Welcome to the MPC Third Quarter 2022 Earnings Call. My name is Casey, and I will be your operator for today's call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session. Please note that this conference is being recorded. I will now turn the call over to Kristina Kazarian. Kristina, you may begin.

Sounds great. Welcome to Marathon Petroleum Corporation's third quarter 2022 earnings conference call. The slides that accompany this call can be found on our website at marathonpetroleum.com under the Investor tab. Joining me on the call today are Mike Hennigan, CEO; 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, and factors that could cause actual results to differ are included there as well as in our filings with the SEC. And with that, I'll turn it over to Mike.

Thanks, Kristina. Good morning, everyone. First, I'd like to introduce Tim Aydt, who will be joining our call as a new Executive Vice President of Refining. Tim has over 37 years of experience in leadership roles across our midstream and refining organizations. Most recently, he was Executive Vice President of Pipelines, Terminals and Marine and Chief Commercial Officer, where he oversaw the business development for the MLP. Now turning to the macro environment. Roughly 4 million barrels per day of refining capacity has come offline globally in the last couple of years. Yet demand for the transportation fuels we manufacture remains robust and continues to grow. In the U.S., demand is still below 2019 pre-COVID levels, and we believe there will be a continued recovery. As supply remains constrained and demand continues to rebound, we maintain a bullish outlook towards the refining environment as we look into 2023. Our third quarter results reflect the team's operational and commercial execution as we focused on delivering products for consumers in this very tight market. In our Refining segment, we ran near full rates while maintaining our steadfast commitment to safely operating our assets, protecting the health and safety of our employees and supporting the communities in which we operate. The commercial team focused on optimizing our scale, footprint and feedstock slate to deliver against strong demand. And despite volatility in the global energy markets, our execution reflects progress towards our goal of improving commercial performance. We normally see seasonal demand decline at this time of the year, but to date, we're not seeing those signs. Strong forward crack spreads and wide salary differentials for 2023 indicate the expectation of a strong refining environment going forward. In the fourth quarter, we are currently running our system at full utilization, except for the planned maintenance activity we have occurring given our back of the year weighted turnaround schedule. Aside from the Refining business, I want to point out that our Midstream segment earnings continue to grow. In the third quarter, our adjusted EBITDA was up nearly 9% year-over-year in midstream. We've been executing strategic capital investments, fostering a low-cost culture and optimizing the portfolio, including advancing several organic growth projects in the Permian Basin. The strength of these cash flows supports MPLX's decision to increase its quarterly distribution by 10%. Based on this level, MPC will receive $2 billion of distribution from MPLX annually. We've received questions regarding the structure of MPLX and whether MPC will acquire the outstanding public unit. So we want to restate what we said in the past. MPLX is a strategic part of MPC's portfolio, its current pace of cash distributions to MPC is $2 billion per year, and we expect that to continue growing. MPLX has continued to demonstrate resilient through-cycle earnings and growing cash flows. As MPLX pursues its growth opportunities, we expect the value of this strategic partnership will continue to be enhanced, and we do not plan to roll up MPLX. Switching to capital allocation, we believe MPC's current capital allocation priorities are optimal for our shareholders. In October, we completed our $15 billion return of capital commitment, repurchasing approximately 30% of MPC's shares outstanding. We're committed to executing our capital allocation framework to deliver peer-leading total returns to shareholders. Today, we announced an increase to MPC's quarterly dividend of approximately 30%. In addition, we intend to continue repurchases, which we believe are a more efficient way to return capital and we expect to commence buybacks in November using the remaining $5 billion repurchase authorization. In early 2000, we shared our three strategic areas of focus. They have become part of MPC's DNA embedded in our unwavering commitment to increase profitability, have the best through-cycle cash flow generation and drive long-term value creation. As we focus on strengthening the competitive position of our assets, in September, we closed on our Martinez Renewables joint venture with Neste. Construction is well underway, and we expect Phase 1 mechanical completion by year-end. We're excited about the partnership with Neste, a global leader in feedstock procurement and renewable fuels production. This joint venture enhances the value of the project by reducing MPC's capital commitment to $0.55 per gallon as well as improving the overall project feedstock slate. Neste has the obligation to bring 80% advantaged feedstock in Phase 2. Due to these improvements, we expect MPC's share in the JV's EBITDA to be only 25% lower than our original stand-alone case. Additionally, this strategic partnership with Neste creates a platform for collaboration. We believe there will be opportunities to leverage the differentiated knowledge and capabilities of two industry leaders as we pursue our shared commitment to the energy evolution. We continue to challenge ourselves to lead in sustainable energy and have made progress on the sustainability goals we have set for ourselves. Focusing specifically on the Martinez Renewables project, which converts our petroleum refinery into a renewable fuels facility. We anticipate the conversion to result in a 60% reduction of the facility's Scope 1 and Scope 2 GHG emissions, 70% lower total criteria air pollutants and 1 billion gallons of water saved annually. If you haven't had a chance yet, we invite you to go to the Sustainability section of our website and learn more about the ways we are challenging ourselves to lead in sustainable energy. At this point, I'd like to turn the call over to Maryann.

