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

Welcome to Marathon Petroleum Corporation's first quarter 2022 earnings conference call. The slides that accompany this call can be found on the 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 SEC filings. With that I'll turn the call over to Mike.

Thanks Kristina. Before we get into our results for the quarter, we wanted to provide a brief update on the macro environment. Year-over-year demand trends have been for the most part positive and the market seems to have reached a post-COVID point of stability. Distillate remains stable, jet continues to recover and gasoline has been more resilient than we would have expected given normal seasonality and recent geopolitical events. The biggest factor outside of our control is changes in global supply and demand. At the end of 2021, Global light product inventories were already tight. Sanctions and boycotts following the Russian invasion of Ukraine have increased supply uncertainties. Product margins have risen to cover the higher cost structure of marginal supply particularly in European regions where there's a high reliance on Russian natural gas. We expect continued volatility in 2022 with an advantage for safe, reliable and low-cost operators. We are focused on optimizing our maintenance schedules to maximize uptime and allow us to do what we can to produce volumes to meet the market demand. As we do this, 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. With this in mind, we anticipate the US refining system running at higher utilization rates in the coming quarters to meet rising demand. MPC's first quarter results reflect the continued recovery for our products and services, which supported higher margins and higher throughput across regions. We delivered adjusted EBITDA of $2.6 billion. We repurchased $2.8 billion in shares in the quarter. And since our last earnings call we have repurchased $2.5 billion of shares. Through today we've completed 80% of our initial $10 billion capital return commitment. I would also like to highlight…

Thanks, Mike. Slide 6 provides a summary of our first quarter financial results. This morning, we reported earnings per share of $1.49. Adjusted EBITDA was $2.6 billion for the quarter and cash flow from operations, excluding favorable working capital changes was $1.9 billion, which is roughly in line with the prior quarter. During the quarter, we returned $330 million to shareholders through dividend payments and repurchased approximately $2.8 billion in shares, which takes us to $2.5 billion repurchased, since our last earnings call. Slide 7 shows the reconciliation between net income and adjusted EBITDA, as well as the sequential change in adjusted EBITDA from fourth quarter 2021 to the first quarter of 2022. Adjusted EBITDA was lower sequentially, driven primarily by $175 million decrease from refining and marketing. The tax rate for the quarter was 19%, which reflects the benefits from the public portion of MPLX net income which is not taxable to MPC. Moving to our segment results. Slide 8 provides an overview of our Refining & Marketing segment. The business reported strong first quarter earnings with adjusted EBITDA of approximately $1.4 billion. Utilization was 91% for the quarter. The sequential decline was driven by lower production, which was primarily the result of unplanned downtime in the US Gulf Coast, where we experienced two unplanned outages. In the beginning of February, the Galveston Bay refinery experienced a citywide power loss which resulted in a complete plant outage. Later in the month, as we were bringing our Garyville refinery back to service, following turnaround activities, a fire occurred near our hydrocracker unit. The unit was repaired and returned to service after about three weeks. Both of these events resulted in approximately $200 million of lost profit opportunity. Margin headwinds in the quarter were a result of the lower capture of…

Thanks, Maryann. 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. Operator, we'll now open the call.

Thank you. And we will now begin the question-and-answer session. Our first question today is from Neil Mehta from Goldman Sachs.

Good morning, team. The first question is around utilization. The 2Q guide at around 95% is very good. And so I was just curious if you made any adjustments to the system? And then how are you just thinking about optimizing whether its maintenance or your runs to make sure that you capture the strong current spot commodity environment?

It's a good question, Neil. Ray, do you want to take that?

Sure. Thanks for the question, Neil. As we've said before, our 2022 turnaround plan was back-end loaded. So you shouldn't look at the first two quarters of the year and extrapolate the spend for the later quarters. But with current demands, we are really seeking to maximize our refining system as indicated by the second quarter guidance. What this really means Neil is that we've looked at some fixed bed catalyst changes that we had planned for the second quarter. We've determined we have a little bit as far as catalyst activity. So we've deferred that out later in the year. So our plan right now is to run really, really full -- run really hard during gasoline season this year.

Very clear. And then it's amazing how far we've come in 1.5 years, isn't it Mike? And I look at your dividend yield now, which is call it 2.5%. And by virtue of the stock having done well, it's compressed to something well below the XLE. How do you think about when it makes sense to have the conversation about raising the fixed dividend again? And do you think recognizing it's at the discretion of the Board.

