Earnings Call Transcript - PSX Q1 2026

Operator, Operator

Welcome to the First Quarter 2026 Phillips 66 Earnings Conference Call. My name is Rob, and I will be your operator for today's call. The operator will provide instructions for the question-and-answer session when appropriate. Please note that this conference is being recorded. I will now turn the call over to Sean Maher, Vice President, Investor Relations and Chief Economist. Sean, you may begin.

Sean Maher, Vice President, Investor Relations & Chief Economist

Hello, everyone. Good morning, and thank you for joining Phillips 66 First Quarter 2026 Earnings Conference Call. Participants on today's call will include Mark Lashier, Chairman and CEO; Kevin Mitchell, Chief Financial Officer; Don Baldridge, President, Midstream and Chemicals; Rich Harbison, President, Refining; and Brian Mandell, President, 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.

Mark Lashier, Chairman and Chief Executive Officer (CEO)

Thank you, Sean. Geopolitical events in the Middle East drove unprecedented commodity price volatility during the quarter. To put this in context, March was the first month that price moves in major crude oil, refined product and European natural gas benchmarks all exceeded the 95th percentile. In the face of this volatility, we remain focused on operational excellence. Our team is executing safely and reliably. The majority of our assets are in the U.S. We have pipeline connectivity to some of the lowest cost and most reliable hydrocarbon corridors in the world. This positions us to reliably supply energy to support global demand. Due to the closure of the Strait of Hormuz, a significant amount of global refining and petrochemical capacity is down. We, however, continue to operate at high utilization supplying products to our customers. Additionally, we have global placement optionality through our commercial organization. This quarter has seen a significant and favorable shift in market fundamentals. First, the importance of U.S.-sourced hydrocarbons has increased due to a need for diversification and access to reliable supply. Second, unplanned downtime in global refining assets has reduced inventories and will support margins. Finally, reduced petrochemical production globally due to downtime and higher naphtha prices has reduced inventories and will also support margins. As a reminder, 80% of CP Chem's capacity is on the U.S. Gulf Coast with competitive ethane feedstock. Recent global events show the importance of reliable domestic energy supply. Our Western Gateway Pipeline project will address long-term refined products needs, improve supply flexibility and increase reliability for the West Coast markets. We're excited about the future due to our strong asset footprint, culture of operating excellence, and attractive fundamental outlook across all of our businesses. Anchored by the strength of our balance sheet, we're confident in our ability to navigate market volatility and capture opportunities. Brian will now share more on Slide 4 about how our commercial organization is one of our competitive advantages.

Brian Mandell, President, Marketing and Commercial

Thanks, Mark. We have a strong commercial organization with six offices across the globe. Our business enhances our asset footprint by optimizing feedstocks, delivering products into the marketplace and capturing value. We capitalize on geographic dislocations and turn volatility into opportunity. With our expertise in global market dynamics, we're ahead of the game. We have an asset-backed trading model and can leverage our physical footprint to take advantage of opportunities. We trade over six million barrels of liquid hydrocarbons every day. This creates optionality and economic value. Markets are fluid right now and volatility is likely to persist into next year. Recent disruptions have created multiple opportunities. For example, we move Bakken crude oil to our Beaumont terminal on the U.S. Gulf Coast and then, leveraging the Jones Act waiver, to our Bayway Refinery. We displaced international crudes with domestic grades into our refining system and sold the international barrels into tight overseas markets. We placed gasoline from our U.S. Gulf Coast commercial blending facilities into the West Coast using the Jones Act waiver. We leveraged our global footprint to deliver LPGs and naphtha produced at our Sweeny hub to global petrochemical customers around the world. Commercial performance is included in the results of our operating segments, enhancing their margins and improving market capture. Moving to Slide 5. The recent shock to the global energy system has been universal. Refining capacity has been damaged, logistics have shifted, arbitrage routes have changed. We are watching these and other signposts closely to capture additional value. The differentials between global indices and physical markets have spiked and forward markets are heavily backwardated. This dynamic reflects tight global crude oil balances. The outlook for product markets looks even tighter, and we expect refining margins to be constructive through the remainder of the year. Our market analysis, commercial capabilities and global footprint enable us to optimize the flow of molecules around our system. Our team maximizes the margin uplift across our value chains. Here are two examples of how we are optimizing our system. First, we've added two dozen originators around the globe. They speak the language, they know the culture, and they know how to source deals that unlock more value and optionality, providing long-term access to key global markets. Second, we've tripled our vessels on time charter in the past two years, securing roughly half of our waterborne crude slate. The global tanker fleet has become tight with limited spot availabilities and a large share of sanctioned vessels. This has caused freight rates to increase to historic levels. By locking in our freight rates early, we reduced the cost of crude to our refineries. We optimize around our refineries, pipelines and terminals to ensure that we're leveraging every molecule and driving additional value from our fundamental knowledge of the global markets. Backed by world-class assets, we find opportunity in volatility to deliver greater shareholder value. Now I'll turn the call over to Kevin.

