Marathon Petroleum Corporation

Welcome to the MPC Fourth Quarter Earnings Call. My name is Elan and I will be your operator for today's call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session. Press star 1 on your touchtone phone to enter the queue. Please note that this conference is being recorded. I will now turn the call over to Christina Kazarian. Christina, you may begin.

Welcome to the Marathon Petroleum Corps' Fourth Quarter 2018 Earnings Conference Call. The slides that accompany this call can be found on our website at MarathonPetroleum.com under the Investor Center tab. On the call today are Gary Heminger, Chairman and CEO, Greg Gough, Executive Vice Chairman, Tim Griffith, CFO, Don Templin, President of Refining Marketing and Supply, Mike Henningens, President of MPLX, as well as other members of the executive team. We invite you to read the Safe Harbor statements on slide 2. It's a reminder that we will be making forward-looking statements during the call and during the question and answer session. Actual results may differ materially from what we expect today. Factors that could cause actual results to differ are included there as well as in our filings with the SEC. I will now turn the call over to Gary Heminger for opening remarks on slide 3.

Thanks, Christina. Good morning and thank you for joining our call. Earlier today, we reported an extraordinary first financial update as a combined company, and we believe these results are an early indication of the tremendous value potential of this powerful combination. Earnings for the quarter were $951 million or $1.35 per diluted share. Results included cost of $1.06 per diluted share, primarily from transaction-related items. Tim will walk through these costs in detail later on the call. As we review our performance for 2018, it is important to highlight that we have built a culture focused on operational excellence and safety. We received multiple awards and accolades over the last year, including an EPA Energy Star Partner of the Year Award and VPP recognition at multiple facilities. We remain committed to a culture of continuous improvement that positions our company to safely grow our earnings and create long-term value for our shareholders. This quarter, we were pleased to report over $2 billion in income from operations and adjusted, consolidated EBITDA of approximately $4.1 billion with our segments performing well. Our expanded integrated business model created significant opportunities for us to capture value. We optimized crude purchases and utilized our larger logistics and diversified marketing footprint to place over 70% of our gasoline volume on a daily basis. Refining throughput was strong during the quarter at 3.1 million barrels per day. This exceeded our expectations and was impressive considering our Detroit, St. Paul Park, and Martinez turnarounds during the quarter, all of which were completed on time and under budget. Our midstream businesses both performed well this quarter. A&DX reported 2018 EBITDA of $1.2 billion, which increased 250 million year over year. For MPLX, 2018 marked the single largest increase in annual EBITDA since it became a public company. MPLX reported 2018 adjusted EBITDA of $3.5 billion, which increased 1.5 billion over the prior year, and nearly 400 million of this increase was driven by organic growth. We have announced a number of compelling new projects within midstream that generate third party revenue. One of the largest projects is the Gray Oak Pipeline and Export Terminal, and we have had inquiries of where this may reside. This project is being funded at the MPC level, and therefore we do not plan to drop these assets into A&DX. As the opportunity set for new infrastructure remains robust, we remain committed to high grading the project backlog toward mid-teen returns and self-funding capital spent at the MLP level. Lastly, our retail segment had a particularly strong fourth quarter. This included record quarterly earnings for MPC's former Speedway segment. While 2018 started slowly for the legacy Speedway business, it ended the year with record EBITDA driven by strong merchandise sales and fuel margins. The retail business continues to add significant stability to our overall cash flow profile. It provides an important placement option for our refining volumes and creates a counter-cyclical balance to our overall business. Continuing the highlights on slide four, we reported approximately $160 million of realized synergies in just three months and continue to expect total annual gross run rate synergies of up to $600 million by year-round 2019 and up to $1.4 billion by the end of 2021. Don will provide a detailed update on our plan in just a few minutes. It was an impressive year with many milestones for Marathon and our integrated business model allowed us to return $4.2 billion of capital to our shareholders, which included $675 million of share repurchases in the fourth quarter. Additionally, last week, we announced a 15% increase in the quarterly dividend, underscoring our confidence in our cash generation potential. As we look into 2019, we remain optimistic about the prospects for our business and our ability to deliver compelling financial results. Now let me briefly address the current macro environment. At this time of year, there's always a lot of focus on gasoline markets. Despite what we view as normal seasonal trends, we are optimistic about the opportunities for our business this year. Demand remains strong, global economic growth continues, and even with recent high refinery utilization, distal inventories remain below five-year averages. MPC's refining system remains one of the most dynamic in the world. We have significant flexibility in terms of switching our crude slates and optimizing our production yields. Our expanded logistics footprint creates opportunities to access export markets, and in December alone, we exported 485,000 barrels per day of refined products. With limited turnarounds in 2019, our system is poised to execute in any market environment. These trends, coupled with our expected synergy capture and the potentially changing dynamics of the low sulfur fuel market, all set the stage to create meaningful benefits across MPC's integrated and diversified business model. Lastly, we continue to make progress on evaluating all options for the two MLPs. Each of the parties involved have retained advisors, and our comments will be limited as we walk through a thorough evaluation process. We will provide an update to investors at the appropriate time. Now let me turn the call over to Don for an update on synergies.

