Marathon Petroleum Corp (MPC) — Q4 2016 Earnings Call Transcript

Thank you, Jason. Welcome to Marathon Petroleum's Corporation fourth quarter and full year 2016 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, 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 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 in our filings with the SEC. Now I will turn the call over to Gary Heminger for opening remarks and highlights.

Thanks, Lisa, and good morning to everyone. If you would please turn to Slide 3. This morning we reported fourth quarter earnings of $227 million or $0.43 per diluted share and full year earnings of $1.17 billion or $2.21 per diluted share. We were pleased with the results for the quarter across all areas of the business, despite a 2016 that proved to be challenging from a commodity price and margin perspective. We are also enthusiastic about MPLX's 2016 results. One year into the combination of MPLX and MarkWest, we remain very encouraged by the growth opportunities in front of the partnership, which will continue to be a source of long-term value for our investors. Moving to the company-owned retail business in 2016, Speedway set all-time records for the year, while continuing to maintain its disciplined approach to cost control. Speedway surpassed segment all-time highs in income from operations, light product gallons sold, merchandise sales, and merchandise gross margin on both percentage sales and absolute dollar basis. Speedway continues to exceed expectations by driving marketing enhancement opportunities and continuing to realize acquisition synergies across the network. Turning to refining and marketing, Garyville successfully completed the largest turnaround in its history during the quarter. As part of the turnaround, we completed an SEC LTF grade project, increasing Garyville's production capacity of high-value Alcolift and light products. We also completed the Galveston Bay refinery export capacity expansion, increasing Galveston Bay's export capacity by 30,000 barrels per day, increasing our total export capacity from both the Galveston Bay and Garyville refineries to nearly 400,000 barrels per day. This morning we also announced our 2017 capital investment plans for both MPC and MPLX, which remain focused on strengthening the sustained earnings power of our business to growth and margin enhancing projects, as well as expanding on more stable cash flow businesses. We are discussing these capital plans separately as the funding will be managed independently and we think the consolidated totals will be less useful going forward. Our capital investment plan for MPC for 2017 excluding MPLX is $1.7 billion. This planned spending for MPC is roughly in line with MPC's capital spending and investments in 2016 and includes nearly $1.2 billion for refining and marketing, $380 million for Speedway, $90 million for Midstream Investments at MPC, and $100 million to support corporate activities. The refining and marketing segment includes $325 million for margin-enhancing investments, including Garyville distillate maximization projects, Galveston Bay export capacity expansion, and approximately $85 million for the South Texas Asset Repositioning project. This morning we also announced a $500 million reduction in the total planned investment for the STAR project. We now plan to spend a total of $1.5 billion for STAR through 2021, while principally maintaining the project's scope and projected returns. The high returns stage investments planned for STAR are designed to enhance profitability and reliability while integrating Galveston Bay at Texas City refineries, creating the second largest refining complex in the United States. We expect to invest about $380 million in Speedway primarily to build new stores and to remodel and rebuild existing retail locations in its core markets, driving continued growth and opportunities in merchandise across the platform. This morning MPLX also announced its 2017 capital spending and investment plan, which is $1.4 billion to $1.7 billion for organic growth plus approximately $100 million for maintenance capital. About 75% of these growth investments are directed to the development of natural gas and gas liquids infrastructure expansion to support MPLX's producer-customer demand, primarily in the Marcellus region. The remaining growth capital will be for the Utica infrastructure build-out in connection with a recently completed Cornerstone pipeline, a butane cavern in Robinson, Illinois, and a tank farm expansion in Texas City, Texas. Additionally, we are executing the strategic actions announced on January 3, to enhance shareholder value. We plan to accelerate the drop-downs of MLP qualifying assets generating approximately $1.4 billion of annual EBITDA to MPLX as soon as practicable and now planned for 2017. Our proposed transaction representing approximately $250 million of this annual EBITDA is already under review by the conflicts committee on the MPLX board and is expected to close by the end of the first quarter. Work related to the remaining planned drop-downs is on schedule and we were pleased to see the qualifying income regulations finally released. We are currently reviewing the amended regulations and pursuing all actions to get comfort around the qualifying income treatment for our proposed fuels distribution model, which will likely involve a private letter ruling on the structure given the substantial differences to precedent transactions. In conjunction with the completion of the planned drop-downs, MPC also expects to exchange its economic interest in the general partner, including incentive distribution rights for newly issued MPLX common units. We expect this exchange will capture the underappreciated value of our general partner interest and optimize the cost of capital for the partnership. Similarly to our long-term intent to maintain an investment-grade credit profile, cash proceeds from the drop-downs and ongoing LP distributions to MPC are expected to fund the substantial ongoing capital return to shareholders. Importantly, all transactions are subject to requisite approvals including the independent conflicts committee of the MPLX Board and will be subject to market and other conditions including tax and other regulatory clearances. Additionally, a special committee of the Board has been formed and has selected an independent financial advisor to assist in the full and thorough review of Speedway to ensure optimum value is delivered to shareholders over the long-term. We expect to provide an update on the review by mid-2017. As we start the new year, I also wanted to provide some observations on the macro-environment we are expecting in 2017. From a commodity and oil price perspective, we are encouraged by OPEC's resolve around production levels and think the prospects for a more balanced supply and demand environment should be supportive of higher crude prices throughout the year. This bodes well for a number of important differentials on the refining side, as well as helping to continue to generate meaningful midstream development opportunities for MPLX. We think the U.S. macro picture remains solid and although we have seen unusual weakness in refining products demand in January, we expect solid economic growth will continue to support good underlying demand for refined products, as inventory levels are worked down over the course of the year. We are also encouraged by the early tone set around energy policy by the new administration. Although the ultimate changes remain to be seen, it appears we may have a legitimate opportunity to walk back some of the regulatory burdens that the industry has had to deal with over the last several years, including excessive delays on important and needed pipelines, a potential revisit of the requirements on the renewable fuel standard, as well as much-needed reform on taxes. The execution of our strategic plan, strengthening commodity prices, recovering refinery spreads, and an improved regulatory environment all contribute to what we expect will be a strong 2017, and believe we are well positioned to deliver long-term sustainable value to our shareholders. Before I turn the call over to Tim, as we announced last Friday, MPC looks forward to welcoming Mike Stice to our Board later this month. Mike comes to us with more than 35 years in the upstream and midstream gas businesses, including as Chief Executive Officer of Access Midstream Partners, where he had one of the largest gathering and processing MLPs. On behalf of the whole MPC Board, it's a pleasure to have Mike joining our ranks as we embark on an exciting year. With that, let me turn the call over to Tim to walk you through the fourth quarter and full year 2016 financial results, Tim?