Yes. Thanks Neil. It's another good question and we talk about it a lot. I'll let Mary comment on it.

Hey Neil thanks. Yes. So, hopefully, you saw as we shared our capital allocation framework, we remain very committed to the dividend. As Mike just mentioned to you it's getting a tremendous amount of attention from the management team. It's on our conversations regularly with our Board. We recognize where the yield is. And certainly as we look at the strength particularly in the back half of the year, we'll expect to come back to you here in the very near future with our plans particularly as we are getting through our first round of share repurchase. So, you should expect us to be back to you here shortly on that.

Thank you. Our next question is from Doug Leggate from Bank of America.

Good morning everyone. So, I don't know if this is for Mary or for Ray, but I think it's really a question around momentum coming into the second quarter. You guys had a lot of downtime as you pointed out. So, I'm trying to get a feel for what the underlying trend has been in this environment? And I guess specifically whether you are continuing to maximize distillate in your system or whether you are given the current relative spreads whether you will in fire pivot more towards gasoline going through the summer?

Sure Doug. Let me take your question as far as distillate production. The answer is absolutely yes. We're working right now to maximize distillate production across our system. Just to give you a little more color on that that's something that we look at daily make sure that we're maximizing the total recoverable distillate, the endpoint and maximizing the front end of the distillate. And then the real thing is just looking at our distillate hydrotreater across the system are full. And so we're doing that across our system. It depends on the toolkit from refinery-to-refinery as far as what that percentage is Gary, but would be the highest since it has a hydrocracker distal hydrotreaters, but whether we have on distillate hydrotreater or three, we're working to maximize across the system.

Sorry Doug I wasn't clear. So, maybe what I was -- thank you for that ray. Maryann what I was really trying to get a handle on was if you could quantify in some way that lost opportunity costs from the first quarter? And what that momentum looks like as you go into the second quarter with the system back up possible?

Yes, certainly Doug. So, for both the Galveston Bay unplanned outage due to the power issue and then again as we talked about Garyville, we've said it's roughly about $200 million in lost profit opportunity, right? ,So that we would have shared with you through the market indicator. I think the other issue there with both of those refineries being down is the fact that as you heard Ray talk about our ability to maximize. We lost the opportunity to increase yield there which obviously, as they come back online and have in the second quarter given the momentum assuming the macro holds as we expected will and cracks, we'll be able to recover that in the second quarter also.

Thank you. My follow-up is actually also a Gulf Coast question. Folks, if you don't mind, I'm going to try and explain what I'm looking for here. It seems that Colonial is being underallocated thus the tightness in the Northeast. And from what we can tell, it doesn't seem that that's going to change much given the call on exports for distillate. So, I'm curious if you could share how you're running your system as it relates to potential Colonial allocations versus the coal and exports, because it seems to us the Northeast is going to remain fairly tighter.

Brian, do you want to take that one?

Yeah, sure Mike. Yeah. So, great question Doug. So, yeah, we definitely see the same dynamic that you're seeing. One of the factors that we look at in shipping barrels all the way up to New York Harbor is the market structure as well. So we've had a really, really strong run up here in the prompt on the front end of the cycle. So that's kind of the bid-ask dynamic ongoing right now with buyers and sellers is the sustainability of that. It certainly is starting to feel a lot more sticky as we look at imports coming into the New York Harbor starting to back off. But in the Gulf Coast, we also have really good placement opportunities not only our book but just across the overall complex, is there's more barrels being demanded in Central and South America. So, I would categorize it Doug is we're in a very, very acute pinch point here in the short-term over those market dynamics. But I think you're reading the tea leaves right as you look forward and think about less Russian exports and European complex starting to find a way to rebalance, the New York Harbor market is one that we expect to be impacted more so than other markets. And as you think about the connectivity via pipe in the Gulf Coast, we do look at that as a forward opportunity more structural and longer term.

Thanks guys. Appreciate it.

Thank you. Our next question is from Roger Read from Wells Fargo.

Yeah. Thank you. Good morning.

Good morning, Roger.

I guess first, Maryann, I'd like to come back to your comment about potentially hitting into the next tranche of the share repurchase during Q2 full disclosure. We've been modeling a little bit of a moderation in share buybacks. It doesn't sound like there's any reason for us to actually go forward with that. So, I was just curious how you're thinking about the cash flow coming in and the process of transitioning that into the share repo.

