Note: This is an earnings call transcript. Content may contain errors.

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DATE

Wednesday, Oct. 29, 2025, at 12 p.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 and Commercial — Brian Mandell

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RISKS

  • Operating results for Q3 2025 reflect a $241 million pretax impact from accelerated depreciation and approximately $100 million in charges related to the plan to idle operations at the Los Angeles refinery.
  • West Coast refining segment reported continued financial headwinds due to the winding down of the Los Angeles refinery, with impacts expected to persist into the next quarter as expenses remain but production ceases.
  • Management stated, "we still need more clarity on federal and state policy" regarding renewable fuels, specifically referencing RVO policy, SRE reallocation, and feedstock guidance as sources of ongoing uncertainty.

TAKEAWAYS

  • Adjusted Earnings -- $1 billion, or $2.52 per share, includes charges related to Los Angeles refinery idling (adjusted, non-GAAP); reported earnings were $133 million, or $0.32 per share.
  • Operating Cash Flow -- $1.2 billion in operating cash flow; excluding working capital, $1.9 billion was generated, with a $742 million working capital outflow attributed to inventory build.
  • Shareholder Returns -- $751 million returned to shareholders, including $267 million in share repurchases.
  • Net Debt to Capital -- 41%, with end-of-period debt at $21.8 billion and an explicit target to reach $17 billion in debt by 2027.
  • Segment Performance -- Chemicals improved on higher margins and lower costs; refining results rose on stronger realized margins but were partially offset by environmental costs from the Los Angeles refinery; marketing and specialties declined due to margin normalization following favorable second-quarter conditions; renewable fuels saw better results from credits and operational improvements.
  • Capital Expenditures -- Adjusted capital budget of $2.1 billion for 2025, with a $150 million increase attributed to the Wood River/Borger acquisition and a $300 million consolidated WRB annual capital run rate going forward, but the direct incremental impact is $150 million with a $300 million consolidated WRB annual capital run rate going forward.
  • Refining Utilization -- Achieved 99% utilization, the best since 2018 and above the industry average; year-to-date clean product yield at a record 87%.
  • Refining Cost Structure -- Adjusted cost per barrel was $7.07, including a $0.40 per barrel impact from a $69 million environmental accrual; management targets an adjusted controllable cost per barrel of $5.50 annually by 2027.
  • Midstream -- Dos Pico gas plant and Coastal Bend pipeline expansion both became operational, enabling record NGL throughput and fractionation volumes; the first expansion phase is fully running with a second planned for late 2026.
  • WRB (Wood River/Borger) Acquisition -- Completed acquisition of the remaining 50% interests, adding 250,000 barrels per day of processing capacity and allowing for operational and commercial synergies across Midcontinent refineries.
  • Western Gateway Pipeline -- Binding open season launched; project aims to supply Arizona, California, and Nevada from Midcontinent refineries, structured as a 50-50 partnership with Kinder Morgan; capex guidance pending, with major investment expected in 2027, 2028, and 2029.
  • Midstream EBITDA Guidance -- $4.5 billion in EBITDA by year-end 2027, with growth from organic opportunities including Permian plant expansions (Iron Mesa, Dos Pico), Coastal Bend expansion, and Powder River restart; management states, "very limited sensitivity to the underlying commodity price" for these projects.
  • Chemicals Segment -- Achieved above 100% utilization year to date; Year-to-date adjusted chemicals EBITDA is $700 million, reflecting a high ethane feedstock advantage and improved margins following plant turnarounds resolved in the prior quarter.
  • Q4 2025 Outlook -- Global O&P utilization is expected to be in the mid-90s percent range; refining crude utilization in the low to mid-90s percent range; turnaround expense guidance of $125-$145 million; corporate and other costs projected at $340-$360 million.

SUMMARY

Phillips 66 (PSX +0.62%) executed strategic portfolio moves in the period, highlighted by full consolidation of Wood River and Borger refineries that management claims will unlock both operational and commercial synergies regionally. The company finalized key midstream infrastructure expansions with the Dos Pico gas plant and the first Coastal Bend pipeline expansion, which together enabled record NGL throughput and fractionation, and are set to drive incremental EBITDA growth with limited commodity price risk. Large-scale organic and commercial opportunities—including the Western Gateway pipeline, new fractionation capacity, and turnarounds at legacy chemical assets—were highlighted as key to the company’s pathway to grow midstream EBITDA to $4.5 billion by 2027. Debt reduction remains central, with clear plans to channel substantial cash flow and asset sale proceeds toward meeting the $17 billion net debt target by 2027. Management emphasized cost controls and high utilization as sources of resilience and margin improvement, particularly in refining and chemicals, while noting policy-related uncertainty as a risk factor for further renewable fuels growth.

  • Management explained, "record NGL throughput and fractionation volumes" were achieved due to new plant and pipeline capacity coming online.
  • Phillips 66 expects to sustain high utilization and clean product yield rates by refining assets as a result of reliability initiatives and footprint optimization.
  • Operational integration and increased ownership in key refineries are structured to provide flexibility in crude processing, facilitate product blending synergies, and reduce reliance on third-party logistics.
  • Policy risks cited in renewable fuels are driven by ongoing federal RVO guidance and uncertainties in global renewable fuel regulatory frameworks.
  • Timing on major capital expenditures for the Western Gateway pipeline is deferred, with management indicating that "capital spend wouldn't be in the next couple of years," and investment mapped to 2027-2029.

