Marathon Petroleum Q1 2023 Earnings Call Transcript

Presentation

[Operator]

Welcome to the MPC First Quarter 2023 Earnings Call. My name is Sheila, and I will be your operator for today's call. [Operator Instructions]. Please note that this conference is being recorded. I will now turn the call over to Kristina Kazarian. Kristina, you may begin.

[Kristina A. Kazarian, Vice President, Finance and Investor Relations at Marathon Petroleum]

Welcome to Marathon Petroleum Corporation's First Quarter 2023 Earnings Conference Call. The slides that accompany this call can be found on our website at marathonpetroleum.com under the Investor tab.

Joining me on the call today are Mike Hennigan, CEO; Maryann Mannen, CFO; and other members of the executive team. We invite you to read the Safe-Harbor statements on Slide 2. We will be making forward-looking statements today. Actual results may differ. Factors that could cause actual results to differ are included there as well as in our filings with the SEC.

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

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

Thanks, Kristina, and good morning, everyone.

Let me first share our view on the macro-environment. In the first quarter, volatility in the global energy markets remained high, driven by uncertainties around the potential for recession, the pace of China's economic recovery and the impact of sanctions on Russian products. At the same time, supply remains tight, supported by nearly 4 million barrels per day of global refining capacity that has come offline in the last couple of years. Global demand continues to grow as the need for affordable, reliable energy increases throughout the world. IEA is projecting 2 million barrels a day increase in 2023.

Since last quarter, distillate cracks have come down, gasoline cracks have improved as expected given the onset of the summer driving season. So overall, we believe supply constraints and growing demand will support strong refining margins throughout 2023. Cracks have decreased from 2022 levels, but it's still above historic mid cycle levels. In alignment with what we said last quarter, we remain bullish into the driving season and gasoline strength is expected to improve the diesel situation while jet demand continues to improve. As we continue throughout the year, much will depend on the ongoing recovery in China and the extent, if any, of [Phonetic] recessionary impacts.

We continue building out our global presence, supported by our offices in Houston, London and Singapore as we invest in our global commercial strategy. And our cost-advantaged refining system is well positioned to supply growing markets. This quarter, despite significant planned turnaround work at several key facilities, in particular in our Gulf Coast region at Galveston Bay and Garyville, we delivered the strongest first quarter results in the Company's history. Planned maintenance activities reduced refinery throughput by 11 million barrels compared with the fourth quarter. Our team's operational and commercial execution supported our ability to generate refining and marketing segment adjusted EBITDA of nearly $4 billion or $15.09 per barrel.

MPLX remains a strategic part of MPC's portfolio as it continues to grow its cash flows and capital returns. Our Midstream segment delivers durable and growing earnings. This quarter, it generated adjusted EBITDA of $1.5 billion, which is up 9% year-over-year. MPLX distributions [Phonetic] MPC was roughly $500 million this quarter, and an annualized rate of over $2 billion, which fully covers MPC's dividend as well as half of our planned 2023 capital program.

During the first quarter, we advanced value-creating projects. At Galveston Bay, we completed the STAR project. Rather than expand the GBR cokers [Phonetic], we elected to upgrade the resid hydrocracker unit as it offers better conversion and increased liquid volume yield. Fractionation modifications offer increased diesel recovery, and the refinery will be able to process significantly more discounted heavy crude.

Overall, STAR is expected to add 40,000 barrels per day of incremental crude capacity and 17,000 barrels a day of resid processing capacity. Startup activities are progressing and we expect to start to ramp through the second quarter of 2023. The incremental profitability from this project will primarily be determined by the spread between heavy crude and untreated diesel over the incremental 40,000 barrels a day of crude capacity.

At the Martinez Renewable Fuels facility, we reached full Phase I production capacity of 260 million gallons per year of renewable fuels, ramping to design rates and yields as planned. Phase II construction activities are on schedule. Pretreatment capabilities are expected to come online in the second half of 2023, which will enable the facility to ramp to its full expected capacity of 730 million gallons per year by the end of 2023. Martinez will be among the largest renewable diesel facilities in the world, underpinned by a competitive operating and capital cost profile, robust inbound and outbound logistics flexibility and advantaged feedstock fleet and our strategic relationship with Neste.

In the first quarter, we returned over $3.5 billion to MPC shareholders via dividends and share repurchases. And today, we announced an additional $5 billion share repurchase authorization, reinforcing our commitment to strong capital returns.

Let me share some of the progress on our low-carbon initiatives. The Martinez [Indecipherable] are competitively advantaged. They are supported by upstream value-creation integration with our Beatrice and Cincinnati pretreatment plants and downstream integration with our vast marketing footprint. The strategic partnerships we're cultivating with Neste, ADM and the Andersons [Phonetic] creates platforms for additional collaboration within renewables.

This quarter, we made an investment in an emerging producer of dairy farm-based renewable natural gas, providing the ability to participate in early-stage development at an attractive entry point. Our [Indecipherable] subsidiaries progressing a commercially feasible assessment for converting bio-based feedstocks into gasoline and sustainable aviation fuel. We believe for these projects and opportunities, we are taking steps to advance our goal to lower the carbon intensity of our operations and the products we manufacture and supply to a growing market.

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

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

Thanks, Mike. Moving to first quarter results. Slide 5 provides a summary of our financial results. This morning, we reported earnings per share of $6.09. Adjusted EBITDA was $5.2 billion for the quarter, and cash flow from operations excluding unfavorable working capital changes was nearly $4.2 billion. During the quarter, we returned $337 million to shareholders through dividend payments and repurchased nearly $3.2 billion of our shares.

