Phillips 66
Q4 2020 Earnings Call Transcript

Published: 29 Jan 2021

[Operator:]

Welcome to the Fourth Quarter 2020 Phillips 66 Earnings Conference Call. My name is David, and I will be your operator for today's call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Please note that this conference is being recorded. I will now turn the call over to Jeff Dietert, Vice President, Investor Relations. Jeff, you may begin.

[Jeff Dietert:]

[Greg Garland:]

Okay. Thanks, Jeff. Good morning, everyone, and thank you for joining us today. At the start of this last year, we could not have envisioned the unprecedented challenges that we faced in 2020. We're proud of and grateful to the many people who have worked diligently and tirelessly to develop the COVID-19 vaccines. We are optimistic about the positive impact of vaccines will have on economic recovery in the months ahead. In the fourth quarter, we had an adjusted loss of $507 million, or $1.16 per share. Market conditions remained challenged. Our refining business continue to be affected by demand destruction associated with the pandemic. For the year, we had an adjusted loss of $382 million, or $0.89 per share. We operated well and completed major growth projects in our Midstream segment, including the Gray Oak Pipeline, our largest pipeline project to date in the Sweeny Hub Phase 2 expansion. We took early decisive steps to reduce costs and capital spending, secure additional liquidity and suspend our share repurchases. We exceeded $500 million in cost reductions and cut capital spending by more than $700 million. These actions, combined with cash flow generation from our diversified portfolio, provided us with financial flexibility to maintain our strong investment-grade credit ratings, sustain the dividend and to navigate the crisis. Our focus continues to be on the well-being of our company, our employees and our communities. In 2020, we contributed $32 million to charitable organizations, including $6 million toward COVID-19 and disaster relief. Even with the distractions and the challenges of the pandemic, our people remain focused on safe, reliable operations and execution of our strategy. 2020 was the safest year in the history of our company.

[Kevin Mitchell:]

Thank you, Greg. Hello, everyone. Starting with an overview on Slide 4, we summarize our fourth quarter results. We reported a loss of $539 million. Excluding special items, we had an adjusted loss of $507 million, or $1.16 per share. We generated operating cash flow of $639 million, including distributions from equity affiliates of $400 million. Capital spending for the quarter was $506 million, including $239 million for growth projects. We paid $393 million in dividends during the fourth quarter.

[Operator:]

Thank you. We will now begin the question-and-answer session. Doug Terreson with Evercore ISI. Please go ahead. Your line is open.

[Doug Terreson:]

Good morning, everybody.

[Greg Garland:]

Good morning, Doug.

[Kevin Mitchell:]

Good morning.

[Doug Terreson:]

Greg, a notable feature of performance last year. Was that the company not only executed on its operating and capital cost reduction plans, but you guys also completed four to five major projects and what was one of the most tumultuous years in recent decades? So first, kudos to the team on strong performance. Simultaneously, while the benefits of diversification and taking care of business like you did last year were clear. The pace of change in the industry seems to be quickening, not only as it relates to energy policy, and likely feature energy mix, but also that which investors expect from their investments in the sector. So I've got a couple of questions. One, how do you think - how do you guys think about how to navigate this evolving and changing environment? Two, more tactical and strategic dexterity likely to be needed maybe more than in the past or do you think it's about the same? And then three, are there obvious implications for financial strategy for Phillips 66 along the way? So, three questions.

[Greg Garland:]