Thanks, Gary. Slide five highlights the success we've already had delivering synergies. During the fourth quarter, we realized $160 million of synergies. 138 million of these synergies were in our refining and marketing segment. Although not all of these synergies are recurring, it has underscored our confidence in delivering on the significant opportunity set available to us. Crude oil supply and logistics delivered just over $100 million of realized synergies during the quarter. We were able to leverage our scale to optimize access to Canadian heavy crudes, which contributed roughly $50 million of synergies. The other 50 million was largely a result of optimizing logistics assets utilization and foreign spot crude oil purchases as a combined business. Within the refining business, we realized $32 million of synergies during the quarter. For example, we utilized MPC's turnaround specialists and our broader access to contractors to support the turnarounds at Martinez and St. Paul Park. This allowed us to come in under budget and ahead of schedule. The $22 million in corporate synergies represents early efficiencies and cost eliminations made possible by the combination. As a reminder, our synergy targets and realizations are incremental to the synergies Endeavour realized as part of the Western acquisition. As of the date of the closing, Endeavour had achieved run rate synergies of 365 million on that transaction. Looking forward, it is our plan to provide details of realized synergies on a quarterly basis during 2019. As Gary mentioned in his comments earlier, we are not constraining ourselves to the synergies originally identified. Our teams are very focused on generating incremental synergy ideas and opportunities. For example, during the fourth quarter, we converted 170 company owned and operated sites in Minnesota, which is a significant number to the Speedway brand. This will support synergy capture in the retail segment going forward. With respect to refining, we've identified the opportunity to utilize sulfur credits across our refining system that will provide approximately $40 million in value during 2019. This is nearly double the value that we were projecting when we discussed this item at Investor Day. As another example, we've identified the opportunity to change the FCC catalyst formulation at the Los Angeles refinery, which should be worth tens of millions of dollars annually. The successes that we had in the fourth quarter of 2018 and our detailed implementation plan give us confidence in the increased synergy potential that we announced at our recent Investor Day. With that, let me turn the call over to Tim, who will provide a walkthrough of our financial results.

