THOMSON REUTERS STREETEVENTS EDITED …...Later we will conduct a question-and-answer se ssion....

THOMSON REUTERS STREETEVENTS

EDITED TRANSCRIPT PSX - Q2 2012 Phillips 66 Earnings Conference Call

EVENT DATE/TIME: AUGUST 01, 2012 / 03:00PM GMT

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AUGUST 01, 2012 / 03:00PM GMT, PSX - Q2 2012 Phillips 66 Earnings Conference Call

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C O R P O R A T E P A R T I C I P A N T S

Clayton Reasor Phillips 66 - SVP-IR, Strategy, Corporate Affairs

Greg Garland Phillips 66 - Chairman and CEO

Greg Maxwell Phillips 66 - EVP and CFO

C O N F E R E N C E C A L L P A R T I C I P A N T S

Ed Westlake Credit Suisse - Analyst

Morgan Bartosh Citigroup - Analyst

Doug Terreson ISI Group - Analyst

Paul Sankey Deutsche Bank - Analyst

Paul Cheng Barclays Capital - Analyst

Blake Fernandez Howard Weil Incorporated - Analyst

Jeff Dietert Simmons & Company International - Analyst

Arjun Murti Goldman Sachs - Analyst

Evan Calio Morgan Stanley - Analyst

Doug Leggate BofA Merrill Lynch - Analyst

Roger Read Wells Fargo Securities, LLC - Analyst

P R E S E N T A T I O N

Operator

Welcome to the second-quarter 2012 Phillips 66 earnings conference call. My name is Sandra and I will be your operator for today's call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session. Please note that this conference is being recorded. I will now turn the call over to Mr. Clayton Reasor, Senior Vice President of Investor Relations, Strategy and Corporate Affairs. Mr. Reasor, you may begin.

Clayton Reasor - Phillips 66 - SVP-IR, Strategy, Corporate Affairs

Good morning and welcome to the second-quarter earnings conference call. We appreciate your interest in our Company and are looking forward to giving you details on our financial operating results, update you on a few of our key strategic initiatives and provide an outlook for the rest of this year. With me this morning are Greg Garland, Chairman and CEO, and Greg Maxwell, Executive Vice President and CFO. Our presentation material and supplemental information is available on the Investor Relations section of the Phillips 66 website. As promised, we have increased the amount of disclosure and granularity in our reporting to help you model future earnings and see the value of Phillips 66. Slide two contains our Safe Harbor Statement. It is a reminder that we will be making forward-looking statements during the presentation and during our question-and-answer session. Actual results may differ materially from what we say today. And factors that could cause actual results to differ are included here on the second page as well as in our filings with the SEC. Before we have Greg Maxwell get into the second-quarter results, we thought it would be great if Greg Garland would give a welcome to you all and give a few opening comments. Greg?

Greg Garland - Phillips 66 - Chairman and CEO


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Thanks, Clayton. Good morning, everyone, and thanks for joining us this morning. Today we report out our initial quarterly results, and as a formation of Phillips 66, we are off to a solid start. The spin transaction was executed flawlessly. We think it is a real tribute to the dedication, the capability of our Phillips 66 employees. We are delivering on the financial and the operating results we expected when the Company was put together. And I am really proud of what our employees have accomplished so far and have absolute confidence they will deliver industry leading value creation. We have a clear strategy for growth, margin expansion and returns enhancement. We think with the right balance between disciplined reinvestment and shareholder distributions we expect our return on capital employed to improve over time. Our approach to capital allocation balances our objectives for earnings growth while returning capital to shareholders. We are demonstrating our commitment to shareholder distributions through the announcement in June regarding our first dividend and this morning's announcement of a $1 billion share repurchase program. We feel strongly that our strategy around returns growth and distributions is the right one for our Company, and we have advantaged assets, organizational capabilities, and the opportunity set and commitment to drive differential value creation. As Greg Maxwell reviews our second-quarter results, you are going to hear that we operated with excellence, we ran well at high utilization rates and turned in a solid financial performance for the quarter in what we have described a positive margin environment. So now, I will turn the call over to Greg who will take you through our second-quarter results.

Greg Maxwell - Phillips 66 - EVP and CFO

Thanks, Greg. Good morning, everyone. I will get started with slide three. We successfully completed the separation with ConocoPhillips and began operating as an independent company on May 1. Our second-quarter financials include one month of carved out financials and two months of actual financials. The financials for April were prepared on the same basis as our Form 10 and our first-quarter 10-Q. As stated in our earnings release, we had reported net income of $1.2 billion and adjusted earnings of $1.4 billion. The $236 million difference is attributable to special items including impairments and gains on the asset sales. On an adjusted basis, earnings per share for the quarter were $2.23 per share. Cash from operations was $1.4 billion, and our year-to-date annualized return on capital employed was 18%. Now let's turn to slide four for a high-level look at our second-quarter earnings. Refining and Marketing generated $1.2 billion in adjusted earnings. The $437 million improvement was primarily driven by much stronger refining margins particularly in the US Midcontinent and Europe. Midstream adjusted earnings were $79 million, which excludes the $170 million special item associated with the impairment of our investment in the Rockies Express Pipeline. On an adjusted basis, Midstream earnings were $32 million lower than the second quarter of last year. The decline in earnings reflects a reduction in equity earnings from DCP which was primarily driven by lower NGL prices. Chemicals-adjusted earnings were $242 million, and this excludes a special item of $35 million associated with the early retirement of $600 million of debt. Adjusted earnings improved this quarter by $52 million, primarily due to higher margins and lower utility costs. I will go through each of these operating segments in more detail later in the presentation. Corporate and Other costs this quarter were $89 million after adjusting for repositioning costs of $30 million. Our Corporate and Other segment consists of interest expense, staff cost, technology, and other items not specifically identifiable to an operating segment. Details on our Corporate segment can be found in the Appendix of this presentation. Next, let's take a look at cash flow for the second quarter as shown on slide five. I will back up for a moment and remind you that our March 31 restricted cash balance of $6.1 billion includes $5.8 billion in senior notes that we issued in March. In April, we closed the financing on a $2 billion, three-year term loan which brought our total debt balance to $8 billion. As part of the separation we've made a net distribution of $6.1 billion to ConocoPhillips which, as shown on the slide, effectively resulted in the Phillips 66 starting out with $2 billion in cash.


