Marathon Petroleum Corporation's (MPC) CEO Mike Hennigan on Q2 2021 Results - Earnings Call Transcript

Marathon Petroleum Corporation (NYSE:MPC) Q2 2021 Earnings Conference Call August 4, 2021 11:00 AM ET

Company Participants

Kristina Kazarian – Vice President, Investor Relations

Mike Hennigan – Chief Executive Officer

Maryann Mannen – Chief Financial Officer

Ray Brooks – Executive Vice President, Refining

Brian Partee – Senior Vice President, Global Clean Products

Conference Call Participants

Neil Mehta – Goldman Sachs

Doug Leggate – Bank of America

Roger Read – Wells Fargo

Manav Gupta – Credit Suisse

Phil Gresh – JP Morgan

Theresa Chen – Barclays

Sam Margolin – Wolfe Research

Jason Gabelman – Cowen

Operator

Welcome to the MPC Second Quarter 2021 earnings call. My name is Sheila, 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.

Kristina Kazarian

Welcome to Marathon Petroleum Corporation's second quarter 2021 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. Factors that could cause actual results to differ are included there, as well as in our filings with the SEC.

And with that, I'll turn the call over to Mike.

Mike Hennigan

Thanks, Kristina. Before we get into our results for the quarter, we wanted to provide a brief update on the business. During the second quarter, we saw gradual improvements in the demand for our products as the rollout of COVID vaccinations and removal of mobility restrictions have led to more economic activity and increased demand for transportation fuels. That said, we're close to the end of the summer driving season, which is typically our strongest part of the year. Gasoline demand is currently 2% to 5% below 2019 levels with the West Coast still lagging at about 10% down. Diesel demand continues to hold up well and is flat to 2019.

Despite the growing levels of personal passenger traffic, we continue to see an absence of the longer haul international flights and business travel. Overall, jet demand remains down nearly 30% below pre-pandemic levels. The full return of aviation fuel demand will likely still take some time, particularly with the recent increasing spread of the COVID-19 variants. As we head into the second half of the year, we remain hopeful, but cautious in the recovery. And so we'll remain focused on the elements of our business within our control.

Slide 4 highlights progress on our strategic priorities for the quarter. First on May 14, we closed the sale of our Speedway business to 7-Eleven. In conjunction with the close, we announced our plans to return $10 billion of sale proceeds to shareholders through share repurchases. As part of our commitment to quickly return capital, we immediately launched a modified Dutch auction tender offer in which we're able to repurchase nearly $1 billion worth of shares. As we shared in our release this morning, we are proceeding with the next steps in our plan to complete the remaining $9 billion return of capital over the next 12 to 16 months.

Second, we continue to take steps to reposition our portfolio. Dickinson reached full design capacity during the quarter at approximately 180 million gallons per year, Dickinson is the second largest renewable diesel facility in the United States. At Martinez, we're progressing detailed engineering and permitting to convert that oil refinery to a renewable diesel facility. Based on our progress and discussion with feedstock suppliers, we're confident in the timeline we have set to begin producing renewable diesel in the second half of 2022 with approximately 260 million gallons per year of capacity. Additionally, we expect to reach full capacity of approximately 730 million gallons per year by the end of 2023.

Third, we continue to keep a diligent focus on cost and capital in a challenging commodity business such as ours, being a low-cost operator ensures we will remain competitive. We have continued to challenge ourselves to examine all aspects of spend, and as a result, have delivered incremental progress. In the first half of 2021, our operating results reflect our goal to reduce overall refining cost structure by $1 billion. Importantly, I want to note that in June we published our two annual ESG related reports. Our sustainability report provides an in-depth look at the company's sustainability approach and performance consistent with the reporting guidance from SASB and GRI. Our perspectives on climate related scenarios follows guidance from TCFD and analyzes the company's resiliency relative to climate scenarios put forth by the IEA.

On Slide 5, I'd like to take a moment to go over some of the ways we're challenging ourselves to lead in sustainable energy. From a strategic standpoint, our focus is to balance the needs of today while investing in a sustainable energy diverse future. That includes strengthening resiliency by lowering our carbon intensity and conservative natural resources, developing for the future by investing in renewables and emerging technologies and embedding sustainability and decision-making in all aspects of engagement with our people and many stakeholders.

We currently have three company-wide targets, many of our investors know well. First, a 30% reduction in our Scope 1 and Scope 2 greenhouse gas emissions intensity by 2030. Second, a 50% reduction in midstream methane intensity by 2025. And lastly, a 20% reduction in our fresh water withdrawal intensity by 2030. The evolving energy landscape presents us with meaningful opportunities for innovation. We've allocated 40% of our growth capital in 2021 to help advance two significant renewable fuels projects. In late 2020, we began renewable diesel production, our Dickinson North Dakota facility, second of its kind in the United States and are progressing the conversion of our Martinez, California refinery tool, renewable diesel facility.

