Q1 2020 Earnings Call
[music].
Welcome to the PC first quarter 2020 earnings call. My name is Jacqueline and I will be your operator for today's call. At this time all participants are in listen only mode. Later, we will conduct a question answer session Press star one on your Touchtone phone to enter into the queue. Please note that.
This conference is being recorded I would now like to turn the call over to Kristina Kazarian Kristina you may begin.
Good morning, and welcome to the Marathon Petroleum Corporation's first quarter 2020 earnings conference call. The slides that accompany this call can be found on our website at marathon petroleum Dot com under the investors tab joining me on the call today, our Mike Hennigan, CEO, Don Templin, CFO and other members of the.
Executive team.
We also invite you to read the Safe Harbor statements on slide two 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 within our FCC filings with that I'll turn the call over to Mike.
Thanks.
Good morning, everyone and thank you for joining our call today.
It's everyone is aware global pandemic became the focus in the corner and that continues today with our immediate priority on safely operating our assets the supply products in the market protecting the health and safety of employees and customers.
Importing the communities in which we operate.
The actions taken to prevent the spread of the virus has significantly reduced global economic activity and demand for our products.
Typically towards the last month of the quarter.
Our refining operating areas have been particularly hard hit in the upper Midwest and on the West Coast.
The same time, our midstream and retail businesses reported strong results, which offset some of the financial impact of lower refining demand and margins.
As a result of this the difficult situation responding with prudent tactical changes in our business.
First reducing our total capital spend by 1.4 billion or approximately 30% to $3 billion for 2020.
This includes approximately $700 million at MPC and $700 million at MPLX.
Production is plans across all segments of the business with the remaining growth capital spend primarily related to projects that are in progress we're nearing completion.
Second.
We have reduced our plans operating expenses by approximately $950 million.
Primarily through reductions of fixed cost and deferring certain expense projects.
This includes $750 million of operating expense reductions at MPC and $200 million of operating expense reductions that MPLX.
Third.
We've taken steps to maintain our financial flexibility.
We've secured $3.5 billion of additional liquidity, including a new 1 billion dollar 364 day revolver and issued $2.5 billion of senior notes.
After taking these actions we have approximately $6.8 billion of undrawn availability on our credit facilities.
These actions strengthen our liquidity and also strengthen the through cycle earnings power of our business.
At this point I'd like to turn it over to Don The review the first quarter results in more detail then I'll come back and share my early focus areas of as we start to implement changes at MPC going forward.
Thanks, Mike Slide five provides a summary of our first quarter financial results earlier today, we reported and adjusted loss per share of 16 cents.
Adjusted EBITDA was 1.9 billion for the quarter.
Cash from operations before working capital changes was $1.3 billion.
And our dividend payments for the quarter were $377 million.
Slide six shows the sequential change in adjusted EBITDA from fourth quarter 2019 to first quarter 2020.
Adjusted EBITDA was down approximately $1.3 billion quarter over quarter, driven primarily by lower earnings and refining and marketing.
Lower crack spreads due to demand destruction from the cobot 19 pandemic significantly impacted our and them earnings.
First quarter results also included noncash lower of cost per market adjustments to inventory and goodwill and asset impairments totaling $12.4 billion.
Moving to our segment results slide seven shows the change in our midstream EBITDA versus the fourth quarter of 2019.
Midstream EBITDA increased 19 million versus the fourth quarter.
The increase was driven by stable fee based earnings and sustained organic growth in the base business overcoming headwinds from declining natural gas prices in the quarter.
Slide eight provides an overview of our retail segment first quarter EBITDA was $644 million.
Retail margins were nearly 33 cents per gallon than the first quarter.
These strong fuel margins were partially offset by lower fuel volumes compared to fourth quarter, reflecting demand destruction associated with cobot 19.
Same store merchandise sales increased year over year, despite fuel demand pressures in the quarter, reflecting the resiliency of the Speedway brand.
We continue to target fourth quarter 2020 for the completion of the separation of Speedway and we are progressing separation activities.
However, the separation timing could change given the cobot 19 related impacts of the business environment and access to the capital markets.
Slide nine provides an overview of our refining and marketing segment.
Performance in this segment reflected the challenges associated with managing the impacts of the cobot 19 pandemic.
And associated shelter in place orders.
First quarter, adjusted EBITDA was $154 million, a decrease of approximately $1.3 billion versus the fourth quarter.
Margins in all regions decrease compared to fourth quarter 2019, particularly in the mid con in West coast regions, where we saw a negative gas cracks towards the end of March.
Despite these challenges our commercial team was able to capture favorable price realizations for both gasoline and diesel.
Slide 20 of the appendix provides additional details on some of the primary drivers for capture.
Refining operating costs decreased approximately $129 million from the fourth quarter.
Slide 10 presents the elements of change in our consolidated cash position for the first quarter.
Cash at the end of the quarter was approximately $1.7 billion.
Operating cash flow before changes in working capital was just over $1.3 billion.
Changes in working capital we're in approximately $2 billion use of cash in the quarter due primarily to the sequential decline in crude oil prices during the quarter.
As you know payment terms for our crude oil purchases are roughly 30 days, while our accounts receivables typically average around 10 days.
Coupling. This 20 day net payable position with our 3 million barrel per day system results in an approximately 60 million dollar use of cash for every one dollar decline in crude oil prices.
The opposite is also true when crude oil prices are increasing.
The company drew $3.5 billion on its revolving credit facilities in March and April primarily as a result of working capital changes.
On slide 11, we provide our second quarter outlook, which includes estimated throughput reductions of our facilities based on projected demand destruction from cobot 19 and associated shelter in place orders.
