Welcome to the fourth quarter 2018 Phillips 66 earnings conference call. My name is Julie, 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, and Kevin Mitchell, Executive Vice President and CFO. The presentation material we will be using during the call can be found on the investor relations section of the Phillips 66 website, along with supplemental financial and operating information. Slide two contains our safe harbor statement. It's a reminder that we will be looking forward statements during the presentation and our Q&A. 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. In order to allow everyone the opportunity to ask a question, we ask that you limit yourself to one question and one follow-up. If you have additional questions, we ask that you rejoin the queue.
With that, I'll turn over the call to Greg Garland for opening remarks.
Thanks, Jeff. Good morning, everyone, and thank you for joining us today. Phillips 66 delivered another quarter of strong operating performance and record-setting financial results for 2018. Adjusted earnings for the fourth quarter were a record $2.3 billion, or $4.87 per share, and we generated $4.1 billion of operating cash flow. We rewarded our shareholders with strong distributions during the quarter, returning $864 million through dividends and share repurchases. Refining operated at 99% capacity utilization, and we sourced heavy Canadian crude and other advantaged crudes throughout our refining system to capture strong margins. In midstream, we benefited from increased pipeline and terminal throughput across our integrated network. For the year, adjusted earnings were $5.6 billion, or $11.71 per share. We generated $7.6 billion of operating cash flow. The record financial performance in 2018 demonstrates our refining portfolio's ability to run well and capture market opportunities.
Marketing provided pull-through of our refined products to achieve record-adjusted earnings. Also contributing to our strong results were the midstream and chemicals growth projects, which were placed into service during the past two years. In 2018, we increased the quarterly dividend 14% and repurchased 10% of the shares outstanding, resulting in $6.1 billion of capital being returned to our shareholders. Since 2012, we returned $22.5 billion to shareholders through dividends, share repurchases, and exchanges, reducing our initial shares outstanding by 30%. Disciplined capital allocation is a priority, we're committed to a secure, competitive and growing dividend. As we look to 2019, we expect to deliver another double-digit dividend increase. Through our ongoing share repurchase program, we can continue to buy shares when they trade below intrinsic value, as demonstrated by our fourth quarter pace of repurchases. Phillips 66 Partners achieved its five-year, 30% CAGR target.
It also delivered industry-leading distribution growth since its IPO in 2013. With its scale, financial strength, and project opportunities, PSXP is well-positioned to fund and sustain an organic program to continue to drive EBITDA growth. We're investing in a robust portfolio of projects across our businesses with attractive returns to create shareholder value. The Gray Oak Pipeline will provide 900,000 barrels a day of crude oil transportation from the Permian and the Eagle Ford to Texas Gulf Coast destinations, including our Sweeney Refinery. The project is supported by shipper commitments and is on schedule to be in service by the end of this year. Phillips 66 Partners is the operator and the largest owner. Gray Oak will connect with multiple terminals in Corpus Christi, including the South Texas Gateway Terminal, in which PSXP has a 25% ownership.
The marine terminal will have two deepwater docks, planned storage capacity of six and a half to seven million barrels, and is expected to start up in mid-2020. At the Sweeny Hub, we're building two 150,000-barrel-per-day NGL fractionators and adding six million barrels of storage at Phillips 66 Partners' Clemens Caverns. The hub will have 400,000 barrels per day of fractionation capacity and 15 million barrels of storage when the expansion is completed in late 2020. We continue to have strong interest from customers in additional fractionation expansion projects. The growth in domestic crude production is expected to result in an increased need for Gulf Coast exports. We're making investments at our Beaumont Terminal to capitalize on this opportunity. During the fourth quarter, we placed 1.3 million barrels of fully contracted new crude oil storage into service. This brings the Terminal's total capacity to 14.6 million barrels.
Construction is underway to further increase crude storage by 2.2 million barrels, with completion anticipated in early 2020. DCP Midstream has a 25% interest in the Gulf Coast Express Pipeline Project that will transport approximately two billion cubic feet per day of natural gas from the Permian to Gulf Coast markets. Completion is expected in the fourth quarter of 2019. In the high-growth DJ Basin, DCP's O'Connor II Plant is expected to begin operations in the second quarter of 2019. CPChem's new Gulf Coast petrochemical assets are running well and generating strong free cash flow. A second Gulf Coast project that is expected to include both ethylene and derivatives capacity is under development. CPChem is also evaluating additional capacity increases across multiple product lines through debottleneck opportunities. In refining, we continue to focus on high-return projects to improve margins.
