Q1 2021 Marathon Petroleum Corp Earnings Call

[music].

Welcome to the M. P C first quarter 2021 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 no.

This conference is being recorded I will now turn the call over to Kristina Kazarian Kristina you may begin.

Welcome to marathon Petroleum Corporation's first quarter 2021 earnings conference call.

And that accompany this call can be found on our website at marathon petroleum Dot com under the Investor tab.

Joining me on the call today are Mike Hennigan, CEO, Maryann Mannen CFO and other members of the executive team. We invite you to read the Safe Harbor statements on slide two we will and making forward looking statements today actual results may differ factors that could cause actual results to differ are included there as well as and our SEC.

Filings with that I will turn the call over to Mike.

Thanks, Christina and thank you for joining our call. This morning.

And we get into our results for the quarter. We wanted to provide a brief update on the business.

During the first quarter, our industry continue to struggle with reduction and global economic activity and demand for transportation fuels and resulted from the mobility restrictions related to COVID-19 pandemic as.

As we started the second quarter with the rollout of explanation, we still see industry wide gasoline demand down around 5% from historical levels and jet demand down around 25% to 30%.

And the extent that depend on desire to travel starts to bright and the macro outlook for our business our team and our assets are poised to take advantage of these opportunities, but in the meantime, as the challenging backdrop holds will continue to concentrate on the elements of our business that are within our control.

Our near term priorities remain the same each quarter, we're focused on strengthening and competitive position of our assets improving our commercial performance and lowering our cost structure.

Slide four highlights some of our actions around our strategic priorities this quarter.

First we're close to completion on the sale of our Speedway business.

Second we continue to take steps to reposition our portfolio our board of directors approved our plans to convert on Martinez assets were 48000 barrels per day of renewable facilities. We expect commissioning of Martinez to begin in the second half of 2022 with approximately 17000 barrels per day of capacity and.

Additionally, we expect to reach full capacity of approximately 48000 barrels a day by the end of 'twenty three.

In line with our commitment to lowering the carbon intensity of our operations and products. We are planning to install wind turbine generator that Dickinson facility.

Sourcing electricity from wind will lower the carbon intensity of the renewable diesel product at that facility.

We will continue to seek out the right opportunity for investing and partnering on renewables and evolving technologies.

Finally, we also continued to exercise strict discipline on how capital and expense dollars are spent and this quarter, we were able to hold refining operating expenses roughly flat with the prior quarter.

I'd like to take a moment on slide five to reinforce our priorities for the proceeds from the sale of our Speedway business.

As we approach the close of the transaction. We've appreciated the continued dialogue we've had with many of you. We remain committed to use the speedway sales proceeds to strengthen our balance sheet and return capital to MPC shareholders.

And important priority is our commitment to maintain a solid investment grade credit profile as.

As we've said before we intend to maintain and appropriate levels leverage for this business and recently Fitch affirmed our investment grade credit rating of Triple B and improve the outlook for MPC from negative to stable.

With respect to debt reduction, we previously indicated $2 $5 billion of debt that could be retired with minimal friction costs.

We've repaid approximately $2 $1 billion of its announced since October by issuing commercial paper, which we intend to pay down immediately with the proceeds from the speedway sale.

We'll be thoughtful on how to reduce our debt to minimize cost.

Not jeopardizing, our investment grade credit rating.

Within this framework and maintaining a solid balance sheet. We expect the remaining proceeds will be targeted for shareholder returns and we plan to announce more details around these plans in conjunction with the closing of the transaction.

Slide six demonstrates our execution around lowering our cost structure.

Our refining and corporate costs results this quarter illustrate the impact on the team's commitment to cost discipline.

And while rising utilization will bring variable costs as volume increase we believe that the structural cost reductions we have made are sustainable.

While our results reflect our focus on cost discipline, we have not compromised on our commitment to safely operating our assets and protect the health and safety of our employees customers and our communities and which we operate.

As you May recall 2020 was the company's best performance ever in the area with nearly 30% improvement across both process and personal safety rates and our very best environmental performance.

And recently four of our refineries received safety awards from the American fuel and petrochemical manufacturers Trade Association.

These awards recognize facilities that go above and beyond to keep their people facilities and surrounding communities safe.

Robinson, Detroit, Anacortes, and Dickinson oil demonstrated outstanding safety performance and leadership that set them apart.

Lastly, I'd like to take a moment to provide some comments on our commitment to ESG.

And from a strategic standpoint, our focus is to meet the needs of today, while investing and the energy diverse future. This includes lowering the carbon intensity of our operations and products expanding renewable fuels and technologies conserving natural resources, engaging with stakeholders and investing and our communities.

We have three companywide targets many of our investors know well first a 30% reduction and our scope one and two greenhouse gas emissions by 2030.

Second a 50% reduction and our midstream methane intensity by 2025, and lastly, a 20% reduction and our freshwater withdrawal intensity by 2030.

Our focus on sustainability is pervasive across everything we do and to ensure this our compensation now includes the sustainability metrics and our bonus targeted weighted at 20%.

We are also linked to diversity metrics of compensation and the same way that last year, we link greenhouse gas intensity reductions to our compensation.

Reflecting our current commitment on ESG, we are pleased for the second consecutive year to her and the U S. Epa's energy star partner of the year sustained Excellence Award.

MPC as the only company with fuels manufacturing as its primary business to earn this award and we're very proud of the work our employees do and this area.

At this point I'd like to turn it over to Mary Anne to review the first quarter results.

Mike.

On eight provides a summary of our first quarter financial results. This morning, we reported and adjusted loss per share of <unk> 20.

Adjusted EBITDA was $1 $552 million for the quarter.

This includes results from both continuing and discontinued operations and.

