Q4 2019 Earnings Call
Welcome to the N.P.C. fourth quarter 2019 earnings call. My name is Jacqueline 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 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 Doug went Doug you may begin.
Thank you directly.
Welcome to marathon Petroleum Corporation's fourth quarter, two girls and my view earnings Conference call.
Boards would accompany this call can be found on our website and material marathon petroleum dot com under the investors to.
On the call today are gearing familiar chairman and CEO , Don Templin, CFO , Mike Hennigan CEO of MPLX as well as other members of the executive team.
No Kristina Kazarian typically homes this call I'm doing that today because of Christina is celebrating the arrival of a baby girl or we go to half ago, both Kristina and baby I guess are doing well.
We invite you to read the Safe Harbor statements on slide two it's a reminder, that when we will be making forward looking statements during the call and during the question answer session.
Actual results may differ materially from what we expect today factors that could cause actual results to differ are included there as well as in our filings with the SEC.
Now I will turn the call over to Gary Heminger for some opening remarks and highlights on slide three.
Thanks, Doug and good morning, and thank you everyone for joining us I'd like to congratulate the Kristina and look forward to her return in a few weeks.
If you please return to to slide number three.
Earlier today, we reported adjusted net income of $1 billion or $1.56 cents per diluted share.
This quarter's performance demonstrates our continued ability to execute across all aspects of our business and capture incremental synergies at an accelerated pace.
And refining and marketing the teams commercial documents.
Coupled with our geographically diverse footprint drove tremendous capture results of 105%.
Key drivers of capture for the quarter included strong gasoline price realizations.
Leveraging our integrated assets and scale to capture geographic base prices dislocations compared to broader market benchmarks and the impact of our strong synergy delivery.
Our refining team executed turnarounds performed engineering projects and completed major maintenance at multiple refiners.
As Gary will the crude revamp project and the first phase of the Coker expansion project were commissioned allowing us to realize higher coker unit rates from the expanded drum size.
The second phase of the Coca project is on schedule to be completed in the first quarter of 2020.
Early operating results on the first quarter.
Coker have been very positive and we have been able to achieve a 17% capacity increase exceeding our original project expectations.
We expect anticipate in the second phase of the project to achieve a similar rate increase.
Our speedway team also executed well this quarter.
They delivered strong results, while also exceeding our cumulative store conversion target with over 700 stores converted to the speedway platform since the combination.
In the midstream segment, we progressed strategic long haul pipeline projects are key to the development of our integrated Permian to Gulf Coast Logistics system.
Additionally.
Northeast gathered processed and fractionated volumes were up 18, 14, and 12% respectively. In 2019 versus 2018, demonstrating continued growth and strong performance in this region.
Our team's execution this quarter continued the trend of a very impressive synergy capture.
We have realized over $420 million of synergies in the fourth quarter.
It has been over a year since a combination with an endeavor.
As a result of our focus on integration.
And outstanding execution over that period, our full year realized synergies now have totaled $1.1 billion.
We believe MPC will build upon this platform and continued to capture substantial incremental value in 2020 and beyond.
Don will provide more details around our synergy capture later on the call.
Now, let me briefly share some thoughts on the macro environment.
While current us gasoline inventory levels have been high at the first few weeks of year. We believe this is a function of healthy supply and high utilization in the fourth quarter.
We anticipate inventory levels to and moderate with the upcoming seasonal RVP transition.
We expect us gasoline demand to remain similar to last years levels supported by a steady economic outlook and stable labor market.
Overall use diesel inventory levels remain relatively constructive.
Running slightly below the midpoint of the five year average.
Warmer than normal temperatures in the northeast of recently weaken distill the demand, but we did I expect this near term weakness to persist as underlying fundamentals for light products remains supportive.
Continued to support this constructive outlook spring turnaround activity globally as expected to be close to last year's record levels, peaking at eight to 9 million barrels per day.
Crude capacity offline in March and April .
Furthermore, we believe the impact of additional global refining capacity will be moderated by lower utilization or less complex foreign refineries due to the collapse of high sulfur fuel oil prices.
Turning to crude we have seen the WCS differential widened since October partly supported by easing of mandate of production cuts and incremental rail loadings.
On a light sweet side, we anticipate a slight narrowing of the Wi Fi Brett spread through the rest of the year as new pipeline takeaway and Gulf Coast export capacity comes online.
Prompt medium and heavy sour differentials are currently narrower than expected in a post IMO world, primarily due to supply constraints geopolitical instability and strong us and Asian demand.
However, we anticipate heavy sour prices to weaken as HFO continues to become a discounted alternative feedstock.
We are focused on minimizing our exposure to weak HFO product pricing by destroying the vast majority of internally produced resulted in our own system aided by the successful expansion at our Garyville Coker.
We're also importing third party HFO Hs evo into our west coast facilities.
As an advantaged feedstock for our brokers.
With low sulfur fuel oil prices meaningfully elevated relative to gasoline and diesel. We're also utilizing our robust postal logistic systems to opportunistically export low software biggio and other components into the bucket bunker market at a premium.
We expect to refining margins to strengthen throughout the first quarter from seasonal factors and transportation markets and the industry's continued response to IMO implementation.
