Marathon Petroleum Corporation

At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. 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.

Welcome to Marathon Petroleum Corporation's fourth 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. Factors that could cause actual results to differ are included there as well as in our filings with the SEC. References to MPC's capital spending during the prepared remarks today reflect standalone MPC capital excluding MPLX. And with that, I'll turn it over to Mike.

Thanks, Christina. Good morning. Thank you for joining our call. First off, I want to recognize a new director on the MPC board. Toni Towns Whitley will be joining our board in March, bringing tremendous experience with her most recent executive position at Microsoft, as well as her board experience on the NASDAQ and PNC boards. I'd also like to recognize Christy Brees, who was appointed as a new independent director of MPLX in November, and who recently served as CFO for U.S. Steel. As we look back at 2022, we've delivered on our strategic commitments. Full-year cash provided by operating activities was just over $16 billion on a consolidated basis and over $13 billion excluding MPLX, reflecting our improving operating and commercial execution. Our commitment to safe and reliable operations resulted in refining utilization of 96% and our team's dynamic responses to volatile product markets delivered strong commercial performance, resulting in a 98% full-year capture. Our focus on fostering a low-cost culture enabled us to sustain our previously achieved $1.5 billion of structural cost reduction throughout the year. We formed a strategic partnership with Nestate. which will enhance the economics of our Martinez Renewable Fuels project and create a platform for additional collaboration within renewables. In midstream, our business grew 7% year over year. MPLX raised its distribution by 10%, and based on this level, we expect MPC will receive $2 billion of annual distributions. MPLX remains a source of durable earnings in the MPC portfolio, and as MPLX grows its free cash flow, we believe it will continue to have the capacity to increase its capital return to unit holders. In 2022, we returned nearly $12 billion through share repurchases, bringing the total repurchases to almost $17 billion since May of 2021. In addition, we increased MPC's dividend 30% to 75 cents per quarter. Executing on our operating, commercial, and financial objectives, combined with a strong macro environment led to total shareholder returns of 87% for MPC in 2022. Before Marianne goes through the results for the quarter, we wanted to share our outlook on the macro environment and the financial priorities for 2023. Our outlook remains bullish for 23, supported by the nearly 4 million barrels per day of refining capacity that has come offline globally in the last couple of years. Demand for transportation fuels we manufacture remains robust. We have seen recovery in demand across all our products since coming out of the pandemic, and we anticipate further recovery in 2023, particularly as we expect consumers to adjust consumption patterns to lower retail fuel prices. Uncertainties remain around the pace and impact of China's recovery, the magnitude of a potential U.S. or global recession, and the impact of Russian product sanctions. But despite these unknowns, we believe that the current supply constraints and growing demand will support strong refining margins in 23. Our financial priorities remain unchanged. These include, first, sustaining capital. We remain steadfast in our commitment to safely operating our assets, protect the health and safety of our employees, and support the communities in which we operate. Second, our dividend. We're committed to the dividend, which we increased 30 percent at the end of last year and intend to evaluate at least annually. And as we repurchase shares, the reduction in the share count increases the ability to support future dividend growth. Third, growth capital. We believe this is a return on and return of capital business. we've been through a progressive change over the last few years and remain focused on ensuring the competitiveness of our assets as we progress through the energy evolution. We will invest capital where we believe there are attractive returns. In traditional refining, we're focused on investments that enhance the competitiveness of our assets. In the low-carbon area, investment at this time is primarily associated with the completion of the Martinez Renewable Project as well as a project at our LA refinery that will improve energy efficiency and lower facility emissions. In addition, we're focused on growth opportunities and emerging technologies, as well as opportunities enabled by digital transformation. Beyond these three objectives, we're also returning excess capital through share repurchases to meaningfully lower our share count. In the period from early November through the end of January, we've completed nearly $2.4 billion of share repurchases. And today, we announced an incremental $5 billion share repurchase authorization, reinforcing our commitment to strong capital returns. Our goal is to be the investment of choice in the refining space, generating the most through cycle cash flow, creating value through strategic deployment of capital, and delivering superior returns to our shareholders. We also challenge ourselves to lead in sustainable energy by setting meaningful targets to reduce GHG emissions, methane emissions, and freshwater intensity, targets which we believe we can demonstrate a tangible path to accomplish. As we innovate for the future, phase one of our Martinez Renewable Fuels Facility is progressing startup activities, marking a significant milestone in our sustainable energy goals. The facility is on track to reach full phase one production capacity of 260 million gallons per year of renewable fuels by the end of the first quarter of 2023. Pretreatment capabilities are expected to come online in the second half of 2023, which will enable the facility to ramp up to its full expected capacity of 730 million gallons per year by the end of 2023. At Dickinson, we've optimized operations to be able to bring in more advantage feedstocks, lowering the carbon intensity of the fuels we produce. We've enhanced our position in the renewables value chain through our pretreatment facilities in Beatrice and Cincinnati. We'll continue to look for opportunities leveraging the strategic partnerships we're cultivating with Nestea and ADM. As evidence of our progress on our sustainability goals, This year, MTC was included in the Dow Jones Sustainability Index for North America for the fourth consecutive year. At this point, I'd like to turn the call over to Mary Ann.

