Phillips 66 (PSX) Q2 2021 Earnings Call Transcript

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Phillips 66 (PSX -2.51%)
Q2 2021 Earnings Call
Aug 3, 2021, 1:00 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Welcome to the Second Quarter 2021 Phillips 66 Earnings Conference Call. My name is Hillary, and I will be your operator for today's call. [Operator Instructions]

I will now turn the call over to Jeff Dietert, Vice President, Investor Relations. Jeff, you may begin.

Jeff Dietert -- Vice President, Investor Relations

Good afternoon, and welcome to Phillips 66 Second Quarter Earnings Conference Call. Participants on today's call will include Greg Garland, Chairman and CEO; Mark Lashier, President and COO; Kevin Mitchell, EVP and CFO; Bob Herman, EVP, Refining; Brian Mandell, EVP, Marketing and Commercial; and Tim Roberts, EVP Midstream. Today's presentation material 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. We will be making forward-looking statements during today's 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.

With that, I'll turn the call over to Greg.

Greg C. Garland -- Chairman and Chief Executive Officer

Thanks, Jeff. Good afternoon, everyone, and thank you for joining us today. In the second quarter, we had adjusted earnings of $329 million. We generated operating cash flow of $1.7 billion. Excluding working capital, operating cash flow was $910 million. With the benefit of our diversified portfolio, we generated cash flow in excess of capital spending and dividends during the quarter. We returned $394 million to shareholders through dividends in the quarter. Since we formed as a company, we've returned over $28 billion to shareholders.

A secure competitive dividend will continue to be a top priority for our company. We anticipate a return to dividend growth as cash flow recovers. We're committed to disciplined capital allocation, focusing on debt repayment in the near term to support a conservative balance sheet, and maintain our strong investment-grade credit ratings. In July, the Phillips 66 Board of Directors appointed Denise Cade and Doug Terreson to serve as independent directors.

We continue to work on Board refreshment, recognizing the value, diversity in terms of gender, age, race, ethnicity, tenure, professional experiences and perspectives. We'd like to highlight our recent 2021 sustainability report that can be accessed on our website. We think it's one of our best points yet. Our commitment to sustainability is based on operating excellence, environmental stewardship, social responsibility and financial performance led by strong corporate governance.

We expanded our commitment to environmental responsibility, setting goal for all of our refineries to achieve top third energy efficiency by 2030. We modified our compensation program to add additional environmental goals. As previously communicated, we will establish meaningful and achievable greenhouse gas emission reduction targets later this year.

So with that, I'll turn the call over to Mark to provide some additional comments.

Mark Lashier -- President and Chief Operating Officer

Thanks, Greg. Good afternoon, and thanks to everyone on the call for joining us today. Continued improved demand across CPChem's product lines and resilient operating recovery from the first quarter winter storms contributed record quarterly earnings in our Chemicals segment. Marketing and Specialties reported strong results as demand increased in many of our key domestic regions. Our Midstream segment recovered well from the first quarter winter storms to report solid results.

Headwinds continued in our Refining segment as RIN adjusted refined product crack only improved modestly and historically low market capture contributed to continued losses. As more people across the globe are vaccinated, we expect continued economic recovery and further improvement in global refined product demand. In addition, permanent refinery closure announcements have increased to over 3.7 million barrels per day globally with additional closure announcements expected.

In Midstream, Phillips 66 Partners continued construction of the C2G Pipeline. The project is backed by long-term commitments and is expected to be operational in the fourth quarter of this year. At the Sweeny Hub, we recently resumed construction of Frac four, which will add 150,000 barrels per day of capacity. Upon completion, which is expected in the fourth quarter of 2022, total Sweeny Hub fractionation capacity will increase to 550,000 barrels per day. The fracs are all supported by long-term commitments.

CPChem continues to develop two world-scale petrochemical facilities on the U.S. Gulf Coast and in Ras Laffan, Qatar. We expect the final investment decision for the U.S. Gulf Coast project next year. The Ras Laffan petrochemical project is progressing with front-end engineering and design as planned. Both projects are in partnership with Qatar Petroleum. In addition, CPChem began construction of its second world scale unit to produce one-hexene, utilizing CPChem's proprietary technology. one-hexene is used for high-performance polyethylene manufacturing and is common in a variety of everyday products, including packaging for food, consumer products and pharmaceuticals.

The unit located in Old Ocean, Texas will have a capacity of 266,000 metric tons per year and is expected to start up in 2023. In May, CPChem was recognized by the Plastic Industry Association for being among the top 2021 industry innovators in sustainability. The award recognizes CPChem's launch of Marlex, a new circular polyethylene, which uses advanced recycling technology to convert plastic waste into high-quality raw materials. We continue to advance our Rodeo Renewed project at the San Francisco refinery.

In July, we reached full production rates of 8,000 barrels per day of renewable diesel from the hydrotreater conversion. Subject to permitting and approvals, full conversion of the facility is expected in early 2024. Upon completion, Rodeo will have over 50,000 barrels per day of renewable fuel production capacity. The conversion will reduce emissions from the facility and produce lower carbon transportation fuels. Rodeo, combined with our portfolio of other renewable fuels projects has the potential to supply one billion gallons of renewable fuels per year.

In Marketing, we're converting 600 branded retail sites in California to sell renewable diesel produced by the Rodeo facility. In Switzerland, our Coop retail joint venture continues to add hydrogen fueling stations. Through our joint venture, we're exploring hydrogen as a fuel option for heavy-duty vehicles to support European low-carbon goals and growing demand for sustainable fuels. We're moving forward and preparing for the future, while maintaining our focus on safe, reliable operations and attractive shareholder returns.

Now I'll turn the call over to Kevin to review the financial results.