Slide 6 shows the reconciliation between net income and adjusted EBITDA as well as the sequential change in adjusted EBITDA from fourth quarter 2022 to first quarter 2023. Adjusted EBITDA was lower sequentially by approximately $600 million. This decrease was driven by refining and marketing as refining margins per barrel were down quarter-over-quarter. As we indicated last quarter, throughputs were lower primarily due to the significant planned turnaround activity.

Corporate expenses were roughly in line with our guidance and despite general inflationary pressures, we have maintained cost discipline since taking $100 million out of corporate cost since 2020. The tax rate for the first quarter was 21%, resulting in a tax provision of approximately $800 million.

Moving to our segment results. Slide 7 provides an overview of our Refining and Marketing segment. Like many in the industry, several of our refineries were impacted by winter storm Elliott at the end of December. These impacts carried into the first quarter, reducing our crude throughput by 3 million barrels. Winter storm Elliott and higher planned maintenance in the Gulf Coast region reduced overall refining utilization, which was down 5% to 89%. Sequentially, per barrel margins were lower in all regions compared with the four quarter. Capture was 98%, reflecting a strong result from our commercial team, particularly given the extensive turnaround activity this quarter.

Refining operating costs per barrel were roughly flat sequentially in the first quarter at $5.68, lower throughput compared to the fourth quarter impacted operating cost per barrel. This was partially offset by lower energy costs, primarily in the Gulf Coast and Mid-Con regions. Although we experienced higher natural gas prices in the West Coast, we expect operating cost per barrel to be lower in the second quarter as reflected in our guidance.

Slide 8 provides an overview of our Refining and Marketing margin capture this quarter, which was 98%. Our commercial teams executed effectively in a volatile market environment. Light product margin tailwinds were balanced against impacts associated with inventory build and planned maintenance activity. Capture results will fluctuate based on market dynamics. Still, we believe through our commercial efforts, our capture baseline has moved closer to 100%.

As our strategic pillar indicates, we have been committed to improving our commercial performance and believe that the capabilities we have built over the last 18 months, we'll provide a sustainable advantage. We have meaningfully changed the way we go to market from a commercial perspective throughout our entire company. We believe these capabilities will provide incremental value beyond what we have realized to date.

Slide 9 shows the change in our Midstream adjusted EBITDA versus the fourth quarter of 2022. Our Midstream segment delivered resilient first quarter results. Adjusted EBITDA was 9% higher year-over-year, reflecting business growth. Our Midstream business continues to grow and generate strong cash flows, we are advancing our capital plan with projects anchored in the Marcellus, Permian and Bakken basins. These disciplined investments in high return projects along with our focus on cost and portfolio optimization are expected to grow our cash flows. This will allow us to reinvest in the business and return capital to unit holders.

This quarter, MPLX distributions contributed $502 million in cash flow to MPC. MPLX remains a source of durable earnings in the MPC portfolio and is a differentiator for us compared to peers without -- between businesses.

Slide 10 presents the elements of change in our consolidated cash position for the first quarter. Operating cash flow excluding changes in working capital was nearly $4.2 billion in the quarter. Working capital was a $98 million headwind for the quarter, driven primarily by increases in crude and product inventory offsetting benefits from a decrease in refined product receivable related to lower product sales. Capital expenditures and investments totaling $664 million this quarter, we saw consistent spending in refining [Phonetic] in the first quarter as work progressed on the Martinez Renewables Fuel facility conversion and the completion of the Galveston Bay STAR project.

MPC returned over $3.5 billion via share repurchases and dividends during the quarter. This represents an 85% payout of the nearly $4.2 billion of operating cash flow excluding changes in working capital, highlighting our commitment to superior shareholder returns. We now have $9 billion remaining under our current share repurchase authorization, which includes the additional $5 billion approval announced today. At the end of the first quarter, MPC had approximately $11.5 billion in cash and short-term investments.

Turning to guidance. On Slide 11, we provide our second quarter outlook, we expect crude throughput volumes of roughly 2.6 million barrels per day, representing utilization of 91%. Utilization is forecast to be higher than the first quarter level due to planned turnaround activity having a lower impact on crude unit in the second quarter. Planned turnaround expense is projected to be approximately $400 million in the quarter, with activity primarily in the Mid-Con and West Coast regions. We expect turnaround activity to be front half weighted in 2023. By the end of the second quarter, we expect to spend roughly $760 million on turnaround in 2023 and anticipate the full year turnaround spend to be comparable to the level of spend in 2022. Operating costs per barrel in the second quarter are expected to be lower at $5.20, as we expect to see benefits from higher throughput and lower energy cost. As we look further into 2023, we anticipate our operating cost per barrel would decline and trend towards a more normalized level, a $5 per barrel as we complete turnaround and project activity.

Distribution costs are expected to be approximately $1.35 billion for the second quarter. Corporate costs are expected to be $175 million representing the sustained reductions that we have made in this area.

To recap, our first quarter results reflect our team's strong operational and commercial execution across the Company. Our capital allocation framework remains consistent. We will invest in sustaining our asset base while paying a secure competitive dividend with the potential for growth. We want to grow the Company's earnings, and we will exercise strict capital discipline beyond these three priorities we are committed to returning excess capital through share repurchases to meaningfully lower our share count.

With that, let me pass it back to Mike.

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

Thanks, Maryann. In summary, our results reflect the strongest first quarter in the Company's history, generating $5.2 billion of adjusted EBITDA. MPLX remains a source of durable earnings in the MPC portfolio, distributing just over $500 million to MPC this quarter. And as MPLX grows its free cash flow, we believe we'll have capacity to increase capital returns to MPC. This quarter, we invested $664 million. We will invest capital where we believe there are attractive returns. We remain focused on ensuring the competitiveness of our assets as we progress through the energy evolution.

