Phillips 66 (PSX) Q2 2025 Earnings Call Transcript

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DATE

Friday, July 25, 2025, at 11 a.m. ET

CALL PARTICIPANTS

• President and Chief Executive Officer — Mark Lashier
• Executive Vice President and Chief Financial Officer — Kevin Mitchell
• Executive Vice President, Refining — Rich Harbison
• Executive Vice President, Midstream — Don Baldridge
• Executive Vice President, Marketing & Commercial — Brian Mandell

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RISKS

• Management confirmed, "the losses [in renewable fuels] are unacceptable and unsustainable," citing continued weak margins and reduced run rates at the Rodeo Renewed facility.
• The announced closure of the Los Angeles refinery, scheduled for the fourth quarter, resulted in a $239 million pretax impact from accelerated depreciation, which was factored into Q2 2025 earnings.
• The Chemicals segment faced lower polyethylene margins due to decreased sales prices in Q2 2025, and "punitive tariffs" from China, with management describing Q2 as "particularly problematic."

TAKEAWAYS

• Adjusted Earnings-- $973 million in adjusted earnings for Q2 2025, reversing an adjusted loss of $368 million in the prior quarter, driven primarily by higher refining margins, 98% utilization, and 99% market capture.
• Operating Cash Flow (excl. Working Capital)-- $1.9 billion, while total operating cash flow including working capital was $845 million; working capital used $1.1 billion due to increased accounts receivable.
• Shareholder Returns-- $906 million returned, including $419 million in share repurchases.
• Refining Utilization-- 98%, marking the highest since 2018, supported by a 17% quarter-over-quarter volume increase linked to minimal turnaround activity.
• Clean Product Yield-- Reached 87% clean product yield, setting a system record and trending 2 percentage points above the prior-year record.
• Refining Cost-- Adjusted cost per barrel was $5.46, the lowest since 2021, with a stated goal to keep the annual average below $5.50 by 2027.
• Refining Segment EBITDA Sensitivity-- Each $1 per barrel change in the refining market indicator impacts quarterly EBITDA by approximately $170 million.
• Midstream Adjusted EBITDA-- Approximately $1 billion in adjusted EBITDA, doubling from $500 million in 2021, attributed to the Coastal Bend (formerly Epic NGL) acquisition and new infrastructure projects like Dos Pikos 2 and Iron Mesa.
• Debt and Leverage-- Net debt to capital ratio was 41%, reflecting the $2.2 billion Coastal Bend asset acquisition; the target remains $17 billion in total debt on a consolidated basis "over the next couple of years" via operational cash and asset sales.
• Marketing and Specialties-- $160 million in adjusted earnings, benefiting from roughly $100 million in timing effects and higher seasonal demand; normalization anticipated at $450 million-$500 million earnings per quarter in Q3, with the Germany/Austria disposition expected to reduce EBITDA by about $50 million per quarter once closed.
• Renewable Fuels Performance-- The segment saw further margin deterioration and reduced operating rates, with ongoing regulatory and credit market headwinds cited.
• Capital Spending-- $587 million funded.
• Refining Turnaround Guidance-- Full-year guidance was lowered by $100 million to $400 million-$450 million (from $500 million-$550 million) for 2025, due to improved planning, risk-based inspection, and reduced scope; $50 million-$60 million anticipated for Q3.
• Shareholder Return Commitment-- Continued pledge to return over 50% of net operating cash flow through share repurchases and dividends.
• Germany/Austria Retail Disposition-- Expected to close in Q4 with projected after-tax proceeds of $1.6 billion, reducing quarterly EBITDA by $50 million post-transaction.
• Strategic Board Actions-- Three new board members onboarded; management emphasized ongoing evaluation of "any alternatives," and maintained the priority of long-term value creation, stating "there are no sacred cows."

SUMMARY

Phillips 66 (PSX 0.50%) delivered a material turnaround in adjusted earnings, powered by industry-leading refining utilization and sharply higher margins across core businesses, while further lowering per-barrel operating costs and accelerating capital deployment in midstream. Management highlighted a step-change in clean product yields and reinforced its target to reach $4.5 billion in midstream EBITDA by 2027, supported by recent pipeline expansions and processing plant startups. The company plans to deploy proceeds from the Germany/Austria retail exit and ongoing cash flows to reduce leverage and advance its shareholder return framework. Executives acknowledged unacceptable renewable fuels losses given market and regulatory challenges, confirmed active evaluation of its portfolio structure, and signaled no change to the integrated strategy amid shareholder feedback and board refreshment.

• Management stated, If you use the sensitivity to a $14 market indicator, it puts you a little north of $5 billion of refining EBITDA.
• Phillips 66 expects refining utilization to decrease in Q3 due to the planned winding down at the Los Angeles refinery and recent storm-driven outages at Bayway.
• Brian Mandell outlined distillate markets as "very strong" and forecast continued tight margins through year-end due to historically low inventories and limited global net additions.
• Phillips 66 is pursuing risk-based inspection and optimized turnaround intervals to further lower long-term maintenance costs in refining.
• The Coastal Bend integration is on track, and pipeline capacity is set to expand from 175,000 to 350,000 barrels per day by 2026, according to Don Baldridge.
• Management projected that working capital release and $1.6 billion in asset sale proceeds in Q4 will close much of the gap to the company's targeted capital structure.
• International and marketing presence in California and Europe will be maintained only if it creates "long-term value," with management stating, "nothing is off the table."

