Phillips 66 (PSX) Q2 2018 Earnings Conference Call Transcript

Phillips 66 (PSX -0.50%)
Q2 2018 Earnings Conference Call
July 27, 2018, 12:00 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Welcome to the second quarter 2018 Phillips 66 earnings conference call. My name is Julie and I will be your operator for today's call. At this time, all participants are in a listen-only mode. Later we will conduct a question and answer session. Please note that this conference is being recorded. I will now turn the call over to Jeff Dietert, Vice President of Investor Relations. Jeff, you may begin.

Jeff Dietert -- Vice President of Investor Relations

Good morning and welcome to Phillips 66's second quarter earnings conference call. Participants on today's call will include Greg Garland, Chairman and CEO, and Kevin Mitchell, Executive Vice President, and CFO. The presentation materials we will be using during the call today can be found on the investor relations section of the Phillips 66 website along with supplemental financial and operating information.

Slide two contains our Safe Harbor statement. It is a reminder that we will be making forward-looking statements during the presentation and our Q&A session. 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 FCC filings. With that, I'll turn the call over to Greg Garland for opening remarks.

Greg Garland -- Chief Executive Officer

Okay, thanks, Jeff. Good morning everyone and thank you for joining us today. Our diversified businesses operated well and delivered strong earnings in cash flows. Adjusted earnings were $1.3 billion, or $2.80 per share. Refining had one of its best quarters and ran at 100% capacity utilization capturing strong margins. Our refining system has industry-leading coking capacity, which allowed us to benefit from continued, favorable heavy crude differentials. We generated $2.4 billion of cash from operations during the quarter, which is the highest since 2012. We rewarded our shareholders by returning 602 million through dividends and share repurchases, which brings our total distribution for the year to $4.4 billion.

A secure, competitive, and growing dividend is fundamental to our strategy. During the second quarter, we increased the dividend 14% resulting in a 27% compound annual growth rate since 2012. We're executing our long-term strategy to capture growth opportunities and enhance returns. Our midstream organization is moving forward with two major growth projects, construction of the Gray Oak Pipeline, an expansion of the Sweeny hub.

Phillips 66 partners recently completed expansion open season for the Gray Oak Pipeline. Gray Oak will provide crude oil transportation from the Permian in Eagle Ford to Texas gulf coast destinations including our Sweeny refinery. The pipeline will have an initial capacity of 800,000 barrels per day based upon shipper commitments of 700,000 barrels per day and a reservation of walk-up capacity for shippers. Gray Oak is expandable to approximately 1 million barrels per day and expected to be in service by the end of 2019. Total cost for the project is anticipated to be approximately $2 billion. Phillips 66 partners will be the largest equity owner in this joint venture project.

At Sweeny, we're building two 150,000 barrel per day NGL fractionators and adding 6 million barrels of storage at Phillips 66's partners, Clemens Caverns. We have agreements in place with multiple parties, including DCP midstream to supply the new fractionators. The hub will have 400,000 barrels a day of fractionation capacity and access to 15 million barrels of storage when expansion is completed in late 2020. We expect robust NGL value chain fundamentals, including continued production growth in the Permian and other shale plays. Our Sweeny hub is strategically located on the Texas gulf coast. The hub includes NGL fractionation and storage capacity with access to local petrochemicals and fuel markets and 200,000 barrels a day of LPG export capacity.

Both the report export terminal and our Sweeny fractionator continue to exceed design rates. At our Beaumont terminal, we recently placed 1.3 million barrels of fully contracted crude storage into service. We're gonna terminal's total crude and product storage capacity to 12.4 million barrels. Additional crude oil tanks are under construction that will increase the terminal's capacity to 14.6 million barrels by the end of the year. We expect the continued growth and domestic crude production will result in higher gulf coast exports. And our Beaumont terminal is well positioned to capitalize on this growth.

DCP midstream continues to expand the Sand Hills Pipeline to meet the demand from the growing NGL production in the Permian Basin. During the second quarter, DCP increased the pipeline's capacity to 425,000 barrels per day with further growth to 485,000 barrels per day by the end of this year. Our new Sweeny fractionators will be supplied by Sand Hills. This pipeline is owned two-thirds by DCP and one-third by Phillips 66 partners. Also in the Permian basin, DCP Midstream has a 25% interest in the gulf cost express pipeline project, which will transport 2 billion cubic feet per day of natural gas to gulf coast markets. Completion of pipeline is anticipated in the fourth quarter of 2019. In the high growth DJ basin, DCP's newborn three gas processing plant is expected to start up in the third quarter of 2018 and the O'Connor two plant in the second quarter of 2019.

In chemicals, CP Chem has strong operations from its new gulf coast petrochemicals assets, which contributed to solid earnings growth during the quarter. Ethane crackers demonstrated 3.5 billion pounds per year of capacity, which is 6% above the original zine rates.

In refining, we've approved an FCC optimization project at our Sweeny refinery that will increase production of higher valued petrochemical products as well as higher-octane gas lane. This project is anticipated to complete in mid-2020. We've completed FCC modernization projects at the bay way in wood river refineries. At both facilities, we upgrade FCC reactor with state of the art technology. The units are performing as expected and are yielding higher value, clean products. So with that, I'll turn the call over to Kevin to review the financials.