Thanks, Mike. Moving to fourth quarter results, slide six provides a summary of our financial results. This morning, we reported adjusted earnings per share of $6.65. This excludes a $176 million LIFO inventory benefit, as well as $60 million gain related to the Speedway transaction. Adjusted EBITDA was $5.8 billion for the quarter, and cash flow from operations excluding unfavorable working capital changes was $4.4 billion. During the quarter, we returned $351 million to shareholders through dividend payments and repurchased over $1.8 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 third quarter of 2022 to the fourth quarter of 2022. Adjusted EBITDA was lower sequentially by approximately $1 billion. This decrease was primarily driven by refining and marketing as the blended crack spread was down over $5 per barrel, reflecting a 20% quarterly decline. Corporate expenses were higher in the fourth quarter, driven by a retroactive operating tax assessment for prior periods. We intend to pursue recovery of these multi-year tax assessments. In addition, corporate includes special compensation expenses, which also affected our refining and marketing and midstream segments. we do not anticipate that these costs will structurally impact future corporate costs. The tax rate for the fourth quarter was 22%, resulting in a tax provision of nearly $1 billion, and the full-year tax rate was 22%. Moving to our segment results, slide eight provides an overview of our refining and marketing segments. Like many in the industry, several of our refineries were impacted by winter storm Elliott at the end of December, primarily in our Gulf Coast and Mid-Con regions. Most of our assets were back online after a short period, and we have not seen structural issues. The crude throughput impact was approximately 4 million barrels, which reduced our crude capacity utilization for the fourth quarter by roughly 2%. Looking to January, we anticipate impacts to throughput of 3.5 million barrels, which is reflected in our guidance for the first quarter of 2023. Even with the disruption at the end of the quarter, our refining assets ran at 94% utilization, processing 2.7 million barrels of crude per day at our 13 refineries. Sequentially, we saw per-barrel margins decline, most notably in the West Coast region, while U.S. Gulf Coast margins were relatively flat, supported by export demand. Capture was 109%, reflecting a strong result from our commercial team. Operating expenses were lower in the fourth quarter, primarily due to lower energy costs, partially offset by a special compensation expense of approximately 15 cents per barrel paid in recognition for our employees' contributions. Due to lower throughputs in the quarter, refining operating costs per barrel were roughly flat in the fourth quarter at $5.62 per barrel as compared to the third quarter. Our full-year refining operating costs per barrel is $5.41. When we compare to 2021 refining operating costs per barrel of $5.02, this increase can be entirely attributed to higher energy costs. We believe the actions we have taken to reduce our structural operating costs are sustainable. Slide 9 provides an overview of our refining and marketing capture this quarter, which was 109%. Our commercial teams executed effectively in a volatile market. Light product margin tailwinds, improved secondary product prices, and favorable inventory impacts all benefited capture. We do not expect all of these tailwinds to be repeatable, and in particular, we would expect the inventory impacts to reverse in the first quarter. As our strategic pillar indicates, we have been committed to improving our commercial performance. and we believe that the capabilities we have built over the last 18 months will provide a sustainable advantage. Historically, we communicated a capture target of 95%, but over the last few years, the baseline has moved through our commercial efforts closer to 100%. We believe we have built capabilities that will provide incremental value beyond what we have realized to date and will produce results that can be seen in our financials. Slide 10 shows the change in our midstream EBITDA versus the third quarter of 2022. Our midstream segment delivered resilient fourth quarter results. We did see lower EBITDA primarily due to impacts associated with lower NGL prices. This quarter, MPLX distributions contributed $502 million in cash flow to MPC. Slide 11 presents the elements of change in our consolidated cash position for the fourth quarter. Operating cash flow, excluding changes in working capital, was $4.4 billion in the quarter. Working capital was a $72 million headwind for the quarter, driven mostly by declining crude prices offset by benefits from inventory impacts. Capital expenditures and investments totaled $1.3 billion this quarter. We saw consistent spending and refining in the fourth quarter as work progressed on the Martinez Renewables Fuel Facility conversion and the Star Project at Galveston Bay. While not reflected in the 2022 capital spend due to the timing of the JV close, the 50% reimbursement from Neste for Martinez capital spend was received and reflected in overall cash flows in the third quarter. MPC returned nearly $2.2 billion via share repurchase and dividends during the quarter. We began using the incremental $5 billion share repurchase authorization in November. For the full year, we returned $13.2 billion out of $17.7 billion of our 2022 cash from operations, excluding working capital impacts, representing a 75% payout. This was partially enabled by our commitment to complete our $15 billion capital return program. The outstanding purchase authorization of $7.6 billion, which includes the incremental $5 billion approval, demonstrates our commitment to returning capital. At the end of the fourth quarter, MPC had approximately $11.8 billion in cash and short-term investments. Slide 12 provides our capital investment plan for 2023, which reflects our continuing focus on strict capital discipline. MPC's investment plan, excluding MPLX, TOTALS APPROXIMATELY $1.3 BILLION. THE PLAN INCLUDES $1.25 BILLION FOR THE REFINING AND MARKETING SEGMENT OF WHICH APPROXIMATELY $350 MILLION OR ROUGHLY 30% IS RELATED TO MAINTENANCE AND REGULATORY COMPLIANCE. OUR GROWTH CAPITAL PLAN IS APPROXIMATELY $900 MILLION BETWEEN LOW CARBON AND TRADITIONAL PROJECTS. WITHIN LOW CARBON, $150 MILLION IS ALLOCATED FOR COMPLETION OF THE MARTINEZ CONVERSION. We are also executing a project at our Los Angeles refinery, which will improve energy efficiency and lower facility emissions. This is a multi-year project. In 2023, we expect associated capital spending to be $150 million. And we have allocated $50 million to smaller projects focused on emerging opportunities. Within traditional refining, $150 million is associated with the completion of the STAR project, $200 million is focused on smaller projects targeted at enhancing the yields of our refineries, improving energy efficiency, and lowering our cost. In marketing, we plan to spend $150 million for projects that focus on enhancing and expanding the platform for our Marathon and ARCO brands. This morning, MPLX also announced their 2023 capital investment plan of $950 million. Their plan includes approximately $800 million of growth capital and $150 million of maintenance capital. The capital spending plan focuses on adding new gas processing plants and smaller investments targeted at expansion and the bottlenecking of existing assets to meet customer demand. Turning to guidance, slide 13, we provide our first quarter outlook. We expect crude throughput volumes of roughly 2.5 million barrels per day representing 88% utilization. Utilization is forecasted to be lower than fourth quarter levels due to turnaround impacts in our U.S. Gulf Coast region. Planned turnaround expense is projected to be approximately $350 million in the first quarter with a significant level of activity in the Gulf Coast region. The remaining scope of the STAR project, specifically 40,000 barrels per day of crude, and 17,000 barrels per day of resid processing capacity is expected to be tied in during the turnaround at Galveston Bay in the first quarter and should begin to ramp starting in the second quarter of 2023. We expect the level of 2023 turnaround spending to be similar to the level of spend in 2022. However, unlike 2022, we expect turnaround activity to be front half weighted this year. with significant planned work in the first and second quarters. Therefore, we will have executed four consecutive quarters of heavy turnaround work. Operating costs per barrel in the first quarter are expected to be flat at $5.60 per barrel for the quarter. In conjunction with our turnarounds, we anticipate higher project-related expenses as we utilize our planned downtime to complete other work planned. We are seeing the benefits from lower energy costs in the Gulf Coast and MidCon regions. But given the majority of our turnaround activity is heavily weighted to the Gulf Coast, our expectations of flat operating costs quarter to quarter is driven by our West Coast exposure, where we have not seen a decline in energy costs recently. As we look into 2023, we anticipate our operating costs per barrel would decline and trend towards a more normalized level as we complete this turnaround and project activity Distribution costs are expected to be approximately $1.3 billion for the quarter. Corporate costs are expected to be $175 million, representing the sustained reductions that we have made in this area. With that, let me pass it back to Mike.