We have an FCC upgrade project underway at Sweeney Refinery that will increase production of higher-value petrochemical products and higher-octane gasoline. This project is planned to be complete in the second quarter of 2020. During the fourth quarter, we completed crude unit modifications at our Lake Charles refinery to run additional advantage domestic crudes. Also at Lake Charles, Phillips 66 Partners is constructing a 25,000-barrel-per-day isom unit to increase production of higher-octane gasoline blend components. This unit is expected to be completed in the third quarter of this year. As we move into 2019, we remain focused on operating excellence and executing our strong portfolio of growth projects. We're optimistic about the future opportunities across our businesses and will invest in projects with attractive returns. Disciplined capital allocation is fundamental to our strategy, and we'll continue to return capital to shareholders through dividends and share buybacks.
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. 2018 adjusted earnings were $5.6 billion, or $11.71 per share. We generated $7.6 billion of operating cash flow, including $2.9 billion in distributions from equity affiliates, with approximately $1 billion each from CPChem and WRB. This is the highest annual earnings and operating cash flow we have delivered since our company's inception. At the end of the fourth quarter, the net debt to capital ratio was 23%. Our return on capital employed for the year was 17%. Slide five shows the change in cash during the year. We began the year with $3.1 billion in cash on our balance sheet. Cash from operations, excluding the impact of working capital, was $7.9 billion. Working capital changes reduced cash flow by $300 million.
We received $1 billion from the net issuance of debt. During the year, we funded $2.6 billion of capital expenditures and investments, paid dividends of $1.4 billion, and repurchased $4.7 billion of our shares, representing 10% of shares outstanding. Our ending cash balance was $3 billion. Slide six summarizes our fourth quarter results. Adjusted earnings were $2.3 billion and adjusted earnings per share was $4.87. We generated operating cash flow of $4.1 billion, including distributions from equity affiliates of $840 million. Capital spending for the quarter was approximately $1 billion, with $648 million spent on growth projects. We returned $864 million to shareholders through $367 million of dividends and $497 million of share repurchases. We ended the year with 456 million shares outstanding. Moving to slide seven. As I mentioned on last quarter's call, we have changed our segment reporting to a pre-tax basis.
Income taxes are reflected at the consolidated company level. This change makes our segment reporting more comparable with our peers. This slide highlights the change in pre-tax income by segment from the third quarter to the fourth quarter. Quarter-over-quarter adjusted earnings increased $804 million, driven by higher results in refining, marketing, and midstream, partially offset by lower chemicals results. The fourth quarter adjusted effective tax rate was 21%. Slide 8 shows our midstream results. Fourth quarter adjusted pre-tax income for the segment was $409 million, an increase of $97 million from the previous quarter. Midstream full-year adjusted pre-tax income was a record $1.2 billion, more than $600 million higher than the prior year. Transportation adjusted pre-tax income for the fourth quarter was $234 million, up $25 million from the previous quarter. The increase was due to higher pipeline and terminal volumes for both our joint venture and wholly owned assets.
Our operated pipelines benefited from strong utilization at our refineries. In addition, fourth quarter throughput on the Bakken Pipeline increased and averaged more than 500,000 barrels per day. NGL and other adjusted pre-tax income was $122 million, an increase of $48 million, primarily from inventory impacts. We continue to run well at the Sweeny Hub. During the quarter, the export facility averaged 10 cargoes a month, and the fractionator averaged 116% utilization. DCP Midstream adjusted pre-tax income of $53 million in the fourth quarter is up $24 million from the previous quarter, primarily due to improved hedging results, partially offset by higher operating costs. During the fourth quarter, DCP completed the expansion of the Sand Hills Pipeline capacity to 485,000 barrels per day. Sand Hills is owned two-thirds by DCP and one-third by Phillips 66 Partners. Turning to Chemicals on slide nine.
Fourth quarter adjusted pre-tax income for the segment was $152 million, $111 million lower than the third quarter. Olefins & Polyolefins adjusted pre-tax income was $158 million, down $67 million from the previous quarter. The decrease reflects seasonally lower polyethylene sales volumes and higher turnaround and maintenance costs. Global O&P utilization was 95% in the fourth quarter. Adjusted pre-tax income for SA&S decreased $35 million due to lower earnings from CP Chem's equity affiliates and higher domestic turnaround costs. The $9 million decrease in other reflects the fourth quarter increase of a contingent liability and the gain on an asset sale in the third quarter. During the fourth quarter, we received $300 million of cash distributions from CP Chem. Next, on slide 10, we'll cover refining. Crude utilization was 99%, compared with 93% in the third quarter.
The fourth quarter clean product yield was 86%, and pre-tax turnaround costs were $130 million, an increase of $75 million from the previous quarter. The market crack declined 36% from the previous quarter. Realized margin was $16.53 per barrel, 24% higher than the third quarter. The chart on slide 10 provides a regional view of the change in adjusted pre-tax income, which increased $745 million, primarily from strong results in the Central Corridor and Gulf Coast regions. For the full year, refining generated adjusted pre-tax income of $4.6 billion. The Atlantic Basin results increased as the Bayway Refinery returned to normal operations following third quarter downtime. Gulf Coast adjusted pre-tax income of $468 million increased $247 million due to higher clean product realizations, improved heavy Canadian crude oil differentials, and increased volumes at the Alliance Refinery following third quarter downtime. The higher clean product realizations benefited from declining market prices.