Thanks, Don. Slide six provides earnings on both an absolute and per share basis. For the fourth quarter of 2018, MPC reported earnings of $1.35 per diluted share compared to $4.09 per diluted share last year. As Gary referenced, fourth quarter earnings were reduced by $1.06 per diluted share, or $745 million, due to purchase accounting related inventory effects, expenses associated with the endeavor combination, and MPL-elected debt extinguishment costs. As a reminder, fourth quarter 2017 earnings included a benefit of approximately $1.5 billion, or $3.04 per diluted share, resulting from a change in the corporate tax rate at the end of 2017. Additionally, the transaction and our mix of earnings drove a higher income tax rate impact for the quarter. Going forward, we expect the effective tax rate to be around 22%. Slide seven provides some additional details on the items which impacted our results in the quarter. And where they're reflected on the income statement. Refining and marketing segment results included estimated costs of $759 million, reflecting the difference between recording acquired inventory at fair value on the closing day of the acquisition, under purchase accounting, and the cost used to value inventory at year end. The effect was magnified as crude prices were rising into the end of the third quarter, and subsequently fell rapidly through the fourth quarter. We also incurred a higher income tax rate of $183 million of transaction related costs, including financial advisor fees, employee severance, and other costs in connection with the endeavor acquisition, which are reflected in items not allocated in segments in the quarter. Lastly, MPLX redeemed all $750 million aggregate principal amount of its .5% senior notes due in 2023, which resulted in $60 million of debt extinguishment costs, which were reflected in interest expense for the quarter. The combined total of these items had an impact of $1.06 per diluted share in the quarter. The bridge on slide eight shows the change in earnings by segment over the fourth quarter last year. Fourth quarter 2017 results included a benefit of approximately 1.5 billion related to the change in corporate tax rates. Refining and marketing increased by 191 million versus last year, driven by the addition of the endeavor operations and significantly wider sweet and sour differentials in the quarter. These benefits were reduced by the 759 million negative purchase accounting effect I just discussed and approximately 231 million of incremental costs driven by the February 1st drop down transaction, as we don't reflect the impact of these drops in prior period results. Midstream's $546 million favorable variance was driven by higher MPLX income and contributions of 230 million from Endeavor Logistics. Retail's fourth quarter results were 465 million higher than the same quarter last year, primarily related to fuel margins and the addition of Endeavor's retail and direct dealer operations. The unfavorable year over year variance in items not allocated to segments was largely due to the 183 million of transaction related costs associated with the endeavor acquisition and the absence of a $57 million litigation gain we recognized in the fourth quarter last year. The balance of the increase largely reflects higher corporate costs and expenses for the combined company. Interest and financing costs were 176 million higher during the fourth quarter this year due to the combined debt balances as a result of the Endeavor transaction, additional MPLX debt compared to last year, along with the $60 million of debt extinguishing costs in the quarter. Higher earnings in MPLX and the addition of Endeavor Logistics resulted in an increased allocation of midstream earnings to the publicly held units in the respective partnerships, shown here as $135 million variance in non-controlling interest. Turning to slide nine, our refining and marketing segment reported earnings of 923 million in the fourth quarter of 2018 compared to 732 million in the same quarter last year. The addition of the Endeavor refining and marketing system drove significantly higher throughput, positively impacting segment results. Volume impacts are shown as shaded bars on each of the relevant steps of the walk and largely reflects this impact. The US Gulf Coast, Chicago, and West Coast blended industry 321 crack spread was 943 in the fourth quarter of 2018 compared to 1083 in the fourth quarter of 2017. Our ability to take advantage of wide crude differentials provided significant benefits in the quarter. Our sourd differential increased from 443 per barrel in the fourth quarter of 17 to $9.14 per barrel in 2018, while our sweet differential increased from $1.13 per barrel in the fourth quarter of last year to 652 per barrel in the fourth quarter of 18. The 330 million negative variance in other margin reflects the inventory purchase accounting effects discussed, partially offset by favorable impacts from strong product margins, feedstock costs relative to the market metrics, and higher refining volume metric gains. Direct operating costs for the fourth quarter were 792 per barrel compared with 721 per barrel in the fourth quarter of 2017. The higher costs associated with over one million barrels per day of additional throughput were the primary drivers of the $924 million unfavorable impact to segment earnings. The 755 million unfavorable variance in other RNM expenses is primarily due to the fees paid to MPLX for the businesses that were dropped in February, as well as additional expenses related to the legacy Endeavor business. Slide 10 provides the midstream segment results for the fourth quarter. Segment income was 889 million in the fourth quarter of 2018 compared to 343 million in the same period in 2017. MPLX income was up 331 million primarily due to the drop of refining logistics and fuel distribution services, as well as record pipeline throughputs and higher gathered process and fraction of volumes in the quarter. Endeavor logistics also added an incremental 230 million of income for the fourth quarter. We encourage you to listen to MPLX earnings call at 11 and A&DX earnings call at one to hear more about the performance of the partnerships. Slide 11 provides an overview of the retail segment, which now includes our legacy Speedway business and Endeavor's retail and direct dealer business. Fourth quarter segment income from operations was 613 million compared to the 148 million of legacy Speedway only results in the fourth quarter last year. The 465 million increase in year over year segment results was primarily driven by the addition of Endeavor's operations along with higher merchandise sales and fuel margins across the nationwide footprint. The 204 million volume impact on the walk and the 193 million increase in operating expenses and 47 million of increased depreciation expense were almost entirely attributed to the addition of the Endeavor operations. The improvement in merchandise and fuel margins was largely related to the expanded business, as well as the margin strength across the entire retail platform, as well as higher same store merchandise sales for the Speedway legacy locations. The month of January started off with positive same store gasoline sales but was impacted by record low temperatures in a substantial portion of our marketing area. January gasoline same store sales in our legacy Speedway locations were down .5% but were optimistic volumes will normalize following the weather impacts. Slide 12 prevents the elements of change in our consolidated cash position for the fourth quarter. Cash at the end of the quarter was approximately 1.7 billion. Core operating cash flow before change of working capital was a 2.3 billion source of cash in the quarter. Working capital was a 457 million source of cash in the quarter, largely due to an adjustment for purchase accounting related inventory effects, partially offset by the negative impacts of falling commodity prices during the quarter. We used approximately 3.4 billion of cash during the fourth quarter to fund the Endeavor and ExpressMart acquisitions net of cash required. Return of capital by way of share of purchase and dividends totaled almost $1 billion in the quarter with 675 million worth of share of purchases with shares reacquired during the quarter. Looking forward to remain committed to our disciplined strategy and returning capital beyond the needs of the business through continued share of purchases and regular dividends. We expect to return at least 50% of discretionary free cash flow to shareholders over the long term. Slide 13 provides an overview of our capitalization and financial profile at the end of the fourth quarter. We had approximately 27.5 billion of total consolidated debt, including 13.4 billion of debt at MPLX and 5 billion of debt at A&DX. Total debt represented 2.5 times last 12 months adjusted EBITDA on a consolidated basis, or 1.3 times EBITDA excluding the debt and EBITDA of MPLX and A&DX. Lower yet if the distributions from MPLX and A&DX are added to the debt service capabilities of the business. Slide 14 provides updated outlook information on key operating metrics for MPC for the first quarter of 2019. We're expecting total throughput volumes of just under 3 million barrels per day with minimal planned maintenance taking place across our 16 plan system. Our average total direct operating cost is projected to be $8.20 per barrel and our corporate and other unallocated items are projected to be 230 million for the quarter, excluding any additional transaction related costs. With that, let me turn the call back over to Christina.

Thanks Tim. As we open the call for your questions as a courtesy to all participants, we ask that you limit yourself to one question and a follow up. If time permits, we'll reprompt for additional questions. With that, we'll now open the call to questions.

Thank you and as a reminder to ask a question, please press star one. Our first question today is from Neil Mehta from Goldman Sachs.

Hey, thank you very much and congrats on a great quarter here. So Gary, maybe a kick off on the gasoline market. You made a point that speedway same store sales were down a percent and a half. Sounds like some of that's weather related but we've been surprised at how elevated gasoline inventories have been to start the year. So just your thoughts on whether this is seasonal or we can work our way through it, what the root cause of the issue is and what the fix is.