Cash from continuing operation, excluding working capital was $613 million, which is in nearly $500 million increase since the prior quarter.

This also marks the first time since the start of the pandemic that cash from continuing operations has been above our quarterly dividend payment, which was $379 million.

Yes.

Slide nine shows the reconciliation from net income to adjusted EBITDA as well as the sequential change in adjusted EBITDA from fourth quarter 2022 first quarter 2021.

Adjusted EBITDA was nearly $650 million more quarter over quarter, driven primarily by higher earnings and refining and marketing.

As a reminder, both the fourth and first quarter results reflect speedway as a discontinued operation.

Moving to our segment results.

10 provides an overview of our refining and marketing segment.

The business reported positive EBITDA for the first time since the start of the COVID-19 pandemic with first quarter adjusted EBITDA of $23 million. This was an increase of $725 million when compared to the fourth quarter of 2020.

The increase was driven primarily by higher refining margins, which were considerably improved across all regions and the first quarter as compared to the fourth quarter.

Total utilization for refining was 83%, which was roughly flat with the fourth quarter utilization of 82%.

Operating expenses were in line with the previous quarter. Despite the slight increase and utilization distribution costs were lower by $69 million due to variations in quarter to quarter timing and costs.

In March severe winter storms impacted our industry.

We estimate that the cost impact across our refining and marketing business was roughly $39 million this quarter.

With an additional $12 million to be incurred and the second quarter.

Although our Galveston Bay, and El Paso refinery, both had to shut down for a period of time, neither experienced any significant mechanical damage or safety incidents as the team with steadfast and safeguarding our operations and ensuring the safety of our employees and the surrounding community.

<unk> was able to quickly resume operation and Galveston Bay was able to began its planned turnaround during the period.

<unk> of our people during this time demonstrate the values that are integral to the way we conduct our business.

Slide 11 shows the change and our midstream EBITDA versus the fourth quarter of 2020.

Our midstream segment continued to demonstrate earnings resiliency and stability with consistent results from the previous quarter share again. The team continues to make excellent progress on reducing operating expenses, which helped to partially offset headwinds from lower gathered and profit volume and reduced revenues we are.

To meet the cost impact from storms on our midstream business was approximately $16 million.

Slide 12 provides an overview of speedway results as a discontinued operation.

Fuel and merchandise volumes were impacted by usual seasonality and the first quarter fuel margin decreased and merchandise revenues were lower due to rising crude and product cost and the quarter.

Overall, we continue to see lower foot traffic and transaction counts than pre COVID-19 levels fuel.

Fuel margins were 26 cents per gallon.

Slide 13, and presents the elements of change and our consolidated cash position for the first quarter. It reflects both our continuing and discontinued operations.

Within continuing operations operating cash flow before changes in working capital was $613 million and the quarter chain.

Changes in working capital was $348 million use of cash and the quarter.

This was primarily driven by the rebuilding of our inventory position and the first quarter and partially offset by a benefit for the increase in crude prices this quarter.

During the quarter net debt increased $865 million as we used our short term debt facilities to manage capital needs during the quarter.

In March we retired 1 billion and senior notes utilizing short term liquidity, we returned $379 million to shareholders through our dividend.

Our cash balance at the end of the quarter for both continuing and discontinued operations was $758 million.

Turning to guidance on slide 14, we provide our second quarter outlook.

We expect total throughput volume of roughly $2 7 million barrels per day.

Planned turnaround costs are projected to be approximately $100 million and the second quarter, which includes activity at our Galveston Bay refinery.

Total operating costs are projected to be $5 20 per barrel for the quarter.

Distribution costs are expected to be approximately $1 two 5 billion for the second quarter.

With that let me turn the call back over to Christina.

Thanks, Marianne 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 and.

Time permits we will re prompt for additional questions. We will now open the call for questions.

Operator.

Thank you we will now begin the question and answer session. If you have a question. Please press Star then one on your Touchtone phone.

Wish to be removed from the queue. Please press Star then two if you are using a speakerphone 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.

Our first question comes from Doug Leggate with Bank of America. Your line is open.

Thank you and good morning, everyone.

Mike.

I Wonder if I could ask about the.

The return of cash and I know, it's kind of a.

We obtain question that comes up every quarter, but.

And you talked about the appropriate level of leverage I'm wondering your thoughts how that's changed on what the latest thinking and there as to what that looks like and then as a kind of a follow on to that and.

When you think about buybacks I would think of a consideration is lowering the dividend growth.

On the X Speedway refining and midstream business I'm, just so basically the debt level on the buybacks I realized <unk> share price has run away from you now so while it's probably off the table on them.

Yeah, Thanks, Doug I'll start and I'll, let maryann jump in.

Throughout this process, we've been getting the question about what those appropriate leverage mean.

When we pick a metric we've been saying one to one five times mid cycle and then everybody says oil then what do you think about mid cycle and ramp.

And my standard answer is I don't think about the 50 yard line I think about the banks on the river.

And I try and do scenario planning around what we think could be.

Good times and bad times, obviously, everybody's excited about vaccine rollouts and getting recovery here and and certainly the market is moving in that direction.

At the same time, Doug and our prepared remarks, we said gasoline demand is still 5% lower year on year overall, the west coast is still considerably down compared to the other areas. So so we're going to have to evaluate it and it'll be dynamic but in general that the best guidance. We have been trying to give us. These other parameters and we think.

About one to one and a half kind of leverage we said, we had two and a half of debt that we could do right away.

And our prepared remarks that we've essentially got most of that on and we'll finish that off once we close with speedway and then we're going to evaluate to try and minimize any friction costs, but make sure that we leave enough dry powder that our balance sheet comes out at a place that we want to be.