Yeah. Thanks for the question, Roger. So, no, you're correct. As I shared on the -- in my prepared remarks, if you look at the pace that we've been buying back, we would expect in the second quarter that we would begin to use that $5 billion authorization. In less than 12 months, we started our program in May of 2021. We've repurchased 80% or roughly $8 billion of our initial $10 billion commitment. If we look at that result through the end of the third quarter -- excuse me, the end of the first quarter. So we end at 331, we repurchased about 113 million shares at an average price of just less than $67 a share. We use part of our process. We use a mechanism that allows us to buy back through blackout periods. And during our quarterly buybacks, there's things that we will evaluate market conditions average daily trading volumes to be exact. So, we don't think anything that you maybe seeing in this quarter is indicative of a lack of commitment here by any means. And certainly, you look at the cash flow for the last several quarters strong and you look at the cash balance that I shared is you about $10.6 billion. So, hopefully that addresses your question.

Yeah. It does. It helps. Thank you. I'm going to ask, kind of the opposite end of the Gulf Coast question on exports. West Coast, obviously, crack has been pretty exceptional. There aren't a lot of places that we typically see products show up on the West Coast from, except for Gulf Coast and occasionally some shipments from Europe. I was curious, as you look across the Pacific, is there anything you're seeing there? We've got lockdowns in some of those countries, so presumably some excess supply. But is there any of that that seems to be coming across the Pacific or any signs that any of that wants to try to come across given the arm?

Brian, do you want to take that?

Yes. Sure, Mike. Yes. So, Roger, in the prompt, no not really. We're not seeing any fundamental shifts on the West Coast or the Pacific Basin. We, of course, continue to watch very closely at the lockdowns happening over in Asia. But they seem to be moving through a bit quicker than expected. I mean, we've all learned to deal with COVID a little bit differently than we did two years ago. So we're not seeing anything in the prompt. But I might maybe just back up and give you some perspective on exports more broadly, I think, it might be helpful, especially on the front end of the diesel strength that we see across the market. I mean, one of the key drivers obviously is recovery in jet demand. We're seeing that domestically and also around the world. The other thing that doesn't get a lot of discussion in the prompt is. Recall back in 2020, we were moving into IMO and different marine fueling. And that did take place. So there's a new call on demand on the distillate pool from MGO that we believe is also pulling on the distillate pool. But from an overall perspective, as we look at our export program, predominantly on the Gulf Coast, we do have some limited exports out of the West Coast. As we exited the first quarter, we were about 200,000 barrels a day of exports from the Gulf Coast, primarily into Latin and South America. But we did move barrels into Europe and we see that as an increasing opportunity for us going forward. And as we look at the forward book here into 2Q, we're moving from a 200,000 barrel a day-ish program to more in the 250,000 to 300,000 barrels a day. So we are seeing continued strength and opportunity there. We certainly have the dock capacity to be able to manage that increase and we're looking forward to that optimization as we roll into 2Q and beyond.

Appreciate it. Thank you.

Thank you. Our next question is from Manav Gupta from Credit Suisse.

Good morning, guys and very clear from you Mike. My question here is, you did not need a partner at your Martinez facility. You obviously have a lot of cash. So -- but you did seek a partner and help us understand why you picked Neste. Why do you think they're your right partner? And how does this JV develop forward with Neste?

Yes, Manav, this is Mike. Thanks for the comment. When we started this project out, we were very open that there were four parameters that we felt would make a very strong project; competitive CapEx, competitive OpEx, strong logistics, and then ultimately feedstocks. And for a while there we had disclosed where we stood on CapEx and OpEx and logistics, but we had not reached conclusion with Neste. So part of our thinking all along has been, over the long term, not just in the short term that we believed that the partnership between us will hit both of our strengths. They bring a lot to the table with respect to feedstocks. Obviously, we're in that market as well, but we think there's a synergistic effect from their participation. And then, at the same time, as you think about it going forward, we feel really good about capital discipline being an important part of our portfolio and having them come in at the numbers that we've already publicly disclosed was a real good win for us and a real good win for Neste as well. So, we're excited about it, Manav. I will tell you that we're talking about a lot of other stuff together. I think the two parties together can create more value together and we're going to continue to try and see if we can do that.

Perfect. My quick follow-up here is, you guys mentioned some of the reasons Gulf Coast was a little weaker. Your Mid-Con assets are very strong and that capture was also slightly weaker. Help us understand what happened during the quarter? And what I'm really trying to get to is, if you look at the cracks and we look at your historical capture rate and we go back to that in 2Q, you could have a massive 2Q Mid-Con earnings. So help us understand some of the reasons 1Q was a little weaker on capture in Mid-Con region. Thank you, so much.

