Marathon Petroleum Corp (MPC) — Q1 2023 Earnings Call Transcript

Welcome to Marathon Petroleum Corporation's First Quarter 2023 Earnings Conference Call. The slides that accompany this call can be found on our website at marathonpetroleum.com under the Investor tab. Joining me on the call today are Mike Hennigan, CEO; Maryann Mannen, CFO; and other members of the executive team. We invite you to read the safe harbor statements on Slide 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. And with that, I'll turn it over to Mike.

Thanks, Kristina. Good morning, everyone. Let me first share our view on the macro environment. In the first quarter, volatility in the global energy market remained high, driven by uncertainties around the potential for recession, the pace of China's economic recovery, and the impact of sanctions on Russian products. At the same time, supply remains tight, supported by nearly 4 million barrels per day of global refining capacity that has come offline in the last couple of years. Global demand continues to grow as the need for affordable, reliable energy increases throughout the world. IEA is projecting a 2 million barrels per day increase in 2023. Since last quarter, distillate cracks have come down, and gasoline cracks have improved as expected given the onset of the summer driving season. So overall, we believe supply constraints and growing demand will support strong refining margins throughout 2023. Cracks have decreased from 2022 levels but remain above historic mid-cycle levels. In alignment with what we said last quarter, we remain bullish into the driving season, and gasoline strength is expected to improve the diesel situation, while jet demand continues to improve. As we continue through the year, much will depend on the ongoing recovery in China and the extent, if any, of recessionary impacts. We continue building out our global presence, supported by our offices in Houston, London, and Singapore as we invest in our global commercial strategy. Our cost-advantaged refining system is well positioned to supply growing markets. This quarter, despite significant planned turnaround work at several key facilities, particularly in our Gulf Coast region at Galveston Bay and Garyville, we delivered the strongest first-quarter results in the company's history. Planned maintenance activities reduced refinery throughput by 11 million barrels compared with the fourth quarter. Our team's operational and commercial execution supported our ability to generate Refining & Marketing segment adjusted EBITDA of nearly $4 billion, or $15.09 per barrel. MPLX remains a strategic part of MPC's portfolio as it continues to grow its cash flows and capital returns. Our Midstream segment delivers durable and growing earnings. This quarter, it generated adjusted EBITDA of $1.5 billion, which is up 9% year-over-year. MPLX distributions to MPC were roughly $500 million this quarter and an annualized rate of over $2 billion, which fully covers MPC's dividend as well as half of our planned 2023 capital program. During the first quarter, we advanced value-creating projects. At Galveston Bay, we completed the STAR project. Rather than expand the GBR cokers, we elected to upgrade the resid hydrocracker unit as it offers better conversion and increased liquid volume yield. Fractionation modifications offer increased diesel recovery, and the refinery will be able to process significantly more discounted heavy crude. Overall, STAR is expected to add 40,000 barrels per day of incremental crude capacity and 17,000 barrels a day of resid processing capacity. Start-up activities are progressing, and we expect STAR to ramp through the second quarter of 2023. The incremental profitability from this project will primarily be determined by the spread between heavy crude and untreated diesel over the incremental 40,000 barrels a day of crude capacity. At the Martinez renewable fuels facility, we reached full Phase I production capacity of 260 million gallons per year of renewable fuels, ramping to design rates and yields as planned. Phase II construction activities are on schedule. Pretreatment capabilities are expected to come online in the second half of 2023, which will enable the facility to ramp to its full expected capacity of 730 million gallons per year by the end of 2023. Martinez will be among the largest renewable diesel facilities in the world, underpinned by a competitive operating and capital cost profile, robust inbound and outbound logistics flexibility, and an advantaged feedstock slate and our strategic relationship with Neste. In the first quarter, we returned over $3.5 billion to MPC shareholders via dividends and share repurchases. Today, we announced an additional $5 billion share repurchase authorization reinforcing our commitment to strong capital returns. Let me share some of the progress on our low-carbon initiatives. The Martinez indicative facilities are competitively advantaged. They're supported by upstream value-creation integration with our Beatrice and Cincinnati pretreatment plants and downstream integration with our vast marketing footprint. The strategic partnerships we're cultivating with Neste, ADM, and the Andersons create platforms for additional collaboration within renewables. This quarter, we made an investment in an emerging producer of dairy farm-based renewable natural gas, providing the ability to participate in early-stage development at an attractive entry point. Our Virent subsidiary is progressing a commercially feasible assessment for converting bio-based feedstocks into gasoline and sustainable aviation fuel. We believe for these projects and opportunities we are taking steps to advance our goal to lower the carbon intensity of our operations and the products we manufacture and supply to a growing market. At this point, I'd like to turn the call over to Maryann.

