Q2 2020 Marathon Petroleum Corp Earnings Call

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[music].

Welcome to the Mpcs second quarter Twentytwenty earnings call. My name is Sheila 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 the Q. Please note that this conference is being recorded I will now turn the call over to Kristina Kazarian Kristina you may begin.

Welcome to Marathon Petroleum Corporation second 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 or Mike Hennigan, CEO, Don Templin, CFO and other members of the executive team, we 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 as an RFP SEC filings with that I'll turn the call over to Mike.

Thanks Kristina.

Good morning, everyone. Thank you for joining our call today.

Yesterday, we announced an agreement to sell Speedway, the 711 for $21 billion in cash demonstrating our commitment to execute on the strategic priorities, we outlined earlier this year.

The sale of this business provides certainty around value realization for MPC shareholders.

As I've stated before I believe this is a return of capital business and the substantial estimated after tax proceeds of approximately $16.5 billion enables us to both strengthen our balance sheet and return capital to our shareholders.

At the same time the sale also creates a long term relationship with 711 that enhances commercial performance potential through attractive fuel supply agreements and future growth opportunities.

The transaction, which is subject to customary closing conditions, including HSR clearance is anticipated to close in the first quarter of 2021.

You move on to slide four as a follow up to our first quarter earnings call.

We're making very difficult decisions to increase profitability create stronger through cycle earnings and drive long term value creation.

Despite the very challenging conditions in today's market, we remain committed to those goals and we'll continue each quarter to update the market as we progress.

We outlined three areas that will be priorities towards achieving our objectives first strengthening the competitive position of our portfolio.

We need to be a leader in cost operating and financial performance metrics and need to make necessary changes so the portfolio to achieve these objectives.

One of our key philosophies is that each asset needs to generate cash back to the business.

We announced the decision to indefinitely aydar, Gallup and Martinez refineries.

Closures as the result of the tough refining business climate ahead of us have been amplified by the impact of the pandemic.

Martinez, we are evaluating re purpose thing the refinery towards the production of renewable diesel.

Facility has the ability to provide up to 48000 barrels per day of renewable diesel.

We have the unique opportunity to take advantage of the strong set of logistics assets for the area and also have three significant processing units that are an ideal fit for making renewable diesel.

These advantages should drive significantly lower capital requirements compared the Greenfield investments and it pursued enable initial production as early as 2022 with the option to ramp up from there.

Second improve our commercial performance.

Then tails, leveraging our extensive integrator footprint to make improvements in how we select in sourced raw materials and how we place our products into the various sales channels in geographic markets.

Our intent is to keep an eye on what we don't control in terms of the market, but really focus on what we can control against any macro environment.

This quarter I've been encouraged by the teams quick progress shifting our mindset and actions.

And third focus on lowering cost and all access.

Aspects of our business and to be disciplined in every dollar spent addressing risk and return to the business without losing focus on safety and reliability.

We're confident we will meet the 950 million dollar expense reduction target for 2020 and in addition, we're on track to lower capital spending by $1.4 billion in 2020, as we previously announced.

We're also implementing plans to structurally lower cost as we look out to 2021 and beyond.

Overall as I stated previously we recognize that we're in a return of capital business and we need to have an asset base and cost structure that works across all cycles, we're focused on becoming a lower cost discipline company that can endure the volatility inherent in this sector, creating value for shareholders that is structural in long term in nature.

On slide five I'd like to share some of the progress on the tactical initiatives, we outlined last quarter focusing on improvements to our liquidity and actions we've taken a carrier company through the current down cycle.

In late April we issued $2.5 billion of senior notes and use the proceeds to pay off a portion of the borrowings that were made on our revolver in March in early April.

Also in late April we enhanced our liquidity position with the addition of a 1 billion dollar 364 day revolver.

We have even more borrowing capacity available to us now than we did at the start of the covert 19 pandemic with over $7.5 billion of financial flexibility available for MPC.

At this point I'd like to turn it over to Don to review the second quarter results in more detail.

Thanks, Mike.

Slide six provides a summary of our second quarter financial results.

This morning, we reported and adjusted loss per share of $1.33.

This adjustment reflects a 1.5 billion dollar pre tax lower of cost or market inventory benefit.

Adjusted EBITDA was 653 million for the quarter.

Cash from operations before working capital changes was a cash source of $172 million.

Our dividend payments for the quarter were $378 million.

Slide seven shows the sequential change in adjusted EBITDA from first quarter 2020 to second quarter 2020.

Adjusted EBITDA was down approximately $1.2 billion quarter over quarter, driven primarily by lower earnings and refining and marketing.

Lower throughputs and crack spreads in the second quarter due to the <unk> the substantial demand destruction from the cobot 19 pandemic significantly impacted our and M earnings.

Second quarter results also include net adjustments of approximately $1.4 billion, primarily related to a lower of cost or market inventory benefit.

Bringing net income for the quarter to $9 million.

Moving to our segment results slide eight shows the change in our midstream EBITDA versus the first quarter of Twentytwenty.

Midstream EBITDA remained relatively stable quarter over quarter, despite challenging market conditions.

EBITDA decreased $51 million versus the first quarter, primarily driven by impacts from the covert pandemic.

These results highlight the stability of the midstream segments fee based earnings and our recently implemented cost control measures.

Slide nine provides an overview of our retail segment second quarter EBITDA was $626 million.

Due to demand destruction associated with cobot 19.

Fuel volumes were down approximately 25% from first quarter and approximately 37% year over year.