INDUSTRY GLOSSARY

  • WRB: Refers to Wood River and Borger refineries—two large, integrated refining facilities acquired in full by Phillips 66 for operational alignment.
  • Western Gateway: Proposed refined products pipeline joint venture with Kinder Morgan designed to transport product from Midcontinent refineries to Western U.S. markets.
  • Turnaround: Planned maintenance and overhaul period in a refinery or chemical plant, temporarily shutting down operations for upgrades, repairs, or compliance checks.
  • O&P: Olefins and Polyolefins segment within chemicals—products like ethylene, polyethylene, and related materials.
  • SAF: Sustainable Aviation Fuel, a renewable, lower-carbon alternative to conventional jet fuel highlighted in the company’s renewable product portfolio.
  • WCS: Western Canadian Select, a heavy crude oil benchmark referenced in Phillips 66’s refinery feedstock sourcing and margin commentary.

Full Conference Call Transcript

Mark Lashier: Thanks, Sean. Before we begin the call, I'd like to take a moment to recognize Jeff Dietert, our Vice President of Investor Relations since 2017. After a long and successful career in the energy sector, Jeff announced his decision to retire at the end of this year. On behalf of the entire management team, I want to extend our deepest gratitude to Jeff for his invaluable contributions to the company. We wish him all the best in retirement. During the quarter, we continued to execute on our strategy and delivered strong financial and operating performance. Refining's results demonstrated our commitment to world-class operations.

Midstream, along with marketing and specialties, delivered another consistent contribution providing a strong foundation for our capital allocation framework. Chemicals generated solid returns despite a challenging market, operating above 100% utilization. Year to date, adjusted chemicals EBITDA is $700 million, reflecting the unique feedstock advantage of our assets. During the quarter, the Dos Pico's two gas plant became fully operational and the first expansion of our Coastal Bend pipeline was successfully completed. These milestones enabled us to achieve record NGL throughput and fractionation volume. Since quarter end, we processed the final barrel of crude oil at the Los Angeles refinery.

We sincerely thank our Los Angeles refinery employees for their exemplary dedication to safely operating the assets as we progress the idling process. Earlier this month, we also closed on our acquisition of the remaining 50% interest in the Wood River and Borger refineries. This transaction simplifies our portfolio and enhances our ability to capture operational and commercial synergies across the value chain. The further integration of the Wood River, Borger, and Ponca City refineries will create a system that offers opportunities to capture margin across our assets. An example is the recently announced open season for Western Gateway. This refined products pipeline will ensure reliable supply to Arizona, California, and Nevada from Mid Continent refineries.

This proposed project is one of many opportunities that will drive greater shareholder value. Aligned with our focus on continuous improvement and the dedication to operational excellence, we're excited about the future. Rich will now provide more context on our progress and the future in refining.

Rich Harbison: Thanks, Mark. Slide four highlights another strong quarter for refining, a clear reflection of our commitment to operational excellence. We achieved 99% utilization, the highest quarter since 2018, and above industry average. Our year-to-date clean product yield of 87% is a record, underscoring our ability to maximize value from every barrel processed. Our third quarter adjusted cost per barrel of $7.07 was impacted by $0.40 per barrel due to a $69 million environmental accrual related to the Los Angeles refinery. Since 2022, we've reduced our adjusted controllable cost by approximately $1 per barrel. We have built our improvement strategy on five pillars of excellence: safety, people, reliability, margin, and cost efficiency. Our greatest asset is our people.

Training them well and sending them home safely each and every day is our top priority. Reliable operations improve nearly every metric. Our team is focused on a world-class reliability program that will sustain our strong operating performance. We are seeing excellent progress in utilization and uptime, and we're not done yet. We've made some tough but impactful decisions that are paying off as we lower our cost structure and improve our flexibility and optionality to capture changing market conditions. Excellence in all five pillars maximizes earnings and value creation. Moving to slide five. Since early 2022, refining has been on a journey.

We have been making structural changes to the portfolio and organization that will continue to drive long-term shareholder value. We've rationalized our refining footprint while strengthening our position in the Central Corridor. The full ownership of the Wood River and Borger refineries creates additional high-return organic opportunities. We've also transformed the organization, centralizing support functions, and operating the assets as a fleet versus independently. We have a list of low-capital, high-return projects in the queue going through our standard review and approval process. The ones we've already executed have improved yields, product value, and flexibility. We've increased our optionality to switch between heavy and light crudes and between finished product mixes.

I look forward to implementing the next phase of organic growth opportunities. Lastly, we're focused on driving efficiencies which will further improve our cost profile. We're targeting an adjusted controllable cost per barrel to be approximately $5.50 on an annual basis by 2027. We are positioned well for the future. Now I will turn the call over to Kevin to cover the financial results for the quarter.

Kevin Mitchell: Thank you, Rich. On Slide six, third quarter reported earnings were $133 million or $0.32 per share. Adjusted earnings were $1 billion or $2.52 per share. Both reported and adjusted earnings include the $241 million pretax impact of accelerated depreciation and approximately $100 million in charges related to our plan to idle operations at the Los Angeles refinery by year-end. We generated $1.2 billion of operating cash flow. Operating cash flow, excluding working capital, was $1.9 billion. We returned $751 million to shareholders, including $267 million of share repurchases. Net debt to capital was 41%. We plan to reduce debt with operating cash flow and proceeds from the announced fourth quarter European retail disposition.

I will now cover the segment results on slide seven. Total company adjusted earnings increased $52 million to $1 billion. Midstream results decreased mainly due to lower margins, partially offset by higher volumes. These results include $30 million of additional depreciation related to the retirement of assets associated with our Los Angeles refinery. Chemicals improved on higher margins and lower costs, which were largely driven by a decrease in turnaround spend. Refining results increased on stronger realized margins partially offset by environmental costs associated with the idling of the Los Angeles refinery. Marketing and specialties results decreased due to lower margins, primarily driven by more favorable market conditions in the second quarter.

In renewable fuels, results improved primarily due to higher margins including inventory impacts and international renewable credits. Slide eight shows cash flow for the third quarter. Cash from operations excluding working capital was $1.9 billion. Working capital was a use of $742 million primarily due to an inventory build. Debt increased primarily due to the issuance of hybrid bonds, which was partially offset by a reduction in short-term debt. We returned $751 million to shareholders through share repurchases and dividends and funded $541 million of capital spending. Our ending cash balance, including assets held for sale, was $2 billion.

