Marathon Petroleum Corp (MPC) — Q4 2018 Earnings Call Transcript

Welcome to Marathon Petroleum Corp's fourth 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. I will turn the call over to Gary Heminger for opening remarks on Slide 3.

Thanks Kristina. Good morning and thank you for joining our call. Earlier today, we reported an extraordinary first financial update as a combined company. And we believe these results are early indications of the tremendous value potential of this powerful combination. Earnings for the quarter were $951 million, or $1.35 per diluted share. Results included costs of $1.06 per diluted share primarily from transaction-related items. Tim will walk through these costs in detail later on the call. As we review our performance for 2018, it's important to highlight that we've built a culture focused on operational excellence and safety. We received multiple awards and accolades over the last year including an Energy and EPA Energy Star Partner of the Year and VPP recognition at multiple facilities. We remain committed to a culture of continuous improvement that positions our company to safely grow our earnings and create long-term value for our shareholders. This quarter we were pleased to report over $2 billion in income from operations. And adjusted consolidated EBITDA of approximately $4.1 billion with our segments performing well. Our expanded integrated business model created significant opportunities for us to capture value. We optimized crude purchases and utilized our larger logistics and diversified marketing footprint to place over 70% of our gasoline volume on a daily basis. Refining throughput was strong during the quarter at 3.1 million barrels per day. This exceeded our expectations and was impressive considering our Detroit, St. Paul Park, and Martinez turnarounds during the quarter, all of which were completed on time and under budget. Our Midstream businesses both performed well this quarter. ANDX reported 2018 EBITDA of $1.2 billion, which increased $250 million year-over-year. For MPLX, 2018 marked the single largest increase in annual EBITDA since it became a public company. MPLX reported 2018 adjusted EBITDA of $3.5 billion, which increased $1.5 billion over the prior year, and nearly $400 million of this increase was driven by organic growth. We have announced a number of compelling new projects within Midstream that generate third-party revenue; one of the largest projects is the Gray Oak pipeline and export terminal, and we've had inquiries about where this may reside. This project is being funded at the MPC level, and therefore, we do not plan to drop these assets into ANDX. As the opportunity set for new infrastructure remains robust, we remain committed to high-grading the project backlog toward mid-teen returns and self-funding capital spend at the MLP level. Lastly, our retail segment had a particularly strong fourth quarter. This included record quarterly earnings for MPC's former Speedway segment while 2018 started slowly for the legacy Speedway business, it ended the year with record EBITDA driven by strong merchandise sales and fuel margins. The retail business continues to add significant stability to our overall cash flow profile. It provides an important placement option for our refining volumes and creates a counter-cyclical balance to our overall business. Considering the highlights on Slide 4, we reported approximately $160 million of realized synergies in just three months and continue to expect total annual gross run rate synergies of up to $600 million by year-end 2019 and up to $1.4 billion by the end of 2021. Don will provide a detailed update on our plan in just a few minutes. It was an impressive year with many milestones for Marathon, and our integrated business model allowed us to return $4.2 billion of capital to our shareholders, which included $675 million of share repurchases in the fourth quarter. Additionally, last week, we announced a 15% increase in the quarterly dividend underscoring our confidence in our cash generation potential. As we look into 2019, we remain optimistic about the prospects for our business and our ability to deliver compelling financial results. Now, let me briefly address the current macro environment. At this time of year, there's always a lot of focus on gasoline markets. Despite what we view as normal seasonal trends, we are optimistic about the opportunities for our business this year. Demand remains strong, global economic growth continues, and even with recent high refinery utilization, distillate inventories remain below 5-year averages. MPC's refining system remains one of the most dynamic in the world. We have significant flexibility in terms of switching our crude slates and optimizing our production yields. Our expanded logistics footprint creates opportunities to access export markets, and in December alone, we exported 485,000 barrels per day of refined products. With limited turnarounds in 2019, our system is poised to execute in any market environment. These trends coupled with our expected synergy capture and potentially changing dynamics of the low-sulfur fuel market all set the stage to create meaningful benefits across MPC's integrated and diversified business model. Lastly, we continue to make progress on evaluating all options for the two MLPs. Each of the parties involved have retained advisors, and our comments will be limited as we walk through a thorough evaluation process. We will provide an update to investors at the appropriate time. Now, let me turn the call over to Don for an update on synergies.

