Q3 2019 Earnings Call

Welcome to the MPC third quarter 2019 earnings call. My name is the number and I will be your operator for today's call.

At this time all participants are in listen only mode. Later, we will conduct a question and answer session Press Star one on your Touchtone phone to enter the Q. Please note that this conference is being recorded I will now turn the call over to Kristina Kazarian Kristina you may begin.

Welcome to the Marathon Petroleum Corporation's third quarter 2019 earnings conference call. The slides that accompany this coal can be found on our website at marathon petroleum Dot com under the investors tab on the call today, or Gary Heminger, Chairman and CEO , Don Templin, CFO , Mike Hennigan CEO Chris.

One of MPLX, Jim War lead independent director of Mpcs Board as well as other members of the executive team.

Invite you to read the safe Harbor statements on slides two and three 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 sectors that could cause actual results to differ or included there as well as in our.

Linked with the FCC now I will turn the call over to Gary Heminger.

Thanks for strain and good morning, and thanks for joining our call.

Every she has demonstrated a history of trust transformative actions to drive shareholder value.

We separated for marathon oil in 2011.

Since that time shareholder returns that significantly outperform our peer group that was what was the S&P.

Over the same period of time, we've returned nearly $21 billion or capital to shareholders, including a dividend has grown at a 23% compound annual growth rate.

With all turn to slide five.

On today's call we plan to provide updates on our integration and execution successes from the past year and discuss our next steps are great shareholder value.

We will close the call with a review of our third quarter financial results.

Moving onto slide six over the past year.

Our primarily primary operational focus has been integrating our two businesses, enabling us to execute and achieve our targeted synergies.

Consistent with our continuous will focus on transforming our business to deliver shareholder value.

Beginning in January this year, we embarked upon a strategic review process.

Well identify the next steps in our value creation process.

This review included board involvement and engagement with multiple financial and other advisors.

Throughout the process, we engaged with our shareholders to understand their perspectives on the company and incorporated their feedback and that review.

As result of that review today, we announced our most recent step to create shareholder value.

And that is our intent to separate speedway into an independent company.

The board in our management are fully committed to pursuing the path that maximizes shareholder value.

And we believe the separation will create two strong industry, leading companies well positioned for long term growth and success.

Now turning to slide seven please.

A new Speedway will consist of all of Mpcs company owned company operated retail stores, which collectively generates approximately 1.5 of annual EBITDA.

We believe this business has significant growth potential fueled by a strong loyal customer base.

The direct dealer business was primarily operates on the west coast will remain with MPC.

This is a separately managed business within our retail segment, which is only fuel supply with no merchandise sales.

Moving on to slide eight.

As we look ahead, we are truly excited about the opportunity the separation presents to each company will unlock value and drive total shareholder return.

We believe the this transaction has significant benefits for both MPC and future Speedway shareholders and has the potential degrade and enterprise value and approximately $15 billion to $18 billion.

On slide nine.

One of the most important aspects that drove our decision to suffer great Speedway today is how much we have grown the scale and earning power's earnings power of the business.

The number of stores has nearly tripled since 2011 to roughly 4000 at the membership within our speed Speedway loyalty program has nearly doubled.

These successes have helped grow speedways EBITDA from approximately $380 million in 2011 were approximately 1.5 billion this year, but nearly fourfold increase.

The impressive growth of this business within MPC has created a position we're in today and our ability to unlock significant value for shareholders.

Turning to slide 10.

Speedway has consistently been a top tier performer in the convenience store industry.

Historically.

Speedway has had industry, leading same store merchandise growth and fuel margins.

On a profitability per store basis Speedway has consistently led the industry.

And Speedway has built a platform position to deliver a strong earnings growth trajectory and exceptional free cash flow conversion.

Which will support continued investment as a Standalone company.

On slide 10.

The new speedway will be the largest us listen convenience store operator.

Hosting a close to close retail network and a nationally recognized brand.

The platform will continue its industry will continue to leverage its industry, leading customer loyalty program to help adaptive consumer buying trends with increased focus on digital engagement with our customers.

Given the expansion of market multiples and growing size or the business. We believe any dissynergies will now be outweighed by the potential value uplift of the separation.

With the continued focus on synergies and the benefits from continue store conversions, the new speedway will be thriving standalone business capable of delivering strong consistent cash generation and growth.

On slide 12.

Turning to the specifics other transactions next steps, we expect to accomplish this operation through a tax free distribution of Speedway shares.

Two MPC shareholders.

An important step into the process is establishing a long term market based supply agreement between MPC and speedway.

We expect speedway to raise new debt and pay a dividend to MPC as part of the separation process.

MPC with utilize these proceeds to reduce debt.

We plan to target a capital structure to maximize valuation for both.

So shareholders and physician speedway for growth.

I should to be completed prior to year end.

2020 subject to board approval and customary closing conditions.

On slide 13.

In addition to our Speedway announcement, we continue to evaluate midstream alternatives to enhance value for both our shareholders and MPLX unitholders.

Unlocking value within midstream is more complex than the separation speedway.

