Welcome to the Second Quarter 2017 Phillips 66 Earnings Conference Call. My name is Julie and I will be operator for today's call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Please note that this conference is being recorded. I will now turn the call over to Jeff Dietert, Vice President, Investor Relations. Jeff, you may begin.

Thank you, Julie. Good morning, and welcome to Phillips 66 Second Quarter Earnings Conference Call. Participants on today's call will include Greg Garland, Chairman and CEO; Tim Taylor, President; and Kevin Mitchell, Executive Vice President and CFO. The presentation material we will 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 Harbor statement. It is 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. Factors that could cause actual results to differ are included here, as well as in our SEC filings. With that, I'll turn the call over to Greg Garland for opening remarks.

Okay. Thanks, Jeff. Good morning, everyone, and thank you for joining us today. Adjusted earnings for the second quarter were $569 million, or $1.09 per share. We delivered good operating performance and generated strong cash flow during the quarter. Utilization increased to 98% in Refining and in CPChem's Olefins and Polyolefins. This represented our second-highest quarter in Refining and the highest utilization CPChem has achieved in the last 10 years. In addition, during the quarter, several of our facilities were recognized at the Annual AFPM Safety Awards. Out of approximately 275 refining and petchem facilities eligible for recognition, 11 total U.S. refineries were recognized for their strong safety performance. Of those 11 refineries, 6 were Phillips 66 facilities. And our Lake Charles Refinery, received the 2016 Distinguished Safety Award, the highest industry recognition. Lake Charles has gone two years and over 11 million hours without a reportable. We're really proud of the people of Phillips 66 through their hard work and dedication, they're demonstrating our commitment to operating excellence and that we can achieve a zero accident workplace, that every employee and contractor can go home safe to their families every day. Cash from operations for the quarter was $1.9 billion, the highest since 2013 and includes the impact of discretionary distributions from CPChem and DCP. We continue to maintain our commitment to shareholder distributions. During the second quarter, we raised our dividend by 11% and increased share repurchases by nearly $100 million to $380 million for the quarter. In our first five years as a company, we've increased the dividend at a 30% compound annual growth rate and repurchased or exchanged 131 million shares, representing more than 20% of our initial shares outstanding. During the quarter, we made significant progress on several growth initiatives, breaching major milestones in key…

Thank you, Greg. Good morning. Starting with an overview on slide 4, second quarter earnings were $550 million. We had two special items that netted to a loss of $19 million. We recognized a $34 million net charge for pension settlement expense. This was partially offset by an insurance claim reimbursement. After removing these items, adjusted earnings were $569 million or $1.09 per share. Cash from operations for the quarter was $1.9 billion. This includes a positive working capital impact. Capital spending for the quarter was $458 million, with $271 million spent on growth projects. Distributions to shareholders in the second quarter totaled $741 million, including $360 million in dividends and $381 million in share repurchases. We finished the quarter with a net debt-to-capital ratio of 25%. Our adjusted effective income tax rate was 32%. Annualized adjusted year-to-date return on capital employed was 6% through the second quarter. Slide 5 compares second quarter and first quarter adjusted earnings by segment. Quarter-over-quarter adjusted earnings increased by $275 million, driven by improvements in Refining and Marketing and Specialties. Slide 6 shows our Midstream results. Transportation adjusted net income for the quarter was $74 million, down $4 million from the prior quarter, mainly due to seasonally-higher maintenance spend. In NGL, we had adjusted net income of $14 million. The $3 million decrease was driven by seasonally-lower propane sales and higher turnaround impact at equity owned fractionators, partially offset by improved results at the Sweeny Hub. DCP Midstream had adjusted net income of $13 million in the second quarter. This represented a $4 million decrease from the first quarter, reflecting the impact of lower commodity prices and higher integrity spend. This was partially offset by a gain on an asset sale. After removing non-controlling interests of $37 million, Midstream's second quarter adjusted earnings were…

Thank you. We will now begin the question-and-answer session. Your first question comes from the line of Phil Gresh with JPMorgan. Please go ahead. Your line is open.

Hi, there. Good morning, good afternoon. First question just on the capital spending, obviously, you're trending quite well. Greg, I didn't hear anything about a reduction in the full year capital budget. I think last year at this time you did give a reduction because you were trending pretty well. So just what are your latest thoughts on CapEx for the full year?

