Marathon Petroleum Corp (MPC) — Q2 2020 Earnings Call Transcript

Welcome to Marathon Petroleum Corporation's second quarter 2020 earnings conference call. The slides that accompany this call can be found on our website at marathonpetroleum.com under the Investors tab. Joining me on the call today are Mike Hennigan, CEO; Don Templin, CFO, and other members of the Executive Team.

Thanks Kristina. Good morning, everyone, and thank you for joining our call today. Yesterday we announced an agreement to sell Speedway to 7-Eleven for $21 billion in cash, demonstrating our commitment to execute on the strategic priorities we outlined earlier this year. The sale of this business provides certainty around value realization for MPC shareholders. As I've stated before, I believe this is a return of capital business, and the substantial estimated after-tax proceeds of approximately $16.5 billion enables us to both strengthen our balance sheet and return capital to our shareholders. At the same time, the sale also creates a long-term relationship with 7-Eleven that enhances commercial performance potential through attractive fuel supply agreements and future growth opportunities. The transaction, which is subject to customary closing conditions, including HSR clearance, is anticipated to close in the first quarter of 2021. We move on to slide 4; as a follow-up to our first quarter earnings call, we're making very difficult decisions to increase profitability, create stronger through-cycle earnings, and drive long-term value creation. Despite the very challenging conditions in today's market, we remain committed to those goals and will continue each quarter to update the market as we progress. We outlined three areas that will be priorities towards achieving our objectives. First, strengthening the competitive position of our portfolio. We need to be a leader in cost, and operating and financial performance metrics need to make necessary changes to the portfolio to achieve these objectives. One of our key philosophies is that each asset needs to generate cash back to the business. We announced the decision to indefinitely idle our Gallup and Martinez refineries. Closures as a result of the tough refining business climate ahead of us have been amplified by the impact of the pandemic. At Martinez, we are evaluating repurposing the refinery towards the production of renewable diesel. The facility has the ability to provide up to 48,000 barrels per day of renewable diesel. We have the unique opportunity to take advantage of the strong set of logistics assets for the area and also have three significant processing units that are an ideal fit for making renewable diesel. These advantages should drive significantly lower capital requirements compared to greenfield investments and pursue enable initial production as early as 2022 with the option to ramp up from there.

Thanks Mike. Slide 6 provides a summary of our second quarter financial results. This morning we reported an adjusted loss per share of $1.33. This adjustment reflects a $1.5 billion pre-tax lower of cost or market inventory benefit. Adjusted EBITDA was $653 million for the quarter. Cash from operations before working capital changes was a cash source of $172 million. Our dividend payments for the quarter were $378 million.

Thanks Don. I'd like to take a moment to provide some comments on our responsibilities around corporate leadership. We’ve recently published our 2019 sustainability report, highlights of which can be found on slide 18 in the appendix. The report is greatly expanded this year in terms of content and disclosure and outlines our commitment to provide information consistent with the many reporting frameworks that are influential in the investment community. As such, the report summarizes our comprehensive efforts related to environmental, social, and governance aspects of our business. On that note, I wanted to touch on recent events that have impacted many of the places where we live and work. At Marathon, we are committed to fostering a diverse and inclusive workplace and to partnering with organizations in the communities where we operate to encourage acceptance, tolerance, and unity. Like many companies, we are charting a path towards greater understanding, listening and open dialogue, and we are firmly committed to continuing to make progress in this very important area. With that, let me turn the call back over to Kristina.

Thanks Mike. 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 will re-prompt for additional questions. We will now open the line to questions. Operator?

Thank you and congratulations Mike, Don, Kristina, and the team on the transaction. The first topic is around cash flow. Can you talk about the pieces that go into the tax number that bridge between $21 billion and $16.5 billion? And with the cash, what's the framework around allocating cash; recognizing we'll get more color around this later and thoughts on debt reduction versus buybacks versus special dividends, and then I do have a follow-up.

Hey Neil. Thanks for the comment. First of all, before answering the question on use of proceeds, let me just make a couple of comments on the deal itself. First of all, we looked at a lot of different structures and a lot of different options and then came to the conclusion that this deal creates the most value and the most certainty for our shareholders.

