Church & Dwight Q1 2022 Earnings Call Transcript

Quartr
Provided by Quartr
May 3, 2022

There are 17 speakers on the call.

Operator

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

Operator

And I would now like to turn the call over to Kristina Kazarian. Christina, you may begin.

Speaker 1

Welcome to Marathon Petroleum Corporation's Q1 2022 earnings conference call. The slides that accompany this call can be found on our website at marathonpetroleum.com under the Investor tab. Joining me on the call today are Mike Hennigan, CEO Mary Anne Mannen, CFO and other members of the executive team. We invite you to read the Safe Harbor statements on Slide 2. We will be making forward looking statements today.

Speaker 1

Actual results may differ, and factors that could cause actual results to differ are included there as well as in our SEC filings. With that, I'll turn the call over to Mike.

Speaker 2

Thanks, Christina. Before we get into our results for the quarter, We wanted to provide a brief update on the macro environment. Year over year demand trends have been for the most part positive And the market seems to have reached a post COVID point of stability. Distillate remains stable, jet continues to recover And gasoline has been more resilient than we would have expected given normal seasonality and recent geopolitical events. The biggest factor outside of our control is changes in global supply and demand.

Speaker 2

At the end of 2021, Global light product inventories were already tight. Sanctions and boycotts following the Russian invasion of Ukraine have increased supply uncertainties. Product margins have risen to cover the higher cost structure of marginal supply, particularly in European regions Where there's a high reliance on Russian natural gas. We expect continued volatility in 2022 with an advantage for safe, reliable and low cost operators. We are focused on optimizing our maintenance schedules To maximize uptime and allow us to do what we can to produce volumes to meet the market demand.

Speaker 2

As we do this, 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.

Speaker 1

With this

Speaker 2

in mind, we anticipate the U. S. Refining system running at higher utilization rates in the coming quarters to meet rising demand. MPC's Q1 results reflect the continued recovery for our products and services, which supported higher margins and higher throughput across all regions. We delivered adjusted EBITDA of $2,600,000,000 We repurchased $2,800,000,000 in shares in the quarter and since our last earnings call, we have repurchased $2,500,000,000 of shares.

Speaker 2

Through today, we've completed 80% of our initial $10,000,000,000 capital return commitment. I would also like to highlight the strength of MPLX in our portfolio. Last year, MPC received $2,200,000,000 of distributions from MPLX. As MPLX continues to generate free cash flow, we believe it will have the capacity to return significant cash to MPC and its public unitholders. Another milestone in our sustainability objectives was the joint venture agreement with Neste for the Martinez Renewable Fuels Project.

Speaker 2

This strategic partnership with Neste enhances our Martinez project by leveraging our complementary strength and expertise. The project will utilize existing process infrastructure, diverse inbound and outbound logistics and is optimally located to California's LCFS goals while strengthening MPC's footprint in renewable fuels. Our intended partnership with Neste also creates a platform For additional collaboration within renewables, we believe there will be opportunities to leverage this partnership between 2 industry leaders as we pursue our shared commitment and operate the facility once construction is complete. Additionally, MPLX Logistics assets support Martinez will remain owned and operated by MPLX. We are progressing through the permit process.

Speaker 2

Contra Costa County certified the environmental impact report for the Martinez project, We're hopeful that the county will shortly provide final approval. We remain excited about the prospects of the project and its ability to deliver low carbon intensity fuels to support California's climate goals. Shifting to Slide 5, we focus on challenging ourselves to lead in sustainable energy. In February, we became the first among our peers to establish a 2,030 target to reduce absolute scope 3 greenhouse gas by 15% below 2019 levels. The new scope 3 target further enhances MPC's disclosures In addition to our existing scope 1 and 2 reduction targets, MPLX also established a new 2,030 target To reduce methane emissions intensity, both natural gas gathering and processing operations by 75% below 2016 levels.

Speaker 2

In the Q2, we will publish our annual Sustainability and Perspectives on Climate related Scenarios reports And provide updates on the progress on the goals we have previously set. At this point, I'd like to turn the call over to Mary Anne to review the Q1 results.

Speaker 3

Thanks, Mike. Slide 6 provides a summary of our Q1 financial results. This morning, We reported earnings per share of $1.49 Adjusted EBITDA was $2,600,000,000 for the quarter And cash flow from operations, excluding favorable working capital changes, was $1,900,000,000 which is roughly in line with the prior quarter. During the quarter, we returned $330,000,000 to shareholders Through dividend payments and repurchased approximately $2,800,000,000 in shares, which takes us to $2,500,000,000 repurchased since our last earnings call. Slide 7 shows the reconciliation Net income and adjusted EBITDA as well as the sequential change in adjusted EBITDA from Q4 2021 For the Q1 of 2022, adjusted EBITDA was lower sequentially, driven primarily by $175,000,000 decrease from Refining and Marketing.

Speaker 3

The tax rate for the quarter was 19%, which reflects the benefits from the public portion of MPLX net income, which is not taxable to MPC. Moving to our segment results, Slide 8 provides an overview of our Refining and Marketing segment. The business reported strong first Quarter earnings with adjusted EBITDA of approximately $1,400,000,000 utilization was 91% for the quarter. The sequential decline was driven by lower production, which was primarily the result of unplanned out time in the U. S.

Speaker 3

Gulf Coast, where we experienced 2 unplanned outages. In the beginning of February, the Galveston Bay refinery experienced a citywide power loss, which resulted in a Later in the month, as we were bringing our Garyville refinery back to service following turnaround activities, A fire occurred near our hydrocracker unit. The unit was repaired and returned to service after about 3 weeks. Both of these events resulted in approximately $200,000,000 of lost profit opportunity. Margin headwinds in the quarter were a result of the lower capture 84% that we experienced this quarter and were primarily realized in the Gulf and West Coast.