Sure and that's a great question, Neil. And if you look at speedway same store sales, I think the majority of this is a result of the weather we've had. But on the counter to that, the weather and the refining system, especially in pad two and in pad four, the polar vortex has really had an effect on the industry, not just marathon but the industry refining system. We expect and you're not seeing it in the numbers yet, Neil. You'll see it over the next couple of weeks. But if you look at the number of refineries that have had some sort of maintenance issues, not turnaround, just maintenance issues due to the polar vortex, we think probably six to seven million barrels of gasoline and distill will come out of the refining system here in the month of February. Back to the first part of your question on, is the inventory, are we in a cycle? And we always build inventory in the first quarter to get ready for the summer grade gasoline. And so as we deplete the gasoline inventory of the winter grade, we have all the tankage and logistics set up to be able to start inventorying that gasoline. I think the most important thing, and the number I gave you is six to seven million, that is above and beyond whatever turnarounds. It appears as though the turnarounds within the industry are going to be a little bit later in the first quarter this year than has been normal, which I think will have an effect on gasoline inventories as well. As you know, distill inventories are in very good shape. And yes, we're at the top end of the four-year average, if you look at that, or the five-year average, whichever one you pay attention to, we're at the top end of that. But you're gonna see inventories decline, I would say rapidly because of some of the issues the industry has had. And you're going to see a later turnaround, or later first quarter turnarounds than normal.

I appreciate that, Gary. And the follow-up is around capital returns. In a scenario where 2019 is tougher than you anticipate, maybe below trend because of differentials or because of gasoline markets, how committed are you to capital returns and share repurchase? In other words, should we think of the buyback commitment as a ratable number? And should we think of the return on capital and any thoughts around how aggressive you intend to be around capital returns would be helpful?

Sure, Neil, it's Tim. I think the capital returns are gonna continue to be a critical part of the overall capital allocation strategy we've got. As we laid out at Investor Day, and I reinforced here this morning, we expect that we're gonna be returning at least half of discretionary free cash flow through dividends, distributions from the MLPs, and share of purchases. And that's a commitment that we'll stay with. So, I mean, certainly to the extent that there is softness in the space, things could adjust, but I don't think there's anything that changes our outlook at this point.

Thank you.

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

Hi, good morning. Morning, Phil. Gary, first question, I'm just thinking about this first pro forma quarter that you guys logged four billion plus of EBITDA, still call it 16 billion plus annualized versus your guidance for 2019 of 12.9 billion. You obviously had some pretty nice tail ends and differentials here that you called out in the bridges and in your prepared remarks, but just maybe your latest thoughts on this guidance now that you got a quarter under your belt?

Well, it'd be very nice if you could annualize things based off of the fourth quarter, but as you know, the fourth quarter had some very key attributes that were a benefit to us with the drop in crude price, which allowed a higher capture margin than is normal. But I would say we're very optimistic on what we presented at Analyst Day. Neil's question that he just posed about EBITDA and share buybacks and so on and so forth, what happens if it's more of a sluggish year than we had anticipated? But we still are very bullish on the year. In fact, I think, Phil, you had written some things earlier about gasoline as kind of an associated byproduct, I think you used that term. We believe, especially and unfortunately what has happened here with the polar vortex that has taken a number of systems down and as you build those systems back up, it's going to clean up the inventory in the system. But I think we're gonna get into second quarter and very likely see, should you be max gasoline or should you be max distillate? And I would anticipate we'll be max distillate, but I think you could see that scenario. And then as we go out into the second part of the year, you're going to see, I think the effects of the ultra low sulfur diesel start to kick in in the marketplace. So we feel very bullish about what we presented on analyst day of 12.9 billion as you suggested. And we'll see where the balance of the year takes us.

Thanks for the color, Gary. My second question, just to focus a bit more on the differential side of things. Hoping for your latest thoughts both on the light heavy differentials in light of the Venezuela sanctions, but also even just the light inland differentials versus coastal. There are a lot of new pipelines that have been announced, obviously the cap line reversal. Do you think we might see a tightening of inland differentials as all these pipelines come on?

Let me ask Rick to talk about the

crude markets. Yeah, hi Phil, Rick Hessling. Good question. You know, as we look at all the new pipelines that are slated or rumored to come online, if you look, there's a large majority of them that are looking to point to the eastern Gulf Coast. So from our vantage point, that's a positive to MPC. As you well know, we have Garyville on the eastern Gulf Coast with a large appetite for both sweets and heavies. And when we look at the differentials, we see it as a positive. We will get pipeline connectivity to advantage barrels, WTI advantage barrels, as well as Canadian heavy and light in time. So we actually view the connectivity as a win for us, and we are bullish production in the basins where that crude oil will be coming from. So for us, it's a big plus.

Any thoughts on light heavy?

