Marathon Petroleum Q4 2022 Earnings Call Transcript

Quartr
Provided by Quartr
January 31, 2023

There are 15 speakers on the call.

Operator

Welcome to the MPC 4th Quarter 2022 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. I will now turn the call over to Kristina Kazarian.

Operator

Kristina, you may begin.

Speaker 1

Welcome to Marathon Petroleum Corporation's 4th Quarter 2022 Earnings Conference Call. The slides that accompany this call can Found on our website at marathonpetroleum.com under the Investor tab. Joining me on the call today are Mike Hennigan, CEO Mary Anne Mannin, CFO and other members of the executive team. We invite you to read the Safe Harbor statements on Slide 2. We will be making forward looking statements today.

Speaker 1

Actual results may differ. Factors that could cause actual results to differ are included there as well as in our filings with the SEC. References to MPC's capital spending during the prepared remarks today reflects And with that, I'll turn it over to Mike.

Speaker 2

Thanks, Christina. Good morning. Thank you for joining our call. First off, I want to recognize a new Director on the MPC Board. Toni Towns Whitley will be joining our Board in March, Bringing tremendous experience with her most recent executive position at Microsoft as well as her Board experience on the NASDAQ and PNC Boards.

Speaker 2

I'd also like to recognize Christy Breese, who was appointed as a new Independent Director of MPLX in November and who recently served as CFO As we look back at 2022, we've delivered on our strategic commitments. Full year cash provided by operating activities was just over $16,000,000,000 on a consolidated basis and over $13,000,000,000 excluding MPLX, Reflecting our improving operating and commercial execution, our commitment to safe and reliable Operations resulted in refining utilization of 96% and our team's dynamic responses to volatile product markets Delivered strong commercial performance resulting in a 98% full year capture. Our focus on fostering a low cost culture Enable us to sustain our previously achieved $1,500,000,000 of structural cost reduction throughout the year. We formed a strategic partnership with Neste, which will enhance the economics of our Martinez renewable fuels project and create a platform For additional collaboration within Renewables, in midstream, our business grew 7% year over year. MPLX raised its distribution by 10% and based on this level, we expect MPC will receive $2,000,000,000 of annual distributions.

Speaker 2

MPLX remains a source of durable earnings in the MPC portfolio. And as MPLX grows its free cash flow, We believe it will continue to have the capacity to increase its capital return to unitholders. In 2022, we returned nearly $12,000,000,000 Through share repurchases, bringing the total repurchases to almost $17,000,000,000 since May of 2021. In addition, We increased MPC's dividend 30 percent to $0.75 per quarter. Executing on our operating, commercial and financial objectives, Combined with the strong macro environment led to total shareholder returns of 87% for MPC in 2022.

Speaker 2

Before Mary Anne goes through the results for the quarter, we wanted to share our outlook on the macro environment and the financial priorities for 2023. Our outlook remains bullish for 2023, supported by the nearly 4,000,000 barrels per day of refining capacity that has come offline globally In the last couple of years, demand for transportation fuels we manufacture remains robust. We have seen recovery in demand across all our products It's coming out of the pandemic and we anticipate further recovery in 2023, particularly as we expect consumers to adjust Uncertainties remain around the pace and impact of China's recovery, The magnitude of a potential U. S. Or global recession and the impact of Russian product sanctions, But despite these unknowns, we believe that the current supply constraints and growing demand will support strong refining margins in 'twenty three.

Speaker 2

Our financial priorities remain unchanged. These include, 1st, sustaining capital. We remain steadfast in our commitment to safely operating our assets, protect the health and safety of our employees And support the communities in which we operate. 2nd, our dividend. We're committed to the dividend, which we increased 30% at the end of last year and intend to evaluate at least annually.

Speaker 2

And as we repurchase shares, The reduction in the share count increases the ability to support future dividend growth. 3rd, growth capital. We believe this is a return on and return of capital business. We've been through a progressive change over the last few years and remain focused On ensuring the competitiveness of our assets as we progress through the energy evolution, we will invest capital where we believe there are attractive returns. In traditional refining, we're focused on investments that enhance the competitiveness of our assets.

Speaker 2

In the low carbon area, Investment at this time is primarily associated with the completion of the Martinez Renewable Project as well as a project at our LA refinery And we will now begin the call to discuss our financial results. Thank you, capital through share repurchases to meaningfully lower our share count. In the period from early November through the end of January, We've completed nearly $2,400,000,000 of share repurchases. And today, we announced an incremental $5,000,000,000 Share repurchase authorization, reinforcing our commitment to strong capital returns. Our goal is to be the investment of choice In the refining space, generating the most through cycle cash flow, creating value through strategic deployment of capital And delivering superior returns to our shareholders.

Speaker 2

We also challenge ourselves to lead in sustainable energy by setting meaningful targets To reduce GHG emissions, methane emissions and freshwater intensity, targets which we believe We can demonstrate a tangible path to accomplish. As we innovate for the future, Phase 1 of our Martinez renewable Fuel facility is progressing start up activities, marking a significant milestone in our sustainable energy goals. The facility is on track To reach full Phase 1 production capacity of 260,000,000 gallons per year of renewable fuels by the end of the Q1 2023. Pre treatment capabilities are expected to come online in the second half of twenty twenty three, which will enable the facility to ramp up full expected capacity of 730,000,000 gallons per year by the end of 2023. At Dickinson, we've optimized operations to be able to bring in more advantaged feedstocks, lowering the carbon intensity of the fuels we produce.

Speaker 2

We've enhanced our position in the renewables value chain through our pretreatment facilities in Beatrice and Cincinnati. We'll continue to look for opportunities leveraging the strategic partnerships we're cultivating with Neste and ADM. As evidence of our progress on our sustainability goals, this year MPC was included in the Dow Jones Sustainability Index for North America for the 4th Consecutive year. At this point, I'd like to turn the call over to Mary Anne.

