Hello, and welcome to the Second Quarter 2023 Phillips 66 Earnings Conference Call. My name is Alex, and I will be your operator for today's call. Please note that this conference is being recorded. I will now turn the call over to Jeff Dietert, Vice President, Investor Relations. Jeff, you may begin.

Good morning, and welcome to Phillips 66 Second Quarter Earnings Conference Call. Participants on today's call will include Mark Lashier, President, and CEO; Kevin Mitchell, CFO; Tim Roberts, Midstream and Chemicals; Rich Harbison, Refining; and Brian Mandell, Marketing and Commercial. 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 it over to Mark.

Thanks, Jeff. Good morning, and thank you for joining us today. In the second quarter, we had adjusted earnings of $1.8 billion or $3.87 per share. We continued to execute on our strategic priorities and returned $1.8 billion to shareholders through share repurchases and dividends. Our results reflect strong operating performance across our portfolio, demonstrating the commitment of our employees to maintain safe and reliable operations. We want to thank them for their dedication to operating excellence and delivering on our mission to provide energy and improve lives. In Refining, we continue to run above industry average rates, and in Midstream, we had record NGL frac volumes. We continue to run our Sweeny Hub fracs and export terminal at above nameplate capacities to meet strong demand. We remain committed to operating excellence and continue to focus on our strategic priorities to create value and return cash to shareholders. Slide 4 summarizes progress toward our strategic priorities. Over the last 12 months, we've returned 14% of our market cap or $5.4 billion to shareholders through share repurchases and dividends. We're on track to return $10 billion to $12 billion over the 10-quarter period between July 2022 through year-end 2024. In Refining, we had another quarter of strong operating performance with crude utilization of 93% and lower operating costs. As of the end of the quarter, more than $300 million of the $550 million run rate cost savings are attributable to Refining. Kevin will provide an update on our business transformation progress in a moment. We're executing our NGL wellhead to market strategy and capturing DCP integration synergies faster than expected. Our current synergy run rate is over $200 million. We've been successful in identifying additional opportunities to increase our target from $300 million to more than $400 million by 2025. In June, we completed the acquisition of DCP Midstream's public common units for $3.8 billion, increasing our economic interest from 43% to 87%. We ended the quarter with a net debt-to-capital ratio of 35%. We expect leverage to be within our target range by year-end. In Refining, we're converting our San Francisco refinery into one of the world's largest renewable fuels facilities. The capital to convert the facility to over 50,000 barrels per day of renewable fuels production is anticipated to be approximately $1.25 billion. This is an increase from our original premise due to higher-than-anticipated material and labor costs as well as impacts related to weather and permitting. The revised capital cost of around $1.60 per gallon remains well below similar announced projects, and the expected returns are significantly above our Refining hurdle rates. The overall project timing and scope remains unchanged. We expect to begin commercial operations in the first quarter of 2024. In Chemicals, CPChem completed construction of the 1-hexene unit in Old Ocean, Texas, and expects to begin operations by the end of the third quarter. The new propylene splitter at its Cedar Bayou facility is expected to start up in the fourth quarter. CPChem and Qatar Energy are jointly building world-scale petrochemical facilities on the U.S. Gulf Coast and in Ras Laffan, Qatar. On the U.S. Gulf Coast, the Golden Triangle Polymers joint venture has project financing in place. The Ras Laffan petrochemical joint venture expects to complete project financing later this year. Both projects remain on schedule to start up in 2026. Now I'll turn the call over to Kevin to review the business transformation savings and second quarter financial results.

