Welcome to the MPC Fourth Quarter 2022 Earnings Call. My name is Sheila, and I will be your operator for today's call. [Operator instructions] Please note that this conference is being recorded. I will now turn the call over to Kristina Kazarian. Kristina, you may begin.

Welcome to Marathon Petroleum Corporation's fourth quarter 2022 earnings conference call. The slides that accompany this call can be found on our website at marathonpetroleum.com under the Investor tab. Joining me on the call today are Mike Hennigan, CEO; Maryann Mannen, CFO; and other members of the executive team. We invite you to read the safe harbor statements on Slide 2. We will be making forward-looking statements today. Actual results may differ, and factors that could cause actual results to differ are included there as well as in our filings with the SEC. References to MPC’s capital spending during the prepared remarks today reflects standalone MPC Capital excluding MPLX. And with that, I'll turn it over to Mike.

Thanks Kristina. Good morning. Thank you for joining our call. First off, I want to recognize a new director on the MPC board. Toni Townes-Whitley will be joining our board in March, bringing tremendous experience with her most recent executive position at Microsoft, as well as her board experience on the NASDAQ and PNC boards. Also like to recognize Christine Breves, who was appointed as a new independent director of MPLX in November, and recently served as CFO for US Steel. As we look back at 2022, we've delivered on our strategic commitments. Full year cash provided by operating activities was just over $16 billion on a consolidated basis, and over $13 billion, excluding MPLX, reflecting our improving operating and commercial execution. Our commitment to safe and reliable operations resulted in refining utilization of 96%. And our team's dynamic responses to volatile product markets delivered strong commercial performance, resulting in a 98% full year capture. Our focus on fostering a low-cost culture enable us to sustain our previously achieved $1.5 billion of structural cost reduction throughout the year. We formed a strategic partnership with Neste, which will enhance the economics of our Martinez Renewables fuels project and create a platform for additional collaboration within renewables. In Midstream, our business grew 7% year-over-year, MPLX raise its distribution by 10%. And based on this level, we expect MPC will receive $2 billion of annual distributions. MPLX remains a source of durable earnings in the MPC portfolio. And as MPLX grows its free cash flow, we believe we will continue to have the capacity to increase its capital return to unit holders. In 2022, we return nearly $12 billion through share repurchases, bringing the total repurchases to almost $17 billion since May of 2021. In addition, we increased MPC’s dividend 30% to $0.75…

Thanks, Mike. Moving the fourth quarter results. Slide 6 provides the summary of our financial results, this morning, we reported adjusted earnings per share of $6.65. This excludes a $176 million LIFO inventory benefit, as well as $60 million gain related to the Speedway transactions. Adjusted EBITDA was $5.8 billion for the quarter, and cash flow from operations, excluding unfavorable working capital changes, was $4.4 billion. During the quarter, we returned $351 million to shareholders through dividend payments, and repurchased over $1.8 billion of our shares. Slide 7 shows the reconciliation between net income and adjusted EBITDA as well as the sequential change in adjusted EBITDA from the third quarter of 2022 to the fourth quarter of 2022. Adjusted EBITDA was lower sequentially by approximately $1 billion. This decrease was primarily driven by refining and marketing, as the blended crack spread was down over $5 per barrel, reflecting a 20% quarterly decline. Corporate expenses were higher in the fourth quarter driven by a retroactive operating tax assessments for prior periods. We intend to pursue recovery of these multiyear tax assessments. In addition, corporate includes special compensation expenses, which also affected our refining and marketing and midstream segments. We do not anticipate that these costs will structurally impact future corporate cost. The tax rate for the fourth quarter was 22%, resulting in a tax provision of nearly $1 billion and the full year tax rate was 22%. Moving to our segment results, slide 8 provides an overview of our Refining and Marketing segments. Like many in the industry, several of our refineries were impacted by winter storm Elliott at the end of December, primarily in our Gulf Coast in Mid-Con regions. Most of our assets were back online after a short period, and we have not seen structural issues. The crude…

Thanks Maryann. In summary, we believe solid execution of our three strategic pillars remains foundational. Similar to what we've achieved with cost reductions and portfolio. We believe the improvements we've made to our commercial and operational execution have driven structural sustainable benefits, which will enable us to capture opportunities, irrespective of the market environment. Our goal is to position MPC as the refiner investment of choice, generating the most cash through cycle and delivering superior returns to our shareholders with our steadfast commitment to returning capital. Let me turn the call back to Kristina.