And then absent that as that evolves, we're going to return capital and we tried to be as transparent as we can throughout this process that we have core liquidity that we want to make sure the balance sheets and good position, we have debt level that we want to make sure is in good position and then we're going to return capital that's been our goal from the from the start of this.

And I go all the way back to at one point, we were going to spin.

Way out to the investors. So they would get that return of capital via that way, we decided to go a different path, we're ending up with this partnership with 711 and that we're looking forward to getting into the next phase where they own the assets and we supply fuel we think theres. Some some real good opportunities for both parties after that so so we're going to.

Continue to evaluate that as we go forward.

And that's the best color I can give you on the balance sheet and thus maryann you want to jump in with anything there.

And I think Mike covered it quite comprehensively just to name a couple of other additions as we continue to say it was our objective and continues to be to maintain and an investment grade balance sheet as you've seen and Mike talked about Fitch has already confirm that so another key variable that we will continue to consider.

And we wanted to be sure that the debt repayment is efficient.

Other than that I think Mike has covered the debt.

And the comments quite well.

And then the only other thing I'd add is we have committed we restated and many times that once we get to close we'll provide some more details we're getting really close and hopefully that's not too far away from now, but we've been resistant to doing it ahead of time. So we're just soon as we get close we'll give a little more color to the marketing and then.

Continue to communicate the way we have been I think.

So Mike just for quality to be clear on my point about the dividend and good obviously, losing.

A substantial cash coverage from the dividend.

Should we expect.

We expect some kind of accelerated buyback to accelerate and production and the dividend burden or how are you thinking about that.

Yeah, and you know Big picture, Doug, We believe and our dividend and we think we have a competitive dividend, obviously, we're going to reduce share count as a result of this how.

How that gets reduced still to be seen as far as the way. This plays itself out and where the share price is over time, but we are committed to a competitive dividend that's something that we've had on our mind all throughout this process. We will see at the end of the return where we end up as far as share count and then kind of evaluate where we are but.

Hopefully the takeaway that you have seen from this is we're committed to our dividend we do believe and returning capital we have a nice opportunity here. That's unique as a result of this sale and that return of capital will be a little bit of a differentiating factor for us for for some time here.

Thanks for that and my follow up I wanted to respectful to everyone else I'll be real quick here that the cost structure looks like youre, making big holes on big strides and and getting your cost on but you haven't talked much about the broader portfolio and review of restructuring one of your competitors suggested the other day that the <unk>.

First let me get resolved one way or the other we could see further.

And the rationalization of refining capacity and so I just wonder if you could bring us up to date with the.

The overall portfolio review and stickiness of the cost reductions you've achieved.

Thanks.

Yeah, Doug on the portfolio, we decided very early on that the two facilities that we idled, we did not see being long term assets for us we do have and ongoing portfolio assessment, but we did pause a little bit because we want and kind of get through this pandemic and see what the other side looks like and what the new norm.

And well looks like so we still have ongoing work internally on portfolio nothing that we're ready to disclose yet, but a conscious decision on our part to kind of pause.

As we went through this pandemic and you're starting to see the light at the end of the tunnel and I know everybody is anxious to get this behind us and hopefully we're getting really close.

The vaccine Rollouts have gone very well, we will get a little better sense of what the new normal looks like and and kind of do a final check on what we think about the portfolio in general but.

No.

And the near term nothing to announce right now we'll get through this new normal we will see what that looks like but I will tell you Doug it's gonna be and ongoing effort on our part to continue to ask ourselves all the time, whereas our cost structure. How is that evolving what is what is the assets that we have on the portfolio. Because we are a believer that over time.

Energy evolution will continue to play itself out and as it does we're gonna be adaptive to the market and obviously one of the high priorities that we put on ourselves was to get our cost structure down so that and our base business, we were in and much more competitive position and I think we've done that to some extent and that's not gonna be and effort.

Debt, we give up on and we're going to continue to do that and so.

I often get asked the question what inning are we in and that in that regard and.

Overall.

I think ray and his team on the refining side are going to continue to look at it in fact, I'll, let ray and make a comment as to where we are on cost as well. So hopefully that answers your oil and portfolio, but let me, let ray make a comment on the cost.

Yes, Mike product, but what inning, we're in and I'd have to say, we're not and the first standing and we're not and the ninth inning and so we challenge ourselves have per day, what can we do to to take more discretionary cost out of our system.

The biggest thing that we did early on and you kind of alluded to that is we took some of our high cost facilities out of the system.

And on the West Coast, you have seen that quarter over quarter as we idled the Martinez refinery as a as an oil refinery and.

And the subsequent quarters, we completed a majority of the idling costs and had gone forward. Doug. We just continue to look at efficiency cost savings fabric day, while maintaining our emphasis towards safe and reliable operations of our assets and those are non negotiable discretionary spending and it's negotiable.

Thanks Ross.

Youre welcome Doug.

Yeah.

Thank you. Our next question will come from Neil Mehta with Goldman Sachs. Your line is open.

Kevin Good morning team and I, just wanted to build on and some of your comments on the prepared remarks on the Speedway transaction, Mike. It sounds like you are really close and I just wanted to get some clarity what really close means from your perspective at.

Are we talking.

Days and we take we're talking.

Months are we talking quarters and in terms of the gating factors just maybe you could talk about what what are the things we should be monitoring from a from a closure perspective.

Okay.

And that's a good way to frame and I think the best way to answer it is exactly the way you set it up is what we believe at this point is that we're in in weeks not months not days, it's not going to be tomorrow. The next day, but but we think we are down to weeks and what we've tried to do and this process is to be in a very.

