Marathon Petroleum Corp (MPC) — Q1 2015 Earnings Call Transcript

Thank you, Cynthia. Welcome to Marathon Petroleum Corporation's First Quarter 2015 Earnings Webcast and Conference Call. The synchronized 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, President and CEO; Don Templin, Executive Vice President of Supply, Transportation and Marketing; Tim Griffith, Senior Vice President and Chief Financial Officer; Mike Palmer, Senior Vice President of Supply, Distribution and Planning; Rich Bedell, Senior Vice President of Refining; Pam Beall, Senior Vice President of Corporate Planning, Government and Public Affairs; and Tony Kenney, President of Speedway. We invite you to read the safe harbor statement on Slide 2. It's a reminder that we will be making forward-looking statements during the presentation and during the question-and-answer session. These results may differ materially from what we expect today. Factors that could cause the results to differ are included here as well as in our filings with the SEC. Now we turn the call over to Gary Heminger for opening remarks and highlights.

Thank you, Geri, and good morning to everyone. I appreciate you joining our call. We are pleased to report record first quarter results with $891 million of earnings. The outstanding results demonstrate our ability to take full advantage of favorable market conditions. MPC's extensive logistics and retail networks give us tremendous flexibility in feedstock acquisition and the ability to optimize refining operations and product distribution throughout our marketing footprint. MPC's integrated refining system made a significant contribution to the quarter's earnings, with Refining & Marketing segment generating $1.3 billion of income during the quarter. Our refineries operated very well, and we were able to capture the strong Gulf Coast and Midwest crack spreads. First quarter results also benefited from lower maintenance activity relative to the first quarter of last year. I am particularly proud of the dedicated employees at both our Catlettsburg and Galveston Bay refineries for operating our facilities safely, efficiently and without production impact during the recent work stoppage, which has ended at Catlettsburg but continues at Galveston Bay. We look forward to a successful resolution at our Galveston Bay complex in the near term. Speedway, MPC's retail segment, also performed very well during the quarter. Speedway's earnings, independent of the contribution from newly acquired retail operations, resulted in a record first quarter. Speedway continues to make excellent progress transitioning its new retail locations to the Speedway brand. As of today, we have converted more than 400 stores, including 260 completed during the first quarter. The comprehensive transition for each store not only includes the changing of signs and canopies, but it's a complete system changeover, which includes the back office, point-of-sale and inventory control systems, as well as integration of the Speedy Rewards Loyalty Program. With the majority of the Florida stores now converted, crews have been focused on convergence in the Northeast for the past month. This rapid pace of store conversions contributes to our confidence that we will achieve the synergies and marketing enhancements we expect as we integrate this business. I am pleased to announce that MPC's board has authorized the sale of its marine logistics business to MPLX, which we expect to close in the next several months. MPC's marine transportation business is a fully integrated waterborne transportation service provider, consisting of 18 towboats, 203 tank barges and related assets supporting the movement of light products, heavy oils, crude oil, renewable fuels, chemicals and feedstocks throughout the Midwest and Gulf Coast regions of the U.S. The addition of the marine business to MPLX, along with its very stable earnings and cash flow, would support our plans to accelerate the growth of partnership and provides increased asset diversity as MPLX continues to grow rapidly. MPLX also completed a binding open season for its Cornerstone Pipeline project, which is being increased in diameter to 16 inches to provide an industry logistic solution, including opportunities to connect many Midwest refineries to production from the Utica Shale, with potential to ultimately reach Chicago area refineries and pipelines that supply diluent to Western Canada. This type of organic growth, in addition to both MPC-sponsored drop-downs and third-party acquisition opportunities, demonstrates our commitment to grow MPLX into a large-cap diversified MLP with an attractive distribution profile. In addition, MPLX declared a $0.41 per common unit cash distribution last week, which puts MPC's general partner interest in the highest tier of the incentive distribution rights. The long-term growth profile of MPLX provides significant value to MPC shareholders over time. We continued our commitment to capital returns in the first quarter, with $209 million of shares repurchased in addition to $136 million in dividends. In addition to the $0.50 per share dividend declared yesterday, our board also announced yesterday a 2-for-1 stock split in the form of a stock dividend to be distributed to MPC shareholders on June 10. MPC has performed very well for its owner since we became an independent company in mid-2011. Our share price has increased substantially since the spinoff, and this stock split reflects our confidence in MPC's continued value creation, making our shares more affordable for a wider range of investors. The stock is expected to begin trading on a split basis on June 11. MPC's geographic footprint and large integrated platform, coupled with favorable market conditions, create a positive outlook for the business. Our large integrated platform provides us excellent access to price-advantaged domestic crude oil and low-cost natural gas. And the significant plant maintenance activity we performed in 2014 has positioned us to run at high utilization for the balance of the year. We also continue to invest in refining margin enhancement projects, with approximately $830 million of ongoing capital investment over the next 3 years for projects focused on increasing our light sweet crude and condensate processing capacity, expanding our export capabilities and increasing our distillate production. These projects are expected to generate approximately $650 million of annual EBITDA and exemplify the high-return capital projects available across our system. We are pleased with the startup of the condensate splitter at our Canton refinery in December, which is already operating above its 25,000 barrel per day design capacity. We look forward to the startup of the 35,000 barrel per day condensate splitter at Catlettsburg, which is expected to be online by the end of the quarter, positioning us very well as condensate production in this region continues to grow. Our efforts to accelerate the pace of growth at MPLX, grow our retail segment and enhance refining margins support the diversified earnings power of the business, and we remain confident in our ability to deliver long-term value for our shareholders. With that, let me turn the call back to Tim to walk through the first quarter results and an update of our financial position.

