Marathon Petroleum Corp (MPC) — Q3 2015 Earnings Call Transcript

Thank you, Hilda. Welcome to Marathon Petroleum Corporation's third 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; Tim Griffith, Senior Vice President and Chief Financial Officer; and other members of MPC's management team. 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 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'll turn the call over to Gary Heminger for opening remarks and highlights. Gary?

Thank you, Geri. Good morning and thank you for joining us. We're pleased to report third quarter consolidated earnings of $948 million. Our results were driven by a solid performance across all of our businesses. We were able to capture strong crack spreads in a favorable refining environment and we took advantage of our flexibility to move feed stocks and refined products throughout our system to optimize profitability where original dislocations occurred. Lower fuel prices facilitated a strong refined product demand, further contributing to our results. Speedway also performed very well during the quarter, benefiting from higher light product margins. Our peer-leading merchandise model continues to drive profitability, with higher earnings compared to the third quarter of last year. On September 30, we celebrated the one-year anniversary of our East Coast retail acquisition and we're very pleased with the results of the transaction so far. The new locations are performing well and the business is on track to more than double the $75 million in synergies we expected in this first year. We're significantly ahead of schedule in converting the acquired stores, with nearly 1,000 of the 1,245 new locations converted to the Speedway brand and operating system. In addition to the conversions, over 240 remodels of these new stores have been completed or are in progress. This rapid progress on conversions and focus on remodeling selected locations will further enhance Speedway's ability to grow merchandise margins across this entire platform. Turning to the midstream business, we look forward to finalizing a combination of MPLX and MarkWest later this year and are very enthusiastic about the prospects of the combined partnership. The MPLX and MarkWest combination will create one of the industry's largest diversified master limited partnerships. We will combine MarkWest's robust organic growth opportunities with MPC's large and growing inventory of MLP-qualifying EBITDA. The growth of distributable cash flows to the combined partnership will also be supported by MPC's and MPLX's strong financial position, creating a large-cap diversified MLP with an attractive distribution growth profile over an extended period of time. The strategic combination will drive substantial long-term value for the unit holders of both partnerships as well as MPC shareholders. At the time MPLX announced a combination with MarkWest, the partnership provided distribution growth guidance through 2019. MPLX remains committed to the growth profile provided in that guidance. Given the significant change in MLP valuations and the resultant higher-yield environment the sector has experienced in the last several months, we now expect drop-down transactions or some other form of MPC support as early as 2016. As MPLX's sponsor, we're committed to supporting its success. As we work to maximize our shareholders' long-term returns, we continue to focus on a disciplined and balanced approach to investing in the business and returning capital to our investors. An important element of this focus has been to identify market opportunities and pursue transactions that accrue long-term benefits to shareholders, as we have done with our acquisitions of the Galveston Bay refinery and the East Coast retail operations. I'm confident we will extend our track record with the pending MarkWest combination. We look forward to MarkWest becoming part of MPLX to the benefit of all equity owners associated with the merger. Another important element of the company's capital discipline is to monitor changes in the market to ensure investments reflect the best long-term, risk-adjusted returns to shareholders. In February of this year, we announced the deferral of the final investment decision on the proposed residual oil upgrader expansion project at our Garyville refinery in order to evaluate the implications of market conditions on the project. While we still believe the ROUX project, as we call it, is an excellent project to enhance MPC's platform, at this time we have decided to cancel the project based on our assessment of market conditions. We wrote off the $144 million in capitalized project costs incurred to date. We will look to deploy this $2.2 billion in capital on a variety of other projects to provide superior long-term return prospects. We were also pleased to return $327 million of capital to shareholders during the quarter. We purchased $156 million of our shares and have approximately $3 billion remaining under our total of $10 billion of share repurchase authorizations. We also paid dividends of $171 million. Our Board approved a $0.32-per-share dividend which was increased 28% last quarter, resulting in a 31.5% compound annual growth rate on our quarterly dividend since we spun in 2011. We continue our efforts to remain a leader in our industry through all cycles by focusing on operational excellence and continuous optimization of our refining and marketing system. We will continue to grow our stable cash flows through our retail and midstream businesses, taking a disciplined approach to capital allocation and delivering significant value to our shareholders through our sponsorship of and our general partner interest in MPLX. Due to the timing of MarkWest's special meeting for the proposed combination with MPLX, we're moving our analyst day meeting back one day to December 3. At that time, we plan to provide an update on our allocation of capital, including margin-enhancing opportunities identified at our Galveston Bay refinery, Speedway's growth in synergies from the stores acquired in September of 2014, the compelling combination with MarkWest, and other midstream areas of focus. We look forward to seeing you at our combined MPC and MPLX analyst day on December 3. With that, let me turn the call over to Tim to walk you through the financial results for the third quarter. Tim?

