Phillips 66 - Earnings Call - Q3 2025

Executive Summary

• Q3 2025 adjusted EPS of $2.52 beat S&P Global consensus of ~$2.16; adjusted EBITDA rose to $2.594B as refining margins reached $12.15/bbl and utilization hit 99% despite elevated environmental costs and accelerated depreciation tied to Los Angeles idling. EPS consensus from S&P Global: $2.16*.
• GAAP EPS was $0.32 (special items: ~$948M refining impairment related to WRB JV and $241M legal accrual in M&S), while adjusted pre-tax income rose QoQ across Refining (+$38M), Chemicals (+$156M); M&S declined on margins.
• Strategic catalysts: closed acquisition of remaining 50% of WRB (Wood River, Borger) on Oct 1, enabling system integration with Ponca City; announced Western Gateway Pipeline open season with Kinder Morgan to move Mid-Continent product to AZ/CA/NV.
• Management reaffirmed debt reduction focus to ~$17B by end-2027; Q4 guide: refining utilization low–mid 90%, turnaround $125–$145M, corporate & other $340–$360M. Dividend of $1.20/share declared for Dec 1, 2025.

What Went Well and What Went Wrong

• What Went Well

  • “We achieved 99% utilization, the highest quarter since 2018… year-to-date clean product yield of 87% is a record,” noted Refining leadership; adjusted controllable cost per barrel targeted at ~$5.50 by 2027.
  • Midstream delivered record Y-grade throughput (1.00 MMb/d) and fractionation (930 mb/d), supported by Dos Picos II and Coastal Bend expansion; adjusted EBITDA $964M.
  • Chemicals ran above 100% utilization with improved margins; adjusted EBITDA $308M; CP Chem resiliency highlighted versus industry cycle.

• What Went Wrong

  • Special items pressured GAAP: ~$948M impairment tied to WRB JV and $241M legal accrual in M&S; GAAP EPS fell to $0.32 vs $2.15 in Q2.
  • Marketing & Specialties adjusted pre-tax income decreased QoQ primarily on lower margins ($477M vs $660M).
  • Renewable Fuels continued to face margin headwinds; segment loss improved to $(43)M, but policy uncertainty persists; management ran at reduced rates and cited need for regulatory clarity (RINs/LCFS/SAF credit).

Transcript

Speaker 8

Welcome to the third quarter 2025 Phillips 66 earnings conference call. My name is Breka, 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 Sean Maher, Vice President, Investor Relations. Sean, you may begin.

Speaker 1

Welcome to Phillips 66 earnings conference call. Participants on today's call will include Mark Lashier, Chairman and CEO, Kevin Mitchell, CFO, Don Baldridge, Midstream and Chemicals, Rich Harbison, Refining, and Brian Mandell, Marketing and Commercial. Today's presentation can be found on the Investor Relations section of the Phillips 66 website, along with supplemental financial and operating information. Slide 2 contains our safe harbor statement. We will be making forward-looking statements during today's call. Actual results may differ materially from today's comments. Factors that could cause actual results to differ are included here, as well as in our SEC filings. With that, I'll turn the call over to Mark.

Speaker 5

Thanks, Sean. Before we begin the call, I'd like to take a moment to recognize Jeff Dietert, our Vice President of Investor Relations since 2017. After a long and successful career in the energy industry, Jeff announced his decision to retire at the end of this year. On behalf of the entire management team, I want to extend our deepest gratitude to Jeff for his invaluable contributions to the company, and we wish him all the best in retirement. During the quarter, we continued to execute on our strategy and delivered strong financial and operating performance. Refining's results demonstrated our commitment to world-class operations. Midstream, along with Marketing and Specialties, delivered another consistent contribution, providing a strong foundation for our capital allocation framework. Chemicals generated solid returns despite a challenging market, operating above 100% utilization. Year-to-date adjusted Chemicals EBITDA is $700 million, reflecting the unique feedstock advantage of our assets.

During the quarter, the Dos Picos II gas plant became fully operational, and the first expansion of our Coastal Bend pipeline was successfully completed. These milestones enabled us to achieve record NGL throughput and fractionation volumes. Since quarter-end, we processed the final barrel of crude oil at the Los Angeles Refinery. We sincerely thank our Los Angeles Refinery employees for their exemplary dedication to safely operating the assets as we progress the idling process. Earlier this month, we also closed on our acquisition of the remaining 50% interest in the Wood River and Borger Refineries. This transaction simplifies our portfolio and enhances our ability to capture operational and commercial synergies across the value chain. The further integration of the Wood River, Borger, and Ponca City Refineries will create a system that offers opportunities to capture margin across our assets. An example is the recently announced open season for Western Gateway.

This refined products pipeline will ensure reliable supply to Arizona, California, and Nevada from Mid-Continent refineries. This proposed project is one of many opportunities that will drive greater shareholder value. Aligned with our focus on continuous improvement and the dedication to operational excellence, we're excited about the future. Rich will now provide more context on our progress and the future in refining. Thanks, Mark. Slide 4 highlights another strong quarter for refining, a clear reflection of our commitment to operational excellence. We achieved 99% utilization, the highest quarter since 2018 and above industry average. Our year-to-date clean product yield of 87% is a record, underscoring our ability to maximize value from every barrel processed. Our third quarter adjusted cost per barrel of $6.07 was impacted by $0.40 per barrel due to a $69 million environmental accrual related to the Los Angeles Refinery.