Thanks, Gary. Slide 4 provides earnings on both an absolute and per share basis for the fourth quarter and full year 2016. MPC's fourth quarter earnings of $227 million or $0.43 per diluted share were up from last year's $187 million or $0.35 per diluted share. For the full year 2016, earnings were nearly $1.2 billion or $2.21 per diluted share, down from $2.9 billion or $5.26 per diluted share in 2015. The chart on Slide 5 shows the changes in earnings over the fourth quarter of last year. It's important to note that the $187 million of fourth quarter 2015 earnings included a $370 million pretax lower cost for market inventory valuation charge. $345 million of this prior year charge is reported in the refining marketing segment, and $25 million was in the Speedway segment with the related tax benefit reflected in income taxes. There were no LCM adjustments in the fourth quarter 2016 resulting in a favorable year-over-year effect for both of these segments and an unfavorable quarter-over-quarter change for income taxes. The quarter-over-quarter comparison also reflects several impacts related to the MarkWest merger and multiple bars on the walk. Midstream segment results increased as we had a full quarter of MarkWest results this year compared to less than one month in 2015. The walk also highlights increased interest expense resulting from the assumed MarkWest debt and an increased allocation of MPL's earnings to the publicly held units in the partnership shown here as non-controlling interest. Turning to Slide 6, our refining and marketing segment reported income from operations of $219 million in the fourth quarter of 2016 compared to $179 million in the same quarter last year. Looking at our key market metrics, an increase in LLS-based blended crack spread had a $105 million favorable impact on segment results as an increase from the Gulf Coast crack more than offset the effects of the decrease in the Chicago crack. The blended crack increased from $6.65 per barrel in '15 to $7.39 per barrel in 2016. We also benefited by $47 million on the sweet/sour differential, as a higher percentage of sour crude in slate more than offset a slightly narrower sweet/sour differential. Offsetting much of these favorable impacts was an unfavorable other gross margin effect of $397 million primarily due to two factors: first, we experienced weaker asphalt price product realizations compared to the fourth quarter 2015. Asphalt realizations were exceptionally strong in the fourth quarter of 2015 and did not increase at the same rate as the rise in the price of crude in the fourth quarter of 2016. Second, we experienced weaker gasoline product price realizations versus the LLS-based crack spread reported in our market metrics for the quarter. Segment results also reflected an unfavorable impact from direct operating costs of $70 million, primarily related to turnaround activity in the quarter. Turnaround and major maintenance costs were $0.45 per barrel higher in the fourth quarter of 2016 compared to the fourth quarter of 2015. Turning to Slide 7, we’ve also provided a sequential comparison of the refining and marketing segment results for the fourth quarter of '16 compared to the third quarter of 2016. A decrease in the LLS-based blended crack had a $201 million unfavorable impact on segment results, as an increase in the Chicago crack spread was only partially offset by an increase in the Gulf Coast crack. The blended crack spread decreased from $8.08 per barrel in the third quarter to $7.39 per barrel in the fourth quarter. Direct operating costs were $70 million higher than the third quarter, primarily related to turnaround activity at our Garyville refinery. A favorable other gross margin effect of $257 million almost completely offset these unfavorable effects. The change in other gross margin was primarily due to two factors: first, we experienced stronger product price realizations versus spot market prices used in the LLS-based crack spread reported on our market metrics. Second, crude and feedstock acquisition costs compared to the market indicators were more favorable in the fourth quarter compared to the third quarter. Slide 8 provides the drivers for the change in refining marketing segment income for the full year versus 2015. Income from operations was $1.5 billion in 2016 compared to $4.1 billion in 2015. The LLS 6-3-2-1 blended crack spread had nearly a $2 billion unfavorable impact on the full year segment results with lower crack spreads in both the Gulf Coast and Chicago markets over the full year. The blended crack spreads for the full year decreased from $9.70 per barrel in 2015 to $6.96 per barrel in 2016. We had $334 million improvement from the sweet/sour differential as a $0.42 wider differential combined with about 5% higher crude oil throughput over the full year. The primary contributors for the nearly $1.1 billion unfavorable other gross margin variance in this walk were narrower gasoline and diesel price realizations versus the LLS-based crack spread in 2016 compared to last year. Finally, the value of refinery biometric gains continues to be lower than last year due to the absolute lower refined product price environment in 2016. The $407 million increase in direct operating costs over 2015 was related to the higher refinery turnaround activity in 2016 versus prior year. Turnaround and major maintenance costs increased $0.70 per barrel compared to 2015, with