering better credit incentives for certain feedstocks than California. Furthermore, the LCFS programs are presently available in California, Oregon, Washington, and Canada, while other states, including Minnesota and Pennsylvania, have recently proposed similar programs. Regarding operations, we are achieving yields of renewable diesel at over 95%, which is higher than we initially projected, and we are producing 30% more renewable diesel at the plant than we originally anticipated. As Mark mentioned, we are excited about Rodeo Renewed, which will have the capability to produce up to 10,000 barrels of renewable jet fuel with minimal capital investment.

Those are all very encouraging updates. Thank you, guys.

Thanks, Manav.

John Royall with JPMorgan. Please proceed. Your line is open.

Hi. Good morning. Thanks for taking my questions. So my first one is on OpEx. So can you talk about OpEx trends in Refining into the second quarter? It's an item that you don't guide to, but 1Q ticks down, presumably on lower natural gas prices and despite higher maintenance. In 2Q, you'll have an even lower price presumably and less maintenance, and of course, your efforts around costs. So any color on expectations on the Refining OpEx side in Q2 and going forward?

Kevin here, John. Your points are valid. We're going to benefit from lower maintenance turnaround costs, and natural gas prices have stabilized at a low level, so we anticipate a decrease from the first quarter to the second quarter. We're not providing specific guidance on the numbers. On the flip side, utilization will increase, which will have a small impact on some variable costs, but that's a positive development. Overall, you should expect a modest sequential decline.

Great. Thanks, Kevin. And then just on the share buyback in 1Q. You paced a bit ahead of your quarterly pace that you need to hit your longer-term guidance, but 2Q does have an outflow from the acquisition. So should we be expecting a slowing in 2Q? And then further, if the environment were to continue to deteriorate from a cracks perspective, could that impact your pacing as well?

Yes, John, I wouldn't worry too much about the pace of the buyback being affected by the funding for it since we ended the first quarter with a $7 billion cash balance. We issued $1.25 billion in notes, but we still have a term loan facility that has not been utilized yet. We will use that as we fund the buyback. Even if everything else remains constant, we'll maintain a healthy cash balance at that time. We're still generating cash, and I believe our buyback pace should remain strong in the second quarter. Our balance sheet is solid, and operating cash flow is still robust. Although we’ve noticed some weakening in refining margins, the business remains strong compared to our mid-cycle expectations. Therefore, I'm not overly worried about the buyback pace being affected by the DCP acquisition.

Thank you.

Matthew Blair with TPH. Please proceed. Your line is open.

Hey, good morning. I was hoping you could expand a little bit on the dynamics in the Central Corridor in Q1 and then heading into Q2 as well. I think you ran at 89% utilization in Q1? Were Wood River and Borger still impacted by some of the issues from Q4? And then it looks like your margin capture was actually pretty good in Q1, 116%. Was that a function of wider WCS dips? And then, I guess, would we expect lower margin capture in Central Corridor heading into Q2 with narrower WCS dips?

Yes, this is Rich. Regarding the Central Corridor, it's important to note that in the fourth quarter, we faced significant challenges with the Keystone shutdown and the impacts of winter storms, which set a baseline for our quarter-over-quarter analysis. In the first quarter, we experienced an improved feedstock advantage by utilizing heavier crudes and increased our crude slate percentage. This positively influenced our market capture. However, some of these gains were offset by unplanned downtime that began in the fourth quarter and continued into the first quarter. The unplanned downtime at Wood River has now been resolved, and the facility is operational again. We did postpone one turnaround from the first quarter to the early part of the second quarter, and that turnaround is currently ramping up this week. We anticipate that utilization rates for the WRB assets will increase. There were also other minor turnaround impacts that affected our first-quarter results, along with slightly lower market cracks that contributed to that outcome. Overall, we see the Central Corridor moving forward with expectations of rising utilization rates.

Great, thank you for the detailed RD update. I have a follow-up question regarding the LCFS pathways. Some of your competitors have noted that CARB is experiencing delays, causing longer processing times than anticipated. As you prepare to launch the full site in Q1 2024, do you anticipate having all your LCFS pathways ready by then, or could this pose a risk to your earnings contribution?

Well, this is Rich again. We anticipated a surge of activity to secure approvals for the LCFS pathways. We've been working hard to obtain these approvals even before the project starts. Any pathway approved for the Unit 250 operation is also relevant to the Rodeo Renewed project. While we have some concerns, I would say there is a significant number of applications for pathways. We believe we are in a strong position, and this should align with the project's start-up.

Great. Thanks so much.

Paul Cheng with Scotiabank. Please proceed. Your line is open.

Hey guys, good morning. Mark, just two questions. First, with the new California windfall profit penalty, that being passed, how does that change your view, or does it change your view about your California asset, both in the Refining and Marketing?