Thanks, Mike. Moving to third quarter results. Slide 6 provides a summary of our financial results. This morning, we reported adjusted earnings per share of $7.81. This quarter's results were adjusted to exclude three items: a $549 million noncash pretax gain related to the contribution of our refining assets to the Martinez Renewables JV, a $509 million noncash gain related to an MPLX third-party contract reclassification and a $28 million LIFO inventory charge. Adjusted EBITDA was $6.8 billion for the quarter and cash flow from operations, excluding unfavorable working capital changes was just under $4.5 billion. During the quarter, we returned $285 million to shareholders through dividend payments and repurchased $3.9 billion of our shares. Slide 7 shows the reconciliation between net income and adjusted EBITDA as well as the sequential change in adjusted EBITDA from the second quarter of 2022 to the third quarter of 2022. Adjusted EBITDA was lower sequentially by approximately $2.3 billion. This decrease was primarily driven by refining and marketing as the blended crack spread was down approximately $10 per barrel, reflecting a 25% quarterly decline. The tax rate for the third quarter was 22%, resulting in a tax provision of $1.4 billion. The tax rate is similar to last quarter due to the Refining & Marketing representing a larger component of total earnings. Moving to our segment slide results. Slide 8 provides an overview of our Refining & Marketing segment. During the quarter, we focused on supplying transportation fuels to meet continued strong market demand. Our Refining assets ran at 98% utilization processing over 2.8 million barrels of crude per day at our 13 refineries. We saw margins decline sequentially across all three regions. Capture was 97%, reflecting a strong result from our commercial team in a volatile global market. Operating expenses were higher in the third quarter. Energy costs were approximately $0.15 per barrel higher in the third quarter, driven by higher natural gas prices. Additionally, we recorded a nonrecurring multiyear property tax assessment of $0.13 per barrel in the third quarter, which we will continue to pursue recovery. We believe the actions we have taken to bring our structural operating cost down to approximately $5 per barrel are sustainable. The cost increases we have seen year-to-date have almost entirely been driven by higher energy costs. Turning to Slide 9, which provides an overview of our Refining & Marketing margin capture this quarter. Market backwardation remained a headwind for the industry, but our commercial strategy of selling ahead of product backwardation while keeping inventories optimized, supported our ability to meet demand and capture strong prompt margins. And while not as significant as the previous quarter, secondary product prices were a headwind as they lagged higher light product prices. Our ability to capture 97% of the market indicator across an incredibly volatile three months was in part due to our commercial responses. Slide 10 shows the change in our Midstream EBITDA versus the second quarter of 2022. Our Midstream segment demonstrated earnings growth with adjusted EBITDA up approximately 3% sequentially and up 9% year-over-year. Overall, we continue to focus on identifying and efficiently executing high-return projects to drive further growth for our midstream business. As Mike mentioned earlier, the growth of MPLX's earnings supported its decision to increase its quarterly distribution by 10% to $0.775 per share, and MPC expects to receive $2 billion in cash from MPLX on an annual basis. MPLX remains a source of durable earnings in the MPC portfolio, and as MPLX grows its free cash flow, we believe it will have the capacity to return capital to its unitholders. Slide 11 presents the elements of change in our consolidated cash position for the third quarter. Operating cash flow excluding changes in working capital was just under $4.5 billion in the quarter. Working capital was a $1.9 billion headwind for the quarter. This quarter, we made a payment of $2.3 billion for estimated federal income taxes, and declining crude prices were also a headwind to working capital. Capital expenditures and investments totaled $756 million this quarter. The increased level of capital spending was related to a ramp in activity related to the Martinez Renewables fuels facility conversion and the Galveston Bay store project. The