Thanks Mike. [Operator Instructions] And with that, Sheila, we're ready for questions.

[Operator Instructions] Our first question will come from Neil Mehta with Goldman Sachs.

Yes, good morning team and congrats on strong results here. The first question I had was around the magnitude of capital returns. How should we think about the percentage of cash flow or free cash flow you target to get back to shareholders in a given year through buybacks and dividends? And then you talk about a $1 billion being the target level of cash. We've heard some of your peers talk about that number being higher, why is a $1 billion the right number and how long does it take to get there? Given how strong the environment is?

Hey, it's Maryann. Thanks for the question. Let me try to break that into a couple of parts there and then see if I can -- if I've done your question justice. So in first part really the cadence if you will of the share buyback and our return of capital, as you can see from the quarter, Neil, we did $1.8 billion in share repurchase and then we continue to buy back in the month of January. Just wanted to remind you we did complete our $15 billion share repurchase in early October and I indicated on the quarterly call that we would begin using that incremental $5 billion authorization in November. So essentially for the better part of October, our cadence, we worked in the market buying back in October, just to be clear. And then we did seek and have announced an incremental $5 billion authorization. So that leaves us with $7.6 billion of share buyback authorization, hopefully indicating our continued commitment to buyback. And we hope you see that. The second part of your question, just really think around our commitment there. I think that's what you were saying. So when do we get to that $1 billion? How long does it take us and why? We feel a $1 billion is an appropriate level of cash. First, because during the pandemic, we probably stress tested our liquidity and our cash position in one of the most challenging markets. Second, I'd say keep in mind that we receive a $2 billion distribution from MPLX, probably unique when you look at us compared to our peers. So, in reality, that's about $3 billion. And then you combine that with our liquidity, we feel pretty comfortable within a range of outcomes that $1 billion is appropriate. I hope that addresses your questions, Neil.

Neil, it’s Mike. Let me just add to what Maryann just said. So we had been at about $1.6 billion from MPLS, moved up to $1.8 billion, we're now at $2 billion pace, we expect that to continue to grow. If people listen to the MPLX call, we're in a real good position there. But that distribution, let's say at the $2 billion pace, that essentially covers the dividend, and half of the refining capital commitment for refining. So that's part of the reason that we are comfortable with $1 billion on the balance sheet. Now, as you pointed out, we still finished the year with close to $12 billion on the balance sheet. So we still have a lot of financial capability to get to a new normal at some point, but hopefully that helps explain why the $1 billion is the right number. And it has to do with our affiliation with MPLX.

Yes, good problems, Mike. And then the follow up is around the STAR project, remind us economics, it seems like it's coming on at a good time. But how should we think about what this project could mean for incremental cash flow? And in both a midcycle environment, but also, its current spot economics?

Yes, Neil, thanks for that question. It's one we've been getting from a lot of people. So it's relatively easy to model. So up until now, the parts of STAR that are in place are in our results. What's not in our results, is 40,000 barrels a day of crude capacity. And the easiest way to model is take that number times the differential between heavy crude, and ULSD. So if you look at that differential, and you multiply it by 40,000 barrels a day, that's the additional EBITDA that we'll get once STAR is online. But STAR is a pretty unique project for us. So I'm going to ask Tim to make a couple of comments on it. So you have the financial side of it, but let me give you a little bit of the background behind it with Tim some details, please.