We have evaluated over 25 different scenarios to optimize MPLX to structure, including asset and business development divestitures that we discussed on our second quarter earnings call as well as potential separation alternatives for MPLX, including the creation of an up C or conversion to a C corp. Among other structures.

We also appreciate and consider the feedback we have received for many shareholders and unit holders over the past few months.

Today, we announced the formation of a special committee of the MPC Board as the next step in our continuing process to determine the best path forward.

On slide 14.

Our goal has been and continues to be maximizing shareholder value over the long term.

We have a track record of making bold transformative change.

To drive value and today's announcement is another step in that journey.

Over the coming months, we expect to execute the separation of the speedway business into a publicly traded company continue optimizing MPC.

Progressed, the realization of synergies and continue evaluating opportunities to further unlock value in the midstream business.

We believe these actions will result in strong nimble and efficient businesses that are positioned for long term growth and success.

The new MPC will continue to be a best in class energy business.

Continuing our history of operational excellence.

With a strong financial profile of the provides a compelling value proposition for shareholders.

On Slide 15, let me turn to our earnings discussion.

Before we get to our financial results I would like to share some thoughts on the macro environment.

Distillate inventory levels are meaningfully below the five year average setting the market up for strong momentum as we approach the implementation of IMO regulations.

Gasoline inventories are also materially below last years levels on today's of supply basis.

US turnaround activity for the fourth quarter peers in line with prior years further supporting a positive forward outlook.

On differentials the heavy Canadian market continues to move in our direction.

The WT Ais, a WCS spread which averaged just over $12 into third quarter has widened to around $17 per barrel.

Given the potential for government railed credits and easing of mandate upper.

We expect continuing continued widening of this differential.

On the product side.

Well as the two high sulfur fuel spread has now widened to $38 per barrel, providing a significant tailwind for coking economics.

MPC is well positioned to capture this opportunity across our major close to refineries.

At our Garyville facility, the corporate poker upgrade project, which is occurring this quarter is expected to increase our visit destruction capacity by 14%.

As part of our ongoing preparations for the IMO fuel spec to change we have established a new retail bunker operation in the Los Angeles area to complement our operation in the Pacific Northwest.

We made our first deliveries of IMO compliant fuel from those facilities in October .

Both locations are prepared to offer a variety of fuels to meet market requirements.

The focus of the first year of our combination was execution to unlock realize value.

We have made significant observable progress improving mechanical availability.

And operational integrity at our acquired refineries.

Expanding our commercial capabilities across the value chain and reducing costs.

This combined with our high quality asset base positions the company to be nimble and thrive in any business environment.

I would like to take this time to congratulate Greg Goff announcement of his retirement from the company and his 38 years in the industry have been quite impressive.

Also I want to congratulate Mike Hennigan in his promotion to president and CEO of MPLX effective tomorrow.

Mike has a deep background in all aspects of marathon and MPLX portfolio and we welcome.

His guidance as we go forward.

Now I will turn to call over to Don Templin to discuss the third quarter highlights.

Thanks, Gary Slide 16 provides a summary of our third quarter financial results.

Earlier today, we reported adjusted earnings per share of $1.63.

Adjusted EBITDA, which excludes $164 million of turnaround costs was $3.1 billion for the quarter.

Operating cash flow before working capital was approximately $2.6 billion.

We returned $848 million to shareholders this quarter and through the first nine months of the year, we have returned approximately $3 billion to shareholders.

Slide 17 shows the sequential change in adjusted EBITDA from second quarter to third quarter.

Adjusted EBITDA was relatively flat quarter over quarter with slightly lower earnings in the retail and refining and marketing segments.

Partially offset by higher earnings in the midstream segment.

Before reviewing the details of each segment I would like to discuss our synergy capture for the quarter.

As shown on slide 18, we realized $283 million of synergies in the third quarter.

210 million of our synergies, we're in the refining and marketing segment.

Benefits in the quarter included unit optimizations that improved distillate recovery.

We also saw improvements in cat cracker yields and throughput.

And continued crude supply and refine product distribution optimization.

In retail we continue to see benefits from economies of scale, our labor model and enhancement of the merchandise model across our newly converted stores.

This has contributed to higher merchandise sales and margin at these locations.

The $34 million in corporate synergies represents continued cost eliminations, including headcount reductions and contract renegotiations made possible by the combination.

Through the first nine months of the year, we've realized $686 million of synergies, including $89 million of onetime synergies.

Our execution through the first nine months gives us great confidence that we will exceed the upper end of our 600 million of gross run rate synergies targeted for 2019.

Slide 19 provides additional insight into our synergy capture since the combination with endeavor.

Synergies and improved capture by approximately 1.5% for the quarter.

We have also delivered reductions in operating costs and the in the overall SGN a expenses.

Although these expenses may fluctuate somewhat from period to period, our team is executing on the commitment to reduce costs.

Moving to segment results.

Slide 20 shows the change in our midstream EBITDA versus the second quarter 2019.

MPLX EBITDA increased $31 million versus the second quarter.

This increase was driven by growth across MPLX is business.

Which included delivering record gathered processed and fractionated volumes.