Looking ahead to the fourth quarter on slide nine, in chemicals, we expect the global O&P utilization rate to be in the mid-nineties. In refining, we expect the worldwide crude utilization rate to be in the low to mid-nineties. Turnaround expense is expected to be between $125 and $145 million. The utilization and turnaround guidance reflects 100% ownership of the Wood River and Borger refineries and removal of Los Angeles. We anticipate corporate and other costs to be between $340 and $360 million. Now we will move to Slide 10 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 remove from the queue, please press star then 2. If you are using a speakerphone, you may need to pick up the handset before pressing the numbers. Once again, if you have a question, please press star, then 1 on your touch-tone phone. Steve Richardson from Evercore. Please go ahead. Your line is open.

Steve Richardson: Great. Thank you. Regarding WRB, I'm interested if we could just dig a little further there. Very clear what looks to be a really attractive acquisition price, and you've got a clear synergy target out there. But could we talk a little bit about beyond this inside and outside the fence line, some of the other benefits and just address what a 100% ownership of these facilities opens up in terms of some of the organic growth that Rich mentioned?

Mark Lashier: Sure, Steve. I think this falls in the category of our strategy and action. Several years ago, we identified that the Mid Continent's central core was core to our business, and we would focus and make strategic decisions around that. Since then, we've made the decision to idle LA and redevelop the land there. We announced our increased ownership of WRB, that you referenced here. And now we push that on with the open season of Western Gateway. Now the first step is that really it opens up the frontier to integrate more freely WRB, Ponca City, and Borger together into one system that creates a lot of optionality, a lot of opportunity.

And I'll let Rich and Brian dive into the details on that.

Rich Harbison: Alright. Thanks, Mark. I'll start and then pass it over to Brian there for the commercial side of the business. So, you know, when I think about this, Steve, you know, we've added 250,000 barrels a day of processing capacity for us. And what is our most competitive portfolio in the Center Mid Continent area there as you indicated, we got it at a very attractive price. Not diving into the cost synergies, but really, this deal opens up some organic growth opportunities that will allow us to increase our crude processing optionality and flexibility.

With our previous arrangement in the JV, we were somewhat locked into a desired crude slate and investments to open up that flexibility were generally not looked upon favorably. So now we have the opportunity to really open up this flexibility inside this system as well as on the product slate side of the business too. So we see lots of opportunity there, which will help us increase our market capture opportunity. But most importantly, from my perspective, it's our ability to operate Wood River, Borger, and Ponca City as a regional system. Actually interconnected with a very good pipeline system operated by our midstream assets.

And this will allow us to really optimize the use of intermediate products between the sites. And what that leads to is higher utilization of these downstream units, these units downstream of the crude operation. And that will also allow us to increase utilization of these conversion units, and make additional products. All that leads to more commercial opportunity, and I'll kick it over to Brian to expand a little bit on that.

Brian Mandell: Hey, Steve. From a commercial point of view, we have currently a cross-functional team looking at synergy opportunities, everything you can think of, and currently have 30 plus initiatives in the pipeline. We're generating new initiatives every single week maybe just to give you a few examples of some flavor for what we're looking at. We've been able to improve our integrated model between Wood River and Ponca City on butane blending. And optimize the two plants which are highly integrated with our midstream assets. Another example is we've updated our variable cost economics on proprietary pipelines to incentivize shipping on Phillips 66 assets versus third-party pipelines.

We're utilizing some of the marine assets that were previously dedicated to WRB for other higher netback service. And also, we're using Borger and Wood River Coke and blending it with coke from other refineries to generate more volume to be placed in the anode coke market. So those are just a few examples. It's early days. Lot more opportunity to go.

Kevin Mitchell: Hey, this is Kevin. Just one other point of clarification I'd like to make because I think there's been a little bit of confusion out there. In terms of impact on capital. So we increased our guidance on capital budget to $2.5 billion or approximately $2.5 billion from what was previously $2 billion, and that has been attributed to WRB. That's a little bit of an overstatement of the impact. The reality here is if you look at 2025, the capital budget was $2.1 billion. WRB capital budget at a 100% level was $300 million. And so our net addition is $150 million relative to that. And that $300 million is a reasonable run rate to assume.

And so, really, we're saying that $2.1 billion goes to $2.4 billion on a 100% consolidated basis, but we already had 50% of that uplift reflected in our operating cash flow because of the way that flows through the distributions from the equity method accounting. So I just wanted to put some clarity around that point.

Steve Richardson: Appreciate the additional color there, particularly on the CapEx. If I could just quickly follow-up and fear of sounding like I'm leading the witness. But fair to assume that a lot of these benefits we just talked about, both on the refining side and the marketing side, are capital efficient and we're gonna see some of those benefits relatively near term. I mean, it's the one point we'd like to probably bring is when do we start seeing some of those things?

Mark Lashier: Yeah. I think you will see capital efficient additions there. There are capital opportunities. It'll add to Rich's list of low capital, high return opportunities, but the kind of synergies we talked about and the commercial opportunities that freeze us up those things are happening as we speak.

Steve Richardson: Wonderful. Thank you.

Operator: Thanks, Steve. Theresa Chen from Barclays. Please go ahead. Your line is open.

Theresa Chen: Hello. Thank you for taking my questions. I wanna dig deeper into Western Gateway. Now that we are we can change into the binding open season. Can you talk about the rationale behind this project and why it's important for Phillips 66? How does it stack up versus one of competing pipeline projects? And if built, how do you think this pipeline will change? How do you flows as well as margin capture for your Central Corridor assets?

