Marathon Petroleum Corp (MPC) 2011 Q3 法說會逐字稿

Welcome to the Marathon Petroleum Corporation third-quarter 2011 earnings conference call.

My name is Sandra and I will be your operator for today's call.

At this time all participants are in a listen only mode.

Later we will conduct a question and answer session.

Please note that this conference is being recorded.

I will now turn the call over to Ms.

Pam Beall.

Ms.

Beall, you may begin.

Thank you, Sandra.

Good morning everybody and welcome to Marathon Petroleum Corporation's third-quarter 2011 earnings webcast and conference call.

You will find synchronized slides that accompany this call on our website, MarathonPetroleum.com.

On the call today are Gary Heminger, President and Chief Executive Officer; Garry Peiffer, Executive Vice President of Corporate Planning and Investor & Government Relations; Don Templin, Senior Vice President and Chief Financial Officer; and Mike Palmer, Senior Vice President of Supply, Distribution & Planning.

On slide 2 you will see it contains a discussion of forward-looking statements and other information included in this presentation.

Our remarks and answers to questions today will contain forward-looking statements, subject to risks and uncertainties that could cause actual results to differ materially from those expressed or implied by such statements.

In accordance with the Safe Harbor provision of the Private Securities Litigation Reform Act of 1995, Marathon Petroleum Corporation has included in its Form-10 filed with the Securities and Exchange Commission and the earnings release issued earlier today cautionary language identifying important factors, but not necessarily all factors, that could cause future outcomes to differ materially from those set forth in the forward-looking statements.

Please note that in the appendix to this presentation is other data that you may find useful.

Now I will turn the call over to Gary Heminger for his opening remarks.

Thank you, Pam, and good morning to everyone.

We had a very strong third-quarter with $1.1 billion of net income, which is close to a record for our Company.

We executed on our ability to capture several of the key market drivers in our business, including the crack spreads in our geographic markets; the differential between our sweet and sour crude basket; and the spread between West Texas Intermediate priced crudes and other light sweet crudes, such as Light Louisiana Sweet.

I am going to ask Mike Palmer, our Senior VP of Supply, Distribution & Planning to go into a little more detail about the crudes we process and how we are positioned to optimize the crude slate across our refineries to produce the highest value finished product yields.

But first I want to explain our balanced approach to business.

Clearly the WTI-LLS spread is attractive today, and our earnings benefited from this market condition.

We have been successful in this business a long time.

And we have structured our logistical and refining assets so that our future earnings and cash flow are not riding just on a wide WTI-LLS spread.

Market conditions are always changing and the current price differential between WTI-LLS won't be an exception.

But having said that, we believe we are well-positioned to continue to benefit from the growth of inland crude production.

And we're investing in our logistics system to ensure we have access to the growing sources of crudes that are priced off of WTI as well as Canadian crudes.

Now I would like to elaborate on what I mean by a balanced approach to our business.

First, we have a balanced crude slate, refining nearly 50% and 50% sweet crude.

We have the flexibility to alter our sweet and sour crude slate in any given quarter in response to market conditions.

Second, we are balanced in our geographic markets with a little over 50% of our refining capacity in PADD II.

This PADD II capacity is well-positioned to refine increased Canadian crude production as well as the prospective Utica crude production.

We also have the advantage of being able to move WTI-linked feedstocks through our logistics system to our PADD II refineries.

Further strengthening our PADD II position, upgrades to our Detroit refinery were approximately 73% complete as of September 30, 2011.

This project remains on budget and on schedule for completion in the second half of 2012.

And when completed these upgrades should allow us to process an incremental 80,000 barrels per day of heavy Canadian crude, reducing our feedstock costs and increasing Detroit's crude oil refining capacity about 15% to 120,000 barrels per day.

It is also important to note that PADD II is a net short of refined products.

So we tend to run our plants at relatively higher utilization rates and better crack spreads than PADD III refineries.

The other half of our crude refining capacity is in the US Gulf Coast, which gives us access to favorable export markets.

Our Garyville refinery is the newest and we believe one of the most efficient refineries in the country.

And when we planned the expansion of Garyville, which we completed in 2009, we expected distillate demand to grow faster than gasoline demand and that certainly has been the case.

Global demand for distillate continues to increase, providing the opportunity to increase distillate exports to higher value global markets.

During the third quarter we continued the optimization of Garyville, which is running significantly above its nameplate capacity.

We also increased the amount of distillates sold for export from Garyville to approximately 73,000 barrels per day last quarter.

With modest additional investment we believe we can increase our distillate for sales export even more, providing us with additional options to place more of our refinery production in higher value markets.

Another point of balance in our business is our integrated approach in using our significant logistics operations to connect our refineries with domestic refined product markets and with our Speedway retail, Marathon brand marketing operations.

