Welcome to the 4th 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 Dieter, Vice President, Investor Relations. Jeff, you may begin.
Good morning, and welcome to Phillips 66 4th 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 2 contains our Safe Harbor statement. It's a reminder that we will be looking forward looking statements during the presentation and our Q and 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 Q4 were a record $2,300,000,000 or $4.87 per share, and we generated $4,100,000,000 of operating cash flow. We rewarded our shareholders with strong distributions during the quarter, returning $864,000,000 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 $5,600,000,000 or $11.71 per share. We generated $7,600,000,000 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 2 years. In 2018, we increased the quarterly dividend 14% and repurchased 10% of the shares outstanding, resulting in $6,100,000,000 of capital being returned to our shareholders. Since 2012, we returned $22,500,000,000 to shareholders through dividends, share repurchases and exchanges, reducing our initial shares outstanding by 30%. This disciplined capital allocation is a priority and 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 continue to buy shares when it trades below intrinsic value as demonstrated by our 4th quarter pace of repurchases. Phillips 66 Partners achieved its 5 year 30 percent 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 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 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 2 deepwater docks, plant source capacity of 6,500,000 to 7,000,000 barrels and is expected to start up in mid-twenty 20. At the Sweeny Hub, we're building 2 150,000 barrel per day NGL fractionators and adding 6,000,000 barrels of storage at Phillips 66 Partners Clemens Caverns. The hub will have 400,000 barrels per day of fractionation capacity and 15,000,000 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 Q4, we placed 1,300,000 barrels of fully contracted new crude oil storage into service. This brings the terminal's total capacity to 14,600,000 barrels. Construction is underway to further increase crude storage by 2,200,000 barrels with completion anticipated in early 2020. DCP Midstream has a 25% interest in the Gulf Coast Express Pipeline project that will transport approximately 2,000,000,000 cubic feet per day of natural gas from the Permian to Gulf Coast markets.
Completion is expected in the Q4 of 2019. In the high growth DJ Basin, ECP's O'Connor II plant is expected to begin operations in the Q2 of 2019. CV Chem'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 derivative capacity is under development. CB Chem 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 Sweeny Refinery that will increase production of higher value petrochemical products and higher octane gasoline. This project is planned to be complete in the Q2 of 2020. During the Q4, we completed crude unit modifications at our Lake Charles refinery to run additional advantaged 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 Q3 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 we'll 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. So with that, I'll turn the call over to Kevin to use the financials.
Thank you, Greg. Hello, everyone. Starting with an overview on Slide 4, we summarize our financial results for the year. 2018 adjusted earnings were $5,600,000,000 or $11.71 per share. We generated $7,600,000,000 of operating cash flow, including $2,900,000,000 in distributions from equity affiliates with approximately $1,000,000,000 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 Q4, the net debt to capital ratio was 23%. Our return on capital employed for the year was 17%. Slide 5 shows the change in cash during the year. We began the year with $3,100,000,000 in cash on our balance sheet.
Cash from operations, excluding the impact of working capital was $7,900,000,000 Working capital changes reduced cash flow by $300,000,000 We received $1,000,000,000 from the net issuance of debt. During the year, we funded $2,600,000,000 of capital expenditures and investments, paid dividends of $1,400,000,000 and repurchased $4,700,000,000 of our shares, representing 10% of shares outstanding. Our ending cash balance was $3,000,000,000 Slide 6 summarizes our 4th quarter results. Adjusted earnings were $2,300,000,000 and adjusted earnings per share was $4.87 We generated operating cash flow of $4,100,000,000 including distributions from equity affiliates of $840,000,000 Capital spending for the quarter was approximately $1,000,000,000 with $648,000,000 spent on growth projects. We returned $864,000,000 to shareholders to $367,000,000 of dividends and $497,000,000 of share repurchases.
We ended the year with 456,000,000 shares outstanding. Moving to Slide 7. 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 Q3 to Q4. Quarter over quarter adjusted earnings increased $804,000,000 driven by higher results in refining, marketing and midstream, partially offset by lower chemicals results. The 4th quarter adjusted effective tax rate was 21%. Slide 8 shows our midstream results. 4th quarter adjusted pre tax income for the segment was $409,000,000 an increase of $97,000,000 from the previous quarter.
