Welcome to the Fourth Quarter 2015 Phillips 66 Earnings Conference Call. My name is Sally and I will your operator for today’s call. [Operator Instructions] Please note that this conference is being recorded. I will now turn the call over to Clayton Reasor, Executive Vice President, Investor Relations, Strategy, Corporate and Government Affairs. Please go ahead, Mr. Reasor.

Thank you, Sally. Welcome to Phillips 66 fourth quarter earnings conference call. With me today are Chairman and CEO, Greg Garland; President, Tim Taylor; and Chief Financial Officer, Kevin Mitchell. The presentation material we’ll 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 operating statement. It’s a reminder that we will be making forward-looking statements during the presentation and our question-and-answer session. Actual results may differ materially from today’s comments and factors that could cause these changes are these actual results to differ are included on the second page as well as in our filings with the SEC. So with that said, I will turn the call over to Greg for some opening remarks.

Thanks, Clayton. Hey, good morning everyone. Thanks for joining us today. We had a good year in 2015. Adjusted earnings were $4.2 billion, which was our highest since 2012. We generated $5.7 billion in cash from operations. This allowed us to maintain a strong balance sheet and financial flexibility, while funding our capital program and returning $2.7 billion to shareholders through dividends and share repurchases. We made significant progress on our growth projects in midstream and chemicals and we continued to improve returns in our refining and marketing businesses. Despite the difficult environment experienced throughout the energy industry, our diversified asset portfolio has performed well. We continue to execute our plan. For us, it all starts with operating excellence. We spent $1.2 billion in sustaining capital in 2015. And from an operating reliability perspective, our businesses ran well. 2015 was a very safe year for us. We tied our best year ever for recordable injuries. And refining, chemicals and midstream were top performers in injury rates. We also maintained the improvement in our environmental performance demonstrated in previous years. We ended 2015 with a solid quarter, especially when considering the current commodity price environment. Adjusted earnings were $710 million or $1.31 per share. Market cracks were down significantly in the fourth quarter from the highs that we saw last summer, but our global refining business continued to run well with 94% utilization. Marketing earnings were healthy. And this continues to be a high return business for us. 2015 adjusted return on capital employed was 35% for this segment. In Midstream, we commenced operations of the Sweeny Fractionator One and supporting Clemens storage caverns. 2016 will be another busy year for us with several other midstream projects scheduled for completion. Our Freeport LPG export terminal is now 80% complete. It’s on…

Thanks, Greg. Good morning. Starting on Slide 4, fourth quarter adjusted earnings were $710 million or $1.31 per share. Reported net income was $650 million, including several special items excluded from adjusted earnings. The special items decreased earnings by $60 million and included $104 million in impairments at DCP and a $33 million lower of cost or market write-down of inventory at our Wood River Borger joint venture offset by an $88 million gain tied to favorable changes in German tax law. Excluding negative working capital changes of $300 million, cash from operations was $1.8 billion. Capital spending for the quarter was $1 billion, excluding the $1.5 billion contribution to DCP Midstream. Dividends and share repurchases in the fourth quarter totaled $704 million. And excluding special items, our adjusted effective income tax rate was 31%. Slide 5 compares fourth quarter and third quarter adjusted earnings by segment. Quarter-over-quarter, adjusted earnings were down $937 million. All segments had lower earnings, but refining accounted for most of the reduction. Next, we will cover each of the segments. I will start with Midstream on Slide 6. Transportation benefited from higher equity earnings and volumes. In NGLs, Sweeny Fractionator One came online during December. Included in the transportation and NGL results is the contribution from Phillips 66 Partners. During the quarter, PSXP contributed earnings of $37 million to the Midstream segment and increased its quarterly LP distribution by 7% over the third quarter. DCP Midstream continues to work on its self-help initiatives to reduce costs, manage its portfolio and restructure contracts. 2015 adjusted return on capital employed to the Midstream segment was 5% based on an average capital employed of $6.8 billion. The return for this segment continues to reflect the impact of increased capital employed driven by our significant growth investments as well…

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Faisel Khan from Citigroup is on line with a question.

Thanks guys. Good afternoon.

Good afternoon Faisel.