Speaker 3

Operating expenses were lower in the Q1, primarily due to lower planned project expense as well as a lower average natural gas price coupled with lower energy consumption compared to the 4th quarter. Natural gas prices strengthened during the quarter, Averaging over $0.70 in MMBtu higher in March than in January. In April, natural gas prices averaged 6 dollars 0.70 in MMBtu or nearly 80% higher than the average price in 2021. The current forward strip for Henry Hub is around $8 for the rest of the year, so we would expect natural gas to be a headwind as the year progresses. Natural gas is an input cost for our refineries, which historically has represented approximately 15% of our operating cost.

Speaker 3

Our natural gas sensitivity is approximately $330,000,000 of EBITDA for every $1 change per MMBtu. This equates to a sensitivity of approximately $0.30 per barrel of cost. Distribution costs were lower in the Q1 due to lower product volumes. Turning to Slide 9. We want to directly address the refining and marketing capture this quarter.

Speaker 3

In the Q1, our capture result was 84%. A few factors drove the majority of the headwinds: secondary and light product margins, Impacts associated with inventory builds and associated derivatives used to manage price volatility and to a lesser extent Gulf Coast Refinery outages impacted our yields. Slide 10 shows the change in our midstream EBITDA versus the Q4 of 2021. Our Midstream segment continues to demonstrate earnings resiliency and stability with consistent results from the previous quarter. Slide 11 presents the elements of change in our consolidated cash position for the quarter.

Speaker 3

Operating cash flow was Approximately $1,900,000,000 in the quarter, which excludes changes in working capital. Working capital was an approximate $600,000,000 source of cash this quarter, driven primarily by increases in crude oil prices, partially offset by increases in crude and product inventory. In March, MPLX issued $1,500,000,000 worth of long term debt, Utilizing a large portion of the proceeds to repay the borrowings under the intercompany loan with MPC. During the quarter, MPC returned $330,000,000 to shareholders through our dividend and Just approximately $2,800,000,000 worth of shares. Now 80% complete with our initial $10,000,000,000 capital return commitment, We could begin using the $5,000,000,000 incremental authorization starting in the second quarter.

Speaker 3

At the end of the quarter, NPC had approximately $10,600,000,000 in cash and short term investments. Last week, we held our Annual General Meeting, which concluded our proxy season. We appreciate the engagement from our investors as we work to create shareholder value, Focus on sustainability and position ourselves to deliver results in an energy diverse future. Turning to guidance. On Slide 12, we provide our 2nd quarter outlook.

Speaker 3

We expect total throughput volumes of roughly 2,900,000 barrels per day, representing 95% utilization. Planned turnaround costs are projected to be approximately $155,000,000 in the 2nd quarter. Expected activity is relatively light and spread through all three regions. As Mike mentioned, our optimized turnaround schedule in the Q2 is expected to allow us to run our assets safely and reliably at high utilization as we remain Total operating costs are projected to be $5.50 per barrel for the quarter. Earlier in the call, we shared our natural gas sensitivity.

Speaker 3

The increase we are currently seeing for natural gas costs are reflected in our 2nd quarter guidance on top of our average baseline $5 per barrel of operating cost. Distribution costs are expected to be approximately 1,300,000,000 For the quarter, corporate costs are expected to be $170,000,000 As we look at the impact of inflation on full year results, the two areas of focus are wages and certain supply However, we have identified incremental sustainable cost reductions that we are executing against to offset these costs. Notwithstanding all of that, we will continue to identify the headwind from rising energy costs to our refining system throughout the year. Slide 13 provides our capital investment plan for 2022. Once we have closed on the Martinez JV, MPC will receive $400,000,000 and be reimbursed for 50% of the capital spent to date.

Speaker 3

After the JV is Close, MPC will be responsible for its 50% share of the capital spend going forward, and Neste will be responsible for its 50% share. The total cost for the Martinez refinery conversion is still expected to be $1,200,000,000 and MPC's net cost will be reduced to approximately 200,000,000 We will provide a more detailed update once we have closed the JV. As a reminder, ongoing growth projects in our Refining and Marketing segment We'll enhance the capability of our refining assets, particularly in the Gulf Coast and also support our focus on growing the value recognized from our Marathon and Arco Marketing Brands. With that, let me turn the call back over to Kristina.

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 re prompt for additional questions. Operator, we'll now open the call.

Operator

Thank you. And we will now begin the question and answer session. Our first question today is from Neil Mehta from Goldman Sachs.

Speaker 4

Good morning, team. The first question is around utilization. The 2Q guide at around 95% is very good. And so I was just Curious if you made any adjustments to the system. And then how are you just thinking about optimizing whether it's maintenance or your runs To make sure that you capture the strong current spot commodity environment?

Speaker 2

It's a good question, Neil. Ray, do you want to take that?

Speaker 5

Sure. Thanks for the question, Neil. As we've said before, our 2022 turnaround plan was back end loaded. So You shouldn't look at the 1st two quarters of the year and extrapolate the spend for the later quarters. But with Current demands, we are really seeking to maximize our refining system as indicated by the Q2 guidance.

Speaker 5

What this really means, Neil, is that We've looked at some fixed bed catalyst changes that we had planned for the Q2. We've determined we have a little bit left As far as catalyst activity, so we've deferred that out later in the year. So our plan right now is to run really, really full, Run really hard during gasoline season this year.

