Marathon Petroleum Q2 2021 Earnings Call Transcript

Participants

Corporate Executives

• Kristina Anna Kazarian, Vice President, Investor Relations
• Michael J. Hennigan, President and Chief Executive Officer
• Maryann T. Mannen, Executive Vice President and Chief Financial Officer
• Raymond L. Brooks, Executive Vice President, Refining
• Brian K. Partee, Senior Vice President, Global Clean Products

Analysts

• Neil Mehta, The Goldman Sachs Group, Inc.
• Doug Leggate, Bank of America Co.
• Roger Read, Wells Fargo & Company
• Manav Gupta, Credit Suisse Group AG
• Phil Gresh, JPMorgan Chase & Co.
• Theresa Chen, Barclays PLC
• Sam Margolin, Wolfe Research
• Jason Gabelman, Cowen Inc

Presentation

[Operator]

Welcome to the MPC Second Quarter 2021 Earnings Call. My name is Sheila, and I will be your operator for today's call. [Operator Instructions] I will now turn the call over to Kristina Kazarian. Kristina, you may begin.

[Kristina Anna Kazarian, Vice President, Investor Relations at Marathon Petroleum]

Welcome to Marathon Petroleum Corporation's Second Quarter 2021 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; Maryann Mannen, CFO; and other members of the executive team. We invite you to read the safe harbor statements on slide two. We will be making forward-looking statements today. Actual results may differ. Factors that could cause actual results to differ are included there as well as in our filings with the SEC. And with that, I'll turn the call over to Mike.

[Michael J. Hennigan, President and Chief Executive Officer at Marathon Petroleum]

Thanks, Kristina. Before we get into our results for the quarter, we wanted to provide a brief update on the business. During the second quarter, we saw gradual improvements in the demand for our products as the rollout of COVID vaccinations and the removal of mobility restrictions have led to more economic activity and increased demand for transportation fuels. That said, we're close to the end of the summer driving season, which is typically our strongest part of the year. Gasoline demand is currently 2% to 5% below 2019 levels, with the West Coast still lagging at about 10% down. Diesel demand continues to hold up well and is flat to 2019. Despite the growing levels of personal passenger traffic, we continue to see an absence of the longer-haul international flights and business travel.

Overall, jet demand remains down nearly 30% below pre-pandemic levels. The full return of aviation fuel demand will likely still take some time, particularly with the recent increasing spread of the COVID-19 variants. As we head into the second half of the year, we remain hopeful but cautious in the recovery and so we'll remain focused on the elements of our business within our control. Slide four highlights progress on our strategic priorities for the quarter. First, on May 14, we closed the sale of our Speedway business to 7-Eleven. In conjunction with the close, we announced our plans to return $10 billion of sale proceeds to shareholders through share repurchases. As part of our commitment to quickly return capital, we immediately launched a modified Dutch auction tender offer in which we were able to repurchase nearly $1 billion worth of shares.

As we shared in our release this morning, we are proceeding with the next steps in our plan to complete the remaining $9 billion return of capital over the next 12 to 16 months. Second, we continue to take steps to reposition our portfolio. Dickinson reached full design capacity during the quarter. At approximately 180 million gallons per year, Dickinson is the second largest renewable diesel facility in the United States. At Martinez, we're progressing detailed engineering and permitting to convert that oil refinery to a renewable diesel facility. Based on our progress and discussion with feedstock suppliers, we're confident in the time line we have set to begin producing renewable diesel in the second half of 2022, with approximately 260 million gallons per year of capacity. Additionally, we expect to reach full capacity of approximately 730 million gallons per year by the end of '23.

Third, we continue to keep a diligent focus on cost and capital in a challenging commodity business such as ours, being a low-cost operator ensures we will remain competitive. We have continued to challenge ourselves to examine all aspects of spend, and as a result, have delivered incremental progress. In the first half of 2021, our operating results reflect our goal to reduce overall refining cost structure by $1 billion. Importantly, I want to note that in June, we published our two annual ESG-related reports. Our sustainability report provides an in-depth look at the company's sustainability approach and performance consistent with the reporting guidance from SASB and GRI. Our perspectives on climate-related scenarios follows guidance from TCFD and analyzes the company's resiliency relative to climate scenarios put forth by the IEA.

On slide five, I'd like to take a moment to go over some of the ways we're challenging ourselves to lead in sustainable energy. From a strategic standpoint, our focus is to balance the needs of today while investing in a sustainable energy diverse future. That includes strengthening resiliency by lowering our carbon intensity and conservative natural resources, developing for the future by investing in renewables and emerging technologies, and embedding sustainability and decision-making in all aspects of engagement with our people and many stakeholders. We currently have three company-wide targets many of our investors know well. First, a 30% reduction in our Scope one and Scope two greenhouse gas emissions intensity by 2030. Second, a 50% reduction in midstream methane intensity by 2025.