significant turnaround activity occurring at Garyville, Galveston Bay, and Robinson in 2016 compared to a fairly light scheduled turnaround activity in 2015. In addition, year-over-year results reflect the favorable effects to 2016's full year segment results caused by the $345 million LCM charge in '15 and the subsequent reversal of the inventory valuation reserve as refined product prices increased in 2016. Moving to our other segments, Slide 9 provides the Speedway segment results for the fourth quarter and full year. Speedway segment income was $165 million in the fourth quarter of 2016 compared to $135 million in the same period of 2015. The increase in segment income was primarily due to lower operating costs, increased merchandise margin, and the absence of an LCM adjustment in '16 compared to the 2015 LCM charge of $25 million. These favorable impacts were substantially offset by lower light product margins, which decreased from $0.1823 per gallon in the fourth quarter of 2015 to $0.1617 per gallon in the fourth quarter of '16. Speedway's income from operations for full year 2016 was a record $734 million compared to $673 million in '15. The increase in segment income was the result of record merchandise margin, gains from asset sales, and the effects of LCM adjustments mentioned earlier. The favorable impacts were partially offset by lower light product margins which decreased from $0.1823 per gallon in '15 to $0.1656 per gallon in 2016. So far this year, we've seen a roughly 3.8% decrease in same-store gasoline volumes when comparing January '17 to January of last year due to lower demand seen across our marketing area, in addition to the impacts from the ice storms in the southeast. For the same period, U.S. gasoline demand decreased approximately 6.5%. As Gary mentioned earlier, despite the seasonal weakness in demand, we continue to expect gasoline demand to rebound to levels comparable to 2016. Slide 10 provides the changes in the Midstream segment income of $151 million quarter-over-quarter and $491 million year-over-year. The increases were primarily due to the combination with MarkWest on December 4th of last year and from the result of new pipeline and marine equity investments during 2016. From a cash flow perspective, Slide 11 presents elements of changes to our consolidated cash position for the fourth quarter. Cash at the end of the year was just over $887 million. Core operating cash flow before changes to working capital was an $896 million source of cash. Working capital was a $95 million source of cash for the quarter, as the price impact on crude payables more than offset inventory impacts in the quarter. Cash flow for the quarter also reflects opportunistic equity issuances by MPLX through its ATM program during the quarter, with net proceeds of $277 million. Returns of capital to shareholders by way of dividends and share repurchases were $210 million during the quarter. Going forward, we intend to maintain our focus on disciplined and balanced approach to capital allocation, including careful investment in the business and continued return of capital to shareholders. As Gary mentioned early, we expect cash proceeds from drop-downs and ongoing LP distributions to fund the substantial ongoing return of capital to shareholders. All conducted with the continued focus on maintaining an investment-grade credit profile at both MPC and MPLX. Slide 12 provides an overview of our capitalization and financial profile of the business at the end of the year. We had $10.6 billion of total consolidated debt, including $4.4 billion of debt at MPLX. Total debt-to-book capitalization was about 33% and represented 2.5 times the last 12 months adjusted EBITDA on a consolidated basis or about 1.9 times if we exclude MPLX. We continue to show the metric without MPLX as we think it's more useful to show the bifurcated capital structure, given the effect of the relatively higher leverage of the growing partnership and consolidated matrix. Slide 13 provides updated outlook information on key operating metrics for MPC for the first quarter of 2017. We're expecting the first quarter throughput volumes to be down slightly compared to the first quarter of 2016, due to more plant maintenance during the quarter. Total direct operating costs are expected to be $10.05 per barrel on a total throughput of 1.68 million barrels per day. The increased operating cost quarter-over-quarter is primarily attributed to plant maintenance, mainly in the Gulf Coast where turnarounds will occur at all three refineries. Gulf Coast crude throughput is estimated at 800,000 barrels per day. Included in the first quarter of plant maintenance is the first turnaround of processed units from Garyville's 2009 major expansion. While costs are higher than the first quarter of last year, we expect the full year plant maintenance cost to be similar to 2016 levels. Manufacturing costs on a per barrel basis are also expected to be higher due to higher forecasted natural gas prices combined with lower throughput volumes. We expect to continue to see the advantage from processing sour crude as reflected in our expectation that it will make up about 64% of crude oil throughput in the first quarter. Estimated percentage of WI type-priced crude is 15%. Our projected first quarter corporate and other unallocated items are estimated at $80 million. With that, let me turn the call back over to Lisa. Lisa?

