Marathon Petroleum Corp (MPC) 2012 Q4 法說會逐字稿

Welcome to the Marathon Petroleum Corporation fourth-quarter 2012 earnings conference call.

My name is John 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, John.

Good morning, everybody, and welcome to our fourth-quarter 2012 earnings webcast and conference call.

The synchronized slides that accompany this call can be found on our website.

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; and Mike Palmer, Senior Vice President of Supply, Distribution and Planning.

If you turn to slide 2, please read the Safe Harbor statement.

It is a reminder that we will be making forward-looking statements during the presentation and 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'll turn the call over to Gary Heminger for some opening remarks.

Thanks, Pam, and good morning.

Thank you for joining us.

If you would please turn to slide 3. During our first full calendar year as an independent company, our commitment to safety and operational excellence underpinned our ability to capture value and deliver strong financial results.

Our employees and contractors achieved record safety performance across our operations, including the world-class safety record for the DHOUP project.

As a result of MPC's outstanding operational and financial performance in 2012, our continued strong financial position and positive outlook, we were able to allocate our capital to value-accretive investments and return significant capital to shareholders.

We returned approximately $1.76 billion to shareholders during the year.

This was accomplished through two accelerated share repurchase programs totaling $1.35 billion, and a 40% increase in our dividend.

Earlier today, we announced the Board authorized an additional $2 billion share repurchase, augmenting the $650 million remaining authorization that was announced in the first quarter of 2012.

This provides a total outstanding authorization of $2.650 billion through 2014.

The expansion of our share repurchase authorization reflects our intent to continue balancing our use of capital, and our recognition of the trust that our investors have placed in us to be good stewards of their capital.

In 2012, the US energy industry continued to adapt to growing North American crude oil and natural gas resources and to transportation bottlenecks for those resources.

These forces will continue to influence the domestic energy market for years to come.

And MPC will invest to remain strategically positioned to create value from these shifts as they reshape our energy landscape.

While we returned substantial capital to our shareholders, we balanced that commitment with critical investments that will enhance MPC's ability to benefit from changing market conditions.

Most significant among these were the very successful initial public offering of MPLX LP, our new midstream master limited partnership.

The completion of the $2.2 billion Heavy Oil Upgrade Project at our Detroit refinery, and the agreement to acquire a world-class refinery in the western Gulf Coast of Mexico.

First, I'll highlight the strategy for MPLX and how it will add value for MPC's shareholders.

We believe we have created a premier MLP, one that has some very attractive features.

MPLX is a fee-based business with stable cash flows and multiple avenues to grow earnings and distributions over an extended period of time.

With multiple avenues to expand, MPLX will be our primary vehicle to grow our midstream business and to participate in the infrastructure investments needed to meet the changing North American energy landscape.

MPLX assets are integral to MPC's integrated logistics and marketing system, providing a MPC's refineries to access to foreign, Canadian, and domestic crude sources and finished products to its wholesale and retail marketing customers.

The growing production of crude oil and natural gas liquids, and changing supply patterns, create opportunities for MPLX to play a vital role in the fast-changing energy landscape.

In addition to organic investments, MPC has a significant and growing portfolio of logistics assets that could be acquired by MPLX in the future.

MPC's interest in MPLX, including its ownership of the general partner, will allow MPC shareholders to participate in the value created by growing the fee-based stable cash flow business of MPLX.

Turning to another significant accomplishment for the year, in November we enhanced our feedstock acquisition economics by completing the Detroit Heavy Oil Upgrade Project, known as DHOUP.

This project increased our Detroit refinery's heavy oil processing capacity from 20,000 barrels per calendar day to 100,000 barrels per calendar day; while increasing our total crude oil refining capacity at the facility from 106,000 barrels per day to 120,000 barrels per calendar day.

Our Detroit refinery's strong financial prospects are a validation of the investment decision we made several years ago that now enables MPC to benefit from discounted Canadian heavy crudes.

DHOUP also set a new standard for mega project execution.

The $2.2 billion project was completed on-schedule and on-budget.

And just as importantly, it also achieved extraordinary safety records since we've started construction on this project in mid-2008.

Early indication of Detroit's operations and financial performance are promising.

The third accomplishment I wanted to highlight is the agreement we reached last year to purchase the BP's Texas City refinery near Galveston Bay.

As the North American energy industry continues to adapt to significant crude supply shifts, we see the western Gulf Coast as a primary destination for the surging crude supply.

This transaction will expand our presence in this increasingly important region.

The agreement includes a world-scale refinery along with related midstream assets and branded jobber contract assignments.

We plan to complete the transaction on February 1 of 2013.

The transaction is expected to be funded with cash on hand and be accretive to earnings in the first year of operation.

This acquisition will enhance our ability to refine price advantaged crude oil, and it expands our distribution options for refined products, including greater export opportunities.

It will provide immediate scale to enable further expansion of our Marathon brand presence in the Southeast.

This refinery is one of the largest and most complex in the US, and is considered to be one of the most technologically advanced and flexible refineries in the world.

It will be the most complex refinery in our portfolio, and it will increase our overall refinery complexity index and significantly increase our participation in the chemicals value chain.