Well, first of all, I don't think you take the first six months and double it to get an annual number but I would say we're going through our midyear capital review now and I think in the last month or so we're going to give you some guidance around that. The question for us is really FID on the fracs and when do we take those. But I think we're at that point in the year, even if we do FID on in the third quarter, we're not to spend a lot of capital this year. It'll probably be an 2018 to 2019 lift for us on those. So I think you're going to see we're going to guide down in terms of capital by several hundred million dollars.

And how would you put that in the context of the longer-term outlook for capital spending, kind of the framework that you've laid out in the past?

Yeah, I still think the framework of $1 billion-ish of sustaining capital, $1 billion to $2 billion of growth capital is still, we think, of appropriate level for us going forward.

Got it okay. And then just the second question, in light of the commentary on Midstream and there's several moving pieces here on the NGL side of things but where are we on the $300 million to $500 million total EBITDA from the frac and the LPG export? Obviously there are some other factors here in the quarter as well but how would you frame that up and when do you think we can hit that full run rate?

Yes, so I'll take a quick stab at it and then Taylor can come over in the top and correct me, maybe, if I get it wrong. So, the frac, we've seen a lot of ethane rejection. We've seen heavier feeds going into the frac and we struggled to hit design rates on the frac. We have done some debottlenecking around the C4s (17:26), which is where our limits were. And so in the second quarter we actually ran the frac at rate 100,000 a day for the first time since we started it up. So I think we've got that issue solved in terms of frac. So it's generating kind of that $60 million to $70 million of EBITDA that we laid out originally. On the export facility, I think there's some market structure issues that we need to just think through in terms of being able to deliver on the promises that we made there. We're currently doing the 8 cargoes a month, although in the second quarter I think we did 20.5 cargoes; we're 3.5 cargoes short. But we're in that seasonal part of the year, where you see those declines. And I would say as we're moving into August, we're more than fully loaded coming into August, so I think we see good results there. As you know, dock utilization across the industry is in the low-80s, and I think we're going to have seen that utilization move up to the 90s before we can actually get the fees up. And so, where we'd premise kind of a $0.12 to $0.14 fees, they're running $0.07 to $0.08. And so, I think, all-in, where we're at right now, we're probably somewhere around $200 million to $250 million-ish of EBITDA in that facility against the $400 million to $500 million that we had promised though. Now and I think as we come into the back half of 2018, we see NGLs coming at us. There's been new fracs announced. We're obviously working on two new fracs, and so I think that we're going to see the NGL supply, particularly propane increase. I think you're going to see it's going to be necessary to export those propane volumes out of the U.S. to clear them. And so, I do think that utilization starts to improve as we move in the back half of 2018 and 2019. And then, I think that's when you see the opportunity for those fees to increase. And I'll turn it over to Tim, and he can add some color on that.

Yes. I think that really the issue is that as you think about it NGL price relative to crude has strengthened, particularly with propane. And so I think as supply increases, you see that coming back into balance. And then, it would structurally be helpful to have a high crude price, and that has an impact as well as you think about substitution economics in the various markets, whether it'd be for heating, or for petchem. So I think you'd like to see crude market strengthening, increased NGL supply in the U.S. That brings the utilization up and gives a chance to really open those arbs up. And until you see that and we think that happens out this next 2018 months or so. Until you see that, you really, I think, kind of see where we are. So we work hard on optimization, reducing our costs, and making improvements that we've done in terms of run rates, operating cost and the values that we get for the products. So make good progress on that, but the real breakthrough has to depend on that market improving.

Got it. Okay. Thanks. I'll turn it over.

Okay.

Your next question is from Paul Sankey with Wolfe Research. Please go ahead. Your line is open.

Hi, everyone. Greg, I may have misheard you, but did you say that the Gulf facility is going to be mechanically complete later this year, because I saw a press release from you guys – well, at least from CPChem saying that it was already mechanically complete?

So, yes. The polyethylene is mechanically complete, and I think we're really close putting hydrocarbon in to those units. So they'll be up and running this quarter. The cracker is going to be mechanically complete until the end of the year, Paul.

Okay. I got it. And so, we would expect a contribution financially next year pretty early on?

I think the big – yes. The big contribution will be in 2018, but we'll get some contribution off the polyethylene units in the back half of this year.

Yes. Got it. Can you talk about the next phase there? And, by the way, while you're on the subject, would you mind just looking back at the original decision to build this thing and how the market has changed both from your own point of view and also the competitive environment down there? Thanks.