Okay. You gave me a lot to unpack there, Doug. Thanks. So maybe starting with - just let’s start at the top with kind of the overview. I think that - for us capital discipline, capital allocation remains core to our strategy in what we do. That's returning capital to shareholders. It’s earning returns above our weighted average cost of capital on what we choose to invest in as a company. So those are our guiding lights or our guiding stars as we think about this, and we think about energy transition. So I tend to think about it in three buckets, near-term, midterm and longer-term, Doug, in terms of our response and how we're going to navigate through it. Clearly, in the near-term, we're building a renewable fuels pathway, what we're doing. So this year, mid-year, we'll start up the first part of Rodeo, 8,000 barrels a day. By 2024, we'll have a full facility conversion, more than 50,000 barrels a day there. We're working with price renewables where 11,000 barrels a day of renewable coming out of our facility. We're kind of co-processing that 3,000 barrels a day Humber today in the UK, moving to 5,000 barrels a day. And so, as we think about, as we approach the middle point of the decade, we should have $1 billion-ish of the EBITDA at our renewable fuels business. So that's certainly one pathway we think about. The second bucket is kind of more in the medium-term. And as you know, we're supplier of specialty graphites and to go into the anode-production and lithium-ion batteries, and we'll continue to work to improve that, to help improve battery performance, but also lower cost. And so I think as we see EVs grow and they're going to grow, EVs sales globally are going to grow, that portion of the business is also going to grow. And I think we can make nice contributions there in terms of what we bring to batteries and battery technologies. And then maybe the third one is around hydrogen and that's longer-term. Certainly, today, we’re building hydrogen fueling stations in Europe. So that's a first step. We're working in the United Kingdom with the Gigastack consortium, which is taking offshore wind, electrolysis to make green hydrogen. We're using that in our Humber Refinery to reduce the carbon content of our fuels produced at Humber. And so, as I think about hydrogen, our industry is big consumers and producers of hydrogen and we really understand it. I think that hydrogen moving into transportation fuels in a big way is probably decades out. But we'll continue to build a pathway around hydrogen for the longer-term. You may have seen that we got a grant from the DOE and we talked about it in the opening comments today, but that's really around our solid oxide fuel cell technology and taking CO2 and running through the fuel cell then to produce clean fuels. And so, there is probably a pathway there for us too. So our idea is we want to participate in energy transition. We want to do it, where we can best and earn returns that are above our weighted average cost of capital. We certainly want to exploit the technology base we have that use existing equipment where we can, and convert it if we need to, like what we're doing at Rodeo. We try to find capital efficient solutions, where we can earn great returns. I think the other thing I want to point out here, Doug, is you think about the challenges that we have before us of providing reliable, affordable abundant energy at the same time, addressing the climate is something that's going to take a whole approach of industry. But I think about the 10 million people that work in the industry today, they're problem solvers, they’re engineers, they’re scientists, they’re marketing people, they're people that understand the complexity of the energy business today. And I think they're some of the best people on the planet that are positioned to help solve this dual challenge that we have. And so I'm an optimist always, and I think this industry and our company certainly will have big role to play in the energy transition as we move forward. And I know you asked three questions, and I don't know if I answered three, but I did the best I could with that. But maybe - go ahead, if you want to follow-up.

[Doug Terreson:]

Well, I was just kind of say no. It sounds like a responsible shareholder-oriented strategy, but I didn't want to interrupt you, so go ahead and finish, Greg.

[Greg Garland:]

Well, I just was – well, I am just going to tie it up with - I know my buddy, Joe, made a point yesterday and we’d be remiss also if we didn't say, we recognize you're coming on a transition point. You made some great calls, you've been at the top of your game for a very long period of time that's really hard to do with the business that you're in, Doug. You've been a friend of the industry and our company, but yet, you’ve had the courage to challenge us when we needed to be challenged and you've always had shareholder interest at heart. So I would tell you really well done. We're going to miss you, and we wish you the very best for you and hopefully we'll see around the energy patch in the future.

[Doug Terreson:]

Well, thanks, Greg. Those are kind comments and I appreciate them. You guys have been really easy to support, because you've had a model for success and you've executed. And so, you positioned this company very well for the future, you and the team and best of luck, and thanks again for your example.

[Greg Garland:]

Thanks, Doug.

[Operator:]

Neil Mehta with Goldman Sachs. Please go ahead. Your line is open.

[Neil Mehta:]

Good morning, team. I guess the first question I had is going back to the Analyst Day from a couple of years, ago it feels like an eternity ago, certainly a pandemic, ago. But the company laid out a $6 billion to $7 billion long-term cash flow target. And obviously 2020, it's hard to capitalize going forward. But as you think about all the different pieces that went into that $6 billion to $7 billion, recognizing it's a moving target. But Greg, you can just share your perspective on, one, do you still think that's the right anchor? And what are the pluses and minuses as far as you can tell, right now, at this point?

