Welcome to the Second Quarter 2012 Phillips 66 Earnings Conference Call. My name is Sandra, and I'll 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 Mr. Clayton Reasor, Senior Vice President of Investor Relations, Strategy and Corporate Affairs. Mr. Reasor, you may begin.

Good morning, and welcome to the second quarter earnings conference call. We appreciate your interest in our company and are looking forward to giving you details on our financial operating results, update you on a few of our key strategic initiatives and provide an outlook for the rest of this year. With me this morning are Greg Garland, Chairman and CEO; and Greg Maxwell, Executive Vice President and CFO. Our presentation material and supplemental information is available on the Investor Relations section of the Phillips 66 website. As promised, we've increased the amount of disclosure and granularity in our reporting to help you model future earnings and see the value of Phillips 66. Slide 2 contains our Safe Harbor statement. It's a reminder that we'll be making forward-looking statements during the presentation and during our question-and-answer session. Actual results may differ materially from what we say today, and factors that could cause actual results to differ are included here on the second page as well as in our filings with the SEC. Before we have Greg Maxwell get into the second quarter results, we thought it would be great if Greg Garland would give a welcome to you all and give a few opening comments. Greg?

Thanks, Clayton. Good morning, everyone. And thanks for joining us this morning. Today, we report out our initial quarterly results since the formation of Phillips 66. We're off to a solid start. The spend transaction was executed flawlessly. We think it's a real tribute to the dedication and the capability of our Phillips 66 employees. We are delivering on the financial and operating results we expected when the company was put together. And I'm really proud of what our employees have accomplished so far and have absolute confidence they will deliver industry-leading value creation. We have a clear strategy for growth, margin expansion and returns enhancement. And we think with the right balance between disciplined reinvestment and shareholder distributions, we expect our return on capital employed to improve over time. Our approach to capital allocation and balances are objectives for earnings growth while returning capital to shareholders. And we're demonstrating our commitment to shareholder distributions with the announcement in June regarding our first dividend, and this morning's announcement of a $1 billion share repurchase program. We feel strongly that our strategy around returns, growth and distributions is the right one for our company, and we have advantaged assets, organizational capability and the opportunity set and commitment to drive differential value creation. As Greg Maxwell reviews our second quarter results, you're going to hear that we operated with excellence, we ran well at high utilization rates and turned in a solid financial performance for the quarter, in what we've described as a positive margin environment. So I'll now turn the call over to Greg, who will take you through our second quarter results.

Thanks, Greg. Good morning, everyone. I'll get started with Slide 3. We successfully completed the separation with ConocoPhillips and began operating as an independent company on May 1. Our second quarter financials include 1 month of carve out financials and 2 months of actual financials. The financials for April were prepared on the same basis as our Form 10 and our first quarter 10-Q. As stated in our earnings release, we had reported net income of $1.2 billion and adjusted earnings of $1.4 billion. The $236 million difference is attributable to special items including impairments and gains on the asset sales. On an adjusted basis, earnings per share for the quarter were $2.23 per share. Cash from operations was $1.4 billion and our year-to-date annualized return on capital employed was 18%. Now, let's turn to Slide 4 for a high-level look at our second quarter earnings. Refining and Marketing generated $1.2 billion in adjusted earnings. The $437 million improvement was primarily driven by much stronger refining margins, particularly in the U.S. Mid-Continent and Europe. Midstream adjusted earnings were $79 million, which excludes the $170 million special item associated with the impairment of our investment in the Rockies Express Pipeline. On an adjusted basis, Midstream earnings were $32 million lower than the second quarter of last year. The decline in earnings reflects a reduction in equity earnings from DCP, which was primarily driven by lower NGL prices. Chemicals adjusted earnings were $242 million, and this excludes a special item of $35 million associated with the early retirement of $600 million of debt. Adjusted earnings improved this quarter by $52 million, primarily due to higher margins and lower utility costs. I'll go through each of these operating segments in more detail later in the presentation. Corporate and Other costs this quarter were…