In addition to major accomplishments such as DHOUP, the creation of MPLX, and initiation of the refinery acquisition, 2012 was a busy year for other improvements from MPC's operational capabilities.

Our Speedway retail segment increased its store count by about 7% last year, after acquiring 97 convenience stores in Indiana, Ohio, and Kentucky.

The acquisitions included 87 GasAmerica stores and 10 Road Ranger stores, bringing its total count to now around 1460 stores.

In addition to strengthening its presence in key marketing areas, Speedway also achieved record segment income and EBITDA per store.

At the same time, Speedway grew its merchandise same-store sales for the 15th consecutive quarter, and achieved its best-ever safety record.

Speedway same-store merchandise sales, excluding cigarettes, increased 4% compared to the same quarter last year, which achieved a 7.2% same-store increase over the prior year.

And moving on, we strengthened our position as a customer of choice for hydrocarbon liquids production from the Utica Shale by building additional infrastructure at our refinery in Canton, Ohio, to receive crude oil and condensate deliveries by transports from nearby wells.

We entered into a letter of intent to jointly develop infrastructure intended to facilitate transfer transportation of hydrocarbon liquids production from the Utica Shale.

The project will result in up to 24,000 barrels per day of truck unloading capacity, and a terminal capable of loading up to 50,000 barrels per day onto barges on the Ohio River at MPC's current Wellsville, Ohio asphalt terminal.

To increase access to Bakken and Canadian crude, MPC agreed to be the anchor shipper on Enbridge's proposed Southern Access Extension, with an option to acquire a 25% equity interest in the pipeline.

This line will originate in Flanagan, Illinois, near Chicago and terminate in Patoka, Illinois, a critical crude storage and blending hub and the origination point for crude supply for our four Midwest refineries.

Recently, Marathon Pipe Line and the owners of Capline have agreed to terms for formalizing a new operating agreement for Marathon Pipe Line to become the operator of the Capline system, effective in September of this year.

Capline is a 633-mile, 40-inch crude oil pipeline running from St.

James, Louisiana, to Patoka, Illinois.

It was constructed in the 1967-68 period, and has been operated by Shell since that time.

Marathon was one of the original owners.

And today, MPC retains its 32.6% interest.

I have spoken about balance often, and the balance between investing in the business and returning to capital to shareholders has been, and we expect will continue to be, a powerful driver of value.

Our share price rose 89% from the year-end 2011 to year-end 2012.

Combined with dividends, total 2012 shareholder return was approximately 93%.

The value we have provided to our shareholders is a result of our continuous efforts to meet the needs of our customers in the most efficient ways possible, whether it's sourcing the most price advantaged crude slate; identifying the most cost effective transportation for crude oil and finished products; or determining where our products will be needed most at any given time.

We believe our focus on safe and efficient operations, strategically located refining assets, diverse logistics, and multiple marketing options positions us to make the most of opportunities wherever and whenever they may occur.

If you'll please turn to slide 4, and looking ahead to 2013, we remain committed to operating our assets in a safe and reliable manner with continuous improvement in our safety record across all of our operations.

Our outlook for US gasoline demand for 2013 is flat, and US distillate demand to be up about 3.5%.

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

Our distillate exports rose to 151,000 barrels per day during the fourth quarter, compared to the 94,000 barrels per day in the same quarter last year.

We remain optimistic about the global competitive position of our US Gulf Coast refineries, and the prospects for future exports of gasoline and distillate.

Our 2013 capital investment plan totals $1.6 billion, excluding the Galveston Bay refinery purchase price.

It allocates capital across all our operating segments to capture value from shifts in the energy landscape in North America, and to increase our exposure to stable cash flow businesses.

Don will go into more detail on specific projects, but I want to highlight a few key points.

We will continue our expansion projects in the Pipeline Transportation segment, including investments in MPLX operations.

And we will pursue additional growth opportunities for this critical logistics operation to support both MPC and third-party business.

We will continue to invest in our Speedway segment through a combination of selective acquisitions and organic projects for new stores, rebuilds, remodels, and site acquisitions.

This channel of distribution generates stable cash flow from its food and merchandise sales inside the store.

Our 2013 plan includes high-return projects in our refining and marketing segment that will increase higher value distillate yields; expand our export capacity; allow us to process higher volumes of light hydrocarbons, expected to be produced in greater volumes from the Utica Shale; and continue upgrades at the new Galveston Bay refinery.

And although we've just completed our first year as an independent company in 2012, we celebrated our 125th anniversary, having been founded in this part of Ohio in 1887.

Our long-term success will continue to be built on our ability to adapt to changing market conditions and a commitment to values of health and safety, environmental stewardship, and integrity.

We look forward to new opportunities in 2013.

As we do, we recognize the trust our shareholders have placed in us.

Our mission continues to be value creation for our investors, incorporating a balance between internal and external investment; and return of capital to shareholders through a strong and growing base dividend over the long term, and share repurchases.

In all, we were pleased with what we were able to accomplish in 2012, and we remain very enthusiastic about our prospects into 2013.

Now I'll turn the call over to Don Templin to review the financial results for the fourth quarter and the full year of 2012.

Don?

Thanks, Gary.

Slide 5 provides earnings, both on an absolute and per-share basis.

Our fourth quarter and full year 2012 financial performance was very strong.

