Marathon Petroleum Corp (MPC) — Q4 2021 Earnings Call Transcript

Welcome to Marathon Petroleum Corporation's Fourth Quarter 2021 Earnings Conference Call. The slides that accompany this call can be found on our website at marathonpetroleum.com under the Investors tab. Joining me today on the call 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 2. We will be making forward-looking statements today. Actual results may differ. Factors that could cause actual results to differ are included there as well as in our filings with the SEC. References to MPC capital spending during the prepared remarks today reflect stand-alone MPC capital, excluding MPLX. And with that, I'll turn the call over to Mike.

Thanks, Kristina, and good morning, and thanks for joining our call. Before we get into our results for the quarter, I wanted to provide a brief update on the macro environment. During the fourth quarter, despite the widespread surge in Omicron variant cases, gasoline demand held up well. On diesel, we're seeing highway trucking volumes continuing to meet or exceed seasonal records. While jet demand reached post-pandemic highs in the fourth quarter, it's still roughly 15% below 2019 levels as business travel remains suppressed, but we expect to see recovery in that this year as well. When we spoke with you in November, we were cautious about rising COVID cases this winter and the potential impact. Based on the trends over the last few months, we've become less concerned about the pace of recovery in transportation fuels demand. Light product inventories remain tight and U.S. demand continues to recover. We believe that refining margins will be well positioned for 2022. On the aspects of the business that are within our control, this quarter we made continued progress on our priorities. Since our last earnings call at the beginning of November, we've repurchased approximately $3 billion of shares. That puts us at approximately 55% complete on our initial $10 billion share repurchase program. Further reinforcing our commitment to return capital to shareholders, we obtained board approval for an additional $5 billion in share repurchase authorization. This brings our total outstanding authorization to approximately $9.5 billion. Today, we announced our 2022 capital spending outlook. We expect MPC will have approximately $1.7 billion in capital expenditures, with approximately 50% of the $1.3 billion growth capital for our Martinez refinery conversion. Total costs for the Martinez refinery conversion are estimated at $1.2 billion. Approximately $300 million has been spent to date, $700 million for 2022 and $200 million for 2023. This competitive capital cost is driven by the fact that Martinez's assets are conducive to retrofit, and we can leverage existing infrastructure and logistics. At Martinez, the project reached another milestone as a 60-day comment period for the Environmental Impact Report concluded on December 17, 2021. We remain committed to progressing the conversion to a renewable fuels facility; engineering is complete, and we're ready to begin construction. Our plan is to have the first phase start-up in the second half of '22. We've already sourced some advantaged feedstocks for the Martinez facility and are engaged in negotiations with multiple parties for the balance. Our strategy is multifaceted, including long-term arrangements, joint ventures, and alliances, all of which are common in this space. A recent example of our success would be our joint venture with ADM. We're also leveraging existing capabilities that are currently supporting Dickinson to optimize between the two facilities. We remain confident in our progress and ability to secure feedstocks for Martinez. On Kenai, we have been working at the sales process since we last communicated. We'll be back to you when we have additional details that we can share. In 2021, we progressed all three of our strategic initiatives, and Slide 4 highlights this execution. On the portfolio, we completed the Speedway sale, receiving $17.2 billion of proceeds from that transaction and securing the 15-year fuel supply agreement with 7-Eleven. Our Dickinson renewable diesel facility started up, reached capacity, and we've been successfully optimizing the operation. We made two strategic decisions to idle our Gallup refinery and to convert Martinez to a renewable fuels facility. This year, MPLX produced exceptionally strong cash flow, which provided $2.2 billion of contributions to MPC. As we look at cost reduction, what began as a $1.5 billion cost-reduction initiative is being embraced by the organization, and now a low-cost culture is becoming embedded in how we conduct our business. Finally, on commercial, while I've been reluctant to share too much, I wanted to highlight a few items that have commercial significance in our portfolio. In March of 2021, we started up the Beatrice pretreatment facility, which processes about 3,000 barrels a day of advantaged feedstock for the Dickinson renewable diesel plant. In December, we closed on a joint venture with ADM, which will provide approximately 5,000 barrels a day of logistically advantaged feedstock for Dickinson when the new soybean crush plant comes online in 2023. In January of this year, we successfully started up our Cincinnati pretreatment facility, which will process about 2,000 barrels per day for our Dickinson renewable diesel plant. We converted this facility from its original configuration as a biodiesel plant. Our team's execution on these three strategic priorities builds a foundation for continued value creation, and we look forward to sharing updates each quarter as we continue to advance these initiatives. Shifting to Slide 5, we remain focused on challenging ourselves to lead in sustainable energy. We have three company-wide targets on GHG, methane, and freshwater intensity that many of our investors and stakeholders know well. In the coming weeks, we look forward to providing an update on our progress against these targets and some of our accomplishments in 2021. At this point, I'd like to turn the call over to Maryann to review the fourth quarter results.