Thank you, Mark. Starting on Slide 5 with an update on our business transformation progress. Our $1 billion business transformation target includes $800 million of cost savings and $200 million of sustaining capital reductions. We have identified over 2,700 initiatives to permanently reduce costs, with employees across the organization actively engaged in the transformation process. We have completed 1,200 initiatives that are generating value today. The chart on the left shows our progress toward the $800 million cost reduction target, with $550 million of run-rate cost savings at the end of the second quarter. The stacked bar shows our actual cumulative cost reductions for the year by category. Over the first half of 2023, we realized $260 million in cost savings. The majority of these cost reductions relate to Refining, which has benefited by about $0.40 per barrel. Business transformation initiatives range from optimizing services across our portfolio of assets to establishing new tools to improve use of steam and energy. Organizationally, we strengthened our centralized model for core functions to drive consistency and efficiencies. We continue implementing cost savings initiatives and are on track to achieve our run rate target by year-end 2023. We expect to realize the full $800 million of cost savings in 2024, which will include Refining cost reductions of $0.75 per barrel. Now I'll move to Slide 6 to cover the second quarter financial results. Adjusted earnings were $1.8 billion or $3.87 per share. The $15 million decrease in the fair value of our investment in NOVONIX reduced earnings per share by $0.03. We generated operating cash flow of $1 billion, including a working capital use of $1 billion and cash distributions from equity affiliates of $239 million. Capital spending for the quarter was $551 million, including $339 million for growth projects. We returned $1.8 billion to shareholders through $1.3 billion of share repurchases and $474 million of dividends. We ended the quarter with 445 million shares outstanding. I'll cover the segment results on Slide 7. Additional details can be referenced in the appendix to this presentation. This slide highlights the change in adjusted results by segment from the first quarter to the second quarter. During the period, adjusted earnings decreased $199 million, mostly due to lower results in Refining and Midstream, partially offset by an improvement in Marketing and Specialties. In Midstream, second quarter adjusted pretax income was $626 million, down $52 million from the prior quarter. The decrease was driven by the impact of declining commodity prices in our NGL business. This was partially offset by higher volumes in transportation. Chemicals adjusted pretax income decreased $6 million to $192 million in the second quarter. The industry polyethylene chain margin increased by $0.03 to $0.20 per pound. However, this was offset by higher maintenance and turnaround costs in the quarter. Global O&P utilization was 98%. Refining second quarter adjusted pretax income was $1.1 billion, down $460 million from the first quarter. The decrease was due to a decline in margins, partially offset by higher volumes and lower operating expenses. Realized margins decreased primarily due to the decline in distillate crack spreads and narrowing heavy crude differentials, partially offset by improved gasoline cracks. In addition, realized margins reflect the impact of losses from secondary products due to declining NGL and coke purchases. Marketing and Specialties adjusted second quarter pretax income was $644 million, an increase of $218 million from the previous quarter, mainly due to seasonally higher global marketing margins on continued strong demand. The Corporate and Other segments adjusted pretax costs were $12 million lower than the prior quarter. The adjusted effective tax rate was 22%, consistent with the previous quarter. The impact of noncontrolling interests was improved compared to the prior quarter and also reflects our acquisition of DCP units on June 15. Slide 13 shows the change in cash during the second quarter. We started the quarter with a $7 billion cash balance. Cash from operations was $2 billion, excluding working capital. There was a working capital use of $1 billion, mainly reflecting an increase in inventory, which included the impact of unplanned downtime at the Bayway Refinery and seasonal storage opportunities. Year-to-date working capital is a use of around $2 billion, primarily related to inventory that we expect to mostly reverse by year-end. We funded $551 million of capital spending. In June, we drew $1.25 billion on a single-draw term loan to partially fund the acquisition of the DCP units for $3.8 billion. This transaction and the redemption of DCP's Series B preferred units of $161 million are represented as repurchase of noncontrolling interests. Additionally, we returned $1.8 billion to shareholders through share repurchases and dividends. Our ending cash balance was $3 billion. This concludes my review of the financial and operating results. Next, I'll cover a few outlook items. In Chemicals, we expect the third quarter global O&P utilization rate to be in the mid-90s. In Refining, we expect the third quarter worldwide crude utilization rate to be in the mid-90s and turnaround expenses to be between $110 million and $130 million. We anticipate third quarter Corporate and Other costs to come in between $280 million and $300 million, reflecting higher net interest expense from funding the purchase of DCP units during the second quarter. In 2023, we expect our full-year capital spend to be above the $2 billion budget, reflecting approximately $200 million of additional spending on Rodeo Renewed. In addition, we just closed on a $260 million acquisition of West Coast marketing assets. This acquisition supports the high-return Rodeo Renewed project by optimizing the full value of our renewable fuel sales to end customers. We continue to review our portfolio to determine if assets meet our strategic long-term objectives or if they provide more value to third parties. Earlier this year, we divested the Belle Chasse Terminal, and very recently, we sold our interest in the South Texas Gateway Terminal. Total proceeds from the two transactions are approximately $350 million. Now we will open the line for questions, after which Mark will make closing comments.

Our first question for today comes from Doug Leggate of Bank of America. Doug, your line is now open. Please go ahead.

