Marathon Petroleum Corp (MPC) — Q4 2020 Earnings Call Transcript

Welcome to Marathon Petroleum's fourth quarter 2020 earnings conference call. The slides that accompany this call can be found on our website at marathonpetroleum.com, under the Investors tab. Joining me on the call today are Mike Hennigan, CEO; Maryann Mannen, CFO; and other members of the executive team.

Thanks, Kristina. Good morning, everyone. I want to start by welcoming a couple of new members to our executive team. First, in January, we announced the appointment of Maryann Mannen as our new CFO. She joins us having spent nearly a decade as a CFO in the energy services and manufacturing sectors. Maryann brings the financial acumen and strategic leadership expertise critical for delivering our business transformation objectives, including strict capital discipline and overall expense management to lower our cost structure. I'm excited for the perspective and business insights she will add to our executive team as we work together to continue strengthening our financial and competitive position. Yesterday, we announced Brian Davis has joined the company in our newly created role of Chief Commercial Officer. Brian has spent over three decades in the industry. His extensive commercial experience, his recent deep background in renewables and alternative energy, and a track record of developing and enhancing capabilities is highly complementary to our strategic focus on improving our commercial performance. We look forward to his leadership in developing and implementing a holistic and integrated strategy for MPC's commercial business. These additions will be integral in supporting our strategic initiatives as we progress through 2021 and beyond. Before we get into our results for the quarter, I wanted to provide a brief business update. The unprecedented challenges this year created by the COVID pandemic accelerated the need for us to act swiftly and decisively to change how we conduct our business. The three initiatives highlighted on the slide focus on the aspects of our business within our control: strengthening the competitive position of our assets, improving our commercial performance, and lowering our cost structure. During the year, we've been faced with many tough decisions, but our team continues to make tangible progress in all three initiatives in ways we believe will drive stronger through-cycle earnings and position the company for long-term success. Slide #5 highlights some of our actions taken around our strategic priorities this quarter. First, we continue progressing the sales of Speedway business. During the quarter, we responded to the second request from the FTC and continue to support 7-Eleven in its efforts to secure antitrust clearance. Our interactions with 7-Eleven and our interactions with the FTC have gone well.

Thanks, Mike. Slide 9 provides a summary of our fourth quarter financial results. This morning, we reported an adjusted loss per share of $0.94. This reflects pre-tax adjustments of $851 million, driven primarily by a $1.2 billion pre-tax lower of cost or market inventory benefit. These adjustments can be found in detail on Slide 29 in the appendix.

Thanks, Maryann. I'd like to take a moment to provide some comments on our responsibilities around corporate leadership. Last quarter, we discussed the recent publication of our 2020 Climate Perspectives Report highlighting opportunities in strategic planning work the company is engaged in related to climate scenarios. We also discussed our goals to reduce greenhouse gas emissions, methane emissions, and freshwater withdrawal intensities. It's important that we set objectives for the organization to drive our continuous improvement on ESG. Our principles for leading in sustainable energy position us to deliver strong results in this space, from lowering the carbon intensity of our operations and products to improving energy efficiency, conserving natural resources, increasing renewable fuels production, and embracing innovation through advanced technologies. We believe the goals we are setting and our transparent disclosures on how we plan to achieve them place Marathon at the leading edge of our industry. We're seeing recent improvements in our ESG ratings reflecting our hard work in the area. Slide 20 in the appendix highlights some of these accomplishments. Our approach to sustainability reflects our commitment to create shared value with our stakeholders, the communities where we operate, our people, our business partners, and many others. How we conduct our business enhances the performance we deliver. We look forward to even further expanding our robust engagement with stakeholders and continuing to serve as a valued partner. With that, let me turn the call back over to Kristina.

Thanks, Mike. As we open the call for your questions, as a courtesy to all participants, we ask that you limit yourself to one question and a follow-up. If time permits, we will re-prompt for additional questions. We will now open the line to questions. Operator?

Good morning, everybody.

Good morning, Doug.

Mike, I have a market outlook question on refining and specifically, it looks like inventories for both gasoline and distillate are headed towards normal levels by the end of this quarter, which may be why refining margins are returning to near year-ago levels. And if we see OPEC raise output later in the year, which also seems likely, we could also get some help on feedstock differentials. So my question is whether you're encouraged by the trends that we're seeing in product markets and the pace of the recovery as well, and also whether you think this will be sustainable?

Yeah, thanks, it's a good question. Before I answer, I’ll let some other members of the team jump in as well. I first want to say, I appreciate your insights over the years, and I want to congratulate you specifically on your next steps in your career and thank you for your contributions to our industry.

