Phillips 66 (NYSE:PSX) Goldman Sachs Global Energy and Clean Technology Conference January 5, 2023 11:00 AM ET
Company Participants
Jeff Dietert – Vice President, Investor Relations
Mark Lashier – President and Chief Executive Officer
Kevin Mitchell – Executive Vice President, Chief Financial Officer
Conference Call Participants
Neil Mehta – Goldman Sachs
Neil Mehta
All right, we’ll get started here. 30 seconds, all right, this is always a highlight of the conference for me to have Phillips 66 here. And you got keynote at a couple of years ago at the conference. And gosh, a lot happened and refined and I don’t think any of it pre-COVID, or the midst of COVID would have thought that refining margins would have ended up being where they are today. So we want to talk with the leadership team about how they’re seeing the go forward, especially on the back of what I thought was a very effective Analyst Day. We have Mark Lashier, President and CEO, Kevin Mitchell, the CFO and Jeff Dietert, Vice President and he knows everything macro. So Mr. Lashier, maybe you talk about the response from investors on the back of the Analyst Day. What do you think was the most important message and from an investment community perspective how we can track your progress and hold the company accountable?
Question-and-Answer Session
Operator
[Operator Instructions]
Mark Lashier
Absolutely. First, Neil, thanks for having us here. It’s great to be here. Happy New Year. We did enjoy our Investor Day was I think we had good strong message that we wanted to deliver. And really at a high level, the takeaway is we want to be very focused and very disciplined, and we’re going to be disciplined around returning value to our shareholders in the near term and the long term. And near term, we committed to returning $10 billion to $12 billion cash returns to shareholders from July of this year through the end of 2024. And that’s a combination of course of dividends and share repurchases. Where we are today with a dividend, you can think about a little less than half of that number will come as dividends and the balance as a share repurchases and we have high degree of confidence that with our outlook on margins, and a conservative view that we’ll be able to deliver against that. And then you go beyond that, then we had, we talked a lot about our business transformation efforts that are underway, fixing some things in our refining business, reducing our costs and positioning us to compete in any environment.
Refining, we’re looking at cutting, reducing our cost by about $0.75 a barrel and also enhancing our ability to capture market what the market gives us by about five percentage points, enhance the availability of our assets create more flexibility. On the bigger picture, our cost restructuring. We’re targeting a $1 billion in cash reductions by the end of ‘24. And we’re — we’ve targeted about half of that this year, about half that next year, we’re outperforming so we’ve got good momentum going into next year on those metrics. And when you look at that billion-dollar number, about $800 million is actual cash cost reductions, and then about $200 million in sustaining capital. And beyond that, beyond the end of ’24, we’ll continue to accrue those sustainable recurring reductions through some modest capital investments. So you’ll see some upside to that number beyond ‘24.
We also talked about our wellhead to market strategy around midstream, particularly NGL midstream and key part of that is a DCP acquisition, that acquisition will add about a billion dollars a year in EBITDA and of course there’ll be synergies associated with that as well. That we’ll talk about once that transaction is complete. And other things we’ve got going on, whether it’s in petrochemicals, the cost initiatives, all those things add up to about an incremental $3 billion in EBITDA that we will grow from our current base over the next couple of years. We’re going to cap our capital investments to $2 billion to be very disciplined about a billion dollars’ worth of growth, about a billion dollars in sustaining. I said we were going to reduce, we’ve been historically at about a billion dollars, we’re going to reduce $200 million of sustaining capital but when you fold DCP in, their sustaining capital expect about a billion dollars and so that’s really it, we’re going to do things to improve our refining performance to have a very focused and deliberate growth in specific areas. Nothing getting out over our skis.
We talked a little bit about what we’re doing in renewables, mostly renewable fuels, the renewable diesel, sustainable aviation fuel, those kinds of things. But as far as tracking that we’re — we intend to deliver metrics and talk about metrics at the very least at earnings calls on a quarterly basis, so you can be able to track what we’re doing and how we’re recapturing that. We don’t count anything until the CFO says we can count. And so we’ll see scorecards, that sort of thing coming out around the cost reduction and enhancements that we’re driving so.