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During the second quarter, we generated $1.4 billion in cash from operations with a minor cash impact related to net working capital changes. We generated proceeds of $234 million from asset sales, primarily from the sale of our Trainer Refinery, and our capital program this quarter was $270 million and was largely focused on the Refining and Marketing segment. This resulted in $3.1 billion in cash and cash equivalents at the end of the second quarter. Let's turn to slide six for a look at our capital structure and returns. At the end of the second quarter, we had $19 billion in equity and $8 billion of debt for a debt to total capital ratio of 30%. Our year-to-date annualized return on capital employed of 18% is up from 14% in 2011. This improvement is driven primarily by higher earnings in our Refining and Marketing segment and our Chemicals segment. And we ended the quarter with $27 billion in capital employed of which R&M represented 76% of this total. Next, we will cover each of our segments in more detail starting with Refining and Marketing, beginning on slide seven. The story in Refining and Marketing this quarter was that we ran well during a strong margin environment. We ran globally at a 93% utilization rate which is the highest second-quarter rate we have achieved since 2008. We also maintained a high clean product yield at 84% and realized higher margins in our refining, marketing and lubricants businesses. Our refining realized margin of $12.56 per barrel is the highest since the second quarter of 2007 and our year-to-date annualized return on capital employed has improved to 17%. Let's turn to slide eight and look at the Refining and Marketing adjusted earnings. Adjusted Refining and Marketing earnings of $1.2 billion reflects significant improvements in our Atlantic Basin/Europe and Central Corridor regions as well as US Marketing, Specialties and Other. In the Atlantic Basin/Europe region earnings increased due to improved margins and lower controllable costs. Margins improved largely as a result of higher market crack spreads while controllable costs were lower primarily because of the absence of operating activity at our Wilhelmshaven and Trainer Refineries. Earnings in the Gulf Coast were fairly flat as improved clean product margins were offset by less of a feedstock advantage, reflecting the narrowing LLS-Maya differentials. The Central Corridor improved significantly this quarter due to higher margins, reflecting our advantaged feedstock position in this region. The WCS discount to WTI and the increased amount of heavy crude processed at our Wood River Refinery, following the completion of the CORE project, drove the feedstock advantage this quarter. The Western/Pacific region was lower this quarter as positive secondary product impacts were more than offset by less of a feedstock advantage along with inventory impacts. Other refining benefited from gains associated with Canadian crude imports as we were able to utilize our pipeline transportation capacity to take advantage of favorable WCS to WTI spreads. Results for this quarter also include foreign exchange gains that are not directly attributable to one of our other regions. From an overall Refining and Marketing perspective the foreign currency exchange impacts this quarter represented a modest loss. US Marketing, Specialties and Other improved by $67 million, due to higher fuel and lubricant margins which were partially offset by higher costs while, internationally, earnings in Marketing, Specialties and Other were comparable to the same quarter last year. The next few slides highlight our performance in refining. As we turn to slide nine, adjusted earnings increased $353 million this quarter. Improved margins were the key driver with higher market cracks and secondary product margins being only offset by less favorable crude differentials. Additionally, lower natural gas prices this quarter resulted in lower utility costs and were a key driver in the lower overall operating costs. Let's take a look at our market capture on slide 10. Here, we look at our global market and realized crack spreads. Overall, the market crack was very favorable this quarter. Our realized margin of nearly $13 per barrel indicates that we captured 70% of the market crack this quarter, and we capitalized on these favorable margins by operating at a 93% utilization rate. The market indicator margin in the second quarter was $17.85 per barrel and assumes a 100% clean product yield. As you can see, our actual clean product yield in the second quarter was 84% which creates the $3.03 adjustment shown on the slide. The $5.32 reduction from secondary product reflects the fact that the non-clean products we produced attracted a sales price which, on average, was less than the cost of our benchmark crudes. The feedstock advantage stems from running crudes and other processed inputs that are priced lower than our benchmark crudes. Our feedstock advantage this quarter was primarily related to the Canadian heavy and foreign sour crudes that we processed. The other category, which contributed to our realized crack of $12.56 per barrel for the quarter, primarily reflects the impacts from volume expansion. In the Appendix, we have also included updated market indicator crack spreads for each of our regions. So, move to slide seven in addition to running at a high utilization rate, this slide shows our progress in being able to process -- to increase our advantage crude runs at our refineries while improving our clean product yield over 84%. Advantaged crudes increased from 47% in 2011 to 52% year-to-date in 2012. This is primarily driven by an increase in Canadian heavy crudes as well as domestic WTI price linked streams, including an increase in the amount of shale crudes that we processed.


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For example, year-to-date we have averaged throughput of 120,000 barrels per day of shale crudes. Many of our refineries have the complexity to run price advantaged Canadian crudes and we have access to multiple pipeline systems to reliably deliver these crudes to our inland US refineries, and this results in a competitive advantage. Moving to slide 12. Marketing, Specialties and Other generated adjusted earnings of $334 million, an increase of $84 million from the same quarter last year. The improvement was driven primarily by higher margins across major product lines. On the fuel side, US wholesale margins improved due to a steep decline in spot -- a huge decline in spot based product cost, which fell more rapidly than posted product prices. Our lubricants business also generated improved results as product cost stabilized during the quarter, compared with the rapidly rising costs in the second quarter of last year. The next slide shows our per barrel metrics. Refining and Marketing's income per barrel improved this quarter to $4.37 per barrel, while the cash contribution increased to $5.19 per barrel. These results are reflective of R&M running well this quarter in a very strong margin environment. This completes our review of the Refining and Marketing business or segment. Next we move to the Midstream segment beginning on slide 14. Our Midstream segment was impacted this quarter by reduced equity earnings from DCP Midstream offset by inventory gains and other -- in our other Midstream businesses. However, year-to-date annualized return on capital employed continues in line with last year's performance of 30%. We ended the quarter with $1 billion in capital employed in our Midstream segment. As mentioned earlier, we recorded an after-tax non-cash impairment of $170 million related to our equity investment in the Rockies Express Pipeline. As we move to slide 15, Midstream's adjusted earnings of $79 million were comprised of $42 million in earnings associated with our interest in DCP and $37 million from our Other Midstream businesses. Slide 16 provides additional variance explanations for both our DCP and our Other Midstream earnings. As shown on the top portion of the slide, earnings associated with our interest in DCP decreased by $48 million this quarter mainly due to DCP's exposure to commodity prices. This was partially offset by a reduction in depreciation expense attributable to an overall increase in the remaining useful lives of DCP's assets. Volume mix was also favorable this quarter as DCP processed more liquids-rich volumes in lieu of dry gas. Our Other Midstream business improved by $16 million. Inventory-related gains primarily contributed to this improvement. Shifting discussion now to our Chemical segment beginning on slide 17. Earnings for the Chemical segment consists of our 50% equity interest in Chevron Phillips Chemical Company or CPChem. CPChem had another great quarter, its best quarter ever, with adjusted earnings of $242 million. Strong performance was driven by improved margins along with lower utility costs. Year-to-date annual annualized after-tax return on capital employed increased to 30%, up from 28% last year, and we ended the quarter with $3.3 billion in capital employed in the Chemical segment. The next two slides provide more detail on Chemicals earnings. This quarter, adjusted earnings increased by $52 million compared to the same period last year. The increase in earnings was primarily in Olefins and Polyolefins, partially offset by increased income taxes, accrued by Phillips 66 on the equity earnings from CPChem. And this was primarily driven by the mix of foreign and domestic earnings. Slide 19 provides additional details on CPChem's operating segments. Olefins and Polyolefins generated income of $245 million in the second quarter. The $62 million increase was due primarily to increased ethylene and polyethylene margins and lower utility costs as a result of reduced natural gas prices.

