Q3 2023 Marathon Petroleum Corp Earnings Call
Participants
Brian K. Partee; SVP of Global Clean Products; Marathon Petroleum Corporation
James R. Wilkins; SVP of Health, Environment, Safety & Security; Marathon Petroleum Corporation
Kristina Anna Kazarian; VP of Finance & IR; Marathon Petroleum Corporation
Maryann T. Mannen; Executive VP & CFO; Marathon Petroleum Corporation
Michael J. Hennigan; President, CEO & Director; Marathon Petroleum Corporation
Rick D. Hessling; SVP of Global Feedstocks; Marathon Petroleum Corporation
Timothy J. Aydt; EVP of Refining; Marathon Petroleum Corporation
Unidentified Company Representative
Douglas George Blyth Leggate; MD and Head of US Oil & Gas Equity Research; BofA Securities, Research Division
Jason Daniel Gabelman; Director & Analyst; TD Cowen, Research Division
John Macalister Royall; Analyst; JPMorgan Chase & Co, Research Division
Manav Gupta; Analyst; UBS Investment Bank, Research Division
Matthew Robert Lovseth Blair; MD of Refiners, Chemicals & Renewable Fuels Research; Tudor, Pickering, Holt & Co. Securities, LLC, Research Division
Paul Cheng; Analyst; Scotiabank Global Banking and Markets, Research Division
Roger David Read; MD & Senior Equity Research Analyst; Wells Fargo Securities, LLC, Research Division
Ryan M. Todd; MD & Senior Research Analyst; Piper Sandler & Co., Research Division
Sam Jeffrey Margolin; MD of Equity Research & Senior Analyst; Wolfe Research, LLC
Theresa Chen; Research Analyst; Barclays Bank PLC, Research Division
Presentation
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 Anna 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 Michael 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.
Michael J. 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 have seen 3.5 million barrels of gasoline inventory drawn out of the U.S. system over the past several weeks. OPEC Plus 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 pads 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 to 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 5 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 3 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 renewable fuels 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 a 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 T. 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 27, we have repurchased 285 million shares or approximately 44% of the shares outstanding.
Slide 6 shows the reconciliation between net income and adjusted EBITDA, and 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 spread. 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 2 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 reform or repair about 3 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 and 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 throughput 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 Basin.
Slide 10 presents the elements of change in our consolidated cash position for the quarter. Operating cash flow, excluding changes in working capital, was 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 source 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 27, 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 the 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 crude 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 cost 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.
Michael J. 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. Partnerships is expected to distribute over $2.2 billion to MPC annually and is 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 Anna Kazarian
Thanks, Mike. (Operator Instructions) And with that, Sheila, we're ready for them.
Question and Answer Session
Operator
(Operator Instructions) Our first question will come from Manav Gupta with UBS.
Manav Gupta
Mike and Maryann, when we look at the refiners, they look at themselves and outperform on different performance metrics. Some look at refining capture. You guys really focused on EBITDA margin per barrel. And when we look at that metric, it looks like for a second year in a row, you will 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 D. Hessling
Manav, it's Rick. First of all, thank you for the perceptive call out. I will tell you, we are over focused on EBITDA and our results compared to others, and our team will certainly greatly appreciate your call out 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 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 4 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 has been consistent, as you stated over the last several quarters, and we expect it to continue.
Michael J. Hennigan
Manav, it's Mike. The only thing I would add to what Rick said is we start with the 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 a 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 who 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 T. 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 2 impacts and 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 at about half rate for just under a week. It took us about -- just back to Galveston Bay for a moment, it took us about 3 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 3 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.
Douglas George Blyth Leggate
Maryann, that last response was actually one of the key things we wanted to hit. So let me try 2 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 outlook in your system?
Michael J. Hennigan
Yes, Doug, I'll let Brian comment on that.
Brian K. Partee
Doug, this is Brian. Good question. 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 2/3 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 is 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.
Douglas George Blyth Leggate
Okay. That's helpful. And Mike, I apologize for this one, but I guess somebody has got to ask it. So there is speculation overnight about the CITGO process and Marathon been 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?
Michael J. Hennigan
Thanks, Doug. I'm going to let Dave start, and then I'll come back afterwards.
Unidentified Company Representative
Doug, so I appreciate the question. We anticipated that. So and Mike said in the past, we like to and do look at everything out there as a general comment. But I think we're more focused currently on -- and Rick touched on this a little bit on opportunities to build out our competencies and increase our competitive advantages along our existing refinery value chains. And when we say that, that's inclusive of MPC and MPLX, so from well head to wheel as a way to think about it. So with that said and on the current environment, we believe that M&A within refining, refining M&A is one of the more challenging ways to create value. And with all that said, I would not anticipate us or you shouldn't anticipate us participating in the current auction process for the CITGO assets.
