Big Digital Energy

00:00:01 [Speaker 1]
Hey, Clyde.
00:00:02 [Speaker 1]
Welcome back.
00:00:03 [Speaker 1]
Special edition BDE Live August community call on Clyde and, something we've talked about repeatedly over the last two or three weeks on our regular weekly show revolves around the issue of what's going on in physical products and particularly as it relates to refining.
00:00:24 [Speaker 1]
And I'm just absolutely thrilled to have a returning guest and collide, guest veteran on many of our other podcasts, Sean Maher, who is VP, chief economist, and head of IR at Phillips sixty six.
00:00:39 [Speaker 1]
Sean, let's let's kick it off for those who aren't familiar with your background and just give us some highlights, and then we'll then we'll jump into the, the world of of refining margins and everything that is being impacted here.

00:00:55 [Speaker 2]
Sounds great.
00:00:56 [Speaker 2]
Mark, it's a pleasure to be here.
00:00:58 [Speaker 2]
Thanks for having me.
00:00:59 [Speaker 2]
I think it's a great topic, a great conversation.
00:01:02 [Speaker 2]
Highlights, I mean, clearly, one of the biggest highlights was getting to work with you for a number of years over at RCH.

00:01:09 [Speaker 2]
That was that was, that was a real thrill.
00:01:12 [Speaker 2]
But I think, you know, I started or joined Phillips in January 2024 as chief economist.
00:01:19 [Speaker 2]
I took over investor relations in October of last year.
00:01:23 [Speaker 2]
And, prior to that, spent fifteen years on the buy side working with you at our CH.
00:01:32 [Speaker 2]
In between, actually launched a fund focused on looking mystically and something I think that the market needed needs to continue to do on a go forward basis and, continue to believe in that thesis.

00:01:43 [Speaker 2]
And prior to that, I was also prior to that, I was at Morgan Stanley, covered midstream, MLPs, integrated natural gas.
00:01:54 [Speaker 2]
Started my career in equity research back in 2001, working for Doug Terrace and covering integrated oils and refining.
00:02:02 [Speaker 2]
So I've been I was around for the first golden age of refining, and it feels like we're kinda coming to that, again, now.
00:02:10 [Speaker 2]
So thrilled to be here and happy to to go wherever wherever you want.

00:02:15 [Speaker 1]
And and just a big disclaimer here, I am not Doug Tarasen.
00:02:19 [Speaker 1]
So Sean had the the early career benefit of working with a true legend.
00:02:24 [Speaker 1]
And, you know, our our time together on the buy side was some of my favorite time in my entire career.
00:02:31 [Speaker 1]
Learned a lot, particularly as, about the midstream, which for an upstream guy, we all know what was going on in the early to mid two thousands is MLPs in particular and upstream were getting more and more connected.
00:02:48 [Speaker 1]
So we hit a 102 plus on, on diesel cracks on Friday, I believe, 102 and change.

00:02:58 [Speaker 1]
Let's start off talking about, you know, what's going on with refining margins, crack spreads, particularly diesel, and and really the sustainability of that.

00:03:13 [Speaker 2]
Yeah.
00:03:14 [Speaker 2]
So the when you think about what's going on with with respect to refining margin and and spreads today, the the the there's really what we need to talk about here, Mark.
00:03:28 [Speaker 2]
And, you know, going into the conflict in The Middle East, we had a pretty constructive view on refining margins through the balance of this decade.
00:03:37 [Speaker 2]
And the driver of that was because you've got very good visibility in terms of incremental supply or capacity additions for new refining capacity, which is new light product yield.
00:03:48 [Speaker 2]
And, what we saw when this is work that I've done back since 2001.

00:03:54 [Speaker 2]
What we saw is that incremental clean product demand, so gasoline, diesel, jet fuel, was going to exceed the incremental clean product supply coming to the market from a from from new refining capacity.
00:04:09 [Speaker 2]
So, you know, we were already constructive going in.
00:04:11 [Speaker 2]
We thought margins were gonna trend higher over the balance of the decade.
00:04:15 [Speaker 2]
And that's just kind of a nice, I guess, steady slope higher, if you will, in terms of what the refining margin outlook, appeared to be.
00:04:25 [Speaker 2]
The other dynamic, though, that really gave refining margins a a jolt was when operation Epicure went underway, we saw a significant drawdown in terms of global clean product inventories.

00:04:40 [Speaker 2]
So now inventories adjusted for demand are at record low levels, and that's keeping that that that margin level margin environment higher than what we otherwise would have anticipated.
00:04:55 [Speaker 2]
I think that what as we look going forward, we think that we're in this high margin environment really through 2027 and into 2028 because it's going to be so challenging to rebuild these clean product inventories while the industry has

00:05:06 [Speaker 1]
been running at

00:05:06 [Speaker 2]
at record levels.
00:05:07 [Speaker 2]
And, inventories while the industry has been running at at record levels.

00:05:12 [Speaker 1]
And alongside that, maybe comment on some of the the the actual damage that's been done to the global re refining complex, particularly Russia.
00:05:23 [Speaker 1]
And that, you know, that that horizon to to repair those damaged, you know, process units, etcetera, that that just adds that that just adds to kind of the structural tightness, I would believe.

00:05:38 [Speaker 2]
Absolutely.
00:05:38 [Speaker 2]
And it's it's it's good for you to point it out because Russia and the damage to the Russian refining complex is something that has gone, I guess, less noticed or less appreciated because of everything going on in The Middle East.
00:05:51 [Speaker 2]
The when the Ukrainians started to become a lot more sophisticated in terms of their ability to strike Russian refining assets, not only were they being more targeted in terms of the structures within the refinery that they're hitting, so you're not just hitting storage tanks, you're actually hitting the the pipe infrastructure.
00:06:10 [Speaker 2]
They've actually been able to go increase their range even further.
00:06:13 [Speaker 2]
So refineries that were otherwise out of the range of Ukrainian drone strikes are now in within range.

00:06:19 [Speaker 2]
And the the the change, the shift is really the duration of these drone strikes and the the scale or the increase of drone strikes.
00:06:31 [Speaker 2]
Initially, the the Russian refining complex was able to run other assets at a higher rate to keep utilizations, and product flowing.
00:06:42 [Speaker 2]
But and what they were also doing was pulling spare parts from some of those facilities that were further away to help repair the the the assets that were hit.
00:06:52 [Speaker 2]
As you've seen this duration, of strikes continue, you are running out of that those spare parts, and it's causing the delays to to repair and rebuild infrastructure to be greater.
00:07:09 [Speaker 2]
So we think that there's anywhere between, you know, one and a half to 2,000,000 barrels a day of rushing refining capacity that that is offline.

00:07:18 [Speaker 2]
And it's likely to stay that way because the because the Ukrainians are continuing to to hit the assets, and it doesn't look like there's gonna be slow any slowdown there.

00:07:28 [Speaker 1]
We talked about this a few weeks ago, keying on a a story.
00:07:34 [Speaker 1]
I think it was around the time Lindsey Graham was last over there before he passed away.
00:07:39 [Speaker 1]
You know, their drone technology is you you've got $55,000 drones that run off of essentially two cycle lawnmower engines, you know, laid out of plywood that or, you know, some very light wood.
00:07:52 [Speaker 1]
And the way I see it is, okay, one one refinery or one unit gets set or one, you know, one one network of pipes get get set, it's a game of whack a mole because you've got almost an infinite stock of that type of weapons technology that can, you know, get under radar and and wreak a lot of havoc.
00:08:14 [Speaker 1]
So

00:08:14 [Speaker 2]
Yeah.
00:08:15 [Speaker 2]
No.
00:08:15 [Speaker 2]
That's that that's exactly right.
00:08:16 [Speaker 2]
And you've got three quarters of of Russian districts or municipalities are now going through sanctions.
00:08:22 [Speaker 2]
So and and we're seeing it, and it's showing up real time.

00:08:26 [Speaker 2]
I'm Russian Russian exports of crude oil are one and a half to 2,000,000 barrels a day higher than they were in averaging 2024, 2025 because you're not able to run that crude through the domestic system.

00:08:41 [Speaker 1]
Let let's talk about something in particular on The US side.
00:08:47 [Speaker 1]
The government accounting office flagged that 25% of the the SPR remaining stock is not available, citing outages.
00:08:57 [Speaker 1]
Any any perspective on kinda what those outages are domestically, or just generally?
00:09:04 [Speaker 1]
It it's it's something that's fairly new.