Manav, it's Maryanne. So, maybe just sort of overall, when we think about the capture and then I'll come back to Mid-Con just in general. A couple of elements that really impacted our quarter and that largely our light product and secondary product margins narrowed during the quarter. That's typical as you know in a rising price environment. And then obviously, secondary product margins certainly in this price environment as well. We also have some inventory build in the quarter. And then of course, we use certain derivatives that -- to manage that price volatility. So, there are a few things really that impacted the quarter. Mid-Con was a bit stronger than it was in the first quarter than -- excuse me the second quarter. But that's really a key driver as we look at the capture rate overall for the quarter.

Manav, it's Mike. I'm just going to add, everybody puts a lot of emphasis on capture and everybody knows I'm not the biggest fan of that metric for a lot of the reasons that -- you start to see the volatility that happens in the quarter can down sit around a little bit. And often, we're asked the question, should we plan on about 100% capture. And one of the things I think people should keep in mind is, we're in a different environment than I'll call it normal. If crude was $70 or so somewhere in that range, the impact of secondary products would be a lot different than it crude is at $100, $110 et cetera. So, I think you've got to keep that in mind, when you look at that particular metric. Those factors come into play. Brian mentioned earlier backwardation to Doug's question on the Colonial pipeline, I mean we're seeing some very unusual times, where we're in the -- at the start of the gasoline season, yet we're seeing extreme volatility with distillate cracks where they are, backwardation where it is on the distillate side of the equation. So, all those things come into play and hit that metric. So, I'm always leery, it bounces to one number, but there's a lot of inputs to come in and out to make that number what it is.

Thank you. Our next question is from Prashant Rao from Citigroup.

Hi. Thanks for taking the question. My first one. I wanted to ask on the crude side. Given all the shifts going on and as Russian product moves out of the market, I was curious about how the changes in feedstock availability might affect product deals. And asking that question really in the context of previous questions that have been asked already on this call, about capturing strong distillate crack. But also, when you think going forward, gasoline demand picking up into the summer driving season and how you balance max distillate versus max gasoline production, the impact that any feedstock availability changes could have on that? And maybe how that plays out or through the rest of the year if you kind of play the tape forward?

Rick, do you want to start with the crude outlook?

Sure Mike. Yeah, Prashant. So it's an excellent question. There's a lot of moving parts in the world right now, especially around feedstocks. From our perspective though when you look at our PADD II, our PADD II and PADD V presence and the avails that we have at our fingertips, we uniquely have not seen that big of a shift in the avails that would directly affect yields, meaning we're able to get whatever Brian Partee and the marketing team are ordering up. So I'll state that as one. And two other items probably to call out related to feedstocks, Prashant is as you know we are a small. We were a small buyer of Russian crudes. And unless some of our peers, we feel that's a competitive advantage especially in this environment. So with our small presence in that Russian crude category, we have seen very, very little impact. And then lastly just to call out to the SPR release because that is incremental to the feedstock market. A couple of things on that front, we applaud the US government being proactive and for really taking quick action in a meaningful way for a prolonged period of time. We believe that will help not only the US consumer but us as buyers of feedstock. And MPC stand to be in a good position from the releases as we have two of our largest assets in Garyville and GBR really in the backyard of the SPR caverns. So I hope that gives you some color on the feedstocks front. I'll toss it over to Brian for any comments on yields and products.

Thanks Rick. Yeah. So Prashant just a couple of comments as we think about the gas and distillate dynamic playing out currently. So we're, obviously, at extreme levels. But at the end of the day this is very much a normal operations environment for us as we think about value chain optimization. So whether there's a penny or a dollar differential between gas distillate yet any of the other core products we're constantly optimizing across our plan as we look out forward as we look within the month, within the week, within the day. And ultimately we're running the system to meet the demands of the market. Clearly in this environment the market is sending us a really strong signal for more distillate. Ray mentioned earlier about our distillate hydrotreater running them in max mode. That's to capture the current market structure. We do expect to see a seasonal call on demand as we look forward to the summer driving season as we would typically expect. It's not really present in the market now if you look at the market structure because we're so strong here in the prompt on distillate. But we do expect that to manifest here as we roll into the summer months. But we're constantly optimizing and I just wanted to make that point clear that it feels very normal for our teams to be doing what they're doing to optimize to meet the market demand.

