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Phillips 66  (NYSE:PSX)
Q3 2018 Earnings Conference Call
Oct. 26, 2018, 12:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Welcome to the Third Quarter 2018 Phillips 66 Earnings Conference Call. My name is Julia, and I will be your operator for today's call. At this time all participants are in a listen-only mode. Later we'll 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, Investor Relations. Jeff, you may begin.

Jeffrey Dietert -- Vice President, Investor Relations

Good morning, and welcome to the Phillips 66 Third 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 material we will be using during the call can be found on the Investor Relations section at Phillips 66 website, along with supplemental financial and operating information.

Slide 2 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 SEC filings.

Before I turn the call over to Greg, I'd like to point out a change in our question and answer session. Based on investor feedback on how to improve our call, and to allow everyone, the opportunity to ask a question, we are asking that you limit yourself to one question and a follow-up. If you have additional questions, we ask you rejoin the queue.

With that, I'll turn the call over to Greg Garland for opening remarks.

Greg Garland -- Chairman & Chief Executive Officer

Thanks, Jeff. Good morning, everyone and thanks for joining us today. Third quarter adjusted earnings were $1.5 billion, a record $3.10 per share. This quarter, we demonstrated the value of our integrated portfolio contributing strong earnings. In the Central Corridor, our Refining and Midstream assets ran at record levels, capturing strong margins. We continue to benefit from the advantage of feedstocks, as the industries largest purchaser of heavy Canadian crude.

We achieved record midstream earnings, and in marketing, we realized solid margins on refined product sales. We've repurchased or exchanged nearly 30% of our initial shares outstanding over the last six years, contributing to our record adjusted earnings per share of this quarter. We continue our commitment to distributions by returning $775 million through dividends and share repurchases in the third quarter and $5.2 billion for the year.

Strong shareholder distributions remain fundamental to our disciplined capital allocation approach. We're investing in a robust portfolio of projects with attractive returns to create shareholder value and drive future growth. During the third quarter, Phillips 66 Partners once again achieved record adjusted EBITDA. PSXP has grown at a rapid pace during its first five years. With its scale and financial strength, PSXP is well-positioned to fund and sustain a significant organic capital program to drive future EBITDA growth.

Phillips 66 Partners is the operator and largest owner in the Gray Oak Pipeline project. Gray Oak will provide crude oil transportation from the Permian and the Eagle Ford to Texas Gulf Coast destinations, including our Sweeny Refinery. Supported by shipper commitments, the capacity of the pipeline will be 900,000 barrels per day and is on schedule to be in service by the end of 2019.

At the Sweeny Hub we're building two 150,000 barrel per day NGL fractionators, and adding 6 million barrels of storage at Phillips 66 Partners Clemens Caverns. We have agreements in place with multiple parties including DCP Midstream to supply Whitegate to the new fractionators. The hub will have 400,000 barrels per day of fractionation capacity and 15 million barrels of storage when the expansion is completed in late 2020.

Our Sweeny Hub is strategically located on the Texas Gulf Coast and directly accessible from the Permian. Gulf Coast fractionation capacity remains tight and there's strong interest from customers and future expansion projects. At the Beaumont Terminal, we were recently placed 900,000 barrels of fully contracted new crude oil storage into service. We have an additional crude tanks under construction that will increase the terminals' total capacity to 14.6 million barrels by the end of this year.

During the third quarter we had about 200,000 barrels per day of exports across our dock. The continued growth in domestic crude production is expected to result in the need for higher Gulf Coast exports and we are making investments to capitalize on this opportunity. At Beaumont, we recently approved a new project to further increase crude storage by 2.2 million barrels with completion anticipated in early 2020. PSXP also has a 25% interest in the South Texas Gateway terminal under development in Corpus Christi.

The terminal is connected to the Gray Oak Pipeline and will provide 3.4 million barrels of crude storage upon completion in late 2019. DCP Midstream continues to expand the Sand Hills Pipeline to meet the demand for growing NGL production in the Permian Basin. DCP increased the pipeline's capacity to 440,000 barrels per day at the end of the third quarter and further expansion to 485,000 barrels per day is expected by the end of this year.

Sand Hills is owned two-thirds by DCP and one-third by Phillips 66 Partners. In the high-growth DJ basin, DCP's Mewbourn 3 gas processing plant started up in the third quarter and the O'Connor 2 plant is expected to begin operations in the second quarter of 2019.

In Chemicals, CPChem has a leading position in polyethylene to supply the world's growing demand for polymers. CPChem's portfolio cost advantage to assets are strategically located in the U.S. and the Middle East. Abundant ethane supplies remain the cost advantaged feedstock for U.S. Gulf petrochemicals growth.

CPChem continues to optimize its new U.S. Gulf Coast petrochemicals assets and is developing a second U.S. Gulf Coast project that would include ethylene and derivative capacity. CPChem is also evaluating additional capacity across multiple product lines to debottleneck on existing units. In Refining, we continue to focus on high return projects to improve margins. We have an FCC optimization project under way at the Sweeny Refinery, that will increase the production of high-value petrochemical products and higher-octane gasoline. This project should complete in mid-2020.

At our Lake Charles Refinery, Phillips 66 Partners is constructing a 25,000 barrels per day isomerization unit. This new unit will increase production of higher-octane gasoline blend components when completed in the third quarter of 2019. We're optimistic about future growth opportunities across our businesses, with growing hydrocarbon production in the shale plays, we see opportunities for further midstream infrastructure build out, including pipelines, export facilities and NGL fractionation.

Our Refining system is well positioned to capture low-cost inland crude feedstock, and we see good opportunities for future chemicals expansion. We will remain a disciplined allocator of capital. We'll continue to invest in growth projects with attractive returns that are aligned with our long-term strategy, and we'll continue to provide a strong competitive growing dividend, and will be a buyer of our shares when they trade below intrinsic value.

With that, I'll turn the call over to Kevin to review the financials.

Kevin Mitchell -- Executive Vice President, Finance and Chief Financial Officer

Thank you, Greg. Hello everyone. Starting with an overview on Slide 4, third quarter earnings were $1.5 billion. After excluding special items, adjusted earnings per share was $3.10. The third quarter adjusted effective tax rate was 23%. Our year-to-date after tax return on capital employed was 14%. Operating cash flow, excluding working capital was $2.1 billion. Working capital impacts reduced cash flow by $1.5 billion.

