Phillips 66 earnings call

is it demand elasticity is it Chinese exports and maybe putting a finer point on the capture discussion what are your expectations at this point for third quarter capture hey Theresa's Brian maybe I'll start with just a list of things that give us a lot of confidence list of tailwinds for uh kind of higher higher cracks going into q3 and carrying on through the rest of next year you know finding fundamentals as Mark talked about are very tight and getting tighter with the issues in Russia and the Mideast. We have 7 million barrels a day of refineries down in Asia and the Mideast and another 1.4 million barrels down in Russia. And the refineries, depending on the damage and the ability to get spare parts, are going to take a good long time to get back online. We have low product inventories in the US and around the world. Chinese exports of products have been low, half of what they have been over the last two years. and the Chinese have shown discipline over the last number of years. We'll see the need to refill SPRs over time and there'll likely be new SPRs that develop to protect against these type of geopolitical problems. We're also forecasting high turnarounds in 27 and 28, likely more unplanned turnarounds in the near term as refiners push work out to take advantage of the higher margins You have the typical inflationary pressures on operating expenses and capex. We have high rent prices. We have elevated freight rates. And the marginal refining barrels in Europe where structural costs are higher, carbon's higher, electricity's higher, labor's higher, all much higher than the US. And so with the opening of the strait, we also see crude supply will exceed product supply, and that drives stronger margins too. And the final point, that we've been talking about for a while is net refinery additions are lower over the coming years and importantly, lower than expected demand increases. So this really sets us up for stronger margins through Q3 and the rest of perhaps next year.

Thanks, Steve. This is Brian. Appreciate the question on commercial. Maybe I'll start by saying I'm incredibly proud of the commercial team, particularly through this period of historical volatility. The team has done an excellent job. And for P66, commercial is kind of a key source of optimization value because it connects our physical assets to market dislocations and opportunities around the world. As you know, we have six global offices. The organization optimizes feedstocks, moves products into the highest value markets, and also captures value from optionality, from arbitrage, captures value from market structure opportunities as well. And our model at Philips is an asset backed model, which means we use our physical footprint. We use our logistics capabilities and integration and our market access to capture value when markets dislocate. So maybe just give you some examples. In today's market, we can substitute lower cost domestic grades for more expensive international grades in our U.S. refining system and then sell those more expensive international grades at a profit. or as you talked about on freight, you know, our time charter freight position has given us a lot of optionality in tight logistics markets. We've expanded our fleet four fold in the past two years, and now it supports roughly 40% of our asset backed demand, also generating a new third party business. And then Jones Act is another example, you know, of how commercial creates value. We've been granted about 20% of the Jones Act waivers issued since the current waiver took effect in March. And combined with our freight position, these waivers have improved our ability to optimize feedstock and product flows from our refining business, marketing business, and midstream businesses. And then finally, as a result of our time charter fleet growth and increased Panama Canal transits, we now hold a favorable canal ranking. You haven't heard a lot of people talk about this. We're 26 out of 556. which allows us to schedule transits well in advance, avoid high auction fees and reduce waiting times and improve on time reliability. So ultimately I'd sum up by saying commercial is focused on creating value across our integrated businesses by capturing the embedded optionality within and across the system. Thanks so much.

Well, our general view on WCS is that differentials are going to wider structurally over time, driven primarily by growing heavy crude supply out of Canada and Venezuela. Canadian production, which has been off line from weather and turnarounds, was back online mostly by the end of last month, and we're heading into diluent blending season. Also, Venezuelan imports into the U.S. are already up 300% since January, which should add downward pressure on heavy crude pricing over time. And then we expect the strong pull of U.S. barrels and higher freight rates and lightering costs to contribute to a wider WTI WCS differential as the inland heavy crude lags the export driven strength of WTI and competes with Venezuelan barrels. But and I think once there's clarity on the movements from the straight, you know, we'll see increased supply of barrels moving into the market. Those will be primarily medium sours, but they'll also support wider heavy differentials. and just as a reminder to all of you on the phone, every dollar the WTI WCS spread widens is an incremental $140 million impact to our annual EBITDA.