Q3 2022 Marathon Petroleum Corp Earnings Call
[music].
Welcome to the M. P fees third quarter 2022, and each call. My name is Casey you know will be the operator for today's call. At this time all participants are in a listen only mode. Later, we will conduct a question answer session. You May press star one 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.
Sounds great welcome to Marathon Petroleum Corporation's third 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.
Statements on slide two we will be making forward looking statements today actual results may differ and factors that could cause actual results or are included there as well as in our filings with the FCC and with that I'll turn it over to Mike.
Thank you Christina good morning, everyone.
First I'd like to introduce Tim I will be joining our call doesn't know executive Vice president of refining.
And that was over 37 years of experience in leadership roles across our midstream and refining the organization.
Most recently he was executive Vice President of pipelines terminals, and Marine and Chief Commercial officer, where he oversaw the business development for the MLP.
Now turning to the macro environment, roughly 4 million barrels per day of refining capacity that's come offline globally in the last couple of years, yet demand for transportation fuels, we manufacture remains robust and continues to grow and.
In the U S.
And it's still below 2019 pre COVID-19 levels, and we believe there will be a continued recovery.
Supply remains constrained and demand continues to rebound, we maintain a bullish outlook towards the refining environment as we look into 2023.
Our third quarter results reflect the team's operational and commercial execution as we focused on delivering product for consumers in this very tight market.
In our refining segment, we ran near full rates, while maintaining our steadfast commitment to safely operating our assets protect the health and safety of our employees and support the communities in which we operate.
The commercial team focused on optimizing our scale footprint and feedstock slate to deliver against strong demand despite volatility in the global LNG market. So execution reflects progress towards our goal of improving commercial performance.
We normally see seasonal demand client decline at this time of year, but to date, we're not seeing those signs strong forward crack spreads and wide salaries differentials for 2023 indicate the expectation of a strong refining environment going forward.
In the fourth quarter, we're currently running our system at full utilization, except for the planned maintenance activity, we have occurring given our back of the year weighted turnaround schedule.
Aside from the refining business, we want to point out that our midstream segment earnings continue to grow.
Third quarter, our adjusted EBITDA was up nearly 9% year over year in midstream.
We've been executing strategic capital investments.
During our low cost culture, and optimizing the portfolio, including advancing several organic growth projects in the Permian basin.
The strength of these cash flows supports mplx's decision to increase its quarterly distribution by 10%.
Based on this level N P C well received $2 billion of distributions from MPLX annually.
We've received questions regarding the structure of MPLX and whether MPC will acquire the outstanding public units.
Want to restate, what we said in the past.
MPLX is a strategic part of Mpc's portfolio. Its current pace of cash distributions to MPC is $2 billion per year, and we expect that to continue growing.
<unk> has continued to demonstrate resilience through cycle earnings and growing cash flows.
<unk> pursues its growth opportunities, we expect the value of this strategic partnership will continue to be enhanced and we do not plan to rollout to MPLX.
Switching to capital allocation, we believe Mpc's current capital allocation priorities are optimal for our shareholders.
In October we completed our $15 billion return of capital commitment.
We're just seeing approximately 30% of Mpc's shares outstanding were.
We're committed to executing our capital allocation framework to deliver peer leading total return to shareholders.
Today, we announced an increased mpc's quarterly dividend of approximately 30% in.
In addition, we intend to continue repurchases, which we believe are a more efficient way to return capital and we expect to commence buybacks in November using the remaining $5 billion repurchase authorization.
In early 2000, we shared our three strategic areas of focus they have become part of Mpc's DNA embedded in our unwavering commitment to increase profitability at the best through cycle cash flow generation and drive long term value creation.
As we focus on strengthening the competitive position of our assets in September we closed on our Martinez renewable joint venture with NES site construction is well underway and we expect phase one mechanical completion by year end.
We're excited about the partnership with <unk>, a global leader in feedstock procurement and renewable fuels production.
This joint venture enhances the value of the project by reducing Mpc's capital commitments of 55 per gallon as well as improving the overall project feedstock slate.
<unk> has the obligation to bring 80% advantaged feedstock in phase II.
With these improvements we expect mpc's share of the JV EBITDA, the only 25% lower than our original Standalone case.
Additionally, this strategic partnership with <unk> creates a platform for collaboration.
We believe there will be opportunities to leverage the differentiated knowledge and capabilities of two industry leaders as we pursue our shared commitment to the energy evolution.
We continue to challenge ourselves to lead in sustainable energy and have made progress on the sustainability goals that we've set for ourselves.
Focusing specifically on the Martinez renewables project, which converts our petroleum refinery until renewable fuels facility. We anticipate the conversion of resolve in a 60% reduction of the facilities scope, one and scope two <unk> emissions.
70% lower total criteria air pollutants, and 1 billion gallons of water saved annually.
You haven't had a chance yet we invite you to go to the sustainability section of our website and learn more about the ways, we are challenging ourselves to lead in sustainable energy.
At this point I'd like to turn the call over to Marianne.
Thanks, Mike.
Moving to third quarter results Slide six provides a summary of our financial results.
We reported adjusted earnings per share of $7 81.
This quarter's results were adjusted to exclude three items.
$549 million noncash pre tax gain related to the contribution of our refining assets to the Martinez renewable JV and $509 million noncash gain related to an MPLX third party contract reclassification.
$8 million LIFO inventory charge.