Distributions from equity affiliates were $910 million. Capital spending for the quarter was $779 million, with $537 million spent on growth projects. We ended the quarter with 461 million shares outstanding.

Slide 5 compares third quarter and second quarter adjusted earnings by segment. Quarter-over-quarter, adjusted earnings increased $134 million, driven by higher earnings in Marketing, Midstream and Refining, partially offset by lower chemical's results. Slide 6 shows our Midstream adjusted net income, which was a record $261 million in the third quarter. Transportation adjusted net income for the quarter was $175 million, up $38 million from the previous quarter. The increase was due to higher volumes, increased pipeline tariffs and storage rates, and lower operating costs.

Our operated pipelines in the Central Corridor benefited from strong utilization at our refineries. In addition, the Bakken Pipeline (technical difficulty) throughput average more than 500,000 barrels per day. NGL and other adjusted net income was $64 million, an increase of $14 million, reflecting increased Sand Hills and Southern Hills pipeline volumes and propane and butane trading activity.

Sand Hills pipeline throughput during the third quarter was a record 421,000 barrels per day. We continue to run well at the Sweeny Hub. During the quarter, the export facility averaged 10 cargoes a month and the fractionator averaged 110% utilization. DCP Midstream adjusted net income of $22 million in the third quarter is up $7 million from the previous quarter, due to increased pipeline volumes, higher NGL prices and improved hedging results.

Turning to Chemicals on Slide 7. Third quarter adjusted net income for the segment was $210 million, $52 million lower than the second quarter. Olefins and Polyolefins adjusted net income decreased $70 million due to low margins from higher ethane feedstock costs. This was partially offset by higher polyethylene sales volumes, as CPChem operated at 96% domestic polyethylene utilization and also drew from inventory.

Global O&P utilization was 91% in the third quarter, reflecting planned turnaround activities and unplanned downtime from a third-party power outage that impacted the Cedar Bayou facility. Adjusted net income for SA&S increased $9 million from improved margins. The $9 million increase in other mainly reflects the gain on an asset sale. During the third quarter, we received $325 million of cash distributions from CPChem.

Next on Slide 8, we will cover Refining. Crude utilization was 93% compared with 100% in the second quarter. Our third quarter clean product yield was 84% and realized margin was $13.36 per barrel. Pre-tax turnaround costs were $55 million, a decrease of $5 million from the previous quarter. The chart on Slide 8 provides a regional view of the change in Refining's adjusted net income, which increased $48 million in the third quarter.

In the Atlantic Basin, adjusted net income increased as the Humber Refinery returned to normal operations following a second quarter turnaround. This was partially offset by third quarter unplanned downtime at the Bayway Refinery. Gulf Coast adjusted net income decreased due to narrowing heavy crude differentials and unplanned downtime at the Alliance Refinery.

Adjusted net income in the Central Corridor was $633 million, an increase of $241 million reflecting improved heavy Canadian and Permian crude differentials and higher volumes. Third quarter capacity utilization was 108%. In the West Coast the decrease was mainly due to a 25% decline in the gasoline market crack. Slide 9 covers market capture. The 3:2:1 market crack for the third quarter was $14.21 per barrel compared with $14.86 in the second quarter. Our realized margin for the third quarter was $13.36 per barrel, resulting in an overall market capture of 94%, up from 83% in the second quarter.

Market capture was impacted in part, by the configuration of our refineries. We made less gasoline and more distillate than premised in the 3:2:1 market crack. Losses from secondary products of $1.62 per barrel were lower than the previous quarter by $1.19 per barrel primarily due to improved NGL and coke prices relative to crude oil.

Feedstock improved realized margins by $2.50 per barrel, a decline of $0.65 from the prior quarter, due to narrowing Gulf Coast heavy crude differentials, partially offset by improvements in the Central Corridor. The other category includes impacts associated with product differentials, RINs, outgoing freight and inventory. This category improved realized margins by $0.26 per barrel.

Let's move to marketing and specialties on Slide 10. Adjusted third quarter net income was $290 million, $95 million higher than the second quarter. Marketing and Other increased $98 million due to higher realized margins in the U.S. and Europe, reflecting seasonally stronger market conditions. U.S. branded marketing volumes increased 2% sequentially. We reimaged 384 domestic marketing sites during the third quarter, bringing the total to over 2,100 since the start of our program. Refined product exports in the third quarter were 190,000 barrels per day.

Specialties adjusted to net income decreased $3 million during the quarter from lower base oil margins. On Slide 11, the corporate and other segment had adjusted net cost of $187 million up slightly from the prior quarter. Lower interest expense was due to a second quarter debt repayment and higher capitalized interest. Corporate overhead increased primarily from employee severance costs and taxes.

Slide 12 highlights the year-to-date change in cash. We entered the year with $3.1 billion in cash on our balance sheet. Cash from operations excluding the impact of working capital was $5 billion. Working capital changes reduced cash flow by $1.6 billion. This reflects a $1.5 billion use in the third quarter due to an inventory build which included the impact of unplanned downtime at Bayway and Alliance, as well as the timing of crude cargo receipts and payments. We received $1.2 billion from the first quarter issuance of debt, net of second quarter debt payments. During the year, we funded $1.6 billion of capital expenditures and investments and we returned $5.2 billion to shareholders through the repurchase of shares and payment of dividends. Our ending cash balance was $924 million. This concludes my review of the financial and operational results. Next I'll cover a few outlook items for the fourth quarter.

In Chemicals, we expect the global O&P utilization rate to be in the mid 90s. In Refining, we expect the worldwide crude utilization rate to be in the mid 90s and pre-tax turnaround expenses to be between $110 million and $130 million. We anticipate corporate and other costs to come in between $170 million and $190 million after tax.

In closing, next quarter we are changing our segment reporting to be on a pre-tax basis. Income taxes will only be reflected at the consolidated company level. This change will make our segment reporting more comparable to our peers.

