Marathon Petroleum Corp (MPC) 2012 Q3 法說會逐字稿

Welcome to the Marathon Petroleum Corporation third-quarter 2012 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.

And welcome to Marathon Petroleum Corporation's third-quarter earnings and webcast and conference call.

The synchronized slides that accompany this call can be found on our website in the Investor section.

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

If you look at slide 2, please read the Safe Harbor statement that we have provided as a reminder that we will be making forward-looking statements during the presentation and also during the question-and-answer session today.

Actual results may differ materially from what we expect today and factors that could cause actual results to differ are included here, as well as in our filings with the Securities and Exchange Commission.

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

Thank you, Pam, and good morning to everyone and thank you for joining us.

I know that many of you that are listening today are from the Northeast, and just let us mention that we are thinking of you and we wish you the very best to be safe in this very difficult and challenging time.

(technical difficulty)

We posted another strong financial and operational performance in the third quarter with adjusted net income of $1.1 billion, which is comparable with our results for the third quarter last year.

These positive financial results are primarily attributed to our Refining & Marketing segment where we were able to capture benefits from favorable market conditions.

In addition, we believe our focus on safe and efficient operations allowed us to utilize our assets at optimal levels and provide us a strategic advantage.

Upgrades to our Detroit refinery are nearly complete and remain on budget and on schedule.

Shortly after Labor Day we began a 70-day plan turnaround to tie-in the new units.

The turnaround has gone according to plan and we are in the early stages of startup and gradually ramping up operations with the upgraded and expanded refinery online later this month.

When completed these upgrades should allow us to lower our feedstock costs and capture incremental value from a heavier crude oil slate.

Once the refinery is running at its new capacity of 120,000 barrels per day, the plant's heavy crude oil processing capacity will increase from 20,000 to 100,000 barrels per day.

As we have shared in the past using the LLS to WCS spread from 2006 to 2010 and for 2011, respectively, the incremental EBITDA from this project could be $200 million to $350 million per year.

Over the past few weeks we announced two significant corporate developments.

On October 8 we announced we had signed an agreement to acquire BP's Texas City Texas refinery and related logistics and marketing assets.

The refinery is one of the largest and most complex refineries in the US with a Nelson Complexity Index of 15.3.

This is a unique opportunity to acquire world-scale refining assets at an attractive price.

In addition to the 451,000 barrel per calendar day refinery the agreement also includes 1,040 megawatt cogen facility, four terminals, three intrastate NGL pipelines, contracts representing 1,200 brand locations and 50,000 barrels per day of assigned shipper history on Colonial Pipeline.

These refinery and related assets will strategically complement our existing business and provide an opportunity to create additional long-term value for our shareholders.

We expect to close the transaction early in 2013.

Also, early in October our 80,000 barrel per day Texas City refinery was certified as a Voluntary Protection Program star site by the Occupational Safety and Health Administration.

I am proud of our employees' commitment to safety and operational excellence, and I commend all our Texas City refinery personnel on the significant achievement.

I firmly believe that our commitment to safety is one of the strongest components of our operational advantage in this very challenging industry.

And last week we announced the completion of an initial public offering of MPLX.

We intend for MPLX to be MPC's primary vehicle for ownership, operation and growth of our Midstream business.

The common units are listed on the New York Stock Exchange under the ticker symbol MPLX.

Garry Peiffer is President of MPLX and I have asked Gary to cover this in more detail in just a few minutes.

We believe the formation and initial public offering of MPLX has the potential to unlock shareholder value and improve our ability to participate in the ongoing expansion of logistics to transport the rapidly growing North American crude and natural gas production to consuming markets.

Turning to demand.

We estimate that US gasoline demand was down about 0.3% and distillate demand was down 3% in the third quarter 2012 compared to a year ago.

We expect US gasoline demand to remain soft through the remainder of 2012 and expect total year 2012 demand to be down approximately 0.2%.

Total year distillate demand is expected to decline about 1.9% in 2012.

Looking ahead into 2013, we expect US gasoline demand to be flat and distillate demand to be up about 3.7%.

In addition, we expect export opportunities to remain attractive in 2013.