MPC had adjusted earnings of nearly $760 million or $2.26 per share during the fourth quarter of 2012.

This was compared to a loss of $75 million in the fourth quarter of 2011.

For the full year 2012, our adjusted earnings were $3.3 billion, almost $1 billion over the prior year.

Adjusted earnings per share was $9.79 for the full year 2012 compared to $6.72 for 2011.

The waterfall chart on slide 6 shows, by segment, the change in adjusted earnings from the fourth quarter of 2011 to the fourth quarter of 2012.

The primary driver for the change in our adjusted earnings was the increase in refining and marketing segment income, partially offset by additional income tax expense.

The significant improvement in Refining & Marketing segment income was primarily the result of higher crack spreads and wider sour crude differentials in the quarter.

The increase in income tax expense is a function of higher 2012 earnings.

As shown on slide 7, Refining & Marketing segment income from operations was almost $1.14 billion in the fourth quarter of 2012.

This was compared with a loss of $182 million in the fourth quarter of 2011.

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

First, the blended LLS 6-3-2-1 crack spread.

It was $2.73 per barrel higher in the fourth quarter 2012 than the fourth quarter 2011, resulting in an estimated favorable variance of $371 million.

Both Chicago and Gulf Coast crack spreads were higher in the fourth quarter this year compared to the fourth quarter last year.

The most significant variance quarter-over-quarter relates to the sweet/sour differential.

The sweet/sour differential for the 2012 fourth quarter was $13.41 per barrel, which was $12.44 per barrel higher than the comparable quarter last year, and represents an estimated $809 million favorable variance.

The LLS-WTI differential was $21.29 for the fourth quarter 2012 compared with $16.77 for the fourth quarter of 2011.

This increase in the differential resulted in an estimated $81 million favorable gross margin variance between the two quarters.

The first three market indicators 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 $1.36 per barrel less than the prompt LLS price during the fourth quarter 2012, while the average delivered crude cost for the same quarter last year was $6.52 per barrel higher than the prompt price.

This $7.88 difference resulted in an estimated $182 million favorable variance.

You may recall there was a dramatic narrowing of the WTI to LLS crude oil differential at the end of last year, which had a significant impact on our crude oil acquisition costs in the fourth quarter of 2011.

Direct operating costs had an unfavorable quarter-over-quarter effect of $90 million.

This was primarily due to higher depreciation expense associated with the completion of DHOUP, and higher plant turnaround costs in the fourth quarter 2012 compared with the fourth quarter 2011.

As you know, we completed the turnaround at our Detroit refinery in the 2012 fourth quarter.

The 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.

They include items such as actual realized prices, refinery yields, other feedstock costs, and crude slate variances compared to the values assumed when we calculate the market indicators.

It also includes refinery volumetric gains and purchase-for-resale activity.

As you can see from the waterfall chart, this combination of factors led to an estimated $24 million unfavorable impact in the fourth quarter of 2012 compared to the fourth quarter of 2011.

Slide 8 provides a similar earnings walk for the Refining & Marketing segment on a year-over-year basis.

The blended LLS 6-3-2-1 crack spread in 2012 was double the $3.35 per barrel crack spread for 2011, resulting in an estimated favorable variance of almost $1.7 billion.

The sweet/sour differential accounted for an estimated favorable variance of $870 million, as the differential was $3.36 per barrel higher than the average for 2011.

The WTI to LLS differential was $0.26 per barrel higher in 2012 compared to 2011, which resulted in an estimated $119 million favorable gross margin variance between the two years.

The LLS prompt versus delivered price variance was not significant when comparing the annual results.

The total prompt versus delivered LLS crude variance accounted for an approximately $49 million positive impact in the full-year comparison.

Market structure had an estimated unfavorable variance of $126 million.

There was $0.39 per barrel less of contango in the NYMEX WTI market structure in 2012 compared to 2011.

Our direct operating costs were $197 million higher in 2012 compared to 2011, primarily due to higher plant turnaround expenses and higher depreciation expense in 2012.

With respect to other gross margin, a number of factors impacted the change year-over-year.

The mix of crudes we actually processed versus the market indicators was the primary contributor of this difference.

On the next few slides, we include earnings walks for each of our other operating segments.

Turning to slide 9, Speedway's income from operations was $77 million in the fourth quarter of 2012 compared with $73 million in the fourth quarter of 2011.

Light product and merchandise gross margin combined were about $21 million higher in the fourth quarter of 2012 compared with the fourth quarter of 2011.

(Technical difficulty) product margins increased by $8 million, as margins averaged $0.1424 per gallon compared to $0.14 in the fourth quarter of 2011.

Merchandise margin was $196 million in the fourth quarter 2012 compared with $183 million in the same period last year.

This $13 million increase was primarily due to an increase in the number of stores compared with the same period last year.

On a same-store basis, gasoline sales volumes decreased 0.2%, and merchandise sales increased 0.2% in the fourth quarter 2012 compared with the 2011 fourth quarter.

The lower same-store gasoline sales volumes primarily reflect the impact of the higher absolute price of gasoline.

Speedway's average retail gasoline price was $3.32 per gallon during the fourth quarter of 2012 compared with $3.20 per gallon for the comparable quarter last year.