We expect total throughput volumes of just over 2 million barrels per day, approximately two thirds of are not nominal normal operating capacity.
We have temporarily idled, our martinez and Gallup facilities in response to demand destruction.
Planned turnaround costs are projected to be $215 million in the second quarter, which includes work at our Galveston Bay and Los Angeles facilities.
Total operating costs, including major maintenance are projected to be $6, a 90 cents per barrel for the quarter.
Total operating costs on a dollar basis, our lower compared to historic levels, but the per barrel costs reflect the impact of lower throughputs throughout our system.
Distribution costs are projected to be $1.275 billion.
For the retail segment, we expect fuel volumes of approximately 1.45 to 1.65 billion gallons and merchandise sales in a range of 1.4 billion to 1.5 billion.
While fuel volumes have been significantly impacted by demand destruction associated with sheltered in place orders.
We expect merchandise sales to remain relatively resilient.
Slide 12 highlights the proactive steps, we've taken to strengthen our liquidity position.
At quarter end, we had a 5 billion dollar revolving credit facility.
A 1 billion dollar 364 day revolving credit facility.
And 750 million from a trade receivables facility.
During the first quarter, we drew 2 billion on the $5 billion revolver and in mid April we drew an additional 1.5 billion primarily to manage working capital impacts.
In late April we added a 1 billion dollar 364 day revolver, and we issued $2.5 billion in senior notes.
We use proceeds from the senior notes to repay borrowings under the revolver.
As of today, the undrawn capacity on our credit facilities.
Total $6.75 billion.
As shown on slide 13, we have a strong track record of maintaining through cycle financial discipline.
Mpcs parent level debt of approximately 11.1 billion represents 1.5 times the last 12 months of Mpcs Standalone EBITDA.
This ratio excludes the debt and EBITDA of MPLX, but includes distributions MPLX paid to MPC.
We believe a strong balance sheet is essential to succeeding in this industry and we are committed to maintaining our investment grade credit rating.
With that let me turn the call back over to Mike for some closing remarks before questions.
Thanks, Don.
Obviously, the current environment is required our immediate focus to ensure our through cycle resiliency of our business model.
But I also wanted to briefly share my view for the future.
Over the past decade. This company has grown to become one of the largest energy platforms in the country.
Although MPC has been successful in many areas Theres also a strong case for change.
The drive increased profitability stronger through cycle earnings and long term value creation.
There are three areas that will be our early focus to help us achieving these objectives first.
We need to strengthen the competitive position of our portfolio.
This means positioning our assets to be a leader in cost operating and financial performance metrics.
MPC has always been focused on safety and operational excellence and that will not change. However, we need to focus further on the contribution of each of our individual assets and ensure the financial performance in all cycles meets our expectations and contributes to shareholder returns.
Second we need to improve our commercial performance. We're fortunate to have an extensive integrated footprint, but we have an opportunity to be more dynamic to capture higher margins across the value chain.
Success for our refining system starts with raw material selection and scenario of opportunity for us to further take advantage of they're finding asset capability.
In addition, we have the opportunity to enhance and optimize the placement of our products across both the sales channels and the geographic marketplace.
Focused enhancements to both raw material selection and product placement will increase our ability to maximize value across the entire value chain increase in the margin we delivered to the bottom line.
And third.
We need to lower overall cost structure and be extremely disciplined and capital allocation.
This means lower our cost in all aspects of our business and challenging ourselves to the incredibly disciplined in every expense dollar we spend across our organization.
It also means having a strict protocol on capital investment for the long term to focus on the highest return projects risk adjusting them and assuring that we position the company to achieve these returns irrespective of market environment.
I'm confident that if we excel in these areas and sharpen our focus on execution across our refining marketing in midstream platforms, we will deliver better results create a higher level of through cycle earnings and provide a compelling value proposition for shareholders.
It's an appropriate time for change I'm excited about the opportunities ahead of us.
In closing.
I'd like to say that we take our responsibility to be a good corporate leaders seriously and they were grateful for everyone working on the front lines of this pandemic.
This quarter to support the efforts on healthcare workers across the country. We donated 575095 math to 45 different hospitals across the country.
Additionally, the marathon Petroleum Foundation made a $1 million donation to the American Red Cross in April to help supply critical resources to communities in crisis.
We have been inspired by the story share with us as the supplies reach many communities in dire need and we're proud to do our apart by contributing supplies in funds the organization supporting those in crisis.
In addition, I'd also like to thank our business critical employees have been on the front line of our business in the stores in the control rooms and at our facilities in assets.
With that let me turn the call back over to Christina 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 question. We will now open the lines for questions operator.
Thank you we will now begin the question answer session. If you have a question. Please press Star then one on your Touchtone phone if you wish to be removed from the Q. Please press Star then Q, if you're using a speaker phone you may need to pick up your handset for bessler pricing the numbers. Once again, if you have a question. Please press star.
Our wine.
On your Touchtone phone. Our first question comes from Neil Mehta. Your line is open.
Good morning, Mike Good morning came in my congratulations on the new role as CEO.
I kick up my kick up question here is on the cost savings in the capital reductions that you announced can you put some more meat on the bones behind.
Key line items that drove dose reductions and how should we think about weather cost and capital reductions are.
Cyclical in response to the environment versus a structurally more capital efficient approach, you're taking to running the business.
Yes, Thanks, Neil I'd say overall, we expect it to be more structural theres, a little bit of cyclicality animals will talk about that in the second, but but mainly overall to be more structural so as I said in my prepared remarks, I mean, one of the things that we're going to focus on is very strict discipline on capital allocation.
I'll start with midstream and that led to dine and Tim jump in their respective areas as far as a little more color but.