Our Speedway retail demand, Marathon brand marketing, and other wholesale arrangements provide an assured domestic outlet for approximately 60% of our refinery gasoline production.

Our Speedway retail business is a segment of the business we intend to grow through a combination of greenfield sites and selective acquisitions.

For example, the 23 convenience stores in Chicago, Illinois, and Northwest Indiana purchased by Speedway during the second quarter of 2011 continue to perform very well.

And we continue to look for similar acquisition opportunities.

To quickly recap, we are balanced geographically.

About 50% of our Refining & Marketing business is in the attractive PADD II market, with access to growing inland crude production that could benefit our Canton, Ohio, and Catlettsburg, Kentucky refineries.

The other half of our refining capacity is in the Gulf Coast with exposure to attractive export markets.

We have a balanced crude slate with flexibility to price -- to process price-advantaged crudes throughout our entire refining system.

We have a significant margin enhancement project at our Detroit refinery to increase our ability to process even more heavy Canadian crude.

And, finally, we have diverse sources of earnings and cash flow from our Pipeline Transportation and Speedway retail businesses that have been less cyclical than refining.

Before I turn it over to Mike Palmer, I want to address a question on the minds of many of our investors -- what are we going to do with the cash on our balance sheet and the free cash we expect to generate in the future?

We gave part of that answer on October 26 when our Board approved a 25% increase in our quarterly dividend.

We are committed to a balanced approach between disciplined investment in the business and returning capital to shareholders in the most appropriate form, given the many different considerations that will exist over time.

We have taken nothing off the table as we evaluate return of capital to our shareholders; however, it is important to understand our ability to issue or retire equity is not solely within our control.

The spinoff of MPC from Marathon Oil was a tax free transaction, and we agreed with Marathon Oil for a period two years generally not to issue or repurchase stock without their consent.

We also know that the world can change very quickly.

Not long ago there was very limited liquidity in the market.

Given limitations in our ability to use equity over the next two years, we will be disciplined as we evaluate all uses of cash for investments and return of capital to shareholders.

And now I will turn it over to Mike Palmer to discuss our feedstock flexibility.

Thanks, Gary.

One of our major objectives every day is to optimize our crude slates.

We purchase those crude oils that will deliver the highest profitability through a combination of price, transportation costs and finished product yield value.

We have developed the flexibility in terms of our logistics system, our contract mix and our business process to achieve this objective.

We have a logistics system that provides access to Canadian crude from the north, mid-continent crude from the West, crude production from the US Gulf Coast and waterborne crude from virtually anywhere in the world through LOOP, The Louisiana Offshore Oil Port.

With volatile crude oil spreads, logistics flexibility is one of the keys to long-term success in this business.

During the third quarter we continued to benefit from wider differentials between West Texas Intermediate and other light sweet crudes, such as Light Louisiana Sweet, and between sweet and sour crudes.

Approximately 50% of the crude we processed last quarter was sour.

Leveraging our logistics systems, we were able to increase our throughput of Canadian Heavy and crude price off WTI to about 38%, [up from] approximately 35% in the second quarter and 33% in the first quarter.

WTI priced crudes represented 27% of the crude we refined during the third quarter of 2011, up from 21% in the same quarter last year.

An example of what we are doing to utilize more WTI-linked crude would be our efforts at the Canton refinery to purchase Utica Shale oil.

We have installed a temporary truck rack that gives us the immediate ability to receive up to 1,000 barrels per day of this new production.

We have engineering under way to install a permanent truck unloading facility with capacity up to 12,000 barrels per day by early next year.

We are studying other options to significantly increase our overall system logistics capability as production in the Utica ramps up.

We are currently seeing very attractively priced Canadian sweet synthetic crude oil that fits our Midwest system very well.

We have been utilizing the Keystone Pipeline to Patoka to take advantage of this opportunity and expect it to continue through the fourth quarter and into next year.

We expect US inland crude production, in large part due to shale plays such as the Bakken, the Eagle Ford and Utica and Canadian production, to continue to show significant growth.

As a result of this growth we expect differentials for these crude oils to be favorable well into the foreseeable future.

We will continue to debottleneck and enhance our logistics to allow us to take advantage of this growth.

Don Templin will now go over the financial results for the quarter.

Thanks, Mike.

Slide 5 provides net income both on an absolute and per-share basis.

Our third-quarter 2011 net income of $1.1 billion reflects an $856 million increase from the $277 million earned in the third quarter of 2010.

Earnings per share was $3.16 for the third quarter compared to $0.77 during the same period last year.

The waterfall chart on slide 6 shows by segment the change in net income from the third quarter of 2010 to the third quarter of 2011.

The primary reason for the increase in our net income was the increase in Refining & Marketing segment income, partially offset by higher income taxes.