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. (Operator Instructions) Doug Terreson from Evercore ISI.

Douglas Terreson -- Evercore ISI -- Analyst

Good morning everybody and congratulations on another great result.

Greg Garland -- Chairman & Chief Executive Officer

Good morning, Doug.

Kevin Mitchell -- Executive Vice President, Finance and Chief Financial Officer

Hey, Doug.

Douglas Terreson -- Evercore ISI -- Analyst

Greg, you guys have been a leader in the whole energy industry and pledging to balance your spending in distributions. And while it's worked very well for shareholders it obviously starts with disciplined capital spending. So on this point while you may not have your specific guidance yet, I want to see if you could provide some color or maybe philosophy that you might have on capital spending for 2019 and beyond?

Greg Garland -- Chairman & Chief Executive Officer

Yeah, I'd start from the guidance we've given that long term we want to reinvest 60% of cash from all sources back into business and 40% goes back to our shareholders who have strong dividend and share repurchase. I see it's deviating from that Doug over the longer term, any given year, we can bounce around a little bit, this year is going to be hard to hit, we hit 60:40, but it's going to be other way, given we're already at $5.2 billion of share purchases for the year. But there's no question I think, we're working the capital budget for 2019. Now, we go to our Board in December for approval. So I don't want to get too far out ahead of that. We've got Gray Oak and the fracs, and of course Gray Oak even though it's a PSXP, it gets consolidate up into PSX. So at the consolidated level we're probably looking at something between $2 billion and $2.5 billion in 2019. We'll tell you what the number is when we get to the Board in December.

Douglas Terreson -- Evercore ISI -- Analyst

Sure. Thanks a lot guys.

Operator

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

Neil Mehta -- Goldman Sachs -- Analyst

Hey guys, good morning. Congrats on a good quarter here. I had two quarter specific questions but also doesn't want to see if we could extrapolate them forward. And so if I think about where the driver of that, one of the big drivers of outperformance versus our model, it was in the mid-con and your Central Corridor business. So you talk about how you see that, that outlook going into the fourth quarter and into 2019 as well. There are lot of components to that question. So your views on Brent WTI, Western Canadian Crude and also just gasoline margins in the region, and then I have a follow up.

Greg Garland -- Chairman & Chief Executive Officer

Okay, that was five questions packed in one, Neil, but we'll try to deal with it. So let me just start with high level and I have Jeff step in and give our view. So I think first of all, the question, large differentials on WCS, but also WTS differentials were strong in the quarter, we're able to capture that at Borger and into some degree into Ponca. And we ran really well, so a 108% capacity utilization. So where we needed to run really well we ran well and we're able to capture that opportunity. And I'll let Jeff comment on our future views in terms of WCS spreads.

Jeffrey Dietert -- Vice President, Investor Relations

Yeah, so PSX is the largest importer of Canadian crudes, and we benefit from these wider discounts. Production growth is continuing to exceed infrastructure development, production up roughly 300,000 barrels a day both in 2017 and 2018 with further growth coming in 2019 as well. The pipelines are full, Enbridge Line 3 is the next one lined up for year end. Next year it's only 370,000 barrels a day incrementally. And then Keystone and Trans Mountain are kind of 2022 plus.

For the time being, the rails are full as well. When you look at the DOE stats for Canadian imports we've imported right at 200,000 barrels a day for the last four months. That looks to be about what we can do at this point as an industry. There are some long-term contracts that have been signed and we expect the rail capacity to increase later this year, and really more so next year. Canadian storage is at record high levels and it typically rises during the fourth quarter. So things continue to be tight with Canadian differentials.

Neil Mehta -- Goldman Sachs -- Analyst

And then the other area was marketing. You guys put up very strong results. I guess there is a seasonality element to that, but it seems like gasoline wholesale margins held on as well. So talk about your view for the marketing and specialties business, and can we carry some of the strength forward?

Greg Garland -- Chairman & Chief Executive Officer

Yeah, so there is seasonal strength there. The third quarter has got July and August, two summer months with the 4th of July and Labor Day weekend in there as well versus only one month, summer month in the second quarter. And so there is a big seasonal component there. When you look at the wholesale gasoline prices, they were relatively flat in the third quarter versus more volatility in the second quarter, and it's easier to push through the margins in a more stable price environment. We had strong margins in Europe as well, and so really strong performance overall for the marketing segment.

Kevin Mitchell -- Executive Vice President, Finance and Chief Financial Officer

Neil, this is Kevin. As you look into 4Q, you would normally expect to see the demand will come off seasonally as it typically does. And so you would expect weaker results from that segment, as you go into the fourth quarter, from the third.

Makes sense. Thanks again guys.

Greg Garland -- Chairman & Chief Executive Officer

Thanks Neil.

Operator

Roger Read from Wells Fargo. Please go ahead, your line is open.

Roger Read -- Wells Fargo Securities -- Analyst

Yeah, thanks. Good morning, and very impressive quarter.

Greg Garland -- Chairman & Chief Executive Officer

Thanks Roger.

Roger Read -- Wells Fargo Securities -- Analyst

Just to dive-in here, maybe a little bit of a follow-up on Neil's question. As we think about capture in the Central Corridor and throughputs, so should we generally think about it as it's Hardisty (ph) price adjusted for transportation? Or is there a component of WCS you get south of the border, doesn't have a price. I'm just trying to think about it in margin capture potential over the next few quarters until crude by rail has an opportunity to maybe narrow the differentials?

Jeffrey Dietert -- Vice President, Investor Relations

So Roger, I think the easiest way to look at this is just on a quarter-on-quarter change in the Canadian heavy discount, 2Q versus 3Q in this case. And as we go into 4Q, just compare the difference in the discount at Hardisty and factor that in. We do see about a 30-day lag, and so I think it makes sense the lag that a little bit as well. But the easiest way to look at that is just sequential changes.

Roger Read -- Wells Fargo Securities -- Analyst

I appreciate.

Greg Garland -- Chairman & Chief Executive Officer

The other thing I'd add is Roger, we have invested in infrastructure that allows us to capture that. So we have things at Hardisty, we've got commitments on pipes coming south. And so I think we're really well positioned to capture that arb when it's there.