Since 2022, we've reduced our adjusted controllable cost by approximately $1 per barrel. We have built our improvement strategy on five pillars of excellence: safety, people, reliability, margin, and cost efficiency. Our greatest asset is our people. Training them well and sending them home safely each and every day is our top priority. Reliable operations improves nearly every metric. Our team is focused on a world-class reliability program that will sustain our strong operating performance. We are seeing excellent progress in utilization and uptime, and we're not done yet. We've made some tough but impactful decisions that are paying off as we lower our cost structure and improve our flexibility and optionality to capture changing market conditions. Excellence in all five pillars maximizes earnings and value creation. Moving to slide 5, since early 2022, refining has been on a journey.

We have been making structural changes to the portfolio and organization that will continue to drive long-term shareholder value. We've rationalized our refining footprint while strengthening our position in the Central Corridor. The full ownership of the Wood River and Borger Refineries creates additional high-return organic opportunities. We've also transformed the organization, centralizing support functions, operating the assets as a fleet versus independently. We have a list of low-capital, high-return projects in the queue going through our standard review and approval process. The ones we've already executed have improved yields, product value, and flexibility. We've increased our optionality to switch between heavy and light crudes and between finished product mixes. I look forward to implementing the next phase of organic growth opportunities. Lastly, we're focused on driving efficiencies, which will further improve our cost profile.

We're targeting an adjusted controllable cost per barrel to be approximately $5.50 on an annual basis by 2027. We are positioned well for the future. Now, I'll turn the call over to Kevin to cover the financial results for the quarter.

Speaker 6

Thank you, Rich. On slide 6, third quarter reported earnings were $133 million, or $0.32 per share. Adjusted earnings were $1 billion, or $2.52 per share. Both reported and adjusted earnings include the $241 million pre-tax impact of accelerated depreciation and approximately $100 million in charges related to our plan to idle operations at the Los Angeles Refinery by year-end. We generated $1.2 billion of operating cash flow. Operating cash flow, excluding working capital, was $1.9 billion. We returned $751 million to shareholders, including $267 million of share repurchases. Net debt to capital was 41%. We plan to reduce debt with operating cash flow and proceeds from the announced fourth quarter European retail disposition. I will now cover the segment results on slide 7. Total company adjusted earnings increased $52 million to $1 billion. Midstream results decreased mainly due to lower margins, partially offset by higher volumes.

These results include $30 million of additional depreciation related to the retirement of assets associated with our Los Angeles Refinery. Chemicals improved on higher margins and lower costs, which were largely driven by a decrease in turnaround spend. Refining results increased on stronger realigned margins, partially offset by environmental costs associated with the idling of the Los Angeles Refinery. Marketing and Specialties results decreased due to lower margins, primarily driven by more favorable market conditions in the second quarter. In renewable fuels, results improved primarily due to higher margins, including inventory impacts and international renewable credits. Slide 8 shows cash flow for the third quarter. Cash from operations, excluding working capital, was $1.9 billion. Working capital was a use of $742 million, primarily due to an inventory build. Debt increased primarily due to the issuance of hybrid bonds, which was partially offset by a reduction in short-term debt.

We returned $751 million to shareholders through share repurchases and dividends and funded $541 million of capital spending. Our ending cash balance, including assets held for sale, was $2 billion. Looking ahead to the fourth quarter, on slide 9, in chemicals, we expect the global O&P utilization rate to be in the mid-90%. In refining, we expect the worldwide crude utilization rate to be in the low to mid-90%. Turnaround expense is expected to be between $125 and $145 million. The utilization and turnaround guidance reflects 100% ownership of the Wood River and Borger Refineries and removal of Los Angeles. We anticipate corporate and other costs to be between $340 and $360 million. Now, we will move to slide 10 and open the line for questions, after which Mark will wrap up the call.

Speaker 8

Thank you. We will now begin the question and answer session. As we open the call for questions, as a courtesy to all participants, please limit yourself to one question and a follow-up. If you have a question, please press star, then one on your touch-tone phone. If you wish to remove from the queue, please press star, then two. If you are using a speakerphone, you may need to pick up the handset before pressing the numbers. Once again, if you have a question, please press star, then one on your touch-tone phone. Steve Richardson from Evercore, please go ahead. Your line is open.

Great, thank you. Regarding WRB, I'm interested if we could just dig a little further there. Very clear what looks to be a really attractive acquisition price, and you've got a clear synergy target out there. Could we talk a little bit about beyond this inside and outside the fence line, some of the other benefits, and just address what 100% ownership of these facilities opens up in terms of some of the organic growth that Rich mentioned?

Speaker 0

Sure, Steve. I think this falls into the category of our strategy and action. Several years ago, we identified that the Mid-Continent Central Corridor was core to our business, and we would focus and make strategic decisions around that. Since then, we've made the decision to idle Los Angeles and redevelop the land there. We announced our increased ownership of WRB that you referenced here, and now we push that on with the open season of Western Gateway. The first step is that really it opens up the frontier to integrate more freely WRB, Ponca City, and Borger together into one system that creates a lot of optionality, a lot of opportunity. I'll let Rich and Brian dive into the details on that.