Douglas George Blyth Leggate
Mike, did you have a follow-up?
Michael J. Hennigan
I don't know where the rumor came from, but we're not interested in the auction process...
Operator
Our next question will come from Paul Cheng with Scotiabank.
Paul Cheng
Maybe this is Maryann or maybe for Rich. For the West Coast marketing margin transition that seems to be very strong, and you do have a terminal network there. So just curious that in the third quarter, how much is the West Coast contribution coming from that piece of the business? Is it growing? Or that -- what's your plan over there? That's the first question.
Brian K. Partee
Yes, Paul, this is Brian. I'll take that one. Really, very limited impact in the quarter from our marketing business on the West Coast. We actually saw prices increase pretty substantially on the West Coast in the quarter due to some unplanned outages in the system. And when that occurs, we actually see just the opposite. We see a lot of pressure on the margin out in the West Coast and other markets. So not a big contributor there in the quarter. Now as we look ahead to 4Q as market comes off, we would expect to see some recovery and some margin expansion in the fourth quarter. But to your other question, we are absolutely actively engaged and growing and continuing to grow that network. We've put up really good numbers last year and this year and look at it as a strategic component of our position out in the West Coast.
Paul Cheng
Brian, do you have any rough estimate you can share that how many stations that you're trying to grow it on an annual basis over the next several years there?
Brian K. Partee
Really don't want to forecast a station growth expectation, Paul. We're really focused on value growth. So it's really -- it's a PV optimization, looking at volume and margin. So it's not driven by station growth or volume alone.
Paul Cheng
Okay. Mike -- I know maybe it's still a little bit early. Can you talk about that the plus and minuses on the variable for the CapEx outlook for the next several years comparing to this year. Are we expecting a pretty steady program or that you are looking for opportunity to grow both in the maybe refining in terms of improving the yield or reducing energy and MPLX. So can you just give us some idea that how the trend is going to look like in the CapEx and (inaudible) level?
Maryann T. Mannen
Sure, Paul. It's Maryann. Let me talk a little bit about CapEx in general, and then I'll pass it to Mike, and he'll share some incremental thoughts as well. But as you know, one of our principles, if you will, our strategic pillars is strict capital discipline. And I think that has -- hopefully, you've seen that we have implemented that principal well over the last few years. When you look at 2017 to 2020, our consolidated CapEx averaged about $3.5 billion. And as you look '21 to '23, that's averaged $2.1 billion. So again, that premise of strict capital discipline, ensuring that we're delivering the returns has been an important piece of the work that we've been doing. I think in refining, we continue to look for cost reduction type projects, those that can enhance reliability, margin enhancement type projects that we would be continuing to evaluate.
And there are several of those projects that we'll evaluate. In terms of the timing, we're a bit early for 2024, frankly, even 2025 guidance. But let me pass it to Mike because I think he wants to give you some incremental color on how he's thinking about it.
Michael J. Hennigan
I think, Maryann, you answered it very well. Paul, the way we think about it is on the MPLX side of the house, we've been spending roughly about $1 billion and growing those cash flows. If you listen to the MPLX call, we're still very comfortable with those cash flows growing that will continue to kick over to MPC via distribution. And then Maryann said it well. On the refining side of the house, we're still very optimistic that we have some good projects that enable us to either increase reliability, which will hit the bottom line or enhance our margins in such a way that we talked about earlier that will generate more EBITDA per barrel.
So we have a pretty fulsome look at where we think we're going to invest and like Mary just gave you the numbers over the last couple of years, you're spending $2 billion to $3 billion overall on a consolidated basis. We think that's a nice base case to have. And then we always look to optimize around that. When we do that, we generate sufficient free cash flow that we can still return capital via dividends and buybacks. And as you've seen in this enhanced margin environment, that's part of DNA to return capital to shareholders.
Operator
Our next question comes from Sam Margolin with Wolfe Research.
Sam Jeffrey Margolin
Questions on the buyback, and it's kind of conceptual just sort of how you think about the stock when you do your internal process. But when you are looking at an MPC share, the question is really how do you view it? Or what does it represent to you? Is it representative of just the parent company and a repository for MPLX distributions? Or do you kind of analyze it as a consolidated entity where something like 40% of it is like a synthetic MPLX share. And the reason I asked is because -- we do get a lot of questions about sort of your price sensitivity in the buyback. And I think the methodology maybe is important.
