Phillips 66 (PSX) CEO Greg Garland on Q2 2021 Results - Earnings Call Transcript

Phillips 66 (NYSE:PSX) Q2 2021 Results Conference Call August 3, 2021 1:00 PM ET

Company Participants

Jeffrey Dietert - Vice President of Investor Relations

Greg Garland - Chairman and Chief Executive Officer

Mark Lashier - President and Chief Operating Officer

Kevin Mitchell - Executive Vice President and Chief Financial Officer

Robert Herman - Executive Vice President of Refining

Brian Mandell - Executive Vice President of Marketing and Commercial

Timothy Roberts - Executive Vice President of Midstream

Conference Call Participants

Neil Mehta - Goldman Sachs Group, Inc

Roger Read - Wells Fargo Securities

Douglas Leggate - BofA Securities

Philip Gresh - JPMorgan Chase & Co

Paul Cheng - Scotiabank Global Banking and Markets

Theresa Chen - Barclays Bank PLC

Manav Gupta - Crédit Suisse AG

Matthew Blair - Tudor, Pickering, Holt & Co. Securities

Jason Gabelman - Cowen and Company

Ryan Todd - Piper Sandler & Co

Operator

Welcome to the Second Quarter 2021 Phillips 66 Earnings Conference Call. My name is Hillary, and I will be your 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.

Jeffrey Dietert

Good afternoon, and welcome to Phillips 66 Second Quarter Earnings Conference Call. Participants on today’s call will include Greg Garland, Chairman and CEO; Mark Lashier, President and COO; Kevin Mitchell, EVP and CFO; Bob Herman, EVP, Refining; Brian Mandell, EVP, Marketing and Commercial; and Tim Roberts, EVP Midstream. Today’s presentation material 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. We will be making Forward-Looking Statements during today’s presentation and our Q&A 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 will turn the call over to Greg.

Greg Garland

Thanks, Jeff. Good afternoon, everyone, and thank you for joining us today. In the second quarter, we had adjusted earnings of $329 million. We generated operating cash flow of 1.7 billion. Excluding working capital, operating cash flow was 910 million. With the benefit of our diversified portfolio, we generated cash flow in excess of capital spending and dividends during the quarter.

We returned $394 million to shareholders through dividends in the quarter. Since we formed as a company, we have returned over $28 billion to shareholders. A secure competitive dividend will continue to be a top priority for our company and we anticipate a return to dividend growth as cash flow recovers.

We are committed to disciplined capital allocation, focusing on debt repayment in the near-term to support a conservative balance sheet, and maintain our strong investment-grade credit ratings. In July, the Phillips 66 Board of Directors appointed Denise Cade and Doug Terreson to serve as independent directors. We continue to work on Board refreshment, recognizing the value, diversity in terms of gender, age, race, ethnicity, tenure, professional experiences and perspectives.

We would like to highlight our recent 2021 sustainability report that can be accessed on our website. We think it is one of our best [indiscernible] our commitment to sustainability is based on operating excellence, environmental stewardship, social responsibility and financial performance will add by strong corporate governance.

We expanded our commitment to environmental responsibility, setting goal for all of our refineries to achieve top third energy efficiency by 2030. We modified our compensation program to add additional environmental goals. As previously communicated, we will establish meaningful and achievable greenhouse gas emission reduction targets later this year.

So with that, I will turn the call over to Mark to provide some additional comments.

Mark Lashier

Thanks, Greg. Good afternoon, and thanks to everyone on the call for joining us today. Continued improved demand across CPChem’s product lines and resilient operating recovery from the first quarter winter storms contributed record quarterly earnings in our Chemicals segment.

Marketing and Specialties reported strong results as demand increased in many of our key domestic regions. Our Midstream segment recovered well from the first quarter winter storms to report solid results. Headwinds continued in our Refining segment as RIN adjusted refined product crack only improved modestly and historically low market capture contributed to continued losses.

As more people across the globe are vaccinated, we expect continued economic recovery and further improvement in global refined product demand. In addition, permanent refinery closure announcements have increased to over 3.7 million barrels per day globally with additional closure announcements expected.

In Midstream, Phillips 66 Partners continued construction of the C2G Pipeline. The project is backed by long-term commitments and is expected to be operational in the fourth quarter of this year.

At the Sweeny Hub, we recently resumed construction of Frac 4, which will add 150,000 barrels per day of capacity. Upon completion, which is expected in the fourth quarter of 2022, total Sweeny Hub fractionation capacity will increase to 550,000 barrels per day. The fracs are all supported by long-term commitments.

CPChem continues to develop two world-scale petrochemical facilities on the U.S. Gulf Coast and in [indiscernible] Qatar. We expect the final investment decision for the U.S. Gulf Coast project next year. The [indiscernible] petrochemical project is progressing with front-end engineering and design as planned. Both projects are in partnership with Qatar Petroleum.

In addition, CPChem began construction of its second world scale unit to produce 1-hexene, utilizing CPChem’s proprietary technology. 1-hexene is used for high-performance polyethylene manufacturing and is common in a variety of everyday products, including packaging for food, consumer products and pharmaceuticals. The unit located in Old Ocean, Texas will have a capacity of 266,000 metric tons per year and is expected to start up in 2023.

In May, CPChem was recognized by the Plastic Industry Association for being among the top 2021 industry innovators in sustainability. The award recognizes CPChem’s launch of Marlex, a new crystalline polypropylene, which uses advanced recycling technology to convert plastic waste into high-quality raw materials.