Yes. Neil, I guess you asked a couple of questions. Let me first talk a little bit about our consideration of use of proceeds. Let me talk a little bit about how we think about defending our investment-grade credit profile. So maybe backtrack just a month or two when we had our first quarter earnings call, liquidity was probably top of mind and I think we took some very proactive actions to make sure that we had addressed that issue, and as I mentioned in our comments, we now have $7.7 billion or so of available liquidity. So we feel like we're well-positioned going forward. As we think about looking ahead, we believe that an important part of our capital structure is an appropriate level of debt. We don't think it's efficient in this environment to be under-levered, but we also want to make sure that we're defending our investment-grade credit profile. And as I think about defending our investment-grade credit profile, no one metric or factor drives that consideration. We'll look to a number of inputs that include obviously the lost EBITDA from the Speedway sale, but we'll also consider the steady cash flows we have from our ownership interest in MPLX, our views around mid-cycle and through-cycle EBITDA, the size of our committed credit facilities which are very significant, and the cash we currently have on our balance sheet, which is a billion dollars, our dividend policy going forward and various metrics such as debt to EBITDA and debt to capital. All of those factors will be part of the consideration, and as Mike mentioned, the unprecedented macro environment makes it difficult right now to be more specific. You did ask a question about tax and so on that particular topic, our tax basis and the assets that we're selling was just under $4 billion, so the after-tax proceeds that were showing in the release, the $16.5 billion is really predicated on that tax basis.

That's very clear. The follow-up is a bigger picture question regarding how you are losing your most valuable business. While you are monetizing it at a significant multiple, can you discuss how you view value creation moving forward? What remains is MPLX and the refining business; how do you generate value from those two segments and position the company for the long term without the consistent cash flow from Speedway?

Hey Neil, that's a good question. Let me make one comment on the Speedway deal relative to that; we still believe we're going to get the benefit of integration. That's not a loss because of the supply agreement that we have and the fact that we'll continue to be using our logistics assets. But to your broader question, we still have a lot of work to do in the three areas that I keep mentioning. So strengthening the portfolio is going to continue to be a theme that you'll hear from us over time as we continue to look at our assets. We're just getting into the midst of improving our commercial performance. So you'll hear more about that over time as well. As well as the cost structure. We've given some early indications for 2020 to lower our cost structure by about $950 million, but we have more work to do in that area. So you have a real good question: where do we go from here? I just ask you to keep thinking about those three priorities. We're going to continue to report on those. We're certainly not done from this standpoint. We've looked at obviously a couple of assets in that regard, and obviously getting the Speedway deal done was a high priority for us. I think it does put us in a unique position to return capital to shareholders, as Don mentioned, to get the balance sheet in the right order. So I think we're in a good position relative to the environment that we're in, and we expect that to stay challenged for some time. Although we're optimistic that, just like all these cycles, we'll get out of it at some point, and we're seeing a slow recovery which is headed in the right direction, but we're just anticipating that it could take a while to get back to normal.

Thanks Mike. Appreciate it.

You're welcome, Neil. Thanks for the question.

Thanks. Good morning, everyone. Mike, I want to add my congratulations on the impressive multiple for Speedway. I have two questions, if that's alright. First, I'd like to discuss Martinez and Gallup. Can you explain the process that led you to your conclusion? Was a sale option considered? Is this an inventory liquidation event? Also, could you outline which other assets in the portfolio currently do not generate positive cash flow?

Yes Doug, also very good question. I'll start with Gallup, and like I said in my prepared remarks, these are very difficult decisions for us to contemplate during some really tough times. I mean, COVID has had an impact on many people in many different ways, but it's obviously had a real strong impact on our business and the business climate that we're seeing going forward is especially with refining supply and demand and obviously that's more weighted towards the demand side. But anyway, to answer your direct question, we had a unique niche in the marketplace there that's essentially been competed away over time. So it's much more difficult for a small refinery to be successful, but to answer your question, we did look to sell the asset. We ran a process, but unfortunately we did not get something that we could execute on. So absent the process being successful, we thought the next step was to put it in an indefinite idling position, but still keep the logistics assets active so that we have some other opportunities from that standpoint, and then we'll see how things play themselves out. On Martinez, we did not look at a sale. To your question there, we're pretty excited about the opportunity of reconfiguring the asset into renewable diesel. We got some more work to do there, and I know we have a lot more detail, but I do want to give you at least the direct answer to your question as to whether we looked at sales. We did at Gallup, we ran a process that wasn't successful. We did not at Martinez. So hopefully that answers that question.

