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Phillips 66 (PSX) Q4 2021 Earnings Call Transcript

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Phillips 66 (NYSE: PSX)
Q4 2021 Earnings Call
Jan 28, 2022, 12:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Operator

Good morning, and welcome to the fourth quarter 2021 Phillips 66 earnings conference call. My name is Sia, and I will be your operator for today's call. [Operator instructions]. Please note that this conference is being recorded.

I will now turn the call over to Jeff Dietert, vice president, investor relations. Jeff, you may begin.

Jeff Dietert -- Vice President, Investor Relations

Good morning, and welcome to Phillips 66 fourth quarter earnings conference call. Participants on today's call will include Greg Garland, chairman and CEO; Mark Lashier, president and COO; Kevin Mitchell, EVP and CFO; Bob Herman, EVP, refining; Brian Mandell, EVP, marketing and commercial; and Tim Roberts, EVP, midstream. Today's presentation material can be found on the investor relations section of the Phillips 66 website, along with supplemental financial and operating information. Slide 2 contains our safe harbor statement.

We will be making forward-looking statements during today's presentation and our Q&A session. Actual results may differ materially from today's comments. Factors that could cause actual results to differ are included here as well as in our SEC filings. With that, I'll turn the call over to Greg.

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Greg Garland -- Chairman and Chief Executive Officer

OK, Jeff. Thank you. Hey, good morning, everyone, and thanks for joining the call today. For the fourth quarter, we had adjusted earnings of 1.3 billion or $2.94 per share.

For the year, adjusted earnings were 2.5 billion or $5.70 per share. We delivered record results in midstream, chemicals and marketing and specialties, demonstrating the strength of our diversified portfolio. For the third quarter in a row, we saw improved refining performance. Looking ahead, we're optimistic about the outlook for our business.

In 2021, our employees exemplified the company's values of safety, honor, and commitment. Our 2021 combined workforce total recordable rate of 0.12 was more than 25 times better than the U.S. manufacturing average. Last year, our strong cash flow generation allowed us to invest $1.9 billion back into the business, returned $1.6 billion to shareholders, and paid down $1.5 billion of debt.

The 2022 capital program of $1.9 billion reflects our commitment to capital discipline. Approximately 45% of our growth capital this year will support lower carbon opportunities, including Rodeo Renewed. As cash flow improves further, we'll prioritize shareholder returns and debt repayment. In October, we increased the quarterly dividend to $0.92 per share.

We remain committed to a secure, competitive, and growing dividend. We'd like to resume share repurchases this year and on our path toward getting back to pre-COVID debt levels over the next couple of years. We're taking steps to position Phillips 66 for the long-term competitiveness. Across our businesses, we're assessing opportunities for permanent cost reductions.

Mark and Kevin are leading this initiative and will provide additional details on the first quarter call in April. We're committed to a lower carbon future while continuing to deliver our vision of providing energy and improving lives around the globe. We announced targets to reduce greenhouse gas emissions intensity last year. By 2030, we plan to reduce Scope 1 and Scope 2 emissions by 30% and Scope 3 emissions by 15% compared to 2019 levels.

So with that, I'll turn the call over to Mark to provide some more details.

Mark Lashier -- President and Chief Operating Officer

Thanks, Greg. Good morning, everyone. In the fourth quarter, we had strong earnings from midstream, chemicals, and marketing and specialties, and we saw a continued recovery in refining profitability. We made progress advancing our growth projects as well as taking strategic actions to position Phillips 66 for the future.

In midstream, we began commercial operations of Phillips 66 Partners' C2G Pipeline. At the Sweeny Hub, construction of Frac 4 is 50% complete, and we expect to begin operations in the fourth quarter of this year. CPChem is investing in a portfolio of high-return projects, growing its asset base as well as optimizing its existing operations. This includes growing its normal alpha-olefins business with a second world-scale unit to produce 1-Hexyne, a critical component in high-performance polyethylene.

CPChem is also expanding its propylene splitting capacity by 1 billion pounds per year with a new unit located at its Cedar Bayou facility. Both projects are expected to start up in 2023. CPChem continues to develop two world-scale petrochemical facilities on the U.S. Gulf Coast and in Ras Laffan, Qatar.

In addition, CPChem completed its first commercial sales of Marlex Anew Circular Polyethylene, which uses advanced recycling technology to convert difficult-to-recycle plastic waste into high-quality raw materials. CPChem has successfully processed pyrolysis oil in a certified commercial scale trial and is targeting annual production of 1 billion pounds of circular polyethylene by 2030. During the year, we began renewable diesel production at the San Francisco refinery and continued to progress Rodeo Renewed, which is expected to be completed in early 2024, subject to permitting and approvals. Upon completion, Rodeo will initially have over 50,000 barrels per day of renewable fuel production capacity.

The conversion will reduce emissions from the facility and produce lower carbon transportation fuels. In marketing, we acquired a commercial fleet fueling business in California, providing further placement opportunities for Rodeo renewable diesel production to end use customers. Additionally, our retail marketing joint venture in the Central region acquired 85 sites in December, bringing the total to approximately 200 sites acquired in 2021. These sites support long-term product placement and extend our participation in the retail value chain.

Our Emerging Energy Group is advancing opportunities in renewable fuels, batteries, carbon capture, and hydrogen. We recently signed a technical development agreement with NOVONIX to accelerate the development of next-generation materials for the U.S. battery supply chain. We own a 16% stake in the company, extending our presence in the battery value chain.

In December, we entered into a multiyear agreement with British Airways to supply sustainable aviation fuel produced by our Humber Refinery beginning this year. For 2022, we'll execute our strategy with a focus on operating excellence and cost management. We will do our part to advance the lower carbon future while maintaining disciplined capital allocation and an emphasis on returns. Now I'll turn the call over to Kevin to review the financial results.

Kevin Mitchell -- Executive Vice President and Chief Financial Officer

Thank you, Mark, and hello, everyone. Starting with an overview on Slide 4, we summarize our financial results for the year. Adjusted earnings were $2.5 billion or $5.70 per share. We generated $6 billion of operating cash flow or $3.9 billion excluding working capital.

