Marathon Petroleum Corporation

Welcome to the MPC third quarter 2022 earnings call. My name is Casey, and I will be your operator for today's call. At this time, all participants are in listen-only mode. Later, we will conduct a question and answer session. You may press star 1 on your touch-tone 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.

Sounds great. Welcome to Marathon Petroleum Corporation's third quarter 2022 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, Marianne Manin, 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, and factors that could cause actual results to differ are included there, as well as in our filings with the FCC. And with that, I'll turn it over to Mike.

Thanks, Christina. Good morning, everyone. First, I'd like to introduce Tim Eide, who will be joining our calls as the new Executive Vice President of Refining. Tim has over 37 years of experience in leadership roles across our midstream and refining organizations. Most recently, he was Executive Vice President of Pipelines, Terminals, and Marine, and Chief Commercial Officer where he oversaw the business development for the MLP. Now turning to the macro environment, roughly 4 million barrels per day of refining capacity has come offline globally in the last couple years. Yet demand for the transportation fuels we manufacture remains robust and continues to grow. In the U.S., demand is still below 2019 pre-COVID levels, and we believe there will be continued recovery. As supply remains constrained and demand continues to rebound, we maintain a bullish outlook towards a refining environment as we look into 2023. Our third quarter results reflect the team's operational and commercial execution as we focused on delivering products for consumers in this very tight market. In our refining segment, we ran near full rates while maintaining our steadfast commitment to safely operating our assets, protect the health and safety of our employees, and support the communities in which we operate. The commercial team focused on optimizing our scale, footprint, and feedstock slate to deliver against strong demand. And despite volatility in the global energy markets, their execution reflects progress towards our goal of improving commercial performance. We normally see seasonal demand decline at this time of year, but to date, we're not seeing those signs. Strong forward crack spreads and wide sour differentials for 2023 indicate the expectation of a strong refining environment going forward. In the fourth quarter, we're currently running our system at full utilization, except for the planned maintenance activity we have occurring given our back of the year weighted turnaround schedule. Aside from the refining business, We want to point out that our midstream segment earnings continue to grow. In the third quarter, our adjusted EBITDA was up nearly 9% year-over-year in midstream. We've been executing strategic capital investments, fostering a low-cost culture, and optimizing the portfolio, including advancing several organic growth projects in the Permian Basin. The strength of these cash flows supports MTLX's decision to increase its quarterly distribution by 10%. Based on this level, MPC will receive $2 billion of distribution from MPLX annually. We've received questions regarding the structure of MPLX and whether MPC will acquire the outstanding public units, so we want to restate what we said in the past. MPLX is a strategic part of MPC's portfolio. Its current pace of cash distribution to MPC is $2 billion per year, and we expect that to continue growing. MPLX has continued to demonstrate resilient three-cycle earnings and growing cash flows. As MPLX pursues its growth opportunities, we expect the value of this strategic partnership will continue to be enhanced, and we do not plan to roll up MPLX. Switching to capital allocation, we believe MPC's current capital allocation priorities are optimal for our shareholders. In October, we completed our $15 billion return of capital commitment Repurchasing approximately 30% of MPC's shares outstanding. We're committed to executing our capital allocation framework to deliver peer leading total return to shareholders. Today, we announced an increase to MPC's quarterly dividend of approximately 30%. In addition, we intend to continue repurchases, which we believe are a more efficient way to return capital, and we expect to commence buybacks in November using the remaining $5 billion repurchase authorization. In early 2000, we shared our three strategic areas of focus. They have become part of MPC's DNA, embedded in our unwavering commitment to increase profitability, have the best through-cycle cash flow generation, and drive long-term value creation. As we focus on strengthening the competitive position of our assets, in September, we closed on our Martinez Renewable Joint Venture with Nesstate. Construction is well underway, and we expect phase one mechanical completion by year end. We're excited about the partnership with Nesstate, a global leader in feedstock procurement and renewable fuels production. This joint venture enhances the value of the project by reducing MPC's capital commitment to 55 cents per gallon, as well as improving the overall project feedstock slate. Neste has the obligation to bring 80% advantage feedstock in phase two. Due to these improvements, we expect MPC's share of the JV's EBITDA to be only 25% lower than our original standalone case. Additionally, this strategic partnership with Neste creates a platform for collaboration. We believe there will be opportunities to leverage the differentiated knowledge and capabilities of two industry leaders as we pursue our shared commitment to the energy evolution. We continue to challenge ourselves to lead in sustainable energy and have made progress on the sustainability goals that we have set for ourselves. Focusing specifically on the Martinez Renewables Project, which converts our petroleum refinery into a renewable fuel facility, we anticipate the conversion to result in a 60% reduction of the facility's Scope 1 and Scope 2 GHG emissions 70% lower total criteria air pollutants, and 1 billion gallons of water saved annually. If you haven't had a chance yet, we invite you to go to the sustainability section of our website and learn more about the ways we are challenging ourselves to lead in sustainable energy. At this point, I'd like to turn the call over to Mary Ann.

