Welcome to the Third Quarter 2024 Phillips 66 Earnings Conference Call. My name is Emily, and I'll 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, Investor Relations. Jeff, you may begin.

Welcome to Phillips 66 earnings conference call. Participants on today's call will include Mark Lashier, Chairman and CEO; Kevin Mitchell, CFO; Don Baldridge, Midstream and Chemicals; Rich Harbison, Refining; and Brian Mandell, Marketing and Commercial. Today's presentation 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. Welcome, everyone, to our third quarter earnings call. The strength of our results in a challenging refining market demonstrates the benefits of our differentiated downstream portfolio. During the quarter, we continued to execute on our strategic priorities and delivered strong operating performance. Since July 2022, we have returned $12.5 billion to shareholders through share repurchases and dividends. We're approaching our $13 billion to $15 billion target. In refining, we've reduced our cost by $1 per barrel and we continue to run our system well. The improvement in clean product yield reflects our investments in high return low capital projects. We continue to evaluate all of our assets as part of our strategic priorities and ongoing portfolio optimization. We recently agreed to sell our 49% interest in a Switzerland-based retail joint venture for approximately $1.24 billion. Our asset dispositions are now expected to exceed the $3 billion target. We plan to use the cash proceeds to support our strategic priorities including returns to shareholders and debt reduction. During the quarter, we achieved the targets on two of the six priorities ahead of schedule. First, we have accomplished our $1.4 billion business transformation cost reduction target. We've driven a permanent shift in the way we work and we remain diligent with a culture of continuous improvement. Our employees have done an incredible job delivering on this commitment and the results are clear as Kevin will cover later. Secondly, we achieved our $400 million synergy target across our NGL wellhead-to-market value chain. This brings the total uplift in mid-cycle adjusted EBITDA to $1.4 billion from acquiring and successfully integrating DCP Midstream. Slide 4 shows the growth of our Midstream business. We have advanced our wellhead-to-market strategy through organic projects and strategic transactions that provided significant synergies and strong returns. Our Sweeny Hub became the second largest NGL fractionation hub in the U.S. with the completion of Frac 4 in 2022. The DCP transactions strengthened this competitive position by fully integrating our value chain. In the third quarter of 2024, we further expanded the business with the acquisition of Pinnacle Midstream. We also approved the construction of an adjacent processing plant with startup expected in mid-2025. On a trailing 12-month basis, Midstream's adjusted EBITDA has increased to $3.7 billion from $2.1 billion three years ago. In addition, Midstream adjusted EBITDA is ahead of 2024 guidance despite weaker natural gas and NGL prices. The stable cash generation from this business covers the company's dividend and our sustaining capital. We continue to high-grade our portfolio and capitalize on our growth platform to generate strong returns and significant free cash flow. Before I wrap up my opening comments, I want to acknowledge our previously announced plans to cease operations at the Los Angeles refinery in the fourth quarter of 2025. The uncertainty of the long-term sustainability of the refinery and market dynamics were key factors in this decision. We are evaluating the future use of the property and will work with the State of California to continue to supply transportation fuels to meet customer demand. As we work towards decommissioning, we're grateful for our employees' continued focus on safety and operating excellence. We are committed to treating all of our employees and contractors fairly and respectfully throughout the process. We continue to deliver on our strategic priorities and targets. I look forward to providing an update on the next earnings call. Now, over to Kevin.