And lastly, a 20% reduction in our fresh water withdrawal intensity by 2030. The evolving energy landscape presents us with meaningful opportunities for innovation. We've allocated 40% of our growth capital in 2021 to help advance two significant renewable fuels projects. In late '20, we began renewable diesel production at our Dickinson, North Dakota facility, second largest of its kind in the United States and are progressing the conversion of our Martinez, California refinery to a renewable diesel facility. Finally, to demonstrate our focus on making sustainability pervasive in all we do for executives and employees, we link a portion of the annual bonus program to an ESG metric.

We recently introduced a diversity, equity and inclusion component to these metrics as well, making us the first U.S. independent downstream company to link improving diversity to compensation in the same way we led the industry in linking GHG intensity reductions to our compensation last year. Safety in our operations is another key to sustainable operations. In 2020, our teams demonstrated strong safety and environmental performance, including a nearly 40% reduction in the most significant process safety events and a 40% reduction in designated environmental incidents over 2019. Our personal safety performance continues to be better than industry average for the U.S. refining and midstream sectors. At this point, I'd like to turn it over to Maryann to review second quarter results.

[Maryann T. Mannen, Executive Vice President and Chief Financial Officer at Marathon Petroleum]

Thanks, Mike. Slide six provides a summary of our second quarter financial results. This morning, we reported an adjusted earnings per share of $0.67. Adjusted EBITDA was $2.194 billion for the quarter. This includes the results from both continuing and discontinued operations. Cash from continuing operations, excluding working capital, was $1.535 billion, which is approximately $1 billion increase from the prior quarter. And for the first time in nearly 18 months, we generated ongoing operating cash flow that exceeded the needs of the business, capital commitments as well as covered our dividend and distributions. Finally, we returned nearly $1.4 billion of capital to shareholders this quarter through dividend payments and share repurchases. The close of the Speedway sale marked a significant milestone in our ongoing commitment to strengthen the competitive position of our portfolio. So we wanted to call out some of the key points on slide seven.

We received total proceeds for the sale of Speedway of $21 billion. Based on our tax basis, our cash taxes, current and deferred, will be approximately $4.2 billion, which is lower than our original $4.5 billion estimate. We have accrued for this on the balance sheet. In addition, we had closing adjustments of approximately $400 million. Therefore, the after-tax proceeds from the sale will be $17.2 billion. To be clear, this number is higher than our initial $16.5 billion estimate. On slide eight, we present an overview of the use of the proceeds. Since the close of the transaction, we have reduced structural debt by $2.5 billion and purchased approximately $1 billion of stock. In the post-tender period, we did not repurchase any incremental shares in light of a couple of regulatory constraints: first, a post-tender cooling off period; and second, our routine quarterly restricted period in the lead up to the release of our earnings information.

That said, not repurchasing during that limited window is not indicative of any deviation from our commitment to complete within 12 to 16 months. Consistent with that commitment, as Mike mentioned earlier, we are commencing the next steps to complete the remaining $9 billion return of capital. Specifically, we are entering into an open-market repurchase program that will allow us to buy for a period of time, including when the company may have information that otherwise precludes us from trading, and we will provide updates on the progress during our earnings calls. Slide nine illustrates the progress we have made, lowering our cost structure. Since the beginning of 2020, we have made a step change in our refining operating cost and decreased our overall cost profile by approximately $1 billion. While there is quarter-to-quarter variability, our refining operating cost in 2020 began at $6 per barrel and are now trending at a quarterly average of roughly $5 per barrel for 2021.

We have applied the same cost discipline framework that we use for refining operating costs to our corporate costs as well. There may be variations in these corporate costs quarter-to-quarter. We believe we have lowered our overall cost structure by more than $100 million, and we are committed to challenging ourselves every day on ways to reduce expenses. As you know, natural gas is a variable cost in operating a refinery. These costs have recently increased nearly $1 per MMBtu, and we anticipate this being a headwind for the third quarter. While our results reflect our focus on cost discipline, every day, we remain steadfast in our commitment to safely operate our assets and protect the health and safety of our employees, customers and the communities in which we operate. As we have shared with you previously, our cost reductions should be sustainable, not impact revenue opportunities, and in no way, jeopardize the safety of our people or our operations.

Slide ten shows the reconciliation from net income to adjusted EBITDA as well as the sequential change in adjusted EBITDA from first quarter 2021 to second quarter 2021. Adjusted EBITDA was more than $600 million higher quarter-over-quarter, driven primarily by refining and marketing. As we previously mentioned, this quarter's results include the impacts of closing the Speedway sale. Here, you can see the $11.7 billion pretax gain on the sale reflected in the adjustments column of $11.6 billion, which includes other adjustments of $79 million for impairment and transaction-related costs. The $3.7 billion financial tax -- excuse me, financial tax provision reflects the net impact of cash taxes and deferred tax impact. The resulting $8 billion gain on sale is reflected in our quarterly net income. Slide eighteen in our appendix walk through the specific impacts of the Speedway sale across the three financial statements.

