Marathon Petroleum Corporation

Welcome to the MPC fourth quarter 2019 earnings call. My name is Jacqueline and I will be your operator for today's call. At this time all participants are in listen only mode. Later we will conduct a -to-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 Doug Wendt. Doug you may begin.

Thank you Jacqueline. Welcome to Marathon Petroleum Corporation's fourth 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, CEO of MPOX, as well as other members of the executive team. As you know Christina Kazarian typically hosts this call. I am doing that today because Christina is celebrating the arrival of a baby girl a week and a half ago. Both Christina and baby Agnes are doing well. 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. Now I will turn the call over to Gary Heminger for some opening remarks and highlights on slide three.

Thanks Doug and good morning and thank you everyone for joining us. I too would like to congratulate Christina and look forward to her return in a few weeks. If you please return to the slide number three. Earlier today we reported adjusted net income of 1 billion dollars or $1.56 per diluted share. This quarter's performance demonstrates our continued ability to execute across all aspects of our business and capture incremental synergies at an accelerated pace. In refining and marketing the team's commercial acumen coupled with our geographically diverse footprint drove tremendous capture results of 105%. Key drivers of capture for the quarter included strong gasoline price realizations, leveraging our integrated assets and scale to capture geographic base prices dislocations compared to broader market benchmarks and the impact of our strong synergy delivery. Our refining team executed turnarounds, performed engineering projects and completed major maintenance at multiple refineries. At Garyville the crude revamp project and the first phase of the Coker expansion project were commissioned allowing us to realize higher Coker unit rates from the expanded drum size. The second phase of the Coker project is on schedule to be completed in the first quarter of 2020. Early operating results on the first quarter, Coker, have been very positive and we have been able to achieve a 17% capacity increase exceeding our original project expectations. We expect anticipate in the second phase of the project to achieve a similar rate increase. Our Speedway team also executed well this quarter. They delivered strong results while also exceeding our cumulative store conversion target with over 700 stores converted to the Speedway platform since the combination. In the midstream segment we progressed strategic long-haul pipeline projects that are key to the development of our integrated permeant and Gulf Coast logistic system. Additionally, Northeast gathered, processed and fractionated volumes were up 18, 14 and 12 percent respectively in 2019 versus 2018, demonstrating continued growth and strong performance in this region. Our team's execution this quarter continued the trend of a very impressive synergy capture. We realized over 420 million dollars of synergies in the fourth quarter. It has been over a year since the combination with an ever. As a result of our focus on integration and outstanding execution over that period, our full year realized synergies now have totaled 1.1 billion dollars. We believe MPC will build upon this platform and continue to capture substantial incremental value in 2020 and beyond. Don will provide more details around our synergy capture later on the call. Now let me briefly share some thoughts on the macro environment. While current U.S. gasoline inventory levels have been high in the first few weeks of the year, we believe this is a function of healthy supply and high utilization in the fourth quarter. We anticipate inventory levels to moderate with the upcoming seasonal RVP transition. We expect U.S. gasoline demand to remain similar to last year's levels supported by a steady economic outlook and stable labor markets. Overall, U.S. diesel inventory levels remain relatively constructive, trending slightly below the midpoint of the five-year average. Warmer than normal temperatures in the Northeast have recently weakened this of the demand, but we did not expect this near-term weakness to persist as underlying fundamentals for light products remain supportive. Continue to support this constructive outlook, spring turnaround activity globally is expected to be close to last year's record levels, peaking at eight to nine million barrels per day of crude capacity offline in March and April. Furthermore, we believe the impact of additional global refining capacity will be moderated by lower utilization for less complex foreign refineries due to the collapse of high software fuel oil prices. Turning to crude, we have seen the WCS differential widen since October, partly supported by easing of mandated production cuts and incremental rail loadings. On the light sweet side, we anticipate a slight narrowing of the WTI bread spread through the rest of the year as new pipeline take away and Gulf Coast export capacity comes online. Prompt medium and heavy sour differentials are currently narrower than expected in a post-IMO world, primarily due to supply constraints, geopolitical instability, and strong US and Asian demand. However, we anticipate heavy sour prices to weaken as HSFO continues to become a discounted alternative feedstock. We are focused on minimizing our exposure to weak HSFO product pricing by destroying the vast majority of internally produced re-ZED in our own system, aided by the successful expansion at our Garyville Coker. We are also importing third-party HSFO into our West Coast facilities as an advantage feedstock for our Cokers. Low software fuel oil prices meaningfully elevated relative to gasoline and diesel. We are also utilizing our robust coastal logistics systems to opportunistically export low software VGO and other components into the bunker market at a premium. We expect refining margins to strengthen throughout the first quarter from seasonal factors and transportation markets and the industry's continued response to IMO implementation. We are optimistic about the prospects for our business with continuous progress of high grading our mystery project backlog. We're targeting positive free cash flow generation across the MPLX business in 2021. In retail, our team is making good progress on the speedway separation while continuing to identify opportunities to grow merchandise margin through store conversions and remodels. In refining, we have made significant enhancements in the operations and reliability of the assets we acquired and we continue to believe that the configuration and upgrading capacity at our coastal refineries positions us well to capture the market opportunities that are expected to arise from the implementation of IMO 2020 regulations. Coupled with our impressive synergy capture so far and the opportunities we have before us, we are confident in our ability to continue delivering compelling financial results and maximizing shareholder value. Let me conclude my comments providing an update on some of our recent strategic actions. Our work on speedway is progressing as planned and we are targeting early fourth quarter for completion of the separation. The midstream special committee is advancing its work as we continue to expect provide an update during the first quarter and the CEO search committee is also progressing the work on schedule with expectations to be complete the latter part of the first quarter. Now let me turn the call over to Mike who will provide an update on our midstream segment. Mike. Thanks