In in midstream, we stated for some time that we want to have free cash flow come out of MPLX and we've been on a program to reduce capital to be real smart about where we're investing for the long term in that business and kind of shifting the portfolio much more towards the Alan as business and little little less towards the investments in the GMP business because.
Was that that investment has been pretty robust over time, so if we get MPLX down to around that $1 billion or less we expect to be free cash flow positive in that business and we've kind of stated that as a target for 2021.
So overall I think you're going to see us trying to maintain that level and right. Now we have a couple of projects that we've talked about went to Webster and Whistler that our MVC back long haul projects as well as the terminal that we're building next to our Garyville refinery.
As an enhancement to that facility. So that's that's a lot of where we're putting the money in that business.
In addition, I will tell you you know one of my philosophies Neal is generating free cash flow from all of our assets. So as we look at capital overall, we've got to make sure each of our assets are contributing cash back to the business. So I know, there's a little more detail in the refining assets I'll, let Don give a little more color on what we're doing it.
Refining there.
Sure Neil as you'll recall when we.
When we rolled out our budget for 2020.
Our refining and marketing budget was $1.55 billion that included $450 million of maintenance capital. So it essentially included 1.1 billion of growth capital.
And when we talked about are up our plan originally for 2020 about 60% of that growth capital was really attributable to two primary projects. One was the continuation of the Star program, which will run into next year 2021, So thats a galvus.
In Bay and the other was the Dickinson renewable diesel project, which will complete this year. So if you think about 60% of our 600 million basically of of capital. We will have the growth capital was those two projects one will be completely done and the other will be.
In sort of a tapering mode and nearing completion, you'll see that we'll have a lot of flexibility around our capital budget next year.
And now it's Mike I'm going to add a little bit city expense side. So again back to your question of how much is variable versus.
Structural.
Obviously with the pandemic and you know us reducing refining rates back to minimal and there's a there's a portion of variable costs, there, but out of the $750 million of expense reduction on on the MPC side. The majority of that is fixed cost that we expect to maintain at a lower level, you know about 500 million of it being fed.
Next I'm going to let Ray you know kind of comment on that in that area and then partially part of it is variable on the midstream side, you know about 200 million of it mostly we said was that deferred expense projects. So right now they sit in the deferred column, but as well as we look at that further we're going to.
Take a look at whether they need to be deferred or whether they actually are part of our long term plan. So let me, let ray add a little bit of color to the to the refining fixed cost situation.
Sure Mike on the fixed cost him refining there's really three components that make that up.
The first would be the turnaround segment, just slower overall turnaround expenses for the year with some deferral out of the out of 2020 and then the other categories are just lower maintenance costs and expansion projects, just just choosing to do a less work class projects at our refineries.
That answer your question now that you have very thorough we've got a good color there that the follow up is just on speedway.
Then.
Mike can you just talk about from your perspective.
As as the new CEO, how strongly you believe in the strategic merit of the speedway spin off or sale.
Whether you still targeting the fourth quarter, which indicated in the press release.
And just any any strategic updates around the execution of the sale, which for many investors is an important catalyst for for for the stock.
Yes, I understand Neos. Good question. So I do believe in the separation is the best value proposition for MPC shareholders. So what we said in our remarks is we are still on schedule and the expectation that we had guided before was completion in the fourth quarter I'd say, we're still so.
Drilling and on target to accomplish that so strategically I still believe the separation is the best value enhancement for MPC shareholders. The only caveat that we put out here. Obviously is you know the Kobe 19 situation is still very fluid and we'll have to see how that plays out as far as recovery in the business and then the capital more.
Get access is another important part of executing that separation in in a highly efficient manner. So with those two caveats. We are still committed to a separation and we are continuing on the schedule. However, we just want to be cognizant of the current environment that there could implemented could.
Implement the timing a little bit, but we'll have to see how how that plays out.
Thank you very much.
Welcome Neil.
Thank you. Our next question comes from Douglas <unk>. Your line is open.
Thank you good morning, everybody hope everybody is doing well and Mike Let me add my congratulations to your usual looking forward to see.
What you would you do next.
Regarding I wonder if I could just pick up on one of your comments you made on the call about.
The three steps, you're taking maybe ask a bit of a leading question.
Where do you see the week links in the visit the remaining portfolio pull speedway. What are the is using need to be addressed to achieve your objectives.
Yes, Doug.
Not ready to disclose the term week links what I will tell you, though is we're going to do a comprehensive look at all of our assets and an over time, you're going to see us come out with disclosures as to where we feel we are from a competitive position on each of the assets.
As I mentioned earlier to Neil's question I, you know I'm, a big believer in looking at long term value the assets on the big believer in managing to free cash flow on it on an individual asset basis, so that the over our portfolios generating cash I measure as you're very aware you know this is a lot to a large.
Then a return of capital business and I think we've done a good job of that in the past and I think there's just an opportunity to do a little better in there if we really look at the portfolio.
So I do think I hope the takeaway is we are going to spend a lot of time on the portfolio of all the assets, we're going to look at where we can improve the competitiveness of those assets either from a cost standpoint or commercial standpoint, that's going to be a very high focus. So I you know I'm, hoping to leave you with those three items and each asset in the portfolios.
To be examine our overall commercial approach and we've started in that discussion already is going to be a discuss quite a bit and then and lastly, we're just going to lower the cost structure of the company, we think theres an opportunity to do that at this point and we're going to get after that as quickly as we can.
Because presumably that means asset rationalization is on the table Mike.
Yeah. Thanks, So Doug as I said, all the assets that we have in the portfolio are going to be examined but yes, I think so and I previously mentioned in the midstream space that you know we didnt, we don't want to be an eight basins that still a true statement. However, you know the gas business is now going through a little bit of a change but.
