Marathon Petroleum Corp (MPC) — Q2 2016 Earnings Call Transcript

Thank you, Katie. Welcome to Marathon Petroleum Corporation's second quarter 2016 earnings webcast and conference call. The synchronized slides that accompany this call can be found on our website at Marathonpetroleum.com under the investors center tab. On the call today are Gary Hemminger, Chairman, President and CEO; Tim Griffith, Senior Vice President and Chief Financial Officer; and other members of MPC's executive team. We invite you to read the Safe Harbor statements on slide 2. It is 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 our filings with the SEC. Now I will turn the call over to Gary Hemminger for opening remarks and highlights.

Thanks, Lisa. And good morning to everyone. Thank you for joining us. If you'll please turn to slide 3. Earlier today, we reported second quarter earnings of $801 million or $1.51 per diluted share. Earnings included a net benefit of $0.44 per share primarily related to a reversal of our lower cost of market inventory valuation reserve. All segments of the business performed well in the second quarter. Earnings benefited from improving crack spreads, robust product demand entering this summer driving and asphalt season, strong retail margins and the inclusion of Mark West in our consolidated results. The refining and marketing segment delivered strong results despite less favorable operating and market conditions during the quarter. Our integrated Seven refinery and extensive logistics network allows us to capture advantageous feedstock and other raw materials as well as enhance price realizations to our refined product distribution system. Our unique asset mix and flexibility position us to optimize operations even during disruptions such as those caused in the second quarter by the Canadian wildfires and refinery outages. Speedway continued its outstanding performance with a record second quarter segment income. In addition to higher light product sales volume and margins, the business delivered higher merchandise margins in the quarter. This improvement is consistent with a strategy to drive marketing enhancement opportunities. We're pleased with our progress in realizing synergies across the Speedway network earlier than originally planned and believe this will be a continuing source of value to the business. Speedway provides significant and growing stable cash flow, complementing MPC's integrated refining and distribution network. Speedway is MPC's most ratable distribution channel, providing a solid base to enhance overall supply reliability and allowing us to optimize our entire refining, pipeline and terminal operations. The midstream segment, including MPLX's financial and operational results, also delivered solid performance during the quarter. MPLX remains on target to achieve its 2016 distribution growth guidance without the need for additional dropdowns from MPC during the year. During the quarter, MPLX expanded its midstream presence in the Southwest with the completion of its Hidalgo gas processing complex in the Delaware Basin, where utilization is exceeding initial expectations. Construction of the Cornerstone Pipeline is also progressing as planned, with the completion expected in the fourth quarter. Cornerstone Pipeline is designed to provide MPC's Canton, Ohio, refinery with a direct supply of condensate out of the Marcellus and Utica regions and to supply natural gasoline to our Midwest refineries. As commodity prices recover, optimism is growing among MPLX's producer customers. And with world-class midstream assets located in some of the best resource plays in the country, MPLX is well-positioned to capitalize on an exceptional set of opportunities along the entire hydrocarbon value chain. As we enter the third quarter, both heavy and light Canadian crude differentials have returned to more favorable levels as the impact of the Canadian wildfires subsided. Canadian heavy production continues to grow and we expect good values throughout the third and fourth quarters. Additionally, we expect to continue to see spot opportunities in foreign sweet and sour cargoes. The regional diversity of our refining assets also enables us to benefit from access to the export market. We believe we have the right assets in the right locations, with 60% of our crude oil refining capacity in the Gulf Coast and 40% in the Midwest. We also expect to complete the first phase of our multi-year STAR program at the Galveston Bay refinery in Texas City next month. This phase will revamp and expand the resid hydrocracker by 12,000 barrels per day, improving the profitability of the refinery by increasing the conversion of lower-value residual oil into gas oil. EBITDA contribution from this initial phase is expected to average approximately $80 million per year. During the second quarter, we returned $221 million to shareholders through dividends and share repurchases. In addition, on July 27, our Board of Directors announced a 12.5% increase in the quarterly dividend to $0.36 per share. The 29% compound annual growth rate in our dividend since MPC became an independent company demonstrates our continuing confidence in the cash flow generation of the business. It also demonstrates our long-term focus on capital returns while maintaining an investment-grade credit profile and strong liquidity throughout the cycle. The efficiency and flexibility of our integrated retail, logistics and refining system drives the diversified earnings power of the business and we remain encouraged by the long-term prospects of our business and the value proposition for our investors. With that, let me turn the call over to Tim to walk you through the financial results for the quarter.