Thanks, Gary. Slide 4 provides earnings on both an absolute and per-share basis. As Gary mentioned, our financial performance was strong once again in the third quarter, with earnings of $948 million or $1.76 per diluted share during the third quarter of 2015, compared to $672 million or $1.18 per diluted share in the third quarter of last year. Just note, third-quarter 2015 earnings reflect the $144 million impairment charge or about $0.17 per diluted share, for the cancellation of the ROUX project that Gary just mentioned. You can see the earnings through the third quarter are already about $140 million ahead of the entire year last year. The chart on slide 5 shows by segment the change in earnings from the third quarter of last year. The $276 million net increase in earnings was primarily due to higher income from our refining and marketing and Speedway segments which I'll discuss further in just a minute. Partially offsetting these higher earnings is a $144 million non-cash impairment charge for ROUX which is included in the items not allocated in the chart, as well as higher taxes resulting from higher taxable income in the quarter. Turning to slide 6, refining and marketing segment income from operations was about $1.5 billion in the third quarter, compared with $971 million in the same quarter last year. The $486 million increase was primarily due to stronger crack spreads in our markets and the favorable effects of Contango in the crude oil market in the third quarter of 2015. You may recall the crack spreads we provide in our market metrics on our website are calculated using prompt product and crude prices. The price we pay for crude, on the other hand, is established 30 to 45 days prior to the prompt month. This price difference is reflected in the $226 million favorable Contango reflected as market structure on the walk. Partially offsetting these increases were less favorable crude acquisition costs relative to our market indicators and lower dollar base refinery volumetric gains resulting from overall lower commodity prices, both of which are included in the $325 million other gross margins column on the chart. On slide 7, we provide the Speedway segment earnings bridge for the third quarter. Speedway's income from operations more than doubled from the same quarter last year. Speedway's newly acquired locations were an important part of that increase, contributing additional income of approximately $66 million to the quarter's results or approximately $98 million of EBITDA in the third quarter. For the legacy Speedway locations, light product gross margin was about $48 million higher in the third quarter of 2015 compared to the same quarter last year. This increase was primarily due to higher light product demand and a favorable pricing environment during the quarter. Overall, the Speedway segment gasoline and distillate gross margin increased by $0.055 per gallon from the third quarter of 2014 to the third quarter this year. Speedway's merchandise margin in the legacy locations was $16 million higher in the third quarter compared to the third quarter last year, primarily driven by an increase in merchandise and food sales and improved margins. On a same-store basis, gasoline sales volumes increased 0.5% and merchandise sales, excluding cigarettes, increased 3.6% in the third quarter compared to the same quarter last year. As you compare our same-store gasoline sales to industry averages, I would point out that these can vary due to many factors including regional footprint, weather, and competition. Speedway continuously strives to optimize total gasoline contributions between volume and margin to ensure fuel margins remain adequate. As you might expect, total light product sales almost doubled in the third quarter last year as a result of the Hess acquisition and we're pleased to highlight that gasoline volumes for the legacy Speedway locations were up 2.4% in the third quarter on an absolute basis versus the same quarter last year. Given that we're now one year into the acquisition, October will be the first month our new East Coast locations will be included in our year-over-year same-store metrics. So far for October, total Company same-store gasoline volumes are up 1.8% versus October last year. Slide 8 shows the changes in our pipeline transportation segment versus the third quarter last year. Income from operations was up slightly from the same quarter last year with $72 million of income in this quarter. The increase was primarily due to higher transportation revenue in the quarter, reflecting higher average tariff rates and higher crude and light product throughput volumes, partially offset by increased operating expenses and about $4 million in transaction-related costs incurred as part of the MarkWest combination. Slide 9 presents the significant elements of our changes in our cash position for the quarter. We had about $2 billion of cash on hand at the end of the quarter. Our operating cash flow was a $1.5 billion source of cash. The $389 million use of working capital noted on the slide primarily relates to a decrease in accounts payable partially offset by a decrease in accounts receivable. The decrease in accounts payable and receivable were primarily due to lower crude oil and refined product prices during the quarter which created the use of cash given the generally longer terms on the crude purchases. We continued delivering on our commitment to balance investments in the business with the return of capital to shareholders. We returned $327 million to shareholders during the quarter, including $156 million in share repurchases. Share repurchases were slightly lower this quarter as we plan our liquidity needs over the next several months, including the $675 million contribution for the MarkWest combination and, based on current prices, the approximately $180 million to MPLX to maintain our 2% general partner interest after the combination is completed. Share count at the end of the quarter was 534 million shares, reflecting repurchase activity since the spin of about 27% of the shares outstanding at that time. Turning to slide 10, in the third quarter we paid a $0.32-per-share dividend, representing a 28% increase over the $0.25-per-share dividend paid during the second quarter. It was the fifth increase in our dividend, and our dividend has seen a 31.5% compound annual growth rate since MPC became a standalone public company in mid-2011. Our continued focus on growing regular quarterly dividends demonstrates our ongoing commitment to our shareholders to share in the success of the business. And as Gary highlighted, we're pleased to affirm that commitment with the $0.32-per-share dividend declared yesterday. Slide 11 shows that our balance sheet continues to be strong and our leverage low, with gross debt at less than one times the $7.2 billion of LTM EBITDA and a debt-to-total-capital ratio of 34%. Slide 12 provides an updated outlook information on key operating metrics for MPC for the fourth quarter of 2015. We're expecting fourth-quarter throughput volumes of 1.8 million barrels per day which are down slightly compared to the fourth quarter of 2014 due to more planned maintenance this year. As the fourth quarter begins and we come out of the summer driving season, we expect to see normal seasonal demand levels which are typically lower in the fourth quarter. Our projected fourth quarter corporate and other unallocated items are $130 million, including an estimated $58 million of pension settlement expense in the quarter. With that, let me turn the call back over to Geri. Geri?