It does, and I appreciate the color there. Maybe I don't know if you want to take the next one with my follow-up as well Mike or if you want to throw it to Don, but I'd like to preface the question by just taking a look at MPLX's stock price or unit price since you did the IPO, I guess about seven or eight years ago, and it's still trading below that level. I realize the MPLX process is done and dusted so to speak, but when you look at the outstanding equity and the amount of cash you just brought in, why would it not make sense to buy in the balance of MPLX given that the incremental cost space still seems to weigh on your refining valuation? I'll leave it there. Thanks.

Yes Doug, it's another good question. As you referred to our midstream study, whether it's bringing it all in or actually looking at the RLFD, you're finding logistics and fuels distribution. We went through a pretty exhaustive study, as you're aware and you referenced, and the bottom line is we came to the conclusion that we didn't want to buy in a cash stream that we were already getting with respect to the RLFD. Marathon has a unique position where we're receiving about $1.8 billion in distributions from MPLX and RLFD is about $1.4 billion of EBITDA. So again, I'm saying we came to that conclusion of why would we buy in that cash stream when we're getting it essentially via distributions and instead use that capital which would be north of $10 billion to return to MPC shareholders. So that's where we came out on the subset of it as far as all in at the end of the day, there is some amount of cash flow that goes to partners on one side of the fence, and on the other side of the fence, we'd be paying tax to a certain extent depending on where we think the tax rates will be going forward. So at this point, and we do recognize and we are frustrated at the level of equity value that MPLX has, at the same time we felt or continue to feel that the amount of capital that would be needed to do that at this time makes more sense to return to shareholders as opposed to not, and obviously we've concentrated a lot on the Speedway unlock of value, and that's kind of where our head is for right now. As I mentioned, and Don commented as well, we're going to be doing a lot of analysis between now and the close to look at what's the best use of proceeds, but the highlight priorities are the balance sheet and returning capital to shareholders.

All right. Appreciate again the answer, guys. Thanks.

Hey, thank you. Good morning.

Good morning, Roger.

I guess maybe to follow up on the whole restructuring and slide 4 where you've got the three kind of, I guess, guideposts, I'll call it, where should we think about where you are in the overall evaluating the company, potentially restructuring the company. This is going to get back to some of the questions already been asked; do you buy an MPLX? Do you want to buy in a bunch of shares, change the dividend, etc.? But I'm just curious because you couldn't have known for certain about getting a sale of retail done until obviously you signed the papers, even if the cash is still a few months away. But now that you have certainty of that, how does that maybe affect the way you are in terms of progress and doing an evaluation throughout the company on both sort of a current COVID basis and then on a maybe called more of a mid-cycle kind of ‘21/’22 outlook standpoint?

Yes, Roger. So like you said on the three initiatives, we still have a lot of work to do on the portfolio. To your point, we could not be assured that we would get this deal done. We were very optimistic because we believe Speedway is a really attractive asset out there. We did get significant interest, and I think we concluded the deal that's in the best interest of ourselves, Speedway, and 7-Eleven. As far as the portfolio, though, we still have a lot more work to do both on the refining side and the logistics side and the GMP side. I mean, there's a lot of activity going on, and the best I can give you is over time, we'll continue to disclose how we're feeling about certain things. We don't want to get ahead of ourselves in the market, but we want to get to a portfolio. Our goal is to get to a portfolio that generates significant free cash in any environment, and for me personally, I'm about protecting downside. So knowing that we're going to have these down cycles, we want to make sure the portfolio is very resilient during those times. As far as the other areas, like I said, we're just starting to make some moves in the commercial area, and that's the one area that I'm probably going to be the least disclosing about just because of the competitive nature. And then the cost structure, I think, just keep an eye for each quarter as we continue to progress. My personal style is not to put out a big number and then try and track against it. It's more of a try to have continuous improvement and continuing to lower our costs in a lot of different ways and change our philosophy on cost and change our philosophy on capital discipline. So each of those, I think, Roger, each quarter, we will be able to talk a little bit about how we've made progress in each of those areas, and then hopefully you'll get to see over time how we're looking to maneuver the company. I hope that makes sense to you.