INDUSTRY GLOSSARY

• Market Capture: Percentage of realized margin relative to a published refinery margin benchmark, adjusted for operational and crude selection factors unique to the company's refinery slate.
• Clean Product Yield: The proportion of total refinery output that constitutes high-value light products such as gasoline, diesel, and jet fuel.
• Turnaround: A planned, comprehensive shutdown of a refinery or plant unit for maintenance, inspection, upgrades, and regulatory compliance; timing and scope significantly affect utilization rates and costs.
• Refining Indicator: A proprietary benchmark reflecting market gross margins for a representative set of crudes and product yields in Phillips 66's operating regions.
• PTC (Production Tax Credit): A U.S. tax credit for producing eligible renewable fuels, important for evaluating plant-level economics in the renewables segment.
• RIN (Renewable Identification Number): Tradable credit issued under the U.S. Renewable Fuel Standard to track renewable fuel volume obligations and compliance.
• SAF (Sustainable Aviation Fuel): Renewable fuel designed as a drop-in replacement for conventional jet fuel, enabling lower lifecycle carbon emissions in aviation.
• LCFS (Low Carbon Fuel Standard): Regulatory program in certain U.S. states and Canada that incentivizes low-carbon transportation fuels by awarding credits based on greenhouse gas intensity reductions.

Full Conference Call Transcript

Mark Lashier: Thanks, Jeff. Welcome everyone to our second quarter earnings call. We had strong financial and operating results this quarter. They are a reflection of our focused strategy, disciplined execution, and meaningful progress towards achieving our 2027 strategic priorities. Coming off our large spring turnaround program, we said we were positioned to capture strengthening market and we delivered. Our refining assets ran at 98% utilization, the highest since 2018. Clean product yield was over 86%, we captured 99% of our market indicator, and achieved our lowest adjusted cost per barrel since 2021. Along with refining, the other parts of our integrated business delivered. Midstream generated adjusted EBITDA of approximately $1 billion.

We are on track to achieve the $4.5 billion annual EBITDA target in midstream by 2027. Marketing and specialties reported its strongest quarter since 2022. The combination of stable contributions from midstream and marketing and specialties provides a robust platform for our capital allocation framework. We returned over $900 million to shareholders this quarter. The resilience of our integrated business model drives results, delivering consistent returns to shareholders. Slide four shows the progress we have made in our refining business from targeted low capital, high return investments, and a dedication to operating excellence. Results are clear. Utilization is improving, and we are consistently above industry average. We have been setting new clean product yield records.

Year to date, our yield is 2% higher than the previous record for the same period set in 2024. These factors have contributed to market capture improving to 99% of our published refining indicator this quarter. Year to date, market capture has increased 5% compared to the first half of last year. Our goal is to drive performance in any market environment while running our assets safely and reliably. The second quarter PSX market indicator was just over $11 a barrel. As a reminder, for every dollar per barrel that the indicator increases, EBITDA increases by roughly $170 million per quarter. In the second quarter, we achieved the lowest refining adjusted cost per barrel since 2021.

The organization has done a fantastic job embracing a culture of continuous improvement, enabling us to more than offset inflation. By 2027, we expect to see the adjusted cost per barrel number below $5.50 per barrel on an annual basis. Midstream is a key growth driver for our company and creates ongoing value for our shareholders through reliable, long-term cash generation. Slide five shows the increase in quarterly average adjusted EBITDA from $500 million in 2021 to $1 billion this quarter. We reached significant milestones in the second quarter as we continue to enhance our integrated wellhead to market strategy. We acquired Epic NGL, now renamed Coastal Bend, at the beginning of the quarter.

We are also near completion on the capacity expansion pipeline project from 175,000 to 225,000 barrels per day. The Dos Pikos 2 gas processing plant came online ahead of schedule and on budget at the end of the second quarter. This plant and the previously announced Iron Mesa plant are great examples of highly strategic and selective investments that enhance midstream's return on capital employed. These projects contribute to our plan to organically grow midstream EBITDA to $4.5 billion by 2027. Midstream is an important part of the Phillips 66 story. We are executing on our wellhead to market strategy and the results are coming through.

Over the past several months, we have had the opportunity to extensively engage with shareholders leading up to and following the annual shareholder meeting. These conversations provided valuable constructive feedback on our strategic direction, along with support of our priorities. We will remain focused on four key areas: enhancing our refining competitiveness, driving organic growth in midstream, reducing debt, and returning over 50% of net operating cash flow to shareholders through share repurchases and a secure, competitive, and growing dividend. We have made substantial progress and remain committed to maintaining safe, reliable operations as we execute on achieving these initiatives by 2027. In the second quarter, we welcomed the addition of three new board members.

As we do with all new directors, each new board member participated in a comprehensive multiday onboarding process with a broad group of our senior leadership team, equipping them to contribute meaningfully immediately. The extensive industry experience of our board members continues to promote thoughtful discussion and thorough evaluation of all opportunities for maximizing shareholder value. Now I will turn the call over to Kevin to cover the results for the quarter.

Kevin Mitchell: Thank you, Mark. On Slide seven, second quarter reported earnings were $877 million or $2.15 per share. Adjusted earnings were $973 million or $2.38 per share. Both the reported and adjusted earnings include the $239 million pretax impact of accelerated depreciation due to our plan to cease operations at the Los Angeles refinery in the fourth quarter. We generated $845 million of operating cash flow. Operating cash flow, excluding working capital, was $1.9 billion. We returned $906 million to shareholders, including $419 million of share repurchases. Net debt to capital was 41%, and reflects the impact of the acquisition of the Coastal Bend assets.

We plan to reduce debt with operating cash flow and proceeds from the Germany and Austria retail marketing disposition, which we expect to close in the fourth quarter. I will now cover the segment results on Slide eight. Total company adjusted earnings increased $1.3 billion to $973 million compared with the prior quarter's adjusted loss of $368 million. Midstream results increased mainly due to higher volumes primarily due to the acquisition of the Coastal Bend assets. In chemicals, results decreased, mainly due to lower polyethylene margins driven by lower sales prices. Refining results increased mainly due to higher realized margins. We came out of a high turnaround season in the first quarter well positioned to capture improved crack spreads.

Market capture was 99%, and crude utilization was 98%. In addition, costs were lower primarily due to the absence of first quarter turnaround impacts. Marketing and specialties results improved due to seasonally higher margins and volumes. In renewable fuels, results improved primarily due to higher realized margins including inventory impacts. Slide nine shows cash flow for the second quarter. Cash from operations, excluding working capital, was $1.9 billion. Working capital was a use of $1.1 billion primarily due to an increase in accounts receivable from higher refined product sales in the quarter following the spring turnaround program. Debt increased primarily due to the acquisition of the Coastal Bend assets, for $2.2 billion.

