Marathon Petroleum Corp (MPC) 2013 Q3 法說會逐字稿

Welcome to the third quarter, 2013 earnings call.

My name is Cliff, and I will be your operator today.

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 would now like to turn the call over to Ms. Pam Beall.

Ms. Beall, you may begin.

Yes, and good morning.

Thanks for joining us today on Marathon Petroleum Corporation's 2013 third-quarter 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, Rich Bedell, our Senior Vice President of Refining, Mike Palmer, Senior Vice President of Supply, Distribution, and Planning.

Please read slide 2. This is our Safe Harbor statement, and it is a reminder that we will be making forward-looking statements during the presentation and during the question-and-answer session.

Our 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 SEC.

Just as a reminder, we will be hosting an Analyst and Investor Day at the St.

Regis Hotel in New York on December 4. If you have not received an invitation and would like to attend, please contact me.

And now, I will turn the call over to Gary Heminger for opening remarks.

Thank you, Pam and good morning to everyone.

Thank you for joining us today.

The third quarter was challenging for MPC and the entire US refining sector with declining crack spreads, narrowing crude oil differentials, and backwardation in the crude market.

We believe much of the pressure on industry fundamentals was due to high industry crude runs.

Incremental inventories held within the US during the hurricane season also contributed to excess transportation fuel inventories since there were no significant adverse weather impacts this year.

Our assets performed well during the third quarter, and we are pleased with the ongoing integration process at the Galveston Bay refinery.

We continue to recognize synergies with Galveston Bay and our other refineries.

In addition, we are evaluating further opportunities to unlock the earnings potential of this recently acquired asset.

Our Pipeline Transportation segment provided consistent results for the quarter.

We continued to advance organic investments in our midstream businesses that are catalysts for significant growth in the future.

In addition to our participation in the recently announced southern access extension project, we are developing a new pipeline project in the Utica shale region that will initially connect multiple production facilities in eastern Ohio with our Canton refinery and other MPLX pipelines in the area.

This project will compliment the existing condensate and crude oil truck unloading facility at Canton and our truck-to-barge logistics operations at Wellsville, Ohio that was brought online in October.

Speedway delivered strong performance for the quarter resulting in more than a 34% increase in income from operations, compared to the same quarter last year.

This was driven in part as a result of an increase in same-store sales volumes and margins and cost control.

Speedway continues its expansion in contiguous markets with construction of new stores in Pennsylvania and Tennessee as well as its growth in commercial fueling locations for increasing sales of diesel fuel.

Despite the challenging market conditions in our Refining & Marketing segment, we returned $1.2 billion of capital to shareholders through dividends and share repurchases in the 2013 third quarter.

We remain confident in our ability to generate cash to continue our balanced approach to investing in value-enhancing investments in the business and returning capital to our shareholders.

This confidence was underscored in September when our Board of Directors approved an additional $2 billion share repurchase authorization.

As of the end of September, we have repurchased 17% of our shares since the spinoff in June of 2011.

As we look forward to 2014, we are optimistic industry fundamentals will improve.

We are encouraged that EPA has acknowledged its renewable volume obligation for 2014 is unworkable.

We remain cautiously optimistic that EPA will establish reasonable targets for 2014.

We, along with others in the industry, continue to press Congress for a permanent legislative remedy to the renewable fuel standard to provide the markets greater certainty over future renewable fuel obligations.

Exports of gasoline and distillate continue to provide refiners incremental markets to distribute transportation fuels.

Our exports reached a record 245,000 barrels per day for the quarter compared to 124,000 barrels per day during the same quarter last year.

The low cost of natural gas and the projected increase in supply of North American crude oil will continue to benefit US refiners.

In addition, US refiners have the ability to produce the low sulfur, refined products being increasingly required around the world.

We believe these advantages will continue to provide US Gulf Coast refineries with a global, competitive advantage.

And, it should allow US Gulf Coast refineries to capture a growing share of demand for transportation fuels, particularly in Latin America and in Europe.

With that, I will ask Don Templin to review quarter results in more detail.

Don?

Thanks, Gary.

Slide 4 provides earnings and adjusted earnings data both on an absolute and per-share basis.

Our third-quarter 2013 adjusted earnings were $183 million compared to $1.1 billion of adjusted earnings in the third quarter of 2012.

Adjusted earnings per diluted share was $0.59 for the third quarter compared to an exceptionally strong $3.31 during the same period last year.

The adjusted third-quarter 2013 earnings excluded $23 million pretax for cumulative pension settlement expenses resulting from the level of employee lump-sum retirement distributions occurring in 2013.

The adjusted third-quarter 2012 earnings excluded $33 million of pretax pension settlement expenses and a $183 million pretax gain on the settlement of items relating to the sale of most of our Minnesota assets in 2010.

The earnings walk on chart 5 -- on slide 5 shows by segment the change in adjusted earnings from the third quarter of 2012 to the third quarter of 2013.

