Marathon Petroleum Q3 2022 Earnings Call Transcript

Quartr
Provided by Quartr
November 1, 2022

There are 15 speakers on the call.

Operator

Welcome to the MPC Third Quarter 2022 Earnings Call. My name is Casey, and I will be your operator for today's call. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session. Please note that this conference is being recorded.

Operator

I will now turn the call over to Kristina Kazarian. Kristina, you may begin.

Speaker 1

Sounds great. Welcome to Marathon Petroleum Corporation's Q3 2022 earnings conference call. The slides that accompany 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 Mannin, CFO and other members of the executive team. We invite you to read the Safe Harbor statements on Slide 2.

Speaker 1

And with that, I'll turn it over to Mike.

Speaker 2

Thanks, Christina. Good morning, everyone. First, I'd like to introduce Tim Eitel will be joining our calls as the new Executive Vice President of Refining. Tim has over 37 years of experience in leadership roles across our midstream and refining organizations. Most recently, he was Executive Vice President of Pipelines, Terminals and Marine And Chief Commercial Officer, where he oversaw the business development for the MLP.

Speaker 2

Now turning to the macro environment, Roughly 4,000,000 barrels per day of refining capacity has come offline globally in the last couple of years. Yet demand The transportation fuels we manufacture remains robust and continues to grow. In the U. S, demand is Still below 2019 pre COVID levels and we believe there will be a continued recovery. As supply remains constrained As demand continues to rebound, we maintain a bullish outlook towards the refining environment as we look into 2023.

Speaker 2

Our 3rd quarter results reflect the team's operational and commercial execution as we focused on delivering products for consumers in this very tight market. In our Refining segment, we ran near full rates while maintaining our steadfast commitment to safely operating our assets, Protect the health and safety of our employees and support the communities in which we operate. The commercial team focused on optimizing our scale, footprint and feedstock slate to deliver against strong demand. And despite volatility in the global energy markets, our execution reflects progress Towards our goal of improving commercial performance. We normally see seasonal demand decline at this time of year, But to date, we're not seeing those signs.

Speaker 2

Strong forward crack spreads and wide sour differentials for 2023 Indicate the expectation of a strong refining environment going forward. In the Q4, we're currently running our system as full utilization Except for the planned maintenance activity we have occurring given our back of the year weighted turnaround schedule. Aside from the refining business, I want to point out that our Midstream segment earnings continue to grow. In the Q3, our adjusted EBITDA was up nearly 9% year over year in Midstream. We've been executing strategic capital investments, fostering a low cost culture and optimizing the portfolio, including advancing several organic growth projects in the Permian Basin.

Speaker 2

The strength of these cash flows supports MPLX's decision to increase its quarterly distribution by 10%. Based on this level, MPC will receive $2,000,000,000 of distribution from MPLX annually. We've received questions regarding the structure of MPLX and whether MPC will acquire the outstanding public unit. So we want to restate what we said in the past. MPLX is a strategic part of MPC's portfolio.

Speaker 2

Its current pace of cash distribution to MPC is $2,000,000,000 per year And we expect that to continue growing. MPLX has continued to demonstrate resilient through cycle earnings and growing cash flows. As MPLX pursues its growth opportunities, we expect the value of this strategic partnership will continue to be enhanced And we do not plan to roll up NPLX. Switching to capital allocation, we believe MPC's current capital allocation priorities Our optimal for our shareholders. In October, we completed our $15,000,000,000 return of capital commitment, We're purchasing approximately 30% of MPC's shares outstanding.

Speaker 2

We're committed to executing our capital allocation framework Deliver peer leading total return to shareholders. Today, we announced an increase to MPC's quarterly dividend of approximately 30%. In addition, we intend to continue repurchases, which we believe are a more efficient way to return capital and we expect to commence buybacks in November Using the remaining $5,000,000,000 repurchase authorization. In early 2000, we shared our 3 strategic areas of focus. They have become part of MPC's DNA, embedded in our unwavering commitment to increase profitability, have the best Through cycle cash flow generation and drive the long term value creation.

Speaker 2

As we focus on strengthening the competitive position of our assets, In September, we closed on our Martinez Renewable joint venture with Neste. Construction is well underway We expect Phase 1 mechanical completion by year end. We're excited about the partnership with Neste, a global leader in feedstock procurement And Renewable Fuels Production. This joint venture enhances the value of the project by reducing MPC's capital commitment to $0.55 per gallon As well as improving the overall project feedstock slate, Neste has the obligation to bring 80% advantaged feedstock in Phase 2. Due to these improvements, we expect MPC share of the JV's EBITDA to be only 25% lower than our original standalone case.

Speaker 2

Additionally, this strategic partnership with Neste creates a platform for collaboration. We believe there will be Opportunity to leverage the differentiated knowledge and capabilities of 2 industry leaders as we pursue our shared commitment to the energy evolution. We continue to challenge ourselves to lead in sustainable energy and have made progress on the sustainability goals that we have set for ourselves. Focusing specifically on the Martinez Renewables project, which converts our petroleum refinery into a renewable fuels facility, We anticipate the conversion to result in a 60% reduction of the facility's Scope 1 and Scope 2 GHG emissions, 70% lower total criteria air pollutants and 1,000,000,000 gallons of water saved annually. If you haven't had a chance yet, we invite you to go to the Sustainability section of our website and learn more about the ways we are challenging ourselves to lead in sustainable energy.

Speaker 2

At this point, I'd like to turn the call over to Mary Anne.