Well, maybe I'll start backwards. I think that we still think it's a good decision to build the facility. It's really made possible by the shale revolution in the U.S., and we still think that North America and the Middle East are the two best places to make petrochemicals. And so, there's nothing that fundamentally around that view has changed. A lot of other people have jumped in and are building capacity, so no question there's a lot of capacity that's coming up in this kind of 2017 and 2018 timeframe, but we're still constructive on the market view. I think that this market's still growing at 1.5 times GDP. As we look around the world, if anything the economies are doing better than we kind of expected. We're seeing good results in Europe. Asia continues to be strong. We're seeing good economic results in the U.S. And so, I think we feel good around the fundamentals, and we're not as concerned about the supply-and-demand balances out in 2018 and 2019 as some people are. I think that you're going to see some compression on margins as these crackers do come up. But, fundamentally, I think that you kind of need four or five crackers a year just to keep up with demand. And so, I think we'll certainly push through that relatively quickly. I don't know Tim, if you want to add any color on that?

Yes. I'd just think back on – reflect back a bit. I think we've anticipated that margins would come in, but they're still quite good today in the order but in that near $0.30 a pound, which still provides incentive and reinvestment economics. And I think as you look out, you still see the supply of ethane in the U.S. increasing and you're seeing already additional announcements. So I think from an industry standpoint, this still looks like a very competitive place in North America to build. The world's appetite's there, and as Greg said, I think the markets have continued to be strong, and as you think about the supply side for a couple of years, I think we've got little – a flatter spot here on utilization in the next 18 months. After that it begins to tighten up again. So I think it's still a pretty constructive market situation and we still like investing here in North America and then in the Middle East as well. But we continue to look at options around the world.

So the first part of the question was around what are we doing on the second project. So you want to give an update on that?

Yes. So we're actually in the engineering phases of site and technology, looking at ways to be more capital efficient, and still thinking that in the U.S. it's likely to be the next site for that. But really an FID on that cracker, we'd see sometime after next year, sometime post 2018. But still advancing down that because we still see the need for growth. We're still leveraging the CPChem's technologies, and we still think it's going to be a very attractive market.

Thank you. You answered the question. Thank you.

Thanks, Paul.

Your next question comes from the line of Doug Leggate with Bank of America, Merrill Lynch. Your line is open.

Thanks. Good afternoon, everybody, good morning, everybody. I've got one housekeeping one and one strategic one if I may. Kevin, the housekeeping one is deferred tax. Can you help us a little bit with how you see that trending? Because it continues to be a fairly substantial piece of the cash flow year-to-date, I think it's now overtaken the full year's deferred tax from last year at this point. And I've got a follow up, please.

Yes, it is. And you will have noticed that it was higher in the first quarter than the second quarter. So we would expect to continue to see some deferred tax benefit in our cash flow and the primary driver there is the impact of tax depreciation versus financial. So we have the benefit of bonus depreciation on new assets that is significantly higher than financial depreciation. And so you see that affect flow through the cash flow statement on deferred tax. The first quarter was a bit of an anomaly because of the item that for earnings was a special item, the consolidation of the MSLP and the gain on that triggered a sizable deferred tax impact there. So I would kind of ignore some of the big jump in the first quarter on that. But over the course of the year, we're still going to see a reasonable deferred tax benefit for the full year, and it will be more than what we saw last year, as you've already pointed out.

Okay. I appreciate the guidance on that. So my follow-up is really more about the drop-down schedule for PSXP, and obviously we're halfway through the year, and I'm guessing we're anticipating something in the second half. So I'm wondering if you could speak to how you see the timing of the next wave of drop downs to get to your $1.1 billion EBITDA target. And more specifically and, Greg, maybe this is for you. The corporate bond that you did at the end of last year had some unique attributes to it, and I'm wondering how that might feature into the likely funding of a PSXP drop-down as it relates to the parent level total debt? And I'll leave it there. Thank you.

Okay. Well, let me start at the high level, and then I'll let Tim and Kevin kind of weigh in. We still think that 20% to 30% debt-to-cap on a consolidated basis at PSX is the right target for us. There was some unique characteristics about how we structured the refinancing of the debt that we did earlier this year, with the intent that we could make that drop debt essentially droppable into PSX as we dropped assets. And Kevin can go through a little bit more of the details. You know we don't guide in terms of timing of drops. Clearly, we're at $675 million, we said we're going to be at $1.1 billion run rate by the end of 2018, and people can do the math around that, and come up with their ideas. I do think we'll have a drop in 2017 and also in 2018, or maybe multiple ones. But I still think that we have a path to get to the $1.1 billion and we're very comfortable with that path. So, Kevin, do you want to talk a little bit about the debt, how we structured that?