Just a couple of questions on the midstream projects, DAPL and ETCOP, given some of the partners look like they may need capital over the next couple of years as their cost of capital gets higher, I just want to understand would you be willing to take sort of a bigger interest in those assets if the opportunity present itself?

Yes. Faisel, it’s Tim. I think that with our partners on DAPL and ETCOP being exploring various options on that, I think our commitment is where we would like it to be at this point, but certainly we will consider that. It’s all about what delivers the best value for us.

Okay, got it. And then you talked about in your prepared remarks, you are targeting a dividend growth rate of 10% for this year, I mean is that sort of locked in or is it there sort of a wiggle room if markets change or things become a little bit more dynamic?

Yes. We said at least 10% and we raised dividend 12% last year. But I would say I think we will take a look at that obviously if the Board approve this too, but we had given guidance 3 years ago that we do double-digit increases in ‘14, ‘15 and ‘16. We stand by that guidance.

Okay. Last question for me, in the Atlantic Basin you guys ran over 100%, throughput was strong and so was uptime. Is that – is this sort of a new set of reliability in the Atlantic Basin or is this an unusual circumstance where things just ran sort of at a higher level for the quarter?

When you look at that remember, we just came out of a Humber turnaround, really came out of that in good shape, good clean refinery. So, I think that it reflects that. And then at Bayway, we continued to run a lot of processed inputs to fill out our downstream units in that facility. So, it was really good quarter. And I would anticipate to pick our obvious going market conditions that we continue to try to run as full as we can.

Got it. Thanks, guys.

Yes, thank you.

Paul Cheng from Barclays is on line with a question.

Hey, guys. Good morning.

Hi, Paul.

Just maybe, this is for Greg, with the changing market condition related to the market acceptance for the funding model in the MLP sector, how that is going to impact your way of the dropdown that I think previously that you have been looking for maybe up to $2 billion a year? I don’t know whether that you have changed. And also that I mean from the CapEx that you spent $3.9 billion in dividend, about $1.3 billion with your cash flow from operations, you don’t have much for the buyback. So, should we assume that you can’t do much of the dropdown, you will correspondingly scale down your buyback or that you are going to increase your balance sheet to maintain the buyback in a certain way?

Well, okay, so let me kind of start with the question around the MLP. Certainly, we understand the question, Paul. As we look out there, there is a lot of stress in the space with people that are over-levered and we will have difficulty accessing the capital equity markets given their prohibitively high cost of capital. We look at PSXP, strong sponsorship, strong investment grade rating. You might even call this the dropdown type maybe, but a great portfolio of existing EBITDA that can be dropped. We have got these projects lined up in the queue that would imply that really add to that. And then you kind of look at where PSXP is trading kind of around 3, so I think the investors look at PSXP, they get the growth story, they understand the growth story. I think that’s a confidence in our ability to execute that. And so we would say that we think the capital markets are going to be open to us in 2016 and our plan is to be out there in there. And you have got the number about right. We have kind of said kind of $2 billion a year that we need to be through the capital markets and the debt markets to hit this $1.1 billion of EBITDA in 2018 at the MLP. And so we standby that guidance and we stay there. We should generate $4 billion to $5 billion mid-cycle of cash. And you kind of add another $1.5 billion to $2 billion coming out of the MLP. So, I think we are fine in terms of funding our capital program and in terms of funding growing distributions through increasing our dividends. And we will have as long as our shares are trading below interesting value we are going to take shares in.

The second question Greg, on DCP, I mean you guys have that capital restructuring in the fourth quarter, but the market condition continued to deteriorate in that business. So, is there the possibility that later this year what does it do if there is any more debt being mature, do we need to do additional capital infusion into that or that you really is confident that you already fixed the problem at this point?

Well, I think that the contributions by both SC and ourselves have gone a long way towards fixing the balance sheet issues at DCP. The other thing, you got to give the folks at DCP a lot of credit. They have done a great job of pulling cost out, restructuring contracts where they can in the portfolio. And so if you look kind of pre-2015 cash breakeven, we need about $0.60 to breakeven on cash on NGLs. And as kind of we exit 2015, we had moved that down to about $0.40 a gallon breakeven. And then the actions that are being further taken in 2016, we expect that the cash breakeven will be somewhere mid-30s. So, I think DCP is going to be fine in this environment that we are in for 2016. The other thing I would say is DCP doesn’t have a debt due until 2019. DPM actually has one due in 2017, but DPM is in pretty good shape. So, I think our view is that DCP is on strong footing. We have purposely set them up for success in this low commodity price environment.