Thanks, Mike. Moving to third quarter results, slide six provides a summary of our financial results. This morning we reported adjusted earnings per share of $7.81. This quarter's results were adjusted to exclude three items, a $549 million non-cash pre-tax gain related to the contribution of our refining assets to the Martinez Renewable JV, a $509 million non-cash gain related to an MPLX third-party contract reclassification, and a $28 million LIFO inventory charge. Adjusted EBITDA was $6.8 billion for the quarter, and cash flow from operations, excluding unfavorable working capital changes, was just under $4.5 billion. During the quarter, we returned $285 million to shareholders through dividend payments and repurchased $3.9 billion of our shares. Slide seven shows the reconciliation between net income and adjusted EBITDA as well as the sequential change in adjusted EBITDA from the second quarter of 2022 to the third quarter of 2022. Adjusted EBITDA was lower sequentially by approximately $2.3 billion. This decrease was primarily driven by refining and marketing as the blended crack spread was down approximately $10 per barrel reflecting a 25% quarterly decline. The tax rate for the third quarter was 22%, resulting in a tax provision of $1.4 billion. The tax rate is similar to last quarter due to the refining and marketing representing a larger component of total earnings. Moving to our segment results, slide eight provides an overview of our refining and marketing segment. During the quarter, We focused on supplying transportation fuels to meet continued strong market demand. Our refining assets ran at 98% utilization, processing over 2.8 million barrels of crude per day at our 13 refineries. We saw margins decline sequentially across all three regions. Capture was 97%, reflecting a strong result from our commercial team in a volatile global market. Operating expenses were higher in the third quarter, energy costs were approximately 15 cents per barrel higher in the third quarter driven by higher natural gas prices. Additionally, we recorded a non-recurring multi-year property tax assessment of 13 cents per barrel in the third quarter, which we will continue to pursue recovery. We believe the actions we have taken to bring our structural operating costs down to approximately $5 per barrel are sustainable. The cost increases we have seen year to date have almost entirely been driven by higher energy costs. Turning to slide nine, which provides an overview of our refining and marketing margin capture this quarter. Market backwardation remained a headwind for the industry, but our commercial strategy of selling ahead of product backwardation while keeping inventories optimized supported our ability to meet demand and capture strong prompt margins. And while not as significant as the previous quarter, secondary product prices were a headwind as they lagged higher light product prices. Our ability to capture 97% of the market indicator across an incredibly volatile three months was in part due to our commercial responses. Slide 10 shows the change in our midstream EBITDA versus the second quarter of 2022. Our midstream segment demonstrated earnings growth with adjusted EBITDA up approximately 3% sequentially and up 9% year-over-year. Overall, we continue to focus on identifying and efficiently executing high-return projects to drive further growth for our midstream business. As Mike mentioned earlier, the growth of MPLX's earnings supported its decision to increase its quarterly distribution by 10% to 77.5 cents per share. and MPC expects to receive $2 billion in cash from MPLX on an annual basis. MPLX remains a source of durable earnings in the MPC portfolio, and as MPLX grows its free cash flow, we believe it will have the capacity to return capital to its unit holders. Slide 11 presents the elements of change in our consolidated cash position for the third quarter, operating cash flow, excluding changes in working capital, was just under $4.5 billion in the quarter. Working capital was a $1.9 billion headwind for the quarter. This quarter, we made a payment of $2.3 billion for estimated federal income taxes. Declining crude prices were also a headwind to working capital. Capital expenditures and investments totaled $756 million this quarter. The increased level of capital spending was related to a rampant activity related to the Martinez Renewable Fuels Facility conversion and the Galveston Bay Star Project. The Star Project is expected to be completed early 2023. Other cash flow benefits of $790 million is primarily driven by the distribution MPC received from the Martinez Renewable JV upon closing on September 21st. At the end of the third quarter, MPC had approximately $11.1 billion in cash and short-term investments. Moving to slide 12, we have completed our $15 billion share repurchase commitment, utilizing the proceeds from the Speedway divestiture at an average price of $78, ahead of our commitment of no later than the end of 2022. As you will see today, when our quarterly financial, the 10Q, is published, we were able to complete that early in the month of October. We intend to begin repurchase against our $5 billion outstanding authorization in November, now that our financials are public. On slide 13, I'd like to walk you through our financial priorities. Sustaining capital. We remain steadfast in our commitment to safely operate our assets, protect the health and safety of our employees, and support the communities in which we operate. We're committed to a secure, competitive, and growing dividend. We believe the quarterly increase to 75 cents per share we announced today is secure through cycle, competitive with peers, and the broader market. and leaves opportunity to potentially grow our dividend in the future. We anticipate this dividend will be supplemented with repurchases, and we are committed to executing our capital allocation framework to deliver peer leading total returns to shareholders. We will evaluate growth opportunities and margin enhancing projects. Share repurchases will be used to return excess capital to shareholders, which we believe are a more efficient way to return capital, and will continue to lower our share count. Underpinning these priorities, we believe a strong balance sheet is essential to being successful in a competitive commodity business. It's the foundation allowing us to execute our strategy. On slide 14, we highlight the strengths of MPC's balance sheet. We continue to manage our balance sheet through an investment-grade credit profile. At the end of our third quarter, MPC's standalone growth debt-to-capital ratio is 21%. which is under our target of a 25 to 30% growth debt to capital ratio. MPLX has a leverage ratio of 3.5 times debt to EBITDA under its target of four times. Both businesses have strong balance sheets with leverage ratios under their respective targets. Turning to guidance on slide 15, we provide our fourth quarter outlook. We expect crude throughput volumes of roughly 2.7 million barrels per day, representing 93% utilization. Utilization is forecast to be lower than third quarter due to planned turnaround activity having a higher impact on crew units in the fourth quarter. Planned turnaround expense is projected to be approximately $430 million in the fourth quarter with a significant level of activity in the Gulf Coast region. Turnaround activity is reflected in our fourth quarter throughput guidance. We are expecting operating cost per barrel in the fourth quarter to be lower projected to be $5.30 per barrel for the quarter. This is primarily driven by expected lower natural gas and energy costs. As a reminder, natural gas has historically represented approximately 15% of operating costs. Our natural gas sensitivity is approximately $330 million of annual EBITDA for every dollar change per MMBTU. This equates to a sensitivity of approximately $0.30 per barrel of costs. Distribution costs are expected to be approximately $1.3 billion for the fourth quarter. Corporate costs are expected to be $170 million, representing the sustained reductions that we have made in this area. In closing, we will continue to execute on our three strategic pillars, strengthening the competitive performance of our assets, fostering a low-cost culture, and improving our commercial performance. We are committed to position MPC as a reliable and efficient energy provider with new investments focused on high return opportunities, supporting the company's evolution, which will position it to lead in an energy diverse future. We will stay steadfast in our plan to position MPC as the refiner investment of choice, striving to deliver superior cash returns regardless of market conditions. And while ensuring we safely operate our assets, protect the health and safety of our employees and support the communities in which we operate. Let me turn the call back to Christina.