Moving to our segment slide -- results. Slide eleven provides an overview of our Refining and Marketing segment. The business recorded the second consecutive quarter of positive EBITDA since the start of the COVID pandemic with adjusted EBITDA of $751 million. This was an increase of $728 million when compared to the first quarter of 2021. The increase was driven primarily by higher refining margins, especially in the Mid-Con region as that region's cracks improved 57% from the first quarter. Also contributing to the improved results was higher utilization, which was 94% for the second quarter versus 83% in the first quarter. It's important to recall that we idled two high-cost refineries in 2020. If adjusted to include that capacity idled in 2020, utilization would have been approximately 78% in the first quarter of '21 and subsequently increased to 89% in the second quarter of '21.

Operating expenses were relatively flat with the previous quarter despite the increase in utilization, reflecting the team's commitment to cost discipline despite rising variable cost. Slide twelve shows the change in our Midstream EBITDA versus the first quarter of 2021. Our Midstream segment continues to demonstrate earnings resiliency and stability with consistent results from the previous quarter. Here again, the team continues to make excellent progress executing on the strategic priorities of strict capital discipline, lowering the cost structure and portfolio optimization. By the end of 2021, we estimate that MPLX will have decreased their structural cost by $300 million. Slide thirteen presents the elements of change in our consolidated cash position for the second quarter.

It reflects both our continuing and discontinued operations. We have also specifically called out items related to the Speedway close. Within continuing operations, operating cash flow before changes in working capital was $1.5 billion in the quarter. Changes in working capital were flat this quarter. Increasing crude prices provided a source of more than $500 million, which was mostly offset by the large receivable balance with Speedway becoming a third-party customer and typical seasonal refined product inventory builds. During the quarter, MPC decreased debt by $3.3 billion. Additionally, MPLX reduced third-party debt by approximately $800 million during the quarter. With respect to capital return, MPC returned $380 million to shareholders through our dividend and repurchased $981 million worth of shares using Speedway proceeds.

At the end of the quarter, NPC had $17.3 billion in cash and higher returning short-term investments, such as commercial paper and certificates of deposits. Turning to guidance. On slide fourteen, we provide our third quarter outlook. We expect total throughput volumes of roughly 2.8 million barrels per day. Planned turnaround costs are projected to be approximately $195 million in the third quarter. The majority of the activity will be at our Robinson and Mandan refineries in the Mid-Con region. As we have previously mentioned, our turnaround activity is back-half weighted this year. Other operating expenses are coordinated to occur during these time periods as well. And so you are seeing the impact in our guided cost trends for the third quarter. Total operating costs are projected to be $5.05 per barrel for the quarter. Distribution costs are expected to be approximately $1.3 billion for the quarter. Corporate costs are expected to be $175 million, consistent with the second quarter and reflecting the approximately $100 billion -- $100 million, excuse me, in cost that have been removed on an annual basis. With that, let me turn the call back over to Kristina.

[Kristina Anna Kazarian, Vice President, Investor Relations at Marathon Petroleum]

Thanks, Maryann. We will now open the call to questions. Operator?

Questions and Answers

[Operator]

[Operator Instructions] Our first question will come from Neil Mehta with Goldman Sachs.

[Neil Mehta, Analyst at The Goldman Sachs Group]

Good morning team. And nice results here this quarter. The first question I had was just about the execution of capital returns. As you said, you have $9 billion to return to capital -- capital to return back to shareholders here over the next 12 to 16 months. Is it fair to say it's going to be in the form of a buyback? And will you be executing it just ratably in the market? Just talk a little bit about how you plan on executing it? And is there any consideration of anything other than a buyback for the capital returns?

[Maryann T. Mannen, Executive Vice President and Chief Financial Officer at Marathon Petroleum]

Sure. Neil, it's Maryann. Yes, we are planning on commencing what we would call our open market repurchase program and that will begin here immediately after the call. We have all of those options that we've shared with you in the past, all of the tools, ASR and open-market purchase, including the possibility for a tender. Those still remain all viable options for us. But we believe right now that the best way for us to achieve that commitment and as we reiterated here on the call, in the next 12 to 16 months and to return that remaining $9 billion would be through an open-market purchase program right now.

[Neil Mehta, Analyst at The Goldman Sachs Group]

And Maryann, as you guys think about that repurchase, is the view that you would want to do it ratably? Or do you want to be opportunistic? Do you believe that the right approach to share repurchases is cost averaging in over the next 12 to 16 months or to be opportunistic on volatility? Just talk about your strategy around execution?

[Maryann T. Mannen, Executive Vice President and Chief Financial Officer at Marathon Petroleum]

Sure. Neil, I think, look, the reason why we're using an open-market repurchase program is we believe we have some control over that and certainly using an opportunistic approach over this time period is the approach that we believe is best for us during this time period. So certainly, we would be using an opportunistic approach during this time period.

[Neil Mehta, Analyst at The Goldman Sachs Group]

Alright. Thanks guys.

[Operator]

Our next question comes from Doug Leggate with Bank of America.

[Doug Leggate, Analyst at Bank of America]

Thank you. Good morning everybody. Mike, there is -- I guess, there's memories that the Biden administration could take a hard look at partnership structures for MLPs. I'm just curious if you can offer any perspective on how it might change your thoughts around your ownership structure and the current strategy around MPLX, if something like that plays out?

