Q1 2022 Marathon Petroleum Corp Earnings Call
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Please note that this conference is being recorded and I would now like to turn the call over to Kristina Kazarian Kristina you may begin.
Welcome to Marathon Petroleum Corporation's first quarter 2022 earnings conference call. The slides that accompany this call can be found on our website at marathon petroleum Dot com under the Investor tab.
Joining me on the call today are Mike Hennigan, CEO , Maryann Mannen CFO and other members of the executive team. We invite you to read the Safe Harbor statements on slide two we will be making forward looking statements today actual results may differ and factors that could cause actual results to differ are included there as well as in our SEC filings.
With that I'll turn the call over to Mike. Thanks, Thanks Kristina.
Before we get into our results for the quarter. We wanted to provide a brief update on the macro environment.
Year over year demand trends have been have been for the most part positive and the market seems to have reached a post COVID-19 point of stability.
Distillate remains stable jet continues to recover and gasoline has been more resilient than we would've expected given normal seasonality and recent geopolitical events.
The biggest factor outside of our control as changes in global supply and demand.
At the end of 2021 global light product inventories were already tight sanction.
Sanctions and boycotts following the Russian invasion of Ukraine have increased supply uncertainties.
Product margins have risen to cover the higher cost structure of marginal supply, particularly in European regions, where theres a high reliance on Russian natural gas.
We expect continued volatility in 2022 with an advantage for safe reliable and low cost operators.
We are focused on optimizing our maintenance schedules to maximize uptime and are willing to do what we can to produce volumes to meet the market demand.
As we do this we remain steadfast in our commitment to safely operate our assets protect the health and safety of our employees and support the communities in which we operate.
With this in mind, we anticipate U S refining system running at higher utilization rates in the coming quarters to meet rising demand.
Mpc's first quarter results reflect the continued recovery for our products and services, which supported higher margins and higher throughput across all regions. We.
We delivered adjusted EBITDA of $2 $6 billion.
We repurchased $2 $8 billion in shares in the quarter and since our last earnings call, we have repurchased $2 5 billion of shares.
Through today, we've completed 80% of our initial $10 billion capital return commitment.
I would also like to highlight the strength of MPLX and our portfolio.
Last year, MPC received $2 $2 billion of distributions from MPLX.
As MPLX continues to generate free cash flow. We believe it will have the capacity to return significant cash to MPC and its public unitholders.
Another milestone in our sustainability objectives was the joint venture agreement with next day for the Martinez renewable fuels project.
This strategic partnership with nest stay enhances our Martinez project by leveraging our complementary strengths and expertise.
The project will utilize existing process infrastructure diverse inbound and outbound logistics and is optimally located to support California's L. CFS goals, while strengthening mpc's footprint and renewable fuels.
Our partnership with Nasty also creates a platform for additional collaboration within renewables.
We believe there will be opportunities to leverage this partnership between two industry leaders as we pursue our shared commitment to the energy evolution and the goal of leading and sustainable energy.
N P C well managed project execution and operate the facility once construction is complete.
Additionally, MPLX logistics assets support Martinez will remain owned and operated by MPLX.
We are progressing through the permit.
Assess contra Costa County certified the environmental impact report for Martinez project, and we're hopeful that the county will shortly provide final approval.
We remain excited about the prospects of the project and its ability to deliver low carbon intensity fuels to support California's climate goals.
Shifting to slide five we focus on challenging ourselves to lead in sustainable energy and.
In February we became the first among our peers to establish a 2030 target to reduce absolute scope three greenhouse gas emissions by 15% below 2019 levels.
The new scope III target further enhances mpc's disclosures in addition to our existing scope, one and two reduction targets.
MPLX also established a new 2030 targets to reduce methane emissions intensity.
Natural gas gathering and processing operations by 75% below 2016 levels.
In the second quarter, we will publish our annual sustainability and perspectives on climate related scenarios reports and provide updates on the progress on the goals. We have previously said.
At this point I'd like to turn the call over to Mary Anne to review the first quarter results.
Thanks, Mike.
Slide six provides a summary of our first quarter financial results.
This morning, we reported earnings per share of $1 49 <unk>.
Adjusted EBITDA was $2 $6 billion for the quarter and cash flow from operations, excluding favorable working capital changes was $1 $9 billion, which is roughly in line with the prior quarter.
During the quarter, we returned $330 million to shareholders through dividend payments and repurchased approximately $2 $8 billion in shares which takes us to $2 $5 billion repurchased since our last earnings call.
Slide seven shows the reconciliation between net income and adjusted EBITDA as well as the sequential change in adjusted EBITDA from fourth quarter 2021 to the first quarter of 2022.
Adjusted EBITDA was lower sequentially, driven primarily by a $175 million decrease from refining and marketing the.
The tax rate for the quarter was 19%, which reflects the benefit from the public portion of MPLX net income, which is not taxable to MPC.
Moving to our segment results slide eight provides an overview of our refining and marketing segment. The business reported strong first quarter earnings with adjusted EBITDA of approximately $1 $4 billion.
Utilization was 91% for the quarter. The sequential decline was driven by lower production, which was primarily the result of unplanned downtime in the U S Gulf Coast, where we experienced two unplanned outages in.
In the beginning of February the Galveston Bay refinery experienced a citywide power loss, which resulted in a complete plant outage later in the month as we were bringing our Gary they'll refinery back to service following turnaround activities a fire occurred near a hydrocracker unit.