Roger Read -- Wells Fargo Securities -- Analyst

Great, thanks. And then the unrelated follow up, PSXP obviously there is been some pressure on Refining MLPs across the space. You've structure differently in terms of assets and the size of the business. Just wondering, are you seeing issues where you may ultimately roll PSXP up? Or that you need to do something about the IDR? Just wondering how you're evaluating that business, time a little bit of change maybe overall in the sector?

Greg Garland -- Chairman & Chief Executive Officer

Yeah, so I'd just -- I'd point out -- we're just -- we're at a different spot, than some of the ones that have rolled up. You know it's a $1 billion plus EBITDA, we've grown at 30% compound annual growth rate, the distributions on our call later this afternoon for PSXP. We're going to lay out the great organic portfolio of projects that's investable. We kind of made the pivot from a dropdown story to organic growth story. PSXP on its own has substantial capacity to invest. And so, we just look at it as a vehicle to help us grow our Midstream business. And so, we like that component, we think PSXP (ph) is a strong entity, and a valuable part of our portfolio.

Now IDRs, this is certainly a topical question, and I don't think we go to a meeting that we don't get asked about IDRs, and what are we going to do with IDRs? I would say that, we don't think that there's a constraint on growth created by the IDRs today, although we do acknowledge that there's a lifecycle to MLPs, we certainly understand that. I would say that the path to how you deal with IDRs is a well-worn path and well understood by most people. And the only guide rails that we would put is we're certainly willing to deal with the IDRs at the appropriate time. But it's going to have to be in a manner that is fair to LP unit holders, but also to the PSX shareholders. So we'll get the IDRs at some point.

Roger Read -- Wells Fargo Securities -- Analyst

All right, thanks. I'll stick to the one-on-one.

Greg Garland -- Chairman & Chief Executive Officer

Okay.

Operator

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

Philip Gresh -- JP Morgan Chase -- Analyst

Yes, thank you. First question, would just be on Chemicals. Greg, obviously there's been some tightness here on the feedstock cost and there has been a little bit of pressure on the margin, on the profit margins side as well. Maybe you could just talk about how you're viewing those fundamentals in 2019? How long will it take to resolve some of the fractionation issues? Obviously you're going to help contribute to that recovery, but just any thoughts you have?

Greg Garland -- Chairman & Chief Executive Officer

Yeah, well I think, during the quarter, I think, I had a wild ride in the high 30s, more than doubled, back down at the high 30s, and it's below that today. I think the industry just had a hard time keeping up with that. So it did cost some margin compression. And frankly we always saw with the new units that have come on, three so far, that there would be some compression in margins as these materials started hitting the market. I think the thing that we all missed was how quickly the frac capacity filled up. And it was really that frac capacity filling up that drove the ethane prices so quickly and rapidly.

I think the chems did a great job of adjusting their feedstocks rates and obviously by cracking more propane and then putting pressure on ethane, and you saw the result on the ethane prices. Well, I think we're going to be at this tension point until we can get some more frac capacity on. We'll see some coming on in 2019, there is two or three fracs coming in 2019 and a couple of more fracs including our frac 2, frac 3, and another 300,000 a day in 2020.

So I think as we move into 2019 and 2020 we start to resolve that issue around feedstock. So in the interim what will happen is I think the export price of propane sets the ceiling, if you will, in ethane price. And of course fuel value is always a four (ph) on ethane price. Our views are still 600,000 or more a day in rejection across the U.S. So, where there's plenty of ethane, we just need the frac capacity get it out. And then finally I just say, as we look in the 2019 we're still constructive in terms of the margin outlook globally. We would see good demand growth, really globally, but in the U.S., Europe and Asia. And we just like the supply demand fundamentals that we see looking out to 2019 and 2020.

Philip Gresh -- JP Morgan Chase -- Analyst

Okay, great. Second question, I guess this one would be for Kevin, since you mentioned it in your prepared remarks, you talked about the secondary products, that coke, I presume maybe that's needle coke, was the contributor to that margin improvement. And if I look in the Atlantic Basin your secondary margins were really strong there. So maybe you could just elaborate on the contribution that you're getting there?

Kevin Mitchell -- Executive Vice President, Finance and Chief Financial Officer

Yeah, so it's a combination, it's not -- you've got the NGL impact, the strong NGL prices and you had improved pricing across all grades of coke. So petroleum coke, anode coke, the needle coke, so strong pricing across the Board and so that all contributes to that secondary products' impact.

Philip Gresh -- JP Morgan Chase -- Analyst

Okay and you feel that sustainable?

Kevin Mitchell -- Executive Vice President, Finance and Chief Financial Officer

Well that depends on where the markets go. I mean that category is if you look back over time that moves around, it can move around quite a bit in terms of the overall impact on capture. So it will move as market conditions do so.

Philip Gresh -- JP Morgan Chase -- Analyst

Okay. Thanks.

Greg Garland -- Chairman & Chief Executive Officer

Maybe it was also down during that period of time. And so that probably impacted that -- the amount of the positive direction on secondary products.

Look I think the coke market globally has improved, there's no question around that. We had two refineries, certainly Lake Charles and Humber, they're probably most impacted and influenced, particularly by the specialty grade cokes. Over the last two, three years, we've been working to develop new markets for specialty grade cokes. One of those is anodes and lithium ion batteries, and we've made good progress there, and they'll open a new high valued market for us. A lot of the other specialty coke goes into our furnace production and that's tied with the global economy.

And so the answer -- the question is it sustainable or not? If the economy continues to do well, I think this business will continue to do well for us. But it's a relatively small component in the overall mix for Phillips 66. It was completely overshadowed by the margin improvement we saw in the central quarter around. You think about Billings, you think about Wood River and Ponca City and Borger in capturing $25 spread there.

Kevin Mitchell -- Executive Vice President, Finance and Chief Financial Officer

Phil, I think it's important to note that we have multiple grades of needle coke for many different applications. And depending on the grade, the quality, the make up of the needle coke, they traded different prices. In addition, for commercial reasons, we don't disclose the duration of our sales contracts which can influence the prices that we capture.

Philip Gresh -- JP Morgan Chase -- Analyst

I appreciate it. Thank you for the additional color.

