Marathon Petroleum Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
August 1, 2023

There are 18 speakers on the call.

Operator

Welcome to the MPC Second Quarter 2023 Earnings Call. My name is Sheila, 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 Christina Kotharian. Christina, you may begin.

Speaker 1

Welcome to Marathon Petroleum Corporation's 2nd quarter 2023 earnings conference call. The slides that accompany this Call can be found on our website at marathonpetroleum.com under the Investors tab. Joining me on the call today are Mike Hennigan, CEO Maryann Mannan, CFO and other members of the We invite you to read the Safe Harbor statements on Slide 2. We will be making forward looking statements during the call today. Actual results may differ.

Speaker 1

Factors that could cause actual results to differ are included there as well as our filings with the SEC. And with that, I'll turn the call over to Mike.

Speaker 2

Thanks, Christina. Good morning, everyone. Beginning with our views on the macro environment, refining margins continued strong in the 2nd quarter. Despite crack spreads incentivizing high refining utilization, product inventory levels remain low. Global capacity additions continue to progress slower than anticipated and we believe that global demand growth will remain strong.

Speaker 2

In In the second half of the year, the refining outlook remains healthy. We expect year over year U. S. Late product demand to grow consistent With what we saw in the first half of the year, supported by lower energy prices and recovering air travel. This demand strength, Plus tight inventories and receding economic headwinds are expected to continue to support elevated margins.

Speaker 2

And as we completed nearly 4 quarters of elevated turnaround activity early in the second quarter, we're expecting an increase And industry planned maintenance work by our peers in almost every region in which we operate. Overall, We believe an enhanced mid cycle environment will continue in the U. S. Due to relative advantages of our international sources of supply, including energy costs, feedstock acquisition costs and refinery complexity. Now turning to our results.

Speaker 2

In the Q2, we delivered strong results across our business. In refining and marketing, strong margins, Cost discipline and sound commercial performance led the segment adjusted EBITDA of nearly $3,200,000,000 Our Midstream segment delivered durable and growing earnings. This quarter, it generated segment adjusted EBITDA of $1,500,000,000 which is up 5% year over year. MPLX remains a strategic part of MPC's portfolio MPC was $502,000,000 this quarter, an annualized rate of over $2,000,000,000 which fully covers MPC's current dividend and half of our planned 2023 capital program, not including MPLX. During the Q2, we progressed Key projects such as completing the STAR project at the Galveston Bay refinery.

Speaker 2

The competitive position of our Galveston Bay refinery is enhanced By the increased residual fuel and heavy crude processing as well as distillate recovery, we're well positioned with 2 premier 600,000 barrel per day refineries on the U. S. Gulf Coast with significant logistics and export capacity to support our global commercial At the Martinez Renewable Fuel Facility, construction activities are progressing. Pre treatment capabilities are starting to come online in the second half of twenty twenty three and the facility is expected to be capable of producing its Full capacity of 730,000,000 gallons per year by the end of 2023. At that point, Martinez will be among the largest, most competitive renewable diesel facilities with a competitive operating profile, Robust logistics flexibility and advantaged feedstock slate and a strategic relationship with Neste.

Speaker 2

On capital allocation, in the second quarter, we returned nearly $3,400,000,000 to MPC shareholders via dividends and share repurchases. And from May 2021 through the end of July, we have repurchased 264,000,000 shares We're approximately 40% of the shares outstanding. Moving to our sustainability efforts, in July, we published our 12th Annual Sustainability Report and our 7th Annual Perspectives on Climate Scenarios Report. Into how we see the energy landscape, our thoughts on climate related risks and opportunities, the resources we put towards addressing them and the results that we've achieved. Our sustainability report shows continued progress on goals that we have set for ourselves, Our efforts to strengthen the resiliency of our operations and to innovate for the future.

Speaker 2

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

Speaker 3

Thanks, Mike. Moving to Q2 highlights. Slide 5 provides a summary of our financial results. This morning, We reported earnings per share of $5.32 Adjusted EBITDA was $4,500,000,000 for the quarter And cash flow from operations, excluding favorable working capital changes, was over $3,100,000,000 During the quarter, we returned $316,000,000 to shareholders through dividend payments and repurchased $3,100,000,000 of our shares. Slide 6 shows the reconciliation between net income and adjusted EBITDA as well as the sequential change in adjusted EBITDA from the Q1 of 2023 to the Q2 of 2023.

Speaker 3

Adjusted EBITDA was lower sequentially by approximately $700,000,000 as higher refining throughput was more than offset By lower market crack spreads, corporate expenses were roughly in line with our guidance. And despite general inflationary pressures, We've maintained cost discipline since taking $100,000,000 out of our corporate costs since 2020. The tax rate for the 2nd quarter was 18 point 4%, resulting in a tax provision of approximately $583,000,000 Our tax Provision included a $53,000,000 discrete benefit related to prior years. Moving to our segment results, Slide 7 provides an overview of our Refining and Marketing segment. Refining utilization increased 4% to 93% despite significant turnaround activity As planned work had a lower impact on crude units in the Q2.