For the 2011 third quarter our effective income tax rate was 35% compared with 37% in the third quarter of 2010.

The 2011 tax rate was favorably impacted by an increase in the amount of income qualifying for the domestic manufacturing deduction.

I also wanted to explain the $51 million in other items.

This variance primarily relates to costs associated with being a standalone company, including some one-time transition costs, as well as higher incentive compensation due to our strong results in 2011 and the interest expense on our $3 billion in senior notes.

As shown on slide 7, Refining & Marketing segment income from operations was $1.7 billion in the third quarter of 2011 compared to $352 million in the third quarter of 2010.

The increase was primarily the result of a higher Refining & Marketing gross margin, which I will discuss it on the next slide.

Slide 8 shows a few of the economic drivers contributing to the improved Refining & Marketing gross margin for the third quarter.

Our gross margin in the third quarter of 2011 benefited from a wider sweet-sour differential, higher Chicago and US Gulf Coast crack spreads and a wider WTI-LLS differential.

The sweet/sour differential increased approximately 48% from an average of $8.08 per barrel in the third quarter 2010 to $11.94 per barrel in the third quarter of 2011.

The benchmark for our blended Chicago US Gulf Coast LLS crack spread increased from $2.83 per barrel in the third quarter of 2010 to $5.98 per barrel in the third quarter of 2011.

In addition, the WTI-LLS differential averaged $22.92 per barrel in the third quarter of 2011.

This was an increase of $19.49 per barrel compared to an average of $3.43 per barrel in the third quarter 2010.

Not reflected in these industry metrics are a number of other factors that impact our gross margin, such as differences between the spot price of refined products used in the crack spread calculation and our actual sales price.

In addition, our average refinery inputs were 1,368,000 barrels per day during the 2011 third quarter compared to 1,445,000 barrels per day during the same quarter last year.

The 77,000 barrel per day decline from the third quarter last year primarily reflects the impact of the sale of our Minnesota refinery in December 2010.

Speedway's income from operations was $85 million in the third quarter of 2011 compared with $105 million in the third quarter of 2010.

The $20 million decline in income from operations is almost entirely attributable to the absence of the 166 convenience stores that were part of the December 2010 sale of our Minnesota refinery and related assets.

On a same-store basis gasoline sales decreased 2% and merchandise sales increased 2% in the third quarter of 2011 compared with the same quarter last year.

The lower same-store gasoline sales primarily reflects the impact of the higher price level of gasoline.

Speedway's average retail gasoline price was $3.52 per gallon during the third quarter of 2011 compared with $2.64 per gallon last year.

Same-store gasoline sales volumes in October 2011 are up slightly to the comparable period last year.

Slide 10 shows changes in our Pipeline Transportation segment income.

Income from operations was $56 million in the third quarter of 2011 compared with $39 million in the third quarter of 2010.

This improvement is primarily attributable to the absence of non-routine maintenance and impairment expenses incurred in 2010, partially offset by less equity affiliate income in the 2011 third quarter.

The chart on slide 11 provides an analysis of cash flows for the third quarter of 2011.

At September 30, 2011, our cash balance was just under $3 billion.

Operating cash flow before changes in working capital was nearly $1.5 billion.

The working capital benefit of $238 million noted on the slide primarily relates to decreases in accounts receivable and inventory and increases in our payables since June 30.

Capital expenditures and investments during the quarter were $317 million, primarily related to our Detroit Heavy Oil Refinery Project.

The first federal income tax return we will file as a separate company will be for a short six-month tax year.

Federal income tax rules allow us to make an initial estimated tax payment on December 15 rather than making payments in each of the quarters.

As a result, our cash flows for the third quarter of 2011 did not include any estimated federal income tax payments.

The Company currently projects its December 15 estimated federal tax payment will include a liability of between $400 million and $500 million related to the third-quarter earnings.

We expect capital spending for the full year 2011 will be approximately $1.4 billion, including approximately $158 million of capitalized interest and corporate items.

Slide 12 shows that at the end of the third quarter we had over $2.9 billion of cash and approximately $3.3 billion of debt.

Our cash adjusted debt to capital ratio was 3%.

Along with our $2.9 billion in cash we have an undrawn $2 billion revolving credit facility and an undrawn $1 billion trade receivable securitization facility.

This should provide us with significant flexibility to manage our operations and to pursue value-enhancing bottom line growth opportunities.

As we look forward, we expect our refining crude oil inputs to be approximately 1.2 million barrels per day for the fourth quarter of 2011.

While it is hard to predict what will happen to crack spreads and differentials for the remainder of the year, I wanted to provide an update on what we have seen in the market during the month of October.

The Chicago and Gulf Coast LLS 6-3-2-1 crack spreads have decreased in October compared to the third quarter.

The preliminary crack spreads are $2.15 and $2.48 for October for Chicago and Gulf Coast, respectively.