Our distillate exports rose to 112,000 barrels per day during the third quarter compared to 73,000 barrels per day in the same quarter last year.

Strong cash flow from operations provides the means for organic investments in the business, to make selective acquisitions like the BP transaction, and to return capital to shareholders.

Since becoming an independent public company in 2011 -- excuse me, in July of 2011, we have returned over $1.2 billion to shareholders through a combination of a 75% increase in our base dividend and share repurchases.

We also have $1.15 billion remaining under the current Board authorization for the repurchase of shares.

Our mission continues to be value creation for our investors, incorporating a balance between internal and external investment and return of capital to shareholders.

Now I will ask Garry Peiffer to provide a little more color on the recently completed IPO of MPLX.

Thanks, Gary.

As Gary just said, MPC intends for MPLX to be its primary vehicle to own, operate and grow its Midstream business.

MPLX' initial assets include a 51% equity interest in a network of FERC regulated common carrier crude oil and product pipeline assets located in the Midwest and Gulf Coast regions, and 100% in a recently constructed 1 million barrel butane cavern located in Neal, West Virginia near our Catlettsburg, Kentucky refinery.

This equity interest structure gives MPC the opportunity to offer additional equity interest in these assets to MPLX over time.

This provides MPLX distribution growth opportunities in addition to the growth we expect from increased revenues, organic investments, acquisitions and drop-downs of other Midstream assets retained by MPC.

We announced in October 26 that we sold 19.9 million common units or 26.4% of MPLX in the IPO.

MPC through its subsidiaries holds a 2% general partnership interest and remaining limited partner interest in MPLX.

These percentages reflect the fact that the underwriters did exercise in full their option to purchase an additional 15% of the common units offered in the IPO.

We priced the common units at $22 per common unit, which was above the initial offering range of $19 to $21.

The initial annualized minimum quarterly distribution on these units will be $1.05, which equates to a yield of 4.77%.

This annualized yield represents the lowest yield over for the initial public offering of a MLP.

We believe this record low IPO yield reflects the attractive initial assets and growth potential of MPLX.

IPO proceeds totaled $438 million of which MPC received $203 million.

The balance was retained by MPLX to cover fees and expenses of the initial public offering and to pre-fund $192 million of organic growth projects.

At MPC our goal is to make every business we operate best-in-class and we are focused on making MPLX a best-in-class MLP.

Highlighted on this next chart are the four primary pillars that should allow MPLX to accomplish its objectives.

MPLX' initial assets will be fee-based businesses and will primarily consist of one of the largest pipeline systems in the US based on the volume of crude and refined products delivered.

The initial MPLX asset base has attractive organic growth prospects anchored by increasing FERC-based tariffs and stable throughput volumes.

To foster this organic growth, MPLX has retained $192 million of IPO proceeds to pre-fund identified organic capital spending over the next two years.

Additionally, our assets are located in the heart of the Midwest infrastructure buildout where we believe there are significant additional potential organic investment opportunities to grow MPLX.

MPC has a large portfolio of MLP qualifying assets, including the 49% retained interest in MPLX' initial pipeline assets that can be offered to MPLX over time to help us achieve our desired annual distribution growth rate.

MPLX also has -- also will have significant third-party opportunities that can evaluate independently or in conjunction with MPC.

A recent example of these opportunities was the letter of intent that MPC signed with Harvest Pipeline Company to join the developed infrastructure that will facilitate transportation on the Ohio River of hydrocarbon liquids production from the Utica Shale in Eastern Ohio and Western Pennsylvania.

At MPC we pride ourselves on maintaining our assets in a first-class manner and we will continue to do so at MPLX.

We have studied the MPL universe for many years and we believe we know what it takes to position MPLX to be a best-in-class MLP as demonstrated by the success of MPLX' initial public offering.

Now I will turn over the call to Don Templin to provide a more detailed update on the financial results for the third quarter.

Thanks, Garry.

Slide 6 provides net income both on an absolute and per-share basis.

Our third-quarter 2012 adjusted net income of $1.1 billion is comparable to the $1.1 billion we earned in the third quarter of 2011.