In January 2013, we've seen an increase in demand, with an approximately 2% increase in same-store gasoline sales volumes at Speedway.

Speedway's income from operations for all of 2012 was $310 million compared with $271 million for 2011.

Light product margins increased by $15 million, as margins averaged $0.1318 per gallon in 2012, slightly higher than the 2011 average.

On a same-store basis, gasoline sales volumes decreased 0.8% in 2012 compared to 2011.

The decrease in same-store gasoline sales reflects lower gasoline demand in our market area.

Merchandise margins were $795 million in 2012 compared to $719 million in 2011, or an increase of $76 million.

The increase in light product and merchandise margins were partially offset by increased expenses of $52 million, primarily due to an increase in the number of stores operated in 2012 as compared to 2011.

Slide 10 shows fourth-quarter and full-year changes in our Pipeline Transportation segment.

Income from operations was $72 million in the fourth quarter of 2012 compared with $30 million in the fourth quarter of 2011.

This increase was primarily attributable to an increase in transportation tariffs and earnings from pipeline affiliates, offset by slightly higher mechanical integrity costs.

Some of the increase in the transportation tariffs were related to the formation of MPLX.

2012 income from operations was $216 million compared with $199 million in 2011.

This improvement was primarily attributable to an increase in transportation tariffs, partially offset by higher mechanical integrity costs and a reduction in pipeline affiliate income in 2012.

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

At December 31, 2012, our cash balance was nearly $4.9 billion.

Operating cash flow before changes in working capital was just over $1.1 billion.

The working capital benefit of $919 million noted on the slide primarily relates to the impact of lower refined product prices on our ending receivables, and a reduction in our inventory levels at year-end.

Capital expenditures and investments during the quarter were $403 million, including amounts related to the completion of our Detroit Heavy Oil Upgrade Project.

Also shown on this slide is the $500 million of cash used in connection with our second accelerated share repurchase program, and the cash we received related to the initial public offering of MPLX.

Slide 12 shows that, at the end of the fourth quarter, we had nearly $4.9 billion of cash and approximately $3.4 billion of debt.

With EBITDA of over $6.3 billion during the last 12 months, we continue to be in a very manageable debt position, with leverage of 0.5 times EBITDA, and a debt to total capital ratio of 22%.

This strong liquidity position will enable us to fund the Galveston Bay refinery in cash, with sufficient remaining balances to support our core liquidity position and continue to focus on capital return.

Turning to slide 13 -- during the last 12 months, we generated almost $4.5 billion in cash from operations and nearly $3 billion of free cash flow.

Consistent with our commitment to return capital to shareholders, we've distributed 60% of our free cash flow in the form of dividends and share repurchases during this past year.

We are committed to being a leader in our peer group in terms of total shareholder return going forward.

As Gary mentioned earlier, our strong liquidity position has supported the Board's authorization of the repurchases of an additional $2 billion of common stock for a total outstanding authorization of $2.65 billion through 2014.

We will periodically update you on the progress of the share repurchase program.

Regarding the $500 million accelerated share repurchase program we initiated in November, we expect the program to complete tomorrow.

The total shares to be received will be based on the average share price over the three-month period of the program.

Based on share prices today, we expect to receive approximately 930,000 shares in addition to the 7.4 million shares received at the inception of the program.

This will bring the total shares acquired under the program to approximately 8.3 million shares, or about 2.4% of the shares outstanding when the program began.

Slide 14 provides outlook information on key operating metrics for MPC for the first quarter of 2013.

This information assumes a February 1 closing date for the Galveston Bay acquisition.

For comparative purposes, those same metrics for the first quarter 2012 are also shown.

Slide 15 provides a breakdown by segment of our actual 2012 capital expenditures and investments, along with our approved capital budget for 2013.

Slide 16 indicates the significant capital projects that we will be working on in 2013 and beyond.

Total capital spending in 2013 associated with plant upgrading of the Galveston Bay refinery and related assets is expected to be approximately $400 million.

We will continue infrastructure investments and complete several programs that are underway at this time.

In addition, we have identified synergies that we should begin to capture during our first year of operation.

Executing on our commitment to expand our assured sales, we've allocated $255 million for organic and acquisition opportunities within our Speedway segment in 2013.

At our Garyville refinery, we are continuing our projects to optimize diesel and gasoline yield through modifications to the older crude unit, hydrocracker, and the distillate hydrotreaters.

Total capital spending is estimated at $225 million, with the hydrocracker revamp to be completed in 2014, and the completion of the final phase of the program in 2015.

We intend to be a first mover in the Utica Shale play, and will position MPC to be the customer of choice for the crude oil and condensate.

Total spending is estimated at approximately $300 million through 2014 to accomplish these objectives.

New barges will be purchased to allow Utica production to be transported to Catlettsburg from the Wellsville facility.

We plan to invest in condensate splitters at Canton and Catlettsburg to allow the refineries to process up to 60,000 barrels per day of condensate from the Utica field.

In 2013, we should complete our Wellsville truck to barge crude system project and begin a condensate gathering line project that will connect production via pipe to both our Wellsville terminal and the Canton refinery.

