Marathon Petroleum Q4 2023 Earnings Call Transcript

Quartr
Provided by Quartr
January 30, 2024

There are 13 speakers on the call.

Operator

Welcome to the MPC 4th Quarter 2023 Earnings Call. My name is call over to Kristina Kazarian. Kristina, you may begin.

Speaker 1

Welcome to Marathon Petroleum's 4th Quarter 2023 Earnings Conference Call. The slides that accompany this call can be found on our website at marathonpetroleum.com under the Investor tab. Joining me on the call today are Mike Hennigan, CEO Mary Anne Mannen, President John Quaid, CFO and other members of the executive team. We invite you to read the Safe Harbor statements on Slide 2. We will be making forward looking statements today.

Speaker 1

Actual results could differ. Factors that cause actual results to differ are there as well as in our SEC filings. References to MPC Capital during the prepared remarks today reflect standalone MPC Capital, excluding MPLX. With that, I'll turn the call over to Mike.

Speaker 2

Thanks, Christina. Good morning, everyone. Thank you for joining our call. 1st, I'd like to recognize some changes we made at our executive management level. Mary Anne Mannin has been appointed President of MPC.

Speaker 2

In this role, she will be responsible for our refining and marketing, commercial and HES and S organizations. John Quaid, previously CFO of MPLX, succeeds Mary Anne as CFO of MPC. In addition to these changes, Rick Hessling has been appointed Chief Commercial Officer. Rick will lead our global feedstock and clean product teams with the goal of maximizing margin capture across the entire value chain. Brian Partee has been appointed Chief Global Optimization Officer.

Speaker 2

Brian will be responsible for assessing and redefining business processes that are critical to improving our performance, including our value chain optimization efforts and determining investments needed to accelerate the delivery of results. At a high level, these organizational changes put more emphasis on advancing important value creating initiatives, driving increased performance throughout our entire value chain and making a step change in our cash flow generation capability. Turning to our 2023 results, we're pleased to continue to deliver on our strategic commitments. Full year Cash provided by operating activities was over $14,000,000,000 on a consolidated basis, reflecting our team's strong execution. Our Refining and Marketing business delivered excellent full year results generating EBITDA of 12.74 per barrel throughput and capture of 100%.

Speaker 2

These results reflect strong utilization of our assets and improved execution against our commercial strategy. Incremental to our refining and marketing results, our midstream business nearly $6,200,000,000 of EBITDA. EBITDA for the midstream segment grew by approximately 7% year over year or by approximately $400,000,000 We expect MPC will receive $2,200,000,000 of annual cash distributions supported by MPLX's most recent 10% increase to its quarterly distribution. MPLX is Strategic to MPC's portfolio, its current pace of cash distributions fully covers MPC's dividend and more than half of our planned 2024 capital program. We expect MTLX to increase its cash distribution as it pursues growth opportunities further enhancing the value of this strategic relationship.

Speaker 2

We are committed to returning excess capital to shareholders. In 2023, we returned $11,600,000,000 through share repurchases, bringing total repurchases to over $29,000,000,000 since May of 2021. In addition, We increased MPC's quarterly dividend by 10% in the 4th quarter. Over the past 5 years, We have grown our quarterly dividend at a compound annual growth rate of over 12%. For the full year 2023, This capital return represents a payout of 92% of our operating cash flow, excluding changes in working capital, highlighting our commitment to superior shareholder returns.

Speaker 2

Executing on our commitments combined with a strong macro environment led to total shareholder returns of approximately 31% for MPC in 2023. Turning to our view on the refining macro environment as we head into 2024, global oil demand hit a record high in 'twenty three and we see another year of record oil consumption in 'twenty four. The IEA is currently projecting demand growth of over 1 point 1,000,000 barrels per day with their projections having been raised higher over the last 3 consecutive months. In our system, both domestically and within our export business, we are seeing steady demand year over year for gasoline, diesel and jet fuel. Global supply remains constrained and anticipated global capacity additions have progressed lower than expectations.

Speaker 2

Gasoline and diesel inventories remain tight globally. And as we look into 'twenty four, we anticipate that above average turnaround activity globally in the Q1 as well as the transition to summer gasoline blends will be supportive of refining margins. As we look further into 2024, we believe the U. S. Refining industry will experience an enhanced sources of supply, including energy costs, feedstock acquisition costs and refinery complexity.

Speaker 2

We remain steadfast in our commitment to safely operate our assets, protect the health and safety of our employees and support the communities in which we operate. 2nd, our dividend. We're committed to paying a secure, and growing dividend. We intend to evaluate the dividend at least annually. 3rd, Growth capital.

Speaker 2

We will invest capital, but be disciplined where we believe there are attractive returns which will enhance our competitiveness and position MPC well into the future. Beyond these three objectives, we will return excess capital through share repurchases to meaningfully lower our share count. From May of 'twenty one through January 2024, We reduced our total share count by approximately 45%, repurchasing approximately 300,000,000 shares at an average price of $97 As we execute in 2024, we remain committed to share repurchases as a key component of our capital allocation priorities. MPC's standalone 2024 Capital Investment Plan excluding MPLX totals $1,250,000,000 Underpinning our commitment to safety and environmental performance, sustaining capital is approximately 35% of capital spend. In Refining and Marketing, growth spending is down nearly $200,000,000 compared to 2023, reflecting strong capital discipline.

