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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Welcome to the Fourth Quarter 2017 Phillips 66 Earnings Conference Call. My name is Julie, 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.
Good morning, and welcome to the Phillips 66 Fourth Quarter Earnings Conference Call. Participants on today's call will include Greg Garland, Chairman and CEO; and Kevin Mitchell, Executive Vice President and CFO.
The presentation material we will be using during the call can be found on our Investor Relations section of the Phillips 66 Web site along with supplemental financial and operating information. Slide two contains our Safe Harbor statement. It is a reminder that we will be making forward-looking statements during the 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'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 fourth quarter were $548 million, or $1.70 per share. We ended the year with a strong quarter, and our operating performance was at record levels.
Refining ran at 100% capacity utilization, and we continue to operate safely and reliably. Our Midstream business significantly grew Phillips 66 Partners by completing a $2.4 billion dropdown; our largest transaction to date. And in Chemicals, CPChem is nearing completion of its U.S. Gulf Coast petrochemicals project.
Our fourth quarter cash from operations was $1.9 billion, our highest quarter since 2013. For the year, operating cash flow was $3.6 billion. We continue our commitment to shareholder distributions. This quarter, we returned 816 million through dividends and share repurchases. This brings our total distribution since inception to $16.4 billion.
During the quarter, we made progress on several of our key projects. In Midstream, we operated well at our Sweeny Hub in a challenging market environment. We averaged nine cargos a month at the export facility, and the fractionator operated 101% utilization. We completed expansion of the Beaumont Terminal's export capacity to 600,000 barrels per day. Today, the terminal has over 11 million barrels of crude and product storage capacity. An additional 3.5 million barrels of fully-contracted crude storage is under construction, and that will take the total capacity to 14.6 million barrels by the end of the year.
We announced an open season with Enbridge with Gray Oak pipeline project to transport crude oil from Permian Basin to markets along the Texas Gulf Coast. The pipeline is expected to have initial throughput capacity of 385,000 barrels per day, and will be placed in service during the second half of 2019. The Bayou Bridge pipeline, in which PSXP holds a 40% interest, has received all permits for the extension from Lake Charles to St. James, Louisiana. Construction is underway. Commercial operations are expected to begin in the second half of 2018.
Existing segment of the line from our Beaumont Terminal to Lake Charles is operating well, is providing crude optionality to our refinery. DCP Sand Hills pipeline, which transports NGL from the Permian Basin to the Texas Gulf Coast has exceeded 3000 barrels per day of throughput in the fourth quarter, and is expected to complete the capacity expansion to 365,000 barrels a day by the end of the quarter. Further capacity expansion of the line to 450,000 barrels a day is anticipated in the second half of 2018. Sand Hills is on two-thirds by DCP and one-third by Phillips 66 Partners.
DCP continues to progress construction of two gas processing plants in a high growth DJ basin. The Mewbourn 3 plant is expected to start up in the third quarter of 2018 and the O'Conner 2 plant is scheduled for completion in mid 2019.
DCP also announced the final investment decision to proceed with joint development of the Gulf Coast Express Pipeline project, in which it holds a 25% interest. The pipeline will provide an outlet for natural gas production in the Permian Basin to markets along the Texas Gulf Coast.
In Chemicals, CPChem is commissioning its new Cedar Bayou ethane cracker, which will start up this quarter and ramp up the full commercial production in the second quarter. At Old Ocean, CPChem has successfully transitioned the two polyethylene units' commercial operations.
In Refining, we continue to focus on high return quick pay up projects. We have multiple yield-enhancing projects that are expected to deliver additional 25,000 barrels a day of clean products by the end of 2018. This includes the diesel recovery project which we completed at our Ponca City Refinery in the fourth quarter.
In addition, we are modernizing FCC units at both our Bayway and Wood River Refineries with anticipated completion during the second quarter of 2018. We also have projects [indiscernible] such as the Lake Charles Refinery, where we are completing modifications to run more domestic crew.
Our 2018 capital budget is $2.3 billion, including $1.4 billion of growth capital and $900 million of sustaining capital. Our portion of capital spend by CPChem, DCP, and WRB is expected to be about $900 million. As we move into 2018, our strategy for long-term value creation remains unchanged. This includes capturing growth opportunities in our midstream and our chemicals business, where we see long-term demand growth and enhancing returns in refining and marketing. Also fundamental to our strategy, our shareholder distributions consisting of a comparative, secure, and growing dividend complemented with share repurchases. We believe the share repurchases are important part of shareholder value creation, and as long as we trade below intrinsic value, we are buyers of our shares.
So with that, I will turn the call over to Kevin.
Thank you, Greg. Good morning. Starting with an overview on slide four, our fourth quarter earnings were $3.2 billion. We had special items that netted to a gain of $2.7 billion mainly due to the U.S. tax reform legislation. This benefit primarily reflects the revaluation of our net U.S. federal deferred tax liability position from 35% to a 21% tax rate, and is partially offset by the repatriation transition facts on foreign sourced earnings. After excluding special items, adjusted earnings were $548 million or $1.7 per share.