We funded $587 million of capital spending and returned $906 million to shareholders through share repurchases and dividends. Our ending cash balance was $1.1 billion. Looking ahead to the third quarter on Slide 10.

Don Baldridge: In chemicals, 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 low to mid-nineties and turnaround expense to be between $50 and $60 million. We continue to optimize turnarounds and improve performance. We are reducing the full-year turnaround guidance by $100 million. New guidance is $400 million to $450 million compared to the previous guidance of $500 million to $550 million. We anticipate corporate and other costs to be between $350 and $370 million. Now we will move to Slide 11 and open the line for questions. After which Mark will wrap up the call.

Operator: Thank you. We will now begin the question and answer session. As we open the call for questions, as a courtesy to all participants, please limit yourself to one question and a follow-up. If you have a question, please press star then one on your touch-tone phone. If you wish to be removed from the queue, please press star then 2. If you are using a speakerphone, you may need to pick up the handset first before pressing the numbers. Once again, if you have a question, please press star then 1 on your touch. Our first question today comes from Doug Leggate with Wolfe Research. Please go ahead. Your line is now open.

Doug Leggate: Thanks. Good morning, everyone. Mark, after all the drama over the last six months, quite a quarter you put up. So good to see that. I am curious, however, your last part of your prepared remarks, you said you referenced, I do not want to put words in your mouth here, but it was kind of engaging with shareholders and, obviously, reviewing or continuing to review the appropriate opportunities to maximize value. I guess, a strategy question.

So after everything that has happened in the last six months, are you still comfortable with the forward strategy of the integrated company, or do you envisage any incremental changes in light of the, you know, what you have been through the last three, four months?

Mark Lashier: Yeah, Doug. It is a good solid question. Thank you for asking that. And we have been quite encouraged frankly by the constructive engagement we have had with all of our shareholders over the last several months. The results of the vote we believe reflect what has been a consistent theme in the conversations that we have had with shareholders. They understand the value inherent in the business. And they recognize that our plans can provide upside as we continue to execute against them. We are fully aligned, and the shareholders agree that there is significant value in Phillips 66, and we have got to go out and capture that upside.

So as we always do, we continue to evaluate a wide range of strategic alternatives. Our board is very engaged in the process, constantly questioning us. Is the strategy effective? Do we need to tweak it? Do we need to make major changes to it? We have a wealth of experience and talent on our board. We have got retired chairman, CEOs, CFOs, corporate execs that are well established and Wall Street veterans. And so they constructively challenge our strategy every step of the way.

And as I mentioned, we have got the three new members that have been deeply immersed in an onboarding process that gives them access to all the data that they did not have access to during the proxy season. And so they have a clear understanding of where we are headed, why we are headed that way, and how we can unlock value. And as I have said before, there are no sacred cows. We are not ideological about anything. We are, well, we are about one thing, and that is shareholder value creation. So let me correct myself.

But, you know, at the right price and for the creation of long-term value, we will consider any alternatives, but we always, always, always are focused on the long-term value creation opportunities. And so I think our shareholders agree with us in that regard.

Doug Leggate: I appreciate the very full answer, Mark. Thank you for that. My follow-up is I guess I am asking a lot of people about debt nowadays, but my follow-up is a little different. Perhaps, the context of the macro. So strong quarter, $2.5 billion of EBITDA. Obviously, you are not where you want to be on midstream. But if I annualize that, at the margin environment we had, we are still obviously quite a bit shy of the $15 billion. So my question is, if you had to try and normalize for today's environment, what would the $15 billion be? Meaning, rather than making a summation on the mid-cycle, what would be a today's environment?

In other words, how far away from that are you? And if assuming it is less than $15 billion, how does Kevin think about the right level of debt for the combined company as it stands today?

Mark Lashier: Yeah. I think what we have said, and I would say the controversy is around, you know, stake in the ground on what everybody believes that mid-cycle conditions are in refining. And so we said that based on our indicators, we see that as a $14 per barrel indicator. And so, clearly, we are several dollars per barrel below away from that, and that is the key driver between that and what chemicals does, and we are in the bottom of the cycle for chemicals. So we have got a lot of upside in chemicals to add to that number. So we have got a long way to go to get to those levels.

Although, I would say this quarter, the gap to mid-cycle closed considerably for refining, but chemicals is still a couple of years out. So, Kevin, I will turn it over to you for debt.

Kevin Mitchell: Yeah. And just one additional point, Doug. So refining EBITDA was $867 million in the quarter. If you annualize that, you get a $3.5 billion number. That is an $11 market indicator. If you use the sensitivity to a $14 market indicator, it puts you a little bit north of $5 billion. You can question whether you have your own view on whether $14 per barrel market indicator is the right mid-cycle, but that is what we have put out there. I would also caution that this was a quarter with minimal turnaround activity. We ran extremely well.

Typically, you are not going to have four quarters of that in a given calendar year, so we need to adjust for that. But, fundamentally, we are in the ballpark of where we should be relative to our mid-cycle assumptions. On the debt question, I go back to what we have been saying that the $17 billion of debt on a consolidated basis we feel puts us in a very comfortable spot relative to our not only our mid-cycle assumptions, but also in a less than mid-cycle environment like we are in today.

Clearly, we are not at that debt level today, but we have that objective to get there over the next couple of years, and we expect to do that. We expect to accomplish that through a combination of cash generated from operations as well as proceeds from dispositions. Notwithstanding all of that, it does not compromise our ability to continue to return cash to shareholders. So 50% of operating cash flow, 50% or more of operating cash flow through share repurchases and dividends.

Doug Leggate: Appreciate the answers, guys. Thanks very much indeed.

Mark Lashier: Thank you, Doug.

Kevin Mitchell: Thank you.

