Marathon Petroleum Corporation

Welcome to the MPC First Quarter 2019 Earnings Call. My name is Sheila and I will be your operator for today's call. At this time all participants are in a listen-only mode. Later we will conduct a question and answer session. Press star one 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 Marathon Petroleum Corporation's First Quarter 2019 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 Hennigan, President of MPLX, as well as other members of the executive team. We invite you to read the Safe Harbor statements on slide two. 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. Slide two also contains additional information related to the proposed MPLX transaction. Investors and security holders are encouraged to read the Consent and Registration Statement to be filed with the SEC as well as other relevant documents filed with the SEC. Now I will turn the call over to Gary Heminger for some opening remarks and highlights on slide three.

Thanks, Christina. Good morning and welcome and thank you for joining our call. Our integrated business generated approximately $1.5 billion of adjusted EBITDA during the first quarter as the stability of our managing and refining market conditions. The diversification of our business model and flexibility of our refining system enabled us to generate through cycle cash flow and despite this being a weaker quarter we generated nearly $1.2 billion of operating cash flow before working capital. In the quarter we returned over $1.2 billion of capital to MPC shareholders including $885 million in share repurchases. Over the long term we remain committed to returning at least 50% of discretionary free cash flow to investors. Beginning of the year was difficult for the entire U.S. refining industry. Inventory levels were high as the industry came off a strong fourth quarter and the seasonal lack of demand as well as several weather disruptions led to challenging gasoline margins. At the same time medium and heavy sour crude differentials compressed substantially given geopolitical and policy changes. As the quarter progressed though, fund improved. Supply reductions helped rebalance the market and gasoline and distillate inventories are now below their five-year averages. For April our blended crack spread of $18.80 was more than double the first quarter average. With the sweet sour crude spreads inside $3 per barrel we have moved towards max sweet mode but also continue to see the incentives to keep our Cogars full. With our midstream business we continue to see a tremendous opportunity set. Earlier this morning MPLX announced it had entered into a definitive merger agreement to acquire A&DX. Details on the transaction were provided this morning and we encourage you to read the deal announcement press release for more information. Looking forward the U.S. has become the largest producer of crude oil in the world and natural gas and NGL volumes continue to grow as well. With this increase in production we believe that our midstream business is well positioned to participate in infrastructure build out opportunities. Mike Kenigan will speak to some of the key project updates later in the call. On the retail side the strong same store merchandise sales and legacy speedway markets that we have seen over the last nine months continued into April. We expect this trend to continue as we move into the prime driving season. As we look to the remainder of 2019 our positive outlook is also supported by solid economic growth and expected contributions from the 700 store conversions and in fact we finished our 300th conversion yesterday. Lastly we see opportunities to drive value creation using our technology platform and inside the store we continue to pursue opportunities to enhance customer interaction and drive sales. We expect the positive dynamics across all three of our business segments to support growing cash flows throughout the remainder of 2019. One of our core objectives is to grow profitably and create competitive advantages through strategic and disciplined investments. On that front we also continuously assess our project portfolio to ensure our investments will generate strong project returns. Based on our internal forecast the Garyville-Coker 3 project no longer comfortably exceeds the 20% hurdle rate we typically use for refining projects. As such we have decided to stop the Garyville-Coker 3 project after completing definition engineering and remove it from our capital spending plans. The change in the project return is primarily driven by our long-term outlook for heavy crude differentials. Geopolitical events have caused lower production of heavy crude including lower Venezuelan production, slower Canadian pipeline development, and Iranian sanctions. In addition more light crude is being produced as a result of continued U.S. shale growth. Having said this our Garyville-Coker Max project remains on schedule to complete the first phase in the fourth quarter of 2019 and the second phase in the first quarter of 2020 to take advantage of the new IMO bunker fuel requirements. Recall this project expands our capacity of the two existing Cokers by about 14% by replacing the four existing 30-foot diameter drums with 32-foot diameter drums. The LERIC project, our Los Angeles refinery, remains on track to be completed in early 2020 and will increase our ability to produce higher value distillates. We are also pleased to announce that for the second year in a row Marathon was awarded the EPA Energy Star Partner of the Year. This is an impressive accomplishment and tangible evidence of our commitment to driving energy efficiency through everything we do. As we look forward to the remainder of 2019 we expect improving industry dynamics of our past investments to support our growing cash flow outlook and our team remains focused on operational excellence, achieving synergies, and creating long-term shareholder value. Now let me turn the call over to Greg who will provide some comments on our integration process, strategy development, and commercial opportunities. Thank you, Gary.