I think you're gonna continue to see pressures on light heavies as we are today. We're in a zone where obviously because of sanctions, because of the stance that OPEC has taken, the medium sours, the heavies, you know, they're commanding a premium. We continue to see that, and I guess to tag onto that, you know, when you look at what the sanctions, speaking of Venezuela, what they have done, I think it's been very well documented in the press that we stepped away from those barrels quite a while ago, quite frankly. So from a supply perspective, we're not exposed one bit whatsoever. We see those replacement barrels being AG barrels, Arabian Gulf barrels, as well as predominantly Latin American barrels. So it'll continue to stay tight, but I would tell you with our added flexibility between the US Eastern Gulf Coast, the US Eastern West Coast, and our West Coast facilities, our flexibility, I think as Don touched on earlier with synergies, really this plays into our hand more so than anyone in the industry that we can optimize between those plants, between grades, and really drive the most value for our shareholders.

And Phil, let me ask Ray to mention here a second that even though heavies and medium sours are more expensive, we are not slacking our Cokers whatsoever. Ray, you want to speak to that?

Yeah, sure, Gary. You know, even though the heavy dips have tightened in a bit, we never met a heavy unit that we didn't like to fill. So, you know, our Cokers, our Resid Hydro Crackers, our de-asphalting units, we're still, you know, we're still running those full out, and, you know, capturing the differentials that are out there. The balance of the crude slate, Rick goes out in his team and gets us the best mix that he can. So today, we're running about 50-50 across our slate, about 50% heavy, 50% sours, 50% sweet.

Okay, thank you.

Thank you, our next question is from Paul Chan from Barclays Capital.

Hey, guys, good morning.

Hey,

Paul.

Gary, maybe that's for Rick, actually, on that. You currently, in the first quarter, you are estimating 48% in sweet and 52% in sour. And given the light-heavy defense is probably as narrow as you may see for some time, is that we should take it as the maximum flexibility you have or that you actually have more ability to sway it more to the sweet if this kind of market condition persists? And similarly, should we look at your system in saying that your gasoline, you're already maxing out in your distillate yield, so you can't really shift any more between the gasoline and distillate, compared to what you currently have been doing?

Yeah, I'm glad you asked that question, Paul, because we want to get this across to the investors very carefully. Ray, you want to take that?

Sure, sure. Yes, a couple questions. The first, as far as the sweet-sour split, and I mentioned that we're roughly 50-50 here today. We have capability, and historically, we've said that we're two-thirds, one-third, that we could go either way. Now, with our new system with 16 plants, it's a little bit different. We can go up to 70% sweet, and so we have a little bit more flexibility on the sweet side. But, Paul, day in and day out, we're running our LP models at all 16 plants, and then we're working with Rick's team to bring the crude slate. That's going to make us the most profitability across the whole system. Right now, that's where we're laying in about -50% on that. The second question had, as far as distillate production, we're right now, distillate production, about -41% of crude for our distillate. We absolutely have everything within our control pointed to distillate production. If things would change, and we'd want to go to a max gasoline mode, we have up to about 10% with cut points, swing streams, that we could direct back into the gasoline pool.

We are actually talking about the other way. Can you increase the distillate yield and reduce the gasoline further from here? I mean, of course, when you take out butane in the summer grade, you will reduce the gasoline yield. But other than that, is there any other flexibility that you can swing even if you want to, that you can swing even more to distillate and less into gasoline?

No, Gary would be pretty mad at me if we weren't already doing that, Paul. We've got everything pointed to the distillate pool that we can and out of the gasoline pool. Now, I'm going to take a little flip on that from the standpoint of, you're trying to say, swing from gasoline to swing to diesel. The other knob that you have is less gasoline. And again, we take gasoline production. Again, we take our notes from what the market gives us. And we saw, about a month ago, we saw the incentive that, hey, we should cut our cat crackers and A, not buy outside gas oil for some of our cat crackers and B, sell some gas oil where we have the opportunity. And we did that. When the gas oil, sweet gas oil price was about 15 cents over the 70-30 split, we made those moves. And then as economics changed, then we changed our operations accordingly. So that's not a shift from gasoline to diesel, but that was just looking at the pure economics of gasoline.

Thank you, Ray. A second question, a quick one. Gary, any update about the cap line reversal?

Cap line, yeah. Let me have Mike Henningen

cover

that, please.

Hi, Paul. It's Mike. So we launched a binding open season that will run through April of this year, our expectation is to have the line available for service September of 2020. So we're in the process of purging the line. We have to do some integrity work, some pump work, et cetera. Obviously, we want to see the results of the open season and then about 18 months of construction to get out to around September. Why we're excited about it, Paul, I would tell you, Ozark connects there, DAPL connects there, the Canadian system connects. We're also talking about a connection with Diamond Pipeline. So getting barrels to the eastern Gulf, I think is going to be a real good opportunity for us as soon as we get the system going.

Mike, are you concerned about depleting too much of the barrel at the Potoka?

No, Paul. I think in the short term, there's some limitations on Canadian barrels getting into Potoka, but we think that'll solve itself over time. And in the meantime, I think you're going to see some more things that people will look at. I mean, we're going to look at, as you know, we already expanded Ozark ourselves. We're going to look at, can we do a little bit more there? That's another opportunity for Cushing Barrels to get up into that area. We're anticipating some more expansion out of the Bakken region as well. So I think you're going to see more flow into the Potoka area, which should be a source of supply for CapLine.

