Marathon Petroleum Corp (MPC) — Q2 2025 Earnings Call Transcript

Welcome to Marathon Petroleum Corporation's Second Quarter 2025 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 Maryann Mannen, CEO; John Quaid, 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 SEC filings. With that, I will turn the call over to Maryann.

Thanks, Kristina, and good morning, everyone. Our second quarter results reflect actions we have taken to create exceptional value. We delivered 97% utilization, achieving record rates at several refineries throughout the quarter. And we leveraged our fully integrated value chains across the West Coast, Gulf Coast, and Mid-Con to deliver 105% margin capture. Current fundamentals, especially strong diesel demand, coupled with tight inventory levels, remain supportive of strong margins. U.S. gasoline inventories are in line with 5-year averages, and diesel inventories are at historically low levels. As anticipated, sequentially, we saw steady growth across gasoline, diesel, and jet. Our system was ready to run. Higher OPEC+ production and more Canadian supply should lead to crude differentials widening later this year. Our longer-term fundamental view supports an enhanced mid-cycle environment for refining as we expect demand growth to exceed the net impact of capacity additions and rationalizations through the end of the decade. We expect the U.S. refining industry will remain structurally advantaged over the rest of the world. The flexibility of our refining assets and our domestic and international logistical and commercial capabilities further increase our global competitive advantage. We are steadfast in our commitment to safely operate our assets and protect the health and safety of our employees. We continue to advance our operational and commercial capabilities to enhance competitiveness, deliver incremental value, and achieve peer-leading profitability in each region in which we operate. In the first half of 2025, our Midstream business delivered 5% year-over-year segment adjusted EBITDA growth. MPLX is well positioned to support the development plans of its producer customers especially as demand increases for natural gas-powered electricity and LNG imports and exports. And with the development of its Gulf Coast fractionation facilities, MPLX is positioned to supply growing global demand for NGLs. MPLX's financial flexibility, its producer customer relationships, and strategic road map for growth all place it in an excellent position to continue to significantly grow its distributions, further enhancing the value of its strategic relationship with MPC. Given our highly advantaged refining and marketing business and the $2.5 billion annualized distribution from MPLX, we believe Marathon can lead the industry in capital returns through all parts of the cycle. We announced two transactions to further our portfolio optimization for today and the future. First, MPC's $425 million divestiture of its partial interest in ethanol production facilities. As the partner's strategic goals evolved and diverged, an opportunity came for MPC to exit the partnership. We were able to monetize our interest at a very compelling multiple. We were the largest blender of ethanol before, and we are the largest blender after the sale. There will be no commercial impacts from the sale. Second, MPLX announced the strategic acquisition of Northwind Midstream for under $2.4 billion. Northwind provides sour gas gathering and treating services in the highly prolific Delaware Basin. Increased crude drilling activity in the eastern edge of the Northern Delaware Basin has been enabled by increased sour gas treating and AGI well capacity provided by these assets. The assets will provide prompt treatment solutions for existing and new producer customers. Our fee structure comprises gathering, compression, processing, as well as more extensive CO2 and H2S treating. The higher levels of CO2 and H2S warrant a higher-fee structure compared to other regions. On average, this gets to an aggregated rate significantly above other regions. These assets are complementary and adjacent to our existing Delaware Basin natural gas system and will expand MPLX's treating and blending operations. The addition of 200,000 dedicated acres will increase MPLX's access to natural gas and NGL volumes. The optionality to direct these new volumes through our integrated system will accelerate our growth opportunities in the Permian. The transaction is expected to be immediately accretive to MPLX's distributable cash flow and represents a 7x multiple on forecasted 2027 EBITDA after the treating system reaches full capacity. MPLX's execution of its wellhead-to-water growth strategy and the ability to accelerate growth opportunities in the Permian extend the duration of its anticipated mid-single-digit EBITDA growth. We believe execution of our strategic commitments, including portfolio optimization, will position our integrated system to deliver industry-leading capital returns and offer a compelling value proposition for our shareholders. Now I'll hand it over to John to discuss our financial performance.

