Q3 2020 Marathon Petroleum Corp Earnings Call
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Welcome to the MPC third 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 a listen only mode. Later, we will conduct a question and answer session Press Star one on your Touchtone phone to enter the queue. Please note that this conference is being run.
Courted I will now turn the call over to Kristina Kazarian, Christina you may begin.
Welcome to Marathon Petroleum Corporation's third quarter 2020 earnings conference call. The slides that accompany this call can be found on our website at marathon petroleum dotcom under the investors tab joining me on the call today are Mike Hennigan, CEO, Don Templin, CFO and other members of our 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 in our filings with the SEC with that I will turn the call over to Mike.
[laughter] yeah.
Thanks for joining our call this morning.
Three highlights our company's three strategic areas of focus in the near term.
Building and executing on these three strategic cars will enable us to position the company for long term success and through cycle resiliency.
As we continue to navigate the challenges created by COVID-19 for both our company and the industry. We remain focused on the aspects of our business within our control. This includes strengthening the competitive position of our assets.
Moving our commercial performance and lowering our cost structure.
On slide four we provide a quick update on actions taken around those three strategic priorities this quarter.
First we're making good progress on the sale of the Speedway business and continue to target in the first quarter of 2021 to close the transaction.
Speedway in 711 teams are very focused on completing the activities required to successfully close the transics transaction.
Additionally, our interactions with the FTC have been constructive.
We also wanted to provide more color around the use of proceeds from the speedway sale. Since we have continued to receive questions about MPLX buying.
As you know we ran a comprehensive midstream review process that began last year and we announced the results of that review earlier this year I.
Our conclusion from that process has not changed.
We remain committed to using the sale proceeds to strengthen our balance sheet and return capital to MPC shareholders and do not intend to buy in MPLX with cash from the Speedway sale.
As it relates to MPLX. However, we continue to position MPLX towards free cash flow after distributions and capital in order to proceed with unit buybacks, which have now been authorized by the MPLX Board.
One of our most important priorities as we evaluate the use of proceeds is our commitment to defending an investment grade credit profile, we expect to target an MPC alone debt to EBITDA leverage metric of one to one and a half times.
Given the significant and stable distributions from MPLX, we don't envision in MPC balance sheet with less than $5 billion of debt on a through cycle basis.
As a reminder, we also expect to increase the cash component of our core liquidity position by an additional $1 billion to offset by the loss of cash flows from speedway.
Within this framework and based on our current assessment, we expect that the remaining proceeds would be targeted for shareholder return.
We are evaluating the form and timing and we'll share our plans closer to their transaction close.
Moving on the renewable we continue to advance our investment in this important area.
We're in the process of starting up our Dickinson North Dakota renewable fuel facility at full capacity is expected to produce 12000 barrels per day of renewable diesel.
We are particularly proud of the team's commitment to execution and the ability to move the startup process up three weeks ahead of schedule. Despite recent challenging weather conditions.
Since the last time, we reported to you. We've also made excellent progress on our plans to convert the Martinez refinery into a renewable diesel facility.
In early October we submitted our permit application to the local regulators. We're also advancing discussions with feedstock suppliers and began detailed engineering work.
Finally, we continue to exercise strong discipline on how on how capital and expense dollars are spent.
We are on track to exceed the targeted reductions of 1.4 billion of capital spending that we announced earlier this year.
We're also maintaining our focus on structurally lowering cost and all aspects of our business.
As a result of this focus we expect to exceed our 2020 forecast that GAAP operating expense reductions of $950 million.
During the quarter, we also took incremental steps to reduce our long term cost structure, including the implementation of a workforce reduction plan.
The difficult decision to reduce our workforce by more than 2000 people was not made lightly we're.
We are committed to treating our employees with integrity and respect as we take these necessary steps to position the company for through cycle resiliency and enhance our long term financial prospects.
I started off my comments by saying that we are focused on the things we can control.
No matter. What lies ahead I believe we are uniquely positioned.
With the Speedway sale, we will have the ability to strengthen our balance sheet and make substantial capital returns to our shareholders simultaneously.
With the after tax proceeds from the Speedway sale, we see a clear pathway to meaningfully reducing our share count which provides more capability to support our dividend.