Speaker 3

Thanks, Mike. Moving to 4th quarter results, Slide 6 provides The summary of our financial results. This morning, we reported adjusted earnings per share of $6.65 This excludes a $176,000,000 LIFO inventory benefit as well as $60,000,000 gain related to the Speedway Transaction. Adjusted EBITDA was $5,800,000,000 for the quarter and cash flow from operations, Excluding unfavorable working capital changes was $4,400,000,000 During the quarter, We returned $351,000,000 to shareholders through dividend payments and repurchased over $1,800,000,000 of our shares. Slide 7 shows the reconciliation between net income and adjusted EBITDA as well as the sequential change in adjusted EBITDA From the Q3 of 2022 to the Q4 of 2022, adjusted EBITDA was lower sequentially by approximately $1,000,000,000 This decrease was primarily driven by refining and marketing as the blended crack spread was down over $5 per barrel, Reflecting a 20% quarterly decline, corporate expenses were higher in the 4th quarter, driven by a retroactive operating tax assessments For prior periods, we intend to pursue recovery of these multiyear tax assessments.

Speaker 3

In addition, corporate includes Special compensation expenses, which also affected our Refining and Marketing and Midstream segments. We do not anticipate that these costs will structurally impact future corporate costs. The tax rate for the Q4 was 22%, resulting in a tax provision of nearly $1,000,000,000 and the full year tax rate was 22%. Moving to our segment results, Slide 8 provides an overview of our Refining and Marketing segment. Like many in the industry, several of our refineries We're impacted by Winter Storm Elliott at the end of December, primarily in our Gulf Coast and Mid Con regions.

Speaker 3

Most of our assets were back online after a short period and we have not seen structural issues. The crude throughput The impact was approximately 4,000,000 barrels, which reduced our crude capacity utilization for the 4th quarter by roughly 2%. Looking to January, we anticipate impacts to throughput of 3,500,000 barrels, which is reflected in our guidance For the Q1 of 2023. Even with the disruption at the end of the quarter, our refining assets ran at 94% utilization, processing 2 point 7,000,000 barrels of crude per day at our 13 refineries. Sequentially, we saw per barrel margins decline most notably in the West Coast region, while U.

Speaker 3

S. Gulf Gross margins were relatively flat supported by export demand. Capture was 109%, reflecting a strong result from our commercial team. Operating expenses were lower in the 4th quarter, primarily due to lower energy costs, partially offset by a special Compensation expense of approximately $0.15 per barrel paid in recognition for our employees' contributions. Due to lower throughputs in the quarter, refining operating cost per barrel were roughly flat in the 4th quarter at $5.62 per barrel as compared to the Q3.

Speaker 3

Our full year refining operating cost per barrel is $5.41 When we compare to 2021 refining operating cost per barrel of $5.02 this increase Can be entirely attributed to higher energy costs. We believe the actions we have taken to reduce our structural operating costs are sustainable. Slide 9 provides an overview of our refining and marketing capture this quarter, which was 109%. Our commercial teams Capture. We do not expect all of these tailwinds to be repeatable and in particular, we would expect the inventory impacts to reverse in the first As our strategic pillar indicates, we have been committed to improving our commercial performance And we believe that the capabilities we have built over the last 18 months will provide a sustainable advantage.

Speaker 3

Historically, we communicated Capture target of 95%. But over the last few years, the baseline has moved through our commercial efforts closer to 100%. We believe we have built capabilities that will provide incremental value beyond what we have realized to date and will produce results that can be seen in our financials. Slide 10 shows the change in our Midstream EBITDA versus the Q3 of 2022. Our Midstream segment delivered resilient 4th Quarter results.

Speaker 3

We did see lower EBITDA primarily due to impacts associated with lower NGL prices. This quarter, MPLX Distributions contributed $502,000,000 in cash flow to MPC. Slide 11 presents the elements of Change in our consolidated cash position for the Q4. Operating cash flow, excluding changes in working capital, Was $4,400,000,000 in the quarter. Working capital was a $72,000,000 headwind for the quarter, driven mostly by declining crude prices offset by benefits from inventory impacts.

Speaker 3

Capital expenditures and investments totaled $1,300,000,000 this quarter. We saw consistent spending in refining in the 4th quarter as work progressed on the Martinez Renewables Fuel Facility conversion And the Star Project at Galveston Bay. While not reflected in the 2022 capital spend due to the timing of the JV close, The 50% reimbursement from Neste for Martinez Capital Spend was received and reflected in overall cash flows In the Q3, MPC returned nearly $2,200,000,000 via share repurchase and dividends during the quarter. We began using the incremental $5,000,000,000 share repurchase authorization in November. For the full year, we returned 13 point $2,000,000,000 out of $17,700,000,000 of our 2022 cash from operations, excluding working capital impacts, representing a 75% payout.

Speaker 3

This was partially enabled by our commitment to complete our $15,000,000,000 capital return program. The outstanding purchase authorization of $7,600,000,000 which includes the incremental $5,000,000,000 approval Demonstrates our commitment to returning capital. At the end of the 4th quarter, MPC had approximately $11,800,000,000 in cash and short term investments. Slide 12 provides our capital investment plan for 2023, which reflects our continuing focus on strict capital discipline. MPC's investment plan, excluding MPLX, totals approximately $1,300,000,000 The plan includes $1,250,000,000 for the Refining and Marketing segment, of which approximately $350,000,000 or roughly 30% It's related to maintenance and regulatory compliance.