Thanks, Maryann. Moving to second quarter highlights. Slide 5 provides a summary of our financial results. This morning, we reported second quarter net income of $3.96 per share. During the quarter, we returned approximately $1 billion to shareholders through dividends and repurchases. Slide 6 shows the sequential change in adjusted EBITDA from first quarter to second quarter 2025, and the reconciliation between adjusted EBITDA and our net results for the quarter. Adjusted EBITDA for the quarter was approximately $3.3 billion, higher sequentially by $1.3 billion, primarily due to increased results in our Refining and Marketing segment. Moving to our R&M second quarter segment results on Slide 7. Our refineries ran at 97% utilization, processing 2.9 million barrels of crude per day. R&M segment adjusted EBITDA was $6.79 per barrel, reflecting strong operational and commercial performance. Turning to Slide 8. Second quarter capture of 105% was driven by our strategic execution to grow our product channels and favorable secondary product pricing relative to gasoline. Leveraging our integrated value chain, we achieved strong profitable growth through our product sales channels including brand, wholesale, and export sales. We are committed to improving our commercial performance and believe we are building capabilities that will provide sustained incremental value and will produce results that can be seen in our financials. We are also making investments in our Refining and Marketing segment targeted on growing our margins. The multiyear projects at our Robinson and Galveston Bay refineries increase our ability to produce higher-value products, and the execution of smaller high-return quick hit projects drive incremental yield and performance improvements. Slide 9 shows our Midstream segment performance for the quarter. Our Midstream segment continues to deliver cash flow growth with year-to-date segment adjusted EBITDA increasing 5% over last year. In the second quarter of 2025, MPC received distributions of $619 million from MPLX, a 12.5% increase compared to the $550 million received in the second quarter of last year. MPLX remains a source of durable growth as it progresses its mid-single-digit adjusted EBITDA growth strategy. Slide 10 shows our renewable diesel segment performance for the quarter. Our renewable diesel facilities operated at 76% for the quarter, which included a planned full plant turnaround at our Dickinson facility. Margins improved as we realized incremental production tax credits in the second quarter, and we will continue to focus on optimizing our renewable facilities, leveraging logistics and our pretreatment capabilities. Slide 11 presents the elements of change in our consolidated cash position for the second quarter. Operating cash flow, excluding changes in working capital, was $2.6 billion for the quarter. Working capital was a $34 million source of cash for the quarter. Inventory drawdowns to normal operating levels were a source of cash, but they were offset by higher product receivables from increased sales volumes. Second quarter capital expenditures, investments, and acquisitions were just over $1 billion, approximately $350 million for MPC on a stand-alone basis, and almost $700 million for MPLX. In the quarter, MPC repaid $1.25 billion in senior notes, which matured in May, and MPLX redeemed $1.2 billion of senior notes, which were scheduled to mature in June. At the end of the quarter, MPC had cash of nearly $300 million, and MPLX cash of approximately $1.4 billion. We manage our balance sheet to an investment-grade credit profile, supported by the $2.5 billion and growing annual distribution from MPLX, our strong balance sheet provides us the financial flexibility to execute our strategy. Turning to guidance on Slide 12. We provide our third quarter outlook. We are projecting crude throughput volumes of 2.7 million barrels per day, representing utilization of 92%. Turnaround expense is projected to be approximately $400 million in the quarter, with activity mainly focused in the Mid-Con and West Coast regions. For the full year, turnaround expenses are expected to be similar to last year at around $1.4 billion. Operating costs are projected to be $5.70 per barrel. Distribution costs are expected to be $1.5 billion, and corporate costs are expected to be $240 million. With that, let me pass it back to Maryann.

Thanks, John. Our strategic priorities and commitments have produced sustained structural advantages. Safe and reliable operations are foundational. Operational excellence is integral. And paired with strong commercial execution, we should deliver peer-leading profitability. We will continue to optimize our portfolio for today and the future through strategic investments and divestitures, such as the sale of our partial interest in ethanol production facilities. We will execute our $1.25 billion stand-alone capital plan for 2025 with 70% targeted on high-return projects designed to create optionality and improve our ability to capitalize on market opportunities. MPLX has announced $3.5 billion of acquisitions so far this year, enhancing the growth platform of its natural gas and NGL value chain strategy, and remains on track to invest $1.7 billion on organic growth plans in 2025. MPLX differentiates MPC from peers, providing distributions that we expect to cover MPC's dividends, stand-alone capital spending, and more. MPLX increased its distribution by 12.5% last year and expects to see similar increases for the next few years. Our integrated value chain and diversified assets position us to lead in capital allocation. Let me turn the call back to Kristina.

