Marathon Petroleum Corp (MPC) — Q3 2018 Earnings Call Transcript

Welcome to Marathon Petroleum's third quarter 2018 earnings 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 and CEO; Greg Goff, Executive Vice Chairman; Tim Griffith, CFO; Don Templin, President of Refining, Marketing and Supply; Mike Hennigan, President of MPLX; as well as other members of the executive team. We invite you to read the safe harbor statement on Slide 2. It's a reminder that we will be making forward-looking statements during the call and during the question-and-answer session. Actual results may differ materially from what we expect today. Factors that could cause actual results to differ are included there as well as in our filings with the SEC. Now I will turn the call over to Gary Heminger for opening remarks on Slide 3.

Thanks, Kristina. Good morning, and thank you, everyone, for joining our call. Earlier this morning, we reported another impressive quarter. Our net income attributable to MPC was $737 million, and we were pleased to report adjusted EBITDA of approximately $2 billion for the second quarter in a row. Our refining throughput was strong at slightly north of 2 million barrels per day. This was especially impressive, considering we had both our Detroit and Canton refineries in turnaround during the quarter, both of which were completed on time and under budget. Our integrated business model, together with our team's commercial and operational execution, continues to create opportunities for us to capture value, driving over $1.2 billion of cash from operations, which allowed us to return over $600 million to shareholders in the quarter. During the quarter, we repurchased $400 million of shares, even though our repurchase ability was limited by the proxy solicitation period. Through the first 9 months of this year, we have returned $3.2 billion of capital to our shareholders and remain committed to our strategy of returning excess cash flow going forward. And we expect to resume our repurchase activity shortly as market and other conditions allow. On October 1, we closed on our transaction with Andeavor. Both sets of shareholders demonstrated overwhelming support as we are now the leading integrated downstream energy company in the U.S. As we look forward, we see extraordinary potential across our nationwide platform, including over $1 billion of annual run-rate synergies within the first three years. Over the first few months, our teams will be diligently working on integrating the business, deploying the best practices, and aligning the cultures. In just the first month, I'm especially impressed with the enthusiasm and energy of our commercial teams. We are already harvesting synergies and plan to report on our progress regularly, starting in 2019. As we look to the fourth quarter and into 2019, we see a lot of positive market trends for our business. Both global and U.S. economic growth continue. While risk factors and the recent market pullback have been the focal point of news headlines, the fundamentals that underpin distillate demand appear strong. Inventory levels remain moderate and days of supply are near 5-year lows. We believe current distillate trends, combined with the impact of changing IMO regulations around sulfur content, will support strong distillate demand well into the future, and we are well-positioned given the investments we have made in our business over the last decade. As you may recall, MPC now has the highest coking and hydrocracking capacity in the U.S. Despite recently weaker gasoline markets, our integrated business model allows us to both flex our yields to maximize our gasoline-to-distillate ratio as well as take advantage of export opportunities. In October, we exported approximately 370,000 barrels per day. With limited turnarounds as we head into 2019, our refining system has the opportunity to capture what appears to be sustainably wider crude differentials in many of our markets. With Detroit and St. Paul Park now out of turnaround, both plants are poised to harvest these wider WCS differentials. We expect to run approximately 500,000 barrels per day of various Canadian crudes across our new refining system. The differentials across these grades, and in particular WCS, appear to be sustainably wider, given meaningful logistics constraints relative to production levels. As we look at our optionality in crude slate, we see opportunities to maximize usage of WTI-based crudes. With the addition of 400,000 barrels per day of MidCon refining capacity, we now have over 1 million barrels per day that are very well positioned to capture the attractive crude differentials in those markets. We are currently wrapping up our fourth-quarter plant turnaround for the Martinez refinery and have some minor maintenance planned at the Robinson refinery. Lastly, as you may have already seen, we announced that we are evaluating the financial business plans of Andeavor Logistics, with the intent to move toward financial policies more consistent with our approach toward MPLX. MPC plans to engage advisers and begin the process of assessing all options for the 2 MLPs, which could include MPLX acquiring ANDX or ANDX acquiring MPLX. Our comments will be limited on this as we work through our evaluation and process, and we will provide an update to investors at the appropriate time. Now let me turn the call over to Don to cover additional highlights for the third quarter and an update on our integration process.