Excellent. Thank you both for your answer. A quick follow-up probably for Maryanne. On working cap, overall positive in the quarter. It's pretty volatile. And I think most of us CMG inventories would be a bit of a headwind as you've called out. I was just wondering if you could give some color on how the components within that total working cap bridge shook out in R&M specifically. And then based on your quarter-to-date and current expectations, would it be reasonable to expect working cap at R&M to start to -- or the overall working cap to continue to be a tailwind as we go forward?

Yes, Prashant. Maryanne, thanks for the question. So as you said working capital in the quarter clearly was a source of cash particularly as we saw crude prices rising. We typically say that each dollar move in the oil price is about a $55 million impact to our working capital, right? So in a rising price environment. You already stated it, we did have some inventory impacts we would expect that not to be repeating in the second quarter when I see inventory impacts our inventory build. One of the other implications as we see prices rising quickly, sometimes it has implications in the receivables because it's not moving as fast as the payable. But in general, it's about a net 20-day payable position. So as long as prices stay where they are, we would continue to see working capital in the second quarter as the tailwind. Obviously, it would reverse as pricing would change.

Thank you. Our next question is from Phil Gresh from JPMorgan.

Yes. Hi. Good morning. I wanted to ask one follow-up on the buybacks, a slightly different way. The first $10 billion had a big component of Speedway proceeds associated with it and you've obviously extended it now to the $15 billion. The second quarter run rate continues to be at a very high level. And I'm just thinking, as we move forward and we lap the Speedway proceeds component of this. Is there a way you're looking at the more normalized level, of return of capital some kind of framework percent of cash flow or management to some kind of minimum cash balance. Obviously, you still have a lot of cash in the balance sheet. So I'm just trying to think through the moving pieces there.

Yes, certainly. It's Maryann. So, you're right. We've got a $15 billion authorization in total right? So about $7.5 billion remaining. We stay very focused on that commitment. As you know we shared with you $10 billion, no later than the end of this year. But based on this pace I shared right, we should be complete with that here in the second quarter and working through our $5 billion secondary or second repurchase authorization. With respect to our plans going forward, we're certainly looking at a series of things that we would share with you around how we would think about in a more normalized balance sheet, as we get to that position post right using the proceeds from the Speedway sale. As you know, cash is fungible and we certainly think about it in that way. But we are looking at a series of things as we talk about our capital allocation and would expect to come back to you, with how we would allocate cash between share repurchase, dividend obviously, our growth capital along our lines of our capital allocation framework shared previously.

Phil, it's Mike. I just want to add that I've said many times that this business is predominantly a return of capital business and a return on capital business. And it's up to us to look at the opportunities that we have from a capital standpoint. I hope the market realizes that we're going to stay very disciplined, looking for solid returns, but we do want to grow earnings. But at the same time, we feel strongly that return of capital is a major component of what we're trying to accomplish here.

Sure. Is there a minimum cash balance Maryanne, at these types of oil price levels you're thinking about? Has there been any adjustment to that thinking?

Yes. We -- I think we shared previously about $1 billion is where we feel comfortable. We've looked at a lot of scenario planning. We had a lot of experience as we looked at sort of some of the toughest volatility and liquidity periods during the pandemic. At one point in time, we had initially talked about potentially holding another $1 billion, but we're comfortable right now that $1 billion should be sufficient for us going forward.

Got it. My follow-up is just on R&D fundamentals in particular LCFS prices. We've continued to see some pressure there. A lot of moving pieces on the deficit versus the credits but just any thoughts that you guys have if you kind of dug into this dynamic.

Yes, Phil, this is Brian. I'm happy to take that one. So, yes, you're probably looking at the Q4 car release late last week on the overall bank and certainly in Q4 with a tremendous build almost one million credits. The bank is at a pretty high level on the heels of slower demand in Q4 versus Q3 out in the West Coast. So, overall, demand was off about 6%. RD production in imports was up about 9%. So the total pool right now out in the West Coast you're looking at about 8% Bio, 30% R&D. And then the last factor driving the dynamics in the prompt is certainly the electric credit generation, which was up about 5% quarter-on-quarter. Now all that being said, you do have new programs coming into the market Oregon and Washington and Canada. We expect these to exert counter pressure over time to be a different placement option and alternative versus California. But that being said, Carbon is very committed to the program and having a workable program. In the very prompt at the end of the day LCFS is proportionally one of the smaller value drivers in the overall proposition if you think about the D4 value in the BTC and current D4 values in the $1.70 to $1.80 range really are helping to underpin the overall economics. It's a bit ironic if you think about the current environment with eggs and commodities flying up. At the same time, we have low LCFS pricing. We're in that operating environment with Dickinson right now and we're quite happy with what we're seeing on the return side, out of our production out of Dickinson. So I think it bodes well for the resiliency the through-cycle resiliency for RD over the long-term.