00:09:07 [Speaker 2]
No.
00:09:07 [Speaker 2]
I don't have any good intelligence on that.
00:09:09 [Speaker 2]
I'm sure our commercial team is is all over it, but it's not something that's floated up to my desk at this point.

00:09:15 [Speaker 1]
So you you mentioned, you know, kind of, tight and elevated refining margin outlook in the you know, throughout 2027 into 2028.
00:09:26 [Speaker 1]
What's what's that scenario based on x demand?

00:09:31 [Speaker 2]
Based on x demand.
00:09:33 [Speaker 2]
So if you assume that I think demand is an interesting conversation.
00:09:37 [Speaker 2]
We actually haven't seen demand fall off.
00:09:40 [Speaker 2]
I and and I was actually listening to to Scott Kirby who was touting his, increase in, new new United Airlines routes, and he was talking about how seasonally, they see a a fall off in jet demand jet transport in the September, October time frame and said his bookings aren't showing that.
00:10:00 [Speaker 2]
So jet demand appears to be strong.

00:10:04 [Speaker 2]
Gasoline demand has been more resilient than expected.
00:10:07 [Speaker 2]
The weekly numbers are always a bit suspect, but every time the monthly numbers come out, tend to be relatively strong.
00:10:12 [Speaker 2]
Diesel has been strong in The US.
00:10:15 [Speaker 2]
We're seeing some softness in in Europe.
00:10:17 [Speaker 2]
But the the reality is is that the price level that we're seeing for gasoline, diesel, and jet is not at a level that is disincentivizing consumption.

00:10:28 [Speaker 2]
And when you look at how much the cost of a gallon of gasoline is today, it's half of what it was in 2008 using two thousand eight adjusted dollars.
00:10:37 [Speaker 2]
So the burden to the consumer is a lot lower.
00:10:40 [Speaker 2]
There was some, there was an economist on this morning, I think, from from Bank of America who was talking about the fact that the the gasoline prices are no longer the top concern for for the consumer.
00:10:54 [Speaker 2]
It's more around home prices and electricity prices.
00:10:57 [Speaker 2]
So going back to answer your question, we think that demand looks relatively strong or resilient through the the forecast period.

00:11:10 [Speaker 2]
And frankly, to be candid with you, Mark, you probably want some softness in demand because as we look into the 2027 and 2028 period, one of the things that, you know, you've talked about this and people are starting to become more familiar with this, The industry, the refining industry has run exceptionally well.
00:11:32 [Speaker 2]
Utilization is 96, 97%.
00:11:35 [Speaker 2]
You know, we continue to run above our peer group in terms of our refining utilizations, and that's just a function of the system the system running well, not just at Phillips sixty six, but with all of our our peers.
00:11:47 [Speaker 2]
As we get into 2027 and 2028, you're gonna see an uptick in turnaround activity.
00:11:54 [Speaker 2]
And this is just planned turnaround activity.

00:11:56 [Speaker 2]
These are these are units that run really hard.
00:11:59 [Speaker 2]
And the when when you look at the numbers, we're gonna lose anywhere between 500 to 750,000 barrels a day of refining capacity in The US just because of planned turnaround activity.
00:12:15 [Speaker 2]
So that's, I mean, that's the equivalent of, you know, two refineries.
00:12:19 [Speaker 2]
That's that's not an insignificant amount of of downtime and that's planned.
00:12:24 [Speaker 2]
So when you start thinking about the potential for unplanned downtime, the the system is running really tight.

00:12:32 [Speaker 2]
Inventories are not building.
00:12:34 [Speaker 2]
Diesel inventories are flat.
00:12:36 [Speaker 2]
Gasoline inventories are are falling.
00:12:38 [Speaker 2]
So it's hard to envision a dynamic where this margin environment doesn't continue for some time because there is no real toggle in terms of incremental supply.
00:12:50 [Speaker 2]
That's why this shock is so much different than what we saw in '2 in 2022, which was really demand led shock when when post COVID and Russia invaded Ukraine.

00:13:00 [Speaker 2]
This is a supply dynamic, and last time we saw this was 2003, and you had five plus years of of of really strong, margin environments.

00:13:10 [Speaker 1]
That's that's a good corollary or a good analog.
00:13:14 [Speaker 1]
Let's unpack refining a little bit here from, an on the ground what's going on standpoint.
00:13:19 [Speaker 1]
We talked about it a little bit out of about it yesterday.
00:13:24 [Speaker 1]
I I guess we'll start today with, you know, our overarching topic.
00:13:29 [Speaker 1]
You know, Kaleid is a oil and gas enterprise AI platform along with the community.

00:13:34 [Speaker 1]
Are are we seeing, adoptions of AI tech and and other things inside the plants that are making it lower risk, than it would have been twenty to thirty years ago to run run these run these units and these plants flat out?
00:13:51 [Speaker 1]
Because one of the things I always worry about inside the fence, and I'm an upstream guy, there's always a place to go when something happens, is, you know, those on the front lines are, you know, under a lot of pressure.
00:14:04 [Speaker 1]
And seeing deferred maintenance, those types of things.
00:14:09 [Speaker 1]
So talk about that a little bit.

00:14:11 [Speaker 2]
Yes.
00:14:11 [Speaker 2]
Absolutely.
00:14:14 [Speaker 2]
Let me start with the safety aspect of this.
00:14:17 [Speaker 2]
And these assets are very complicated.
00:14:22 [Speaker 2]
And at at Phillips, job number one is making sure that everyone is safe.

00:14:26 [Speaker 2]
Right?
00:14:27 [Speaker 2]
So everyone comes home at the end of each day, so we are never gonna do anything that compromises safety, especially for our employees and and the communities in which we operate.
00:14:37 [Speaker 2]
The what technology has enabled us to do, though, and our refining team has done a phenomenal job.
00:14:43 [Speaker 2]
We use we use AI across the organization, and it enables us to run a lot more efficiently and a lot more reliably.
00:14:52 [Speaker 2]
And that means from a refining context, that means we're able to get more barrels through our refinery than we otherwise would, which means we're able to produce more product, which is frankly great in this environment because we're able to provide fuels to the consumer because they need it.

00:15:08 [Speaker 2]
So our our refining teams, we've got we've got monitors set up at at every station, and it it becomes a bit of a game where the one shift will will say, hey.
00:15:18 [Speaker 2]
I ran at this utilization, and I made this much more money.
00:15:22 [Speaker 2]
And then the next shift will come in and say, well, I've gotta beat Joe and and and his team.
00:15:26 [Speaker 2]
And so it it it it's made it a lot of fun because everybody likes to to be in a position where they're they're making money and and the systems are running well.
00:15:36 [Speaker 2]
But with the with the turnaround conversation, you know, what technology has enabled us to do, and Rich Harvison who runs our refining organization has done a phenomenal job of this.

00:15:51 [Speaker 2]
But, you know, we've really moved from a from a time based turnaround schedule to a need based.
00:15:58 [Speaker 2]
And so that's technology has enabled us to understand how the units are operating and where we think that there might be a need to go in and accelerate a turnaround or the assets are running okay, so we don't we don't need to undertake a turnaround.
00:16:11 [Speaker 2]
But at at the same time, we are not going to do anything that's going to compromise that safety.
00:16:18 [Speaker 2]
So we have our turnarounds, our large turnaround scheduled.
00:16:21 [Speaker 2]
We are going to ensure to honor those turnarounds because the one thing that is is unfortunately a reality is the the more you defer planned turnaround activity, the more likely you're to see unplanned turnaround activity, and that tends to be a lot harder to recover from.

00:16:39 [Speaker 2]
So I think that most people in the industry are gonna stay, pretty diligent on honoring that that that that planned turnaround activity.
00:16:46 [Speaker 2]
And just to to put a fine point on it, this this market is so volatile.
00:16:53 [Speaker 2]
In October 2025, we actually took our Sweeny plant down for a turnaround that was scheduled for the first quarter of twenty twenty six.
00:17:02 [Speaker 2]
Now back then, diesel cracks were about $45 a barrel, and you're like, well, why are you doing that?
00:17:07 [Speaker 2]
Because the asset said it was time to do it.

00:17:09 [Speaker 2]
So if we need to pull them forward, we're gonna pull them forward, but I wouldn't imagine you're gonna see us defer anything.