Speaker 4

Very clear. And then, it's amazing How far we've come in a year and a half, isn't it Mike? And I look at your dividend yield now, which is call it 2.5% And by virtue of the stock having done well, it's compressed to something well below the XLE. How do you think about When it makes sense to have the conversation about raising the fixed dividend again and do you think recognizing it is It's at the discretion of

Speaker 6

the Board.

Speaker 2

Yes. Thanks, Neil. It's another good question and we talk about it a lot. I'll let Maira comment on it.

Speaker 3

Hey, Neil, thanks. Yes, so hopefully, you saw as we shared our capital allocation framework. We remain very committed to the dividend. As Mike just mentioned to you, it's getting a tremendous amount of attention from the management team. It's on our conversations regularly with our Board.

Speaker 3

We recognize where the yield is. And certainly, as we look at the strength, particularly in the back half of the year, we We'll expect to come back to you here in the very near future with our plans, particularly as we are getting through our first round of Share repurchase. So you should expect us to be back to you here shortly on that.

Operator

Thank you. Our next Question is from Doug Leggate from Bank of America.

Speaker 7

Good morning, everyone. So I don't know if this is for Mero or for Ray, but I think it's really a question around momentum coming into the Q2. You guys had a lot of downtime as you pointed out. So I'm trying to get a feel for what the underlying trend has been in this environment. And I guess specifically Whether you are continuing to maximize distillate in your system or whether you are given the current relative spreads, But will you willing to pivot more towards gasoline as you go into the summer?

Speaker 5

Sure, Doug. Let me take your question as far as distillate production. The answer is absolutely yes, that we're working right now to maximize Distillate production across our system. Just to give you a little more color on that, that's something that we look at daily, make sure that we're maximizing The total recoverable distillate, the endpoint and maximizing the front end of the distillate. And then the real thing is just looking at our distillate hydro treaters across the system are full.

Speaker 5

And so we're doing that across our system. It depends on the toolkit from refinery to refinery as far as what that percentage is. Garyville would be the highest since it has a hydrocacker and 3 Disla hydrotreaters, but whether we have 1 distal hydrotreater or 3, we're looking to maximize across the system.

Speaker 7

So sorry, Deb, I wasn't clear. So Mary Anne, what I was thank you for that, Ray. Mary Anne, what I was really trying to get a handle on was if you could quantify in some way the Lost opportunity costs from the Q1 and what that momentum looks like as you go into the Q2 with the system back up, is that possible?

Speaker 3

Yes, certainly, Doug. So from both the Galveston Bay unplanned outage due to the power And then again, as we talked about Garyville, we've said it's roughly about $200,000,000 in lost Profit opportunity, right? So that we would have shared with you through the market indicator. I think the other issue there with both of those refineries being down Is the fact that, as you heard Ray talk about our ability to maximize, we lost the opportunity to increase yield there, which obviously, as they come back online and have in the Q2, given the momentum, assuming the macro holds as we It will and cracks. We'll be able to recover that in the second quarter also.

Speaker 7

Thank you. My follow-up is actually also a Gulf Coast question folks, if you don't mind, but I'm going to try and explain what I'm looking for here. It seems that Colonial has been under allocated, thus the tightness in the Northeast and it doesn't From what we can tell, it doesn't seem that that's going to change much given the call on exports for distillates. So I'm curious if you could share how you're running Your system as it relates to potential Cornell allocations versus the coal and exports because it seems to us the Northeast is going to remain fairly tight here.

Speaker 2

Brian, you want to take that one?

Speaker 8

Yes, sure, Mike. Yes, so great question, Doug. So yes, we definitely see the same dynamic that you're seeing. One of the factors that we look at in shipping barrels all the way up to New York Harbor is the market So we've had a really, really strong run up here in the prompt on the front end of the cycle. So That's kind of the bid ask dynamic ongoing right now with buyers and sellers is the sustainability of that.

Speaker 8

It certainly is starting to feel a lot more sticky as we Look at imports coming into the New York Harbor starting to back off. But in the Gulf Coast, we also have really good placement opportunities, not only our book, but just across the overall Complex as there's more barrels being demanded in Central and South America. So I would categorize it, Doug, is we're in a very, very acute Pinch point here in the short term over those market dynamics, but I think you're reading the tea leaves right. As you look forward and think about less Russian exports and European complex starting to find a way to rebalance, the New York Harbor market One that we expect to be impacted more so than other markets. And as you think about the connectivity via pipes and the Gulf Coast, We do look at that as a forward opportunity, more structural and longer term.

Speaker 7

Thanks, fellas. Appreciate it.

Operator

Thank you. Our next question is from Roger Read from Wells Fargo.

Speaker 9

Yes. Thank you. Good morning. Just first, Maryann, I'd like to come back to your comment about potentially hitting into the next tranche of Share repurchase during Q2. Full disclosure, we've been modeling a little bit of a moderation in Share buybacks, it doesn't sound like there's any reason for us to actually go forward with that.

Speaker 9

So I was just curious how you're thinking about The cash flow coming in and the process of transitioning that into the share repo?

Speaker 3

Yes. Thanks for the question, Roger. So, no, you're correct. As I shared on the in my prepared remarks, if you look at the pace that we've been buying back, we would Expect in the Q2 that we would begin to use that $5,000,000,000 authorization. In less than 12 months, we started our program in May of 2021.

Speaker 3

We've repurchased 80% or roughly $8,000,000,000 of our initial $10,000,000,000 commitment. If we look at that result through the end of The Q3 excuse me, the end of the Q1, so the end of threethirty one, we repurchased about 113,000,000 shares At an average price of just less than $67 a share, we use part of our process, we use a mechanism that allows us to buy Back through blackout periods, and during our quarterly buybacks, there's things that we will evaluate, market conditions, average daily trading volumes to be exact. So we don't think anything that you may be seeing in this quarter is indicative of a lack of commitment here By any means, and certainly, you look at the cash flows for the last several quarters strong, and you look at the cash balance that I shared with you about $10,600,000,000 So Hopefully, that addresses your question.

