Marathon Petroleum Corporation (NYSE: MPC) Q1 2020 Earnings Call Transcript

Marathon Petroleum Corporation (MPC) Q1 2020 earnings call dated May 05, 2020

Corporate Participants:

Kristina A. Kazarian — Vice President, Investor Relations

Michael J. Hennigan — President and Chief Executive Officer

Donald C. Templin — Executive Vice President and Chief Financial Officer

Raymond L. Brooks — Executive Vice President, Refining

Timothy T. Griffith — President, Speedway LLC

Brian K. Partee — Senior Vice President, Marketing

Rick D. Hessling — Senior Vice President, Crude Oil Supply and Logistics

Analysts:

Neil Mehta — Goldman Sachs — Analyst

Doug Leggate — Bank of America Merrill Lynch — Analyst

Manav Gupta — Credit Suisse — Analyst

Paul Cheng — Barclays — Analyst

Roger Read — Wells Fargo — Analyst

Phil Gresh — JP Morgan — Analyst

Prashant Rao — Citi Investment Research — Analyst

Brad Heffern — RBC Capital Markets — Analyst

Presentation:

Operator

Welcome to the MPC First Quarter 2020 Earnings Call. My name is Jacqueline, and I will be your operator for today’s call. [Operator Instructions]

I would now like to turn the call over to Kristina Kazarian. Kristina, you may begin.

Kristina A. Kazarian — Vice President, Investor Relations

Good morning, and welcome to Marathon Petroleum Corporation’s First Quarter 2020 Earnings Conference Call. The slides that accompany this call can be found on our website at marathonpetroleum.com under the Investors tab. Joining me on the call today are Mike Hennigan, CEO; Don Templin, CFO; and other members of the executive team. We also invite you to read the safe harbor statement on slide two. 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 SEC filings.

With that, I’ll turn the call over to Mike.

Michael J. Hennigan — President and Chief Executive Officer

Thanks, Kristina. Good morning, everyone, and thank you for joining our call today. As everyone is aware, the global pandemic became the focus in the quarter, and that continues today with our immediate priority on safely operating our assets to supply products to the market, protecting the health and safety of our employees and customers and supporting the communities in which we operate. The actions taken to prevent the spread of the virus have significantly reduced global economic activity and demand for our products, specifically towards the last month of the quarter. Our refining operating areas have been particularly hard hit in the Upper Midwest and on the West Coast.

At the same time, our Midstream and Retail businesses reported strong results, which offset some of the financial impact of lower refining demand and margins. As a result of this difficult situation, we’re responding with prudent tactical changes in our business: first, reducing our total capital spend by $1.4 billion or approximately 30% to $3 billion for 2020. This includes approximately $700 million at MPC and $700 million at MPLX. This reduction is planned across all segments of the business, with the remaining growth capital spend primarily related to projects that are in progress or nearing completion.

Second, we have reduced our planned operating expenses by approximately $950 million, primarily through reductions of fixed costs and deferring certain expense projects. This includes $750 million of operating expense reductions at MPC and $200 million of operating expense reductions at MPLX. Third, we have taken steps to maintain our financial flexibility. We’ve secured $3.5 billion of additional liquidity, including a new $1 billion 364-day revolver and issued $2.5 billion of senior notes. After taking these actions, we have approximately $6.8 billion of undrawn availability on our credit facilities. These actions strengthen our liquidity and also strengthen the through-cycle earnings power of our business.

At this point, I’d like to turn it over to Don to review the first quarter results in more detail, then I’ll come back and share my early focus areas as we start to implement changes at MPC going forward.

Donald C. Templin — Executive Vice President and Chief Financial Officer

Thanks, Mike. Slide five provides a summary of our first quarter financial results. Earlier today, we reported an adjusted loss per share of $0.16. Adjusted EBITDA was $1.9 billion for the quarter. Cash from operations before working capital changes was $1.3 billion, and our dividend payments for the quarter were $377 million. Slide six shows the sequential change in adjusted EBITDA from fourth quarter 2019 to first quarter 2020. Adjusted EBITDA was down approximately $1.3 billion quarter-over-quarter driven primarily by lower earnings in Refining & Marketing. Lower crack spreads due to demand destruction from the COVID-19 pandemic significantly impacted R&M earnings. First quarter results also included noncash lower of cost or market adjustments to inventory and goodwill and asset impairments totaling $12.4 billion.

Moving to our segment results. Slide seven shows the change in our Midstream EBITDA versus the fourth quarter of 2019. Midstream EBITDA increased $19 million versus the fourth quarter. The increase was driven by stable fee-based earnings and sustained organic growth in the base business, overcoming headwinds from declining natural gas prices in the quarter.

Slide eight provides an overview of our Retail segment. First quarter EBITDA was $644 million. Retail margins were nearly $0.33 per gallon in the first quarter. These strong fuel margins were partially offset by lower fuel volumes compared to fourth quarter, reflecting demand destruction associated with COVID-19. Same-store merchandise sales increased year-over-year despite fuel demand pressures in the quarter, reflecting the resiliency of the Speedway brand. We continue to target fourth quarter 2020 for the completion of the separation of Speedway, and we are progressing separation activities. However, the separation timing could change given the COVID-19-related impacts to the business environment and access to the capital markets.

Slide nine provides an overview of our Refining & Marketing segment. Performance in this segment reflected the challenges associated with managing the impacts of the COVID-19 pandemic and associated shelter-in-place orders. First quarter adjusted EBITDA was $154 million, a decrease of approximately $1.3 billion versus the fourth quarter. Margins in all regions decreased compared to fourth quarter 2019, particularly in the Mid-Con and West Coast regions where we saw negative gas cracks towards the end of March. Despite these challenges, our commercial team was able to capture favorable price realizations for both gasoline and diesel. Slide 20 of the appendix provides additional details on some of the primary drivers for capture. Refining operating costs decreased approximately $129 million from the fourth quarter.