The unit was repaired and returned to service after about three weeks.
Both of these events resulted in approximately $200 million of lost profit opportunity.
Margin headwinds in the quarter were a result of the lower capture rate of 80%, 84% that we experienced this quarter and were primarily realized in the Gulf and West coast.
Operating expenses were lower in the first quarter, primarily due to lower planned project expense as well as a lower average natural gas price, coupled with lower energy consumption compared to the fourth quarter.
Natural gas prices strengthened during the quarter, averaging over 70 cents an M btu higher in March than in January and.
In April natural gas prices averaged $6 70, and M. N V to you or nearly 80% higher than the average price in 2021.
The current forward strip for Henry hub is around $8 for the rest of the year. So we would expect to natural gas to be a headwind as the year progresses.
Natural gas is an input cost for our refineries, which historically has represented approximately 15% of our operating cost our natural gas sensitivity is approximately $330 million of EBITDA for every $1 change per M. N V to you.
This equates to a sensitivity of approximately <unk> 30 per barrel of costs.
Distribution costs were lower in the first quarter due to lower product volumes.
Turning to slide nine we want to directly address the refining and marketing capture this quarter in.
In the first quarter. Our capture result was 84% a few factors drove the majority of the headwinds.
Secondary in light product margin impact.
Impacts associated with inventory builds and associated derivatives used to manage volatility and to a lesser extent Gulf coast refinery outages impacted our yields.
Slide 10 shows the change in our midstream EBITDA versus the fourth quarter of 2021, our midstream segment continues to demonstrate earnings resiliency and stability.
With consistent results from the previous quarter.
Slide 11 presents the elements of change in our consolidated cash position for the quarter.
Operating cash flow was approximately $1 $9 billion in the quarter, which excludes changes in working capital.
Working capital was an approximate $600 million source of cash this quarter, driven primarily by increases in crude oil prices, partially offset by increases in crude and product inventory.
In March MPLX issued $1 $5 billion worth of long term debt utilizing a large portion of the proceeds to repay the borrowings under the intercompany loan with MPC.
During the quarter MPC returned $330 million to shareholders through our dividend and repurchased approximately $2 $8 billion worth of shares.
Now, 80% complete with our initial $10 billion capital return commitment, we could begin using the $5 billion incremental authorization starting in the second quarter.
At the end of the quarter N P. C had approximately $10 $6 billion in cash and short term investments.
Last week, we held our annual general meeting, which concluded a proxy season. We appreciate the engagement from our investors as we work to create shareholder value.
Focus on sustainability and position ourselves to deliver results in an energy diverse future.
Turning to guidance on slide 12, we provide our second quarter outlook.
We expect total throughput volumes of roughly $2 9 million barrels per day.
Representing 95% utilization.
Planned turnaround costs are projected to be approximately $155 million in the second quarter expected.
Activity is relatively light and spread through all three regions.
Mike mentioned, our optimized turnaround schedule in the second quarter is expected to allow us to run our assets safely and reliably at high utilization as we remain focused on supplying the products and services services markets are demanding.
Total operating costs are projected to be $5 50 per barrel for the quarter.
Earlier in the call we shared our natural gas sensitivity. The increase we are currently seeing for natural gas costs are reflected in our second quarter guidance on top of our average baseline $5 per barrel of operating cost.
Distribution costs are expected to be approximately $1 $3 billion for the quarter corporate costs are expected to be $170 million.
As we look at the impact of inflation on full year results for two areas of focus are wages and certain supply chain inputs. However, we have identified incremental sustainable cost reductions that we're executing against to offset these cost notwithstanding all of that we will continue to identify the headwind from rising energy costs to our refining system throughout the year.
Slide 13 provides our capital investment plan for 2022 once we have closed on the Martinez JV MPC will receive $400 million and be reimbursed for 50% of the capital spent to date. After the JV has closed MPC will be responsible for its 50% share of the capital spend goes.
Forward and that they will be responsible for its 50% share. The total cost for the Martinez refinery conversion is still expected to be $1 $2 billion in mpc's net cost will be reduced to approximately $200 million.
We will provide a more detailed update once we have closed the JV.
As a reminder, ongoing growth projects in our refining and marketing segment will enhance the capability of our refining assets, particularly in the Gulf Coast and also support our focus on growing the value recognized from our marathon and Arco marketing brands.
With that let me turn the call back over to Christina.
Thanks Marianne.
As we open the call for your questions as a courtesy to all participants we ask that you limit yourself to one question and one follow up if time permits we will re prompt for additional questions.
Operator, we will now open the call.
Thank you Hello, 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 it up the handset first before pressing the button is and once again, if you have a question.
<unk> Please press star one.
Our first question today is from Neil Mehta from Goldman Sachs.
Good morning, good morning team.
The first question is around utilization the <unk> guide at around 95% is very good.
And so I was just curious if you've made any adjustments to the system and then how are you just thinking about.
Optimizing whether it's maintenance so or your runs to make sure that you capture the strong current spot commodity environment.
It's a good question Neil do you want to take that sure. Thanks for the question Neil.
As we've said before our 2022 turnaround plan was back end loaded. So you shouldn't look at the first two quarters of the year and extrapolate this spend for later quarters.
But with current demands we are really seeking to maximize our refining system as indicated by the second quarter guidance.