Thanks, Gary. Slide 4 provides earnings both on an absolute and per-share basis. As you can see in the green bars in the chart, our financial performance for the first quarter is quite strong. MPC had earnings of $891 million or $3.24 per diluted share during the first quarter of '15 compared to $199 million or $0.67 per diluted share in last year's first quarter. The chart on Slide 5 shows, by segment, the change in earnings from the first quarter of last year. The primary drivers for the change were the $954 million increase in Refining & Marketing and the $110 million increase in Speedway income, partially offset by higher income taxes associated with those higher earnings. Turning to Slide 6, Refining & Marketing segment income from operations was $1.3 billion in the first quarter of 2015 compared to $362 million in the same quarter last year. The increase was primarily due to a higher crack spreads in the U.S. Gulf Coast and Chicago regions as well as lower turnaround and other direct operating costs in the business. The higher blended crack spread had a positive impact on earnings of approximately $449 million. The blended crack spread was almost $2 per barrel higher at $9.69 per barrel in the first quarter compared to $7.85 per barrel in the first quarter of 2014. The $503 million year-over-year benefit in direct operating cost relates primarily to the substantially lower turnaround activity in the first quarter versus the first quarter last year. Turnaround and major maintenance costs decreased to $0.79 per barrel in the first quarter from $3.15 per barrel in the same period in 2014. The lower turnaround activity also benefited throughputs, which were 202,000 barrels per day higher than the same period last year. During the quarter, we recognized a reduction in our projected refined product inventories. The cost in these inventories was based on prices in early 2014, which were much higher than current prices. As a result, we recognized a pretax charge of approximately $30 million in connection with this LIFO inventory reduction. On Slide 7, we provide the Speedway segment earnings walk for the first quarter. Speedway's income from operations was $110 million higher in the quarter than the first quarter of 2014. Speedway's newly acquired locations are performing better than expected, contributing income of approximately $36 million to the quarter's results or approximately $68 million of EBITDA during the period. For the legacy Speedway sites, the light product gross margin was about $70 million higher in the first quarter of '15 compared to the same period last year. Overall, the Speedway segment's gasoline and distillate gross margin increased by more than $0.08 to $0.197 per gallon in the first quarter versus the same quarter last year. Merchandise gross margin was $22 million higher in the first quarter of 2015 compared to the first quarter of 2014 for those legacy locations. On a same-store basis, which excludes locations acquired within the past year, gasoline sales volumes decreased 1.2% over the same period last year. Merchandise sales in the quarter, excluding cigarettes, increased 6.2% on a same-store basis on a year-over-year basis. In April, we have seen no change in same-store gasoline volumes compared to last April. Slide 8 shows the changes for our Pipeline Transportation segment versus the first quarter of last year. Income from operations was down $5 million to $67 million in the first quarter. The decrease was primarily due to increases in various operating expenses and lower pipeline affiliate income, partially offset by higher transportation revenue in the quarter. Slide 9 presents the significant elements of changes in our cash position for the quarter. Cash at the end of the quarter was $2.1 billion. Core operating cash flow was a $1.2 billion source of cash. Working capital was essentially flat for the quarter. Long-term debt was a $103 million source of cash during the quarter, which was driven by MPLX's issuance of its first public debt during the quarter. Proceeds from the upside debt offering were used to pay down its revolver as well as for the continuing growth of the partnership. We continue delivering on our commitment to balance investments in the business with return of capital to our shareholders. We repurchased 209 million of shares and paid 136 million of dividends in the first quarter. Share count at the end of the quarter was 272 million shares, reflecting share repurchase activity since the spin of about 25% of the shares outstanding. Slide 10 shows that we had $2.1 billion of cash and approximately $6.7 million of debt at the end of the quarter. With EBITDA of about $6.5 billion during the last 12 months, we continue to be in a very manageable debt position with about 1 turn of EBITDA and a debt to total capital ratio of 36%. The strong cash generation of the business, highlighted by the $1.2 billion in the first quarter, continues to provide great flexibility as we pursue this balanced approach in our capital allocation. Turning to Slide 11, we have generated $3.5 billion in cash from operations and $1.4 billion of adjusted free cash flow during the last 12 months. Over this same period, we've returned about $2.2 billion to shareholders through dividends and share repurchases for approximately 1.6x our adjusted free cash flow. During the first quarter of '15, we repurchased 2 million shares for $209 million through open market repurchases. It's our intention to continue returning capital to our shareholders that is not currently needed to support the operational and investment needs of the business, and we continue to believe share repurchases are the most efficient way to do so. Slide 12 provides an updated outlook information on key operating metrics for MPC for the second quarter. We are expecting second quarter throughput volumes to be up about 93,000 barrels a day compared to second quarter 2014 and up about 75,000 versus first quarter of '15 due to less planned maintenance. Since we have no comparable 2014 data that includes the newly acquired Hess locations, we'll continue to provide Speedway outlook information by quarter for 2015. For the second quarter of '15, we project Speedway's light product sales volume will be approximately 1.5 billion gallons. With that, let me turn the call back over to Geri.