Thanks, Gary. Turning to Slide 4. We reported third quarter earnings of $737 million and income from operations of $1.4 billion. Refining & Marketing delivered strong results with third quarter segment earnings of $666 million. We operated exceptionally well throughout the quarter and achieved 97% utilization across our refining system, despite having our Canton and Detroit refineries in turnaround during the quarter. Within the Midstream segment, which largely reflects the financial results of MPLX, we reported income from operations of $679 million, driven by strong pipeline throughput volumes as well as record gathered, processed, and fractionated volumes during the third quarter. MPLX announced several new projects during the quarter, including planned investments in two long-haul pipelines as well as the acquisition of a Gulf Coast export terminal in Louisiana. We encourage you to listen in on the MPLX call at 11 a.m. this morning to hear more about MPLX's performance and the opportunities across the business. We would also point you to ANDX's call on November 7, as both partnerships will be part of our Midstream segment going forward. On the retail side, Speedway reported income from operations of $161 million. In the third quarter, gasoline and distillate margins continued to be adversely impacted by rising crude oil prices. In a rising market, there is a delay in our ability to react at the retail level, which pressures margins. Our focus continues to be optimizing total gasoline contributions between volume and margin as market conditions adjust. While our third quarter earnings materials do not reflect the results for Andeavor, I would like to provide some key statistics for the quarter, which demonstrate continued strong performance in the legacy business. The legacy Andeavor refining segment had throughput of 1.1 million barrels per day, which was roughly 97% utilization. The Andeavor index was $16.03 per barrel for the quarter with a margin capture rate of 80%. Manufacturing cost was $5.50 per barrel. We look forward to reporting on a consolidated basis starting in the fourth quarter when we think the tremendous benefits to combining these two powerful businesses will be evident. As shown on Slide 5, one of the first tangible signs of integration comes from the retail segment. We immediately started converting the Andeavor company-owned and operated stores to the Speedway brand. At the end of October, roughly 90 sites in the St. Paul and Minneapolis markets have been converted, and we expect to complete approximately 200 sites by the end of 2018. These conversions are an important element in the synergy capture we are driving. We are learning each day, implementing the best practices from each organization, and while the conversions of the Speedway stores are an easy first milestone to point out, we look forward to providing more updates across our refining, midstream, and retail organizations at our upcoming Investor Day. With that, let me turn our call over to Tim to provide a more detailed walk-through of the financial results for the third quarter.