Gary. Turning the slide for today we updated MTLX 2020 growth capital target to approximately 1.5 billion dollars down from the approximately 2 billion dollar target shared last quarter. This reduction shows our ongoing commitment to high-grade our project portfolio. We are also targeting growth capital of approximately 1 billion dollars for 2021. We continue to emphasize the growth of the LNS segment. We also remain focused on advancing our strategy of creating integrated crude oil and natural gas logistics systems from the US Gulf Coast. For the past several years we have been committed to funding our growth project portfolio without issuing equity. Given our attractive growth capital project portfolio we have historically funded around 50% of our growth needs with debt. We have done so while maintaining healthy distribution coverage of around 1.4 times and investment grade leverage of approximately 4 times. Assuming continued growth in our earnings and growth capital of approximately 1.5 billion and approximately 1 billion in 2020 and 2021 respectively we are expecting to achieve positive excess free cash flow generation in 2021. The target reduction in capital is expected to allow the funding of our distribution and capital program entirely from internally generated cash flow as well as provide us with improved capital allocation flexibility to pursue opportunities including leverage reduction or unit repurchases. With continued earnings growth and investment discipline we believe that we will be positioned to pursue incremental capital allocation opportunities, broadening our value creation options and enhancing long-term flexibility. Now let me turn the call over to Don to cover financial highlights for the quarter.