Speaker 9

Yes, it does. It helps. Thank you. I'm going to ask Kind of the opposite end of the Gulf Coast question on exports. West Coast, obviously, cracks have been pretty exceptional.

Speaker 9

There aren't a lot of places that we typically see product show up on the West Coast from except for Gulf Coast and occasionally some shipments From Europe, I was curious as you look across the Pacific, is there anything you're seeing there? We've got lockdowns in some of those countries, So presumably some excess supply, but is there any of that that seems to be coming across the Pacific or any signs that any of it wants Try to come across given the arm?

Speaker 2

Brian, you want to take that?

Speaker 8

Yes, sure, Mike. Yes, so Roger, in the prom, no, not really. We're not seeing any fundamental shifts On the West Coast of the Pacific Basin, we, of course, continue to watch very closely at the lockdowns happening over in Asia. But they seem to be moving Drew, a bit quicker than expected. I mean, we've all learned to deal with COVID a little bit differently than we did 2 years ago.

Speaker 8

So we're not seeing anything in the prompt, but I might maybe just back up and give you some perspective on exports more broadly. I think it might be helpful, Especially on the front end of the diesel strength that we see across the market, I mean, one of the key drivers, obviously, is recovery in jet demand. We're seeing that domestically and also around the world. The other thing that doesn't get a lot of discussion in the prompt is, recall back in 2020, we were moving into IMO and different marine fueling, and that did take place. So there's a new call on demand on a distillate pool from MGO that we believe is also pulling on the distillate pool.

Speaker 8

But from an overall perspective, As we look at our export program predominantly on the Gulf Coast, we do have some limited exports out of the West Coast. As we exited the first We were about 200,000 barrels a day of exports from the Gulf Coast, primarily into Latin and South America. But we did move barrels into Europe, and we see that as an increasing opportunity for us going forward. And as we look at the forward book here into 2Q, we're moving from a 200,000 barrel a day ish program to more in the 250,000 to 300,000 barrel a day. So we are seeing continued strength and opportunity there.

Speaker 8

We certainly have the dock capacity to be able to manage that increase, And we're looking forward to that optimization as we roll into 2Q and beyond.

Speaker 9

Appreciate it. Thank you.

Operator

Thank you. Our next question is from Manav Gupta from Credit Suisse.

Speaker 10

Good morning, guys and great to hear from you, Mike. My question here is, you did not need a partner at your Martinez facility. You obviously have a lot of cash. So But you did seek a partner and help us understand why you picked Neste? Why do you think they're your right partner?

Speaker 10

And how does this JV develop forward with Neste?

Speaker 2

Manav, this is Mike. Thanks for the comment. When we started this project out, we were very open that there were 4 parameters that we felt would make a very strong project, competitive CapEx, Competitive OpEx, strong logistics and then ultimately feedstocks. And for a while there, we had We have stood on CapEx and OpEx and Logistics, but we had not reached conclusion with Neste. So Part of our thinking all along has been over the long term, not just in the short term that we believe that the partnership Between us, we'll hit both of our strengths.

Speaker 2

They bring a lot to the table with respect to feedstocks. Obviously, we're in that market as well, but we think there's a synergistic effect from their participation. And then at the same time, As you think about it going forward, we feel really good about capital discipline being an important part of our portfolio And having them come in at the numbers that we've already publicly disclosed, we thought it was a real good win for us and a real good win for Nest Day as well. So We're excited about it, Manav. I will tell you that we're talking about a lot of other stuff together.

Speaker 2

I think that the 2 parties together can create more value And we're going to continue to try and see if we can do that.

Speaker 10

Perfect. My quick follow-up here is, you guys mentioned some of the reasons Gulf Coast was a little weaker. Your Mid Con assets are very strong, and that capture was also slightly weaker. Help us understand what happened during the quarter. And what I'm really trying to get to is, if you look at the cracks and we look at your historical capture rate And we go back to that in 2Q.

Speaker 10

You could have a massive 2Q Mid Con earnings. So help us understand Some of the reasons 1Q was a little weaker on capture in MidCon region. Thank you so much.

Speaker 3

Manav, it's Mary Anne. So maybe just sort of overall when we think Capture and then I'll come back to MidCon just in general. A couple of elements that really impacted our quarter and that largely our light product and Secondary product margins narrowed during the quarter. That's typical, as you know, in a rising price environment and then obviously secondary product margins certainly in this price environment as well. We also had some inventory builds in the quarter.

Speaker 3

And then, of course, we use certain derivatives that to manage that So there are a few things really that impacted the quarter. MidCon was a bit stronger than it was in the Q1, excuse me, the Q2. But that's really a key driver as we look at the capture rate overall for the quarter.

Speaker 2

Manav, it's Mike. I'm just going to add, everybody puts a lot of emphasis on capturing, and everybody knows I'm not the biggest fan of that metric For a lot of the reasons that you start to see the volatility that happens in the quarter can bounce that around a little bit. And often we're asked the question, should we plan on about 100% capture. And one of the things I think people should keep in mind is we're in a different environment than I'll call it normal. If crude was $70 or so, somewhere in that range, the impact of secondary products would be a lot different than if Crude is at $100 $110 etcetera.

Speaker 2

So I think you've got to keep that in mind when you look at that particular metric. Those factors come into play. Brian mentioned earlier backwardation to Doug's question on the Colonial Pipeline. I mean, we're seeing some very unusual times where we're in the at the start of the gasoline season, yet we're seeing extreme Volatility with distillate cracks where they are, backwardation where it is on the distillate side of the equation. So all those things come into play and hit that metric.