I'm not sure who wants to answer this, maybe Kevin, but we've obviously talked ad nauseam about what we think could be a new mid-cycle Refining outlook. But what we haven't taken into account is the continued upgrade to your synergy targets, the faster delivery of your cost reductions, and more importantly, the continued appearance of deferred taxes in your operating cash flow. So, Kevin, I guess my somewhat convoluted question is, what do you think your sustainable mid-cycle free cash flow looks like for the company post these recent series of changes that you've introduced?

Yes, Doug. We had projected cash flow to grow from $7 billion to $10 billion at Investor Day. The reality is that we have taken steps to bridge that gap; currently, we are likely around $8 billion, possibly a bit more, but we haven’t reached the $10 billion mark yet as we still have actions to complete. We are making solid progress from $7 billion to $10 billion. Regarding your point on deferred taxes, we expect a larger-than-usual benefit this year, estimating it at $700 million to $800 million instead of the previously indicated $400 million to $500 million, primarily due to the effects of the DCP buy-in. After this, we anticipate returning to a more traditional range of $400 million to $500 million.

Just to be clear, you have not changed your view of mid-cycle margins, is that right?

That is correct. We have not changed our view of mid-cycle, but we would acknowledge that we are in a stronger than mid-cycle margin environment currently. We have been for the last 1 year-plus, 1.5 years. And barring any major economic downturn, we actually think that will continue for a reasonable period of time, just given the overall supply and demand balances that exist globally.

Okay. Thank you. My follow-up, just a quick one. The step-up in the back piece. Is that a transitory perhaps as a consequence of the DCP process? I'm not quite sure what other things might have delayed you. But I guess my point is that if I look to the $5 billion to $7 billion buyback guidance you gave through 2024, two things come to mind, which is well, it seems to us you could maintain an elevated pace and certainly a pace well beyond 2024. So, I could just wonder if you could just touch on the cash return strategy, and I'll leave it there. Thanks.

Yes, I agree. As you know, aside from the COVID period, we have consistently been buying back shares since we initiated the program in 2012. The increased pace in the second quarter was not primarily related to the DCP transaction. Instead, it was driven by our assessment of our share price at that time and our positive outlook on overall business fundamentals, making it a good opportunity to accelerate the buyback. Given our current situation, it appears to be a wise decision. The $5 billion to $7 billion we indicated during Investor Day is the minimum amount we plan to achieve. This does not preclude us from reaching a total return of $10 billion to $12 billion before the end of 2024, nor does it imply we will stop once we reach that threshold. I would like to emphasize our traditional guidance of returning at least 40% of cash flow to shareholders through dividends and buybacks.

Our next question comes from Neil Mehta of Goldman Sachs. Your line is now open. Please go ahead.

Thank you. I want to stay on the topic of capital structure. The net debt to capital, as you guys indicated, kind of ticked up to 35%, but you indicated that you expect it to move lower by year-end. Talk about some of the things that are moving back into your favor in addition to the strong margin environment, working capital or other items that we need to keep in mind. And how should we think about exit rate for that metric?

Yes, Neil. I think we had given guidance that we expected our debt to cap to increase once we completed the buy-in of the DCP units. And so, it wasn't a surprise to us where we landed on that number. The two big drivers that will bring that back between now and the end of the year are what you pointed to, working capital. So that's about $2 billion inflow in cash that we expect to see between now and the end of the year, and then also just the ongoing ability to generate earnings, generate strong earnings, and build to equity. So, on our math, we think we end the year at right around the 30% level, so the top end of the range, but nonetheless, still within that overall target range. Obviously, this thing will move around quarter-over-quarter depending on what's going on in terms of market environment and cash items like working capital. But fundamentally, we think we're on a reasonable trajectory to be able to sustain in that target range.

Thanks. And then the follow-up is just on Rodeo Renewed. Some changes, it sounds like in the capital scope here. Just can you walk us through the drivers of those changes? And then as we think about against the capital, the type of EBITDA that you can generate from the asset, how has your view of mid-cycle from that asset evolved as you spend more time on the project? Thank you.

Yes, Neil, it's Mark. I'll give a brief overview, and then Rich can provide more details. When we began executing the project, we encountered significant rainfall, which delayed the start due to permitting issues. We believe that the earnings from this project will significantly surpass what we've earned so far from the San Francisco refinery, so we aimed to adhere to our timeline. Consequently, we incurred additional costs to offset productivity losses caused by bad weather and permitting delays. We also faced inflation since, at the time the project was approved, we had not yet faced major inflationary pressures. This is the only project where we are experiencing this impact, and we are addressing it. We still consider the $1.60 a gallon rate to be very competitive. The asset's overall competitiveness is strong, and we have advantages due to our location and retail presence. As we bring this facility online, we plan to produce almost as much renewable diesel as we remove traditional diesel from the market, so the market disruption will be minimal. We are very optimistic about this project, and we believe the economics remain robust despite the rising costs. Rich, would you like to add anything?