Midstream full year adjusted pre tax income was a record $1,200,000,000 more than $600,000,000 higher than the prior year. Transportation adjusted pre tax income for the Q4 was $234,000,000 up $25,000,000 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, 4th quarter throughput on the Bakken pipeline increased and averaged more than 500,000 barrels per day.
NGL and other adjusted pre tax income was $122,000,000 an increase of $48,000,000 primarily from inventory impacts. We continue to run well at the Sweeny Hub. During the quarter, the export facility averaged 10 car business a month and the fractionator averaged 116% utilization. ECP Midstream adjusted pretax income of $53,000,000 in the 4th quarter is up $24,000,000 from the previous quarter, primarily due to improved hedging results, partially offset by higher operating costs. During the Q4, DCP completed the expansion of the Sand Hills pipeline 185,000 barrels per day.
Sand Hills is owned 2 thirds by DCP and 1 third by Phillips 66 Partners. Turning to chemicals on Slide 9. 4th quarter adjusted pre tax income for the segment was $152,000,000 $111,000,000 lower than the Q3. Olefins and polyolefins adjusted pre tax income was $158,000,000 down $67,000,000 from the previous quarter. The decrease reflects seasonally lower polyethylene sales volumes and higher turnaround and maintenance costs.
Global O and P utilization was 95% in the 4th quarter. Adjusted pre tax income for SA and S decreased $35,000,000 due to lower earnings from CPChem's equity affiliates and higher domestic turnaround costs. The $9,000,000 decrease in other reflects the 4th quarter increase of a contingent liability and the gain on an asset sale in the 3rd quarter. During the Q4, we received $300,000,000 of cash distributions from CPChem. Next on Slide 10, we'll cover refining.
Crude utilization was 99% compared with 93% in the 3rd quarter. The 4th quarter pre product yield was 86% and pre tax turnaround costs were $130,000,000 an increase of $75,000,000 from the previous quarter. The market crack declined 36% from the previous quarter. Realized margin was $16.53 per barrel, 24% higher than the 3rd quarter. The chart on Slide 10 provides a regional view of the change in adjusted pre tax income, which increased $745,000,000 primarily from strong results in the Central Corridor and Gulf Coast regions.
For the full year, refining generated adjusted pretax income of $4,600,000,000 The Atlantic Basin results increased as the Bayway refinery returned to normal operations following Q3 downtime. Gulf Coast adjusted pretax income of $468,000,000 increased $247,000,000 due to higher clean product realizations, improved heavy Canadian crude oil differentials and increased volumes at the Alliance refinery following Q3 downtime. The higher clean product realizations benefited from declining market prices. Capacity utilization in the Gulf Coast region was 100%. Adjusted pretax income in the Central Corridor was $1,200,000,000 an increase of $342,000,000 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 321 market crack for the Q4 was $9.11 per barrel compared to $14.21 per barrel in the 3rd 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 321 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 Feedstocks 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 Q4 pre tax income was a record $592,000,000 $207,000,000 higher than the 3rd quarter. Marketing and other increased $205,000,000 from improved margins associated with sharply falling spot prices.
Refined product exports in the 4th quarter were a record 249,000 barrels per day. We re imaged 466 domestic branded sites during the Q4, bringing the total to approximately 2,600 since the start of our program. For 2019, an additional 1800 sites are scheduled for reimaging. Specialties adjusted pretax income increased $2,000,000 during the quarter, primarily due to higher lubricants margins. On Slide 13, the Corporate and Other segment had adjusted pre tax costs of $201,000,000 improved $22,000,000 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 3rd quarter. This concludes my review of the financial and operating results. Next, I'll cover a few outlook items for the Q1 and the full year. In Chemicals, we expect the Q1 global O and P utilization rate to be in the mid-90s.
