© 2024 Alpha Spread Limited. All Rights Reserved.
www.alphaspread.com is not operated by a broker, a dealer, or a registered investment adviser. Under no circumstances does any information posted on www.alphaspread.com represent a recommendation to buy or sell a security. The information on this site, and in its related newsletters, is not intended to be, nor does it constitute, investment advice or recommendations. The information on this site is in no way guaranteed for completeness, accuracy or in any other way. In no event shall Alpha Spread Limited be liable to any member, guest or third party for any damages of any kind arising out of the use of any content or other material published or available on www.alphaspread.com, or relating to the use of, or inability to use, www.alphaspread.com or any content, including, without limitation, any investment losses, lost profits, lost opportunity, special, incidental, indirect, consequential or punitive damages. Past performance is a poor indicator of future performance.
You don't have any saved screeners yet
Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Welcome to the MPC Third Quarter 2020 Earnings Call. My name is Sheela, 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 [Operator Instructions] Please note that this conference is being recorded.
I will now turn the call over to Kristina Kazarian. Kristina, you may begin.
Welcome to Marathon Petroleum Corporation's third quarter 2020 earnings conference call. The slides that accompany this call can be found on our website at marathonpetroleum.com, under the Investors tab. Joining me on the call today are Mike Hennigan, CEO; Don Templin, CFO; and other members of our 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.
With that, I'll turn the call over to Mike.
Thanks, Kristina, and thanks for joining our call this morning. Slides 3, highlights our company's three strategic areas of focus in the near-term. Building and executing on these three strategic pillars will enable us to position the company for long-term success and through cycle resiliency.
As we continue to navigate the challenges created by COVID-19, for both our company and the industry, we've remained focused on the aspects of our business within our control. This includes, strengthening the competitive position of our assets, improving our commercial performance, and lowering our cost structure.
On Slide 4, we provide a quick update on actions taken around those three strategic priorities this quarter. First, we're making good progress on the sales of Speedway business and continue to target the first quarter of 2021 to close the transaction. The Speedway and 7-Eleven teams are very focused on completing the activities required to successfully close the transaction. Additionally, our interactions with the FTC have been constructive.
We also wanted to provide more color around the use of proceeds from the Speedway sale, since we have continued to receive questions about an MPLX buy in. As you know, we ran a comprehensive midstream review process that began last year, and we announced the results of that review earlier this year.
Our conclusion from that process has not changed. We've remained committed to using the sale proceeds to strengthen our balance sheet and return capital to MPC shareholders, and do not intend to buy an MPLX with cash from the Speedway sale.
As it relates to MPLX, however, we continue to position MPLX towards free cash flow after distributions and capital, in order to proceed with unit buybacks which have now been authorized by the MPLX Board.
One of our most important priorities as we evaluate the use of proceeds is our commitment to defending an investment grade credit profile. We expect to target in MPC alone debt-to-EBITDA leverage metric of 1 to 1.5 times.
Given the significant and stable distributions from MPLX, we don't envision an MPC balance sheet with less than $5 billion of debt on a true cycle basis.
As a reminder, we also expect to increase the cash component of our core liquidity position, by an additional $1 billion to offset for the loss of cash flows from Speedway. Within this framework and based on our current assessment, we expect that the remaining proceeds will be targeted for shareholder return. We are evaluating the form and timing and we'll share our plans closer to their transaction close.
Moving on to renewables, we continue to advance our investment in this important area. We're in the process of starting up our Dickinson, North Dakota renewable fuel facility, at full capacity is expected to produce 12,000 barrels per day of renewable diesel. We're particularly proud of the team's commitment to execution, and the ability to move the startup process up three weeks ahead of schedule, despite recent challenging weather conditions.
Since the last time we reported to you we've also made excellent progress on our plans to convert the Martinez Refinery into a renewable diesel facility. In early October, we submitted our permit application to the local regulators. We're also advancing discussions with feedstock suppliers, and began detailed engineering work.
Finally, we continue to exercise strong discipline on how capital and expense dollars are spent. We're on track to exceed the targeted reductions of $1.4 billion of capital spending that we announced earlier this year.
We're also maintaining our focus on structurally lowering costs in all aspects of our business. As a result of this focus, we expect to exceed our 2020 forecast to operating expense reductions of $950 million.
During the quarter, we also took incremental steps to reduce our long-term cost structure, including the implementation of a workforce reduction plan. The difficult decision to reduce our workforce by more than 2,000 people was not made lightly. We are committed to treating our employees with integrity and respect as we take these necessary steps to position the company for through cycle resiliency and enhance our long-term financial prospects.
I started off my comments by saying that we're focused on the things we can control. No matter what lies ahead, I believe we are uniquely positioned. With the Speedway sale, we will have the ability to strengthen our balance sheet and make substantial capital returns to our shareholders simultaneously.
With the after-tax proceeds from the Speedway sale we see a clear pathway to meaningfully reducing our share count, which provides more capability to support our dividend. It's a challenging environment, where we are optimistic about our ability to deliver shareholder value in both the short and long-term.
At this point, I'd like to turn it over to Don to review the third quarter results.
Thanks Mike. MPC's adjusted EBITDA was $1 billion for the third quarter of 2020. In addition to the adjustment for turnaround costs, adjusted EBITDA excludes net pre-tax charges of $525 million recorded in the third quarter, which are summarized on Slide 5. We recorded $348 million of restructuring expense related to the indefinite idling of our Martinez and Gallup facilities, as well as costs associated with our announced workforce reduction plan.
We also recorded $433 million of impairment expense, primarily associated with assets that will no longer have a continuing use at the Martinez Refinery. We recorded two inventory related adjustments for the quarter. Due to carrying lower crude inventories, we recorded a $256 million LIFO liquidation charge. We also recorded a $530 million lower of cost or market inventory benefit from higher commodity prices, which partially reverses charges taken in prior periods.