What this really means is that we've looked at some fixed bed catalyst changes that we had planned for the second quarter. We determine we have a little bit left as far as catalysts activity. So we've deferred that out later later in the year. So our plan right. Now is to is to run really really poorly run really hard.
Turning gasoline season this year.
Very clear then.
It's amazing how far we've come in in a year and a half isn't it Mike.
And I look at your dividend yield now which is call it two 5%.
And by virtue of the stock having done well.
Compressed to something well below the <unk>, how do you think about when it makes sense to have the conversation about raising the fixed dividend again, and do you think and recognizing it as a.
It's at the discretion of support.
Yeah. Thanks, Neil it's another good question and we talk about it a lot I'll, let I'll, let Mary comment on it.
Thanks, Yeah. So hopefully you saw as we shared our capital allocation framework, we remain very committed to the dividend as Mike just mentioned to you it's getting a tremendous amount of attention from the management team. It's on our conversations regularly with our board.
We recognize where the yield is and certainly you know as we look at the strength, particularly in the back half of the year.
We'll expect to come back to you here in the very near future with our plans, particularly as we are getting through our.
The first round of share repurchase so you should expect us to be back to you here shortly on that.
Thank you. Our next question is from Doug Leggate from Bank of America.
Good morning, everyone.
So I don't know if this is for a minute.
Mirror or for re.
But I think it's really a question around momentum coming into the second quarter. You guys had a lot of downtime as you pointed out so I'm trying to get a feel for what the underlying trend.
Trends has been.
In this environment and I guess, specifically for those you are continuing to maximize distillate in your system or whether you are given the current relative spreads.
Are you willing hard pivot more towards gasoline this summer.
Sure Doug Let me, let me take your question as far as distillate production.
The answer is absolutely, yes that we're working right now to maximize.
Distillate production across our system.
To give you a little more color on that that's something that that we look at daily make sure that we're maximizing.
Total recoverable distillate.
The endpoint and maximizing the front end of the distillate and then the real thing is just looking at are just a lot of hydro treaters across the system are full and so and so we're doing that across our system.
<unk> on the toolkit from refinery to refinery.
Far as what that percentage is Gary but it would be the highest since it has a hydrocracker and three a.
That's all hydro treaters, but whether we have one default hydro treater three we're working to maximize across the system.
So sorry, if I wasn't clear so maybe on what others think about Marion what it was really trying to get a handle on was if you could quantify in some way the lost opportunity costs from the first quarter in both our momentum looks like as you go into the second quarter, but the system back up.
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Yes, certain certain windows, so from both the Galveston Bay unplanned outage due to the power.
Issue and then again you know as we talked about Gary Bill. We've said, it's roughly about 200 million in lost profit opportunity right. So you know that we would have shared with you through the market indicator I think the other issue there with both of those refineries being down is the fact that you know as you heard ray talk about our ability to maximize.
We lost the opportunity to increase yield there.
Obviously as they come back online and <unk> and have that in the second quarter given the momentum assuming the macro holds as we expect it will and cracks will be able to recover that in the second quarter also.
Thank you my follow up is actually also a Gulf coast question folks if you don't mind I'm going to try and.
Explain what I'm looking for here it seems that colonial has been under allocated.
Thus the tightness in the northeast on it doesn't from what we can tell it doesn't seem that that's going to change much given the coal and exports for distillate. So I'm curious if you could share how youre running your system as it relates to potential Cornell allocations versus colon exports because it seems to us the northeast is going to mean currently.
Sure.
Brian you want to take that one.
Yes, sure Mike Yes, so great question question, Doug So, yes, we definitely see the same dynamic that youre seeing.
One of the factors that we look at and shipping barrels all the way up to New York Harbor as the market structure as well. So we've had a really really strong run up here in the prompt on the front end of the cycle. So that's that's kind of the bid ask dynamic ongoing right now with buyers and sellers is the sustainability of that.
Certainly is starting to feel a lot more sticky as we look at imports coming into New York Harbor, starting to back off but in the Gulf Coast. We also have really good placement opportunities not only in our book, but just across the overall complex season, there's more barrels being demanded in central and South America. So I would categorize it Doug is we're in a very.
Very acute pinch.
Pinch point here in the short term over those market dynamics, but I think you're reading the tea leaves right. As you look forward and think about less Russian exports and European complex starting to refined the way to rebalance The New York Harbor market is one that we expect to be impacted more so than other markets and as you think about the connectivity.
Via pipe from the Gulf Coast, we do look at that as a forward opportunity more structural and longer term.
Okay. Thanks I appreciate it.
Okay.
Thank you. Our next question is from Roger read from Wells Fargo.
Yes, Thank you and good morning.
Roger just firstmerit I'd like to come back to your comment about potentially hitting into the next tranche of the share repurchase during Q2.
Full disclosure, we've been modeling a little bit of a moderation in share buybacks. It doesn't sound like there's any reason for us to actually go forward with that so I was just curious.
How are you thinking about the.
The cash flow coming in in the process of transitioning that into the share repo.
Yeah. Thanks, Thanks for the question Roger.
You are correct Dino as I shared on the in my prepared remarks, if you look at the pace that we've been buying back we would expect in the second quarter that we would begin to use that $5 billion authorization.
In less than 12 months, we started our program in May of 2021, we've repurchased 80% or roughly $8 billion of our initial $10 billion commitment you know if we look at that result through the end of the third quarter excuse me the end of the first quarter. So at the end of $3 31, we repurchased about 113.