STAR project is expected to be completed early 2023. Other cash flow benefits of $790 million are primarily driven by the distribution MPC received from the Martinez Renewables JV upon closing on September 21. At the end of the third quarter, MPC had approximately $11.1 billion in cash and short-term investments. Moving to Slide 12. We have completed our $15 billion share repurchase commitment, utilizing the proceeds from the Speedway divestiture at an average price of $78, ahead of our commitment of no later than the end of 2022. As you will see today, when our quarterly financials, the 10-Q was published, we were able to complete that early in the month of October. We intend to begin repurchase against our $5 billion outstanding authorization in November, now that our financials are public. On Slide 13, I'd like to walk you through our financial priorities, sustaining capital. We remain steadfast in our commitment to safely operate our assets, protect the health and safety of our employees and support the communities in which we operate. We're committed to a secure, competitive and growing dividend. We believe the quarterly increase to $0.75 per share we announced today is secured through cycles, competitive with peers and the broader market and leaves opportunity to potentially grow our dividend in the future. We anticipate this dividend will be supplemented with repurchases, and we are committed to executing our capital allocation framework to deliver peer-leading total returns to shareholders. We will evaluate growth opportunities and margin-enhancing projects. Share repurchases will be used to return excess capital to shareholders, which we believe are a more efficient way to return capital and will continue to lower our share count. Underpinning these priorities, we believe a strong balance sheet is essential to being successful in a competitive commodity business. It's the foundation, allowing us to execute our strategy. On Slide 14, we highlight the strength of MPC's balance sheet. We continue to manage our balance sheet through an investment-grade credit profile. At the end of our third quarter, MPC's stand-alone gross debt to capital ratio is 21%, which is under our target of a 25% to 30% gross debt-to-capital ratio. MPLX has a leverage ratio of 3.5x debt to EBITDA under its target of 4x. Both businesses have strong balance sheets with leverage ratios under their respective targets. Turning to guidance on Slide 15, we provide our fourth quarter outlook. We expect crude throughput volumes of roughly 2.7 million barrels per day, representing 93% utilization. Utilization is forecast to be lower than the third quarter due to planned turnaround activity having a higher impact on crude units in the fourth quarter. Planned turnaround expense is projected to be approximately $430 million in the fourth quarter with a significant level of activity in the Gulf Coast region. Turnaround activity is reflected in our fourth quarter throughput guidance. We are expecting operating costs per barrel in the fourth quarter to be lower, projected to be $5.30 per barrel for the quarter. This is primarily driven by expected lower natural gas and energy costs. As a reminder, natural gas has historically represented approximately 15% of operating costs. Our natural gas sensitivity is approximately $330 million of annual EBITDA for every dollar change per MMBtu. This equates to a sensitivity of approximately $0.30 per barrel of cost. Distribution costs are expected to be approximately $1.3 billion for the fourth quarter. Corporate costs are expected to be $170 million representing the sustained reductions that we have made in this area. In closing, we will continue to execute on our three strategic pillars: strengthening the competitive performance of our assets, fostering a low-cost culture and improving our commercial performance. We are committed to positioning MPC as a reliable and efficient energy provider with new investments focused on high-return opportunities supporting the company's evolution, which will position it to lead in an energy-diverse future. We will stay steadfast in our plan to position MPC as the refiner of choice, striving to deliver superior cash returns regardless of market conditions, all while ensuring we safely operate our assets, protect the health and safety of our employees and support the communities in which we operate. Let me turn the call back to Kristina.