Solid execution of our three strategic pillars is foundational. We remain steadfast in our commitment to safely operate our assets, protect the health and safety of our employees and support the communities in which we operate. We believe the improvements we've made to our cost structure, portfolio and commercial and operational execution have driven sustainable structural benefits, which will enable us to capture opportunities irrespective of the market environment. We believe MPC is positioned as the refiner investment of choice with the ability to generate 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.

[Kristina A. Kazarian, Vice President, Finance and Investor Relations at Marathon Petroleum]

Thanks, Mike. As we open the call for your question, 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. Sheila, we are ready for them.

Questions and Answers

[Operator]

Thank you. [Operator Instructions]. Our first question will come from Neil Mehta with Goldman Sachs. Your line is open.

[Neil Mehta, Analyst at The Goldman Sachs Group]

Hey, good morning, team, and congrats on a great first quarter. I had a couple of questions here. The first is around the West Coast. We're all watching Singapore margins right now and they continue to trade very weak. And just your perspective of -- do you think the weakness in Asia is a reflection of demand? And do you see risk that that product comes to the West Coast at which point there could be some downward pressure on PADD 5 margins?

[Rick D. Hessling, Senior Vice President, Global Feedstocks at Marathon Petroleum]

Yeah. Hi, Neil, it's Rick. Really, I think the way we look at it is we're looking at it from a global perspective. So we'll touch on the West Coast here in a moment. But when you think globally, it's a great callout to put Asia and Singapore in a bucket, but I'd also throw Europe into that bucket as well. And if we've learned anything over the last couple of years as trade flows and cracks or the world is more connected than it's ever been, so it's a really good callout in drawing if there is a truly impact to the U.S. refiners. One thing I'd say is as we look at Asia and Europe specifically, we actually see that as support for U.S. cracks. We see it as bullish for MPC. I mean we're hearing rumors of both regions you mentioned, Singapore and Asia and Europe, we're hearing rumors of run cuts there, which we see as bullish for us, especially on the West Coast, as you know, the incremental barrel at times comes from Asia. And if it doesn't come to the West Coast, we see that as positive for margins and cracks. And then lastly, I'd say our breakeven is structurally lower than it's been in the past. And as we view Europe as the marginal player in the world, we have a competitive advantage, as you know, on energy costs, feedstock acquisition, complexity of our refineries, our workforce, our reliability, and then last, but certainly not least, we have an incredible export -- global export program on products. So we're able to clear our markets quite well. So we believe if you -- when you add all of those up, Neil, it really gives us quite the competitive advantage, specifically in the West Coast, but I would say in PADDS 2, 3 and 5 where we operate. And with that, I'll ask Brian if he has any specific comments on products in the West Coast to add.

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

Yeah. Thanks, Rick, and good morning, Neil. Just a couple of quick data points. Very good question. We are seeing some fundamental shifts in global trade flows as a result of economic activities and product sanctions, etc. Rick did mention the marginal barrel coming into the West Coast has traditionally been for many years an import coming from the Far East. So just on order of magnitude, we're looking at 250,000 barrels a day to balance the system, primarily gas and jet fuel, and we expect that balance to continue to trend in terms of favoring more imports as we go forward as more facilities are converted to RD on the West Coast. Other data point, I think that's relevant in terms of penetrating the West Coast market and from the Far East, is also the tanker rates and availability of the foreign fleet. Current rates out of South Korea into the West Coast are about $8 a barrel. That's about 2 times of what historically we'd seen in the market. And the other two components that make it a little bit tricky to push incremental barrels into the West Coast or of course in California, [Indecipherable] and then just logistics constraints in terms of docks and tankage, which are also being further constrained by some of the RD penetration that we're seeing in the West Coast market.

[Neil Mehta, Analyst at The Goldman Sachs Group]

That's great perspective, guys. And then a follow-up for me is just around return of capital. And you guys have done a super job getting the share count down. Is there a consideration here though, given the degree of economic uncertainty that might be out there about [Technical Issues] downside resilience through strengthening the balance sheet as we've seen in the past, companies have gotten themselves in trouble by buying back stock towards the top of the cycle, and you guys have generally been countercyclical in your buyback approach.

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

Hey, Neil, thanks for the question. It's Maryann. So look, first of all, as you know, we've got a little over $11.5 billion of cash sitting on the MPC balance sheet. And you've heard from the team and Mike this morning, our views on the balance of the year. We do take into consideration each time we make our decisions on what the share repurchase will look like, and we do that quarterly. We look at the macro conditions. We look at our cash positions. Obviously, having a strong balance sheet is foundational for us to be able to execute our capital allocation program as we just shared with you. But we do take a look at it quarterly, and it is not something that we set for a long period of time. So we have the ability to evaluate all of those things, as you just outlined for us.

[Neil Mehta, Analyst at The Goldman Sachs Group]

Thank you, guys.

[Operator]

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

[Kalei Akamine, Analyst at Bank of America]

Hey, good morning, guys. This is actually Kalei on for Doug. So thank you for getting me on. My first question is just on the macro and how you're positioned here for the second quarter. So your peers are seeing really solid demand numbers and your opening commentary was quite constructive. Yeah, the throughput guidance put out for the second quarter looks a bit conservative. So at a high level, can you share any insights on demand from your own system and maybe elaborate a bit more on your outlook near term?