The Patoka-to-Catlettsburg crude oil pipeline upgrade project is within MPLX, and has been pre-funded with $160 million of proceeds received from the initial public offering.

This major upgrade project is expected to increase capacity and reliability, and will be completed in September 2014.

The Robinson unicracker project is a planned revamp of our distillate hydrocracker to improve margins by processing more feedstock at a lower conversion, and shifting approximately 10,000 barrels per day of other products to diesel production.

Estimated total capital spending for the project is $75 million, and it should be complete in 2015.

With respect to our gasoline and distillate export project at Garyville, we are progressing well and plan to have the final phase of the project complete, ahead of schedule, in late 2013.

This $40 million capital project, along with some minor optimization work, has already allowed us to increase our diesel export capacity by 50,000 barrels per day, while the addition of a tank will expand our ability to export gasoline as well.

The Catlettsburg vacuum cut-point project is a revamp that will recover additional volumes of gas oil from the refineries' residual oil production to be processed in the cat cracker, thus increasing the production of higher-value gasoline and diesel.

This project is expected to be completed in 2014.

Now I will turn the call back to Pam Beall.

Thanks, Don.

Many of you have asked about the assets in MPC's refining and marketing segment that could potentially be acquired by MPLX in the future.

You'll find in our 10-K, which will be filed next month, additional disclosure about those assets that we believe will be useful to investors.

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

And then, of course, you may re-prompt for additional questions as time permits.

So, John, with that, we'd like to open the call to questions.

(Operator Instructions).

Chi Chow, Macquarie Capital.

Thanks, good morning.

Gary, you mentioned in your remarks the news on Capline.

And I'm wondering with Marathon becoming an operator, does that change your thoughts at all on a possible reversal of line?

Or are you still happy with the crude supply optionality from the Gulf Coast longer-term?

Thanks, Chi, and good morning to you.

The operatorship -- this has been under discussion for some time.

And so I would find that separate from whether or not there's an opportunity to reverse the line.

We continue to study those opportunities.

As we've said before, there are three owners, and it takes all of us to agree on which direction that pipeline might flow.

We will continue to analyze this going forward, and determine if there's any change in that direction.

Okay.

So the ownership structure doesn't change at all?

No, it does not.

Okay.

And does the upcoming decision on the Keystone XL line influence your thoughts, do you think; or, all three owners' thoughts?

Well, it's going to be very interesting.

If Keystone XL gets approved or if it's delayed, I think it's going to take longer to get that decision made than we had initially thought.

But certainly if something were to happen, that pipeline doesn't get built to the western Gulf, then that would put, I think, a different view maybe for some of the owners on Capline, but that remains to be seen.

Okay, thanks, Gary.

And then a second question on DHOUP, can you talk about how the unit is operating so far here in January?

And I think you've put out a $350 million EBITDA accretion number out there on 2011 pricing.

What are your thoughts on handicapping upside or downside on that, on that accretion at this point?

Right.

The numbers that you've quoted are correct, that we've put up the numbers for both the 2006 to 2010 timeframe and 2011, the number you quoted is correct.

And, Chi, we're very pleased.

I really congratulate end complement our refining team that built this project and got it up and running.

It's running very well.

It's been able to meet its stated capacity very early on.

And so, we are in the process now of testing to see -- it's too early yet, Chi.

I'll take you back to how we brought Garyville up.

We're in some very early stages.

So I don't have any of the test data yet on if it can outrun its design capacity.

It's just too early.

But it's running very well, and it came up relatively seamless.

Great.

What type of barrels are you displacing with the increased runs of the heavy Canadian?

Let me ask Mike Palmer to answer that.

Yes, Chi, obviously we've talked before about the ability of bringing in an incremental 80,000 barrels a day of heavy Canadian, and we've been ramping that up.

But basically we've been bringing in the heavy Canadian, which we've been very successful at acquiring and moving; and backing out a -- really, what is a variety of other lighter and some sweet crudes.

Okay, great.

Thanks, Mike.

Appreciate it.

Doug Leggate, Bank of America.

Thanks.

Good morning, everybody.

I've got a couple as well, hopefully I won't take too long.

You guys mentioned that you were getting ready to basically -- you'd be able to process increasing amounts of condensate up from the Utica.

Have you already got line of sight as to where the supplies are coming from?

And have you been in negotiations with suppliers already?

Because obviously volumes are still somewhat fairly sparse as you understand it.

Yes, Doug, this Mike Palmer.

You're right.

Certainly the Utica production, both the crude oil and condensate, has come on more slowly than what the producers originally estimated.

But it's very interesting -- just to give you some rough numbers, there have been something on the order of 500 drilling permits that have been issued.

There have been about 200 wells that have been drilled, and only about 50 wells are actually producing.

So, there is a lot of wells that have been already drilled that are just waiting to be hooked up to gas processing and takeaway capacity.

And we certainly expect that's going to begin to happen around mid-year this year and continue through 2013, 2014, and beyond.

So we remain very optimistic about the volumes of condensate and some crude that we'll have coming out of the Utica for our operation.

Great, thanks.

Two quick follow-ups, if I may.

Gary, the accelerated -- or rather the step-up in the buyback program, could you give us some idea as to how you are thinking about prioritizing now between competitive dividend growth and buybacks?