Due to the announced sale of Speedway, we are now required to present Speedway's results as discontinued operations. I thought it might be useful to walk through a couple of slides, summarizing the changes to our financial reporting brought about by this requirement.
As shown on Slide 6, Speedway's standalone results will be reported separately, rather than as a component of what was previously being captured in the retail segment. The direct dealer business, which was the other component of our retail segment, is being retained by MPC and its results are now included in the refining and marketing segment. Results for historical periods have been recast to reflect these reporting changes.
On Slide 7, we provide an illustration of how the reporting of historical and current period adjusted EBITDA has changed. In addition to moving direct dealer to R&M, and reporting Speedway separately, discontinued operations accounting requires Speedway's results to be presented differently as compared to their previous presentation.
First, MPC Corporate costs, which had previously been allocated to Speedway are no longer allocated to the business. Results for all periods have been recast to exclude any allocation of MPC Corporate costs to Speedway. You can see the $7 million adjustments for both second quarter 2020 and third quarter 2020 on this slide.
Second, we ceased recording depreciation and amortization for Speedway from the time of the signing of the sale agreement. This is a prospective change from the beginning of August 2020 forward. You won't see that impact on this slide because it shows EBITDA, but I wanted to mention it since it will impact comparability for other financial metrics.
To put that in perspective, depreciation and amortization for Speedway was averaging about $34 million per month in 2020.
Slide 8, shows the sequential change in adjusted EBITDA from second quarter 2020 to third quarter 2020. As a reminder, the second quarter adjusted EBITDA has been recast to reflect Speedway as a discontinued operation.
Adjusted EBITDA was up approximately $353 million quarter-over-quarter, due to increased earnings from refining and midstream. Third quarter results also included net pre-tax adjustments of approximately $525 million, as discussed previously.
Moving to our segment results. Slide 9 provides an overview of our refining and marketing segment. Third quarter adjusted EBITDA improved by $296 million. As a reminder, adjusted EBITDA for the R&M segment has been recast to include the direct dealer business. This business accounted for $105 million of EBITDA in the second quarter of 2020, and $133 million in the third quarter.
While crack spreads improved quarter-over-quarter, margins in all regions remained under pressure, as crude differentials narrowed considerably compared to the second quarter.
As Mike mentioned earlier, we are very focused on structurally reducing our costs. You'll recall that the second quarter costs were significantly lower than the first quarter costs. Despite much higher utilization and the resumption of activities, such as maintenance and turnarounds, which ordinarily would have increased our costs, our third quarter operating costs were actually lower than the second quarter.
In absolute terms, our third quarter operating costs were down more than $350 million when compared to the first quarter of 2020, and down more than $500 million when compared to the fourth quarter of 2019. This gives us confidence that our focus on structural expense reductions is working.
Slide 10, shows the change in our midstream EBITDA versus the second quarter of 2020. Our midstream segment continues to demonstrate earnings resiliency and stability, with EBITDA increasing by $96 million from last quarter. Our performance during the third quarter highlights the stability of our underlying businesses, the quality of our contracts and execution on our capital and operating expense reductions to help offset what we knew would be a challenging environment.
Slide 11, provides an overview of Speedway results as a discontinued operation. Third quarter adjusted EBITDA is down $36 million from second quarter. While fuel volumes continued to recover from the prior quarter, fuel margins were approximately $0.15 per gallon lower than second quarter.
Merchandise sales continued to improve quarter-over-quarter, as well as year-over-year. The Speedway team has also done an excellent job with expense control in an environment of reduced demand and transaction counts. Expenses are nearly flat on a sequential quarter basis as shown here, and are approximately $35 million lower than the same quarter last year.
Slide 12, presents the elements of change in our consolidated cash position for the third quarter. Cash at the end of the quarter was approximately $716 million. Adjusted operating cash flow before changes in working capital was $11 million in the quarter. Changes in working capital was a $1.2 billion source of cash in the quarter, as rising commodity prices and increasing utilization continue to reverse working capital cash use impacts from the first quarter.
Working Capital also reflects an increase in accrued liabilities of approximately $297 million, related to the cash portion of restructuring expenses that will be paid in future periods.
On Slide 13, we provide our fourth quarter outlook, which includes estimated throughput at our facilities based on projected regional demand. We expect total throughput volumes of just under 2.5 million barrels per day, slightly down from third quarter actual throughput. Distribution costs are expected to be approximately $1.3 billion for the fourth quarter. While some of our peers report these costs as part of gross margin, we have historically called them out separately.
Plant turnaround costs are projected to be $100 million in the fourth quarter, which includes activity at our Catlettsburg and El Paso facilities. Total operating costs, including major maintenance and engineering projects are projected to be $5.50 per barrel for the quarter.
For Speedway, we expect fuel volumes of approximately 1.5 billion gallons to 1.7 billion gallons, and merchandise sales in a range of $1.55 billion to $1.65 billion, reflecting some recovery in demand, but still down from 2019.
With that, let me turn the call back over to Mike for some closing remarks.
Thanks, Don. I'd like to take a moment to provide some comments on our responsibilities around corporate leadership. We recently published our 2020 perspectives on climate related scenarios report, highlights of which can be found on Slide 17 in the appendix. This is the fourth year we have published our TCFD compliant report, which highlights the opportunities and strategic planning work the company is engaged in related to climate scenarios.
As a result of continued refinements of our ESG perspectives, we want to mention two additional and important initiatives we have established, incremental to our announcement earlier this year to reduce greenhouse gas emissions intensity to 30% below 2014 levels by 2030.
First, we've established a 2025 goal to reduce methane emissions intensity from our natural gas business to 50% below 2016 levels. Second, we're focusing on conserving and managing our use of water. Through our efforts in this area, we have reduced our freshwater withdrawal intensity by over 10% since 2015, and we expect to further reduce it by an additional 10% by 2030.
We look forward to continuing in our ESG journey and our commitment to stakeholder engagement with our people, business partners, customers and communities. We view sustainability as the fundamental process of shared value creation, and how we conduct our business enhances the performances we deliver.