Appreciate it. Thank you.

Hey, Brian, Bill that was a pretty good recap for Brian. I'll just add a few points. When we look at renewable diesel, there's -- it's a multivariable equation. There's really four regulatory drivers and Brian talked about a lot of them, along with the flat price or the renewable diesel on the feedstock price. So we're trying to optimize every day at Dickinson today to maximize profitability. I will say the biggest thing that we found success in at Dickinson will take forward to Martinez as the optionality on the feedstock, the ability to pivot to the feedstock that makes the most sense for us. And we've -- at Dickinson we have pre-treatment capabilities off-site that allow us to do that at Martinez that's part of the base CapEx for that plan. So you're right, right now LCFS pressure on that, but there's a lot of things that are within our control that we'll work to optimize.

Thank you.

Thank you. Our next question is from Paul Cheng from Scotiabank.

Hi. Good morning everyone. First, I might wish you a speed in through recovery after your treatment. And also Maryann, I just want to make a request if possible. Some of your larger customers by Exxon share fund they start disclosing the timing the timing benefit or the timing malls. We need to develop different inventory in the presentation or press release in each quarter. So I think all your investors will be grateful here. That's something that you guys will consider.

Paul, I apologize. Your line is cutting in and out a little bit for us here. Unfortunately, we weren't able to hear that. I did hear you say something that said investors would like to see something in our financials. So maybe we could take that one off-line. And then, if you send us a note. But just so you know just go a little slower because your line is cutting in and out with your question.

Okay. Can you hear me okay now?

Yes, that's better Paul.

Okay. So let me just repeat my request and I'm saying some of your larger customer Exxon, Shell. They've been disclosing the timing impact from derivative and inventory in their press release. And I think your investors will appreciate that if you guys consider providing those information. And in terms of...

Thanks, Paul. It's Maryann. I'm sorry. I apologize. Please finish your question sorry.

Sure. No my question is on three-fold. One when we -- some of your -- one of your competitors has said when the product market is in backwardation that will also impact the margin capture or your ability to realize the pricing on the product screen. So just want to see that how that impact in your system when we are seeing in a backwardation curve. And also that some of your competitors seems like they all have three large inventory or derivative timing losses in the quarter. So Maryanne, you also mentioned that you have some of them. Can you quantify it? Thank you.

Paul, it's Mike. First off, thank you for your comment. It's a multipart question. So I'm going to start and I'll let Brian talk a little bit about structure, but I'm going to repeat a little bit of what I said earlier right? I know everybody likes that metric of capture and if it wasn't for Kristina, I probably would not be a fan of putting it out there, but she keeps saying how important it is for everybody to see that metric. But there are so many things that play into that and one that doesn't normally occur to the extent that it's occurring now is the structure. And the backwardation that we've seen I mean if you look at the screen right now on distillate, since we've talked a lot about distillate, month one to month two backwardation is pretty strong, especially for this time of year. We would never normally think along those lines. So that comes into play as we're moving products and I'll let Brian talk a little bit about it. He mentioned it earlier, as far as a prompt barrel versus something that's got to travel on Colonial. And then Mayor mentioned earlier too is as flat price gets higher and higher you end up with this phenomenon where secondary products don't keep pace with flat price of crude and you end up with an impact there as well. So there's a lot of things hitting. And in this quarter particularly, as Doug mentioned earlier, it's a pretty volatile quarter. January versus February versus March was pretty sizable in volatility as to what we are seeing in the market. So anyway, let me let Brian make a comment towards structure. If you want to add there, Brian?

Yeah. Thanks, Mike. Happy to jump in. Yeah, there's two key elements the way I think about market structure, Paul, to your question. So the first and Mike alluded to this is really in a rising price environment which is the phenomenon that we largely saw in the first quarter. So in a rising price environment, we do see compression. We often call it out obviously in the secondary products, but it's also prevalent in the primary. So the racks effectively do not move up as efficient in a very short period of time. Now they catch up over time. And then you do enjoy the benefit on the back end of that as prices come off they'll go slower. So that's one dynamic timing element. Specific to backwardation though, with the pronounced backwardation in the marketplace here today, the way I think about it, it's effectively transit time. So from the outside looking in, you look at market price point today and I think the way most people run their models is they assume a ratable operation. And that's just not how our system or anybody else's system works. There's transit times, and moving barrels to market, whether they're going on a truck or a pipe or rail, it really doesn't matter. And in a backward market, if you're looking at a ratable program at $2 today and the market has fallen off $0.50 by the time you get it to the market, your actual realization is going to be less. So in that environment, the obvious signal is to sell in the prompt and to not sell out on the curve. And that's really the phenomenon that's been playing out in the marketplace today, particularly on distillate as there's been steep backwardation and a big call to sell more in the problem.