Mark Lashier: Yeah. Theresa, that's a great question. When you step back and think about our mission to provide energy and improve lives, and when we looked at the evolution of refining capacity out west, impacting both California as well as Arizona and Nevada. And we saw an opportunity along with the alignment of Wood River, Ponca City, and Borger to really make something special happen. And in essence, the ability to bring our midcontinent strengths, midcontinent advantages to the West Coast, Saint Louis all the way to Santa Monica. And we believe there's great opportunities there. Less refining capacity in California, growing demand in Arizona and Nevada, all those things combined to get us interested in this opportunity.

Brian and Don can dig into the details of those and address the specifics of your question.

Don Baldridge: Sure. Thanks, Mark. And, Theresa, we do think it's a unique and compelling opportunity. And if you think about just the framework of the project, our gold line really operates like a supply header that's gonna be able to access the Mid Continent refineries bring that volume to help fill the Western Gateway pipeline. It's gonna take product along the new pipeline all the way to Phoenix, you know, that will help satisfy that market, that area. And then the balance of that volume being able to go all the way to Colton, California where it can access the broader California and Nevada market. We think that's a compelling opportunity.

It certainly early days in the open season, or having a constructive and active conversation with interested parties. So more to come on that. I think the project and how we have it set up is something that resonating quite well with the market.

Brian Mandell: And maybe just from a commercial perspective, you know, the way I think about it is PADD five is gonna look very similar to PADD one. Where you're you have a short market, you have a pipeline, that brings in domestic volumes like Colonial does to PADD one, and then you have barrels coming from overseas, waterborne barrels as well. So it'll be set up very similar to that market. And as you know, a pipeline is the most reliable way to move volume won't be susceptible to dock restrictions or lack of logistics. Demerge, or weather issues.

And assuming only our pipeline gets built, we estimate probably about half of the volume will end up in the Phoenix market with reversal of Kinder Morgan and the rest will end up in California, which makes sense as Mark mentioned, as you see, there were closures of California refineries. But California will continue to be an waterborne import market, and at Phillips 66, we'll continue to be import barrels by the water. And from our commercial perspective at Phillips, the pipeline will allow us to move products, as Mark said, from our Mid Con refineries for likely better than Mid Con netbacks, and all our Mid Con refineries can make Arizona grade gasoline and California grade gasoline.

So we see the pipeline as a great opportunity for California, for Arizona, for Nevada, and for all the potential shippers.

Mark Lashier: Yeah. As far as the comparison of our project to OneOak's project, I think they have different target markets or target sources, Gulf Coast versus Mid Continent. And I think that, ultimately, the market will determine if one or either of the projects go forward. So we believe we've got a strong ability to bring midcontinent volumes all the way to California with Kinder Morgan really provides a lot of strength for this option. And we have full faith that we'll move forward with this.

Theresa Chen: Thank you for that comprehensive answer. And as a follow-up, from a cost perspective, what kind of CapEx should we anticipate for Western Gateway given the substantial greenfield component? And how will the cost be split between the partners since Kinder is contributing its existing pipeline infrastructure?

Don Baldridge: Sure, Theresa. So the partnership is fifty-fifty with Kinder Morgan. And so that'll be at the end of the day. But how the balance works. And then in terms of the overall CapEx, you know, we haven't disclosed that number. And part of that is because as we talk through with shippers and different supply connections, we're still working through, you know, what some of that connection cost might entail. And how all that will flow from a volume standpoint. And that will drive some of the infrastructure needs and capital requirements. But safe to say this is a consistent midstream type return investment that we're looking at in concert with Kinder Morgan.

Kevin Mitchell: And probably also worth highlighting that the capital spend wouldn't be in the next couple of years either. You're sort of looking at 2027, 2028, 2029 time frame. So no near-term impact on capital budgeting.

Theresa Chen: Thank you very much.

Operator: Neil Mehta with Goldman Sachs. Please go ahead. Your line is now open.

Neil Mehta: Yes. Good morning, Mark and team. Wanted to keep on pushing on this midstream point. And you've talked about $4.5 billion in EBITDA by year-end 2027 as the run rate. Do you annualize Q3? You're close to $4 billion. And so maybe you could just talk about bridging that $500 million and if oil prices languish, how sensitive is the EBITDA to that? And so giving us confidence around that incremental $500 million would be great.

Mark Lashier: Absolutely, Neil. I'll kick it off and then turn it over to Don. But you know, first of all, I think you have to look at our track record. We've grown that NGL business from $2 billion to $4 billion over the last several years. And as you noted, we're just under a billion dollars this quarter. So the $4 billion is in line of sight. This is all the result of the concerted effort based on our strategy we aligned on several years ago with our board. To establish this wellhead to market presence in NGLs. And we've done disciplined, accretive, inorganic, and organic things to do that to get to where we are today.

And we see the next increment another $500 million largely from organic. I mean, we've got line of sight on organic opportunities. The inorganic opportunities were facilitated by noncore asset dispositions, so we've been able to reallocate capital and free that up. And most importantly, the organic opportunities quite often are unleashed because of the inorganic opportunities. So this has all been a relentless pursuit of higher ROCE in the midstream business as well as building competitive on top of competitive advantage. And I'll tell you that it was a great visit. We had the Sweeney last week. We've done some things around the fracs there. The operations have been incredible.

And the operators pointed out that they found our fifth frack. We have four fractionators at Sweeney. They found enough capacity through some debottleneck projects they've done. So in essence, they've added an additional frac through very low capital opportunities. So much like refining, we're looking at ways to be more efficient, to grow more aggressively, in midstream and more accretively. And Don's got another list of opportunities that he's gonna go after.

Don Baldridge: Sure. Thanks, Mark. And definitely the platform that we have developed over the years, it just lends itself to a lot of organic growth opportunities. And that's what's really driving this growth from $4 billion to $4.5 billion. A lot of those projects are publicly announced and are in execution phase. If I look at the gas gathering and processing business, we got plant expansions in the Permian with our Dos Pico gas plant that came on just a few months ago. That's it will fill up by 2026, and then Iron Mesa gas plant that we announced, it's under construction. That'll come online in early 2027 and fill up.