We have made notable progress integrating the two companies over the past seven months. Multiple senior executives and other key leaders have moved to our Finley headquarters. In April we launched a complete redesign of our corporate website. Much of the back office work that prompted this relaunch was driven by our aligned direction work. The focus of this work was on cultural integration and developing the framework for the company's vision, strategy, and core values. Additionally, we have launched an initiative to begin the process of integrating our technology platforms. This initiative will enable us to improve efficiencies and deploy a world class ERP system. Related to our commercial and competitive strategy, we are also very pleased with the continued success we have had growing our integrated business into new key markets. In western Mexico, we are currently supplying 192 sites of which 142 are ARCO branded. We now have the ARCO brand in five states that include Baja California, Sonora, Sinaloa, Baja California Sur, and Chihuahua. Recently we held grand opening activities at our first ARCO site in Ciudad Juarez. The ARCO branded sites in this area will be supplied directly from our El Paso refinery. In support of this ARCO growth, we continue to pursue additional Mexico supply capabilities through development of our Rosarita light products terminal in northern Baja and lease capacity being built in Sinaloa. On the other side of the work, we announced our agreement to acquire a large number of new products like product and asphalt terminals and 33 NoCo express retail stores in Buffalo, New York from NoCo incorporated in support of our Midwest product placement strategy. This builds upon prior investments including Speedway's acquisition of 78 ExpressMart locations in western New York. This extension of our integrated business model is positioned to be supplied from the Midwest, Canada, or the New York harbor via multiple supply routes including pipeline, truck, rail, or moraine. We continue to progress additional commercial development projects related to development of our renewables portfolio, continuing to grow the reach of our integrated business model, and optimizing our existing portfolio of integrated assets to create additional value for our stakeholders. Now, let me turn the call over to Tim who will provide a walkthrough of our financial resources.

Thanks, Greg. Slide four provides a summary of our first quarter financial highlights. We reported a $7 million loss attributable to MPC in the quarter. Income from operations was $669 million. Adjusted EVITA was nearly $1.5 billion for the quarter. These results include $186 million of turnaround costs incurred during the quarter. Operating cash flow before working capital was approximately $1.2 billion. Capital spending for the quarter was just over $1.3 billion. Share of purchase and dividends were over $1.2 billion in the quarter, including $885 million in share of purchases and $354 million in dividends, which is reflective of the 15% increase in MPC dividend announced in January. We ended the quarter with $667 million shares outstanding and consolidated leverage of 39% of book capitalization or 1.4 times the adjusted EVITA on a parent-only basis. To allow additional time for questions, we streamlined the information on the call for this quarter. The more detailed segment earnings walks have been provided in the appendix of the presentation. The new format on slide five captures our segment results and the walk of income by segment from the first quarter of 2018. Refining and marketing segment income decreased $201 million versus the same quarter last year as the addition of Endeavor's refining and marketing system was offset by narrow accrued discounts across our medium and heavy sourcing. Additionally, high industry gasoline inventories following fourth quarter's strong production environment resulted in weaker than expected gasoline margins and price Quarterly segment results were also impacted by one extra month of incremental costs from the February 1st drop-down transaction. Refinery capacity utilization was 95%, resulting in total throughputs of 3.1 million barrels per day for the first quarter, which was 1.2 million barrels per day higher than the first quarter last year due to the addition of the legacy Endeavor refineries. Recall, during the quarter we completed planned maintenance work at our Robinson refinery and the Wilmington portion of the Los Angeles refinery. Looking at our midstream segment, income increased 341 million versus the first quarter of 2018. The increase was due to contributions of 220 million from Endeavor logistics and 121 million increase in results driven primarily by growth across MPLX's businesses. Moving to our retail segment, income increased 75 million versus the same quarter last year primarily due to the addition of Endeavor's retail and direct dealer operations as well as a $24 million increase in MPC's legacy speedway segment earnings. Retail fuel margins averaged 17.15 cents per gallon in the first quarter of 2019. Same store merchandise sales increased by .4% year over year and same store gasoline sales volumes decreased by .2% year over year. Items not allocated segments had a favorable impact of 14 million versus last year primarily due to a $207 million non-cash gain related to the exchange of MPC's undivided joint interest in the cap line system for an equity ownership in a newly formed joint venture. This benefit was partially offset by 91 million of transactions related costs primarily associated with adopting MPC's vacation accrual policies across the legacy Endeavor employee base as well as higher corporate costs and expenses for the combined company. Interest and financing costs were 123 million higher during the first quarter of this year primarily due to higher combined debt balances as a result of the combination. Income taxes increased 82 million due to higher income from operations as well as a 36 million prior period state tax adjustment. We expect our effective income tax rate to be 2 to 3 percentage points lower than the previous quarter. Non-controlling interest increased 68 million primarily driven by higher earnings in MPLX and the addition of Endeavor logistics and the allocation of those earnings to the public unit holders of both partnerships. Slide 6 presents the elements of changes in our consolidated cash position for the first quarter. Cash at the end of the quarter was just under 900 million. Core operating cash flow before changes to working capital was a $1.2 billion source of cash in the quarter. Working capital was a $470 million source of cash in the quarter largely due to the effects of rising commodity prices and the shorter terms on refined products compared to the longer terms on purchases of crude oil. Return of capital MPC shareholders by way of share of purchase and dividends totaled over 1.2 billion with 885 million worth of shares required during the quarter. Distributions to public unit holders of MPLX and Andeax was 230 million in the quarter. At quarter end we had approximately $28 billion of total consolidated debt including 13.8 billion of debt and 5.1 billion at Andeax. With that let me turn the call over to Don.