Kevin Mitchell -- Chief Financial Officer

Thank you, Greg. Good morning. Starting with an overview on slide four, second-quarter earnings were $1.3 billion. We have special items that netted to a gain of $17 million. After excluding special items, adjusted earnings were $1.3 billion or $2.80 per share. The second quarter adjusted effective tax rate was 22%. Operating cash flow was $2.4 billion. This included distributions from equity affiliates of $610 million and positive working capital impacts. Capital spending for the quarter was $538 million with $348 million spent on growth projects. Second quarter distributions to shareholders consisted of $372 million in dividends and $230 million in share repurchases. We ended the quarter with $464 million shares outstanding.

Slide five compares second quarter and first quarter adjusted earnings by segment. Quarter-over-quarter adjusted earnings increased over $800 million mainly driven by refining. Slide six shows our midstream results. Transportation adjusted net income for the quarter was $137 million, in-line with the previous quarter. Increased volumes following the completion of first quarter refinery turnarounds and higher backend pipeline equity earnings were offset by asset impairments and seasonal maintenance.

NGL and other adjusted net income was $50 million, down $23 million reflecting positive inventory impacts in the first quarter of about $20 million. We continue to run well at the Sweeny hub. During the quarter, the export facility averaged 10.5 cargos a month and the fractionator averaged 109% utilization. While improved, US gulf coast to Asia LPG export margins remain challenged. DCP midstream had adjusted net income of $15 million in the second quarter, a $9 million decrease from the previous quarter. The first quarter included a $9 million benefit due to timing of incentive distributions. The impact from increased volumes during the quarter was offset by seasonal operating and maintenance costs. Turning to chemicals on slide seven, second quarter adjusted net income for the segment was $262 million, $30 million higher than the first quarter.

In olefins and polyolefins, adjusted net income increased $23 million from the ramp-up of the new ethane cracker and polyethylene units. Global ONP utilization was 95% in the second quarter. Adjusted net income for SA&S increased $14 million from the completion of first quarter turnarounds. CP Chem's other adjusted net costs increased due to lower capitalized interest following completion of the US Gulf Coast petrochemicals project.

Next, on slide eight, we'll cover refining. Crude utilization was 100% compared with 89% in the first quarter. Our second quarter clean product yield was 84%. Pre-tax turnaround costs were $60 million, a decrease of $185 million from the previous quarter. Refining second quarter adjusted net income was $911 million up $822 million from last quarter.

Across our regions, the increased earnings were due to higher realized margins as well as higher volumes and lower costs following the completion of first quarter turnarounds. WRB equity earnings also increased this quarter due to the completion of turnarounds at the Wood River and Borger refineries. The market crack increased 13% during the quarter. A realized margin improved 32% to $12.28 per barrel up from $9.29 per barrel last quarter. The increased margin capture was primarily due to the widening Brent-WTI spread, discounts on US inland crudes, and improved heavy crude differentials.

Capitalizing on our integrated infrastructure and supply network, we sourced more advantage crudes into our refining system in response to widening differentials. Slide nine covers market capture. The 3-2-1 market crack for the second quarter was $14.86 per barrel compared to $13.12 per barrel in the first quarter. Our realized margin for the second quarter was $12.28 per barrel, resulting in an overall market capture of 83% up from 71% in the first quarter. Market capture was impacted in part by the configuration of our refineries. We made less gasoline and more distillate than previous in the 3-2-1 market crack.

Losses from secondary products of $2.81 per barrel were higher than the previous quarter by $1.34 primarily due to rising crude prices. Feedstock improved realized margins by $3.15 per barrel, which was a $1.52 per barrel better than the prior quarter due to improved crude differentials. The other category mainly includes costs associated with product differentials, RINs, outgoing freight, and inventory impacts. This category reduced realized margins by $0.75 per barrel compared with $2.08 per barrel in the prior quarter. The improvement was driven by lower RIN costs and improved clean product realizations.

Let's move to marketing and specialties on slide 10. Adjusted second-quarter net income was $195 million, $21 million higher than the first quarter. In marketing & other, seasonally higher volumes and improved west coast and central region margins contributed to increased earnings. We reimaged over 250 domestic marketing sites during the quarter bringing the total to over 1,700 since the start of the program. We continue to see strong export demand during the quarter, with 200,000 barrels per day of refined product exports. Specialties adjusted net income increased $5 million from improved base oil margins.

On slide 11, the corporate & other segment had adjusted net costs of $183 million this quarter compared with $162 million in the prior quarter. The $21 million increase reflects higher interest expense and taxes. Slide 12 highlights the change in cash during the quarter. We entered the quarter with $842 million in cash on our balance sheet. Cash from operations excluding the impact of working capital was $1.7 billion. Working capital changes increased cash flow by $692 million primarily from increased net payables as refining returned to normal operating levels following the first quarter turnarounds. During the quarter, we funded $538 million of capital expenditures and investments, returned $602 million to shareholders through dividends and the repurchase of shares, and repaid $250 million of debt, our ending cash balance with $1.9 billion. This concludes my review of the financial and operational results. Next, I'll cover a few outlook items for the quarter.

In chemicals, we expect the global ONP utilization rate to be in the mid-90s. This reflects the Cedar Bayou ethane cracker at the recently increased capacity of $3.5 billion pounds per year. In refining, we expect the worldwide crude utilization rate to be in the mid-90s and pre-tax turnaround expenses to be between $60 million and $80 million. We anticipate corporate and other costs to come in between $170 million and $190 million after tax. With that, we'll now open the line for questions.

