Q3 2021 Marathon Petroleum Corp Earnings Call
Welcome to the MPC third 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 note that.
This conference is being recorded I will now turn the call over to Kristina Kazarian Kristina you may begin.
Welcome to Marathon Petroleum Corporation's third quarter 2021 earnings conference call. The slides that accompany this call can be found on our website at marathon petroleum Dot com under the investors tab joining me on the call today 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 be making forward looking statements today actual results may differ factors that could cause actual results to differ are included there as well as in our filings with the SEC with that I'll turn the call over to Mike.
Thanks Kristina.
Before we get into the results for the quarter, we wanted to provide a brief update on the business.
Midway through the quarter, we were impacted by Hurricane Ida.
After the hurricane passed over our Gary Bill refinery with wind speeds topping 120 miles per hour.
Fortunately all of our employees in the region were safe, but many of them experienced severe damage to their homes and the communities around them.
Our team was able to shut down our refinery in a controlled manner. They ahead of the storm and ensure operational integrity and safety of all of our employees.
It took roughly a week to restore sunpower, which enabled the first crude unit to restart over the next several days.
The remainder of the refinery restarted sequentially over the next 10 days as more power became available to the facility.
I'd like to recognize our refining team and our support groups for their dedication and efforts. Our commercial teams also did an excellent job in keeping our customers in the region supplied through coordinated efforts across the company.
Riyadh will cover the specific impacts when she reviews the refining results.
In addition to the Louisiana Hurricane our Los Angeles refinery was impacted by an earthquake on September 18th.
Again, the major challenge was the loss of power once power was restored the units were restarted the refinery was back to normal operations and roughly one week.
Our teams did an excellent job responding to these events and minimizing the negative impact to our financial results.
Looking more broadly during the quarter, we saw gradual increases in the demand for our products as mobility continued to recover.
Globally product inventories are at their tightest level in many years and this improvement has lifted margins.
And then in the U S gasoline and diesel inventories have steadily improved and are both at the low end of their five year averages.
Jet fuel inventories have moved into the five year range, although demand is still well below pre pandemic levels and we expect that to be a headwind for some time.
Our system is seeing gasoline demand currently 2% to 3% below 2019 levels with the west coast still lagging at about 8% below.
Diesel demand is now slightly above 2019 levels jet.
Yet demand has improved but still remains down nearly 15% to 20% below pre pandemic levels.
Natural gas costs steadily rose during the quarter with an average increase of over one dollar from the second to the third quarter.
There's still some uncertainty as we head into the fourth quarter, but lower inventory levels and strong holiday travel could be supportive and looking at next year of global product inventories remain tight and demand continues to recover we would expect the refining sector to rebound in 2022 at.
At the same time, we're watching prices to see if there's a consumer demand pullback.
On the aspects of the business that are within our control this quarter, we advanced several key initiatives.
We progressed, our renewables initiative with the addition of a new strategic partnership with a T M.
This JV will own and operate Atms soybean processing complex and Speer with North Dakota.
Upon completion, which is expected in 2023.
This facility will source and process local soybeans supplying a proxy that approximately 600 million pounds of soybean oil exclusively for MPC enough feedstock for approximately 75 million gallons of renewable diesel per year.
While this JV provides a little locally advantaged feedstock for our deck in some projects, we continue to evaluate feedstock options for our Martinez facility in California.
And Martinez, our renewable fuels facility conversion reached another project milestone when its environmental impact report was issued for public comment in mid October the <unk>.
Process highlights our extensive after working with the local regulators and other stakeholders.
Also in October United Airlines Marathon, and others conducted a successful test flight of the 737, which flew for 90 minutes using dropping sustainable aviation fuel.
The S. A F used during the test flight was 100% renewable drop in fuel made possible by proprietary technology from fire in our wholly owned subsidiary, which has a demonstration plant in Madison, Wisconsin.
And as we continue to focus on ways to strengthen the competitive position of our assets today, we announced that we are pursuing strategic alternatives for the Kenai refinery, which could include a potential sale.
We often share our belief that our business is both a return on and return of capital business and this quarter, we made progress strengthening our portfolio continuing our low cost focus and progressing our commitment to return capital to our shareholders.
As of today, we've completed approximately 25% of our $10 billion share repurchase program and we're confident in our ability to return the remaining $7 $5 billion by the end of 2022.
Finally, MPLX announced a third quarter distribution, consisting of a two 5% increase to its base distribution amount and a special distribution amount as well.
M. P. C will receive a total of $829 million. This announcement reinforces the strategic importance of MPLX as part of Mpc's portfolio and its ability to return substantial cash to MPC and all unit holders.
Slide four provides a framework around some of the ways, we are challenging ourselves to lead in sustainable energy.