Speaker 3

Thanks, Mike. Moving to Q3 results, Slide 6 provides a summary of our financial results. This morning, we reported adjusted earnings per share of $7.81 This quarter's results were adjusted to exclude 3 items, a $549,000,000 non cash Pretax gain related to the contribution of our refining assets to the Martinez Renewable JV, a $509,000,000 non cash gain Related to an MPLX 3rd party contract reclassification and a $28,000,000 LIFO inventory charge. Adjusted EBITDA was $6,800,000,000 for the quarter and cash flow from operations, excluding unfavorable working capital changes, Was just under $4,500,000,000 During the quarter, we returned $285,000,000 to shareholders Through dividend payments and repurchased $3,900,000,000 of our shares. Slide 7 shows the reconciliation between net income and adjusted EBITDA as well as the sequential change in adjusted EBITDA from the Q2 of 2022 to the 3rd Quarter of 2022.

Speaker 3

Adjusted EBITDA was lower sequentially by approximately $2,300,000,000 This decrease Was primarily driven by refining and marketing as the blended crack spread was down approximately $10 per barrel, reflecting a 25% quarterly decline. The tax rate for the Q3 was 22%, resulting in a tax provision of $1,400,000,000 The tax rate is similar to last quarter due to the refining and marketing representing a larger component of total earnings. Moving to our segment slide results. Slide 8 provides an overview of our Refining and Marketing segment. During the quarter, We focused on supplying transportation fuels to meet continued strong market demand.

Speaker 3

Our refining assets ran at 98 Percent utilization processing over 2,800,000 barrels of crude per day at our 13 refineries. We saw margins decline sequentially across all three regions. Capture was 97%, reflecting a strong result from our commercial team in a volatile global market. Operating expenses were higher in the 3rd quarter. Energy costs were approximately $0.15 per barrel higher in the 3rd quarter, driven by higher natural gas prices.

Speaker 3

Additionally, we recorded a nonrecurring multiyear Property tax assessment of $0.13 per barrel in the 3rd quarter, which we will continue to pursue recovery. We believe the actions we have taken To bring our structural operating costs down to approximately $5 per barrel are sustainable, the cost increases we have seen year to date Have almost entirely been driven by higher energy costs. Turning to Slide 9, which provides an overview of our refining And marketing margin capture this quarter. Market backwardation remained a headwind for the industry, but our commercial strategy of selling ahead of product backwardation, while keeping inventories optimized supported our ability to meet demand and capture strong comps margins. And while not as significant as the previous quarter, secondary product prices were a headwind as they lagged higher light product prices.

Speaker 3

Our ability to capture 97% of the market indicator across an incredibly volatile 3 months was in part due to our commercial responses. Slide 10 shows the change in our Midstream EBITDA versus the Q2 of 2022. Our Midstream segment demonstrated earnings growth With adjusted EBITDA up approximately 3% sequentially and up 9% year over year, overall, we continue to focus on identifying and efficiently Achieving high return projects to drive further growth for our midstream business. As Mike mentioned earlier, the growth of MPLX's earnings supported decision to increase its quarterly distribution by 10% to $0.77 expects to receive $2,000,000,000 in cash from MPLX on an annual basis. MPLX remains a source of durable earnings in the MPC portfolio.

Speaker 3

And as MPLX grows its free cash flow, we believe it will have the capacity to return capital to its unitholders. Slide 11 Presents the elements of change in our consolidated cash position for the Q3. Operating cash flow, excluding changes in working capital, Was just under $4,500,000,000 in the quarter. Working capital was an $1,900,000,000 headwind for the quarter. This quarter, we made a payment of $2,300,000,000 for estimated federal income taxes, declining crude prices We're also a headwind into working capital.

Speaker 3

Capital expenditures and investments totaled $756,000,000 this quarter. The increased level of capital spending was related to a ramp in activity related to the Martinez Renewable Fuels Facility conversion and the Galveston Bay Star project. The Star project is expected to be completed early 2023. Other cash flow benefits of 790,000,000 It's primarily driven by the distribution MPC received from the Martinez Renewable JV upon closing on September 21.

Speaker 4

At the

Speaker 3

end of the Q3, MPC had approximately $11,100,000,000 in cash and short term investments. Moving to Slide 12, we have completed our $15,000,000,000 share repurchase commitment, utilizing the proceeds from the Speedway divestiture At an average price of $78 ahead of our commitment of no later than the end of 2022. As you will see today, when our quarterly financials, The 10 Q was published. We were able to complete that early in the month of October. We intend to begin repurchase against our $5,000,000,000 Ending authorization in November, now that our financials are public.

Speaker 3

On Slide 13, I'd like to walk you through our financial priorities. Sustaining capital. 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. We're committed to a secure, competitive and growing dividend. We believe the quarterly increase to $0.75 per share we announced today is secured through cycle, competitive with peers and the broader market, and leaves opportunity to potentially grow our dividend in the future.

Speaker 3

We anticipate this dividend will be supplemented with repurchases, and we are committed to executing our capital allocation framework to deliver Peer leading total returns to shareholders. We will evaluate growth opportunities and margin enhancing projects. Share repurchases will be used to return excess capital to shareholders, which we believe are a more efficient way to return capital and will continue to lower our share count. Underpinning these priorities, we believe a strong balance sheet is essential to being successful in a competitive commodity business. It's the foundation allowing us to execute our strategy.

Speaker 3

On Slide 14, we highlight the strength of MPC's balance sheet. We continue to manage our balance sheet through an investment grade credit profile. At the end of our Q3, MPC's standalone growth Debt to capital ratio is 21%, which is under our target of a 25% to 30% growth debt to capital ratio. MPLX has a leverage ratio of 3.5 times debt to EBITDA under its target of 4 times. Both businesses have strong balance sheets with leverage ratios under their respective targets.

Speaker 3

Turning to guidance on Slide 15, we provide our 4th quarter outlook. We expect crude throughput volumes of roughly 2,700,000 barrels per day, representing 93% utilization. Utilization is forecast to be lower than Q3 due to planned turnaround activity having a higher impact on crude units in the 4th quarter. Planned turnaround expense is projected to be approximately $430,000,000 in the Q4 with a significant level of In the Gulf Coast region, turnaround activity is reflected in our 4th quarter throughput guidance. We are expecting operating cost per barrel in the 4th quarter to be lower, projected to be $5.30 per barrel for the quarter.