Yes. I will, Doug, and you're referring to the $1.5 billion of PSX bonds that matured actually in the second quarter. It was May 1 maturity, we refinanced those in April to take care of that. They were refinanced with short-term floating rate notes and term loans that are assignable to PSXP. And so what that means, we can, as part of a drop transaction, move debt down with the drop as part of that funding and then PSXP would have the flexibility to go out into the market and term out over a longer period of time that debt financing. So that in and of itself means that component of the payment, if you like, for that drop would not generate cash at the PSX level but it's also consistent with how we've talked about PSX level debt dropping as the MLP debt increases. The MLP structure, obviously it's a leveraged structure, and it will increase debt as it grows. And so to manage consolidated debt, this is one way of accomplishing that, that we're effectively moving debt down from the parent level into the MLP.

Kevin, thanks for the color. I know it's kind of complicated issue. But just a quick point of clarification still, if you're moving debt off the balance sheet at PSX to nonrecourse at PSXP, obviously, you're not getting the cash in the door from the debt they may otherwise have raised. So how does this impact the buyback schedule as opposed to debt reduction as a relative priority producer (29:21)?

Yeah, so a couple of things. It is still consolidated debt on the PSX balance sheet. So on the PSX financial statements, that debt is still there, okay? So it does. It reduces the net incoming cash to the overall corporation, because all we've done is move debt between entities. But when we step back and look at the cash that's generated from the business, from the equity markets, and it's not that PSXP won't be doing any debt financing of its own incremental to what's coming from PSX. So we still think – we look across, holistically across all of that and it still works in terms of being able to fund the capital program, fund the dividend, fund the share buybacks.

Really helpful.

We don't have to drop the debt, right?

That's true, that's true.

Yes, fair point. Thanks a lot, guys. Appreciate the answers.

Thanks, Doug.

Your next question is from Neil Mehta with Goldman Sachs. Please go ahead. Your line is open.

Good morning, team.

Hi. Good morning.

I thought we'd start off on the Specialties and Marketing business. Relative to our model, that was the standout area in the quarter. So love for you guys to talk about what was the driver of relative strength in the business. And then on Specialties, in particular, anything that you would call out of whether the strength was sustainable or not?

Yes, Neil. This is Tim. On the Specialties business, it's really the improvement in our lubes business. And we talked about improved base oil margins. We also did – you know, Lake Charles was in turnaround the first quarter which is where the base oil unit is. And so this is much more of what we would've expected versus the prior quarter. So I think it continues to be a business for us that one where we continue to see fairly stable earnings. And so I look at the second quarter and that's something that we would expect to continue more at that level versus the first quarter, so good improvement as a result of that. On the other side, on the Marketing side, it's really strong results in our European Marketing. It's strong results in our U.S. Marketing and it just reflects from the standpoint the spread between the rack and the wholesale margin expanded in that market environment and it fluctuates but, generally, that's been a pretty strong performer. And so I think a pretty consistent cash flow on the marketing side and EBITDA in those businesses. And we've been, I think, pleased with the strength that we've seen, both in Europe and the U.S., in terms of that spread between the rack and the wholesale margin.

I appreciate the comments. The follow up is it's around the health of the product markets. And I'd appreciate your guys' views in terms of what you're seeing in your outlook in terms of your views on distillate and gasoline and the outlook going into the back half of this year.

In the gasoline market, I think it's relatively flat in the U.S. We look at same-site sales. We look at reimage sites. We're seeing strengths in various regions across the U.S. being a little bit different, but it still feels to us like this year will be a lot like last year in terms of total demand. The real upside is coming from the U.S. perspective with the export side. The short that we've seen in Latin America, particularly in Mexico, with some of the things we've had there, both in the Gulf Coast and the West Coast have actually improved that. Europe, as Greg mentioned earlier, is doing better as well and Asia continues to be on a global basis there. So I think we're encouraged on the demand side but it's not over the top growth but it's still been fairly good growth if you just step back and look at the global side. And the distillate cracker has actually improved versus last year. And I think what we're seeing is a little more industrial activity around the world's helping to support that. In the U.S. perspective, we've been able to export and there's just been support this year on that distillate crack and with strong distillate jet sales, et cetera, that have improved the overall crack in the market. So unlike 2016, I think that's helped balance the proportion of distillate to gasoline and has improved the overall profitability in the segment as a result. But still not what I'd call a supply-constrained market. And so I think that we see seasonal strength coming through the third quarter and then some tail off in the fourth and first quarter.