Thanks, Tim. We will now open the call to questions.

My first question. Gary, could you elaborate on your opening comments regarding the favorable market conditions that you referenced? And as there's always investor apprehension around early summer margin compression? Do you see any industry elements that reduce margin volatility, and more particularly, MPC's ability to perform better through those periods of seasonal weakness given willingness return to cash to shareholders and generate additional proceeds via drop-downs?

Sure. Regarding market conditions, we had a very strong first quarter with improvements in the Gulf Coast and the Midwest, the latter showing signs of recovery earlier than what we've seen in the past. As we've indicated to investors, we perform well in volatile market conditions, allowing us to capture margins due to our logistics systems. However, in this first quarter, we did not experience the significant revenue gross margin adjustment we had in previous quarters, as crude prices remained more stable, though we did see some increases in various wholesale margins. Looking ahead to the second quarter, Mike Palmer can provide more detailed insights. We continue to have a strong export market, which I believe will help not only Marathon but the entire industry maintain solid performance going forward. We are carefully monitoring inventories across our operational regions since refiners seek to operate at full capacity given the current crack spreads. I think our ability to reach the export market and leverage margins from both the crack spread and market differentials will be beneficial. Mike, would you like to share any additional insights regarding exports?

Gary, I think you addressed it pretty well. As you said, I think that the export market for us continues to be as good as it has been. We continue to grow volumes, and we don't expect that to change. So I think looking at the second quarter, the product inventories have been pretty well behaved relative to the crude inventories that have grown a lot. So right now, the second quarter looks pretty good.

Great. The domestic market looks pretty strong too. For my second question, can you provide an update on the BP Texas City integration now that it's operational? It seems like you're capturing a higher percentage of your benchmark for several quarters, and I'm curious if you're experiencing any upside in synergy since the acquisition and integration. Any comments on that?