Thanks Mike. Slide five provides a summary of our fourth quarter financial results. Earlier today we reported adjusted earnings of $1.56 per share. Adjusted EBITDA was $3.2 billion for the quarter. Operating cash flow before working capital was approximately $2.7 billion. We returned $409 million to shareholders in the fourth quarter bringing the total of $3.3 billion of capital returned to shareholders in 2019 including approximately $2 billion in share repurchases. Slide six shows the sequential change in adjusted EBITDA from third quarter to fourth quarter. Adjusted EBITDA was up approximately $100 million quarter over quarter driven by higher earnings in all segments of the business. Fourth quarter results included a non-cash impairment charge of approximately $1.2 billion related to goodwill associated with gathering and processing businesses acquired as part of the Endeavor combination. Our reported effective tax rate for the quarter was 51%. This is significantly higher than our historical rate due to the effects of the non-taxable deductible midstream goodwill impairments and a biodiesel tax credit included in pre-tax income. Excluding these items our overall adjusted tax rate for the quarter would have been approximately 17.5%. This adjusted rate was also lower than our normal 21% effective tax rate primarily as a result of discrete tax benefits recognized in the fourth quarter. Before reviewing the details of each segment I would like to discuss our synergy capture for the quarter. As shown on slide seven we realize $420 million of synergies in the fourth quarter including 91 million of one-time synergies offset by 48 million of system integration costs. For the full year we realized over $1.1 billion of synergies. The full year results substantially exceed the $600 million of gross run rate synergies targeted for 2019. Slide eight provides additional insight into our synergy capture for the quarter and full year. For the fourth quarter more than 80% of our synergies were in the refining and marketing segment. This included $62 million from catalyst formulation improvements at multiple refineries, $55 million in crude supply optimization in the mid-continent region, and $15 million in marine optimization. For the full year 2019 the majority of the synergy capture related to operational and commercial performance in the refining and marketing segment. This included $128 million in catalyst formulation enhancements at seven refineries, $76 million in turnaround execution improvements at the Los Angeles, Martinez, and St. Paul Park refineries, $127 million in crude supply optimization in the mid-continent region, and $25 million in improved crude sourcing for the West Coast refineries. We also realized $121 million of synergies in the retail segment associated with economies of scale and implementation of the speedway labor and merchandise models at the newly converted stores. Lastly, we realized $24 million of synergies in the midstream segment and $109 million of net corporate synergies. The corporate synergies were driven by cost eliminations and contract negotiations made possible by the combination. Moving to our segment results, slide nine shows the change in our midstream EBITDA versus the third quarter 2019. MPLX EBITDA increased $3 million versus the third quarter. During the fourth quarter MPLX had strong terminal and pipeline throughputs. MPLX also successfully brought online three new gas processing plants and a new fractionator. We also continued to progress the reversal of the cap line pipeline with the purge of the main line completed in the fourth quarter. In Texas, the gray oak pipeline began initial startup in the fourth quarter and we expect the pipeline to be in full service in the second quarter of 2020. Slide 10 provides an overview of our retail segment results. Fourth quarter EBITDA was $636 million. Retail fuel margins were nearly 29 cents per gallon for the quarter. Merchandise margins decreased by $47 million compared to the third quarter, reflecting typical seasonality. We continue to see strong merchandise performance with a .7% year over year increase in same store sales. Operating expenses decreased by $12 million in the fourth quarter. The increase in the other column of the walk is due to both an asset sale gain as well as a new commercial diesel branding agreement with pilot travel centers that began in the fourth quarter. The fuel volumes and associated income related to this agreement are now reflected in the other portion of the segment rather than in fuel margin. More details on this agreement can be found in the appendix. Speedway continues to execute its brand expansion strategy through store conversions. We converted 158 sites in the fourth quarter bringing the cumulative store conversion count to 708 locations, exceeding our goal of 700 total cumulative store conversions by the end of 2019. Slide 11 provides an overview of our refining and marketing segment results. R&M performed very well despite declines and crack spreads in all regions. Fourth quarter adjusted EBITDA was $1.5 billion, an increase of approximately $51 million versus the third quarter. Despite a $4 per barrel decrease in the Chicago WTI 321 crack spread, our mid-con margin remained relatively flat for the quarter, reflecting our ability to leverage our diverse geographic footprint to capture regional market opportunities, particularly in the Salt Lake City and southwest regions. In the Gulf Coast region, the reduction in overall margin of $1.5 billion was primarily related to lower through-quits associated with planned work at our Garyville refinery. On the West Coast, our team did an extraordinary job capturing a $19.44 per barrel margin, an increase of over $3 per barrel from the third quarter, despite a relatively flat indicator crack spread. This performance demonstrates our ability to use our operational and commercial expertise to drive value in this market. Strong performance across all three of our regions led to capture of 105% for the quarter. Slide 21 in the appendix provides additional details on some of the primary drivers for capture. Fourth quarter results included a benefit of $153 million for the biodiesel Blender's credit attributable to volumes blended in 2018 and the first three quarters of 2019. The benefit was recognized in the fourth quarter because the legislation authorizing the credit was enacted in December 2019. Refining operating costs increased versus the third quarter, primarily due to planned project work at our Garyville and Los Angeles facilities. Slide 12 presents the elements of change in our consolidated cash position for the fourth quarter. Cash at the end of the quarter was approximately $1.5 billion. Operating cash flow before changes in working capital was a $2.7 billion source of cash in the quarter. Working capital was a $334 million use of cash in the quarter, primarily due to changes in inventory levels. Return of capital to MPC shareholders via share repurchases and dividends totaled $409 million with $65 million worth of shares acquired in the quarter. In 2019, we returned $3.3 billion to investors through dividends and share repurchases. You'll recall that at our investor day in December 2018, we articulated our target of returning at least 50% of MPC's operating cash flow after maintenance and regulatory capital to our shareholders. The $3.3 billion we returned to investors during 2019 substantially exceeded the approximately $2 billion of growth capital invested in the MPC businesses, excluding MPLX. As shown on slide 13, we have a strong track record of maintaining through cycle financial discipline. At quarter end, we had approximately $28.8 billion of total consolidated debt, including $19.7 billion of debt at MPLX, which is non-recourse to MPC. MPC's parent level debt of approximately $9.1 billion represents 1.2 times the last 12 months of MPC's standalone EBITDA. This ratio excludes the debt and EBITDA of MPLX, but includes distributions received from MPLX. On slide 14, we provide our first quarter outlook. We expect total throughput volumes of just under 3 million barrels per day. Planned turnaround costs are projected to be $425 million. Planned work for the quarter includes turnarounds at our El Paso and Salt Lake City refineries, as well as catalyst changes at our Anacortes and Garyville facilities. Additionally, we have planned maintenance work related to the completion of the Coker Drum Upgrade Project at Garyville and the expansion of the Wilmington Hydrocracker, which is the last phase of the LEREC project. For the year, we anticipate turnaround spend of roughly $1.1 to $1.2 billion. Total operating costs, including major maintenance, are projected to be $6.05 per barrel for the quarter. Distribution costs are projected to be $1.3 billion, which is consistent with historic guidance. Corporate costs are projected to be $225 million for the quarter, which is slightly higher than previous quarters, primarily due to corporate contributions and benefit adjustments that typically occur in the first quarter of every year. Slide 15 provides our capital investment plan for 2020, which remains focused on strengthening the earnings power of our business through growth and margin-enhancing investments across the enterprise. MPC's investment plan, excluding MPLEX, totals approximately $2.6 billion. The plan includes $1.55 billion for the refining and marketing segment, of which approximately $450 million is for maintenance capital. Our plans are focused on high-return projects that enhance margin, produce higher-value products, and promote resist destruction. We expect to invest approximately $550 million in the retail segment, primarily to build new speedway stores and to rebuild and remodel existing speedway locations. The plan also includes approximately $300 million for our corporate activities. Midstream segment capital projects include the CapLine Reversal and the South Texas Gateway Terminal Project. As Mike mentioned earlier, MPLEX also announced its 2020 capital investment plan, which includes approximately $1.5 billion of organic growth capital and $250 million of maintenance capital. With that, let me turn the call back over to Doug.