The sweet/sour differential averaged $5.46 in October and the WTI- LLS differential averaged $25.65.

As you know, our historical pre-spin corporate costs do not reflect all of the costs of operating as a stand-alone company.

We estimate these costs will total an incremental $80 million pretax on a normalized annualized basis.

Finally, assuming no special items during the fourth quarter of 2011, we expect the overall effective income tax rate to be approximately 37% for the full year.

Now I will turn the call back to Pam Beall.

Thank you, Don.

Before we open the call to questions I just want to remind you that our first Investor Day will take place on November 30 in New York City.

Management presentations will begin at 8.30 AM.

If you have not registered for the meeting and wish to attend in person, you can contact Beth Hunter or me.

For those unable to attend in person there will be an audio webcast of the management presentation.

As we open the call for questions, we ask that to accommodate all who wish to ask questions, you limit yourself to one question plus a follow-up.

You may reprompt for additional questions as time permits.

With that, Sandra, we would now like to open the call to questions.

We will now begin the question and answer session.

(Operator Instructions).

Ed Westlake, Credit Suisse.

Congratulations on the strong results.

Just a question for Mike, I guess, at the beginning.

So when I am thinking about your refineries, Patoka, you will be able to access a bit more crude as XL is built.

You can capture more Eagle Ford.

You have got Utica coming and extra Canadian at DHOUP.

Is there anything else that we should be thinking about in terms of your ability to capture crude discounts?

Well, I think you have hit on most of them.

I think that we continue to focus on North America and we look at the Canada and the Canadian growth to continue -- we think that is good to be a real benefit to our Midwest system -- and then the shale plays.

In addition to the shale plays I think there is this other production going on.

One of the things I mentioned in my talk was the sweet synthetic.

We certainly see the sweet synthetic production being robust in December forward and we have already begun purchasing more of that crude.

The differentials versus LLS are still very attractive.

So I think that pretty much sums it up.

Then a follow-on.

You have given 1.2 million barrels a day of guidance for 4Q.

I think you did just about 1.37 in 3Q.

Is there any sort of regional mix in terms of where that utilization will fall?

Is it mid-con or Gulf?

This is Gary.

I would think it would be pretty evenly split between the two.

Okay, thanks very much.

But I know it will change.

And maybe a final one.

How much Canadian crude did you process at Garyville in the third quarter?

We don't get into that level of detail.

Okay, thanks very much.

Paul Sankey, Deutsche Bank.

Gary, you made some comments about return of cash and seem to be saying that you can't buy back stock without permission of -- without agreement from Marathon Oil.

Is that also by extension something that would trigger a change in the tax status of the spin?

Let me ask Don to address that.

Sure, Paul.

The tax sharing agreement that was put into place was to protect the tax-free status of the spin.

So those protections -- and Marathon Oil Company is the obligor, or the tax obligor.

So those protections were put in there to -- or those stipulations were put in there so that Marathon Oil Company could weigh in on those conversations.

There are opportunities, I guess, to -- that you could have some share transactions, but we have not explored that with them currently.

So to all intents and purposes you won't be buying back or issuing stock in the next two years?

That would be -- as we said today, that would be our plan.

So that would limit you then to, I guess, special dividends or sitting on cash?

Or investment opportunities that we may have.

So definitely our base dividend, we could you consider a special dividend.

And as I said, we are going to be very disciplined in our capital spend.

We have already spoken to the investment we made in Northwestern Indiana and Chicago with some retail facilities.

But, again, this is a -- we want to have a bulletproof balance sheet as we go into to this business.

And we have -- all understand what happened in 2008 and 2009 and liquidity in the markets and balance sheets of some, and how dividends have moved over that period of time.

So we're going to be very careful.

But you are correct, we don't plan on issuing nor buying back any equity in the short term.

I've got you.

If you were to pay a special, what would be the timing on a decision or announcement?

I guess it would just be the Board meeting cycle, would it?

Yes, we review this every Board meeting.

So it just depends on where we are at the time.

As Don mentioned, I think some questions that we received earlier this morning on cash, I think -- and Don explained it well in his presentation here -- that our federal tax payment is not going to be made until December 15 or so.

So I think that was a surprise to some people that they didn't know that we didn't make that tax payment here in Q3.

So that answers a little bit of the cash.

But still at the end of the day we are setting on a very strong position and we will look at it, as I say, at every Board meeting.

Thanks, Gary.

I mean, this is all one question, obviously.

Bulletproof balance sheet, can you give me some parameters and I will leave it there.

Obviously, I think you are at $300 million net cash right now.

Right, and there is an array of -- we don't have enough time probably for me to go into all of the detail on what I mean by that, but basically what I -- my meaning is, I go back to when we first started talking about this spin in 2008 and then the liquidity in the market completely dried up.

