Marathon Petroleum Corporation (NYSE:MPC) Q3 2023 Earnings Call Transcript

Marathon Petroleum Corporation (NYSE:MPC) Q3 2023 Earnings Call Transcript October 31, 2023

Marathon Petroleum Corporation beats earnings expectations. Reported EPS is $8.28, expectations were $7.79.

Operator: Welcome to the MPC Third Quarter 2023 Earnings Call. My name is Sheila and I will be your operator for today’s call. [Operator Instructions] Please note that this conference is being recorded. I will now turn the call over to Kristina Kazarian. Kristina, you may begin.

Kristina Kazarian: Welcome to the Marathon Petroleum Corporation third quarter 2023 earnings conference call. The slides that accompany this call can be found on our website at marathonpetroleum.com under the Investors tab. Joining me on the call today are Mike Hennigan, CEO; Maryann Mannen, CFO and other members of the executive team. We invite you to read the Safe Harbor statements on slide 2. 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 refining utilization for the third quarter, as well as fourth quarter guidance now include the addition of approximately 40,000 barrels a day of capacity related to STAR in our Gulf Coast region. And with that, I’ll turn the call over to Mike.

A tanker filled with petroleum products, sailing through a calm sea.

Mike Hennigan: Thank you, Kristina. Good morning. Thank you for joining our call. Beginning with our view on the refining environment, in the third quarter, we saw strong demand and global supply tightness supporting refining margins. Diesel cracks led the barrels inventories remain tight and European distillate production ran below capacity. Globally, oil demand is at a record high as the need for affordable and reliable energy increases throughout the world. In our system, both domestically and within our export business, we are seeing steady demand year-over-year across the gasoline and diesel and demand for jet fuel continues to grow. Global supply remains constrained and global capacity additions have progressed at a slow pace.

In the regions where we operate, seasonal butane blending has increased gasoline supply. However, we expect typical seasonal turnarounds to be supportive of cracks. To that end, we’ve seen 3.5 million barrels of gasoline inventory drawn out of the U.S. system over the past several weeks. OPEC+ has reduced production, adding pressure to medium sour differentials. While crude differentials have generally been narrowing, we have seen WCS widen and we’re strategically situated to run heavy Canadian crude at our refineries across PADDs 2, 3 and 5. As we look towards 2024, we believe an enhanced mid-cycle environment will continue in the U.S. due to the global supply demand fundamentals and the relative advantages over international sources of supply, including energy costs, feedstock acquisition costs and refinery complexity.

Turning to our results, in the third quarter, we delivered strong cash generation across our business. In Refining & Marketing, strong margins, 94% utilization and solid commercial performance led the segment adjusted EBITDA of $4.4 billion or $16.06 per barrel. Our Midstream segment delivered durable and growing earnings. This quarter, it generated segment adjusted EBITDA of over $1.5 billion. Year-to-date, our Midstream segment EBITDA is up 6% compared to the prior year period. The strength of MPLX’s cash flows supported its decision to increase its quarterly distribution by another 10%. With this increase, MPC is expected to receive $2.2 billion of distributions from MPLX annually. MPLX is strategic to MPC’s portfolio. Its current pace of cash distributions fully covers MPC’s dividend and more than half of our planned 2023 capital program.

We expect MPLX’s cash distribution to continue growing as it pursues growth opportunities, which will further enhance the value of this strategic relationship. We believe MPC’s current capital allocation priorities are optimal for our shareholders. In the third quarter, we returned $3.1 billion to MPC shareholders via dividends and share repurchases. Last week, we announced an additional $5 billion share repurchase authorization and a 10% increase to MPC’s quarterly dividend. With this increase, we have grown our quarterly dividend at over 12% compound annual rate over the past five years, which has led our refining peers. Our overall capital allocation framework remains consistent. We will invest in sustaining our asset base, while paying a secure competitive and growing dividend.

We intend to grow the Company’s earnings and we will exercise strict capital discipline. And beyond these three priorities, we are firmly committed to returning excess capital through share repurchases to meaningfully lower our share count. Let me also share some of the progress on our low carbon initiatives. The Martinez Renewables fuel facility is being delivered safely, on time, and on budget, and by the end of 2023, the facility is expected to produce 730 million gallons per year. At that point, Martinez will be among the largest renewable diesel facilities with a competitive operating profile, robust logistics flexibility, and advantaged feedstock slate and should benefit from the global strategic relationship with Neste. Our Dickinson renewable diesel facility is operating well.