Maryann T. Mannen
Sam, it's Maryann. Let me give you a few thoughts on that, and I can pass it to Mike in case he's got some added value. I mean there are several things that we look at as we are making decisions about the level of share buyback. And certainly, when we're looking at intrinsic value, there's a couple of approaches. So we'll look at some of the parts. We'll look at discounted cash flows, we use a series of reviews, obviously, looking at our EBITDA multiples of their respective businesses. But typically, when we are making the decision about an MPC buyback, that intrinsic value assumes the discounted cash flows, as I just shared. There are several constraints as we look at that, that we evaluate each time we go to buy back stock, none the least of which obviously is market, cash flows, where we think the quarter is going to be where we think our cash balances are. And we've worked pretty diligently to try to outperform the market here. Hopefully, you've seen that over the significance of the buyback that we've done. But we do look at it in a holistic approach.
Let me pass that back to Mike and see if he wants to add any color.
Michael J. Hennigan
Yes, Sam, here's the way I think about it. As you know, we don't control the margins. So as the quarter progresses, we don't have a specified amount that says we're going to do x in this quarter, other than we've been trying to be as aggressive as we possibly can within the constraints that the SEC puts on us, such as daily volume traded limitations or blackout periods, et cetera, et cetera. So we've been -- because it kind of looks like it's been consistent just because we've been trying to be as aggressive as possible, once we generate the cash, as we talk to Paul's question, we have our dedication that we want to invest capital in. And then we want to be returning capital to shareholders as quickly as we can.
At the same time, I will tell you that we also still try to beat the market. One of our goals is to be as aggressive as we can on return capital, but take advantage of the volatility that's within the quarter. And since we started this program, we've ended up reducing the share count by about 40%. It's a rough number. And during that process, we've kind of beat the market by about $4. So if you say, hey, we've reduced somewhere around 270 million shares at around $4, it's roughly about $1 billion of value creation just in our execution. But it starts with, obviously, generate cash, figure out how much we can return to shareholders as quickly as we can within those constraints and then try our best to beat the market during that execution. I hope that helps.
Sam Jeffrey Margolin
Yes, very much so. And my follow-up is just more of a straightforward ops question, but it's about the West Coast. And TMX has been delayed. But once it starts up, it might be impactful to fundamentals on the West Coast. And it seems noteworthy because of your comments about how the Midwest is this integrated system with shipper status for WCS and you're able to move things around. And so I wonder in the context of TMX, if there's -- if you see any analogs there with building out sort of a full value chain or commercial integrated platform.
Rick D. Hessling
Sam, it's Rick. Your analogy is spot on. So when TMX comes online, we'll not only see benefits in the Pacific Northwest, specifically at Anacortes and at L.A. So the way we look at it is you're going to get access to an advantaged barrel more so than what you do today. And we believe that barrel will compete very well, especially on the West Coast. We believe TMX will have some start-up issues. They have some well-publicized marine hurdles they need to get over. And with that being said, having that barrel clear all the way to Asia will be difficult. And sitting on the West Coast, we have a structural advantage from a transportation cost perspective. So we do see that playing into both of our assets, one in the Pacific Northwest and L.A. on the West Coast.
Operator
Next, you will hear from Roger Read with Wells Fargo.
Roger David Read
Okay. Can you hear me all right?
Maryann T. Mannen
We got you, Roger.
Roger David Read
All right. I'd like to come back around on the renewable diesel. We heard from others and seen some stories about permit issues. Just curious you can kind of walk us through the way we should be thinking about that as we head into start-up kind of year-end and in early part of '24.
James R. Wilkins
Roger, this is Jim Wilkins. We're working with the county on one issue related to our land use permit. That issue, we expect will get resolved in the upcoming months, and it's related to our odor mitigation plan. The resolution of that matter won't impact our ability to construct or operate the facility.
Roger David Read
Does it change at all the feedstock that you'd be able to use early on.
James R. Wilkins
No.
Roger David Read
I'm not terribly experienced with this, but I know that some of the feedstocks are -- well, let's just say they're not what you would want to smell, I guess.
James R. Wilkins
No, Roger. So we actually have an approved odor mitigation plan with the Air Quality division. And actually, what we're doing is circling back to the land use permit where we said we'd develop an odor mitigation plan and embedding the plan that's already been approved.