[Greg Garland:]

Yes, I think, I'll start off and then, Jeff and other folks can help me. I don't think we’re ready to make a call that mid-cycle has changed yet. I think that it's early to do that. In terms of how we reoriented kind of the capital plan here in response to COVID, also I think as the industry itself has kind of paused in terms of the upstream and the midstream opportunities available to us. Certainly, we're probably going to run $200 million to $300 million under the growth plans we announced at that day, and simply because we're not going to read Red Oak pipeline. We're not going to raise pipeline and some of the other things that we had laid into the plan that we've just - we just stopped working on. But we may well find other opportunities, so you have our review that's going to come in and it's going to be a big EBITDA generator that wasn't in those numbers. 66 we continue to prosecute that, if you remember somewhere $600 million or so that was around our value chain strategy optimization work, we're going to do it. All that's mid-cycle predicated, so we've done a lot of work around there. We haven't been in mid-cycle conditions. And so in 2020, we're not achieving the results. We got, we achieve there, but I think if we move into 2021 and into 2022, we're pretty optimistic that we get back to recover in the mid-cycle conditions around that part of the portfolio. So, Jeff, I don't know if you want to tag on there and add anything to that. But I think that would be my views.

[Jeff Dietert:]

Yes. I think within the Marketing segment, we had $1.4 billion of EBITDA kind of baked in, and they generated $1.6 billion of EBITDA in a market, where we had some demand hits in 2020 is supported by the JV retail acquisition that we made early last year. The Midstream contributions have held up nicely with the fee-based approach, that we've had there, $2.1 billion of EBITDA this year in tough market conditions, obviously strong with Sweeny Fracs 2 and 3, Clemens, South Texas Gateway all contributing a full year in 2021. CPChem, we've not really changed the outlook there and there is a potential for future contributions from Gulf Coast 2 and Roswell project. So I think there is still a lot to be encouraged about as we look forward.

[Neil Mehta:]

And the follow-up is just on refining, obviously was it, there was a tough fourth quarter and utilization was call it system-wide I think kind of 69%, and you're running low-70s in January. Do you have a view on sort of the trajectory of utilization for the industry, recognizing in the near term, it's going to be very much demand dependent. And is there a good rule of thumb of refining utilization when it gets to a certain level, you think the business is back to generating pre-tax profit?

[Bob Herman:]

Yes. This is Herman. I think when we think about the near-term future and how do we get back to higher utilizations, it all kind of starts with the vaccines, that Greg referenced in his opening comments, right. We got to get people back to a normal life and back out on the roads using their cards, going to school, going to work, going to going to soccer on the weekend. That's the kind of the first step and that leads to a demand signal for gasoline and distillate to a lesser extent. And you start to pull on utilizations, that I think you will see will be following the market to add capacity back. And if you kind of think about the timing, we believe the government will get more efficient at getting people vaccinated as the months go by here. But certainly by summer, we would expect that a good portion of the American public is able to get out and burn the fuels that we make and that should lead to a more normal type summer level. We don't have a rule of thumb of what we've got to get back to. But obviously running more is better and spreading out our cost over more barrels. Some of our plants get more efficient at higher run rates, the market gets more efficient and higher run rates, and we kind of return. We always think about you got to have that clean product crack signal to get utilization up, that leads to covering your costs, and then really, we need more normalized crude differentials in the market. I know those are all play out together because there is utilization rises across the industry, there is going to have to be a pull primarily on salary heavy barrels that should help move the crude spreads back out and that's really how we capture more and more of our cracking, and kind of get back on the path to high utilization rates and a lot more profitability.

[Operator:]

Phil Gresh with JPMorgan. Please go ahead. Your line is open.

