Talking refining capacity with Phillips 66 (Ep. 260)

All right, welcome back to Energy Sense, an S&P Global Energy Podcast covering all topics on the intersection of energy and finance. This is your host, Hillvaden, here with your other host, hostess Sam Hofer. Hello. I feel like it's deeply unprofessional to laugh before it's even begun, but there we are. You just gave that hand signals that normally like send a bunch of balloons up in your background, but no balloons came up. Did you get that feature turned off? No, because it's happened many, many times today in lots of very serious calls, and it's either been balloons or fireworks. I can't switch off. It doesn't know control of when it happens. It's very, very Stephen King. All right, we spoke today with Sean Marr, Philip 66 Chief Economist and Head of Invest relations about the current high margin, high utilization rate that the downstream, the global downstream industry is experiencing, and really have a great conversation, Sam. Can you give some people to listen to over the next 30 minutes? I think so. The start is quite nice having quite an optimistic conversation about refining. Philip 66 has really increased its utilization rates over the last consistently, high utilization rates over the last few quarters, and a combination of technology advances, which is really interesting to listen to. It was also interesting to get his take on where growth markets are leading towards and the role globally of what people will be looking for from a refining perspective, particularly in current climate. It was very interesting, but what about you? What did you think? Yeah, I go mad, and refining is in an interesting place, and we talked about a little bit in the call, but heavy assets, low up to lessons. Halo is kind of the term that investors are using a lot these days, and I think U.S. refining checks the box on that. We'll hand off the discussion now. All right, Sean. Thank you very much for joining Sam and me. For everybody's benefit here, Sean is sitting here and using with me in the office. So this is an infrequent occurrence where most of the time we do these virtually or digitally, so it's nice to have you in person. It's nice to talk about refining in Philip 66. Happy to be here. Thanks for having me. Of course. So let's start with Philip 66, and the state of the refining sector right now. It's August 19th. We've just finished earnings. Refining is running at capacity kind of globally. People are making money. It seems to be a good time to be a refiner. Can you elaborate? Yeah, absolutely. And it is, but I think one of the things that is lost on the market is all of the work that not only has been done in Philip 66, but across the industry to enable the industry to run at the utilization levels that they are. And so the industry is running at record utilization. Philip 66 and the second quarter was at 96% utilization at 5th quarter in a row where we led the industry and our peers. But a lot of that work is really what's driving the ability to keep product into the market and enable prices for consumers to be at more reasonable levels. Not only in the US, but globally because of the amount of exports that we're seeing. But the margin environment is very attractive, and it's imperative that refiners are diligent and are really focused on their reliability, their flexibility of feedstocks, and the optionality in terms of being able to place product into the markets that need the most. And that's really been a core tenant at Phillips over the course of the last few years as the team has spent a lot of time looking at the assets, looking at the portfolio. We closed down our Los Angeles refinery late last year. We consolidated the Wood River Borger assets in the central corridor. So really allowed us to focus on that central corridor, golf coast portfolio where we're able to do some things to improve that reliability and flexibility. And it's an exciting time to be sure, but it's really a function and a testament to the engineers and the people in the industry that are keeping these assets running. So 96% utilization rate is pretty remarkable. Just how has that been achieved? And consistently, like you said, it's been quarter of a quarter of this high utilization rate, which is brilliant. But I'm really intrigued as to how that has been sort of how on earth have you done that? So you think about the utilization rates. And that's going to be something that Hill and I were actually talking about just just before the podcast started. The industry has done an exceptional job of using technology, using AI in terms of improving that reliability, the throughput of the systems. At Phillips last year in 2025, we actually increased the name plate or minimum maximum daily rate of our capacity at four of our refineries to were a function of some projects that we did from a deep bottle neckening perspective. And the other was just learning how to optimize those systems. So we added 2% to our global refining footprint just through asset optimization. And as we continue through the course of this year and you're constantly trying to improve your portfolio, you're constantly trying to do better. You continue to debodel Mac. You continue to