Do you want to say something about capital in DCP?

The other thing is we haven’t really announced the capital, but DCP capital this year is going to be down about 50% from what it was last year. I think our share of DCP capital is about $233 million this year thereabouts give or take. So, we are continuing to manage capital at DCP, will be more cost taken out of DCP this year, more work around the restructuring of the contracts this year. So, I think they are in pretty good shape.

Can I have a final question, one last one?

Sure.

If I look at why now you are investing a number of projects that you commit on the Midstream, so that’s why your CapEx last year and this year for the total corporation are pretty high, 4.3 and 3.9. And if we base on you suggest that you are still targeting on the long-haul 60:40 between reinvestment and the payout to the shareholder. At 60%, if we say snap a $3 billion that would translate into a $5 billion cash flow. So from that standpoint, should we assume after the next 1 or 2 years, we should see your CapEx drop back down to us into the $2.5 billion to $3 billion range or when you say 60-40, you are also including those dropdown proceeds in the calculation?

Yes, hello. Yes to both. I think capital probably does come down in the year. So, we have already said ‘15 will be a peak year for us. And so you see that coming down at PSX. You see it coming down at DCP. Also at CPChem, their capital budget for this year is going to be down about 20%. So, there will be a $1.45 billion will be our share of the CPChem capital for 2016. So, truly, I think ‘15 is a peak year for us. But yes, you need to add in the proceeds from the drops in the MLP to the cash and then think about that in terms of your total amount for distributions.

Alright, thank you.

You bet.

Doug Leggate with Bank of America Merrill Lynch is on line with a question.

Thanks. Good morning, everybody. I guess I will start with – can you hear me?

Yes.

Yes, sorry. I thought you couldn’t hear me there. I will start with chemicals if I may. I think Kevin mentioned that there had been some downtime that looked to us that given your vertically integrated chemicals business has normally been somewhat resilient compared to some others a little bit weaker this quarter to us. Was it just the downtime in which case can you quantify the opportunity cost or is there something structural there you see is changing in this lower commodity environment?

Hey, Doug, it’s Tim. I looked at delta between Q3 and Q4 it’s about $90 million. I would say that about $50 million of that or so was compression in the margin in the olefins, polyolefins chain margin. And the other remaining amount was largely the impact of turnaround costs and then some impact from the volumes as a result of that.

Okay. So, are we done now or do we bonus spike in terms of operating activity in Q1?

Yes. So, I think we have got it to the higher operating rate in Q1 with that. These record turnarounds in polymer units, so there is always some of that, but generally volumes come back. The real question about the margins I think largely depend on where you think crude prices end up, but as prices fall and gas price doesn’t fall as much and the ethane price, then you get some compression there. But I will say that we continue to see good demand. We don’t see inventories building in that and that demand really is around the globe. So for us, we have been looking at the underlying fundamentals and still see the demand piece there. The moving piece really is going to be around the energy price and what happens. But barring a significant change, we would expect similar industry margins that we saw in the fourth quarter.

Tim, I don’t want to labor the point, but you said the downtime, the turnarounds were in your polymer units. So would that mean that you didn’t have the vertical integration benefit in Q4 that would normally have cushioned you a little bit?

Yes, if you are thinking about – when you don’t have the pull on the [indiscernible] issue, you can’t impact the total output on the total integrator between ethylene and polyethylene specifically.

And that’s what I was getting at, right. Okay, that’s helpful. Thank you. Discussing with chemicals for a second, so Sweeny is up and running now. I think your previous guidance was $400 million to $500 million of EBITDA. What does that look like in today’s environment in terms of the contribution?

Export LNG terminal?

Right.