Yeah. It applies to all the a the other assets that we have in the portfolio, whether the retail assets in the short term or are there refining assets as well. So so yeah, a real good examination of the competitiveness of of our portfolio is is a first priority.
Great. Thank you my follow up I was going to ask you about the dividend, but you've talked about the tournament cash business. So we've got their someone else what I would like to ask you guys is zone.
Given the unique position to monitor demand trends couple of your competitors, obviously have talked about I would call. It green shoots coming out of vehicle Im just wondering what you can share with us in terms of how you see things evolving in your markets and I guess more importantly, the 65% utilization.
You did for the nice quarter.
How would you respond quickly could you look to step up your activity before you feel comfortable enough I guess with the demand recovery usually underway.
Okay.
Hey, Thanks, Doug it's another another really good question. So I'll start off on a high level macro obviously, you know theres a lot of optimism towards recovery you know at a very high macro level fiscal policy from the administration towards stimulus packages are being implemented monetary policy is it low rate.
You know when oil prices are at low rates for consumer so there's a lot optimism and recovery you. My caution. However, as we are currently in an oversupplied market. You know this has been a demand driven event both globally and in the U.S. you know, we've been particularly hard hit in our view in the upper Midwest and then even more particularly.
On the West coast. So we're optimistic that we're starting to see that recovery will have some.
Comments, so I'll, let Tim comment on specifically at the gasoline level as far as our same store sales et cetera, or give you a little bit more color. There and then then I'll, let Brian give you a little color overall and the diesel market as well. So I'd say overall optimistically that we're seeing good signs of recovery, but we still got a long way to go that we're still oversupplied.
Pretty much crude end products across the board. So there is lot of inventory that needs to work off you know as far as you know when do you respond I've, obviously the market will tell us that so it's a demand driven event and when the demand is sufficient for us to it to change our strategy, we'll do that but for right now we're staying at Ed minimum rate. So let me like Tim comment a little bit about.
Overseeing that speedway.
Yeah, Doug at the retail level, you know as a as a lot of the stay at home orders got put in place and sort of the middle and late part of March.
We saw gas demand, which bottom probably even more than 50% down I mean that was in sort of late March in early April.
You know the the we've seen steady recovery since mid April with 5% to 15% improvement really dependent upon the region off the lows. The weekly data that we're seeing in terms of sales are supportive of that trend so far.
And we expect to see continued improvement as more of the states continue restart the reopening protocols over the next couple of months I mean, the timing of a complete recovery as a as uncertain. It's really a function of how quickly. These stay at home orders are removed at how quickly the consumer gets back out on the roads, obviously, you've got a lot of businesses where people continue to.
Work from home and they May continue through this month.
But we'll we'll watch that activity, we've certainly seen a nice creep in demand and and expect that is going to that's going to continue.
But we've got to get the commuters back on the roads, rather there commuting to work rather they are taking kids to school, which we may not see until the fall rather they are driving to locations for vacation or else wise, we've got to gets consumer back on the road and and hopefully get get some signs of recovery. So we're seeing some nice signs, but but there's probably a few months before we can really.
[music].
Give a better sense for exactly how this is going to play out, but it's we're definitely off the lows and seeing some nice improvement.
Yes, Doug. This is Brian you just to kind of reiterate a little bit of on the gasoline side built off of what Tim said, we have seen really the profile of the decline. It was really the last two weeks of March where we really think script offering fast really across all geographies you hit the bottom in the market. We look weak on weak sales we think is.
Most relevant data points in the short term to the week of April six was really what we're calling kind of the bottom the market over the last three weeks, we've seen steady week on we've grown so we see that is an optimistic trend for some reasons, Mike indicated earlier some of the drivers to that.
So in here. This week is starting off solid as well, but measured optimism well. This is an unprecedented event not exactly sure what the profile of recovery looks like what we're seeing positive trends.
On a distillate side. Similarly, we hit the bottom of the market and we can for six very modest recovery no sense and it's been less impacted.
Overall E call on distillate demand has been some or decline has been somewhere in that 20% to 25%, we've not seen across or whole book.
We're off more in the 15% range currently year on year part of that is due to gearing, we're not really exposed to to pad. One so there's been with some of the Corona.
Absolutely impact and pad one we're not really exposed to that the way maybe others are so we're off more than 50% recovery on the disciplined size really going to be tied to the broader economy. It's traditionally diesel demand has been driven by the health of the economy and we believe that's going to be case in coming out of this is we're going to be watching economic indicators, we think that will drive.
Every on the distillate side.
It's very sorry, guys things may have made just size nice Christine and her team has done a great joking has navigated. This so thanks to her thanks to dawn for getting in the form that as injury came out. So appreciate all your health.
Thanks, I appreciate though were kind words.
Thank you enter next question comes from the NAV, Doug Your line is open.
Oh, Hey, guys ahead of questions a valuable for demand question on that on the jet fuel insight of the equation. We are seeing jet fuel demand, which is any though and they find that the tying to compensate by blending check mode and the diesel and that is causing the decently landscapes to move out of liver.
I'm trying to understand how MPC I look around this entire jet fuel situation and is this something that can be done that you don't jet fuel into the diesel, causing the dividend mentally to move out.
Well not I'm going to I'm going to let Ray give you some specifics there, but I would add one comment to your question and kind of what Doug was asking as well is I think there is some belief and we have this belief that there could be slower recovery back into the into the jet world, but that may also be is a little bit of a boost to gasoline recovery.