Okay. Thanks Mike. So Neil, is good question that you have there. So let me give you a little backdrop, keep in mind that we've done this project in phases, a fair amount of the STAR scope has already been completed and put in service, so it's already earning a return, the remaining work that we have is really going to be completed with this planned turnaround that ends late in the first quarter, and then we'll be starting up the units in April. So we do expect STAR’s EBITDA contribution to continue to ramp after startup in April and through the second quarter. The remaining scope is really going to be one like Mike just indicated, is going to increase crude capacity by 40,000 a day, and also the resid upgrading capacity by 17,000 a day. So maybe a little background on that decision rather than expanded the Galveston Bay cokers, we elected to upgrade the resilient hydrocracker unit because it offers better conversion and increased liquid volume yield. So it was a better choice than the coker. The fractionation modifications that we made are also going to increase the diesel recovery, which is profitable. And then the refinery will also be able to process a significantly more of the discounted heavy Canadian crude. So those are some of the reasons that drove us to that. So we feel really good about the economic drivers of the project. And with the current heavy crude discounts and the strong diesel margins, the near-term economics are better than when we sanction the project. So hopefully that's helpful.

Our next question will come from Doug Leggate from Bank of America.

Someone didn't pay the phone bill, guys. I'm so sorry about that. So how is everybody doing? Thanks. I apologize for that. So I, well I was – half of my questions got asked, but let me give it a go. I guess Mike, first of all, when I look at the earnings part of the business, and I look at where your share price is trading. And obviously you gave us a dividend back in November. How are you thinking about you reloaded the buyback program? How are you thinking about the balance between dividends and share buybacks? And you know where I'm going with this? Because obviously, your dividend is fully covered by your distributions from MPLX. So in this kind of environment, should we be buying back a lot of stock at this level? Or should we be thinking that the dividend is a bit more of a bias in 2023?

Hey, Doug, it’s Maryann. I'll pass it back to Mike here in a second. But as we talked about the dividend, we committed to looking at that dividend annually. We wanted to be sure that it was secure. We wanted to be competitive with the potential to grow. And we will continue to look at that. As we've shared in the past, and obviously, as you stated, we have increased the outstanding authorization to $7.6 billion of share repurchase, we continue to think that share repurchase over dividend is an appropriate return of capital. You'll see us continuing to use that authorization as we did here in the last quarter. So, yes, we'll evaluate that dividend but we continue to see share repurchase as a bit more preferential over the dividend. I'll pass it to Mike.

Yes, Doug, I'll just add to what Maryann said, obviously, we want to have a competitive dividend and a growing dividend over time. So that is foundational to us. It is a little bit tax inefficient relative to share buybacks. That's why Maryann just said that we leaned a little more that way. And the sheer magnitude of the financial capacity we have right now with finishing the year with about $12 billion of cash on the balance sheet and continuing to have a strong refining environment, just the sheer magnitude is much more towards that side of the return of capital. So we're going to look at it, we've committed that we'll look at it each year, and we want to be committed to it. At the end of the day, obviously, a lot of our attention just because of the magnitude of the number is directed towards the repurchase program.

Okay, I understand, I guess no one is going to complain about the yield, given that your share price is a big part of that. So but I appreciate the answer. My follow up is an operational question, Mike, I think it's pretty well known that you guys had a fair amount of maintenance in the quarter. But the capture rate was still quite strong, at least on our numbers. And I am looking at the product sales relative to the refinery throughput and wondering if that was part of what was going on there. So I'm wondering if you could help us understand the strength of the operating performance, and maybe give us a steer as to how you see your full year ‘23 downtime average because we're hearing from a lot of your peers that ‘23 is going to be a big year for the whole industry. And I'll leave it there. Thanks.

Doug. It's a good question. So I'm going to pass it to Maryann in a second. But when we started this out a couple of years ago, we said there's three areas that we're going to concentrate heavily on, one of them was improving our commercial performance. So let Maryann give a little more color on that.

Sure. Thanks, Doug. As Mike indicated, our strategic pillars remained foundational, and our commercial performance is clearly one that we remain committed to, you may remember in the last set of guidance, we said that we thought our capture could actually be impacted, given what was a higher turnaround, frankly, they are highest one in 2022. But the commercial team did take quite a bit of initiative in the quarter. I'll give you some highlights and then pass it to Brian and Rick, but one of the things that we saw at 109% capture in this quarter, we had strong light product margins, we had favorable inventory impacts. And then also favorable pricing of secondaries. We we don't think necessarily all of these tailwinds would repeat, and certainly depending on where we sell pricing, some of them could actually be a headwind, particularly when we look at our secondary products. And historically, we've talked about a 95% capture rate over the last few years, given the work that the commercial team has been doing. We're moving more toward 100%. So we're going to continue to challenge ourselves to deliver that. And with that, I'll maybe ask Brian and Rick to give you some incremental color on the specifics there.