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.

Gary, I was just wondering if you could talk a little bit about the border adjustment tax. If it happens, how would it affect MPC's behavior, how it would affect product markets in general, and maybe the likelihood you think that it would get passed?

Well let me start, in the event that it was to be passed, Brad, the refiners are going to have to be able to pass any incremental cost on to the consumer. I'm very confident that we will be able to do that, just as we did when crude prices were $100 to $147; we passed the price on to the consumer. Now the calculus is really political on whether I think it would be passed, because that's going to be the concern trying to pass something through Congress that is going to increase domestic crude prices at the benefit of domestic producers to the detriment of the consumer; I think it is going to be difficult. But if it were to pass, we will be flexible, we will be able to move the price on to the consumer. Now I’ve had a lot of questions, Brad, what do I think will happen with incremental exports? The companies that have their refineries in the Gulf Coast have the infrastructure and logistics to be able to export; they will be the ones who will still be the most likely to export because we'll have the lowest cost. So, as we stated, we are a little over 300,000 barrels per day of exports in this quarter. We now have the infrastructure set that we can go around 400,000 and move up to 500,000 barrels per day. So we're in a very, very good position. Even if border adjustments were to happen, I think Marathon is in one of the best positions because of our logistics and infrastructure; our optimization between PAD-2 and PAD-3 refining, I think we'll be in good shape if it were to happen.

Okay. Thanks for that color, Gary. And then shifting over to the OPEC cut, I was curious if you've seen any impact on your volumes? Because of that cut, one of your peers said that they were getting prorated. And has there been any meaningful impact on the system overall?

Yes, let me have Mike Palmer cover that.

Yes, Brad. Certainly, we've seen the OPEC cuts. We have seen that there has been a tightening in some of the sour foreign opportunities that we've seen in past quarters. We at MPC have strong relationships and contracts with Middle-East suppliers. So far in January and February, we’ve had turnaround, so there has been really no impact on us; our demand has been down. But as I said, we've got very strong relationships, and we don’t think that there is going to be a big impact. We are already in the market buying March and April crude oil for the system, and we've continued to see some real values in sour crude opportunities. So, I don’t think it's going to have a big impact on us.

First question is just to follow up on some of the demand commentary. Gary, just curious what you're seeing on the demand front. Why the data has been as weak as it has at the start of the year and what makes you confident that it will get back to a stable outlook as we progress through the year?

Well, first of all, Phil, I'll take you back to the same time last year. We didn’t have a winter, if you recall. So last year demand in January was strong; plus we were on the rebound after the rapid decline in crude prices and therefore gasoline prices. Additionally, there were really no upsets in the weather patterns over the same period last year, leading to a very strong first quarter volume. Now we've had a couple of big storm cells that have come through mainly the Southeast, earlier in the year. That has caused pretty big upheaval. Secondly, we have seen a lot of fog in and around the Gulf Coast regions used in ship channels, all the way through to Florida that has caused some supply and demand issues. But I think we'll get beyond this, and everything seems to have really got back into a different place right now. What we’re seeing, as you see crude prices increase, is that in many of our markets, Tony Kenney's Speedway operations in many of the markets, he has to lead the price up in order to get the incremental cost to the street. That will have some short term hit on demand, but I believe as long as crude prices continue to have a methodical pace upwards, we will be able to get that price to the street and not see too big of a hit on volume.

Okay, got it. My second question is about maintenance. The first quarter has shown very high levels for both you and your competitors. How do you view maintenance for the full year in the MPC system compared to last year? Are you expecting that the whole industry will experience significant maintenance from February through April? Does that align with your perspective?

Let me have Ray Brooks first handle our maintenance.

Okay, as Tim stated earlier, our maintenance for the first quarter is up substantially, because in the Gulf Coast we have significant turnaround activity at all three of our refineries, so we're up for the quarter. But for the year, we look at being flat with 2016, where we actually ended up at 2016, and I will say, in 2016 we were very aggressive about bringing our spend levels down. So we're projecting to hold it even with that for the year.