Thanks, Maryann. Please note, operator instructions. With that, operator, can you open up for questions today.

Yes. Thank you. We will now begin the question-and-answer session. Our first question today comes from Doug Leggate with Bank of America. Go ahead please. Your line is open.

Thank you, everyone. I apologize for the issue with the mute button. Good morning, and I appreciate you taking my questions. Mike or Maryann, whichever one of you would like to address this. Now that the first phase of the buyback has been completed, your distributions from MPLX continue to exceed your dividend payments. Could you provide some insight on your expectations for the new pace of buybacks? The $5 billion authorization will likely be utilized quickly. Additionally, how should we view the balance between future dividend growth and your desired balance sheet status? This is essentially a question about cash utilization, which is a nice challenge to have. I have a follow-up question as well.

Thanks, Doug. So as you know, we made a commitment that we would reassess the dividend immediately after completing the $15 billion, and we've done so. We wanted three objectives really around the dividend. One was for it to be secure and competitive. And then obviously, with the potential to grow dividends in the future, as you said, we believe our increase to $0.75 in the quarter meets all three of those objectives. As you know, we completed that $15 billion share authorization and have a remaining $5 billion new authorization, which both Mike and I had shared on our prepared remarks that we intend to begin to use that very early in the month of November. We continue to think that our equity is undervalued. And when we look at distribution return on capital between dividend and share repurchase, we believe share repurchase remains a more efficient tool in that portfolio. So we'll look at the market, we'll look at other growth opportunities, and we'll look at the macro and we'll continue to use share repurchase absent other growth opportunities as the vehicle to continue to return capital to the shareholders. Every decision that we make is obviously focused on trying to ensure we've got peer-leading returns. I hope that helps, Doug.

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

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

And Doug, it's Mike. I want to build on Maryann's comments. As I stated earlier, the fundamentals of our business have shifted due to recent events. Approximately 4 million barrels of refining capacity have been removed from the market during a period when demand was low, but demand is now starting to recover. We have not yet returned to the 2019 levels of demand across all products, such as gasoline, diesel, and jet fuel, but we are seeing a gradual increase. This means we have constrained supply alongside recovering demand. As you noted, the mid-cycle outlook we anticipate is clearly higher than what we experienced previously due to changes in global fundamentals. While we expect some capacity additions around the world, we believe that demand will continue to grow, leading to a new mid-cycle that is significantly above our historical levels. This is why we maintain a positive outlook and believe our assets are still undervalued. Although we know you would like us to share specific internal figures, we are not providing those. However, we have conducted stress tests under various scenarios, and we are confident that purchasing our shares at current prices adds value for our shareholders, which is why we are actively engaged in this area. We are committed to returning capital, and as Maryann mentioned, we have been repurchasing shares at favorable prices, viewing this as an ongoing opportunity. Regarding the dividend, the recent increase was prompted by rising equity prices, and we had indicated that an adjustment would come after completing the $15 billion Speedway deal. We've acted consistently with what we communicated. While we acknowledge it's not the most tax-efficient method of returning value to shareholders, we want the dividend to remain competitive. An increase of 30% is a positive change, and we will monitor that closely while also continuing to reduce the share count. I hope this provides some additional clarity.

You make significantly higher mid-cycle as what I was looking for. Thanks very much indeed.

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

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

Thank you for the question, Neil. I'll let Rick and Brian share their insights. However, I want to mention that we identified three key areas to focus on early on, and we have made progress in the commercial sector. There's still significant opportunity for us, so we are not finished there, but we have achieved some advancements. I'll hand it over to Rick and Brian for their comments.

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

Thanks, Rick. Yes, Neil, just great question. I appreciate the opportunity to kind of weigh in here. And Rick said it, but I'll double down on it. It's about one or two things. It's literally everything. We've changed. We've moved mountains and really proud of the work that the team has done. There's been a lot of progress as Mike alluded to in his comments; there's more to get. I think foundationally as we look going forward, one of the key components is our digital transformation that underpins a lot of the efforts we have on the commercial front. And we think leveraging our scale across our coast-to-coast platform provides us a distinct opportunity set as it relates to that digital evolution in our space. The other thing I'd say just real quick is what underpins all this? Or alignment changed everything. We fundamentally changed the organizational structure and realigned people, we empowered people and we held them accountable. We have a people-centric business in the commercial space, and we're really leveraging that. And the core tenet of what we're trying to accomplish is to let our great people do great things.