Cash from operations for the quarter was $1.9 billion, which includes a positive working capital impact of $913 million. Capital spending for the quarter was $537 million with $234 million spend on growth projects. Distributions to shareholders in the fourth quarter consisted of $353 million in dividends and $463 million in share repurchases.
Slide five compares fourth quarter and third quarter adjusted earnings by segment. Quarter-over-quarter adjusted earnings decreased by $310 million, driven by lower results in Refining, Marketing, and Chemicals, partially offset by improvements in Midstream. New this quarter, our segment reporting is on a net income basis, instead of net income attributable to Phillips 66, as previously presented. Our segment earnings now include earnings that are attributable to non-controlling interests. This segment reporting change better aligns with how we manage the business and makes our reporting more comparable with our peers.
Slide six shows our Midstream results. Transportation adjusted net income for the quarter was $108 million, up $10 million from the prior quarter. The increase was primarily due to higher terminal and pipeline volumes. In NGL and other, the $20 million increase from the prior quarter was largely due to the PSXP acquisition of Merey Sweeny. DCP Midstream had adjusted net income of $14 million in the fourth quarter. A $13 million increase from the previous quarter was due to the absence of third quarter asset impairments, higher NGL prices, and increased volumes.
Turning to Chemicals on slide seven, fourth quarter adjusted net income for the segment was $121 million, $32 million lower than the third quarter. In olefins and polyolefins, adjusted net income decreased by $42 million. This decrease was due to lower sales volumes and higher depreciation and operating costs, partially offset by improved margins. The increased depreciation and operating costs reflect the start up of the new polyethylene units at Old Ocean.
Global O&P utilization was 79%, reflecting continued downtime at Cedar Bayou. The Cedar Bayou facilities hurricane-related repairs continued into the fourth quarter with most major units returning to service by December. Adjusted net income for SA&S increased by $12 million due to higher margins and lower operating costs.
In Refining, our crude utilization was 100% for the quarter, up from 98% in the third quarter. Pre-tax turnaround costs were $99 million, $56 million higher than the third quarter. Clean product yield was 87%, an increase of two percentage points from the prior quarter, primarily due to processing more intermediate term inventory and increased butane [indiscernible].
Realized margin was $8.98 per barrel, down from $10.49 per barrel last quarter. The chart on slide eight provides a regional view of the change in adjusted net income. In total, the Refining segment had adjusted net income of $358 million, a decrease of $190 million from last quarter. This decrease was driven by a 35% decline in gasoline market cracks and higher turnaround costs, partially offset by improved clean product differentials and increased volumes.
Adjusted net income in the Atlantic Basin was $120 million, down $52 million from the third quarter. The decrease was primarily due to the lower gasoline market crack, partially offset increased volumes and improved clean product differentials as European cracks improved relative to the New York Harbor crack. The Atlantic Basin region ran at 104% utilization in the fourth quarter; the third consecutive quarter at or above full capacity.
The Gulf Coast adjusted net income was $72 million, down $5 million from the third quarter. The decrease was due to the lower market crack, which was largely offset by higher clean product realizations and increased volumes. The Gulf Coast capacity utilization was 102%, up from 93% in the third quarter. Adjusted net income in the Central Corridor was $192 million, down $6 million from the previous quarter. The decrease was primarily due to turnaround activity at the Ponca City Refinery. New West Coast adjusted net income decreased $127 million from the previous quarter, reflecting the 32% decline in the market crack.
Slide nine covers market capture. The 3:2:1 market crack for the quarter was $13.98 per barrel, compared to $18.19 per barrel in the third quarter. Our realized margin for the fourth quarter was $8.98 per barrel resulting in an overall market capture of 64%, up from 58% in the third quarter. Market capture is impacted in part by the configuration of our refineries. During the fourth quarter, we made less gasoline and more distillate than premised in the 3:2:1 market crack. And the distillate crack was stronger relative to the gasoline crack. As a result, the configuration loss of a $1.44 per barrel was an improvement with $1.58 per barrel from the prior quarter.
Losses from secondary products of a $1.99 per barrel were lower than the previous quarter due to improved NGL prices relative to crude. Feedstock advantage improved realized margins by $0.82 per barrel. This was $0.20 better than the prior quarter. The other category mainly includes costs associated with rents, outgoing freight, product differentials, and inventory impacts. This category reduced realized margins by $2.39 per barrel, compared with $3.20 per barrel in the prior quarter. The improvement was primarily due to clean product price differentials.
Let's move to marketing and specialties on slide 10. Adjusted fourth quarter net income was $124 million; $87 million lower than the third quarter. In marketing and other, the $76 million decrease in adjusted net income was largely due to lower realized margins and seasonally lower branded volumes. During the fourth quarter, we exported 236,000 barrels per day of refined products with continued strong demand from Latin America. Specialties adjusted net income was $37 million, a decrease of $11 million from the prior quarter, mainly due to lower base oil and finished lubricant margins.
On slide 11, the Corporate and Other segment had adjusted net costs of $140 million this quarter compared to $127 million in the prior quarter. The $13 million increase in net costs was primarily due to positive tax adjustments in the third quarter.