Thanks, Tim. As we open the call for questions, we ask that you limit yourself to one question plus a follow-up. You may re-prompt for additional questions as time permits. With that, we will now open the calls to questions. Hilda?

I understand that most of your questions this morning will likely focus on MarkWest. While having some form of support, such as a drop-down, would be beneficial, I would like to hear about other types of support you have. Additionally, I have a broader question regarding MarkWest.

So, Ed, as you know, we have discussed multiple forms of support on this call before. Let me take a moment to discuss this transaction and the broader market. I am consistently surprised by the overall market performance, particularly how MPLX has performed. In a higher yield environment, we may need to consider support sooner than we initially anticipated. However, I believe the industrial logic behind the combination of these two companies remains very strong, with MarkWest having an impressive array of assets and growth opportunities, while MPLX boasts a substantial and growing backlog of EBITDA eligible for drop-downs in the future. We have significant flexibility and I won’t limit us to just one strategy. We can incubate projects, which is our plan moving forward, and we have been clear about that strategy. When I take a step back and consider the current MLP landscape and how robust MPLX is compared to other MLPs that were previously just a drop-down story, we still stand out very favorably, if not as one of the best in the industry, and now we are aligning it with a strong growth profile. Thus, when I reflect on it, I don’t focus on whether it’s gathering and processing, a natural gas MLP, a refined products MLP, or a retail MLP. Instead, what matters is our backlog and the quality of the EBITDA we possess. I truly believe that we have one of the best-quality portfolios of EBITDA available in this sector moving forward. As I mentioned, we are considering incubating projects and can take MarkWest’s backlog and incorporate those projects within MPC, timing them for optimal impact. We have numerous options including evaluating the multiples on our asset drop-downs, executing intercompany loans, and other arrangements. The options for flexibility are extensive. Given the current yield environment for MLPs, I expect that our yield will significantly improve as the market becomes more confident in this combination moving forward.

And then on the yield comfort, obviously there's a big move in the spreads of the overall index. But the upstream in the Northeast is under stress because gas prices are low and NGL prices are low. And when you look at MarkWest, although they have a lot of capacity and acreage dedication, the MPCs, the volume protection is relatively low on some of the new areas. So just give us some color as to how much diligence you've done on the ability of the MarkWest EBITDA to deliver against your expectations. And then if it does fall short, what would be the plan to support the overall combined EBITDA to the extent that volumes in the Northeast disappoint?

We conducted extensive due diligence prior to signing this agreement. If we take a look at the Marcellus and the Utica gas regions, it's clear that many major producers there continue to experience success. Recently published well data indicates significant output in the acreage we hold. I'll allow Frank to discuss his current environment during his earnings call next week, but I want to emphasize that we've thoroughly evaluated the situation. We're confident that the break-even costs in the Marcellus and Utica, where MarkWest operates primarily, remain among the best in the country. If we encounter a slowdown, as mentioned previously, we'll consider taking action sooner. We have a project and EBITDA backlog of $1.6 billion within MPC, and that figure is expected to keep growing. Importantly, our financial strength allows us to leverage the backlog of projects within MarkWest, which we believe will outweigh any potential decline from the producer side.

Gary, I wanted to give you the floor a little bit on the oil macro which you are always great about reflecting on. I wanted you to talk through your views on Brent LOS and some of these key crude spreads in a potentially lower production environment. And also views on the flat price as we get into the OPEC meeting in December.