Thank you.

Our next question is from Connor Lynagh from Morgan Stanley.

Yeah. Thank you. Obviously, sustainability of the current environment is a question that most people are struggling with right now, sort of two parts to this question, but I'm going to ask them both at once here. So on the first side, there's obviously been significant disruptions in crude and product markets from events in Russia and Ukraine. Do you feel that what's happening, particularly in distillate markets is directly a result of that, or do you feel that there is a broader issue at play here in either the refinery system inability to raise runs, or substantially higher demand than expected. But the second part of that is, as we move into the summer months, the expectations are that you'll continue to see upward pressure on demand. Do you guys have any concerns, or do you have any sort of framework for thinking about demand destruction? Thanks.

Connor, it's Mike. I'll start. First, to your point, geopolitical events always have an impact on supply and demand in the energy markets, and we're seeing it now in the current situation with Russia and Ukraine. But if you go back in time, much all geopolitical events tend to have some impact to energy. So that's an ongoing thing. The point you made about sustainability that's kind of in parallel to what's happening as well. So people are starting to think about, how do they position the portfolios as we have and put out their goals in sustainability. We're very proud. We think we're leading in that area in certain regards. And at the same time that we're trying to supply the market because, obviously, it's a very tight inventory situation. And as Ray mentioned earlier, we're pushing back some turnarounds. We're trying to maximize production as best we can in the short term. So I mean, at the end of all this counter, my word to the team all the time is, let's worry about what we can control. There's a lot of things out there that, we don't control and we stay attuned to them, but we try and bring it back to what we do control. And in the short term, what we do control is trying to maximize production into the marketplace. And that's what Ray and the team are trying to do.

And then just on the second part of that there, on a risk demand destruction. Are you guys seeing any evidence of that based on your interaction with customers or anything like that, or is there a price at which you think that certain areas of the economy can tolerate the product pricing?

Yeah. Brian, do you want to take that?

Yeah, sure, Mike. Yeah. So Connor, maybe a couple of comments to build upon what Mike just stated. There is some fundamental support and premium in the marketplace right now, but there's also a degree of uncertainty premium based on what's going on over in the Ukraine. So I wanted to make that point that there's two things that are I think moving the market. One is just the pure fundamentals and I'll get into that in a minute. But there is a uncertainty premium right now that's penetrating the market. From an overall macro perspective though, the outlook is this. We've got really four positives working for us or tailwind. We've got the demand recovery upside coming out of COVID predominantly on gas and jet. We've got very low inventory positions both in the US and around the globe. And then we also have delayed turnaround and major maintenance on a lot of the refining system both domestically and internationally. That too will pressure utilization over the cycle here. And then also as you think about some of the closures that we've had during COVID that also is providing fundamental support to this current market dynamic. Now on the other side of that there's three, I'll call them uncertainties, new additions to refining capacity as an example. I think with supply chain disruptions, labor disruptions, the disruption economically during COVID there's a little bit more uncertainty on new addition refining capacity coming into the marketplace. I mentioned the Russian-Ukraine situation, but that's likely to pull some supply away from the market more so than the other. And then the last thing that's a bit of uncertainty and maybe specifically to your question is the global economic outlook. And certainly whether it's fuel pricing or any goods and services we've had very broad inflation and that's something that we're keeping a watchful eye on and watching the demand dynamics. But all that being said, we think there's right now a slight balance between the headwinds and tailwinds, and it's really difficult to tell which way the market is going to break. But at this 10 seconds it feels like we're pretty balanced and more optimistic than not as we look forward through the next quarter and beyond on overall demand.

Thank you. Our next question is from Theresa Chen from Barclays.

Hi, there. Thanks for taking my questions. First I wanted to revisit the discussion on regional balances product shifts and the general tightness in Pad 1. I believe years ago you had underwritten some pipeline expansions to move product from the Mid-Con two Pad 1 from that Eastern Ohio market eastward. And at the time, I believe it was a seasonal movement. I was just wondering given the structural tightness that we're seeing PAD1 going forward, is there an ability to eke out additional capacity along that quarter to potentially see additional tailwinds for Mid-Con capture?