As consumers kind of stay more towards vehicles as opposed to airplanes, you know as the recovery starts to happen I think thats, a phenomenon that never going to see a little bit, but let me let me, let ray give you some specifics on the on jet and diesel.
Okay and whatnot.
With regards to jet fuel, we have a lot of capabilities to to blend that into the diesel pool and have done so.
In cases, where we where we have high sulfur jet fuel we have the ability with the excess hydrotreating capacity with the slow downs to hydrate hydro trade data and ER and to ultra low sulfur diesel.
I guess.
The thing I really like to communicate as it's been very fluid as far as.
Whether desk, let style strong initially desk slipped products.
And so we had the ability to put everything into the this Philip pull and we really stretch the distillate pull now where sands that strengthening of gasoline were reworking those swing streams and pushing some back to gasoline.
We've communicated in the past that our swing between gasoline and distillate is about in the 10% range.
Then we been exercising every better that are starting to pandemic.
Thank you flip taking my question.
You're welcome.
Thank you. Our next question comes and Paul Cheng Your line is open.
Hey, guys good morning.
Right.
With that I want to add my congratulations.
Congratulations.
A couple of question I guess first on the commercial pokemon.
If we look back say 20, yes. It go to go what's your from the commercial side, so when you're looking at.
What you know about with a market that may be a while ago and how.
Maryland has been doing as Danny every at that you think okay late that I can change on the best practice and other was that what is the the Opel and also that you need to wait okay UK operation for the commercial closer to maybe to Houston or what that some uptick.
So hall and do you need.
Pick up in your common extended upon and on that operation. That's the first question.
Yeah. Thanks for Oh, Yeah first of all I mean, you hit it on the head My you know my personal background is more in the commercial area in the financial area. So so it's an area where I'm going to spend a lot of my my early time here.
I don't want to give any real specifics, but to your second question, though you know we do plan to have a bigger presence in Houston that something it's on our list of things that we want to accomplish we have not had that in the past so Rick and his team are moving towards that they've already has some stuff down in the in the Texas.
Area. So I think you're going to see US overtime, you know developed much more of a presence down in that area. I you know I'm a believer that you know they used in market is the center of the oil markets in the U.S. just like New York is the center of the financial markets. So having to use them presence I think is real important for US you know as far as a talent.
Overall, it's another area that I think we're going to spend quite a bit of time, you know looking at where we can improve some of our talent across that area. So I guess, a you know the good news in the bad news for my commercial team is I have a lot of background. In this area. You know I have a lot as you know strong thoughts and how to approach things. So you know there's going to be you know a good collapse.
One of discussion about how to go about it and and I will tell you know we started in that had already that the you know the immediate focus of what's happening with the the markets. As a result of of Cove. It is forced a lot of a discussion here. So again due to the you know the competitive nature of it Paul I can't get into a lot of specifics here, but I can.
I'd tell you you know as I stated earlier, it's one of my main three areas that we're going to spend a lot of timeline.
Let me because I am just announced that they think historic protein that.
The team is good.
Apps that they fit too conservative their problem because how they look at sales.
And not changing as raping aggressively at some other conditions change.
Yeah, you know I've taken a secondary to see what you're thinking there Paul I mean, there's some areas where I think you know we could be too conservative theres. Other areas, where are you know there's different types of opportunities I don't really think of it overall in that regard I think of it.
More in how we approach the market how we'd go about crude selection Howie how we view different things I mean, we recently just saw pretty strong you know crude market contango and how to take advantage of that as an example is some of the discussions that we've had recently so so I I don't know vide use your term as as the.
Catch all for what we're doing I think of it more as you know looking at what our assets do how we position ourselves commercially.
Looking at how you know the markets are responding where product placement is best suited. So I think Kevin you know, maybe a little bit more quick flexibility and reacting to markets quickly if you're using that term to be conservative and maybe I agree with that from that perspective, but I. Just think you know use the word being more.
Dynamic more more flexible more able to adapt to market conditions quicker and then overall just having you know much more focus on what we're doing commercially to support the assets that we have in place.
And I will tell you know one of the things that you know as a result of this covance situation. You know we were having daily meetings on what was occurring in the marketplace and how we should be responding to that and that's just one example of you know what the a the new environment will be going forward.
Okay. Thank you for the second question is footballing dawn on the working capital management.
Thank you look at your two major competitor.
Fit up 66 cents per barrel.
They think the thing similar situation then to level out there, we finding operation puppy pretty similar size to yours.
But that the negative impact at least what this quarter on the cash flow from working capital your stance so doing less so.
Roughly one yes about hop in the other one yes far less than half full impact. So Ken can you maybe in that new opinion comes up.
That how perhaps that you guys lending Tiffany.
And your P. it if that's and it depends on your family will afford improvements that we would be able to.
Perhaps to minimize there wasn't a practical swing a bit more [noise].
Yup Yup, Paul I mean, I guess, you know the working capital changes are really a function of for US three primary things you know our accounts receivable our inventory position and then our accounts payable position and there's lots of sort of moving pieces that impact each of those.
Three you know each of those three components, what I did try to do was to give you a rule of thumb. So that you all could model changes in our business I don't have sort of particular insight into you know what the amount of crude volume is in our competitors payables and why.
But the amount of refined product sales are in there or receivables.
But what I can tell you for us during the quarter accounts receivable went down for the first quarter went down about $1.9 billion. So that was a source of cash for us receivables went down.
Sounds payable went down about two and a half a billion dollars in the quarter and that was obviously a use of cash and then our inventories because we're trying to manage inventory appropriately and end to capture contango in the market and those type of things our inventories were up about $400 million. So the combination of sort of way.
1.9.