Speaker 3

This is primarily driven by expected lower natural gas and energy costs. As a reminder, natural gas has historically represented approximately 15% of operating costs. Our natural gas sensitivity is approximately $330,000,000 of annual EBITDA For every dollar change per MMBtu, this equates to a sensitivity of approximately $0.30 per barrel of cost. Distribution costs are expected to be approximately $1,300,000,000 for the 4th quarter. Corporate costs are expected to be $170,000,000 representing the sustained reductions that we have made in this area.

Speaker 3

In closing, we will continue to execute on our 3 strategic pillars, Strengthening the competitive performance of our assets, fostering a low cost culture and improving our commercial performance. We are committed to position MTC as a reliable and efficient energy provider with new investments focused on high return opportunities, Supporting the company's evolution, which will position it to lead in an energy diverse future. We will stay steadfast in our plan to position MPC As the refiner investment of choice, striving to deliver superior cash returns regardless of market conditions, And while ensuring we safely operate our assets, protect the health and safety of our employees and support the communities in which we operate. Let me turn the call back to Christina.

Speaker 1

Thanks, Mary Anne. As we open the call for your questions, as a courtesy to all participants, we ask that you limit yourself to one question and one follow-up. If time permits, we will pre prompt for additional questions. And with that, operator, can you open us for questions today?

Operator

Yes, thank you. We will now begin the question and answer session. Our first question today comes from Doug Leggate with Bank of America. Go ahead please. Your line is open.

Speaker 5

Thank you, guys. Sorry, trouble with the mute button. Good morning, everyone. Thanks for taking my questions. I guess, Mike or Mary Anne, whichever one wants to take this, now that you've completed the buyback, at least Your distributions from MPLX are still more than covering your dividend.

Speaker 5

So Can you walk us through how you think about what the new pace of buybacks could look like? Because obviously the $5,000,000,000 authorization is Probably going to be chewed through fairly quickly. And what we should think of in terms of the balance between future dividend growth And where you want your balance sheet to be? Basically, it's

Speaker 2

a use of cash question,

Speaker 5

because this is a pretty nice problem to have. And then I've got a follow-up, please.

Speaker 3

Thanks, Doug. So as you know, we made a commitment that we would reassess the dividend immediately completing the $15,000,000,000 and we've done so. We wanted 3 objectives really around the dividend. One was for it to be secure, competitive And then obviously with the potential to grow dividends in the future as you said, we believe our increase to $0.75 in the quarter Meets all three of those objectives. As you know, we completed that $15,000,000,000 share authorization and have a remaining $5,000,000,000 new authorization, Which both Mike and I have shared on our prepared remarks that we intend to begin to use that very early in the month of November.

Speaker 3

We continue to think that our equity is undervalued. And when we look at distributions, Return on capital between dividend and share repurchase, we believe share repurchase remains a more efficient tool in that portfolio. So we'll look at market, we'll look at other growth opportunities and we'll look at the macro and we'll continue to use share repurchase Absent other growth opportunities as the vehicle to continue to return capital to shareholders, and every decision that we make obviously focused on trying to ensure we've got I hope that helps Doug.

Speaker 5

It does, Marianna. Sadly, it also prompts my follow-up, If I may, and it's a little bit of a, I guess, a less easy question to answer. And as you just made the point of You believe your equity is undervalued. Now we obviously agree with that, but your share price is at an all time high. So when we think about value, when the market thinks about value, there have to be some assumptions that go behind How you're defining value.

Speaker 5

So my question is, what's the mid cycle to the extent you can define it, EBITDA or cash flow that you anticipate from the portfolio that goes behind that statement of we believe our equity is undervalued and I'll leave it there. Thanks.

Speaker 3

Yes. Doug, I'll start off and I'm sure Mike will want to add incremental comment as well. I think the mid cycle is an extremely difficult For us to put opinion as we stand right now. Certainly, when we look at the market dynamics, as Mike shared as well, We remain pretty bullish on the outlook, not only for the Q4, but certainly as we head into 2023. A series of factors that we use and we look at to determine when we say we believe that equity is undervalued And we'll continue to be as opportunistic as we can, as we are using share repurchase in evaluating where both the 4th and the first

Speaker 2

And Doug, it's Mike. I'll add to Mary Anne's comments. So what I said in the prepared remarks is The fundamentals of the business have changed as a result of what's happened over the last couple of years. Roughly 4,000,000 barrels Refining capacity has come out of the market at a time early on when demand was down, but demand continues to recover. We're still not at 2019 levels of demand across all the products, gasoline, diesel, jet fuel.

Speaker 2

So we're still below, but we are slowly recovering. So So you have supply constrained, you got demand recovering. And to your point, the mid cycle that we see into the future It's clearly above the previous mid cycle because the global fundamentals have changed. And as we look out in time,

Speaker 4

there are going to be some capacity additions occurring throughout the

Speaker 2

world, but we also are a The additions occurring throughout the world, but we also are a believer that demand is going to continue to pace such that the new mid cycle for what we're going to see It's significantly above where we've been in the past. So that's obviously why we have a bullish overtone here And why we still believe that the assets that we have are still trading under intrinsic value. Now I know you love us to give the exact number what we call internally, So I'm not going to do that as you know, but we stress test it. We stress test it in a low case, our view of a mid case and our view of a higher case. And as we look at all those things, we still believe fundamentally that we can purchase our shares at a price that's still adding value to our shareholders.