Thanks, Marianne. In summary, we believe solid execution of our three strategic pillars remains foundational. Similar to what we've achieved with cost reductions and portfolio, we believe the improvements we've made to our commercial and operational execution have driven structural, sustainable benefits, which will enable us to capture opportunities irrespective of the market environment. Our goal is to position MPC as the refiner investment of choice, generating the most cash through cycle and delivering superior returns to our shareholders with our steadfast commitment to returning capital. Let me turn the call back 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. And with that, Sheila, we're ready for questions.

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, please 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 will come from Doug Leggett with Bank of America. Your line is open. Thank you.

Good morning, everyone. For those of you who have questions,

and I do apologize, it looks like Doug's line has dropped, so we will move forward to the next question at this time. Our next question will come from Neil Mehta with Goldman Sachs. Your line is open.

Yeah, good morning, team, and congrats on strong results here. The first question I had was around the magnitude of capital returns. How should we think about the percentage of cash flow or free cash flow You target to get back to shareholders in the given year through buybacks and dividends, and then you talk about a billion dollars being the target level of cash. We've heard some of your peers talk about that number being higher. Why is a billion dollars the right number, and how long is it going to take to get there, given how strong the environment is?

Hey, it's Mary Ann. Thanks for the question. Let me try to break that into a couple of parts there, and then see if I've done your question justice. So, in first part, really the cadence, if you will, of the share buyback and our return to capital. You know, as you can see from the quarter, Neil, we did $1.8 billion in share repurchase and then we continued to buy back in the month of January. Just wanted to remind you, you know, we did complete our $15 billion share repurchase in early October. And I indicated on the quarterly call that we would begin using that incremental $5 billion authorization in November. So essentially, for the better part of October, our cadence, we weren't in the market buying back in October, just to be clear. And then we did seek and have announced an incremental $5 billion authorization in So that leaves us with $7.6 billion of share buyback authorization, hopefully indicating our continued commitment to buyback. And we hope you see that. The second part of your question, just really I think around our commitment there, I think that's what you were saying. So when do we get to that $1 billion? How long does it take us and why?

Yeah.

We feel a billion dollars is an appropriate level of cash, first, because during the pandemic, we probably stress-tested our liquidity and our cash position in one of the most challenging markets. Second, I'd say keep in mind that we receive a $2 billion distribution from MPLX, probably unique when you look at us compared to our peers. So, you know, in reality, that's about $3 billion. And then you combine that with our liquidity, we feel pretty comfortable within a range of outcomes that that billion dollars is appropriate. I hope that addresses your questions, Neil.

Neil, it's Mike. Let me just add to what Marianne just said. So we had been at about, you know, 1.6 from MPLX, moved up to 1.8. We're now at 2 billion PACE. We expect that to continue to grow. If people listen to the MPLX call, we're in a real good position there. But that distribution, let's say at the $2 billion pace, that essentially covers the dividend and half of the refining capital commitment for refining. So that's part of the reason that we are comfortable with $1 billion on the balance sheet. Now, as you've pointed out, we still finished the year with close to $12 billion on the balance sheet. So, you know, we still have a lot of financial capability to get to, you know, a new norm at some point. But hopefully that helped explain why the billion is the right number, and it has to do with our affiliation with MPLX.

