Q2 2021 Marathon Petroleum Corp Earnings Call
30% below pre pandemic levels.
The full return of aviation fuel demand will likely still take some time, particularly with the recent increasing spread of the COVID-19 variants.
As we head into the second half of the year, we remain hopeful but cautious and their recovery and so we will remain focused on the elements of our business within our control.
Slide 4 highlights progress on our strategic priorities for the quarter.
First on May 14th we closed the sale of our speedway business to 711 and conjunction with the close we announced our plans to return $10 billion of sale proceeds to shareholders through share repurchases.
And as part of our commitment to quickly return capital. We immediately launched a modified Dutch auction tender offer and which we were able to repurchase nearly $1 billion worth of shares.
As we shared in our release. This morning, we are proceeding with the next steps and our plan to complete the remaining 9 billion return of capital over the next 12 to 16 months.
Second we continued to take steps to reposition our portfolio to continue reached full design capacity during the quarter at approximately 100 million 180 million gallons per year of Dickinson is the second largest renewable diesel facility and the United States.
And Martinez.
We're progressing detailed engineering and permitting to convert that oil refinery to a renewable diesel facility.
Based on our progress and discussion with feedstock suppliers, we're confident and the timeline, we have set to begin producing renewable diesel and the second half of 2020.2 with approximately 260 million gallons per year of capacity.
Additionally, we expect to reach full capacity of approximately 730 million gallons per year by the end of 'twenty 3.
Third we continue to keep a diligent focus on cost and capital and a challenging commodity business such as ours being a low cost operator ensures we will remain competitive we.
We have continued to challenge ourselves to examine all asset aspects of spend and as a result of delivered incremental progress and.
And the first half of 2021, our operating results reflect our goal to reduce overall refining cost structure by $1 billion.
Importantly, I want to note that in June we published our 2 annual ESG related reports our sustainability report provides an in depth look at the company's sustainability approach and performance.
Insistent with the reporting guidance from <unk> and <unk>.
Our perspectives on climate related scenarios.
Guidance from Tcf D and analyzes the company's resiliency relative to climate scenarios put forth by the IEA.
On slide 5 I'd like to take a moment to go over some other ways, we're challenging ourselves to lead and sustainable energy.
From a strategic standpoint, our focus is to balance the needs of today, while investing and a sustainable energy diverse future.
That includes strengthening resiliency by lowering our carbon intensity and conserving natural resources.
Developing for the future by investing in renewables and emerging technologies, and embedding sustainability and decision, making and all aspects of engagement with our people and many stakeholders.
We currently have 3 companywide targets many of our investors know well first a 30% reduction and our scope 1 and scope 2 greenhouse gas emissions intensity by 2030.
And a 50% reduction and midstream methane intensity by 2025, and lastly, a 20% reduction and our freshwater withdrawal intensity by 2030.
The evolving energy landscape presents us with meaningful opportunities for innovation.
We've allocated 40% of our growth capital in 2020, 1 to help advance 2 significant renewable fuels projects.
And late 'twenty, we began renewable diesel production and our Dickinson North Dakota facility second largest of its kind of United States and are progressing the conversion of our Martinez, California refinery tool renewable diesel facility.
Finally.
To demonstrate our focus on making sustainably sustainability pervasive and all we do for executives and employees. We link a portion of the annual bonus program, 2 and ESG metrics.
We recently introduced a diversity equity and inclusion component to these metrics as well, making us the first U S independent downstream company to link improving diversity to compensation and the same way, we led the industry and linking ghd intensity reductions to our compensation last year.
Safety and our operations as another key to sustainable operations, and 2020, our teams demonstrated strong safety and environmental performance, including a nearly 40% reduction and the most significant process safety events, and a 40% reduction and designated environmental incidents over 2019.
Our personal safety performance continues to be better than industry average for the U S refining and midstream sectors.
At this point I would like to turn it over to Maryann to review second quarter results.
Thanks, Mike Slide.
Slide 6 provides a summary of our second quarter financial results. This morning, we reported and adjusted earnings per share of <unk> 67 cents.
Adjusted EBITDA was $2 billion $194 million for the quarter. This includes the results from both continuing and discontinued operations.
Cash from continuing operations, excluding working capital was $1.535 million, which is approximately $1 billion increase from the prior quarter.
And for the first time and nearly 18 months, we generated ongoing operating cash flow that exceeded the needs of the business capital commitments as well as covered our dividend and distributions.