Retail margins of nearly 40 cents per gallon help support relatively stable quarter over quarter segment earnings despite the decline in fuel volumes.

We saw merchandise sales improved from first quarter supported by seasonality.

Same store merchandise sales only decreased 4% year over year, despite stay at home mandates and a significant fuel demand pressures of the quarter.

Within merchandise declines, we experienced across food and soft drinks in the quarter due to lower in store traffic were largely offset by increased demand for alcohol and cigarettes.

Same store sales, including cigarettes were essentially flat to last year.

Slide 10 provides an overview of our refining and marketing segment.

Performance in this segment reflected three full months of demand destruction associated with the cobot 19 pandemic.

Second quarter, adjusted EBITDA was negative $1 billion, a decrease of approximately $1.2 billion versus the first quarter.

Margins in all regions were under considerable pressure compared to first quarter 2020.

Refining and marketing margin was down over $4 per barrel from first quarter and utilization was down 20%.

Despite these challenging conditions the team did an excellent job managing costs through the quarter.

Slide 11 presents the elements of change in our consolidated cash position for the second quarter.

Cash at the end of the quarter was approximately $1.1 billion.

Operating cash flow before changes in working capital was $172 million in the quarter.

Changes in working capital was a 366 million dollar source of cash in the quarter.

We saw crude prices increase in May and June partially reversing some of the previous working capital cash use impacts.

Slide 12 highlights the progress, we're making to lower our cost structure.

We provided guidance for refining operating costs in may for the second quarter, which included assumptions around targeted cost reductions and throughput of about 2.1 million barrels per day.

The guidance of $6, a 90 cents per barrel was based on forecast operating expenses of about $1.3 billion approximately $300 million lower than the first quarter results.

Second quarter results show that operating expenses came in $64 million better than the already lowered guidance.

Demonstrating the disciplined approach, we're taking with every dollar spent.

On slide 13, we highlight our liquidity position at the end of the second quarter.

Our credit facility availability increased to approximately $7.7 billion at the ended the quarter.

As a reminder, in late April we issued $2.5 billion of senior notes.

Net proceeds were used to repay a portion of the amounts outstanding on the five year revolving credit facility.

In June we fully repaid that credit facility.

We believe we've positioned the company with ample liquidity to successfully operate in the current business environment.

On slide 14, we provide our third quarter outlook, which includes estimated throughput at our facilities based on projected regional demand.

We expect total throughput volumes of just over 2.3 million barrels per day, a slight increase from total second quarter throughput.

Planned turnaround costs are projected to be $270 million in the third quarter, which includes hydro cracker turnarounds at our Los Angeles facility, a full plant turnaround in Kenai and catalyst changes at Galveston Bay and Garyville.

Total operating costs operating costs, including major maintenance are projected to be $6.50 per barrel for the quarter.

And distribution costs are projected to be under $1.3 billion.

For the retail segment, we expect fuel volumes of approximately two to 2.2 billion gallons and merchandise sales in a range of $1.7 billion to $1.8 billion.

Fuel volumes have begun to recover from second quarter lows. However, there is some demand uncertainty from actions currently being taken to address resurging Cobot 19 chase rates.

Consistent with the prior quarter, we expect merchandise sales to remain relatively resilient.

With that let me turn the call back over to Mike for some closing remarks.

Thanks, Don.

I'd like to take a moment to provide some comments on our responsibilities around corporate leadership.

We recently published our 2019 sustainability report highlights of which can be found on slide 18 in the appendix.

The report is greatly expanded this year in terms of content and disclosure and outlines our commitment to provide information consistent with the many reporting frameworks that are influential in the investment community.

As such the report summarizes our comprehensive efforts related to environmental social and governance cover governance aspects of our business.

On that note I wanted to touch on recent events that have impacted many.

Other places, where we live and work.

Marathon.

We are committed to fostering a diverse and inclusive workplace and to partnering with organizations in the communities, where we operate to encourage acceptance tolerance and unity.

Like many companies, we are charting a path towards greater understanding listening and open dialogue and we're firmly committed to continuing to make progress in is very important area.

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 line to question operator.

Thank you.

I will begin the question and answer session.

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 are using a speaker phone you may need to pick up the handset first before pricing the numbers. Once again, if you have a question. Please press Star then one on your Touchtone phone.

Our first question will come from Neil Mehta with Goldman Sachs. Your line is open.

Thank you and congratulations Mike Don Christina team on the transaction.

The first topic is around cash flow can you can you talk about the pieces that go.

And to the tax number that bridge between $21 billion and $16.5 billion and with the cash what's the framework around allocating cash recognizing we'll get more color around this later and thoughts on debt reduction versus buybacks versus special dividends in the idea that a follow up.

Hey, Neil Thanks to the comment.

First of all the before answering the question on on use of proceeds that let me just make a couple of comments on the deal itself.

First of all you know we looked at a lot of different structures and a lot of different options and came to conclusion that this deal creates the most value and the most certainly for our shareholders.

And I just want people to recognize you know speedway is a leader in the company owned company operated business and 711, which currently has a larger franchisee model and a smaller company out footprint.

We'll now be able to look to the speedway employees and benefit from Speedways expertise in the company owned model and the combined entity will be that much stronger going forward. So I think that's important to recognize as part of this deal.

Okay on use of proceeds and capital I'll make a few comments and then I'll, let Don also touch on the topic.

Yeah first of all <unk> I've stated previously many times that in prepared remarks. It I believe this is a return of capital business.