Questions and Answers:

Operator

Thank you. We will now begin the question and answer session. If you have a question, please press * then 1 on your touchtone phone. If you wish to be removed from the queue, please press the # key. If you are using a speakerphone, you may need to pick up the handset first before pressing the numbers. Once again, if you have a question, please press * then 1 on your touchtone phone.

Neil Mehta from Goldman Sachs, please go ahead, your line is open.

Neil Mehta -- Goldman Sachs -- Analyst

Hey, thanks very much. Good morning Jeff, good morning Greg and Kevin. I appreciate the comments today and congrats on a good quarter. I wanted to talk a little bit about the captures because they certainly came in better than what we expected on the refining segment. Can you just help us understand what drove the delta versus maybe what you guys were even modeling internally? And I suspect part of it has to do with the way we are modeling the crude capture versus the product capture if that makes sense. You just have a tendency to have more of the crude discounts dropped to the pre-tax margin. Any of those deltas would be helpful in terms of framing the gulf forward.

Greg Garland -- Chief Executive Officer

I think refining performed exceptionally well in the quarter, averaging 100% utilization so I think the most important thing is we were up and running well in a strong margin environment. Turnaround expenses were down substantially quarter-on-quarter and that brought down operating cost. It increased volumes and helped improve yield.

We also took advantage through our integrated supply network to capture crudes. We benefited from the YWTI brand differential. We benefited from inland crudes trading at steeper discounts including Canadian heavy, Bakken, and Permian crudes as well as improved heavy discounts on the gulf coast and on the west coast as well. We also saw some improvement in product price realizations especially on the gulf coast and in the west coast as well. I think finally, RINs cost were cut in half during the quarter so that helped capture rates as well.

Neil Mehta -- Goldman Sachs -- Analyst

That's helpful color. I wanted to build on that WCS point because we've seen the differentials really widen out here. You guys import more WCS than anybody else. So can you just talk about how you see that playing out through the balance of this year and into 2019 ahead of Enbridge line 3 and before the IMO impact?

Jeff Dietert -- Vice President of Investor Relations

Sure. We had the Syncrude out each this summer, which supported WCS temporarily, but now that project's starting to come back on. We expect additional volumes in August and September. Fort Hills is continuing with its impressive ramp toward 200,000 barrels a day, potentially higher. As we look at maintenance activity, pad two has well above average refinery maintenance planned for the fall and some of that is gonna reduce the demand for WCS as well. So we see a seasonal opening of WCS discounts this fall.

We expect the discount to be set by rail, assuming there is sufficient rail capacity, which would be the equivalent of kind of WTI minus 20. If rail is not sufficient it could be wider. When you look at the Canadian exports by rail, we did see a new high in April, 109,000 barrels a day. But that's only slightly higher than the average of 130,000 barrels a day last year. So we're getting a little bit more rail but not substantially more. So we expect WCS discounts to be attractive for at least the next 18 months and potentially longer.

Neil Mehta -- Goldman Sachs -- Analyst

Thanks, Jeff.

Operator

Roger Reed from Wells Fargo, please go ahead, your line is open.

Roger Reed -- Wells Fargo -- Analyst

Thank you, good morning. Really great quarter there, I think we have to say. I'd like to come at it from the refining utilization side. 100% utilization and we've seen from the DOE stats really good performance for the whole industry. I was just curious, is this a function of that really is utilization or maybe there have been some increases in capacity that aren't exactly being measured properly? Not so much for you, but maybe for the industry? And then, how should we think about running above utilization levels as we roll into an IMO driven event next year?

Greg Garland -- Chief Executive Officer

In our case, Roger, certainly we came out of a heavy turnaround in the first quarter. We came up, we ran really well. Given the market opportunities available to us, I think -- to run. I suspect that we're in a period where difs may come in just a little bit but then as we come back into the maintenance season in the fall, you're gonna see those difs open back up in many cases. IMOs are gonna be a nice tailwind I think for the industry as we start moving into 2019, strictly the back half of 2019. And so I think that we're pretty constructive on both the supply and demand side. We've got a strong economy going and you think about the opportunities that are coming in on '19, we're pretty constructive on that. I don't know, Jeff, if you want to add any color on the IMO?

Jeff Dietert -- Vice President of Investor Relations

No, I think that's all accurate. I think the IMO is gonna benefit complex refining and so I would expect higher utilization of the complex refineries in the US and in our portfolio. Higher utilization of coking capacity, which we're an industry leader there. I think they'll continue to be a focus on running well, certainly within our portfolio.

Roger Reed -- Wells Fargo -- Analyst

Yeah, I appreciate that. I guess that's what I'm trying to get at is, if you ran at 100% this quarter, the anticipation is that margins would be even more favorable in the latter part of '19 into '20. Do we think about this as you can run it 102 or 103 or something like that? Or is there something else that we should be focused on? Like this kind of is it and so you just have to simply work your way within the system as is.

Greg Garland -- Chief Executive Officer

Well, I think that even in our second quarter we pry about 3.5% downtime due to unplanned downtime and turnaround activity during the quarter so obviously, we had assets that ran well above the 100% level coming into it. The other I would say, we've come through two heavy turnaround years in '18 and '17 for us and so we're really, I think from a portfolio standpoint, well positioned for '19 and '20 to run well.

Roger Reed -- Wells Fargo -- Analyst

And then as you look at secondary impacts of the IMO here, potential for some of weaker competitors out there, really outside the US to get pushed out. Any thoughts about how that'll affect crude flows or product demand?