Kevin Mitchell, Chief Financial Officer (CFO)

Thank you, Brian. On Slide 6, first quarter reported earnings were $207 million or $0.51 per share. Adjusted earnings were $200 million or $0.49 per share. As a result of a sharp increase in commodity prices during the first quarter, the company's financial results were impacted by mark-to-market losses of $839 million related to short derivative positions used as economic hedges to manage price risk on certain physical positions. We had a use of operating cash flow of $2.3 billion. Operating cash flow, excluding working capital, was approximately $700 million. Capital spending for the quarter was $582 million. We returned $778 million to shareholders including $269 million of share repurchases and $509 million of dividend payments. We increased the quarterly dividend 7% on an annualized basis. I will now cover the segment results on Slide 7. Total company adjusted earnings were $200 million. Midstream results decreased mainly due to lower volumes, largely due to impacts from winter storm burn, lower margins associated with customer recontracting and accelerated depreciation associated with a Permian Basin gas plant. In Chemicals, results increased mainly due to higher polyethylene margins. Across refining, marketing and specialties and renewable fuels, results decreased mainly due to mark-to-market impacts. In Corporate and Other, the pretax loss increased primarily due to the inclusion of costs associated with the decommissioning and redevelopment of the idled Los Angeles refinery site. Slide 8 shows cash flow for the quarter. We started the quarter with a $1.1 billion cash balance. Cash from operations, excluding working capital, was approximately $700 million. There was a $3 billion use of working capital, mainly reflecting an inventory build and an increase in cash collateral on derivative positions, partly offset by the net benefit in our payables and receivables positions associated with rising commodity prices. We funded $582 million of capital spending and returned $778 million to shareholders through share repurchases and dividends. Our commitment to return greater than 50% of net operating cash flow to shareholders remains unchanged. The company increased debt in the first quarter. Given the sharp increase in commodity prices, we issued a term loan and increased borrowings on short-term facilities to manage the margin collateral requirements. We ended the quarter with $5.2 billion in cash. We are well positioned to manage further commodity price volatility through significant liquidity, including a high cash balance and cash generated from operations. Slide 9 shows the projected path from the current debt level to year-end 2026 and 2027 debt. We remain fully committed to a total debt balance of $17 billion by year-end 2027. Consensus cash from operations for 2026 and 2027 is approximately $8 billion. In the remainder of 2026, we expect operating cash flow, working capital benefits and the reduction of cash balances as markets stabilize to enable us to reduce debt to approximately $19 billion. In 2027, we expect operating cash flow to enable us to reduce debt by a further $2 billion to $17 billion. This is consistent with the capital allocation framework we have previously laid out with approximately $2 billion each to dividends, share repurchases, capital spend and debt paydown. Looking ahead to the second quarter on Slide 10: In Chemicals, we expect the global olefins and polyolefins utilization rate to be in the low 80s, driven by the uncertainty of operating levels at CPChem's joint ventures in the Middle East. In Refining, we expect the worldwide crude utilization rate to be in the low to mid-90s. Turnaround expense is expected to be between $120 million and $150 million. We anticipate corporate and other costs to be between $430 million and $450 million. Moving to Slide 11. Mark will now provide some final thoughts. We will then open the line for questions.