Thanks, Mary Ann. As we open the call for your questions, as a courtesy to all participants, we ask that you limit yourself to one question and one follow-up. If time permits, we will pre-prompt for additional questions. And with that, operator, can you open us for questions today?

Yes, thank you. We will now begin the question and answer session. If you have a question, please press star, then 1 on your touchtone phone. If you wish to be removed from the queue, press star, then 2. 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 1 on your touchtone phone. Our first question today comes from Doug Leggett with Bank of America. Go ahead, please. Your line is open.

Thank you, guys. Sorry, trouble with the mute button. Good morning, everyone. Thanks for taking my questions. I guess, Mike or Marianne, whichever one wants to take this, now that you've completed the buyback, at least the first phase of the buyback, your distributions from MPLX are still more than covering your dividends. So can you walk us through how you think about what the new pace of buybacks could look like? Because obviously the $5 billion authorization is probably going to be cured through fairly quickly. And what we should think of in terms of the balance between future dividend growth and where you want your balance sheet to be. Basically, it's a use of cash question, because this is a pretty nice problem to have. And then I've got to follow up, please.

Thanks, Doug. So, you know, as you know, we made a commitment that we would reassess the dividend immediately completing the $15 billion, and we've done so. We wanted three objectives really around the dividend. One was for it to be secure, competitive, and then obviously with the potential to grow dividends in the future, as you said. We believe our increase to 75 cents in the quarter meets all three of those objectives. As you know, we completed that $15 billion share authorization and have a remaining $5 billion new authorization which both Mike and I had shared on our prepared remarks that we intend to begin to use that very early in the month of November. We continue to think that our equity is undervalued. And when we look at distributions, return on capital between dividend and share repurchase, we believe share repurchase remains a more efficient tool in that portfolio. So we'll look at market, we'll look at other growth opportunities, and we'll look at the macro, and we'll continue to use share repurchase absent other growth opportunities as a vehicle to continue to return capital to the shareholders. And every decision that we make, obviously, focused on trying to ensure we've got peer-leading returns. I hope that helps, Doug.

It does, Mariana. Sadly, it also prompts my follow-up, if I may. And it's a little bit of, I guess, a less easy question to answer. And she just made the point of you believe your equity is undervalued. Now, we obviously agree with that. But your share price is at an all-time high. So when we think about value, when the market thinks about value, there have to be some assumptions that go behind how you're defining value. So my question is, what's the mid-cycle to the extent you can define it, EBITDA or cash flow that you anticipate from the portfolio that goes behind that statement of we believe our equity is undervalued? I'll leave it there. Thanks.

Doug, I'll start off, and I'm sure Mike will want to add incremental comment as well. I think the mid-cycle is an extremely difficult place for us to put a pin in as we stand right now. Certainly, you know, when we look at the market dynamics, as Mike shared as well, we remain pretty bullish on the outlook, not only for the fourth quarter, but certainly as we head into 2023. So, you know, a series of factors that we use and we look at to determine when we say we believe that equity is undervalued and will continue to be as opportunistic as we can as we are using share repurchase. in evaluating where both the fourth and the first quarter will go, and frankly, longer term. So several factors that we consider, but we certainly look right now at a fairly optimistic outlook for the next several quarters.

And Doug, it's Mike. I'll add to Marianne's comments. So what I said in a prepared remark is the fundamentals of the business have changed as a result of what's happened over the last couple of years. You know, roughly 4 million barrels of refining capacity has come out of the market at a time early on when demand was down, but demand continues to recover. You know, we're still not at 2019 levels of demand across all the products, gasoline, diesel, jet fuel. So we're still below, but we are slowly recovering. So you have supply constraint, you got demand recovering, and to your point, the mid-cycle that we see into the future is is clearly above the previous mid-cycle because the global fundamentals have changed. And as we look out in time, you know, there are going to be some capacity additions occurring throughout the world, but we also are a believer that demand is going to continue to pace such that the new mid-cycle for what we're going to see is significantly above where we've been in the past. So that's obviously why we have a bullish overtone here and why we still believe that the assets that we have are still trading under intrinsic value. Now, I know you'd love us to give the exact number, what we call internally, so I'm not going to do that, as you know. But we stress test it. We stress test it in a low case, our view of a mid case and our view of a higher case. And as we look at all those things, we still believe fundamentally that we can purchase our shares at a price that's still adding value to our shareholders. So that's why we've been so aggressive in that area. We had committed to that return. You know, as Mary Ann said in the prepared remarks, you know, we've bought back at a pretty good number, and we still see that as an ongoing opportunity. You know, you also asked about the dividend. I mean, our dividend, you know, being where it was, was mainly because of the equity price coming up. And we did feel it warranted an adjustment. People had asked us for several quarters in a row whether we were going to do that, and we said we're going to do it after we do the $15 billion of Speedway. So hopefully we were consistent with what we said there. We've moved it up. As Mayor said, it's not a tax-efficient way to return to shareholders, but we want to have a competitive number as well. So 30% is a good bump. We'll keep an eye on that. And at the same time, we're going to continue to reduce the share count. Hopefully that gives you a little more color.