Jeff Dietert -- Vice President of Investor Relations

Well, I think the refineries that produce high percentage of fuel oil are gonna be the ones that are gonna be stressed. A lot of Latin American refineries fall in that category. We'll have to see how the product flows adjust but we're focused on our portfolio and making sure we can meet the standards across all our refineries.

Operator

Phil Gresh from JP Morgan. Please go ahead, your line is open.

Phil Gresh -- JP Morgan -- Analyst

Hey, good morning. First question just on chemicals: Could you just elaborate a little bit about what kind of contribution you think you saw from the cracker in the second quarter, what kind of stud up cost may still have been incurring. Just kind of trying to tie it back to your mid-cycle guidance, adjusted on a quarterly run rate basis, if you have anything on that?

Kevin Mitchell -- Chief Financial Officer

It's Kevin. I'd say as you look at the second quarter you certainly have some ramp-up in terms of utilization so it's not -- you don't have a complete quarter of contribution from those assets, although by the end of the quarter we were at very healthy utilization rates. I don't think start-up expenses were anything to really move the needle in the quarter. There may have been a little bit but it's just not material. And I think as we step back and look at this the mid-cycle guidance that we've talked to previously is still intact. So still expect to generate that incremental EBITDA in the same range of numbers we've talked about in the past.

Greg Garland -- Chief Executive Officer

I think moving in the third quarter we're certainly would expect kind of run rate type level to performance out of that asset. You think about the near-term -- so DOW was up, we're up, now I saw Mobile's coming up, and so near-term you could have some compression of margins as these volumes start to get absorbed in the marketplace.

Offsetting that though, the global economy's strong, you saw the GDP number for the US today and so we've got great demand on this and so we're still pretty constructive out over the next three to four years of good, solid demand growth. And I think that our view is there's probably more upside than downside on the margins if you want to look out in this three to four-year window.

Phil Gresh -- JP Morgan -- Analyst

And Greg, if I were to think about how that feeds into your timing of a potential second cracker, what are your latest thoughts there?

Greg Garland -- Chief Executive Officer

I think you kind of start with the fundamentals. You still have 5, 600,000 barrels a day of ethane in rejection there's more coming at us, there's gonna be plenty of feedstock for the next wave of crackers. We're funding work on the second cracker today. I think the FID decision is one we obviously haven't taken yet still but I think probably late '19, '20 is still what we're thinking in terms of FID on the next cracker. Frankly, we like that spacing in between this project and the next project.

Phil Gresh -- JP Morgan -- Analyst

And then Kevin, just on the cash flow and the cash balances and the allocation of that end. I know you've talked about wanting to pay some of the debt down that you incurred in the first quarter. Obviously, you got some of the working capital reversed on the cash balances, both have nicely, so how do you think about the cash balances now and what you want to prioritize for the rest of the year?

Kevin Mitchell -- Chief Financial Officer

So, 1.9 billion at the end of the second quarter. Obviously, the first quarter not only impacted by the normal working capital drain that we see in Q1 but with the Berkshire buyback, we drained cash to partly fund that as well. So getting cash back to a more comfortable range for us. I think you'll see to the extent we continue to have strong cash generation we'll probably do a bit more debt pay down. That's probably running a little bit higher than we'd like it to be.

The balance sheet's still strong, still get great credit ratings, but would like to do a little bit more on debt pay down. That right there as well is a possibility. We've talked about the growth projects and the capital programs. So we may end up building a little bit more cash. I think we're still -- if you look where we've been over the last four, five years or so, we've had to been running cash that's been 2 billion to 3 billion certainly for a chunk of that time. Wouldn't surprise me if we end up carrying a little bit more cash for a period of time.

Operator

Paul Cheng from Barclays. Please go ahead, your line is open.

Paul Cheng -- Barclays -- Analyst

Good morning. Very good quarter. Maybe then Greg, just curious that we're finding in this quarter that we have a similar market condition, do you think that is repeatable for your performance or that you think that this is heavy start-up not yet ready for you guys and would be difficult to repeat it?

Greg Garland -- Chief Executive Officer

I think that we're set up to run well in terms of utilization. We don't have a lot of big turnaround in front of us coming into the third quarter from that standpoint. I think definitely the marketplace, the strengths of our portfolio, I think our commercial and some folks did a really nice job getting the right crudes in the refineries and the guys in the refineries did a great job of running those crudes and creating value. As I look out into third quarter, fourth quarter, I'm still constructive on refining going forward. So whether we can repeat $1.3 billion quarter or not, I can't forecast that for you today. But I do think that refining is gonna do well coming into the third quarter.

Paul Cheng -- Barclays -- Analyst

It seems the margin near-term bottom in late June recovering in the last several days that have seen a sudden surge. Just curious, have you guys seen any theory behind why the last several days that we see such a strong movement in the bottom margins?

Jeff Dietert -- Vice President of Investor Relations

I think it's mainly driven by utilization. We saw very strong utilization early in the summer and in June and that drove gasoline prices down into the quarter relatively soft into Q2. Since that time, we've seen utilization come down. Demands remained relatively health on the gasoline side and now gasoline cracks are back up to the middle or slightly above the five-year range.

On the diesel side, we're seeing a really strong demand, 9% up year-on-year and that's driven by strong trucking activity with 8% increase year-on-year. Rail movements are up 3.7% year-on-year. And we're seeing strength in the areas where oil-drilling activity is ongoing as well. And the distillate inventories are at the low end, or actually below the five-year range on absolute and days of demand cover basis. So distillate looks awfully strong.