We continue to advance our Rodeo Renewed project at the San Francisco refinery. In July, we reached full production rates of 8,000 barrels per day of renewable diesel from the hydrotreater conversion. Subject to permitting approvals, full conversion of the facility is expected in early 2024.

Upon completion, Rodeo will have over 50,000 barrels per day of renewable fuel production capacity. The conversion will reduce emissions from the facility and produce lower carbon transportation fuels. Rodeo, combined with our portfolio of other renewable fuels projects has the potential to supply one billion gallons of renewable fuels per year.

In Marketing, we are converting 600 brand retail sites in California to sell renewable diesel produced by the Rodeo facility. In Switzerland, our co-op retail joint venture continues to add hydrogen fueling stations.

Through our joint venture, we are exploring hydrogen as a fuel option for heavy-duty vehicles to support European low-carbon goals and growing demand for sustainable fuels. We are moving forward and preparing for the future, while maintaining our focus on safe, reliable operations and attractive shareholder returns.

Now I will turn the call over to Kevin to review the financial results.

Kevin Mitchell

Thank you, Mark. Hello, everyone. Starting with an overview on Slide 4, we summarize our second quarter results. We reported earnings of $296 million. Excluding special items, we had adjusted earnings of $329 million or $0.74 per share.

We generated operating cash flow of $1.7 billion, including a working capital benefit of $833 million and cash distributions from equity affiliates of $612 million. Capital spending for the quarter was $380 million, including $179 million for growth projects. We paid $394 million in dividends.

Moving to Slide 5. This slide shows the change in adjusted results from the first quarter to the second quarter, an increase of $838 million. Pretax income improved across all segments, with the largest contribution from Chemicals. Our adjusted effective income tax rate was 19%.

Slide 6 shows our Midstream results. Second quarter adjusted pretax income was $316 million, an increase of $40 million from the previous quarter. Transportation contributed adjusted pretax income of $224 million, up $18 million from the previous quarter. The increase was due to improved volumes from higher refinery utilization, partially offset by higher costs due to the timing of maintenance and asset integrity work.

NGL and other adjusted pretax income was $83 million. The $47 million increase from the prior quarter was mainly due to lower operating costs and higher volumes, reflecting recovery from the winter storms.

The Sweeny fractionation complex averaged 380,000 barrels per day and the Freeport LPG export facility loaded a record 42 cargoes in the second quarter. DCP Midstream adjusted pretax income of $9 million, was down $25 million from the previous quarter, mainly due to lower mark-to-market hedging results from higher natural gas and NGL prices.

Turning to Chemicals on Slide 7. Second quarter adjusted pretax income was $657 million, up $473 million from the first quarter. This is the highest quarterly earnings for Chemicals since the joint venture was formed in 2000.

Olefins and Polyolefins adjusted pretax income was $593 million. The $419 million increase from the previous quarter was driven by strong demand, high supplies and recovery from the winter storms that contributed to higher margins and lower utility costs.

The industry chain margin increased over $0.17 per pound to a record $0.62 per pound. Global O&P utilization was 102% for the quarter. Adjusted pretax income for SA&S increased $55 million.

The increase primarily reflects improved margins due to tight industry supplies following the winter storms as well as lower turnaround costs. During the second quarter, we received $322 million in cash distributions from CPChem.

Turning to Refining on Slide 8. Refining second quarter adjusted pretax loss was $706 million, an improvement of $320 million from the first quarter. The improvement was driven by lower utility and turnaround costs and higher volumes. This was partially offset by lower realized margins.

Improved market crack spreads were more than offset by higher lower electricity sales in the Texas market, decreased secondary product margins, lower clean product differentials and inventory impacts.

Pretax turnaround costs were $118 million, down from $192 million in the prior quarter. Crude utilization was 88% compared with 74% last quarter. The second quarter clean product yield was 82%.

Slide 9 covers market capture. The 3:1 market crack for the second quarter was $17.76 per barrel compared to $13.23 per barrel in the first quarter. Realized margin was $2.92 per barrel and resulted in an overall market capture of 22%. Market capture in the previous quarter was 33%. Market capture is impacted by the configuration of our refineries.

Our refineries are more heavily weighted toward distillate production than the market indicator. During the quarter, the gasoline crack improved $5.68 per barrel, while the distillate crack increased $2.20 per barrel.

Losses from secondary products of $2.38 per barrel or $1.09 per barrel higher than the previous quarter as crude prices strengthened. These stock costs improved $0.36 per barrel compared to the prior quarter. The other category reduced realized margins by $7.84 per barrel. This category includes RINs, freight costs, new product realizations and inventory impacts.

Moving to Marketing and Specialties on Slide 10. Adjusted second quarter pretax income was $479 million compared with $290 million in the prior quarter. Marketing and other increased $181 million due to higher domestic margins and volumes, reflecting strong demand in key markets. Refined product exports in the second quarter were 216,000 barrels per day. Specialties generated second quarter adjusted pretax income of $87 million, up from $79 million in the prior quarter.

Slide 11 shows the change in cash for the quarter. We started the quarter with a $1.4 billion cash balance. Cash from operations was $1.7 billion. This included a working capital benefit of $833 million. In June, we received a $1.1 billion U.S. federal income tax refund, which is reflected in working capital.