Finally, to demonstrate our focus on making sustainability pervasive in all we do for executives and employees, we link a portion of the annual bonus program to an ESG metric. We recently introduced a diversity equity and inclusion component to these metrics as well, making us the first U.S. independent downstream company to link improving diversity to compensation in the same way we led the industry in linking GHG intensity reductions to our compensation last year. Safety in our operations is another key to sustainable operations. In 2020, our teams demonstrated strong safety and environmental performance, including a nearly 40% reduction in the most significant process safety events and a 40% reduction in designated environmental incidents over 2019. Our personal safety performance continues to be better than industry average for the U.S. refining and midstream sectors.

At this point, I'd like to turn it over to Maryann to review second quarter results.

Maryann Mannen

Thanks, Mike. Slide six, provides a summary of our second quarter financial results. This morning, we reported an adjusted earnings per share of $0.67. Adjusted EBITDA was $2.194 billion for the quarter. This includes the results from both continuing and discontinued operations. Cash from continuing operations, excluding working capital, was $1.535 billion, which is approximately $1 billion increase from the prior quarter. And for the first time in nearly 18 months, we generated ongoing operating cash flow that exceeded the needs of the business, capital commitments, as well as covered our dividend and distributions.

Finally, we returned nearly $1.4 billion of capital to shareholders this quarter through dividend payments and share repurchases. The close of the Speedway sale marked a significant milestone in our ongoing commitment to strengthen the competitive position of our portfolio. So we wanted to call out some of the key points on Slide 7. We received total proceeds for the sale of Speedway of $21 billion; based on our tax basis our cash taxes current and deferred will be approximately $4.2 billion, which is lower than our original $4.5 billion estimate. We have accrued for this on the balance sheet. In addition, we had closing adjustments of approximately $400 million. Therefore, the after-tax proceeds from the sale will be $17.2 billion. To be clear this number is higher than our initial $16.5 billion estimate.

On Slide 8, we present an overview of the use of the proceeds. Since the close of the transaction we have reduced structural debt by $2.5 billion and purchased approximately $1 billion of stock. In the post tender period we did not repurchase any incremental shares in light of a couple of regulatory constraints; First, a post tender cooling off period, and second, our routine quarterly restricted period in the lead-up to the release of our earnings information. That said not repurchasing during that limited window is not indicative of any deviation from our commitment to complete within 12 to 16 months. Consistent with that commitment as Mike mentioned earlier, we are commencing the next steps to complete the remaining $9 billion return of capital. Specifically, we are entering into an open market repurchase program that will allow us to buy for a period of time, including when the company may have information that otherwise precludes us from trading. And we will provide updates on the progress during our earnings calls.

Slide 9, illustrates the progress we have made lowering our cost structure. Since the beginning of 2020, we have made a step change in our refining operating cost and decreased our overall cost profile by approximately $1 billion. While there is quarter-to-quarter variability, our refining operating cost in 2020 began at $6 per barrel and are now trending at a quarterly average of roughly $5 per barrel for 2021. We have applied the same cost discipline framework that we use for refining operating costs to our corporate cost as well. There may be variations in these corporate costs quarter-to-quarter we believe we have lowered our overall cost structure by more than $100 million. And we are committed to challenging ourselves every day on ways to reduce expenses. As you know, natural gas is a variable cost in operating a refinery, these costs have recently increased nearly $1 per MMBtu, and we anticipate this being a headwind for the third quarter. While our results reflect our focus on cost discipline, every day we remain steadfast in our commitment to safely operate our assets and protect the health and safety of our employees, customers, and the communities in which we operate. As we have shared with you previously, our cost reductions should be sustainable, not impact revenue opportunities and in no way jeopardize the safety of our people or our operations.

Slide 10 shows the reconciliation from net income to adjusted EBITDA as well as the sequential change in adjusted EBITDA from first quarter 2021 to second quarter 2021. Adjusted EBITDA was more than $600 million higher quarter-over-quarter driven primarily by refining and marketing. As we previously mentioned, this quarter's results include the impacts of closing the Speedway sale. Here you can see the $11.7 billion pretax gain on the sale reflected in the adjustments column of $11.6 billion, which includes other adjustments of $79 million for impairments and transaction related costs. The $3.7 billion financial tax provision, excuse me, financial tax provision reflects the net impact of cash taxes and deferred tax impact. The resulting $8 billion gain on sale is reflected in our quarterly net income. Slide 18 in our appendix walks through the specific impacts of the Speedway sale across the three financial statements.