With that, let me turn the call back over to Kristina.
Thanks, Mike. As we open the call for your questions, as a courtesy to all participants, we ask that you limit yourself to one question and one follow-up. If time permits, we will re prompt for additional questions. We will now open the call to questions. Operator?
Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question will come from Doug Legate with Bank of America. Your line is open.
Well, thank you. Good morning, everybody. Mike, I appreciate the clarity on recent statement on MPLX, however, I wonder if I could ask you to elaborate a little bit on the justification. And just to remind you and I'm sure you know, we have a 15% yield versus MPC at a little under 8%. And obviously the question is over what happens after the election as it awaits for the relative tax advantage are probably going to be something that that you may want to comment on as well.
But just a justification as to, why buying an MPLX does not make sense for MPC at this point?
Hey. Good morning, Doug. So I'll give you couple of comments. Number one, we stated continuously that our goals have been to put the balance sheet back in order and return capital MPC shareholders. So, we still believe that that's our first priority here.
And as you look at what we've done over the last couple of months, we've enhanced our base case on shareholder return with the change from a spin of Speedway into a sale of Speedway, which I do believe is a win-win for both ourselves and for 7-Eleven.
But as we look at the equities, I mean we certainly acknowledge the argument the people have made about, like you said, a 15% yield or so around MPLX. At the same time, we view both equities are very undervalued. Particularly we view the MPC considerably undervalued compared to where we think it should be long-term.
And if you dovetail that with our commitment to returning capital to shareholders, we think the best value is to return capital in the form of buying back units in MPC. We believe that the yield at MPLX should improve with our base plans at MPLX, which we noted today that we are going to continue to proceed into a free cash flow after distributions in capital at MPLX, and put ourselves in a position to start buying back MPLX's units with MPLX cash flow, and then we can target MPC cash at MPC shareholders in a form of buybacks.
We also mentioned on the call that we still have a little bit of time before we get to closing, which we're still anticipating first quarter. But we're going to continue to look at, we've said form and timing of those buybacks is something we're continuing to evaluate, continuing to talk to our Board about. But at the end of the day, we think it's a much better value proposition for MPC shareholders, and we believe it's the right use of proceeds.
Okay. I appreciate the answer. We can probably debate that, but I'm sure you continue to get questions on it. My follow-up, if I may, is on the portfolio. It looks like your operating cost reductions or at least the headcount reductions you mentioned are starting to show up in the numbers. So just wondered, if you can give us an update on how you see any specifics as to what you see are the next steps for the portfolio?
I know you've been somewhat reluctant to give any specifics, but as the process is going on, I just wondered if you can offer any more clarity, and I'll leave it there. Thank you.
Yes. Thanks, Doug. A couple of comments, on the portfolio, obviously, the most important things we've been going we've been very public about. I mentioned Speedway sale is a win-win. I think at the end of the day, 7-Eleven is getting a quality team and a group of assets that enhance their portfolio. At the same time, MPC is monetizing the retail margin by keeping the fuel supply chain, so I think that's an important portfolio step for us.
We've also talked about moving into the renewable space. We can give a little more color on that as well, but we're starting up a facility up in North Dakota. We're continuing plans at Martinez. So, those are the major portfolio discussions that we have going in our public about at this time.
I will tell you that, we continue to look at our portfolio and our goal is to make sure that we have a competitive set of assets that can manage through any type of tough environments, like we're experiencing today. The other thing that hopefully you are going to continue to see on a quarter-to-quarter basis, is our cost cutting efforts and time to change the cost structure of the company.
One of my styles is not to get ahead of ourselves, because we continue to work at it. We're continuing internally to challenge ourselves in different areas. So the best way to stay apprised of that effort is to look at our quarterly results, as we continue to report out each quarter. And I think you'll see a sense of concentration on this area. And you'll be able to really see what we're delivering as far as costs restructuring of the company.
Mike, I appreciate again the full answer, but just for clarification. There's been speculation in the market that you were looking to exit one of your assets on the Gulf Coast. Can you address that directly, and I will leave it there? Thanks.
Yes. Doug, again, there's always a lot of rumors. We're not expecting to exit our assets on the Gulf Coast, we are expecting to evaluate all of our assets. And we're looking at ways that we can reduce our cost structure in the Gulf Coast, on the West Coast and in the midcontinent.
But right now, I think, the important thing for you to think about is, look at the results that we're delivering, try and get a good assessment of where you see the costs, I'll let Don comment on that specifically. And then continue to get updates from us on a quarterly basis, and we'll try and give you as much color as we can as to how that occurred.
One of the tough things in our business is, we did implement a workforce reduction. As I said, in my prepared remarks, that's a very difficult decision for us, but we thought it was necessary for the long-term viability of the Corporation.
Yes. Doug, I might add in Mike's comments, he talked about at the end of the first quarter, when we had our earnings call, we told you all that we were targeting two things around reducing capital and reducing our expenses. And we'd indicated that we were planning to reduce our capital by about $1.4 billion. I think we're trending probably $100 million to $200 million better than that right now. Most of that would be on the R&M side of the business, but we're also seeing some improvement on the MPLX side of the business.
With respect to the - and you'll recall that that $1.4 billion of reductions was split sort of evenly $700 million for MPLX, $700 million for the rest of them MPC.
With respect to the cost reductions that we were targeting $950 million that was $750 million for MPC, excluding MPLX, and $200 million for MPLX. MPLX is doing well against their target and we'll do better than they were targeting. And I think where we've really seen the difference and the improvement and the effort is around our R&M part of the business, particularly the refining part of the business.
So I mentioned that our operating costs have been averaging about $1.27 billion a quarter since we made that announcement, that's about $350 million better than the first quarter of 2019. So if you just extrapolated that sort of $350 million a quarter, that gets you to - and our guidance for the fourth quarter is right in that same range, that would get you to about $1.50 billion against what was a target of $750 million. So, we feel really good about our ability to deliver that cost reduction.
