Marathon Petroleum Corp (MPC) — Q3 2016 Earnings Call Transcript

Good morning and welcome to Marathon Petroleum's third quarter 2016 earnings webcast and conference call. The 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, Chairman, President and CEO; Tim Griffith, Senior Vice President and Chief Financial Officer; and other members of our MPC executive team. We invite you to read the Safe Harbor statements on slide two. It's a reminder that we will be making forward-looking statements during the call and during the question-and-answer session. Actual results may differ materially from what we expect today. Factors that could cause actual results to differ are included there as well as in our filings with the SEC.

Thanks, Lisa, and good morning to everyone. If you please turn to slide three. We issued two press releases earlier today: our third quarter earnings announcement and a strategic plan to enhance shareholder value. Driving long-term value for our shareholders is a top priority. Despite the steps we have taken to create value for investors, we believe that MPC's share price reflects a significant discount to the intrinsic value of our business, particularly as it relates to the valuation described for our general and limited partner ownership interests in MPLX and to the midstream assets we hold directly. First, we announced an aggressive dropdown strategy. By the end of 2017, we plan to offer to MPLX assets contributing a total of approximately $350 million of annual EBITDA with the first dropdown of assets contributing $235 million of annual EBITDA expected to occur by the end of the first quarter. The partnership's plans for funding these drops would likely include transactions with MPC, including the potential for a substantial amount of equity to MPC. We also intend to execute on additional value-enhancing dropdowns totaling an estimated $1 billion of annual EBITDA as soon as practical within the next three years. As a reminder, we are still awaiting tax clearance on a substantial portion of this dropdown portfolio, which includes the revised treasury qualifying income regulations and a subsequent private letter ruling for our fuels distribution business. Nonetheless, we are moving forward aggressively with other portions of the MLP eligible earnings available within MPC. This aggressive dropdown strategy is expected to support increased limited and general partner distributions from MPLX and provide value creation for investors. These transactions are subject to market and other conditions, as well as requisite approvals. In addition, we are evaluating strategic opportunities to highlight and capture the value of our general partner ownership interest in MPLX and optimize the cost of capital for the partnership. We have retained independent financial advisors to assist with this evaluation. We will be evaluating a number of alternatives aimed at highlighting the value inherent in the general partner and will provide additional detail to investors once we have determined the path providing the greatest opportunity to capture this value. Finally, in connection with these strategic actions to unlock value from our midstream assets, we plan to evaluate changes to our internal financial reporting, largely focused on the assets and earnings associated with our future dropdown strategy that are currently reported in our refining and marketing segment. Our review is likely to result in changes to our segment reporting beginning in 2017. These initiatives are designed to unlock additional value from our robust portfolio of midstream assets and to further benefit from the value-enhancing platform we have established with MPLX. We will continue to analyze our businesses and portfolio to ensure we continue to deliver superior performance and returns consistent with our track record of maximizing shareholder value over the long-term. We will be moving ahead expeditiously on each of these actions and look forward to communicating with our shareholders as we execute our strategic plan. That said, let me turn back to our results for the third quarter. In our earnings release this morning, we reported third quarter earnings of $145 million or $0.27 per diluted share. Earnings include a $0.31 per diluted share charge related to the impairment of our investment in the Sandpiper Pipeline project, due to the withdrawal of regulatory applications for the project. The lower earnings this quarter were due in part to lower crack spreads and compressed project price realizations in the refining and marketing segment. Despite a challenging quarter, we remain optimistic as we move forward into 2017, given signs of market rebalancing and sustained strong demand. The combination of our niche inland refineries and large Gulf Coast refineries provide competitive advantages, including optimization potential and excess export capabilities. We continue to recognize benefits from the diversified nature of our business as the Speedway and midstream segments