Thanks, Maryann. As we open the call for your questions, as a courtesy to other 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 call for questions. Operator?

Maryann, congrats on a strong quarter. I need to ask about the 105% capture. I know you typically don't emphasize this, but in the past, you've gone over 100% in the fourth quarter, where circumstances change. However, I don’t recall seeing over 100% in the second quarter before. Can you discuss the 105% capture you achieved in the second quarter?

Of course. Thank you for your question. We've been prioritizing our commercial performance. It has been, and will continue to be foundational for us to deliver peer-leading results. The commercial and value chain optimization teams have been, and will remain, committed to improving commercial performance. We expect that these are sustainable, and we'll be able to continue to deliver those results in the coming quarters. We've got the scale of our fully integrated system across our three regions. We've increased commercial capabilities, as you know, and we think those sustainable changes will continue to deliver value in the future. It's part of our commitment to excellence. And frankly, we expect this to lead to stronger cash flows and our ability to deliver the most cash flow per share. With that, let me pass it to Rick because I'm sure he's got a few other things that he would like to share with you as well on the performance in the quarter.

Manav, thank you for the question. So Maryann used the word sustainable. I couldn't agree more, but I would also say I want to leave you with the fact that we have made and continue to make structural improvements to our organization to better our performance. So I think that's a key point that I want you to walk away with. This isn't a one and done. We expect to maintain this and to continue to improve on our performance. Maryann also mentioned our regional optimization. So when you look at our fully integrated value chains within the Mid-Con, the West Coast, and the Gulf Coast, we believe we're unparalleled to take advantage of our assets and our connectivity within each region, whether that's moving feedstocks, intermediates, or products between one plant or one region to another, we have incredible flexibility. And then, Manav, what was mentioned on the call in the second quarter, we certainly achieved strong profitable growth through our product channels, our Marathon brand, our wholesale channel, and our international clean product exports. As well as I'll leave you with, it's very well known that diesel cracks have been driving the market as well as jet has been very strong, and we leaned in significantly to both of those product channels throughout the quarter. So I hope that helps to give you some color, Manav.

No, that's very helpful. My quick follow-up here is, we have seen OPEC put in some hikes, more hikes are on the table. We are not seeing still a material widening on the quality discounts. WCS has actually started to move. The last I checked was almost a $13 discount to WTI, which does help you a lot. I'm just trying to understand your outlook for the quality discounts as OPEC comes forward with August and September hikes of additional barrels, how do you see those discounts trending into the year-end?

Yes. It's a really good call out, Manav. I will tell you that we expect differentials flat out to widen out in the back of the second half this year. As everyone has seen OPEC recently accelerated increasing bringing barrels to market by 547,000 barrels a day by September. I want to double-click on September for just a moment because that's key. What you will find at least in our experience is, it will take a month or two, Manav, for those barrels to impact the global flows and then ultimately impact the spreads. So continue to watch that as third quarter plays out here. And then I'd be remiss if I didn't chat about the Canadian production as well and where we see everything coming out of Canada. So with Canadian maintenance behind the producers, we're seeing bullish Canadian production as witnessed by recent apportionment on lines out of Canada for actually six out of the last eight months. And as you know, turnarounds are increasing in the Gulf Coast this fall, reducing demand for Canadian barrels. And then here in the middle to end of third quarter, we're going to have diluent blending kicking in here shortly to swell the pool as well. So we see a lot of positive trends on the Canadian barrel that, as you know, comes into our system, and we can use in a very dynamic way. In fact, there is no one in the United States that can consume more heavy Canadian than us. So we're looking forward to third quarter, fourth quarter, as you pointed out, Manav. The signals and the differentials are already beginning to change.

Maryann, there are two questions in here. One, maybe this is for Rick. With the two pending California refinery closures for your system, how do you think that is going to impact you? And I would imagine there's a lot of opportunity for you and where you see is the biggest opportunities? The second question is on the turnaround expense. You have back-to-back two years actually pretty heavy turnaround, about $1.4 billion spending. Is that considered the cycle high? And over the next several years, what would be a more normal level or average for the cycle? What is the more normal level for the turnaround expense that we can expect?