Hey, Doug. It's just a few add-ons to Maryann's comments. So the 98% in 2022, is it sustainable? What I would say to that is, is there will be a lot of volatility, and it'll ebb-and-flow. But this is not a one-time event, we have meaningfully changed the way we go to market from a commercial perspective throughout our entire company. And the focus that we've had since Mike has taken the helm and put in the new leadership team has been night and day and will continue to be. So when you look at 2023 and beyond, I would say you should expect continued momentum, expect volatility, but expect results that will continue to outpace many of our peers.

Honestly, guys, I think that has been overlooked. Sorry, please go ahead.

Yes, Doug, this is Brian, I was just going to bolt-on, real quickly to Rick's comments that we really have the team relentlessly pursuing value capture. We've got the team consolidated into really one functional team across the entire value chain, which historically was divided up into multiple silos. And that's been a key differentiation point for us. We're also very adamant about serving our customers. So my team has an example on the clean product side of things. So as we think about turnaround activity and impact to capture, we've got to operate in an environment where whether it's an unplanned outage or planned outage, we've got to serve our customers. So there's a lot of things that we can do from a turnaround planning perspective to build and advance the turnaround to build different feedstocks, depending on the units that are down. And ultimately, we've got the logistics firepower to purchase to cover as well. So I think that's what you're seeing in the numbers as you called out the churn activity relative to sales. We've got the right capabilities to purchase the cover, if we've got refining down either planned or unplanned.

Guys, I think it is going to surprise a lot of people. I really appreciate the full answer. Thanks so much.

Our next question will come from Roger Read with Wells Fargo.

Yes, good morning, everybody. Yes, another, certainly, I'll give you congrats on the capture there. Well done everything. Maybe to change pace though a little bit. I'd like to ask about the process in Martinez, and how we should think about the upcoming timeline and any particular milestones we should be watching for, and maybe how you think about it contributing at a cash flow basis, whether that's happens meaningfully in ‘23 or we should wait till ‘24.

Hello, Roger, this is Tim, I'll take that one. I guess first on the schedule, we spent really the most the part of January, conducting startup and commissioning activities. And we put fresh feed and actually yesterday in the HDO unit. And we expect finished product the storage here next week. So we are on track to reach full phase production capacity, which is 260 million gallons per year of renewable fuels by the end of this first quarter here. You may know that we're also what we refer to as Phase 2 is constructing some pretreatment capabilities. And those are scheduled to come online in the second half of 2023. And then the facility is expected to be capable of producing the full capacity, which is 730 million gallons per year, by the end of 2023. So we're on track and feeling good.

Roger, it’s Mike. The only thing that I would add is we feel really good about the project. And the team's execution has been good. But in light of where the refining macro is today it's not the contributor that it would be saying it when we get back to midcycle at some point, it's going to be a meaningful contributor, but obviously, it's dwarfed by what's happening in refining today.

Yes, refining is certainly strong, but that kind of gives me my other follow up question is we've obviously seen some good things in terms of pickup in jet demand, gasoline has continued to look a little soft, I just wonder if he could give us an overview. I guess basically, across your system, how you see things.