As we look across the entire industry, we see that our refining in PAD-2 and PAD-3 is roughly equal to last year's total maintenance, with possibly a slight increase in the Gulf Coast. The work completed in January is slightly ahead of schedule and under budget, indicating strong performance. While there are concerns in the industry regarding the labor force, I don't anticipate this will significantly affect the refining sector. However, it's worth monitoring. Overall, we are in excellent shape with all of our turnarounds.

Hi. It's actually Johannes here pinch hitting for Ed. First and foremost, just a quick question on it's really the logistics side of the house. It seems like there was a bit of a bump in MPLX EBITDA guidance. How much of that is throughput utilization in the Northeast from kind of low capital intensive improvements?

Don, you want to take that?

Yes, I don’t think any of it was related to that. I mean, we’re just seeing stronger demand as we especially are moving into '17; we feel great about the growth opportunities that we have. The logistics and storage business is performing really, really solidly, and we have some very good potential growth opportunities on the gathering and processing side.

Okay. Are there any regional differences or specific drivers you would like to highlight?

Well, I would say that from our perspective, the Marcellus probably has some very strong opportunities for us, and we're seeing good volumes there. Our major producer customers such as Antero and Range and EQT have been very bullish on volumes going into '17. We also see a lot of optimism and opportunities for us in the Southwest. Our capital budget probably will spend more money in the Southwest this year than we do in the Utica region.

Okay. That's very helpful. And then circling back to the border adjustment tax very quickly, out of curiosity, do you have a sense as to either for yourselves or the industry as a whole what percentage of WCS is on long-term contract?

Well, Mike, do you have any information on WCS?

Well, on long-term contract, again going back to WCS, WCS really refers to the heavy Canadian; WCS is a particular grade, but there are many heavy Canadian grades. Most of that crude oil coming out of Canada is either sold spot month-to-month or on 30-day or 60-day kind of evergreen contracts. So it can be turned around fairly quickly. I think that regardless of the border tax, Canadian crude, the heavy Canadian continues to grow, and that crude will flow into the U.S. Does that answer your question?

I think it does, more or less. So most of it is at the outside as kind of a 60-day contract?

Yes, most of that is sold on 30-day or 60-day evergreen contracts.

Gary, I realize that the process around Speedway is still ongoing. But I wonder if I could ask you to frame your latest thoughts on the viability of a separate retail business while still pursuing the fuels distribution drop. I know control and influence over fuels distribution is important to the refining business, so I was wondering if you could talk about the viability at a very high level, albeit we're still waiting on the result of the outcome of the review by mid-year.

Sure, Doug. As we mentioned in the January 3 call, the viability is one of the scenarios we are considering. We are conducting a thorough review of all possible scenarios. It's important to evaluate counterparty risk, the balance sheet of MPC after the fuels distribution is implemented, and the credit profile. We will analyze all scenarios without favoring one over the others. Our statement from January 3 indicates that we will conduct a comprehensive review and determine the outcome by mid-year.

Okay, I thought it was worth a try, but we will need to be patient. Gary, my follow-up question is also about tax, but it's slightly different. I'm curious about how you are preparing or planning internally. You are clearly a significant cash taxpayer. What scenarios are you considering regarding the potential changes in corporate tax rates, specifically the Brady Bill versus a 15% corporate rate, as well as the offsets from depreciation? How are you preparing for these changes? And ultimately, if the tax rate decreased, would you anticipate a significant reduction in your cash tax payments? That's what I'm trying to understand. I'll leave it there. Thank you.

Sure, Doug. Tim, you want to take that?

Sure, Doug. I think the picture is still a little bit murky in terms of how all the potential reforms play out. I mean certainly the reduction and the proposed change in the corporate tax rate, either under the Republican blueprint or under the Trump plan, that potentially 20% to 15% is obviously very helpful and could dramatically lower the cash tax burden of the company. There is also, obviously, a proposal to eliminate interest expense as a deduction, and there is part of the proposal that incorporates immediate expensing of capital and then, obviously, the border tax adjustment. There is really a pretty complicated set of potential changes that come out, and we're trying to look at them as clarity is offered in terms of what the net impact could be on the business and sort of where it plays out. I think a little bit though to handicap exactly what form it takes does remain difficult, but certainly there are elements to the tax reform that we think are extraordinarily positive, the lowering of the tax rate, and the immediate expensing are two areas that we're very supportive of, and what the offset from some of the other provisions could be, I think remains to be seen at this point. It would be tough to handicap or indicate exactly where that’s going to come up, but we’re going to look at it pretty carefully. We certainly are entirely supportive of the notion of tax rates going down to make the U.S. more competitive on the global stage, and we think those are very productive discussions and could be fantastic if implemented. But I think it's tough to say at this point what the net impacts on a cash tax basis for us could be?

I think the first question is for Tim. Tim, you mentioned that the quarter showed improvement in outer margins due to two factors. One factor is stronger price realizations than what the screens indicate, and the other is the true and fiscal purchase call, which had a small benefit at both ends of the benchmark. Looking at the current quarter, do you expect those trends to continue and become more favorable, remain the same, or become less favorable?