Thank you, Mark. Slide 5 provides cost detail at the total company level through the end of the third quarter compared to the same period of 2022. We have supported growth while mitigating inflationary impacts through business transformation and synergy capture. Through the first nine months of the year, we have realized approximately $700 million in cost reductions including our share of WRB costs. In addition, we have reduced logistics spend by $200 million; these costs flow through gross margin. We lowered sustaining capital spend and continue to prioritize safe and reliable operations. Slide 6 shows the business transformation reduction to refining cost per barrel. Adjusted controllable costs excluding turnarounds are $5.84 per barrel year-to-date; we have eliminated $1 per barrel of costs, achieving our target ahead of schedule. Slide 7 covers key financial metrics. Earnings were $346 million. Adjusted earnings were $859 million, or $2.04 per share. The adjusted results exclude special items, which include a legal accrual in the third quarter. We generated operating cash flow of $1.1 billion and returned $1.3 billion to shareholders. I will now move to Slide 8 to cover the segment results. Adjusted earnings decreased $125 million compared with the prior quarter. Midstream results decreased mostly due to seasonal maintenance costs and lower equity earnings, reflecting the sale of our interest in the Rockies Express pipeline. These decreases were partially offset by higher margins on LPG exports. In Chemicals, results increased mainly due to higher polyethylene chain margins and lower costs. Lower refining results primarily reflect weaker crack spreads. Capture of the new indicator was 92% in line with the previous quarter. In addition, the plan to cease operations at our Los Angeles refinery resulted in the acceleration of depreciation. The impact in the third quarter was $25 million. Going forward, we expect approximately $230 million per quarter of additional depreciation through the fourth quarter of 2025. Marketing and specialties results were higher, mostly due to seasonally stronger margins. In renewable fuels, results decreased due to lower realized margins. The Rodeo Renewable Energy Complex produced 44,000 barrels per day of renewable fuels during the third quarter. Slide 9 shows the change in cash flow. Cash from operations, excluding working capital, was $1.5 billion, supported by the stability of our Midstream and Marketing and Specialties businesses. Working capital was a use of $381 million, mainly reflecting the impact of falling commodity prices. In July, we acquired Pinnacle Midstream for $567 million. Also during the quarter, we received cash proceeds of approximately $200 million from the sale of non-core midstream assets. Looking ahead to the fourth quarter, in Chemicals, we expect the global O&P utilization rate to be in the mid-90s. In Refining, we expect the worldwide crude utilization rate to be in the low to mid-90s and turnaround expense to be between $125 million and $135 million. Full year turnaround expense is now expected to be $485 million to $495 million. This is a reduction of more than $100 million from our original guidance. We anticipate corporate and other costs to come in between $300 million and $330 million. Now, we will open the line for questions, after which Mark will wrap up the call.

Thank you. We will now begin the question-and-answer session. Operator Instructions. Our first question comes from John Royall with JPMorgan. Please go ahead. Your line is now open.

Hi, good morning. Thanks for taking my question. So my first question is just on your decision to shutter your remaining conventional capacity in California. Can you just talk about what went into that decision and how much did recent regulatory changes play into that decision? Or was this something that you had planned even after that?

Good morning, John. As we've stated in our strategic priorities, that we will do an ongoing evaluation of all of our assets. And so the LA decision really was part of that. The Los Angeles refinery has been under significant market pressure. And the refinery, if you think back historically, was originally designed to process in-state California crude production and that's declined by about 75%. So the continued outlook in California in the face of declining diesel and gasoline demand was a pretty tough one. When we took that given outlook for the markets and also factored in California's stated policy to move away from fossil fuels, we expected California to be a pretty challenging refining market going forward. We also have the typical maintenance and regulatory spending that we face, and that's only going up. There are a lot of factors that go into these decisions, and these decisions are only made after we do an exhaustive review of all of the alternatives. That exhaustive review led us to idle the refinery as we announced earlier this month. So it wasn't any kind of knee-jerk reaction in the face of any policy changes in California. This has been a long-term analysis.

Great. Thank you, Mark. And then my follow-up is on the balance sheet and maybe you could just talk about your outlook for the balance sheet and perhaps where you think you could finish the year on leverage following the sale of the Swiss business and potentially the Germany and Austria business and recognizing there are a lot of moving pieces around working capital and some other things. But just any guidance on where you could finish the year on the balance sheet?

Yes, John, it's Kevin. We certainly expect to finish the year with a stronger cash or net debt position than where we are currently. That will be partly reflected by proceeds from asset dispositions, but the bulk of that is going to be 2025. So we expect the Swiss business transaction to close in the first quarter of next year, and the Germany, Austria retail business; we're still in active negotiations around that, and so that will be a 2025 item as well. Nonetheless, the proceeds from dispositions give us a lot more added flexibility as we think about balance sheet priorities, continuing to return cash to shareholders, and also investment in the business. And just as a reminder, from a capital allocation standpoint, the first priority is sustaining capital, that's about $1 billion per year. The second priority is the dividend, that's approximately $2 billion per year. Everything after that is available for investing in the company and growth, returning cash to shareholders, which the dividend obviously is a part of that, but also share repurchases and then the balance sheet and debt reduction. We're a bit off of our target leverage metric, and we expect to get closer to that. It'll take a little while when you look at the different components of the debt and equity on that, but we expect to be moving our way towards that objective.