We also continued to progress the reversal of the cap line pipeline with appeared to the mainline initiated in October .

In Texas, the Gray of pipeline is nearing completion and is expected to be placed in service by the end of the here.

Sure.

Slide 21 provides an overview of our retail segment.

Third quarter EBITDA was $555 million.

Retail fuel margins were nearly 25 cents per gallon in the third quarter.

Same store merchandise sales increased 5.2% year over year, continuing the positive trend we've seen over the last year.

Operating expenses increased by 47 million in the third quarter, primarily due to the usual summertime seasonality.

Speedway continues to execute its brand expansion strategy through store conversions.

We converted 142 sites in the third quarter, bringing the total number of conversions since the combination with endeavor to approximately 550.

We remain on track to reach 700 total cumulative store conversions by the end of 2019.

Including locations on the West Coast.

And in the southwest.

Slide 22 provides an overview of our refining and marketing segment.

This segment performed very well despite declines in crack spreads in the mid con and west coast regions.

Third quarter, adjusted EBITDA was $1.4 billion, a decrease of approximately 110 million versus the second quarter.

Despite an approximately five dollar per barrel decrease in the Chicago WT three to one crack spread our mid con margin only decreased by approximately $3 to $17.42 per barrel for the quarter.

Our Gulf Coast margin was $11.26 per barrel in the third quarter and improvement of nearly $2 per barrel versus the second quarter.

Our west coast margin decreased by approximately $2 to $15, an 85 cents per barrel for the quarter, primarily due to a $4 per barrel decrease in the west coast and us three to one crack spread.

Capture for the quarter was an impressive 94% a significant increase versus the second quarter.

The increased capture was driven by enhanced margins through realize synergies as well as favorable price realizations.

Page 30 of the appendix provides additional details on our capture for the quarter.

Earlier this month, we completed turnaround work at our Saint Paul Park, and Gallup facilities.

The Gallup turnaround was completed following a seven year operating run which is longer than the average five to six years site.

Okay.

During the same pulp park FCC turnaround the refinery was able to maintain maximum crude rates by exporting gasoil much of it to our Garyville refinery.

This is the first time same ballpark has been able to export to this magnitude yet. Another example of our commercial teams ability to leverage our larger system.

Slide 23 presents the elements or change in our consolidated cash position for the third quarter.

Cash at the end of the quarter was approximately $1.5 billion.

Operating cash flow before changes in working capital with a $2.6 billion source of cash in the quarter.

Working capital was $168 million source of cash in the quarter, largely due to higher payable values, which were partially offset by higher inventory levels.

Return of capital to MPC shareholders via share repurchases and dividends totaled $848 million with $500 million worth of shares acquired in the quarter.

Distributions to public unitholders of MPLX were $310 million for the quarter.

As shown on slide 24, we have a strong track record of maintaining through cycle financial discipline.

At quarter end, we had approximately $28.8 billion of total consolidated debt, including $19.7 billion of debt at MPLX, which is non recourse to MPC.

Mpcs parent level debt of approximately $9.1 billion represents 1.1 times. The last 12 months of Mpcs Standalone EBITDA.

This ratio excludes the debt an EBITDA of MPLX, but includes the distributions MPLX paid to MPC.

On slide 25, we provide our fourth quarter outlook.

We expect total throughput volumes of just under 3 million barrels per day.

Planned turnaround costs are projected to be $185 million.

We have planned turnaround activity at the Garyville refinery in coordination with our crude revamp and croak coker drum replacement projects.

The project work and turnaround activities were aligned to optimize total plant downtime.

We also have project work on the Coker at our Los Angeles refinery.

As a result, we expect higher operating costs for the Gulf Coast and West Coast in the fourth quarter for these project related expenses.

Total operating costs, including major maintenance are projected to be $6.10 per barrel.

Distribution costs are projected to be $1.3 billion, which is consistent with prior quarter guidance.

For the retail segment, we expect fuel volumes of approximately 2.5 to 2.6 billion gallons and merchandise sales in the range of $1.5 billion to $1.6 billion.

With that let me turn the call back over to Christina Thanks, Don as we open the call frequent your questions as a courtesy to other participants we ask that you limit yourself to one question and then one follow up if time permits we will re prompt for additional question with that we will now open the call.

Question.

Thank you we will now begin question and answer session. If you have a question. Please press Star then one on your Touchtone phone if you wish to be removed from the Q. Please press Star then Q.

If you are using a speaker phone you may need to pick up the handset first the far pressing the numbers. Once again, if you have a question. Please press Star then one on your Touchtone phone.

Our first question comes from Roger read with Wells Fargo. Your line is open.

Well thank you.

Good morning, and Gary Congratulations on I mean, what's been a gray run.

Across the board here I know bumpy at times, but what you've been able to do in terms of putting this company together given how well the Q3 results turned out at all.

And then I.

Hi, Thanks, setting up a a really interesting strategic.

At the end, it's it's pretty for not only just say congratulations on that front.

Thanks Roger.

Did jump into the question side.

I guess really what I'd like to talk about first is the strategic review, which.

Imagine was a component of.