Capacity utilization in the Gulf Coast region was 100%. Adjusted pre-tax income in the Central Corridor was $1.2 billion, an increase of $342 million, reflecting expanded discounts on Canadian crudes. Capacity utilization in the Central Corridor was 106%. In the West Coast, the increase was mainly due to higher realized margins driven by widening crude differentials, partially offset by higher turnaround costs. Slide 11 covers market capture. The 3-2-1 market crack for the fourth quarter was $9.11 per barrel, compared to $14.21 per barrel in the third quarter. The realized margin was $16.53 per barrel and resulted in an overall market capture of 181%. Market capture was impacted by the configuration of our refineries. We make less gasoline and more distillate than premised in the 3-2-1 market crack. The gasoline crack spread declined by $8.75 per barrel during the quarter, while the distillate crack improved by $2.20 per barrel.
Losses from secondary products of $0.29 per barrel were improved $1.33 per barrel from the previous quarter due to the decline in crude oil prices relative to NGL, fuel oil, and coke. Advantage feedstock improved realized margins by $3.79 per barrel, an improvement of $1.29 per barrel from the prior quarter, primarily due to widening Canadian crude differentials. The other category improved realized margins by $3.57 per barrel, primarily due to optimization across our logistics network to capture market opportunities associated with widening crude differentials. Realized margins were further improved by Gulf Coast clean product price realizations. Moving to Marketing and Specialties on slide 12. Adjusted fourth quarter pre-tax income was a record $592 million, $207 million higher than the third quarter. Marketing and Other increased $205 million from improved margins associated with sharply falling spot prices.
Refined product exports in the fourth quarter were a record 249,000 barrels per day. We re-imaged 466 domestic branded sites during the fourth quarter, bringing the total to approximately 2,600 since the start of our program. For 2019, an additional 1,800 sites are scheduled for re-imaging. Specialties adjusted pre-tax income increased $2 million during the quarter, primarily due to higher lubricants margins. On slide 13, the Corporate and Other segment had adjusted pre-tax costs of $201 million, improved $22 million from the prior quarter. Lower net interest expense was due to interest income on a higher average cash balance and increased capitalized interest. The corporate overhead cost decrease was due to employee severance costs recognized in the third quarter. 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 in the mid-80s and pre-tax turnaround expenses to be between $140 million-$170 million. We anticipate first quarter Corporate and Other costs to come in between $210 million-$240 million pre-tax. For 2019, we plan full-year turnaround expenses to be between $550 million-$600 million pre-tax. We expect corporate and other costs to be in the range of $850 million-$900 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 twenties. 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 yourselves to one question and one follow-up question. If you have a question, please press star then one on your touch-tone phone. If you wish to be removed from the queue, please press 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 touch-tone phone. Phil Gresh from J.P. Morgan, please go ahead. Your line is open.
Hi, and congratulations on a solid quarter here. Greg, I guess the first question here would be, if you look back at 2018, this is the third straight quarter where you've handily beaten the consensus expectations. It seems to be driven by different parts of the portfolio. Obviously, refining has been strong, even other parts of the portfolio have been very strong as well. How do you think about the performance this year? Do you see some kind of sustainable structural improvement going on at Phillips that's underappreciated, or is this just Peter keeping control of this outside bet?
You guys are doing a great job, Phil Gresh. Look, I think that there's no question the market environment we find ourselves is playing to the strength of our portfolio. It's two things. It's distillate and differentials. No question, in the fourth quarter, the WCS differential drove a lot of the value creation. We improved our distillate yield. We're up another 1% in the fourth quarter, so 39% distillate yield. Versus our peers, we're at the high end of the range on distillate and giving our coking capacity and our ability to run heavy, it's differential. The other thing I would just say is, we got these chemicals assets are up, they're running, they're performing well. That's going to continue to drive earnings improvement versus mid-cycle for us. You think about our midstream business starting to kick in.
We actually made more in midstream than we made in chemicals in 2018. Across the portfolio, the things we've been investing in are starting to show up and deliver value. Finally, we continue to run really well. Operational excellence is key for us. We continue to emphasize that. In the quarter where we needed to run well, we ran 106% utilization in the central quarter. We ran 100% on the Gulf Coast, and it showed up as value. I don't know, Jeff Dietert, do you have any comments on other structural changes?
I think the projects that Greg's talking about, $1.5 billion of EBITDA and incremental projects added across evenly distributed between chemicals, midstream, and refining. That's improved our overall cash flow from operations in a normalized environment.
