Marathon Petroleum Corporation

Welcome to the MPC Fourth Quarter 2020 Earnings Call. My name is Sheila, and I will be your operator for today's call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session. Press star one on your touchtone phone to enter the queue. Please note that this conference is being recorded. I will now turn the call over to Christina Kazarian. Christina, you may begin.

Welcome to Marathon Petroleum's Fourth Quarter 2020 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, Mary Mannin, CFO, and other members of the executive team. We invite you to read the safe harbor statements on slide two. 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. With that, I'll turn the call over to Mike.

Thanks, Christina. Good morning, everyone. I wanna start by welcoming a couple new members to our executive team. First, in January, we announced the appointment of Maryann Mannin as our new CFO. She joins us having spent nearly a decade as a CFO in the energy services and manufacturing sectors. Maryann brings the financial acumen and strategic leadership expertise critical for delivering our business transformation objectives, including strict capital discipline and overall expense management to lower our cost structure. I'm excited for the perspective and business insights she will add to our executive team as we work together to continue strengthening our financial and competitive positions. Yesterday, we announced Brian Davis is joining the company in our newly created role of Chief Commercial Officer. Brian has spent over three decades in the industry, his extensive commercial experience, his recent deep background in renewables and alternative energy, and a track record of developing and enhancing capabilities is highly complimentary to our strategic focus on improving our commercial performance. We look forward to his leadership in developing and implementing a holistic and integrated strategy for MPC's commercial business. These additions will be integral in supporting our strategic initiatives as we progress through 2021 and beyond. Before we get into our results for the quarter, wanted to provide a brief business update. The unprecedented challenges this year created by the COVID pandemic accelerated the need for us to act swiftly and decisively to change how we conduct our business. The three initiatives highlighted on the slide, focus on the aspects of our business within our control, strengthening the competitive position of our assets, improving our commercial performance and lowering our cost structure. During the year, we've been faced with many tough decisions but our team continues to make tangible progress on all three initiatives in ways we believe will drive stronger through cycle earnings and position the company for long-term success. Slide number five highlights some of our actions taken around our strategic priorities this quarter. First, we continue progressing the sale of the Speedway business. During the quarter, we responded to the second request from the FTC and continued to support 7-Eleven in its efforts to secure antitrust clearance. Our interactions with 7-Eleven and our interactions with the FTC have gone well. As everyone is aware, the timing of the close is dependent on the FTC process and we continue to target closing by the end of the first quarter of 2021. Within the scope of what we can control, we're finalizing transition services agreements with 7-Eleven and expect to have them completed by the end of February. Moving on to other actions to reposition our portfolio, we continue to advance our investments in renewables. During the quarter, we worked through startup issues and our ramping production at our Dickinson, North Dakota, Renewables Fuels facility. This facility is now the second largest renewable diesel facility in the United States. Consistent with the timeline we discussed last quarter, we have begun to load trains and ship renewable diesel out of the facility. We remain on track to reach full production by the end of the quarter. Since the last time we reported to you, we've also made excellent progress on our plans to convert our Martinez refinery into a renewable fuels facility. We've continued to progress engineering and permitting activities. We expect commissioning in the second half of 2022 with approximately 17,000 barrels per day of capacity. Further, we expect the pretreatment system to be online in 2023 and to reach full capacity of approximately 48,000 barrels per day by the end of 2023. Finally, we continue to exercise strict discipline on how capital and expense dollars are spent. This year, we accomplished our goal of significantly reducing our capital spending levels by over $1.4 billion from the initial 2021 plans. We also reduced our 2020 forecasted operating expenses by more than our target of $950 million. I started off my comments by saying that we're focused on the things we can control. No matter what lies ahead, we're setting the company on a path to drive stronger through cycle earnings and position the company for longer term success. I'd like to take a moment on slide six to reinforce comments made on our last earnings call around priorities for the proceeds from the sale of our Speedway business. We continue to receive questions on our use of proceeds framework, so I wanted to reiterate that our plans have not changed We remain committed to using the sale proceeds to strengthen our balance sheet and return capital to MPC shareholders. An important priority in our commitment is to defend a solid investment grade credit profile. On a mid cycle basis, we expect to target MPC standalone debt to EBITDA leverage metric of around one to one and a half times. This metric contemplates MPC earnings and also includes distributions from MPLX. Given the significant and stable distributions from MPLX, we don't envision an MPC balance sheet with less than $5 billion of debt on a through cycle basis. As a reminder, we also expect to increase the cash component of our core liquidity position by an additional $1 billion to offset the loss of cash flows from Speedway upon completion of the sale. With respect to debt reduction, we have approximately $2.5 billion of debt that can be addressed with minimal friction costs. We'll be thoughtful on how we reduce incremental debt amounts to minimize costs while not jeopardizing our credit rating. Within this framework, we continue to expect that the remaining proceeds will be targeted for shareholder return. We continue to evaluate the form and timing and we'll share more details as we get closer to the transaction close. Moving to slide seven, we highlight some of the reductions we've made to our cost structure. In refining, we've reduced our operating costs by more than $1 billion from the 2019 spending levels. In the midstream business, we've reduced our costs by over $200 million. And at the corporate level, we've applied the same discipline and these reductions are reflected in our fourth quarter results. We're pleased with these results when you consider we have not compromised on our commitment to safely operating our assets and protect the health and safety of our employees, customers and support the communities in which we operate. In fact, the full year 2020 was the company's best performance ever in this area with a nearly 30% improvement across both our process and personal safety rates and our best ever environmental performance. Moving to another key focus area, slide eight highlights our focus on capital discipline. Today, we announced our 2021 capital outlook for MPC. We significantly reduced our capital program from 2019 levels. MPC's investment plan now stands approximately $1.4 billion excluding MPLX. This reflects a nearly $1.7 billion reduction from 2019 and a $1.2 billion reduction from our initial plans for 2020 prior to the pandemic. Our 2021 outlook reflects funding for growth projects already underway. However, our incremental growth capital will be primarily focused on renewables and projects that we expect will help us reduce future operating costs. We expect our team's focus on lowering our cost structure and capital discipline to be something that will be a recurring theme for 2021 and beyond. At this point, I'd like to turn it over to Mary Ann to review the fourth quarter results.