Paul Cheng -- Barclays -- Analyst

Thank you. And the autos are great information, just curious that because typically those are not going to need to order certain for the last several days, a sudden jump, so wondering if marketing people have seen any news or anything out there say that, all of a sudden happen in the last several days that may have triggered such a substantial move?

Jeff Dietert -- Vice President of Investor Relations

There's been some unplanned downtime, some heat-related power issues, but nothing more specific than that.

Paul Cheng -- Barclays -- Analyst

And can you tell us that, how much is the heavy oil you run in the US in the second quarter compare to the first quarter or the second quarter last year as a percentage?

Jeff Dietert -- Vice President of Investor Relations

It was up slightly. I don't have that off the top of my head but I'd be happy to get back with you.

Paul Cheng -- Barclays -- Analyst

Okay. And for Capex, Kevin, that previous range that you guys have given, is this still a good range, even if we assume that you're going to make more money and have more cash?

Kevin Mitchell -- Chief Financial Officer

As you know, we've just recently sanctioned two large midstream projects at a consolidated level. Obviously, the Gray Oak Pipeline being done at the NLP but that rolls up into the consolidated number. Year to date spends running lower, so we're just under 900 million year to date, the consolidated budget's 2.3 billion, but we are seeing the spend rate pick up and we would expect that to continue into the second half of the year. So at this point, I'd say there's potential but we could go a little bit over the $2.3 billion budget in aggregate. I don't think it would be significantly above that. I would guess at this point would be somewhere between $2.3 billion and $2.5 billion for the year. Obviously, as the next few months go by we'll have much better visibility into where that's going to end up.

Paul Cheng -- Barclays -- Analyst

How about the next several years? Kevin, should we still assume about 2.5 billion entire range? Or it's going to be higher?

Kevin Mitchell -- Chief Financial Officer

Yeah, I would. I think in overall terms the 2 billion to 3 billion a year of Capex is good guidance to go with still.

Paul Cheng -- Barclays -- Analyst

Two final questions. A quick one, do you guys think that we would have sufficient COO export capability in the gulf coast if over the next two or three years we will continue to increase the warming that we need to export by half to one million barrel per day a year? And whether that as a business you guys also want to get into more? And secondly, when you contact with your government people, do you think that there is a higher risk the IMO '22 end up being pushed out because of potential backslash if what we expect in terms of rapid rise in the product prices come to materialize?

Greg Garland -- Chief Executive Officer

Paul, I would say we do see a big opportunity for exports across oil and products. As part of the Gray Oak expansion, we've got the south Texas gateway and as we look at the majority of the large long-haul pipelines, they have got export options. And so we see export capability being added. We believe most of the incremental production is gonna get exported and so we do see that opportunity and see the market addressing it.

With regard to IMO, we are gaining confidence in the implementation date. The IMO certainly is emphasizing moving forward. When you look at the other fuels have already reduced sulfur and Bakker fuel is a small percentage of total transport demand but it makes up the vast majority of SO2 emissions. And so I think there is incentive to move forward.

We see a recent announcement out of China, announcing that they're gonna increase their marine fuel regulations to require the 0.5 sulfur next year and then taking it down to 0.1% sulfur in the following year. We've seen the IMO focus on inspections on both the import and export facilities and so we see this moving forward on 1-1 2020. There may be, or we would expect it, that there would be a system set up in the even that supply is not available on a one-off basis. That there may be a waiver. But it would be short-term in nature and specific to particular incidence.

Operator

Justin Jenkins from Raymond James. Please go ahead, your line is open.

Justin Jenkins -- Raymond James -- Analyst

Great, thanks, good morning everybody. I guess maybe starting in the Permian. I appreciate all the additional details on the Gray Oak project but is it right to think that the scope of that project is being designed that it can be taken all the way to the million a day number with pretty little incremental capital from the 800 a day starting point?

Greg Garland -- Chief Executive Officer

We're putting in a 30-inch pipe so that kind of tells you that it's gonna be a pretty easy lift to get to the million barrels a day. I think a lot of interest still in the Permian and takeaway capacity. I think we're pleased at where we're at in terms of project execution. Got the steel on order essentially, lined up the contractors so the project's really on track. So we're pleased with where we're at.

Justin Jenkins -- Raymond James -- Analyst

Perfect, appreciate that. And then maybe following up on Phil's question on capital allocation. How should we think about M&A if at all in that process? Maybe especially with some of the midstream packages out there today?

Greg Garland -- Chief Executive Officer

I think we, like everyone else, kind of looks at everything that's out there, things look really pricey to us, particularly in the midstream space. As you think about the opportunity to create value we have such a great organic profile in front of us that we don't feel like we need to rush out and do something in terms of the M&A space today. So we'll continue to watch it. If we can create value by doing it we're certainly willing to do it. We've got the balance sheet and the capability to do it if the right opportunity happens to come our way.

Operator

Doug Leggate from Bank of America Merrill Lynch. Please go ahead, your line is open.

Doug Leggate -- Bank of America Merrill Lynch -- Analyst

Thanks, good morning everybody. Kevin, maybe if I could go back to the cash question. You've got a nice distribution obviously from CP Chem this quarter. I'm just curious, as a broad idea of how this might evolve. Is that a biannual distribution? How do you expect that to look going forward? And is there a level of cash that you want to get back to? I think you kind of suggested you obviously want to build a little bit more cash after the buyback, the Berkshire buyback. Is it a level of cash you want to get to and I guess as a bolt onto that, the balance between share buybacks and dividends and I've got a quick micro follow-up.

