Welcome to the Fourth Quarter 2019 Phillips 66 Earnings Conference Call. My name is Rob, and I will be your Operator for today's call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session. Please note that this conference is being recorded. I will now turn the call over to Jeff Dietert, Vice President, Investor Relations. Jeff, you may begin.
Good morning. And welcome to Phillips 66 Fourth Quarter Earnings Conference Call. Participants on today's call will include Greg Garland, Chairman and CEO, Kevin Mitchell, Executive Vice President and CFO. Today's presentation material can be found on the investor relations section of the Phillips 66 website, along with supplemental financial and operating information. Slide two includes our safe harbor statement. We're going to be making forward-looking statements today. Actual results are going to be different. Factors that could cause results to differ are included here, as well as in our SEC filings. In order to allow everyone the opportunity to ask a question, we ask you limit yourself to one question and a follow-up. With that, I'll turn the call over to Greg Garland for opening remarks.
Thanks, Jeff. Good morning, everyone, and thank you for joining us today. Total adjusted earnings for the fourth quarter were $689 million or $1.54 per share. We generated $1.7 billion of operating cash flow. For the year, adjusted earnings were $3.7 billion or $8.05 per share. During the fourth quarter, we continued to progress our major growth projects. We achieved a major milestone with initial startup of the Gray Oak Pipeline. Midstream performed well, delivering another record quarter in the transportation business. Refining and Chemicals ran at 97% utilization. However, turnaround activity and weak product and petrochemical margins impacted our financial results. During 2019, we made significant progress on executing our growth strategy in Midstream and Chemicals. Operating excellence remains a top priority for us, and we maintain our industry-leading performance. We can always do better.
We believe that a zero incident, zero accident workplace is achievable, and it's a goal we work hard for daily. Midstream completed a number of growth projects and delivered strong operating performance, contributing to another year of record-adjusted earnings for that segment. For the year, refining ran at 94% utilization, while CPChem operated at 97% O&P utilization. In 2019, we delivered a 34% total shareholder return for Phillips 66 shareholders. Phillips 66 Partners is integral to our midstream strategy. PSXP delivered strong operating performance, eliminated Incentive Distribution Rights, and achieved a 56% total unitholder return in 2019. Phillips 66 Partners continues to be a leading Master Limited Partnership with a strong financial position, attractive growth opportunities, and disciplined capital allocation. We announced our AdvantEdge66 business transformation program in late 2019. AdvantEdge66 is leveraging technology to transform the way we run our operations, execute projects, and make decisions.
Through this program, we expect to deliver $1.2 billion of enhancements by the end of 2021. We're committed to strong shareholder distributions. During the year, we returned $3.2 billion through dividends and share repurchases. In 2019, we increased the quarterly dividend 12.5% and announced a $3 billion increase to our share repurchase program. Since 2012, we've returned $26 billion to shareholders and reduced our initial shares outstanding by 33%. We made significant progress on our key projects. These projects will contribute to future cash generation and create shareholder value. Phillips 66 Partners commenced initial operations on the Gray Oak Pipeline in November, and we anticipate full service in the second quarter of 2020. The 900,000 bbl per day pipeline will transport crude oil from the Permian in the Eagle Ford to the Texas Gulf Coast, including our Sweeny Refinery. Phillips 66 Partners owns a 42.25% interest in the pipeline.
Gray Oak will connect to multiple refineries and export facilities in the Corpus Christi area, including the South Texas Gateway Terminal, in which PSXP has 25% ownership. The terminal will have two deepwater marine docks, 8.5 million bbl of storage capacity, and up to 800,000 bbl per day of throughput capacity. The terminal is expected to start up in the third quarter of 2020. The Liberty Pipeline will provide transportation of the growing Rockies and Bakken production areas to Cushing, Oklahoma. We own a 50% interest and will construct and operate Liberty. The Red Oak Pipeline system will connect Cushing and the Permian Basin to multiple locations along the Gulf Coast, including Corpus Christi, Ingleside, Houston, and Beaumont. We own a 50% interest and will operate Red Oak.
The Liberty and Red Oak Pipelines are backed by long-term commitments, and we're targeting initial service in the first half of 2021.
We're adding three 150,000 bbl per day fractionators at the Sweeny Hub. Fracs 2 and 3 are on track to start up in the fourth quarter of 2020. Frac 4 is expected to be completed in the second quarter of 2021. The fracs are backed by long-term customer commitments. On completion of Frac 4, Sweeny Hub will have 550,000 bbl per day of fractionation capacity. We're adding 2.2 million bbl of crude oil storage at our Beaumont terminal to meet increased need for Gulf Coast export infrastructure. On completion in the first quarter of 2020, the terminal will have 16.8 million bbl of crude and product storage capacity. In addition, we're constructing a new 200,000 bbl per day dock. This project is expected to be completed in the third quarter of 2020, resulting in a total dock capacity of 800,000 bbl per day at our Beaumont terminal.