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

Good morning. This is Brian. Yeah, let me weigh in on that. So first and foremost, as we look across an outlook for demand, we really look comprehensively at our entire book of business from a marketing standpoint. So it's including our wholesale class of trade, our direct dealer, our branded jobber, our national accounts. So we really think that, that's more reflective of the market as a whole. And let me give you some color on the quarter. So I'll give you some numbers in terms of what Q1 looked like relative to Q1 of 2022. So on the gasoline front, our book of business is just described was up 4.7%. The EIA call on demand on Q1 was about 1.7%. On the West Coast, despite some historically heavy rainfall and flood events, we're actually flat year-on-year, which bodes for some optimism as we trend into the summer in the West Coast. On the distillate side, we are off about 1.2% in the first quarter. EIA call on demand was down about 7%, but we believe that's heavily weighted with some sluggish home heat demand due to the warmer weather temperatures this past winter in the Northeast. On the West Coast, often asked in terms of distillate, we were actually up 1.4% year-on-year again despite those weather events. And on the jet fuel side of the business, we saw a 6% rise in demand in the quarter, which comps to about 5% from the EIA perspective. And we expect to see jet to continue to grow on the trend that it's been on really over the last two years to reach pre-pandemic levels late this year into early 2024. A couple of other really important data points as we look forward on demand, I think it's important to mention that -- if we look at gasoline, last year around this time of the year, we were about $4.20 per gallon at retail. We're currently around $3.61. So about 15% below prior year. We believe that bodes favorably. We're seeing that. As we look at our April sales, as we trend into Q2, we've seen week-on-week growth. So we're seeing that optimism built into the summer driving season. And similarly, on the distillate side, retail is off almost 22% year-on-year. Now as it relates to some of the sluggishness in demand in the first quarter on the distillate side of the book, as we look domestically, certainly, inflation is creating some degree of drag on demand. We're seeing that really pretty consistently across the U.S. on a nominal basis coming off a pretty high clip over the last year or so. But it goes without saying, with the inflationary pressures, you do expect to see some demand curtailments, and we do see that manifesting. But it's not something that is a bright red light for us right now. It's something that we're watching closely. As we trend into the ag season here in the Mid-Con, we're seeing early signs of recovery of demand as we go into the second quarter and have optimism as we roll through the balance of the year. The last thing I would say is as we look forward, and we've seen a shift away from a demand perspective, favoring diesel to gasoline, we do think that that sets up well for our commercial capabilities as we look to do more inter and intra-regional optimization as we come away from a strong, strong distillate lead over the last year and a half or so, to more of a balance between gas and diesel in terms of which one leads the crack.

[Kalei Akamine, Analyst at Bank of America]

So I guess, on balance, it sounds quite positive. Thank you. My second question is for Maryann. The buyback is obviously something that separates you from your peers, and we appreciate the visibility provided by the $5 billion expansion today. But I want to ask about the ordinary dividend. In our view, refining is not contributing to that dividend today as it's more than covered by the distributions from MPLX. So as you close out spending on the STAR project and consider what we think is a reset in the mid-cycle, it looks like the dividend has a lot of capacity to increase here. So how are you thinking about that piece of your value proposition?

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

Thanks for the question. So as it relates to the dividend, we continue to be committed to the secure competitive, and as we've said, potentially growing dividend. We've committed to evaluate that dividend at least annually, and we intend to do so in a very similar schedule as we did in 2022. It is part of the capital allocation framework, as we've shared, and we will evaluate that in a similar time frame as we did in 2022.

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

[Speech Overlap] Thanks for noticing that. One of the things that we think is unique in our value proposition is the $2 billion-plus that we're getting from MPLX. And if you listened to the call earlier, MPLX had a very strong quarter. We continue to grow the cash flows at MPLX. We'll have a similar distribution increase discussion later in the year. But I think it's pretty important to understand that $2 billion-plus coming in, as you mentioned and I mentioned in prepared remarks, covers the dividend and a good portion of the capital. So I think it's a pretty important point as to the way we think about all the cash flows within the portfolio. So thanks for pointing that out, and it does come into our thinking as we advance both dividend and repurchase activity.

[Kalei Akamine, Analyst at Bank of America]

I appreciate the comments, guys. Thank you.

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

You're welcome.

[Operator]

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

[Manav Gupta, Analyst at UBS Group]

See, I quickly just wanted to focus a little bit on the Galveston-based STAR project. I think it's not as I understood. And if you could help us understand how to model it a little more accurately? I mean, 40,000 barrel day increase we can model more accurately. But how does the 17,000 barrel resid processing capacity, what are the spreads we should watch for that so we can give you full credit for this project because I honestly don't think you're getting too much credit for this project in your numbers?

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

Manav, it's Mike. I'll start, and then I'll let Tim add some color. As far as modeling, the way to think about the incremental change at the plant now is we'll be able to run 40,000 barrels a day of more heavy crude with the additional resid processing capability. So the way to model it is 40,000 times the delta between heavy crude and untreated or unfinished distillate, that's exactly what STAR is doing, and then we can add in commercial changes to that, etc., etc. But as far as the modeling, it's that delta for whatever margin you think, and today, I will say, right today, that's running about $15 to give you a point in time, multiply it by the 40,000 and wherever you project margins into the future. Tim can give a little bit more color on where we stand on the project itself.

[Timothy J. Aydt, Executive Vice President, Refining at Marathon Petroleum]

Yeah, Manav, this is Tim. Thanks for the question. I would say that you have to keep in mind is, first off, I think, that we completed this project in phases. So really a good amount of the STAR scope has already been completed and has been put in service previously. So it's already earning a return. I think the remaining STAR project is really around this resid portion of the RHU. So that' indeed finished up during the mechanical completion during the first quarter turnaround and then we've been in start-up during April. So that's all looking good from that standpoint. I think the other thing that I would say is that we ended up expanding the RHU, the resid hydrocracker instead of the GBR cokers and that's really because of the better conversion and the liquid volume expansion that you get with the addition of the hydrogen. So that can maybe be explained a little bit if you look at a comparison between a coker and the RHU unit, if you put 100 barrels of liquid into the coker, you get about 80 barrels of liquid out and the rest is coke. That's lower valued. If you put that same 100 in the RHU unit, you get 107 barrels of liquids out. So obviously, that 27 barrels is about 34% increase in liquids, which are higher valued. So that's why we made that decision. I would also point out that GBR is unique and this got the only operating resid hydrocracker unit in the U.S. So that's what made that beneficial. And we had a pretty capital-efficient project there to make the modifications to the RHU as opposed to starting with another greenfield coker. So hopefully, that's helpful.