Thanks, Don. Slide 6 provides earnings on both an absolute and per share basis. For the third quarter 2018, MPC reported earnings of $1.62 per diluted share compared to $1.77 per diluted share last year. Third quarter 2018 earnings of $1.62 per diluted share included pretax charges of $49 million related to pension settlement and transaction costs or approximately $0.08 per share. The bridge on Slide 7 shows the change in earnings by segment over the third quarter last year. The log shows a decline of $431 million in the Refining & Marketing earnings. Approximately $230 million of the variance was driven by the February 1 dropdown transaction as we don't reflect the impact of these drops in prior period segment results. The remaining variance is driven by lower crack spreads and higher turnaround costs in the quarter. Speedway's third quarter results were lower than the same quarter last year by $47 million, primarily related to lower light product margins and higher operating expenses. The $324 million favorable Midstream variance was due to the February 1 drop of refining logistics and fuels distribution services to MPLX as well as higher pipeline volumes and record gathered process and fractionated volumes compared to last year. The unfavorable year-over-year variance in items not allocated to segments was largely due to transaction costs related to the combination of Andeavor and increased employee benefit costs. Interest and financing costs were $82 million higher during the third quarter of this year due to higher debt levels at MPLX compared to last year and $45 million of pension settlement charges in the quarter. Income taxes were a benefit as lower taxable income, combined with a lower tax rate, resulted in $193 million lower taxes compared to last year. The higher earnings in MPLX resulted in an increased allocation of MPLX earnings to the publicly held units in the partnership, shown here as $103 million in noncontrolling interest variance. Turning to Slide 8. Our Refining & Marketing segment reported earnings of $666 million in the third quarter of '18 compared to nearly $1.1 billion in the same quarter last year. The LLS-based blended crack spread had a $111 million unfavorable impact to segment results, largely due to lower Midwest and Gulf Coast crack spreads. The LLS blended 6-3-2-1 crack spread was $8.03 per barrel in the third quarter of '18 as compared to $8.68 per barrel in the third quarter of 2017, reflecting to some extent the wider cracks experienced during Hurricane Harvey last year. Our ability to take advantage of crude differentials provided substantial benefits in the quarter. The widening sweet/sour differential had a positive effect of approximately $283 million versus last year, with the differential increasing from $5.42 per barrel in the third quarter of '17 to $9.09 per barrel in 2018. The LSS/WTI differential increased to $4.71 per barrel, up from $3.42 per barrel in the third quarter of 2017. This wider differential drove a $102 million benefit based on the WTI-linked crude in our slate. Direct operating costs for the third quarter were $6.60 per barrel compared with $6.37 per barrel in the third quarter of 2017, resulting in a $51 million unfavorable impact to segment earnings. The increase was driven by higher turnaround and maintenance spending during the quarter. The $419 million unfavorable variance in other R&M expenses is primarily due to the fees paid to MPLX related to the businesses that were dropped to MPLX in February. Prior period R&M results were not adjusted to reflect these newly constituted businesses. Moving to our other segments. Slide 9 provides the Speedway segment results walk for the third quarter. Segment income from operations was $161 million compared to $208 million in the third quarter last year. The year-over-year decrease in segment results is primarily related to lower light product margins and higher operating expenses. Speedway's gasoline and distillate margin decreased to $0.165 per gallon in the third quarter of 2018 compared to $0.177 per gallon in the third quarter of 2017, primarily due to the effects of rising crude oil prices and the lag effect at the retail level. Same-store merchandise sales, excluding cigarettes, increased by 4.9% in the third quarter of 2018 versus the same quarter last year, leading to the $10 million increase in merchandise margin. Operating expenses increased $28 million year-over-year, mainly due to higher labor and benefit costs and depreciation, which was $8 million higher, primarily due to increased investments in the business. For the month of October, we experienced approximately a 0.5% increase in same-store gasoline volumes versus last year. Slide 10 provides the Midstream segment results for the third quarter. Segment income was $679 million in the third quarter of 2018 compared to $355 million for the same period in 2017. The $361 million improvement for MPLX was favorably impacted by $230 million from the earnings of the businesses included in the February 1 dropdown. The rest of the improvement is related to higher pipeline throughput volumes and record gathered, processed, and fractionated volumes. As Don referenced, we encourage you to listen to the call at 11 to hear color on MPLX's strong performance in the third quarter. Slide 11 presents the elements of changes in our consolidated cash position for the third quarter. Cash at the end of the quarter was nearly $5 billion, including the approximately $3.5 billion necessary to close the Andeavor transaction on October 1. Core operating cash flow before a change to working capital was a $1.6 billion source of cash in the quarter. Working capital was a $408 million use of cash in the quarter, largely due to lower volumes of net crude payables, offset to some extent by a net inventory reduction in the quarter. Return of capital to shareholders by share repurchase and dividends totaled $607 million in the quarter. The $400 million of shares acquired was accomplished despite having a more limited window to repurchase shares, given the pending Andeavor transaction vote in closing. Looking forward, we remain committed to our disciplined capital strategy and returning capital beyond the needs of the business in a manner consistent with maintaining the company's current investment-grade credit profile and expect to resume share repurchase activity consistent with that strategy during the fourth quarter. We plan to provide an update and guidance around capital allocation strategy at the Investor Day in December. Slide 12 provides an overview of our capitalization and financial profile at the end of the third quarter. We had approximately $18.5 billion of total consolidated debt, including nearly $13 billion of debt at MPLX. Total debt represented 2.8x the last 12 months adjusted EBITDA on a consolidated basis or 1.4x EBITDA excluding the debt and EBITDA of MPLX. Lower distributions from MPLX are added to the debt service capabilities of the parent. Moving to Slide 13. We intend to provide fourth quarter and 2019 guidance at our Investor Day in December, and we'll be suspending publication of the market data on our website until then. Given all the moving pieces, we want to provide an update on the company's 2018 capital investment plan to give an illustration of run rate capital spending for the combined business. On a consolidated basis, including the MLPs, we expect to invest roughly $6 billion this year. This combined total remains in line with prior guidance. As you can see on the slide, roughly half of the planned investment will be pursued and funded by MPLX and ANDX directly. We look forward to providing our 2019 capital outlook at our Analyst Day on December 4. We hope you can join us. With that, let me turn the call back over to Kristina.