Operator: Our next question comes from Manav Gupta with UBS. Please go ahead.

Manav Gupta: Good morning. I wanted to focus a little bit on the refining results. 99% capture, 98% crude utilization. I understand some of those things would be tough to replicate, but even quarter over quarter or year over year, these are remarkable achievements. So can you help us understand what helped you drive close to $1.3 billion in quarter over quarter improvement in refining? I know the cracks were higher, but help us walk through some of the stuff which you were able to achieve here. I think you probably were working on it for some time, but it all came together in the second quarter.

Mark Lashier: Yeah. Thank you. We appreciate that. As the data shows, and as we have said for the last several years in refining, we had full intention to improve refining performance and we were with a focus on the things that we can control. That is most evident in things like the clean product yield, the utilization rate. Market capture is going to have more variability in it because of the movements in the market and crude diffs and all those variables that we have less control over. But we absolutely will continue to drive costs down in the areas that we can control.

Things like natural gas costs may go up and down, but where we are looking at the things that we can control, we will continue to drive those costs down where it is responsible to do so. And so we will continue to fight that fight and position refining for whatever the market conditions are. We are going to be out there to capture the market that is available. And I think that is what we saw in the second quarter. It is a combination of very disciplined focus over the last three years of preparing, and implementing projects, and executing to be able to capture that market when it is available to us.

So Rich can drive into more detail.

Rich Harbison: Yeah. I mean, let me go a little bit maybe a layer deeper here on this. You know, our mission in refining is to run the assets safely and reliably and then drive world-class performance. And we do this, as Mark indicated, by managing the items we can control and then sustainably implementing change over time. And, of course, the foundation for all of this is safe and reliable operations, and we are a leader in safety, and we have that culture in our organization that continually challenges ourselves to be the best we can be.

We have also established a comprehensive reliability program that has been applied to each of our assets out there in the field, and we are measuring that success by mechanical availability. Ultimately, utilization of the assets will be the final measurement of that one. You talked, you asked a little bit about market capture. We had a fantastic quarter at 99% market capture. But even if you look at the data a little bit closer, year over year, year to date, we are showing a 5% improvement year over year. So, you know, that is sustainable improvement is what we are looking for over time. And there are a couple of reasons we are able to achieve that.

One is the reliability program and the impact it is having on our ability to utilize our assets, and crude utilization was at 98% for the quarter. That is actually nine out of the last 10 quarters we have been well above industry average on utilization, only interrupted by a set of turnarounds in the first quarter of this year. We have reached some record clean product yield as well at 87% for the assets. We are on pace this quarter also to meet that and potentially exceed it. And this is a reflection of what I have been talking about over the last three years, which is the execution of these small capital high return projects.

They have improved both our clean product yield as well as driven flexibility into the system. We have increased our ability to produce gasoline, diesel, and jet and swing between those three components. We have also improved our flex to process light and heavy crudes without losing capacity in the overall system. There is no better example of this than at our Sweeney where we recently completed the sour crude flex project, we called it. This project actually increased our ability to process light crude by three times the historic volume in the largest crude unit at the site.

Reduce our dependence on waterborne crudes, and it also takes advantage of the integration of the site, the midstream NGLs, and CPChem feedstock generation with increased lidans production, and we see a nice improvement with market capture with that project as well. Also, been driving the inefficiencies out of the business. I think this is also a big important part of refining performance, and we have been managing the fundamental difference here that we have been doing as an organization is managing the assets as a fleet versus a set of independent operations.

And that is really opened up our ability to drive inefficiencies out of the business, and we have removed well over a dollar per barrel out of the system. We saw a really good number of $5.46 in the second quarter, and we are striving to be below $5.50 on an annualized basis as our goal. The key thing quarter over quarter was really higher utilization for the assets. We had a set of turnarounds in the first quarter. Had a 17% increase in volume in the second quarter. So that improved really drove the dollar per barrel cost down.

But if you look underneath that even a little bit more, the operating cost for the assets were flat quarter over quarter with the exception of the turnarounds. So that base cost is still there. It is fixed. It is doing, we are able to operate the assets well. And it is a little bit subject, as Mark indicated, to the natural gas price. As that is moving around a little bit on us right now, which drives a dollar per barrel as well. You know, we are making some portfolio management changes with the Los Angeles refinery. But let me kind of wrap this up. You know, we have made good progress. But we are not done.

We will continue to focus on and drive these strategies. And I think, Manav, if you look at it over time, you see this trend. The steady drumbeat of improvement that has occurred in the refining system. And that means our processes of changing are really sustainably implemented. And most importantly, the people, our organization, our people, have proven that we are willing to take on the hard work of change. And put it in place and capture the opportunities over time.

Mark Lashier: Yeah. I just want to echo Rich's closing comments there, whether it is refining, marketing, commercial, midstream, or back office. Across the board, we have got a company full of people that are humble enough to know we can always do it better. And we are driven to do it better. We have got the competitive mindset to do it better. And to get up and do it better each and every day. And that is what is going to make this sustainable, and that is going to continue to improve those metrics that you have seen across the board. So thanks for the question.

Manav Gupta: Thank you, guys. I will give a quick follow-up. Very strong results from MNS, better than our expectations even if you deduct the $89 million one time. Help us understand some of the dynamics there. And now that you have sold these assets, what would be a good run rate of EBITDA normalized for this business?

Kevin Mitchell: Yeah. Manav, it is Kevin. So, yeah, very strong results in the quarter, $160 million as you highlighted. We had about a $100 million benefit in the quarter that were really timing with an offset in the first quarter. And so you would call that a sort of one-time effect if you like. And so as we look at the results, we had higher volumes, as the refining system came out of turnarounds and the seasonal effect on demand as well as stronger margins which, likewise, you have a seasonal driver there.

But also just the nature of the way the product price has moved over the course of the quarter, falling prices tended to help that on the margin front. As you look ahead to the third quarter, we would expect to be at a more sort of normal level for the business in the third quarter, which is somewhere in the order of $450 to $500 million of earnings is where we would expect that to be. Your other component to the question on the disposition, so we have not closed that disposition yet. We expect that to happen in the fourth quarter.