Our approach to sustainability spans the environmental social and governments and governance or ESG dimensions of our operations.
And incompetence 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 in decision, making and all aspects of engagement with our people and many stakeholders.
We have three companywide targets, many of our investors and stakeholders know well.
First a 30% reduction in our scope, one and scope two greenhouse gas emissions intensity by 2030.
Second a 50% reduction in midstream methane intensity by 2025, and lastly, a 20% reduction in our freshwater withdrawal intensity by 2030.
The evolving energy landscape presents us with meaningful opportunities for innovation we.
We have allocated 40% of our growth capital in 2021 to help advance two significant renewable fuels projects.
In late 2020, we began renewable diesel production at our Dickinson North Dakota facility. The second largest of its kind in the United States and are progressing the conversion of our Martinez, California refinery to renewable diesel facility.
I'd also like to highlight a few specific updates from the quarter. We were recently awarded an ESG a rating by MSCI. We are the only U S. Based refiner that holds this rating.
We continue to focus on enhancing our disclosures in this quarter. We also submitted data on our scope three emissions through CDP and we are in the first in our refining sector to do so.
We invite you to go to sustainability section of our website and learn more about how we are challenging ourselves to lead in sustainable energy.
At this point I'd like to turn it over to Mary Anne to review the third quarter results.
Thanks, Mike.
Slide five provides a summary of our third quarter financial results.
This morning, we reported earnings per share of $1 nine and adjusted earnings per share of 73 cents.
Adjusted earnings exclude 48 million of pretax charges, primarily related to hurricane Ida impairments and idling cost.
Additionally, the adjustments include an incremental 272 million of tax expense, which adjusts all results to a 24% tax rate.
Our year to date effective rate is just under 2%.
We therefore expect to retain the tax benefits realized in 2021.
We will continue to make this tax rate adjustment for the fourth quarter of 2021.
Adjusted EBITDA was $2 $4 billion for the quarter, which is approximately $500 million higher from the prior quarter.
Cash from operations, excluding working capital and a voluntary pension contribution was nearly $1.8 billion, which is an increase of $230 million from the prior quarter.
During the quarter, we paid $575 million into our pension plan, we elected to contribute this additional amount as it was beneficial from a tax perspective.
This amount covers nearly three years of estimated contributions and we forecast the plan would be fully funded at year end.
This also increased the cares act benefit to a total of $2 $3 billion.
Similar to last quarter, we generated ongoing operating cash flow that exceeded the needs of the business and capital commitments as well as covered our dividend and distributions. Finally, we returned nearly $1 $3 billion of capital to shareholders this quarter through dividend payments and share repurchases.
Slide six illustrates the progress we have made towards lowering our cost structure. Since the beginning of 2020, we have taken almost $1.5 billion out of the company's total cost.
Refining has been lowered by approximately $1 billion midstream reduced by 300 million and corporate cost by about 100 million.
Regardless of the margin environment, our EBITDA is directly improved by this $1.5 billion.
We continue to emphasize our safe reliable and low cost focus across the organization, while we do not see further cost reductions of the same magnitude that we have already taken out there are still opportunities for us to reduce cost.
Natural gas prices were higher in the third quarter and continue into the fourth quarter.
For every $1 change in natural gas prices, we anticipate there is an approximate $360 million impact to annual EBITDA to our R&M segment.
Just on current prices, we estimate that in the fourth quarter higher natural gas prices have the potential to impact our business by an incremental 30 cents per barrel.
As we have previously mentioned our refining cost in 2020 began at $6 per barrel and are now trending at a quarterly average of roughly $5 per barrel for 2021, as we continue and we continue to believe these are structural reductions.
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 in 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 seven shows the reconciliation from net income to adjusted EBITDA as well as the sequential change in adjusted EBITDA from second quarter 2021 to third quarter 2021.
Adjusted EBITDA was approximately $500 million higher quarter over quarter, driven primarily by refining and marketing, but also benefiting from our strength in midstream.
$48 million of pre tax charges during the quarter are reflected in the adjustment column.
Moving to our segment results slide eight provides an overview of our refining and marketing segment. The business reported continuing improvement from last quarter with adjusted EBITDA of $1 $2 billion. This was an increase of $444 million when compared to the second quarter of 2021.
The increase was driven primarily by higher refining margins, especially in the Gulf Coast region as that region's cracks improved 34% from the second quarter.
As Mike mentioned, our Gary they'll refinery was impacted by Hurricane Ida we estimate the cost impact was $19 million this quarter with an additional $11 million to be incurred in the fourth quarter.
We estimate the lost opportunity from the hurricane to be approximately $80 million.
The Gary they'll refinery was down for about 10 days and took another 10 days to ramp back up to full production.