Congratulations on completing the Andeavor transaction. Gary, the turnaround activity in the Midwest was notably high this quarter and throughout 2018. Were the higher turnarounds somewhat intentional, as the company aimed to take advantage of the upcoming 2019-2020 IMO period, or were there other contributing factors? Regardless, what are the implications for refinery utilization over the next couple of years?

That's a very good question and one of our main focuses, Doug. First of all, in combining the new companies, we are aiming to make these turnarounds smoother so that we don't experience a sporadic turnaround schedule during any specific period. Looking at what we've just completed, we have done some work at El Paso, St. Paul, Detroit, Canton, and we're nearly finished with a turnaround at Martinez. Particularly in the MidCon markets, as I mentioned earlier, we now have just over 1 million barrels a day of refining capacity in areas related to WTI in Cushing, which is a significant advantage. With all that work behind us, we are aiming to streamline operations going into 2019 and 2020, and we expect that 2019 will be relatively quiet regarding turnarounds.

Gary, I want to start off on your comment in your prepared remarks around the 500,000 barrels a day of Canadian crude that you're taking in right now. It's a big number. So can you talk about kind of what the economics of that crude that you're bringing in? I'm sure not all of it is getting the discounted heavier light barrel. And how much of a tailwind you see that being on a go-forward basis? And to frame that out, if you could just talk about your broader views on Western Canadian differentials from here.

Sure. I'm going to ask Rick Hessling to get into that in more detail. And as you know, as we visited last week, we talked a little bit about the Canadian as well. And not only are we a very large purchaser of WCS, but we're very large in the Syncrude side, which have had tremendous margins, or I should say, differentials as well. But Rick will give you some more detail.

Yes, Neil, it is a very good question. So on the heavy front, as you know, on the WCS side, it's touched $50 under TI; and Syncrude, I think, yesterday touched $32 under. So as Gary mentioned, there's a lot of upside for us. We mentioned our purchases being north of 500,000. We do not share and break down how much is fully discounted and how much isn't. What I can share, though, is that our optionality is significant amongst PADD II, especially when now, when you put in St. Paul Park into the grid, that allows us even more connectivity and optionality to really eke out the most benefit for these advantaged barrels. Going forward, Neil, on discounts, we're bullish. We sit and we see high all-time production in Canada. There are constraints leaving the basin. Rail is limited. Rail is doing slightly over 200 today, and it may get into the mid-3s in 2019. That certainly will not alleviate the constraints. So we're bullish on the differentials going forward, not only on heavy but light and medium, which we're players in all three. And really, the relief won't happen, Neil, until you get another big pipeline out of the basin, which, by all accounts, might be on line by the end of 2019 at best.

Appreciate all that color. The follow-up is just on synergies. It gets come out saying that you expect at least $1 billion, know that you've only had the Andeavor assets for a couple of weeks at this point. But I just want to get your sense of your conviction around achievability of that $1 billion as most of us use some level of a discount to $1 billion, where you think there's potential upside. Sure, we'll get a little more flavor here in a couple of weeks, but any early thoughts?

Neil, we'll provide more detailed insights at the Analyst Day Meeting. When I hear that some are still skeptical about this figure, I believe we can address those concerns effectively at the meeting. We've been actively engaged in identifying opportunities during the transition period, not just standing idly by. I want to turn it over to Don, who has been leading the integration team, to share some initial insights on what we are observing. We are already noticing some synergies that exceed what we anticipated during our due diligence process. Let’s hear from Don for more details.

Yes, Neil, we are very optimistic about achieving those synergies. You mentioned the $1 billion target, and we projected a ramp-up to about $480 million in the first year, eventually reaching the $1 billion. I am very confident that we can achieve both the $1 billion and the ramp. For instance, we discussed the Speedway conversion in my prepared remarks. When considering crude acquisition, we operate 10 refineries with over 1.1 million barrels of processing capacity in the MidContinent and Midwest, along with various logistics assets. As Rick noted, we are optimizing these logistics assets more quickly than we initially expected, which is helping us realize those synergies faster than we estimated. On the refined products side, we now have the capability to place cargoes for customers from either the West Coast or Gulf Coast, which was not possible before the merger. Additionally, on the refining side, we talked about a couple of turnarounds that Gary highlighted. We leveraged the expertise of MPC employees and some of our key contractors at both St. Paul Park and Martinez, resulting in both turnarounds being completed under budget and ahead of schedule. These four tangible examples—retail, crude acquisition, refined product supply, and refining efforts—give us considerable confidence in our ability to deliver.

