Welcome to the First Quarter 2025 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 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 first quarter earnings call. During the quarter, we continued to execute on our transformational strategy and deliver returns to our shareholders. By staying focused on what we can control, we made important progress across our 2027 priorities. Improving refining operations, enhancing our NGL value chain and executing on our growth opportunities. Underpinned by the strength of cash flow contributions from our Midstream business, we returned $716 million to shareholders this quarter. We did this in a challenged macro environment in refining, renewables and chemicals. We also executed one of the largest spring turnaround programs in the history of Phillips 66 that impacted volumes and margins. These important investments position us well for the future. While our results reflect the challenges of this environment, our ability to return significant capital to shareholders demonstrates the strength of our integrated business model. We remain focused on strategy execution, disciplined capital allocation and cash returns to shareholders. Slide 4 shows how we continue to improve refining operations through targeted low capital, high return projects. These recent investments lead to greater feedstock flexibility and yield. Before I touch on some of these projects, I want to highlight the success of our spring turnaround program, which was completed safely, on time and under budget. Furthermore, our refineries not in turnaround this quarter ran well. These accomplishments would not have been possible without our employees' unwavering dedication to operating excellence and safety. Thank you to the refining team. Well done. The bulk of the annual turnaround activity and associated costs are largely behind us, which you will see reflected in our guidance going forward. We are well positioned to capture upside in the market for the remainder of the year. During this quarter's turnarounds, we achieved meaningful project milestones. At the Sweeny Refinery, we removed constraints and enhanced crude flexibility. We now have an additional 40,000 barrels per day of heavy light crude switching capability. Depending on market conditions, we will run additional Permian barrels displacing imported heavy crudes. We expect this flexibility in a rapidly changing price environment will enhance long-term margins at this strategic refinery. Also at our Bayway facility, we completed a project that increases our FCC native feedstock capabilities, reducing the need for VGO imports. Both of these low capital and high return projects are enabling us to enhance market capture. We're committed to our Refining business. We have a clear path to increase operational run time, improve yields and reduce cost per barrel. Moving to Slide 5, Midstream is critical to our integrated strategy. It's a key growth driver and creates ongoing value for shareholders. We've made disciplined investments to build out our integrated wellhead to market strategy, a strategy that allows us to efficiently move products from the wellhead to high value end markets. This strategy provides significant stability to our financial results and adds material benefits to other segments. Our value chain creates optionality in product placement and supports reliable long-term cash generation. We acquired EPIC NGL on April 1st, which is immediately accretive and expands our takeaway capacity from the Permian. The acquired assets are highly integrated with the existing Phillips 66 asset base and provide long-term fee based earnings growth. This acquisition enhances our ability to offer producers unmatched flow assurance while expanding connectivity to end markets. We also continue to expand our natural gas gathering and processing footprint in the Permian Basin. Our Dos Picos II expansion plant, which was part of our Pinnacle acquisition strategy is expected to come online in the third quarter of 2025. Today, we're announcing the construction of another gas processing plant in the Permian. The Iron Mesa plant will serve Delaware and Midland Basin production and will be funded within our existing capital budget. The facility is expected to come online in the first quarter of 2027. Both of these projects are great examples of our highly strategic and selective investments at low build multiples. They contribute to our plan to organically grow Midstream run rate adjusted EBITDA to $4.5 billion by 2027. At Phillips 66, we've embraced a culture of continuous improvement and have taken decisive actions to create long-term value for our shareholders. Slide 6 shows some of the achievements over the past three years. We have divested more than $3.5 billion of non-core assets at high multiples, while making strategic acquisitions within Midstream at attractive multiples to build a world class NGL value chain. In Refining, we're improving competitiveness by optimizing our assets to align with long-term demand trends. We've made operational improvements throughout the portfolio and we've rationalized our footprint with the sale of Alliance, conversion of Rodeo and plan to cease operations and repurpose the land at Los Angeles. We have taken steps to execute on our transformational strategy and we will do more. We remain committed to maintaining safe and reliable operations, investing in high return growth opportunities and capturing integration benefits. We will return over 50% of net operating cash flow to shareholders through share repurchases and a secure competitive and growing dividend. Demonstrating this commitment, we recently announced a $0.05 per share increase in our quarterly dividend. Since our formation in 2012, the annual dividend has increased every year resulting in a significant 15% compounded annual growth rate. We have delivered over $14 billion to shareholders since July 2022. We will continue to create long-term value for shareholders as we execute on our 2027 strategic priorities maintaining operational excellence, pursuing disciplined growth, returning capital and ensuring financial strength. Now over to Kevin to cover the results for the quarter.

