Phillips 66 announced third-quarter results and updates to the strategic priorities first presented at its November 2022 Investor Day.
“Phillips 66’s focus on strong operating performance and execution on our strategic priorities, coupled with favorable market conditions, enabled us to achieve significant improvement in earnings and cash generation,” said Mark Lashier, Phillips 66 president and CEO. “Today we are raising the bar by putting forth enhanced, ambitious and achievable plans that will reward shareholders now and well into the future.”
Strategic priorities update
Phillips 66 is on track to exceed its original strategic priority targets. The company is successfully executing operational enhancements in Refining and delivering business transformation cost reductions. In Midstream, the implementation of the company’s NGL wellhead-to-market strategy has exceeded expectations and enabled an increase to the synergy target. Given the company’s substantial progress on these strategic priorities, combined with plans to increase commercial contributions, Phillips 66 is increasing its mid-cycle adjusted EBITDA growth target from $3 billion to $4 billion by 2025.
Phillips 66 returned $6.7 billion through share repurchases and dividends since July 2022 and is on pace to exceed the original $10 billion to $12 billion target. The company is now increasing this target to a range of $13 billion to $15 billion and plans to return at least 50% of operating cash flow to shareholders. The Board of Directors of Phillips 66 approved an additional $5 billion in share repurchase authorization. This is in addition to its previous authorization, which had approximately $3.1 billion remaining as of September 30. Since 2012, the Board has authorized share repurchases totaling $25 billion.
Phillips 66’s business transformation will deliver over $1 billion in run-rate cost and capital reductions by the end of 2023. The company is now targeting a $1.4 billion run-rate by the end of 2024.
The company also plans to monetize non-core assets that are expected to generate over $3 billion in proceeds that will be deployed to further strategic priorities, including returns to shareholders. In August, Phillips 66 sold its 25% interest in South Texas Gateway Terminal for $275 million. The company’s total proceeds from asset dispositions were $370 million through the third quarter of 2023.
Third-quarter results
For the third quarter 2023, Phillips 66 announces earnings of $2.1 billion compared with earnings of $1.7 billion in the second quarter. Excluding special items of $27 million, the company had adjusted earnings of $2.1 billion in the third quarter, compared with second-quarter adjusted earnings of $1.8 billion.
Midstream
Midstream third-quarter 2023 pre-tax income was $712 million, compared with $604 million in the second quarter of 2023. Results in the third quarter included a gain of $101 million on the sale of an investment and a gain of $46 million from a change in inventory method for an acquired business, partially offset by $4 million of integration-related restructuring costs. Results in the second quarter included $22 million of integration-related restructuring costs.
Transportation third-quarter adjusted pre-tax income was $285 million, in line with adjusted pre-tax income of $284 million in the second quarter.
NGL and other adjusted pre-tax income was $293 million in the third quarter, compared with adjusted pre-tax income of $357 million in the second quarter. This decrease was mainly due to timing of cargo freight costs, as well as higher employee, integration and utility costs, partially offset by increased margins from improved commodity prices.
In the third quarter, the fair value of the company’s investment in NOVONIX, Ltd. decreased by $9 million compared with a $15 million decrease in the second quarter.
Chemicals
The chemicals segment reflects Phillips 66’s equity investment in Chevron Phillips Chemical Company LLC (CPChem). Chemicals third-quarter 2023 reported and adjusted pre-tax income was $104 million, compared with $192 million in the second quarter of 2023. This decrease was mainly due to lower margins, partially offset by higher volumes. Global olefins and polyolefins utilization was 99% for the quarter.
Refining
Refining third-quarter 2023 reported and adjusted pre-tax income was $1.7 billion, compared with pre-tax income of $1.1 billion in the second quarter of 2023. Results in the third quarter included a $30 million legal accrual. Results in the second quarter included a $14 million loss related to a sale of assets.