Thanks, Mike. Slide nine provides a summary of our fourth quarter financial results. This morning, we reported an adjusted loss per share of 94 cents. This reflects pre-tax adjustments of $851 million driven primarily by a $1.2 billion pre-tax lower of cost or market inventory benefit. These adjustments can be found in detail on slide 29 in the appendix. Adjusted EBITDA was $907 million for the quarter. This includes the results from both the continuing and discontinued operations. Our dividend payment for the quarter were $377 million. Slide 10 shows the reconciliation from net income to adjusted EBITDA as well as the sequential change in adjusted EBITDA from the third quarter of 2020 to the fourth quarter of 2020. Adjusted EBITDA was down $100 million quarter over quarter driven primarily by lower earnings in refining and marketing and Speedway. As a result of the contemplated sale of Speedway, both the third and fourth quarter results reflect Speedway as a discontinued operation. Moving to our segment results, slide 11 provides an overview of our refining and marketing segment. Fourth quarter adjusted EBITDA was negative 702 million, a decrease of approximately $80 million when compared to the third quarter of 2020. As a result of the contemplated sale of Speedway, adjusted EBITDA for the RNM segment now includes the direct dealer business. Crack spreads and margins remain under considerable pressure. Results across our three regions were impacted by weaker crack spreads and narrow crew differentials. As a result of these challenging macro conditions, we moderated throughput levels, which resulted in capacity utilization of 82% for the fourth quarter. In response to these challenging conditions, the team continues to focus on structurally lowering costs and driving efficiencies. When you compare our RNM expense to the prior year, 2020 expenses are over 1 billion lower than 2019, and we continue to pursue opportunities to lower cost. Slide 12 shows the change in our midstream EBITDA versus the third quarter of 2020. Our midstream segment continues to demonstrate earnings, resiliency and stability increasing by 22 million from the last quarter. This performance is underpinned by stable fee-based revenues, growth from organic projects and the continued execution on operating expense reductions. It is worth highlighting that MPLX, which contributes a substantial portion of MPCs midstream EBITDA, inflected to excess cash for 2020 for the first time in the partnership's history, self-funding both capital spending and distributions. With this inflection, MPLX began repurchasing units in the fourth quarter. Slide 13 provides an overview of speedway results as a discontinued operation. Fourth quarter adjusted EBITDA is down 66 million from third quarter. Fuel and merchandise revenues were impacted by seasonality as well as COVID-related lower fuel demand and lower resulting foot traffic in the stores. On a year over year basis, merchandise sales were up 1.8%. Slide 14 presents the elements of change in our consolidated cash position for the fourth quarter. It reflects both our continuing and discontinued operations. Within continuing operations, operating cash flow before changes in working capital was 144 million in the quarter. Changes in working capital was 804 million source of cash in the quarter as rising commodity prices and increasing utilization continue to offset working capital cash use impacts from the first quarter. During the quarter, debt declined $344 million. We returned $377 million to shareholders through our dividend. Our cash balance at the end of the quarter for both continuing and discontinued operations was approximately $555 million. Slide 15 provides our capital investment plan for 2021, which reflects our continuing focus on strict capital discipline. MPC's investment plan excluding MPLX totals approximately $1.4 billion. The plan includes just over a billion for the refining and marketing segment of which approximately $250 million or roughly 25% is related to maintenance and regulatory compliance spending. Our growth capital is approximately $800 million, split between renewable and ongoing projects such as the STAR project. Keeping these ongoing projects moving forward will enhance the capability of our refining assets, particularly in the Gulf Coast. Within renewable spending, we have capital allocated for potential projects like our Martinez conversion. Until close, we will fund Speedway Capital and anticipate this spending will be approximately $150 million. The plan also includes approximately $50 million for our midstream segment for projects such as the Cap Line reversal. Also included is approximately $150 million of corporate spending to support activities we believe will enhance our ability to lower future costs. This morning, MPLX also announced its 2021 capital plan investment plan, which includes approximately $800 million of organic growth capital and $165 million of maintenance capital. On slide 16, we provide our first quarter outlook which includes estimated throughput at our facilities based on projected regional demand. We expect total throughput volumes of just over two and a half million barrels per day, a slight increase compared to the fourth quarter actual throughput. Plan turnaround costs are projected to be $150 million in the first quarter, which includes activity in our Galveston Bay refinery. For the year, we expect turnaround spending to come in at below our 2020 levels, reflecting a lighter than average year. Total operating costs, including major maintenance and engineered projects are projected to be $5.35 per barrel for the quarter. This operating expense guidance represents a slight increase from fourth quarter actuals to account for higher costs associated with work we plan to do in conjunction with our turnarounds. Distribution costs are expected to be approximately $1.3 billion for the first quarter. This slight increase relative to fourth quarter actuals is due to costs associated with moving product to the West Coast from our new Dickinson Renewable Diesel Facility. As a reminder, our Dickinson Renewable Facility is accounted for in the guidance we provided for the RNM segment. For Speedway, we expect fuel volumes of approximately 1.3 to 1.5 billion gallons and merchandise sales in a range of 1.43 to 1.53 billion. With that, let me turn the call back over to Mike for some closing remarks.

Thanks, Marianne. I'd like to take a moment to provide some comments on our responsibilities around corporate leadership. Last quarter, we discussed the recent publication of our 2020 Climate Perspectives Report, highlighting opportunities and strategic planning work that companies engaged in related to climate scenarios. We also discussed our goals to reduce greenhouse gas emissions, methane emissions, and freshwater withdrawal intensities. It's important that we set objectives for the organization that drive our continuous improvement on ESG. Our principles for leading in sustainable energy position us to deliver strong results in this space, from lowering the carbon intensity of our operations and products, improving energy efficiency and conserving natural resources, to increasing renewable fuels production and embracing innovation and deploying advanced technologies. We believe the goals we are setting and our transparent disclosures on how we plan to achieve them place marathon at the leading edge of our industry. We're seeing recent improvements in our ESG ratings reflecting our hard work in the area. Slide 20 in the appendix highlights just some of these accomplishments. Our approach to sustainability also reflects our commitment to create shared value with our stakeholders, the communities where we operate, our people, our business partners, and many others. How we conduct our business enhances the performance we deliver. We look forward to even further expanding our robust engagement with stakeholders and continuing to serve as a valued partner. With that, let me turn the call back over to Christina.