Thanks Gary. Slide 4 provides earnings on both an absolute and per-share basis. MPC's second quarter 2016 earnings of $801 million or $1.51 per diluted share, were down slightly from last year's second quarter earnings of $826 million. Gary referred to the $0.44 per-share net benefit in the quarter which included a benefit of $0.47 per diluted share related to the reversal of the lower of cost to market inventory valuation reserve and a charge of $0.03 per diluted share related to the impairment of one of MPLX's equity investments. The chart on slide 5 shows by segment the change in earnings from the second quarter of last year. As mentioned, earnings were impacted during the quarter by a $385 million pretax benefit to fully reverse our lower cost of market reserve. $360 million of this benefit is included in the refining and marketing segment and $25 million is reflected in the Speedway segment. After adjusting for this benefit, earnings were down approximately $410 million over the same quarter last year, largely attributable to lower income from our refining and marketing segment, higher interest expense resulting from the MarkWest merger and the equity impairment I just mentioned. These negative impacts for the quarter were partially offset by higher income contributed by our midstream and Speedway segments and lower income taxes. Turning to slide 6, our refining and marketing segment reported income from operations of almost $1.1 billion in the second quarter, compared to the income from operations of $1.2 billion in the same quarter last year. The decrease, after excluding the $360 million benefit from the LCM reversal, was primarily due to weaker crack spreads in both the Gulf Coast and Chicago and narrower LSWTI differential, less favorable market structure and higher costs related to turnaround activity in the second quarter. Partially offsetting these negative impacts was an improvement in the sweet/sour differential in the quarter. The lower blended crack spread had a negative impact on earnings of approximately $502 million. The blended crack spread was $2.58 per barrel lower at $7.66 per barrel in the second quarter of 2016, compared to $10.24 per barrel in the same period last year. R&M segment income benefited $227 million by an approximately $2 per barrel widening of the sweet/sour differential as well as higher sour runs in the quarter versus last year. The LSWTI differential narrowed $3.25 per barrel from $4.99 per barrel in the second quarter of 2015 to $1.74 per barrel in the second quarter of this year. This had a negative impact on earnings of about $100 million based on the WTI linked crudes in our slate. The market structure contango effect during the quarter is reflected in the $78 million unfavorable variance on the walk and relates to the difference between the product crude prices we use for market metrics and the actual crude acquisition costs in the quarter. The $70 million increase year over year in direct operating costs relates primarily to higher turnaround activity in the quarter versus last year. Turnaround in major maintenance costs increased $0.50 per barrel or over $80 million, compared to the second quarter of 2015. The higher turnaround activity also impacted total throughputs which were 62,000 barrels per day lower than the second quarter last year. Capture rate for the quarter was negatively impacted by the effect of rising crude oil prices on wholesale and secondary product margins, narrower crude differentials and tighter differentials on feedstocks relative to crude. Turning to our other segments, slide 7 provides a Speedway segment earnings walk versus the same quarter last year. As Gary mentioned, Speedway had a record second quarter earnings of $193 million which were $66 million higher than the second quarter 2015. Light product margin was a significant contributor to this increase along with higher merchandise gross margin and the $25 million reversal of Speedway's lower cost of market inventory reserves in the quarter. Gasoline and distillate margins were about $0.02 higher than in the second quarter last year at $0.155 per gallon, while volumes were up 33 million gallons quarter over quarter. On a same-store basis, gasoline sales volumes increased 3/10 of a percent over the same period last year. Merchandise gross margin was $10 million higher than the second quarter last year due to overall higher merchandise sales and the higher margins realized on those sales. Merchandise sales in the quarter, excluding cigarettes, increased 2% on a same-store year-over-year basis, reflecting some of the progress we're making on enhancing our merchandise model across the entire business. In July, we've seen a decrease in gasoline demand, with approximately a 1% decrease in same-store gasoline sales volumes compared to last July which you may recall was a very strong month in 2015. Speedway same-store gasoline sales growth was lower than estimated U.S. demand growth as we continually strive to optimize total gasoline contributions between volume and margin to ensure fuel margins remain adequate. Slide 8 provides the changes in the midstream segment income versus the second quarter last year. The $98 million increase quarter over quarter was primarily due to the combination of MarkWest at the end of last year which contributed $81 million of the incremental segment income to the quarter. The remaining increase of $17 million was primarily due to an increase in income from our equity affiliates and lower operating expenses versus last year. Slide 9 presents the significant elements of changes in our consolidated cash position in the second quarter. Cash at the end of the quarter was nearly $1.8 billion. Core operating cash flow was a $1.2 billion source of cash. The $1 billion source of working capital noted in the slide primarily relates to an increase in accounts payable and accrued liabilities partially offset by smaller increases in accounts receivable. The increases in accounts payable and receivable were primarily due to higher crude oil and refined product prices during the quarter which led to the net source of cash given the generally longer terms in the crude payables versus refined products. As we discussed in the first quarter call in April, MPLX issued convertible preferred equity during the quarter, generating equity proceeds of about $984 million. Proceeds from this private placement are broken out separately in the walk. MPLX used a portion of these funds to pay down its revolver which is included in the $521 million of net debt repayment on the walk. Return of capital during the quarter included the repurchase of $51 million worth of shares and $170 million of dividends. Share purchase activity may vary from quarter to quarter based on our needs and the cash flow characteristics of our business in any particular period. Our commitment to continuously returning capital remains the fundamental element of our strategy and an important part of the value proposition for investors. Share count at the end of the quarter was approximately 528 million shares, reflecting repurchase activity of about $7.4 billion, retiring approximately 28% of the outstanding shares at the time that it was at peak. In addition, as Gary mentioned earlier, the $0.36 per-share dividend announced by our Board yesterday represents a 12.5% increase over last quarter's dividend and contributes to a 29% compound annual growth rate in the dividend since our spin.