And perhaps what the likely pace you would anticipate, given the cash on your balance sheet, of executing that buyback program.

And I've got one final one, please.

Sure, Doug.

Let me ask Don to take that one.

Yes, Doug, this is Don.

With respect to returning capital to shareholders, we've indicated to you on a number of occasions, our bias is to having a strong base dividend; and then, to the extent that we have incremental cash like we have currently, to use other mechanisms to return the capital to shareholders.

So, our -- we have favored share repurchases historically.

And we will continue, I believe, to favor share repurchases going forward.

With respect to our base dividend, we view that as a long-term commitment to our shareholders.

And we believe that successful companies grow their share -- their dividend over time on a sustained basis, and we'd be committed to doing that.

But to the extent that we have excess cash, we would look to use tools like a share repurchase program.

I think we've historically used accelerated share repurchases, at least the last two times.

That doesn't necessarily mean that that's how we would plan to do it going forward.

Great, thank you.

I apologize for squeezing a third one in, but just very quickly on the macro, Gary.

If I could ask for your perspective on the outlook for Canadian heavy differentials, now that you guys are essentially a fairly significant buyer of that.

And I'll leave it there.

Thank you.

Yes, Doug.

There are going to be many changes in the Canadian heavy market this year.

Now, of course, it depends on what happens to the Excel pipeline.

But that won't be completed even if were approved the first half of this year; probably won't be completed into the 2015 timeframe or so, somewhere in that arena.

But with the -- we just brought Detroit up, DHOUP up, in November.

And there's another very large project up in Whiting that will come up, we understand, later this year.

So we really would expect to have strong differentials through the front half of this year.

And then we'll see what happens when this other project comes up.

But at the same time, you are going to see one or two more fields come onstream.

And I still think it's going to come down to the pipelines, and the pipeline capacity, and where and what regions that heavy crude could move.

And then, of course, that will be tempered by any turnarounds and any downtime in any of the Canadian upgraders or Canadian production operations.

Got it.

Thank you for the answers, Gary.

I appreciate that.

Ed Westlake, Credit Suisse.

Good morning, Gary and everyone, and congrats on the results.

Trying to focus in on Texas City.

Obviously we'll actually see the EBITDA soon enough.

But can you give us any updates on, say, OpEx per barrel or the logistics EBITDA within Texas City, or the potential capture rate that you think relative to Gulf Coast margins, given that you've got a lot of aromatics and propylene production in Texas City?

Right.

Let me ask -- thanks for the comments, there, Ed; and let me ask Don to cover this.

Yes, Ed, with respect to, I'll say, the operating expenses or manufacturing costs, we've embedded those manufacturing costs in the outlook information that we've included in our slides.

So that includes two months' worth of Galveston Bay, or the Texas City refinery, in those amounts.

Okay, great.

Okay?

So you can see those numbers as reflected, or compared to 2012.

With respect to the EBITDAS, we don't give specific EBITDA per plant or by refinery.

But at the time that we did announce the acquisition last year, we used two different price decks.

And the incremental EBITDA associated with the refinery, using those two price decks, was between $700 million and $1.2 billion.

Great.

And, Ed, the other thing with your question on aromatics -- we're just going to take over on Friday.

We just received the LP late in the process here; because the former owner -- that was their property and we needed to make sure this thing got to the finish line.

As I said, it will on this Friday.

So we just got that LP.

We will be refining that and really get into the details of that starting next week.

So, we really can't break out the aromatics yet.

But all of that value is embedded in the numbers, the $700 million to $1.2 billion that Don just gave you.

And those numbers are based on a 12-month -- and of course this is going to be an 11-month period.

Yes.

And then the other question is around gasoline versus diesel.

Obviously gasoline prices have been depressed, partly because of American demand and partly because refineries in the US are running as hard as they can, whereas diesel obviously has been a little bit more profitable.

When you think about uses of the free cash flow that you have, what thoughts do you have around making some larger investments to improve the diesel yield at the refinery system?

Well, Ed, we have made -- and I think we were a little bit ahead of the curve -- but going back to when we built Garyville.

We build Garyville to be a balanced refinery; about 50% gasoline, 50% diesel.

Then when we did DHOUP, the same thing, to get more diesel output and to be able to lessen the amount of [reset] in the marketplace.

And then the further investments we've made at Garyville to even expand the hydrocracker, to make more diesel, and a couple of the other process units.

And then lastly to be able to export that diesel out of the marketplace in an efficient manner.

So we have made a lot of investments in what I call low-hanging fruit early on, and probably ahead of some.

But no plans to do a major hydrocracker build?

Not at this time, Ed.

Okay.

Thanks very much.

Evan Calio, Morgan Stanley.

Good morning, guys.

A question on your 2013 CapEx.

First, can you quantify how much of the $1.6 million is midstream, including dock capacity?

I'm trying to understand better the organic growth or more of the conventional growth in MLPX assets within the portfolio.

And I have a second question.

Evan, this is Don.

We have not typically broken that out.

You can see what we've included for Pipeline Transportation.

But a big piece of that number relates to the Patoka-to-Catlettsburg upgrade expansion project.

But we have not separately detailed the other projects.

Right.

But the fact that it's listed number two would mean it's a pretty big priority item you are spending here.