Thanks, Greg. Well, as we execute our strategy, we remain focused on our initiatives to enhance return on capital, deliver profitable growth and grow shareholder distributions. We're also committed to operational excellence and creating a great place to work. We continue to improve our metrics around personal and process safety, and environmental stewardship. As we said, we plan to reduce costs by eliminating spin-related di-synergies by the end of 2013 and we set a target of $200 million. We're also working hard to create a great place to work for our employees. We value our employees, we want to have a place of mutual respect and collaboration. We completed the sale of the Trainer Refinery and we'll continue to work to optimize our portfolio. We did make the decision not to sell Alliance. We have a positive view on domestic Gulf Coast crudes to becoming an advantage feedstock, and we think as this plays out, Alliance will create long term value in the portfolio. Earlier, you saw our crude slate, which demonstrates the progress we've made on getting advantaged crudes into our refineries. We continue to work this hard because every dollar we can save on feedstocks significantly improves our bottom line results. Crude and energy is greater than 70% of our cost structure. It's the single biggest lever we have to improve value. Some of our initiatives in this area, we've talked about the railcar acquisition, to get 2,000 railcars, but we've also worked agreements to allow us to more efficiently load and unload crudes at both the source sites and the refinery. We're also expanding our own infrastructure. For instance, to bring Mississippi line crude into our Ponca City refinery. And we'll work other deals in other areas to get more advantaged crudes to the front end of…

[Operator Instructions] And the first question is from Ed Westlake from Credit Suisse.

So, I think a lot of questions are going to be focused on trying to understand the earnings outlook. So maybe just start with 1 small question on Chemicals. You mentioned the 1-hexene plant. Could you give us a sort of an idea what the investments in that plant so we can think about the contribution it might make to cash flow ... ?

But Edward, that's a proprietary technology for us. And we typically have not given out the investment in that. We think it is the best route in the industry to make 1-hexene. We have those facilities up and running in Qatar today. Just starting one up in Saudi Arabia. This will be our third such facility.

And just to confirm on the Saudi cracker, you said 10% to 15% uplift to the CPChem overall earnings, is that?

Correct.

Right. And just on the plans to increase advantaged crudes. Obviously, we've seen your investment in the railcars, but maybe help us walk through where those crudes might go or in fact, if you think of the different U.S. regions, the types of barrels that you may be able to add into each region, which is advantaged?

Yes. So, kind of year-to-date, we've increased our exposure to the TI-linked crudes obviously. 120,000 barrels a day of shale crudes. We've also increased Canadian heavy by about 33%. We're running about 205,000 barrels a day of Canadian heavy today. About 60,000 barrels a day of Canadian medium light. And then -- about 225,000 barrels a day of other WTI or TS-related crudes. So that's 600,000 barrels a day where I'd say TI-linked crudes. On the heavy, we are running -- the heavy asset, Latin American heavy, about 471,000 barrels a day. So actually, about 50,000 barrels a day reduced in this area. And we've also reduced our exposure to Brent-related crudes by about 165,000 barrels a day all in. So, as we think about where can we move crudes, we want to move the shale crude from 120,000 to ultimately 450,000, 460,000 barrels a day. And we're trying to get those crudes to every refinery we can. But clearly, to Ferndale on the West Coast, Bayway on the East Coast. We think Ferndale can probably run 50,000 barrels a day of Bakken crude. Wood River, we can run up to 90,000 to 120,000 barrels a day of shale-type crudes there. Ponca about 60,000 barrels a day. Bayway, 100,000 barrels a day of shale-type crudes that we can advantage, that we can move into Bayway. Smaller, Rodeo, we can get in 30,000 barrels a day. And Sweeny about 40,000 barrels a day. And then Alliance, we're running today, Eagle Ford crude and some Bakken crude in Alliance. But ultimately, 50,000 to 90,000 barrels a day. So we have a plan to get advantaged crude into most of our refineries, Ed.

And final one on that topic. Most of that is related to rail or are you going to be doing some sort of lower-cost -- I mean, rail is $12, $13 or so, if that's the right number, but some lower-cost numbers are on other forms of transport?

No. Absolutely. So what I mean, we're down to 2,000 cars, that gets us about 120,000 barrels a day of capability. And that can go east or west out of Bakken. There's other areas and other shale plays that we're looking at rail to get to the front end of refineries. We're looking at making investments around P66 infrastructure. For instance, in gathering systems and/or trucking in the Mississippi Line to get advantaged crude into Ponca, we're looking at connecting to other pieces of pipe that are coming north, south, to get more Canadian heavy into some of our assets. And then around the Eagle Ford, we're looking at pipe solutions around Eagle Ford. So I would say that we're hooking at pipe, rail, truck, barge, just about any way we can get advantaged crude to the front end of the refineries.