00:17:15 [Speaker 1]
Yeah.
00:17:16 [Speaker 1]
I'll, I'll take a little walk down memory lane back in my consulting days a long time ago, pre AI for sure, and pre kind of equity research and and Wall Street.
00:17:26 [Speaker 1]
I I spent quite a bit of time on downstream ops and, you know, supply chain sourcing type of engagements.
00:17:35 [Speaker 1]
And ironically, a couple of those involve Sweeney and Borger.
00:17:40 [Speaker 1]
So but but I think about how the, sophistication of maintenance and just the overall kind of ethos and and strategy has moved from heavier on the corrective preventative side to now lighter on corrective, hopefully.

00:17:57 [Speaker 1]
Right?
00:17:57 [Speaker 1]
Because that's reactive and unplanned.
00:18:00 [Speaker 1]
Preventive is anticipating based on sometimes intuition and gut feel.
00:18:07 [Speaker 1]
You know, a lot of the veteran operators had all that great travel knowledge in their head to now being able to listen to and talk to the units, and the units talk back and tell you kind of what's going on.
00:18:21 [Speaker 1]
So you you're you're able to optimize, reduce even preventive to doing predictive that has got to be a more kind of just over overall time and yield efficient type of process.

00:18:36 [Speaker 2]
Absolutely.
00:18:37 [Speaker 2]
And that's and that's where we spend a lot of our time focused is really around three core tenants, if you will, on the refining side.
00:18:45 [Speaker 2]
It's it's reliability.
00:18:47 [Speaker 2]
Right?
00:18:47 [Speaker 2]
You want the assets to be running.

00:18:49 [Speaker 2]
Flexibility in terms of the crude slate that you're able to put through that system.
00:18:53 [Speaker 2]
And then optionality in terms of what what you're producing, whether it's, you know, increasing jet fuel, which which we've we've we can run and produce jet fuel at at all of our assets, or we can we we had record distillate volumes for the second quarter of twenty twenty six because that that's where the the the greatest margin was, but also where you can place it.
00:19:17 [Speaker 2]
So optionality is important in terms of being able to place product into the market.
00:19:23 [Speaker 2]
And so reliability, flexibility, optionality, that's really kind of the the the core tenants of how we're looking at making sure that we're we're running and we're we're maximizing shareholder value.

00:19:37 [Speaker 1]
Yeah.
00:19:38 [Speaker 1]
Let's, let's talk a little bit about the demand question that you alluded to.
00:19:48 [Speaker 1]
I think it was mostly and most people think about it in gasoline terms.

00:19:54 [Speaker 2]
Sure.

00:19:55 [Speaker 1]
And I've I've been I've been repeatedly, reminding folks that, you know, in this quote, unquote crisis of $3.50 gasoline, if you go back to the equivalent price twenty years ago, even at the at the peak when we're approaching, you know, high threes, if you look back and inflation adjusted 2006, and I use 2006 as a a kind of a benchmark starting point for an upstream reason, and you would have been paying something on the order of, you know, $44.35 to $4.50 a gallon.
00:20:29 [Speaker 1]
Mhmm.
00:20:31 [Speaker 1]
But everybody sees what's on the street corner on the digital signboard.
00:20:35 [Speaker 1]
They see the majors' names particularly, notwithstanding the fact that the majors control far less than a half a percent of US retail.

00:20:44 [Speaker 2]
Alright.

00:20:45 [Speaker 1]
So the diesel side to me, I think, is a is a bit more vexing because of as I responded to a couple on on x over the past couple of weeks, you know, it it it's fine.
00:21:00 [Speaker 1]
You can jawbone crude as we've seen in the in the last few months, but the diesel's a different matter.
00:21:08 [Speaker 1]
It touches everything that matters.

00:21:10 [Speaker 2]
Right.

00:21:10 [Speaker 1]
And we've talked about everything from trucking rates to fuel surcharges, etcetera.
00:21:15 [Speaker 1]
Do you do you do you kind of separate gasoline and diesel here just because of the reach of diesel into, you know, everything we do every day and consume every day.

00:21:27 [Speaker 2]
Yeah.
00:21:28 [Speaker 2]
It's a great point, Mark.
00:21:30 [Speaker 2]
And I think that the the work that we had done was looking at what does global manufacturing look like?
00:21:41 [Speaker 2]
What does US manufacturing look like?
00:21:43 [Speaker 2]
European, Asian.

00:21:45 [Speaker 2]
And, really, starting in the middle of last year, I started to get a view that there were gonna be real green shoots going on with respect to diesel demand going forward.
00:21:58 [Speaker 2]
And a lot of people just had diesel demand running flat, and I'm gonna use The US as a mark as the the primary talking point here.
00:22:06 [Speaker 2]
But when you think about the fact that we were in contraction mode for PMI manufacturing for the better part of the last two and a half years, was diesel demand really weak or we just we were re were we just in an economy that was being driven by services and not being driven by manufacturing?
00:22:24 [Speaker 2]
And with the with all of the data center build outs, with all of the construction, with the reshoring, onshore, and front shoring, sure enough, we've seen a significant increase in diesel demand and in manufacturing PMIs.
00:22:39 [Speaker 2]
And we think that that is going to continue here for the foreseeable future because diesel and diesel and jet are far more, inelastic than gasoline demand.

00:22:52 [Speaker 2]
And why is that?
00:22:54 [Speaker 2]
Well, it's because diesel is at the it's the blood that runs through globe the The US manufacturing system, the global manufacturing system.
00:23:03 [Speaker 2]
And so you need diesel for everything.
00:23:05 [Speaker 2]
And if you're building a $3,000,000,000 or $10,000,000,000 data center, you're not gonna be too worried about if diesel's $5 a gallon or if it's $6 a gallon.
00:23:14 [Speaker 2]
You've gotta build that that facility.

00:23:17 [Speaker 2]
And so we think diesel is gonna be more resilient.
00:23:20 [Speaker 2]
There's also fewer substitutions for it.
00:23:23 [Speaker 2]
Right?
00:23:23 [Speaker 2]
With gasoline, there's electric vehicles, there's fuel efficiency, all of those kind of great things, but you don't see that with diesel and you don't see it with jet.
00:23:31 [Speaker 2]
And I guess the, the other point I would make, and I I hear this a lot, or it it started to come up a lot because of this El Nino narrative with respect to what is the what is the market look like over the course of the winter and into next year.

00:23:45 [Speaker 2]
Diesel inventories are not building.
00:23:48 [Speaker 2]
Gasoline inventories are not building, and you're running at record utilizations.
00:23:54 [Speaker 2]
And so that should be a sign to the market that if we have a period here where demand is relatively soft because of an El Nino, for example, then that might actually be a bit of a relief, which the industry could probably utilize because we are going into an uptick and turnaround activity in the in the in the third, fourth quarter of this year and the and I already referenced what 2027 is gonna look like.
00:24:20 [Speaker 2]
So the the the fact that the system is running as as well as it is and people are working as hard as they are to ensure that we're getting this product into the market is is something that I think the we all need to be paying attention to.

00:24:36 [Speaker 1]
Yeah.
00:24:37 [Speaker 1]
And, as we've been saying for a while now that we're switching into, refined products, particularly diesel led oil market from from crude, you know, every day that goes by, I can see better the end of the runway before November 5.
00:24:52 [Speaker 1]
And and and so there's a tremendous amount of of political pressure that's driving and and cascading down to all the operators, the refiners, the producers, everywhere.
00:25:04 [Speaker 1]
And so, you know, that's thinking turning back to the Super El Nino and, you know, typically, we go from coming off of of peak driving demand, certainly from an ag standpoint, harvest season, I think typically kind of brackets from August through September, early part of October.
00:25:25 [Speaker 1]
You've got distillate inventories that are as low that that are as low as they they they haven't been as low since 1996.

00:25:32 [Speaker 1]
So we're talking thirty years.
00:25:34 [Speaker 1]
100 I think, hundred and seven hundred and seven million barrels today.
00:25:38 [Speaker 1]
And you pointed out we're heading into kind of big turnaround season.
00:25:44 [Speaker 1]
Stocks aren't growing, and your utilization has been running high.
00:25:48 [Speaker 1]
It's going to go down because units are going to come down.

00:25:52 [Speaker 1]
You know, are we hanging a hope on a Super El Nino that somehow a significantly warmer, and and they're talking about something, that hasn't happened from a Super El Nino pattern since 1950?
00:26:05 [Speaker 1]
So there there's a lot of, there there seems to be a lot of building hope that we're gonna get some help from from the weather.