Rich, would you handle that, please?

Sure. We are currently in the process of integrating the two plants. The pipe rack is being prepared to connect them. Additionally, we have successfully achieved some synergies related to crude and storage, as well as utilizing gas, oils, and cat crackers. These improvements have been realized. I don’t think Mike has any further comments. Overall, we are very satisfied with the performance of Galveston Bay.

And the other thing that I would add to that, Evan, is in my comments, I talked about $830 million of CapEx with $650 million of EBITDA. Part of that comes from Galveston Bay. And if you recall, in the first 2 years we operated in Galveston Bay, we really were going in and doing turnarounds, trying to get the plant operationally headed towards our method of operating and some of our operational excellence metrics. So we're just now starting into the process of being able to capture some of these low-hanging fruits that we think have outstanding returns. And that's why I stated $830 million of CapEx was $650 million of EBITDA per year. Part of that is coming from Galveston Bay. And as you can recognize, those are very high returns.

And also good to see the operating cost performance coming through as you run the operations more fully this year. 2 questions. You gave us the Cornerstone update that looks like it's moving ahead. Any updates on Sandpiper-SAX that you could share, and obviously, the proposal to reverse Capline?

Mike, do you want to take Sandpiper-SAX, and I'll handle Capline.

Yes. Okay, Gary, that sounds fine. Yes, Ed. With regard to Sandpiper and SAX, it looks very positive for us. SAX, I think, we've cleared all the permitting hurdles that we've had. Construction is going to begin this summer. We would expect to see SAX operating sometime in the fourth quarter. With regard to Sandpiper, I think as we've talked about, we did have some permitting delays in Minnesota, but in April, the administrative law judge did basically rule in favor of the certificate of need. He made a recommendation to the Minnesota PUC that the project go forward and the certificate of need be granted. So that was very, very positive. And we're waiting on that ruling that will take place within the next couple of months, and then it will go into a routing hearing as well, but things look very positive to-date.

And Ed, regarding Capline, there’s really nothing new since our last discussion. As I mentioned earlier, reversing a pipeline like this is not very complicated. It just requires time and proper organization to ensure that we can continue moving barrels from the South to the North if we decide to proceed with the reversal. As I've mentioned before, I spoke at the CERA conference last week where we addressed some questions on this topic. We are still in discussions with the other owners about their interest in moving forward, and I believe it will take some additional time to align all the owners on the belief that this is the right course of action.

The first question is about the retail business. The integration with Speedway is progressing well. Gary, could you share your thoughts on how we might monetize those retail assets? Are there different ways to realize their full value that may not be immediately apparent?

Clearly, there are various structures and options available. We have evaluated these over time, and currently, they do not seem viable to us. Our main focus is on fully transitioning Speedway East into the operation model that Tony leads, and I'm pleased with the progress being made in both store conversions and the improvement we're seeing in inside sales results. Those are our priority areas. We initiated an MLP back in 2012, which has proven fruitful, and we've discussed our fuels distribution strategy. To implement this distribution within our MLP, we are relying on the expected volume levels. We remain open to various possibilities in the future and will continue to assess our options.

All right, Gary. The second question is more of a macro one. The LLS brand appears to be tight right now. Given your unique perspective, I'm interested in your thoughts on the potential bottlenecks between Houston and St. James and what's needed to improve the spread.

Certainly, a very timely question, and let me have Mike address this.

Recently, the LLS brand differentials have been fluctuating around parity. Currently, there's roughly a $1 spread with LLS pricing lower than Brent. The forward market indicates that this should be in the $3 range, which seems reasonable. However, we still face logistical challenges in transporting light sweet crude through Houston and into the St. James area. Companies are actively working on these issues, but there is a common misconception about a significant surplus of light sweet shale crude. In reality, refiners are effectively managing the increase in light sweet production domestically. We are processing more now than in the past, and there is still capacity available at our Gulf Coast plants for additional light sweet crude. Moreover, producers are efficiently clearing the market, with over 400,000 barrels a day of light sweet crude being exported to Canada. Additionally, around 50,000 barrels a day are being transported on Jones Act vessels to the East Coast, although this number varies with the market conditions. We also have approximately 50,000 barrels a day in condensate exports under BIS regulations. Therefore, I believe producers are successfully managing market dynamics. As inventories in the mid-continent grow and more barrels head south, we should see the differentials widen, making that $3 level a plausible target.