The next question is from Faisel Khan from Citigroup.

Yes. This is actually Mohit Bhardwaj talking on behalf of Faisel Khan. I have a question regarding the CORE project. If you guys look at the WTI, WCS differentials, they move around a lot. I'm just trying to understand what level of heavy-light differential is required to make an investment in a new coker in these market conditions when everybody is trying to build one?

Well, I'm not sure that anyone would start a new coker today in today's market environment. There's more coking capacity then there is heavy capacity to get into the cokers today. And I think we view that through at least 2017. But on the other hand, I would say that we're pleased with our investment that we made in the CORE project. It's delivering the results that we anticipated. We're up to 200,000 barrels a day of Canadian or heavy crude into Wood River. We're seeing the clean product yield improvement that we envisioned. We are net 65,000 barrels a day of clean products to us. So 120,000 across the refinery. So as we step back and look at that project, $3.8 billion investment, solid returns in our view. This is a 15%, 20% type return project for us.

You know the reason why I asked this question was it's been the darkest in years as far as the Gulf Coast is concerned. You have -- you require is a 8% to 9% is the discount that has been said if you want to run a sand coker for heavy-light differentials. I'm just trying to understand what's the number as far as some of these mid-continent cokers that you guys are building, some of the others are trying to build. What level of TI CS differential would be required to justify the economics?

I'm not sure that we've really given the specifics. I guess it would depend upon the size of the coker, where the facility is, what other investment options you have. But I think -- I don't think we can give you a specific number on that one.

And the next question is from Doug Terreson from ISI.

My question is on financial strategy and specifically, while equity is growing and some will be removed by the repurchase plan that you announced, you're probably going to have to remove a lot of equity to stay within your stated capitalization range, that is unless debt is reduced as well. So my question is, what is the plan for debt reduction, if there is one, given the low-cost nature of the debt that you took on recently? And how do you try to balance or how do you plan to balance these strategies in coming quarters?

Doug, this is Greg Maxwell. I think in response to your question, it's a good question. As a mentioned, we don't have any debt maturities coming due in 2012. In the near term, we've got the 3-year term loan that starts coming due in 2013 on out about $570 million due in the first quarter of next year. The balancing aspect of it is, as you know, debt is cheap right now, and so we have to balance that with the other pieces of our capital programs as far as distributions, dividends, as well as capital expenditures. And currently, we have, as we mentioned, no intention or a stated intention to pay off any debt in 2012 and we -- the current plan is to meet the obligation that we have in March of the first piece of the 3-year term loan.

The next question is from Paul Sankey from Deutsche Bank.

I'd like to echo the appreciation for the disclosure that you gave. We appreciate that. I had 3 questions that are pretty quick to ask. They maybe long to answer. The first was, given your organic project queue and buyback, I assume that means that acquisitions are less important to you. You haven't really said anything about that. I just wondered if you could kind of make a statement for our benefit. The second was, can you just explain to us, to the best extent you can, what the impact of low NGL prices is on your business? And the final one was, you have a controllable cost target, which, off the top of my head, I seem to recall is, $4 billion of controllable costs for 5% with the target for around $200 million of savings. You did mention the controllable cost improvement you had during the quarter, but I wondered if you could just update us on the target?

Okay, Paul. Great. I'll take them one by one. In terms of the project cues, we kind of said we expect that the P66 capital will be between $1 billion to $1.5 million. We certainly have some infrastructure investments that we'd like to make around getting the advantaged crudes to the front end of the refineries, to export infrastructure products out into attractive export markets. We've booked at what's out there on the market right now in acquisitions, and there's nothing really interesting to us at this time. So we've got our plate full in terms of executing the plan around improving our base R&M business. Improving margins, returns. As you know, we have a significant organic growth going on in our Midstream business at DCP and in our Chemicals business at CPChem. I mean, we're very comfortable with that profile of spend in both of those businesses. In terms of low NGL prices, in some ways, we balance across DCP and CPChem, and we tend to pick up margin across that value chain. But just in terms of the Midstream business itself, about $0.01 per gallon change in NGL price is about $4 million in net income for us.

The last one was controllable costs?