Slide 10 presents the elements of change in our consolidated cash position for the first quarter. Cash at the end of the quarter was approximately $1.7 billion. Operating cash flow before changes in working capital was just over $1.3 billion. Changes in working capital were an approximately $2 billion use of cash in the quarter due primarily to the sequential decline in crude oil prices during the quarter. As you know, payment terms for our crude oil purchases are roughly 30 days, while our accounts receivables typically average around 10 days. Coupling this 20-day net payable position with our three million barrel per day system results in an approximately $60 million use of cash for every $1 decline in crude oil prices. The opposite is also true when crude oil prices are increasing. The company drew $3.5 billion on its revolving credit facilities in March and April primarily as a result of working capital changes.

On slide 11, we provide our second quarter outlook, which includes estimated throughput reductions at our facilities based on projected demand destruction from COVID-19 and associated shelter-in-place orders. We expect total throughput volumes of just over two million barrels per day, approximately 2/3 of our nominal normal operating capacity. We have temporarily idled our Martinez and Gallup facilities in response to demand destruction. Planned turnaround costs are projected to be $215 million in the second quarter, which includes work at our Galveston Bay and Los Angeles facilities.

Total operating costs, including major maintenance, are projected to be $6.90 per barrel for the quarter. Total operating costs on a dollar basis are lower compared to historic levels, but the per-barrel costs reflect the impact of lower throughputs throughout our system. Distribution costs are projected to be $1.275 billion. For the Retail segment, we expect fuel volumes of approximately 1.45 billion to 1.65 billion gallons and merchandise sales in a range of $1.4 billion to $1.5 billion. While fuel volumes have been significantly impacted by demand destruction associated with shelter-in-place orders, we expect merchandise sales to remain relatively resilient.

Slide 12 highlights the proactive steps we’ve taken to strengthen our liquidity position. At quarter end, we had a $5 billion revolving credit facility, a $1 billion 364-day revolving credit facility and $750 million from a trade receivables facility. During the first quarter, we drew $2 billion on the $5 billion revolver. And in mid-April, we drew an additional $1.5 billion, primarily to manage working capital impacts. In late April, we added a $1 billion 364-day revolver, and we issued $2.5 billion in senior notes. We used proceeds from the senior notes to repay borrowings under the revolver. As of today, the undrawn capacity on our credit facilities total $6.75 billion.

As shown on slide 13, we have a strong track record of maintaining through-cycle financial discipline. MPC’s parent-level debt of approximately $11.1 billion represents 1.5 times the last 12 months of MPC’s stand-alone EBITDA. This ratio excludes the debt and EBITDA of MPLX but includes distributions MPLX paid to MPC. We believe a strong balance sheet is essential to succeeding in this industry, and we are committed to maintaining our investment-grade credit rating.

With that, let me turn the call back over to Mike for some closing remarks before questions.

Michael J. Hennigan — President and Chief Executive Officer

Thanks, Don. Obviously, the current environment has required our immediate focus to ensure our through-cycle resiliency of our business, but I also wanted to briefly share my view for the future. Over the past decade, this company has grown to become one of the largest energy platforms in the country. Although MPC has been successful in many areas, there’s also a strong case for change to drive increased profitability, stronger through-cycle earnings and long-term value creation. There are three areas that will be our early focus to help us achieve these objectives.

First, we need to strengthen the competitive position of our portfolio. This means positioning our assets to be a leader in cost, operating and financial performance metrics. MPC has always been focused on safety and operational excellence, and that will not change. However, we need to focus further on the contribution of each of our individual assets and ensure the financial performance in all cycles meets our expectations and contributes to shareholder returns.

Second, we need to improve our commercial performance. We are fortunate to have an extensive integrated footprint, but we have an opportunity to be more dynamic to capture higher margins across the value chain. Success for our refining system starts with raw material selection, and it’s an area of opportunity for us to further take advantage of the refining asset capability. In addition, we have the opportunity to enhance and optimize the placement of our products across both the sales channels and the geographic marketplace. Focused enhancements to both raw material selection and product placement will increase our ability to maximize value across the entire value chain, increasing the margin we deliver to the bottom line.

And third, we need to lower our overall cost structure and be extremely disciplined in capital allocation. This means lowering our costs in all aspects of our business and challenging ourselves to be incredibly disciplined in every expense dollar we spend across our organization. It also means having a strict protocol on capital investment for the long term to focus on the highest-return projects, risk adjusting them and ensuring that we position the company to achieve these returns irrespective of market environment. I’m confident that if we excel in these areas and sharpen our focus on execution across our refining, marketing and midstream platforms, we will deliver better results, create a higher level of through-cycle earnings and provide a compelling value proposition for shareholders. It’s an appropriate time for change, I’m excited about the opportunities ahead of us.

In closing, I’d like to say that we take our responsibility to be a good corporate leader seriously and that we are grateful for everyone working on the front lines of this pandemic. This quarter, to support the efforts of health care workers across the country, we donated 575,000 N95 masks to 45 different hospitals across the country. Additionally, the Marathon Petroleum Foundation made a $1 million donation to the American Red Cross in April to help supply critical resources to communities in crisis. We have been inspired by the story shared with us as these supplies reach many communities in dire need, and we’re proud to do our part by contributing supplies and funds to organizations supporting those in crisis.

In addition, I’d also like to thank our business-critical employees who have been on the front line of our business, in the stores, in the control rooms and at our facilities and assets.

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

Kristina A. Kazarian — Vice President, Investor Relations

Thanks, Mike. [Operator Instructions] We will now open the line for questions. Operator?

Questions and Answers:

Operator

Thank you. [Operator Instructions] Our first question comes from Neil Mehta. Your line is open.

Neil Mehta — Goldman Sachs — Analyst

Good morning, Mike. Good morning. Team. And Mike, congratulations on the new role as CEO. My kickoff question here is on the cost savings and the capital reductions that you announced. Can you put some more meat on the bones behind the key line items that drove those reductions? And how should we think about whether cost and capital reductions are cyclical in response to the environment versus a structurally more capital-efficient approach you’re taking to running the business?