In Refining, we expect the Q1 worldwide crude utilization rate to be in the mid-80s and pre tax turnaround expenses to be between $140,000,000 $170,000,000 We anticipate 1st quarter corporate and other costs to come in between $210,000,000 $240,000,000 pretax. For 2019, we plan full year turnaround expenses to be between $550,000,000 $600,000,000 pretax. We expect corporate and other costs to be in the range of $850,000,000 to $900,000,000 pretax for the year. We anticipate full year D and A of about $1,400,000,000 And finally, we expect the effective income tax rate to be in the low 20s. 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 one follow-up Phil Gresh from JPMorgan, 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, I mean, this is the 3rd 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, but even other parts of the portfolio have been very strong as well. So 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 either keeping control of the Southside better?
You guys are doing a great job, Phil. So look, I think that there's no question the market environment we find ourselves is playing to the strength of our portfolio. And it's 2 things, it's distillate, right, and differentials. And so no question, the Q4, the WCS differential drove a lot of the value creation. We improved our distillate yield or another 1% in the 4th quarter, so 39% distillate yield.
So 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've 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. Then you think about our midstream business starting to kick in. We actually made more in midstream than we made in chemicals in 2018.
So, across the portfolio, the things we've been investing in are starting to show up and deliver value. And then 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, I mean, we ran 106% utilization in the central quarter, ran 100% on the Gulf Coast and it showed up as value. So I don't know, Jeff, do you have any comments on other structural changes?
Yes. I think the projects that Greg is talking about, dollars
1,500,000,000 of EBITDA and incremental
projects added across the $1,000,000,000 of EBITDA and incremental projects added across kind of evenly distributed between chemicals, midstream and refining that's improved our overall cash flow from operations in a normalized environment.
Yes. I would probably say, given kind of normalized mid cycle, we used to say $4,000,000,000 to $5,000,000,000 We're kind of $6,000,000,000 to $7,000,000,000 now of cash flow on a normalized basis.
Got it. Okay. Thanks. I guess, second question, just looking at the guidance for the Q1, 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 and for the industry that is warranting some run cuts here in the Q1?
So 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 margin, Phil. There wasn't a lot of work there. So it's mostly focused around our turnaround activity.
Got it. Okay. One last one just for Devin. How do you feel about the balance sheet levels here? Obviously, earlier in the year, you issued some debt to buyback some shares finishing the year really strong on cash flow clearly.
So how do you feel about desires to pay down debt from here?
Yes, Phil. So, I feel pretty good about where we got to. In fact, we basically we replenished the cash from where we had been with the strong 3rd Q4 this year. So $3,000,000,000 of cash, debt to cap is at 29% on a fully consolidated basis, 23% net of cash. So, we feel good on that.
We have some debt that's available for pay down, but 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 Q1. And so we'd expect to see that happen as it typically does. But the nice thing is we have a lot of flexibility to work through.
So 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 Tarasan 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. So kudos to the team on exceptional results. That's really good work there.
And my question is on your outlook for the key businesses. And starting with refining, with margins on variable costs for conversion capacity unusually low,
do
you think that utilization is going to decline for some of these processes or because weakness is often seasonal this time of the year, throughput is going to remain high? So 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?
So, I'll take a stab and Jeff can correct me. How about that? So, look, I think that everyone's concerned about the high gasoline inventories at this point in the cycle. There's no question the Q4, the market environment was encouraging you to run, given the diesel cracks that we had and gasoline cracks weren't that great. But we're heading into the spring turnaround season.
There's some operational issues out there. So, our assessment is we're probably a little above normal in terms of outages for this time of year. Then 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 just what demand up 1% to 1.3% in that range. And you add on IMO, and I know there's a debate about IMO in that, but it's still going to be some level of tailwind. So as we look at 2019 for the year, we're still mid cycle or better in terms of refining cracks, Doug.
Okay. Thanks, Greg. Jeff, did you want to say anything or did you cover it?
You covered it well.
Forgot, I didn't mean to interrupt. Anyway, on chemical,
you guys Go ahead, Doug.
Well, I was just going to ask a question about chemicals. And specifically, you guys have strained capacity in the last couple of years, and you're seeing position for more spending in the area based on Greg's comments today. So just want to get an update on your constructive view on chemicals, which is a little bit more constructive than than some. And so the basis for increased investment
in that area, why are
you guys optimistic for chemicals?
Yes. So, 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. But we're still constructive demand, particularly for polyethylene, which is mostly what CPChem makes. In our view, as demand is going to grow faster than capacity in 20 19. So, it should be constructive for operating rates and margins, 2019.