The facility processed 75% advantaged feed in the third quarter. The nearby Spiritwood soybean processing plant, which is owned through a joint venture with ADM, is expected to deliver enough vegetable oil to produce approximately 75 million gallons per year of renewable diesel. Additionally, we are advancing early stage developments through our interest in low carbon intensity RNG and other small scale investments. We believe through these projects, we’re taking disciplined steps to advance our goal to lower the carbon intensity of our operations and the products we manufacture and supply to a growing and evolving market, while operating our current asset base to deliver superior cash flow and meet demands. At this point, I’ll turn the call over to Maryann.

Maryann Mannen: Thanks Mike. Moving to third quarter highlights, slide 5 provides a summary of our financial results. This morning, we reported adjusted earnings per share of $8.14. This quarter’s results were adjusted to exclude a $106 million gain on sale of MPC’s 25% interest in the South Texas Gateway Terminal, as well as $63 million of response costs associated with our unplanned outage at Garyville. These adjustments reduced our reported adjusted earnings by $0.14 per share. Adjusted EBITDA was $5.7 billion for the quarter. And cash flow from operations, excluding favorable working capital changes, was over $4.3 billion. During the quarter, we returned $297 million to shareholders through dividend payments and repurchased over $2.8 billion of our shares.

And from May 2021 through October 27th, we have repurchased 285 million shares or approximately 44% of the shares outstanding. Slide 6 shows the reconciliation between net income and adjusted EBITDA as well as the sequential change in adjusted EBITDA from second quarter 2023 to third quarter 2023. Adjusted EBITDA was higher sequentially by approximately $1.2 billion, driven by higher R&M margins. Corporate expenses were higher sequentially by $40 million, primarily due to a charge related to valuation of existing performance-based stock compensation expense. The tax rate for the third quarter was 22%, resulting in a tax provision of approximately $1 billion. Moving to our segment results, slide 7 provides an overview of our Refining & Marketing segment.

Our refining assets ran at 94% utilization, processing nearly 2.8 million barrels of crude per day at our 13 refineries. Sequentially, per barrel margins were higher across all regions driven by higher crack spreads. Capture was 93%. Refining operating costs were $5.14 per barrel in the third quarter, flat sequentially. We did have unplanned downtime during the quarter, impacting our two largest refineries, which resulted in lost crude throughput of 4.7 million barrels due to the Galveston Bay reformer outage and 2.1 million barrels at Garyville. Additionally, this downtime resulted in a headwind to our overall capture. We began construction activities on the reformer repair about three months after the event, once regulators gave us clearance and we were able to finalize the required repairs.

Since then, repairs have progressed as planned and during this outage, we pulled forward turnaround work into the third and fourth quarters, which had been scheduled in the first quarter of 2024. Slide 8 provides an overview of our Refining & Marketing margin capture this quarter, which was 93%. Our commercial team executed effectively, despite weak secondary product pricing and refinery downtime, which weighed on capture this quarter. Capture results will fluctuate based on market dynamics. We believe that the capabilities we have built over the last few years will provide a sustainable advantage. This commitment to commercial performance is foundational and we expect to continue to see the results. Slide 9 shows the change in our Midstream segment adjusted EBITDA versus the second quarter of 2023.

Our Midstream segment delivered strong third quarter results. Segment adjusted EBITDA was flat sequentially and 3% higher year-over-year, primarily due to higher throughputs and rates. Year-to-date, our Midstream segment EBITDA is up 6% compared to the prior year period. As Mike mentioned earlier, the growth of MPLX’s earnings supported its decision to increase its quarterly distribution by another 10% to $0.85 per unit, and MPC expects to receive $2.2 billion in cash from MPLX on an annual basis. Our Midstream business continues to grow and generate strong cash flows. We are advancing high-return growth projects anchored in the Marcellus and Permian basins. Slide 10 presents the elements of change in our consolidated cash position for the quarter, operating cash flow, excluding changes in working capital with over $4.3 billion in the quarter.