That will reduce EBITDA by about $50 million per quarter when we with that disposition of the 65% interest in our Germany and Austria business.

Manav Gupta: Thank you so much for the responses, and it was great to see Mark on CNBC today morning. Thank you.

Mark Lashier: Thanks, Manav.

Operator: Thank you. Our next question comes from Neil Mehta with Goldman Sachs. Please go ahead.

Neil Mehta: Yeah. Good morning. Good afternoon. You know, I have been spending some time, you know, chatting with Mr. Dietert about global refining balances and there is a healthy debate in the market over the next couple of years about how you guys are thinking about net capacity adds. And then also the swing factor of China, which obviously has excess export capacity, but it has been pretty disciplined about product quotas. And so we just love your bottoms-up view of how you think about those net adds over the next couple of years?

Brian Mandell: Hi, Neil. This is Brian. I would say that net refinery additions are low for as far out as we forecast certainly through the end of the decade. And that is before you even start thinking about unplanned shutdowns. We had Lindsay UK refinery announced that they are shutting down or in the process of shutting down last week or this week, and we expect more of those coming in the system. Also, some of the refineries, as you pointed out, particularly in Asia, they are petchem focused. So those, when you are thinking about crude, you really have to think about clean product yields, and those are very low clean product yields, 30 to 35% clean product yield.

So I would say bottom line is with the net additions below demand expectations, we see a very strong margin environment.

Neil Mehta: Just a follow-up on the cash flow to Doug's question about just debt levels being about 10, 11 points higher than where you want it to be. And you just talk about two dynamics. Working capital, there was a $1.1 billion outflow, but it I would think that swings back in the back half, so you could just talk about what drove that and how you think that evolves. And then the jet sale, because between those two nuts, I think you can close a lot of the gap that you need to get to the $17 billion level.

Kevin Mitchell: Yeah. Neil, it is Kevin. You are right on both fronts. So the working capital, $1.1 billion use of cash as you highlighted, that was predominantly due to increased accounts receivables. If you think about the end of the first quarter where utilization was much lower, we are still just wrapping up the heavy turnaround activity. Versus the June where we are running full product production and sales are significantly higher, and so that creates a build in accounts receivable. That is the biggest single component to the move. In working capital. There is also some inventory impact on the NGLs as we build for the sort of seasonal trade. On that.

And so over the course of the year, we would expect a release of working capital, probably more fourth quarter item than a third quarter item. Because the receivables component that I mentioned, you would expect that to continue at the same sort of levels through the third quarter. But come fourth quarter, you will see the normal inventory reductions that will take place and probably some modest benefit on the receivables payables front. So do expect that to come back. Expect the cash proceeds in the fourth quarter, €1.5 billion, $1.6 billion. And so you put that together, and we will make some significant inroads towards the debt target.

Neil Mehta: Makes sense. Thanks, Tim.

Operator: Thank you. Our next question comes from Jason Gabelman with TD Cowen. Please go ahead, Jason.

Jason Gabelman: Yeah. Hey. Thanks for taking my question. I wanted to go back to kind of how you are thinking about the business after the activism campaign that you endured and, you know, there was a lot of focus on that midstream part of the business. And I am wondering if the company is thinking about doing a deep dive on that segment and the structure that makes sense in any way that would be different than how you kind of evaluate that business in normal course through the year.

Mark Lashier: Absolutely. We have done that in the past. We will continue to do that. We will look to see if anything has changed. We will engage with industry experts to make sure that we are thinking about it the right way, and certainly, we will lay it all out for our board to drive to the right decision. So as I said earlier, nothing is off the table. But it has got to create long-term value for our shareholders, full stop.

Jason Gabelman: Great. Thanks. And my follow-up is just on a couple of weaker segments, chems and renewable fuels. And on chems, just want to know if your outlook for when we reach mid-cycle in that industry has changed at all. And then renewable fuels given margins where they are, do you consider tapering back runs there and just kind of outlook for margins in general would be great. Thanks.

Mark Lashier: Yeah. I will grab the chemicals question. I set second quarter was particularly problematic when you think about the disruptions that tariffs caused. At one point, the Chinese had imposed punitive tariffs of 100% on polyethylene imports, and CPChem has really minimized its exposure to China, but all of that material that was flowing into China got pushed back into the world market. So that was a big challenge this quarter. Our longer-term view is still consistent. You are seeing rationalization in Europe. You are seeing rationalizations rumored in Asia. And I think you are starting to see capitulation of those players that need to take assets off the table. That will be constructive.

And we continue to see things firming up throughout '26 and '27 and beyond without a lot of new capacity coming on. Other than what CPChem and Qatar Energy are bringing to the table. And, again, CPChem fares relatively well versus their competitors because of the advantaged ethane position they have both on the Gulf Coast and in The Middle East. And the high-density polyethylene volumes continue to be strong. They can run at high rates because demand for that product continues to grow. It is really a very resilient product. And their cost position allows them to continue to operate profitably.

And so they built out a strong competitive position that is passing the test of time as others are showing weakness.

Brian Mandell: Hey, Jason. It is Brian. On the renewable front, renewable margins are indeed weak, and they were weaker in the second quarter slightly than the first quarter. We are running at reduced rates. In the second quarter, we went at reduced rates, and we continue to run at reduced rates. Maybe I will give some color and tailwinds and headwinds the regulatory and in the renewable segment in general. As you know, there have been a number of regulatory changes for 2026 and a number of those are headwinds for the plants, including limiting the eligible feedstocks for PT credits to those from North America and also in reducing the premium for sustainable aviation fuel.

We also have RVO obligations that support Rodeo renewed, other policies included in the RVO such as that reduced RIN generation for renewable fuels derived from imported feedstocks will present a challenge. We are doing a lot of things in self-help, in talking to state and federal regulators to promote profitability for the plant. Additionally, we are working very hard on lowering the cost of operating the plant just like Rich has done in the refining segment. We are focused on this plant as well. And we are thinking about how to adjust operations to increase SAF production and also to provide additional optionality for feedstocks.