find ways to put more barrels into the system, whether that's through higher runtime or just improved optimizing of the crude slate and the product slate. And that's enabling you to get more barrels through. And I would imagine that as we get to the end of this year, you're going to see an increase in refining capacity. Again, and that's just the capacity creep that the industry seems to continue to deliver and has over the course of the last five, 10 years. So how, I mean, if I'm operating at 96%, I'm thinking about this as a runner, right? I can run a pretty fast mile. But at that time, it starts to deteriorate if I turn one mile into two into 10 and to 12. So the refining industry, and this is true of Phillips 66, it's true of all of them, right? You're effectively redlining it. Is that setting up the sector for challenges in the coming years? How long can the sector hold like this? So it's a great point. And I think one of the things that the industry in the broader market needs to appreciate is that as we look into 2027, 2028 assets, these assets are capital intensive. They are workhorses, but they require periodic turnaround activity. And historically, you were operating on a time-based turnaround. So you take your crew to unit down every five years, you take your FCC down every six years, and you undertake a major turnaround. Maybe the asset needed it. Maybe it didn't. And we've become a lot more deliberate at Phillips on making it a need-based turnaround as opposed to a time-based. But inherently, as we think about 2027 and 2028, plan turnaround activity, not only for the company, but for the industry is going to go up. So you'll see utilization levels come down as people go in and make sure that the assets are well positioned to keep running, running safely, reliably. And so you'll see utilization has come down in 2027 and 2028, just as a function of this planned turnaround activity. What was interesting is sometimes we get questions about will we defer turnaround activity? And at Phillips, we take a lot of pride in the safety of our employees. And that's job number one is make sure everyone goes home safely at the end of the day. But it's also reliability. And so when we have a turnaround, or we think that we need to do a turnaround, we're going to continue to honor that schedule. And in fact, we'll actually pull turnaround's forward if that's what makes the most sense for the asset. And give you an example of that. In the fourth quarter of 2025, when the diesel crack was north of $40 a barrel seemed like a lot back in the day, we had a turnaround at Sweeney, which was scheduled for the first quarter of 2026. But the systems, the engineer said, we should really pull this into Q4. And so we pulled that turnaround forward. The more that you defer plan turnaround activity, the higher the probability that it becomes unplanned turnaround activity. And that's a lot harder to get away from and to solve for. So, yes, the industry is running exceptionally well right now. It's because we went through turnaround and the assets are optimized, they're primed. But as we get to 2027, 2028, you'll see utilization has come down, not on the US, but globally. And that's how you get this more balanced turnaround over a cycle, if you will. So yes, 96% is really high. But let's say 92% is on the low side. So it gives you that mid 90s average. I will say that the industry has gone from a level of utilization where 90% or low 90s was viewed as normal. But because of technology, because of the work that teams do, you're actually seeing that creep up across the industry in terms of what is normal in terms of being able to run those systems at higher levels over the longer periods of time. It's a great inflation. Exactly. So one thing I want to follow on from that, obviously, you've announced your earnings results recently. And for the last quarter or so, I mean, market conditions have been favorable. But can you kind of explain like the, to what extent those results have been driven by either market conditions or operational improvements? Is there a big disparity or do they just sort of will hand it hand a little bit? So they're hand in hand and I and you wouldn't be able to capture the results that we realized in this margin environment if you were not operating at a very high level. And I think that's one of the things with the company that we were very pleased about with the second quarter in particular is that it was a very clean operational quarter not only in refining, but for our midstream business, for our renewables business. Our renewables, our rodeo renewed facilities, a 50,000 barrel a day name plate facility, and ran well north of that because of the same optimization and and focus on operating excellence. So it is a it is a journey. It's a process and you're always trying to improve and make that better. But you do that because when the margin environment is there, you need to be able to capture it. And so one of the things that we spent a lot of time focused on within Philips, I mentioned this before is that reliability factor. The volatility in the global marketplace for energy, whether it's refined products, natural gas liquids, crude oil, natural gas is only going to continuing