I would probably say, given normalized mid-cycle, we used to say $4 billion-$5 billion. We're $6 billion-$7 billion now of cash flow on a normalized basis.
Got it. Okay, thanks. I guess second question, just looking at the guidance for the first quarter, the mid-80s utilization and refining and the turnaround costs there. Would you say that the entire impact on utilization is the turnarounds, or are you seeing an environment here for yourselves or for the industry that is warranting some run cuts here in the first quarter?
Most of that guidance is centered around turnaround activity. We pulled a few things maybe from the back half of the year into the front half of the year where we could, making sure that we can run in the back half, but that's around the margins, Phil. There wasn't a lot of work there. It's mostly focused around our turnaround activity.
Got it. Okay. One last one just for Kevin. How do you feel about the balance sheet levels here? Obviously earlier in the year, you issued some debt to buy back some shares, finishing the year really strong on cash flow, clearly. How do you feel about desires to pay down debt from here?
Yeah, Phil, I feel pretty good about where we got to. In fact, we basically replenished the cash from where we had been with a strong third and fourth quarter this year. $3 billion of cash, debt to cap is at 29% on a fully consolidated basis, 23% net of cash. We feel good on that. We have some debt that's available for pay down, we'll look at that in the overall context of how the start of the year shakes out. We'll have a little bit of turnaround on working capital. That's typically a use of cash in the first quarter, we'd expect to see that happen as it typically does. The nice thing is we have a lot of flexibility to work through.
If we have weak margins for any kind of extended period, we have the flexibility to continue to work through that and fund all of our obligations.
Okay, thanks. I'll turn it over.
Thanks, Phil.
Doug Terreson with Evercore ISI, please go ahead. Your line is open.
Good morning, everybody.
Hey, Doug.
Good morning.
Guys, your 17% return on capital employed and your 10% reduction in shares outstanding are the best in the U.S. energy industry. Kudos to the team on exceptional results. That's really good work there. My question is on your outlook for the key businesses and starting with refining, with margins on variable cost for conversion capacity and usually low, do you think that utilization's going to decline for some of these processes or because weakness is often seasonal this time of the year, it's going to remain high. The question is: How are you guys thinking about managing conversion utilization given these circumstances and also, how do you think it plays out across the industry?
I'll take a stab and Jeff can correct me. How about that? I think that everyone's concerned about the high gasoline inventories at this point in the cycle. There's no question the fourth quarter, the market environment was encouraging you to run, given the diesel cracks that we had, and gasoline cracks weren't that great. We're heading into the spring turnaround season. There's some operational issues out there. Our assessment is we're probably a little above normal in terms of outages for this time of year. You get to the stop putting butane in gasoline. It comes out of the gasoline pool. That's all directionally helpful for gasoline. We're still constructive overall demand. We think gasoline demand in North America is going to be flat for 2019. We see diesel demand up 1.2%, 1.3%, in that range.
You add on IMO, I know there's a debate about IMO and that, it's still going to be some level of tailwind. As we look at 2019, for the year, we're still mid-cycle or better in terms of refining cracks, Doug.
Okay, thanks. Great. Jeff, did you want to say anything or did he cover it?
I think he covered it well.
Forgot, I didn't mean to interrupt. Anyway, on chemicals, you guys.
Go ahead, Doug.
I was just going to ask a question about chemicals and specifically you guys have streamed capacity in the last couple of years, and you seem positioned for more spending in the area based on Greg's comments today. Just wanted to get an update on your constructive view on chemicals, which is a little bit more constructive than some, the basis for the increased investment in that area. Why are you guys optimistic for chemicals?
First of all, you think about a growing global economy and albeit 2019 is probably going to be a lower growth year than what 2018 is globally. We're still constructive demand, particularly for polyethylene, which is mostly what CPChem makes. In our view, demand's going to grow faster than capacity in 2019. It should be constructive for operating rates and margins, 2019. You look at all the advantaged feedstocks that are still available in the U.S., Doug. That really says, you should build into that if you have a great position, which CPChem does, access to advantaged feedstocks, great technology, great return business. It's a business that we should want to invest into.
Polyethylene grew by 6% last year, substantially above GDP growth. We did have some weakness in the fourth quarter. We experienced the typical seasonal softness in demand, but it was compounded by a 35% decline in crude prices. As we started the year, margins were soft, but crude prices have rebounded and CPChem's seeing signs of demand improvement. Healthy demand is expected to drive some polyethylene price increases in the first quarter.
Neil Mehta from Goldman Sachs, please go ahead. Your line is open.
Good morning, team. I'll add my congratulations on a good quarter here.
Thank you.