And I made a statement that we have three key initiatives going on you know optimizing the portfolio and evaluating assets for free cash flow generation, improving our commercial performance and reducing cost and I think you know all these are aimed at returning more capital to shareholders and this transaction is no different you know.

Correct. You know two primary uses of proceeds one is to defend their investment grade profile and Don's going to talk about that a little more and then returning capital to our shareholders.

And with respect to return of capital you know we know this is an important component of the value realization and we are committed to it.

The issue we have right now, though if there wasn't a you know global pandemic and a global recession and progress and we had a much clearer picture of refining supply and demand going forward it be much easier to give a little bit more detail.

But between now and the closing date, we're gonna have continue to evaluate the most efficient and effective means to accomplish it and we'll provide more specifics at the time of the transaction closing, but let me, let Don give a little bit more comments it.

Related to a that is positioning.

Yeah, Neel I guess, you know you asked a couple of questions. Maybe let me first talk a little bit about because I think it's important around our consideration of use of proceeds let me talk a little bit about.

How we think about defending our investment grade credit profile, So maybe backtrack, just a month or two.

When we had our first quarter earnings call liquidity was probably top of mind I think we took some very proactive actions to make sure that we had up you know address that issue and as I mentioned on our comments now we have $7.7 billion or so of available liquidity. So we feel like we're well positioned well situated.

Going forward.

As we think about you know as we look ahead I guess that we believe that an important part of our capital structure isn't appropriate level of debt.

We don't think it's efficient in this environment to be under Levered and we but we also want to make sure that were defending our investment grade credit profile and as I think about defending our investment grade credit profile.

No one metric or factor drives that consideration will look to a number of inputs that include obviously the lost EBITDA from the speedway sale, but we'll also consider the steady cash flows we have from our ownership interest in MPLX.

Our views around mid cycle and through cycle EBITDA.

The size of our committed credit facilities, which are very significant and the cash. We currently have on our balance sheet, which is a billion dollars.

Our dividend policy going forward and various metrics such as debt to EBITDA and debt to capital, but I think that you know all of those things will be part of the consideration and as Mike mentioned, you know the an unprecedented macrilen bike and environment makes it difficult right now to be more specific you.

Did ask a question about tax and so you know on that on on that particular topic are our tax basis in the assets that we're selling was you know just under $4 billion and so the after tax proceeds that you know where where we're showing in the release the 16 and.

<unk> billion is really predicated on on that tax basis.

That's very clear I had the follow up is bigger picture question, which is in many ways. You are losing your most valuable business, how you're monetizing had had a great multiple but can you talk like about how you think about value creation for here and what you're left with this is.

MPLX kind of refining business, how do you drive value out of the two business segments and set up the company over the long term without that the and the stable ratable cash flow of Speedway.

Yeah, that's a good question.

But let me let me make one comment on the speedway deal relative to that is you know we still believe we're getting good the benefit of integration that's not lost because of the supply agreements that we have and the fact that will continue to be using our logistics assets, but sit tier two your broader question you know we still have.

A lot of work to do in the three areas that I keep mentioning so strengthening the portfolio. A you know it's going to continue to be a theme that you'll hear from us overtime as we continue to look at at our assets.

We're just getting you know instead of ended amidst of improving our commercial performance. So you'll hear more about that overtime as well as well as the cost structure. We've given you know some early indications for 2020 to lower our cost.

Cost structure.

By about $950 million, but we have more work to do in that area. So you have a real good question you know where do we go from here and I just ask you to keep thinking about those three priorities, where we're going to continue to report on those.

We're certainly not done from this standpoint, we've looked at obviously a couple assets.

In that regard and obviously getting this speedway deal done was a was a high priority for us and I think it does put us in a unique position or you know to return capital to shareholders as Don mentioned to get the balance sheet in in the right order. So I think we're in a good position relative to you know the environment that we're in and it and we expect that to stay channel.

For some time, although you know we're optimistic that you know just like all these cycles will get out of it at some point and were and we're seeing a slow recovery, which is a headed into right direction, but we're just anticipating you know that it could take a while to get back to normal.

Thanks, Mike appreciate it.

You're welcome they'll thanks for the question.

Thank you next we'll hear from Doug Leggate with Bank of America, You May go ahead.

Thanks, Good morning, everybody on Mike, Let me add my congrats to that take great multiple and speedway.

So I have.

Two questions if I may in the first one is actually about [noise].

Martinez and Gallup I Wonder if you could just walk us through the process I go you to the conclusion that you can see was there.

On an option for example for a sale.

Is that an inventory liquidation event that comes out of this and maybe if you could frame for us what other assets in the portfolio today don't meet that criteria of generating positive cash flow.

Yeah, Doug <unk> also very good question, Oh, I'll start with a Gallup and and like I said in my prepared remarks, you know these are very difficult decisions for us to contemplate doing some really tough times.

I mean covert has had an impact on many people in many different ways, but it's obviously had a real strong impact on on our business and the business and climate that we're seeing going forward, especially with the refining supply and demand and obviously, that's more weighted towards the demand side, but anyway to answer the question Yeah, We had a.

Oneq niche in the marketplace. There that's essentially been competed away over time. So that's it's much more difficult for a small refinery to be successful.

So to answer your direct question, we did look to sell the asset we ran a process.

But unfortunately, we did not get something that we could execute on so absent. These you know the and process being successful.

We thought the the next step was to put it in an indefinite idling position, but still keep the logistics assets. You know active so that we have some other opportunities from that standpoint, and a and then we'll see how things play itself out.