Thanks, Mike. Moving to first-quarter results. Slide 5 provides a summary of our financial results. This morning, we reported earnings per share of $6.09. Adjusted EBITDA was $5.2 billion for the quarter, and cash flow from operations, excluding unfavorable working capital changes, was nearly $4.2 billion. During the quarter, we returned $337 million to shareholders through dividend payments and repurchased nearly $3.2 billion of our shares. Slide 6 shows the reconciliation between net income and adjusted EBITDA, as well as the sequential change in adjusted EBITDA from the fourth quarter 2022 to first quarter 2023. Adjusted EBITDA was lower sequentially by approximately $600 million. This decrease was driven by Refining & Marketing as refining margins per barrel were down quarter-over-quarter. As we indicated last quarter, throughputs were lower primarily due to the significant planned turnaround activity. Corporate expenses were roughly in line with our guidance. Despite general inflationary pressures, we have maintained cost discipline, having taken $100 million out of corporate costs since 2020. The tax rate for the first quarter was 21%, resulting in a tax provision of approximately $800 million. Moving to our segment results, Slide 7 provides an overview of our Refining & Marketing segment. Like many in the industry, several of our refineries were impacted by winter storm Elliott at the end of December. These impacts carried into the first quarter, reducing our crude throughput by 3 million barrels. Winter Storm Elliott and higher planned maintenance in the Gulf Coast region reduced overall refining utilization, which was down 5% to 89%. Sequentially, per-barrel margins were lower in all regions compared with the fourth quarter. Capture was at 98%, reflecting a strong result from our commercial team, particularly given the extensive turnaround activity this quarter. Refining operating costs per barrel were roughly flat sequentially in the first quarter at $5.68. Lower throughput compared to the fourth quarter impacted operating cost per barrel. This was partially offset by lower energy costs, primarily in the Gulf Coast and Mid-Con regions, although we experienced higher natural gas prices in the West Coast. We expect operating costs per barrel to be lower in the second quarter as reflected in our guidance. Slide 8 provides an overview of our Refining & Marketing margin capture this quarter, which was 98%. Our commercial teams executed effectively in a volatile market environment. Light product margin tailwinds were balanced against impacts associated with inventory builds and planned maintenance activity. Catch results will fluctuate based on market dynamics. Still, we believe through our commercial efforts, our capture baseline has moved closer to 100%. As our strategic pillar indicates, we have been committed to improving our commercial performance, and believe that the capabilities we have built over the last 18 months will provide a sustainable advantage; we have meaningfully changed the way we go to market from a commercial perspective throughout our entire company. We believe these capabilities will provide incremental value beyond what we have realized to date. Slide 9 shows the change in our Midstream adjusted EBITDA versus the fourth quarter of 2022. Our Midstream segment delivered resilient first-quarter results. Adjusted EBITDA was 9% higher year-over-year, reflecting business growth. Our Midstream business continues to grow and generate strong cash flows. We are advancing our capital plan with projects anchored in the Marcellus, Permian, and Bakken basins. These disciplined investments in high-return projects, along with our focus on cost flow optimization, are expected to grow our cash flows. This will allow us to reinvest in the business and return capital to unitholders. This quarter, MPLX distributions contributed $502 million in cash flow to MPC. MPLX remains a source of durable earnings in the MPC portfolio and is a differentiator for us compared to peers without Midstream businesses. Slide 10 presents the elements of change in our consolidated cash position for the first quarter. Operating cash flow, excluding changes in working capital, was nearly $4.2 billion in the quarter. Working capital was a $98 million headwind for the quarter, driven primarily by increases in crude and product inventory, offsetting benefits from a decrease in refined product receivables related to lower product sales. Capital expenditures and investments totaled $664 million this quarter. We saw consistent spending in refining in the first quarter as we progressed on the Martinez renewable fuel facility conversion and the completion of the Galveston Bay STAR project. MPC returned over $3.5 billion via share repurchases and dividends during the quarter. This represents an 85% payout of the nearly $4.2 billion of operating cash flow, excluding changes in working capital, highlighting our commitment to superior shareholder returns. We now have $9 billion remaining under our current share repurchase authorization which includes the additional $5 billion approval announced today. At the end of the first quarter, MPC had approximately $11.5 billion in cash and short-term investments. Turning to guidance. On Slide 11, we provide our second-quarter outlook. We expect crude throughput volumes of roughly 2.6 million barrels per day, representing utilization of 91%. Utilization is forecast to be higher than the first-quarter levels due to planned turnaround activity having a lower impact on crude units in the second quarter. Planned turnaround expense is projected to be approximately $400 million in the quarter, with activity primarily in the Mid-Con and West Coast regions. We expect turnaround activity to be front-half weighted in 2023. By the end of the second quarter, we expect to spend roughly $760 million on turnaround in 2023 and anticipate the full-year turnaround spend to be comparable to the level of spend in 2022. Operating costs per barrel in the second quarter are expected to be lower at $5.20 as we expect to see benefits from higher throughput and lower energy costs. As we look further into 2023, we anticipate our operating costs per barrel would decline and trend towards a more normalized level of $5 per barrel as we complete turnaround and project activity. Distribution costs are expected to be approximately $1.35 billion for the second quarter. Corporate costs are expected to be $175 million, representing the sustained reductions that we have made in this area. To recap, our first-quarter results reflect our team's strong operational and commercial execution across the company. Our capital allocation framework remains consistent. We will invest in sustaining our asset base while paying a secure competitive dividend with the potential for growth. We want to grow the company's earnings, and we will exercise strict capital discipline beyond these three priorities; we are committed to returning excess capital through share repurchases to meaningfully lower our share count. With that, let me pass it back to Mike.