Finally, we returned nearly $1.4 billion and capital to shareholders this quarter through dividend payments and share repurchases.
The close of the Speedway sale marked a significant milestone and our ongoing commitment to strengthen the competitive position of our portfolio. So we wanted to call out some of the key points on slide 7.
We received total proceeds for the sale of speedway of $21 billion.
Based on our tax basis, our cash taxes current and deferred will be approximately $4.2 billion, which is lower than our original $4.5 billion estimate.
We have accrued for this on the balance sheet. In addition, we had closing adjustments of approximately $400 million.
And therefore, the after tax proceeds from the sale will be $17.2 billion.
To be clear this number is higher than our initial $16.5 billion dollar estimate.
On slide 8 we present, an overview of the use of the proceeds.
Since the close of the transaction, we have reduced structural debt by $2.5 billion and purchased approximately $1 billion and stock.
In the post tender period, we did not repurchase any incremental shares in light of a couple of regulatory constraints first a post tender cooling off period and second our routine quarterly restricted period and the lead up to the release of our earnings information.
That said not repurchasing during that limited window is not indicative of any deviation from our commitment to complete within 12 to 16 months.
Consistent with that commitment as Mike mentioned earlier, we are commencing the next steps to complete the remaining $9 billion return of capital.
Specifically, we are entering into an open market repurchase program that will allow us to buy for a period of time, including when the company may have information that otherwise preclude us from trading.
And we will provide updates on the progress during our earnings calls.
Slide 9 illustrates the progress we have made lowering our cost structure.
Since the beginning of 2020, we have made a step change in our refining operating cost and decreased our overall cost profile by approximately $1 billion.
While there is quarter to quarter variability, our refining operating cost in 2020 began at $6 per barrel and are now trending at a quarterly average of roughly $5 per barrel for 2021.
We have applied the same cost disciplined framework that we use for refining operating cost to our corporate cost as well.
There may be variations and these corporate cost quarter to quarter. We believe we have lowered our overall cost structure by more than $100 million.
And we are committed to challenging ourselves every day on ways to reduce expenses.
As you know natural gas is a variable cost and operating a refinery. These costs have recently increased nearly 1 dollar per M and btu and we anticipate this being a headwind for the third quarter.
While our results reflect our focus on cost discipline every day, we remain steadfast in our commitment to safely operate our assets and protect the health and safety of our employees customers and the communities and which we operate.
As we have shared with you previously our cost reductions should be sustainable.
Not impact revenue opportunities and didn't know way jeopardize the safety of our people or our operations.
Slide 10 shows the reconciliation from net income to adjusted EBITDA as well as the sequential change and adjusted EBITDA from first quarter 2021 second quarter 2021.
Adjusted EBITDA was more than $600 million higher quarter over quarter, driven primarily by refining and marketing.
As we previously mentioned this quarter's results include the impact of closing the speedway sale.
Here, you can see the $11.7 billion pre tax gain on the sale reflected in the adjustments column of $11.6 billion, which includes other adjustments of $79 million for impairments and transaction related cost.
The $3.7 billion dollar financial tax provision excuse me financial tax provision reflects the net impact of cash taxes and deferred tax impact.
The resulting 8 billion dollar gain on sale is reflected in our quarterly net income.
Slide 18, and our appendix walk through the specific impacts of the speedway sales across the 3 financial statements.
Moving to our segment slide results Slide 11 provides an overview of our refining and marketing segment.
The business recorded the second consecutive quarter of positive EBITDA since the start of the Covid pandemic with adjusted EBITDA of $751 million. This was an increase of $728 million when compared to the first quarter of 2021.
The increase was driven primarily by higher refining margins, especially in the mid con region as that region's cracks improved 57% from the first quarter.
Also contributing to the improved results with higher utilization, which was 94% for the second quarter versus 83% and the first quarter.
It is important to recall that we idled 2 high cost refineries in 2020.
If adjusted to include that capacity idled in 2020 utilization would have been approximately 78% and the first quarter of 'twenty, 1 and subsequently increased to 89% in the second quarter of 'twenty 1.
Operating expenses were relatively flat with the previous quarter, despite the increase and utilization, reflecting the team's commitment to cost discipline, despite rising variable cost.
Slide 12 shows the change and our midstream EBITDA versus the first quarter of 2021.