Thanks, Don. 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 will re-prompt for additional questions. With that, we will now open the call to questions.

Thank you. Our first question comes from Phil Gresh of JPMorgan.

Yes, hi. Good morning. First question, Gary, you shared a lot of helpful color on your thoughts on how things are going to progress here from a macro perspective. Just wanted to hear additional thoughts on high sulfur fuel oil. You had talked about your expectations that prices would continue to come down there and then pressure the sweet-sour spreads, but obviously recently you've seen a rather strong improvement or strengthening in the high sulfur fuel oil crack. What do you think is happening there and how do you foresee this playing out?

Yes, Phil, let me turn that over to Ray Brooks and give you some color on this.

Hi, Phil. Hey, as far as high sulfur fuel oil, we have seen that incentive and we've taken advantage of that with our system. I kind of want to break that into two pieces. The first is our internal production of high sulfur fuel oil where we don't have coking capacity. What we've done through our investments at our coking refineries is have the logistics that essentially we're taking all that material and we're taking it to our coastal refineries with cokers and destructing that. The other thing is we're configured for additional high sulfur fuel oil and we're taking advantage of that. The biggest thing thus far is out on the west coast between LAR and Martinez. We're in the 20,000 to 30,000 barrels a day range of purchased feedstock. We talked earlier on the call about our work in the first quarter with Garyville completing that coker work. Once that's done, we'll have similar opportunities at Garyville.

Okay, and then just from a macro perspective, maybe Gary, your thoughts as to why the cracks have strengthened so much and do you see a re-weakening of high sulfur fuel oil cracks coming?

Well, this has really been our strategy all along that we didn't see that we would see an increase in the cracks due to higher distillate prices on the front end. We really saw it as a feedstock advantage on the front end as Ray just discussed. Now as we go forward and it appears to us we're getting the market starting to strengthen and we're seeing pretty strong compliance with the shipping companies in switching over to the low sulfur fuel oil and we think this bodes well. We never expected in the first three or four weeks of January to have an acceleration in the distillate cracks. We thought this would come and we'll be stair-stepped into the year and that's still how we feel,

Phil. Okay, second question would just be on the capital spending or obviously we've seen some reduction in the planned spending here. The refining growth capex is still fairly elevated in 2020 and I know in the past, Gary, I think you've talked about some potential for that to come down further especially as we look beyond 2020. So is that something that you would still expect and then if I could tie in just the turnaround spending number is also up quite a bit year over year? Is this just an elevated turnaround year and is that something you'd also expect to come down more in future years? Thanks.

Yeah, Phil, this is Don. Let me address sort of capex first and then I'll have Ray talk a little bit about the turnaround spending. So you'll recall that in December 2018 at our investor day, we targeted about $2.8 billion of capital for MPC excluding MPLX and we also targeted basically flat capital spending in 2020 from that 2.8. So our total capital budget for MPC excluding MPLX is down and as you rightfully say, there are some projects that are multi-year projects. So about 40% of our refining growth capital is related to the STAR project, so that's the one at GBR and the Dickinson Renewable Diesel Project. The Dickinson Renewable Diesel Project will essentially be complete at the end of the year so all that capital will fall off and the STAR project, its spending will be substantially less in 2021 than in 2020. So your comment about some of those ongoing capital projects tapering off is absolutely correct. So let me turn it over then to Ray to talk a little bit about turnarounds.

Okay, Phil. Hey, when we did the combination back in 2018, the turnaround spend, go-forward spend was not as ratable as we would prefer. 2019, even though we did a lot of work at Los Angeles, Martinez and St. Paul Park, was a little lighter than average. 2020 will be a little heavier on average, particularly in the first quarter, but we're working that our go-forward schedule is going to be more even year in and year out. Our biggest work is in the first quarter of 2020. We're currently in the latter stages at El Paso doing a turnaround on the south side of that refinery and then we'll follow that up with pretty much a full plant refinery at Salt Lake City and both of these are seven years cycle ending turnarounds, so not a whole lot of options to work with there. And then the other piece that's major in this quarter is we have the second phase of our Gary Bo Koker Max project. It's just starting in a couple weeks coupled with the catalyst change. So, you know, higher first quarter, but when margins are low, that's when we really want to load our turnaround spend.

Thanks for taking my questions.

Thank you. Our next question comes from Doug Liggett from Bank of America. Your line is open.