Speaker 3

Our growth capital plan is approximately $900,000,000 Between low carbon and traditional projects. Within low carbon, $150,000,000 is allocated for completion of the Martinez conversion. We are also executing a project at our Los Angeles Refinery, which will improve energy efficiency and lower facility emissions. This is a multiyear project. In 2023, we expect associated capital spending to be $150,000,000 And we have allocated $50,000,000 to smaller projects focused on emerging opportunities.

Speaker 3

Within traditional refining, $50,000,000 is associated with the completion of the Star project, dollars 200,000,000 is focused on smaller projects Targeted at enhancing the yields of our refineries, improving energy efficiency and lowering our cost. In marketing, we plan to spend $150,000,000 for projects that focus on enhancing and expanding the platform for our Marathon and Arco brands. This morning, MPLX also announced their 2023 capital investment plan of $950,000,000 Their plan includes approximately $800,000,000 of growth capital and $150,000,000 of maintenance capital. The capital spending plan focuses on adding new gas processing plants and smaller investments targeted at expansion and debottlenecking of existing assets to meet customer demand. Turning to guidance, Slide 13, we provide our Q1 outlook.

Speaker 3

We expect Crude throughput volumes of roughly 2,500,000 barrels per day, representing 88% utilization. Utilization is forecasted to be lower than 4th quarter levels due to turnaround impacts in our U. S. Gulf Coast region. Planned turnaround expense is projected to be approximately $350,000,000 in the Q1 with a significant level of activity In the Gulf Coast region, the remaining scope of the Star project, specifically 40,000 barrels per day of crude And 17,000 barrels per day of resid processing capacity is expected to be tied in during the turnaround at Galveston Bay in the Q1 and should begin to ramp starting in the Q2 of 2023.

Speaker 3

We expect the level of 2023 turnaround spending to be similar to the level of spend in 2022. However, unlike 2022, we expect turnaround activity to be front half weighted this year, With significant planned work in the 1st and second quarters. Therefore, we will have executed 4 consecutive quarters of heavy turnaround work. Operating cost Per barrel in the Q1 are expected to be flat at $5.60 per barrel for the quarter. In conjunction with our turnarounds, We anticipate higher project related expenses as we utilize our planned downtime to complete other work planned.

Speaker 3

We are seeing the benefits from lower energy costs in the Gulf Coast and Mid Con regions. But given the majority of our turnaround activity is heavily weighted To the Gulf Coast, our expectations of flat operating costs quarter to quarter is driven by our West Coast exposure, Well, we have not seen a decline in energy costs recently. As we look into 2023, we anticipate our operating cost per barrel would decline and trend towards a more normalized level as we complete this turnaround and project activity. Distribution costs are expected to be approximately $1,300,000,000 for the quarter. Corporate costs are expected to be $175,000,000 representing The sustained reductions that we have made in this area.

Speaker 3

With that, let me pass it back to Mike.

Speaker 2

Thanks, Mary Anne. In summary, we believe solid execution of our 3 strategic pillars remains foundational. Similar to what we've achieved with cost reductions and portfolio, we believe the improvements we've made to our commercial and operational execution Have driven structural, sustainable benefits, which will enable us to capture opportunities irrespective of the market environment. Our goal is to position MPC as the refiner investment of choice, generating the most cash through cycle And delivering superior returns to our shareholders with our steadfast commitment to returning capital. Let me turn the call back to Kristina.

Speaker 1

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

Operator

Thank you. We will now begin the question and answer session. Our first question will come from Doug Leggate with Bank of America. And I do apologize, it looks like Doug's line has dropped, so we will move forward to the next question at this time. Our

Speaker 4

The first question I had was around the magnitude of capital returns. How should we think about the percentage of cash flow or free cash flow you target to get back to shareholders in the given year through buybacks and dividends? You talk about $1,000,000,000 being the target level of cash. We've heard some of your peers talk about that number being higher. Why is $1,000,000,000 is the right number and how long is it going to take to get there given how strong the environment is?

Speaker 3

Hey, it's Mary Anne. Thanks for the question. Let me try to break that into a couple of parts there and then see if I can if I've done your question justice. So in first Really the cadence, if you will, of the share buyback and our return to capital. As you can see from the quarter, Neil, We did $1,800,000,000 in share repurchase and then we continue to buyback in the month of January.

Speaker 3

Just wanted to remind you, we did complete our $15,000,000,000 share repurchase in early October And I indicated on the quarterly call that we would begin using that incremental $5,000,000,000 authorization in November. So essentially for the better part of October, our cadence, we weren't in the market buying back in October, just to be clear. And then we did seek and have announced an incremental $5,000,000,000 authorization. So that leaves us With $7,600,000,000 of share buyback authorization, hopefully indicating our continued commitment To buyback, and we hope you see that. The second part of your question, just really, I think around Our commitment there, I think that's what you were saying.

Speaker 3

So when do we get to that $1,000,000,000 how long does it take us and why? We feel $1,000,000,000 is an appropriate level of cash. First, because during the pandemic, we probably stress test Our liquidity and our cash position in one of the most challenging markets. 2nd, I'd Keep in mind that we receive a $2,000,000,000 distribution from MPLX, Probably unique when you look at us compared to our peers. So in reality, that's about $3,000,000,000 and then you combine that with our liquidity.

Speaker 3

We feel pretty comfortable within a range of outcomes that, that $1,000,000,000 is appropriate. I hope that addresses your questions, Neil.

Speaker 2

Neal, it's Mike. Let me just add to what Mary Anne just said. So we had been at about 1.6 from MPLX, We're now at $2,000,000,000 pace. We expect that to continue to grow. If people listen to the MPLX call, we're in a real good position there.