Yeah, good problems, Mike. And then the follow-up is around the STAR project. Remind us if It seems like it's coming on at a good time. But how should we think about what this project could mean for incremental cash flow in both a mid-cycle environment but also in current spot economics?

Yeah, Neil, thanks for that question. It's one we've been getting from a lot of people. So it's relatively easy to model. So up until now, the parts of STAR that are in place are in our results. What's not in our results is 40,000 barrels a day of crude capacity. And the easiest way to model it is take that number times the differential between heavy crude and ULSD. So if you look at that differential and you multiply it by 40,000 barrels a day, that's the additional EBITDA that we'll get once STAR is online. But STAR is a pretty unique project for us, so I'm going to ask Tim to make a couple comments on it. So you have the financial side of it, but let me give you a little bit of the background behind it. With Tim, some details, please.

Okay. Thanks, Mike. So Neil, it's a good question that you have there. So let me give you a little backdrop. Keep in mind that we've done this project in phases. A fair amount of the star scope has already been completed and put in service. So it's already earning a return. The remaining work that we have is really going to be completed with this planned turnaround that ends, you know, late in the first quarter. And then we'll be starting up the units in April. So we do expect STARS EBITDA contribution to continue to ramp, you know, after startup in April and through the second quarter. The remaining scope is really going to be one like Mike just indicated. It's going to increase crude capacity by 40,000 a day and also the resid upgrading capacity by 17,000 a day. So maybe a little background on that decision. Rather than expand the Galveston Bay cokers, we elected to upgrade the resid hydrocracker unit because it offers better conversion and increased liquid volume yield. So it was a better choice than the Coker. The fractionation modifications that we made are also going to increase the diesel recovery, which is profitable. And then the refinery will also be able to process significantly more of the discounted heavy Canadian crude. So those are some of the reasons that drove us to that. So we feel really good about the economic drivers of the project. And with the current heavy crude discounts and the strong diesel margins, the near-term economics are better than when we sanctioned the project. So hopefully that's helpful.

That's awesome.

Thanks, guys. You're welcome, Neil.

Our next question will come from Doug Leggett with Bank of America. Your line is open.

Someone didn't pay the phone bill, guys. I'm so sorry about that. How's everybody doing?

Welcome back, Doug.

Thanks. I apologize for that. So while I was... My questions got asked, but let me give it a go. I guess, Mike, first of all, when I look at the earnings power of the business and I look at where your share price is trading, and obviously you gave us a dividend bump back in November, how are you thinking about... You've reloaded the buyback program, but how are you thinking about the balance between dividends... and share buybacks and you know where I'm going with this because obviously your dividend is fully covered by your distributions from MPLX. So in this kind of environment, should we be buying back a lot of stock at this level or should we be thinking that the dividend gets a bit more of a bias in 2023?

Hey Doug, it's Marianne. I'll pass it back to Mike here in a second. You know, as we talked about the dividend, we committed to looking at that dividend annually. We wanted to be sure that it was secure. We wanted to be competitive with the potential to grow. And, you know, we will continue to look at that. You know, as we've shared in the past, and obviously, as you stated, we have, you know, increased the outstanding authorization to $7.6 billion of share repurchase. We continue to think that share repurchase over dividend is an appropriate return of capital. you'll see us continuing to use that authorization as we did here in the last quarter. So, yes, we'll evaluate that dividend, but we continue to see share repurchase as a bit more preferential over the dividend. I'll pass it to Mike.

Yeah, Doug, I'll just add to what Mayor said. Obviously, we want to have a competitive dividend and a growing dividend over time, so that is foundational to us. It is a little bit tax inefficient relative to share buybacks. That's why the mayor just said that we, you know, we lean a little more that way. And the sheer magnitude of the financial capacity we have right now, you know, with finishing the year with about $12 billion of cash on the balance sheet, you know, and continuing to have a strong refining, you know, environment, just the sheer magnitude is much more towards that side of the return of capital. So we're going to look at it. You know, we've committed that we'll look at it each year. We want to be committed to it. At the end of the day, obviously a lot of our attention, just because of the magnitude of the number, is directed towards the repurchase program.

Okay. I understand. I guess no one's going to complain about the yield, given that your share price is a big part of that. But I appreciate the answer. My follow-up is an operational question, Mike. I think it's pretty well known that you guys had a fair amount of maintenance in the quarter, but the capture rate was still quite strong, at least on our numbers. And I'm looking at the product sales relative to the refinery throughput and wondering if that was part of what was going on there. So I'm wondering if you could help us understand the strength of the operating performances And maybe give us a steer as to how you see your full year 23 downtime outlook, because we're hearing from a lot of your peers that 23 is going to be a big year for the whole industry. And I'll leave it there. Thanks.

Doug, it's a good question. So I'm going to pass it to the team in a second. But when we started this out a couple of years ago, we said there's three areas that we're going to concentrate heavily on. One of them was improving our commercial performance. So let me let the team give a little more color on that.