We are at the optimistic about the prospects for our business with continuous progress of migrating our midstream project backlog, we are targeting positive free cash flow generation across the MPLX business in 2021.
In retail our team is making good progress on the speedway separation.
While continuing to identify opportunities to grow merchandise margin through store conversions and remodels.
In refining we have made significant enhancements in the operations and reliability of the assets, we acquired and we continue to believe that the configuration and upgrading capacity at our cocoa coastal refineries positions us well to capture the market opportunities that are expected to arise from the implementation of IMO 2000.
20 regulations.
But world with our impressive synergy capture so far and the opportunities we have before us we're confident in our ability continue to continue delivering compelling financial results and maximizing shareholder value.
Let me conclude my comments, providing an update on some of our recent strategic actions.
Our work on Speedway is progressing as planned.
And we are targeting early fourth quarter for completion of the separation.
The midstream Special Committee is advancing its work as we continue to expect.
Provide.
And update during the first quarter.
And the CEO search committee is also progressing the work on schedule with expectations to be complete the latter part of the first quarter.
Now, let me turn the call over to Mike, who will provide an update on our midstream segment Mike.
Thanks, Gary turning to slide four today, we updated MPLX is 2020 growth capital target to approximately $1.5 billion down from the approximately $2 billion targeted shared last quarter.
This reduction shows our ongoing commitment to high grade our project portfolio.
We are also targeting growth capital of approximately $1 billion or 2021.
We continue to emphasize the growth of the all in that segment. We also remain focused on advancing our strategy of creating integrated crude oil and natural gas logistics systems from the Permian to the us Gulf Coast.
For the past several years, we have been committed to funding our growth project portfolio without issuing equity.
Given our attractive growth capital project portfolio, we have historically funded around 50% of our growth needs with debt.
We had done so while maintaining healthy distribution coverage of around 1.4 times and investment grade leverage of approximately four times.
Assuming continued growth in our earnings and growth capital of approximately 1.5 billion and approximately 1 billion in 2020, and 2021 respectfully, we're expecting to achieve positive excess free cash flow generation in 2021.
The target a reduction in capital is expected to allow the funding of our distribution and capital program entirely from internally generated cash flow as well as provide us with improved capital allocation flexibility to pursue opportunities, including leverage reduction or unit repurchases.
With continued earnings growth and investment discipline, we believe that we will be position to pursue incremental capital allocation opportunities broadening our value creation options and enhancing long term flexibility.
Now, let me turn the call over to Don to cover financial highlights for the quarter.
Thanks, Mike.
Slide five provides a summary of our fourth quarter financial results.
Earlier today, we reported adjusted earnings of $1.56 per share.
Adjusted EBITDA was $3.2 billion for the quarter.
Operating cash flow before working capital was approximately $2.7 billion.
We returned $409 million to shareholders in the fourth quarter, bringing the total the 3.3 billion of capital returned to shareholders in 2019, including approximately $2 billion in share repurchases.
Slide six shows the sequential change in adjusted EBITDA from third quarter to fourth quarter.
Adjusted EBITDA was up approximately $100 million quarter over quarter.
Driven by higher earnings in all segments of the business.
Fourth quarter results included a non cash impairment charge of approximately $1.2 billion related to goodwill associated with gathering and processing businesses acquired as part of the endeavor combination.
Our reported effective tax rate for the quarter was 51%.
This is significantly higher than our historical rate due to the effects of the non taxable deduct non tax deductible midstream goodwill impairments.
And biodiesel tax credit included in pre tax income.
Excluding these items, our overall adjusted tax rate for the quarter would've been approximately 17.5%.
This adjusted rate was also lower than our normal 21% effective tax rate, primarily as a result of discrete tax benefits recognized in the fourth quarter.
Before reviewing the details of each segment I would like to discuss our synergy capture for the quarter.
As shown on slide seven we realize $420 million of synergies in the fourth quarter, including 91 million of onetime synergies offset by $48 million of system integration costs.
For the full year, we realize over $1.1 billion of synergies.
The full year results substantially exceed the 600 million of gross run rate synergies targeted for 2019.
Slide eight provides additional insight into our synergy capture for the quarter and full year.
For the fourth quarter more than 80% of our synergies we're in the refining and marketing segment.
This included $62 million from catalyst formulation improvements at multiple refineries.
$55 million in crude supply optimization in the mid continent region.
And 15 million in marine optimization.
For the full year 2019, the majority of the synergy capture related to operational and commercial performance in the refining and marketing segment.
This included 128 million in catalyst formulation enhancements at seven refineries.
$76 million and turnaround execution improvements at the Los Angeles, Martinez and Saint Paul Park refineries.
$127 million in crude supply optimization in the mid continent region.
25 million improved crude sourcing for the west coast refineries.
We also realized $121 million of synergies in the retail segment associated with the economies of scale.
And implementation of the Speedway labor and merchandise models at the newly converted stores.
Lastly, we realized $24 million of synergies in the midstream segment.
And 109 million of net corporate synergies.
The corporate synergies were driven by cost eliminations and contract negotiations made possible by the combination.
Moving to our segment results slide nine shows the change in our midstream EBITDA versus the third quarter 2019.
