Phillips 66 Expanding Joint Ventures in Downstream Marketing

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Watch for Phillips 66 to pursue more joint ventures in downstream marketing, based on comments from top brass in a fireside chat at the Bank of America energy conference this week.

Executive Vice President of Refining Rich Harbison expressed the company’s ambition to participate “all the way through” the value chain, from the crude oil wellhead to the refinery to the pump. This move is driven by the company’s belief in the strength and advantage of such ventures, as well as their desire for increased integration with core refining assets.

Phillips 66 has already seen success in expanding its participation with retailers, resulting in a boost in income from about $1.5 billion to over $2 billion in that segment. While the company has not disclosed the specific entities they have partnered with for marketing joint ventures, various vice presidents at Phillips have made it clear that they aim to have control over fuels from the refinery gate to the retail outlet.

In addition to their focus on joint ventures, executives at Phillips 66 also emphasized their plans to divest $3 billion worth of assets from their portfolio. They highlighted that certain refineries, chemical plants, or midstream properties may hold more value for other companies. Industry observers speculate that joint venture partner Cenovus Energy might acquire Phillips 66’s stake in joint ventures at their Borger, Texas, or Wood River, Ill. locations. However, executives stress that they maintain a positive and “healthy relationship” with the Canadian major.

During the discussion, Harbison addressed the potential to extend the operation of the Rodeo refinery beyond the first quarter of 2024 if strong margins persist. While Phillips is committed to transforming the facility into a renewable fuels-only plant, he hinted that challenging permitting issues could allow for continued crude processing until next spring. Nevertheless, the company remains fully capable of operating Rodeo as a crude facility in case the transformation process encounters delays.

Meanwhile, Phillips 66 has been actively pursuing various marketing arrangements in California to establish control over the final stage of renewable diesel distribution. This strategic move aims to enable the company to “own the last mile” in this rapidly growing market.

Some Insights from the Fireside Chat

At the fireside chat, several important points were raised:

Phillips 66’s Storage and Pipeline Capacity for Canadian Crude

A significant advantage of Phillips 66 is its storage for Canadian heavy sour crude in Alberta, along with its pipeline capacity. This allows Phillips to optimize the use of Canadian crude and transport it to its Lake Charles refinery.

Interest in Phillips’ Assets

During the third quarter earnings call, Phillips hinted at the possibility of disposing of $3 billion worth of assets. This announcement prompted a flood of inquiries from interested buyers.

Positive Outlook on Distillate Margins

Despite the increasing global refining capacity, Phillips remains optimistic that distillate margins will trade above midcycle levels throughout 2024. While there have been some weaknesses in secondary products and modest cost inflation for refining, Phillips expects returns on refining to grow from $4 billion last year to over $5 billion in 2023.

Potential Growth for Chemical Businesses

Although currently experiencing a “cyclical trough,” Phillips’ chemical businesses are expected to grow in line with advancing global GDP and population expansion.

Reducing Reliance on Contractors

Phillips aims to reduce its reliance on contractors in its refining properties. They plan to increase the capture rate for refining by 5% or more and enhance their commercial expertise around refined products, which will ultimately contribute to improved EBITDA.

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