Specialties, aromatics and styrenics earnings increased by $5 million compared to the same period last year. This was due largely to improved benzene margins. This concludes our discussion of the financial and operating results for the quarter. Next I will provide you with some outlook items for the remainder of 2012. In Refining and Marketing, we expect our global utilization rate to be in the mid-90s and our pretax turnaround expense of approximately $145 million over the second half of the year. In Midstream, the majority of capital expenditures, depreciation, and interest will be incurred by DCP. For 2012, we estimate DCP on a 100% basis will fund a capital program of approximately $2 billion with depreciation and amortization of $300 million and net interest expense of $170 million. In Chemicals, we estimate that CPChem on a 100% basis will have capital expenditures and investments of approximately $1 billion in 2012, with depreciation and amortization of roughly $260 million and net interest expense of $10 million to $15 million. CPChem expects to complete the repayment of its remaining $400 million of senior notes during the third quarter of this year.


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Corporate and Other is expected to be a cost of about $125 million per quarter for the remainder of the year, including after-tax interest of about $50 million per quarter. Guidance for Phillips 66 for 2012 is capital expenditures of $1 billion to $1.5 billion with depreciation and amortization of $900 million. Our corporate tax rate is a function of mix, largely dependent on the amount of US versus international earnings and we expect our adjusted effective tax rate to be around 35% for all of 2012. And finally Phillips 66 does not have any debt maturities coming due in 2012. We can now turn to slide 21, and I will hand the call over to Greg Garland to take you through an update on how we are advancing our strategic initiatives. Greg.


Thanks, Greg. So while we execute our strategy, we remain focused on our initiatives to enhance return on capital, deliver profitable growth and grow shareholder distributions. We are also committed to operational excellence in creating a great place to work. We continue to improve our metrics around personal and process safety and environmental stewardship. As we said, we plan to reduce costs by eliminating spin related to synergies by the end of 2013 and we set a target of $200 million. We are also working hard to create a great place to work for our employees. We value our employees. We want to have a place of mutual respect and collaboration. We completed the sale of the Trainer Refinery and we will continue to work to optimize our portfolio. We did make the decision not to sell Alliance. We have a positive view on domestic Gulf Coast crudes becoming an advantaged feedstock, and we think as this plays out, Alliance will create long-term value in the portfolio. Earlier you saw our crude slate which demonstrates the progress we have made on getting advantaged crude into our refineries. We continue to work this hard because every $1 we can save on feedstock significantly improves our bottom-line results. Crude and energy is greater than 70% of our cost structure -- it is the single biggest lever we have to improve value. Some of our initiatives in this area we have talked about the rail car acquisition to get 2,000 rail cars. But we have also worked agreements to allow us to more efficiently load and unload crudes at both the source sites and the refinery. We are also expanding our own infrastructure -- for instance, to bring Mississippi lime crude into our Ponca City refinery. And we will work other deals in other areas to get more advantaged crudes to the front end of our refineries. Besides crude advantage, we are working to improve access to exports. So far this year, we have increased our capacity to export about 14,000 barrels a day so we have a current capability of 130,000 barrels per day. We are progressing about four different projects that are expected to increase our export capacity to over 220,000 barrels a day by the end of next year. So we have some key growth projects underway in Midstream and Chemicals. In Midstream, DCP is progressing its NGL logistics and gathering and processing projects. Two big pipes. One is the Sandhills Pipeline that will run from the Permian and the Eagle Ford to Mont Belvieu 720 miles, 20-inch line; initial capacity 200,000 barrels a day. We can expand it up to 350,000 barrels a day. The Eagle Ford section is expected to be operational in the third quarter. This is about a $1 billion project. The Southern Hills pipe really runs from the Midcontinent to Belvieu. This pipe is targeting capacity over 150,000 barrels a day of NGLs. About $1 billion of investment, completion expected in mid-2013. Both these pipelines, once in service, will contribute fee-based margins to DCP. DCP is working on the Eagle plant in the Eagle Ford. It is a 200 million cubic feet per day gas processing facility. It is expected to be up in the fourth quarter. Also, have other gas plants in construction. The LaSalle plant in the DJ Basin, Rawhide plant in the Permian, natural helium upgrade in the Granite Wash -- all scheduled for startup in 2013. In total we expect DCP will spend between $4 billion and $6 million in 2012 and 2014. In Chemicals, CPChem has a 35% ownership interest in Saudi Polymers Company. This project was formed to execute a major petrochemicals project in Saudi Arabia. The facility will produce ethylene, propylene, high-density polyethylene, polypropylene, polystyrene and 1-hexene. Startup activities are in progress with commercial production expected in the near future. This facility will have an annual capacity of 1.2 million metric tons of ethylene and 1.1 million metric tons of high-density polyethylene.