Communication tool because it's really between the FTC and 711 and obviously, we're at the table trying to understand if we can help the process at all but I guess, the best way to describe it as the FTC communicated to us that we're in the final stage of the process, so with that and mines.

And we think we are within weeks I guess, that's the best way to to give you our sense of it. We don't think we're and months. We don't think were days, but we think we're very very close and that's why we chose the word close to completion and I hope that helps you and I know everybody's anxious for us to give the next set of disclosures relative to this and we're also anxious to do that this has been a.

A process Thats taken a long time.

And the market appreciates that we've tried to be as transparent as we can.

We thought for a long time, there we thought we were going to hit by the end of the quarter that kind of came and went a little bit process takes a little bit longer sometimes when you get into the details.

At the end, but but we are very very close and hopefully we're talking within weeks.

And that that conviction comes through sub debt. Thank you that's great. Mike and then the follow up is on Martinez, maybe you could just step back and talk about the renewable diesel project and if you could level set on sort of how you think about the total capital associated with the project to the extent you can provide and I think you've given the guidance for.

$350 million of renewable spend this year, but just sort of the total spend associated with the project and how should we think about the returns associated with this project and there are a lot of moving pieces, but the biggest fear I guess is the soybean prices continue to move higher and so how do you manage the feedstock flexibility to ensure.

Sure. This is a good through the cycle investments.

Yes, it's a great question, Neil and and obviously, we've communicated that we've gotten full board support for this project. So I'll, let ray start off and give you some color on how we're thinking about it and then.

Brian and Dave jump in as needed on feedstocks et cetera. So.

Okay, Great share mine.

From a project standpoint, I'd like to give a little bit of color on where we stay on the from a from a timing schedule standpoint at this point phase one we're targeting completion and the second half of next year 2022, and that would be for 17000 barrels have renewable fuels coming on line and then that would.

And we followed up by pretreatment, and 2023 and and finally, the the rest of the facility and the back half of 'twenty, three and poor total of 48000 barrels from renewable diesel.

Renewable fuels production.

Now if I go back to Doug's comment or question before virus Opex I commented that our team is was a very high cost oil refinery, but there is some real gems that Martina and is that make it on.

A very good project for us from a renewable fuel standpoint, pretty hydro processing units two hydrogen plants the infrastructure.

And that provides us the ability to have a very cost competitive brownfield project and so I can't give a lot more capex guidance and you've already alluded to but we're very excited about this project and just what we've done and in the last quarter and Q1, we progressed, our engineering where towards the end.

The definition and engineering and have also made a lot of progress on our permitting efforts with regards to getting the environmental impact report.

Kickstarted in and out for review and the near term.

And Neil I'll turn it over to the commercial guys and the second just I.

I guess, one way to think about it is and there were three major hurdles. The way we think about this project do we have the right location and logistics and obviously Martinez is sitting on the demand.

Thick and thin on the other hand is very close to the supply so we like our location and our renewable facilities Rajesh.

Ray just mentioned the second Big hurdle is capital and operating expense basically what do you think of the hardware.

And Ray just described it the full assets facility was relatively high cost, but the real gem as he mentioned was and the hydro processing area. So it became obvious to us that the best use of this asset was to put it in the service and then the last piece of the puzzle is the one that's ongoing and thats feedstock optimization and that will continue.

So I'll, let the guys comment a little bit on that.

Okay, Hi, Brian Davis here, so maybe just picking up the feedstock question.

I think the first thing here is that our ray and his team have done a good job and.

Creating and.

Sufficient optionality there through on site pre treatment over time, but also the capability to receive feedstock by rail as well as by water. So that opens out commercial flexibility quite considerably.

We're evaluating our portfolio of options to give us the right mix of feedstocks, which will deliver value over the life of the project.

We have a number of commercial negotiations underway with a wide range of suppliers and we've been leveraging our existing capabilities and relationships because we have been buying these feedstocks for period of time for our existing biodiesel and now more recently for Dickinson.

Okay. Thanks, guys I appreciate it.

Youre welcome Neal.

Yeah.

Our next question will come from Phil Gresh with J P. Morgan Your line is open.

Yes, hi, good morning.

First question just be on the Opex results on the West Coast.

And the Opex per barrel, there was even lower than it was in 2019.

Despite the fact that utilization is still pretty low here at.

At this point so maybe you could just obviously Martinez I think is probably out of those numbers now so maybe thats the biggest factor, but any other things that we should think about us as to the drivers of the lower Opex and how you think about the potential there is utilization ramps back up.

Okay.

And I'll go ahead and take that question that says Fray and Youre right Martinez is largely out of the Opex down burgers, Philly and some risk.

And with central Opex for tank cleaning and work that will carry on into this year. So there is a little bit of Mark Kane and span.

And I'll say on the West Coast Q1 quarter, one was a challenging opex.

<unk>, primarily because the energy cost.

Put on quite a big demand and.

The last part of February and early March I will say on the West coast.

Partially able to mitigate the impact of those natural gas price spike by reducing our natural gas purchase requirements and close to balance by producing more internal fueled from our operations.

I think that's a real key for us as far as managing the winter storm, not chips, and Texas, but across all of our operations and I really I got to give a shout out to our commercial growth close coordination with our commercial group and the refineries really allowed us to pivot quickly and you know on.

On the day on natural gas went up by 100 fold and adjust our operations reduced rig.

<unk>.

Man requirement for natural gas.

And have them as minimal other and impact on our opex as possible. So you know that was across all of our system.

And it really was impactful on the west coast as well.

Aside from that and I'll, just go back and what I said earlier as far as every day and we challenge ourselves you know.

Discretion and discretionary spending from Gotta do stay in business type of spending and that that's starting to show and the numbers.

Okay, Great. That's helpful. Thank you.