Thanks, Mike. Slide 6 provides a summary of our fourth quarter financial results. This morning, we reported earnings per share of $1.27 and adjusted earnings per share of $1.30. Adjusted earnings exclude $132 million of pretax charges related to make-whole premiums for the $2.1 billion in senior notes we redeemed in December. Additionally, the adjustments include an incremental $112 million of tax expense, which adjusts all results to a 24% tax rate. Beginning with our first quarter 2022 results, we will be reporting our effective tax rate on an actual basis and will no longer adjust our actual results to a 24% tax rate. Adjusted EBITDA was $2.8 billion for the quarter, which is approximately $400 million higher from the prior quarter. Cash from operations, excluding working capital, was $2 billion, which is an increase of almost $300 million from the prior quarter. Finally, during the quarter, we returned $354 million to shareholders through dividend payments and approximately $2.7 billion in share repurchases. In the three months since our last earnings call, we have repurchased approximately $3 billion of shares. Slide 7 illustrates the progress we have made towards lowering our cost structure over the past two years. As we think about our strategy on cost structure, I want to emphasize a few things. We will never compromise the safety of employees or the integrity of our assets. And we are committed to ensuring the current cost reductions are sustainable, even during periods of general cost pressures. Since the beginning of 2020, we have been able to maintain roughly $1.5 billion of cost reductions that have been taken out of the company's total cost. Refining has been lowered by approximately $1 billion. Our refining operating costs in 2020 began at $6 per barrel. While we were able to finish 2021 with a full year operating cost per barrel that was $5. Additionally, midstream was reduced by $400 million and corporate cost by about $100 million. However, regardless of the margin environment, our EBITDA is directly improved by this $1.5 billion. This improvement is expected to make the company more resilient in future downcycles while having more bottom line profitability in upcycles. Turning to Slide 8, we would like to highlight our financial priorities for 2022. First, sustaining capital as 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. Second, we're committed to the dividend. As we continue to purchase shares, we will reduce the share count and increase the potential of returnable cash flow. Third, we continue to believe this is both a return on and return of capital business and we will continue to invest capital where we believe there are attractive returns. In traditional refining, we're focused on investments that are resilient and reduce cost. In renewables, current spend is primarily focused on our Martinez renewable fuel conversion. We believe that share repurchases can be used to meaningfully return capital to shareholders. In order to successfully execute the strategies guided by these priorities, MPC needs a strong balance sheet as a foundation. We continue to manage our balance sheet to an investment-grade credit profile. Moving to another key focus area. Slide 9 highlights our focus on strict capital discipline. Today, we announced our 2022 capital outlook for MPC. MPC's 2022 capital investment plan totals approximately $1.7 billion. As we continue to focus on strict capital discipline, our overall spend remains approximately 30% below 2019 spending levels. Sustaining capital is approximately 20% of capital spent, underpinning our commitment to safety and environmental performance. Of the remaining 80% for growth, approximately 50% of this $1.3 billion supports the conversion of Martinez into a renewable fuels facility. The remainder of the growth capital is for other projects already underway. At our refineries, the growth capital is primarily for projects that enhance returns at MPC's large coastal assets with a focus on completing the Galveston Bay STAR project as well as smaller projects at Garyville and Los Angeles. Going forward, we expect growth capital will continue to have a significant portion for renewables and projects that will help us reduce future operating costs. Slide 10 shows the reconciliation from net income to adjusted EBITDA as well as the sequential change in adjusted EBITDA from the third quarter 2021 to the fourth quarter 2021. Adjusted EBITDA was higher quarter-over-quarter, driven primarily by a $354 million increase from Refining & Marketing. The adjustment column reflects $132 million of pretax charges for make-whole premiums for debt redemption during the quarter, which has also been excluded from the interest column. Moving to our segment results. Slide 11 provides an overview of our Refining & Marketing segment. The business reported continued improvement from last quarter with adjusted EBITDA of $1.5 billion. Fourth quarter EBITDA increased $354 million when compared to the third quarter of 2021. The increase was driven primarily by higher refining margins in the U.S. Gulf Coast and West Coast regions. U.S. Gulf Coast production increased by 14%, recovering from storm-related downtime last quarter, and solid margin per barrel increased 31% due to higher export sales and higher sales of light product inventory. The West Coast margin per barrel increased 40% associated with increased demand and refinery outages. Utilization was 94% for the quarter, slightly improved from the third quarter. The higher Gulf Coast throughput was offset by lower throughput