It makes significantly higher mid-cycle is what I was looking for. Thanks very much indeed.

Our next question comes from Neil Meda with Goldman Sachs. Go ahead, please. Your line is open.

Good morning, team. The first question is really to build on your comments around commercial. The capture rates have continued to come in very well over the last couple of quarters. And Mike, I know when you came into the role, one of the opportunities you identified was really strengthening your commercial efforts. So can you just talk about What specifically has driven sort of that improvement in capture rates and how much of that is because of those commercial initiatives?

Yeah, thanks, Neil, for the question. I'm going to let Rick and Brian comment. But before they do, I would say to you, you know, we did say early on that we had three major areas that we were going to put emphasis on. And we've made progress in the commercial area. We still see a lot more opportunity for us, but we're not done in that area. But we have made some progress. I'll let Rick and Brian give some comments.

Yeah. Hi, Neil. It's Rick. Thank you for the question. You know, it's one of these items where we've been looking at the pull through and we've been seeing it the last several quarters. So it's nice that you're noticing it as well. I would start by saying earlier this year, we changed a lot. We changed processes. We changed structure and culture around all things commercial. That's been a game changer for us. In terms of details and how competitively I'll be careful in what I share here, Neil, but if you look at it through a broad lens, we've set up a dedicated what we call VCO team, value chain optimization team, that goes from end to end, from feedstocks to products, from purchasing or procuring to placement, and we're relooking at everything we do. The why, the how, all modeling constraints, assumptions, everything was put on the table and relooked at. And so a lot of change and great positive results have come out of that, especially in the midst of the environment we're in. So every win when you're in an environment like we're in today is exemplified with the high crack, and I think you're seeing that. In addition, you're seeing a lot of the reroute of global products and feedstocks happening throughout the world. And through this initiative, we've been able to take advantage of a lot of purchasing of feedstocks and the placement of our clean products in a time that has been highly advantageous. So with that, I'll turn it over to Brian for more color on the clean side.

Thanks, Rick. Yeah, Neil, just great question. I appreciate the opportunity to kind of weigh in here. And Rick said it, but I'll double down on it. It's not one or two things. It's literally everything. We've changed. We've moved mountains. I'm really proud of the work that the team's done. There's been a lot of progress, as Mike alluded to in his comment. There's more to get. I think foundationally, as we look going forward, one of the key components is our digital transformation that underpins a lot of the efforts we have on the commercial front. And we think leveraging our scale across our Coast to Coast platform provides us a distinct opportunity set as it relates to that digital evolution in our space. The other thing I'd say just real quick is what underpins all this? Org alignment changed everything. We fundamentally changed the organizational structure and realigned people. We empowered people, and we held them accountable. We have a people-centric business in the commercial space, and we're really leveraging that. And the core tenet of what we're trying to accomplish is to let our great people do great things.

Yeah, that's a great caller. So it's showing up in the numbers. And the follow-up is just a specific dynamic around feedstock. We've seen WCS really blow out. Historically, you guys have been one of the larger buyers of Western Canadian crude. But you're also seeing heavy, wider in barrels like Maya and high sulfur fuel oil. So you can talk about what's driving the weakness in the heavy crude and product markets. And how are you optimizing your refining slate to take advantage of that?

Yeah, hi, Neil. It's Rick again. So great question. You know, these markets are blowing out. We're seeing unprecedented levels again. On the heavy side, I think I looked this morning and I saw the forward curve. December was marked at minus 30, Q1 minus 27, and unbelievably so. 2023, Cal was 23 under. So what's driving it? Boy, it is a plethora of items. Production from the Canadian front, Neal, is pretty solid. And we're entering right now blending season, as you know. So the blending season is swelling the pool, which is certainly helping as well. You know, we've had some short-term shot in the arms with some maintenance in pad two, three, and five. When I say maintenance, unplanned maintenance, that's been a plug for us. And then fuel oil is really cheap. So you're seeing a lot of people substitute that for heavies in other parts of the world. So all of this is driving, is really putting pressure on anything that hits the U.S. Gulf Coast. And lastly, I'll say when you look at the Gulf of Mexico medium sour production, it's been healthy as well. So lately here, you're seeing Mars blow out. Certainly you referenced the Canadians. So all of these items are stacking on top of one another and creating for a very bullish outlook here into 2023. In terms of MPC specifically, I think you are well aware we have great access and optionality that we've built out our system over the years in Pad 2, Pad 3, and now Pad 5. And so we are going heavy. We're heavying up our slate. We're filling up our cokers, as you would expect, and we'll continue to do so into Q3 as these indicators tell us to do so.