Neil Mehta
That’s great.
Mark Lashier
We are pretty excited about it. So we’re moving heavily into execution, last year was a lot about putting all this together and planning. And now it’s all about execution and delivery.
Neil Mehta
It was great. That’s a good foundation for our conversation. Let’s start on refining. And this question for all of you. But maybe I’ll pick on Jeff first. So just your perspective on where we are in the refining cycle? The perspective on cracks when you actually set out the Analyst Day, which when you can do math implies $13 of long term EPS, you set it at a pretty conservative crack spread. Does that reflect some conservatism in the way you’re thinking about the market? Or and just where are we — what’s the potential that we’re above midcycle?
Jeff Dietert
Yes, so I think one thing that was big that really happened since the pandemic is we’ve taken about 4.7 million barrels a day of refining capacity out of the market. And so that rationalization has tightened up the market. Last summer, we saw demand back close to 2019 levels, and saw margins, frankly, I didn’t think we’d see and hadn’t seen historically. And so that is tight in the market, diesel in particular is very tight. Today, diesel inventories are 15%. below the five-year average, gasoline inventories are 7% below the five-year average. So the market is still tight. We’ve seen a little bit of softness in demand, recently, gasoline and diesel down relative to 2019 levels. But still a tight market. When we think about mid cycle, we use the 2012 to 2019 period. And when average rent adjusted crack during that period of time, was $12 a barrel. And today we’re over $20 a barrel in January, which December in January are usually your weakest months of the year, weak demand period versus a summer driving season. We do have an above average maintenance period, the industry as a whole does for the spring. So maintenance is going to be heavy. For Phillips 66, we have had our heavy maintenance period in 2022 last year, so we’ll have something closer to normal turnaround year this year. But things look to continue to be tight as we are maximizing diesel yield year-round. And so as we approach the summer driving season, gasoline, we expect gasoline and diesel to be tight again this summer now.
Neil Mehta
China’s an interesting wildcard because it can move two ways. And Mark, you’ve spent a lot of time looking at China in your experience running chemicals businesses, what are your thoughts around reopening and what that could mean for global demand, but also the offset potentially, of higher product exports?
Mark Lashier
Yes, I think that’s a great question. We pay a lot of attention to that both from refining, refined product perspective, as well as petrochemical. I think from a petrochemicals perspective, it really could be a catalyst that pulls us away from what we kind of see as the bottom of the trough right now. And it’s those markets, it doesn’t take a lot to catalyze a movement towards restocking and see margins expanding. Refined products between COVID and China and the sanctions on Russia and crude oil from Russia going to China and India and very soon, maybe refined products. And if you’re Chinese producer, do you run Russian crude through your refinery to produce refined products? Or do you import refined products and the Chinese are very good at making buy versus make decision. So it’s going to be an interesting dynamic to see how that all plays out. But I think that’s — that is the biggest wildcard I think that we’re looking at in ‘23 is how that equilibrium gets reestablished.
Neil Mehta
But to be clear, even though you use $12 at midcycle in the way that you set your long-term guide, you believe we’re going to sustain above midcycle?
Mark Lashier
I believe we will. I think there’s a number of things driving that dynamic. I think the cost structure in the US is competitive globally. I think that Europe while it’s not having the blowout cost and energy that it was, it’s still going to be under pressure. It’s going to put pressure on which crudes Europeans can process and so I think that does create a structural advantage, at least in the near term, and they may reset out in the future. But we’re bullish for now.
Jeff Dietert
Well, that’s natural gas prices in the US about $4 a MMBtu. In Europe, it’s about $24 a MMBtu. For us, that’s about a $6 a barrel cash operating cost advantage in today’s market.
Neil Mehta
That’s real money, and higher European gas prices, even though it has come off cyclical peaks. Still will differ a European refiner from running a hydrocracker, but also from processing heavy crude, and I think that is showing up less than locational differentials in Western Canada. But in terms of quality differentials, and you guys have the largest western Canadian crude buying capability of any refiner in America, so you talk about how you’ve been able to take advantage of that here more recently?