Mark Lashier, Chairman and Chief Executive Officer (CEO)

Great things happen when preparation meets opportunity. The current environment is attractive across all our businesses. We've prepared by focusing relentlessly on what we control: cost, culture, competitiveness and capital discipline, all in the service of safe, reliable operations that deliver strong shareholder returns. Our teams are performing, and we're pressing in and capturing those opportunities. Fully prepared, fully committed to execute and win. When we win, you win.

Operator, Operator

The conference is now open for the question-and-answer session. Our first question is from Steve Richardson from Evercore ISI.

Stephen Richardson, Analyst, Evercore ISI

I was wondering if you could start on the mark-to-market adjustments and give us some color on some of these impacts by segment, if you could. And I know you addressed this in the 8-K, but could you get into a little bit of how the volatility that you witnessed was outside the bands of expectations? And can you also touch on how you think about that draw of liquidity, what it means going forward? And would it have any impacts on your shareholder return commitments?

Kevin Mitchell, Chief Financial Officer (CFO)

Yes, Steve, this is Kevin. Let me walk through some of that detail. As we laid out in the first quarter, we saw an $839 million mark-to-market loss from an income statement perspective that impacted refining, marketing & specialties and renewables, and the specific amounts by segment were detailed in the press release. This is broadly consistent with what we put out in the 8-K. We said approximately $900 million. At that point, that was our best estimate at that point in time. It's important to make clear that these are mark-to-market impacts on paper hedges that we have in place to offset physical purchases. Those paper positions are marked-to-market at the end of each month, but the physical inventory is not, and so there's a temporary net impact through the income statement. I want to emphasize that we do this to protect economic value. This is a risk mitigation tool and a standard practice. In the normal course, the impacts of these mark-to-market transactions are not that significant or material. But as Mark mentioned, we saw unprecedented volatility across the commodity markets in which we participate, and of course this produced an outsized impact. As you look ahead in terms of what you can expect on a go-forward basis, it's very much a function of where commodity prices move from the end of March through, say, the end of the year. If we use the forward curve as of end of day yesterday, we'd recover by the end of the year about $500 million of that $839 million. It's a commodity-by-commodity calculation on a quarter-by-quarter basis. So based on the forward curve, if that were to play out as reality, that's what you would see come back. From a cash standpoint, at the end of the quarter, we had a total of $3.2 billion out on margin associated with all of this activity. That differs from the income statement effect because there are other barrels being marked where we actually do a corresponding impact to reflect the physical gain. So you have more paper activity than is subject to the income statement-related mark-to-market. That cash impact will reverse in two ways: directly in falling prices you'll see the reverse effect, and in normal course, because this is a continual process as volatility subsides, we effectively consume this cash through normal purchasing activity. To put some context around that, $3.2 billion was out on margin at the end of March; at the end of yesterday, it was $2.1 billion, even though absolute price levels are pretty similar. So we'll see that come down as we work our way through the year. Regarding capital allocation, debt reduction, and share buybacks: as I covered earlier and on the slide, we think we will be able to utilize working capital benefits and the remainder of the year operating cash flow and, as markets stabilize and we don't need to carry that much cash, draw down cash and get debt down to about $19 billion at the end of this year and then down to our target $17 billion next year, all while still returning at least 50% of our operating cash flow through dividends and buybacks. We used Street estimates for cash generation in that calculation, but I feel optimistic there's upside and we'll hold true to that. So 50% back to shareholders and the other excess will accelerate debt reduction.

Stephen Richardson, Analyst, Evercore ISI

That's great. Thanks for the full answer, Kevin. I was wondering if I could also ask about CPChem. The consultants have full chain margins up, I believe, $0.33 at last check for the second quarter. Could you talk about what you're seeing in your business and your view on capturing this, with obviously a very high utilization rate on the U.S. Gulf Coast into the second quarter and the balance of the year?