Speaker 2

In 2024, we are focused on investments that enhance margin and reduce costs. In low carbon, we are investing in an opportunity that offers an attractive return, lowers our cost, Increases reliability and reduces emissions. This morning, MPLX also announced its 2024 Capital Investment Plan of 1 $1,000,000,000 which is anchored in the Marcellus and Permian Basins. At this point, I'd like to turn the call over to Mary Anne.

Speaker 3

Thanks, Mike. Solid execution of our 3 strategic pillars remains foundational. We believe the improvements we've made to our cost structure, Portfolio and commercial execution have driven sustainable structural benefits irrespective of the market environment. We will continue to build on this strong foundation to recognize value throughout our business. Our refining utilization in 2023 was 92% as we operated our portfolio to meet consumer demand.

Speaker 3

Recently, we have said we believe our average capture over longer periods of time is approaching 100%. And in 2023, our full year capture was 100%. This commitment to commercial excellence is foundational and we to continue to see these results. While our capture results will fluctuate based on market dynamics, we believe that the capabilities we have built over the last few years and expect to enhance further will provide a sustainable advantage. Turning to our operations in the Gulf Coast, Bay reformer repairs progressed as planned, we started the unit back up in mid November and returned to full operating rates by mid December.

Speaker 3

At our Martinez facility, we will be operating at approximately 22,000 barrels per day in the short term. We have been working closely with the regulators to proceed with repairs to ensure safe and reliable operations. Let me move to Slide 7, which shows our capital investment plan for 2024 in a bit more detail. MPC's investment plan excluding MPLX totals 1.25 $1,000,000,000 The plan includes $1,200,000,000 for Refining and Marketing segment. Our growth capital plan is approximately 825,000,000 between traditional projects and low carbon.

Speaker 3

We are investing primarily at our large competitively advantaged facilities to enhance shareholder value and position MPC well into the future. Within traditional refining and marketing, dollars 100,000,000 is associated with a multiyear project to increase Finished distillate yield at the Galveston Bay refinery. Dollars 375,000,000 is focused on smaller projects targeted at enhancing yields at our refineries, improving energy efficiency and lowering our costs as well as investments in our branded marketing footprint. Within low carbon, $330,000,000 is allocated to a multiyear infrastructure investment at our Los Angeles refinery, which will improve energy efficiency and lower facility emissions and $20,000,000 for smaller projects focused on emerging opportunities. Slide 8 provides an overview of the multi year investment at our Los Angeles Refinery.

Speaker 3

The Los Angeles refinery is a core asset in our West Coast value chain and is one of the most competitive refineries in the region. This investment, once completed, is expected to further enhance its cost competitiveness by integrating and modernizing utility systems, which will improve reliability and increase energy efficiency. Additionally, a portion of this improvement addresses a new regulation mandating further reductions in emissions. This regulation applies to all Southern California refineries. The improvements are expected to be completed by the end of 25, we expect to generate a return on our investment of approximately 20%.

Speaker 3

Turning to Slide 9, at Galveston Bay, We are investing to construct a 90,000 barrel per day high pressure distillate hydrotreater. This project is planned to strengthen the competitiveness of the refinery through increased production of higher value finished products. Once in service, the new distillate hydrotreater will upgrade high sulfur distillate to ultra low sulfur diesel, eliminating the need for 3rd party processing or sales into shrinking lower value high sulfur export market. This strategic investment ensures we provide the clean burning fuels the world demands and further enhances the competitive position of our U. S.

Speaker 3

Gulf Coast value chain. The project is expected to be complete by year end 2027 and generate a return of over 20%. Turning to our low carbon initiatives, we challenge ourselves to lead in sustainable energy by setting meaningful targets to reduce greenhouse gas emissions, methane emissions and freshwater intensity, targets which we believe we can demonstrate a tangible pathway to accomplish. In our 2024 capital outlook, we are investing to significantly lower energy intensity and emissions at Los Angeles, one of our largest refineries. Additionally, we are investing in smaller amounts of capital in early stage developments like RNG, which could significantly aid and greenhouse gas emission reductions in the future.

Speaker 3

Overall, we're taking disciplined steps to advance our goal to lower the carbon intensity of our operations and the products we manufacture, while continuing to supply a growing and evolving market by safely operating our current asset base with the objective to deliver superior cash flow. Let me turn the call over to John.

Speaker 4

Thanks, Mary Anne. Moving to 4th quarter highlights, Slide 11 provides a summary of our financial results. This morning, we reported adjusted earnings per share of $3.98 for the 4th quarter and $23.63 for the full year. This quarter's results were adjusted to exclude the $0.14 per share net effect of 3 items, A $145,000,000 LIFO inventory charge, dollars 47,000,000 of net recoveries related to MPLX's Garyville incident and a $92,000,000 gain recognized by MPLX. Adjusted EBITDA was over $3,500,000,000 for the quarter and almost $19,000,000,000 for the year.

Speaker 4

Cash flow from operations excluding working capital changes was nearly $2,300,000,000 for the quarter $13,900,000,000 for the year. During the quarter, we returned $311,000,000 to shareholders through dividend payments and repurchased over $2,500,000,000 of our shares. Slide 12 shows the sequential change in adjusted EBITDA from the Q3 to Q4 of 2023 as well as the reconciliation between net income and adjusted EBITDA for the quarter. Adjusted EBITDA was lower sequentially by approximately $2,200,000,000 driven by lower R and M margins. The tax rate for the quarter was 18%, Reflecting the impacts of the MPLX structure and a discrete benefit largely related to state taxes.

Speaker 4

For 2024, We expect our tax rate to be around 21%. Moving to our segment results, Slide 13 provides an overview of our refining and marketing segment for the Q4. Our 13 refineries ran at 91% utilization, processing nearly 2,700,000 barrels of crude per day. Sequentially, per barrel margins were lower across all regions driven by lower crack spreads. Capture for the quarter was 122%.