Cash from operations, excluding working capital, was $910 million, which more than covered $380 million of capital spend and $394 million for the dividend. The other category includes a $90 million loan to our WRP joint venture. Our ending cash balance was $2.2 billion.

This concludes my review of the financial and operating results. Next, I will cover a few outlook items. In Chemicals, we expect the third quarter global O&P utilization rate to be in the mid-90s. In Refining, crude utilization will be adjusted according to market conditions.

In July, utilization averaged around 19%. We expect third quarter pretax turnaround expenses to be between $120 million and $150 million. We anticipate third quarter Corporate and Other costs to come in between $240 million and $250 million pretax.

Now we will open the line for questions.

Question-and-Answer Session

Operator

Thank you [Operator Instructions] Your first question comes from the line of Neil Mehta with Goldman Sachs.

Neil Mehta

Good morning team. Thanks for taking the question. The first one is just on Chemicals. And Mark, this might be for you. Kevin indicated that the indicator was $0.62, which is very robust and above mid-cycle in Q2. How do you see it playing out in July and August so far? And just any thoughts on what the mid-cycle number has been? I think you guys have been in the $0.25 camp, if I remember. Has that view changed in light of recent margin strength?

Mark Lashier

Yes. Thanks, Neil. It is a great question. We are still consistent on our mid-cycle margin projection. And of course, we are well above that today. And as we look out into the third quarter, we are seeing the strength continue in the third quarter. We have got cost increases on the table that are being negotiated as we speak.

Even if things went forward just as they are today, we are still at record margins. And we think that, that can carry into third quarter. There is a lot of strength in the marketplace, particularly in North America and in Europe. Asia is still kind of lagging, but starting to perk up a little bit.

So the real story is the fundamental economic resurgence in the U.S., in North America and Europe. And we believe that there is some upside that will offset some headwinds out in the future as the rest of the global economy kicks in. We are at record margins.

Nobody believes those are sustainable for the long term. However, I think we can go from something at the record level to something that is still pretty robust. We see seasonal downturn typically in the fourth quarter, but we have also seen conditions where we can kind of carry through when there is strong enough marketing momentum.

And there may be those kind of conditions now. We are particularly focused on high-density polyethylene. And that is still pretty tight in the marketplace. The inventories have not recovered to where CPChem would be comfortable operating. And it is unusual to be there this time of year with hurricane season. We typically want to be a little higher in inventories going into the hurricane season.

So there is a number of factors that could lead to sustain this momentum into the third quarter and beyond into the fourth quarter. And then we see the world economy kicking in. About the same time, additional capacity is coming on, say, first half of next year. So there is some good fundamentals out there. And I think it is still got some legs based on the demand that will come to bear as the world economy fully recovers from COVID.

Greg Garland

Neil, we talk about mid-cycle kind of be in the 2012 to 2019 average. And if you look at the IHS polyethylene full chain margin has averaged about $0.30 per pound.

Neil Mehta

Okay. $0.30 per ton. Okay. That is all great. And then the follow-up, Greg and Jeff, this for you is just thoughts on the refining side of the equation, if the refining system, if you told me the refining system was running at these type of levels, I would have thought that Phillips 66 would have been making pretax profits in the refining system. And so is the U.S. refining system running too hard, and how are you guys thinking about your own utilization as you get into the fall?

Robert Herman

Yes. This is Bob, I will take that question. I think when you look back over the last quarter, I think there were plenty of market signals there for us to run at the utilization rates we are at. There is a lot of moving parts, in particular, the cost of RINs that just continue to increase throughout the quarter. And we take a pretty good hit in Refining for the full cost of those prints.

I think we would have all expected maybe on a global basis, Europe and Asia demand ticked back a little better than it did. I think the RIN adjusted margins that we saw in the second quarter really across our system are very representative of a global market.

So until we start seeing recovery, particularly in Europe because we seem to see products flowing out of Europe into North America and South America, we won’t really see RINs get back to where we would like to.

I think the second piece for us, in particular is more geared towards heavy crudes making diesel. And certainly for the second quarter, it was a gasoline-driven market without much differential on heavy crude.

We have seen those widen out here now in July to a much more respectable level. So we think it is headed in the right direction. But I think all of that added up to being challenged in the second quarter to turn a 90% type utilization number into a profit.

Greg Garland

Brian, do you want to comment on what we are seeing today in the market?

Brian Mandell

I think in terms of the heavy dips and dips, we have seen them start to expand LLS to Mars. There is two holes at the beginning of the year, WTI since the beginning of the year. So I think we have some tailwinds that are going to help us in the second quarter. We expect distillate cracks to perform as we get toward wintertime.

So all in all, I think we have also seen actually markets overseas come back. We have marketing in Europe. And we have seen Europe, Germany, where we market 90% to 95% of demand. Austria, where we market, 100% of demand. So we have seen those markets come back as well. So as Bob said, the overseas markets start to come back, that will help the U.S. cracks, and we should see some profitability in Q3.

Greg Garland

One thing I might add is if you look at the OPEC projections, we were kind of shy of 95 million barrels a day in 2Q, projected to get to 99.5 million barrels a day by the end of the year. So our expectations for demand to continue to improve in the back half of the year.

Neil Mehta

Great. Thank you.

Operator

Your next question comes from the line of Roger Read with Wells Fargo.