I have two questions. In any merger, the importance of back-office support in integration is often overlooked, and we've seen many failures due to poor attention in that area. Based on this, even though it's early, could you provide some insight into how that process is being managed and what opportunities you foresee? Additionally, will you have a system in place that enables us to externally track and reconcile the synergy benefits with your financial results?

Yes, Paul, it's Tim. We understand the importance of effectively integrating and coordinating our systems, which has been recognized from the beginning. There are still some integration processes ongoing within the legacy Andeavor business. We will ensure those are completed correctly, and we will soon begin evaluating our plans for full system integration. At this moment, we cannot provide a timeline for how long that will take, but it will be a major focus. Regarding the synergies, this integration is not a significant factor in achieving them. While there is a small portion of synergies related to system integration, most of the synergies, as Don mentioned, will come from other areas. Therefore, this is not a barrier or a critical path for the synergy achievements we anticipate over time, though we will keep our attention on it. When it comes to reporting, we fully expect to regularly provide updates about the synergies to the market. We will share more information at Investor Day and beyond, establishing a framework and reporting protocol to communicate our progress. This is a priority for us. Regardless of whether the systems integrate successfully, we will have the capability and are committed to reporting our progress as we move forward. Thank you for the question, Paul.

Paul, I'd like to expand on that. It's important for investors to understand that next week we'll be holding a meeting with our top 100 management team. In a transaction like this, it’s crucial to take a step back and recognize the scale, as well as to envision how large this company has become. The scale will play a significant role not only in driving synergy but also in enhancing efficiency. We will emphasize the concept of scale in our discussions with investors. We're already witnessing some of the early synergies we expected, and it’s clear that scale is vital. When you have scale that is aligned and moving in the same direction, it can lead to very positive outcomes with considerable momentum. This is the key message I want to convey to investors.

I totally agree, I mean that the scale, I think, is going to be phenomenal in your advantage at this point. The second question, if I may, on Speedway. Historically that Marathon, using a one brand strategy, one brand in the retail, one brand in the wholesale or in the market, and this legacy is multi-brand. And so how exactly that going forward that you guys going to be in the brand strategy? And how fast are you going to move on that?

We are currently finalizing the transition of our St. Paul and Wisconsin assets from SuperAmerica to Speedway, which we anticipate will be completed by the end of the year. Our teams are capable of converting 7 to 8 stores daily. This conversion involves not only changing signage but also remerchandising the stores and updating backroom systems and management for the entire operation. Once we finish these in December, we plan to expand to the west and southwest, initially targeting the El Paso and Arizona markets for rebranding to Speedway. In California, the ARCO brand is notably strong, and we are still assessing which brands will be appropriate for that region. We won’t have the resources available to proceed further west until around mid-2019 to late 2019. As we conduct our analysis, ARCO remains a powerful brand, as does Speedway, which has excellent convenience store merchandising. We aim to streamline the number of brands to either one or a select few by the project's completion. Additionally, regarding our Marathon-branded jobber business, many brands have historically been used with Andeavor, and we expect to transition most of them to the Marathon brand in due time. The analysis will take some time as we consult with suppliers and customers to decide on the brands, but Marathon will be the primary brand moving forward in that portion of our business.

First question, just wanted to follow up one more time on the crude exposures because you mentioned 1 million barrels a day of advantaged crudes. How do you think about the Bakken exposure for the pro forma company at this point? Obviously, the differentials have widened up quite a bit. I'm just wondering how you think about your advantage access there and then just if you have a view of how much of this is temporary for maintenance versus more structural because of pipeline or rail capacity constraints.

Yes, Phil, it's a good point. And you recall, when we invested in the Dakota Access Pipeline, it gives us that ability to bring Bakken crude down into our PADD II refineries. It gives us the ability to run it now in some of our MidCon refineries. As you know, Greg and his team have taken Bakken to the west of the rail and other methods of transportation. So we have tremendous optionality, to use Rick's term, on being able to move Bakken around our system. But let me ask Rick to get into the details of what he's seeing and talk about the structure of the market.