Speaker 4

Refining operating costs were $5.67 per barrel in the 4th quarter, higher sequentially due to higher energy costs, particularly on the West Coast, as well as higher project related expenses associated with planned turnaround activity. Slide 14 provides an overview of our refining and marketing margin capture of 122 percent for the quarter. We ran well and our commercial teams executed effectively to deliver strong results. Capture this quarter benefited from light product margin tailwinds, in particular for jet fuel as well as less of a headwind from secondary product prices. Slide 15 shows the changes in our midstream segment adjusted EBITDA versus the Q3 of 2023.

Speaker 4

Our Midstream segment delivered strong 4th quarter results. For the full year 2023, our Midstream segment EBITDA is up 7% compared to the prior year. Our midstream business is growing and generating strong cash flows as we advance high return growth projects anchored in the Marcellus and Permian Basins. Slide 16 presents the elements of change in our consolidated cash position for the Q4. Operating cash flow excluding changes in working capital was nearly $2,300,000,000 in the quarter driven by both our refining and midstream businesses.

Speaker 4

Working capital was a 1 point the quarter driven

Speaker 2

primarily

Speaker 4

by a $320,000,000 headwind from changes in our income tax receivable, which you might usually expect to see as a working capital change. Capital expenditures and investments totaled $896,000,000 this quarter. This includes MPLS's acquisition of full ownership of a gathering and processing joint venture in the Delaware Basin for approximately $270,000,000 MPC returned $2,800,000,000 via share repurchases and dividends during the quarter. This represents an approximate 125 percent payout of the $2,300,000,000 of operating cash flow excluding changes in working capital. Highlighting our commitment to deliver superior shareholder returns.

Speaker 4

As of January 26, have approximately $5,900,000,000 remaining under our current share repurchase authorization. And at the end of the Q4, MPC had approximately $10,200,000,000 in consolidated cash and short term investments, including approximately $1,000,000,000 of MPLX cash. Turning to guidance on Slide 17, We provide our Q1 outlook. We expect crude throughput volumes of almost 2,500,000 barrels per day representing utilization of 83%. The utilization is forecasted to be lower than 4th quarter levels due mainly to higher turnaround activity.

Speaker 4

Planned turnaround expense is projected to be approximately $600,000,000 We are turnarounds at 4 of our largest refineries Galveston Bay, Garyville, Los Angeles and Robinson all in the Q1 when margins are typically lower to minimize the financial impact of these outages. Turnaround expense for the full year is anticipated to be similar to last year at around $1,300,000,000 Operating costs in the first quarter are expected to be $5.85 per barrel, higher sequentially due mainly to lower throughput volumes associated with the significant planned turnaround Distribution costs are expected to be approximately $1,450,000,000 for the quarter. Corporate costs are to be $185,000,000 And with that, let me pass it back to Mike. Thanks, John.

Speaker 2

We've delivered strong execution on our strategic commitments again this year. This includes running reliably with high utilization, structural improvements to our commercial performance, fostering a low cost culture and strengthening the competitive position of our assets. At MPLX, The partnership has continued to grow increasing its cash flow and its cash distribution MPC. We've invested capital to to grow earnings while exercising strict capital discipline. This has resulted in superior cash flow generation and supported the repurchase initiatives.

Speaker 2

Looking forward, we will continue to prioritize capital investments to ensure the safe and reliable performance of our assets and we will also invest in projects where we believe there are attractive returns. We believe our focus on safety, environmental I'm sorry, operational excellence and sustained commercial improvement will position us to capture this enhanced mid cycle environment, which we expect to continue longer term given our advantages over marginal of supplying growing global demand. MPC's Midstream segment, consisting primarily of MPLX, has grown EBITDA by $1,300,000,000 since 2019, which is a 6% compound annual growth rate over the last 4 years. As MPLX continues to grow its free cash flow, we believe it's in a strong position to continue to consistently grow its distribution. As a result of MPLX increasing its distribution 10% over each the last 2 years, MPC expects to receive $200,000,000 of cash distributions, which reflects a $400,000,000 increase since 2020.

Speaker 2

Each 10% distribution increase is approximately $200,000,000 of additional cash flow that MPC receives through its ownership in the partnership. In summary, this year we generated $14,000,000,000 of cash from operations. We increased our dividend 10%, repurchased $11,600,000,000 of shares resulting in a 92% payout ratio. In 2023, MPC's total shareholder return was 31%. We believe MPC is positioned as the refiner investment of choice with the strongest through cycle cash generation and the ability to deliver superior return to our shareholders.

Speaker 2

With that, Let me turn it back over to Kristina.

Speaker 1

Thanks, Mike. As we open the call for your questions, as a courtesy to all participants, we ask that you limit yourself to one question and a follow-up. If time permits, we will re prompt for additional questions. Sheila, we're ready.

Operator

Thank you. We will now begin the Our first question will come from Neil Mehta with Goldman Sachs.

Speaker 5

The first question is really on Slide 14, and this is what we're getting from investors this morning, which is the 122 percent system capture and that $885,000,000 of margin uplift. And I recognize there's some sensitivities about what you can say and can't say here. But just can you talk about what drove that strength and how much of this feels one time ish versus stuff we want to carry forward?