Our midstream segment continues to demonstrate earnings resiliency and stability with consistent results from the previous quarter.
Here again, the team continues to make excellent progress executing on our strategic priorities of strict capital discipline and lowering the cost structure and portfolio optimization by.
By the end of 2021, we estimate that MPLX will have discrete decreased their structural cost by $300 million.
Slide 13 presents the elements of change and our consolidated cash position for the second quarter at.
It reflects both our continuing and discontinued operations.
We have also specifically called out items related to the speedway close.
Within continuing operations operating cash flow before changes in working capital was $1.5 billion and the quarter.
Changes in working capital were flat this quarter, increasing crude prices provided a source of more than $500 million, which was mostly offset by the large receivable balance with speedway, becoming a third party customer and typical seasonal refined product inventory builds.
During the quarter MPC decrease debt by $3.3 billion and.
Additionally, MPLX reduced third party debt by approximately $800 million during the quarter.
With respect to capital return MPC returned $380 million to shareholders through our dividend and repurchased $981 million worth of shares using speedway proceeds.
At the end of the quarter MPC had $17.3 billion and cash and higher returning short term investments such as commercial paper and certificates of deposit.
Turning to guidance on slide 14, we provide our third quarter outlook.
We expect total throughput volumes of roughly $2.8 million barrels per day.
Planned turnaround costs are projected to be approximately $195 million and the third quarter.
The majority of the activity will be at our Robinson, and Mandan refinery and the mid Con region.
As we have previously mentioned our turnaround activity is back half weighted this year. Other operating expenses are coordinated to occur. During these time periods as well and so you are seeing the impact and our guided cost trends for the third quarter.
Total operating costs are projected to be $5.5 per barrel for the quarter.
Distribution costs are expected to be approximately $1.3 billion for the quarter.
Corporate costs are expected to be $170.75 million consistent with the second quarter and reflecting the approximately $100 billion.
$100 million excuse me and costs that have been removed on an annual basis with that let me turn the call back over to Christina.
Thanks, Marianne as we open the call for questions as a courtesy to all participants we ask that you limit yourself to 1 question and a follow up if time permits we will re prompt for additional questions. We will now open the call to questions operator.
Thank you we will now begin the question and answer session. If you have a question. Please press Star then 1 on your Touchtone phone.
Wish to be removed from the queue. Please press Star then 2 if you are using a speaker phone and you may need to pick up the handset first before pressing the numbers.
Once again, if you have a question. Please press Star then 1 on your Touchtone phone.
Our first question will come from Neil Mehta with Goldman Sachs. Your line is open.
Good morning team and nice results here this quarter.
The first question I had was just about the execution of capital return that you said you have $9 billion.
Return to capital shareholders capital to return back to shareholders here over the next 12 to 16 months.
Is it fair to say.
It's going to be in the form of a buyback and what would you be executing it just radically and the market just talk a little bit about how you plan on executing it and is there any consideration of anything other than a buyback.
For for the capital returns.
Sure Neal Hey, it's Marianne and and good morning.
And yes, we are planning on commencing what we would call our open market repurchase program and and that will begin here immediately after the call.
We have all of those options that we've shared with you and the past all of the tools.
<unk> and open market purchase and including you know the possibility for a tender those still remain all viable options for us, but we believe right now that the.
And the best way for us to achieve that commitment and and as we reiterated here on the call and then.
12 to 16 months and to return on that remaining 9 billion would be through and open market Smart market purchase program right now.
And Mary and as you guys think about that repurchase is that is the view that you would want to do it ratably or do you want to be opportunistic.
Do you believe that the right approach to share repurchases is cost average again over the next 12 to 16 months or to be opportunistic on.
And on volatility.
Talk about your strategy around execution.
Sure Neal and.
Look the reason why we're using and our open market repurchase program is we believe we have some control over that and certainly.
Using an opportunistic approach over this time period is the approach that we believe and it is best for us. During this time period. So certainly we would be using an opportunistic approach during this time period.
Alright, thanks, guys.
Our next question comes from Doug Leggate with Bank of America, you May have.
Proceed.
Thank you and good morning, everybody.
Mike There is.
I guess those menu items.
Our buys and administration.
To take a hard look at partnerships focus on Mlps.
Curious if you could offer any perspective on the Dol and how it might change your.
Or on your ownership salts or on the current installed.
John will get on <unk>.
Something like that played out.