Thank you, Tim. As we open the call for your questions, as a courtesy to all participants, we ask that you limit yourself to one question and one follow-up. If time permits, we will re-prompt for additional questions. With that, Katie, we will now open the call to questions.

Gary, there has been a lot of discussion in the sector regarding the potential value of your retail business. Your prepared remarks seemed to emphasize your viewpoint. I would like to ask you to reaffirm your stance on whether you are satisfied with the current structure of Speedway and the business as it stands, and if you would ever think about a separation to take advantage of the arbitrage that some others have mentioned.

Well, Doug, as you and I have talked many times, of course we look at this all the time. But, as in my remarks, we're very happy. And it illustrates when you have a down market like the refining sector has been in the last couple quarters, how important having a diversified portfolio and a diversified value chain is to a business like ours. It is not only the most ratable customer within our portfolio, it's also this and our long-term strategy to grow the midstream business as well as the retail business. Those two segments are becoming, I would say, our most ratable cash flow streams within the business. So, yes, we're happy with the structure. But, yes, we continue to analyze and analyze very critically as you call an arbitrage. But when you look at an arbitrage, Doug, you also need to understand what the integration value is. Now, the integration value is, I would say, proprietary. I can't give out a number for competitive reason on that integration value, but I can say it is very significant, especially when you look at downturns in the cycle. As I've mentioned several times, then you look again at the first half of this year, the EBITDA from Speedway the first half of this year clearly covers the total dividend and interest costs on our capital. So, yes, we're happy. Yes, we continue to analyze it very carefully. But I would expect that we will continue on as we're.

I realize it's not always easy to answer those kinds of questions. My follow-up is really on the dividend. Obviously a nice bump last night. You're now mid-range with the peers. Going forward, what are your thoughts on the bounds in terms of distributions between buybacks and continued dividend growth? And I'll leave it there. Thanks.