[Phil Gresh:]

First question just on the Chemicals business, wanted to get your thoughts there on the outlook and in particular for your own business, I think margins have been extremely strong and continue to be here in the first quarter. And many of your peers have put a strong result as well. It seems like your results maybe had a little bit more of a lag effect or some cost headwinds there in the fourth quarter. So something you might be able to elaborate on that a bit and your outlook here as we enter 2021?

[Greg Garland:]

Well, we're constructive chemicals, Phil. I think that demand is still really strong in that segment. We see that across all regions where there is China, Europe or North America. CPChem has run really well had record sales volumes. The other thing we've seen is we've seen delays in the startup of new facilities, Partners been economic-related, Partners has been COVID related as people have either slowed construction or paused construction, they didn't see workers on these big sites. So at this point then - balances actually look better to us. At this point, in 2021, and they did the equivalent point last year. And so I think we're pretty optimistic around operating rates. Margins are - and the delta of the marker margins, it's not unusual to see CPChem kind of deviate of a value chest marker margins, we've seen that many times in the past. And certainly it's timing, it's portfolio, it's geography as you think about that. If you think about the fourth quarter, poly - obviously polyethylene contract prices were - they are essentially flat, October, November, they go up in December. And then if you think about your contract portfolio, there could be lag of 30 to 60 days of really fully realizing those price increases through the portfolio, so the part of that is just geography, probably a third of CPChem sales are export-oriented sales. So you think about the U.S. market price, usually the Europe price is higher and it's usually higher by about the freight delta. The Asian prices probably been $0.20 under the North American price and so you have that geographic mix that also comes into play when you're looking at that. But having said all of that, we think that margins are certainly above mid-cycle today. And we have, I mean, good line of sight to what we think our above mid-cycle margins for 2021. So we feel confident. I think, Tim, you want to talk about propylene or some of the things going on there too.

[Tim Roberts:]

Yes, I think, you really had summarized, and Greg, to your comments, that well, well what's probably important is we had COVID come along, and it really had an impact on a lot of different industries with regard to demand. With regard to Chemicals, what we did see is demand in lain March, especially in the consumable side. So consumables remain very strong, which benefited CPChem which really has a larger exposure to that. Durables really fell off. So what you're seeing now, I think Phil is, as durables are coming back, some of the other competitors out there have more exposure to durables. So reducing that rebalancing that's going on. But it's a good thing overall because the people are out, still buying consumables, which is good. And now they're back out buying durables, which is good. So again building to economy hopefully, they started to pivot back towards where it should be.

[Phil Gresh:]

A second question, I guess this is probably for Kevin. As you think about 2021 and the progression of cash flow generation and the balance sheet, I think you've talked about in the past, a tax refund that will be coming in, one factor. But how do you think about that post the free cash flow profile, dividend coverage and balance sheet targets? Thanks.

[Kevin Mitchell:]

Yes, Phil, so one element of our cash generations in 2021 will certainly be a - it will show up as positive working capital when it will - because we'll be collecting on the tax receivables. So we have a tax receivable at year-end of - by $1.5 billion. And we expect about two-thirds of that to come in, in the first half of the year, probably second quarter, and then the remainder towards the end of the year. So that's a significant component of cash generation. And so when you step back and think about in 2020, and as bad as things were in 2020, we're projecting better conditions in 2021. When you think about the full year - full year '21 compared to full year '20. So we had $2.4 billion of free working capital, cash generation in 2020. So we'd expect a stronger number than that, plus the positive impact from working capital. And so, to us there is pretty clear line of sight to not only covering the capital program, which is $1.7 billion. So we've taken a lot - of the capital program relative to previous years. It's $1.7 billion of capital dividends, $1.6 billion and then we'd expect to be able to make some progress on paying down some of the debt. And as we've talked before, we have a lot of flexibility around that. In terms of debt, that's either coming due or debt that is callable without any penalty to do that. So I think we feel pretty confident that we'll be able to make some good progress, not getting all the way to where we want to get to over the next - probably couple of years. We'd like to be able to get the debt that we've added over the course of 2020 came down, and have the balance sheet back to where we want it to be. And that's important to us, it's important that we maintain those strong investment grade credit ratings A3 BBB+. We feel good about those, we want to be able to maintain that sort of financial flexibility and strength.