Roger Read

Jumping back to Refining here. I guess one of the questions is, it is obvious that things should improve. But is there anything internally that Phillips has done or would plan to do to help out on the margin front, just thinking of any additional changes within your own system or anything else that might be there part of the full advantage program that was laid out months to years ago now.

Mark Lashier

Yes, Roger. I think there is a couple of answers to that question. One, internally, right, we expected tough operating conditions for a good part of this year. Recovery has been slower than we expected, but we went into this year, trying to reduce some of our heavy maintenance expenses and adjusting turnarounds and all that.

And so the guidance Kevin just gave for the third quarter is fairly light for us. So I think that helps the third quarter profitability. You can translate that as we are available to run. So if the cracks are there, we are going to be able to run pretty hard in the third quarter and make money.

Around the 66 program that we laid out, so a lot of that is built around margin enhancement, margin improvement. So we ran pretty well in the second quarter, and we are using all those tools that are in our toolkit. The value chain optimization activities that went on in the second quarter were pretty robust.

We did a lot of things that we haven’t done before or needed to do before, such as we ran a lot of down into our Sweeny refinery, where typically, we would be running or some of the heavy Canadians. The profitability really wasn’t there. And so optimizing around high sulfur into our system. It is just one example about where we are kind of running the circuits.

We are pretty happy with the results we are seeing on the operating front. A lot of our initiatives in Refining are around being able to operate well, operate better, operate safer with the smaller environmental footprint, and we are seeing value come out of all of those initiatives. They don’t necessarily translate directly to the bottom line where you can see them, but overtime, they are paying dividends.

Greg Garland

Roger, I think when I think about kind of Q2 and maybe Q1, we have had quite a bit of planned FCC downtime this year. So if you look at our yields relative to historical years, we are probably down 2%. And so we are just simply going to run better in the third quarter and fourth quarter. I think, Bob, that things tuned up that we are ready to do that. So I think that is one of the things that we are focusing on right now also.

Roger Read

Okay. Great. And then one thing that was definitely nice this quarter generating enough cash flow to cover all the outflows. I don’t know, Kevin, this question is for you. But as you kind of look budgeting for the back half of the year, things are as they are today. I think that we have pretty much turned the corner on the COVID world and Phillips will be in a position to improve the balance sheet, start taking some of the debt down as we go through the next, say, two to four quarters?

Kevin Mitchell

Yes, Roger, I certainly would expect to be able to do that. I mean, obviously, we are not back at mid-cycle cash generation yet, which is really going to be our sort of marker in terms of truly being able to get the balance sheet back to where we need it to be. But it is certainly a nice improvement from where we have been.

And with the cash balance and if we continue to build that over the course of the year, we should be able to start making some inroads into that next year. And as you know, as we have talked about before, we have a lot of flexibility around debt reduction given the profile of the maturities that we have starting next year and some of the callable debt that we have in place. So a lot of flexibility on that front.

Roger Read

Great. Thank you.

Operator

Your next question comes from the line of Doug Leggate with Bank of America.

Douglas Leggate

Thank you good afternoon everybody. I wonder if I could ask you how - when you go through a cycle like this, obviously a downturn, one of the margins that you stressed testing all the assets in the portfolio. So I guess as kind of a follow-up to Roger’s question. Do you see any weak links in the portfolio today that you think might be revisited change in portfolio structure specifically into the Chinese side. I’m obviously thinking specifically by the -.

Greg Garland

Yes, Doug. I guess I would say that we spend for amount of time every year stress testing and looking at every one of our assets and where do we think the future of that asset lies. And in a bigger picture context too, not just the Refining asset, but the rest of our value chain around it, how much marketing are we supplying in the area. We have got Midstream assets. Commercial is trading around many of our assets, particularly on the coast.

So we look at a much more holistic picture. And quite frankly, we have a debt that we think is a long-term debt. Considering what we think the future holds for liquid fuels and we look at our assets in that context. So they are assets at the end of the day. And so we are always looking to upgrade or find more ways to make money on any given asset from year-to-year.

Douglas Leggate

We will watch for how that evolves. I guess my follow-up maybe for Kevin. Slide 9, you give up fairly clear description of how we realize margin has evolved this quarter. 784 delta. Can you maybe walk us through how much of that - maybe you can dig into a little bit more detail as to how much of that is truly transitory that we should expect to address? And I will leave it there. Thanks.

Kevin Mitchell

Yes. Doug. So the largest single element within that 784 other is the RIN cost that as Bob referenced earlier, is that expense is borne by refining. And so it is half or slightly more than half of the total within that other. Most of the other items in there are - but RIN is always in there. Obviously, RIN costs were particularly high during the quarter. Product differentials, which is the difference between the market indicator and actual product realizations, that one can move around and go both directions on us.

During the quarter, those differentials we were not getting - seeing the value for some of those premium products that often can be a benefit to us in the quarter. So that is one that can move around and come back to the other direction. And then the other component that is also in there it can go both directions, it is inventory impacts. And so inventory was a hurt to earnings in Refining in this particular quarter, but that can move in both directions.

Douglas Leggate

So just to be clear, the configuration, your different slate and product mix, that is not in configuration that is in other or how should we think about that -.

Kevin Mitchell

No. The configuration reflects the 321. So two-thirds gasoline, one-third distillate in the market indicator versus what we actually produce by way of gasoline and distillate. In other, you have got the actual pricing for those products, including whether it is premium gasoline and other premium products that can often be an uplift relative to the standard market indicator. But in the period, they were not.