Yes. I think that we are at lower end of that because there was some commercial opportunity. We have said about 80% fee based in that number. And so we are still in that range when you look at both the frac and the dock and the caverns and the services that, that provides. And then what’s happened today, the orbs between the U.S. and other markets in the world are narrower. But I will also say that we see shipping constraints being alleviated. So I think we are kind of in flux about what the orb will ultimately be, but we still look at the market here and know that the NGLs need to find another home outside the U.S. So I think there are still fundamental drivers that will push that. And the real question is how much of the orb, do we have $100 million of the EBITDA from the orb or something different. But on the long-term, I think we feel there is going to be significant commercial opportunity as well as the fee base, but the primary driver on those projects, are the fees.

Last one for me, if I could follow Mr. Cheng’s lead to squeeze another one in. The heavy-light differentials obviously, spreads have come in from light crude. You guys are heavy relatively resilient, you made – you spend a lot of time telling us how much effort you are moving to maximize your light sweet crude throughput. What are you doing today and how much flexibility do you have to swing back if you chose to? And I will leave it there. Thank you.

Yes. We talked a lot last year about how much more lights could we run. I think the main thing about our system is we have the ability to flex. I think even in fourth quarter, we probably had 3% more medium sours. We didn’t run quite as much heavy sours because of turnarounds at Los Angeles and Lake Charles during the quarters we probably would have like to. We ran a little bit more Canadian heavy during the quarter. But yes, I think we have the ability to flex that. I think we are still on max gasoline mode, as you want to think about it that way. But I think the important spreads for us this year are going to be the light, heavy, the sweet sour and the TI-WCS spreads. I think Brent and LS can trade near parity. And it’s going to be a very volatile market. And things are going to move around in terms of the TI-Brent differentials. We just had to watch that.

Doug, actually have project to billings to continue to go to even heavier sour grades here that would improve and kind of capitalize on that light-heavy. And then at Wood River, we are doing some work around light sweet de-bottlenecking that will allow us push more heavies into that facility. So we are taking some incremental steps to increase our ability to handle heavy and medium sour crudes.

Thanks guys. We look forward to seeing you in a couple of weeks.

Okay. Take care.

Roger Read from Wells Fargo Securities is on line with the question.

Yes. Good morning.

Hi, Roger.

I guess say a couple of the things we always like to talk about. Product exports, what are you seeing in that market here in Q1 and thoughts on where a lot of people are focusing on in terms of some softness in the diesel side?

Well, I think globally just to comment on distillate inventories that’s always something that we are watching. And clearly with the warm winter and less industrial activity seeing softness in that demand, we still expect growth on the distillate. On the export side of the U.S., we have the options to either place product in the U.S. or export and we just simply picked the best value at the time when we make that decision. But we still feel there is still good demand that when we look across the globe for both gasoline and distillates out of the U.S.

Okay, great. And then shifting gears to the Midstream segment, the new fractionator online, the export facility later this year, can you give us an idea how we should think about the impact of those two events as we look at the EBITDA guidance originally for those product – projects, kind of thinking Q1 this year probably to Q1 of next and what’s the reasonable progress of how it works this way in?

So the first step on those is the fractionator, relatively minor piece of that total $400 million to $500 million dollars EBITDA guidance that we gave. The next big step is later in the year when you really reach with the LPG export terminal, larger fee based component as well as some commercial opportunity. So smaller impact at the beginning and then towards – assuming that we start up on time in third quarter, in the fourth quarter, you begin to see full impact of that $400 million to $500 million.

And just quick follow-up on that, once export facility is available, is that something where you ramp to full utilization fairly quickly or should we think of that as a step process, I am not familiar with the – with those type of units, so I am just wondering what the expectation should be?

Well, we are connected both to our fractionator and it’s – say it’s 150,000 barrels a day equivalent initially. Roughly 40,000 or so of propane comes off with our new frac. And then we are connected to Mont Belvieu and other facilities to supplement that. So it really is about getting the capacity in place, the commercial agreements and then you have got the capacity to not only take the output from our frac but also supplement that with feeds out the NGLs system on the Gulf Coast. I think we said we would expect about eight cargoes a month coming through the terminal. And I would say we have made great progress on contracting those eight cargoes.

And has margin on that been affected at all by the change in pricing or is that – I mean is it just more tariff related we don’t have to worry as much about the lower prices today?

The tariff impact has been where we thought in terms of the fee. That’s about 80% of that. What is narrower today is the commercial opportunity, although we expect that to widen again with shipping constraints removed and as markets begin to collaborate, you establish that.