contributed more than $450 million of combined segment income in the third quarter. Speedway delivered strong light product sales volume and record merchandise margin dollars. The higher merchandise margin is consistent with its strategy to realize marketing enhancement opportunities. Having a strong retail business as Speedway is a valuable differentiator for MPC. Our integrated structure provides growing stable cash flows across market cycles, enabling us to return capital to shareholders while reinvesting in value-enhancing growth initiatives. The stable cash flow also helps us maintain our investment-grade credit profile. The midstream segment, which includes MPLX, delivered solid results supported by increases in gathering, processing, and fractionation volumes. MPLX continues to drive exceptional growth opportunities, supporting a diverse set of producer customers in some of the nation's most prolific shale plays and positioning it well to benefit from a rising commodity price environment. Additionally, in October, MPLX commenced operations of the Cornerstone Pipeline on schedule and under budget. We believe that our highly integrated and coordinated business model, comprised of refining and marketing, midstream, and Speedway along with a strategic plan announced today, will enhance shareholder value and position MPC for future growth and continued attractive returns to investors. 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 four provides earnings on both an absolute and per share basis. MPC's third quarter 2016 earnings of $145 million or $0.27 per diluted share were down from last year's third quarter earnings of $948 million or $1.76 per diluted share. As Gary mentioned, third quarter 2016 results include a $267 million or $0.31 per diluted share impact from the impairment of our investment in the Sandpiper Pipeline project. The chart on slide five shows by segment the changes in earnings from the third quarter of last year. The $803 million net decrease in earnings was primarily due to lower income from our refining and marketing segment. In addition, we had higher impairment expense during the quarter as well as higher interest expense resulting from the debt assumed as part of the MarkWest merger. These negative impacts for the quarter were partially offset by lower income taxes and higher income contributed by our midstream segment. Turning to slide six, our refining and marketing segment reported income from operations of $306 million in the third quarter of 2016 compared with $1.4 billion in the same quarter last year. The decrease was primarily due to weaker crack spreads in both the Gulf Coast and Chicago and less favorable product price realizations compared to the LLS-based crack spread. The lower blended crack spread had a negative impact on earnings of approximately $711 million. The blended crack spread was $4.10 per barrel lower at $8.08 per barrel in the third quarter compared to $12.18 per barrel for the same period last year. There were four primary contributors to the $463 million unfavorable other gross margin variants in this quarter. First, we experienced narrower gasoline and diesel price realizations versus reported market metric LLS-based crack spread in the third quarter of 2016 compared to the same quarter last year. Second, our price realizations were negatively impacted by less favorable margins on non-transportation products, which includes asphalt. Asphalt realizations were exceptionally strong in the third quarter of 2015 and have not increased at the same rate as the rise in the price of crude. Third, as I mentioned, we experienced weaker crack spreads during the quarter. At the same time, our outright RIN purchase costs more than doubled when compared to the third quarter of 2015. Our cost to purchase RINs to comply with the RFS standards was $80 million this quarter. Finally, refinery volumetric gains also continued to be lower this quarter due to the lower commodity price environment we're in. R&M segment income benefited $79 million by an approximately $0.40 per barrel widening of the sweet/sour differential, as well as higher sour runs in the quarter versus the same quarter last year. The LLS, WTI differential narrowed by $2.14 per barrel from $3.72 per barrel in the third quarter of 2015 to $1.58 per barrel in this third quarter. This had a negative impact on earnings of about $69 million based on the WTI-linked crudes in our slate. The market structure, or contango effect during the quarter is reflected in the $32 million favorable variance on the WACC and relates to the difference between the prompt crude prices we used for market metrics and the actual crude acquisition costs in the quarter. The $35 million year-over-year increase in direct operating costs relate primarily to higher turnaround activity in the quarter versus last year. Turnaround in major maintenance costs increased $0.25 per barrel or over $46 million compared to the third quarter of 2015. Moving to our other