The primary driver for the change in our adjusted earnings was the decrease in income from our refining and marketing segment, partially offset by an increase in income from our Speedway and Pipeline Transportation segments and lower income taxes.

As shown on slide 6, Refining & Marketing segment income from operations was $227 million in the third quarter of 2013, compared with just under $1.7 billion in the third quarter of 2012.

We have expanded this chart to show both price and volume impacts.

The change from 2012 was primarily due to lower crack spreads, narrower crude differentials, and lower product price realizations partially offset by increased volumes due in large part to the acquisition of the Galveston Bay refinery along with operations at the Detroit refinery.

The unfavorable earnings impacts associated with the lower crack spreads and narrowing crude differentials are found in the price columns for the following four markets metrics -- LLS 6321 crack, the sweet/sour differential, the LLS to WTI differential, and the LLS prompt versus delivered column.

All of these indicators utilize spot market values.

As a result, differences in our actual product price realizations and our actual crude costs quarter to quarter are reflected in the other gross margin column.

Let me make a few comments about each of these items.

First, our product price realizations compared to spot market values were lower in the third quarter of this year than in the third quarter of last year due in part to the impact of renewable identification numbers, or RINs.

RIN prices averaged approximately $0.085 on a per [E10] gallon basis for the third quarter 2013 compared to $0.015 per gallon in the third quarter of 2012.

Our cash cost for the RINs we purchased to meet our RFS obligation was approximately $25 million per month for the third quarter of 2013.

We continue to believe that the traditional crack spreads using [neat] gasoline and distillate spot market values versus the biofuel blends that are actually sold likely overstate refiners' earnings due to the impact of RINs.

Second, our actual crude and feedstock acquisition costs compared to the market indicators were more favorable during the 2013 third quarter than they were in the comparable period last year.

The increase in direct operating costs quarter-over-quarter is primarily due to the acquisition of the Galveston Bay refinery and is consistent with our guidance.

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

Slide 7 shows Speedway's income from operations was $102 million in the third quarter of 2013, compared with $76 million in the third quarter of 2012.

Speedway's light product gross margin was $27 million higher in the third quarter of 2013 compared with the third quarter of 2012.

This increase was primarily due to a $0.03 per gallon higher gross margin.

Merchandise margin was $224 million in the third quarter of 2013 compared with $217 million during the same period last year.

This $7 million increase was primarily due to margin expansion from increasing merchandise and food sales.

On a same-store basis, gasoline sales volumes were up 1% in the third quarter 2013 compared with 2012 third quarter.

Speedway's same-store merchandise sales, excluding cigarettes, increased 5.6% over the third quarter last year, which is noteworthy considering the third quarter last year was up 4.1% from the same quarter in 2011.

Speedway's average retail gasoline price during the third quarter of 2013 was $3.44 compared to $3.62 in the same period last year.

Slide 8 shows changes in our pipeline transportation segment income.

Income from operations was $54 million in the third quarter of 2013 compared with $52 million in the third quarter of 2012.

This increase was primarily attributable to an increase in transportation tariffs offset by higher operating expenses and depreciation.

A portion of the increase in transportation tariffs was related to the formation of MPLX.

A number of items that made up the unfavorable operating expense variance, the largest of which were costs now incurred by MPLX as a standalone entity.

Slide 9 presents the significant drivers of changes in our cash flow for the third quarter of 2013.

At September 30, 2013, our cash balance was just over $2 billion Operating cash flow before changes in working capital was up $475 million source of cash.

As shown on this slide, the primary driver of the reduction in cash balance for the third quarter is the over $1 billion of cash used for share repurchases that Gary Heminger highlighted earlier.

Slide 10 shows that at the end of the third quarter, we had just over $2 billion of cash and approximately $3.4 billion of debt.

With EBITDA of almost $4.8 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 11, during the last 12 months, we generated nearly $4.1 billion in cash from operations and $1.3 billion of free cash flow.

Over that same period, we've returned over $3.3 billion to shareholders through dividends and share repurchases.

This was about 2.5 times our free cash flow over that period.

During the third quarter 2013, we purchased approximately 14 million shares for about $1 billion through open-market repurchases.

It is our intention to continue returning capital to our shareholders that is not currently needed in the business.

Slide 12 provides Outlook information on key operating metrics for MPC for the fourth quarter of 2013.

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

As you can see, turnaround costs are expected to be substantial in the fourth quarter at approximately $350 million, or just over $2 per barrel of total throughput.

Looking forward we also expect significant turnaround costs in the first quarter of 2014, estimated to approximate $500 million.

The October market data document will be published tomorrow on our investor website.

Our mission continues to be value creation for our shareholders.

We are committed to pursuing opportunities to create near- and long-term value and believe the returns to our shareholders reflect that focus.

We will be balanced and disciplined in our approach to capital allocation as we continue to assess the opportunities in front of us.

And now, I will return the call back to Pam Beall.

Okay.

Thank you, Don.

As we open the call for your questions, we do ask that you limit yourself to one question and a follow-up.