Mark Lashier, Chairman and Chief Executive Officer (CEO)

Yes, absolutely, Steve. CPChem is well positioned to capture those margins. There can be some contractual step-ups that occur, but they're certainly out there, and CPChem is aggressively pushing to capture that value. You've seen the supply and demand situation tighten dramatically with limitations coming out of the Middle East. Additionally, you've seen limitations for producers in Asia where some countries are selectively moving hydrocarbons away from petrochemical production and into energy use to protect domestic supplies. That further tightens global markets. The cost curve has dramatically shifted as the price of oil has risen versus low-cost ethane in North America; you see that price floor going up and driving margin increases. Prior to recent events, China was accessing deeply discounted crude and converting that into deeply discounted naphtha and exporting polyethylene to the world market at a material advantage versus normal cost curves. We think that advantage, about $0.05 to $0.06 per pound, has been largely eliminated by recent events. So it's very constructive for CPChem. They can operate from the U.S. Gulf Coast at high rates and over 80% of their capacity is in the U.S. with access to advantaged ethane feedstocks. Feedstock cost in North America has been relatively stable compared to the rest of the world. So CPChem is very well positioned to capture these improved margins.

Operator, Operator

Our next question is from Neil Mehta from Goldman Sachs.

Neil Mehta, Analyst, Goldman Sachs

Yes. Mark and team, the standout number from this quarter was really the worldwide market capture, which ticked up to 138%. Maybe you can bring this to life a little bit. What are a couple of examples of dynamics that specifically drove that strength? And when we think about a mid-cycle market capture rate, you've talked about mid-90s type utilization. Many investors were thinking 2Q could be lower than that mid-90s number because of backwardation in the curve. Do you think that mid-90s is achievable in Q2?

Kevin Mitchell, Chief Financial Officer (CFO)

Yes, Neil, it's a great question. Brian was pretty humble in his opening remarks, but we always talk about optionality and creating optionality, and what he and his commercial team demonstrated in Q1 was leveraging that optionality. If you think about moving Bakken crude to New Jersey without using a train and leveraging shipping logistics in advance, we have an advantage. By using Jones Act waivers and other logistics, Brian and his team could take full advantage of opportunities and drive that capture number. That's what drove that remarkable capture number, and we're really proud of what they've been doing. They weren't sitting around watching the world in a crisis; they were moving product to take advantage of the optionality we've created and prepared for. Brian, you can go ahead and talk a little more about what your team has been up to.

Brian Mandell, President, Marketing and Commercial

As Mark said, with the huge market volatility and the integration of our businesses, there was a lot of value to be had in the market. Some specific examples: we profited from a long RIN position, including RINs we generated at a renewable facility, and we were also able to roll some lower-cost RINs from prior years into this year. We had strong results in our European and Asian trading businesses. As I mentioned earlier, the time charters we put on over the last couple of years really helped in the elevated freight market and reduced our accrued costs into our refineries. Also, some product differentials like octane and jet were higher than indicators, which helped. For context going forward, if we use our refining indicator—it's embedded in the indicator—historically an average for the year would be that in Q1 we captured and benefited from the commercial opportunities I mentioned. Normally in Q2, at the beginning of summer driver season, we'd think about mid-50s for capture, so start with the mid-90s utilization and consider tailwinds and headwinds. Tailwinds include butane blending for RVP waivers, strong jet/er octane dips that can help us, and additional commercial value. Headwinds include backwardation, inventory impacts and potential turnarounds in Q2 that would impact capture. So I'd start with mid-90s utilization and adjust based on market conditions for Q2.

Neil Mehta, Analyst, Goldman Sachs

Is it fair to say mid-90s is a good starting point, though, based on current trends?

Brian Mandell, President, Marketing and Commercial

Mid-90s would be a good starting point.

Neil Mehta, Analyst, Goldman Sachs

Okay. And then Kevin, can you hit Slide 9 again, maybe in a little more detail? There's been pushback since the 8-K that leverage is elevated and part of that is you're holding excess cash. Can you spend a little more time unpacking this slide because I think it is important?