The throughput impact was approximately $8 3 million barrels. We also believe there was an additional $10 million of lost opportunity impact associated with the earthquake at our Los Angeles refinery, which was back to the planned rate after roughly one week.
Utilization was 93% for the quarter flat with the second quarter, we saw lower utilization in the Gulf coast compared to the second quarter due to hurricane impacts.
The mid Con region continued its strong utilization and west coast strengthen as reopening in California continue to increase demand. If adjusted to include capacity, which was idled in 2020 utilization would have been approximately 88% in the third quarter of 2021.
Operating expenses were higher in the third quarter, primarily due to higher natural gas prices.
Slide nine shows the change in our midstream EBITDA versus the second quarter of 2021.
Our midstream segment continues to demonstrate earnings resiliency and stability with consistent results from the previous quarter, the strong cash flow profile and lower capital spending supported the decision to return more cash to unitholders.
Today, MPLX announced a 2.5% increase in the partnerships based quarterly distribution and a special distribution amount of approximately $600 million.
As I mentioned earlier this quarter, our midstream assets in the region were also impacted by Hurricane Ida We estimate the cost impact was $4 million this quarter with an additional $7 million to be incurred in the fourth quarter.
Slide 10 presents the elements of change in our consolidated cash position for the third quarter opt.
Operating cash flow was $1 billion $765 million in the quarter as I mentioned earlier this excludes changes in working capital and in incremental payment of approximately $575 million into our pension plan.
Also this amount does not include changes to our cares tax receivable in the quarter, which was a $500 million source of cash and is included in the income taxes bar of this chart.
Working capital was effectively flat this quarter.
During the quarter MPLX reduced its third party debt by $1 billion funded by borrowing an additional 877 million under the MPC or marathon intercompany loan agreement our income tax balances represented a use of cash primarily driven by a decrease in accrued.
Taxes.
We made a tax payment due for the speedway gain of $2 $9 billion out of a total of $4 2 billion, we have accrued.
We were able to offset about 400 million of the amount using our cares tax receivable there were about $100 million of other charges in our tax balances.
During the quarter, we adjusted our cares tax refund up to $2 $3 billion from $2 $1 billion last quarter.
We have identified a total of about 700 million that can be offset against our speedway tax obligation, including the $400 million, we use this quarter and $300 million that we expect to use in the fourth quarter of 2021 to offset remaining balances for taxes due from our speedway transaction.
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We received $1.55 billion of the cares Act refund in October there is about $60 million of the refund remaining which we expect to receive in the first half of 2022.
With respect to capital return MPC returned $370 million to shareholders through our dividend and repurchased $928 million worth of shares in the quarter using speedway Speedways proceeds.
At the end of the quarter.
MPC had $13 $2 billion in cash and higher returning short term investments such as commercial paper and certificates of deposit.
Last quarter, we promise to continue to provide status updates on our progress deploying speedway proceeds we have repurchased an incremental $1 $5 billion in shares since the end of the second quarter.
This is comprised of $928 million of repurchase in the third quarter plus additional shares purchased through the end of October.
As Mike indicated we are approximately 25% complete with our $10 billion share repurchase program.
We are continuing to use a program that allows us to buy on an ongoing basis and we will provide updates on the progress during our earnings calls.
To meet our $10 billion share repurchase commitment we are progressing steps to be able to complete the remaining repurchases of approximately 7.5 billion by the end of 2022.
The options. We have previously discussed remain available to us to complete. This objective today, we also announced that we intend to redeem an additional $2.1 billion of debt. This entails two tranches of notes that mature in 2023 given.
Given the current interest rate environment as well as our cash position. It makes economic sense to redeem. These notes early and we anticipate this will lead to roughly $20 million of savings.
This short term cash management provides immediate interest payments savings and we will have the ability to reissue notes at the appropriate time with this redemption, we had no maturities over the next three years.
Our third quarter debt to capital ratio for MPC, excluding MPLX was approximately 24%. The redemption of these notes will continue to lower this ratio as we manage our balance sheet. We continue to ensure that we maintain our investment grade credit portfolio.
Turning to guidance on slide 12, we provide our fourth quarter outlook. We expect total throughput volumes of roughly $2 8 million barrels per day planned turnaround costs are projected to be approximately $200 million in the fourth quarter. The majority of the activity will be in the mid Con region.
Total operating costs are projected to be $5 40.
Per barrel for the quarter.
Based on the current prices, we estimate that in the fourth quarter higher natural gas prices have the potential to impact our business by an incremental 30 per barrel.
As we have previously mentioned our turnaround turnaround activity is back half weighted this year. Other operating expenses are coordinated to occur. During these time periods as well distribution costs are expected to be approximately $1 $3 billion for the fourth quarter corporate costs are expected to be 107.
$80 million, reflecting the approximately $100 million in costs that had been removed on an annual basis.