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 reprompt for additional questions. We will now open the line to questions. Operator?

Thank you. We will now begin the question and answer session. If you have a question, please press star then one on your touchtone phone. If you wish to be removed from the queue, please press star then two. If you are using a speakerphone, you may need to pick up the handset first before pressing the numbers. Once again, if you have a question, please press star then one on your touchtone phone. Our first question will come from Doug Terrason with Evercore ISI. Your line is open.

Good morning, everybody. Good morning, Doug. Mike, I have a market outlook question in refining. And specifically, it looks like inventories for both gasoline and distillate are headed towards normal levels by the end of this quarter, which may be while refining margins are returning to near year-go levels. And if we see OPEC raise output later in the year, which also seems likely, we could also get some help on feedstock differentials. So my question is whether you're encouraged by the trends that we're seeing in products markets and the pace of the recovery as well, and also whether you think this will be sustainable.

Yeah, thanks, Doug. It's a good question. Before I answer, and I'll let some other members of the team jump in as well, I first wanna say I appreciate your insights over the years, and I wanna congratulate you specifically on your next steps in your career, and thank you for all your contributions to our industry.

Well, thank you, Mike. You guys have been easy to support, for sure. Pleasure's been all mine.

On your question as far as go forward, I think you mentioned a lot of things that we're looking at, and I guess our term is cautious optimism. You know,

for

me specifically, I tend to try not to call the market, but really call the banks of the rivers more. And on the positive side, some of the things that you mentioned that we clearly see, and we have that, I call it cautious optimism as a result. Hopefully, vaccinations will go smooth, and hopefully we'll come out of this pandemic in a robust way. So that's kind of the bull view. And then the bear cases, we saw towards the end of last year, cases were going up, restrictions started to kick in a little bit more. And we saw what a lot of people anticipated, which was a tough December and into January. Now we're approaching February, and we'll head into the spring. So for us, there's a bull case that says things are moving in the right direction. There's a bear case that says we're not through with this pandemic yet, and we got some more field to play through before we really see the end of it. But let me, I'm gonna let Tim comment on gasoline a little bit, and Brian can comment on the other projects, just so you can get a sense of what we see in the

market today. Tim? Yeah, thanks, Mike. Doug, just to reiterate Mike's comments, we did see a little bit of softness into the back half of the year, really after Thanksgiving and really through the end of the year, almost a step down with regard to demand. And again, a lot of it relating to higher case rates. We'll see, we're seeing a couple bright spots early in the year, but we're hoping for more. We think this is probably gonna take some time. As Mike said, we really need to get the immunization protocol built, and as a country, accelerate that process to get more and more people comfortable, and then ultimately get schools back in session, get people back in the office, get people back in the roads, improve discretionary travel. And we think that's gonna happen, but that may take some time, and I think we're gonna be sort of patient over the course of the year to see that really bear fruit. But definitely better times ahead. We just think it's gonna take a little bit of time to really see that. For first quarter, I think based on the year of a year, we're probably gonna be 90% of last year's volumes at the retail gasoline level. And again, hope to see improvement over the continued of the rest of 2021.

Okay, and then also, Mike, a few minutes ago, you talked about strategic focus and commitment to corporate responsibility as being key elements. And so that makes it kind of clear to me that your leadership team believes that we may be experiencing a paradigm shift in energy, maybe more so than we've had in the past. And so my question is, first of all, do you agree? And second, what are some of the things that the management team needs to do to stay on the leading edge in the industry, which I think was the phrase you used a minute ago in this new environment?

Yeah, it's a really good question, Doug. So first off, yes, we do believe that there is a paradigm shift occurring. I like the word energy evolution, so we see that occurring. And I guess the momentum towards a low carbon future is obvious, we're focused on how we position ourselves, as you mentioned. I felt that we had to get some things in line relative to cost and looking at our portfolio, but a focus on cost is essential in addition to a lower carbon intensity company to remain competitive for the longterm as these scenarios start to play themselves out. As you mentioned, we have made a commitment in sustainable energy, and partly that comes from lowering the carbon intensity of our assets and increasing our exposure in renewable fuels production. And we can talk about that in a lot more detail today, but we have our Dickinson facility up and running and Rays working through the startup there. And then we're still very optimistic about what Martinez can bring to us in that area. And then we're hopeful as technology's advanced that we're on top of that, and commercially and responsibly putting ourselves in a position for the future. So I do agree with your belief that it is a paradigm shift. I do believe there's gonna be increasing momentum towards low carbon. Obviously everybody sees that occurring through the administration's announcements as well as many other companies coming out. And our goal is to stay focused on that change and put Marathon in the best position to be a long-term player in that energy evolution.

Thanks again, everybody.

Thank you, Doug. And again, congratulations on your next step. Thank you.

Thank you. Our next question will come from Neil Mehta with Goldman Sachs. Your line is open.

Good morning, team, and congrats on some better than expected results here. I guess the first question is just to build on that, is refining costs came in certainly better than what we were expecting. And in the 2021 standalone capital spending surprised as well to the downside, and that was largely at refining as well. So can you talk about both of those, the CAPEX and the OPEX improvements, and how much of it is cyclical, given that you still are running at depressed utilization, although maybe a little bit better than what we had anticipated based on your guide, and how much of it is structural, and that will carry forward as we recover from here?