segments, slide seven provides the Speedway segment earnings WACC compared to the same quarter last year. Speedway's income was down $34 million compared to the third quarter of 2016, primarily driven by lower light product margins. Gasoline and distillate margins were $0.177 per gallon in the third quarter of 2016, which was $0.037 lower than the third quarter of 2015, which was a period of very strong margins. On a sequential basis, light product margin was $0.022 per gallon higher than second quarter 2016. Partially offsetting lower fuel margins were higher gasoline and distillate sales volumes and higher merchandise margins. Gasoline and distillate sales volumes were up 20 million gallons over the same quarter last year. On a same-store basis, gasoline volumes decreased 0.6% over the same period last year. Our focus continues to be on optimizing total gasoline contributions between volume and margin to ensure fuel margins remain adequate. The increase in merchandise sales continues to be a focus, the results of which can be seen in the $28 million increase in Speedway's merchandise gross margin compared to the third quarter of 2015. Merchandise margins increased due to higher overall merchandise sales, as well as higher margins realized on those sales. Merchandise sales in the quarter, excluding cigarettes, increased 4% on a same-store year-over-year basis. In October, we've seen a decrease in gasoline demand with approximately 4% decrease in same-store gasoline sales volumes compared to last October. The decrease we expect to be temporary and largely reflects the impacts of Hurricane Matthew at approximately 500 Speedway locations. Slide eight provides the changes in the midstream segment income versus the third quarter last year. The $165 million increase quarter-over-quarter was primarily due to the combination with MarkWest at the end of last year, which contributed $121 million of incremental segment income to the quarter. The remaining increase of $44 million was primarily due to an increase in income from our equity affiliates and lower operating expenses compared to the third quarter last year. Slide nine presents the significant elements of changes in our consolidated cash position for the third quarter. Cash at the end of the quarter was just over $700 million. Core operating cash flow was a $1.1 billion source of cash. The $666 million use of working capital noted on the slide primarily relates to a decrease in accounts payable and accrued liabilities and an increase in crude and refined product inventory levels during the quarter. The decrease in accounts payable and accrued liabilities was primarily due to the lower crude prices and volumes, as well as the timing of tax payments. Given the weaker refining margins we've seen this year, we took the opportunity to selectively prepay some of our debt during the quarter, which is reflected in the $516 million of net debt cash outflow shown in the WACC. MPLX opportunistically issued equity through its ATM program during the quarter, with net proceeds of $184 million as shown on the WACC. Return of capital during the quarter included share repurchases of $51 million and dividends of $190 million. During the third quarter, we increased our dividend by 12.5% or $0.36 per share. We've increased our dividend six times since becoming a standalone company five years ago, resulting in a 28% compound annual growth rate on the dividend. Our continued focus on growing regular quarterly dividends demonstrates our ongoing strategy to share in the success of the business with our shareholders, and this dividend increase just reaffirms that strategy. Slide 10 provides an overview of our capitalization and financial profile at the end of the quarter. We had $10.6 billion of total consolidated debt, including $4.4 billion of debt at MPLX. Total debt-to-book capitalization was about 34% and represented 2.3 times last 12 months pro forma adjusted EBITDA on a consolidated basis, or about 1.8 times if we exclude MPLX. We're showing the metric without MPLX, since the debt is non-recourse to MPC, and MPLX will maintain a capital structure, which uses relatively higher leverage, making consolidated debt-to-EBITDA increasingly less useful, given the size and continued growth of the partnership. Slide 11 provides updated outlook information on key operating metrics for MPC for the fourth quarter of 2016. We're expecting fourth quarter throughput volumes to be down slightly compared to the fourth quarter of 2015, due to more planned maintenance in the quarter. Total direct operating costs are expected to be $8.05 per barrel on total throughput of 1.83 million barrels per day. Beginning this quarter, we're also providing our estimated percentage of sour crude throughput, which we expect to be 58% in the fourth quarter, due to the continued sour crude advantage. Our projected fourth quarter corporate and other unallocated items are estimated at $75 million. With that, let me turn the call back over to Lisa.