Thanks, Maryann. In summary, our results reflect the strongest first quarter in the company's history, generating $5.2 billion of adjusted EBITDA. MPLX remains a source of durable earnings in the MPC portfolio, distributing just over $500 million to MPC this quarter. As MPLX grows its free cash flow, we believe we'll have capacity to increase capital returns to MPC. This quarter, we invested $664 million. We will invest capital where we believe there are attractive returns. We remain focused on ensuring the competitiveness of our assets as we progress through the energy evolution. Solid execution of our three strategic pillars is foundational. 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. We believe the improvements we've made to our cost structure, portfolio and commercial and operational execution have driven sustainable structural benefits, which will enable us to capture opportunities irrespective of the market environment. We believe MPC is positioned as the refiner investment of choice with the ability to generate the most cash through cycles and delivering superior returns to our shareholders with our steadfast commitment to returning capital. Let me turn the call back 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. Sheila, we are ready for them.

Congrats on a great first quarter. I had a couple of questions here. The first is around the West Coast. We're all watching Singapore margins right now, and they continue to trade very weak. What's your perspective? Do you think the weakness in Asia is a reflection of demand? And do you see a risk that that product comes to the West Coast, at which point there could be some downward pressure on PADD 5 margins?

Neil, it's Rick. We are considering this from a global perspective. While it's a good idea to group Asia and Singapore together, I would also include Europe in that consideration. We've observed over the last few years that trade flows indicate a more interconnected world. Specifically regarding Asia and Europe, we view them as supportive of U.S. market conditions, which we believe is favorable for MPC. We've heard discussions regarding reductions in both Singapore and Europe, which we view positively, especially for the West Coast, as additional supply often comes from Asia. If that supply doesn’t reach the West Coast, we see it as beneficial for margins. Additionally, our breakeven point is lower than it has been historically. We have a competitive edge due to energy costs, feedstock procurement, refinery complexity, workforce, and reliability. Our robust global export program enhances our competitive position, particularly on the West Coast and in regions where we operate. With that, I’ll ask Brian if he has any specific comments regarding West Coast products.

Yes, thanks, Rick and Neil. Just a quick data point. We are seeing some fundamental shifts in global trade flows due to economic activities and product sanctions. The marginal barrel coming into the West Coast has traditionally been an import coming from the Far East. On order of magnitude, we're looking at 250,000 barrels a day to balance the system, primarily gasoline and jet fuel, and we expect that balance to continue to trend in terms of favoring more imports as we go forward as more facilities are converted to renewable diesel on the West Coast. Another relevant data point impacting imports from the Far East is the tanker rates and availability of the foreign fleet. Current rates out of South Korea into the West Coast are about $8 a barrel, much higher than historically seen. The logistics constraints in California make it tricky to push incremental barrels into the market.

That's great perspective, guys. And then a follow-up for me is around the return of capital. You have done a super job in reducing the share count. However, is there a consideration here, given the economic uncertainty about downside resilience through strengthening the balance sheet? Companies have gotten themselves into trouble by buying back stock during the highs of the cycle, and you guys have generally been countercyclical in your buyback approach.

Neil, thanks for the question. We have a little over $11.5 billion in cash sitting on the MPC balance sheet. We take into consideration each time we make decisions about share repurchase, and we do that quarterly. We look at macro conditions and cash positions. Having a strong balance sheet is foundational for us to be able to execute our capital allocation program. We evaluate these decisions quarter by quarter.

This is actually Kalei on for Doug. My first question is just on the macro and how you're positioned for the second quarter. Your peers are seeing solid demand numbers, and your opening commentary was constructive. However, the throughput guidance put out for the second quarter looks a bit conservative. At a high level, can you share any insights on demand from your own system and elaborate further on your near-term outlook?