If you look broadly at manufacturing PMI U.S. level for May was the highest since 2014. Germany PMI has really spiked. China year-to-date is the highest since 2012. So manufacturing activity, the indicators we're seeing more broadly are supportive of distillate demand.

Are you seeing that translate into your U.S. Marketing business as well, Jeff? And any comments in terms of what you're actually seeing on the wholesale side?

I would say on the distillate side, we continue to see very much what we see. We think about the more retail-oriented piece of that. We see very much what we see with gasoline, kind of volatile up-and-down but not strong increases. Some increase with oilfield and some of those activities coming back and – in transportation movements, largely offset probably by efficiencies, even in the diesel market. And so I think that it's related more to infrastructure additional activity around the world in that in the construction side. But I would say the distillate and gasoline markets look fairly similar in terms of just fundamental demand in the U.S. in terms of year-on-year growth, with jet being probably the one exception where it's really been a strong market around the world.

Great.

Your next question is from the line of Paul Cheng from Barclays. Please go ahead. Your line is open.

Hey, guys. Good morning.

Hi, Paul.

Kevin. Kevin, what is the cash distribution from CPC and DCP this quarter?

Yes. Paul, so we don't disclose the specific distributions. But I can tell you that – so $422 million of total distributions this quarter. If you look back over the last previous five quarters or so, the average distributions were $150 million per quarter, $422 million this quarter. The increase is essentially is explained by what's coming out of those two and the bulk of it is CPChem. So we did receive distribution from DCP but it's small compared to CPChem. And I'd also say it's still not ratable, so we probably had disproportionately more in the second quarter than you'd expect to see on a normal quarterly basis. Maybe not so much so if you look at the second quarter, if you think about that as a first half, then more in line with what you'd expect to see annualizing a half year number.

Actually, Kevin, I mean, with the CPC expansion, the spending has pretty much come to end. I'm actually surprised that you didn't expect the distribution going to be higher from the CPC than what we've seen in the first half.

And it will be as you look forward into next year, especially. So you have two effects going on. The capital spend is coming down. So this year's CapEx at the CPChem level is about $500 million, $600 million lower than the previous year, lower than 2016. And then as you look ahead to 2018, you'd drop off by a similar amount in capital expenditure. And by 2018, you'll see some – you'll see the operating cash flow from the new assets as well. So you will as you look forward see that cash ramping up.

Okay. And the next one is for – I think for Tim and Greg. Some of your competitors that have decided to move into Mexico on the logistic and maybe bidding on some of the physical assets to – as an extension of their export strategy. Just wondering that is that a business that you guys would be interested or that you view it differently.

Paul, this is Tim. We've had a long-established relationship in Mexico so it's been a trade partner with us. So we continue to access that market and I think you have to look at the infrastructure and say is that something that you need to serve that? So it's something you can think about for consideration. I think the second part of the question though is about what do you think about exports? And we continue to expand at Beaumont. We continue to look at ways to access additional exports out of our Gulf Coast refineries. And so that's something that we think about in terms of a Midstream and Refining investment that may be a way to leverage and really take care of a, so to speak, the demand side that we're seeing from the international side. So we have projects underway to look at dock expansions, those kinds of things, to increase access to all those markets, not just the Mexico market.

Right. So, Tim, I guess my question is that so that sounds like that you're not in the camp that you necessarily need to own the physical asset in Mexico in order to expand your export capability or that you're walling into that country. (39:06)

I think we'll evaluate those but I think right now we've been comfortable that with our existing relationships that we've been able to serve that market quite well. So it really depends if the market structure changed then I think we'd have to think about that but right now we're comfortable with where we are.

Okay. And a final one, if we look back the Sweeny NGL Hub as you mentioned earlier that right now it's probably running maybe about 60% to 50% of the EBITDA is what you originally expect. Just curious that from a look back standpoint, does it in any shape or form, that have changed the way how you evaluate project and FID the process going forward or do you believe that this is somewhat unique by itself and also it's just a temporary event. So it doesn't really change the way how you look at project going into the future.

Yes, I think for better or worse we kind of live in a commodity world, Paul, and we're used to both kind of volumes and margins fluctuating on us and we really can't call the timing that well. We do think about the trends and long-term and we're always talking about the mid-cycle and thinking about the mid-cycle case. And I do think that we'll have the opportunity to grow margins in that business. Certainly, the volumes are there and as we look at what's coming at us out of the Permian over the next couple years and out of U.S. shale, I do think that that we'll have the opportunity to improve the earnings in that asset. But we FIDed it in a $100 crude world and we're in a $50 crude world today, so that is a big difference. In retrospect, we might've moved sooner and faster maybe to tie up some of these longer-term contracts. And so I think that's a learning for us on that one, Paul, but I do think that we're still very comfortable taking commodity risk as at the PSX level.