Gary, one of your competitors, when they pre-announce a negative earnings for the first quarter, one of the reasons cited is that, given the strike, that the one of their recently bought facility. In this case, that will be Carson because they didn't have enough people in the headquarter that have worked in that facility. And so as a result even though they've been able to run it, that there's a huge degradation or efficiency loss. Wondering that, in your case, that in Galveston Bay, did you experienced any of those kind of yield degradations or efficiency loss? In other words, that when the strike is over, should we assume we could have another improvement in the operating performance?

Yes, Paul. First of all, I again want to recognize our team, both in Catlettsburg and Galveston Bay, but you're specifically asking about Galveston Bay here. And a gentleman who I went down to the plant, Rich and I went together, went down and visited the plant just a few weeks ago. And I was really impressed by our management and the ship foremen and the superintendents who were running the facility. This is something that we train. We train diligently to be prepared. And from day 1 of taking over this refinery, this was our plan to make sure we always had a trained workforce, no matter what the event that could come in and help out. So I would say, and I will let Rich talk about it in more detail, but we have set new records on a number of process units, and we have been able to get a backlog of maintenance completed and doing it all in a very, very safe manner. And Rich, do you want to go into some of the details?

Yes, we have been operating both Catlettsburg and Galveston Bay at full capacity throughout this period. Our refining team is well-staffed, and we have additional personnel ready to step in if necessary. We are adequately prepared to maintain operations at Galveston Bay for as long as needed. As Gary mentioned, we have set production rates, reduced our costs, and increased our output, thanks to the excellent performance of our teams at Galveston Bay and Catlettsburg.

My second question is about the U.S. economy. Gary, can you share any insights regarding your retail network, even though you are not involved in diesel sales as much anymore? Also, could you let us know what the RIN cost was for you in the first quarter?

I'll let Don or Mike discuss the RIN cost. Regarding the U.S. economy, we are noticing strong diesel demand across all regions, with an increase in distillate demand of about 1.3% to 1.5%, which I believe indicates the ongoing momentum of the economy. These increases are positive, especially compared to last year's significant growth. However, there is a slight concern as we try to align data from various government agencies with our own assessments and those of our competitors. The gasoline demand figures reported by the EIA seem to be higher than what we observe, leading me to believe they may be overstated. On a positive note, Tony's sales in merchandise show an increase across the board, indicating customer engagement. There were challenges in the first quarter due to severe storms affecting several areas, including the Midwest and Northeast, which led to store closures. As we enter the second quarter, we expect clearer insights into gasoline demand trends. So far, in April, we're experiencing a slight uptick in gasoline demand. Now, I'll pass it over to Don to discuss the RINs.

Sure. RIN expense for the first quarter was $41 million, Paul.

I have a couple of quick questions about the marine business. Can you provide any annual EBITDA estimates for those assets? Is the business entirely related to MPC, or are there third-party operations involved as well? Also, could you share any comments on the tax basis concerning the assets?

Sure, Chi. The annual EBITDA is about $115 million, which is entirely related to MPC activities. We also charter out, but those specific assets are dedicated solely to moving MPC volumes. What was the last question, I'm sorry, Chi?

The tax basis.

The tax basis, yes. They have a relatively low tax basis, and that's not inconsistent with some of the other assets that we have, that would ultimately be dropped into MPLX. But yes, relatively low tax basis.

But obviously, still tax efficient on the MPC level. Okay. So another question on MPLX, and I don't know if I'm doing my math right here. But I believe your guidance on EBITDA run rate coming at the tail end of '15 is $450 million. Is that correct on annualized run rate?

That's correct.

And so you also have a 29% distribution growth target at least for this year. It seems like there's a mismatch on my numbers, and it suggests that you may end up with a coverage ratio that's well above industry averages. Am I doing the math right there? And is that the intention?

Yes, Chi, this is Tim. I don't believe your calculations are incorrect. Our primary goal was to significantly expand the partnership to establish a solid foundation of earnings and the necessary scale to pursue independent projects. Therefore, it's possible that coverage in the initial couple of years may exceed our 1.1 target during that timeframe.