Greg Garland -- Chairman & Chief Executive Officer

You bet.

Operator

Paul Sankey from Mizuho Securities. Please go ahead. Your line is open.

Paul Sankey -- Mizuho Securities -- Analyst

Thank you. Good morning.

Greg Garland -- Chairman & Chief Executive Officer

Hi, Paul.

Paul Sankey -- Mizuho Securities -- Analyst

Hi guys. Can we talk a little bit more about chemicals. I thought that they would actually be a bit weaker than the result that you achieved. Could you just give us an outlook for both volumes and margins, your best guess? That will be great. Thanks.

Greg Garland -- Chairman & Chief Executive Officer

Well, specifically to the third quarter, we had a turnaround at Port Arthur on the ethylene side, but we're selling out of inventory. Now ethylene inventories are still relatively high and that's also leading to some of the margin compression we're seeing in ethylene. I know in CPChem's case, especially built inventory to cover the derivative start up from last fall to the new cracker came on, and the new cracker came on better, quicker and ran higher rates than we expected.

And so we've been adjusting inventories at CPChem to bring ethylene inventories down. So -- then you come back and you think about, OK what's happening going into next year, the sales volumes are so strong. Polyethylene sales volumes are up quarter-over-quarter. We're seeing strong demand growth and really across all regions, Paul. So I'd say we're constructive on the outlook for margins going into 2019.

Paul Sankey -- Mizuho Securities -- Analyst

Are you hitting maximum volumes in our growth in terms of your sales?

Kevin Mitchell -- Executive Vice President, Finance and Chief Financial Officer

I think the, certainly the Middle East assets are running at capacity. We had a global O&P rate of 91% but that was influenced by the Port Author turnaround. Then we had a power outage at our Cedar Bayou facility which took down the new cracker and the old cracker, Cedar Bayou. So that really impacts and operates. But I would, we've given guidance kind of mid 90s for the fourth quarter and I think we feel pretty comfortable with that guidance.

Paul Sankey -- Mizuho Securities -- Analyst

Great. And then the follow up was just on gasoline, again the marketing exceeded our expectations which is are kind of little bit counterintuitive because we are in a -- generally in a rising pricing environment. I don't know if there was anything to add on that. But if additionally, you could talk little bit about what looks like very weak gasoline markets at the moment? And whether that's a transitory effect or really what's going on there? Thanks.

Jeffrey Dietert -- Vice President, Investor Relations

Yeah, I think as you look at New York Harbor gasoline trading at $8 a barrel crack that's the weakest in two years. New York Harbor distillates trade at $29 a barrel, that's a seven year high. So we're definitely seeing that split. Seasonality is a big factor, with the RVP change. Butane is coming into the blending cool, gasoline inventories are high, even relative to seasonal norms. What we're seeing is more pressure in the Atlantic basin especially on the European side of the Atlantic, simple refining margins in Europe are negative and we are starting to see economic run cuts in Europe.

We are in the U.S. starting to see gasoline imports slow, early year, this year they were running about 800,000 barrels a day and a fall into 500,000 barrels a day and recently only 300,000 barrels a day. In addition gasoline exports to South America are improving. You look at October of 2017 with 700,000 barrels a day were up over a 1 million barrels a day this year. So the other side of that equation with strong distillate is encouraging runs on the distillate side. But really the U.S. is well positioned relative to the international markets, when you think about attractive crude discounts, strong diesel demand and cracks with low fuel and operating cost and competitive taxes that we enjoy here.

And as you look into 2019, 2020 we expect high complexity refining capacity to benefit from the IMO environment and higher runs for high complexity, lower runs for low complexity refining.

Paul Sankey -- Mizuho Securities -- Analyst

Thanks, Jeff, that was extremely helpful. Maybe you should think about (inaudible). Thanks guys.

Jeffrey Dietert -- Vice President, Investor Relations

Thanks Paul.

Greg Garland -- Chairman & Chief Executive Officer

Thank you, Paul.

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. Actually going to do my questions in reverse, Kevin. Paul just asked about one. So I'm going to do a follow-up Jeff if I may and this may probably for you. So what's this gasoline situation has been an accident waiting to happen given the strength of runs in the US. But my question is, when you think about export of light sweet crude with Gray Oak and capacity expanding on the Gulf Coast, along with the IMO impact for European refiners, in other words higher runs, by combination seems to us to be another threat to gasoline in 2019, higher runs later yields. I'm just curious if you can offer your thoughts on how do you see the gasoline market improving in an IMO world next year or going into 2020, I guess?

Jeffrey Dietert -- Vice President, Investor Relations

Well, I think the gasoline market's going to be challenged through the winter months. I think as we shift into next year, there's going to be a focus on emphasizing distillate yields in an effort to improve distillate yields with confidence that -- that's a longer term event with IMO coming as opposed to the US that really tries to maximize gasoline yield in the summer months. It's certainly possible that we could have maximizing diesel yields year around for the next number of years. And so we're looking at those yields shifting as IMO approaches feedstock.

FCC feedstock is a good Marine blending component which could have the impact of reducing FCC runs as well and shifting more product yield in the distillate and added gasoline. I think that's how we get out of this, but gasoline is probably going to be soft through the winter months.

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

I appreciate that. I may be take the rest of that in offline. But my follow-up is for Greg, and Greg you're going to hate this because I ask it every couple of quarters I guess, and it's really the split between the dividend and the buyback, and I want to be very specific. We agree with you that your stock is undervalued, but you never tell us what your number is. We unfortunately have to publish our numbers. So we're kind of -- they're in a exposed so to speak. But the point is that, you're not immune to the seasonality, the weakness, the market weakness and all the rest of it.

So my question is, are your buybacks -- are you committed to ratable buybacks, are you a bit more discerning on when you execute your buyback program. And in this environment, why wouldn't you swing the benefit of your diversified portfolio back toward more of a dividend cut than a buyback cut in terms of the cash and I'll leave it there. Thanks.

Greg Garland -- Chairman & Chief Executive Officer

We've never contemplated in cutting the dividend.