Speaker 3

During the quarter at Galveston Bay, an incident occurred at 1 of the refineries This unit has been out of service since May 15. This resulted in approximately 2 point 5,000,000 barrels of crude throughput reduction and an approximate 1% reduction to capture. Sequentially, per barrel margins were lower in the Gulf Coast and Mid Con regions, driven by lower crack spreads and our sour crude differentials. Capture was 97%, reflecting a strong result from our commercial team, particularly given the extensive turnaround early in the quarter. Refining operating costs were $5.15 per barrel in the 2nd quarter, Lower sequentially due to higher throughput and lower energy costs.

Speaker 3

Slide 8 provides an overview of our refining and marketing margin capture this quarter, which was 97%. Our commercial team executed effectively and achieved a strong capture result Considering a significant amount of planned and unplanned refinery downtime, gasoline and distillate margin tailwinds were balanced Capture results will fluctuate based on market dynamics. We believe that the capabilities we have built over the last few years We'll provide a sustainable advantage. This commitment to commercial performance has become foundational and we expect to see the results of this emphasis. Slide 9 shows the change in our Midstream segment adjusted EBITDA versus the Q1 of 2023.

Speaker 3

Our Midstream segment delivered strong 2nd quarter results. Segment adjusted EBITDA, while flat sequentially, was 5% higher year over year. Our midstream business continues to grow and generate strong cash flows. We are advancing high return growth projects Anchored in the Marcellus and Permian Basins, these disciplined capital investments, along with our focus on cost And portfolio optimization are expected to grow our cash flows. This will allow us to reinvest in the business and return capital to unitholders.

Speaker 3

Slide 10 presents the elements of change in our consolidated cash position for the 2nd quarter. Operating cash flow, Excluding changes in working capital was $3,100,000,000 in the quarter. Working capital was an $854,000,000 tailwind for the quarter, driven primarily by changes in crude oil and refined product inventories. Capital Expenditures and investments totaled $570,000,000 this quarter, consistent with our 2023 outlook. MPC returned nearly $3,400,000,000 via share repurchases and dividend during the quarter.

Speaker 3

This represents 108 percent payout of the $3,100,000,000 of operating cash flow, excluding changes in working capital, highlighting our commitment to superior shareholder returns. And as of today, we have approximately $6,300,000,000 remaining under our current share repurchase authorization. At the end of the second quarter, MPC had $11,500,000,000 in consolidated cash and short term investments. Turning to guidance, Slide 11. We provide our 3rd quarter outlook.

Speaker 3

We expect crude throughput volumes of roughly 2,700,000 barrels per day, representing utilization of 94%. Utilization is forecasted to be higher sequentially due to lower planned turnaround activity in the 3rd quarter And enhanced mid cycle margins continue to incentivize high refining utilization. While we have not confirmed a start up Our throughput guidance assumes the reformer at the Galveston Bay refinery will be down for the entire quarter. Plant turnaround expense is projected to be approximately $120,000,000 in the 3rd quarter. Operating costs per barrel in the 3rd quarter are as we expect to see benefits from higher throughput and lower costs, given we have completed The significant portion of our turnaround and project activity.

Speaker 3

Distribution costs are expected to be approximately $1,400,000,000 For the Q3, corporate costs are expected to be $175,000,000 representing the sustained reductions That we have made in this area. To recap, our 2nd quarter results reflect our team's execution against our strategic pillars across the company. Our capital allocation framework remains consistent. We will invest in sustaining our asset base, while paying a Your competitive dividend with the potential for growth. We want to grow the company's earnings and we will exercise strict capital discipline.

Speaker 3

Beyond these three priorities, We are committed to returning excess capital through share repurchases to meaningfully lower our share count. With that, let me pass it back to Mike.

Speaker 2

Thanks, Mary Anne. In summary, we will continue to invest capital to ensure the safe and reliable performance of our assets and where we believe there are attractive returns. Year to date, we've invested over $1,200,000,000 Our focus on operational excellence and sustained commercial improvement will position us to capture this enhanced mid cycle environment. MPLX remains a source of growth in our portfolio, distributing over $2,000,000,000 to MPC annually. And as MPLX continues to grow its free cash flow, we believe it will continue to have capacity to increase its cash contributions To MPC, we believe MPC is positioned as the refiner investment of choice with the strongest through cycle cash flow generation And the ability to deliver superior returns to our shareholders.

Speaker 2

With that, let me turn the call back over to Kristina.

Speaker 1

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

Operator

Thank you. We will now begin the question and answer Our first question will come from Doug Leggate with Bank of America. Your line is open.