Thanks, Gary. Slide 5 highlights the success we've already had delivering synergies. During the fourth quarter, we realized $160 million of synergies, $138 million of the synergies were in our refining and marketing segment. Although not all of these synergies are recurring, it has underscored our confidence in delivering on the significant opportunity set available to us. Crude oil supply and logistics delivered just over $100 million of realized synergies during the quarter. We were able to leverage our scale to optimize access to Canadian heavy crude, which contributed roughly $50 million of synergies. The other $50 million was largely a result of optimizing logistics assets utilization and foreign spot crude oil purchases as a combined business. Within the refining business, we realized $32 million of synergies during the quarter. For example, we utilized MPC's turnaround specialists and our broader access to contractors to support the turnarounds at Martinez and St. Paul Park. This allowed us to come in under budget and ahead of schedule. The $22 million in corporate synergies represents early efficiencies and cost eliminations made possible by the combination. As a reminder, our synergy targets and realizations are incremental to the synergies Andeavor realized as part of the Western acquisition. As of the date of the closing, Andeavor had achieved run rate synergies of $365 million on that transaction. Looking forward, it is our plan to provide details of realized synergies on a quarterly basis during 2019. As Gary mentioned in his comments earlier, we're not constraining ourselves to the synergies originally identified. Our teams are very focused on generating incremental synergy ideas and opportunities. For example, during the fourth quarter, we converted 170 company-owned and operated sites in Minnesota to the Speedway brand. This will support synergy capture in the retail segment going forward. With respect to refining, we've identified the opportunity to utilize sulfur credits across our refining system that will provide approximately $40 million in value during 2019. This is nearly double the value that we were projecting when we discussed this item at Investor Day. As another example, we've identified the opportunity to change the FCC catalyst formulation at the Los Angeles refinery, which should be worth tens of millions of dollars annually. The successes that we had in the fourth quarter of 2018 and our detailed implementation plan give us confidence in the increased synergy potential that we announced at our recent Investor Day. With that, let me turn the call over to Tim, who will provide a walk-through of our financial results.