Thank you, Mark. First quarter reported earnings were $487 million or $1.18 per share. The adjusted loss was $368 million or $0.90 per share. Both the reported earnings and adjusted loss include the $246 million pre-tax impact of accelerated depreciation due to our plan to cease operations at the Los Angeles Refinery at the end of 2025. The adjusted loss excludes the $1 billion pre-tax gain on disposition of our non-operated interest in Coop. We generated $187 million of operating cash flow and returned $716 million to shareholders, including $247 million of share repurchases. I will now cover the segment results on Slide 8. Total company adjusted loss increased $307 million compared with the prior quarter. Midstream results decreased mainly due to lower volumes because of the turnaround activity in Refining. This was partly offset by the impact of higher commodity prices benefiting gathering and processing results. Also during the quarter, the Sweeny Hub had record fractionation volumes of 650,000 barrels per day. In Chemicals, results increased mainly due to higher volumes and lower costs driven by turnaround activity in the prior quarter. Lower refining results reflect the impact of lower volumes and higher costs driven by turnaround activity and higher utility prices. This is partly offset by increased realized margins from higher market cracks. Marketing and Specialties results improved due to lower depreciation and higher margins in the international business. In Renewable Fuels, results decreased mainly due to the transition from blenders tax credits to production tax credits, inventory impacts and lower international results. Slide 9 shows cash flow for the first quarter. Cash from operations including working capital was $187 million. We received $2 billion from the sales of the non-operated equity interests in Coop and the Gulf Coast Express Pipeline. We paid down $1.3 billion of debt and returned $716 million to shareholders through share repurchases and dividends. We funded $423 million of capital spending. Our ending cash balance was $1.5 billion. Looking ahead to the second quarter of 2025 on Slide 10. In both Chemicals and Refining, we expect utilization rates to be in the mid-90s. In Refining, we expect turnaround expense to be between $65 million and $75 million. We anticipate Corporate and Other costs to be between $340 million and $360 million. Now we will move to Slide 11 and open the line for questions after which Mark will wrap up the call.

Thank you. We will now begin the question-and-answer session. Our first question today comes from Doug Leggate with Wolfe Research. Please go ahead, Doug. Your line is open.

Well, thanks. Good morning or good afternoon, everybody. Thanks for taking my question. I guess it is still morning, sorry. Mark, obviously there has been a lot of dialogue, a lot of back and forth between yourselves and Elliott regarding the right structure for the business. I guess my question is, I had an opportunity to chat with you about this a month or so ago. And our understanding at least is you guys have looked at a lot of these proposals before and made decisions that are perhaps different. I wonder if you could share the extent to which you did look at some of these ideas that they're putting forward, for example, separating the Midstream and kind of rationalize why you came to a different outcome? I think everyone would probably like to hear your perspectives on that. I've got a quick follow-up, please.