Yes, Phil, I'm really glad you brought this up. A lot of people want to talk Canadian and want to talk Midland. And really, Bakken is kind of the forgotten basin, if you will, and it's extremely important to us. Yesterday, Beaver Lodge, which is an origin point that feeds DAPL, traded at a $14 differential. So unheard of, by all accounts, every report we hear is that basin is flushed with barrels. Really similar to the Canadian story, Phil, it's flushed with barrels, and there's no way out. And there's no immediate relief, Phil, that we can see. Rail can only do so much. And as we head into winter, you're going to have rail constraints, the difficulties of loading rail out. So we kind of see that's the perfect storm we had in our St. Paul Park refinery now. That gives us, as Gary said, more optionality and connectivity. We have the DAPL Pipeline that feeds barrels to us right into Patoka, where we can go throughout our PADD II system, as well as we can also take their barrels to Southern Access Extension or Ozark. So we have multiple ways of getting barrels to multiple plants, and we're very bullish on this differential here going forward.

And just to clarify, the Bakken is in the 1 million barrels a day of advantaged crudes that you're speaking to.

Yes, correct.

Could you provide some insights into Andeavor's performance in the quarter? I understand you may not be able to share specific financials, but any information would be appreciated since we lack public data.

Sure. Greg, would you like to handle that?

Yes, it's a good question, Phil. Looking back at the third quarter, our refinery utilization was around 97%, processing just over 1.1 million barrels per day, and we had a strong index for the quarter, which was slightly over $16.50 a barrel. We didn't have maintenance during this period, as it began in October, allowing us to operate effectively. We also continued to advance the Los Angeles project, successfully shutting down the cat cracker as planned and beginning to transport feedstocks through the pipelines connecting different parts of the facility. This project is on track and positions us well for the International Maritime Organization regulations, enabling us to process an additional 40,000 barrels a day in distillates over gasoline, taking advantage of market trends. The marketing business showed strong volumes, though margins were slightly lower than planned due to rising crude prices, but overall results across our system were robust. We continue to see growth in Mexico, aligning with our integrated business strategy, and our logistics business performed exceptionally well. Regarding the Bakken, we are experiencing strong growth in our crude oil system in North Dakota, and the development of our Permian system is progressing as expected. Our involvement in the Gray Oak Pipeline enhances our ability to manage crude from the wellhead to the system, whether it’s to Corpus Christi or elsewhere. Overall, the business performed very well and is on target with strong financial results.

Phil, I want to add one more point that relates to the confidence we have in capturing synergies. The performance of the legacy Andeavor assets in the third quarter and the strong utilization rates of the MPC assets, despite a couple of turnarounds during a major transaction, demonstrate our ability to execute on large projects. Historically, over the past seven years, we've consistently completed significant projects on time and often under budget. The impressive performance from both sides during the integration process reinforces our confidence that we will be able to execute well moving forward.

I would like to add that I understand there have been several questions regarding the synergies and the progress of the integration process. Based on my experience with similar situations, I am very confident in the opportunities we have identified. These synergies are essentially ideas and opportunities generated within the organization, and we have been able to validate them. It has been both interesting and exciting to see the immediate opportunities that have emerged. From my perspective and the work I have been involved in, I have strong confidence in our direction. I would also like to emphasize Don's summary of our current situation, and I believe we will deliver robust synergies over time that will pleasantly surprise many.

I would like to continue discussing crude differentials and crude capture. Other companies on both sides of the border have mentioned issues with pipeline apportionment. I'm curious about your thoughts on the deliverability of Canadian crudes, whether heavy or light, and any apportionment challenges you might be facing. Also, did the earlier comments regarding the advantages of adding the SPP unit have any impact on that aspect?

Yes, let me ask Rick to take that, Roger.

Yes. So, Roger, ultimately, the apportionment that Enbridge has had out of the basin has been pretty consistent, plus or minus 5%. We predicted every month and we usually come in within 1% or 2%. And to be frank, if you look at what the barrels we received in the past with what we receive in the current month and what we believe we'll receive going forward, we're very confident with the numbers we've shared to date going forward. So I can't speak to anyone else's view on apportionment, but from our standpoint, it's been relatively consistent, and we see it that way going forward.