Makes sense. Thank you, Tim.

You're welcome, Neil.

Our next question comes from Roger Reed with Wells Fargo. Go ahead, please. Your line is open.

Yeah, thank you. Good morning. Morning, Roger. Let me take the diesel question that everybody wants to ask in all these calls. Kind of what you're seeing across your system, whether or not the Mississippi River issues had anything to do with what's going on in the central part of the country, and just any thoughts you have on some of the policy issues that are percolating out there, you know, in terms of any risk of government intervention on the diesel export front.

Yeah, Roger, this is Brian Partee. I can take that. There's a couple of different things to unpack there. First, on the Mississippi River, we have a really strong and capable inland river system and team. We've got over 20 tugs and 300 barges. We largely operate on the Ohio River, but also do transit the Mississippi. And the team has been working extremely hard over the last several months, making sure the product continues to flow. So I can say there's been no impact, but it's been on the heels of our team working very diligently hard. and positioning the right equipment in the lower Mississippi River to make sure that we don't have disruptions. So on that front, you know, things have been going pretty well. As it relates to, you know, the ongoing dialogue with the administration, we have had frequent engagement and communication, which has been welcomed. I think it's good to share and understand each other's perspectives. And, you know, as it relates to the export ban, I think that through the dialogue, there's been general consensus and understanding that that likely would be counterproductive to the goals and objectives of building inventory and reducing prices. I mean, fundamentally, if you look at our 2.5 million barrels of exports in the U.S., we just don't have enough demand to back it in. We've got grade mixes. We've got logistics disconnects. So I think there's been broad understanding and engagement that that's not the best course of action. And all that being said, I just can't speak on behalf of the administration. I think anything's on the table at any time.

Hey, Roger, it's Mike. I'll just add to Brian. I'll give you my thoughts on it. Number one is I do think the administration understands that a ban would not have the effect that they were originally looking for, you know, and instead would decrease inventory levels, reduce refining capacity, and actually put upward pressure on consumer fuel prices, which is not what they were intending. So I think, you know, given these potential outcomes, it's my opinion that the administration would not pursue that path. But that's just my thought at this point.

Yeah, I follow that, but then see a wish for a windfall profits tax, which would be unlikely to lower prices either based on experience. So you just never know what they might decide they want to do or feel forced to. I threw a lot into that, so I'll turn it over or turn it back over. Thanks.

Our next question comes from John Royal with J.P. Morgan. Go ahead, please. Your line is open.

Hey, guys. Good morning. Thanks for taking my question. So on the OpEx guidance for 4Q, I'm surprised to see it down from 3Q levels, given you have more relative to 3Q. So anything to point to there, either something from 3Q that's non-repeating or anything in 4Q in particular?

Sure, John, it's Marianne. So in the third quarter, we had really three things that were largely equally weighted that impacted the actual result in the quarter. The first, as you mentioned, was I call it a one time. We had about a 13 cent impact from a four year adjustment on property tax costs. Unfortunately, the state has the ability to go back and do that. So that is non-repeating. And as I mentioned in my remarks, We'll go after that and continue to pursue it. But unfortunately, when it's levied, we need to record it. So that was in the quarter. Second, you know, obviously higher energy costs just in general, quarter over quarter, as I mentioned. And then the last piece, to your point, in the third quarter, given the level of back half-weighted turnaround expenses, are other activities associated with that or higher? When we gave guidance for the fourth quarter, we certainly see energy costs somewhat, you know, not gas-related increases. declining Q3 to Q4 and obviously the tax impact we do not expect to repeat. I hope that addresses the question.

John, it's Mike. Let me just add to what Marianne just said. So we try our best to give you as good a guidance as we can with the one caveat being where's natural gas price going to be? So we look at the forward curve right before we give the guidance. And just reminding you, the sensitivity is, you know, 30 cents a barrel for every dollar per, you know, million BTUs. So where that actually ends up in the quarter is hard to call. So we just take a look at the forward curve ahead of time and put our best number on it. So what I feel good about is the areas that we control and cost. I continue to say we have sustainable reductions that we've seen over the last, you know, couple of years. And that's good. As Mayor mentioned, you know, we have, you know, a tax dispute that we'll follow up on. And, you know, we have this unknown as to where natural gas will actually price itself throughout the whole quarter. Hopefully that helps.

It does. Thank you. And then just a follow-up to Neil's question on capture rates. I think you went into some of kind of the broader dynamics. But I just wanted to be curious. relative to the commentary that it would be down. And I think you touched on it a little bit in the prepared remarks, but just kind of, you know, some of the moving pieces there. And then in order, like at 4Q, you know, it's looking to me like it's a heavy maintenance quarter relative to 3Q. And then you have price moving up in recent October. So I should be thinking about that number kind of pointed down in 4Q.

John, Marianne, I'll start and then I'll pass to Rick and Brian to give you any incremental color. But you're right. When I provided guidance on capture for the third quarter, knowing that we had a fairly strong third and fourth quarter, frankly, but third quarter compared to the second quarter turnaround activity, we expected that we would have seen some capture impact as a result. Having said that, there were certainly some offsetting elements in the quarter. First, as you know, we actually saw prices come down a bit, and those lower prices actually improved our clean product margins. Pricing actually really did benefit as we looked at the volumetric gains quarter over quarter. And then while secondaries were still a headwind in the quarter, they were better than what we had initially projected. Your question was a little bit tough. You were cutting in and out, but as we talk about the fourth quarter, I think is what you were asking as well. Obviously, it will be, as you've seen from the guidance, our heaviest turnaround quarter of all four quarters. So we would certainly anticipate that capture in the fourth quarter could be below what we saw in the third quarter. for some of those very reasons. But let me pass it to Rick and Brian and give you incremental color. I think Mike wants it too.