Are there any thoughts on the speed of reducing that coverage ratio to enhance what I'm observing regarding the GP distributions and the IDRs?

Well, there will be a natural migration back to about 1.1 over the course of the next several years. But again, over these first couple, you could well see a coverage ratio that's well above. So for how we have dropped assets thus far and our anticipated growth for MPLX, we'll see an earnings growth that probably will outpace the distribution growth early on and then those will sort of converge over time.

Okay. Okay, great. And maybe just one final question. Any update on the Garyville hydrocracker decision?

We have largely completed the front-end engineering, and we won't revisit this until the fourth quarter. We are currently preparing the budgets for next year and the subsequent years. As you might expect, this will largely depend on the direction of overall commodity prices in the coming years.

Could we just go back to your direct operating cost for a little bit more analysis, if that's okay? On Slide 6, you show that year-over-year, it's about half of the uplift that you got from refining earnings. I just was wondering, can you break out a little bit how much of that was just the volume increase that we saw in that period and whether or not you can quantify some of the other issues? And I'm thinking, I guess, of fuel cost as helping against any other impacts there may have been.

Tim, you want to handle that?

Sure. The primary reason for the $503 million in direct operating costs is mainly due to the lack of turnaround costs that were incurred in the first quarter of the previous year. We will provide more specific details regarding the volume impact later, but the main factor driving these costs was definitely the absence of turnaround activities compared to the same period last year.

Yes, I understand. Clearly, there is a dual cost impact from operating at a lower capacity while facing additional expenses, which accounts for most of the increase. I'm curious if there’s anything more to share, especially regarding your sensitivity to natural gas prices, which seem relatively unchanged, and how the decrease in oil prices might lower your operating costs.

Paul, the operating energy costs were down in Q1 '15 about $80 million.

Okay. And then just totally separately the buyback, I guess, it's our forecast and it's our miss, but it was behind what we were thinking. Could you just talk a bit about how you're looking at the attractiveness of buying in more stock, the pace at which you're doing that and whether or not it's a competition against, for example, higher CapEx?

Sure, Paul. I think our primary drivers around how we're viewing that is, again, how we're situated on a core liquidity perspective as sort of our first prime mover. Core liquidity, in the environment of lower prices, that actually declines to some extent, but again, we'll continue to manage the cash position of the corporation in accordance with the needs. The slightly slower pace in first quarter is not reflective of any change in approach or belief that the shares were appropriately valued. Or otherwise, we still think the shares are substantially undervalued. And again, we'll continue to assess our capital and cash situation as we go and make adjustments. Share repurchase certainly affords us the best lever to make those adjustments, and we'll continue to use it as such.

I believe your debt decreased slightly during the quarter, but I assume you are still within the range you aim for regarding debt ratios.

Yes. I mean, the debt was, at a static level, unchanged, but with the role of LTM EBITDA, we actually had more earnings. So the debt-to-EBITDA decline really as a result of earnings growth as opposed to debt reduction. But yes, Paul, we're very much in the comfort zone with regard to where we think we need to be on maintaining an investment-grade profile, and we'll continue to manage it that way.

Gary, just to clarify your comments on Galveston Bay, it sounds like not only has the work stoppage not led to a reduction in output, but that production and efficiency have been pretty resilient and may have increased during the work stoppage. Is that the correct way to think about that situation?

Yes, it is, Doug.

Global oil demand growth has been unexpectedly strong this year, and you previously mentioned some insights about export markets. I would like to know more about the regional demand trends the company is observing and if there are any notable highlights or factors contributing to the improvement that might be occurring outside of the United States.