Roger, this is Brian. So I'll start in just a little bit of reflection on 2022. Because I think we've as an industry really domestically here in the US exited at a point of inflection as relates to COVID recovery. So globally, really strong year in 2022, when you look at a year-on-year 2.3 million barrels a day of overall oil demand increase, as Mike mentioned, in his prepared remarks, we expect to see continued increases into 2023 and beyond. Domestically from what we're seeing, and this is a bit of a triangulation, I know, there's a lot of dialogue around individual marketing books, EIA, data, mobility data. So you have to be a little bit of a statistician and try to piece it all together to formulate an informed view around actual demand. But from an overall perspective, backing through the back end of COVID, diesel has been resilient throughout. It remains resilient domestically here in the US, gasoline if you remember when we went into COVID, early on a lot of conversations around structural impacts. And we do feel like we've seen some structural implications as a result of COVID. But most of that's been on the gasoline front. And we're kind of at a point now where our call of post COVID demand is off about 3% on the gasoline front from 2019 levels. That's probably pretty sticky. The headwind, there is obviously the work from home a little bit of tailwind. We've seen some decreased use in public transportation offsetting that, but 3% is been about the number that we've seen consistently as we look across our books. And then as it relates to jet, steady rate double recovery as what we've seen the last couple of years, we expect to see full recovery domestically here, as we progress through 2023. So back half of 2023 seeing full recovery. As relates to our book, maybe I'll just kind of wrap it up there. What we found in Q4, gasoline year-on-year, 2%. The bright spot of interest was the West Coast. So we actually saw a 5% increase year-on-year in the fourth quarter in the West Coast. Diesel was up 4% and jet was up 3% on year-to-year basis.

Our next question comes from Paul Cheng with Scotiabank.

Hi, guys. Good morning. Few questions, if I could. The first one is really simple. Fourth quarter, I think Maryann mentioned that as some favorable inventory benefits. I assume, Maryann, you were referring outside the LIFO impact which you take it as a special item or that's what you refer. If this is not then can you give us some idea, then how big is that number in the fourth quarter? And secondly, I think you guys talking about a continuing investment, that this year $150 million in the LA refinery system? If I didn't get it wrong. Can you maybe give us some idea that what all investment we're talking about? And what all of benefits we could expect from there, is there any changing in terms of the crews lay or energy usage or that product yield? Anything that you could share on that? Thank you.

Hey, Paul, it's Maryann. So you're absolutely correct. The inventory benefits that I was discussing, when talking about the capture rate we achieved in the quarter are outside the LIFO benefits. As you've seen, we've excluded the LIFO benefit from our adjusted results. So I'm talking about commercial performances, obviously, winter storm has impacts on us. And the ability for our teams to address the inventory issues is really what I was referring to when we talk about capturing the quarter not LIFO.

Yes, Maryann, can you quantify how roughly -- how big is that benefit in the fourth quarter?

Yes, Paul, we've not provided that level of detail on each of those individual contributors, inventory, a piece of that, again, I mentioned strong light product margins in the quarter. We saw the benefit of pricing happen on the secondaries. So there were several contributors to the upsides performance, but we typically don't provide that granular detail on this significance of each one of those.

Okay. This is Tim, I'll take your second question. Relative to the LAR project that we were referring to in the opening remarks, that's really a project that addresses the next phase of an upcoming regulation that is going to be mandating further NOx reductions. And that's regulation is going to apply to all of the refineries in the LA basin, not just ours, of course. And so there's going to be some significant investment required by the industry in order to comply with this. And we believe we have a very unique opportunity at our Los Angeles refining complex to really modernize our utility systems at both Carson and Wilmington facilities in order to meet this Phase 1 and Phase 2 of these reduction requirements. So that's what's driving it. And I think the other thing that's worth noting is this novel project really goes beyond NOx reductions for us. And it will also reduce our SO2, our particulate matter, or VOCs, and some greenhouse gases. So besides lowering our facility emissions, it's also going to improve our reliability. And it's going to reduce our energy usage, which will significantly lower our operating cost. These cost reductions will come in the form of energy efficiency and lower maintenance spend. And the thing we like about it is that these favorable economics are independent of the light product margin fluctuations that can occur. So this was kind of all around the backdrop of the LA refinery is certainly a core asset for us on the West Coast. And it's part of the value chain. And it's already one of the most competitive refineries in the state. So this project is going to further cement its competitive position in California, which is consistent with our strategic initiative of being the most cost-effective refiner in every market we serve. So we expect the project to be completed in 2025. And in time to meet the initial compliance dates for the new regulation. So hopefully, that's helpful.

Yes, what's the total investment? That $150 million for this year, should we assume $150 million again in 2025. And in terms of the lower energy costs, better efficiency on there? Is there any number you could share to try to quantify what is that benefits?