On Martinez, we did not a look at a sale to your question there or you know we're pretty excited about the opportunity of reconfiguring. The the asset into renewable diesel we got some more work to do there.

And I know a you know we have a lot more detail, but I do want to give you you know at least the direct answer to your question as to whether we looked at sales. We did at Gallup. We ran a process that wasn't successful we did not have martinez.

So hopefully that answers that question.

It does not fishing Condor, maybe I don't know if you want to take the next one as my follow up as well my color. If you want to throw it to dawn, but I'd like to Prefacing question, but I'm just taking a look to MPLX is still price or unit price since you did see.

The IPO I guess about seven or eight years ago on its still trading below that level.

Aligns the MPLX processes is done in dusted so to speak.

But when you look at the outstanding equity in the amount of cash you just grow and why would that not make sense to buy in the balance of MPLX given the the incremental cost base still seems to weigh on your refining valuation I'll leave it there. Thanks.

Yeah, Doug it's a another good question and and as you referred to are you know our midstream study you know whether it's you know, bringing it all in are actually looking at the RL ft refining logistics and fuels distribution. Yeah. We went through a pretty exhaustive study as you're aware and you referenced at.

In the bottom line is you know we came to conclusion, you know that we didn't want to buy in a cash stream that we were already getting with respect to the RL ft. You know you know marathon has a unique position, where we're receiving about $1.8 billion in distributions from MPLX and you know our Lf days about 1.4.

Billion of EBITDA. So yeah, again, I'm, saying, we came to that conclusion of why would we buy in that cash stream. When we're getting it essentially via distributions and instead use that capital, which you know would be north of $10 billion in return to a to MPC shareholders. So so that's where we came out on the subset of it.

You know as far as all in you know at the end of today that you know there is some amount of cash flow that goes to partners on the on the one side of the fans on the other side of the fence, we'd be paying tax to a certain extent, depending on where we think the tax rates will be going forward. So at this point, we do rack.

The NYSE and we are frustrated at the level of you know equity value that MPLX has.

At the same time, you know, we felt or and continue to feel that the amount of capital that would be needed to do that at this time makes more sense to return to shareholders as opposed to not and obviously, we've concentrated alok a lot on the speedway unlock a value and and that's kind of where our head is for right now and as.

As I mentioned in Don commented as well as you know we're going to be doing a lot of analysis between now and the close to look at what's the best use of proceeds, but but the highlight priorities are you know the balance sheet and returning capital to shareholders.

All right appreciate I appreciate the answers guys. Thanks.

You're welcome Doug.

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

Hi, Thank you good morning.

Morning, Roger.

[noise].

I guess, maybe to follow up on kind of the whole restructuring in slide four where you've got the you know the threed kind of or I guess guide posts I'll call. It.

Where should we think about where you are in the overall sort of evaluating the company potentially restructuring the company and there's going to get back to some of the questions already that actually idea by an MPLX do you want to buying a bunch of shares change a dividend et cetera, but I'm. Just curious what gives you couldn't have known for certain about getting a sale.

Ah retail done until obviously you sign that the papers, even if the cash is still a few months away, but now that you have certainty of that how is that may be affect the way and where are you maybe in terms of [noise].

Progress in doing an evaluation throughout the company on both sort of a current covert basis and then on a maybe call. It more of the mid cycle 21, 22 outlook standpoint.

Yeah, Roger So so like you said on the three initiatives or you know we still have a lot of work to do on the portfolio. Tierpoint. You know we could not be assured that we would get this deal done we were very optimistic because we believed to be ways of really attractive asset out there.

We did get significant interest and I think we concluded the deal that's in the best interest of of ourselves Speedway and 711.

As far as the portfolio, though you know we still have a lot more work to do you know, both oh, and the refining side and the logistic side and the GMP side I mean, there's there's a lot of activity going on and the best I can give his overtime will continue to to disclose how we're feeling about certain things. We don't want to get ahead of ourselves in the mark.

But we want to get to a portfolio. Our goal is to get to a portfolio that you know generates significant free cash you know in any environment and for me personally I'm a of protect the downside. So you know knowing that we're going to have these down cycles, we want to make sure. The portfolio is very resilient during those time.

James.

As far as the other areas like I said, we've just starting to to make some moves into commercial area and that's the one area that I'm, probably going to be the least disclosing about just because of the competitive nature and then the cost structure. I think you know just keep an eye out for each quarter as we continue to progress.

My personal style is not to you know put out a big number and then a you know try and track against its more of a try to have continuous improvement in continuing to lower our cost and a lot of different ways and change or you know our philosophy on cost and change our philosophy on capital.

Disciplined so each of those I think Roger a each quarter, we'll be able to talk a little bit about how we've made progress in each of those areas and then hopefully you'll get to see overtime, how were look into a to maneuver the company.

I hope that makes currency.

It does you're going to you're going to make us ways. That's that's always artists thing for us [laughter].

As a as a follow up I don't know Don you've already tried to address the tax issue, but we've been getting a lot of questions and on it I was just curious you know the other refiners for the most part is discontinued.

Our guidance because the current environment and their care Act had some real impact. So I was just curious as we think about you know the 21 billion to 16 and a half net are there other things it may flow through here in coming quarters, whether it's a going back and capturing prior profit.

Tax payments or something else that my allow you to whittle down the tax impact on the sale.

Yeah, Roger and in you know in connection with sort of the effective tax rate. I mean 2020 is was an unusual or is going to be an unusual year because.

As you look at least our book income you know we had significant charges related to goodwill and you know it's it has limited deductibility. So.

Our our first quarter, and then year to date effective rate.