Doug, our approach has been since the spin to focus on maintaining a regular dividend that has a growth cycle, ideally achieving double-digit growth over an extended period. Our main objective is to ensure that we have a solid capital turnaround alongside an attractive and sustainable dividend. Share repurchase remains a consideration based on the cash needs of the business, our core liquidity situation, and our overall outlook. We have reduced our capital spending plans for 2016, and some of the reductions in share repurchase align with a careful assessment of how the year is likely to unfold and what our cash flow generation looks like. Share repurchase will continue to be significant, dependent on our cash and liquidity position as we progress. While activity has been lower in the second and first quarters compared to previous years, this is simply a reflection of the business's liquidity needs at various times.

And Doug, one more point to that. As many leading analysts have already printed this morning, as MPLX now has gotten into a good rhythm within the capital structure, the balance sheet and our growth going forward and as we expect that the yield will continue to improve within MPLX, that's going to give us that ability in the future as we have dropdowns to be able to bring that cash back in and further buy back shares. So that's a very important ingredient in our strategy as well.

My question is a sum follow-up to Doug's first question and maybe a different way to partially monetize the value arbitrage. I know you filed the IRS letter to expand the characterization of wholesale EBITDA which would add to your droppable inventory. Any update there and can you dimension the potential range for expansion of what might be MLP-able out of what is currently characterized as retail? Really appreciate it.

We are still waiting for the IRS to respond to our Private Letter Ruling request. We hope to hear back soon, but it’s unclear whether that will be this quarter, next quarter, or the following one. We submitted our request a while ago and are still waiting. The fuels distribution we discussed earlier is a strategic approach to avoid retail tax blockers, allowing us to drop down some of that value. So, we need to be patient and wait for the IRS's decision on our request. We are optimistic that it will be approved, and we will provide a clearer range once we receive feedback from the IRS.

And the second question is on midstream. Shell is now building a cracker in Pittsburgh. It's still five years out. It's very positive for MPC and MPLX both from volume growth and what it means for pricing and relative Northeast pricing in particular put at parity with Mount Bellevue. Can you discuss that project or how it could affect your business and maybe how you are thinking about our positioning for that today?

Yes, Evan, this is Don. We have a strong presence in ethane within the Marcellus and Utica regions. We have invested significantly in the past to enhance our ethane recovery capabilities. We believe that production and growth in ethane will continue, which presents us with opportunities. We estimate that by the early 2020s, ethane production could reach around 500,000 barrels per day, based on various forecasts we've encountered. If we reach those levels, we might initiate capital projects ranging from $500 million to $1 billion to extract that ethane, supporting not only the crackers but also the ethane requirements in the Gulf Coast and other transportation projects to the East Coast.

Gary, can you comment on the state of the product market as you see it? Inventories are elevated right now. Do you think that's a function of refining supply or a demand? And how do we work our way out of this? Do you ultimately think we need to see run cuts later this year in the world? And if so, where?

Yes, Neil, that's a very insightful question. Looking back at the same period last year, we were in a strong refining market. However, refiners operated at full capacity, resulting in a significant build-up of excess inventories, which contributed to the downturn in the fourth quarter and early first quarter this year due to the rapid increase in inventories and the time it will take to reduce them. The inventory data released yesterday shows that in the areas where we mainly operate, gasoline in PADD 2 is 2.9 million barrels higher than this time last year, even though we saw a decline of 2 million barrels for the week. Overall, we are in a solid position. The Gulf Coast still has somewhat high inventories. However, Mike Palmer noted that there is a significant turnaround schedule coming up in the Gulf Coast, particularly for PADD 3 and early PADD 4, which is expected to remove around 700,000 to 1 million barrels during this timeframe. Additionally, we will soon transition to winter-grade gasoline. Regarding distillates, both PADD 2 and PADD 3 seem fairly balanced across the industry. The crucial point is that the refining industry has demonstrated good discipline in the past, indicating there is no need to increase inventories to a level that could harm margins in the future. Currently, distillates are in decent shape, and gasoline in PADD 2 is performing well, while gasoline in PADD 3 is slightly high.