Mark Lashier
Well, certainly, we’ve got refineries positioned to take advantage that both from the pipeline connectivity as well as the kits that they have on the ground, and so it has been beneficial to our refineries. I think, Jeff, do you want to comment further.
Jeff Dietert
Yes, I think we’re experiencing really wide differentials today, $27, $28 a barrel discount to WTI. We do expect that to soften next year, the SPR, a lot of the crude pulls out of the SPR in 2022 was medium sour crude, but still expect strength there, the forward curves about $23 a barrel for 2023. So that’s still a nice advantage for us.
Neil Mehta
Yes, okay, let’s talk about the operational improvement journey. And the self-help, because that’s really important. So you spent some time we saw each other over the summer, and you talked about, you’re doing some diagnosis to try to figure out the root cause of why uptime hasn’t been as good as you wanted it to be? And what do you think as you look back and diagnose the initial issues, what they work? And what is the structural fix, to ensure that you’re operating at first quartile going forward?
Mark Lashier
Yes, I think that it’s a number of things as the head of our Refining Division, Rich Harbison talked about on Investor Day, that we have taken our eye off the ball a little bit with respect to refining and refining, it was kind of a beat-up industry for a couple of years. And we were focused on growing midstream, we were focused on developing other opportunities, there refining was facing existential questions, frankly, across the globe, that’s changed. And that we’ve got the opportunity to correct those things and to come back and actually make some fairly minor investments to enhance our ability to operate. I think we’ve come through a very heavy turnaround season, post COVID, the kits are running well, they’re running incredibly well. Even through the winter storm, they showed great resilience, I think that we’ve turned a corner there from a bit on our ability to operate, but we’re going to continue to focus on enhancing that availability. Now if the market is there, we want to be able to run and we think the market is going to be there for at least a couple of years. And to be able to capture those margins that are out there and in the same time, reduce our cost and enhance our ability to process crude if the WCS, this contract, we want to be able to shift to lighter crudes that are available in North America. So we want to focus our ability on key assets to be able to compete for the very long term. So we’re talking decades now instead of years, and we’re in it for the long haul in refining and we’ve got to make the right moves to make sure those assets are ready to fight and whatever the market environment is.
Neil Mehta
It strikes me one of the practical implementations of this is shifting from really a hub and spoke type of a model where each of the businesses ran as independent refiners to one where it’s a lot more centralized. Is that a fair assessment?
Mark Lashier
That’s a fair assessment. That’s a very accurate assessment. Frankly, we want to simplify the business. We want to standardize the way we run our refinery business. We want to optimize across the platforms, technologies that we’ve put in place will enable that. And we really think it’s the way to position ourselves competitively, and it’s being embraced by the organization today.
Neil Mehta
Okay. Well, we saw you guys ran really well in Q3 so our eyes open for Q4. Sounds good.
Mark Lashier
More to come.
Neil Mehta
All right. So in Midstream, let’s talk about DCP to the extent you can.
Mark Lashier
Sure.
Neil Mehta
And that’s where are we in terms of bringing that business into the fold and because you now have a controlling interest in the entity.
Mark Lashier
Yes.
Neil Mehta
It sounds like you can already make forward progress on driving the synergy without the business.
Mark Lashier
We are making progress, we’re already taking action, we are essentially operating the business now. We’ve identified we’re driving synergies. Now Kevin is actually the Chairman of the DCP Board. So maybe I’ll let him address the question.
Kevin Mitchell
Neil, I mean, you’re right, we’re limited on what we can say. And I think the one thing you could be sure of is when we have something to tell you, you’ll be the first to hear, we will be public on that. And just from my perspective, in terms of what that means timeline, once we have an agreement, and this whole process is in negotiation with the special committee of the DCP board, they have a fiduciary responsibility to the LP investors. And so they have to go through their process, obviously, our motivation is to be able to conduct this transaction at the lowest cost, lowest price, we can, but they’re motivated the other side of that. So we’re working through that process. And when we have something to say, we’ll certainly be in a position to do that. But just to kind of think about timeline, once we reach agreement, there’s about a probably four-month period before we close because it’s still an acquisition of a public entity. And so there’s a defined process around that. And it takes a little bit of time. So realistically, if you assume we get something done in the not-too-distant future, it’s still going to be a second quarter closing. But to Mark’s earlier point, we already control the entity, we’re already executing on integration plans. In fact, we’re, the integration planning is done, we’re executing on integration. And you saw some of the changes that were announced at the end of the year.