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

Hey, good morning, everyone. How are you?

Good morning, Neil. How are you?

Great. Thanks, Gary. So, Gary, can you provide some early flavor as it relates to some of the strategic changes that you talked about, dropdowns, the GP structure, and some of the accounting changes? And then, talk about how retail fits into it, if at all?

Sure, Neil. As we indicated in our separate release this morning, we've been working on this for quite some time. We spent the early part of the year in the transition to get MarkWest into the fold and to really get our businesses lined out. We have a tremendous portfolio of assets that can be considered over time for dropdown, and we felt that it was best to get into a very aggressive, strong rhythm on how to dropdown the assets that we have. It's not just a dropdown strategy; we expect to be acquisitive in certain markets where it makes sense for the midstream, as well as we have a very good organic suite of projects to work on. But as we step back and looked at our total midstream business, we felt that now is the time to take very bold aggressive action. We've stated not just the dropdowns for 2017 of approximately $350 million, but we’re also talking about a future dropdown strategy of approximately $1 billion of other assets. Let me be specific; a significant portion of those assets is under the fuels distribution piece that we have a private letter ruling request into the IRS. We need to be careful to ensure we don't have any potential tax liability of dropping those down sooner than we believe we have IRS approval. One additional point I want to highlight is the value of the general partner interest. Let me have Tim talk about some of the actions and the aspects that we have around looking at the general partner interest.

Yeah, Neil. We've seen pretty clearly that the value of the GP is not being fully recognized in the value of MPC. So, we want to take a careful but aggressive look at exactly how we can highlight that value, capture it, and optimize the cost of capital for the partnership. There's no preconceived notion or conclusions as to where ultimately this may lead us. Again, with that objective of highlighting that value and optimizing the cost of capital for the partnership, it could include things like a buy-in of the IDRs at the partnership level, a public sale of some portion of the GP, or other alternatives around restructuring the GP interests. We want to make sure that we're looking at everything and understanding what might be the best path to really have that value better reflected in the overall valuation of MPC.

Yeah, I appreciate.

And Neil, to your question on Speedway. We've discussed this many times, and we believe that Speedway is critical in balancing our cash flow across all cycles. We also believe that a significant portion of the discount in our share price today reflects the midstream space, and Speedway is not the catalyst or the driver. Speedway has continued to perform very well, as indicated again in the performance for this quarter. We look at the integration value and we still believe that it has a very strong fit in our system.

I appreciate those comments, and Gary, my follow-up here is that you cited four reasons that other gross margins were under pressure: gasoline and diesel, non-transportation products, RINs, and I believe volumetric gains. How much of that is a third quarter phenomenon here as opposed to a recurring point? And I guess the reason I'm going here is that when I think about MPC's portfolio, historically you guys have outperformed your indicator margins by taking advantage of the logistics and the infrastructure advantages that you have. I want to ensure that that's going to be a recurring advantage for MPC on a go-forward basis.

Neil, you're spot on. Let's go back and look at the third quarter of 2016 versus the third quarter of 2015. The third quarter of 2015 experienced a rapid drop in crude prices, allowing us to retain margins across all aspects of our business, including asphalt. Because we started seeing steady crude prices with some challenges in third quarter, we weren't able to capture that value through our logistics arm. It backed product into the Gulf Coast and into the West. We also spent a lot of incremental money to service our customers during that period. I would say those are the big things, and I expect them to be nonrecurring. Additionally, early in the fourth quarter, Hurricane Matthew affected the entire Gulf Coast, and both that and Hermine's impact in the third quarter will be reflected in our numbers. While those storms affect volume, I expect these pressures to be nonrecurring.

I appreciate the comments. Thank you.

Yeah. Good morning, and congratulations on the more aggressive strategy. I guess, in MPLX, debt to pro-forma adjusted EBITDA I think was 3.5 times at September 30. When you think from the MPC perspective of the cash versus units debate, could you just give some color on how much cash you could expect from these drops over the next year and then maybe next three years?