<unk> shares at an average price of just less than $67 a share.
We use part of our process, we use a mechanism that allows us to buy back through blackout periods.
And during our quarterly buybacks there was things that we will evaluate market conditions everyday average daily trading volumes to be at to be exact. So we don't think anything that you know you may be seeing in this quarter is indicative of a lack of commitment here bite by any means and certainly you look at the cash flows for the last several quarters strong and you look at the <unk>.
Cash balance that I shared with you about $10 6 billion. So hopefully that addresses your question.
Yes, it does and it helps thank you.
I'm going to ask.
Kind of the opposite end of the Gulf Coast question on exports.
West Coast, obviously cracks and pretty exceptional there arent a lot of places.
That we typically see product show up on the West coast from except for Gulf Coast and occasionally some some shipments from Europe I was curious as you look across the Pacific is there anything youre seeing there we've got lockdowns in some of those countries. So presumably some some excess supply.
But is there any of that change to be coming across specific or any signs that any of that wants to try to come across given they are.
Brian do you want to take that.
Yes sure Mike.
Yes, so Roger in the problem.
No not really we're not seeing any fundamental shifts on the west coast to the Pacific Basin. We of course continue to watch very closely at the Lockdowns happening over in Asia.
But they seem to be moving through a bit quicker than expected I mean, we've all learned to deal with COVID-19, a little bit differently than we did two years ago. So we're not seeing anything in the problem, but I might maybe just back up and give you. Some perspective on exports more broadly I think it might be helpful, especially on the front end of that.
Diesel strength, we see across the margin I mean, one of the key drivers, obviously is recovery and jet demand.
We're seeing that domestically and also around the world. The other thing that doesn't get a lot of discussion in the prompt as you'll recall back in 2020, we were moving into <unk> and different marine fueling that did take place. So there is a new call on demand on the distillate pool from Mgo that we believe is also.
Pulling on the distillate pool.
But from an overall perspective as we look at our export program predominantly on the Gulf Coast. We do have some limited exports out of the West coast.
We exited the first quarter, we were about 200000 barrels a day of exports from the Gulf Coast, primarily into Latin and South America.
But we did move barrels into Europe , and we see that as an increasing opportunity for us going forward and as we look at the forward book here into <unk>, We're moving from a 200000 barrel a day ish program to more than the $2 50 to 300000 barrels a day. So we are seeing continued strength and opportunity there.
We certainly have the dock capacity to be able to manage that increase.
And we're looking forward to that optimization as we roll into <unk> and beyond.
Okay.
I appreciate it thank you.
Thank you. Our next question is from Manav Gupta from credit Suisse.
Good morning, guys and great to hear from you Mike My question here is.
You did not need a partner.
Martinez facility.
You, obviously have a lot of cash so, but you did seek a partner and help us understand.
Why you picked nasty.
Why do you think that Youre right partner and how does this TV develop forward with nasty.
Yes, Manav, it's Mike. Thanks, Thanks for the comment when we started this project out we were very open that there were four parameters that we felt would make a very strong project.
<unk> Capex competitive Opex strong logistics, and then ultimately feedstocks and for a while there we had disclosed where it stood on capex and Opex and logistics, but we had not reached conclusion with net state. So part of part of our thinking all along has been over the long term.
Not just in the short term that we believe that the partnership.
US will hit both of our strengths they bring a lot to the table with respect to feedstocks, obviously, we're in that market as well, but we think there is a synergistic effect from from their participation and then at the same time as you.
Think about it going forward, we feel really good about capital discipline being a important part of our portfolio and having them come in at the numbers that we've already publicly disclosed what it was a real good win for us and a real good wind for next day as well so.
We're excited about it Manav I will tell you that we're talking about a lot of other stuff together I think that the two parties together can create more value together and we're going to continue to try and see if we can do that.
Perfect. My quick follow up here is you guys mentioned some of the reasons Gulf Coast was a little weaker.
Mid con assets are very strong and that capture was also slightly weaker help us understand what happened during the quarter and what I'm really trying to get to is if you look at the cracks and we look at your historical capture rates and we go back to that into Q you could have a massive <unk> mid con earnings so help us understand some of the reasons.
<unk> <unk> was a little weaker on capture in mid Con region. Thank you so much.
None of its merit, it's Marianne so maybe just sort of overall when we think about the capture and then I'll come back to mid Con just in general a couple of elements that really impacted our quarter and that largely our light product and secondary product margins.
<unk> narrowed during the quarter. That's typical as you know in a rising price environment and then obviously secondary product margins you know certainly in this price environment as well. We also have some inventory build in the quarter and then of course, you know we use certain derivatives that.
To manage that price volatility.
So there are a few things really are that that that impacted the quarter mid con was a bit stronger than it was in the first quarter.
They then excuse in the second quarter.
But that's really a key driver as we look at the the capture rate overall for the quarter.
Yeah.
Manav, it's Mike I'm, just going to add everybody puts a lot of emphasis on capturing and everybody knows I'm not the biggest fan of that metric for a lot of the reasons that you start to see the volatility that happens in the quarter can bounce around a little bit.
And often we're asked the question should we plan on about a 100% capture.
One of the things I think people should keep in mind is we're in a different environment than.
Well I'll call normal.
If crude was $70 or so somewhere in that range.