The kickoff question for me is on Western Canadian crude differentials, which have obviously were a big tailwind in four Q and have reversed here in one Q. Our view is that they ultimately will settle out towards transportation economics, which is wider than here. Just your latest thoughts on how this plays out in 2019 and then longer term as there's still a lot of uncertainty around the pipe and how you're adjusting your business to take advantage of that.
Yeah. We've gone from an unsustainably wide discount for Canadian heavy to an unsustainably narrow discount, we believe. With mandated cuts, there was substantially more volume that came off the market than what the 325 targeted amount was. We also had some economic run reductions, production reductions. We're running well below what the producing capacity is in Canada. We do expect similar to your comments, to move to rail economics as this passes. I think a number of the Canadian producers have argued for moving away from the mandates. We expect the differentials to go back to kind of rail economics, WTI minus 20, something in that area.
That's helpful. The follow-up is something a little more specific. Slide 11 of your deck on refining margins. Kevin, you walked through configuration of feedstock. That made a lot of sense. The other number felt bigger than normal, $3.57. But it was a big part of the strength in the realized margin. Can you talk about what that is in a little bit more detail and how should we think about that? Is that just a function of crude prices coming down precipitously, or can we carry any of that forward?
I think you're partly onto that, Neil. There are a variety things in that other category, the big drivers for why that's a positive of $3 plus per barrel this time is a function of, one, realizing stronger prices on product realizations, a lot of which is a function of the overall declining market helped on the product price realizations. The other is just on the crude side, the crude differential side, being able to optimize how we're moving barrels around our network to capture opportunities as they're available, which in that kind of market environment we saw in the fourth quarter sort of lent itself to us being able to do that. You think about both of those. It was good to have in the fourth quarter, good that we could capture it, not something you'd assume is ratable.
Blake Fernandez with Piper Jaffray. Please go ahead. Your line is open.
Guys, good morning, congrats as well on the strong print there. I know you covered chemicals already, in the release, you talked a little bit about some potential debottlenecking, I was hoping you could maybe elaborate a little bit on that. I'm assuming that's totally separate from a potential second cracker. I'm just trying to get a sense of how significant that could be and maybe timing around that.
Yeah, Blake, it's Kevin. In terms of the bottleneck opportunities, those are not of anything like the scale of the next major project, i.e., a second cracker project. These are what I would consider to be in a portfolio like CP Chem has. We're always able to identify opportunities for incremental investment to drive incremental production and usually very strong returns on those investments. I don't think we look at any one of those as significantly large, but they typically screen pretty high to the list of priorities for investment because by nature it would be an incremental to the existing portfolio, usually very attractive returns.
Gulf Coast project was like 33% capacity increase. I mean, a bottleneck is typically on the order of 5%, maybe 10%, Blake. It's not across all the products. We have very specific places where we think we can get some more capacity out of the derivatives and actually some of the ethylene units too. They're certainly worth pursuing when you look at the returns.
Yep, got it. The second one really is just on, I guess, is a focus on moving toward light sweet given the compression in heavy differentials in the market. Maybe if you could just give an update on where you are in your system as far as ability to flex back and forth between light sweet, and then I guess while we're on it, maybe the same with distillate and gasoline, if you're at max distillate mode at this point.
Yeah. We have shifted. Given the economics in the marketplace, they've really driven a move towards maxing diesel, we're there. We've been there, we're making about as much diesel as we can given the current economics. Similar on the light product side, we're about 50% sweet and 50% sour. That's about 1 million barrels a day or so of sweet crude. There's a potential to go maybe another 100,000 barrels a day. It's obviously dependent on economics. We'd need the economic incentive to do that. That's what our upside potential is there.
Roger Read with Wells Fargo. Please go ahead. Your line is open.
Yeah, thanks. Good morning.
Morning.
Roger. I guess maybe we could talk a little bit about the midstream segment. Obviously, highlighted Gray Oak and so forth. As I think about the performance in the quarter, looking into 2019 and 2020 in an E&P industry that seems to be slowing its spending a little bit, maybe slowing production, how does that environment compare to the baseline that you've laid out in terms of your expectation for future pipeline investments and, I guess, NGL fractionation, et cetera, as you think about what may get the trigger pulled on it in 2019 or 2020? I guess really at the heart of it, I'm trying to understand what maybe the growth prospects are for at least the transportation and NGL side of the midstream as we look over the next year or two.
I would start with we're just not going to build speculative capacity, Roger. I think that the midstream projects we have in the queue are subscribed with P&D and long-term contracts. These are seven- and 10-year contracts with good counterparties on the other side. I think that's the starting point. I think you're right that since if the drill bit slows down in North America, some of these additional investments will slow down. If we can't get these things subscribed, we're not going to build them. It's probably the starting point on that. Gray Oak, fully subscribed. Frac 2, 3, fully subscribed. It's interesting. We're still seeing good interest in additional frac capacity. We're out in open seasons in Red Oak and Liberty. I'd say interest levels good on those. We'll see.