With that let me turn the call back over to Christina. Thanks, Maryann as we open the call for your questions as a courtesy to all participants we ask that you limit yourself to one question and a follow up if time permits we will re prompt for additional questions I'll 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 if you 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 will come from Neil Mehta with Goldman Sachs. Your line is open.
Good morning team thanks for taking the question.
The first question is around capital returns and you still have $7 $5 billion of stock, which is a lot of stock to buy back up by the end of 'twenty two.
So what we know right now is it fair to assume that you're going to be buying this back ratably at $1 billion $5, a quarter or do you see yourself leaning into it and then tie that into your capital return strategy at MPLX.
We saw the special dividend.
Through this morning.
That's something that we should think of as potentially.
More likely to happen going forward or was that onetime in nature.
Sure. Thanks, Neil So let me talk about the.
Share buyback program and your question around rate ability just maybe as a quick reminder, we did not get into the market until the completion of our second quarter earnings call. So we really didn't have a full quarter. If you will and hopefully you've seen and what we've been doing in the remaining weeks post our earnings calls.
As I tried to share with you. We do believe that we have opportunity as we go forward given the timing of our earnings to be a little more opportunistic so I would not assume in any way that ratably is the only plan that we have I think what you can see is if that were to be the case, we certainly would have.
Full ability to complete our program as we say no later than the end of 2022, but that is certainly not the only available set of opportunities for us I will turn the call I'll turn the question over to Mike on MPLX.
Good morning, Neil I'll address your second point, So let me give you a little bit of a long winded answer, but hopefully it will get to the meat of your question. So at MPLX one of the things that we do.
<unk> decided to do was to move the business model such that we would have free cash after distributions and after growth capital that would put us in a financial flexibility situation, where we could have options.
We achieved that about the third quarter of 2020 and as a result of that we now have a situation where we have capital for deployment at MPLX that can be growth capital buybacks.
<unk> distribution to the base. So as you saw it's bumped that up today additional distribution amounts in the form of a special which we've talked about a little bit here and I'll I'll address it further but but the bottom line. There is where we're gonna be dynamic and evaluating what's the best opportunity for us on that side of the house based on market.
<unk> business needs et cetera, et cetera, and important point, though from the MPC side of it is we often get asked the question how does MPLX provide value to MPC shareholders, well, we tried to enumerate many different ways, but this is one. Other example, where this is additional cash that's coming from mpls.
Next to MPC. So at the base distribution amount MPC gets about one $8 billion and that's been pretty ratable since our since 2020 with this special distribution amount.
It will now be $2 $2 billion, because it's about 400 million Mpc's take up of the special that went to all unit holders. So instead of a 1.8 say EBITDA addition from MPC Youre now looking at two point too and we will continue to evaluate that going forward. It's clearly our intent to grow earnings.
Ed.
MPLX and as a result of that there's going to be more cash available to come to MPC over time, whether it's through distributions to the base or special while we also continue to look at buybacks at MPC as well. So hopefully everybody sees this as a nice strategic.
Importance of MPLX to MPC shareholders as part of our overall scheme here.
That makes sense Danielle no that's.
Really helpful. Mike My follow up is kind of a housekeeping modeling type of stuff, which has two parts to it one is tax rate came in a little bit of lower.
Slower than expected.
This quarter should we think about the tax rate going forward given that midstream such a big part of the earnings lower than the 24%.
The tax rate that we could base casing and then just any any flavor on 22 capex.
A housekeeping questions.
So Neil on the on the tax question, so you're absolutely right in the quarter frankly, we actually recorded from continuing operations about an $18 million benefit part of that is driven by our ability to carry back the incremental pension contribution and some other favorable.
Discrete items in the quarter. The second part of your question is whether or not we would actually migrate toward the statutory rate of 24% and I think you've articulated that as we look at the amount of Noncontrolling interest.
Would most likely not see a statutory rate of 24%, but as the level of R&M continues to improve against that we'll see that rate get higher than the 2% that you were seeing on a year to date basis. So we will migrate from 2%.
Trending toward but we would not reach the statutory rate. We have continued to make this adjustment since the first quarter of 2020.
And we'll do that in the fourth quarter for consistency, but most likely going forward beginning in the first quarter of 2022, we will not be making a tax adjustment to bring all of our earnings to 24% I hope that I hope that answered the question.
And then I'll I'll address your second question around capital as you saw we had a significant reduction from 2020 to 2021.
And we're largely on track.
To reach that cap Capex number for 2021, we have not given guidance for 2022 as yet and we'll do that on our fourth quarter earnings call as we normally do but I think as you know one of the key strategic pillars, along with cost reduction is strict capital discipline.
We've begun to outline for you the amount of capital that we are targeting or committing to renewables and we would expect to be able to share that with you as well for when we gave our guidance.