Kevin Mitchell, Chief Financial Officer (CFO)

Yes. That's an important point. From a debt and cash standpoint, we've effectively grossed up the balance sheet by borrowing more than we need from a normal day-to-day standpoint to position ourselves in the event of extreme volatility and potential margin calls. It feels like since the end of the first quarter that dynamic has settled down a little bit, although markets continue to fluctuate. Our expectation is as market conditions stabilize, we'll be able to draw that cash down, which will reduce debt. We had a big working capital use in the first quarter, and we expect that to more than come back over the remainder of the year through normal annual trends—first quarter is usually a working capital use for us—and it was exacerbated by margin calls this year. We expect to recover that and project a slight working capital benefit for the full year. We expect healthy operating cash flow that will go to debt reduction. As you roll into next year, we continue to assume about $8 billion of operating cash flow, which allows a couple billion for debt reduction comfortably, getting us to the projected $17 billion target. If we see a continuation of strong margin conditions in refining and chemicals, that will further enhance cash generation, enabling faster debt paydown and additional returns to shareholders.

Operator, Operator

Our next question is from Manav Gupta from UBS.

Manav Gupta, Analyst, UBS Financial

I have more of a theoretical question. Based on your preliminary comments, it feels your refining system, which is mostly in the U.S., is relatively insulated from these crude supply disruptions and other global issues where certain refining assets may be very good but can't run. Does that mean a U.S. refiner like Phillips 66 or any U.S. refiner is structurally better off than global counterparts? If so, is this the time to be bullish on U.S. refining?

Brian Mandell, President, Marketing and Commercial

Hi, Manav. You're absolutely right. This is a time to be bullish on U.S. refining. What happened started in Asia, moved to Europe, but the U.S. has been relatively insulated on supply. Refinery runs are strong, consumer demand is healthy, and crude production is relatively stable. This highlights how we're relatively immune to the global crisis, although not to higher prices. At Phillips 66, for instance, we only purchased about 1% of our crude from the Middle East. Our crude is generally from Canada, the U.S., and Latin America. From Canada and the U.S., it's all pipeline connected. So we are in a very favorable position.

Mark Lashier, Chairman and Chief Executive Officer (CEO)

I'd add to Brian's comments: the actions taken in the first quarter demonstrate how we interface with the rest of the world. We're able to move product and leverage domestic supply, pushing normal imports out into global markets. In addition, our North American refining position and CPChem's strength in North American petrochemicals, particularly the high-density polyethylene value chain, give us tailwinds across product lines. All of our businesses have favorable fundamentals in this environment, and we think those tailwinds will persist for a considerable time.

Manav Gupta, Analyst, UBS Financial

Quickly pivoting to renewables: you own a significant amount of renewable diesel capacity in the U.S. Renewable diesel margins were negative previously, but we are in a very different environment now. Given the size of your footprint, would it be fair to say year-over-year you could see a material free cash flow inflection in your renewable diesel business, given current market conditions?

Brian Mandell, President, Marketing and Commercial

Absolutely. If you just consider the RIN values, the current blended RIN is more than twice what it was in 2025. So just credit value alone is substantially higher. Our renewable facilities are running very well right now, in fact above nameplate capacity. So you should see a substantial improvement year-over-year compared to prior year.

Operator, Operator

Our next question is from Doug Leggate from Wolfe Research.

Douglas George Blyth Leggate, Analyst, Wolfe Research

Brian, we've got extraordinary margins that are steeply backwardated. I get the bullish near-term outlook, but what's your view on duration? We're seeing airlines cut capacity; is this demand destruction versus supply constraints? What's your view on how long these elevated margins persist? I have a follow-up for Kevin after this.

Brian Mandell, President, Marketing and Commercial

Thanks, Doug. We view this as lasting through the rest of this year and into early next year. It's less about demand destruction and more about demand constriction—managing product needs. Think of it as a race to the top: tight markets and rising crude prices will force product prices higher to open refinery margins and keep refiners producing the products the world needs. Jet fuel is the tightest. As a result, refinery margins will need to open up. We saw that in Europe where gasoline cracks moved higher to incentivize refiners to produce the needed products. So we expect this dynamic to continue through this year and into the early part of next year, even if the straits reopen in the next month or two.

Douglas George Blyth Leggate, Analyst, Wolfe Research

Brian, would you treat this as annuitizable or treat it as a windfall?