Well, I don't know exactly where we'll end up yet when people want to sign. We just completed a successful open season on DAPL going to 570. We're still seeing good interest level out there from the producers and investing in or having infrastructure to clear from the production centers to the market centers. Jeff, you want to comment?
Yeah. There's still substantial resource available. With new infrastructure coming, the potential that activity resumes. We're looking at NGL production growth that's been around 500,000 barrels a day year-on-year. We're not adding to that type of capacity in 2019. As production continues to grow, the need for us infrastructure will continue. The challenge is matching the timing with production growth and infrastructure growth. That's what getting projects fully contracted attempts to do.
Okay, great. Thanks. Then, shifting gears back to refining. Greg, you mentioned kind of a mid-cycle or better assumption on margins for refining in 2019. Seems that on a macro front, we get more concerns raised by investors that globally new capacity coming online will be faster than demand growth. Not asking you to forecast demand growth. That's too tough for any of us. As you think about the new capacity coming online, how much of that do you think is really aimed at the transportation market versus what is nominally aimed at the petrochemical side in terms of feedstock?
Yeah. We have a couple in China, one in the Middle East coming on in 2019. The transparency into China is probably a little harder for us. Our view is those two refineries are probably more petrochemical feedstock-oriented and less gasoline-oriented. We think that they're probably towards the back half of 2019. Yeah, there's capacity that are going to come on this year. I'm not sure it's going to be as big an impact, particularly through the first half of the year as what some people think. Jeff, you want to comment?
I think on the Chinese side, it's petrochemical-focused, as Greg mentioned, but with low diesel yields as well.
Paul Sankey from Mizuho, please go ahead. Your line is open.
Good afternoon, everyone. Greg, you made some interesting comments recently to us about China demand keeping on with the general demand picture. Your sales there, I think, have held up very well. Can you expand on what you were saying about the global market for petrochemicals? We also, as you may know, had Exxon saying that there's weakness because of excess capacity, which I think you'd really referred to earlier on this call, new capacity. Could you just talk a little bit about how the market could be clearing and particularly the market is so concerned about China? Anything you could add on that would be interesting. Thanks.
Yep, absolutely. Thanks, Paul. First of all, we're still constructive petrochemical demand coming into 2019. It's still driven by hundreds of millions, if not billions of people ultimately coming into the middle class over the next decade or so. I think that the fundamentals are set up well there. China, it's interesting when you see crude prices fall as drastically as they did in the fourth quarter. They always slow down because they know that petrochemical prices are going to follow us down, and they'll wait to try to time the bottom and start buying again. We did probably see some slowdown activity in the fourth quarter around China. As we look into China through into the base demand in China, it's still pretty healthy. I'd say North American demand, European demand, still relatively healthy in terms of growth.
I think that's been the surprise to the upside in the chemicals environment. Still constructive. The other thing I would say is our fundamental view on 2019 for chemicals is that demand on chemicals is going to grow faster than capacity additions. The other thing is we may see some slippage on these other projects that are slated to come up in 2019.
Great. Thank you. Then the follow-up is a pretty large strategy question, but it's related to your cash return versus CapEx framework, which is 60/40, as we know at the moment. I was wondering over what timeframe and for what reasons that might shift given the scale of the company, for example, is getting so large. Thanks.
Yeah. If you think about 2012 to 2018, and consider our investments in equity affiliates, we are right on top of the 60/40, 60% reinvested back into our company, and 40% back to shareholders who secure growing competitive dividend and share repurchase and exchanges. In 2018, we were 60/40. It was just the other way, where 60% distributions and 40% investment back into our business. Paul, as I think kind of over a three-year horizon, the midterm, most of our projects that we're investing in midstream and refining kind of have two-year horizons on them. The chemicals projects tend to go into a three to four-year horizon on them. If I want to think about a three-year horizon, I still think 60/40 is about the right place for us to be.
Paul Cheng from Barclays, please go ahead. Your line is open.
Hey, guys. Good morning.
Morning, Paul.
Hey, Paul.
Couple quick questions. Greg you talk about China. Can you talk about Mexico?
Yeah.
Where do you see on the export market there? We have heard early in the year that some widespread fuel shortage. Does it, in any shape or form, that impact your export volume, and have you seen any change in the trend? That's the first question. The second question is on the crude differential. Exxon has said that in the fourth quarter versus the year before fourth quarter, their crude differential benefit is about $1.2 billion after tax. Marathon, if you look at their chart, look like it's about $1.6 billion. I'm wondering, is there a number that you can share?