Sure, Doug. I welcome that question. And I think when we're talking about strategic alternatives or the strategy that drives the company forward, it really is important to understand the mindset of our board. And we've got a strong board. We've got talented board members that have deep experience. Many of them have deep experience in refining and energy, and they have high expectations for us when it comes to preparing and delivering strategic alternatives for them. They expect a very detailed, intelligent overview of all the options available, and they want to fully understand the risks and the unintended consequences of any strategic actions that we might recommend. In fact, they want to understand the risks and the unintended consequences of not making strategic actions as well. So it's very comprehensive, and it's not just some simple high-level spreadsheet that they might rubber stamp. They are, I would put them in the classification of brilliant. They ask tough questions, and they hold us deeply accountable. And my experience with the board really goes back to when I came back to Phillips 66 in 2021, and I was asked to prepare the strategic materials for our fall deep dive into strategy. What we did is we took the board through scenario planning. Because if you remember back in 2021, all the rates was Net Zero 2050. So we spanned the whole spectrum from Net Zero 2050 to a scenario where the world recognized there was a strong need over the long term for hydrocarbons, and we established milestones to track. This analysis informed our strategic alternatives that then we did a deep dive on with the board members. We have reviewed all of those options and refreshed our views on those options in subsequent years. I would say every board meeting, the board asks us strong questions around the strategy and the implementation of the strategy. What's changed? What's new? Should we move this way or that way? We talk about our stock valuation and the evolving market conditions and the strategic alternatives. We do this every board meeting. In the fall, again, we'll take them into another deep dive to review what's changed since the prior year, what is our most recent view of where we stand in those scenarios. I'll tell you that one of the underlying principles of every discussion is that everything in our portfolio is for sale at the right price, but the board expects us to understand the full consequences if we should dispose of an asset or spin out a part of our company that they want to understand what the impact is on the remaining assets, what's the impact on the remaining company, what are the unintended consequences, where are all the financial impacts. I would say that some of the parts is a part of that discussion, but it's not always the total driver of that discussion. One thing that we've learned, and I believe many of you observe this as well, is that when you talk about the multiple a company realizes in the marketplace, it's really correlated strongly with earnings volatility. That's why the Midstream business has become such an important part of our business. It generates very steady earnings and we've grown those earnings quite quickly from right around $2 billion of EBITDA a year to $4 billion and increasing. If there was a spinoff opportunity for that business, our board would be the first ones to challenge us to take a look at that, and they have challenged us to take a look at that. When you step back and look at our board, the people that we have on our board and the two new nominees that we have, amongst them, they've overseen more than $300 billion in major separation transactions during their careers. This includes sales and spinoffs. Phillips 66 itself was the result of a spinoff. John Lowe, one of our key members, was involved in that and he's one of the architects of the spinoff. You've got the DowDuPont three-way breakup into Dow, DuPont and Corteva. Our nominee, Howard Ungerleider, was one of the architects of that and was right in the middle of all that in the decision-making there. You look at United Technologies. That was a conglomerate that broke; it went through a three-way breakup into Carrier, Otis and RTX. Greg Hayes was the architect of that. And Abbott Laboratories spinoff into AbbVie. Glenn Tilton was right in the middle of that as well. Few, if any, boards in this country have more experience in executing such transformational transactions than the Phillips 66 board. They know how to do it when it makes sense, and they're challenging us every step of the way to explain to them what makes sense and what doesn't make sense. I mentioned the split-up of United Technologies, a conglomerate. That word's been used in the same sense as Phillips 66. The first time I heard that, I thought, well, I thought I knew what a conglomerate was, but I better look it up to be sure. When I looked it up, there was nothing there that resembled Phillips 66. We are a hydrocarbon transporter and processor. We gather and transport hydrocarbons from the oil fields or from imports and we move those through our transportation assets, and we convert those materials into high-value products that you use every day. Whether it's the crude value chain or the NGL value chain, it's very synergistic and we're in the business of managing molecules, optimizing them every day. If you look at what we have down at our Sweeny complex, all of those value chains come together in a deeply integrated way, whether it's the fractionators where we've got massive fractionation capacity. We've got a 260,000 barrel per day refinery, 550,000 barrel per day fractionation capacity. There are three ethane crackers on that site owned and operated by CPChem. We've got 37 million barrels of capacity in 23 salt dome caverns at our Clemens Dome, and we've got direct access to Freeport Export Terminals. We leverage that infrastructure—we leverage it in an integrated way every day, moving the molecules where they can create the most value. We've got a commercial organization that trades around that information every day. So there is no hint of conglomerate in what we do. If you look at the potential to spinoff businesses, the board also asked us to bring in third parties to get an objective review of what we do. We’ve hired the best investment banks out there to look at strategic alternatives. When you look at Midstream monetization specifically, the third-party independent analysis will tell you that there are incredible dissynergies, based on that deep physical integration, that there’s a massive tax burden that any spin would realize and that there are diseconomies of scale. We’ve got a very strong balance sheet as an integrated company. The balance sheets of RemainCo and SpinCo would be impaired compared to what we have today. You throw additional SG&A on those remaining businesses. The public company costs, none of these things are fully reflected in a simple sum of the parts analysis. We take that into account and make sure that our board understands every step of the way and is verified by independent parties. If you look at just the accomplishments we've had over the last three years, the board was front and center in all of those decisions. We took bold actions to ensure that we were successful over the long term, the $3.5 billion of non-core assets. The only way we could define non-core assets is to have a well-defined strategy that was blessed by our board. That's how we define what is core and what is non-core. We expanded our NGL wellhead-to-market strategy with the Pinnacle and EPIC acquisitions fully supported by our board. We sold the Alliance refinery. We converted Rodeo, and we have plans to seize the Los Angeles refinery. Every one of those major strategic actions has been deeply considered, vetted, and approved by our board. In Refining operations, we've improved utilization, we've raised clean product yield and reduced operating costs over the last three years. We have plans for further progress. Again, part and parcel of our conversations with our board every time we meet, every action we take. Because of all these actions that we put in place with the blessing of our board, we believe there’s substantial upside to our stock as we implement our 2027 strategic priorities. We’re going to maintain operational excellence, pursue disciplined growth, return capital and ensure financial strength. Finally, I want to be crystal clear on is we're making these strategic decisions at the board level, as we're making operational decisions at the operating and management level, we are focused on data. We are focused on facts. We don't act out of fear or short-term trends. We act on what we believe will create the most long-term value for our shareholders each and every time. Since the activists launched their campaign in February, the investor sentiment around their thesis has become more and more negative, while they have become more and more positive around the process that or the progress that we've made in our refining and all of our businesses. We believe we're in a strong position. We're committed to it, and we're going to base it on data and facts moving forward. Thank you, Doug, for that question, and I look forward to your follow-up.