Thanks, Don. Slide 6 provides earnings on both an absolute and per share basis. For the fourth quarter of 2018, MPC reported earnings of $1.35 per diluted share compared to $4.09 per diluted share last year. As Gary referenced, fourth quarter earnings were reduced by $1.06 per diluted share or $745 million due to purchase accounting related inventory effects, expenses associated with the Andeavor combination, and MPLX debt extinguishment costs. As a reminder, fourth quarter 2017 earnings included a benefit of approximately $1.5 billion or $3.04 per diluted share resulting from a change in the corporate tax rate at the end of 2017. Additionally, the transaction and our mix of earnings drove a higher income tax rate impact for the quarter. Going forward, we expect the effective tax rate to be around 22%. Slide 7 provides some additional details on the items which impacted our results in the quarter and where they reflected on the income statement. Refining and marketing segment results include estimated costs of $759 million, reflecting the difference between recording acquired inventory at fair value on the closing date of the acquisition under purchase accounting and the cost used to value inventory at year-end. The effect was magnified as crude prices were rising into the end of the third quarter and subsequently fell rapidly through the fourth quarter. We also incurred $183 million of transaction-related costs, including financial advisor fees, employee severance, and other costs in connection with the Andeavor acquisition which are reflected in items not allocated to segments in the quarter. Lastly, MPLX redeemed all of $750 million aggregate principal amount of its 5.5% senior notes due in 2023, which resulted in $60 million of debt extinguishment costs, which were reflected in interest expense for the quarter. Combined total of these items had an impact of $1.06 per diluted share in the quarter. The bridge on Slide 8 shows the change in earnings by segment over the fourth quarter last year. Fourth quarter 2017 results included a benefit of approximately $1.5 billion related to the change in corporate tax rates. Refining and marketing increased by $191 million versus last year, driven by the addition of the Andeavor operations and significantly wider sweet and sour differentials in the quarter. These benefits were reduced by the $759 million negative purchase accounting effect that I just discussed and approximately $231 million of incremental costs driven by the February 1 dropdown transaction as we don't reflect the impact of these drops in prior period results. Midstream's $546 million favorable variance was driven by higher MPLX income and contributions of $230 million from Andeavor logistics. Retail's fourth quarter results were $465 million higher than the same quarter last year primarily related to fuel margins and the addition of Andeavor's retail and direct dealer operations. The unfavorable year-over-year variance in items not allocated to segments was largely due to the $183 million of transaction-related costs associated with the Andeavor acquisition and the absence of a $57 million litigation gain we recognized in the fourth quarter last year. The balance of the increase largely reflects higher corporate costs and expenses for the combined company. Interest and financing costs were $176 million higher during the fourth quarter this year due to the combined debt balances as a result of the Andeavor transaction, additional MPLX debt compared to last year along with the $60 million of debt extinguishment costs in the quarter. Higher earnings in MPLX and the addition of Andeavor logistics resulted in an increased allocation of midstream earnings to the publicly held units in the respective partnerships shown here as a $135 million variance in non-controlling interests. Turning to Slide 9, our Refining & Marketing segment reported earnings of $923 million in the 4th quarter of 2018, compared to $732 million in the same quarter last year. The addition of the Andeavor refining and marketing system drove significantly higher throughput positively impacting segment results. Volume effects are shown as shaded bars on each of the relevant steps of the walk and largely reflect this impact. The US Gulf Coast, Chicago and West Coast blended industry 3-2-1 crack spread was $9.43 in the fourth quarter of 2018, compared to $10.83 in the fourth quarter of 2017. Our ability to take advantage of wide crude differentials provided significant benefits in the quarter. Our sour differential increased from $4.43 per barrel in the fourth quarter of 2017 to $9.14 per barrel in 2018. While our sweet differential increased from $1.13 per barrel in the fourth quarter of last year to $6.52 per barrel in the fourth quarter of 2018. The $330 million negative variance in other margin reflects the inventory purchase accounting effects discussed partially offset by favorable impacts from strong product margins, feedstock costs relative to the market metrics, and higher refining volumetric gains. Direct operating costs for the fourth quarter were $7.92 per barrel compared with $7.21 per barrel in the fourth quarter of 2017. The higher costs associated with over 1 million barrels per day of additional throughput were the primary drivers of the $924 million unfavorable impact to segment earnings. The $755 million unfavorable variance in other R&M expenses is primarily due to the fees paid to MPLX for the businesses that were dropped in February, as well as additional expenses related to the legacy Andeavor business. Slide 10 provides the Midstream segment results for the fourth quarter. Segment income was $889 million in the fourth quarter of 2018, compared to $343 million in the same period in 2017. MPLX income was up $331 million, primarily due to the drop of refining logistics and fuels distribution services as well as record pipeline throughputs and higher gathered process and fractionated volumes in the quarter. Andeavor logistics also added an incremental $230 million of income for the fourth quarter. We encourage you to listen to MPLX earnings call at 11 and ANDX's earnings call at 1 to hear more about the performance of the partnerships. Slide 11 provides an overview of the retail segment, which now includes our legacy Speedway business and Andeavor's retail and direct dealer business. Fourth quarter segment income from operations was $613 million, compared to the $148 million of legacy Speedway only results in the fourth quarter last year. The $465 million increase in year-over-year segment results was primarily driven by the addition of Andeavor's operations along with higher merchandise sales and fuel margins across the nationwide footprint. The $204 million volume impact on the walk and the $193 million increase in operating expenses and $47 million of increased depreciation expense were almost entirely attributed to the addition of the Andeavor operations. The improvement in merchandise and fuel margins was largely related to the expanded business as well as the margin strength across the entire retail platform as well as higher same-store merchandise sales for the Speedway legacy locations. The month of January started off with positive same-store gasoline sales, but was impacted by record low temperatures in a substantial portion of our marketing area. January gasoline same-store sales in our legacy Speedway locations were down 1.5%, but we're optimistic volumes will normalize following the weather impacts. Slide 12 presents the elements of change in our consolidated cash position for the fourth quarter. Cash at the end of the quarter was approximately $1.7 billion. Core operating cash flow before change in working capital was a $2.3 billion source of cash in the quarter. Working capital was a $457 million source of cash in the quarter, largely due to an adjustment for a purchase accounting related inventory effects, partially offset by the negative impacts of falling commodity prices during the quarter. We used approximately $3.4 billion of cash during the fourth quarter to fund the Andeavor and Express Mart acquisitions net of cash acquired. Return of capital by way of share repurchase and dividends totaled almost $1 billion in the quarter with $675 million worth of shares reacquired during the quarter. Looking forward, we remain committed to our disciplined strategy and returning capital beyond the needs of the business through continued share repurchases and regular dividends. We expect to return at least 50% of discretionary free cash flow to shareholders over the long term. Slide 13 provides an overview of our capitalization and financial profile at the end of the fourth quarter. We had approximately $27.5 billion of total consolidated debt, including $13.4 billion of debt at MPLX and $5 billion of debt at ANDX. Total debt represented 2.5X last 12 months adjusted EBITDA on a consolidated basis, or 1.3X EBITDA, excluding the debt and EBITDA of MPLX and ANDX, lower yet if the distributions from MPLX and ANDX are added to the debt service capabilities of the business. Slide 14 provides updated outlook information on key operating metrics for MPC for the first quarter of 2019. We're expecting total throughput volumes of just under 3 million barrels per day with minimal planned maintenance taking place across our 16-plant system. Our average total direct operating costs are projected to be $8.20 per barrel and our corporate and other unallocated items are projected to be $230 million for the quarter, excluding any additional transaction-related costs. With that, let me turn the call back over to Kristina.