Yes. If you look at some of the announcements from yesterday regarding Saudi Aramco's plans to significantly boost their supply efforts and capture more market share in Asia, particularly in China, there are major questions about the Yanbu refinery soon to be operational in Jubail and its potential impact on the U.S. market. I visited the area a few weeks ago, and it's evident that the output from these refineries is expected to head east due to favorable transportation costs. Despite China having global markets, their internal demand has slightly decreased. However, it remains up compared to last year, and we would appreciate similar growth in the U.S. market. Looking at crude movements globally, as I mentioned in the fourth-quarter call and various energy conferences, it's important for investors to keep an eye on where crude is being imported into the U.S. We're seeing a strong market for crude imports, particularly medium sours. This quarter, we processed approximately 56% medium sour, an increase from previous levels. Our strategy is to always procure the best barrels available, and medium sours have proven to be particularly appealing. While I can't speak for all refiners, it seems there are still numerous opportunities to use other light sweet crudes if they are competitively priced against medium sours, which are coming from international sources. This indicates that we expect inventory levels in Cushing and PADD III to continue to rise. As inventories grow and considering the prevailing contango market, we are nearing operational capacity limits in Cushing and some other areas. As refiners, we need to be cautious not to degrade the quality of the crude we purchase, especially if we are sharing tank space. Thus, we are close to reaching our maximum operational capacity. I believe we should monitor foreign imports and inventory growth closely, as I still expect to see wider spreads appearing in the second quarter.

My first question is about the midstream sector. Considering your goal to be a diversified MLP in the long term, how are you viewing the opportunities for mergers and acquisitions at this point? Additionally, with the potential for slowing crude oil production growth, do you think this could speed up M&A activity in this area, or what are your thoughts on this in the coming years?

When we observed the decline in crude prices, we anticipated that it could lead to an increase in midstream assets available on the market from certain producers. Although we've seen some of that, it's not significant. Overall, despite the volatility and decrease in crude prices, there remains a considerable amount of capital available to support producers and midstream companies that may be sensitive to commodity price changes. With a few exceptions, I don't believe we are witnessing significant distressed selling in the market at this time. We are actively assessing opportunities for mergers and acquisitions, in addition to potential drop-downs from MPC. As I've mentioned previously, we are exploring a wide range of opportunities, prioritizing those that would benefit both MPC and MPLX. There are numerous pathways for growth through acquisition, and we have a dedicated team evaluating various opportunities.

And as you evaluate the M&A opportunities, would you likely use MPC as a source of funding? Or do you feel like a MPLX is large enough at this point to do sizable M&A as you think about the tradeoff between drops and M&A?

Well, I think each opportunity really will be fact and circumstance-based. It's hard to make that general comment. Of course, one of the reasons we are committed to accelerating the growth of MPLX is to position it so that it could take on larger opportunities directly.

What's good, Phil, is that we have the options and flexibility to go in either direction. We aren't reliant on others who may not have the financial strength to pursue certain acquisitions. We have that flexibility. Referring back to what I said about Doug's question, if we observe wider spreads moving into the second quarter, there could be pressure as we progress into the second and third quarters. We'll see how our crude prices perform, but there could be additional pressure that may lead to increased M&A activity.

A lot of private equity out there chasing opportunities.

Understood. On the retail side, with respect to the synergy capture it has, Gary, maybe, you could just talk a little bit about where you stand today and what you think the biggest incremental source of upside could be as you look ahead with where you're at in the process?

Sure, Phil. And we have Tony on the line who's operating these stores every day. And so let me have Tony handle that.

Thanks, Gary. As commented earlier, we're very pleased with the progress we're making on the conversions to the Speedway brand. And along with that includes the implementation of our merchandise programs inside the stores, which is a real source of synergies down the road. To date in 2015, we feel very good on the progress that we're making. We're going through the best practices of both companies that we committed to. And that is in and of itself is a good source of the synergies that we're experiencing, primarily, right now on the expense side of the business. So as we continue to go forward, we're going to start to realize some marketing efficiencies as well. So on a full year basis, in 2015, we're right on plan with where we expect to be on the synergy capture in 2015.

Sort of staying right there, I was wondering if you could give an update for the Hess stores that have been converted. Has there been any noticeable loss of customers? Or going the other way, have you been able to pull in more customers from other areas in Florida?

Yes, I'll address that. The advantage we have with the conversion is our loyalty program, particularly in markets like Florida as we expand into the Northeast. Historically, these areas haven't had a strong retail loyalty program presence. We're seeing a positive response from customers signing up for our loyalty program, which serves as a key indicator of how effectively we are attracting new customers. There are several factors at play. As gasoline prices decline, we're noticing an increase in traffic. We're being cautious in our analysis since we have only been operating under this deal for a little over seven months, with the conversions in Florida being around three to five months old. Thus, our data is still somewhat limited, but we're receiving excellent feedback from our customers regarding their loyalty and the offers associated with the Speedway brand once converted.