Okay, great. Thank you.

Blake Fernandez with Howard Weil is on line with a question.

Hi guys, good morning. Greg, you mentioned max gasoline mode and I guess historically, we have always viewed PSX as having the kind of one of those the highest distillate yields. And that’s been an advantage until just recently where the markets shifted in favor of gasoline. Are there any opportunities that you are looking at to maybe reconfigure or change your opportunities to kind of capture some of the gasoline strength that we have been seeing?

Yes. At the margin, I think we ran 44% gasoline in the fourth quarter and that’s – I think that cushion the maximum what we can do, like...

Okay. So there is no capital investment projects or anything that you are evaluating?

We do have a project that we have authorized at Bayway to improve the yield on the FCC there that would incrementally add some volume to that. And as we go around our system, we are looking at that, but those take a bit longer because they are capital. But I think as Greg said, in terms of optimization today, we are doing all we can to push that, given where the market is today.

I think FCC upgraded Bayway 2018. Yes.

So we are a couple of years out on that project, but we are executing it right now.

Got it, okay. The second one, this may go nowhere quickly, but I will ask it anyhow. So Buffet continues to increase his stake holding. And I am just curious what, if any dialogue you are having and any sense of what the longer term intentions are?

You are right, it’s going nowhere. We don’t comment on conversations with shareholders. That’s a good question though.

Fair enough. Thanks.

Thank you.

Ed Westlake with Credit Suisse is on line with a question.

Hi there. Good afternoon. Congrats on everything you have achieved last year and looking forward. Question on the risk, really in the Midstream area I mean obviously oil prices, gas prices are low. Volumes are going to be coming down across the piece. So just maybe give us a – I don’t if you have done an assessment of volume and counterparty risk, I am thinking less about your new projects, which obviously you spend a lot of time working on, but more maybe in some of the legacy and DCP area?

Well, I think that we look across the DCP portfolio and 90% of this is kind of investment grade. So I think that they have good counterparties on the other side of that. As we think through the volume risk side of it in the portfolio, we think from Permian is probably going to do a little bit better. We think DJ is going to do pretty good. Scoop is going to do good. Eagle Ford is going to decline as we think across that. And so I would say just from a pure volume metrics perspective, we are probably going to be flat to maybe slightly lower in ‘16 at DCP. We think that gasoline demand is going to be good. We think distillate demand is going to grow although we have challenge inventories there. We think petrochemical demand is going to grow. So on balance as we think across the portfolio, Midstream kind of flat to down at DCP. Of course we are going our Midstream is what we are doing with the frac coming up export facility, Bayou Bridge, Dapple coming on late ‘16. So we will see increased volumes in the transportation segment there, that flow through and then we think petrochemicals be okay. Tim, if you want to add on that?

I think that really is. And I think we are looking at the macro environment with the production breaking over the U.S., there is not going to be a lot of extra volume drive through that. And so I think this is a question of how much decline occurs around that. We do think the gas markets will continue to have a pretty good pull. And that’s a piece of what underlies DCP as well. And so to this point, we have not been concerned. And I think to reiterate the counterparties on our midstream business look very solid.

You might just talk a little bit about our view and what that does to PSXP and the investment portfolio that we are thinking out 2018 and beyond.

Yes. To-date, we have done – we expect on the NGL chain major crude line with DAPL ETCOP related to kind of new production, good counterparties, solid volumes on that on the T&D side. But as we go forward and as we look at our portfolio, I think that we are shifting our attention to things that support our refining business logistically that touch existing midstream assets or add value perhaps just the chemicals value chain. So, we are shifting more to the downstream, the demand side as we think about the midstream options versus a heavy focus initially on that upstream part of that.

So, less on production growth and more around liberating higher returns in our existing assets.

Okay, fair enough. And then just a smaller point, your refining turnaround expense, I mean I thought it would maybe come down a bit this year. I mean, it’s still a healthy chunk, maybe just talk through what the key plans are on the refinery and turnaround side for this year?

From an expense side, Ed, we actually spent quite a bit less in ‘15 than we originally planned. And so the outlook for ‘16 is somewhat higher than we have previously talked about. So, that reflects just the timing of some of the activity that ended up moving from ‘15 into ‘16. As you know, we don’t give specific guidance on exactly what we are doing and when we give cost guidance for the upcoming quarter and the full year outlook on that.