Speaker 4

Thanks. Good morning, everyone. Thanks for having me on. Mike, I want to pick up On one of the headlines from your press release, which seems to be coming a bit of a recurring theme, sustained commercial improvements. And I guess it's a capture rate question, but can you just walk us through what's going on in your capture because it looks like we're as I look back Pre COVID, for example, leaving the distortions of COVID out of it for a minute.

Speaker 4

Your capture rate seems to have stepped up. Is that portfolio management? Is it something else? Is it trading? What's going on to have addressed that issue and capture rate?

Speaker 2

Yes. Good morning, Doug. Thanks for the question. I'm going to let Rick give a little more detail, but I'll start off with a couple of comments. 1, We have made structural changes and have changed our commercial process quite a bit.

Speaker 2

With that said, I know yourself and a lot of the analysts Like to look at that capture metric. I just want to always caution people that the metric that I care more about It's cash flow generation and earnings profitability. So I look at that much more than that capture metric because I think there's pros and cons to it. But to your point, obviously, it has trended up and driven by a lot of the things that we've changed over the last couple of years. So I'll let Rick Give a little more detail.

Speaker 5

Yes, Doug, first off, very perceptive question. I think it's a good call out and warranted. We do believe this structural change is something that's going to stick. In fact, we continue to improve and we're never going to be done improving in this So it's something that we focus on daily. So in giving you an answer, I think you'll respect that I We'll have to be broad as to not give away what I would call true competitive advantages, but it's All the buckets you've touched on, it's optimization, it's trading, it's all of the above.

Speaker 5

And the best way I can say it, Doug, it's a holistic change in our mindset on everything we do to optimize our assets around our size, our logistics system, our knowledge, our expertise And it's driving incremental value throughout our entire system from feedstocks to products. And there isn't anyone in the company that's not engaged. I mean, I can't say enough, our goal is

Speaker 6

to be the

Speaker 5

best cash flow generator through cycle and this just isn't a one and done exercise. This is the mindset That not only our commercial team, but our entire company is attacking every day with.

Speaker 4

We'll continue to watch it, Rick. Thanks for the color. I guess my follow-up is also a question that It's hard not to bring this up every other quarter, but Marianne, the buyback case in July is $800,000,000 Your dividend at the MPC level is about 150% covered by your distributions from MPLX. Why should we not assume that buybacks should be ratable at mid cycle at that kind

Speaker 7

of level going forward?

Speaker 3

Hey, Deb. Good morning, Mary Anne. Thanks for the question. From a capital allocation framework perspective and hopefully even from the Comments that Mike and I have both made here this morning, we remain committed to superior returns and remain committed to our capital allocation as we have defined it. As it relates to the buyback, as you know, Each quarter now we are trying to look as best as we can.

Speaker 3

We take a series of things into consideration. We look at market, we look at our cash flows And we try to do the best job we possibly can to maximize our ability to perform in a given quarter. As you've seen, dollars 3,100,000,000 in the quarter. When you look from month to month, you see that visibility as you get our quarterly documents, you see a bit of variability there. But again, we remain committed.

Speaker 3

We think share repurchase is a very efficient return of capital. As it relates to the dividend, again, an important part of our capital allocation framework as we've shared in the past, We remain committed to that. We want it to be sustainable. We certainly want to be competitive and the opportunity to grow that as well. Hope that answers your question.

Speaker 4

Marianne, forgive me the clarification question. Are you price agnostic? Because your shares are Pretty much at new high the all time highs you were out there this year.

Speaker 3

Again, Doug, we try to be as opportunistic As possible as we can in the quarter. So we hope that that's the what you are seeing from our approach to that. So yes, we continue to buy back stock as you have seen.

Speaker 4

Opportunistically. Okay. Thanks so much. Go ahead, Mike.

Speaker 2

Let me just add a couple of comments to it. As I just said to your first question, the number one concentration is to generate cash. And then I'm a believer that this business has both return on and return of capital as its requirements. So on the return on, we are investing capital to improve our earnings and grow our cash flows over time, but we're also committed to return of. So We use the word strict capital discipline.

Speaker 2

We set our programs such that we're going to be able to participate in both sides of that because I'm a big believer in both. We got to show the market that we can invest capital wisely to grow our earnings and we also want to show the market that we're returning capital to the owners. So that's That's a program that we've been on for a while here, a couple of years. We're going to continue in that mode. And I just want to give you a little bit more flavor as to how we look at it, but it all starts with

Operator

Next, we will hear from Neil Mehta with Goldman Sachs. You may proceed.

Speaker 8

Yes. Good morning, team. I want To get your perspective on the product markets, we've really seen it firm up here across the crack. And so any perspective you have on the strengthening recent Strengthening in margins and then what are you seeing from a demand perspective in your own system for diesel, jet and gasoline?