Well, I think first of all, Mark, thanks for the thorough answer. I think I've taken enough time. I want to be respectful to my sell-side colleagues. So I did have a follow-up, but I'll pass it back. Thanks so much for the answer.

Thanks, Doug.

Thank you. The next question comes from John Royall with JPMorgan. John, please go ahead.

Hi. Good morning. Thanks for taking my question. Tough to follow that back and forth, but maybe I'll go with a balance sheet question. So, you're remaining well above your target at 38%. You got the big turnaround quarter for the year in the rear view and you also have a potential asset sale coming, which is good. But also, the macro environment remains uncertain. So, my question is, what do you view as your path to getting back to 30%? And does the path include maybe buying back a little less stock than your framework would otherwise imply?

Yes. John, it's Kevin. Let me respond to that question. It's a very valid question. It's one we put a lot of focus on. We have targets on leverage, the 30%. The real target that I focus on is the $17 billion absolute debt level. That's what I'm focused on, and the 30% becomes an output because it's a measure of debt and equity, as you know. Our expectation is that between the cash that comes in from disposition of assets and some improvement in the overall operating environment from where we were in the fourth quarter and the first quarter combined with Refining now being very well set for the remainder of the year to run at high utilization, and you combine that with some margin recovery, which we have seen as you look into April, we’re seeing margins that are sort of $3 to $4 per barrel higher than where we were on average in the first quarter, then that should position us quite well in terms of being able to make progress on debt reduction. I'd love to hit that $17 billion number by the end of this year. I can't guarantee that will happen. It will be dependent on where operating cash flow comes out. The overlay here is we're still committed to the 50% or more cash returns to shareholders in terms of operating cash flow. So that's the sort of basic criteria around returning cash to shareholders, 50% or more of operating cash flow, and at the same time, through hopefully strong cash generation and proceeds from asset dispositions be able to make progress on debt reduction.

Great. Thank you, Kevin. And then my next question is on renewables. This was a little bit of a noisy quarter with the PTC coming into effect mid-quarter. Can you help us really as detailed as you're willing to be on what the post-PTC world kind of looks like in your renewables business? If you could give us any kind of sense for maybe the proportion of production that's eligible and how much you expect to receive on a per gallon basis based on your current feedstock slate, that would be very helpful. Thank you.

Yes, John, let me first just clear the first quarter result because it was a somewhat of a messy result to be honest. Let me just walk through what drove that, and then Brian will give a bit of the sort of forward expectations around it. We had a significant drop from the fourth quarter to the first quarter. The transition from BTC was a significant impact. It was the largest driver of that drop. But we also had LIFO inventory impacts from drawing down low CI feedstock inventory where the LIFO rate exceeded market prices. That was about a $60 million hit in the first quarter. In international, the recognition of the UK credits, these are the RTFC credits, is not ratable. So we recognized about $50 million of those in the fourth quarter, and we did not have any credit recognition in the first quarter. So when you put all those things together, you get back to why the result was where it sits. So maybe Brian can give a forward look.

Yes. So I would say it's hard to provide guidance for Q2. You can tell I'm losing my voice, so I'm going to try as hard as I can. But with so many outstanding policy issues, including the tariffs and the RVO for RINs that haven't been set yet, it's difficult, but we believe the RVO will need to strengthen the D4 RIN—the Biodiesel RIN—to continue to provide an incentive for RD production, and margins continue to be challenged even in April, and the current market has us running the plant at reduced rates. In terms of tailwinds, we are seeing our biodiesel plants closing given the tight margins, and we've also seen demand for renewable diesel firming, and that's a seasonal firming of demand. Finally, we look forward to collaborating with the administration to support US manufacturing by addressing the unintended consequences of tariffs on feedstocks, given international RD imports to the US are untariffed, which disadvantages domestic producers like Rodeo.

Thank you.

Thank you. Our next question comes from the line of Roger Read with Wells Fargo. Roger, please go ahead.

Yes. Thank you. Good morning. Maybe just to kick this off, update on where you are on kind of final asset dispositions. I think there's still some stuff in retail, maybe something in the Midstream space.

Yes, Roger, it's Kevin. So as you know, we've done $3.5 billion of dispositions to date. We're ahead of the target that we laid out almost a couple of years ago, I guess. The major item we're still working on is the Europe retail, so the Jet, Germany, Austria, that is a very active process. I know I've said this several times, but we are legitimately in-depth negotiations on that and hope to have some updates soon.