[Manav Gupta, Analyst at UBS Group]

Yeah. That's very helpful. My follow-up quickly here is your first phase of Martinez is already on, looks like a very smooth start compared to some of the other projects, which are facing problems. Now obviously, at some point, pretreat comes on and then the second phase. So if you could just walk us through when everything starts up, and then there is one small request is that when everything starts up, you probably are one of the bigger producers of renewable diesel. So at some point, if you could break those earnings out for us, then we can give you more credit for it.

[Timothy J. Aydt, Executive Vice President, Refining at Marathon Petroleum]

Okay. Manav, I'll start with maybe just giving an update on the schedule. So you are correct. The Martinez reached the full Phase I production of 260 million gallons per year back in -- earlier in the first quarter. Facility did ramp up to the design rates as planned and as scheduled. We're happy to report that the remaining construction activities at Martinez are on schedule. Regarding the pretreatment unit, that's scheduled to come online in the second half of 2023. And then by the end of the year, we're looking to have the full rate of production of renewable diesel at 730 million gallons per year by the end of December. And now I'll turn it to Maryann relative to the second part of your question.

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

Thanks for the question, Manav. Yeah. We'll continue to evaluate the appropriate timing for a renewable segment. As we've shared before, for 2023, we won't have a renewable segment, but we recognize the question. We recognize the importance of our renewables and commitment to low-carbon strategies, and we'll continue to evaluate that and make a proper determination as these projects come full online as to when we'll do that.

[Manav Gupta, Analyst at UBS Group]

Thank you so much for your help.

[Operator]

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

[Paul Cheng, Analyst at Scotiabank]

Hey, guys. Good morning. Can I just go back into the Galveston Bay? Can you -- I mean, you talked about wanting more heavy oil. Does it in any shape or form that changes your product [Indecipherable] and also that what is the opex associated with wanting that additional assets or that expanded asset?

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

Yeah, Paul, I think you hit it on the head. It just gives us more ability to run heavy crudes. So that's at the front end and the incremental coming out the back end is distillate. The project itself coming out of the resid hydrotreater, it's unfinished distillate, but that's why I was trying to answer Manav's question on how to model it. The easiest way to think about it is heavy crude to unfinished distillate. That's the crack spread of the incremental change.

[Paul Cheng, Analyst at Scotiabank]

So we should assume that the entire 40,000 because then you have [Indecipherable] expansion, so that [Indecipherable] is up, say, 43,000 barrels per day. Is it all of them that will be distillate or 70%?

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

No, no, it's the 40,000, Manav -- I'm sorry, Paul. I'm saying just like I answered to Manav is, it's 40,000 barrels a day of crude that comes into the plant, heavy crude, what comes out of the plant is untreated distillate.

[Paul Cheng, Analyst at Scotiabank]

I see. Okay. So at the end of time [Technical Issues] distillate. And how about the opex associated with that unit? Is that [Speech Overlap].

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

We haven't given that specific, that particular unit itself specifics.

[Paul Cheng, Analyst at Scotiabank]

Okay. The second question is quite simple. Maryann, in your presentation, you indicated that first quarter result was being hurt by unfavorable inventories impact. Can you quantify and that -- also that -- say where's that unfavorable inventory impact that's showing up? I suppose that it's showing up in the plant [Indecipherable]? And also that [Indecipherable] will get reversed in the second quarter?

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

Sure, Paul. So in the quarter, as I was trying to share capture in the quarter was 98%. There were a couple of key factors that actually impacted our performance. One of those, as I mentioned, was planned turnarounds. Obviously, that impacted throughput, Galveston Bay. And as you know, we took Galveston Bay, we took that opportunity to complete STAR as well. And there was also turnaround in the Mid-Con as well. The second driver was inventory impacts. And you may remember from the fourth quarter, we actually had a tailwind. We built some inventory in the quarter. We wouldn't expect necessarily that inventory to impact the second quarter as well, but those things are volatile. And then one of the key benefits in the quarter was actually light product margins. In the second quarter, we gave guidance. But remember, we are very much front half-weighted from a turnaround perspective. Actually, our guidance for Q2, roughly $400 million is above the first quarter actual turnaround expense. This will be for us four quarters of heavy turnaround somewhat unprecedented. We made what we think were some good decisions in early 2022 to delay turnaround to be sure that we did not have lost opportunity with respect to the heavy driving season and the increased demand. And similarly, when we think about the second quarter, we would expect that the months of May and June would see benefit as we look at the turnaround expense there. So I will pause there and see if maybe Rick and/or Brian want to add any incremental color with respect to the performance in the quarter.

[Paul Cheng, Analyst at Scotiabank]

And Maryann, I just want to clarify that. So the first quarter, the statement saying that is a negative inventory -- unfavorable inventory impact, that is the absence of the fourth quarter benefit or that it actually is a negative inventory impact in the first quarter?

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

No, Paul, sorry about that. It is actually a negative impact in the first quarter. We actually built inventory in the quarter.

[Paul Cheng, Analyst at Scotiabank]

And would you quantify how big is that?

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

Paul, we normally don't give that level of detail. It was not, however, the -- of those three elements, it was not the single largest driver.

[Paul Cheng, Analyst at Scotiabank]

Okay. And can you tell us which region that majority of the inventory build happened? Or is it just across all regions?

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

Yeah. We had inventory builds across all regions, Paul.

[Paul Cheng, Analyst at Scotiabank]

Okay. Thank you.