Michael J. Hennigan — President and Chief Executive Officer

Yes. Thanks, Neil. I’ll say, overall, we expect it to be more structural. There’s a little bit of cyclicality, and we’ll talk about that in a second, but mainly overall to be more structural. So as I said in my prepared remarks, I mean, one of the things that we’re going to focus on is very strict discipline on capital allocation. I’ll start with Midstream, and I’ll let Don and Tim jump in, in their respective areas as far as a little more color. But in Midstream, we’ve stated for some time that we want to have free cash flow come out of MPLX. And we’ve been on a program to reduce capital, to be real smart about where we’re investing for the long term in that business and kind of shifting the portfolio much more towards the L&S business and a little less towards the investments in the G&P business because that investment has been pretty robust over time. So if we get MPLX down to around that $1 billion or less, we expect to be free cash flow positive in that business, and we’ve kind of stated that as a target for 2021.

So overall, I think you’re going to see us try and maintain that level. And right now, we have a couple of projects that we’ve talked about, Wink-to-Webster and Whistler that are MPC-backed long-haul projects as well as the terminal that we’re building next to our Garyville refinery as an enhancement to that facility. So that’s a lot of where we’re putting the money in that business. In addition, I will tell you, one of my philosophies, Neil, is generating free cash flow from all of our assets. So as we look at capital overall, we got to make sure each of our assets are contributing cash back to the business. So I know there’s a little more detail in the refining assets. I’ll let Don give a little more color on what we’re doing in refining there.

Donald C. Templin — Executive Vice President and Chief Financial Officer

Sure, Neil. As you’ll recall, when we rolled out our budget for 2020, our Refining & Marketing budget was $1.55 billion. That included $450 million of maintenance capital, so it essentially included $1.1 billion of growth capital. And when we talked about our plan originally for 2020, about 60% of that growth capital was really attributable to two primary projects: one was the continuation of the STAR program, which will run into next year, 2021, so that’s at Galveston Bay; and the other was the Dickinson Renewable Diesel project, which will complete this year. So if you think about 60% of our $600 million basically of capital of the growth capital was those two projects, one will be completely done and the other will be in sort of a tapering mode and nearing completion, you’ll see that we’ll have a lot of flexibility around our capital budget next year.

Michael J. Hennigan — President and Chief Executive Officer

And Neil, it’s Mike. I’m going to add a little bit to the expense side. So again, back to your question on how much is variable versus structural. Obviously, with the pandemic and us reducing refining rates back to minimum, there’s a portion of variable cost there. But out of the $750 million of expense reduction on the MPC side, the majority of that is fixed costs that we expect to maintain at a lower level, about $500 million of it being fixed. And I’m going to let Ray kind of comment on that, in that area. And then partially, part of it is variable. On the Midstream side, about $200 million of it mostly we said was deferred expense projects. So right now, they sit in the deferred column. But as we look at that further, we’re going to take a look at whether they need to be deferred or whether they actually are part of our long-term plan. So let me let Ray add a little bit of color to the Refining fixed cost situation.

Raymond L. Brooks — Executive Vice President, Refining

Sure, Mike. On the fixed cost in Refining, there’s really three components that make that up. The first would be the turnaround segment, just lower overall turnaround expenses for the year with some deferral out of 2020. And then the other categories, there’s just lower maintenance costs and expense projects, just choosing to do less work, less projects at our refineries.

Michael J. Hennigan — President and Chief Executive Officer

Does that answer your question, Neil?

Neil Mehta — Goldman Sachs — Analyst

Yes, very thorough. A lot of good color there. The follow-up is just on Speedway. And then, Mike, can you just talk about from your perspective as the new CEO, how strongly you believe in the strategic merit of the Speedway spin-off or sale or whether you’re still targeting the fourth quarter, which you indicated in the press release? And just any strategic updates around the execution of the sale, which for many investors is an important catalyst for the stock.

Michael J. Hennigan — President and Chief Executive Officer

Yes. So I understand, Neil. It’s a good question. So I do believe in the separation is the best value proposition for MPC shareholders. So what we said in our remarks is we are still on schedule. And the expectation that we had guided before was completion in the fourth quarter. I’d say we’re still scheduling and on target to accomplish that. So strategically, I still believe the separation is the best value enhancement for MPC shareholders. The only caveat that we put out here obviously is the COVID-19 situation is still very fluid, and we’ll have to see how that plays out as far as recovery in the business.

And then the capital market access is another important part of executing that separation in a highly efficient manner. So with those two caveats, we are still committed to a separation and we’re continuing on the schedule. However, we just want to be cognizant of the current environment that could implement the timing a little bit. But we’ll have to see how that plays out.

Neil Mehta — Goldman Sachs — Analyst

Thank you very much.

Michael J. Hennigan — President and Chief Executive Officer

Welcome Neal.

Operator

Thank you. Our next question comes from Doug Leggate. Your line is open.

Doug Leggate — Bank of America Merrill Lynch — Analyst

Thank you. Good morning, everybody. I hope everybody has that doing well. And Mike, let me add my congratulations to your new role. Looking forward to seeing what you do next. In that regard, I wonder if I could just pick up on one of your comments you made on the call about the three steps you’re taking and maybe ask you a bit of a leading question. Where do you see the weak links in the remaining portfolio post Speedway? What are the areas you think need to be addressed to achieve your objectives?

Michael J. Hennigan — President and Chief Executive Officer

Yes, Doug, I’m not ready to disclose the term weak links. What I will tell you, though, is we’re going to do a comprehensive look at all of our assets, and over time, you’re going to see us come out with disclosures as to where we feel we are from a competitive position on each of the assets. As I mentioned earlier to Neil’s question, I’m a big believer in looking at long-term value of the assets. I’m a big believer in managing to free cash flow on an individual asset basis so that the overall portfolio is generating cash. I mean, as you’re very aware, this is a lot to a large extent, a return of capital business. And I think we’ve done a good job of that in the past, and I think there’s just an opportunity to do a little better in there if we really look at the portfolio.

So I do think I hope the takeaway is we are going to spend a lot of time on the portfolio of all the assets. We’re going to look at where we can improve the competitiveness of those assets, either from a cost standpoint or a commercial standpoint. That’s going to be a very high focus. So I’m hoping to leave you with those three items that each asset in the portfolio is going to be examined, our overall commercial approach, and we’ve started into that discussion already, is going to be discussed quite a bit. And then and lastly, we’re just going to lower the cost structure of the company. We think there’s an opportunity to do that at this point, and we’re going to get after that as quickly as we can.