Billion on the accounts receivable side and then the inventory in a p. move how to a negative working capital impact of about $2 billion.
We're also seeing some of that and I think we've articulated we would've seen some of that continue in April where we started buying less crude volume so to support a 3 billion or I'm, sorry, 3 million barrel a day system in the first quarter. We're basically now supporting a 2 million barrel a day system.
So in April you would've seen crude purchases going down from a volume perspective, but as we start to ramp up you should see the inverse of that right. We will be moving upwards will be buying more crude and at least recently crude prices have started to increase as well. So that should also have a favorable impact on working capital.
[music].
Thank you Don just a quick side question that with a new CEO yesterday, and we plan to book that their terms in policy plateauing of volume so expensive to tech or is it.
Mike shaking his head I mean, we've look we've looked at that I guess, what we wanted to do you know Paul is we did provide I'm going back about a year now we did try to provide.
Information that was you know pulling out the turnaround.
Cost so that you could look at sort of our adjusted EBITDA on a comparable or like to like basis, but some of our peers still actually you know expensive than some of our peers, obviously capitalize it.
Thank you.
Thank you Sir our next question comes from Roger read Your line is open.
Yeah. Thank you good morning.
Oh and Roger.
Good morning, everybody, I guess I'd like to to get into a little bit of or maybe the forward looking side refining restarts, particularly obviously martinez in Dallas.
As we think about the Opex and Capex guidance is that built in there for the sake.
Our or should we presented that that's out until 21.
Well.
That's helpful Solvable.
So Roger it's Mike I'll start off and then I'll turn it over to re one of the things that I think everybody realizes the different regions had been hit harder or less to some extent, depending on where you are I mean, we've been particularly hard hit on the West Coast. If you look at our Uh Huh.
Haydn's you know we're at minimum across the system, but in the West Coast system, we're running at about 50% of capacity as opposed to the roughly 66 67 ish overall, so so the west coast demand drop was even more severe than I'll say the whole national average we.
Let us to take more action on the west coast, specifically or in that area. So let me turn it over to re give you a little more color on on both gallop in Martinez.
Hey, Roger as far as Gallup and Martinez your question as far as the guidance does it take into account the the costs of Gallup and Martinez into index short answer is yes fed it does.
You know a week, we chose to idle or our two higher costs refineries and ER and make up that at that production and re supply with lower cost facilities and all the cost impacts variable and fixed are taking it on count in that.
Yeah I understand in terms of the Q2 guidance I would guess I was just curious on a full year.
Restart of those units is that also included or does the guidance presume that those assets are offline for all of 2020, that's what I was I was kind of getting at another words, we are seeing a recovery awesome.
Around a virus and as we looked at the latter part of the year right. They expectation would be we get very close to two kind of normal levels at least it up I would think gets both those units back online. So just curious is that included in the guidance than I had one follow up question.
Yeah. Roger this is Mike. So yeah, we stated that those assets are idled on a temporary basis and we'll have to see you know when the when the market requires them to come back online I think the question you were asking though is you know we don't see significant cost at all to bring those back up I mean Ray has them you know one hot standby fall I'll let.
Him comment on that so we are prepared to bring those back online when the demand in the market requires it we just into short term.
I've seen some recovery as Tim and Brian had alluded to earlier, but you know we still have a ways to go before we would.
Be needing that asset so to speak yeah, yeah, Roger taking that both those refineries down Gallup and Martinez has not it's not dissimilar from a hurricane standpoint, when we take one of our refineries down we take them down sequentially. We keep the we keep the utility systems going we keep a there still are.
Operators and maintenance personnel looking after the equipment. So we would see a restart being fairly.
Fairly.
Easy done within a that time parity of about a week and not a significant costs and pack.
Okay, great. Thanks, that's helpful and.
Roger This is this just on sort of one other point.
Achieving those capital cuts and those operating expense cuts does not require those refineries to be idled for the rest of the year I think maybe that was made the way you were asking the question I mean, we assume that those will come back online and so our opex numbers and our Capex numbers assume we're operating at more normal levels as the year progresses.
Okay. That's helpful. Yeah, I was just trying understand has been the opex cut guidance, obviously, the cat that's got cut guidance and the other parts.
And then maybe slipping back to the kind of strategy strategic question. A lot of guys are trying to get out here on the call. Mike as you look at the company you expect to do or you already doing like a large sort of call. It a benchmarking survey as everything that that's on does or does.
Isn't due and how well it does it or doesn't do it at all.
As you think about the you know the 2021 and on version of that software exactly separated from retail as I as I think we all expect.
Yeah, Roger So yeah, we started in that analysis, and obviously I I've been part of the marathon team for a while here. So I have my own initial thoughts you know the only caveat I would give you though is in the 45 days or so that I've had the home you know most of our time and most of the whole senior teams time is.
In dedicated to the to the near term situation. So hopefully we'll get back to normal you know in the a in the health of situation as far as the country and also as far as the economy and get back to normal, but yeah, we started into the process.
But I would also tell you you know that a lot of the time recently has been dedicated to the near in situation. So started more to come.
I hope to disclose more as time goes by but I don't want to a.
Kids you that the opportunity has been limited because of the near term situation and our focus on on trying to respond to the pandemic.
I appreciate that thank you.
You're welcome.
Thank you. Our next question comes from Phil Gresh. Your line is open.
Yes, hi, good morning.
My first question just on the balance sheet done you talked about the target of any investment grade credit rating.
So you said the rating agencies have put out.
Some of their own metrics that they're looking at.
Of the Speedway spin off here that that is still plan and I'm, just wondering about how would that spin off [noise].