Adjusted earnings per share was $3.31 for the third quarter 2012 compared to $3.16 during the same period last year.

The 2012 third-quarter earnings per share data reflects the impact of shares acquired in our share repurchase program.

The waterfall chart on the slide 7 shows by segment the change in adjusted net income from the third quarter of 2011 to the third quarter of 2012.

All three segments had comparable results to the same period last year.

As shown on slide 8, Refining & Marketing segment income from operations was $1.69 billion in the third quarter of 2012 compared with $1.71 billion in the third quarter of 2011.

Although the segment results were comparable, the drivers of those results differed from quarter to quarter.

In explaining the key components of the Refining & Marketing gross margin, I will refer to the changes in the market indicators applied to the MPC actual volumes to arrive at the quarter-over-quarter variances.

First, the blended LLS 6-3-2-1 crack spread was $5.83 per barrel higher in the third quarter of 2012 than the third quarter of 2011, resulting in an estimated favorable variance of $709 million.

The Chicago crack spread was $6.44 per barrel higher than the third quarter of 2011, and the Gulf Coast crack spread was also higher, up $5.19 per barrel.

The sweet/sour differential increased slightly, up $0.31 per barrel over the third quarter last year and resulted in an estimated favorable variance of $90 million.

The LLS WTI differential was $17.21 for the third quarter of 2012 compared with $22.92 for the third quarter of 2011.

This decrease in the differential resulted in an estimated $193 million unfavorable gross margin variance between the two quarters.

The first three market indicators I discussed are calculated by reference to an LLS prompt price.

Rapid changes in crude prices can cause significant differences between the LLS prompt prices embedded in the market indicators and the actual amount we pay.

On average, the delivered LLS crude cost was almost $2 per barrel higher than the prompt LLS price during the third quarter of 2012 when compared to the third quarter of 2011.

This accounted for an estimated unfavorable variance of $59 million.

Direct operating cost had an unfavorable quarter-over-quarter effect of $118 million primarily due to higher planned turnaround costs in the third quarter of 2012 compared with the third quarter 2011.

As you know, we completed the Robinson turnaround in July and began the Detroit turnaround in early September.

The other gross margin column captures a number of other factors that need to be considered when reconciling the market-based metrics to the change in our gross margin.

There are two primary factors affecting the $428 million unfavorable variance.

First, as a result of changing crude oil differentials, our actual crude acquisition prices were higher than the market indicators due to differences in the mix of the crudes acquired versus the crudes used in those market indicators.

The second factor was lower wholesale price realizations compared to the market indicators primarily due to rising product prices.

On the next two slides we provide earnings walks for each of our other operating segments.

On slide 9, Speedway's income from operations was $76 million in the third quarter of 2012 compared with $85 million in the third quarter of 2011.

Speedway's light product gross margin was $12 million lower in the third quarter of 2012 compared with the third quarter of 2011.

The decrease was primarily due to a nearly $0.016 per gallon lower gross margin for the third-quarter of 2012 compared with a similar period in 2011.

Merchandise margin was $217 million in the third quarter of 2012 compared with $200 million during the same period last year.

This $17 million increase was primarily due to an increase in the number of stores compared to the same period last year.

Same-store gasoline sales volumes decreased 3.9% in the third quarter of 2012 compared with the 2011 third quarter.

Speedway's October same-store gasoline volumes were up approximately 1%, which puts their same-store sales down about 1% year-to-date.

Same-store merchandise sales decreased 0.8% in the third quarter of 2012 compared with the 2011 third quarter.

However, same-store merchandise sales excluding tobacco increased 4.1% compared to the same quarter last year, which had a 7.2% same-store increase over 2010.

Slide 10 shows changes in our Pipeline Transportation segment income.

Income from operations was $52 million in the third quarter of 2012 compared with $56 million in the third quarter of 2011.

This decrease was primarily attributable to a decrease in earnings from pipeline affiliates.

The chart on slide 11 provides an analysis of cash flows for the third quarter of 2012.

At September 30, 2012 our cash balance was nearly $3.4 billion.

Operating cash flow before changes in working capital was $1.3 billion.