Doug Leggate — Bank of America Merrill Lynch — Analyst

Presumably, that means asset rationalization is on the table, Mike?

Michael J. Hennigan — President and Chief Executive Officer

Yes. I think so, Doug. As I said, all the assets that we have in the portfolio are going to be examined. But yes, I think so. And I had previously mentioned in the Midstream space that we didn’t we don’t want to be in eight basins. That’s still a true statement. However, the gas business is now going through a little bit of a change. But yes, it applies to all the other assets that we have in the portfolio, whether they’re retail assets in the short term or the Refining assets as well. So yes, a real good examination of the competitiveness of our portfolio is the first priority.

Doug Leggate — Bank of America Merrill Lynch — Analyst

That’s great. My follow-up is I was going to ask you about the dividend but you’ve talked about return of cash business, so I’ll leave that for someone else. What I would like to ask you guys is you’re in a unique position to monitor demand trends. A couple of your competitors obviously have talked about, I would call it, green shoots coming out of April. I’m just wondering what you can share with us in terms of how you see things evolving in your markets. And I guess, more importantly, the 65% utilization guided for the next quarter, how would you respond? How quickly would you look to step up your activity before you feel comfortable enough, I guess, that the demand recovery is really underway? I’ll leave it there.

Michael J. Hennigan — President and Chief Executive Officer

Thanks, Doug. It’s another really good question. So I’ll start off on the high level macro. Obviously, there’s a lot of optimism towards recovery. At a very high macro level, fiscal policy from the administration towards stimulus packages are being implemented. Monetary policy is at low rates. Oil prices are at low rates for consumers, so there’s a lot of optimism in recovery. My caution, however, is we are currently in an oversupplied market. This has been a demand-driven event, both globally and in the U.S. We’ve been particularly hard hit, in our view, in the Upper Midwest and then even more particularly on the West Coast. So we’re optimistic that we’re starting to see that recovery. We’ll have some comments I’ll let Tim comment on specifically at the gasoline level as far as our same-store sales, etc., give you a little bit more color there. And then I’ll let Brian give you a little color overall on the diesel market as well.

So I’d say, overall, optimistically that we’re seeing good signs of recovery, but we still got a long way to go, that we’re still oversupplied on pretty much crude and products across the board. So there’s a lot of inventory that needs to work off. As far as when do you respond, obviously, the market will tell us that. So it’s a demand-driven event, and when the demand is sufficient for us to change our strategy, we’ll do that. But for right now, we’re staying at minimum rates. So let me let Tim comment a little bit about what we’re seeing at Speedway.

Timothy T. Griffith — President, Speedway LLC

Yes, Doug, at the retail level, as a lot of the stay-at-home orders got put in place in sort of the middle and late part of March, we saw gas demand, which bottomed probably even more than 50% down, I mean, that was in sort of late March and early April. We’ve seen steady recovery since mid-April with 5% to 15% improvement, really dependent upon the region, off of the lows. The weekly data that we’re seeing in terms of sales are supportive of that trend so far. And we expect to see continued improvement as more of the states continue or start the reopening protocols over the next couple of months. I mean the timing of a complete recovery is uncertain. It’s really a function of how quickly these stay-at-home orders are removed and how quickly the consumer gets back out on the roads.

Obviously, we’ve got a lot of businesses where people continue to work from home and they may continue through this month. But we’ll watch that activity. We’ve certainly seen a nice creep in demand and expect that’s going to continue. But we’ve got to get the commuters back on the roads, rather they’re commuting to work, rather they’re taking kids to school, which we may not see until the fall, rather they’re driving to locations for vacation or elsewise, we’ve got to get the consumer back on the road and hopefully get some signs of recovery. So we’re seeing some nice signs, but it’s probably a few months before we can really give a better sense for exactly how this is going to play out. But it’s we’re definitely off the lows and seeing some nice improvement.

Brian K. Partee — Senior Vice President, Marketing

Yes. Doug, this is Brian. Just to kind of reiterate a little bit on the gasoline side and build off of what Tim said. We have seen really the profile of the decline. It was really the last two weeks of March where we really things clipped off very fast really across all geographies. We hit the bottom of the market. We look week-on-week sales. We think this is the most relevant data points in the short term. So the week of April six was really what we’re calling kind of the bottom of the market. And over the last three weeks, we’ve seen steady week-on-week growth. So we see that as an optimistic trend for some of the reasons Mike indicated earlier, some of the drivers to that. So this week is starting off solid as well. But measured optimism. This is an unprecedented event. Not exactly sure what the profile of recovery looks like, but we’re seeing positive trends.

On the distillate side, similarly, we hit the bottom of the market the week of 4/6. Very modest recovery, though, since then. It’s been less impacted. Overall, EIA call on distillate demand has been somewhere declined, has been somewhere in the 20% to 25%. We have not seen that across our whole book. We’re off more in the 15% range currently year-on-year. Part of that is just due to gearing. We’re not really exposed to PADD one. So there’s been with some of the Corona depths of impact in PADD one, we’re not really exposed to that the way maybe others are. So we’re off more than 15%. Recovery on the distillate side is really going to be tied to the broader economy. Traditionally, diesel demand has been driven by the health of the economy. And we believe that’s going to be the case coming out of this, is we’re going to be watching the economic indicators. We think that will drive the recovery on the distillate side.

Doug Leggate — Bank of America Merrill Lynch — Analyst

That’s very thorough, guys. Thanks. May I just add, Mike, that Kristina and her team have done a great job helping us navigate this. So thanks to her and thanks to Don for getting on the phone with us when you ECU, Matt. So appreciate all your help.

Michael J. Hennigan — President and Chief Executive Officer

Thanks, Doug. Appreciate the kind words.

Operator

Thank you. And our next question comes from Manav Gupta. Your line is open.

Manav Gupta — Credit Suisse — Analyst

Hey, guys. I have a question, a bit of a demand question. On the jet fuel side of the equation, we are seeing jet fuel demand which is very low. And refiners are trying to compensate by blending jet more in the diesel, and that is causing the diesel inventories to move out a little. I’m trying to understand how MPC kind of work around this entire jet fuel situation. And is there something that can be done where you don’t blend jet fuel into the diesel causing the diesel inventory to move out?