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

Hey, thank you very much and congrats on a great quarter here. So, Gary, to kick off on the gasoline market, you made a point that Speedway same-store sales were down 1.5%, it sounds like some of that is weather-related, but we've been surprised at how elevated gasoline inventories have been to start the year. So just your thoughts on whether this is seasonal or we can work our way through it. What the root cause of the issue is and what the fix is?

Sure, that's a good question. If you examine Speedway's same-store sales, much of the decline can be attributed to the weather we’ve experienced. On the flip side, the weather affecting the refining system, particularly in PADD II and PADD IV, due to the Polar Vortex has significantly impacted the entire industry, not just Marathon. We anticipate that you won't see this reflected in the numbers yet, but it will become apparent in the coming weeks. Considering the number of refineries dealing with maintenance issues—beyond standard turnaround maintenance—due to the Polar Vortex, we estimate around 6 million to 7 million barrels of gasoline and distillate will be removed from the refining system in February. Regarding your earlier question about inventory levels, we typically build our inventory in the first quarter in preparation for summer-grade gasoline. As we deplete the winter-grade gasoline inventory, we have the necessary tankage and logistics to begin stocking the summer gasoline. It’s important to note that the estimated 6 million to 7 million barrels mentioned is in addition to the regular turnarounds. Turnarounds in the industry this year will likely happen later in the first quarter than usual, which should also impact gasoline inventories. Distillate inventories are in very good shape, and we are at the upper end of the four-year or five-year averages, depending on what you consider. However, we expect to see a rapid decline in inventories because of the industry's challenges and the delayed turnarounds in the first quarter.

I appreciate that, Gary. My follow-up question is about capital returns. In a situation where 2019 might be more challenging than expected, potentially below trend due to differentials or gasoline markets, how committed are you to capital returns and share repurchases? Should we view the buyback commitment as a steady figure? Any insights on how aggressive you plan to be regarding capital returns would be useful.