Speaker 2

So That's why we've been so aggressive in that area. We had committed to that return. As Mary Anne said in the prepared remarks, we bought back at a pretty good number And we still see that as an ongoing opportunity. You also asked about the dividend. I mean, our dividend being Where it was, was mainly because of the equity price coming up.

Speaker 2

And we did feel it warranted an adjustment. People had asked us for several quarters in a row Whether we're going to do that and we said we're going to do it after we do the $15,000,000,000 of Speedway. So hopefully, we were consistent with what we said there. We've moved it up. As Mair said, it's not a tax efficient way to return to shareholders, but we want to have a competitive number as well.

Speaker 2

So 30% is a good bump. We'll keep an eye on that. And at the same time, we're going to continue to reduce the share count. Hopefully, that gives you a little more color.

Speaker 5

Yes, Mike, significantly higher mid cycle is what I was looking for. Thanks very much indeed.

Operator

Our next question comes from Neil Mehta with Goldman Sachs. Go ahead please. Your line is open.

Speaker 6

Good morning, team. The First question is really to build on your comments around commercial. The capture rates, have continued to come in very well over the last couple of quarters. And Mike, I know when you came into the role, one of the opportunities you identified was really strengthening that through your commercial efforts. So can you just talk about What specifically has driven sort of that improvement in capture rates and how much of that is because of those commercial initiatives?

Speaker 2

Yes. Thanks, Neil, for the question. I'm going to let Rick and Brian comment. But before they do, I would say to We did say early on that we had 3 major areas that we were going to put emphasis on and we've made progress in the commercial area. We still see a lot more opportunity for us, but we're not done in that area, but we have made some progress.

Speaker 2

I'll let Rick and Brian give some comments.

Speaker 7

Yes. Hi, Neil. It's Rick. Thank you for the question. It's one of these items where we've been looking at the pull through and we've been seeing it the last several So it's nice that you're noticing it as well.

Speaker 7

I would start by saying earlier this year, we changed a lot. We change processes, we change structure and culture around all things commercial. That's been a game changer for us. In terms of details and how competitively, I'll be careful in what I share here, Neil. But If you look at it over through a broad lens, we've stood up a dedicated what we call VCO team, value chain optimization That goes from end to end, from feedstocks to products, from purchasing or procuring to placement, And we're relooking at everything we do, the why, the how, all modeling constraints, assumptions, everything was put on the table And we looked at.

Speaker 7

And so a lot of change and great positive results have come out of that, especially in the midst of the environment we're in. So every win when you're in an environment like we're in today is exemplified with the high crack, and I think you're seeing that. In addition, you're seeing a lot of the reroute of global products and feedstocks happening throughout the world. And Through this initiative, we've been able to take advantage of a lot of purchasing of feedstock and the placement of our clean products In a time that has been highly advantageous. So with that, I'll turn it over to Brian for more color on the Clean side.

Speaker 8

Thanks, Rick. Yes, Neil, just great question and appreciate the opportunity to kind of weigh in here. And Rick said it, but I'll double down on it. It's about 1 or 2 things. It's literally everything.

Speaker 8

We've changed, we've moved mountains and really proud of the work that the team has done. There's been a lot of progress as Mike alluded to in his comments, there's more to get. I think foundationally as we look going forward, one of the key components is our digital transformation that underpins a lot of the efforts we have on the commercial front. And we think leveraging our scale across our coast to coast platform provides us a distinct opportunity set as it relates to that digital evolution in our space. The other thing I'd say just real quick is what underpins all this.

Speaker 8

Organ alignment changed everything. We fundamentally changed the organizational structure and realigned people. We empowered people and we held them accountable. We have a people centric business in the commercial space and we're really leveraging that. And the core tenant of what we're trying to accomplish So let our great people do great things.

Speaker 6

Yes, that's great color. So, and it's showing up in the numbers. As the follow-up is just a specific dynamic around feedstock. We've seen WCS really blow out. Historically, you guys have been one of the larger buyers of Western Canadian crude, but you're also seeing heavy, wider in barrels like Maya and high sulfur fuel oil.

Speaker 6

So can you talk about what's driving The weakness in the heavy crude and product markets and how are you optimizing your refining slate to take advantage of that?

Speaker 7

Yes. Hi, Neil. It's Rick again. So great question. These markets are blowing out.

Speaker 7

We're seeing unprecedented levels again. On the heavy side, I think I looked this morning and I saw the forward curve, December was marked at minus 30, Q1 minuteus 27 and unbelievably so, 2023 Cal was 23 under. So what's driving it? Boy, it is a plethora of items. Production from the Canadian front, Neil, is pretty solid And we're entering right now blending season as you know, it's the diluent blending season is swelling the pool, which is certainly helping as well.

Speaker 7

We've had some short term shot in the arms with some maintenance in PADD II, III and V. When I say maintenance, unplanned maintenance, that's been a plug for us. And then fuel oil is really cheap. So you're seeing a lot of people substitute that For heavies in other parts of the world. So all of this is driving is really putting pressure on anything that hits the U.

Speaker 7

S. Gulf Coast. And lastly, I'll say, when you look at the Gulf of Mexico medium sour production, it's been healthy as well. So lately here, you're seeing Mars blow out. Certainly, you referenced the Canadians.

Speaker 7

So all of these items are stacking on top of one another And creating for a very bullish outlook here into 2023. In terms of MPC specifically, I think you Are well aware, we have great access and optionality that we've built out our system over the years in PADD II, PADD III And now PADD 5. And so we are going heavy. We're having up our slate. We're filling up our cokers, as you would expect, And we'll continue to do so into Q3 as these indicators tell us to do so.

Speaker 6

Makes sense. Thank you, team.

Speaker 2

You're welcome, Neil.

Operator

Our next question comes from Roger Read with Wells Fargo. Go ahead please. Your line is open.

Speaker 9

Yes. Thank you. Good morning.

