Marathon Petroleum Corporation (NYSE:MPC) Q4 2023 Earnings Call Transcript
Marathon Petroleum Corporation (NYSE:MPC) Q4 2023 Earnings Call Transcript January 30, 2024
Marathon Petroleum Corporation beats earnings expectations. Reported EPS is $3.98, expectations were $2.36. Marathon Petroleum Corporation isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Welcome to the MPC Fourth 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 Marathon Petroleum’s fourth quarter 2023 earnings conference call. The slides that accompany this call can be found on our website at marathonpetroleum.com under the Investor cab. Joining me on the call today are Mike Hennigan, CEO; Maryann Mannen, President; John Quaid, 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 could differ. Factors that cause actual results to differ are there as well as in our SEC filings. References to MPC Capital during the prepared remarks today reflects standalone MPC Capital, excluding MPLX. With that, I will turn the call over to Mike.
Mike Hennigan: Thanks, Kristina. Good morning, everyone and thank you for joining our call. First, I’d like to recognize some changes we made at our executive management level. Maryann Mannen has been appointed President of MPC. In this role, she will be responsible for our Refining & Marketing, Commercial and HES&S organizations. John Quaid, previously CFO of MPLX succeeds Maryann as CFO of MPC. In addition to these changes, Rick Hessling has been appointed Chief Commercial Officer. Rick will lead our global feedstock and clean products teams with the goal of maximizing margin capture across the entire value chain. Brian Partee has been appointed Chief Global Optimization Officer. Brian will be responsible for assessing and redefining business processes that are critical to improving our performance, including our value chain optimization efforts and determining investments needed to accelerate the delivery of results.
At a high level, these organizational changes put more emphasis on advancing important value-creating initiatives, driving increased performance throughout our entire value chain and making a step change in our cash flow generation capability. Turning to our 2023 results. We are pleased to continue to deliver on our strategic commitments. Full year cash provided by operating activities was over $14 billion on a consolidated basis, reflecting our team’s strong execution. Our Refining & Marketing business delivered excellent full year results generating EBITDA of $12.74 per barrel of throughput and capture of 100%. These results reflect strong utilization of our assets and improved execution against our commercial strategy. Incremental to our Refining & Marketing results, our Midstream business posted nearly $6.2 billion of EBITDA.
EBITDA for the Midstream segment grew by approximately 7% year-over-year or by approximately $400 million. We expect MPC will receive $2.2 billion of annual cash distributions supported by MPLX’s most recent 10% increase to its quarterly distribution. 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 2024 capital program. We expect MPLX to increase its cash distribution as it pursues growth opportunities further enhancing the value of this strategic relationship. We are committed to returning excess capital to shareholders. In 2023, we returned $11.6 billion through share repurchases, bringing total repurchases to over $29 billion since May of 2021.
In addition, we increased MPC’s quarterly dividend by 10% in the fourth quarter. Over the past 5 years, we have grown our quarterly dividend at a compound annual growth rate of over 12%. For the full year 2023, this capital return represents a payout of 92% of our operating cash flow, excluding changes in working capital, highlighting our commitment to superior shareholder returns. Executing on our commitments, combined with a strong macro environment led to total shareholder returns of approximately 31% for MPC in 2023. Turning to our view on the refining macro environment as we head into 2024, global oil demand hit a record high in ‘23 and we see another year of record oil consumption in ‘24. The IEA is currently projecting demand growth of over 1.2 million barrels per day with their projections having been raised higher over the last 3 consecutive months.
In our system, both domestically and within our export business, we are seeing steady demand year-over-year for gasoline, diesel and jet fuel. Global supply remains constrained and anticipated global capacity additions have progressed slower than expectations. Gasoline and diesel inventories remained tight globally. And as we look into ‘24, we anticipate that above-average turnaround activity globally in the first quarter as well as the transition to summer gasoline blends will be supportive of refining margins. As we look further into 2024, we believe the U.S. refining industry will experience an enhanced mid-cycle environment due to global supply demand fundamentals and its relative advantages over international sources of supply, including energy costs, feedstock acquisition costs and refinery complexity.
Our capital allocation priorities remain unchanged. These include: first, 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. Second, our dividend. We are committed to paying a secure, competitive and growing dividend. We intend to evaluate the dividend at least annually. Third, growth capital. We will invest capital, but be disciplined where we believe there are attractive returns, which will enhance our competitiveness and position MPC well into the future. Beyond these three objectives, we will return excess capital through share repurchases to meaningfully lower our share count. From May of ‘21 through January 2024, we reduced our total share count by approximately 45%, repurchasing approximately 300 million shares at an average price of $97.
As we execute in 2024, we remain committed to share repurchases as a key component of our capital allocation priorities. MPC’s standalone 2024 capital investment plan, excluding MPLX, totals $1.25 billion. Underpinning our commitment to safety and environmental performance, sustaining capital is approximately 35% of capital spend. In Refining & Marketing, gross spending is down nearly $200 million compared to 2023, reflecting strong capital discipline. In 2024, we are focused on investments that enhance margin and reduce costs. In low carbon, we are investing in an opportunity that offers an attractive return, lowers our cost, increases reliability and reduces emissions. This morning, MPLX also announced its 2024 capital investment plan of $1.1 billion, which is anchored in the Marcellus and Permian basins.