Speaker 2

So I'm always leery, it bounces to one number, but there's a lot of inputs that come in and out to make that number what it is.

Operator

Thank you. Our next question is from Prashant Rao from Citigroup.

Speaker 6

Hi, thanks for taking the question. My first one, I wanted to ask on the crude side, given all the shifts going on and as Russian product moves out of the market, I was curious about how the changes in feedstock availability might Affect product yields and I'm asking that question really in the context of previous questions that have been asked already on this call about capturing strong or distillate crack, but also When you think going forward, gasoline demand picking up into summer driving season and how you balance max distillate versus Gasoline production, the impact that any feedstock availability changes could have on that and maybe how that plays out through the rest of the year if you kind of play the tape forward?

Speaker 2

Rick, you want to start with the crude outlook?

Speaker 11

Sure, Mike. Yes, Prashant. So it's an excellent question. There There's a lot of moving parts in the world right now, especially around feedstocks. From our perspective though, when you look at our PADD II, our PADD And the avails that we have at our fingertips, we uniquely have not Seeing that big of a shift in the avails that would directly affect yields, meaning we're able to get Whatever, Brian Partee and the marketing team are ordering up.

Speaker 11

So I'll state that as one. And 2 other items Probably to call out related to feedstocks, Prashant, is, as you know, we are a small we were a small buyer of Russian crudes. And unlike some of our peers, we feel that's a competitive advantage, especially in this environment. So with our small presence In that Russian crude category, we have seen very, very little impact. And then lastly, Just to call out to the SPR release because that is incremental to the feedstock market.

Speaker 11

A couple of things on that front. We applaud the U. S. Government for being proactive and for Really taking quick action in a meaningful way for a prolonged period of time, we believe that will help not only The U. S.

Speaker 11

Consumer, but us as buyers of feedstock and MPC Stand to be in a good position from the releases as we have 2 of our largest assets in Gary And GBR really at the back in the backyard of the SPR caverns. So hope that gives you some color on the feedstocks I'll toss it over to Brian for any comments on yields and products.

Speaker 8

Thanks, Rick. Yes. So Prashant, just a couple of comments as we think about the gas and distillate dynamic playing out currently. So we're obviously at extreme levels. But at the end of the day, this is very much a normal operations environment for us as we think about value chain optimization.

Speaker 8

So Whether there's a $0.01 or a dollar differential between gas, distillate, jet, any of the other core products, we're constantly optimizing across Our plan as we look out forward, as we look within the month, within the week, within the day, and ultimately, we're running the system to meet the demands of the market. Clearly, in this environment, the market is sending us a really strong signal for more distillate. Ray mentioned earlier about Our distillate header cheaters running them in max mode, that's to capture the current market structure. We do expect to see a seasonal call on demand as we look forward to the Driving season as we would typically expect. It's not really present in the market now if you look at the market structure because we're so strong here in the prompt on distillate, but we do expect that To manifest here as we roll into the summer months, but we're constantly optimizing, and I just wanted to make that point clear that it Feels very normal for our teams to be doing what they're doing to optimize to meet the market demand.

Speaker 6

Excellent. Thank you both for that thorough answer.

Speaker 8

A quick

Speaker 6

follow-up probably for Mary Anne. On working cap, Overall positive in the quarter, it's pretty volatile and I think most of us assumed inventories would be a bit of a headwind as you've called out. Was just wondering if you could give some color on how the components within that total working cap bridge Shookout and R and M specifically and then based on sort of your quarter to date and current expectations, would it be reasonable to expect working capital R and M To start to or the overall working capital continue to be a tailwind as we go forward?

Speaker 3

Yes. First shot, Marianne. Thanks for the question. So as you said, Working capital in the quarter clearly was a source of cash, particularly as we saw crude prices rising. We typically say that each dollar move in the oil price is about a $55,000,000 impact To our working capital, right, so in a rising price environment.

Speaker 3

You already stated it. We did have some inventory impacts. We would expect that not to be repeating in the Q2 when I see inventory impacts our inventory build. One of the other implications, as we see prices rising quickly, sometimes it has implications in the receivables because it's not moving as fast as the payable. But in general, it's about a net 20 day payable position.

Speaker 3

So as long as prices stay where they are, we would continue to see working capital in the second quarter as the tailwind. Obviously, it would reverse as pricing would change.

Operator

Thank you. Our next question is from Phil Gresh from JPMorgan.

Speaker 12

I wanted to ask one follow-up on the buybacks a slightly different way. The first $10,000,000,000 had a big component of Speedway proceeds associated with it, you've obviously extended it now to the $15,000,000,000 The second quarter run rate continues To be at a very high level. And I'm just thinking as we move forward and we lap the Speedway Proceeds component of this, is there a way you're looking at the more normalized level of return of capital, some kind Framework percent of cash flow or management to some kind of minimum cash balance. Obviously, you still have a lot of cash in the balance sheet. So I'm just trying to think through the moving pieces there.

Speaker 3

Yes. Certainly, it's Mary Anne. So you're right. We've got a $15,000,000,000 authorization in total, right? So about 7 point 1,000,000,000 remaining.

Speaker 3

We stay very focused on that commitment. As you know, we shared with you $10,000,000,000 no later than the end of this year. But Based on this pace I shared, right, we should be complete with that here in the second quarter and working through our $5,000,000,000 secondary or second repurchase authorization. With respect to our plans going forward, we're certainly looking at A series of things that we would share with you around how we would think about in a more normalized balance sheet as we get to that position Post, right, using the proceeds from the Speedway sale. As you know, cash is fungible, and we certainly think about it in that way.