Speaker 2

Good morning, Roger.

Speaker 9

Let me take the diesel question that everybody Wants to ask on all these calls, kind of what you're seeing across your system, whether or not the Mississippi River issues had anything to do with what's going on in the central part of the country? And then just any thoughts you have on Some of the policy issues that are percolating out there in terms of any risk of government intervention On the diesel export front.

Speaker 8

Yes, Roger, this is Brian Partee. I can take that. There's Couple of different things to unpack there. First on the Mississippi River, we have a really strong and capable inland river system and team. We've got over 20 tugs and 300 barges.

Speaker 8

We largely operate on the Ohio River, but also do transit in Mississippi. And the team has been working extremely hard over the last several months making sure the So, I can say there's been no impact, but it's been on the heels of our team working very diligently hard And positioning the right equipment in the Lower Mississippi River to make sure that we don't have disruption. So on that front, things have been going pretty well. As it relates to the ongoing dialogue with the administration, we have had frequent engagement and communication, which has been welcomed. I think it's good to share and understand each other's perspectives.

Speaker 8

And as it relates to the export ban, I think that through the dialogue, there's been general And understanding that that likely would be counterproductive to the goals and objectives of building inventory and reducing prices. I mean fundamentally, If you look at our 2,500,000 barrels of exports in the U. S, we just don't have enough demand to back it in. We've got great mixes. We've got logistics disconnect.

Speaker 8

So I think there's been broad understanding and engagement that that's not the best course of action. Now all that being said, I just can't speak on behalf of the administration. I think anything is on the table at any time.

Speaker 2

Hey, Roger, it's Mike. I'll just add to Brian. I'll give you my thoughts on it. Number 1 is, I do think the administration understands that a ban would not have the effect that they were originally looking for And instead would decrease inventory levels, reduce refining capacity and actually put upward pressure on consumer fuel prices, which is not what they were intending. So I think given these potential outcomes, it's my opinion that the administration would not pursue that path.

Speaker 2

But that's just that's my thought at this point.

Speaker 9

Yes, I follow that, but then see a wish for a windfall profits tax, which would be unlikely to lower prices either based on experience.

Speaker 4

So you

Speaker 6

just never

Speaker 4

know what they might

Speaker 9

decide they want to do or So you just never know what they might decide they want to do or feel forced to. I threw a lot into that. So I'll turn it over I'll turn it back over. Thanks.

Operator

Our next question comes from John Royall with JPMorgan. Go ahead please. Your line is open.

Speaker 10

Hey guys, good morning. Thanks for taking my question. So on the OpEx guidance for 4Q, I'm I'm surprised to see it down from 3Q levels given you have more churn relative to 3Q. So Anything to point to there, either something from 3Q that's non repeating or anything in 4Q in particular?

Speaker 3

Sure, John. It's Mary Anne. So in the Q3, we had really three things that were largely equally weighted that The actual results in the quarter. The first, as you mentioned, was I call it a one time. We had about a $0.13 impact from a 4 year adjustment on property tax cost.

Speaker 3

Unfortunately, the state has the ability to go back and do that. So that is non repeating. And as I mentioned in my remarks, We'll go after that and continue to pursue it, but unfortunately when it's levied, we need to record it. So that was in the quarter. Second, obviously higher energy Cost just in general quarter over quarter as I mentioned.

Speaker 3

And then the last piece to your point, in the Q3, given the level of Back half weighted turnaround expenses or other activities associated with that are higher. When we gave guidance for the Q4, We certainly see energy costs, somewhat natgas related declining Q3 to Q4, and obviously, the tax impact we do not expect to repeat. I hope that addresses the question.

Speaker 8

John, it's Mike.

Speaker 7

Let me

Speaker 2

just add to what Mary Anne just said. So we try our best to give you as good a guidance as we can With the one caveat being where's natural gas price going to be. So we look at the forward curve right before we give the guidance. And just reminding you, the sensitivity is $0.30 a barrel for every dollar per 1,000,000 BTUs. So Where that actually ends up in the quarter is hard to call, but we just take a look at the forward curve ahead of time and put our best number on it.

Speaker 2

So What I feel good about is the areas that we control on cost. I continue to say we have sustainable reductions that we've seen over the last couple of years, and that's good. As Meyer mentioned, we have a tax dispute that we'll follow-up on, and we have this unknown as to where natural gas will actually price Throughout the whole quarter. Hopefully that helps.

Speaker 10

It does. Thank you. And then Just a follow-up to Neil's question on capture rates. I think you went into some kind of the broader dynamics. But Just wanted to re queue relative to the commentary that it would be down.

Speaker 10

And I think you touched on it a little bit in the prepared remarks, but Just kind of some of the moving pieces there. And then in order to look at 4Q, it's looking to me like It's a heavy maintenance quarter relative to 3Q and then you have price moving up in October. So should we think be thinking about that number kind of Pointed down in 4Q.

Speaker 3

John, Mary Anne, I'll start and then I'll pass to Rick and Brian to give you any incremental color. But you're right. When I provided guidance on capture for the Q3, knowing that we had a fairly strong 3rd Q4, frankly, but Q3 compared to the Q2 turnaround activity, we expected that we would have seen some capture impact as a result. Having said that, there were certainly some offsetting elements in the quarter. 1st, as you know, we actually saw prices come down a bit And those lower prices actually improved our clean product margins.

Speaker 3

Pricing actually really did benefit as we looked at the volumetric gains And then while secondaries were still a headwind in the quarter, they were better than what we had initially projected. Your question was a little bit tough. You were cutting in and out. But as we talk about the Q4, I think is what you were asking As well, obviously, it will be, as you've seen from the guidance, our heaviest turnaround month Of all excuse me, quarter of all 4 quarters. So we would certainly anticipate that capture in the 4th quarter could be below what we saw in the 3rd quarter For some of those very reasons, but let me pass it to Rick and Brian and give you incremental color.