In chemicals, CP Chem is expanding its strategic partnership with Qatar Petroleum to develop petrochemical assets in the U.S. Gulf Coast and in Qatar. Pending final investment decisions, these world-scale projects will add ethylene and high-density polyethylene capacity in advantaged feedstocks locations. This further enhances CP Chem's leading polyethylene position to supply the world's growing demand for polymers. In refining, we're upgrading one of the FCCs at the Sweeny refinery to increase production of higher valued petrochemical products and higher octane gasoline. The project is on track to be completed in the second quarter of 2020. The Ponca City Refinery, we're upgrading an FCC to increase yields of higher valued products and to process more advantaged feedstocks. This project is expected to be completed in the fourth quarter of 2020. We recently canceled the renewable diesel project at our Ferndale Refinery.
Permitting uncertainties were leading to project delays and increased costs, impacting the viability of this project. Our renewable diesel strategy has not changed. We continue to pursue renewable diesel opportunities that leverage our existing infrastructure, supply network, and capabilities. In marketing during the fourth quarter, we entered into a retail marketing joint venture with operations primarily on the U.S. West Coast. The joint venture currently operates 580 retail sites. In addition, the joint venture is expected to close on an acquisition of approximately 100 additional sites in the first half of this year. The joint venture enables increased long-term placement of our refinery production and increases our exposure to retail margins. Our strategy and commitment to capital discipline remains steadfast. We are focused on operating excellence, project execution, maintaining financial strength while providing strong returns to our shareholders.
With that, I'll turn the call over to Kevin to review the financials.
Thank you, Greg. Hello, everyone. Starting with an overview on slide four, we summarize our financial results for the year. 2019 adjusted earnings were $3.7 billion or $8.05 per share. We generated $5.6 billion of operating cash flow excluding working capital. Distributions from equity affiliates totaled $2.1 billion, including $831 million from CPChem. At the end of the fourth quarter, the net debt to capital ratio was 27%. Our adjusted after-tax return on capital employed for the year was 11%. Slide five shows the change in cash during the year. We started the year with $3 billion in cash on our balance sheet. Cash from operations was $5.6 billion excluding working capital. There was a working capital use of $830 million, mainly related to an increase in receivables associated with the timing of crude oil sales at year-end. Consolidated debt increased by $500 million due to issuances at PSXP.
During the year, we funded $3.5 billion of adjusted capital spending and returned $3.2 billion to shareholders, including $1.7 billion of share repurchases. Our ending cash balance was $1.6 billion. Slide six summarizes our fourth quarter results. Adjusted earnings were $689 million, or $1.54 per share. Operating cash flow was $1.7 billion, including a working capital benefit of approximately $500 million. Capital spending for the quarter was $1.3 billion. We invested $880 million in growth projects, including $260 million of capital associated with the retail marketing joint venture. We returned $810 million to shareholders through $398 million of dividends and $412 million of share repurchases. We ended the year with 441 million shares outstanding.
Moving to slide seven. This slide highlights change in pre-tax income by segment from the third quarter to the fourth quarter. During the period, adjusted earnings decreased $713 million, driven by lower results in all segments.
The fourth quarter adjusted effective tax rate was 24%, driven by adjustments to our tax liabilities to reflect a full year adjusted effective tax rate of 21%. Slide eight shows our midstream results. Fourth quarter adjusted pre-tax income was $405 million, a decrease of $35 million from the previous quarter. Transportation delivered another record quarter with adjusted pre-tax income of $250 million, up $2 million from the previous quarter. The increase was due to higher pipeline and terminal volumes that were mostly offset by increased planned maintenance costs. NGL and other adjusted pre-tax income decreased $49 million, driven by lower propane and butane trading results following a strong third quarter, as well as inventory impacts. At the Sweeny Hub, the export facility averaged a record 13 cargoes per month, and the fractionator ran at 107% utilization.
DCP Midstream adjusted pre-tax income of $35 million was up $12 million from the previous quarter. The increase reflects the effect of lower depreciation and amortization following the third quarter impairments, as well as our increased ownership of LP units following the elimination of IDRs. Turning to chemicals on slide nine. Fourth quarter adjusted pre-tax income was $173 million, down $96 million from the third quarter. Olefins and Polyolefins adjusted pre-tax income was $154 million. The $97 million decrease from the previous quarter is due to lower polyethylene margins and seasonally lower volumes, as well as higher turnaround in maintenance costs. Global O&P utilization was 97%. Adjusted pre-tax income for SA&S decreased $1 million. During the fourth quarter, we received $143 million in cash distributions from CPChem.
Next on slide 10, we'll cover refining. The fourth quarter crude utilization rate was 97%, and clean product yield was 84%.