Speaker 3

Hey, Neil. Good morning. It's Mary Anne. Thanks for the question. So, 1st and foremost, as you know, commercial performance has been and will continue to be a foundational pillar for us in terms of delivering outstanding execution and meeting the goals and objectives that Mike shared with you around delivering best through cycle cash flow throughout the cycles.

Speaker 3

In the quarter, we generated about 122 percent capture as we shared. Overall, as you know, we've been talking about our Over the last couple of quarters, Rick and Brian have been sharing with you some of the key elements around changes that we believe are sustainable. And then Mike announced this morning a couple of other changes, which we think will continue to drive our ability to identify and deliver against that foundational principle. In the quarter, we had a couple of benefits that delivered 122%. So first of all, strong light product margins and frankly, a more favorable secondary impact.

Speaker 3

This is not abnormal for this period of time. Having said that, we also saw stronger jet fuel premiums Diesel and the benefit of diesel blending excuse me, of butane blending in the quarter as well. To your question, how much of this is Obviously, some of those things are not repeatable, particularly when we look at the sharper drop in crude oil and refined product prices. We also did have the ability of having, as I shared with you, our reformer at GVR and other benefits of projects that we completed fully operating in the quarter. So let me pause there and see if that's helped to answer your question at all.

Speaker 5

That's great, Mary Anne. That's a lot of good color there. And the follow-up is just on Slide 17, sticking with the deck here, which is, It does seem like a period of heavier turnaround in Q1, particularly in the West Coast region. Just maybe you could talk about the position Around where you took maintenance, how that fits into the full year plan and Anything we should be thinking about as you approach this turnaround season?

Speaker 2

Yes, Hanyo, it's Mike. Yes, I think we said in our prepared remarks that our turnaround spend this year is about the same as last year. But the way you should think about it is, As Mary Anne mentioned, in the Q1, we're pretty heavy at 4 of our largest facilities, our largest financial generating facility. So we're taking advantage the fact that margins are down in the Q1. So we're spending $600,000,000 in the Q1, which is a high number relative to the full year.

Speaker 2

And I know we don't traditionally give quarter to quarter, but I'll just tell you that next quarter the turnaround number drops down to like 200 or so, somewhere in that range. We're being opportunistic in some regard. A lot of the activity does get planned, but at the same time, we want take advantage of the fact that the margin environment now is constructive for us to be offline so that when margins we think are going to be a lot stronger in 2nd quarter, we'll have our 4 largest facilities turned around and ready to deliver results. Thanks, Mike. You're welcome, Neil.

Operator

Our next question will come from Manav Gupta with UBS. Your line is open.

Speaker 6

First of all, congrats guys. I know one of the goals was to get to 100% Although Mike always says focus on EBITDA per barrel margin and free cash. I know one of the goals was to get to 100% capture. Congrats on overshooting that, Mark. My question here is on the 2 growth projects.

Speaker 6

Los Angeles, Some of the people out there are looking to exit the state given the tougher laws. You are actually going back and investing in this project. So help us understand what's driving that. And again, on the Galveston Bay moving from upgrading high sulfur to ULST, What kind of realization uplift could you get if you do execute this project?

Speaker 2

Manav, this is Mike. I'll start. First of all, thank you for the comment on capture. And as you said, it's not my favorite metric, but I'm a big believer in how much cash are we generating, how much cash per share we're generating and I want to lead in those categories It's the metric that I spend the most time looking at, but it does give some good indication as Mair said. It's hard just to differentiate the question Neil asked between what's happening in the market and what are some of the structural improvements that we've implemented over the last couple of years here.

Speaker 2

But Anyway, thanks for the comment. As far as our capital investment, I'm hoping everybody sees a couple of things. One is, yes, we are investing in our LA facility. It's an area where we believe that we can put a decent amount of investment in there and really improve the competitiveness of that facility. But we already believe it's one of the top facilities on the West Coast.

Speaker 2

So it is an area that we want to invest in. Now that particular investment is about efficiency, reliability and lowering our costs. And to your point, being a very Liable supplier out there is an important part of the equation. The other project that we've announced is a margin enhancement project. And in our view, things are not going to get easier for anhydro treated distillate into the future.

Speaker 2

And if you look at the spreads today, even today, they're pretty wide. So at the end of the day, what's driving us the most in both of those, when we put this in the slides is, we think both of these projects are north of 20% returns. And hopefully we're conservative on that, but we think they're very good investments and again in 2 of our largest highest financial generating facilities. So One of the themes that you've heard from us is we're going to invest in projects that we feel really strong about on a return basis, but they're also enhancing in competitive positions of some of our biggest facilities. And I think you've heard the theme from us for a while here.

Speaker 2

It's margin enhancement, lower costs and efficiencies. And out on the West Coast, the other driver is, there's emissions reductions goals that are going to occur over time and this project will take care of that in a large way and that's why we grouped it into our low carbon area. So hopefully that gives you a little bit more color.

Speaker 6

Perfect. My quick follow-up here is You were looking to ramp towards the nameplate capacity at your renewable diesel project on the West Coast. If you can give us some update over there, How is that project progressing?

Speaker 3

Certainly, it's Mary Anne. Currently, we are running at about 22,000 barrels a day versus our nameplate at 48. We're going to continue to run at that level as we work with the regulators to determine what repairs need to be complete in order to be able to get to that nameplate at 48. As we think about that, as you know, we've got our JV with Neste. So really what we're looking at is the differential for MPC of about 13,000 barrels a day.

Speaker 3

Not meaningful to the 3,000,000 barrel system that we run. But again, running at 22 overall for this facility and we'll continue to work with our regulators to determine when we can bring it to full 48. Thank you so much.