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

Thank you, Mark. Hello, everyone. Starting with an overview on Slide four, we summarize our second quarter results. We reported earnings of $296 million. Excluding special items, we had adjusted earnings of $329 million or $0.74 per share. We generated operating cash flow of $1.7 billion, including a working capital benefit of $833 million and cash distributions from equity affiliates of $612 million. Capital spending for the quarter was $380 million, including $179 million for growth projects. We paid $394 million in dividends.

Moving to Slide five. This slide shows the change in adjusted results from the first quarter to the second quarter, an increase of $838 million. Pretax income improved across all segments, with the largest contribution from Chemicals. Our adjusted effective income tax rate was 19%.

Slide six shows our Midstream results. Second quarter adjusted pre-tax income was $316 million, an increase of $40 million from the previous quarter. Transportation contributed adjusted pre-tax income of $224 million, up $18 million from the previous quarter. The increase was due to improved volumes from higher refinery utilization, partially offset by higher costs due to the timing of maintenance and asset integrity work. NGL and other adjusted pre-tax income was $83 million.

The $47 million increase from the prior quarter was mainly due to lower operating costs and higher volumes, reflecting recovery from the winter storms. The Sweeny fractionation complex averaged 380,000 barrels per day and the Freeport LPG export facility loaded a record 42 cargoes in the second quarter. DCP Midstream adjusted pre-tax income of $9 million, was down $25 million from the previous quarter, mainly due to lower mark-to-market hedging results from higher natural gas and NGL prices.

Turning to Chemicals on Slide seven. Second quarter adjusted pre-tax income was $657 million, up $473 million from the first quarter. This is the highest quarterly earnings for Chemicals since the joint venture was formed in 2000. Olefins and Polyolefins adjusted pre-tax income was $593 million. The $419 million increase from the previous quarter was driven by strong demand, tight supplies and recovery from the winter storms that contributed to higher margins and lower utility costs.

The industry chain margin increased over $0.17 per pound to a record $0.62 per pound. Global O&P utilization was 102% for the quarter. Adjusted pre-tax income for SA&S increased $55 million. The increase primarily reflects improved margins due to tight industry supplies following the winter storms as well as lower turnaround costs. During the second quarter, we received $322 million in cash distributions from CPChem.

Turning to Refining on Slide eight. Refining second quarter adjusted pre-tax loss was $706 million, an improvement of $320 million from the first quarter. The improvement was driven by lower utility and turnaround costs and higher volumes. This was partially offset by lower realized margins. Improved market crack spreads were more than offset by higher RIN costs, lower electricity sales in the Texas market, decreased secondary product margins, lower clean product differentials and inventory impacts.

Pretax turnaround costs were $118 million, down from $192 million in the prior quarter. Crude utilization was 88% compared with 74% last quarter. The second quarter clean product yield was 82%. Slide nine covers market capture. The 3:2:1 market crack for the second quarter was $17.76 per barrel compared to $13.23 per barrel in the first quarter. Realized margin was $3.92 per barrel and resulted in an overall market capture of 22%. Market capture in the previous quarter was 33%. Market capture is impacted by the configuration of our refineries. Our refineries are more heavily weighted toward distillate production than the market indicator.

During the quarter, the gasoline crack improved $5.68 per barrel, while the distillate crack increased $2.20 per barrel. Losses from secondary products of $2.38 per barrel were $1.09 per barrel higher than the previous quarter as crude prices strengthened. These stock costs improved $0.36 per barrel compared to the prior quarter. The other category reduced realized margins by $7.84 per barrel. This category includes RINs, freight costs, new product realizations and inventory impacts.

Moving to Marketing and Specialties on Slide 10. Adjusted second quarter pre-tax income was $479 million compared with $290 million in the prior quarter. Marketing and other increased $181 million due to higher domestic margins and volumes, reflecting strong demand in key markets. Refined product exports in the second quarter were 216,000 barrels per day. Specialties generated second quarter adjusted pre-tax income of $87 million, up from $79 million in the prior quarter.

Slide 11 shows the change in cash for the quarter. We started the quarter with a $1.4 billion cash balance. Cash from operations was $1.7 billion. This included a working capital benefit of $833 million. In June, we received a $1.1 billion U.S. federal income tax refund, which is reflected in working capital. Cash from operations, excluding working capital, was $910 million, which more than covered $380 million of capital spend and $394 million for the dividend. The other category includes a $90 million loan to our WRB joint venture. Our ending cash balance was $2.2 billion.

This concludes my review of the financial and operating results. Next, I'll cover a few outlook items. In Chemicals, we expect the third quarter global O&P utilization rate to be in the mid-90s. In Refining, crude utilization will be adjusted according to market conditions. In July, utilization averaged around 98%. We expect third quarter pre-tax turnaround expenses to be between $120 million and $150 million. We anticipate third quarter Corporate and Other costs to come in between $240 million and $250 million pre-tax.

Now we will open the line for questions.

Questions and Answers:

Operator

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Your first question comes from the line of Neil Mehta with Goldman Sachs.

Neil Mehta -- Goldman Sachs -- Analyst

Good morning team. Thanks for taking the question. The first one is just on Chemicals. And Mark, this might be for you. Kevin indicated that the indicator was $0.62, which is very robust and above mid-cycle in Q2. How do you see it playing out in July and August so far? And just any thoughts on what the mid-cycle number has been? I think you guys have been in the $0.25 camp, if I remember. Has that view changed in light of recent margin strength?

Mark Lashier -- President and Chief Operating Officer

Yes. Thanks, Neil. It's a great question. The -- we're still consistent on our mid-cycle margin projection. And of course, we're well above that today. And as we look out into the third quarter, we're seeing the strength continue in the third quarter. We've got cost increases on the table that are being negotiated as we speak. Even if things went forward just as they are today, we're still at record margins. And we think that, that can carry into third quarter. There's a lot of strength in the marketplace, particularly in North America and in Europe. Asia is still kind of lagging, but starting to perk up a little bit.