My second question is -- and maybe you are saying you won't answer that.

But in terms of the Galveston Bay, the Texas City CapEx, can you at least dimension how much is regulatory maintenance versus growth?

Trying to understand how much invested capital could drive incremental returns on a flat crack basis rather than aggregate amount of what's being invested.

Yes.

I think we -- $400 million is our expectation of the spend that we would have related to Galveston Bay this year, Evan.

And I would say substantially all of that relates to either regulatory, or projects that were ongoing.

Our view around expansion opportunities actually occurs in subsequent years.

Okay.

And then finally, the question is obviously is very topical around midstream and downstream this quarter.

But do you see a role for rail in your system?

Or do you really think you're best served by pipe, given your location?

I'll leave it at that.

Thanks.

Evan, this is Mike Palmer.

We've looked at rail over and over again.

And if you look at our system, again, with our plants in the Midwest and the plants and the Gulf Coast, we just don't think that our investing in rail makes a lot of sense.

We think that we can accomplish much lower transportation costs through pipeline.

We understand why others do it.

But we've looked at it and just can't make sense of it.

Okay.

That makes sense.

I appreciate it, guys.

Doug Terreson, ISI Group.

Good morning, everybody, and congratulations on your great results.

Gary, industry net exports seemed to have slowed during the past year, although I think you pointed out that you didn't have any problems because yours rose, and they're going to increase further with the expansion of Garyville.

So, my question involves any insight that you may have into the slowdown of industry exports; meaning either supply- or demand-side features that are present here, and what do you consider your major advantages in this area?

And also how the new refinery will affect your export capabilities in coming years -- meaning, will you have to make investments or is it ready-made for export?

So, if you could just comment on a couple of those items I'd appreciate it.

Sure, Doug.

Our numbers on exports appear to be about flat for distillate, and I'm talking distillate because that's the commodity that we export the most; so, about flat to last year.

But one of the things that I think gives a good position in the market is the quality of the distillate that we're making out of Garyville.

It has a high cetane rate, which is sought-after in the marketplace.

So, I think that is, as I say, gives us that strong position.

You'll notice that we substantially increased quarter-over-quarter last year.

I believe the numbers were -- Pam -- 151 this year to 94 last year.

So we substantially increased that, and continue to have a strong demand for our distillate.

Now, as we take on Galveston Bay, and the way part of the synergies and the way that we're going to operate there -- the day we moved some of our products -- I would say we criss-cross up with Galveston Bay because Galveston Bay is a very large supplier into the Florida market; the same as Garyville is.

And then we also -- both plants were exporters into the Latin America, South America market and some to Europe.

So, we'll be able to pick up some synergy and be able to optimize how we move those products to marketplace; and, I think, take advantage of some good transportation savings, both in distance and in the volume or the metric tons that you're going to ship in one batch.

So, that's what we're looking at up front, Doug.

Okay.

And I had a couple of other questions about inventory.

I think you guys mentioned that there was an inventory gain in the quarter, so I wanted to find out the magnitude.

And then, Gary, you're a leader for the industry in Washington, so I wanted to see if we could get some updated insights from you on the potential changes in industry tax policy; and, specifically, while it doesn't sound like there's going to be some type of mandate whereby the refiners migrate from LIFO to FIFO, just wanted to see what your views might be in that area -- and also the level of your current LIFO reserves.

So, there's three questions there.

All right, Don will cover the inventory first.

Yes, so with respect to inventory, I think the comment I made was in the fourth quarter, as part of our cash flow or working capital items, our inventories at year-end were slightly below -- or were lower than our inventories at the end of the third quarter.

But on a year-on-year basis, our inventories are just slightly up, maybe $200 million, I want to say, roughly.

So that's the inventory.

And industry tax policy, Gary, your view?

Right.

A couple things.

Industry tax policy -- of course the industry would certainly embrace staying with LIFO.

And that's the direction that we're working hard is trying to explain in Washington.

I would say the biggest item in Washington that we're dealing with short-term would be the renewable fuel standard.

It's unworkable in its current approach.

You see that there was a decision that came out this week that said that maybe -- not maybe, but a decision was made that EPA overstepped some boundaries within the biodiesel side of the business.

So, but I would say renewable fuel standard -- because as we've come to hit the blend wall, and the requirements that are there for blending, and the lack of cellulosic and the lack of some other advanced cellulosic type of materials, really puts us in an unworkable solution -- or unworkable position, I should say.

The next ideas -- or next discussion point is going to be around E15.

And we don't think that works either.

And it's going to be something that we continue to work very hard on, inside the Beltway.

But from a tax position, we certainly embrace staying with LIFO.

I'll let Don discuss --

I think you had asked about LIFO, but we don't have -- I don't have that reserve number with me right now.

But if you are asking about the replacement cost, fair value exceeds our carrying costs by somewhere around $5.4 billion at the end of the year.

Okay.

Great, guys.

Thanks a lot.

Blake Fernandez, Howard Weil.

Hi, guys.

Good morning.

I had a question for you on Texas City -- understanding you are about to close -- but the history of the facility.

It obviously has been run somewhat inefficiently.

I'm curious if you've had a chance to get in there and assess some cost-cutting and efficiency opportunities yet?