These results reflect our highest annual earnings for the midstream, chemicals, and marketing and specialty segments. Cash distributions from equity affiliates totaled $3 billion, including a record $1.6 billion from CPChem. We ended 2021 with a net debt-to-capital ratio of 34%. Our adjusted after-tax return on capital employed for the year was 9%.

Slide 5 shows the change in cash during the year. We started the year with $2.5 billion in cash. Cash from operations was $6 billion. This included a working capital benefit of $2.1 billion, mainly due to the receipt of tax refunds as well as the impact of rising prices on our net payable position.

During the year, we paid down $1.5 billion of debt. In November, both S&P and Moody's revised their outlooks from negative to stable. We are committed to further deleveraging as we continue to prioritize our strong investment-grade credit ratings. We funded $1.9 billion of capital spending and returned $1.6 billion to shareholders through dividends.

Our ending cash balance increased to $3.1 billion. Slide 6 summarizes our fourth quarter results. Adjusted earnings were $1.3 billion or $2.94 per share. We generated operating cash flow of $1.8 billion, including a working capital benefit of $412 million and cash distributions from equity affiliates of $757 million.

Capital spending for the quarter was $597 million. $265 million was for growth projects, which included approximately $100 million for retail investments in the marketing business. We paid $403 million in dividends. Moving to Slide 7.

This slide highlights the change in adjusted results from the third quarter to the fourth quarter, a decrease of $105 million. Our adjusted effective income tax rate was 20% for the fourth quarter. Slide 8 shows our midstream results. Fourth quarter adjusted pre-tax income was $668 million, an increase of $26 million from the previous quarter.

Transportation contributed adjusted pre-tax income of $273 million, up $90 million from the prior quarter. The increase mainly reflects the recognition of deferred revenue. NGL and other adjusted pre-tax income was $284 million, compared with $357 million in the third quarter. The decrease was primarily due to lower unrealized investment gains related to NOVONIX, partially offset by higher volumes at Sweeny Hub and favorable inventory impacts.

Our investment in NOVONIX is marked to market at the end of each reporting period. The total value of the investment, including foreign exchange impacts, increased $146 million in the fourth quarter, compared to an increase of $224 million in the third quarter. The fractionators at the Sweeny Hub averaged a record 417,000 barrels per day, and the Freeport LPG export facility loaded a record 45 cargoes in the fourth quarter. DCP midstream adjusted pre-tax income of $111 million was up $80 million from the previous quarter, mainly due to favorable hedging impacts in the fourth quarter compared to negative hedge results in the third quarter.

The actual hedge benefit recognized in the fourth quarter amounts to approximately $50 million. Turning to chemicals on Slide 9. Chemicals' fourth quarter adjusted pre-tax income of $424 million was down $210 million from the third quarter. Olefins and polyolefins adjusted pre-tax income was $405 million.

The $208 million decrease from the previous quarter was primarily due to lower polyethylene margins, reduced sales volumes, as well as increased utility costs. Global O&P utilization was 97% for the quarter. Adjusted pre-tax income for SA&S was $37 million, compared with $36 million in the third quarter. During the fourth quarter, we received $479 million in cash distributions from CPChem.

Turning to refining on Slide 10. Refining fourth quarter adjusted pre-tax income was $404 million, an improvement of $220 million from the third quarter, driven by higher realized margins and improved volumes. This was partially offset by higher costs. Realized margins for the quarter increased by 35% to $11.60 per barrel.

Impacts from lower market crack spreads were more than offset by lower RIN costs from a reduction in our estimated 2021 compliance year obligation and lower RIN prices. In addition, we had favorable inventory impacts and improved clean product differentials. Refining adjusted results reflect approximately $230 million related to the EPA's proposed reduction of the RVO, of which about 75% applies to the first three quarters of the year. Pretax turnaround costs were $106 million, up from $81 million in the prior quarter.

Crude utilization was 90% in the fourth quarter and clean product yield was 86%. Slide 11 covers market capture. The 3:2:1 market crack for the fourth quarter was $17.93 per barrel, compared to $19.44 per barrel in the third quarter. Realized margin was $11.60 per barrel and resulted in an overall market capture of 65%.

Market capture in the previous quarter was 44%. Market capture is impacted by the configuration of our refineries. Our refineries are more heavily weighted toward distillate production than the market indicator. During the quarter, the distillate crack increased $3.10 per barrel, and the gasoline crack decreased $3.76 per barrel.

Losses from secondary products of $1.88 per barrel improved $0.10 per barrel from the previous quarter due to increased butane blending into gasoline. Our feedstock advantage of $0.18 per barrel improved by $0.17 per barrel from the prior quarter. The Other category reduced realized margins by $2.02 per barrel. This category includes RINs, freight costs, clean product realizations, and inventory impacts.

Moving to marketing and specialties on Slide 12. Adjusted fourth quarter pre-tax income was $499 million, compared with $547 million in the prior quarter. Marketing and Other decreased $52 million from the prior quarter. This was primarily due to lower marketing fuel margins and volumes as well as higher costs.

Specialties generated fourth quarter adjusted pre-tax income of $97 million, up from $93 million in the prior quarter. On Slide 13, the corporate and other segment had adjusted pre-tax costs of $245 million, an increase of $15 million from the prior quarter. This was primarily due to higher employee-related costs and net interest expense. Slide 14 shows the change in cash during the fourth quarter.

We had another strong quarter for cash. This is the third consecutive quarter that our operating cash flow enabled us to return cash to shareholders, invest in the business, pay down debt while increasing our cash balance. 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 high 80s and pre-tax turnaround expenses to be between 120 and $150 million. We anticipate first quarter corporate and other costs to come in between 230 and $250 million pre-tax. For 2022, we plan full year turnaround expenses to be between 800 and $900 million pre-tax.

We expect corporate and other costs to be in the range of 900 to $950 million pre-tax for the year. We anticipate full year D&A of about $1.4 billion. And finally, we expect the effective income tax rate to be in the 20 to 25% range. Now we will open the line for questions.