to increase over the course of the next one, three, five, 10 years because the demand centers are moving further away from the supply centers. That means that you've got a significant increase in transit time. You're going to have more dislocations with respect to freight. And that inherently creates volatility. So if you end up in a situation where a refinery goes down in a market for a period of time, then refining margins are going to go through the roof for lack of a better term. And you want to make sure that your asset is operating to to take advantage of that. So it's really the focus is playing the long game and focus on you've got to be running and you've got to be sure that you're capturing that margin environment when it presents itself because no one even knows when it's going to happen. Things unfortunately do happen. The assets work really hard. And we have to deal with things like tornadoes. You have to deal with lightning strikes. You have to deal with random acts of nature. And we're very fortunate, frankly, that there hasn't been any hurricane activity to date in the Gulf because that's another potential problem when you think about the Gulf coast refining complex. But it's that reliability that enables you to capture that margin environment. And I think that's that's just a testament to certainly our employees who've done a lot to make that to make that happen and make that a reality. So can you talk a little bit about so you sit and invest relations and five or six years ago the oil complex as a whole was I'll say out of favor and maybe that's to use a very gentle euphemism for the reality. And can you talk about how the conversations might be changing or might not be changing with institutional investors and the oil complex but more specifically downstream refining. And I'm going to add a little bit more to this that there's there's an investment theme with the acronym HALO heavy assets low obsolescence. And we would argue that refining assets meet that threshold right that that it is a heavy asset in the risk of obsolescence is low. And five or six years ago I think people would take in the other side of that bed. Are the conversations that you're having with investors changing and are you talking to more investors these days. So to answer your question directly yes I'm going to backtrack a little bit because I joined Phillips in January of 2024. And the 15 years before that I was at an energy hedge fund and prior to my joining Phillips we I looked to launch a strategy and it was really predicated on the fact that everybody was leaving energy assets as as dead because we were going down this new path of of low carbon everything. And the reality is when you look at the global market we need all of it. It isn't all of the above conversation. And so when I had the opportunity to come into Phillips initially as the chief economist which is looking at the long term fundamentals I was extremely excited to do that because the asset footprint at Phillips was in my opinion second to none because you had a very concentrated position on both downstream in terms of refining assets which the market was not fully appreciating because of the reason you mentioned. But also the midstream assets and the infrastructure and all that interconnectivity from the DJ Basin to the Eagle for Chale the Permian Basin all of the Gulf Coast all of that flowing together. So whether it's refining specifically or just north the value of North American infrastructure was something that I thought that the market was under appreciating and I think that the market continued to under appreciate that until what we saw earlier this year with with the Strait of Hormuz and you are seeing a notable shift in terms of consumer behavior whether it's countries that were securing 80% of their LPG or clean fuel supplies from the Middle East now they're looking to the US Gulf Coast to be able to to satiate that demand. And energy has become much more as a as an investment theme use almost as a barbell relative to AI and you know when I'm listening to podcasts and when I'm hearing about data centers and the biggest concern is AI and then I've got references to the Permian Basin and Landman. I mean you're like we're probably people are probably starting to pay attention but yeah our conversations with investors are increasing I think that there there is an a bit of an anxiety right now with respect to where refining margins are how sustainable are they at these levels we've been incredibly fortunate in in my opinion because we are not at a point where we're seeing demand destruction. The price levels not only in the US but Europe Southeast Asia they're at levels that are going to continue to support economic growth and I think that that's something which if we can continue at this Goldilocks level is going to be wonderful for the industry for for an extended period of time the the concern is is clearly going to be around demand destruction what does that look like but investors are doing the work and so at Philips we went over to Europe earlier this year for the first time in five years I think and the reception that we had in Europe was incredible and the the the the investor wanted to talk about US