The increase was primarily due to higher realized margins supported by strong utilization. Realized margins increased from $15.32 per barrel in the second quarter to $18.96 per barrel in the third quarter, driven by higher market crack spreads, partially offset by inventory hedge impacts, lower secondary product margins and lower Gulf Coast clean product realizations. The composite RIN adjusted market crack spread increased from $20.96 per barrel in the second quarter to $28.64 per barrel in the third quarter.
Refining pre-tax turnaround costs for the third quarter were $111 million. In addition, there were $37 million of turnaround costs related to the Rodeo renewables facility. Crude utilization rate was 95% and clean product yield was 85%.
Marketing and specialties
Marketing and specialties third-quarter 2023 reported and adjusted pre-tax income was $633 million, compared with $644 million in the second quarter of 2023.
Corporate and other
Corporate and other third-quarter 2023 pre-tax costs were $346 million, compared with pre-tax costs of $330 million in the second quarter of 2023. Results in the third and second quarter included business transformation-related restructuring costs of $51 million and $41 million, respectively. The second quarter also included a loss on early redemption of debt of $53 million. Adjusted pre-tax costs were $295 million in the third quarter. The increase in the third quarter was mainly due to higher net interest and employee-related expenses.
Financial position, liquidity and return of capital
Phillips 66 generated $2.7 billion in cash from operations in the third quarter of 2023. Cash from operations includes pension plan contributions of $358 million. Excluding working capital impacts, operating cash flow was $2.4 billion.
During the third quarter, Phillips 66 funded $855 million of capital expenditures and investments, $752 million of share repurchases and $465 million in dividends. Also in the quarter, the company received proceeds of $280 million from asset dispositions. The company ended the quarter with 440 million shares outstanding.
As of September 30, 2023, the company had $3.5 billion of cash and cash equivalents and $6.3 billion of committed capacity available under credit facilities. The company’s consolidated debt-to-capital ratio was 38% and its net debt-to-capital ratio was 33%.
Business update
In midstream, the company remains focused on capturing over $400 million of commercial and operating synergies across its wellhead-to-market value chain by 2025. The run-rate synergy capture at the end of the third quarter was approximately $250 million.
In chemicals, CPChem recently completed construction and began operations of a 586 million pounds per year 1-hexene unit in Old Ocean, Texas. CPChem expects to start up its 1 billion pounds per year propylene splitter project at its Cedar Bayou facility in the fourth quarter.
CPChem continues to pursue a portfolio of high-return growth projects. CPChem and QatarEnergy are building joint-venture petrochemical facilities on the U.S. Gulf Coast and in Ras Laffan, Qatar. On the U.S. Gulf Coast, the Golden Triangle Polymers (GTP) facility will include a 4.6 billion pounds per year ethane cracker and two high-density polyethylene units with a combined capacity of 4.4 billion pounds per year. CPChem owns a 51% equity share in the joint venture, which has secured project financing. The GTP facility is expected to begin operations in 2026.
The Ras Laffan Petrochemical (RLP) facility will include a 4.6 billion pounds per year ethane cracker and two high-density polyethylene units with a total capacity of 3.7 billion pounds per year. The joint venture, owned 30% by CPChem, secured project financing in October. The RLP facility is expected to start up in late 2026.
In refining, the company continues to advance high-return, low-capital projects to improve asset reliability and market capture. The company is implementing 10 to 15 projects a year to improve market capture by 1% to 2% per year. In 2022, the company completed projects that added 2% to market capture based on mid-cycle pricing and is on track to increase market capture by 1.3% in 2023.
Phillips 66 is converting its San Francisco Refinery in Rodeo, California, into one of the world’s largest renewable fuels facilities. Construction continues on the Rodeo Renewed refinery conversion project that is expected to begin operations in the first quarter of 2024. The total project will cost approximately $1.25 billion. The conversion will reduce emissions from the facility and produce lower carbon-intensity transportation fuels. Upon completion, the facility will have over 50,000 BPD (800 million gallons per year) of renewable fuel production capacity.
The company recently acquired a marketing business on the U.S. West Coast to optimize the placement of renewable diesel that will be produced at the Rodeo facility.