Right, but it’s shifting, so we can look into that. Okay, thank you.

Yes, that’s right.

Paul Sankey from Wolfe Research is on line with a question.

Good morning. Can you just update us on how the changes in oil price and the effects on the U.S. E&P industry are coming through from your point of view? I am particularly interested the toughest one for us is always the NGL market. Can you talk about the dynamics there? And if there is shift in where supply is coming from shifts in the oversupply? And then update us on how you are getting on with the exports, which I think you have partly done, but it would just be interesting if you could give it from a more macro perspective? Thanks.

Yes. Paul, on the NGL side, we continue to see growth in the NGL supply, but there is no question that it’s going to be at a slower pace as we lookout. The other interesting thing is that there is a lot of ethane rejection today as the values don’t pull it forward. So, I think as the cracker start off, there is going to be an influx of ethane, so to speak, into the NGL piece. But I think that certainly causes us some pause when we think about how large and how much increase beyond today we see in the NGL still see it, but probably not to the extent that we had seen a couple of years ago with all the E&P activity. On the export side, a lot of interest still in LPG cargoes for both petrochemical operations and heating markets, Asia, Latin America and even Europe. So, I think we are still seeing a lot of interest around the world as people look at alternate supply so to speak on both the fuels and petrochemicals side. So, as Greg mentioned earlier, lot of good progress on the contract side and just a lot of interest there that we are working to continue to look at.

We look at the balances and we are going to be long propane. So, we think we are going to have to export propane to make everything work for the next few years in this country.

Got it. And – forgive me if you have given these numbers, but did you say how much gasoline and distillate you exported and how much of that maybe crude I don’t know? Thanks.

We have in the past. I don’t know if we did for the quarter.

In the quarter, it’s like 122 for the quarter. And it’s the typical 80% distillate and 20% gasoline.

Okay. And again I guess I assume that the demand there is robust.

Yes, I would say demand is robust, but we have actually exported fewer barrels this year than we did last year and it’s because we have had better placement opportunities in the domestic markets.

Understood. And – yes, sorry, the crude export thing, does that make any difference? And I will leave it there. Thanks, guys.

We will see. Taylor wants to answer the question. Yes, I don’t think it really matters. I don’t think you are going to see a lot of crude exports out of the U.S. I don’t think the numbers work all that much. I think it probably caps the differential and you are not going to see the big blowouts that we saw in ‘13 and ‘14. But I think ‘16 is going to be a really volatile year and there is going to be times it’s just going to be hard to call what that differential is going to be. We think 4 to 6 long-term it ought to be in that. It’s what’s going to take the export barrels of crude out of the U.S.

Could create opportunities for us in Beaumont.

Yes. I think the other way to look at that is we are, at Beaumont and even with Sweeny and Freeport we have options to capitalize when should they develop. But I think generally, our view is there is just kind of a balancing point today, where excess crude is trying to push in and then we have got local production here. So, I think it just narrows that dip at the coast. And I think that’s going to continue. And I think that’s a significant change from over the last 2 years.

Great, thank you very much.

Thanks, Paul.

Jeff Dietert with Simmons & Company is on line with a question.

Good afternoon.

Hey, Jeff.

Hey, you talked a little bit about shifting your organic growth away from meeting production needs towards maybe better integrating existing assets, what about the M&A, asset M&A, corporate M&A? Where does that fall in the pecking order?

Well, certainly I think we look at everything that’s out there. And we think about a build multiple versus a buy multiple. And as long as the build multiples are better, I think you will see us do that. But we will certainly take a look at what comes across and everything on there, Jeff, but...

So, I had read that Whitegate maybe back on the market. Can you talk about the process there, if there is one and perhaps any other assets you may consider divesting?

Here is what I am telling you that yes we are in the process in Whitegate. And we are kind of well into that process. So, we obviously can’t talk about the specifics. But we have people that are interested. And so there is a list of people that we are going through with that asset. I think on balance that’s the only process we have going on right now in terms of assets. People will get ask a lot about the West Coast in the U.S. And West Coast, as we have said, it’s an option on the future, but we have no current programs are – there is nothing on our way today in terms of the West Coast. Margins have been pretty good there last year or two and we have got good assets out there. We have got great people running those assets. And so, it’s an option on the future is the way I look at the West Coast.