Questions & Answers:


Operator

Thank you. [Operator instructions]. Your first question will come from Neil Mehta with Goldman Sachs. Please go ahead.

Neil Mehta -- Goldman Sachs -- Analyst

Good morning, team. Greg and Kevin, first question for you on how you're thinking about normalized cash flow. If I look at the back half of 2021, ex working capital, you put up almost $3 billion of cash flow, so annualized, close to $6 billion. I think a lot of us use 5 to $6 billion as sort of that normalized cash flow range.

But Greg, you've been clear that you think it's kind of closer to 6 to 7 billion. And so just your thoughts on whether that's still how you're thinking about mid-cycle. And the underlying buildup to that 6 to 7 billion, if you can kind of walk through the world of your different segments of how you get there would be great.

Greg Garland -- Chairman and Chief Executive Officer

I'll be happy to do that. I mean, I don't think we really changed from our view of 6 to 7 billion. Of course, it's nice to see $6 billion of cash last year. It just happened to occur in different buckets that you might expect from a traditional mid-cycle.

So I think we've been signaling in the last couple of months, we're pretty constructive on the refining business coming into 2022. And if you think about the rest of the businesses, they've actually performed at or better than mid-cycle all through the pandemic in '20 and into '21. We remain pretty constructive on those businesses coming into '22 at all. So really, for us, the wildcard has really been refining.

And when has refining recovered back to something approaching a mid-cycle? But just to remember how it all builds up on an EBITDA basis, kind of 4-ish billion in refining, kind of 2 billion in midstream, 2 billion in chemicals and 1.5, 1.6 billion in marketing and specialties, it pushes you to something like 9-ish billion of EBITDA, which translates to 6 to 7 billion of cash. And so I think we're pretty comfortable that we're kind of still in that range. Obviously, we've had some outperformance. I mean, CPChem had a blowout year last year, all driven by great operations, fundamentally good control of their costs and then super margins.

Our marketing and specialties businesses, which we typically would say is a 1.5, 1.6 billion business was $2 billion. And of course, we've been investing in adding retail our joint ventures. But I think it's really great execution on the operations side, particularly in the U.S. but also in our European operations, where we saw good volumes, good margins across that.

And so I would say that we're probably on the upside of that. So given 6 to 7 billion of cash flow, our first dollar is always going to go to sustaining capital, that's $1 billion. Dividend is 1.6 billion, and then that leaves room for us. We can signal that the capital budget is going to be 2 billion or less, so we're 1.9 billion for this year.

That's a deliberate signaling that for this year or next year, we're going to be very constrained on capital. That frees us up to pursue some debt repayment and get back to share repurchases while doing a little bit of growth. And so I think we make that all balance as we think about that. Now Kevin or Jeff, if you want to add to that, please step in or more --

Kevin Mitchell -- Executive Vice President and Chief Financial Officer

No, I mean, you covered it all.

Neil Mehta -- Goldman Sachs -- Analyst

Thanks, Greg. And that's -- the logical follow-up for me, which is how you're thinking about share repurchases. Again, the focus has been to get the debt level lower. Looks like the ratings agencies are giving you the all-clear, at least that things are moving in the right direction.

So what are the gating factors for you to begin a share repurchase program? And how do you think about sizing it?

Greg Garland -- Chairman and Chief Executive Officer

Well, we've always said the gating factor is getting cash flows back to something approaching a mid-cycle and making a dent in the debt repayment. So I think coming into April, we're going to pay another 1.5 billion-ish of debt off in April as it comes due. So that's three of the 4 billion. We've made a big dent in that.

So I think that kind of post April, that's why I said that I would be disappointed if by midyear, we're not back in a share repurchase mode at our company.

Neil Mehta -- Goldman Sachs -- Analyst

Perfect. Thanks, Greg.

Operator

The next question will come from Phil Gresh with J.P. Morgan. Please go ahead.

Phil Gresh -- J.P. Morgan -- Analyst

Yes. Hello. My first question, just on one of the guidance items here on the refining maintenance, 800 to 900 million. Just looking back, it looks like it's the highest in the history of the company.

And I was just curious, I mean, is there anything unique we should be thinking about there? I didn't think 2020 or 2021 were too far below the historical norms. And then I guess bigger picture, when I think about your maintenance and what others have said, it seems like the industry might be kind of capped in terms of what utilization can be this year. So is this an environment where we're just going to see margins get pressured higher to keep up with demand?

Greg Garland -- Chairman and Chief Executive Officer

So let me just take a high level and then I'll let Bob come in and talk about it since it's his business. But if you look '12 through '19, we kind of averaged about 5 billion in a quarter in terms of total turnaround expense. And there's -- we did push some of '20 and '21 into 2022. I think probably a lot of the people did that in the industry as we were trying to conserve cash and protecting the balance sheet.

So it's a big number, Phil, there's no question. But I'll let Bob speak to the specifics and what we're doing there.

Bob Herman -- Executive Vice President, Refining

Yes. I think Greg hit on it pretty good. The last couple of years were going to be lower turnaround years anyway with this 2022 always going to be a bit of a larger turnaround. We've got two refineries, both Ferndale and Billings that when they take their turnaround, their entire facility turnaround, they're coming to see -- you kind of got to go back five years to find them in the cycle.

So that causes a little bit of lumpiness in it. And then to your second question, I really -- we would agree that a lot of people managed their turnarounds and maintenance work out of '20 and '21. Some of that's running the lower utilizations. We made our catalyst in the hydrotreaters and hydrocrackers last longer so we were able to stretch those runs.

We put a lot of work into making sure we could do it from a mechanical integrity standpoint. But now those things are coming due, right? You can't do that forever. And for us this year, it's a pretty heavy lift across the system, and I suspect we're not the only ones that are going to see that.

Phil Gresh -- J.P. Morgan -- Analyst

OK. Great. Thanks for that color. Just one more on the refining business.

Needle coke is a unique business to Phillips 66 versus the other refiners. I was curious, it's a bit of an opaque market, but could you talk about what you're seeing in the fundamentals of that business, kind of how it finished out 2021 and how you see it progressing in 2022 and beyond? Thanks.