MPLX EBITDA increased $3 million versus the third quarter.
During the fourth quarter, MPLX had strong terminal and pipeline Throughputs.
MPLX also successfully brought online three new gas processing plants and the new fractionator.
We also continued to progress the reversal of the cap line pipeline with the purge of the mainline completed in the fourth quarter.
In Texas, the Grey Oak pipeline began initial startup in the fourth quarter and we expect the pipeline to be in full service in the second quarter of 2020.
Slide 10 provides an overview of our retail segment results.
Fourth quarter EBITDA was $636 million.
Retail fuel margins were nearly 29 cents per gallon for the quarter.
Merchandise margins decreased by $47 million compared to our third quarter, reflecting typical seasonality.
We continue to see strong merchandise performance with a 4.7% year over year increase in same store sales.
Operating expenses decreased by $12 million in the fourth quarter.
The increase in the other column of the walk is due both is due to both an asset sale gain as well as a new commercial diesel branding agreement with pilot travel centers that began in the fourth quarter.
The fuel volumes and associated income related to this agreement are now reflected in the other portion of this segment rather than in fuel margin.
More details on this agreement can be found in the appendix.
Speedway continues to execute its brand expansion strategy through store conversions, we converted 158 sites in the fourth quarter, bringing the cumulative store conversion count to 707 708 locations exceeding our goal of 700 total cumulative store conversions by the.
End of 2019.
Slide 11 provides an overview of our refining and marketing segment results.
Our NEM performed very well despite declines in crack spreads in all regions.
Fourth quarter, adjusted EBITDA was $1.5 billion, an increase of approximately 51 million versus the third quarter.
Despite a for dollar per barrel decrease in the Chicago W. T three to one crack spread.
Our midcon margin remained relatively flat for the quarter.
Reflecting our ability to leverage our diverse geographic footprint.
To capture regional market opportunities.
Particularly in the Salt Lake City and southwest regions.
In the Gulf Coast region. The reduction in overall margin dollars was primarily related to lower throughputs associated with planned work at our Garyville refinery.
On the West Coast, our team did an extraordinary job capturing a 19 dollar and 44 cents per barrel margin an increase of over $3 per barrel from the third quarter.
Despite a relatively flat indicator crack spread.
This performance demonstrates our ability to use our operational and commercial expertise to drive value in this market.
Strong performance across all three of our regions led to capture of 105% for the quarter.
Slide 21 in the appendix provides additional details on some of the primary drivers for capture.
Fourth quarter results included a benefit of $153 million for the bio diesel blenders credit attributable to volumes blended in 2018, and the first three quarters of 2019.
The benefit was recognized in the fourth quarter because the legislation authorizing the credit was enacted in December 2019.
Refining operating costs increased versus the third quarter, primarily due to planned project work and our Garyville and Los Angeles facilities.
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 $1.5 billion.
Operating cash flow before changes in working capital was at $2.7 billion source of cash in the quarter.
Working capital was a 334 million dollar use of cash in the quarter, primarily due to changes in inventory levels.
Return of capital the MPC shareholders via share repurchases and dividends totaled $409 million with $65 million worth of shares acquired in the quarter.
In 2019, we returned $3.3 billion to investors through dividends and share repurchases.
You will recall that at our Investor day in December 2018, we articulated our target of returning at least 50% of Mpcs operating cash flow after maintenance and regulatory capital to our shareholders.
The 3.3 billion, we returned to investors during 2019 substantially exceeded the approximately 2 billion of growth capital invested in the MPC businesses excluding MPLX.
As shown on slide 13, we have a strong track record of maintaining through cycle financial disciplined.
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 1.2 times the last 12 months of Mpcs Standalone EBITDA.
This ratio excludes the debt and EBITDA of MPLX, but includes distributions received from MPLX.
On slide 14, we provide our first quarter outlook.
We expect total throughput volumes of just under 3 million barrels per day.
Planned turnaround costs are projected to be $425 million.
Hi, and work for the quarter includes turnarounds at our El Paso, and Salt Lake City refineries.
As well as catalyst changes at our Anacortes and Gary Bill facilities.
Additionally, we have planned maintenance work related to the completion of the Coker drummed upgrade project at Garyville.
And the expansion of the Wilmington, Hydrocracker, which is the last phase of the Lehrich project.
For the year, we anticipate turnaround spend of roughly $1.1 billion to $1.2 billion.
Total operating costs, including major maintenance are projected to be $6.05 per barrel for the quarter.
Distribution costs are projected to be 1.3 billion, which is consistent with historic guidance.
Corporate costs are projected to be 225 million for the quarter, which is slightly higher than previous quarters, primarily due to corporate contributions and benefit adjustments that typically occur in the first quarter of every year.
Slide 15 provides our capital investment plan for 2020, which remains focused on strengthening the earnings power of our business through growth and margin enhancing investments across the enterprise.
Mpcs investment plan, excluding MPLX totals approximately 2.6 billion.
The plan includes 1.55 billion for the refining and marketing segment.
Of which approximately $450 million is for maintenance capital.
Our growth investments in refining and marketing are focused on high return projects that enhance margin produce higher value products and promote resis destruction.