Before we pass to the other guys, John, I just want to remind everybody that, you know, when Q2 margins were as high as they were, you know, we made a conscious decision to delay some activity into the back half of the year, specifically into the fourth quarter. At that time, You know, we felt it was a good idea, you know, provided there was no safety issues or anything to make that adjustment. So some of what's happened here is we've traded some Q2 margin for Q4 margin. And, you know, we still think that was a good call, but it has loaded up a little bit more activity in the fourth quarter as far as our turnaround activity.

Yeah, John, this is Rick. I'll just add to Mary Ann's earlier comments and make a comment on secondary product margins. So, you know, we're one month into the quarter. We'll see where the next two months go. But secondary product margins have been so volatile and trying to predict where WTI is going to go from here is anyone's guess. I would say that's one of the biggest wild cards on where our capture will end up. So, More to come there. We'll see how the rest of the quarter plays out. And with that, I'll see if Brian has any color to add.

Yeah, thanks, Rick. John, just one quick summary wrap-up comment. It's hard to call the ball one month into the quarter, but I will say that October, from a clean products perspective, started off strong, as Mike indicated in his opening commentary. We did not see the seasonal turn down in demand. We've had weather working largely in our favor. We haven't had a hurricane event, and the country as a whole has been pretty moderate on the weather front. So we did see – we've seen strong demand throughout the month of October, and correspondingly, we've seen strong margins as well. So, you know, directionally, I think favorable, but too early to call the ball.

Very helpful.

Thank you. You're welcome.

Our next question comes from Sam Margolin with Wolf Research. Go ahead, please. Your line is open.

Good morning, everyone. Thanks for taking the question. Good morning, Sam. I wanted to ask on the renewable diesel business. You mentioned Neste brings some benefit on the feedstock procurement side. You also have the JV with Archer Daniels, so you're covered across categories within the feedstock universe. know there's a lot of disparity between vegetable oils and waste oils right now and so I'm just curious how you think about the feedstock picture overall whether it's important to really have security on both sides or if you know you might be leaning towards one specific category of feedstock over another yes Sam this is Brian I'll take that question it's a great question so you know

First, let me just back up and talk a little bit about what we have going on out west with Martinez. So we're well into our pre-fill strategy. So we've been pre-selling since middle of the summer. We're currently buying from over 50 different suppliers. So we forayed into this business two years ago with Dickinson, and the team has come up very, very fast in developing those relationships. Beyond just the types of feedstocks, it's really a big part of our focus in most areas is around – logistics flexibility. So, you know, Martinez is greatly positioned on logistics flexibility. We've got three facilities in the Bay Area that we're bringing feedstocks into, all of which have rail and access to the marine opportunities as well. So, in addition, we've got our two pre-treat facilities in the central part of the U.S., in Cincinnati and Beatrice. So, we've quickly gone from not being in the business to being holistically in the business with two different plants here shortly. pre-treat capacity, and we're confident, very confident in our ability to source optimal feedstocks. But it's really an optimization, much like we undertake on the crude side of our business. We run an LP model. We look at unit constraints at the refinery. We look at logistics. We look at pricing and, of course, CI value. So it's a broad optimization, very similar to what we do on the crude side of our business.

Okay, thanks. And then, you know, speaking of optimization on the refining side, Maybe if we could go back in time to the Mark West acquisition a number of years ago, a big part of that was NGL integration into the refineries, or at least there was a contemplated synergy. And now we've got a pretty noteworthy NGL dislocation, and specifically butane. And I wonder if that relationship is as you imagined it at that time, or if in the process of your sort of commercial transformation, if you've fenced them off or organized them differently.

Yeah, hi Sam, it's Rick. So the call out is outstanding, especially in these low MGL price environments we're in right now. So when you look at the logistics of combining MWE and MPC and our total footprint, it's incredible today, especially as we optimize our octane with MGLs and heading into the butane blending season. Really, to answer your question, it's yes and yes. Yes, we saw this coming to the extent it is here today. I would say it's certainly a nice shot in the arm for us as we optimize around our system, both from specifically butane and all things NGLs tied to our whole system. We're seeing specific benefits, certainly on the Gulf Coast with Garyville, but it's throughout our entire system. So great call out.

All right. Thanks so much. Have a great day.

You're welcome.

Up next, we have Paul Chang with Scotiabank. Go ahead, please. Your line is open.

Thank you.

Hey, guys. Good morning.

Two questions. First, I want to go back into the how to pick stock. I find that on the Recently that we have seen the CI-adjusted petri-treated soybean oil price is nearly comparable to the UCO, the used cooking oil. So I want to see that how you guys see that and why that you think that has happened. And do you think that this trend is going to sustain and give a corresponding impact on your feedstock strategy? So that's the first question. The second question is related to maybe that how the IRA and also that the declining LCFS prices that we have seen over the past four months, impact your renewable longer-term outlook and strategy? Thank you.