Speaker 2

But that distribution, let's say, at the $2,000,000,000 pace, that essentially covers the dividend and half of the refining capital commitment for refining. So That's part of the reason that we are comfortable with $1,000,000,000 on the balance sheet. Now as you've pointed out, We still finished the year with close to $12,000,000,000 on the balance sheet. So we still have a lot of financial capability to get A new norm at some point, but hopefully that helped explain why the $1,000,000,000 is the right number and it has to do with our

Speaker 4

Yes, good problems, Mike. And then the follow-up is around the Star project. Remind us Economics, it seems like it's coming on at a good time, but how should we think about what this project could mean for incremental Cash flow in both the mid cycle environment, but also in current spot economics?

Speaker 2

Yes, Yes, Neal. Thanks for that question. It's one we've been getting from a lot of people. So it's relatively easy to model. So up until now, The parts of STAAR that are in place are in our results.

Speaker 2

What's not in our results is 40,000 barrels a day of Crude capacity and the easiest way to model it is take that number times the differential between heavy crude and ULSD. So if you look at that differential and you multiply it by 40,000 barrels a day, that's the additional EBITDA that we'll get once STAR is online. But STAR is a pretty unique project for us, so I'm going to ask Tim to make a couple of comments on it. You have the financial side of it, but let me give you a little bit of the background behind it with Tim some details, please.

Speaker 5

Okay. Thanks, Mike. So Neil, it's good question that you have there.

Speaker 6

So let me give you

Speaker 5

a little backdrop. Keep in mind that we've done this project in phases. A fair amount of the StarScope has already been completed and put in service, so it's already earning a return. The remaining work that we have It's really going to be completed with this planned turnaround that ends late in Q1 and then we'll be starting up the units in April. So we do expect Starz EBITDA contribution to continue to ramp after startup in April and The remaining scope is really going to be 1 like Mike just indicated.

Speaker 5

It's going to increase crude capacity by 40,000 a day And also the resid upgrading capacity by 17,000 a day. So maybe a little background on that decision. Rather than expand The Galveston Bay cokers, we elected to upgrade the resid hydrocracker unit because it offers better conversion and increased liquid volume yield. So It was a better choice than the coker. The fractionation modifications that we made are also going to increase the diesel recovery, Which is profitable.

Speaker 5

And then the refinery will also be able to process significantly more of the discounted heavy Canadian crude. So those are some of the reasons that drove us to that. So we feel really good about the economic drivers of the project. And with the current heavy crude discounts and the strong diesel margins, The near term economics are better than when we sanctioned the project. So hopefully that's helpful.

Speaker 4

That's awesome. Thanks guys.

Speaker 2

You're welcome, Neil.

Operator

Our next question will come from Doug Leggate with Bank of America. Your line is open.

Speaker 7

Someone didn't pay the phone bill, guys. I'm so sorry about that. How's everybody doing?

Speaker 2

Welcome back, Doug.

Speaker 7

Thanks. I apologize for that. So Well, I was struggling with that. All my questions got asked, but let me give it a go. I guess, Mike, first of all, when I look at the earnings power of the business And I look at where your share price is trading and obviously you gave us a dividend bump back in November.

Speaker 7

How are you thinking about you've reloaded the buyback program, but how are you thinking about the balance between dividends And share buybacks, you know where I'm going with this because obviously your dividend is fully covered by your distributions from MPLX. So In this kind of environment, should we be buying back a lot of stock at this level or should we be Thinking that the dividend is a bit more of a bias in 2023.

Speaker 3

Hey, Doug, it's Mary Anne. I'll pass it back to Mike here in a second. But As we talked about the dividend, we committed to looking at that dividend annually. We wanted to be sure that it was secure. We wanted to be competitive with The potential to grow and we will continue to look at that.

Speaker 3

As we've shared in the past and obviously as you Dated, we have increased the outstanding authorization to $7,600,000,000 of share repurchase. We continue to think that share repurchase Over dividend is an appropriate return of capital. You'll see us continuing to use that authorization As we did here in the last quarter. So yes, we'll evaluate that dividend, but we continue to see share repurchase As a bit more preferential over the dividend, I'll pass it to Mike.

Speaker 2

Yes, Doug, I'll just add to what Mir said. Obviously, we want to have Competitive dividend and a growing dividend over time. So that is foundational to us. It is a little bit tax inefficient Relative to share buybacks, that's why Maher just said that we lean a little more that way. And the sheer magnitude of the financial capacity we have Right now, with finishing the year with about $12,000,000,000 of cash on the balance sheet and continuing to have a strong refining environment, Just the sheer magnitude is much more towards that side of the return of capital.

Speaker 2

So we're going to look at it. We've committed that we'll look at it each year. We want to be committed to it. At the end of the day, obviously, a lot of Attention just because of the magnitude of the number is directed towards the repurchase program.

Speaker 7

Okay. I understand. I guess no one is going to complain about the yield Given that your share price is a big part of that. So, but I appreciate the answer. My follow-up is an operational question, Mike.

Speaker 7

I think it's pretty well known that you guys had a fair amount of maintenance in the quarter, but the capture rate was still Quite strong, at least on our numbers. I'm looking at the product sales relative to the refinery throughput and wondering if That was part of what was going on there. So I'm wondering if you could help us understand the strength of the operating performance and maybe give us a steer as to How you see your full year 'twenty three downtime outlook, because we're hearing from a lot of your peers that 'twenty three is going to be a big year for the whole industry. And I'll leave it there. Thanks.

Speaker 2

Doug, it's a good question. So I'm going to pass it to the team in a second. But when we started this out a couple of years ago, we said there's 3 areas that we're going to concentrate Heavily on. One of them was improving our commercial performance. So let me let the team give a little more color on that.