Adjusted EBITDA was $6 $8 billion for the quarter.
Cash flow from operations, excluding unfavorable working capital changes was just under $4 5 billion.
During the quarter, we returned $285 million to shareholders through dividend payments and to repurchase $3 9 billion of our shares.
Slide seven shows the reconciliation between net income and adjusted EBITDA as well as the sequential change in adjusted EBITDA from the second quarter of 2022 to the third quarter of 2022.
Adjusted EBITDA was lower sequentially by approximately $2 3 billion.
This decrease was primarily driven by refining and marketing is the blended crack spread was down approximately $10 per barrel, reflecting a 25% quarterly decline.
The tax rate for the third quarter was 22%, resulting in a tax provision of $1 4 billion.
The tax rate is similar to last quarter due to the refining and marketing representing a larger component of total earnings.
Moving to our segment results slide eight provides an overview of our refining and marketing segment.
During the quarter, we focused on supplying transportation fuels to meet continued strong market demand.
Finding assets ran at 98% utilization processing over $2 8 million barrels of crude per day, and our 13 refineries, we saw margins decline sequentially across all three regions.
<unk> was 97%, reflecting a strong result from our commercial team and a volatile global market.
Operating expenses were higher in the third quarter <unk>.
Energy costs were approximately <unk> 15 per barrel higher in the third quarter driven by higher natural gas prices.
Additionally, we recorded a non recurring multi year property tax assessment of 13 cents per barrel in the third quarter, which we will continue to pursue recovery.
We believe the actions we have taken to bring our structural operating costs down to approximately $5 per barrel are sustainable.
Cost increases we have seen year to date have almost entirely been driven by higher energy costs.
Turning to slide nine which provides an overview of our refining and marketing margin capture this quarter.
Market Backwardation remained a headwind for the industry, but our commercial strategy of selling ahead of product backwardation, while keeping inventories optimized supported our ability to meet demand and capture strong profit margins.
And while not as significant as the previous quarter secondary secondary product prices were a headwind as they lagged higher light product prices, our ability to capture 97% of the market indicator across an incredibly volatile three months was in part due to our commercial responsive.
Slide 10 shows the change in our midstream EBITDA versus the second quarter of 2020 to our midstream segment demonstrated earnings growth with adjusted EBITDA up approximately 3% sequentially and up 9% year over year overall, we continue to focus on identifying and efficiently executing high return.
To drive further growth for our midstream business.
As Mike mentioned earlier the growth of MPLX earnings supported its decision to increase its quarterly distribution by 10% to $77.05 per share.
<unk> expects to receive $2 billion in cash from MPLX on an annual basis.
<unk> remains a source of durable earnings in the MPC portfolio and as MPLX growth its free cash flow. We believe it will have the capacity to return capital to its unitholders.
Slide 11 presents the elements of change in our consolidated cash position for the third quarter operating cash flow excluding changes in working capital was just under $4 5 billion in the quarter.
Working capital was $1 $9 billion headwind for the quarter. This quarter, we made a payment of $2 $3 billion for estimated federal income taxes declining crude prices were also a headwind to working capital.
Capital expenditures and investments totaled $756 million this quarter the increased level of capital spending was related to a ramp in activity related to the Martinez renewable fuels facility conversion and the Galveston based on a project to Star project is expected to be completed early 2023.
Other cash flow benefits of $790 million is primarily driven by the distributions MPC received from the Martinez renewable JV upon closing on September 21.
At the end of the third quarter MPC at approximately $11 1 billion in cash and short term investments.
Moving to slide 12, we had completed our $15 billion share repurchase commitment utilizing the proceeds from the speedway divestiture at an average price of $78 ahead of our commitment of no later than the end of 2022 and you will see today when our quarterly financials. The 10-Q is published.
We were able to complete that early in the month of October we intend to begin repurchasing against our $5 billion outstanding authorization in November now that our financials are public.
On slide 13.
Like to walk you through our financial priority sustaining capital.
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 were.
We're committed to a secure competitive and growing dividend. We believe the quarterly increase to 75 cents per share we announced today is secured through cycle competitive with peers in the broader market and leaves opportunity to potentially grow our dividend in the future. We anticipate this dividend will be supplemented with repurchases.
And we are committed to executing our capital allocation framework to deliver peer leading total returns to shareholders.
We will evaluate growth opportunities and margin enhancing projects.
Share repurchases will be used to return excess capital to shareholders, which we believe are a more efficient way to return capital.
We'll continue to lower our share count.
Underpinning these priorities, we believe a strong balance sheet is essential to being successful in a competitive commodity business. It's the foundation, allowing us to execute our strategy on slide 14, we highlight the strength of Mpc's balance sheet, we continue to manage our balance sheet to an investment grade credit profile at the end of our third quarter.
Mpc's Standalone gross debt to capital ratio is 21%, which is under our target of a 25% to 30% gross debt to capital ratio.
<unk> has a leverage ratio of three five times debt to EBITDA.
Its target of four times.
Both business.
Sheets with leverage ratios under their respective targets.
Turning to guidance on slide 15, we provide our fourth quarter outlook.
We expect crude throughput volumes of roughly $2 7 million barrels per day, representing 93% utilization utilization is forecast to be lower than third quarter due to planned turnaround activity, having a higher impact on crude units in the fourth quarter.