I might've misheard that, but did you call out same-store gasoline sales in Speedway were down 1% in July? And do you think that's just a function of comps? And could you just speak to how you see the demand trends on the gasoline side for the balance of the year?

And that's what we said; you are right, Neil. Gasoline has been a real strong contributor to Speedway over the first half of the year and I think somewhat can be timing. As you know, weather has been outstanding across most of the markets so far early in Q3 here. So, I would say it would be a bit more timing. I know Tony is on the line. Tony, would you like to add what you are seeing across the market?

Yes, you're right about the weather. That is driving traffic. We're seeing some nice benefits inside the store. On the volume, though, I think the comment about the comps that we're facing from last July were fairly significant. We were close to 2% up last year, and relative to both year’s performance isn’t all that bad.

When the market opens in the two minutes whether yield on MPLX goes. But do you think the yield at MPLX is now low enough, bearing in mind you've got the IDRs, to get on the front foot for growing projects at this cost of capital assuming that the upstream customers are there to do it? And also to start dropping down for cash?

I believe the yield is higher than it should be, considering the outstanding suite of assets we have, both from drop-downs and organic growth. Additionally, we mentioned in our release this morning that we expect double-digit growth in 2017, which we haven't discussed before. With the recent increase in MPLX and the anticipated growth, alongside the success we've had and the expected growth in volumes, there's a lot to look forward to. Another important factor is our capacity utilization. As commodity prices improve, we have significant available capacity that we can utilize, which will positively impact our bottom line. We expect our yield to continue improving with our strong performance and our solid balance sheet. However, to make substantial improvements in our ability to drop down assets at favorable multiples, we aim to be more competitive with our yield moving forward.

Yes. I guess I was just trying to get to the point that obviously there's been an improvement in cash this quarter. Obviously, part of it is the preferred and the working capital release. But if you can start dropping down for cash, you can start to build cash at MPC level, drive the LP BCF per unit up and also then obviously buy back stock. So just trying to get a sense of when that process might start, in your opinion.

Yes, you are absolutely right. As we stated earlier, we're in very good shape. We don't need to have another drop here in 2016. But we will continue to see how the markets perform and we can always pivot if we need to. But I think we're in very good shape, as we said.

My follow-up question is about the progress on synergy capital. This is a significant potential for future EBITDA, estimated between $6 billion and $9 billion. While the industry may not be fully proactive yet, I believe there is considerable work happening behind the scenes. Can you provide some insights on the nine projects you have? Specifically, how are these projects performing collectively?

Yes, this is Don. We're very focused on advancing several key projects. Our top priority is to facilitate the movement of NGLs to the East Coast. Our producer customers are feeling optimistic about NGL pricing improvements, but they're also dealing with the differential issues they've encountered, such as with Mount Bellevue pricing. We are committed to moving NGLs to the East Coast, and this project is currently the most advanced in terms of its in-service date and overall solution. We are also exploring the possibility of transporting NGLs to the Gulf Coast and are in regular talks with our partner Enterprise regarding the feasibility of reversing Centennial. Additionally, we are dedicating significant time to a butane-to-alkylate project, which would likely be located near our processing facilities in the Utica Marcellus. This project aims to convert butane to alkylate, offering our producer customers increased overall valuation. It is a substantial undertaking that will require multiple years to complete, and we are currently in the detailed engineering phase of its evaluation.

Circling back on repurchases for this quarter, obviously there is the big working capital benefit and the cash balance was up pretty significantly on a sequential basis. Can you talk about why there weren't more repurchases? Is it a matter of that working capital potentially reversing next quarter?

I believe that whenever we are evaluating our liquidity position and our current standing, we also consider how we expect things to unfold in the next months and quarters. We are aware of this. The advantages in working capital are significantly influenced by where crude prices are and how swiftly they change. Much of what we did in terms of cash management was essentially pre-funding for the capital expenditures anticipated at MPLX throughout the year. Therefore, the capital raise was less about accumulating a large cash reserve for spending and more about meeting the partnership's requirements for the latter half of the year. We also paid down some debt to increase our capacity. However, I would say that most of the funds raised are already allocated at this stage, and we are unlikely to consider share repurchases.