Speaker 3

Sure. Thanks, Doug. As Mike indicated, our strategic pillars remain foundational and our commercial performance Clearly one that we remain committed to. You may remember in the last set of guidance, we said that we thought our capture Sure could actually be impacted given what was a higher turnaround, frankly, the highest one in 2022. But the commercial team did take quite a bit of initiative in the quarter.

Speaker 3

I'll give you some highlights and then pass To Brian and Rick, but one of the things that we saw at 109% capture in this quarter, we had strong light product margins. We had favorable inventory impacts and then also favorable pricing of secondaries. We don't think All of these tailwinds would repeat and certainly depending on where we saw pricing, some of them could be a headwind, particularly when we look at our secondary products. Historically, we've talked about a 95% capture rate Over the last few years, given the work that the commercial team has been doing, we're moving more toward 100%. We're going to continue to challenge ourselves to deliver that.

Speaker 3

And with that, I'll maybe ask Brian and Rick to give you some incremental color on the specifics there.

Speaker 8

Hey, Doug, it's Rick. Just a few add ons to Mary Anne's comments. So the 98% in 2022, Is it sustainable? What I would say to that is there will be a lot of volatility and it will ebb and flow, but This is not a one time event. We have meaningfully changed the way we go to market from a commercial perspective throughout our entire company And the focus that we've had since Mike has taken the helm and put in the new leadership team has been night and day And will continue to be.

Speaker 8

So when you look at 2023 and beyond, I would say you should expect continued momentum, expect volatility, But expect results that will continue to outpace many of our peers.

Speaker 7

Honestly guys, I think that's been overlooked. Sorry,

Speaker 5

Yes, Doug, this is Brian. I was just going to bolt on real quickly to Rick's comments that we really have the team relentlessly pursuing value Sure. We've got the team consolidated into really one functional team across the entire value chain, which historically was Divided up into multiple silos, and that's been a key differentiation point for us. We're also very You know, adamant about serving our customers. So my team has an example on the clean product side of things.

Speaker 5

So as we think about turnaround activity and impact to capture, We've got to operate in an environment where whether it's an unplanned outage or planned outage, we've got to serve our customers. So there's a lot of things that we can do from a turnaround planning To build in advance of the turnaround, to build different feedstocks depending on the units that are down and ultimately we've got the logistics firepower to purchase to cover as well. So I think that's what you're seeing in the numbers as you called out in the churn activity relative to sales. We've got the right capabilities to purchase to cover If we've got refining down either planned or unplanned.

Speaker 7

Guys, I think that's going to surprise a lot of people. I really appreciate the full answer. Thanks so much.

Speaker 2

You're welcome, Doug.

Operator

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

Speaker 9

Yes. Good morning, everybody. And yes, another Good morning, Riser. Certainly, I'll give you congrats on the capture there. Well done on Maybe to change pace though a little bit, I'd like to ask about The process in Martinez and how we should think about the upcoming timeline and any particular milestones we should be watching for and maybe how you think about it We should be watching for and maybe how you think about it contributing at a cash flow basis, whether that It happens meaningfully in 'twenty three or we should wait till 'twenty four.

Speaker 5

Hello, Roger. This is Tim. I'll take that one. I guess first on the schedule, we spent really the most part of January conducting startup and commissioning activities And we put fresh feed in actually yesterday in the HDO unit and we expect finished product, the storage here in the next week. So, we are on track to reach full phase production capacity, which is 260,000,000 gallons per year Renewable Fuels by the end of this Q1 here.

Speaker 5

You may know that we're also what we refer to as Phase 2 is constructing some pretreatment capabilities And those are scheduled to come online in the second half of twenty twenty three and then the facility is expected to be capable of Producing the full capacity, which is 730,000,000 gallons per year by the end of 2023. So we're on track and feeling good.

Speaker 2

Roger, it's Mike. The only thing that I would add is, we feel really good about the project. The team's execution has been good. But in light of where the refining macro is today, it's not the contributor that it would be saying it when we get back to a mid cycle at some point. It's going to be a meaningful contributor, but obviously it's dwarfed by what's happening in refining today.

Speaker 9

Yes, refining is certainly strong. That kind of gives me my other follow-up question is, we've obviously Seeing some good things in terms of a pickup in jet demand. Gasoline has continued to look a little soft. I just wonder if you could give us an overview, Basically across your system, how you see things.

Speaker 5

Yes, Roger, this is Brian. So I'll start in just a little bit of Reflection on 2022, because I think we've as an industry really and domestically here in the U. S. Exited at a point of inflection as it relates to COVID recovery. Globally, really strong year in 2022 when you look at year on year 2,300,000 barrels a day of overall oil demand increases.

Speaker 5

As Mike mentioned in his We expect to see continued increases into 2023 and beyond. Domestically, from what we're seeing, And this is a bit of a triangulation. I know there's a lot of dialogue around individual marketing books, EIA data, mobility data. So You have to be a little bit of a statistician to try to piece it all together to formulate an informed view around actual demand. But from An overall perspective backing through the back end of COVID, diesel has been resilient throughout, and it remains resilient domestically here in the U.

Speaker 5

S. Gasoline, if you remember when we went into COVID early on, there was a lot of conversation around structural impacts and we do feel like we've seen some structural implications as Result of COVID, but most of that's been on the gasoline front. We're kind of at a point now where our call of post COVID demand is off about 3% On the gasoline front from 2019 levels, that's probably pretty sticky. The headwind there is obviously the work from home, a little bit of tailwind. We've seen some decreased use in public transportation offsetting that, but 3% has been about the number that we've seen consistently as we look across our book.