in the Mid-Con for planned turnaround activity. Operating expenses were higher in the fourth quarter, primarily due to higher natural gas prices. There was also higher routine maintenance and planned project expense. Additionally, we saw natural gas prices soften during the quarter, coming off highs in the $5 to $6 range and ending in the $3 to $4 range. **Slide 12 shows the change in our Midstream EBITDA versus the third quarter of 2021. Our Midstream segment continues to demonstrate earnings resiliency and stability with consistent results from the previous quarter. Slide 13 presents the elements of change in our consolidated cash position for the fourth quarter. Operating cash flow was approximately $2 billion in the quarter. This excludes changes in working capital and also excludes the cash we received for our CARES tax refund in the quarter, which was approximately $1.6 billion source of cash and is included in the income tax part of the chart. Working capital was an approximate $1.3 billion source of cash this quarter, driven primarily by a reduction in crude and product inventory. As we announced on last quarter's call, MPC redeemed $2.1 billion in senior notes in December. Under income taxes, we received approximately $1.6 billion of our CARES tax refund in the fourth quarter. We also used about $300 million to offset against our Speedway tax obligation. There is about $60 million of the refund remaining, which we expect in the first half of 2022. We paid approximately $1.2 billion for our Speedway income tax obligation. All that remains is about $50 million of state and local taxes. With respect to capital return during the quarter, MPC returned $354 million to shareholders through our dividend and repurchased approximately $2.7 billion worth of shares. At the end of the quarter, MPC had approximately $10.8 billion in cash and short-term investments. Slide 14 provides our capital investment plan for 2022 which reflects our continuing focus on strict capital discipline. MPC's investment plan, excluding MPLX, totals approximately $1.7 billion. The plan includes $1.6 billion for the Refining & Marketing segment, of which approximately $300 million or roughly 20% is related to maintenance and regulatory compliance spending. Our growth capital plan is approximately $1.3 billion, split between renewables and ongoing projects. Within renewable spending, the majority is allocated for the Martinez conversion. Ongoing projects in our Refining & 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. Also included is approximately $100 million of corporate spending to support activities we believe will enhance our ability to lower future costs and capture commercial value. This morning, MPLX also announced their 2022 capital investment plan of $900 million. Their plan includes approximately $700 million of growth capital, $140 million of maintenance capital, and $60 million for the repayment of their share of the Bakken Pipeline joint venture's debt due in 2022. On Slide 15, we review our progress on our return of capital. Since our last earnings call at the beginning of November, we have repurchased approximately $3 billion of company shares. This puts us at approximately 55% complete on our initial $10 billion repurchase program commitment, leaving approximately $4.5 billion remaining. We remain committed to completing the $10 billion program by the end of 2022. And as we are ahead of pace given our recent repurchases, could foresee completion sooner than initially planned. As part of our long-term commitment to return capital, we announced an incremental $5 billion share repurchase authorization today, increasing our recent repurchase authorizations to $15 billion. We plan to continue using open market repurchase programs, although all of the programs we have previously discussed remain available to us to complete our commitment. We intend to use programs that allow us to buy on an ongoing basis, and we will provide updates on the progress during our earnings call. As we have said many times, 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. Slide 16 highlights some of the key points about our balance sheet. MPC ended the year with approximately $10.8 billion of cash and short-term investments. But longer term, we believe that we will need to maintain about $1 billion of cash on the balance sheet. Additionally, we will always ensure that we have enough liquidity to endure market fluctuations. Currently, we have a $5 billion bank revolver that is undrawn. We continue to manage our balance sheet to an investment-grade profile. At year-end, MPC's gross debt-to-capital ratio is 21%, and our long-term gross debt-to-capital target is approximately 30%. As we continue to execute our share repurchase program, we will see that ratio increase. After the recent redemption in December, our current structural debt is approximately $6.5 billion, and we do not have any maturities until 2024. Turning to guidance. Slide 17, we provide our first quarterly outlook. We expect total throughput volumes of roughly 2.9 million barrels per day. Planned turnaround costs are projected to be approximately $155 million in the first quarter. The majority of the activity will be in the Gulf Coast region. Our 2022 planned turnaround activity is back half-weighted this year. Total operating costs are projected to be $5.10 per barrel for the quarter. Distribution costs are expected to be approximately $1.3 billion for the quarter. Corporate costs are expected to be $170 million. With that, let me turn the call back over to Kristina.