Sure, Ed. This is something we will evaluate carefully. The drops we've discussed here are certainly more substantial than we've done in the past. But we will always be mindful of what the market capacity is to absorb new units. We have a tremendous amount of flexibility to take back units where we need to and will access the market in an opportunistic way as we move forward.

And then you've just had this new 707 tax rule, which reduces the amount of debt that you can use in basis for dropdowns. Have you got any idea of what tax leakage you would expect at the MPC level in terms of the drops or the impact that that ruling has?

Well, using our strategies as tax-efficient as possible is always our focus. The 707 regulations do not have a massive impact on our strategy, as utilizing debt-financed distributions back would not have been a part of our normal mode regarding the drops either. This change is not substantial to our strategy as we were already keen on managing tax implications.

Okay, and then if I could sneak a quick one in, the cash flow was the full working capital at $1.07 billion, but your earnings collapsed. Obviously, there's the impairment, but even adjusting for that. Any color on why cash generation is diverging from earnings would be helpful.

Ed, there's nothing specific here. We did have some working capital impacts from the quarter based on some changes in prices and some inventory buildup. That was the biggest item contributing to potential divergence.

Great, thanks. Good morning. Gary, can you talk about the specific assets you're targeting for the 2017 drops?

Sure, let me ask Don to cover that. Don's been doing most of the work on this.

Yeah, Chi. We expect that particularly the first drop will be predominantly pipeline and terminal assets—very traditional midstream assets that we currently own. Later in the year, we also have some joint interest pipelines and others. So, it will be typical, straight down the fairway midstream assets that will be moving from MPC to MPLX.

Okay, great. Can you comment on the sort of multiple range you're targeting for the drops?

We're not targeting a specific multiple range. It's a fact-and-circumstance-driven function. We want to ensure the drops are appropriately accretive for MPLX. A driving growth rate of 12% to 15% and having a multiple on the drop to support that is in everyone's best interest.

One other question, can you comment on Marathon's interest in utilizing the reversal of the Laurel Pipeline once that becomes operational? What opportunities might that open up for you down the road?

Yeah, Chi, this is Mike Palmer. When you look at the Midwest, we have a lot of refining capacity, and in the wintertime when gasoline demand goes down, we have gasoline and distillate that needs to seek new markets. We've been looking at numerous opportunities, and reversing Laurel to supply the Pittsburgh market from the Midwest is certainly significant for us and we would participate in that.

Chi, we’ve been saying for some time that it really makes sense to go West to East to supply the PAD 1 market and to further balance all of PAD 2. We won't get specific yet on how many barrels we might move, but this open season will be a big event for the entire PAD 2 industry because it has another outlet for us to balance the Midwest.

Thanks. Good morning, everyone. Good morning, Gary.

Doug, how are you?

Good, thank you. I hope to see you in a couple of weeks. I'm looking forward to that. The decision to take or the potential to take MPLX units in lieu of cash. Obviously, the quantity of the balance hasn't been determined yet, but what would that mean for your subsequent monetization of those units as it relates to your buyback strategy for MPC?

Doug, it's Tim. That if we took back units, the percentage and number of units that MPC holds become substantial. The potential sale of those units is something we will evaluate over time. Our focus remains on total value being realized within the system rather than just net cash, but we will look for efficient ways to assess those units over time.

I guess, just for clarification on my question, if you took MPLX units, would you expect your buyback pace to moderate?

The dropdown itself is not predicated on producing a huge amount of cash for a buyback necessarily. The buybacks will always depend on the cash that's being generated on an operating basis and potentially some from what gets dropped, so again we’ll evaluate it as we move forward. Even if there are a number of units taken back, there's probably still a substantial amount of debt to be undertaken at the MPLX level on those assets.

In 2016, we were focused on reducing our leverage at MPLX, obtaining an investment-grade credit profile. We'll likely fund future growth with a balanced debt-equity type of arrangement.