Thanks Tim. As Greg mentioned we are pleased with the significant progress we have made integrating our assets and operations. One example is the continued success we have had delivering synergies. As seen on slide seven we realized $133 million of synergies in the first quarter. 89 million in refining and marketing, 29 million in retail. We continue to have confidence in our ability to deliver on the significant opportunity set available to us as most of these realized synergies are recurring or run rate synergies. Within the refining business we realized approximately $55 million of synergies during the quarter. Examples include utilizing turnaround best practices to lower costs and accelerate the completion date for the Los Angeles-Wilmington turnaround, catalyst reformulation changes and optimizing tier three gasoline compliance. Crude oil supply and logistics delivered approximately $30 million of realized synergies during the quarter. The majority of these synergies were driven by our ability to again leverage our scale to optimize access to Canadian crudes in our mid-continent region and foreign spot crude oil purchases as a combined business. The 29 million in corporate synergies represents continued cost and we are still at a loss for the total by the combination. Moving on to slide eight. As we discussed at our 2018 investor day in December we listened to investor feedback and are now providing R&M margin on a regional basis. An important point to note is that because of differences in our margin calculation method and different composition of our regions for the combined company our reported margins are not directly comparable to historical margins reported by Endeavor. Some of the reasons include cost allocation between cost of sales and SG&A as well as expenses that are not allocated to any specific region such as fees paid to MPLX and A&DX. For the first quarter our Gulf Coast refining margin was $7.82 per barrel. Our mid-con refining margin was $15.26 per barrel. And our West Coast refining margin was $10.94 per barrel. Slide nine provides updated outlook information on key operating metrics for MPC for the second quarter of 2019. As we look through 2019 we continue to expect our turnaround slate to be lighter than 2018. With that said in the second quarter we do have planned maintenance work at our Garyville, Martinez and Los Angeles refineries. The most significant of these activities is at Los Angeles where we are nearly complete with a 50-day outage on the FCC and alkylation units. Inclusive of these events we expect total throughput volumes of approximately 2.9 million barrels per day. Our average total direct operating cost is projected to be $8.70 per barrel and our corporate and other services are expected to be $8.70 per barrel. With that let me turn the call over to Mike to briefly discuss our midstream business and projects.

Thanks. We continue to see tremendous opportunities set across our midstream portfolio. We have recently progressed on several key midstream projects across our companies. First today MPLX announced its participation in the Wink to Webster crude pipeline. Although our prior project had sufficient commitments we made the decision to join this project to enhance our capital efficiency and achieve a much higher return. Second MPLX completed a binding open season pipeline which is partially owned by MPC. We received significant shipper interest for both light and heavy crude providing the opportunity to move forward with plans to start light oil deliveries in September 2020 and heavy oil deliveries in 2022. This project will allow cushioning supply to reach the eastern gulf and open the ability to export crude via the Louisiana offshore oil port commonly referred to as loop. Third at the MPC level the Gray Oak project where we have a 25% ownership remains on track to come online in the fourth quarter of this year. Last as Gary mentioned early this morning MPLX announced it reached an agreement to acquire ANDX. We are incredibly excited about the announcement. This deepens our presence in the Permian, has natural synergies and integration with MPC's refining business and it creates tremendous opportunity to expand the logistics focus regions of the U.S. I'll turn it back to Christina.

Thanks Mike. 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 will now open the call to questions.

Thank you. We will now begin the question and answer session. If you have a question please press star then one on your touch tone phone. If you wish to be removed from the queue please press star then two. If you are using a speaker phone you may need to pick up the handset first before pressing the numbers. Once again if you have a question please press star then one on your touch tone phone. Our first question comes from Phil Gresh with JP Morgan. Your line is open.

Hey, good morning. First question for Gary. Just looking at your guidance for the second quarter and thinking back to your guidance back in December for the full year EBITDA, how are you thinking about that today in terms of whether the macro environment that we're seeing right now kind of with one queue in the rear view would still be supportive of your full year EBITDA guidance?

Well, Phil, as you know the first quarter ended up dramatically different for the entire industry, not just for us. And particularly on West Coast margins were weaker than we had anticipated. But the first quarter is in the rear view mirror and as I stated in my comments, we're bullish on the balance of the year. As I stated our margin here, quarter to date is 1880 which is about twice what it was in the first quarter. But I think more important and kind of following in the line with if you recall what I stated in the fourth quarter call, we had predicted that inventories were going to start to fall, some 6 to 7 million barrels per day and they did. We see right now inventories are at the low end, gasoline is at the low end. If you look at it by region, really pad 3 is the only area that inventories are a little bit on the high side. That's also the big export region of the country and those have come back in line I think very quickly. So we're very bullish on where inventories are across the board, pad 5, pad 2, even pad 1 inventories. I look at it as a very light turnaround year for us. Don just mentioned that we've made tremendous progress. We're going to, not going to go on here, but we're going to finish the LA turnaround ahead of schedule, below budget. This is one of the key synergies that Greg and I spoke to when we talked about this combination was how we could do major turnarounds, major projects and bring in our expertise to be able to accomplish those. So I would say with first quarter being in the rear view mirror that we remain very bullish on the balance of the year.