Great. Thanks for the full answers, fellows. I appreciate it.
You're welcome, Doug.
Thank you. Our next question will come from Neil Mehta with Goldman Sachs. Your line is open.
Hey, good morning, guys. And thanks for doing this, this morning. I guess just going back to the Speedway transaction, what are the hurdles and milestones we should be watching in terms of closure of the transaction? It does seem like you guys believe they'll be on track for Q1.
And then as you think about the allocation of the cash to the extent that you will be executing it fill a large buyback program. Just how do you think about doing it efficiently and ensuring that you're able to reduce as much of the share count as possible? So that's more of a tactical question. That's my first question.
Good morning, Neil. So on your first part, I mean, the process is going along as expected. We did receive a second request from the FTC. And we were expecting that, 7-Eleven was expecting that. So the teams are working through the questions that have come out of that review.
Overall, I would say, in general, it just takes time to get through that process. And as a result of that, that's why we've targeted this first quarter timing. We don't see anything at this moment that takes us off of that timing.
Obviously, if we did, we would communicate that. But right now the process is going I'd say as expected and the situation is such that we have not seen any surprises. Our anticipation of what the FTC would ask is very consistent with what 7-Eleven was thinking as well. So overall, I'd say the process is on target. And our expectation is still for a first quarter close. I just forgot - what was the second question, I forget.
It was around the process for returning shares, or share repurchase or a capital return, if you will.
Okay. Yes. And on that, Neil, I mentioned in the prepared remarks that, we've tried to put some clarity on use of proceeds. As Doug mentioned, there was a lot of questions around MPLX buy in. And we wanted to definitively state that our goal is not to buy an MPLX with this cash, but to return to shareholders, as well as get the balance sheet in order.
We're not ones, it's not in our DNA to predict what's the mid cycle going to be. But we thought, we'd give a little bit more clarity by some of our scenario planning, which basically said that we don't see the debt on the balance sheet at MPC going below $5 billion. I mean, hopefully, that gives a little more clarity as we do our scenario planning. We want to have an appropriate amount of leverage at MPC. And so we thought that that was a good disclosure for the market to understand how we're thinking about it.
As far as the return, we're still in that process. We have several more months to go before we reach the closure point. Myself, Don, the Board, the whole team is evaluating with our advisors. And I think you hit it on the head, what's the most efficient way for us to return that capital? And that's exactly what we have been debating.
And as you know, there's a lot of different ways that you can return that capital, there are pros and cons to each of those. And it's our expectation that as we get closer to the close, we'll give a little bit more clarity there. But that's where we are in the process at this point.
No, that's very clear, Mike and Don. And the follow-up is, there's been a lots happening on the West Coast. I just want your perspective on the medium to long-term outlook for the refining market out there, as you weigh a couple of different factors, renewable diesel, changes in efficiency standards, but on the positive side, asset closures. How do you think about the different moving pieces on the West Coast?
Hey, Neil, I'll start and Don can jump in if he likes or Ray. One of the things that I think is occurring with COVID is it's forcing rationalization in this industry, and you don't want a faster pace that would normally be occurring in a downward cycle. So, one of the things that I think we're seeing across the board, certainly for Marathon, we've announced that we are changing the configuration at Martinez, that's our goal at this point to move it to renewable diesel as a result of its cost structure. And we've also put Gallup in a shutdown mode.
So, our view is the tough challenge, whether it's the West Coast, or whether it's global worldwide, the industry is under a lot of stress right now. And the way cyclical industries get out of that stress is rationalization. And our expectation is that COVID is just accelerating that.
Overall, Neil my motto is, we're going to worry about the things we can control and keep an eye on the things that we don't control. The things we do control out on the West Coast specifically is moving expeditiously the change, what we believe was a high cost asset that would not survive in the long-term, processing hydrocarbons and moving that to renewable diesel.
And we have an update on that in our prepared remarks, like I said, or Ray can go into a little bit more. But that's something that we do control. So, we're moving forward with that study. At the same time, we are continuing to evaluate costs back on the West Coast, as well as the rest of the company. Don just gave you, hopefully, a lot more color on what we're doing in that area.
And then again, I'll just reiterate that our style will be such that every quarter we'll try and give you an update on these major initiatives, and tell you how we're progressing with Martinez, tell you how we're progressing with our cost initiative, and any changes to the portfolio we'll be happy to update as time goes by.
Thanks, guys.
You're welcome, Neil.
Our next question will come from Roger Read with Wells Fargo. Your line is open.
Yes, thanks. Good morning, everybody. I guess really to dive into last parts of kind of your answer to Neil's question. As we think about rationalization in an industry that's absolutely struggling here. What thoughts do you have for - I don't know, if it's magnitude, if it's timing, it's a combination of the two of what else the industry may do here? I mean, Marathon is obviously taking a big first step on your own kind of what are the expectations for the industry, as we look into, I guess, Q1 and Q2 of next year for most of the big decisions to occur between now and yearend as well?
Roger, I think, you pointed out and like you said we addressed that a little bit on Neil's question is, at the end of the day, one of the things that the industry is struggling with is, the loss of demand that's occurred and been accelerated as a result of COVID. That demand has recovered quite a bit, but it's not back to the levels that we've seen previous to the virus.
Overall, gasoline and diesel are obviously doing much better than jet fuel. But at the end of the day, this is a commodity business, it's a margin business. And to your very point, the way that the industry gets itself back into a good position is twofold, is one is demand recovers to the point of post-Coronavirus, whenever that occurs, hopefully vaccines are progressing, as we've been reading about. And I'm sure you guys have been reading about, so the expectation for that to occur sooner is great news. And that'll help on the demand side.
And then on the supply side, it's purely a matter of math and marginal assets, we'll have to rationalize. If you look at some of the data, even outside the U.S. that rationalization is occurring and the bottom line is in a new world, wherever that may be, from a demand standpoint, or whatever, marginal assets will not be able to sustain themselves long-term. And the main reason that one of our key short-term initiatives is get our cost structure in a position that can manage these types of dips in commodity markets.