Yes. Controllable costs, we've put a number out there, $200 million. We think it's a good number. I frankly think we'll do better than that. We tend to always exceed. We've got a program we call the Optimize 66 that we're working across this budgeting process which we're in the middle of it now. And people are looking at all avenues to improve efficiency and reduce cost. And frankly, the boys have come up with some great ideas from their early work that I've seen. So I think that the $200 million is a good number for a target.

And the next question is from Paul Cheng from Barclays.

I have a number of questions, hopefully that they are all short in terms of your answer. Greg, do you have any low-cost, cheap capacity expansion opportunities in your Central Corridor in the Gulf Coast systems?

So you're talking about Refining capacity?

Yes.

I don't think so. I think the investment that we're looking in the Central Corridor in the Gulf Coast is really right in infrastructure around the refineries, rather than expanding the refineries.

Right. I know that you are not looking at expanding, I'm just wondering if there are opportunity for low-cost expansion at all?

Yes. There maybe things on the back end of turnarounds, just normal de-bottlenecking that would occur in refineries. Maybe around Wood River, as we get more experience in the CORE project. But I'm not aware of any capacity additions that are coming in the Central Corridor or Gulf Coast.

And Greg, since that you guys have been talking about the focus, at least for the next couple of years, on the investment, if not the infrastructure. Does it make sense, from that standpoint, that to launch a MLP for the -- put some of your Refining, related logistics also into that and then use that as a vehicle to invest, given that they have a much better funding cost than Refining in general?

Well, thanks for being the first person to ask the MLP question. So, what we said publicly and we'll continue to say is that, in the Analyst Meeting in December, we're going to shed more light on where we're going with the MLP. As you know, we have an MLP embedded within DCP. I think we understand the potential for value creation that MLP will bring and certainly, I think DCP is using MLP very effectively to raise equity to fund their growth program. So similarly, as we're thinking about a Phillips 66 MLP, we'd look to say can we add value through raising infrastructure. So we'll tell you more about that in December, but we're working that hard, we're thoughtfully considering how do we use an MLP to the best advantage of Phillips 66.

But at the minimum, Greg, based on your answer that we should assume that you guys are not resistant to the idea that this could be a value creation ...

Oh, no, no, no. We're not resistant ...

[indiscernible] good vehicle [ph] that to host those growth projects that you may be talking about?

No, we're not resistant at all. I think we have an MLP embedded within DCP. We like it. We think it's been a very efficient way of raising equity and will continue to be a good vehicle for DCP. And we're just thinking about what's the best way for Phillips 66 to work in this space.

Can I have the number of the balance sheet item that what is your inventory market value in excess of both your short-term debt or up the entire total debt? And also your working capital, as well as do you have any goodwill and intangible asset on your balance sheet?

Okay, so let me run through those real quick again for Greg Maxwell so he can catch up. So the first one was [indiscernible] inventory relative to book?

Yes. In excess of the book.

Yes, we've got a $5.5 billion of inventory on the books. I will get that additional number for you as we go through the answers. It's in the back of our Q and I'll get that for you. But I think it's in the neighborhood of $5 billion. The second question ...

That one I think was short term debt relative to ...

Short-term debt.

Short term debt. What you'll see, Paul, on our short-term debt is really only the maturity of what we have coming due, as I mentioned earlier on the first tranche of the term loan. $590 million.

And do you have any goodwill on your intangible asset on the book?

Yes, we have a pretty good chunk of goodwill on our books. We have about $3.3 billion of goodwill associated with the previous acquisitions. And then intangibles of just about $700 million.

Okay. And what is your working capital?

The working capital in total, if you look at our current assets, we have $18.5 billion -- this is all the end of second quarter, $18.5 billion of current assets of which $3.1 billion is cash. So looking at that, we have $15.4 billion of current assets and about $14.4 billion of current liabilities. That gives us a net overall working capital of about $1 billion.

Perfect. 2 final quick questions. One, the share buyback, Greg, I know this would be subject to your management's discretion. Any kind of target date? How quickly that you want to complete that?

It's an open-ended program and we're not going to disclose an end point target. But you know, as we typically don't sit on our hands, I think you should expect to see us in the market every day, but not necessarily the same amount every day.

Sure. A final one, on dividend. I understand that...

And Paul, we'll report the amount of shares that we buy or the number of shares that we buy and the amount that we've used on a quarterly basis.