The working capital benefit of $513 million noted on the slide primarily relates to an increase in payables and a decrease in inventory, partially offset by an increase in accounts receivable since June 30.

Capital expenditures and acquisitions during the quarter were $358 million, including amounts related to our Detroit heavy oil refinery project.

Slide 12 shows that at the end of the third quarter we had almost $3.4 billion of cash and approximately $3.3 billion of debt.

With EBITDA of almost $5 billion during the last 12 months, we continue to be in a very manageable debt position with leverage of 0.7 times EBITDA and a debt to total capital ratio of 23%.

Turning to slide 13.

During the last 12 months we generated almost $3.1 billion in cash from operations and nearly $1.6 billion of free cash flow.

Consistent with our commitment to return capital to shareholders, we have distributed 77% of our free cash flow in the form of dividends and share repurchases during this past year, and we are committed to being a leader in our peer group in terms of total shareholder return going forward.

Slide 14 provides outlook information on key operating metrics for MPC for the fourth quarter of 2012.

For comparative purposes those same metrics for the fourth quarter of 2011 are also shown.

Now I will turn the call back to Pam Beall.

Thank you, Don.

Before we open the call to questions, I want to remind you that we remain in a quiet period for 25 days following the completion of the initial public offering, so our comments will be limited with respect to discussions about the future potential of (technical difficulty).

I do want you to know that we will be holding separate conference calls for MPLX, beginning with the fourth quarter 2012 results that will be reported early in 2013.

We open the call for your questions, but we ask that you limit yourself to one question plus a follow-up.

Of course, you may re-prompt for additional questions as time permits.

And with that we are going to open up the call to your questions.

Sandra.

(Operator Instructions).

Edward Westlake, Credit Suisse.

Good morning and congrats on the results and on all of the strategic progress in the last quarter.

I'm going to try anyway on the logistics side.

Just on the EBITDA in the Refining & Marketing segment at MPC, not obviously MPLX, are you able to give a rough range of that now that MPLX is done?

This is Garry Peiffer.

We are basically limited to what we disclosed in the prospectus, the S-1, which in the S-1 essentially we disclosed the physical characteristics of those assets but not the EBITDA, which at this point we haven't done a calculation on a GAAP basis of.

So the answer to that question is no.

But as you know and as I said, the one asset we do have that has obvious EBITDA associated with it is the 49% interest in the MPLX' pipeline assets that we are retaining.

So that had an EBITDA of roughly $90 million in our pro forma 2013 results, so that is the one fairly obvious indicator we have of a drop-down type of asset.

Okay, great.

And then switching to Texas City, I believe on the call on Columbus Day you weren't able to talk about operating costs, I think because you hadn't had a chance to sit down with the regulators.

Are you able to give a range of operating costs for the Texas City asset?

No, Ed, we have not been able to do that yet.

Of course, we have our forecasts internally, but we have not sat down with the regulators, nor through our CA can we make that available yet.

But as we go through the process here of preparing to complete this transaction, we will be meeting with the regulators later in the quarter.

Okay, I will duck out there, but I have some questions on the quarter for the end.

Thanks.

Chi Chow, Macquarie.

One of your remarks in the opening -- your opening comments caught my attention.

You mentioned that you expect distillate demand growth to be up 3.7% next year, is that correct?

Yes, sir.

What is your underlying assumption there?.

Well, as we look at the total demand so far this year -- and we are up against a period -- while we were down here this quarter if you look at last year, it appears the economy had picked up a little bit in last year, so we are up against a strong quarter in 2011.

But as we look at over the road diesel, we are looking at the portal movements.

We are looking at the over the road 18 wheel transportation movements, as well as the exports to Latin America, Europe, South America.

We are expecting to see that type of growth across our system.

Okay, so this 3.7% is your demand from your system?

Well, that is the US demand, but that is -- also we expect to play in that basically in-line.

Okay, so exports are on top of this 3.7%?

No, no.

Okay, (multiple speakers).

Excuse me a second, Garry is telling me something different.

Well, yes.

This is Garry Peiffer.

That is just our estimate of what US demand growth will be in 2013.

And really it is offsetting a dramatic loss this year of almost -- we are figuring probably 2% to 2.5%.