Yeah, Paul, thanks. This is Brian. I understand the question. So first on the CI as it relates to soybean oil, yuko, and actually even some of the other feedstocks that we look at, I would say that we're at a point or we've been at a point here the last several months where we, like ourselves and others, have been in startup mode. So there's been a bit of a surge in demand in acquiring feedstocks as it relates to startup. And the market broadly is not super efficient yet. So it's an emerging market. Relationships matter. A lot of the sellers in this space, so whether it's Yuko or Rendered Fats, it's a new business line for them. So there's a lot of exploration ongoing. So I don't think it's a structural change as we've seen here in the last couple months, but I do think it's just the nature of the market evolving from a CI perspective. But As I said earlier to Sam's question, logistics are going to be key. Those relationships are going to be key to make sure we get the right feedstocks, the most advantaged feedstocks into our facilities. Your second question related to LCFS, certainly we've seen the supply and demand of LCFS credits gap out here over the last year and a half or so. The one point I'd make here is we're seeing that in California, but there's other states, other areas, Canada, Oregon, that have emerging programs. That's a new variable that's entering into the equation in calculus for us and others in terms of where you actually place the product. So we reported, CARB reported a pretty big build for the second quarter. Credit's built a little over 1.3 million credits in the second quarter, so that surplus continues to grow. We do expect CARB, they're going through a scoping assessment now on the LCFS program. We do expect them to make adjustments to the plan going forward to really support the investments needed on the low carbon side of things. I think that'll be an opportunity in 2023 to engage in and discuss and probably something we see manifest in 2024. Ultimately, the economics as it relates to RD are really founded on several interrelated variables. We've had the positive side of that on the RIN and the Blender's tax credit. Certainly the product pricing in California has been supportive, so that's all been on the positive side. P-stop pricing, although stable through the third quarter, has been towards the higher side as we think about this year. And then, as you mentioned, the LCF values have been the lower side. But all that combined, considered, we're seeing stable margin production out of our Dickinson facility, and we'd expect the same out in Martinez, just through a variety of different variables.

Hey, Paul and Mike, I just want to add a comment. We've been talking about Martinez for a while now, and early on we said that in order to have a terrific facility, we wanted to have competitive CapEx, I think everybody has seen our numbers on that. We've disclosed that. OPEX, we're in a really good position with a former refinery asset. Brian's talked about we're pretty bullish to the logistics assets that we have set up here. And the last piece of the puzzle was feedstocks, which you're asking about, and Brian just gave you some color on our side. Plus, I do want to reiterate, that was part of the driver for our partnership with Nestea. You know, we know their portfolio and see them as a global leader in this area. So it was one of the key factors that enabled us to say we wanted to JV with them. And as we said in our prepared remarks, you know, we think there's more to come with the relationship with Neste. We're working on different things together as we feel that we've had a win-win for both sides of this. But fee stock procurement is actually, you know, one of the most important parts of this and kind of the last leg of the stool after we talked about CapEx, OpEx, and logistics. So hopefully that helps.

Sure. And Mike, just curious, do you guys have any plan to add additional Audi development plan or an Audi plan, say, over the next one or two years or that? you just have the machines going to bump up and you're going to wait until that fully warm up and run it for a while. So what kind of strategy that you guys have in mind?

Yeah, so weren't sure what you said. Christina said she thought you heard you say, are we adding algae plants? Did you say algae or algae? No, no.

No, I'm saying that I hear what you say about this doctor's curious that now you have the renewable diesel plan and the things are going to come up very soon. And so what is the next step in your strategy? Do you plan to add additional new facility or new development in the area before you fully start up on the Matinsa or that you say, okay, we just have some major investment on the space and let's run it for a couple years before we look for the next addition?

Okay, I understood. It was RD. Yeah. I think, Paul, it's more the latter. We have some things going on. I'll let Dave make a few comments on some of the areas that we're looking at. But we'll have Martinez started up here very shortly within a couple months. We're gonna mechanically complete at the end of the year. So it's probably a little more ladder to the scenario that you played out. But the whole area continues to evolve. So Dave, why don't you give a little color on some of the things that we're looking at?

Yeah, Paul. This is Dave. So I think, as Mike stated, while we have Dickinson up and going and we're bringing Martinez online, both phase one and phase three, even with the Neste JV. Part of our strategy, and Brian touched on a lot of it, from feedstock all the way to product placement, is I won't say replicating the hydrocarbon value chain, but leveraging our core competencies, our strengths that we've shown in the commercial value we can extract out of participating up and down that value chain. Probably a little bit of a difference from the hydrocarbon to the renewable is We don't want to get over our skis and maybe outside of our core competencies, and we also want to have speed to market. Hence the reason you're seeing our relationships, our JVs, we'll use them, our partnerships with ADM and Neste, for example. So as Mike stated, we're going to continue to evaluate new opportunities. We look at a lot of stuff, but it needs to be capital efficient. The IRA is a It could be some tailwind as you look at this, but I still think it's a little early to see how some of those variables all play out and the actual mechanics of the IRA before we can make long-term investment strategies. Thank you.

Thank you. You're welcome, Paul.

Our next question comes from Teresa Chaston with Barclays. Go ahead, please. Your line is open.

Hi, there. Thank you for taking my questions. First, I wanted to touch on your comments about demand across your system. Your earlier comments about being down versus 2019, was that specific to your assets or were you talking about the DOE numbers in general? I'd love to get some colors there. And also on the supply outlook on the product side, just given the multiple variables at play, be it Russian products rerouting ahead of the February 5th new ban or or incremental Asian exports, you know, China and ex-China potentially coming to water and hitting Pad 5. We'd love to hear your views on how all of that percolates.