[Michael J. Hennigan, President and Chief Executive Officer at Marathon Petroleum]

Yes. Doug, it's a good question. So obviously, with the administration change and with the agenda that they have out there, they're looking for ways to pay for the programs that they have in place. So we're aware of the potential there. Obviously, there's a couple bills that are involved with that dynamic. I would tell you, right now, our thinking though, is that we would stay in the MLP structure because we don't think it's going to change. We don't know for sure. Obviously, if it did lose its tax status, it would change our dynamic. But right now, Doug, if you're asking what's the probability, I think we are on the side of -- we don't think it is going to change, and we think the partnership will still maintain its tax status.

So obviously, for the size of the MLP that we have, if all of a sudden, it was a taxed entity you're looking at around $800 million to $1 billion of cash flow that would be lost. And I know others have asked this in the past. I mean it's predominantly the number one reason why we maintain the partnership structure as compared to converting to a C corp. There's two dynamics that come into play. One is an immediate tax impact to all unitholders, of which MPC is the largest, obviously. And then more importantly is to the ongoing cash flow change that would occur at MPLX. So we understand some of the pros and cons of the structure. At the same time, we think having that cash flow keeps us in the MLP mode. So obviously, if the rules change, if the administration does something different, we'll adapt accordingly. But in the short term, we still support the structure because it gives us that additional cash flow as opposed to a tax burden.

[Doug Leggate, Analyst at Bank of America]

Yes. Presumably, you're not aware of any discussions that you've had then with the administration around this particular issue?

[Michael J. Hennigan, President and Chief Executive Officer at Marathon Petroleum]

No. I mean we know that there's some advocacies for it and some that are against it. Our intel is that we think at the end of the day, the partnership status will stay the way it is. But I'm not trying to call politics here, Doug. Whatever happens, we'll adjust to it, but for right now, we think the MLP structure will stay the way it is.

[Doug Leggate, Analyst at Bank of America]

Mike, my follow-up is, I guess, as a follow-on to the question on buybacks just to kind of put some numbers to you that I'm sure you're very familiar with. Your market capitalization, obviously, mid-30s, you strip out your share of the publicly traded value of MPLX. And what you're left with there's a value of around $15 billion, $16 billion, which implies that the remaining buyback would be more than half of the current market capitalization. Clearly, that's impactful. I'm just wondering if you can frame for us how you would intend to tackle a buyback of that scale when you think about it that way? I know you've touched on that a little bit, but when you put microchip in context, is it big enough. Just curious how you think about moving that forward over the next 16 months.

[Michael J. Hennigan, President and Chief Executive Officer at Marathon Petroleum]

Yes. Doug, I'd say it's a good problem to have. We are committed -- as Maryann said in her remarks, we are committed to returning capital. At the end of the day, we -- for a long time, we were saying about $16.5 billion. I mean now that we've closed and worked through some of the details, it's a little over $17 billion. We have prioritized the balance sheet. We've taken out some debt there. We've maintained some dry powder to see how things continue to play out, and we've committed to $10 billion. So throughout the time from the announcement to close, we reiterated to investors that we wanted to do it as quickly and efficiently as possible.

To meet our commitment of quickly, we offered a Dutch tender. The market spoke and said $1 billion as opposed to what we had offered out as far as the total liquidity. Now we are, as Maryann said in the remarks, we're going to go more opportunistic and be in an open market environment. So some of the questions that we get from people is are we still committed to that? And as Maryann said, we want to reiterate, we are committed to that. Nothing has changed in our thought process there. It is going to take time. To your point, it is a large number. We are limited by the amount of trading volume we have and the liquidity that we have in our shares. So that is part of the constraint that we have, but we are committed to returning it. And we're going to go into this program, and obviously, each quarter, we'll update the market on the results.

[Doug Leggate, Analyst at Bank of America]

Alright, thanks Mike. I appreciate your taking my question.

[Michael J. Hennigan, President and Chief Executive Officer at Marathon Petroleum]

Your welcome Doug.

[Operator]

Thank you. Next, we will hear from Roger Read with Wells Fargo. Your line is open.

[Roger Read, Analyst at Wells Fargo & Company]

Yes, thank you. Good morning. Let me take a quick detour over to the renewable diesel side of the business. Obviously, you've got the North Dakota Dickinson facility up and running. I was curious is it running off soybean oil? If you could give us any incremental views on its contribution to the Mid-Continent profit that we saw improve this quarter? And then on the startup in Martinez, what do you expect the feedstocks to be there?

[Michael J. Hennigan, President and Chief Executive Officer at Marathon Petroleum]

So it's a good question, Roger. I'm going to let Ray give you some specific on Dickinson? Go ahead, Ray.

[Raymond L. Brooks, Executive Vice President, Refining at Marathon Petroleum]

Roger, this is Ray Brooks. Just want to talk a little bit about Dickinson and how it's running. As you alluded, Dickinson is up and running now. During the second quarter, we did reach our design capacity of 180 million gallons a year, good news, and we're happy about that. The other thing operationally is we did reach the yields of renewable diesel we were seeking to get in the mid-90s, and so we're happy about that. As far as feedstocks, the design for Dickinson was basically an 80-20 mix of soybean oil and distilled corn oil. And as you probably know, the soybean oil economics are challenged right now.