Okay, that's helpful, Don. I guess my follow-up is probably also for you, Don, because the more traditional nature of the assets—pipelines, terminals, accelerating the dropdowns—obviously means increasing the refining cost basis. Can you quantify what that would look like based on the plan you have? How much would you expect the cost basis for refining to go up as you monetize these assets?

I’m not sure of the specifics; we view this on an enterprise level in terms of earnings and where they may reside rather than the overall impact on specific segments.

Hey, guys. Good morning.

Hi, Paul.

Gary, just curious, do you have a timeline in terms of the strategic review with respect to the GP and MLP structure? When do you expect to conclude it, or do you really not have a specific timeline?

We've already been working on the strategic review. While we do not have an exact end date, my expectation based on the work we've done is that we should be able to conclude this around mid-year.

So, at the December Analyst Meeting, should we not assume we will hear a lot of updates on that?

No, we typically do it every other year.

We do it generally every other year, Paul.

I think the review is one of our biggest sources of value discount related to MPC, so we have every incentive and motivation to move through this as expediently as we can. We want to approach this carefully but swiftly.

Okay. The second question is just quickly, Tim, regarding Colonial Pipeline's downtime, how much did you incur in additional trucking costs to supply your Speedway and Marathon network? Is that material?

We haven't quantified it as a material item. I mean we've seen some marginal increases in trucking and logistics costs, but nothing significant we'd call out specifically.

I see. And is it included in the net margin or is it below the line?

It's categorized in the other category regarding the WACC. Not amounts that we would call out specifically.

Good morning, everyone.

Hey, Brad.

Gary, circling back to the general partner discussion, I'm curious about your comment regarding optimizing the cost of capital for the partnership. How does that interact with unlocking value and could there be a chance of an IDR waiver as part of this process?

I don't think we have preconceived conclusions regarding the path we take. Modifications to GP interests or IDR modifications, buy-ins, public sales—this is all on the table. The primary focus is on highlighting this value and ensuring the market understands it.

That's helpful. Also, thinking about the drops that you're discussing, I know that RINs are generally internal within the refining and marketing business. Are any of these drops expected to include RINs?

No, the drops we have in mind will not reflect earnings from RINs; those are independent.

I think a couple of months ago you mentioned a potential reduction in the scope of the STAR project from $2 billion to $1.5 billion. Where are you now in that review, and do you have an updated EBITDA target for the new scope?

Earlier this year, we completed feasibility engineering of all the components of STAR, concluding that one component did not meet our internal minimum returns. Therefore, we aren’t progressing with that portion. We expect to drop the CapEx we were looking at before from the $2 billion range. We’ll continue assessing what makes sense economically.

Okay, so no new EBITDA target?

Not at this time. We're still finalizing the project components and will share updates once we have that finished.

Hey, good morning.

Good morning, Phil.

First question is just on capital spending. I saw there's a budget out there for MPLX for 2017; could you comment on the overall MPC capital spending outlook relative to this year?

We haven't provided specific guidance at the MPC level. That’s likely something we’ll give in the fourth quarter. Generally, we don't expect major changes from this year’s figures.

Okay. Second question—just on the droppable EBITDA pool of $1 billion that includes fuels distribution. Is there a chance for that pool to increase, or does it fully encompass the total opportunity within fuels distribution?

I don't recall saying that there’s a chance for that pool to increase. It's volume dependent. We sell approximately 20 billion gallons today of material that would qualify for fuels distribution, but I don't expect that to increase.

Okay. Lastly, MPC filed a lawsuit with respect to Texas City, and I just wondered if you could comment on that a little bit?

Sure, Phil. Unfortunately, due to the ongoing litigation, we're unable to discuss it openly at this stage.

Good morning.

Good morning, Jeff.

Hi, Jeff.

Tim, on your slide 20, you did a WACC on the basic components of refining segment income that other gross margin was $287 million. On the narrower gasoline, diesel margin, was that primarily a factor of Colonial Pipeline outage or were there other factors that impacted?

