Phillips 66 Aktie

Great. Good morning. Thank you all for joining us this morning at the conference. I have the pleasure of introducing Mark Lashier, Chairman and CEO of Phillips 66. Mark has been in the role since July of 2022. Prior to that, most recently, he ran CPChem business, having started his career with Phillips Petroleum in the late 1980s. So Mark, thanks very much for joining us today.

Matt, glad to be here.

With the recent reopening of the Strait of Hormuz after a period of heightened Middle East tensions and closure, how are you assessing the macro outlook for crude and the refined products over the near and medium term? Specifically, how quickly Middle Eastern barrels normalize back into the trade flows and the read-through for light heavy differentials and product cracks?

Yes, Matt, I think that's top of mind for everybody across the industry. It's -- we're all hopeful that the Strait is open, stays open, that it gets resolved in a permanent structural way. But I think it's going to be pretty tenuous. There are ships coming out now. I think that there's somewhere between 90 million and 100 million barrels trapped in the Strait. That will work its way out over time. Then the question is who will be brave enough to send ships back in? Will it be able to get insurance? How does that all play out? Because that's the next critical step. We believe that most of the tanks onshore are full before crude can appreciably ramp up, you have to get some room in those tanks to place that crude.

And so it's going to be a long drawn-out paced process. The world has benefited from how efficient the response to the Strait of Hormuz closure has been. That's, I think, kept crude from getting up to the $200 a barrel level. But now a lot of the land gap in the system has been tightened up. And there are lots of calculations out there to explain why it didn't get worse, but many of those are temporary, the SPR releases. If you fly over Cushing, Oklahoma, the tanks are at the bottoms there. I think that's the most visible thing for us. So people are going to need to refill those inventories over time.

So there's going to be, I think, some structural shift in what the crude floor is. We expected there to be an immediate reaction to the announcements. You've seen that in crude price coming off. Refined products have hung in there a little tighter because I think there's greater line of sight to those inventories than there is to what the crude inventories really are out there. And so there's a lot of moving parts. You hear the President say one thing, you hear the Vice President say another thing, you hear the Iranians say a third thing. And so this MOU really is an agreement to try to reach an agreement, and it's pretty thorny, and I think it's going to take time to work out.

Right. Yes. As you and I were talking beforehand just in terms of time to restart and the process, these things don't necessarily start easily and efficiently as people thought.

And for so much of it to come back online efficiently and easily, and there's no good transparency to what the damage is out there. And we had this horrific incident with the gas facility at Ras Laffan in Qatar. And I think that's a bit of a harbinger of what countries and companies are going to be dealing with as they go to restart things that are in uncertain condition. And I hope that things can get restarted timely and safely, but it's going to be a big challenge.

Right. How does Phillips 66's predominantly U.S.-based footprint position you competitively versus global peers? And does the recent volatility change how you think about crude sourcing flexibility and refining margins through the back half of this year?

We're well positioned in the Mid-Continent and the Gulf Coast. We have assets on the East Coast, West Coast. We predominantly consume North American crudes, Canadian WCS. We have access to Latin American crudes. Even prior to this, we processed very little Middle Eastern crude. Now of course, the presence of Middle East crude does impact things like the WCS differentials, but we were able to run at extraordinary rates.

Our kit has been in good shape now for several years, and we were able to leverage Jones Act waivers to move refined products to the West Coast, crude to the East Coast in a very efficient way. And so we were in a great position to take care of our customers and to make sure that the hydrocarbons that need to get to our facilities and need to get to our customers and our marketing outlets happened in a very efficient way in spite of what was going on in the rest of the world.

Right. How about the availability of Venezuelan versus Canadian? How do you guys think about that dynamic?

I think it's a great dynamic for us. We have assets on the Gulf Coast that can consume Venezuelan crude that also consume WCS as Venezuelan crude has made its way into Gulf Coast assets, that's put more pressure on WCS. I think right now, though those differentials have tightened up, there's been some disruptions in production in Canada, first fires, then floods. But those things will work themselves out, and we see those differentials widening back out. And as Middle Eastern crude comes in, that will put even more pressure on those differentials. But we welcome the access to Venezuelan crude. That's beneficial to our flexibility. But every day, we're optimizing on what are the best crudes from wherever we can access them to maximize the refining -- or the margins coming out of our refineries.

Great. As the bond guy, we'll jump over to some bond-related question, capital allocation. So total debt rose to $27.1 billion at quarter end due to margin posting and term loan with a path toward $19 billion by year-end '26 and then $17 billion in '27. Can you outline the practical milestones to get there?

Absolutely. The most practical milestone is the cash -- positive cash flow that we're experiencing right now. We've built up cash on our balance sheet to help deal with the volatility. That's part of the answer. But if we think about it as [ 2, 2 and 4 ] that as inventory valuations come down and the need for that collateral to protect our positions come off, that will -- we see about $2 billion freed up there. We see an additional $2 billion in cash from operations. We have a commitment to return 50% of our net cash from operations to investors through the growing dividend secure.

And then the balance of that 50% would come from share repurchases. Now the cash -- as cash flows are higher than anticipated, that frees up more cash for debt repayment, and we see another $2 billion coming from that cash. And then as we get through this war, as the Strait open up, we will feel less inclined to hold the large cash balances on our balance sheet. So that's another $4 billion in cash. So that $8 billion will get us down to about $19 billion. And if there's even more upside to the cash flow, we could get to $17 billion even before the end of '27, but that's our current thinking.

Got you. In terms of that minimum cash balance, what is that comfort level? Where do you see that headed to?

I don't know that we talk about that publicly, but yes, it's a low -- few billion dollars.

A couple of billion.

Yes.

Great. Once you reach the $17 billion gross debt target, how do you expect the cash return framework to evolve? And how do you think about using the balance sheet countercyclically when opportunities arise?

I think that when you step back and think about why are we targeting $17 billion. And with our integrated business, we have a refining business that can be volatile. We have chemicals business that can be volatile. But we have very steady earnings and growing earnings from our midstream business. We've been at about $4 billion, headed to $4.5 billion of EBITDA by the end of next year. We have very steady income from our Marketing and Specialties business.

So you call that about $6 billion and at 3x that EBITDA, that gives us something that says we should be comfortable with $18 billion. So $17 billion is a nice cushion under that. And that effectively says that we don't have any debt that has to be serviced by our Refining and our Petrochemicals business. And so we look at that as providing what we'd call a fortress balance sheet to free things up. And if we may build excess cash on the balance sheet beyond that, but we are absolutely committed to returning 50% of that net cash from operations, and then we'll reassess and see what opportunities are out there at that point in time.

Got you. That's a great segue to jump into some of the segments. Maybe in Midstream, you reaffirmed $4.5 billion midstream EBITDA target for year-end '27 despite the 1Q '26 step down tied to weather, recontracting and depreciation timing. How much of the step-up is driven by projects under construction versus optimization? And how should we think about the sustainability of midstream growth into '28?

Yes. The projects that we have underway really are driving that $4.5 billion. That number really isn't a target. It's an outcome of the projects that we've developed and the efficiencies that we're finding and the capacity that we're unlocking in existing assets. So you go back to our Pinnacle acquisition had an operating asset that we've enhanced the productivity of that asset. And then we added another brownfield asset right next to it. It continues to ramp up. So we're seeing more throughput than anticipated when we made that acquisition.

The EPIC acquisition, we had a debottleneck on that pipeline underway, that contributes to it. We have our Iron Mesa project underway that will start up later this year and 300 million cubic feet a day gas plant right between the Midland and Permian Basin. And we have -- so those things are baked into that $4.5 billion. So it's primarily new builds, organic growth and then increased efficiency, increased cost reductions.

And then beyond that, we have more organic growth, more projects lined up to continue that mid-single digits kind of growth rate. So we've announced the Zeus project complementary to Iron Mesa, another 300 million standard cubic feet a day gas plant. We've announced 100,000 barrel a day fractionator in Corpus Christi to add to our Coastal Bend operations down there. And so we continue to find these great organic opportunities to continue that -- ticking that growth up beyond 2027 and 2028, 2029.

Got you. There continues to be investor concerns about overbuilding the NGL capacity out of the Permian and increased ethane rejection following the start-up of multiple residue gas pipelines in the second half of this year. What is your view? And what does that imply for NGL volumes? And how do you think about the feedstock advantage for CPChem through your ownership structure?

We continue to see data from upstream producers that increase the NGL volumes that they're going to be producing. And so we're responding to that. That's what's opening up these great organic opportunities for us. And the takeaway capacity, I think from an ethane perspective, yes, I think ethane is going to be abundant. That's a strong benefit to CPChem. And I think the benefits we see through CPChem through low ethane costs are more than compensated by the returns we see from CPChem on using those molecules. So we see it as a positive on both sides of the equation.

Great. Maybe jumping over to refining. With consolidation of 100% of Borger and Wood River following WRB close, can you talk about the optimization opportunity across Wood River, Ponca City and Borger as a super system, including the most actionable low-hanging fruit?

Yes. We identified the Central Corridor and Gulf Coast really as our core area for refining and for midstream and where we can lean into integration and not just integration between midstream and refining, but between refining assets. And when you look at Wood River, Ponca City and Borger, we can treat them as a super system moving back and forth. But really, even before that integration kicks in, we saw opportunities commercially to lean in around Borger and Wood River.

When we had 100% control, it opened up our ability to optimize even deeper around the crudes that we access and process and commercially how we optimize for the -- from a Phillips 66 perspective rather than a joint venture perspective. So that was an immediate impact, and we can move streams freely between Ponca City, Borger. We can take refinery-grade propylene from Ponca City and move it to Borger and use it in the alkylation facility there, so we can unlock the full downstream capacity of the refineries by mixing and matching the streams that we can move back and forth.

And then you stack on top of that, the opportunity that Western Gateway pipeline provides. We can move all the way -- we're going to reverse flow on a couple of pipelines to be able to move refined products from Wood River, Ponca City, Borger. Borger will kind of be the eastern terminus of the Western Gateway pipeline, and we'll be able to move refined products on to El Paso and Phoenix and the West Coast. And that will pull excess refined products out of the Mid-Continent. Mid-Continent is more seasonal.

It will really levelize and frankly, reduce the volatility in margins in the Mid-Continent, and it will feed those refined products into Phoenix and California and reduce their reliance on waterborne refined products coming in. And we have a strong marketing presence, marking short on the West Coast that matches up with that quite well. So it's going to be a win for our Mid-Continent assets. It's going to be a win for consumers in California as well as Arizona and Nevada.

Yes. That's a great segue to my next question. Following the second open season, successful open season for Western Gateway with long-term shipper commitments and expanded delivery into the L.A. market, you've discussed potential mid- to late summer path to FID and a 2029 in service. Can you walk through the remaining steps to FID and the key milestones and how the project fits with the post-L.A. refinery West Coast strategy?

Yes. It's -- we've done a lot of heavy lifting with the open season to unlock who is interested to join that project as shippers and where those refining products would come from and what was the optimum, and it really was a great outcome. And now we're -- the open seasons are closed, and we are working on finalizing the agreements with Kinder Morgan. You've got 2 great partners that have tremendous experience in midstream projects and execution and operations.

Kinder has the access to California. We both have existing pipelines that we can bring to bear. And so the new build pipelines are minimized with this project, and we have line of sight to really a high-quality project. And when you combine Kinder Morgan's assets and our refining and our marketing and our transportation experience, we are a premier shipper on those assets. And so it's going to be a great project. We're working towards FID. I think in the next couple of months, you should hear something.

Great. And then just in terms of permitting risk, execution complexity, like obviously, doing anything into California is complicated.

Yes. The California piece is relatively straightforward. There's no new assets. It's reversing pipeline. California -- the administration in California is quite supportive of this. As you might imagine, we ceased operations at our L.A. refinery, and that was well received by the California administration. But part of the discussions we had with them when we announced our intent to cease operations, we laid out plans that we had to resupply California with the refined products it needed. So that's why we -- I think that, that conversation was quite successful.

At that point in time, we had not disclosed to them Western Gateway. That was being developed in parallel. But then when that came along, it was quite warmly received as well, both in California and Arizona and Nevada. It -- any time you can have a pipeline connection versus waterborne sources, it's a benefit. And we think this will become the Colonial Pipeline of the West, where you can access Mid-Continent and Gulf Coast refined products, take them to the 2 coasts that are exposed to import markets. And certainly, you've seen what import markets can do when there's disruptions in the world. And you won't see those kinds of disruptions in North America. So these are very secure supplies of refined products to California, and it opens up a lot of optionality there.

I like that, the Colonial of the West Coast. That's great. Maybe moving over to Marketing & Specialty with first quarter results impacted by mark-to-market headwinds. How do you view go-forward domestic fuel margins in the U.S. for the Marketing & Specialty business and your level of confidence in mid-cycle margin resiliency?

Yes. I think that you see those -- the disconnect between the paper and the physical drove that in the first quarter, and you're seeing them come in better alignment now as prices have come off, whether it's crude oil or, say, refined products on the water in the West Coast drove a lot of that accounting exercise. And we'll see more of that clear up as we sell down inventories later in the year. So that's performing as predicted as prices come off. But in the backdrop of that, you're seeing refined product margins staying healthy, hanging in there as crude oil comes off, you can follow our margin indicators are strengthening.

And I think that -- you've seen strong jet demand. The industry responded quite quickly. Now jet is -- yes, free markets work. I would -- when you look at what we were able to do around the Jones Act, once you had access to ships that could move to where the market was calling for material, it happened very quickly. Response was great. And so you are seeing markets -- people believe that crude is going to line out very quickly, okay, that's one thing.

We don't control crude. We focus on what we can control. But the combination of whatever the crude price is with tight refining capacity globally is a good setup for the refining complex. And we'll see how other capacity comes back into the market. Certainly, Russia refining complex has taken some pretty very public significant hits, and we'll see how China ramps back up. But it's very constructive for refining margins in the near to medium term.

Great. Maybe switching to Renewable Fuels with Rodeo running over nameplate and Renewable credit value significantly higher than in 2025 levels. How should we think about the free cash flow inflection from renewables this year? And how does PTC regulatory change affect operations and capital planning?

Yes. The asset is running extraordinarily well. We focus every day on getting the right feedstocks to that asset, whether they're import, domestic, and whether they're low CI, high CI, whatever generates the most margin for this. I mean it's -- that asset had an existential crisis earlier this year. And we don't waste a good crisis. We drove a lot of cost out. We realigned the logistics to be able to take more domestic feedstock versus international feedstocks on the water in San Francisco, and it's paying off. And the team there did a tremendous job.

And then the regulatory environment improved. So certainly, that has improved what this asset has the capability of doing. I think when we originally rolled out the project, we had a mid-cycle of about $700 million in EBITDA, and that required an indicator margin of about $1.50. We're above the $1.50. Of course, there's a lot of volatility out there. So it's -- but it's well on its way towards what we would consider successfully at or above that mid-cycle level. And we're really excited about what's happening there. California has responded positively from a regulatory environment. And then the federal regulations certainly are constructive as well.

As far as the producers tax credit, that's really targeted at new builds. And frankly, the environment for new builds around renewable assets is a bit challenged right now. We like Rodeo. We're not ready to go out and do another Rodeo anytime soon. Our focus is on making sure that, that asset works well. We have access to profitably consume and optimize. And by the way, we can -- we're producing just under 10,000 barrels a day of neat sustainable aviation fuel that when you blend it up, it's about 18,000, 19,000 barrels a day of sustainable aviation fuel. That is attractive in the marketplace without the same level of subsidies that you get with renewable diesel. So we can optimize and move molecules back and forth between renewable diesel and sustainable aviation fuel, just like we would in a traditional refinery between diesel and jet and, of course, gasoline.

Got you. Moving to portfolio and M&A. As you continue to work through the portfolio to divest noncore and nonstrategic assets, how should you think about incremental asset sales from here? And what lines of business could they come from?

Yes. We've taken a very active role in managing our portfolio. We had assets that were good assets, but not critical to our growth, not critical to our integrated strategy. And we've successfully monetized a number of those assets, several billion dollars worth. And we have more assets that fit that description, and we would be interested in monetizing. We're not actively out pushing anything in the marketplace, but we know the assets that we would part with. We -- and frankly, we have no sacred cows. We -- if someone is interested and willing to pay the -- pay something beyond our hold value for any assets that we have, we'd be interested in talking to them. But we don't have any active program out there to push assets out the door.

Got you. We have about 5 minutes left. I have plenty more questions. We'll open it up to the floor. If anybody has any question, there's mics around. While they're getting queued up, I'll ask you one more just in terms of the Board and governance. Obviously, you've had additions of 2 new Board members. Can you just talk about the refreshed Board composition, how that supports the strategic direction and executive priorities you've laid out, particularly around operational excellence and disciplined capital allocation.

Yes. We've had a very deliberate refresh of our Board. The latest 2 additions fit into key parts of the talent matrix that we want to have at the Board level, Howard Ungerleider, he's an accomplished CFO in the chemicals business. He's been through some very large transformation efforts in his history. And so he brings certainly a perspective on capital discipline and financial focus to the Board and a great addition as well as Kevin Meyers, a long history in the energy business, understands the upstream and that interface with the midstream and refining, a veteran of ConocoPhillips and ARCO, both bring tremendous experience.

Kevin is an experienced Board member at Hess, and we couldn't be happier having both of them on the Board. They've onboarded and they're fully engaged. And the entire Board has stacked hands and reinforced our integrated perspective, the way we're operating, the primary goals of improving refining performance, driving costs out. We've got a $5.50 milestone, I'd call it a milestone in cost reduction, and we're zeroing in on that and hope to just keep moving right past that $5.50 if we can do it responsibly and with reliable operations.

We're focused on disciplined capital growth in midstream business, primarily in the Permian, disciplined capital investment in refining to improve and enhance returns from refining, focused on the Mid-Continent and the Gulf Coast and really leaning into the integration, creating and capturing that integrated advantage that we've developed in the Mid-Continent and the Gulf Coast. Absolute firm commitment to return 50% of our net cash from operations to shareholders through that sustainable growing competitive dividend and then share repurchases to top that up to get to that 50%.

And we talked earlier about our $17 billion debt target, and we have that line of sight. We have a plan to get there. We have debt maturities that will roll off at the right time. So we can hold cash until those debt maturities hit and take them out in a very responsible way. And so we believe that we're well positioned to enhance things organically to continue to grow it, to continue focus on excellence, being prepared in these businesses to capture the margins when they appear. We don't control the energy price. We don't control the global macro, but we can certainly control how we operate our assets and how we position ourselves to capture them and to -- and we're focused on flexibility, so we can move very quickly to respond to whatever circumstances the world has. And I think the Hormuz crisis really highlights how we can be agile, we can move quickly to take advantage of what the markets afford us to do.

Great. I don't know if there's any questions. There's one here in front.

Mark, thanks for your presentation. I was wondering if you could just go through your overall investment thesis, you're going to be meeting with investors today. Just give them the elevator pitch and why you think PSX is a compelling opportunity for any portfolio.

Yes, absolutely, Arun. We think we're unlike any other company in our peer group. We are an integrated downstream energy provider. We don't have upstream. We don't want to be in upstream. We want to be able to flex to whatever crude makes the most sense. We want to be out there gathering and processing hydrocarbons in a very integrated way with our midstream business, our refining business, have the marketing and specialties group that can go out and capture the most value from the marketplace wherever that value may appear to be agile, to be flexible.

We sit on top of some of the best hydrocarbon basins in the world. We can access crudes from Latin America, from Canada, whatever makes the most sense. And we can also -- we have a large enough footprint to be able to trade around those assets and add even more competitive advantage to the mix. And we are optimizing every day. We're streamlining our assets. We've got an intense focus on continuous improvement. We've changed the culture and everybody is out there competing to win, but to do it in a safe, reliable way. And we are absolutely committed to cash returns to shareholders, fortress balance sheet, so we can be opportunistic when the opportunity arises. And we believe we've got a compelling story for investors for the long term and for the near term.

Great. That's time. Thank you all for joining. Thanks, Mark.

Thank you.

Welcome to the First Quarter 2026 Phillips 66 Earnings Conference Call. My name is Rob, and I will be your operator for today's call. [Operator Instructions] Please note that this conference is being recorded. I will now turn the call over to Sean Maher, Vice President, Investor Relations and Chief Economist. Sean, you may begin.

Hello, everyone. Good morning, and thank you for joining Phillips 66 First Quarter 2026 Earnings Conference Call. Participants on today's call will include Mark Lashier, Chairman and CEO; Kevin Mitchell, CFO; and Don Baldridge, Midstream and Chemicals, Rich Harbison, Refining; and Brian Mandell, Marketing and Commercial.

Today's presentation can found on the Investor Relations section of the Phillips 66 website, along with supplemental financial and operating information. Slide 2 contains our safe harbor statement. We will be making forward-looking statements during today's call. Actual results may differ materially from today's comments. Factors that could cause actual results to differ are included here as well as in our SEC filings.

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

Thank you, Sean. Geopolitical events in the Middle East drove unprecedented commodity price volatility during the quarter. To put this in context, March was the first month that price moves in major crude oil, refined product and European natural gas benchmarks all exceeded the 95th percentile.

In the face of this volatility, we remain focused on operational excellence. Our team is executing safely and reliably. The majority of our assets are in the U.S. We have pipeline connectivity to some of the lowest cost and most reliable hydrocarbon corridors in the world. This positions us to reliably supply energy to support global demand.

Due to the closure of the Strait of Hormuz, a significant amount of global refining and petrochemical capacity is down. We, however, continue to operate at high utilization supplying products to our customers. Additionally, we have global placement optionality through our commercial organization.

This quarter has seen a significant and favorable shift in market fundamentals. First, the importance of U.S. sourced hydrocarbons has increased due to a need for diversification and access to reliable supply. Second, unplanned downtime in global refining assets has reduced inventories and will support margins.

Finally, reduced petrochemical production globally due to downtime and higher naphtha prices has reduced inventories and will also support margins. As a reminder, 80% of CP Chem's capacity is on the U.S. Gulf Coast with competitive ethane feedstock.

Recent global events show the importance of reliable domestic energy supply. Our Western Gateway Pipeline project will address long-term refined products needs, improve supply flexibility and increased reliability for the West Coast markets. We're excited about the future due to our strong asset footprint culture of operating excellence and attractive fundamental outlook across all of our businesses.

Anchored by the strength of our balance sheet, we're confident in our ability to navigate market volatility and capture opportunities. Brian will now share more on Slide 4 about how our commercial organization is one of our competitive advantages.

Thanks, Mark. We have a strong commercial organization with 6 offices across the globe. Our business enhances our asset footprint by optimizing feedstocks, delivering products into the marketplace and capturing value. We capitalize on geographic dislocations and turn volatility into opportunity. .

With our expertise in global market dynamics, we're ahead of the game, we have an asset-backed trading model and can leverage our physical footprint to take advantage of opportunities. We trade over 6 million barrels of liquid hydrocarbons every day. This creates optionality and economic value.

Markets are fluid right now and volatility is likely to persist into next year. Recent disruptions have created multiple opportunities. For example, we move Bakken crude oil to our Beaumont terminal on the U.S. Gulf Coast and then leveraging the Jones Act waiver to our Bayway Refinery. We displaced international crudes with domestic grades into our refining system and sold the international barrels into tight overseas markets.

We placed gasoline from our U.S. Gulf Coast commercial blending facilities into the West Coast using the Jones Act waiver. We leveraged our global footprint to deliver LPGs and naphtha produced at our Sweeny hub to global petrochemical customers around the world.

Commercial performance is included in the results of our operating segments. Enhancing their margins and improving market capture. Moving to Slide 5. The recent shock to the global energy system has been universal. Refining capacity has been damaged, logistics have shifted arbitrage routes have changed.

We are watching these and other signposts closely to capture additional value. The differentials between global indices and physical markets have spiked and forward markets are heavily backward dated. This dynamic reflects tight global crude oil balances.

The outlook for product markets looks even tighter, and we expect refining margins to be constructive through the remainder of the year. Our market analysis, commercial capabilities and global footprint enable us to optimize the flow of molecules around our system. Our team maximizes the margin uplift across our value chains.

Here are 2 examples of how we are optimizing our system. First, we've added 2 dozen originators around the globe. They speak the language. They know the culture, and they know how to source deals that unlock more value and optionality providing long-term access to key global markets.

Second, we've tripled our vessels on time charter in the past 2 years, securing roughly half of our waterborne crude slate. The global tanker fleet has become tight with limited spot availabilities and a large share of sanctioned vessels. This has caused freight rates to increase to historic levels by locking in our freight rates early, we reduced the cost of crude to our refineries.

We optimize around our refineries, pipelines and terminals to ensure that we're leveraging every molecule and driving additional value from our fundamental knowledge of the global markets. Backed by world-class assets, we find opportunity and volatility to deliver greater shareholder value.

Now I'll turn the call over to Kevin.

Thank you, Brian. On Slide 6, first quarter reported earnings were $207 million or $0.51 per share. Adjusted earnings were $200 million or $0.49 per share. As a result of a sharp increase in commodity prices during the first quarter, the company's financial results were impacted by mark-to-market losses of $839 million related to short derivative positions used as economic hedges to manage price risk on certain physical positions.

We had a use of operating cash flow of $2.3 billion. Operating cash flow, excluding working capital, was approximately $700 million. Capital spending for the quarter was $582 million. We returned $778 million to shareholders including $269 million of share repurchases and $509 million of dividend payments.

We increased the quarterly dividend 7% on an annualized basis. I will now cover the segment results on Slide 7. Total company adjusted earnings were $200 million. Midstream results decreased mainly due to lower volumes, largely due to impacts from winter storm burn, lower margins associated with customer recontracting and accelerated depreciation associated with a Permian Basin gas plant.

In Chemicals, results increased mainly due to higher polyethylene margins. Across refining, marketing and specialties and renewable fuels, results decreased mainly due to mark-to-market impacts. In Corporate and Other, the pretax loss increased primarily due to the inclusion of costs associated with the decommissioning and redevelopment of the idled Los Angeles refinery site. Slide 8 shows cash flow for the quarter.

We started the quarter with a $1.1 billion cash balance. Cash from operations, excluding working capital, was approximately $700 million. There was a $3 billion use of working capital, mainly reflecting an inventory build and an increase in cash collateral on derivative positions, partly offset by the net benefit in our payables and receivables positions associated with rising commodity prices.

We funded $582 million of capital spending and returned $778 million to shareholders through share repurchases and dividends. Our commitment to return greater than 50% of net operating cash flow to shareholders remains unchanged. The company increased debt in the first quarter.

Given the sharp increase in commodity prices, we issued a term loan and increased borrowings on short-term facilities to manage the margin collateral requirements. We ended the quarter with $5.2 billion in cash.

We are well positioned to manage further commodity price volatility through significant liquidity and including a high cash balance and cash generated from operations. Slide 9 shows the projected path from the current debt level to year-end 2026 and 2027 debt. We remain fully committed to a total debt balance of $17 billion by year-end 2027. Consensus cash from operations for 2026 and 2027 is approximately $8 billion.

In the remainder of 2026, we expect operating cash flow, working capital benefits and the reduction of cash balances as markets stabilize to enable us to reduce debt to approximately $19 billion. In 2027, we expect operating cash flow to enable us to reduce debt by a further $2 billion to $17 billion. This is consistent with the capital allocation framework we have previously laid out. with approximately $2 billion each to dividends, share repurchases, capital spend and debt paydown.

Looking ahead to the second quarter on Slide 10. In Chemicals, we expect the global O&P utilization rate to be in the low 80s, driven by the uncertainty of operating levels at CPChem's joint ventures in the Middle East. In Refining, we expect the worldwide crude utilization rate to be in the low to mid-90s.

Turnaround expense is expected to be between $120 million and $150 million. We anticipate corporate and other costs to be between $430 million and $450 million. Moving to Slide 11. Mark will now provide some final thoughts. We will then open the line for questions.

Great things happen when preparation meets opportunity. The current environment is attractive across all our businesses. We've prepared by focusing relentlessly on what we control: cost, culture, competitiveness and capital with discipline, all in the service of safe, reliable operations that deliver strong shareholder returns.

Our teams are performing, and we're pressing in and capturing those opportunities. fully prepared fully committed to execute and win when we win, you win.

[Operator Instructions] Steve Richardson from Evercore ISI.