I would say also there are some tailwinds we see in the market potentially stronger LCFS and RIN credits with the tighter regulations. European markets are driving greater incentives, including Germany. We have been exporting to Europe almost every month this year. There are stronger biofuels programs in Oregon and Washington and stronger Canadian markets as well. So I would say just in summary, Rodeo renewed, as you know, is one of the world's largest RD and SAF plants. We can also generate up to 15% of the country's D4 and D5 RINs.

So ensuring profitability for the plant will be important for energy supply, for affordable energy across the country given the RIN generation, and for energy dominance in The United States.

Mark Lashier: Yeah. I would just add to that, you know, it is clear that the losses are unacceptable and unsustainable. But this is, as Brian noted, a strategic asset, not just for us, but for the country and for the whole RIN program. It is important as well as the volume of diesel that it produces. And its capability to produce sustainable aviation fuel to meet a lot of the policies that are underway. So we are fully engaged at the federal level and fully engaged at the state level in California. To make sure that all the right choices are made to support this strategic asset.

Jason Gabelman: Great. Thanks for the answers.

Kevin Mitchell: Thank you.

Operator: Our next question comes from Jean Ann Salisbury with Bank of America. Please go ahead.

Jean Ann Salisbury: Hi. I have a midstream question. Obviously, the top concern right now across Permian volume, Leaburg Midstream is the falling rig count in the Permian and whether growth could materially slow there next year. Can you talk about PSX's exposure to potentially slowing growth in the Permian? And how you might actually be less exposed than some peers in the medium term given your high share of contracted third-party volume?

Don Baldridge: Hi, Jean Ann. Yes, this is Don. I mean, a couple of things around the Permian Outlook. We do stay very close with our producer customers, and currently, see, you know, not a significant change in their plans based on where we are from a pricing standpoint and what their drilling activity looks like. One of the things I think you have to realize though is the NGL content in the new production is higher than the old production.

So even when you see some tampering in the or the dampening of the volume growth in crude, you are still seeing good robust growth on the gas and NGL side because of the higher GOR from the wells that are being drilled. So that certainly creates some buffer when you see some rig count changes or see a change in producer plans. But as you mentioned, our volume outlook is supported both by our G&P processing volumes as well as a robust third-party contract portfolio. And based on, you know, conversations we were having across the board, we still have good confidence in the outlook of the volumes coming through our system.

See our utilization rates continuing to stay high. We are turning on expansion at Coastal Bend and volumes continue to grow and fill that capacity. So feel like we are in good shape there.

Jean Ann Salisbury: Great, Don. Thanks for that color. And then as a broader follow-up, I think in the most recent PSX deck, there were a lot of examples of the $500 million of operating synergies from integration. Can you just kind of speak high level, like directionally, I guess, on what environments cause those operating synergies to be higher? Like, for example, is it just when there are better refining and chem's margins, do those numbers go up too or perhaps in more volatile environments? The operating synergies go up? But any kind or is it just more of a steady-state number as you guys look at it?

Don Baldridge: Sure. I will take this one. It is fairly steady. I mean, there is some seasonality when you think about butane blending with our refining kit and how that interacts with our NGL business. That has some seasonality. But a lot of it is fairly steady when you think about, a lot of this is throughput driven, a lot of this is operational synergies that we have across the portfolio. And so those tend to get realized on a month in and month out basis. So a lot of stability in that regard.

I would echo what you heard certainly from Mark and Rich is that we still see a lot of opportunity to continually improve and even extract more value in the integrated model. So excited for the opportunities that we see the portfolio is presenting us.

Jean Ann Salisbury: Great. Thanks, Don. That is all for me.

Operator: Thank you. Our next question comes from Ryan Todd with Piper Sandler. Please go ahead.

Ryan Todd: Good. Thanks. Maybe first off, one back on refining. Distillate markets have been very tight, with really supportive margins. Can you talk a way about what you see as the primary drivers in your view? How do you see the outlook over the remainder of the year? And as you think about your operations, is there anything more that you can do to increase distillate yields, or are you maxed out given the current crude slate?

Brian Mandell: Hey, Ryan. It is Brian. Well, I would say, although distillate has been favored over gasoline every month this year, May, distillate remains very strong as you pointed out. With lowest US inventories in decades and recent lower clean product yields versus Q2 of 2024. We would expect distillate margins to remain strong through the end of the year, planting season coming up or hurricane season, you know, coming up fall turnarounds, and then winter demand right after that. And so we would expect tight distillate margins to put also bullish pressure on gasoline margins. As refineries move to making more and more distillate through the driving season.

I would say, you know, thinking about what would put some pressure on the distillate margins, it will come from additional OPEC crude and the weakening of fuel oil values with a heavy crude pressure. Additionally, we have Canadian producers ramping up production to be more heavy crude on the market and we have seen back and forth some jet moving into the diesel pool. So I would say that one of the things we are doing is watching the Mideast and India where the global net distillate length exists. For the potential imports into Europe. While we do not think China is going to add any more gasoline or diesel imports, this could also take some steam from distillate.

And finally, as many people have talked about, we have seen lower biodiesel and our renewable diesel production. It is also bullish for distillate. So we would think that distillate margins will remain strong through the year. Eventually coming off some when you get these extra barrels. Heavy crude barrels back onto the market.

Ryan Todd: Alright. Thank you. And then, one, I know a big focus to your improvement in refining performance has also been an improvement on the commercial side of the business. Can you talk about how you view your progress in that regard and particularly in a quarter like this one? What benefits you might be seeing in terms of your efforts on the commercial side?

Brian Mandell: Yeah. We continue to drive our commercial business. We have done a lot of hiring. We have done a lot of upgrading. In the business. We are focused on driving more value through an integrated system. And moving barrels further along the value chain. As you know, we have offices in Houston, Canada, and Calgary, in The UK, Singapore, and a small office in China as well. So we are constantly looking to drive value by moving barrels to the highest netback markets. So as an example, LPGs or naphthas may end up in Asia, we have the customers in Asia. We have the boys in Asia to talk to those customers and figure out what they need.