All right. Thank you.

You bet.

Your next question is from Blake Fernandez with Scotia Howard Weil. Please go ahead. Your line is open.

Hey, guys. Good morning.

Hey, Blake.

Hey. The cash flow was really strong and I know you addressed a couple of the drivers but one was working capital and it looks like you unwound about half of the hit that you witnessed in 1Q. So I'm just curious if you have any thoughts on how that could change here in the back end of the year?

Yes, Blake. It's Kevin. That's right. It is about half of the hit we took in the first quarter. Remember the first quarter you had the impact of pretty sizable inventory build and also we were hit on payables, especially with all the turnaround activities that you effectively run down the payables balance. And so we've got the payables component back to kind of more normal levels and then the rest is just normal kind of ins and outs. So we had a slight benefit on receivables with the falling price. We had a slight reduction in inventory and so you kind of get back to that $600 million, $700 million working capital improvement. I don't think as you look ahead to the third quarter, absent there'll be fluctuations based on prices and all of that but I wouldn't anticipate anything significant in the context of the third quarter. And then as you go into the fourth quarter, you'd typically have the inventory drawdown and then it's just a question of how much of that flows through to cash versus carries forward as receivable.

Got it. Okay. And then that kind of leads me to my second question, which is on the buybacks. Obviously, there was a pretty healthy step-up step change from where we had been trending the previous several quarters, and I guess I'm just trying to figure out is that a function of the improvement in working capital, just a one-off quarter, where we have additional cash, or are you guys trying to strategically kind of change the profile of the distributions?

No, I think we're still at the highest level, kind of at the 60/40 split we've always talked about, Blake. I think that a couple of things. One is we pull capital down a lot. 2016, we pulled share purchase down in 2016 just given the fact that we generated half the cash that we generated in 2015. There's always questions around where the margins were going to go in 2017, and then the share price took a dip, and we just bought more shares as the share price dipped. But we've guided to $1 billion to $2 billion of share repurchase in 2017. I think I've also said that we don't intend to be at the bottom of the range this year, if that helps.

Yes. Thank you.

You bet.

Your next question is from Roger Read with Wells Fargo. Please go ahead. Your line is open.

Yes. Thanks. Good morning.

Hey, Roger.

I guess maybe come back to some of the Midstream, specifically in my case DCP, that has continued to struggle, and I'm just kind of wondering you've put a lot of effort into you and your partners fixing it, restructuring it and all, and still the results are a little bit on the soft side. So I'm just wondering what's the thought process there. Is it improvement in margins? Or is there additional sort of internal restructuring we should be waiting for?

I think that we did the major restructuring early this year where, essentially, what we get now out of DCP is the LP and GP distributions. There's some level of holdback at the GP level that can happen depending on cash needs at DCP today, but you really kind of need to think about the distributions that we're going to see out of DP is really going to be related to our LP and GP ownership, which is about 38% today at the LLC level. The good news is with the restructuring, we're getting distributions out of DCP, which is new. And then, you think about DCP, I think in a kind of a mid-$50, let's say, NGL-price environment, I think they'll be able to cover their distributions. So, I think that – I don't know if DCP is completely fixed, if you want to put it that way, but I do think we've made a lot of great progress in terms of the cost structure, the contract-portfolio work that's been done, and then just the fact that NGLs are kind of trading up in that mid-$50 range has been very constructive for DCP. And so, as we move forward and we think about NGLs going forward, I think we're still pretty constructive on the NGL prices going forward, particularly as that thing starts to come out in rejection.

Yes, Roger. It's Tim. So, hey, as ethane comes out, the volumes come up. And if you look at DCP, some of the opportunity they're seeing is in the DJ Basin, the Permian particularly with Sand Hills, the debottleneck, and so the volumes have been increasing there. So I think that you need a stronger environment where we're seeing in the crude, gas, and NGL markets would help that. But then, beyond that, it's just continuing to increase that fee-based business, and that's where they've really put their emphasis, and they're looking at expanding their G&P footprint, as well as their pipeline connections to do that. So I think it takes some time, but at the current market rates they're in a pretty good position with the backstop on the GP IDRs to help that transition period.