I was wondering if you could start on the mark-to-market adjustments and wondering if you could give us some color on some of these impacts by segment, if you could. And I know you addressed this in the 8-K, but if you could get into a little bit of how the volatility that you witnessed was outside the bands of expectations?

And can you also just be sure to hit on how you think about that draw of liquidity, what it means going forward? And would it -- any impacts it may have on your shareholder return commitments?

Yes, Steve, this is Kevin. Let me walk through some of that detail. So as we laid out in the first quarter, we saw an $839 million mark-to-market loss from an income statement that impacted refining M&S and renewables and the specific amounts by segment were detailed in the press release. .

This is broadly consistent with what we put out in the 8-K. We said approximately $900 million. At that point, that was our best estimate at that point in time. And so I think it's important to make it clear that these are mark-to-market impacts on paper hedges that we have in place to offset physical purchases those purchases are mark-to-market at the end of each month, but the physical inventory is not.

And so there's a net impact through the income statement. I do think it's important to emphasize that we do this to protect economic value. There is -- this is a risk mitigation tool. We've been doing this for some time. It's a standard practice. And in the normal course, the impacts of these mark-to-market transactions are just not that significant, not that material.

But as Mark mentioned in his comments, we saw unprecedented volatility across the commodity markets in which we participate that course this, we'll see as a sort of outsized impact. as you look ahead in terms of what you can expect on a go-forward basis, it's very much a function of where the commodity prices move from end of March, I think through, say, the end of the year.

And if we were to use the forward curve as of end of day yesterday, we'd recover by the end of the year, about $500 million of that $893 million. And it's a commodity-by-commodity calculation on a quarter-by-quarter basis.

So based on the forward curve, if that were to play out as reality, that's what you see come back in that context. From a cash standpoint, we have -- at the end of the quarter, we had a total of $3.2 billion out on margin associated with all of this activity. That differs from the income statement effect because there are other barrels being marked where we actually do a corresponding impact to reflect the physical gain.

And so you have more paper activity than is subject to the income statement related mark-to-market. That cash impact will come back -- 2 ways it comes back. One, directly in falling prices, you'll see the reverse effect. But in normal course, because this is a continual process as volatility subsides, we effectively consume this cash through a normal purchasing activity.

So just to put some context around that, $3.2 billion out on margin at the end of March, at the end of yesterday, it was $2.1 billion, even though the absolute price levels are pretty similar to where they were at the end of the first quarter. And so we'll see that come down as we work our way through the year.

And then as we get into -- what does this mean in terms of capital allocation, debt reduction, share buybacks, big picture. And I covered it in the earlier comments and the slide that we put in the presentation on debt targets, we think we will be able to utilize between working capital benefits and the remainder of the year, operating cash flow and as the market stabilize, we don't need to carry that much cash, which is what we showed at the end of the quarter and still do.

But we can draw down that cash, get debt down to about $19 billion at the end of this year and then down to our target $17 billion next year, all while still returning 50% of our operating cash flow back through dividends and buybacks and quite frankly, we used Street estimates for cash generation in that calculation, but I feel pretty optimistic that there's upside there as well and we'll hold true to that.

So 50% back to shareholders and the other excess will just accelerate debt reduction.

That's great. Thanks for the fulsome answer, Kevin. I was wondering if I could just hit as well, we've got you on CPChem. The consultants have full chain margins up, I believe, $0.33 at last check for the second quarter. I was wondering if you could talk about what you're seeing in your business and your view on capturing this with obviously a very high utilization rate on the U.S. Gulf Coast into the second quarter and the balance of the year?

Yes, absolutely, Steve. This is Mark. CPChem is well positioned to go out and capture those margins. There can be some contractual step-ups that occur, but they're certainly out there aggressively pushing that -- you've seen the supply and demand situation tightened up dramatically with the limitations coming out of the Middle East.

And additionally, you've seen limitations for producers in Asia that, frankly, some countries in Asia are selectively moving hydrocarbons away from petrochemical production and into energy use to protect that. And so that further tightens things up. And the cost curve has dramatically shifted as the price of oil has gone up versus low-cost ethane in North America, you see that price floor going up, driving the margin increases.

And then there's this factor that prior to Venezuela prior to the activities in Iran. China was accessing deeply discounted crude and so they were converting that into a deeply discounted naphtha and then pouring that polyethylene to the world market.

We think that somewhere in the $0.05 to $0.06 per pound advantage versus what the cost curve should have been. Now that's been eliminated with the things that have been going on. And so it's very constructive for CPChem. They can operate from the U.S. Gulf Coast at high rates and over 80% of their capacity is in the U.S. access to advantaged ethane feedstocks that have been -- that feedstock cost has been stable versus what's been going on in the rest of the world. So they're very well positioned to go out and capture those margins.

Neil Mehta from Goldman Sachs.

Yes. Mark and team, the standout number from this quarter was really the worldwide market capture, which ticked up to 138%. And maybe you can bring this to life a little bit. What -- can you give us a couple of examples of dynamics that specifically drove that strength? And then when we think about sort of a mid-cycle market capture rate, you've talked about mid-90s type of utilization.

I think there are a lot of investors on the call who were thinking that 2Q could be lower than that mid-90s number, though, just because of the backwardation in the curve. And just your perspective of that is actually achievable as we set up for Q2.

Yes, Neil, it's a great question. Brian was -- he was pretty humble in his opening remarks, but we always talk about optionality and creating optionality and what he and his commercial team demonstrated in Q1 is leveraging that optionality.

If you think about moving Bakken crude to New Jersey without using a train and leveraging the shipping logistics that they've at least in advance. So we've got an advantage over shipping using the Jones Act waivers, all those things lined up to where Brian and his team could take full advantage of that and to drive that.

And that's what drove that pretty remarkable capture number, and we're really proud of what they've been doing. They weren't sitting around watching the world in a crisis. They were -- they were moving things to take advantage of the optionality that we've created and we're prepared for. So Brian, you can go ahead and talk a little bit more about what your folks have been up to.

And as Mark said, with the huge amount of volatility in the market with market dislocations and just the integration of our businesses, there was a lot of value to be had in the market. Just maybe some examples, we profited from a long RIN position, including RINs, we generated at a RIDEA renewable facility.

And we were also able to roll some lower cost RINs for prior year into this year. We had really strong results in our European and Asian trading businesses. As I mentioned earlier, and as Mark mentioned, the time charters that we put on over the last couple of years really helped in the elevated freight market. And reduced our accrued costs into our refineries.

And then finally, you saw some of the product differentials like on octane and Jet were higher than the indicator. So that helped as well. So to give you some context maybe going forward, if we use our refining indicator, it includes a lot of the impacts already.

It's embedded in the indicator. Historically, an average for the year would be -- in Q1, we captured -- benefited from all the commercial opportunities I just mentioned. Normally, in Q2, beginning of summer driver season, we would think about mid-50s so just thinking about some of the tailwinds and headwinds, tailwinds, things like butane blending.

We think there'll be more butane blending to the RVP waivers. Strong Jetter octane dips can help us there and additional commercial value. And I think we'll continue to see some of the same value we saw in Q1. But then there's some headwinds, as you said, backwardation and inventory impacts and even turnarounds if we had some in Q2 would impact capture. So I'd start with the mid-90s and think about what you think the market will look like in Q2 and then work our way from there.

Is it fair to say mid-90s is a good starting point, though, based on plus [indiscernible]

Mid-90s would be a good starting point. .

Okay. All right. And then Kevin, can you hit Slide 9 again, maybe in a little bit more detail because this is on the pushback since the 8-K came out that I know you and we have gotten on the PSX stores is leverage pretty elevated. And I think part of that is you're just holding excess cash. And so if you could spend a little more time just unpacking this slide because I think it is important.

Yes. And that is a really important point that we've effectively, from a debt and cash standpoint, we sort of gross up the balance sheet by borrowing more than we need from a normal day-to-day standpoint but being positioned in the event that we see more extreme volatility and have a need on, for example, margin calls in the event that significant price increases.

It does feel like since the end of the first quarter, that dynamic has settled down a little bit. I mean the markets still continue to fluctuate. But we've been in this -- if you look at crude in the sort of $90 to $110-ish band over that period. And so our expectation is as market conditions stabilize, we'll be able to draw that cash down. And clearly, that will have an offset on debt.

Likewise, on working capital. We had a big working capital use in the first quarter. We expect that to more than come back over the course of the remainder of the year through the combination of normal sort of annual trends. First quarter is usually a working capital use for us.

It was exacerbated by the margin calls this year. but we expect that we recover that and end up our projection is a slight working capital benefit for the year -- for the full year. That's our assumption. And then operating cash flow. We expect to have healthy operating cash flow, and that will go to debt reduction.

And as you roll into next year, we continue to have that sort of $8 billion of of operating cash flow, then a couple of billion of that can go to debt reduction pretty comfortably. All that gets us to our projected $17 billion target. And I will emphasize that if we see a continuation of strong margin conditions in refining and chemicals, that will further enhance the cash generation will enable us to pay down the debt quicker and also enable us to return more cash to shareholders.

Manav Gupta from UBS Financial.

I have more of a theoretical question. What I'm trying to get to the bottom of this, based on your preliminary comments, it feels your refining system, which is in the U.S. mostly is relatively insulated from these crude supply disruptions and other things that are happening in the world where certain refining assets may be very good, but can't run.

You are relatively insulated from these things. And what I'm trying to understand is -- does that mean somebody like a Philips or even any U.S. refiner in this environment is structurally better off than their global counterparts. And if that is the case, in your opinion, is this the time to be bullish U.S. refining? Or is it this time to be bear issue as refining, if you could help us answer that.

Hi, Manav. It's Brian. You're absolutely right. This is the time to be bullish, U.S. refining. If we look at what's happened in the marketplace, it started in Asia, moved to Europe, but U.S. has been relatively insulated on supply. Refinery runs are strong, consumer demand is healthy.

Crude production is relatively stable. And this kind of highlights how we're immune to the crisis, although not to the higher prices. But largely, our crude -- for instance, at Phillips 66, we only purchased about 1% of our crude from the Middle East.

Our crude is generally from Canada from the U.S. and from Latin America. And of course, from Canada and the U.S., it's all pipeline connected. So we are in a very, very good position.

And I would add to Brian's comments and you think about the activities that they undertook in the first quarter, they do interface with the rest of the world, so they're able to move around and leverage domestic supply and push normal imports out into what the global markets are demanding.

And then in addition to that great position in North American refining CPChem is rock solid in North America petrochemicals and the high-density polyethylene value chain. So all of our product lines, all of our businesses really have tailwinds in this environment. And we think that those tailwinds will persist for a considerable amount of time.

We completely agree. Quickly pivoting to -- sometimes people don't forget that you actually own a significant amount of renewable diesel capacity in the U.S., you never actually entered into a JV to split your capacity. Renewable diesel margins were negative. Everybody was losing money, but we are in a very different environment.

Given the size of your footprint, would it be fair to say year-over-year, you could see a material free cash flow inflection in your renewable diesel business, given where we are right now.

Well, absolutely. Even if you just think about the Ringman of the current blended RIN is more than twice what it was in 2025. So just a credit value alone. And we are running very, very well right now, in fact, above nameplate capacity. So you should see a substantial difference than prior year.

Doug Leggate from Wolfe Research.

Brian, I wonder if I could direct this to you. So we've got extraordinary margins, you pointed out multiple times, that it's steeply backward dated and I get the bullish near-term outlook question and duration and what breaks it. And we're seeing a lot of airlines cutting capacity or balancing demand through demand disruption, you could argue versus physical supply constraints.

What's your response to that in terms of margins are great, but what's your view on duration? And then I've got a follow-up for Kevin, please.

Thanks, Doug. Our view is throughout this is going to last throughout the rest of this year and into early next year. If you think about what's going on, it's less about demand destruction and more about demand constriction, trying to manage the need for products. And we kind of think of it as a race to the top.

We're watching very tight food markets and crude prices keep moving up $106 today on TI, 118 on Brent. And as crude prices move up, products are going to have to move up even further to open up the refinery margin to keep refiners producing the products that the world needs.

Clearly, the world is tight. And as you mentioned, it's jet fuel is the tightest. So it's the refinery margins are going to have to keep opening. And we saw that even for instance, in our European refinery recently, where we saw the gasoline crack were somewhat weak compared to the distillate crack, which seemed to be slowing down European refineries.

And then all of a sudden, the gasoline, in fact, made a large move to the upside, opening up margins so that European refiners could produce the products that they need. So I think we'll continue to see that through this year and through the early part of next year, even if the straits are opened in the next month or 2 months.

2 Brian, would you treat this as -- would you [indiscernible] this or treat it as a windfall?

What was the question? .

Would you annuitize this? Or would you treat that as a windfall?

In other words, are the margin is going to persist. Yes, I think we see them persisting for longer than the straights being closed. Annuitize it. I don't know that we're at the point where we would annuitize anything, but we see it more than just a few months phenomenon.

So this is my follow-up question, which is for Kevin. Kevin, your share price is 5% off is high. And I think Mark just said we wouldn't annuitize this. This is the opportunity to permanently shift this windfall to your equity value comes from debt reduction versus buying back your shares? Why is that not the right answer if this is indeed a windfall.

Yes, Doug. So you are correct that debt reduction is -- creates equity value as well. And debt reduction is a priority the $17 billion target that we laid out there is a target. If we have significant excess cash generation, we will reduce debt below that level. I'm not going to go so far as to say we will stop buying back shares so it can all go to debt reduction.

I think having -- maintaining a degree of balance through the cycle on capital allocation. We've been pretty clear on the 50% return of which at current levels, about half of that is the dividend and the other half is buybacks.

But as the absolute level of cash generation increases by definition, if you take 50% back to shareholders, that's an increasing amount also going to the balance sheet. And so we view it as a balance across the board.

As of right now, while we may only be a few percent off of our high, we still think there is good value in our share price. And so we feel comfortable with that plan and capital allocation.

Joe Laetsch from Morgan Stanley.

So I wanted to start on the macro, just given where product prices are today. Can you talk about the demand trends that you're seeing within your system in the U.S.? Are you seeing any signs of demand destruction on gasoline and diesel, but the inventory levels in the U.S. have drawn to at or below the 5-year range on products, things are starting to look pretty tight. .

Joe, this is Brian. We haven't seen much demand destruction, probably 1% or down for products, both gasoline and diesel. And then in terms of our system, we've actually done really well.

We added over 500 franchise stores last year in marketing. So we're actually seeing a lot of value from the good work the sales team has done in marketing. But we haven't seen demand disruption in the U.S.

That's helpful. And then I wanted to just ask on the refining side. So utilization rates of 95% in the quarter were solid, even with some maintenance and some third-party pipeline impacts as well.

Can you just talk to some of the drivers of the performance during the quarter and then as part of that operating costs, they continue to trend in the right direction. And I recognize there is variability quarter-to-quarter with throughput and natural gas costs. But could you just touch on what inning you think you're in, in terms of cost reduction efforts and the path to the $550 per barrel?

Yes, Joe, this is Rich. Thanks for the question. Yes, first quarter, I'll start with the cost per barrel and then maybe look back at some of the regional performance opportunities that we see last quarter. The cost per barrel 1Q was $6.21. That's actually $0.80 per barrel improvement year-over-year.

So good movement there. I'm very happy with what the team has accomplished on that front. Quarter-over-quarter, as you indicated, it was slightly higher. And that's primarily due to fewer barrels processed in the quarter. And that was a combination of planned maintenance activity as well as there's just fewer days in the quarter and the first quarter of the year, and that does have a material effect.

Total process inputs were down about 2% quarter-over-quarter. Seasonally, higher natural gas price was also a big player in this prices gone all the way. I think, averaged about $4.87 per MMBtu at the Henry Hub. We normalize that back to the $3 annual natural gas price, which is the basis we've used for the $5.50 target, the number moves into the low 5.80s on a dollar per barrel OpEx basis.

So that says we're well within striking range here of this $5.50 per barrel target in 2027. The organization is really working hard. They've actually got over 200 initiatives that we're actively pursuing right now which are forecasted to drive $0.15 to $0.20 per barrel out of the base operating costs.

And these are structural changes in our cost profile and continuing a trend that we've started here well over 4 years ago now. And maybe an example of 1 or 2 of these One of them is really changing our approach to how we clean FCC boilers. It doesn't sound like something very exotic but that actually will, once accomplished, will drive down our annual cost by well over $3 million.

And another example is really acid consumption in our sulfuric acid alkylation units and we're working on tightening up the process controls and the temperature controls on those -- that strategy is projected to save another $2 million per year.

So it's racking these wins up 1 by 1 by 1 across the system, and the team has been doing a fantastic of doing that. So the balance of the closure, I see us continuing to increase our availability and utilization of the assets, the continued maturity of our reliability programs as well as something I've mentioned before, which is increasing our total process inputs by filling up the downstream units, behind the crude units, using all that discipline that we put in for the crude unit side to apply it to the downstream units.

So this remains an ongoing execution story, and I'm very happy with the way the organization is progressing it, and we do see additional upside on that. On the market capture, regional performance side of the business, Brian covered a lot of that generally at the macro level. But what we saw on the refining side was cargo prices coming in a little bit lower for us in refining.

And some of that's just the anomaly of pricing, you got prior month pricing that's coming in on crude deliveries and really good work by the European office to capture strong results. And especially on the jet side of the business, the Kerosene fuel is those prices disconnected from traditional tied to distillate.

On the Gulf Coast, we saw the same -- a similar story, jet production there quarter-on-quarter was very high. That's for us, and it was also very timely with the Jet pricing blowing out coming out of the Gulf Coast area as well. And then in the central corridor, this is where we had a lot of our turnaround activity focused for the quarter.

So we did see the market capture actually go down a bit there, and that was related to maintenance activity at Wood River and Borger facilities and some mark-to-market impacts that Kevin had pointed out earlier in the call here. And last but not least, the West Coast was in a pretty good spot.

As you mentioned, there was some impact with third-party pipeline operations there that slowed down our Pacific Northwest operations. But short of that, the team did a fantastic job of capturing the marketplace.

Philip Jungwirth from BMO Capital Markets.

How does -- on midstream, just how does the higher crude prices change, how you're thinking about investment opportunities? If it becomes clear, there's going to be a greater call on shale. We see the public raise CapEx. Just would you be willing to look more at organic growth here -- if so, which parts of the value chain would that consistent GMP pipeline frac or exports?

And then just last, just how much sensitivity is there around the $4.5 billion midstream EBITDA target by year-end '27 if we do see higher U.S. volumes?

Phil, it's Don. When I think about the crude prices and the activity. What I would say, first and foremost, that the capital discipline, returns, those are very important to us. I mean certainly, as opportunities evolve, whether that's volume growth in the field where we can add gathering and processing capacity to serve our customers and fill our value chain up we'll certainly pursue those opportunities.

We've got growth plans in place. You'll see us continue to add capacity as the customer needs evolve. I think that's a sooner the fairway of our midstream growth plans. You'll see that we try to maintain a balanced value chain. What I mean by that is adding -- gathering and processing capacity, making sure we've got the downstream infrastructure, but also being mindful of what capacities are needed in the market.

Again, going back to staying focused on capital discipline, staying focused on the returns that we can generate with those organic growth opportunities. In terms of and our $4.5 billion target. We feel very good about that target, the path that we are on.

Certainly, the fundamentals are bright. Coupled with our execution and commercial successes, we feel very comfortable with where we are on that trajectory as well as the ability staying that growth beyond 2027.

Great. And then coming back to Chemicals. Once the Strait opens up, how do you see the progression for getting back to normal operations for CPChem where you are guiding the lower 2Q utilization, but obviously benefiting on the margin front in the Gulf Coast. And if you could also just comment on the broader industry that would also be helpful just in terms of what does that scenario look like, steps to take and time duration to get back to normal.

I think as far as CPChem is concerned, the assets in the Middle East that are offline are in good shape. The bigger question is then the greater infrastructure in the Middle East and what challenges there may be.

I think that there's probably a greater sense of urgency to get crude oil and refined products moving and then petrochemicals may be a next layer. So I think that revival from the Gulf will be a little lag behind the energy recovery and then you're going to see the system need to repopulate the inventory chain, the logistics chain, and that will take some time.

So I think you'll see this have some legs on it. Now we've got 2 big projects underway, too. And those projects, the Golden Triangle project in the U.S. and the RPP project in Qatar, are both proceeding as expected. And there's been no disruption in the progress of the LPP project.

In spite of what's going on, everybody's been safe. everybody is doing what they need to do to get that project going. And both those projects will come online fully in 2027, you'll see Golden Triangle polymers starting to commission things later this year and they're making great progress.

And so I think they will contribute capacity at a time when it will be really sorely needed, I think. And so there'll be good progress from multiple dimensions for CPChem as this crisis resolves itself.

Lloyd Byrne from Jefferies.

Mark, Kevin, team, thank you for having me on. Can I start by following up on Neil's question on capture. And I know you commented on how well positioned your transportation is, but how does that impact second quarter capture or maybe even third quarter if rates continue to go on like this.

You should see a benefit -- given that we locked in our shipping rates over the last couple of years and shipping rates are so elevated, you should continue to see a benefit from shipping rates, particularly in our Atlantic Basin region.

Okay. And let me ask a follow-up of -- I don't know whether Don is on, but maybe Mark can answer it. You can comment on Western Gateway and obviously, a very good open season. Just what are the hurdles left and kind of the timing for FID.

Lloyd, this is Don. I appreciate the question on Western Gateway. We are quite excited about where we are on the Western Gateway project, the progress we've made to date and where we find ourselves at the end of the second open season.

How I see the path forward here is to complete the JV arrangements with Kinder Morgan as well as execute the transportation agreements with the third-party shippers, we've got a team that's working hard to get that done. I would say with the successful conclusion of that work over the next couple of months, I'd expect we would be in a position to FID this project mid- to late summer, again for 2029 in service date.

And one of the things I plugback on just the progress we've made and what we've learned through the open season, is really twofold. One, I think there is a strong market interest in having a new build pipeline built to Phoenix and be able to deliver reliable, secure transportation fuels to the west.

And then two, there's strong support from the state and federal groups, agencies and officials in having this pipeline in service as soon as possible. So that gives me a lot of confidence that Western Gateway is the right project at the right time and we'll deliver the right returns.

Jason Gabelman from Cowen.

I know you reiterated the $4.5 billion of EBITDA on midstream 1Q obviously moved sequentially lower particularly in the NGL business quarter-over-quarter. Can you just help us, I guess, bridge quarter-over-quarter decline and remind us how you get to that $4.5 billion and perhaps given Western Gateway and potential for continued activity? Do you see what type of upside do you see from that $4.5 million?

Sure, Jason. Appreciate the question. And just in summary at the very onset, absent the impact of volume from winter storm earn, we're right where I expected us to be from a quarter 1 performance. We continue to have great commercial success, not only in the growth, but also in the recontracting, which -- that has some impact in Q1 and maybe unpack that a little bit.

When we think about our renewals, we're quite proactive in how we do that. We tend to renew those a year prior to their expiration dates. The ones that came up for this quarter, we had renewed those and what was exciting about that is we had renewed those for 10-year plus terms.

For me, that really validates the success of our customer service the success of our relationships with our customers, that execution gives me a lot of confidence in our ability to continue to grow into our $4.5 billion target by 2027.

If the fundamentals are bright, the execution by the team is strong. And as we look through with Western Gateway, whether it's some of the follow-on expansion when we talk about additional gas plants, that gives me confidence that we can sustain this growth rate beyond just 2027.

Got it. And I neglected to ask about the LPG export ARB opportunity in the current environment. So if you could just talk about how you're thinking about that. .

Sure. In the near term, most of our windows are spoken for, either with our term customers or by ourselves, from our time charters, where we've had success is really in our delivered time charter market, where the team in Singapore has been able to optimize deliveries, be able to take advantage of the volatility much like what you just heard Brian talk about.

I think, overall, what this shows is the importance and the strength of the Gulf Coast LPG export capability. So I think this will continue to be a good tailwind for Gulf Coast exports, and we expect Freeport to be a beneficiary of that outlook.

Great. And my follow-up is just on some of the assets you have on the West Coast. One, given Western Gateway, does that make Ferndale any more or less quarter of the business than it previously was? And maybe can you also talk about the opportunity to sell down part of the interest in the renewable diesel plant as your peers have done and as that market has strengthened here. .

Yes. Absolutely. From a Ferndale perspective, Ferndale is integrating well into the California market, and we see the 2 things complementary there. They're more targeted at Northern California, Western Gateway is a Southern California opportunity.

And so we still see strong tailwinds for Ferndale as they enhance their capability with CARB and sustainable aviation fuel and blending and so they're in a strong position and Western Gateway will come in and provide some stability in Southern California. The other question about renewable yes, I think that we'll see what the market does.

The asset is running strong. we would always entertain any interest, but it's a great asset, world-class asset runs like a Swiss watch, and we're seeing great value from that asset today.

Theresa Chen from Barclays.

On the midstream front, with the crude price outlook likely risk to the upside over the medium term and potential re-acceleration of activity in second-tier basins, can you talk about utilization and the ability to expand your path for NGL assets that are now or soon will be connected to Kinder's double age conversion now an NGL surface. .

Is there renewed growth, if there is renewed growth in associated gas, either in the Bakken or in the Rockies itself, how much incremental pipe capacity could you have on your Rockies to Sweeny NGL system? Or would that require a significantly more investment?

Teresa, I appreciate the question. In the Rockies, right now, actually, our DJ production, we're seeing some record volumes. So it's very exciting to see the volume in that area. And certainly, as you alluded, there's opportunities, whether that's in the Powder River Basin or the Bakken for additional development.

We certainly have a well-positioned NGL network out of Colorado that flows through our system in multiple different routes and feeds into our Sweeny complex. We've recently restarted our Powder River NGL pipeline to be able to take some early Bakken barrels.

If there's growth in that area, we would certainly look at opportunities to be able to expand capacity to be able to fill the downstream pipes that we have out of the Rockies. So that is certainly an area that we're keeping an eye on.

And in regards to Western Gateway, now that the commercialization process is done what range of total CapEx and expected to build multiple on a 100% basis, can you share at this point regardless of how the economics would be split between the partners?

We still need to kind of work through some of the final details with our partner in terms of scope and connections with our perspective of shippers. So we're probably premature to have that information out there, but it will be out there shortly.

Matthew Blair from TPH.

Just one question for me. Could you talk about the Canadian crude market? It looks like WCS Hardisty is one of the most attractive crudes out there. Are the wider dips relative to TI due to any pipeline constraints coming out of Canada? And then the market structure impacts that you talked about earlier for U.S. inland barrels, would those apply to Canadian barrels as well? Or are they not affected by that?

I say the -- clearly, the WTI WCS differentials have moved wider for very tight levels earlier on this year. They're now next month at almost $18 off. And a couple of reasons. The first reason is that light sweet crudes from the U.S. are being pulled to Asia. And so that's tightening up light sweet crudes and medium sours.

And the second reason is that the Venezuelan barrels on the market and also some planned and unplanned outages at refineries have put some pressure on the heavy grades. And so that's kind of widened the WTI, WCS and our kind of view is they're going to stay wide for some period of time.

We're in a very strong position with our Mid-Con portfolio and our pipeline position, which is a competitive advantage, given the Canadian crudes to our refineries. And we benefit from those widened differentials, as you mentioned. And currently, just as a reminder, our sensitivity is $140 million of additional earnings for every dollar wider at the dips to come.

And this concludes the question-and-answer session. I will now turn the call back over to Sean Maher for closing comments.

Thank you for your interest in Phillips 66. If you have any questions or feedback after today's call, please retain to Kirk or myself. Thanks, and have a great day.

This concludes today's conference call. Thank you for your participation. You may now disconnect.

All right. Thanks, everybody. We're going to continue now shifting to Integrated Downstream Company with Phillips 66. We've got here, we're excited to have Kevin Mitchell, the EVP and CFO; and Rich Harbison, EVP of Refining here with us.

So maybe let's just jump in and start with the first question for everybody, which is that we might as well start with what's happening in the Middle East right now. It has ripple effects that are having significant impacts across multiple parts of your portfolio.

So maybe at a high level, and we can touch in more detail later on. But at a high level, how is what's going on right now? How is it impacting your businesses across refining and across petrochemicals? And can you talk about maybe expectations in the near term and what the possibility might be for lingering impact going forward?