<unk> turnaround expense is projected to be approximately $430 million in the fourth quarter with a significant level of activity in the Gulf Coast region.
Turnaround activity is reflected in our fourth quarter throughput guidance.
We are expecting operating cost per barrel in the fourth quarter to be lower projected to be $5 30 per barrel for the quarter. This is primarily driven by expected lower natural gas and energy costs.
As a reminder, natural gas has historically represented approximately 15% of operating costs. Our natural gas sensitivity is approximately $330 million of annual EBITDA for every dollar change per annum btu.
Equates to a sensitivity of approximately <unk> 30 per barrel cost.
Distribution costs are expected to be approximately $1 3 billion for the fourth quarter.
Corporate costs are expected to be $170 million, representing the sustained reductions that we have made in this area.
In closing, we will continue to execute on our three strategic pillars.
<unk> the competitive performance of our assets fostering our low cost culture and improving our commercial performance.
We're committed to positioning MPC as a reliable and efficient energy provider with new investments focused on high return opportunities.
Porting, the Companys evolution, which will position to lead in an energy diverse future. He will stay steadfast in our plan to position MPC as the refiner investment of choice driving to deliver superior cash returns regardless of market conditions.
And while ensuring we safely operator assets protect the health and safety of our employees and support the communities in which we operate let me turn the call back 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 one follow up if time permits we will III.
Prompt for additional questions and with that operator can you open up for questions today.
Yes. 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 Press Star then two if you are using a speakerphone you may need to pick up the handset first before Christina numbers. Once again, if you have a question. Please press Star then one.
You touched on the phone.
First question today comes from Doug Leggate with Bank of America Go ahead. Please your line is open.
Thank you you guys sorry of trouble with the mute button.
Good morning, everyone. Thanks for taking my questions I guess micro Maryann whichever one wants to take this.
Now that you've completed the buyback or at least the first phase of the black box.
Your distributions from MPLX was still more than covering your dividend so can.
Can you just walk us through how you think about what the new pace of buybacks could look like because obviously the $5 billion authorization is probably going to be chewed through fairly quickly.
And what we should think of in terms of the balance between future dividend growth and where you want your balance sheet to be basically it's Josh question because.
This is a pretty nice problem to have and then I've got a follow up please.
Thanks, Doug.
As you know we made a commitment that we would reassess the dividend immediately completing a $15 billion and we've done so.
We wanted three objectives really around the dividend.
One was for it to be secure.
Competitive and then obviously with the potential to grow dividends in the future. As you said, we believe our increased to 75 cents in the quarter meets all three of those objectives.
We completed that $15 billion share authorization and have a remaining $5 billion, new authorization, which both Mike and I had shared on our prepared remarks that we intend to begin to use that very early in the month of November .
We continue to think that our equity is undervalued and when we look at distribution return on capital between dividend and share repurchase we believe share repurchase remains a more efficient tool in that portfolio.
We'll look at market, we'll look at other growth opportunities and we will look at the macro and will continue to use share repurchase absent other growth opportunities as the vehicle to continue to return capital to shareholders and every decision that we make obviously focused on trying to ensure we've got peer leading returns I hope that helps.
Doug.
It does vary on a suddenly it also prompts my follow up.
If I may and it's a little bit of a guess.
The less easy question to answer unless you just made the point of you believe your equity is undervalued, but we obviously agree with that but.
But your share prices at an all time high.
So when we think about volume in the market thinks about volume or how it could be some assumptions that go behind how youre defining values. So my question is.
What's the mid cycle.
To the extent you can define that EBITDA or cash flow that you anticipate from the portfolio that goes behind that statement of we believe our equity is undervalued and I'll leave it there. Thanks.
Yeah, Doug I'll I'll start off and I'm sure, Mike will want to add incremental comment as well I think the mid cycle is an extremely difficult for us to put opinion as we stand right now certainly.
When we look at the market dynamics as Mike shared as well, we remain pretty bullish on the outlook not only for the fourth quarter, but certainly as we head into 2023. So a series of factors that we use and.
And we look at to determine when we say we believe that equity is undervalued and we will continue to be as opportunistic as we can as we are using share repurchase in evaluating where both the fourth and the first quarter will go and frankly longer term so.
Several factors that we consider but we.
We certainly look right now at a at a fairly optimistic outlook for the next couple of quarters.
And Doug, it's Mike I'll add some <unk> comments so.
What I said in the prepared remarks is the fundamentals of the business have changed as a result of what's happened over the last couple of years.
Roughly 4 million barrels of refining capacity has come out of the market at a time early on when demand was down but demand continues to recover.
We're still not at 2019 levels of demand across all the products gasoline diesel jet fuel. So we're still below but we are slowly recovering. So do you have supply constrained you got demand recovering and then to your point the mid cycle that we see into the future is clearly above the previous mid cycle because the glue.
Fundamentals have changed and as we look out in time, there are going to be some capacity additions occurring throughout the world, but we also believe the demand is going to continue to pace such that the new mid cycle for what we're going to see significantly above where we've been in the past.
That's obviously why we have a bullish over tone here and why we still believe that the assets that we have are still trading under intrinsic value now I know you love us to give the exact number what we call internally, so I'm not going to do that as you know, but we stress test that we stress tested in a low case our view.
Of a mid case and our view of a higher case and as we look at all of those things we still believe fundamentally that we can purchase our shares.
At a price thats still adding value for our shareholders. So that's why we've been so aggressive in that area, we had committed to that return.