Brian Mandell, President, Marketing and Commercial

We see the elevated margins persisting longer than just a few months, so in that sense it's more than a short-term windfall. I wouldn't say we'd fully annuitize it—it's too early to lock that in—but we do see it as a multi-quarter phenomenon rather than a one-off.

Douglas George Blyth Leggate, Analyst, Wolfe Research

Kevin, follow-up: your share price is only about 5% off its high. If this is a windfall, should you prioritize debt reduction over buybacks to convert this windfall into permanent equity value? Why not focus more on debt reduction?

Kevin Mitchell, Chief Financial Officer (CFO)

Doug, debt reduction does create equity value and is a priority; the $17 billion target is a target, and if we have significant excess cash generation, we will reduce debt below that level. I'm not going to say we'll stop buying back shares entirely to focus only on debt reduction. We aim for balance. We've been clear on returning at least 50% of operating cash flow: at current levels, about half of that is the dividend and the other half is buybacks. As cash generation increases, the absolute amounts returned increase and so will the balance sheet reduction. We view the approach as balanced across the board. While the share price may be near highs, we still think there is good value in our shares and are comfortable with the current capital allocation plan.

Operator, Operator

Our next question is from Joe Laetsch from Morgan Stanley.

Joseph Laetsch, Analyst, Morgan Stanley

Can you talk about demand trends within your U.S. system? Are you seeing any signs of demand destruction for gasoline and diesel? Inventories in the U.S. have drawn to or below the 5-year range and things look tight.

Brian Mandell, President, Marketing and Commercial

Joe, we haven't seen much demand destruction—probably around 1% down for products, both gasoline and diesel. In our system we've done well: we added over 500 franchise stores last year in marketing, so we're seeing value from sales efforts. But overall we have not seen demand disruption in the U.S.

Joseph Laetsch, Analyst, Morgan Stanley

That's helpful. On the refining side, utilization rates of about 95% in the quarter were solid despite maintenance and third-party pipeline impacts. Can you talk about drivers of performance during the quarter and about operating costs—how far along are you on cost reduction efforts and the path to $5.50 per barrel OpEx?

Richard Harbison, President, Refining

Yes, Joe. I'll start with cost per barrel then look at regional performance drivers. Cost per barrel in 1Q was $6.21, which is $0.80 per barrel improvement year-over-year—so good movement. Quarter-over-quarter it was slightly higher primarily due to fewer barrels processed in the quarter, a combination of planned maintenance and seasonality with fewer days in the quarter. Total process inputs were down about 2% quarter-on-quarter. Seasonally higher natural gas prices were also a factor; Henry Hub averaged about $4.87/MMBtu in the quarter. Normalizing to a $3 annual natural gas price, which is the basis we've used for the $5.50 target, the number moves into the low $5.80s per barrel OpEx. That suggests we're within striking range of the $5.50 per barrel target by 2027. The organization is working hard: we have over 200 initiatives actively pursued, forecasted to drive $0.15 to $0.20 per barrel of improvement. These are structural changes in our cost profile. Examples include changing our approach to cleaning FCC boilers—an initiative projected to save over $3 million annually—and tightening process controls in sulfuric acid alkylation units to save about $2 million annually. We're racking up wins across the system. We also expect to increase availability and utilization, continue maturing reliability programs, and increase total process inputs by filling downstream units. On regional performance: in Europe, cargo prices were favorable and our European office captured strong results, particularly on the jet side. On the Gulf Coast, jet production was high and timely with jet pricing. In the central corridor, turnaround activity affected market capture, particularly at Wood River and Borger, and there were mark-to-market impacts. On the West Coast, aside from third-party pipeline impacts that slowed Pacific Northwest operations, the team did a great job capturing market opportunities.

Operator, Operator

Our next question is from Phillip Jungwirth from BMO Capital Markets.

Phillip Jungwirth, Analyst, BMO Capital Markets

On midstream, how does higher crude prices change how you're thinking about investment opportunities? If there's a greater call on shale and public companies raise CapEx, would you look more at organic growth? If so, which parts of the value chain—gathering, processing, pipelines, frac, or exports? Also, how sensitive is the $4.5 billion midstream EBITDA target by year-end 2027 to higher U.S. volumes?