I'll take the Mexico question. We are seeing some impact on exports to Mexico as their demand has gone down with the pipeline shutdowns. Mexico demand is about 800,000 barrels a day gasoline and about 350,000 barrels a day of diesel. They import about 75% of that from the U.S., at least in 2018. As you know, refining utilization averaged about 38% last year, we're expecting it to go down lower from that this year. We have seen some impact on exports into Mexico, and those volumes are down. We're seeing some signs of movement into some of the interior, but some of that demand is going to be lost permanently, and as they're able to get product back into the center of the country, that will resume their imports. We are seeing that down somewhat.
Jeff, have you seen any sign the export to Mexico start to recover or increasing?
We have seen a little bit of relief recently. It's probably going to be an area we don't have a lot of transparency in as they try to recover from these pipeline outages.
Mm-hmm. Thank you. How about the crude differential?
Hey, Paul. On your first question, when you look at WCS-WTI kind of year-over-year 2017 versus 2018, it's about $13, and $1 is about $100 million. On our EBITDA basis, it's $1.3 billion for us, Paul.
Perfect. Thank you.
Thank you.
Doug Leggate from Bank of America Merrill Lynch, please go ahead. Your line is open.
Hey, guys. This is Kaleon for Doug. Thanks for taking the question.
Hey.
My first is a follow-up to Phil's question about the use of cash. Just wondering, with your balances reloaded, does this affirm the high end of your $1 billion-$2 billion buyback target for 2019?
I think we'll guide to the range of $1 billion-$2 billion.
My second question is a follow-up to Neil's question. Just on the WCS differential. The Alberta cuts have worked, but perhaps they've worked too well since the diff is now out of the money as it relates to rail. My question is, do you see a sharp slowdown in rail, and do you think that this could be a catalyst for a sharp widening of the diff? Maybe not to October levels, but towards that direction?
Yes, we are seeing a reduced utilization of rail as we come into February. I believe some of the Canadian producers that ship by rail have acknowledged a reduction. Those economics are closed, the arbs closed, the marketplace is starting to react.
It's interesting. It looks like to us that we've pulled inventories, which was the whole idea of the government intervention, we've overshot on the differential, it looks like to us inventories are starting to build again in Canada. I think that we will get back to the point where we have a differential, at least a clear by rail. You think about a fully loaded rail cost, kind of $18-$20 a barrel. You look at variable costs is probably $15-$16. I think we'll get to a variable cost, then we'll move to variable costs as the year goes on.
Prashant Rao with Citigroup, please go ahead. Your line is open.
Thanks. Good morning, and thanks for taking the question. My first sort of straddles midstream and refining a bit. Thinking about storage capacity and needs, particularly in the Gulf Coast and through logistics needs and opportunities over the next couple of years, I sort of see at least two event windows here, one being IMO. I'm thinking about longer hydrocarbon chains here, in particular, medium to longer hydrocarbon chains. One is IMO. We were expecting storage needs for fuel oil, storage needs for different sorts of distillate, changes in crude trade lanes and dynamics. The second being the wave of barrels that we expect to hit the Gulf Coast up for export as we get towards 2020, 2021.
I'm curious to know sort of your thoughts on how the existing infrastructure, wherever it stands in terms of the capacity to handle the demand that'll be there along these various lanes, and sort of where's the opportunity for Phillips since you're invested in projects that are all through the value chain. I figured you might have a view into sort of where the best sort of incremental opportunities are and how these play off against each other.
Yeah. We do expect the growing production to largely be exported, as the pipelines are announced. Most of the major pipelines have associated export terminals tied with them, similar to our Gray Oak and South Texas Gateway Terminal. We've got export capacity out of Beaumont, and we're continuing to build out that facility. We've got LPG export capability out of Sweeney, and as more and more fractionation comes online, a lot of that LPG is going to need to be exported. We do see those opportunities across many of our value chains.
Manav Gupta with Credit Suisse, please go ahead. Your line is open.
Hey, guys. Can you talk about the benefits of Bayou Bridge on your entire Gulf Coast refining system and the actual start-up date?
Yeah. Bayou Bridge, we have expectations for it to start up in March, and provide service into St. James. Bayou Bridge also provides service from Beaumont into Lake Charles and our Lake Charles refinery. At Lake Charles, we've had projects there to increase our ability to use discounted domestic crudes, we're benefiting there from the Bayou Bridge access to crudes. The Bayou Bridge, Lake Charles to St. James, provides the opportunity for ACE Pipeline, which is in open season. That open season is continuing with strong interest, and hopefully we'll have more to report on that in the near future.
A quick follow-up, Jeff. Two areas where you first see the recession coming is polyethylene demand and distillate demand. Demand softness is one thing, you are very close to both those end markets. Is there any sign in any of those two markets that we are probably approaching this recession?
Yeah. I think Greg covered the polyethylene side of the equation and perhaps more information there. When we look at diesel, demand's very strong. Truck tonnage up 8% year-over-year in most recent information. Global airline revenue miles up 6% year-over-year. We're continuing to see strong diesel demand in the markets in which we participate. We don't see any signs as of this point.