energy they want to talk about US energy infrastructure and today in the in the market when we talk about infrastructure it's always about utilities it's about data centers it's about power grids but the reality is the transportation fuel demand pipelines natural gas liquids that's infrastructure that is keeping everything going and it's been overlooked because we in the US are very very fortunate because we're able to draw upon extremely reliable hydrocarbon supplies whether it's Western Canadian select or the Permian Basin or even now that resourcing vendors will uncrueds out of out of Latin America we've got access to reliable low cost supplies and we're able to process it here and then use it domestically and then send it into the global market but if you're not in doubt with that domestic resource and that domestic infrastructure things become very concerning very quickly so investors are starting to pay attention it's still early stages energy is three percent of the S&P 500 today and portfolio managers will use a lot of that waiting to go to the super majors the exons and the chevrons of the world because I can own it and I can not worry about it and energy is a small part of the S&P but as energy starts to go from three percent of the S&P 500 to four percent to five percent which with these returns on capital across the the midstream downstream parts of the the energy value chain that it's going to be return on capital which drives valuation the stock market and people are going to have to pay attention and I think that that's one of the things that's exciting about where we sit today as as a company but also as an industry because there is a there what you're doing what you're doing with this podcast the education that it presents in the market is critical because so many people have moved away from energy there's a lot of learning that has to go on and that's where this becomes incredibly valuable and my role as investor relations I use it I view it more as a as a conduit to to help educate on the fundamentals of the industry because it's been so overlooked for for an extended period of time and it punches above its weight right it's three percent on a market cap basis but it's on a on a profit basis on a profit basis it's north four to five percent it's actually closer to ten or eleven oh wow yeah okay and that and that tenor eleven is actually free the conflict so it's it's probably north of that today I mean you've sort of already touched on this but I think part of the conversations that people are having a look the growth areas so whether it's ngl snap there and so on and what is what is physics is rolling that where do you see those opportunities particularly the way things are right now that that's one of the things that I think that we're extremely excited about as a as a company as an organization because when when we look out over the course of the next ten years right we we forecast I forecast the demand outlook for all the transportation fuels and liquid fuels and ngl's and naphtha and ngl's and naphtha is it's the building block for for for petrochemical demand. In the US, we consume 13 times the amount of plastics per day as they do in India, right? So as global economic growth occurs in the emerging parts of the world that that need these supplies, it's the US and the Middle East that are the prime supply sources for that. And the Permian Basin, I keep coming back to it, but the Permian Basin as the geology continues to develop, and as you continue to drill into more and more mature areas, you're getting more natural gas, and you're getting more natural gas liquids. Those natural gas liquids have got to be evacuated to those markets where you can take the ethane and turn it into ethylene and polyethylene or propane, and you can use it for LPGs for home heating, cooking, cleaning. Propane is far more efficient, a fuel for home cooking in places like Africa than natural gas in the current environment, just because of the infrastructure. Canisters a lot easier to carry around than trying to build a natural gas pipeline. So you think about the value of NGLs, but in the US, we're already satiated in terms of the amount that we can consume. CPCOM Phillips joint venture with Chevron is building a world-scale cracker, golden triangle on the US Gulf Coast, so that'll consume a significant amount of ethane. However, the point, Sam, that I would make is that volumetric push is going to continue to need infrastructure, and it's going to continue to need export capacity. And Phillips position in that is where we fractionated over a million barrels a day of NGLs in the most recent quarter. We transported over a million barrels a day. We're one of four companies that can export LPGs off of the US Gulf Coast, and we're continuing to take that NGL molecule and we can provide ethylene or ethane to basically the majority of the petrochemical complex along the Gulf. So producers have a lot of choices in terms of where those barrels go, which helps with their margins and netbacks. But that's that NGL nap, the discussion is something that we don't think about, we don't talk about because we're using it every day, but the rest of the world is going to continue to use it, and