And the distribution might get from that spin off would help you achieve the investment grade rating long term or not cheap and maintain it long term in light of the downturn, we're going through and just broad more broadly are there other levers. The thank you can pull.
To ensure that you maintain it through this down cycle. Thanks.
Yeah, Phil I guess I wanted to you know recommit to we want to defend our investment grade credit profile and we'll continue to defend that you know I think Mike mentioned in the discussions around speedway one of the important things around.
The timing of the speedway separation is our ability to capitalize speedway and to be able to have you know a balance sheet at speedway that allows them to they're going to take on some leverage and that leverage will then you know result in cash at speedway, which will be distributed.
Back up to MPC and when they distribute that cash back up to M.B.C., we would expect that distribution would be on a tax free basis, and we would expect that we would be utilizing all of that cash to manage the balance sheet. It would either be putting cash on the balance sheet to to sort of support our core liquidity.
Position. So you know historically weve maintained.
So about a billion dollars of cash on the balance sheet. In addition to the revolving credit facilities that we've had and I think we articulated when we announced the speedway separation that we thought that requirement would probably be closer to 2 billion versus 1 billion. We'll obviously, we look at at sort of.
Core liquidity in total given all the events that have transpired over the last 30 days to make sure or or 45 days to make sure that were fully evaluating downside risk to the company and then the incremental amounts would be used to pay down debt. It's one of the reasons why we had some debt maturities we have said.
$850 million of debt maturity at the end of this year in December and we Havent billion dollars of MPC debt maturity in the first quarter of 2021, and we we were planning on having those those are that debt mature and didnt try to extend that previously because we were.
Wanted the capability to be able to pay off debt at MPC without incurring any incremental cost to do that so the timing of of those maturities was really a lined with or coincident with a speedway transaction. We did go out into the market in the end of April and issue.
Senior notes once again, we were very focused on shorter tenor notes. So three years in five years. There was some demand for 10 years, but we didnt really want to get into the 10 year market that felt like that was structural debt. We wanted to put on up you know we were basically if you will allowing ourselves the flux.
His ability to have shorter term debt allows us to pay it off and allows us to manage our balance sheet without incurring significant incremental costs.
Okay, great. Thank you for all that color.
I guess just the follow up would be just as I was referencing other levers that you might be able to pull out.
Yes, just to continue due to lower debt balances, whether it's at the parent level or at a consolidated level. So how do you generally think about the distributions whether it's the FCC dividends, the MPLX distributions and the priority of maintaining.
Lower leverage moving forward.
Particularly if we're going to lose a billion five EBITDA for speedway. Thanks.
Yes. So this is Mike you know on on dividend policy first off as you know, it's it's a board decision and we had some very robust discussion about it.
You know we think about this in the long term and how do we see the business you know as far as mid cycle earnings in how we see the business you know in the long term.
We obviously decided we wouldn't want to make a major change in a return of capital one on would hopefully is a very short term issues. So you know our discussion led to our highest priority was defending liquidity as Don said in defending our investment grade.
You know rating that was very important to us and you know I would just comment that you know we went into this event. If you want to call that with a little under $7 billion. The liquidity and now we've taken you know the working capital pain with the reduction in crude price et cetera, and as Don stated in his remarks, we're sitting here at about that very same level.
So we still have a lot of liquidity going forward.
As far as you know recovery in the business you know hopefully it'll be sooner rather than later I think you're hearing from our team you know, there's you know cautious optimism that we could be coming back yet at the same time, you know as Tim mentioned, we're still pretty far down year on year on gasoline demand, but we'll have to see how that recovers.
But overall you know our return of capital is something that we we obviously think is really important I mentioned earlier I think this is to a large extend for findings the return of capital business. So we'll have a you know a lot of discussion with the board as to how that plays out going forward.
Yeah, Phil I might also at this is Don on the working capital side, you know given sort of the low volumes that were you know the low utilization rates were up and the lower crude prices.
It is really a color asymmetric up opportunity now we would expect that working cap the working capital will be a source of cash going forward as prices improve and as volumes pick up as opposed to the significant use of cash over the last 60 days.
Okay, great and thanks, a lot like down look forward to add here at the conference in June.
Yeah. Thanks, Phil.
Thank you. Our next question comes from person to rail your line is open.
Hi, Good morning, Thanks for taking my question and Mike Congratulations.
I appreciate everything you outlined at the beginning there in terms of the three areas early focused very helpful.
Mike Thanks.
Of course, but my question is on on on really on return on invested capital expectations here.
First.
On the remaining 2020 investments after these capex reductions is it fair to assume that these are probably towards the higher end of the range of.
Clearing hurdle rates are on a NPV basis versus what you have deferred.
More of a housekeeping question I, suppose but bigger picture than the second question.
Given the macro shock you know the potential for strategic value realization at marathon overall portfolios you outlined in the early areas of focus here could you help us with your thoughts on in a hurdle rates for capital projects, how they change going forward at all.
You know how that might be you're talking about every dollar earning its return thats invested assets I wanted to think about that in terms of the various.
End market for any of the segments and and what that means for thinking about maybe putting higher hurdle rates on certain types of projects are in certain end market exposures.
Yeah for Sean I think you know the easy answer to your first question is is yes, and then to your second point.
Yeah. The approached it I believe is especially in this type of business, which is very volatile and when you invest capital your investment for a very long time. So I think you know using the word strict discipline is the best way to describe it I stress test in general you know how do we think about invest.
In capital if X occurs or if why occurs and and my own personal biases you know because it's the refining business, that's very cyclical and there are downturns you got to make sure that you're still getting a good return even if you're having to you know down cycle. So to speak. So so overall I think you know without giving you.