Speaker 3

But we are looking at a series of things as we talk about our capital allocation and would expect to come back to you with how we would allocate cash Between share repurchase, dividend, obviously, our growth capital along our lines of our capital allocation framework shared with you previously.

Speaker 2

Okay. Phil, it's Mike. I just want to add that I've said many, many times that this business is predominantly a return of capital business And it's up to us to look at the opportunities that we have from a capital standpoint. I hope the market realizes that we're going to stay very disciplined, looking for solid returns, but we do want to grow earnings. But at the same time, we feel strongly that return of capital is a major component of what we're trying to accomplish here.

Speaker 12

Sure. Is there a minimum cash balance, Mary Anne, at these types of oil price levels you're thinking about? Has there been any adjustment to that thinking?

Speaker 3

Yes. I think We shared previously about $1,000,000,000 is where we feel comfortable. We've looked at a lot of scenario planning. We had a lot of as we looked at sort of some of the toughest volatility and liquidity periods during the pandemic. At one point in time, we had initially talked about potentially Holding another $1,000,000,000 but we're comfortable right now that $1,000,000,000 should be sufficient for us going forward.

Speaker 12

Got it. My follow-up was just on RD fundamentals, in particular LCFS prices. We've continued to see some pressure there. A lot of moving pieces on the deficits versus the credits, but just any thoughts that you guys have as you've kind of dug into this dynamic?

Speaker 8

Yes. Phil, this is Brian. I'm happy to take that one. So yes, you're probably looking at the Q4 CARB release late last week on the overall bank. And certainly, in Q4, it With a tremendous build, almost 1,000,000 credits, the banks hit a pretty high level, on the heels of slower demand in Q4 versus Q3 out in the So overall demand was off about 6%.

Speaker 8

RD production and imports was up about 9%. So the total pool right now out in the West Coast, You're looking at about 8% bio, 30% RD. And then the last factor driving the dynamics in the prompt is certainly Electric credit generation, which was up about 5% quarter on quarter. Now all that being said, you do have new programs coming into the Oregon and Washington and Canada, we expect these to exert counter pressure over time to be a different placement option and alternative versus California. But that being said, CARB is very committed to the program and having a workable program.

Speaker 8

In the very prompt, at the end of the day, LCFS is Portionally, one of the smaller value drivers in the overall proposition if you think about the D4 value and the BTC and current D4 values in the $1.70 to $1.80 range, really are helping to underpin the overall economics. It's a bit ironic if you think about the current environment with eggs And commodities flying up, at the same time, we have low LCFS pricing. We're in that operating environment with And we're quite happy with what we're seeing on the return side out of our production out of Dickinson. So I think it bodes well for The 3 cycle resiliency for RD over the long term.

Speaker 12

I appreciate it. Thank you.

Speaker 5

Hey, Brian. Bill, that was a pretty good recap for Brian. I'll just add a few points. When we look at renewable diesel, there's it's a multi variable There's really 4 regulatory drivers, and Brian talked about a lot of them, along with the flat price of the renewable diesel and the feedstock price. So we're trying to optimize every day at Dickinson today to maximize profitability.

Speaker 5

I will say the biggest thing that we Found success in Dickinson, we'll take forward to Martinez as the optionality on the feedstock, the ability To pivot to the feedstock that makes the most sense for us. And we've at Dickinson, we have pretreatment capabilities off-site that allow us To do that, at Martinez, that's part of the base CapEx for that plan. So you're right. Right now, LCFS Pressure on that, but there's a lot of things that are within our control that we'll work to optimize.

Speaker 12

Thank you.

Operator

Thank you. Our next question is from Paul Cheng from Scotiabank.

Speaker 13

Hi. Good morning, everyone. First, I might wish you a speedy and full recovery after your treatment. And also, Mary Anne, I just want to make a request, if possible. Some of your larger customers, my Exxon SharePoint, They start disclosing the timing benefit or the timing loss related to the derivative and inventory in the presentation or press release in each quarter.

Speaker 13

So I think all your investors will be Grateful, yes. That's something that you guys will consider.

Speaker 1

Paul, I apologize. Your line is cutting in and out a little bit for us here. So unfortunately, we weren't able I did hear you say something that said investors would like to see something in our financials. Right. So maybe we could take that one offline and then if you send us a note.

Speaker 1

But just so you know, just go a little slower because your line is cutting in and out with your question.

Speaker 13

Okay. Can you hear me okay now?

Speaker 1

Yes, that's better, Paul.

Speaker 13

Okay. So let me just repeat my request is that I'm saying Some of your larger customers, Exxon SharePoint, they've been disclosing the timing impact From derivative and inventory in the press release. And I think your investor will appreciate that if you guys consider providing those information. Thank you, Maryann.

Speaker 3

I'm sorry. I apologize. Please finish your question. Sorry.

Speaker 13

Sure. Now, my question is on TRU-one. When we some of your one of your competitor has said, when the product market is in bad rotation, That will also impact the margin capture or the ability to realize the pricing on the product screen. So just want to see that how that impact in your system when we are seeing in a dilution curve? And also that some of your competitors seems like they all have pretty large inventory or derivative timing losses in the quarter.

Speaker 13

So Mary Anne, you also mentioned that you have some of them. Can you quantify it? Thank you.

Speaker 2

Well, it's Mike. First off, thank you for your comment. It's a multipart question. So I'm going to start and I'll let Brian talk a little bit about I'm going to repeat a little bit of what I said earlier. I know everybody likes that metric of capture.