Maryann said in the prepared remarks, we've bought back at a pretty good number and we still see that as an ongoing opportunity.
You also asked about the dividend I mean, our.
<unk>.
In where it was was mainly because of the equity price coming up and we did feel it warrant an adjustment.
People would ask us for several quarters in a row, whether we're going to do that and we said we're going to do it. After we do the $15 billion of Speedway. So hopefully we were consistent with what we said there.
It up as Mir said, it's not a tax efficient way to return.
To shareholders, but we want to have the competitive number as well so 30% is a good bump will keep an eye on that and at the same time, we're going to continue to reduce the share count.
Hopefully that gives you a little more color.
It makes significantly higher mid cycle as well as looking forward thanks very much.
Our next question comes from Neil Mehta with Goldman Sachs. Go ahead. Please your line is open.
Yes.
Morning team.
The first question is really to build on your comments around commercial the capture rates.
<unk> has continued to come in very well over the last couple of quarters and Mike I know when you came into the role one of the opportunities you identified list really strengthen that your commercial efforts. So can you just talk about what specifically has.
As driven and sort of that improvement in capture rates and how much of that is because of those commercial initiatives.
Yeah. Thanks, Neil for the question I'm going to let Rick and Brian comment, but before they do I would say to you.
Did say early on that we had three major areas that we're going to put emphasis on and we've made progress in the commercial area, we still see a lot more opportunity for us, but we're not done in that area, but we have made some progress I'll, let I'll, let Rick and.
And Brian give some comments.
Yes, Hi, Neal it's Rick Thank you for the question.
It's one of these items, where we've been looking at the pull through and we've been seeing over the last several quarters. So its nice that you are noticing as well.
Would start by saying earlier this year, we changed a lot we change processes, we changed structure and culture around all things commercial.
Been a game changer for us.
In terms of details and how competitively I'll be careful in what I share here Neil but.
If you look at it over we're through a broad lens.
We've stood up a dedicated what we call V. Seo team value chain optimization team that goes from end to end from feedstocks. The products from purchasing are procuring placement and we're really looking at everything we do but why.
The how all modeling constraints assumptions everything was put on the table and we looked at and so a lot of change and great positive results have come out of that especially in the midst of the environment. We're in so every win when you are in an environment like we're in today is exemplify.
With with the high crack and I think Youre seeing that in addition, youre seeing a lot of the re route of global products and feedstocks happening throughout the world and through this initiative, we've been able to take.
The advantage of a lot of purchasing of feedstocks and the placement of our feed of our of our clean products.
Time that has been highly advantageous so with that I'll turn it over to Brian for a more color on the claims side.
Thanks, Rick Yes, Neal just great question I appreciate the opportunity to kind of weigh in here.
Rick Rick said, it but I'll double down on it it's about one or two things. It's literally everything we've change we've moved mountains and really proud of the work that the team's done theres been a lot of progress as Mike alluded to in his comments there is more to get I think foundational as we look going forward one of the key component is our digital transformation that underpins a lot of the efforts.
We have on the commercial front and we think leveraging our scale across our coast to coast platform provides us a distinct opportunity set as it relates to that digital evolution in our space.
The other thing I'd say just real quick is what underpins all of this organ linemen changed everything we fundamentally changed the organizational structure and realign people, we empower people and we hold them accountable. We are a people centric business in the commercial space and we're really leveraging that in the core tenant of what we're trying to accomplish and so what our great people do great things.
Yes, that's good that's great color. So it's showing up in the numbers is the follow up is just.
Specific dynamic around feedstock, we've seen WCS really blow out historically you guys have been among the larger buyers of western Canadian crude, but you're also seeing heavy wider.
Barrels like Maya and high sulfur fuel oil so could you talk about what's driving the weakness in the heavy.
Crude and product markets and how are you optimizing your refining slate to take advantage of that.
Yes, Hi, Neal it's Rick again, so great question. These markets are blowing out we're seeing unprecedented levels again.
The heavy side I think I looked this morning, and I saw the forward curve.
December was marked at minus 30, Q1 minus 2007, an unbelievably so.
123 retail was 23 under so what's driving it.
And as a plethora of items production from the Canadian front, Neil is pretty pretty solid.
And more entering right now blending season as you know the 1 billion limit blending season as swallowing the pool, which is certainly helping as well we've had we've had some short term shot in the arms with some some maintenance in pad two three and five when I say maintenance unplanned maintenance that has been a.
A plug for US and then fuel oil is really cheap so youre seeing a lot of people substitute that for or have these and other parts of the world. So all of this is driving is really putting pressure on anything that hits the U S Gulf Coast.
And lastly, I'll say when you look at the Gulf of Gulf of Mexico medium sour production, it's been healthy as well so lately here Youre seeing Mars blowout <unk>.
Certainly you referenced the Canadians. So all of these items are stacking on top of one another and creating for a very bullish outlook here into 2023 and.
In terms of MPC, specifically I think you are well aware, we have great access and Optionality that we've built out our system over the years in pad two pad three and now past five.
We are we are going heavy.
We're having up our slate, we're filling up our coworkers as you would expect and we'll continue to do so into Q3 as these indicators tell us to do so.
Makes sense. Thank you Tim.
Yes.
Youre welcome Neal.
Yeah.
Our next question comes from Roger read with Wells Fargo. Go ahead. Please go line is open.