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In the current environment we expect this project will increase Chemicals segments earnings by 10% to 15%. CPChem is also expanding its fractionation capacity at Sweeny by 22,000 barrels a day. So, total capacity will be 138,000 barrels a day. Expect completion on this project in the first quarter of 2013. This is roughly a $100 million investment. CPChem has started construction on a 1-hexene plant at its Cedar Bayou facility. This plant will utilize CPChem's proprietary 1-hexene technology; annual capacity of 250,000 tons. It will be the largest of its kind in the world. We expect startup in the first quarter of 2014. CPChem also continues to progress efforts on its US Gulf Coast petrochemicals project. This project includes a 1.5 million metric ton per year ethylene cracker at the Cedar Bayou facility and a 1 million metric ton per year polyethylene plant, which will be built adjacent to CPChem's Sweeny facility. Polyethylene capacity will consist of two plants that will both use CPChem's proprietary technology. Its final project approvals are expected in 2013. Startup, 2017. As part of our plan to increase distribution to shareholders, our Board of Directors declared a $0.20 dividend to be paid in the third quarter. We expect to have modest dividend increases in the range of about 5% a year. We want to look back in 10 years and say we increased the dividend every year at this Company. This morning, we announced that our Board of Directors had approved the repurchase up to $1 billion of our outstanding common shares. The shares are going to be repurchased from time to time in the open market at our discretion, subject to market conditions and other factors. We plan to hold the shares in stock as Treasury shares. So all in, I think we had a solid quarter. We ran well. We generally had improved margins going for us. I am proud of the employees. There was an immense amount of work done behind the scenes to get the new Company up and running. Our employees didn't take their eye off the ball. They executed well. They turned in excellent results from operational excellence to very disciplined management of the business in all aspects of the business. So with that, we will conclude and we will open the line for questions. Q U E S T I O N A N D A N S W E R

Operator

(Operator Instructions). Ed Westlake, Credit Suisse.

Ed Westlake - Credit Suisse - Analyst

Thanks very much and congratulations on the earnings and for all of the numbers that we are now going to have to crunch with the great disclosure that you've given.


Thanks, Ed.


So, I think a lot of the questions are going to be focused on trying to understand the earnings outlook. So maybe just start with one small question on Chemicals. You mentioned the 1-hexene plant. Could you give us an idea of the investments in that plant so we can think about the contribution it might make to cash flow?



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That is a proprietary technology for us and we typically have not given out the investment in that. We think it is the best route in the industry to make 1-hexene. We have those facilities up and running in Qatar today. We are just starting one up in Saudi Arabia. This will be our third such facility.


And just to confirm on the Saudi cracker you said 10% to 15% uplift to the CPChem overall earnings. Is that --?


Correct.


Right. And just on the plans to increased advantaged crudes. Obviously we have seen your investment in the rail cars, but maybe help us walk through where those crudes might go or, in fact, if you think of the different US regions the types of barrels that you may be able to add in to each region which is advantaged?


Yes. That's -- so year-to-date we have increased our exposure to the TI link crudes obviously. We -- 120,000 barrels a day of shale crudes. We have also increased Canadian heavy by about 33%. We are running about 205,000 barrels a day of Canadian heavy today, about 60,000 barrels a day of Canadian medium light and then about 225,000 barrels a day of other WTI or TS related crudes. So about 600,000 barrels a day, what I would say TI linked crudes. On the heavy we are running the heavy acid -- Latin American heavy, about 471,000 barrels a day. So actually about 50,000 a day reduced in this area. And we have also reduced our exposure to Brent-related crudes by about 165,000 barrels a day all in. So as we think about where can we move crudes, we want to move the shale crudes from 120,000 to ultimately 450,000 to 460,000 barrels a day. And we are trying to get those crudes to every refinery we can. But clearly to Ferndale on the West Coast to Bayway on the East Coast, we think Ferndale can probably run 50,000 barrels a day of Bakken crude. Wood River, we can run up to 90,000 to 120,000 barrels a day of shale type crudes there. Ponca about 60,000 barrels a day. Bayway, 100,000 barrels a day of shale type crudes that we can advantage, that we can move into Bayway. Smaller Rodeo we can get at 30,000 barrels a day and Sweeny about 40,000 barrels a day. And then Alliance, we are running today Eagle Ford crude and some Bakken crude in Alliance, but ultimately 50,000 to 90,000 barrels a day. So we have a plan to get advantaged crude into most of our refineries.


And final one on that topic, most of that is related to rail or are you going to be doing some sort of lower-cost rail is $12, $13 or so, if that is the right number, but some lower-cost numbers on other forms of transport?


No, absolutely. We are down to 2,000 cars. I guess it is about 120,000 barrels a day of capability and that can go East or West out of Bakken. There's other areas and other shale plays that we are looking at rail to get to the front end of the refineries. We are looking at making investments around P66 infrastructure. For instance in gathering systems and or trucking in the Mississippi lime to get advantaged crude into Ponca, we are looking at connecting to other pieces of pipe that are coming north-south to get more Canadian heavy into some of our assets and then around the Eagle Ford we are looking at pipe solutions around Eagle Ford. So I would say that we are looking at pipe, rail, truck, barge, just about any way we can get advantaged crude to the front end of the refineries.

Operator

Faisel Khan, Citigroup.


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Morgan Bartosh - Citigroup - Analyst

This is actually [Morgan Bartosh] talking on behalf of Faisel Khan. I have a question regarding the CORE project. If you guys look at the WTI WCS differentials, they move around a lot. I'm just trying to understand what level of heavy light differential is required to make investment in a new coker in these market conditions when everybody is trying to build one?


Well, I'm not sure that anyone would start a new coker today in today's market environment. There's just -- there's more coking capacity than there is heavy capacity to get into the cokers today. And I think we view that through at least 2017. So, but on the other hand I would say that we are pleased with our investment that we made in the CORE project. It is delivering the results that we anticipated. We are up to 200,000 barrels a day of Canadian or heavy crude into Wood River. We are seeing the clean product yield improvement that we envisioned, we are net 65,000 barrels a day of clean products to us. So 120 across the refinery. So as we step back and look at that project you know $3.8 billion investment, solid returns in our view. This is a 15% to 20% type return project for us.

Morgan Bartosh - Citigroup - Analyst

The reason why I ask this question was -- it's been the talk has been as far as the Gulf Coast is concerned, you have it requires a 8% to 9% as a discount that has been said if you want to run [some] coker for heavy light differentials. I was trying to understand what's the number as far as some of these Midcontinent covers that you guys are building and some of the others are trying to build, what level of TI CS differentials would be required to justify the economics?