The impact of secondary products would be a lot different than if crude is at a $100 or $110 et cetera. So I think you've got to keep that in mind. When you look at that particular metric those those factors come into play.
Ryan mentioned earlier backwardation.
To Doug's question on the <unk>.
O'neal pipeline.
We're seeing some very unusual times where were.
At the start of the gasoline season, yet we're seeing extreme.
Volatility with distillate cracks, where they are backwardation, where it is on the distillate side of the equation. So all those things come into play and hit that metric so I'm always leery.
Bounces to one number but theres a lot of inputs that come in and outs to make that number what it is.
Okay.
Thank you. Our next question is from Prashant Rao from Citigroup.
Hi, Thanks for taking the question My first one I wanted to ask on the crude side given all the shifts going on and as Russian product moved out of the market I was curious.
About how the changes in feedstock availability might affect product yields and I'm asking that question really in the context of previous questions have been asked already on this call about capturing strong additional correct, but also when you think going forward gasoline demand picking up into the summer driving season, and how you balance.
Max distillate versus Max gasoline production the impact that any feedstock availability changes could have on that and maybe how that plays out.
Through the rest of the year, if you kind of play the tape forward.
Rick do you want to start with the crude outlook.
Sure Mike Yeah Prashant.
An excellent question Theres, a lot of moving parts in the world right now, especially around feedstocks from our perspective, though when you look at our pad two are pad three and pad five presence and the avails that we have at our fingertips, we uniquely have not seen that big of a shift in there.
The avails that would directly affect yields, meaning we're able to get whatever Brian partee and the marketing team are ordering up.
<unk> that is one and two other items probably to call out related to feedstocks for Sean is as you know we are a small we were small buyer of Russian crudes and unlike some of our peers.
We feel that as a competitive advantage, especially in this environment, so with our small presence in and that Russian crude category. We have seen very very little impact and then lastly.
Just to call out to the SPR release, because that is incremental to the feedstock market.
A couple of things on that front, we applaud the U S government and proactive and for really taking quick action in a meaningful way for a prolonged period of time.
We believe that will help not only the U S consumer, but also buyers of feedstock and Mpc's stand too.
Stand to be in a good position from the releases as we have two of our largest assets in Gary <unk> really at the bag in the backyard.
The SPR caverns. So hope that gives you some color on the feedstocks front I'll toss it over to Brian for any comments on yields and products.
Thanks, Rich yeah. So just a couple of comments as we think about the gas and distillate dynamic playing out currently.
Obviously in extreme levels at the end of the day. This is very much a normal operations environment for us as we think about value chain optimization, so whether theres, a penny or a dollar differential between gas distillate jet any of the other corn products, we're constantly optimizing across our plan as we look out forward as we look within the month within that.
Weak within the day.
Ultimately we are running the system to meet the demands of the market clearly in this environment. The market is sending us a really strong signal for more distillate Ray mentioned earlier about our.
Hydro treaters running them and Max mode.
To capture the current market structure, we do expect to see a seasonal call on demand as we look forward to the summer driving season as we would typically expect it's not really present in the market now if you look at the market structure. Because we are so strong here in the prompt on distillate that we do expect that to manifest here as we roll into the summer months, but we're constantly.
Optimizing and I just wanted to make that point clear.
It's very normal for our teams to be doing what theyre doing to optimize to meet the market demands.
Excellent. Thank you both for that.
Thorough answer.
A quick follow up.
Probably for Maryann on working cap.
Overall positive in the quarter it was pretty volatile and I think most of us assumed inventories would be a bit of a headwind as you've called out I was just wondering if you could give some color on how the components within that total working cap.
Bridge shook out and R&M, specifically and then based on sort of your quarter to date and current expectations. It would it be reasonable to expect working capital R&M to start to or the overall working capital continued to be a tailwind as we go forward.
Yeah, John Maryann. Thanks for the question. So as you said working capital in the quarter clearly was a source of cash, particularly as we saw crude prices rising we typically say that each dollar move in the oil price is about a $55 million.
The impact to our working capital right. So.
In a rising price environment, you already stated it we did have some inventory impacts we would expect that not to be repeating in the second quarter, when I say inventory impacts our inventory build you know one of the other implications as we see prices rising quickly sometimes it has implications on the receivables because it's not.
Moving as fast as the payable but in general it's about a net 20 days payable position so as long as prices stay where they are we would continue to see working capital in the second quarter as the tailwind obviously it would reverse as pricing would change.
Okay.
Thank you. Our next question is from Phil Gresh from Jpmorgan.
Yes, hi, good morning.
Wanted to ask one follow up on the buybacks.
A slightly different way.
The first 10 billion had a big component of Speedway proceeds associated with it and you've obviously extended it now to the $15 billion.
In the second quarter run rate continues to be at a very high level.
And I'm, just thinking as we move forward and we lap the speedway.
Mostly it's a component of this is there a way you are looking at the more normalized level of return of capital or some kind of framework percent of cash flow or management to some kind of minimum cash balance. Obviously, you still have a lot of cash in the balance sheet. So I'm just trying to think through the moving pieces there.
Yeah.
It's maryann.
You're right, we've got a $15 billion authorization in total right. So about $7 5 billion remaining we stay very focused on that commitment as you know we shared with you 10 billion. No later than the end of this year, but based on this pace I shared right we should be complete.
With that here in the second quarter and working through our $5 billion.