Yes, Blake.

First and most important to us is to bring this on in a very safe manner -- safety to the employees, safety to the community and the environment.

And that's really where we're focused.

We've set up a complete separate team to be able to bring this on, and turn this over, so that they're not distracted with their -- by a job back up on one of the other refineries.

They are there to look after this plant.

We have named a new management team, and we have confidence in their abilities.

We are not going to focus on cost cutting early on.

We really need to, as Don outlined a little bit ago, that capital that is on our plate this year is mainly to -- this and the next couple of years -- is to complete the regulatory or consent decree capital, if you want to call it that, that is required in this plant.

Then we will focus on what is the best way, in our opinion, to operate.

Mike Palmer's group is going to focus on the best way to optimize the feedstocks, and then how we sell it into the marketplace.

But I want to be very clear, we're not going to step out and try to reduce operating costs immediately until we totally get this under control in a safe -- turn over the operation.

Understood.

Thanks for that, Gary.

And then the second question was, one of your peers yesterday talked about the opportunity to where they've pushed out all the foreign barrels they were using along the Gulf Coast and replaced it with domestic barrels.

I'm just curious, do you have a similar opportunity with Garyville and, of course, Texas City coming online?

I don't know if you have a mix offhand of what foreign crude you run.

And is there a chance to replace those?

Yes, Blake.

This is Mike Palmer.

We certainly believe that here in 2013, that there really won't be any material volume of foreign cargo sweet crude left in the Gulf.

We always look to optimize our crude slates.

And where we can bring in a domestic barrel that's priced better, and provides higher profitability than a foreign barrel, we do that.

So, there is not a lot of foreign sweet crude that we bring into the Gulf anymore.

And there may be some at Galveston Bay.

And, once we get the LP and we're looking at that refinery closely, we'll determine what the best crude slate is there.

The other thing I would say is, while there won't be any real material light sweet cargo crude coming into the Gulf, there will always be opportunities that various refiners will look at to bring special crudes in that provide value to that refinery.

So it's not as if this crude is going to go completely away.

Got it.

Perfect, thank you.

Jeff Dietert, Simmons.

Good morning.

I know we are late in the hour, and my question is regarding barging activity on the Mississippi River.

I think historically you've moved something like 50,000 barrels a day by barge down to Garyville.

Are you being impacted by the low water levels?

And what are the constraints to moving more Mid-Continent crude down to Garyville?

Yes, this is Garry Peiffer.

The regarding the Mississippi River, at the moment it's pretty much operating as normal.

We're operating our Wood River with 9 foot drafts, so that's pretty much what we'd normally operate at.

The good news is, we've had some pretty good precipitation here lately.

So from an operations standpoint, other than the incident that occurred down in the southern part of the river here over the weekend, that they expect to have up and running in the next couple days, the river levels are not impeding our flow on the -- or our activity on the Mississippi.

(Multiple speakers) is the 50,000 barrel a day movement the right ballpark?

And what's the constraining factor to keep you from moving more?

Yes, this is Mike Palmer.

Let me answer that.

As you well know, the reason for these very wide differentials that we're seeing on the heavy Canadian now is due to pipeline constraints.

And that's for everybody.

And what we'll do as we go forward is we'll have to look at the logistics space, the pipeline space that we have, and how we best utilize that space within the system.

So, whether or not the heavy barrels that we can get into, say, the Patoka area, whether those move on to Garyville by barge or whether we move those by pipe down to Galveston Bay, or whether we move those to the Midwest system, will be part of the optimization process that we'll do each and every month.

But there are pipeline constraints.

Thanks, Mike.

Thanks, Gary.

John, we'll take one last question, and then we'll call it a wrap.

(Operator Instructions).

Thomas Stenvoll, Bocage.

Hi, good morning, guys and congratulations on a great year.

My question to you is on how you are acting as a blender and producer of gasoline in response to this move higher in RINs over the last few weeks?

You alluded to the structural question on the blend well, but with current RIN economics and a shortage of ethanol after last year's crop year, how are you planning to comply with the renewable mandate for 2012 and 2013?

We don't see that we'll have any problem meeting the renewable mandate.

And please understand that the way the RINs work is, you can carry some RINs forward, and then we buy RINs on the third-party market as well.

And of course there was a bit of an issue a couple years ago with the validity of some RINs.

But that has pretty much been all straightened out.

And we feel confident that it's not going to give us any problem in meeting that window.

(Multiple speakers) Go ahead.

Would you prefer if you could get term ethanol supply agreement, or buying RINs in the third-party market as a means to fulfill that obligation?

We don't have any problem.

We have term ethanol agreements already, so that's not a problem to us.

Great, thank you.

All right.

And, Pam, let me state, I mentioned something in my speech that I caught afterwards.

For the folks at Speedway, I said 15 straight quarters; it's really 15 straight years that they've increased their merchandise sales, and my compliments to them.

Okay.

Well, thank you, Gary.

Thanks, everyone, for joining us today.

If you have any follow-up questions, I'll be in the office this afternoon if you want to give us a call.

Thank you.

Bye-bye.

Thank you, ladies and gentlemen.

This concludes today's conference.

Thank you for participating.

You may now disconnect.