Yeah, Neil, thanks for that question. So obviously we've been very focused on cost. I stated that throughout 2020 that we needed to make a step change. And in refining, particularly Ray and his team have taken that and put some really good actions in place. So I'll let him comment in a second. But overall, I think what you're seeing from us is trying to reset our overall cost structure, whether it's in the corporate area or midstream or refining. To your point, we do expect over time as we get past the pandemic for variable costs to come up a little bit. At the same time, we believe that many of the cost reductions that we have in place are structural, they're fixed cost in nature. Obviously we're hopeful that we have more variable costs and that the demand for our products comes back up. But I think you've seen over the last couple of quarters a pretty sustainable step change, and that's what we were hoping to show the market. As far as capital, Neil, what we're doing there is pivoting to what Doug just referred to as a new paradigm. We have a bunch of projects that are already in progress in refining that will continue to finish those out. Examples of that would be like the STAR project we have going on down in the Gulf Coast. That's an important project for us that's still going to take some time to get through. But at the end of the day, we're going to do those projects that we think are in progress and are still valued. We're going to look for projects in refining that lower our costs going forward or change the dynamic we have around this energy evolution and then obviously pivot more into the renewable space. We have a bunch of things planned for both Dickinson and Martinez. It's kind of the first step in this energy evolution. Renewables is the hot topic, and I think we're in a real good position to put ourselves in a good spot there. So, Ray, do you have anything you want to add? Sure, Mike. Neil,

I'll just give a little bit more color on the OPEX, and this should be fairly consistent with what we talked about during the last earnings call. But for OPEX reductions in refining, it wasn't just one thing. It was a multitude of things. But if I had a key on two items, I would say the first is scrutinizing the number of people in our facilities. This is both contractors and employees. And just looking at the number of people we have, the number of projects we were working on and so forth, and not just cutting people, but also consolidating contractor companies and really taking an efficiency look at that. The other thing that we really wanted to do in our procurement supply chain group did a phenomenal job of working with us is making sure that we really leverage the spend across our 2.9 million barrel a day refining system. So looking at all of our contracts, goods, and services, and making sure that we just had the best terms and best contracts out there. Just want to jump on to what Mike said earlier too, is our goal is to make sure that these reductions are as structural as possible. Early on in the pandemic, we did some deferral activity with turnarounds, but largely that was to get out of the initial period of March, April, May timeframe. But since then, we've caught up on our turnaround work, and going into this year, we'll do more of the same. So that's just a little bit more color on OPEX.

Thanks guys. And the follow-up is just on the transaction, the Speedway transaction. Can you just walk us through what are the gating items to close the deal, your conviction level that you can close it in Q1. And Mike, I've asked this question so many times over the last couple of months, but can you just kind of walk through the waterfall again of you got $16.5 billion of cash coming in plus another 1.2 or so from the government. And based on where your debt level is, what's the sort of the ballpark ability to return capital to shareholders is. So that framework, so two questions there. Deal gating factors and then return of capital framework.

Yeah, Neil, on the first one, the major gating factor is the FTC process with 7-Eleven. So we're watching the process, we're contributing where we can and as needed, but that's really a process between 7-Eleven and the FTC. What we know as of today continues to go well. And like I say, I use the word we're targeting for the end of Q1 or we're hopeful that the end of Q1 is the right timing. But really the gating item is essentially that process that is not really our process, it's more 7-Eleven and the FTC. So we're supporting it where we can, as I mentioned in our prepared remarks, we've responded to questions, we're supporting it as much as we can. The other activities that we have to get accomplished, which we're very confident will get done is the transition services. Obviously it's a major transaction between us and 7-Eleven and there's some services that Marathon is going to transition to 7-Eleven over time. So that's been a lot of the internal work that we've been doing recently. But the bottom line, and I know everybody keeps asking about use of proceeds, we're as anxious as anybody to get to that spot. But at the end of the day, the major gating item is we don't have control of that timing. All we can do is continue to give you the best insight we have. And right now we still say, we're hopeful it's end of first quarter, we're targeting that, we think that's achievable based on what we know. So that's our best guidance at this point. On your second issue, as far as use of proceeds, we've tried as best we can to frame what we believe is the two main pillars that we're gonna be targeting, which is getting the balance sheet back to where we want it to be, and then return capital to our shareholders as quickly and as efficiently as we can. And on the first issue, we've tried to make the statement that our debt situation maturities is there's about two and a half billion that comes with essentially minimal friction costs. We'll jump on that one right away. Right today, we have a little over 11 billion of debt. We'll continue to try and evaluate as everybody wants to know where is mid cycle gonna be, et cetera, et cetera. We need to work with the agencies. So our financial team, Mary Ann and Tom and the treasury team will work with the agencies as to the proper path to bring that debt down to a level that we think is the right spot. In an effort to try and give as much color as we can, we've kind of said to people that, hey, we don't see it going below $5 billion. And that's kind of like our low refining case if you wanna call it that. So if you say, in that regard, we have about a little over 11 billion, we don't see it going below five. So a number to put on the piece of paper is around six, depending on how well the recovery is and how quick the recovery is and working with the agencies, et cetera. Absent that, we said we're gonna return capital. We've talked about what's the best way to do that. And the only reason we don't give additional color there is because at least in our mind, what we believe right now is end of March is the targeted timeframe. So we have another 60 days to go and we'll continue to evaluate the market and the opportunities. And we've been going through this internally with our board, with our advisors, with ourselves. And we have a pretty good framework, but we just don't wanna get ahead of ourselves in case it takes a little longer than we're expecting. So we do wanna return that capital to shareholders. I personally am a believer that refining to a large extent is a return to capital business. We gotta position ourselves where we're generating cash and then think about the best way to create value, returning it to shareholders. And we've talked about all the various ways to do that. It's predominantly in a buyback type mode. That's what we're thinking about. And then there's pros and cons to the various ways that you can do that. And then kind of our commitment is once we get close enough that we know we're there, then we'll come on publicly and give a little bit more color as to how we think that'll affect itself. But our goal is as efficiently and as quickly and effectively as we can, we wanna try and provide that return of capital.