Thanks Barry.
Thank you next we will hear from Doug Leggate with Bank of America. Your line is open.
Thanks, Good morning, everybody.
So guys, you've given a lot of moving parts a lot of detail about post reductions parts of Jos sensitivities and so on.
I Wonder if I could ask you to kind of a dumb it down the quarters, a little bit as we transitioned back to.
For one of a better expression mid cycle.
What do you see as the mid cycle EBITDA for the portfolio. After all the changes what it sounds like today and I'm talking specifically the refining business ex the <unk>.
The MLP consolidation.
Is that something you can quantify.
Okay.
Yeah, Doug it's Mike.
No from some of our previous conversations.
I think it's very very hard to call the mid cycle.
I, often say I use the football analogy that you know just getting it to between the Forty's is tough enough let alone trying to find mid cycle. So, but most importantly for me Doug I will tell you that the way we manage the company is we're not concerned about calling the 50 versus the 40 I like to think about the two end zones, how do we feel about our low.
<unk> and our high environment and how are we set up from a portfolio standpoint.
Whether each of those come at us because invariably over time as you've seen you'll see cyclical high margin environments and then obviously, we've seen some pretty low ones with the pandemic. So so I don't really have a number for you that's not something we spend a lot of time with.
Obviously internally, we also like to think about whereas our balance sheet and leverage et cetera et cetera.
Marianne talked about right now we're in a different situation than normal we have a lot of cash on the balance sheet. We did a short term optimization around that that cash management ultimately I think our leverage to a normal mid cycle would be higher in the future.
But we'll keep debating that and ultimately try and frame ourselves.
We're in a good position, but at the end of the day I don't have a I don't have the crystal ball to tell you exactly what I think mid cycle is going to be but I do think that we're going to manage the company such that we're prepared for either end of it and we're going to have the appropriate.
Management disciplines and financial disciplines around those scenarios.
And Doug Maryann here, you know maybe at the risk of repeating that but.
We always say, we're going to control the things, we can and whatever that mid cycle brings as I was sharing were $1 $5 billion better than we otherwise would have been from the cost reductions that we've been able to achieve.
We still believe we have some opportunities in our low cost culture, but certainly 1 billion and a half better than we otherwise would have been regardless of what that market brings us.
Thank you I was worth those worth of stuff I guess, but my follow up I.
I guess, we've touched on this every other quarter, Mike, but the portfolio changes Kenai is the latest that seems to be these are kind of.
As you fly.
It would be fair. These are dribbling out over a long period of time I'm just wondering if you could.
If you're in a baseball analogy give us an idea of where you think we are as well.
Process and I Wonder if I could also ask you to touch on whether there was any similar.
Studies or evolution of the portfolio going on at the MPLX level.
For a long time, there's been a lot of discussions over gathering and processing for robots the right fit for all.
And then L P type of business.
Thank you.
Yeah, Doug to your first part.
Don't know that we think about it is dribbling around I mean from the portfolio standpoint.
Executed the sale of the Speedway business, which as everybody knows took a long time to get through that process. We made early moves to idle some high cost facilities.
In our refining system converted Martinez to renewable diesel that's in progress completed a feedstock JV.
In an equity position in the feeds.
Feedstock situation for Dickinson. So we continue to examine the portfolio I think we've done some things that shows the market that it is a high priority for us. It's one of my three main initiatives that I stated from the start.
With respect to Kenai.
I would tell you Doug normally I'm not a big fan of announcing stuff until things are done or not.
As a general rule, but but in this particular case, we've done an analysis and the reason we disclosed it now is we're in pretty advanced discussions with several parties.
And because of the timing of this call. We didn't want to have this call and if something progresses to closure in the near future. We didn't want everybody, saying, Hey, why didn't you tell us about it. So so we decided to kind of go off our norm a little bit and disclose that we may be able to execute something here in the short term.
But it may not happen as well so we're trying to be as open and as transparent as we can be.
We're evaluating it it is advanced discussions and that's the that's the main reason that we've decided to tell the market. That's where we are but I will tell you that we will continue to evaluate the portfolio theres more work in our mind that needs to be done and hopefully over time people will continue to see a pattern of us challenge ourselves to have a very.
Robust portfolio that that works in all market conditions, and ultimately what I'd try and say to our team as we want all of our assets to provide free cash.
Over the cycle of our cash flows and margin environments that we hit.
Mike I Wonder if I could just press you on the MPLX question, I guess was the better expression instead of years, but it does that extend to MPLX.
Okay.
Doug could you just say that again apologies we couldn't hear you did you say drip seed.
Sorry.
My point was I think drip feed was a better expression and dribble I think was the board that Mike used my question was does this extend to the MPLX portfolio.
The portfolio, yes, it does.