Michael J. Hennigan — President and Chief Executive Officer

Manav, I’m going to let Ray give you some specifics there, but I would add one comment to your question and kind of what Doug was asking as well is I think there is some belief and we have this belief that there could be slower recovery back into the jet world, but that may also be a little bit of a boost to gasoline recovery as consumers kind of stay more towards vehicles as opposed to airplanes as the recovery starts to happen. I think that’s a phenomenon that we’re going to see a little bit. But let me let Ray give you some specifics on jet and diesel.

Raymond L. Brooks — Executive Vice President, Refining

Okay. Manav, with regards to jet fuel, we have a lot of capabilities to blend that into the diesel pool and have done so. In cases where we have high-sulfur jet fuel, we have the ability with the excess hydrotreating capacity, with the slowdowns, to hydrotreat that into ultra-low sulfur diesel. I guess the thing I’d really like to communicate is it’s been very fluid as far as whether distillates, strong initially distillate products. And so we had the ability to put everything into the distillate pool, and we really stretch the distillate pool now.

We’re seeing the strengthening of gasoline where we’re reworking those swing streams and pushing some back to gasoline. We’ve communicated in the past that our swing between gasoline and distillate is about in the 10% range, and we’ve been exercising every bit of that during the pandemic.

Manav Gupta — Credit Suisse — Analyst

Thank you for taking my question.

Michael J. Hennigan — President and Chief Executive Officer

You’re welcome.

Operator

Thank you. Our next question comes from Paul Cheng. Your line is open.

Paul Cheng — Barclays — Analyst

Hey guys, good morning. Mike, I want to add my belated congratulations. A couple of questions. First, on the commercial improvement. If we look back, say, 20 years ago to your words from the commercial side, so when you’re looking at what you know about the market that maybe a while ago and how Marathon has been doing, is there any area that you think, okay, maybe that I can change on the best package? In other words, what is the overall and also that do you need to relocate the operation for the commercial to be closer to maybe either Houston or that some of the commercial hub? And do you need beef up in your talent, external talent on that operation? That’s the first question.

Michael J. Hennigan — President and Chief Executive Officer

Yes. Thanks, Paul. Yes, first of all, I mean, you hit it on the head. My personal background is more in the commercial area and the financial area. So it’s an area where I’m going to spend a lot of my early time here. I don’t want to give any real specifics, but I to your second question, though, we do plan to have a bigger presence in Houston. That’s something that’s on our list of things that we want to accomplish. We have not had that in the past. So Rick and his team are moving towards that. Dave already has some stuff down in the Texas area. So I think you’re going to see us, over time, develop much more of a presence down in that area. I’m a believer that the Houston market is the center of the oil markets in the U.S., just like New York is the center of the financial market.

So having a Houston presence, I think, is real important for us. As far as talent overall, it’s another area that I think we’re going to spend quite a bit of time looking at where we can improve some of our talent across that area. So I guess the good news and the bad news for my commercial team is I have a lot of background in this area. I have a lot of strong thoughts on how to approach things. So there’s going to be a good collaborative discussion about how to go about it. And I will tell you, we started in that already. The immediate focus of what’s happened with the markets as a result of COVID has forced a lot of discussion here. So again, due to the competitive nature of it, Paul, I can’t get into a lot of specifics here. But I can tell you, as I stated earlier, it’s one of my main three areas that we’re going to spend a lot of time on.

Paul Cheng — Barclays — Analyst

Maybe can I just ask that do you think historically that the team is good but perhaps that they are a bit too conservative in their parameter how they look at things and not changing as maybe rapidly as the market condition change?

Michael J. Hennigan — President and Chief Executive Officer

Yes. I was taking a second there to see what you were thinking there, Paul. I mean there are some areas where I think we could be too conservative. There’s other areas where there’s different types of opportunities. I don’t really think of it overall in that regard. I think of it more in how we approach the market, how we go about crude selection, how we view different things. I mean we recently just saw pretty strong crude market contango, and how to take advantage of that, as an example is some of the discussions that we’ve had recently. So I don’t know if I’d use your term as the catch-all for what we’re doing. I think of it more as looking at what our assets do, how we position ourselves commercially, looking at how the markets are responding, where product placement is best suited.

So I think having maybe a little bit more quick flexibility and reacting to markets quickly. If you’re using that term to be conservative, then maybe I agree with that from that perspective. But I just think I use the word being more dynamic, more flexible, more able to adapt to market conditions quicker, and then overall, just having much more focus on what we’re doing commercially to support the assets that we have in place.

And I will tell you, one of the things that as a result of this COVID situation, we were having daily meetings on what was occurring in the marketplace and how we should be responding to that. And that’s just one example of what the new environment will be going forward.

Paul Cheng — Barclays — Analyst

Okay. And the second question is for Don. Don, on the working capital management, if we look at your two major competitors, Phillips 66 and Valero, they’re facing the same similar situation, and Valero, their refining operation is probably pretty similar size to yours. But that the negative impact, at least for this quarter, on the cash flow from working capital is substantially less, roughly one is about half and the other one is far less than half of your impact. So can you maybe elaborate a little bit in terms of how perhaps that you guys manage differently than your peers, if there’s any difference? Or is there any room for improvement so that we will be able to perhaps minimize the working capital swing a bit more?

Donald C. Templin — Executive Vice President and Chief Financial Officer

Yes, Paul. I mean, I guess the working capital changes are really a function of, for us, three primary things: our accounts receivable, our inventory position and then our accounts payable position. And there’s lots of sort of moving pieces that impact each of those three components. What I did try to do was to give you a rule of thumb so that you all could model changes in our business. I don’t have sort of particular insight into what the amount of crude volume is in our competitors’ payables and what the amount of refined product sales are in their receivables.

But what I can tell you, for us, during the quarter, accounts receivable went down for the first quarter, went down about $1.9 billion, so that was a source of cash for us, receivables went down. Accounts payable went down about $2.5 billion in the quarter, and that was obviously a use of cash. And then our inventories, because we’re trying to manage inventory appropriately and to capture contango in the market and those type of things, our inventories were up about $400 million. So the combination of sort of $1.9 billion on the accounts receivable side and then the inventory and AP move had a negative working capital impact of about $2 billion.