We expect to invest approximately $550 million in the retail segment, primarily to build new speedways stores and to rebuild and remodel existing speedway locations.
The plan also includes approximately 300 million for our midstream segment and approximately 200 million to support corporate activities.
Midstream segment capital projects include the cap line reversal and the South Texas Gateway Terminal project.
As Mike mentioned earlier.
MPLX also announced its 2020 capital investment plan, which includes approximately 1.5 billion of were organic growth capital and $250 million of maintenance capital.
With that let me turn the call back over to Doug.
Thanks, Don as we open the call for your questions as a courtesy to all participants we ask that you limit yourself to one question any follow up if time permits we will we re prompt for additional questions with that we will now open the call to questions.
Thank you I first question comes from sales crash of JP Morgan.
Yes, hi, good morning.
Good morning.
Yes first question go you shared a lot of.
Helpful color on your thoughts on how things are going to progress here.
From a macro perspective.
Just wanted your additional thoughts on high sulfur fuel oil you had talked about your expectations.
So as we continue to come down there and then pressure the sweet sour spreads, but obviously reselling of sand.
Rather strong improvement are strengthening in the high sulfur fuel oil crack. So what do you think is happening there and then how do you foresee this playing out.
Yes, let me turn that over Ray brought to give you some color on this.
Now hey, as far as high a high sulfur fuel oil we have seen on we have seen that incentive and we've taken advantage of fat with our system I kind of want to break that into two pieces that first is our internal production of high sulfur fuel oil, where we don't have coking capacity, what we've done not third.
Our investments.
Yeah.
At our coking refineries has had the logistics had essentially we're taking all back material and were taken at to our close from refineries for coastal with Cokers and distracting that.
The other thing as work or configured for additional high sulfur fuel oil.
And were taken advantage at the biggest thing thus far is out on the west coast.
Between lay our end Martinez wearing the 20 to 30000 barrels a day range about purchased feedstock.
We talked earlier on the call about our work in first quarter with Gary by completing that Coker work.
Once that's done well have similar opportunities that carried though.
Okay, and then just from a macro perspective Medicare your thoughts as to why does the cracks have strengthened so much and you do you see a re weakening high sulfur fuel oil cracks Kelly.
You know this has really been our strategy all along that.
We didn't see that leave us.
Increase in the cracks due to.
Higher distillate prices on the front end.
We really saw it as a feedstock advantage on the front end as Ray just discussed now as we go forward end.
It appears to us we're getting a sale of the market is starting to.
The strengthen and we're seeing pretty strong compliance with the other shipping companies and switching over.
To the low sulfur fuel oil.
And we think that bodes well, we never expected in the first three four weeks of January .
We'll have a.
Celebration in the distillate cracks, we thought this with Tom and will be stair step into the year and Thats still how we feel felt.
Okay.
Second question I would just be on the capital spending or obviously, we've seen some reduction in the planned spending here. There is finding growth capex is still fairly.
Fairly elevated and Tony Tony and I know in the past Gary I think you've talked about some potential for that to come down further, especially as we look beyond 2020. So is that something you'd still expect than that if I could tie in just the turnaround spending number is also up quite a bit year over year.
This is just an elevated turnaround year and is that something you'd also expect to come down more in future years. Thanks.
Yeah, Phil Phil This is Don Don Let me, let me address Sorta Capex first and then I'll have ray talked a little bit about the turnaround spending so you'll recall that in December 2018 at our Investor day, we targeted about $2.8 billion of capital for MPC, excluding MPS.
Alex.
Our our target and we also targeted basically flat capital spending in 20 in 2020.
From that 2.8, so our total capital budget for MPC, excluding MPLX is down and as you rightfully say there are some projects that are multiyear project. So about 40% of our refining growth capital is related to the star project. So thats the one at.
Guar and the Dickinson renewable diesel project the Dickinson renewable diesel project will essentially be complete at the end of the year. So all of that capital will fall off and the Star project.
Spending will be substantially less in 2021 than than in 2020. So your comment about some of those ongoing capital projects tapering off is absolutely correct. So let me let me turn it over then to ready to talk a little bit about turnarounds.
Okay fail.
Hey, when we get that combination back in 2018 to turnaround span go forward spend was not as ratable as we booked preferred 2019, even though we did a lot of work at Los Angeles Martinez and sang park.
It's a little lighter than averaged 2020 will be a little heavier on average and particularly in the first quarter.
We're working that our go forward schedule is going to be more even year end year out.
Our biggest spark in the first core is into first quarter 2020.
We're currently in the latter stages at El Paso on building a turnaround on the south side of that refinery and then we'll follow that up with pretty much full plant refinery at Salt Lake City in both of these are seven year cycle ending turnaround so not a whole lot of options to work with there.
And then that the other piece that's made during this this quarter.
As we have the second phase of our Gary about Coker Max project.
Starting in a couple of weeks coupled with the catalyst change. So you know higher first quarter bat when when margins are low that's that's when we really want to add.
Load our turnaround span.
Thanks for taking my questions.
Thank you. Our next question comes from Doug Leggate from Bank of America. Your line is open.
Thanks, Good morning, everybody.
Gary I have a feeling this might be a year last earnings call on so just want to wish you all the basketball saw skew.