Yes. Thank you good morning.
Good morning, Roger.
Let me let me take the diesel question that everybody wants to ask on all these calls.
Kind of what Youre seeing across your system.
Whether or not.
Mississippi River issues had anything to do with what's going on in the in the central part of the country and then just any thoughts you have on some of the policy issues that are percolating out there.
In terms of any risk of government intervention on the diesel export front.
Yes, Roger this is Brian Partee I can take that there is a couple of different things to unpack there first on the Mississippi River.
We have a really strong and capable.
Inland River system and team we've got over 20, tugs and 300 barges, we largely operate on the Ohio River, but also do transit the Mississippi and the team has been working extremely hard over the last several months, making sure the product continues to flow. So.
I can say, there's been no impact, but it's been on the heels of our team working very diligently hard.
And positioning the right equipment in the lower Mississippi River to make sure that we don't have disruption so on that front things have been going pretty well.
As it relates to the ongoing dialogue with the administration, we have had frequent engagement and communication, which has been welcomed.
I think it's good to share and understand each other's perspective and.
As it relates to the export ban I think that through the dialogue there has been general consensus and understanding that that likely would be counterproductive.
The goals and objectives and building inventory and reducing prices I mean fundamentally if you look at our $2 5 million barrels of exports in the U S. We just don't have enough demand back in and we've got grade mixes we've got logistics disconnect. So.
There's been broad.
Understanding and engagement that that's not the best course of action now all that being said I just can't speak on behalf of the administration I think anything's on the table at any time.
Hey, Roger It's Mike I'll, just add the Brian I'll give you my thoughts on it.
Number one is I do think the administration understands that a band would not have the effect that they were originally looking for.
Instead would decrease inventory levels reduce refining capacity and actually put upward pressure on consumer fuel prices, which is not what they were intending so.
Given these potential outcomes my opinion.
That the administration would not pursue that path.
But thats just Thats my thought at this point.
Yes, I follow that but then see.
A wish for windfall profits tax, which would be unlikely to lower prices either based on.
Experience. So you just never know what they might decide they want to do or our field force to read a lot into that so.
I'll turn it over turn it back over thanks.
Our.
Next question comes from John Royall with Jpmorgan go ahead. Please your line is open.
Hey, guys. Good morning, Thanks for taking my question.
So on the Opex guidance before Q I'm surprised to see it down from <unk> levels given you have.
Or are you relative to <unk>, so anything to point to there either something from <unk>, that's non repeating or anything.
And <unk> in particular.
Sure John It's Marianne.
In the third quarter, we had really three things that were largely equally weighted that impacted the actual results in the quarter. The first as you mentioned was I call. It a one time, we had about a 13 <unk> impact from a four year adjustment on property tax costs.
Unfortunately, the state has the ability to go back and do that so that is non repeating and as I mentioned in my remarks, we'll go after that and continue to pursue it but unfortunately, when it's ready we need to record. It so that was in the quarter.
Second obviously higher energy costs, just in general quarter over quarter as I mentioned and then the last piece to your point in the third quarter, given the level of back half weighted turnaround expenses or other activities associated with that are higher when we gave guidance for the fourth quarter, we certainly see energy cost.
Somewhat nat gas related decline in Q3 to Q4, and obviously the tax impact we do not expect to repeat I hope that addresses the question.
John It's Mike Let me just add to what <unk> said, so we try our best to give you.
Good a guidance as we can with the one caveat being whereas natural gas price is going to be.
So we look at the forward curve right before we give the guidance.
And just reminding you of the sensitivity is 30, a barrel for every dollar per million Btu use so where that actually ends up in the quarter is hard to call, but we just take a look at the forward curve ahead of time and put our best number on it so what I feel good about is the areas that we control on costs I continue to say we have.
Sustainable reductions that we've seen over the last.
Couple of years and that's good.
As Mary mentioned, we have a <unk>.
<unk> dispute that will follow up on <unk>.
And we have this unknown as to where natural gas will actually price itself throughout the whole throughout the whole quarter hopefully that helps.
It does thank you and then.
So a follow up to Neil's question on capture rate I think you went into some kind of a broader dialogue.
Dynamics, but just.
Just wanted to be.
Relative to the commentary that it would be.
And I think you touched on it a little bit in the prepared remarks, but.
Just kind of moving pieces there.
Four two.
The new I guess with the heavy maintenance quarter relative to <unk> in IVF price moving up.
For October so should we be thinking about that number kind of.
Pointed down at <unk>.
Yes, John Mariana I'll start and then I'll pass to Rick and Brian to give you any incremental color, but you are right.
When I provided guidance.
On Caf share for the third quarter, knowing that we had a fairly strong.
Third and fourth quarter, frankly, but third quarter compared to the second quarter turnaround activity. We expected that we would have seen some capture impact as a result, having said that there were certainly some offsetting elements in the quarter first as you know, we actually saw prices come down a bit.
And those lower prices actually improved our clean product margins.
Pricing actually really good benefit as we looked at the volumetric gains quarter over quarter, and then well secondaries were still a headwind in the quarter they were better than what we had initially projected.
Your question was a little bit tough you were cutting in and out but as we talk about the fourth quarter. I think is what you are asking.
As well.
Obviously, it will be as you've seen from the guidance.