Donald Baldridge, President, Midstream and Chemicals

Phil, thanks. First, capital discipline and returns remain very important to us. As opportunities evolve—whether volume growth in the field where we can add gathering and processing capacity to serve customers and fill our value chain—we will pursue those opportunities. We have growth plans in place and will continue to add capacity as customer needs evolve. We'll maintain a balanced value chain: adding gathering and processing capacity while being mindful of downstream infrastructure needs and focusing on returns. Regarding the $4.5 billion EBITDA target, we feel very good about that target and the path we're on. Fundamentals are bright and coupled with execution and commercial successes, we feel comfortable with the trajectory and the ability to sustain growth beyond 2027. If higher U.S. volumes develop, that would be an upside to the target and we'd evaluate incremental investments consistent with our capital discipline.

Phillip Jungwirth, Analyst, BMO Capital Markets

On Chemicals, once the Strait opens up, how do you see the progression to getting back to normal operations for CPChem? You guided lower utilization in 2Q, but are benefiting on margins on the Gulf Coast. What does the scenario look like and the timeframe to return to normal?

Mark Lashier, Chairman and Chief Executive Officer (CEO)

For CPChem, assets in the Middle East that are offline are in good shape. The bigger question is broader infrastructure in the Middle East and what challenges may exist. There's likely a greater urgency to get crude oil and refined products moving first; petrochemicals may recover on a slightly longer timeline. Inventory and logistics chains will need to be repopulated, and that will take time, so the recovery will have legs. We have two big projects underway: the Golden Triangle project in the U.S. and the LPP project in Qatar, and both are proceeding as expected with no disruption. Both will come online fully in 2027, with Golden Triangle polymer commissioning beginning later this year. Those projects will add capacity at a time when it will be needed, so CPChem should see contributions as the crisis resolves.

Operator, Operator

Our next question is from Lloyd Byrne from Jefferies.

Lloyd Byrne, Analyst, Jefferies

Mark, Kevin, team, thank you. Following up on capture: how does secured transportation impact second-quarter capture or third-quarter if rates continue elevated?

Brian Mandell, President, Marketing and Commercial

You should see a benefit because we locked in shipping rates over the last couple of years. With shipping rates elevated, locking in time charters reduces our freight costs, so you should continue to see a benefit from shipping rates, particularly in our Atlantic Basin region.

Lloyd Byrne, Analyst, Jefferies

Following up on Western Gateway: great open season. What hurdles remain and timing for a final investment decision?

Donald Baldridge, President, Midstream and Chemicals

Lloyd, we're excited about Western Gateway and the progress through the second open season. The path forward is to complete JV arrangements with Kinder Morgan and execute transportation agreements with third-party shippers. Our team is working to complete that. With successful conclusion over the next couple of months, I would expect us to be in a position to make an FID mid- to late summer, targeting a 2029 in-service date. From the open season, we've learned two things: strong market interest in new-build pipeline capacity to Phoenix to deliver reliable transportation fuels to the West, and strong support from state and federal agencies and officials for allowing the pipeline in service quickly. That gives me confidence Western Gateway is the right project at the right time and will deliver attractive returns.

Operator, Operator

Our next question is from Jason Gabelman from Cowen.

Jason Gabelman, Analyst, Cowen

You reiterated the $4.5 billion midstream EBITDA target. 1Q moved lower sequentially, particularly in NGLs. Can you help bridge the quarter-over-quarter decline and remind us how you get to $4.5 billion? Also, given Western Gateway and continued activity, what upside do you see to that $4.5 billion?

Donald Baldridge, President, Midstream and Chemicals

Jason, absent the impact of winter storm burn, Q1 performance was in line with expectations. We continue to have commercial success in growth and recontracting. Regarding recontracting, we renew proactively—often a year prior to expirations. The contracts that came up this quarter were renewed for 10-plus year terms, which validates customer confidence and our customer service and execution. That gives me confidence in the $4.5 billion target by 2027. Fundamentals are bright, and coupled with execution and our commercial successes, we feel comfortable on that trajectory and the ability to sustain growth beyond 2027. Regarding upside from projects like Western Gateway or additional gas plants, there is potential to grow beyond the target depending on market fundamentals and execution.