Speaker 5

And then as it relates to Jet, steady ratable recovery is what we've seen in the last couple of years. We expect to see full recovery domestically here As we progress through 2023, so back half of twenty twenty three seeing full recovery. As it relates to our book, maybe I'll just kind of wrap it up there. What we saw In Q4, gasoline year on year 2%, the bright spot of interest was the West Coast. So we actually saw a 5% increase year on year in the 4th Quarter in the West Coast, diesel was up 4% and jet was up 3% on a year to year basis.

Speaker 9

That's great. Thank you.

Speaker 2

You're welcome, Roger.

Operator

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

Speaker 10

Hey guys. Good morning.

Speaker 2

Good morning Paul.

Speaker 10

Two questions if I could. The first one is really simple. Q4, I think Mary Anne mentioned that there's some favorable inventory benefit. I So, Mary Anne, you are referring outside the LIFO impact, which you take it as a special item or this is what you If this is not, then can you give us some ideas and how big is that number in the 4th quarter? And secondly, I think you guys talking about a continued investment that this year $150,000,000 in the LA Refining Systems, if I didn't get it wrong, can you maybe give us some idea What kind of investment we are talking about and what kind of benefit we could expect from there?

Speaker 10

Is there any change in terms of The cruise slate or energy usage or that product yield, anything that you could share on that? Thank you.

Speaker 3

Hey, Paul, it's Mary Anne. So you're absolutely correct. The inventory benefits that I was discussing when talking about the Capture rate we achieved in the quarter are outside the LIFO benefits. As you've seen, we've excluded the LIFO benefit from Our adjusted results, so I'm talking about commercial performance. As you know, obviously winter storm has impacts on us and the ability for our teams to Address the inventory issues is really what I was referring to when we talk about capturing the quarter, not LIFO.

Speaker 10

Yes. Marion, can you quantify roughly how Is that benefit in the Q4?

Speaker 3

Yes. Paul, we've not provided that level of detail on each of those individual contributors. Inventory, a piece of that. Again, I mentioned strong light product margins in the quarter. We saw the benefit of pricing happen on the secondary.

Speaker 3

There were several contributors to the upsized performance, but we typically don't provide that You know granular detail on the significance of each one of those.

Speaker 10

Okay.

Speaker 5

Paul, this is Tim. I'll take your second question. Relative to the LAR project that we were referring to in the opening remarks, that's really a project that addresses the next phase of an upcoming regulation That is going to be mandating further NOx reductions and that regulation is going to apply to all of the refineries in the LA Basin, Not just ours, of course. And so there's going to be some significant investment required by the industry in order to comply with this. And we believe we have a very unique opportunity at our Los Angeles Refining Complex to really modernize our utility systems At both Carson and Wilmington facilities in order to meet this Phase 1 and Phase 2 of these reduction requirements.

Speaker 5

So that's what's driving it. And I think the other thing that's worth noting is this novel project really goes beyond NOx reductions for us And it will also reduce our SO2, our particulate matter, our VOCs and some greenhouse gases. So besides lowering our facility Emissions, it's also going to improve our reliability and it's going to reduce our energy usage, which will significantly lower our operating cost. These cost reductions will come in the form of energy efficiency and lower maintenance spend. And the thing we like about it is that these favorable economics are independent of the light product margin fluctuations that can occur.

Speaker 5

So, this is kind of all around the backdrop of the LA Refinery is certainly a core asset for us on the West Coast and it's part of the value chain And it's already one of the most competitive refineries in the state. So this project is going to further cement its competitive position in California, Which is consistent with our strategic initiative of being the most cost effective refiner in every market we serve. So We expect the project to be completed in 2025 and in time to meet the initial compliance dates for the new regulation. So hopefully that's helpful.

Speaker 10

Yes. What's the total investment that $150,000,000 for this Here should we assume $150 a year to 2025. And in terms of the lower energy cost, better efficiency on there, Is there any number you could share to trying to quantify what is that benefit?

Speaker 5

Unfortunately, we generally don't get into those specific numbers on individual projects and returns, But it's significant in the sense that it's lowering our emissions and providing a payback.

Speaker 10

How about in CapEx, Is it $150 a year?

Speaker 2

Hey, Paul, it's Mike. We haven't disclosed the multiyear. We will give more color on that as time goes on. What Tim was trying to say is that it is a multiyear project and we're going Start off with it, it will be $150,000,000 this year and we'll give more color as time goes by.

Speaker 10

Okay, will do. Thank you.

Speaker 2

You're welcome.

Operator

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

Speaker 11

Hey, Good morning. Thanks for taking my question. So just to stick with the project growth and looking at your CapEx budget and your growth program of about $900,000,000 That number, I assume, will be going down post Martinez and STAAR. So looking into the future, where do you think growth capital goes from here? I think will we see structurally lower growth CapEx in 2024 plus or Is there maybe another phase of projects that we'll start hearing about going forward?

Speaker 11

I know you've spoken about the LA project, but just wondering beyond that.

Speaker 2

Hey, John, it's Mike. I'll start off. We've broken it into 2 buckets, traditional refining and low carbon. And It's our expectation that, that low carbon bucket will continue to grow over time. And at the same time, though, we do have a bunch of projects.

Speaker 2

Tim just mentioned one that will really improve the competitiveness of L. A. We have a bunch of those still that we think we can implement on the Traditional refining side as well. So I think you're going to see a nice blend on both sides of the business there over time. I don't think you should expect that number to be going meaningfully down.

Speaker 2

I know people have talked a lot about Star, but we have enough projects That we think are attractive returns. We just want to implement them over time and be disciplined on the way that we allocate capital. But I think you're going to see both buckets and not have an expectation they're going down because we still think there's a decent amount of return on capital Opportunities for us in light of what's been a major return of capital recently from us.