Bob Herman -- Executive Vice President, Refining

Sure. So as you may know, needle coke is used to make graphite electrodes, which in turn, is used production of steel, electric arc furnaces, which are actually a cleaner technology than blast furnaces, and we use needle coke also to make anode lithium-ion batteries. The past two years, we've seen a weaker needle coke market with steel producers running off high inventories. But we do see some slow strengthening end of this year, last year and this year as well.

If you listen to steel production, which is a leading indicator, they had a record year last year, even as needle coke markets lagged because of the high inventories. The market seems to have mixed opinions about steel production this year. Some steel producers think it will continue to increase, some think it'll come off. Either way, we've seen good demand from both steel producers and anode producers, and we expect that market to continue to gradually increase.

We think with the refinery utilization coming back up and lower graphite electrodes, that it will be a slightly strengthening market.

Phil Gresh -- J.P. Morgan -- Analyst

Great. Thank you.

Operator

The next question will come from Roger Read with Wells Fargo. Please go ahead.

Roger Read -- Wells Fargo Securities -- Analyst

Thank you, and good morning.

Greg Garland -- Chairman and Chief Executive Officer

Good morning, Roger.

Roger Read -- Wells Fargo Securities -- Analyst

I'd like to start off kind of on your comments about the -- getting back to share repos. Maybe what are some of the markers you'd want to see? And kind of tagging on with Phil's question about maybe a little higher spending on the turnaround side. Is there a timing issue with those turnarounds where you'd want to get past a certain level? Or is it bigger picture on the balance sheet for -- and overall cash flows when you'll feel comfortable?

Greg Garland -- Chairman and Chief Executive Officer

Yes. Well, I think we're kind of back to the question on refining and when does refining get to mid-cycle type cracks? I mean, in 4Q, we're $11.60 realized crack. So I mean, that's the highest quarterly crack that we've seen in refining since the fourth quarter of 2018. So there are some things that are in that number, obviously.

But as we look coming into 2022, where constructive supply and demand, there's been a lot of supply that's come off the market. We think there's new supply coming on but it's going to be staged. It's not all going to hit when people think it's going to hit because it always takes longer for it to come on. So from that standpoint, we're constructive on the demand side.

What we see with each successive wave of COVID, the impacts to demand are less and less. And so I'm not sure when that moment in time as we transition from pandemic to endemic but that could happen next year. But regardless, we see the demand impacts less and less from each successive wave of COVID. Prior to the current variant, we were seeing gasoline demand kind of back at 2019 levels.

There's disciplined demand above 2019 levels. Jet was recovering nicely. So as we move into 2022, we're constructive around the demand side. We talked about the turnaround activity and what impact that could have ultimately on utilizations.

And so we just see everything balancing out toward -- we get back toward more of a mid-cycle crack in refining. And so once we get refining there, I think we feel pretty comfortable that we're going to have sufficient cash flow, cover our sustaining capital, our dividend, pay down some debt, get back share repurchases and fund the growth program that we have this year, which is about $900 million in growth. Kevin, if you want to add anything to that.

Kevin Mitchell -- Executive Vice President and Chief Financial Officer

No, I think that's very complete. Just in terms of the debt paydown detail, we have a $450 million term loan maturity in April. We have $1 billion notes maturing in April. And we intend to take care of both of those at maturity.

And then what happens after that, we just have flexibility. We still have other callable debt available if we need to. But we'll -- with that taken care of and if cash flows back at mid-cycle levels, we would have a lot of flexibility.

Greg Garland -- Chairman and Chief Executive Officer

I think we paid 3 billion of the 4 billion that we borrowed during 2020 down. I think that demonstrates our commitment to paying down debt and returning the balance sheet over a couple of year periods to something that resembles kind of pre-COVID levels of, say, 12 billion on a consolidated basis. So I think we're pretty comfortable in that construct, Roger.

Roger Read -- Wells Fargo Securities -- Analyst

OK. Appreciate it. Other question I had, sort of the unrelated follow-up. As you look at setting everything up on the renewable diesel side, any progress or increased comfort level in terms of the feedstock side of that? I mean, that seems to be one of the biggest questions we get coming in is what is our comfort level that each of the companies will be able to supply what you need to maintain a healthy margin in that business and the returns that you're targeting.

Brian Mandell -- Executive Vice President, Marketing and Commercial

Roger, it's Brian. We don't see any issue with the feedstock availability, although it may be challenging for those that maybe are less commercial, have less logistics experience. We think between increased acreage and yield, switching from biodiesel, better aggregation of used cooking oil, we'll have plenty of feedstock to produce renewable diesel. Prices may vary over time and that's to be expected.

At Rodeo, we're on the water so we have access to both domestic and foreign feedstock. And we also sit on the U.S.'s greatest demand center, California, so feel good there. Our commercial organization has been working on feedstock for quite a while. We have offices around the world.

We have storage in Asia and Europe and in the U.S. We have good relationships with vegetable oil producers. You heard our announcement in our investment in Shell Rock Soy Processing. We purchased for the start-up of Rodeo, we purchased soybean oil, canola oil, distilled corn oil since last April.

We have strong relationships with tallow producers and aggregators of used cooking oil. In fact, with used cooking oil, we've been in that market for over four years supplying Humber used cooking oil from around the world, currently 12 different countries. So I think Rodeo Renewed will have a maximum optionality in its system, and then we'll use a linear program to decide what the best and most cost-effective feedstock is based on not just CI but price, credit generation to the sales market and logistics.

Roger Read -- Wells Fargo Securities -- Analyst

It sounds like something for an MLP there. All right. Thank you.

Operator

The next question will come from Ryan Todd with Piper Sandler. Please go ahead.

Ryan Todd -- Piper Sandler -- Analyst

Maybe one on European refining. As a refiner with some exposure to European refining, can you talk about the impact of high nat gas prices that you're seeing on refining economics over there and in a broader sense, in that part of the world? Do you expect high nat gas prices to impact European utilization rates to the benefit of U.S. refiners this year?