Yeah. Okay. Great. Thanks. And then, to completely change gears here, on the Refining side, light-heavy diffs have been narrowing. You seem to come through 2Q without too much trouble on that. I was just wondering as you look at Q3 and then, obviously, some risk on Venezuelan barrels one way or the other, how you're looking at the light-heavy? Have you switched aggressively to a light barrel? What is your flexibility from this point forward? Kind of what other measures would you take at this point?

I think in the second quarter, we ran about 6% less heavy crude, 3% more medium, 3% more light. I think our view is that just given all of the operational issues in Canada, what's going on with the crude cuts in the Middle East, and troubles in Venezuela, I think you're going to see light-heavy diffs kind of pressured into the third quarter. I think as we come in the back half of the year, you see some of operational issues maybe solved, Mildred Lake and different places. You get into refining turnaround season, and the fall turnaround season, you might see those diffs open up a little bit more. But I would expect coming into the third quarter, they're going to be pretty narrow.

Okay. Thank you.

You bet.

Your next question is from Justin Jenkins with Raymond James. Please go ahead. Your line is open.

Okay. Great. Thanks. Good morning, everybody. I guess I'll start with a dovetail on Roger's question there, and get one light crude differentials. It seems like Brent versus WTI has been reasonable, and Permian has shown a few signs of life in terms of discounts. Is there a potential that we see PSXP maybe look to get an even bigger presence with upstream customers to maybe gain better control of those barrels or at least maybe the quality of the barrel?

Yes, Justin, this is Tim Taylor. So I think PSXP continues to look at the Permian and the areas of SCOOP STACK. You've seen that JV. We're expanding that, we're extending the reach. That's a very attractive barrel for instance, in our Ponca City Refining System, plus it has trading opportunities around the Cushing hub. So I think we all continue to look at ways to tap into that increasing light supply. I do think though that the Brent/TI differential just ends up being kind of stays narrow because of the opportunity to export now. So it's also letting us at PSX expand at Beaumont as we've seen a demand for movement across the dock as well as storage there. So I think as this continues to develop, there are opportunities in the Midstream to capture that liquids inflow, but I don't think that you're going to see light differentials between Brent and WTI really come out, unless we get truly infrastructure constrained. And that doesn't look like it's going to happen in the very near term. It would take a substantial increase in the Permian or some other play to really drive that. And we'll see if that goes, but I think now with exports, you really limit that opportunity for a quick blow-out.

I think our view is that infrastructure seems to be keeping up at this point in time.

Okay, sounds about right. And then I guess staying in Midstream, it seems like the capital program there has also trended a bit below the 2017 budget. Is it something that's back end loaded I guess maybe it's one of the potential fracs maybe being in PSXP?

Well, I think most of our growth capital is in Midstream, and so I think as we give the guidance here in the next month or so, that's where you're going to see most of the cut. And you're right, it's a lot around the timing of the fracs and the uptake of the fracs in terms of actual versus what we had budgeted.

We've also seen about a quarter slippage in Bayou Bridge, which was our joint venture with Energy Transfer and Sunoco eastbound out of Lake Charles over to St. James. And so that's affected the spending and the timing a little bit. But I think that in the Midstream, we just carefully evaluate the opportunity is still growing, Beaumont and some of the options around our basic skeleton. But I think that you've got to see those commitments on the producer side, and I think they've grown a bit more cautious on that.

Perfect. Thanks, guys.

Your next question is from Faisel Khan with Citigroup. Please go ahead, your line is open.

Hi. Thanks. Good afternoon.

Good afternoon.

Hi. I want to clarify, on the distributions from CPChem as the project – the ethane cracker has reached its completion. Is there some debt that has to be paid down at the joint venture? Or should we expect that distributions sort of wrap up as the profitability takes off?

Yeah, Faisel. It's Kevin. There is debt at CPChem that matures in 2018. And so one of the questions that the owners need to answer is, do we use the cash flow to pay off that debt as it comes due or do we refinance and turn some of that out which would obviously enable more cash for distribution. So that's something that we'll work through with our other owners around that. So, that can be a factor. But nonetheless, even with pay down of debt, we would still assume an uptick incrementally higher distributions in 2018 compared to 2017.

Okay. Got you. And then separately, the Jones Act tankers that you guys contracted for a few years ago, when are those contracts are up and do you see yourself coming back into the market to continue to move crude, I guess, from the Gulf Coast up to the Eastern Sea board or has that opportunity sort of evaporated?