Yes, Ryan, let me talk to that a little bit, and thanks for being here. Always a great conference. First off, I would say that as a primarily U.S. based company with mostly U.S. assets and access to hydrocarbon resources in the U.S. We are relatively well positioned as both a country and as a company given the extreme turmoil that's going on in the global markets, whether it's crude oil, LNG, refined products, petrochemicals.

And so from that sort of big picture, while we see a lot of that volatility and turmoil out there, we're relatively well positioned because you look from a crude standpoint, we are running primarily U.S. crude oil and Canadian heavy crude, our prime resources. We are exposed to some import barrels, but that is a much smaller component of the total. And then likewise, when you look at the refined product markets and pretty significant implications in other parts of the world, in Asia and Europe, in part because their access to crude has been significantly restricted given what's going on in the Middle East. And we're able to continue to produce and supply products to our customers.

In Chemicals, it's an interesting dynamic where we've come through this period of quite a long down cycle, a trough that has -- we've -- for the last 2 years, we thought the trough was about to end and it's just continued. And so we see some light at the end of that tunnel from that perspective, given reduced pet chems production in the Middle East, and it's also coming off in Asia because of restricted access to feedstocks. And so the U.S. producers stand to see some benefit there.

From our portfolio standpoint, about 15% to 20% of CPChem's production is Middle East based. And so certainly that's impacted. But the majority of the production is U.S. Gulf Coast with ethane feedstock. And so we're seeing some uptick there, too soon to say what the long-term impacts of that are, but certainly see some benefit from that standpoint. I think as you look ahead as to what is the longer-term outlook around this, it's a very tough decision to answer because it really comes down to when does the military activity cease and when do Middle East operations return to normal in the context of the Strait of Hormuz being back to fully functioning. So that's a tough one to answer.

The other longer-term dynamic that's out there and again, we don't know how this plays out, but we do run the risk that with elevated commodity prices, significantly elevated commodity crude oil prices on a global basis that, that translates into a significant economic downturn, which could ultimately have a pretty detrimental impact on the business because, as you know, in a business like ours, we rise and fall with the state of the economies and a sort of global recession would be a pretty ugly situation to be in, even though on a relative basis, in the U.S., we would stand to position ourselves strong -- better than most.

Okay. That's helpful. Maybe I want to follow up on the Chemical side because I feel like there's probably been -- there's been a lot of discussion around the impact on crude, maybe a little bit less on refining and probably even less on the pet chem side, even though the impacts are material what's going on right now.

We've been stuck in the midst of what felt like a cycle that felt like the cyclical recovery was taking longer and longer and longer, and we've been balancing along the trough for a while. The near-term aspects or benefits are pretty significant, as you mentioned some of them. What does this potentially mean for the cyclical recovery? Is there a possibility that this accelerates the cyclical recovery in any way? Or does it change how you think about the impacts on Asian petrochemicals? Does it do something to lift how you think about the margin over the medium term and how we get out of this eventually?

Yes. I do think it will provide some benefit relative to where we were. And just for context, the situation we've been in for the last 2, 3, 4 years, which is one of global oversupply of capacity relative to demand. Demand has not been the problem, it's just there's been so much new supply come on, primarily in China. China has also benefited by having access to discounted feedstocks. And what I mean by that is, over the last few years, they've been buying discounted crude oil from Venezuela, discounted crude oil from Iran and discounted crude oil from Russia. And they're primarily naphtha-based cracking, and so their input cost is lower than any of the other sort of traditional market players, and that's setting that price level.

If coming out of this as a base case, they're paying market price -- true market price for feedstock, that will raise the level of the commodity pricing just because of that floor has been raised because they pay market price for feedstock and no longer benefiting from discounted feedstocks. We still need to fundamentally get global supply and demand back into balance. And some of that will materialize as demand increases incrementally as a percent of GDP. So we'll see that. And we still think there's capacity that needs to rationalize because it's uneconomic for the long term. The light feed cracking, the U.S. Gulf Coast crackers on ethane supply are extremely competitive from a cost curve, cost positioning standpoint.

And so we'll see some benefit. I don't think we're -- it solves the problem permanently. But I do think it probably gives us a step change improvement toward a more mid-cycle environment relative to where we were previously.

Perfect. Before we get into some of the -- maybe deeper into some of the impacts on refinery, I want to take a step back a little bit and for a high-level view of the company, which is, you've been in the midst of kind of a multiyear process over the last few years of -- to kind of drive improvements across, particularly like refining profitability but also capital allocation, cost structure, balance sheet, a number of these things. You've both been at the company for quite a while. At your level, like what has changed over the last 3, 4, 5 years or few years? What's changed in terms of the approach to the business or the allocation of capital that's helped some of the improvements that we've seen? And where do we go from here?

Maybe I'll give Kevin a break for a second, and then you can come in on the macro side of that. So I've been in the business for 37 years now associated with the company. And when I step back and see the transformational change that's occurred in the company, it's really fundamental around this concept of integration. And it's not just at the molecule level, but it's also at the business operational level. And we used to run the company as really as separate entities. You had the Refining Business, you had the Midstream Business, and you had the Commercial Marketing Business.

And yes, was there a little bit of interface here and there? Absolutely. But we have taken that culture and completely changed that to one that now is looking for ways to be better at what we do each and every day, and it's driving efficiencies into our business decision-making at the corporate level, the enterprise level. So we're really seeing a shift to general interest decision-making, which is benefiting the overall bottom line of the company.

One of the fundamental structural changes that is helping support that was a shift that we made a few years ago to a single bonus structure for the company. We used to have individual bonuses for each of the business units and then even subdivided underneath that. Now it's one-for-all, all-for-one type bonus structure, which has fundamentally again, changed the decision-making process and really pushed us to general interest decision-making.

Now one of my, I'll call my career successes is when we were talking about refining, and there was a lot of pressure when I came into the role about you got to fixed refining, you've got to fix refining. Well, it became very clear to me very early that the fix refining wasn't just a refining issue. Certainly, there were some challenges there, and we needed to absolutely improve our performance. But this is really an enterprise-wide effort that needed to occur. Refining relies on the Midstream, Refining relies on the marketing and commercial organization. And it also absorbs a lot of the overhead that comes in from the corporate office. So we needed to be more efficient at the corporate level. We needed to be better integrated in decision-making across all of these and that cultural shift has completed.

I mean we're certainly not done with all the efforts that we got to do on this, but we have improved the way we're making decisions and as a result, getting better general interest decisions. And refining ourselves a bit of a microcosm associated with that. We used to run each refinery as an individual business unit. We now run it as a fleet. And we have centralized a lot of the functional support -- the functional support around the system, which has driven efficiencies into the business. And then we have also that indirect effect or direct effect of that has also allowed the management teams that are running the sites to be more focused on operating safe and reliably. And we've seen that come through in our performance. And that's also showing through on all the financial components of the business that we're working on.

And you can see it in there. You see that our cost per barrel has been creeping down. We've seen our utilization numbers creeping up. We've seen our earnings per barrel also showing nice progress. Market capture has been very good. And so steady, steady progress as it goes. And we're not done yet. That's the most exciting part about all of this is that we've got plenty of opportunity to continue to capture additional market opportunities and integration value for that matter as well.

Kevin, do you want add anything else there?

I think you've covered a lot.

So on the integration side, I mean, I appreciate that you talked about the integrated nature of the decision-making because having covered the company for a long time, I would say there certainly seems to be a greater coherence in terms of the capital allocation across the entire company. And maybe one example of that is something like the Western Gateway pipeline project that you're doing, which has benefits across Midstream, Marketing and Refining. Can you maybe talk about the example of that? Like how is that an example of maybe how the approach has changed a little bit on what the opportunity set is there?

Yes. I guess it's -- you love it when a plan starts to come together. And you can -- this Western Gateway project is really a result of some other critical moves that we are making on the portfolio. First, we were basically pulling out of the California market, right? We found that we were not competitive in that market. It was a drag on our earnings portfolio. And so it was the best move for us was to withdraw from that market. Still committed to supply the market with the barrels coming in because we had a very strong marketing organization and portfolio in that area.

And then the other second component of that was to really take over the full operation of our Wood River and border operations, and we bought out that JV and moved to 100% operation of those assets and integrating that with our third refinery in that area, which was Ponca City Refinery. So now we have this nice portfolio of very strong refining presence in an area of the country that we are very competitive. We've created a short essentially in the area on the West Coast, the natural next step is let's fill that void and let's do it on an integrated basis.

So a small team of folks got together. They put a lot of thought to it, and they came up with this concept of this pipeline operation into the West Coast from the Mid-Continent area. And so you're now connecting the energy corridor and even in a market that can be long at times, with the energy island of the West Coast and we're currently working through that process right now. We're in the second open season for this project. It -- we've opened up the aperture on it a little bit. It was originally a pipeline from St. Louis to Phoenix and then from Phoenix to Colton, which is Southern California. And there was a lot of interest in that, but there was more interest from folks to see if we could get actually into the heart of Los Angeles distribution system.

So we opened up a second season to extend the delivery into Central L.A., the Watson area, if you're familiar with that, and also opened up origination location from the Gulf Coast, which was also a lot of feedback we got on the first open season. So that second open season is in progress right now and should close here March, April, early April time frame. And we're very hopeful. We've got a lot of positive interest in this, and we're very hopeful that this eventually moves to a final investment decision somewhere second, third quarter of this year. And then we will be in a position now to supply from our core assets in the Mid-Con to the West Coast.

And I would just add that the way the company was run previously, I'm not sure we could have come up with this project and gotten it to where it is because by its nature, this is an integrated project. And we'll see -- ultimately, we'll see benefits in refining, in midstream, and in marketing. So all of our primary operating segments will be beneficiaries of a project that I'm not sure we could have done it in the old world when we were very much silo focused and nobody was incentivized to come up with integration opportunities.

Thank you. I want to touch on a couple of other -- a couple of quick things on refining. We came into the year at the start of the year, and it was all Venezuela all the time, right? And it was one of the biggest themes in refining was widening of crude differentials, right? There's going to be crude diff more Venezuelan barrels, heavy, medium sour differentials are going to widen out. The current issues in the Middle East probably have somewhat of an opposite effect on crude diff. How do you think about these balancing factors? Where are we going in terms of crude differentials from here? And how do you think about how that impacts your system in your portfolio?

Yes. Maybe what I'll do is let me start. There's a lot going on right now. So -- and let's start with -- let's set the Middle East activity aside for a moment. And I'll talk a little bit about how we saw the supply and demand balance is working out here over the next -- this year and next year. So with the Middle East activity set aside, we saw strong crude deliveries, strong crude supply into the marketplace. We also saw strong distillate and jet demand through the system. We saw gasoline flat in the U.S., maybe slightly growing worldwide. So there was a little bit of growth on the gasoline front. And in refining, we saw refining capacity that was tight, but new plants on, still going through some start-up and some additional capacity in Asia coming on, on the back half of 2007. When we look at all of those, very bullish on refining because refining was a bit of the bottleneck in that whole supply chain for transportation fuels.

Now let's layer in the current activity. So this year has been really a tale of 2 tapes. Originally started with the Venezuela action, which, for us, increased the heavy crude supply to the market in North America, that put pressure on the crude -- the heavy crude price. It opened up the heavy light spread on crude. And we saw that. It was starting to move from 2000 -- or 2025, it was running around $12, $13, and it started moving up into the $13, $14 range and maybe even into bouncing off the $15 range when the Venezuelan crude came on the market.

Now the activity occurs in Iran, the Middle East that closes off the Saudi barrels coming into the market with the medium sours and heavies that basically reversed that activity with Venezuela, and we saw the heavy light spread then move back to essentially where it was last year, 2025 in that $12 range. Hopefully, this is short-lived, right? And this activity eventually solves itself out. The Straight gets reopened here in the not-too-distant future. There's been no significant impact to the global GDP and things start to iron out to back to where we were projecting them where these barrels start coming on to the market. We see the heavy light spread open up a little bit more, which is very favorable for our kit that we operate, puts some pressure on the Western Canadian select crude which we think the incremental barrel clears through the Gulf Coast because the TMX to the West pipeline is essentially full.

And those barrels are clearing to the West Coast with the Venezuela barrels coming in and the Saudi barrels coming in, we see pressure on that heavy light spread, which is favorable to our refining kit, which also plays into the heavy distillate and jet demand because this crude definitely shifts your profile -- your yield profile to distillate and jet as well. So it all comes together nicely for us with the way we see it over the next 2 years.

Maybe one last thing before we leave refining. There's been chatter in the news over the -- on and off over the last week about possible export bans or lifting to the Jones Act. What are you seeing? What do you think about the possibility there? Are these real possibilities? If so, what would be the impact?

Yes. Well, who knows what's possible? I don't want to predict politics. That's for sure. There's a reason I'm not in politics. But if we've been through the no export scenario, just not too terribly long ago, under the previous administration. There was a lot of talk about no more exporting products or -- and I think we were successful in educating the administration on the total impacts of that. And we will do the same thing with the current administration if that's one of the proposals.

The Jones Act, it's a real possibility, right? That is one that essentially opens up more marine equipment available to ship supplies around in the U.S. And the markets that will benefit from that will be the ones that are generally short product, right? So you got the West Coast and then you've got the East Coast. So the barrels would move into those markets likely out of the Gulf Coast is where that would come. So it makes a lot of sense to move that around.

However, there's always been traditionally very strong resistance to any significant Jones Act waivers because of the underlying, I guess, points of view on that particular Act.

So there's also been some talk around RVP waivers and things like that. So we'll see how that all plays out. But when you have to rack and stack the options that are in front of the administration, you're likely going to see the ones that administrative executive orders can take the action first, and that would be the Jones Act or the RVP activity. And then it gets increasingly more difficult because you have congressional action required for some of the other things that are on the list, and that is more and more unlikely that would occur.

Shifting to Midstream real quickly. You've got a target to hit $4.5 billion in EBITDA by the end of 2027. Can you talk about how you think about the drivers and the risk of hitting that number? And then you haven't talked a lot -- you certainly haven't provided targets, but you've got a decent amount of organic growth opportunities that should provide continued growth in the Midstream business and well beyond 2027. So maybe how confident should we feel in hitting the $4.5 billion number? And how do you think about the opportunity set post 2027?

Yes. We feel very good about the $4.5 billion target. That's an end of 2027 run rate adjusted EBITDA for Midstream. We were at essentially $4 billion end of 2025. And we have organic projects in flight that will get us to that number between the -- we brought a new gas land on last year, the Dos Picos II plant will be up to a full year contribution of that facility in 2026. We have another gas plant under construction, the Iron Mesa plant that comes online early 2027. We're expanding the Coastal Bend pipeline. So we acquired the Coastal Bend system, formerly known as EPIC, that NGL system in early 2025. We've completed a first phase expansion of the NGL pipeline at the end of last year, we're undergoing the second phase of expansion that we'll complete by the end of this year, early next year.

We are also evaluating -- we continue to evaluate additional gas client opportunities as well as additional frac capacity. Our most likely next frac expansion project would be on the Coastal Bend system at Corpus Christi. That will be the most capital-efficient frac expansion that we can do.

Now to be clear, that wouldn't be part of the $4.5 billion that would go beyond that. So I'm kind of blending into some of the opportunities that we see as we go beyond at 2027. But with the capital budget we have this year of growth capital for Midstream, $700 million budget. We expect it to be about that level for the next couple of years, at least. That will get us to the $4.5 billion as we continue to also, from a commercial standpoint, optimize the flow of molecules around the system and maximize the margin uplift in capture that we can across that full NGL value chain.

And then as you look beyond 2027 post the $4.5 billion, if you assume about a similar level of capital spend, and to be clear, it's not a given that, that amount of capital is available to Midstream. But if they have the right projects, the right opportunities that remember, our priority here is not growing for the sake of scale. It's growing to increase the returns on capital employed in that business. So all of these projects we do, the ultimate benchmark is this consistent with our objective to grow return on capital employed. But with the opportunities we see, you look at projects like Western Gateway, that is further out, that would be a sort of 2029 completion on the assumption that project goes ahead.

We feel very good that there is line of sight to continued ratable growth in Midstream earnings, not anything dramatic in terms of significant increases in capital, but just continuing to work away on additional gas plants, pipeline expansion, frac capacity, Western Gateway and then optimizing around the entire system.

Right. Thank you. I think that's all the time we have. But Rich, Kevin, thanks so much for being here.

Thank you.

Thank you.

All right. Let's go ahead and get started with our keynote fireside chat with Phillips 66. Thank you to all the investors in the room and for those who are tuning in on the webcast. Those of you that don't know me, my name is Joe Lat, and I'm the refining analyst here at Morgan Stanley. Today, I'm very pleased to be joined by Mark Lashier, Chairman and CEO of Phillips 66.

Before we get going here, for important disclosures, please see the Morgan Stanley research disclosure website at www.morganstanley.com/researchdisclosures. And if you have any questions, please reach out to your Morgan Stanley sales representative.

With that out of the way, Mark, thank you for being here with us this afternoon. We have plenty to talk about today, but maybe to start higher level here. Phillips 66 has been active in the past few years, building out its midstream business, improving refining operations and optimizing its portfolio. As you sit here today, can you talk a bit about that journey and your strategic initiatives and plans in 2026 and beyond?

Sure, Joe. I'd love to. Thank you, everyone, for being here. Thank you, Joe, for hosting this, and it's been a great conference. We've gotten a lot out of it, timely and all the events going on. But when you think about the journey that Phillips 66 has been on, we are intensely focused on being a unique opportunity for investors.

We have designed things and are leaning into things such that we've got durable, sustainable cash flow across the cycle.

So the integrated positions we have, could be countercyclical. We've got businesses that just deliver rock solid earnings quarter after quarter. And then we've got more volatile segments that can really throw off a lot of cash at the peak, but then afford us opportunities to do things across the spectrum of investment opportunities we have while still delivering at least 50% of our cash back to shareholders each and every quarter.

We've had a strong growth story in our dividend. We're committed to being competitive, sustainable and growing with our dividend every year. It's grown every year. I think our annual compounded rate of increases has been about 15% over the 13 years that we've been around, and that's our commitments, and we're sticking to it. We just increased our dividend again this year at our last Board meeting.

And when you think about those segments, we've got midstream that gathers hydrocarbons, whether it's crude oil, natural gas, natural gas liquids. We move those hydrocarbons through our transportation assets to our facilities where we convert them to the molecules that you need, that you use every day. And we just don't convert them to any molecules, we find the best value opportunity that we can create for our shareholders. And we get those molecules out into the marketplace, finding the best disposition for those molecules across the globe.

We've got in addition to our midstream organization, refining organization, we've got a commercial organization and their job is to optimize what goes into what comes out of these assets and then captures the ultimate value that we can capture out of the marketplace, and that all works incredibly well together. And don't forget about CPChem, our 50-50 JV with Chevron, it's deeply physically integrated with us at our Sweeny complex. It consumes a lot of the NGLs that we produce. And so we understand those markets very well and how it interacts with the markets for our NGL clean products and so our purity products.

And so it's all one big integrated hydrocarbon machine, and we endeavor to do it better each and every day. We've been on a journey of improvement in refining, we recognized 4, 5 years ago that we had some challenges in refining that we had a cost problem in refining. And we stepped up to the plate, and we've been delivering and executing. It's been a hard journey, but we've reduced costs across the board. We've taken $1 a barrel plus out of our refining costs.

We've improved the utilization of our assets. We've improved the clean product yield and all the time in the background, lowering the cost and delivering value. We've built a midstream wellhead to market presence that can compete with any midstream company out there. It's been a tough journey as well, but we've been very deliberate, very disciplined in the investments we made, and now you're seeing the fruits of those labor.

Over the last 4 years, I think we've increased our earnings there by 40%. And we're headed -- we're right at about $4 billion EBITDA a year, we're headed to $4.5 billion by the end of 2027. And we've enhanced our commercial organization. We've added a couple of dozen of origination players out across the globe, people that speak the local language, that know the local landscape that can help us find the best feedstocks and the best disposition for the molecules that we're producing. So we're on the move. We're looking for every way we can improve across the enterprise, and we're leaning in hard on integration and delivering value to shareholders every day.

Awesome. That's a great overview and a lot to unpack there. But maybe before we get into the segments, I have to ask one of the key topics in meetings this week has been the events that have unfolded in Iran and the Middle East over the past few days, and there's a lot of factors to consider that could affect refiners from product prices, feedstock costs, freight as well as we're talking about chemicals implications as well.

But there's still a lot of uncertainty about the path forward here. Could you just talk about what you're hearing from your commercial organization currently? How are you thinking about the potential impact to PSX, whether it's on the refining side of chemicals or...

I'm really glad that we're blessed with a strong commercial organization from the minute -- even before this started happening when you could see the military buildup, they started thinking about what could happen and then they're providing thoughtful insights every day, multiple times a day and looking at what's going on across the spectrum, whether it's LNG movements, the impact there on LNG markets out in the world marketplace to what the response is in Asia from a crude acquisition perspective, how refineries are already signaling that they're backing off run rates in Asia and what does that mean.

And answering the questions, the very challenging questions just in the U.S. where we're safe, secure. We've got access to whether it's Western Canadian crude or Venezuelan crude or Permian crude. We've got access to crudes, but what's it going to do to the pricing, what's it going to do the pricing of refined products, what's going to be the political reaction globally and domestically. All of those things are coming into play.

This is -- all of us, I think, intellectually have done the game in our head, geez, what would happen if the Strait of Hormuz is closed, but to sit here today and watch it unfold in real time, it's a little bit surreal to see these things. This is not just a scenario planning exercise. This is a real live war. People unfortunately are dying. We've lost, I think, 6 U.S. soldiers, and it's tragic to see what is unfolding.

But now what -- how do we get to the other side of this and how do we ensure that the world has access to the resources it needs to avoid major economic disruption and how do we work with the government to ensure that the U.S. economy is on solid footing and that our customers get the resources they need to go about their business. And so the commercial group has been very good at providing the fundamentals we need to start thinking that through and making those decisions.

That's helpful. I recognize there's a lot of uncertainty right now. So maybe we can dive into some of the segments. So starting with refining. So cracks have been volatile to start the year. Can you just talk about what you're seeing across your footprint from a demand perspective? And maybe longer term, how you see supply-demand balance shaping up over the next couple of years?

Yes. At a high level, we've seen strong distillate demand. We've been in heavy distillate mode. And certainly, current events only reinforce that. You can see the strain situation where there's no incentive to move into summer gasoline mode, which could create some interesting dynamics. Gasoline demand is -- diesel demand has been high, mostly at the expense of renewable diesel.

The economics change around renewable diesel. That volume has been replaced by traditional diesel, but you're also seeing stronger demand out in the economy. And so there's a lot of strength in distillate. Jet has -- continues to be strong. Gasoline has been about flat year-to-year. But if gasoline has to compete with distillate this summer, it's not going to feel flat. It's going to feel very tight. So that's kind of the 50,000-foot view of where we are on supply and demand.

I think if you look back, again, I shouldn't be remiss to touch base on how we see the gives and takes from capacity additions, capacity reductions. I think this year, our view is there might be another 1 million barrels of crude capacity -- crude conversion capacity out there. We see it coming on late in the year. So it's going to be a negligible impact.

When you boil that down to the refined product level, you're seeing this year, maybe 400,000 barrels a day of refined product impact when you're seeing demand increase by 600,000 barrels a day to 800,000 barrels a day. So really, we see things continuing to tighten into this year. That new capacity will come on late this year, it will ramp up into next year, and it will be offsetting the capacity -- or the volume growth that we see in refined products next year. So it's going to be kind of a wash. And beyond that, there's not much going on. So we're very constructive medium and long term on the balance for refined products. It's a good time to be a refiner.

That's helpful. The other big development so far this year has been Venezuela and the incremental Venezuela barrels available to the market. Can you just talk about the latest dynamics that you're seeing on the light heavy crude side, crude availability, recognizing that the Middle East inject some uncertainty just how you're seeing that light, heavy crude availability.

If you stick it into the box of U.S. consumption patterns and the interaction there really is about the competition between Venezuelan heavy crude and WCS. And we are right at the interface of that competition. We've got Mid-Continent refineries that consume WCS. Our Gulf Coast refineries consume WCS or Venezuelan crude. And so Venezuelan crude is going to have to be priced to compete with WCS. Likewise, WCS is going to have to be priced to compete with Venezuelan crude.

The diffs have spread out from about $11 a barrel to about $15 a barrel on WCS, and that's certainly benefiting us today at places like Wood River, which we now have total control of.

So I think as one of my colleagues has been mentioning in our speed dating sessions that we really like the Wood River transaction at $11 diffs, we love it at $15 diffs, and it is true. We understood that when we came in that there was tremendous upside having control over the Wood River Refinery and the Borger Refinery, and we're seeing that benefit today well beyond the synergies that we're capturing out of that. We're seeing the uplift in these tighter times.

And so we have the ability to process about 250,000 barrels a day of Venezuelan crude, most of it at our Sweeny Refinery and some at our Lake Charles Refinery. And we have, in the past, imported even before Maduro was removed. Chevron had the ability to export to the U.S. when we were taking barrels in. But there's nothing magically different today other than there will be more crude available. It still has to compete to get into our portfolio. We're not going to process it just because it's available. We're going to process it because it displaces in the Gulf -- in our Gulf Coast refineries, it displaces WCS. WCS will still compete. And so I think it's a very good dynamic place for us to be right in the middle of that.

Makes a lot of sense. And then I want to switch on the operational side. So last year, clean product yields they reached a record level. The refineries ran really well and costs continue to move lower. Can you just talk about where you are in the refining improvement process and what the next steps are from here?

No, that's a great question. You're right, Joe. We hit record clean product yields. We've been outpacing the industry on utilization rates, and we've been driving costs out of the system. And those have been the primary metrics that we've been focused on. And it didn't happen overnight. This journey have started in late 2021 when we recognized that we had some challenges that we needed to address.

We came up with a plan to address those challenges, and it's been a very hard path. It's very -- we've had to make a lot of tough decisions. But what you saw in 2025 is an inflection point where all those tough decisions we made started to come home to roost in a positive way. You're seeing it in our results. You can't turn the battleships that we have around, but -- overnight, but we started looking at our refining system as a fleet, not as individual refineries.

We challenged ourselves to drive cost out and to centralize a lot of things that could be centralized. We put our entire company on a unified bonus program versus competing with individual assets inside the portfolio. We were competing against the external world, and that changed the thinking and the approach of things overnight.

We went out to the front lines and said, look, what things have you been challenged with in getting your job done? What makes your job difficult? How can we make your job more efficient? And we set aside capital to address things that were making it hard for our frontline operators to run their assets. Maybe there were steam leaks, maybe there were things that just a weird position on valves that made their jobs more difficult. And that one of the hearts and minds of the front line, and they started coming up with more and more projects, more and more things we could do to be more efficient.

And we asked everybody in the organization to challenge the status quo. Don't get stuck in the old ways of doing things. Let's think about what we're doing and how we can do it better. We even had things embedded in our optimization models that were artificial limits that we were hitting. And we said, why is that limit there? Well, it's always been there. Well, can we get beyond that limit safely? Yes, but nobody has ever wanted us to do that. Let's -- if we can do it safely, we can do reliably, let's challenge it. We ruthlessly benchmark ourselves against other refiners. And we are closing gaps. We have more gaps to close.

You saw in our last earnings call, we rerated 4 of our refineries, and that's not something we take lightly. We were getting good accolades for having these high utilization rates, and they became so persistently high at 4 of our refineries, we said we need to rerate those because we don't want our refineries to get lazy and comfortable that, oh, yes, we're operating at 100%. We can't do any better than that. Well, your denominator is going to go up. So you're going to have to work a little harder. And that's what we did, 4 refineries.

Two of those refineries were rerated solely on what we call operational excellence. They were being operated better. They were managing their turnarounds better. And so they could go up about 10% in rates consistently -- consistent enough that we said, okay, that's now what your baseline is. And a couple of other projects like Sweeny and Bayway, we did specific projects that unleashed more potential, more throughput in those refineries, and it's been very beneficial in both those places.

And there's more to come. We've opened up that door for our process engineers and the operators out there to be creative in how we run these things, to be creative in utilization and in product yield. That's how you see the clean product yield going up. I love it, when I go to a stewardship review at one of our refineries, and there's a stream of young process engineers that come in and said, hey, we figured out how to do this. We rewired this and now we're going to make $20 million a year, and we only spent $500,000. I said, why are you standing here talking to me about these great things, go out and find more, and they do. They've been -- their intellectual capability has been unconstrained. They're applying AI to what they do.