we are going to be the source of that supply. So that volumetric growth ramp that we see over the course of the next three, five, ten years is really what drives our company's baseline cash flows, which drives our dividend growth, which is going to be supplemented or augmented by the cyclicality of the commodity-based cash flows of refining or petrochemicals or renewable fuels, for example. So I think we're just extremely excited about the position that we have in that midstream, downstream infrastructure narrative, and the global reach that we have, it could be because, sorry, for going along with it here, but the other critical part of this is you've got to be able to access those markets. And so you look at our commercial footprint, we've got seven offices around the globe, we signed the first term contract with India back in February, pre-the conflict for LPGs, and we've continued to build upon that, but we're trading six million barrels a day of liquids every single day, and so to take low-cost, domestic resource, be able to run it through a very complex network of infrastructure assets and refining these refractionators, and then deliver that to the global consumer. That gives you flexibility and optionality, and I think the two important legs of the stool. So infrastructure came out of you, you mentioned that word several times as you were just talking, and everyone loves infrastructure, everyone should love infrastructure, and not everyone loves infrastructure, which I guess is kind of where I'm going with this. And you mentioned Landman and the podcast discussion on the difficulties of building data centers, right? The difficulties of putting up power plants. It's no easier to put up refineries, it's no easier to put in pipelines. Pipelines have the same problems. Any linear project has a problem of moving from point A to point B because anything in between point A and point B kills a project, right? So how should we think about, so if Philip 66, it wants to invest in growth or wants to invest in infrastructure, particularly in the West, it's really hard to put a refinery or even a pipeline in somebody's backyard to use a proverbial reference point. How do you think about it? You've got this period of profitability, you can buy back shares, you can raise dividends, you can invest in new infrastructure, but that's going to get really expensive in the US because somebody's going to try to stop you. Yeah, so it's actually interesting, and the permitting process is a real challenge. The ability to get rights of way, the ability to build new assets, to try to expand existing refining infrastructure. The refining industry has been deboddling mecking for 25 years, and when I started the industry in 2001, it was the golden age of refining because all the refineries had to invest in units which would allow them to run heavier sour grades of crude, but do it in an environmentally friendly way. But even back then, in 2003, 4 and 5, the footprint within the fence line was already getting maxed out, and so the industry has been incredible in terms of what they've been able to do from a creep perspective. The notion of being able to build a new refinery is almost laughable without being too critical about it, just because of the permitting and the requirements associated with it. Pipelines are challenging. I will say that there are opportunities to invest in the market. We are going to be very disciplined in terms of how we allocate our capital. We are not here to build empires. We're not trying to build multi-billion dollar backlogs for the sake of saying that we've got this place that we can allocate dollars. For us, as a company, the North Star is going to be returned on capital employees, are we making good investments for our stakeholders, our shareholders, our employees, our customers, and that's going to be the guide. There are those opportunities, though. You mentioned getting product to the West. We recently announced the closure of the Los Angeles refinery. Valero did the same with their beneath refinery. One of the things that came out of that conversation when we were dealing with the regulators had very open and ongoing discussions with them. It was actually a great discussion and great dialogue was the need for more infrastructure into Southern California so that we could help to replace those barrels. We were able to get some permits approved to reduce some dock work and bring in more waterborne barrels to help satiate that local supply short. Arizona and Nevada were highly concerned about the closure of the loss of refinery capacity in California because they source a lot of their barrels from that market. Fast forward to really just last, as a week ago today, actually, we announced the Western Gateway project. So the Western Gateway project is a $5 billion enterprise value pipeline that is going to go from our, basically, our borger refinery all the way to the Southern California market. So we're going to go across New Mexico into Arizona. Organs and West Texas? Yeah. And Texas Panhandle. So you think about our refining and we're doing that with Kinder Morgan and Holly Frontier as our partners. But think about this, we've set up a situation here where the mid-con