Okay, great. And then second question, you made some comments in your prepared remarks about the rationale for canceling the Garyville-Coker project. I had two questions about that. One is whether we should read into that that perhaps you're less bullish on light heavies specifically around IMO 2020 or is it more just a longer term comment since the project doesn't come on until 2021? And then secondarily, what does this mean for capital spending at the parent company level? I think you said $2.8 billion annually in 19 and 20. And so should we see that come down rateably each year for canceling that project or are there other offsets?

No, as you recall, Bill, when we talked about this project to begin with, we stated it was not an IMO 2020 project. This was subsequent to the initiation and implementation, if you will, of IMO 2020. So this has nothing to do. We're very positive about IMO 2020. And you've noticed all of the discussions in D.C. and around the international markets. And I specifically went over to Singapore and some Asian markets to really get a real good fix and came away very positive that even those markets are going to be in compliance with IMO 2020 going forward. So this project was clearly the canceling or long deferral is maybe is a better word, was clearly where we see the light heavy spreads today. Let me turn it over to Don to give you some more color on the spreads.

Yeah, Phil, I mean, I think Gary explained it right. We're very bullish on IMO, so our view hasn't changed there. This was really a longer term view around what was happening on the light heavy differentials. And then to your comments or questions around sort of capital spending, I think we indicated at Investor Day, but this was very much back ended in terms of the spending. Twenty nineteen was going to be primarily an engineering year. And so we had about 70 million dollars or so in the budget in 2019 related related to this project. A really big proportion of the spend was actually in 2021. So I think as we sit here, we're you know, we're very comfortable with the guidance that we gave for twenty nineteen and not being over that. And we're very comfortable with being flat into 2020. And, you know, we'll as we get to the end of the year, we'll give more more color around our 2020 budget. But I don't think you should see a dramatic change in 2019. It wasn't a pro rata spend.

And Phil, I'll just add one more thing. You know, as we've talked several times, you've been in to visit with us about capital discipline. This just illustrates how disciplined we are. You know, Ray came to us and said, you know, as we looked at our internal forecast, the spreads weren't there. It still was a good return project. But we have better projects down the road. And so we're very disciplined and said now is not the time.

Thanks for the comments.

Our next question comes from Roger Reed with Wells Fargo. Your line is open.

Yeah, thank you. Good morning. And let me say thanks for the additional disclosure at the regional level. I think that'll be very helpful going forward. Just jumping in here, kind of two main questions. One, if you can help us to understand on the synergy progress, how that compared to sort of your expectations, not just in the 133 relative to the 600 plus run rate by year end, but also, you know, kind of by segment, how that's progressing. And then my other question is kind of dovetailing with that as you generate more cash flows out of the synergies and, you know, what should be a better outlook overall for the remainder of the year, how the share repurchase program should be thought of here, the pace we saw in Q1, maybe some deceleration to kind of match cash flows from here, just how you're thinking about that.

Yeah, Roger, on the synergy, I'll just start off on the synergy. The 133 this quarter is incremental for the first three months of operation, which we had 165, 166 million of synergy. So, you know, if you look at it, it's about $300 million in total. I just wanted to clarify it's not 133 by itself. You have to look at what we already accomplished. But Don can go into the details here, and then Tim will talk about the share repurchase.

Yeah, Roger, it's fair to say that we are, you know, well ahead of our plan in each of the segments around the realization of synergies. So, you know, you'll recall that our original guidance was $480 million the year and up to $600 million. That's for, you know, end of 2019. That would imply, you know, $40 million a month at the $480 million level and higher than that at the $600 million level. You know, we're already above $40 million a month averaging for the first quarter, and that was along all of the different business segments. So, you know, I feel very comfortable in our ability. We had a ramp in the plan anyways. It was going to grow as the year went on, and you'd definitely see that in things like retail where we're doing the conversions, and you would have those synergies coming on. The other thing that happens is as we realize synergies, they enter, you get more months of capturing the synergy. So if we captured a synergy, let's say, or realized a synergy in March, we would have only had one month of that synergy in the first quarter, but we're going to have three months of that synergy in the second quarter. So we feel really good about the positioning, and let me turn it over to Tim to talk about the share repurchase piece of it.

Yeah, Roger, thanks for the question. I mean, you know, as we did at Investor Day, we really laid out what our commitment around return of capital is going to be. You know, 50% of discretionary, consolidated, free cash flow, and we're going to be steadfast to that commitment. You know, we had the 885 in the first quarter probably had a little bit of concentration to it, but we'll assess it over the course of the year. Again, we've built this metric as a direct tie to operating cash flow, less the maintenance capital we need to support the business. So, you know, from that point I want to make is that, you know, we're really viewing return of capital on par with capital by that construct. But we remain steadfast. We'll see how the rest of the year plays out to the extent that synergies result in additional cash flow through operating cash flow. It's part of that formulation. So we'll be steadfast to that commitment for the long term, and, you know, we'll measure it over calendar period.

And another thing, Ray, I'd like you to talk about, Ray just updated us this week on the big turnaround that we're just completing at L.A. and some of the catalyst formulations that you will see these synergies coming in the subsequent months. But talk a little bit about what you're seeing there.