Well, thank you, Mike. You guys have been easy to support, for sure. The pleasure has been all mine.

On your question as far as go forward, I think you mentioned a lot of things that we're looking at. Our term is cautious optimism. For me specifically, I tend to try not to call the market, but really call the banks of the rivers more. On the positive side, we're seeing some encouraging trends you mentioned, and I hope vaccinations will go smoothly, and we'll come out of this pandemic robustly. For us, there's a bull case that says things are moving in the right direction. There's a bear case that says we're not through with this pandemic yet. We have some fuel to play through before we see the end of it. But let me - I’m going to let Tim comment on gasoline a little bit and Brian can comment on the other projects, just so we can get a sense of what we see in the market today. Tim?

Yes. Thanks, Mike. Doug, just to reiterate Mike’s comments, we did see a little bit of softness into the back half of the year really after Thanksgiving and through the end of the year, almost a step down in demand, primarily relating to higher case rates. We're seeing a couple of bright spots early in the year, and we think this is probably going to take some time. We need to get the immunization protocol built and as a country accelerate that process to get more people comfortable, ultimately get schools back in session, get people back in the office, improve discretionary travel. We think that will happen, but it may take some time. For the first quarter, I think we're probably looking at about 90% of last year’s volumes at the retail gasoline level, and we hope to see improvement throughout the rest of 2021.

Okay. And then also, Mike, a few minutes ago, you talked about strategic focus and commitment to corporate responsibility as key elements. That makes it clear to me that your leadership team believes we may be experiencing a paradigm shift in energy, possibly more so than we've had in the past. So my question is, do you agree? What are some of the things the management team needs to do to stay on the leading edge in the industry in this new environment?

Yes, it's a really good question, Doug. So first off, yes, we do believe there is a paradigm shift occurring. I like the term energy evolution that you used. We're focused on how we position ourselves. I felt we had to get some things lined up regarding costs and portfolio. Our focus on cost is essential alongside lowering our carbon intensity to remain competitive long-term. We have made a commitment to sustainable energy, partly by lowering carbon intensity and increasing renewable fuels production. We have our Dickinson facility up and running and are optimistic about what Martinez can bring. Our goal is to stay focused on this change and put Marathon in the best position to be a long-term player in that energy evolution.

Thanks again, everybody.

Thank you, Doug, and again congratulations on your next step.

Thank you.

Good morning, team, and congrats on some better-than-expected results here. I guess the first question is just to build on that. Is refining costs came in certainly better than what we were expecting, and the 2021 standalone capital spending surprised as well to the downside and that was largely at refining as well. Can you talk about both of those, the CapEx and the OpEx improvements and how much of it is cyclical, given that you still are running at depressed utilization although maybe a little bit better than what we had anticipated based on the guide, and how much of it is structural and will carry forward as we recover from here?

Hey, Neil, thanks for that question. Obviously, we've been very focused on cost. I stated throughout 2020 that we needed a step change. In refining, particularly, Ray and his team have taken that and put some good actions in place. I'll let him comment in a second. Overall, I think what you’re seeing from us is a reset of our overall cost structure whether in the corporate area, midstream, or refining. We do expect over time, as we get past the pandemic, for variable costs to come up a little. At the same time, we believe that many of the cost reductions in place are structural. They're fixed cost in nature. Obviously, we're hopeful that we have more variable cost and that demand for our product comes back. Over the last couple of quarters, we've seen a sustainable step change, and that's what we're hoping to show the market. As far as capital, we're pivoting to what Doug just referred to as a new paradigm. We have several projects already in progress in refining that we'll continue to finish out. Examples would be the Star project down in the Gulf Coast. We're looking for projects in refining to lower our costs going forward or change the dynamic we have around this energy evolution and pivot more into the renewable space. We have several things planned for both Dickinson and Martinez. Renewables is a hot topic, and I think we’re in a position to leverage that.

Sure Mike, Neil, I'll just give a bit more color on the OpEx. This should be consistent with what we talked about during the last earnings call. For OpEx reductions in refining, it wasn’t just one thing; it was a multitude of things. If I had to key in on two items, the first is scrutinizing the number of people in our facilities, both contractors and employees. We're looking at the number of people we have, the projects we were working on, consolidating contractor companies, and taking a hard look at that. The other thing we did was leverage our spend across our 2.9 million barrel per day refining system, ensuring we have the best terms and contracts out there. Our goal is to make these reductions as structural as possible. Early on in the pandemic, we deferred some turnaround activity, but since then, we've caught up on our turnaround work and plan to do more this year.