00:26:15 [Speaker 2]
Yes.
00:26:16 [Speaker 2]
Indeed.
00:26:16 [Speaker 2]
The

00:26:18 [Speaker 1]
The weather casino.

00:26:19 [Speaker 2]
Just take just take a step.
00:26:21 [Speaker 2]
Just think about all of the things that we've talked about already in in this conversation, and this is why energy is just so amazing.
00:26:27 [Speaker 2]
Right?
00:26:27 [Speaker 2]
There are so many different pieces that you have to constantly be thinking about because of how intertwined everything is.
00:26:34 [Speaker 2]
And if we think about El Nino in its own right, then, yes, that's something that could be impactful to demand.

00:26:41 [Speaker 2]
The problem is that when and we tend to be very focused on The US market.
00:26:47 [Speaker 2]
Global demand is going to grow for gasoline and diesel.
00:26:51 [Speaker 2]
And so, we've got may we might have softer demand in The US.
00:26:57 [Speaker 2]
We're exporting record amounts of product out of the Gulf Coast to Latin America.
00:27:03 [Speaker 2]
Brazil is not getting diesel and distillate from Russia because of that refining capacity being down.

00:27:09 [Speaker 2]
So we're satiating that.
00:27:11 [Speaker 2]
You know, we are we are providing fuels to Southeast Asia.
00:27:16 [Speaker 2]
We're providing fuel to Australia.
00:27:17 [Speaker 2]
Phillips sixty six sold cargos to Australia.
00:27:19 [Speaker 2]
That's never happened before out of the Gulf Coast.

00:27:22 [Speaker 2]
These are we've completely changed global trade flows.
00:27:26 [Speaker 2]
When you think about what's going on with the Strait Of Hormuz and we think and when you think about what's going on with Russian refining capacity, the part of the reason why we haven't seen a massive run up in prices is because The US system is running so well, and we we are exporting as much product as we are.
00:27:43 [Speaker 2]
And so it's impossible to look at any one region in a vacuum, which is what I think a lot of people have tended to do.
00:27:50 [Speaker 2]
And if I take this a little bit further just from a from a narrative perspective, you know, you you've, Mark, you've heard me talk about and Arjun Mirdi, who you know well, right, has coined the lucky 1,000,000,000 and the the the other, you know, 7,000,000,000 and people in the world.
00:28:06 [Speaker 2]
You know, gasoline demand in India was was up 10% in 2025 relative to 2024.

00:28:16 [Speaker 2]
The number of vehicles sold was exactly the same.
00:28:19 [Speaker 2]
So how is gasoline demand up when the number of cars sold is the same?
00:28:24 [Speaker 2]
They're buying SUVs.
00:28:26 [Speaker 2]
As the emerging economies get wealthier and those populations continue to grow, they're going to consume more fuels.
00:28:32 [Speaker 2]
The average person in India consumes 1.3 barrels per person per year.

00:28:38 [Speaker 2]
In The US, we consume 22 barrels per person per year.
00:28:42 [Speaker 2]
So as the reality of the liquid hydrocarbon market, the the energy market is it is global.
00:28:53 [Speaker 2]
And The US is we are extremely well endowed with reliable, low cost feedstocks, whether it's through US shale or Western Canadian or Venezuelan barrels of the whole Americas.
00:29:07 [Speaker 2]
We've got reliable, low cost feedstocks.
00:29:09 [Speaker 2]
We've got the most complex refining network in the world, and we're able to help satiate that global demand narrative.

00:29:17 [Speaker 2]
Or or and and, frankly, with the Jones Act waiver, we've actually been able to do a lot in terms of supplying the East Coast and the West Coast with with products as well.
00:29:28 [Speaker 2]
So there are a lot of different moving moving parts, but a a softening in demand, to answer the question, I guess, a softening in demand because of an El Nino in The US is probably a bit of a reprieve as opposed to something that anybody would be really be concerned about.

00:29:44 [Speaker 1]
Yeah.
00:29:44 [Speaker 1]
I think the and we talked a little bit about this yesterday.
00:29:47 [Speaker 1]
I think the, waterborne arbitrage for products is wide open, and we're going to see, I think, a lot of pressure from Hormuz affected countries and regions in the world.
00:30:02 [Speaker 1]
And so everything we can make available for export, you you you just you we're we're so globally connected and and getting that way fast in natural gas as well.

00:30:16 [Speaker 2]
Oh, and natural gas liquids.
00:30:18 [Speaker 2]
Absolutely.
00:30:18 [Speaker 2]
And and and Yeah.
00:30:20 [Speaker 2]
Mark, sorry to inter sorry to interrupt, but that that's that's exactly what you're seeing.
00:30:24 [Speaker 2]
You had countries go into force majeure five days.

00:30:30 [Speaker 2]
And so from The Middle East.
00:30:35 [Speaker 2]
And like Phillips had signed an agreement to fly LPGs into the Indian market, but countries are going to be willing to pay more to have diversification of supply.
00:30:47 [Speaker 2]
And what that means is you're gonna need to have more transport to different markets, which is going to cause a call an increased call on boats and vessels, if you will.
00:31:05 [Speaker 2]
And freight rates are are at elevated levels.
00:31:08 [Speaker 2]
So that's not going to change either.

00:31:10 [Speaker 2]
And this is this, you know, this system, the the value of US North American infrastructure, liquid hydrocarbon infrastructure, whether it's natural gas liquids or refined products or crude oil.
00:31:25 [Speaker 2]
The the I think that this is one of the things that as we look forward over the course of the next few years, as I look forward over the next few years, putting on, like, my investor hat, I think that the value of US infrastructure is just now starting to become more fully appreciated.
00:31:40 [Speaker 2]
And when you think about the tightness of the refining complex and the the we talked about technology.
00:31:48 [Speaker 2]
Think about how well technology is enabling upstream companies, a lot of your a lot of your clients, to lower breakevens.
00:31:56 [Speaker 2]
Right?

00:31:56 [Speaker 2]
Breakevens are continue to come down.
00:31:58 [Speaker 2]
And if I continue to get more and more crude oil and my refining capacity is is capped.
00:32:05 [Speaker 2]
My feedstock costs are going down, but my product prices are staying staying high.
00:32:10 [Speaker 2]
That's pretty good for margins as well.
00:32:13 [Speaker 2]
And the last comment I would make on this is markets which historically were probably softer than than otherwise than others.

00:32:23 [Speaker 2]
For example, you know, the Central Corridor in q one and q four, you know, when there's four feet of snow on the ground in Chicago, people aren't really driving.
00:32:32 [Speaker 2]
But if all of a sudden I've depleted all of my Gulf Coast inventories and I'm still exporting two and a half million barrels a day of product to the global market, all of a sudden that Central Corridor starts to get a pull that it didn't have.
00:32:45 [Speaker 2]
And that's the and that's going to be something in perpetuity as one of the projects that we have at Phillips is our Western Gateway pipeline.
00:32:57 [Speaker 2]
And that's going to take 230,000 barrels a day to to the Southwest market, which is incredibly reliant on on California at this point.
00:33:08 [Speaker 2]
And we're just there there's a lot going on in this industry, and I don't think people have paid a lot of attention to it.

00:33:14 [Speaker 2]
I think but I do think they're starting.

00:33:17 [Speaker 1]
Yeah.
00:33:17 [Speaker 1]
The California is an island, notion is is one, you know, one of our one of our, community senator, submitted a question about, you know, we we have blinders on, from understanding what's going on in the refining market.
00:33:35 [Speaker 1]
And I think all you've just talked about,

00:33:38 [Speaker 2]
you

00:33:38 [Speaker 1]
know, all all the work that's been going on to optimize and do brownfield expansions of capacity, we're we're continuing to push that because I don't know if you have a current estimate, of what a new kind of 250,000 barrel a day greenfield refinery would cost.
00:33:56 [Speaker 1]
What's what's the what's the throughput kind of replacement cost on that?
00:34:02 [Speaker 1]
And I have mentioned

00:34:02 [Speaker 2]
The numbers are silly.
00:34:04 [Speaker 2]
Yeah.