We are going to cut off the call exactly at one hour.

So, want to make sure that people that have a question get a chance to ask it.

You may re-prompt for additional questions if the time permits.

With that, I will open up the call to questions.

Cliff?

(Operator Instructions)

Ed Westlake, Credit Suisse.

Thanks for all of the commentary around year-to-year changes.

My first comment is actually on the MLP.

I do not know if you -- I'm sure you've seen the market response to the other transactions that we have seen in the MLP space.

I'm thinking Devon, Crosstex being a little bit more aggressive in terms of bringing forward the value of the MLP.

Does that change the way you're thinking about your progressive drop-down strategy?

Yes, Ed.

This is Garry Peiffer.

We are watching all of those transactions and activities very closely.

And, considering that, when we set our growth -- annual distribution growth targets, and I think in those cases we just celebrated essentially today our one-year anniversary.

So, we have only been in the MLP space for a relatively short period of time.

But, we watch them all.

That is why I think when in the last quarter, we gave a little bit more definitive guidance to the market when we said that we are projecting annual distribution growth in the 15% to 20% range for at least the next several years to give a more specificity, if you will, to what we are expecting and how we are expecting to grow the MLP.

We are definitely watching, aware of, and analyzing all of those activities.

A specific question on the data pack and the RIN distortions.

Obviously, RIN prices have pulled back thanks to what it seems like the EPA is looking to do.

Have you started to see those distortions versus the data back on the pricing reduce?

Yes, this is Garry again.

I think yesterday, RINs were assessed maybe about $0.25 a gallon per RIN, or about $0.025 per E10 gallon.

In the third quarter, we averaged closer to about $0.85 or so, and that was about the same in the second quarter.

So, the distortion that you saw in the second and third quarter is obviously less at $0.025 a gallon versus $0.085 per gallon, so I think we are getting better clarity of what impact that has on the bottom line.

As you know, we've talked last time, it's really an impact whether you write a check to acquire RIN or you sell at the wholesale level, that effect really comes through financially no matter which way you go about acquiring your RINs

So, your thought process is that the RIN has been driving these distortions, it is not other factors such as gasoline oversupply, et cetera?

I think that is obviously affecting the overall market, but I think the distortion when you try to translate the gross neat spot values into a bottom-line profit after RINs that is where the distortion comes in.

Okay, thank you.

Evan Calio, Morgan Stanley.

Good morning.

Maybe a follow-up to Ed's question.

On a longer-term basis, given your higher multiple at MPLX, it translates to a lower yield.

It at all relates to the parent affiliation with MPC and the drop-down potential there.

Do you believe MPLX over the longer term is a natural consolidator within the midstream space?

Evan, this is Gary.

Yes, we do.

As we continue to follow MPLX and back to Ed's question, certainly we're following everything that is in the marketplace.

As we have discussed many times, with our logistics assets that we have inside of MPC as well as the remaining ownership that we have that has not been dropped down yet into MPLX from our initial start of the Company.

We have much flexibility and many avenues in which we can turn.

On top of that, I think it is very important to understand we are working on many organic opportunities.

As we stated when we first started this Company, this was not just going to be a drop-down story of MPC assets.

We are working very hard and expect to be able to give you some more color when we are together in early December around that strategy.

So, again, it is not just around MPC.

It is what we can do to grow this business and really tee it up for the long term.

As I said, we will give you more information on that when we are together in early December.

Okay.

Perfect.

Second question on capital allocation.

That was an aggressive buyback in the quarter.

It was representing a much higher percentage of relative free cash flow.

Can you talk about that change?

Are you making a statement that you believe weaker 3Q conditions are transitory, and you are using associated weakness to retire shares, in addition to the cash that remains on the balance sheet.

Do you also view MLP-able assets as another potential source of liquidity that could fund a lot of different things including a buyback?

I'll leave it at that.

Evan, this is Don.

We have consistently said that we are committed to returning cash that is in excess of the needs of our business and core liquidity needs to our investors.

We have discussed a number of times our view around our core liquidity needs including the cash balance that needs to support that core liquidity needs.

And, the activity that we have been undertaking really in the last 12 to 18 months has been very focused at getting our cash balance down -- working it down -- and returning that excess cash that isn't being deployed to the business to our shareholders.

I do think that we have a lot of tools in the future that are available that allow us, in addition to our strong earnings growth profile and what we think we can continue to grow in the midstream.

MPLX is a great tool, and we can generate cash by dropping assets down to support return of capital to shareholders.

We have LP units, as you know, that we can monetize if we need to.

So, I feel great about our ability over the long-term to continue to return capital to our shareholders in a very disciplined way.

Great.

One last one if I might.

Can you provide an update on turnarounds in the quarter?

I believe Garyville is your only asset currently in turnaround.

Any update when you expect to exit there?

Or, what more the utilization impact in the quarter might be?

Other than what you already gave us, which I think was the turnaround expense?

With respect to the utilization impact, our Outlook information, that includes the projected crude throughput at the refineries.