Yeah, very clear. Thanks guys.

You're welcome, Neil.

Our next question comes from Doug Leggett with Bank of America. You may proceed.

Good morning, everyone. Happy New Year, Mike and Tim. I hope you're all doing well. Thanks, Doug. Same to you. Mike, you're gonna hate me for this. I'm gonna bleat on about the same issue of my first question and I've got a follow-up on the micro for Ray, please. And it's really, I wanted to do some very quick math with you and make sure I'm thinking about this right. So your market cap is about $30 billion. Your share of MPLX 2 3rds is about $16 billion. So let's assume on a sum of the parts basis, that means that the value recognized for everything else is about 14 billion. And you're potentially gonna have a $10 billion shared buyback program if I net out $6 billion of debt payback. Those are pretty enormous numbers, obviously. So first of all, am I thinking about that right? And secondly, how exactly would you expect to deploy such a scale of a buyback, which I guess is Neil's question. And I'm thinking along the lines of like a bought deal, a direct, regular acquisition of shares in the market. What are you actually thinking about structure and timing? Because those numbers are obviously pretty significant when you look at it that way.

Yeah, Doug, first of all, I don't hate you for asking the question. It's a fair question. And I know you've asked a few times about, do we plan to use any of the proceeds towards MPLX? And as I stated before, we don't see that as in the best interest, but we do see to your point, returning that capital. And I think you've made the point. It'll be a large sum of money. It'll take some time to effectively do it efficiently, et cetera. So that's part of what we're kicking around. And a lot of things come into play. Where's the equity gonna be when we actually go to do this? What's the best method, pros and cons relative to that? So part of the reason that we don't get more detailed at this point, I just use this as the example, is when we announced the deal, we were trading in the 30s. Now we're trading around the mid 40s or so. And we'll see where we are in 60 days or whatever the timing turns out to be. Obviously to your point, if you're trying to convince us we're undervalued, we're 100% aligned with you. We think that there's a lot of opportunity in our equity. But part of the process and looking at the pros and cons is, where is that equity gonna be by the time we get there? And what's the best way to actually go about doing things? The debt side of it, I mentioned a little bit, that'll be ongoing conversations with the rating agencies. We do wanna protect our investment credit rating. So that's important to us. We wanna see how the pandemic continues to play itself out. As you heard Tim mentioned earlier, you're feeling good and then all the restrictions and things give you a little bit of a pause, but we're feeling pretty good about that as well. So taking that all into consideration is what we're thinking about. And then to your point, it'll be a large return of capital and it will definitely take some time. And when we get there, we'll give as much color as we can as to what we think at that time. And then there'll be some ongoing dialogue to your point. The numbers are good and we're happy that we're in that position. So we think we'll be able to affect a balance sheet, adjustment that's really good for us. We think we'll be able to affect return of capital that's really good for us. It will take some time. And the only thing that we're holding out is the method and the timing because we'll have to wait and see when that time comes. Hopefully that helps. I'm trying my best to give you guys as much color as I can, but at the same time, trying not to get ahead of where we're gonna be when we actually receive the proceeds.

Operator. Thank you. Our next question will come from Roger Reed with Wells Fargo. Your line is open.

Hey, good morning. Good morning, Roger. And I just wanna say, I'm glad to know that we on the sell side don't have to talk you into your stock being undervalued. That's very comforting on our side.

Thanks,

appreciate that. Kidding comment for the day. Yeah, to kick back into some of the stuff that's been asked and maybe to dig a little deeper on a couple of things. First off, I think Doug Terrason mentioned on the crack spreads, but as we know, at least part of the move in the crack spreads here has been RENs related. And I know with the separation of speed while you're retaining the RENs inside of the RNM segment, I was just curious how you're looking at the impact of the increase in the RENs costs and then how we should think about that flowing through the company now that we're gonna have, I guess essentially already have the separation in terms of how it comes through.

Hey, Roger, that's a good question on RENs. I'll let Brian take that one.

Thanks.

Hey, Roger, good morning, thank you. Yeah, so great question. So, REN expense is real, right? It's cash out the door. We face it, it's an element of our industry, but REN costs are also very transparent day in and day out. So we really believe full consideration is given really across the entire value chain when you look at refiners, ethanol producers, blenders, marketers that sit in the value chain and establishing daily prices. So that's not to say that it's quote unquote in the crack. I think empirically that's very difficult to point to, no different than hydrogen costs or catalyst costs being in the crack, but it's a very transparent element in the value chain that we believe is fully considered in the commercial tension across all the various players that we mentioned. Specific to Speedway, yeah, absolutely zero impact. I mean, we've always treated Speedway as a third party customer and our contracts across our entire book really give full consideration for REN cost, REN value. But so really no impact, no shift in value when you think about between segments as a result of the separation. The last point to make on this really is across our entire book, we have extensive terminal network and a pretty robust marketing platform, the least of which is the Speedway Book of Business. So historically or near historically the last couple years, 70 to 75% of our RFS obligations has been met really through wet blending. With Dickinson, you can add roughly another 10% of that and you can keep doing the math and the Martinez. So we're quickly approaching 100%. So we feel like historically we've positioned well on this issue, we're positioned great today and we're gonna be positioned even better into the future.

Okay, that's helpful, thanks. And then I guess as a somewhat unrelated follow-up here, I saw in the capex for the renewables, I think, I'm sorry, I'm gonna try to find the chart here. I was flipping around all the different pages, but I think it's 325 or 350 in renewables capex in 2021. Is that all Martinez? I mean, I know you've mentioned some other things in renewables, so I was just curious what all is included in that 350. And as we think about Martinez, would it be another 350 and 22 is just sort of a preliminary way to think about it.

Yeah, Roger, so yeah, you're right on that, most of that is Martinez, that's the way to think about it. There's a little bit that's dedicated to Dickinson, but mostly Martinez. And that's the start of what we believe is gonna be a multi-phase project. So I'll let Ray give you a little bit more color on that to talk a little bit about timing and the phased approach that we have to it. But we're pretty excited about the opportunity.