Thanks, Paul. First, on California. Let me share a few thoughts, and then I'll pass it to Rick and he can give you incremental color. On California, we've been studying this region, as you well know, for a long period of time. And one of the things that we've said is we believe that we have one of the most competitive regions on the West Coast. Frankly, we've shared over the last two years, we've put about $700 million to work in our L.A. asset with a return that we expect in and about 20%. It will improve efficiency. It will add reliability, obviously, generate incremental EBITDA. All at the same time, then complying with required NOx emission reductions. And so we think there's real advantages there, as you well know. We think about the number of ICE vehicles remaining in that state, 28 million vehicles. I think about eight million of those sit in LAR, really in very close proximity to our asset as well. So we've made commitments to the region. We continue to feel positive about those commitments we've made. And again, this project that I referred to will be complete this year. I'm going to pass it to Rick and he can give you any incremental color on California.

Yes, Paul. So just a few additional items because Maryann really covered it well. A couple of things to watch as the closures happen is we will have access to a lot of local California crudes that we don't have access to today, or not as much access to. And we see those as being advantaged barrels. So look for that to happen. We see that certainly as a tailwind for us being right there in L.A. with our facility. And then I'll also leave you with don't just think of us as L.A. and L.A. only. Really, think of us as our fully integrated system. What I mean by that is our Pacific Northwest, it's Anacortes and it's Kenai. So we have the optionality to use all three facilities to play off of one another. Whether that be providing CARB gasoline into the state of California, i.e., San Francisco, when differentials blow out, or to move intermediates between the three facilities. So we have a lot of optionality, which we believe ultimately gives us a really strong competitive advantage in that region.

Rick, can you discuss how this impacts the Southwest market, particularly with the El Paso refinery and the Rocky Mountain area? Since L.A. is theoretically sending barrels to Phoenix, that means those barrels may become less available. How will you be able to leverage this situation?

Yes. Great question, Paul. I will tell you that El Paso can reach the Phoenix market very efficiently and effectively, and we'll continue to lean into that market even more as all things play out within California. Because ultimately, it's fair to say that most people know that California is short and it's going to be even shorter going forward. So that will continue to place more emphasis on our El Paso refinery to cover the Arizona market.

And Paul, I wanted to come back to your second question, I think, which was around turnaround and whether or not this run rate is what we're expecting going forward? Just a couple of comments, and I'll pass it to John to give you some of the details. But as you know, we've continued to prioritize our peer-leading performance and our operational excellence to ensure, one, safe and reliable operations. And two, the ability to continue to improve profitability per barrel. A lot of the work that we've been doing, quick hit projects, projects that I mentioned as well, are all part of our objective to ensure the most profitable results for each of the regions. Let me pass it to John to address your turnaround question.

Yes. Thanks, Maryann. And thanks for the question, Paul. I think like you noted, I think we're still kind of coming out of the backlog from COVID, et cetera, still working through that. So we might be here at the peak as we continue to work through that backlog. And then I think if you look out a little further beyond that, we'll see the numbers come back down, although I'm not going to give you a 2027 guidance on the call today. But I hope that directionally, that gives you a feel for where we are.

First question is about the return of capital. This has been a key aspect of MPC's strategy following COVID, particularly in terms of reducing the share count. The buyback this quarter might be lower than our recent trends. I'm not sure if there were specific factors influencing this or if it's just a reflection of our current cash balances. Maryann, could you share your thoughts on the return of capital, especially regarding the buyback?

Yes, Neil. So no change in the way that we think about prioritizing the return of capital. One of the things that we've been trying to say is all of the work that we're doing, improving commercial performance, our operational excellence should yield the strongest cash flow per share and therefore allow us to lead in capital return compared to our peers. I think the other thing that I would want to be sure when we look at MPLX, we've been talking about that 12.5% distribution and the potential to continue to grow that over the next few years. We raised that distribution last year as well. The benefit of that, at least right now, is $2.5 billion on an annual basis coming to MPC. As you know, that covers MPC's dividend to its shareholders and the capital that MPC was planning to put to work in 2025 with some, right, available for other elements. So as MPLX is able to grow that distribution, and that $2.5 billion improves as well, that should further support our ability, right, to continue to lead in capital return. But I think your statement is accurate. When you look at the amount of cash flow that we have in terms of our results and how we prioritize that cash flow, these are reasonable ranges. We'll take a look each quarter at market dynamics, our cash flow expectation, et cetera, but we intend to return all free cash flow in the form of share buybacks. So no change to that at all, Neil. I hope that answers your question.