Yeah, Doug it's a good question, so obviously with the administration change and with the.
Agenda that they have out there they're looking for ways to pay for the programs that they have in place. So we're aware of the potential. There. Obviously there is a couple of bills that are involved with that dynamic.
I would tell you right now our thinking though is that we would stay in the MLP structure, because we don't think it's going to change we don't know for sure. Obviously, if it did lose its tax status that would change our dynamic but right now Doug if you're asking what's the probability I think we are on the side of we don't think it.
And is going to change and we think the partnership will still maintain its tax status. So.
Obviously for our for the size of MLP of the MLP that we have if all of a sudden it was taxed entity youre looking at around $800 million to $1 billion of cash flow that would be lost and I know others have asked this in the past.
It's predominantly the number 1 reason why we maintain the partnership structure as compared to converting to a C Corp, and there was 2.
2 dynamics that come into play 1 is and immediate tax impact to all unit holders of which MPC as the largest obviously and then more importantly as to the ongoing cash flow change that would occur at MPLX. So so we understand some of the pros and cons of the structure at the same time, we think.
Having that cash flow keeps us.
In the MLP mode. So obviously, if the rules change if the administration does something different we will adapt accordingly, but but and the short term we still support the structure because it gives us that additional cash flow as opposed to a to a tax burden.
Okay, presumably I'm not aware of any discussions you are hot and with the administration on this.
Particularly Asia.
No I mean, we know that there is some advocacy for it and some that are against it.
Our Intel.
Is that we think at the end of the day the partnership status will stay the way it is.
<unk>.
I'm not trying to call politics here, Doug whatever happens, we will adjust to it but for right now we think the MLP structure will stay the way it is.
Thank you Mike My follow up is I guess as a follow on to the question on buybacks just to kind of put some numbers to you and I'm sure you're very familiar with.
And your market capitalization, obviously mid thirties.
And your share.
And with a publicly traded volume of MPLX and what you are left with.
There is a volume of around $15.16 billion, which implies that.
The remaining buyback would be more than half on.
And the current market capitalization and clearly that's an impactful on this.
Wondering if you can frame for us how you would intend to tackle a buyback of scale. When you think about it that way.
You've touched on a little bit, but when you put on microchip.
Context, it's a big number.
Just curious how you think about moving forward over the next 16 months of and you said.
Yeah, Doug.
It's a good problem to have we are committed and as Maryann said in her remarks, we are committed to returning capital.
At the end of the day, we for a long time, we were saying about 16 and a half I mean now that we've closed and worked through some of the details it's a little over $17 billion, we have prioritized the balance sheet.
Taken out some debt there we've maintained some dry powder to see how things continue to play out and we've committed to $10 billion. So.
Throughout the time from the announcement, so close we reiterated to investors that we wanted to do it as quickly and efficiently as possible to.
And to meet our commitment and quickly we offered a Dutch tender the market spoke and said $1 billion as opposed to what we had offered out as far as the total liquidity.
Now we are as Maryann said in the remarks, we're gonna go more opportunistic and ambient and open market environment. So.
Some other questions that we get from people is are we still committed to that and as Maryann said, we want to reiterate we are committed to that and nothing has changed and our thought process there.
It is going to take time to your point. It is a large number we are limited by the amount of trading volume, we have and the liquidity that we have and our shares. So that is part of the constraint that we have but we are committed to returning it and we're going to go into this program and obviously each quarter, we will update the market on the results.
Alright, Thanks, Mike I appreciate you taking my questions.
Youre welcome Doug.
Thank you next we will hear from Roger read with Wells Fargo. Your line is open.
Yes. Thank you good morning.
Have you taken.
Quick detour over to the renewable diesel side of the business.
Obviously, you've got.
The North Dakota Dickinson facility up and running I was curious is it running all soybean oil and if you could give us any incremental views on on its contribution to the mid continent profit.
And that we saw improved this quarter and.
And then on the startup and Martinez, what do you expect the feedstocks to be there.
So it's a good question Raj I'm going to let Ray give you some specific on taking thing good range.
And Roger that's Ray Brooks.
Just wanted to.
Talk a little bit about that concern and how it's running as you alluded to <unk> is up and running now during.
During the second quarter, we did breach our design capacity of 180 million gallons a year.
Good news and we're happy about that the other.
Other thing operationally as we did reach the yields have renewable diesel we were seeking to get and the mid nineties and so we're happy about that.