Secondary or second repurchase authorization with respect to our plans going forward. We're certainly looking at a series of things that we would share with you. How we would think about in a more normalized balance sheet as we get to that position post right using the proceeds from the speedway sale.
As you know cash is fungible and we certainly think about it in that way, but we are looking at a series of things as we talk about our capital allocation.
We would expect to come back to you with how we would allocate cash between share repurchase dividend, obviously, our growth capital allowance along our lines of our capital allocation framework shared with you previously.
Okay. So it's Mike I, just wanted to add that.
Said, many many times that this business is predominantly a return of capital business and a return on capital business.
And.
It's up to us to look at the opportunities that we have from a capital standpoint, I hope the market realizes that we're going to stay very disciplined looking for solid returns, but we do want to grow earnings but at the same time, we feel strongly that return of capital is a major component of what we're trying to accomplish here.
Sure is there a minimum cash balance Marianne at these types of oil price levels Youre thinking about has there been any adjustment to that thinking.
Yeah, We I think we shared previously about $1 billion is where we feel comfortable we've looked at a lot of scenario planning we had a lot of experience as we looked at sort of some of the toughest volatility and liquidity periods. During the pandemic you know at one point in time, we had initially talked about potentially.
Holding another billion, but we're comfortable right now that $1 billion should be sufficient for us going forward.
Got it my follow up was just on <unk> fundamentals in particular El CFS prices.
We've continued to see some pressure there.
A lot of moving pieces on the deficits versus the credits, but just any thoughts that you guys have kind of dug into this dynamic.
Yes, Phil this is Brian I'm happy to take that one.
So yes, you're probably looking at Q4 Carb released late last week on the overall bank and certainly in Q4 was a tremendous build almost 1 million credits the banks in a pretty high level on the heels of slower demand in Q4 versus Q3 out in the West coast. So overall demand was off about 6%.
R&D production and imports was up about 9%. So the total pool right now out on the West Coast, you know looking at about 8% via 30% R&D.
And then the last factor driving the dynamics in the prompt and certainly the electric credit generation, which was up about 5% quarter on quarter.
Now all that being said.
Do have new programs coming into the market in Oregon, and Washington in Canada.
We expect these to exert counter pressure over time.
It will be a different placement option and alternative versus California, but that being said carbons very committed to the program and having to work a workable program.
In the very prompt at.
At the end of the day <unk> proportionally one of the smaller value drivers in the overall proposition. If you think about the <unk> value in the BTC and currently for values in the $1 70 to $1 80 range.
Really are helping to underpin the overall economics, it's a bit ironic. If you think about the current environment with eggs and commodities flying up at the same time, we have low <unk> low <unk> pricing.
We're in that operating environment with Dickinson right now and we're quite happy with what we're seeing on the return side out of our production out of Dickinson. So.
It bodes well for the resiliency the through cycle resiliency for R&D over the long term.
I appreciate it thank you.
Hey, Brian .
That was a pretty good recap for Brian .
I'll just add a few points when we look at renewable diesel there is it's a multi variable equation theres really four regulatory drivers and Brian talked about a lot of them along with the flat price for the renewable diesel in the feedstock price.
So we're trying to optimize every day of that concern today to maximize profitability I will say the biggest thing that we've found success in that concern. It will we will take forward to Martinez is the optionality on the feedstock the ability to.
To pivot to the feedstock that makes the most sense for us and.
At that at that concern, we had pre treatment capabilities offsite that allow us to do that at Martinez. That's part of the base Capex for that plan. So you're right right now F. L. CFS pressure on that but theres a lot of things that are within our control that will work to optimize.
Thank you.
Thank you. Our next question is from Paul Cheng from Scotiabank.
Hi, good morning, everyone.
First I wish you a split in full recovery after treatment.
And also Maryann I just wanted to make a request if possible some of your larger Hudson's My Exxon Chevron they stopped disclosing.
The timing.
On the.
The timing benefit of all of that timing rolls, we need to move inventory in our presentation.
I'll touch when these.
This quarter, so I think you'll.
Oh, George Best I would be grateful if that's something that you guys will come to see that.
Paul I apologize your line is cutting in and out a little bit press here. Unfortunately, we weren't able to hear that I did hear you say something that said investors would like to see something in our financials. So maybe we could take that one offline and then if you send us a note, but just so you know just go a little slower because your line is cutting in and out with your question.
Can you hear me Okay now.
Yes, that's better Paul.
Okay.
So that not only just we picked my request it sounds <unk>.
Some of your larger custom Exxon Shire phone.
They've been disclosing the timing impact from.
The red tape and inventory their personal needs.
And I. Thank you all of you investors will appreciate that you guys can see that pull winding those information.
And in terms of again look I'm, sorry, and I apologize. Please finish your question sorry.
So now that.
My question yet.
The two for one.
When we some of your one of your competitor set.
The poor market and yet that was patient.
That would also impact the margin capture or the ability to realize.
The pricing on the product screen.
So just wanted to see that.
How would that impact in your system. When we are seeing in a better.
That rotation.
And also that some of your competitors seems like they all have very large.
Inventory or they've moved kip timing losses in the quarter.
So maryann you also mentioned that you have some of them can you quantify yet thank you.
Paul It's Mike first of all thank you for your comment.
It's a multi part question, so I'm going to start and I'll, let Brian talk a little bit about structure I'm.