To to maybe frame your outlook for the micro going forward.
Specifically is is IMO playing out as you expected I know you touched on a few minutes ago, but it seems things a little soft or at least from the product side and I Wonder if we could have you elaborate on your.
Confidence, let's say that the new capacity additions going forward.
We met with some.
Run cuts and less advantaged areas and I've got a follow up for dawn, please but but again I hope to run into again gallery and thanks for everything you've done over the years.
Okay. Thank you Doug maybe in the future you can take me through a proper dinner.
That's that's a long history with Doug.
So Doug.
Yes as I just stated we think IMO is is starting off like wed anticipated and we were conservative in our views on IMO did not expect a a significant run up in crack spreads.
Now of course, this has been a bit of a off of a downward move recently with the Corona virus, but I think that will all.
I think distillate demand will certainly pick up.
Quickly after the aftermath of this.
But I.
As I said first we were looking at feedstocks to be depressed and give us higher margins being able to run the feedstocks that is happening we are being able to eradicate all of the reset in our own system by moving it into our close to refineries as Ray just mentioned that's right on target while we expected.
And as I said, we that we never expected a immediate run up in ER and distillate pricing. We think this is going to be more steady and stairstep over the year and of.
I think that most positive thing that we're seeing is what appears to be the compliance of the shipping companies.
And.
So I would say, Doug it's right on target of where we expected.
At Ray wants to add another comment.
The other thing regarding run cuts and the thing that I would offer we talked about recent distraction, we talked a little bit about diesel the other factor with high I know is biggio and how it plays into it so what we've seen as had very very strong.
Joe market and so we pivoted on that so mainly in the in the US Gulf Coast, where we taken about 50000 barrels a day out of our cat crackers.
And that net and Indonesia market.
And I got to say the last part.
Hi, Jerry host Foster refineries of which we believe we have the the highest leverage.
To anyone in the industry, but the culture refineries that have the processing ability to handle the you know the heavy resid and ER and destroy that in our cooking system. When you look across the globe of those refineries that have that processing are going to be advantaged and we expect up.
Probably some east coast, Henry and <unk> and European Refiners, who do not have that capability will have a hard time competing.
On the front end here.
I I appreciate your comments I don't want to elaborate on this question too much but really could I just touch on your video comment I mean, Holden, hoping that may happen, but do you think is enough to perhaps clean up the gasoline weakness that we've been seeing here in the last several quarters.
It does I would say high Chrysler I mean, the thing that you're going to see immediately to clean up the gasoline.
Inventories is the RVP changeover ill that will be starting here just a couple of weeks and that vector will accelerate anything that is viaggio.
Dave you agree with that comment.
So when we get started actually out west with the with the RVP turn and a few days really but.
Additional did RVP turn areas the.
It is the shutdown schedule coming up that also tends to put a drawn on the on not only gas for diesel inventories.
Well, thanks, a lot of Philadelphia, Yeah. It doesn't detailing my follow up very quickly and I I will hopefully keep it quick because I've been talking longtime about the stuff already the just the capture rates in the synergies I'm. Just wondering if the synergies are flowing through just obviously, a little bit quicker or we now see upside risk a permanent reset than you would capture rates or may.
The the likelihood that youre going to go over the buying gallery in reset the synergies higher sometime this year, thus seems to be is trending for sure, but I'll leave it there and again that congrats Scott able to run into some.
Yeah, you bet, Doug I'm, not turn it over to die, but let me say this is something we've been talking about for some time as our is our synergy capture I would say this quarter is where you've seen the accumulation of all the work that we've been doing to really bring.
The refineries that we just acquired.
Ray and his team have done a tremendous job at accelerating the pace of improving those refineries and proving the run rates.
I'll have don get into the yield improvements, but we think that the catalyst reformulations that we put in the technology that we put in these plants on a very accelerate basis youre now going to see that yield improvement as a structural change.
I have Don will over that they capture rate here, yes I.
Echo Gary's comments, what we're doing around synergies I think is repeatable.
The capture rate is also impacted by a number of other factors. So this quarter, particularly.
And you saw it really in December when the crack spreads drop very quickly there tends to be some stickiness around refined product.
Capture so we benefited this quarter from very strong gasoline price realizations and I think part of that was due to the that drove the very sharp decline in crack spreads. The other thing that we did this quarter that is won't always be recurring is that they are there can be.
Price.
Differences in markets, particularly compared to the benchmark.
That we're using so as I mentioned in Salt Lake City, and some of the southwest regions were very attractive for a period of time, and we were able to use our logistics and other integrated model to supply markets, where the demand was high and where the pricing was was favorable.
And up ended up one more thing that the as Claire not only did we have yield improvements on the synergies.
Our commercial skills of being able to take all these dislocations Ron many different markets you couple that with our midstream system that is second to none in the industry, but the key factor. The key underlying fundamental is the commercial skills, we have to be able to capture that value.
Very clear Fellows I'll leave our midstream question to someone else. Thanks, so much I.
Hi, Thanks.
Thank you. Our next question comes from Roger read with Wells Fargo. Your line is open sorry.
Yes, good morning, and similar words, Ed Let me say Gary.