Yes, I think you covered most of that, Mark. Maybe I can add just a little bit of color to it. As we talked about, the primary drivers for the increase were material and labor costs. And when you think about the timing of this project, it was estimated and approved prior to the heavy inflationary period. So, we're realizing that inflationary pressure that's occurred over the duration of the development of the project. Half of those costs we'll experience this year. The other half will flow into next year's capital allocation. As Mark indicated, the project is still very capital efficient at $1.60 a gallon, and we're very happy with that and that is very competitive versus other announced projects. And we continue to work full steam ahead on the construction, and it remains on track for commercial operation in the first quarter of 2024. Now I know there's been a lot of focus around the lower LCFS credits over the recent change. But the reality of this, the economics around this project are centered around four programs as well as the retail price of diesel in the state of California and other markets that recognize renewable diesel. And those programs, too, are federal and two are at the state level. And all of these seem to be working interrelationally with each other as well as impacting the feedstock costs as well. So, when we look at the overall momentum and movement of all this interrelationship, we still see very strong economics for the project and continue to be very optimistic about the EBITDA returns on it.

And when you look at those increases across '23 and '24, it will require a modest increase in our capital target of $2 billion for this year, but we will manage that additional cost within our $2 billion target going forward in 2024.

Our next question comes from Roger Read of Wells Fargo. Your line is now open. Please go ahead.

Thank you. Good morning. I was hoping to follow up on the DCP transaction, just how that's gone so far. And while I understand you've raised the, I guess we would call it, cost savings, another part of this transaction was on the revenue synergy side, building a truly integrated model. So, I was just curious what you've seen to date, what you maybe expect in the near term on that or maybe even the medium term on that in terms of how the transaction comes together as a seamless organization.

Roger, this is Tim. Thank you for your question. We began addressing this right after completing the initial part of the transaction last year by assembling our integration teams. Back in the fall, we estimated that we could achieve a value of $300 million through the first quarter of 2025, coinciding with certain contracts transitioning to third parties, which we planned to bring into our system. However, we anticipated most of this value would be realized by 2024. As we delved deeper with our engaged teams, we discovered additional opportunities. That's why we are now comfortable projecting an increase to $400 million, and I hope to provide even more positive updates as we continue our efforts, which will extend through the first quarter of 2024. Currently, our teams are collaborating commercially, and it's important to note that our initial $300 million estimate was comprised of one-third cost savings and two-thirds related to commercial optimization. Now, with the revised estimate of $400 million, the division has shifted to a more balanced 50-50 split between cost savings and commercial optimization efforts. We've identified further savings in procurement, maintenance, and operations. The key focus for us leading into the first quarter of 2024 remains on systems integration. The team is doing excellent work, but this process takes time, and it’s essential to get it right. We are committed to taking the necessary time, and we expect to finish this phase by the end of the first quarter, after which we will operate in what we consider normal, steady-state mode for the business.

Yes, I'd just like to comment a little bit on that, the integration impact. This really is a clear indication of how well the teams are integrating, the DCP team, the Phillips 66 teams coming together. And as Tim noted, once we had operational control of the entity after the Enbridge transaction, we were able to really hit the ground running and started executing against our targets. And getting these teams integrated, one team, one culture, taking the best of the best and driving this, this is really the biggest visible measure of how successful that's been. And we see those numbers move up and we see teams excited about the future and looking at ways to capture more value, both from a cost perspective and a commercial perspective. And so, this is going to be what they are and what they do from this point forward.

Thank you for that. Regarding the $0.40 per barrel refining margin and the goal to reach $0.75, can you provide insight into what this process entails? I understand you've mentioned cost reductions, but how is this being implemented? Is it a matter of applying best practices from one location to others, or is it an overall review of the cost structure? This figure is quite impressive and appears to be sustainable over time. I'm curious about where you began, how you achieved this progress, and your confidence in reaching the $0.75 target within the timeline you've established.