What I'm really proud of the team is doing is we're seeking every day to optimize a few things. First, optimize the operation of the facility to get to the lowest carbon intensity from our operations, and then we're also optimizing the feed slate within the -- from the design basis and we're having some success in that regard. So that's really how Dickinson is running. And right now, it's -- like I said, it's up running, and it's the second-largest renewable diesel plant in the United States.

[Michael J. Hennigan, President and Chief Executive Officer at Marathon Petroleum]

Roger, it's Mike again. I was just going to say to your second question on Martinez, we're not going to disclose at this point what we're thinking about as far as the feedstocks. That's still in discussion with many players. So I can't really comment on that other than what we said in our prepared remarks that the engineering is going well, the permitting is going well. We still feel really good about the project from a lot of aspects. So we'll give you more color on that as time goes by.

[Roger Read, Analyst at Wells Fargo & Company]

Okay. Great. And then a follow-up question, maybe for you, Maryann, just because you made the comment about natural gas prices being up. Are there any other inflationary aspects we need to watch for in the R&M sector here? I know you've got your overall goal to cut costs and some progress there, but there's always an offset unfortunately. I was just curious what else may be pushing against you there, recognizing, of course, that natural gas can go down about as quickly as it goes up.

[Maryann T. Mannen, Executive Vice President and Chief Financial Officer at Marathon Petroleum]

Yes. You're right. And certainly, as we see it right now, we're looking at it as a tailwind that is natural gas to the third quarter. I'd say to your first question around any other specific inflationary aspects, there's nothing -- obviously, we didn't point to anything. There's really nothing of significance that we see at this juncture that would have a negative impact on the third quarter.

[Roger Read, Analyst at Wells Fargo & Company]

Okay. Thank you.

[Operator]

Our next question comes from Manav Gupta with Credit Suisse. Your line is open.

[Manav Gupta, Analyst at Credit Suisse Group]

So Mike, first, congratulations. I know you took over during the pandemic, but one thing which you took over when you stressed was everything has to be free cash flow in the portfolio and refining was free cash flow positive, I think you made about $500 million or $600 million in free cash, so congratulations on achieving that goal.

[Michael J. Hennigan, President and Chief Executive Officer at Marathon Petroleum]

Thanks, Manav.

[Manav Gupta, Analyst at Credit Suisse Group]

My question here is on those lines. If I look at your current dividend obligation about $1.3 billion and then I look at the cash that MPLX is giving you about $1.8 billion, and you look at the corporate and expenses of like $175 million a quarter, like essentially, where we are in the equation? Even if refining only contributes like $100 million to $200 million to overall free cash flow, you can meet your dividend obligation. And once you do execute this buyback there's like $320 million or so dividend obligation reduction. So what I'm trying to get to is, not that refining will not make a positive free cash flow but you actually do not need a positive refining free cash flow to meet the dividend obligation. Am I thinking about these parameters correctly?

[Michael J. Hennigan, President and Chief Executive Officer at Marathon Petroleum]

Yes. Manav, you are in general. I think one of the things that sometimes people miss is our relationship with MPLX as you're pointing out. So at the current distribution level at MPLX, we do get that $1.8 billion coming back into MPC. So I think you're right. It's one of the uniquenesses that's a positive of the structure that we have. Right today, MPLX is generating excess cash flow beyond capital and distribution as well. So financial flexibility is increasing at the partnership as well. So I think we're in a pretty good position from that standpoint, and I think you're thinking about it right.

[Manav Gupta, Analyst at Credit Suisse Group]

Okay. And the quick follow-up here is, I mean, you have done a -- the team has done a very good job of lowering opex per barrel. It is about 25% down year-over-year. So besides the closure of the two assets, Gallup and Martinez, which are the other assets or part of the portfolio in the refining, whether it was Galveston Bay or wherever, where these material reductions have come in, which is allowing you to push the opex per barrel down?

[Michael J. Hennigan, President and Chief Executive Officer at Marathon Petroleum]

Yes. Manav, it's really occurred across the whole portfolio. Ray and the refining team have done a really nice job on that side. All the support functions on the corporate side have done as well. So it is part of my DNA to be very, very conscious about cost. The team knows that's going to be a high priority for us all the time. In fact, if anything, Maryann just mentioned, as refining runs have come back up kind of with the recovery, variable costs have come up, but we've been able to maintain a pretty consistent level of opex there. So that's been a good story for us. We do have, again, natural gas potentially going up. But overall, we're going to continue to challenge the portfolio, both on the refining side of the business, also in the midstream side of the business.