Got it. And finally as far as Sweeny Frac Two is concerned, should we think about that project just being on hold until drilling activity reaccelerates?

Well, as you know, we pushed Frac Two FID from last year to this year. So, we are still doing engineering work on that and we will make a decision on that later this year, midyear, third quarter. But we won’t proceed unless we get it fully contracted. And we are long NGL today, but it’s not fully contracted. So, we are not going to build a speculative frac.

Got it. Thanks for your comments.

You bet.

Phil Gresh from JPMorgan is on line with a question.

Hey, good afternoon.

Good afternoon, Phil.

First question is just on chemicals given the compression of the gas to oil price ratio. As you look ahead, are you still considering a second cracker at this point? Would the economics work at this stage if we were to indeed stay at these types of levels?

Phil, it’s Tim. We continue to do engineering work. And again, I will reiterate this is a global view with a global business. North America still looks attractive long-term. And today’s margins do work. It’s obviously not the same return that we would have if it was $0.10 a pound better. So, I think that for us it’s really about continuing to meet the customer demand, the opportunity. And then structurally, our view of the long-term advantage on U.S. or Middle East relates to ethane cracking in the case of the ethylene chain, still to us has the greatest appeal and we think long-term, a competitive advantage. Although it’s less than it was, it’s still quite good by historical standards.

Okay. So is there a period of time in which you are trying to make a decision on the second FID or it’s really just kind of open ended at this point?

So doing engineering work, anything you start now puts it out post-2020. And I think we just continued to evaluate the options, sighting, permits, all those kinds of things to look at it here and then look at options that we might have available in other parts of the world as well.

Okay, got it. Second question is on the specialties business. You mentioned lower margins and the step down sequentially, would you say that the component of that is seasonal or do you think that that’s more of a structural step down from increased competition in that business that we should think about as a more of a new run rate or maybe some combination of the two, how would you think about that?

Okay, a couple of things. You have a lag effect in that business on prices. So as prices come down, you tend to hold it and it catches up. And so I think this quarter, there was a piece of that, but if you think about finished lubricants price versus VGO feedstock into the base oil business. The one segment that we are seeing in the U.S. that’s weaker is oil and gas, as you might expect. But generally, strong automotive business that when you are looking at what’s going on in Detroit. And so our view is volumes are still pretty good this year versus last, not a lot of growth inherently in that business by the nature of it. But we are seeing nothing fundamental there. And I think we would say next year to us probably looks a lot like – for this year it looks a lot like last year in terms of how we look at the lubricants. But it’s a business we like, good returns. I think this quarter just had some noise around it. And I would also say that you can imagine customers don’t particularly like to buy a lot when they see the price falling. So we don’t see a lot of inventories building the chain, but they don’t want to get caught on tight higher cost inventory. So there is always some effect when you see that in any quarter in which that occurs.

Okay, understood. Last question is just on the global gasoline supply demand outlook for 2016, where do you guys stand on that, because if we have global demand growth in the 400,000 to 500,000 barrel a day range, is there enough global supply to keep up with that and what’s your view on gasoline cracks for this year?

Well, I think we are fairly well supplied today, but basically if just break the components, we would expect stronger gasoline growth globally than distillate. We are thinking it’s less than this year. But in total, the two probably in the million barrel a day range or so, with the two-thirds or so of that being on the gasoline side and the third really coming from the distillates. Clearly, distillate has more headwind I think because of the general economic conditions and less capital spend as you think about the distillate activity, whereas we still see a pretty strong consumer market around the world that pulls along gasoline and to some extent, the chemicals business as well.

Okay, thanks.

Ryan Todd from Deutsche Bank is on line with the question.

Great. Thanks. Good afternoon everybody. Maybe a couple – if I could ask one, you gave a little bit of color on Bayou Bridge and Dapple pipes, could you maybe give a little bit of more granularity in terms of the timing of ramp on each and maybe what the impact you are looking for both to distillates in your refining business or potential impact on differentials?