and refining complex is going to become the lowest cost refiner into California because we're going to be able to take product from, you know, our facilities and from other facilities. And, you know, at Phillips, we can already produce Azure Bob and Carbob and we're going to be able to bring product from Sweeney up from the Gulf Coast up through, through Explorer and bring that product into the, into the West Coast market. And Don Baldridge, who runs our midstream business, would tell you in his entire career and his entire career has been in midstream and building pipelines and doing things. He's never seen such a consistent degree of support from both the federal government, but also the local municipalities. And if you think about what this does, it will foster and fuel incremental growth in that Southwestern market where population demographics are moving, but the cost of energy is a challenge. And so you're able to, you're going to be able to give them another source of reliable, rateable supply that is not going to be dictated by weather or freight rates or other things that are going to be forced to come through, you know, the Southern and California coast, but it's also improving the reliability of supply into that California market as well. And without adding any incremental infrastructure. So Kinder Morgan is contributing to their assets into the joint venture. And so it's about a billion and a half in value of asset contribution, three and a half billion of total eight-eighths investment, Phillips 66 is investing two and a half billion of that of that three and a half. And the market is very excited about this project. And I say that because when we, when we announced the project yesterday, that, or last week when it was FID, you announced a $2.5 billion capital project and the stock goes up ahead of its peers. That's a pretty good sign and we've had a lot of support from the investment community because it just makes sense. And so if something makes sense, there's going to be a way to get it done. And it's just making sure that we're doing things for the right reason, the right economic returns and that makes it possible, but it is a challenge. Yeah, that's funny that I mean, just like the data centers that you're talking about, when data centers announce these plans to spend tons and tons of money to build, their stocks are going up right, and you're getting that same investor appreciation at it. Hey, let's put steel on the ground, let's do things. All right, well, we always like to like finish these conversations up with a little forward, and you've already talked about some exciting projects that you're working on, but we had to like pin you down with a forecast of something to look for, watch for in the next six months, that's maybe not related to stuff that's going on in the market. What would one thing that you would like to call out for people to pay attention to? From a Philips 66 perspective. Philips 66, so I do. Sure, I think over the next six months, some of the things that we're really excited about are we've got the Iron Mesa gas plant coming online in West Texas. So that's going to be a plant that will replace our goldsmith plant, and that's going to come online in early 2027, and that's exciting because when we think about the Permian basin and we think about that transition from that tier 1 geology, and as producers are trying to do everything they can to maintain crude volumes, they're looking at tier 2 geology, and there's the Barnett trend, which is really right in the middle of the Eastern part of the Central Basin platform, the Western part of the Midland Basin, the Iron Mesa plant is going to be sitting right on top of that and go a long way in terms of adding more NGLs into the system. And then the other thing that I think that we're really excited about at Philips is the Golden Triangle project is slated to come online at the end of this year, and full operations in early 2027, and our second large petrochemical project in Roslophone is scheduled to come online and be fully operational next year. So we've got some very large projects that are coming to the market and coming to fruition, and they're different in terms of their importance. The midstream projects that we're talking about really just lend itself to the durability and longevity of our cash flow stream, and that wash rinse repeat model of we're going to thoughtfully develop and invest and deliver that single digit type growth rate off of our midstream business, which will support the entirety of our organization, but then those large world-scale crackers that CPCam is bringing online is something that the teams worked very hard on at CPCam, and I think everyone's ready to see those come to fruition. All right, it's a very good answer, a very specific answer, so much better than forecasting a hurricane or something. No, we don't want to do that. Nondustin in August, Madden in August. We can wait and talk about that November. Yeah, November will be fine. There's other things going on November that will distract us. Indeed, indeed. Wish all and thank you. This has been fantastic. Wonderful, Hill. Thank you so much, Sam. It's a pleasure. Great to be here, so thank you. [BLANK_AUDIO]