Speaker 9

Neil, good morning. This is Brian. Yes, let me first comment on the demand side of the equation because we are seeing the demand side of the So on gasoline in the quarter, our system was up. And when I say our system, it's really our entire It was up 4% year on year versus an EIA call of about 2%. This most recent week, we see continued We were up 7% last week on the gasoline pool.

Speaker 9

So we continue to see the strength, which is very encouraging as we enter the back half of the Driving season here. And the West Coast has been an outsized performer, 5% on the quarter, 8% last week. And then looking at diesel, it's been largely flat. EIA has got a call for the quarter of up about 1%. And of course, I think everybody's pretty dialed into jet.

Speaker 9

We had a 9% increase on a quarter For jet fuel demand year on year versus EAA of about 3%. And just real quick on the crack, I would say that the big story here over the last 30 to Today's has been a distillate. So I mean, our view is distillate really ran up late last year, obviously, with the situation in Ukraine, Uncertainty around sanctions in the 1st part of this year over in the EU and now we have a lot more certainty. So the market came off pretty Precipitously since the beginning of the year and now we're seeing it recover to a more fundamental level.

Speaker 8

Thanks team. It's been notable. The follow-up is just around the dividend. It's Down to about 2%, given how strong the stock has been. Is there a little perspective and just your perspective on Is there headroom to raise the fixed dividend?

Speaker 8

Remind us again when you typically would do that.

Speaker 3

Neil, thanks for the question. It's Mary Anne. So, as I mentioned, hopefully you see that we've got a couple of criteria for the dividend. Obviously yield only being one of them, sustainability of that and obviously the potential to grow. So as we've committed, we'll be back next quarter with our intentions to share with you our plans for the dividend.

Speaker 3

So next quarter consistent with our approach from last year as well. I hope that answers your questions.

Speaker 8

Thanks, Peri.

Operator

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

Speaker 10

Good morning guys. My question is like this year you are bringing to conclusion 2 of your big mega projects, the Galveston as well as the Martinus RD, at this point you haven't indicated another mega project. So should we assume in the year 2024, more of your CapEx would be dedicated to quick hit projects, which generally are not that expensive And that can mean that year over year, 2024 CapEx could be down versus 2023 unless you pick up a mega project at this stage.

Speaker 3

It's Mary Anne and thanks for the question. I think you characterized it well. As we shared with you, Starry is largely behind us. And as you heard from our comments as well, Martinez on its way to be with this next phase up and running by the end of the quarter. As you know, we're a bit early to give 2024 guidance.

Speaker 3

We'll get a little bit closer to that and give you some more color. We intend to give U. S. As we have in prior quarters, a look at what we would be contemplating spending in refining as well as Our low carbon initiatives as well, but I think you stated it well. We haven't talked about any significant major projects heretofore.

Speaker 3

Hope that helps.

Speaker 2

Manav, it's Mike. I just want to add, it's just a little early in the year. We obviously have some insight as to what we're planning to do in 'twenty four, But we'll talk about that in subsequent quarters as opposed to now.

Speaker 10

I completely understand. My quick follow-up here is, As I understand when you first envisioned the Martinus project, it was more of soybean refined, unrefined. As you brought in the somewhere your own thought process or what you want to run changed and at this stage you are looking at a higher percentage of lower CI feedstocks versus soybean, can you comment a little bit on that?

Speaker 9

Yes, Manav, this is Brian. Certainly, yes, you've got it pretty dead on there in terms of The strategy and the strategic relationship we have with Neste. Just a couple of things to mention around your question though that we are on startup So, as mentioned, we've got our pretreatment facility coming online and really the full horsepower of this facility really Enters in the back half of this year, but we're quite confident in our ability with our relationship with Neste that really is looking beyond just This is just the beginning of our relationship. But one point of view that I will share with you, not Martina specific, but to give just a A little bit of perspective, we just exited July with our operation up in Dickinson and we ran a 74% Advantage Feed Slate out of our facility up in Dickinson and its startup design was very similar to Martinez. So hopefully that frames things up for you A little bit better of what to expect when we get Martinez up to full rate later this year.

Speaker 2

Manav, it's Mike. I just want to add that when we look at We try and challenge ourselves, as Brian said, without the advantaged feedstock to make sure we're comfortable that we have a good project Even in that conservative nature and then obviously the commercial teams are going to work very hard to optimize the feedstocks Whether it's to our other refineries or to the RD facilities, but we try and start out before we deploy that capital In such a way that we feel comfortable that we will have upside as we do better commercially on the feedstock side. Thank you so much. You're welcome.

Operator

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

Speaker 11

Hi, thank you. Hey guys, good morning. Good morning, Paul. Mahe, I think in the past you said Yes, by looking at your refining portfolio, cars and they see the biggest potential upside. So is there any kind of investment initiative that you're currently thinking on that To capture that upside, that's the first question.