That data that we projected forward there includes the volumes -- or decrease in volumes arising from the turnaround.

We do not give specific information on which refinery it is, and how long the turnaround lasts.

Got it.

Fair enough.

Thanks.

Paul Sankey, Deutsche Bank.

We have done a little work over the past three years on crude discounts, and I think we buy into the idea obviously of a structural discount of US crude to international.

Our concern is the product markets, in your case particularly around Chicago, and whether or not we may just end up with an oversupply of product in those internal markets.

Gary, can you talk a bit more about how you can mitigate the risk of product oversupply inland US as a way of maintaining excess profit in refining as opposed to just cheap crudes simply leading to cheap gasoline?

Thanks.

Right.

That is a very delicate situation, as you outlined, Paul.

What we can do to mitigate is really a strategy that we have employed for many years.

Being one of the larger suppliers into the Midwest Pad 2 and having pipeline logistics that we can move from Pad 3 into Pad 2. And, then using our barge system that we also can move products out of Pad 2, we optimize every day.

And, we are a big buyer of additional products in the Midwest as well.

And, over the years, what we have done to mitigate that is to be able to take advantage of excess at times, excess product, mainly gasoline.

Distillate is fairly balanced in Pad 2. But, mainly, gasoline.

If there is excess product available, we buy it for different turnaround cycles, different maintenance cycles.

And, we can deploy that around the Midwest instead of shipping it up from the South.

I am sure that you have noticed over time that pipeline shipments from the South in various of the big [common carrier] systems have certainly declined over time, and that is because of the way we have tried to resupply in some of those markets by using that product in the Midwest.

I will agree with you that when you look at the shoulder quarters, and especially the inventory that was in place -- as I said in my talk earlier.

The inventory that was in place over the summer, building for hurricanes.

You just don't build inventory in the Gulf Coast for hurricanes, but in the form of either crude or refined products, we moved that up into some of the Midwest terminals as well.

As that inventory was there, and you reduce that inventory and use it up, I think that is what has caused some of the downturn in the crack spreads over this period of time.

But, those are the types of things that we have done to try to mitigate and be a leader in the marketplace.

Yes, I guess it speaks to your integration strategy.

The follow-on question would just be on the obvious question, which would be on product exports.

Can you talk about the dynamics there?

How much they're growing?

How the Outlook looks?

And, what you are doing to invest in increasing those exports?

Thank you.

Let's have Mike Palmer talk about this.

Yes, Paul.

I know you have seen our numbers.

Obviously, we have been growing these exports considerably, probably more than anybody expected over the last couple of years.

And, I can tell you that we have no shortage of opportunities to export both distillate and gasoline.

Things are looking really good in that area.

We are doing things to de-bottleneck that allow us to export more over the docks.

We have an export tank that is coming on at Garyville that will allow us to export gasoline more than we do today.

We see this as a core part of our business, and we would expect to continue to grow it.

Thank you.

Paul Cheng, Barclays.

Hello.

Real quick.

If I am looking at in the third quarter, comparing to the market data, it seems like sequentially to the second quarter, your margin capture rate actually is somewhat better.

Is there any particular factors that we should be aware?

Paul, this is Garry Peiffer.

Nothing that strikes me off the top of my head -- directly -- I guess the one thing that probably has happened is like we have talked about earlier in terms of the RINs.

I think there is better understanding of the RINs' effect going on between the second quarter and the third quarter, which was similar.

The value of those RINs were similar.

I think the market, as you know, it takes a while for it to get a little clarity when you have a sudden shock to the system like when the WTI LLS spreads collapse, or when these RINs enter into the equation, everything takes a little bit of time to recalibrate itself.

I think that is going on now.

The people understand the impact of RINs on spot market prices, on crack spreads, and on people's bottom lines.

I think it is more maybe the market is getting itself a little more acclimated and recalibrated to this new world of having to consider RINs in the calculation of how much you charge and how you much you make.

Gary, in the second quarter, one of the factors that you pointed out hurting your results is that the rest of the Midwest region where your refinery locate, the [port of] prices did not move up as much as Chicago.

So, regional differences.

I think in the third quarter that that still has that issue.

What have you seen so far in the quarter?

Have we started to see the reversal that the rest of the Midwest market catch-up with the Chicago pricing?

Paul, this is Gary.

What we have seen -- and you are right.

And, I think it goes back to the discussion I had before about mitigating prices due to at times, excess supply in Pad 2. As we go in now to Pad 4 and just looking here at some of the terminal prices, we are seeing a rebound in both gas and distillate pricing so far here in the fourth quarter.

And, again, it's using up that inventory that was on hand for hurricane and other weather impacts.

So, we are starting to see -- (multiple speakers).

Gary, I guess my question is more on that let's say if I am looking at Kentucky or Ohio, is the port of pricing relative to Chicago, we turn back to a more historical level now?

Or, that there is still being disadvantage as what we have seen in the second quarter and perhaps in the third quarter?

Pardon?

Go ahead, Mike.