Speaker 3

I think Mike wants it too.

Speaker 2

Yes. Before we pass to the other guys, John, I just want to remind everybody that when Q2 margins were as high as they were, we made a conscious decision To delay some activity into the back half of the year, specifically into the Q4. At that time, we felt it was a good idea, Provided there was no safety issues or anything to make that adjustment. So some of what's happened here is we've traded some Q2 margin For Q4 margin and we still think that was a good call, but it has loaded up a little bit more activity in the Q4 as far as our turnaround

Speaker 7

John, this is Rick. I'll just add to Mary Anne's earlier comments and make a comment on secondary Product margin. So we're 1 month into the quarter. We'll see where the next 2 months go, but secondary product margins have been still volatile So, and trying to predict where WTI is going to go from here is anyone's guess. I would say that's one of the biggest wildcards on where our Capture will end up.

Speaker 7

So more to come there. We'll see how the rest of the quarter plays out. And with that, I'll see if Brian has any color to add.

Speaker 8

Yes. Thanks, Rich. John, just one quick summary wrap up comment. It's hard to call the ball 1 month into the quarter, but I will say that October From a clean products perspective, it started off strong. As Mike indicated in his opening commentary, we did not see the seasonal turndown in demand.

Speaker 8

We've had weather working largely in our favor. We haven't had a hurricane event and the country as a whole has been pretty moderate on the weather front. We did see we've seen strong demand throughout the month of October and correspondingly we've seen strong margins as well. So directionally I think favorable, but too early to call them all.

Speaker 10

Very helpful. Thank you.

Speaker 2

You're welcome.

Speaker 3

Our next

Operator

question comes from Sam Margolin with Wolfe Research. Go ahead please. Your line is open.

Speaker 11

Good morning everyone. Thanks for taking the question.

Speaker 2

Good morning, Sam.

Speaker 11

I wanted to ask on the renewable diesel business. You mentioned Neste brings some Benefit on the feedstock procurement side, you also have the JV with Archer Daniels. So you're covered across categories within the feedstock universe and there's a lot of disparity Between vegetable oils and waste oils right now. And so I'm just curious how you think about the feedstock picture overall, whether it's important to really Have security on both sides or if you might be leaning towards one specific category of feedstock over another?

Speaker 8

Yes. Sam, this is Brian. I'll take that question. It's a great question. So first, let me just back up and talk a little bit about what we have What's going on out west with Martinez?

Speaker 8

So we're well into our pre fill strategy. So we've been pre selling since middle of the summer. We're currently buying from over 50 different suppliers. So we forayed into this business 2 years ago with Dickinson and the team has come up very, very fast in developing those relationships. Beyond just the types of feedstocks, it's really a big part of our focus in most areas is around Logistics flexibility.

Speaker 8

So Martinez is greatly positioned on logistics flexibility with, we've got 3 facilities in the Bay Area that we're bringing feedstocks into, All of which have rail and access to the marine opportunities as well. So in addition, we've got our 2 pretreat in the central part of the U. S. And Cincinnati and Beatrice. So we've quickly gone from not being in the business to being holistically in the business with 2 different plants here shortly, Pre tree capacity and we're confident, very confident in our ability to source optimal feedstocks.

Speaker 8

But it's really And optimization much like we undertake on the crude side of our business. We run an LP model. We look at unit constraints at the refinery. We look at logistics. We look Pricing and of course, the eye value.

Speaker 8

So it's a broad optimization, very similar to what we do on the crude side of our business.

Speaker 11

Okay. Thanks. And then speaking of optimization on the refining side, maybe if we could go back in time to the Mark West Acquisition a number of years ago, a big part of that was NGL integration into the refineries or at least there was a contemplated synergy. And now we've got You know, a pretty noteworthy note where the NGL dislocation and specifically butane and I wonder if that Relationship is as you imagined it at that time or if in the process of your sort of commercial transformation, if you've pensed them off or organized them differently?

Speaker 7

Yes. Hi, Sam. It's Rick. So the call out is outstanding, especially in these low NGL Price environments we're in right now. So when you look at the logistics of combining MWE and MPC And our total footprint, it's incredible today, especially as we optimize our octane with NGLs And heading into the butane blending season.

Speaker 7

Really to answer your question, it's yes and yes. Yes, we saw this coming. To the extent it is here today, I would say it's certainly a nice shot in the arm for us as we optimize around our System both from specifically butane and all things NGLs Tied to our whole system, we're seeing specific benefits certainly on the Gulf Coast with Garyville, but it's throughout our entire system. So great call

Speaker 11

out. All right. Thanks so much. Have a great day.

Speaker 2

You're welcome.

Operator

Up next, we have Paul Cheng with Scotiabank. Go ahead, please. Your line is open.

Speaker 12

Thank you. Hey, guys. Good morning. Two questions. First one, I want to go back into the how do you fix that?

Speaker 12

Recently that we have seen the CI adjusted pretreated soybean oil price is nearly comparable to the UCO,

Speaker 5

To use the cooking

Speaker 12

oil, so I want to see that how you guys see that and why that you think that may That has happened. And do you think that this trend is going to sustain and Correspondingly, impact on your feedstock strategy. So that's the first question. It's related to maybe that how the IRA and also that the The timing LCFF prices that we have seen over the past 12 months impact your renewable longer term outlook and strategy? Thank you.

Speaker 8

Yes, Paul, thanks. This is Brian. Understand the question. So First on the CI as it relates to soybean oil, EUCO and actually even some of the other feedstocks that we look at, I would say that we're at a point or we've been at a point here in the last several months We like ourselves and others have been in startup mode. So there's been a bit of a surge in demand in acquiring feedstocks As it relates to startup, and the market broadly is not super efficient yet.