The next question comes from Roger Read with Wells Fargo. Roger, please, go ahead.

Yes. Thank you. Good morning. Kevin, I have two questions for you here. I'll just throw them together. One is, we think about the stated savings, the $1.4 billion on the synergies or, I'm sorry, on the overall cost reduction plan, the $0.4 billion from the synergies with DCP offset by the inflation that's in Slides 5 and 6, I think, which it sounds like you're using a standard CPI there. I just would like to maybe dig into a little bit of how we look at those two moving parts, one, pretty substantial savings, two, inflation that's out there. You mentioned it comes out of the operating costs, but those can also be impacted by seasonality, by maintenance and so forth. But how we should really look at that on a net basis and what's the maybe inflationary pressure going forward?

Yes. I think as you look at that, and as you point out, we highlighted the inflationary impact; we also highlighted the market impact. You could say those are two versions of similar factors. They're market-driven; they're outside of our control. One of them has been a headwind for the last couple of years. The other one has been a tailwind for us with lower natural gas prices, primarily. What we're trying to focus on, as you would expect, are those things that are directly within our control and that's reflected in that cost reduction bar on the chart. On market, I wouldn't be completely dismissive of that being outside of our control because we are also, as part of our cost reduction initiatives focused on energy reduction in terms of volume quantity. That is something that we're very focused on as well. It is consistent with our environmental GHG objectives around that. On a go-forward basis, I think the worst of the inflationary pressures are behind us and we'd expect that that has somewhat normalized on a go-forward basis. So, lesser headwinds than we have experienced over the last couple of years.

And then, just as a follow-up to that, the $100 million reduction in the turnaround costs, is any of that related to the LA issue, the shutdown, or is that just outperformance during the year?

Hey Roger, this is Rich. There are really two key factors in that $100 million reduction in our outlook. Half of it's attributed to this enhanced inspection process that we've been putting in place over the last several years. It's allowed us to actually extend the intervals between turnarounds. So some of that data was coming in this year on some planned turnarounds, and after we had a chance to evaluate it, we were able to defer those turnarounds. That's roughly half of that $100 million. The other half of the $100 million is the organization's execution of the work. They've actually gotten much more efficient at our execution through a number of initiatives that we put in place with turnarounds and we're seeing the fruits of that labor come through now, so.

The next question comes from Neil Mehta with Goldman Sachs. Neil, please go ahead.

Yes. Good morning, team. Just want to follow-up on the comments around balance sheet and capital allocation. And you guys have made a tremendous amount of progress in returning capital to shareholders via buyback and dividends. But how do you think about the pace of that going forward and what appears to be a softer commodity environment?

Yes, Neil, for the last year-and-a-half or longer, we have been very focused on the commitment that we put out there, the $13 billion to $15 billion target, and that has somewhat informed our decisions around the pace of buybacks. As we get to the end of that, I think we will move to more of a, in excess of 50% of operating cash flow being the return to shareholder metric. We talked about that, I think on the last call that the go-forward assumption around this is 50% or more of cash from operations being returned to shareholders. I think that's a good way to think about this as you model out into 2025 for that metric.

Okay. That's helpful. And then we saw very solid strength in the Chemicals business relative to some of your peers this quarter. And then marketing ticked up, I would imagine some of that is just because crude softened at the end of the quarter. But can you talk about those two businesses and the outlook as we think about the sequential into fourth quarter and early next year?

Well, Neil, I'll take the chemicals side of that. And we've seen CPChem's performance strong. They're able to operate at high rates when others have had to cut back because of costs. I think that they don't have any operation or much operations exposure in Europe, which is beneficial. And they've got their advantaged feedstock position, low-cost ethane in two locations in the world that they've really been able to lean into. You do see some seasonal softness coming in this time of year, which is pretty typical. Lower crude prices also make naphtha producers' floors a little bit impacted there as well. But on the long-term, we see continued improvement in the macro for chemicals. They're coming out of that trough of a year ago; they continue to make good progress. They continue to see demand from their perspective and their ability to capture the market increasing and we see that going forward.