Yes, Roger, this is Rich. We are making significant progress towards our savings target of $0.75 per barrel that we committed to during the Investor Day last November. What excites me most about this process is the engagement from the entire organization. While there is some sharing of best practices from site to site, most of the identified opportunities come from local teams stepping up to improve the business. They are finding ways to enhance efficiency in their work processes and fundamentally altering how these processes operate to eliminate inefficiencies and ultimately reduce costs. For instance, we have already achieved $0.40 per barrel year-to-date, which can be traced back to our production figures for the year and reflects positively on our financial performance. We have more initiatives planned, as Mark mentioned, with a target of $550 million, over $300 million of which is currently linked to Refining. It’s important to note that while the run rate indicates potential savings, it doesn't mean those savings are fully realized yet. It signifies that we have identified these opportunities, and now we need to focus on translating them into actual financial benefits, which is a testament to the organization's effort to bring these opportunities to fruition.

Yes. There are clear similarities in the mindset of our Refining and Midstream organizations. The business transformation process we are undergoing emphasizes the cost impact and the cost targets. However, the most remarkable change is the shift in mindset and the commitment from our employees to improve their daily work. We are transitioning from a pure cost focus to prioritizing value creation and collaboration. This includes organizing our value chain optimization in a more synergistic manner across the refineries, with VCO team members actively participating in refinery leadership to find optimization and coordination opportunities. This mindset and drive are vital for making our cost savings and synergy achievements sustainable in the long term. This approach will become our standard business practice moving forward.

Our next question comes from John Royall of JPMorgan. Your line is now open. Please go ahead.

Hi. Thanks for taking my question. So, my first question is on the Bayway FCC. I think your last official statement was around mid-July for the restart. We saw reports after that, that it was the end of July. I'm not sure if that's been confirmed. So, if you can just update us on the status of the unit and when you expect it up and running full if it's not now.

John, this is Rich. The FCC repairs were completed, and the unit has been operational since July 20. That is when it resumed producing material that meets specifications. The refinery has returned to normal operations, and all units and assets are functioning according to our plan. The Bayway team did an exceptional job completing the repair work efficiently. I am very pleased with their performance in finishing that task. Additionally, while Mark was discussing this mindset activity, we noticed other areas of our organization putting in efforts to support our teammates at Bayway who were facing challenges. This resulted in outstanding performance at our refineries in Sweeny, Ponca City, and Billings, each achieving record performance, along with our assets on the West Coast. All of this led to a system-wide utilization of 93%, the highest crude utilization we've seen since 2019. We are eager to build on this momentum and continue into the third quarter.

Great. And then I know it's early on but maybe sticking with Refining. You could give us possibly some expectations on some puts and takes around captures for 3Q. And then relatedly, maybe you can weave in your view on WCS dips from here. We've widened out a fair amount off of bottoms but still look very tight. So, any views there into 2H would be helpful.

It's Brian. I'll talk about product demand and share our thoughts for Q3. The strength in U.S. products is primarily due to low inventories. Gasoline stocks are 7% below five-year averages, and distillate stocks are 19% below those averages. That's significant. We have a lot of new capacity coming online in the U.S., but we've experienced even more outages than the additional capacity. Gasoline demand is up about 2% from last year in the U.S. and about 4% globally, indicating strong demand. Distillate demand is slightly down in the U.S., mainly in industrial manufacturing segments, but it is increasing globally. Latin America shows a 9% increase in distillate demand, Asia has seen a 4% increase, and diesel cracks are robust and expected to remain strong moving into the higher demand planning season and winter in the U.S., with distillate outpacing gasoline in every region now. Regarding jet fuel, demand is also strong, with low inventories and an increase in both domestic and international travel. Global seat demand is nearly flat compared to 2019 levels, and TSA throughput numbers in the U.S. have returned to 2019 levels. Additionally, U.S. jet yields are slightly higher, which should provide some additional strength to diesel. As for WCS, it has started to widen again, which is beneficial for us since we purchase a large amount of WCS. The widening is due to a general increase in heavy crude dips, and fall turnarounds in pad 2 are looking very strong. Also, in September, we'll begin Dillon blending, which will increase the volume of Canadian crude. All these factors are putting pressure on and widening the dips to our advantage.

Our next question comes from Ryan Todd of Piper Sandler. Your line is now open. Please go ahead.

Hi, thanks. We don't usually discuss Marketing much, but your Marketing business consistently seems to exceed expectations. The contributions for the first half are quite comparable to last year's first half, which was also higher-than-anticipated at year-end. Is it possible that this business is fundamentally stronger than we realized or than what you've projected? What do you think is driving the ongoing strength in the Marketing area?