[Operator:]

Roger Read with Wells Fargo. Please go ahead. Your line is open.

[Roger Read:]

Maybe to follow a little up on kind of the path still is going down. You talked about issues that hampered CPChem this quarter, but I was taking a look at all of the things that you started up, late Q3 through Q4 in the midstream area. So I just wanted to maybe see if you could quantify some of the issues there? Not so much as I guess I've missed revenue, but more so on the cost. And then the type of expectation on performance in Q1 and maybe in Q2, given the pace of start-up?

[Tim Roberts:]

Roger, this is Tim Roberts, I'll chime in a little bit here. A couple of things. Clearly, we're down, we were up quarter-over-quarter, but our expectation is higher and with transportation and some of our pipelines being down over what we projected or have performed out before truly related to refinery utilization is one key part of that. So that's driving a piece of that. In the meantime as well, we've also seen some of the producers out there, which has had an impact clearly on people putting volumes through the pipes. So that's shown out there. We've shown up a little more on the crude side. The one bright spot, we've seen actually has been in the NGL space. And we're anticipating that to continue on here in the 2021. But really those, it's been a little bit, we brought this new capacity on. In fact, I would say that in the fourth quarter, as you go 3Q to 4Q, we had a plus $30 million improvement in our Sweeny Hub. And that was really related to bringing on the two fracs 2 and 3, and then subsequently having a record performance with regard to shipments, at the LPG export facility, which also contributed to that $30 million increase quarter-over-quarter. Have a little bit with regard to some trading activity with our propane and butane, which we trade around our business to make sure we optimize our system. It's really to make sure we get the right molecule at the right place. And so we have a little bit of mark-to-market impact there and also wants some inventory, which impacted us. But also, we saw a little bit of an impact as well in the fourth quarter, if you go from 3Q to 4Q, on ethane rejection. Ethane was getting back into the NGL barrel in 3Q, and it's really gone - now it's going back into rejection. And so that's impacted some NGL volumes and where did it impact us, a little bit of our equity ownership in Sand Hills. And then the other part is, we've got two JD fracs, as well that had lower volumes and lower margins, most of it was driven by just you were cracking a heavier barrel and there were few barrels coming down the pipe.

[Greg Garland:]

Roger, with respect to the new project contributions, I'd point you to the investor update and our midstream project updates. We outline all the capital spending and they're kind of six to eight multiple EBITDA kind of investments. Sweeny Frac 2 and 3, $1.4 billion. We've got South Texas Gateway, Clemens contributing as well. So those were kind of a one-quarter contribution in 2020, that will get full year contributions in 2021. C2G Pipeline scheduled to come on mid-year, so we'll get half a year of contribution from that asset in '21. So I think those are the increments to be aware of, supporting '21 profitability and ultimately 2022 profitability in the midstream.

[Kevin Mitchell:]

I'd just like to make a comment on costs as well. Roger, we've talked about costs were up quarter-over-quarter. And we talked about that. But if you step back and look at the year, we reduced costs. Our full-year cost were $650 million lower than 2019. So we had a $500 million cost reduction target. And as we step back and look at everything we've done, we actually feel extremely good about where we came in on costs. When you also factor in all of the project activity work that we had in the new assets that came up and came online. So overall, we actually feel very good about where we are.

[Roger Read:]

Yes, I wasn't trying to criticize you on the cost side. I was more just trying to understand if you had a full cost impact in Q4, would start-ups, but not a whole volume impact that impact you - ramped up volumes, things would look better in Q1. That's kind of where I started the question.

[Greg Garland:]

Yes. That's right. There is an element of that in there, Roger.

[Roger Read:]

Okay. And then just a follow-up question also kind of piggybacking on solely on the cash flow side, you mentioned in the year, with the $2 billion of cash flow. I think about three quarters of it coming from equity partnerships. What would be the expectation for that kind of cash flow performance as we look at '21? Is there any of that has to be paid back? Or if that was taken on, it there is partnerships, does that have to get paid down before we would expect additional cash flows to come through? In other words '22 will be fine but '21 maybe constrainable?