On slide 12, we summarized our financial results for the year. 2017 adjusted earnings were $2.3 billion, or $4.38 per share. At the end of the fourth quarter, our net debt to capital ratio is 20%. The adjusted return on capital employed for 2017 was 8%.
Slide 13 shows the change in cash during the year. We entered the year with $2.7 billion in cash on our balance sheet. Cash from operations was $3.6 billion with minimal working capital impact, and PSXP raised $1.2 billion in equity proceeds. We funded $1.8 billion of capital expenditures and investments, and distributed $3 billion to shareholders in dividends and share repurchases. The $400 million in other includes affiliate loan repayments. We ended the year with 502 million shares outstanding, and our cash balance was $3.1 billion.
This concludes my review of the financial and operational results. Next I'll cover a few outlook items. In the first quarter, in Chemicals, we anticipate the global O&P utilization rate to be in the mid 90s. In Refining, the first quarter will be a heavy turnaround quarter for us. We expect the worldwide crude utilization rate to be in the mid 80s and pre-tax turnaround expenses to be between $230 million and $260 million. We anticipate corporate and other costs to come in between $160 million and $180 million after-tax during the first quarter.
For 2018, we plan full-year turnaround expenses to be between $520 million and $570 million pre-tax. We expect corporate and other costs to come in between $640 million and $680 million. Our after tax corporate costs are higher due to the lower U.S. tax rate as well as the inclusion of interest expense associated with non-controlling interests. We anticipate full year D&A of $1.4 billion. And companywide, we expect the effective income tax rate to be in the low to mid 20% range.
Our effective income tax rate reflects the impact of the new U.S. Federal rate, state and foreign tax rates, and the impact of income attributable to non-controlling interests. The Tax Cuts and Jobs Act should be positive for Phillips 66. We will benefit from the 21% corporate tax rate and the capital cost recovery provisions. We also have more flexibility in managing our global cash balances.
With that, we'll now open the line for questions.
Thank you. We will now begin the question-and-answer session. [Operator Instructions] Neil Mehta from Goldman Sachs. Please go ahead. Your line is open.
Good morning, Neil.
Good morning, guys. A couple of questions here, the first is just around share repurchases. With tax reform coming in and the amount of cash flow, you guys should be able to draw as you go into this harvesting mode with lower capital spending. You should be in a position to be aggressive around share repurchases, especially if you do believe the stock is trading below intrinsic value. You have come out with this $1 billion to $2 billion range in the past, Greg and team, just want to see how you are thinking about the potential to even go over that in this type of environment?
Neil, first of all, good morning, good to hear from you. There is a couple of things that I think about. One is we've got new income coming on from all these investments we have been making. Mid cycle that's a billionish to $1.5 billion. We have got nice tailwind probably from tax reform as you think about that. And then as we think about the investment opportunity universe [ph] it's really competitive out there. So I certainly don't see us increasing capital expenditures.
So on balance, if you think '12 to '17, we really hit the 60:40 allocation of reinvestment business versus giving cash back to shareholders. We are going to probably drift more towards a 50:50 number certainly in 2018–2019 as well looks like to us. So, will certainly be right towards the high-end of that range, Neil; we are not -- we go over it, we will just see how the year goes.
Appreciate that. And then follow-up is just on the refining macro. Greg, can you talk about -- and team talk a little bit both your view on the -- views on the product balances? We have seen gasoline build. It feels seasonal. Distillate has been strong, and then your thoughts on Brent TI [ph], because that's compressed by quite a bit over the last couple of weeks here as we think about the year?
Do you want to take stab at that, Jeff? And then, I'll come in.
Yes, I think as we look, the global economic indicators are really multiple year highs, both from a manufacturing and from a consumer confidence and unemployment, multi-year lows on unemployment. So, the economy looks good globally in all the major region. That's positive for the demand outlook. As we start the year and think back to last year, gasoline and distillate inventories on days of demand cover last year were above the 5-year range. And they shifted to the bottom of the 5-year range this year. So, the starting point certainly feels better. As we think about demand, we are seeing strong demand on the product export side. We had record exports in the fourth quarter, 260,000 barrels a day.
And then, as we look at Canadian production in particular continuing to grow with Fort Hills ramping up this year and really no major pipeline start ups for 2018 and 2019. The rails ramped up in the fourth quarter relative to third quarter, but it doesn't appear they have substantial excess capacity. So that's going to be a positive. And PSX is the largest importer of Canadian crudes, buying over 0.5 million barrels a day of Canadian crude. Lower taxes should benefit U.S. refiners. And then we have got the IMO bunker fuel specifications on the horizon. So, we are cautiously optimistic on the outlook for refining profitability this year.
Great, guys. Thank you very much.
Thank you.
Doug Terreson from Evercore ISI. Please go ahead, your line is open.
Good morning, everybody.
Hey, Doug.
Hi.