No. I think there's still Jones Act demand on the product in the crude side. And so we have various phases on commitments on that. So we just look at that every time those commitments come up, does that make sense in that term. But it's not as tight as it was a couple of years ago. And so I think we leave that more as an optimization as those leases come up. But we have a – I think I'd say we have a comfortable position with our exposure on Jones Act.

Okay. Got you. Thank you.

Your next question is from Craig Shere with Tuohy Brothers. Please go ahead. Your line is open.

Hi. Thanks for fitting me in. Do you see an enhanced vertical integration with a potential FID of a second Sweeny frac later this year and helping to ultimately widen out and stabilize LPG terminal margins?

Okay. So I think I if I interpret your question, A, I think the next increment of investment is more cost effective. And as you increase the production of propane in your own internal fracs, there is an uplift as well. So the incremental decision has more traction. That said, we still need to make sure it makes sense in the context of the total term. But it would be an improvement with the already sunk investment in pipes, caverns and the LPG dock that help drive higher utilization across that system.

Well, that's a good point. The second frac is definitely going to be more economic and cheaper to build. And you all also foreshadowed that you might be lowering 2017 growth CapEx. Kind of as a segue, if recharging Midstream growth CapEx takes longer than expected, can you see share buybacks continuing to trend up possibly above $2 billion? Or would you be looking to possibly build cash over time in an environment with fewer initial growth opportunities?

Well, so I'll take a stab at that. At a higher level, I still think we're comfortable with $1 billion to $2 billion of growth capital longer-term and $1 billion to $2 billion of share buybacks longer-term. So I think you could tweak that in any given year, given where you see your investable opportunities, where you see cash going on. And certainly, we did that in 2016. But long-term, we're committed to investing in the business. Our investments have to hit our hurdle rates obviously. And then in terms of the share repurchase, as long as we're trading below intrinsic value, we're going to buy our shares. And so we think it makes sense in today's environment so we're buying today.

Very good. Thank you.

Your next question is from Spiro Dounis with UBS Securities. Please go ahead. Your line is open.

Hey, everyone. Thanks for taking the question. Just wanted to start off with – and I guess the concept of moving maybe more product into PADD I from PADD II. Obviously some news out there about pipeline reversals. And just given your unique position I guess on both sides of that, can you view something like that as viable, or even makes sense over the longer term?

Well, this is Tim Taylor. So today, the Gulf Coast, for instance, the Colonial arb is still closed. And so I think just anything that connects these markets makes them more efficient, PADD II is different than PADD III. And it may make sense from a PADD II perspective that excess material can go – so to speak – can go into the PADD I. So I think that has to rest on its own merits of what you believe those long-term diffs would be and where the product placement on utilization could be. So I can't speak to the merits of that directly because it's not a project we're looking at. But if you think about balances, it may be a way to balance PADD II length with that. And then you either adjust Colonial or imports or some other type of supply into PADD I, which is still an import region in the U.S.

Okay. So it sounds like flows would still be pretty seasonable. So if there was a pipeline reversal, it's not like it's going to be utilized all year round, it sounds like?

It really just depends on the value of imports versus where you are on supply out of the U.S. system. So it could very well be structural as well as seasonal.

Got it. I appreciate that. Second quick one here, just on refining configuration. Seems like it took a bit of a larger hit this quarter on it. So just curious maybe what was driving that. And more broadly, if you'd comment either for you or your peers if you're skewing a little bit more towards gasoline or distillate these days.

Spiro, it's Kevin. Specifically on our – that variance on capture driven by configuration. If you look at the market crack the way we calculate our global market crack, the entire improvement in market crack was gasoline and the distillate crack was essentially flat quarter-over-quarter. And so that will drive a larger impact to that configuration component of the reconciliation from market than to realized.

Yes, we made about 45% gasoline and 38% distillate in the second quarter.

Got it. And then just in terms of where you're running these days either max gasoline or distillate, how you're thinking about that?

I think that this is the peak driving season. So you're definitely skewered toward more gasoline on supply side but unlike last year, there's still support for that distillate. So I would say that you've got to just optimize around each and every refinery and their configuration but this is the peak season. So you do tilt more toward gasoline. As you get to winter, you're going to tilt more toward the distillate.

Yes, and we're pretty close to max gasoline right now.

Got it. Appreciate the color. Thanks, everyone.

Okay. Thank you.

Thank you. We have now reached the time limit available for questions. I will now turn the call back over to Jeff.

Thanks, Julie, and thank all of you for your interest in Phillips 66. If you have additional questions, please call Rosy, C.W. or me. Thank you.

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