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

Yes, hi Neil, it's Rick again. That's a great question. These markets are experiencing significant changes. We're seeing unprecedented levels once more. On the heavy crude side, I checked this morning and noted the forward curve showing December at minus 30, Q1 at minus 27, and surprisingly, 2023 Cal at 23 under. So what's causing this? There are many factors at play. Production from Canada is quite strong, and we're entering the diluent blending season, which is slowing the pool and certainly contributing positively. We've also had a temporary boost from some unplanned maintenance in regions 2, 3, and 5. Additionally, fuel oil prices are very low, leading many to substitute that for heavier crude types elsewhere. All of this is exerting pressure on supplies reaching the U.S. Gulf Coast. Lastly, Gulf of Mexico medium sour production has also been robust. Recently, Mars pricing has surged, and as you mentioned, the Canadian crudes are contributing as well. All these factors are stacking up and creating a very optimistic outlook for 2023. Specifically for MPC, you know we’ve developed excellent access and options throughout our system over the years in regions 2, 3, and now 5, so we are increasing our heavy crude intake. We're filling our cokers as expected, and we will continue this trend into Q3 as market indicators suggest.

It makes sense. Thank you, team.

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

Yes, thank you. Good morning.

Good morning, Roger.

Let me take the diesel question that everybody wants to ask on all these calls, kind of what you're seeing across your system? Whether or not the Mississippi River issues had anything to do with what's going on in the Central part of the country and just any thoughts you have on some of the policy issues that are percolating out there in terms of any risk of government intervention on the diesel export front?

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

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

Yes, I understand that, but I also see a desire for a windfall profit tax, which based on experience, is unlikely to lower prices. You never really know what decisions they might feel pressured to make. I shared a lot on that, so I'll hand it back now. Thanks.

Our next question comes from John Royall with JPMorgan. Go ahead please. Your line is open.

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

Sure, John. It's Maryann. In the third quarter, three key factors equally influenced the results. First, we had approximately a $0.13 impact due to a four-year adjustment on property tax costs, which is a one-time occurrence that the state can retroactively apply. Although we will pursue this, we had to record it when it happened. Second, there were higher overall energy costs, as I mentioned. Lastly, in the third quarter, we faced increased turnaround expenses and related activities. While we expect a decline in energy costs, particularly related to natural gas, from the third to the fourth quarter, the tax impact is not expected to recur. I hope that answers your question.

John, it's Mike. Let me just add to what Maryann just said. So we try our best to give you as good a guidance as we can, with the one caveat being where is natural gas price going to be? So we look at the forward curve right before we give the guidance and just reminding you the sensitivity is $0.30 a barrel for every $1 per million BTUs. So where that actually ends up in the quarter is hard to call. So we just take a look at the forward curve ahead of time and put our best number on it. So what I feel good about is the areas that we control on cost. I continue to say we have sustainable reductions that we've seen over the last couple of years, and that's good. As Maryann mentioned, we have a tax dispute that we'll follow up on. And we have this unknown as to where natural gas will actually price itself throughout the whole quarter. Hopefully, that helps.

Thank you. To follow up on Neil's question about capture rates, I appreciate your insights on the broader dynamics. I wanted to clarify the commentary regarding a potential decline. You briefly mentioned it in your prepared remarks, but I'd like to understand the moving pieces involved. It appears that in the fourth quarter, we're looking at a significant maintenance period compared to the third quarter, along with rising prices. Should we anticipate that number trending downward in the fourth quarter?

I'll start and then I'll pass it to Rick and Brian for additional insights. When I provided guidance for the third quarter capture, I anticipated we would see some impact due to a strong performance in both the third and fourth quarters, especially in comparison to the second quarter's turnaround activities. That said, there were also some offsetting factors in the quarter. Firstly, we observed a slight decline in prices, which positively affected our clean product margins. The pricing actually benefited from the quarter-over-quarter volumetric gains. Although secondaries remained a challenge during the quarter, they performed better than our initial expectations. Regarding your question about the fourth quarter, it is indeed our heaviest maintenance period. Therefore, we expect that capture in the fourth quarter may fall short compared to the third quarter for several reasons. Now, I'll turn it over to Rick and Brian to provide further details, and I believe Mike would like to add his thoughts as well.