I'm not sure that we have really given the specifics. I guess it would depend upon the size of the coker where the facility is, what options -- what other investment options you have. I think -- I don't think we can give you specific numbers on that one.

Operator

Doug Terreson, ISI.

Doug Terreson - ISI Group - Analyst

Good morning guys and congratulations on great results and the really high degree of disclosure. It is really good.


Thank you, Doug.


My question is on financial strategy and, specifically, while equity is growing and some will be removed by the repurchase plan that you announced, you are probably going to have to remove a lot of equity to stay within your stated capitalization range, that is, unless debt is reduced as well. So my question is what is the plan for debt reduction if there is one, given the low-cost nature of the debt that you took on recently. And how do you try to balance or how do you plan to balance the strategies in coming quarters?


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I think in response to your question, it is a good question. As I mentioned we don't have any debt maturities coming due in 2012. In the near term we have got the three-year term loan that starts coming due in 2013 on out about $570 million due in the first quarter of next year. The balancing aspect of it is, as you know, debt is cheap right now and so we have to balance that with the other pieces of our capital program. So, as far as distribution, dividends as well as capital expenditures. And currently we have, as we mentioned, no intention to -- or stated intention to pay off any debt in 2012 and we -- the current plan is to meet the obligation that we have in March of the first traunch -- the first piece of the three year term loan.


Okay. That is a high-quality problem to have. Thanks a lot.

Operator

Paul Sankey, Deutsche Bank.

Paul Sankey - Deutsche Bank - Analyst

Good morning, everyone, and I would like to echo the appreciation for the disclosure that you give. We appreciate that. The -- I had three questions that are pretty quick to ask. They may be long to answer. The first was, given your organic project queue and buy back I assume that means that acquisitions are less important to you. You haven't really said anything about that. Just wondered if you could make a statement for our benefit. The second was, could you just explain to us to the best extent you can what the impact of low NGL prices is on your business? And the final one was you have a controllable cost target which, off the top of my head I seem to recall was $4 billion of controllable costs for 5% was the target for around $200 million of savings. You did mention the controllable cost improvement you had during the quarter, but I wondered if you could just update us on the target. Thanks a lot.


Okay, Paul. Great. I will take them one by one. In terms of the project queues, we have kind of said we expect that P66 capital will be between $1 billion to $1.5 billion. We certainly have some infrastructure investments that we would like to make around getting advantaged crudes to the front end of the refineries. Export infrastructure to get products out into attractive export markets. We have looked at what is out there on the market right now in acquisitions and there is nothing really interesting to us at this time. So we have got our plate full in terms of executing the plan around improving our base R&M business, improving margins, returns. As you know, we have a significant organic growth going on in our Midstream business at DCP and in our Chemicals business at CPChem and I am very comfortable with that profile of spend in both of those businesses. In terms of low NGL prices, in some ways we balance across DCP and CPChem and we tend to pick up margin across that value chain. But just in terms of the Midstream business itself about $0.01 per gallon change in NGL price is about $4 million in net income for us.

Paul Sankey - Deutsche Bank - Analyst

The last one was controllable cost?



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Yes. Controllable cost, we put a number out there $200 million. We think it is a good number. I frankly think we will do better than that. We tend to always exceed. We have got a program we call Optimize 66 that we are working across this budgeting process, which we are in the middle of now. And people are looking at all avenues to improve efficiency and reduce costs. And, frankly, [the boys] have come up with some great ideas from their early work that I have seen. So I think that the $200 million is a good number for a target.

Operator

Paul Cheng, Barclays.

Paul Cheng - Barclays Capital - Analyst

Good morning. I have a number of questions hopefully that they are all short in terms of your answer.


Or you could reduce the number of questions. That's the other way to do it.


Do you have any low-cost, cheap capacity expansion opportunity in your Central Corridor and your Gulf Coast systems?


So you are talking about refining capacity?


Yes.


I don't think so. I think the investment that we are looking at Central Corridor and Gulf Coast is really infrastructure around the refineries rather than expanding the refineries.


Right. I know that you are not looking at expanding. I am just wondering is there are any opportunities for low-cost expansion at all?


There may be things on the back end of turnarounds just normal debottlenecking that would occur in refineries. Maybe about -- maybe around Wood River as we get more experience in the CORE project. But I am not aware of any capacity additions that are coming in the Central Corridor or Gulf Coast.



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And it seems that you guys have been talking about the focus at least for the next couple of years on the investment just on the infrastructure. Does it make sense on this standpoint that to launch a MLP for the -- put some of your refining related logistical side into that and then to use that as a vehicle that to invest given that they have a much better funding cost than we find in general.


Well, thanks for being the first person to ask the MLP question. So we -- what we said publicly and what we continue to say is that in the analyst meeting in December we are going to shed more light on where we are going with the MLP. As you know we have an MLP embedded within DCP. I think we understand the potential for value creation that MLP will bring. And certainly, I think DCP has used the MLP very effectively to raise equity to fund their growth program. So similarly as we are thinking them about a Phillips 66 MLP, we would look to say, can we add value through raising infrastructure? And so, we will tell you more about that in December. But we are working it hard. We are thoughtfully considering how do we use a MLP to the best advantage of Phillips 66.


But at the minimum, based on your answer that we should assume that you guys are not resistant to the idea that this could be a value creation.


Oh no, no, we are not resistant.


-- would be a good vehicle that to host those growth projects that you may be talking about.


Yes, no we are not resistant at all. I think we have an MLP embedded within DCP. We like it. We think it has been very efficient way of raising equity and it will continue to be a good vehicle for DCP. And we are just thinking about what is the best way for Phillips 66 to work in this space.


Can I have a number of balance sheet items that what is your inventory market value in excess of both your short-term debt or of the entire total debt and also your working capital has in other words, you have any goodwill intangible asset on your balance sheet?


So let me run through those wrote quick again for Greg Maxwell so he can catch up. So the first one was (multiple speakers) inventory relative to book?


Yes. In excess of the book.


Yes, we have got $5.5 billion inventory on the books. I will get that additional number for you as we go through the answers. It is in the back of our Q and I will get that for you. But I think it is in the neighborhood of $5 billion. The second question --


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Second one I think was short-term debt relative to --


Short-term debt.