My follow up on renewable diesel I guess, I'll, just try and <unk> together very quickly.

If you could just talk about how you feel things are going with the startup so far Dickinson and what you've learned from that start up process and then.

Just on the feedstock side of things would you consider signing up for.

And some kind of joint venture or something like that for per soybean crush capacity.

Like for like we've seen from one of your peers is that is that one of the things you are considering thank you.

Okay, that's great again, and I'll, just I'll start off with the first thing as far as what we learned from startup one of the things. We learned we already knew is that startups are hard.

Push a button and everything works perfectly, but I will tell you and the first quarter, we achieved 90% of our desire and capacity.

Epic and Cerner and we also qual.

Qualified and got a professional score for our renewable feedstocks, which is soybean oil and corn oil and.

That's a lower number than the temporary score that we start off with but as you know we're not we're not seeking to get to 90% we want to get to a 100% of capacity and get lower carbon intensity scores. So work has continued in that regard and we work with our license solar for the process and catalyst on a new <unk>.

Catalyst formulation, we just actually did that work and have come back up so we're working towards.

Getting better getting toward 100% yield and exactly what we want from the project.

Okay and try and fill it's Brian here on your question about and <unk>.

Soybean crush capacity et cetera, and we're looking at all options here, it's really where we're targeting our advantaged feedstocks as much as possible, but we.

We think we'll also and the industry will need to use soybean oil and its production as well so.

They're certainly considerations or putting in the commercial mix as we understand the right balance between gaining access to the right seeds at the right price with the security of supply.

And you feel its Mike the only thing I'll add kind of a tag on to what Neil asked as well.

And we really liked the project.

You described it well we think we've got really advantaged hardware from Capex and Opex, we're concentrating on the feedstock side of the equation now we're open to a lot of things as Brian said, but we're anxious to get this project on line. We think it's going to be a nice addition to our portfolio and and it really does optimize the assets that were available to us and <unk>.

And is where we're going to use the really strong ones for hydro processing and then take out a lot of cost that were they were part of the facility from from a crude processing standpoint.

Okay, great. Thanks.

Youre welcome.

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

And thank you and good morning.

Good morning, Roger.

Yes.

Come back and take a shot here, yes, the core refining business. So I think Doug mentioned earlier the Rss.

Most of your peers have talked about it as being.

<unk> and general being quite the headwind to capture your capture was actually pretty good I know and speedway as being separate and Youre trying to maintain as much of the bonding capacity as possible I was just curious if you could kind of breakout maybe how your exposure to rins is today, either pre or post the.

Spin.

And what impact do you believe it had on Q1.

Yeah. Roger This is Brian Partee I can address that question so consistent with the past, we self generate about 70% to 75% of our rins through either blend and your generation and our.

Biofuel and refining assets so.

Q1 was pretty similar to that historical average as it relates to the separation and speedway and no real impact there.

On the rent is something thats pretty transparent and the marketplace. It's a real expense, we all have to deal with it.

It's not something we can control.

We think of it like a commodity we deal with commodity prices that are volatile and moved dramatically up and down and the one thing I would I'd leave you with on the rent and the rent expense and I know, there's a lot of hyperfocus on it appropriately right now and the environment that we're in but there is also a really good opportunities to optimize and that space. So.

Depending on how you are modeling and what Youre looking out you have to think about Rand and terms of true obligated volume obviously not all gallons are obligated. So if you think about stripping off exports jet as well as some other boot tiki fuels and for US Alaska also is not an obligated state from and RVO perspective.

The other thing and I think played out interestingly and the market and the first quarter was the year on year carry and so you can meet obligations and the prompt year with up to 20% of carrying on from prior year and.

We think there's far less carry and from 2020 to 2021, largely due to the uncertainty around the election last fall so and.

And the last part about the commercialization and the Rins space is how you buy and when you buy and I would presume maybe from a modeling.

Perspective assumed kind of a ratable purchase for rens and.

And that could be a strategy and.

And we tried to be very commercial on this space and.

Try to optimize and obviously the higher the RIN value gets the more opportunity there is to outperform and Conversely, underperform and that space.

Okay. Thanks.

The other question and I had again kind of sticking with the refining side of things.

We're hearing that some of the maintenance and Canada may not happen on a quite the same pace because of.

The COVID-19 issues up there, which I guess might imply it's a little more drawn out but as you think about light heavy whether it's and when U S or coastal U S. What what sort of updates can you offer there in terms of crude availability.

What you're seeing and expectations on crude differentials.

Yeah, Hi, Roger This is Rick Hessling, so the Intel and Youre getting and Canada are from Canada spot on and we're hearing the same thing.

They've experienced some startup issues on a couple of with a couple of their maintenance projects as well as we're hearing one of the producers specifically is having some some COVID-19 issue. So.

And that's certainly not good from production in Canada. So we will continue to watch that specifically to Canada.

In terms of differentials in Canada, I would point you towards and I still think probably our general rule of thumb is the forward market, there, which is plus or minus $12 and you know the incremental barrel and Canada is moving out and being a rail the pipes on a full so we expect that to continue.

And you look worldwide and more and more so on the Gulf Coast.

A lot of there's a lot of conversation around OPEC and the barrels that they are releasing into the market.

I'm, a little more measured on OPEC and what we might expect on the Gulf Coast and then others quite frankly, when you look at what OPEC is done and the last several months and they've been very measured on how there.

Managing their production with demand and currently today as you know we've got a tug of war and Theres, a little bit of slight optimism coming out on the west and then there was a lot of the fear of the unknown, which is well publicized and India. So we will just have to see how that plays out.

Great. Thank you.

Youre welcome.