Okay, understood. Then in the prepared comments, you talked about the phase 1 of the STAR project coming online and the $80 million in EBITDA. I'm curious, is that all EBITDA that comes online when you guys flip the switch on that or has some of that been seen in previous quarters? And additionally, what's the underlying assumption for that $80 million in EBITDA? Is that at current cracks or is that some sort of five-year average number?

Yes, this is Ray Brooks. I'll address that question. The $80 million of EBITDA is on an annualized basis. As Gary mentioned, we're bringing on phase 1 of the STAR project this year, which consists of two parts. One part was completed a few months ago where we revamped the asphalting unit, restoring it to its original purpose of producing asphalt resid. Additionally, by the end of next month, we will have the rest of that project finished, which includes expanding our capacity by 12,000 barrels a day. Together, these components contribute to a combined EBITDA of $80 million annually. We are also continuously evaluating the economics moving forward, and we remain optimistic based on our current assumptions that it will stay within that range.

As you review your linear program models in the current margin environment, it seems you are on track to maintain strong throughput as per your guidance. How is the LP developing? Are you still focusing on summer-grade gasoline? Are there any areas where you are moving towards a distillate-based yield? Additionally, there has been some discussion about the transition to winter-grade gasoline production. Can you provide insights on how the current pricing landscape is influencing these aspects?

Sure. This is Ray Brooks and I will answer that question as well. You asked several things. First, regarding the LP model, we run it weekly to assess our crude availability and product mix, which helps us decide what to produce and at what rate. We only focus on options that are economically viable for us. Currently, we are producing summer-grade gasoline and have about two months until we can legally sell higher vapor pressure gasoline. As for distillate versus gasoline production, the economics shift frequently, and right now, we are mainly oriented towards diesel. To give you an idea, we have about a 10% flexibility to adjust our production between gasoline and diesel.

And secondly, product exports have been an important part of your strategy. Could you talk about what you saw on second quarter product exports and perhaps give a view on early 3Q outlook on exporting product?

Yes, it's Mike Palmer. I would be happy to discuss exports. In the second quarter of 2016, we exported 325,000 barrels a day, which indicates strong performance. Overall, the second quarter looks very promising for us. Most of the strength in the market was in Latin America, and we are well-positioned to supply that region due to our proximity. Additionally, we are also sending diesel cargos to Europe. Although the arbitrage opportunity has become more challenging, it still works under certain conditions. We anticipate that exports will remain strong and have no reason to believe this will change in the third quarter. The first quarter was slightly lower due to supply constraints from turnaround activities, but overall, things are continuing to improve.

I have a couple of questions. First, regarding the crude slate, it appears that you processed a significantly higher percentage of WTI-based crudes in the Gulf Coast during Q2 compared to recent trends. This is somewhat unexpected considering the TI spread. Could you elaborate on that? Additionally, it seems that the differentials for heavy and medium sour crude have recently decreased, especially on a percentage basis. What is your outlook on the dynamics in the heavier crude markets moving forward?

Yes, Chi, Mike Palmer again. You know, regarding your second question first, I guess, with regard to sour crude, we're finding a lot of opportunities in the sour crude right now. Not only in Gulf of Mexico where, if you look at those spreads over the last six months, Mars has been discounted to LLS in the range of $5 to $6. It's been pretty stable. We see that continuing. The sour crudes in the Gulf are still growing and we see really good value there. With the ARB coming in, we're also seeing some really good opportunities worldwide. We're bringing in more spot sour cargos than typically we have been able to find value in. And because Galveston Bay and Garyville have the ability to run the heavy, more difficult crudes high-TAN crudes, that's what we tend to focus on because that's where we get the discount. So we see that continuing to go forward. In terms of the additional WTI-based crudes, that's going to shift back and forth depending upon what's happening at the plants, what crudes we're really optimizing on a daily basis between the WTI and the LLS-based crudes. So I don't think there's anything structural in the market there. It's just part of the overall optimization.