Speaker 2

You're welcome, Manav.

Operator

Thank you. Next, we will hear from Doug Leggate with Bank of America Securities. You may proceed.

Speaker 7

Thank you. Good morning, everyone. Mike, I hate to do this. I wonder if I could try to capture a question different way because we, I guess, have a slightly different view of this. If we look at your system as more of an LP, We see a great deal of linearity between the indicator margin and what you're delivering.

Speaker 7

I think I agree with you. I think is a terrible metric to try and measure our linear program business frankly. But what we do see however is that the mix of inputs seems to be changing some, which is allowing you to capture more of the margin. So my question is really that What are you doing in your commercial business or operations that is changing the optimization of the slate That you're running in your system. Obviously, there are a lot of moving parts around crude in the U.

Speaker 7

S. Right now with TMX and a few other things. Is that a factor?

Speaker 8

Yes. Hi, Doug. This is Rick. So I'll take a stab at that. So we are significantly, I would say every day, Doug, we are optimizing our slate.

Speaker 8

And we look at this regionally. We look at this by plant. But in the end, Doug, I think what we do better than others in the industry is we optimize for the betterment of our total return at the end of the day. So we are not we could sub optimize one plant for the benefit of another. And we have worked years, decades as a matter of fact to give ourselves optionality within our Mid Con system.

Speaker 8

We are currently juggling optionality with TMX in our West Coast and Pacific Northwest system as well as we've worked on it for quite a while on the Gulf Coast. So, you are on to something from a crude slate perspective. It's Constantly changing. We're constantly pushing the norm on what we should run, what crudes we look at, what assays we look at updating our system. So this is just an ongoing exercise that's been happening now for several years now.

Speaker 8

And I've said it before, we're unpacking everything from A to Z, Doug, we're leaving no rock unturned in terms of capturing value. And that not only goes certainly on the crude slate side, but It goes throughout our entire value chain.

Speaker 2

Hey, Doug, it's Mike. I know it's been a source of frustration since we don't give a lot of detail in this area for competitive reasons. But to Rick's point, we've made some changes. And to be honest with you, I'm more excited about what's been the future for us. Brian's new role as Head of Global Optimization for us, I think is going to make a step change for where we're going.

Speaker 2

So we've had a lot of momentum in this area. It's showing up in the results. As we discussed, capture is not my favorite, but generating cash is and at the end of the day, I think we have more opportunity in the whole area. If we run well and then deliver commercially, we'll continue to generate cash and be a good source of return for shareholders?

Speaker 7

LPs are a complicated beast and you guys seem to have figured that out. So thank you for the answer guys. My follow-up is probably for might be for Maryann. I'm not sure. Congratulations everyone on your roles.

Speaker 7

But Mary Anne, if I look at Slide 21, you're showing your debt maturity profile at the MPC level. Obviously, sitting with a net cash position at the MPC level. What are your thoughts on where you want your balance sheet to be as those debt maturities come

Speaker 9

Hey, good

Speaker 4

morning, Doug. It's John. I'll go ahead and take that one.

Speaker 10

Good morning, John. I wasn't sure if you'd take

Speaker 4

that one off. Thank you. No, no, not a problem at all. And I think you Kind of, kind of we're hinting at it as you were getting there. We've got a lot of financial flexibility right now.

Speaker 4

We're very comfortable with the gross amount of debt that MPC has, but certainly have the balance sheet to be very thoughtful about the right timing of refinancing that debt and really optimizing our cost of capital and really that cost of debt. And I think longer term, right, we've laid out a target of kind of the gross debt to 25% to 30%, we're a good bit away from that, but that's something we'll continue to monitor as

Speaker 7

we look out into the future. John, remind me, is that consolidated for MPLX or standalone?

Speaker 4

It's standalone.

Speaker 7

Okay, great stuff. Thank you very much. And then

Speaker 4

obviously Lex is in a much different position. I can probably speak to that one pretty well, just given the seat I was in before, where you've got a really stable running at sub-3.5 percent leverage, but the cash flows there can probably support a debt to EBITDA ratio of 4 times. Again, they've got some financial flexibility to be smart about what they're doing as well. So I think both balance sheets are in a really strong place.

Speaker 7

Thank you very much.

Operator

Our next question comes from Paul Cheng with Scotiabank. Your line is open.

Speaker 11

Hey, guys. Good morning. Good morning, Paul. Maia, I think in the past, You have shown that you are not really interested in acquisition of refining asset. But one way argue that, I mean, given how well you are running your facility, do you think that there's The value to be added to have some additional asset to your platform, so you can apply your technical know how to even a bigger profile.

Speaker 11

And also in the Gulf Coast, you have 2 huge refineries. If we add additional With that further diversify and reduce the operating risk, having multiple facility and also Frankly, that will perhaps that even increase the commercial and optimization So just want to see that, I mean, how you guys look at that question internally?

Speaker 2

Yes, Paul. First off, Dave Hetner's group is constantly looking at the market and what assets are available. I always say never say never, but in the meantime, while Dave is working on that side of the equation, We're also looking at the footprint we have in the assets we have and that's part of the reason that we came out with the announcement today. 2 of our key facilities, we we can make a meaningful change and we've been more transparent than normal to try and explain to people. We think we got north of 20 return projects here on the assets that we own ourselves.