Douglas Leggate

Great stuff. I appreciate the information. Thank you.

Operator

Your next question comes from the line of Phil Grech with JPMorgan.

Philip Gresh

Greg, in the past, you always have referenced normalized earnings potential across the various areas of the portfolio. And I’m curious how you think about Refining normalized EBITDA potential now that we have kind of gone through this COVID cycle. Is there anything that having gone through this that has changed your view? I think there is a $4 billion EBITDA number that you have thought about in the past.

Greg Garland

Yes. No, I think in 2019, we laid out kind of a $4 billion EBITDA number. And at the time was kind of a 12 to 19 average EBITDA for our Refining business. I don’t think we are ready to sound to retreat yet on mid-cycle on Refining. So if you go back all the way back to the first quarter of 2020, that is the last time we actually made money as a company. So it is been a long haul as we have kind of come through this. There is no question. There has been a lot of stress put on a lot of companies in our industry.

But I think we are constructive, particularly as we come in the back half of the year around demand. This has been a story of vaccinations, efficiency, lockdowns and people trying to get back to some to normal, and that all translates strictly into the demand that we see for our products.

And there is still a question, I think the U.S. is probably lead in terms of demand recovery through this cycle. And so we have seen the impacts of Europe coming to the U.S. We have seen the impacts of not being able to export as much as we would like to, to South America in places. And so I think as the world returns to normal, we have got a good shot at getting back to something that looks more like a mid-cycle.

I think we said on the last call, we really need to see that 321 frac on a RIN adjusted basis get back to about $12. And then I think we will see the appropriate kind of market captures around that to be able to generate something around $4 billion.

Jeff, I don’t know if you want to add anything on that?

Jeffrey Dietert

Yes. I think you guys have hit on the demand side of the equation. We are seeing Refining rationalization, 3.7 million barrels a day of announced closures, 800,000 a day of temporary outages that could become more permanent. And we are up to about 1.7 million barrels a day of capacity that has been announced as considering either terminals or other types of service or potential shutdown. So that rationalization is a big piece of it as well. And I think we are expecting more closures to be announced.

Philip Gresh

Got it. Okay. In the press release, there is a mention of returning to dividend growth as cash flow recovers. So I was hoping maybe you can lay out the priorities in terms of where you want that balance sheet leverage to get to before you would reconsider dividend growth? And Kevin, just quickly I think you said $1.1 billion for the tax refund in the second quarter. Is it still $1.5 billion for the year?

Kevin Mitchell

So in terms of the tax refund, you are right that it is about $1.5 billion total. We received $1.1 billion. There is another $350 million or thereabouts, but we don’t expect the remainder to be a 2021 cash item that will roll into next year. So for a variety of reasons, that is not going to be cash this year, although it still will realize itself overtime for us on that.

And then in terms of dividend growth, I think we go back to the earlier comments around as cash generation recovers to something around about mid-cycle, and we are in a position to pay down debt. We are making progress on paying down debt. We have got sort of clear line of sight to our ability to continue to do that and get the balance sheet back to where we want it to be, then we should feel comfortable on some of the other capital allocation priorities and increasing the dividend is one of those.

So I think it is a little bit of a long-winded way of saying we don’t need to get to all we want to get through on the balance sheet before we make a decision on the dividend. We just need to be very comfortable that the structure is there, the cash generation is there. We are making the progress we need to make, and therefore we will be able to signal that in terms of our confidence to shareholders with the dividend.

Greg Garland

Yes. I think it is important. I think overriding, we do want to protect the BBB+ A3 rating. So we think a lot about that. And I think post is starting to approach mid-cycle earnings for our company as you know $6 billion to $7 billion of cash flow at mid-cycle. And that gives us plenty of cover to do the things we need to do. I think we have said in previous calls, we kind of expect CapEx for the next couple of years to be $2 billion or less.

And so I think in the context of $6 billion to $7 billion of cash flow at a total capital program of $2 billion and $1.6 billion dividend. Then I think we will have plenty of room to do the things we want to do around bringing the balance sheet into order, thinking about capital return to our shareholders, the dividend increases and share repurchases.

Philip Gresh

Thanks a lot.

Operator

Your next question comes from the line of Paul Cheng with Scotiabank.

Paul Cheng

Two questions. Greg, I think if I look at your NGL business, this quarter, your EBITDA around $135 million. In 2019, the average quarterly EBITDA is about 170. But we have the two and three come on stream and actually at the full operation, which probably should least contribute $30 million, $40 million a quarter in the EBITDA, if not more. So trying to reconcile that if the market conditions really change that much or will that get that much worse because NGL price is actually very good in the second quarter. So maybe that someone can help us on that.

The second question would be just a real quick one. On the renewable, the full plant conversion. Just want to see if there is a permit status that you can put And also that the last couple of years, you guys have been trying to the work process and go for digitization. And so just wanted to see if you can give an update on where we are on that? Is that pretty much a fun with what you guys aim from a couple of years ago. I think at the time that the cost savings target was pretty high, but with the pandemic, I mean everything gets can all get messed up. So it is very difficult to reconcile. So maybe you can give us some update.

Robert Herman

Paul, this is your NGL question. Yes, I will tell you what. The first thing I would say is in 2019, I wish we were back in that macro. That was a good time with regard to the overall supply/demand fundamentals. Global demand was where you wanted it to be on really all of our Midstream products, whether it is crude products and NGLs.