Sure. Thanks, Doug. You know, as Mike indicated, our strategic pillars remain foundational and our commercial performance is clearly one that we remain committed to. You may remember in the, you know, in the last set of guidance, we said that we thought, you know, our capture could actually be impacted given what was a higher turnaround, frankly, their highest one in 2022. But the commercial team did take quite a bit of initiative in the quarter. I'll give you some highlights and then pass it to Brian and Rick. But, you know, one of the things that we saw at 109% capture in this quarter, we had strong light product margins. We had favorable inventory impacts and then also favorable pricing of secondaries. You know, we don't think necessarily all of these tailwinds would repeat. And certainly, you know, depending on, you know, where we saw pricing, some of them could actually be a headwind, particularly when we look at our secondary products. You know, and historically, we've talked about a 95% capture rate. Over the last few years, given the work that the commercial team has been doing, you know, we're moving more toward 100%. So, you know, we're going to continue to challenge ourselves to deliver that. And with that, I'll maybe ask Brian and Rick to give you some incremental color on the specifics there.

Hey, Doug. It's Rick. Just a few add-ons to Mary Ann's comments. So, the 98% in 2022, Is it sustainable? What I would say to that is there will be a lot of volatility, and it will ebb and flow, but this is not a one-time event. We have meaningfully changed the way we go to market from a commercial perspective throughout our entire company, and the focus that we've had since Mike has taken the helm and put in the new leadership team has been night and day and will continue to be. So when you look at 2023 and beyond, I would say you should expect continued momentum, expect volatility, but expect results that will continue to outpace many of our peers.

Honestly, guys, I think that's been overlooked. Sorry, please go ahead.

Yeah, Doug, this is Brian. I was just going to bolt on real quickly to Rick's comments that You know, we really have the team relentlessly pursuing value capture. We've got the team consolidated into really one functional team across the entire value chain, which historically was divided up into multiple silos. And that's been a key differentiation point for us. We're also very, you know, adamant about serving our customers. So my team has an example on the clean product side of things. So as we think about turnaround activity and impact to capture, We've got to operate in an environment where, whether it's an unplanned outage or planned outage, we've got to serve our customers. So there's a lot of things that we can do from a turnaround planning perspective to build in advance of the turnaround, to build different feedstocks, depending on the units that are down. And ultimately, we've got the logistic firepower to purchase to cover as well. So I think that's what you're seeing in the numbers, as you called out, in the turnaround activity relative to sales. we've got the right capabilities to purchase the cover if we've got refining down either planned or unplanned.

Guys, I think I was going to surprise a lot of people. I really appreciate the full answer. Thanks so much.

You're welcome, Doug.

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

Yeah, good morning, everybody. Good morning, Roger. Certainly, I'll give you a Congrats on the capture there. Well done on everything. Maybe to change pace, though, a little bit, I'd like to ask about the process in Martinez and how we should think about the upcoming timeline and any particular milestones we should be watching for and maybe how you think about it contributing to at a cash flow basis, whether that's, you know, happens meaningfully in 23 or we should wait until 24.

Hello, Roger. This is Tim. I'll take that one. I guess first on the schedule, we spent really the most, the part of January conducting startup and commissioning activities. And we put fresh feed in actually yesterday in the HDO unit. And we expect finished product, you know, the storage here next week. So we are on track to reach full phase production capacity, which is 260 million gallons per year of renewable fuels by the end of this first quarter here. You may know that we're also what we refer to as phase two is constructing some pretreatment capabilities, and those are scheduled to come online in the second half of 2023. And then the facility is expected to be capable of producing the full capacity, which is 730 million gallons per year by the end of 2023. So we're on track and feeling good.

Roger, it's Mike. The only thing that I would add is, you know, we feel really good about the project. You know, the team's execution has been good. But in light of where the refining macro is today, you know, it's not the contributor that it would be saying when we get back to a mid-cycle at some point. You know, it's going to be a meaningful contributor, but obviously it's dwarfed by what's happening in refining today.

Yeah, refining is certainly strong. That kind of gets me to my other follow-up question is, you know, we've obviously seen some good things in terms of a pickup in jet demand. Gasoline's continued to look a little soft. I was just wondering if you could give us an overview, you know, basically across your system, how you see things.

Yeah, Roger, this is Brian. So I'll start in just a little bit of reflection on 2022, because I think we've, as an industry, really domestically here in the U.S., exited at a point of inflection as it relates to COVID recovery. So, you know, globally, really strong year in 2022 when you look at a year-on-year 2.3 million barrels a day of overall oil demand increase. As Mike mentioned in his prepared remarks, we expect to see continued increases into 2023 and beyond. You know, domestically, you know, from what we're seeing, and this is a bit of a triangulation. I know there's a lot of dialogue around, you know, individual marketing books, EIA data, mobility data. So you have to be a little bit of a statistician to try to piece it all together to formulate an informed view around actual demand. But, you know, from an overall perspective, backing through the back end of COVID, diesel has been resilient throughout. It remains resilient domestically here in the U.S., gasoline, you know, if you remember when we went into COVID early on, there was a lot of conversations around structural impacts. And we do feel like we've seen some structural implications as a result of COVID. But most of that's been on the gasoline front. And we're kind of at a point now where our call of post-COVID demand is off about 3% on the gasoline front from 2019 levels. That's probably pretty sticky. You know, the headwind there is obviously the work from home, a little bit of tailwind. We've seen some decreased use in public transportation offsetting that, but 3% has been about the number that we've seen consistently as we look across our book. And then as it relates to JET, you know, steady rateable recovery is what we've seen the last couple years. We expect to see full recovery domestically here as we progress through 2023, so back half of 2023 seeing full recovery. As it relates to our book, maybe I'll just kind of wrap it up there, what we saw in Q4 is Gasoline year-on-year, 2%. The bright spot of interest was the West Coast. We actually saw a 5% increase year-on-year in the fourth quarter in the West Coast. Diesel was up 4%, and jet was up 3% on a year-to-year basis.