Thanks. Good morning, everybody. Gary, I have a feeling this might be your last earnings call, and so I just want to wish you all the best, but also ask you to maybe frame your outlook for the micro going forward. Specifically, is IMO playing out as you expected? I know you touched on it a few minutes ago, but it seems things are a little softer, at least on the product side, and I wonder if I could have you elaborate on your confidence, let's say, that the new capacity additions going forward might be met with, you know, run cuts in less advantaged areas, and I've got a follow-up for Don, please. But again, I hope to run into you again, Gary, and thanks for everything you've done over the years.

Okay, thank you, Gary. Doug, maybe in the future you can take me to a proper dinner. That's a long history with Doug. So, Doug, yes, as I just stated, we think IMO is starting off like we'd anticipated, and, you know, we were conservative in our views on IMO, did not expect a significant run-up in the past, but we're looking at the current market, and we're looking at the current market spreads. Now, of course, this has been a bit of a, you know, a downward move recently with the coronavirus, but I think that will, I think this demand will certainly pick up quickly, you know, in the aftermath of this, but I, you know, as I said first, we were looking at being able to run the feedstocks. That is happening. We are being able to eradicate all of the reset in our own system by moving it into our coastal refineries, as Ray just mentioned. That's right on target, what we expected, and as I said, we never expected an immediate run-up in distillate pricing. We think this is going to be more steady and stair-step over the year, and, you know, I think the most positive thing that we're seeing is what appears to be the compliance of the shipping companies, and so, yeah, I would say, Doug, it's right on target to where we expected. Ray wants to add another comment.

Yeah, the other thing regarding run cuts, the thing that I would offer, you know, we talked about residual destruction, we talked a little bit about diesel. The other factor with IMO is BGO and how it plays into it. So what we've seen is a very, very strong BGO market, and so we pivoted on that. So mainly in the U.S. Gulf Coast where we've taken about 50,000 barrels a day out of our cat crackers and putting that in the BGO market. And, Doug, I would say

the last part,

you know, those

coastal refineries, of which we believe we have the highest leverage to anyone in the industry, but the coastal refineries that have the processing ability to handle the, you know, the heavy resid and, you know, and destroy that in our coking system, when you look across the globe, those refineries that have that processing are going to be advantaged. And we expect, you know, probably some East Coast and European refiners who do not have that capability will have a hard time competing on the front end here.

I appreciate all your comments. I do not want to elaborate on this question too much, but, Ray, could I just touch on your BGO comment? I mean, we've all been hoping that might happen, but do you think it's enough to perhaps clean up the gasoline weakness that, you know, we've been seeing here in the last several quarters?

Well, I, you know, Doug, I would say the thing that you're going to see immediately to clean up the gasoline inventories is the RVP changeover. You know, that'll be starting here in just a couple weeks. And, you know, that will accelerate anything than in BGO. Dave, do you agree with

that comment? Yes, we get started actually out west with the RVP turn in a few days, really. But additional to the RVP turn, Gary, is the shutdown schedule coming up. That also tends to put a draw on not only gas, but diesel inventories.

Well, thanks for that, fellas. Yeah, it does indeed, Gary. My follow-up very quickly, and I will hopefully keep it quick because I've, you know, been talking a long time about this stuff already. Just the capture rates and the synergies, I'm just wondering if the synergies are flowing through just obviously a little bit quicker. Are we now upside risk a permanent reset in your capture rates or maybe the likelihood that you're going to go out with a bang, Gary, and reset the synergies higher sometime this year? That seems to be raised trending for sure. But I'll leave it there. And again, congrats, Gary. I hope to run into you soon.

Yeah, you bet, Doug. I'm going to turn it over to Don. But let me say, you know, this is something we've been talking about for some time as our synergy capture. I would say this quarter is where you've seen the accumulation of all the work that we've been doing to really bring the refineries that we just acquired. You know, Ray and his team have done a tremendous job at accelerating the pace of improving those refineries and improving the run rates. I'll have Don get into the yield improvements, but we think that the catalyst reformulations that we put in, the technology that we put in these plants on a very accelerated basis, you're now going to see that yield improvement as a structural change. And I'll have Don go over the capture rate

here. Yeah, I, you know, echo Gary's comments. What we're doing around synergies, I think, is repeatable. You know, the capture rate is also impacted by a number of other factors. So this quarter, particularly, and you saw it really in December, when the crack spreads drop very quickly, there tends to be some stickiness around refined product capture. So, you know, we benefited this quarter from very strong gasoline price realizations, and I think part of that was due to the very sharp decline in crack spreads. The other thing that we did this quarter that, you know, won't always be occurring is that there can be price differences in markets, particularly compared to the benchmark that we're using. So, as I mentioned, Salt Lake City and some of the southwest regions were very attractive for a period of time, and we were able to use our logistics and other integrated model to supply markets where the demand was high and where the pricing was favorable.

And one more thing that is clear, not only do we have yield improvements from the synergies, but our commercial skills of being able to take all these dislocations around many different markets, you couple that with our midstream system that is second to none in the industry, but, you know, the key factor, the key underlying fundamental is the commercial skills we have to be able to capture that value.