So fundamentally, there are big changes in the market. But when you look specifically at 2021, let me just highlight a couple of things for you there that are - have reared their head. The biggest one that is had the biggest impact is winter storm Uri. When you look at Uri, it impacted our frac significantly down there. And mainly not from the standpoint of damaging the units or any issues there. Even though we did have some costs with the units, that was on utilities. Our utility bill was significant.

So from that standpoint, and that is going to be hard to call back for the rest of this year. So on a positive note, I would just tell you, structurally, we like the NGL business. Demand has been very robust to support chemicals growth, both locally and globally. NGL Production is ramping up. We still see about one million barrels in rejection at this point in time. But overall, demand is really good in that space.

Our LPG exports have been in a record clip. So overall, the fundamentals feel good that it was a big cost hit as well as lost production hit that we had initially in 1Q, which really on a year-to-date basis stays with us.

The last thing I would just cover in Q2, the overall structure in NGLs has jumped up significantly, as you probably are well aware, propane, butane and ethane. We are at about $0.86, $0.87 on a gallon basis for NGL on a composite. In 2019, it was $0.37. So it is gone up. And with that, we have seen an impact on some mark-to-market we have on some of our inventory. So that is there. That usually turns into a timing issue. But just nonetheless, that shows up in the results in 2Q.

Paul Cheng

How big was that the impact on the mark-to-market in the second quarter?

Robert Herman

I’m going to guesstimate right now. I don’t have the number in front of me $10 million, $11 million.

Robert Herman

Paul, it is Bob. I think your second question was around the permitting status that Rodeo Renewed and the conversion out there of the Refinery to run in renewable fuel. So we continue to develop the environmental impact statement with Contra Costa County. I would characterize that has gone about as well as it could, better than we expected.

We are essentially done writing the permit. It is in review right now internally with the county, and we would expect them to probably sometime this month release the permit to begin the public comment period. So that would be pretty much right on our time line, maybe a little bit ahead.

And so far, it is been a good cooperative process with the regulators and their permit So we are encouraged and pretty happy where we are. We continue to outreach with all the other stakeholders in Contra Costa County and Northern California, that make sure everybody understands what that project is going to do for the Bay Area and for California in general.

So far, so good. And digitization. Yes, third piece. I think was a question around the 66 and cost reductions. And you are right, in a year like 2020, it is hard to say. But I would say we have been able to deliver within bounds of the environment on both sides of the equation.

So we have had good optimization opportunities around reduced utilization in our refineries and our ability to get down as low as we did and to make jet go away and all those I think we are much easier because of some of the efforts we had. The second piece I would say is at the when we had the social distance and we had to use alternative work approaches and everything.

Our early jump into digitalization allowed our people to get a lot more done without human contact and really was a dividend to us upfront in our ability to keep supporting the operators who were on the units, while minimizing contact with the outside world. And the third piece is we were able to hold the line on costs quite well throughout last year.

And in fact, we saw cost reductions in many of kind of our bigger cost items, caps and those sorts of things that are a big piece of our operating budget. We applied some of the learnings that we got through 66 to those. And I think we got sustainable longer-term price reductions there that will continue to pay out throughout this year. So kind of full steam ahead on all our initiatives there, particularly in Refining.

Greg Garland

Paul, I might just come in and just say, I mean, we are never done on the controllable cost side of our business. There is more work we have got to do in terms of continuing cost. That is what you do in a commodity business. When I look at the controllable costs through the first six months this year relative to the first six months of last year, we are up about $300 million almost all of that cost in Q1.

And so if you adjust for the energy component, we are kind of holding the cost savings we were able to achieve last year. But that is not good enough. There is more work for us to do on the controllable cost side of it. So hopefully, you have got all those questions answered.

Operator

Your next question comes from the line of Theresa Chen with Barclays.

Theresa Chen

Hi there, thanks for taking my question. I guess, first, just on the topic of global refining capacity and closures going forward, I’m curious to hear about your outlook for the European market in general, given your exposure there? During the quarter, the macro data looked weak for a good portion. Now we are seeing some strengthening there and hearing - same news of operators with starting units and calling back workers. Just curious to hear about how you see that evolving in the closures landscape.

Greg Garland

Yes. So I think Europe has been one of the most challenged market in the first half of the year. Lower margins and lower complexity. I think the demand has been slow to recover there. We are seeing some improvement, but it looks like one of the more challenging regions.

I think we have seen continued weakness in Latin American in Refining utilization as well, that could be a challenged area also. And I think there was an expectation for a stronger summer than what we have actually had. And as we come into the fall, that is typically where we see more closure announcement activity.

Robert Herman

I would say the weakness - and we pointed this out, the weakness in Europe has translated to weakness in the U.S. on our Refinery margins. we have seen typically 100,000 barrels of diesel imports into the U.S. this year. We have seen 200,000 barrels of diesel imports into the U.S. or Europe.

We expect, as Europe comes back from COVID lockdown, that those increased barrels will stop. We saw high imports of gasoline from Europe as well. We believe that, that will start to as Europe comes back from lockdowns. We have seen it already taper off. So all those things when we Refinery complex come back in Europe and COVID lockdowns decrease, we will see the U.S. also strengthen.