Moving to our segment slide results; Slide 11 provides an overview of our refining and marketing segment. The business recorded the second consecutive quarter of positive EBITDA since the start of the COVID pandemic with adjusted EBITDA of $751 million. This was an increase of $728 million when compared to the first quarter of 2021; the increase was driven primarily by higher refining margins, especially in the Mid-Con region as that region's cracks improved 57% from the first quarter. Also contributing to the improved results was higher utilization, which was 94% for the second quarter versus 83% in the first quarter. It's important to recall that we idled two high cost refineries in 2020. If adjusted to include that capacity, idled in 2020 utilization would have been approximately 78% in the first quarter of 2021 and subsequently increased to 89% in the second quarter of 2021. Operating expenses were relatively flat with the previous quarter, despite the increase in utilization, reflecting the team's commitment to cost discipline despite rising variable cost.

Slide 12 shows a change in our midstream EBITDA versus the first quarter of 2021. Our midstream segment continues to demonstrate earnings resiliency and stability with consistent results from the previous quarter. Here again, the team continues to make excellent progress executing on the strategic priorities of strict capital discipline, lowering the cost structure and portfolio optimization. By the end of 2021, we estimate that MPLX will have decreased their structural costs by $300 million.

Slide 13, presents the elements of change in our consolidated cash position for the second quarter. It reflects both our continuing and just continued operations. We have also specifically called out items related to the Speedway close. Within continuing operations, operating cash flow before changes in working capital was $1.5 billion in the quarter. Changes in working capital were flat this quarter increasing crude prices provided a source of more than $500 million, which was mostly offset by the large receivable balance with Speedway becoming a third-party customer and typical seasonal refined product inventory builds. During the quarter, MPC decreased debt by $3.3 billion. Additionally, MPLX reduced third-party debt by approximately $800 million during the quarter. With respect to capital return MPC returned $380 million to shareholders through our dividend and repurchased $981 million worth of shares using Speedway proceeds. At the end of the quarter, MPC had $17.3 billion in cash and higher returning short-term investments, such as commercial paper and certificates of deposit.

Turning to guidance on Slide 14, we provide our third quarter outlook. We expect total throughput volumes of roughly 2.8 million barrels per day. Planned turnaround costs are projected to be approximately $195 million in the third quarter. The majority of the activity will be at our Robinson and Mandan refineries in the Mid-Con region. As we have previously mentioned, our turnaround activity is back half weighted this year. Other operating expenses are coordinated to occur during these time periods as well. And so you are seeing the impact in our guided costumes for the third quarter. Total operating costs are projected to be $5.05 per barrel for the quarter. Distribution costs are expected to be approximately $1.3 billion for the quarter. Corporate costs are expected to be $175 million consistent with the second quarter and reflecting the approximately $100 billion – $100 million, excuse me, in costs that have been removed on an annual basis.

With that, let me turn the call back over to Kristina.

Kristina Kazarian

Thanks, Maryann. As we open the call for questions, as a courtesy to all participants, we ask that you limit yourself to one question and a follow-up, if time permits we will be prompt for additional questions. We will now open the call to questions. Operator?

Question-and-Answer Session

Operator

Thank you. We will now begin the question-and-answer session. [Operator instructions] Our first question will come from Neil Mehta with Goldman Sachs. Your line is open.

Neil Mehta

Good morning, team, and nice results here this quarter. The first question I had was just about the execution of capital returns. As you said, you have $9 billion to return to capital – capital to return back to shareholders here over the next 12 to 16 months. Is it fair to say it's going to be in the form of a buyback? And will you be executing it just ratably in the market? Just talk a little bit about how you plan on executing it? And is there any consideration of anything other than a buyback for the capital returns?

Maryann Mannen

Sure, Neil. Hi. it's Maryann and good morning. Yes, we are planning on commencing what we would call our open market repurchase program and that will begin here immediately after the call. We have all of those options that we've shared with you in the past, all of the tools, ASR and open-market purchase, including the possibility for a tender. Those still remain all viable options for us, but we believe right now that the best way for us to achieve that commitment and as we reiterated here on the call, in the next 12 to 16 months and to return that remaining $9 billion would be through an open-market purchase program right now.

Neil Mehta

And Maryann, as you guys think about that repurchase, is the view that you would want to do it ratably? Or do you want to be opportunistic? Do you believe that the right approach to share repurchases is cost averaging in over the next 12 to 16 months or to be opportunistic on volatility? Just talk about your strategy around execution?

Maryann Mannen

Sure, Neil. I think, look, the reason why we're using an open-market repurchase program is we believe we have some control over that and certainly using an opportunistic approach over this time period is the approach that we believe is best for us during this time period. So certainly, we would be using an opportunistic approach during this time period.