AI is helping our operators operate better. It's helping our maintenance people maintain our assets better and to shorten our turnarounds. AI is helping our commercial people make better decisions faster. It's helping our midstream teams find methane leaks using satellite data faster. It's -- we're quietly implementing things that are going to be beneficial to our business through AI. And I think we're just touching the tip of the iceberg.

It's great to see the improvements coming through. You spoke on it a little bit earlier, but one of the strategic focuses has been improving the commercial side of the business. I know you've been building out the organization. We saw that at the headquarters last fall. Can you talk about the progress you made on the commercial side, where to go from here? And what are the signposts we should watch for in those results?

Absolutely. We've got commercial operations in Houston, in Calgary, London, Singapore. We have a small office in China. We recognize that we have to do a better job on the origination side of things. And so we've added 2 dozen originators out across the planet. They speak the local language. They know the local cultures. They know where these deals are hidden and how to unlock those deals and bring more value from an inbound perspective.

We've got more 100 gatherers out there looking for better places to capture more value on the disposition of our products. We hired a new head of our trading organization, came in with tremendous experience, and he has hit the ground running, and he's pushing that organization to higher levels of performance.

And so you're going to start seeing that in the commercial results, but you'll also see it in the capture in refining and in the equivalent numbers in midstream because they are working on behalf of those organizations to capture the most value out of the marketplace to find the optimal feedstocks to bring in and the optimal placement of products on the other side and to trade around our assets in a very proactive way to make sure that we're leveraging every stream that we have, every molecule that we have, the shorts that we understand, the longs that we understand to make that all work to the benefit of our shareholders.

That's helpful. So I wanted to shift over to midstream. So this has been one of the key focuses, on the NGL wellhead-to-water strategy. DCP, Pinnacle, Coastal Bend have been integral to that process. Can you just talk about the strategy at a high level, where you are in the process of developing this platform?

Yes. The strategy really started when we had PSXP assets that we had built in our MLP. We had our DCP joint venture, and there was a disconnect between those assets. And then we recognized that if we had those assets all under our control, we could create this wellhead to market backbone that would afford us the opportunity to take advantage of the growth that we saw continuing in the Permian Basin. And so we executed the DCP roll-up. A lot of people were scratching their heads. It took -- it was a difficult transaction to get done, a difficult nut to crack.

And we knew that then everybody was watching what are you going to do next? What have you -- where are you headed with this? And what we did next was start to build out more G&P assets that could feed into that backbone, acquire assets like Pinnacle that sit right on top of those assets that we were the natural operator that had built a competitive advantage on top of competitive advantages that we had and drove all that value creation down to our fractionators at Sweeny.

And then the EPIC transaction came along. We now call that Coastal Bend. We knew that we -- not only were we adding capacity to fill out our own fractionators in a proprietary way, we're going to need more transportation assets to bring those molecules to our fractionators. We could do what others have done is go out and build another big piece of pipe or we could acquire the pipe that we're already moving some molecules on, that had debottleneck capacity. We've already debottlenecked that pipeline once and have another debottleneck, I think, to the tune of 125,000 barrels a day that will be done by early 2027. And so we're not buying assets to be buying assets. We're buying assets that create more competitive advantage for us and more organic growth opportunities for us.

So Pinnacle, we bought Pinnacle. There was one G&P asset sitting there in operation with great contracts behind it, footprint for 2 more. We've executed the second one. It's up and running, and it's flowing into that EPIC pipeline, out to -- between the Midland and Delaware Basins, we've got Iron Mesa, a 300,000 barrel a day gas plant under construction. It's going to take the place of a very old unreliable Goldsmith plant that we had and add additional capacity beyond that.

And there's more to come in that region as we reestablish ourselves as a premier operator. Goldsmith, no one could put it in the premier operator category. We had lots of challenges with unsatisfied customers out there. They see the Goldsmith asset as a whole new bond of a new midstream opportunity out there. And now they're bringing other opportunities to us. We've got a lot of demand pull on more G&P assets that we're going to add, but we're only going to add assets at the pace where we see the demand for the liquids that will fill them and the gas that will fill them.

We're not growing just for growth's sake. We believe that we will hit $4.5 billion of EBITDA in the midstream business by the end of 2027. That's not an aspirational goal that said, hey, we need to get to $4.5 billion of EBITDA. No, that's not the way we do it. We look at the accretive opportunities that we have in the midstream business and what is the result of executing well on those accretive opportunities and we get to $4.5 billion. So we're not driven by an EBITDA growth target. We're driven by creating value for our shareholders and driving accretive returns.

That's helpful. Could I ask beyond 2027. So Western Gateway, that's a project that could add to growth beyond that time horizon. Can you just talk to the interest you've received in the project, path to reaching FID and how it fits within the overall strategy?

Yes. Western Gateway is the epitome of an integrated strategy. We had to have refining involved, we had to have midstream involved, we had to have commercial involved, we had to have marketing involved because we've got marketing assets in California.

And actually, the idea was originally conceived and generated in a leadership development program we had, where we had representatives from all of those parts of the company being developed as future leaders. And we asked them instead of just giving them a Harvard Business Review, we said, hey, take a look at the company, we're focused on integration. Can you tell us, is there something that we should be looking at? And they came up with this concept even before we had executed on WRB, even before we had announced the exit of L.A., they said, this looks like a great opportunity, and we ran with it.

Now having full control of WRB and having our own short position because we ceased operations at L.A. made the project just jumped to the front of the queue. And we've been through one open season with our partners at Kinder Morgan. The first open season was successful. It was primarily focused on getting Mid-Continent shippers providing Kinder Morgan the assurance that we were able to get enough volume to satisfy Phoenix so they can reverse the flow of their system that comes from California into Phoenix. So now they're comfortable with that.

So we're having a second season, and says, okay, now we're going to open up the season for flow all the way into California. And we heard in the first round that there were Gulf Coast shippers that would like to participate. So we opened up origination points in the Gulf Coast that could come up through Explorer and tie into the system that we're developing.

That open season will wrap up at the end of this month, and then we'll decide how big the pipe needs to be. And if the economics are compelling, we'll proceed. And we're bullish on those economics. We're going to be one of the primary shippers on the pipeline. And so we believe in the project. It's a matter of getting that open season, getting all the shippers committed and seeing what we can do.

Sounds good. We'll stay tuned. So I want to talk about chemicals for a little bit. I must say margins have been challenged recently. Can you just talk about what you're seeing in the market currently? Maybe if we go back to Friday, I know there's a lot of uncertainty in the market currently. How do you see the path progressing back to mid-cycle? Is it more demand growth driven supply rationalization? How you see the Atlanta land?

Yes. I'll try really hard to put myself back in Friday mode. But no, it's been a tough market. It's been a tough down cycle. CPChem was built for these conditions to survive in these conditions, and they're actually doing quite well at the bottom of the market versus their competitors. They've been running at 100% plus operating rates. They've got assets on the Gulf Coast. They've got assets in the Middle East. They're focused on advantaged ethane and the polyethylene and related olefins chains.

And -- and it's -- in the 26 years that CPChem has been in existence, it's grown faster and more profitably than their competitors. If you look at the last week view, North American assets exporting more than 50% of their production, running at over 90%, you get to 85% in that business, it's pretty tight. North America is running at 90%. Europe is running at 60% and rationalizing assets.

Asia is running at 60% and rationalizing assets, but more rationalization under those conditions, under those scenarios needs to occur. And one thing that we've been talking about even before the current situation is, I'm not sure the world understands the drag on that business that subsidized or submarket crude oil being sold into China has.

The way you look at when you're thinking about pricing and cost in that business, there's a stark S shaped cost curve where you've got naphtha producers that are converting naphtha to ethylene in China at the high end of the cost curve, and you've got people that are converting ethane in the Middle East and the Gulf Coast at the low end of the cost curve. Well, China is buying crude oil at a 40% discount, that cost curve got -- gets distorted.

And China, everybody scratching their head, geez, China is so aggressive. They're dumping polyethylene in the world markets. They don't usually do that. Well, it's because they've got this incredible cost advantage. And so they're being disruptive in dumping into the rest of the world. And so we were already looking at that saying that's just a disconnect, that's a dislocation, that's a drag and causing us to continue to be at the bottom of this cycle.

And now all of a sudden, you look at something that's coming into play that could change that. They're not getting discounted Venezuelan crude. They're not getting discounted Iranian crude. They're probably still getting discounted Russian crude, but you're seeing refiners in Asia cut back. You're seeing petrochemical assets in Asia cut back. Even the propane dehydro facilities are going to be challenged. And so it's a double whammy.

You're going to see that cost curve maybe revert to where it should be. And then you layer in the supply and demand impact that you're seeing from what's going on in the Arabian Gulf, Persian Gulf is that production can't get out of Qatar, production can't get out of Saudi Arabia, production can't get out of other locations, it's trapped. And so it's going to tighten up supply, not just for crude oil, but for polyethylene and in some respects, polypropylene as well.

So you're going to see a cost curve revert and you're going to see supply and demand tighten. So that could be a catalyst that gets us up off of this bottom of the cycle kind of condition. Will it hold and bridge to the next uptick? It could if it stays in place long enough as global demand keeps ticking upward. People continue to move from poverty to the middle class and demanding more of these products. And so it could be that catalyst that really sets the next up cycle in the petrochemicals business.

Helpful. So maybe just bringing it all together, the value of integration has been a key topic of discussion over the past year or so. Can you just talk about the advantages of having refining, midstream and chemicals businesses all under one roof.

Yes. I think it starts with the midstream business. We've got -- we move crude oil, we move NGLs, raw Y-Grade. Those 2 businesses are synergistic. We can manage them together. We realize cost advantages. They're just in the midstream. But then you -- I think the poster child of our integration is our Sweeny complex where it all comes together. We've got millions of barrels of underground salt dome storage capability where we can manage the NGL system, CPChem can manage their petrochemical system, and we can keep things moving and take advantage of markets each and every day.

And so there are synergies around understanding the market movements being a global player from that position on the Gulf Coast. We've got bidirectional flow from -- coming out of the Permian into Corpus Christi bidirectional flow on purity products to Sweeny, back to Corpus Christi all the way up to Mont Belvieu. So we can play all of those markets for our producers upstream.

And all those assets are advantaged because of how we manage the whole Sweeny complex. And we've got an export terminal at Freeport. So we can access global markets out of Corpus Christi, out of Freeport and out of Mont Belvieu. And you look at there in the Sweeny complex, the cost advantages of being able to leverage that midstream presence, that refining presence and we've got petrochemical assets, 3 NGL crackers right at our Sweeny complex that are owned and operated by CPChem. They're producing polyethylene, they're producing other olefin products right there.

We've got streams that are going back and forth seamlessly without the friction of vastly different ownership. And we understand those markets and we understand the influence of those markets on the NGL value chain, and so we can make better decisions commercially faster. And it's challenging to put a number on that, and we're working towards being able to discern what we can disclose to describe the values around that, but it may be easier to think about what the value is that would be destroyed if you broke that integrated value chain up.

We can take you to a location in Greeley, Colorado and show you a gas plant we have there. And at one end of the gas plant, there are 50 fairly innocuous wellheads. We're capturing all the gas and gas liquids off of those wellheads, capturing those liquids sending in the Sweeny, fractionating them at Sweeny and turning the ethane from those streams into polyethylene -- into ethylene and polyethylene pellets at Sweeny, and it's incredibly efficient, incredibly effective.

And our partner is the one -- partner in CPChem, the C side of CPChem owns those wells. And so it's just very integrated, efficient. Things happen seamlessly every day. And if you were to break that up into 3 distinct chunks, that would be a very challenging operation. Could you paper it? Sure, you can. But every piece of paper adds friction, adds a point of disconnect as a potential for lost value for everybody, not just you get value and I lose value, it's just a loss of value.

That's what we saw inside Wood River. Decisions were made slower. We couldn't really look at the full integrated value of running the right crudes at Wood River or Borger because of the things that we could do out at the retail level and capture value. That value is now freed up and we're delivering that. And it's amazing how we're able to optimize better across the board each and every day, seamlessly without friction.

That makes a lot of sense. So I wanted to ask on M&A. PSX has been active in M&A recently. Can you talk about, is the portfolio in an optimal place right now? Is there more to do on either the acquisition or divestment side?

Yes. We've divested about $5.5 billion worth of what we deem noncore assets, high-value assets, but noncore, assets that were generating good EBITDA but had no growth potential. And we've redeployed much of that capital into the acquisitions that we did primarily midstream, and it was the mirror image of that.

We saw assets like Pinnacle that we could acquire and not only get great assets, but open up an organic growth opportunity, the EPIC pipeline or then the Wood River acquisition. We got it at great value, tremendous value if you look at where diffs are today. And so there's got to be a value creation opportunity for us to acquire something. It was great to clean up our portfolio, but it was incredible to be able to redeploy the capital that we freed up into areas that would give us great returns on that capital invested and open up even higher return opportunities from a growth opportunity perspective, primarily in midstream, but we're not shy about refining if we find the right opportunities as well.

That makes sense. So I wanted to ask just on cash flow. Can you talk about how you think about the balance between shareholder returns, debt paydown, the path to the $17 billion debt target by 2027. And then buybacks versus dividends, which you just raised your dividend by about 6%, I think, recently.

Sure. Absolutely. Well, we're rock solid committed to delivering at least 50% of our operating cash flow to shareholders. And we beat that target last year. We beat it for quite some time. And so if you think about that, I think the consensus numbers for '26 and '27 have us generating about $8 billion of cash. And so if you think about that $8 billion, that's -- it's convenient to divide that up by $4, to $2, to $2, and $8 billion says you got to give $4 billion of that back to shareholders. Well, about $2 billion of that goes to the dividend right away, straight away. And so that means share repurchases are going to be about $2 billion. And our capital budget is around $2 billion. And so that leaves debt repayment around $2 billion. And so we're targeting around $1.5 billion in '26, $1.5 billion of debt repayment in '27.

And so that's how we look at that. That's how we think about that. To the extent that we have cash beyond that, we could accelerate the debt repayment and then -- but it's really going to be balanced about where we think our share price is versus the ultimate value of our share price. But we're committed to ratably deliver share repurchases, and we've got models in place that will make purchases based on where we think the share price is versus the ultimate value.

But we know the things that we have in the hopper to create value out in the future. So we can have line of sight on that and say, hey, this is knowing what we know out in the future, this is a pretty good deal to continue to buy shares. So we think we can do both. And we think we're going to have plenty of cash to get the debt down to that $17 billion level probably sooner than later and still have upside in share repurchases, delivering cash to shareholders.

And remember, we've got growth capital baked into that budget as well. So we're not just going to say, okay, we're buying these shares and there's no growth out there. We've got profitable growth coming that will enhance that share price as well. So -- and it's doubly compounded because we're shrinking the number of shares, and we've got growth opportunities that are going to stack on top of that smaller pile of shares going forward.

Perfect. We're a little bit over time, but I think that's a great place to here. Mark, thank you so much for being here. Really appreciate it.

Alright. Thanks, Joe. I enjoyed the talk.

Welcome to the Fourth Quarter and Full Year 2025 Phillips 66 Earnings Conference Call. My name is Michael, and I will be your operator for today's call. [Operator Instructions] Please note that this conference is being recorded.

I'll now turn the call over to Sean Maher, Vice President of Investor Relations and Chief Economist. Sean, you may begin.

Hello, and welcome to the Phillips 66 Fourth Quarter Earnings Conference Call. Participants on today's call will include Mark Lashier, Chairman and CEO; Kevin Mitchell, CFO; and Don Baldridge, Midstream and Chemicals; Rich Harbison, Refining; and Brian Mandell, Marketing and Commercial.

Today's presentation can be found on the Investor Relations section of the Phillips 66 website, along with supplemental financial and operating information.

Slide 2 contains our safe harbor statement. We will be making forward-looking statements during today's call. Actual results may differ materially from today's comments. Factors that could cause actual results to differ are included here as well as in our SEC filings.

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

Thank you, Sean. Welcome, everyone, to our fourth quarter earnings call. We delivered strong financial and operating results, reflecting our continued focus on world-class operations. Our disciplined approach to improving Refining performance has delivered high utilization rates, record clean product yields and enhanced flexibility.

In Midstream, we achieved another quarter of record NGL transportation and fractionation volumes, driven by our Coastal Bend and Dos Picos II expansions. More importantly, our team remains focused on continuous improvement. We're lowering our cost structure and increasing reliability so that we can maximize profitability in any market environment.

Moving to Slide 4. Safe, reliable operations, coupled with disciplined investment generates compelling shareholder returns. Safety is foundational. I'm pleased to report that 2025 was our best year ever for safety performance. I'm very proud of our employees for their commitment to safety. I would like to congratulate them on a job well done.

In 2025, we optimized our portfolio through multiple strategic actions. We acquired the remaining 50% interest in the WRB joint venture, sold a 65% interest in the Germany and Austria retail marketing business and idled the Los Angeles Refinery. We also improved our competitive position in Midstream with the acquisition of Coastal Bend and expansion of Dos Picos II. The strong operating results are a reflection of a concerted multiyear plan and we're not done yet.

In Refining, we're targeting adjusted controllable cost per barrel to be approximately $5.50 on an annual basis by the end of 2027. We've also streamlined our business to focus on the areas where we have a competitive advantage. As an example, our acquisition of the remaining 50% interest in WRB increased our exposure to Canadian heavy crude differentials by 40%. These differentials have widened by approximately $4 a barrel since the announcement of the acquisition.

Phillips 66 assets are well positioned to capture opportunities in markets across the value chain. Combining operating excellence, our integrated portfolio and our disciplined capital allocation mindset, we'll continue to deliver shareholder returns across commodity cycles. Last quarter, Rich discussed the progress and future of Refining. This quarter, Don will share more about our plans in Midstream.

Thanks, Mark. In Midstream, we've built an asset base that offers flexibility and reliability for our customers. We've increased adjusted EBITDA by 40% since 2022, and we've delivered approximately $1 billion of adjusted EBITDA in the fourth quarter of 2025. Our growth and our performance is the result of disciplined execution, which has created a competitive wellhead to market value chain.

Over the past 4 years, we have high-graded and simplified our portfolio. We bought in PSXP and DCP and we expanded the Sweeny Hub. Additionally, our recent Pinnacle and Coastal Bend acquisitions are performing above expectations, both operationally and financially, improving our acquisition multiple by about 0.5 turns. We intend to deliver increasing returns, improved customer service and enhanced reliability.

Moving to Slide 6. The platform that we have developed has paved the way to growth opportunities that provide line of sight to a run rate adjusted EBITDA of approximately $4.5 billion by year-end 2027. We anticipate adding a gas plant about every 12 to 18 months due to our attractive footprint in the Permian Basin. For example, we commissioned the Dos Picos II gas plant in 2025, and we announced the Iron Mesa gas plant, which is expected to be in service in early 2027.

These plant volumes support our NGL growth. We completed the first phase of our Coastal Bend pipeline expansion and we are bringing online incremental capacity of 125,000 barrels a day in late 2026.

In addition to these larger projects, we continue to identify low-capital, high-return organic growth opportunities across multiple basins. We are positioned to deliver mid-single-digit adjusted EBITDA growth, which will support our corporate capital allocation priorities. Our team continues to execute at a high level on a day-to-day basis. We have great momentum to deliver on our growth plans.

Now I'll turn the call over to Kevin.

Thank you, Don. On Slide 7, Midstream adjusted EBITDA covers 2 important priorities: a secure, competitive and growing dividend of approximately $2 billion and sustaining capital of approximately $1 billion. This leaves the balance of cash flows available for accretive growth opportunities, share repurchases and debt reduction. Further, at our targeted debt level of $17 billion, total debt would be approximately 3x the adjusted EBITDA for Midstream and Marketing & Specialties, leaving Refining essentially debt-free.

We remain committed to a conservative balance sheet and to returning greater than 50% of net operating cash flow to shareholders through dividends and share repurchases.

On Slide 8, fourth quarter reported earnings were $2.9 billion or $7.17 per share. Adjusted earnings were $1 billion or $2.47 per share. Both reported and adjusted earnings include the final $239 million pretax impact of accelerated depreciation associated with idling the Los Angeles Refinery. Capital spending for the quarter was $682 million. We generated $2.8 billion of operating cash flow. We returned $756 million to shareholders, including $274 million of share repurchases. Net debt to capital was 38%.

I will now cover the segment results on Slide 9. Total company adjusted earnings were flat for the quarter at $1 billion, with sequential improvements in Refining, Renewable Fuels and Midstream, mostly offsetting decreases in Chemicals and Marketing & Specialties. Midstream results increased mainly due to higher volumes, partly offset by lower margins. In Chemicals, results decreased mainly due to lower polyethylene margins, driven by lower sales prices. Refining results benefited from the acquisition of WRB. Additionally, we saw higher realized margins in the Gulf Coast, partly offset by weaker Central Corridor crack spreads. Marketing & Specialties results decreased primarily due to the sale of a 65% interest in the Germany and Austria retail marketing business and seasonally lower domestic margins, partly offset by higher U.K. margins and lower costs. In Renewable Fuels, results improved primarily due to higher realized margins, including inventory impacts, partly offset by lower credits.

Slide 10 shows cash flow for the fourth quarter. Cash from operations of $2.8 billion included a $708 million working capital benefit due to an inventory reduction, partly offset by the impact of falling prices on our net receivables and payables position. We received $1.5 billion from the sale of a 65% interest in the Germany and Austria retail marketing business. We repaid over $2 billion in debt and acquired the remaining 50% interest in WRB. We funded $682 million of capital spending and returned $756 million to shareholders through share repurchases and dividends. Our ending cash balance was $1.1 billion.

Looking ahead to 2026 on Slide 11. In the first quarter, we expect the global O&P utilization rates to be in the mid-90s. We anticipate corporate and other costs to be between $400 million and $420 million. Beginning in 2026, costs associated with the idled Los Angeles Refinery will be reported in Corporate & Other. In Refining, we expect the worldwide crude utilization rate to be in the low 90s. Turnaround expense is expected to be between $170 million and $190 million.

For the full year, we expect turnaround expenses to be between $550 million and $600 million. Utilization rates and turnaround expenses by region are provided in the appendix. We expect Corporate & Other costs to be between $1.5 billion and $1.6 billion. Depreciation and amortization is expected to be between $2.1 billion and $2.3 billion.

Moving to Slide 12. Mark will now provide some final thoughts. We will then open the line for questions, after which Sean will wrap up the call.

2025 was a pivotal year for Phillips 66. Over the last 4 years, we've been laser-focused on improving performance and advancing our strategy. We reduced cost, simplified the company and made tough decisions. We streamlined leadership, reduced headcount, outsourced work and rationalized our refining footprint. In 2025, we began to see the benefits of the discipline, solid, consistent results, which we're excited to build upon.

We monetized more than $5 billion of assets and leaned into our integrated portfolio. We built a competitive wellhead to market position in Midstream, and we raised the bar in Refining. Our teams responded and we're driving toward world-class performance, and we're excited about what we'll do. Our assets work together. They complement one another, and our people maximize their value.

We built a culture of ownership and accountability. We've challenged every employee to step up and aligned incentives so more of our people think and act like owners.

Going forward, our priorities are clear: safe, reliable operations, continuous improvement and disciplined capital allocation that returns cash to shareholders now while funding accretive returns that generate even more cash over time. This is a competitive business, and we have to earn investors' trust every day. We have momentum, and we're confident that we can rise to the challenge and deliver for our shareholders. Results matter. And in 2025, you've seen a positive inflection point in our results, and the best is yet to come.

[Operator Instructions] First question comes from Stephen -- Steve Richardson with Evercore ISI.

I was wondering if you could start on the Central Corridor, please. Can you talk about your outlook for Mid-Continent products and opportunities you see on the feedstock side, particularly now that you have a quarter plus of WRB consolidated. I appreciate the comment in the prepared remarks about the 40% increase in exposure to Canadian heavies. But wondering, if we could dig in there first, please.

Steve, this is Brian. In PADD 2, we have our maximum integration between our Refining, Midstream and Marketing assets. And as you probably know, we're one of the largest importers of Canadian crude.

From a crude perspective, PADD 2 is the first stop for this advantaged heavy Canadian crude. We also have crude optionality with various Cushing crude grades and advantaged crudes directly from the wellhead in PADD 2. And widening heavy dips are a tailwind -- a strong tailwind for the business. And as you heard in the intro, we've seen those dips widen by $4 since our purchase of WRB. Our sensitivities indicate that each dollar is worth $140 million in yearly earnings for the crude dip.

Additionally, PADD 2 is expected to have the most robust demand profile for the next decade with gasoline stable and with diesel and jet continuing to grow. We have really well-positioned assets in the market, and we have a strong supply of WCS and other crudes and good product demand. So margins should be very supportive.

Also the ability of our commercial team to extract optionality from the assets and extract optionality from the integration of the assets provide additional value. And then finally, I'd say the Western pipeline will help raise demand for PADD 2 products to fill a short in PADD 5.

That's great. I was wondering if you could follow up a little bit on costs. You've shown pretty good incremental progress on controllable refining costs this quarter, particularly relative to last year's fourth quarter. Can you talk about your 2026 priorities on the cost outlook? This is probably for Rich, but particularly as you have really improved utilization rate and clean product yields so significantly?

Yes. Thanks. This is Rich. Maybe I'll just start with a little bit of a recap of the fourth quarter, which is really setting the base for the 2026 performance and it has some really good highlights here to show.

We were $5.96 in the fourth quarter, which is clearly a nice improvement quarter-over-quarter. And directionally heading towards that $5.50 target that we're up.

Regionally, we saw some volume on the denominator side change. So of course, we have the Los Angeles Refinery idling and then the WRB acquisition. So those have subtle impacts to the calculation.

The primary headwinds we saw in the fourth quarter were really the natural gas pricing had increased. That was about a $0.13 a barrel headwind for us. But also the Los Angeles Refinery idling was also a big expense. We had a lot of expense there as we wound down that operation and put it in a safe position. And we had essentially no barrels throughput through in that. So if we were to exclude that cost from our calculation for the fourth quarter, our actual fourth quarter performance was around $5.57 a barrel. So very strong performance by the organization even in the headwinds of this. So I'm very optimistic. We're on track for this $5.50 target.

Going forward in '26, the idling of the Los Angeles Refinery will have a positive influence on an annualized basis of about $0.30 a barrel. So that's a positive tailwind for us. And also probably as important is our organization and the continuous improvement effort our organization has really built into how we do our business day in and day out.

And we're targeting another $0.15 a barrel reduction on that by year-end 2026. We've got over 300 initiatives that we're working and a very solid track record of capturing value from this program.

So all this is resulting in what I see as a very structural change in the business, honestly. We've got these organizational changes and work processes that we've put in place. And we've got dedicated resources that are challenging the status quo of everything we do each and every day, trying to find a better way to do it, driving inefficiencies out, eliminating waste.

And of course, foundationally, all this is reliability. You've got to be in the market to capture the market. And we're seeing continued progress on our reliability programs and we have a very safe operation as well, organization that is committed to safety. So we're making great progress. I'm very excited about it. I think the cost profile is heading in the right direction, and we're not done yet.

We now turn to Neil Mehta with Goldman Sachs.

Yes. Just building on the operations and refining. You talked about operating costs. Can you spend a little time on turnaround specifically last year? I think you were able to beat your turnaround guide. In Q1, it looks like you're going to be running in the low 90s utilization, which is probably better than a lot of your peers. Just your perspective on how you're managing through the turnarounds and what you're looking to be best in class there.

Neil, it's Rich again. Thanks for the question. And I think I'm getting a few questions on this front. And one thing I want to make clear is the 2025 guidance for turnarounds did not include WRB. The 2026 guidance includes 100% WRB. So there is a little bit of basis difference on these turnarounds. So you see a slight uptick in turnaround -- total turnaround costs, but full inclusion of the WRB assets in that.

So when I think about 2026 and how that is going to move, we see ourselves in a relatively low part of the cycle on the turnarounds. The TAs are focused primarily in the Central Corridor with the smaller effort in the Gulf Coast area and '26 first quarter TAs, and that's highlighted in our enhanced information provided at the back end of the presentation here, which has given you some insight on the quarterly or the area's geographic location of the turnarounds that we're providing.