Theresa Chen

Got it. And then just on the crude side, what -- can you talk to us about your medium- to long-term outlook for WCS differentials in light of Line 3 replacement projects coming online in fourth quarter. Should that equal narrow the differentials to the Mid-Con? And subsequently, when we think about cap line reversal happening later on, could there be a situation where you see the same chains market being flooded with incremental heavy barrels which could actually help your Gulf Coast facilities, while the Mid-Con would be a little weaker with narrower - structurally narrow spread? And how do we see that dramatic development playing out?

Greg Garland

So obviously on the WCS, we have seen differentials come off quite a bit. We got 4.5 million barrels currently, we have about 4.4 million barrels of pipeline egress of another 100,000 barrels on rail. But we have seen, which is something a little different from what we have seen in the past couple of years as we have seen the WCS differential in the Gulf Coast weaken. It is weaken about $2.5 over the past couple of quarters. And when that weakens, so does the hardest differential, you have to have an to get the barrels to the Gulf Coast.

And one of the reasons the Gulf Coast is weakening, is because low exports means that you have to have a weaker differential on WCS to get that WCS exported out of the U.S. So as you said, Theresa, we have Enbridge coming online in next quarter, quarter four, we would think that would firm up differentials a bit. But don’t forget in the wintertime, we add diluent to crude, and that also increases the volume of crude that has to move. So our view, our forecast is that you’ll see differentials somewhere between 12.5% and $13.5 off of WTI going forward.

Theresa Chen

Thank you.

Operator

Your next question comes from the line of Manav Gupta with Credit Suisse.

Manav Gupta

Hey guys. I wanted to focus on the Rodeo conversion. We are seeing 2 trends out there. One, are guys who are not building a pretreat and their cost is varying between $1 to $1.50 a gallon. And then there are guys are building the - and their cost is varying between 43 to about $3.50 a gallon. Unit five standard deviations from it. You are the only one who’s building a and your cost is $1 a gallon. So help us understand what is special about this plan? I’m not trying to question. I’m sure you’ll get there. But why is it so unique that you can pull this off and nobody else can

Robert Herman

So it is Bob. I agree with you. We will get there. So what really sets up Rodeo completely differently, one is the full plant conversion, so we have all the kit available. And we have two very high-pressure hydrocrackers that we can put into service.

And to convert those units from where they are today to being able to run renewable diesel is actually a very low cost part of the project. So most of the cost of that project is in either the logistics piece and then the big chunk is the freight themselves.

So I think that is what allows us to be able to have a unique position of building a project that is going to be at an installed cost of about $1 a gallon, which you are right, is lower than anybody else, but it is because if there was a refinery that was custom built to be able to be converted to renewable feedstocks Rodeo - since it is very, very unusual to have two hydrocrackers.

And excess hydrogen capacity on site between our own hydrogen plant and that of our third-party supplier that is built at the site. So we have kind of got a perfect storm there. So we are spending money to get all the logistics right, a little bit of metaling up in the hydrocrackers and in the pretreatment unit, and we will be ready to go.

Manav Gupta

Perfect, sir. I have just 1 quick follow-up. I think the pandemic somewhere changed the nature of people as when it comes to the use of plastics, and that could somewhere be permanent. I’m just trying to understand, you have these two crackers which you were kind of put on a back burner. You can bring them forward, FID them. I’m just trying to understand, let’s say, you do decide that from the point of FID, how long will it take to get the first one and the second one. So if this change is permanent and the demand for plastics is in an up cycle, you can capture a part of it.

Robert Herman

Well, obviously, we agree that the fundamentals have improved dramatically since we initiated these projects. And as I noted earlier, the U.S. Gulf Coast we are looking at FID next year and the Qatar project is about a year behind that. And you can you can target about four years from FID to start-up. And we believe we don’t try to market time these investments that we do believe that window is a particularly good window to pursue something.

So we have got our foot forward on these. We are ready to move, and we are working with contractors to make sure that we are getting the capital cost right. Clearly, the global markets are improving, but there is still some disruption in the world economy. We would like to see a little clearer path to a fully resolved economic recovery from COVID, get the delta variant and any other variance behind us, but we are leaning in and ready to move with FID on that project next year.

Manav Gupta

Thank you so much for taking my questions.

Operator

Our next question comes from the line of Matthew Blair with Tudor Pickering Holt.

Matthew Blair

Hey good morning. Thanks for taking my questions here. First is on chems. Could you share some color on the PE inventory picture? The industry data shows that PE inventories really ballooned up to new highs, but in your release talked about tight supplies, and also say the inventory is pretty tight. So I was hoping you could just explain the disconnect there.

Greg Garland

So one of the disconnects Matthew is looking at just the gross inventories versus the days of sales of inventories because demand has increased almost 6% in North America. And so that is important. And then you also have to parse it out by kind of polyethylene because high density, linear low density, low density, all have different inventory levels and different applications.

And we are heavily exposed to high density and high density is particularly tight supply now and uncomfortably tight. It is been building. CPChem ran at 102% of their capacity in the second quarter, so they really delivered from an operational excellence perspective. But much of that went into rebuilding those inventories.

So even though they had such a strong quarter, a lot of that production went into inventory, and they are still not where they would comfortably be heading into a hurricane seasoned. They like to be prepared for that.

They don’t plan to have a hurricane, but they are prepared if there are hurricanes to impact that. So I think that is where you are seeing the tightness. It is really from a day of sales perspective with the high growth in demand in North America as well as where we are in the weather cycles in North America.