So the real story is the fundamental economic resurgence in the U.S., in North America and Europe. And we believe that there's some upside that will offset some headwinds out in the future as the rest of the global economy kicks in. We're at record margins. Nobody believes those are sustainable for the long term. However, I think we can go from something at the record level to something that's still pretty robust. We see seasonal downturn typically in the fourth quarter, but we've also seen conditions where we can kind of carry through when there's strong enough marketing momentum. And there may be those kind of conditions now. We're particularly focused on high-density polyethylene. And that's still pretty tight in the marketplace.

The inventories have not recovered to where CPChem would be comfortable operating. And it's unusual to be there this time of year with hurricane season. We typically want to be a little higher in inventories going into the hurricane season. So there's a number of factors that could lead to sustain this momentum into the third quarter and beyond into the fourth quarter. And then we see the world economy kicking in. About the same time, additional capacity is coming on, say, first half of next year. So there's some good fundamentals out there. And I think it's still got some legs based on the demand that will come to bear as the world economy fully recovers from COVID.

Greg C. Garland -- Chairman and Chief Executive Officer

Neil, the -- we talk about mid-cycle kind of be in the 2012 to 2019 average. And if you look at the IHS polyethylene full chain margin, it's averaged about $0.30 per pound.

Neil Mehta -- Goldman Sachs -- Analyst

Okay. $0.30 per ton. Okay. That's all great. And then the follow-up, Greg and Jeff, this for you is just thoughts on the refining side of the equation, if the refining system -- if you told me the refining system was running at these type of levels, I would have thought that Phillips 66 would have been making pre-tax profits in the refining system. And so is the U.S. refining system running too hard, and how are you guys thinking about your own utilization as you get into the fall?

Robert A. Herman -- Executive Vice President, Refining

Yes. It's Bob, I'll take that question. I think when you look back over the last quarter, I think there were plenty of market signals there for us to run at the utilization rates we're at. There's a lot of moving parts, in particular, the cost of RINs that just continue to increase throughout the quarter. And we take a pretty good hit in Refining for the full cost of those prints. I think we would have all expected maybe on a global basis, Europe and Asia demand ticked back a little better than it did. I think the margins -- the RIN adjusted margins that we saw in the second quarter really across our system are very representative of a global market.

So until we start seeing recovery, particularly in Europe because we seem to see products flowing out of Europe into North America and South America, we won't really see RINs get back to where we would like to see. And I think the second piece for us, in particular, is our kit more geared toward heavy crudes making diesel. And certainly for the second quarter, it was a gasoline-driven market without much differential on heavy crude. We've seen those widen out here now in July to a much more respectable level. So we think it's headed in the right direction. But I think all of that added up to being challenged in the second quarter to turn a 90% type utilization number into a profit.

Greg C. Garland -- Chairman and Chief Executive Officer

Brian, do you want to comment on what we're seeing today in the market?

Brian Mandell -- Executive Vice President, Marketing and Commercial

I think in terms of the heavy dips and sour dips, we've seen them start to expand LLS to Mars. There's $2 widest at the beginning of the year, WTI to Maya is $3 wider since the beginning of the year. So I think we have some tailwinds that are going to help us in the second quarter. We expect distillate cracks to perform as we get toward wintertime. So all in all, I think we've also seen actually markets overseas come back. We have marketing in Europe. And we've seen Europe, Germany, where we market 90% to 95% of demand. Austria, where we market, 100% of demand. So we've seen those markets come back as well. So as Bob said, if the overseas markets start to come back, that will help the U.S. cracks, and we should see some profitability in Q3.

Greg C. Garland -- Chairman and Chief Executive Officer

One thing I might add is if you look at the IEA, EIA, OPEC projections, we were kind of shy of 95 million barrels a day in 2Q, projected to get to 99.5 million barrels a day by the end of the year. So expectations for demand to continue to improve in the back half of the year.

Neil Mehta -- Goldman Sachs -- Analyst

Great. Thank you.

Operator

Your next question comes from the line of Roger Read with Wells Fargo.

Roger Read -- Wells Fargo -- Analyst

Hey. Good morning or afternoon as the case may be, I guess now. Jumping back to Refining here. I guess one of the questions is, it's obvious that things should improve. But is there anything internally that Phillips has done or would plan to do to help out on the margin front? Just thinking of any additional changes within your own system or anything else that might be there part of the Phillips advantage program that was laid out almost two years ago now.

Robert A. Herman -- Executive Vice President, Refining

Yes. Roger, I think there's a couple answers to that question. One, internally, right, we expected tough operating conditions for a good part of this year. Recovery has been slower than we expected, but we went into this year, trying to reduce some of our heavy maintenance expenses and adjusting turnarounds and all that. And so the guidance Kevin just gave right for the third quarter is fairly light for us. So I think that helps heading into the third quarter profitability. You can translate that as we're available to run. So if the cracks are there, we're going to be able to run pretty hard in the third quarter and make money.

Around the advantage 66 program that we laid out, right, so a lot of that is built around margin enhancement, margin improvement. So I would sell -- I think we ran pretty well in the second quarter, and we're using all those tools that are in our toolkit. The value chain optimization activities that went on in the second quarter were pretty robust. We did a lot of things that we haven't done before or needed to do before, such as we ran a lot of resid down into our Sweeny refinery, where typically, we'd be running Maya or some of the heavy Canadians. The profitability really wasn't there.