Short-term debt, what you'll see on our short-term debt is really only the maturity of what we have coming due us I mentioned earlier on the first tranche of the term loan (multiple speakers) $590 million.


Do you have any good view on intangible asset on the book?


We have a pretty good chunk of goodwill on our book. So we have about $3.3 billion of goodwill associated with previous acquisitions. And then intangibles of just about $700 million.


Okay. And what is your working capital?


The working capital in total if you look at our current assets we have 18.5 -- this is all in the second quarter -- $18.5 billion of current assets of which $3.1 billion is cash. So looking at that we have $15.4 billion of current assets and about $14.4 billion of current liabilities. So that gives us a net overall working capital of about $1 billion.


Perfect. Two final quick questions. One the share buyback, Greg, I know this is -- will be subject to your management discretion, any kind of target date of how quickly you want to complete that?


It is an open-ended program and we are not going to disclose an endpoint target. But you know as we typically don't sit on our hands, I think you should expect to see us in the market every day and -- but not necessarily the same amount every day.


Sure. Final one on dividend. I understand that --


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We will report the amount of shares that we buy or the number of shares that we buy and the amount that we have used on a quarterly basis.


Perfect. On the final one on dividend, I understand that we saw that you raise your dividend every year. But I don't know whether you gentlemen agree but look like some of the long -- only a time that they are historically looking at refining as just a trading group and I think management has a great opportunity to change that perception if we boost the payout to at least into the 3.5% to 4%. And then even that that is [by $1.50] per share and given your earning power seems like you still have plenty of room that to grow over time. So I don't know if that is something that may be under consideration or that you just wanted that to go slow.


So, Paul, I read your report. That was thoughtful and well done and I think we appreciate your advice and counsel on that subject. I think that what I would like to say about dividends are, they are the centerpiece, they are just fundamental to our philosophy around shareholder returns and distributions. We want to pay a competitive dividend. We want to increase that dividend over time. We recognize this is a volatile business. There are going to be some years where you feel flush with cash and some years when you don't feel as good about the cash flow in the business. You'll see us protect and defend that dividend at pretty much all costs. It is so important to us. We do want to increase it. And you will see us use share repurchases and specials, also, as we think about returning cash to shareholders. So we will look at that total toolbox that we have in terms of dividends -- increasing the dividend, share purchases and specials in terms of returning cash to shareholders.


Paul -- this is Greg Maxwell -- I was a little light on the number for the excess of current replacement cost on over LIFO at the end of the second quarter. It was 6.9.


Thank you.


Sorry about that.

Operator

Blake Fernandez, Howard Weil.

Blake Fernandez - Howard Weil Incorporated - Analyst

Good morning. Nice quarter. I had a question on your decision to retain Alliance. Obviously in this market, there's a lot more sellers of assets than there are buyers. I was hoping maybe you could give us some kind of indication of the interest that you saw on the asset and how much of your decision was a result of maybe a lack of interest or your actual shift in strategy on Gulf Coast crudes?



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Yes, I would say it was actually a combination of both. We had a lot of people go through the data room. We had a handful of offers and nothing we really regarded as approaching our whole value for the asset. We made the decision to put the asset on the market. It really is integrated ConocoPhillips, we kind of had one view of where LLS was or where it was going. I think in the interim year that's passed since we made that first decision that our view has changed in terms of Gulf Coast crudes particularly LLS as becoming advantaged. So we just think Alliance really has more future value than certainly -- value today than what people are willing to pay.


Is it fair to say that Alliance is one of the key contributes to the increased export capability over the next year or so?


We are exporting out of Alliance and looking to increase export out of Alliance. It is a nice refinery. Single train refinery built in 1977. It is a good solid refinery, it is just a light sweet refinery on the Gulf Coast of the US. And so I think that as our thinking has evolved around LLS and around exporting, we see more value in Alliance.


Fair enough. Thanks. The second question I have for you was on the ethane cracker on the Gulf Coast. I see you looking for FID in 2013. I just try to understand the process. The permitting component of that, do you need to have that in hand before you can move to FID? And if so can you just tell us where you are in that process?


Yes. So the credits we need have been acquired. Permits have been applied for and we -- I mean, just part of our process we won't take FID without having the permits. So I think that is probably the factor that gets us there. We are in the process of -- we have a two-step process where we do about 20% or 30% engineering up front. So we are just starting really that first phase of engineering and --. But, we fully expect that we will be ready for FID in 2013.

Operator

Jeff Dietert, Simmons.

Jeff Dietert - Simmons & Company International - Analyst

Good morning. Thanks for the financial disclosure. Can't emphasize how helpful that is enough. So thank you.


Yes, give a shout out to all our accountants. They did a great job.


I know it was a huge effort. So we should make sure that they appreciate -- that we appreciate it. On refining rationalization is something you talked about through the spin and now you've got Trainer done and Alliance, you have talked about retaining. So is effectively the rationalization complete on the refining side?


Well, I think you'll see us continue to work the portfolio. I think we are like any Company we have a range of assets within our portfolio in terms of the returns in the future respective values of the assets. So, you will see us continue to work that. You think about the assets around the periphery that could be non-core to us in the


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markets. But certainly as you think around the central corridor assets, we really liked those assets. We think they are long-term value-creating assets. Our Gulf Coast assets, same. And so we are not going to name specific assets today on the call but I would say that we do have fix or exit plans around some of our assets that are and as you can see the numbers that we released today particularly, for example, the West Coast challenged environment today. You go back 2005 -- great, great earnings, great returns. But clearly with the California crude decline with the demand decline in California and the high operating cost that we see in California, a really challenged environment. And so we are working to put advantaged crudes to the front of those refineries. We are looking at our cost structure and how we can improve our cost structure to improve those assets.


Very good. Slip into crude on the US Gulf Coast, particularly with Alliance. How much light crude are you importing into the Gulf Coast and just trying to get an idea of what the opportunity is to shift from international sweets to domestic sweets?


I'm not sure I have got that one. That is something I can get, but we run a little bit of sweet at Sweeny. So I think we have got the crude unit there of 50 day or so at West Africa or North Sea. I don't know if they are running Eagle Ford now. I think we have moved some Eagle Ford into Sweeny and moved a little -- but I think we are still importing at Sweeny. I think Alliance was primarily HLS and LLS. So I don't think we were importing a whole lot into Alliance. Lake Charles, I think that was -- that is a heavy -- medium sour refinery but I can get those numbers for you. I don't think it is a big number. Percentages?


