Marathon Petroleum Corporation — 2024 Q1

Neil, I'll let Rick start off with that one.

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.

Yes. 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.

Guys, in your introductory comments, you did mention that some global capacity was supposed to come on. It's challenge, it's not really come on, I'm trying to understand here, once we go past 2024, like 2025, there's limited capacity expansions that we are aware of. And at this point, I think we understand that 2024 will be above mid-cycle. But based on your commentary, would it be fair to say even Rodeo shutdown and other Houston refinery shutting down, you could well see 2025 also as a year where cracks are well above the mid-cycle levels.

Yes, Manav, I think you've said it very well. I'll let Rick add some comments. But in general, like we said in our prepared remarks, 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 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.

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's real time in their thought process, but it's also good to look back no matter which agency is doing. In fact, the U.S. agency, when they put the monthlies out, have continually for a long period of time, been underestimating 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, embedded, then they are sometimes in the real-time disclosures.

Perfect. My quick follow-up here is, I don't think I remember any time when I've seen a $650 million turnaround expense in a single quarter. So this quarter was truly exceptional in the amount of downtime you took.

It's Maryann. Let me start. So you're absolutely right. We tried to share, 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.

Yes. And 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 turnaround, some of that on 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.

And just to quickly follow up, like the higher throughput also results in higher MPLX earnings for the next quarter, right?

Yes. Manav, it's 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 contracts. 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 U.S., et cetera. 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've 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.

I guess that maybe different answer. If we look at comparing to your guidance from last quarter, your throughput is lower, OpEx and turnaround expenses are higher than the guidance. Is it all contributed by what you characterized that some of these quick-hit projects that is not originally in the guidance or that something else has contributed that? That's the first question.

It's Maryann. So yes, 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, that we guided, which contributed to the OpEx per barrel number that you saw slightly higher than what we guided.

Okay. The second question is that, maybe this is for Rich. With the TMX part, how that will impact your West Coast operation, will you be able to fully replace the heavy oil and the medium sour that you're currently running over there by the WCS or that will have some kind of configuration limitation because the WCS consists mostly near the bitumen and a lot of condensate but don't have the [ metal ].

Yes, Paul. 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 into Paul, our Pacific Northwest system, but also our West Coast system.

[ Rich ] can you share that how much WCS you think you may be able to run?

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

So my question is a follow-up on capital allocation. You drew cash by about $2 billion at the parent level in 1Q, you now sit at about $7 billion in parent cash. So we're slowly getting closer to the $1 billion minimum cash balance, and I know we aren't there yet, but can you talk about how we should think about the buyback once you get to your minimum cash balance? Should we expect something like 100% of free cash flow paid out given you won't be supplementing with the balance sheet anymore? Just any color on what kind of normal could look like after you've drawn down your cash would be helpful.

Yes, John, this is Mike. I'll 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.

And then so my follow-up is just on long-term captures. I don't think you're officially calling 100% your long-term capture, but that's certainly where the business has trended. And you talked a lot about of sources of improvements to date.

John, it's Maryann and thanks for the question. As we've been sharing, our commercial performance remains foundational. 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.

Yes, John, I can't help myself to jump in here. I know this capture metric gets a lot of discussion. And Kristina 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, et cetera, 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 is to look at the most is cash.

Great. 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've 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.

Jason, it's Maryann. Thanks for the question. So let me give you an update on Martinez. As you stated, we are currently operating at about 50% of our nameplate capacity. In November, we had a heater tube failure at Martinez and as I shared with you last quarter, we continue to work with all the regulators to align on what repairs are necessary and ensure a safer level operation going forward.

So in our second quarter guidance, we do not have any cost yet included in that second quarter. 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.

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.

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.

Yes. 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 signals. 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, ANS, the biggest difference is ANS. It has about 5x 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 other's toolkits on what the amount is that they can run but we've yet to see -- we need to see that play out.

Yes, Matt, it's Rick again. So I will tell you, good call out. We're seeing octane values being 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.

Yes. So 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, whether anything waterborne where we can find a home to clear the product is what we and others are doing.

Theresa, can you restate the back half of your question, I'm not sure I caught that part, please. This is Rick.

Yes, good question. So it can be significant. And depending on the region it's just tough, as you pointed out, in an 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. 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.

Yes, 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.

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.