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

No, no, no. What I mean is the split when I say cut, I mean like which way it cuts in favor of dividend versus in favor of buybacks. Bad choice of phrase, sorry.

Greg Garland -- Chairman & Chief Executive Officer

It was a Scottish definition of cut that got me. Okay. So look, I think we've consistently kind of guided to $1 billion to $2 billion of share repurchases for the past couple of years. Obviously, this year we had an opportunity in February to take a big swing with Berkshire and we did. But I think the guidance are still a pretty good guidance going forward.

Look, we look at the stock price every quarter. We have a grid, we reset that grid every quarter, Doug. So in the past two weeks we've been buying a lot more stock than we would normally buy, as the share price fell and I think you'd want us to do that. But we look at that every quarter. And as I think out into 2019 kind of that $1 billion to $2 billion consistent range of share repurchases would be the guidance that we'll give for 2019 also.

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

Yeah, I guess also, what I was looking for the discernability, is what I was looking for. Thanks a lot, Greg.

Operator

Prashant Rao from Citigroup. Please go ahead, your line is open.

Prashant Rao -- Citigroup -- Analyst

Thanks for taking the question. I wanted to circle back on cash flows, particularly cash flow from operations. One of the step up that we saw Q-on-Q in the equity affiliate distributions and just to become -- being a more material part of CFFO. Wanted to get a sense and I don't want to front run anything you're going to say on the PSXP call. But maybe just sort of, to get a sense of where that cadence could move as we sort of model cash flows going forward? And think about how much that could be an offset to maybe CapEx needs coming up both in the Midstream and then maybe further on in Chemicals?

Kevin Mitchell -- Executive Vice President, Finance and Chief Financial Officer

Yeah, this is Kevin. Fundamentally the way that what drives the distributions from the equity affiliates are the operating cash flows within the equity affiliates, less in the case of CPChem, WRB, less the capital spending but they're undertaking at the -- at that level at the JV level. In the Midstream, it's a little bit different because most of those affiliates are distributing most of their operating cash flow, if not all. And then the growth capital, the expansion capital is being funded by contributions back into those entities. So you've seen a robust distribution so far this year, so just over $900 million in the third quarter, the year-to-date through the third quarter is just over $2 billion of distributions coming out.

And so you think about WRB, which both refineries have benefited very well from the overall crude differential environment, that we're sitting in, and WRB will essentially distribute most of its cash. There's no incentive, neither owner is incentivized to have the partnership sit on more cash than it needs to fund its ongoing operations. So that's part of it as WRB does well. And so the cash distributions coming back will do so.

With CPChem, some of this has been a function of the capital spend has come off significantly with the big project complete, that's all behind us now and so that capital spending program this year is quite a bit lower than it had been and so they're in a position to continue with pretty healthy distributions. We had guided to -- for CPChem $600 million to $800 million of distributions for the year. We've done $725 million through the third quarter and it's certainly possible it could be another distribution coming in the fourth quarter. So pretty healthy outlook from that standpoint.

Prashant Rao -- Citigroup -- Analyst

Okay, thank you very much. That's very helpful. And then, just a quick follow up. Kevin, I apologize if you did detail this in your prepared remarks but the working capital swing that we saw in the quarter, do we expect most of that to reverse out next quarter and so for the full year we sort of end up breakeven on that volatility or is there something -- anything that sort of residual that we should be mindful of?

Kevin Mitchell -- Executive Vice President, Finance and Chief Financial Officer

No, I think that's a reasonable assumption. It's always hard to get forecast working capital with too much precision given the amount of moving parts are within that, but high level would -- we would expect that to reverse and so the full year working capital is something reasonably close to breakeven.

Prashant Rao -- Citigroup -- Analyst

Okay. Thanks very much for the time gentlemen.

Operator

Paul Cheng from Barclays. Please go ahead. Your line is open.

Paul Cheng -- Barclays -- Analyst

Hey, guys. Good afternoon. Two quick questions. First on the needle coke, is there any capability for you guys in the short term say within the next six months or so be able to increase the production on that? Also that, on the medium term, do you have any plan to increase the capacity?

Greg Garland -- Chairman & Chief Executive Officer

The refining, the coke business is within the Humber refinery in the Lake Charles Refinery. So it shows up in our refining portfolio or refining segment. In that segment, we highlight the most important capital projects every year and you've seen us with the Wood River and Bayway FCCs, with now the Sweeny FCC, we highlight all the large capital projects. And so the fact that we haven't highlighted a large capital project, it's probably a reasonable assumption that there's not one.

Paul Cheng -- Barclays -- Analyst

Right. Thank you for that. But I think needle coke is a function of that. What type of oil that you choose are go into to coking -- into the coker. So maybe I got it wrong, that is the coker. Its area actually need to be specially designed because I don't think it is, but maybe you guys can help me understand and it will be better?

Jeffrey Dietert -- Vice President, Investor Relations

We do have industry leading technology associated with needle coke production, it is a different process. And so we are very unique in that regard.

Operator

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

Brad Heffern -- RBC Capital Markets -- Analyst

Hey, good morning everyone. Switching back to Chemicals, I was wondering you guys were a little more candid this quarter talking about progressing a second U.S. Gulf Coast project. Can you give a sense of the timeline there when it could potentially see FID and so on?

Greg Garland -- Chairman & Chief Executive Officer

Well as a joint decision with our partner, I think the timing we've kind of guided to kind of a late 2019, early 2020 type FID. We are progressing work around the site location, the permits required, initial designs around that facility. But I still think that it's late 2019 or early 2020 in terms of FID for that facility.

Brad Heffern -- RBC Capital Markets -- Analyst

Okay got it. Thanks. And then I guess on the frac capacity side, I was wondering if you could just talk about sort of the path forward for NGL production in the U.S. over the next six, nine months when there isn't incremental frac capacity in Mont Belvieu. Do you guys see Y-Grade just getting produced in the tanks or does it get rerouted to Conway or Appalachia? Or how do you see that playing out?