Roger David Read
Okay. Perfect. So -- and just to be absolutely clear, no other regulatory hurdles that need to be cleared for startup.
James R. Wilkins
Correct.
Operator
Our next question comes from John Royall with JPMorgan.
John Macalister Royall
So I had -- my first one is a follow-up on the buyback. You've now gotten through another quarter with a really solid crack environment in 3Q and another quarter where you aren't drawing any cash. And in fact, you build cash by about, I think, $1.5 billion which I wouldn't characterize as a problem by any stretch, but you've talked about getting that cash balance down closer to $1 billion longer term. And Mike talked about the constraints to doing more on the buyback. And now we're seeing a worsening environment in 4Q. So my question is, given all your excess cash, should we think about the buyback is not particularly sensitive to the crack environment? And would you expect to start drawing cash from here?
Maryann T. Mannen
John, it's Maryann. So a couple of things. Yes, you're absolutely right. As you see, we said a little over $13 billion at the end of the quarter. And again, just keeping in mind, about $1 billion of that belongs to MPLX. And then obviously, there is some working capital sensitivity as we have timing of our liability payments. We would expect to see a bit of that unwind as normal. We'll see some of that happen in the fourth quarter and then again in the first quarter. Having said that, your point is accurate. We've said we're quite comfortable with $1 billion on our balance sheet. The nice part about having the cash on the balance sheet today versus if we were sitting here a year ago is we're generating close to $0.5 billion in interest income as we're holding on to that cash.
Certainly, when we are looking at the amount of share buyback that we want to do in any particular period of time, and I think Mike articulated it as well, we're looking at several factors. The fact that we've got cash on the balance sheet to allow us to take advantage of volatility, I think, is a plus. We remain committed to share repurchase and the return of capital. We've got some priorities, obviously, safe and reliable operation of our assets gets it first. We're committed to our dividend, as we just shared with you. And we're looking for opportunities to put that capital to work in order to be able to grow the business and particularly earn the types of returns that you all expect. And we continue to see share buyback as an efficient return of capital. So again, we'll look at all factors as we head into any particular quarter and try to be as opportunistic as we can and be sure that we are doing our best to beat the market and taking advantage of the volatility where we can.
John Macalister Royall
Great. And then Maryann called out some turnaround work pulled in from next year to the second half of this year. And so just thinking about next year, any early look on what 2024 could look like from a turnaround perspective. I think you had some catch-up over the past 2 years, and now this work pulled into '23. So is it reasonable to think it might be kind of a below average year?
Maryann T. Mannen
John, Maryann again. So in general, notwithstanding the impact of COVID, if you look over an average period of time, our turnaround is pretty similar we're operating 13 refineries, fossil fuel and 2 renewable diesel. And at every point in time, there is some level of turnaround. You're absolutely right. One of the things that we did, notwithstanding the unplanned downtime on the reformer is pull forward some turnaround that we expected to do in our 2024 plans into 2023. But again, absent the period of COVID, you can see the level of turnaround being pretty similar watching those.
In the fourth quarter also, you may have noticed in our guidance, West Coast utilization we do have turnaround activity there. We've got 2 locations in LAR. We are trying to get those turnarounds done ahead of the driving season next year, just as an example, if you're looking at activity in the fourth quarter as well. I'll pause there.
Operator
Our next question comes from Jason Gabelman with TD Cowen.
Jason Daniel Gabelman
A decent amount of focus on the buyback. I wanted to ask about the dividend raise of 10%. Last year, the dividend raise was higher in line with the amount you had repurchased over the trailing 12 months this year, that wasn't the case -- and it's also, I guess, lower than the incremental cash you'll be receiving from MPLX with their higher distribution. So the question is, how do you think about kind of that dividend raise? How did you come up with that 10%? And then how do you think about it moving forward, especially in light of the commentary that you expect the refining environment, the mid-cycle environment to be higher, and I would expect the dividend moving higher would be a good way to message that earnings power to the market.
Michael J. Hennigan
Jason, it's Mike. I'll start, and I'll let Mary jump in. Yes, I think what you're referring to is we had a bigger increase before because the way we looked at it is most in our industry kind of paused around COVID during that tough year of cash. So we made a bigger jump. And now what we're showing this year is we're trying to show the market that we believe in a growing dividend that is part of our capital allocation we want it to be competitive. But at the same time, I often say that it's more tax efficient to go return capital through share repurchases. And the sheer quantum of dollars in each case is pretty different. So overall, we want the market to know, yes, we're going to grow the dividend. We're going to consistently do that. We want it to be competitive. We want to show that we're going to grow earnings, that comes back to investing capital and all the self-help that we can do. But at the same time, we're going to earn more on the side of share repurchases because we think it's more tax efficient and a better way to return capital.