I don't know what our [end parts] are, we will have to look at the waterborne barrels. We can get it for you.


We will follow up on that. And Greg, maybe just a quick update on what petrochemical demand and margins look like going into 3Q.


Petrochemical demand? (multiple speakers). We can talk about 2Q. We are kind of hesitant to give forecast, I think. We can talk about CPChem. Their volumes were relatively flat to slightly up. Margins improved second quarter over first quarter but there's a lot of turnaround activity during the first half of the year. So, we expect there's going to be some pressure on ethylene margins going into the back half of the year. So, we think globally that we are concerned about Europe. We are concerned about China slowing down and so I think that could have an impact on the global petrochemical business.


Lots of good information on the call today. Thanks.


Appreciate it. Thank you.


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Operator

Arjun Murti, Goldman Sachs.

Arjun Murti - Goldman Sachs - Analyst

My thanks as well to your accountants especially for the Appendix slides here 25 to 28. That's very appreciated you included that margin detail.


We are here to serve.


That's nice. You mentioned you are keeping Alliance, just to follow up on that. Can you quantify at all order of magnitude, what types of discounts you are now looking at for presumably LLS to Brent that made you want to keep this?


I think it is $2.00 to $3.00 is what our expectations are going to be longer term.


Right. So it has gone from what would have been $1 or $2 premium to a $2, $3 type discount?


Absolutely. It may take a year or two to get there.


Yes, that's great. And when we think about restructuring the portfolio, you mentioned the ability to get the shale to places like Bayway and Ferndale. We would have probably, at least at one point, had them on the list as restructuring or potential asset sales candidates. I presume the decision to keep or not keep those very much hinges on can you land that shale crude at enough of a discount to Brent or ANS as the case may be. And if you can, they are much more likely to remain part of the portfolio.


Absolutely.


That's great. Just lastly in terms of the -- looks like 24% of your product slate that is heavy or non-light sweet crude, how much flexibility do you have if you wanted to run all light sweet instead of that heavy if the discounts are wide enough? Could you run all of that at light sweet or would some of it have to always be heavy or acidic crude?



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Well, I think we would run a lot more light sweet if we were willing to take rate reductions. And we are running those models every day and so we are point to chase value versus volume. And if the models tell us that we can make more money running less crude, we will do that.


But they are really configured, as you know, you get constrained at the light ends handling on the facilities. So that is what the issue is.


We've looked at that, seems like the numbers is like 25% reduction in throughput to go all the way.


To go all the way.


As far as we can, yes.


There must be some ability to do one for one and then it falls off, I would assume?


I think that's right. I think there's -- obviously there is some blending that you could do as well. I think that is the approach we're taking right now.


I'm sorry. One last one. What you are calling WTI, WTS Canadian -- is that Canadian syncrude or is there heavy crude in what -- in that Canadian portion. This is slide 11.


Yes, we have got all of the WTI WTS lumped together and so --.


But what you're calling Canadian, is that light sweet Canadian or is there WCS in heavy Canadian, in that Canadian or is that all in the heavy acidic mix?


I think that is all in the WTI. So what we have got in that 29% or 28% is we have got about 100,000 of the shale. We have got about 205,000 of Canadian heavy, 60,000 of Canadian medium light, and then 225,000 of TI TS light crude.



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Yes, the heavy and acid is Latin American. There is no Canadian in that.


Got it. So some of the Canadian heavies are in that Canadian number. Got it. That's great. Thank you so much.

Operator

Evan Calio, Morgan Stanley.

Evan Calio - Morgan Stanley - Analyst

Congratulations on a great first quarter and I will make it unanimous as we approach the hour that I appreciate the additional disclosure.


Thanks, Evan.


Yes, my first question is maybe a follow-up to Paul's question earlier and maybe I missed the answer, but I know you guys are very focused on cash returns. You are focused on growth in Midstream and Chemicals. But I mean are refining acquisitions off the table or is it similarly situated peer. Looked at Sun as a way to maximize the value uplift and then on LP structure, I mean, are those types of transactions not in your forward plans?


Yes. Just -- there's just nothing out there that interests us right now in terms of acquisition in the R&M space.


Okay, and in Midstream?


I don't think we would say we would not be interested in a Midstream acquisition, but I think the evaluation that we are looking at Midstream assets right now prices are --


They look high to us. Both Chemicals and Midstream looks high on the valuations to us right now.


So I wouldn't expect any significant M&A type deal in the near term from us. You know, we've said that increasing refining capacity for us is probably not in the cards. So an acquisition of a refinery would not be consistent with what we have said in the past.


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Understood. Thank you. But second question on the refined products export capacity that you are -- are you currently at that max rate? I think you mentioned it was 130,000 barrels a day or effectively limited any way in exports? Or are these expansions more to allow for profitable exit when new Gulf capacity particularly distillate streams in 2013 or Gulf Coast utilizations ramp in a Brent LLS differential opening up?


We are running about 90 a day in the second quarter which was actually down from the first quarter. But we had some turnaround activity that really impacted that and so our plan is to ramp export up to somewhere around 220, but we are going to chase value. So if arb is there, we are going to take it. If not we will sell it where we can get the highest value.


Yes, it is really around creating optionality for us at those facilities. So when the markets are better we can participate in them.


That's great and on the rail car order, can you discuss maybe cash costs or Bakken differentials you will need to move feedstock into Bayway and whether or not there is any other transloading capacity that needs to be built out there? And are you railing anything but currently I thought there was some volumetrics that were moving in there?


Yes, we are doing some currently today. We have 10,000 rail cars today already. But there's probably just a couple of hundred I would guess in crude service right now or advantaged crudes and that is the reason we went ahead and made the order for another 2,000 cars. So we are negotiating with other third parties to improve access for loading and unloading. We are looking at doing some of our own infrastructure for loading and unloading. So it is kind of an all above. And yes, we are running in Bayway today a couple -- I don't know, 10,000 or 20,000 barrels a day I think in Bayway today. So the answer is yes. We like that. We are trying to get as much in as we can. We are looking at all the infrastructure. Preferably if we can get third-party deal from someone else that is great. If not, we will build it ourselves.


And maybe one last one if I could. I know you guys clearly benefit on the NGL feedstock side in Chemicals. And yet with lower pricing and REX impairment, does it change in any way the way you look at NGL infrastructure such as Sandhills or Southern Hills lines projects?