Ryan, this is Brian. Exceeding expectations is a good thing. We're happy about that. We did have a strong quarter in Q2. We've added a bunch of retail JVs since 2019. We're roughly at 750 retail stores, which have really performed well since we've added them and certainly in 2Q. We had higher margins, as Kevin mentioned, in both the domestic markets and in our Western European business. We had U.S. volumes up a bit. And finally, in our lubricants business, the base oil business has been performing really well as the feedstock prices have been falling more than the base oil prices. So, I'd tell you for Q3, when you're thinking about Q3, our earnings should be in line with our mid-cycle expectations, assuming the kind of normal seasonal demand.

Yes. I would just comment over again and compliment Brian and his Marketing team on the execution of the strategy that they've held for several years is to go in and participate through these joint venture opportunities in markets that make sense for us, that we have a competitive advantage that there's strength to capitalize on. And we don't go and do this everywhere. It's very surgical. It's very intentional, and it is exceeding expectations so it's a well-executed strategy.

Thank you for the update. I have a follow-up regarding Rodeo based on your earlier comments. As we consider the timeline leading up to the start-up in the first quarter of 2024, are there any permits still pending or legal challenges we should be aware of? What potential risks do you see, or what aspects are you monitoring as we approach the commercial start-up?

Yes, Ryan. Permitting to complete any project in California is very challenging, projects even to convert a conventional crude oil facility refinery to a lower carbon intensity transportation fuel production facility. So, we did recently receive news on an appeal to our environmental impact report that is the supporting document for permits. This was filed by a couple of NGOs in the state. And the good news is the court ruling found several issues in the favor of Phillips 66. And notably, most notably is the construction of the Rodeo Renewed project can continue with the county work to resolve three issues. So, we're working closely with the county and the courts to provide the necessary information to reconsider the open issues. And we remain very confident that the Rodeo Renewed project is on track to start commercial operation in the first quarter of 2024.

Okay, thank you.

Thank you.

Thank you. Our next question comes from Jason Gabelman of Cowen. Your line is open please go ahead.

Hey, thanks for taking my question. I wanted to follow up on Ryan's question just now on Marketing and the outlook for 3Q. There were reports of droughts in the Rhine River. And I think typically when that happens, you're positioned to supply that region well and take advantage of margin moves there. Have you seen any strength in 3Q, or early 3Q as a result of those outages? And would you expect, as a result, continued outperformance in Marketing in 3Q? And then conversely, what you're seeing on chems, we've seen chain margins fall into July. Just any views on the outlook there into 3Q and then beyond that when you expect Chemical margins to move back to mid-cycle?

Hey Jason, it's Brian. So far in Western Europe on the Rhine, we haven't seen water levels low enough to benefit us. It is true if water levels do get low, we benefit from that. But the water levels haven't gotten there yet. Can't really predict where they're going to go in Q3, but if they get lower, then we'll have some benefit.

Yes, this is Tim Roberts speaking about Chemicals and the current state of chain margins. It has been an interesting period, with supply outpacing demand, resulting in a decline in chain margins over the last few quarters. Currently, IHS indicated an increase of about $0.12 in chain margins. Looking ahead, we believe that high-cost producers in both Asia and Europe will set the pricing, while those with advantageous feedstock locations will continue to operate at higher capacities, which is what we are observing in North America and the Middle East. In contrast, others are either reducing capacity or managing production for various reasons. Fundamentally, we need supply and demand to align and begin reducing inventory levels. In North America, ethylene inventories are above the five-year average, indicating a need for reduction. We see similar trends in polyethylene, which are two key products for our CPChem joint venture. However, we are performing strongly, with robust exports from North America due to our favorable feedstock situation. Our outlook suggests that we need to reach a low point before we can recover. While I cannot confirm that this is the turning point, cash costs typically determine where the bottom lies and the speed of recovery. We believe that low costs and low prices will eventually resolve pricing issues. Overall, we remain optimistic, as population growth continues, and economies, including China, are poised for recovery, even if it is not consistently seen on a global scale. We expect this recovery will help absorb excess capacity, rebalance markets, and lead us back to a mid-cycle scenario.

Great. That's really helpful. And my follow-up is just on acquisitions and divestments. You mentioned it at the top of the call that you continue to evaluate the portfolio. As you look across the various segments you operate in, any thoughts on where maybe you have non-core positions or you have some portfolio gaps? And how are you viewing the broader M&A market? Thanks.