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

Hi in your prepared remarks, you did indicate that while the demand is recovering its the recovery the pace of recovery is slower on the west coast.

I think California is going for a full three open around mid June so I'm, just trying to understand going forward do you see and improved demand recovery based on a fully reopened in California.

Yeah and Manav. This is Brian Partee I can take that one so you know.

What I would say to kind of reiterate mikes points and he made in his opening remarks, and we have seen gasoline demand really grind back across the entire portfolio and certainly the west coast has lagged.

And the east we've been running over the last several weeks, 2% to 5% off of 2019 comps and the west it's been more in the 18 and call it high teens to low twenties, but we have seen a gradual grind back from the early part of this year and you're spot on yes, California is prepared to reopen here mid June and just looking at some of the vaccination.

And data and just anecdotal discussions and the market we do expect.

Meaningful recoveries through the summer months to what extent is very difficult to estimate.

COVID-19 has been a very dynamic environment for US, California has been very aggressive so I'm really hesitant to make a call on where we expect it to go but we've.

We've seen favorable trends and other markets as we've gotten back off and opened up the economies and we'd expect to see a degree of the same out on the west coast.

And then obviously the other.

Other thing that I would add is kind of what I said earlier as you know once we get through this and a lot of these states open up I mean, California as Brian just mentioned a major indicator as to where.

That market is going to be the floor.

Florida, New Jersey, New York the other.

They're big gasoline consuming states are also and the process of reopening.

And the question becomes where do we end up.

And after that point.

One other things that I think we still need to see is you know is there potential pent up demand is that one other things that we're going to see come out of this is there going to be a new normal with the way people operate as far as work and remote operations et cetera et cetera. So.

We're excited that it continues to get better, but we're also cautious as to what it's going to mean once we get to the other side of this.

If anything I would say the way we try to think about it is.

At the end of the day.

Vaccines are rolling out well states are opening up things are heading in the right direction to what absolute number as Brian just mentioned where that ends up is still to be played out and to your point June like you said, it's going to occur and June it's essentially in the second quarter will be over and we'll be talking about results here, where we still don't really have as much insight.

So I think it's still going to play out a little bit more time understand that pent up demand how much of it is robust to stay long term and how much of it is just short term for people trying to get get out from under a lockdown conditions, So still a lot to learn.

And like I said, we we concentrate on what we control we will keep an eye on what we don't control and try and learn as much as we can as to what the new normal looks like.

And Mike one quick follow up here and we saw you're putting in something that volumes on the Dickinson refinery to lower the carbon intensity. Clearly you guys are focusing a lot on carbon intensity and one on some of what your peers and others are doing is carbon capture and sequestration is it something which the MPC could look.

At potentially to further lower the carbon intensity of both gasoline and diesel that's just producing and its refineries.

Yeah, and Manav, I think I'll, let ray and Dave jump in there, but we are obviously cognizant of the value of lowering the carbon intensity of the of the operations of the product et cetera.

The wind situations that they consider other if you want to give a little more color there or David if you want to give total color on lowering carbon.

Yeah, just to give you a little bit more.

Detail on debt concerned on what we're doing with the carbon intensity and the first thing that you mentioned and as wind turbines and so that's a project that we're planning on to go ahead with that and 2022 to put and up wind turbines and there to provide about 50% of our electricity demand.

Renewable electricity and that lowers the carbon intensity and the other thing that that we're doing is we've got to feed per treatment now down at Beatrice and that but that plant has started up that material has made its way to debt concern and so we now have pretreated corn oil that cigna.

And from a carbon intensity standpoint that one its pre trade and show it processes, better secondly, and such significantly lower carbon intensity and soybean oil.

Oh, yes, and this day veteran or just another comment would be whether it be wind turbines or carbon capture and sequestration and those are all you know additional complementary technologies to increase the.

And the value of the victims and project by lower on a Ci there's other technology assessors renewable natural gas solar and other technologies. We're continue to evaluate and we will implement those if and when they make sense for us.

Thank you. Thank you.

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

Hi, and thank you all right come on and guys.

My question.

Definitely looking at your cost structure, what does the U S P.

The refining opex that.

The shippers on calls and and the corporate cost together or individually a day.

And with a really well and the first quarter and you have done a quick drop there I was just curious that when I'm looking at your total throughput diet and it's higher.

Natural gas cost is lower.

Second quarter.

And we use on this just.

And conservative on what that's a some one off reasons why the second quarter unit cost.

And it caused a body and youll be finding actually going to be higher and your corporate costs and the distribution and quality. It's also going to be higher so thats. The first question.

The second question is that going back into the.

Yes, G with the energy transition and what's the longer term plan.

Our objective and Youre going to take the initiative and you said.

And so just trying to load your oil.

Michelle and North sea, I or that you're looking at yet as an opportunity.

And for you to expand and perhaps that's even Cree and they were and Io business and also on the way and they were both on the feedstock.

One of your largest competitor.

Put all day renewable diesel into a joint venture and partner with <unk>.

Someone and expertise in the feedstock supply.

And why that's not a good idea for you guys. Thank you.

It's Marianne and let me try to address your first question around the second quarter guidance and certainly as it compared to the first quarter and.

And just media that there's a bit of a reminder, we are expecting volume to be up slightly from the first quarter about $2 7 million barrels per day, and you spoke about and the distribution cost and a 1.25 E P.

The expectation for the second quarter again up slightly we are expecting some higher product demand and therefore, obviously some higher costs to transport product, but overall you know apparently flattish if we look at that the increase in the expectation for throughput and then similarly, when you look at total operating costs.

On a per barrel basis, when you consider that there were about flattish Q1 to Q2, so hope that helps to address your questions and there around the nature of that.