Thanks guys, and a follow-up is just on the Speedway transaction. Can you walk us through the gating items to close the deal? Your conviction level that you conclude in Q1, and Mike, I've asked this question so many times over the last couple of months, but can you just walk through the waterfall again of how you get $16.5 billion of cash coming in, plus another $1.2 billion or so from the government, and based on where your debt level is, what is the ballpark ability to return capital to shareholders in that framework? So two questions there: deal gating factors and then return of capital framework?

Yeah Neil, on the first one, the major gating factor is the FTC process with 7-Eleven. We're watching the process and contributing where we can, but that's really a process between 7-Eleven and the FTC. What we know today continues to go well, and I'm hopeful that the end of Q1 is the right timing. The other activities we need to complete, which we're confident we'll get done, involve transition services. Marathon will transition some services to 7-Eleven over time. The bottom line, as everyone keeps asking about, is the major gating item is timing, which we don't have control of. On the use of proceeds, we’re targeting getting the balance sheet back to where we want it to be and returning capital as quickly and efficiently as possible. We’ve indicated that our debt situation has about $2.5 billion that comes with minimal friction costs. Right now, we have a little over $11 billion of debt. We don’t see it going below $5 billion, which is our low refining case. Absent that, we want to return capital, and we’ve discussed ways to do that mainly through buybacks. We'll provide additional color once we get close enough to know we're there.

Mike, you're going to have me for this. I am going to lean on about the same issue as my first question. I'm going to hold you or Ray for this. I want to preserve some very quick marks with you and make sure I think about this right. Your market comp is about $30 billion, your share of MPLX two-thirds is about $16 billion. Assuming value recognized for everything else is about $14 billion, you're potentially going to have a $10 billion share buyback program if our net charge is $6 billion of debt paydown. Those are pretty enormous numbers. Am I thinking about right? Secondly, how exactly would you expect to deploy such a scale of a buyback? Are you thinking along the lines of regular acquisition of shares in the market? What is your structure and timing for that?

Doug, first of all, I don’t hate you for asking the question. It's a fair question, and I know you've asked a few times about whether we plan to use any of the proceeds towards MPLX. We don’t see that as in the best interest, but returning capital is important. To your point, it will be a large sum of money and will take some time to do it efficiently. A lot of things will come into play, such as where our equity will be when we actually do this and the best method for returning capital. We want to protect our investment-grade rating, so those are ongoing conversations with rating agencies. We’re feeling good about where we're headed, so we'd like to ensure we're effectively utilizing capital when the time comes. I am trying my best to give you as much insight as I can, but we want to wait until the timing is right for return capital to shareholders.

I want to say I’m glad to know that we on the sell side don’t have to talk to you about your stock being undervalued; that's comforting on our side. Kidding aside, I want to dig a little deeper on a couple of things. First off, I think Doug mentioned on the crack spreads. A part of the move in the crack spreads here has been rims-related, and I know with the separation of Speedway, you're retaining the rims inside the R&M segment. I was curious how you're looking at the impact of the increase in rims cost and how we should think about it flowing through the company now that we’ve had the separation.

Hey Roger, that's a good question on rims. I'll let Brian take that one.

Hey Roger, good morning. Great question. Rims expense is real; it's cash out the door. We believe the full consideration is given across the entire value chain when you look at refiners and some of our producers and marketers. That said, no rims costs are also very transparent day in and day out. We believe they are factored into the commercial pricing across all players. Specific to Speedway, there will be zero impact; we've consistently treated Speedway as a third-party customer. So there's no change in value post-separation. We are effectively positioned regarding what we handle in terms of pricing with our extensive terminal network and robust marketing platform.

That's helpful, thanks. I did see on the CapEx for renewables, I think it’s $325 or $350 million in renewable CapEx in 2021. Is that all for Martinez? I know you’ve mentioned some other initiatives.

Roger, you're right. Most of that is for Martinez; that’s the way to think about it. A little is dedicated to Dickinson, but mostly it's focused on Martinez. That’s the start of what we believe will be a multi-phase project. I'll let Ray give more color on that regarding timing and the phased approach.

Thanks Mike. We are progressing the Martinez renewable fuels project, and that is the bulk of the projected renewable spend in 2021. We are currently in the definition engineering phase of the project and working to progress our permit. We're working with governmental, regulatory, NGO, and stakeholders for aggressive permitting efforts. Our aim is to have the first phase, the first of the hydro treater reconverted to a renewable diesel facility in the second half of 2022, followed by the remaining two hydro treaters and pretreatment system in 2023. We're quite excited about this opportunity.

Thank you, Mike. I am so sorry my line dropped when you were halfway through your question, but I'll see the answer in the transcript. My follow-up question was probably for Ray. I wanted to go back to the product side of things. What we’re seeing is lots of LPG substitution in Asia for heating. With all that heat demand, are you seeing gasoline products being sent from non-transportation sources?