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 re-prompt for additional questions. And with that, operator, we'll open it to questions.

Mike, Maryann, I believe this is your first time speaking, so happy new year. It's a great start to the year with your earnings. I have a couple of questions. First, Maryann, I want to ask about the dividend policy moving forward. Once your buybacks are completed, the overall dividend burden will be significantly lower than it is now and much less than the distribution you receive from MPLX. With the yield currently around 3%, what are your thoughts on the appropriate payout ratio or dividend policy going forward? How should we expect that to change?

So maybe a couple of things. First, as you've seen from the capital framework that we've been sharing this morning, the dividend obviously remains an important piece of the capital allocation strategy. As you look, you're right, as we continue to complete our capital program and share repurchase program, the amount of capital that's allocated towards the dividend will be declining. We think that's somewhere in the range of $200 million to $300 million right now. We continue to think that share repurchase in the short term is an appropriate allocation of that. As we get to what we would consider to be a capital structure in a more normal environment, meaning we complete that share repurchase, we'll continue to evaluate the timing of any dividend change. But again, when you look at the difference in that dividend payment, we certainly think that we're providing that allocation in an appropriate manner.

Doug, it's Mike. Let me just add a little bit to Mary's comments. One of the things that I think may be getting misconstrued is we are still committed to the dividend, as Mary just said. However, we're in a little bit of a different situation than normal operating cash flow. I mean we're sitting with about $11 billion on the balance sheet in a large return program. And as you just saw, we did about $3 billion since the last call. So as far as order of magnitude, we're committed to returning capital. But right now, the size of the share repurchase relative to the dividend is just out of proportion until we get to a more normal balance sheet. So I don't want people to think we're not committed to the dividend. We are going to evaluate it, as Mary just said. But right now, we're putting a lot of the effort in the return into the buyback program. I hope that helps.

It certainly does. There is a lot of potential to achieve all of this. I was curious about the share price and how the yield is now at a below-average level. It seems like there is significant room for improvement there. Thank you for that information. My follow-up question is somewhat technical, and I’m not sure if Ray is available, but I'm interested in the structural changes we observed 20 years ago that impacted mid-cycle refining earnings, particularly with regards to alkylate and demand-supply mismatches. I'm curious about what's currently happening with natural gas between the U.S. and Europe and how that might give U.S. refiners a structural advantage. Have you considered whether the situation we're seeing in Europe and internationally could act as a new structural tailwind for refining margins, particularly for U.S. refiners like Marathon?

Doug, it's Mike. I'm going to pass this over to Brian on products and Rick on crude to provide some insights. It's a good question. Clearly, that dynamic is happening in Europe. So Brian, why don't you begin?

Yes, sure. This is Brian. Great question. So I think the short answer is too early to tell, but I think you're on to it. Maryann mentioned in her prepared comments the volatility we've seen in natural gas over the last several months. We've gone from $3 gas to $6 down to $4, now we're peaking back up to $5. So directionally, yes, very supportive relative to the cheap natural gas position we have that we believe is certainly sustainable over the long term in the U.S. But ultimately, these are long-term decisions for anybody that has that exposure overseas to higher natural gas prices. But yes, directionally, we do see it as supportive. It's just a little bit too early to tell. But if we stay in this $5 to $6 gas range, it will absolutely put pressure on those that have that exposure, and we'll look for upside. But it's one of many variables.

I'm curious, have you seen any shift in imports coming from Europe as a consequence of that cost disadvantage? And I'll leave it there.

Yes. No, from an import perspective, not yet. I mean, that's one thing that we're looking at, both the fundamental balance in the Atlantic Basin looking at opportunities to actually export into Europe. But the ARPS has been pretty stable. No big immediate changes here in the short term, but we're watching it very closely.

Doug, it's Rick. I'll just add on a few more comments. With Europe at $30 an MMBTU or thereabouts, there's no doubt a structural advantage. But with that being said, what we're seeing right now out of Europe is just slight run cuts at best because their margins are covering or higher than OpEx costs. So we haven't seen the impact substantially yet. If it continues, I think that's another story. So as Brian said, it's still a little bit too early to tell. But then I'll also leave you with a couple of wild cards that we're watching closely, which could exacerbate it as well in terms of nat gas costs. It's the Russian-Ukraine conflict, which we're all well aware of. And then ultimately, it's Nordstream 2 and what is the result that comes out of that. So a tailwind could get much better depending on how either one of these two plays out. It's just a little bit too early, Doug.

I wanted to switch to talking about renewable diesel a bit. But first, on Martinez, could we dive in a little bit to the CapEx that you've outlined specifically, what all is getting completed this year? And I guess related to that, does that sort of tie into the utilization level we see for the guidance on the West Coast? And when you talk about back half weighted turnarounds as well, is that sort of impacting that too? And I have a follow-up.

Yes, of course. Thank you for the question. Before discussing the CapEx for Martinez, I would like to update you on the project's permitting status. As previously mentioned, we completed the public comment period in December, and for the past month and a half, we have been actively working with environmental authorities to address their inquiries and finalize the permit. We aim to have the sequel permit finished by the end of the first quarter, allowing us to begin construction. I want to highlight that we are fully prepared for this phase. Our engineering work for the first phase is complete, and we are close to finishing the engineering for the subsequent phases. We have the necessary equipment, including pipes, pilings, and vessels, ready on site. Regarding the project details, I have discussed before how beneficial Martinez is, highlighting the three hydroprocessing units and two hydrogen plants, along with on-site Co-Gen power generation. I want to focus on a couple of key areas concerning our spending. One significant area is pretreatment. This project aims to process all renewable feedstocks, and we want to manage the pretreatment ourselves. Thus, we have invested in pretreatment capabilities and are excited about the technology we've selected. We believe it offers a lower capital expenditure and has sustainability benefits. Additionally, we're making substantial investments in logistics. Martinez offers both scale and flexibility with options for transporting feedstocks via truck, rail, pipe, and water. I wanted to provide some insight into our spending plans for 2022.