Hey, thanks, Mike. Yeah, as Mike said earlier, we are progressing the Martinez Renewable Fuels Project, and that is a bulk of the projected renewable spend in 2021. Just to tell you where we are right now, we're in definition engineering. So we're in the third phase of the engineering on the project and we're also working to progress our permits. So we're working with the governmental, the regulatory, the NGO, all the stakeholders in our project for our aggressive permitting efforts. And our focus remains to have the first phase of the hydrotreaters reconverted to a renewable diesel facility or diesel unit in the second half of 2022. And then we would follow that up with the remaining two hydrotreaters in 2023 along with the pretreatment system. So it's a stage project. And the reason that we're doing the first stage in 2022 is that requires the least amount of equipment modification to do that. So we're still in the evaluation stage, but just want to give you a little color on the project.

Appreciate it, thank you.

You're welcome.

Thank you, one moment. Our next question will come from Doug Leggett with Bank of America, your line is open.

Thank you, Mike, I'm so sorry, my line dropped when you were halfway through your question, but I managed to see the answer in the transcript. So thank you for that. And I apologize again, everybody. My follow-up question was probably for Ray. And Ray, it's actually a follow-on from Mr. Terrison's question earlier on crack spreads. But I wanted to be a little bit more specific. It seems to us that we're seeing NAPFA LPG substitution in Asia, probably heat-related, driving up NAPFA Brent spreads. And we're obviously at the second order effects down in the gasoline pool. So I'm just wondering if you could share any observations you have specific to that issue. Are we seeing gasoline crack support coming from non-transportation sources? I just want to get your color on that. I'll leave it there, thank you.

Yeah, Doug, sorry about that. This is Brian Pertti. Yeah, I think on the NAPFA to Brent spread, we have seen some uptick in the demand over in Asia as a result of obviously the cooler temperatures over there and really the entire petrochemical complex. So we've seen some steady demands outside of the US Gulf and even beyond moving over to Asia and really moving into the petrochemical space. So I think it's been supportive to that. I don't know that that's a long-term structural shift, but in the short term, we've seen that as a positive.

I just want confirmation about tailwinds in place. But again, I apologize for the disruption, guys, and appreciate the answers. You're welcome, Doug.

Thank you. Our next question comes from Manav Gupta with Credit Suisse. You may go ahead.

Hey, guys, wanted to focus on the Gulf Coast operating costs, which was like $3.40, down about 31% year over year. This is one of the lowest we have seen for MPC and definitely well below a number of your peers. So what has allowed MPC to achieve this? I know, Mike, you're very focused on cost reductions, but trying to understand what's specifically driving the Gulf Coast cost reductions here.

Yeah, Manav, that's a good question. I'll let Ray give you some specifics there.

Hey, Manav, good morning. Say on the Gulf Coast, we have two refineries, large refineries, Garyville in Louisiana and Galveston Bay in Texas. And of course, Garyville has always been a very low-cost refinery for us. And so the ability to get better there is somewhat limited. The big reductions that we've had in our Gulf Coast structure has been at Galveston Bay. They've made significant improvements in their OPEC, and that really showed in the back half of 2020.

Quick follow-up here is on your Dickinson facility. Obviously, you're spending some money right now to move the product to California, but Canada has already, is talking about introducing the clean-through standards, the TK2022. The location of that facility would allow you to move the products seamlessly across the border. So is that something you're considering? And also, if a pre-treatment unit possible at the Dickinson facility also, besides the market facility. Thank you.

Hey, Manav, this is Brian Partilla. Just to address kind of the market disposition out of Dickinson, of course, we're looking for the highest-valued markets. The design for Dickinson and the expectation in and around placement is certainly in California, and that really has proven to be the most lucrative markets out of the box, but we're having active dialogue with outside of really the West Coast and California, including Canada, and we'll continue to chase that highest-value placement. But with our position in the Portland area and the Pacific Northwest, we really feel optimally positioned with a wet physical position to be able to move product into Canada and even export, as well as into California. And we also think long-term with the contemplated project at Martina is really complimentary to having kind of a robust position out on the West Coast. And the last thing I would say, beyond just Canada, there's a lot of different contemplated low-carbon fuel standards in the US as well, that with the loadout on rail, we have really ultimate flexibility, only limited by the rail infrastructure in the US, which is quite robust. So long-winded way of saying, we really feel like we've got a good, we're in a great position logistically to optimize the placement of the product out of Dickinson.

Did you ever consider a pre-treatment unit at Dickinson also?

We have pre-treatment options for Dickinson, but that would be at our facility with Beatrice pre-treat corn oil. So that is in progress.

Thank you.

You're welcome.

Thank you. Our next question will come from Paul Cheng with Scotiabank. Your line is open.

Hey guys, good morning. Good morning, Paul. I think the first question I have is for Ray. Ray, the ARMICS course in refining and the distribution course is really impressive. So at this point, is it the bulk of the, say, whatever you are doing that you think you already captured it, as you say, like in Garaville, that is limited upside, or that, I mean, I'm sure that you continue to drive the course down, but then really is that function change from this point on that we could expect, or that this is a pretty good base and any improvement would be pretty limited? So that's the first question. The second question is probably from Mike and Brian. Brian, I mean, if we look at your old firm, they are far more aggressive in the commercial trading and everything. So when we're looking at Marathon, do you have the right systems in pace and also the right personnel for your organization, or that's really only the first step and you really going to take some time for you to build it out, and where you see the most opportunities for the improvement in return and earning from that operation and where's the risk? And are we going to see that increase the risk?