Considering the total of 1 million barrels, would it be accurate to say it's likely about 30-70 heavy to light? Or are you leaning more towards an approximate 50-50 distribution if you have full flexibility?

Yes, it would be closer to 2/3, 1/3, but I would caution you that fluctuates month-to-month. It's really all based on refinery runs, are we looking to run more gas, more diesel, and obviously, the differentials. So I would caution you not to get locked in on a specific percentage because that does fluctuate month-to-month significantly.

Yes, Roger, that 2/3, 1/3 is really a reference to the Canadian acquisition or Canadian crudes that we're acquiring.

I hate to keep bringing up the differentials, but I will. Canadian heavy has been particularly weak, and your company is well-positioned to take advantage of that. I'm curious about your thoughts on how things will unfold as a significant amount of downtime in PADD II comes back online. More importantly, Gary, your ability to transport crudes through your system has been central to the strategy you developed at Marathon. When you assess the opportunities for logistics and moving crudes within the Andeavor network, do you identify any clear advantages? Greg has done a commendable job in that area, and I'm interested in whether you anticipate any significant changes in the daily movement of approximately 1 million barrels across the combined company on a proportional basis.

Yes, I can confirm that we are capturing additional value in some areas, but I can't disclose specific details due to the competitive nature of the market. In the past, I mentioned that a different system I worked with lost its competitive edge very quickly. However, we are definitely seeing positive developments in and around the Northern Pipeline systems. When considering the costs of transporting from Canada or the Bakken to PADD I, which can be $15 to $16 per barrel, our MidCon, PADD II, and PADD IV systems provide us with a significant advantage for moving the next barrel out of that market. We've identified some early synergies that weren't apparent during our initial assessments. I'll leave it at that.

I assume we can get into some of that detail in December, Gary, hopefully or not. My follow-up question relates to a comment Greg made about gasoline, distillate, and the IMO situation. I would like a general perspective from someone who is best suited to provide an answer. It appears that one of the key uncertainties is whether diesel will experience the anticipated spike. There is a relatively straightforward solution regarding cat feed as a low-cost alternative bunker fuel. I am interested in your thoughts on how this might limit any diesel premium that could arise due to the IMO, particularly in the European market. I'll leave it at that.

Yes. If I understand your question, it plays into sweet gas oil as well as ULSD. And certainly, from our standpoint, we position ourselves really well across our entire 16-plant system to make a whole lot of ULSD. We also have the ability to bring in additional sour gas oil if needed and make sweet gas oil for our system. So is that really what you're getting at?

A huge range of uncertainty and a wide range of expectations out there. What I'm really trying to understand is if gasoline is as weak as it's been, I'm thinking Brent-based tracked European refineries, this is probably the best thing to happen to them in 20 years. But it seems to us that you could cap that upside by swinging cat feed into the bunker fuel market and essentially improving the supply side of what is expected to be a tight supply dynamic. I'm just wondering if you think we're getting that wrong. Is that something you think about as well? And ultimately, what do you think the endgame would be if that was the case?

At this point, none of our plants would have us essentially slacking our cat crackers and then blending that cat feed. Our models going forward see very good opportunities for running our cat crackers. We have taken the opportunity to change our catalyst mix and our cat crackers to swing more toward petrochemicals, but we don't have any forward look that slacks our cat cracker at this point.

Yes, Doug, you fully utilize the equipment and processing facilities you have. You might adjust your feedstock slightly, but given our setup—whether it's cat feed, light crude, or heavy crude—we will fully maximize diesel production regardless of the available feedstocks. We will fully utilize those facilities.

Gary, earlier this year, you collaborated closely with Washington to address the RINs situation, and it appears that your efforts, along with other measures, have effectively resolved many issues. It's important to remember that MPC does have retail operations but remains affected by RINs, just as Andeavor was. Can you explain how the decline in RIN prices will benefit the combined entity of MPC and Andeavor?