Hey Neil, this is Brian. On the marketing side, Q3 is typically marketing's strongest quarter and during the quarter marketing had improved margins in the U.S. across both wholesale and franchise channels, driven as you mentioned by falling spot prices. We also saw some stronger volumes additionally in the lubricants business base oil margins also improved with falling feedstock prices. But going forward, expectations for the M&S segment in Q4 are just a seasonal pullback in earnings consistent with what we call mid-cycle Q4 earnings.

The next question comes from Ryan Todd with Piper Sandler. Ryan, your line is now open.

Thank you. I have a question regarding the refining sector. You've made significant strides in reducing costs, enhancing reliability, and increasing utilization rates, as well as improving your refining capture rate. However, refining earnings are still facing challenges in the current market, a situation that affects everyone. We are currently below mid-cycle margins, and it appears you are still some distance from meeting your refining business targets, even under mid-cycle conditions. What is your perspective on your current progress, and what should we anticipate in the next 12 months to facilitate the next phase of improvement in refining profitability?

Yes, Ryan, this is Mark. I'll just comment at a high level that I do believe that we're still on that journey. We've pretty dramatically enhanced our cost position and we'll continue to do so. We are focused on being competitive and continuing that journey. And we've also been very deliberate in just working away at these small projects that have quick payouts that enhance our ability to capture the market. In our strategic priorities, we've got things that we see in 2025 and things that we see happening by 2026. We've got a long list of things that we can continue to work away at in refining to enhance our competitive position and increase our ability to capture value from the marketplace.

Yes, so maybe I'll just add a little more color to that. This is Rich. So we had three primary improvement focuses in refining. First, is the cost reduction and that's a slog, right? It's getting in the mud pit, digging it out and pulling out these expenses that are very sticky, takes a lot of organizational effort to do that. I'm very happy with the organization's performance on this. We've exceeded our original expectations, and now we've removed over $600 million of cost out of the cost profile for refining. So we're not declaring infinite success with that. We will move to what I'll call a continuous improvement mode on the cost. But I will shift the organization's attention now to the earnings per barrel focus here as we move into the future. That is taking advantage of what Mark was talking about, which are these small capital projects with high returns and we will continue to execute those. We still have a laundry list of those projects to go. There are also efforts that we utilize our existing equipment and make sure that we are extracting the highest level of value out of that. We see some opportunities across the system. We're going to focus on that and continue to extract that value out. And of course, Brian's organization is working diligently. This integrated model that we have is really about extracting the value out of the entire value chain. The commercial organization is the glue that keeps that together. We've got a lot of initiatives that we're working on on that front. You add all these up; they're well over $1 billion of impact to our earnings at mid-cycle pricing. I'm very confident that when we get back to mid-cycle pricing scenarios that you'll see the performance of the refining organization hit the $4 billion to $5 billion range of earnings.

Great. Thank you. And then maybe one more, as we look at renewable diesel and we think about the path to improvement there, can you maybe walk through how you think about the path to improvement in 2025 both in terms of the broader market? What are some of the levers or moving pieces that you think drive improvement in terms of the macro backdrop and then maybe Rodeo specifically? What are things that you're looking to do that will drive improvement in terms of the profitability there?

Sure. This is Brian, Ryan. Maybe to start kind of where we are today, we're still in startup mode for the Renewable segment. So I think we've had some startup costs. We're also running higher or lower CI, but we're also running some higher CI now in Q4. I think if you think about renewable diesel margins going into Q4 and beyond, we think margins are going to strengthen for a number of reasons; feedstock prices remain depressed. There are a number of plants that continue to struggle. Some of the RD production is going to be converted into renewable jet production, like some of our competitors on the Gulf Coast, and we will do as well. There are fewer imports into the U.S. tighter West Coast old diesel market with refinery production issues. We've seen some renewable diesel from our competitors come from the Gulf Coast into the West Coast and then just the stronger credit markets with the tightening of those credit markets and the disincentivizing of biodiesel production. So all those things together I think will drive renewable diesel margins stronger as we go forward.

The next question comes from Manav Gupta with UBS. Please go ahead. Your line is now open.

Good morning. I wanted to focus a little bit on your central corridor earnings. You were up $65 million quarter-over-quarter or 26% quarter-over-quarter. That is something we haven't seen in the Mid-Con region. It's a very strong help us understand what were the factors helping you out. And we understand you have very good assets over there, but generally talk to us what really helped you out to deliver such a strong performance in Central corridor.