I think we have made a lot of progress. We have added a strong origination group. We have hired about two dozen originators around the world. These are people that speak multiple languages, understand multiple commodities, and can drive value with customers thinking about what we might want to buy, sell with customers and how we might use our integrated system to drive more value. So really excited about the progress we have made in commercial. And I think there is, as Don and Mark have pointed out, there is still more opportunity.

Ryan Todd: Okay. Thank you.

Kevin Mitchell: Thank you.

Operator: Our next question comes from Philip Jungworth with BMO. Please go ahead.

Philip Jungworth: Thanks. You guys have been pretty active in managing the midstream portfolio and are now shifting the focus more to organic growth. But wondering if there is more to do on the divestiture side here where there is crude or refined product pipelines that maybe do not necessarily operate. Are there arguably still integration synergies, or maintaining ownership more about enhancing cost structure for refining, diversification, or just not the right environment to really realize full value?

Mark Lashier: So, Joe, we or I am sorry. Philip, we have got an active list that we look at. We have taken a deep dive and defined what our core assets are, what we believe are non-core assets are, and we are working that list. So there are more potential sales of non-core assets. Some primarily in midstream non-operated kinds of assets, and we are not ready to put a number out there or talk about specific assets, but we do have a considerable list of things that we could continue to monetize.

Philip Jungworth: Okay. Great. And then I do not think we have asked about the new MNS allocation slide that you have in the deck here just to be more apples to apples in terms of comparing refining performance. But it was a nice quarter for refining. I mean, typically, PSX tends to really outperform in the central corridor. I assume with the MNS allocation, I mean, the outperformance is even greater there. So just in a quarter where WCS did not really give you much help, what do you guys look at as far as really attributing and driving that relative outperformance?

And then in some of the other regions, maybe like the Gulf Coast, I know you mentioned the Sweeney project, but are there other things you can do there, new projects or otherwise to improve relative margin uplift given that you are pretty vertically integrated in the Gulf Coast also?

Brian Mandell: Hey, Philip. It is Brian. Maybe I will start on talking about the MidCon strength. We talked about the commercial organization. I think they had a hand in the MidCon as well. We were able to increase value in MidCon by optimizing the system essentially. On both gasoline and diesel. We anticipated strong MidCon prices in Q2 with heavy turnarounds and decreasing inventories, and we positioned our system appropriately. And also on the gasoline prior to the emergency RVP waivers, our refineries were able to produce the lower which received a premium in the market given the limited production. And finally, I think just in general, our refineries had minimal maintenance during a heavy MidCon turnaround season.

So we benefited by running while others were down.

Rich Harbison: Yeah. And I guess I will add on the refining side of the business. What we see an opportunity on in the Gulf Coast and even a bit in the MidCon area is to continue to fill up the secondary units in our processes, and that may not be the net native feedstocks may not be generated from the front end of the facility. So that is an opportunity that we have zeroed in on, and we think there is a good potential there that we can increase the overall utilization of the assets and generate more clean products for the marketplace.

Philip Jungworth: Thanks.

Operator: Thank you. Our next question comes from Joe Lache with Morgan Stanley. Please go ahead.

Joe Lache: Hey team, thanks for taking my questions. So I wanted to start on the full-year turnaround expense guidance, which was reduced by $100 million. Was this due to outperformance or was prior planned maintenance deferred? I am getting at and trying to figure out if the $400 to $500 million level is a fair run rate to use going forward. Thanks.

Rich Harbison: Yeah. I will take that one, Joe. This is Rich. So the third quarter guidance we gave you was 50 to 60 million. And if you look at the year-to-date spend, we have underspent based on our previous guidance there. So we did feel it was important to adjust the overall guidance for the year. And that is attributed to really two primary things that we have got going on. And one has been our continued focus on execution and planning, and that work has really allowed us to be very efficient on the execution and actually come under our historical productivity or above our productivity numbers, but under our historical spend to execute our work.

And the second key component of this is the maturity of our inspection programs. Where we are moving from a time-based inspection process to a risk-based inspection process. That does two things. One, it allows us to really optimize the interval between turnarounds. So we can, as more data comes available, we have a technical basis to move a turnaround from, call it, thirty months to forty-eight months or whatever that interval is. And the other benefit that this inspection process is driving is actually reduced scope of work inside the turnarounds. Which is reducing the complexity of the turnarounds and then compounding the effectiveness on the execution and planning side of the business.

So, you know, year to date, we have performed quite well. Spent around $320 million year to date. So looking at the numbers, we felt it was the right thing to do to adjust our full-year outlook down by $100 million.

Joe Lache: Thanks for that detail and good to see the execution. My second question is on the midstream side. Now that Coastal Bend has been closed for a couple of months, can you talk to how the integration is going, synergy capture, and any surprise now that you have had some time with it in the portfolio? Thank you.

Don Baldridge: Sure. This is Don. I would say our Coastal Bend integration work is going quite well. As you heard on the call today, the first phase of our expansion is near complete. We are on schedule for completing the second expansion, which would take us up to 350,000 a day of volume capacity in 2026. We are well on our way capturing the cost synergies as well as the commercial opportunities that we saw that would be associated with bringing Coastal Bend into our broader wellhead to market system. So that is all going quite well. I think you step back, it is a great addition that really supports our organic growth plans.

That you see us executing in the Permian with our gas gathering and processing plant expansions like Dos Pikos two, and the Iron Mesa gas plants, all of that is volume that is going to come out of those plants and feed into Coastal Bend. And then hit that Gulf Coast market where Coastal Bend plus what we had really created a great network of purity product lines that hits a lot of markets up and down the Gulf Coast and really see robust opportunity there. And, you know, the customer feedback, customer engagement we have had post-closing Coastal Bend has been robust and very positive.