Both are consistent with the prior quarter. This was a heavy turnaround quarter, with $232 million of costs, up from $120 million in the third quarter. In addition, our share of WRB turnaround expenses amounted to $41 million this quarter. Refining fourth quarter adjusted pre-tax income was $345 million, down $494 million from last quarter. The chart provides a regional view of the change from the prior period. The Atlantic Basin adjusted pre-tax income decreased $218 million due to lower gasoline cracks, as well as premium coke inventory and margin impacts. In the Gulf Coast, the $108 million decrease was driven by lower product margins and the Lake Charles refinery turnaround. This was partially offset by widening Gulf Coast crude differentials. In the Central Corridor, the decrease was due to a decline in the gasoline market crack that was partially offset by widening WCS crude differentials.
In the West Coast, the decrease was driven by turnaround activity at the San Francisco refinery was $12.45 per barrel compared to $14.60 per barrel in the third quarter. Our realized margin was $9.50 per barrel and resulted in an overall market capture of 76%. Market capture in the previous quarter was 77%. Market capture is impacted by the configuration of our refineries. We make less gasoline and more distillate than premised in the 3-2-1 market crack. During the quarter, the distillate crack increased approximately $1 per barrel, and the gasoline crack declined by almost $4 per barrel. Losses from secondary products of $2.35 per barrel increased $1.28 per barrel from the previous quarter due to premium coke impacts, partially offset by increased butane blending into gasoline.
Our feedstock advantage of $1.02 per barrel was improved by $0.99 per barrel from the prior quarter as we benefited from widening WCS and Gulf Coast crude differentials. The other category mainly includes costs associated with RINs, outgoing freight, product differentials, and inventory impacts. The other category reduced realized margins by $0.54 per barrel. Moving to Marketing and Specialties on slide 12. Adjusted fourth-quarter pre-tax income was $287 million, $211 million lower than the third quarter. Marketing and other decreased $203 million from lower margins driven by less favorable market conditions and seasonality, as well as higher costs associated with a one-time true-up to a branded marketing agreement. The marketing results included a $62 million benefit from 2019 biodiesel blender tax credits. Specialties decreased $8 million due to lower finished lubricants margins.
We re-imaged 532 domestic branded sites during the fourth quarter, bringing the total to approximately 4,200 since the start of the program. In our international marketing business, we re-imaged 82 European sites since the start of the program in early 2019. Refined product exports in the fourth quarter were 157,000 bbl per day compared with 220,000 bbl per day in the third quarter. On slide 13, the corporate and other segment had adjusted pre-tax costs of $211 million, an increase of $33 million from the prior quarter. The increase is primarily due to higher environmental net interest and employee-related expenses. This concludes my review of the financial and operating results.
Next, I'll cover a few outlook items for the first quarter and the full year. In chemicals, we expect the first quarter global O&P utilization rate to be in the mid-90s.
In refining, we expect the first quarter worldwide crude utilization rate to be about 90% and pre-tax turnaround expenses to be between $280 million and $330 million. We anticipate first-quarter corporate and other costs to come in between $200 million and $220 million pre-tax. For 2020, we plan full-year turnaround expenses to be between $630 million and $680 million pre-tax. We expect corporate and other costs to be in the range of $800 million- $850 million pre-tax for the year. We anticipate full-year D&A of about $1.4 billion. Finally, we expect the effective income tax rate to be in the low 20% range. With that, we'll now open the line for questions.
Thank you. We will now begin the question-and-answer session. As we open the call for questions, as a courtesy to all participants, please limit yourself to one question and a follow-up. If you have a question, please press star and one on your touchtone phone. If you wish to be removed from the queue, please press the pound key. If you are using a speakerphone, you may need to pick up the handset first before pressing the numbers. Once again, if you have a question, please press star, then one on your touchtone phone. Phil Gresh from JPMorgan.
Hi. Good morning. Can you hear me?
Yes.
Okay. First question, just looking at the quarter here. I think several of your peers, particularly in refining, put up stronger results relative to expectations, and this is obviously a tougher quarter for you guys. I was hoping it might be possible you could disaggregate that for us or help us understand what you think the differences there were. Obviously, the turnarounds were called out as a factor, but I'm also looking at secondary products here as a pretty big headwind in the Atlantic Basin. I'm wondering if needle coke was a factor there as well. Just if you could help us think through some of the moving pieces. Thanks.
I think, as you look at the quarter, the turnaround activity was heavily focused in October. October was actually one of the better margin environments that we had last year. Our turnarounds were focused in that period. Margins softened substantially kind of in the back half of November and in December. The turnaround expense, $232 million, was more than our guidance and up substantially from the $120 million in the third quarter. As you look at our premium coke products, there are two primary markets there, the steel industry and EV sales for batteries. Both were weak with weaker GDP and manufacturing activity impacting steel as well as lower sales volume or disappointing sales volumes in EVs. Both China and India had declining sales in 2019 relative to 2018.
As you know, we've extended our coke product line to serve the battery market, which has a substantially faster growth profile. The car manufacturers are investing significantly to increase manufacturing capabilities. We expect that growth to return and balance that market.