Yeah, Paul, this is Rick. Just to tag on to what Mike said. So when you look at both the Enbridge system and Keystone XL and the timing of their potential increases in capacity, it really lines out well with bringing an incremental barrel into Potoka to take down CapLine.

Thank you. Our next question is from Mnafgupta from Credit Suisse, North America.

Hi, guys. Can you talk a little bit about the retail here? Like MPC was doing $182 million in run rate. Endeavor was doing $170 million, $190 million. You put those two together, that's $400 million, but you did $613 million in retail earnings alone. So I understand the weaker crude would have helped, but the results are stellar regardless. So what's driving these retail earnings besides the weaker crude?

Right. Mnaf, first of all, let me compliment you. You were the first out this morning with your analysis, and I thought you did a good job on your quick outlook. The retail, Tony and his team had a phenomenal year, a phenomenal fourth quarter. As you know, the year started off a little bit slow, but we saw a ramp up in merchandise sales, a ramp up in merchandise margin. But really, for the most part, it was the volume through, now total speedway, that we were able to capture very strong margins across the entire sector of speedway, as well as the direct retail part of our business was very strong for the quarter. As we look going forward, and this is one of the real bright spots when Greg and I worked on putting these companies together, one of the real bright spots was the retail side that we thought through synergies and through our marketing ability. I talked earlier about a 70% of our volume is going to our retail chains, either the speedway side or the Marathon brand or direct retail. That, I think, helps prop up the refining side, it helps prop up the retail side. While we had very strong margins in the fourth quarter, I wouldn't expect them to continue at that high of a rate. As I looked through the first part of the year, we continue to perform very well across the entire retail sector.

Gary, a quick follow-up. We remember when you acquired S, you gave out a synergy target for three years, but you literally got there in one year. Now today you are indicating that 160 million in synergies in one quarter and reiterated 600 million for next year. The way we are looking at it, the way our business is going and the retail business is going, it looks easily like 800, 900 at least. Are you just being very conservative there, again, for the second time?

Well, you're being very kind, Manav, but I would look at retail. We've had this discussion, I had this discussion on Analyst Day. The synergy walk that you're going to see with this transaction is a bit different than other synergy walks. A lot of times you'll see synergies up front and then a very long and slow tail, if you will, of synergies. Whereas these synergies are going to be more of a stair step going forward. We've already done, Don talked about 170 stores, we've already re-ID'd in Minnesota. We're now in Southwest Texas, going to start in Arizona here soon. And New Mexico, -ID'ing and developing those stores into the speedway mark. So I was in Arizona last week and had a full market tour and there's so many opportunities there that I'm holding my breath that we can get going as soon as possible. But then it's going to take a little bit longer as we go into California and some of the other western states to get things permitted. So you're going to see more of a stair step. And I would say year two is even going to have higher synergies and year three higher synergies than the Hess model. The Hess model, we were able to get in in about 18 to 24 months, get everything re-ID'd and get tremendous synergy. More on the inside of the store. Here we have to take and go in and completely redo the MSO stores to get those into the speedway type of operations. But yes, we are very bullish on the synergies that are there. I too believe that there can be some upside in the retail synergies. And stay tuned.

Thank you for taking my question.

Thank you. Our next question is from Doug Leggett from Bank of America, Merrill Lynch.

Thanks. Good morning, everyone. Gary, I appreciate, we always appreciate your comments on the macro, but obviously a reasonable amount of focus on gasoline this morning. I wonder if I could challenge you a little bit on whether there actually have been some structural changes. And what I'm thinking is the US is obviously running the lightest ever API slate, at least according to the EIA. That obviously has ramifications for gasoline yields. And obviously utilization has been incentivized by crude spread. So I guess my question is, do you think that's a valid reason why we've seen so much gasoline, both production and inventories? In which case should we expect the industry and Marathon in particular to see maximum distillate as perhaps a new normal through the cycle as opposed to seasonally?

Well, just because of the crude differentials in the fourth quarter, well, third and fourth quarter, it led people to want to run more sweet. You're correct, Doug. But I would say the reason the inventories are highest, everybody ran it very, very high utilizations because the differentials allowed you to do that. Even though you built some inventory, which if you were on the call earlier, I think you're going to see over the next few weeks here as the EIA numbers start to come out, you're going to see a decline in gasoline inventories due to some of the operational issues caused by the weather. Don, you want to add more to this?

Yeah, I guess, Doug, if we think about particularly you saw in the Gulf Coast, we had record exports. And so our view is, Ray said we're at 40% or so diesel production. That's kind of max diesel for us, and we'll continue to do that. But we're really well situated from a perspective of if there is a better market, a higher value market for the products that we're producing, we're taking advantage of that either through the West Coast exports or through the Gulf Coast. And that's what we saw in December and the fourth quarter. I think December was 485,000 barrels a day of exports. And for the fourth quarter, I think it was just slightly under that number. And about 300,000 to 390,000 of that came out of the Gulf Coast. So we were very focused on delivering to markets where we thought there was incremental value.