So when you combine the negative effect this year with the positive effect next year it is a fairly small gain overall.

Right, right.

Okay.

Thanks for that.

I guess my second question, I will just keep it more macro.

What is your outlook for non-Canadian light heavy differentials?

They seem to be widening out a bit here lately.

I will let Mike Palmer discuss this.

Yes, the non-Canadian light/heavy differentials?

Yes, so like the Maya spread certainly looks to be widening out.

What is your outlook into 2013 on light/heavy spreads?

I guess -- when we look at light/heavy, to be honest, the most important thing that we look at is really on the Canadian side, because that is where most of the heavy crude is going to come from.

And we -- you have seen those spreads that have widened out.

We expect that certainly into the first and second quarter that those spreads will remain wide.

I think if you look at LLS Mars differential those kinds of spreads ought to be very related to whatever the heavy product market does.

It should follow closely.

All right, okay.

Thanks, Mike.

I appreciate it.

Arjun Murti, Goldman Sachs.

I just wanted to make sure I understood how you were thinking about the stock buyback.

You did the, I think, accelerated repurchase at the beginning of the year.

You still have the $1.15 billion.

Now that MPLX will soon be done and you will be out of quiet period, is it meant to be opportunistic going forward when stock price is weak?

If you can just provide any color that would be great.

This is Don.

I think it is probably not appropriate for me to comment on our specific plans, but I will say that over the last year I think we have had a really strong track record of returning capital to shareholders, and I think you should expect that will continue into the future.

We have a discussion with our Board regularly about the most appropriate ways to return capital to shareholders, and they are committed as we are committed to doing that regularly.

Got it, thank you.

Any update on how you're thinking about 2013 CapEx, I guess, either with or without Texas City, however you want to phrase it?

We have not put out a 2013 CapEx number yet.

I would say that from a -- as we are thinking about MPC excluding BP Texas City we would probably be in the range that we were 2011 and 2012.

And then we are working through, obviously, the budget related to the acquisition itself.

So we are more likely to be able to give that color in a couple of months' time.

That is great.

Thank you so much.

Evan Calio, Morgan Stanley.

Congratulations on a successful MPLX IPO.

On MPLX, and it is not related to what you can't talk about, but as the apparent drop-down provide you another lever for cash flow to MPC in addition to the $3.4 billion of cash on the balance sheet and the $500 million undrawn on the revolver at MPLX as gunpowder to fund future drops, can you discuss how this additional potential source of cash impacts your return strategy?

Are you more or less inclined to use a special dividend that could be associated with future drop-downs or how are you incorporating that?

This is Garry Peiffer.

I think it is hopefully fairly obviously, and this will be stated in the prospectus, is that we didn't necessarily do this initial public offering as a means to generate cash flow.

Obviously, we don't have a balance sheet that needs repairing or anything like that, so our primary objective by the creation of MPLX is to, as we have stated, own and operate and really grow our downstream -- our Midstream assets.

So our primary focus is on growing MPLX.

And I think you know our dividend strategy, and Don can comment as well, isn't changing.

We are looking at dividends like we always have, and this is just another part of the levers that we have to grow our cash at the MPC level as well.

Okay, that is great.

And maybe a follow-up on -- I know MPC had something like $230 million of CapEx that was pipeline and transportation for 2012.

Has that changed with this new vehicle?

Should we expect spending on organic Midstream projects at both levels or it would find potential drops or would it -- as that shifted to the MPLX with the -- leaving some of the cash proceeds at that level?

Yes, and this is Garry again.

It is a little bit of both.

As we -- as I stated, we are leaving $192 million of the IPO proceeds within MPLX to really fund some organic projects we have identified at this point, primarily related to 2013 and 2014.

But we have also been doing things at the MPC level, like I mentioned with Harvest Pipeline to expand some of our transportation, logistical assets in the Utica area.

So it is going to really depend upon what is the profile of the project in terms of EBITDA growth in the future.

Because the thing we did, obviously, with the MLP assets we contributed originally to the MPLX was these are fee-based, very stable, very predictable type of assets that we want to continue to grow MPLX using that same profile if possible.