We don't want to be in that position and we don't want to have to manage from that type of the position.

So we will go slow.

We will be very disciplined in our investment, and then we work with the Board on how we look at our dividends.

Great, I will let someone else have a go.

Thanks, guys.

Chi Chow, Macquarie Capital.

Gary, can you give us an update on the diesel export expansion timing?

And what are the ultimate capacity you are looking for on exports?

Well in fact, we have already started.

Some of this is what we call debottleneck work where you put in some additional lines to dock or you put in -- you can tie in some additional tanks to a manifold in order to be able to get more product or to load faster at an export facility.

So as I say, we have already started.

Some have the engineering complete on a couple of these projects.

We do not have the detail yet on the amount of export, but I would say it is kind of mid-2012 is when we would expect to have some additional capacity.

And it is all at Garyville is what we are looking at right now.

And it will come in stages.

First there would be some debottlenecking of some of the lines and some of our pumping capacity.

Then, second, we will look at maybe another tank in order to provide us some with additional optionality.

Okay, great.

In the third quarter where did you transport the diesel exports, to which markets?

[I will let] Mike handle that here.

It has been a combination of Latin America and Europe.

Okay.

Are you concerned at all that this debt crisis in Europe will shut down the diesel export channel to that market?

Well, you know, the way we are looking at things -- and it is a very good question -- but throughout the entire Q3 we have had these -- the problems in Europe and it continues to grow.

There have been some European refineries that had some upsets, but more so upsets in Latin America-type refineries.

So the global distillate demand continues to increase.

What I think we are seeing is that maybe logistics are continuing to balance out different markets and move distillate that prior was either going into Europe, or maybe Europe was moving a little bit more towards the Med and some of their refining.

Is that logistics is changing some of those patterns, and if anything, we are continuing to see an increase and continue to see more robust response to the export volumes that we have a available each week.

Okay, that's great.

And then, finally, just a couple of housekeeping things.

It looks like G&A expenses were up quarter-over-quarter and pre-Q.

Do you have any guidance on that and going forward?

And then did you have any derivative gains in the refining results in the quarter?

This is John.

Let me answer the second question.

We did have -- consistent with prior quarters we did have derivative activity, and we had a $258 million gain in this quarter.

And then with respect to your question on G&A, we are estimating as a standalone company that we will have incremental costs of roughly $80 million on a normalized basis per year.

Yes, annually per year.

The SG&A item, one of the contributors to that -- there was about $15 million of costs related to credit card fees in there.

There is an offset in revenues, so some of that increase this quarter was just a function of our brand marketing credit card fees and the increase in the price of product.

Okay, great.

Thanks for your comments.

I appreciate it.

Doug Terreson, ISI.

Congratulations on your great results, everybody.

My question is on Keystone XL and whether you guys could provide an update on whether you feel the status of that pipeline has changed, and if so, how.

Meaning today was supposedly a deadline for approval of that pipeline and, Gary, you have obviously been an industry leader in progressing that situation, so any insight you may have on Keystone XL is appreciated.

I unfortunately don't have any more insights than what we are all reading in the paper.

We have done a tremendous amount of work and continue to be leaders.

I will be in DC the next couple of days working on a number of issues, this being one of those issues.

And it appears to us the majority of the work is complete within the environmental impact study.

Now things tend to be tied up around the aquifer in Nebraska.

And so I would say that that seems to have slowed the process down.

We still seem to get favorable comments out of the Administration, but I don't know how long this issue in Nebraska may delay things.

Sure, and then on feedstock, you guys have obviously been very successful in accessing lower cost feedstocks with Canadian Heavy, plus WTI, I think, rising from 28% to 38% of your throughputs during the past year.

That has obviously been very positive.

So my question is whether or not you guys still have scope for meaningful future gains in that area and, if so, what areas are you most focused?

Right, and we do have additional scope.

This goes right in with the comment that Mike Palmer was making and I made on whether it is debottlenecking refining or debottlenecking our logistics system.

So we have a number of things working on debottlenecking our logistics system, and we plan on giving more detail of this in our November call because we are in the midst right now of finalizing some agreements.

But we certainly have an appetite to do that and we think we can do it [at a] relatively low investment.

Okay, that sounds good.

Thanks a lot, Gary.

Paul Cheng, Barclays Capital.

A number of kind of short questions.

On the balance sheet, Gary or Don, can you give me what is the working capital, the market value of the inventory in excess of the book?

And I presume that all the total debt is in the long-term.

On the balance sheet working capital is roughly $3 billion.

And I --.

And that is including cash, right?

That is including cash, correct.

The question on the fair value over carrying value, I don't have that number immediately, so let me get back to you on it.

That would be great if you had someone e-mail that to me.