So, one of our important goals is to make sure that we continue to progress, our cost structure changes, and I think you'll continue to see that quarter after quarter as we work on these initiatives, and position ourselves so that we're not the marginal assets. To Neil's point, whether it's West Coast-related or U.S.-related or globally-related, at the end of the day rationalization will occur, is occurring, will continue to occur and hopefully, demand comes back and the industry gets itself back on a better footing.
Okay. Great, thanks. And then a question for you, Don, kind of, I guess we call them somewhat non-operating cash flow questions. But working capital had a big move here in Q3, what are your thoughts as we look into the next quarter?
And then on the income tax receivable side, that was discussed on the last call. I was just curious where that number kind of shakes out? And if there's any change in the expectation of cash recovery, Q2 of next year on that front?
Yes. So let me take sort of your second question first, Roger, in terms of a tax refund. So, we anticipate that we will have a relatively significant NOL this year, and we will have the ability to carry that back into prior years. We have not yet published our 10-Q, but I'll kind of give you sort of a preview in the 10-Q, you'll see in the cash flow statement that there's an increase in tax receivables of about a $1 billion. So right now, that will be the - what we will be having as a receivable sitting on our balance sheet related to our forecast right now of that sort of refund.
Obviously, lots of things can happen between now and the end of the year. If there's a change in administration or we see a change in tax law, between now and the end of the year, there's probably some knobs that we may want to or levers that we may want to manage to make sure that we're optimizing our tax situation in 2020, and in 2021. But right now, I would say that numbers in sort of the $1 billion-ish range that will be on the balance sheet at the end of the third quarter.
The other thing in terms of timing, I think realistically, the timing is probably third quarter, not second quarter. And the reason I say that is, we'll need to get everything closed, our tax returns filed, and then wait for the refund, and I just don't know how fast that will happen. But I think that it'll take some period of time into 2021 to get the tax return completed, all the things that we have to do. So, hopefully that's helpful from that perspective.
And then I think you're right, in terms of the cash flow statement for the quarter, we had a fairly large working capital impact. And we highlighted one piece of that working capital impact that related to accruals that we made with respect to the restructurings that we were doing.
I guess, the other piece that's in the working capital adjustment, so in the $868 million, you'll recall that we had a $256 million charge for LIFO liquidations. So that $256 million charge is showing up as a negative, if you will, in cash flow - cash flow from operations. And then the reduction in the inventory is showing up as a source of cash in the cash flow statement from working capital. So, there's a bit of - our cash flow statement probably is a little bit has some unusual items in it this quarter because of some of the charges that we've recorded.
As we think forward, I mean, we were pleased with where we ended up with cash, as the quarter end was at $716 million. And if you think about sort of the change from the second quarter about $300 million change, and $200 million of that change was really because we paid down some debt at MPLX. So I think a pretty strong cash quarter for us, given the situation and the environment in which we're operating.
Definitely. Thanks. Just to clarify your comment on the tax receivable. The $1 billion change, was it like year-to-date? Or is that the Q2 to Q3 we should think about? And I appreciate the Q will come out later, but I'd just…
That's year-to-date, Roger. So that will be in the cash flow statement. The cash flow statement has not done for a quarter, the cash flow statement has done for a year-to-date period. So that $1 billion is in the year-to-date number.
Okay, great. Thank you.
Our next question will come from Manav Gupta with Credit Suisse. Your line is open.
Hey, guys. Congrats on getting the Dickinson Refinery converted. I'm just trying to understand, can you help us understand, when you create the product in North Dakota, the logistics and the marketing involved and trying to move it to the end market where you can get the highest value, which in this case right now would be California. At some point, we hope Canada puts a similar program so the market moves closer to you. But right now, how would you get your 12,000 barrels a day from North Dakota all the way to California?
Yes, Manav, this is Brian Partee. Good morning. Thanks for the question. So we've got the distribution channel all set up. We're working through the production and startup. It is a complex distribution network as you'd expect, and it's new too. So we've got transit time, so we'll be loading out the [ph] rail. So a lot of flexibility as we hit the rail in North Dakota, and then we'll be moving it to the Pacific Northwest, where we'll be able to get to the water from there.
So, both from rail domestically, as well as into Canada, we have a lot of flexibility to move, and then we'll be on the water out in the West Coast to hit as you noted, California, and frankly, wherever else we see the demand.
From a marketing standpoint, as is typical, we've got a full portfolio to optimize how we sell into the market, both bulk sales. We've got committed contract sales as well as open rack sales. So we're excited to see the production come on. We're very optimistic placing into the market has not been a problem. So we've got things lined up and ready to go.
In startup, though, we think probably mid to late December, so we've got oil in. Cash in is really important, obviously on the other end of thing. So we'll probably be mid to late December on that, and then really set up well for Q1 of 2021 to be rolling with the full production and full distribution.
Thanks. And I have a quick follow-up. You filed your permit for the Martinez conversion, I think October 1. You have listed various feedstocks in there. Can you help us understand the way the breakup would work between lower carbon intensity feedstocks versus higher carbon intensity feedstocks? And how do you plan to get the lower carbon intensity feedstocks to the Martinez Refinery? Thank you.
Hey, Manav, this is Ray Brooks. Thanks for the question. Our first goal has always been to complete the construction of the facility started up, and then optimize the refinery. And when I say optimize, optimize the carbon intensity of the operation, and then also the feedstock slate.
And so I'm really happy to report that the plant completed construction about three weeks early, and is currently in startup as Mike said to earlier.
I'm also happy that we were able to go from shovel to start up in under two years. Doing this while navigating through two North Dakota winters and a pandemic, and I just want to state that I'm really, really proud of the team for everything that they've accomplished.