Neil Mehta

All right. Thanks.

Operator

Our next question comes from Doug Leggate with Bank of America. You may proceed.

Doug Leggate

Yes, thank you. Good morning, everybody. Mike, there is – I guess, there's murmurings that the Biden administration could take a hard look at partnership structures for MLPs. I'm just curious if you can offer any perspective on how it might change your thoughts around your ownership structure and the current strategy around MPLX, if something like that plays out?

Mike Hennigan

Yes, Doug, it's a good question. So obviously, with the administration change and with the agenda that they have out there, they're looking for ways to pay for the programs that they have in place. So we're aware of the potential there. Obviously, there's a couple bills that are involved with that dynamic. I would tell you, right now, our thinking though, is that we would stay in the MLP structure because we don't think it's going to change. We don't know for sure. Obviously, if it did lose its tax status, it would change our dynamic. But right now, Doug, if you're asking what's the probability, I think we are on the side of – we don't think it is going to change, and we think the partnership will still maintain its tax status.

So obviously, for the size of the MLP that we have, if all of a sudden, it was a taxed entity you're looking at around $800 million to $1 billion of cash flow that would be lost. And I know others have asked this in the past. I mean, it's predominantly the number one reason why we maintain the partnership structure as compared to converting to a C corp. There's two dynamics that come into play. One is an immediate tax impact to all unitholders, of which MPC is the largest, obviously. And then, more importantly is to the ongoing cash flow change that would occur at MPLX. So we understand some of the pros and cons of the structure. At the same time, we think having that cash flow keeps us in the MLP mode. So obviously, if the rules change, if the administration does something different, we'll adapt accordingly. But in the short term, we still support the structure because it gives us that additional cash flow as opposed to a tax burden.

Doug Leggate

Yes, presumably, you're not aware of any discussions that you've had then with the administration around this particular issue.

Mike Hennigan

No, I mean, we know that there's some advocacies for it and some that are against it. Our intel is that we think at the end of the day, the partnership status will stay the way it is. But I'm not trying to call politics here, Doug. Whatever happens, we'll adjust to it, but for right now, we think the MLP structure will stay the way it is.

Doug Leggate

Thank you. Mike, my follow-up is, I guess, as a follow-on to the question on buybacks just to kind of put some numbers to you that I'm sure you're very familiar with. Your market capitalization, obviously, mid-30s, you strip out your share of the publicly traded value of MPLX. And what you're left with there's a value of around $15 billion, $16 billion, which implies that the remaining buyback would be more than half of the current market capitalization.

Clearly, that's impactful. I'm just wondering if you can frame for us how you would intend to tackle a buyback of that scale when you think about it that way? I know you've touched on that a little bit, but when you put microchip in context, is it big enough. Just curious how you think about moving that forward over the next 16 months.

Mike Hennigan

Yes, Doug, I would say it's a good problem to have. We are committed – as Maryann said in her remarks, we are committed to returning capital. At the end of the day, we – for a long time, we were saying about $16.5 billion. I mean, now that we've closed and worked through some of the details, it's a little over $17 billion. We have prioritized the balance sheet. We've taken out some debt there. We've maintained some dry powder to see how things continue to play out, and we've committed to $10 billion. So throughout the time from the announcement to close, we reiterated to investors that we wanted to do it as quickly and efficiently as possible.

To meet our commitment of quickly, we offered a Dutch tender. The market spoke and said $1 billion as opposed to what we had offered out as far as the total liquidity. Now we are, as Maryann said in the remarks, we're going to go more opportunistic and be in an open market environment. So some of the questions that we get from people is are we still committed to that? And as Maryann said, we want to reiterate, we are committed to that. Nothing has changed in our thought process there. It is going to take time. To your point, it is a large number. We are limited by the amount of trading volume we have and the liquidity that we have in our shares. So that is part of the constraint that we have, but we are committed to returning it. And we're going to go into this program, and obviously, each quarter, we'll update the market on the results.

Doug Leggate

Thanks, Mike, for taking my questions.

Mike Hennigan

You're welcome, Doug. Thank you.

Operator

Next, we will hear from Roger Read with Wells Fargo. Your line is open.

Roger Read

Yes, thank you. Good morning. Let me take a quick detour over to the renewable diesel side of the business. Obviously, you've got the North Dakota Dickinson facility up and running. I was curious is it running off soybean oil? If you could give us any incremental views on its contribution to the Mid-Continent profit that we saw improve this quarter? And then, on the start-up in Martinez, what do you expect the feedstocks to be there?

Mike Hennigan

So it's a good question, Roger. I'm going to let Ray give you some specific on Dickinson? Go ahead, Ray.