So we do see a fairly light turnaround cycle. Even though you see the dollars go up a little bit, it's not really that inclusion of WRB into it that's reflecting it.

And the other thing to think about, we've often guided to $0.75 a barrel as the impact of our turnarounds. And there is a slight uptick if you were to take WRB and look at it in isolation, but that's being offset by the idling of the Los Angeles Refinery. So there's essentially no material change to that guidance on an annual basis either, Neil.

And Mark and Kevin, follow-up for you. I think, Kevin, you talked about this 8-2-2-2 framework. I thought that was a helpful way or moniker for thinking about the cash flow associated with the business. So I guess one of the questions as you guys are working down the debt towards the 30% net debt target, you're at 38% right now is what's the capacity to buy back stock. And so if you could walk through that framework, that would be helpful.

Yes, Neil, it's -- actually, I think it's pretty straightforward because we've laid out the debt target and also the 50% or greater of operating cash flow return to shareholders through the dividend and share buybacks. So the dividend, which is secure, competitive and growing is right around $2 billion per year. The capital program and we continue to be very disciplined around how we think about the capital program and the execution against that.

We put the capital budget at $2.4 billion. So that's the second of the 2, so slightly over $2 billion. And then the balance is available for debt reduction and buybacks.

And so when you think about an $8 billion operating cash flow, then that means there's just shy of $4 billion available for debt reduction and buybacks, and it would split approximately equally between the two, slightly weighted towards share buybacks, if you think about that 50% calculation.

And of course, you can change if the operating cash flow is going to -- it will be what it is, and it can flex up or down from that level. But the framework is there and in place. And so we think that we should be able to reduce debt by somewhere in the order of $1.5 billion per year for the next 2 years. And that's excluding any additional flexibility we have with any asset dispositions that we have not baked into our plan.

We have not communicated any targets around that, but we continue to work through the portfolio and options we have to monetize noncore, nonstrategic assets that may be worth more to others than to us.

We now turn to Doug Leggate with Wolfe Research.

Mark, I'm sure you want to probably pass this off to one of your operations guys. But I'm afraid I want to ask you a obvious question about spreads, about Venezuela, the WCS and so on. And I guess my question is quite simple. Are these -- what's the actual dynamic that's going on in the Gulf Coast from Phillips perspective? Are you seeing physical barrels beyond the sequestered cargoes that we're obviously taking to begin with? And are they competitive?

And what I'm really trying to understand is, is the market overreacting here because WCS normally widens in the wintertime. And we haven't really seen a ton of physical barrels show up yet. So we're trying to figure out what the market is pricing in here if it's -- everybody is competing for these barrels at the same time, including places like India and so on. Any color you could offer on your experience would be appreciated. And I've got a follow-up on operations, please.

Yes, Doug, thanks for the question. Yes, we're getting a lot of interest in the impact of Venezuelan crude. And certainly, we welcome the advent of more crude into the system. We've got the flexibility, as you know, to process Venezuelan crude. In fact, I think we publicly stated we can process about 250,000 barrels a day. And if you look at that as a percentage of our total crude processing capacity, I think we're more heavily weighted, more opportunity there than our peers. And so we're quite interested in being able to do that.

And ultimately, we do think that there is an impact on WCS spreads. And there are cargoes of Venezuela crude coming into the U.S. Even before Maduro was removed, there were cargoes coming in, and we participated in that from time to time when the economics dictated it.

And as you know, we're going to look at the economics. We're going to run our models and see if it makes sense to process it or not. But we've got the capacity there. We don't have to spend a dime to get there, and we're ready to go. So I'll let Brian dig into the numbers a little more.

Of course, I agree with everything Mark said. We were buying Venezuelan crude. Prior to Maduro, we were buying Venezuelan crude. Now taking to our refineries. But even if the Venezuelan crude doesn't come to our refineries, it hits the global market, it's going to impact heavy crude differentials. And even if -- on WCS, if you take a look at WCF's 2025 differentials versus this year's actuals and forward curve, we're $3.50 weaker in 2026 this year. So the market is a forward market.

It's looking at barrels coming on and its processing and thinking about what the differentials should be, not just for Venezuelan crude, but for all crudes. And I would say we -- as Mark said, we look at relative crude values.

So when we're thinking about crudes whether we bring in Venezuela crude or some other crude, we're thinking about the cost of the crude, the crude type, the value of the products that crude makes, transportation costs, the specific refinery that the crude is going to. And we have a lot of flexibility about what crudes we can run in all our refineries.

We also have a strong commercial organization, and that allows us to redo the crude slate pretty quickly as the market dictates. So that's also a help. But I would also -- one other final point that I haven't heard people talk about, which is the heavy naphtha. And as more heavy naphtha is sent to the U.S. Gulf Coast for blending Venezuelan crude, it's likely to be a benefit to the gasoline margins, particularly when we're moving into gasoline season.

I appreciate the answers, guys. Maybe just a clarification very quickly. I'm trying to understand if it's the physical market has driven the widening or the expectation from the physical market. Or is this paper markets bidding out in the future, but the physical hasn't shown up yet?

I'm trying to understand if it's already happening or if this is more speculative that's driving these gap -- the gap that we've seen around what is normally a winter spread on WCS?

I would say both. It's the barrels are coming into the market, both in the domestic market, foreign markets, and it's the expectation of continued barrels into the markets.

Okay. My quick follow-up, Mark, is just on your comments about the final utilization. Obviously, reliability was under the spotlight for quite a while. You guys have stepped up there, and I think Neil already observed on his question.

My question is simply, when we think about your run rate going forward, what would you have us think about the range of utilization? It's obviously moved up. What should we think about as the go-forward sustainable utilization rate?

Yes. I'll let Rich tackle that. He's got some good metrics there.

Okay. So utilization, obviously, we've been focused on enhancing our reliability in our programs that underlie that continued long utilization. So utilization is really 2 things in my mind. One is the equipment has to be available to run and then the market needs to be there. So the market will be what it will be.

But when it comes to our ability to run, we're seeing some really good progress with these reliability programs. So much so we've actually even looked at our capacities as an organization and did some noodling on it. And we've concluded the fact that we've had some structural changes in 4 of our refineries. And you're going to see us release some increased capacities and maybe even in the supplemental data on this -- on the presentation, but there's 2 primary reasons. One that we're going to increase these capacities.

One is demonstrated improved operating rates at 2 of the refineries and projects that have been implemented at 2 other refineries. So -- at our Billings Refinery, we're going to move the capacity of that facility from historic 66,000 barrel a day stated capacity to 71,000 barrels a day. And at the Ponca City Refinery, we're going to move that from 217,000 barrels a day to 228,000 barrels a day.

And on the project side, we've talked about both of these projects. And I think in 2025, they were both commissioned and have both demonstrated their capability to meet the design parameters. So at the Bayway facility, we've talked about the VGO -- the native VGO project. That has also unlocked some crude capacity for us, and we're going to move the Bayway Refinery up to 275,000 barrels a day capacity from 258,000. And then the Sweeny Refinery from 277,000 to 265,000 related to the sour crude flex project, which we've talked a lot about over the time. 35,000 barrel a day increase in capacity across the system, about a 2% increase.

So when we think about utilization and then as a fact of capacity, you could see us using the equipment even at a higher level than what we have historically reported on.

And I would just add to that, there's been a concerted effort around turnarounds. You've seen our turnarounds become more disciplined, and we're taking work out of the turnarounds. The work still getting done, but we're finding creative ways to get it done outside of turnaround. So it shortens that duration and the financial impact. And we've been using things like machine learning.

We reduced the spend on turnarounds in our forecast, I believe, midyear substantially. And I think we still beat that throughout the year because we're getting better and better at using those tools to better implement our turnarounds to manage the impact on utilization. So that's underlying some of that performance as well.

Mark, thank you so much for the answer. You are the reason we're having a panel on this exact topic at our conference in a few weeks. So thanks, guys, very thorough answer.

We now turn to Lloyd Byrne with Jefferies.

Maybe you guys could start with just an update on Western Gateway and the open season? And then any -- I know you guys are extending the destination to L.A., but any hurdles, next steps? Where are you in permitting all that stuff?

Lloyd, this is Don Baldridge. I appreciate the question. Yes, to unpack that a bit. We had a first open season, positive response. We received multiple shipper commitments, which really gives us a solid base of volume and some certainty there. And as you mentioned, what we're doing now in this second open season, it's really an extension as opposed to our expansion instead of an extension because what we've done is we've expanded the delivery points all the way into the California market, specifically the L.A. market, which is really the heart there, California demand.

That, plus being able to reach back into the Gulf Coast, where we have made arrangements to be able to pull product in from the Gulf Coast through the Explorer Pipeline to reach the Western Gateway path. And as you know, we're a 22% owner of Explorer, so there's some benefit there.

And so now prospective customers, they really have the ability to reach a very liquid demand center in the L.A. market, be able to reach back to supply origins both in the Mid-Continent as well as the Gulf Coast. We think that is really a compelling offer. That's what this second open season is primarily focused on.

And what I'd emphasize for you is that liquidity, that's really, I think, what's going to help drive additional interest in this project. Like I said, we received commitments in the first open season. We're expected to get additional commitments for this path that would really be the Gulf Coast, Mid-Continent to L.A. The feedback has been positive. I think we're -- the folks that we are actively engaged with along this project see the market developing a lot like we do, where the West Coast begins to look a lot like the East Coast where you have -- it's supplied by a few refineries, some imports that are waterborne and then you have a pipeline, which delivers really competitively priced, attractive, reliable American-produced fuel to that market. So that's what we think is really exciting about this.

We're obviously actively working through the scoping and design phase and feel real confident in terms of the ability to execute. It's really right now securing third-party supply commitments with the right contract terms and such to give us the right returns to be able to execute the project.

That's great. The support from the state's been pretty good?

Yes. I mean from my experience, this is one of a unique project, and I've been in the pipeline business for most of my career, but to have the amount of support from regulatory folks, elected folks, both state and federal. This one is a first to have that type of just kind of unilateral support and understanding for this type of project. The design, the capacity, the timing, all of it makes a lot of sense to most of the folks that we talk to.

That's awesome. And a quick follow-up, I think, to maybe Steve's question. Clean product yields have been really strong. And just the sustainability of that, the catalyst optimization and then whether Central Corridor will help with respect to those yields going forward?

Yes, this is Rich. Thanks. It's been a real focus for us. We just talked a little bit about utilization and capacity, and that's really focused on the front end, the crude side of the business.

The utilization and clean product yields component of that is a continued now focus for us. And we've taken time to evaluate every key unit that we have in our system. And we're using the discipline that we used for the crude unit utilization part of the business and applying that discipline now to all the downstream units that we have. And what you're seeing is the results of this effort starting to creep into the numbers here. And you see it in the clean product yield component of that. We had a record year this year annually for clean product yield, which is not an easy thing to achieve in a system as large as ours. But it's -- what it is, is each organization is taking detailed look at every one of these conversion units and making sure that we are converting to the highest product value that we can.

So I feel it's structural. It's a structural change in our business. And I see it as very sustainable. And I also see it as we're going to -- you're going to see continued progress on this as we move forward here. Part of it driven by the organization's performance. The other part, driven by our small capital, high-return investment opportunities.

We now turn to Manav Gupta with UBS.

Congrats on a lot of positive developments, including the debt paydown and cost reductions. My question here is, when we look at the Midstream earnings, you can let me know if I'm wrong, but I think you've almost doubled them in the last 2 years. So how should we think about the Midstream portfolio going ahead? Should we assume like the organic 5% or something like mid-single-digit organic growth in Midstream and a possibility of good bolt-on deals if they come along? Like help us understand the growth path for Midstream from here on.

Yes, Manav, this is Mark. You're absolutely right. You've seen that kind of growth in our earnings. There have been a number of things that historically have factored into that, certainly organic. But I think really, the big upside has been the inorganic things that we acquired that opened up a larger organic playing field. So you've seen that with Dos Picos, you've seen that with Coastal Bend, and we'll continue to look for opportunities like that. But the current focus to get us to that 4.5% is organic opportunities. And Don can walk you through what that looks like going forward.

Yes. Manav, I can just say, I think we are right where I expected us to be from a run rate EBITDA right around that $1 billion. And maybe to kind of unpack how that looks over the next couple of years, I expect this to be about this $1 billion run rate. We'll have some quarter-to-quarter variability, a bit with commodity prices that are sensitive in our G&P business and what the realized prices are as well as just our contract and volume mix when that when we factor in fee escalations and recontracting and spot rates and such.

And the real step changes will be these organic growth projects that we have been talking about. And when those come online and fill up here the latter part of '26 and into '27, those will be the big earning contributors. That's what really takes us to that $4.5 billion run rate by the end of '27. And what I'd highlight for you, and I think you heard it a bit from Mark is the momentum that we have within our Midstream business.

As you know, I came in from the DCP acquisition. And I can tell you we are a much different midstream business today than we were just a few years ago. Because of the platform that we've built, like Mark mentioned, some of these acquisitions, putting this platform together, we are a dramatically better midstream company.

We have really great response from our customers. They see the breadth and the quality of the service and the reliability that we are executing on. So we're getting a lot more deal flow. We see that as what really gives me a lot of confidence in hitting our target at that $4.5 billion by end of '27.

We also -- you're seeing the deal pipeline fill up for things past '27, like a potential expansion of Corpus Christi frac, like the Western Gateway and those types of projects that are starting to come to fruition in our deal pipeline that gives me a lot of confidence that this is a sustainable growth rate of that mid-single digits, not only into '27 but well beyond '27.

Perfect. So my quick follow-up here is a little bit on the Refining macro. And we started 2025 with a very bearish outlook and things improved and refiners massively outperformed S&P in 2025.

Now you're starting '26 with a very similar sentiment there for some reason, people are overly bearish on refining. But the way the setup is looking, it's still looking pretty constructive to us. And year-to-date, refiners have again massively outperformed S&P. You have definitely outperformed S&P. I'm just trying to understand what's your refining macro outlook? And do you believe that you could have another good year in 2026 as we did in 2025?

We couldn't agree with you more, Manav. We are very bullish. If you look toward the start of spring turnarounds, we believe the Refining system will have trouble keeping up with demand.

First, demand continues to keep growing in 2026. And if you look at global net refinery additions, they are less than global demand growth. We also see new refinery builds weighted to the very end of the year, and they'll probably slip into 2027.

Second, we had very low unplanned turnarounds in 2025, and it would be hard for unplanned outages for the U.S. refining system to be much lower, particularly with, as you point out, that recent high utilization. So couple this with the widening of the heavy dips benefit of that to our system, and we are very constructive margins for the year.

We now turn to Theresa Chen with Barclays.

On the Midstream front, how do you view the likelihood of increased ethane projection in the Permian following the start-up of multiple residue gas pipelines in the second half of 2026 and beyond. What implications could that have for your NGL volumes and margin realizations over time?

And given your integrated strategy translating this potential development to the chemical side, if Gulf Coast ethane availability tightens, could incremental upstream rejection ultimately affect the feedstock advantage for Gulf Coast crackers?

Theresa, this is Don. I think our view on -- when you think about the dynamics in the Permian with more gas pipelines coming on, our view is that ethane will have to continue to get priced so that sufficient recoveries are there to feed the demand in the Gulf Coast. And so we don't see a material change in rejection recovery in the Permian with the new gas pipelines coming on.

Obviously, through our CPChem ownership, we've got some big demand coming on from an ethane standpoint as we turn on the Golden Triangle project in 2027 when it really starts commissioning and has that flow. And so I think we see this as continuing to balance out. As gas prices rally, you might see some ethane, obviously, price with that, so it stays in recovery. But that's pretty much how I see it.

We now turn to Paul Cheng with Scotiabank.

I think this is the first one. Maybe, it's for Mark. You guys have done a lot in improving your refining operation. So as of this point, with your houses gradually, I think getting into the shape that you want, do you believe you could be a good consolidator in the refining industry? And do you have the desire to do it if that's a good refining asset that -- or that okay refining asset is available that you may be able to add to the system and be able to enhance. So what kind of criteria you may be looking at?

Secondly is that if we look at your heavy oil, I assume that in the first quarter, you're going to run more heavy oil, given the discount. So is the first quarter that you are already maxing out that capability or that you actually think you still have excess capacity for the remaining of the year comparing to the first quarter level.

And as you increase your heavy oil processing, will that in any shape or form impact your light product yield as well as your throughput level?

Yes, Paul, I'll add to your second question first and maybe invite others to pile on, but we are maxed out heavy. We are taking full advantage of what's out there. And of course, there is a impact on clean product yield. And so we recognize that. And it's beneficial to the economics or we wouldn't be shifting that direction.

On your first question, the improving refining operational performance, thank you for recognizing that. It's true. And I would say that what you're seeing and what you saw in '25 and we'll build on that momentum in '26, the precursors to that were set in motion almost 4 years ago.

And we've been very diligent and the results also reflect the momentum that we have because we're not just waking up today and thinking about what we can do tomorrow. These things have been building and building over the last 4 years. And so there's much more to come, much more to do, much more to accomplish.

And could M&A take a role in that? Certainly, we've shown that for the right value creation opportunity like we saw with WRB, we would add to our refining capabilities. I think they're fairly rare and maybe you could call them unicorns.

But if there are the occasional unicorns that come up, we would certainly take a look at it. And if it added to our competitive advantage, particularly in the Mid-Continent or Gulf Coast, we would certainly take a hard look at things.

We now turn to Sam Margolin with Wells Fargo.

Maybe turning back to Midstream. You made a comment, you alluded to this post 2027 growth opportunity. And we have the 2027 EBITDA target out there, but it does seem just like underpinned by fundamental trends, GORs and underlying production and efficiency trends, there is going to be a tail to your midstream growth opportunity?

And really, the question is how you are going to frame that on the spending side. You've got some organic projects that are starting up this year and next, feels sort of like a peak spend. Maybe there's some operating leverage and some infill in those new assets. Or there is an opportunity to accelerate spend. So just a question about how the midstream gas opportunity extends past 2027 and what that means for your capital framework?

Sure. The way I think about that, we've built this platform that has this now, I think, an organic opportunity flywheel that continues to bring additional opportunities that are low capital, high return, being able to add incremental volumes to our system. And we'll continue to have some of these chunkier build-out, and we've talked about a gas plant every year or so.

I think we're on that pace, additional fractionator, we're on that kind of pace, we'll have those types of additions. But in the interim, just lower capital, higher return, both kind of build out extensions of what we have from a platform, I think, will continue to carry day.

And so I'd probably step back and just tell you that momentum in that platform that we see is just being able to generate those kinds of projects that will carry us beyond '27 and be able to continue on that mid-single digits.

But I'd also say it's not just in our NGL business. We're seeing opportunities in and around our crude to clean value chain that we continue to stay focused on. And those are a lot of optimization projects around our pipes and terminals. So the breadth of which we can execute within the midstream space is pretty impressive and pretty exciting.

Sam, it's Kevin. I'd also just highlight that the Western Gateway, if that's a project that moves ahead, that is not in any of our current projections. And so that just further adds to the potential for growth post 2027, if that goes ahead.

Understood. Okay. And then maybe just a follow-up on chems. It's an industry issue, not a not a CPChem or a PSX issue, but there is more capacity coming. And maybe just your latest thoughts on chems, both strategically after this slate of projects you have come online? And then in the near term, mitigating some of these commodity challenges?

Certainly, I think that CPChem is focused on getting those big projects up and operating. They do see them being quite accretive even in this environment. And so they need to get those online and generating value. But -- and CPChem has shown that they're quite resilient during this downturn, generating our share of their EBITDA, $845 million in 2025.

And what needs to happen and is happening in the marketplace is pretty large-scale rationalization on the order of 20 million tons per year, and that would get the industry back to 85% utilization.

Now I'd note that right now, the U.S. base is running at 90%. And so U.S. is leveraging its cost advantages, its capabilities, while Asia Pacific and Europe are running at about 65%. So they're on the bubble. They're on the ropes, and that's where we think the bulk of the rationalization needs to occur. We saw 5 million metric tons a year come off in '25. We expect another 5 million to 7 million metric tons coming out of Southeast Asia in this year and next and then an additional rationalization of naphtha crackers in Europe to tighten things up.

And then the new builds that are out there beyond what we see at Golden Triangle and Ras Laffan are primarily in China, and there's not a lot of clarity around those, when they will come up. There were stories of them being operational, but not actually being run in '25. And so that's a little bit fuzzier.

And typically, it takes longer for those assets to come on and they will be -- they'll only be brought on when the Chinese think that they might be useful. And so that continues to push out.

We now turn to Matthew Blair with TPH.

Maybe to stick on chems here. Could you talk a little bit more about the modeling considerations for your Gulf Coast cracker and PE plant that's scheduled to come online later this year. Do you think that Q3 is a good start-up target? And if so, how long would that take to ramp. In terms of the sales split, would that be completely oriented to the export market? Or do you think like a 50-50 domestic export split would be reasonable?

And then finally, for the ethane supply, does that all come from PSX? Or do you have any sort of contracts with third-party ethane providers?

Yes. Thanks, Matt. Those assets should be commissioning and really starting up in the fourth quarter and then ramping up through at least the first half of '27.

And given where we are today, it's going to be largely export-oriented and certainly initially, they'll always want to repatriate as much of that volume as we can, but starting up, it will be primarily export-oriented.

As far as the sourcing of ethane, the majority of it is coming from us, but they certainly have connectivity to ensure that they have the best possible situation and multiple sources of ethane.

Sounds good. And then you mentioned the L.A. shutdown impact on op costs in the fourth quarter, which we found very helpful. Do you have a similar number, if there is one, on the L.A. shutdown impact for margin capture in the fourth quarter? And I guess the reason I ask is if I look at your margin capture in 2025 versus 2024, it looks like it came down about 1 percentage point and some of your peers are talking about how their margin capture increased year-over-year.

And of course, these indicators aren't exactly apples-to-apples, but maybe you could just help us understand if there were any sort of unique headwinds to your margin capture in 2025.

This is Rich. Los Angeles Refinery, when we step back and look at it, and we're making the decision here to the faith of the asset and the operation, it was very clear to us on 2 things. One, the cost to produce was very high, and the materiality of the earnings was very low, if not negative, in a number of cases. So -- and the outlook on capital -- recapitalization of the asset was also very high.

So when I think about it, it is not material to the earnings side of the business, the shutdown. And the market capture on an overall system basis, if you think about it, there was 135,000 barrel a day facility and a 2 million-barrel a day operation. So it was not extraordinarily material either on the overall system. So I would say nonmaterial on market capture and nonmaterial on earnings.

Let me now turn to Jason Gabelman with TD Cowen.

Yes. Most of my questions have been answered, but maybe if I could just touch on the Midstream guidance because it sounded like the ramp-up from the new projects wouldn't really hit until the second half of this year.

So wondering if you're seeing any headwinds in the first half from recontracting on the NGL pipes and if that's something that will be a feature in future years. And then also, anything specifically in 4Q that resulted in a step-up in OpEx, which looked a bit high.

Jason, yes, on the -- in terms of the first half of this year, I think we're going to see ourselves pretty close and pretty flat on that $1 billion a quarter run rate. I think pretty well set. That factors in, like you mentioned some contract renewals. That factors in contract fee escalations, all in there. So I think that will stay fairly steady and you'll see the uptick really when we start filling in some of these organic growth projects.

And in terms of OpEx in the fourth quarter, that's really just sort of timing and seasonality. I think if you look at us over multiple quarters and years, we spent a lot of time talking about extracting cost out of the Refining business.

And some of those successes have blended over into the Midstream because the team there has also been able to grab some efficiencies through the scale that we've built to be able to leverage what we have at Phillips in total.

And so we're seeing really, I think, a healthy operating discipline there from a cost standpoint. But there's obviously some seasonality and some quarter-to-quarter timing, but really pleased with the performance from an operations standpoint.

This concludes the question-and-answer session. I'll now turn the call back over to Sean Maher for closing comments.

Thank you all for your interest in Phillips 66. If you have any questions or feedback after today's call, please feel free to reach out to Kirk or myself.

All right. We got a great turnout for this session. We're very honored every year to have Mark come and Phillips 66 team, Kevin, Don. I'm Neil Mehta. I'm joined by my colleague, John Mackay here, and we're going to have a great conversation on refining. This morning, we started off talking about the Permian, then we went to the Marcellus and the Haynesville and now we're going to move to the world of refining, and there's a lot to talk about.

So Mark, I want to give you an opportunity to talk about some of the big strategic initiatives and plans in '26, and then we're going to jump right into refining because there's a lot of moving pieces. A lot of that we can talk about.

Well, first off, Neil, I want to thank you and John and the rest of the Goldman team for hosting this every year. It's a great way to come out of the holidays, rested and refreshed and see what's going on in the world, and there's a lot going on in the world. But first and foremost, I just want to make the point that Phillips 66 is positioned to deliver durable through-cycle cash flow with a ratable dividend.

We've got a lower volatility business model. We're an integrated player, but we don't have exposure to the volatility of the upstream. So we're focused entirely on downstream, and we've got a great group of complementary assets in our midstream, our refining and marketing petrochemicals.

And many of those assets sit right on top of the regions you just discussed, Neil, and take advantage of one of the best hydrocarbon corridors on the planet. And we've got this system, the combined refining and midstream marketing and chemicals assets that, frankly, are irreplaceable.

When you look at the combination of those assets on the Gulf Coast, the Mid-Continent out in the Permian, it would be prohibitive for anybody to try to replace those assets. And at the end of the day, we're hydrocarbon processors, and we intend to be world-class hydrocarbon processors, getting better every day, more efficient, focused on safe, reliable operations. And we're there to process crude and NGLs. And while those are valuable commodities, they're of no use to anyone until you turn them into products that you use and that you use in your life every day, the clean fuels, the feedstocks, the petrochemicals, the polyethylene. And we're there to do that, and we've got the system that creates a lot of optionality. So we can optimize around that system.

We can get the most value out of every molecule out of every barrel that we process. And at the end of the day, that positions us to deliver consistent cash flow, consistent returns, growing over time, getting better for you, our investors. And we absolutely believe that Phillips 66 can be a cornerstone of your portfolio.

That we are committed to being very disciplined capital allocators to take advantage of these assets to deliver those through-cycle cash returns over time and a consistent growing competitive dividend. And so we welcome you, and we look forward to providing that performance for you on an in and out basis and continuing to provide consistent performance and consistently improving performance.

So Mark, we'll flow the conversation. Well, I'll start on refining. I'm going to turn to John to talk about midstream, and then we want to spend some time talking about capital allocation, chemicals and the rest of the business. Refining, important news over the weekend, the potential return of Venezuela supplies is a very dynamic situation right now.

You process 500,000 barrels a day of Western Canadian crude, which will anchor against the Maya crude, but you also have the capacity to run then in your Gulf Coast units. Talk about how you're watching the situation and what it could mean?

Well, we're watching it very carefully. Our friends from Chevron have been participating in Venezuela and exporting crudes, and we've been partaking of that on occasion. So we do have 2 Gulf Coast refineries that can turn and process Venezuela crudes as they ramp up. And I think that there's -- our view is that there's going to be near-term impacts and then, of course, the longer-term play there.

Near term, we could see more of those barrels coming into the markets into North America, certainly being processed by Gulf Coast refineries, but also then competing with the WCS that's currently being consumed in those refineries and have an impact on those differentials back into the Mid-Continent as well.

So we see it being constructive both for our Gulf Coast refining capabilities as well as our Mid-Continent refineries. And ultimately, there's going to be more naphtha requirements. We've got opportunities to export C5s back into Venezuela if that opportunity exists.

And longer term, what you see is the potential for growth. Venezuela was producing 3 million barrels a day of heavy crude. We've got refineries designed for the long term to process that crude. But it's going to take a lot of investments by the upstream folks over years, if not decades, to realize the full potential.

But we really believe that this is an opportunity for Venezuela to return back into the capitals fold to bring their economy and to benefit their people over the long term. It's a crime what's happened there, and we really do hope that it all plays out that way.

Kevin, you've been involved in Venezuela over the years have been watching it, whether it was in your Conoco seat or as a buyer of Venezuelan crude at Phillips 66. I mean how are you thinking about the situation? And remind us what is the capacity to process. That would be Lake Charles and at Sweeny as well?