Paul, we are trying to understand what you're asking.

Are you asking about wholesale RAC prices?

Yes.

In the various states -- (multiple speakers).

What I am saying is that in the second quarter, didn't you pinpoint -- point out or highlight one of the reasons behind why you did not capture as much as what the market indicators suggest is that in the Midwest market, you are using the Chicago port pricing as a benchmark, but that the rest of the Midwest market in the second quarter did not wise up to the same extent.

So, that there is a regional basis difference between the rest of the Midwest and the Chicago pricing, and my impression is that have you seen that trend reverse?

(multiple speakers)

We now -- I am sorry, Paul.

We now understand your question.

In the second quarter, we had pretty sudden increases in prices in the Midwest driven by some turnaround activity primarily, plus compounded by a bit of the confusion related to the RINs.

I think that has been mitigated in the third quarter, and I think as we've looked at the demand, we see demand as being relatively good for gasoline here in the last few months.

I think all of those things are translating into a little bit better realization in terms of how much we put in our pocket at the end of the day versus those spot market values, unlike that sudden run-up in the second quarter for Chicago.

All right.

Very good.

Thank you.

Doug Leggate, Bank of America.

Thanks.

Good morning, everybody.

Gary -- Gary Heminger, you were very early to share your thoughts about the structural discount on crude pricing.

I wonder if I could just ask you to bring us up-to-date with your latest thoughts?

And, specifically what I am thinking is the view that you take as to how the discounts of crossing grades particularly towards sour grades on the Gulf Coast, and how that might perhaps change the way you think about your slate going forward.

Sure.

And, you're right, Doug, we have talked about this.

Maybe we are one of the early ones to come out and chat.

Let me turn this over to Mike because Mike has a lot more detail in the crude markets right now.

So, Mike, if you will take that question.

Okay, and I want to be sure I understand your question.

Are you interested about sour spreads in the Gulf Coast?

Basically, because it's not just obviously -- it appears that with LLS with a discount to Brent that everything that typically trades on the Gulf Coast is now pricing off LLS.

I just wanted to get your perspective as to how sustainable you think that might be?

And, how it might change your view as to feedstock going forward?

Again, coming back to this whole LLS situation, and I would throw Mars into the same package, I think.

One of the things that is happening right now in the Gulf Coast, obviously you have seen these very wide LLS to Brent spreads.

We are talking $10-$11.

We think that is pretty unusual right now.

The inventories on the Gulf Coast -- the crude inventories are very high.

There was a massive amount of turnaround activity that took place.

I think there was something like 700,000 barrels a day of refining capacity that was off-line for a period here in October.

And, that has led to near-record, high inventories on the Gulf.

I think as a result of that, you have seen LLS spreads that have been extremely wide relative to Brent.

We have said for some time that structurally as the production of the shale plays continues, we have said for some time that we expect LLS to trade at a discount to Brent.

We still believe that, and that should be several dollars.

So, we think that that is going to be a benefit longer term.

It is probably something that as these inventories start to come down, you will probably see this $10, $11 spread start to come back together again.

Now, LLS and Mars -- Mars obviously being the sour crude in the Gulf.

Those two have traded in a very similar trade differential over the last several months.

It has been in that $4.50 to $6.50 kind of level.

It hasn't changed very much.

I appreciate your comments on that.

Gary, if I could use my follow-up to talk about something that doesn't get a lot of attention often is the retail business.

As it relates to your growth plans, some time ago you had mentioned that you saw a very competitive and attractive business in the Hess retail network.

I don't want to be too specific here, but I am just wondering how you are feeling currently about expanding your retail business both organically or through acquisition.

I will leave it there.

Thanks.

As I said earlier in my speech, Doug, we have expanded into both Tennessee and Western Pennsylvania with our Canton refinery with Utica shale and with moving those products into Western Pennsylvania, especially as you see some of the logistics change from the East Coast that used to bring refined product back to Western Pennsylvania.

We have seen a great opportunity to move into that market, and Speedway has done so.

Same as in Tennessee.

So, they are expanding those markets as well as continuing to fill in the flanks, if you will, in the current markets which we have operated more so with rebuild stations than with new builds in those states.

But, we are going to continue to step out with Speedway.

I doubt that we will do a leapfrog of several states unless we can do something that has some market density.

Your question pertaining to Hess.

My compliments to John Hess.

He has developed, I think, one of the best looking retail chains in the -- across the eastern seaboard, and we will just continue to see what plays out as they make their strategic decisions on that part.

But, as I say, my hat is off to them.

I think they have one of the best-looking systems on the East Coast.

Good fit with Marathon, Gary?

I'm sorry?

Will it be a good fit with Marathon?

I think it would be an excellent fit.

It would be an excellent fit with Speedway.

Marathon is the jobber side of our business whereas Speedway is the Company-owned and operated side.

It would be a good fit there.

Thanks, Gary.

I appreciate the comments.

Thank you.

Chi Chow, Macquarie Capital.

Thank you.