Greg Garland -- Chairman & Chief Executive Officer

Yeah, I think it's going to be interesting to see how we move forward. We'll probably see rejection maintained at high levels at the gas plant as people attempt to ship and fractionate the heavier barrels. So I think that rejection will stay relatively high. I think this will encourage additional NGL pipeline capacity and additional fractionator capacity, because supply is likely to continue to grow as we go forward, drilling activities continuing in the Permian. We're drilling 600 wells a month and only completing 400 wells a month. So the dock inventory is growing by 200 every month. Once the infrastructure comes online, then those completions will accelerate and fill the infrastructure. So I think, we're going to add supply, then add infrastructure, then add more supply. We're kind of in that cycle.

Brad Heffern -- RBC Capital Markets -- Analyst

Okay. Appreciate the thought. Thanks.

Operator

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

Matthew Blair -- Tudor Pickering Holt -- Analyst

Hey, good morning everyone. I was intrigued by the comments of debottlenecking existing Chem's units. Could you give a sense of just a general capacity that you'd be talking about here as well as the timing and also with some of these debottlenecks occur at your brand new cracker and PE units?

Greg Garland -- Chairman & Chief Executive Officer

The answer is yes. I think we probably have room to do debottleneck the new cracker but we -- across the platform I would say, we have opportunities in some of the older assets to do some additional debottlenecking. So we're not going to give a number today in terms of the volumes on that, but I think that CPChem has a great portfolio of opportunities, kind of internal to the existing asset portfolio where they can get more value out of those assets. As you know, the debottlenecks are the easiest ones to do highest returning projects typically in the portfolio. So we will prosecute those.

Matthew Blair -- Tudor Pickering Holt -- Analyst

Right. And then over in Refining, what were your Bakken rail volumes to Bayway if any in the quarter and how would you expect this to potentially ramp going forward. Do you see the bottleneck is just the lack of the 117J railcars?

Kevin Mitchell -- Executive Vice President, Finance and Chief Financial Officer

Yeah. You know we benefit from Bakken differentials as an owner and shipper on the Bakken Pipeline. We do rail volumes to both the East Coast and the West Coast. We haven't disclosed those specifically. We really don't talk about specific refinery feedstock procurement but we are seeing an acceleration in growth in the Bakken oil productions up over 200,000 barrels a day year-on-year. But it's actually accelerating, it's up 75,000 barrels a day quarter-on-quarter. The pipelines are largely full. The rail logistics are tight. I think you're right, with the new compliant railcars being a bottleneck there. We have had some heavy refining maintenance in the Mid-Continent this quarter which will lead up as we get into later in November and December, but we do expect Bakken differentials to remain wide.

Matthew Blair -- Tudor Pickering Holt -- Analyst

Thank you.

Operator

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

Manav Gupta -- Credit Suisse -- Analyst

Hey guys. So PSX is one of the global leaders in coking capacity, given IMO indicating no chance of a delay ignoring the administration. Would PSX be open to investing in any resid destruction or resid upgrade projects. I mean, when you look at the Sweeney refinery location, it's right next to Jones Creek. So you can source a lot more WCS there. So this could be a good candidate to build a coker. So just wanted your views on it?

Greg Garland -- Chairman & Chief Executive Officer

Yeah. So we are the global leader in coking capacity and we really achieved this through a number of previous investments and we are well positioned with our portfolio, higher diesel yields relative to our peers and significant hydro treating capacity. So our portfolio is really well positioned without significant future capital investment requirements for the IMO environment.

Manav Gupta -- Credit Suisse -- Analyst

Okay. And a quick follow-up, in the Mid-con, besides WCS, did you actually increase an uptake on the Permian crude that helped drive that big delta up?

Jeffrey Dietert -- Vice President, Investor Relations

So PSX benefits from discounts on Permian barrels at its border refinery, as well as transporting volume into the Mid-Continent in the US Gulf Coast refineries as well. We also benefit at PSXP from the ownership and the 900,000 barrel a day Gray Oak pipeline in the South Texas Gateway facility. So those were the primary beneficiaries of the wide Permian des during the quarter.

Greg Garland -- Chairman & Chief Executive Officer

And we also ran our first train out of the Permian this year around to -- out of this quarter around to the Beaumont. So I think we're doing everything we can around the portfolio to create value out of these opportunities.

Manav Gupta -- Credit Suisse -- Analyst

Thank you guys. Thank you so much.

Operator

Craig Shere from Tuohy Brothers. Please go ahead. Your line is open.

Craig Shere -- Tuohy Brothers -- Analyst

Good afternoon.

Greg Garland -- Chairman & Chief Executive Officer

Good afternoon.

Craig Shere -- Tuohy Brothers -- Analyst

Picking up on Roger's PXP question a bit, kind of apart from you know collapsing the MLP structure or worrying about the IDRs at this point. It seems a lot of industry peers have either gone in one direction or the other in terms of, to the extent they still have an MLP putting all their midstream down there, and then of course the opposite, which is just consolidating it all back to the parent. You still have substantial existing assets and major growth projects at the C corp in the midstream space. Are you just comfortable having this kind of dual pronged summit PSXP -- summit PSX approach or do you envision a longer term kind of simplification around how to think about Midstream?

Greg Garland -- Chairman & Chief Executive Officer

Yeah, well, first of all you're right we probably have $700 million to $900 million of the EBITDA at the PSX level. That's MLP qualifying EBITDA. Although, $300 million or so that resides in our Refining business today. We just don't see the need to do that. We have such a strong portfolio of organic opportunities investable at PSXP and has a balance sheet and the capability to execute those projects, that I suspect that there will be a long time before we get to the need to do any drops. It gives us comfort that we have in there, if we need them. But I would just say we're comfortable with the structure, we think about PSXP as a vehicle to help grow our Midstream business.

I think we've said many times, so we would be very comfortable if all the investments we're making in Midstream could be executed at the PSXP level. And indeed, we've grown from almost zero capital budget to $750 million this year and this afternoon we're going to tell you a budget over $1 billion for PSXP over 2019. So you can see that the strategy, it's evolving and so it's doing what we needed to do in terms of helping us to grow our Midstream business, and we're comfortable with it.

Craig Shere -- Tuohy Brothers -- Analyst

Fair enough. And my second question, can you all update a little bit on how the market is looking for incremental LPG export contracting opportunities?