It does. You're going to make us wait. That's always the hardest thing for us. As a follow-up and I know Don, you've already tried to address the tax issue, but we've been getting a lot of questions in on it. I was just curious, the other refiners for the most part have discontinued ETR guidance because the current environment and the CARE Act has some real impact. So I was just curious as we think about the $21 billion and the $16.5 net; are there other things that may flow through here in coming quarters, whether it's going back and capturing prior profit tax payments or something else that might allow you to whittle down the tax impact on the sale?

Yes, Roger. Regarding our effective tax rate, 2020 is an atypical year due to significant goodwill charges, which have limited deductibility. Our effective tax rate for the first quarter and year-to-date is in the middle teens percentage-wise, primarily influenced by this. We are focusing on our cash tax position, and as we indicated in the first quarter, we expect to report net operating losses for 2020 because of the environment and substantial past capital expenditures allowing depreciation deductions when assets are put into service. We anticipate a significant NOL, and the CARES Act permits a carryback of these losses for up to five years, which would allow us to utilize those in years with a 35% tax rate. We see this as beneficial for MPC. Our goal is to file our 2020 tax return as promptly as possible in 2021 to facilitate that NOL carryback and the associated refund. Regarding the sale of Speedway, we will continue to assess the situation and seek ways to optimize our tax position, but we felt it was important to share the sales price minus basis, applying what we believe to be a normal tax rate at a statutory level.

I just have one minor follow-up regarding the timing of the refund for when you file the 2020 and 2021 returns, which is my last data point.

We believe that happens relatively quickly, but who knows what the world looks like in 2021 if people are still working from home or still in their offices, Roger, but we believe that that's a relatively rapid transaction, not transaction a rapid result if you will. So we're going to push really, really hard to get our return filed as quickly as we can, and then we would expect that the refund would manifest itself relatively quickly after that.

Thank you.

Thank you. Good morning, guys.

Good morning, Paul.

My two questions if I could. I think earlier that you said that it doesn't make sense for you to buy for the remaining of MPLX. So if the company considered that with far more flexibility with the cash infusion, whether that you may be open that do you want to spin off totally the MPLX? Whether that this is a consideration or that you still conclude after the exhausted evaluation that you're just going to keep the structure as it is? The second question is related to the Golden Eagle; whether not shopping yet can you still one the renewable or that you want the renewable you need to shut it and in terms of the renewable, how big is the business that you want that in the long haul for your business taking into consideration on one hand current margin and return are very good but on the other hand, the barrier of entry is low and the margin and the demand and your sense with government mandate. So I want to see how you deal with that business long haul. Thank you.

Hey Paul. So on the first one, we don't have any other comments other than, as I mentioned, we're going to do a lot of analysis. We have some time to look at what's the best thing to do with the proceeds, but I do want to leave everybody with the priorities that we have are the balance sheet and returning capital. So one of the obvious things that we stated from the beginning with Speedway was we did want to unlock that value realization, and returning capital is a high priority. So I don't want to comment on anything other than those at this point. On your questions on Martinez and renewable, I'm going to turn to Ray in a second, but let me just give a couple of opening comments. So first off, I think Martinez is in a unique set of circumstances relative to the hardware that exists at the facility, and I'll let Ray talk about that. We are believers that the renewable positioning is going to be beneficial to us because it aligns with California's low carbon fuel standards. We've also stated MPC has greenhouse gas reduction targets that we want to accomplish throughout the decade, so strategically this fits with where our thinking is, and I would just give you a little bit of framework as we think about capital investment there, and this was the harder decision. The expected capital that we're going to put in for the first phase, assuming we go with this, is about the same amount of capital that we would put into a planned turnaround for the facility. So we really hit a decision point and decided to pivot and look at renewable diesel production as opposed to refined product production. So that's kind of the decision tree if you want to call it that. There is a lot of details that go into the analysis. So I'm going to let Ray give you a little bit more detail so you understand some of the specifics around Martinez and its own specifics about the facility.