Yes. This is Mark. As far as other asset dispositions, we have other assets that we would define as non-core, non-operated assets. Many of them are in the midstream. We're not going to name any specific assets. But certainly, we know what the value of those assets are, and we know that there are potential buyers out there.

And as a follow-up on that, how should we think about the use of cash flows or cash raised, I guess, maybe I should say from those asset sales at this point? Do you see it, Kevin, as you were talking earlier in terms of return of capital to shareholders, or is most of this targeted for debt reduction?

I would expect most of this to be debt reduction. Think of the cash returns to shareholders being relative to operating cash generation. So a different part of the cash flow statement driving the cash returns.

Okay. And then if I could just toss in one more if that didn't count as my follow-up, Jeff, I apologize if I'm violating the rules. But heavy maintenance in Q1 in refining was very low in Q2. Were you essentially wrapped up as we started Q2, or is there a little lingering into Q2 that we should think of within that mid-90s guidance?

Yes. This is Rich, Roger. Thanks for the question. The Q1 was the heavy concentration of the turnaround activity. You can tell by the guidance that we provided for the second quarter there is a little bit of linger that comes from quarter to quarter, but it's certainly winding down in the second quarter and you see that in the overall guidance.

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

Good morning, team. Can you help us better understand how some of these LPG exports will have to reset to accommodate around tariffs? Because I think you were sending like 48% of our ethane to China and about 22% of propane to China. So how do these NGL exports now reset globally to work around the tariffs?

Hey, Manav. This is Brian. I'd say, like you said, the majority of China's LPG supply, which is primarily propane, comes from the US. Tariffs will likely alter those routes for Chinese LPG supply. It's possible that China could get their supply from the AG, from Australia, or from Southeast Asia. The US will just supply; it will backfill the hole left by those regions just rerouting trade flows. Bringing it back to our assets, our Freeport LPG is mostly termed up, and we haven't seen any FOB cancellations for cargoes. We also have a strong international trading team that manages delivered cargoes, which allows us to capture additional value and optimize the Freeport exports when we see changes to fundamentals or when we have market dislocations caused by tariffs.

Perfect. My quick follow-up here is on the polyethylene chain margin. It was weaker even before the tariffs were announced. Again, some portion of polyethylene reasonably moves to China, made into products and sold back into the US. Those flows cannot be sustainable with the tariffs. So your medium-term outlook for the polyethylene chain margin here?

I think that there certainly is pressure from the tariff situation. Purchasing decisions are going to be impacted. I do believe that CPChem has minimized their exposure to China. They've got the ability to source material from the Middle East, similar to the propane discussion, and there would be rebalancing. It's certainly clear that uncertainty around tariffs causes people to slow down their decision-making; you see that across the economy.

Yes. Thank you. Appreciate the thorough answer to the question around some of the parts. Kevin, I had a follow-up for you around the Midstream side of the equation because that's where I think there's been a lot of focus around you built a good business. Does it make sense to try to monetize it? I think you made a comment that there's significant tax leakage around monetization. Is that in the case of a spin as well? And then can you provide a little bit more detail or help us quantify a framework for thinking about tax leakage associated with Midstream monetization?

Yes, Neil, the tax hit is in the context of a sale of the business. A spinoff you would expect would be structured in a tax-free manner. I would expect minimal tax implications from a spin. But in terms of an actual disposition of the business, it is a significant tax effect because the majority of those assets were constructed or acquired during a period where we had accelerated depreciation. So just to put some context around that, depending on what number you use for valuation, and there's a $50 billion number that's out there that would drive a $10 billion tax hit to sort of quantify what we mean by significant tax impacts.

Got it. And then there's no clear offsets that you could put against that, it sounds like?

Not that I'm aware of.

Okay. All right. And then the follow-up for the team is really on the Refining side. It's obviously challenging conditions in Q1, but you guys are going to be running better here in Q2. Just love your thoughts on the path back to mid-cycle. One of the factors that has been suppressing profitability has been the tightness of WCS. Just how do you guys see that moving from here as we work through turnaround? Can that be a tailwind?