A specific number yeah, we will be stress testing or in your terms you know raising the hurdle rate to make sure that you know the investment that we do is is a very long lasting and it's going to guarantee is a good return.
So in general that will translate to a higher hurdle, yeah without giving you a number I would say, yes, that's correct and and I think you're going to just see us have a lot more robust discussion on the strategic nature of of where we invest in and guarantee and ourselves that its long term investment and convincing ourselves that it's a good use of cash.
Capital.
I mean at the end. It today, you know where were stewards of the shareholders capital and that's the you know one of the most important things we can control I mean in our business and I know you guys often ask a lot of questions about our views on things that we don't control and we're happy to give you our views, but I I tried to spend a lot more time on the things we do control.
And obviously have an opinion of things that we don't control as far as market conditions et cetera, et cetera, but but really spend as much time as we Kendall and the things that we actually control and having a disciplined about how we how we spend that money, whether it's organic capital whether it's M&A you know whether its expense dollars et cetera, et cetera, I think all those.
You know deserve a lot of attention and that's part of what we will focus going forward on.
Thank you that's very helpful.
A quick follow up.
It's really on the improving gasoline cracks that we're seeing on the screen and sort of the sequential pickup or use the term measured optimism I like that on on the product demand side.
Just for our purposes to help understand.
Given lower the low utilization rates.
And also you know crude differential volatility what are the impacts of business kind of unpleasant precedented here, but.
Capture impacted as it should we be thinking about them.
Maybe you're taking the grain of salt in terms of dislocations versus what you're able to capture on a on a on a realized basis versus what we're seeing on the screen either way either that you have recapture under heavy but sort of trying to reconcile back as we all kind of have an idea what we do.
A more normal times, but these are obviously it sort of three sigma the type of a fixing went up a period. We're in right now so just wanted to sort of get your thoughts around that.
No I I'll give a couple of thoughts you know one is in and we did you know the term of cautious optimism that we're seeing some recovery.
But I also try and you know balance that with the overall inventories we still have Ah I don't know with exact number is Dave Dave can jump in maybe 30 million barrels of of light products gasoline and distillate that are over the long term average we're still sitting on roughly 50 million barrels of crude over that same long term average so.
Even though I think we're seeing demand you know start to recover I still think we have a ways to go to get back to some closer to normal inventory levels and normal demand levels. So.
I think thats, just going to play itself out again that falls in that category of you know something we don't control you know well, we'll try and keep an eye on the demand you know we do have some insights from our from our marketing view and and we'll try and match the supply of our products into the into those demands and then we're always going to try and be opportunistic to find you know the best.
Market or the best region to to optimize our system.
Okay. Thank you very much like appreciate it.
You're welcome.
Thank you our last question comes from Brad Heffern. Your line is open.
Hi, everyone. Thanks for fitting in.
I guess does a good segue into asking about another thing that you can't control. So I'm curious about just the inland differentials that we're seeing now obviously in late March in early April we saw these very wide differentials now is the shut ins of starting to increase we're seeing in a relatively narrow differentials, especially for WCS. So can you give your outlook on that and.
Any thoughts about how sustainable is it sort of the enlink cracks are increasing at the same time. Thanks.
Yes, Hi, Brad This is Rick hassling and inland differentials you're spot on we have seen incredible volatility.
Literally from one end of the spectrum to the other.
Right now what you're seeing in the market places you're seeing the free market work, you're seeing north American producers and.
Specifically U.S. producers Canadian producers, you know self regulating if you will and it's affecting the differentials.
However, you know they've come in they have swung the other way here in the last three four weeks versus blowing out a 30 days ago.
I think the offs that honestly will be as the state's come out of.
Shutdowns and demand increases you know, you'll you'll see some more volatility there so predicting where they go is difficult a lot of it as demand driven a lot of it is.
Producer caught driven so I would tell you, though when you look at the mid Con specifically, Brad. It's it's very tight inventories at Cushing are extremely high as that's well publicized almost at maximum so I think you're going to continue to see.
Incredible volatility in the mid Con, which we will be able to take advantage of.
Okay, Thanks for that and as my follow up.
Just a question about the asphalt market. So you know typically when we have flat price the slow asphalt so much greater contributor to profitability that would normally be.
Is that the case right now and it can you talk about how the demand side looks obviously, we have these cobot impacts, but I would imagine maybe some some governments are taking advantage of this to to do more road repairs than they normally with thanks.
Yes, Brad this is Brian party yet so.
Currently asphalt you know if you look at the inventories we've been towards the higher side on inventories part of that had to do is coming out.
I know in the first quarter, but.
The workload log is out there.
We're seeing it we're seeing the demand starting to pick up as we head into the season here you know I don't know that asphalt has an outsized contribution at this point relative to overall contribution we have seen steady you know the benchmark, we look out and we think about the asphalt market is asphalt prices relative to T and we've been selling over T I consistently which is.
Fairly typical of a down market so.
From a pricing standpoint, we're happy with where things around the work is starting to pick up the watch out or are focused really on the asphalt demand is going to be really taxes and access to funding at the local levels and cuts in discretionary spending and.
And it's uncertain, whether we see that are not that that's unfolding as we speak but you know working with our customers. The backlog is there they're ready to go to work, we're starting to see it pick up so I guess, it's it falls into the measured optimism similar to what I said on the distillate side of things, but you know that's kind of where we sit today on the asphalt mark.
Good.
Great and with that well and our call today. So thank you for your interest in Marathon Petroleum Corporation should you have additional questions or would like clarifications on topics discussed. This morning, our team will be available to take your.
Oh, Thank you again for joining us operator.
Thank you for your participation in today's conference you May now disconnect at this time, how wonderful day.