Great, I will re-prompt for a couple of other smaller questions.

Thank you.

Jeff Dietert, Simmons.

I had a question regarding Canadian heavy.

Canadian heavy discounts have recently widened from about $15 a barrel at the middle of October to now currently $30 a barrel under WTI.

So the Canadian heavy discounts are widening substantially right in front of the Detroit upgrader completion.

So it looks as though you should be off to a strong start with profitability at Detroit.

Mike, could you comment on what is driving those wide differentials for the Canadian heavies in the current market?

Yes, I would be happy to.

I guess there is probably three things that I would comment on.

First of all, I think that the widening -- the severe widening of the differentials started when Keystone discovered an anomaly in their pipeline.

I think it was in the Missouri area.

And they had to shut down for their maintenance, and they were down for about five days.

So when they're operating a little over 500,000 barrels a day they backed 2.5 million barrels of primarily heavy crude back into the market, and the differential started widening out considerably at that point.

Of course, that happened just recently and we are at a point where we are ending the asphalt season, and historically the heavy diffs in Canada have studied to widen out during that period anyway.

And then there have been some upgrader problems of late as well.

So with the particular problem that I am thinking of it is going to reduce the amount of light synthetic available, but it is going to increase the amount of heavy crude that they will be blending and making available on the market.

So as usual, there is a number of issues that are going on, but we would expect that these wider differentials than normal, now that we out of the asphalt season, will continue.

Thank you.

If I could ask a quick question on the slide 8 -- that is a very helpful slide -- on the other gross margin.

You talked about the $428 million negative impact and the two factors, actual crude prices and the wholesale prices rising.

Could you break down those two factors and what percentage of the $428 million was from each of those two factors?

We have not disclosed that.

I guess it is probably appropriate to follow-up maybe on the details with Beth after the call, I guess.

In terms of the example -- kind of the two driving factors in our -- as an example -- in our sweet/sour differential calculation there is an assumed sour basket in there.

And when our actual crudes that we acquire differ from that assumed sour basket we have a mix differential that drives that.

And the same thing with -- in the 6-3-2-1 crack spread there is a spot -- there is an assumed spot product price.

And when our wholesale realizations differ from those assumed spot product prices we also have a differential.

So So probably -- it is probably best for Beth to walk you through the details of that off-line.

Very well.

Thank you.

Doug Terreson, ISI Group.

Congratulations on great results everybody.

Some of your competitors have been fairly vocal about the changing dynamic between the environmental regulator at the federal and also at the state level in Texas during the past couple of years.

And while this obviously may change, I just want to get your perspective on this item and whether you even consider it an issue as it relates to future permitting.

And along these lines, BP invested significantly in Port Arthur.

And it may be too early to know, but when you did your economic assessment on the plant did you envision meaningful investment anyway?

So those are my two questions.

On the permitting process, I must admit that we have been I think very pleased.

Our permitting, if you go back to Garyville and Detroit and then some additional permitting we have done we have, in the areas of the country in which we operate and these transparency in which we operate, I think we have been very successful in being able to gain the permits in a timely manner.

So I do understand some of the issues that some of the competitors have discussed possibly on the West Coast and those issues, but the markets again in which we operate we have been very successful.

Now -- and you asked on looking at BP, when we were looking at BP, I didn't catch the last part of your question.

Yes, so the question was -- so when you are assessing the economics of the plant, obviously, they have spent a ton on this refinery over the years, did you -- do you guys really envision a lot of investment that would need permitting anyway?

I am sorry.

I'm sorry, I missed the permitting word.

No, in fact, the majority of the investment going forward is going to be to complete work that already is -- was in either a consent decree or some other agreements that have been made in that plant.

So there should not be any incremental permits are required.

And Rich Bedell is here with me.

Rich can chime in.

Rich, are you aware of any big permits that we need?

No, we have looked at that and we are in good shape.

They're operating with their permits right now and those will be assigned over -- we will transfer those permits -- operating permits over to Marathon, in fact, that process is ongoing right now.

Great, it sounds like it is a nonevent.

Thanks a lot.

Faisel Khan, Citigroup.