Im going to repeat a little bit of what I said earlier, I know everybody likes that metric of capture and.
It wasn't for Christina I, probably would not be a van and putting it out there, but she keeps saying how important it is for everybody to see that metric, but there's so many things that play into that and one that doesn't normally occur to the extent that it's occurring now as the structure and the foundation that we've seen I mean, if you look at the screen right now on distillate since we've talked a lot.
This slid a month once a month to backwardation is pretty strong, especially for this time of year, we would never normally think along those lines. So so that comes into into play as we're moving products and I'll, let Brian talk a little bit about it he mentioned it earlier as far as prompt barrel versus something that's got a travel on colonial.
And then <unk> mentioned earlier too is as flat price gets higher and higher you end up with this phenomenon, where secondary products don't keep pace with flat price of crude and you end up with the impact there as well so there's a lot of things hitting and then this quarter, particularly.
Doug mentioned earlier.
Pretty volatile quarter January versus February versus March.
Pretty sizable and volatility as to what we're seeing in the market. So anyway, Let me, let me, let Brian make a comment towards structure. If you want to add there Brian .
Yes, Thanks, Mike happy to jump in.
There's two key elements of the way I think about market structure.
Paul to your question, So first and Mike alluded to this is really in a rising price environment, which is a phenomenon that we largely saw in the first quarter. So in a rising price environment, we do see compression, we often call. It out obviously in the secondary products, but it's also prevalent in the primary so the.
The racks effectively do not move up as efficient in a very short period of time now they catch up over time, and then you do enjoy the benefit on the back end of that as prices come off don't go slower. So that's one dynamic timing element specific to backwardation, though with the pronounced backwardation in the marketplace here today.
The way I think about it it's effectively transit time, so from the outside looking in you look at a market price point today, and I think the way most people run their models as they assume a ratable type of operation and Thats, just not how our system or anybody else's system works. There is transit times and moving barrels to market, whether theyre going on a trucker.
Pipe or rail it really doesn't matter and in a backward market if youre looking at a ratable program at two bucks today and the market's fallen off 50 by the time you get into the market. Your actual realization is going to be less so in that environment.
Signal is to sell in the prompt and to not sell out on the curve.
That's really the phenomenon thats been playing out in the marketplace today, particularly on distillate and if theres been steep backwardation in a big call to sell more in the prompt.
Thank you. Thank you.
Thank you. Our next question is from Connor Lynagh from Morgan Stanley .
Yes. Thank you.
Obviously sustainability of the current environment is a question that most people are struggling with right now sort of two parts to this question, but I'm going to ask them. Both at once here. So on the first side, there's obviously been significant significant disruptions in crude and product markets from events in Russia, and Ukraine do you feel that.
What's happening, particularly in distillate market is directly a result of that or do you feel that there is a broader issue at play here in either the refinery system inability to raise runs or substantially higher demand than expected, but the second part of that is as we move into the summer months. The expectations are that youll continue to see upward pressure on.
Demand.
Do you guys have any concerns or do you have any sort of framework for thinking about demand destruction.
Okay.
Conor it's Mike I'll start.
First to your point geopolitical events always have an impact on supply and demand in the energy markets and we're seeing it now in the current situation with Russia, and Ukraine, but if you go back in time, a much all geopolitical events tend to have some impact to energy. So that's an ongoing thing the point you made about sustainability.
That's kind of in parallel to what's happening as well. So people are starting to think about how do they.
Physician portfolios as we have and put out their goals and sustainability. We're very proud we think we're leading in that area in certain regards.
And at the same time that we're trying to supply the market because obviously, it's a very tight inventory situation and as Ray mentioned earlier.
We're pushing back some some turnarounds we're trying to maximize production is as best we can in the short term. So I mean at the end of all this counter my words at a team all the time is let's worry about what we can control. There's a lot of things out there that we don't control and we stay attuned to them, but we try and bring it back to what we do control and in the shore.
Term, what we do control is trying to maximize production.
The marketplace and Thats, what ray and the team are trying to do.
And then just on the second part of that there are any risks to the demand destruction are you guys seeing any evidence of that based on your interaction with customers or anything like that or is there a price at which you think.
Certain areas of the economy can't tolerate the product pricing.
Yeah, Brian do you want to take that.
Yes sure Mike.
Maybe a couple of comments to build upon what Mike just stated.
There is some fundamental support and premium in the marketplace right now.
There was also a degree of uncertainty premium based on what's going on over in the Ukraine. So.
Wanted to.
That point is there is two things that are I think moving the market. One is just the pure fundamentals and I'll get into that in a minute, but there is an uncertainty premium right now that's penetrating the market.
From an overall macro perspective, though the outlook is this we've got really four positive working for US tailwind, we've got the demand recovery upside coming out of Covid predominantly on gas and jet.
We've got very low inventory position, both in the U S and around the globe.
And then we also have delayed turnaround and major maintenance on a lot of the refining system, both domestically and internationally that too will pressure utilization over the cycle here.
And then also if you think about some of the closures that we've had during COVID-19 that also is providing fundamental support to this current market dynamic.
Now on the other side of that Theres, three I'll call them uncertainties.
No.
New additions to refining capacity as an example, I think with supply chain disruptions labor disruption the disruption economically during COVID-19. There is a little bit more uncertainty on New addition, refining capacity coming into the marketplace I mentioned, the Russia, Ukraine situation.