00:34:04 [Speaker 1]
I I have mentioned that Kevin O'Leary, before he quickly switched to building a a data center the size of Manhattan in Utah, was out there talking about building something like a $16,000,000,000 refinery.
00:34:16 [Speaker 1]
That that conversation went on for about two and a half minutes.
00:34:20 [Speaker 1]
So, it's hard.
00:34:22 [Speaker 1]
Even if you could build one, it

00:34:24 [Speaker 2]
Even yeah.
00:34:25 [Speaker 2]
Even if you could, even if you got the permits, you're still looking at something that's five years away.

00:34:31 [Speaker 1]
Yeah.
00:34:32 [Speaker 1]
And and at least we're not for the in the rest of the country, we're not shutting them down like we are in California.

00:34:38 [Speaker 2]
No.
00:34:38 [Speaker 2]
But we are shutting them down globally.
00:34:41 [Speaker 2]
And I think that's something that the that that people need to appreciate as well is as we go into these big turnaround cycles here over the course of the next couple years, whether it's in The US, Europe, Southeast Asia, you're going to have companies who make the economic decision that it doesn't make sense to do the turnaround.
00:35:03 [Speaker 2]
Spend two hundred, three hundred million dollars for a facility where you don't know what demand is gonna is gonna look like or the cost structure so prohibitive.
00:35:12 [Speaker 2]
You know, one of the things that you referenced a few minutes ago is about the Strait Of Hormuz.

00:35:15 [Speaker 2]
It was natural gas.
00:35:17 [Speaker 2]
I've read some recent research reports.
00:35:20 [Speaker 2]
So you look at at natural gas storage levels in Europe.
00:35:24 [Speaker 2]
They're they're at at seasonal and and historic lows where some are are postulating that TTF prices could get hit, you know, a $100 an hour.
00:35:36 [Speaker 2]
And if if that's the case, that significantly disadvantages that European refining complex and is gonna create that that is gonna hurt their cost structure, which will benefit The US refining complex, but it's not gonna do anything to incentivize somebody to keep the facilities open longer.

00:35:58 [Speaker 2]
And that's something we need to be worried about.

00:36:00 [Speaker 1]
That that only strengthens the case going into the winner for, you know, a robust transatlantic arb for US refiners and exporters.
00:36:10 [Speaker 1]
Before we leave this topic, just just talked about it a little bit yesterday, but we have a playbook that we've seen in the recent past and had to do with natural gas.
00:36:24 [Speaker 1]
Remember back when the European winter crisis, I think it was 2122, you had every spot cargo of LNG being out outbid by whatever European country was needing the gas.
00:36:39 [Speaker 1]
And that disadvantaged the global South because they didn't have, you know, the the financial leverage to to compete in those auctions.
00:36:48 [Speaker 1]
I think Pakistan went through three or a series of three or four no bids, if that's what you call them on spot cargos, and they all went to Europe.

00:36:57 [Speaker 1]
My my concern is that's going to play out again.
00:37:00 [Speaker 1]
You mentioned India and some other countries in the global South that on the refined product side, particularly diesel, we gotta get stuff on the water to places and can't get it through Hormuz, that we're we're gonna see the same type of kind of, you you know, what what you what I used to think about in the framework of the $20 bill auction.
00:37:21 [Speaker 1]
You know, those those things are going to be, those those spot the those spot products are going to be not available to a large chunk of the world's population because they're they're just essentially getting priced out of it.

00:37:35 [Speaker 2]
Nope.
00:37:36 [Speaker 2]
No.
00:37:36 [Speaker 2]
That's that's that's absolutely correct.
00:37:38 [Speaker 2]
And I think that, you know, we, you know, we at at Phillips, we we are in the global market.
00:37:45 [Speaker 2]
We've got more vessels under time charter than than any one of our peers.

00:37:49 [Speaker 2]
I think we're we're the third largest buyer of Venezuelan crude.
00:37:53 [Speaker 2]
I mean, we we ship product.
00:37:55 [Speaker 2]
We have nearly 4,000 that excuse me.
00:38:00 [Speaker 2]
We have over nearly 4,000, vessel trips a year in terms of being able to satiate that global demand, but it is a global market.
00:38:13 [Speaker 2]
And so you're going to move that product to to where that demand is greatest.

00:38:19 [Speaker 2]
And it it is a real concern, and it's one of the things going back to the comment earlier.
00:38:24 [Speaker 2]
People are going to be willing to pay more for a surety of supply.
00:38:28 [Speaker 2]
And and candidly, it's not even in the global market, Mark.
00:38:32 [Speaker 2]
You're seeing it in the domestic market.
00:38:33 [Speaker 2]
So you have, like, wholesale versus branded gasoline stations.

00:38:38 [Speaker 2]
You know, if you if you have a branded gasoline state branded gasoline contract, you're going to be guaranteed supply, whereas wholesale, you might not be.
00:38:46 [Speaker 2]
And so this is something that is it's it's on a macro level from a global perspective, but it's at the micro level in terms of, you know, that the the fuel stations in your neighborhood.

00:38:58 [Speaker 1]
Yeah.
00:38:59 [Speaker 1]
Well, before I'm gonna I'm gonna bring in something else.
00:39:03 [Speaker 1]
But, you you said about a three wood away from Mont Belvieu, in your office.
00:39:07 [Speaker 1]
Right?
00:39:08 [Speaker 1]
Mhmm.

00:39:09 [Speaker 1]
And we we pay a lot of attention as to what's going on with, you know, Permian, in particular, Waha Gas

00:39:17 [Speaker 2]
Yeah.

00:39:17 [Speaker 1]
And and the continued structural problem it has for getting out of the base.
00:39:22 [Speaker 1]
And a big, you know, a big part of that conversation involves NGLs because associated gas is pretty wet.
00:39:30 [Speaker 1]
We get a lot of y grade down to the Gulf Coast.
00:39:32 [Speaker 1]
I I'm just curious, from your vantage point, what what's what's the fractionation situation?
00:39:40 [Speaker 1]
We're not as I understand it, we're not exporting a lot of y grade, but it it's it's it's fractionated product across the spectrum.

00:39:48 [Speaker 1]
Right?

00:39:49 [Speaker 2]
That's right.
00:39:49 [Speaker 2]
No.
00:39:49 [Speaker 2]
So you so you're you're you are you are seeing a need for for increased fractionation capacity.
00:39:56 [Speaker 2]
I think some of the midstream companies are are looking to to expand capacity in Mount Bellevue.
00:40:01 [Speaker 2]
We've we've announced the our Corpus Chris, Corpus Christi frac, which will come online in 2028.

00:40:09 [Speaker 2]
And that and so we're looking to build out fractionation capacity.
00:40:13 [Speaker 2]
We're doing everything that we can from a from an export capacity perspective in terms of getting those molecules on the water because demand for LPGs isn't growing in The US, and it it is a it is more of a global market.
00:40:29 [Speaker 2]
You think about the value of propane or butane in Africa for cooking, if you will.
00:40:35 [Speaker 2]
It's it's a lot cleaner.
00:40:36 [Speaker 2]
It's a lot easier than natural gas.

00:40:39 [Speaker 2]
But the your the the natural gas supply dynamic coming out of the Permian Basin, all of these pipelines that are being that are being built, and they need to be built for for egress so that egress so that the producer, the upstream company can actually drill the well.
00:40:55 [Speaker 2]
Right?
00:40:56 [Speaker 2]
We are far more environmentally conscious and a a big part of that was we just didn't have the infrastructure in place.
00:41:03 [Speaker 2]
So whether it's two BCF a day, five BCF a day of natural gas, there's gonna be a lot of natural gas liquids associated with that because we're seeing the g the GORs, the gas oil ratio that you referenced continue to increase in the Permian Basin.
00:41:18 [Speaker 2]
And that's causing us as as a company to have a very high degree of comfort that not only are we going to see our system remain full for the extended period of time, but we're going to need to continue expand expand our system from a y grade takeaway.

00:41:37 [Speaker 2]
We're expanding our our Coastal Bend asset in 2027 for for some of these reasons because of some processing facilities that we have.
00:41:46 [Speaker 2]
The the comment about, you know, a what?
00:41:50 [Speaker 2]
And I don't know if I could actually hit it with a driver when my golf game isn't all that good, Mark.
00:41:54 [Speaker 2]
But, I mean, one of the things that I think we we find as an advantage for us when when we're talking to producers is we actually have fractionation capacity at Sweeny.
00:42:04 [Speaker 2]
We have fractionation capacity at Bellevue and fractionation capacity at Corpus.