That's great. Thank you.

You're welcome, Roger.

Our next question comes from Paul Chang with Scotiabank. Your line is open.

Hey, guys. Good morning. Good morning, Paul. Two questions, if I could. The first one is really simple. For quarter, I think Marianne mentioned that there's some favorable inventory benefit. I assume, Marianne, you are referring outside the LIFO impact, which you take it as a special item, or this is what you refer. If this is not, then Can you give us some ideas on how big is that number in the fourth quarter? And secondly, I think you guys are talking about a continuing investment that this year, 150 million in the LA refining system, if I didn't get it wrong. Can you maybe give us some idea that what kind of investment we are talking about and what kind of benefit we could expect from that. Is there any change in terms of the crew's lay or energy usage or that the product yield, anything that you could share on that? Thank you.

Hey, Paul. It's Marianne. So, you're absolutely correct. The inventory benefits that I was discussing when talking about the capture rate we achieved in the quarter, are outside the LIFO benefits. As you've seen, we've excluded the LIFO benefit from our adjusted results. So I'm talking about commercial performance. As you know, obviously, winter storm has impacts on us, and the ability for our teams to address the inventory issues is really what I was referring to when we talk about capturing the quarter, not LIFO.

Yeah. Marion, can you quantify roughly how big is that benefit in the fourth quarter?

Yeah, Paul, we've not provided that level of detail on each of those individual contributors. Inventory, a piece of that. Again, I mentioned strong light product margins in the quarter. We saw the benefit of pricing happen on the secondaries. So there were several contributors to the upsized performance. But we typically don't provide that granular detail on the significance of each one of those.

Mm-hmm.

This is Tim. I'll take your second question. Relative to the LAR project that we were referring to in the opening remarks, that's really a project that addresses the next phase of an upcoming regulation that is going to be mandating further NOx reductions. And that regulation is going to apply to all of the refineries in the LA Basin. not just ours, of course. And so there's going to be some significant investment required by the industry in order to comply with this. And we believe we have a very unique opportunity at our Los Angeles refining complex to really modernize our utility systems at both Carson and Wilmington facilities in order to meet this phase one and phase two of these reduction requirements. So that's what's driving it. And I think the other thing that's worth noting is this novel project really goes beyond NOx reductions for us. And it'll also reduce our SO2, our particulate matter, our VOCs, and some greenhouse gases. So besides lowering our facility emissions, it's also going to improve our reliability and it's going to reduce our energy usage, which will significantly lower our operating costs. These cost reductions will come in the form of energy efficiency and lower maintenance spend. And the thing we like about it is that these favorable economics are independent of the light product margin fluctuations that can occur. So this is kind of all around the backdrop of the L.A. refinery is certainly a core asset for us on the West Coast and it's part of the value chain. And it's already one of the most competitive refineries in the state. So this project is going to further cement its competitive position in California and which is consistent with our strategic initiative of being the most cost-effective refiner in every market we serve. So we expect the project to be completed in 2025 in time to meet the initial compliance dates for the new regulation. So hopefully that's helpful.

Yeah, what's the total investment that is $150 for this year? Should we assume $150 a year until 2025? And In terms of the lower energy cost, better efficiency on there, is there any number you could share to try to quantify what is that benefit?

Unfortunately, we generally don't get into those specific numbers on individual projects and returns, but it's significant in the sense that it's lowering our emissions and providing a payback.

How about in CapEx? Is it $150 million a year?

Hey, Paul, it's Mike. We haven't disclosed the multi-year. We will give more color on that as time goes on. What Tim was trying to say is that, you know, it is a multi-year project, and we're going to start off with it. It'll be $150 million this year, and we'll give more color as time goes by. Okay. Thank you. Yeah, you're welcome.

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

Hey, guys. Good morning. Thanks for taking my question. So just to stick with the project growth, I'm looking at your CapEx budget and your growth program of about $900 million. That number, I assume, will be going down post-Martinez and star. So looking into the future, where do you think growth capital goes from here? I think will we see structurally lower growth capex in 2024 plus, or is there maybe another phase of projects that we'll start hearing about going forward? I know you've spoken about the LA project, but just wondering beyond that.

Hey, John, it's Mike. I'll start off. You know, we've broken it into two buckets, traditional refining and low carbon. And it's our expectation that that low carbon bucket will continue to grow over time. You know, and at the same time, though, we do have a bunch of projects. You know, Tim just mentioned one that will really improve the competitiveness of L.A. We have a bunch of those still that we think we can implement on the traditional refining side as well. So I think you're going to see a nice blend on both sides of the business there over time. I don't think you should expect that number to be going meaningfully down. I know people have talked a lot about STAR, but we have enough projects that we think are attractive returns. We just want to implement them, you know, over time and be disciplined on the way that we, you know, allocate capital. But I think you're going to see both buckets, you know, and not have an expectation they're going down because we still think there's a decent amount of return on capital opportunities for us. in light of what's been a major return of capital recently from us.

