Marathon Petroleum Corporation

Welcome to the MPC third quarter 2019 earnings call. My name is Amber, 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 Corporation's third quarter 2019 earnings conference call. The slides that accompany this call can be found on our website at marathonpetroleum.com under the Investors tab. On the call today are Gary Heminger, Chairman and CEO, Don Templin, CFO, Mike Hennigan, President of MPLX, Jim Rohr, Lead Independent Director of MPC's Board, as well as other members of the Executive Team. We invite you to read the Safe Harbor Statements on Slides 2 and 3. 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. Now, I will turn the call over to Gary Heminger.

Thanks, Christina, and good morning, and thank you for joining our call. MPC has demonstrated a history of transformative actions to drive shareholder value. We separated from Marathon Oil in 2011, and since that time, shareholder returns have significantly outperformed our peer group as well as the S&P. Over the same period of time, we have returned nearly $21 billion of capital to shareholders, including a dividend that has grown at a 23% compound annual growth rate. And I'll turn to slide 5. On today's call, we plan to provide an update on our integration and execution successes from the past year and discuss our next steps to great shareholder value. We will close the call with a review of our third quarter financial results. Moving on to slide six, over the past year, our primary operational focus has been integrating our two businesses, enabling us to execute and achieve our targeted synergies. Consistent with our continuous focus on transforming our business to deliver shareholder value, beginning in January this year, we embarked upon a strategic review process to identify the next steps in our value creation process. This review included board involvement and engagement with multiple financial and other advisors. Throughout the process, we engaged with our shareholders to understand their perspectives on the company and incorporated their feedback in that review. As a result of that review, today we announce our most recent step to create shareholder value, and that is our intent to separate Speedway into an independent company. The board and our management are fully committed to pursuing the path that maximizes shareholder value, and we believe this separation will create two strong industry-leading companies well-positioned for long-term growth and success. We'll now turn to slide seven, please. The new Speedway will consist of all of MPC's company-owned and company-operated retail stores, which collectively generates approximately 1.5 of annual EBITDA. We believe this business has significant growth potential, fueled by a strong, loyal customer base. The direct dealer business, which primarily operates on the West Coast, will remain with MPC. This is a separately managed business within our retail segment, which is only fuel supply with no merchandise sales. Moving on to slide 8, as we look ahead, we are truly excited about the opportunity that separation presents to each company to unlock value and drive total shareholder return. We believe that this transaction has significant benefits for both MPC and future Speedway shareholders and has the potential to create an enterprise value in approximately $15 to $18 billion. On slide 9, One of the most important aspects that drove our decision to separate Speedway today is how much we have grown the scale and earnings power of the business. The number of stores has nearly tripled since 2011 to roughly 4,000, and the membership within our Speedway loyalty program has nearly doubled. These successes have helped grow Speedway's EBITDA from approximately $380 million in 2011 to approximately $1.5 billion this year. a nearly four-fold increase. The impressive growth of this business within MPC has created the position we are in today and our ability to unlock significant value for shareholders. Turning to slide 10, Speedway has consistently been a top-tier performer in the convenience store industry. Historically, Speedway has had industry-leading same-store merchandise growth and fuel margins. On a profitability per store basis, Speedway has consistently led the industry. And Speedway has built a platform positioned to deliver a strong earnings growth trajectory and exceptional pre-cash flow conversion, which will support continued investment as a standalone company. On slide 10, the new Speedway will be the largest U.S.-listed convenience store operator, boasting a coast-to-coast retail network and a nationally recognized brand. The platform will continue to leverage its industry-leading customer loyalty program to help adapt to consumer buying trends with increased focus on digital engagement with our customers. Given the expansion of market multiples and growing size of the business, we believe any disenergies will now be outweighed by the potential value uplift of the separation. With a continued focus on synergies and the benefits from continued store conversions, The new Speedway will be a thriving, stand-alone business capable of delivering strong, consistent cash generation and growth. On slide 12, turning to the specifics of the transaction's next steps, we expect to accomplish this operation through a tax-free distribution of Speedway shares to MPC shareholders. An important step in the process is establishing a long-term, market-based supply agreement between MPC and Speedway. We expect Speedway to raise new debt and pay a dividend to MPC as part of the separation process. MPC would utilize these proceeds to reduce debt. We plan to target a capital structure to maximize valuation for both sets of shareholders and position Speedway for growth. We expect the transaction to be completed prior to year end 2020, subject to board approval and customary closing conditions. On slide 13, In addition to our Speedway announcement, we continue to evaluate midstream alternatives to enhance value for both our shareholders and MPLX unit holders. Unlocking value within midstream is more complex than the separation of Speedway. We have evaluated over 25 different scenarios to optimize MPLX's structure, including asset and business divestitures that we discussed on our second quarter earnings call, as well as potential separation alternatives for MPLX, including the creation of an upsea or conversion to a seacorp, among other structures. We also appreciate and consider the feedback we have received from many shareholders and unit holders over the past few months. Today we announce the formation of a special committee of the MPC Board as the next step in our continuing process to determine the best path forward. On slide 14, our goal has been and continues to be maximizing shareholder value over the long term. We have a track record of making bold, transformative change to drive value, and today's announcement is another step in that journey. Over the coming months, we expect to execute the separation of the Speedway business into a publicly traded company, continue optimizing MPC, progress the realization of synergies, and continue evaluating opportunities to further unlock value in the midstream business. We believe these actions will result in strong, nimble, and efficient businesses that are positioned for long-term growth and success. The new MPC will continue to be a best-in-class energy business, continuing our history of operational excellence, with a strong financial profile that provides a compelling value proposition for shareholders. On slide 15, let me turn to our earnings discussion. Before we get to our financial results, I would like to share some thoughts on the macro environment. Distillate inventory levels are meaningfully below the five-year average, setting the market up for strong momentum as we approach the implementation of IMO regulations. Gasoline inventories are also materially below last year's levels on the days of supply basis. U.S. turnaround activity for the fourth quarter appears in line with prior years, further supporting a positive forward outlook. On differentials, the heavy Canadian market continues to move in our direction. The WTI to WCS spread, which averaged just over $12 in the third quarter, has widened to around $17 per barrel. Given the potential for government rail credits and easing of mandated production cuts, we expect continued widening of this differential. On the product side, the ULSD to high sulfur fuel oil spread has now widened to $38 per barrel, providing a significant tailwind for coking economics. MPC is well-positioned to capture this opportunity across our major coastal refineries. At our Garyville facility, the Coker Upgrade Project, which is occurring this quarter, is expected to increase our resin destruction capacity by 14%. As part of our ongoing preparations for the IMO fuel spec change, we have established a new retail bunker operation in the Los Angeles area to complement our operation in the Pacific Northwest. We made our first deliveries of IMO compliant fuel from those facilities in October. Both locations are prepared to offer a variety of fuels to meet market requirements. The focus of the first year of our combination was execution to unlock realized value. We have made significant, observable progress, improving mechanical availability and operational integrity at our acquired refineries, expanding our commercial capabilities across the value chain and reducing costs. This, combined with our high-quality asset base, positions the company to be nimble and thrive in any business environment. I would like to take this time to congratulate Greg Goff for the announcement of his retirement from the company. and his 38 years in the industry have been quite impressive. Also, I want to congratulate Mike Hennigan and his promotion to president and CEO of MPLX effective tomorrow. Mike has a deep background in all aspects of Marathon and MPLX portfolio, and we welcome his guidance as we go forward. Now I will turn the call over to Don Templin to discuss the third quarter highlights.