I also wanted to ask a question about your views on some of the likely market impacts of some of these new environment regulations that are set for the next few years. Meaning Jeff, mentioned IMO 2020. And then, we've got tier fuels too that I wanted to ask about, and how the company is positioned. So, the first, do you sense that the U.S. and global refining industries are investing enough to satisfy some of these roles? Second, do you envision margin to the key products such as the [indiscernible] fuels and crude oil spreads? How do you they are going to vary because of these mandates? And then, finally, how is the company positioned for these changes? Meaning, there's three parts to the questions is the industry ready in your view? Two, what do you think are the likely outcomes with spreads? And most importantly, how is Phillips 66 positioned for these new environmental mandates?
Well, let me start backwards, and I will then pass it off to Jeff to talk about some of the details. So the answer how we are positioned, we are pretty through the Tier 3 investment period. And that's one reason you have seen our sustained capital come down in refining, Doug. In terms of IMO, we are not planning on making significant investments. There are probably some small things will do around the assets in terms of looking at yields and conversions. But, we don't view that necessarily as a negative impact on our business. I think we are constructive on what that does in terms of the distillate price. But, we are probably not as optimistic as some of the others are out there, although Jeff is pretty optimistic on it. So, I will let him talk you through what he thinks the impacts are going to be in terms of margins and maybe some of the other refiners out there.
Yes, we are -- you are bringing up a source of internal debate that happens on a fairly regular basis. But, as we look at it, the IMO is about 4 million barrels a day in rough numbers. You take the scrubbers and probably non-compliance that might be a million barrels a day of it. There's a million barrels a day that might get blended up and end up with still about 2 million barrels of incremental diesel demand. And you compare that to the global demand of 35 million barrels a day, that's about a 6% increase, the meaningful increase upcoming. On the [indiscernible] side, it's also 2 million barrels a day [indiscernible] needs to be destroyed and that compares to a global coking capacity market in the 6 to 8 million barrel a day range. And a lot of that capacity is already highly utilized.
So, the industry is preparing in advance. The global system has flexibility, but these are meaningful shifts. As we think about what we are dealing. In 2017, we had about 15 projects that added 10,000 barrels a day of diesel production capability. In 2018, we've got about 30 projects that will add 20,000 barrels a day of clean product. That leans a little bit more towards gasoline, but there is diesel there as well. And so, these are low CapEx but high return projects.
Okay, thanks, Jeff, and congratulations everybody on your solid results.
Right. Thanks, Doug.
Blake Fernandez from Scotia Howard Weil. Please go ahead. Your line is open.
Hey, folks, good morning. I wanted to go back on the WCS differentials. And Jeff, I think you mentioned you guys have access to over 500,000 barrels a day of Canadian crude. Can you help remind me I guess the actual access to that as far as is that piped, is that railed, a combination? I guess I am just trying to fish around to see how of this blow out in the differential you are actually going to realize?
Yes, there is a big pipe component of it. It's primarily heavy and primarily vast majority of this utilized in our own refineries. We do import some offshore barrels. That's a small portion of the total. But, we are large buyers across the way. There is not much movement by rail at this point.
Okay. So, it sounds like you've got pretty direct leverage to the differential move here.
Right.
Okay. And the second question, I guess, maybe shifting over to the Chemicals piece since we've got the cracker kind of coming online and ramping up into next quarter. It looks like some of the chain margins have maybe been trending below the $0.30 per pound, which I think is always kind of a mid-cycle proxy you guys use. I didn't know if you had any thoughts on that and if maybe some of the recent move in gas prices has kind of impacted the margins there?
Yes, so let me just talk. So, margins in the quarter were up about $0.02 for the year. They're up about $0.03 in 2017. You kind of think about [indiscernible] came on in the fourth quarter. We had our polyethylene capacity up in the fourth quarter. So from a market basing standpoint, we were moving the products, and we believe that Exxon Mobil actually ran some of their derivative capacity in the fourth quarter also. So you're starting to see the impact of those products hit the market.
I think that in many ways the global economy is pretty good. You think about in U.S., think about Europe, you think about Asia, and it's really taking these materials without a lot of margin impact in -- to your point like, I think if you look at that full chain polyethylene margin based on a weighted average speed it is kind of hovering around $0.25 level, which is kind of reinvestment level economics mid-cycle if you want to think about it. You look at on ethane basis, that full chain margin is around $0.31, $0.32. And so those are the really healthy margins for us. And so, I think that we kind of look at the Chemicals businesses is getting this new cracker up, getting polyethylene in the market, maybe there's going to be some margin compression, you know, these other projects to come online in 2018, but I think you got to remember higher crude prices are very constructive for us. And we like high crude, low natural gas prices in the Chemicals business. And so, that'll open up the margins for CPChem.
Thanks, Greg.
You bet.
Paul Sankey from Wolfe Research. Please go ahead. Your line is open.
Hi, guys. I'll start with the detail one if I could. You said utilization was up at 198% respectively over the past couple of quarters. It seems a bit lower in Q1. Could you just talk a little bit about some -- whether that's sort of a level number and what the outlook for you guys this is in terms of turnarounds over the coming year? And then, I have a follow-up. Thanks.
Go ahead.
Yes, we provided guidance. You saw that the first quarter is a relatively heavy lift for us on maintenance. We are guided to $230 million to $260 million. First quarter of last year was $299 million, and that was that heaviest quarterly maintenance period in the last decade. So we're below last year, but still a meaningful lift for the first quarter.