As the challenging environment, but we are optimistic about our ability to deliver shareholder value in both the short and long term.
At this point I'd like to turn it over to Don to review the third quarter results.
Thanks, Mike.
Mpcs adjusted EBITDA was $1 billion for the third quarter of 2020.
In addition to the adjustment for turnaround costs adjusted EBITDA excludes net pre tax charges of $525 million recorded in the third quarter, which are summarized on slide five.
We recorded $348 million of restructuring expense related to the indefinite idling of our Martinez and Gallup facilities.
As well as costs associated with our announced workforce reduction plan.
We also recorded $433 million of impairment expense, primarily associated with assets that will no longer have a continuing use at the Martinez refinery.
We recorded two inventory related adjustments for the quarter.
Due to lower due to carrying lower crude inventories, we recorded a $256 million or LIFO liquidation charge.
We also recorded a $530 million lower of cost or market inventory benefit from higher commodity prices, which partially reverses charges taken in prior periods.
Due to the announced sale of Speedway, we are now required to present speedways results as discontinued operations.
I thought it might be useful to walk through a couple of slides summarizing the changes to our financial reporting brought about by this requirement.
As shown on slide six Speedways Standalone results will be reported separately rather than as a component of what was previously being captured in the retail segment.
The direct dealer business, which was the other component of our retail segment is being retained by MPC and its results are now included in the refining and marketing segment.
Results for historical periods have been recast to reflect these reporting changes.
On slide seven we provide an illustration of how the reporting of historical and current period adjusted EBITDA has changed.
In addition to moving direct dealer to our in them and reporting speedway separately discounts.
Discontinued operations accounting requires speedways results to be presented differently as compared to their previous presentation.
First MPC corporate costs, which had previously been allocated to speedway are no longer allocated to the business.
Results for all periods have been recast to exclude any allocation of MPC corporate costs to speedway.
You can see the $7 million adjustment for both second quarter 2020, and third quarter 2020 on the slide.
Second we ceased recording depreciation and amortization for speedway from the time of the signing of the sale agreement.
This is a prospective change from the beginning of August 2020 forward.
You won't see that impact on this slide because it shows EBITDA, but I wanted to mention that since it will impact comparability for other financial metrics.
To put that in perspective, depreciation and amortization for speedway was averaging about $34 million per month in 2020.
Slide eight shows the sequential change in adjusted EBITDA from second quarter 2020 to third quarter 2020.
As a reminder, the second quarter adjusted EBITDA has been recast to reflect speedway as a discontinued operation.
Adjusted EBITDA was up approximately 353 million quarter over quarter due to increased earnings from refining and midstream.
Third quarter results also included net pre tax adjustments of approximately $525 million as discussed previously.
Moving to our segment results Slide nine provides an overview of our refining and marketing segment.
Third quarter, adjusted EBITDA improved by $296 million.
As a reminder, adjusted EBITDA for the RM segment has been recast to include the direct dealer business.
This business accounted for 105 million of EBITDA in the second quarter of 2020 and $133 million in the third quarter.
While crack spreads improved quarter over quarter margins in all regions remained under pressure as crude differentials narrowed considerably compared to the second quarter.
As Mike mentioned earlier, we are very focused on structurally reducing our costs.
You will recall that the second quarter costs were significantly lower than the first quarter costs.
Despite much higher utilization and the resumption of activities, such as maintenance and turnarounds, which ordinarily would have increased our costs, our third quarter operating costs were actually lower than the second quarter.
In absolute terms, our third quarter operating costs were down more than $350 million when compared to the first quarter of 2020.
And down more than $500 million when compared to the fourth quarter of 2019.
This gives us confidence that our focus on structural expense reductions is working.
Slide 10 shows the change in our midstream EBITDA versus the second quarter of Twentytwenty.
Our midstream segment continues to demonstrate earnings resiliency and stability.
With EBITDA, increasing by $96 million from last quarter.
Our performance during the third quarter highlights the subs stability of our underlying businesses.
The quality of our contracts and execution on our capital and operating expense reductions to help offset what we knew would be a challenging environment.
Slide 11 provides an overview of speedway results as a discontinued operation.