Well, we wouldn’t give guidance necessarily on the trending into the first quarter. I mean I think we would highlight that the third quarter from a sort of product price realizations on a number of fronts was what we thought to be unusually low from product price realizations. A lot of those impacts did not occur again in the fourth quarter, and less likely we would see those as we go forward. But we really would not provide guidance necessarily on how that will shake out in the first quarter; we’ll see what the product markets look like. As Gary indicated, in environments where prices are rising, there is generally a little bit of lag in terms of the catch-up on street prices, which will have a product price realization impact. But again, I think we would probably characterize the third quarter as a little bit unusual relative to the realizations that we've seen over the last several years here.

Tim, in the fourth quarter, did you sell any inventory? Did you sell down anything from the inventory?

No. We actually had a slight inventory build into the fourth quarter. So there was no net liquidation of inventory in the fourth quarter.

The second question is that, Gary, should we assume the MPLX $1.7 billion in the CapEx for this year is going to be fully funded? It's not going to require any support from MPC? And also, wondering, is there any additional color in terms of the drop-down pace for this year? Are we going to do the $1.4 billion totally in this year, $250 million in the first quarter; should we assume the other remaining get dropped down in the fourth quarter?

I will address the last part of your question first. We have already transferred approximately $250 million to the conflicts committee and are currently assessing the best pace for the rest of the year. No additional amounts have been turned over to the conflicts committee at this time. It was anticipated that you might see another amount, though I wouldn't call it a regular occurrence, perhaps another chunk around the third quarter to distribute it more evenly throughout the year. I'll hand it over to Don to discuss the budget and his funding plans.

Yes, Paul, on the $1.7 billion, we would expect to fund that all with MPLX, without any support from the parent. You'll recall that in 2016 there was a real focus on capital preservation; the balance sheet and the leverage metrics at MPLX were higher than we wanted them to be and what we were targeting. We started out with about 4.7 times leverage at the beginning of '16. We're down to 3.4 times by the end of '16, and we're in a very comfortable position to be able to fund our organic growth through a combination of equity and debt.

Thank you. Gary, I would like to comment on the retail situation. Considering the significant decline and the change in gross profit, I believe it would be wiser to keep Speedway as part of the company rather than spinning it off. Thank you.

Thank you, Paul. I appreciate your comments; always appreciate your comments.

Regarding the acceleration of the Midstream drops, does the commitment to contribute all the assets this year suggest that you may forgo the private letter ruling on field distribution? And I suppose by extension, did the recent IRS regulation give enough comfort on dropping that field distribution business down as qualifying income?

Sure, Tim?

Yes, I think the regulations that are issued were we think positive, we don’t see anything in them at our initial review that is suggestive of anything that would be a gating item to fuels distribution. Nonetheless, we still think it’s prudent that we will pursue a PLR just given the size of the earnings that represent and the impact it could have on the partnership. So, we're certainly, as Gary said, pleased to see them finally issued; we are working through them now and again think it's still likely that we would pursue a PLR just to make sure we've got high levels of comfort that we're not putting something in the partnership that would not be qualifying in nature and potentially threaten the partnership's QI treatment.

Given your drop-down guidance, do you expect that PLR then soon? Sometime this year then? Is that what you're suggesting then with the guidance?

You never know exactly when things will happen, and there may be some delays with certain PLRs. However, we will continue to address them now, and we anticipate submitting the PLR in the near future while awaiting feedback from the Treasury. We're still optimistic that all of these developments could occur in 2017, but that remains uncertain.

Okay. Thanks. Second question, can you give us your thoughts on the potential change in the RIN obligation from refiners to blenders and what potential impact that might have on Marathon?

Well Chi, if you look at how RIN prices have already come down from just over a dollar early in the fourth quarter to $0.47 today and that is not caused necessarily by concerns over the change in the point of obligation. I think it’s really caused from the new administration taking over and stating that it does not like this RIN requirement and the renewal volume obligation requirements. As we've always said, the market can be balanced at just a little bit under 10% in ethanol. Refiners and blenders, we need the ethanol in order to be able to meet our octane requirements. So I don’t think it’s a volume obligation versus RIN cost scenario; I think it's really we need to step back and look at does this renewable fuel standard make sense in any way going forward, and my answer would be no, the way it's set today on an absolute volume basis needs to be changed to a percentage basis, and if that happens, that will take care of all the RIN costs.

Okay. Thanks. Gary, one other follow-up. If I read the IRS regulations correctly, and I might not be able to, that was a hard document to get through, but it appears that they are ruling that the sale of RIN is considered a qualifying event. Does that change your thinking at all on possibly dropping RINs if they're still around into MPLX down the road?

Well, one of the things that we have always said. We do not see the RINs as affordable, and so it will be very difficult to separate RINs and have a steady revenue stream from RINs. It's our belief that the RINs are in the crack spread, and Mike, I'll turn it over to you to see if you see any differently.

No, Gary. I wouldn’t answer the question any differently than you just did.