Speaker 2

So there's always a balance, Paul, between obviously the assets you own inside and out, Whereas the ones you're evaluating externally, there's a little bit of concern from diligence, etcetera. But I will tell you, I think people know my DNA in general, but at the same time, Dave and his team are challenging where can we make investments that are outside of our portfolio. We haven't done a lot as you mentioned on the refining side, but we have made some investments, what we're calling low carbon. We've made some investments in Some pretreat facilities on the low carbon side, we've invested in an RNG facility. So Dave and his team are looking at both refining And outside of refining and we just constantly talk about that and decide where do we think we want to put our capital.

Speaker 2

And for today, we're pleased to report that we think we have 2 pretty good projects. But the other part, let me just mention this one last thing because this is kind of important. On the slide where we talk about our capital, we say in traditional refining, we're investing 475,000,000 Mary Anne mentioned that $100,000,000 of that is related to the DHT project, but $375,000,000 of that is what we don't typically talk about on earnings These are projects in all of our facilities that are higher return, really good projects for us, but they don't have the sexy headline about them. But if you look at it though, 375 out of the 475 in traditional are these smaller high return projects. The team does a nice job.

Speaker 2

Tim and his organization are constantly looking for areas where we can make margin improvement, lower costs, Increased reliability, as you said, this all starts with you got to run reliably and then you got to be smart commercially. And I think we've demonstrated that a little bit and then we just try to invest capital to keep bolstering that equation. So hopefully that gives you a little more color.

Speaker 11

Can I just go back into the commercial question? In the Q4, you guys Definitely done well and you cited. And if we're looking at versus the margin capture 100, The additional 22%, is there a number that you can share? How much of them is coming from the commercial side of the business That you have done really well and that's why that you are seeing that much better in the capture. And also that I think in the past, you're saying that one of the maybe Holy Grail for commercial Operation is that you will be able to optimize based on breakdown the signal and optimize based on the Total company, where are we in that process?

Speaker 11

Do you think that you're already there or that you are just still stretching the surface on that process?

Speaker 2

Yes. Paul, I'll start with the second part. I said, I'll repeat myself a little bit, but we still think there's quite a ways to go where we can do better. And that was part of the reasoning behind the organizational change. Brian's role as global optimization lead is going to his team is going to work with the commercial guys, with our refining guys and You heard me say redefine process, find places to invest, change what we're doing today.

Speaker 2

So I think we've made a lot of progress. People always ask What inning or I guess it's football season, so what quarter are we in? And that's always hard to ascertain because I think we keep Peeling the onion back and seeing that we can make another step change. So I'm optimistic that we got a lot of Road to go and I think at the end of the day, our mantra is just keep watching our results and you'll see what comes out of it. As far as the first part, it's always hard.

Speaker 2

That's why I'm not the biggest fan of that metric. It's always hard to differentiate some of the market factors that Mary Anne mentioned, obviously the Q4 you get butane blending as one thing that enhances capture, But there is a significant if I want to give some kudos to our team, there is a significant change in the way we're approaching the business. You heard from Rick earlier. And So I think it is additive to whatever the market's given us. And my thought is the way we have to run the company is we don't control The margin environment, but whatever margin environment is given to us, we just got to deliver more results and generate more cash and more cash per share.

Speaker 2

So while everybody outside and inside wants to talk about that capture metric, I just keep looking at the one that matters the most to me.

Speaker 11

Thank you.

Speaker 2

You're welcome.

Speaker 3

Hey, Paul, it's Mary Anne. I just might try to add a bit more around some of the things that we're doing specifically around commercial performance without necessarily trying to give you a percentage. But We've been talking over the last several quarters about the capabilities we've built regionally, obviously, Houston office, Singapore office, London office, that has helped us. Doug was laughingly saying to Mike about cracking the code on linear programming. But some of the capabilities that Rick and Brian and their respective teams have built Historically give us very robust tools and data analytics that allow us to assess the decisions that we've made and know How good or bad those decisions were and what we might do with that to change it.

Speaker 3

So it is building these capabilities, are building sustainable learning and capabilities in the organization that we think will continue to drive our performance. I hope that's a bit more helpful too.

Operator

Next, we will hear from Roger Read with Wells Fargo.

Speaker 9

Maybe just if we could address the changes here on the management team and whether or not that What it does portend about the future. I know, Mike, you're approaching the point at which the Board has to make a decision to extend, if I understood correctly, from the meetings back in late November. So anything you can offer us up on, Any updates there?

Speaker 2

Yes, Roger. I'll start off with the changes are driven by 2 things. Results, one of the things that I feel my responsibility is to reward the results that we're getting because the team has done a very nice effort across the whole team. And the second part is development, putting people in positions such that they grow more personally so that they can contribute to the team. Both of those factors I think played into a lot of these assessments that occurred at the executive level, but it's also occurring below that that not everybody gets to see.

Speaker 2

So I'm a big believer in the team approach. Practically all decisions that we make, all of our team is involved in. There's a heavy component of development on top of the results that have occurred the last couple of years. As far as me personally, I think you've heard in the past that's a Board decision. The Board is very aware of that.

Speaker 2

That will play itself out in time. But boards, if it's not their top priority, it's obviously at the very top of the first couple is what their responsibility is. So that's just work in progress. It's been in progress for quite some time and it will play itself out as time goes by.

Speaker 9

Okay. And then my other question was to follow-up a little bit on the balance sheet question I think Doug had asked about in debt to cap guidance given. But if you keep buying shares back, theoretically, you could end up shrinking the equity side, which could get you to the 25% even if you held debt flat. So none of us can predict the future exactly where all So shake out, but would that sort of math imply that you could actually end up Staying at the same debt level, in other words, simply refinance the debt, implying that all the cash that's on there would be eligible for share repurchases or some other sort of return to shareholders, and that's the right math to follow?