Speaker 11

2nd question that Maybe this is for Rick. When I'm looking at the Q3, your full year guidance, Which is actually coming in that should be about exactly the same as the Q2, but the turnaround activity is significantly lower. So are we missing something or that number is just being very conservative that when we had thought with the turnaround You will have a much higher throughput than the second quarter. Thank you.

Speaker 2

It's Mike. I'll start on the first one and I'll let Rick take the second one. Similar to Manav's question is, We'll give a little more color on 2024 Capital in the next couple quarters. We do have some projects that we think will continue to Optimize our portfolio and improve upon it. But like I said a few minutes ago, it's a little early to talk about that capital at this point.

Speaker 2

So if you can just hold your thought, we'll give a little bit more on the next quarter and start to give you a little bit more insight as to what we're thinking

Speaker 5

Yes. Hi, Paul. It's Rick. So on our throughput guidance for 3Q, you're correct. It is lighter than 2Q and we see that as an advantage, especially as a lot of our competitors Have heavier turnaround work in 3Q.

Speaker 5

But with that being said, Paul, I think the one difference maybe that you're not accounting 4 is the reformer outage. So when you factor that in, that's really takes you to where we landed in our guidance, Paul, that's really the only difference.

Speaker 11

Hey, Rick, can I clarify on that because the reformer was done since mid May And so this is only going to be adding maybe half of our quarter of the downtime and so that may what Drop you 30,000, 40,000 barrels per day in total throughput? So I'm still a little bit surprised that the Corporate level is not high yet on the guidance for Q3.

Speaker 3

Hey, Paul, it's Mary Anne. Let me try to provide an incremental Color into all the commentary that Rick has given you. So you're right. In the Q2, the reformer was down from May 15 to the end of the quarter. For purposes of guidance this quarter, what we have assumed is we would not be operational at all.

Speaker 3

So it's about 75,000 a day. When we talk about the impact last quarter, it was about 1%. If you look at the impact Just strictly in the U. S. Gulf Coast from the absence of that particular unit not operating, it's about a 7% reduction quarter over quarter in U.

Speaker 3

S. Gulf Coast And that's about a 3% overall to the whole system. So hopefully that's helpful to you.

Speaker 11

Okay. Thank you.

Operator

Our next question will come from Sam Margolin with Wolfe Research. Your line is open.

Speaker 12

Hi, everyone. Thanks for calling on me. This is a macro question and I want to hearken back to a call, a marathon call from earlier this year. I think it was Brian made the prediction that the Russian sanctions, the first diesel cracks would go down and then they would go up again. And that's sort of exactly what happened and it has to do with the destock pattern and then later on specification issues.

Speaker 12

And so I just want to bring that comment back to the service here and see if it is part of the reason for the strength we're In diesel cracks now and if you see in your export markets, for example, if you see a shortage of on spec products That's driving some of the strength here.

Speaker 9

Hey, Sam. Good to hear from you. Yes, absolutely. We are seeing things played Now as we expected, I mentioned it earlier, I think the big thing with the Russian situation was the uncertainty and I think the market Become much more certain today for all of us in terms of really limited friction on Russian distillate barrels hitting the world market. We have seen a little bit of market share exchange, deeper penetration of Russian barrels into Latin America, notably Brazil, In exchange share for the U.

Speaker 9

S. System into Europe. So we're seeing here over the last couple of months almost 300,000 barrels a day of distillate exports to backfill the European market. And what we're hearing from customers over in Europe is really energy security, no surprise, A big driving factor for them. So with our team over in London right now operating really, really strong, we are finding really good traction for our book over into Europe.

Speaker 9

But To your broader question on demand, the export market has been very stable and strong for many cycles Now and continues to be our outlook going forward, the case on both gasoline and distillate.

Speaker 12

Okay, thanks. And then this is an operational follow-up, but we've seen Heavy intermediate differentials compress and it seems to correspond to a bunch of different Factors, maybe STAAR starting up is one of them, but there's a couple other similar new conversion units and new refining capacity starting up concurrently. And then you have the OPEC cuts. And so just on this heavy light setup and specifically on high For fuel oil, is this is the tightness here just a function of all of these things happening at once and then over time the market will adjust and we might see It's just a Fogo back towards where it was or is this kind of the normalization with all the new capacity? Thanks.

Speaker 9

Yes, Sam, this is Brian. A couple of data points on that. So if you look at the heavy sulfur distillate spread, of course, we swung real, real low last year. And Of course, the system is in max distillate mode. So we were producing we, the whole entire refining complex was producing as much diesel Possible, which generated more high sulfur distillate, which outran hydrotreating capacity by and large as we've come off of max diesel mode and we've been in here as a system this summer, we've seen that retrench, so more of a traditional relationship.

Speaker 9

So I think the factor to look at is really Are we in max gas or max diesel mode? Some of the things you mentioned are nominally impactful. But if you're looking specifically at the Gulf Coast, The one kind of watch out is it's a very thinly traded market, so it can move quite dramatically up or down depending on what's occurring in the system.