Heaviest turnaround month excuse me quarter of all four quarters. So we would certainly anticipate that capture in the fourth quarter could be below what we saw in the third quarter for some of these very reasons, but let me pass it to Rick and Brian and give you incremental color think Mike wants to chip in before we pass for the other guys. John I just wanted to remind everybody.
That.
Q2 margins were as high as they were we made a conscious decision to delay some activity into the back half of the year specifically into the fourth quarter at that time, we felt it was a good idea provided there was no safety issues or anything to make that adjustment. So so some of what's happened here is we've.
Some Q2 margin for Q4 margin and we still think that was a good call, but it has loaded up a little bit more activity in the fourth quarter as far as our turnaround activity.
Yes, John This is Rick I'll, just add to Marion's earlier comments and make a comment on secondary product margins. So.
One month into the quarter, we will see where the next two months ago, but secondary product margins have been so volatile and trying to predict where WTS is going to go from here is anyone's guess I would say that's one of the biggest wildcards on where our capture will end up so more to come there, we'll see how the rest of the quarter plays.
With that ill see if Brian has any color to add.
Yes, Thanks, Rick John just one quick summary, wrap up comment it's hard to call. The ball on one month into the quarter, but I will say that October from a clean products perspective started off strong as Mike indicated in his opening commentary, we did not see the seasonal turndown in demand.
Had whether working largely in our favor we haven't had a hurricane event in the country as a whole has been pretty moderate on the weather fronts. We did see we've seen strong demand throughout the month of October and correspondingly, we've seen strong margins as well so directionally I think favorable.
Two early to call the ball.
Very helpful. Thank you.
Youre welcome.
Our next question comes from Sam Margolin with Wolfe Research go ahead. Please your line is open.
Good morning, everyone. Thanks for taking the question.
Good morning, Sam.
I wanted to ask on the renewable diesel business you.
You mentioned SD bring some.
A benefit on the feedstock procurement side you also have the JV with Archer Daniels.
So you covered across categories within the within the feedstock universe, and there's a lot of disparity between vegetable oils and wastewater right now and so.
Just curious how you think about the feedstock picture overall, whether it's important to really have.
Security on both sides or if you might be leaning towards one specific category of feedstock over another.
Yes, Sam this is Brian I'll take that question, it's a great question. So.
First let me just back up and talk a little bit about what we have going on out west since Martina and so we're well into our <unk> strategy. So we've been pre selling since middle of the summer.
We're currently buying from over 50 different suppliers so.
Before I get into this business two years ago was thick and thin and the team has come up very very fast and developing those relationships.
Beyond just the types of feedstocks, it's really a big part of our focus.
In most areas is around logistics flexibility so.
Martina is greatly positioned on logistics flexibility with we've got three facilities in the Bay area that we're bringing feedstocks into all of which have rail and.
Access to the marine opportunities as well so and.
In addition, we've got our to Pretreat facilities in the central part of the U S. In Cincinnati in pediatric so we've quickly gone from not being in the business to being holistically in the business with two different plants here shortly.
We have capacity and we are confident very confident in our ability to source optimal feedstocks, but.
It's really an optimization much like we undertake on the crude side of our business. We run an LP model, we looked at unit constraints at the refinery we look at logistics, we looked at pricing and of course, the high value. So it's abroad optimization very similar to what we do on the crude side of our business.
Okay. Thanks, and then speaking of optimization on the refining side.
If we could go back in time to the Markwest acquisition, a number of years ago, a big part of that was NGL integration into the refineries or at least there was a contemplated synergy and now we've got.
Pretty noteworthy NGL dislocation and specifically butane and I wonder if that relationship is as you imagine that at that time or if in the process of your sort of commercial transformation, if you've sent them off our organize them differently.
Yeah, Hi, Sam it's Rick So the callout is outstanding, especially in these low NGL.
Price environment, we're in right now so when you look at the logistics of combining <unk> and MPC and our and our total.
Footprint it's in.
Credible today, especially as we optimize our octane with Ngls and heading into the butane blending season really to answer your question. Its yes, and yes, yes, we we saw this coming to the extent it is here today I would say it's.
Certainly a nice shot in the arm for us as we optimize around our system, both from specifically butane and all things Ngls tied to our.
Tied to our whole system, we're seeing specific benefits certainly on the Gulf coast with Gary, though but it's throughout our entire system. So great callout.
Alright, thanks, so much have a great day.
Youre welcome.
Up next we have Paul Cheng with Scotiabank go ahead. Please your line is open.
Thank you Hey, guys good morning.
Two question first one wanted to go back into the.
Paul.
Why is that.
<unk>.
Recently, we have seen the CIA just treat.
Trip that soybean oil prices comparable to the new CEO .
Got it.
Yes.
Used cooking volume.
So.
Want to see that how would you guys see that and why you think that may happen.
And do you think that this trend that's going to sustain and gateway.
Correspondingly impact on your feedstock strategy.
That's the first question.
The second question is.
Later too.
I think that the.
How the IL two.
And also the.
The timing of Lcs at places that we have sustained over the past 12 months.
Pat.
They look over the longer term outlook and strategy. Thank you.
Yes, Paul Thanks, This is Brian .
Understand the question. So first on the <unk> as it relates to soybean oil yuko and actually even some of the other feedstocks that we look at I would say that we're at a point or we've been at a point here in the last several months, where we've like ourselves and others who've been in startup mode. So there has been a bit of a surge in demand.