Sure. Neil, it's Tim, I think, the cap returns are going to continue to be a critical part of the overall capital allocation strategy we've got, I mean, as we laid out at Investor Day and I reinforced here this morning, we expect that we're going to be returning at least half of discretionary free cash flow through dividends, distributions from the MLPs, and share purchases. And that's a commitment that we will stay with. So, I mean, certainly to the extent that there is softness in the space, things could adjust, but I don't think there's anything that changes our outlook at this point.

Hi, good morning. Gary, first question, I'm just thinking about this first pro forma quarter that you guys logged $4 billion plus of EBITDA, so call it $16 billion plus annualized versus your guidance for 2019 of $12.9 billion, you obviously had some pretty nice tailwinds and differentials here that you called out in the bridges in your prepared remarks. But just any latest thoughts on this guidance now that you've got a quarter under your belt?

Well, it would be very nice if you could annualize things based off the fourth quarter. But as you know, the fourth quarter had some very key attributes that were a benefit to us with the drop in crude price which allowed a higher capture margin than that is normal. But I would say we're very optimistic on what we presented at Analyst Day, Neil's question that he just posed about EBITDA and share buybacks going so far, what happens if it is more of a sluggish year than we had anticipated, but we still are very bullish on the year. In fact, I think, Phil, you had written some things earlier about gasoline as kind of an associated byproduct, I think you used that term. We believe, especially and unfortunately, what has happened here with the Polar Vortex that has taken a number of systems down, and as you build those systems back up, it's going to clean up the inventory in the system. But I think, we're going to get into the second quarter and very likely see should you be max gasoline or should be max distillate and I would anticipate will be distillate. But I think you could see that scenario, and then as we go out into the second part of the year, you're going to see, I think, the effects of the ultra-low-sulfur diesel start to kick in the marketplace. So we feel very bullish about what we presented on our Analyst Day of $12.9 billion as you suggested, and we'll see where the balance of the year takes us.

Thanks for the color, Gary. I guess my second question just to focus a bit more on the differentials side of things, hoping for your latest thoughts, both on the light-heavy differentials, in light of the Venezuela sanctions, but also even just the light inland differentials versus coastal obviously the Capline reversal. Do you think we might see a tightening of inland differentials as all these pipelines come up?

Let me ask Rick to talk about the crude markets.

Yes, hello, Phil. Great question. When we consider the new pipelines that are expected or rumored to be developed, most of them seem to be directed towards the Eastern Gulf Coast. From our perspective, this is beneficial for MPC, especially since we have our Garyville facility in that region, which has a strong demand for both sweet and heavy crude. Looking at the differentials, we view this positively. We anticipate gaining pipeline connectivity that will provide access to advantageous barrels, including WTI and Canadian heavy and light crude over time. Therefore, we see this connectivity as a significant advantage, and we are optimistic about production levels and the basins where this crude will originate. Overall, this is a strong positive for us.

Any thoughts on light-heavy?

I think you're going to continue to see pressures on light-heavies as we are today. We're in a zone where obviously because of sanctions, because of the stance that OPEC has taken, the medium sours, the heavies, they are commanding a premium. We continue to see that and I guess to tag on to that, when you look at the sanctions, speaking of Venezuela, what they have done and I think it's been very well documented in the press that we stepped away from those barrels quite a while ago quite frankly. So from a supply perspective, we're not exposed one bit whatsoever. We see those replacement barrels being AG barrels, Arabian Gulf barrels, as well as predominantly Latin American barrels. So it will continue to stay tight, but I would tell you with our added flexibility between the US Eastern Gulf Coast and the US Eastern West Coast and our West Coast facilities, our flexibility, I think as Don touched on earlier with synergies really, this plays into our hand more so than anyone in the industry that we can optimize between those plants, between grades and really drive the most value for our shareholders.

And Phil, let me ask Ray to mention here a second that even though heavies and medium sours are more expensive, we are not slacking our cokers whatsoever. Ray, you want to speak to that?

Yes, sure Gary. Even though the heavy depths have tightened in a bit, we never met a heavy unit that we didn't like to fill. So our cokers have resid hydrocrackers or deasphalting units. We're still running those out and capturing the differentials that are out there, the balance of the crude slate, Rick goes out and his team and get us the best mix take that he can. So today we're running about 50-50 across our slate, about 50% sours, 50% sweet.