At this point, I’d like to turn the call over to Maryann.
Maryann Mannen: Thanks Mike. Solid execution of our three strategic pillars remains foundational. We believe the improvements we’ve made to our cost structure, portfolio and commercial execution have driven sustainable structural benefits, irrespective of the market environment. We will continue to build on this strong foundation to recognize value throughout our business. Our refining utilization in 2023 was 92% as we operated our portfolio to meet consumer demand. Recently, we have said we believe our average capture over longer periods of time is approaching 100%. And in 2023, our full year capture was 100%. This commitment to commercial excellence is foundational and we expect to continue to see these results. While our capture results will fluctuate based on market dynamics, we believe that the capabilities we have built over the last few years and expect to enhance further will provide a sustainable advantage.
Turning to our operations. In the Gulf Coast, the Galveston Bay reformer repairs progressed as planned. We started the unit back up in mid-November and returned to full operating rates by mid-December. At our Martinez facility, we will be operating at approximately 22,000 barrels per day in the short-term. We have been working closely with the regulators to proceed with repairs to ensure safe and reliable operations. Let me move to Slide 7, which shows our capital investment plan for 2024 in a bit more detail. MPC’s investment plan, excluding MPLX, totals $1.25 billion. The plan includes $1.2 billion for Refining & Marketing segments. Our growth capital plan is approximately $825 million between traditional projects and low carbon. We are investing primarily at our large competitively advantaged facilities to enhance shareholder value and position MPC well into the future.
Within traditional Refining & Marketing, $100 million is associated with a multiyear project to increase finished distillate yields at the Galveston Bay refinery. $375 million is focused on smaller projects targeted at enhancing yields at our refineries, improving energy efficiency and lowering our cost as well as investments in our branded marketing footprint. Within low carbon, approximately $330 million is allocated to a multiyear infrastructure investment at our Los Angeles refinery, which will improve energy efficiency and lower facility emissions and $20 million for smaller projects focused on emerging opportunities. Slide 8 provides an overview of the multiyear investment at our Los Angeles refinery. The Los Angeles refinery is the core asset in our West Coast value chain and is one of the most competitive refineries in the regions.
This investment, once completed, is expected to further enhance its cost competitiveness by integrating and modernizing utility systems, which will improve reliability and increase energy efficiency. Additionally, a portion of this improvement addresses a new regulation mandating further reductions in emissions. This regulation applies to all Southern California refineries. The improvements are expected to be completed by the end of 2025. We expect to generate a return on our investment of approximately 20%. Turning to Slide 9. At Galveston Bay, we are investing to construct a 90,000 barrel per day high-pressure distillate hydrotreater. This project is planned to strengthen the competitiveness of the refinery through increased production of higher value finished products.
Once in service, the new distillate hydrotreater will upgrade high sulfur distillate to ultra-low sulfur diesel, eliminating the need for third-party processing or sales into shrinking lower value high sulfur export market. This strategic investment ensures we provide the clean burning fuel of the world demand and further enhances the competitive position of our U.S. Gulf Coast value chain. The project is expected to be complete by year-end 2027 and generate a return of over 20%. Turning to our low carbon initiatives, we challenge ourselves to lead in sustainable energy by setting meaningful targets to reduce greenhouse gas emissions, methane emissions and fresh water intensity. Targets, which we believe we can demonstrate a tangible pathway to accomplish.
In our 2024 capital outlook, we are investing to significantly lower energy intensity and emissions at Los Angeles, one of our largest refineries. Additionally, we are investing in smaller amounts of capital in early-stage developments like RNG which could significantly aid in greenhouse gas emission reductions in the future. Overall, we are taking disciplined steps to advance our goal to lower the carbon intensity of our operations and the products we manufacture, while continuing to supply a growing and evolving market by safely operating our current asset base with the objective to deliver superior cash flow. Let me turn the call over to John.
John Quaid: Thanks, Maryann. Moving to fourth quarter highlights, Slide 11 provides a summary of our financial results. This morning, we reported adjusted earnings per share of $3.98 for the fourth quarter and $23.63 for the full year. This quarter’s results were adjusted to exclude the $0.14 per share net effect of three items, a $145 million LIFO inventory charge, $47 million of net recoveries related to MPLX’s Garyville incident response, and a $92 million gain recognized by MPLX. Adjusted EBITDA was over $3.5 billion for the quarter and almost $19 billion for the year. Cash flow from operations, excluding working capital changes, was nearly $2.3 billion for the quarter and $13.9 billion for the year. During the quarter, we returned $311 million to shareholders through dividend payments and repurchased over $2.5 billion of our shares.