Okay, thanks. The second question would just be on the chemical side of things. Obviously, it seems like everybody's been getting a lot of questions here on the fundamental picture. Greg, would love to get your latest thoughts about how you're viewing this cycle and the pace of potential recovery. As you look ahead at the investment opportunities that you outlined in your prepared remarks, does the cycle situation right now concern you at all with respect to those possible investments moving forward? Thank you.
Hey, Phil. I think first of all, we're constructive chemicals in the medium and long term. There's no question that margins today are cyclical troughs. At least they feel like it anyway at this point in time. Yeah, I think there's a couple of tailwinds. We saw some economic slowdown globally as we came into the back half of 2019. Certainly, the tariffs have had some depressing effect on global margins, whether it's $0.05 or $0.10 or somewhere in between, but certainly it's had an impact. There's quite a bit of capacity coming on in 2019 and also in 2020 and 2021. I suspect that there's going to be some headwinds on margins as we move into 2020 and 2021, just from the new capacity coming on globally.
When I think about how CPChem's positioned, I like their hand and how they're going to play their hand. First of all, assets in the Middle East and on the U.S. Gulf Coast are going to be an advantage from a feedstock location. Today, an LPG cracker on the Gulf Coast is probably $400- $500 a ton advantage over a naphtha cracker in Asia or in Europe. I think that's good. Then as we look and kind of dissect the product portfolio, CPChem's exposure is really on the high-density polyethylene side. That's not going to be quite as impacted as some of the other ethylene derivatives as we look out in 2020 and 2021. In terms of the FIDs for the new projects, these are five-year projects to build. We can't call the cycle that closely.
We probably don't hit an FID until late 2020 or early 2021 on the first project. We've got some time certainly to look at it. I would say today that we would be on track to approve those projects and move forward with those projects, just given what we see around the supply and demand balances for high-density polyethylene and where CPChem sits in kind of that ranking of assets.
Phil, I would say, when we look at the IHS full chain margin, it averaged $0.165 in the fourth quarter. December was down slightly below $0.15 per pound. We've seen that rally back year to date to about $0.165 back flat with the fourth quarter average.
With Doug Terreson from Evercore ISI. Please go ahead. Your line is open.
Good morning, everybody.
Hey, Doug.
Greg, over the past several years, Phillips 66 has consistently posted better results than peers and especially better than the super majors, and especially in the downstream. It seems like AdvantEdge66 is going to sustain that performance over the medium term. My question regards this outlook and specifically whether you feel that there are advantages that you have or disadvantages that you don't have that help explain performance and also how the AdvantEdge66 plan is progressing. Second, what role does stronger corporate governance play into it in your view? Meaning, since you're one of only a few energy companies that benchmarks performance against diversified peers, which is obviously a higher bar for return on capital than other energy companies, it reasons that disciplined capital management would be pretty high emphasis. I've got two questions.
One, insight into competitive advantages, progress on AdvantEdge66, and also the role that corporate governance plays into capital management at Phillips 66.
Yeah. Okay. Well, thanks for the question, Doug.
Yep
Working backwards, maybe. I think strong governance starts with a strong board of directors, and we have a strong board of directors. They're fully engaged in strategy discussions. We don't have a board of directors meeting at Phillips 66 where we don't talk about the strategy of the company, we don't talk about the capital allocation. Those are two topics we cover every board meeting. I think that as we think about our methodology and our criteria and the 60/40. 60% reinvested back in our company, 40% returned back to shareholders, and some flexibility around that given the opportunities that are in front of us to invest and where shares are trading. Over a long period of time, that's where we want to be. That is all contingent upon having opportunities to invest in that exceed our hurdle rates.
If you look at 2017, 2018, 2019, so the last three-year period, our return on capital employed is 13%. Our nearest refining peers are high single digits. By the way, it's an after-tax return on capital employed. We're always interested in returns, and if we can't find good return projects, we're simply not going to invest. Then you think about in 2019, returning $3.2 billion back to our shareholders through a strong, secure, growing dividend and buying our shares when they trade below intrinsic value. That's just fundamental to our capital allocation strategy. You'll see us continue to do that. To your first question around the portfolio and what differentiates us, I think there's a couple things. One, we do have a strong diversified portfolio. We've got a good portfolio of refining assets.
We've built a strong Midstream business, $2.3 billion, $2.4 billion of EBITDA in our Midstream business now. Really, if you go back to 2012, excluding DCP, we were about $450 million of EBITDA in our Midstream business. We've built a significantly stronger Midstream business at Phillips 66. We've got a great Marketing Specialties business. You add on top of that the Chemicals business. I like the diversification that we have across the portfolio. It creates investable opportunities for us. It's a portfolio that generates strong returns. I would say that Phillips 66 is a great operator. We're consistently one of the safest operators in the industry. We're generally at or better than industry average on operating rates, we operate really well. This organization has demonstrated the ability to execute well on these capital projects.
We went back for our board and looked at all of our investments from 2012 through 2019, and we're right on the money in terms of what we said we were going to put the assets on the ground for. Importantly, we're right on the money in terms of what we promised to deliver in terms of the earnings from those assets, which is, in my 40 years in the business, that's probably as good as it gets, Doug.