Hey thanks, Mike. Paul, I just want to give you a framework a little bit that we've actually been looking at Martinez for a long time, essentially ever since we merged with Andeavor, and early on we evaluated what you suggested, co-processing for renewable diesel, but those economics weren't nearly as strong as the conversion that we're looking at right now. The key item and Mike just hit on this is with the refinery continuing in its current form is that it has an extremely high cost structure, and then we have the near-term headwinds with a heavy turnaround spend in the coming year. So we believe that transitioning Martinez to a renewable diesel plant ultimately creates value for our shareholders, and there are certain unique advantages for this site. Our Martinez renewable diesel facility can provide up to 48,000 barrels per day of capacity, and we expect the initial production could be online in 2022 and ramping up from there. We are continuing to evaluate in more detail, but the initial analysis looks extremely promising. Martinez currently produces about 54,000 barrels per day of ULSD at full utilization, and the conversion would produce up to 48,000 barrels per day of renewable diesel. I want to emphasize that this is not a grassroots facility. So there is an element of speed of conversion. We believe that we have an early mover advantage, and we believe that there are opportunities for meaningful partnerships with feedstock suppliers. Now we fully understand that the drivers for the economics of this project are not our typical refinery project; there are regulatory drivers, but at the end of the day, with the unique advantages for Martinez that I talked about earlier, we're just really excited to take this evaluation further.

Ray and Mike, can you give us some idea that for the company as a whole long term, how big a renewable diesel business that you want to be, or you're willing that to get you say a ceiling; or you think that there's really no ceiling; it depends on the opportunity set; and also that after the Speedway itself, who is going to keep win. That's it for me. Thank you.

Yes Paul, it's Mike. While we don't have a specific target number at this moment, I want to emphasize that we will continue to assess the portfolio and make decisions as we progress. Our priority, as Ray mentioned, will be to evaluate the different phases involved. Additionally, for those familiar with my past, I believe that joint venture arrangements can be extremely successful when engaged in these types of deals. Therefore, managing our capital and striving for a better overall outcome for all parties involved is another focus we are intensely considering. We are looking into that approach. Overall, we see some unique advantages here that could be beneficial. Ray provided a lot of technical details. From a commercial standpoint, we plan to discuss joint venture opportunities in the future. Capital management is one of our key priorities; maintaining strict discipline is crucial. That is an important aspect to highlight. I also want to give Brian an opportunity to share his thoughts.

Yes Paul. To your question, the last question that you snuck in there regarding the rent as it relates to the Speedway separation, just wanted to address that real quick. So I think the first thing to understand and appreciate is that we've always had a market-based philosophy and approach to pricing with Speedway. So as a result of the separation, fortunately due to that historical philosophy, there's really no step-changer movement and value shift, but fundamentally MPC will be the blender of record in all transactions. So we will possess the rent and retain the rent. As it relates to the value of that rent, that's all always driven by market specifics which is individual market by market and the agreement fully contemplates that. When you talk about a long-term agreement like this, we have to make sure that it's resilient over time, and the agreement fully contemplates this for rents or anything else frankly in the future. So that's the way it's going to be handled in the agreement. So I just wanted to underline and underscore that there is no value shift whatsoever as a result of the transaction on rents.

Thank you.

Hey guys, my question is on the crude sourcing side. During 2Q medium servers are very tight, but as we move into 3Q, we are seeing Russia and other OPEC countries raise those volumes. So do you expect more discounts or medium server crudes going into 3Q, which could help your Gulf Coast results in 3Q?

Hey Manav, it's Mike. So Rick's not here today. So I'll take a shot at that. He's out of the office today. I mean, in general, we think directionally the crude market is going to hopefully move towards us with increased production. As you stated, we're going to have a little bit of a recovery in the production side of it, which hopefully will put some pressure on differentials. Right at the moment, as you're very aware, refining crack spreads are still very weak and it's not been a good environment for refiners, but as I mentioned earlier, we're optimistic but cautious. As recovery continues to progress, hopefully we'll get to see a recovery in refining margins, which we haven't seen yet. As crude production continues to progress to your point, then hopefully we'll get to see a little bit more opening on those spreads. I would, Manav, this might be a good opportunity. Let me let Tim and Brian make a comment on where we think we are in demand recovery. So I give you a little bit of a flavor of how we're seeing the demand side. So Tim, why don't you start with gasoline, and then Brian can finish up with the portfolio.