Working capital was a $609 million tailwind for the quarter, driven primarily by increases in crude oil prices. Year-to-date, working capital has been $1.4 billion worth of cash. Capital expenditures and investments totaled $486 million this quarter, consistent with our 2023 outlook. MPC returned nearly $3.1 billion via share repurchases and dividends during the quarter. This represents an approximately 72% payout of the $4.3 billion of operating cash flow, excluding changes in working capital, highlighting our commitment to superior shareholder returns. As of October 27th, we have approximately $8.3 billion remaining under our current share repurchase authorization, which includes the additional $5 billion approval announced last week. At the end of third quarter, MPC had approximately $13.1 billion in consolidated cash and short term investments.

This includes approximately $1 billion of MPLX cash. Turning to guidance, on slide 11, we provide our fourth quarter outlook. We expect crude throughput volumes of over 2.6 million barrels per day, representing utilization of 90%. Utilization is forecasted to be lower than third quarter levels due to turnaround activity having a higher impact on units in the fourth quarter. In the Gulf Coast, with respect to the Galveston Bay reformer, repairs have progressed as planned. We anticipate starting the unit back up in mid November. Production is expected to ramp over the next several weeks. And guidance anticipates returning to full operating rates by mid-December, following advanced turnaround activity. And as I mentioned earlier, during this outage, we plan to continue progressing and complete turnaround work that was previously scheduled for 2024.

As a result, planned turnaround expense is now projected to be approximately $300 million in the fourth quarter. Operating costs per barrel in the fourth quarter are expected to be $5.60, higher sequentially due to higher energy cost, particularly on the West Coast, as well as higher project-related expenses associated with planned turnaround activity. Distribution costs are expected to be approximately $1.4 billion for the fourth 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.

Mike Hennigan: In summary, we will continue to prioritize capital investments to ensure the safe and reliable performance of our assets. We’ll also invest in projects where we believe there are attractive returns. Through the third quarter, we’ve invested over $1.7 billion in capital and investment, which includes $390 million of maintenance capital as well as over $900 million on refinery turnarounds in 2023. Our focus on safety, operational excellence, and sustained commercial improvement will position us to capture the enhanced mid-cycle environment, which we expect to continue longer term given our advantages over marginal sources of supply and growing global demand. MPLX remains a source of growth in our portfolio. Partnership is expected to distribute over $2.2 billion to MPC annually.

And as MPLX continues to grow its free cash flow, we believe it will continue to have capacity to increase its cash distributions to MPC. We believe MPC is positioned as the refiner investment of choice, with the strongest through cycle cash generation and the ability to deliver superior returns to our shareholders, supported by our firm commitment to return capital. With that, let me turn the call back over to Kristina.

Kristina Kazarian: Thanks, Mike. As we open the call for your questions and as a courtesy to all participants, we ask that you limit yourself to one question and one follow-up. If time permits, we’ll re-prompt for additional questions. And with that, Sheila, we’re ready for them.

Operator: Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question will come from Manav Gupta with UBS.

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Q&A Session

Manav Gupta: When we look at the refiners, they look at themselves and perform — on different performance metrics, some look at refining capture. You guys really focus on EBITDA margin per barrel. And when we look at that metrics, it looks like for a second year in a row, you’ll be on top of that table, outperforming your peers. So, help us understand a little better what’s allowing you to drive this outperformance and deliver such strong results when it comes to EBITDA margin per barrel in your refining system?

Rick Hessling: Hi, Manav. It’s Rick. First of all, thank you for the perceptive callout. I will tell you we are uber-focused on EBITDA and our results compared to others. And our team will certainly greatly appreciate your callout on this as they’ve been working on this consistently for years now, Manav, and you’re seeing it pull through to our results. So, who kudos to the team there. I will kind of backtrack and state what we’ve stated in past quarters, Manav. We’ve made structural improvements throughout our entire commercial value chain to capture value from the front end all the way through the back end. And specifically, we’re doing so in a way today that is — it is creating a mindset change within our teams, and we are, I would say, taking more calculated risk with our approach and how we look at everything.