Ray Brooks

Good morning, Roger, this is Ray Brooks. Just want to talk a little bit about Dickinson and how it's running. As you alluded, Dickinson is up and running now. During the second quarter, we did reach our design capacity of 180 million gallons a year, good news, and we're happy about that. The other thing operationally is we did reach the yields of renewable diesel we were seeking to get in the mid-90s, and so we're happy about that. As far as feedstocks, the design for Dickinson was basically an 80:20 mix of soybean oil and distilled corn oil.

And as you probably know, the soybean oil economics are challenged right now. What I'm really proud of the team is doing is we're seeking every day to optimize a few things. First, optimize the operation of the facility to get to the lowest carbon intensity from our operations, and then, we're also optimizing the feed slate within the – from the design basis and we're having some success in that regard. So that's really how Dickinson is running. And right now, it's – like I said, it's up running, and it's the second-largest renewable diesel plant in the United States.

Mike Hennigan

Roger, it's Mike again. I was just going to say to your second question on Martinez, we're not going to disclose at this point what we're thinking about as far as the feedstocks. That's still in discussion with many players. So I can't really comment on that other than what we said in our prepared remarks that the engineering is going well, the permitting is going well. We still feel really good about the project from a lot of aspects. So we'll give you more color on that as time goes by.

Roger Read

Okay, great. And then, a follow-up question, maybe for you, Maryann, just because you made the comment about natural gas prices being up. Are there any other inflationary aspects we need to watch for in the R&M sector here? I know you've got your overall goal to cut costs and some progress there, but there's always an offset unfortunately. I was just curious what else may be pushing against you there, recognizing, of course, that natural gas can go down about as quickly as it goes up.

Maryann Mannen

Yes, you're right. And certainly, as we see it right now, we're looking at it as a tailwind that is natural gas to the third quarter. I would say to your first question around any other specific inflationary aspects, there's nothing – obviously, we didn't point to anything. There's really nothing of significance that we see at this juncture that would have a negative impact on the third quarter.

Roger Read

Okay, thank you.

Operator

Our next question comes from Manav Gupta with Credit Suisse. Your line is open.

Manav Gupta

So Mike, first, congratulations. I know you took over during the pandemic, but one thing which you took over when you stressed was everything has to be free cash flow in the portfolio and refining was free cash flow positive. I think, you made about $500 million or $600 million in free cash, so congratulations on achieving that goal.

Mike Hennigan

Thanks, Manav.

Manav Gupta

My question here is on those lines. If I look at your current dividend obligation about $1.3 billion and then, I look at the cash that MPLX is giving you about $1.8 billion, and you look at the corporate and expenses of like $175 million a quarter, like essentially, where we are in the equation? Even if refining only contributes like $100 million to $200 million to overall free cash flow, you can meet your dividend obligation. And once you do execute this buyback there's like $320 million or so dividend obligation reduction. So what I'm trying to get to is, not that refining will not make a positive free cash flow but you actually do not need a positive refining free cash flow to meet the dividend obligation. Am I thinking about these parameters correctly?

Mike Hennigan

Yes, Manav, you are in general. I think, one of the things that sometimes people miss is our relationship with MPLX as you're pointing out. So at the current distribution level at MPLX, we do get that $1.8 billion coming back into MPC. So I think you're right. It's one of the uniquenesses that's a positive of the structure that we have. Right today, MPLX is generating excess cash flow beyond capital and distribution as well. So financial flexibility is increasing at the partnership as well. So I think, we're in a pretty good position from that standpoint, and I think you're thinking about it right.

Manav Gupta

Okay. And the quick follow-up here is, I mean, you have done a – the team has done a very good job of lowering OpEx per barrel. It is about 25% down year over year. So besides the closure of the two assets, Gallup and Martinez, which are the other assets or part of the portfolio in the refining, whether it was Galveston Bay or wherever, where these material reductions have come in, which is allowing you to push the OpEx per barrel down?

Mike Hennigan

Yes, Manav, it's really occurred across the whole portfolio. Ray and the refining team have done a really nice job on that side. All the support functions on the corporate side have done as well. So it is part of my DNA to be very, very conscious about cost. The team knows that's going to be a high priority for us all the time. In fact, if anything, Maryann just mentioned, as refining runs have come back up kind of with the recovery, variable costs have come up, but we've been able to maintain a pretty consistent level of OpEx there. So that's been a good story for us. We do have, again, natural gas potentially going up.