Third quarter, adjusted EBITDA is down $36 million from second quarter.
While fuel volumes continue to recover from the prior quarter.
Fuel margins were approximately 15 cents per gallon lower than second quarter.
Merchandise sales continued to improve quarter over quarter as well as year over year.
The Speedway team has also done an excellent job with expense control in an environment of reduced demand and transaction counts.
Expenses are nearly flat on a sequential quarter basis as shown here and are approximately $35 million lower than the same quarter last year.
Slide 12 presents the elements of change in our consolidated cash position for the third quarter.
Cash at the end of the quarter was approximately $716 million.
Adjusted operating cash flow before changes in working capital was $11 million in the quarter.
Changes in working capital was a $1.2 billion source of cash in the quarter as rising commodity prices and increasing utilization continued to reverse working capital cash use impacts from the first quarter.
Working capital also reflects an increase in accrued liabilities of approximately 297 million related to the cash portion of restructuring expenses that will be paid in future periods.
On slide 13, we provide our fourth quarter outlook, which includes estimated throughput at our facilities based on projected regional demand.
We expect total throughput volumes of just under 2.5 million barrels per day.
Slightly down from third quarter actual throughput.
Distribution costs are expected to be approximately $1.3 billion for the fourth quarter.
While some of our peers report these costs as part of gross margin, we have historically called them out separately.
Planned turnaround costs are projected to be $100 million in the fourth quarter, which.
Which includes activity at our Catlettsburg and El Paso facilities.
Total operating costs, including major maintenance and engineered projects are projected to be $5.50 per barrel for the quarter.
For Speedway, we expect fuel volumes of approximately 1.5 to 1.7 billion gallons.
And merchandise sales in a range of $1.55 billion to $1.65 billion, reflecting some recovery in demand, but still down from 2019.
With that let me turn the call back over to Mike for some closing remarks.
Thanks, Don.
Like to take a moment to provide some comments on our responsibilities around corporate leadership.
We recently published our 2020 perspectives on climate related scenarios report highlights of which can be found on slide 17 in the appendix.
The fourth year, we have published our TC FD compliant report, which highlights the opportunities and strategic planning work. The company is engaged in related to climate scenarios.
As a result of continued refinement of our FC perspectives, we want to mention two additional and important initiatives. We have established incremental to our announcement earlier this year to reduce greenhouse gas emissions intensity to 30% below 2014 levels by 2030.
First we've established a 2025 goal to reduce methane emissions intensity from our natural gas business to below.
Our natural gas business to 50% below 2016 levels.
Second, we're focusing on conserving and managing our use of water.
Through our efforts in this area, we have reduced our freshwater withdrawal intensity by over 10% since 2015, and we expect to further reduce it by an additional 10% by 2030.
We look forward to continuing in our SG journey, and our commitment to stakeholder engagement with our people business partners customers and communities.
We view sustainability as the fundamental process of share value creation, and how we conduct our business enhances the performance as we deliver with.
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 one follow up if time permits we will re prompt for additional questions. We will now open the call to question.
Operator.
Thank you we will now begin the question and answer session. If you ask a question. Please press Star then one on your kitchen so.
If you wish to be removed from the queue. Please press Star then two if you are using a speaker. So you may need to pick up the handset first before pressing the numbers. Once again if you have a question. Please press Star then one on your Touchtone phone.
First question will come from Doug Leggate with Bank of America. Your line is open.
Thank you good morning, everybody, Mike I appreciate the clarity on the or at least a statement on MPLX. However, I wonder if I could ask you to elaborate a little bit on the justifications and just to remind you as I'm sure you know, we'll be over 15% yield versus MPC it a little under eight.
And obviously.
The the the questions over what happens after the election as it relates to the relative tax advantage are probably going to be something that you may you may you may want to comment on as well, but just the justification as to why buying and MPLX does not make sense for MPC at this point.
Hey, good morning, Doug.
Maybe a couple of comments number one we stated continuously that our goals have been to put the balance sheet back in order and return capital MPC shareholders. So we still believe that Thats, our first priority here and as you look at what we've done over the last couple of months, we've we've enhanced our base case on shareholder return with the.
Change from a spin of speedway into a sale of Speedway, which I do believe is a win win for both ourselves and for 711.