Neil Mehta
Yes.
Kevin Mitchell
And so we’re marching quickly down that road. And the only downside is, at this point in time, any synergies we only capture the 43% benefit net to us, once the rollout is complete, then it’s 87% to us, so we’re continuing to progress down that path.
Neil Mehta
It’s understandable, it’s hard to provide what the synergies numbers are until you close this back.
Kevin Mitchell
That’s right.
Neil Mehta
What does DCP provide to Phillips 66? And how is the weakness of the NGL market change the, your thinking around the investment, or has it not at all?
Mark Lashier
We’ve got a long-term view on the strength of the NGL markets and the resource base in the Permian and DJ, where we can access is going to be around for a very long time. And it fits well and integrates well into our view of petrochemical markets. So they’re going to drive demand long term for NGL products as well as gas and gas is becoming more important, natural gas is becoming more and more important. So we, — DCP acquisition and the roll up of the public units is key to our strategy to have a wellhead to market strategy. So we can be a one stop provider for producers in the Permian, for instance. And they know that they can have their molecules, their NGL molecules or gas molecules can be taken to market without going through multiple parties where they got to have somebody that does a GMP, somebody does a transportation, somebody does a fractionation, we’ve got the whole value chain now. We see that as where we want to be to derive future growth.
Jeff Dietert
Neil, if I could add just on macro perspective, NGL and petrochemical feedstocks have grown at a pace faster than overall GDP, as opposed to crude demand, which grows at a fraction of GDP. So the growth there has been sustained for quite a while and we expect that to continue. NGL production in the US has outperformed crude and natural gas for many years. And in 2022 NGLS grew 8% to 9%. Crude was up 4% and natural gas was up 3%. So it continues to grow at a faster pace than the other products.
Kevin Mitchell
And I would just add further, you look through the pandemic, DCP held up extremely well during the pandemic period, which was a little bit of a surprise to us to be honest, but it really did, which speaks to the resilience of those molecules. The other factor is their businesses about 70% 75% fee based, so it’s not 100% commodity exposure, there is some residual commodity exposure there. And honestly, for us in our portfolio, we’re okay with that. Because as you know, we have significant commodity exposure anyway.
Neil Mehta
Yes.
Kevin Mitchell
So it works for us.
Neil Mehta
And as you talked to ratings agencies, they’re okay with you taking on a little bit more leverage because of the higher fee base contribution.
Kevin Mitchell
Yes.
Neil Mehta
So that’s actually a great pivot over to chemicals. And Mark, I’ll turn this one over to you. We went from euphoria to depression in this market a matter of a couple of months. I thought refining was volatile. What the heck happened? And how do we get out of it.
Mark Lashier
I guess the cure for high prices is high prices. But what you’re seeing is really when, chemical demand was strong, polyethylene demand was strong across COVID for a number of reasons. That included weather disruptions and just strong demand. Demand continues to be strong with there’s been quite a few capacity additions in North America. And those are kind of running their course now over the next year, demand continues to increase globally, though, there could be an impact of recessionary influences and what happens in China. But the fact is, we’re kind of running our course on the near-term demand or the supply additions, and you’re seeing the demand continue to increase. So we believe margins have pretty well bottomed out. And if you look at the data, they’ve flatlined, and they’re starting to show some life again. And should just typic season low typically is towards the end of the year. And so we see things starting to improve probably maybe the second half of this year and continue to 2024.
Neil Mehta
So you really do a good job of putting this in terms of cents per margin the integrated basins. And so I think your midcycle over the years has been about $0.30.
Mark Lashier
Correct.
Neil Mehta
And we peaked out at what $0.50?
Mark Lashier
Approaching $0.60. Yes, it was in $0.60.
Neil Mehta
And where did we trough out?
Mark Lashier
It’s about between $0.07 and $0.08, four months or so it’s a bottomed out.
Neil Mehta
And now we’re flattening out.