I have got a question on Galveston Bay.

Gary, you mentioned this in your remarks.

But, can you talk a more about the specifics on the opportunities you're undertaking at the plant now that you've had it for nine months?

In particular, I am interested in what sort of crude changes you have made so far?

Sure, Chi.

That is a very fair question, and what we have decided to do, Chi -- we have several things to talk about in Galveston Bay.

Instead of using the conference earnings call to talk about this, this is going to be one of the primary things that we discuss at our meeting in December.

So, if I could ask your forgiveness to give me six weeks, and we will give you a lot more detail out of the synergies that we have been able to capture so far.

The different crude runs that we have been able to change and capture that Mike's group has done, and then Rich's group on what some of the opportunities are as we seek to really capture additional -- what we see -- potential value.

That is really going to be one of the centerpieces of our presentation in December.

Okay, Gary.

You are forgiven on that one.

Let me try this one on Galveston Bay.

Can you just from a modeling standpoint, going forward here, how does Galveston Bay now impact the capture rate of your system relative to historical patterns?

Any comments on that end?

Well, as you know, we have not given individual refining information, and our plant is competitively -- and I know there are several of you that -- and probably all of you that would like us to give individual refining information going forward.

And, we are not -- our plan is at this time not to do that.

I think Garry might have some comments about the capture rate itself.

Chi, this is Garry Peiffer.

What we have given in the way of some market metrics in terms of some moves in crack spreads and sweet/sours, we have incorporated in those calculations our best estimates of what the Galveston Bay refinery impact is on those metrics.

We have tried to incorporate those into the metrics we have given already.

And, when crack spreads change $1, we are saying that is roughly at $450 million -- or $425 million bottom line effect.

So, those [oil] metrics -- they all incorporate our best estimate at Galveston Bay.

Chi, just a year ago when we were outlining Galveston Bay and what our plans were -- and then, we closed that transaction in February.

I will leave a little bit forward here and talk about, we are very pleased with the operation of the plant and how it is performing on a volumetric basis.

We have gone in and repaired and really brought this refinery up to our standards in many areas.

But, as I said, this was not a dash that we were entering.

This was going to be a joinery.

This was going to be a longer-term run here.

That is why we are going to outline for you in December what some of the opportunities are.

But, I would say, no surprises.

We continue to gather synergies at a faster clip than we had expected.

And, we are very pleased with the asset to date.

Okay.

Thanks, Gary.

Don, on the CapEx budget.

Are you still at a little over $1.6 billion for 2013?

Is that still accurate?

Chi, that is an accurate budget.

And, what we will do at our December investor Day, we will plan to give you the 2014 budget as well.

We have a Board meeting coming up where that gets approved, and the timing of that meeting was scheduled so that we could communicate the 2014 budget to you all.

That suggest a pretty high capital spend in the fourth quarter.

Can you give any details on sort of the components of that spending in 4Q?

In terms of your -- I'd interpret your question -- do you think you will go over your $1.6 billion.

We are not expecting to go over the $1.6 billion.

We may come under that $1.6 billion, if that is your question.

I was just -- given the spending through third quarter year to date, it just suggests a significant bump up in the fourth quarter from what I see.

I was just wondering the components of that spending?

And then, maybe if you can remind us of what your minimum cash balance is that you are comfortable with.

You made mention of that earlier.

In the minimum -- on the core liquidity, I think we have consistently said that we believe that the core liquidity preferred MPC is somewhere in the $4.5 billion to $5 billion range, and that is currently satisfied by the $2.5 billion revolver, the $1 billion AR securitization, and then, the cash balance makes up the rest of that commitment.

I think we have said $1 billion to $1.5 billion in cash is what we believe is a core component of our balance sheet.

Chi, this is Garry Peiffer.

Regarding the capital.

Just by the way, we've historically constructed things and being here in the Midwest with a lot of C-stores that we are building at the moment.

It is fairly traditional that we tend to spend, not necessarily 50%, but a good share of our budget in the fourth quarter finishing up projects that we don't necessarily start in a lot of cases until the second quarter.

So, I have every confidence that we will spend close to the $1.6 billion -- barring some major issue that we are not aware of at this point.

Doug [Pearson], ISI.

Good morning, everyone.

Gary, this might be the same question that Chi just asked, but it is a little bit different.

But, if you want to defer, that's fine.

When I think about Galveston Bay and the longer-term perspective there, I guess the question is really about, has your perspective on that scope to add value longer term changed?

I ask the question because you significantly surpassed everybody's expectations at Garyville during the past four, five years by doing production growth and capital productivity.

The question is, when you think about this longer term, do you sense that there may be a parallel?

I know that the movement continues at Garyville today, and performance is fantastic.

Might we see a similar type of outcome at Galveston Bay, whether it be additional de-bottlenecking of petrochemicals that is over and above some of the things that you commonly talk about when you refer to synergies?

Doug, I'd say a very fair question.

I want to be careful that we do not lean too far forward here until we are ready to make a fulsome presentation on Galveston Bay.