Hey Manav, it's Rich. Thanks for pointing that out. We're very happy with the performance of the Central Corridor operation. There are a couple of factors here that played into the outperform. One of the margins were higher, which increased mainly due to favorable impacts on our inventory hedges. So with the WTI price falling quarter-over-quarter, that hedge was a positive tailwind for us on that. We also had the benefits of the WCS heavy crude dips, which are included in our indicator, but that benefit was also seen in the Mid-Con area as well. There was a 10% increase quarter-over-quarter in the cracks for the region. We did see that positive move there. We also saw lower product differentials as a result of that as well. Our secondary products also played into this tailwind for the quarter. We saw improved pricing in both the NGLs and the heavy intermediates. This all pulled together with very good operating performance for the region. We had 100% crude utilization and 89% clean product yields, which are two very, very good performances by the assets.

Perfect. My quick follow-up here is you are at $2.7 billion on asset sales of the $3 billion, but you still have a marketing package out there in Europe. So how should we think about asset sales proceeds for the next 9 months or 12 months?

I think the way you should think about it, Manav, is it's part of that portfolio optimization. It's ongoing. We've defined what we think are non-core assets. That $3 billion was considered as a floor that we would hit. We will continue to evaluate non-core assets and move forward with any dispositions that we view as favorable for us.

The next question comes from Matthew Blair with Tudor, Pickering, Holt. Matthew, please go ahead.

Thank you, and good morning. Your Refining capture held up reasonably well in the third quarter at 92%, compared to 93% in the second quarter. Typically, in the fourth quarter, refineries experience some advantages, such as higher butane blending volumes. Could you share your expectations for capture in the fourth quarter? Do you believe it's feasible to anticipate a slight improvement from the previous quarter, or is it too early to tell?

I think it's too early to say, Matthew, just one month into the quarter, there's still opportunity for some volatility as we go through the end of the year.

Sounds good. And then the West Coast seemed pretty challenging for Phillips and some of your peers in the third quarter. I think the capture fell to 63% versus strong levels in Q2. You obviously made a decision to close the Los Angeles refinery. Can you talk about the headwinds in the third quarter in the West Coast? And whether there's been any improvement so far in the fourth quarter?

Yes. This is Rich. I'll talk about some of the headwinds we saw on the West Coast. There are a lot of moving parts, actually. Primarily, we saw weaker market cracks and weaker feedstock advantages. So those were both the keys to driving lower earnings in that region. Margins decreased with our West Coast indicator falling about 46%. You saw that if you're tracking along in our indicator; those were primarily driven by Portland and Los Angeles gasoline cracks. Crude deliveries also played into this as well. There was a prior month injection of crude delivered by pipeline coming out of the north from Canada. In a declining price environment, we also saw an impact in that as well versus the benchmark. Secondary product impacts were primarily related to heavy intermediate drawdown of inventory. In the second quarter, we built heavy intermediate inventories as a result of maintenance activity at both Los Angeles and Ferndale. The drawdown occurred in the third quarter, and that happened to occur in a declining price environment as well, impacting the market capture. We are also experiencing some continuing costs associated with the wind down of the Rodeo crude operation. I don't want to forget about that. We expect the majority of this work to be complete by year-end as we prepare a number of the assets for demolition. The demolition costs are currently reserved in our ARO, but that cost to prepare for that demolition is something that we'll see ongoing through the end of this year. As Kevin indicated in his recap earlier, there were a couple of entries into the quarter that impacted earnings from the LAR announcement to idle operations. One is the accelerated depreciation, that $25 million in the quarter. The other was a special item of $41 million, recognizing some benefit obligations associated with that announcement. All that said, the assets operated well for the quarter at 93% clean product yield and a 94% crude utilization for the assets, so primarily market-driven factors there.

Our next question comes from Jason Gabelman with TD Cowen. Jason, your line is now open.

Hey, thanks for taking my questions. I wanted to ask first on the Refining business. Back in the 2022 Analyst Day, there was some guidance for 5% margin capture improvement by 2025. I think there was some kind of optimization across the portfolio involved in that and some discrete projects involved in that. It sounds like maybe those projects have been a bit delayed. I can't really tell. But how much has capture improved from 2022 tough to compare given the change in indicator. Would you say you're on track with the projects that underpinned that capture improvement?