Speaker 5

All right, thanks, Mark. I'll start and then pass it over to Brian there for the commercial side of the business. When I think about this, Steve, we've added 250,000 barrels a day of processing capacity for us in what is our most competitive portfolio in the center Mid-Continent area there. As you indicated, we've got a very attractive price. Not diving into the cost synergies, but really this deal opens up some organic growth opportunities that will allow us to increase our crude processing optionality and flexibility. With our previous arrangement in the JV, we were somewhat locked into a desired crude slate, and investments to open up that flexibility were generally not looked upon favorably. Now we have the opportunity to really open up this flexibility inside this system, as well as on the product slate side of the business too.

We see lots of opportunity there, which will help us increase our market capture opportunity. Most importantly, from my perspective, it's our ability to operate Wood River, Borger, and Ponca City as a regional system, actually interconnected with a very good pipeline system operated by our midstream assets. This will allow us to really optimize the use of intermediate products between the sites. What that leads to is higher utilization of these downstream units, these units downstream of the crude operation. That will also allow us to increase utilization of these conversion units and make additional products. All that leads to more commercial opportunity, and I'll kick it over to Brian to expand a little bit on that.

Speaker 7

Hey, Steve. From a commercial point of view, we have currently a cross-functional team looking at synergy opportunities, everything you can think of, and currently have 30+ initiatives in the pipeline, and we're generating new initiatives every single week. Maybe just to give you a few examples of some flavor for what we're looking at, we've been able to improve our integrated model between Wood River and Ponca City on butane blending and optimize the two plants, which are highly integrated with our midstream assets. Another example is we've updated our variable cost economics on proprietary pipelines to incentivize shipping on Phillips 66 assets versus third-party pipelines. We're utilizing some of the marine assets that were previously dedicated to WRB for other higher netback service.

We're using Borger and Wood River Coke and blending it with Coke from other refineries to generate more volume to be placed in the anode Coke market. Those are just a few examples. It's early days, a lot more opportunity to go.

Speaker 2

Hey, Steve. This is Kevin. Just one other point of clarification I'd like to make, because I think there's been a little bit of confusion out there in terms of impact on capital. We increased our guidance on capital budget to $2.5 billion, or approximately $2.5 billion from what was previously $2 billion, and that has been attributed to WRB. That's a little bit of an overstatement of the impact. The reality here is, if you look at 2025, the capital budget was $2.1 billion. The WRB capital budget at a 100% level was $300 million. Our net addition is $150 million relative to that. That $300 million is a reasonable run rate to assume.

We're saying the $2.1 billion goes to $2.4 billion on a 100% consolidated basis, but we already had 50% of that uplift reflected in our operating cash flow because of the way that flows through the distributions from the equity method accounting. I just wanted to put some clarity around that point.

Appreciate the additional color there, particularly on the CapEx. If I could just quickly follow up in fear of sounding like I'm leading the witness, but fair to assume that a lot of these benefits we just talked about, both on the refining side and the marketing side, are capital efficient, and we're going to see some of those benefits relatively nearer term. I mean, that's the one point we'd like to probably bring is when do we start seeing some of those things?

Speaker 0

Yeah, I think you will see capital-efficient additions there. There are capital opportunities. It'll add to Rich's list of low-capital, high-return opportunities, and the kind of synergies we talked about and the commercial opportunities that frees us up, those things are happening as we speak.

Wonderful. Thank you.

Thanks, Steve.

Speaker 8

Theresa Chinn from Barclays. Please go ahead. Your line is open.

Hello. Thank you for taking my questions. I want to dig deeper into Western Gateway. Now that we are a week and change into the binding open season, can you talk about the rationale behind this project and why it's important for Phillips 66? How does it stack up versus one of its competing pipeline projects and it built? How do you think this pipeline will change patchy flows as well as margin capture for your Central Corridor assets?

Speaker 0

Yeah, Theresa, that's a great question. When you step back and think about our mission to provide energy and improve lives, and when we looked at the evolution of refining capacity out west, impacting both California as well as Arizona and Nevada, we saw an opportunity along with the alignment of Wood River, Ponca City, and Borger to really make something special happen. In essence, the ability to bring our Mid-Continent strengths, our Mid-Continent advantages to the West Coast, St. Louis all the way to Santa Monica. We believe there's great opportunities there, less refining capacity in California, growing demand in Arizona and Nevada, all of those things combined to get us interested in this opportunity. Brian and Don can dig into the details of those opportunities and address the specifics of your question.

Speaker 10

Sure. Thanks, Mark. Theresa, we do think it's a unique and compelling opportunity. If you think about just the framework of the project, our Gold Line really operates like a supply header that's going to be able to access the Mid-Continent refineries, bring that volume to help fill the Western Gateway pipeline, which is going to take product along the new pipeline all the way to Phoenix. That will help satisfy that market, that area. The balance of that volume being able to go all the way to Colton, California, where it can access the broader California and Nevada market. We think that's a compelling opportunity. It's certainly early days in the open season. We're having a constructive and active conversation with interested parties. More to come on that. I think the project and how we have it set up is something that's resonating quite well with the market.

Speaker 7

Maybe just from a commercial perspective, the way I think about it is PAD 5 is going to look very similar to PAD 1, where you have a short market, you have a pipeline that brings in domestic volumes like Colonial does to PAD 1, and then you have barrels coming from overseas, waterborne barrels as well. It will be set up very similar to that market. As you know, a pipeline is the most reliable way to move volume. It won't be susceptible to dock restrictions or lack of logistics to merge or weather issues. Assuming only our pipeline gets built, we estimate probably about half the volume will end up in the Phoenix market with the reversal of Kinder Morgan, and the rest will end up in California, which makes sense, as Mark mentioned, as you see the closures of California refineries.