Hey, Neil, it's Brian. I'll try to get this out. Just on market outlook, and maybe the caveat is geopolitics and the slowing economy make everything hard to predict. What we've seen, Kevin has mentioned this, US margins in April are firming quite a bit, and you can see that in our market indicator. We're estimating about 1 million barrels worth of global refining capacity shutting this year, and most of that rationalization will be in the US and in Europe. If you look out through the end of the decade, we only show about 300,000 barrels a day of net additions per year, and we're likely to see that number continue to decrease. Regarding gasoline, we're forecasting global gasoline demand to be about 0.5% up for the year and US gasoline demand to be up about 1%. Looking at the first quarter, that was 1.1% year-on-year growth in the US. Lower pump prices, good unemployment numbers, and less working from home all contributed to that strength. US gasoline inventories are currently at about five-year averages. Our current gasoline supply outlook is for those inventories to continue to tighten, particularly as we get into gasoline season and particularly in the US. On the distillate side, we see demand globally up about 1%, and in the US, up about 2% for the year. Part of the demand increase will come from lower biodiesel and renewable diesel production driven by the weaker renewable margins. Additionally, there's a shift to Mediterranean ECA fuel in May, which will help US diesel inventories that are really sitting at very low five-year seasonal lows in part due to ongoing maintenance in the Gulf Coast and in the Mid-Con. Finally, on Jet, at Q1 '25 global jet demand was up about 2.3% year-on-year. We're forecasting 2025 global jet demand to be up 2%. Many of the airlines have talked about their uncertainty for the rest of the year; if you think there is going to be a recession or additional tariffs, those bets are off. If you don't believe those events will happen, this is kind of our view. We're starting to see trimming of near-month flights, making predictions difficult. In Q2, we anticipate about 315,000 barrels a day off the market, mostly driven by planned maintenance and production facilities. Looking across the year, we see differentials start to widen out. You'll get the seasonal benefit of diluent in the product, and that will be reflected in more OPEC barrels on the market, which will also help weaken the heavy differentials.

It's all great color. Thank you so much.

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

Hi. I wanted to go back to the NGL conversation. There are materials circulating about a carve-out for NGLs within the Chinese reciprocal tariffs. Do you have an early view on this, especially for ethane, and in the event of additional downside volatility for NGL prices in the Gulf Coast, how is your business positioned within the backdrop of potentially lower LPG ARBs, crack spreads and POP margins in processing?

Well, I think, first of all, most of our business is termed up at the Freeport facility, and as I mentioned, we're not seeing anybody cancel any of those term contracts. A lot of the ethane for China comes from the US, and we've seen that still moving. We expect it to continue to move. I don't think that will really impact our business going forward.

Yes. I think, Theresa, at a high level, there are a few other options for Chinese that are consuming ethane. It's clear that there are possibly some rational discussions going on around tariffs. It's all maybe rumor and speculation at this point, but hopefully, those discussions move in a rational direction, as the Chinese need access to US propane and ethane. So it's in their best interest to seek that accommodation.

Got it. And related to the FID of Iron Mesa. Would you be able to quantify the cost? And is this plant the first of maybe several plants to increase the Y-Grade under your control, especially in light of a competitor building out their own frac and dock infrastructure later this decade that may create a volume shortfall in Sweeny and Freeport?

Hi, Theresa. This is Don. Yes, I may say, it continues to demonstrate the progress we're making in building out our NGL value chain. It does support our Permian G&P growth and position in terms of barrels coming out of our own gas plants. From an investment standpoint, it's a typical midstream return, from a build multiple kind of sub-five times type size. A little bit maybe to unpack Iron Mesa, it's going to be located near our Goldsmith facility. That provides us with several benefits. We'll be able to retire portions of our Goldsmith facility, upgrade the processing. That's going to improve our operational efficiencies, our reliability, reduces our environmental footprint, and improves our cost structure. We’ll get an immediate uplift on the existing throughput that we have there. We’ll load this plant first. From a location perspective, given our pipeline network in that area, we’ll be able to process and bring gas from both the Midland and the Delaware Basins to this facility. This facility will be tied into our Sand Hills NGL system. I expect us to continue to be successful commercially from a gathering and processing standpoint. We have opportunities to grow our G&P footprint organically like this, whether through a partial upgrade of existing facilities as well as just expansion. All of that is helpful for our overall NGL value chain. To step back, I’ll note that at this plant and the two plants in the Midland Basin, the Dos Picos and Dos Picos II, we will have added close to 800,000 a day of gas processing capacity. That produces over 100,000 barrels a day of NGLs to feed our system. We’re making good progress as we grow our system. We feel good about our footprint and what our supply outlook for Sweeny is.

Thank you.

Thank you. Our next question comes from Jean Ann Salisbury with Bank of America. Please go ahead.

Hi. Good morning. I think many Midstream investors don't own PSX stock because of the volatility of the earnings of the other segments. Is that your view as well? Given your answer to Doug's question, which I think suggested you were not that interested in the spin. What other things can PSX do to get fuller credit for the stability of the Midstream earnings in your stock?