I’m not sure I have enough time to discuss this in depth, Neil. However, during our last meeting, I mentioned that the market seems to indicate we will be in a lower price environment for an extended period. This is particularly evident when examining trade flows and the crude oil resources being sourced from the Middle East and West Africa heading to the East Coast. We've also been identifying additional supply sources, notably Iraqi crudes entering the Gulf. Michael Palmer, who is with me today, can provide further insights on this, but the influx of Iraqi crudes will likely impact our market for an extended time, especially as domestic production remains steady. Although domestic production has leveled off, particularly in the Permian and Eagle Ford regions, we are seeing growth in offshore production from the Gulf of Mexico due to our stake in LOOP. Looking ahead, we anticipate prices in the $50 to $55 range for the rest of this year and into next year, with potential to rise into the higher $50s by mid to late next year. I expect prices to remain within that range throughout most of 2016 and possibly into 2017 until we see some balancing of increased Iraqi production and adjustments in domestic production. Additionally, we need to monitor Russia's export strategy and its effect on Asian markets. As for domestic spreads, the additional production from the Gulf Coast should positively influence supply. After coming down from our high-demand quarter in the U.S. refining sector, we expect spreads to widen as we approach the latter part of Q4 and into Q1, and I'll let Mike Palmer, our expert on the spread market, share more information on that.

Gary, I couldn't agree more with you. I just want to add that in the third quarter, we processed slightly more sour crude than in the previous quarter or the same quarter last year. One notable trend is the ongoing increase in Gulf of Mexico production. Additionally, as Gary mentioned, we have taken advantage of some foreign cargo opportunities in the Gulf Coast that others are also capitalizing on. This trend is likely to persist, especially with the Iraqi crude being produced. There’s also a potential for trading more Iranian crude at increased volumes next year, which should apply further pressure on sour grades that appear to be more appealing. Conversely, the sweet crude in the Gulf has been pricier, and there's no excess of light-sweet crude waiting to find a market. Producers have plenty of options to sell it. Therefore, I believe we will be running more sour crude going forward.

The second question is more of a housekeeping question. The buyback was a touch lower than we were expecting in maybe the previous quarter as well. Was that related to MarkWest and some of the processes going on there? Anything you can speak to in terms of the quarterly buyback.

Again, there has been no sort of philosophical change around the way that we've approached capital return to shareholders. I think in any given quarter we're going to plan carefully in the liquidity. We obviously have a contribution that MPC will make to the MarkWest transaction that we certainly are thinking around. But if you look at cash balances, things are generally in line with where we're at. So, no change to behavior, no change to belief. I think just circumstances in the quarter were suggestive of a little bit lower activity.

I guess just on MarkWest, there has been a lot of speculation on the acquisition price given the decline in both MPLX and MarkWest unit prices. How comfortable are you with transaction as it is currently structured? And are there any actions you are considering to support the closing of the deal?

I believe this deal remains very compelling. The most significant positive action we announced today was reaffirming our guidance. When you look at the strength of MPC's and MPLX's balance sheets and our current financial position, it sets us up as a leading combination in the industry moving forward. We consider it a compelling enterprise with several options previously discussed. We expect to go effective with a proxy today, and it will be sent out shortly.

Okay. I guess the timing of closings here by moving the analyst day back one day, is that corresponding to when you expect to be able to close?

Right. It may not necessarily be closed, Chi; it just depends on the timing. With Thanksgiving and another bank holiday, Veterans Day, coming up, we lose two business days. Unfortunately, that's how the timing worked; it pushed us back a day for the analyst meeting. So, yes, we expect to have the vote in the first or second week of December.

I have a couple of questions following up on Neil's inquiries about the crude markets. Could you discuss what you've observed in the heavy crude markets, especially regarding the new Detroit coker in Canada? Are the spreads for WCI still appealing? How do you anticipate that market developing? We now have pipeline access all the way to Houston, and you have upgraders—can we also focus on upgraders? What is your perspective on the heavy Canadian market, and how does it compare to the heavy market in the Gulf Coast? What are your thoughts on supply and demand trends moving forward?

Yes, Chi, I'll give you some thoughts on that. The heavy Canadian market continues to be very attractive. We've seen differentials to TI that have been gyrating around that minus $15 mark. By historical standards, that's a pretty good discount in a $45, $50 environment. And, again, this market is influenced by many things that take place. We saw a great opportunity on the heavy Canadian this summer during some turnarounds that were taking place. The spreads went a little wider and we really took advantage of that. We brought quite a bit more Canadian into our system and we were able to move record amounts down to Garyville. So, going forward, again, I don't see any reason to believe that that's going to change. We think that the differential will stay in that kind of a range and we will continue to take every advantage we can. We're continuously looking at foreign cargo opportunities that we can bring to the Gulf Coast. We see opportunities coming in from Brazil with some of their heavy sweet crudes. We oftentimes find very good values in crudes that are more difficult to run. They are either high TAM or they've got some other issue. The Mexican crude has been relatively attractive as well. So the heavy market looks pretty good right now and I don't see any reason why that should change.