Unfortunately, we generally don't get into those specific numbers on individual projects and returns but it's significant in the sense that it's lowering our emissions and providing a payback.

$1 billion CapEx, is it $150 million a year?

Hey, Paul, it's Mike, we haven't disclosed the multiyear, we will give more color on that as time goes on. What Tim was trying to say is, it is a multiyear project, and we're going to start off with it. It'll be $150 million this year, and we'll give more color as time goes by.

Our next question comes from John Royall with JPMorgan.

Hye, guys. Good morning. Thanks for taking my question. So just to stick with project growth, and looking at your CapEx budget, and your growth program was about $900 million. That number, I assume will be going down close to Martinez and STAR. So looking into the future, where do you think growth capital goes from here? I think we could structurally lower growth CapEx in 2024 plus, or is there maybe another phase of project we'll start hearing about going forward? And I know you've spoken about the LA project, but just wondering beyond that.

John, it's Mike, I’ll start off. We've broken it into two buckets, traditional refining and low carbon. And it's our expectation that low carbon bucket will continue to grow over time and at the same time, though, we do have a bunch of projects Tim just mentioned one that will really improve the competitiveness of LA, we have a bunch of those still, that we think we can implement on the traditional refining side as well. So I think you're going to see a nice blend on both sides of the business there over time. I don't think you should expect that number to be going meaningfully down. Yes, I know, people have talked a lot about STAR but we have enough projects that we think are attractive returns, we just want to implement them over time and be disciplined on the way that we allocate capital, but I think you're going to see both buckets and not have an expectation they're going down, because we still think there's a decent amount of return on capital opportunities for us in light of what's been a major return of capital recently from us.

Great. That's really helpful. Thanks. And then maybe just talk about how you're thinking about the Russia product sanctions that are going to be hitting here on the certain? And how that maybe -- how that may trickle through the market? And how long do you think it will take for supply chains to adjust? And then relatedly, if you could just remind us the breakdown of Marathon’s export destinations? How much goes to Latin America? How much goes to Europe? And do you expect to increase your exports to Europe after the fifth?

Yes, John, this is Brian, I'll take that. So just really quick on your question on timeline, we do not expect it to really unfold until the second quarter. So leading into the sanctions, as you'd expect, we saw a pretty meaningful de-inventorying coming out of Russia getting out of the sanctions, coupled with a re-inventorying in large parts of Northwest Europe. So as a result, we're entering the sanction period of time at really historically high levels of inventory, particularly in Europe. So we view it as 2Q and beyond timeline perspective, but directionally, we see it as bullish for cracks. We see 800 million to 1 million barrels a day of I'll call them structural historical imports into Northwest Europe coming out of Russia, those are going to have to be displaced. And we do expect a high degree of friction on those barrels, for variety of reasons. Product spec mix, is going to be difficult to place them in other markets. So as you'd expect, you have various regional specifications that need to be met local fuel standards that's going to propose some headwinds. The global tanker fleet is really pretty active and overburdened right now with differing trade flows on the crude front. And this is going to create another degree of inefficiency on a tanker, global tanker fleet capacity that we think will provide a degree of friction. And the last thing I'd mentioned, unlike crude on the product side, these are generally going to either countries or end consumers that really rely on receipt of the product. So supply assurance is a new variable that's really important here as well, that is we're hearing from our customers every day, that's a really important thing for them. I think, given the dynamic nature of the situation in Russia, that supply assurance component is really a big unknown, but we feel well, very well positions to take advantage of that, given our position in the Atlantic basin, as you probably know, we opened an office over in London late last year, and are very active in that market. The last point of your question in terms of distribution, without giving too much granular detail, a large portion of them historically have moved into Latin America. We've historically exported 250,000 to 350,000 barrels a day, depending around turnaround and unplanned downtime activity within our system, we do see an incremental pull into Europe, we've seen that we've got some actually really good fit for our Garyville distillate stream because we don't make jet out of our Garyville facility. It fits well into Northwest Europe, especially this time of the year. And we've seen exports into Northwest Europe late last year and the 120,000 barrels a day for the US into Europe. And we've done a meaningful part of that. And we expect to be meaningful part of that going forward.