So our footprint, you know, that plus the commercial successes as well as the higher NGL content in the production, that's really driving a lot of the volume growth that's coming through our system. That's, again, all fee-based type margin. So very limited sensitivity to the underlying commodity price. That volume drives what happens downstream in our NGL pipeline business. You know, we just completed the first phase of our Coastal Bend expansion. We're running that full. We've got a next phase of capacity, a 125,000 a day of additional capacity will come on later in 2026. As well as the restart of our Powder River pipeline that will pull in barrels out of the Bakken.

So those volumes, that capacity, and the volumes that will flow through there, again, help drive this earnings growth that will take us to that $4.5 billion run rate by 2027. So we've got a well-defined organic growth plan that we're executing. The other thing I would just say is that now our asset footprint, you know, it definitely is in a position where it creates additional growth opportunities that are high return, low capital, that we continue to pull together and execute on. So really see, like, we've got some great momentum within this part of the business and are executing it on a day-to-day basis.

Neil Mehta: Thank you, Don, and thank you, Mark. So the follow-up is just crude and transit. A lot has been made of the 1.4 billion barrels that appear to be on the water. But today's DOE is the view that they aren't finding their way into US shores or into a lot of OECD pricing nodes. And I want to get your perspective of or do you guys have visibility to that crude actually manifesting its way over here?

And if not, what do you think is driving that you think it's the sanctions, whether it's Iran, Venezuela, and now Russia contributing to that difference between what appears to be a visible build in inventory on the water but not on land?

Brian Mandell: Yeah. Neil. It's Brian. Hey. We do see a very large build on water barrels. It's a function of what those barrels are, and it's not clear if those are Russian barrels and they don't get to end users. They may sit there for a while. If they are other barrels maybe Saudi barrels or OECD barrels that will get to market. And that will probably put pressure on Saudi OSPs. And benchmark crudes. And so we're kind of waiting to see what those crudes are, and it's not clear. But it is clear that there is a lot of crude on the water now.

Neil Mehta: Okay. Thanks, Brent.

Operator: Justin Jenkins from Raymond James. Please go ahead.

Justin Jenkins: Great. Thanks. I guess one of the common questions we get from longer-term investors is on the debt side, the pathway to your 2027 targets. And Kevin, you touched on it a bit in your remarks, but maybe I'd ask if you could give your thoughts on the bridge to that $17 billion debt target by '27?

Mark Lashier: Hey, Justin. This is Mark. I just want to context it a little bit that we've clearly been using both our balance sheet as well as asset dispositions to drive the inorganic transactions as well as the organic opportunities midstream as well as in refining while sustaining our commitment to return at least 50% of our cash from operations to shareholders. And so we've been able to do that quite effectively. We're making a more proactive shift now towards intently focusing on the debt level and then that debt reduction is a clear priority, and Kevin is well prepared to walk you through the math going forward.

Kevin Mitchell: Yeah. Thanks, Mark. So we still have that same $17 billion debt target. That has not changed. You will have noticed that in the third quarter, our debt level increased to $21.8 billion. Now that increase was a combination of some debt issuance and some short-term debt reduction. But also had a corresponding increase in cash balance. So on a net basis, we were essentially flat during the third quarter. But as we look ahead to the next over the next the fourth quarter and the next couple of years, and you look in the at the third quarter, actually, the second quarter, pre-working capital, generated $1.9 billion of operating cash flow in both periods.

You think about WRB coming into the equation and I'll use this number partly to keep the math simple, but if we're at $8 billion in operating cash flow annually, you can you know, we're still committed to returning 50% of cash operating cash to shareholders. That's $4 billion, which would be split evenly between the dividend and the buybacks. That leaves $4 billion that's available. The capital budget of $2 to $2.5 billion per year as we talked about earlier, leaves somewhere in the order of $1.5 to $2 billion per year available for debt reduction. That's 2026 and 2027. Obviously, margins will do what margins do, and so we don't have complete control over all of that.

That's a reasonable construct to think about this. In the fourth quarter of this year, we will have the proceeds from the Jet disposition, but we also had just funded the WRB acquisition in those two kind of offset but we'll have a sizable working capital benefit. In the fourth quarter, somewhere in the order of $1.5 billion will come back to us, maybe slightly more so between $1.5 billion in the fourth quarter of this year and then the $1.5 to $2 billion potentially in each of 2026 and 2027 gets us comfortably to that $17 billion level by the '27. And that doesn't include any potential additional dispositions of noncore assets which just provides upside and additional flexibility.

Justin Jenkins: Perfect. Appreciate that detail, Kevin and Mark. I guess my second question on the refining macro and maybe tilt to that cash generation side of things. Does seem to fit your portfolio pretty well with high diesel frac and expectations for wider diff. Maybe just your overall expectation on how cracks play out and crude diff play out into 2026?

Brian Mandell: Hey there. This is, Chris O'Brien again. On the crude dips, you know, we expect to see light heavy spreads start to widen. During Q4 and into Q1. It's been somewhat delayed, think, surprising many of us. But the heavy crude has been slower, as I said. With additional OPEC barrels moving into China's SPR. And staying in the East in general, and then just the geopolitical concerns heading market volatility around Russia, Iran, and Venezuela? In The US Gulf Coast through Q3, the Canadian heavy crude became more attractive than high sulfur fuel oil. Which caused refiners on The US Gulf Coast to run more Canadian crude, and that supported differentials.

But that we as we've entered Q4, we're starting to see some impact from additional OPEC crude and a kind of relative weakening, although still strong of the high sulfur fuel oil. Additionally, the WCS production increased by 250,000 barrels in Q3 and we were gonna expect another 100,000 barrels or more in Q4. And as more Canadian volume comes online along with the winter diluent blending, we're seeing the WCS diff weaken by about a dollar in Q4 versus Q3. And Canadian production is expected to increase next year as well with several projects coming online and also from winter diluent blending.