This is Brian Partee. I think on that front, we've seen some uptick in demand over in Asia primarily due to cooler temperatures and the entire petrochemical complex. While that's helpful, I wouldn’t say it's a long-term structural shift. In the short term, we see that as a positive for our offerings.

Okay. That's confirmation of that. Thank you.

I wanted to focus on the Gulf Coast opening cost, which was at $3.40, down about 31% year-over-year. This is one of the lowest for MPC. What has allowed them to achieve this? I know Mike, you're focused on cost reductions, but I'm trying to understand specifically what is driving those reductions in the Gulf Coast?

It’s a good question. I'll let Ray give you some specifics.

On the Gulf Coast, we have two large refineries: Garyville in Louisiana and Galveston in Texas. Garyville has always been a very low-cost refinery, so the ability to improve there is limited. The significant reductions we've had in our Gulf Coast structure came from Galveston Bay. They've made substantial improvements in their OpEx, especially in the back half of 2020.

A quick follow-up here is on your Dickinson facility. You're spending some money to move product to California, and Canada is talking about introducing low-carbon fuel standards in 2022. Is that something you're considering? What is the size of the market for that facility?

Hey Manav. Just addressing the market disposition out of Dickinson, we're looking for the highest valued markets. The design for Dickinson primarily aims for placement in California as that market has proven to be the most lucrative. We’re having active discussions beyond just the West Coast, including Canada, and we're well-positioned logistically to optimize product placement out of Dickinson.

We have pretreatment options for Dickinson, but that would relate to our facility alongside Beatrice pretreated corn oil. That is in progress.

I would like to ask about the average cost in refining and distribution. Given the impressive reductions, do you think you’ve captured most of the efficiencies available, or do you see continued opportunities to drive costs down?

Paul, I’ll start. We’ve made a significant move, and we're challenging ourselves in '21 and beyond to evaluate where we spend money whether it’s in refining or on the corporate side. I appreciate the acknowledgment of the significant move we’ve made but understand that we are not done just because we've come to the end of the year. The culture is here to question everything.

What I’ll emphasize is that with $1 billion of cost taken out of the system, we’ve made a significant move, but our team is questioning everything we do beyond this, ensuring nothing impacts safety or environmental performance.

On restructuring, you'll see some benefits occurring in the first quarter. We did it in late 2020, so you'll see the benefits starting now.

Regarding commercial opportunities, we’ve undergone a massive transformation, consolidating our marketing, supply, and trading into a unified organization. This structure will help unleash opportunities, and we are currently building the systems needed to improve our operations.

I just want to clarify: Should we expect that the CapEx for 2021 serves as a base for future spending, or will it significantly increase?

We’re not providing guidance beyond 2021 expenditures at this time, but we plan to finish the projects in progress and will evaluate each investment opportunity based on our ongoing shift towards renewable energy. I appreciate your understanding as we update you on our progress.

I want to ask about your outlook on the gasoline market. Based on anticipated capacity coming offline, could we see a return to more of an importing scenario for the U.S.?

I think everyone is trying to understand the supply-demand landscape post-pandemic. We're looking closely at supply-demand trends and how this will evolve as we free-up capacity. The challenge is to gauge where this will all settle at the end of the day, and that remains uncertain.

Thanks Mike, that’s helpful. Can you remind us of the ability to flex your gasoline yields?

We typically have about a 10% swing between gasoline and diesel yields, adjusting based on economics.

It’s essential to recognize that yield will also depend on various external factors such as the sweet-sour spreads.

I wanted to get your big-picture view on renewables. To what extent are you considering separating that as a different segment to help analysts quantify performance?

We do have that on our radar and could consider it at some point. We’re still in the early stage with Dickinson, so we’ll wait until it is generating results to have more of a significant discussion on it. Renewable diesel is a priority for us as we execute our strategy.

I wanted to ask about carbon capture efforts and opportunities you see through low-carbon fuel standards?

We're examining carbon capture opportunities, but one challenge lies with sequestration. We have promising avenues regarding hydrogen plants and other areas, and it's part of our strategy to evaluate economical options that create shareholder value.

Appreciate all the insights. Just to follow up on the cash flow statement regarding working capital, especially as it pertains to Speedway.

On working capital, we have about a net 20 days exposure. It depends on crude and product prices. The Speedway cash flows included working capital impacts post-separation.

Sounds great. Thank you, everyone, for joining the call today. If you have any follow-ups after the call, our team is available to help out with that. And with that, I'll turn it back to the operator.