00:42:09 [Speaker 2]
So the producer is always going to get the best option in terms of where they're able to sell and offload that product.
00:42:15 [Speaker 2]
Sometimes, producers get to Bellevue, and that's really the only place that they have to go.
00:42:20 [Speaker 2]
But we're able to take that product into those different those different markets, and our header system along the Gulf Coast allows us allows us to feed the vast majority of the petrochemical complex as well.
00:42:32 [Speaker 2]
So it it provides some some good diversification for for producers so that they don't end up in, in one one location.

00:42:41 [Speaker 1]
Yeah.
00:42:42 [Speaker 1]
I'm I'm glad you brought up GORs.
00:42:45 [Speaker 1]
We've talked a lot about that.
00:42:47 [Speaker 1]
You know, Permians as of EIA last, last year, December exit was 6,700,000 barrels a day of production.
00:42:57 [Speaker 1]
A million of that was coming out of the the, essentially, the Woodford and Barnett with the Dean and and, others thrown in there.

00:43:05 [Speaker 1]
The difference is and if that's the next, you know, big layer growth as we run out of tier one and and core inventory in the Mhmm.
00:43:13 [Speaker 1]
Wolfcamp, Bone Spring, etcetera, you know, Permian combined GOR today is around 4,300.
00:43:20 [Speaker 1]
That wedge of a million barrels a day out of coming out a lot of the like the Dean and Woodford and Barnett is over 8,000.
00:43:27 [Speaker 1]
And so the incremental barrel coming out is going to be a lot gassier.
00:43:32 [Speaker 1]
It's going to be it's going to be natural gas liquids rich.

00:43:36 [Speaker 1]
Mhmm.
00:43:36 [Speaker 1]
And and so, you know, there there is a structural shift, I think, think, where we're going to have a lot of gas to deal with for a long time, and it can just organically grow, but because the the physical and kind of fluid dynamics are changing going forward.
00:43:52 [Speaker 1]
Mhmm.
00:43:52 [Speaker 1]
So

00:43:52 [Speaker 2]
There there is a lot of natural gas.
00:43:54 [Speaker 2]
No doubt

00:43:55 [Speaker 1]
about it.
00:43:56 [Speaker 1]
One one one question, you know, down on the down on the coast, that kinda relates to fractionation capacity and exports.
00:44:04 [Speaker 1]
What's what's the current situation with export dock capacity and, you know, what what what where are we now just generally in terms of send out capacity and how much more do we need to build and how long does that take?

00:44:19 [Speaker 2]
Yeah.
00:44:20 [Speaker 2]
So there's there's new capacity coming on from from some of our peers.
00:44:25 [Speaker 2]
So I'm sure that that'll probably fill up relatively quickly.
00:44:28 [Speaker 2]
We're we've been running at above nameplate utilization from from exports for some time.
00:44:34 [Speaker 2]
And, you know, I think that as incremental capacity gets built, it Mark, you know this as well as as well as anyone from all of our time talking about infrastructure in the past is, generally, when when stuff gets built, you know, not everyone is gonna be as disciplined as as they probably should be, which tends to mean that the market gets overbuilt for a period of time, and that creates really good opportunities to get cheap capacity because of because of overbuilding.

00:45:04 [Speaker 2]
And I think that that's you'll probably see some of that with respect to exports.
00:45:09 [Speaker 2]
But again, when you just when you play the the development of the Permian or US shale forward over the course of the next five to ten years, volumes are gonna continue to grow and you're going to continue to need that export wedge.
00:45:25 [Speaker 2]
Otherwise, you're not gonna be able to produce the well in in the Permian.
00:45:29 [Speaker 2]
And we we we saw we actually saw some of this, last year when we were dealing with with some of the dynamics around tariffs.
00:45:39 [Speaker 2]
Right?

00:45:39 [Speaker 2]
When we could not export LPGs or ethane into the the Chinese market, we saw there was real risk that that facilities were going to become full and you were gonna back product all the way up to the wellhead.
00:45:55 [Speaker 2]
So it it's not as it it's not as unfathomable unfathomable as some might otherwise think.

00:46:03 [Speaker 1]
Yeah.
00:46:04 [Speaker 1]
Well, before we, go north and get into a little bit of Canada, I wanted to remind everybody that's online and watching that, you know, bring you're you're able to ask live questions, so fire them our way.
00:46:20 [Speaker 1]
I don't I don't have anything in the queue at the minute.
00:46:22 [Speaker 1]
So let's let's talk about, WCSB egress and and quality differentials.
00:46:28 [Speaker 1]
You're you know, we've been running at about a 14 to $20 spread depending on where it's coming from in the month.

00:46:35 [Speaker 1]
But we're kinda well short of what's what happened in 2018 with the,

00:46:39 [Speaker 2]
Sure.

00:46:40 [Speaker 1]
The blowout.
00:46:40 [Speaker 1]
So maybe talk about, you know, what the future looks like, in terms of egress.
00:46:46 [Speaker 1]
Obviously, the Keystone XL conversation is back on the table.
00:46:51 [Speaker 1]
And so, just take it away on Canada.

00:46:56 [Speaker 2]
Sure.
00:46:57 [Speaker 2]
No.
00:46:57 [Speaker 2]
So we're we are, very familiar with Canada.
00:47:00 [Speaker 2]
We've been one either the number one or number two, importer of Canadian barrels for, you know, over a decade.
00:47:08 [Speaker 2]
I think Canadian crude is, through our system, is the greatest per is the highest percentage of all of our peers when you think about the amount of crude we run relative to our refining capacity.

00:47:20 [Speaker 2]
All of our assets in the Central Corridor have pipeline can and Gulf Coast have pipeline connectivity to Canadian barrels.
00:47:27 [Speaker 2]
So we can run WCS at Wood River.
00:47:30 [Speaker 2]
We can run WCS at Sweeney.
00:47:31 [Speaker 2]
We can run WCS at Lake Charles.
00:47:33 [Speaker 2]
So it's all about the netback.

00:47:36 [Speaker 2]
Right now so what we're seeing is coming into this year, we thought that the WTI WCS differential was going to gradually widen from where it was in 2025 to, you know, call it $16.17 dollars a barrel in the, call it, 2027, 2028 time frame because we saw incremental Canadian volumes from from the upstream companies.
00:48:04 [Speaker 2]
They're continuing to grow their their productive capacity.
00:48:08 [Speaker 2]
The there were two things that that kinda changed that dynamic.
00:48:12 [Speaker 2]
First was the the reopening, if you will, of Venezuela.
00:48:16 [Speaker 2]
So you've Venezuelan imports are up 300% relative to to what they were.

00:48:22 [Speaker 2]
I mentioned that we're the the third largest buyer.
00:48:25 [Speaker 2]
We're one of four or five companies that can actually buy from Venezuela directly, and it works out for us because we've got the boats to put them on.
00:48:33 [Speaker 2]
But economically, we've actually been running WCS because WCS has been the better barrel from a from an economic perspective for us to run.
00:48:43 [Speaker 2]
But what that Venezuelan barrel does is it creates incremental pressure on that light heavy differential.
00:48:50 [Speaker 2]
And so with increasing Venezuelan production, with increasing Canadian production, the need for there is a need for more egress out of out of Canada because of what producers are doing.

00:49:03 [Speaker 2]
So we'd expect some pipeline connect pipeline expansions and or potential new projects.
00:49:09 [Speaker 2]
TMX is is practically and and literally full, and so there isn't gonna be any more crude going to the West Coast unless they they do build another pipeline for for that.
00:49:19 [Speaker 2]
I think that's probably a ways down the road.
00:49:22 [Speaker 2]
But I I think we we feel very good about that WTI WCS differential for the foreseeable future.
00:49:31 [Speaker 2]
And for us, it's a it's a huge benefit to our economics because every $1 move in that differential adds a 140,000,000 barrel a $140,000,000 of of EBITDA.

00:49:42 [Speaker 2]
So the the the cards, if you will, are all, or arrows are all pointing in the the right direction from a from an economic perspective, but also from from a growth perspective.
00:49:56 [Speaker 2]
And if you're if you're a Canadian producer, why wouldn't you drill?
00:50:00 [Speaker 2]
The economics of of the that that that heavy oil sands is incredibly compelling.
00:50:08 [Speaker 2]
So you're you're you once you've put all that upfront cost in, you're gonna do the the brownfield optimization in terms of increasing production.