Yes. So specifically for Venezuela crudes at those facilities, it's somewhere in the order of a couple of hundred thousand barrels per day that we could process if the crudes are available and the economics are there to support it. But I think what's very important is the point that Mark was getting to that it impacts the entire sort of heavy crude dynamic. And so across the system, where we're running about 0.5 million barrels per day of heavy crudes, you'd expect to see that benefit flow up through the consumption we have in the Mid-Continent where we're currently a heavy buyer of Western Canadian crude.

There's a debate about how much incremental supply that we could come into the market. And I think as we've talked about, there's real challenges around infrastructures and upgraders, but maybe the value is in the redirection of flow, right, Mark, because those barrels otherwise would have flowed into China that now appear to be heading towards the Gulf Coast.

Yes. I think that that's the near-term impact that we could see. I think then there will also be -- the Chinese are going to have to find other crudes to backfill those. At one point in time, we were the largest exporter of the Gulf Coast of WCS, and that could come back. They're going to take all they can out of TMX. TMX, we think it's maxed out. We're starting to see more WCS come down through the Mid-Continent, and we could return to the days where we were exporting a few hundred thousand barrels a day out of the Gulf Coast to China to backfill that.

So the system is going to rebalance. But fortunately, I think we're positioned to benefit from that rebalancing.

Yes. Let's talk about refining broadly. I think if we had this conversation 5 years ago, Phillips 66 would have been the refining skeptic in the room. I think, Mark, under your leadership, the view has evolved to become more constructive, including tacking on some refiners last year since the last time we did this conference in Wood River and Borger. Are you guys in the structural bull camp now? And how do you think about the supply-demand balances over the next couple of years?

Yes. Well, Neil, 5 years ago, the world was telling every refinery that they needed to go away that there was no future, there's no terminal value in your refineries. And we did a deep dive and came to the conclusion that, that was all nonsense, that the world was going to need refined products for a very long time, that it was going to need all of the above energy and it's really played out.

We did scenario planning, had this envelope of where we thought things could play out. I think it's actually above our high case in the way that the things have played out for energy demand and particularly refined product demand. And we continue to see tightness in refining capacity. And certainly, there's abundant crude supply out there.

Refineries continue to be rationalized. You're going to see more rationalizations this year. You're going to see additions. I think between now and the end of the decade, we see maybe net 500,000 barrels a year being added, maybe a little more next year, back-end loaded for next year, but really no material movement to loosen things up.

We see structurally capacity is going to be tight, and there's probably more rationalization going to happen out there than is visible today.

0.5 million barrels a day of annual average against the demand number of product, plus/minus 1 million.

Yes. So yes, so you see continued tightness in that -- I think that's a conservative number. That doesn't take into account these new builds, will they operate well? Do they come on stream on time? And then it doesn't take into account any unknown rationalizations that we don't have line of sight on today.

Yes. Let's talk about Wood River and Borger. I mean, Wood River, in particular, is looking like a good transaction in light of some widening of WCS and the potential for further widening depending on what happens in Venezuela, how is that being integrated into the business?

And are there other opportunities for opportunistic refining M&A? We saw what you did yesterday around the Lindsey refinery as well, although that felt more like a logistics-related asset.

Yes. We've been looking at the Wood River situation for a long time. Plan is finally aligned where it made sense from a value perspective for us and for our partner, and we were able to move quickly. We were the operator of those assets. So there wasn't a significant change there.

I think commercially, it frees us up to do more things commercially around those assets, the crudes that we run and how and where we market the refined products. But it also enables us to more deeply integrate Borger and Wood River into Ponca City and to move intermediates back and forth and to operate that more as one large refining system.

Then you layer in the potential of our Western Gateway pipeline that will take refined products to the West Coast that we can -- as we've been telling you, we can deliver from St. Louis to Santa Monica at that point in time. And it really opens up a whole new frontier for those Mid-Continent refineries.

And Mark, I think while over the last couple of years, the market has broadly appreciated the advantages of being on the Gulf Coast, and you've seen that in the equity performance of the Valeros and the Marathons over the last decade. One of the areas that I think you are making an out-of-consensus bet on is the Mid-Continent.

WRB was signaling that, but there has been a view that the Mid-Con is a disadvantaged place to be relative to the Gulf Coast because less crude optionality and less access to product markets. Talk about that because I think that's an important part of the PSX differentiation relative to some of your peers.

Mid-Continent is and has been our strongest competitive position. We do have linkages to the Gulf Coast. Those assets can move barrels of molecules back and forth between Lake Charles and Wood River, for instance. So there is some connection down to the Gulf Coast, and we'll continue to look at ways to enhance that connectivity. And as far as M&A in refining, I think we've shown great discipline.

We know what we would like to have. If it is available, we'll be very disciplined around doing anything there. But certainly, strengthening the Mid-Continent and the Gulf Coast is -- would be directly in our wheelhouse if those opportunities present themselves.

Kevin, this is a question for you, Mark, please feel free to jump in as well is this one of the things that when you guys took over a couple of years ago that we were really focused on is improving reliability, improving capture rates, lowering OpEx per barrel, but also improving uptime.

Where are you in that journey? What inning are we in? What's the next step?

I like the inning analogy. I would say that from the perspective of safe, reliable operations from the perspective of continuous improvement, of course, it all starts with safety and reliable operations are a key to everything in this business. You have to be running -- you have to be able to run when others can't, and that's when you really capture the upside. And this is a continuous process, Neil.

I don't think we'll ever be done chasing the gold or the brass ring of improvement. And that's embedded in our mindset now. We've evolved our entire company from a position of competing internally for capital between different segments to operating as one integrated system, one team PSX and to take on the competition on the outside.

And that requires you to absolutely be improving every day that you're in operation. It's like I said in my opening comments, we want to have consistent performance and consistently improving performance. We see -- we set goals out there. We don't see those goals as endpoints. We see those as milestones. And we've got a target to get to $5.50 a barrel in our refining costs. We've already taken $1 a barrel out. By the end of this year into 2027, we should be at a run rate at $5.50 or lower, but that's just a milestone. We're going to continue to drive that mindset to safely and reliably operate these assets at lower and lower cost. Taking L.A. out of the system will get us halfway from where we are today to where we want to be at $550 million, but it doesn't stop there.

Okay, Mark. I want to spend some time on cash flow, capital allocation and chemicals, but let's turn it over to John first on midstream.

Yes. Thanks, Neil. Don, Mark was just talking about some of these kind of medium-term targets you have. The $4.5 billion of EBITDA at midstream has been a big focus for people. You're at 3.9, 4.0 right now. Can you walk us through -- maybe set the stage for midstream, but walk us through that bridge to get there and what it looks like after that?

Sure, sure. So we have this target to hit the $4.5 billion by the latter part of 2027. And that growth from where we are today, about $500 million of EBITDA growth. You can think about that as some -- we have some really attractive organic growth projects that we've announced that we're pursuing in the construction phase, whether that's the Dos Picos gas plant that we just turned on last summer, filling that up. We've announced the Iron Mesa gas processing plant that will add capacity in the Permian as well. They'll come on in 2027.

Those volumes out of those plants need additional NGL transportation capacity on our system. So we have a coastal bin pipeline expansion that will come online toward the end of '26. Those are the big chunks, if you will, of that $500 million, call that 60% of that.

The balance of that growth comes through -- continue to improve the efficiencies, continue to have commercial successes around that platform. That incorporates renewals as contracts roll off as well as escalations of existing contracts. And that's really the glide path, if you will, over the next 8 quarters to get you to that $4.5 billion.

We were -- I was lucky enough to get invited to the PSX Midland trip to see a bunch of the midstream assets about a month ago. You guys have done some acquisitions. You've invested some capital organically. Maybe just talk about the overall Permian strategy as a whole. How much of that is getting back to maybe where you'd left some money on the table on the DCP days where you didn't have the capital to invest? How much of it is where we sit in the cycle right now? Maybe just a general kind of Permian growth trajectory for PSX.

Sure. We are certainly blessed with a great footprint within the Permian Basin, and that comes from the legacy DCP assets that we bought in several years ago. And what you're seeing is us invest in new infrastructure, large processing capacity and really start to harvest the opportunity that we have there.

The Permian Basin is such a resource-rich long-term growth prospects. And by us investing, showing the commitment into that basin, we're seeing the commercial success is the customer response. That's driving the supply growth into our system, which feeds our overall wellhead to market value chain. That's where we see a lot of our growth opportunities continuing to be around the Permian.

But across our midstream platform, we have -- we're in different basins in the Mid-Continent and the DJ that provide some opportunities as well as then just in the refined products and crude business that we have that's really associated with feeding our refineries, taking products from our refineries, delivering that to premium markets. So all in all, that Permian is a core, but it's a broad framework that we're able to execute on.

You touched on this on your first question, but we've seen some of your midstream peers have seen some headwinds from recontracting in the basin. That's been a big focus. You guys have been sound a little less worried about that. Maybe just walk us through what you're seeing from NGL recontracting, how that fits into the $4.5 billion plan and maybe what it is about your system or your set of contracts that maybe differentiates you from some of your peers?

Sure. Our plan certainly incorporates renewal, and we have a pretty clear view of our contract roll-offs, what kind of volumes that will come due over the next 5 years, what are the renewal rates that we see in the market. And so all that's incorporated in our glide path to the $4.5 billion. And the way I think about it is we have contracts that gets renewed, they'll go to market. And so that will have an impact.

But then you have this base business that has annual escalators. And that -- those 2 combined, although on a quarter-by-quarter, there can be some movement. If you look at it over 8-quarter multiyear basis, those really tend to offset.

And so that's why we -- you think about our growth plan, we've got that base business that incorporates renewals, it incorporates escalation. And then you see these growth projects that are adding capacity, adding volume that's really driving the earnings growth.

You guys have talked about a kind of maybe towards the end of the decade, $5 billion. I don't know if you want to call it not formal target, but directional goal with some of these other projects you've talked about that haven't reached FID what would be the steps you need to get there? Maybe it's a question for Kevin, too, how much capital might you need to spend? And then how would kind of continued midstream M&A fit into that strategy or not?

Yes. I think to step back, what we see in the midstream opportunity set is really a mid-single-digit growth rate on an annual basis. And so that's really what we're seeing that's driving our targets for 2027. But now you're seeing the follow-on opportunities that are out there that's past 2027. If you think about our potential for Corpus Christi frac expansion that would be in '28. You think about the Western Gateway pipeline that if that comes to fruition, that would be in '29.

And those type of organic, very attractive investments that allow us to continue to grow at that growth rate. All of that is certainly predicated with living within our capital program. We're about $1 billion plus that we spend within midstream. If you think about these projects are multiyear construction projects typically. And so all of that fits well within that framework and allows us to, I think, execute on that growth rate beyond 2027, continue to fill the opportunity pipeline and continue to deliver that growth.

And last one on the midstream side and any of the 3 of you can answer this. On the trip, there's a lot of discussion from Don and the whole team about what Mark said earlier, kind of breaking down the silos between the segments.

Could you spend a little bit of time just talking about kind of, let's say, maybe this new approach to how midstream fits into the broader portfolio, how the integration works, how you think about kind of planning between midstream and chems, midstream and refining and maybe again, how that's different from, let's say, a couple of years ago?

I'll kick it off. I think Western Gateway is a prime example of something that is within the midstream framework shows the power of integration where midstream is a lot of our focus is really about the supply aggregation to feed our processing units, whether that's gas plants, fractionators or refineries and then take that finished product from the tailgates and deliver them to advantaged markets.

And that's the focus of midstream. That forces us and has us very much aligned with the rest of the company. I think that's a bit of a shift from maybe the MLP days where things were a little bit more separate and just a growth for midstream. That was the MLP of just growing EBITDA for EBITDA's sake, very much more strategic now aligned with the overall business and the overall returns that we're trying to capture.

Yes. I think it's -- we've got everybody focused on integration and growing the value of the entire organization and creating and building on strategic advantage. And so if the returns aren't accretive, if the ROCE is not there, if we're not building out of advantage, if you can't see that an acquisition is going to open up more organic growth that can be accretive to that, then why are we considering it?

We're not going to grow just for growth's sake. We're going to grow for value creation sake. The entire organization is focused on that, whether it's from a cost control perspective or a margin enhancement perspective or how we integrate and leverage across the organization.

Now we've got people in midstream and refining coming up with these small few million dollar opportunities that unlock incredible value. So I love it when a young engineer will get up and say, hey, we just -- we just found a project that's got a 1,000% return and said, why are you standing here talking to me? Why aren't you out there looking for more of those?

And it's really created a lot of fun out in the organization to hunt down those opportunities and deliver them. And we've completely removed the barriers to accessing that kind of capital to get those things done.

Thanks, John. Let's pivot to chemicals, and then we'll talk a little bit about cash flow. We'll finish off there. Mark, we're in a tough part in the chemical cycle. Right now, there's a lot of debate about whether CPChem is core or not core, if there's a deal to be done with your partner there. Talk about your view of the industry, talk about whether this is the right time in the cycle to monetize.

Yes. I mean the chemical industry is in the toughest downturn we've experienced certainly in my long career. I would say that from just a pure industrial perspective, CPChem is designed not to just survive situations like this, they're thriving in this environment. They're generating good returns for this part of the cycle.

And not only they're not burning cash, they're generating cash for the owners at this point in time. And they're about to start up 2 facilities that will define world scale and best-in-class cost structure and that will generate good returns even in this environment. And so they're going from strength to strength. It's been a good model for the last 25 years. We've had good cooperation that's delivered the kind of growth. CPChem has grown faster and more profitably than their competitors. So from an industrial perspective, it's been a great partnership. We've been very clear to the marketplace that any asset that we have is transactable. But a premium asset would require a premium return to us.

And so that's where we are. But we're looking at owning half of what we would argue is the world's best positioned petrochemical player has the access to the lowest cost ethane on the planet, whether it's the Middle East or the U.S. And so it's very advantaged and it's a very premium asset.

And when do you think the market gets better?

I have no idea. But we've seen some green shoots in the third quarter. Others had some outages and CPChem's margins popped a bit. That's a good sign, but that's constructive. But it really depends on how quickly assets are rationalized.

There are assets that do need to be rationalized, perhaps bringing on these world-scale, world-class assets that would be difficult to compete with may cause some more capitulation out there.

We'll see how that plays out. And the big question is whether all of the premise capacity in China actually comes online or not. And if Chinese have their evolution that would rationalize older assets. We don't have any control over that.

What we look at is the long-term fundamentals of that business. We see continued demand growth. We can see continued prosperity emerging in non-OECD countries. And so the long-term fundamentals are there, and that's what we've believed in for 25, 26 years with CPChem, and we continue to believe in those fundamentals.

Thank you, Mark. Kevin, let's talk about cash flow. I think you've got a good framework that we talked about at dinner last night of the 8s and the 2s. So do you want to walk us through it?

Yes. And a lot of this comes up in the context of both capital allocation and balance sheet and debt reduction. And so in the context of balance sheet, we had $21.8 billion debt level at the end of the third quarter. We have a target $17 billion by the end of 2027.

And we will accomplish that from between the fourth quarter of 2025 and '26 and '27 in approximately equal chunks. So we expect strong cash generation in the fourth quarter. A lot of that will be driven by working capital.

We'll have proceeds from asset dispositions, the Europe retail asset sale closed December 1, but we also funded the WRB acquisition at the beginning of the fourth quarter as well. And those 2 approximately offset. But as you look to '26 and '27, we're looking at about $8 billion of operating cash flow, which is consistent with where the Street expectations are.

The formula of the 2s is pretty straightforward. The dividend, competitive, growing, secure. It's about $2 billion per year. 50% total return to shareholders, I would say $2 billion of buybacks. So that's $4 billion accounted for. And then the capital budget is a low $2 billion number and the remainder is available for reducing debt.

And so you repeat that over '26 and '27 and you get that almost $22 billion number down to $17 billion. Now what I'd also say is that excludes any other asset dispositions. We have no announced target or really nothing announced around that, but we continue to work through the portfolio and identify those assets that are less strategic, less core, likely non operated and potentially worth more to others than us.

And so we think there is upside from a cash generation standpoint from additional dispositions that can help expedite that debt reduction and also just give us other financial flexibility, whether it's returns to shareholders or other potential investments. So we think there's incremental flexibility through that.

And you'll have some working capital also coming back your way, I would imagine.

Yes. Specifically in the fourth quarter, we had a pretty hefty drag on working capital through the year, and we'll see at least a sizable amount of that reverse in the fourth quarter.

Mark, on asset sales, you guys have been effective in monetizing a number of assets, including the European retail position, a large part of it. Is there anything that's logical from your perspective beyond the CPChem conversation that we should be thinking about?

I think Kevin characterized it well. There are assets that may be non-operated, that are non-core. We've got -- internally, we've got a list of things that we would be interested in talking about. We're not advertising that, but I think the players out there that would -- that might be interested are likely aware of the kinds of assets we'd be talking about. But these are generally good high-quality assets generating great EBITDA. But the way we look at it is if it's a non-operated asset or there's no growth opportunities, it's kind of trapped and we can redeploy that capital either the balance sheet, share repurchases or to grow midstream to do something opportunistic.

And so we try -- we want to free up that capital to be able to grow or to benefit our shareholders in other ways.

Let's finish off talking about refining again because that has certainly been the focus. And just maybe talk about the WCS path. We want to ask you to predict where these diffs are going because there's a lot of moving pieces. But are you structurally bullish the widening of the differential? Or is that going to be a tough thing to see in a lower flat price environment?

Well, I think that we are constructive, but I don't think you'll -- with $50, $60 crude, you're not going to see $40 diffs. I mean it's not going to happen. But I think if you look at where the baseline is now, can you see higher teens kinds of this? That's not out of the realm of possibility, that would be...

Under TI.

Yes. Yes, that would be certainly constructive for us.

Yes. John, any last questions?

Maybe one more, just going back to midstream. I mean, you guys have sold -- maybe just to the asset sale point, you have sold a handful of midstream assets over the last, let's say, 1.5 years. I think that is where we've seen a lot of these kind of non-operated assets. Is that the bucket you're looking to? And then how do you think about that in the kind of context of where we sit in the macro cycle? Is that a -- I want to wait to see my midstream multiples go up another 2 turns or buyers know what these are worth and...

I think buyers know what these assets are worth. And we've got a well-defined set of parameters that we look at, and we're patient. We don't -- nothing is a fire sale. We've got a plan to get our debt where we want it. So we don't feel forced to sell these things, but think of it more of a portfolio cleanup and freeing up that capital to do more accretive growth opportunities. And so we've got that list, but we don't feel like there's a tremendous sense of urgency to execute on that list.

Mark, last one for me. Marketing, plus/minus $2 billion business, maybe a little bit less than amount like you still $350 million, maybe it's a $1.8 billion business. Any perspective on what we're seeing real time in terms of demand in your system? And is that a good run rate number to assume going forward?

That is a good run rate number. Marketing in our portfolio has been incredibly consistent in their ability to generate margins. The lion's share of it is wholesale, but we do have retail in a joint venture, United that is in very specific strategic locations, some pull through some just high return markets, and we like where that is and the performance of what we have today.

You saw us exit a couple of positions in Europe. There was no pull-through. There was no strategic rationale and having those assets and we're able to get good value for them and redeploy that capital.

Great. Mark, Kevin, Don, John and I thank you very much. Great conversation. Wish you luck at the conference today.

All right. Thanks, Neil. Thanks, John.

Thank you, my friend. And next up, we'll have John Hess in 5 minutes.

Welcome to the Third Quarter 2025 Phillips 66 Earnings Conference Call. My name is Breka, and I will be your operator for today's call. [Operator Instructions] Please note that this conference is being recorded.

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

Welcome to Phillips 66 Earnings Conference Call. Participants on today's call will include Mark Lashier, Chairman and CEO; Kevin Mitchell, CFO; Don Baldridge, Midstream and Chemicals, Rich Harbison, Refining; and Brian Mandell, Marketing and Commercial. Today's presentation can be found on the Investor Relations section of the Phillips 66 website, along with supplemental financial and operating information.

Slide 2 contains our safe harbor statement. We will be making forward-looking statements during today's call. Actual results may differ materially from today's comments. Factors that could cause actual results to differ are included here as well as in our SEC filings.

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

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 industry, 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 and 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 Picos II 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 volumes.

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 in the future in refining.

Thanks, Mark. Slide 4 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 $6.07 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 costs by approximately $1 per barrel. We have built our improvement strategy on 5 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 improves 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 5 pillars maximizes earnings and value creation.

Moving to Slide 5. 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, 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 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'll turn the call over to Kevin to cover the financial results for the quarter.

Thank you, Rich. On Slide 6, 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 7. 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 8 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 9. In Chemicals, we expect the global O&P utilization rate to be in the mid-90s. In Refining, we expect the worldwide crude utilization rate to be in the low to mid-90s. Turnaround expense is expected to be between $125 million 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 million 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 Instructions] Steve Richardson from Evercore.

Great. Regarding WRB, 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 100% ownership of these facilities opens up in terms of some of the organic growth that Rich mentioned.

Sure, Steve. I think this falls into the category of our strategy in action. Several years ago, we identified that the Mid-Continent Central Corridor was core to our business, and we would focus and make strategic decisions around that. And since then, we've made the decision to idle L.A. and redeveloped land there. We announced our increased ownership of WRB that you referenced here. And now we pushed that on with the open season of Western gateway. 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 I'll let Rich and Brian dive into the details on that.

All right. Thanks, Mark. I'll start and then pass it over to Brian there for the commercial side of the business. When I think about this, Steve, 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. And 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.

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 and we're generating new initiatives every single week.

So 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 2 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 P66 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 this is just -- those are just a few examples. It's early days, a lot more opportunity to go.

Steve, 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. The 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 the $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.

Appreciate the additional color there, particularly on the CapEx. If I could just quickly follow up and at the 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 going to see some of those benefits relatively nearer term? I mean the one point we'd like to probably bring is when do we start seeing some of those things?

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

Theresa Chen from Barclays.

I want to 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 ONEOK's competing pipeline project it built? How do you think this pipeline will change [ passive ] flows as well as margin capture for your Central Corridor assets?

Yes, 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, 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 Mid-Continent strengths, our Mid-Continent advantages to the West Coast, St. 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 of those things combined to get us interested in this opportunity. Brian and Don can dig into the details of those opportunities and address the specifics of your question.

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 going to be able to access the Mid-Continent refineries, bringing that volume to help fill the Western Gateway pipeline, which is going to take product along the new pipeline, all the way to Phoenix, which -- 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's certainly early days in the open season. We're having constructive and active conversation with interested parties. So more to come on that. I think the project and it's -- how we have it set up is something that's resonating quite well with the market.

And maybe just from a commercial perspective, the way I think about it is PADD 5 is going to look very similar to PADD 1, where you have a short market, you have a pipeline that brings in domestic volumes like colonial does to PADD 1 and then you have barrels coming from overseas, waterborne barrels as well. So it will be set up very similar to that market. And as you know, a pipeline is the most reliable way to move volume. It won't be susceptible to dock restrictions, lack of logistics, demerge or weather issues.

And assuming only our pipeline gets built, we estimate probably about half the volume will end up in the Phoenix market with the reversal of Kinder Morgan, and the rest will end up in California, which makes sense as Mark mentioned, as you see the closures of California refineries. But California will continue to be a waterborne import market. And at Phillips 66, we'll continue to 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.

Yes. As far as the comparison of our project to ONEOK's project, I think they have different target markets or target sources, Gulf Coast versus Mid-Continents. 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 Mid-Continent volumes all the way to California and the partnership with Kinder Morgan really provides a lot of strength for this option, and we have full faith that we'll move forward with this.

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?

Sure, Theresa. So the partnership is 50-50 with Kinder Morgan. And so that will be, at the end of the day, how the balance works. And then in terms of the overall CapEx, 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 what some of that connection costs might entail and how all that will flow from a volume standpoint. And that will drive some of the infrastructure needs and obviously, capital requirements. But safe to say, this is a -- from an investment opportunity, this is a consistent Midstream type return investment that we're looking at in concert with Kinder Morgan.

And probably also worth highlighting that capital spend wouldn't be in the next couple of years, either you're sort of looking at '27, '28, '29 time frame. So no near-term impact on capital budgeting.

Neil Mehta with Goldman Sachs.

I wanted to keep on pushing on the Midstream point. And you've talked about $4.5 billion in EBITDA by year-end 2027 as the run rate. 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.

Absolutely, Neil. I'll kick it off and then turn it over to Don. But first of all, I think you have to look at our track record. We've grown that NGL business from -- the Midstream business from $2 billion to $4 billion over the last several years. And as you noted, we're just under $1 billion 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 -- to get to where we are today. We see the next increment, another $500 million, largely from organic. I mean we've got line of sight on organic opportunities. And the inorganic opportunities were facilitated by non-core 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 opportunity. So this has all been a relentless pursuit of higher ROCE in the Midstream business as well as building competitive advantage on top of competitive advantage. And I'll tell you that it was a great visit we had to Sweeny last week. We've done some things around the fracs there. The operations has been incredible. And the operators pointed out that they've found our fifth frac. We have 4 fractionators at Sweeny. 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 going to go after.

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've got plant expansions in the Permian with our Dos Picos gas plant that came on just a few months ago that will fill up by 2026. And then our Iron Mesa gas plant that we announced that's under construction that will come online in early '27 and fill up.

So our footprint, 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 margins. So very limited sensitivity to underlying commodity price. That volume drives what happens downstream and in our NGL pipeline business. We just completed the first phase of our Coastal Bend expansion. We're running that full. We've got a next phase of capacity, 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 the end of 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, 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.

So the follow-up is just the crude in transit. A lot has been made of the 1.4 billion barrels that appear to be on the water. But today's DOEs reinforce the view that they aren't finding their way into U.S. shores or into a lot of OECD pricing nodes. And I want to make -- get your perspective of -- do you guys have visibility to that crude actually manifesting its way over here? And if not, what do you think is driving that? Do 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?

It's Brian. We do see a very large build on water of 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, 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.

Justin Jenkins from Raymond James.

Great. I guess one of the common questions we get from longer-term investors who sit 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 2027?

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.

Yes. 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 we 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 at the third quarter actually and the second quarter, pre-working capital, we 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 -- we're still committed to returning 50% of cash -- operating cash to shareholders. That's $4 billion, which is -- would be split evenly between the dividend and the buybacks. That leaves $4 billion that's available. The capital budget of $2 billion to $2.5 billion per year, as we talked about earlier, leaves somewhere in the order of $1.5 billion to $2 billion per year available for debt reduction. That's '26 and '27. Obviously, margins will do what margins do, and so we don't have complete control over all of that, but 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 just funded the WRB acquisition, and those 2 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. And so between $1.5 billion in the fourth quarter of this year and then the $1.5 billion to $2 billion potentially in each of '26 and '27 gets us comfortably to that $17 billion level by the end of '27. And that doesn't include any potential additional dispositions of noncore assets, which just provides upside and additional flexibility.

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. It does seem to fit your portfolio pretty well with high diesel cracks and expectations for wider dips, maybe just your overall expectation on how cracks play out and crude dips play out in 2026.

This is Brian again. On the crude dips, we expect to see the light-heavy spreads start to widen during Q4 and into Q1. It's been somewhat delayed, I 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 hitting market volatility around Russia, Iran and Venezuela. In the U.S. Gulf Coast, through Q3, the Canadian heavy crude became more attractive than high sulfur fuel oil, which cause refiners on the U.S. Gulf Coast to run more Canadian crude, and that supported differentials. But as we've entered Q4, we're starting to see some impact from additional OPEC crude and the kind of relative weakening, although still strong of the high sulfur fuel oil.

And additionally, the WCS production increased by 250,000 barrels in Q3, and we're going to 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 $1 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.

So as additional crude hits the market, including Middle Eastern crude, we 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.

Douglas Leggate with Wolfe Research.

Guys, utilization rates blow 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 forget the gentleman's name who joined you from Chevron recently. So what are you doing differently on how you think about plant turnarounds, the habitual once every 4 or 5 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 ask the question is because Valero had a similar situation. And between the 2 of you, you've just basically offset the closure of Lyondell, Houston. So we're trying to understand if higher utilization is a new normal for not just you guys, but for the industry generally.

Doug, this is Rich. Generally, while you were talking with Bill. He's a 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 our -- one of our core strategies, which is integration with the Midstream and also CPChem operation there as well.