This is related to Speedway and retail. What drives the pickup in capital spending here in 2017 versus 2016 at Speedway? And then, Gary, can you talk about how you think about the outlook for retail margins next year? Especially if you're right that crude prices continue to grind higher?

I'll address the latter part. If crude prices change at a slow and steady pace, as I mentioned at your conference, we expect that by the end of 2017, prices will be in the $60 to $65 range. A gradual increase to that level will allow us to adjust prices without significantly affecting demand. During the conference, I noted that for every $0.50 increase in retail price, demand might decrease by about 1.5% to 2%, varying by region. However, I don't anticipate a major impact; we expect gasoline prices to remain flat overall, while diesel will rise a couple of percent for the year. Now, I'll pass it over to Tony to discuss his capital budget for the year.

The biggest change in our capital is we had a provision in our capital for 2017 to be able to comply with the Euro Pay MasterCard, Visa requirements at our dispensers at 2,700 locations. As you know, that date has changed; we have the capital in there; it's not going to go away. Ultimately, sooner or later, the U.S. is going to have to comply with the ability to take chip cards at our retail locations. So we're currently evaluating how we want to approach along the changed timeline, our investment in the changes that will make it retail. So most of that change is in regard to how we are going to go forward with the investments we need to make in accepting chip cards at our locations.

I appreciate the comments. And the second is on Dakota Access. Can you just talk about where we are in terms of the Dakota Access Pipeline and when you ultimately expect that crude to start flowing?

Okay, Don, do you want to take that?

We are optimistic, especially with the recent updates from the administration regarding the pipeline. We believe that the pipeline will be completed soon. From MPLX's perspective, we are ready to invest in the pipeline once the necessary conditions are met. While it may not be appropriate for us to discuss the specifics of first oil, we are confident that the transaction and completion of the pipeline will occur in the near future, and we are well prepared for it.

Gary, maybe just to come back to some of the retail questions here. You mentioned on the January 3 call, I think, in response to a question, that you felt that most of the RINs expense is in the crack. If that's the case, then as we think about retails EBITDA generation down the line, should we think about it as sans RINs price? And that it's maybe a little lower performer than what we've been used to?

No, I don’t think so, Roger. We're not seeing any value related to RINs on the Speedway side. Marathon is the primary blender for much of our volume that goes into Speedway, but I don't anticipate any changes at Speedway due to potential adjustments in RINs. Tim, do you view it differently?

No, I think that’s correct, Gary. Ultimately, Marathon serves as the blender where this is getting picked up. So, Roger, there is really nothing related to Speedway segment earnings that involves RINs. The RINs are reflected in pricing and influence the transfer pricing we consider in the business, but there isn't anything that would change, even if there were some separation in the future, which remains to be seen.

No.

Okay. So there is not an allocation risk, like you said, on the transfer pricing or anything?

No.

Okay. Perfect. And then, Gary, can you give us a little more detail on exactly who's doing the evaluation of Speedway for the spin and maybe what Marathon management's input is on that directly?

Yes, Roger. As I mentioned, the Board has appointed a special committee that is currently working with a financial advisor. We want to maintain confidentiality around this process, so we won't disclose the advisor's identity at this moment; we will do so in the future. My role isn't part of the special committee, as I felt it was crucial for this process to remain completely independent. The committee consists of five Board members, but I am not one of them. Management will gather and provide a significant amount of data for the committee and the advisors to analyze, but the primary responsibility of management is just to compile this information and deliver it.

We've tracked about 10 Bcf a day of new pipelines coming on in the Marcellus this year and another 10 Bcf a day in 2018. I was wondering if you could talk about how you expect this infrastructure to impact Northeast natural gas prices and opportunities for you in the Marcellus?

So, Don.

Sure, Jeff. We are monitoring those individual projects and are confident that many will ultimately be completed. From our perspective, the past year has been focused on supporting our producer-customers and providing them opportunities to transport NGLs out of the Utica Marcellus. Based on my discussions with producer-customers, movements of residue gas out of the Utica Marcellus are a significant factor in their growth plans. We expect that over time, as those specific projects are in place, the differential will likely decrease to about a $0.50 differential, primarily representing transportation costs. As you know, in the summer and at other times of the year, those differentials have reached as high as $1.50. Therefore, we anticipate improving the differential for our producer-customers by approximately $1.

Great. You've previously guided to about $7.5 billion of organic spending between 2016 and 2020. It sounds like your 2017 guidance is kind of in that fairway. Any bias higher or lower on your long-term organic spending outlook?

I think we're really confident about and optimistic about the opportunity to identify and to deliver on organic growth projects, Jeff. So I would say that if I had a bias, it would be on the higher side of that, not on the lower side of that.

Just wondering if you can give us an update on how you're thinking about your return of capital program this year and how you guys balance the pace of your buybacks stock with the visibility you might have with your drop-down plan.