Said for some time and maybe to our detriment again, but we'd like to err on transparency.
We believe that there's parts of the portfolio, a very core and going to continue to get capital deployment. There's parts of the portfolio that we do not think long term is core but at the same time, we're generating free cash from those areas and we'll continue to keep those part of the portfolio unless we see something that adds more value.
Bid ask on the non core has been wide and and like I say, maybe no no. Good deed goes unpunished. The fact that we've been open about that option I think has led people to try and lowball us as far as some of the bids, but we know what the value of the assets are in our mind, we're not going to move them for numbers less than that we're happy with the execution.
All of the assets at this point so.
We're in a what I call good position, we're generating free cash the portfolio is working for US we'll look for an opportunity if it makes sense at some point to divest something that we think can be more useful to somebody else in the long term, but if not we'll manage the capital into those areas and continue to generate free cash and deploy capital where we think.
There's more longer term values. So so long answer to your question, but yeah. The portfolio is obviously something that matters at both MPC and MPLX.
Okay. Thank you very much.
Youre welcome Doug.
Thank you next we will hear from Phil Gresh with J P. Morgan Your line is open.
Yes, Hey, good morning.
My first question is just around the balance sheet in the past you've talked about parent leverage of I think one to one five times.
Obviously, you have a lot of cash coming in the door.
The macro is looking more and more like mid cycle faster.
So does this impact in any way the way youre thinking about the right level of consolidated or parent leverage that you wanted to maintain moving forward.
It's Marianne I'd say no. It does not we are certainly as I as I tried to share committed to maintaining our investment grade ratings on both MPC and MPLX our decision in the short term on the incremental debt is really based on the <unk>.
<unk> million dollars worth of interest rate savings as.
As I mentioned on the call, we're sitting at about 24% debt to cap that will lower that obviously as weak as we take that incremental debt out but it. It short term, we'll continue to look at the cash position.
And then of course as we complete the share repurchase you know, we'll see that leverage move up a bit as well, but this in no way changes the way that we are thinking about the optimal capital structure for MPC and MPLX. We remain comfortable if you will we've been talking about four times at the MPLX.
And as John mentioned on the call earlier. This morning, we're sitting at about $3 seven at the end of this quarter.
And just to clarify.
Hi, guys.
I just wanted to add to what Mary Anne said, because I want to make sure that the market doesn't over interpret this short term move so we have cash sitting on the balance sheet. The market has moved such that we can take out that debt a little earlier in such a way that we can put $20 million in our pocket.
Interest rate that we're getting on the cash in the short term, obviously, a small basis points compared to put in $20 million in our pocket. So so as an optimization, we look to take that debt out, but don't read into it which I am concerned thats, what youre doing don't read into it that that's where we think our debt should be on a long term basis because.
Does that makes sense to you.
Hey, guys I just wanted to make sure Maryann did I clarify or quantify that correctly I wanted to one five times for the parent leverage as well or.
Just want to make sure I'm thinking about that the right way.
Yes, I think that's a fair assessment, yes.
Got it Okay and then my second question.
Again with all the.
Cash flow.
Movements here with the macro environment.
Does marathon have a way that is thinking about its dividend framework moving forward post speedway.
I don't know if its percent of cash flow or something where you're trying to think about not only the buybacks, which are reducing the dividend burden, but also the potential for dividend growth. Thank you.
Yeah, Phil it's Mike So yeah, we're having a lot of internal discussions around the dividend level, but in the short term our priority is to buyback the shares through the program. We have we're not going to make a change on the dividend while that program is in place, but we are looking at what's the appropriate level going forward.
Especially considering how much cash that we're generating at both MPC and MPLX and like I mentioned earlier now the.
The amount of EBITDA that is coming from MPLX into MPC for at least for this year is considerably higher than what it's been in the past. So it is something thats on our radar screen, but while we're reducing shares we're going to concentrate on that program first before we make any further comments on the dividend.
Okay. Thank you.
Youre welcome.
Our next question will come from Manav Gupta with Credit Suisse. You May proceed.
Hey, Mike.
Given the cash, which we have seen quarter over quarter.
Yeah.
I know since you have taken or you have been very focused on cost reductions what you can control and optimizing the portfolio, but just because the cash is building instead of possibility you could accelerate your renewable fuel development to more jv's are actually acquire some assets under development or even.
Forms of renewable energy I'm, just trying to understand if that's part of the portfolio can be accelerated healing tool.
Inorganic means is is that something you would be open to.
Yeah Manav.
We're certainly open to it I mean, we have a team of people that is constantly looking at the opportunities are out there inorganically, obviously, we don't count on that in our base plan and we count on the things we control as you mentioned, but yes, we have a whole team of people both on the MPC and MPLX side looking for opportunities in renewables and as well.