I was just out at the site, and it's really impressive facility, you might think that a 12,000 barrel day plant is small, but it's now the second largest renewable diesel plant in the United States. And getting to your question on the feed slate, the initial feed slate is 10,000 barrels a day of soybean oil, 2,000 barrels a day of corn oil. And we'll work diligently to make sure that we optimize that within any capabilities that we have.
But I just want to say that we're really excited about the Dickinson plant being an early mover in the renewable diesel space.
Sorry, my question was more on the Martinez feedstock side. But that wasn't clear. How do you plan to run Martinez as far as lower CI versus higher CI feedstocks are concerned?
Pivoting to Martinez and I'll just talk a little bit about Martinez to give you a little bit more information you're looking for. But we're excited about Martinez from the standpoint that we have a facility with three hydro processing units, two hydrogen plants and an extensive infrastructure that gives us a very capital efficient project. And it gives us a capital efficient project from the standpoint that we will be able to run a multitude of feedstocks, whether it's soy, whether it's corn, whether it's tallow, whether it's use cooking oil. We are designing that flexibility into the program, into the project. And we're working diligently right now talking to feedstock suppliers as far as potential partners with us from the feedstock standpoint on that.
The Martinez project, a little bit farther out there, while Dickinson is currently in operation. Martinez, we're working hard to get to that point. But now what we've done in the last quarter, we've submitted applications for our air permit. We've also submitted the initial study for the environmental impact report. We've completed our feasibility engineering and moved into detailed engineering. And we've also met with key regulatory, governmental and NGO stakeholders. So, we're continuing to move that along. And then part of moving that along will also be on the feedstock supply.
So, we're not ready to tell you exactly what we're going to do on that, just tell you that we're working on it.
No, this is very helpful. Thank you so much, guys.
Hey, Manav, this is Don. One other just sort of point to raise, you'd asked about sort of the cost to move Dickinson product to the West Coast. So, you probably saw in our outlook information that distribution costs went up slightly. And that sort of slight change in distribution costs is reflective of the distribution costs related to getting the Dickinson product to the West Coast.
Thank you. Thank you, guys.
You're welcome, Manav.
Thank you. Our next question will come from Benny Wong with Morgan Stanley. Your line is open.
Hey, good morning, guys. Thanks for taking my question. My first one is really around how you think about the midstream business? I think, there's expectations for lower E&P and upstream activity going forward, potentially more moderated volumes domestically. How do you guys see the environment changing? And how does that translate into how you, see an approach that part of the business?
Hey, Benny, this is Mike. So, couple things. Number one, I'll say prior to COVID, the number one question we were getting asked was, the gas portion of MPLX in the midstream business. And since COVID, I mean, obviously, a lot of things have changed. And we're looking at a gas strip that has a three in front of it now compared to what was some pretty tough natural gas prices.
So, our view longer-term, and we've kind of stated this, so I'm going to just repeat myself a little bit is, MPLX is an important part of MPCs structure. We really rely on that stable dividend that comes out or distribution that comes out of MPLX. It's an important part of our structure.
At the same time, we do believe the midstream business is going to continue to grow. To you point, albeit maybe at a different pace, if the E&P business and goes to a little slower mode. But being a natural gas we think is an important thing right now, as the market continues to evolve in the energy landscape, natural gas in our view is going to continue to be an important part of growth.
At the same time, as I mentioned earlier, we do believe we'll get back to normal once we get through the virus and have a vaccine and get demand back in our LMS business as well. We have a couple projects in play right now that will bring additional earnings. So, the forward growth structure there may be a little slower than originally anticipated, as a result of the E&P change. But at the end of the day, we think it's going to be a very strong contributor and continue to have growth that will continue to increase earnings, as far as even at MPLX, which continues to add value for both MPLX and MPC.
At the end of the day, I'd tell you one of the things that I think has been misunderstood a little bit is, the stability of the earnings at MPLX. And hopefully, this quarter it gets to show how much we think how strong that earnings profile is, as well as it being supplemented by cost reductions that we've talked about as well.
Thanks, Mike. That's very clear and helpful. My follow-up might be for Don, but obviously, could be open for anybody. I appreciate the information around the recent changes in reporting. Just going forward, just curious how you think about how you can present the company, as your renewable diesel business grows it doesn't make sense at some point breaking that out, like some of your peers?
And for your refining, marketing disclosures, could some of the marketing and direct dealer business eventually broken out so your refining business can be more comparable to peers? So, essentially, just curious how you think about how you can present your performance or your business and make it easier for investors to benchmark you guys? Thanks.
Benny, this is Don. Thanks for that question. So, I think one of the things that we've been very focused on over let's say the last four quarters or so, with feedback from you all and from our investors, is that there was sort of a request or a suggestion that will be helpful, if we stabilized the way we were reporting the information to you all, so that it was consistent quarter-to-quarter without a lot of changes, so that you could get to a point where your models could get tightened up refined, whatever the right terminology is. So, I think we've gotten to that point.
This quarter was obviously a quarter with lots of moving pieces, including the discontinued operations. And we didn't think that it was an appropriate quarter to introduce a whole bunch of other changes. Mike's talked about how we're restructuring the company, how we're optimizing it, there's a lot of changes that are still occurring. And I guess it would be our view, my view that the best time to roll out sort of a new way of thinking about how the company presents its information and operates is when we get through some of that transition, so that we can do at one time. We can recast all the prior periods. We can provide you all the data that you need to update your models timely, and avoid any sort of confusion or situations where the information isn't as clear.
So yes, we are thinking about how the company should look and how we should be presenting that information. This just wasn't the right time to do that. But we will be looking for the right time to think about how we present that information. And we do welcome feedback from you all and from the investors on what's the right way to or what's helpful in terms of information that we can provide that allows you to understand our business better.
Great. Thanks, Don.
Thank you. Our next question will come from Paul Cheng with Scotiabank. Your line is open.
Thank you. Good morning, everyone. Couple of questions. The first one is probably for Don. In the third quarter, you have very good cost performance and is actually much better than your guidance. And you actually on the absolute dollar term in the refining, and you have a higher throughput. So Don, the question is, is that being just conservative in your guidance or that the performance has ended up better than what you think?