00:50:17 [Speaker 1]
Well, isn't it just kind of just kind of exploring and contrasting VINCRUDE with Canadian heavy.
00:50:26 [Speaker 1]
Mhmm.
00:50:27 [Speaker 1]
It's I think it's true since, you know, the beginning of the Chavez era and certainly accelerated through Maduro.
00:50:34 [Speaker 1]
We saw precipitous fall off in betta basis production.
00:50:38 [Speaker 1]
We saw a big drop, obviously, in US exports from Venezuela sanctions, etcetera.

00:50:46 [Speaker 1]
Canadian barrels kind of filled that wedge.
00:50:50 [Speaker 1]
Is it true that the upgrading of the heavy barrel in Canada produces a superior barrel to an impaired upgraded barrel in Venezuela?
00:51:02 [Speaker 1]
Because there's a lot of capital that I I see that has to go into building and restoring Venezuela's ability to, you know, to have to have kind of modern sophisticated upgrading capability?

00:51:15 [Speaker 2]
Yeah.
00:51:15 [Speaker 2]
So for and I think every system well, every system is gonna be different.
00:51:20 [Speaker 2]
I would tell you that, you know, as we look at it, we would we need or would want Venezuelan crude to be a buck 50 to $2 discount to WCS to make those those economics those LP economics more in parity.
00:51:35 [Speaker 2]
So that just speaks to to what you're referencing in terms of, you know, what's coming out of Canada versus what's coming out of Venezuela.
00:51:42 [Speaker 2]
You know, I think that keep in mind, a lot of that a lot of those Venezuelan barrels were really flowing into China pre January.

00:51:51 [Speaker 2]
And so the Chinese were buying sanctioned and very low priced Venezuelan crude, and they're able to make the economics work.
00:52:01 [Speaker 2]
And some of the new the new refining capacity in China was actually tailor mail tailor made for that Venezuelan barrel.
00:52:09 [Speaker 2]
And now and this speaks to coming back kinda full circle to the tightness of the refining market, though, the the Chinese the smaller Chinese refineries, the ones that are less efficient, perhaps, you know, less environmentally friendly, a lot of their economics were driven by the fact that they were buying sanctioned Venezuelan barrels.
00:52:32 [Speaker 2]
They were buying sanctioned Iranian barrels.
00:52:34 [Speaker 2]
They were buying sanctioned, Russian barrels.

00:52:37 [Speaker 2]
That very low cost crude gave you the ability to have breakeven economics for for sub act sub optimal assets.
00:52:47 [Speaker 2]
And so you don't have that anymore, and it's unlikely that we're gonna see that change in in the near future.
00:52:54 [Speaker 2]
It also it also impacts petrochemicals as well, though, because, a lot of that low cost crude turns into low cost naphtha, and we think that that's probably helped the the chain margin on the can side by anywhere in the and anywhere in the neighborhood of 6 to 7¢ per pound relative to what we saw in the trough.
00:53:11 [Speaker 2]
So the the there's a lot of capital that needs to be spent in Venezuela.
00:53:18 [Speaker 2]
I think that there in terms of getting us getting them back to levels that were even, you know, comparable to where they they were, you know, ten, fifteen years ago, but it'll be it's gonna take a healthy amount of time.

00:53:32 [Speaker 2]
Yeah.

00:53:35 [Speaker 1]
Yep.
00:53:35 [Speaker 1]
So, man, there's a lot more to explore here.
00:53:40 [Speaker 1]
I could go on for another hour plus, but why don't we, we got about five, six minutes left.
00:53:47 [Speaker 1]
Why don't we Mhmm.
00:53:48 [Speaker 1]
Why don't we close it out and just zoom out?

00:53:51 [Speaker 1]
We're both recovering energy dedicated portfolio manager analyst.

00:53:57 [Speaker 2]
Mhmm.

00:53:57 [Speaker 1]
Just talk about, you know, the sector at large and then the the subsectors that are, you know, in your field of vision every day, namely, you know, refining and midstream and all all that we've been talking about.
00:54:12 [Speaker 1]
And I guess I'm always curious.
00:54:15 [Speaker 1]
We're still at at, I think, absurdly low, representation in the S and P broadly as as an energy complex.

00:54:24 [Speaker 2]
Mhmm.

00:54:25 [Speaker 1]
Despite the fact in real time, we're seeing the criticality of the value, What do you see as the potential for kind of rerating, etcetera?
00:54:34 [Speaker 1]
How you think about, you know, I I was thinking about the E and Ps this morning, and all of a sudden we've got the the vaunted pure play shale producers, single basin guys are now buying assets in Argentina.
00:54:47 [Speaker 1]
EOG has got its big exploration program, in shale kicked off in The UAE.
00:54:53 [Speaker 1]
Pretty excited about that.
00:54:55 [Speaker 1]
There's a bit of a return to more frontier kind of wildcat conventional exploration, etcetera, etcetera.

00:55:01 [Speaker 1]
Mhmm.
00:55:02 [Speaker 1]
Talk just just talk broadly.
00:55:04 [Speaker 1]
You you talked to a lot of investors.
00:55:06 [Speaker 1]
You've you've been an investor.
00:55:07 [Speaker 1]
You've been an analyst.

00:55:09 [Speaker 1]
So let's let let let let's hear Sean's kinda thesis and philosophy on on where the energy sector is headed from a from a valuation and rerating standpoint.

00:55:20 [Speaker 2]
Wow.
00:55:21 [Speaker 2]
Alright.
00:55:22 [Speaker 2]
So a lot to unpack with that.
00:55:24 [Speaker 2]
I would tell you, Mark, this is probably the most exciting time I've ever seen in my career with respect to energy and the energy equity markets or the the equity opportunity, if you will.
00:55:41 [Speaker 2]
I think that people are realizing that providing liquid hydrocarbons, providing energy, providing electrons is a lot more challenging than what we've become accustomed to in a very just in time.

00:55:56 [Speaker 2]
We can just pull up and and the molecule is there, the energy is there, the electrons there.
00:56:02 [Speaker 2]
You know, you're seeing that with electricity prices as data centers get build out.
00:56:06 [Speaker 2]
Infrastructure is a real challenge.
00:56:09 [Speaker 2]
And if you have infrastructure, if you have pipelines, if you have interconnectivity, that is something that may maybe it might be replaceable, but at what cost?
00:56:19 [Speaker 2]
And I think that the value of North American infrastructure is becoming increasingly appreciated.

00:56:26 [Speaker 2]
And when I start to listen to AI podcasts referencing the Permian Basin and energy supply out of the Permian as one of the key risks to that AI build out, it makes me feel like that barbell of the portfolio is gonna be AI and and energy on going forward.
00:56:45 [Speaker 2]
The industry is a lot more disciplined today.
00:56:48 [Speaker 2]
Capital discipline is is paramount.
00:56:51 [Speaker 2]
And I think that if if that's the case, then returns on capital are going to rise and returns on capital are what drive valuation in the market.
00:57:00 [Speaker 2]
So not only am I just excited about where we sit from an from a North American energy appreciation in terms of what we deliver to the world and what we bring to the world.

00:57:14 [Speaker 2]
But we've been under invested, we've been under exposed in in the, in with the S and P 500, you know, 3% of the S and P 500, but more than 10% of earnings.
00:57:27 [Speaker 2]
And you can't have the other, you know, 97% of the S and P 500 without the 3% that that that we bring to the to the table every day.
00:57:38 [Speaker 2]
So the market is starting to appreciate that.
00:57:41 [Speaker 2]
We are getting more calls and conversations with investors and generalists who are trying to understand how does energy fit into a portfolio, what are the different parts of the energy value chain.
00:57:53 [Speaker 2]
And so you've got upstream, you've got midstream, downstream, petrochemicals, natural and we start thinking about natural gas versus liquid hydrocarbons.

00:58:04 [Speaker 2]
There are there are different factors driving all of them.
00:58:07 [Speaker 2]
But the to me, the the way that you maximize the value of that molecule is by being able to take that molecule from the wellhead at the producer level and bringing it all the way to the consumer, whether that's the consumer in in Galveston or the the consumer in New Guinea or, you know, wherever it is around the world.
00:58:35 [Speaker 2]
And that's that opportunity is not something that you can create overnight.
00:58:42 [Speaker 2]
And that I think that's one of the the key things of the the running reliably as supply moves further away from where demand is.
00:58:51 [Speaker 2]
There's gonna be more volatility in the system.