Speaker 5

Hey, Sam, this is Rick. Just to tag on to what Brian was saying as part of your question, the heavy light crude differentials. So We do believe the bottom is in. We're actually quite optimistic. We believe that spread will get wider point forward through the end of this year and It's really for a variety of reasons.

Speaker 5

You've got increased planned turnaround work, specifically in PADD 2 and 3 that's going to take some crude demand needs off the table, so that will cause some length. You've got the Canadian Producers that have come out of their maintenance season and they are running well and then you've got incremental Gulf of Mexico and Venezuela in production from Chevron Clearing The U. S. Gulf Coast. So when we look at the markers and specifically Sam on heavy Canadian, it hit its low in around June at about $10 discount.

Speaker 5

The current trade cycles got it at about a $14 discount. So it's widened out even significantly here over the last 30 days. And we continue to see it widening out further when you look at the forward curve between now and the end of the year.

Speaker 12

Got it. Thank you so much.

Speaker 2

You're welcome, Sam.

Operator

Next, we will hear from Jason Gabelman with TD Cohen. You may proceed.

Speaker 7

Yes. Hey, thanks for taking my questions. I wanted to key in on a couple of macro comments, Mike and Nate on the top of the call. I was hoping you could elaborate. First, you mentioned higher maintenance moving forward in almost every region that you operate in.

Speaker 7

It sounded like from Rick's answer just now that was going to be in PAD II and PAD III. So one, can you confirm that and is that Higher maintenance sequentially or is it higher than what you would typically expect in the fall? And then secondly on the macro, you mentioned some refinery startups Globally, are a bit delayed. I was wondering if there are any sites in particular that you had in mind? And I have a follow-up.

Speaker 7

Thanks.

Speaker 2

Yes, Jason, it's Mike. I'll start and then I'll let Rick jump in. What I was saying in the prepared remarks is, we as a company have gone through 4 Quarter is a pretty heavy turnaround, and so we're lighter into the rest of the year compared to what we see as the industry, and we'll have to How it plays out, but it looks like the industry has a lot more activity into the rest of the year. So that's what I was trying to say As far as the difference between where we are and where we think the rest of the industry is.

Speaker 5

Yes. And then I'll just tag on. In terms of global refining capacity, what we found and it appears to continue to be true is Over promise and under deliver. So generally speaking, I really don't think it's appropriate to give you specifics, but generally speaking, We're seeing delays versus others throughout the world meeting their projections of when that when their utilization

Speaker 7

And my follow-up is on the Martinez biofuels project. I just wanted to confirm because It's tough to tell. It sounds like everything is going according to plan, but we've heard from industry sources that there are some court challenges that you're having to address. Is that fair in terms of what's going on? And is there any risk that any of these core challenges could impact The ramp up of the project to the full 730,000,000 gallons?

Speaker 7

Thanks.

Speaker 13

So there were 6 Challenges to our land use permit, we prevailed on 5 of them and the one is currently still Being briefed with the court, we anticipate a favorable outcome here in the upcoming months. So nothing projected to impact construction and or operation.

Speaker 7

Okay. And just to clarify, you need do can you Ramp up while that court is ongoing while that case is ongoing or would you need that to be resolved before you ramp up capacity?

Speaker 13

No, we can continue both on construction and with the operation.

Speaker 7

Great. Thanks a lot.

Operator

Our next question will come from Roger Read with Wells Fargo. Your line is open.

Speaker 6

Hey, thank you and good morning. I'd like to follow-up as well on Martinez, maybe just if you can help us out with understanding Some of the milestones we should watch. We know that the industry has been challenged at times to get these facilities to start up You've obviously put out a goal of full run rate by the end of the year. So as we think about this point in late October looking back at the Q3, where would you expect to see that unit and when would you anticipate that it That it becomes a positive contributor in terms of EBITDA, cash flow, earnings.

Speaker 14

Hello, Roger. This is Tim. I'll take that question. So first off, the remaining construction activities at Martinez, they are on schedule And things are going very well. As both Brian and Mike indicated early on in the prepared remarks in the Q and A, we recently started up A portion of the Martinez pretreatment unit and we're now pretreating on-site with one train That will really just support the Phase 1 volumes.

Speaker 14

The big ticket item though is when we ramp up With the 2nd train at the end of the year when we bring alongside the RD capacity, when the facility conversion is complete. So I would give it positive remarks. Team is doing a great job and we look forward to the end of the year.

Speaker 2

Hey, Roger, it's Mike. To your question financially, you're going to be thinking into 'twenty four. As Tim said, we're ramping, we're starting up, we're going to bring on the additional units And if all goes well, we'll be on by the end of the year. So you'll start to see the financial performance more in 'twenty four On a go forward basis.