Very clear, fellas. I'll leave that midstream question to someone else. Thanks so much. All right, thanks.

Thank you. Our next question comes from Roger Reed with Wells Fargo. Your line is open, sir.

Yeah, good morning. And similar to Deb, let me say, Gary, thanks for everything and good luck not having to talk to us anymore on earnings calls.

I love talking to you, Roger.

I know. It's just I can't see anybody would actually miss earnings calls all that much. I was wondering if we could dig in a little bit on the coronavirus and particularly since you're on the West Coast and they're talking about limiting flying, just kind of maybe give an idea of exposure to jet fuel as a component of the distillate side and whether or not that's something we really need to focus on or you've got the flexibility to move that around as well within your trading ops and all.

Yes, in fact, Dave Weichauer talked to this. Jet fuel is one of the bright spots in our overall demand equation within MPC. So, Dave, you want to cover this? Yeah, so

on the West Coast, we actually have a short position against our contracted demands and are importing in order to cover that short. So we're actually in a really well position for covering that internally if the markets send us in that direction. So so if there is some sort of impact to jet demand, our position is actually short and should and should benefit the company.

Okay, good.

Roger, this is Brian Partee. I wanted to bolt onto that, too. One of the elements of our demand profile in the U.S. and where we're seeing the growth is actually in the cargo. So commercial travel is one element that actually a lot of the growth we're seeing, particularly in pad two and pad three, is in air cargo.

Okay, good. That's helpful. So I guess we'll watch it like everybody else, but at least we won't panic at this particular point. Second question, a little bit on the unrelated side. As we look at some of the future restructuring may occur here and the guidance, obviously, on lower cap X going forward and free cash flow. But one of the thoughts has been, or at least as we've talked to investors, expectations have been for cleaning up a little bit on asset sales in that segment. So I was just curious if there's been any progress there or is there any sort of timeline we should be thinking about as we look into the vast majority of this year?

Hey, Roger, this is Mike Hennegan. Now, there's not a real lot of progress to report there, mainly because of the macro backdrop in the gas business. With natural gas dipping under $2, we continue to look in the market, but as we've said many times, our view is this will only work for us if we think we've got a real good value for the assets. So in the short term, we continue to look. We continue to have an advisor engaged in helping us look, but I'm not expecting a whole lot of action in the short term.

And Roger, I think I don't want the investors to miss. While the Marcellus and Utica has had kind of an umbrella of pressure, look at our execution and look at our performance. Gathered, processed, and fractionated volumes up 18%, 14%, and 12%, respectively, in an area that some people had expected would be down. I think this just shows the strength of our assets in those regions, the strength of where they're located, and how we have commercially put those transactions together. So I think we're in very good shape, and we certainly think this is a our position there is a gold standard within the natural gas processing space. So we aren't just going to give assets away.

No, we don't want you to do that. I'm just curious if anything was pending, but I appreciate the clarity there. And thanks. I'll turn it back to you all.

All right. Thanks, Roger.

Thank you. Our next question comes from Benny Wong with Morgan Stanley. Your line is open.

Hey, good morning, guys. Thanks for taking my call. Just a little bit all around the strategic review and the midstream. I understand you guys are looking to give us an update in the first quarter here. I guess my question is really, at the same time you guys are looking for a new CEO, how interconnected or related are those two processes? I guess, like, would you guys need a pretty good idea of who's coming in as CEO before you make a decision on your midstream, or how are you guys thinking about that?

Well, Benny, as we just had a board meeting this week, and we're on target in all of the strategic reviews that we're doing. This is a very thorough review with the board from an operating execution and a governance standpoint. So all those will be taken into context. Timing-wise, all I can say is we'll see on any overlap. But the structure of the board is, we have kept the board so much involved, and they're driving. We have a special committee on the midstream, a special committee on the Speedway transaction, as well as my successor. And all of them are involved. All of them understand the game plan, and we'll just see how it plays out.

I appreciate the color there, Gary. And then my next question is really on Speedway. Within your retail budget, I guess, how many store conversions are you guys targeted within there this year? And beyond that, how much more opportunity is there for conversions outside of new acquisitions? And if it's possible, would it be possible to give us an update in terms of how much those conversions generally cost you, and what's the associated EBITDA or merchandise uplift you're seeing so far?

All right, Tim. Yeah, Benny, it's Tim. In terms of the go-forward conversion plans, as you heard, we've converted since the close of the acquisition over 700 locations. There's probably something on the order of about 250 that would be left to be converted this year. We expect to have that probably done on around midyear. We haven't given specific guidance on what the earnings potential is per store or what the investment is. But I can certainly point to the fact that you saw relatively strong merchandise, same store sales. This is really the quarter where we had the former Endeavor locations in, and you're starting to see some of that pull through on the conversions. We go through a little bit of a two-phase on conversion where we'll convert to the brand, and then we'll bring in and re-lay out the store. We'll re-lay out the cooler. We'll put food programs in where appropriate, and we're starting to see some of those impacts in the business. So I'd say keep an eye on merchandise over the course of the year. I think you're going to continue to see a lot of that uplift, which is clearly going to be synergy for business and really put the business in a good position.