Good morning, everyone. Gary, perhaps you can elaborate on that. In the first quarter, you are predicting a distribution of 48% sweet and 52% sour. Given the ongoing light-heavy differential, should we interpret this as your maximum flexibility, or do you actually have the capacity to increase sweet production if the current market conditions continue? Additionally, can you confirm that your gasoline production is already optimized in terms of distillate yields, meaning there isn't much room for adjustment between gasoline and distillate compared to what has been happening?

I'm glad you asked that question, Paul, because we want to get those across to the investors very carefully. Ray, you want to take that?

Yes, we are currently at a roughly 50/50 split between sweet and sour products. Historically, we've worked with a two-thirds to one-third ratio, which gave us the flexibility to adjust accordingly. With the implementation of our new system across 16 plants, we now have the capacity to increase our sweet product output to as much as 70%, providing us greater flexibility in that area. However, we are consistently running our LP models at all 16 plants and collaborating with Rick's team to optimize the crude slate for maximum profitability across our operations, which currently remains at a 50/50 split. As for distillate production, we are operating at about 40% to 41% of crude for distillate. We have strategies in place to focus on distillate production, but if needed, we could pivot to increasing gasoline production by directing up to 10% from our cut point swing streams into the gasoline pool.

Ray, I'm actually talking about the other way. Can you increase the distillate yield and reduce the gasoline further from here, not, I mean, of course, that when you take out butane in the summer grade, you will reduce the gasoline yield, but other than that, is there any other flexibility that you swing even if you want to, that you can swing even more to distillate and lesser into gasoline?

Gary would be upset if we weren't already focused on that, Paul. We're directing as much as we can towards the distillate pool and away from the gasoline pool. Now, to switch gears a bit, you're asking about transitioning from gasoline to diesel. The issue is that with less gasoline production, we need to adapt to what the market tells us. About a month ago, we recognized the need to reduce our cat crackers, avoid purchasing external gas oil for some of them, and sell some gas oil when it was advantageous. When the sweet gas oil price was about $0.15 above the 70/30 split, we acted accordingly, and as the economics evolved, we adjusted our operations to match. So, while it's not a direct transition from gasoline to diesel, we’re simply responding to the economics of gasoline.

Hey guys, can you talk a little bit about the retail here like MPC was doing $180 million to $200 million in run rate, Andeavor was doing $170 million to $190 million, you put those two together, that's $400 million, but you did $613 million in retail earnings alone. So I understand the weaker crude would have helped, but the results are stellar regardless, so what's driving these retail earnings besides the weaker crude?

Right, Manav. First of all, let me compliment you; you were the first this morning with your analysis, and I thought you did a good job with your quick outlook. The retail segment, led by Tony and his team, had an exceptional year, particularly in the fourth quarter. As you know, the year started off a bit slow, but we saw an increase in merchandise sales and merchandise margin. However, the key factor was the volume we captured through the Speedway network, achieving strong margins across the entire Speedway sector, as well as from our direct retail business, which performed very well for the quarter. Looking ahead, one of the highlights when Greg and I combined these companies was the retail side, which we expected to benefit from synergies and our marketing capabilities. I mentioned earlier that about 70% of our volume flows to our retail chains, whether from Speedway, the Marathon brand, or direct retail. This structure supports both the refining and retail sides of our business. While we achieved impressive margins in the fourth quarter, I don't anticipate they will remain that high. However, I expect strong performance across the entire retail sector in the early part of the year.

Gary, a quick follow up. We remember when you acquired Hess, you gave out a synergy target for three years, but you literally got there in one year. And now today you are indicating that $160 million in synergies in one quarter and reiterated $600 million for next year, but the way we are looking at it, the way R&M business is going and the retail business is going, it looks easy like $800 million to $900 million at least. So are you just being very conservative there again for the second time?