[Greg Garland:]

Yes, in terms of the distributions direct to affiliates?

[Roger Read:]

Yes, sir.

[Greg Garland:]

Yes. No, I would, just thinking high level through that, I don't see why that number wouldn't continue at that level. In fact, it may go up, certainly from a CPChem standpoint, we had $632 million from CPChem in 2020. We would expect CPChem to probably come in stronger in 2021, given the trajectory on margins and what they're doing there. So that element and that's by far the biggest single equity distribution we receive. And the rest of them, no real reason to think they would come-off dramatically. So I think if anything, we would expect a slight positive on that.

[Operator:]

Doug Leggate with Bank of America. Please go ahead. Your line is open.

[Doug Leggate:]

My name is Doug. Good morning. Good morning guys. Happy New Year. I wonder if I choose Kevin, to set the balance sheet question again. So a real simple question. We've obviously seen a lot different level of volatility than perhaps any of us thought was through the cycle. How does that changes your view of where do you want the balance sheet to be medium term? Once we consider the other side of this, we reset the absolute debt metrics to a lower level? My first question.

[Kevin Mitchell:]

Yes. As I think about that Doug, if we were a refining only business that may be something that we need to consider. And certainly you'd expect we're buying only, you would need to run that lower leverage because of the volatility. But as we've been growing, all of the non-refining segments, I think, we actually feel pretty good, maintaining that same construct around how we think about the balance sheet, both in terms of absolute debt levels and debt to capital ratios. And as you know in the past, we talked about 30% debt capital target, that's really more of a sort of guidelines - an easy number to calculate. And it's a useful indicator. Ultimately, we're really focused on the credit ratings, maintaining the strong investment grade credit ratings. And I feel that we added $4 billion over the course of last year. So we can take care of that or something very close to that, when you factor in the growth in the other parts of the business. I think we'll be in a very good position from a balance sheet perspective.

[Doug Leggate:]

I appreciate the answer. My follow up fells fairly the micro-question. I'm just hoping you can offer a little bit of color as to what's going on the fairly substantial recovery not anywhere near mid-cycle of course, but nevertheless substantial recovery in cracks in just the last two or three weeks. Demand has been come back, inventories are still high. And we're just trying to kind of figure out what's going on, I just wonder, if you could offer some color on what your prospect to those? And then I'll pass it on. Thank you.

[Greg Garland:]

Well, I would say, we have seen product inventories come down. Product inventories are in the five-year average, gasoline is actually below the five-year average by 3%. So we're seeing that, and I think as the vaccine gets out, there are people who are optimistic. Crater is when you think about markets to think about future markets, and the future looks bright. So gasoline cracks have been moving distillate cracks as well.

[Doug Leggate:]

Yes. I think, I was thinking more on a demand adjusted basis. We haven't really seen any tightening of the system addresses, was my point. So I appreciate your context, I just wondered, if there was anything you're going on right now. Maybe stockpiling ahead of maintenance or unusual maintenance, so even with spring maintenance perhaps another round of . But if you going to - just a normalization of inventories, and fair enough I just want...

[Greg Garland:]

I would just make one comment, if you think about RINs, we think RINs are in the crack. So when you think about product prices and crack prices for products, the RIN in there. So as the RIN goes up, you would expect that to show up in the crack margins on both our gasoline and distillate cracks.

[Operator:]

Paul Cheng with Scotiabank. Please go ahead. Your line is open.

[Paul Cheng:]

Greg, just curious, is that, I mean, you make some reconfiguration getting . And if we're looking at your in your portfolio, how you Europe will fit into the longer-term portfolio given arguably that maybe even more challenging, regulatory environment that we're seeing there. And is there any meaningful adjustment you need to do in that business? That's the first question.