Second quarter guidance My kids cleared for you you know sort of how we're thinking about the second quarter. Obviously, you know things can can play out and just depending on how the demand and recovery happens and hopefully that addresses your question Paul.

And I'm, sorry, but debt your unit cost is actually higher in your guide and he and the second quarter, that's even on the distributors on Si on the distribution cost.

Paying to the first quarter and that's why I'm not sure you said.

We have some one off issue that's why that you expect the unit cost on a per barrel of oil put going higher.

Because one would imagine that and with that higher full price volume and lower energy costs that.

And that the per unit cost should be going and what not going on here.

Yeah, Paul and it's Maryann again, Phil So you're right. When we talk about total operating costs and based on that demand, it's about $5 20 versus the quarter, which was about $5 in 16, and I was saying about flat and not.

But youre right that there is there is a slight tick up as we as we think about those total operating costs and then distribution costs, hopefully I tried to address and that the key elements. There that were drivers kid and the higher the higher cost.

Paul It's Mike on your second point.

And I think it's a combination of cost and portfolio as.

As Ray mentioned earlier, one of the things that we accomplished and kind of got two birds with one stone is Martinez was one of our highest cost facilities gala was one of our highest cost facility. So we want to have and we're processing fossil fuels are very competitive low cost system.

It's going to be around for a long time, and we want to make sure that we create value in that regard and at the same time the energy evolution is going to tick into renewables and other technologies as they develop so we've found a nice opportunity. We're very pleased with the effort that's going on at Dickinson.

And as Dave just mentioned once we're in that boat and we're going to try and do everything we can and will increase the profitability whether it is low and the carbon intensity of the operation and the product of feedstocks as Brian mentioned and I'll, let Brian comment and like I said earlier is.

Location is and a good spot for us capex as and a good spot for US Opex is and a good spot for us.

And going through some some learnings on the startup of the one facility, which will help us on the next facility and then the last piece of your puzzle with feedstock and and I'll, let Brian reiterate but I would tell you we like our base plan, we feel very comfortable that we have a really good project in front of us, but we are continuing to challenge ourselves is there a way to increase value there.

Yeah.

Sure. Thanks, Mike.

Yeah, so as we as we build out the feedstock procurement strategy and create more options. We're certainly looking at partners along the entire value chain and they all.

Away from the procurement and feedstock onwards, and so we are.

Considering where we can do more with partners and just only a commercial arrangement, but I think we still got to let those discussions play out and whatever we do needs to make sense for them and obviously it makes sense for us as well from a value perspective.

Mhm and Mike can you also just that on the longer term do you see the energy transition, we create a new and my old business for you or that you are looking at yeah. That's the other initiative is just to wait they're using you already mentioned and Ci.

Your existing operation.

Yeah, I don't think of it as either or Paul I think of it as somewhat both and we're gonna have an opportunity is this trend transition or I like to call. It evolution.

Evolves there is gonna be center technologies that we can implement and.

And our existing fossil fuel facilities that will be helpful. There's going to be some technologies that didn't get implemented and truly renewable facilities. So I think and time youre going to see us grow both and it and.

What's the and gave us what you're asking and I don't know how long youre thinking out in time, but you know the and gave us for us to have a very competitive refining offering of fossil fuels and a very competitive offering on renewable fuels and continue to look for ways to grow our earnings.

And Dave mentioned it we're looking at a lot of different things right at the moment.

We're going to act on them and once we believe that they will give a good return for us some things I think are a little ahead of their time right at the moment and the technology still needs to develop a little bit.

Same time, there are some things like Ray just mentioned, we're going to implement some wind support to our Dickinson facility as early as next year. So some things are on the immediate side. Some things are on the watch side and evaluate.

We're going to have a very robust look at through all this.

And one other things that everybody keeps asking me and hopefully you'll get to see it through results and what are we doing commercially and it's one of my.

Goals is to improve our commercial performance and it's.

It's not something that we're going to talk about in the and the forecasting of it but hopefully we'll point out things as we go along and Ray mentioned a couple of today.

Net.

It happened and the first quarter that helped us minimize our impact around the winter storm. So I think youre going to see the answer to your question is really both theres going to be some opportunities on on both sides of the business as we change the portfolio overtime and.

And that was asked earlier today youre going to see some more changes and the portfolio as time goes by.

And as we get to evaluate that we'll give disclosures as quickly as we clean and so everybody knows which way we're pointing the company.

Thank you.

Youre welcome.

Thank you. Our next question comes from Chris Schott with Citigroup. Your line is open.

Hi, Thanks for taking the question and my question.

<unk> are both on R&M and specifically on Capex first on them on Martinez I know you can't disclose on overall cost, but Mike I was wondering if you know in terms of cadence that's 350 million this year and it sounds like you do the first diesel hydro Treater next year and then the three other hydro.

I was on the pre treat come on in 2023. So is it right to think about it as sort of a stair step.

The capex for that and therefore, they R&M growth capex kind of steps up and.

In terms of renewables next year and in 2023 years, and sort of more evenly spread out and sort of related to that I'm just wanted to check that would that be funded.

Purely from internally generated cash or would you be looking to.

What are your financing sort of options. If you how are you.

How are you from the project and then I have a follow up.

Yeah for sure and I think you're thinking about it right and it is a phased approach to.

The activity out there, but it kind of dovetails too and Paul just asked so when you step back and think about it roughly 40, some percent or let me round to half of the growth capital that we have and this year's directed towards renewables, but then also half of it is directed towards our fossil fuel business. So we still think theres going on.

Continuing monies that we can spend and that business. So like what Paul was asking and I was trying to say, we're going to do a little bit of both.