Yes. This is Rich again. Short story is we're on track. How that's all coming together is a series of small capital projects with high return. I mentioned those a little bit earlier. In 2022 and 2023, we completed a series of projects, roughly 12 to 15 each year. These are return projects that, assuming mid-cycle pricing, return about 3% improvement in market capture associated with those projects. In 2024, we have 15 additional projects that we're executing right now. Those projects will add about 2% of market capture to a mid-cycle priced earnings profile. So, when you add those all up over the three years program, it comes up to the 5%. That 5% number is equivalent to essentially $400 million of earnings at mid-cycle pricing. If we see that environment, I'm very confident that we will see the impact and we'll have to recreate a bridge to the traditional indicator.

Okay. Thanks. My follow-up question is going back to some of the commentary on distributions next year and the balance between deleveraging and buying back shares. There are a few targets out there in terms of debt. There's 25% to 30% net debt to cap. There's $18 billion of net debt. What's kind of the preferred metric investors should look at to determine what the buyback capacity is next year? And how do you feel about the balance sheet going into next year, given all the concern around the refining market environment? Thanks.

Yes, Jason, it's Kevin. I’d like to add a few comments on that. Our leverage target is between 25% and 30%, but we recognize that it may take some time to reach that level due to the current situation and the factors influencing our debt and equity calculation. We're aiming for our net debt to be below $18 billion. At the end of the third quarter, our net debt stood at $18 billion, and we hope to lower it further. We anticipate having some flexibility as we head into next year. Although the refining environment is not as strong as we would prefer, our other businesses are performing well. Our broader portfolio is yielding positive results. Additionally, we will have some healthy cash coming in from asset sales. While we’ve announced $2.7 billion in potential sales, less than half of that has been realized so far. We still have significant transactions in progress, which will provide us the flexibility to meet our cash return objectives and improve our balance sheet, a key strategic priority for us.

Our next question comes from Doug Leggate with Wolfe Research. Doug, please go ahead.

Thank you. Good morning, everyone. I appreciate you taking my questions. Mark, I'm not sure if this is something you want to address, but if we look back at the targets you set in 2022, while the acquisition of DCP wasn't included, the disposal program wasn't clearly defined within your EBITDA targets. Could you provide some insight into what the EBITDA losses from the $2.7 billion of disposals so far might be?

Yes, thank you for bringing that up, Doug. As we reassess our earnings capacity, our mid-cycle projection stands at $14 billion by the end of 2025. We understand that parts of the portfolio are fluctuating. Early next year, we will evaluate the factors influencing that number and provide a revised mid-cycle earnings capacity. It is important to note that this figure does not represent our earnings forecast for 2025, but rather our mid-cycle earnings capacity for that year. We will keep everyone updated on this.

You can't put a number around $2.7 billion at this point?

We're not prepared to do that right now. We'll revise that early next year.

Thank you. My follow-up relates to the $14 billion. I want to clarify that this is not a target for 2025 but reflects mid-cycle capacity, which includes over $5 billion from Refining at mid-cycle. You've expressed your views on global industry capacity, and I'm curious if you believe there is still potential for a higher mid-cycle, or if we are simply trying to maintain what has been the average for the last decade.

There certainly a lot has changed in the last 10 years. I think part of our review is we will step back and see what has happened in mid-cycle with respect to inflation inside the crack spreads, where all that comes down. I think it's very different than it was 10 years ago, but we do see enhanced strength in our ability to capture value in our refining assets, and we believe in the long list of things that Rich has talked about and the combination of creating more integration value, our ability of our commercial group to capture more value from the marketplace and a different posture around how we trade around our assets has significantly enhanced our mid-cycle earnings capability in refining. If you look at 2025, yes, we don't believe that we'll be at mid-cycle in 2025, but we believe that going forward beyond 2025 that we're going to see global demand growth that will exceed the net impact of capacity additions and rationalizations. You're seeing more rationalization announcements coming at us and very little beyond the two big refineries that are coming on now; very little capacity addition beyond 2025. We've got a fairly bullish outlook in the medium term.

Appreciate your comments, Mark. I look forward to that update. Thanks so much.

Thanks, Doug.

The next question comes from Theresa Chen with Barclays. Please go ahead.