Chris Sighinolfi with Jefferies, please go ahead. Your line is open.
Hi, Greg. Thanks for taking my questions. I have two. They both relate to marketing and specialties. I guess first, very strong results here in the fourth quarter, and if I look at how things performed versus our expectations and history, it appears international fuel margins were a particularly bright spot. I'm wondering with almost a doubling of the foreign margin quarter-on-quarter, I believe it's the second consecutive record for you on fuel margins there. Just wanted to check in about any particular drivers of that and if anything structural is afoot that you'd caution us to pay attention to.
I'd maybe start with in Europe, our markets are focused around Germany, Austria, Switzerland, and the U.K. In Germany, we had low water levels at the Rhine, and that presented some logistical challenges, and we were able to use our infrastructure and logistics systems to capture some of the opportunity and advantage. As you know, we're kind of reimaging, rebuilding about 30 new JET sites a year in Europe. We're seeing some increased uplift from that. That's a piece that's, I don't know if it's structural or not, but it's certainly an adder. We're moving into U.K., doing some similar work in the U.K. around the JET brand in the U.K. Combination of a logistical opportunity created in the fourth quarter and just some good, nice growth opportunities.
I would just add on that the overall environment, the falling price environment, had the benefit you would expect to see in those markets as well.
Yeah
like we saw in the U.S.
Right. Okay, thanks. I guess, secondly, you've continued to execute that reimaging effort on the branded sites. Here, you noted in the release, I think, a roughly 2% same-store sales growth figure for the reimaged sites last year. I'm just curious how that would compare to sites that have yet to be reimaged.
I think the 2% is a really good number. That's what we see inside, outside in terms of the uplift. I mean, the sites are certainly more attractive. It's drawing people in, and they're spending money, and that's the whole reason we're doing the campaign.
Jason Gabelman from Cowen and Company, please go ahead. Your line is open.
Yeah. I was going to ask about the international margin, thanks for addressing that. I guess my other question is just going back to refining margins. I'm wondering with oil prices falling as they did, just in terms of secondary product realizations, which geography do you see the highest uplift from those secondary products?
We do see uplift across all our regions. As you know, we have cokers at all our refineries except for Ferndale and Bayway. There is some meaningful contribution from all the different regions. We saw a benefit coke in NGLs and fuel oil during the quarter. It was really across all the products, and there was meaningful contributions from each of the regions.
Okay. You wouldn't say just a more general way that one region tends to benefit more than others, sounds like?
Yeah. It's across the board.
All right. Then just a quick follow-up. It looks like CapEx ran a little high in 4Q. Obviously, not a big concern given the cash flow you generated in the quarter, I was just wondering what that was from and if that results in maybe CapEx coming in a bit lower next year.
This is Kevin. You just look at the two large projects that we sanctioned last year and the timing of when spend really started to ramp up on those. That was Gray Oak and the expansion of the Sweeney hub with the additional fractionation capacity. You're just seeing the impact of the spend level ramping up on those projects. That's already factored into our capital budget for 2019 that we communicated back in December.
Matthew Blair from Tudor, Pickering Holt. Please go ahead. Your line is open.
Hey, good morning, everyone. It seems like your Gulf Coast refining system really outperformed peers. You think that was the result of bringing down the WCS barrels, Was there anything unusual or anything that stood out this quarter?
I think as we optimize across the integrated logistics network, we are able to allocate the Canadian heavy volumes to the area that are most beneficial. We did consume a fair amount of Canadian heavy in the Gulf Coast. We also benefit from the wide Bakken differential with the Bakken Pipeline feeding into the Gulf Coast and across Bayou Bridge into Lake Charles. Those were big contributions. Configuration is a meaningful impact on Gulf Coast because we produce less gasoline and more diesel than is in the 3-2-1. Product realizations from pricing lags in a declining oil price environment were a positive. I think, finally, the Alliance Refinery was down for maintenance during part of the third quarter and ran during the fourth quarter. We had higher volumes and lower turnaround expense there.
100% utilization for the region for the quarter always helps too.
Sounds good. What kind of impact, if any, are you expecting from this recent Keystone Pipeline outage?
Yeah. It's a little bit early to know what the impact's going to be. We are a shipper on the pipe, so there's the potential for some impact. We'll have to wait and see what the details of that situation are.
I do think we've got workarounds. We actually talked about that this morning. I guess Platts down too. I think we're prepared. Again, as Jeff said, I think we need to see more details about how long the pipe's going to be down.
We have now reached the time limit available for questions. I will now turn the call back over to Jeff.
Good. Thank you, Julie, and thank all of you for your interest in Phillips 66. If you have additional questions, please call Brent or me. Thank you.
Thank you, ladies and gentlemen. This concludes today's conference. You may now disconnect.