When I -- 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 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 visionary type direction that you're moving a large set of assets to. Of course, we started that with a cost and margin, but we also simultaneously was running an improvement 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 2 to 3 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 of years ago, and that was really centric around starting to fill up our downstream processing units behind the crude. First, you got to fill the crude unit up and then you got to fill the downstream units up. Those directly result in clean product yield, which is where most of the 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.

That's really helpful. I threw the AI words out to Valero and it bumped the stock up, I think. So maybe you could say AI is helping you manage your utilization. So my follow-up is 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 static enterprise value, and 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. It seems to me that the easiest way to basically boost your equity value is to reduce your net debt. Simple math, equity is enterprise value minus net debt. So why is net debt reduction not part of the cash return formula? Raise a formula to include net debt. Why not?

Well, it's -- I mean you're absolutely correct that everything else stays the same, 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 in terms of the capital program. And now we've got this -- the additional dynamic of debt reductions in which bucket does it fall into. We tended to just break 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.

Manav Gupta with UBS.

I want to really thank Jeff Dietert over the years. I've thrown a lot of stupid questions at him, and 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 a higher ethane blend than what probably the indicator is 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?

Yes. 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 ask insightful questions. And this one is very insightful. You partially answered it. CPChem's chain margins increased about $0.095, $0.097 per pound. IHS was flat. There's really 3 drivers there. We had higher -- high-density polyethylene margins due to lower feedstock costs. 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 worm turns, 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 the chemicals world is still oversupplied, but I would say that, 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. CPChem because of its cost position is going to -- they've 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 $1 billion, 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 100% when others are rationalizing.

There's going to be a lot of asset rationalization going forward. You're even hearing news out of Korea about the potential for rationalization. Europe is 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 going to be a long slog forward. But I think there'll be more shake out. When CPChem starts up their 2 large world-scale -- the definition of world-scale, frankly, assets, both here in the U.S. and in Ras Laffan, Qatar. And that will even, I think, potentially force out other high-cost producers. And so they're going to be moving from strength to strength and the long-term prospects are quite good for CPChem.

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 whole expansion happens? If you could just run us through that math.

Yes. 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 Don can fill in the details of what's coming next.

Sure, Manav. And the -- in terms of just looking back since we closed on the EPIC transaction in April, compared to the acquisition plan, we are meeting and even exceeding what we expected from the assets. That's really a testament to the synergy capture around the operations and commercial opportunities around that. Now Coastal Bend pipeline, it certainly has been a really nice add in the Gulf Coast for us with the Corpus Christi presence combined with what we have at Sweeny.

And as you mentioned, we turned on the first phase of the expansion here in August. We're running the pipeline full. Again, that's, I think, 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 will come on later in 2026. And most -- all of that volume is already on the ground and flowing on third-party pipes that will move over or it's a volume that's going to come from the G&P 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 opportunities that we're seeing with having that as part of our portfolio.

Jason Gabelman with Cowen Inc.

Yes. 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?

I think there's a couple of key things to think about here. It's -- clearly, we have a core strategy around the integration of our Mid-Continent Central Corridor refineries there. They have the greatest crude flexibility. They have lots of optionality. But that doesn't mean that we're ignoring our remaining coastal refineries. You think about Ferndale, we've already talked about its transitioning to produce California CARBOB and its value is increasing as refineries -- refining capacity in California tightens up. And so we're not going to kick out assets that are creating good value, but we are going to focus more intensely on the integration opportunities 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 strong opportunities there that we're continuing to look at.

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?

This is Brian, Jason. I mean just talking 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 send more of our renewable products to Pacific Northwest where fossil basis were 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, probably less timing impacts than we had in Q3. 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 RVO policy, including reallocation of SREs and regeneration and foreign feedstock and even more clarity on the European policy.

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 that's not a direct impact.

Ryan Todd with Piper Sandler, please go ahead.

Maybe a couple back on refining. Throughput was obviously much higher than anticipated in the quarter. But margin capture 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 project? 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?

Ryan, this is Rich. Let me start and then Brian can clean up anything else on the market front there. But 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 feedstock 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 on our journey to improve, we had a clean product yield in that region of 88%. So very solid performance on that area. And we think that's -- a lot of that's supported by the self-help that we've done, but also 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 lower octane and jet differentials. So we saw that in the marketplace. Utilization for the region, pretty solid at 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 that overall clean product yield for the facilities.

Central Corridor, 101% market capture, very solid. Again, 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 is the common theme you're hearing here, the octane value as well as the jet to distillate differential. Again, for the Central Corridor, 103% on the utilization front and 90% clean product yield. So you can see how that -- those assets are running and performing quite well. And then, of course, one of our headwinds for the quarter was in the West Coast at 69% market capture, and that's primarily driven by the wind down of the Los Angeles refinery and the impacts associated with that.

So 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 in the West Coast at 88%. And of course, they're very complex refineries, so they're clean product yields up there, too.

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 a weakening naphtha to crude. And so that's also will be a tailwind for us as well.

Phillip Jungwirth with BMO.

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 reversal in the California?

Yes, Phil, we have a team that looks at integration opportunities that has representation 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.

Yes. 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 from an integration standpoint, this is a project that Phillips 66 is uniquely positioned to help facilitate and drive as 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.

I've had conversations with key people at the federal level as well as the state level in California, and they are enthusiastic about this. I think the opportunity to leverage Mid-Continent energy dominance through infrastructure that can come online fairly quickly is very attractive at the federal level and 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.

Okay. Great. And recognizing Chemicals ran really well in the quarter. Just going back to industry capacity rationalization. I 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?

Well, I think you've seen it in refining in China, where the teapot refineries, it's 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, less efficient assets to make room for what they're doing around their crude to chemicals things. 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.

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

Thanks for all your 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.

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

Welcome to the Second Quarter 2025 Phillips 66 Earnings Conference Call. My name is Emily, and I will be your operator for today's call. [Operator Instructions] Please note that this conference is being recorded. I will now turn the call over to Jeff Dietert, Vice President, Investor Relations. Jeff, you may begin.

Welcome to Phillips 66 Earnings Conference Call. Participants on today's call will include Mark Lashier, Chairman and CEO; Kevin Mitchell, CFO; Don Baldridge, Midstream and Chemicals; Rich Harbison, Refining; and Brian Mandell, Marketing and Commercial. Today's presentation can be found on the Investor Relations section of the Phillips 66 website, along with supplemental financial and operating information. Slide 2 contains our safe harbor statement. We will be making forward-looking statements during today's call. Actual results may differ materially from today's comments. Factors that could cause actual results to differ are included here as well as in our SEC filings. With that, I'll turn the call over to Mark.

Thanks, Jeff. Welcome, everyone, to our second quarter earnings call. We had a strong financial and operating results this quarter. They are a reflection of our focused strategy, disciplined execution and meaningful progress towards achieving our 2027 strategic priorities. Coming off our large spring turnaround program, we said we were positioned to capture a strengthening market, and we delivered. Our refining assets ran at 98% utilization, the highest since 2018. Clean product yield was over 86%, we captured 99% of our market indicator and achieved our lowest adjusted cost per barrel since 2021. Along with refining, the other parts of our integrated business delivered Midstream generated adjusted EBITDA of approximately $1 billion. We are on track to achieve the $4.5 billion annual EBITDA target in Midstream by 2027. Marketing and Specialties reported its strongest quarter since 2022. The combination of stable contributions from Midstream and Marketing and Specialties provide a robust platform for our capital allocation framework.

We returned over $900 million to shareholders this quarter. The resilience of our integrated business model drives results delivering consistent returns to shareholders. Slide 4 shows the progress we've made in our refining business from targeted low capital, high-return investments and a dedication to operating excellence. The results are clear. Utilization is improving, and we're consistently above industry average. We've been setting new clean product yield records. Year-to-date, our yield is 2% higher than the previous record for the same period set in 2024. These factors have contributed to market capture improving to 99% of our published refining indicator this quarter. Year-to-date, market capture has increased 5% compared to the first half of last year. Our goal is to drive performance in any market environment while running our assets safely and reliably.

The second quarter PSX market indicator was just over $11 a barrel. As a reminder, for every dollar per barrel that the indicator increases, EBITDA increases by roughly $170 million per quarter. In the second quarter, we achieved the lowest refining adjusted cost per barrel since 2021. The organization has done a fantastic job embracing a culture of continuous improvement, enabling us to more than offset inflation. By 2027, we expect to see the adjusted cost per barrel number below $5.50 per barrel on an annual basis. Midstream is a key growth driver for our company and creates ongoing value for our shareholders through reliable, long-term cash generation.

Slide 5 shows the increase in quarterly average adjusted EBITDA from $500 million in 2021 to $1 billion this quarter. We reached significant milestones in the second quarter as we continue to enhance our integrated wellhead to market strategy. We acquired EPIC NGL, now renamed Coastal Bend at the beginning of the quarter. We're also near completion on the capacity expansion pipeline project from 175,000 to 225,000 barrels per day. The Dos Picos II gas processing plant came online ahead of schedule and on budget at the end of the second quarter. This plant and the previously announced Iron Mesa plant are great examples of highly strategic and selective investments that enhance Midstream's return on capital employed. These projects contribute to our plan to organically grow Midstream EBITDA to $4.5 billion by 2027. Midstream is an important part of the Phillips 66 story. We're executing on our wellhead to market strategy and the results are coming through.

Over the past several months, we've had the opportunity to extensively engage with shareholders leading up to and following the Annual Shareholder Meeting. These conversations provided valuable constructive feedback on our strategic direction along with the support of our priorities. We will remain focused on 4 key areas: enhancing our refining competitiveness, driving organic growth in Midstream, reducing debt and returning over 50% of net operating cash flow to shareholders through share repurchases and a secure, competitive and growing dividend. We've made substantial progress and remain committed to maintaining safe and reliable operations as we execute on achieving these initiatives by 2027.

In the second quarter, we welcomed the addition of 3 new Board members. As we do with all new directors, each new Board member participated in a comprehensive multi-day onboarding process with a broad group of our senior leadership team, equipping them to contribute meaningfully and immediately. The extensive industry experience of our Board members continues to promote thoughtful discussion and thorough evaluation of all opportunities for maximizing shareholder value. Now I'll turn the call over to Kevin to cover the results for the quarter.

Thank you, Mark. On Slide 7, second quarter reported earnings were $877 million or $2.15 per share. Adjusted earnings were $973 million or $2.38 per share. Both the reported and adjusted earnings include the $239 million pretax impact of accelerated depreciation due to our plan to cease operations at the Los Angeles refinery in the fourth quarter. We generated $845 million of operating cash flow. Operating cash flow, excluding working capital, was $1.9 billion. We returned $906 million to shareholders including $419 million of share repurchases. Net debt to capital was 41% and reflects the impact of the acquisition of the Coastal Bend assets. We plan to reduce debt with operating cash flow and proceeds from the announced Germany and Austria retail marketing disposition, which we expect to close in the fourth quarter.

I will now cover the segment results on Slide 8. Total company adjusted earnings increased $1.3 billion to $973 million compared with prior quarter's adjusted loss of $368 million. Midstream results increased mainly due to higher volumes, primarily due to the acquisition of the Coastal Bend assets. In Chemicals, results decreased mainly due to lower polyethylene margins driven by lower sales prices. Refining results increased mainly due to higher realized margins. We came out of a high turnaround season in the first quarter, well positioned to capture improved crack spreads. Market capture was 99% and crude utilization was 98%. In addition, costs were lower primarily due to the absence of first quarter turnaround impacts. Marketing and Specialties results improved due to seasonally higher margins and volumes. In renewable fuels, results improved primarily due to higher realized margins, including inventory impacts.

Slide 9 shows cash flow for the second quarter. Cash from operations, excluding working capital, was $1.9 billion. Working capital was a use of $1.1 billion, primarily due to an increase in accounts receivable from higher refined product sales in the quarter following the spring turnaround program. Debt increased primarily due to the acquisition of the Coastal Bend assets for $2.2 billion. We funded $587 million of capital spending and returned $906 million to shareholders through share repurchases and dividends. Our ending cash balance was $1.1 billion.

Looking ahead to the third quarter on Slide 10. In Chemicals, we expect the global O&P utilization rate to be in the mid-90s. In Refining, we expect the worldwide crude utilization rate to be in the low to mid-90s and turnaround expense to be between $50 million and $60 million. We continue to optimize turnarounds and improve performance. We are reducing the full year turnaround guidance by $100 million. The new guidance is $400 million to $450 million compared to the previous guidance of $500 million to $550 million. We anticipate corporate and other costs to be between $350 million and $370 million. Now we will move to Slide 11 and open the line for questions, after which, Mark will wrap up the call.

[Operator Instructions] Our first question today comes from Doug Leggate with Wolfe Research.

Mark, after all the drama of the last 6 months, quite a quarter you put up. So good to see that. I am curious, however, your last part of your prepared remarks, you said -- you referenced -- I don't want to put words in your mouth here, but it was kind of engaging with shareholders and obviously reviewing or continuing to review the appropriate opportunities to maximize value. I guess it's a strategy question. So after everything that's happened in the last 6 months, are you still comfortable with the forward strategy of the integrated company? Or do you envisage any incremental changes in light of the -- what you've been through the last 3 or 4 months?

Yes, Doug, it's a good solid question. Thank you for asking that. And we've been quite encouraged, frankly, by the constructive engagement we've had with all of our shareholders over the last several months. The results of the vote, we believe reflect what's been a consistent theme in the conversations that we've had with shareholders. They understand the value inherent in the business, and they recognize that our plans can provide upside as we continue to execute against them. We're fully aligned and the shareholders agree that there's significant value in Phillips 66, and we've got to go out and capture that upside. So as we always do, we continue to evaluate a wide range of strategic alternatives. Our Board is very engaged in the process constantly questioning us, is the strategy effective? Do we need to tweak it? Do we need to make major changes to it? And we have a wealth of experience and talent on our Board.

We've got retired Chairman, CEOs, CFOs, corporate executives that are well established and Wall Street veterans. And so they constructively challenge our strategy every step of the way. And as I mentioned, we've got the 3 new members that have been deeply immersed in an onboarding process that gives them access to all the data that they didn't have access during the proxy season. And so they have a clear understanding of where we're headed, why we're headed that way and how we can unlock value and as I've said before, there's no sacred cows. We're not ideological about anything. We're -- well, we are ideological about one thing and that's shareholder value creation. So let me correct myself. But at the right price, and for the creation of long-term value, we'll consider any alternatives, but we always, always are focused on the long-term value creation opportunities. And so I think our shareholders agree with us in that regard.

I appreciate the very full answer, Mark. My follow-up is -- I guess I'm asking a lot of people about debt nowadays, but my follow-up is a little different perhaps in the context of the macro. So strong quarter, $2.5 billion of EBITDA. Obviously, you're not where you want to be on Midstream. But if I annualize that, at the margin environment we had, we're still obviously quite a bit shy of the $15 billion. So my question is, if you had to try and normalize for today's environment, what would the $15 billion be, meaning rather than making an assumption on the mid-cycle, what would it be at today's environment? In other words, how far away from that are you? And if assuming it is less than $15 billion, how does Kevin think about the right level of debt for the combined company as it stands today?

Yes, I think what we've said, and I would say the controversy is around to putting a stake in the ground on what everybody believes that mid-cycle conditions are in refining. And so we said that based on our indicators, we see that as a $14 per barrel indicator. And so clearly, we're several dollars per barrel below -- away from that. And that's the key driver between that and what Chemicals does. And we're in the bottom of the cycle for Chemicals. So we've got a lot of upside in Chemicals to add to that number. So we've got a long way to go to get to those levels, although I would say this quarter, the gap to mid-cycle closed considerably for refining, but Chemicals is still a couple of years out. So Kevin, I'll turn it over to you for debt.

Yes. And just one additional point, Doug. So refining EBITDA was $867 million in the quarter. If you annualize that, you got a $3.5 billion number, that's an $11 market indicator. If you use the sensitivity to a $14 market indicator, it puts you just a little bit north of $5 billion. You can question whether -- you have your own view on whether $14 per barrel market indicator is the right mid-cycle, but that's what we've put out there. I would also caution, though, that this was a quarter with minimal turnaround activity. We ran extremely well. Typically you're not going to have 4 quarters of that in a given calendar year, so we need to adjust for that. But fundamentally, we're in the ballpark of where we should be relative to our mid-cycle assumptions.

On the debt question, I go back to what we've been saying that the $17 billion of debt on a consolidated basis, we feel puts us in a very comfortable spot relative to our -- not only our mid-cycle assumptions, but also in a less than mid-cycle environment like we're in today. Clearly, we're not at that debt level today, but we have that objective to get there over the next couple of years, and we expect to do that. We expect to accomplish that through a combination of cash generated from operations as well as proceeds from dispositions. Notwithstanding all of that, it does not compromise our ability to continue to return cash to shareholders. So 50% of operating cash flow, 50% or more of operating cash flow through share repurchases and dividends.

Our next question comes from Manav Gupta with UBS.

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

Yes, Manav, thank you. We appreciate that. As the data shows and as we've said for the last several years in refining, we had full intention to improve refining performance, and we were with a focus on the things that we can control. And that's most evident in things like the clean product yield, the utilization rate. Market capture is going to have more variability in it because you -- because of the movements in the market and crude dips and all those variables that we have less control over.

But we absolutely will continue to drive costs down in the areas that we can control, things like natural gas costs may go up and down, but where we're looking at the things that we can control, we'll continue to drive those costs down where it's responsible to do so. And so we'll continue to fight that fight and position refining for whatever the market conditions are, we're going to be out there to capture the market that's available. And I think that's what we saw in the second quarter. It's a combination of very disciplined focus over the last 3 years of preparing and implementing projects and executing to be able to capture that market when it's available to us. So Rich can drive into more detail.

Yes, Manav, let me go a little bit maybe a layer deeper here on this. Our mission in refining is to run the assets safely and reliably and then drive world-class performance. And we do this, as Mark indicated, by managing the items we can control and then sustainably implementing change over time. And of course, the foundation for all of this is safe and reliable operations, and we are an industry leader in safety, and we have that culture in our organization that continually challenges ourselves to be the best we can be. We've also established a comprehensive reliability program that has been applied to each of our assets out there in the field, and we're measuring that success by mechanical availability. Ultimately, utilization of the assets will be the final measurement of that one. You talked -- you asked a little bit about market capture and we had a fantastic quarter at 99% market capture.

But even if you look at the data a little bit closer, year-over-year, year-to-date, we're showing a 5% improvement year-over-year. So that sustainable improvement is what we're looking for over time. And there's a couple of reasons we're able to achieve that. One is the reliability program and the impact it's having on our ability to utilize our assets and crude utilization was at 98% for the quarter. That's actually 9 out of the last 10 quarters, we've been well above industry average on utilization, only interrupted by a set of turnarounds in the first quarter of this year. We've reached some record clean product yield as well at 87% for the assets. We're on pace this quarter also to meet that and potentially exceed it. And this is a reflection of what I've been talking about over the last 3 years, which is the execution of these small capital, high-return projects.

They've improved both our clean product yield as well as driven flexibility into the system. We've increased our ability to produce gasoline, diesel and jet and swing between those 3 components. We've also improved our flexibility to process light and heavy crudes without losing capacity in the overall system. There's no better example of this than at our Sweeny complex, where we recently completed the sour crude Flex project, we called it. This project actually increased our ability to process light crude by 3x the historic volume and the largest crude unit at the site. It's reduced our dependence on waterborne crudes, and it also takes advantage of the integration of the site with the midstream NGLs and CPChem feedstock generation with increased light ends production, and we see a nice improvement with market capture with that project as well. Also we've been driving the inefficiencies out of the business.

I think this is also a big important part of Refining performance. And we've been managing -- the fundamental difference here that we've been doing as an organization is managing the assets as a fleet versus a set of independent operations. And that's really opened up our ability to drive inefficiencies out of the business. And we've removed well over $1 per barrel out of the system. We saw a really good number of $5.46 in the second quarter, and we're striving to be below $5.50 on an annualized basis as our goal. The key thing quarter-over-quarter was really higher utilization for the assets. We had a set of turnarounds in the first quarter. We had 17% increase in volume in the second quarter. So that improves really drove the dollar per barrel cost down. But if you look underneath that even a little bit more, the operating costs for the assets were flat quarter-over-quarter with the exception of the turnarounds.

So that base cost is still there. It's fixed. It's doing -- we're able to operate the assets well. And it's a little bit subject, as Mark indicated, to the natural gas price as that is moving around a little bit on us right now, which drives dollar per barrel as well. We're making some portfolio management changes with the Los Angeles refinery. Let me kind of wrap this up. We've made good progress, but we're not done. We'll continue to focus on and drive these strategies. And I think, Manav, if you look at it over time, you see this trend the steady drumbeat of improvement that's occurred in the refining system. And that means our processes of changing are really sustainably implemented. And most importantly, the people, our organization, our people have proven that we're willing to take on the hard work of change and put it in place and capture the opportunities over time, so.

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

A quick follow-up. Very strong results from M&S, better than our expectations, even if you deduct the $89 million onetime. Help us understand some of the dynamics there. And now that you have sold these assets, what would be a good run rate of EBITDA normalized for this business?

Yes, Manav, it's Kevin. So yes, very strong results in the quarter, $660 million, as you highlighted. We had about $100 million benefit in the quarter that were really timing with an offset in the first quarter. And so you'd call that a sort of onetime effect, if you like. And so as we look at the results, we had higher volumes as we -- as the refining system came out of turnarounds and the seasonal effect on demand as well as stronger margins, which likewise, you have a seasonal driver there, but also just the nature of the way the product prices moved over the course of the quarter.

Falling prices tended to help that on the margin front. As you look ahead to the third quarter, we would expect to be at a more sort of normal level for the business in the third quarter, which is somewhere in the order of $450 million to $500 million of earnings is where we'd expect that to be. Your other component to the question on the disposition. So we haven't closed that disposition yet. We expect that to happen in the fourth quarter. That will reduce EBITDA by about $50 million per quarter when we -- with that disposition of the 65% interest in our Germany and Austria business.

It was great to see Mark on CNBC today morning.

Thanks, Manav.

Our next question comes from Neil Mehta with Goldman Sachs.

Yes. I've been spending some time chatting with Mr. Dietert about global refining balances and there's a healthy debate in the market over the next couple of years about how you guys are thinking about net capacity adds? And then also the swing factor of China, which obviously has excess export capacity, but it's been pretty disciplined about product quotas. And so would just love your bottoms-up view of how you think about those net adds over the next couple of years?

Neil, this is Brian. I would say that net refinery additions are below for as far out as we forecast, certainly through the end of the decade. And that's before you even start thinking about unplanned shutdowns. We had Lindsey U.K. refinery announced that they're shutting down or in the process of shutting down last week or this week, and we expect more of those coming in the system. Also, some of the refineries, as you pointed out, particularly in Asia, they're pet chem focused. So those -- when you're thinking about crude, you really have to think about clean product yields, and those are very low clean product yields, 30% to 35% clean product yield. So I'd say bottom line is with the net additions below demand expectations, we see a very strong margin environment.

Just follow-up on the cash flow to Doug's question about just debt levels being about 10, 11 points higher than where you want it to be. I mean just talk about 2 dynamics, working capital, there was a $1.1 billion outflow, but I would think that swings back in the back half. So you could just talk about what drove that and how you think that evolves. And then the jet sale because between those 2 nuts, I think you can close a lot of the gap that you need to get to the $17 billion level.

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

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

Our next question comes from Jason Gabelman with TD Cowen.

Yes. I wanted to go back to kind of how you're thinking about the business after the activism campaign that you endured and there was a lot of focus on that Midstream part of the business. And I'm wondering if the company is thinking about doing a deep dive on that segment and the structure that makes sense. In any way, that would be different than how you kind of evaluate that business in normal course through the year?

Absolutely. We've done that in the past. We'll continue to do that. We will look to see if anything has changed. We will engage with industry experts to make sure that we're thinking about it the right way. And certainly, we'll lay it out all out for our Board to drive to the right conclusion. So as I said earlier, nothing is off the table, but it's got to create long-term value for our shareholders.

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

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

That would be constructive and we continue to see things firming up throughout '26 into '27 and beyond without a lot of new capacity coming on other than what CPChem and Qatar Energy are bringing to the table. And again, CPChem fares relatively well versus their competitors because of the advantaged ethane position they have both on the Gulf Coast and in the Middle East. And the high-density polyethylene volumes continue to be strong. That's -- that they can run at high rates because demand for that product continues to grow. It's really a very resilient product and their cost position allows them to continue to operate profitably. And so they've built out a strong competitive position that's passing the test of time as others are showing weakness.

Jason, it's Brian. On the renewable front, renewable margins are indeed weak, and they were weaker in the second quarter slightly than the first quarter. We are running at reduced rates. In the second quarter, we ran at reduced rates, and we continue to run at reduced rates. Maybe I'll give you some color and tailwinds and headwinds in the regulatory and in the Renewable segment in general. As you know, there's been a number of regulatory changes for 2026, and a number of those are headwinds for the plants, including limiting the eligible feedstocks for PTC credits to those from North America and also in reducing the premium for sustainable aviation fuel. while we also have RVO obligations that support Rodeo Renewed, other policies included in the RVO such as that reduced RIN generation for renewable fuels derived from imported feedstocks will present a challenge. We're doing a lot of things in self-help, including talking to state and federal regulators to promote profitability for the plant.

Additionally, we're working very hard on lowering the cost of operating the plant, just like Rich has done in the refining segment. We're focused on this plant as well. And we're thinking about how to adjust operations to increase SAF production and also to provide additional optionality for feedstocks. I'd say also there are some tailwinds we see in the market, potentially stronger LCFS and RIN credits with the tighter regulations. European markets are driving greater incentives, including Germany. We've been exporting to Europe almost every month this year. There are stronger biofuels programs in Oregon and Washington and stronger Canadian markets as well. So I would say, just in summary, Rodeo Renewed, as you know, is one of the world's largest RD and SAF plants. And we can also generate up to 15% of the country's D4 and D5 RINs. So ensuring profitability for the plant will be important for energy supply, for affordable energy across the country, given the RIN generation and for energy dominance in the United States.

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

Our next question comes from Jean Ann Salisbury with Bank of America.

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

Jean Ann, this is Don. A couple of things around the Permian outlook. We do stay very close with our producer customers and currently, we see not a significant change in their plans based on where we are from a pricing standpoint and what their drilling activity looks like. One of the things I think you have to realize though is the NGL content in the new production is higher than the old production. So even when you see some tampering and the -- or dampening of the volume growth in crude, you're still seeing good robust growth on the gas and NGL side because of the higher GOR from the wells that are being drilled.

So that certainly creates some buffer when you see some rig count changes or see a change in producer plans. But as you mentioned, our volume outlook is supported both by our G&P processing volumes as well as a robust third-party contract portfolio. And based on the conversations we were having across the board, we still have good confidence in the outlook of the volumes coming through our system, see our rate -- our utilization rates continuing to stay high. We're turning on expansion at Coastal Bend and volumes continue to grow and fill that capacity. So I feel like we're in good shape there.

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

Sure. I'll take this one. It is fairly steady. I mean, there's some seasonality when you think about butane blending with our refining kit and how that interacts with our NGL business that has some seasonality. But a lot of it is fairly steady when you think about a lot of this is throughput-driven. A lot of this is the operational synergies that we have across the portfolio. And so those tend to get realized on a month in and month out basis. So a lot of stability in that regard. I would echo what you heard certainly from Mark and Rich, is that we still see a lot of opportunity to continually improve and even extract more value in the integrated model. So excited for the opportunities that we see the portfolio is presenting us.

Our next question comes from Ryan Todd with Piper Sandler.

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

Ryan, it's Brian. Well, I'd say, although distillate has been favored over gasoline every month this year, but May, distillate remains very strong, as you pointed out, with lowest U.S. inventories in decades and recent lower clean product yields versus Q2 of 2024. We would expect distillate margins to remain strong through the end of the year with planting season coming up, our hurricane season coming up, fall turnarounds and then winter demand right after that. And so we'd expect tight distillate margins to put also bullish pressure on gasoline margins as refineries move to making more and more distillate through the driving season. I'd say thinking about what would put some pressure on the distillate margins, it will come from additional OPEC crude and the weakening of fuel oil values with heavy crude pressure. Additionally, we have Canadian producers ramping up production to be more heavy crude on the market.

