Marathon Petroleum Q1 2024 Earnings Call Transcript

Yeah. Good morning, Neil. I'll let Rick start-off with that one.

Yeah. Hi, Neil. Good morning. The market really in California is fundamentally short and it's long diesel, that's kind of the thesis as we look out there. And an example of that is if you look at gasoline inventories, especially right now, they're tight. In fact, they're below the five year average and we're seeing solid demand across the integrated system. So I generally would say that's the reasoning. That's the reasoning for the scenario right now. And I just want to reiterate, the market is short gasoline and so this is an environment that we expect may persist through summer and we'll see where it goes from there.

Yeah, Neil, this is Mike. Thanks for that question. There is no change in our commitment to returning capital, evidenced by the fact that we got the board to authorize another $5 billion. So, what I would say to you is, don't read into the quarter-by-quarter variability. To your point, it could have been a little bit higher, but there's a lot of factors that are influencing the activity within the quarter. So the takeaway should be, we are committed and that hasn't changed. We believe in returning capital to shareholders. You're going to continue to see us do that.

Yeah, Manav, I think you said it very well, I'll let Rick add some comments. But in general, like we said in our prepared remarks, you know, global supply is constrained and we are a believer that demand will continue to set records year-after-year throughout the rest of the decade. So we're very bullish. Demand with a constrained supply scenario leads us to, you know, the situation that we have in the market today. We don't see it changing based on everything that we know is available to us and that's why we have that view.

But I'll let Rick add some color.

Yeah. Hi, Manav. So I will echo Mike's comments and share what you know and what you're reading is what we're seeing and hearing in the marketplace as well, that the expansions appear to be continuously delayed. And with that Mike mentioned in his opening remarks, we see demand growing by 1.2 to upwards to 2 million barrels a day. So pick a number even in between there and that exceeds, Manav, the expansions that may come online end of year this year or sometime in 2025. So even with those expansions coming online, we see demand outpacing those expansions and thus why we're so optimistic on this mid cycle plus environment lasting.

And Manav, let me also add that historically, the demand numbers continue to get revised up. I know everybody is real time in their thought process, but it's also good to look back no matter which agency is doing. In fact, you know, the US agency, when they put the monthlies out, have continually for a long period of time been under estimating gasoline and diesel demand. So it's just another factor that should put on people's radar to really look at all the revisions that have occurred because the demand numbers have been stronger once they get fully corrected and vetted than they are sometimes in the real time disclosures.

Manav, good morning, it's Maryann. Let me -- let me start. So, you know, you're absolutely right. We tried to share, you know, as we were on our call last quarter that we expected to have really the largest turnaround in MPC's history in the first quarter and we did. We had four of our largest assets in turnaround. We think that's important, as you well stated, given getting that work done ahead of summer driving season, we think we are well poised for that. You made comment also about the utilization, you can see from our guidance, utilization is up. Opex per barrel, similarly, when you look, you know, quarter-over-quarter, the throughput impacted by the turnaround was certainly a driver, sequentially were down opex and you can see from what we guided in the second quarter as well that, you know, that opex per barrel is actually well below the what we printed for the first quarter.

So I think you said it well. We took the opportunity in the quarter while we had the downtime at those largest plants as I mentioned in my prepared remarks to work on some projects at those same refineries, those same assets that we think will add reliability in the future as well. Hope that answers your question?

Hey, Manav, it's John. Just to build on what Maryann is saying, to connect some dots as well, those additional projects that we took the time to do, right, you can see some of that in turnaround, some of that in opex. But really, we felt like given the window we had and getting ready for the rest of the year, that was the right thing to do, sorry, I just wanted to add that.

Yeah. Hey, Manav, its John and I'm not sure this question came up on the MPLX call as well, but I know a little bit about it from my prior role. Remember, there's maybe less sensitivity on the L&S side of that business, as refinery utilization moves higher and lower, just given the contractual structure of those contract. So while there is some sensitivity, it may not be as much as you might be thinking.

Manav, it's Mike. I just want to add, I think the takeaway is, as Maryann said is, we chose to use the first quarter to take down four of our most profitable refineries, it's a lower demand period in the US, etc. And our thought process there was spend that money, increase the reliability, get ourselves ready, so that we're able to perform in the second and third quarters as we progress out the year. So we think we positioned ourselves very well despite a heavy spend in the quarter. We're happy that we've done it. We think the assets are in really good shape and we're looking forward to the rest of the year.

You're welcome.

Good morning, Paul.

Paul, hi, it's Maryann. So, yeah, I think you characterized it well. We took the opportunity while those assets were down in turnaround to work on a few projects, frankly, wanted each of them that we felt would improve reliability going forward. When you talk about the guidance throughput, as you said, slightly below that we guided, which contributed to the -- to the Opex per barrel number that you saw slightly higher than what we guided. But in general, you know, as you are -- as we're in turnaround and we look at the activity there, we took the opportunity to do what we needed to do to ensure safe, reliable operations. And as Mike has already said, given us the opportunity to run hard as we look at the driving season ahead and increase performance.

