Phillips 66 Weighs More Flexibility to Adjust Fuels Output

(Bloomberg) -- Phillips 66 is maximizing diesel production to take advantage of strong demand and would consider investing in projects that give its refineries greater flexibility to tweak fuel output to match changing consumption patterns.

The refiner reported second-quarter earnings on Friday that topped analysts’ estimates, with wider-than-expected margins boosting profit in its fuel-making division 19% from a year earlier.

“Refining margins have been driven by strength in diesel,” Chief Financial Officer Kevin Mitchell said in an interview. “That is a function of very low inventories for distillate as well as strong demand.” 

Phillips 66 would consider projects that increase its ability to shift between making gasoline and diesel as the trend of low inventories and high demand for diesel persists, Mitchell said. The company earlier this year completed a project at its refinery in Sweeny, Texas, to allow it to more easily switch between processing heavy and light crudes. 

“We would expect distillate margins to remain strong through the end of the year,” Brian Mandell, executive vice president of marketing and commercial, said on an earnings call Friday. Hurricane season, fall turnarounds and then winter heating demand all support strong profits for producing diesel, Mandell said. 

Diesel has been a focus for refiners and fuel traders this year after President Donald Trump’s trade war roiled markets, turning speculators bearish on the industrial and road fuel, which is closely tied to the health of the global economy. But as diesel inventories dwindled into the summer months, traders have boosted bullish bets on the fuel, making it a bright spot for broader oil prices.

“We feel good about where the economy is at this point in time, but acknowledge there is uncertainty,” Mitchell said.

Heading into the second half of the year, OPEC’s production increases should pressure heavy crude prices, benefiting Phillips 66, Mitchell said. At the same time, about 1.1 million barrels of daily refining capacity is set to close this year — including Phillips 66’s Los Angeles refinery — and capacity additions in Asia are focused on petrochemicals rather than refined products, Mitchell said. 

“You put all that together, and we’re relatively bullish on refining for the near to medium term,” he said.

(Updates with executive’s comment in fifth paragraph)

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