You'll recall when we announced the acquisition, we saw this as one of our biggest opportunities, a lot of low-hanging fruit in being able to improve the store performance, both front court and back court. And that certainly is playing out. But an exceptional performance to get over 700 stores converted in this period of time is really exceptional.

Yeah, I agree. Congrats, guys. Thanks for the color.

Thank you. Our next question comes from Manish Gupta with Credits Lease. Your line is open.

Hey, Gary. I wanted to focus a little bit on the West Coast. Going back to 1Q19, throughputs were a little low, OPEX was high, turnaround expense was high, capture was low. As the year has progressed, every metric has improved to a point where this quarter, you almost captured $20 in gross margin. So can you walk us through the measures that have been taken, which is now allowing you to not only capture the synergies but operate these assets in a materially better way than they were being operated at the start of the acquisition?

Yes. Let me ask Ray to talk about that. So it's not only the operations of the physical assets. Then I want Dave Weickart to talk about the commercial side, because the commercial side is equally important on how we have really improved the commercial abilities that were there before to what we're doing today. So,

Ray? Okay. Hey, you hit on it. In the first quarter of 2019, we did some major work at both LAR and Martinez doing turnaround work. In the fourth quarter, we were able to take advantage of doing that work. Specifically in October, when gasoline got very strong, we were able to pivot quickly and maximize our gasoline production. One thing I want to focus on at LAR is a couple things that I'm very proud of the team of doing. The first thing is we were able to defer some COCA work that we planned early in the month. We were able to defer that working with our commercial team by a couple weeks so that we could take advantage of the strong margin environment. The second thing is one of the synergies we talked about Gary just talked about on the call today was catalyst reformulation synergies. The biggest one that we did was in LAR's cat cracking unit where we did a complete reformulation. And this is a big unit, 100,000 barrels a day cat cracker. And so it went really well. Everything we wanted to happen happened. The light product yield went up, the heavy yields went down, the gasoline octane went up. So we were really able to take advantage of that. And that well for us in the month of October. Hey, just one thing I'll say in concluding my part is the west coast is a very challenging region. And our key focus has been and will be reliability and then also cost control. Now I'll turn it over to Dave.

So from a commercial standpoint, one of the value adds that we've had managing the west coast has actually been to rely on the Gulf Coast for shifting our export barrels from mostly from the west coast northern refineries over to the Gulf Coast in order to keep that high valued west coast product in the west coast and sell it at those high basis margins. So there's been basically a tripling of the number of of the number of cargoes that we've relocated from the from the west coast to the Gulf Coast here since the first quarter. So that's a pretty significant improvement given the basis differential between those two markets. And I'd say secondly, we had a lot of commercial activity around managing our inventories in that system and had tremendous success in capturing value and in basically trading around the refinery given the market condition. So I think that from a commercial perspective, you've got you really got it coming both ways from not only from from the folks that are on the ground there and working out of San Antonio, but also our our ability to quickly relocate these cargoes from the west coast to Gulf Coast as the market dictates.

And hey, this is where I just want to add on to Dave's comments. So from a crew perspective, the story is very similar to what Dave just mentioned. We with our size, our integration and our flexibility have been able to toggle between the eastern Gulf Coast to the US west coast with foreign spot and turn barrels that that just that optionality wasn't there in the past. So we've we've added significant value by optimizing and making those moves as well.

All these make a lot of sense. Quick follow up is there's more of an IMO question. Gary initially mentioned that heavy sours have moved out WTIWC is 21. We're also seeing Brent Maya trend towards that $10. What I'm trying to understand is if sulfur is the problem, why aren't Mars and medium discounts slightly wider or wider from where they are right now? What's causing those spreads to be so narrow?

Yeah, it's a great question. See, you know, you're there's so many world dynamics going into play with the medium sours geopolitical events, the Venns volume offline, Iranian volume offline. I will tell you as you look out our view going forward as you will see movement there, specifically when we look at the Gulf Coast and you look at the Mars and the production in the Gulf Coast, you know, right around right now, we're expecting it to exceed 2 million barrels per day in 2020. So that's a good sign. And I would also say when you look at the Guyana and Brazilian production that is coming online here, well, just recently and more here in 2020, I think you will see some of that trend play out. But short term, I would say it was was and is geopolitical events, you know, beyond anyone's ability to predict going forward. We see this as a potential bright spot.

Thank you for taking my questions.

Thank you. Our next question comes from Paul Chang with Scotiabank. Your line is open. Hey,

guys. Good morning. And Gary, if I don't talk to you in the next content call, then best wishes for your retirement. And if you're in New York, please give me a call. A couple questions. I think the first one is, if I'm looking at the cash flow, stripping out the MPLX on the C-Corp level, look like you have the cash flow is in excess of your capital and your dividend. So the question is that is there any reason why you were not maybe more aggressive in the buyback?