Yeah. Also, Greg, things like the AdvantEdge66 plan will help you guys sustain this performance over the medium term. Is there anything to report there on that project?
Yeah, I think consistent with what we said at our investor day, we still see that there's $1.2 billion of opportunity for us. We hope to drive 60%, 70% of that to the bottom line in terms of seeing that in EBITDA. You'll see that in terms of margin capture, you'll see that in terms of cost reduction, you'll see that in terms of capital avoidance, but also cost avoidance across the enterprise. More importantly from that, changing the way of working for our people. At the end of the day, it's going to be a much better place to work. We're going to have better tools to make better decisions. We'll work smarter, we'll be more agile, we'll be more efficient, and I think that will differentiate from our peers. Everyone's going to move this way, Doug, at some point in time.
You either go digital or you die in this business. I think we're out, at least I think, in the lead position here.
Neil Mehta from Goldman Sachs, please go ahead. Your line is open.
Yeah. Thanks very much, guys. First question is on the crude side, and wanted to get your perspective on how you think about Western Canadian crude discounts, but also some of the barrels that you import from OPEC or from Alaska that are more medium and heavy in nature. Western Canadian differentials are wide right now. We're trying to get a sense of the sustainability of that from your perspective, and with those medium and sours, we're just trying to think about how the upcoming OPEC meeting could influence the outcomes there.
I think that's a good question. With some of the production in Canada returning from curtailment, with the special production allowance, rail waivers, we've seen more production coming into the market in Canada. There's another 150,000 bbl a day or so of new production scheduled to start up in 2020. There's more supply coming into the market. That has supported wider differentials here in the first quarter. As you know, we have about a 30-day lag on delivery there. The wide discounts in December will really show up in 1Q. We expect WCS discounts to follow the normal seasonal pattern with wider winter differentials, and then they get tighter in the summer as the production companies perform maintenance.
I think as we look with the new IMO environment and the wider high sulfur fuel oil discounts, we're expecting to see not only your historical transportation differentials, but probably some increased penalty for sulfur content. We're expecting that to occur. On the Gulf Coast, we've moved away from a lot of imports from many of the OPEC countries. We've reduced exposure there. As you know, we don't pull anything in from Venezuela. I think there is less exposure there from a direct perspective, but indirectly with more OPEC barrels eventually coming into the market. Those will be heavy sour barrels, which should widen the heavy sour discount. I think also, as you look into 2020, there's more Canadian heavy barrels coming in the market. Saudi, Kuwait are bringing up production in the neutral zone, which is heavy sour production.
We've got some incremental Gulf of Mexico barrels, which are medium and sour. New production in Norway is 28 API and 0.8% sulfur. Lower quality than a normal North Sea barrel.
Thanks, guys. Just sticking with the macro, we've got the bull and the bear on IMO on the call and Jeff versus Greg. Just wanted to get both of your perspectives on how that dynamic is changing, recognizing there are a lot of other variables that are affecting particularly the distillate side of the equation. Would love a refresh on the views there.
Yeah. I'll start. Greg can clarify what I miss. I think in isolation, IMO is a positive factor for complex refiners like ours. Obviously, there are a number of other considerations. High sulfur fuel oil has widened to about a $20 discount relative to Brent. The 10-year average is $12 a barrel. IMO has caused some wider discounts there. It was $30 a barrel in December. It's come in a little bit. If you look at the 2024 recurve as of last year, it was trading $20-$25 under Brent. We're kind of at the low end of that range. To the industry's credit, the transition to the low sulfur marine fuel market has gone very smoothly. Very few compatibility issues or FONAR, fuel non-available reports. I think there will be strong enforcement.
Very low sulfur fuel oil has been rapidly adopted with its high energy content viscosity and lubricating qualities. Very low sulfur fuel oil is actually trading wider than ULSD in some markets. I think the disappointment has been on the diesel side, and diesel's been weak following manufacturing activity that's been disappointing. Recently mild winter weather. I think as we look at demand, the first quarter is typically the weakest quarter of the year. Gasoline diesel demand decline over 1 million bbl a day from 4Q to 1Q. Marine fuel, if you look at some of the major ports, Singapore in the U.S., Houston, L.A., Long Beach, they all have seasonal trends where the first quarter is the lowest demand quarter for marine transportation. As that demand picks up, we could see some improvement.
Finally, I think with the weakness in gasoline cracks, that's pulling low sulfur VGO out of the FCCs and into the marine fuel market. As we move into the summer-grade gasoline season, that's not likely to be the case. That probably cleans up the gasoline market faster than otherwise would've been the case in the spring and provide some incremental diesel demand for the marine fuel market in the summer.
Good job, Jeff.
Roger Read from Wells Fargo. Please go ahead. Your line is open.