Perfect. On the final one, on dividend. I understand the desire, that you raise your dividend every year. But I don't know whether you gentlemen agree, but to place [ph] somewhat a loan only account [ph] that historically, looking at Refining as a just a trading group, and I think management has a great opportunity to change that perception if we boost the pay out to at least into the 3.5% to 4%. And then even at that is like 150 per share and given your earning power, it seems like you still have plenty of room that you grow over time. So I don't know if that's something that may be under consideration or that you just wanted that to go slow --

So Paul, I read your report. I thought it was thoughtful and well done. And I think we appreciate your advice and counsel in that subject. I think that what I would like to say about dividends are, I think they're the centerpiece, they're just fundamental to our philosophy around shareholder returns and distributions. We want to pay a competitive dividend. We want to increase that dividend over time. We recognize this is a volatile business. There's going to be some years where you feel flushed with cash and some years when you don't feel as good about cash flow in the business. You'll see us protect and the defend that dividend at pretty much all cost. It's so important to us. We do want to increase it. And you'll see us use share repurchases and specials also, as we think about returning cash to shareholders. So we'll look at that total toolbox that we have in terms of dividends, increasing the dividend, share repurchases and specials in terms of returning cash to shareholders.

Paul, this is Greg Maxwell. I was a little light on the number for the excess of current replacement cost over LIFO. At the end of the second quarter, it was 6.9. Sorry about that.

And the next question is from Blake Fernandez from Howard Weil.

I had a question on your decision to retain Alliance. Obviously, in this market, there's a lot more sellers of assets than there are buyers. I was hoping maybe you could give us some kind of indication of the interest that you saw on the asset and how much of your decision was a result of maybe a lack of interest or your actual shift in strategy on Gulf Coast crude?

I would say it's actually a combination of both. We had a lot of people go through the data room. We had a handful of offers and another one, we really regarded, as approaching our hold value for the asset. We made the decision to put the asset on the market, it really has integrated ConocoPhillips. We kind of had 1 view of where LLS was or where it was going. I think in the interim year that's passed since we made that first decision, that our view has changed in terms of Gulf Coast crudes, particularly LLS, becoming an advantage. So you think Alliance really has more future value than -- and certainly, value today than what people are willing to pay.

Greg, is it fair to say that Alliance is one of the key contributors to the increased export capability over the next year or so?

So we are exporting out of Alliance and looking to increase the export out of Alliance. It's a nice refinery. Single train refinery built in '77. It's a good, solid refinery. It's just a light sweet refinery on the Gulf Coast of the U.S. And so I think that as our thinking has evolved around LLS and around exporting, we see more value in Alliance.

Okay. Fair enough. The second question I had for you was on the ethane cracker on the Gulf Coast. I see you're looking for FID in '13. I'm just trying to understand the process. The permitting component of that, do you need to have that in hand before you can move to FID? And if so, can you just tell us where you are in that process?

Yes. So the credits we need have been acquired. Permits have been applied for. And I mean, just part of our process, we won't take FID without having the permits. And so, I think that's probably the factor that gets us there. We're in the process of -- we have a 2-step process where we do about 20% to 30% of the engineering up front. So we're just starting that, really, that first phase of engineering. But we fully expect that we'll be ready for FID in 2013.

And the next question is from Jeff Dietert from Simmons.

On refining rationalization, there was something you talked about through the spin and now you've got Trainer done, and Alliance you've talked about retaining. So is effectively, the rationalization complete on the Refining side?

Well, I think you'll see us continue to work the portfolio. I think we're like any company, we have a range of assets within our portfolio in terms of the returns and the future expected values of the assets. So you'll see us continue to work that. If you think about the assets around the periphery that could be non-core to us in the markets. But certainly, if you think around the Central Corridor assets, we really like those assets, we think they're long-term value-creating assets. Our Gulf Coast assets, same. And so we're not going to name specific assets today on the call. But I would say that we do have fixed our asset plans around some of our assets that are -- and you can see the numbers that we released today. Particularly, for example, the West Coast-challenged environment today, go back 2005, great earnings, great returns. But clearly, with the California crude decline, with the demand decline in California and the high operating costs that we see in California, really a challenged environment. And so we're working to put advantaged crudes to the front of those refineries and look at our cost structure and how to improve our cost structure to improve those assets.

Very good. Slipping to crude on the U.S. Gulf Coast, particularly with Alliance. How much light crude are you importing into the Gulf Coast? I'm just trying to get an idea of what the opportunity is to shift from international sweets to domestic sweets?