Thanks for everything and good luck.
Yes, not having to talk to us anymore on earnings cost.
I Love property Roger.
I know, it's just I can't see anybody would actually Miss earnings calls all that much.
I was wondering if we could or could dig in a little bit on the corona viruses, particularly since you're on the west coast and they're talking about.
Limiting flying just kind of.
Maybe give an idea of exposure to jet fuel as a component of the distillate side, whether or not that's something we really need to focus on or you've got the flexibility to move that around as well within your trading ops and all.
Yes in fact, Dave Weicker talk to that jet fuel is one of the real bright spots and our overall demand equation or within Mpcs, a Dave you want to cover this.
Yes, so on the.
On the on the West Coast, we actually are have a short position against our contracted demands and and are importing in order to cover that short.
So so we're actually really well positioned for 'em for covering that internally if the if the.
At the markets send us in that direction. So.
So if there is some sort of impact of jet demand our position is actually short and should and should benefit the company.
Okay Yeah.
Roger This is Brian Party, just I wanted to bolt onto that Q1 of the elements of our demand profile in the U.S. and where we're seeing that growth is actually in the cargo, though commercial traveled one element that actually a lot of the growth, we're seeing particularly in pad to pad three is in air cargo.
Okay. That's helpful. So.
Yes, well watch it like everybody else, but at least we want panic at this particular point.
Second question.
Little bit on the unrelated side as we look at some of the future restructuring that may occur here and the guidance, obviously on MPLX on lower Capex going forward and free cash flow, but one of the thoughts has been or at least as we've talked to investors' expectations of Ben for cleaning up a little bit on asset sales and.
Segment. So I was just curious if theres been any progress there or is there any sort of timeline, we should be thinking about as we look into the well the vast majority of this year.
Hey, Roger this is Mike Hennigan.
Now, there's not a real lot of private to report there mainly because of the macro backdrop, India in the gas business.
Natural gas tipping under $2, we continue to look in the market, but as we said many times.
Our view is only work for us if we think we got it real good value for the assets. So in the short term. We continue to look we continue to have an advisory engaged in helping us look, but but I'm not expecting a whole lot of action in the short term.
And Roger I think.
No I don't want investors to Miss.
While the Marcellus and Utica has had a kind of an umbrella of pressure.
Look at the our our execution and look at our performance gathered process and fractionated volumes up 18, 14, and 12% of respectively and them in a area that some people had expected would be down I think thats just shows the strength of our assets in those regions the strength of where they're located.
And how we have commercially but those transactions together. So I think were very good shape and we certainly.
I think this as a out.
Our position there is a gold standard within the of natural gas processing.
Space So as.
We aren't just kind of give assets away.
No. We don't want you to do that I would just curious you know if anything was was pending but I appreciate the clarity there and thanks, all I'll turn it back to you all.
Hi, Thanks Roger.
Thank you. Our next question comes from Benny Wong with Morgan Stanley . Your line is open.
Hey, good morning, guys.
Thanks for taking my call just some just a little bit all around the strategic review into midstream I understand.
You guys are looking to give us an update in first quarter here I guess my question is really at the same time you guys looking for new CEO , how interconnected are related or those two processes I guess like.
Would you guys need a pretty good idea of who's coming in as CEO before you make a decision on your midstream or or how you guys thinking about that.
Well that as of now we just had our board being this weekend or we're on target and all of the strategic reviews are doing.
Yeah. This is a.
Very thorough review with a with the board drama and operating execution in the governance standpoint, so all those will be taken into context.
You know timing wise of they'll all I can say as we'll see a on of any overlap but of the structure. The board as you know.
We have kept the board so much involved in a and of they're driving out we have a special committee of the midstream as special Committee on the Speedway transaction as well as up they'll buy successor and of all of them are involved all of them understand the game plan and we'll just see how plays out.
I appreciate the color there Gary and then my guess next question is really really on speedway.
Within your retail budget I guess, how many store conversions are you guys are targeted.
Within there this year and beyond that how much more opportunity is there for conversions outside of new acquisitions.
And if it's possible would it be possibly give us an update in terms of how much. Those conversion is generally cost you and then what's the associated EBIT dollars merchandise uplift you're seeing so far.
Alright, then yes.
Tim the.
In terms of the go forward conversion plans as you heard you know we've converted since the close the acquisition over 700 locations Theres, probably something on the order of about 250 that would be left to be converted this year.
We expect to have that probably done.
On around mid year, we haven't given specific guidance on what the earnings potential is per store or what would be investment is but I can certainly points of the fact that you saw relatively strong merchandise same store sales. This was really the first quarter, we're where we had.
From our Denver locations and you're starting to see some of that pull through on the conversions. You know we go through a little bit about a two phase on conversion where will convert to the brand and then we'll bring in and relay out the store will really out through the cooler, we'll put food programs and where appropriate and we're starting to see some of those impacts in the business. So I'd say keep an eye on on merchandise over the course of the year.
I think you're going to continue to see a lot of that uplift, which is clearly going to be synergy for the business and the and really put the business. So the good the good position.
As you'll recall when we announced acquisition. We saw this is one of our biggest opportunity is a lot of low hanging fruit and being able to improve the store performance, both frontcourt and ER and backcourt and up and that certainly is playing out but.