I know it's not an easy one to answer, so thank you for that. My follow-up's a quick one, Don. It's probably also for you. You said in your prepared remarks that synergies, not all of the Q4 synergies, were recurring. So can you give us an idea what the annualized recurring synergies stand at right now relative to the 600 guidance? And I'll leave it there. Thank you.

Yeah, so thanks, Doug. I wanted to get in on the last question as well. So if you look at our $160 million of realized synergies in the fourth quarter, a little over 100 of it came from our crude oil supply and logistics. And that piece of it is really comprised of sort of two pieces. One is incremental volume that we're able to get through optimizing pipeline space and those type of things. And then the other piece of it is the differentials. Well, as you know, the fourth quarter differentials were incredibly wide, particularly around Canadian crude. And so when I'm saying it's non-recurring, the volume piece of it is recurring. The differential piece will fluctuate quarter to quarter. Another example, Doug, would be on the turnaround. So we talked about the turnaround at St. Paul Park and Martinez. We are going to have turnaround opportunities annually, but we won't always have them every quarter. So in the fourth quarter, there was a turnaround and we were able to capture that. The timing of capturing synergies around turnarounds in 2019 will be different than the timing of capturing turnaround synergies in 2018. So I think we feel very... Our original base plan was 480 million run rate, which implies 40 million a month exiting 2019. I think we feel very comfortable that we'll be above that number exiting 2019.

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

Yeah, good morning. Sorry, good morning. Hopefully you can hear me there. There you go. Actually, I'd like to come back real quick on the gasoline thing. I'm with you that it seems to be more higher volumes. If you look at gasoline yields from the weekly DOE data, we're down from a year ago and we're about where we've been the last, say, five-year average. So it looks like higher throughputs. Maybe, Gary, if you could give us a little more detail on your thoughts about the weather impacts and how persistent the problems from that may be. I know you talked about kind of a... I think it was a six to seven million barrel product loss, but do you see that as strictly the pad two area or is that something nationwide?

The numbers I gave you were more probably pad two, pad three. Excuse me, pad two and pad four. And I would say another way to look at this, Roger, I should have mentioned this earlier, because this is really a precursor to what I think the inventory is coming. Look at where gasoline crack spreads have gone in the last seven days. They're up about seven, eight dollars a barrel from where they were just a week, 10 days ago, and that's because of the market having to rebalance to take care of these shortages. So you clearly are going to see this inventory come down and come more into balance here in the next few weeks. And the best metric to look at is where's the gas crack in pad two and pad four today? And you've seen that they've come up substantially over the last seven to 10 days.

Yeah, it's funny how that seems to happen every year, huh?

Yes.

If we could follow up on Manav's questions about the retail side and the process of switching the MSOs over, should we look at this as a more CAPEX intensive approach than, say, the Hess merger was as we think about switching stores over, or is this a fairly straightforward rebranding that isn't too high on the CAPEX side? I'm just trying to think about what other changes need to be made, and it's quite a different system. And then if I could tag on just as a separate refining question, if we look at West Coast OPEX, we know it's historically higher, but I was wondering, given the moving parts in the quarter, the inventory adjustment, how much of that much higher manufacturing cost was related to that and how much of it is that's a clean number that you want to get down over time?

Okay, Roger, I'll take the first one on the retail. We put the numbers out in our analyst day in Tony's presentation. He had the capital numbers in there, so it's going to take us to remodel, re-ID these stores. So it's not a big number. It's pretty much in line with where we were on the Hess for the re-ID side and the remodel side as well. So no, I do not expect it to be any more incremental capital than we already had in the plan, which is not significant to begin with. We're making very good progress on the re-ID front. One of the things we learned from the Hess side is that it's best to remodel at the same time you're doing the re-ID so you're not back to the store twice. So while it might seem as though we're moving a little slower, we're going to capture, I think, incremental sales, incremental margins at a faster rate by doing both of those combined. But you should not expect to see any increase in capital that we have already identified. Ray, you want to talk about the West Coast OPEX?

Sure, sure. The West Coast OPEX is definitely something that's high on our radar right now. We're historically used to operating in the U.S. Gulf Coast Midwest and seeing numbers that are a magnitude lower than what we have right now. If we look at our OPEX projection for the first quarter of the West Coast, some of that is driven by, we do have some turnaround activity going on right now at LAR. We have some turnaround in the Wilmington Alky that's associated with the LARIT project. That's inflating our OPEX, but in general, we see a real opportunity and an incentive for us to want to bring that down. We talked a little bit about this at Analyst Day when we showed the Galveston Bay performance in the six years that we have had that refinery and that we brought that from a fourth quartile down to what we view as a midpoint OPEX refinery. We'll utilize the same Galveston Bay playbook on the West Coast and look for opportunities to bring those costs down too.

Great, thank you.

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

Hi, thanks for taking the question. I wanted to circle back on the synergy detail on the crude supply and logistics. I appreciate the split there, the 50-50 between the WCS and the logistics foreign spot. I sort of wanted to drive back to the Western acquisition that's already in the numbers we're accounted for on the close, the $365 million. Is there a similar split that we could get or some sort of way of thinking about how much of that was maybe driven by differentials as well so that we could get that? You can kind of get a sense of, you know, to combine what the run rate is going forward.