Yes. Jean Ann, that's a great question. I think I touched on that earlier that we're in the process of growing those earnings. Really we weren't recognized as a strong Midstream player per se until earlier this year when we announced the EPIC transaction. As those stable earnings become a bigger part of our portfolio, I think those seeking that multiple from stable earnings will take note. Across the spectrum, we're getting solid feedback and support for that.

Yes. I was going to add on a little bit there in terms of we will continue to examine our disclosures and the information we provide around the Midstream segment and enhance where appropriate. As the Midstream business grows, the part of the narrative is that the Refining business, yes, has volatility, but it also provides a lot of nice upside from a cash generation standpoint and returns to shareholders. That’s where I see that value proposition - a large stable Midstream business supplemented by the upside that comes with the Refining and Marketing business.

Great. I'll leave it there. Thank you.

Thanks, Jean Ann.

Thank you. Our next question comes from Joe Laetsch with Morgan Stanley. Please go ahead, Joe.

Hey, team. Thanks for taking my questions. I just wanted to ask on shareholder returns. With the dividend increase a few days ago, the stock is yielding just north of 4.5%, which is above refining peers. Could you just talk through the balance between raising the dividend and leading in the buyback given where shares are trading?

Yes, Joe, the dividends are principles there are secure, competitive and growing. The reason for the growing is we do have investors that are clearly dividend investors. One of their criteria is a dividend that increases on an annual basis. You can expect to see us increase the dividend every year. It was a relatively modest increase; it's $0.05, 4%, smaller than some of our more recent increases, but we felt it was appropriate in the overall context of the business environment that we’re in today. Therefore, the real upside from a shareholder return standpoint is going to be in share repurchases. As you see operating cash flow increase, that increases the—go back to the 50% of operating cash flow returned to shareholders. The dividend is easy to compute, but so is the share repurchase at the 50% and potentially above level, depending on where we are with other priorities including balance sheet.

Yes, and Joe, when you look at the combination of share repurchases and our dividend, the gross dividend outlay has remained pretty stable because the shares are declining. It really is almost needed to catch up, and we're taking advantage of that. Think about that overall dividend outlay as relatively constant, and then share repurchases are the swing item that can grow even faster than the dividend when the cash is there.

Great. Thanks for taking my questions.

Thank you. Our next question comes from Matthew Blair with Tudor Pickering Holt. Matthew, please go ahead.

Thank you and good morning. I have a two-parter on Marketing and Specialties. First, should we expect a pretty considerable tailwind to your Q2 Marketing and Specialties results from the falling crude price environment? We do track retail indicators looking quite strong in the second quarter. I know your wholesale business is a little bit different, but what are your expectations on Marketing and Specialties for the second quarter? Is there a big pickup in line? And then second, every company reports things a little differently. I think there's an argument to be made that Phillips refining results are a little different than your large-cap peers because your US wholesale activities are in Marketing and Specialties and not in refining. Could you help us understand roughly what percent of Marketing and Specialties EBITDA and costs are related to those wholesale activities so we can look at things on a little bit more of an apples-to-apples basis? Thank you.

Hey, Matthew. It's Brian. I’ll start and then Kevin can take over. I think you're right that when prices are falling, it’s usually somewhat beneficial for marketing. Just to give you color, we're seeing stronger April margins. Barring any significant slowdown in the economy, we would expect a seasonal uptick in Q2 earnings or margins consistent with prior years.

Yes, Matt, it's Kevin. Just on the second question, we don't break out our results by channel of trade, which is what you're referring to. Our Marketing and Specialty segment covers the wholesale business but also covers retail to the extent we have retail. The bulk of that business is a wholesale model. We don’t have a breakout of the EBITDA or the costs. The costs are relatively low when you think about the company-owned retail business having a higher cost structure for sure, but it’s not something that we’re breaking out at that channel of trade level.

Thanks. I'll leave it there.

Thank you. Our next question comes from Ryan Todd with Piper Sandler. Please go ahead.

Great. Thanks. Maybe just one follow-up on some of your earlier comments on renewable diesel. Outside of the macro backdrop, which is obviously very noisy, as we think about the first quarter and into the second quarter, can you talk about maybe some of the challenges that you had optimizing things from a feedstock point of view in the first quarter because of the timing of some of the announcements? Looking into the second quarter, and I don’t know if you’ve said this earlier but do you have a rough estimate of maybe what percent of the products you were able to book credits on during the quarter? As we think into the second quarter, how will both of those things change and be a potential tailwind for you this quarter?