Yes, and exceptional performance to up we had 700 over 700 stores converted in this period of time is really exceptional.
Yeah I agree congrats guys. Thanks for the color.
Thank you. Our next question comes 10 money Gupta with credit Suisse. Your line is open.
Oh, Hey, Gary I wanted to focus a little bit Honda less cost.
Going back to one COVID-19.
To put sort of know opex on the high come on expense was high Captain was mill.
As the year has progressed and three metrics has improved to a point that this quarter you almost captech $20 in gross margin. So can you walk us through the nations that have been Deakin, which is now, allowing you to not only capturing the synergies, but opening these assets in immediately beverly than they were being up and it had to stock.
The acquisition.
Yes, let me, let me ask rate to talk about that so as not only the operations of the physical assets that I want to have a Dave why car to talk about other commercial side because of commercial side is equally important on how we have really improve the commercial abilities or were there before for what we're doing today so right.
Okay, Hey, you hit on it in the first quarter of 2019, we had some major work at both Atalay Iron Martina is doing a turnaround work.
In the fourth quarter, we were able to take advantage of doing that work.
Specifically in October when gasoline got very strong we were able to pivot quickly and maximize our gasoline production one thing I want to focus on at L.A. are as a couple things that I'm very proud of the team of doing the first thing as.
We were able to defer some poker work that we planned early in that and a month, we were able to defer that the working with our commercial team by a couple of weeks.
So that we could take advantage of the strong margin environment. The second thing is one of the synergies we talk about Gary just talked about on the call today was catalyst free formulation synergies. The biggest one that we did was in L.A. ours cat cracking unit, where we did.
Complete formulation and Thats at the beginning at 100000 barrels a day, a cat cracker and so it went really well everything we wanted to happen happened a light product keeps going up the heavy yields went down to gasoline octane went up so we were really able to take advantage of that and that paid off well for us in the month of October .
Hey, just one thing I'll say and concluding my part is the west coast as a is a very challenging region and our key focus has been and well be.
Reliability and then also cost control now I'll turn it over to date.
So from a commercial standpoint.
One of the one of the value adds that we've had a managing the west coast has actually been do rely on the Gulf Coast.
For for shifting.
Our export barrels from from mostly from.
The west coast, northern refineries over to the.
The Gulf Coast in order to.
And keep that high valued the west coast product in the West coast and sell it at those high.
Hi, a basis margins. So so there's been a basically a tripling of the of the number of.
The number of cargoes that we've relocated from the from the West coast to the Gulf Coast here since the first quarter. So that's a that's a pretty significant improvement given the the basis differential between those two markets.
And I'd say secondly, we had done a lot of of Oh.
The commercial activity around managing our inventories in that and that system, and ER and and had tremendous success in and capturing value in a in basically trading around the refinery given the market condition. So.
I think that from a commercial perspective, you've got you've really got to coming both ways that from not only from.
From the folks that are on the ground there and working on of San Antonio, but also our our ability to quickly relocate these some cargos from the west coast to the Gulf Coast as the market dictates.
Hey, Matt This is with excellent I just want to add on could shave comments from with fruit perspective. The story is very similar to what Dave just mentioned, we with our size our integration in our flexibility had been able to toggle between the eastern Gulf Coast to the U.S. West coast with four.
One spot and turn barrels that that just that optionality wasn't there in the past so we've.
We've added significant value by optimizing and making those moves as well.
All these nickel on offensive quick follow up is then what if an IMO question getting she mentioned light heavy solids have moved out WK. WCS is 21, then also seen bank Maya trend to let's say $10. What I'm trying to understand is his son from here is the problem why on modest and medium.
Discount slightly wider and lighter from there they are right now, what's causing they'll spend so we saw an idle.
Yeah. So it's great question see your there's so many world dynamics going into play with the medium sours geopolitical events events the volume offline Iranian volume offline I will tell you as you look out.
Our view going forward as you will see movement there specifically when we look at the Gulf Coast and you look at the Mars and the production in the Gulf Coast right around right now it's a we're expecting it to exceed 2 million barrels per day and 2020. So that's a good sign and I would also.
I will say when you look at big Diana and Brazilian production. The is coming on line here well, just recently and more here and 2020 I think you will see some of that trend play out, but short term I would say it was wasn't as geopolitical events you know beyond anyone ability.
To predict going forward, we see this is a potential bright spot.
Thank you for taking my questions.
Thank you. Our next question comes from Paul came with Scotiabank. Your line is open.
Hey, guys the money and gamma you've I don't talk to you in the Knicks contents call and best wishes for you on a onetime and Union New GAAP Peazazz give me a call.
That's a couple of question I think the first one just on your by looking at the cash flow stripping out the M.P.L.A. on to see Continental Lee you have oh, the cash bonus in excess of your Capex Angela dividend.
So the two questions that is any reason why you would not maybe more aggressively in the buyback.
Yup Yup Paul.
So as you know we returned a significant amount of capital this year through share repurchases nearly $2 billion.
Those share repurchases, sometimes are always ratable and we also I think you know we tend to use or have used tools like tenbfive programs to be able to affect share repurchases. There are times, where those type of programs expire in a period, where we are able to.