As all of the other alternative energy options.
In the short term we have not found anything that we think is is worthy of a deployment, but but we'll continue to look at it. Some of these other technologies I think they're going to develop over time and I think we're going to get some opportunities in there.
The future, but up until this point, we haven't found anything that we thought was a was worthwhile, but we're certainly open to it and like I said, we have a lot of people looking at all the different.
Parts of this energy evolution, that's going to continue to evolve over time.
And a quick follow up here is during the quarter in refining obviously, the widening solid different shows what a meaningful tailwind for you.
Obviously, I think it's $150 million quarter over quarter, we are seeing opaque raise some volumes here.
Seeing some widening of the Canadian differentials Lee if you could help us understand the outlook for medium and heavy sour differentials here and how that plays into MPC. Thank you.
Yes, Hi, Manav, it's Rick Hessling I can help you there so you're absolutely correct here in the near term medium sours heavy differentials have widened.
So you're seeing that in the marketplace going forward, what I would share is theres a lot of put and takes out there in the marketplace. We've certainly got the OPEC plus decision here that's expected on Thursday that.
I will pivot the market certainly a bit we've got political intervention I E. SPR releases that always weigh in the outlook. So it makes it very tough to truly take a position.
Above and beyond that you've got production, you've got Gulf of Mexico production Canadian production recently looking robust.
But then on the flip side, you certainly have consumer demand where will that go how will the demand play out and then lastly, several other wildcards on how it will affect these differentials, which is aligned three and cap line reversal here in a few months. So a lot of puts and takes manav.
Really hard to call going forward.
Thank you so much.
Youre welcome.
Our next question will come from Roger read with Wells Fargo. Your line is open.
Yes, Thank you and good morning.
Good morning, Roger.
Good morning, guys, just donovan to adhere.
First one on the Martinez conversion just to make sure you talk a little bit about feedstock earlier, how you are looking at where you are relative to secured feedstock and how that would compare to the.
The normal process in other words, if you don't have 100% that's not a surprise because we're still two years away essentially for them.
Full run rates.
Our year and a half and then are there any specific regulatory hurdles remaining permitting et cetera that needs to go on there.
So Roger I'll, let I'll, let ray talk about the regulatory side, and then I'll come back on the feedstocks.
Good morning, Roger.
Hey, the big hurdle for US the first hurdle was the environmental impact.
Report was actually issued for public comment a few weeks ago on October 18th and that's a 60 day comment period I want to emphasize this this was a major milestone for us and not an insignificant piece of work, it's a 450 page.
<unk> answered a question since scenarios and so forth. They're initially was a little bit of misinterpretation of that but I was very pleased to see that some of our key stakeholders, particularly carb came out and strong support for our project. So.
That's encouraging and will monitor any comments that we receive over the next 60 days and address those accordingly at the end result.
We are hopeful to get a land use permit and that's the big deal because what that does is that allows us to go ahead and start construction and what I want to emphasize is the project is ready for that phase one where we're done with the engineering, we've got materials staged and we're ready to put the building.
<unk> <unk> to <unk>.
Work on getting phase one going.
As far as our outlook on it we remain where we've been in the past where second half 2022 phase one of the renewable diesel project is online.
And Roger It's Michael I'll, just add to what Ray was saying first off on your question on feedstock. So we continue to have commercial discussions around that.
We have kept that kind of close to divest for now and we'll keep it that way, while we were having some of these discussions.
But what I wanted to point out to you is like Ray said, we're at an important point in the project.
Out for public comment like Ray said, we're ready to go to construction.
I know the market has been asking us to disclose the capital. We're looking forward to doing that we've been holding that back to get through this regulatory process. Once we're through that then hopefully we'll be able to give you a lot more color with respect to capital in feedstocks and everything else as to where we are but but this important part of this process is.
As Ray just.
You mentioned will play itself out and then hopefully by the next time that we talk will be able to give you more color.
I appreciate that.
The other question I had.
Opposite direction of the discussion earlier on.
<unk>.
Coming up with a different solution for the Kenai unit.
Lot of units are for sale out there from various operators on.
Refining and I was just curious.
Yeah.
Did a big transaction. Shortly before you took this role understandable you'd want to clean up some of what you bought and some of what you already had but as you look out over the next three to five years is there any interest in expanding the refining footprint or you look at the issues with.
Cafe standards, Evs et cetera, and you say generally speaking, we're probably shrinking refining from here I'm, just curious how youre kind of looking at strategically.
Yeah, Roger it's Mike again, so I'd like to I never say never but it's not a high priority for us to increase our refining position I think the higher priority for us is to increase our opportunities in the energy evolution you'd see us doing some things in renewables we've gotten a.