And if that's the case, what's driving that better performance? Is it some one-off, or just [indiscernible]? And also that in California, you're $10.50 per unit on the operating costs. If those still have the personnel cost on McKinsey [ph] or that those 0is already out? That's the first question.
The second question is for Mike, for the 30% GHG emission intensity reduction by 2030, is that going to be sufficient? A lot of your larger customers, I think they are targeting by 2035 going to be net carbon zero at least in group one and two. So, is that something that you think is applicable to you? And if not, why not? Thank you.
So Paul, let me try to, I think dissect the question or questions that you asked around our performance. So, the first one was, our operating costs have - the team has been performing very well, I mean, very much of a focus area for us. And we're very pleased with the progress that we're making there. So, I think that on a per barrel basis, we probably not only were the absolute costs, lower than we were projecting them to be. But our throughputs were slightly higher.
And you have to remember, that guidance was provided at the end of the second quarter, and there was still a lot of uncertainty around what was happening with COVID and what the numbers would be.
We've I think, stabilized a little bit in terms of the utilization rates. And so our guidance that we're giving for the fourth quarter, is pretty consistent with the actual that we incurred in the third quarter. And we have a lot of confidence sort of in providing that information.
I think you asked about the West Coast and the costs on the West Coast. So, in our operating costs for the West Coast, there are still some continuing costs related to the Martinez Refinery and the idling there. And so, those are obviously putting sort of pressure, if you will, on the per barrel, and there's no equivalent operations at Martinez. So that would have some upward pressure on the per barrel cost.
And then I think you were interested in maybe capture rate and sort of how the capture rate was significantly higher than we've historically guided to. So, I think most people model to a 90% capture rate. I think one of the things that happens is when your margins are thin, small variations can cause the capture rate to either be very high or very low. So this quarter, a couple of the factors that impacted the capture rate, I think, for purposes of modeling going forward, I would still be focused on in a normal world, a 90% capture rate, I would then think that I would want to add something for direct dealers, so let's just say, $100 million a quarter or in that range. And then the other things, I think, move about sort of quarter-to-quarter.
So, hopefully, that's helpful. But I think part of what made the capture rate look as strong as it was this quarter, was the margins were very thin.
Don. Can I just follow-up on the West Coast? What will be a reasonable target on your OpEx, or maybe this is for Ray, say in 2021 or 2022 once that you're restructuring and everything is in?
Yes. I think it's a little premature. We want to give that guidance. We know everybody wants that guidance, Paul, we gave you fourth quarter of what we expect the West Coast to do. But we're going to start tracking and providing color around what I would say is the costs to run or that the incremental costs at Martinez, that we're incurring on a quarterly basis, so that you can see that.
And obviously, as we trend to a renewable diesel facility, there's going to be some period of time where we're incurring costs, but we're not incurring or not delivering any sort of throughput through that refinery. But we will be doing that kind of guidance and providing that outlook information sort of on a quarterly basis as we move into 2021.
And, Paul, this is Mike. On your question on the greenhouse gas emissions intensity target, and whether it's enough, I think a couple points I wanted to point out. First off, we think it's more important to have kind of a mid-range goal instead of just a 2050 goal. But it's important to note that the background for our goal there is, so our goal of 30% reduction by 2030 from 2014 levels represents about a 2% reduction per year in carbon intensity, which is the slope necessary to meet the desired reductions, or aspirations of the Paris agreement by 2050.
So, in order to kind of stay on track to that, we set a goal of 2030 that we believe kind of aligns with that longer-term 2040 to 2050 goal. And as time progresses, we will amend the target on a periodic basis to ensure we remain in line with those longer-term aspirations. But we thought it was more important to kind of show the slope and put a target out there that was more near in, so it was more achievable rather than so far out, that it doesn't - it gets a gets a little bit discounted.
The other thing I do want to mention, Paul, aside from the greenhouse gas emissions intensity, I do want to reiterate, something we said in our prepared remarks is that we have stated, 2025 goal to reduce methane emissions intensity. And I think that's a significant ESG move on our part, as well as setting a goal on freshwater withdrawal intensity. Those are two other important areas, where we believe that we can make progress in this area and continue our commitment in the ESG area.
Thank you.
You're welcome.
Thank you. Our next question comes from Prashant Rao with Citi Group. Your line is open.
Hi, good morning, thanks for taking the questions. My first one is really on the operating costs continued progress there, and now that you're talking about exceeding the $950 million in OpEx reduction savings. So, just wanted to circle back to that to get a little bit of clarity. How should we think about this kind of on a carry forward basis?
I know, Mike, we had discussed in the spring, sort of the some of this is volume related and some of this is sort of just flat cost reduction that carries forward into future years. So, I just wanted to get an update on how we should think about flat and the sort of $950 million plus now?
And then also the workforce reduction initiative, that restructuring, I wanted to get a sense of conceptually, is that kind of apart from the numbers that we were targeting? I know you were targeting earlier in the year. It sounds like it was but I just wanted to sort of confirm that, that sort of that really is the gap that the excess over the $900 million plus that we were talking about maybe six months ago? So, that's my first question and the follow-up on commercial ops. Thanks.
Yes, Prashant. This is Don. So, with respect to the guidance that we gave at the end of the first quarter, the $950 million, that at the time did not envision, that we would - I guess we'd not embarked upon the workforce reduction plan that we just initiated and implemented. So, some of those costs would have been variable costs from operating in an environment where we anticipated that utilization rates would be lower than historical.
What I can say and one of the things that we have been able to deliver, I mentioned on the refining side, the whole reduction for R&M or onsite for MPC, excluding MPLX was $750 million for the year 2020. And based upon what we've achieved and what we're guiding, we're probably closer to $1.50 billion or maybe slightly higher than that on an MPC, excluding MPLX basis.