Does the agreement with Pemex on the crude swap open things up a bit more or have any impact?

No, I don't think so. As you know, I think what's been approved is 75,000 barrels a day. It's really a relatively small amount. I really don't see that changing the market for us at all.

Maybe just a follow-up there, I presume you will use a proxy solicitor that will inform you how the vote is going through that solicitation period and utilize that data to determine or consider your options as it relates to the offer. Is that fair?

Yes, sir. That's correct.

If the transaction were to be voted down, which I understand is a possibility for both you and us, would you then go back to your previous drop-down strategy considering your considerable potential at the parent level and your ability to generate growth internally? What are your thoughts on that?

You're correct in your initial observation. That is definitely part of our base case. We feel very confident that this establishes an excellent position in the marketplace, characterized by a strong financial standing and significant growth potential. However, if for any reason the deal does not proceed, we would indeed revert to our previous drop-down strategy.

I believe this will be a beneficial transaction for MPC and its shareholders. Can you provide details on the committed pipeline volumes for your two Bakken pipelines? Additionally, how do you view the risk to MPC or your exposure in a scenario where Bakken is experiencing a decline? I understand that pipelines should perform better than rail under those circumstances, but I would like to hear your thoughts on this, including any actual exposure.

Yes, I will answer that, Evan. Our Southern Access Extension Pipeline, SAX, a joint venture with Enbridge, is complete. We will begin filling line fills and tank bottoms in early December, and by January, we will be fully operational. We're already buying crude for that pipeline and expect to reach planned rates, utilizing both North Dakota crude and a variety of Canadian crudes. We're excited about the opening of the SAX pipeline, as it offers us flexibility and options that we previously lacked, which we anticipate will lead to strong earnings from the crude transported to our Patoka hub. Regarding Sandpiper, we believe that North Dakota crude will remain attractive for those with pipeline capacity, as we are the best option available. Given the narrow Brent TI spreads, we expect that East Coast players who have been transporting North Dakota light will see a decrease in volumes, especially as their commitments expire without renewal. This development should alleviate some pressure on North Dakota light crude. Thus, we see Sandpiper as another valuable asset for us, enhancing flexibility and opportunities in a market poised for increased production in the future.

And Evan, the other thing about those two pipelines is that it provides a significant cash flow EBITDA stream back to MPLX in the future.

All right, maybe if I could ask one more question, Gary, and thanks for your insights on the oil market. In the past, you've also shared your thoughts on demand. Do you have any comments on demand as you see it, whether through retail or exports? What are your thoughts on that, considering it's an increasing concern in the market? I'll leave it there.

As Tim mentioned today, we are pleased to report that year to date in October, Speedway has seen a 1.8% increase in gasoline sales. Last year at this time, we anticipated a rise in gasoline demand, but it did not truly begin until early in the second quarter. Consumers seemed to gain confidence that gasoline prices would remain stable, leading to strong demand in the second and third quarters, which is now carrying into the fourth quarter. Additionally, we set a new record this quarter with 333,000 barrels per day in refined product exports, including both gasoline and distillates. We are also increasing our gasoline exports, having completed upgrades to our gasoline tanks in Garyville and continuing progress in Galveston Bay, improving our logistics. As we move into 2016, I believe the macro environment for crude will benefit consumers, maintaining good incremental gasoline demand. On the distillate side, global demand has been relatively flat. In the U.S., over-the-road diesel demand remains stable, and our insights from travel centers and commercial fueling locations give us a clear picture of overall distillate demand, which continues to be strong. However, on a global scale, some regions have experienced a slight slowdown in distillate demand exports, although they remain robust.

We have a question from Doug Terreson from Evercore ISI.

So Gary, I just wanted to see if you could clarify the last point that you made about distillate demand. I think you highlighted that there were a couple of regions that had been a little bit spotty recently. Could you provide a little bit more color on which ones those might be?

It seems there has been a slowdown in Asia, which we have all noticed. Brazil has also experienced some slowdown. However, Europe remains strong, and the majority of Latin American countries are performing well. In fact, there is a noticeable increase in gasoline demand in Latin America compared to other regions. Overall, the markets we serve continue to be resilient. I was addressing that question on a global scale, noting the new refineries that have been established in Saudi Arabia and some in China, which contribute to the shifting material balance worldwide, leading to some softness.