But that's likely to pull some supply away from the market more so than the other.
And then the last thing Thats a bit of uncertainty and maybe specifically to your question is the global economic outlook, and certainly whether it's fuel pricing or.
Any goods and services, we've had very broad inflation and that's something that we're keeping a watchful eye on and watching the demand dynamics, but all that being said.
We think there is right now is quite balanced between the headwinds and tailwind and it's really difficult to tell which way the market is going to break but at this 10 seconds. It feels like we're pretty balanced and more optimistic than not as we look forward to the next corner and beyond on overall demand.
Thank you. Our next question is from Theresa Chen from Barclays.
Hi, there thanks for taking my questions. Firstly I wanted to revisit the discussion on regional balances product shifting the general tightness has had a fun and.
I believe years ago, you had underwritten some pipeline expansions to move product from the mid Con shoe Pat one from that eastern Ohio market and eastward and at the time I believe it was a seasonal movement and I was just wondering given the structural tightness that we're seeing in pipeline going forward or is there ability to.
Additional capacity along that quarter or to potentially see additional tailwind for mid con capture.
Trying to take a stab at that.
Yes, yes happy to Mike Yeah, Theresa that to answer your question.
Theres been a number of pipeline in that quarter that traditionally flowed out of the New York Harbor into the mid con that have since been reversed.
And there's been some incremental capacity added here in the last year that also is helping to facilitate that move and ourselves as well as the broader market are definitely taking advantage of that capacity in the <unk>.
<unk> is effectively wide open in the current market dynamics today to translate barrels into western and Central Pennsylvania.
We also see actually trucking opportunities if you think about our position in eastern Ohio to truck into the pad as far into Western New York as an example for some specialty grades. So yes. The market is working the market sufficient and we are finding more and more opportunities to move that way.
Yes.
Thank you.
And shifting to the Martinez project I just wanted to clarify how the JV agreement works in terms of.
Feedstock procurement will it be done independently between the two partners or together and can you just explain more about this initiative stick aspects of feedstock procurement there.
And also Marianne if you could provide how much capital has been spent out of the 700 budgeted for this year to date.
Okay. So it's Mike on the feedstock question, what we said last time as well.
To provide more color on the dynamics around the feedstock and who does what et cetera, but we want to wait until we get the JV.
JV closed we're hoping that as very shortly as Ray mentioned, we're we're very close on the permitting side assuming that false follows through then we'll get to.
Closed JV and at that time, we will give a little bit more color on when the feedstock dynamics.
Three states, it's Marianne so to answer your second question I think on the.
The allocation of capital and how it has been spent to the $1 2 billion to date.
In 2021, we've spent roughly just under $300 million. That's in 2021, if you look at 2022 in our capital plan, we estimated roughly $700 million in total so again, depending on how all of that project.
It gets outlined for 2022, we would spend roughly half of that so MPC would that have about $350 million of that 700 and next day.
<unk>, obviously at $3 50, and then obviously that would give us about $200 million plus or minus remaining to complete the project in 2023.
Thank you.
Thank you and our next question is from Jason <unk> from Cowen.
Hey, Thanks for taking my questions I wanted to clarify a statement made earlier just about the backwardation impact to your.
Margin.
Diesel backwardation that Youre seeing.
The point there that on a lot of your barrel that youre actually not receiving the diesel price that we see in the prop month, but it's actually the diesel price and the one month ahead and if so kind of what percentage of your product is exposed to that and then my second question.
On the <unk> joint venture.
Mentioned that there's potential opportunities to grow in the future and I wonder if if.
MPC would be open.
So participating in renewable diesel plants or other biofuel endeavors outside of the U S.
Focus is just within the country.
Brian you want to start.
Up.
Yeah sure Jason as a point of clarification on the backwardation.
Dependent on the motive delivery. So it's really about I made the comment on the cycle time or delivery cycle times. So it's it's different depending on each market and export as an example has a very long delivery cycle versus a spot sale and I'll leave it at that won't go into the particulars of the percentage of our book and what Theyre under but it's.
Every mode of delivery is different.
Jason It's Mike I would just add obviously as sellers, we're trying to maximize the prompt and as buyers people are trying to buy down the curve as a general rule. So you have that Ying and Yang going on and like Bryan said every situation is unique but backward market is telling you that you have tight inventories thats ultimately.
<unk> with Backwardation is all about it says that inventories are tight and product availability is tight.
With respect to your second question.
We're not going to speculate out in time with SD, but I will tell you that.
The effort to get to this partnership was long and the team Dave Hepner headed it up inside our shop here and worked with the <unk> group for a long period of time and one of the biggest things that I believe is important as a result of it was the mutual respect each company has.
Each other and common goals that we're setting for each other so I think it is a nice platform for us to continue to look for ways that we can do business together and that was really important for us as we were working through this very similar to when we've entered other partnerships one of the things that's most important to us as well the partnership endure the test of time.
Jv's are difficult in general and you need to be really comfortable at the start of a JV that you feel that you have the right partner in and we feel that way with especially with respect to Martinez.
Alright, thanks for the answers.
Thank you and that is all the time, we have for questions I would now like to turn the call back to the speakers for closing remarks.
Thank you for your interest in marathon today should you have no questions or would you like clarification on topics that were discussed. This morning, please reach out and the team will be available to take your calls thank you for joining us.
Thank you. This does conclude today's conference you may disconnect at this time.