And so optimizing around high sulfur resids into our system. It's just one example about where we're kind of running the circuits. We're pretty happy with the results we're seeing on the operating front. A lot of our initiatives in Refining are around being able to operate well, operate better, operate safer with the smaller environmental footprint, and we're seeing value come out of all of those initiatives. They don't necessarily translate directly to the bottom line where you can see them, but over time, they're paying dividends.

Greg C. Garland -- Chairman and Chief Executive Officer

Roger, I think when I think about kind of Q2 and maybe Q1, we've had quite a bit of planned and unplanned FCC downtime this year. So if you look at our yields relative to historical years, we're probably down 2%. And so we're just simply going to run better in the third quarter and fourth quarter. I think, Bob, said if things tuned up that we're ready to do that. So I think that's one of the things that we're focusing on right now also.

Roger Read -- Wells Fargo -- Analyst

Okay. Great. And then one thing that was definitely nice this quarter generating enough cash flow to cover all the outflows. I don't know, Kevin, this question is for you. But as you kind of look budgeting for the back half of the year, things are as they are today, I think that we've pretty much turned the corner on the COVID world and Phillips will be in a position to improve the balance sheet, start taking some of the debt down as we go through the next, say, two to four quarters?

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

Yes. Roger, I certainly would expect to be able to do that. I mean obviously, we're not back at mid-cycle cash generation yet, which is really going to be our sort of key -- sort of marker in terms of truly being able to get the balance sheet back to where we need it to be. But it's certainly a nice improvement from where we've been. And with the cash balance and if we continue to build out over the course of the year, we should be able to start making some inroads into that next year. And as you know, as we've talked about before, we have a lot of flexibility around debt reduction given the profile of the maturities that we have starting next year and some of the callable debt that we have in place. So a lot of flexibility on that front.

Roger Read -- Wells Fargo -- Analyst

Great. Thank you.

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

Yeah. Thanks, Roger.

Operator

Your next question comes from the line of Doug Leggate with Bank of America.

Doug Leggate -- Bank of America -- Analyst

Thank you. Good afternoon, everybody. Gents, I wonder if I could ask you how -- when you go through a cycle like this and obviously a downturn, one margins that you stress testing all the assets in the portfolio. So I guess it's kind of a follow-up to Roger's question. Do you see any weak links in the portfolio today that you think might be revisited change in portfolio structure, specifically in the Refining side. I'm obviously thinking specifically by the Atlantic Basin.

Greg C. Garland -- Chairman and Chief Executive Officer

Yes. Doug, actually Bob will like to...

Robert A. Herman -- Executive Vice President, Refining

All right. Yes, I guess I would say that we spend a fair amount of time every year stress testing and looking at every one of our assets and where do we think the future of that asset lies. And in a bigger picture context too, not just the Refining asset, but the rest of our value chain around it, how much marketing are we supplying in the area. We've got Midstream assets. Commercial is trading around many of our assets, particularly on the coast.

So we look at a much more holistic picture. And quite frankly, we have a debt that we think is a long-term debt, considering what we think the future holds for liquid fuels and we look at our assets in that context. So they are assets at the end of the day, and so we're always looking to upgrade or find more ways to make money on any given asset from year to year.

Doug Leggate -- Bank of America -- Analyst

We'll watch with interest how that evolves. I guess my follow-up maybe for Kevin. Slide nine, you give a fairly clear description of how your realized margin has evolved this quarter, $7.84 delta. Can you maybe walk us through how much of that -- maybe you can dig into a little bit more detail as to how much of that is truly transitory that we should expect to address? And I'll leave it there.

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

Yes. Doug, so the largest single element within that $7.84 other is the RIN cost that, as Bob referenced earlier, is -- that expense is borne by refining. And so it is half or slightly more than half of the total within that other. Most of the other items in there are -- well, RIN is always in there. Obviously, RIN costs were particularly high during the quarter. Product differentials, which is the difference between the market indicator and actual product realizations, that one can move around and go both directions on us.

During the quarter, we -- those differentials we were not getting -- seeing the value for some of those premium products that often can be a benefit to us in the quarter. So that's one that can move around and come back to the other direction. And then the other component that's also in there, again, it can go both directions, it is inventory impacts. And so inventory was a hurt to earnings in Refining in this particular quarter, but that can move in both directions.

Doug Leggate -- Bank of America -- Analyst

So just to be clear, the configuration -- so your different slate and product mix, that's not in configuration that's in other? Or how should we think about that...

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

No. The configuration reflects the 3:2:1. So 2/3 gasoline, 1/3 distillate in the market indicator versus what we actually produce by way of gasoline and distillate. In other, you've got the actual pricing for those products, including whether it's premium gasoline and other premium products that can often be an uplift relative to the standard market indicator. But in this period, they were not.

Doug Leggate -- Bank of America -- Analyst

Great stuff. Appreciate the information. Thank you.

Operator

Your next question comes from the line of Phil Gresh with JPMorgan.

Phil Gresh -- JPMorgan -- Analyst

Yes, thank you. Good afternoon. Greg, in the past, you always have referenced normalized earnings potential across the various areas of the portfolio. And I'm curious how you think about Refining's normalized EBITDA potential now that we've kind of gone through this COVID cycle. Is there anything that having gone through this that has changed your view? I think there's a $4 billion EBITDA number that you've thought about in the past.

Greg C. Garland -- Chairman and Chief Executive Officer

Yes. No, I think in 2019, we laid out kind of a $4 billion EBITDA number. And at that time was kind of a 12 to 19 average EBITDA for our Refining business. I don't think we're ready to sound to retreat yet on mid-cycle on Refining. So it's been -- if you go back -- all the way back to the first quarter of 2020, that's the last time we actually made money as a company. So it's been a long haul as we've kind of come through this. There's no question. There's been a lot of stress. I put on a lot of companies in our industry. But I think we're constructive, particularly as we come in the back half of the year around demand. This has been a story of vaccinations, efficiency, lockdowns and people trying to get back to someone to normal, and that all translates strictly into the demand that we see for our products.