Yeah, Prashant, this is Greg Goff. As far as the Western synergies that was quoted in there was through the third quarter. The amount that Don stated was through 3Q of 18 had no impact on differentials. Those were the synergies where what had been talked about in the past and from corporate synergies to supply to refining operations to the whole basket. There was nothing to do with the crude differentials.

Okay, thank you. I think my second question here, as we look to the West Coast now as combined, I kind of wanted to drill down on the dynamics there. You know, maybe some color on how maybe the California assets compared to the Pacific Northwest market and, you know, what we're seeing here in 1Q. And maybe a little bit of an opinion on some of the progress that might be there as well in terms of anything on the synergy or integration side.

Well, Prashant, we're just getting into, you know, those refineries. Ray just had a very good, you know, discussion on what we see, the opportunities we see at LAR. You know, then we're going to move up the coast to Martinez. And we see opportunities there on the operating expense and operational excellence side of the equation. And then move up to an anacortis as well. Ray, you want to go into some of the things you're looking at anacortis, anything in Alaska?

Yeah, I would just say this will play into our whole synergy playbook. But we're looking at how we can better utilize, better optimize the four refineries on the West Coast, Kenai, anacortis, Martinez, and LA. Endeavor historically had done a really good job of that. We think there's additional opportunities. I'll say with IMO coming beginning of next year to maybe move some of the heavy streams from the, and I'll say from Kenai, anacortis down to our LA refineries where we have more processing capabilities. The other thing I'll say relative to anacortis is that refinery, it's on the West Coast, but has a very good crude advantage with the Bakken and being able to bring in unit trains. And so we're really excited about what we've seen thus far with their capability from a crude processing standpoint. Kenai, a little bit smaller of an asset, you know, at 60,000 each barrels a day with more of a limited marketing presence. But we still think there's opportunities within that toolkit, within the refinery configuration to optimize that a little bit going forward. As Gary said though, we're four months into this. We're spending a lot of time analyzing the assets at each of the refineries, and there'll be more to come at more of these earnings calls. But I'll say the biggest thing that we're focused on right now is really just making sure, one, we understand the cost structure on the Pacific Coast, and two, we get a game plan how to, you know, how to make that lower.

Yeah,

Prashan, I just, this is Rick Hessling. I'd like to add just a few comments to that. So from a crude sourcing aspect, it's an incredible synergy to have the Pacific Coast and the West Coast as part of our footprint. We're able to take Canadian now to the West Coast, to the Pacific Coast, as well as Ray mentioned Bakken, and this expanded footprint gives us the ultimate flexibility to guide a barrel there, to guide a barrel to St. Paul Park, or to guide a barrel into pad two for our four refineries there. And then in addition to that, our foreign purchasing strategy enables us to toggle barrels between the U.S. Gulf Coast to those regions as well. So never before have we had this flexibility, and this is, as Don stated earlier, a large part of our synergy. So a true advantage for both the West Coast and the Pacific Coast.

Thank you. Our next question is from Paul Senke from Azuho.

Good morning, everyone. Gary, could I ask you the usual question about Washington, please? Particularly, my understanding is the Venezuelan sanctions were abrupt and a surprise. I was wondering if you thought that they would be, I assume we believe they'll be lifted if there's change of regime there. And secondly, any thoughts that you have about Iran and how that might impact the market? Because I assume if there's enough oil out there, as stated by the administration, the chances are of very strict sanctions on Iran later this year. And further to that, any other observations you have on the latest situation in Washington? Thank you.

Right. And I would say that Venezuela was not a surprise to us. I think the president was very clear in his messaging and the administration was very clear in their messaging upfront on what might come about. As Rick stated earlier, we were well prepared and had eliminated, for the most part, a cargo here or there, but eliminated anything from Venezuela in our steady diet. As to Iran, I think you'll continue to see the discussions and sanctions in and around Iran, you're going to continue to see, I would say, the same discussions. Probably the thing to keep a close eye on, though, Paul, is we all read yesterday of how some of the Middle East producers in Russia are looking to kind of have a sub-pact inside of OPEC. That's probably something more important to really keep our eye on, on what that might mean, on how they're trying to really be able to balance the global food market.

Yeah. Can I just follow up on that? What are your thoughts on the no-pec, the chance of a no-pec deal?

Oh, I think it's too early to tell. I think that's what I just discussed and what's being written in the media a lot about Middle East producers and Russia. They're the powerful producers. I think that would be a much more powerful combination than a no-pec type of an issue.

Got it, Gary. Then I've got a left of field one, if you don't mind. We've seen exceptionally strong international earnings from, for example, Exxon and Valero. This quarter, given that you've now presumably reached terminal scale in the US, would you consider international expansion for Marathon Petroleum? Thank you.

Not at this time, Paul. We have plenty to say. Grace, over here, I've worked through my career. I've worked through those cycles many times. I don't see that that would be on our wish list at this time.

Perfect. Operator, thank you for everyone for your interest in Marathon Petroleum Corporation. Should you have additional questions or would like clarification on topics discussed this morning, we will be available to take your calls. With that, thank you so much for joining us. Thank you.