Yes. I think that again, as Kevin mentioned earlier, we looked across our portfolio, and there's different dimensions across our portfolio where others may have some interest in our assets and may place a greater value because it's not strategic to us and we'll continue to evaluate that. I wouldn't comment on any specific opportunities. And likewise, as we did with Marketing in California, we made some relatively small acquisitions to enhance the opportunities around Rodeo once it's up and running, and we've done a series of those and they're all doing quite well. And so, we'll look at smaller opportunistic things. But you think about where we've come from, we've done some pretty significant transactions in Midstream. It's time to digest those and to drive value through those. And if we can find some very accretive small, midsized kinds of things, we'd look at them, but there's nothing in the queue and nothing that we'd want to comment on. We've got a great backbone there, and history has shown that the strong backbone in that industry can attract smaller investments that are quite attractive. So, think in terms of small, very accretive, high-return opportunities like we've done in Marketing would be on our scale. But we're going to stick with our disciplined approach going forward. We've got a commitment of around $2 billion for 2024, and anything around that would be very disciplined and high return.

Great thanks for the call.

Thank you. Our next question comes from Manav Gupta of UBS. Your line is open please go ahead.

I want to start on the East Coast. That was a 52% margin capture. That's a significant drop from the last quarter. Was it primarily the outage at Bayway? Can you talk about some of the factors that led to such a significant drop on the East Coast and margin capture?

Yes. No, this is Rich. Over in that, what we refer to as the Atlantic Basin, we did have higher volumes and lower costs due to less turnaround activity at Bayway quarter-over-quarter when you look at those. But a lot of those were offset by lower margins. The realized margin was lower primarily due to a weaker market crack. Configuration impacts also played into this with the gasoline cracks increasing by $10 a barrel and then the distillate crack decreasing by $18 a barrel. That played into the market capture quite a bit. And there was lower product differentials there. And then the other one that goes a little bit unnoticed in this market is really the secondary product cost and margins on those secondary products. And both the NGLs for both Bayway and Humber were lower. And then the petroleum coke that sold out of Humber also experienced lower product differentials. So, those are the primary reasons you saw lower market capture there in Atlantic Basin.

Can you discuss the TMX expansion? There is significant capacity being added as crude will be transported to the West Coast starting next year. How do you think this will affect the WCS and WTI differential outlook?

Hey Manav, this is Brian. First, we believe that TMX will likely come online later in the year, although the line fill is expected for early Q1. I don't think the line will be fully filled. Our expectation is that some of those barrels may be exported to Asia, but we'll see if that occurs. There are challenges with transporting VLCCs there; they can’t be loaded directly and must be loaded ship to ship outside of L.A. We'll have to wait and see how things develop. However, having more of that crude could definitely benefit the West Coast.

Thank you. Our next question comes from Matthew Blair of Tudor, Pickering, Holt. Your line is open please go ahead.

Hey, good morning thanks for taking my question. On the Midstream side, did Phillips unwind any of the DCP, NGL, and Nat gas hedges? And if so, could you quantify the impact that flowed through the Midstream EBITDA in Q2?

Yes, Matt, this is Kevin. We have unwound those hedges, or they have naturally rolled off, and now we have less exposure in that area. Our hedging strategy regarding the natural gas and NGL commodity prices is different from what DCP historically maintained in our overall portfolio. Additionally, considering our role in Refining as a consumer of those products, it seemed more suitable to allow the natural offsets to come through. We have made these adjustments but have not provided specific numerical figures. What we have done is update the sensitivities for Midstream to show that those hedges are no longer in place, resulting in a slightly higher sensitivity to commodity prices than previously observed.

Okay, sounds good. And then I don't know if I missed it, but did you give out a number for refined product exports in Q2? I think a year ago, it was 153,000 barrels per day. How did it trend this year? And are you seeing a mix shift with more barrels headed to Europe and fewer to Latin America?

This is Brian. We exported over 200,000 barrels this quarter, which was up. In large part, our Sweeny refinery was making some higher sulfur diesel that we exported to Latin America. Like others have said, we have been exporting more distillate to Europe as trade flows from Russia change and Russia is importing more barrels, particularly into Brazil, 120,000 barrels to 140,000 barrels, and where U.S. exporting more barrels to Europe.

Brain. Thank you.

Thank you. Our next question comes from Paul Cheng of Scotiabank. Your line is open please go ahead.