So, what that means is that, yes, there's still some variable costs that would have been, might go up as we ramp up operations into 2021. But a lot of the change that we've seen so far is around fixed costs. And so that gives us great confidence going forward.
With respect to the workforce reduction, so that was more than 2,000 of our employees were impacted by those actions. Some of those were focused at the Martinez Refinery and the Gallup refinery, but a lot of those were also focused across the rest of the operation.
So, you should start seeing some of those costs being embedded in our future projections. And I think, several of those costs, you'll see when we give our first quarter 2021 guidance, you'll be able to see, I think, a meaningful piece of that in the guidance that we give in 2021, but we've not moved that far forward yet.
Okay. That's very helpful color. Thanks, Don. And then just a quick follow-up on to commercial operations and the improvement there. And it's hard to see in an environment like this and the numbers, so I was wondering if maybe Mike or Don you could talk about this for qualitatively, perhaps or point us to where you're seeing that improvement on a Q-on-Q basis, it looks like in your results especially that are held up, as well as not better than some of your peers?
So just curious if you could talk about maybe some of the initiatives there that might be helping to bully those results in this tough macro, whether it be on the crude purchasing and logistics side or on the product placement side? And I'll leave it there. Thanks.
Hey, Prashant. This is Mike. I'll turn it over to Brian and Rick to give a comment. Although, I just want to remind you that in the commercial area, that's probably the toughest area for us to give disclosures, just because of the competitive nature to it, but I'll let the guys give a comment if they like.
Yes, thanks Mike. Prashant, good morning. This is Brian Partee. So great question, and I appreciate the recognition that we're in kind of unique environment here to optimize commercially. But just a couple of high-level comments and things to think about where we're focused.
I mean, the first one is really around alignment, and that alignment being with people. So we did a pretty heavy restructuring, I have responsibility for all the clean products value chain. So aligning our marketing folks, our supply folks and our training folks into one unified team that are focused geographically, we think is a very positive step, will allow us to operate more efficiently and effectively going forward. And frankly, with the right people in the right space.
The second part of focus really here in the short-term is around inventory levels. So we're operating in a different demand environment. So two things we're looking at there. One is, inventory levels and opportunities around inventory reductions, and then related distribution costs. So as Mike stated we're really focused on things that we can control. And those are two things we feel in the short to medium-term are really under our control.
And the last part I'll mention before handing it back over to Rick is on the export side. So exports, we believe are foundational and fundamental to helping the business in North America clear, and we're really focused there, developing a broader long-term strategy around how to hit markets outside of the U.S., and utilize our full both production capacity as well as our logistical capacity, primarily along the Gulf Coast, but also on the West Coast as well.
Yes, Prashant. This is Rick, thank you for the question. Also, on the crude side from a distribution standpoint, we're certainly going towards more of a just-in time asset model, reducing our distribution costs, that's becoming readily apparent in our results.
And in addition to that, when you look at crude avails, we've significantly shifted to light suite. You'll see that in our run rate here in the third quarter, so the adaptability the optionality the switch significantly to light suit runs throughout our operating area has been significant.
And then as we look forward, we're looking at medium sours. We've come off a very, very disruptive storm season. And we're starting to see some signs of medium sours getting back to normal. And then we're seeing a little bit of a glimmer of hope from the Canadian side, when you look at the mandate that's been lifted. We're entering the diluent blending season, which will swell the pool. So we're optimistic on a few of the alternative grades, especially that we run in our midcontinent system.
Thank you.
Operator, I think we have time for one last question.
Excellent. Thank you. Our last question then will come from Phil Gresh with JP Morgan. Your line is open.
Hey, good morning. My first question would be just around capital spending, obviously, on track or doing well on the reductions there. But as you look at, say, 2021, or more of a longer-term view on capital spending, curious how you think about that both for total company or just some kind of breakdown amongst the different business lines?
Yes, Phil, I mean, as I mentioned, and Mike mentioned in the early comments, we're very, very focused on managing capital right now. As it relates to 2021, we've not gotten to the position where we're providing that guidance. We'll get our budget approved later in the year and we'll provide that guidance when we get to our yearend earnings call.
But what I can say is that, particularly from the R&M side of the business, we are investing or continuing the investment in projects that are ongoing or that we're completing. And we are very focused on eliminating, I'll call it sort of discretionary spending unless it is in sort of promoting our cost reduction initiatives.
So, there was a time probably where our growth spending on the R&M side of the world was more about, I'll call it molecule management, and trying to take sort of, take what we're producing and upgrade what we're producing. I think right now, given the environment we're in, a lot of what we're focused on, on the discretionary spending is on allowing us to be able to manage in a very competitive, low margin environment.
So, with those parameters, I think that's what we're doing on the MPC side. On the MPLX side, I mean, the same kind of discipline there. Mike talked about the fact that we feel very good about being positioned in a place where the cash flow from MPLX will cover not only distributions and CapEx, but will have availability then to have that excess cash to deploy to repurchasing units.
So very, very focused. Discretionary capital needs to meet a very, very high hurdle, and it needs to be really focused on the initiatives that, Mike has laid out, which is, improving our competitive performance, or reducing our cost structure.
Phil, it's Mike. The only the only thing I want to add to Don's comments is hopefully you've seen over the last couple quarters, the discipline that we're putting in those areas. And then I just ask you to keep an eye on the next couple quarters as we continue to work through our initiatives, that you should be able to see that we are putting a high hurdle as Don mentioned, on ourselves and putting a strict discipline on ourselves in both the OpEx and the CapEx areas.
Thank you. Go ahead.
Oh, perfect, Sheela.
Thank you. That is all the time that we have for questions today. I will now turn the call back over to Kristina Kazarian for closing remarks.
Thank you for your interest in Marathon Petroleum Corporation. Should you have additional questions or clarifications on topics discussed this morning, our team will be available to take your call. And with that, thanks for joining us.
That does conclude today's conference. Thank you for participating. You may disconnect at this time.