And Don and Gary, I just want to make sure my math is correct.

Now you said that you have 38% of the crude [won], your WTI-linked or Canadian, which is also linked to WTI, so that is equal to about 456,000 barrels per day for this quarter.

So that means that theoretically, even if the Brent WTI [differential] will drop down to $5, you should still have earned about $1.60 or $1.70 per share.

So is that kind of illustrating your -- maybe the earning power in a lesser robust environment?

Is that a fair way to look at it or that we need to make some additional adjustments?

This is Garry Peiffer.

No, I think you have hit the major points.

As we showed on page 8 of the slide deck that we just reviewed -- and this is not much different than what we have talked about in the past.

The biggest difference versus the past, obviously, is the WTI-LLS is now rather than being a few dollars, like we showed back in the last year, it is now -- obviously in the third quarter of 2011 -- almost $23.

So when you add up about 50% of the sweet/sour differential, and I might note on that schedule or on that slide, we define it based upon what we would expect to run on an annualized basis different types of crudes.

That changes quarter to quarter and it changes by how individual companies tend to calculate that number.

And then the other big thing for us, obviously, is the crack spread for the US Gulf Coast and Chicago.

So you have hit the major points, but the big one now -- and we kind of laid it out on that table to help everyone a little bit -- is the amount of WTI we are running that also had a big impact versus LLS this quarter.

A final question.

Gary, can you give us some insight that how is the M&A market looking like?

I think that with BP trying to sell Texas City, which is adjacent to your own Texas City, can you maybe share with us what kind of potential synergy if you're ever going to buy that refinery that you may have?

Well, I wouldn't go so far as to say that -- or be leaning forward as you are that we may be considering that.

You know, as well as I, all of the opportunities that are out there -- Texas City certainly as being one of those.

They have a West Coast refinery, and as I have stated in the past, we aren't interested in just going to the West Coast for a single-stage -- for a single refinery or single asset.

But a number of issues going on in PADD I right now.

But we will continue to look at all of those and see what might fit -- if anything, were to fit our system going forward.

Well, I know that I run out of my time.

Just a clarification, the 1.24 million barrel per day for the fourth-quarter throughput, is that crude or total throughput?

That is crude.

Okay, thank you.

Evan Calio, Morgan Stanley.

Good quarter.

A lot covered, but comments on the Utica and truck rack additions, I think you mentioned 10 going to -- potentially going to 30.

Have you had any discussions on either locking in supply with operators as this is as stranded as any mid-con crude would be -- and/or pricing and how that price might link, and also what it might backout of the Ohio system, I presume, LLS?

Let me ask Mike to cover that.

And what we said is, 1 going to 12.

So I guess what I would say on that as far as the Utica is concerned, as you know, it is very, very early days.

But what we want to do is position ourselves with all the assets that we have in that Midwest area in Ohio and then Catlettsburg, we want to position ourselves so that we are the customer of choice for that Utica oil.

And that is what we intend to do.

So, and, yes, on the margin, I would agree that it is probably a Light Louisiana Sweet that it would backout.

Okay.

I know you mentioned on the screen pricing versus realized, I think that don referenced, is that because exports are taking a better price than your indicator and why those barrels are moving, is that fair?

The diesel exports?

Yes.

Right.

As you look at the US demand for diesel and where in the regions of the market -- the region of the US markets that have that appetite for additional diesel, and then what we offer for sale in the marketplace we are getting a better spread or a better netback to sell to some of these foreign export cargoes.

I know it was at least brought up on the European distillate demand, but what is your view here into year-end?

As best that we can tell, distillate inventories globally are low -- China, Asia, US, days covered, Europe completely backwardation, cleaning out tertiary storage.

Absent the demand collapse, do you have a view on the strength here in the year-end on that diesel market, any views?

Well, we still believe, and when I look at over the road diesel here in the US, while some of the intermodal transport has dropped, we are still up -- same period over last year we are still ahead.

But the overall diesel market continues to feel like it is strong to us.

That is good.

And did you ever reach any export limitations?

I know you talked about debottlenecking, but were you ever at a point where you are max export diesel at Garyville?

Well, I would say we are pretty close to being there today.

In my comments I said we were 73,000.

Our prior quarter, I believe, was around 65,000 -- 65,000 to 70,000.

And we thought we were pretty much at the max there and we were able to improve on some our operations to even load quicker this quarter.

But until we get some of these additional lines as I was saying earlier, I think it was to Doug's question or maybe it was Chi's question, get some of these additional lines out to the docks and improve some of our pumping capacity, it would mid-next year before we can take it up from there.

Okay, appreciate it.

Faisel Khan, Citigroup.

You mentioned in your prepared remarks how you got to 38% of your crude slate being benchmarked to WTI or Canadian Heavy.