Few other ideas that were percolating on that hopefully in time, we will advance the portfolio, but probably in general as a general rule, where we're looking to balance the portfolio and had a little bit more leaning in towards where things are going to be growing over the next couple of decades, if we get the right opportunity.
Alright, great. Thank you.
Youre welcome.
Our next question comes from Chris Schott with Citigroup. Your line is open.
Hi, Thanks for taking the question.
If I could follow up on retainer is a bit.
Mike you talked about where you are with feedstocks and obviously I appreciate keeping that close to the vest right now, but perhaps viewed another way could you help us out with maybe thinking about the Ci score or a range of Ci scores.
Bandwidth youre looking at fees.
Feasible or realistic for for what's going to be produced.
Out of Martinez.
Maybe if I could tie that into some recent news and some movement. We've had here on sustainable aviation fuel, where it looks like not only has to blenders tax credit higher but it ties in and emissions reduction factor.
Is that also sort of on the table that given where we are and that will be coming on stream, you'll have the SaaS BTC credit as well. So does that how does that change how you think about purpose and we asset.
So for Sean I'll I'll start off and then I'll, let ray give you a little bit more color on SaaS et cetera. So.
The first item is when we sanction this project, we assumed 100% soybean. So we assumed the highest ci and theory worst feed that we could imagine here because over a long period of time.
The market will equilibrate, obviously in the short term we are looking to provide some better opportunity on the feedstock side for for Dickinson and for Martinez.
But as I as I said, we're going to keep that discussion a little close to the best right now while we get through this whole regulatory period as far as Saf. We are open to the opportunity for us, but it comes with some puts and takes and I'll, let ray give you a little bit more color on that.
Sure Mike.
I just wanted to emphasize in the.
The first portion of the Martinez project phases, one two and three Saf isn't in the base scope for what we are engineering and building. However, having said that we believe that Saf will be an opportunity for Martinez and to support that we're currently doing engineering work at Martinez.
As far as what the Capex would be to add that to the portfolio.
I think everybody knows that SaaS economics will compete with renewable diesel.
We believe that the economic drivers for Saf are not there right now, but they will they will be there eventually is regulatory and product demand.
Support builds for this and so that's why we're evaluating at Martinez, but I just want to emphasize and near term. Our next two year focus at Martinez, we're not building for SaaS, but thats.
Definitely a future future enhancement to the plant.
Thanks, that's very helpful and my second question just to touch back in I think Mike Marianne you both talked about this in answering previous questions on this call, but I just wanted to take a.
Different tack on this on the capital allocation framework growth potential for one you are making great progress on the debt buyback is 25% through on the speedway proceeds now.
I guess and I know I've asked this before and others have too.
Eventually could we expect that there should be a framework.
Return to shareholders out of organic cash flows and in terms of timing of when that might get announced what do you need to see to be able to.
To give us a bit better.
Mission on that day.
I mean.
Is it something that.
You need to be maybe midway through the speedway.
Speedway proceeds buyback and with a good view into 2022, right now or would you look to maybe get through the $10 billion first and then it becomes more of sort of a 2023 or further out question.
I know, it's a bit specifically if you can help us think about you know.
Gauging our expectations on that I think that'd be helpful. Thanks.
Yes.
Sure. Thanks for the question. So maybe just a couple of things.
It just stayed here you're right, 25% of that share repurchase as we as we shared of that $10 billion well on our way to complete no later than the end of 2022 and hopefully as you've heard in terms of the debt reduction consistent with what we've been sharing with you in certain lease short term in nature I think.
What we've been discussing and what we've tried to share with you is we'd like to see more progress around our $10 billion share repurchase completed before we begin to provide a little more structural content on how we think about the remaining use of that cash so we'd want to get a little bit farther along in.
That in that 10 billion before we give you any more specifics around that I'll pass it back to Mike and I think he wants to add a little more color for you.
No I think Marianne just said it very well we were just trying not to get ahead of ourselves in the program Manav asked earlier or are we looking at some opportunities that maybe are inorganic we continue to look at that we definitely have excess cash to the to the point that was opening.
In the call.
Margins recover we hope to be continuing to generate more cash through our business. So we're just trying not to get in front of ourselves. We know we have cash beyond the commitment. We've made today, we know theres going to be opportunities and I understand your question, but we just don't want to get too ahead of ourselves because we're in a good spot and we have some time.
Here to continue to execute the program and as we move along we'll disclose more and more obviously, we want to grow earnings. So we're looking for opportunities.
I keep saying, it's a return of and a return on capital business.
We want to balance those we're very committed to the return of as you've seen us executing now we'd like to see some more opportunities and return on as we continue to look for opportunities to grow earnings. So it's just that balance as we move forward and just not trying to get ahead of ourselves while we have the time to execute.
Makes sense. Thank you both for the time.
Youre welcome.