[Greg Garland:]

…in the portfolio, I was going to start with California. Okay, but lets go to Europe. I think, if you think about Europe and I mean, first of all, in a return on capital employed, it's 35% plus return. So it's actually one of the stronger businesses in our portfolio from a return standpoint. It's - the marketing business that we excel at in that part of the world do a really good job with it. Then you move over to our Humber refinery in U.K., we think it's one of the better refineries in Europe. It certainly has an contributor around our especially needle coke businesses. And so we like that value proposition with that asset. So we tend to like the Continental business that we have in Europe, we like the position that the Humber enjoys, not only from a cost standpoint, but from an environmental standpoint, in that European theater. Bob, I don't know if you want to add on to that, you can.

[Bob Herman:]

Yes, the one thing I would add on to, is we were talking about energy transition earlier and the anode for the batteries. And so Humber coke, right is going to be a player in that. And if you look at the even laws in the U.K., after Brexit, and their ambitions to have EVs, they want local content produced batteries. So I think that opens up an opportunity for Humber and we really like we're sitting today with that. Humber also has the advantage of being designated U.K. is sitting in a cluster, that the government there is very interested in developing the green hydrogen and the blue hydrogen schemes and things like that, that Greg talked about. So we see a lot of opportunity in kind of the medium term, I think for Humber, and just beyond being a strong fuels provider in the U.K.

[Greg Garland:]

And I would just add in the marketing side, maybe in the United States, people less familiar with our brands . We're the best brand in Switzerland, we're the second-biggest brand in Australia, and third in Germany, because we had very, very strong brand certainly - strong return on capital employed.

[Paul Cheng:]

Okay, great. Second question that I think in the past has been asked on the PSXP with EU at 13%. I mean, strategically that then we benefit having debt as a public trade company. And with that, I mean, I think that you guys have been saying that you don't want to rush into that. But what kind of timeline that you would get yourself in looking at? What the debt structure mix sense for you to maintain?

[Kevin Mitchell:]

Yes, Paul, it's Kevin. I think I would just sort of reiterate what we've said in the past, that clearly there is a big - the significant battle overhang on PSXP, that's creating uncertainty which is understandable. And the PSXP has actually worked extremely well for us. You look at the growth and where that entity has come from and where it is today. And so an objective measure, you look at that and we feel very good about it. But obviously, the unit price, we don't like, and so we've got this uncertainty around DAPL and we just don't feel will be appropriate to make any rash decisions right now. While there is kind of uncertainty over it, and doing something different. We just don't think it's the right timing to be considering that.

[Paul Cheng:]

Can I just maybe as a shy question. You mentioned earlier that to Doug's question that you think the longer-term balance sheet debt ratio, it really didn't change comparing to pre-pandemic level, because some of the other business. But if we're looking at that, other than Chemical, your other business whether your transportation, the NGL, there is still hydrocarbon or also fuel, we laid that. And we have been beat that, we're going through the energy transition. Those business we also get the impact. So from that standpoint, should we still go with, a far more conservative balance sheet?

[Kevin Mitchell:]

Well, their hydrocarbon-based businesses - but you don't have the margin volatility that you have in the traditional fuels refining business. And so our assets are fundamentally there are supported by long-term contracts, committed volumes, minimum volume commitments. And so I don't think - I think your question is maybe you get far enough out there and there is a different point on that. But within a reasonable time horizon, I still think we feel good that those businesses are going to provide solid, stable generation of earnings and cash, and therefore can support the debt that we would have on the balance sheet.

[Operator:]

Jason Gabelman with Cowen. Please go ahead. Your line is open.

[Jason Gabelman:]

On the first, as we going to refining business, and it's been I think a little weaker in the entire year than we had expected it to be. And this other bucket has been a big headwind. It looks like it's been the past couple of quarters you're on $3 a barrel headwind versus the base crack. I think last year it was under $1.50. So can you just talk about what is exactly going on there? I know, RINs are part of it and there is timing impacts, but why is that headwind expanded this year? And do you see that reversing next year? And I have a follow-up, thanks.