Yeah. Paul, that's been taking up a lot of intellectual capacity for, I think, the entire industry since that was rushed through. Before that, California was a tough place to manage the refining business, and I think this just makes it even a little more difficult. We're like everyone else, working hard to understand both the intended and unintended consequences of SBX1-2. And it certainly, at a fundamental level, creates more uncertainty, and it's going to make it more difficult for people to step up and invest in the supply chain that the consumers need, because even though you've got a lot of things coming over the hill to reduce demand, today, demand is strong, and you can see what happens when there's disruptions and the supply chain can be pretty tight there. So it's really tough for us to see how this new law is going to benefit consumers at the end of the day.

Mark, do you believe that you or the industry will take legal action against them? I'm uncertain why a penalty would be imposed when the industry hasn't been shown to have done anything wrong.

Yeah. I think that it's logical to assume that industry associations will defend and protect the interests of the industries, and even individual companies may take action. That's certainly going to be up to each company. But from an industry perspective, I think that, that's an angle that's obviously being looked at.

Okay. The second question, I think this is for Kevin. Kevin, you mentioned about in the Refining capture in your presentation, the other corners is a very big positive. And I actually went back to the last, say, four, five quarters. I think mainly without exception, that column is always a negative, that is helping your margin instead of, say, benefiting like what we've seen in this quarter. I think you sort of talked a bit in your prepared remarks. Can you elaborate a little bit more than what that column really represents and why we have seen such an improvement and whether those are sustainable?

The main factor behind the change this quarter compared to last quarter is related to product realizations and differentials. Last quarter, we experienced a significant negative impact due to our market crack for the Atlantic Basin. We base our calculations on a New York Harbor crack, where the distillate and jet crack were particularly strong, while performance was weaker in Europe. Our production is roughly split evenly between New York, the Northeast, and Europe, so the weaker distillate production in Europe negatively affected our overall results. A similar situation occurred on the West Coast, where we use an LA marker that covers the entire region, including Northern California and the Pacific Northwest. When these markets are misaligned, it can lead to variations in our actual product realizations, which is evident in the results. This is the primary factor contributing to the changes this quarter.

And it was really negative impacts from in the fourth quarter.

Yes.

Jason Gabelman with Cowen. Please proceed. Your line is now open.

Hey, thanks for taking my questions. The first I wanted to ask was on kind of global Refining margin structure. There are stories out there that Asian plants are cutting runs while US cracks are still really healthy, $20 a barrel. So the question is, is that kind of a leading indicator that some of that weakness will ultimately make its way over into the US via lower margins, or is it an indication that the global margin environment could be at a floor because we're cutting around somewhere? Thanks.

Hey, Jason, this is Brian. I'd say that as you know, refineries in the US are advantaged relative to European and Asian refineries. And as margins in Asia and Europe have begun to fall, like you said, we're beginning to see runs trim, particularly in Korea, Taiwan, and Europe. Also, China is heading this month into a turnaround season, which should, along with the low US inventories and the fact that we're stepping into summer driving season, begin to help strengthen, in our opinion, global margins.

Okay, great. And my follow-up is on DCP, and I understand the deal isn't closed yet but just maybe wanted to get some early indications on progress. And specifically, I think part of the rationale for the deal was the combined Midstream platform of Phillips and DCP would attract more acreage to fill midstream assets within that platform and support growth there. And so the question is, are there any early indications that upstream companies do view this combined platform as more favorable to partner with to support future growth for Philips? Thanks.

Yes, Jason. This is Tim Roberts. Regarding the second part of the deal, which includes the buy-in and the public units, we expect to finalize that in the latter half of the second quarter, which would increase our economic interest to nearly 87%. As for the rationale behind the deal, we have observed that those who are integrated at the wellhead, particularly in the NGL sector, are more advantageous compared to those who only engage in certain parts of the value chain, such as GNP or transportation logistics, fractionation, and exports. It is challenging to sell wellhead products directly to the market without full participation in the entire process. By combining the GNP segment of DCP with Phillips' transportation capabilities to the dock, we believe we have created a robust infrastructure that can compete effectively. In response to your question about interest from producers, the answer is yes. We have seen significant activity and engagement, as anticipated. Companies are seeking options and alternatives, and we are offering a viable solution that includes the ability to transport barrels from the Houston Ship Channel to less congested areas like Freeport. So far, things are looking promising, and we need to ensure that we convert this interest into tangible results.

Great. That's really helpful. Thanks for the color.

Thank you, Jason.

That concludes the question-and-answer session. I will now turn the call back over to Mark Lashier for closing remarks.

Thank you, Sierra. I just want to recap a few key things. We had a strong start to the year. We had solid first quarter results, and we raised the dividend and increased our share repurchases, which are on pace to deliver our targeted return of $10 billion to $12 billion from July of 2022 to year-end 2024. We've made great progress in Refining with strong turnaround execution, improved market capture, and lower costs. In Midstream, just as Tim mentioned, we advanced Midstream integration and we remain confident in capturing $300 million of synergies. We expect to close on the buy-in this quarter. We're progressing our business transformation initiatives, and we're on track to achieve $1 billion of annual run rate savings by year-end. We remain committed to financial strength, disciplined capital allocation, and returning distributions to our shareholders. We look forward to updating you on our progress. Thank you for all your interest in Phillips 66.