The follow-up, I'm sorry, go ahead.

Yes, Prashant, it's Mike. I want to elaborate on what Ray said. Initially, I've approached this project by assessing whether we have competitive capital expenditures, operational expenditures, logistics, and ultimately, feedstock to make it viable. Ray has shared some insights about the capital expenditures, and we've finally disclosed that figure. The reason for not sharing it until now is that we've been carefully working on the feedstock aspects, which are still ongoing. We hope to provide more updates as we progress. Now, after negotiating with various parties, we felt it was the right time to disclose the capital expenditures, as it has been part of all our discussions and negotiations. By sharing this now, we aim to convey that we've included capital expenditures that we believe will lead to lower operating costs over time. The entire picture is aligning as we envisioned: competitive capital expenditures, competitive operational expenditures, and good logistics. As Ray mentioned, we are still progressing with the feedstock side, but we're making significant headway towards our goals.

That's really helpful. I wanted to discuss the feedstock aspect, particularly the pretreatment you mentioned. You brought up Beatrice from last year and the current Cincinnati project. It seems pretreatment is significant for Martinez as well. So, I have two questions. First, on a broader scale, what are your thoughts on the current situation where the differences between feedstocks are narrowing? While some of this narrowing could be temporary due to project timelines and logistical challenges, there may also be shifts happening that influence CI scores. This leads to a larger philosophical question about the value of pretreatment and how to adapt your pretreatment strategy as you anticipate changes in feedstock differentials, particularly with the anticipated increase in supply both globally and within the U.S. I'll stop there.

Yes, Prashant, it's Mike. I'll start off and then I'll let Brian or Ray jump in if they'd like to. One of the things people have asked me about is can you talk a little bit about commercial stuff. And I've tried not to go into a lot of detail there. But the point you're making has got a little bit of portfolio and a little bit of commercial side to it. Long term, I think the point you're making is markets equilibrate and you'll see some competitiveness, and we agree with that. It's part of the reason that we stress test Martinez. But in the short term, we've got Dickinson up and running, and you got to be fast in this business. You got to be quick. I think what you're seeing through the team effort here, because it's our portfolio and it's part commercial, is to get this Beatrice plant up and running, get 3,000 barrels a day of really advantaged feedstock there, get a couple of thousand barrels a day of converting the biodiesel plant. So it's partly the portfolio or the engineering team working with the commercial team. To your point, right at the moment, those feedstocks are advantaged and getting pretreated. Long term, you're right. The competitiveness will change over time. There will be more equilibrium. But at the same time, as Ray talked about, we felt having full pretreatment at Martinez was still going to be a good thing for us in the long term. The technology that we picked there, so there's a lot of important thoughts from an engineering and technical side that also marry into what we want to try and achieve commercially. And like I said, hopefully, we'll be able to give you a little bit more color on feedstock as time goes by. But we felt it was a good enough time to explain what the CapEx number is and how we're feeling about it.

That's super helpful.

Two questions for me. The first one is on refining. Capture rate, as you show on Slide 22, was very strong, 116% this quarter. And I recognize capture rates are very hard metrics to try to calibrate. But on Slide 23, you help us think through some things like other margins. So Mike, I guess the question for you is, how much of this do you think is a carryforward versus a one-time dynamic? And are some of the things that you talked about around optimizing the commercial side of the business and getting your costs down starting to show up in that capture rate number.

Neil, it's Maryann. I want to provide some insights here before passing it back to Mike. I appreciate your comments. This quarter, we achieved about 116% capture overall. We experienced a few factors during the quarter. Firstly, we had favorable inventory conditions this quarter, which can change from period to period. Looking at the third quarter as an example, we achieved around 100% capture. We benefited from the timing of crude purchases from advantageous inventory in the third quarter that we utilized in the fourth quarter. Additionally, we experienced strong seasonal marketing margins. Historically, we have indicated that our baseline for refining capture is around 95%. While there is quarter-to-quarter volatility, we currently believe our baseline is closer to 100% based on our recent commercial execution. I will share a couple of specific points from the quarter before handing it over to Mike. We benefited in the fourth quarter from a $62 million adjustment for the full year related to the 2021 RINs, which is generally spread evenly across the quarters, so a quarter of that is attributed to this quarter. We also realized a benefit of about $39 million from the Dickinson LCFS adjustment due to lower carbon intensity this quarter. These elements contributed positively to our overall performance this quarter. Now, I will pass it back to Mike.

Yes, Neil, I'm going to add, but it looks like Brian wants to jump in and want to comment, and then I'll finish up.