It was in the sort of a middle teens as a as a percentage really driven by that.

What we spend all of our time doing is really looking hard at you know our cash tax position and you know as we disclosed in the first quarter and as we will disclose again in our second quarter 10-Q, you know we believe that that as a result of the Cures Act you know.

We're anticipating that we will have net operating losses in 2020, given the environment and also given the significant.

Capital expenditures that we've made in the past, where we get to take the depreciation deduction. When assets are placed in service. So we expect that there will be a significant in a well and the cures Act provides that you can carry that back up to five years, and we would expect to carry back and a wells into years.

That given that five years that have a 35% tax rate. So we think thats a good thing for MPC. Our plan would be that we would work on getting our 2020 tax return filed as quickly as we could in 2021 to be able to affect that and a well carry back.

And the refund that would be associated with that with respect to the sale of speedway.

You see we will continue to evaluate that and we will look for ways to best optimize the tax position, but we thought that it was appropriate for purposes of this announcement to give you you know the sales price minus the basis times you know what we believed was a normal tax rate.

At a statue at a relatively statutory rate.

Okay, just one minor follow up on that in terms of if when you file the 2020 returning 21.

Timing on a refund that's just my last a data point.

We believe that that happens relatively quickly, but you know who knows what the world looks like in 2021. If people are still working from home we're still in their offices, Roger but you know we believe that that's a relatively you know a relatively up a rapid up you know a rapid transaction.

I'm not trying a rapid a result, if you will so we're going to push really really hard to get our return filed as quickly as we can and then we would expect that the refund would would manifest itself relatively quickly after that.

Thank you.

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

Thank you good morning, guys.

Morning, Paul light.

Two questions if I could.

I think earlier that you say that it doesn't make sense for you to buy input that we may have entail eggs. So it's.

The company come safe that that way far more effective pay TV day.

Cash infusion what that that you may be open that you.

Do you want it to a spin off totaled eight the NPL X.

What that that they see effect on speculation or Thats just income cool.

But take so let's say.

Evaluation that it's just going to kick the structure assay kits.

The second question is when they that to the Golden Eagle, whether a lost something get can you still wasn't that we knew what they want that to one that we knew what do you need to shut yet and intensify as these new AFFO.

How big it it's just that you want that in the long haul for excess.

Into consideration on one hand kind of on margin then we tend not very good but on data had the battery off then I guess low and a margin then but at the moment and says we've got them and mandate. So want to see how can get deals that they set long haul. Thank you.

Hey, Paul So so one the first one you know we don't we don't have any other comments other than as I mentioned you know, we're we're gonna do a lot of analysis. We you know we have some time to to look at what's the best thing to do it the the proceeds.

But I do want to leave everybody with the the priorities that we have our you know the balance sheet and returning capital. So one of the obvious things that we stated from the beginning with Speedway was we did want to unlock that value realization and returning capital is a is a high priority. So I I don't want to comment on anything other than then those at this point.

On on your questions on Martinez and renewable I'm going to turn to re in a second but.

Let me just give a couple opening comments so.

First off I think Martinez is in a unique.

Set of circumstances relative to the hardware that that exist at the facility in and I'll, let ray talk about that.

We are a believer you know that the you know renewable you know positioning is gonna be beneficial to us because it aligns with californias low carbon fuel standards.

We've also stated MPC has greenhouse gas reduction targets that we want to accomplish you know throughout the decade. So strategically. This said this fits with where our thinking is and and I would just give you little bit of framework is as we think about capital investment there and this was the harder decision you know they expect.

Capital that we're going to put in for the first phase assuming we go with this is about the same amount of capital that we would put into a planned turnaround for the facility. So we really hit a decision point and decided to pivot and look at renewable diesel production as opposed to refine product production.

And so that's kind of the at the decision tree, if you want to call. It that there's a there's a lot of details that go into the analysis. So I'm going to all of that Ray give you a little bit more detail say say understand some of the specifics around Martina is a you know its own specifics about the facility I.

Hey, Thanks, Mike.

Paul just wanted to give you a framework or.

A little bit that that we've actually been looking at Martinez for for a long time essentially ever since Oh, we merge with sand ever and early on we evaluated but you suggested co processing or for renewable diesel, but those those economics weren't nearly as strong as as the conversion.

That we're looking at right now the key item and Mike just hit on Nash is with the refinery continue and then and its current form is that it has been extremely high cost structure and then we have been here near term headwinds with a heavy turnaround spend and the coming here.

So we believe that transitioning martinez to renewable diesel plant ultimately creates value for our shareholders in or certain unique advantages for this site.

Martinez renewable diesel for Sony can provide up to 48000 barrels per day of capacity and we expect the initial production could be online and 2022 and ramping up from there.

We are continued tenant valuate in more detail, but the initial analysis looks extremely promising Martinez current complexity presents a capital efficient project for us given that there are three high pressure Hydroprocessing units retrofitting. These units will allow for renewable diesel production equal to about one.

One third at the current refineries nameplate crude capacity. There also is the existing hydrogen plant power generation and extensive inbound and outbound logistics that are all needle needed to produce renewable diesel.

So our intention is to pivot to the production of higher value low carbon intensity diesel for California.

Martinez produces about 454000 barrels per day up you LSD at full utilization and the conversion would produce up to 48000 barrels per day up renewable diesel.

I want to emphasize that this is not a grassroots facility. So there is an element of speed up conversion. We believe that we have an early mover advantage and we believe that there are opportunities for meaningful partnership partnerships with feedstock suppliers now we fully understand that the drivers for the economics.