Sure, Gary. At L.A., as Gary alluded to earlier, we're completing a very large turnaround on the cap and alkylation unit on the Carson side. Right now, one of the synergies that we've got pretty much in the bag, as he talked about, was from the turnaround management side. We expect a turnaround in close to a week ahead of schedule and under budget. So that's all working well. But where we think the real value is, is once we start the unit up, we will move to a different catalyst formulation in the Catcracker. And this is a true synergy with how we operate our Garyville refinery. We'll go to a formulation that mirrors Garyville, has the same output of that, and, you know, will result in a huge yield benefit once we start that unit up. In fact, we actually are transferring about 750 tons of spent catalyst from Garyville so that when we start that unit up, hopefully in a week or two, we'll get the benefit from that immediately. Great. Thank you.

Our next question comes from Prashant Rao with Citigroup. Your line is open.

Good morning. Thanks for taking the question. I wanted to pick up on that a little bit, Ray, on the LA turnaround and coming out of that, and Pad 5, the gasoline crack is obviously very strong. I wanted to get sort of a shorter-term outlook on how we should think about capture as you come out of the maintenance there and given the healthy gasoline crack. And then a bigger picture, I guess, question for multiple members of the team. We're entering a position of strength for gasoline, I think, nationwide now versus where we started at the beginning of the year. I think that the mentality has changed 180 degrees. I'm looking forward to IMO 2020. We think about maybe some benefits there as well. I was wondering if you could speak to the strength of the global gasoline market and maybe the U.S. overall within that. Sort of your view maybe going out a few quarters is to, you know, are you more bullish now than you were maybe three months ago, or is there a reason to maintain that bullishness for us as we look at the modeling of that?

Yeah, for a shot, this is Gary first. I would say we definitely are more bullish on the global gasoline market than we were three months ago. You know, let's back up and make sure everybody understands, you know, what happened over this six-month period. The fourth quarter was very strong due to very wide crude differentials and very strong or excuse me, and a very quick collapse of the crude market, which led to very wide differentials or crack spreads, as well as very wide gasoline margins at the retail. So all of those things therefore led to refineries running full out. Then we come over to the first quarter and we have ample inventory. Now, that inventory really came back in check not only here in the U.S., but, you know, when I look at things globally, and one of the reasons I went to Asia to really understand what the markets were doing there, I think the U.S. refining industry is set up very, very well for two things. We're set up very well for both gasoline. Everybody's talked about IMO and the distillate expectations. And yes, we've been running max distillate, you know, for most of the first quarter. But I would suggest again that I think there's a good shot that we'll be seeing, you know, kind of a max gasoline mode second quarter and into the third quarter. And Ray can talk about that in more detail here. But we certainly are much more bullish and it's certainly evident. Yes, the first quarter, you know, pad five margins in the first quarter were very challenged. But I looked at where they have been, you know, they got much better in February, got a lot better in March, and very strong in April and month to date here in May. So pad two continues to be very strong. So I think, as I said earlier, pad three is really the export market to the globe. And I think that they're going to be able to bring those inventories in check. But, you know, Ray can go over for you by pad or by region what he sees as far as max gas or max diesel.

Sure, sure. And it varies as far as what region we're in and where we are with our swing streams. On the West Coast back in March, we saw incentive to move to a max gasoline mode. And we did that in the mid-con area in early April. We saw that incentive and we made that move to gasoline focus. The Gulf Coast is a little bit different animal. On the Gulf Coast, one, we've seen stronger diesel prices relative to gasoline, which support being staying in a diesel mode. The other thing is it's not all just about diesel prices and gasoline prices. On the Gulf Coast, where we have the ability to buy and sell intermediates, that comes into play. And specifically the weakness of the NAFTA market has driven us to remain in a diesel mode on the Gulf Coast. What I'd like to emphasize is that, you know, one, it's not a two-variable equation. And then the other thing, every day we're looking at the prices and we're running our LP models to determine, hey, where should we be from our cut points, from our gasoline focus and diesel focus? We're seeing a little bit of a change out on the West Coast. Even though gasoline has been strong, we're seeing diesel become strong relative to gasoline. And if need be, we'll pivot again on that. So, you know, we don't have a set opinion about which way we're going to go. So we're going to let the market tell us and do what's most economical. Hey, the other thing before I leave this question and follow up to California and back what I was talking about with the LA Carson Cat Cracker, that's a large cat cracker, about 100,000 barrels a day. And the catalyst reformulation was really driven to fully optimize the LERC project that Endeavor had done. And if you recall, that project actually shut down a cat cracker but remained with two alkylation units. What we're doing with the catalyst reformulation is make sure that we fully utilize those two alkylation units to make a very premium gasoline blend product. That's it.

Thank you very much. I appreciate all the comments. Just one last quick one. I wanted to circle back on the Gary Wilkoker 3. I appreciate the color there. It's a change maybe in where we are with light-heavy differentials and expectations. I just wanted to get a sense, you know, as we think about longer term, for your view, are you thinking maybe light-heavy differential? It's just a question of how tight we are right now, that the widening and normalization, sort of the shape of that curve is similar, but we're just starting at a tighter point? Or is there something in the duration of light-heavy differential volatility looking out, you know, as you go through IMO 2020 that changed in your mind?