So in 2026, WCS curve is off another dollar from Q4 as additional crude hits the market, including Middle Eastern crude, we'd also expect to see Middle Eastern OSPs to fall and put additional pressure on heavy crude. And as you know, we're a large user of WCS. So watching the WCS differential continue to widen will be a benefit to us.

Justin Jenkins: Thanks, man.

Operator: Doug Leggett with Wolf Research. You may proceed with your question.

Doug Leggett: Hey. Good morning, everybody. Guys, utilization rates blew out quarter record, I believe, since 2018, I think you said in the release. When we were running around Sweeney with you guys, I asked I forgot the gentleman's name who joined you from Chevron recently. So what are you doing differently on how you think about plan turnarounds, the habitual ones every four to five years is that changing? And should we think about your go-forward capacity utilization, your ability to manage that if you like, as averaging higher over time. The reason I asked the question is because Valero had a similar situation. And between the two of you, you've just basically offset the closure of Lyondell, Houston.

So we're trying to understand if our utilization is a new normal for not just you guys, but for the industry.

Rich Harbison: Hey, Doug. This is Rich. You know, the gentleman you were talking to is Bill. He's the refinery manager down there at Sweeney, and that was a good visit. I'm glad you mentioned that. It was a good opportunity for us to show off an asset there that highlights one of our core strategies, which is integration with the midstream and also CPChem operation there as well. You know, when Doug, when I think about your question and how do I answer that, it's to me, it's a journey that we have been on. And, you know, you don't sustain utilization rates like this if you're making quick and short-term decisions.

These have to be long-term end of sight, you know, visionary, type direction that you're moving a large set of assets to. You know, of course, we started that with a cost and margin, but we also simultaneously was running an improvement, out opportunities and initiatives around our reliability programs. And those reliability programs are essential to this sustainability component. To it. And that to me is what culturally has continued to improve over the last two to three years on this journey as we've marched down this path.

And also on the margin front, which is a journey that we started a couple years ago, and that was really centric around starting to fill up our downstream processing units behind the crude. First, you gotta fill the crude unit up, and then you gotta fill the downstream units up. Those directly result in clean product yield. Which is where, you know, most of their earnings are flowing into the organization. So I think with that commitment to reliability, world-class reliability program that we're executing. As well as the fundamental change in our cost and margin outlooks.

At each of the sites gives me a high level of comfort that we will be able to sustain this level of performance going well into the future.

Doug Leggett: That's really helpful. I threw the AI, words out to Valero and it bumped their stock up, I think. So maybe you could say AI helping you manage your utilization. So my follow-up, a very quick one for Kevin. Kevin, on that same trip, we had an opportunity to have dinner with the guys and you sadly, were not there to take this question on the chin. And the question basically is, if you're a relatively enterprise volume, what I mean by that is you've got a lot of long-life assets. However, you think about mid-cycle, a little bit of growth in midstream in the context of the overall company, but relatively static enterprise value.

Seems to me that the easiest way to basically boost your equity value is to reduce your net debt. Simple math. Equities enterprise value minus net debt. So why is net debt reduction not part of the cash return formula? Raise the formula, include net debt. Why not?

Kevin Mitchell: Well, it's I mean, you're absolutely correct. That everything else stays the same, a reduction in debt. Translates into an increase in equity value. And you can choose to look at debt reduction in that light. I mean, what we do is take a very sort of consistent view that most others in the space do, which is the cash return to shareholders is the dividend plus the buybacks. And at the same time, as part of our capital allocation framework, we've got debt reduction as a key part of that.

We actually have this debate internally when we have traditionally thought of capital allocation being how much is returned to shareholders, dividend and buybacks, and how much is reinvested in the business. Terms of the capital program. And now we've got this the additional dynamic of debt reduction, at which bucket does it fall into. We tended to just break it out separately on its own. But you are absolutely correct that there is clear value proposition for equity holders through debt reduction and we do see it the same way in that context. It's really then down to the semantics of how you, how we communicate that.

Doug Leggett: Great. I appreciate the answer, Kevin. Thanks.

Operator: Manav Gupta with UBS. Please go ahead. Your line is open.

Manav Gupta: I want to really thank Jeff Dietert over the years. I've thrown a lot of stupid questions at him. He's been very patient in answering all of those. So thank you, Jeff. You will be missed a lot. My first question here, sir, is on the chemical side. The indicator, and I understand it's an industry indicator, seemed relatively flat. The earnings jumped materially. Now I think some part of it was the Port Arthur non-downtime, but was it also a function of you using higher ethane blend than what probably the indicator is in showing? That's what I concluded, but I wanted your opinion on it.

And if you could also talk about when can we get back to, like, mid-cycle chemical margins?

Mark Lashier: Yeah. Just for the record, Manav, I've never fielded a stupid question from you, so I think I can speak for the rest of them. You asking insightful questions, and this one's very insightful. You partially answered it. You know, CPChain's chain margins increased about 9.5, 9.7¢ per pound. IHS was flat. There's really three drivers there. We had higher high-density polyethylene margins due to lower feedstock cost. So our blend of feedstock is different than the blend used in the IHS Marker. We're, as you noted, more heavily weighted to ethane. I think the most heavily weighted to ethane, and that provides a very resilient advantage.

Also, in the second quarter, CPChem had some planned downtime at Port Arthur, some unplanned downtime at Cedar Bayou. They had some turnarounds as well. And so when you flip all that to the third quarter, those things go away. That was beneficial. And also, the warm burns, other people had unplanned downtime in the third quarter and CPChem was able to take full advantage of that because of the short in the market. And so we see you know, the chemicals world is still over but I would say that what happened in the third quarter with that quick uptick in margins when there was a little bit of tightness created that's a really good sign.