As far as feedstocks the design for that concern was basically and 80.20 mix of soybean oil and distiller corn oil and.
And as you probably know the soybean oil economics are challenged right now.
What what I'm real proud of the team is doing is we're seeking every day to optimize a few things.
First optimize the operation of the facility to get to the lowest carbon and carbon intensity from our operations and then we're also optimizing the feed slate within.
From the design basis, and and we're having some success in that regard.
So that's really how that concern is running and right now it's it's like I said, it's up running and that's the second largest renewable diesel plant and the United States.
Okay.
Okay.
Yeah, It's Mike again, I was just going to say to your second question on Martinez.
Not going to disclose at this point, what we're thinking about as far as the feedstocks that's still in discussion with many players so can't really comment on that other than what we said and our prepared remarks that the engineering is going well the P.
Permitting is going well, we still feel really good about the project from from a lot of aspects. So we'll give you more color on that as time goes by.
Okay, Great and then a follow up question and.
And maybe for you and Marianne just because you made the comment about natural gas price is being up are there any other inflationary aspects, we need to watch for in the R&M sector here.
I know you've got your overall goal to cut costs and some progress there, but you know theres always and offset Unfortunately I was just curious what what else may be pushing again.
Cash you there recognizing of course and natural gas can go down about as quickly as it goes.
Yeah.
Youre right and and certainly as we see it right now where we're looking at it as a tailwind that is natural gas to the third quarter I would say to your first question around any other specific inflationary aspects.
Nothing obviously, we need and point to anything there was really nothing of significance that we see at this juncture that would have a negative impact on the on the third quarter.
Okay. Thank you.
Our next question comes from Manav Gupta with credit Suisse.
Your line is open.
So Mike first congratulations I know you took over during the pandemic, but 1 thing that you took a lot of and you stressed was that everything has to be free cash flow and the portfolio and refining was free cash flow positive I think you made about 5 or 600 million and free cash so congratulations on achieving that goal.
Thanks Manav.
My question here is on those lines if I look at your current dividend obligation about 1.3 billion and then I look at the cash that MPLX is giving you about 1.8 and.
And when you look at the corporate and BB and corporate and expense as of like 175, a quarter like essentially where we are and the equation.
Even if refining only contributes like 100 to 200 million to all other free cash flow you can meet your dividend obligation and once you do execute this buyback doesn't mean like $320 million or so dividend obligation reduction and so what I'm trying to get to is not that refining will not make a positive free cash flow.
But you actually do not meet a positive refining free cash flow to meet the dividend obligation and my thinking about this that and make those correctly.
Yeah, and Avi you are in general I think 1 other things that sometimes people Miss is our relationship with MPLX as youre pointing out so at.
The current distribution level at MPLX, we do get that $1.8 billion coming back into MPC. So so I think youre right. Its 1 of the uniqueness is that as a positive of the structure that we have.
Right today, MPLX is generating excess cash flow beyond capital and distribution as well so financial flexibility is increasing at the partnership as well. So I think we're in a pretty good position from that standpoint, and and I think youre thinking about it right.
Okay and a quick follow up here is.
And you have done the theme was on a very good job of lowering opex blurred bottle, it's about 25% down year over year or so so besides the closure of the 2 assets the Gallup and Martinez of each other other assets or part of the portfolio and the refining or whether it was guy listen bail it very well.
With these material reductions have come in which is allowing you to push the opex part about it at all.
Yeah, Manav, it's really occurred across the whole portfolio Ray and the refining team have done a really nice job on that side.
All of the support functions on the corporate side of I've done as well. So it is part of my DNA to be very very conscious about costs. The team knows that's going to be a high priority for us all the time and in fact, if anything you know Maryann just mentioned.
Refining runs have come back up kind of with the recovery variable costs have come up but we've been able to maintain.
Pretty consistent level of Opex. There. So that's been a good story for US we do have again natural gas potentially going up but but overall, we're going to continue to challenge the portfolio.
Both on the refining side of the business also and the midstream side of the business.
For those who listened and city MPLX call. We had originally stated about $200 million of cost reductions at MPLX. We've now increased that to about $300 million of about another 100 million that we feel pretty comfortable that we can take out of that business as well. So it's going to continue to be and area of focus for us that's never going to chew.
<unk>, we will look for opportunities for us to.