Mark Lashier
Yes.
Neil Mehta
And so your view is by ‘24, we can start to get back towards mid cycle.
Mark Lashier
And I think you would start moving toward mid cycle, yes, correct.
Neil Mehta
Because we still have to digest some new capacity coming in, including North America.
Mark Lashier
Yes. And I think when we look at CPChem’s US Gulf Coast II, potentially RLPP, those coming on in ’26, ‘27. That turns out to look like a pretty fortuitous time to bring assets on because there’s not a lot, you look at everyone pulled back hard through COVID, looking at capital investments, and yes, if you wake up tomorrow and say, Gee, I want to build a petrochemical complex, it’s about a 10-year horizon. And so I think that the things that you would see come on in ‘26, and ‘27 have to be pretty well baked at this point in time. And there’s not much going on, so yes.
Neil Mehta
Interesting because as we talked to the majors, and we’ll hear from Aramco and others over the course of this conference, I think a number of them are looking at the demand profile, exactly what just said, gasoline looks tough. It looks pretty good in chemicals. And so there’s a tendency to move towards building out a desire to build out in areas where growth is more significant. But your point is, it’s different to do the work on and analysis around project versus getting FID?
Mark Lashier
Correct. It’s a long process to develop these, and there’s a handful of companies that have the wherewithal to do it. So there’s been a fair amount of discipline over the years.
Neil Mehta
So at your mid-cycle margin, how should we think about the returns on your recent Gulf Coast FID? And why are you excited about that project?
Mark Lashier
Yes. The Gulf Coast FID is going to be mid-teens, and we’ve always upside to those kinds of projects. There’s always debottleneck opportunities. And so I think you — and that’s consistent with what CPChem has done over the last 20 years that we won’t. We take a very conservative front view. The capital looks good. It came — we worked hard to get it to where it is. The construction is going to happen at a good window. There’s not a lot of other competing construction projects. We’ve got line of sight on labor. So we’re comfortable with that. And inflationary pressures, I think, have been taken into account in that number, and we see those starting to ease by the time we really hit the heavy construction. So we’re feeling pretty good about it.
Kevin Mitchell
If I can just add a little bit on the returns. So those — that mid-teen is a project-level return, and that project is being financed at a sort of 50-50 level. So one, in terms of the effective returns to CPChem and to us is greater than that because of the benefit of the leverage but that also plays out in terms of the capital funding commitments to it.
So you’ve got a 51%, 49% joint venture and then 50% financing. And so when you do the math and you then figure that’s a spend profile over about a 4-year period. The capital commitments to CPChem really are very manageable. And in fact, less than — quite a bit less than the original Gulf Coast project, which did not have financing and was 100% CPChem level.
Mark Lashier
Yes. CPChem will also be the marketer for the offtake. And so there’ll be an uplift for them — there as well. And they’re also — because it is located and will tap into existing CPChem infrastructure that they’ll see additional return benefit there. It will be incremental above what the project was [inaudible].
Neil Mehta
Okay. That is helpful. So then the question is the composition of the business. It’s really been balanced across these four different pillars. If you look at some of parts equal weighted marketing, chemicals, refining, and midstream. Is there a conscious effort and decision here to say, all right, refining because we’re worried about this on a long-dated basis. We’re going to start investing a little bit more in chemicals and so one was going to make up for the other?
Mark Lashier
Yes. I think that it really is all about what you believe about growth and how you can position yourself to take advantage of growth and secure those returns that our investors expect, and that will drive it. And so we see the growth in NGL. We see the growth in chemicals. We see modest opportunities. And I like what John said about bullets versus cannons in renewables because that’s exactly what our strategy has been. We’ve put our toe in the water of several places, renewable diesel is a lot closer to home. We’ve got assets that are very amenable to that. So that’s been a bigger step for us, but the other renewables or longer term, we’re not — we’re continuing to press down that path, but we’re going to be cautious on some of the more long-term, more exotic opportunities.