Teresa, I'll start off with my comments related to the DOE data, but I'll let Brian give a little color on our own specific data. But just in general, I think it's consistent that we still see a lot of demand recovery, and that's why, you know, we're so bullish at this point. And then we'll take the second part of your question in a second. Yeah, thanks. Thanks, Teresa, for the question.

So, yeah, just a bit of color maybe on the system. First, you know, to address Mike's comments around our data, yeah, Mike did, you know, quote on the DOE data. Our comps back to 2019 aren't super relevant given that we've shut down a couple of different refineries. We sold off a retail unit. So we really look at the year-to-year. And I'll give you just a high-level overview for Q3. So year-on-year, this one has been steady and strong, you know, very stable across the platform and really flat year-on-year. Jet continues to perform well, and we're seeing that recover year-on-year about 6%, but still below 2019 across the platform. And then gasoline is probably the most interesting. We were off slightly from 2021 in Q3, about 2%. And it really correlates to retail prices. So we'll start in the west, and about 4% below Q1 of 2021 out west. So 4% decline that we really correlate directly to the retail prices and the elasticity impact of higher retails. Midwest was about 3% and the Gulf Coast was 1%, so overall about 2%. But kind of going back to Mike's earlier comments, we do remain optimistic as we think about demand. I mentioned October we came out of the chute really strong here for Q4. We're continuing to see COVID demand recovery. Jet travel more broadly, the halo around activity and vacations, not just jet but marine fuel, diesel, gasoline, etc., And we also have moderated retail prices coming off of the summer highs. We're currently around $3.75 a gallon, well off of our highs in the summer. And demand continues to also be robust in South America and the Caribbean. The economies there are geared a little bit differently. We've got strong agriculture demand globally, as well as mining activity. There's been some price subsidization that's occurred in the south of the border here that's also helped to prop up demand. And then we're seeing pulls into Europe as well for obvious reasons, primarily around energy security and just having access to the fuel going forward as the winter ensues here. And the last thing I'd mention is on the supply constraint side, we've taken a lot of capacity offline globally, and we do expect a degree of friction around the Russian exports of production. Hard to call the ball on how impactful that might be. Everybody's watching very closely, but we don't expect it to be positive for incremental supply. We do expect it to drag just a bit.

I'm sorry, the Asian exports or potential exports?

Yeah, as it relates to a lot of UN rumor coming out of Asia in terms of export quotas, COVID policies. really difficult for us to call. The one data point I can give you, though, Theresa, empirically on that is we have not seen, where we compete, we have not seen a step change in terms of competing with refineries coming out of Asia, specifically to China. It's been steady as she goes, status quo here for the last several months.

Theresa, this is Mike. I would just add that the inventories are obviously low. The market needs additional barrels. We're doing our best to put out as much product as we can. Brian mentioned the point about we see some price plasticity when prices get too high. So I think at the end of the day, we spend as much time on what we control, and that's to run as hard as we can, put as much product into the market as we can. And whether agent exports come or don't come, the market needs the supply. So I think that's why, at the end of the day, we still see this to be a pretty bullish outlook. It's evolved over a couple of years. We think demand is going to continue to come back. Brian just gave you some specifics on our areas. I had mentioned the DOE stuff. You know, we believe that demand will continue to recover, and then whether supply comes from China or from, you know, the U.S. market itself, the market just needs it. It's a supply-constrained, recovering-demand outlook that makes us have this, you know, bullish look.

Our last question today will come from Matthew Blair with TPH. Go ahead, please. Your line is open.

Hey, good morning, and Mike, congrats on your good health news from last month. That was great to hear. I had a question on the STAR project, which you mentioned will be complete in early 2023. I think at one point you were hoping for about $525 million at EBITDA from the project. Has that number moved up with your expectations of a higher mid-cycle environment? And if so, could you give us the range on what that might look like And then in terms of just how it'll flow through the financials, I believe it'll add 40,000 barrels a day of new refining capacity. So we should expect a volume kick, but then also a margin improvement, right, from, you know, the ability to handle residuals better. And I think there might be some octane benefits, too. So if you could walk through that, that'd be great.

Hey, Matt, this is Tim. I'll take the first part of that question. So the remaining scope that we have will indeed increase the heavy crude capacity by about 40,000 barrels a day. It'll also improve the resit upgrading by about 17,000 a day. We do still feel really good about the economic drivers of the project. Obviously, we've got the current widening heavy crude differentials, and you've got strong distillate cracks that have really kind of improved the project value over our original look. We also made some logistics investments that are being heavily utilized, and those further improve product margins in some of these niche markets, be it domestic or foreign. And then, as I've said in the prepared remarks, so the remaining work is going to be tied in during a turnaround in the first quarter of next year. So that's kind of where we're at on the STAR project, so I'll turn it back over to

Mike and Matt, you can just, whatever numbers you want to put on, you had it right from the beginning. It's 40,000 barrels a day of additional crude times whatever number you want to put on that and 17,000 barrels a day of heavy upgrading. So whatever your outlook is, that's the math that will give you the additional EBITDA once we start this up. Good stuff. Thanks. I'll leave it there. You're welcome.

Sounds great there. And then on that operator, I think we are done for today. So thank you, everyone, for your interest in Marathon Petroleum. Should you have any additional questions or would like clarification on topics discussed today, please reach out, and our IR team will be available to help you with your questions. Thank you, everyone.

Thank you so much. That will conclude today's conference, and we thank you for participating. You may disconnect at this time.