00:58:54 [Speaker 2]
That's going to create opportunities as long as you're proactive and and you're prepared for it.
00:58:59 [Speaker 2]
But I I think that midstream downstream is is a real exciting place to be.
00:59:06 [Speaker 2]
Obviously, I'm talking my book working at Phillips, but, you know, keep in mind, I was on the buy side and sell side for twenty five years before that.
00:59:12 [Speaker 2]
So it was to me, it it feels like a lot of things are kinda coming together.
00:59:17 [Speaker 2]
I think upstream I think the upstream industry is fascinating.

00:59:21 [Speaker 2]
Right?
00:59:21 [Speaker 2]
The upstream industry continues to do so much with technology.
00:59:25 [Speaker 2]
Engineers are just incredible in terms of what they're able to do.
00:59:30 [Speaker 2]
All of this product, though, that's coming to the market from from the upstream side, it's gotta be processed.
00:59:35 [Speaker 2]
Yes.

00:59:36 [Speaker 2]
A a barrel of crude oil is not worth anything unless you can run it through a refinery and get clean products.
00:59:42 [Speaker 2]
So there is there is going to be a need for incremental refined products, capacity in order to absorb all of that that potential liquid hydrocarbon production.
00:59:56 [Speaker 2]
And if and when the Strait reopens, you you are going to see more molecules flow out of that market.
01:00:03 [Speaker 2]
You're already seeing it today, whether it's the East West pipeline or workarounds with Fujara, you The US rec export record exports.
01:00:13 [Speaker 2]
Excuse me.

01:00:15 [Speaker 2]
There's this is just incredibly dynamic, and it's really exciting.
01:00:18 [Speaker 2]
And I think that I I do think that energy is coming back to the the center stage of its importance, longevity, duration, cash flow.
01:00:29 [Speaker 2]
Yeah.
01:00:29 [Speaker 2]
All of these things are are tantamount to infrastructure assets with, you know, decades of of, earnings power.

01:00:40 [Speaker 1]
Yeah.
01:00:42 [Speaker 1]
And I I like to contrast it with what happened in the.com boom that, you know, there was a lot of of hyperbole around, asset light, digital, but this is different.
01:00:53 [Speaker 1]
And I agree with you.
01:00:54 [Speaker 1]
I've I've been around the industry in various adjacencies for, you know, more than thirty five years, and it's the most interesting and thrilling and sometimes anxious period, particularly over the last five years.
01:01:07 [Speaker 1]
And looking ahead, I'm really excited about the next decade and what that means, you know, for what we can do for the world.

01:01:15 [Speaker 1]
Mhmm.
01:01:15 [Speaker 1]
But also, I I do think there is a case to be made that energy's representation in the market certainly shouldn't be three.

01:01:24 [Speaker 2]
No.
01:01:24 [Speaker 2]
You know, do do

01:01:25 [Speaker 1]
we get back to the contemporaneous peak of of 13%?
01:01:29 [Speaker 1]
Maybe.
01:01:30 [Speaker 1]
That's a few trillions of capital rotating

01:01:32 [Speaker 2]
Exactly.
01:01:33 [Speaker 2]
Yeah.

01:01:33 [Speaker 1]
Into the sector.
01:01:34 [Speaker 1]
So it it's it's not where it should be now.
01:01:38 [Speaker 1]
And small moves and a, you know, few tens to hundreds of basis points are a lot of opportunity just broadly, for those that are looking harder at energy.
01:01:48 [Speaker 1]
And the fact that the go forward where we are now in digital, meaning AI, data centers, etcetera.

01:01:54 [Speaker 2]
Look,

01:01:54 [Speaker 1]
we're learning very quickly that you can't uncouple from the physical world, including natural resources because there's a tremendous amount of energy and physical, resources that take to go into building all this out.

01:02:10 [Speaker 2]
And and, Mark, I wanna give you a a plug here.
01:02:13 [Speaker 2]
Right?
01:02:13 [Speaker 2]
The work that the work no.
01:02:15 [Speaker 2]
I mean, seriously, the work that you all are doing, I think, is critically important.
01:02:19 [Speaker 2]
Right?

01:02:19 [Speaker 2]
And you're you're making energy fun again, right, for a lot for a lot of people.
01:02:24 [Speaker 2]
And when we think about the importance of technology, you think about the importance of AI, innovation.
01:02:30 [Speaker 2]
Right?
01:02:31 [Speaker 2]
Innovation comes in from lots of different areas, but you've got to have people willing to go out and look at the market and figure out how can I do this better?
01:02:39 [Speaker 2]
Every day, you have to come in and say, how can I do this better?

01:02:43 [Speaker 2]
Because that's what the world is going to demand.
01:02:45 [Speaker 2]
That's what we have to deliver.
01:02:47 [Speaker 2]
And, you know, you're embracing of technology and getting people fired up about what what the world can look like.
01:02:55 [Speaker 2]
It's it's incredibly value added, and it's incredibly necessary because we need you need reliable, low cost energy in order for economies to grow.
01:03:06 [Speaker 2]
Period.

01:03:07 [Speaker 2]
Full stop.
01:03:08 [Speaker 2]
And there's no way that 7,000,000,000 people in the world can live the same quality of life that the the lucky 1,000,000,000 club do without utilizing all forms of energy, whether it's liquid hydrocarbons, natural gas, wind, solar, you know, take your pick, nuclear, geothermal, all of this stuff is is is important, but it starts with education.
01:03:32 [Speaker 2]
People have to remember that it does matter.
01:03:34 [Speaker 2]
And I think that's something that that you and the team do a really good job of.
01:03:38 [Speaker 2]
And it's one of the things I think is the most fun about this this role right now, whether it's as chief economist or investor relations, is being able to to talk to people about, you know, what we do day in and day out and why it matters.

01:03:51 [Speaker 2]
So Yeah.
01:03:52 [Speaker 2]
Thanks to you and the team for everything and for for bringing me on today.

01:03:55 [Speaker 1]
Well, thank you for saying that.
01:03:56 [Speaker 1]
It's a hell of a lot of fun, and, you know, I'm excited about it.
01:04:01 [Speaker 1]
And from my perspective and linking it to kind of the here and now, your low cost, affordable, reliable, abundant energy is, you know, I I I think the the hyperscalers and the data center boys are are figuring out that that is absolutely critical when they throw a demand of five nines reliability on you.
01:04:23 [Speaker 1]
Right?
01:04:23 [Speaker 1]
So, that that is all

01:04:26 [Speaker 2]
It tells you something when it tells you something when when data centers and and all these these hyperscalers are out there looking for natural gas traders.
01:04:37 [Speaker 2]
Right?

01:04:39 [Speaker 1]
Yeah.
01:04:39 [Speaker 1]
Exactly.
01:04:40 [Speaker 1]
Is it So They're they're setting up gas gas and power desk.
01:04:43 [Speaker 1]
Alright.
01:04:44 [Speaker 1]
I think we need to finish it off there, but I do have, a fun question from Douglas Chris.

01:04:54 [Speaker 1]
How is the Saint Bonaventure men's basketball team going to be this year?

01:04:59 [Speaker 2]
Well, now that we got Will Joe from ESPN as our general manager, I think we're gonna I mean, we're gonna do pretty well.
01:05:05 [Speaker 2]
The it's, the Bonnie's are the Bonnie's are they they they're workhorses.
01:05:12 [Speaker 2]
They're gonna do the best that they can, but Wojo's certainly gonna help out.
01:05:15 [Speaker 2]
And, hopefully, I can catch a game with Doug here at some point.

01:05:20 [Speaker 1]
No, no comment on, Texas A and M CFP aspiration.
01:05:24 [Speaker 1]
So we'll shut it down here.
01:05:26 [Speaker 1]
Sean, thanks so much.
01:05:27 [Speaker 1]
Thanks, everybody, for joining us.
01:05:28 [Speaker 1]
It was great to see you, pal.

01:05:31 [Speaker 2]
You too.
01:05:31 [Speaker 2]
You too.

01:05:32 [Speaker 1]
Safe safe travels, and, keep, you know, keep keep pounding the message of how great this industry is.
01:05:39 [Speaker 1]
And, we'll we'll get through this current crisis and come out better on the other side and do bigger and better things.
01:05:45 [Speaker 1]
So thanks again, and we'll see everybody next time, next week on, on regular BDE live.

01:05:53 [Speaker 2]
Thanks, Mark.
01:05:53 [Speaker 2]
Thanks, everybody.