And I think you're also seeing the way we're approaching this project, which is in a phased approach. So as Ray mentioned and we'll get it online you know early next year free treatment comes on full capacity comes on and so there will be some stair stepping and capital in that area. At the same time you know we're still looking forward to the 450 million that we're investing.

<unk> and the base business, we still got some activity going on down on the Gulf Coast.

Star project that we want to get to the finish line as well. So so kind of dovetail to your question. The same as Pauls is that we're gonna have activity occurring in both areas and we're committed to both sides of the business goes it's going to be a long evolution, it's not something that's going to happen very quickly, but it's something that we're gonna be very attentive to as to where are we.

Deploy capital on <unk>.

And everybody is getting a feel for us and we're gonna have strict capital discipline and that's that's a mantra that we're going to continue to to push and challenge ourselves through all the scenario planning that we do as to what's the best use of that capital whether it's in our existing facilities and fossil fuels are and renewable facilities, whereas Paul mentioned, if we come up with.

Something that we think is a little bit more of a step out so we'll try and give everybody as much disclosure as we can as time goes by we're looking forward to the opportunity as you know is the evolution continues and we think that'll provide us on some value.

Opportunities to increase value for the shareholders.

Great.

And then.

Sort of related to I guess, the second part of my question there was on.

And how you expect to fund projects because it sounds like this is going to be a very large facility at Martinez.

But you also have a ramp here in terms of.

Cash flow generation and potentially internally generated so I just wanted to get a sense of if you broadly speaking expect to us on Martinez out of opt.

Operating cash that you generate or if there.

If you were to finance it would you look at.

And the project financing or.

And what would be some of the options in terms of how you fund the build on the project.

And from <unk>, our base plan, obviously, assuming the market cooperates as we Wanna funded out of operating cash.

Don't want to discolor and with Speedway earnings and we'll give more color on that that return on capital as kind of separate and hopefully and as everybody is anticipating as the market kind of comes back to normal and we will be generating operating cash that will fund our capital program fund our dividend hopefully have excess beyond that and we'll have optionality beyond that.

As well.

Okay, Great and just one last follow up real quick on the maintenance side.

I think you've guided to about $250 million this year and R&M.

And a little early I know to answer this Mike, but any color on how you think about that and maintenance number and R&M on sort.

Sort of a through cycle basis, when we get volume back up and as we look at.

M P C.

And in the years coming ahead is at 250 and not that far off from how youre looking at maintenance costs be rationalized cost across the structure and and we'll continue to do so.

And we were thinking that this is sort of a.

Although year and there should be a little bit more that we need to layer and as we think about next year and maybe beyond.

Yeah.

Yeah, Let me, let me take a shot at that this and spray.

And I talked earlier about.

Looking at our debt needs first and sponsor.

Certainly the main maintenance capex since along that along that line. So we challenge ourselves every day to the point of where we are whether it's opex or capex as far as really scrutinized and that spend so on.

And our goal is not to go growth free up on maintenance Capex per.

Perfect.

Thank you very much for the time I appreciate it.

Youre welcome.

Thank you our last question will come from Ryan Todd with Simmons Energy. Your line is open.

Okay.

Great. Thanks, maybe.

And just one quick one on the on the refining side.

The utilization guidance for the second quarter and.

A little more conservative in terms of sequential improvement relative to some of your peers I mean and I got your commentary has maybe been a little more cautious is that how do you think about ramping utilization over the next couple of months.

And there's is there a potential upside to your <unk> guidance there.

And I think Brian alluded to it early on as you know when you have these states that have a lot of impact of gasoline and the west coast being one of them.

And they're all talking about go in and then the next phase of opening up we just don't know how to totally gauge what that means.

And I've mentioned June from the West Coast, we will see if it turns out to be June or not I mean, we got to get through the rest of may.

I mean, we're doing our best to try and forecast that but I try and remind everybody that we don't have control of that we're just just like everybody else monitoring the situation and given our best assessment, but you know there's a lot of key states that are saying theyre going to be opening up on.

Mentioned, a few and New York, New Jersey, Florida on the East Coast and obviously the West Coast has been under the most restrictions and no Brian mentioned, 20% down year on year on overall youre about 5% down on gasoline and so it's a pretty.

A bifurcated situation right now and we'll just have to see how it plays out and obviously, we try and give you the best guidance, we can and then and as the results come in.

And we'll give you kind of a post on it or you know what things look like.

And maybe a quick follow up.

And on Dickens and.

And I guess as you think about.

The I know you have the pretreatment up and up and go in for some of the corn oil do you have I mean is there a thought for what you think the you know.

Kind of an average.

Mix might look like in terms of vegetable oil versus versus corn oil debt facility.

And and estimate and maybe what what you think the average value of the product will be once the.

Once the wind facilities are up and running.

Sure.

Purchase right that their time basis for for the project and its 10000 barrels a day of soybean oil and 2000 barrels.

Corn oil traded corn oil and so you know that's that's that's the goal that's where we're headed to get and that's where you get into the second second quarter.

Just a little bit about the.

Let's see I value the debt target Ci value per soybean oil and it's going to be on the mid fifties and.

About 30 numbers off that four four and corn oil and so that's that's range and need to be thinking about from a carbon intensity standpoint.

And how much do you think you can and how meaningful is the wind energy in terms of is that assuming the wind energy or can you not a few more points assets with that project.

Okay.

Right and I would tell you you know, let us get that up and running and and we'll be happy to give you. Some some feedback after that but we don't want to get ahead of ourselves we're excited about the opportunity.

But we don't want to.

Pre determined how are how effective we're gonna be there and we're excited about it but let us get it up and running and we'll give you more color.

Awesome. Thanks, guys.

Youre welcome.

Yeah.

And we are sharing with many other questions. Thanks.

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