And so you’re going to see that balance. Some of those things may show up in refining like Rodeo or if we do anything in sustainable aviation fuel, but you’re going to see chemicals, obviously, attracting more capital, NGL attracting more capital, marketing has been low capital, high return and we continue to look. We’ve got a very specific strategy, targeted strategy there that we like that’s been successful across COVID, across a number of different market conditions. And so we’re going to continue to make modest investments there as well.
Neil Mehta
Yes. Let’s talk about marketing. That has been a consistent surprise relative to our model, and you did raise your mid-cycle view of that business. What’s going on to drive higher cents per gallon effectively?
Mark Lashier
Yes. The higher cents per gallon because we’re getting more exposure in targeted markets to retail margin, and we’re focused on markets where is a retail margin to capture. And we’ve partnered with entities that know more about running the convenience store part of it than we do. And we bring strength to complement that. And so you’ve got an evolution going on in the marketing where we used to supply gasoline, diesel to literally moms and pops that were out there running these stores. And they’ve grown to these moms — 50, 60 or 100 stations, but maybe the third generation is not interested in it. So we know the business really well. We know the assets. We know the environment really well.
And so we’re partnering with those that know how to run convenience stores, but we can then participate in the region. And we do it in a very — in that. We’ve got — we know what we’re looking for in specific markets to take advantage of that.
Neil Mehta
What are you seeing in terms of real-time demand through your marketing system?
Jeff Dietert
So we’re seeing gasoline demand down about 5% relative to 2019 levels and diesel down about 4% recently. So we’ve seen demand softened a little bit relative to last summer, we were approaching 2019 levels.
Mark Lashier
Yes. And those are — that’s published government numbers across the industry, not us specifically.
Neil Mehta
And as you’ve done the analysis and you kind of tried to ascertain why we’re trending lower than pre-COVID levels. This might be an economy being bigger than where we were back then. Is it the remnants of COVID? Is it work from home dynamics? Is it the consumer wallet being impacted by inflationary forces? How do you think about that?
Jeff Dietert
Yes. There’s some of all of that. I think we’ve seen it hit on the East Coast and the West Coast more significantly than the central part of the country. We’ve not seen commuters go back to that 33% that was pre-pandemic component of overall U.S. gasoline demand. There’s been more in the press about Gavin Newsom, trying to take ICE vehicles out by 2035, the concern over inventories on the East Coast, it’s been in the news a lot more. And we know that when it’s in the news, it tends to impact consumer behavior, where it’s been not as much in the news in the Central Corridor and the Gulf Coast. So it hadn’t had as big an impact. So I think all those are variables.
Mark Lashier
Yes. And I think that you still — the airlines were perhaps hit hardest during COVID, their demand destruction and the industry was able to ratchet back and make jet fuel go away in different ways. But I think the rapid recovery in travel, I think the airline industry has struggled to keep up with that. And I think it’s still limiting the growth in jet demand is just the capacity of the airline industry to keep planes moving to keep everybody happy. It looked like it’s getting better and then maybe 2 steps forward, 1 step back.
Neil Mehta
Jet’s actually the tightest market today. Jet cracks are the highest in diesel and gasoline is lagging. Now that’s been interesting to see the difference between the distillate complex and the gasoline complex. Gasoline is basically at the 5-year this time of year, diesel in jet trading very strong. You have this heavy refining kit. Are you running max diesel right now? And how do you think about that spread between these two products, especially in an environment where European gas is still elevated, but it’s not $12 a barrel elevated to $6 a barrel elevated.
Jeff Dietert
Right. I think — hit me with the first question again. I am sorry.
Neil Mehta
How do you think about the spread between —
Jeff Dietert
Yes. so diesel, we max diesel all year last year. I think the industry did as well. There was incentive to — which historically, we max gasoline yield in the summer months. But even — so we ran hard through the summer. There was a heavy turnaround season in late September, October. And then the industry ran hard November and December. We looked up early December, the industry was running 95% utilization. Typically, in December, we’re running 88%, 89% utilization. And so gasoline inventories recovered somewhat but they’re still 7% below the 5-year average, and we see heavy maintenance this spring and go — likely to go in with pretty tight inventory situation into the summer driving season. Again, even — so we’re expecting to max diesel throughout the year.