That's really helpful. Regarding Galveston Bay, it appears there was some downtime at the RHU unit. Can you update us on when we might restart that? I know you're also working on projects related to high sulfur distillate and converting that to ultra-low-sulfur diesel. What is the current status of that project as well?

Yes, certainly, Neil. As you saw in the second quarter, there was very minimal impact from GBR. I'm going to hand it over to Mike shortly, who will outline the plans for the third quarter and discuss the upcoming restart for GBR. You're correct that we are also prioritizing capital, with Galveston Bay being a key focus for DHT as we aim to optimize that product slate. We have a couple of other projects, including Robinson, where we can enhance yield. We continue to invest capital similarly to our approach with Galveston Bay, which is crucial for us from a reliability perspective. Especially considering the returns we anticipate on these major projects, around 20%, and our overall portfolio expected to reach about 30% this year. Now, let me pass it to Mike to provide details on the GBR restart plans.

Thank you, Maryann. In June, there was an incident involving one of our trains in the resid hydrocracker. The refinery team handled the situation well, responding quickly and extinguishing the fire without any injuries. We are approximately halfway through our phase start-up process. The 200 train is operational, and the downstream units are stable. We are currently working on the 300 train and expect it to be operational soon. Overall, we anticipate returning to planned production rates shortly. We are optimizing the remaining plant operations related to resid containment, and this has been factored into our third quarter guidance, which is expected to have a minor impact on our capture trends.

Maryann, I wonder if I could come back to the issue of capture, please. You and I have had this conversation before about the danger of the perception that when you talk about commercial, people think trading, you get a 1x multiple. And what I really want to ask is, obviously, this capture trend has been getting better. And it looks like it's more embedded in the go-forward capture rate, which you've always talked about as being kind of a 100% target. So I wonder if I could put you on the spot a little bit and say, well, if this is repeatable, what is the new capture rate? What is the new sustainable capture rate that you would expect out of your system? Or is it still too early to answer?

Yes. Doug, thanks. So a couple of things. One, and I hope you heard both from the earlier question around capture. Both Rick and myself speak about sustainable changes. As you've mentioned, we've been talking about it for a period of time. We've continued to prioritize our commercial performance. We've talked about some of the things that we've done, giving us greater visibility as we look at operations, not only in Findlay but in Houston, in London, and in Singapore. We think those provide us sustainable change and visibility. It's an area where we continue to prioritize. I don't think you heard in Rick's response that he talked about one-time results and trading. Now certainly, we look to optimize in the prompt as well but a lot of the work that we're doing is really quite different, and that is really sustainable, looking at the way that we make our decisions, looking at the tools and the capabilities that we have to make decisions more rapidly. Those would be the things that I would point to. It's a challenge to call capture from quarter-to-quarter. The reason for that, obviously, is some of those things are not within our control. We'll use the phrase, you've heard us say it. We're going to control the things we can. Obviously, as prices move up or down more rapidly, the impact on secondary. Rick talked about brand, Rick talked about across the value chains and the integration there. These are the types of changes that he, and the rest of the commercial team, have been making. So we prioritize commercial for a period of time, and we will continue to do that and ensure that we can deliver results quarter after quarter. I'm going to pause, Doug.

That’s what I’m getting at, right? Because when Shell and others discuss trading, it's usually a 1x multiple business, and I want to ensure we're understanding it correctly. My follow-up, Maryann, if you don’t mind, is about cash taxes. It's typically a question we ask of the E&Ps, but it seems to us, even though you don’t provide the full detail of your cash flow statement, that we might be starting to see some benefits from the One Big Beautiful Bill regarding some of the investments you’ve made on the West Coast. I wonder if you could provide some insight into whether you're receiving accelerated bonus depreciation, not just in the West Coast, but also for your planned projects over the next year or so across the portfolio.

Doug, it's John. I'll just step in and take that one. I think you're spot on, right? We're a capital-intensive business. Going back to full expensing on a permanent basis and rolling that back to January of this year, there's a nice cash tax benefit that we're going to be expecting to see versus where those rates had lowered under the previous legislation. We don't mind the federal rate staying at 21% as well, but certainly a nice cash flow benefit from bonus depreciation.