California will continue to be a waterborne import market, and at Phillips 66, we'll continue to import barrels by the water. From our commercial perspective at Phillips 66, the pipeline will allow us to move products, as Mark said, from our Mid-Continent refineries for likely better than Mid-Continent netbacks. All our Mid-Continent refineries can make Arizona-grade gasoline and California-grade gasoline. We see the pipeline as a great opportunity for California, for Arizona, for Nevada, and for all the potential shippers.

Speaker 5

Yeah, as far as the comparison of our project to One Oak's project, I think they have different target markets or target sources, Gulf Coast versus Mid-Continent. I think that ultimately the market will determine if one or either of the projects go forward. We believe we've got a strong ability to bring Mid-Continent volumes all the way to California, and the partnership with Kinder Morgan really provides a lot of strength for this option. We have full faith that we'll move forward with this.

Thank you for that comprehensive answer. As a follow-up from a cost perspective, what kind of CapEx should we anticipate for Western Gateway, given the substantial greenfield component? How will the cost be split between the partners since Kinder Morgan is contributing its existing pipeline infrastructure?

Speaker 10

Sure, Theresa. The partnership is 50/50 with Kinder Morgan. That will be at the end of the day how the balance works. In terms of the overall CapEx, we haven't disclosed that number. Part of that is because, as we talk through with shippers and different supply connections, we're still working through what some of that connection cost might entail and how all that will flow from a volume standpoint. That will drive some of the infrastructure needs and obviously capital requirements. It is safe to say this is, from an investment opportunity, a consistent midstream type return investment that we're looking at in concert with Kinder Morgan.

Speaker 2

is probably also worth highlighting that the capital spend wouldn't be in the next couple of years either. You're sort of looking at 2027, 2028, 2029 timeframes. No near-term impact on capital budgeting.

Speaker 8

Thank you very much. Neil Mehta with Goldman Sachs, please go ahead. Your line is now open.

Speaker 10

Yeah, good morning, Mark and team. I wanted to keep on pushing on this midstream point. You've talked about $4.5 billion in EBITDA by year-end 2027 as the run rate. You annualized Q3, you're close to $4 billion. Maybe you could just talk about bridging that $500 million bucks. If oil prices languish, how sensitive is the EBITDA to that? Giving us confidence around that incremental $500 million bucks would be great.

Speaker 5

Absolutely, Neil. I'll kick it off and then turn it over to Don. First of all, I think you have to look at our track record. We've grown that NGL business from $2 billion to $4 billion, or the midstream business from $2 billion to $4 billion over the last several years. As you noted, we're just under $1 billion this quarter, so the $4 billion is in line of sight. This is all the result of a concerted effort based on our strategy. We aligned on several years ago with our board to establish this well-head-to-market presence in NGLs. We've done disciplined, accretive, inorganic, and organic things to do that to get to where we are today. We see the next increment, another $500 million, largely from organic. We've got a line of sight on organic opportunities, and the inorganic opportunities were facilitated by non-core asset dispositions.

We've been able to reallocate capital and free that up. Most importantly, the organic opportunities quite often are unleashed because of the inorganic opportunities. This has all been a relentless pursuit of higher ROCE in the midstream business, as well as building competitive advantage on top of competitive advantage. I'll tell you that it was a great visit. We had the Sweeney last week. We've done some things around the fracs there. The operations have been incredible, and the operators pointed out that they've found our fifth frac. We have four fractionators at Sweeney. They've found enough capacity through some debottleneck projects they've done. In essence, they've added an additional frac through very low-capital opportunities. Much like refining, we're looking at ways to be more efficient, to grow more aggressively in midstream and more accretively. Don's got another list of opportunities that he's going to go after.

Speaker 10

Sure, thanks, Mark. The platform that we have developed over the years just lends itself to a lot of organic growth opportunities. That's what's really driving this growth from $4 billion to $4.5 billion. A lot of those projects are publicly announced and are in execution phase. If I look at the gas gathering and processing business, we've got plant expansions in the Permian with our Dos Picos II gas plant that came on just a few months ago. That will fill up by 2026. Our Iron Mesa plant that we announced is under construction, that'll come online in early 2027 and fill up. Our footprint, plus the commercial successes, as well as the higher NGL content in the production, is really driving a lot of the volume growth that's coming through our system. That's all fee-based type margins, so very limited sensitivity to the underlying commodity price.

That volume drives what happens downstream. In our NGL pipeline business, we just completed the first phase of our Coastal Bend expansion. We're running that full. We've got a next phase of capacity, 125,000 a day of additional capacity will come on later in 2026, as well as the restart of our Powder River pipeline that will pull in barrels out of the Bakken. Those volumes, that capacity, and the volumes that will flow through there help drive this earnings growth that will take us to that $4.5 billion run rate by the end of 2027. We've got a well-defined organic growth plan that we're executing. The other thing I would just say is that now our asset footprint definitely is in a position where it creates additional growth opportunities that are high return, low capital, that we continue to pull together and execute on.

I really see like we've got some great momentum within this part of the business and are executing it on a day-to-day basis.