Slide 12 shows the sequential change in adjusted EBITDA from the third quarter to fourth quarter of 2023 as well as the reconciliation between net income and adjusted EBITDA for the quarter. Adjusted EBITDA was lower sequentially by approximately $2.2 billion, driven by lower R&M margins. The tax rate for the quarter was 18%, reflecting the impacts of the MPLX structure and a discrete benefit largely related to state taxes. For 2024, we expect our tax rate to be around 21%. Moving to our segment results. Slide 13 provides an overview of our Refining & Marketing segment for the fourth quarter. Our 13 refineries ran at a 91% utilization, processing nearly 2.7 million barrels of crude per day. Sequentially, per barrel margins were lower across all regions driven by lower crack spreads.
Capture for the quarter was 122%. Refining operating costs were $5.67 per barrel in the fourth quarter, higher sequentially due to higher energy cost, particularly on the West Coast as well as higher project-related expenses associated with planned turnaround activity. Slide 14 provides an overview of our Refining & Marketing margin capture of 122% for the quarter. We ran well and our commercial teams executed effectively to deliver strong results. Capture this quarter benefited from late product margin tailwinds, in particular for jet fuel as well as less of a headwind from secondary product prices. Slide 15 shows the changes in our Midstream segment adjusted EBITDA versus the third quarter of 2023. Our Midstream segment delivered strong fourth quarter results.
For the full year 2023, our Midstream segment EBITDA is up 7% compared to the prior year. Our Midstream business is growing and generating strong cash flows as we advance high return growth projects anchored in the Marcellus and Permian basins. Slide 16 presents the elements of change in our consolidated cash position for the fourth quarter. Operating cash flow, excluding changes in working capital, was nearly $2.3 billion in the quarter, driven by both our Refining and Midstream businesses. Working capital was a $1.1 billion use of cash for the quarter, driven primarily by declining crude prices. Cash from ops for the quarter was also impacted by a $320 million headwind from changes in our income tax receivable, which you might usually expect to see as a working capital change.
Capital expenditures and investments totaled $896 million this quarter. This includes MPLX’s acquisition of full ownership of a gathering and processing joint venture in the Delaware Basin for approximately $270 million. MPC returned $2.8 billion via share repurchases and dividends during the quarter. This represents an approximate 125% payout of the $2.3 billion of operating cash flow, excluding changes in working capital, highlighting our commitment to deliver superior shareholder returns. As of January 26, we have approximately $5.9 billion remaining under our current share repurchase authorization. And at the end of the fourth quarter, MPC had approximately $10.2 billion in consolidated cash and short-term investments, including approximately $1 billion of MPLX cash.
Turning to guidance on Slide 17, we provide our first quarter outlook. We expect crude throughput volumes of almost 2.5 million barrels per day, representing utilization of 83%. Utilization is forecasted to be lower than fourth quarter levels due mainly to higher turnaround activity. Planned turnaround expense is projected to be approximately $600 million. We are executing turnarounds at 4 of our largest refineries, Galveston Bay, Garyville, Los Angeles and Robinson, all in the first quarter when margins are typically lower to minimize the financial impact of these outages. Turnaround expense for the full year is anticipated to be similar to last year at around $1.3 billion. Operating costs in the first quarter are expected to be $5.85 per barrel higher sequentially due mainly to lower throughput volumes associated with the significant planned turnaround activity.
Distribution costs are expected to be approximately $1.45 billion for the quarter. Corporate costs are expected to be $185 million. And with that, let me pass it back to Mike.
Mike Hennigan: Thanks, John. We’ve delivered strong execution on our strategic commitments again this year. This includes running reliably with high utilization, structural improvements to our commercial performance, fostering a low cost culture and strengthening the competitive position of our assets. At MPLX, the partnership has continued to grow, increasing its cash flow and its cash distribution MPC. We have invested capital to grow earnings while exercising strict capital discipline. This has resulted in superior cash flow generation and supported the repurchase initiatives. Looking forward, we will continue to prioritize capital investments to ensure the safe and reliable performance of our assets, and we will also invest in projects where we believe there are attractive returns.
We believe our focus on safety, environmental, I’m sorry, operational excellence and sustained commercial improvement will position us to capture this enhanced mid-cycle environment, which we expect to continue longer-term, given our advantages over marginal sources of supply and growing global demand. MPC’s Midstream segment, consisting primarily of MPLX has grown EBITDA by $1.3 billion since 2019, which is a 6% compound annual growth rate over the last 4 years. As MPLX continues to grow its free cash flow, we believe it’s in a strong position to continue to consistently grow its distributions. As a result of MPLX increase against distribution 10% of reach in the last 2 years, and MPC expects to receive $2.2 billion of cash distribution, which reflects a $400 million increase since 2020.
Each 10% distribution increase is approximately $200 million of additional cash flow that MPC receives through its ownership in the partnership. In summary, this year, we generated $14 billion of cash from operations. We increased our dividend 10%, repurchased $11.6 billion of shares, resulting in a 92% payout ratio. In 2023, MPC’s total shareholder return was 31%. We believe MPC is positioned as the refinery investment of choice with the strongest through-cycle cash generation and the ability to deliver superior return to our shareholders. With that, let me turn it back over to Kristina.
Kristina Kazarian: 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. Sheila, we’re ready.
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