I have a few quick questions. Gary, I'm curious about the fourth quarter; the turnaround seems unusually heavy for your team. Are those mainly in the crude unit or conversion? Also, regarding the 2016 turnaround cycle, will they be similar to 2015, or will they be higher or lower?

The turnarounds in the third quarter, what we've had is Robinson has been primarily around a hydrocracker and its revamp. In Catlettsburg and the Robinson one is finished. In Catlettsburg, we do have a crude unit now. We're doing a revamp to that one to recover more gas oil. So that has impacted the crude runs at Catlettsburg. We also had a shutdown planned at Detroit to do some coker cleanout and catalyst changes there and that one is wrapping up right now. So those were the major turnaround activities here in the third quarter for us.

How about which 2016 is the turnaround cycle going to be comparable to? 2015? Or that we should assume it's going to be higher or lower?

Paul, you know, our policy is we don't talk about turnarounds into the future.

No. In fact, Paul, I'm glad you asked that question. We believe the most significant aspect of our platform in this strategic combination is that all of our midstream assets are performing very well. We do not see stranded investment. While several peers and members of the industry within the MLP community are beginning to discuss lowering their guidance and cutting back on investment, we reiterated this morning, for what I believe is the third time since we announced this transaction, our guidance and our expectations for our midstream. This is grounded in the fundamentals of our business. We have a substantial backlog of projects within MarkWest and some projects within MPC. Additionally, many of the barrels that will move through these projects are barrels that we already control. As I mentioned, many are slowing their growth. This ties back to Ed Westlake's first question this morning, which is why I wanted to address this. We have a very strong case, and I believe our yield should be much lower and be valued alongside the high-value MLPs in the industry. I’ll now ask Don Templin to share a few comments as well.

Yes, Paul, we find it particularly intriguing and exciting that in the Utica and Marcellus regions, there is currently more production than the available capacity to transport it. This situation has led to constraints for our producer customers in accessing markets where they can achieve better financial returns. We see this as a significant strategic opportunity to address the needs of these producers. There are projects that are well-suited for investment, as they already have production underway and a demonstrated need for transportation capacity. Our priority is to initiate projects that help producer customers transport their NGLs to markets where they can attain higher returns, presenting a substantial opportunity for us.

And Paul, we're one of the few MLPs that have the financial strength to be able to get this done. Those projects, the back-up that's in the Utica, the Marcellus, they don't get done unless you have a strong balance sheet. And you can incubate these projects over time. That's where the strategic logic is.

I have two final questions. First, regarding Galveston Bay, you've mentioned opportunities related to what you call Galveston Bay version two. You've already completed a house and are looking to seize low-hanging fruit or other opportunities. Can you provide an update on what this opportunity set might look like over the next two to three years? Second, when you announced the write-down this morning, you indicated it was partly due to long lead-time equipment. Is there any alternative use for that equipment, or is the write-down solely because you're not taking delivery at all? Additionally, has there been any change in your future FID pull sets to avoid this situation, particularly regarding the timing for ordering long lead-time equipment?

No, that's a fair question, Paul. I'll address your question about the ROUX first and then return to GVR. We are still assessing whether we can utilize some of this long lead equipment, which is named for its fabrication time of three to four years. As a result, we halted fabrication early on, meaning it is not in a finished state and has minimal lead time. The majority of the $144 million accounted for preliminary engineering, which retains value for the future as markets improve. We'll reassess the situation; this remains a strong project and a solid strategic platform for our system. However, the markets have cooled, and if the spreads aren't favorable, it doesn't make sense to proceed. Our FID process performed well, as we didn't rush things and kept fabrication costs minimal. We have not initiated any construction or site preparation for this project. Our FID process helped us reach our final decision effectively. As always, we try to delay any long-lead equipment purchases until we have a clear decision. When we made that choice two years ago, this was a 25% recurring project, but the market has shifted. Regarding your first question about Galveston Bay, you jumped ahead a bit. That will be a key topic during our analyst day. We will discuss Galveston Bay and our midstream business in a combined meeting with MPLX. We'll focus significantly on midstream and also cover Speedway, providing insights on how we plan to capitalize on immediate opportunities. The projects we’re exploring in Galveston Bay are expected to yield quick returns and generate EBITDA promptly, avoiding the prolonged capital expenditures that delay returns.

And Speedway, just circling back to an earlier question, I was wondering if you could put a finer point on the synergies generated to date. Has it been the overall pool of synergies has expanded, or have they been just coming in faster than you would expect and perhaps the 2017 goal now becomes the 2016 goal? But the overall synergies are not more than you originally expected?