There isn’t a rock that we’re not overturning to see what’s under it. And we’re assuming, Manav, we do everything wrong. And with that mindset, you can create a lot of value, in looking at things you haven’t looked at in the past. In the Midwest specifically, I will really pivot on a couple of things. We have a fully integrated system. We have four great refineries in the Midwest. In the third quarter, as you know, they ran very well. We have access to advantaged feedstocks, both Canadian and domestic, and then Brian’s team has created exceptional optionality for product placement. So, when you combine all those factors together, Manav, you really get to an end result that it’s been consistent, as you stated, over the last several quarters and we expect it to continue.

Mike Hennigan: Manav, it’s Mike. The only thing I would add to what Rick said is, we start with EBITDA per barrel. We want to make sure we’re generating as much earnings as we can as we run our assets. Ultimately, though, I care the most about cash generation. I mean, it starts with EBITDA per barrel, but the bottom line is, are we generating significant amount of cash to give us the flexibility to drive shareholder returns. So, I think you hit the starting point with EBITDA per barrel. The ending point is generating cash and then having that flexibility.

Manav Gupta: Perfect. A quick follow-up here. You guys are known for your strong operational performance. 3Q was a little unusual. You had some unplanned incidents. And despite those, you delivered a pretty strong beat. But I’m trying to understand, let’s say those incidents would not have happened, would we have got even a stronger quarter, if you could talk about that?

Maryann Mannen: Yes. Thank you, it’s Maryann and thanks for the question. You’re right. As we shared with you, we did have a couple of unplanned downtime events in the quarter that impacted the Gulf Coast. One, the most significant in terms of its contribution is the Galveston Bay reformer, and then, obviously, we had our, Garyville. Had we not had those two impacts, I’m happy to share a little bit more about those in a moment here, our capture would have been 6% higher than what we reported with the lion’s share of that capture event obviously being the reformer. As I mentioned, 4.7 million barrels in the quarter that we lost, and then on Garyville, it’s about 2.1 million barrels as we operated about half rate for just under a week.

It took us about — just back to, Galveston Bay for a moment. It took us about three months before, we were able to begin our work as we — as the regulators got through their work and then we determined where all the repairs needed to be. So we were about three months, to the start of getting those, activities launched. I hope that answers the question.

Operator: Next, we will hear from Doug Leggate with Bank of America.

Doug Leggate: Well, first of all, thank you for taking my questions. Maryann, that last response was actually one of the key things we wanted to hit. So, let me try two more if I may. First of all, Mike, in your opening remarks, you talked about demand in your system is pretty strong. I wonder if I could ask you to isolate that to export demand, because obviously that’s a fairly big swing factor for the U.S. market in particular. How does that look in your system?

Mike Hennigan: Yes. Doug, I’ll let Brian comment on that.

Brian Partee: So really, our theme on demand, both domestically and internationally is stable and steady. It’s been that way really throughout the year. In the quarter, we exported roughly 250,000 barrels a day out of our system in the Gulf Coast, despite some operational challenges, as noted. About two-thirds of that is distillate, the balance of course is gasoline. The demand center in Latin America and the Caribbean really has been strong and resilient and growing throughout the year. They import roughly 2.3 million barrels a day into the system. The U.S. has been about 65% of that. We have come off a little bit in terms of our share into Latin America and the Caribbean in exchange for share into Europe. So, we are seeing growth in European imports as you’ve probably seen as well, roughly 200,000 barrels a day in the quarter from the U.S. into Europe.

The one cautionary tale there, it is the one weakest spot that we see throughout our network, which is distillate demand in Europe. Our team sees it as roughly 4% to 6% off year-to-year with expectations and a bit of hope that as we get into the colder weather season here later this year, we’ll see a pickup in demand in Europe, but that is the one soft spot that we’re seeing.

Doug Leggate: Mike, I apologize for this one, but I guess somebody’s got to ask it. So, there’s speculation overnight about the Citgo process and Marathon being mentioned as a potential bidder. So, I wonder if you could frame whether that is, in fact, a consideration that you thought about, what the rationale would be and how you would see something like that fitting in with your portfolio high-grading focus that you’ve had over the last several years?

Mike Hennigan: I’m going to let Dave start, and then I’ll come back afterwards.