Neil Mehta
Okay. That makes a ton of sense. So let’s spend some time on low carbon and we’ll finish off on the fun stuff that how we think about your mid-cycle cash flow because I think that’s going to be really important for investors to think about how to value your businesses. What is the low-carbon strategy? And help us — I think it was at this conference, Jeff, right, three years ago that you guys announced that you were starting to develop — two years ago, you’re starting to develop a low-carbon — that low carbon platform.
What is — what’s your EBITDA expectation from that business and target? And how should we think about your strategy there?
Mark Lashier
Yes. We’ve talked about a $2 billion EBITDA by the end of the decade. I think that we’re not going to move heaven and earth to realize that. We really are focused on how do we get the kinds of returns that we expect that our shareholders expect from emerging energy opportunities, from energy transition opportunities. And that landscape is evolving. And so really, from a lower carbon perspective, it starts with our existing hydrocarbon business. How do we lower the hydrocarbon — the carbon footprint of our hydrocarbon business. So we’ve got goals in mind there. We’ve published our Scope 1, Scope 2, Scope 3 emission targets there. But then our next nearest neighbor to that is our aspirations around renewable fuels and primarily the first move is renewable diesel, taking used cooking oil, vegetable oils, animal fats, converting those to renewable diesel.
We’ve got an asset in California that’s being converted today, our Rodeo facility. It’s got hydrotreating capacity that’s perfect. It’s almost as if it was just put there for this purpose. We can put new catalysts in there, put a front end on that to clean up all these different cats and dogs that we’ll bring in to process there. It’s in a great market, great logistics location. We’ve got access to feedstocks. And there’s a unit running today, unit 250 is proving the concept. So we’ve got great comfort there. It’s going to be a high-return project. The next nearest neighbor to that is sustainable aviation fuel. There’s strong market demand for sustainable aviation fuel, every airline has made net zero commitments and really the only opportunity for them out there today would be sustainable aviation fuel, and there’s not enough go around. And so there’s a market pull, there’s government support. So that’s starting to look interesting as well.
I think the key there is to not compete for the same feedstocks that renewable diesel consumes into sustainable aviation fuel. We do produce a small amount of sustainable aviation fuel, co-processed in Rodeo. We do produce a small amount in our Humber facility in the U.K., but longer term, I think it’s going to be on purpose production of sustainable aviation fuel. Then you start looking at things like hydrogen and carbon capture. I personally believe that carbon capture is going to be very important because it’s going to be hard to get away from the high energy density of liquid hydrocarbons for a very long period of time. And the only way to mitigate that carbon that the Scope 3 emission is carbon capture. So we believe that carbon capture is going to be important.
We’re not doing fundamental research in carbon capture, but we believe that the technologies are out there that are going to become very important and necessary hydrogen. We know a lot about hydrogen. We know a lot about the cost of hydrogen, how hydrogen is produced. And I think hydrogen is over the horizon a bit from a cost perspective, moving to an entire hydrogen economy I think it’s going to require nuclear fusion or something like that long before that happens. But we are shooting bullets in that direction. No cannon balls yet, but we’re tracking that. We’ve got technologies that we’re looking at around hydrogen. And we’ve got our battery opportunities. We could believe both EV batteries, lithium-ion batteries for EVs as well as storage batteries to facilitate the use of wind and solar power are important.
We aren’t investing in wind. We’re not investing in solar, but we certainly are looking at helping others invest in wind and solar around our facilities, so we can again lower our carbon footprint of what we do today.
Neil Mehta
Yes. I’m not even — I’m not sure if I’m even allowed to ask you about needle coke given all the sensitivities and how much of the market, you’re involved in. But just talk about the contribution from that business. It does seem to us that pricing has firmed up a little bit there.
Mark Lashier
Yes, pricing has firmed up, and I think that you look at the scarcity of materials to meet the world’s aspiration around lithium-ion batteries, one of those that are challenged, most is graphite, synthetic graphite, and our needle coke goes into synthetic graphite production, it’s a very good precursor to synthetic graphite. So we’re — that’s why we are looking at that value chain to find out where is — where can we capture the most value, is it at the needle coke is that synthetic graphite, is it somewhere further down the battery value chain. But again, we’re walking before we run. We’ve made our investment in NOVONIX. We’re learning a lot about that business today.