Yeah. Hi Paul and thank you for the question. So, on the west coast specifically, let me maybe back up and share what is public. We do have a TMX commitment on the line and we believe we will be a significant beneficiary because we will receive incremental Canadian advantaged crude, not only in to pull our Pacific Northwest system, but also our west coast system. And specifically, to your question, we'll end up, I believe, having a significant amount of opportunities on the spot market within the Westridge dock to take potentially barrels to LA. And because of sulfur limitations, because the majority of people out on the west coast, I believe, as you know, are running A&S, we believe you'll see somewhat of a dumbbell type blending system where you'll take heavy Canadian with a lighter grade and introduce it into the units out there. But the net-net for us is, we believe it will be quite positive for us not only at Anacortes, our Pacific Northwest refinery, but also at LA.

Right now, Paul, that's an unknown. We're continuing to look at the system and we'll look at the economics, so that'll vary from month-to-month.

You're welcome. Thank you, Paul.

Yeah, John, this is Mike. I start-off by saying, we've been fortunate enough to continue to generate cash, that's been a good story for us. Back to Neil's first question, we want to make sure there's no ambiguity. We're committed to returning capital. One of the questions that Neil asked was a little lower in the quarter and I tried to explain to not read into that quarter-to-quarter variability because a lot of factors that impact that. So I think the biggest takeaway is, we're huge believers in returning capital to shareholders. And depending on the market conditions, etc, we evaluated every single quarter and we try and put a program in place that prioritizes that. At the same time, we're also looking at where should we invest. You heard Maryann just talk about, we decided to spend a little bit more money in the first quarter to enhance the reliability of our assets.

That's a good decision on our part, it's the first decision in our capital framework. But going forward, I think the big takeaway is, you'll continue to see us be a leader in returning capital to shareholders that's something we believe in. You'll see us be a leader in generating cash among our peers. As I said in my prepared remarks, very happy despite the situation we were in the first quarter, with four of our largest, most profitable assets down. We still generated more cash than our peers. So we think that was a good accomplishment.

And over time, you're going to see that, we'll remain committed to our capital framework, of which, when will we get to that $1 billion? That's a good question. I don't know that I can predict it depending on how the market treats us, but I think the biggest takeaway is, we're committed to returning capital and as long as we continue to generate cash, we'll continue to do that and reduce the share count going forward.

John, hey, it's Maryann and thanks for the question. You know, as we've been sharing, our commercial performance remains foundational. You know, you heard us talk about last quarter, some changes that we made in the organization to continue to focus on value chain optimization. That's clearly an objective that Mike has for the organization. We're not done. We think a lot of the things that we have put in place are sustainable, but we do believe there is opportunities going forward. We like to say that we're approaching 100% over a longer period of time, as you've seen, we did it last year. And as you know, there's things from the market that we can't control, you look at our performance this quarter. As you know, we had weaker light product margins, as I shared and obviously, the commercial team took some decisions pretty late in the quarter on product inventory build as well.

But we will continue to focus on the things that we can and we do believe there are opportunities that will allow us to continue to improve commercial performance. But we say we're approaching 100% and we hope you've seen us use that as a deliverable going forward. Ultimately, at the end of the day, as Mike has shared with you, our objective is to deliver the strongest EBITDA per barrel and cash generation relative to our peers and that remains a key focus when we look at our capture performance.

Yeah, John, I can't help myself to jump in here. I know this capture metric gets a lot of discussion and Kristine has been steadfast that we need to report on it. I just want to caution, as I always do, that there's a lot of factors, market factors, etc, that hit on that. The market should know, we're committed to improving our commercial performance, that's obviously a goal here. But the metric that I want you to look at the most is cash. At the end of the day, go to the bottom of the sheet as opposed to all the very different variables throughout it. The most important thing is, are we generating the most cash? So that's the metric that I start with as we analyze the performance of the assets, etc. So I just want to reiterate that I know a lot of people like to talk capture, it's not the one that I think tells the story of the business that much.

You're welcome.

Great. Hey, Jason, it's John. Let me take the first part of that and then I'll turn it over to Maryann. But just to clarify, that other that you're seeing on the R&M walk, it is not related to Martinez. Largely what you're seeing there are and you've seen it in prior quarters are some of the insurance proceeds we recognized in regards to a claim we had at some of our refineries.

But I'll turn it over to Maryann to talk about Martinez, but I want to clarify, it's not in that bar.

Hey, Jason, it's Maryann. Thanks for the question. So let me give you an update on Martinez. You know, as you stated, we are currently operating at about 50% of our nameplate capacity. You know, in November, you know, we had a heater tube failure at Martinez. And as I shared with you last quarter, we continue to work with the regulators to align on what repairs are necessary and ensure, you know, a safe, reliable operation going forward. We would expect to continue to operate at 50% for the second quarter and then somewhere mid third quarter, we would expect to see our capacity increase to about 75% of that nameplate. And again, when I talk about nameplate, I'm talking about 48,000 barrels a day, by the way, just, you know, for clarity.

And then, you know, we do expect to ramp up to full capacity on Martinez by year end. So again, 50% second quarter ramping to 75% mid third quarter with full rate capacity by year end.