To optimize our system, where we can and back to your original point, Yes. We did have a couple of closures. They were our highest cost facilities, but we're going to continue to evaluate the portfolio.
And I've said, a couple of times the people that I wanted to get out of this pandemic environment to see what you know what.
Things look like afterwards, but we are still evaluating.
All assets on the portfolio and to your point and I'm glad you remember that is.
I am a driver that all of our assets need to generate free cash flow. That's a mantra that I believe in and we're hoping that we have that in our portfolio at all times.
Thank you so much for taking my questions.
Youre welcome enough.
Our next question will come from Phil Gresh with J P. Morgan Your line is open.
Yes, hi, good morning.
First question just 1 additional 1 on on the buybacks.
The proceeds as you noted or $700 million.
Higher than expected I think you still have the $2 billion plus tax refund coming here and the third quarter.
So how should we think about the ability over time to potentially exceed the $10 billion buyback target.
Or perhaps other way of asking the question is are there other.
Uses you would see for the cash.
Besides returning capital to shareholders, given what you've said about the balance sheet and the past.
And you feel it's maryann. Thanks for the question Yeah. As you know as we've been sharing with you. The use of proceeds we've really just been focused on the $10 billion capital return as you state very clearly we know we have roughly $2.1 billion coming back from the cares Act.
We continue to expect to receive the lion's share of that in and about the third quarter.
Late in the third quarter, frankly is our expectation. So so you're right. We will have the remaining proceeds and as well as the incremental $2 billion that we will continue to evaluate and.
And and make good decision really around whether or not that would go in in the form of AR and the form of capital return, but we've not really declared beyond that initial 10 billion right now as we continue to look at the balance sheet and thank you know you know the.
Obviously, our intent also wants to ensure that we maintained investment grade as you hopefully you've seen the 3 rating agencies did reconfirm that so we do have an investment grade again on.
On on by all 3 of those agencies, we certainly will continue to focus on the balance sheet and be sure that that maintains a nimble if you will.
But again.
That use of proceeds will continue to evaluate as we go forward.
Yes, just to clarify there is no change to the absolute debt or cash balance targets, you set and the past.
That's right right now for MPC, we've got about $9 billion of long term debt as we shared with you. Initially we took 2 and a half a billion dollars off immediately frankly as you saw on the quarter, we actually did a bit more than that a little over 800, and we really cleared and anything and that was sitting on our on our revolver and.
As well, we will continue to evaluate that but at this point. We as you know we were trying to be efficient about that.
So we've not moved anything beyond that initial 2 and $5 billion of debt reduction.
Got it Okay and my follow up just 1 more on the operating cost equation with the $5 a barrel of Opex here and the third quarter and the fact that opex.
Opex is lower 2021 over 2020, despite higher throughput and.
Higher net gas.
Or do you feel we are I guess this is for Mike and <unk>.
Cost reduction journey here, particularly as we benchmark to peers.
They're obviously regional differences to consider across portfolios, but hum.
Far along do you think we are when you look at what.
Peers are doing.
Yes, Phil.
And how far along is always a tough question because like I said earlier is it's it's a never ending game. So we're going to continue to challenge ourselves, we'll look for incremental improvements from here. Obviously, we've we've gotten the lion's share of what we originally targeted to get but it's something that we're going to continue it's going to be part of our DNA that we are going to look.
And every opportunity every chance, we get to continue to push that down.
And I am a believer that and this business, we need to be a low cost operator.
Team deserves a lot of credit to get after that and we've made some meaningful change, but we're not done.
No.
Ralph on from the last call you know, we're not and the first inning and we're not and the ninth inning. So the game is still being played and will continue to be played and will will just obviously challenged ourselves all the time to see where we can.
Run ourselves it is lena opportunity as we can without sacrificing safety. That's another really important mantra, we're not going to put anybody at jeopardy, but we're going to run as lean as we can and.
And my my guidance for years, and keep watching our results and keep talking about it and as we have additional disclosures to tell you what's happened and will bring those up quarter to quarter.
Just mentioned earlier midstream has just moved from.
On a sustainable $200 million down to $300 million down. So so we feel good about that we're now telling people that we were comfortable with that number still challenging it and in the midstream space as well so we're going to keep.
The eye on the ball as far as our cost and we'll continue to look for opportunities to be as lean as we can be.
Okay. Thanks for the thoughts.
Youre welcome Phil.