Yep. Yeah, Paul. So as you know, we returned a significant amount of capital this year through share repurchases, nearly $2 billion. Those share repurchases sometimes aren't always rattle. And we also I think, you know, we tend to use or have tools like 10B5 programs to be able to affect share repurchases. There are times where those type of programs expire in a period where we aren't able to sort of reimplement the program. So I don't think you should read anything into the amount of share repurchases that occurred in the fourth quarter and extrapolated into a view that we're not committed to returning capital to We are absolutely committed to doing so and we'll continue that practice going forward. Thank you.

The second question is for Ray. Ray, can you tell us which of your refineries you were able to run the high sulfur fuel oil and how much you run in the fourth quarter and what is the maximum you think you can run if not by refinery but on the total region or total company? And also that I think you guys have said that you are exporting some L.S. VGO in the fourth quarter. How much do you export and what if the current economic sustain, how much more that you will be able to export? Thank you.

Okay, hey, as far as HSFO that we ran and what our capacity, what we did in the fourth quarter of 2019 and the first quarter of 2020 has primarily been on LAR and Martinez and like I said earlier running in the 20 to 30,000 barrel day range. Since we're running what we would call a cut reset, that essentially has to go through the crude unit. So when we're running this, we're backing out some crude in the process of doing that primarily at Martinez. So we think we're in a good spot on the west coast where we have potential whether this is an HSFO or additional resid that comes from crude at the margins. So dictate will be at the Garibald refinery once we complete the expansion. And just to give you a little bit of a background, we were targeting to get about a 14% increase in coca rate and we got 17% to date with our V bottlenecking there. And we expect a similar type of increase when we do the second coca. So when you put the two together, we're going to be talking about 18,000 barrels a day of additional resid destruction capacity at the Garibald refinery.

Hey Ray, in the Garibald field, are you going to run also similar to in California that is going to run it full into the crude unit or that you will have the logistic allow you to directly feed it into the coca?

You know, it depends on what the cargo looks like and the infrastructure. On the west coast, LAR and Marquino's were primarily set up to go through the crude unit. At Garibald, we actually put infrastructure in to take directly into the coca. And we've already done that with our internal production that we've directed from Catlisburg down to Garibald. So at Garibald, we'll have the flexibility then to take hot resid direct to the coca or if we get a hot resid or an M100 type material, we would take that to the crude unit.

Any opportunity in Galveston Bay?

Galveston Bay is a little different animal. First, I'll start off by saying we're keeping our resid destruction units full. And so at Galveston Bay, we have some coking capacity. So we have an opportunity there should we choose. The bigger opportunity at Galveston Bay as far as resid destruction is with the resid hydrotreater. And so when we're running all three trains, all that's 70,000 barrels a day. But we've got to be very careful there because resid quality really matters with that unit and from the stability of the unit. So we actually prefer to fill the the root unit, the resid hydrocracker via very defined crude that we run there. So a little less optionality at Galveston Bay relative to LAR Martinez and Garibald. Thank you.

Thank you. Our next question comes from Neil Mehta with Goldman Sachs. Your line is open.

Hey, Gary, I really wish you well here. And if Christina's listening, congrats to her on her baby daughter. I guess the first question is just on the CEO successor process. Can you provide an update on where we stand? It sounds like we'll get an update at the end of the first quarter and just in general in conversations with the board, what are the characteristics important in terms of who you're going to pass the baton to?

Yes, as I said in my earlier comments, the board has a very detailed, very strong governance and a thorough review process, national search. They're on target and we expect to give you a, you know, hopefully an answer at the latter part of this quarter. But it's moving along very well and as I said, the board is very engaged.

All right. And the follow up is actually for Mike here, I think you had made the comment that you're evaluating 25 different options in Midstream, but there was no silver bullet. And I think today you're saying the environment's tricky for Midstream asset sales. Again, I know you're going to provide a little more color on this. So I'm not asking you a front run, but is it fair for us to construe that it would be difficult to execute a full spin out of MPLX in the current environment that we're in?

Yes, Neil, like you said, I'm not going to front run the committee. What I can tell you is the committee is very, very engaged. We've had a lot of detailed discussions and we continue to do that work. So we're not quite at a completion, so I won't comment on that. What I will comment on, though, that I think this will help you overall is we've announced the goal to be free cash flow in 2021. I would tell you that return on investment capital has always been a high priority for us, but we did not want to pass on the opportunity for some MVC backed projects like Whistler and Wink to Webster, et cetera. Also remind everybody that MPLX does return $3 billion in the form of distributions. But with that, we continue to high grade our portfolio. We're trying to drive to a ROIC. And at the end of the day, I think it'll be a very good opportunity for us long term to be in that free cash flow positive mode as quickly as we can get there.

Yeah, the capex reduction is notable and we appreciate it. Thanks very much.

You're welcome, Neil.

Thank you 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. Thank you for joining us.

Thank you for your participation in today's conference. You may now disconnect at this time. Have a wonderful day.