You know, CPChem because of its cost position, is gonna they generated year to date $700 million of EBITDA. They should that's our half, not just CPChem, our half of their EBITDA. They'll be up around a billion dollars, and this is the bottom of a very protracted cycle. And so they are doing quite well. They're able to jump in when others falter. They're running at above a 100% when others are rationalizing. There's gonna be a lot of asset rationalization going forward. You're even hearing news out of Korea about the potential for rationalization. Europe's already well down that path, and so I think when you start seeing margin upticks when people have outages, that's a good sign.

We're not calling this down cycle over. We think it's gonna be a long slog forward. But I think there'll be more shakeout when CPChem starts up their two large world-scale the definition of world-scale, frankly, assets both here in The US and in Ras Laffan, Qatar and that will even, I think, potentially force out other high-cost producers. And so they're gonna be moving from strength to strength. And the long-term prospects are quite good for CPChem.

Manav Gupta: Thank you for the detailed response. My quick follow-up is here, sir. Initially, when you did the epic deal, I think now you call it Coastal Bend, there was a little bit of a pushback but now things are really coming together. The line has already had one expansion, and I think one more phase is planned. So help us understand where is the epic acquired assets EBITDA at this point on a quarterly basis and then what would it become once the full expansion happens? If you could just run us through that math. Thank you.

Mark Lashier: Yeah. Thank you for highlighting that, Manav. Again, the inorganic opportunities that we've done in midstream have always opened up more organic opportunities. And so I think that it's important to continue to look at our track record of what we do. We're not buying inorganic opportunities just to get bigger. We're buying because it opens up a new playing field. It creates more opportunity that perhaps the incumbents couldn't realize. And that is the case in Epic, and we're quite pleased with Epic and everything that's going on around that. And, you know, Don can fill in the details of what's coming next.

Don Baldridge: Sure, Don. And in terms of just looking back since we closed on the epic transit in April, you know, compared to the acquisition plan, we are meeting to even exceed what we expected from the assets. That's really a testament to the synergy capture around the operations and commercial around that now Coastal Bend pipeline. It certainly has been a really nice add in the Gulf Coast for us. The Corpus Christi presence. Combined with what we have at Sweeney. And as you mentioned, we turned on the first phase of the expansion here in August. We're running that pipeline full. Again, that's a sign that we've had the volumes available on the system.

That's why we acquired the system and expanded it because we needed the capacity. We're filling it up as we turn it on. We've got another expansion that'll come on later in 2026. And most all that volume is already on the ground and flowing on third-party pipes that will move over or it's a volume that's gonna come from the GNP expansions that we've already announced. So we're executing on the acquisition plan as we advertised and really pleased with the results and the follow-on opportunity that we're seeing with having that as part of our portfolio.

Manav Gupta: Thank you.

Operator: Jason Gabelman with Cowen Inc. Please go ahead. Your line is open.

Jason Gabelman: Yeah. Hey. Thanks for taking my questions. The first question is a portfolio one. You've obviously concentrated your footprint in Central Corridor talking a lot about synergies with your midstream footprint. As you think about your East Coast and West Coast refining footprints, do you still view those as core? I mean, there are some good assets there. But obviously not as well integrated. With what you're doing in midstream and chems. So how do you think about the importance of those regions within the overall business?

Mark Lashier: I think there's a couple of key things to think about here. It's that clearly, we have a core strategy around the integration of our Mid Continent or Central Corridor refineries there. They have the greatest crude flexibility. They have lots of optionality. That doesn't mean that we're ignoring our remaining coastal refineries. You think about Ferndale, we've already talked about it. Transitioning to produce California carob and its value is increasing as refinery capacity in California tightens up and so we're not gonna kick out assets that are creating good value but we are going to focus more intensely on the integration in the Mid Continent and Central Corridor.

Likewise, Bayway, when you think about the Atlantic Basin, we've got opportunities to integrate between Bayway and Humber. We can move streams back and forth to optimize there and to enhance the profitability and the reliability of both of those assets. And there's some very, very strong opportunities there that we're continuing to look at.

Jason Gabelman: Okay. Great. That's very clear. My follow-up is on the renewable fuel segment and obviously results saw a meaningful improvement quarter over quarter. You mentioned some impact from selling credits and I think there was something about selling product out of inventory in there. So wondering if you could just elaborate on what drove the increase quarter over quarter, how much of that is kind of underlying versus some timing impacts? Thanks.

Brian Mandell: This is Brian Jason. Let me just talk about Q3, and we'll talk a little bit about what we're seeing in Q4 and beyond. But in Q3, the renewable margins were actually worse if you took a look at just the margins. But we did a lot of self-help in Q3. We reduced costs. We improved our logistics, particularly to get in more domestic feedstock. We sent more of our renewable products to Pacific Northwest where fossil basis was stronger. We got a lot of value from some new pathways that we got. We doubled SAF production. And then as you pointed out, we had the timing of the European credits. In Q4, we'll have some timing impacts as well.

But in Q4, margins are improving with weaker soybean prices and relatively stronger credit values. We think the industry will continue to run at about the same rates as they did in Q3 given the turnaround activity. The European market will continue to attract renewable products. We've been sending renewable products in that direction both in Q3, and we continue doing that. We also anticipate continuing to increase our SAF production in Q4, and we've seen strong interest from SAF buyers. And finally, the new pathways that I mentioned will give us some additional flexibility. But in the end, we still need more clarity on federal and state policy.

For example, the guidance on the RVO policy, including reallocation of SREs and wind generation on foreign feedstock, and even more clarity on the European policy.

Kevin Mitchell: And Jason, it's Kevin. Just one other clarification. That inventory comment, that was a variance relative to the second quarter. There was no net benefit in the third quarter from inventory. It's just relative to what we saw in the second quarter. So there's that's not a direct impact.