But as we look at the equities I mean, we certainly acknowledge the argument that people have made about like you said, a 15% yield or so around MPLX at the same time, we view both equities are very under valued.
Particularly we view the MPC.
Considerably undervalued compared to where we think it should be long term and if you if you'd dovetail that with our commitment to returning capital to shareholders. We think the best value is to return capital in the form of buying back units and MPC.
We believe that the yield at MPLX should improve with our base plans at MPLX, which we noted today that we are going to continue to proceed into a free cash flow after distributions and capital at MPLX and put ourselves in a position to start buying back MPLX units with MPLX.
Cash flow and then we can target MPC cash at MPC shareholders in the form of buybacks.
We also mentioned on the call that we still have a little bit of time before we get to closing, which we're still anticipating first quarter, but we're going to continue to look at you know, we've said form and timing of those buybacks is something we're continuing to evaluate continuing to talk to our board about but at the end of the day, we think it's a much better value.
Addition for MPC shareholders and we believe it's the it's the right use of proceeds.
Okay. I appreciate the answer which is we can go into beta, but I'm sure you'll continue to get questions on it but my my follow up if I may is.
The portfolio review it looks like the operating cost reductions or at least the headcount reductions you mentioned are starting to show up in the numbers. So I just wonder if you'd give us an update on how you see any any specifics as to what you see are the next steps for the portfolio I know you've been somewhat reluctant to give any specifics, but posed a process is going on.
I just wonder if you can offer any more clarity and I'll leave it there. Thank you.
Yes, Thanks, Doug a couple of comments on the portfolio obviously, the most important things we have going we've been very public about.
I mentioned Speedway sale is a win win I think at the end of the day seven elevens getting a quality team and a group of assets that enhance their portfolio at the same time mpcs monetizing the retail margin, but keeping the fuel supply chain. So I think thats, an important portfolio step for us.
We've also talked about moving into the renewable space.
We can give a little more color on that as well, but we're starting up a facility up in North Dakota, We're continuing plans at Martinez. So so that those are the major portfolio discussions that we have going in our public about it at this time.
I will tell you that we continue to look at our portfolio and our goal is to make sure that we have a competitive set of assets that they can manage through any type of a tough environments like we're experiencing today.
Other thing that hopefully you are going to continue to see on a quarter to quarter basis.
He is our cost cutting efforts in time to change the cost structure of the company.
One of my styles is not to get ahead of ourselves because we continue to work at it we're continuing internally to challenge ourselves in different areas. So the best way to to stay apprised of that effort is to look at our quarterly results. As we continue to report out each quarter and I think you'll see a sense of concentration on this area.
Yes, and you'll be able to really see what we're delivering it as far as costs.
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Restructuring of of the company.
Well, Mike I appreciate again, the true answer, but just for clarification, there's been some speculation in the market you were looking to exit one of your process on the Gulf Coast can you cite directly I will leave it there. Thanks.
Yeah, Doug again, so theres always a lot of rumors we are not expecting to exit our assets on the Gulf Coast, we are expecting to evaluate all of our assets and we are looking at ways that we can reduce our cost structure in the Gulf coast on the West coast and in the mid continent, but.
But right now I think the important thing for you to think about is you know look at the results that we're delivering try and get a good assessment of where you see the cost side I'll, let Don comment on that specifically and then continue.
Continue to get updates from us on a quarterly basis, and we'll try and give you as much color as we can as to how that occurred one of the tough things in our business as we did implement a workforce reduction as I said in my prepared remarks, that's a very difficult decision for us, but we thought it was necessary for the long term viability of of the Corporation.
Yes, Doug I might add you know in Mike's comments, he talked about that in the end of the first quarter. When we had our earnings call. We told you all that we were targeting two things around reducing capital and reducing our expenses and we indicated that we were planning to reduce our capital by.
About $1.4 billion.
I think we're trending probably $100 million to $200 million better than that right now most of that would be on the up the RM side of the business, but we're also seeing some improvement on the MPLX side of the business with respect to the and you'll recall that that 1.4 billion.
Dollars or reductions was split sort of evenly 700 million for MPLX 700 million for the rest of them MPC.