Initially, we projected generating $75 million in synergies for 2015. However, as Gary pointed out, we have achieved approximately double that amount so far. The accelerated conversions, back-office platforms, and operating platforms have all contributed to these additional synergies. Moreover, our ability to market the stores in line with our existing ones has enhanced these benefits. The remodels we've completed, which involve investing $300,000 to $500,000 to redesign key areas in the stores, are also yielding accelerated synergies. Additionally, the overall integration of our operations and the training of thousands of employees on new systems and procedures have exceeded our expectations. Consequently, we've successfully capitalized on these savings in our operating expenses and general and administrative costs.

And then just thinking about Speedway in general and its place in the portfolio, obviously it is a very valuable asset. At this point, the head stores are not mature. But fast-forward a couple years, if you feel that you are not getting the credit that you should for Speedway in the share price, how do you think about unlocking that?

Well, we will just continue to follow that through, Brad. We continue to believe Speedway, as you said, is a very, very strategic part of our portfolio along with our refining system and our midstream and how everything works and we move those volumes through our integrated logistics space, but we will cover that down the road.

The first question, just one more on MPLX, could you talk a little bit more about the interplay between the drops that you're not talking about in the organic growth that you see from MarkWest and other opportunities? How should we think about the mix of those two things when you look at 2016 in order to hit that 25% distribution growth target?

When we look at MarkWest on its own, they have publicly announced plans for approximately $1.5 billion in capital expenditures this year, which will support ongoing projects. As fields develop, they are also enhancing the utilization of their existing assets. Additionally, we have contributed assets to the MLP that continue to grow. A key aspect of this operation involves how we transport refined products; it may be advantageous to export some while others may be piped through our system. We factor all of this into our strategy, along with any potential drop-downs we might consider. Now, I'll turn it over to Pam Beall, who is overseeing the transition between MPLX and MarkWest. Pam can share some insights.

Gary really elaborated extensively early on the call about the many different ways that the parent can support the distribution growth for MPLX going forward. So it's not simply a combination of drop-down and organic growth. And we will determine as we move through 2016, based on a lot of different considerations, what we think is the best combination of the many tools that MPC can lend to the partnership to support its distribution growth.

Phil, this is Don. I think the other really important factor in there is the yield environment. That will impact how the trajectory of where the EBITDA sources are and how that works going ahead. So what we feel great about is that we have a lot of options and tools to be able to manage whatever yield environment that we're in to be able to reach the distribution growth guidance that we've articulated. And we think that differentiates MPLX from many of MLPs that are out there. So I can't tell you the exact percentage, but I can tell you we have all the tools that we need to meet that distribution growth guidance and that is a differentiator.

I would like to follow up on the cancellation of the ROUX product. You mentioned it briefly, but regarding future capital deployment, is this primarily project-specific? Should we consider the specific economics of this project? Does it reflect the dynamics between gasoline and distillate prices going forward? Additionally, when assessing capital allocation within your portfolio, are there better opportunities outside of refining, or are there viable options within refining if these price spreads are not favorable for capital investment?

This is a specific project and is influenced by current market conditions. The project aims to take heavy residue and upgrade it through the ROUX process to produce diesel. Given the recent decline in crude prices, the product price has also dropped, leading to a significant compression of the spread. Previously, this project was expected to yield a 25% return with an annual EBITDA of approximately $800 million to $1 billion. Our final investment decision process has been effective, indicating that, with market conditions likely remaining low for an extended period, now is not the right time to invest in this project. However, we do have more promising projects in the Galveston Bay area that offer higher rates of return and quicker capital recovery, which makes more sense to prioritize. Thus, we have put this project on hold for now, but once the market rebounds, we have completed all the necessary engineering work and can quickly resume it. This decision reflects our commitment to capital discipline and allows us to allocate resources to other refining projects or other sectors, such as midstream or Speedway, that offer strong returns.

A lot of questions have been raised, but I have two points to make. You might want to save this for the analyst day. Gary, you have been quite transparent and proactive in finding ways to unlock value over the years. One significant part of your business now is retail, particularly following the acquisition a year or two back. What are your long-term strategic views on retail, considering that it appears to be a higher-multiple segment compared to the lower-multiple refining sector? I'm interested in your overall perspective on this. Additionally, I have a follow-up question.

We have been clear that Speedway is a very strategic part of our business. Our goal is to maintain a high-control volume from our refinery, especially for gasoline. As Speedway expands its diesel business, it continues to support this goal. The capture rate from our refining and the margins we earn benefit from having Speedway as a consistent demand source for our refined products. As mentioned when we acquired Speedway East, we aim to grow Speedway into a $1 billion-a-year EBITDA business, and we believe we are on track to achieve that in the first year of operations. This demonstrates the effectiveness of our strategy and the outstanding execution by Tony and the Speedway team, who have managed to reconvert about twice as many stores in the first year than we expected. We will provide more details at analyst day. To address your primary concern, we are not considering spinning off Speedway; it remains a crucial element of our strategy moving forward.