Yes, Neil, thanks for the question. This is Brian. So just commercially, we are hyper-focused on optimization and improvement. I think we've been pretty transparent and clear about that as one of our three key strategic initiatives. So just a bit of color. The Gulf Coast was an area here over the last quarter where we saw some nice, marked improvements in our operations commercially that help to drive a better capture. Really fundamentally, what's helping with that for us and our business is better alignment of the team. We're getting the right resources and getting them focused in the right areas and aligned efficiently. In a couple of examples, in the Gulf Coast, just highlighting that as an example, it's really helping us drive our marketing book and our growth in and along the Gulf Coast. And then our export expansion as well. We've been really focused on our expansion of our export book. And specific to our export book, we're really focused on more delivered cargoes. So we're moving further down the value chain, higher margin capture. So we've had a lot of success in growing that line of our business. And then lastly, we did take in a position in the Caribbean in the fourth quarter that allows us to optimize supply both internationally and domestically, particularly into Florida as well as developing a blending program in and along the Caribbean. I just wanted to provide some color and some examples of things that we're doing to help advance our commercial initiatives.

And Neil, it's Mike. I appreciate the progress that Brian and the team are making in various areas. However, I want to reiterate that I'm not a strong supporter of this metric. I have expressed this many times. The primary reason is that there are other factors that can influence the metric in different ways. The difference between light products and heavy products is the most significant aspect. I want to remind people that you can have a low capture rate while still being very profitable, or you could have a high capture rate and not be as profitable. So it's important to be cautious and examine the details because the metric has its flaws. That said, I'm pleased that we are making incremental progress. Ideally, we would want to see the number increase. However, I want to caution everyone, as Kristina is tired of me repeating this to her, that there are other factors impacting that metric that could mislead or misinterpret some ongoing activities. But overall, as Mary and Brian mentioned, positive developments should push that metric in the right direction. I just want to maintain that caution. I'm still challenging Kristina and our team to find a better approach. We haven't achieved that yet, but we're working on it because I believe we can come up with something improved. In the meantime, I know everyone keeps track of this metric and is accustomed to analyzing it, so it is what it is, and I wanted to ensure I expressed my caution regarding it.

It's been clear about that and a lot of good perspective there. The follow-up is back on Martinez. Thanks for the $1.2 billion. Is there a way to tie that into an EBITDA number, either with or without the blenders tax credit? Or is it still too early for you guys to come out there with an EBITDA number that we can then ultimately tie back into returns?

Yes, Neil, it's a good question. It is still a little early. What I was saying earlier is we're still actively engaged in some feedstock discussions. So we can't go to that disclosure. We got to the point with our discussions that capital is now very open with everybody, so we thought we could disclose it. So that's where we are in the process. You saw in our prepared remarks, we have secured some feedstock. We're still in some discussions, but still a little premature. But we were thinking that we could at least put the capital out there and that would give some color to some of the questions that people have been asking us. I know it's taken a little bit of time, but part of it is we couldn't disclose it while we were still in some level of those negotiations. Now that we're past that, we can disclose that piece, but we still have some activity going on.

Congratulations on the quarter. Maybe to kind of take up where part of the answer to Neil's question left off. Yes, you made the comment, Mike, about capture doesn't tell the whole story. And obviously, one of the big things is the reduction in costs. So as we look at the conversion of Martinez, the closure of Gallup, we think about that in terms of the impact on costs, and we think about that as an impact on capture. What else should we be thinking about is going on? And is there any possibility you can quantify across those items to help us understand what we ought to consider as sustainable and what we ought to consider as maybe just a product of current market environment?

Yes, Roger, it's a good question. What I'm trying to say is the metric can be driven by different factors other than what we're doing than things we have control of. Brian was mentioning some of the things that we have control of that we think are increasing our commercial capture. What I was trying to say, sometimes the spreads themselves can drive that metric in a different direction. So the only thing I was trying to say is the metric itself has some good parts to it. It has some bad parts to it. And you usually have to drill down to really understand what's happening. Now like I just said, I'm happy with the commercial team making progress. For apples-to-apples, we want to see that number higher. But I just want to continue to caution people that there are some flaws in the metric or some other things that drive it, just like Mary said in her remarks. Part of, like you said, cost and everything that we're doing on that side is still a high focus. We have a lot of focus, as Brian said, on the commercial side of the business, trying to be a little reluctant to give a lot of details in that regard because of the competitive nature of it, but also listening to people saying, 'Hey, can you give me some color what's going on there?' So we tried to pick a few examples that we could give you a little bit of the way we're thinking about it. And hoping it helps, but I'll leave it there.

One additional point to consider regarding cost and sustainability is that during the Martinez conversion, the current operating costs are part of the capture rate you're observing. The day-to-day operating costs needed to complete the conversion are already included in that capture rate you see today.

Okay. Yes. That's well, I'll save the follow-up on that for another time. I had another question regarding the commercial side, which has obviously been a focus for the company. With the change in leadership there, I'm curious how you envision the commercial operations evolving and how that will develop moving forward.