Is there any bigger items that just that you can talk about?
I think as we look at it, last year was more crude unit heavy, and some of the downstream units, the conversion units are more impacted in this quarter.
Got it. Greg, if I can take it to a high level, you made an interesting comment that is always a debatable one regarding the intrinsic value, both the stock relative to your appetite buyback, could you just expand on that a little bit? Thank you.
Sure. Well, we are never going to give you the number, but you can keep asking, Paul. But yes, so the way we think about intrinsic value, we're looking at kind of EBITDA two years out, we're using kind of historical multiples and some of the parts. And based on that, obviously it's a higher pricing what we're trading today and that's why we're buying shares today.
Yes, it's an interesting point. I mean. I don't think we haven't quite get to the answer on when the optimum time, I think you can read very long academic studies on the optimum times for buying back, but I guess just to follow-up, there's nothing really you have to do on the debt side, is that I mean it sounds that maturities or any other outlet for excess cash?
That's right, Paul. Yes, nothing coming up in the near term.
Great, okay. Thanks a lot.
Justin Jenkins from Raymond James. Please go ahead your line is open.
Great, thanks good morning everybody. I guess maybe just to start, Jeff; he made a few comments on the Canadian heavy differentials. Has there been any thoughts or discussions in terms of the asset profile of Refining? Are you comfortable with the asset base as it stands or any ownership structure of the WRB shifting on those lines?
No, I think look, we're pretty happy with the portfolio today. We always look at the portfolio many times a year. We're always looking at it. But I just think as the portfolio lies today, we like the portfolio where it sits. [Indiscernible] been a great partner at WRB. And we continue to make investments there between the two of us. In fact, we're modernizing the FCC. It's one of the projects we have for 2018 there. So I would say portfolio is in pretty good shape.
Perfect. Thanks, Greg. And then may be shifting on taxes, Kevin you mentioned in your opening remarks, but anything else to note as it relates to the earnings outside the U.S., whether it's tax payments over time for the new tax law or any plans to repatriate cash?
No, not specifically. I mean we with -- in terms of the foreign cash that the new tax law probably gives us access to a $1 billion, $1.02 billion of cash that previously was overseas, and we didn't have cost effective access to. So, it gives us gives a bit more flexibility in managing our overall cash. In reality, we have plenty of cash anyway. So it's not like we need to rush out for that, but it just helps them from an overall flexibility and managing the cash position.
Perfect, thanks Kevin. I'll leave it there. Have a good weekend, guys.
You too. Thank you.
Doug Leggate from Bank of America Merrill Lynch. Please go ahead. Your line is open.
Hey, guys. Good morning. This is [indiscernible] on for Doug. I've got a couple questions, both macro-related. First, I wanted to see if I get an update on the performance at the LPG export business. I know in prior quarters, you guys have talked about the cargo turning near capacity, and I think you are working on doing some things optimized cost there. But the bigger piece of the EBITDA contribution is really ARB [ph] related and that hasn't been there in past quarters. I'm wondering if you can talk about whether that's improving against these positive demand trends in oil?
So I'll start on that. I think that we've demonstrated 25% of the design capacity of the terminals. So I think we're loading like 10 cargos this month, did 96 in the fourth quarter. So we're running it to capacity, as you know, the ARB -- the fees has been around between $0.05 and $0.07 in that range. And that's substantially below what we had promised when we improved the project. So we think about what's coming at us particularly from the Permian, we see strong in geo growth in 2018. We think that utilization rates across the docks are going to come up, and the opportunity to move those dock fees and hence those margins across will improve as we move into the back-half of 2018, certainly as we get into 2019.
Yes. You saw the DOE monthly stats October and November NGL production up over 400,000 barrels a day year-on-year. I don't know if that pace is going to be sustained, but clearly we're seeing very strong growth on the NGL front, which is going to need to be exported. And that's going to help fill these pipelines. Based on DOE stats last year, LPG export facilities ran in the low 80s percentage utilization and we think that will move into the high 80s this year, which by the end of the year 2019 starts helping margins
Got it. Thanks, guys. Second question, just kind of looking at the WTI brand spread today. It's nearing below $4. What do you think the appropriate ranges for the stainable WTI brand spread? What do you think set those parameters? And secondly, do you attribute any of this weakness to seasonality, perhaps staggered refinery maintenance profiles which means the Gulf Coast and the Mid-Continent post refinery maintenance could this perhaps start widening out again?
Well, I think if you look at just West Houston versus Brant it's traded around a buck-and-a-half, kind of $0.50 plus or minus. That part of the differential has been relatively stable. When you look at what's happening between Cushing and Permian and the Gulf Coast, we've seen substantial changes recently with those pipelines being very highly utilized, close to full in the October-November timeframe. Since that time, Valero's diamond pipeline has added 200,000 barrels a day out of Cushing. That's drawing pushing inventories down pretty rapidly. And from the Permian, the Midland-to-Sealy and the expansions of the existing added 700,000 barrels a day, so we've gone from a period of not enough capacity to too much capacity in the short-term. Permian, it's certainly possible; could grow 700,000 barrels a day this year, and be back to a very tight level by the end of the year, or certainly 2019. So that Cushing to Gulf Coast is going to swing more. Right now there's enough capacity and those rates are tightening. We'll see some seasonal impacts for maintenance, but I think those are the big drivers.