Maryann T. Mannen
Jason, it's Maryann. The only thing that I would add to Mike's comments are the dividend is only one part, as you said, of the capital allocation strategy. But having said that, we think this increase is peer leading at 12% CAGR over the last 5 years. So we hope you see it that as well.
Jason Daniel Gabelman
Got it. And then my follow-up is on one of the growth projects that I think you have for next year, the hydrogen hub project that was selected for funding from the DOE. I was hoping just to get more color on exactly what Marathon's participation is in that project, how it could benefit the company? Any thoughts around capital spending that you would have to contribute there?
Unidentified Company Representative
Yes, Jason, this is Dave. I'll touch on that. So start with high level. Number one, there are 7 hubs that were approved for funding from the DOE for $7 billion. We mean MPC/MPLX we're involved in 2 of them. So 1 in Appalachia and 1 in the Heartland area. So when we think about the involvement of MPC and MPLX, they're a little bit different. On the MPLX side, it's more around storage of hydrogen and transportation of CO2 on pipelines. From an MPC perspective, it is inclusive of lowering the carbon intensity of via hydrogen production. And when you think about it in the Heartland area do the location of it very -- the proximity very close to our Dickinson renewable diesel facility. So of course, anytime you can lower the CI of the base product you're making from renewable diesel, you can get that pull-through value of that asset that we already invested in. So the best way to think about it, like we do everything, these are bolt-on type investments that can create value up and down the value chains.
Jason Daniel Gabelman
Okay. When should we see those benefits start to accrue when do the projects come online?
Unidentified Company Representative
Yes. So that's great. So we are -- while this DOE funding was a major milestone for all of us that got granted, some funding from this, it's in the very early stages. So to think about it, next phase of this is a negotiation with the DOE on the funding and the contractual commitments around that funding requirement, then you've got to design and build the facility. So from a capital spend and associated benefit to the company, I think you're looking into late 2024, 2025 timeframe. So it's still a ways out there.
Operator
Our next question comes from Theresa Chen with Barclays.
Theresa Chen
I wanted to follow up on Sam's question related to TMX for which MPC has a known commitment. And I was just wondering if you could update us with where you think the toll may settle out at given the discussion with the pipeline owner and the bid ask currently? And related to that, how much do you think really it can tighten WCS differentials for your Mid-Con assets given that Coast holds are comparable to going to the U.S. Gulf Coast versus Burnaby?
Rick D. Hessling
Yes. Theresa, it's Rick. So on the first part of your question, I'm just really not in a position to comment on the toll or speculate what it may end up at. On the second part of your question, the guidance I'd give you is as we look at the forward curve on WCS, so today, WCS sits at about a $26 discount. In Q1, it's plus or minus $25. And in Q2, if TMX comes online there, and I think the market is still questionable on that. The forward curves $15 to $18 discount. So still a pretty significant discount, and we'll just have to see where it goes from there.
Theresa Chen
Got it. And going back to Mike's earlier comments about additional investment opportunities, RNG being one 1 of them. Can you just give us an update on progress related to the LF Bioenergy assets after the Q1 acquisition announcement, how that's trending? And do you expect to use this as a launch pad for additional RNG investments? Or is this going to be more of a roll up strategy from here?
Unidentified Company Representative
Yes, Theresa, this is Dave again. I'll touch on that. So yes, the LF Bioenergy investment, that joint venture is progressing as we planned. We are building out the facilities. The plan is to build out 13 of those RNG facilities collecting a very low CI dairy RNG and then monetizing that, again, as I touched on a little bit with the hydrogen hub taking that RNG into our renewable diesel facilities such as Dickinson and Martinez, will lower the CI of that base renewable diesel product coming out. So relative to the relationship and the investment, we're very happy with the investment, the management team there, the projects we've -- that they're identifying, they've got a good runway of portfolio projects and they're coming online as planned.
So -- and the second part of your question, is this a one-off or a foundation for subsequent investments in renewable diesel space or the renewable natural gas space. So we continue, as I said earlier, we look at a lot of stuff. There are some opportunities out there. But we -- the key to this one was we got in early. And didn't overpay for a built-out system. So when we think of subsequent investments, I think of them that way. If there's one that we can step in early and participate in the build-out of the infrastructure and integrate it with our business rather than paying for a built-out system, we'll continue to evaluate those opportunities.