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

You're welcome.

[Operator]

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

[Sam Margolin, Analyst at Wolfe Research]

Hi, good morning, everybody. Thanks for taking the question. This one is on diesel. It connects to some of your comments earlier about the heating impact and maybe some timing-related factors in the market. But there was an expectation that as jet fuel recovered that it would benefit the diesel market because there was some overblending of jet components into diesel and we ran into sort of tough demand comps around both price and weather. And so maybe that benefit didn't necessarily filter through, but I was wondering, since you're so -- you guys are pretty indexed heavily to the jet market, you probably see things that other operators don't. If you think that that benefit is maybe coming just a little bit on a lag, particularly given some of your comments around demand on the jet side, which seems to be performing as expected? Thanks.

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

Yeah, Sam, this is Brian. Yeah, very good question, very on point. I think the question here and the paradox is demand looks fairly decent as you look across the distillate barrel, but we've seen this sell off here over the last several weeks. So there lies the question. And our view is it's a little bit overdone. But I think the read-through is not on the macro fundamentals of supply and demand. But the one element that we think overreached into the distillate market and the outlook was the Russian sanctions. So we've all been anticipating the sanctions that went into place earlier this year and the associated impacts were uncertain. And as you know, the market doesn't process uncertainty very well. And I think the market had to be more bearish view, if you will, of those sanctions and the implications in terms of slowing flows into the global market. And what we've seen is those flows have continued, albeit at a pretty significant discount, they have continued. So I think the overreach or the overarching sentiment around distillate and valuation is not on supply and demand, but with a little bit more clarity around the impact or lack of impact, if you will, on the Russian sanctions on the global distillate flows.

[Sam Margolin, Analyst at Wolfe Research]

Okay. Yeah, that makes sense. We saw the same thing in crude, I guess. I am sorry, go ahead.

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

No, I was just going to add, Sam, we still are constructive on jet recovery as well, to your point. It's been slowly moving in the right direction. We think that's going to continue to advance throughout. And if gasoline is as strong as we think it's going to be, I mean, inventories are still pretty low gasoline compared to last year compared to the five-year average, however, you want to look at it. It's a constructive gasoline market, it's a recovering jet market. And in our view, that bodes well for distillate.

[Sam Margolin, Analyst at Wolfe Research]

Okay. Thanks. And as a follow-up, this is sort of a redo on Neil's question about the balance sheet structure and capital allocation, but I'll put it in a different way. I think a lot of people are aware now that the MPLX distribution more than covers the MPC dividend, but what's interesting now is that your interest income on your cash balance covers like half of the MPC dividend or almost. And it's -- there's a matter of uncertainty in the economic environment, but then there's also sort of what's going on with rates and the optimal capital structure around that. So I'm just wondering if -- maybe there's a change to kind of the mid-cycle cash balance that I think was $1.5 billion that you were targeting? Thanks.

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

Yeah. I'm going to start and turn it over to Maryann. Thanks for pointing that out as well, Sam. One of the things, I know all the analysts want to hear, what are we going to do over the next 12 months or so? And what we've been trying to say is it's much more of a dynamic discussion. Obviously, having north of $11 billion on the balance sheet is an important part of what we're doing. And at the end of the day, you said it very well. We're generating a decent amount of earnings off of that compared to where we were just a short time ago. So overall, I think the message that everybody should take away is we're not projecting out 12 months as to what we're going to do there because we think it's a real-time discussion. We are committed. As everybody has seen our DNA, we're committed to returning capital. At the same time, we look at all the parameters that come into play there. The MPLX distribution, the interest that we're getting on that, etc., etc. So I think you pointed out a couple of things that are important in our discussion and I know it frustrates people that we won't say what we're going to do for the next 12 or 18 months. But I think you've seen us get additional authorization from the Board. So we're committed to returning capital. I think you've seen us be very strict in our discipline on investing capital. We'll continue to do that. And our thought is, over the long term, that gives us the ability to increase value for shareholders.

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

I think Mike has covered it well. We talked about ultimately carrying $1 billion. We've had some real life during COVID, stress testing of that. We remain committed to our $1 billion. Your comment around interest, I think, is a real fair one. When you look at the -- our total interest and other financial costs. You can see over the last several quarters, the impact of the benefit of interest income on those cash balances as well, Sam. So I hope we've covered your question well.

[Sam Margolin, Analyst at Wolfe Research]

Yes. Thank you so much. Have a great day.

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

You're welcome.

[Operator]

Our next question will come from Jason Gabelman with TD Cowen. Your line is open.

[Jason Gabelman, Analyst at TD Cowen]

Good morning. Thanks for taking my questions. I wanted to first ask -- hey, I wanted to first ask on the light heavy spreads. They've come in quite a bit. It looks like [Indecipherable] is now below $12. Can you just talk about what you're seeing in the market, why that tightening is occurring? And if we were setting back to maybe something that's a more typical light-heavy spread versus where we've been the past six months or so?

[Rick D. Hessling, Senior Vice President, Global Feedstocks at Marathon Petroleum]

Hi, Jason, it's Rick. So actually, we believe the market's been overdone, which is often the case in markets. When you look at Q4, one could say it was overdone to the positive for us. Right now, we're looking and saying it's overdone to the negative. And a lot of things are yet to play out. And what I mean by that is when you look at the OPEC+ announced cuts, what will they really cut? History says they announced something and then often do less. So we'll watch that play out throughout the global flows. But in addition to that, I think a dynamic that we've seen change, and we actually view as a positive for us in some instances as barrels are staying closer to home. So what do I mean by that? When you look at Gulf of Mexico production, you look at BP's Mad Dog 2, look at Shell's Vitol platforms that just came online, that's incremental production right in our backyard in the Gulf Coast. We have a really close pulse on Canadian production, and we're seeing upticks in Canadian production. And that's positive for us throughout our entire system. Then you have the Venezuelan barrels that have been in the news lately, the Chevron Venz [Phonetic] barrels that we and others have taken advantage of. So I think this is yet to fully play out, Jason. I don't think it's as bad as it is today. Where it will go? That's a tough call. We just don't feel it is as depressed of an environment from a sweet-sour spread is what you're seeing today. And then lastly, I'll state, we were a big buyer of SPR barrels. Those barrels will just be coming into our system. That data is public. So when you add up all of the pluses and minuses, we actually feel a little more optimistic today going forward than pessimistic.