Hey, John, this is Rick, just add on to Brian's comments. So a couple of points to further drive home how we feel about this market going forward. If you look at winter storm, Elliott in December, when it hit the immediate impact, it had on cracks. And it is again taken our life product inventories, especially here in the US down to levels that are five-year type low numbers, when you compound diesel inventories with VGO and the potential impact that the EU ban on Russian exports will have this could just further exasperate cracks to the positive. So more to watch on this. See how it plays out. I think Mike said earlier, it's neutral to positive. We're viewing it as a positive, especially if the cutbacks and sanctions take hold like most people think they will.

Our next question will come from Sam Margolin with Wolfe Research.

Good morning, everyone. Thank you. I'm actually, I'm tempted to ask about commercial and turnaround integration again, because I do think that's probably the most important thing from this call. But I think people got the picture there. Instead of asking about low carbon growth, and specifically SAF. And I'm asking because investors ask about it a lot, because airlines talk about it frequently. And both of your partners in the renewable fuels category are also sort of publicly, very pro SAF. And so it'd be great to get your thoughts on that category. And see if you think there's any opportunity there. Thank you.

Thanks, Sam. Hey, this was Dave, let me step back a little bit and touch on first that one of our strategic growth pillars for the company is around maximizing the value of our renewable liquid fuels. And so while promptly, a lot of that has been focused on renewable diesel with our Dickinson and Martinez, and the pretreat facilities around those as we look forward that's inclusive of Sustainable Aviation Fuel or SAF. So when you're thinking about growth, it is also inclusive SAF. And so second thing I want to maybe touch on is that we are a very large supplier of fossil fuel, jet fuel today. And our goal is to supply the products that our customers want, and need going forward. So as they, as you stated, there's a lot of chatter around SAF, we're there to help meet that and why you're hearing a lot of the chatter through the airline industries is because SAF is the most viable near term, decarbonization tools for that space. So as we look forward, we are very active in that. The challenge is the premium required, as you look at the SAF whether it be a conversion of a Dickinson or Martinez produce SAF or new investment, these are multiyear very large capital projects. Having confidence in that premium to justify that investment is where that little opportunities exist today. So we are very active just as we were in RD and the evaluation, the studies of where to participate in SAF and I think you see a lot of it within MPC, but also within our subsidiary company Virent. They take sugars into sustainable aviation fuel, you've seen announcements with them on test flights with United, most recently won with the Emirates along with our JV partner Neste. So you can see We're very active in the space of evaluating it, studying it, monitoring it and determining when is the right time to invest.

Our next question comes from Theresa Chen with Barclays.

Hi there. I just had a follow up question related to the Russia discussion, and specifically related to VGO and with the Russian’s VGO exports to Europe dissipating from market and lack of clarity where incremental VGO is going to come from and understand that could help definitely in cracks all else equal, but how should we think about how it impacts your capture and what your net VGO position is long or short and how it trickles through your system?

Yes, Theresa, this is Rick. So we're short VGO, we're out in the market, especially now more than ever, when it’s turnaround season and I will tell you the way we view this is this short and VGO is going to high grade up all capture specifically on Jet, diesel and light products. So we believe will be a recipient of it and that'll show through via the cracks going forward. Specifically, I will tell you as these Middle Eastern refineries come online midsummer, Theresa, they will domestically consume VGO which, in turn will further short the market, which we believe to be a nice shot in the arm, kind of mid-year end year. So more to come on that. Just something to keep your eye on.

Thank you. And I also had a follow up question related to my comments about consumers potentially adjusting consumption patterns to lower retail fuel prices. Just curious what your views on elasticity is or are at this point. How does that reconcile with Brian's comments about gasoline and potentially structurally being off about 3%?