Kevin Mitchell -- Chief Financial Officer

In terms of absolute cash level, there's not a target level, there's not a number. Very comfortable with where we are today. So I think when we're 800 million at the end of the first quarter, that's a bit lower than we'd like to be. So you're probably looking at something north of 1.5+ billion, 1.5 billion to 3 billion's a very comfortable range to be in. But not prorating any one particular number on that. In terms of CP Chem cash distributions, there is no set schedule on distributions so we've guided to 600 to 800 million this year.

The significant increase from where we have been and it's driven by a function of higher operating cash flow with a new assets coming online as well as much lower capital spending at the CP Chem level. Ideally, a quarterly distribution would be perfect but it doesn't necessarily play out like that. So it's somewhat dependent on how the cash balances at CP Chem move over month to month and as a board we kind of work through what the appropriate distributions are going to be. Ratable would be nice and it probably will be not too far off of ratable but it can still be somewhat lumpy there. And there was a third one.

Greg Garland -- Chief Executive Officer

The board can decide what to do at CP Chem but the basis of the foundation agreements are is we really don't hold a lot of cash at CP Chem; we tend to distribute the cash-out. Obviously, we want to hold enough cash to do the capital programs or whatever's going on at CP Chem but it's kind of a basic fundamental tenet of the joint venture we tend to distribute the cash.

Doug Leggate -- Bank of America Merrill Lynch -- Analyst

The last one embedded in there was, any change in the thoughts of buyback dividend balance?

Kevin Mitchell -- Chief Financial Officer

Really not. The principles around the dividend secure growing competitive and obviously, you saw the 14% increase last quarter and then buybacks we look at that on an intrinsic value, we look at where the shares are trading relative to our view of intrinsic value. We've guided to a 1 to 2 billion per year range in normal circumstances, obviously this year's a little bit unique with the large transaction we did last quarter but in overall terms, no change.

Doug Leggate -- Bank of America Merrill Lynch -- Analyst

Thanks. Greg, I wonder if I could just go to my micro question then. On those IM orders, obviously you've been, I think if I may phrase it this way, a little more measured in your expectations of how that may play out and the way you've characterized it but we're starting to hear about new refinery or dormant refineries coming back up. Hovensa's been mentioned, Zarqa's been mentioned, I think there's a German refinery's the latest one to be mentioned. I'm just curious as to how you can frame your thoughts as to how much conviction you have on the scale, the potential benefit, and my quick bolt-on is to one of the earlier questions on the export issue. It's been of a random one, really, but are we comfortable if the export capacity gets built, the bottleneck gets cleared once the pipeline's moved, assuming there are no trade war ramifications from the potential outlets there. I'll leave it there, thanks.

Greg Garland -- Chief Executive Officer

I'll go backward with the export capacity is gonna get built. I think the infrastructure to clear all the products, whether it's crude, NGLs, or gas, are going to get built because it just looks like to us that the production's gonna grow faster than what we can consume it here in the US. I think that fundamental permis that we're gonna be exporting all three products is a good one and we actually want to participate in that. We talk about the Buckeye, but we're also by the end of the year, we're gonna have Beaumont going from 900,000 barrels a day. You think about our export platforms off the US Gulf coast. We've probably got 10% or 12% expansion capabilities laid into those over the next two years or so. I think we're trying to position the portfolio to get ready to export more crude in products. And then on IMO, I suspect that people -- and we're familiar with the German one you just mentioned, we shut it down.

Doug Leggate -- Bank of America Merrill Lynch -- Analyst

You can speak to the speculation; it was probably the equity respectively, so you're not selling them then.

Greg Garland -- Chief Executive Officer

No, we're happy with our position there, Doug, let's put it like that.

Jeff Dietert -- Vice President of Investor Relations

I think IMO is kind of perceived as a big opportunity by people and people are gonna try to play that opportunity to the extent that they can. I think that fundamentally, our view hasn't changed. I think that over the next couple of years it's gonna be a nice tailwind for the industry. We can argue about whether it's $5 or $10 on the distillate crack or what it's gonna be but I do think when you look out over a long enough timeframe, we'll continue to build global refining capacity. And that capacity will get directed to solve that problem.

A lot of that capacity is gonna go up in the Middle East and in China and India. So I just think that over time that the industry will work its way through this and indeed, that's been the history of the industry over a long period of time. The big opportunities tend to get competed away over time and so I just don't fundamentally have a different view on that today.

Doug Leggate -- Bank of America Merrill Lynch -- Analyst

Just last one to bolt on very quickly. All of you guys, I mean Joe was the same with Valero and Gary been relatively constructive in the second half. Are you factoring in the announcement from Mexico that their entire refinery system could go down for maintenance in the second half of the year and your thoughts?

Greg Garland -- Chief Executive Officer

I just saw that. That certainly is a nice tailwind. It could be a meaningful impact next year, an ongoing trend to Venezuela refining utilization and Mexico refining utilization. As we think about IMO, it will likely take some time. There's not a substantial uptick in capital spending that's under way to meet the IMO specs. And these are projects that are capital intensive and long lead-time. The high complexity refineries, many of them are running at high utilization rates already. So I think it will be a challenge for the industry but a challenge we're up for.

Operator

Brad Heffern with RBC Capital Markets. Please go ahead, your line is open.