Project are not not are typical refinery project that there are a regulatory drivers, but at the end of the day with the unique advantages for Martinez said I talked about earlier, we're just really excited to take this evaluation further.

Oh wait and Mike can can you give us some idea that all the company at the whole long term how they.

I will be what both diesel business that you want to be over your Whitney that to get the assess ceiling coal you think that mill. That's no winning those same thing it depends on the opportunity set.

And also that offset the yes, basically sell who is going to kick me.

That's it for me thank you.

Yeah, Paul it's Mike So I don't think we have a target number at this point, but I do want to say that we're going to continue to look at the portfolio and and make decisions as we go along.

Martinez.

Our priority as Ray said is gonna be evaluating the different phases here. The other thing I would like to add.

If you know for those who know me in the past you know I believe joint venture arrangements can be very successful as well when you get into these types of deals. So you know managing the capital and achieving a better overall outcome for all parties is something else that we're looking at very hard here. So we're evaluating that approach in general.

I I think at the end at a day or you know we think there's some real uniqueness here that should be beneficial you know ray gave a lot of technical stuff I say on the commercial side, we're going to talk a little bit you know about you know JV opportunities in the future you know managing the capital is one of our main criteria as we wouldn't have to.

Glenn So that's that's another important piece of this so I I just wanted to make that comment I'd also going to let let Bryan make a comment as well.

Yeah, Paul to your question. The last question that you snuck in their regarding the RIN as it relates the speedway separation just wanted to address that real quick. So I think the first thing to understand and appreciate that we've always had a market based philosophy and approach to pricing was speedway. So as a result of the separation Fortunately due to that historical philosophy, there's really no.

Step change or movement in value shift, but fundamentally MPC will be the lender of record in all transactions. So we will possess the RIN retained Iran. As it relates to the value of that ran that's all always driven by market specific switches individual market by market an agreement fully contemplates that you know when you talk about a long term agreement like this.

We have to make sure that its resilient overtime and the agreement fully contemplated this for rins or anything else frankly in the future. So.

You mean, the that's the way it's going to be handled the agreement to mean, just just wanted to make the point underlying that underscore that there is no value shifts whatsoever as result of the transaction on Rins.

Thank you.

Mhm.

Thank you.

We'll hear from Manav Gupta with credit Suisse. You May proceed.

Hey, guys. My question is on on the cool so close sourcing site cheating till Q mediums toddlers already tight but as you move into TQL, we have seen Russia and other OPEC countries reasonable volumes. So do you expect.

More discounts on medium sour crude going into Q, which could help but of course has always been PQ.

Hey, Matt its Mike so risks not here today, so I'll take a shot at that he's out of the office today I mean in general we think Directionally you know the crude market is going to hopefully move towards us with increased production. As you stated you know, we're gonna have a little bit of.

Recovery in the production side of it which hopefully will put some.

I'm pressure on differentials right right at the moment as you're very aware refining crack spreads are still very weak and it's not been a good a environment for refiners, but you know as I mentioned earlier you know we're we're optimistic.

But cautious you know as recovery you know continues to progress.

Hopefully, we'll get to see a recovery in refining margins, which we haven't seen yet and as crude production continues to progress to your point you know then hopefully we'll get to see a little bit more oh.

Opening on on those spreads I I wouldn't manav this might be a good opportunity I, let me, let Tim and that Brian make a comment on where we think we are in demand recovery site.

Give you a little bit us a flavor of how we're seeing the demand side. So Tim why don't you start with a with gasoline and then Brian can finish up with the portfolio.

Yeah, you bet, Mike you know as John referenced we've seen a really continuing amount of recovery and gasoline.

Demand since early April lows, and really all regions or countries move the state the reopened.

Probably the greatest strength in the Midwest really through the second quarter.

Recovery trends nationwide have slowed more recently with system wide.

Weighted same store sales volumes currently down sort of 10 to 10% to 15% compared to last year when the east coast about 5% by in the Midwest in the West coast, another 5% behind that.

So were us as referenced earlier, we're watching carefully the latest covance case escalation in multiple regions.

And the potential were states are counties to backup on the reopening plans.

Schools going back to in person is a significant wild card and the demand side as students at home will have some consequence for the ability to parents to return to the workplaces.

And getting people back in the roads.

You know for what it's worth we also thanks to increase our requirements for masks nationwide as a positive for demand as facilitates increase mobility with more more things able to be open which potentially gets people back on the road to a meaningful extent, we'd much rather see people out on the roads with masks than at home without them.

With that I'll turn it over to Brian for these anja.

Yes, thanks, Tim So to continue on demand Manav I can kinda talk across our entire book. So the Tim's point, we see the exit rate for July is down about 10% to 15% overall, so like an echo when 10 seeing that just a couple of regional nodes. The one I guess downside note on a regionality is in the southwest so with the right.

Surgeons in cases of coded in southwest we have seen a weakening here over the last several weeks in that particular region on the bright side, the Midwest and Atlantic Coast, Oh, both recovered and they're down roughly 7% year on year across in total book, which is really good sign for the Atlantic Coast as everybody knows that were pretty hard hit up in the New York, New Jersey Mark.

And plays on the diesel side, we hit our low point just as a reminder, in the early to mid April we're off about 22% year on year, we exited July off about 10% in into Tim's point on demand profile. We have seen since the fourth of July kind of aside were sideways motion as it relates to demand, but it's been pretty stay.

Able over that period of time, but somewhat in a plateaued manner.