Greg Garland -- Chairman & Chief Executive Officer

Well, so I would say that our export terminal which was 150,000 barrels a day design, we've demonstrated kind of 200,000 barrels a day, we're running at about 180,000 barrels a day. Our view we're constructive on the export market growth for LPGs, and indeed when we look at all the NGL is coming at us -- out of the Permian and Eagle Ford and the other basins. We're going to need to export LPGs to clear the U.S. markets because the U.S. management is not going to grow fast enough to absorb that. So I think we're comfortable with the growth profile we see out there.

I think a lot of people have questions around tariffs and what tariffs were doing. What we're seeing is the market is pivoting around the tariffs today. So we have Chinese buyers that aren't necessarily shipping to China today, and they may be trading now for Air (ph) Gulf cargo. But the markets working, in our view at this point in time. And I just think longer term we'll certainly solve the tariff issues. So I don't think we're concerned about that on a medium to a long-term basis. So we like the profile we see. I think the issue is that the asset from our view is still underperforming our expectations, even at kind of this 180,000 to 200,000 barrels a day, given where dock fees are. We think dock utilizations for the U.S. were still around 83%, 84%, let's say. As we move into 2019, we see those utilization is improving and we think the opportunity to earn these will improve. But in this market today, I don't think we would be interested in taking on a long-term contract at $0.06.

Craig Shere -- Tuohy Brothers -- Analyst

Understood. And --

Jeffrey Dietert -- Vice President, Investor Relations

From a demand perspective, we see continuing growth in the residential and commercial side for LPGs internationally, especially in Asia, as well as for chemical feedstocks.

Craig Shere -- Tuohy Brothers -- Analyst

And just in summary, would you think that a multi-year economic contracting market could begin to return by second half 2019?

Jeffrey Dietert -- Vice President, Investor Relations

Yes, as utilization of the existing LPG export capability moves from the 80s to the over 90%, we expect that those margins will start to widen out across the dock. And there will eventually be a need for additional capacity which will push those margins up and offer some opportunity for contracting.

Operator

Chris Sighinolfi from Jefferies. Please go ahead. Your line is open.

Christopher Sighinolfi -- Jefferies -- Analyst

Hi, guys. Thanks for the opportunity (multiple speakers) this afternoon. I just want to quickly circle back on CPChem, it was really helpful color on the inventory sales in the third quarter, and some of the outages, power-related complications you had encountered? I guess, as we look in the future peers and securities, with regard to the inventories you mentioned, and as they get normalized, how that might shape the sales profile? I guess simplistically what I'm asking is, how much of that excess inventory that you talked about having built up remains to be liquidated and how might that shape, what we should think about the 4Q?

Greg Garland -- Chairman & Chief Executive Officer

I think from an industry's perspective, the excess inventory is really in the ethylene part, not the derivative part of the chain. So it's really people making adjustments on the ethylene production side to bring the ethylene inventories back in the line. And I mean, when you look at -- we look at the full chain margin. And so what you've seen is the margins really shifted into the derivatives over the last couple of quarters. And I mean that's a value being totally integrated from that perspective. But I suspect that as ethylene inventories kind of come back to more normal, some of that margin shifts back into the ethylene side. But from the CPChem perspective, they're kind of agnostic, because they capture that full value through the chain. And so managing the inventory is just part of good blocking and tackling and capital discipline around working capital. So I think that, what we fundamentally look at, we look at the Middle East, are the assets running, is inventory stacking up at the docks, it's not. China continues to be a strong buyer, and inventory seemed to be clearing through that system, and of course demand in the US appears very good to us fundamentally. So I just --we're constructive in our outlook in '19, '20, and '21, and from a fundamental supply and demand balance issue, we see increasing operating rates which I think is constructive toward margins as we move forward in that business.

So I think the comments around inventory are really specific around kind of the third and fourth quarter. I think as you get into '19, those start to clear out in terms of the ethylene side.

Christopher Sighinolfi -- Jefferies -- Analyst

Okay that's really helpful. I guess, real quickly just switching gears, and I don't want to run -- front run the PSXP call, but two questions if I could on Gray Oak. One is, the upside have initially targeted capacity of 900 from 800. Is that purely just based on additional contract volumes secured or was there something else influencing it.

And then second is, just as Enbridge provide any early indication view as to what it will do with its option. I guess I'm asking the context of your earlier comments regarding capital budgeting discussions with the board at this point or entering 4Q about what '19 looks like?

Greg Garland -- Chairman & Chief Executive Officer

I would say there were multiple parties involved in the uplift to 900,000 barrels a day. The line we're building 32-inch line regardless -- and so -- but it was nice to be able to firm up those commitments. Certainly Enbridge has an option to come in and that option expires in November I think. And so I think by the fourth quarter, you'll have visibility and where they decide to exercise that option or not. I hope they do. They're great partner. If they don't, we're willing to keep their share. I think it's a great project. So you'll have some more insight into that, in fact, all of the other people that have options to come in to Gray Okay have to do so by November. If I was going to bet your money on it, I think our ownership's going to be 42.25%, because I think people will exercise their options coming to the line. I know I would.

Christopher Sighinolfi -- Jefferies -- Analyst

Thanks.

Jeffrey Dietert -- Vice President, Investor Relations

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: 64 minutes

Call participants:

Jeffrey Dietert -- Vice President, Investor Relations

Greg Garland -- Chairman & Chief Executive Officer

Kevin Mitchell -- Executive Vice President, Finance and Chief Financial Officer

Douglas Terreson -- Evercore ISI -- Analyst

Neil Mehta -- Goldman Sachs -- Analyst

Roger Read -- Wells Fargo Securities -- Analyst

Philip Gresh -- JP Morgan Chase -- Analyst

Paul Sankey -- Mizuho Securities -- Analyst

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

Prashant Rao -- Citigroup -- Analyst

Paul Cheng -- Barclays -- Analyst

Brad Heffern -- RBC Capital Markets -- Analyst

Matthew Blair -- Tudor Pickering Holt -- Analyst

Manav Gupta -- Credit Suisse -- Analyst

Craig Shere -- Tuohy Brothers -- Analyst

Christopher Sighinolfi -- Jefferies -- Analyst

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