And acquiring feedstocks as it relates to startup in the market broadly is not super efficient yet so it's an emerging market.
Relationships matter a lot of the sellers in this space and whether it's <unk> or rendered fats.
It's a new business line for them. So there's a lot of exploration ongoing so I don't think it's a structural change as we've seen here in the last couple of months, but I do think it's just the nature of the market evolving from a Ci perspective, but as I said earlier to Sam's question logistics are going to be key those relationships are going to be key to make sure we get the right feedstock.
Most advantaged feedstocks into our facilities.
Your second question related to <unk>, certainly we've seen the <unk>.
Client demand of LCD fence credits gap out here over the last year and a half or so.
<unk>.
One point I'd make here is we're seeing that in California, but theres other states other areas, Canada, Oregon have emerging program. So that's a new variable that's entering into the equation and calculus for us and others in terms of where you actually price place. The products. So we reported card reported a pretty big builds for the second quarter credit still a little over one.
3 million credits in the second quarter, so that surplus continues to grow.
We do expect carb is theyre going through a scoping assessment now on the <unk>.
<unk> program, we do expect them to make adjustments to the plan going forward to really support the investments needed on the low carbon side of things you think that'll be an opportunity into 2023 to engage and discuss and probably something we see manifest in 2024.
Ultimately the economics as it relates to R&D are really founded on several interrelated variables. We've had the positive side of that on the Rins and the blenders tax credit certainly the product pricing in California has been supportive. So that's all been on the on the positive side feedstock pricing, although stable through the third quarter has been towards the higher <unk>.
Side as we think about this year and then as you mentioned the <unk> have been the lower side, but all of that combined considered we're seeing stable margin.
Production out of our Dickinson facility and we'd expect the same out Martina just through a variety of different variables.
Hey, Paul and Mike I, just wanted to add a comment we've been talking about Martinez for a while now and early on we said that in order to have a <unk>.
Terrific facility, we wanted to have competitive Capex I think everybody has seen our numbers on that we've disclosed that opex. We're in a really good position with a former refinery asset Bryan talked about we're pretty bullish that the logistics assets that we have set up here and the last piece of the puzzle was feedstocks.
Youre asking about in Brian just gave you some color on our side.
I do want to reiterate that was part of the driver for our partnership with next day.
We know their portfolio and see them as a global leader in this area. So it was one of the key factors that enabled us to say, we wanted to to JV with them and then we said in our prepared remarks, we think there's more to come with the relationship with <unk>. We were working on different things together as we feel that we've had a win win for.
Both sides of this.
But feedstock procurement is actually one of the most important parts of this in kind of the last leg of the stool. After we talked about Capex Opex and logistics.
Hopefully that helps sure Mike just curious can you.
Any plan to.
At additional out in <unk>.
Development plan or not with the plan.
The next one or two years all of that.
You just have been the team's going to bump up and youre going to wait until that that 40 of them up in one year or so what kind of strategy that you guys have in mind.
Okay.
Yeah. So we're not sure what you said Kristina said she thought you heard you say are we adding alky plants did you say <unk>.
No I'm, saying that.
I hear what you say about it but just.
<unk> is that you have.
The newer BOE diesel opinion that things are going to come up very soon.
So what's the next step in the Australia, and you plan to add additional new facility or a new development in the air.
Area.
I thought you all these.
Startup on the cancer or that you say, okay. We just have some major again, that's my own this space.
Yes.
One day, a couple years before we look forward the next edition.
Okay understood.
Yes.
I think Paul its more the ladder, we have some things going out I'll, let David make a few comments on some of the areas that we're looking at but but we will have Martina has started up here very shortly within a couple of months, we're going to mechanically completed at the end of the year. So it's probably a little more ladder to the scenario that you played out but the whole area continues.
To evolve so Dave why don't you give a little color on some of the things that we're looking at.
Yes, Paul.
This is Dave So I think.
As Mike stated, while we have Nick and sent up and up and going and we're bringing Martinez online both phase one and phase three even with the <unk> JV part of our strategy and Brian touched on a lot of it.
From feedstock all the way on a product placement is I won't say replicating that hydrocarbon value chain.
Leveraging our core competence of our strengths.
We've shown in the commercial.
Value, we can we can extract out of <unk>.
Participate in up and down that value chain, probably be a little bit of a difference from the hydrocarbon to renewable is we don't want to get over our skis and maybe outside of our core competencies and we also want to help speed the market. Hence the reason youre seeing our relationships our JV will use some of our partnerships with ADM and net stay for <unk>.
<unk> so as Mike stated, we're going to continue.
And evaluate new opportunities.
We look at a lot of stuff, but it needs to be capital efficient.
The IRR is a could be some tailwind as you look at this but I still think it's a little early to see how some of those variables all play out in the actual.
<unk> of the IRS before we can make long term investment strategies. Thank you.
Thank you.
Youre welcome Paul.
Our next question comes from Theresa Chen with Barclays. Go ahead. Please your line is open.
Hi, there. Thank you for taking my questions.
First I wanted to touch on your comments about demand across your system.
Your comments about being down versus 2019 was that specific to your asset or were you talking about the <unk> number if in general and I'd love to get some color there and also on the supply outlook on the product side, just given the multiple variables at play be it brushing on products for your routing ahead of them.
February 5th ban or incremental Asian exports in China, and ex China, potentially coming to water and hitting past five and would love to hear your views on how all of that percolate.