Chi, that was the right question. If you look at our slate, as we discussed at this same time last year, we were running about 55% sour. This year, we ran a little over 61%. We have the ability to adjust due to the composition of our refineries and take advantage of the best margins in the market. So, 61% is one of the highest percentages of sour we've had for some time. I wanted to provide you with those details.

That's really high. Are you seeing Canadian barrels return to normal levels of availability at this time? Also, regarding the Gulf Coast, do you have any concerns about the significant production increases we're observing from Mexico, Colombia, and Venezuela in terms of heavier crude availability from those areas?

We've had difficulty understanding much of the Venezuelan crudes for quite some time. They are not very reliable and have been in decline. Therefore, we haven't focused significantly on most of the Latin American crudes. There are some from Colombia that have been beneficial for us, but we don't consider that a major factor. We've noticed increased interest in some of the heavy crudes from the Middle East. Regarding Canada, the wildfire situation is behind us now, and we've observed that Canadian spreads have returned to normal, looking much more appealing than before. Additionally, Canadian heavy crude projects that were approved before the recent drop in crude prices are progressing, and we see substantial value in Canadian heavy crude.

I have a question about the potential decrease in the fuels distribution margin. If that margin were to drop, what would happen to the RIN? Would it decrease along with the margin, or would it remain at the MPC level?

No, we expect that the RIN would still be controlled by MPC. Yes, but where we're looking at the fuels distribution, it would be after the RIN or after the blending would have taken place. So, I would expect that we would not be putting any RIN volatility inside of MPLX.

Yes, Chi, what’s important for us in considering this and how we might structure it is that we view it more as a service arrangement rather than merely transferring inventory. Therefore, we don’t anticipate any changes regarding the location of the RINs and where the associated benefits lie.

I would like to catch up a little more and discuss how to approach the share repurchases and their integration. I know it might be early to outline the 2017 capital expenditures, but you have improved the balance sheet year to date. It seems that MPLX is in a much stronger position with a solid growth outlook. Refining is likely to perform better in 2017 than it is currently. As you generate free cash flow, how should we consider the balance between consistently raising the dividend, repairing the balance sheet if necessary, and executing share repurchases?

The focus on capital return and how we approach it will remain central to our business for the foreseeable future. Balancing our strategies is crucial; we aim to take a measured approach rather than commit fully to investments or share buybacks. Our goal is to find a balance based on our earnings, cash flow generation, and our financial position at any given time. This will create a dynamic process as we decide how to allocate capital. We anticipate varying levels of activity over time, but maintaining a balanced approach to capital allocation will be essential.

And as a follow-up to that, Gary, certainly Marathon has been an acquisitive Company. I understand you may be in more of a digested phase right now. But as you do free up more capital, whether from a retail, wholesale drop-down or further growth inside of MPLX, what else looks interesting on the M&A front? Is there a desire to expand the refining or should we think about it as a midstream retail growth really only at this point?

When considering the current valuation metrics in refining, I believe we have a solid platform and presence in this sector that we are pleased with. This doesn’t mean we won’t explore other opportunities that may arise; we certainly will. On the retail and midstream fronts, we are keen on expanding within our existing reach. In retail, we have the necessary platform, capability, and, as Tony's team has demonstrated, the expertise to step beyond our current footprint and perform exceptionally well. Therefore, we will remain interested in retail opportunities, as both retail and midstream likely offer us higher returns. However, given our current share prices, as Tim mentioned, share buybacks will also be a priority for us.

Gary, now that MPLX is stabilized, do you think that any new investment opportunities, like expanding the NGL distribution business, will be self-funded? Will there be any need for support from the parent operation going forward, or is it possible that MPLX could present a significant opportunity that might require assistance from the parent?