Thank you, Don. Thank you, Mark. The follow-up is just the crude in transit. A lot has been made of the 1.4 billion barrels that appear to be on the water. Today's DOEs reinforced the view that they aren't finding their way into U.S. shores or into a lot of OECD pricing nodes. I want to get your perspective of, do you guys have visibility to that crude actually, you know, manifesting its way over here? If not, what do you think is driving that? Do you think it's the sanctions, whether it's Iran, Venezuela, and now Russia contributing to that difference between what appears to be a visible build in inventory on the water but not on land?

Speaker 7

Yes. Brian, we do see a very large build on water of barrels. It's a function of what those barrels are, and it's not clear if those are Russian barrels and they don't get to end users. They may sit there for a while if they are other barrels, maybe Saudi barrels or OECD barrels that will get to market. That will probably put pressure on Saudi OSPs and benchmark crudes. We're kind of waiting to see what those crudes are, and it's not clear. It is clear that there is a lot of crude on the water now.

Okay. Thanks, Brian.

Speaker 8

Justin Jenkins from Raymond James, please go ahead.

Great, thanks. I guess one of the common questions we get from longer-term investors is on the debt side, the pathway to your 2027 targets. Kevin, you touched on it a bit in your remarks, but maybe I'd ask if you could give your thoughts on the bridge to that $17 billion debt target by 2027.

Speaker 0

Hey, Justin. This is Mark. I just want to context it a little bit that we've clearly been using both our balance sheet as well as asset dispositions to drive the inorganic transactions as well as the organic opportunities midstream, as well as in refining while sustaining our commitment to return at least 50% of our cash from operations to shareholders. We've been able to do that quite effectively. We're making a more proactive shift now towards intently focusing on the debt level, and that debt reduction is a clear priority. Kevin is well prepared to walk you through the math going forward.

Speaker 2

Yeah, thanks, Mark. We still have that same $17 billion debt target. That has not changed. You will have noticed that in the third quarter, our debt level increased to $21.8 billion. That increase was a combination of some debt issuance and some short-term debt reduction. We also had a corresponding increase in cash balance. On a net basis, we were essentially flat during the third quarter. As we look ahead to the next, over the next fourth quarter and the next couple of years, and you look at the third quarter, actually, and the second quarter, pre-working capital, we generated $1.9 billion of operating cash flow in both periods. You think about WRB coming into the equation. I'll use this number partly to keep the math simple.

If we're at $8 billion in operating cash flow annually, you can, you know, we're still committed to returning 50% of operating cash to shareholders. That's $4 billion, which would be split evenly between the dividend and the buybacks. That leaves $4 billion that's available. A capital budget of $2 to $2.5 billion per year, as we talked about earlier, leaves somewhere in the order of $1.5 to $2 billion per year available for debt reduction. That's 2026 and 2027. Obviously, margins will do what margins do. We don't have complete control over all of that. That's a reasonable construct to think about this. In the fourth quarter of this year, we will have the proceeds from the JET disposition. We also had just funded the WRB acquisition.

Those two kind of offset, but we'll have a sizable working capital benefit in the fourth quarter, somewhere in the order of $1.5 billion. It will come back to us maybe slightly more. Between $1.5 billion in the fourth quarter of this year and then $1.5 to $2 billion potentially in each of 2026 and 2027 gets us comfortably to that $17 billion level by the end of 2027. That doesn't include any potential additional dispositions of non-core assets, which just provides upside and additional flexibility.

Perfect. Appreciate that detail, Kevin and Mark. I guess my second question on the refining macro and maybe tilts to that gas generation side of things does seem to fit your portfolio pretty well with high diesel CRECs and expectations for wider diff. Maybe just your overall expectation on how CRECs play out and crude diff play out into 2026.

Speaker 7

Hey there. This is Brian again. On the crude dips, we expect to see the light heavy spread start to widen during Q4 and into Q1. It's been somewhat delayed, I think, surprising many of us. The heavy crude has been slower, as I said, with additional OPEC barrels moving into China's SPR and staying in the east in general, and just the geopolitical concerns hitting market volatility around Russia, Iran, and Venezuela. In the U.S. Gulf Coast through Q3, the Canadian heavy crude became more attractive than high sulfur fuel oil, which caused refiners on the U.S. Gulf Coast to run more Canadian crude, and that supported differentials. As we've entered Q4, we're starting to see some impact from additional OPEC crude and a kind of relative weakening, although still strong, of the high sulfur fuel oil.

Additionally, the WCS production increased by 250,000 barrels in Q3, and we're going to expect another 100,000 barrels or more in Q4. As more Canadian volume comes online along with the winter diluent blending, we're seeing the WCS diff weaken by about $1 in Q4 versus Q3. Canadian production is expected to increase next year as well, with several projects coming online and also from winter diluent blending. In 2026, the WCS curve is off another dollar from Q4. As additional crude hits the market, including Middle Eastern crude, we also expect to see Middle Eastern OSPs to fall and put additional pressure on heavy crude. As you know, we're a large user of WCS. Watching the WCS differential continue to widen will be a benefit to us.

Thanks, Brian.

Speaker 8

Douglas Leggate with Wolfe Research. You may proceed with your question.