Downside regionally the great Plains is off 15% to 20% a lot that it has to do with a heavy demands up in the Bakken area that have curtailed as a result of drilling activity up in that market and then the upside regionally in Midwest is about 5% off from are actually up in the southeast year on year on the distillate side.

In closing out and on on jet fuel you know the second quarter, we are off roughly 30%, 34% year on year, a pretty big outperformance relative to the market a lot and have to do with our sales mix.

We are heavily levered to cargo sales, which are really strong resurgence really since the cobot outreach outbreak in even before that was online retailing really driving a lot of the demand in the Midwest and off up in the Alaskan market.

July were actually down year on year in the low teens, so really strong performance by our aviation team.

It's really starting to see the fruits of the combination commercially with the endeavor portfolio and MPC coast to coast a lot of the jet buyers there levered across not only the U.S., but just globally, so really been able to create richer relationships there to drive incremental captured market share overall really the outlook on August is pretty flat to July.

Why we expect to be some downside to that based on the resurgence and in both cases stay at home orders as well as quarantine and really the thing we're watching right now as we look at into September is what is the man going to look like in September given that a lot of schools are not returning to normal people are working from home. So there is definitely a pent up demand of folks wanting to move around.

So it's a bit of a wildcard what demands going to look like in September you can make is as good of an upside cases, the downside case, we're watching it closely.

And then I'll just to circle back to crude I know you asked about the Gulf coast, but.

Hopefully a Canadian differentials will start to widen a little bit is more production comes online in that market and then on the West Coast <unk>, we're starting to see some foreign economic alternatives are like rushing grades Brazilian grades et cetera et cetera. So.

Been pretty tough sledding for refiners, and and I'm, hoping we get a little bit of margin improvement with the some of the adjustments of crude production coming on.

Hello. This is like they had it puts US ahead of a quick follow up on Apple I think it moving about 15000 on bought but it didn't make best midcon refineries, but I think that T offsets and caucus sand ballpark and then Dan can you speak up yeah, Bob can use change between DAPL and non dapple I'm, just trying to understand and gifts definitely does.

Go down our that enough offsets to that 50000 battle. So you ask anything RCM earnings headwind on that finding site.

And then I've that's accurate so yeah, we have a bunch of other alternatives other than dapple as far as supply. So if if dapple word to not run Oh, we think we have enough alternatives on the supply side. So I think you're right on with your statement.

One comment I would say, though on the logistics side, you know with respect to dapple as well as you know another pipeline up in that area. The high Plains pipeline I mean, MPLX is a 9% owner in dapple and then the high plains pipeline or if that were to shut down as as well as a result of the recent.

Discussions about you know the be IEI looking to have it shut down I'll give you a couple of comments that I think would be helpful to clear in the market not number. One is you know we believe on the on the B. I a that you know a of an appeal has been filed at this point, which triggers an automatic stay of the show.

Got down so we don't think theres anything in the short term because there is an automatic stay and then we will continue to try and advance that discussion to it to a good conclusion for all parties.

On Dapple, obviously energy transfer is taking the lead and that discussion.

From the legal standpoint et cetera, but both both of those together if they were both to shut down on the logistics side, we think the impact to us would be no less than $100 million. If if both entities were to be down we don't think thats. The likelihood case, but I just wanted to give you a little bit of the logistics side of it and then to your point on the.

MPC supply, we think we have enough alternatives that you know manned Dan would be supply adequately is as well as our pad two refineries.

Thank you so much for taking my questions.

Thank you.

Next question comes from Benny Wong with Morgan Stanley. Your line is open.

Hi, Good morning, everyone. Thanks for taking my question. My first one I was wondering if you can provide some color.

Or details around the 15 year supply agreement with 711 wondering if there's a value would you would assign to it and maybe give us a sense of the opportunities of growth in terms of aireon and inside there.

So I'll I'll give some comments and I'll, let Brian add a then as I mentioned earlier one of the the big benefits that we see in the agreement is we maintain.

Integration benefit that we see.

As as part of our portfolio. So I mentioned earlier you know it's about approximately 8 billion gallons for 15 years. So it's a long term relationship that we're looking forward to with 711 and a lot of the a in in a integration benefit that we have is providing the logistics service and providing the transportation.

Trucking services, so well you know we're going to continue to provide those services for 711. So you know there'll be a benefit to us as far as using you know our logistics assets using our trucking services trying to give them the utmost in terrific service. So I think it's a win win for both of US you know we're going to capture the.

The the integrated value as far as the logistics in the supply and you know in 711, obviously, we'll capture the the margin in the retail business going forward and another important point is that that's you know 7.7 billion hold steady for the whole 15 years. So it's it's a very long term relation.

Unshipped, So that's one component and the second component is yeah. We plan to work hand in hand with 711 as they grow out their portfolio. They've had asked you know stated.

Our goal to expand to about 20000 stores and so we have a second agreement with them.

That I'll, let Brian comment on which is to continue to supply them beyond the existing speedway situation.

Yes, Thanks, Mike, Yes, so somebody it's a little tricky to talk about the supply agreement commercially for obvious reasons, then maybe I'd kind of underscore a couple of the guiding principles and tenants to in hit upon what Mike already mentioned really as you know it's important to know we had a market based philosophy, so it's very difficult and tricky.

To develop a long term supply arrangement, but we think we've done. It. We think this is a really good solid relationship. It's a win win for both parties. You know if you think about the history of the speedway portfolio literally growing up over decades in and around the infrastructure. So it was important to us to preserve the integration value operationally associated with that which we've done so in the contract at the same time.