Let me ask Rich Bedell here to make a few comments.

Doug, just looking at Galveston Bay, it has a lot of the similarities in that it has got the size.

It has the complexity.

It has the logistical options both for all of the crudes that are coming into the area and also the logistical options to export product.

So, in that regard, it has a lot of the same qualities that Garyville has.

And, I think if we think long-term, we are thinking of having two powerhouse Gulf Coast refineries there with a lot of crude, a lot of upgrading capacity, and a lot of export potential.

That is our vision.

Okay, that is great.

I'll look forward to seeing the details in December.

Thanks a lot.

Thanks, Doug.

Jeff Dietert, Simmons.

Good morning.

I was hoping I could get you to talk a little bit about the rail strategy.

You have obviously got a big logistical footprint existing.

But, you haven't been as aggressive as some of the peers in buying new railcars and announcing new rail unloading facilities.

So, your responses seem to be more muted.

Are you less excited about the potential for rail than others in the industry?

Or, do you believe that people are underestimating the cost?

Or, could you talk a little bit about your rail strategy?

Yes, Jeff.

This is Mike Palmer.

I would be happy to do that.

We have spent a lot of time doing analysis and really looking at rail.

It is not as if we have not done that.

In fact, I can tell you that we have even experimented with rail.

We have brought in both North Dakota crude into the system.

We have brought some heavy Canadian into the system by rail.

We have watched it.

We have looked at the costs.

But, I can tell you that it is a high-cost transportation alternative.

And, maybe one of the reasons that we are a little different than others is that we are pretty well connected by pipeline.

And, I think that everybody in the industry would agree that with rail, it can't compete with pipe if you have pipe that is connected to your refining system.

And, that is really where we are at.

So, we always look at it.

We continue to look at it to see if there is any opportunities.

But, by and large, we are well connected to pipelines, and we are kind of committed to that strategy.

And, Jeff, we've previously talked about the sax extension.

We have been public about that.

Things we are working on is to every day is to provide a cheaper alternative.

And, if rail is the cheaper alternative, we certainly would be investing in that.

But, the way our refineries are and the way we are situated, I totally agree with Mike's comments.

We are blessed with a very strong midstream system, continue to grow that midstream system, and will more than likely do that with pipes and possibly barges, rather than rail.

Thanks for your comments.

Roger Read, Wells Fargo.

Good morning.

Good morning, Roger.

I guess maybe following up on the logistics questions.

Could you give us a little more of an idea maybe of the volumes you are starting to see in the Utica.

Where -- I know you've talked historically about maybe being able to use about 30,000 barrels a day of condensate without additional investments in the units there.

Are you seeing enough barrels now moving forward with this pipeline that we should expect to see some investments in the units to maybe expand the number of barrels of condensate or very light oil?

Roger, this is Mike Palmer again.

Yes, the answer is, absolutely.

We are still very optimistic about the Utica.

And, I think as you know, there have been a lot more wells permitted and drilled than are actually producing.

And, that has been a result really of the gas takeaway capacity that is coming on.

We have been ramping up.

At Canton today at the truck rack, we are bringing in roughly 10,000 barrels a day of mostly condensate.

If you look at Catlettsburg, we just brought in our first barge over the Wellsville dock, and that will continue.

I think that what we expect is that over, certainly over 2014 and 2015 as this gas infrastructure gets hooked up, these wells will come on, and we will be ramping up the volume of condensate that we can process at these plants.

Roger, this is Don.

In fact, we have two capital projects that we have talked about -- condensate, splitters at both Canton and Catlettsburg that get our -- allow us to probably use up to 60,000 barrels a day of condensate.

We've staged them -- one for completion in 2014 and one for completion in 2015.

Really to be consistent with our expectations around the increase in the growth in that Utica production.

Okay, and could you probably go into a little more detail than you want to do.

But, if you could give us any idea of the advantage that you are able to achieve on condensate in that part of the country relative to say other markers, WTI, Syncrude, something like that.

Roger, we really don't get into the pricing on individual crudes.

As you could expect, Utica is a WTI-based kind of crude.

And, being a condensate, you're going to get a discount.

But, we really do not want to share more than that.

Okay.

And, I guess my final question, you talked earlier about exports.

Export as much as you can, or I don't remember the exact wording.

I was curious as you look out, say two years, where you think your exports might be versus where your exports are today?

The big thing, Roger, with our exports -- when we built our GME project and started it up in 2009, we built a brand-new dock.

At the time, we thought that the dock had a capacity of about 75,000 barrels per day.

We have been able to de-bottleneck.

We've been able to add some incremental tankage.

And, in fact, Rich has a big gasoline tank that will be done at the end of this year, early part of next year, to even provide us more flexibility.

What we have done is we've been able to de-bottleneck the Garyville docks using the crude and other product dock space to be able to optimize way beyond what we thought.

We have the same thing at Galveston Bay, and we are continuing to optimize Galveston Bay, and we have a big study on how -- your question is asking number of years down the road.