Hey, good morning, everybody. Utilization rates blew out quarter record, I believe, since 2018, I think you said in the release. When we were running around Sweeney with you guys, I asked, I forget the gentleman's name who joined you from Chevron recently. I said, "What are you doing differently on how you think about planned turnarounds, the habitual once every four to five years? Is that changing? Should we think about your go-forward capacity utilization, your ability to manage that, if you like, as averaging higher over time?" The reason I asked the question is because Valero had a similar situation. Between the two of you, you've just basically offset the closure of Lyondell-Houston. We're trying to understand if higher utilization is a new normal for not just you guys, but for the industry generally.

Speaker 5

Hey, Doug. This is Rich. The gentleman you were talking to is Bill. He's the refinery manager down there at Sweeney, and that was a good visit. I'm glad you mentioned that. It was a good opportunity for us to show off an asset there that highlights one of our core strategies, which is integration with the midstream and also CP Chem operation there as well. When I think about your question and how do I answer that, to me, it's a journey that we have been on. You don't sustain utilization rates like this if you're making quick and short-term decisions. These have to be long-term, end-of-sight, visionary type direction that you're moving a large set of assets to. We started that with a cost and margin. We also simultaneously were running improvement opportunities and initiatives around our reliability programs. Those reliability programs are essential to this sustainability component.

That, to me, is what culturally has continued to improve over the last two to three years on this journey as we've marched down this path. Also, on the margin front, which is a journey that we started a couple of years ago, that was really centric around starting to fill up our downstream processing units behind the crude. First, you got to fill the crude unit up, and then you got to fill the downstream units up. Those directly result in clean product yield, which is where most of the earnings are flowing into the organization.

I think with that commitment to reliability, the world-class reliability program that we're executing, as well as the fundamental change in our cost and margin outlooks at each of the sites, gives me a high level of comfort that we will be able to sustain this level of performance going well into the future.

That's really helpful. I threw the AI words out to Valero and it bumped their stock up, I think. Maybe you could say AI's helping you manage your utilization. My follow-up is a very quick one for Kevin. Kevin, on that same trip, we had an opportunity to have dinner with the guys, and you, sadly, were not there to take this question on the chin. The question basically is, if you're a relatively static enterprise value, and what I mean by that is you've got a lot of long-life assets, however you think about mid-cycle, a little bit of growth in midstream in the context of the overall company, but relatively static enterprise value, it seems to me that the easiest way to basically boost your equity value is to reduce your net debt. Simple math, equity is enterprise value minus net debt.

Why is net debt reduction not part of the cash return formula? Raise a formula, include net debt. Why not?

Speaker 2

You are absolutely correct that everything else stays the same. A reduction in debt translates into an increase in equity value. You can choose to look at debt reduction in that light. What we do is take a very sort of consistent view that most others in the space do, which is the cash return to shareholders is the dividend plus the buybacks. At the same time, as part of our capital allocation framework, we've got debt reduction as a key part of that. We actually have this debate internally when we have traditionally thought of capital allocation being how much is returned to shareholders, dividend and buybacks, and how much is reinvested in the business in terms of the capital program. Now we've got the additional dynamic of debt reduction and which bucket does it fall into. We've tended to break it out separately on its own.

You are absolutely correct that there is clear value proposition for equity holders through debt reduction. We do see it the same way in that context. It's really then down to the semantics of how we communicate that.

Great. I appreciate the answer, Kevin. Thanks.

Speaker 8

Manav Gupta with UBS. Please go ahead. Your line is open.

Speaker 10

I want to really thank Jeff Dietert. Over the years, I've thrown a lot of stupid questions at him, and he's been very patient in answering all of those. Thank you, Jeff. You will be missed a lot. My first question here, sir, is on the chemical side. The indicator, and I understand it's an industry indicator, seemed relatively flat. The earnings jumped materially. I think some part of it was the quota for non-downtime. Was it also a function of you using a higher ethane blend than what probably the indicator is showing? That's what I concluded, but I wanted your opinion on it. If you could also talk about when can we get back to like mid-cycle chemical margins?

Speaker 5

Yeah, just for the record, Manav, I've never fielded a stupid question from you. I think I can speak for the rest of them. You ask insightful questions, and this one's very insightful. You partially answered it. CP Chem's chain margins increased about $0.097 per pound. IHS was flat. There are really three drivers there. We had higher high-density polyethylene margins due to lower feedstock costs. Our blend of feedstock is different than the blend used in the IHS marker. We're, as you noted, more heavily weighted to ethane. I think the most heavily weighted to ethane, and that provides a very resilient advantage. In the second quarter, CP Chem had some planned downtime at Port Arthur, some unplanned downtime at Cedar Bayou. They had some turnarounds as well. You flip all that to the third quarter, those things go away. That was beneficial. Also, the worm turns.

Other people had unplanned downtime in the third quarter, and CP Chem was able to take full advantage of that because of the short in the market. We see the chemicals world is still oversupplied. I would say that what happened in the third quarter with that quick uptick in margins when there was a little bit of tightness created, that's a really good sign. CP Chem, because of its cost position, is going to, they've generated year-to-date $700 million of EBITDA. That's our half, not just CP Chem, our half of their EBITDA. They'll be up around $1 billion. This is the bottom of a very protracted cycle. They are doing quite well. They're able to jump in when others falter. They're running at above 100% when others are rationalizing. There's going to be a lot of asset rationalization going forward.