But overall, we're going to continue to challenge the portfolio, both on the refining side of the business, also in the midstream side of the business. For those who listened to the MPLX call, we had originally stated about $200 million of cost reductions at MPLX. We've now increased that to about $300 million, about another $100 million that we feel pretty comfortable that we can take out of that business as well. So it's going to continue to be an area of focus for us. That's never going to change. We'll look for opportunities for us to optimize our system where we can. And back to your original point, we did have a couple closures. They were our highest cost facilities, but we're going to continue to evaluate the portfolio.

I've said a couple times to people that I want to get out of this pandemic environment to see what things look like afterwards, but we are still evaluating all assets of the portfolio. And to your point, and I'm glad you remember that is I am a driver that all of our assets need to generate free cash flow. That's a mantra that I believe in, and we're hoping that we have that in our portfolio at all times.

Manav Gupta

Thank you so much for taking my questions.

Mike Hennigan

You're welcome, Manav.

Operator

Our next question will come from Phil Gresh with JP Morgan. Your line is open.

Phil Gresh

Yes, hi, good morning. First question, just one additional one on the buybacks. The proceeds, as you noted, were $700 million higher than expected. I think, you still have a $2 billion-plus tax refund coming here in the third quarter. So how should we think about the ability over time to potentially exceed the $10 billion buyback target? Or perhaps another way of asking the question is, are there other uses you would see for the cash besides returning capital to shareholders, given what you've said about the balance sheet in the past?

Maryann Mannen

Hey, Phil, it's Maryann. Thanks for the question. Yes, as you know, as we've been sharing with you the use of proceeds, we've really just been focused on the $10 billion capital return. As you state very clearly, we know we have roughly $2.1 billion coming back from the CARES Act. We continue to expect to receive the lion's share of that in and about the third quarter – late in the third quarter, frankly, is our expectation. So you're right, we will have the remaining proceeds, as well as the incremental $2 billion that we'll continue to evaluate and make good decision really around whether or not that would go in the form of capital return. But we've not really declared beyond that initial $10 billion right now as we continue to look at the balance sheet. I think, you know the – obviously, our intent also was to ensure that we maintained investment grade as you hopefully you've seen the three rating agencies did reconfirm that.

So we do have investment grade again on – by all three of those agencies. We certainly will continue to focus on the balance sheet and be sure that that maintains a nimble, if you will. But again, that use of proceeds will continue to evaluate as we go forward.

Phil Gresh

To clarify, there's no change to the absolute debt or cash balance targets you've set in the past?

Maryann. Mannen

That’s right. Right, now for MPC, we've got about $9 billion of long-term debt. As we shared with you initially, we took $2.5 billion off immediately, frankly, as you saw in the quarter; we actually did a bit more than that a little over 800. We really cleared in anything that was sitting on our revolver as well. We'll continue to evaluate that. But at this point, we as you know, we were trying to be efficient about that. So we've not moved anything beyond that initial $2.5 billion of debt reduction.

Phil Gresh

Got it. Okay. A follow-up, just one more on the operating cost equation. With $5 a barrel of OpEx here in the third quarter and the fact that OpEx is lower 2021 over 2020 despite higher throughput and higher Nat gas. Where do you feel we are, I guess this is for Mike in the cost reduction journey here? Particularly as you benchmark to peers there are obviously regional differences to consider across portfolios, but how far along do you think we are when you look at what peers are doing?

Mike Hennigan

Yes. So how far along is, is always a tough question because like I said earlier it's a never ending game. So we're going to continue to challenge ourselves. We'll look for incremental improvements from here. Obviously we've gotten the lion's share of book. We originally targeted to get, but it's something that we're going to continue. It's going to be part of our DNA, that we're going to look at every opportunity, every chance we get to continue to push that down. I am a believer that in this business, we need to be a low cost operator. The team deserves a lot of credit to get after that. And we've made some meaningful change, but we're not done.

I'll quote Ray from the last call, we're not in the first inning and we're not in the ninth inning. So the game is still being played and it'll continue to be played. And we'll just obviously challenge ourselves all the time to see where we can run ourselves at as lean of opportunity as we can without sacrificing safety; that's another really important mantra. We're not going to put anybody at jeopardy, but we're going to run as lean as we can. And I just, my guidance to you is keep watching our results and keep talking about it.

And as we have additional disclosures to tell you what's happening, we'll bring those up quarter-to-quarter. Like I just mentioned earlier midstream has just moved from a sustainable $200 million down to $300 million down. So we feel good about that. We're now telling people that we were comfortable with that number. Still challenging it in the midstream space as well; so we're going to keep the eye on the ball as far as our costs, and we'll continue to look for opportunities to be as lean as we can be.

Phil Gresh

Yes. Thanks for the thoughts.

Mike Hennigan

You're welcome, Phil.

Operator

Our next question will come from Theresa Chen with Barclays. Your line is open.