Yes, Roger, it's Mike. I'll take that again. In general, you’re referring to the change at the CCO level. I want to acknowledge that Brian contributed this year. He’s a great person and very smart. The commercial team has been doing some excellent work. However, we weren't aligned on philosophy and expectations, which led me to believe that a change was necessary. I want to recognize the progress the team has made and appreciate Rick and Brian, who are on the call today, along with their teams. I love Brian’s term, hyper-focused, and I was glad to hear that. We believe there are opportunities in this area. As I mentioned, we had some philosophical and expectation differences, and I felt it was justified to make a change instead of trying to realign. I’m pleased with the progress that’s taking place and believe we have a clear view of additional opportunities. I know it can be frustrating that we don’t provide much detail, but hopefully, you’ll continue to see results, and we will find ways to communicate things that will help you understand the business from our perspective better.

Mike and team, my question is a little bit around the CapEx of Martinez, it's about 1.2. If my math is right, that's putting you about that $1.6 or $1.65 a gallon with a very good pre-treat. And what we are generally seeing out there is people who are trying to build really high-class pre-treats are hitting that cost of about $3.25 to $3.50. So if you can talk about your comfort level with that CapEx, what is allowing you to do it at about 50% of what others are doing? And what role has already operations at Dickinson where you are already making R&D? What are the learnings from there, which are basically kind of, I think, allowing you to bring this facility on at a highly discounted CapEx per gallon basis?

Manav, this is Ray. Let me take another shot at talking about Martinez and your math is right. It's about $1.60 a capacity gallon for that, which we feel good about compared to the industry and why we are excited about this project. As far as why that's the case, it gets back to the toolkit that's already sitting there at Martinez, three hydrocrackers, hydro treaters, two hydrogen plants, and a Cogen facility. So what we're investing, the big thing that's new is investing in the pretreat system. The rest that we're doing is we're investing a lot in connectivity, piping to get all those units to go to the right places and logistics from that standpoint. So largely, the reconfiguring of Martinez allowed us to have a very capital-efficient project.

And Manav, it's Mike. I want to highlight something important and acknowledge Ray and his team's efforts. We've spent considerable time deliberating over this capital expenditure. While the number is favorable, we initially anticipated a lower capital case would result in higher operating expenses, as Ray pointed out. We opted to invest a bit more capital to enhance the commercial aspect of the decision alongside the technical considerations, which has worked out well for us. Although Ray hasn't elaborated much on it, the technology we selected was crucial. We can discuss this further later, but it's a significant element in the project's progress, choosing to increase CapEx for the benefit of reducing OpEx. This was a key point in our discussions. We're quite satisfied with the project's sustainability and how we structured that aspect. I appreciate Ray and his team for linking the commercial side, as it's essential to emphasize that this isn't merely about engineers selecting solutions; there needs to be collaboration that improves the project. Even as you consider the favorable number, we actually evaluated a lower number with higher OpEx, but we chose this approach for better long-term benefits with lower OpEx. The technology, sustainability, and carbon footprint have all turned out positively, so we're pleased to share this information. We can provide additional details later.

Perfect. Mike, my follow-up question is about the changes that occurred since you took over, particularly the internal focus on optimization and cost cuts, which seem to be paying off. You're nearly generating $1 billion in post-dividend free cash each quarter. I want to understand what you see as the ideal debt level given this cash accumulation. Is this cash available for potential strategic acquisitions, considering the current buildup on the balance sheet?

I'll let Mary discuss the balance sheet and debt, as it's an important aspect, but I'll provide a broad overview. We aim for all our assets to create free cash. You’ve highlighted something we’ve focused on over the past few years. We make portfolio adjustments and alter commercial activities to reach a favorable position like the one we're in now. It was noted earlier that we haven't stopped the dividend; we've just temporarily paused it while we return a significant amount of capital through share buybacks. Nonetheless, I believe it's crucial to get the business in a position that allows us to have valuable discussions about capital returns and returns on capital. We want to grow the business and are being very selective about where we invest. When we choose wisely, we will return cash to shareholders. We will continue to encourage our teams to align the technical and commercial aspects of our business, ensuring we create options for ourselves. We have some ideas for the future. I don’t want to jump ahead, but I'm pleased that the team accepts the idea of ensuring that all assets contribute to free cash generation. As I've mentioned repeatedly, we don’t control the market; we are largely price takers in refining, which can cause volatility in our business. We want to maintain a solid balance sheet. I'm not sure if Mary has anything to add, but ultimately, you highlighted an important goal: to generate substantial cash, maintain flexibility, and make smart decisions on creating value.

It's Maryann. I'll just add maybe a few additional comments. We've been looking over the last several quarters and talking about the balance sheet. We continue to say that, that investment-grade profile for us is critically important. That means we need to stay in and around gross debt-to-capital range of about 30%. We're below that, as I shared with you today. But keep in mind, we've got $9.5 billion of share repurchase remaining, and all other things being consistent as we continue to do that share repurchase, right? We'll see that ratio improve. We've done quite a bit of work to ensure we've got the right liquidity. We'll sit with $1 billion on the balance sheet, which is somewhat lower than we had initially contemplated a few quarters ago, and we think that's certainly a positive step. Mike already mentioned that returning to the more, I'll say, normal capital structure. We have outlined our capital priorities, obviously, sustaining capital, the dividend being important, and then we'll use share repurchase opportunistically to return that capital as we see the outlook for 2022. I hope that helps.