Matthew Blair

Sounds good. And then California LCFS status showed that combined RD and biodiesel blend rates in the state were about 35% in Q1. It seems like that number is only been higher going forward. But I was wondering, are you feeling a pinch on placing your diesel out of the Los Angeles refinery and what are your long-term options here?

Greg Garland

No. Most of our diesel on the low ends refinery goes out of state out of California. So that is a non-issue for us there, Matthew.

Matthew Blair

Got it. Thank you.

Operator

Your next question comes from the line of Jason Gabelman with Cowen.

Jason Gabelman

Yes. Hey thanks for taking my questions. I wanted to ask two, specific to the quarter on refining earnings related to RINs. It seems like marketing earnings increased a decent amount this quarter and refining is still kind of in the doldrums in part two to RINs. And I understand there is some accounting and value split between the RIN benefit in marketing versus the cost in refining. So can you just talk about maybe how RINs benefited marketing this quarter and how much of your RIN exposure is being minimized by blending and pass through to consumers? And then the second question, just also on the quarter quickly, co-product realizations, I know we are a relatively larger than normal headwind. How is that looking 3Q quarter-to-date so far?

Brian Mandell

So Jason, this is Brian. I will start off on the RINs question. Our view is that the RINs are in the crack. It is a cost that refining pays and that the crack has passed on the -- the value of the crack is passed on to the consumer who pays for the RIN at the So Marketing doesn’t see any benefit from the RINs per se.

There may be some leakage in that chain, but Marketing doesn’t really see any benefit. Marketing did have a really very strong quarter in Q2. And a large part of that was we had kind of the right portfolio in the right places. We saw demand jump up in March and then again in June.

We have a strong presence in the Rockies and in the Mid-Con, where there were less COVID lockdowns and more movement. We added, as you know, retail in late 2019 and also in 2020 on the West Coast, and that retail has done better than We also added retail this year in the Mid-Con and Rockies and that retails in bed in premise.

And finally, I would add - And we have been reimaging the stores for the past three years. We are up to 85% of the stores reimaged and we have seen the 2% to 3% jump in volumes and margins in those stores as well. So we have done a lot of things to help our portfolios in the right spots. And so I think that is where we saw the value in marketing in Q2.

Jeffrey Dietert

I think on the secondary products within Refining, they typically get squeezed in a rising oil price environment and improve in a declining oil price environment, and we are kind of four quarters in a row of rising oil prices here. So I think that is the biggest variable driving that secondary product margin.

Greg Garland

Yes, I would agree, with Jeff. And usually, this time here, too, we start seeing a little bit of a little help in the secondary products because some of the we make ends up in the asphalt market then this time of the year, as people are out fixing roads and merges and all those things, and that is offset a little bit, but we quite blending the U.K. in the back half of the second quarter comes back again in September. So there is a lot of moving parts in there. But I would think we are probably. This is kind of the maximum we would see for this type of oil price.

Operator

And your next question comes from the line of Ryan Todd with Piper Sandler.

Ryan Todd

Hey thanks. Maybe just a couple of quick questions on the diesel business. I mean having ramped the Rodeo to the near-term target capacity of 8,000 barrels a day. Can you speak to any learnings or takeaways that you have from getting to that kind of critical milestone and what you are seeing from kind of a margin or a profitability point of view? And then maybe a follow-up. Can you talk about what it entails to convert your marketing locations to market renewable diesel? What the capital cost is associated with this? And how you envision kind of the marketing effort of RD to play out as the Rodeo conversion fully ramps up over the next few years?

Robert Herman

This is Bob, I will take the first question there. So as we came out of turnaround and started up the Rodeo hydrotreater and renewable service, actually came up that ran really well. We had almost a full quarter running at low rates. We still have a project to get the rail infrastructure to finished, so that we can supply 9,000 barrels a day to make to 8,000 barrels a day of renewable diesel.

So we are learning how the catalyst reacts and what the actual kinetics are around running oil. It is a little bit of a learning for the ultimate project of converting the refinery. And these projects really are two very separate things in that there was no real work to do to convert 50 to oil, it was a matter of changing the catalyst that a regular scheduled turnaround and then being able to run it. So it is helpful.

I think the bigger picture there is it is very helpful to our commercial organization to learn how to source renewable feedstocks. So logistics are getting them there, some of the peculiar areas around transporting it. Those sorts of things all set us up to be a lot more nimble and ready for when we go from 8,000 barrels a day to 50,000 barrels a day with the renewable conversion.

I think probably the best thing to come out of it is we did not see anything that made us stop and think about the project to convert the rest of the refinery that we needed to go back and think about our design pretty much operating as expected.

Robert Herman

And I would add to Bob, we got that plant up 2.5 months earlier than we thought, 9,000 barrels into the plant, high conversion rate just kind of a great asset so far. We firmed up that over 50% of the feedstock for the plant going forward. We run soybean, but we have also run other vegetable oils there. So we have got some experience going out of oils.

We are looking at international feed as well. We started to bring stores, as you mentioned. It is low capital converted stores. We will have all 600 stores converted by the end of the year, and that will allow us to run volumes equal to three quarters of more of the R&D that we are producing currently.

Ryan Todd

Great. thank you.

Operator

And this does conclude today’s conference call. You may now disconnect.