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

John, this is Rick. I'll add to Maryann's earlier comments about secondary product margins. We're just a month into the quarter, and it's uncertain how the next two months will unfold. Secondary product margins have been quite volatile, and predicting the direction of WTI from here is challenging. I would say that's one of the most uncertain factors influencing our capture. More updates will come as we see how the rest of the quarter progresses. I'll check to see if Brian has anything to add.

Thank you, Rick. I just want to provide a brief summary. It's challenging to make predictions a month into the quarter, but I can say that October started off strong in terms of clean products. As Mike mentioned earlier, we did not experience the usual seasonal decline in demand. The weather has been largely favorable, without any hurricane events, and overall conditions have been quite moderate. We've seen strong demand throughout October, which has resulted in solid margins. Overall, the outlook seems positive, but it's still too early to make definitive conclusions.

Very helpful, thank you.

You're welcome.

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

Good morning everyone. Thanks for taking the question.

Good morning, Sam.

Wanted to ask on the renewable diesel business. You mentioned Neste brings some benefit on the feedstock procurement side. You also have the JV with Archer-Daniels. So you're covered across categories within the feedstock universe, and there's a lot of disparity between vegetable oils and waste oils right now. And so I'm just curious how you think about the feedstock picture overall, whether it's important to really have security on both sides or if you might be leaning towards one specific category of feedstock over another?

Yes, Sam, this is Brian. I'll take that question. It's a great question. So, first, let me just back up and talk a little bit about what we have going on out west with Martinez. So we're well into our prefill strategy. So we've been prefilling since middle of the summer. We're currently buying from over 50 different suppliers. So we forayed into this business two years ago with Dickinson, and the team has come up very, very fast in developing those relationships. So we've quickly gone from not being in the business to being holistically in the business with two different plants here shortly, with pretreat capacity. And we're confident, very confident in our ability to source optimal feedstocks. But it's really an optimization much like we undertake on the crude side of our business. We run an LP model. We look at unit constraints at the refinery, we look at logistics, we look at pricing, and of course, continuity and value. So it's a broad optimization, very similar to what we do on the crude side of our business.

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

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

Thanks so much. Have a great day.

You're welcome.

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

Thank you. Good morning, everyone. I have two questions. First, I want to revisit the stock. I've noticed that the adjusted pretreated soybean oil price is now quite similar to the price of Used Cooking Oil. I'd like to know your thoughts on this and the reasons behind this change. Do you believe this trend will continue and how might it affect your feedstock strategy? My second question concerns the impact of the Inflation Reduction Act and the recent fluctuations in LCFS prices on your long-term renewable outlook and strategy. Thank you.

Yes, Paul, thanks. This is Brian. I understand your question. First, regarding CI and soybean oil, UCO, and other feedstocks we consider, we've recently been in startup mode. There has been an increase in demand for feedstocks as we ramp up operations, and the market isn't very efficient yet. It's an emerging market where relationships are crucial, as many sellers of UCO or rendered fats are exploring this new business line. I don't believe we've seen a structural change recently, but rather the market is evolving from a CI perspective. As I mentioned before, logistics and maintaining strong relationships will be key in securing the right and most advantageous feedstocks for our facilities. Regarding your second question about LCFS, we have noticed a gap in the supply and demand for LCFS credits over the past year and a half. Notably, California is experiencing this, but other states and regions, such as Canada and Oregon, are also developing programs, which introduces new variables for us. CARB reported a significant surplus of over 1.3 million credits in the second quarter, and that surplus continues to grow. We expect CARB to adjust their LCFS program to better support investments in low carbon initiatives, which will likely create engagement opportunities in 2023 and see results in 2024. The economics related to RV depend on several interrelated factors. We have benefited from positive aspects like RIN values and the Blenders Tax Credit, along with supportive product pricing in California. Although feedstock pricing has been stable in the third quarter, it remains on the higher side this year, and LCFS prices have been lower. However, taking everything into account, we are seeing stable margin production at our Dickinson facility, and we expect similar results in Martinez, influenced by various factors.