And you are right, Paul; it just depends on the situation. As Don mentioned, he was referring to some of the significant organic projects we discussed. Some of those can be substantial due to the size of the projects. We will see what the carry might be, if any. However, we have stabilized the balance sheet. I believe that the core business is picking up. As commodity prices improve, the coverage should continue to enhance. I am confident that it can operate independently into 2017, and we will assess the situation then. I don’t foresee any need for MPC to intervene and support their balance sheet in the coming quarters.

I know it's early. Can you provide any guidance on CapEx for 2017, especially considering the recent weaknesses in the refunding margins? Should we assume that CapEx will be about the same as this year, or do you think it might decrease or increase?

Well, Paul, I would say that when we come to your conference during September, we're going to be able to have a pretty good idea of where we're looking at CapEx going forward. We're in that phase right now. I wouldn't expect it to be up from where we're in 2016, but we're just in an initial phase of looking at the capital for 2017 and beyond.

You know, that really depends on what happens with crude prices and we think that things are rebalancing quickly now. We think that oil prices will be up and we do believe that North Dakota production is a big resource. We believe that North Dakota production will go up as well. So there will be oil into the future to feed the various pipelines.

Perhaps just as a follow-up to Ed's question on the drop potential, how do you think about the deal pace of drops moving forward in terms of maybe on an annualized basis, what you think MPC you can get back from jobs that can be reallocated? And then also in terms of value-unlock opportunities, how are you thinking about the GP here? Do you think it's at a mature enough state to consider unlocking some value there or do you think you would need more time?

Well, I would say, Phil, we don't look at it as what can we hurry up and drop. We look at it as what is the growth rate that we're trying to achieve and what are the mechanisms that we use to achieve that growth rate. And as we stated in our release this morning that we expect double-digit growth rates, we're on target, first of all, to meet that parameters that we set out of 12% to 15% this year and then a double-digit growth next year. So, that is directionally how we look at it, Phil. The GP, when you visited us, we still believe that the GP needs to mature more before we can consider that. Clearly, this isn't the right market to pursue a GP IPO. Additionally, we recognize that some changes in structure indicate that simplification may be more effective. However, we will continue our analysis and pursue that direction.

Okay. And then my follow-up is just around the level of maintenance spending that we're seeing this year in the refining side. As we look ahead, would you say this is above normal in terms of maintenance this year? Or how might you suggest we think about the normal level of maintenance spending moving forward?

This year has certainly seen an increase in maintenance efforts, particularly as it was a significant turnaround year. Our objective in refining is to determine how we can manage maintenance spending consistently each year. We want to address our turnarounds while striving for as much stability in our spending as possible.

Is there a specific number you might think about that you would get back next year just from having fewer turnarounds?

Back to the issue with RINs, Gary, I'm concerned. I'm not sure if you heard what was discussed about a lawsuit yesterday or if you noticed Jack Lipinski's strong comments this morning, suggesting that third-party traders and speculators are causing RIN prices to rise. My question for you, Gary, given your involvement in Washington, is what is your perspective on what should happen? What does Marathon Petroleum aim for? What do you believe is in your best interest regarding RINs? Thank you.

Sure. While we continue to strive for our best interests, our goal is a full repeal of the renewable fuel standard. However, recognizing that this is a significant challenge, a bill known as the Flores bill has been introduced that would limit blending to 9.7%, which also considers the neat gasoline available in the market. We believe this bill needs substantial support, which is already gaining traction in the House, and we need to engage more members as well. Regarding RIN prices, you're correct that they have reached around $0.95 to $0.98, and have even exceeded $1 in recent weeks. The reason for this is that the market anticipates we may exceed the 10% ethanol blend wall this year, leading to a demand for RINs that will likely outstrip supply. The measures we have implemented over the years, as highlighted in our comments this morning, have positioned us well, and we are fairly balanced regarding RINs. Nonetheless, we strongly advocate for a significant amendment or repeal of the renewable fuel standard and are diligently working towards that goal.

Thank you, Katie and thank all of you for joining us today and your interest in Marathon Petroleum Corporation. Should you have additional questions or would like clarification on topics discussed this morning, Teresa, Holman and I will be available to take your calls. Thank you.