You're right, Manav. In fact, I will be returning to Washington next week to discuss this. Our major effort has been to refresh the renewable fuel standard. Although that hasn't happened yet, if you look at the numbers, RIN prices have dropped from $1.25 back in 2016 and 2017 to $0.78 this week. We've made significant progress, which is related to lower refinery exemptions and the accounting of RINs beyond that. The cost of RINs has improved greatly. I will ask Tim to address your question about the value. As I mentioned, we've made considerable progress, though we are not quite where we believe the market needs to be and where the administration should go regarding the RFS issue. We are continuing to work on it diligently. Tim, can you provide an answer on the value aspect?

Sure. Manav, you've probably seen and we've mentioned this several times over the last couple of years that we don't believe RIN costs drive differences in profitability within the refining system. We are quite convinced that as RIN prices rise, it gets reflected in the crack, and overall, the system remains unaffected compared to its current state. So I'm not sure we would emphasize any additional benefit from the lower RIN costs. It certainly reduces the noise in the market regarding what the actual economic cracks are, but we wouldn't identify any inherent economic advantage for the system related to the lower prices.

A very quick follow-up. You're cracking about 3.5 million to 4 million barrels of capacity coming from Permian to the Gulf Coast. What's your outlook for 2021 for light sweet crude on the Gulf Coast? Would the entire MPC's refining system become an advantage system just like the MidCon as all this Permian crude flows into the Gulf Coast?

You've touched on our main thesis regarding the future. As we've previously mentioned, we can run either 70% light slate or 70% medium sour to heavy slate. With the significant amount of light sweet crude being exported and Middle Eastern producers wanting to maintain their market share in the Gulf Coast, we expect medium sour crude to become standard since so much light sweet crude is leaving the market. Foreign competitors will likely avoid competing against this dynamic. We believe we are strategically positioned, especially with our ability to process mediums that resemble Mars, which we anticipate will be a strong feedstock moving forward. We can handle a substantial amount of medium sours or heavies, or we can maintain operations in the light range. Additionally, it’s crucial to discuss the major pipeline projects emerging from the Permian and our strategic plans. We previously engaged in the Gray Oak Pipeline deal and are now focused on the Permian to Gulf Coast Pipeline and projects like Swordfish for the Eastern Gulf. These opportunities are significant and will enhance our feedstock supply. Mike, would you like to elaborate on that strategy?

Sure, Gary. Manav, what we've been doing on the logistics side to support MPC's refining system includes the Permian to Gulf Coast Pipeline, which will allow crudes from the Delaware Basin and Midland Basin to be transported from Wink, Crane, or Midland to the Houston and Texas City markets, along with other locations. A key focus is supplying the Galveston Bay refinery. We've also expanded the Ozark Pipeline and the Wood River to Patoka Pipeline to ensure that Cushing light material reaches that area. As Gary mentioned, we are considering market demands for exports as well. We'll discuss the Swordfish Pipeline further during a later call; it uses existing assets that we believe will be very competitive in linking the Eastern Gulf system to refineries and export markets. We recognize the importance of light sweet growth and are focused on maximizing our ability to deliver that to markets, whether to MPC's refining systems or others, and also into the export market.

I wanted to discuss crude sourcing. You’ve mentioned this earlier on the call, but I believe waterborne crude is an important aspect when considering the availability of domestic heavy discounted barrels versus light barrels. I’d like to get some insights on the current market situation. We've noticed that Maya differentials have narrowed, especially in the Gulf Coast, where waterborne heavy barrels have become somewhat tougher to source, particularly in the third quarter. So, my first question is about the Gulf Coast. Additionally, looking at PADD V and hearing from some peers, it seems that waterborne heavier barrels may be more challenging to obtain compared to domestic and ANS. I’d appreciate your thoughts on that, as well as any initiatives the company may have to manage crude costs in the medium term in both regions.

Rick?

Yes, this is Rick. To start with the Maya situation, Maya has become quite costly. Its pricing is largely based on WTS and some other domestic grades. As a result of the strengthening market, Maya has priced itself out of competitiveness. The positive aspect for us regarding Maya is that we use very little of it and can shift away from it, giving us the flexibility to utilize other heavy grades. Regarding market tightness, I agree it has been tight for some time, but now we are noticing a favorable outlook with good availability and strong economics for both heavy and light Gulf crudes, as well as Latin American crudes on a global scale. We feel that the tightness in the market is easing, and we anticipate better conditions ahead, especially with our options for all waterborne crudes in the Gulf.