[Jason Gabelman, Analyst at TD Cowen]

Great. Thanks. I appreciate that outlook. My second question, I wanted to follow up on prepared -- on the prepared remarks you made around the low carbon business. And it seems like you may have aspirations to grow this business well beyond the Martinez renewable diesel plant. You talked about partnerships with a few counterparties, you purchase -- or you bought into the small RNG business. Can you just -- and then I guess the other thing is you have exposure to natural gas sourcing via MPLX. So I was just hoping if you could discuss maybe broadly, how you see this business evolving over the next few years? How big it could get? What the areas of growth you're focused on, particularly in light of the Inflation Reduction Act? Thanks.

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

Yeah. So I'll start. We're very enthusiastic that there could be some opportunities, albeit we think it's going to take a considerable amount of time for those to develop. We guided at the last quarter that we would spend about $350 million roughly in our low carbon portfolio. As you heard in our prepared remarks, we have some things going on in a couple of different areas. I think at the end of the day, that's why I keep using the word evolution rather than transition. It's going to evolve over a long period of time. It's going to be something that we think will be additive to our base business, but it will take a while for it to be meaningfully different than the strong refining and natural gas footprint that we have. But we're trying to be attentive to it. I mean we understand how the pendulum is going to move in that direction. We think the pace will be slower than other people think in general. But at the same time, we do think there's some opportunities for us. As we mentioned, we've made a small investment in renewable natural gas, which -- if that continues to be what we think it could be, we'll continue to put capital to work there. We went in at an early entry point. We thought that was important for us, and then we'll see if we can grow out that business as -- that's just one example. So we're attentive to it. Dave's team has a lot of resource looking for opportunities for us. And as we see them, we'll continue to update you.

[Jason Gabelman, Analyst at TD Cowen]

Got it. Thanks.

[Kristina A. Kazarian, Vice President, Finance and Investor Relations at Marathon Petroleum]

Sheila, I think we are ready for the next question.

[Operator]

Thank you. Our next question comes from Roger Read with Wells Fargo. Your line is open.

[Roger Read, Analyst at Wells Fargo & Company]

Yeah. Thanks. Good morning. Would like to come back to commentary on the gasoline markets. Just kind of maybe dig in a little deeper where you see the bigger issues, be it gasoline supply itself, whether it's components and then as we think across the 5 PADDs, the stress is not evenly distributed, right? I mean PADD 3 doesn't look all that bad on its own, the PADDS 1, 2 and 5 all show kind of different issues. So between the regional things you're looking at, the underlying demand trends and then anywhere else, there's octane components or something else? Can you walk us through where you think the biggest challenges will be for supply?

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

Yeah, Roger, good morning. This is Brian. So I'll give you a little bit more color on kind of our views. And I think you're fairly rooted in it based on your questions. The way I look at the markets, they're fairly well balanced and in check. So if you look at the -- the only really interesting [Indecipherable] right now is is the New York Harbor market, as you indicated, on gasoline, both whether it's in the West or out of the Gulf Coast. And the New York Harbor has seen quite a bit of strength in the quarter, primarily attributed to really low inventory levels. As mentioned earlier on the distillate side of the book, that was more of a drag, it was more of a net positive on the gasoline side of the business in the New York Harbor Northeast markets. There was some turnaround work as well in the PADD [Phonetic]. The [Indecipherable] down a little bit in the first quarter. And of course, some of the labor strikes over in Europe caused a little bit of havoc in New York Harbor in the markets and the balance is a bit. One of the kind of related read-throughs, if you will, on the interplay between Europe and the New York Harbor, I think, is relevant. As we've looked through the transition over the last couple of years, the New York Harbor has been long-time position as really the recipient of the push barrels, gasoline barrels coming out of Europe. And as refining balances have changed, a little bit more of a change in terms of consumer preference in Europe towards gasoline and away from distillate on the back end of diesel gate and some of the outflow of that several years ago in Europe have now created more of a pull environment into the New York Harbor. So that dynamic has changed and progressive over the last year. And yes, you're right to say that it's one of the more interesting markets in the U.S. And I'm confident that the market will work to close that gap. We're active in that market. We continue to see opportunity to push further into that market. Beyond that, octane, just for a moment, we had a huge pullout last summer in octane as $5 a barrel. We had a really strong start in the first quarter on octane values, but we do see that plateauing. More naphtha coming into the stream for blending in gasoline. And actually, as we switch from a diesel optimization throughout the system, it's more of a gasoline focus that will help the balances. And even some of the favorability of the light crudes in the Gulf Coast have a better yield on the gasoline/octane side of the book. So the forward view on octane is still favorable, but not -- we don't see quite the environment that we enjoyed last year as we progressed through the summer months.

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

And Roger, it's Mike. Brian gave a lot of specifics. I'll just give you my simplistic view is gasoline inventories, like you said, are spread around in the different regions, but there's still 10 million barrels below last year, 17 million barrels below the five-year average. The demand numbers are strong relative to last year, if you look over a longer period of time. So at least in our view, we think it's a very constructive time for gasoline at this time of the year as we're heading into which is more of the higher demand time as we head into the summer. So we're more constructive, I'll say, than maybe some people out there. And as I mentioned earlier, I know there's some concern around distillate, but we think Jet is going to continue to recover as well. And for the first time in whatever it is, 18 months, gasoline is now over distillate. That's a change in the environment going into this summer that wasn't there last summer. So we still think it's a very constructive environment for us, and we'll see how it plays out.