Thank you, good morning guys. I think this is for Mark. Mark, if we look at California, you still have the Carson and Wilmington, combined refinery. Today, probably 60% of the diesel in California being consumed by renewable and biodiesel. And that in several years' time, you may end up that to be 100%. So, what's the role of that facility going to look like, and how your configuration may need to change?

Yes, that provides a general overview. Paul, I believe Brian has some insights on the current situation as well. On one hand, we're well connected to LAX from that facility, and there is significant potential for jet fuel production, which we are definitely considering increasing. One factor to consider is that as we take the San Francisco refinery offline, the diesel production will cease, which will impact the market. However, there is a nearly equivalent opportunity to replace it with renewable diesel. Additionally, there are current exports from California, and Brian can elaborate on that, which presents a chance to balance the market.

And Paul, I would add, the best amount of distillate producer at LA is actually exported by pipeline to neighboring states. So, we don't make a lot of California distillate at that refinery. So, it's, for us, at least a nonissue.

Okay. Do you believe that, in the long run, it should be included in your portfolio? Or considering the political climate and other factors, do you think there might be a need to take action similar to what was done for Rodeo?

Well, yeah Paul, we're looking at everything we can do to keep the LA refinery competitive in that environment. It is, frankly, a difficult environment. And it's been very publicly, politically challenging there, whether it's EV mandates. But we believe that it's going to be challenging for California to implement their aspirations around EVs so I think that may be overplayed. But we're watching the market's environment very carefully and doing everything that's in our control to keep the LA refinery competitive and supplying products in that market.

Okay. And the final one, I think this maybe is for either Rich or Kevin. When we look at your margin capture or that your margin realization in Central Corridor, you're actually doing better than we thought. Is there any one-off benefit that we see or it's just normal market condition and that recovery from the downtime in the first quarter? Thank you.

Paul, this is Rich. I'll start it off here with an answer. The Central Corridor, the primary reason that you're seeing is a really strong performance from our facilities there. It's specifically Ponca City and the Billings refinery. Both of those facilities have been running very, very well over the last several quarters and continue to operate, exceeding expectations on utilization as well as clean product yield, which is improving the market capture there.

And just to clarify, it's not a function of one-off items that are benefiting. It is all operational, as Rich described.

Thank you. Our next question comes from Joe Laetsch of Morgan Stanley. your question is live please go ahead.

Great thanks on Beyond. So, I wanted to go back to a couple of topics we've already hit on. But first on Chemicals. So, with the two CPChem projects starting up in the back half of the year, could you just give us a sense of earnings contribution and uplift, probably 2024 on a normalized margin environment from those two projects, just how we should think about that?

Yes. On that, Joe, probably to clarify, those projects are expected to start up in 2026. And so, on the hexene units, okay. So, with regard to the hexene unit, yes, that 1 was completed. We're looking at that, my apologies here. I was thinking of the bigger projects. 1-hexene has been completed down at Sweeny. They'll be in start-up mode through the third quarter. And you should probably start to see some level of earnings start to show up in the fourth quarter. The splitter project, which is up at Cedar Bayou, that project also is in the final completion at this point or they're going to be ready to get everything completed by the end of sometime in the mid-fourth quarter, excuse me. So, you're really probably not going to see anything meaningful as they go through shaking out the units, getting them started up. And probably for both of them, you may be probably landing more toward a grueling first quarter before something really starts to show up there.

Yes. And CPChem executed the hexene project and brought it in under budget as well so I think that's notable in this environment.

Great. Thank.

Thank you.

Thank you, Alex, and thanks to all of you for your questions. We delivered strong second-quarter financial and operating results as we executed on our strategic priorities by focusing on the things we control, most importantly, the commitments we made to our owners in November. We continued a healthy pace of returning cash to shareholders. And in Refining, we had another quarter of strong operating performance with above-industry average crude utilization and lower operating costs. We're executing our Midstream NGL wellhead-to-market strategy and completed the buy-in of DCP's units and raised our synergy targets to over $400 million, wrapping up a series of foundational transactions to drive value creation in our NGL business. We're realizing our business transformation initiatives and are on track to achieve at least $1 billion of annual run rate savings by year-end while driving a transformative mindset across the enterprise. As we deliver on our strategic priorities, we remain committed to financial strength, disciplined capital allocation, and returning cash to shareholders. The outstanding operational performance will position us to capture the current strong market environment in the third quarter. And we look forward to updating you on our progress. Thank you all for your interest in Phillips 66.

Thank you for joining today's call. You may now disconnect your lines.