And I think one of the comments, if you could just clarify, you said you took more capacity on Keystone or you increased capacity on Keystone into Patoka for you guys.

Can you clarify that comment please?

Yes, I can clarify that.

As you know, the Keystone trunk line was completed mid-2010.

And it takes time to debottleneck both at the origin point as well as destination when you get a new trunk line like that put into place.

So we have been continually doing that month-to-month.

So our objective continues to be to bring in as much Canadian crude as economically makes sense for us.

And there are various things that we are doing to enable that to happen.

And that will continue in the future.

You guys have firm capacity on Keystone right now, is that how it works?

No, we are not one of the committed shippers.

We have worked with committed shippers to utilize their space.

Okay, okay, understood.

I am glad you brought that question up, because I want to reiterate, that -- and that is the point for me going into how balanced we are.

We have had many questions that we are just a WTI-LSS focused type company, and as all the numbers prove, we are very balanced across the system.

And we have this ability to bring in further Canadian, bring in WTI-based crudes or, obviously, export crudes that could come in through LOOP, hit Garyville or hit our Midwest system.

So that is really the point we're trying to make to everyone.

Okay, great.

Then last question.

On the derivative gain of $258 million in the third quarter can you just give us a comparison of what that was -- the derivative gain was in the second quarter and the third quarter of last year?

Second quarter it was $234 million, and we will get you the third quarter last year.

Okay, great.

But that amount is in our margin.

That is reflected in our crack spreads.

And that is on the crude side or on the product side?

Well, it is in the gross margin, so it is in all -- all that gain -- excuse me, this is Garry Peiffer.

All the gain is in the gross margin, both for products and for crude.

Okay, understood.

And in the third quarter of 2010 we had a loss of about $20 million.

Okay, great.

Thank you.

Arjun Murti, Goldman Sachs.

Gary, just to follow-up on your thoughts on things like Brent TI and LLS TI.

You all are obviously more of a PADD II Midwest refining company, do you see any distinction between PADD II and PADD IV in terms of how spreads might progress?

I guess, I am really thinking about the period before things like Keystone XL and some of the other pipelines come on.

In the period before that do you see any reason why, being a Midwest refiner, the spread could close any faster than the folks in the Rockies?

Thank you.

Mike, go ahead.

I don't see why that would happen.

No, I think it will happen for the entire market at once.

And in terms of your pipeline business and the ability to, I guess, both continue to access some of the discounted crudes, as well as participate in some of the growth, do you see your pipeline business as something you would also like to expand?

You mentioned the retail, but whether it is Seaway on the market, there's a lot of other proposed projects, do you see MPC participating in some of that or not?

The big new play, which is in the heart of our pipeline system, will be -- and it is going to be more of a gathering system type play than a trunk line.

The majority of our pipeline systems today are trunk line, but, obviously, the Utica being right here in our backyard could have some opportunity around a gathering and kind of distributing or transporting from a lease custody transfer type point.

Back to your question on PADD IV versus PADD II, when you really think about how the pipelines move, today all of PADD IV is saturated with the amount of crude that goes directly to the refineries, and the majority of that is going to go either by gathering system or truck.

So I definitely agree with Mike that the systems as you export, although systems again will move west to east or a little bit south and then to the east, that I believe that they will go hand-in-hand, because all of those refineries today will be completely full with the type of production that is coming out of either Canada, the Bakken, the Niobrara, some of those areas.

That is really helpful.

And just a final one, and I apologize that I may partly repeat a previous question.

But when you do a tax-free spin, I get why someone else couldn't buy MPC without potentially having some tax liabilities.

And I think I get the stock buyback part of it.

What I wasn't quite as clear on is if you saw something you wanted to buy, are you saying you couldn't issue equity for that, or more you would have to consult with Marathon Oil and they would have to sign off on it, if you will?

Are you actually completely prohibited from issuing equity to buy something?

We believe we are prohibited from doing that without their permission.

Without their permission.

But that doesn't mean you would necessarily incur a large tax liability if you did something.

Again, I get the takeout situation, where it likely would trigger a tax event, but is it just a question of asking for their permission or do you actually think MRO and MPC would actually incur a tax liability by issuing -- by one of you issuing equity?

When we went to seek, or when we went with Marathon Oil Company to seek the tax-free -- the private letter ruling, we agreed that we wouldn't do that.

So that is the stipulation in that agreement.

I understand.

Thank you very much.

Blake Fernandez, Howard Weil.

Congratulations on a good quarter.

I wanted to dig into the WTI-linked up crude.

You illustrated that you have moved it up from 33% to 35% and now 38%.

Do you have a sense of where that number can go to?

Well, as I said earlier, we have a number of other debottleneck type projects that we are working through right now.

And, of course, the bottom line part of the answer is going to be how much crude is available of those types of crudes to get into the big trunk lines that can then service PADD II.