First question, I just want to clarify Neil's question regarding the RVO aspect. Maryann, did you mention $62 million per quarter? So should I multiply that by four for what appeared in the fourth quarter specifically? My main question is about your comments on maintenance being a bit more back-end loaded. Could you remind us what a typical maintenance level would be per year, and do you have an annual figure that we can consider?

Yes, sure, of course. So let me be clear, the $62 million that I referred to is the annual adjustment for the 2021 compliance year. So the $62 million is the total adjustment or reduction, if you will, to our obligation for all of 2021. If you think about the impact on that on the capture rate in the quarter, so we were about 116. That's about 1.7 change in the capture rate, including all $62 million. My comment on a quarterly basis was just to say that it's fairly ratable. Had we had that RVO obligation at the beginning of the year, you would have seen roughly a $15 million benefit to the prior quarters. That's all that I was trying to say. The second one is really around turnaround. And I guess what we would say is, yes, absolutely back half of the year, we see a greater weighting, if you will, toward our turnaround expenses. We see this year, meaning 2022, slightly higher than a normal year. We tend to think normal is in the range of $600 million to $700 million, as you saw from what we had this year. So we do expect that to be a higher total for 2022. I'll let Mike add any comments.

No, I don't have anything to add.

Okay. Great. No, that's very helpful. My second one, just on the buybacks. Obviously, the pace in Q4 has essentially tripled from the Q2, Q3 run rate. And with the increase in the authorization, recognizing it doesn't have a specific end date, is there any reason to think that the new run rate that you've been doing is not achievable or doable on a go-forward basis? Or anything in particular about the fourth quarter that you would say is nonrepeatable?

It's Maryann. We will definitely assess our liquidity. As you know, we committed during our third quarter earnings call to changing our approach, and I believe we have shown our capability to do that with our third quarter results. We will certainly look into liquidity, and as mentioned, we remain dedicated to achieving that in 2022. Given our current progress, it seems likely that we could accomplish this sooner than expected. I'm referring to the $10 billion initial commitment.

I have a couple of housekeeping questions. First, I'd like to follow up on Maryann's response to Neil regarding the RVO adjustment benefit and the LCFS adjustment. Can you explain the benefit from the crude timing and the inventory benefits by region? Second, Mike, looking back at your career with Sunoco over the past 20 years, how do you see the longer-term role of your commercial operations? Should we consider it primarily as a facilitator for refining and MPLX operations, or should we view it as a profit center similar to BP, Shell, and Total? What do you foresee for that business moving forward, what achievements have been made so far, and where do you see the greatest opportunities for improvement or growth in the next one to two years?

I'll start with your second question and let Mary address the first. To answer your question, Paul, it's both. Yes, it should function as a separate profit center for us, and Rick, Brian, and the team are very committed to that. You've heard some examples of this earlier, so it's definitely a standalone. The other aspect is ensuring connectivity throughout the entire business, making certain that the commercial side and the portfolio are completely aligned. So the answer is really both. As I mentioned before, portfolio cost and commercial are all interconnected, and there's a shared responsibility across the supply chain. Each area must achieve excellence in its own domain. The commercial side must excel within that space, and Ray's team needs to focus on selecting the right technology. That responsibility transcends both areas while maintaining specific excellence within them. So, the brief answer to your question is both. I'm trying to share examples of our approach without going into too much detail, but I hope this offers a bit more insight into our philosophy. Now, I'll let Mary address the first part.

Yes. No, no worries at all. Yes, unfortunately, we really do not provide those inventory movements quarter-to-quarter on a regional basis. So not disclosed, and it's not something that we would typically share.

Can I ask that on the appendix, Page 22 on your presentation, you saw a capture impact of 597, we can identify based on the RVO and the LCFS roughly 100. So the other 500 on the total sum, is that primarily driven by the favorable inventory impact and the crude timing? Or I mean you have not break down by region; can you share that what is the total system on those two benefits?

Paul, it's Maryann. Maybe we can take that offline and address all of your questions specifically. Would that be helpful?

Yes, that would be great.

And Paul, the only thing that I would add is, again, watch quarterly results, there's always timing from Q3 into Q4, Q4 into Q1. Some of that occurred here. Like I said, Mary can give you a little bit more offline and Kristina and the team. But just be careful when you look at one quarter in isolation, that tends to get a little bit misaligned if there was activity across the quarters. So just keep that in mind when you guys have the discussion.

All right, Sheila? Operator, are you still there?

Perfect. Well, thank you so much, everyone, for joining our call this afternoon. If you have any questions that you didn't get addressed on the call today, the Investors Relations team is available any time, please just reach out. Thank you again.