And there's still a question, I think the U.S. is probably led in terms of demand recovery through this cycle. And so we've seen the impacts of Europe coming to the U.S. We've seen the impacts of not being able to export as much as we'd like to, to South America and places. And so I think as the world returns to normal, we've got a good shot at getting back to something that looks more like a mid-cycle. I think we said on the last call, we really need to see that 3:2:1 crack on a RIN adjusted basis get back to about $12. And then I think we'll see the appropriate kind of market captures around that to be able to generate something around $4 billion. Jeff, I don't know if you've got -- you want to add anything on that, but...

Jeff Dietert -- Vice President, Investor Relations

Yes. I think you guys have hit on the demand side of the equation. We are seeing Refining rationalization, 3.7 million barrels a day of announced closures; 800,000 a day of temporary outages that could become more permanent; and we're up to about 1.7 million barrels a day of capacity that's been announced as considering either terminals or other types of service or potential shutdown. So that rationalization is a big piece of it as well. And I think we're expecting more closures to be announced.

Phil Gresh -- JPMorgan -- Analyst

Got it. Okay. In the press release, there is a mention of returning to dividend growth as cash flow recovers. So I was hoping maybe you can lay out the priorities in terms of where you want that balance sheet leverage to get to before you would reconsider dividend growth? And Kevin, just quickly I think you said $1.1 billion for the tax refund in the second quarter. Is it still $1.5 billion for the year?

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

So in terms of the tax refund, you're right that it's about $1.5 billion total. We received $1.1 billion. There's another $350 million or thereabouts, but we don't expect the remainder to be a 2021 cash item that will roll into next year. So for a variety of reasons, that's not going to be cash this year, although it still will realize itself over time for us on that.

And then in terms of dividend growth, I think we go back to the earlier comments around as cash generation recovers to something around about mid-cycle, and we're in a position to pay down debt, we're making progress on paying down debt, we've got sort of clear line of sight to our ability to continue to do that and get the balance sheet back to where we want it to be, then we should feel comfortable on some of the other capital allocation priorities and increasing the dividend is one of those.

So I think it's a little bit of a long-winded way of saying we don't need to get to all we want to get through on the balance sheet before we make a decision on the dividend. We just need to be very comfortable that the structure is there, the cash generation is there. We're making the progress we need to make, and therefore we'll be able to signal that in terms of our confidence to shareholders with the dividend.

Greg C. Garland -- Chairman and Chief Executive Officer

Yes. I think it's important. I think overriding, we do want to protect the BBB+ A3 rating. So we think a lot about that. And I think our milepost is starting to approach midcycle earnings for our company. As you know, $6 billion to $7 billion of cash flow at mid-cycle. And that gives us plenty of cover to do the things we need to do. I think we've said in previous calls, we kind of expect capex for the next couple years to be $2 billion or less. And so you think in the context of $6 billion to $7 billion of cash flow at a total capital program of $2 billion and $1.6 billion dividend, then I think we'll have plenty of room to do the things we want to do around bringing the balance sheet into order, thinking about capital return to our shareholders, the dividend increases and share repurchases.

Phil Gresh -- JPMorgan -- Analyst

Excellent. Thanks a lot.

Operator

Your next question comes from the line of Paul Cheng with Scotiabank.

Paul Cheng -- Scotiabank -- Analyst

Hey, guys. Good afternoon. Two questions. Greg, I think if I look at your NGL business, this quarter, your EBITDA around $135 million. In 2019, the average quarterly EBITDA is about $170 million. But we have the fractionator two and fractionator three come on stream and actually at the full operation, which probably should least contribute $30 million, $40 million a quarter in the EBITDA, if not more. So trying to reconcile that if the market conditions really change that much or will that get that much worse because NGL price is actually very good in the second quarter? So maybe that someone can help us on that.

The second question would be just a real quick one. On the renewable, the full plant conversion, just want to see if there's a permit status that you can provide? And also that the last couple of years, you guys have been trying to rebrand the work process and go for digitization. And so just wanted to see if you can give an update on where we are on that? Is that pretty much done with what you guys aim a couple of years ago? I think at the time that the cost savings target was pretty high, but with the pandemic, I mean everything gets can all get messed up. So it's very difficult to reconcile. So maybe you can give us some update.

Mark Lashier -- President and Chief Operating Officer

Okay. Let's start with the NGL...

Brian Mandell -- Executive Vice President, Marketing and Commercial

Paul, this is Brian. So on your NGL question, yes, I'll tell you what. The first thing I would say is in 2019, I wish we were back in that macro. That was a good time with regard to the overall supply/demand fundamentals. Global demand was where you wanted it to be on really all of our Midstream products, whether it's crude products and NGLs. So fundamentally, there are big changes in the market. But when you look specifically at 2021, let me just highlight a couple things for you there that are -- have reared their head.

The biggest one that's had the biggest impact is winter storm Uri. When you look at Uri, it impacted our frac significantly down there and -- mainly not from the standpoint of damaging the units or any issues there. Even though we did have some costs with the units, that was on utilities. Our utility bill was significant. So from that standpoint, and that's going to be hard to call back for the rest of this year. So on a positive note, I'd just tell you, structurally, we like the NGL business.

Demand has been very robust to support chemicals growth, both locally and globally. NGL production is ramping up. We still see about one million barrels in rejection at this point in time. But overall, demand is really good in that space. Our LPG exports have been in a record clip. So overall, the fundamentals feel good that it was a big cost hit as well as lost production hit that we had initially in 1Q, which really on a year-to-date basis stays with us.