Okay, great. And then thinking about SAX, I was wondering if you could go through maybe the ways in which SAX is going to change the crude sourcing in the Midwest, or is it really more providing optionality?

Yes, Gary. Yes, Brad, it's going to have a significant impact for us. As you know, that pipeline runs from Enbridge's system in South Chicago down to Putoco, which is our hub. And today, if you look at our flexibility of bringing in either the Bakken crude or other Canadian crude, we pretty much limited that out with the logistical capability that we have today. And SAX, even before Sandpiper is completed, is going to give us that flexibility to increase the amount of crude that comes in from both of those sources. So it's a big deal for us. It's going to help the bottom line, certainly.

Gary, I don't know if I picked up on this earlier, but back to Paul Sankey's question on gas sensitivity. I was looking back at the operating cost question. I was looking back at the presentations from the last year and the Q1 delta last year was a negative 605 versus the prior first quarter 2013, and of course, gas was very strong last year. And this year, you had, obviously, had a big operating cost benefit of over $500 million. So I don't know if I picked it up wrong, but can you just walk through again what your gas sensitivity is, because obviously if gas prices remain low, those cost benefits are, probably, going to be quite sticky, I'm guessing?

Okay. Let me turn this over to Don or Rich. I don't have any of those numbers with me here.

Sure, Doug. A $1 change in natural gas prices results in approximately $140 million after-tax on an annual basis. In comparing the first quarter of 2015 with the first quarter of 2014, there was around an $80 million benefit in the other manufacturing cost line due to lower energy costs.

I want to clarify the full-year cost impact from last year, which was approximately $913 million year-over-year according to the presentation. I'm trying to understand the reasons behind the cost increase last year, as this is an absolute figure rather than a unit measure. Additionally, I'm interested in what has been reversed to affect the first quarter and whether this change is sustainable.

I mean, which quarter are you comparing?

For the first quarter year-over-year, you had a little over $500 million of benefit in the presentation. But the full year, last year, the direct operating cost negative impact was $913 million, most of which was in the first quarter, which is when gas prices were $5. So I'm trying to understand what the moving parts are. Like I say maybe I need to take it off-line, but what reversed out that gave you $913 million negative last year that gave you a $500 million positive in the first quarter, I guess, is where I'm getting at. I don't know if that's complicating the question too much.

The big piece of it last year, I think, was all the heavy turnaround activity that we had, Doug. So we can walk through individual components, but last year, you will recall, we had very, very heavy turnaround activity, which was a detriment to that quarter. And this quarter really is the absence of all of that turnaround activity.

And Doug, it's both cost and volume this quarter.

I guess, I'd like to follow up a little bit on the light sweet crude. Obviously, you discussed a lot of the pipeline issues and sort of the storage issues. Previously, I think you mentioned as much as 65% of the volumes that you have at hand, could be light sweet crude. Can you let us know what we need to see? Is it the wider differential? Is it more pipeline access in order to get to those volumes?

Mike?

Yes, Roger. I think, what we need to see is we need to see differentials, say, versus medium sour that are more compelling than what they've been. When we're constantly in the market, it is every day trying to optimize our crude slates, and we do that on a day-to-day basis with domestic barrels. So we have this option to buy light sweet crude. We have this option to buy medium sour crude, for example, at Garyville. And so we're constantly looking at the differentials to see which makes a higher margin. And honestly, between the light sweet crude that so many think has this huge overhang in the market. And therefore, you think it would be priced so that it was compelling to bring in, that's just simply not the case. We go back and forth between buying the medium sours versus the light sweet. So at some point, if the production rises enough and the producers don't clear it to another market, then we would see numbers that would allow us to run higher volumes of light sweet.

Cynthia, with that, we'll close the question-and-answer. I want to thank everyone for joining us today, and thank you for your interest in Marathon Petroleum Corporation. Should you have additional questions or, like, clarification on the topics we have discussed this morning, Teresa Homan and I will be available to take your calls.