Yeah, you know, Sean, this is a long-term project. If we thought that this was just an aberration, a one-year aberration, we would have continued on with the project. You know, our concerns over some policy changes around the world, you know, the issues going on in Venezuela, that was a big supplier of heavy crude, and so therefore it kind of leads the Middle East producers as the swing producer to bring heavy into this market. And so we just see, you know, that it's, I would say, the latter to your point. This is going to be narrower or compressed differentials for a longer period of time. And I want to emphasize, though, that, you know, we will have finished the conceptual engineering. This is done. You know, we'll have it available to us. If we decide that the markets turn, you know, if Canadian markets open back up, the Venezuelan situation improves, there's other heavies that come into the marketplace, we can, you know, reinstitute this project quickly. But again, I think it's just the right capital play, the right capital discipline at this time.

Our next question comes from Neil Metzow with Goldman Sachs. Your line is open.

Thank you very much. I guess my first question is just around earnings consistency, Gary. And if I look back over the last five years, so let's take the last 21 quarters, you've beaten consensus about 50% of the time. And the S&P large cap average is closer to 75%. So just one of your thoughts on what the company can do to get a more consistent pattern of earnings execution. We're not quarter to quarter folks, but certainly that helps with continuing to support the story when you have a more consistent earnings set of results.

Well, Neil, I'm in the same camp as you. I wish we were all perfect and to provide, you know, forecasts that follow a simple model. But we're running a dynamic model. And in a dynamic model with – and, you know, we're, you know, two quarters into this, you know, very large transaction. I applaud the team here for, you know, tremendous accomplishments to date, not only on synergy, but on integration and where we see how we're accelerating this integration from the systems and our modeling concept going forward. You know, we provided first time information to the market here on a regional basis, which you've been asking for and rightly so. You've been asking for for some time, which is certainly going to help with that. And I think as the market really gets more attuned, you know, we have a huge MLP. And with that MLP, we have, you know, assets that, you know, the terminal assets or marine assets, the pipeline that used to be within the R&M sector that now flow into that, you know, into the MLP. Therefore, that is a deduction, if you will, or an operating expense that flows through the last R&M section. I think for the most part, the MLP and the retail side is more of a simple model to be able to forecast. But it's a multiple layered dynamic model to be able to do the whole R&M system. We're going to get better with that. I haven't done the math to be able to confirm or deny your comment of I think we're better than 50-50, but as I said, I haven't done that, nor is that the real question. The real question is how do we, you know, get our system to be able to help you model better going forward to have the best data that you can. But I'll take you back to the first quarter and the way we, you know, we're out front talking about where we thought inventory levels were going to go and see that happening, and it did happen. So, you know, stay tuned. I wish we were perfect, but we're going to get better as we go forward. Don, you want to add a few things?

Yeah, Neil, I mean, maybe one other comment is, you know, we're trying to provide you with information, I think, that allows that modeling to occur. So, you know, a little bit more color on turnarounds like we did this time. So you understand it was a cat-elky. So that will obviously impact gasoline production on the West Coast. I mean, we're trying to give that kind of data so you can build that into your model, and that's our commitment going forward is to try to give incremental color like that.

No, and we definitely appreciate the incremental color. It goes a long way. I guess the follow-up is the stock, the way we look at it, is so dislocated relative to its -the-parts value. The question we consistently get is what ultimately is going to unlock that value? So going back a couple years, there was a talk about disintegration and whether there's value in doing that. But, Gary, one of your latest thoughts there, and just saying, if the stock is this discounted relative to its -the-parts, how do you pull forward that value? Is MPC better together or apart?

Well, you're right, Neil. The stock is discounted when you look at it on a -the-parts basis. But I also want you to take a strong look at the first quarter's performance. The MLP performed really, I would say, right in line. The MLP is right in line with expectations, providing $908 million of EBITDA. The retail performed very, very well, and as we stated, the merchandise sales are running at about a 4 to 5 percent same-store increase, which is very, very strong. Granted, in the first quarter, with a rising crude price, the same-store volume was on gasoline slips because you tried to get that gasoline price to the street. But you add those two sectors together, and they were very, very strong sectors. And I compare to those, to some of our peers in the first quarter, who did not – they did not have those sectors in their portfolio. So I would say, for the long term, I'd rather be invested in a company that has that type of a portfolio balance. But you saw here in the first quarter, we bought back a substantial amount of shares. I think it was a very smart purchase to continue to buy back shares at this low valuation rate. And as we project the second through the fourth quarters, we expect to be, as I said earlier, bullish. And that should provide us with the capital to continue to lean into the share repurchases. And Greg, I think Greg will add a few more.