Hi, thank you for taking my questions. First, on the cost side for the chemical business, with ethane in contango due to natural gas being into contango, also perhaps, and because we have incremental residue capacity coming out of the Permian, allowing for the option to project into 2025. How do you see that impacting chemical margins from a macro perspective through 2025? And related to that, just given your processing footprint and your option to project or extract ethane for at least some of your volumes, could that maybe be a way to bolster earnings across the integrated value chain, midstream and chemical in a way that competitors cannot?

Hi Theresa, this is Don. I think from an ethane standpoint as it relates to CPChem, I think the advantage of ethane will continue to be there near-term and long-term. So I feel good about that outlook and how that will continue to be beneficial for CPChem's position in the chemical market. With regard to our assets and how we think about it, we do have, obviously, with our gas processing assets, a lot of flexibility in terms of ethane recovery and rejection, and we make those decisions on a day-by-day basis based on market conditions and what our downstream infrastructure is associated with those assets and how to maximize both the throughput as well as the profitability as we push those barrels downstream. We think we've got, as an integrated player, a really good play kit to utilize and optimize across that gas to ethane and then ethane as a feedstock into the petchem industry. We think it's going to be an opportunity set that we'll be able to execute on here in the near-term as well as on down through the future.

Got it. And turning to the residue side in the Permian. I'd love to get a sense of how you view your exposure there? And you've sold a gas transmission asset outside of the Permian. Do you view your interest in GCX as core to your business, keeping in mind that the two other interests in GCX have consistently transacted with a double-digit multiple and the pipe also recently FID an expansion that's going to cost nearly $0.5 billion on a 100% basis. Is that the best use of your capital? And I'd love to hear your thoughts there.

Well, first, I'd say we are very excited to see the customer support behind the GCX expansion. We do think that's a big vote of confidence as to the productivity and the outlook of volume growth in the Permian, which obviously we're a beneficiary of given our footprint there. We are an active participant in the residue gas marketing space and moving gas out of that basin. So we're pleased with where things situate from that standpoint. I'll probably just reiterate what Mark has said; we regularly evaluate our portfolio and look for opportunities to high-grade where it makes sense. We think that's just the right way to ensure our capital is allocated to the best opportunities. It will just be part of our GCX interest; it will be no different than the other assets in our portfolio. We'll continually evaluate and make a decision when the time and the opportunities make sense.

The next question comes from Paul Cheng with Scotiabank. Paul, please go ahead. Your line is now open.

Hey guys, good morning. I think the first question…

Good morning, Paul.

Hi, good morning, Mark. My first question is for Kevin. In the past, you mentioned aiming for a cash balance of $4 billion to $5 billion. I'm wondering if that goal still stands, especially with the current market volatility and the higher-than-preferred debt levels you've indicated. Should we expect to continue paying out more than 50% of cash flow, or might the payout decrease after you fulfill the $13 billion to $15 billion commitment? My second question is for Rich. You mentioned the Central Corridor and the benefits from WTI hedges. Are you referring to the physical derivatives involved, rather than the CMA? Is that specifically for your Central Corridor operations, or are you using other types of hedges elsewhere? Thank you.

Yes, Paul, it's Kevin. I'll take your first question. I think the $4 billion to $5 billion; it sounds like one of our competitors uses that number for cash. We've said $2 billion to $3 billion is our sort of ideal cash level, which gives us adequate flexibility. Of course, we've also got plenty of other liquidity available to us. So $2 billion to $3 billion is the number that we've been saying in terms of cash balance. As you can see, we were slightly lower than that at the end of the third quarter. On a go-forward basis on cash returns, 50% still feels pretty reasonable as an objective, 50% or more. The dividend is $2 billion. While in theory, there's flexibility on that, that's not how we think about it. We view that as a very much a commitment. The 50% still leaves adequate room for the other things we want to accomplish. I would also emphasize that we continue to be very disciplined around our capital program, our growth capital. So back two years ago, we said for the couple of years, 2022 and 2023, we'd have a $2 billion capital budget. While we haven't laid out our capital budget for 2025 yet, we expect that we're going to continue to have that discipline around how we make those decisions. So I think when you put all that together, the 50% is still a reasonable number.

Hey Paul, this is Brian. Regarding accounting for GAAP, you need to mark your hedges, but you only mark the physical inventory once it’s sold or moved. In a falling market, the hedges are profitable while the physical remains unmarked. That will be recorded in the next quarter.