Bob Herman -- Executive Vice President, Refining

Yes, this is Bob. I think that's absolutely right. We look at what goes on in our operations, and we've got a very complex and strong refinery over there and the impact of high natural gas prices on us. And then we translate that to some of the simpler refineries in Central Europe.

It's got to be really tough for them to be making money right now, and I'm sure we're going to see that. We know that clean product yield out of a bunch of those refineries is down because they're not buying hydrogen or buying natural gas to make hydrogen to hydrotreat because we see the high sulfur stuff showing up in the market, which is somewhat good for us. It's putting pressure on the sour crudes, which will be good for us in the long term. So I think high natural gas prices are going to continue for a while in Europe, and it is really going to strain kind of that bottom quartile of refiners that are left.

Greg Garland -- Chairman and Chief Executive Officer

As Bob pointed out, if the Europeans are running more sweet crude, it kind of widens that sour-sweet dip, which is beneficial to us. The utilization comes off on those refineries because they can't afford to run. That's good for the U.S. as well because we'll be able to export products to Europe, so it'd be good for our businesses as well.

Ryan Todd -- Piper Sandler -- Analyst

Great. Thanks. And then maybe a follow-up on the last question before this. I mean, you now have a couple of quarters under your belt producing renewables you sold there in California at a pretty decent level.

I mean, can you talk about what you've learned from your operations, both in product placement as well as feedstock acquisition there as you think about preparation for the -- for kind of the full project completion later on? And then as we've seen feedstock spreads narrow in the back half of the year and headline HOBO spreads have improved, any comment on what you've seen in the profitability of your production there?

Greg Garland -- Chairman and Chief Executive Officer

Well, the profitability between Q3 and Q4 has strengthened. There's a lot of things to think about. When you're thinking about the renewable diesel margins, you have to think about feedstock, the renewable diesel price, the credits. You have to think about logistics.

So there's a lot of pieces to it. We'll have a linear program for renewables as well. The key to renewable production is finding as many feedstocks, as many suppliers as you can and having the logistics to get it to the plant, which is what we've been working on. We've set up a global organization to do that and we're working hard.

In renewable diesel, the key for us is getting the renewable diesel to the end user. That's the key. We keep more of the margin that way. So in part, our purchase of our commercial fleet fueling business was enabled that to -- for us to get some of that product to end users.

You'll continue to see those type of things. We've taken all the stores in California that we have, and we've converted those to renewable diesel as well. So we're going to have as much renewable diesel as we can to the end user, and we're going to have as bog a feedstock slate as we can for the plant and we'll optimize through our linear program.

Bob Herman -- Executive Vice President, Refining

I might add to that, that being able to operate 250 out there on renewable feedstocks instead of hydrocarbon-based feedstocks has really given us a good opportunity to -- for the operators and staff to learn because it is very different, and it runs different than there are different characteristics to handling it and getting it in the unit and dealing with it. So it's been a great warm-up for us for the Rodeo Renewed project that's yet to come and just, I think, raises our confidence level in our ability to be able to run really hard right out of the gate with that unit.

Greg Garland -- Chairman and Chief Executive Officer

You want to talk about the pathways, the CI approval, etc.?

Bob Herman -- Executive Vice President, Refining

Yes. So we started up the unit after the last turnaround on basically clean soybean oil. And since, and since Brian mentioned it earlier, we've been able to establish pathways. So in California, you run new feedstocks, you get a provisional CI number for them and then you have to go through, I'd say, a pretty lengthy bureaucratic process to qualify your other feedstocks.

So since we've done that, we've been able to qualify not only the soybean oil but the distiller's corn oil, we're working on. We've got a pathway on canola oil. I think that's but that process will keep repeating itself as we find more and more feedstocks ahead of Rodeo Renewed coming up in '24 or early '24, that really allow us to take advantage of the lower CI material right away.

Greg Garland -- Chairman and Chief Executive Officer

It's just another key learning is how you get through that process and navigate that process in California.

Bob Herman -- Executive Vice President, Refining

Like everything else, you get better at it the second time.

Ryan Todd -- Piper Sandler -- Analyst

Perfect. Thanks, guys.

Operator

The next question will come from Doug Leggate with Bank of America. Please go ahead.

Doug Leggate -- Bank of America Merrill Lynch -- Analyst

Thanks, fellows. I've got two questions that I hope can add some color for everybody. I guess my first one, Kevin, is on the balance sheet. I was looking back at your share price, it seems like a horrible memory now but your share price pretty much got cut in half twice last -- during the 2020 period.

And obviously, you did not buy back stock when that happened, given the circumstances. So my question is why carry $10 billion of net debt rather than work the balance sheet down to a level where we know these corrections are going to happen occasionally in this business to allow you to take advantage of that? What was the philosophy behind the buybacks in the recovery versus building the balance sheet during the recovery and buying back during corrections?

Kevin Mitchell -- Executive Vice President and Chief Financial Officer

Yes, Doug, I think it's really a -- it is a bit of a balancing, trying to meet multiple priorities. So we think about an optimum capital structure in terms of cost of capital, right? So too little debt is increasing cost of capital, and so you've got that component to it. We've got other opportunities that we want to be able to fund. And bear in mind also that as we are growing the business and we're seeing that in the non-refining segments, as we're growing the business, we are actually -- we're effectively strengthening our overall financial condition because on a debt-to-EBITDA basis, we're continuing to improve from that standpoint.

And obviously, we don't like the fact that we weren't buying shares at $40, but that was -- we were not in a position to do so and so we had to just accept that. And so it's really around finding that optimum capital structure that will give us sufficient flexibility through the cycle, albeit you've always got more flexibility. The lower the debt balance, obviously, that provides added flexibility. But at what cost is that? And so it's having the optimum structure to where we've got adequate flexibility, we can be -- stick with our sort of capital allocation framework, so 60% reinvestment in the business, 40% cash returns to shareholders between the dividend and buybacks over an extended time period, recognizing that year over year, that will fluctuate.

So it's really just trying to balance through all of that. I'm not sure of going too much further down on debt than our sort of stated objectives is going to buy us a whole lot in that context. So I still feel pretty good with how we're laying out our objectives.