Speaker 2

And If it wasn't for Christina, I probably would not be a fan of putting it out there, but she keeps saying how important it is for everybody to see that metric. But there's so many things that play into that. And one that doesn't normally occur to the extent that it's occurring now is the structure. And The backwardation that we've seen, I mean, if you look at the screen right now on distillates, since we've talked a lot about distillate, month 1 to month 2 backwardation is pretty strong, Especially for this time of year. We would never normally think along those lines.

Speaker 2

So that comes into Play as we're moving products and I'll let Brian talk a little bit about it. He mentioned it earlier as far as a prompt barrel versus something that's got to travel in Colonial. And then Meyer mentioned earlier too is, as flat price gets higher and higher, you end up with this phenomenon where secondary products don't keep pace With flat price of crude and you end up with an impact there as well. So there's a lot of things hidden. And in this quarter particularly, as Doug mentioned earlier, it's pretty volatile quarter.

Speaker 2

January versus February versus March was pretty Sizable in volatility as to what we are seeing in the market. So anyway, let me let Brian make a comment towards structure, if you want to add there, Brian.

Speaker 8

Yes. Thanks, Mike. Happy to jump in. Yes, there's 2 key elements to the way I think about market structure, Paul, to your question. So the first, and Mike alluded to this, is really in a rising price environment, which is the phenomenon that we largely saw in the Q1.

Speaker 8

So In a rising pricing environment, we do see compression. We often call it out, obviously, in the secondary products, but it's also prevalent in the primary. So The racks effectively do not move up as efficient in a very short period of time. Now they catch up over time. And then you do enjoy the benefit on the back end of that.

Speaker 8

As prices come off, they'll go slower. So that's one dynamic timing element. Specific to backwardation though, with the pronounced backwardation in the marketplace here today, the way I think about it, it's effectively transit time. So from the outside looking in, you look at a market price point today, and I think the way most people run their models is they assume a ratable type of operation, That's just not how our system or anybody else's system works. There's transit times and moving barrels to market, whether they're going on a truck or a pipe or rail, It really doesn't matter.

Speaker 8

And in a backward market, if you're looking at a ratable program at $2 today and the market's fallen off By the time you get into the market, your actual realization is going to be less. So in that environment, the obvious Signal is to sell in the prompt and to not sell out on the curve. And that's really the phenomenon that's been playing out in the marketplace today, particularly on distillate As there's been steep backwardation and a big call to sell more in the prompt.

Speaker 13

Thank you.

Operator

Thank you. Our next question is from Connor Lynagh from Morgan Stanley.

Speaker 14

Yes, thank you. Obviously, sustainability of the current environment is a question that most people are struggling with right now. Sort of 2 parts to this question, I'm going to add them both at once here. So on the first side, there's obviously been significant disruptions in crude and product markets from events in Russia and Ukraine. Do you feel that what's happening particularly in distillate markets is directly a result of that or do you feel that there is a broader issue at play here in Either the refinery system, the inability to raise runs or substantially higher demand than expected.

Speaker 14

But the second part of that is, As we move into the summer months, the expectations are that you'll continue to see upward pressure on demand. Do you guys have any concerns or do you have Sort of framework for thinking about demand destruction? Thanks.

Speaker 2

Conor, it's Mike. I'll start. First to your point, geopolitical events always have an impact on supply and demand in the energy markets and we're seeing it now in the current situation But if you go back in time, how much all geopolitical events tend to have some impact to energy. So that's an ongoing thing. The point you made about Sustainability, that's kind of in parallel to what's happening as well.

Speaker 2

So people are starting to think about how do they Position their portfolios as we have and put out their goals in sustainability. We're very proud. We think we're leading in that area in certain regards. And at the same time, we're trying to supply the market because obviously it's a very tight inventory situation. And As Ray mentioned earlier, we're pushing back some turnarounds.

Speaker 2

We're trying to maximize production as best we can in the short term. So I mean, at the end of all this, Conor, my words to the team all the time is, let's worry about what we can control. There's a lot of things out there that we don't control and Stay attuned to them, but we try and bring it back to what we do control. And in the short term, what we do control is trying to maximize production Into the marketplace, and that's what Ray and the team are trying to do.

Speaker 14

And then just on the second part of that there on any risks to demand destruction, are you guys seeing any evidence of that based Your interaction with customers or anything like that? Or is there a price at which you think that certain areas of the economy can't tolerate the product pricing?

Speaker 2

Yes. Brian, you want to take that?

Speaker 8

Yes. Sure, Mike. Yes. So, Conor, maybe a couple of comments To build upon what Mike just stated, there is some fundamental support and premium in the marketplace Right now, there's also a degree of uncertainty premium based on what's going on over in the And so I wanted to make that point that there's 2 things that are, I think, moving the market. 1 is just the pure fundamentals, and I'll get into that in a minute.

Speaker 8

But there is an Uncertainty premium right now that's penetrating the market. From an overall macro perspective, though, the outlook is this. We've got really four Positives working for us or tailwinds. We've got the demand recovery upside coming out of COVID, predominantly on gas and jet. We've got very low inventory positions, both in the U.

Speaker 8

S. And around the globe. And then we also have delayed Turnaround and major maintenance on a lot of the refining system, both domestically and internationally, that too will pressure utilization over the cycle here. And then also, if you think about some of the closures that we've had during COVID, that also is providing fundamental support to this current market dynamic. Now on the other side of that, there's 3, I'll call them uncertainties, new additions refining capacity as an example.

Speaker 8

I think with supply chain disruptions, labor disruptions, the disruption economically during COVID, there a little bit more uncertainty on new addition refining capacity coming into the marketplace. I mentioned the Russian Ukraine situation, But that's likely to pull some supply away from the market, more so than the other. And then the last thing that's a bit of uncertainty and maybe To your question is the global economic outlook. And certainly, whether it's fuel pricing or any goods and services, we've Had very broad inflation, and that's something that we're keeping a watchful eye on and watching the demand dynamics. But all that being said, We think there is, right now, a slight balance between the headwinds and tailwinds, and it's really difficult to tell which way the market is going to break.