You're even hearing news out of Korea about the potential for rationalization. Europe is already well down that path. I think when you start seeing margin upticks when people have outages, that's a good sign. We're not calling this down cycle over. We think it's going to be a long slog forward. I think there'll be more shakeout when CP Chem starts up their two large world scale, the definition of world scale, frankly, assets, both here in the U.S. and in Ras Al Fawn, Qatar. That will even, I think, potentially force out other high-cost producers. They're going to be moving from strength to strength, and the long-term prospects are quite good for CP Chem.

Speaker 10

Thank you for a detailed response. My quick follow-up is here, sir. Initially, when you did the EPIC deal, I think now you call it Coastal Bend, there was a little bit of a pushback. Now things are really coming together. The line has already had one expansion, and I think one more phase is planned. Help us understand where the EPIC acquired assets, EBITDA, is at this point on a quarterly basis, and what it would become once the full expansion happened that you could run us through that math. Thank you.

Speaker 5

Yeah, thank you for highlighting that, Manav. Again, the inorganic opportunities that we've done in midstream have always opened up more organic opportunities. I think that it's important to continue to look at our track record and what we do. We're not buying inorganic opportunities just to get bigger. We're buying because it opens up a new playing field, creates more opportunity that perhaps the incumbents couldn't realize. That is the case in EPIC. We're quite pleased with EPIC and everything that's going on around that. Don can fill in the details of what's coming next.

Speaker 10

Sure, Manav. In terms of just looking back since we closed on the EPIC NGL transaction in April, compared to the acquisition plan, we are meeting and even exceeding what we expected from the assets. That is really a testament to the synergy capture around the operations and commercial opportunities around that now Coastal Bend pipeline. It certainly has been a really nice add in the Gulf Coast for us with the Corpus Christi presence combined with what we have at Sweeney. As you mentioned, we turned on the first phase of the expansion here in August. We're running that pipeline full. I think that's a sign that we've had the volumes available in the systems. The reason we acquired the system and expanded it is because we needed the capacity. We're filling it up as we turn it on.

We've got another expansion that will come on later in 2026, and most all that volume is already on the ground and flowing on third-party pipes that will move over, or it's a volume that's going to come from the GMP expansions that we've already announced. We're executing on the acquisition plan as we advertised and really pleased with the results and the follow-on opportunities that we're seeing with having that as part of our portfolio. Thank you.

Speaker 8

Jason Gabelman with Goldman Sachs. Please go ahead. Your line is open.

Yeah. Hey, thanks for taking my questions. The first question is a portfolio one. You've obviously concentrated your footprint in the Central Corridor, talking a lot about synergies with your midstream footprint. As you think about your East Coast and West Coast refining footprints, do you still view those as core? I mean, there's some good assets there, but obviously not as well integrated with what you're doing in midstream and chems. How do you think about the importance of those regions within the overall business?

Speaker 5

I think there's a couple of key things to think about here. It's that clearly we have a core strategy around the integration of our Mid-Continent, our Central Corridor refineries there. They have the greatest crude flexibility. They have lots of optionality. That doesn't mean that we're ignoring our remaining coastal refineries. You think about Ferndale. We've already talked about it's transitioning to produce California CARBOP, and its value is increasing as refining capacity in California tightens up. We're not going to kick out assets that are creating good value, but we are going to focus more intensely on the integration opportunities in the Mid-Continent and Central Corridor. Likewise, Bayway, when you think about the Atlantic Basin, we've got opportunities to integrate between Bayway and Humber. We can move streams back and forth to optimize there and to enhance the profitability and the reliability of both of those assets.

There are some very, very strong opportunities there that we're continuing to look at.

Okay, great. That's very clear. My follow-up is on the renewable fuels segment and obviously results. Saw meaningful improvement quarter over quarter. You mentioned some impact from selling credits, and I think there was something about selling product out of inventory in there. I am wondering if you could just elaborate on what drove the increase quarter over quarter, how much of that is kind of underlying versus some timing impacts. Thanks.

Speaker 7

This is Brian. Jason, just talking about Q3, and we'll talk a little bit about what we're seeing in Q4 and beyond. In Q3, the renewable margins were actually worse if you took a look at just the margins. We did a lot of self-help in Q3. We reduced costs. We improved our logistics, particularly to get in more domestic feedstock. We sent more of our renewable products to the Pacific Northwest where a fossil basis was stronger. We got a lot of value from some new pathways that we got. We doubled SAF production. As you pointed out, we had the timing of the European credits. In Q4, we'll have some timing impacts as well, probably less timing impacts than we had in Q3. In Q4, margins are improving with weaker soybean prices and relatively stronger credit values.

We think the industry will continue to run at about the same rates as they did in Q3, given the turnaround activity. The European market will continue to attract renewable products. We've been sending renewable products in that direction both in Q3, and we've continued doing that. We also anticipate continuing to increase our SAF production in Q4, and we've seen strong interest from SAF buyers. Finally, the new pathways that I mentioned will give us some additional flexibility. In the end, we still need more clarity on federal and state policy. For example, the guidance on RBO policy, including reallocation of SREs and regeneration on foreign feedstock, and even more clarity on the European policy.

Speaker 2

Jason, it's Kevin. Just one other clarification. That inventory comment was a variance relative to the second quarter. There was no net benefit in the third quarter from inventory. It's just relative to what we saw in the second quarter. That's not a direct impact.

Yep, that's a helpful call-out. Thanks, guys.

Speaker 8

Ryan Todd with Piper Sandler. Please go ahead.