So Paul, I'll start on both of them and then I'll let Ray and Brian chip in. So on the cost, we've made a significant move, as you noted. We're gonna challenge ourselves in 21 and beyond to continue to look at each part of our portfolio and where we're spending money, whether it's in refining or on the corporate side, et cetera. So I don't wanna ever say that we're done. At the same time, I do appreciate acknowledging that it was a pretty significant move. I mean, we decided when I put out the three initiatives that cost would be a major part of what we were doing in 2020. So that's why it got a lot of attention, but it continues on, right? It's not something that's over just because we've come to the end of the year or whatever. So I'll let Ray comment a little bit more on refining. And then on your second question, relative to commercial and systems, I mean, one of the things if you look at in our disclosure on capital is we are spending some money at the corporate level to try and improve ourselves from a digital standpoint. Doug mentioned, we're moving into a low carbon future. The business has also become much more strategic from a digital standpoint. And our new chief digital officer has a lot of good thoughts that will help our commercial teams advance the ball. So we're gonna try and deploy capital in that regard and put ourselves in a much better position from an information standpoint so that we can act on it better commercially. But I'll let Ray jump in and Brian, if he wants to add something there.

Sure, Paul, on the OPEX, I'm prepared to ask that because Mike actually asked that to me all the time. Are we done yet? Is there more to do? What I'll tell you is with a billion dollars of cost taken out of the system, you know, we took a big bite out of the apple in 2020. But what I'll tell you is that the culture is there. As far as questioning everything we do, whether it's a person replacement, whether it's a project need to do or whatever, there's definitely the mentality and refining to question everything that we do from a cost standpoint. The one thing that I wanna emphasize though is the one thing that's not in play is anything that would impact the safety or environmental performance of our refineries. Mike in his opening comments talked about 2020 being the safest and best environmental performance that we had. So that always is the key thing, but our team really is questioning everything we do beyond that.

Hey Ray, just curious that in September, you guys have a restructuring effort and about a thousand people from the team say and also get up people are gone. So is that benefit already fully back cleaning into the fourth quarter or we have another make up in the first quarter that we will see the benefit coming in?

You know, on that one, Paul, you'll see some of the benefit occurring in the first quarter. We did the restructuring in the back end of 2020, but you'll actually see the benefit in the first quarter. But before I turn it over to Brian Partee, I wanna, since we have two Brian's now, you may have been asking relative to Brian Davis who's just joined us, but Brian Davis is not on the call for us today, but I'll let Brian Partee talk a little bit from products and I'll let Rick kick in with a little bit from crude and by our next call, you know, Brian Davis will be with us and we'll be able to get his insights as well.

Yeah, thanks Mike. Paul, this is Brian Partee. Yeah, just to answer your question on people insistence and commercial opportunity. The short answer is absolutely yes. I mean, we've gone through a massive transformation over the last several months, realigning on the clean product side of the business, our marketing, supply and trading, our international book as well into one unified organization. So I think just org structure alone will help, has helped unleash opportunities. As Mike indicated, we're spending quite a bit of time building out for a massive system to integrate the back office and that's in flight and underway in really long term see great potential. We're starting to see the benefits of that already. And, you know, when we think about commercial performance, it's not just revenue, it's looking at the expense and distribution costs as you called out earlier, inventory positions as well. So it's really the full deployment of capital across the value chain, not just on the revenue side, but I'm extraordinarily encouraged with where we're at. And we're really pivoting, Paul, to be quite honest with you from really a legacy of more of an operational focus with refinings over the last decade, you know, running full capacity and utilizing physically infrastructure and ARBs to maximize value to the system that we're in today, which is requiring a little different playbook and more commerciality. So we're excited to work with the team to bring that all to bear. And we're seeing benefits already. And we'll continue to build on that here over the next year.

Thank you. Mike, can I just sneak in with a really quick question? Should we look at over the next several years, the CapEx for 2021 will be sort of the baseline and you're not going to be substantially higher than that?

Yeah, Paul, on capital, you know, we're not given guidance beyond that, but I can give you my general philosophy is, like I mentioned earlier, we're going to obviously finish the projects that we have in progress. So some of those are going to go in 2021 into 2022. So that's ongoing. As far as investment in refining, you know, asking Ray to look at, you know, ideas that reduce costs and put ourselves in a position for a low carbon future. So, you know, energy intensity, as an example, is something that still matters a lot in the energy evolution. You know, looking at putting ourselves in a position where, you know, we check both of those boxes of cost and carbon emission reductions, et cetera, are going to be top of mind for us. At the same time, you know, we're pivoting to investment into renewables and some of the other areas, which will give you some more color as time goes on. But I think that's the general philosophy of it. You know, as far as the absolute spend, you know, we'll obviously give guidance as we progress. But I think just in general, I think that's the philosophy that you should be thinking about. And, you know, it kind of started off with the way Doug asked the question. We do think there's a paradigm shift occurring. And our reaction to that is, you know, get our costs down, be very conscious of the new environment, and, you know, try and check off two birds with one stone. Put ourselves portfolio-wise in a position where our refining assets are in a good spot for many decades to come. That's obviously a goal for us. And position ourselves as the products we're making are what the demand in the market is. So that's kind of our overall philosophy, and we'll continue to challenge what we're doing in that area. And we tried to give you a little bit more color with that breakdown of capital. So hopefully that helps people get a sense of what we're thinking philosophy-wise.

Thank

you.

You're welcome.

Thank you. Our next question will come from Benny Wong with Morgan Stanley. You may go ahead.

Hey, good morning, guys. Thanks for taking my question. My first question is really on your outlook on the gasoline market. I think, you know, over the next couple of years, we're going to see almost a million barrels per day of capacity come offline. Arguably half of that is going to be gasoline. And if I kind of look at the imports over the last, you know, five years, you know, we've been importing about 500,000 barrels per day, if demand kind of ramps back up to more of a normal environment, you know, could we get back to more of an importing scenario for the U.S.? Is that kind of a reasonable way to think about it, or how do you guys think about that?