Got it. Thanks, guys.
Phil Gresh from JPMorgan. Please go ahead. Your line is open.
Yes, hi. Good morning. So Kevin, you probably know I was going to start with this one; so I'll get this one out of the way, but just the deferred tax fees in terms of the tax reform and the impacts and how you think about 2018 with the investments you have, kind of a cash tax versus book tax rate?
Yes, Phil, so I think the best way to look at that -- I don't want to go down the path of trying to give a cash tax rate, because you really know what your pre-tax income is to go there, but the way to model that is you can assume a deferred tax benefit for 2018 total company in the order of $400 million is what we're seeing. And so that predominantly reflects the additional tax depreciation over and above financial depreciation. So there is about $400 million benefit on cash flow relative to with the financial tax.
Okay, great. Thanks. Second question is on Midstream. If you look at the increased disclosure here in the filings this quarter, the run rate of EBITDA and Midstream adjusted basis, XTCP is around $1.2 billion annualized, and I know the guidance is for a longer term to -- I think by the end of '18 to be more like 1.8 billion to 2.0 billion. So could you talk about that path of trajectory towards the end of the year and what projects do you expect to contribute to the bulk of that?
Yep. So I'll start. So, you're right. You take the kind of the 300 or so, 295 and annualized that you get to 1-2, and remember in that number of slides that we show that you got about $300 million or so refining with just -- that pushes you about $1.5. And there's about $300 million of growth in market that we've got laid in to the plan this year. And that number is kind of into your run rate number also. So, obviously, we got expansions on Sand Hills. We got second segment of Bayou Bridge. We got all the work we're doing around the Beaumont Terminal. There is a lot of multitude of projects in blending at various terminals across the system, and then you got organic growth at PSXP that's laid into that number. So that's -- I don't think the 300 growth rate or annualized run rate growth is going to be that big of a lift force in 2018. I think we'll hit that.
And so, are you implying that the $300 million on the refining side is likely to be dropped in '18 then, or is it just a categorization?
No. That's just trying to highlight potential Midstream income that we had. It could be droppable. I suspect that refining incremented some of the very last step we get to, Phil.
Okay. Just one last question, in terms of -- there is some questions already in Canadian Heavy, I was just curious you're having some challenges of Wood River being able to get full access to crude of the Keystone, I know Keystone is still running I think at 80% right now. I'm just curious how your accessibility is to that Canadian crude at Wood River right now?
Yes, we still got access. Keystone is not fully backup, but it's running, and we've got access there that we need.
Okay, thanks.
Kristina Kazarian from Credit Suisse. Please go ahead. Your line is open.
Good afternoon, guys.
Hey, Kristina.
Hi, Kristina.
Hi. Shifting back to the Chem segment, you guys mentioned the new cracker and associated key units will be fully commercial in 2Q. Can you just remind me, one, what the start up costs are? And two, how long it takes me from there to get kind of full utilization? And if I use some of the current margins we were talking about earlier in the call, what does that imply versus what we've talked about re-mid cycle guidance?
Yes. So I think that -- so polyethylene came up relatively quickly. It was running at almost full capacity utilization by the end of the quarter. But I suspect by the end of the second quarter, it'll be at full rate. And again remember, the polyethylene is the big pull on, and it's already out in the market. So it's just getting the cracker up to supply the ethylene going into the polyethylene. So I think it will be a fairly quick ramp up. I think it's kind of the $0.32 margins that we're looking at on the ethane margins, we're in the range of the kind of that 1-2ish billion of EBITDA, certainly 1 to 1.2, in that range, as you move back and you think about, that's a pretty close to that $0.25 mid-cycle case for the weighted average feed for the industry.
So, I think in today's margins were kind of there. You could see a little compression as we come up; Exxon is going to come up later in the year, but I still think that given strong fundamental demand in the business and there is not a lot of capacity coming on globally in Pet Chems in 2018, but we're still very constructive around margins for the balance of 2018.
And were there a start up cost number that you guys want to frac for me as well?
No.
Got it. Now, on the pipeline side, can you just maybe provide an update around the Open Season around the Gray Oak pipeline JV, and maybe talk about the benefits from a project like that and how I would be thinking about this project versus some of the other ones announced there? Would you maybe be willing to merge two together? And just general thoughts there.
Well, we're still in the midst of the Open Season. So it's probably not too appropriate to comment. I would say that high level of interest, and it was actually -- we were asked by many of the producers in the region to do this project. So there was a lot of interest going into it. And so yes, there is a lot of pipelines that have been announced, there is no question; I think that we have high levels of confidence that we'll get to a good endpoint on this project for Gray Oak.
Perfect. That's it from me. Look forward to that, thank you.
Thanks, Kristina.
Roger Read from Wells Fargo. Please go ahead, your line is open.
Yes, thanks. Good morning.