But we will outline it in more detail.

And I'm not being evasive of the question today, just I think everybody understands as you put different transactions together to be able to give you that opportunity, you really don't want to talk about them until you get everything complete.

So we expect to give you more color on that at our November meeting.

Understood.

Second question for you, back to the Utica and Canton, I understand you're still working the truck racks and the ability to put some barrels over there, but ultimately is there an opportunity to actually expand Canton?

It is way too early to determine.

The thing that we will look at -- based on the type of crude that we are seeing up front it is a very light crude, so you would -- you could look at increasing some of the process units rather than increasing the crude distillation capacity.

You would look at some of the downstream process units to be able to get more throughput in some of those units.

Now the thing is, I am only speaking of Canton there.

At Catlettsburg, you know, a very large refinery, and again depending -- there is I think all of five wells or so that they are producing out of today -- 5 to 8, something like that -- and continue to do research on the different areas that they're producing from today to determine what that crude could mean long-term.

So as Mike Palmer said, very early in the stage to determine what might be the best fit.

Okay, and I am sorry to ask one more, but I just wanted to clarify, the $400 million to $500 million tax payment in the fourth quarter, that is purely a cash impact and not an earnings impact, is that correct?

That is correct.

Okay, great.

Thank you very much.

Jeff Dietert, Simmons.

Lots of questions on WTI, so let's shift to another region.

When you look at crude storage inventories they have fallen aggressively over the last eight weeks.

PADD II and PADD IV crude storage is roughly right where it was last year.

Cushing stocks are down.

But most of the decline has happened on the Gulf Coast.

And with the SBR release, which you guys benefited from purchases there, kind of depressed Gulf Coast crude pricing and closed the [ARB] for imports during the month of August.

Imports remain pretty low, I guess, as people shift as best they can to mid-continent and cheaper feedstocks.

How do you expect the Gulf Coast to play out as we move forward?

And the imports stay low, inventories stay low or do you see a change as we move through the end of the year and into 2012 there?

I think -- this is Mike Palmer -- certainly in the short term that you're talking about, year end or just into the new year, I think that it is pretty hard for us right now to see that the market is going to change significantly.

With the ARB being close, even though it has come in a bit in the last 10 days to 14 days, we still are not seeing very many opportunities on cargo crude that works for us.

So I would not expect things to change much from where they have been in the last few months.

Got you.

As far as throughput, you provided the guidance 1.2 million barrels a day for the fourth quarter.

Is that effectively where your LPs are suggesting you should run or are you running perhaps a little bit more conservatively given some of the questions on the economic outlook?

This is Garry Peiffer.

No, that is basically what the LPs are -- what we normally look at every day as to what is telling us is the most profitable run rate for our refineries.

And that is crude, not total throughput.

Got you.

Thanks for your comments.

Ann Kohler, CRT Capital Group.

Just a couple of questions.

Just a clarification.

Did you state that the sweet/sour differential for the month of October was $5.46?

Yes, this is Garry Peiffer, yes, $5.46 and the LLS -- or WTI-LLS differential has averaged about $25.65.

Okay, great.

Then I just wanted to circle around on the retail side.

The 2% decline that you had in same-store sales on the gasoline side, what was the average in the markets that you serve?

The same.

Was it?

Okay, great.

Take you very much.

Mark Gilman, The Benchmark Company.

Two quick ones.

Do you have the ability to move Eagle Ford crude or are you working on the ability to move Eagle Ford crude to Texas City?

We are moving Eagle Ford crude and we are looking at being able to even move more Eagle Ford crude.

Can give me an idea, Gary, how much you're moving currently?

I really don't want to put that out public, because we are -- a lot of negotiations going on right now on different pipeline systems and different other crude systems, so I don't want to let that out right now.

Okay, just one other quick one.

The derivative gains, are they realized or are they mark-to-market?

This is Garry Peiffer.

About $37 million or so of that is yet to be closed out, if you will, so all but about $37 million.

And I would also maybe make the point just to make sure, I think you understand it, but everyone else that this is what we do month in and month out.

These are operational type of derivatives.

And just maybe a little additional color.

About half of that was related to inventory derivative transactions and the other half was trying to mitigate price risk primarily on our foreign crude activity.

So those losses are offset by physical gains or losses depending upon the quarter we have in the market.

Okay, thanks Garry.

This concludes our question-and-answer session of the portion of today's call.

Ms.

Beall, I will turn the call over to you for closing remarks.

Thank you, Sandra.

Really that just concludes our conference call today.

And I want to remind everybody about the Investor Day on November 30.

And thanks for joining us today.

Thank you for your interest in Marathon Petroleum.

Bye-bye.

Thank you, ladies and gentlemen.

This concludes today's conference.

Thank you for participating.

You may now disconnect.