[Bob Herman:]

It's Bob. You're right, it is a headwind, but that is the category where we kind of put the . So RINs is a big piece of it, right. If you just look at the fourth quarter, and we draw the box just around refining, so we're not talking about what we recover downstream on the RIN - on the refining per barrel basis in the fourth quarter, it was $2 of that $3.08. So it is a big part of that other category. The other big one in there is what we spend to get our products from the refinery gate to market. So there is distribution costs that come back in there, and some of those are per barrel, but some of those kind of fall into the fixed category. So we've got tankage rented downstream. So we've got take-or-pays on pipelines that we need to pay minimum volumes, that all kind of comes back but those costs then elevate when you've got less volume we're pushing through there. So by definition, those costs will come back down and gets smaller and as we ramp volumes up period through the first part of 2021. And that really kind of accounting for the two big drivers in that, other category.

[Jason Gabelman:]

And just on the RIN, technically, the headwind in refining should be a tailwind in the marketing business is that the right way to think about it?

[Bob Herman:]

Yes, that's correct. We recover portion of those cost downstream of the refiners.

[Greg Garland:]

And we blend in the quarter, the majority of the gasoline produced by our refineries in our marketing business. And as we add retail for the integration of our running business, particularly in the Middle America, where it's much more difficult to export, we will get more capture of that RIN.

[Jason Gabelman:]

And then I just wanted to ask about DAPL, which was just good to mention, and the litigation process. Can you just discuss the path forward? I believe there is a case being heard in the lower-court about the ability to keep the pipeline shutdown, while this permit process is ongoing in terms of trying to get the new EIS in place to support the permit. So just wondering what the next steps on that litigation process? Can Biden step in and shut down the pipeline without kind of going through the adjudication process and any other thoughts on that? Thanks.

[Greg Garland:]

Yes, I think as we look at the Bakken Pipeline it's operated extremely well. We think it should continue to operate as we're working through the environmental impact statement. I think it's hard to speculate on how the legal proceedings are going to play out. We review and analyze many scenarios and how we will react as depending on how this plays out. But the courts are going to have to continue to work through the process and will react accordingly.

[Operator:]

Manav Gupta with Credit Suisse. Please go ahead. Your line is open.

[Manav Gupta:]

First a quick question, I think your Gulf Coast operations got hit pretty hard on the hurricane. And then you decided to move forward some turnaround. So for two quarters your Gulf Coast refineries have been in the kind of a turnaround. I'm just trying to understand from here on, how do you stabilize those operations? And when do you get the refineries back to let's say even 70%, 75% utilization versus where they have been operating for the last two quarters?

[Tim Roberts:]

Yes, Manav, you're absolutely right. So if you kind of look at the three refineries that we've got now, we got Sweeny, which really operated per the market conditions in the entire quarter. Alliance, we chose to have down for the entire quarter. So back in September - second half of September we came down because we had a hurricane pointed straight out. Hurricane moved at the last minute, we're - down, since we are only a couple of weeks away from shutting down for some reformer catalyst change work. We decided to stay down. We executed that work. And then you usually the market conditions in the fourth quarter in U.S. Gulf Coast are pretty tough. So we took advantage of that and kept the refinery down and pulled some difficult to do turnaround work that we would have done late this year, early next year. We pulled it forward and got it out of the way. So that was a conscious decision to keep all right down, that's Alliance before it came down was in 180,000 barrel a day range from an operating standpoint. And then Lake Charles with the two hurricanes that came running through there. We were just about back up and running after the first one and then we came back down for the second one, weighted on electricity again for a few days, and then came back up. And we've had a couple of operating issues coming back out of that, that we're dealing with. The most part, Lake Charles is up and running and processing crude. We restarted Alliance in early January, and they are up and running at kind of for the market rate that we want them to be at. So other than kind of normal turnaround work and stuff we've got going on, we don't anticipate any other issues in this quarter or next in the Gulf Coast.

[Operator:]

And we have reached the end of today's call. I will now turn the call back over to Jeff.

[Jeff Dietert:]

Thank you, David, and thank all of you for your interest in Phillips 66. If there are additional questions, please call Shannon or me. Thank you.

[Operator:]

Thank you, ladies and gentlemen, this concludes today's conference. You may now disconnect.