Yes you bet Mike. As Don referenced, we've seen a really continuing amount of recovery in gasoline demand since the early April lows in really all regions of the country as many of the states have reopened, with probably the greatest strength in the Midwest really through the second quarter. Recovery trends nationwide have slowed more recently with system-wide weighted same store sales volumes currently down sort of 10% to 15% compared to last year, with the East Coast about 5% behind the Midwest and the West Coast another 5% behind that. So as referenced earlier, we're watching carefully the latest COVID case escalation in multiple regions and the potential for states or counties to back up on the reopening plans. Schools going back to in person is a significant wild card on the demand side as students at home will have some consequence for the ability of parents to return to their workplaces and getting people back on the road. For what it's worth, we also think the increasing requirements for masks nationwide is a positive for demand as it facilitates increased mobility with more things able to be open, which potentially gets people back on the road to a meaningful extent. We'd much rather see people out on the roads with masks than at home without them. With that, I'll turn it over to Brian for diesel and jet.

Yes. Thanks Tim. So to continue on demand, Manav, I can kind of talk across our entire book. So to Tim's point, we see the exit rate for July being down about 10% to 15% overall. So I can echo what Tim's seeing that just a couple of regional notes, the one downside note on a regionality is in the Southwest. So with the resurgence in cases of COVID in the Southwest, we have seen a weakening here in the last several weeks in that particular region. On the bright side, the Midwest and Atlantic coast both recovered, and they're down roughly 7% year-on-year across in total book, which is a really good sign for the Atlantic coast, as everybody knows that we're pretty hard hit up in the New York, New Jersey marketplace. On the diesel side, we hit our low point just as a reminder in early to mid-April. We were off about 22% year-on-year. We exited July off about 10%, and to Tim's point on the demand profile, we have seen since the fourth of July kind of a sideways motion as it relates to demand, but it's been pretty stable over that period of time, but somewhat in a plateaued manner. The downside regionally, the Great Plains is off 15% to 20%, a lot of that has to do with the heavy demand up in the Bakken area that have curtailed as a result of drilling activity up in that market, and then the upside regionally, the Midwest is about 5% off, and we're actually up in the Southeast year-on-year on the distillate side. Closing out on jet fuel, in the second quarter, we are off roughly 34% year-on-year, a pretty big outperformance relative to the market. A lot of that has to do with our sales mix. We're heavily levered to cargo sales which are really strong resurgence, really since the COVID outbreak and even before that with online retailing really driving a lot of the demand in the Midwest and also up in the Alaska market. In July we're actually down year-on-year in the low teens. So really strong performance by our aviation team. That's really starting to see the fruits of the combination commercially with the Endeavor portfolio and MPC coast to coast. A lot of the jet buyers are levered across not only the U.S. but just globally, so it's really been able to create richer relationships there to drive incremental capture of market share overall. Really the outlook on August is pretty flat to July. We expect to be some downside to that based on the resurgence, and in both cases, stay-at-home orders as well as quarantine, and really the thing we're watching right now as we look at September is what is demand going to look like in September given that a lot of schools are not returning to normal, and people are working from home. So there is definitely a pent-up demand of folks wanting to move around. So it's a bit of a wild card what demand is going to look like in September. You can make as good of an upside case as a downside case. We're watching it closely.

And then I'll just circle back to crude. I know you asked about the Gulf Coast, but hopefully Canadian differentials will start to widen a little bit as more production comes online into that market, and then on the west coast, we're starting to see some foreign economic alternatives like Russian grades, Brazilian grades, etc. etc. So it's been pretty tough sledding for refiners, and I'm hoping we get a little bit of margin improvement with some of the adjustments of crude production coming on.

This is a very helpful sir. I had a very quick follow-up on Dapple. I think you're moving about 50,000 on Dapple to your Midwest and midcon refineries, but I think there are three offsets, and Mandan can you split up with your Bakken bargain usage between Dapple and non-Dapple. I'm just trying to understand in case does go down, are there enough offsets to that 50,000 barrels so you actually may not see an earnings headwind on the refining side.