You're too kind, Manav. When I consider retail, and as we've discussed before, the synergies from this transaction differ from those we've seen in the past. Typically, you'd notice immediate synergies followed by a slow progression over time. In contrast, these synergies will evolve in a stair-step manner moving forward. For example, we've already rebranded 170 stores in Minnesota. We're also starting in Southwest Texas and will soon begin in Arizona and New Mexico to transition those stores to the Speedway brand. I recently visited Arizona and saw numerous opportunities that I'm eager to pursue quickly. However, gaining the necessary permits in California and other western states will take a bit longer. Therefore, expect a stair-step approach with even higher synergies in the second year and more in the third year than what we achieved with the Hess model. With the Hess acquisition, we completed the rebranding in about 18 to 24 months, focusing heavily on internal store efficiencies. Here, we need to completely overhaul the stores to align them with Speedway operations. Overall, we are very optimistic about the potential for synergies, and I believe there could be some upside in the retail synergies as well, so stay tuned.

Thanks, good morning everyone. Gary, I appreciate your insights on the macro situation, especially regarding gasoline this morning. I’d like to challenge you on whether there have been some structural changes. The US is currently running the highest API slate ever, according to the EIA, which certainly impacts gasoline yields. Utilization has also been encouraged by the crude spread. So, my question is, do you believe this could explain the significant increase we’ve seen in gasoline production and inventories? Should we anticipate that the industry, and Marathon specifically, will experience maximum distillate as a new normal throughout the cycle rather than just seasonally?

The reason for the high inventories is that many operated at very high utilization rates due to favorable crude differentials, despite accumulating some inventory. As we discussed earlier, in the coming weeks, you may observe a decrease in gasoline inventories when the EIA data is released, primarily due to operational challenges related to the weather. Don, would you like to elaborate on this?

Yes, Doug, if we look at the Gulf Coast, we achieved record exports. Our standpoint is that we are operating at about 40% diesel production, which is our maximum capacity, and we plan to maintain that level. We are well-positioned to capitalize on any higher-value markets for our products, whether through exports from the West Coast or the Gulf Coast. In December, we exported approximately 485,000 barrels a day, and for the fourth quarter, it was just under that figure, with around 300,000 to 390,000 barrels coming from the Gulf Coast. We focused on delivering to markets where we saw additional value.

Sorry. Good morning. Hopefully you can hear me there. Actually, I'd like to come back real quick on the gasoline thing; I'm with you that it seems to be more higher volumes. If you look at gasoline yields from the weekly DOE data, we're down from a year ago and we're about where we've been the last, say, five-year average. So it looks like higher throughputs, and maybe Gary, if you could give us a little more detail on your thoughts about the weather impacts and how persistent the problems from that maybe, I know you talked about kind of, I think it was a 6 million to 7 million barrel product loss. But do you see that is strictly the PADD II area or is that something nationwide?

The numbers I provided were mostly related to PADD II and PADD IV. Additionally, I should have mentioned earlier that this serves as a precursor to the expected inventory changes. Over the past week, gasoline crack spreads have increased by about $7 to $8 a barrel compared to where they were a week to ten days ago, driven by the market's need to address these shortages. As a result, we will likely see inventory levels decrease and come into better balance in the coming weeks. The best way to assess this is to look at the gas crack in PADD II and PADD IV today, which has risen significantly over the past week to ten days.

Hi, thanks for taking the question. I wanted to circle back on the synergy detail on the crude supply and logistics, appreciate the split there, the 50/50 between the WCS and the logistics foreign spot, I sort of wanted to drive back to the Western acquisition that's already in the numbers are accounted for on the close, the $365 million. Is there a similar split that we could get or some sort of way of thinking about how much of that was maybe driven by differentials as well so that we can kind of get a sense of to combine what the run rate is going forward?

Yes, Prashant, this is Greg Goff. Regarding the Western synergies mentioned, those were applicable through the third quarter. The amount Don referenced for the third quarter of 2018 had no effect on differentials; the synergies discussed previously pertained to corporate synergies, supply, refining operations, and the overall package. Thus, there was nothing related to the crude differentials.