Yeah, thanks. Maybe a couple back on refining. TrueFoot was obviously much higher than anticipated in the quarter. Margin capture, that's still probably still a few headwinds that we see that existed in third quarter. Can you talk about maybe some of the headwinds in the third quarter and how those might be trending or improving into the fourth quarter? Then maybe as a follow-up, a few years ago, as part of your strategic priorities, you talked about a goal of driving margin capture improvement of 5%. Can you talk about where you are on that progress? You've clearly made improvements on clean product yield, but where do you think you are on that journey and what are some of the things that you may be working on over the next couple of years that we should keep an eye on on that front?

Speaker 5

Hey, Ron. This is Rich. Let me start, and then Brian can clean up anything else on the market front there. As I think about it, maybe the best way to approach this is a regional conversation. In the Atlantic Basin, market capture this quarter, 97%, pretty solid. Quarter over quarter, that was really a difference in turnaround activity in that region. We did see improved market CRECs and some inventory impacts that were really offset by some higher feedstock costs, as well as some lower product differentials in the region. The operations of the plants were quite good, though. Utilization for the region was sitting at 99%. On our journey to improve, we had a clean product yield in that region of 88%. Very solid performance in that area.

We think that's a lot of that supported by the self-help that we've done, but also a project that we initiated at Bayway that increased the native gas oil production. It's allowed us to fill up that CAT. We're seeing positive returns on that. In the Gulf Coast area, market capture was a little bit lower at 86%. The headwinds on this one were lower octane and jet differentials. We saw that in the marketplace. Utilization for the region, pretty solid at 100%. The clean product yield's at its typical 81% for that area, which may seem a little low on clean product yield. I'll just remind everyone that at Lake Charles, we produce a gas oil that is sent over to Excel that impacts that overall clean product yield for the facilities. Central Corridor, 101% market capture, very solid. Again, that's one of our highest performing regions.

The headwinds there, lower product differentials again. Those were offset by some improved market CRECs. That differential is a common theme you're hearing here, the octane value, as well as the jet to distillate differential. For the Central Corridor, 103% on the utilization front and 90% clean product yield. You can see how those assets are running and performing quite well. One of our headwinds for the quarter was in the West Coast at 69% market capture. That's primarily driven by the wind down of the Los Angeles refinery and the impacts associated with that. We had that impact in the third quarter. You'll see that impact continue into the fourth quarter where we will have wind down expenses, but yet no barrels to offset that in the profile. We'll provide some clarity on that when we report in on the fourth quarter.

Utilization was reasonably well on the West Coast at 88%. They're very complex refineries, so their clean product yield's up there too.

Speaker 7

The only thing I would add was now we're seeing, we saw, as Rich mentioned, jet under diesel. Now those regrades have flipped and across all pads, jet is over diesel, which will be a tailwind for us. Octane spreads have firmed as well with a weakening naphtha to crude, so that also will be a tailwind for us as well.

Great, thank you.

Speaker 8

Laetsch with BMO Capital Markets. Please go ahead. Your line is now open.

Thanks for taking the question. On Western Gateway, how important is Phillips 66's integration between midstream and refining in designing and executing this project? What's your level of confidence just around regulatory permitting risk and any different dynamics here to keep in mind between the Greenfield pipe and the reversal into California?

Speaker 5

Yeah, we have a team that looks at integration opportunities that has representation from refining, commercial, midstream, all looking at where can we capture the most value, create the most optionality. This opportunity jumped right out of that kind of collaboration. It was a home run. We see opportunities both on the refining side. We see commercial opportunities. Certainly, midstream is the glue that pulls it all together. Don, if you have anything on the regulatory side?

Speaker 10

Other than the feedback that we've gotten initially from folks in the various states, as well as in the federal, has been encouraging and positive. We're obviously in the early days of going through the open season and firming up any of the route nuances as we look at the new build. We feel very positive in terms of the ability to get this project done. To follow on just to what Mark said, I think from an integration standpoint, this is a project that Phillips 66 is uniquely positioned to help facilitate and drive as a really compelling industry solution to market access for the Midwest refineries, as well as satisfying a supply deficit in the West. We really feel good about where we stand and the opportunity set in front of us.

Speaker 5

I've had conversations with key people at the federal level, as well as the state level in California, and they are enthusiastic about this. I think the opportunity to leverage Mid-Continent energy dominance through infrastructure that can come online fairly quickly is very attractive at the federal level. California is looking for ways to provide energy security, and this does that. When you get both of those sides to the table in a positive way, I think that's a strong vote of confidence for the project.

Great. Recognizing chemicals ran really well in the quarter, just going back to industry capacity rationalization, I wanted to get your sense on the China anti-involution policies and just how meaningful do you think this could be to help bring balance back into the market?

I think you've seen it in refining in China, where the teapot refineries, it's the same kind of concept. We're hearing from our chemicals folks that they're looking at drawing a line in the sand around old, less efficient assets to make room for what they're doing around their crude to chemicals thing. I think that watch that space. I think that will result in rationalization of assets, maybe even as young as only 10 or 20 years old.

Thanks.

Speaker 8

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

Speaker 5

Thanks, Ron. Great questions. We remain committed to our strategic priorities: consistently strong operational performance across our assets, disciplined investments which deliver attractive returns, a strong balance sheet, and a commitment to returning capital to shareholders. Thank you for your interest in Phillips 66. If you have questions or feedback after today's call, please reach out to Sean or Owen.