I'm not sure I've got that one. That's something that I can get, Jeff. But we run a little bit of sweet at Sweeny. So I think we've got a crude in there of 50 a day or so that West Africa or North Sea. I don't know if they're running Eagle Ford now. I think we have moved some Eagle Ford into Sweeny and moved -- but I think we're still importing at Sweeny. I think Alliance was primarily HLS and LLS. So, I don't think we were importing a whole lot into Alliance. Lake Charles, I think that was a heavy -- that's a heavy medium-sour refinery, but I can get those numbers for you. I don't think it's a big number. I don't know what our in parts are. We'll have to look at the waterborne barrels.

We can get it for you.

We'll follow up on that. And Greg, maybe just a quick update on what petrochemical demand and margins look like going into 3Q?

Petrochemical demands.

We can talk about 2Q. We are kind of hesitant to give a forecast, I think. If we think about CPChem, their volumes were relatively flat to slightly up, margins improved second quarter over first quarter. But there's a lot of turnaround activity during the kind of first half of the year, so we expect there's going to be some pressure on ethylene margins going into the back half of the year. So we think globally, we're concerned about Europe, we're concerned about China slowing down. And so I think that could have an impact on the global petrochemical business.

And the next question is from Arjun Murti from Goldman Sachs.

My thanks as well to your accountants, especially for the appendix slides, your 25 to 28, that's very appreciated that you included that margin detail.

We're here to serve.

That’s nice. You mentioned you're keeping Alliance. Just a follow-up on that, can you quantify at all, order of magnitude, what types of discounts you're now looking at for, presumably LLS to Brent, that made you want to keep this?

Oh, I think it's $2 to $3 is what our expectations are going to be, longer term.

Right. So it's gone up from what would have been $1 or $2 to coupled $3-type discount?

Absolutely. It may take 1 year or 2 to get there.

Yes. That's great. And when we think about restructuring the portfolio, you mentioned the ability to get the shale to places like Bayway and Ferndale. We would've probably, at least at one point, had them on the list as kind of restructuring or potential asset sale candidates. I presume the decision to keep or not keep those very much hinges on, can you land that shale crude at enough of a discount to Brent or ANS as the case may be, and if you can, they're much more likely to remain part of the portfolio?

Absolutely.

Yes. That's great. Just lastly, in terms of the -- it looks like 24% of your products slate that's heavy or non-light sweet crude. How much flexibility do you have if you wanted to run all light-sweet instead of that heavy, if the discounts are wide enough? Could you run all of that at light-sweet or would some of that have to always be heavy or is that [ph] a crude?

Well I think we could run a lot more light-sweet if we're willing to take rate reductions. And we're running those models every day, and so, we're going to chase value versus volume. And if the models tell us that we can make more money running less crude, we will do that.

But they're really configured. As you know, you get constraint at the light ends handling on the facilities and so that's what the issue is.

We've looked at that. It seems like the numbers are -- it's like a 25% reduction in throughput to go all the way -- as far as we can, yes.

There must be some ability to do one for one and then it falls off, I'd assume?

I think that's right. Obviously, there's a blending that you can do as well as. I think that's the approach we're taking right now.

Yes. And I'm sorry, one last one. You're calling WTI, WTS Canadian. Is that Canadian syncrude or is there heavy crude in that Canadian portion? This is Slide 11.

So, yes. We've got all the WTI WTS kind of lumped together, and so.

But what you're calling Canadian, is that light sweet Canadian or is there WCS and heavy Canadian in that Canadian or is that all in the heavy acidic mix?

I think that's all in the WTI. So what we've got in that 29% or 28% is we got about 100,000 of shale, we've got about 205,000 of Canadian heavy, 60,000 of Canadian medium light and then 225,000 of TI TS.

Yes. The heavy and acid is Latin American, there's no Canadian in that.

Got it. So some of the Canadian heavy's are in that Canadian number.

And the next question is from Evan Calio from Morgan Stanley.

I'll make it unanimous, as we approach the hour, that I appreciate the additional disclosure. Yes, my first question is a, maybe a follow-up to Paul's question earlier. And maybe I missed the answer, but I know you guys are very focused on cash returns. You're focused on growth in Midstream and Chemicals, but I mean, are Refining acquisitions off the table or as a similarly situated peer looked it's on its way to maximize the value uplift in an MLP structure, I mean, are those types of transactions not in your forward plans?

