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Phillips 66: refining achieved 100% utilisation in 2Q16

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Phillips 66 has announced second quarter earnings of US$496 million, compared with US$385 million in the first quarter of 2016. Adjusted earnings were US$499 million, an increase of US$139 million from the last quarter.

"We operated well during the quarter and delivered industry leading safety performance," said Greg Garland, chairman and CEO of Phillips 66. "Refining ran at record utilisation rates, Chemicals successfully completed major turnarounds, and DCP Midstream had improved results. We experienced increased demand across our businesses."

"During the quarter, we generated US$1.8 billion in cash from our operations and a PSXP equity offering. We reinvested US$620 million into our businesses and returned US$570 million of capital to shareholders through dividends and share repurchases. In addition, during the quarter we raised our quarterly dividend 12.5%, our sixth increase since the formation of our company," said Garland.

Midstream's second quarter earnings were US$39 million, compared with US$65 million in the first quarter of 2016. The first quarter Midstream earnings included a net benefit of US$25 million from special items, primarily related to proceeds from a favourable legal settlement at DCP Midstream, LLC (DCP Midstream).

Midstream's second quarter adjusted earnings were US$39 million, in line with the first quarter of 2016. The second quarter results were impacted by planned maintenance, losses from the timing of seasonal propane and butane storage, project expenses related to the Freeport LPG Terminal and lower earnings from the Rockies Express Pipeline joint venture. These items were largely offset by higher fractionation and transportation volumes, as well as improved results from DCP Midstream.

For the second quarter, the company’s equity investment in DCP Midstream had a loss of US$9 million, compared with a US$21 million adjusted loss in the prior quarter. Results benefited from improved commodity prices, improved asset performance, favourable contract restructuring efforts and cost reduction initiatives.

The Chemicals segment reflects Phillips 66's equity investment in Chevron Phillips Chemical Company LLC (CPChem). Chemicals' second quarter earnings were US$190 million, compared with US$156 million in the first quarter of 2016.

During the second quarter, CPChem's Olefins and Polyolefins business contributed US$170 million to Phillips 66's Chemicals earnings. This was an increase of US$25 million compared with the prior quarter, primarily due to higher polyethylene sales prices and margins. Equity earnings were also up due to improved margins. Global utilisation for O&P was 91 %, reflecting planned maintenance, compared with 93% in the first quarter.

CPChem's Specialties, Aromatics and Styrenics business contributed US$25 million of earnings in the second quarter, an increase of US$9 million from the prior quarter. The increase was primarily from improved earnings at CPChem's SA&S equity affiliates due to higher sales prices.

Refining's second quarter earnings were US$149 million, compared with US$86 million in the first quarter of 2016. Refining earnings in the second quarter of 2016 included a net charge of US$3 million from special items, primarily related to a long term logistics commitment, partially offset by a favourable UK tax settlement.

Refining's adjusted earnings were US$152 million in the second quarter, compared with US$86 million in the first quarter of 2016. The increase in adjusted earnings was largely driven by increased volumes. Phillips 66’s worldwide refining operations achieved 100% crude utilisation, compared with 94 % in the first quarter. Despite higher worldwide market crack spreads, realised margins were flat compared to the prior quarter primarily due to lower clean product differentials and lower secondary product margins due to rising crude prices.

Turnaround costs for the second quarter were US$69 million. Phillips 66's worldwide clean product yield was 84% in the second quarter, compared with 82% in the first quarter.

Marketing and Specialties (M&S) second quarter earnings were US$229 million, compared with US$205 million in the first quarter of 2016.

Earnings for Marketing and Other were US$199 million, an increase of US$37 million from the prior quarter. The increase in earnings was largely due to improved international retail margins and higher domestic marketing volumes reflecting improved seasonal demand. Refined product exports in the second quarter were 174 000 bpd, versus 126 000 bpd in the prior quarter.

Phillips 66’s Specialties businesses generated earnings of US$30 million during the second quarter. The US$13 million decrease from the prior quarter was mainly due to narrower base oil margins.

Corporate and Other’s second quarter net costs were US$111 million, compared with US$127 million in the first quarter of 2016. The US$16 million improvement was primarily due to reduced environmental accruals and lower taxes.

Financial position, liquidity and return of capital

During the second quarter, Phillips 66 generated US$1.2 billion of cash from operations. Excluding working capital impacts, operating cash flow was US$560 million. Working capital changes were primarily driven by increases in commodity prices and the timing of Marketing receipts. Capital expenditures and investments totalled US$620 million.

Phillips 66 returned US$571 million to shareholders during the quarter, consisting of US$329 million in dividends and the repurchase of 3 million shares of common stock for US$242 million. Since July 2012, the company has returned US$12.3 billion to shareholders in the form of dividends, share repurchases and share exchange. Phillips 66 ended the quarter with 523 million shares outstanding.

As of 30 June 2016, cash and cash equivalents were US$2.2 billion and debt was US$8.9 billion, including US$1.1 billion of debt at Phillips 66 Partners (PSXP). The company's consolidated debt-to-capital ratio and net-debt-to-capital ratio were 27 % and 22 %, respectively.

Strategic update

Phillips 66 continues to evaluate its portfolio of assets and opportunities to ensure investments deliver value.

CPChem's world scale US Gulf Coast Petrochemicals Project is approximately 80% complete, with startup expected in the second half of 2017. This project consists of an ethane cracker and related polyethylene facilities that will increase CPChem's global ethylene and polyethylene capacity by approximately one third.

In Refining, progress continues on several high return projects. The Wood River refinery has debottlenecking and yield improvement projects that are scheduled for completion in the third quarter. The Billings refinery is increasing its heavy Canadian crude run ability to 100%. This project is expected to be complete in the first half of 2017, while the Bayway refinery is undergoing an FCC modernisation to increase gasoline yield, expected in 2018.

In Midstream, the Freeport LPG export terminal is nearing completion. The project is on budget with startup expected by year-end.

Phillips 66 continues to invest in its Beaumont terminal, the largest terminal in the company's portfolio. The terminal has 3.2 million barrels of new storage capacity under construction; 2 million barrels of additional crude storage are expected to be in service by year-end and 1.2 million barrels of additional product storage are expected to be in operation by mid-2017.

In May 2016, Phillips 66 contributed the remaining 75% interest in the Sweeny fractionator and associated NGL storage caverns along with the Standish pipeline to PSXP for total consideration of US$775 million. Transaction consideration consisted of the Partnership assuming US$675 million of notes payable to Phillips 66 and the company's receipt of US$100 million in newly issued PSXP units. PSXP used the net proceeds of US$656 million from a public unit offering to repay debt assumed.

Phillips 66 is participating in joint ventures to develop the approximately 470 000 bpd Dakota Access pipeline (DAPL) and Energy Transfer crude oil pipeline (ETCOP) projects. Phillips 66 has a 25% interest in these joint ventures. The pipeline projects remain on schedule and are expected to be ready for service by the end of 2016.

Adapted from press release by Rosalie Starling

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