Our next question will come from Theresa Chen with Barclays. Your line is open.
Good morning.
Wanted to maybe first ask about the refining and macro landscape given that demand has recovered completely on the default fund and.
And mostly on the gasoline front.
And with the utilization that you achieved and the second quarter as well as the guidance for the third quarter. It seems to indicate relatively optimistic outlook.
For the near term so Glenn would you agree with that and just generally what are your views on refining profitability and the second half and.
Related to your comments about jet demand being off 30% are still still is that whats Kathy and the utilization.
Our guidance from here.
Yeah, Chris I'll start and I'll, let the other.
Other guys jump in.
I guess the term we used was hopeful but cautious. So we are hopeful that we are recovering and continue to do so.
What we've seen obviously over the last year has been a very tough environment that we're coming out of particularly in the U S. They are the reason we're still cautious. However is the delta variant is spiking up and a lot of areas outside the U S is a much more difficult environment than inside the U S. Today and then.
You pointed out a couple of things as you know.
Net fuel is still lagging and and our view and that will continue to lag for some time, but eventually it will come back but for right now it is still lagging and the other 1 that we pointed out was the west coast is still lagging. So we're going to have to see true so to be honest with you we're going to have to see how.
The Covid plays itself out into the second half of the year and as we approach and other winter season.
If there continues to be increased infection, obviously theres going to be some restraint on the demand as a result, like we've seen before hopefully not hopefully people are seeing this variance spread and and vaccination rates will increase from where they are today I think there was a good response.
Originally but I think it needs to go to another level. So we're obviously hopeful that people will take a caution and get vaccinated.
But in general I mean, we have the same outlook that I think you and others have is that's why we use the word hopeful that we're recovering you know coming out of this but cautious that we still have some some roads plowed and <unk>.
You want to add.
And nobody wants that.
Fair enough and my second question is related to the Martinez conversion and <unk>.
Following up on on some of that came up in the midstream call about housing and some other assets within MPLX just in light of the midstream entity throwing off good free cash flow with healthy balance sheet currently and needing to insulate its own terminal value. When we think about some of the bigger ticket items that you have to spend on such as the pre treatment.
And.
Conversion of some of the processing units and.
Would you have the flexibility to decide between MPLX and participating at cost or dropping down and once fully cash flowing is there a preference at this point between the 2 if that is the path forward and just on the latter if you shock things out and once fully cash flowing and just thinking I think this is I believe.
Previous strategy with cap.
Top line and keeping that upstairs until it is fully reversed.
Because when you boil it all down for my team as I imagine this would.
Really delineate like a pretty meaningfully.
Different amount of capital that MPLX could contribute to fund the project.
Yeah that was.
Long run there Theresa let.
Let me see if I can break it apart I think the main message that you're asking is we do have a unique structure that enables us to look to create value for both MPC shareholders and MPLX unitholders. So there is no rule of thumb to what you stated earlier, it's case by case basis Theres a lot of specifics that go into it the diner.
<unk> of each of the individual opportunities, but but we do have that ability to sit down and figure out how we can create value on both sides and you know obviously, it's our goal to create value at MPC and MPLX and having the flexibility between the 2 structures.
Enables that but but I do want to leave you with there is not a rule of thumb, there's not a hey. This is the way. We do this every instance gets its own debate and discussion and we decide what we think is the best to create the most value.
Thank you.
Youre welcome.
Next we will hear from Paul Cheng with Scotiabank. Your line is open.
Thank you Paul are you there with us today.
Are you on mute by any chance Paul.
Alright, operator, let's move to the next caller and then we can have Paul re prompt and here with us Paul.
Thank you next and then we will hear from Sam Margolin with Wolfe Research you May proceed.
Good morning, Thank you.
Good morning, Dan.
Question on Martinez and.
The initial startup I was just wondering how youre thinking about.
Its performance in the period before the pretreatment unit.
Darts up and contextualize it with.
Something 1 of your peer said which is that.
And if theres, an expectation that feedstock might eventually price itself on Ci score similar to the way that within the refining complex commodities price on sort of their and market value and so.
I was just wondering if youre thinking about that as a possible outcome and whether that may make operations before the pizza you starts up a little easier or whether the expectation is really that Martina shouldnt enter kind of a run rate profitability until that P to you is going.
Yeah.
Hey, Sam. This is this is Ryan and I'll take your question.
Youre right as we as we develop the Martinez project and it comes on and phases that different phases will and you know.