Theresa Chen

Good morning. I wanted to maybe first ask about the refining macro landscape given that demand has recovered completely on the diesel front and mostly on the gasoline front; and with the utilization that you achieved in the second quarter as well as the guidance for the third quarter, it seems to indicate a relatively optimistic outlook for the near-term. So would you agree with that? And just generally, what are your views on refining profitability in the second half? And related to your comments about jet demand being off 30% or so, still is that what's capping the utilization guidance from here?

Mike Hennigan

Yes. Theresa, sorry, I'll let the other guys jump in. I guess the term we use was hopeful, but cautious. So we are hopeful that we are recovering and continue to do so. What we've seen obviously, over the last year has been a very tough environment that we're coming out of particularly in the U.S. The reason we're still cautious, however, is the Delta variant is spiking up in a lot of areas. Outside the U.S. is a much more difficult environment than inside the U.S. today. And then you pointed out a couple of things. Jet fuel is still lagging in our view, and that'll continue to lag for some time, but eventually it will come back. But for right now, it is still lagging, and the other one that we pointed out was the west coast is still lagging.

So we're going to have to see Theresa, to be honest with you, we're going to have to see how the COVID, plays itself out into the second half of the year. And as we approach another winter season if, if there continues to be increased infection, obviously there's going to be some restraint on the demand as a result like we've seen before. Hopefully not, hopefully people are seeing this variant spread and vaccination rates will increase from where they are today. I think there was a good responses originally, but I think it needs to go to another level. So we're obviously hopeful that people will take caution and get vaccinated. But in general, I mean, we have the same outlook that I think you and others have is that's why we use the word hopeful that we're recovering; coming out of this, but cautious that we still have some road to plow.

And anybody wants to add. Nobody wants to add.

Theresa Chen

Fair enough. And my second question is related to the Martinez conversion and following up on something that came up in a midstream call about housing some of the assets within MPLX, just in light of the midstream entity throwing off good free cash flow with healthy balance sheet currently, and needing to insulate its own terminal value. When we think about some of the bigger ticket items that you have to spend on such as the pre-treatment unit, or even the conversion of from the processing units, would it – would you have the flexibility to decide between MPLX participating at cost or dropping down once fully cash flowing. Is there a preference at this point between the two? If that is the fast-forward and just on the ladder, if you drop things down once fully cash flowing thinking, I think this is, I believe, your previous strategy with cap line and keeping that upstairs until it is fully reversed. Because when you boil it all down for Martinez, I imagine this would really didn't leave like a pretty meaningfully different amount of capital that MPLX could contribute to fund the project?

Mike Hennigan

That was a long one there, Theresa. Let me see if I can break it apart. I think that the main message that you're asking is we do have a unique structure that enables us to look to create value for both MPC shareholders and NPLS unit holders. So there is no rule of thumb to what you stated earlier, it's case by case basis. There's a lot of specifics to go into it. The dynamics of each of the individual opportunities, but we do have that ability to sit down and figure out how we can create value on both sides. So, obviously it's our goal to create value at MPC and MPLX and having the flexibility between the two structures, enables that. But I do want to leave you with, there's not a rule of thumb. There's not a, hey, this is the way we do this. Every instance gets its own debate and discussion, and we decide what we think is the best to create the most value.

Theresa Chen

Thank you.

Mike Hennigan

You're welcome.

Operator

Next we will hear from Paul Cheng with Scotiabank. Your line is open.

Kristina Kazarian

Hey Paul, are you there with us today? Are you on mute by any chance, Paul? All right. Operator, let's move to the next caller and then we can have Paul re-prompt if you're with us, Paul.

Operator

Thank you. Next, then we will hear from Sam Margolin with Wolfe Research. You may proceed.

Sam Margolin

Good morning. Thank you.

Mike Hennigan

Good morning, Sam.

Sam Margolin

Question on Martinez and the initial start-up; I just wonder how you're thinking about its performance in the period before the pre-treatment unit starts-up and I'll contextualize it with something, when your peer said, which is that there's an expectation that feedstock might eventually price itself on CI score, similar to the way that within the refining complex commodities price on sort of their end market value. And so I was just wondering if you're thinking about that as a possible outcome, and whether that may make operations before the PTU starts up a little easier? Or whether the expectation is really that Martinez shouldn't enter kind of a run rate profitability until that PTU is going?

Ray Brooks

Hey, Sam, this is this is Ray, and I'll take your question. You're right. As we develop the Martinez project and it comes on and phases – the different phases will have a different feedstock mix. And so Phase I essentially as we come on with the initial hydroprocessing unit that is going to be without the pre-treatment system. I don't want to get, like Mike said; I don't want to get into too much of the feedstock slate. What I would like to emphasize though is, is we have a lot of optionality around how we receive feedstock between truck and rail and water and ability without having to pre-treatment system still to optimize that – optimize that mix?