Speaker 11

Great. That's really helpful. Thanks. And then, if you could maybe just talk about how you're thinking about the Russia product sanctions That are going to be hitting here on the 5th and how that may be trickle through the market and how long do you think it will take for supply chains to adjust? And then Relatedly, if you could just remind us the breakdown of Marathon's export destinations, how much goes to Latin America, how much goes to Europe?

Speaker 11

And do you expect to increase your

Speaker 5

Yes, John, this is Brian. I'll take that. So just really Quick on your question on timeline, we do not expect it to really unfold until the Q2. So leading into the sanctions, as you'd expect, we saw a Pretty meaningful de inventorying coming out of Russia, getting out of the sanctions, coupled with a re inventorying in large parts of Northwest Europe. So As a result, we're entering the sanction period of time at really historically high levels of inventory, particularly in Europe.

Speaker 5

So We view it as a 2Q and beyond timeline perspective. But directionally, we see it as bullish for cracks. We see 800 to 1,000,000 barrels a day of, I'll call them, structural historical imports into Northwest Europe coming out of Russia. And those are going to have to be displaced and we do expect a high degree of friction on those barrels for a variety of reasons. Product Spec mix is going to be difficult to place them in other markets.

Speaker 5

So as you'd expect, you have various regional specifications that need to be met. Local fuel standards, that's going to propose some headwinds. The global tanker fleet is really Pretty active and overburden right now with differing trade flows on the crude front. And this is going to create another degree of inefficiency on the tanker, global Tanker fleet capacity that we think will provide a degree of friction. The last thing I'd mention, unlike crude, on the product side, these are generally going to either countries or end And consumers that really rely on receipt of the product.

Speaker 5

So supply assurance is a new variable that's really important here as well that is we're hearing from our customers Every day, that's a really important thing for them. I think given the dynamic nature of the situation in Russia, that supply assurance component It's really a big unknown, but we feel very well positioned to take advantage of that, given our position in the Atlantic Basin. As you probably know, we opened an office over in London late last year, and are very active in that market. The last Point of your question in terms of distribution, without giving too much granular detail, a large portion of them historically have moved into Latin America. We've historically exported 250,000 to 350,000 barrels a day depending around turnaround and unplanned We do see an incremental pull into Europe.

Speaker 5

We've seen that we've got some Actually really good fit for our Garyville distillate stream because we don't make jet out of our Garyville facility. It fits well into Northwest Europe, especially this time of the year. And we've seen exports into Northwest Europe late last year in the 120,000 barrels a day for the U. S. Into Europe.

Speaker 5

We've been a meaningful part of that and we expect to be meaningful part of that going forward.

Speaker 8

Hey, John, this is Rick. Just to add on to Brian's comments. So a couple of points To further drive home how we feel about this market going forward, if you look at winter storm Elliott in December, when it hit The immediate impact it had on cracks and it is again taken our light product inventories especially here in the U. S. Down to levels that Our 5 year type low numbers, when you compound diesel inventories with VGO and the Potential impact that the EU ban on Russian exports will have.

Speaker 8

This could just further exasperate Cracks to the positive. So, more to watch on this, see how it plays out. I think Mike said earlier, it's neutral A positive. We're viewing it as a positive, especially if the cutbacks and sanctions take hold like most people

Operator

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

Speaker 12

Good morning, everyone. Thank you. Actually, I'm tempted to ask about commercial and turnaround integration again, because I do think that's probably the most important thing in this call, but I think people got the picture there. Instead I'll ask about low carbon growth and specifically SAF And I'm asking because investors ask about it a lot because airlines talk about it frequently and both of your partners in the Renewable fuels category are also sort of publicly very pro SAF. And so, it would be great to get your thoughts On that category and see if you think there's any opportunity there.

Speaker 12

Thank you.

Speaker 6

Thanks, Sam. Hey, this is Dave. Let me step back a little bit and touch on first that one of our strategic growth pillars for the company Is around maximizing the value of our renewable liquid fuels. And so while promptly a lot of that has been focused on renewable diesel with our Dickens and Martinez And the pre treat facilities around those, as we look forward, that's inclusive of sustainable aviation fuel or So when you're thinking about growth, it is also inclusive of SAF. And

Speaker 2

so Second thing I

Speaker 6

want to maybe touch on is that we are a very large supplier of fossil fuel jet fuel today. And our goal is to supply the products that our customers want and need going forward. So as they and as you stated, there's a lot of chatter around SAF. We're there to help meet that. And why you're hearing a lot of the through the airline industries is because SAF is the most viable near term decarbonization tools for that space.

Speaker 6

So as we look forward, We are very active in that. The challenge is the premium required. As you look at the SAF, Whether it be a conversion of a Dickinson or Martinez produced SAF or new investment, these are multi year, very large capital projects. Having confidence in that premium to justify that investment is where that little opportunities Exists today. So we are very active just as we were in RD and the evaluation, the studies of Where to participate in SAF?

Speaker 6

And I think you see a lot of it within MPC, but also within our subsidiary company, Virent. They take sugars into sustainable aviation fuel. You've seen announcements with them on test flights with United, Most recently, one with the Emirates along with our JV partner Neste. So you can see we're very active in the space, Evaluating it, studying it, monitoring it and determining when is the right time to invest.

Speaker 12

Thank you very much. I'll actually leave it there. Have a great day.

Speaker 2

Thank you, Sam.

Operator

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

Speaker 13

Hi, there. I just had a follow-up question related to the Russia discussion And specifically related to VGO, with the Russian VGO exports to Europe dissipating from the market and Lots of clarity where incremental VGO is going to come from. Understand that it could help gasoline cracks all else equal, but how should we think about How it impacts your capture and what your net DGO position is long or short and how it trickles through your system?