Can you quantify it, John?

No, I don't know if I want to do that here today. I think you'll see that as we start to report in our quarterly results, and we'll speak to it then.

Start on the balance sheet. And it seems like you leaned on it a bit more this quarter to support buybacks. If I think about prior guidance, I think it included $7 billion gross debt at the parent, and $1 billion of cash. So $6 billion of net debt, and I think you're closer to $7.5 billion now. So can you talk about if your targets for net debt have changed? Or if there are one-offs in the quarter that impacted net debt that you'd expect to reverse?

Jason, it's John. I'll take that one. Yes, I think, look, I don't know that I'd look too much this quarter, and I'll try and walk you through some pieces because our targets have not changed of being around $1 billion on the cash and the debt targets you mentioned from a gross debt standpoint. I think here, you heard us talk about the sale of this interest in our ethanol JV, which closed last week. That cash is in the bank. We knew kind of where we were with that as we went into the end of the quarter. And again, from quarter end to quarter end, you're going to get some timing things that come through. I guess the clearest way I can kind of maybe put you at ease as we just closed here the month of July, we're pretty much right back to our $1 billion of cash on the balance sheet.

Got it. That's helpful. And then my other question is kind of strategic initiatives. At the June investor event you held, you talked about a few things that I was hoping you could update us on. One of them being targeting moving more barrels from kind of Eastern PAD to further East. One on interest in petchem bolt-ons and then the last on kind of organic Gulf Coast capacity growth. I'm not sure if any of those really had more fully baked plans behind them? Or if those were things you were initially exploring, but I was just hoping to get any additional color on those if you have any to share?

Sure, Jason. Maybe just a couple of comments, and I'll pass it to Rick to address a few of them that you had embedded in there that we shared when we were together in June. Certainly, portfolio optimization is a strategic priority for us. As an example, we talked about the Andersons today. So we continue to ensure that the portfolio that we have for today, as well as the portfolio we see necessary to carry out our strategic objectives, both at MPC and MPLX, are where they need to be. Ensuring the competitive nature of all of those assets, and optimizing our profitability across all three regions that we operate is one of the key tenets of our strategic opportunities. So just wanted to be sure. We'll continue to look for those and ensure that the portfolio is appropriate for now and for the long term. I'll pass it to Rick, and he can address some of the specifics that you mentioned.

Yes, Jason. I can provide a brief update on clearing Mid-Con barrels since our last conversation. This is a key focus for us every day, especially during the winter months when demand decreases in the Midwest. We are actively looking for opportunities to push barrels eastward. A third-party pipeline is expected to come online in early to mid fourth quarter, which we plan to take advantage of to move barrels east. We are also directing barrels toward the Gulf Coast and into the Nashville market, among others. While we have been doing this for years, our efforts to penetrate these markets have intensified recently. Additionally, we plan to clear extra barrels into the East Coast by the end of the fourth quarter.

Maybe turning back on the macro. As we see the evolution of capacity curtailments and limited additions, how do you view the net capacity outlook for the global refining kit between the near to medium term, and its relative impact on your assets?

Overall, we've maintained a positive long-term outlook on our refining sector. This year, we've witnessed reductions in capacity coming offline. When you consider both the reductions that have been announced and those that are yet to occur, we're looking at an approach of over 1 million barrels a day, although some of this will extend into next year. In terms of incremental supply, both Dangote and Dos Bocas have commenced operations, but they still face some challenges. Once they reach full capacity, we expect them to contribute nearly 900,000 to 1 million barrels. Additionally, there are a few smaller potential reductions in Europe and Asia. We anticipate demand to grow by about 1 million to 1.2 million barrels a day. Once we navigate through this balance of supply coming online and offline, we see a very positive outlook. Globally, we believe the U.S. remains in a strong position, and the initiatives we are pursuing across our portfolio should provide us with excellent opportunities to continue leading in the market.

Understood. And longer term, as far as the strategic path forward with significant growth announcements within your midstream portfolio, both organically and inorganically thus far this year. What do you think is the next frontier growth for MPC?

I'd say, look, in the short term, as we continue to grow MPLX, that distribution growth coming back to MPC gives us flexibility to return capital. I mentioned earlier the importance of our portfolio optimization, ensuring that the assets that we have today, and those that we have in the future, support our long-term strategic plans. As you know, with the announcement of our frac and export dock on the midstream side. Our ability to market LPGs in the export market continues to be an opportunity for us to grow in that space as well. There would be a few things, Theresa, that I would tell you in the short term, support how we see MPC.