Thank you. For my second question, I would like to focus on the West Coast. I am interested in understanding the dynamics there, specifically how the California assets compare to the Pacific Northwest market and what we are observing in the first quarter. Additionally, I would appreciate any updates on potential opportunities regarding synergies or integration efforts.

Well, Prashant, we're just starting to engage with those refiners. Ray recently had a very productive discussion regarding the opportunities we see at LAR. We're planning to increase the costs at Martinez, where we also see potential for improving operating expenses and enhancing operational excellence. We'll then turn our attention to Anacortes as well. Ray, could you share some insights on what you're examining at Anacortes and anything related to Alaska?

We will focus on optimizing the four refineries on the West Coast: Kenai, Anacortes, Martinez, and LA. Andeavor has historically managed this well, and we see additional opportunities, especially with the upcoming IMO regulations. We may be able to shift some of the heavy streams from Kenai and Anacortes to our LA refineries, which have greater processing capabilities. Anacortes has a strong advantage with its access to Bakken crude via unit trains, and we are pleased with its crude processing capabilities. Kenai is a smaller asset, processing about 60,000 barrels a day, and has a limited marketing presence, but we believe there are still opportunities to optimize its configuration. As we have been analyzing each refinery for the past four months, our primary focus is on fully understanding the cost structure on the Pacific Coast and developing a plan to lower those costs.

Yes, Prashant, this is Rick Hessling, I'd just like to add just a few comments to that. So from a crude sourcing aspect, it's an incredible synergy to have the Pacific Coast and the West Coast as part of our footprint. We're able to take Canadian now to the West Coast, to the Pacific Coast as well as Ray mentioned Bakken, and this expanded footprint gives us the ultimate flexibility to guide a barrel there, to guide barrel to St. Paul Park, or to guide a barrel into PADD II for our four refineries there. And then in addition to that, our foreign purchasing strategy enables us to toggle barrels between the US Gulf Coast to those regions as well. So never before have we had this flexibility and this is, as Don stated earlier, a large part of our synergy. So a true advantage for both the West Coast and the Pacific Coast.

Good morning, everyone. Gary, could I ask you the usual question about Washington please, particularly. My understanding is the Venezuelan sanctions were abrupt and surprise. I was wondering if you thought that they would be, I assume, we believe they'll be lifted if there is change of regime. And secondly, any thoughts that you have about Iran and how that might impact the market because I assume if there's enough oil out there as stated by the administration, the chances are very strict sanctions on Iran later this year and further to that, any other observations you have on the latest situation in Washington? Thank you.

Right. And I would say that Venezuela was not a surprise to us. I think the president was very clear in his messaging and administration was very clearly messaging upfront on what might come about. As Rick stated earlier, we were well prepared and had eliminated for the most part a cargo here or there, but eliminated anything from Venezuela in our steady diet. As to Iran, I think you'll continue to see the discussions and sanctions in and around Iran; you're going to continue to see, I would say the same discussions. Probably the thing to keep close eye on though, Paul, as we all read yesterday of how some of the Middle East producers and Russia are looking to kind of have a sub-pact inside of OPEC, that's probably something more important to really keep our eye on what that might mean on how they're trying to really be able to balance the global crude market.

Yes, can I just follow up on that, what are your thoughts on the NOPEC, the chance of the NOPEC deal?

I think it's too early to tell, I think this, what I just discussed and what's being written in the media a lot about Middle East producers and Russia, they are the powerful producers. I think that will be a much more powerful combination than an OPEC type of an issue.

Got it, Gary. I have one more question if you don’t mind. Given the exceptionally strong international earnings we've seen this quarter and that you’ve presumably reached terminal scale in the US, would you consider expanding internationally for Marathon Petroleum? Thank you.

Not at this time, Paul, we have plenty to say grace over here. I've worked through my career, I've worked through those cycles many times and I don't see that that would be on our wish list at this time. End of Q&A

Perfect. Operator, thank you for everyone for your interest in Marathon Petroleum Corporation. Should you have additional questions or would like clarification on topics discussed this morning, we will be available to take your calls. And with that, thank you so much for joining us.