So really excited about what the acquisition has done for us and what the opportunity set looks like.

Joe Lache: Great. Thanks for taking my questions.

Operator: Thank you. Our next question comes from Paul Cheng with Scotiabank. Please go ahead.

Paul Cheng: Hey, guys. Good luck. Good. I think it is still good. Good morning for you guys. Brian, can I go back to the renewable diesel? You are saying that you are running at reduced rate. Just curious that if the margin is lower, if that means that you are going to reduce further from the second quarter level. In other words, how sensitive you are in your one way, versus the market condition and also whether you have fully booked the PTC in the second quarter or that there is some incremental benefit that we should assume? Expect on that? That is the first question. The second question, I think, is for Mark.

Upon the completion of the shutdown LA, you have no refinery in California. But you have wholesale and marketing and retail marketing operation there. And also that in Europe, given the market condition is never really bad. Great for the oil and gas business. So in those two sets of business, means that in Europe, your refining and marketing business, and in California, your marketing business, in the long haul, how you see them fit into your portfolio? Are they should be part of your portfolio long haul? Thank you.

Brian Mandell: Hey, Paul. It is Brian. I will start. I will tell you that we are likely to run Rodeo at reduced rates even from Q2 and Q3. But that will be predicated on the market and the market may be better or may not. We are watching as you know, there are a lot of aspects to the margins for renewable diesel and renewable jet. Including all the credits, including the price of the renewable diesel, relative to carb diesel and also the price of the and they all move in tandem. So we are watching it all very closely, and depending on what the market gives us, that is what we will run the plant at.

Mark Lashier: Yeah. Paul, on your second question regarding LA shutdown, you are right. We will have no traditional refining capacity in California. I would point you to what we did when we converted Rodeo to renewable feedstocks. In essence, we were neutral on diesel production. It just to be renewable diesel versus traditional diesel, but we had to backfill gas. We did that. And other market participants did that by importing. We also had the ability to import from our Ferndale refinery in Washington, so it is a good position there. And then as we shut down LA, again, it is primarily a gasoline import opportunity. And the California authorities have been very proactive in helping us address the import opportunities.

From the water, whether it is international or other domestic sources. And so we have got a great plan that has been well received by California.

Brian Mandell: And, you know, I would also add to Mark's comments. I think what is interesting is we believe that volatility in California gasoline prices will actually be reduced with more gasoline imports. Because if you think about having mature supply chains, which are similar to other markets like PADD one, which is also a gasoline import market. You are going to have barrels coming in large ships, 300,000 barrels 700,000 barrels, and those barrels will come off the ship and be stored and ready for market dislocations. You also have many more destinations that can produce now carb gasoline than in the past. And, also, as Mark pointed out, destinations that are very close to California, like our Ferndale refinery.

And in fact, gasoline imports into California versus a five-year average are up 70,000 barrels a day already. So really do not see any constraints on getting the carb gasoline. We see a lot more gasoline coming into the market. The steady stream will help put a lid on volatility to a certain degree. The only issue is infrastructure. That is a potential issue, but what we have seen is the state is aware of this and seems poised to continue to help us on that infrastructure. So we think California is in a very good position.

Mark Lashier: Yeah. And regarding Europe, we have already exited coop. We are exiting 65% of our jet position in Germany and Austria. So clearly, that is not strategic for us. We like the deal that we did for Jet. It was a solid offer from a high-quality buyer. They wanted us to come along for some period of time as they adjust to that market and we, you know, we still have exposure to the upside there. With clear exit provisions. And so we are comfortable with where we are there in Europe. Around Humber and the integrated position in The UK, Humber is really the leading refinery in The UK, perhaps in all of Europe.

It is a strong position there. It has good optionality. And as you see others rationalize assets, it is only going to strengthen its position.

Operator: Thank you. Our next question comes from Matthew Blair with Tudor Pickering Holt. Please go ahead, Matthew.

Matthew Blair: Thank you, and good morning. I want to check in on the refining guide for Q3. I think it was for utilization in the low to mid-90% range versus the 98% in Q2. Your turnaround expense is flat quarter over quarter. The indicator in July at least, should be higher than the Q2 average. So I guess we are a little surprised that utilization might be coming down fairly significantly in Q3. Is there anything to read into that? Or what is going on there?

Rich Harbison: I will take that one. There are a couple of things going on that you need to think about on this one, Matt. One is, and this is public information. Bayway, our Bayway facility had an upset here, power outage during the last set of storms that rolled through. And that took the entire plant down. The plant is back up now and operating well, but that will have an impact on utilization. And then the second thing is around our Los Angeles refinery. We, you know, we have indicated that we are going to cease operations in the fourth quarter.

But actually, on the backside of the third quarter, you will start seeing some winding down of the operation that will have also some impact on utilization.

Matthew Blair: Thank you. That is helpful. And then on the renewables business, I am wondering if it would make sense to seek out a partner here. There are a lot of other examples in the space where your competitors are working with partners to provide help on feedstock. We saw a deal earlier this week where a partner came in and valued staff capacity at about $4.50 a gallon. Which seems like a pretty attractive number. So is that on the table for PSX bringing in a partner on the renewable diesel side?

Mark Lashier: With assets like this, we always look at what the best options are to create value. And I agree with you. That was a very attractive number. But, everything, as I said earlier, everything is on the table.

Matthew Blair: Great. Thank you.

Mark Lashier: Thanks, Matt.

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

Mark Lashier: Thanks for all your questions. Before we wrap up, I want to emphasize three points from the call. The strong financial and operating results this quarter show that we are executing well on a proven strategy. Our integrated business model generates competitive returns through disciplined investments and synergy capture along our crude, and NGL value chains. And we are committed to returning over 50% of net operating cash flow to shareholders through share repurchases, and a secure, competitive, and growing dividend. Thank you for your interest in Phillips 66. If you have questions or feedback after today's call, please contact Jeff or Olen.

Operator: Thank you everyone for joining us today. This concludes our call, and you may now disconnect your lines.