Doug Leggate -- Bank of America Merrill Lynch -- Analyst

I appreciate the answer. I guess it's more of a net debt question because obviously, it's -- 2020 hindsight is perfect but it kind of gets back to this. I wonder if COVID has reset everybody's view of what volatility looks like. So -- but I appreciate the answer.

My follow-up is something I really value from you guys periodically is your view on the net capacity outlook. And I guess my question is, are we getting to a point now where the mid-cycle refining outlook has been reset higher, much like it did in the mid-2000s? I don't want to say golden age but something of that nature. And here's my point, gas prices are up. That's probably structural for international players.

Net additions disclosures like demand with IMO. I'm just wondering, are you guys thinking along those lines? How do you see the net additions, past additions and subtractions in terms of impacting that mid-cycle view?

Jeff Dietert -- Vice President, Investor Relations

Yes, Doug, I think we've seen a total of about 4.5 million barrels a day of refining rationalization that's been announced and much of that has already occurred. When you look at last year, it was the first year in at least 30 years where there was more capacity rationalized out of the global fleet than there was capacity added. And so we are seeing that benefit. As we look forward, there's still pressure with higher natural gas prices in Europe on that -- those units' profitability.

So we see that continuing to occur. We've also seen COVID delays, challenges getting labor in to execute new capacity additions so they're getting spread out. We've seen a reduction of capital spending and concerns over energy transition. So it's definitely impacting the supply side of the equation.

And we are seeing demand come back. As Greg mentioned, gasoline was above '19 levels before this recent COVID hit, diesel comfortably above. Jet's been coming back aggressively. And so we think jet demand by late this year could be back at '19 levels as well.

So the demand's still in the system and the supply is more constrained than what we have seen historically.

Operator

The next question is from Theresa Chen with Barclays. Please go ahead.

Theresa Chen -- Barclays -- Analyst

Thanks for taking my questions. First, Kevin, I just wanted to follow up on your comment about the adjustments from the lower RVO for 2021 out of the refining results. So just to be clear, the 404 of adjusted EBT, did that include the 230?

Kevin Mitchell -- Executive Vice President and Chief Financial Officer

Yes, it does, Theresa. So the 404 includes the 230. It applies to the full year. And so if you think about what my additional comment was, if you think about that in terms of the quarter, as you could say, three-quarters of that 230 would apply to the first three-quarters of the year and if you're doing any kind of normalization around that.

Theresa Chen -- Barclays -- Analyst

OK. So -- but you presumably do not get that revaluation over and over again. So the clean number for the quarter would be 174?

Kevin Mitchell -- Executive Vice President and Chief Financial Officer

If you -- yes, if you back out the full 230, yes.

Theresa Chen -- Barclays -- Analyst

OK. Great. Thank you. And then I also wanted to follow up on one of Brian's comments about the fuel fleet that you bought in California as you seek to place barrels to the end user for all of your renewable diesel production.

Is this something that you expect to grow in terms of your footprint and the vertical integration as incremental renewable diesel will hit the state over time to insulate your position there? Or is it something that you were thinking of doing all along? Would love to understand your strategy more here.

Greg Garland -- Chairman and Chief Executive Officer

Yes. Theresa, that's exactly right. Our goal is to be able, at some point, to get the entire 50,000 barrels of diesel that we make to the end user. That may not be possible but we'll see.

We may export some of that depending on markets, but this is just one step. As I said, we upgraded all the stores to renewable diesel. We're looking at a lot of different opportunities to also get diesel to the end user. But the goal is to get it to the end user that way, we keep all of the margin and we think that's the best bet.

Theresa Chen -- Barclays -- Analyst

Thank you so much.

Operator

The next question is from Manav Gupta with Credit Suisse. Please go ahead.

Manav Gupta -- Credit Suisse -- Analyst

This is a question which we get a lot of investors so don't shoot the messenger. Your partner has gone ahead and made a statement that they don't really want to be in the business of JV refining. You have a very profitable JV, which has worked very well for you over the years, and that has resulted in a lot of speculation. If you keep one refinery, they keep one, they sell you both, you sell them both.

There are multiple scenarios here or just keep the status quo, if you could comment a little on that situation?

Greg Garland -- Chairman and Chief Executive Officer

Take that, Bob. You've been shooting.

Bob Herman -- Executive Vice President, Refining

Also, I'd tell you is we continue to work really well with our partner on our joint venture, WRB, for Wood River and Borger. And as you pointed out, it's been a very good partnership since 2007, stood the test of time. They seem to like us as an operator. They've been a great partner to work with and give us good insights on things.

And their world has changed. But for now, we continue to work together to run WRB and invest in those two facilities as needed to extract more value out of both of them.

Manav Gupta -- Credit Suisse -- Analyst

Perfect. And my follow-up quick question is when you look at the segments here, the Gulf Coast operating cost was a little higher and so was the DD&A. I'm assuming these are just like one times and as the refinery closes, your op costs will actually trend down sequentially, not up and so for the DD&A. If you could just comment on that one times, I mean, they look like one times from the alliance on the Gulf Coast results.

Bob Herman -- Executive Vice President, Refining

Yes, you're exactly right. There's a lot of noise in 4Q, and it is -- there are -- we still have all the people in the fourth quarter because we worked through redeploying some and all that. So we had costs in the fourth quarter and obviously, no volume to go with it. So we'll see those costs trend off very quickly in the first quarter.

On a dollar per basis -- barrel basis in the Gulf Coast, all our refineries are on base costs. Ex turnarounds are about the same cost per barrel so you won't see a big change in our -- in that metric. But the absolute cost -- controllable cost in the Gulf Coast will go down.

Kevin Mitchell -- Executive Vice President and Chief Financial Officer

Manav, it's Kevin. Just on the D&A, we did, as you suspected, associated with the alliance conversion, we impaired some assets that flows through the D&A line. So that is onetime in nature.

Manav Gupta -- Credit Suisse -- Analyst

Thank you so much for taking my questions, and great work.

Operator

The next question will come from Paul Cheng with Scotiabank. Please go ahead.

Paul Cheng -- Scotiabank -- Analyst

Hey, guys. Good morning. Two questions for you. I think the first one is for Kevin.