Brian, you want to take that?

Yes, happy to Mike. Yes. Theresa to answer your question there's been a number of pipelines in that quarter that traditionally flowed out of the into the Mid-Con that has since been reversed. And there's been some incremental capacity added here in the last year that also is helping to facilitate that move and ourselves as well as the broader market are definitely taking advantage of that capacity. The ARB is effectively wide open in the current market dynamics today to translate barrels into Western and Central Pennsylvania. We also see actually trucking opportunities. If you think about our position in Eastern Ohio to truck into the pad as far into Western New York as an example for some specialty grades. So yes, the market is working, the market is efficient and we are finding more and more opportunities to move that way.

Thank you. And shifting to the Martinez project, I just wanted to clarify how the JV agreement works in terms of feedstock procurement. Will it be done independently between the two partners or together? And can you just explain more about the synergistic aspects of feedstock procurement there? And also Maryanne, if you could provide how much capital has been spent out of the $700 million budgeted for this year to date?

Theresa, it's Mike. On the feedstock question, what we said last time is we're going to provide more color on the dynamics around the feedstock and who does what et cetera. But we want to wait until we get the JV closed. We're hoping that is very shortly. As Ray mentioned, we're very close on the permitting side. And then assuming that follows through then we'll get to close JV. And at that time we'll give a little bit more color on the feedstock dynamics.

Theresa, it's Maryann. So to answer your second question I think on the allocation of capital and how it's been spent on the $1.2 billion to date. So in 2021, we've spent roughly just under $300 million that's in 2021. If you look at 2022 in our capital plan, we estimated roughly $700 million in total. So again, depending on how all that project gets outlined for 2022. We would expect roughly half of that. So MPC would have about $350 million of that $700 million in Neste the balance obviously at $350 million. And then obviously that would give us about $200 million plus or minus remaining to complete the project in 2023.

Thank you.

Thank you. And our next question is from Jason Gabelman from Cowen.

Thanks for taking my questions. I wanted to clarify a statement made earlier just about the backwardation impacts to your margin just the diesel backwardation that you're seeing. Was the point there that on a lot of your barrels that you're actually not receiving the diesel price that we see in the prop month but it's actually the diesel price in the month ahead? And if so, kind of what percentage of your product is exposed to that? And then my second question on the Neste joint venture, you mentioned that there's potential opportunities to grow in the future. And I wonder, if MPC would be open to participating in renewable diesel plants or other biofuel endeavors outside of the US or if your focus is just within the country. Thanks.

Brian do you want to start and I'll fish up.

Yes. Sure. Yes. Jason as a point of clarification on the backwardation. It's really dependent on the mode of delivery. So it's really about – I made the comment on the cycle time or delivery cycle time. So it's different depending on each market. Have an export as an example has a very long delivery cycle versus a spot sale. And I'll leave it at that. I won't go into the particulars of the percentage of our book and what they're under but it's – every mode of delivery is different.

Jason it's Mike. I would just add, obviously as sellers were trying to maximize the pump and as buyers people are trying to buy down the curve as a general rule. So you have that yin and yang going on. And like Brian said, every situation is unique. But backward markets tell you that you have tight inventories. That's ultimately what backwardation is all about. It says that inventories are tight and product availability is tight. With respect to your second question, yeah, we're not going to speculate out in time with Neste, but I will tell you that the effort to get to this partnership was long. And the team, Dave Heppner headed it up inside our shop here and worked with the Neste Group for a long period of time. And one of the biggest things that I believe is, important as a result of it was the mutual respect each company have for each other and common goals that were setting for each other. So I think it is a nice platform for us to continue to look for ways that we can do business together. And that was really important for us as we were working through this, very similar to when we've entered other partnerships. One of the things that's, most important to us is, will the partnership endure the test of time. JVs are difficult in general, and you need to be really comfortable at the start of a JV that you feel that you have the right partner. And we feel that way with Neste with respect to Martinez.

Great. Thanks for the answer.

Thank you. That is all the time we have for questions. I would now like to turn the call back to the speakers, for closing remarks.

Thank you for your interest in Marathon today. Should you have additional questions or would you like clarification on topics that were discussed this morning, please reach out and the team will be available to take your calls. Thank you for joining us.

Thank you. This does conclude today's conference. You may disconnect at this time.