And we've seen back and forth some jet moving into the diesel pool. So I'd say that one of the things we're doing is watching the Mid East and India where the global net distillate length exists for potential imports into Europe. And while we don't think China is going to add any more gasoline or diesel exports, this could also take some steam from distillate. And finally, as many people have talked about, we've seen lower biodiesel and our renewable diesel production. It's also bullish for distillate. So we would think that distillate margins will remain strong through the year, eventually coming off some when you get these extra barrels, heavy crude barrels back onto the market.

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

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

We've added a strong origination group. We've hired about 2 dozen originators around the world. These are people that speak multiple languages, understand multiple commodities and can drive value with customers, thinking about what we might want to buy and sell with customers and how we might use the integrated -- our integrated system to drive more value. So really excited about the progress we've made in commercial and I think there's -- as Don and Mark have pointed out, there's still more opportunity.

Our next question comes from Phillip Jungwirth with BMO.

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

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

Okay. Great. And then I don't think we've asked about the new M&S allocation slide that you have in the deck here, just to be more apples-to-apples in terms of comparing refining performance. But it was a nice quarter for refining. I mean, typically, PSX tends to really outperform in the central corridor. I assume with the M&S allocation, I mean, the outperformance is even greater there. So just in a quarter where WCS didn't really give you much help, what do you guys look at as far as really attributing and driving that relative outperformance? And then in some of the other regions, maybe like the Gulf Coast, I know you mentioned the Sweeny project, but are there other things you can do there, new projects or otherwise to improve relative margin uplift given that you are pretty vertically integrated in the Gulf Coast also?

Phillip, it's Brian. Maybe I'll start on talking about the Mid-Con strength. Again, we talked about the commercial organization. I think they had a hand in the Mid-Con as well. We were able to increase value in Mid-Con by optimizing the system essentially on both gasoline and diesel, we anticipated strong Mid-Con prices in Q2 with heavy turnarounds and decreasing inventories, and we positioned our system appropriately. And also on the gasoline prior to the emergency RVP waivers, our refineries were able to produce the lower RVP, which received a premium in the market given the limited production. And finally, I think, just in general, refineries had minimal maintenance during a heavy Mid-Con turnaround season. So we benefited by running why others were down.

Yes. And I guess I'll add on the refining side of the business, what we see an opportunity on in the Gulf Coast and even a bit in the Mid-Con area, is to continue to fill up the secondary units in our processes, and that may not be -- native feedstocks may not be generated from the front end of the facility. So that is an opportunity that we've zeroed in on, and we think there's good potential there that we can increase the overall utilization of the assets and generate more clean products for the marketplace.

Our next question comes from Joe Laetsch with Morgan Stanley.

So I wanted to start on the full year turnaround expense guidance, which was reduced by $100 million. Was this due to outperformance or was prior planned maintenance deferred? What I'm getting at and trying to figure out is if the $400 million to $500 million level is a fair run rate to use going forward?

Yes. I'll take that -- this one, Joe. This is Rich. So the third quarter guidance we gave you was $50 million to $60 million. And if you look at the year-to-date spend, we've underspent based on our previous guidance there. So we did feel it was important to adjust the overall guidance for the year. And that's attributed to really 2 primary things that we've got going on. And one has been our continued focus on execution and planning. And that work has really allowed us to be very efficient on the execution and actually come under our historical productivity or above our productivity numbers, but under our historical spend to execute our work. And the second key component of this is the maturity of our inspection programs where we're moving from a time-based inspection process to a condition-based inspection process.

That does 2 things. One, it allows us to really optimize the interval between turnarounds. So we can -- as more data comes available, we have a technical basis to move a turnaround from, call it, 36 months to 48 months or whatever that interval is. And the other benefit that this inspection process is driving is actually reduced scope of work inside the turnarounds, which is reducing the complexity of the turnarounds and then it's compounding the effectiveness on the execution and planning side of the business. So year-to-date, we performed quite well. We've spent around $320 million year-to-date so looking at the numbers, we felt it was the right thing to do to adjust our full year outlook down by $100 million.

Good to see the execution. My second question is on the Midstream side. Now that Coastal Bend has been closed for a couple of months, can you talk to how the integration is going, synergy capture and any surprises now that you've had some time with it in the portfolio?

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

I think you step back, it's a great addition that really supports our organic growth plans that you see us executing in the Permian with our gas gathering and processing plant expansions like Dos Picos II and the Iron Mesa gas plants, all of that is volume that's going to come out of those plants and feed into Coastal Bend and then hit that Gulf Coast market where Coastal Bend plus what we had really creates a great network of purity product lines that hits a lot of markets up and down the Gulf Coast and really see robust opportunity there. And the customer feedback, the customer engagement that we've had post closing Coastal Bend has been robust and very positive. So really excited about what the acquisition has done for us and what the opportunity set looks like.

Our next question comes from Paul Cheng with Scotiabank.

Brian, can I go back to the renewable diesel? You're saying that you are running at reduced rate. Just curious that if the margin is lower, that means that you're going to reduce further from the second quarter level. In other words, that how sensitive you are in your run rate versus the market condition? And also whether you have fully booked the PTC in the second quarter or that there's some incremental benefit that we should assume and expect on that? That's the first question. The second question, I think, is for Mark. Upon the completion of the shutdown of L.A., you have no refinery in California, but you have wholesale and marketing and retail marketing operation there. And also that in Europe, given the market condition is never really that great for the oil and gas business. So in those 2 set of business, it means that in Europe, your refining and marketing business and in California, your marketing business. In the long haul, how you see them fitting into your portfolio? Are they should be part of your portfolio long haul?

Paul, it's Brian. I'll start. I'll tell you that we're likely to run Rodeo at reduced rates even from Q2 in Q3, but that will be predicated on the market and the market may be better or may not. We're watching -- as you know, there's a lot of aspects to the margins for renewable diesel and renewable jet, including all the credits, including the price of the renewable diesel relative to CARB diesel and also the price of the feedstock and they all move in tandem. So we're watching it all very closely. And depending on what the market gives us, that's what we'll run the plant at.

Yes, Paul, on your second question regarding L.A. shutdown, you're right. We'll have no traditional refining capacity in California. I would point you to what we did when we converted to Rodeo to renewable feedstocks. In essence, we were neutral on diesel production. It just happened to be renewable diesel versus traditional diesel, but we had to backfill gasoline. We did that and other market participants did that by importing. We also have the ability to import from our Ferndale refinery in Washington. So it's a good position there. And then as we shut down L.A., again, it's primarily a gasoline import opportunity and the California authorities have been very proactive in helping us address the import opportunities. from the water, whether it's international or other domestic sources. And so we've got a great plan that's been well received by California.

And I'd also add to Mark's comments. I think what's interesting is we believe that the volatility in California gasoline prices will actually be reduced with more gasoline imports because if you think about having mature supply chains, which are similar to other markets like PADD 1, which is also a gasoline import market, you're going to have barrels coming in large ships, 300,000 barrels to 700,000 barrels, and those barrels will come off the ship and be stored and ready for market dislocations. You also have many more destinations that can produce now CARB gasoline than in the past.

And also, as Mark pointed out, destinations that are very close to California, like our Ferndale refinery. And in fact, gasoline imports into California versus a 5-year average, we're up 70,000 barrels a day already. So we really don't see any constraints on getting the CARB gasoline. We see a lot more gasoline coming into the market. The steady stream will help put a lid on volatility to a certain degree. The only issue is infrastructure. That's a potential issue. But what we've seen is the state is aware of this and seems poised to continue to help us on that infrastructure. So we think California is in a very good position.

Yes. And regarding Europe, we've already exited co-op. We are exiting 65% of our jet position in Germany and Austria. So clearly, that's not strategic for us. We like the deal that we did for jet. It was a solid offer from a high-quality buyer. They wanted us to come along for some period of time as they adjust to that market, and we still have exposure to the upside there with clear exit provisions. And so we're comfortable with where we are there in Europe. Around Humber and the integrated position in the U.K. Humber is really the leading refinery in the U.K., perhaps in all of Europe. It's a strong position there. It has good optionality. And as you see others rationalize assets, it's only going to strengthen this position.

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

I want to check in on the refining guide for Q3. I think it was for utilization in the low to mid-90% range versus the 92 -- or 98% in Q2. Your turnaround expense is flat quarter-over-quarter. The indicator in July, at least should be higher than the Q2 average. So I guess we're a little surprised that utilization might be coming down fairly significantly in Q3. Is there anything to read into that? Or what's going on there?

I'll take that one. There's a couple of things going on that you need to think about on this one, Matt. One is -- and this is public information, Bayway -- our Bayway facility had an upset here, power outage during the last set of storms that rolled through and that took the entire plant down. The plant is back up now and operating well, but that will have an impact on utilization. And then the second thing is around our Los Angeles refinery. We've indicated that we're going to cease operations in the fourth quarter. But actually, on the backside of the third quarter, you'll start seeing some winding down of the operation that will have also some impact to utilization.

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

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

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

Thanks for all your questions. And before we wrap up, I want to emphasize 3 points from the call. The strong financial and operating results this quarter show that we're executing well on a proven strategy. Our integrated business model generates competitive returns through disciplined investments and synergy capture along our crude and NGL value chains. And we're committed to returning over 50% of net operating cash flow to shareholders through share repurchases and a secure, competitive and growing dividend. Thank you for your interest in Phillips 66. If you have questions or feedback after today's call, please contact Jeff or Owen.

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

Okay. For our next session, we're very pleased to welcome Mark Lashier, Chairman and CEO of Phillips 66. Mark has been CEO since 2022, and he's, I believe, been a lifer with the company back to Phillips Petroleum and inclusive of his time at CPChem, where he had several positions and ultimately ran CPChem prior to taking the helm of Phillips 66.

So Mark, thanks very much for joining us today.

John, thanks for having us here.

So let's start with probably the key topic, which is the annual meeting, if we can. So you've had this highly public situation with an activist shareholder. Ultimately, you had a split Board vote with 2 of the 4 Board members, 2 of your 4 nominees elected. Can you talk about how you view the outcome of the shareholder vote?

Sure, John. Thanks. I think the whole process, I think, gave us an opportunity to really dig in deeply with a broad array of shareholders, investors and to tell our story, to bring Board members in front of them, to give them an inside view to the process around what we do around strategy. So I think it was great, good constructive feedback from shareholders. We really appreciate the time that they took to hear our story. I think it helped us sharpen our message and provide clarity and really double down on our commitment to improve our Refining performance. We've been on that journey for some time. Employees responded incredibly well during this. And I think that -- and now that we're in the process beyond the Annual General Meeting, we're onboarding 3 new Board members, and that's going well. It's live last week, this week.

And I think that they're -- now they're getting an inside view of all the things that we've been talking about, all the things that we're doing. And I believe that across the whole spectrum of our Board, we consistently have Board members that constructively challenge us on our strategies to look at what we're doing. There's no -- they know that there's no sacred cows at Phillips 66, that everything is fair game. But the numbers have to make sense at the end of the day. We've got some very experienced investors, very experienced CEOs, very experienced executives on our Board that are very independent. And they do what they're supposed to do, and that's challenges on our strategy, make sure that we have the right people doing the right things and delivering long-term value for our shareholders. So from that perspective, it was a very constructive interaction with our shareholders.

Great. My next question is on the balance sheet and kind of the push-pull between the balance sheet and returns of capital. How do you think about the balance sheet between the leverage target and buybacks in 2025 and beyond? And how much of the proceeds from the JET asset sales, do you expect to allocate to JET paydown?

Yes, John, we're absolutely committed to returning at least 50% of our net operating cash flow to investors. And so the first priority is our sustaining capital. That's less than $1 billion and then ensure that we're taking good care of our assets so we can deliver safe, reliable operations over the long term. And then our $2 billion in dividend. And beyond that, we've got opportunities for share repurchases, growth capital and balance sheet. And when you think about the balance there, we say that we're going to be zeroing in our capital budget, $2 billion to $2.5 billion. And so you take $1 billion out, we've got about $1 billion to $1.5 billion in growth CapEx. So we think there's plenty of room for share repurchases and balance sheet, getting our balance sheet in shape.

Now from ongoing operating cash flow perspective, we'd like to see Refining margins be a little more robust to get to that $17 billion number, but the proceeds from selling 65% interest in our JET assets in Germany and Austria, that will close the second half of this year. And after tax, we should see about $1.5 billion come in from that. That's all going to debt pay down. So that will be a big step towards our goal of getting down to $17 billion. And really the way we think about debt, we like to think that -- look, Refining, I think that there's a lot of incentives for a Refining business to be debt-free.

We have a Midstream business that -- and a marketing business, when they're combined, they generate very consistent earnings of about $6 billion. And when you put a conservative 3 multiple on those -- on that EBITDA, you've got capacity just from those 2 businesses to easily service about $18 billion in debt. And so we're -- that's where our $17 billion target is coming from. And so we feel like that's a very conservative balance sheet and the right place to be for now.

Great. My next question is on Midstream. Can you talk a little bit about the organic expansion that's happening on the gas processing side with both Dos Picos and Iron Mesa. Do you need more gas plant capacity from here to achieve the level of integration you're looking for with the NGL value chain?

Yes. When you step back in the big picture, since we've rolled up DCP and if you look at what we have in flight with Dos Picos II, Iron Mesa, we'll have added about 700 million cubic feet a day of gathering and processing capacity. And we believe that we can be on a pace of about 1 gas processing plant a year to ensure that we have the capacity to manage the acreage commitments that we have out there. So we like to understand that we're going to be able to load these facilities up before we put them in place. And it's a good combination with the contractual commitments we have out there from other people's gas gathering facilities.

So Dos Picos was an opportunity that came in with the Pinnacle acquisition. They had one operating gas plant. Here, this is a duplicate of that, another 250 million standard cubic feet a day. That will come online in the second half of this year. There is room for a third at that location, and there is the capacity for that, that could come out later on because we wanted to next address opportunities out in the Midland and Delaware Basins, and that's where Iron Mesa comes in. It will be 300 million cubic feet a day. It's our largest gas gathering and processing facility. It will be incredibly cost efficient. It addresses some reliability challenges we had at the Goldsmith Plant that is in the same neighborhood. Upstream producers are thrilled to see this asset coming. It will be on stream in 2027. And again, beyond that, we have the ability to add about another gathering and processing unit per year for the foreseeable future.

And when you look at the Pinnacle acquisition, the EPIC acquisition in particular, it's opened up frontiers for us to add the gathering and processing assets in a very efficient way that we want to add. And we can take full advantage of the competitive advantage we've created with those assets. And when you think about what we're doing in the NGL midstream, at every step that we've done, we've leveraged a competitive advantage, whether it's the fractionators that we built at Sweeny, the storage that we leverage at Sweeny, the pipelines that we brought in from DCP, the gathering and processing assets that we've acquired have all been very synergistic with existing assets.

And then the EPIC acquisition really opened up a whole new frontier that directly integrates not only with the DCP assets in the basin, but down through Corpus Christi. And now we've got this bidirectional freeway for NGL volumes from Corpus Christi to Sweeny up to Mont Belvieu, something that no other NGL producer can provide in terms of market access to their upstream customers. And so we're very pleased with that.

And if you look forward, right now, we're oversubscribed on our capacity on Sand Hills. We're having to move volumes on other people's pipes. And the beauty of the EPIC transaction is there are volumes already moving through EPIC, but there's 2-stage expansions that are underway that we'll be able to move either capacity that we will get from our own G&P assets or from third-party G&P assets that are committed to our system. And so we're quite full, and we have control of those volumes. And at some point in time, we believe we'll have an opportunity to add fractionation capacity either to the existing EPIC footprint down at Corpus Christi or in our Sweeny complex, whichever makes the most economic sense at the time. So it really is a fantastic perfect fit for us from the perspective of creating and leveraging the competitive advantages that we have.

Great. And so my next question is on a business that I'm sure is near and dear to you, which is Chemicals. Ethane-based ethylene margins are well below mid-cycle today. They have been for some time. What are your expectations for margins for the second half of the year? And what will it take for margins to show a recovery? Is China demand the key driver? Are there other drivers we should think about?

Yes. I know, John, it's -- CPChem has been a great business for us. It's been around 25 years as a joint venture. It's been remarkably successful as a joint venture. It's -- over the long term, it's our highest return on capital employed business, and it's grown faster and more profitably than any of its competitors. So it's been a success by any measure. But right now, it's in one of the longest downturns. The industry is in one of the longest downturns that we've seen in 30 or 40 years, certainly in my career. And maybe I'm an optimist, but those long downturns tend to be the preparation for a very good upswing. And we believe that will happen because global demand continues to increase.

There -- a lot of capacity was added based on low-cost ethane in North America, low-cost ethane in the Middle East. We participated in that because we believe we can be the low-cost producer through CPChem. So we've got these assets that we're building with QatarEnergy over in the Golden Triangle and one in Ras Laffan, Qatar that will be world-class. And CPChem, even though it's a downturn, CPChem is generating on the order of $1 billion of EBITDA a year, while assets in Europe and assets in the Far East are struggling or rationalizing shutting down. If they're not shutting down, they're bleeding cash. And so CPChem was built for this environment, and there will be a shakeout.

And so really, I think that China aside, I think there are 2 things that are going to drive the recovery, rationalization of noncompetitive assets that need to go away and this continued march up into the right of demand growth in the globe. Now we've had some turmoil around tariffs. We've had turmoil around geopolitics this year that maybe have complicated that a bit. But again, those long-term fundamentals still exist, and we believe that the combination of the continued demand growth, rationalization. And other than the assets that CPChem and QatarEnergy are adding, there's not a lot of new capacity coming over the horizon. So we're constructive long term around the performance of CPChem and the ethane value chain.

So would Chemicals ever be on the table as part of an asset sale program if it were -- if you were to kind of get the right price for it? And outside of your JV partner, are there potentially other buyers there? Or is there just the one natural buyer?

Yes. As I said in response to the first question, there's no sacred cows at Phillips 66. We do a comprehensive review of all of our assets annually and think about what assets should be in our portfolio, what assets might have greater value in the hands of someone else. CPChem is no different. And if -- but the challenge is in the current environment, I don't believe there's anyone interested in paying us full value for those assets. And I think there's been even some sell-side commentary out there about what the sell-side view is the key -- the whole value of those assets from our perspective.

And I think that in this environment, it would be tough for a seller to come up with that. It's probably a good time to buy petrochemical assets, but it's probably not a great time to sell petrochemical assets. And you throw in the fact that CPChem has 2 mega projects coming online, and there's earnings upside there as well as coming out of this long downturn, there's a lot of upside potential there. But having said that, like any asset we own, if there's a buyer out there that sees more value in these assets than we do and is willing to commit to the right kind of deal, we're all ears.

So maybe moving on to Refining. Can you talk about what inning you're currently in, in terms of your reliability efforts? What improvements you've made so far and what's still ahead of you?

Yes. I think we're still in early to mid-innings in Refining. It's interesting. I think last year, I was talking to you at this venue, John, and I quoted Rich Harbison said we need to focus in Refining on the things that we can control. And the first step was to get our cost down. And now we're focusing on opportunities to enhance margin, increase yields. And you fast forward now, we've had 2 years of utilization rates above industry average. And one of our 2027 strategic priorities is to ensure that we're at least 2 full percentage points above industry average utilization.

If you look at -- and that contributes to lower cost per barrel. If you look at things like yields, we -- the last 3 quarters, we've increased our high-value product yields, and we've gone from 84% to 87%, almost a straight line up to the right. That didn't happen by accident. That happened because of very deliberate small, but very impactful capital investments that we made, where we've made investments to enhance the flexibility of these assets. And we're really focusing intentionally on the central corridor assets where we -- I think we're a leader in EBITDA per barrel production primarily because this is where our assets are integrated. We can move streams between refineries to optimize a stream that is in a refinery that's full. We can optimize it in another stream or another refinery that may have some room to maneuver.

But across the board, we've had a very intentional and major program to reduce costs, not just in the Refining, but support costs, SG&A costs, everything. I think initially in '22, we came out with a $0.75 a barrel target. In '23, we increased that to $1 per barrel. We've exceeded that aspiration. And now we've pushed it from somewhere around $7 a barrel to below $6 a barrel, and now we're targeting $5.50 a barrel and beyond. And probably the biggest impact that you'll see this year is when we ceased operations at our Los Angeles refinery in the fourth quarter. That's a very high-cost refinery, low to no earnings. And so we'll be able to not only reduce the controllable cost in our entire refining fleet by, say, $0.20, $0.25 a barrel, but we'll also free up all the sustaining capital that was going into that asset to keep it viable to make it available for other uses.

And so -- and then when you move beyond that impact. The other -- the remainder of that $0.20, $0.25 is just the continuous focus across the board on reducing costs, enhancing efficiencies, driving consistent operations, all and lowering our turnaround costs as well. It's been very gratifying to see our employees response to the cost program. We've -- there's always resistance to change, but we've reached a tipping point, I think, in the last year where employees are coming forward and saying, we were worried about these cost reductions. We were worried about you taking people out of the organization. But now we have fewer people. We're getting more done. Our jobs are more enjoyable. Let's keep on this path. And so now there's a lot of ownership in that.

And I'll be honest with you, John, that the whole situation around our proxy heightened employees' awareness. They realize that it's just not an exercise. This is something that we have to do every day to compete and stay competitive because people are watching and shareholders have expectations. And so it's been a very virtuous cycle that we're in around the cost control. So by 2026, we should have baked in that $5.50 a barrel. So it's out there consistent. And we're going to have aspirations to move beyond that, but that's just the next step.

Great. And then just a follow-up on Refining. There's a little bit of an issue with comparability with peers because you have some of your refining-related income that sits in M&S. Are there any plans to kind of improve the transparency around that for people like me to get a better comparison?

One thing we're committed to is ensuring that we've got a great narrative out there that investors sell side, buy side have as much clarity as possible on what we're doing. And so we're certainly looking at what we can do to make sure that our performance is compared on an apples-to-apples basis. It's not a simple thing to do, but we're going to -- we're looking at it. Kevin Mitchell, our CFO, and his team are certainly taking a hard look at how to do that to get us close. You can never get it perfectly because it's different businesses, but I think you can get it in a context where everyone can look at it and say, okay, that's an apples-to-apples comparison.

Great. So my next question is on growth CapEx. What are some examples of growth projects that are still ahead of you on the Refining side? And what type of spend is necessary to achieve your goals for improving on the capture rate?

Yes. When you look at our overall capital budget, we've said that this year and the next several years, the capital budget will be between $2 billion and $2.5 billion a year. In Refining this year, I think we're around $800 million. About half of that is sustaining capital, about half of that is -- I won't call it growth capital, I'll call it returns capital because we're not trying to grow our Refining business, but we've got some very high return, quick return projects. There are things to enhance low sulfur diesel production in Lake Charles. We just completed a significant project at Sweeny that will allow us to swing from 40,000 barrels of heavy sour crude to 40,000 barrels of light Permian crude. And so we can have some flexibility when the economics dictate.

And I think as we look out into the future with the volatility in the markets, the need to leverage domestic hydrocarbons to go out and compete in the world that, that flexibility is important. We're moving more molecules in distillate up from diesel into Jet. We're moving lower octane molecules into higher octane. So things like that just to continue to produce higher-value products, things that are worth less than a barrel of oil. We want them to be worth more than a barrel of oil. And so it's just small projects here and there that are very high return, quick payout projects. And we've got a healthy appetite so that most of that $400 million is -- every year is associated with projects like that. And we've got a long list of opportunities. Most of that will be focused in our central corridor, where we see our long-term competitive advantage and a lot of integration value there.

Okay. And then maybe we can step back and go back to kind of some more macro-type questions. My next question is on crude differentials. Where do you think the WCS will settle now post TMX. And how long do you think it will take before supply kind of grows into takeaway in Alberta?

Sure. Yes. No, I think that you've seen a lot of things come into play first half of this year, of course, TMX taking barrels out to the West Coast. We do still have barrels coming down to the Gulf Coast. But there's a number of headwinds right now. You've got producers in Alberta, doing a lot of maintenance this time of year. You've had a lot of wildfires up there. And all of that has come together to tighten up the diffs. So we're in the, call it, $7 to $8, I think, where we are today. We see that turnaround work being done if the fires are mitigated second half of this year, we may see diffs widening back out to $12 to $14. So there's a lot of heavier OPEC crude, Saudi crude, Middle East crude coming into the market. That's constructive for those diffs as well.

Well, let's stay with that maybe and a follow-up on coastal light heavy diffs. And what's your view on coastal light heavy diffs for the remainder of the year? Obviously, a lot of moving pieces around OPEC+ bringing back barrels and all the geopolitical things that are going on right now. So what's your view on just the coastal light heavy diffs?

Yes, there's some headwinds there as well. The main crudes are declining and more of that is being shifted as those [ Bakus ] refinery comes up there. You've got sanctions on Venezuelan crude. So there are headwinds there as well. And it's related also to the tailwind of OPEC coming in, but then the headwind of more Canadian crudes moving to Asia. So it's all interconnected, I think, at the end of the day. But there's -- I would say, just from the coastal crudes specifically, there's probably more headwinds than tailwinds to those diffs.

So my next question is on Refining in California. You've announced the closure of your operations at Wilmington. What were the key drivers in that decision? And then is there anything that could lead you to postpone or reverse the decision before the end of the year?

Well, it's always a tough decision to shut down an asset. I think 600 people are looking for jobs elsewhere. Frankly, in California, a lot of them are finding jobs very quickly. It's a robust job market. But when you look at all the elements that you need to be competitive in refining crude advantage. California has lost its crude advantage. These refineries were configured to run California crude. California crude production is down 75%. These refineries -- this refinery is actually 2 old refineries that are interconnected. So it's configuration isn't particularly competitive. You have to make CARB gasoline, which adds to cost. And you -- and just the base -- call it, the base cost of operating a refinery in California is probably 2x what it is on the Gulf Coast.

So there were just a lot of headwinds against this refinery. So it was one of our highest cost refineries, very low contribution to the bottom line. All those things conspired to lead to the conclusion that we needed to cease operations this year and start a process to redevelop the land for a higher-value use. And I'll tell you that we've had great cooperation with the California Administration, Governor Newsom, the California Energy Council. They have been very helpful in helping us identify the best ways to resupply California. So getting permits to import refined products from offshore. Our Ferndale asset in Washington is shifting over to be able to produce CARB gasoline to bring both into Northern California and Southern California. And by the way, we've done the whole resupply thing already in Northern California when we converted Rodeo to renewable diesel, we stopped producing gasoline up there.

And so it works, the economics work. And I think it's a -- frankly, it's even more stable for the state of California once there is a consistent supply of refined products coming in versus relying primarily on refineries in California that go up and down and then you have to wait maybe a couple of weeks for refined products to gear up and come in from Asia. This will be kind of a consistent flow, much like we see in the Northeast. And the Northeast is short refining capacity. Most people don't realize that most of the refined products come from offshore, from Europe, from Africa, from the Middle East.

And no one feels that in the marketplace here. It's a very competitive market because that California can have a similar situation over the long term, where they can have stability with existing assets in California with imports, and we're going to be part of that import. We have retail outlets in California. Most -- all of them have been converted to provide renewable diesel. And we've got to supply the gasoline to those. We've got other customers in California that we're going to make sure they're supplied. So we're committed to resupplying what we're taking out of the California market.

So my next question is on your outlook just on RINs. There have been a lot of moving pieces. Obviously, the PTC switch is a net -- has been a positive for RINs. You've also had the preliminary RFS has come out, but we don't really know which way small refinery exemptions are going to go. So can you just -- how do you sort of put it all together and think about RIN prices?

Yes. It's complicated. There's a lot going on, whether it's the 45Z elements in the big beautiful bill, the way the EPA is interpreting things, the farm lobby has been active in protecting their interest. And so in general, we see from a renewables perspective, RINs being constructive, though from an imported molecule perspective, not as much, but we think it's directionally moving the right way. And so from a small refinery exemption perspective, it's a little controversial because there's the potential that large refiners would have to cover the small refineries exemption.

And I think that as a large -- as most of our portfolio would -- is considered large refineries, we would be covering that. Most large refiners would. It's not clear if that would actually be done, though. I think in the first Trump administration, same rules were in place, small refineries got exemptions and they didn't reallocate those exemptions to large refineries. And so there is some flexibility in how the rules get implemented. So it's getting clearer, but there's still a lot of elements out there, John, that we're watching very carefully.

Great. Well, we're at about a minute. So why don't we wrap there. But Mark, thank you very much for your time. Really appreciate it.

Thank you, John.