Providing a really compelling supply out operationally as well as commercially for 711 in the transaction so.

You know, we think going forward.

It's really set up well for both sides of from a win win perspective, and then Mike from a growth perspective, historically, we Havent had you know I'd say based on their scale 711 haven't had a huge supply relationship with them. So we think there's opportunity there, especially across the broad bar a platform. We now have coast to coast to work closely together and find more opportunities.

So we think we started down the right path. We think we've got the commercial construct to get there and we're excited about the prospects of.

Going forward once we get to the closing table to drive incremental value not only for MPC, but across both both sides of the table.

Great. Thanks, that's very helpful. On my follow up question a follow up on your decision on closing Martina than Gallup.

Just wanted to get your thought on the impact, especially Martinez on packs by when we get back to more normal environment. So we expect that region to split to be more in portable product and what you think that potentially does to the the margin volatility and in that region and also wanted to get a sense in terms of the changing.

Cost structure, it bring and and if you think how much the the price improvements from a tighter supply I might brinci other assets and potentially offset.

The normal contributions from these assets.

So many I'll, let Brian make a comment on on the balance and in rate can make a comment on the on the cost structure.

You have any as it relates to the West coast balance I think you know taking Martinez down it certainly directionally helpful for the balance and that's an obvious statement hard to predict though going forward what that actually looks like as we continue to trend down of out of Kobin, but.

We've been able to optimize and resupply with internet work as well as with some of our trade partners in that marketplace. So a you know directionally positive and then as diesel side I think ray hit on it earlier, if you think about the mix of of diesel production out of Martinez and what we're replacing with renewable diesel going forward, we think a one for one but the.

Key there is a renewable diesel demand element in the market. So it puts us in it really good position to not be the export or in the markets really help penetrate the market with what's being demanded out on the west coast. So it's hard to know if it was complete certainty and predict the future, but obviously, we feel it's very directionally favorable for the marketplace.

Hey, many spray I'll, just talk a little bit on the cost structure, when I talked a little bit Arlington about Martinez I commented that.

Got it has very high cost structures have refined product refinery I'm, so that going forward well have a much more streamlined facility with the three hydroprocessing units.

Hydrogen plants and so forth shallow you know will have a well have a much lower cost structure on on Opex standpoint, as well as I talked earlier about the Capex conversion.

So that that at the end of the day, we really feel that we'll have a cost advantage renewable diesel opportunity.

Great. Thank you very much it along.

You're welcome.

Thank you.

Your next question will come from <unk>.

Your line is open.

Good morning, Thanks for taking the question.

I wanted to follow up on the West coast there.

Martinez going down how do you think about the synergies having sort of that.

Coastal coverage north to south in PADD, five does that increase or change the way the importance of worry or change the way that you think about you know in an accord as or.

Hi, I'm in terms of where that fits into portfolio.

And then.

Service related to that too I wanted to ask a follow up about a some of the a lower complexity smaller refineries in the mid con, but maybe starting on that West coast synergy question, and then Oh wait for defaults.

Yes push on this is Brian party be absolutely, yes, we it's a fundamental shift not only in the west coast balanced, but certainly to our book. So as a result, it has a direct impact on how we think about medium and long term without the assets out in the west coast. So.

You know something in the West Coast system today is somewhat akin to what we're used to running in the Midwest with some of the flexibility we had between the plants and this really just levers that and puts us into a different gear out west thinking about logistical assets marine assets terminal assets and what not to be able to optimize the overall portfolio. We've always run the Midwest as a quote unquote system and then.

On the West Coast is largely function is similar manner and we see this directionally helpful to help us optimized assistant overall and we believe we've got the logistical capability to do that and really feel like it puts us in a great position going forward.

Okay great.

Just a follow up on the some of the a beat them.

The mid continent broadly speaking assets to the less complex foreigners, you mentioned that Dickinson conversions is on target and I think would that kind of hitting in the back burner in terms of market view or what we were paying attention to and so that's it's kitchen getting update there, but when you look at some of the other assets that are there you have a few.

The other.

Or lower complexity, so to speak a smaller refining assets in that mid con well, where do you think that fits into the portfolio longer term you know some of those.

In terms of disposal versus conversion.

Or keeping them running as is.

Just wanted to get some sense of of your thought process around those.

Yeah for sounds like I like I said, a couple of times here you know all the portfolio is gonna be evaluated for what we think will be the best long term.

You did mention you know Dickinson and I'll, let ray give an update so so the market as a sense of where that stands but I think you know the takeaway should be you know, we've obviously looked at several of the a the assets. We have we have a lot more that we're having discussion about and then hopefully like I said, our goal is to get to a point where.

You know the portfolio you know is able to generate cashing in all environments. I mean, the one we're in right now is obviously very difficult, but if we get back to a more normal environment. We want to have a portfolio that you know very resilient. So right you want to make a comment or on a on to consider yeah, hey, when we thought.

The challenge is that we've had with co bad a very very pleased that we've been able to progress that can send right along schedule and so at this point werent cornerstone still targeting before the ended the year to complete construction of a 12000 barrel a day renewable diesel facility and start up and have product by the end of the air So that.

That's still trending very well for us.

Okay. Thank you very much rates on.

You're welcome present.

And with that operator, thank you and thank you everyone for your interest in Marathon Petroleum Corporation should you have additional questions or would you like clarifications on topics discussed. This morning, our team will be available to take your calls. Thank you so much for joining us and good day.

Thank you that does conclude today's conference.

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