Great. That's really helpful. Thanks. And then maybe just talk about how you're thinking about the Russia product sanctions that are going to be hitting here on the 5th and how that may trickle through the market and how long do you think it'll take for supply chains to adjust? And then relatedly, if you could just remind us the breakdown of Marathon's export destinations How much goes to Latin America? How much goes to Europe? And do you expect to increase your exports to Europe after the fifth?

Yeah, John, this is Brian. I'll take that. So just really quick on your question on timeline, we do not expect it to really unfold until the second quarter. So leading into the sanctions, as you'd expect, we saw a pretty meaningful de-inventorying coming out of Russia, getting out of the sanctions. coupled with a reinventoring in large parts of Northwest Europe. So as a result, we're entering this sanctioned period of time at really historically high levels of inventory, particularly in Europe. So we view it as a 2Q and beyond timeline perspective. But directionally, we see it as bullish for cracks. You know, we see 800 to a million barrels a day of, I'll call them structural historical imports into Northwest Europe coming out of Russia. Those are going to have to be displaced, and we do expect a high degree of friction on those barrels for a variety of reasons. Product spec mix is going to be difficult to place them in other markets, so as you'd expect, you have various regional specifications that need to be met, local fuel standards. That's going to propose some headwinds. The global tanker fleet is really pretty active in overburden right now with differing trade flows on the crude front. And this is going to create another degree of inefficiency on a tanker, global tanker fleet capacity that we think will provide a degree of friction. The last thing I'd mention, unlike crude, on the product side, these are generally going to either countries or end consumers that really rely on receipt of the product. So supply assurance is a new variable that's really important here as well, as we're hearing from our customers today. you know, every day, that's a really important thing for them. I think given the dynamic nature of the situation in Russia, that supply assurance component is really a big unknown. But we feel very well positioned to take advantage of that, given our position in the Atlantic Basin. As you probably know, we opened an office over in London late last year and are very active in that market. The last point of your question in terms of distribution is, without giving too much granular detail, a large portion of them historically have moved into Latin America. We've historically exported 250,000 to 350,000 barrels a day, depending on turnaround and unplanned downtime activity within our system. We do see an incremental pull into Europe. We've seen that. We've got some actually really good fit for our Garyville distillate stream because we don't make jet out of our Garyville facility. It fits well into Northwest Europe, especially this time of the year. And we've seen exports into Northwest Europe late last year in the 120,000 barrels a day for the U.S. into Europe, and we've been a meaningful part of that, and we expect to be a meaningful part of that going forward.

Hey, John, this is Rick. Just to add on to Brian's comments, so a couple of points to further drive home how we feel about this market going forward. If you look at winter storm Elliott in December, when it hit, the immediate impact it had on cracks. And it has, again, taken our light product inventories, especially here in the U.S., down to levels that are five-year-type low numbers. When you compound diesel inventories with VGO and the potential impact that the EU ban on Russian exports will have, this could just further exasperate cracks to the positive. So, More to watch on this, see how it plays out. I think Mike said earlier it's neutral to positive. We're viewing it as a positive, especially if the cutbacks and sanctions take hold like most people think they will.

Very thorough. Thank you, guys.

You're welcome, John.

Our next question will come from Sam Margolin with Wolf Research. Your line is open.

Good morning, everyone. Thank you. I'm actually, I'm tempted to ask about commercial and turnaround integration again, because I do think that's probably the most important thing from this call. But I think people got the picture there. Instead, I'll ask about low carbon growth, and specifically SAF. And I'm asking because investors ask about it a lot, because airlines talk about it frequently. And both of your partners in the renewable fuels category are also sort of publicly very pro-SAF. And so it would be great to get your thoughts on that category and see if you think there's any opportunity there. Thank you.

Thanks, Sam. Hey, this is Dave. Let me step back a little bit and touch on first that one of our strategic growth pillars for the company is around maximizing the value of our renewable liquid fuels. And so while promptly A lot of that has been focused on renewable diesel with our Dickens and Martinez and, you know, the pre-treat facilities around those. As we look forward, that's inclusive of sustainable aviation fuel or SAF. So when you're thinking about growth, it is also inclusive of SAF. And so the second thing I want to maybe touch on is that we are a very large supplier of fossil fuel jet fuel today. And our goal is to supply... you know, the products that our customers want and need going forward. So as they, and as you stated, there's a lot of chatter around SAF. We're there to help meet that. And why you're hearing a lot of the chatter through the airline industries is because SAF is the most viable near-term decarbonization tools for that space. So as we look forward, we are very active in that. The challenge is, is the premium required. As you look at the SAF, whether it be a conversion of a Dickinson or, you know, Martinez-produced SAF or a new investment, these are multi-year, you know, very large capital projects. Having confidence in that premium to justify that investment is where that little opportunity exists today. We are very active, just as we were in RD, in the evaluation, the studies of where to participate in SAF. And I think you see a lot of it within MPC, but also within our subsidiary company, Virent. They take sugars into sustainable aviation fuel. You've seen announcements with them on test flights with United, most recently one with the Emirates, along with our JV partner, Nestea. So you can see we're very active in the space, evaluating it, studying it, monitoring it, and determining when is the right time to invest.

Thank you very much. I'll actually leave it there. Have a great day. Thank you, Sam.

Our next question comes from Teresa Chen with Barclays. Your line is open.

Hi there. I just had a follow-up question related to the Russia discussion and specifically related to VGO. With the Russian VGO exports to Europe dissipating from the market and lack of clarity where incremental VGO is going to come from, I understand that it could help gasoline cracks all else equal, but how should we think about how it impacts your capture and what your net VGO position is, long or short, and how it trickles through your system?