I think in your prepared remarks, you talked about an inventory panic in NGL and also the refining that helped the quarter. Can you quantify how big are those number? And also, I believe that the third tax deferred revenue you recognized in the transportation, if you can quantify that also. Maybe that -- after that, then I ask the second question.

Greg Garland -- Chairman and Chief Executive Officer

Yes, Paul. On the deferred revenue, it's basically the variance quarter over quarter equates to the deferred revenue essentially, so that is the way to think about it. But I would say with deferred revenue, that is not -- I don't think of that as a sort of onetime item because the nature of those contracts on the pipelines, we're either going to get the volumes and the revenues recognized as we get the volumes, or if there's a short fall in volumes, recognized as you get the volumes or if there's a shortfall in volumes, we still collect the cash and then there's either makeup rights or ultimately, they close out, and we then recognize the deferred revenue. So that's a phenomenon that you see going period to period.

So it's not a -- I don't think of it as a true onetime item. We had inventory impacts, both in the midstream and in refining, but we have inventory impacts every period. And that's not something we typically quantify unless it was excessively large in terms of the impact. So we typically don't quantify those.

Paul Cheng -- Scotiabank -- Analyst

OK. That's fine. And can you tell us that at least that in refining, which region is the inventory impact?

Greg Garland -- Chairman and Chief Executive Officer

No. It's going to show up across all areas.

Paul Cheng -- Scotiabank -- Analyst

OK. The second question, Greg, just I think before the pandemic, I think in the past that you're sort of looking at long-term capex in the range of two and a half to 3 billion kind of range, that talking about 1 to $2 billion of the -- maybe the growth capex. Since then, of course, that the outlook for the investment opportunity in the midstream has changed, so you're probably not going to spend that much money. So once that your debt is back to a comfortable level and you start to be more in the growth phase, what is the capital allocation we should look at on the longer-term basis? And also maybe on a side question, on DCP.

Is there any way to restructure that structure, I mean, you say 35, $40 million a quarter associated -- it seems like, yes, not causing you a problem, but you're also not adding a lot value. I mean does it really fit it into a long-term portfolio for you?

Greg Garland -- Chairman and Chief Executive Officer

OK. Paul, I think you're up to five questions now, but I'll try my best to start. At least I'll answer the ones I want to, how about that? So first of all, we -- I mean, historically, we've used 1.5 billion to 2.5 billion is growth capex. So I think that for many reasons, pandemic, one of them, the need to be structured around debt repayment and get back to share repurchases, we purposely signaled total capex budgets of 2 billion or less for this year and kind of next year.

We'll see what happens going forward. But I do think we want to get the balance sheet back to something over the next two years, approaching pre-COVID, so call it, 12 billion. I want to get back to share repurchases. I mean, we've been out of share repurchases, and it's time to step back into those.

And so I think for all the right reasons, we want to keep capital constrained across the portfolio over the next couple of years. And to your point, certainly, midstream, we just don't think those investable opportunities that will hit our return hurdles are going to be there in the next two years in the midstream business. And we'll see where renewables goes and where renewables takes us. But right now, the biggest project in front of us is Rodeo Renewed, a circa $850 million project.

So I mean, that in itself is almost a mega project by any standards. So I think there's still big things going on around the portfolio in terms of growth, and then you add on CPChem and the two mega projects they're looking at. So there are certainly lots of growth still around the portfolio, allows us to be very structured about how we think about capital allocation. But to your point, the whole idea is to free up more cash for debt repayment and getting back into share repurchases.

Kevin, if you want to take DCP, I'll let you take it.

Kevin Mitchell -- Executive Vice President and Chief Financial Officer

Thanks. So, Paul, I mean, you're right that with DCP, we're looking at -- you take out all the hedging noise, you're probably at 50, $60 million per quarter of earnings generation and a pretty consistent distribution that comes along with that. While you could say we're structurally challenged, it's been a JV we've had in place for over 20 years. It's been a very successful JV.

The ownership has changed with -- as the owners -- with the M&A type activity over that time period. But nonetheless, it has continued to be successful for us. It does give us some nice integration through our own midstream business. So DCP volumes, we jointly own the Southern Hills pipelines with DCP and NGL volumes through that system come into Sweeny and into our fracs.

And so we have the benefit of that integration. So while a different structure might be a more efficient way of looking at that business, it's not something that we have to get done. There's nothing compelling that tells us we must have a different solution. When the reality is you get into these kind of arrangements that have been in place for a long period of time, it can be pretty hard to exit for any party when you look at the tax considerations and all of that.

So it's a little bit like the Cenovus question earlier. We actually feel that the JV has been very successful. It does what we want it to do and we'll take it from there. We're always open to alternatives as we are with most of our portfolio but it's continued to work well for us.

Operator

The next question is from Matthew Blair with Tudor, Pickering, Holt. Please go ahead.

Matthew Blair -- Tudor, Pickering, Holt and Company -- Analyst

Good morning. Could you shed some more light on this British Airways SAS deal? How should we think about the economic impact to PSX here? Is it like a take-or-pay arrangement or maybe something else? And then also, why do you think we're seeing these offtake deals in SAS but not really in RD?

Mark Lashier -- President and Chief Operating Officer

So I'll take the shot at the first one. So the Humber Refinery entered into this deal to supply sustainable aviation fuel to British Airways. It's a small volume. We don't run a lot of renewable feedstock at Humber yet.

We're working on a lot of things in Humber to reduce the carbon intensity of the fuels that come from that plant. So we entered into this with British Airways, really to get the partnership going and to understand their needs and they can understand what we can do. And we can grow this business over time and be a good supplier. We're a supplier to British Airways anyway, so this just kind of extends our reach there.

So it's not large and material yet but it really signals that in Europe, with British Airways, that we're going to expand that business as we expand our ability to run used cooking oils and other renewable feedstocks in Humber.

Jeff Dietert -- Vice President, Investor Relations

Yes. I think that maybe -- and, Mark, if you want to add on to this. But if you think about Humber, and even once we get Rodeo Renewed, there's going to be sustainable aviation fuel. And I think the challenge for us is how do we think about that yield and how we push that yield structure to make more sustainable aviation fuel in the future.