The last thing I'd just cover in Q2, the overall structure in NGLs has jumped up significantly, as you probably are well aware, propanes, butanes and ethane. We're at about $0.86, $0.87 on a gallon basis for NGL on a composite. In 2019, it was $0.37. So it's gone up. And with that, we've seen an impact on some mark-to-market we have on some of our inventory. So that's there. That usually turns into a timing issue. But just nonetheless, that shows up in the results in 2Q.

Paul Cheng -- Scotiabank -- Analyst

How big is that the impact on the mark-to-market in the second quarter?

Brian Mandell -- Executive Vice President, Marketing and Commercial

I'm going to estimate right now. I don't have the number in front of me is around $10 million, $11 million.

Robert A. Herman -- Executive Vice President, Refining

Paul, it's Bob. I think your second question was around the permitting status that Rodeo Renewed and the conversion out there of the Refinery to run in renewable fuel. So we continue to develop the environmental impact statement with Contra Costa County. I would characterize that has gone about as well as it could, better than we expected. We're essentially done writing the permit. It's in review right now internally with the county, and we would expect them to probably sometime this month release the permit to begin the public comment period.

So that would be pretty much right on our time line, maybe a little bit ahead. And so far, it's been a good cooperative process with the regulators and their permit writers. So we're encouraged and pretty happy where we are. We continue to outreach with all the other stakeholders in Contra Costa County and Northern California, that make sure everybody understands what that project is going to do for the Bay Area and for California in general. So far, so good.

Jeff Dietert -- Vice President, Investor Relations

And digitization.

Robert A. Herman -- Executive Vice President, Refining

Yes. Third piece, I think was a question around the A66 and cost reductions. And you're right, in a year like 2020, it's hard to say. But I would say we've been able to deliver within bounds of the environment on both sides of the equation. So we've had good optimization opportunities around reduced utilization in our refineries and our ability to get down as low as we did and to make jet go away and all those I think we're much easier because of some of the efforts we had.

The second piece I would say is at the height of COVID when we had the social distance and we had to use alternative work approaches and everything, our early jump into digitalization allowed our people to get a lot more done without human contact and really was a dividend to us upfront in our ability to keep supporting the operators who were on the units, while minimizing contact with the outside world.

And then third piece is we were able to hold the line on costs quite well throughout last year. And in fact, we saw cost reductions in many of kind of our bigger cost items, caps and kims and those sorts of things that are a big piece of our operating budget. We applied some of the learnings that we got through A66 to those. And I think we got sustainable longer term price reductions there that will continue to pay out throughout this year. So kind of full steam ahead on all our initiatives there, particularly in Refining.

Greg C. Garland -- Chairman and Chief Executive Officer

Paul, I might just come in and just say, I mean, we're never done on the controllable cost side of our business. There's more work we've got to do in terms of continuing to address cost. That's what you do in a commodity business. When I look at the controllable costs through the first six months this year relative to the first six months of last year, we're up about $300 million. Almost all that synergy cost in Q1. And so if you adjust for the energy component, we're kind of holding the cost savings we were able to achieve last year. But that's not good enough. There's a bit more work for us to do on the controllable cost side of it. So hopefully, you've got all those questions answered.

Operator

Your next question comes from the line of Theresa Chen with Barclays.

Theresa Chen -- Barclays -- Analyst

Hi there. Thanks for taking my questions. I guess, first, just on the topic of global refining capacity and closures going forward, I'm curious to hear about your outlook for the European market in general, given your exposure there? During the quarter, the macro data looked weak for a good portion. Now we're seeing some strengthening there and hearing -- same news of operators with starting units and calling back workers. Just curious to hear about how you see that evolving in the closures landscape.

Jeff Dietert -- Vice President, Investor Relations

Yes. So I think Europe has been one of the most challenged market in the first half of the year. Lower margins and lower complexity. I think the demand has been slow to recover there. We are seeing some improvement, but it looks like one of the more challenging regions. I think we've seen continued weakness in Latin American Refining utilization as well, that could be a challenged area also. And I think there was an expectation for a stronger summer than what we've actually had. And as we come into the fall, that's typically where we see more closure announcement activity.

Robert A. Herman -- Executive Vice President, Refining

I would say the weakness -- and we pointed this out, the weakness in Europe has translated to weakness in the U.S. on our Refinery margins. We've seen typically 100,000 barrels of diesel imports into the U.S. this year. We've seen 200,000 barrels of diesel imports into the U.S. for Europe. We expect, as Europe comes back from COVID lockdown, that those increased barrels will stop. We saw high imports of gasoline from Europe as well. We believe that, that will start to as Europe comes back from lockdowns. We've seen it already taper off. So all those things when the Refinery complex come back in Europe and COVID lockdowns decrease, we'll see the U.S. also strengthen.

Theresa Chen -- Barclays -- Analyst

Got it. And then just on the crude side, what -- can you talk to us about your medium- to long-term outlook for WCS differentials in light of Enbridge's Line three replacement project coming online in fourth quarter. Should that all else equal narrow the differentials to the Mid-Con? And subsequently, when we think about cap line reversal happening later on, could there be a situation where you see the same chains market being flooded with incremental heavy barrels which could actually help your Gulf Coast facilities, while the Mid-Con would be a little weaker with narrower -- structurally narrow WCS spread, and how do we see that dramatic development playing out?

Brian Mandell -- Executive Vice President, Marketing and Commercial

So I would say on the WCS, we have seen differentials come off quite a bit. We got 4.5 million barrels ready to leave Canada, currently. We have about 4.4 million barrels of pipeline egress, we have another 100,000 barrels on rail. But we've seen, which is something a little different from what we've seen in the past couple of years as we've seen the WCS differential in the Gulf Coast weaken. It's weakened about $2.5 over the past couple of quarters. And when that weakens, so does the hardest WCS differential, you have to have an to have an arm get the barrels to the Gulf Coast.