Yeah, Teresa, this is Rick. So we're short VGO. We're out in the market, especially now more than ever, when it's turnaround season. And I will tell you, the way we view this is this short in VGO is going to high grade up all capture, specifically on jet, diesel, and light products. So we believe will be a recipient of it, and that will show through via the cracks going forward. Specifically, I will tell you, as these Middle Eastern refineries come online mid-summer, Teresa, they will domestically consume VGO, which in turn will further short the market, which we believe could be a nice shot in the arm kind of mid-year, end of year. So more to come on that, just something to keep your eye on.

Thank you. And I also had a follow-up question related to my comments about consumers potentially adjusting consumption patterns to lower retail fuel prices. Just curious what your views on elasticity is or are at this point. How does that reconcile with Brian's comments about gasoline potentially structurally being off about 3%?

Yeah, it's a great question. It's one that we look at and try to draw the right corollary to, but we do see a degree of flexibility there, of course. It depends on the market, depends on the extent of the retail prices. We have seen, and I commented on the West Coast in my comments earlier, And what I didn't mention, but we got under $5 a gallon on the West Coast in Q4. So that's where we saw, my view is we saw, you know, nice demand recovery as it relates to retail prices. But our forward view is definitely instructed by a moderated view on retail pricing, which we do think will impact demand somewhere in the neighborhood of 2% to 3%, depending on the market, but somewhere in the neighborhood of 2% to 3%. Thank you.

You're welcome, Teresa.

Thank you. Our next question comes from Jason Gableman with Cohen. Your line is open.

Yeah, morning. How's it going? I don't think you guys discussed the outlook. Maybe I missed it. The outlook for light, heavy, crude quality gifts. Clearly, they've been very supportive in the past couple quarters to earnings. And I think many in the market expect those to come in as refiners consume, the SPR releases, new capacity comes online, OPEC exports have fallen off a bit. Can you just discuss how you expect those differentials to trend throughout the year? Thanks.

Yeah, hi, Jason. It's Rick. Very good question. So it's kind of a tale of two ends. I'll start with the front end here because as you look with what happened with the Keystone Pipeline outage, that backed in barrels into Canada. Canadian inventories are high. We've had a lot of turnarounds in the U.S. Gulf Coast. We've had Winter Storm Elliott back in barrels. So when you kind of add all of these together, along with a few folks in the MidCon, specifically Pad 2 having issues, we are seeing really robust spreads right now. And we continue to see that to hang on for a bit. As the year plays out and things get back to normal, I would say you could see some fall off to the spread, but we're still quite optimistic. that it's going to be a better spread than mid-cycle as we look at the year in total.

Great. That's helpful. And just my follow-up, I appreciate the comments on the Martinez project and operationally it sounds like everything is going well there. I was wondering from an earnings perspective how much you expect that project to contribute in 2023 just given the pre-treatment unit won't start up until later in the year. And at the numbers we look at, it seems like margins for projects that don't have pre-treatments are much more challenged than projects that do. So if you just talk about the earnings in 2023 and the potential step up from the project once that pre-treatment unit's online.

Yeah, this is Brian. Jason, just maybe a reminder that we do have pre-treatment capacity, not onsite, but offsite. both at beatrice and our cincinnati facility we've got substantial pre-treatment capability there so just just kind of a reminder there and i'll defer uh regarding the overall economic outlook to mike and marianne yeah jason we we don't give specific individual facility uh earnings profiles uh i know it's a question that people have been trying to get their arms around but if

The best guidance I can give you is if you look at the macro environment around the California market and where each of the subsidies are trading, the key to remember, because people ask us about LCFS, but there are other components to subsidy out there that all kind of work together, and the three of them together have been relatively consistent. even though a lot of them are moving around a little bit. So that should help you a little bit as you model it. And then, obviously, look at where, you know, feedstocks are trading and diesel's trading.

The other incremental comment that I would add to Mike's also is, remember when we completed the JV with Neste, one of the things that we were looking for was incremental improvement around our feedstock slate, and we got that with a partner in Neste. So- even though we are sharing 50% of the project, we actually improve the economics of the project by the feedstock that Neste is obligated to bring through their partnership with us. So just another data point as you're contemplating how to think about that.

Great. Thanks. You're welcome.

Our next question and our last question will come from Matthew Blair with TPH. Your line is open.

Hey, thanks for taking my question. Could I get your thoughts on the wide octane spreads that we've been seeing? Do you think that'll persist for the rest of 2023? And are you fully compliant on tier three or are you short in buying credits in the market? Thanks.

Yeah, man, I can comment on the octane. They obviously are going to move seasonally quite a bit, but we've seen steady strength in octane spreads really as a result of, you know, running the systems harder. You know, as we look at not just our system, but the global system working to meet demands and outrunning our octane capacity to a certain extent as other facilities have been shut down throughout the network. So, you know, kind of a bullish long-term outlook as it relates to octane spreads and positioned well around that based on our octane capacity in our system.

And to the last part, we're not going to comment on our long or short position on the credits.

Great.

Thank you. You're welcome.

All right. With that, thank you everyone for your interest in Marathon. Should you have any additional questions or if you'd like clarification on the topics discussed this morning, please reach out and our IR team will be available to your calls. Look forward to speaking with everyone. Thank you.

Thank you. that does conclude today's conference thank you for participating you may disconnect at this time