Yeah, Neil, what I'd like to do is just add a couple comments to what Gary said. I think, one, everyone needs to recognize that we just went through a tremendous change. We're only six months or seven months into this big change. But I think underneath that change, when our whole idea, going back many months ago, was that the power in what we were able to create by having this integrated business provides tremendous opportunities to generate earnings and cash and capital. And we're on track to be able to do that. So one of the things that I think that has an impact on the valuation at this point in time is just that we're in the early stages of developing a track record of pulling all these things together. And I think everything you've heard about the synergies, the work in the marketing business, retail, to do the conversions that drives the integration and all that will start to deliver over time. But we're absolutely convinced that our integrated business, by taking it from where we buy our crude to how we sell it in the marketplace, is the most powerful way to run the business forward. And we'll demonstrate that over time.

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

Hey, Gary. So when I go back to the days of Galveston Bay, it used to be a high-cost asset. And then you took over and crushed the OPEX over there. And I'm looking at the West Coast OPEX guidance. It looks a little higher right now. And if somebody can crush it, it's used. I'm just trying to understand what's the plan of action to bring this more to a normalized level. And by then, can we see this op-cost trending down lower?

Sure, Manav. And that's a good point. If you go back to our analyst day, we had a couple slides in there that depicted the difference in the Solomon Index. If you look across the industry, what our Solomon Index is for the Legacy Marathon versus the Legacy Endeavor sites, and specifically to L.A. We took Galveston Bay from a very high fourth quartile performing refinery. But we expect when the final numbers are going to come out mid-year this year for 18, we expect to have that down to probably the top end of a first quartile refinery on an EDU basis. The second thing to understand, I was going to turn it over to Ray, but Ray's too humble to answer this question. Ray ran Galveston Bay. When we asked Ray to go run Galveston Bay, it was with our succession plan. Ray went in there and did a good job operating that place. He more than likely was going to run all of refining. And he did an outstanding job. He has on L.A., our new plant manager came from Kalisberg, Tracy Case, who ran Garyville, who ran the best EDU on a cost per barrel basis, the best refinery in the country, is looking over that refinery now. So trust me, we are very, very focused. And I think it is further illustrated in that we're going to get this turnaround done early and below budget. So we're very, very focused. And lastly, the work that we just came out of, we have now completed all of the represented refineries are complete with the negotiations of those contracts. And we cut a significant amount of cost out of the L.A. refinery here in our first contract negotiations. Ray, any more to add?

Yeah, I'd just like to add that your point is spot on with what our focus is. We've put for the second quarter. Of course, some of that is driven by the high turnaround work that we have in California in the second quarter. But our real focus is looking at the other manufacturing costs. And when you see that differential relative to the Gulf Coast, we know California won't get to the Gulf Coast, but directionally we can improve from where we are. So that's spot on. And it's not one thing. It's not turnarounds. It's not people. It's a combination of looking for all the efficiency knobs. And Gary talked about one of them just now as far as, hey, our contracts, we believe coming out of the first quarter, we have more efficient contracts to work with. And so we will continue to work with the California teams to just say, hey, given the landscape that we have out there, how can we get better?

And a quick follow-up, guys. On the analyst day, one of the slides kind of highlighted that in 2019 and 20, you expect close to $1.9 billion in cash to be kicked back from the midstream to the parent. Given the deal announcement today morning, I did my quick math. I was still coming very close to $1.9 billion. I'm just trying to understand, is that still the number that you expect the midstream component of the business to give it back to you in terms of cash returns?

Yeah, Mnav, it's Tim. Obviously, the guidance on distributions back was based on sort of standalone. With the combination, there could be some adjustments to it. And again, we're not going to sort of re-guide to it. But there is certainly, by way of the combination, less distributions that would be made out of what would have been the A&D system. So there's probably some adjustment offset by what the distribution outlook as we set that for 2020, which we're not doing at this time. So I don't think we're concerned at all about any degradation of cash flow coming from MLP distributions and its impact on MPC's capital or return plans.

Our next question comes from Doug Leggett with Bank of America. Your line is open.

Hi. Good morning, everybody. Gary, the MPLX deal addresses one element of complexity, one could argue. But I think in your prior conversations, prior remarks you've made about this, you remain quite unhappy with the way the overall MLP has traded by way of its yield today, which I think is still one of the highest in the space. What can you do next now that you've simplified this part of the structure? Any further thoughts on how you can improve the market reception to what is now one of the most attractive yields in the space?

Sure, Doug. You know, the conversation for the last six months has been the overhang of having two MLPs and the overhang not only on MPLX, but therefore the overhang that then translates into MPC. So we just announced the transaction this morning. We will see over time here how things move. We've talked with the market over time that we continue to look at does the C Corp structure make sense? Does some other structure make sense? But I think that, you know, give it some time here. This overhang should come out of the market. All the projects that Mike Henigan outlined here on this call and earlier today on the MPLX call and this combination, you know, we probably have the best backlog and the best growth of third-party fee-based revenue in really in the whole MLP space. So, you know, time will tell if we get respect for these projects and respect for what we have put forth. I think we will because it's very clean, it's very simple, and, you know, performers will dictate how we recover.

Okay. Well, I guess we'll have a chance to chat more about that later as we come sure. My follow-up is just a real quick one, follow-up on the synergies question from earlier. I just wanted to be clear whether you're achieving the same synergy target quicker or if you're finding more in terms of the overall prognosis for your synergy target. I'll leave it there. Thanks.