Yes. There's just nothing out there that interests us right now. In terms of acquisition in the R&M space.

Okay. And in Midstream?

Well, things are -- I don't think we would say we would not be interested in a Midstream acquisition, but I think with the valuations that we're looking at the Midstream assets right now, prices are...

They look high to us. Both Chemicals and Midstream looks high on the valuations to us right now.

So I wouldn't expect any significant M&A type deal in the near term from us. And we've said that increasing refining capacity for us is probably not in the cards. So, an acquisition of a refinery wouldn't be consistent with what we've said in the past.

Understood. Second question. On the refined product export capacity that you're -- are you guys currently at that max rate? I think you mentioned is 130,000 barrels a day or effectively limited in any way in exports. Or are these expansion more to allow for profitable exit when new Gulf capacity, particularly distillate streams in 2013 or Gulf Coast utilizations ramp in a Brent [indiscernible] differential opening up?

So we ran about 90 a day in the second quarter, which is -- it was actually down from the first quarter. But they have some turnaround activity that really impacted that. And so, our plan is to ramp exports up somewhere around 220. But we're going to chase value. So if [indiscernible] is there, we're going to take it, if not, we'll start where we can get the highest value.

It's really around creating optionality for us at us at those facilities. So when the markets are better, we can participate in them.

That's great. And on the railcar order, can you discuss maybe kind of cash costs or Bakken differentials you'll need to move feedstock into Bayway and whether or not there's any other transloading capacity that needs to be built out there? And are you railing anything, but currently I thought there was some volumetrics that were moving in there?

Yes, we're doing some currently today. Yes, but we have 10,000 railcars today already, but there's probably just a couple of hundred, I would guess, in crude service right now for advantaged crudes. And that's the reason we went ahead and made the order for another 2,000 cars. So, we are negotiating with other third parties to improve access for loading and unloading. We're looking at doing some of our own infrastructure for loading and unloading, so it's kind of an all above. And yes, we're running in Bayway today, a couple -- I don't know, 10,000 or 20,000 barrels a day, I think, in Bayway today. So, the answer is yes, we like that we're trying to get as much in as we can. We're looking at all the infrastructure. Preferably, if we can get a third-party deal with someone else, that's great, if not, we'll build it ourselves.

And maybe one last one, if I could. I know you guys clearly benefit on the NGL feedstock side in Chemicals. It was lower pricing and were ex impairment. Does it change, in any way, the way you look at NGL infrastructure such as Sand Hills or Southern Hills lines projects?

I mean, those are both fee-based, for the most part, projects. We think they're good solid return projects. We're not going to slow down on those. To me, the governor is going to be on the E&P side and the development, is crude going to be $60 or is it going to be $100. And I think that will ultimately will set the pace for all this $80 billion worth of industry investment in infrastructure. But as we kind of look out, we're kind of $90 to $100 guys, so I think, in terms of our view of where crude prices go longer-term, and so, we think that there's going to be value in pursuing these infrastructure projects.

And the next question is from Doug Leggate from Bank of America.

Again, I'd like to echo all the additional disclosures. It's much appreciated. Thanks for that.

Thanks, Doug.

A couple of things. I think some of these have been touched in different questions but I wanted to get a little bit more granular on the portfolio. I mean, you still obviously have -- if of you look at the earnings mix, that clearly, things have been moving increasingly towards the U.S. That's going to be the dominant part of your business going forward. How do you feel therefore about how assets in Malaysia, I guess, Ireland -- I'm leaving Humber out, because we all know that's a phenomenal facility. But, some of these other peripheral facilities, are those a permanent part of the portfolio as given the strategic advantage the U.S. has right now over the rest of the world?

So, I would say in the integrated ConocoPhillips, that, that asset was a strategic asset. I think if you think about Phillips 66, it's a not strategic asset for us.

You're talking about Melaka.

Melaka, yes.

And Whitegate, of course, is challenged. From the standpoint, it's a light-sweet crude refinery that's fairly simple and European refining is under pressure, so. I guess we look at things from a couple of different angles. One is from the returns. So what are the returns at the facility compared to the rest of the portfolio and compared to what our targets are? Can it generate mid-teens returns? And then secondly, would be free cash flow generation. So what does that refinery do in terms of a discounted free cash after CapEx? And is it a source of capital or can we monetize it and redeploy that capital in another part of the portfolio. But those are, I would say, will be the 2 key criteria that we would use on whether or not the assets would remain in our portfolio.