Brad Heffern -- RBC Capital Markets -- Analyst

Hey, good morning everyone. Question on the cracker. So you guys have already demonstrated above nameplate on that. I'm sure that you're not very far along in the de-bottlenecking process, either. Any thoughts as to where that could go over time if you've already demonstrated such a healthy level?

Greg Garland -- Chief Executive Officer

I think with all assets we'll get better as we get a little more experience running it. We know that we have some low-cost cap to bottleneck in that facility, too, that I think we'll be able to address better with you in the coming quarters. But certainly, the asset came up and ran better than our expectations and it's probably the smoothest start-up we've seen in the last five of those big assets that we started up.

Brad Heffern -- RBC Capital Markets -- Analyst

Great. And then on the new fracks. You guys obviously put out a cost estimate but now EBITDA number. I would think that the fracks themselves are probably getting sort of a normal tolling fee if you will. But I know you overbuilt the original one so I'd imagine the whole system should work better together. Any thoughts on what the EBITDA uplift across the whole hub is?

Greg Garland -- Chief Executive Officer

On the new fracks themselves, you should expect kind of a difficult tight midstream returns and so let's call it six to eight. And the fracks are probably to the higher end of that. The pipes are probably to the lower end of that. And so, you can kind of back into it.

Brad Heffern -- RBC Capital Markets -- Analyst

Okay. But is there any uplifts for the existing assets from having the two new fracks installed?

Greg Garland -- Chief Executive Officer

There's no question that a large part of the investment for frack one was an infrastructure pipes to get to Belvieu and back some of the early cavern work that we did. Today, off of frack one we're making, I don't know, 38,000 barrels a day of propane and we're running the export facility at 200,000 barrels a day and so that delta between what we're making and what we're exporting, we're actually bringing from Mount Belvieu. So we're buying those barrels in Belvieu today and we're paying a fee to move them on the pipes and so there are going to be synergies and uplifts by making more the propane at the Sweeny site to be exported.

Operator

Manav Gupta from Credit Suisse. Please go ahead, your line is open.

Manav Gupta -- Credit Suisse -- Analyst

Hey, guys, so looking at the ethylene cracker start-up over the last decade, all the crackers that came online in the Middle East, meaning '09 and '12 had some start-up issues. One of your peers achieved mechanical completion in Q1 could not start the cracker for six months and then ran into multiple issues at the start-up. The other twin crackers had one of the smoothest starts in the last decade. Most ethylene crackers achieved 70% to 80% design rate, you're already hitting 106 so it's pretty impressive. I'm just trying to understand how you did it. What did you guys do so differently that others could not?

Greg Garland -- Chief Executive Officer

Hopefully, we learned something over the five times when we were one of those parties that started up and had troubles in the Middle East. I think our last outing was our Saudi Palmers project and it took eight months to get that cracker up and running from the time that we started up. And we had multiple challenges and issues. I think we had a dedicated project team of strong ops people on this project from the very beginning on the design all the way through the construction, the start-up of the facility. I think that really helped.

I think as we watch the construction and we were going to the fabrication sites we had better quality control this time and so we just didn't see the equipment issues starting up this facility. And then the construction, while we were probably late by six to seven months and we're disappointed with that, the overall quality of this construction was very, very good.

Manav Gupta -- Credit Suisse -- Analyst

Great job, guys. The second question is: On the gulf coast it's good to see meaningful contribution from the refining learnings on the gulf coast. Can you talk about how buy bridge adds to this positive momentum and uplift you get once you get the second leg completed?

Greg Garland -- Chief Executive Officer

Certainly, I think Buy Bridge is an important asset for us and we're running barrels over to our Lake Charles refinery. Obviously, we get the fee for moving the barrel but on a general interest basis on 80,000 or 90,000 barrels a day we're probably picking up a dollar a barrel or something like that for the general interest of the company, which is really a strong performance. We're anxious to get the pipe to St. James completed this year. And then we're also looking at running the pipe through St. James down to Eliot.

So ultimately, we want to connect all of our Louisiana refineries with the Texas Gulf coast and from a general interest perspective, we think that's good. And then the other thing I would just say about the gulf coast, we import a lot of Canadian heavy down, we run all we can, we sell the rest. But we got Canadian heavy into Sweeny this quarter, some into Lake Charles. Obviously, Lake Charles benefited by the Mya LLS also. And so, things just worked well for us in the gulf coast this quarter.

Manav Gupta -- Credit Suisse -- Analyst

Great. And the last question is that ethane prices have moved up to $0.35 per gallon and I was wondering if you could talk about how that impacts your NGL business and does that actually change your view of how you intrinsically value DCP?

Greg Garland -- Chief Executive Officer

Well, I think that there's no question NGL prices have moved up. I don't think they moved up as much as people expected them to. At this point, a cycle given three crackers start-ups each needing about 90,000 barrels a day of ethane. So we continue to like DCP, there's no question that a higher NGL price for the barrel also benefits them to the extent that we're pulling more ethane out of rejection in the areas where DCP contributes, that's also a very positive toward DCP. But it doesn't fundamentally change our view on DCP. We like DCP, we like the asset footprint that they have in the Eagle Ford and the Permian, in the mid-continent strictly in the DJ Basin. So, good assets for DCP.

Operator

Matthew Blair from Tudor, Pickering, Holt, please go ahead. Your line is open.