Yes, Theresa, it’s a great question. It's one that we look at and try to draw the right corollary too but we do see a degree of flexibility there. Of course, it depends on the market, depends on the extent of the retail prices. We have seen and I commented on the West Coast in my comments earlier, in what I didn't mention, but we got under $5 a gallon on the West Coast in Q4. So that's where we saw my view is we saw nice demand recovery as relates to retail prices. But our forward view is definitely instructed by a moderated view on retail pricing, which we do think will impact demand somewhere in the neighborhood of 2% to 3% depending on the market, but somewhere in the neighborhood of 2% - 3%.

Our next question comes from Jason Gabelman with Cowen.

Yes, good morning. How's it going? I don't think you guys discussed the outlook maybe I missed it, the outlook for light heavy crude quality dips. Clearly, they've been very supportive in the past couple quarters to earnings. And I think many in the market, expect those to come in as refiners consume. The SPR releases, new capacity comes online. OPAC exports have fallen off a bit. Can you just discuss how you expect those differentials to trend throughout the year? Thanks.

Yes. Hi, Jason. It's Rick. Very good question. So it's kind of a tail of two ends. I'll start with the front end here. Because as you look with what happened with the Keystone Pipeline outage, that back then barrels into Canada, Canadian inventories are high. We've had a lot of turnarounds in the US Gulf Coast. We've had winter storm Elliot back in barrels. So when you kind of add all of these together, along with a few of -- a few folks in the in the Mid-Con specifically pad two having issues. We are seeing really robust spreads right now. And we continue to see that to hang on for a bit. As the year plays out, and things get back to normal. I would say you could see some fall off to the spread, but we're still quite optimistic that it's going to be a better spread than midcycle as we look at the year in total.

Great, that's helpful and just my follow up. I appreciate the comments on the Martinez project. And operationally, it sounds like everything's going well there. I was wondering from an earnings perspective, how much you expect that project to contribute in 2023, just given the pretreatment unit won't start up until later in the year. And at the numbers we look at, it seems like margins for projects that don't have pretreatments are much more challenged than projects that do. So if you just talk about the earnings in 2023, and the potential step up from the project once that operation units online.

Yes, this is Brian, Jason, I just maybe a reminder that we do have pretreatment capacity, not on site but off site. So both at Beatrice and Cincinnati facility, we've got substantial pretreatment capability there. So just kind of a reminder there, and I'll refer it regarding the overall EBITDA or our economic outlook to Mike and Maryann.

Yes, Jason, we don't give specific individual facility earnings profiles. I know it's a question and people have been trying to get their arms around. But the best guidance I can give you is if you look at the macroenvironment around the California market, and where each of the subsidies are trading, the key to remember because people ask us about LCFS. But there are other components to subsidy out there that all kind of worked together. And the three of them together have been relatively consistent, even though a lot of them are moving around a little bit. So that should help you a little bit as you model it. And then obviously, look at where feedstocks are trading and diesel's trading.

The other incremental comment that I would add to Mike's also is remember when we completed the JV with Neste, one of the things that we were looking for was incremental improvement around our feedstock slate, and we got that with a partner in Neste. So even though we are sharing 50% of the project, we actually improve the economics of the project by the feedstock that Neste is obligated to bring through their partnership with us. So just another data point as you're contemplating how to think about that.

Our next question, and our last question will come from Matthew Blair with TPH.

Hey, thanks for taking my question. Could I get your thoughts on the wide octane spreads that we've been seeing? What -- do you think that'll persist for the rest of 2023? And are you fully compliant on Tier 3? Or are you short and buying credits in the market? Thanks.

Yes, Matt, I can comment on the octane, they obviously you're going to move seasonally and quite a bit. But we've seen steady strength in octane spreads, really as a result of running the systems harder. As we look at not just our system, but the global system working to meet demands, and out running our octane capacity to a certain extent as other facilities have been shut down throughout the network. So you kind of have a bullish long-term outlook as it relates to octane spreads and position well around that, based on our octane capacity in our system.

And to the last part, we're not going to comment on our long or short position on the credits.

All right. With that, thank you, everyone for your interest in Marathon. If you have any additional questions or if you'd like clarification on the topics discussed this morning, please reach out and our IR team will be available to your call. I look forward to speaking with everyone. Thank you.

Thank you. That does conclude today's conference. Thank you for participating. You may disconnect at this time.