Speaker 8

So it's an emerging market. Relationships matter. A lot of the sellers in this So whether it's YUKO or rendered fat, it's a new business line for them. So there's a lot of exploration ongoing. So I don't think it's a structural change As we've seen here in the last couple of months, but I do think it's just the nature of the market evolving from a CI perspective.

Speaker 8

But as I said earlier to Sam's question, Logistics are going to be key. Those relationships are going to be key to make sure we get the right feedstocks, the most advantaged feedstocks into our facilities. Your second question related to LCFS. Certainly, we've seen the supply and demand of LCFS credits gap out here over the last year and a half or so. The one point I'd make here is we're seeing that in California, but there's other states, other areas, Canada, Oregon that have emerging programs.

Speaker 8

So That's a new variable that's entering into the equation and calculus for us and others in terms of where you actually place the product. So we reported CARB reported a pretty big build for the Q2. Credit's build a little over $1,300,000 credits in the Q2. So That surplus continues to grow. We do expect carb, they're going through a scoping assessment now on the LCFS program.

Speaker 8

We do expect them to make adjustments to the plan going forward to really support the investments needed on the low carbon side of things. I think That'll be an opportunity in 2023 to engage and discuss and probably something we see manifest in 2024. Ultimately, the economics as it relates to RD are really founded on several interrelated variables. We've had the positive side of that On the RIN and the blenders tax credit, certainly the product pricing in California has been supportive, so that's all been on the positive side. Feedstock pricing, although stable through the Q3, has been towards the higher side as we think about this year.

Speaker 8

And then as you mentioned, the LCF values have been the lower side. But all that Combined considered, we're seeing stable margin production out of our Dickinson facility and we'd expect the same out in Martinez Just through a variety of different variables.

Speaker 12

Hey, Paul,

Speaker 4

it's Mike.

Speaker 2

I just want to add a comment. We've We've been talking about Martinez for a while now. And early on, we said that in order to have a terrific facility, we wanted to have competitive CapEx. I think everybody has seen our numbers on that. We disclosed that.

Speaker 2

OpEx, we're in a really good position with a former refinery asset. Brian has talked about we're pretty bullish to the logistics assets that we have set up here. And the last piece of the puzzle was feedstock that What you're asking about and Brian just gave you some color on our side. Plus, I do want to reiterate, that was part of the driver for our partnership with Neste. We know their portfolio and see them as a global leader in this area.

Speaker 2

So it was one of the key factors That enabled us to say we wanted to JV with them. And as we said in our prepared remarks, we think there's more to come with the relationship with Neste. We're working on different things together as we feel that we've had a win win for both sides of this. But feedstock procurement is actually one of the most important parts This is kind of the last leg of the stool after we talked about CapEx, OpEx and Logistics. So hopefully that helps.

Speaker 12

Sure. And my just curious, do you guys have any plan to add additional Audi Development plan or novelty plan, say, over the next 1 or 2 years or that you just have the Matins Going to start up and you're going to wait until that fully ramp up in 1 year for a while. So what kind of strategy that you guys have in mind?

Speaker 2

Yes. So We're not sure what you said. Christina said she thought you heard you say, are we adding alky plants? Did you say alky or R and D?

Speaker 12

No. I'm saying that I hear what you say about the feedstock. Just curious that now you have the renewable Diesel plan and the teams are going to come up very soon. And so what is the next step in your strategy? Do you Plan to add additional new facility or new development in the area before you Will they start up on the Matinsa or that you say, okay, we just have some major investment on the space and that's Run it for a couple of years before we look for the next addition.

Speaker 2

Okay. Understood. It was RD. Yes. I think, Paul, it's more the latter.

Speaker 2

We have some things going on. I'll let Dave make a few comments on some of the areas that we're looking at. But we'll have Martinez started up here very shortly within a couple of months. We're going to mechanically complete at the end of the year. So it's probably a little more latter To the scenario that you played out, but the whole area continues to evolve.

Speaker 2

So Dave, why don't you give a little color on some of the things that we're looking at?

Speaker 8

Yes, Paul. This is Dave. So

Speaker 13

I think as Mike stated,

Speaker 2

while we have Dickinson

Speaker 13

Up and going and we're bringing Martinez online, both Phase 1 and Phase 3, even with the Neste JV. Part of our Strategy and Brian touched a lot of it from feedstock all the way to product placement is, I won't say replicating a higher carbon value chain, but Leveraging our core comps and our strengths that we've shown in the commercial value we can extract out of Participating up and down that value chain. Probably the little bit of the difference from the hydrocarbon to the renewable is We don't want to get over our skis and maybe outside of our core competencies, and we also want to have speed to market. Hence, the reason you're seeing our Relationships, our JVs, I'll use them, our partnerships with ADM and Neste, for example. So as Mike stated, we're going to continue Evaluate new opportunities, we look at a lot of stuff, but it needs to be capital efficient.

Speaker 13

The IRA is a Could be some tailwind as you look at this, but I still think it's a little early to see how some of those variables all play out in the actual Mechanics of the IRA before we can make long term investment strategies. Thank you.

Speaker 12

Thank you.

Speaker 2

You're welcome, Paul.

Operator

Our next question comes from Theresa Chastain with Barclays. Go ahead please. Your line is open.

Speaker 14

Hi, there. Thank you for taking my questions. First, I wanted to touch on your comments about demand across your system. Your earlier comments about being Down versus 2019, was that specific to your asset or were you talking about the DOE numbers in general and would love to get some color there? And also on the supply outlook, on the product side, just given the multiple variables at play, be it Russian products rerouting ahead of the February 5th new ban or incremental Asian exports, China and ex China potentially coming to water and hitting pass by, would love to hear your views on how all of that percolates.