Jason Gabelman: Yep. That's a helpful call out. Thanks, guys.

Operator: Brian Todd with Piper Sandler. Please go ahead.

Brian Todd: Yeah. Thanks. Maybe a couple back on refining. Throughput was obviously, you know, much higher than anticipated in the quarter. But margin capture, the still probably still a few headwinds that we see that existed in the third quarter. Can you talk about maybe some of the headwinds in the third quarter and how those might be trending or improving into the fourth quarter? And then maybe as a follow-up, a few years ago, as part of your strategic priorities, you talked about a goal of driving margin capture improvement of 5%. Can you talk about where you are on that progress you've clearly made improvements on clean product yield. But where do you think you are on that journey?

And what are some of the things that you may be working on over the next couple of years that we should keep an eye on that front?

Rich Harbison: Hey, Ryan. This is Rich. Let me start and then Brian can clean up anything else in the market front there. But you know, as I think about it, maybe the best way to approach this is a regional conversation. In the Atlantic Basin, market capture this quarter 97%, pretty solid. Quarter over quarter, that was really a difference in turnaround activity in that region. But we did see improved market cracks and some inventory impacts that were really offset by some higher feed costs as well as some lower product differentials in the region. The operations of the plants were quite good though. Utilization for the region was sitting at 99%.

And, you know, and on our journey to improve, you know, we had a clean product yield in that region of 88%. So very solid performance in that area. And we think that's a lot of that's supported by a project that we initiated at Bayway that increased the native gas oil production and it's allowed us to fill up that cat and really, we're seeing positive returns on that. In the Gulf Coast area, market capture was a little bit lower at 86%. And, really, the headwinds on this one were we saw that, in the marketplace. Utilization for the region pretty solid at a 100%.

And the clean product yields at its typical 81% for that area, which may seem a little low on clean product yield, but I'll just remind everyone that at Lake Charles, we produce a gas oil that is sent over to Excel that impacts the overall clean product yield for the facilities. Central Corridor 101% market capture. Very solid. Again, you know, that's one of our highest performing regions. The headwinds there, lower product differentials again, and those were offset by some improved market cracks. But that differential, the common theme you're hearing here, the octane value, as well as the jet to distillate differential. Again, for the 103% on the utilization front. And 90% clean product yield.

So you can see how those assets are running and performing quite well. And then, of course, one of our headwinds for the core was in the West Coast that 69% market capture. And that's primarily driven by the wind down of the Los Angeles refinery and the impacts associated with that. So you'll we had that impact in the third quarter. You'll see that impact continue into the fourth quarter. Where we will have wind down expenses but yet no barrels to offset that. In the profile. So we'll provide some clarity on that when we report in on the fourth quarter.

Utilization was reasonably well on the West Coast at 88% and of course, they're very complex refineries, so they're playing product yields up there too.

Brian Mandell: And the only thing I would add was now we're seeing we saw, as Rich mentioned, jet under diesel. Now those regrades have flipped and across all pads Jet is over diesel, which will be a tailwind for us, and octane spreads have firmed as well. With weakening naphtha to crude and so that's also will be a tailwind for us as well.

Brian Todd: Great. Thank you.

Operator: Philip John Lewis with BMO. Please go ahead. Your line is now open.

Philip John Lewis: Thanks for taking the question. On Western Gateway, how important is Phillips integration between midstream and refining and designing and executing this project? And then separately, what's your level of confidence around regulatory permitting risk? And any different dynamics here to keep in mind between the greenfield pipe and the reverse in the California?

Mark Lashier: Yeah. So we have a team that looks at integration opportunities that has from refining, commercial, midstream, all looking at where can we capture the most value, create the most optionality. And this opportunity jumped right out of that kind of collaboration. And it was a home run. And so we see opportunities both on the refining side, we see commercial opportunities, and certainly midstream is the glue that pulls it all together. So Don, I don't know if you have anything on the regulatory side.

Don Baldridge: Yeah. Other than, yeah, the feedback that we've gotten initially from folks in the various states as well as in the federal has been encouraging and positive. We're obviously in the early days of going through the open season and firming up any of the route nuances as we look at the new build. But we feel very positive in terms of the ability to get this project done and to follow on just to what Mark said.

I think, you know, from an integration standpoint, this is a project that Phillips 66 is uniquely positioned to help facilitate and drive as a really a compelling industry solution to market access for the Midwest refineries as well as satisfying a supply deficit in the West. So really feel good about where we stand and the opportunity set in front of us.

Mark Lashier: I've had conversations with key people at the federal level as well as the state level in California. California, and they are enthusiastic about this. I think the opportunity to leverage Mid Continent energy dominance through infrastructure. They can come online fairly quickly. It's very attractive. At the federal level in California. Is looking for ways to provide energy security and this does that. So when you get both of those sides to the table in a positive way, I think that's a strong vote of confidence. For the project.

Philip John Lewis: Okay. Great. And recognizing Chemicals ran really well in the quarter, just going back to industry capacity rationalization, wanted to get your sense on the China anti-involution policies and just how meaningful do you think this could be to help bring balance back into the market?

Mark Lashier: Well, I think you've seen it in refining. In China where the teapot refineries is the same kind of concept. We're hearing from our chemicals folks that they're looking at drawing a line in the sand around old in less efficient assets to make room for what they're doing around their crude to chemicals thing. So I think that watch that space. I think that will result in rationalization of assets, maybe even as young as only 10 or 20 years old.

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

Mark Lashier: Thanks, Raj. Great questions. We remain committed to our strategic priorities. Consistently strong operational performance across our assets, disciplined investments which deliver attractive returns, a strong balance sheet, and a commitment to returning capital to shareholders. Thank you for your interest in Phillips 66. If you have questions or feedback after today's call, please reach out to Sean or Owen.

Operator: Thank you. This concludes today's conference. Thank you all for your participation and you may now disconnect.