We'll have a different feedstock mix and so so phase 1 is essentially as we come on and with the initial hydro processing unit.
That that is going to be without the pretreatment system.
I don't want to get like Mike said, I don't want to get into too much of the feedstock slate what I would like to emphasize though is as we have a lot of optionality around how we received feedstocks between truck and rail and water.
And ability without having to pretreatment system start to optimize that.
Optimize that mix.
The other thing and I'll talk about Martinez, whether it's phase 1 or phase 2 phase III is we did our when we looked at this project we looked at it with different feedstock capabilities and you know the most conservative feedstock availability and.
And for phase, 1 and and and we still feel good about the project, even even with the if it was a very strong soybean oil based slate, but like I said, we're going to work to optimize around.
All of the logistics assets the capabilities that <unk> offers us.
And Sam it's Mike and I'm, just going to add to what Ray said I mean I know your question is depending on where the market goes but.
And the thing that makes us feel really good about Martinez is several factors.
And we think we have a really competitive capex and opex situation and that was 1 of the major drivers when we looked at this second as Ray just mentioned we have really.
Really strong logistics pipeline rail water truck, we have a lot of opportunity there to provide value and then you know the ultimate logistics is we're in California, where were sitting on the demand. So location also matters, so regardless of what happens in the marketplace and it'll ebb and flow just like every other commodity.
Market.
And the reason, we're so bullish on our Martinez asset is those factors that are in place day in and day out Opex that we're going to run the capex that it takes to get there the logistics that we have the location that we have all of those play to our favor regardless of how the commodity markets move day to day I hope that makes sense.
Yeah understood and and then just a follow up on <unk>.
<unk> and the RVO.
Mpc's advantaged because you satisfy your.
And the 6 obligation through blending, but theres some element of that that are hard to follow in terms of realizations.
Because marketing outcomes have different <unk>.
And effects embedded in them. So I was wondering if theres anything you can share about just sort of a net effect of blending.
And the gasoline on the gasoline side and.
And how you navigate it just the volatile and environment and maybe what that means on on sort of a go forward basis. Thanks.
Yes, Sam this is Brian Partee I can take that question. So first thing I would do is actually zoom out and just a little bit and think about.
Blended sales actually further down the value chain. So it's naturally going to be a higher margin sales and say a bulk sale and it doesn't have a range or a blend component to it so.
And we've stated publicly that were and that 70% to 75% from blend perspective from an RVO. So we're just naturally further down the value chain I think you hit on a couple of things, though the volatility is important so.
On the RVO is a 12 month compliance window and it's really how you execute your compliance strategy.
And it's the volatility and actually and the high rent environment and now provides opportunities for probably and outperform or underperform, depending on the execution of your compliance program and how you meet those obligations. So.
That is something thats, probably not been as transparent to the marketplaces, we have historically run around and nickel or so on rins, but now in this environment. It does provide an opportunity it's high risk high reward, but we.
And we feel confident with our ability to execute both from a blended perspective of what we blend but also on the compliance program.
Thanks, so much.
You bet.
Our next question will come from Jason <unk> with Cowen Your line is open.
Hey, Thanks for taking my questions.
Actually try to ask the question Sam just asked a little differently, which is have you seen the value proposition for blending biofuels change and this environment relative to where it was in 2018 to 2019 or is the value benefits still there meeting that it blending ores.
The financial cost of having to go out on buying Rins, because it's been suggested that the value proposition has changed a bit for various reasons.
Yes, Jason this is Brian partying and yeah, I can take that I think.
And the great debate is the pass through of the ran and the RFS costs and it's very difficult to empirically point to that as a path through so again I'll fall back on the execution side of things.
And I think that's really where the performance lies.
But it's very difficult to pinpoint any difference between the data points that you referenced back in 2018 to today and it really gets oil and founded the execution side of things.
Okay.
And then just a quick accounting question there was about on $82 million benefit from other income other income excuse me and refining and marketing margin that appears like the first time, it's been there.
Can you just discuss what drove that.
I'm sorry, Jason It's Maryann could you repeat your question again, you're saying and $82 million benefit in the quarter I'm, sorry, I'm not sure.
Quarter again, and the line item other income included and refining and marketing margin.
Yeah.
Yeah, Jason we'll take a look at that for you and we'll come back to you has that alright.
Alright, that's great. Thanks.
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