Matthew Blair -- Tudor, Pickering, Holt -- Analyst

Hey, good morning everyone. Greg, I was wondering, does CP Chem have any interest in adding more ethylene derivative capacity? I know you've run more of an integrated model here but we're looking at pretty low ethylene spot prices and if we look out over the next five years or so we definitely see a lot more cracker capacity coming online then derivative capacity. Not sure if you agree with that. I think you mentioned previously that PE demand growth was strong. So what kind of interest, if any, would you have in say a stand-alone PE unit to take advantage of some of these trends?

Greg Garland -- Chief Executive Officer

Well, first of all, if you don't like the ethylene spot price today just hang around a little bit because it's gonna change. CP Chem generally runs just slightly long on ethylene. We like to be relatively balanced and so I wouldn't be surprised to see them add our debottlenecks some derivative capacity. To your question, would we build speculative derivative capacity based on someone else's long? I don't think so. And the reason is we want to capture that value through the full chain. If you look, that value moves. It's not always in the derivative. Sometimes it moves to the ethylene side and so we like that integration and be able to participate in that full value chain.

Matthew Blair -- Tudor, Pickering, Holt -- Analyst

Makes sense. And then, on heavy Canadians, Enbridge made some progress on their line three replacement recently. I don't think Phillips has much of a shipper on Enbridge but regardless it would add more WCS to the overall US supply mix. How much of an appetite would you have to run additional WCS in either your central corridor or gulf coast system? Are you pretty maxed out or could you ramp runs if more supply was available?

Greg Garland -- Chief Executive Officer

Yes. We're bringing over 500,000 barrels a day, Canadian crude in today, so we're the largest import of Canadian crude. We're probably running about 80% of it or so I would guess. I don't know, Jeff, you've got the exact number, but it's right in that range. We're kind of maxed out on Canadian heavy today.

Jeff Dietert -- Vice President of Investor Relations

About 80% of that is heavy and we're running what we can. We're not big shippers on Enbridge, Matthew.

Operator

Craig Shere from Tuohy Brothers, please go ahead, your line is open.

Craig Shere -- Tuohy Brothers -- Analyst

Hi, congratulations on the great quarter. I understand nothing's really changed in terms of capital allocation and we at least want to pay back another billion, maybe 1.25 billion on the debt we took out for the share buyback in the first quarter. But it sounds like there's a vision here of maybe a really nice call it two, maybe three year one time very strong cash flows on the low inventories but leading in IMO 2020. Of course, the thinking that eventually that'll get worked out by the market. But what do you do with a windfall? If you come up with an extra couple billion dollars and you don't think it's repeatable, how do you think about that?

Greg Garland -- Chief Executive Officer

Well first of all, what a great problem to have. I think our fundamental capital allocation strategy, which has served us well for six years, really isn't going to change. We kind of think about this 60-40, 60% of our cash available from all sources, we want to reinvest in our business to the extent that we have opportunities that we can generate acceptable returns. And then 40%, we're gonna give back to shareholders through strong secure growing dividend and share repurchases.

As long as we 're trading below intrinsic value on the share repurchase side. We continue to look three years out, some of the parts, historic multiples, and if that values higher than the price of the market, we're buying. So we're buying today in the markets. I don't think that fundamental changes. Maybe we hold a little higher cash, pay down a little bit more debt along the way. But fundamentally, you're not gonna see us change our capital allocation strategy.

Craig Shere -- Tuohy Brothers -- Analyst

In terms of the reinvestment, we had a little temporary hiatus as we worked on some massive project portfolio. And then you announce Gray Oak and Sweeny fracks expansions. How much after that do you think we have? As we look into the early 2020s, do you think there's the ability if the cash flows materially increased to take it up to 3 billion to 4 billion in growth Capex on an annual basis for a couple of years?

Greg Garland -- Chief Executive Officer

Yeah, I just come back. I think the portfolio's gonna generate $5 billion to $6 billion of cash. We got $1 billion just sustaining capital. We want to fund another $1 billion to $2 billion of growth. So call it $2 billion, $3 billion of capital. So that takes care of that. Got a $1.5 billion dividend today and that leaves room for another $1 billion to $2 billion of share repurchases. And that kind of all balance within our means. So I think that you'll continue to see us work that.

I do think there's gonna be other opportunities. We'd like to do frack four out there in the future. There may be more pipe opportunities, more export-oriented opportunities for us as we think about 2020 and beyond. So I think we've got a good run in front of us in terms of just opportunity set that we see around infrastructure, midstream, and of course the petrochemicals business.

Operator

We have no further questions at this time. I will now turn the call back over the Jeff.

Jeff Dietert -- Vice President of Investor Relations

Thank you Julie, and thank you for your interest in Phillips 66. If you have additional questions, please call Rosie or me. Thank you.

Operator

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

Duration: 58 minutes

Call participants:

Jeff Dietert -- Vice President of Investor Relations

Greg Garland -- Chief Executive Officer

Kevin Mitchell -- Chief Financial Officer

Neil Mehta -- Goldman Sachs -- Analyst

Roger Reed -- Wells Fargo -- Analyst

Phil Gresh -- JP Morgan -- Analyst

Paul Cheng -- Barclays -- Analyst

Justin Jenkins -- Raymond James -- Analyst

Doug Leggate -- Bank of America Merrill Lynch -- Analyst

Brad Heffern -- RBC Capital Markets -- Analyst

Manav Gupta -- Credit Suisse -- Analyst

Matthew Blair -- Tudor, Pickering, Holt -- Analyst

Craig Shere -- Tuohy Brothers -- Analyst

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