Hey, thanks. Good morning. Maybe just to come back to something that was talked about a little in the fall and probably becomes a bigger issue this spring and ties into that whole description of the gasoline market. On Tier 3, is there anything that you've seen where that's affecting the market or do you have any particular thoughts as we switch from winter grade to summer grade and the butane comes out, whether or not we'll see any impacts from Tier 3?
I think it's a good point. We're very well positioned for Tier 3. The vast majority of our tier spending has already occurred, we're in good shape there. We produce much higher premium gasoline as a percentage of total than the industry average. We haven't seen octane strengthening yet, I think like you, we're looking to the shift in RVP and summer grade and taking cheap butane that is a good blend stock for the winter grade. We are seeing alkylate prices strengthen in anticipation of the summer. You know, we recently completed our Lake Charles ISOM unit, which will provide high octane material, high octane blend stocks as well. I think we're looking to the summer to see evidence of the influence of Tier 3.
Okay, great. Thanks. Changing gears completely there. Midstream side of the business, Greg, I was wondering, it seems like things have gotten tougher in the outlook for a lot of other companies in the midstream. Is there anything, as you look at it, where it might make more sense to be acquisitive rather than build? Do you need to see valuations and a project, I shouldn't say project, but specific facilities come on the market would have to discount quite a bit from current levels to fit within your return criteria?
There's nothing today that we'd be interested in, just simply from a return criteria part, Roger. I think that the nice thing, that we're really well-positioned, certainly for 2020 and 2021. We've got a great portfolio of projects that we're executing. Post 2021, we'll see. If we can find investable opportunities, we'll invest. If we don't, we won't. We're not concerned at this point in time in terms of the opportunities that we have before us. We'll continue to watch what goes on in that space. There's really nothing out there today that we would be interested in doing in the midstream space.
Paul Cheng from Scotiabank. Please go ahead. Your line is open.
Hey, guys. Good morning.
Hey, Paul.
We have seen a slowdown in the export to Mexico and LATAM. Greg, wondering that, based on your market intelligence, that if that slowdown is driven by the core demand over there is slowing down or that is every year that we have the fog in Houston, yeah, we have fog, but doesn't seem like year over year that should be an incremental factor. Trying to understand that, what is the dynamic we are seeing?
Yeah, I think, Paul, with regard to Mexico, you remember a few quarters back, there were pipelines that were shut down as people were stealing product off the pipelines, and I'm not sure we fully recovered all the demand there. I think that may have suppressed some demand in Mexico. We are seeing that as a continued good market for product exports. I think if you look at our exports in fourth quarter, they were down a little bit, and that was really driven by some of our export refineries being in maintenance and in some cases, finding higher priced domestic markets than what was available in the export market. We expect to continue to see some growth in the Latin American market from an export perspective.
Mm-hmm. Jeff, I think you guys are receiving about 300,000 bbl per day of WCS net to you. I think another 100 bbl maybe going to the JV partner. With the increase in the WCS production, is there any opportunity for you guys to receive more? Is that something that you guys are working on?
Yeah, we're constantly assessing the availability of transportation out of Canada and our ability to access more barrels. They're attractively priced both from a Midcontinent and a Gulf Coast perspective. We're constantly assessing those opportunities, and our commercial people take advantage of the opportunities when they present themselves. As far as long-term commitments for rail or something like that, we don't see that at this point.
Prashant Rao from Citigroup. Please go ahead. Your line is open.
For taking the question. Thank you. Good morning. Thanks for taking the question. My first one's on renewables and biofuels. I was wondering, Greg, if you could talk a bit more about the decision to cancel the Ferndale project, apart from the permitting and regulatory hurdles and what you said in your prepared remarks. Were there any constraints on feedstock sourcing or developing that network? Then maybe taking a bigger picture view on the other projects in the portfolio, San Francisco, Humber, and the offtake and marketing in Nevada. Could you help us to understand how these differ from Ferndale, not only in terms of the regulatory and permitting, but maybe also in terms of the feedstock resourcing?
First of all, it wasn't a feedstock sourcing concern that we had at Ferndale. It was strictly around the ability to permit the project there. We withdrew. When you think about what we're doing at Humber or what we're doing in San Francisco, these are existing assets that we're either repurposing or utilizing differently. Those are certainly very easy to do. Easy to feedstock to us, and we'll continue to look for other opportunities within our portfolio. The deal with Ryze is essentially we're responsible for securing the feedstock, and then we have an offtake agreement there. Think of it like a tolling arrangement, and we have no concerns there. As we've thought about how we're going to approach the renewable strategy for us, we want to use existing assets where we could do that.
We wanted to partner with people that had existing technology and capabilities and then look at grassroots investments, again, in a partnership, which is where the Ferndale one really fell. That would've been a circa $800 million-$1 billion investment in cooperation with REG. We'll see. I think that we certainly have other places that we could build a grassroots facility, and you should expect that our strategy really hasn't changed. It may not be at the Ferndale location.