Doug, this is Don. I would say yes to both of those. So we knew that there were opportunities and the goal was one, to expand the opportunity set and the ideas that we have that will generate synergies, and the second was to accelerate the realization of those. And so, you know, we're really pleased actually with both. The portfolio backlog is growing and the realization rate is occurring much faster than we anticipated.

I appreciate the answers,

guys.

Go ahead, Gary.

Sorry. Yeah, and Doug, you know, the first quarter here, you know, it's unfortunate that the whole industry, you know, struggled just from the commodity prices and mainly from the big overhang in inventory and then the compression of the crude diffs. But our synergies are really masked by, you know, the downturn in the overall refining industry. But, you know, I really would like to compare this transaction, as Greg just said, you know, we're only seven months into this. I'd like to compare this transaction to any other major transaction that's ever been put together on how quick we're able to integrate and how quick we're going that we're delivering these synergies. And you'll see it now that the markets are turning around. You know, we had a little bit of noise here, you know, with some catch-ups on vacation accruals and some things that, you know, just happened in a large transaction. But you'll see it, you know, really start to accelerate then and these synergies will be sticky into the earnings power going forward.

Our next question comes from Matthew Blair with Tudor Pickering Holds. Your line is open.

Great. Thanks for taking my question. Maybe turning back to some of the parts of the discussion, Gary, you have a pretty expansive portfolio these days. Are there any opportunities to potentially divest any underperforming businesses or non-core businesses that eventually might help your multiple?

Certainly. And we have discussed that in the past. We're looking at, you know, there are possibly, and we're high grading some of the assets and systems right now in the midstream system. There may be some assets in certain basins that could fit some other players better than they fit us. And the market is valuing some of these assets quite lofty right now. We certainly, on the retail side, Tony Kenny of Speedway, they have a number of assets that aren't at the high level of performance that Speedway wants. We've put together some package between Tony and Brian Partee here to probably divest some of those assets into our trade eventually. We are quite pleased where we sit right now on the refining side. You know, as we look at the refining systems and how I think we can go in and really make some improvements in the operating expense. So we're quite pleased. I don't see that we'd make any divestitures in refining at this point. But we have some components within retail, within midstream that, you know, we're going through that process right now.

Great. And then your other operating expenses in refining ticked up by about $180 million compared to Q4 levels. I think it's about a 19-cent EPS impact. Could you just walk through what drove that increase? And is the $1.268 billion figure from Q1, is that a good run rate going forward? Thanks.

Yeah, Matthew, it's Tim. I mean, remember that that other category within R&M has got really the sort of cumulative effect of a lot of the drop activity that was done, frankly, even before the combination. So, you know, you had in first quarter an extra month of the drops that were done in February of last year. That's probably the big delta versus where we saw things in fourth quarter. But that level around, you know, between sort of a billion, a billion three is, you know, there are no other big factors in there that would be solid or anything unusual that suggested that that is going to change dramatically on a going-forward basis. Again, we're not going to guide to it specifically, but there weren't things present in first quarter that we wouldn't expect to be present on a going-forward basis. So you've got the cumulative effect of the drops, an extra month in there from where we were in the prior year. And again, I guess the other big change here is that a lot of the transportation costs within the legacy Endeavor system were captured in refining margin. So we've reclassified and remapped those costs into this category. So there was a relatively big delta on bringing those transportation costs into that category. But again, it's probably going to be around that zip code on a going-forward basis.

Our next question comes from Justin Jenkins with Raymond James. Your line is open.

Great. Thanks. Realize we're at the hour mark here, so I'm just going to keep it to one. Gary, you mentioned in your prepared remarks about going towards maximum light, sweet on the crude side of things. I'm just curious how you see it playing out here with a lot more discussions on the quality of the light, sweet crude being produced here in the U.S. and increasing amounts of the higher gravity material and how that's impacting operations here.

Right. Justin, let me turn that over to Rick Heston, who runs all of our supply functions.

Yeah. Hi, Justin. Very good question. And if you look at a ,000-foot level, we're running just shy of 60% sweet. And if you do a comparator to 2Q, that'll be our 2Q number. And if you go 2Q of 18, we're 12% up from it. So we are maximizing light, sweets in and around WTI Midland as you well can track. Those differentials are very attractive. We're the beneficiary of those differentials at an El Paso, at a Gallup, at Galveston Bay. And then throughout our Midwest system, we've got just shy of 800,000 barrels per day. We are certainly maximizing light, sweet there as well as Garyville. And then last but not least, certainly the West Coast. So we are all out light, sweet where we can, where the differentials make sense. And similar to what Ray said earlier, we're running our LP models every day and tweaking them every day based on current length and or lack of length and gas and diesel in specific regional markets.

Got it. Thanks,

all. And that is all the time that we have for questions today.

Thank you, operator. Thank you for your interest in the Marathon Petroleum Corporation. Should you have additional questions or would you like clarification on topics discussed this morning, we will be available to take your calls. Thank you for joining us.

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