Speaker 6

That makes sense. And then maybe this question is for Mary Anne. Dickinson is a very small operation, so I understand as part of refining, but now that it's going to be a much bigger overall Operation, granted you own half of it via the Neste joint venture, but how should we think about from a reporting accounting standpoint, when or will we see a breakout of renewable diesel operations from the rest of the business?

Speaker 3

Thanks for the question, Roger. As you said, as it relates to Dickinson First, we've been operating for about 2 years And consistent with the way we have expected profitability there, although some of the moving parts are different, we continue to see the performance Of that, consistent with what we thought, Mike just shared with you when we should expect to see real contribution from Martinez. So We will evaluate both Dickinson and Martinez in terms of their total contribution. As you know, we've said for 2023, we are not planning to break that out, but we'll come back to you as we continue to move along our path of profitability for both Dickinson and Martinez.

Speaker 2

Hey, Roger, it's Mike. The other thing and I know you know this already, but obviously the refining assets Cash flows are significantly higher than what's happening in renewable diesel. I think the way you should think about that is Us looking at all our assets and we talk about portfolio optimization to take 2 assets that we did not think would be competitive long term And deserving of investing capital and it put them in a positive cash flow mode going forward, obviously in a diesel mode as opposed So I think it's more of a portfolio optimization, realization, compared to where we are on refining cash flows.

Speaker 6

All right. Well, I'll just leave you with my final thoughts on it, which is we haven't really put a lot in valuation uplift because it's difficult to know exactly What some of the contributions will be and where. So I think more disclosure will be a positive for you.

Speaker 2

Okay. Appreciate that feedback. Thank you.

Speaker 3

Thank you.

Operator

Thank you. Our next question comes from John Royall with JPMorgan. Your line is open.

Speaker 15

Hi, good morning. Thanks for taking my question. So my first question is just coming back to the Galveston Day reformer. Is there an update on when we could see that coming back? I know you're assuming out for the full quarter with 3Q guidance, but Maybe just a little bit of color on where you are in that restart process beyond just that assumption in your guidance.

Speaker 14

So John, this is Tim. I'll take part of that. And all I can really share is We are expeditiously and prudently completing the repairs on that unit and we don't have any further guidance beyond what Mary Anne has already provided relative to schedule.

Speaker 15

Okay, fair enough. And my next question is on tax. You had a very low rate in 2Q. You called out $50,000,000 ish of that looks non recurring. But even when I adjust for that, it's still trending down the past couple of quarters.

Speaker 15

Is that just on the mix of non taxable MPLX versus refining with refining coming down past couple of quarters? Are there any other moving pieces to think about in the tax rate?

Speaker 3

Hey, John, it's Mary Anne. Yes, thanks for that. So as we stated, the $53,000,000 that I called out for you is related to prior periods. It's a good news story. We were successful on a resolution of an item that has prior period benefit and it will have some, but I'll bet smaller Benefit going forward and that's about $0.13 in the quarter.

Speaker 3

As you stated, typically the biggest mover on our rate is the relationship between our midstream business They are positive. But as you stated, the typical driver there when you look at our federal rate and the state tax rate would be that relationship.

Speaker 15

So if I adjusted out the $53,000,000 in this quarter, that's a decent run rate to think about going forward?

Speaker 3

One of the things that you've said, when you look at that rate, it's a little bit lower than average. I think you're probably coming to around a 20% zip code in the quarter. As you've seen from last year, we've run about 22%. So there is a range there, but Certainly, 20 is at the lower end of that when you look at the relationship between refining and midstream today.

Speaker 11

Thank you.

Operator

Thank you. Our next question comes from Therese Chien with Barclays. Your line is open.

Speaker 16

Hi, thank you for taking my question. I just had a quick follow-up related to the discussion of the Martinez ramp up and your Renewable diesel outlook in general, related to the economics of LCFS, it seems that the final draft of the proposed changes will be submitted to to carve over the next couple of months and I'd love to hear your thoughts and expectations on where you see that landing and your general outlook for pricing from here?

Speaker 9

Theresa, good morning. This is Brian. Yes, so we've been very actively involved with CARB on the evaluation of the reset. We believe carb foundationally wants to find a way to support the program. Obviously, LCFS prices have come off Fairly precipitously over the last couple of years as RD has penetrated, so we are expecting support for the market.

Speaker 9

But note LCFS This is the smallest variable in our overall value equation. So it's not been a big needle mover, but we do think it's important going forward To underpin the profitability on the RD space, in addition, obviously, we're looking at markets beyond California. So as LCFS prices come down in California, There's other state level programs on the West Coast and beyond that we're finding opportunities to penetrate with our R and D market position.

Speaker 3

Thank

Operator

you. Thank you. Our next question will come from Matthew Blair with TPH. You may proceed.

Speaker 17

Hey, good morning. Thanks for taking my questions here. Chicago diesel cracks were We're quite weak earlier in July even related to other PADD II markets like Group III. Do you have any color On what was going on here, it looks like they recovered so far, but any color as to why Chicago diesel at one point was negative on an RVO adjusted basis?