For those who listened to the MPLX call, we had originally stated about $200 million of cost reductions at MPLX. We've now increased that to about $300 million, about another $100 million that we feel pretty comfortable that we can take out of that business as well. So it's going to continue to be an area of focus for us. That's never going to change. We'll look for opportunities for us to optimize our system where we can. And back to your original point, we did have a couple closures. They were our highest cost facilities, but we're going to continue to evaluate the portfolio. I've said a couple times to people that I want to get out of this pandemic environment to see what things look like afterwards, but we are still evaluating all assets of the portfolio. And to your point, and I'm glad you remember that is I am a driver that all of our assets need to generate free cash flow. That's a mantra that I believe in, and we're hoping that we have that in our portfolio at all times.

[Manav Gupta, Analyst at Credit Suisse Group]

Thank you so much for taking my questions.

[Michael J. Hennigan, President and Chief Executive Officer at Marathon Petroleum]

Your welcome Manav.

[Operator]

Our next question will come from Phil Gresh with JPMorgan. Your line is open.

[Phil Gresh, Analyst at JPMorgan Chase & Co.]

Yes. Hi, good morning.First question, just one additional one on the buybacks. The proceeds, as you noted, were $700 million higher than expected. I think you still have a $2 billion-plus tax refund coming here in the third quarter. So how should we think about the ability over time to potentially exceed the $10 billion buyback target? Or perhaps another way of asking the question is, are there other uses you would see for the cash besides returning capital to shareholders, given what you've said about the balance sheet in the past?

[Maryann T. Mannen, Executive Vice President and Chief Financial Officer at Marathon Petroleum]

Phil, it's Maryann. Thanks for the question. Yes, as you know, as we've been sharing with you the use of proceeds, we've really just been focused on the $10 billion capital return. As you state very clearly, we know we have roughly $2.1 billion coming back from the CARES Act. We continue to expect to receive the lion's share of that in and about the third quarter -- late in the third quarter, frankly, is our expectation. So you're right. We will have the remaining proceeds as well as the incremental $2 billion that we'll continue to evaluate and make good decision really around whether or not that would go in the form of capital return.

But we've not really declared beyond that initial $10 billion right now as we continue to look at the balance sheet. I think you know the -- obviously, our intent also was to ensure that we maintained investment grade as you hopefully you've seen the three rating agencies did reconfirm that. So we do have investment grade again on -- by all three of those agencies. We certainly will continue to focus on the balance sheet and be sure that, that maintains a nimble, if you will. But again, that use of proceeds will continue to evaluate as we go forward.

[Phil Gresh, Analyst at JPMorgan Chase & Co.]

To clarify, there's no change to the absolute debt or cash balance targets you've set in the past?

[Maryann T. Mannen, Executive Vice President and Chief Financial Officer at Marathon Petroleum]

That's right. Right now, for MPC, we've got about $9 billion of long-term debt. As we shared with you initially, we took $2.5 billion off immediately. Frankly, as you saw in the quarter, we actually did a bit more than that, a little over $800 million. We really cleared anything that was sitting on our revolver as well. We'll continue to evaluate that. But at this point, we -- as you know, we are trying to be efficient about that. So we've not moved anything beyond that initial $2.5 billion of debt reduction.

[Phil Gresh, Analyst at JPMorgan Chase & Co.]

Got it. Okay. A follow up, just one more on the operating cost equation. With $5 a barrel of opex here in the third quarter and the fact that opex is lower 2021 over 2020 despite higher throughput and higher nat gas, where do you feel we are, I guess this is for Mike, in the cost reduction journey here? Particularly as you benchmark to peers, there are obviously regional differences to consider across portfolios. But how far along do you think we are when you look at what peers are doing?

[Michael J. Hennigan, President and Chief Executive Officer at Marathon Petroleum]

Yes. Phil, how far along is always a tough question because like I said earlier, it's a never-ending game. So we're going to continue to challenge ourselves. We'll look for incremental improvements from here. Obviously, we've gotten the lion's share of what we originally targeted to get, but it's something that we're going to continue. It's going to be part of our DNA that we're going to look at every opportunity, every chance we get to continue to push that down. I am a believer that in this business, we need to be a low-cost operator. The team deserves a lot of credit to get after that, and we've made some meaningful change, but we're not done. I'll quote right from the last call, we're not in the first inning, and we're not in the ninth inning. So the game is still being played.

It will continue to be played, and we'll just obviously challenge ourselves all the time to see where we can run ourselves as a leaner opportunity as we can without sacrificing safety. That's another really important mantra. We're not going to put anybody at jeopardy. But we're going to run as lean as we can. And I just -- my guidance to you is keep watching our results and keep talking about it, and as we have additional disclosures to tell you what's happening, we'll bring those up quarter-to-quarter. Like I just mentioned earlier, midstream has just moved from a sustainable $200 million down to $300 million down. So we feel good about that. We're now telling people that we're comfortable with that number, still challenging it in the midstream space as well. So we're going to keep the eye on the ball as far as our costs, and we'll continue to look for opportunities to be as lean as we can be.

[Phil Gresh, Analyst at JPMorgan Chase & Co.]

Yes, thanks for the [Indecipherable]

[Michael J. Hennigan, President and Chief Executive Officer at Marathon Petroleum]

Your welcome Phil.