Could you talk a little bit about the factors behind the recent strength in diesel cracks? I think you previously mentioned low inventories and pretty good demand. But how sustainable do you think this is? Should we expect strong diesel cracks for the rest of the year and into 2026?

You accurately identified the main reasons. U.S. inventories are at five-year lows or lower, and we haven't seen such low diesel inventories in a long time. The demand signals from both over-the-road and agricultural customers are quite strong. Additionally, there is robust demand for jet fuel, which competes with diesel production. Looking ahead, we expect to see a healthy premium continue for the rest of the year, especially if we experience a cold winter. We are currently in hurricane season, and any weather disruptions could provide an additional boost. Overall, we are optimistic about diesel cracks remaining at current levels over the next three to four months.

Sounds good. And then could you also share a little bit more behind the thinking of divesting the ethanol stake? Looks like the valuation was quite attractive, approximately $1.70 per gallon. I think some of the public peers trade much closer to $1 per gallon. But were there any other factors that led you to exit the JV? And also, should we think about the proceeds as being earmarked for share buybacks?

Yes. Thanks for your question. I think you said it well. We received what we thought was a compelling offer for our partner. We have been the largest ethanol blender, and we will continue to be. There's no change there. Really no change to the commercial outlook. When we think about this JV, the opportunities that we saw to put capital to work versus the opportunities that our partners saw were different. And so we took the opportunity to optimize our portfolio for the future. I think you characterized the economics well.

More on the midstream side, a number of the major Appalachian producers are pointing to potential growth in coming years with incremental in-basin demand, new takeaway. You have the processing expansion. But wondering what other areas of the value chain could you see yourselves participating in across the midstream build-out? And how are you viewing these opportunities versus the Permian?

Phillip, this is Dave. I'll take that. So I'm going to take it from two different angles. I'll touch it from the NGL side and also from the nat gas side. So let me start with the NGL side. When we've looked at our business, it's really around the continued evolution and optimization of those strategies. When you look at the Permian NGL, you touched on the processing side. We recently acquired 100% of our BANGL pipeline, announced our Gulf Coast fractionation export terminal project. But again, strategies don't stop. They continue to evolve. As you look forward on the NGL side, one of the reasons we're excited about it is with our JV with ONEOK with our relationship between MPC and MPLX. We have some of the largest advantaged refineries in the U.S. Gulf Coast. Think of integration with those. Also think about the Gulf Coast, the large petrochemical platform and the integration opportunities around the petchem down the road. That kind of gives you a view of what we're thinking about on the NGL side going forward. If you go to the nat gas side out of the Permian, I start by saying we believe incremental takeaway capacity is necessary in the Permian for the nat gas. That's being driven by not only the growth of nat gas in the Permian but also from the demand side, really driven by the LNG complexes down the U.S. Gulf Coast. That is being complemented a little bit with a lot of the discussion around the growth in the data center side, but the main drivers being the LNG. So you think about our previously announced projects, a lot of them around the JV. We've been really pleased with the pace of our volume growth, our ramps from FID to full capacity in our JV. So think about the Whistler, the Matterhorn, Blackcomb, those long-haul pipes coming out of the basin. In addition, think about our announcement of Traverse and the subsequent expansion of 2.5 Bcf a day, the connection between Agua Dulce and Katy and the increased flexibility that gives our customers. The last piece, I want to maybe keep in your mind is the final connectivity to those LNG facilities I touched on earlier. I think of ADCC and BayRunner. With all that said, based on the continued strong demand we're seeing, the production growth, the interest from our business partners, we believe there's still a lot of opportunities going forward in that space. Hopefully, that helps.

And Phillip, this is Rick. Just one other item maybe to point out on the Utica Marcellus. We have a healthy demand for condensate in the region. We have condensate splitters at Canton and at Catlettsburg. Over the years, we've built out quite a system to connect to the Utica-Marcellus region to get access to those barrels, and we're continuing to look for new opportunities to even lean into it more so. So keep your eyes open there.