Hey, good morning.
And maybe just a follow-up on Midstream piece, the target of getting to the 1.8 exit rate in '18, NGL and other was a nice contributor in the fourth quarter, and imagine higher oil prices are helping that out along with the increased volumes. But as you think about that improvement from kind of this Q4 exit Q4 of '18, how much are you thinking NGLs improve from here, or given the sort of price volatility on that that's actually a relatively small component of the improvement?
Yes, I would say that's a relatively small contributing piece to it.
So, in other words, if we get a stronger NGL pricing, we can think about easier to make the target or exceeding the target?
Yes. If oil prices continue to strengthen, that will support our NGL business and make it an easier lift to get to the 1.8. The difference between the 1.8 and 2 is really market-related. And so, I would put it in that category.
Okay, thank you.
As a 1.8 number, we've got about a $150 million laid in for the frac and for the exports. So we've been pretty conservative in our view of what that project contributes in 2018. I do think as we come into back half of the year, we're going to like the dock piece a lot better, but a lot of that's just growth in organic growth at PSXP for some of the expansions we have going on the pipe. And so, we just -- lot of this is more pipeline type volumes, the terminal type that activity versus NGL improvement.
No. That's helpful. Thanks. And then, hasn't really been hit on this call, I don't believe, it come up on the prior ones; potential reform of the RFS, do you have any thoughts on it? I know I could guess what your view would be, but just curious if you have any views on the potential for that? Was it picking up, gone the Corn State Senators actually talking to the Oil State Senators instead of holding each other hostage on their appointments?
Well, I think you answered the question for me. Look, we're all in on this. We think it's a right thing to do. We think the legislation is fraud, we're adding our voice at Capitol Hill. I agree with you, I think that the dialog particularly from the Senate side with the Texas Senators and the Corn State Senators is constructive and helpful. Congressman Walden and Hoff continue to be very helpful in terms of moving the dialog forward. My only concern is there is still a lot on Congress's plate. I think that making recommendations about what this Congress is or isn't going to get accomplished just for referral, and so we will just have to see. I just don't think RFS reform is one of the top cards of their agenda. And then you move in a back half year with the election year, I think it's harder to get things done. So if it's not done early in the year, I think it gets pushed.
Okay, great. Thank you.
You bet.
Spiro Dounis from UBS Securities. Please go ahead. Your line is open.
Hey, good afternoon. Thanks for taking the question. Just wanted to comeback capital allocation, but focus a little more maybe it's on the dividend. I think we are still about a quarter or so we definitely announced any change there, but just kind of looking for a framework on how you are thinking about that relation. So last year's 11% increase and obviously a lot of project startups this year. And then, of course any benefits from tax reform?
Well, so I think going to pure competitive dividend as what we always frame that answer. We think about, it's got to be affordable, it's got to be, we want to continue to grow the dividend every year. We look at where we said versus our refining competitors and other industry competitors were except versus yield on the kind of the S&P 100 and you kind of take all that in, but certainly you should expect that we will increase the dividend this year and I will just leave it to that.
Fair enough. And then just one follow-up on CPChem, I think you guys ran down the inventory there in the third quarter. I don't expect any way you got a chance to really ramp them back up in fourth quarter with Cedar Bayou down but as you head into 1Q now, I would see the value back up. Would you expect to sort of refill that inventory, just trying to get a sense of if 1Q performance is also slowly a way down a bit as you sort of refill the inventory?
Well, I think we start up on the new crack and obviously as you think about the startup of that cracker that will certainly impact those balances. We pull down inventories A because Cedar was down but B because we are running the polyethylene units at Old Ocean also. So you have that kind of that combination going on and of course the hurricane impacted the entire industry there on the Gulf Coast. Yes, I would say we normalize inventories at CPChem going forward. But you know, there is not a reason to hold a lot of high inventory in my view at CPChem or anyplace in our chains, we try to manage that working capital really tightly and I would say we are constructive demand, what we see. So typically seasonally first quarter is weak in terms of petrochemical demand, a lot of that's on the Chinese New Year and what you see going on there but we've seen continued good buying activity out of Asia really hasn't been impacted this year. So seasonally strong coming into the first quarter, so we like what we see in the demand side on petchem.
Great. Thanks for the color Greg. I appreciate it.
Ryan Todd from Deutsche Bank. Please go ahead. Your line is open.
Okay, thanks. Maybe a follow-up on some of the earlier questions on CPChem, I think previously you've spoken to $600 million to $800 million here in distributions. Can you maybe update on the trajectory of how we should think about over the course of the year. Will we see any distributions in the first and second quarter or will that mostly be weighted towards the second half?
Yes, Ryan. It's Kevin, I think what you will see on that is it's probably going to be a little bit weighted towards the second half of the year. I don't want to refer from that we won't receive any distributions in the first half. I think first quarter is probably unlikely just given that we are just getting the cracker you know, that just start coming up in during the first quarter and bring that up to full operations. So you'll probably see it kind of more from second quarter on through the year.