[Operator]

Our next question will come from Theresa Chen with Barclays.

[Theresa Chen, Analyst at Barclays]

Good morning. Wanted to maybe first ask about the refining macro landscape, given that demand has recovered completely on the diesel front and -- mostly on the gasoline front. And with the utilization that you achieved in the second quarter as well as the guidance for the third quarter, it seems to indicate a relatively optimistic outlook for the near term. So one, would you agree with that? And just generally, what are your views on refining profitability in the second half? And related to your comments about jet demand being off 30% or still, is that what's capping the utilization guidance from here?

[Michael J. Hennigan, President and Chief Executive Officer at Marathon Petroleum]

Yes. Theresa, I'll start, and I'll let the other guys jump in. I guess the term we used was hopeful but cautious. So we are hopeful that we are recovering and continue to do so. What we've seen, obviously, over the last year has been a very tough environment that we're coming out of, particularly in the U.S. The reason we're still cautious, however, is the delta variant is spiking up in a lot of areas. Outside the U.S. is a much more difficult environment than inside the U.S. today. And then you pointed out a couple things is jet fuel is still lagging, in our view, and that will continue to lag for some time. But eventually, it will come back. But for right now, it is still lagging. And the other one that we pointed out was the West Coast is still lagging.

So we're going to have to see, Theresa, to be honest with you, we're going to have to see how the COVID plays itself out into the second half of the year and as we approach another winter season. If there continues to be increased infection, obviously, there's going to be some restraint on the demand as a result like we've seen before. Hopefully not, hopefully, people are seeing this variant spread and vaccination rates will increase from where they are today. I think there was a good response originally, but I think it needs to go to another level. So we're obviously hopeful that people will take caution and get vaccinated. But in general, I mean, we have the same outlook that I think you and others have is -- that's why we used the word hopeful that we're recovering coming out of this, but cautious that we still have some road to plow. Anybody want to add? Nobody wants to add.

[Theresa Chen, Analyst at Barclays]

Fair enough. And my second question is related to the Martinez conversion. And following up on something that came up in the midstream call about housing some of the assets within MPLX, just in light of the midstream entity, throwing off good free cash flow with a healthy balance sheet currently and needing to insulate its own terminal value, when we think about some of the bigger ticket items that you have to spend on such as the pretreatment unit or even the conversion of some of the processing units, would it -- would you have the flexibility to decide between MPLX participating at cost or dropping down once fully cash flowing? Is there a preference at this point between the two if that is the path forward? And just on the latter, if you drop things down once fully cash flowing thinking, this is, I believe, your previous strategy with Capline and keeping that upstairs until it is fully reversed because when you boil it all down for Martinez, I imagine this would really delineate like a pretty meaningfully different amount of capital that MPLX could contribute to fund the project?

[Michael J. Hennigan, President and Chief Executive Officer at Marathon Petroleum]

That was a long one there, Theresa. Let me see if I can break it apart. I think the main message that you're asking is we do have a unique structure that enables us to look to create value for both MPC shareholders and MPLX unitholders. So there is no rule of thumb to what you stated earlier. It's case-by-case basis. There's a lot of specifics to go into it, the dynamics of each of the individual opportunities. But we do have that ability to sit down and figure out how we can create value on both sides. Obviously, it's our goal to create value at MPC and MPLX and having the flexibility between the two structures enables that. But I do want to leave you with, there's not a rule of thumb. There's not a, "Hey, this is the way we do this." Every instance gets its own debate and discussion, and we decide what we think is the best to create the most value.

[Operator]

Next we will hear from Paul Cheng with Scotiabank. Your line is open.

[Kristina Anna Kazarian, Vice President, Investor Relations at Marathon Petroleum]

Hey, Paul, are you here with us today? Are you on mute by any chance, Paul? All right, operator, let's move to the next caller and then we can have Paul reprompt if you're with us, Paul.

[Operator]

Thank you. Next then, we will hear from Sam Margolin with Wolfe Research.

[Sam Margolin, Analyst at Wolfe Research]

Good morning, thank you. Question on Martinez and the initial startup. I just wonder how you're thinking about its performance in the period before the pretreatment unit starts up, and I'll contextualize it with something one of your peers said, which is that there's an expectation that feedstock might eventually price itself on CI score similar to the way that within the refining complex commodities price on sort of their end market value. And so I was just wondering if you're thinking about that as a possible outcome and whether that may make operations before the PTU starts up a little easier? Or whether the expectation is really that Martinez shouldn't enter kind of a run rate profitability until that PTU is going?

[Raymond L. Brooks, Executive Vice President, Refining at Marathon Petroleum]

Sam, this is Ray, and I'll take your question. you're right. As we develop the Martinez project and it comes on in phases, the different phases will have a different feedstock mix. And so phase 1, essentially, as we come on with the initial hydroprocessing unit. That is going to be without the pretreatment system. I don't want to get -- like Mike said, I don't want to get into too much of the feedstock slate. What I would like to emphasize, though, is we have a lot of optionality around how we receive feedstocks between truck and rail and water and ability without having the pretreatment system still to optimize that mix. The other thing I'll talk about Martinez is, whether it's phase one or phase 2, phase three is, we did our -- when we looked at this project, we looked at it with different feedstock capabilities and the most conservative feedstock availability for phase 1. And we still feel good about the project even if it was a very strong soybean oil-based slate. But like I said, we're going to work to optimize around all the logistics assets, the capabilities that Martinez offers us.