Gary, my follow-up is really, I guess we started off the call talking about MPLX or maybe I could just finish it up there. Clearly, the share price of MPLX is not under pressure. I think that's a wider market issue than just a Marathon issue. But leaving that aside, what does it do to your view on what you think you can attract by way of acquisition multiples for your midstream assets? And I'm thinking more the longer-term refining drops. A lot of you still think that sort of 8 to 10 multiple is still reasonable. And if so, when do you think we can start to see that process kickstart again?

I will answer that from a broad perspective, Doug. As we examine the entire midstream sector, I still believe consolidation will occur within midstreams. It's necessary due to the pressure on the balance sheets of certain midstream companies, which is why this combination is compelling. The rationale is our strong balance sheet paired with a company that has an extensive backlog of projects and is unable to manage all of them independently. That’s the first point. I expect additional combinations in this industry to continue. Secondly, regarding available assets, high-quality assets that are appealing in the market are still commanding multiples of 8, 10, and sometimes even higher when bidding for those assets in an open auction. Consequently, the market remains favorable because the assets that can be integrated into the MLP are very high-quality with strong cash flow sustainability and will command a premium. So, I believe the market is still robust. Don, do you have any comments?

Well, maybe the other just observation, Doug, is in an environment where the yields have widened as much as they have, there is probably going to be some pressure just around the market in general on multiples. I mean, if you have a higher cost of capital on a higher yield, what you are able to pay for at acquisition, I think, does go down over time.

Can we discuss exports a bit? You mentioned expanding operations, and I'd like to know your thoughts on volume growth beyond record levels. Given this expansion, where do you see volumes heading? As you pointed out earlier, competition is increasing, although it may not be within your core markets. Additionally, there is some capacity coming online in Latin America, though it's sporadic and there might be significant downtime in that region that won't be resolved quickly. Could you clarify your expectations regarding the volume, which I believe you quoted as 330,000?

Yes, we did 333,000 this quarter. Let me ask Rich Bedell and Mike Palmer may have a few comments as well.

We have two projects aimed at enhancing our export capacity that are progressing this year. One project at Garyville has been completed, focusing on increasing gasoline output. At Galveston Bay, we're working on a project to boost distillate production. Looking ahead to around 2018, we plan to raise our stated export capacity to approximately 395,000. Additionally, we anticipate reaching just over 500,000 with a project we will finish in 2018 at Galveston Bay, which involves converting old crude import docks into export docks for gasoline and distillate. Mike, you can elaborate on the broader demand landscape.

Sure, here's what I would say. The export market is very dynamic and complex. Whenever we notice a slight slowdown in one area, the demand tends to shift elsewhere. Currently, most of our business is in Europe or Latin America, but we also have shipments going to Asia. There are various needs for different specifications and sizes of cargoes. The market continues to be highly dynamic. We have not missed a beat since the major export refineries came online, and I have no reason to believe we won't maintain the advantages we've had in the past.

And one follow-up on that, you mentioned weak diesel demand overall domestically, globally. It seems to me any sort of pickup in that is going to tighten the distillate market fairly quickly. And I don't know exactly how to name the timing of that. But do you see that there is any, especially given the shift to gasoline this summer that there is a substantial amount of excess distillate capacity that's not being used out there?

No, we don't think there's that much. In fact, a lot of upsets around the world in refining over the last quarter have been able to soak up a lot of that excess inventory in the marketplace. But you are right; it goes back, Roger, to basic economic theory. It's not going to take much to turn that distillate market around. Whether it's 50,000 barrels a day or 100,000 barrels a day, it's fairly balanced today. And so it's not going to take much to happen. A little bit of pickup in Asia, a little bit of pickup in Brazil that I was mentioning earlier. Europe continues to remain strong. So it's not going to take much to, I think, put things in a positive position on the distillate side of the equation.

My question is related to high-octane gasoline and I was wondering if you could comment on your flexibility to increase production of high-octane gasoline within your system. Are you seeing retail sales and high-octane gasoline grow more rapidly? And then the regular 87-octane gasoline?

From the refining standpoint, we've noticed an increase in octane demand, mainly due to the processing of shale and Canadian crudes with diluents. This means we're utilizing octane more effectively while blending in the refinery. At Marathon's refinery, we have a significant amount of reformer capacity, which we use to its fullest potential to generate octane. We're also exploring projects to produce even more octane through our cat crackers and alkylation units. Additionally, we review our product slates and optimize our refineries accordingly. Mike, would you like to discuss some details about our octane sales?