Okay, thanks. And then, maybe just anytime as you might have on the west coast. I mean, the west coast was problematic during the -- in terms of refining margins during the fourth quarter high utilization and number of other things happen, but can you - any updates on yourselves how you see the rest of the first quarter either from a turnaround activity, you switch to some gasoline and how you expect margins to trend there over the next few months?
Yes, I think west coast in December. December is typically a weak period. The industry ran well with high utilization rates, we had some weather influences negatively impact demand and so it's a tough time here and things got weak. As you look into the first quarter, there is maintenance on the west coast in January in January that's kind of support the crack here. It looks like after the current turnarounds are completed, it looks a little bit light on the west coast. Mid-Continent looks like it's for the industry or relatively heavy refining maintenance period and there is some maintenance relatively large on the PADD I as well. Internationally, it looks like relatively heavy or close above normal, let's call it rather than heavy maintenance season this spring with backend loaded kind of March, April, May timeframe.
Okay. Thank you.
Operator
Craig Shere from Tuohy Brothers. Please go ahead. Your line is open.
Good afternoon. Thanks for taking my question. So on the export terminal, LPG export terminal, it sounds like ongoing optimism going out in the second half and it's '19, what do you think the prospects are in the coming 12 months, maybe 18 months of expanding the amount of contract and position on that facility?
As our prices are, you suddenly want to expand your contracts at the bottom; it's kind of our view. You know, look hey I sometime in '19 we are probably going hit limits in terms of industry, capacity to clear the barrels and you kind of need a $0.10 to $0.12 fee across the doc to justify new investment and so I think we will get there but a lot of it depends on what's going on in the Permian and how many NGLs are going to be showing up, we remain constructive around our views on that.
Do you think that the market will be supportive enough to get longer term contracting five to ten years or you think when we start to settle a couple of years of the time?
It can be a couple of years at a time in this environment. We will see a surprise if you can write five year paper.
Understood. And last question. On the balance sheet management, I understand there is not a lot of debt coming to [indiscernible] for a while. You do have -- if I'm not mistaken a couple of billion chunk out to 2022, how do you think about building cash balances and expectation of a large managing a large maturity like that, would you be willing to hold outsize cash balances for couple of years?
Yes, Craig. It's Kevin. I - we may build cash simply by virtue of strong operating cash flow and depending on where overall capital fits, how much what is going on from a capital expenditure standpoint and then the other side of that with distributions, dividends and buybacks. But I don't think we would be building cash just for the purpose to upholding it to pay time debt for years out from this point. We have a lot of flexibility from a balance sheet debt management standpoint and so given the strength for the balance sheet to credit rating that we got we can easily refinance maturities as they come to that's what we choose to do, so. I would look at cash balances more from a broader picture in terms of what it means from a capital allocation standpoint.
Understood. And that Kevin, I got you. That 1 billion to 1.2 billion of foreign cash, is it pretty nominal cost to bring that back, if you wanted in the future?
Yes, that's the point that post tax reform we now have access to that cash without having to pay any excess U.S. taxes.
Oh, zero. Okay. Thanks.
Thanks. Because we pay the repatriation tax upfront -- the group repatriation.
We paid in advance on that one.
Yes, we paid it, yes.
Thank you.
Brad Heffern from RBC Capital Markets. Please go ahead. Your line is open.
Hey, good morning everyone. I will start with sort of a macro question with kind of tied into the WTA brand conversation. I'm just wondering if you guys have a perspective on crude export capacity in the U.S. I think you said earlier in the call, Permian could grow 700,000 barrels a day that's probably pushing us into the over 2 million barrels a day of export. So you would run into a wall at some point on that?
Yes, it's a good question. I think with the hurricane back in the fall, we found out that we can export 2 million barrels a day. We thought that might have been the max we could export at that time, and perhaps it was, because we hadn't gone materially higher than that. But I think there is a need for continued infrastructure to get the Permian barrels to the shore, and the majority of the increase in production is going to be exported. And so, as you look at oil production growing over 1 million barrels a day here at the end of 2017 with continued improvement in IP rates and drilling efficiency gains, the drilled but uncompleted well count continue to go up during this increase in production. So it looks to us like there is going to be sustained, strong production growth in the U.S. and that more infrastructure will be needed.
Okay, thanks, got it. And I guess, switching over to DCP, you know, Enbridge has labeled that as an un-core [ph], so how do you guys feel about owning half of the GP versus potentially taking out more of it?
I feel happy with the structure as it is today. There is no question, I mean Enbridge is great company, and we are finding another ways to work together. Gray Oak is a great example of that. And so, we continue to like DCP, we like their positions in the Permian, the Eagle Ford, the Mid-Con, the DJ. DCP has done a nice job of managing this business through really tough time, and they are coming out the other end. And so, EBITDA is growing nicely. They have some great growth profiles in front of them. So, you know, fundamentally we like the asset, the [indiscernible] goes with our partner.
Okay, appreciate it. Thanks.
You bet.
Thank you. We have now reached the time limit available for questions. I will now turn the call back over to Jeff.
Yes, thank you. I appreciate your interest in Phillips 66. If there is any follow-up calls, please contact Rosy or me.
Thank you. Ladies and gentlemen, this concludes today's conference. You may now disconnect.