And then you look at all the advantaged feedstocks that are still available in the U. S. Again, so that really says you should build into that. If you have a great position, which CPTM does, access to advantaged feedstocks, great technology, great return business. And so, 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 4th quarter. We experienced the typical seasonal softness in demand, but it was compounded by 35% decline in crude prices. As we started the year, margins were soft, but crude prices have rebounded and CPChem seeing signs of demand improvement. Healthy demand is expected to drive some polyethylene price increases in the Q1.
Neil Mehta from Goldman Sachs. Please go ahead. Your line is open.
Good morning, team, and 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 4Q and have reversed here in 1Q. Our view is that you ultimately will settle out toward transportation economics, which is wider than here. But just your latest thoughts on how this plays out in 2019? And then longer term, is there still a lot of uncertainty around the pipe and how you're adjusting your business to take advantage of that?
Yes. We've gone from unsustainably wide discount for Canadian heavy to an unsustainably narrow discount, we believe. With the mandated cuts, there were substantially more volume that came off the market than what the $325,000,000 targeted amount was. We also had some economic run reductions, production reductions. And so 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. And so we expect the differentials to go back to kind of rail economics WTI minus 20 something in that area.
That's helpful. And then 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 market. 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?
So I see you're probably on to that, Neil. It does cover a variety of things in that other category, but the big drivers for why that's a positive of $3 plus per barrel this time is a function of 1, realizing stronger prices on product realizations, a lot of which is a function of the declining the overall declining market helped on the product price realizations. And then 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 Q4 sort of lent itself to us being able to do that. So you think about both of those and not really
it was good to
have in the Q4, good that we could capture it, but not something you'd assume is ratable.
Blake Fernandez with Piper Jaffray. Please go ahead. Your line is open.
Guys, good morning and congrats as well on the strong print there. I know you covered chemicals already, but in the release you talked a little bit about some potential debottlenecking and I was hoping you could maybe elaborate a little bit on that. I'm assuming that's totally separate from a potential second cracker. Just trying to get a sense of how significant that could be and maybe timing around that?
Yes, Blake, it's Carolyn. In terms of the debottleneck opportunities, those are not of anything like the scale of the next major expansion major project, I. E, a second cracker project. These are what I would consider to be in a portfolio like CPChem has. We're always able to identify opportunities for incremental investment to drive incremental production and usually very strong returns on those investments.
So 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 of them being incremental to the existing portfolio, usually very attractive returns.
So Gulf Coast project was like 33% capacity increase. I mean, the bottleneck is typically on the order of 5%, maybe 10% like and but 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 F-one units too. But there's certainly worth pursuing when you look at the returns.
Yes, got it. The second one really is just on, I guess, is focused on moving toward light suite, given the compression and heavy differentials
in the market. So 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 maybe the same with the distillate and gasoline, if you're at max distillate mode at this point?
Yes. We have shifted. Given the economics in the marketplace, they've really driven a move towards maxing diesel. And so we're there, we've been there. And so 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 1,000,000 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.
But that's what our upside potential is there.
Roger Reads with Wells Fargo. Please go ahead. Your line is open.
Yes, thanks. Good morning.
Good morning. Hi, Drew.
I guess maybe we could talk a little bit about the midstream segment. Obviously, you've highlighted Gray Oak and so forth. But as I think about the performance in the quarter looking into 2019 2020 in an E and 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, etcetera, as you think about what may get the trigger pulled on it in 2019 or 2020? And 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 2.
So 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 and D and long term contracts. These are 7 10 year contracts with good counterparties on the other side. So I think that's the starting point. I think you're right that in the sense that the drill bit slows down in North America, some of these additional investments will slow down.
So 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. But it's interesting, we're still seeing good interest in additional frac capacity. We're out in open seasons in Red Oak and Liberty.
And 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 successful open season on DAPL, going to 570. But we're still seeing good interest level out there from the producers and investing or having infrastructure to clear from the production centers to the market centers.
Jeff, do you want to comment?
Yes. There's still substantial resource available. And 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 that type of capacity in 2019.
And so as production continues to grow, the need for us infrastructure will continue. The challenge is matching the timing with production growth and infrastructure growth. And so that's what getting projects fully contracted attempts to do.