Speaker 4

Yes. Hey, Roger, it's John. You read through my subtle comments very, very well. It's certainly the other part of that equation, right, is what we're doing on the equity side. So that was my comment.

Speaker 4

Hey, we think our gross levels of debt are appropriate as we look forward because that will be part of the math. We'll take a look at that. But I think you're pretty spot on. I'm not sure I can add much from what you said to be honest.

Speaker 2

Yes, Roger, the only thing I would add is I'm sorry, I just wanted to just add. As a general rule, my belief is we don't want to be under levered, we don't want to be levered. We want to find what we think is the appropriate level and we think we've been there and we've been consistent there and that's why people should read into our cash position as that's going to be targeted for return to shareholders. I think our job is to generate the most cash we can, run the balance sheet properly, which we've done over the past and then at the end of the day return excess capital to shareholders.

Speaker 9

Thanks.

Speaker 2

You're welcome.

Operator

Thank you. Our next will come from John Royall with JPMorgan. Your line is open.

Speaker 12

Hi, good morning. Thanks for taking my question. So I just had a follow-up on the balance sheet. You had another strong quarter for the buyback of 2,500,000,000 But with the crack environment turning down, you did end up drawing almost $3,000,000,000 of cash. And despite the big maintenance coming up in 1Q, it looks like January is off to a really healthy pace at $900,000,000 So my question is, Would you expect to maintain a similar pace throughout 1Q as you progress these turnarounds?

Speaker 12

And what could that mean for the cash draw and where balances could be at the end of 1Q?

Speaker 4

Yes. Hey, good morning, John. It's John here. I'll take that one and let Mike add some other comments as well. But let me just start by saying as I roll into I want to be clear, there's no change in how we're viewing return of capital as you heard even in Mike's prepared remarks.

Speaker 4

Again, really strong performance last year again as we're looking to drive strong returns to our investors and that will continue to be a Key part of our capital allocation priorities in 2024. And as we look at that, we're going to look at lots of things. 1, we want to be in the overall capital allocation, and we'll consider the refining macro environment along with lots of other items, but and the balance sheet and where it is, but ultimately just want to be clear, we're going to be steadfast in our commitment to return of capital.

Speaker 2

Hey, John, it's Mike. The only thing that I'll add is, we think it's part of our DNA and duty to return capital as part of our mantra. So we've been saying for quite some time and we've been fortunate as you said, the margin environment has been conducive to generating more cash, but we've targeted all along to return that capital to shareholders, we're going to continue to do that. And then again, whatever market environment we get handled or get handed, I'm sorry, we will make that still a priority for us. It's on our capital allocation priority.

Speaker 2

We'll start off with maintaining the assets, growing the dividend, investing in the business. So that's So part of our DNA as well, but at the end, I'm a huge believer is give that capital back to shareholders and then let shareholders decide where they want to invest longer term. We want to be the vehicle where we generate cash and return capital. And as people have seen that over time, that isn't going to change regardless of what the margin environment is.

Speaker 12

Great. Thank you. And then I apologize ahead of time to Mike for this, but I do have another question on capture. But the commercial stuff aside, Can you help us think about some of the moving pieces in the Q1? And particularly, how should we think about the impact of the heavy maintenance in the quarter?

Speaker 12

Is this So potential to be 100% type quarter, given you have so much maintenance and any other moving pieces that we should think about that might move you away from That 100% either direction in 1Q.

Speaker 3

Hey, John, it's Mary Anne. And let me see if I can take that for you and address your question. So, 1st and foremost, as we say, we continue to think for 2024, our objective is to drive toward that 100%. You're absolutely right in the quarter. As we said, we've got about $600,000,000 but we're touching crude units.

Speaker 3

So we're not expecting a significant amount of negative impact On our capture, despite the fact that we are seeing that level of turnaround. Now as you know, we do have variables that impact the capture rate from quarter to quarter. But right now, we are not expecting turnaround to have a substantially negative impact on that drive towards 100%.

Speaker 12

Great. Thank you very much.

Speaker 3

You're welcome.

Operator

Our next question will come from Theresa Chen with Barclays. Your line is open.

Speaker 3

Hi. I wanted to ask about the outlook from a product supply perspective. Just so on the domestic front, there does seem to be a good amount of planned work this Including within your own system, which should be constructive for inventories going to summer, but internationally, there is quite a bit of new supply coming online. And One of your competitors has talked about a 1,500,000 barrel per day number. Would you agree with that?

Speaker 3

And how much do you think could be realistically utilized?

Speaker 8

Hi, Theresa. This is Rick. I'll attack the new refining capacity first. So We see that coming on later versus sooner. And when I say later, I would say second half of this year and then some.

Speaker 8

Over the years when you bring on new greenfield facilities, which are being brought on, it's been proven difficult to bring them on in a timely fashion. And these specific facilities, like others will face challenges with logistics and supply. So I won't specifically comment on the 1.5, but I will say we believe it will be later versus earlier. And then for the demand piece specifically, certainly you've seen as you referenced utilization Even here recently down 7% in the last week due to turnarounds and weather related events. When we look at that and look going forward, we're continuing to see steady demand as Mike mentioned in his opening remarks.

Speaker 8

Our export book on gas and diesel has been very solid. It was solid in 2023 and we're off to a very good start in 2024. So when we look at all of this together, we see it setting up very well, Theresa, for a very supportive spring and summer season.