What would you expect to -- I mean, is that something that's going on as an active review or just something that's not a priority right now?

I know, at least as part of the company that we were spun out of, we were very specific on the size of our asset disposition program and pretty public on how much we were going to sell when. I don't think we're going to take that same approach in terms of how we manage the portfolio, in terms of being as transparent on how much we're going to sell in any given year. But we have $50 billion of assets. And so, we need to be looking at our portfolio all the time and looking at the bottom 5% or 10% saying to ourselves, okay, is this worth more to somebody else or does it belong as part of our portfolio? So, you should expect us to continue to work that portfolio even if we're not saying something publicly.

Great. Terrific. And then a couple of quick follow ups if I may. The CORE project, I'm just curious, obviously, the whole thing is designed around, I guess, Canadian disadvantaged crude. But with the dynamics changing the way they have done, are you currently running heavy crude through the CORE project or are you basically -- I'm just trying to get an idea as to what the marginal economics looks like right now heavy versus light. I understand there's a yield loss or a utilization loss, but it would seem to us that the light sweet has the advantage right now?

We like the numbers around the Canadian heavy right now or almost any Canadian crude, as you think about it. So, yes. We're running Canadian heavy today.

Yes, I don't -- are you looking at like LLS to Maya being compressed or because actually the [indiscernible].

Yes, I'm just trying to get an idea. I mean, obviously I bet there was huge drop off at the beginning of the quarter. But as we look forward, there's a lot -- it seems to be a lot of pipeline infrastructure coming on stream towards the back end of this year and early next year. I'm just curious of which -- what the LP would basically determine would be the better way to go. But I guess another way of asking the question is are you open to running light-sweet to [ph] cost even though the obviously, the investment was geared towards the heavy?

Absolutely, of course. I mean to the extent that we'll back out other TI type barrels to run a cheaper Bakken barrel, we would do that. But quite [ph] I think we're pleased with the performance of the CORE project to date . It came up. It's run well. It's been profitable. It's done the advertised improvement in clean product yields, in capacity expansion. It's hitting on all of its metrics and so, we're pleased with that.

Last one for me. Just the big move in crude prices during the quarter. I'm just curious is there any kind of derivative or timing difference issues that helped your margins? And I'll leave it at that.

I think it helped marketing, right? I think as crude prices or product prices fall sharply, it creates short-term margin expansion. But I don't think, in terms of inventory or trading gains, we saw a significant impact from the decline in crude price.

And the last question will be from Roger Read from Wells Fargo.

Just really kind of quick questions, maybe more on the operational front. As you look at your performance in the Mid-Con here, what you call the Central Corridor, how much of that was strictly the market and how much of that is maybe some of the changes you were able to make transportation wise, in terms of a little more permanence or at least a little bit of dislocation relative to just market indicators?

I would think that a big part of it was the market. Part of it was improved around running more heavy at Wood River. We just talked about in clean product yield around that. We did get some more advantaged -- other advantaged crudes into the Mid-Con refineries. But if I had to guess, it's probably 80%, 85% market and 15% other improvements.

During this second quarter, we really didn't have much turnaround activity in the central. The second quarter turnarounds were really on the coastal refineries. I guess we had 1 refinery that was down. But turnaround activity was relatively light as well. That may have helped.

Okay. And the only other question I had more on the financial side. The share repurchase, you said you're going to hold the shares as part of the treasury stock. What's the thought on that? Is that for future compensation and acquisitions? I mean, as opposed to retiring them, what's the thought process there?

Roger, this is Greg Maxwell. Initially, the share repurchase program at $1 billion is about 4% over the time and since we're not starting out with really any treasury shares, the view, current view, is that we would hold those initially as treasury shares, and then we'll look at our options going forward. But as you hit on it, as you go forward, you could have some use for those. And so, that's just an opportunity for us to continue to hold those at least in the interim period.

At this time, I'll turn the call over to Mr. Clayton Reasor for closing remarks.

Okay, great. Well thanks Sandra. I think it was a great initial quarter conference call. Obviously, we feel good about the results. You can find a copy of our presentation material and the sensitivity data on our website. Transcript will be there as well. And if you have follow-up questions, feel free to give us a call. Thank you very much.

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