Speaker 2

Theresa, I'll start off with my comments related to the DOE data, but I'll let Brian give a little color on our own specific But just in general, I think it's consistent that we still see a lot of demand recovery and that's why we're so bullish at this point. And then we'll take the second part of your question in

Speaker 8

Yes. Thanks. Thanks, Theresa for the question. So yes, just a bit of color maybe on the system. First, to address Mike's comments around our data.

Speaker 8

Yes. Mike did quote on the DOE data. Our comps back to 2019 aren't super relevant given that we've shut down A couple of different refineries we sold off for retail units, so we really look at the year to year. And I'll give you just a high level overview for Q3. So year on year, This one has been steady and strong, very stable across the platform and really flat year on year.

Speaker 8

Jet continues Perform well and we're seeing that recover year on year about 6%, but still below 2019 across the platform. And then gasoline is probably the most interesting. We did we were off Slightly from 2021, in Q3 about 2%, and it really correlates to retail prices. So we'll start in the West and about 4% below Q1 of 2021 out west, a 4% decline that we really correlate directly to the retail prices and the elasticity impact of higher retails. Midwest was about 3% and the Gulf Coast was 1%.

Speaker 8

So overall about 2%. But kind of going back to Mike's earlier comments, we do remain optimistic As we think about demand, I mentioned October, we came out of the chute really strong here for Q4. We're continuing to see COVID demand recovery. Jet travel more broadly, the halo around activity and vacations, not just jet, but marine fuel, Diesel, gasoline, etcetera. And we also have moderated retail prices coming off of the summer highs.

Speaker 8

We're currently around $3.75 a gallon, Well off of our highs in the summer and demand continues to also be robust, in South America and the Caribbean. The economies are geared a little bit differently. We've got strong agricultural demand globally as well as mining activity. There's been some price subsidization that's occurred in south of the border here. It's also helped to prop up demand.

Speaker 8

So, and then we're seeing pulls into Europe as well, for obvious reasons, primarily around energy security And just having access to fuel going forward as the winter ensues here. And the last thing I'd mention is on the supply constraint side, we've taken a lot of capacity offline globally And we do expect a degree of friction around the Russian exports of production. Hard to call the ball on how impactful that might be. Everybody is watching very closely, but we don't I expect it to be positive for incremental supply. We do expect it

Speaker 2

to drag just a bit.

Speaker 14

I'm sorry, the Asian exports or potential exports?

Speaker 8

Yes. As it relates to a lot of And you had a rumor coming out of Asia in terms of export quotas, COVID policies, really difficult for us to The one data point I can give you there, Teresa, empirically on that is we have not seen where we compete, we have not seen a step change In terms of competing with refineries coming out of Asia, specifically to China, it's been steady as she goes, status quo here for last several months.

Speaker 2

Teresa, it's Mike. I would just add that the inventories are obviously low. The market needs additional barrels. We're doing our best to put out as much product as we can. Brian mentioned the point about we see some price elasticity when prices get too high.

Speaker 2

So I think at the end of the day, we spend as much time on what we control, and that's to run as hard as we can, put as much product into the market as we can. And whether agent exports come or don't come, the market needs the supply. So I think that's why at the end of the day, We still see this to be a pretty bullish outlook. It's just it's evolved over a couple of years. We think demand is going to continue to come back.

Speaker 2

Brian just gave you some specifics on our areas. I had mentioned the DOE stuff. We believe that demand will continue to recover and then whether supply comes from China or from U. S. Market itself is The market just needs it.

Speaker 2

It's a supply constrained recovering demand outlook that makes us have this bullish look.

Operator

And our last question today will come from Matthew Blair with TPH. Go ahead please. Your line is open.

Speaker 4

Hey, good morning and Mike congrats on your good health news from last month. That was great to hear. I had a question on the Star project, which you mentioned will be complete in early 2023. I think at one point you were hoping for about 525 EBITDA from the project, has that number moved up with your expectations of a higher mid cycle environment? And if so, could you give us the range on What that might look like?

Speaker 4

And then in terms of just how it will flow through the financials, I believe it will add 40,000 barrels a day of new refining capacity, so we should expect A volume kick, but then also a margin improvement, right, from the ability to handle residuals better and I think there might be some octane benefits too. So If you could walk through that, that would be great.

Speaker 7

Hey, Matt, this is Tim. I'll take that first part of that question. So the remaining Hope that we have will indeed increase the heavy crude capacity by about 40,000 barrels a day. It will also improve the resid upgrading by about 17,000 We do still feel really good about the economic drivers of the project. Obviously, we've got the current Widening heavy crude differentials and you've got strong distillate cracks that have really kind of improved the project value over our original look.

Speaker 7

We also made some logistics investments that are being heavily utilized and those further improved product margins in some of these niche markets, Be it domestic or foreign. And then as I said in the prepared remarks, so the remaining work is going to be tied in during the turnaround in the Q1 of next

Speaker 8

So that's kind of where we're at on the Star project. So I'll

Speaker 2

turn it back over to Mike. Matt, you can just whatever numbers you want to put on, you had it right from the beginning. It's 40,000 barrels a day of additional crude Times, whatever number you want to put on that and 17,000 barrels a day of heavy upgrading. So, whatever your outlook is, that's the math that will give The additional EBITDA once we start this up.

Speaker 4

Good stuff. Thanks. I'll leave it there.

Speaker 2

You're welcome.

Speaker 1

Sounds great there. And then on that operator, I think we are done for today. So thank you everyone for your interest in Marathon Petroleum. Should you have any additional questions or would like clarification on topics discussed today, please reach out and our IR team will be available to help you with your questions. Thank you everyone.

Operator

Thank you so much. That will conclude today's conference, and we thank you for participating. You may disconnect at this time.

Powered by Quartr
Earnings Conference Call
Marathon Petroleum Q3 2022
00:00 / 00:00