Yes. So let’s start with the Bayou Bridge because it’s closest to being in service. So there are two segments. One is Nederland to Beaumont area over to our Lake Charles refinery and then from Lake Charles to St. James. That first leg to Lake Charles will be in service at the end of this quarter. And that will have some initial impact in terms of the Midstream earnings. And then later this year, we will complete the leg in St. James. So those are both underway, I think it clearly connects the Texas market with Louisiana. There is still a drive for that. That line is underwritten on the commitment side with T&D, so there has been interest in that on the refining side to get a new source of supply. And I think that’s still a piece of what needs to happen. So I think that this continues to make crude options more available now to the Eastern Gulf versus what we have seen just really in the Western Gulf. If you look at DAPL ETCOP, the Bakken to Patoka, then Patoka to Beaumont, I think there is a pretty good call on Northern tier on the Bakken today. Again that line is underwritten with T&Ds but very good counterparties. And so I think you will continue to see when that comes in service at the end of this year, early next year, the ability to move those crudes then into the markets that want that and then ultimately, down into the Beaumont area as an option as well. And ultimately for us, we think DAPL ETCOP as a potential way to supply Bayway via the pipe and then around with the Jones Act tanker into Bayway to make it very competitive with the real option that exists from the Bakken to Bayway today. So I think it’s all about creating more options of the refining site for ourselves as well as others. And it does also, once you get the Beaumont creates the opportunity to export should that develop. So I think just a lot of good options. And that’s I think that project we look at it is going to be – continue to be the lowest cost option to get Bakken to the markets that we are talking about serving.

What’s your expected cost from Bakken to the Gulf via that route?

We have not disclosed that. I think we just simply say it’s the most competitive, but it’s substantially less than rail. And we look at other piping system, it’s still a more effective way to move.

Great. Thanks. And then maybe one final one, we have seen some of your peers talk about or actually invest in various ways – capital in various ways to address perceived octane shortages, what’s your outlook on this regard and is there any interest or ability within the organization to invest – to address the shortages?

I mean, we have some incremental opportunities that we are going to pursue. They are value creative, but they are small projects and they don’t add a lot. We are looking at standalone LP and trying to see if that makes sense. On the other hand, I don’t want to be the last one, if everyone else builds. There would probably be no reason for us to do it. So we will have to assess that against our other opportunities. The small incremental thing that we do this year and next year, they make a lot of sense and we will do those.

Great. Thanks a lot. I will leave it there.

Brad Heffern from RBC Capital Markets is on line with the question.

Good morning everyone. Thanks for taking my quests. Greg, I just wanted to go back to an earlier question around DCP, I mean I think you explained it a relatively well, but I was hoping you can put a final point on it. If you just take strip pricing, do you think DCP does not require any further equity injections?

If you take current pricing, no. We don’t expect. They have a balance sheet they can work from. They are working to get their cash breakeven down in the mid-$0.30 this year. So I think DCP would be fine in 2016.

Okay. Thanks for the clarification. And then just curious talking about Santa Maria, I was curious if you had any update or timeline around crude sourcing there, obviously, it’s been impacted by Plains downtime?

So we have increased truck unloading at Santa Maria to mitigate that. We do run more process inputs at San Francisco to supplement. The pipe is still something we would like to see. So we continued to work on more trucks, other options. We would like to get the pipe back, but I think that is out somewhat based on permits and public and government acceptance of that. So I think we are is this mode for a while. And so we continue to look at new ways to get more options in there. But until we get that pipe back in service or an alternate, it’s harder to get the full volume that we need.

The pipes in preferred route, but we don’t control that. So I think the folks have been a great job of mitigating it, but it’s 20-25 today impact at Santa Maria. We probably cut that in half with trucks. And we have made up the volume metrics on process inputs at Rodeo, but obviously the margin delta is not as good.

Great. All of you there thanks.

Thank you.

Thank you. We have come to the end of the allotted time. I will now turn the call back over to Clayton Reasor.

Well, thank you very much for your interest in Phillips and participating in the call today. You will be able to find a transcript of the call posted on our website shortly. And if you have got additional questions, don’t hesitate to reach out to either CW or me, we would be happy to take your call. Thanks again.

Thank you, ladies and gentlemen. This concludes today’s conference. Thank you for participating. You may now disconnect.