[Michael J. Hennigan, President and Chief Executive Officer at Marathon Petroleum]

Sam, it's Mike. I'm just going to add to what Ray said. I mean I know your question is depending on where the market goes. But the thing that makes us feel really good about Martinez is several factors. One, we think we have a really competitive capex and opex situation. And that was one of the major drivers when we looked at this. Second, as Ray just mentioned, we have really strong logistics: pipeline, rail, water, truck. We have a lot of opportunity there to provide value.

And then the ultimate logistics is we're in California where we're sitting on the demand. So location also matters. So regardless of what happens in the marketplace, and it will ebb and flow just like every other commodity market. The reason we're so bullish on our Martinez asset is those factors that are in place day-in and day-out. The opex that we're going to run, the capex that it takes to get there, the logistics that we have, the location that we have, all of those play to our favor regardless of how the commodity markets move day to day. I hope that makes sense.

[Sam Margolin, Analyst at Wolfe Research]

Yes. Understood. And then just a follow-up on RINs and the RVO. MPC is advantaged because you satisfy your D6 obligation through blending. But there's some elements of that, that are hard to follow in terms of realizations because marketing outcomes have different RINs effects embedded in them. So I was wondering if there's anything you can share about just sort of the net effect of blending in -- on the gasoline side? And how you navigate it just the volatile RINs environment and maybe what that means on sort of a go-forward basis?

[Brian K. Partee, Senior Vice President, Global Clean Products at Marathon Petroleum]

Yes. Sam, this is Brian Partee. I can take that question. So the first thing I would do is actually zoom out just a little bit and think about blended sales actually further down the value chain. So it's naturally going to be a higher-margin sale than, say, a bulk sale that doesn't have a RIN or a blend component to it. So we stated publicly that we're in that 70% to 75% from a blend perspective from an RVO. So we're just naturally further down the value chain. I think you hit on a couple of things, though.

The volatility is important. So the RVO is a 12-month compliance window, and it's really how you execute your compliance strategy. And it's the volatility actually in the high RIN environment that we're in now provides opportunities for probably an outperform or an underperform depending on the execution of your compliance program and how you meet those obligations. So that is something that's probably not been as transparent to the marketplace as we historically were around $0.05-or-so on RINs. But now in this environment, it does provide an opportunity. It's high risk, high reward, but we feel confident with our ability to execute both from a blended perspective of what we blend, but also on the compliance program.

[Operator]

Our next question will come from Jason Gabelman with Cowen.

[Jason Gabelman, Analyst at Cowen]

Thanks for taking my questions. I'll actually try to ask the question Sam just asked a little differently, which is, have you seen the value proposition for blending biofuels change in this environment relative to where it was in 2018, 2019? Or is the value benefit still there, meaning that blending offsets the financial cost of having to go out and buying RINs because it's been suggested that the value proposition has changed a bit for various reasons?

[Brian K. Partee, Senior Vice President, Global Clean Products at Marathon Petroleum]

Yes. Jason, this is Brian Partee, again. Yes, I can take that. I think the great debate is the pass-through of the RIN and the RFS costs. And it's very difficult to empirically point to that as pass-through. So again, I'll fall back on the execution side of things. And I think that's really where the performance lies. But it's very difficult to pinpoint any difference between the data points that you referenced back in 2018 to today, it really gets boiled down to the execution side of things.

[Jason Gabelman, Analyst at Cowen]

Okay. And then just a quick accounting question. There was about an $82 million benefit from other income in Refining and Marketing margin that appears like it's the first time it's been there. Can you just discuss what drove that?

[Maryann T. Mannen, Executive Vice President and Chief Financial Officer at Marathon Petroleum]

I'm sorry, Jason. It's Maryann. Could you repeat your question again? You're saying an $82 million benefit in the quarter? I'm sorry, I'm not following your question.

[Jason Gabelman, Analyst at Cowen]

Yes. For the quarter, in the line item, other income included in Refining and Marketing margin.

[Maryann T. Mannen, Executive Vice President and Chief Financial Officer at Marathon Petroleum]

Yes. Jason, we'll take a look at that for you, and we'll come back to you. How's that?

[Jason Gabelman, Analyst at Cowen]

All right. That's great.

[Operator]

[Operator Instructions]

[Kristina Anna Kazarian, Vice President, Investor Relations at Marathon Petroleum]

All right. Sheila, if there are no other questions in the queue today, we wanted to thank everyone for joining us. If you do have any outstanding questions, please feel free to reach out to our team at any point in time, and we will be here to help. Thank you, everyone, for joining our call today, and have a great day.

[Operator]

[Operator Closing Remarks]