Phillips 66 reports stellar Q4 2021 refining results, plans heavy turnaround year in 2022

Phillips 66 reported the third consecutive quarterly improvement in refining segment earnings in Q4 2021 as Renewable Fuel Standard compliance costs fell and demand strengthened with the waning impact of coronavirus, a trend Phillip 66s expects to continue into 2022, CEO Greg Garland on the Jan. 28 Q4 results call

"As we look coming in 2022, we are constructive ...on the demand side. What we see with each successive wave of Covid, the impacts to demand are less and less," he said.

Reduced refinery supply will also be a factor to supporting strong margins. Phillips 66 estimated that about 4.5 million b/d of global refining capacity has been "rationalized" or shut down since the beginning of the coronavirus.

Jeff Dietert, head of investor relations, noted that it was the "first year in at least 30 years where there was more capacity rationalized out of the global fleet than there was capacity added."

And the start-up new refinery projects to increase capacity will be "staged".

"It's not all going to hit when people think it's going to hit because it always takes longer to come on," Garland said.

Supply chain and coronavirus-related labor issues have complicated many projects, delaying the time of many.

Highest crack since 2018

Q4 refining segment income was $404 million, $202 million higher than Q3 earnings, with total system refining margins rising by 35% to $11.60/b, the highest level since 2018.

"Impacts from lower market crack spreads were more than offset by lower RINs costs from a reduction in our estimated 2021 compliance year obligation and lower RINs costs," said Kevin Mitchell, chief financial officer on the call.

Mitchell was referring to Renewable Identification Numbers which are credits bought by refiners to comply with the Environmental Protection Agency's Renewable Fuel Standard.

On Dec. 7, 2021, the EPA issued proposed volumes mandates for the Renewable Volume Obligation for 2021 which were lower than originally expected due to the demand destruction caused by the coronavirus.

RINs prices weakened after the announcement, pushing down Q4 2021 RVO prices to an average 14.54 cents/gal from the 17.33 cents/gal in Q3 and 19.37 cents/gal in Q2, according to S&P Global Platts assessments.

Mitchell said Phillips 66 adjusted 2021 earnings to reflect the $230 million or so "related to the EPA's proposed reduction of the RVO, of which 75% applies to the first three quarters of the year."

Delayed turnarounds hike 2022 turnaround expenses

Phillips 66 will increase turnaround activity at its refineries in 2022, after two years of running at lower utilizations due to the coronavirus, Garland said.

"I think probably a lot of people did that in the industry as we were trying to conserve cash and protecting the balance sheet," Garland

Phillips 66 expects to spend between $800 million and $900 million for turnarounds at its refineries in 2022, possibly the highest in the company's history, according to JP Morgan analyst Phil Gresh.

This includes between $120 million to $150 million to be spent in Q1 2022 when refinery utilization is forecast at high 80% utilization range.

During Q4 2021, Phillips spent $106 million for turnarounds and ran its refineries at 90% of capacity.

Slated for complete facility turnarounds in 2022 are Phillips 66's 66,000 b/d refinery in Billings, Montana, and its 105,000 b/d Ferndale refinery in Anacortes, Washington, said Robert Herman, head of refining.

"And we would agree that a lot of people managed their turnarounds and maintenance work out of '20 and '21. Some of that's running lower utilizations. We made our catalyst in the hydrotreaters and hydrocrackers last longer so we were able to stretch those runs," Herman said.

"But you can't do that forever...And for us it's a pretty heavy lift across the system. And I suspect we are not the only ones who are going to see that," he added.

According to S&P Platts Global Analytics, US refinery downtime is expected to be 2.4 million b/d in January, 2.7 million b/d in February, and 3 million b/d in March.