Okay, great. Thanks. And 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 as too tough for any of us. But 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 size in terms of feedstock?
Yes. So we have a couple in China, 1 in the Middle East coming on in 2019. The transparency into China is probably a little harder for us. Our view is those 2 refineries are probably more petrochemical feedstock oriented and less gasoline oriented. So and we think that they're probably towards the back half of twenty nineteen.
So yes, there's capacity that's going to come on this year, but I'm not sure it's going to be as a bigger impact particularly through the first half of the year, is what some people think. Jeff, you want to comment?
Yes. 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 here, 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, but or rather it's a 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.
Yes, absolutely. Thanks, Paul. Well, first of all, we're still constructive petrochemical demand coming into 2019. It's still driven by 100 of millions, if not billions of people ultimately coming into the middle class over the next decade or so. So I think that the fundamentals are set up well there.
China, I mean, it's interesting when you see crude prices fall as drastically as they did in the Q4, they always slow down because they know that petrochemical prices are going to follow those down and they'll wait to try to time the bottom and start buying again. We did probably see some slowdown activity in the Q4 around China. But 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 is still relatively healthy in terms of growth. So I think that's been the surprise to the upside in the chemicals environment.
So still constructive. The other thing I would say is that our fundamental view on 20 19 for chemicals is that demand on chemicals is going to grow faster than capacity additions. And the other thing is we may see some slippage on these other projects that are slated to come up in 2019.
Great. Thank you. And then the follow-up is a pretty large strategy question, but it relates to your cash return versus CapEx framework, which is sixty-forty as we know at the moment. I was wondering over what time frame and for what reasons that might shift given the scale of the company, for example, is getting so large? Thanks.
Yes. If you think about 12 to 18 and consider our investments in equity affiliates, we are right on top of the sixty-forty percent, 60% reinvested back into our company and 46% back to shareholders who secure growing competitive dividend and share repurchase and exchanges. In 2018, we were sixty-forty. It was just the other way. We're 60% distributions and 40% investment back into our business.
But Paul, so I think kind of over a 3 year horizon in the midterm. Most of our projects that we're investing in midstream and refinery kind of have 2 year horizons on them. The chemicals projects tend to go into a 3 to 4 year horizon on them. But if I want to think about a 3 year horizon, I still think sixty-forty is about the right place
for us to be. Paul Cheng from Barclays. Please go ahead. Your line is open.
Hey, guys. Good morning. Good morning, Paul. Hey, Paul. Couple quick questions.
Greg, you talked about China. Can you talk about Mexico? That where do you see on the export market there that would I mean, we have heard early in the year that some widespread fuel shortage. That's 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 defense. Exxon has said that in the Q4 versus the year before Q4, their crude defense of benefit is about $1,200,000,000 after tax. And Marathon, if you look at the chart, look like it's about $1,600,000,000 I'm wondering there is 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 and 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. But we are seeing that down somewhat.
Jeff, have you seen any side the export to Mexico start to recover or are you increasing?
Yes. We have seen a little bit of relief recently, but 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.
Thank you. And how about
the pre take on that?
On your first question, when you look at WCSTI kind of year over year 2017 versus 2018, it's about $13 And $1 is about $100,000,000 So on an EBITDA basis, it's $1,300,000,000 for us, Paul.
Perfect. Thank you. Thank you.
Doug Reggate from Bank of America Merrill Lynch.
This is Kalei on for Doug. So my first is on as 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 $1,000,000,000 to $2,000,000,000 buyback target for 2019?
I think you will guide to the range of $1,000,000,000 to $2,000,000,000
All right. My second question is a follow-up to Neil's question. Just on the WCF differential, the Alberta cuts have worked, but perhaps they worked too well since the diff is now out of the money as it relates to rail. So 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 reduction. Those economics are closed, the arbs closed and 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. And we've overshot on the differential and it looks like to us inventories are starting to build again in So, I think that we will get back to the point where we have a differential at least to clear by rail. And so, you think about a fully loaded rail cost kind of $18 to $20 a barrel. You look at variable cost, it's probably $15 to $16 So I think we'll get to a variable cost and then we'll move to a variable cost 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 2 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. And the second being the wave of barrels that we expect to hit the Gulf Coast 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 capacity to handle the demand that will be there along these various lanes? And sort of where is the opportunity for Phillips since you're invested in projects that are all through the value chain? I have figured you might have a view into sort of what
are the best sort of incremental opportunities are and how play off against each other?