Speaker 8

Yes, Theresa, this is Rick. So we're short VGO. We're out in the market, Especially now more than ever when it's turnaround season. And I will tell you, the way we view this is this So we believe we'll be a recipient of it and that will show through via the cracks going forward. Specifically, I will tell you as these Middle Eastern refineries come online mid summer, Teresa, they will We'll domestically consume VGO, which in turn will further short the market, which we believe could be a nice shot in the arm Kind of mid year, end of year.

Speaker 8

So more to come on that, just something to keep your eye on.

Speaker 13

Thank you. And I also had a follow-up question related to my comments about consumers Just curious what your views on elasticity is Or at this point, how does that reconcile with Brian's comments about gasoline potentially structurally being off about 3%?

Speaker 5

Yes. Theresa, it's a great question. It's one that we look at and try to draw the right corollary to. But We do see a degree of flexibility there, of course. It depends on the market, depends on the extent of the retail prices.

Speaker 5

We have seen and I commented on the West Coast in my comments earlier and what I didn't mention, but we got under $5 a gallon on the West Coast in Q4. So that's where we saw my view is we saw nice demand recovery as it relates to retail prices. Our forward view is definitely instructed by a moderated view on retail pricing, which we do think will impact demand somewhere in the neighborhood of 2% to 3 Depending on the market, but somewhere in the neighborhood of 2% to 3%.

Speaker 3

Thank you.

Speaker 2

You're welcome, Theresa.

Operator

Thank you. Our next question comes from Jason Gabelman with Cowen. Your line is open.

Speaker 14

Yes, good morning. How is it going? I don't think you guys discussed the outlook, maybe I missed The outlook for light heavy crude quality just clearly they've been very supportive In the past couple of quarters to earnings and I think many in the market expect those to come in As refiners consume, the SPR releases, new capacity comes online, OPEC exports have fallen off a bit. Can you just discuss how you expect those differentials to trend throughout the year? Thanks.

Speaker 8

Yes. Hi, Jason. It's Rick. Very good question. So it's kind of a tale of 2 ends.

Speaker 8

I'll start with the front end here because As you look with what happened with the Keystone pipeline outage that backed in barrels into Canada, Canadian inventories are high. We've had a lot of turnarounds in the U. S. Gulf Coast. We've had winter storm Elliott back in barrels.

Speaker 8

So when you kind of add all of these together along with a few of a few folks in the Mid Con, specifically Had 2 having issues. We are seeing really robust spreads right now and we continue to see that To hang on for a bit, as the year plays out and things get back to normal, I would say you could see some fall off So the spread, but we're still quite optimistic that it's going to be a better spread than mid cycle as we look at the year in total.

Speaker 14

Great. That's helpful. And just my follow-up, I appreciate the comments on the Martinez project and operationally it sounds like Everything is going well there. I was wondering from an earnings perspective, how much you expect that project to contribute in 2023, Just given the pretreatment unit won't start up until later in the year and at the numbers we look at, it seems like margins For projects that don't have pretreatments are much more challenged than projects that do. So if you could just talk about The earnings in 2023 and the potential step up from the project once the pretreatment unit is online.

Speaker 5

Yes. This is Brian. Jason, just maybe a reminder that we do have pretreatment capacity not on-site, but off-site. So Both at Beatrice and our Cincinnati facility, we've got substantial pretreatment capability there. So just kind of a reminder there and Regarding the overall EBITDA or economics outlook to Mike and Mary Anne?

Speaker 2

Yes, Jason, we don't give specific Individual facility earnings profiles, I know it's a question that people have been trying to get their arms around, but The best guidance I can give you is if you look at the macro environment around the California market and where each of the subsidies are trading, The key to remember because people ask us about LCFS, but there are other components to subsidy out there That all kind of work together and the 3 of them together have been relatively consistent, even though a lot of them are moving around a little bit. So that should help you a little bit as you model it. And then obviously look at where feedstocks are trading and diesel is trading.

Speaker 3

The other incremental comment that I would add to Mike's also is remember when we completed the JV with Neste, one of the things that we were Looking for was incremental improvement around our feedstock slate and we got that with a partner in Neste. So Even though we are sharing 50% of the project, we actually improved the economics of the project by the feedstock that Neste is obligated to bring through their partnership with us. So just another data point as you're contemplating how to think about that.

Speaker 2

Great. Thanks. You're welcome.

Operator

Our next question and our last question will come from Matthew Blair with TPH. Your line is open.

Speaker 11

Hey, thanks for taking my question. Could I get your thoughts on the wide octane Spreads that we've been seeing, do you think that will persist for the rest of 2023? And are you fully compliant on Tier 3 or are you short And buying credits in the market. Thanks.

Speaker 5

Yes, Matt, I can comment on the octane. They obviously are going to move seasonally quite a bit, but we've seen steady strength in octane spreads really as a result of running the systems harder. As we look not just our system, but the global system working to meet demand and outrunning our octane capacity to a certain extent as Other facilities have been shut down throughout the network. So kind of a bullish long term outlook as it relates to octane spreads and positioned well around Based on our octane capacity in our system.

Speaker 2

And to the last part, we're not going to comment on our long or short

Speaker 1

All right. With that, thank you everyone for your interest in Marathon. Did you have any additional questions or if you'd like clarification on the topics discussed this morning, Please reach out and our IR team will be available to your call. Look forward to speaking with everyone. Thank you.

Operator

Thank you. That does conclude today's conference. Thank you for participating. You may disconnect at this time.

Remove Ads
Powered by Quartr
Earnings Conference Call
Marathon Petroleum Q4 2022
00:00 / 00:00
Remove Ads