Speaker 8

But at this 10 seconds, It feels like we're pretty balanced and more optimistic than not as we look forward to the next quarter and beyond on overall demands.

Operator

Thank you. Our next question is from Theresa Chen from Barclays.

Speaker 15

Hi there. Thanks for taking my questions. First, I wanted to revisit the discussion on regional balances, This is product shift and the general tightness in PADD 1. I believe years ago you had underwritten some pipeline expansions To move product from the Mid Con to PADD 1 from that Eastern Ohio market, eastward. And at the time, I believe it was a seasonal movement.

Speaker 15

I was just wondering given the structural tightness that we're seeing in PADD 1 going forward, is there ability

Speaker 13

Brian, do

Speaker 2

you want to take a stab at that?

Speaker 8

Yes. Yes, happy to, Mike. Yes, Theresa, to answer your question, There's been a number of pipelines in that quarter that traditionally flowed out of the New York Harbor into the Mid Con that have since been reversed. And There's been some incremental capacity added here in the last year that also is helping to facilitate that move. And ourselves, as well as the broader market, definitely taking advantage of that capacity.

Speaker 8

The arb is effectively wide open in the current market dynamics today to translate barrels into Western and Central Sylvania. We also see actually trucking opportunities. If you think about our position in Eastern Ohio to truck into the pad as far into Western New York as an example for some specialty grade. So yes, the market's working, the market's efficient, and we are finding more and more opportunities to move that way.

Speaker 15

Thank you. And shifting to the Martinez project, I just wanted to clarify how the The 2 partners are together and can you just explain more about the synergistic aspects of feedstock procurement there? And also, Mary Anne, if you could provide how much capital has been spent out of the 700 budgeted for this year to date?

Speaker 2

Chris, it's Mike. On the feedstock question, what we said last time is, we're going to provide more color on the dynamics Around the feedstock and who does what, etcetera. But we want to wait till we get the JV closed. We're hoping that is very shortly. As Ray mentioned, We're very close on the permitting side and assuming that follows through, then we'll get to a At that time, we'll give a little bit more color on the feedstock dynamics.

Speaker 3

Theresa, it's Mary Anne. So to answer your second question, I think, on the allocation of capital and how it's been spent to the $1,200,000,000 to date. So in 2021, we've spent roughly just under $300,000,000 that's in 2021. If you look at 2020 2, in our capital plan, we estimated roughly $700,000,000 in total. So again, depending How all that project gets outlined for 2022, we would spend roughly half of that.

Speaker 3

So MPC would have about $350,000,000 of that $700,000,000 and Neste, the balance, obviously, at $350,000,000 And then obviously, that would give us about $200,000,000 plus or minus remaining to complete the project in 2023.

Speaker 15

Thank you.

Operator

Thank you. And our next question is from Jason Gabelman from Cowen.

Speaker 16

Hey, thanks for taking my questions. I wanted to clarify a statement made earlier just about the backwardation impacts to your margin, Just the diesel backwardation that you're seeing. Was the point there that on a lot of your barrels that you're actually not receiving The diesel price that we see in the prompt month, but it's actually the diesel price in the 1 month ahead? And if so, kind of what percentage Of your product is exposed to that. And then my second question on the Neste joint venture, You mentioned that there's potential opportunities to grow in the future.

Speaker 16

And I wonder if MPC would be open To participating in renewable diesel plants or other biofuel endeavors outside of the U. S. Or if your focus is just within The contrary.

Speaker 2

Thanks. Brian, you want to start and I'll finish up?

Speaker 8

Yes, sure. Yes, Jason, as a point of clarification on the backwardation, it's really dependent on the mode of delivery. So it's really about I made the comment on the cycle time or delivery cycle time. So it's different depending on each market. And export, as an example, A very long delivery cycle versus a spot sale, and I'll leave it at that.

Speaker 8

I won't go into the particulars of the percentage of our book and what they're under, but it's Every mode of delivery is different.

Speaker 2

Jason, it's Mike. I would just add, Obviously, as sellers, we're trying to maximize the prompt. And as buyers, people are trying to buy down the curve as a general rule. So you have that yin and yang going on. And like Brian said, every situation is unique.

Speaker 2

But backward markets tell you that you have tight inventories. That's Ultimately, what backwardation is all about, it says that inventories are tight and product availability is tight. With respect to your second question, yes, we're not going to speculate out in time with Neste, but I will tell you that The effort to get to this partnership was long and the team, Dave Hepner headed it up inside our shop here And worked with the Neste Group for a long period of time. And one of the biggest things that I believe is important as a result of it Was the mutual respect each company have for each other and common goals that we're setting for each other. So I think it is a nice platform For us to continue to look for ways that we can do business together.

Speaker 2

And that was really important for us as we were working through this, very similar to when we've entered other partnerships.

Speaker 13

One of the

Speaker 2

things that's most important to us is, will the partnership endure the test of time? JVs are difficult in general And you need to be really comfortable at the start of a JV that you feel that you have the right partner and we feel that way with Rusty with respect to Martinez.

Speaker 16

Great. Thanks for the answers.

Operator

Thank you. That is all the time we have for questions. Would now like to turn the call back to the speakers for closing remarks.

Speaker 1

Thank you for your interest in Marathon today.

Operator

Thank you. This does conclude today's conference. You may disconnect at this time.

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Earnings Conference Call
Church & Dwight Q1 2022
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