There’s going to be ecosystems built up around lithium-ion batteries in North America and in the UK or in Europe, and we’re well positioned from Lake Charles and from Humber in the U.K. to supply those ecosystems or participate in them if it looks like the right thing for us to do.
Jeff Dietert
Yes. From a demand perspective, we’re optimistic as well. Obviously, electric vehicle market is growing, and we serve that. But also the steel manufacturing, electric arc furnace has a smaller carbon footprint than traditional steel manufacturing, and we are seeing the addition of new electric arc furnaces into the market. So both aspects of demand look positive.
Neil Mehta
Great. We only have a couple more minutes. I want to make sure people get food before — for lunch as well. But I thought Kevin, I’ll finish with you on just the numbers, right? You always do a good job of helping bridge from mid-cycle cash flow to thinking about how you’re going to use the cash. So walk us through the numbers.
Kevin Mitchell
Yes. So what we laid out at Investor Day, mid-cycle cash flow on a 2022 basis of $7 billion. Obviously, 2022 actual cash generation significantly stronger than that. But on a mid-cycle basis, $7 billion, growing to $10 billion by 2025. So that’s $3 billion increment. And it comes from a combination of the midstream growth that is driven primarily by the acquisition and integration of DCP. There are some other components to the midstream growth but that’s a large piece of the $3 billion in cash flow growth. We also see Rodeo renewed coming online in 2024 and that’s another approximately $700 million of EBITDA, which is going to translate into about the same from a cash standpoint.
And then the third major element to that is the business transformation efforts. And so the business transformation, by that point in time, it’s a $1 billion run rate, of which there’s a couple of hundred million of sustaining capital, $800 million on the cost side of it. And so when you put all that together, you’re at this approximate $3 billion growth in cash generation. But I think what’s really important when you measure that against our commitment to returning cash to shareholders, we actually can deliver on that commitment based on the 2022 mid-cycle. So that $7 billion, the dividend is just under $2 billion, and we’re committed to competitive, secure and growing. So you can continue to expect to see an increase in the dividend on an annual basis. And effectively, that will get funded — that increase will be offset by the impact of share repurchases.
So $2 billion on the dividend, the capital program at a $2 billion level, approximately $1 billion of sustaining and $1 billion of growth. You saw the capital budget that we laid out for this year, very consistent with what we said on that. And so that’s $4 billion that’s consumed. That leaves $3 billion for share repurchases, any incremental work you want to do around the balance sheet. But it gives us a lot of flexibility, especially when you consider that we’re actually in an above mid-cycle environment. We were significantly above mid-cycle last year. We will go into 2023 with a strong cash position.
And yes, we got the DCP buy-in to fund. But the DCP buy-in also funds a sizable component of that cash generation growth. And so that will start accruing to us pretty soon once we’re able to get that transaction completed and announced. And just one other comment from a balance sheet standpoint. We did — you may have noticed in December, we paid off $0.5 billion of debt at the Phillips 66 level. That was debt that was maturing anyway early this year. At the DCP level, we also redeemed $500 million of preferred equity. That became callable in December. At that point, it also went from a fixed coupon structure to a variable rate structure, which would put it at about a 10% cost of funding. So that was a very straightforward financial transaction. It also goes to continue to help clean up the balance sheet. So I think we can do all of that and stay within our stated objectives of a 25% to 30% net debt to capital level, which we feel very comfortable given that will include the — and we already have consolidated the DCP debt and the funding associated with that.
Jeff Dietert
And Neil, just to put that in perspective, $10 billion to $12 billion for a company with a $45 billion to $50 billion — returning 20% to 24% to shareholders over 2.5 years, 10 quarters.
Neil Mehta
Yes. That’s great. Well, thank you. The story is very, very clear post the Investor Day, well done. I wish you guys a wonderful ’23, and thank you for coming to Miami.
Mark Lashier
Thanks for having us, Neil.
Kevin Mitchell
Thank you.
Neil Mehta
We got food outside, and then we’ve got Cheniere coming up on the stage. Thank you so much, everyone.
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