And one of the reasons the Gulf Coast is weakening is because low exports means that you have to have a weaker differential on WCS to get that WCS exported out of the U.S. So as you said, Theresa, we have Enbridge coming online in next quarter, quarter four, we would think that, that would firm up differentials a bit. But don't forget in the wintertime, we add diluent to crude, and that also increases the volume of crude that has to move. So I view, our forecast is that you'll see differentials somewhere between $12.5 and $13.5 off of WTI going forward.

Theresa Chen -- Barclays -- Analyst

Thank you.

Operator

Your next question comes from the line of Manav Gupta with Credit Suisse.

Manav Gupta -- Credit Suisse -- Analyst

Hey, guys. I wanted to focus on the Rodeo conversion. We are seeing two trends out there. One, are guys who are not building a pretreat and their cost is varying between $1 to $1.50 a gallon. And then there are guys are building the pretreat and their cost is varying between $3 to about $3.50 a gallon. You make five standard deviations from it, you are the only one who's building the pretreat a and your cost is $1 a gallon. So help us understand what is special about this plan? I'm not trying to question. I'm sure you'll get there. But why is it so unique that you can pull this off and nobody else can?

Robert A. Herman -- Executive Vice President, Refining

So it's Bob. I agree with you. We will get there. So what really sets up Rodeo completely differently, one is it's a full plant conversion, so we have all the kit available. And we have two very high-pressure hydrocrackers that we can put into service. And to convert those units from where they are today to being able to run renewable diesel is actually a very low cost part of the project. So most of the cost of that project is in either the logistics piece and then the big chunk is the pretreaters themselves.

So I think that's what allows us to be able to have a unique position of building a project that's going to be at an installed cost of about $1 a gallon, which you're right, is lower than anybody else, but it is because if there was a refinery that was custom built to be able to be converted to renewable feedstocks Rodeo it's a -- since it's very, very unusual to have two hydrocrackers and excess hydrogen capacity on site between our own hydrogen plant and that of our third-party supplier that is built at the site. So we've kind of got a perfect storm there. So we're spending money to get all the logistics right, a little bit of metaling up in the hydrocrackers and in the pretreatment unit, and we'll be ready to go.

Manav Gupta -- Credit Suisse -- Analyst

Perfect, sir. I have just one quick follow-up. I think the pandemic somewhere changed the nature of people when it comes to the use of plastics, and that could somewhere be permanent. I'm just trying to understand, you have these two crackers which you were kind of put on a back burner, you can bring them forward, FID them. I'm just trying to understand, let's say, you do decide that from the point of FID, how long will it take to get the first one and the second one. So if this change is permanent and the demand for plastics is in an up cycle, you can capture a part of it.

Robert A. Herman -- Executive Vice President, Refining

Well, obviously, we agree that the fundamentals are -- have improved dramatically since we initiated these projects. And as I noted earlier, the U.S. Gulf Coast we're looking at FID next year and the Qatar project is about a year behind that. And you can target about four years from FID to start-up. And we believe we don't try to market time these investments that we do believe that window is a particularly good window to pursue something.

So we've got our foot forward on these. We are ready to move, and we're working with contractors to make sure that we're getting the capital cost right. Clearly, the global markets are improving, but there's still some disruption in the world economy. We'd like to see a little clearer path to a fully resolved economic recovery from COVID, get the Delta variant and any other variants behind us, but we are leaning in and ready to move with FID on that project next year.

Manav Gupta -- Credit Suisse -- Analyst

Thank you so much for taking my questions.

Operator

Our next question comes from the line of Matthew Blair with Tudor, Pickering, Holt.

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

Hey good morning. Thanks for taking my questions here. First is on chems. Could you share some color on the PE inventory picture? The industry data shows that PE inventories have really ballooned up to new highs, but in your release talked about tight supplies, Lyondell and Dow also say the inventory is pretty tight. So I was hoping you could just explain the disconnect there.

Greg C. Garland -- Chairman and Chief Executive Officer

One of the disconnects Matthew is the -- looking at just the gross inventories versus the days of sales of inventories because demand has increased almost 6% in North America. And so that's important. And then you also have to parse it out by kind of polyethylene because high density, linear low density, low density, all have different inventory levels and different applications. And we're heavily exposed to high density and high density is particularly tight supply now and uncomfortably tight. It's been building. CPChem ran at 102% of their capacity in the second quarter, so they really delivered from an operational excellence perspective. But much of that went into rebuilding those inventories.

So even though they had such a strong quarter, a lot of those -- a lot of that production went into inventory, and they're still not where they would comfortably be heading into a hurricane season. They like to be prepared for that. They don't plan to have a hurricane, but they're prepared if there are hurricanes to impact that. So I think that's where you're seeing the tightness. It's really from a day of sales perspective with the high growth in demand in North America as well as where we are in the weather cycles in North America.

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

Sounds good. And then California LCFS status showed that combined RD and biodiesel blend rates in the state were about 35% in Q1. It seems like that number is only been higher going forward. But I was wondering, are you feeling a pinch on placing your diesel out of the Los Angeles refinery and what are your long-term options here?

Greg C. Garland -- Chairman and Chief Executive Officer

No. Most of our diesel on the Los Angeles refinery goes out of state, out of California. So that's a nonissue for us there, Matthew.

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

Got it. Thank you.

Operator

Your next question comes from the line of Jason Gabelman with Cowen.