Yes, Manav, that's accurate. So we have a bunch of other alternatives other than Dapple as far as supply. So if Dapple were to not run, we think we have enough alternatives on the supply side. So I think you're right on with your statement. One comment I would say though on the logistics side with respect to Dapple, as well as another pipeline up in that area, the high plains pipeline, I mean, MPLX is a 9% owner in Dapple, and then the high plains pipeline, if that were to shut down as well as a result of the recent discussions about the BIA looking to have it shut down. I'll give you a couple of comments that I think would be helpful to clear in the market. Number one is we believe on the BIA that an appeal has been filed at this point, which triggers an automatic stay of the shutdown. So we don't think there's anything in the short term because there is an automatic stay, and then we'll continue to try and advance that discussion to a good conclusion for all parties. On Dapple, obviously, Energy Transfer is taking the lead in that discussion from the legal standpoint, etc., but both of those together, if they were both to shut down on the logistics side, we think the impact to us would be less than $100 million if both entities were to be down. We don't think that's the likely case, but I just wanted to give you a little bit of the logistics side of it, and then to your point on the MPC supply, we think we have enough alternatives that Mandan would be supplied adequately as well as our PADD II refineries.

Thank you so much for taking my questions.

You're welcome.

Hi, good morning everyone. Thanks for taking my question. My first one was wondering if you can provide some color or details around that 15-year supply agreement with 7-Eleven? Wondering if there's a value or you would assign to it and maybe give us a sense of the opportunities of growth in terms of areas and size there.

So I'll give some comments, and I'll let Benny add. I mentioned earlier, one of the big benefits in the agreement is we maintain a lot of the integration benefit that we see as part of our portfolio. So, I mentioned earlier it's about approximately 8 billion gallons for 15 years. So it's a long-term relationship that we're looking forward to with 7-Eleven, and a lot of the integration benefit that we have is providing the logistics service and providing the transportation and trucking services. So we're going to continue to provide those services for 7-Eleven. So there'll be a benefit to us as far as using our logistics assets, using our trucking services, trying to give them the utmost and terrific service. So I think it's a win-win for both of us. We're going to capture the integrated value as far as the logistics and the supply and 7-Eleven, obviously, we'll capture the margin in the retail business going forward. Another important point is that's 7.7 billion hold steady for the whole 15 years. So it's a very long-term relationship. So that's one component, and the second component is we plan to work hand in hand with 7-Eleven as they grow out their portfolio. They've had a stated goal to expand to about 20,000 stores. So we have a second agreement with them that I'll let Brian comment on which is to continue to supply them beyond the existing Speedway situation.

Yes. Thanks Mike. Yes, it's a little tricky to talk about the supply agreement commercially for obvious reasons, but maybe I'd kind of underscore a couple of the guiding principles and tenets to it and hit upon what Mike already mentioned really is it's important to know we had a market-based philosophy. So it's very difficult and tricky to develop a long-term supply arrangement, but we think we've done it. We think this is a really good solid relationship that's a win-win for both parties. If you think about the history of the Speedway portfolio literally growing up over decades in and around the infrastructure. So it's important to us to preserve the integration value operationally associated with that, which we've done so in the contract. At the same time, providing a really compelling supply operationally as well as commercially for 7-Eleven in the transaction. So we think going forward it's really set up well for both sides from a win-win perspective, and then Mike from a growth perspective historically we haven't had, I'd say, based on their scale, 7-Eleven hasn't had a huge supply relationship with them. So we think there's opportunity there especially across the broader platform that we now have coast to coast to work closely together to find more opportunities. So we think we've started down the right path. We think we've got the commercial construct to get there, and we're excited about the prospects of going forward once we get to the closing table to drive incremental value not only for MPC but across both sides of the table.

Great. Thanks. That's very helpful. My follow-up question, a follow-up on your decision on closing Martinez and Gallup. Just wanted to get your thought on the impact, especially Martinez, on PADD V. When we get back to more of a normal environment, should we expect that region to flip to be more an important product, and what you think that potentially does to the margin volatility in that region, and also wanted to get a sense in terms of the change in cost structure it brings and if you think how much the price improvements from a tighter supply might bring to other assets and potentially offset the normal contributions from these assets.