Yes, maybe I'll start and others can join in. I would say, like everybody, if you don't understand the rules of the game, it makes it more difficult to play. The PTCs were kind of not completely known. At that time, we didn’t have the PTC value for imported used cooking oil, and now we don’t. We made some decisions between the end of last year and beginning of this year that were sub-optimized given our view of what credits would be and how they turned out in some of the sanctions. Going forward, we’ll have a clearer view. We still don’t have a complete view of the PTCs. We think that will come in June or July with the tax bill. We talked about the RVO proposal; we expect it to come at the second half of May but not for implementation until Q3. The good news is I think ag and oil are aligned that we need to increase the RVO to make up for some of the credit value lost in the PTCs and the LCFS is also up for debate. We think by the end of June, we’ll have more clarity on that. The more clarity we have on the credit values and how they work, the better we'll be able to run the plants and focus on finding the right feedstock to make the right product.

Thanks, Ryan.

Thank you. Our next question comes from Paul Cheng with Scotiabank. Paul, please go ahead.

Hey, guys. Good morning or good afternoon. Mark, I think it can be easy—maybe for the investors, it’s a little bit easier to understand the integration benefit on the Midstream to the rest of your business. Maybe it’s a little bit more difficult on the Chemical. Even CPChem is a joint venture and they run by their own board and their own management. In theory, all transactions between you and CPChem should be in arm's length. Could you help us understand a little bit better why—even though it's a great asset, why that is important for them to be part of the portfolio and what are synergy or integration benefits you can receive from there?

Yes. Paul, glad to take that on. When you look at CPChem, first of all, the model has been great for the last 25 years. It's grown faster and more profitably than its competitors. It’s been a great return on capital employed business. It's thrived and done quite well. We've sat across the table from our partners, sharing our interest in owning all of it if the other is interested in parting from it. We believe there’s great operational synergy between CPChem and Phillips 66 as an NGL provider and an asset operator around the Sweeny complex, where there's a significant presence of CPChem, including storage at the Clemens Terminal, the physical location and streams going back and forth between the assets. There is an arm's length agreement, but all of that happens quite seamlessly. If Phillips owned those 100%, we would capture even greater synergies, but being a 50% owner and deeply co-located creates significant advantages. Those represent substantial assets. You’ve got three Gulf Coast crackers on that site embedded and deeply integrated. It is real and happens every day. If it were truly an independent entity, there would be frictional losses in making things happen over time and less financial integration. So there are benefits in both ways.

Okay, great. The second question, I think, is for Kevin. Just curious that, I mean, with all the volatility created, given the Trump administration's economic and tariff policy, should Phillips 66 visit? What is the cash balance that you really want to keep on the book, as well as what is the debt to capital ratio and your payout ratio? Should you have a higher payout ratio still going to pay out more than 50%, or should you prioritize debt reduction until maybe the volatility becomes a little lower and the risk of recession becomes less?

Yes, Paul, it's all about balancing the different priorities. And there is a lot of uncertainty out there right now. But the point is, it is uncertainty, and we don't know exactly how it will play out. We don't want to make any dramatic decisions around that. We think that the way we've set our prioritization is very measured and balanced to work in low cycle environments or a more volatile environment and in a more robust environment as well. The 50% payout ratio is relatively modest. We do have cash from asset dispositions, and from a balance sheet standpoint, the cash at the end of the quarter was $1.5 billion. We've tended to run around about that somewhere between $1.5 billion and $2 billion to $2.5 billion at the end of most periods. Would it be nice to have more? Yes, but it’s perfectly adequate. There’s a natural cycle over the course of the month; the end of the month, the end of the quarter tends to be a relatively low point in that cycle. We have significant liquidity facilities that we can draw on as necessary. When we need to, we do. We holistically look at what that balance sheet needs to look like and feel that at the $17 billion level, when considering that Midstream with a very stable $4 billion of EBITDA, the marketing business, also stable around $2 billion, supports that debt. That supports the leverage at a modest ratio. We expect a debt level that can be supported by more stable cash-generating businesses and will regard the Refining business and the Chemicals business as being debt-free from a Phillips 66 balance sheet standpoint.

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

Thanks for all of your questions. Less than three years ago, we embarked on a transformative strategy. We've divested multiple non-core assets at attractive multiples, strengthened our NGL value chain and rationalized our refining portfolio. We improved refining operational reliability and reduced refining controllable costs, all while returning over $14 billion to shareholders. Looking forward, we will deliver significant value through our 2027 strategic priorities maintaining operational excellence, pursuing disciplined growth, returning capital and ensuring financial strength. We value shareholder feedback. We're committed to maximizing long-term value for our shareholders through operational excellence and disciplined capital allocation. Thank you for your interest in Phillips 66. If you have questions or feedback after today's call, please call Jeff or Owen.

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