[Operator]

Our next question will come from John Royall with J.P. Morgan. Your line is open.

[John Royall, Analyst at J.P. Morgan]

Hi, good morning. Thanks for taking my question. So I just had a follow-up on capture rates. Just any thoughts on the moving pieces directionally in 2Q from the 98% in 1Q? It's another heavy maintenance quarter, but you have the non-recurrence presumably of inventory impact. So should we center around maybe the 100% level as a starting point, maybe a little lower due to maintenance or any other moving pieces we should think about?

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

John, thanks for the question. It's Maryann. I'll give you a few high-level comments, and then I'm going to pass to Brian and Rick to give you a little more detail on the quarter. You're right, actually, as we talked about turnaround is slightly higher in the second quarter, but we will be touching less of the crude units just as an example. And so while there is some planned maintenance, the impact of that should be less in the second quarter. Commercial performance, as you know, has been something that we have targeted for the last 18 months. We believe a lot of the work that we have done is sustainable and it certainly is a continued focus of the team as we head into the balance of the year. I'm going to pass it to Rick and Brian and let them give you a little more color on their expectations for Q2.

[Rick D. Hessling, Senior Vice President, Global Feedstocks at Marathon Petroleum]

Hey, John, it's Rick. So I'll just double-click on really the last item Maryann touched on. I can't emphasize enough, under Mike's leadership, we've unpacked and changed everything we do commercially from A to Z, from feedstocks through finished products, there isn't anything that hasn't been looked at under the covers and redesigned where it needs to be redesigned. So as we look forward, a lot of people say, are you done? And Brian and I would say, will never be done. And Mike would tell us that on a daily basis rightfully. So with that being said, we do expect to continue to get incremental value by region going forward in every region we operate in. We're continuing on this journey and it's a journey that won't end. And it's quite the change for us corporately as we improve collaboratively from refining all the way through commercial. So if you can't tell, we're quite excited about it. And without giving too much detail, we would encourage you to stay tuned and continue to look at our results. Our boss tells us our results speak for themselves, and that's the mantra we live by and feel good about in this metric as you've seen over the last year or so.

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

Yeah, John, this is Brian. Just to maybe wrap it up, I think Maryann and Rick covered it quite well. But I see it very simply on the journey that we've been on and where we're at, really working hard to leverage our scale, our unrivaled business insights in the industry. Moving further down the value chain for enhanced margin capture is also another important attribute that we have momentum behind whether it's our export program and delivered cargoes or a branded business, all the things that we're doing -- or we've done historically, we're just doing better today and with more focus and rigor down the value chain. The last thing I would say is really mindset, and Rick hit on this is really two things, continuous improvement, you are never done, and relentless innovation, always trying to reimagine how to run the business, how to do things differently. And I'll put it in the exclamation point, we've been pretty opaque around specifics, but keep watching the results. Rick and I are proud of the work that the team has done, and we've got more to get.

[Operator]

Thank you. And we do have time for just one more question. Our last question will come from Theresa Chen with Barclays. Your line is open.

[Theresa Chen, Analyst at Barclays]

Hi, there. Thanks for squeezing me in. Just really quickly, Brian, on your demand commentary. Clearly, you categorically beaten all the industry data in the first quarter. And as we are a month and change into the second quarter, I am curious to hear a little bit more on the diesel side. So you're seeing some early indications of incremental demand from an ag perspective, what about trucking just because we've seen some of the easing in the tonnage data?

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

Yeah, Theresa, sure. So on the distillate side, yeah, we do see ag picking up. Of course, that's a year-on-year comp. So it's hard to get a complete read, but we expect it to be a strong season. We do see, again, as I mentioned earlier, some softness on the transportation side of the business, largely driven through consumption and the curtailment of consumption. So whether it be activity at the ports over the road, fairly consistently with our big customers, we've heard that theme. The positive standout though, I would mention is in the mining business, and we do have a pretty big exposure on the mining side of the industry. And we do see robust activity on the mining side of our business throughout really all regions. But it's really that consumer consumption component that we're watching very closely. As we transition here seasonally, I think it's early. As I stated earlier, to call favorably or unfavorably, which direction things are going to break, but it is something that we're keeping a close eye on.

[Kristina A. Kazarian, Vice President, Finance and Investor Relations at Marathon Petroleum]

All right. With that, thank you so much, everyone, for joining our call today. If you have additional questions or like clarifications on topics discussed this morning, please feel free to reach out to any members of the Investor Relations team, and we're here to help today. Have a great day.

[Operator]

[Operator Closing Remarks].

Participants

Corporate Executives

• Kristina A. Kazarian, Vice President, Finance and Investor Relations
• Michael J. Hennigan, President and Chief Executive Officer
• Maryann T. Mannen, Executive Vice President and Chief Financial Officer
• Rick D. Hessling, Senior Vice President, Global Feedstocks
• Brian K. Partee, Senior Vice President, Global Clean Products
• Timothy J. Aydt, Executive Vice President, Refining

Analysts

• Neil Mehta, The Goldman Sachs Group, Inc.
• Kalei Akamine, Bank of America Co.
• Manav Gupta, UBS Group AG
• Paul Cheng, Scotiabank
• Sam Margolin, Wolfe Research
• Jason Gabelman, TD Cowen
• Roger Read, Wells Fargo & Company
• John Royall, J.P. Morgan
• Theresa Chen, Barclays PLC