We are also seeing some of that. And I think we’ve articulated, we would have seen some of that continue in April where we started buying less crude volume. So to support a three billion or I’m sorry, three million barrel a day system in the first quarter, we’re basically now supporting a two million barrel a day system. So in April, you would have seen crude purchases going down from a volume perspective, but as we start to ramp up, you should see the inverse of that, right? We will be moving upwards. We’ll be buying more crude. And at least recently, crude prices have started to increase as well, so that should also have a favorable impact on working capital.

Paul Cheng — Barclays — Analyst

Just a quick side question that with a new CEO, is there any plan to look at the accounting policy for turnaround expenses to capitalize it?

Donald C. Templin — Executive Vice President and Chief Financial Officer

Mike’s shaking his head. I mean we’ve looked at that. I guess what we wanted to do, Paul, is we did provide going back about a year now, we did try to provide information that was pulling out the turnaround costs so that you could look at sort of our adjusted EBITDA on a comparable or like-to-like basis. But some of our peers still actually expense it and some of our peers obviously capitalize it.

Paul Cheng — Barclays — Analyst

Thank you.

Operator

Thank you. Our next question comes from Roger Read. Your line is open.

Roger Read — Wells Fargo — Analyst

Yeah. Thank you.

Michael J. Hennigan — President and Chief Executive Officer

Good morning. Roger.

Roger Read — Wells Fargo — Analyst

Good morning everybody. I guess I’d like to get into a little bit of maybe the forward-looking side, the refining restarts, particularly, obviously, Martinez and Gallup. As we think about the opex and the capex guidance, is that built in there for, say, a Q3 restart? Or should we presume that, that’s out until 2021 and then we’ll have some [Indecipherable] on some of the capex, opex side?

Michael J. Hennigan — President and Chief Executive Officer

So Roger, it’s Mike. I’ll start off and then I’ll turn it over to Ray. One of the things that I think everybody realizes is the different regions have been hit harder or less to some extent, depending on where you are. I mean we’ve been particularly hard hit on the West Coast. If you look at our guidance, we’re at minimum across the system. But in the West Coast system, we’re running at about 50% of capacity as opposed to the roughly 66%, 67%-ish overall. So the West Coast demand drop was even more severe than, I’ll say, the whole national average, which led us to take more action on the West Coast, specifically in that area. So let me turn it over to Ray to give you a little more color on both Gallup and Martinez.

Raymond L. Brooks — Executive Vice President, Refining

As far as Gallup and Martinez, your question as far as the guidance, does it take into account the cost of Gallup and Martinez, and the short answer is yes, that it does. We chose to idle our two higher-cost refineries and make up that production and resupply with lower-cost facilities. And all the cost impacts, variable and fixed, are taken into account in that.

Roger Read — Wells Fargo — Analyst

Yes, I understand in terms of the Q2 guidance. I guess I was just curious on a full year a restart of those units, is that also included or does the guidance presume that those assets are off-line for all of 2020? That’s what I was kind of getting at. In other words, we are seeing a recovery off of Coronavirus. And as we look to the latter part of the year, right, the expectation would be we get very close to kind of normal levels, at least enough, I would think, gets both those units back online. So I was just curious, is that included in the guidance? Then I had one follow-up question, please.

Michael J. Hennigan — President and Chief Executive Officer

Roger, this is Mike. So yes, we stated that those assets are idled on a temporary basis, and we’ll have to see when the market requires them to come back online. I think the question you were asking, though, is we don’t see significant costs at all to bring those back up. I mean Ray has them on hot standby. So I’ll let him comment on that. So we are prepared to bring those back online when the demand in the market requires it. We just, in the short term, have seen some recovery, as Tim and Brian had alluded to earlier, but we still have a ways to go before we would be needing that asset, so to speak.

Raymond L. Brooks — Executive Vice President, Refining

Yes, Roger. Taking both those refineries down, Gallup and Martinez, is not dissimilar from a hurricane standpoint. When we take one of our refineries down, we take them down sequentially. We keep the utility systems going. We keep there are still operators and maintenance personnel looking after the equipment. So we would see a restart being fairly easy done within the time period of about a week and not a significant cost impact.

Donald C. Templin — Executive Vice President and Chief Financial Officer

Roger, this is Don. Sort of one other point. Achieving those capital cuts and those operating expense cuts does not require those refineries to be idled for the rest of the year. I think maybe that was the way you’re asking the question. I mean we assume that those will come back online. And so our opex numbers and our capex numbers assume we’re operating at more normal levels as the year progresses.

Roger Read — Wells Fargo — Analyst

Okay, that’s helpful. Yes, I was just trying to understand within the opex cut guidance, obviously, the capex cut guidance and the other parts. And then maybe slipping back to the kind of strategy strategic question a lot of guys have tried to get at here on the call. Mike, as you look at the company, do you expect to do or are you already doing like a large sort of, call it, a benchmarking survey of everything that Marathon does or doesn’t do and how well it does it or it doesn’t do it at all as you think about the 2021 and on version of Marathon, presumably separated from retail, as I think we all expect?

Michael J. Hennigan — President and Chief Executive Officer

Yes, Roger. So we started in that analysis. And obviously, I’ve been part of the Marathon team for a while here, so I have my own initial thoughts. The only caveat I would give you, though, is in the 45 days or so that I’ve had the helm, most of our time and most of the whole senior team’s time has been dedicated to the near-term situation. So hopefully, we’ll get back to normal in the health situation as far as the country and also as far as the economy and get back to normal. But yes, we’ve started into the process. But I would also tell you that a lot of the time recently has been dedicated to the near-in situation. So start it, more to come and I hope to disclose more as time goes by. But I don’t want to kid you that the opportunity has been limited because of the near-term situation and our focus on trying to respond to the pandemic.

Roger Read — Wells Fargo — Analyst

I appreciate that. Thank you.

Michael J. Hennigan — President and Chief Executive Officer

You’re welcome.

Operator

Thank you. Our next question comes from Phil Gresh. Your line is open.