Again, if we look back at '16, obviously, the buyback activity is always a function of sort of where we see operating cash flow in the business. But I mean, I think with the plans that are announced with regards to the drops and again the prospects and at least the potential for the full $1.4 billion to be dropped into MPLX in 2017, again subject to our maintaining an investment grade credit profile and any adjustments we may need to make to the capital structure to support that. The primary source of those funds is going to be in return of capital, so that will come in the form of potential considerations around the dividend and certainly for share buybacks which we think are the most efficient way to get the capital back. I think our expectations based on what's laid in front of us for '17 is that capital return will be a much larger source of activity in 2017 and again, outside of any adjustments we make to debt will be the primary use of the cash.

Thanks for that. Just a follow-up, unrelated, can you give us some color around the scale back of the capital at the STAR program? Is there items that you are no longer investing in, or did you figure out some work around where you're able to obtain the same result without spending the money? Just trying to get a better understanding of the change there.

Ray, you want to talk about what the reduction entails?

We are making steady progress on the STAR program, which we now estimate to be a $1.5 billion project. Everything is looking promising. To provide some additional details, the STAR program includes several components within the Galveston Bay TRD complex. The initial part was implemented in 2016 when we repurposed a resid de-asphalting unit to process resid, which we then expanded. This move produced outstanding returns, surpassing our expectations and generating more EBITDA than we had anticipated. Looking ahead, there are three additional components to consider: revamping our sour crude unit, expanding our resid hydrocracker, and evaluating a diesel hydrotreater. Currently, we are advancing engineering for two of these components: the revamped crude unit and the resid hydrocracker. We haven’t advanced engineering for the diesel hydrotreater yet, as we are assessing each component independently for their return. Two of the projects exceed our refining total rate of under 20%, whereas the diesel hydrotreater does not meet that threshold. That's a bit more detail on this project's direction.

And Benny, what Ray was talking about there, our expectation for 2016, the de-asphalting unit that was complete, we had expected about $80 million of EBITDA, and now we're projecting that to be north of $100 million. So a very, very strong increase due to the performance of the unit.

A quick follow-up to Johannes' question on MPLX guidance. Don, can you comment on what's included for DAPL in 2017 in the guidance?

There is nothing included for DAPL in guidance.

Okay. And if I remember correctly, you guys already pre-funded to CapEx for DAPL? Is that right?

We currently have about $2.7 billion in liquidity, including nearly $300 million in cash, which puts us in a very strong position as we look ahead.

Okay. That's helpful. And then a quick follow-up. I'm assuming you guys have been in communication with rating agencies as it relates to some of the pro forma debt-to-EBITDA metrics following the drop-downs. Can you give us some commentary on what we can expect it would take to retain IG for both levels there?

Sure, we've had dialogs and even with the negative outlooks that Moody's and Fitch put out, more recently we have talked even beyond that. But I think we feel very comfortable that anything that we do with regard to capital structure will be supportive for both entities. For MPLX, what we've indicated is that about a four times debt-to-EBITDA over the course of the time makes sense and is an appropriate amount of leverage for a partnership that's investment-grade rated. You may have seen even yesterday S&P published that MPLX on a standalone basis is investment-grade, that initial rating was based on the rating of appearance, so we think that's very encouraging. On the MPC side, we will continue to look at and evaluate; I think the initial reactions to the announcements have generated some concern about the increase in leverage, and again what we've indicated is that we will take actions and adjust the capital structure as we need to, to support that profile over time. Even with all of the actions we’re taking here, I think it's worth reminding everyone that the amount of cash distribution that comes back to MPC, even once we work through a GP buy-in, are going to be substantial, and that will afford us a tremendous amount of financial flexibility to make adjustments as we need to, as well as continue to return capital. So I think we're very comfortable that the investment-grade credit profile for both the entities is something that we'll be able to maintain, and we'll take action to support that over time.

Okay, that’s really helpful. Thanks, guys.

Just wanted to ask you about your decision to repay or prepay some debt last quarter. I'm just wondering where you're thinking about going forward? Did you make a decision again, and could we see you scale that down over the next quarter? Thanks.

Well, again Spiro, it's Tim. I think the consideration around the debt repaid in the third quarter again was just based on where we saw the full year earnings coming out for refining and just making sure that again we're calibrating the capital structure for the underlying earnings. Any further adjustments to capital structure would really be based on sort of what we're doing with the drops and what things will look like in terms of the new debt taken out of MPLX and what that could mean for the consolidated picture. So it's something we'll look at; I don’t think there is anything that compels us at that point, but again, it would be a function of the drops and what the pro forma capital structures look like once this activity is completed. So it's something we'll continue to monitor; no specific guidance that we would provide right now other than, we're going to continue to watch very carefully and adjust the leverage situations at MPC as we think appropriate.

Thank you, Jason. And thank you for your interest in Marathon Petroleum Corporation. Should you have additional questions or would like clarification on topics discussed this morning, Denise Myers, Doug Wendt, and I will be available to take your calls. Thank you for joining us this morning.