This is Brian. As we consider our outlook for demand, we look comprehensively at our entire book of business from a marketing standpoint. On the gasoline front, our book of business increased by 4.7%. The EIA call on demand for Q1 was about 1.7%. On the West Coast, despite historically heavy rainfall and flood events, our demand was flat year-on-year, which bodes well as we trend into the summer. On the distillate side, we are off about 1.2% in Q1. EIA call on demand was down about 7%, but we believe that's heavily influenced by sluggish home heat demand due to warmer winter temperatures in the Northeast. On the jet fuel side of the business, we saw a 6% rise in demand in the quarter, which compares favorably to the EIA perspective. We expect jet demand to continue to grow and reach pre-pandemic levels late this year into early 2024.

So I guess, on balance, it sounds quite positive. My second question is for Maryann. The buyback obviously separates you from your peers. I want to ask about the ordinary dividend. Refining is not contributing to that dividend today due to being more than covered by MPLX distributions. As you close out spending on the STAR project and consider a reset in the mid-cycle, it looks like there is a lot of capacity for dividend increases. How are you thinking about that piece of your value proposition?

As it relates to the dividend, we continue to be committed to a secure competitive and potentially growing dividend. We evaluate that dividend at least annually, and we intend to do so following a similar schedule as we did in 2022. It is part of the capital allocation framework, and we will evaluate it similarly to last year's approach.

I'll just add to that. One thing we think is unique in our value proposition is the $2 billion-plus that we're receiving from MPLX. MPLX had a strong quarter, and we continue to grow those cash flows. We'll have a similar distribution increase discussion later in the year, which covers our dividends and capital spending.

I quickly wanted to focus a little on the Galveston-based STAR project. Can you help us understand how to model it more accurately? We can model the 40,000 barrel-per-day increase, but how does the 17,000-barrel resid processing capacity work? What spreads should we watch for that?

Manav, it’s Mike. As far as modeling, the way to think about the incremental change at the plant is running 40,000 barrels a day of more heavy crude with the additional resid processing capability. That's the delta between heavy crude and untreated or unfinished distillate. Today, the spread is about $15 for your reference, multiply it by the 40,000 and use that margin for future projections.

Thanks for the question, Manav. I’d say that we completed this project in phases, and a good amount has already been put in service previously. The remaining STAR project is around the resid portion. We previewed the start-up last quarter. We also expanded our hydrocracker instead of the GBR cokers for better conversion and liquid volume expansion. This is unique, as it's the only operating resid hydrocracker unit in the U.S. So that's an important aspect of this project.

That’s very helpful. My follow-up is regarding Martinez, which seems to be seeing a smooth start compared to other projects. Can you walk us through when everything starts up and request that once everything is operational, you break out earnings for us?

The Martinez facility reached full Phase I production of 260 million gallons per year earlier in Q1, ramping per schedule. The pretreatment unit is scheduled to come online in the second half of 2023. By year-end, we expect to achieve a full production rate of 730 million gallons per year. Regarding breaking out earnings, we will evaluate the appropriate timing for a renewable segment in the future.

Can we go back into Galveston Bay? Does that change your product slate? Also, what is the operating expense associated with the additional assets?

The project gives us more capability to run heavy crudes, which means the output will largely be dwindling down to distillate. The project itself is aimed at unfinished distillate. Regarding operating expense, we haven't provided specifics yet.

As for the inventory impact on Q1, we had a negative impact due to building inventory during the quarter. We do expect this to reverse in Q2; those changes are volatile. The impacts noted were driven by the planned turnarounds.

This is on diesel. There was an expectation that as jet fuel recovered, it would benefit the diesel market. Since you are indexed heavily to the jet market, do you think that benefit is coming just on a lag?

Yes, Sam, it’s a great question. We've seen some demand rise on the distillate barrel, but we've also seen a softening sell-off in recent weeks. Our view is the bearish sentiment directly relates to the Russian sanctions and their impacts, not indicative of a broader supply/demand imbalance.

We remain positive on jet recovery. We believe it will continue to progress, and gasoline inventories are significantly low compared to last year or the five-year average, which contributes to our constructive outlook.

As a follow-up, I want to bring attention to your capital allocation. Given the MPLX distribution covers the MPC dividend and your interest income nearly covers half, are you considering adjustments to your mid-cycle cash balance target?

Our approach is more dynamic. Having north of $11 billion on the balance sheet is critical to our plans. We’re committed to returning capital while evaluating market conditions.

We've maintained a $1 billion target despite stress testing through COVID. The interest income on our cash balance has provided benefits that we appreciate and factor into our decisions.

I wanted to ask about light-heavy spreads. They've come in quite a bit, and Brent is now below $12. Can you discuss why this tightening is occurring and the outlook for the light-heavy spread?

We believe the market’s been overdone to the negative. OPEC+ cuts may not be as impactful as shown, and U.S. refiners have many upside advantages, including our logistics and production capabilities. We see short-term volatility but are expecting more favorable conditions ahead.

Thank you for joining our call today. If you have additional questions or need clarifications on topics discussed this morning, please feel free to reach out to any members of the Investor Relations team. Have a great day.