So I'll start off, and I'll let the guys jump in. So one of the things, Benny, that I think everybody's, you know, obviously trying to understand is what does the supply demand look like post-pandemic? And, you know, we obviously are seeing in the short term the demand reduction, supply rationalizations, you know, in progress, but how that all plays itself out at the end of the day is still an unknown. You know, we tend to, like I said earlier, we look at the banks of the river, you know, we anticipated, you know, some challenges on the supply demand coming into the decade. That's part of the reason why we wanted to focus on cost reductions. But, you know, the question of where does the supply demand, you know, end up after the pandemic, after the demand settles to a new normal, wherever that's gonna be, after the rationalization settles out to where that's gonna be, I think that's still the question that we're all trying to get our arms around. You know, for us, like I keep saying, is we try to look at it from a banks of the river standpoint, and then we'll, you know, we'll assess it as time goes on. I don't know if any, if you guys have anything to add, they're shaking their heads, so I think that's the best we can give you at this point.

Thanks, Mike, that's very helpful. And can you just remind us, like, if we look at MPC system, what's the ability to flex your gasoline yield, and how different is that from the US complex? Is it more or less or is it relatively in line?

Are you asking, Benny, like, flex between gasoline and this load? Is that what you're asking?

Yeah, like, how high can you get your yield in terms of gasoline output overall?

Yeah, Benny, this is Ray. You know, we typically will have, like, a 10% swing that we can, we swing between our gasoline, gasoline and diesel, and we'll do that based on the economics that we see, and what I'll tell you, in the last year in the pandemic, you've seen us do, you know, do it both ways. You've seen us all the way to diesel and challenging ourselves how much more diesel can we make, and we've gone back the other direction.

Yeah, Benny, this is Rick. Just one thing I'll add to that, to raise comments on yield. You know, a lot of that is driven by econ, and then a lot of that is driven by the sweet-sour spread, the -to-light spread. So, as we've stated many times, we have great flexibility by region, as you'll continue to see as we pivot from sweets to sours, from heavies to lights. We often say one-third, two-third, but that varies by region, and that gives us the flexibility to really turn that yield knob.

All right, guys, very helpful. Thank you very much. You're welcome.

Thank you. Our next question will come from Prashant Rao with Citibank. You may go ahead.

Hi, thanks for taking the question. First one, Mike, I wanted to touch back on the leaning into renewables. We've talked about it several times on this call. So, I wanted to take a big picture of you. You know, ultimately, how do you think about your ambitions here, and would you think about, at some point, maybe as we go forward, holding that out, either as a separate earning stream or a separate segment? I think some of the peers in the space are starting to allude to or are starting to do that, helping analysts and investors to quantify that and sort of gauge where the progress is. That's my first question. And within that, too, sort of a tag along is on carbon capture. I know you've talked about carbon emission reduction and energy intensity earlier in this call. I was curious, you know, there's opportunities with adding carbon capture on LCFS programs that are fairly attractive. So, I wanted to sort of ask on that. And then I just had a follow-up on the cashflow statement after that. Thanks.

Yeah, Prashant, on your first one, as far as renewables and segment results, we do have that on the radar screen. At some point, we think that may be appropriate for us as you know, we just started up Dickinson. So, you know, we don't even have a full quarter yet. So, once we get Dickinson up and running and are generating results, and then we have Martinez coming behind that, then we'll have more of a significant discussion point on actual results as opposed to where we are today, which is anticipating those results. So, I can see that at some point. I would say one of the things that we've worked with Christine and our team on is trying to be very consistent so people can get a good insight into the things that we're doing today. But at some point in the future, I think you could see some changes from us and we'll give you obviously heads up when we're thinking of doing that. Second question was? Carbon capture. Oh, yeah, carbon capture. And I'll let Ray jump in on this as well. I mean, right now in all of the areas of low carbon future or climate areas, there's a lot of things on the plate. Obviously, renewable diesel, as you mentioned, is kind of at the top of the list because we're executing on that as we speak. But there's a lot of different items that we haven't talked a lot about, technologies, different areas that we think we can drive our carbon footprint down. And there's different ways, whether it's capture or many other areas that we have on the radar screen and we're looking at it. We want to make sure that what we're thinking about is economical for us, going to create value for the shareholders. Like I said, if we can hit two birds with one stone, that's the best of all worlds. So I'll let Ray comment specifically on capture.

Yeah, what I'll just add on capture is that's something that's on a radar screen. We're looking at opportunities there. And I'll just emphasize that the capture part is the easier part. The sequestration is a little bit more of a challenging part. So you have opportunities within hydrogen plants and some of our other operations to do capture and sequestration. I'll just say that it's on a radar screen. We're looking at it, but nothing more incremental to really say at this point.

Okay, I appreciate all that color. And then just a quick follow up on the financial statements, particularly on the cashflow. The working cap was obviously a good tailwind and the quarter, sort of a two-parter. One, how to think about that here in one queue is that hold up towards, if we see a bit of a reversal. And secondly, within the speedway portion of discontinued as working cap also, I'm assuming was included in that, was that also sort of positive there as well?

Yeah, Prashan, on working capitals, we've said in the past is there's a rule of thumb that as flat price moves, we have essentially a net 20 days exposure to that. So as flat price moves itself up, that's obviously a source of capital for us. And if flat price were to come down, like we saw in the early part of 2020, then it's a use of capital. So part of that that you're gonna see is depending on where crude prices and product prices are. But as a general rule, we're about a net 20 day exposure there.

Okay, and then the fastest, and that speedway number in the discontinued also included working capital as well. That's not, just to clarify, that's not an ex-working capital number,

correct? I don't know if I'm understanding your question there.

The working capital, sorry, not the working capital, the cash flow from ops, I apologize, the cash flow from ops from speedway that was in the discontinued portion. I just wanted to just clarify if that includes any working capital impacts to speedway and the discontinued portion of cash flows, if that makes sense. I was just sort of trying to suss out how much was of working capital impact is still in MPC after speedway, but I can take that question offline as well, Mike.

Okay, probably better to take it offline, thanks.

Yeah, thanks.

Thank you. That is all the time that we have for questions. I will now turn the call back over to Christina Kazarian for closing remarks.

Sounds great. Thank you everyone for joining the call today. If you have any follow-ups after the call, our team is available to help out with those. And with that, I'll turn it back to the operator.

Thank you. That does conclude today's conference. Thank you again for your participation. You may disconnect at this time.