Yes. So 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 Sweeny and as more and more fractionation comes online, a lot of that LPG is going to be need to be exported.
And so we do see those opportunities across many of our value chains.
Manav Gupta with Credit Suisse. Please go ahead. Your line is open.
Can you talk about the benefits of BioBridge on your entire Gulf Coast refining system and the actual start up date?
Yes. So 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.
And so we're benefiting there from the Bayou Bridge access to crudes. And then the Bayou Bridge, Lake Charles to St. James provides opportunity for ACE pipeline, which is in open season and that open season is continuing with strong interest and hopefully we'll have more to report on that in the near future.
And 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, but 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?
I think Greg covered the polyethylene side of the equation and perhaps more information there. But when we look at diesel, demand is very strong. Tonnage up 8% year on year in most recent information. Global airline revenue miles up 6% year on year. We're continuing to see strong diesel demand in the markets in which we participate.
So 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 2. They both relate to marketing and specialties. I guess, first, very strong results here in the 4th quarter.
And if I look at how things performed versus our expectations and history, it appears international fuel margins were particularly bright spot. So I'm wondering with a near almost a doubling of the foreign margin quarter on quarter, I believe it's the 2nd 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.
Well, I'd maybe start with in Europe, our markets are focused around Germany, Austria, Switzerland and the 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. And so we're seeing some increased uplift from that. So that's a piece that's I don't know if it's structural or not, but it's certainly an adder. And then we're moving into UK, doing some similar work in the UK around the Jet brand in the UK.
So a combination of a logistical opportunity created in the Q4 and just some good nice growth opportunities.
I would just add on that, that the overall environment, the fall in price environment had the benefit you would expect to see in those markets as well, like we saw in the U. S. Right. All right.
Okay. Thanks.
And I guess, secondly, you've continued to execute that reimaging effort on the branded sites. Here you noted in the release, I think, that roughly 2% same store sales growth figure for the reimaged sites last year. And I'm just curious how that would compare to sites that have yet to be re imaged?
I think the 2% is a really good number. That's what we see inside, outside in terms of the uplift. I mean, their sites are certainly more attractive. It's drawing people in and they're spending money and that's a whole reason we're doing the campaign.
Jason Gabelman from Cowen and Company. Please go ahead. Your line is open.
Yes. I was going to ask about the international margin. So thanks for addressing that. I guess my other question is just going back to refining margins. 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. And so there is some contribution meaningful contribution from all the different regions. We saw it benefit coke, NGLs and fuel oil during the quarter. So it was really across all the products and there was meaningful contributions from each of the regions.
Okay. So you wouldn't say just a more general way that one region tends to benefit more than others, sounds like?
Yes. It's across the board.
All right. And 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, but 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 2 large projects that we sanctioned last year and the timing of when spend really started to ramp up on those. So that was Gray Oak and the expansion of the Sweeny Hub with the additional fractionation capacity. And so you're just seeing the impact of the spend level ramping up on those projects. And 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 or was there anything unusual or anything that stood out this quarter?
I think as we optimize across the integrated logistics network, we did 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. So those were big contributions. Configuration is a meaningful impact on Gulf Coast because we produce less gasoline and more diesel than is in the 321.
Product realizations from pricing lags in a declining oil price environment were positive. And I think finally, the Alliance Refinery was down for maintenance during part of Q3 and ran during the Q4. So we had higher volumes and lower turnaround expense there. So 100 percent utilization
for the region for the quarter always helps too.
Sounds good. And what kind of impact, if any, are you expecting from this recent Keystone pipeline outage?
Yes. It's a little bit early to know what the impact is going to be. We are a shipper on the pipe, so there's the potential for some impact. But 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. So, we're I think we're prepared. But again, as Jeff said, I think we need to see more details about how long the pipe is going to be down.
We have now reached the time limit available for questions. I will now turn the call back over to Jeff.
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.