A couple questions.

The first one is could you elaborate a little bit more on the same-store sales for the quarter, down 3.9%, what exactly caused that quarterly drop?

Is this timing or was there something more extreme in the quarter that caused that?

I think it is all price.

If you look at the retail price this year versus same time last year, and you look at the last three or four years, how that retail price and the really discretionary demand how it changed at different retail price levels, I would say that price level now seems to be $3.50.

Once you get over $3.50 the discretionary demand seems to drop.

We are seeing right now here in the month of October that demand has picked up because we got below the $3.50 range.

So I would say it is all price level.

And as you know, over the summer, early fall we got up close to $4, and that has really been the determining factor.

Okay, and then my follow-up question is on the deal with Harvest Pipeline Company.

Are you now more confident that the oil volumes in the Eagle Ford are picking up and there is a -- you're going to see material growth over the next 12 to 18 months, or is this more of an option in case things accelerate?

What we have always said is that we want to make sure that we are in position to have first mover advantage.

The Utica area is still under the front end of trying to determine what the flow properties are going to be, and how that area is going to be produced.

Again, it is just -- it is ramping up slowly, so we have set up the option in order to be able to if we want, and working with Harvest, to be able to develop this way to offload crude.

But -- and again, we believe our two refineries, Canton, Ohio and then Catlettsburg, probably provide the best two transportation alternatives in the marketplace, so therefore, we want to be out front in determining what the best options are going forward.

Okay, I appreciate that.

Thanks.

Roger Read, Wells Fargo.

I guess I would like to follow up, given your commentary earlier on the distillate or the diesel demand side, what can you do inside of your facilities -- I guess, we could ask it two ways -- both excluding Texas City and then your expectations once you have that inside your operations -- in terms of taking advantage of higher diesel against flat gasoline demand?

In other words, what can you do on the yield side, throughput side, et cetera?

Let's let Rich, who runs our refining, talk about this.

Normally what we are talking there, you're swinging -- maybe about 5% of your output you can swing from gasoline into diesel, along those lines.

And recall, when we build Garyville our strategy was to, unlike most refineries in the US, to make this a much heavier output of diesel of around 50% is gasoline; 50% is diesel.

We have been able to outperform on the capacity throughput from what our initial design was, therefore, make some additional diesel.

And then, also, we had some projects in the budget here in 2012 that -- and 2013 that were increasing some of our throughput.

Let me ask Rich to go a little more into detail -- your increase out of the cat and the hydrocracker at Garyville.

At Garyville, the increase in --.

Not the absolute, but what the projects that you have going on.

Okay, sure.

Certainly the hydrocracker, and we have also talked about the expansion of the hydrocracker project there, and the expansion of the cat cracker that we did, both those bring more distillate stocks out.

So we have got projects there as well as Catlettsburg for recovering more distillate and gas oil out of our existing crude unit.

So all those are projects -- and the other one is the Robinson.

We have announced that we have a hydrocracker project there which will shift the yields from the gasoline to more towards distillate.

Okay, so as we look at 2013 you should be able to generate a let's say meaningfully -- statistically meaningful volume of diesel to hit that growth that is going to be out there that you expect to be out there?

Those projects are more 2014, 2015.

Okay, so what we are looking at in 2013 should be very similar to 2012?

I think that is a fair assumption, yes.

Okay, so even with margins already favoring distillate there is not a whole lot that is within your operations that would necessarily change?

Correct.

Okay, and then can you give any comments at all about Texas City, your expectation or how maybe it would compare to your operations -- higher, lower in that gasoline/diesel kind of yield?

The Texas City refinery is more on the lower diesel/distillate yield, probably the low 30% type number.

And it has a much larger petrochemical output.

It has a very large aromatics, paraxylene and those sort of yield.

So it is actually, like I say, a low 30% type distillate yield.

It is a combination of diesel and jet fuel.

Okay, thank you.

Eli Bauman, Barclays.

It is Eli for Paul.

I wanted to quickly see if I could get the standard balance sheet data, the working capital, value market value of inventory in excess of booked and long-term debt.

This is Don.

Working capital is $4.2 billion; current assets were 12.5 and current liabilities were 8.3.