Yes, and we saw some producer consolidation there during the quarter, which might help also. And then just on California refining, so the legislature is currently looking at a number of potential regulatory changes, including RVP waivers, E15, LTFS caps, streamlining refining permit and also regional gasoline spec. So a lot there, but just any view on how you would see some of the changes impacting market conditions, potential changes, or just helping to offset some of the impact from closures?

Yes, Phillip, thank you. Just a couple of things really about California. I think it's interesting. You talked about several of the initiatives, thoughts, changes, et cetera, we've been dealing with. The potential for minimum inventory requirements, not necessarily sure whether it's on production or on demand. There was a point in time in which perhaps the state was considering actually running refineries to ensure that there was ample supply. What we are seeing now with respect to some of the closures that have been announced also is a shift from some of this rulemaking and trying to be more structured around that, to a way that the state is really trying to ensure that there will be ample fuel supply to meet customer demand. You talk about a series of other changes. I think you mentioned a couple of them. I'm going to ask Jim to give you his thoughts as we really track what's been happening in California to some of those that could have some meaningful impact, either in a positive or a negative way. I'll ask Jim to share some of that with you.

Thanks, Phil. We've been dealing with CARB on a lot of matters to help kind of expedite permitting through the state on a few of the projects we're looking at, some of the maintenance projects that currently get held up by the CECWA process. We find the agencies are very open right now to those discussions, and we do think some good benefits will come out of them. I would say, all in all, they've been much more receptive, I think, to the items we need to execute our refineries in the state.

Maybe just one for me on the biofuel side and renewable diesel. Nice improvement quarter-on-quarter. But if we take a step back and look at the macro backdrop, you've had a couple of positive regulatory steps in the right direction this year but margins have stayed pretty rough. Is this lingering uncertainty, this lag effect as we work through credit banks? Or as you look into the back half of this year and into 2026, what do you think we need to see for the market to tighten up and margins to move higher?

Yes. Thanks for the question. I would say this. First and foremost, you've seen the approach that we, MPC, have taken in renewable diesel. As you know, it's a fairly small portion of our daily throughput. We've got about 12,000 a day in Dickinson. We produced 48,000 a day at Martinez of which 24,000 is ours, so a pretty small percentage. If you allow me to round up, right, 50,000 a day versus our 3 million barrels a day. We've tried to take a prudent approach to putting capital to work there, particularly on Martinez as well. I think you said it well, there are clearly some things that need to have happened in order for the economics to improve. We believe we have, frankly, one of the most competitive assets. But certainly, the incremental regulation and other changes in order to get the margins to improve are critical for the longer term.

I wanted to go back to California. We talked about peers closing facilities while Marathon continues to invest in its L.A. Refinery. I know currently, you're investing to reduce operating costs and lower emissions. But looking ahead, could you talk to how you think about further investments or expansions at L.A. to take advantage of a market that's becoming increasingly short gasoline and jet?

Certainly. Thank you for that. That project, we expect to really come online by the end of this year. We think it's about a 20-ish percent return, as I mentioned, improved reliability, reduces overall cost, and adds efficiency while committing to NOx reduction emissions, et cetera. Going forward, I think what we would be looking at is really all focused on improving the reliability of that asset. As we've talked about, one of the things that we are trying to achieve is being the most profitable in every region where we operate. Reliability and commercial execution, obviously, are key to that. So what we're looking at right now would be really committing work that would improve the overall reliability of the assets at LAR.

Yes, Joe, we continue to see strong and what I would characterize as stable compared to last year, gasoline demand. We're having a good summer driving season. A lot of times, when you get to the point in time where we're at in the summer, you would see quite a fall-off, and we're not seeing that yet. So we're very constructive.

Distillate strength and broader tightness in heavier molecules have been discussed a bit already. But diesel and jet differentials appear to have been particularly strong in the Mid-Con and West Coast in recent weeks. What are you seeing in those regions that could be driving that?

Yes. Conor, this is Rick. I think what you're seeing is you're seeing more refiners running a sweeter slate and that shorts diesel and jet. Thus, you're seeing octane spreads blow out in the Mid-Con. But I think it's a slate call, one, and then it's a demand call, two. When you put both of those on top of one another, I think that explains the majority of why you're seeing that phenomenon.

Thank you for your interest in Marathon Petroleum Corporation. Should you have additional questions or want clarification on topics discussed this morning, please contact us, our team will be available to take your calls. Thank you for joining us today.