So in our second quarter guidance, we do not have any cost yet included in that second quarter guidance, sorry about that. Yes, we continue to work with regulators to align on the path forward. So we believe, again, continue to work with them, but we believe we understand the work that needs to be done and we are aligning with our regulators to achieve that.

Yeah, it's Maryann. So you'll notice that we try to give you on that slide, we show you the impact that is from crude and the impact from product. And what you saw this quarter is what was normally a very positive impact from product margins really narrowed quite a bit in the first quarter. Alternatively, you know that crude is typically a key driver. It always pulls capture and that will ebb and flow just depending on a series of things. But the key driver in this first quarter, as you see were product margins and the inventories, right? We made some commercial decisions which we think were the right ones and we made those decisions sort of late in the quarter. But, you know, as those market dynamics change, you know, we'll be able to share that with you going forward.

You're welcome, Jason.

Yeah, hi, Roger, it's Rick. So I'll start with light heavy spreads. We continue to see them right about where they're at today. Obviously, we've seen the WCS spread come in a few bucks. And ironically, if you look out on the forward curve, towards the end of this year, it actually starts to move back out $2 to $3 due to strong Canadian production and diluent blending. So, we see this as a little bit of a near term blip. Specifically in the MidCon, I do believe there's a misconception that the MidCon will be shorted heavy. We don't believe that to be the case. As you know, we're a big buyer in the MidCon. And when we look at TMX coming online, we believe the marginal Canadian barrel that's going to get backed out of the system first is a US Gulf coast export barrel.

And so with that being said, when we're looking forward here and whether it's pad two, three or five, we expect to generally run about the same mix of Canadian barrels that we've run here the past several quarters.

Yeah, we don't see it changing a lot. I will tell you, when we look at Brazilian growth, when we look at Guyana production and then Canadian, even with some barrels getting backed out, we don't see our mix changing that much, Roger. And then we certainly have barrels that could potentially come from the Middle east if we get the right economic signal. So I would say all in, I really don't expect a significant change.

It is something that will balance, Roger, I believe I said earlier, A&S the biggest difference is A&S, it has about five times lower sulfur than WCS. So that's why we believe there will be a lot of blending going on, on the west coast. But I do believe in general, you will see it limit others toolkits on what the amount is that they can run, but we've yet to see. We need to see that play out.

Thank you, Roger.

Yeah, Matt, it's Rick again. So I will tell you, good call out. We're seeing octane values be extremely high and as you know, we have a lot of reforming capacity. So we are a large octane producer, so we're seeing the benefit. Certainly you hit on a couple of the reasons. Specs is certainly a region, but I will also tell you, we're seeing strong signals on the export side. And when you think about the export market, we're sending over volume there that generally does not have ethanol in it. So that is eating up a lot of octane long product. And then there is persistent length in the naphtha market due to poor petchem margin, so that's helping us out on the octane side.

And then lastly, more recently here, you're certainly seeing the impact of high turnarounds, just taking octane off the market here in Q1 and it's carrying into Q2 and we see it persisting for a while, Matt.

Yeah. So great, great comment and my comment earlier, the industry, I would say is long diesel and we're not alone in that category. We are as well and you're right, we've got to find export opportunities, Matt, anything waterborne where we can find a home to clear the product is what we and others are doing.

Absolutely. Thank you.

Hi, Theresa. Can you restate the back half of your question? I'm not sure I caught that part, please, this is Rick.

Yeah, good question. So it can be significant and depending on the region, it's just tough as you pointed out in a upward market. If you look at Q1 to your point, Theresa, I think we had a $14 flat price increase throughout the quarter. So it definitely was a headwind and it can be significant. You know, we, amongst all of our competitors, need to be competitive at our racks and in an up market, it continues to be a headwind. So I don't have a specific number that I can share with you, but it's definitely a factor in our capture.

Yeah, Theresa, we don't have a target per se using that term. We do have a goal of generating increasing cash flows from third parties, as well as optimizing within our own system as well. The point I was trying to make is where we stand today, that distribution from MPLX covers the MPC dividend and more than half of the capital. But going out, and again, this isn't guidance, but if you look at the trend, you know, we're going to continue to increase the MPLX distribution over time. And as you see that occurring and depending on the capital needs at the refining side of the business, the statement I said was, there'll be a point where MPLX's distribution will cover the dividend and all the capital and still have excess cash. That's how unique the competitive advantage is of that business.

And, you know, we've been bullish, natural gas growth for a long time. And I always caution, I'm not saying natural gas price, I'm saying natural gas growth volume. We continue to believe that that has tailwinds behind it, whether it's, you know, all the topics that have been talked about recently. But as that continues to occur, that ability for MPLX cash generation to increase will just continue and it will get to a point where it's covering the distribute, I'm sorry, the dividend at MPC, the capital at MPC and still generate excess cash, that's where we're headed. So I don't know that we have a target other than that target and we'll try and keep growing that.

You're welcome, Theresa.

All right. With that, thank you so much for your interest in Marathon Petroleum Corporation. Should you have additional questions or would you like clarification on topics discussed this morning? Please reach out and the IR team will be available to help with your call today. Thank you for joining us.