So I'll let Brian make a comment on the balance, and then Ray can make a comment on the cost structure.

Yes, as it relates to the west coast balance, I think taking Martinez down is certainly directionally helpful for the balance, and that's an obvious statement. Hard to predict though going forward what that actually looks like as we continue to trend out of COVID, but we've been able to optimize and resupply with inter-network as well as with some of our trade partners in that marketplace. So directionally positive and on the diesel side, I think Ray hit on it earlier. If you think about the mix of diesel production out of Martinez and what we're replacing with renewable diesel going forward, we need to go one for one, but the key there is renewable diesel is the demand element in the market. So it puts us in a really good position to not be the exporter in the market, to really help penetrate the market with what's being demanded out on the west coast. So hard to know with complete certainty and predict the future, but obviously we feel it's very directionally favorable for the marketplace.

Hey Benny, this is Ray. I'll just talk a little bit on the cost structure. When I talked a little bit earlier about Martinez, I commented that it has a very high cost structure as a refined product refinery. So that going forward, we'll have a much more streamlined facility with the three hydro processing units, hydrogen plants, and so forth. So we'll have a much lower cost structure on an OPEC standpoint as well as I talked earlier about the CapEx conversion. So at the end of the day, we really feel that we'll have a cost advantage renewable diesel opportunity.

Great. Thank you very much, everyone.

You're welcome.

Good morning. Thanks for taking the question. I wanted to follow up on the west coast there. With Martinez going down, how do you think about the synergies in having sort of that coastal coverage north to south in PADD V? Does that increase or change the way the importance of or change the way that you think about Anacortes or Kenai in terms of where that fits in the portfolio, and then sort of related to that too, I wanted to ask a follow-up about some of the lower complexity smaller refineries in the midcon, but maybe starting on that west coast synergy question, and then I'll wait for the follow-ups.

Yes, Prashant, this is Brian Partee. I mean, absolutely yes, it's a fundamental shift not only in the west coast balance but certainly to our book. So as a result, it has a direct impact on how we think about medium and long term about the assets out in the west coast. So something in the west coast system today is somewhat akin to what we're used to running in the Midwest with some of the flexibility we have between the plants, and this really just levers that and puts us into a different gear out west thinking about logistical assets, marine assets, terminal assets and whatnot to be able to optimize the overall portfolio. We've always run the Midwest as a system, and the west coast is largely functioning in a similar manner, and we see this directionally helpful to help us optimize the system overall, and we believe we've got the logistical capability to do that and really feel like it puts us in a great position going forward.

Okay. Great, and then just to follow up on some of the mid-continent broadly speaking assets, the less complex refineries. You mentioned that the Dickinson conversion is on target, and I think would that have kind of been in the back burner in terms of market view or what we were paying attention to, and so that's good to get an update there. But when you look at some of the other assets that are there, you have a few other sort of lower complexity so to speak, smaller refining assets in the midcon. Where do you think that fits into the portfolio longer term; some of those in terms of disposal versus conversion or keeping them running as is? Just wanted to get some sense of your thought process around those.

Yes, Prashant, like I said a couple of times here, all the portfolio is going to be evaluated for what we think will be the best long term. You did mention Dickinson, and I'll let Ray give an update so the market has a sense of where that stands, but I think the takeaway should be we've obviously looked at several of the assets. We have a lot more that we're having discussions about, and then hopefully, like I said, our goal is to get to a point where the portfolio is able to generate cash in all environments. I mean, the one we're in right now is obviously very difficult, but if we get back to a more normal environment, we want to have a portfolio that's very resilient. So Ray, you want to make a comment on Dickinson?

Yes, hey, with all the challenges that we've had with COVID, very-very pleased that we've been able to progress Dickinson right along schedule. At this point we're still targeting before the end of the year to complete construction of the 12,000-barrel-a-day renewable diesel facility and start up and have product by the end of the year. So that's still trending very well for us.

Okay. Thank you very much for the time.

You're welcome, Prashant.

And with that operator, thank you and thank you everyone for your interest in Marathon Petroleum Corporation. Should you have additional questions or would you like clarifications on topics discussed this morning, our team will be available to take your calls. Thank you so much for joining us. Have a good day.