The amount by which the fair market value of inventory exceeds our book inventory is about $6.2 billion.

Okay.

And then the long-term debt piece?

$3.3 billion.

And then, finally, you guys have been really consistent on returning cash to shareholders, but I just wanted to see if I could get specifically on the regular dividends more color about how management and the Board thinks about timing and size of increases.

Well, I guess, we have said that we think having a very strong base dividend is really important.

It is important to management and the Board, and we know it is important to our investors, so we will continue.

And we have a regular discussion with our Board at least quarterly about base dividend.

We did increase it 40% just one quarter ago and so we will continue to evaluate it every quarter and have meaningful discussion with our Board about it.

Okay, great.

We think that is the base around which we target return of capital so we always want to have a very strong base dividend.

Okay, thank you, guys.

Edward Westlake, Credit Suisse.

This is just around disclosure.

I guess, post Texas City are there any plans to break out the Gulf from the Mid-Con region, I think I would clearly be helpful for us, although it does involve a bit more work?

It is too early for us to decide until we get this transaction under our belt, but I would expect that we would not be breaking things out in that micro of a level going forward.

And then on Texas City, how concerned are you on the aromatics and I guess the propylene component of the output of the refinery that as you get more and more cracking based off gas put into the Gulf Coast, should we be concerned about some margin impacts on that part of the barrel?

Actually, if the ethylene crackers go to more of an ethane feedstock their propylene yields decline considerably.

So you look at the overall propylene balance and if these crackers go to lighter and later feedstock the propylene market -- the propylene supply declines.

So I think the propylene market will be fine.

Okay, thanks very much.

Evan Calio, Morgan Stanley.

Your throughput guidance on slide 14 is a bit higher.

Can you walk me through that?

Are you guys running higher Garyville volumes in addition to Detroit coming back up or is there something else driving that throughput guide here?

I don't think we are running any -- I'm not sure I can point to anything specific.

Garyville is running very well, and I guess our view around fourth quarter is that all of our plants will be up and running, including Detroit.

The other thing is that, as you remember, Robinson was in turnaround through part of July, and so I think it is really a combination of all those factors that is driving that.

I am not sure one individual facility is making the difference.

Okay, that is great.

And just a quick one on Detroit.

Is WCS a good market there for what you intend to run?

And do you have capacity through Enbridge, Lakehead, and I guess via that new line 79, is that where you are sourcing heavies from?

That is primarily where the heavies will be sourced from on the Enbridge line.

And, yes, we are in very good shape from a capacity standpoint; that shouldn't be a problem.

And we will have a basket of heavy crudes that actually come into Detroit, but WCS is the typical heavy marker.

Okay, that is great.

Thanks for taking my questions.

And guys remember to vote next week, because all that matters, right?

Chi Chow, Macquarie.

Two quick follow-ups.

On DHOUP are there any product yield changes with the new coker coming online?

And, secondly, can you give us any sort of guidance on upcoming turnarounds here in the fourth quarter into 2013?

The yields on Detroit, I think that we have slightly more gasoline and slightly more diesel, because we are raising the crude rate, but proportions are pretty close to what they are right now.

And, Chi, you know that we will stay with our plan of not giving forward guidance on turnarounds.

Okay.

One other additional thing I thought of after your question on diesel demand.

As you probably recall, although you didn't experience maybe in Denver, the East Coast had an unusually warm first quarter this year, and the PAD 1 demand was down 13%, so we're not expecting a repeat of the demand we had -- in 2013 that we had in 2012, so that is really getting more back to normal.

Wet winter weather would be also a big contributor to the increase in 2013.

Okay, so better comps on heating oil in the Northeast?

Correct.

Okay, thanks.

This concludes the question-and-answer session for today's call.

I will now turn the call back over to Pam Beall for closing remarks.

Thank you, Sandra, and thanks everyone for joining us on the call today.

Beth Hunter and I will be in the office all afternoon and if you have any follow-up questions please reach out to us.

And thanks again for joining us.

Thank you.

Ladies and gentlemen, this concludes today's conference.

Thank you for participating.

You may now disconnect.