Jason Gabelman, Analyst, Cowen

Thanks. On the LPG export arbitrage opportunity: how are you thinking about that in the current environment?

Brian Mandell, President, Marketing and Commercial

In the near term, most export windows are spoken for with our term customers or by ourselves via time charters. Our team in Singapore has been able to optimize deliveries and take advantage of volatility, much like we've discussed elsewhere. Overall, this highlights the strength of Gulf Coast LPG export capability, and we expect Gulf Coast exports to continue to be a good tailwind. Freeport should be a beneficiary of that outlook.

Jason Gabelman, Analyst, Cowen

On West Coast assets: does Western Gateway make Ferndale more or less core to the business than before? And is there an opportunity to sell down part of the interest in the renewable diesel plant as peers have done?

Mark Lashier, Chairman and Chief Executive Officer (CEO)

Ferndale integrates well into the California market and is complementary to Western Gateway. Ferndale targets Northern California while Western Gateway will serve Southern California. We see strong tailwinds for Ferndale, particularly as they enhance capabilities for CARB and sustainable aviation fuel blending. Ferndale remains a strong asset. On the renewable diesel plant, we'll evaluate market interest; it's a great, world-class asset running well, and we would entertain interest but it remains an important, high-performing asset for us.

Operator, Operator

Our next question is from Theresa Chen from Barclays.

Theresa Chen, Analyst, Barclays

On midstream, with crude price outlook biased to the upside and potential re-acceleration of activity in second-tier basins, can you talk about utilization and ability to expand NGL paths that flow to your Sweeny complex? If there is renewed growth in associated gas in the Bakken or Rockies, how much incremental pipe capacity could you have on the Rockies-to-Sweeny NGL system or would that require significant investment?

Mark Lashier, Chairman and Chief Executive Officer (CEO)

Teresa, in the Rockies we're seeing record volumes in the DJ basin, which is encouraging. There are opportunities in Powder River and Bakken for additional development. We have a well-positioned NGL network out of Colorado that feeds into our Sweeny complex along multiple routes. We recently restarted our Powder River NGL pipeline to take some early Bakken barrels. If production grows in those areas, we'd evaluate expanding capacity to fill downstream pipes out of the Rockies. So that's an area we're monitoring and prepared to support incremental customer-driven growth.

Theresa Chen, Analyst, Barclays

Regarding Western Gateway commercialization now complete, what range of total CapEx is expected to build the project on a 100% basis, regardless of how economics are split between partners?

Mark Lashier, Chairman and Chief Executive Officer (CEO)

We need to finalize partner scope and shipper connections before we provide full CapEx details. We're still working through final details with our partner and prospective shippers, so it's premature to provide a CapEx range today. That information will be available shortly as we conclude those discussions.

Operator, Operator

Our next question is from Matthew Blair from TPH.

Matthew Blair, Analyst, TPH

Could you talk about the Canadian crude market? WCS Hardisty appears attractive. Are wider differentials versus TI due to pipeline constraints out of Canada? Do the market structure impacts you discussed for U.S. inland barrels apply to Canadian barrels as well?

Brian Mandell, President, Marketing and Commercial

WTI-WCS differentials widened earlier this year and are now almost $18 off for next month. Reasons include U.S. light sweet crudes being pulled to Asia, tightening light sweet supplies, and Venezuelan barrels and refinery outages putting pressure on heavy grades, widening the WCS differential. We expect those differentials to remain wide for some period. We have a strong Mid-Con portfolio and pipeline positions as a competitive advantage for shipping Canadian crudes to our refineries, and we benefit from those widened differentials. Currently, our sensitivity is about $140 million of additional earnings for every dollar wider on the WTI-WCS differential.

Operator, Operator

That concludes the question-and-answer session. I will now turn the call back over to Sean Maher for closing comments.

Sean Maher, Vice President, Investor Relations & Chief Economist

Thank you for your interest in Phillips 66. If you have any questions or feedback after today's call, please reach out to Kirk or myself. Thanks, and have a great day.

Operator, Operator

This concludes today's conference call. Thank you for your participation. You may now disconnect.