There were several factors; other drivers also contributed to the overall changes.

Okay, so Colonial was not the major driver there?

No, it was not.

And talking about the inventory builds, how significant was the inventory build during the third quarter, and is that going to be a positive offset in Q4?

The inventory actions we took in the third quarter were not unusual for positioning in anticipation of hurricanes, so nothing out of the ordinary. Most of those effects will typically balance out across our LIFO targets for the business.

Hey, folks, good morning. Gary, historically, you've talked about the advantages of control regarding MLP. Has there been any change in your appetite regarding control in the context of some changes at that level?

No, Blake. Maintaining control of our pipeline and terminal assets, which are key to our integrated model, remains very important. We continue to expect to retain control.

For clarity, you've already got a midstream segment. Is the purpose behind this to reallocate some of that EBITDA out of the refining segment into midstream? If so, should we expect some restated historical gross margins?

Yes, Blake. Conceptually, that’s how we are targeting this. There's a lot of MLP eligible earnings historically categorized in the R&M segment, which we want to identify separately.

Yeah, good morning.

Hi, Roger.

I guess to kind of come back to the overall strategic plan. As you mentioned the GP, should we consider almost anything as a potential option, including eliminating the GP, resetting the IDRs, or IPO of the GP, or is there anything that's not on the table?

Again, I don't think we have preconceived conclusions regarding the path we take. We want to carefully evaluate everything with a focus on highlighting that value and optimizing the cost of capital for the partnership.

Is there an ideal cost of capital you're targeting before and after the $1 billion of dropdowns?

There’s no specific number that we focus on. We are generally unhappy with the trading levels at the LP level, and identifying ways to improve this, particularly with the IDRs, is part of our evaluation moving forward.

Okay. My last question is to clarify: the capital raised from the dropdowns—should we expect it to go towards share repurchases, debt reduction, or both?

It will contribute to the overall capital structure. Share purchases are high on our list. However, we did some debt repurchase recently calibrating our capital structure to the refining environment.

In 2016, we focused on reducing MPLX's leverage for an investment-grade credit profile. Future growth funding will aim for a balanced debt-equity arrangement.

Hey, good morning, guys and congrats on today's strategic actions.

Thank you, Evan.

Just a follow-up to the last point. Accelerated drops would be a significant cash windfall, right? Shouldn't we assume that most of that's going to support a buyback, given your history and the impetus for announcing today's actions?

Substantial cash proceeds would prioritize share purchases if they arise. Our focus remains on value recognition.

If drops are on the way, will you buy shares or use the balance sheet before they occur, especially in Q4?

Yes, large cash drops can facilitate share purchases, so we remain attentive to the opportunity.

Tax implications are crucial when taking back units. Maintaining MPLX unit value is important to us, and those factors will guide considerations.

Could you share an aggregate tax basis for the drop EBITDA? That would be helpful.

Okay, thank you.

Thank you. I guess having settled that, I'm still a little perplexed about the timing here. If I look at the MPC share price or MPLX share price charts, they don't look significantly troubled. Could you remind me why now is the right time for this announcement?

Paul, we've worked extensively on the MarkWest transition, which prepared us to set out clear paths for dropdowns and growth. We recognize the need for aggressive action to increase those dropdowns due to the value tied up within both components.

So you perceive this as a major shift to a more aggressive dropdown outlook?

Correct. We need to align ourselves with the marketplace, realizing the rate of dropdowns wasn't infinite and that the MarkWest merger would help enhance our position.

Can I just ask about RINs? There seems to be a variety of views among refiners on next steps following the upcoming deadline. Could you provide more clarity here?

We believe Marathon is well-positioned, with flexibility built into our business model. Changing the point of obligation could have many ramifications, but we feel that RIN costs are factored into our pricing strategy and not concerned about the point of obligation shift.

Thank you, Katy, and thanks to 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 we discussed this morning, Teresa Homan, Doug Wendt, and I will be available to take your calls. Thank you.