The other thing I'll talk about Martinez, whether it's Phase 1 or Phase 2, Phase 3 is we did our – when we looked at this project, we looked at it with different feedstock capabilities and the most conservative feedstock availability, and for Phase 1. And we still feel good about the project, even with a – if it was a very strong soybean oil-based slate, but like said we're going to work to optimize around all the logistics assets, the capabilities that Martinez offers us.

Mike Hennigan

Sam, its Mike. I'm just going to add to what Ray said. I mean, I know your question is depending on where the market goes? But the thing that makes us feel really good about Martinez is several factors. One, we think we have a really competitive CapEx and OpEx situation, and that was one of the major drivers when we looked at this. Second as Ray just mentioned, we have really, really strong logistics; pipeline, rail, water, truck, we have a lot of opportunity there to provide value.

And then the ultimate logistics is we're in California, where we're sitting on the demand. So location also matters. So regardless of what happens in the marketplace and it will ebb and flow just like every other commodity market? The reason we're so bullish on our Martinez asset is those factors that are in place day in and day out. The OpEx that we're going to run, the CapEx that it takes to get there, the logistics that we have, the location that we have, all of those play to our favor regardless of how the commodity move day-to-day; I hope that makes sense.

Sam Margolin

Yes. Understood. And then just to follow-up on RINs and the RVO. MPC's advantaged because you satisfy your D6 obligation through blending, but there's some elements of that that are hard to follow in terms of realizations because marketing outcomes have different RINs effects embedded in them. So I was wondering if there's anything you can share about just sort of the net effect of blending on the gasoline side and how you navigate it. Just the volatile RINs environment and maybe what that means on sort of a go-forward basis? Thanks.

Brian Partee

Yes, Sam, this is Brian Partee. I can take that question. So, first thing I would do is actually zoom out just a little bit and think about a blended sale is actually further down the value chain. So it's naturally going to be a higher margin sales and say a bulk sale that doesn't have a rant or a blend component to it. So we've stated publicly that we're in that 70% to 75% from blend perspective from an RBO. So we're just naturally further down the value chain. I think you hit on a couple of things, though. The volatility is important. So the RVO is a 12 months compliance window, and it's really how you execute your compliance strategy.

And it's the volatility in – actually in the high RIN environment that we're in now provides opportunities for probably an outperform or an underperformed depending on the execution of your compliance program and we meet those obligations. So that is something that's probably not been as transparent to the marketplace as we are historically around in nickel, or so. On RIN that now in this environment, it does provide an opportunity. Its high risk high reward, but we feel confident with our ability to execute both from a blended perspective of what we blend, but also on the compliance program?

Sam Margolin

Thanks so much.

Brian Partee

You bet.

Operator

Our next question will come from Jason Gabelman with Cowen. Your line is open.

Jason Gabelman

Yes. Hey, thanks for taking my questions. I'll actually try to ask the question, Sam just asked a little differently, which is I've you seen the value proposition for blending biofuels change in this environment relative to where it was in 2018, 2019, or is the value benefits still there, meaning that it blending offsets the financial costs of having to go out and buying RINs because it's been suggested that the value proposition has changed a bit for various reasons.

Brian Partee

Yes. Jason, this is Brian Partee, and yes, I can take that. I think the great debate is the pass-through of the rant and the RFS costs, and it's very difficult to empirically point to that as a pass through. So, again, I'll fall back on the execution side of things. And I think that's really where the performance live, but it's very difficult to pinpoint any difference between the data points that you referenced back in 2018 to today, till today, It really gets boiled down to the execution side of thing?

Jason Gabelman

Okay. and then just a quick account question. There was about an $82 million benefit from other income, other income, excuse me, and refining a marketing margin that appears like the first time it's been there. Can you just discuss what drove that?

Maryann Mannen

I'm sorry, Jason, its Maryann. Could you repeat your question again? You're saying an $82 million benefit in the, in the quarter. I'm sorry, I'm not following you question.

Jason Gabelman

Yes. For the quarter, and the line item other income included in refining a marketing margin.

Maryann Mannen

Yes. Jason, we'll take a look at that for you and we'll come back to you. How's that?

Jason Gabelman

Okay, All right. That's great. Thanks.

Maryann Mannen

Yes.

Operator

Thank you. [Operator Instructions]

Kristina Kazarian

All right, Sheila, if there are no other questions in the queue today, we wanted to thank everyone for joining us. If you do have any outstanding questions, please feel free to reach out to our team at any point in time, and we will be here to help. Thank you everyone for joining our call today and have a great day.

Operator

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