Phil Gresh — JP Morgan — Analyst

Yes, hi, good morning. My first question, just on the balance sheet, Don. You talked about the target of having investment-grade credit rating. Obviously, some of the rating agencies have put out some of their own metrics that they’re looking at. We have the Speedway spin-off here that is still planned. And I’m just wondering about how that spin-off and the distribution you might get from that spin-off would help you achieve the investment-grade rating long term or not achieve, but maintain it long term in light of the downturn going through? And just more broadly, are there other levers that you think you can pull to ensure that you maintain it through this down cycle?

Donald C. Templin — Executive Vice President and Chief Financial Officer

Yes, Phil, I guess I wanted to recommit to we want to defend our investment-grade credit profile, and we’ll continue to defend that. I think Mike mentioned in the discussions around Speedway, one of the important things around the timing of the Speedway separation is our ability to capitalize Speedway and to be able to have a balance sheet at Speedway that allows them to they’re going to take on some leverage, and that leverage will then result in cash at Speedway, which will be distributed back up to MPC. And when they distribute that cash back up to MPC, we would expect that distribution would be on a tax-free basis, and we would expect that we would be utilizing all of that cash to manage the balance sheet. It would either be putting cash on the balance sheet to sort of support our core liquidity position.

So historically, we’ve maintained about $1 billion of cash on the balance sheet in addition to the revolving credit facilities that we’ve had. And I think we articulated when we announced the Speedway separation that we thought that requirement would probably be closer to $2 billion versus $1 billion. We’ll obviously relook at sort of core liquidity in total given all the events that have transpired over the last 30 days to make sure or 45 days to make sure that we’re fully evaluating downside risk to the company. And then the incremental amounts would be used to pay down debt.

It’s one of the reasons why we had some debt maturities. We have $650 million of debt maturity at the end of this year in December, and we had $1 billion of MPC debt maturity in the first quarter of 2021. And we were planning on having those that debt mature and didn’t try to extend it previously because we wanted the capability to be able to pay off debt at MPC without incurring any incremental cost to do that. So the timing of those maturities was really aligned with or coincident with Speedway transaction.

We did go out into the market in the end of April and issued senior notes. Once again, we were very focused on shorter tenor notes, so three years and five years. There was some demand for 10 years, but we didn’t really want to get into the 10-year market. That felt like that was structural debt. We wanted to put on we are basically, if you will, allowing ourselves the flexibility to have shorter-term debt, allows us to pay it off and allows us to manage our balance sheet without incurring significant incremental costs.

Phil Gresh — JP Morgan — Analyst

Okay. Great. I guess just the follow-up would be, just as I was referencing, other levers that you might be able to pull just to continue to lower debt balances, whether it’s at the parent level or at a consolidated level. So how do you generally think about the distributions, whether it’s the MPC dividend, the MPLX distributions and the priority of maintaining lower leverage moving forward, particularly if we’re going to lose $1.5 billion of EBITDA from Speedway?

Michael J. Hennigan — President and Chief Executive Officer

Phil, this is Mike. On dividend policy, first off, as you know, it’s a Board decision and we had some very robust discussion about it. We think about this in the long term and how do we see the business as far as mid-cycle earnings and how we see the business in the long term. We obviously decided we wouldn’t want to make a major change in return on capital on what hopefully is a very short-term issue. So our discussion led to our highest priority was defending liquidity, as Don said, and defending our investment-grade rating. That was very important to us.

And I would just comment that we went into this event, if you want to call it that, with a little under $7 billion of liquidity. And now we’ve taken the working capital pain with the reduction in crude price, etc. And as Don stated in his remarks, we’re sitting here at about that very same level. So we still have a lot of liquidity going forward. As far as recovery in the business, hopefully, it will be sooner rather than later. I think you’re hearing from our team, there’s cautious optimism that we could be coming back. Yet at the same time, as Tim mentioned, we’re still pretty far down year-on-year on gasoline demand, but we’ll have to see how that recovers.

But overall, our return of capital is something that we obviously think is really important. I mentioned earlier, I think this is, to a large extent, Refining is a return of capital business. So we’ll have a lot of discussion with the Board as to how that plays out going forward.

Donald C. Templin — Executive Vice President and Chief Financial Officer

Yes, Phil, I might also add, this is Don, on the working capital side. Given sort of the low volumes that we’re or the low utilization rates we’re at and the lower crude prices, it is really, I’ll call it, asymmetric opportunity now. We would expect that working capital will be a source of cash going forward as prices improve and as volumes pick up as opposed to the significant use of cash over the last 60 days.

Phil Gresh — JP Morgan — Analyst

Okay, great. And thanks a lot. Mike, Don look forward to have at the conference in June.

Michael J. Hennigan — President and Chief Executive Officer

Thanks, Phil.

Operator

Thank you. Our next question comes from Prashant Rao. Your line is open.

Prashant Rao — Citi Investment Research — Analyst

Hi, good morning. Thanks for taking my question. Mike, congratulations. Appreciate everything you outlined at the beginning there in terms of the three areas of early focus. It’s very helpful. My question is on really on return on invested capital expectations here. First, on the remaining 2020 investments after these capex reductions, is it fair to assume that these are probably toward the higher end of the range of clearing hurdle rates or on an NPV basis versus what you’ve deferred? That’s sort of more of a housekeeping question, I suppose.

But bigger picture then, the second question. Given this macro shock, the potential for strategic value realization at Marathon, the overall portfolios you outlined and your early areas of focus here, could you help us out with your thoughts on hurdle rates for capital projects, how they change going forward at all and how that might be you’re talking about every dollar earning, its return that’s invested. I sort of wanted to think about that in terms of the various end markets that you’re in, the segments and what that means for thinking about maybe putting higher hurdle rates on certain types of projects or in certain end market exposures.

Michael J. Hennigan — President and Chief Executive Officer

Yes, Prashant, I think the easy answer to your first question is yes. And then to your second point, yes, the approach that I believe is, especially in this type of business which is very volatile, and when you invest capital, you’re investing for a very long time. So I think using the word strict discipline is the best way to describe it. I stress test in general. How do we think about investing capital if X occurs or if Y occurs? And my own personal bias is because it’s a refining business that’s very cyclical and there are downturns, you got to make sure that you’re still getting a good return even if you’re having a down cycle, so to speak.