Mark Lashier -- President and Chief Operating Officer

And I think the big difference is there's not the regulatory incentives there for SAS yet. We think they'll come but we also see airlines making commitments, and so there's a demand pull for SAS out there that we will work to supply. But to shift that optimization wholesale away from renewable diesel into SAS, there has to be a financial incentive, but it is sort of a co-product at this point that we can make commitments on.

Bob Herman -- Executive Vice President, Refining

And the only difference is in overseas in our Hamburg plant, the reason we were able to make that deal is because that scheme, the European scheme is different from the U.S. scheme, which treats renewable diesel, renewable gasoline and renewable jet fuel the same. So that was why that deal was done there. And that's why deals haven't been done in the United States yet.

But we expect that as part of the Build Back Better plan, that we'll get some incentive and over time, we'll either get more incentive or airlines will make commitments to pay more for the SAF.

Greg Garland -- Chairman and Chief Executive Officer

Yes. And I think it's just the nature of how the market is going to work. When you think about the airline business, I mean, their only option today to decarbonize is sustainable aviation fuel. We don't think hydrogen is going to work in planes, batteries aren't going to work in long-haul planes.

And so I think they're anxious to work with the industry in developing sustainable aviation fuels. And I think what you're going to see is going to be contractual relationships developed so that they have access to the molecules that are going to be there.

Matthew Blair -- Tudor, Pickering, Holt and Company -- Analyst

Thanks for the color. I will leave it there.

Operator

The next question is from Jason Gabelman with Cowen. Please go ahead.

Jason Gabelman -- Cowen and Company -- Analyst

Yes. Thanks for taking my questions. I wanted to ask about the build diversify and M&A outlook on the marketing and chemicals business segments. Midstream, given that you're going to be consolidating PSXP, do you expect to be selling some of those noncore assets? Or are you in a stronger position to acquire midstream assets now that you have this larger portfolio? And the chemicals build versus buy question, in light of the fact that you're still evaluating two world-scale crackers.

And then my second question is just, I think you mentioned Rodeo capex is going to be 850 million, if I heard you correctly, which is a bit higher than what you previously guided to. I think you had previously said something like 750 million. I just want to confirm that's correct. Thanks.

Greg Garland -- Chairman and Chief Executive Officer

Do you want to start?

Brian Mandell -- Executive Vice President, Marketing and Commercial

Sure. I think on the build versus buying chemicals, I think, that we -- at CPChem level, they have always scanned the horizon, looking for opportunities to acquire assets but it's an environment that's tough to acquire. Things are really highly valued. And they've got a long history of organic growth through true partnerships and been very successful in doing that.

And that's what's driving both the U.S. Gulf Coast II project and the ROPP project. And we're looking forward to an FID on U.S. Gulf Coast II mid-summer, late summer time frame this year.

We're taking a tough look at the economics to make sure that it meets the economic hurdles that we have in place, but we're optimistic that it will, but we're working with EPC contractors now to develop that whole package to bring forward. And then the ROPP project is about a year later. It's already cleared front-end engineering design, and so it's well on its way to an FID sometime next year. So we continue to see opportunities, organic, that are more attractive than any acquisition opportunities in the chemical space.

Greg Garland -- Chairman and Chief Executive Officer

Yes. I might just comment on the marketing and specialties. That business is consolidating, particularly the retail marketing in the U.S. And we're seeing many of our longtime business partners.

They may be second or third generation businesses. And for family estate planning, they want to exit or maybe the current generation doesn't want to take over. And so it's creating those opportunities. So we ensure that we continue to have access to those markets long term.

And so that's what's driving a lot of what we're thinking. I think Brian did a really nice job of talking about renewable diesel and making sure we're capturing all the value we can. I think one of the things we've been frustrated with RINs is we've never been able to explain what we think is some value leakage in the RINs. And so we want to make sure that we're going to capture that full value chain around the renewable diesel side of that.

So I think that maybe is an important point as you think about what we're trying to do in the marketing and specialties space around that. We always look at buy versus build. I think that certainly this is an opportunity to think about that, particularly in businesses that are going to consolidate, for instance, like midstream. I still think midstream will have some consolidation.

And to your point, as we roll out PSXP and we have a full suite of assets kind of within our control, then I think we have the chance to really think about how we optimize our midstream and particularly, our NGL-oriented portfolio around that. Tim, if you want to add anything on that on midstream, please?

Tim Roberts -- Executive Vice President, Midstream.

I mean, you covered at the high level. We're all about creating value. So we're always going to look at that portfolio and how we maximize that value. That can include buying, building, and divesting but that's just part of stewarding the capital that we've got in the business that we're running.

Operator

We have reached the end of today's conference call. I will now turn the call back over to Jeff.

Jeff Dietert -- Vice President, Investor Relations

Thank you, Sia, and we thank all of you for your interest in Phillips 66. If you have further questions on today's call, please call Shannon or me. Thank you.

Operator

[Operator signoff]

Duration: 63 minutes

Call participants:

Jeff Dietert -- Vice President, Investor Relations

Greg Garland -- Chairman and Chief Executive Officer

Mark Lashier -- President and Chief Operating Officer

Kevin Mitchell -- Executive Vice President and Chief Financial Officer

Neil Mehta -- Goldman Sachs -- Analyst

Phil Gresh -- J.P. Morgan -- Analyst

Bob Herman -- Executive Vice President, Refining

Roger Read -- Wells Fargo Securities -- Analyst

Brian Mandell -- Executive Vice President, Marketing and Commercial

Ryan Todd -- Piper Sandler -- Analyst

Doug Leggate -- Bank of America Merrill Lynch -- Analyst

Theresa Chen -- Barclays -- Analyst

Manav Gupta -- Credit Suisse -- Analyst

Paul Cheng -- Scotiabank -- Analyst

Matthew Blair -- Tudor, Pickering, Holt and Company -- Analyst

Jason Gabelman -- Cowen and Company -- Analyst

Tim Roberts -- Executive Vice President, Midstream.

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