Okay. Thank you. That's helpful. My second question is on ESG. The discussion seems to be progressing pretty quickly overseas, and focus on decarbonization is really stronger than it was even a year ago. It seems like the discussion here in the States may be following a similar path, but perhaps at a delay to what's going on overseas. Phillips 66 has been a leader in positive ESG momentum within the U.S. hydrocarbon space. I just want to get your thoughts on looking ahead if there is a greater focus on decarbonization among investors, what are some of the strategies to balance this and still maintaining Phillips 66's strong return on capital and your low cost of capital across the portfolio? Particularly as you think about growth CapEx decisions, both what's currently in the portfolio and maybe overall, the longer-term opportunity set.
Yeah. Well, maybe you want to start with, I think the U.S. is a world leader in technology and innovation. Our economy is the envy of the rest of the world. We're a world leader in energy production. We're a world leader in emissions reductions, including greenhouse gas emissions. I think that there is a path forward that would say we can develop our energy resources responsibly, sustainably. We can have a strong growing economy, and we can have a better environment. They're not mutually exclusive at all in our way of thinking. As we think about the opportunity set in front of us, we're investing in next-generation technologies for a lower carbon economy. Things like our OPV, organic photovoltaics, our solid oxide fuel cells.
You've seen us introduce two lubes, one for heavy-duty trucks, one for light-duty vehicles that increase the mileage by 4% or 5%. That's a direct reduction in greenhouse gas emissions. So I think that you'll see Phillips 66 and many companies, frankly, approach this problem from many different angles. Specifically around low carbon investments, I think it's a good thing. I think we should encourage our companies to invest in low carbon technologies, and we should incent them to do that. But as we look out two and three decades, we still see that fossil fuels are going to be a majority part of the energy mix, just because you're not going to be able to get there from here with the current technologies that we see.
Doug Leggate from Bank of America, please go ahead. Your line is open.
Hi, good morning, everybody. Greg, I wonder if I could take you back to midstream again. You did a pretty thorough job of walking us through the assets that you have coming online and your interworking interest and so on. I'm just curious about what is the thinking in terms of the timing, if and when those may be dropped to the MLP, or do you have different plans for those versus your historical pattern?
Well, maybe we start from the point that all those midstream assets are qualifying income, and they could certainly go to the MLP. We've resisted and we'll continue to resist specific information about timing of drops and when those drops could occur. I think we've spoken publicly about our interest in growing our midstream business at PSXP. It's an efficient way for us to do that, given where PSXP trades and the yields that it generates. Then you think about the uplift in some of the parts. We're still incented to grow PSXP as fast as we can. So our view is that you grow it efficiently, but it's got to pay its own way, too.
Equity markets are closed, in our view, beyond some dribs and drabs around the ATM program, but generally, great balance sheet at PSXP, executing an $800+ million capital program this year at PSXP. At some point in the future, you should expect these assets should logically end up at PSXP. The timing, we just don't go through that, Doug.
Okay. Just a reminder, can you tell me what the EBITDA is associated with those assets held at the C corp level?
We've got $800 million-$900 million of EBITDA still at PSX. Growing, of course, as we're bringing on these new projects, too.
That's the qualifying income, right?
That's right.
Okay. Thanks. My follow-up is just very quickly on turnarounds. Obviously, your turnaround expense is up a bit this year. Just as for Phillips specifically, but also for the industry, I think Jeff touched on this a little bit, do you anticipate that we're going to see that contributing to clean up of the overhang we've seen for gasoline in particular right now. Just specific to Phillips, is there anything unusual this year, or is this normal course of business?
I think that's a good question, Doug. I think there was a lot of speculation that given the high turnaround activity in 2019, that there was a lot of activity that had been moved forward out of 2020 into 2019. A lot of the turnaround activity is on a pretty strict schedule for replacement. We are seeing 2020 turnaround activity being relatively high for the industry as well. You look at the Gulf Coast, PADD 3 looks to be a very active turnaround season this spring, with a lot of FCC and alkylation units being included in that planned work. I think we're continuing to see turnaround activity in 2020 as well. I think that's one of the factors that could help clean up the gasoline market.
Paul Sankey from Mizuho. Please go ahead. Your line is open.
Hi, everyone. Sorry for the detailed question, but as regards to the situation in China, I was wondering, in reference to your contracts and how it takes time for these things to feed through, when do you think you'll be able to say, with some degree of certainty, what's actually happening to markets over there? Thanks.
Yeah. It's a good question, Paul. I think it's still early. We are seeing, I think, some impact on diesel demand, diesel cracks, jet cracks. I think we are starting to see some impact on freight rates. It's really early. It's a little bit speculative to say that, but I think we are getting some indication of impact already. It's really hard to measure, and I think it's going to be difficult to determine the depth and the duration of this event. I think there's still a huge amount of uncertainty out there. As you well know, there was about 300,000 bbl a day of impact from SARS. In fact, you've included it in one of your reports. China's economy is much bigger today than it was at that time. I think, Paul, we're still dealing with a lot of uncertainty as to the impact on the coronavirus.