Speaker 2

Theresa, it's Mike. I'll just add, I mean, it's pretty well documented. I mean, last year oil demand globally was over 2,000,000 barrels I know some of the forecasters are calling it 1 plus ish. We'll see how that plays itself out for this year. But I think the bigger picture even though there's been a lot of attention particularly to these 2 refineries that are coming up as Rick mentioned later in the year is, reason we believe it's more constructive over time is we're still believers in demand is going to continue to rise and absent this short term issue with Some of the supply coming on, we just see it very constructive where demand is going to continue to outpace and that's why we think margins will stay In an above mid cycle is the term everybody is using.

Speaker 2

I think at the end of the day, we'll keep a watch out of it and there may be some short term variations to that. But I think part of the reason that we remain bullish is if we look over time, We're just big believers in demand is going to stay robust. And on paper, aside from the short term issue, we don't see a whole lot of supply response trying to match that. Hopefully that makes sense to you.

Speaker 1

Thank you.

Speaker 2

You're welcome.

Operator

Thank you. Our next question will come from Ryan Todd with Piper Sandler. Your line is open.

Speaker 10

Good. Thanks. Maybe As a follow-up on that last question, in your prepared remarks, I mean, you mentioned that you what you view as an enhanced mid cycle environment for U. S. Refiners in the coming years.

Speaker 10

I mean, I think you were just talking about some of the broader global supply and demand that I would feed into that. But can you maybe talk a little bit more about what you view as the primary drivers of that uplift to margins, particularly for U. S. Refiners? And when you think about the go forward environment versus go forward mid cycle versus past mid cycle, do you What sort of uplift if can do you think about $1 a barrel, $2 a barrel is there And how do you underpin that in terms of kind of U.

Speaker 10

S. Advantages for you and your system?

Speaker 8

Yes, Ryan, it's Rick. So for U. S. Advantages, they're quite significant. Mike touched on early on in his prepared remarks.

Speaker 8

We have a feedstock advantage here in North America with feedstock at our doorstep and we have access to crude from around the world. So we believe that's a significant advantage. And it's been very well documented. We have an energy advantage with the U. S.

Speaker 8

Being extremely long in nat gas and we have cheap nat gas prices. But in addition to that, when we look at our workforce At our assets and our refinery complexity, when you start layering all of those on top of one another, Ryan, It adds up significantly to an advantage, which is why Mike referenced earlier, we believe in an enhanced mid cycle. Now when you think of it from our perspective, this is where our scale really comes into play. So we run a 1,000,000,000 barrel a system, A 1,000,000,000 barrel system annually. So you can pick the number.

Speaker 8

We won't give you a number, but it's easy math. If it's Mid cycle plus a buck that adds $1,000,000,000 to MPC's bottom line, a $2 incentive Our enhancement over mid cycle $2,000,000,000 So that's where our scale really comes into play. Now we are bullish because of a lot of the reasons Mike mentioned. Global demand, we believe, will hit a record consumption in 2024. 2023 was a record.

Speaker 8

We believe 24 will be a record. IEA believes 24 will be a record. In fact, IEA continues to revise up their demand forecast month after month and have done so for the last 3 months. In addition, we referenced turnarounds. Globally, turnarounds are high when you're looking at history and We are set up well here for a strong spring summer.

Speaker 8

I hope that helps you.

Speaker 2

Ryan, it's Mike. Let me just add, we don't pick a number. We do scenario planning, like Bricks gave you some examples, but we do scenario planning, what if it's $2 what if it's $4 what if it's $6 and take a look at it from that perspective rather than trying to estimate what the number is. I'm a big believer and it's hard to call the 50 yard line, but if we get the banks of the river, we get the 2 end right, then we'll be able to run the business properly for the long term.

Operator

And we do have time for just one more question. Our last question will come from Jason Gabelman with TD Securities. Your line is open.

Speaker 4

Hey, good morning. Thanks for squeezing me in. I wanted to ask about the West Coast project that you disclosed today and a 2 part question on it. First, when you reference the returns, how much is there a decent chunk of that that's related to avoided regulatory penalties that you would incur if you didn't do the project? And then how do you get comfortable with the demand outlook on the West Coast and the potential regulations that can limit MPC's ability to capture periods where product prices are higher?

Speaker 2

So Jason, on your first part, there's nothing that you said was avoiding costs or whatever. So nothing's related to that. So it's a think of it as a reliability project, a modernization project, an efficiency project, a lower cost project and reducing greenhouse gas, which we need to do out there. There's regulations out there that are going to occur over time. We could have made the choice to wait until that regulatory requirement was there, but we saw an opportunity to enhance the requirement was there, but we saw an opportunity to enhance the facility ahead of time.

Speaker 2

And we've kind of disclosed already, we think there's greater than 20% return there. How do we get comfortable in the overall macro? There's going to be a tough environment for California if things get more and more competitive out there, But we think we have a very competitive asset. So we think we're in it for the long term. We don't think all the facilities out there will survive the long term.

Speaker 2

But as that volatility occurs out there, we want to have a really strong competitive, reliable, efficient, low cost facility.

Speaker 8

Jason, I'll just add to that. We believe our integrated system in California is a competitive advantage over the merchant refiner as well. So when you look across our entire value chain from feedstocks and all the way through to the station level, That's a competitive advantage over the merchant refinery when you have demand declines.

Speaker 1

All right. And with that, thank you for your interest in Marathon Petroleum Corporation. Should you have additional questions or like clarification on any of the topics Discussed this morning, please reach out and a member of the Investor Relations team will be here to help you. Thank you for joining us.

Operator

That does conclude today's conference. Thank you for

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Earnings Conference Call
Marathon Petroleum Q4 2023
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