Sure I'll start off with my comments were related to the Doe data, but I'll, let Brian give a little color on our own specific data, but just in general I think it's consistent that we still see a lot of demand recovery and that's why we're so bullish at this point and then we will take the second part of your question, yes. Thanks.
<unk> for the question, so just a bit of color maybe on the system first.
To address Mike's comments around our data, yes, Mike Mike did quote on the BOE data our comps back to 2019 aren't super relevant given that we've shut down a couple of different refineries, we sold off a retail units. So we really look at the year to year and I'll give you just a high level overview for Q3, so year on year discipline has been steady and strong.
Very stable across the platform and really flat year on year <unk> continues to perform well and we're seeing that recovery year on year about 6%, but still below 2019 across the platform.
And then gasoline is probably the most interesting we did we were off slightly from 2021 in Q3 about 2% and it really correlates to retail prices. So it will start in the west and about 4% below Q1 of 2021 out west and a 4% decline that we really correlate directly to the retail prices and the elasticity impact.
Active higher retails Midwest was about 3% in the Gulf Coast was 1% so overall about 2%.
But kind of going back to Mike's earlier comments, we do remain optimistic as we think about demand I mentioned the October we came out out of the chute really strong here for Q4.
Continuing to CECO with demand recovery jet travel more broadly the halo around activity and vacations, not just chat marine fuel.
Low gasoline et cetera.
So have moderated retail prices coming off of the summer highs.
Currently around $3 75, a gallon while off of ours are highest in the summer and demand continues to also be robust in South America and the Caribbean.
Comedies are geared a little bit differently, you've got strong agricultural demand globally as well as mining activity.
Theres been some price subsidization that's occurred in south of the border here. That's also helped prop up demand so.
And then we're seeing pulls into Europe as well for obvious reasons, primarily around energy security and just having access to the fuel going forward as the winter into here.
Last thing I'd mention is on the supply constrained side, we've taken a lot of capacity offline globally, and we do expect a degree of friction around the Russian exports of production.
Hard to call the ball on how impactful that might be everybody's watching very closely but we don't expect it to be positive for incremental supply. We do expect it to drag just a bit.
I'm, sorry, the Asian export potential exports.
Yeah as it relates to <unk>.
A lot of innuendo rumored coming out of Asia in terms of export quota as COVID-19 policies really difficult for us to call. The one data point I can give you. The three recent empirically on that is we have not been where we compete we have not seen a step change.
In terms of competing with refineries coming out of Asia, specifically to China, and just it's been steady as she goes status quo here for the last several months.
Chris This is Mike I would just add that the inventories are obviously low the market needs additional barrels.
We're doing our best to put out as much product as we can.
Brian mentioned the point about we see some price plasticity when when prices get too high.
At the end of the day.
<unk> spend as much time on what we control and that's the run as hard as we can put as much product into the market as we can.
And whether Asia exports come or don't come the market needs to supply. So I think thats why at the end of the day, we still see this to be a pretty bullish outlook.
It's just it's evolved over a couple of years, we think demand is going to continue to come back Brian just gave you some specifics on our areas.
I had mentioned that the OEM stuff so.
We believe that demand will continue to recover and then whether supply comes from China or from U S. Market itself is the market just needs. It's a supply constrained recovering demand outlook that that makes us have this book.
Bullish look.
Our last question today will come from Matthew Blair with BPH go ahead. Please your line is open.
Hey, good morning, and my congrats on your good health news from last month, So it's great to hear.
I had a question.
<unk>.
I had a question on the Star project, which you mentioned will be completed in early 2023.
At one point you were hoping for about $525 million in EBITDA from the project has that number moved up with your expectations.
The higher mid cycle environment, and if so could you give us a range on what that might look like and then in terms of just total flow through the financials.
I believe it will add 40000 barrels a day of new refining capacity. So we should expect a volume kick, but then also our margin improvement right from the.
The ability to handle residuals, better and I think there might be some octane benefits too. So if you could walk through that that'd be great.
Okay, Hey, Matt This is Tim I'll take the first part of that question. So the remaining scope that we have will indeed increase the heavy crude capacity by about 40000 barrels a day and will also.
Prove the residual upgrading by about 17000, a day, we do we do still feel really good about the economic drivers of the project obviously, you've got the current.
Widening heavy crude differentials and you've got strong distillate cracks.
Pivoted really kind of improve the project value over our original look.
We also made some logistics investments that are being heavily utilized in those further improve product margins and some of these niche markets.
Domestic or foreign.
And then as I've said in the prepared remarks. So the remaining work is going to be tightened during a turnaround in the first quarter of next year. So that's that's kind of where we're at on the Star project. So.
Turn it back over to.
Mike and Matt you can just whatever numbers you want to put on you had it right from the beginning it's 40000 barrels a day of additional crude.
So whatever number you want to put on that in 17000 barrels a day of heavy upgrading.
So whatever your outlook is that's the math that will give you.
Additionally, but once we start this up.
Good stuff, thanks, I'll leave it there.
Youre welcome.
It sounds great there and then on that operator, I think we are done for today. So thank you everyone for your interest in marathon petroleum should you have any additional questions or would like clarification on topics discussed today. Please reach out and our IR team will be available to help you with your questions. Thank you everyone.
Thank you so much that will conclude today's conference and we thank you for participating you may disconnect at this time.
Yes.
Okay.