Yeah. Understood.
Paul, I was just going to say, petrochemical, same thing, right? I think we're concerned, and we'll continue to watch petrochemicals. Right now, pricing's kind of moving up a little bit in Asia. When you look at petrochemical inventories, they're at five-year lows, though. We'll just have to see and watch this. I agree with Jeff, it's just almost too early to make a call on this. It certainly has our attention, and we're watching it closely.
Yeah. Understood. Obviously, this thing really only took off in the past week. I just wondered how long you thought it would be before you could actually say, we now know that this has happened, given the time it takes for all this stuff to move around the world.
Yep.
Yeah. It's certainly impacting commodity markets. The volumes, we'll have to keep an eye on.
Yeah, I was thinking more obviously in terms of real volumes. If I could switch. You had a tough October in many ways because it was a good environment and you had downtime. Do you have a sense for what your cost opportunity was there, your opportunity cost was there? Could you just go over again the outlook for this year in terms of your turnarounds? I know you've addressed it somewhat, it's interesting to think how skewed this quarter might've been if it hadn't been for the October turnaround. Thanks.
Yeah. It's a good point. We don't typically comment on LPOs. I think if you assume most of the downtime occurred in April and adjust and kind of model October versus November versus December, I think it would get you close. We have provided guidance on turnaround activity. First quarter, we do have some turnaround activity planned as well. We've got the full year guidance there also. I might just lean to that guidance.
Manav Gupta from Credit Suisse. Please go ahead. Your line is open.
Hi, Jeff. Can you clarify where you are with the permitting process of both Red Oak and Liberty? Liberty specifically because there were some news items out there, and I was hoping you could set the record straight over there.
Yeah. We're moving forward. We're getting some feedback there. I'll go ahead here. We're moving forward. We've ordered the pipe for Liberty and taken delivery of pipe. The permitting process is moving forward as expected. We're very much moving forward as anticipated there. It's a first half 2021 in service date, and all systems are go on both Liberty as well as Red Oak.
A quick follow-up on the marketing and specialty side. We saw a slight jump in the CapEx between 3Q and 4Q, about $264 million. I'm assuming this is associated with the JV payment of the West Coast thing. The press release is saying you are going to acquire 100 more stores in 1Q or in the 2020. I'm trying to understand, would there be a second payment associated with these 100 stores or all the payment has already been made here?
Yeah, Manav, it's Kevin. Yeah, you're right that the variance in CapEx for that segment is all attributable to the formation of that joint venture. $260 million went in, which is almost the full variance quarter-over-quarter. The additional acquisition that was referred to in the press release does have some additional spend in whenever that timing, whenever that acquisition closes, there will be some additional spend on that. It's not of the same magnitude as the initial upfront JV formation, though. You'll see that coming through whenever that closes.
Matthew Blair from Tudor, Pickering, Holt. Please go ahead. Your line is open.
Hey, good morning, everyone. Given the discounted high sulfur fuel oil prices in the fourth quarter, were you able to increase your runs of HSFO as a feedstock at your refineries? If so, can you provide any sort of numbers on the incremental volumes or EBITDA uplift? I guess if not, was the constraint economic or more just equipment related?
Yeah, it's a good question, Matthew. I would highlight one of the things we talked about at the Investor Day was some refining projects that allow us to upgrade over 30,000 bbl a day of high sulfur fuel oil to very low sulfur, sub 0.5% blend stock. We accomplished that late last year and think there's actually some upside to those volumes. We are moving some very low sulfur product into the market. We are finding opportunities to take advantage of dislocations associated with IMO. I think not only on the high sulfur fuel oil side, but we've been able to increase the sales of low sulfur production into the market to capture some of the premiums on low sulfur material. We've also been able to bring high sulfur material in as a feedstock for our processing units.
As you know, we have substantial coking and treating capacity to upgrade heavy sour streams. I think you might look in our supplemental information. We provide both our crude throughput as well as our total process volumes. The difference there would probably give you a good indication on intermediate feedstocks and a lot of those being heavy sour products.
Great. Thanks for the color. On the chem side, Greg, I was hoping you could share some insights on just the Asia PE markets. We've seen margins dip negative for a little bit now. Haven't really seen shutdowns. Are those coming in your opinion, or I guess do other regions need to cut back first?
I think our view is that probably Asia and Europe are probably under the most pressure today, and you would expect there could be some cuts there. You're starting to see some price movement in Asia, though. I think that's a sign that people need to do something about the margin environment they find themselves in. Then I would just say, tariffs are still kind of an overhang, particularly to China. We'll see where all that plays out. Yeah, I think it's pretty tough margin environment out there right now.
Thank you. We have now reached the time limit available for questions. I will now turn the call back over to Jeff.
Thank you very much for your interest in Phillips 66. If you have any follow-up questions, please contact Brent or me. Thank you.
Thank you, ladies and gentlemen. This concludes today's conference. You may now disconnect.