Sorta, we implement the program. So I don't think you should read anything into the amount of share repurchases that occurred in the fourth quarter and extrapolate it into a view that were not committed to returning capital to shareholders. We're absolutely committed to do doing so and will and we'll continue that practice going forward.
Dan keep the same question useful me can you tell us that which often we find ways to you were able to run the high sulfur fuel oil and how much you've run in the fourth quarter and what is the maximum.
You think you can run.
If not by refinery, but on the total return on a total company and also that thing are you guys have said that you a exporting some L.S. biggio in the fourth quarter, how much you export and what if the current economics abstain.
How much more that you would be able to expand thank you.
Okay, Hey, as far as HFO that we brand and what our capacity what we did in the fourth quarter 2019, and the first quarter of 20 2020 has primarily been on non on IR.
And Martinez and like I said earlier of running in that 20 to 30000 barrel a day range and since we're running what we would call I caught re said a that essentially has to go to the crude unit. So when we're running nets for or backing out some crude into process had up doing NAFTA primarily at Martinez.
So shall we think we're in a good spot on the West coast, where we have potential whether this is an hs epo or additional re said that comes from a crude at the margin. So dictate will be at the Garyville refinery once we complete the.
The expansion and just give me a little lower color on that we did the first expansion on the fourth quarter last year, and where we were targeting yet about 14% increase and coker right and we got 17% to date with our de bottlenecking, there and we expect assembled.
Our type of increased when we do the second coker. So when you put to two together.
We're going to be talking about 18000 barrels a day up up additional Reis said distraction cap capacity at the at the carried over finally.
Hey me into again, we have that you go into one also seminar two again, a tiny phone that that is going to use the.
When you Fujian into the cool you need on what that you will have to not just staying on the argued that to direct the figure union to difficult.
You know on it it depends on what the cargo looks like and ER and the infrastructure at a at on the West Coast had L.A.R. and Martinez, where primarily set up to pick out through the crude unit at Gary, though we actually put infrastructure end to take directly into into the.
Coker and we've already done that with our internal production that a week directtv from Catlettsburg down to downtick area, though so area that will have the flexibility than to take hot Reis had direct to the coker or if we get a cut reset or a and am 100 type material.
We but we would take that to the to the Creganna.
And the opportunity in giving Cindy.
Chemists and B.
Galveston Bay is is a little different animal first I'll start off by fan.
We're keeping our re said distraction units full and it sounds like Galveston Bay, we have some coking capacity. So we have an opportunity there should we choose a bigger the bigger opportunity at Galveston Bay as fires reset distraction is with a reset hydrotreater and so.
One more run at all three trains Paul that 70000 barrels a day, but we got to be very careful there because resent reset quality really matters with that in it and die from that stability update you have the unit. So we actually prefer to fill the on the Rogaine at Devry said hydrocracker.
Be a very defined crudes that we run there.
Something little last Optionality at Galveston Bay relative to L., IR Martinez and Gary though.
Thank you.
Thank you Sir our next question kind of San Neil Mehta with Goldman Sachs. Your line is open.
Hey, I carry a really wish you well here and if Christina lifting congrats to her on her baby daughter, I guess the first question is just on the the CEO .
A successor process I can can you provide an update on on where we stand it sounds like we'll get an update at the end of the first quarter and just in general in conversations with the board what are the characteristics important in terms of who you're going to pass the baton.
Two.
Yes, or no as I've said in my earlier comments Oh, the border. So as a very detailed a very strong governance and a thorough review process a national search.
Yeah, there are on target and we expect to give you a oh.
Hopefully an answer.
The latter part of this quarter.
But it's moving along very well and as I said the board has very engaged.
All right and that does the follow up is that actually on for Mike here. I think you you had made the comment that that you're evaluating 25 different options in midstream, but there was no silver bullet and I think today, you're saying the environments tricky <unk> and for midstream asset sales.
Again, I know, there's going to provide a little more color on this sets I am asking a front run but it is it fair for us to construe that it it would be difficult for you to to execute a full spin out of MPLX and the current environment that we're in.
Yes, and Neil.
You said I'm not going to front run the committee what I can tell you is the committee is very very engaged we've had a lot of detailed discussions and we continue to do that works or not quite at a completion, so I won't comment on that.
What I will comment on though that I think this will help you overall is we've announced the goal to be free cash flow in 21, I would tell you that return on invested capital is always been a high priority for us, but we did not want to pass on the opportunity for some NBC backed projects like Whistler and linked to Webster said.
Correct.
Also remind everybody to MPLX you know does return $3 billion in the form of distributions, but with that though we continue to high grade our portfolio, we're trying to drive to a higher our haro I see and at the end of today I think it'll be a very good opportunity for us long term to be in that free cash.
Flow positive mode as quickly as we can get there.
Yeah. They the Capex reduction is notable and we appreciate it thanks very much.
You're welcome Neil.
Thank you for your interest in Marathon Petroleum Corporation. So do you have additional questions or would like clarification on topics discussed. This morning, we will be available to take your calls thank you for joining us.
Thank you for your participation in today's conference you May now disconnect at this time have a wonderful day.