Speaker 9

Yes, Matthew, this is Brian. Yes, it's a great question. Clearly, overdone. It's recovered fully. The unique nature of the Chicago Complex is the marker is in the far west side of Chicago, which from time to Time can get pretty volatile.

Speaker 9

I think really that's what we saw from a trade basis over on the West Side of Chicago, but it's recovered Quite nicely here as we've trended out of that period of time and we remain optimistic that we're in a good position as we head into the harvest season here in the Midwest, where we expect to see distillate strength.

Speaker 17

Sounds good. And then The CARB data posted last night showed that in the Q1 of this year, California diesel consumption was 49% RD and up to 8% BD. For your Los Angeles refinery, are you having any problems Placing your petroleum diesel volumes in that California market and are you having to export any volumes to Singapore For Mexico, do you consider that a risk down the road?

Speaker 9

Yes, Matthew, this is Brian. In the prop basis, no problems Clearing the barrels, but yes, you're on point there. As RD penetrates the California market, it's a one for one relationship. It's fairly balanced. I'll say the West Coast system as a whole that our expectation planning horizon does include the ability to make sure that we can export barrels Beyond the U.

Speaker 9

S, in addition, obviously, Jet is very, very strong right now. So if you look at the yield Structure in terms of how we're running the refineries. We're working really, really hard to make sure that we're maximizing jet fuel And the cost of the distillate side of the boat.

Speaker 17

Great. Thank you.

Speaker 2

You're welcome.

Operator

Thank you. We do have time for just one more question. Our last question comes from Ryan Todd with Piper Sandler. Your line is open.

Speaker 13

Okay. Thanks. Maybe a question on the refining side. On the Gulf Coast, you had very strong performance despite the downtime at the reformer at Galveston Bay. Can you I'm curious as to how much contribution you saw from the Star expansion in the quarter?

Speaker 13

And maybe Just an update on how the expansion of that project is going forward and contribution in the future?

Speaker 3

Yes. Thanks for the question, Ryan. It's Mary Anne. Let me try to give you a little bit of color. When we look at Q1 to Q2 performance, keep in mind in the U.

Speaker 3

S. Gulf Coast, As you stated, we were under turnaround in the Q1 and obviously ramping up. So you saw the benefits of that obviously in the second quarter Despite the fact that we did have the reformer down for just a portion of the month, as I was commenting on it, it's only about a 1% impact For the Q2, that will get a little bit larger, as I shared, given the fact that we're assuming it to be down. I think the other thing to keep in mind is typically when we look at cost in the quarter, when we're doing heavy turnarounds, as we did in the Q1, we're typically doing Maintenance work, and that was much later in the Q2 as well. As it relates to STAAR, As you know, we were ramping up our comments as we've been sharing.

Speaker 3

STAAR was ramping up through the Q2, so minimal impact with respect to Star, but you'll begin to see that now as we've reached the completion of that project.

Speaker 13

Great. Thank you. And maybe just kind of a high level question. You've obviously been active to date in various low carbon transportation fuels, Meaningful investment in renewable diesel, even a recent investment in an RNG producer. As you look at the long term outlook for transportation fuels in your markets over the next 10 years, how are you thinking about your overall strategy For the transition and in particular maybe a sense of your role and a broader definition of transportation fuels And where do you go from here in terms of potential future investments?

Speaker 2

Yes, Ryan, it's Mike. I like the word energy evolution more than energy transition. I know a lot of people use energy transition, but I think it's going to evolve Over a longer period of time than most have written about. So we're trying to be very thoughtful. We will, using The word evolve, we will evolve the company over time.

Speaker 2

As you pointed out, 2 of our facilities now are renewable diesel. We made Small investment in an RNG facility. So Dave and his team are looking at all those opportunities. We talked on a call earlier today about we're active in some of the Some of the DOE hydrogen hubs and we'll see how that plays out over time. So think of us as going to be very thoughtful.

Speaker 2

We try to use the word Capital discipline, we do want to invest as opportunities present themselves, but we are committed to getting solid returns. So Overall, I'd say you're just going to see us chip away at little activities over time and constantly evolve it to your point about what are we going to look In 10 years, 20 years or whatever Marathon has been around for 130 years. We plan to be around for 130 more. We'll evolve the company as the market dictates. And obviously, consumer preferences, regulatory impacts, all those things are going Drive what happens and we'll be very attentive to it and we'll look to deploy capital as we see the opportunities.

Speaker 1

All right. Well, thank you for your interest in Marathon Petroleum Corporation. Should you have additional questions or would you like clarification on topics discussed this morning, Please reach out. A member of our Investor Relations team will be here to help today. Thank you so much everyone.

Operator

Thank you. That does conclude today's conference. Thank you once again

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Earnings Conference Call
Marathon Petroleum Q2 2023
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