Yes. But Brian, is it only for the Central Corridor that you have that or do you also have hedges in other regions?

Yes, we have it in all regions.

The next question comes from Jean Ann Salisbury with Bank of America. Please go ahead. Your line is now open.

Hi, I believe that the enterprise TW products pipeline has started up to PADD 4. Are you seeing that impact in PADD 4 margins yet?

No, not yet.

Okay. And then my follow-up is on, I think you kind of referenced this in the comments, but LPG Export has gotten extremely wide, as I'm sure that you're aware. I think they're expected to stay that way for a few quarters until more export capacity comes online. How much exposure does PSX have to arc and does that increase over the next few quarters?

Yes, this is Don. At Freeport, we are experiencing strong demand for LPGs, and I would just say we have a portfolio mix of short and long-term contracts there at Freeport as well as really across our whole NGL value chain. This portfolio approach lets us capitalize on opportunities like we see today across the system. It sort of helps navigate where at any point in time across the NGL value chain, you have some positives from a margin standpoint and some headwinds, so it really helps kind of level out across that value chain. We are seeing real positive healthy dock fees given the spread today to international markets, the ample supply of vessels and then just a tight existing dock capacity across the Gulf Coast. We'll get a share of that, and we believe it's a pretty healthy outlook, as you mentioned, for the foreseeable quarters.

The next question comes from Joe Laetsch with Morgan Stanley. Joe, please go ahead.

Hey, good morning, team, and thanks for taking my questions. So on the macro side, thanks for your comments earlier on the supply outlook. Could you just talk to what you're seeing on the demand side for gasoline, diesel, and jet within your system as well as your outlook from here?

Sure, this is Brian. Starting with gasoline, year-to-date global gasoline demand is about 1% higher than last year. European demand is a positive factor, with sales of gasoline-powered and hybrid vehicles supporting a growth of around 4% in the third quarter compared to the same period last year. U.S. demand has also performed well, increasing over 1% from the third quarter of last year, partly due to notably lower retail prices. Regarding distillates, global demand is about 1.5% lower year-to-date, and in the U.S., we experienced a decline of about 2% in the third quarter compared to last year. Some freight companies are expressing cautious optimism; for example, UPS announced last week that it had positive revenue and profit growth for the third quarter, following nearly two years of underperformance. Additionally, in the global container shipping sector, container volumes have risen, reaching a record high in August, which indicates some positive trends. As for jet fuel, year-to-date global jet demand is approximately 8.5% higher than last year, primarily driven by Asia. While flight demand in Europe and the U.S. has returned to 2019 levels, overall jet demand has not fully recovered, mainly due to the efficiency of the aircraft fleet.

Great. Thank you. And then just shifting to renewable, some peers have talked about seeing a premium for SAF over RD. What are you seeing from a commercial demand standpoint for SAF at Rodeo?

Yes, we also observe a premium for renewable jet production. I want to note that in the fourth quarter, we are unlikely to produce renewable jet. Currently, we are utilizing higher carbon intensity feedstocks for the plant as we get ready for the production tax credit next year. However, we anticipate being in a steady state at the renewable diesel complex by the first quarter of next year. So by that time, you should see us producing renewable jet.

Yes. Maybe just to add a little bit of color there. We did actually produce sustainable aviation fuel in September. We have in the past indicated that that was our intention. We did successfully produce a sustainable aviation fuel. There's this market anomaly that Brian is talking about here in the fourth quarter that will limit that production. But we fully intend to be a supplier of sustainable aviation fuel to the marketplace.

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

Thanks for all your questions. We delivered strong performance across our differentiated downstream portfolio. Business transformation achieved $1.4 billion of run rate cost reductions and lowered our refining cost by $1 per barrel. Midstream achieved its synergy target and provided stable earnings with attractive growth opportunities. We expect to exceed our $3 billion asset disposition target, having signed agreements to generate $2.7 billion in proceeds to date. We continue to evaluate assets as part of our ongoing portfolio optimization. I'm proud of our employees' significant achievements toward our commitments. We're confident in our strategy and continued execution on the remaining targets. Thank you for your interest in Phillips 66. If you have questions after today's call, please call Jeff or Owen.

Thank you, everyone, for joining us today. This concludes our call, and you may now disconnect your lines.