Operator
Our next question comes from Matthew Blair with TPH.
Matthew Robert Lovseth Blair
Maybe sticking with the renewables. For some operators, the next leg of the RD story is moving into SAF, is that an option for Martinez? And if so, any thoughts on timing or cost to add that flexibility?
Unidentified Company Representative
Yes, Matthew, this is Dave again. So yes, there is no question both from a Dickinson and Martinez, both those have the opportunity to convert to SAF. And (inaudible) SAF is one of the most cost competitive on a CapEx per barrel basis for SAF production. With that said, the challenge in SAF is the premium associated to justify the investment. And while the IRA has been communicated, there's a lot of unknowns out there and a lot of clarity that still needs to be determined relative to the IRA, not only from the sliding scale and the CI benefit of it, but also the long-term duration. Right now, it ends in 2027, as far as the documented incentives relative to that. So it's hard to make multi-hundred million dollar investments without that clarity going forward. So lack of clarity and lack of premium from airline industry makes it very difficult to justify those investments at this time.
Michael J. Hennigan
Matthew, it's Mike. I'll just add to your and to Theresa's question. I think what you're trying -- or hopefully, what you're seeing from us is we're tentative to this whole low-carbon world, whether it's investment in RNG, like Theresa talked about or as Dave just mentioned, SAF, in my opinion, is going to happen at some period as Dave said, there's a little bit of wrangling around the economics of it at this point. But when those opportunities present themselves to us, we'll continue to optimize our portfolio. So I think if you take a stair step over time, you're going to see us continue to be conscious of that, at the same time, recognizing that the base business is still the majority of what we do.
But over time, we're going to continue to look, whether it's RNG, whether it's SAF, whether it's continued build-out in some other areas, those are things that we continue to evaluate. Dave and his team is constantly looking at it, and we'll make some investment there. But we're not looking for the big splash of a major investment, as Dave just said, we're not looking to buy something that's already been proven out. We're looking to get ourselves in and grow with those opportunities.
Matthew Robert Lovseth Blair
Sounds good. And then do you have any early thoughts on refining margin capture into the fourth quarter? Do you think it would be up on tailwinds from things like butane blending and getting the reformer back for at least part of the quarter.
Maryann T. Mannen
Matthew, it's Maryann. Yes, I think it's hard for us to project capture. But when you talk about the things you did, obviously, as we shared, the reformer we expect will begin to come back up mid-November, our guidance reflects the fact that it will be operational at planned rates mid-December. We talked about some secondary headwinds. We talked about marketing margins changing. You heard Brian talk about that as well. Those things clearly have a positive influence on capture. But as you know, it's difficult to predict where capture what otherwise go. But certainly, those things point to improving capture from the third quarter.
Operator
Our last question will come from Ryan Todd with Piper Sandler.
Ryan M. Todd
Great. Maybe if I could I have one follow-up on the Martinez conversion project. Can you talk about where you are from an operational point of view there? Maybe how much throughput you had in during the third quarter from Phase 1 of the project? And maybe as we think about startup of Phase 2 of that project by the end of this year, is there any ramp that we should associate with it, either in terms of total throughput or in terms of the type of fees that you anticipate working their way into the system. So how should we think about the progress from an operational point of view from -- for that asset?
Timothy J. Aydt
Okay. Ryan, this is Tim Aydt. Thanks a lot for the question there. I would say that, first off, the project is going exceptionally well, both from a safety and on-time and on-budget standpoint. The team's really done a great job, and I do want to give them a shout out because it really kind of demonstrated one of Marathon's key strengths here and that's that they can execute on a complex project. We did, as you likely know, we start up the pretreatment unit in late second quarter, and it is operating very well. We're able to pretreat the entire production that comes about with the Phase 1 Martinez capacity. And now we're going to be looking to ramp that pretreatment capacity with the production of RD that's coming on toward the end of the year when we finish the project. And as Maryann said earlier, when we do finish the project, we're going to be able to produce 730 million gallons annually, and that should happen by the end of the year. So all in all, operationally and project wise, we're moving forward, wrapping it up, and we'll be ready at the end of the year.
Kristina Anna Kazarian
All right. With that, thank you so much, everyone, today for your interest in Marathon Petroleum Corporation. Should you have additional questions or would you like clarification on topics discussed this morning, please reach out, and our team will be available to take your calls. Thanks so much for joining us.
Operator
Thank you. That does conclude today's conference. Thank you for participating. You may disconnect at this time.