So overall, I think without giving you a specific number, yes, we will be stress testing or, in your terms, raising the hurdle rate to make sure that the investment that we do is very long lasting and it’s going to guarantee us a good return. So in general, that will translate to a higher hurdle, yes. Without giving you a number, I would say, yes, that’s correct. And I think you’re going to just see us have a lot more robust discussion on the strategic nature of where we invest and guaranteeing ourselves that it’s long-term investment and convincing ourselves that it’s a good use of capital. I mean, at the end of the day, we’re stewards of the shareholders’ capital, and that’s one of the most important things we can control.

I mean in our business and I know you guys often ask a lot of questions about our views on things that we don’t control, and we’re happy to give you our views but I try to spend a lot more time on the things we do control, and obviously have an opinion of things that we don’t control as far as market conditions, etc., etc., but really spend as much time as we can on the things that we actually control and having discipline about how we spend that money, whether it’s organic capital, whether it’s M&A, whether it’s expense dollars, etc., etc., I think all of those deserve a lot of attention, and that’s part of what we’ll focus going forward on.

Prashant Rao — Citi Investment Research — Analyst

That’s very helpful. And my quick follow-up is really on the improving gasoline cracks that we’re seeing on the screen and sort of the sequential, I guess I use the term measured optimism, I like that, on the product demand side. Just for our purpose is to help understand, given lower the low utilization rates and also crude differential volatility, what are the impacts this is kind of unprecedented here, but is capture impacted? Is it should we be thinking about some maybe taking a grain of salt in terms of dislocations versus what you’re able to capture on a realized basis versus what we’re seeing on the screen? Either way, either that you overcapture or undercapture, but just sort of trying to reconcile that because we all kind of have an idea of what we do in more normal times, but these are obviously sort of three-sigma type of period we’re in right now. So I just wanted to sort of get your thoughts around that.

Michael J. Hennigan — President and Chief Executive Officer

I’ll give a couple of thoughts. One is and we did the term of cautious optimism that we’re seeing some recovery. But I also try and balance that with the overall inventories, we still have I don’t know what the exact number is, Dave can jump in, maybe 30 million barrels of light products, gasoline and distillate that are over the long-term average. We’re still sitting on roughly 50 million barrels of crude over that same long-term average.

So even though I think we’re seeing demand start to recover, I still think we have a ways to go to get back to some closer-to-normal inventory levels and normal demand levels. So I think that’s just going to play itself out. Again, that falls into the category of something we don’t control. We’ll try and keep an eye on the demand. We do have some insights from our marketing view, and we’ll try and match the supply of our products into those demands. And then we’re always going to try and be opportunistic to find the best market or the best region to optimize our system.

Prashant Rao — Citi Investment Research — Analyst

Okay, thank you very much, Mike. Appreciate it.

Michael J. Hennigan — President and Chief Executive Officer

You’re welcome. Thanks.

Operator

Thank you. Our last question comes from Brad Heffern. Your line is open.

Brad Heffern — RBC Capital Markets — Analyst

Everyone, thanks for fitting me in. I guess that was a good segue into asking about another thing that you can’t control. So I’m curious about just the inland differentials that we’re seeing now. Obviously, in late March and early April, we saw these very wide differentials. Now as the shut-ins have started to increase, we’re seeing relatively narrow differentials, especially for WCS. So can you give your outlook on that? And any thoughts about how sustainable it is if sort of the inland cracks aren’t increasing at the same time?

Rick D. Hessling — Senior Vice President, Crude Oil Supply and Logistics

Yes. This is Rick Hessling. On inland differentials, you’re spot on. We have seen incredible volatility, literally from one end of the spectrum to the other. Right now, what you’re seeing in the marketplace is you’re seeing the free market work. You’re seeing North American producers and specifically U.S. producers, Canadian producers, self regulating, if you will, and it’s affecting the differentials. However, they’ve come in, they’ve swung the other way here in the last three, four weeks versus blowing out 30 days ago.

I think the offset, honestly, will be as the states come out of shut-ins and demand increases, you’ll see some more volatility there. So predicting where they go is difficult. A lot of it is demand-driven. A lot of it is producer cut-driven. So I would tell you, though, when you look at the Mid-Con specifically, Brad, it’s very tight. Inventories at Cushing are extremely high as that’s well publicized, almost at maximum. So I think you’re going to continue to see incredible volatility in the Mid-Con, which we will be able to take advantage of.

Brad Heffern — RBC Capital Markets — Analyst

Okay. And then as my follow-up, just a question about the asphalt market. So typically, when we have flat price this low, asphalt is a much greater contributor to profitability than it would normally be. Is that the case right now? And can you talk about how the demand side looks? Obviously, we have these COVID impacts, but I would imagine maybe some governments are taking advantage of this to do more road repairs than they normally would.

Brian K. Partee — Senior Vice President, Marketing

Yes. Brad, this is Brian Partee. Yes. So currently, asphalt, if you look at the inventories, we’ve been towards the higher side in inventories. Part of that had to do with coming out of IMO in the first quarter. But the work log is out there. We’re seeing it we’re seeing the demand starting to pick up as we head into the season here. I don’t know that asphalt has an outsized contribution at this point relative to overall contribution. We have seen steady the benchmark we look at when we think about the asphalt market is asphalt prices relative to TI, and we’ve been selling over TI consistently, which is fairly typical in a down market.

So from a pricing standpoint, we’re happy with where things are at. The work is starting to pick up. The watch out or focus really on the asphalt demand is going to be really taxes and access to funding at the local levels and cuts in discretionary spending. And it’s uncertain whether we see that or not. That’s unfolding as we speak. But working with our customers, the backlog is there. They’re ready to go to work. We’re starting to see it pick up. So I guess it falls into the measured optimism similar to what I said on the distillate side of things. But that’s kind of where we sit today on the asphalt market.

Kristina A. Kazarian — Vice President, Investor Relations

Great. And with that, we’ll end our call today. So thank you for your interest in Marathon Petroleum Corporation. Should you have additional questions or would like clarifications on topics discussed this morning, our team will be available to take your calls. Thank you again for joining us. Operator?

Operator

[Operator Closing Remarks]