Jason Gabelman -- Cowen -- Analyst

Yeah. Hi. Thanks for taking my question. I wanted to ask two, specific to the quarter on refining earnings related to RINs. It seems like marketing earnings increased a decent amount this quarter and refining is still kind of in the doldrums in part due to RINs. And I understand there's some accounting and value split between the RIN benefit in marketing versus the cost in refining. So can you just talk about maybe how RINs benefited marketing this quarter and how much of your RIN exposure is being minimized by blending and pass through to consumers? And then the second question, just also on the quarter quickly, co-product realizations, I know we're a relatively larger than normal headwind. How is that looking 3Q quarter-to-date so far?

Brian Mandell -- Executive Vice President, Marketing and Commercial

So Matt, this is Brian -- Jason, this is Brian. I'll start off on the RINs question. Our view is that the RINs are in the crack. It's a cost that refining pays and that the crack has passed on the -- the value of the crack is passed on to the consumer who pays for the RIN at the pump. So marketing doesn't see any benefit from the RINs per se. There may be some leakage in that chain, but Marketing doesn't really see any benefit. Marketing did have a really very strong quarter in Q2. And a large part of that was we had kind of the right portfolio in the right places. We saw demand jump up in March and then again in June.

We have a strong presence in the Rockies and in the Mid-Con, where there were less COVID lockdowns and more movement. We added, as you know, retail in late '19 and also in '20 on the West Coast, and that retail has done better than premise. We also added retail this year in the Mid-Con and Rockies and that retails in better in premise. And finally, I'd add how we've been reimaging the stores for the past three years. We're up to 85% of the stores reimaged, and we've seen the 2% to 3% jump in volumes and margins in those stores as well. So we've done a lot of things to help our portfolios in the right spots. And so I think that's where we saw the value in marketing in Q2.

Jeff Dietert -- Vice President, Investor Relations

I think on the secondary products within Refining, they typically get squeezed in a rising oil price environment and improve in a declining oil price environment, and we're kind of four quarters in a row of rising oil prices here. So I think that's the biggest variable driving that secondary product margin.

Robert A. Herman -- Executive Vice President, Refining

Yes. I would agree, with Jeff. And usually, I guess, this time here, too, we start seeing a little bit of -- a little help in the secondary products because some of the coke we make ends up in the asphalt market then this time of the year as people are out fixing roads and converges and all those things, and that's offset a little bit, but we've quit blending butane in the back half of the second quarter comes back again in September. So there's a lot of moving parts in there. But I would think we're probably. This is kind of the maximum we would see for this type of oil price.

Operator

And your next question comes from the line of Ryan Todd with Piper Sandler.

Ryan Todd -- Piper Sandler -- Analyst

Hey thanks. Maybe just a couple of quick questions on the diesel business. I mean having ramped the Rodeo hydrotreater to the near-term target capacity of 8,000 barrels a day. Can you speak to any learnings or takeaways that you have from getting to that kind of critical milestone? And what you're seeing from kind of a margin or a profitability point of view? And then maybe a follow-up. Can you talk about what it entails to convert your marketing locations to market renewable diesel? What the capital cost is associated with this? And how you envision kind of the marketing effort of RD to play out as the Rodeo conversion fully ramps up over the next few years?

Robert A. Herman -- Executive Vice President, Refining

This is Bob, I'll take the first question there. So as we came out of turnaround and started up the Rodeo hydrotreater and renewable service, actually came up that ran really well. We had almost a full quarter running at low rates. We still have a project to get the rail infrastructure to finish, so that we can supply 9,000 barrels a day to make to 8,000 barrels a day of renewable diesel. So we're learning how the catalyst reacts and what the actual kinetics are around running bean oil. It's a little bit of a learning for the ultimate project of converting the refinery. And these are really -- these projects really are two very separate things in that there was no real work to do to convert 250 to bean oil, it was a matter of changing the catalyst that a regular scheduled turnaround and then being able to run it.

So it's helpful. I think the bigger picture there is it's very helpful to our commercial organization to learn how to source renewable feedstocks, so logistics are getting them there, some of the peculiar areas around transporting it. Those sorts of things all set us up to be a lot more nimble and ready for when we go from 8,000 barrels a day to 50,000 barrels a day with the renewable conversion. I think probably the best thing to come out of it is we did not see anything that made us stop and think about the project to convert the rest of the refinery that we needed to go back and think about our design, pretty much operating as expected.

Jeff Dietert -- Vice President, Investor Relations

And I would add to Bob, we got that plant up 2.5 months earlier than we thought, 9,000 barrels into the plant, high conversion rate just kind of a great asset so far. We've firmed up that over 50% of the feedstock for the plant going forward. We run soybean, but we've also run other vegetable oils there. So we've got some experience going out of vegetable oils. We're looking at international feed as well. We started to bring stores as you mentioned. It's low capital converted stores. We'll have all 600 stores converted by the end of the year, and that will allow us to run volumes equal to 3/4 of more of the R&D that we're producing currently.

Ryan Todd -- Piper Sandler -- Analyst

Okay. Thank you.

Operator

[Operator Closing Remarks]

Duration: 61 minutes

Call participants:

Jeff Dietert -- Vice President, Investor Relations

Greg C. Garland -- Chairman and Chief Executive Officer

Mark Lashier -- President and Chief Operating Officer

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

Robert A. Herman -- Executive Vice President, Refining

Brian Mandell -- Executive Vice President, Marketing and Commercial

Neil Mehta -- Goldman Sachs -- Analyst

Roger Read -- Wells Fargo -- Analyst

Doug Leggate -- Bank of America -- Analyst

Phil Gresh -- JPMorgan -- Analyst

Paul Cheng -- Scotiabank -- Analyst

Theresa Chen -- Barclays -- Analyst

Manav Gupta -- Credit Suisse -- Analyst

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

Jason Gabelman -- Cowen -- Analyst

Ryan Todd -- Piper Sandler -- Analyst

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