Those are both fee-based for most part projects. We think they are good solid return projects. We are not going to slow down on those. To me the governor is going to be on the E&P side in the development. It -- is crude going to be $60 or is it going to be $100. And I think that will ultimately will set the pace for all this $80 billion worth of industry investment and infrastructure. But as we look out, we are $90 to $100 guys, I think, in terms of our view of where crude prices go longer term. And so we think that there is going to be value in pursuing these infrastructure projects.



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Appreciate the response and disclosures.


Thank you.

Operator

Doug Leggate, Bank of America.

Doug Leggate - BofA Merrill Lynch - Analyst

Good morning. Again I would like to echo all the additional disclosure is much appreciated. Thanks for that. A couple of things. I think some of these have been touched in different questions, but I wanted to get a little bit more granular on the portfolio. You still obviously have, if you look at the earnings mix, clearly, things have been moving increasingly towards the US. That is going to be the dominant part of your business going forward. How do you feel there for about how assets in Malaysia, I guess Ireland, I'm leaving Humber out, because you know that is a phenomenal facility. But some of these other peripheral facilities, are those a permanent part of the portfolio as given the strategic advantage the US has right now with the rest of the world?


I would say that in the integrated ConocoPhillips that that asset was a strategic asset. I think as you think about Phillips 66, it is a nonstrategic asset for us.


You talking about Melaka?


Melaka, yes.


And Whitegate, of course, is challenged from the standpoint it is a light sweet crude refinery that is fairly simple and European refining is under pressure. So I guess we look at things from a couple of different angles. One is from the returns. So what are the returns at the facility compared to the rest of the portfolio. Compared to what our targets are, can it generate midteens returns? And it, secondly, would be free cash flow generation. So what does that -- what does the refinery do in terms of discounted free cash after CAPEX? And is it a source of capital or can we monetize it and redeploy that capital in another part of the portfolio? But those I would say would be the two key criteria that we would use on whether or not the assets would remain in our portfolio.


What would you expect to have -- I mean, is that something that is going on as an active review or just something that is not a priority right now?



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I know at least as part of the company we were spun out of, we were very specific on the size of our asset disposition program and pretty public on how much we were going to sell when. I don't think we are going to take that same approach in terms of how we manage the portfolio in terms of being as transparent on how much we are going to sell in any given year. But we have $50 billion of assets and so we need to be looking at our portfolio all-time and looking at the bottom 5% or 10%. Saying to ourselves, okay, is this worth more to somebody else or does it belong as part of our portfolio? So you should expect us to continue to work the portfolio even if we are not saying something publicly.


Great. Terrific. And then a couple of quick follow-ups, if I may. The CORE project, I'm just curious. Obviously the whole thing is designed around I guess Canadian advantaged -- or disadvantaged crude. But with the dynamics changing the way they have done are you currently running heavy crude through the CORE project or are you basically -- I'm just trying to get an idea as to what the marginal economics look like right now, heavy versus light. I understand there is a yield loss or a utilization loss, but it seems to us that the light sweet has an advantage right now.


We like the numbers around the Canadian heavy right now or almost any Canadian crude as you think about it. Yes, we are running Canadian heavy today.


But I don't -- are you looking at like LLS to Maya being compressed or -- because actually the margins (multiple speakers).


Yes, I'm just trying to get an idea of honestly there was a huge drop-off at the beginning of the quarter. But as we look forward there's a lot there seems to be a lot of pipeline infrastructure coming onstream towards the back end of this year and early next year. I'm just curious of which -- what the LP would basically determine would be the better way to go? But I guess another way of asking the question is are you open to running light sweet at Woods Cross [Wood River], even though the, obviously, the investment was geared toward the heavy? (multiple speakers)


Oh absolutely. Of course. And then I mean, to the extent that we will back out other TI type barrels to run a cheaper Bakken barrel, we would do that but clearly, I think we are pleased with the performance of the CORE project to date. It came up, it has run well, it's been profitable. It has done the advertised improvement in clean product yields and capacity expansion. It is hitting on all its metrics and so we are pleased with that.


Last one for me. The big move in crude prices during the quarter I'm just curious. Was there any kind of derivative or timing difference issues that helped your margins? And I will leave it at that.


I think it helped marketing. I think as you -- as crude prices or product prices fall sharply, it creates short-term (multiple speakers) margin expansion. But I don't think in terms of inventory or trading gains, we saw significant impact from the decline in crude price.


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Operator

Roger Read, Wells Fargo.

Roger Read - Wells Fargo Securities, LLC - Analyst

Good morning. Just really quick questions, maybe more on the operational front. As you look at your performance in the Midcon here, what you call the Central Corridor, how much of that was strictly the market and how much of that is maybe some of the changes you are able to make transportation-wise in terms of a little more permanence or at least a little bit of dislocation, relative to just market indicators?


I would think that a big part of it was the market. Part of it was improved around running more heavy at Wood River, what we just talked about and clean product yield around that. We did get some more advantage -- other advantage crudes into the Midcon refineries but if I had to guess it is probably 80%, 85% market and 15% other improvements.


Yes and during the second quarter, we really didn't have much turnaround activity in the Central -- you know the second quarter turnarounds were really on the coastal refineries. I guess we had -- that's right. We had one refinery that was down. But turnaround activity was relatively light as well. That may have helped.

Roger Read - Wells Fargo Securities, LLC - Analyst

Okay, and then the only other question I had more on the financial side, the share repo you said you are going to hold the shares as part of the Treasury stock. What is the thought on that? Is that for future compensation, acquisitions? I mean as opposed to retiring them what is the thought process there?


Initially the share repurchase program at $1 billion is about 4% over the time and since we are not starting out with really any Treasury shares the view -- current view -- is that we would hold those initially as Treasury shares, and then to look at our options going forward. But as you hit on it as you go forward you could have some use for those. And so that is just opportunity for us to continue to hold those at least in the interim period.

Operator

Thank you. At this time, I will turn the call over to Mr. Clayton Reasor for closing remarks.


Okay, great. I think it was a great initial quarter conference call. Obviously we feel good about the results. You can find a copy of presentation material and the sensitivity data on our website. The transcript will be there as well. And if you have follow-up questions, feel free to give us a call. Thank you very much.

Operator

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


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