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

Sure. Just curious, do you guys have any plan to add additional development plan or now the plan, sales at a next one or two years? Or that you just have the machines going to bump up and you're going to wait until that's fully ramp up. So what type of strategy that you guys have in mind?

Yes. So we're not sure what you said. Kristina said, you thought you heard you say, are we adding alkeplants, did you say alke or?

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

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

Yes, Paul. This is Dave. As Mike mentioned, with Dickinson operational and Martinez soon to come online, our strategy encompasses both Phase 1 and Phase 3, including our partnership with Neste. Brian covered much of this, focusing on the feedstock and product placement. While we aren't looking to completely duplicate the hydrocarbon value chain, we aim to capitalize on the strengths of our core companies and the commercial value we can derive from engaging across that chain. The key difference from hydrocarbons to renewables is our desire to stay within our core competencies and maintain a balance on speed to market. That's why we're fostering our relationships and joint ventures, such as those with ADM and Neste. As Mike noted, we will continue to assess new opportunities. We review many prospects, but they must be capital-efficient. The IRA could provide some advantages, but it's still early to fully understand how its factors will unfold and influence our long-term investment strategies. Thank you.

Thank you.

You're welcome, Paul.

Our next question comes from indiscernible with Barclays. Please go ahead; your line is open.

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

Theresa, I'll start off with mine. My comments were related to the DOE data, but I'll let Brian give a little color on our specific data. But just in general, I think it's consistent that we still see a lot of demand recovery, and that's why we're so bullish at this point, and then we'll take the second part of your question in a second.

Thank you, Theresa, for your question. I’d like to provide some insights about the system. Firstly, in response to Mike's remarks regarding our data, he referenced the DOE data. Our comparisons to 2019 are not particularly relevant due to the closure of several refineries and the divestiture of our retail units. Therefore, we focus on year-on-year comparisons. Here’s a brief overview for Q3: year-on-year, distillate products have remained steady and stable, showing little change. Jet fuel continues to perform well, with a year-on-year recovery of about 6%, although it remains below 2019 levels. Gasoline is quite interesting as we saw a slight decline from 2021 in Q3, about 2%, which is closely linked to retail prices. Starting in the West, we are around 4% below Q1 2021, which directly correlates to retail prices and the impact of elevated prices. The Midwest saw a decrease of about 3% and the Gulf Coast was down by 1%, resulting in an overall decline of about 2%. However, returning to Mike's earlier comments, we remain optimistic about demand. In October, we started Q4 on a strong note, continuing to see recovery in COVID-related demand. Jet travel is improving, along with activity in marine fuel, diesel, and gasoline. Additionally, retail prices have moderated since their summer peaks, currently around $3.75 a gallon. Demand also remains strong in South America and the Caribbean, with these economies operating differently. There is robust agricultural demand globally, as well as increased mining activity, aided by some price subsidies near the southern border, which have helped boost demand. We are also observing interest from Europe due to energy security concerns and the need for fuel access as winter approaches. Lastly, concerning supply constraints, we have taken significant capacity offline globally and anticipate some friction regarding Russian export production, making it difficult to predict its full impact. However, we do not expect this to positively affect incremental supply and foresee a slight drag instead.

Theresa, it's Mike. I want to emphasize that our inventories are notably low and the market is in need of additional barrels. We're doing everything we can to produce as much product as possible. Brian highlighted that we observe some price sensitivity when prices rise too high. Ultimately, we focus on what we can control, which is to operate at full capacity and deliver as much product to the market as possible. Regardless of whether exports from Asia occur or not, the market has a demand that needs to be fulfilled. That’s why we maintain a bullish outlook. This perspective has developed over the past couple of years, and we believe demand will continue to recover. Brian provided specific details about our sectors, and I mentioned the Department of Energy information. We are confident that demand will keep increasing, and whether the supply comes from China or the U.S. market, the demand is present. It’s a situation where supply is constrained while demand is recovering, which fuels our optimistic outlook.

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

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

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

Matt, feel free to use any numbers you like, but the projection was accurate from the start. We expect an increase of 40,000 barrels a day in additional crude and 17,000 barrels a day from heavy upgrading. No matter how you look at it, that will lead to additional EBITDA once we begin operations.

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

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