We have a big study on how we can optimize Galveston Bay's dock down the road to be able to get more capacity.

So,, every quarter, the guys tell me we are at capacity and we find ways to get more out of the plants and over the docks.

So, we will continue to do that.

Thanks.

If I missed it earlier, did you give an export number for this quarter?

Yes, we were at 245,000 barrels per day for this quarter.

And, the breakdown between gasoline and diesel?

We do not break that down.

Okay, great.

Thank you.

Faisel Khan, Citigroup.

Thank you for taking my question.

I appreciate it.

Just given your expanded position on the Gulf Coast and your preference to use pipelines rather than rail, do you think that you need to expand your pipeline capacity portfolio, your leased capacity?

And, even some of the investments you are making right now?

Is there a need for expansion beyond what you are doing?

Or, what you have right now?

Faisel, there are many pipeline projects being talked about, especially in the Gulf Coast.

A lot of people announce projects before they get done sometimes.

A lot of competition for pipeline capacity coming out of the Eagleford.

There is some pipeline reversals and some incremental pipelines being discussed in between [Loop] and the Houston ship channel.

The sax pipeline that we already talked about is going to give us that niche that is missing today to be able to get us to get more crude potentially down into the Gulf Coast area.

There are many opportunities going.

Some that we're looking at being investors in through MPLX, and some that Mike just might be shipping on.

And, I will ask Mike to add maybe a little bit more color here.

Yes, Faisel.

I guess what I would say, too, is that if you look at the plans that various companies have for pipeline activity in the Gulf coast, and you think about our Galveston Bay plant, certainly you have seen the pipelines that are being built in the Permian Basin into Houston.

The Longhorn reversal -- there is another pipeline called Bridgetext that will be coming on next year.

There's a lot of capacity for us to utilize in order to bring, for example, the Permian Basin crude into Galveston Bay.

The Eagleford infrastructure -- there is a lot there already as I'm sure you know.

Then, it is supplemented with vessels, with barges.

And, the other thing that you need to think about as well is for example the big pipelines that are getting built from Canada to come down.

Obviously, Xcel has not been approved yet.

No one knows for sure if it well.

But, Enbridge has a Gulf Coast access project where they are going to build a new piece of pipe from south Chicago down to Cushing.

They're going to loop the Seaway line.

It provides a lot of additional capacity into that Houston, Galveston Bay area.

And, I am sure that there will be smaller things that we need to do ourselves in the area.

There is some major assets that are being built.

Okay.

Last question for me.

This is kind of more of a controversial question.

With all of this crude hitting the Gulf Coast by pipeline and production growth continuing to accelerate in the US.

Gary, do you have any opinions on the crude oil export ban in the US?

And, whether you think there is any chance that something happens with that ban?

Or, do you think it just stays the same?

There continues to be discussion.

Obviously, with the RIN issue and all of the work that we have done inside of the Beltway on the RIN issue, there's been some discussion at the same time about exporting crude.

We will see -- we are really exporting crude today.

It just happens to look like refined product.

And, that is the mechanism to export crude today.

We will see where it goes.

I think it is more than likely down the road that that would even be considered.

The second thing you look at is, if you were to export crudes whether the markets that are really clamoring for -- the types of light sweet crude that are available today.

And, I think Mike outlined it very well when he was talking about a number of the pipelines from the Eagleford, the Permian, trying to get this into the refining suite that uses these types of crudes is really what is going on right now.

We will wait and see what happens on the crude side.

There is not a lot of discussion on it right now.

Thanks, I appreciate that.

I appreciate the comments.

We have time for one more question.

Allen Good, Morningstar.

Good morning.

Thank you for taking the question.

Just a quick one on the retail.

Is there any way to gauge your appetite for increasing the size of Speedway?

Whether that be a number of stores?

Or, percent of the [shirt] sales?

Or, anything along those lines that we can sort of get an idea of how far you want to take the acquisition strategy and grow that business?

Allen, what we have said about Speedway and our Marathon brand also is that we think it is important to continue to increase the amount of -- our definition is called controlled volume.

That is where we can use our pipeline assets, our terminal assets, our refining assets in order to be able to have a steady, ratable movement of that product into the marketplace.

And, we would like to grow that number -- to get it back up into the 70% or so range.

We used to be at about 65% before we bought Galveston Bay.

Granted, we got a number of retail stores or retail supply, I should say, through the Marathon brand when we bought Galveston Bay.

But, that number is probably down in the high 50% to 60%-type range today.

We have a strong appetite to continue to grow.

We think Speedway continues to show very strong return on invested capital-type numbers and expect that into the future.

And, we think retail in the future is really going to be --the winners in that market are the ones the best backroom and the best cost control.

And, I think Speedway ranks up there in both of those as a top-tier, best-in-class performer.

The amount of capital it is going to take, as I said earlier in my comments, it would be hard for us to leapfrog markets just to go buy a chain somewhere that does not give us the synergies that we have today.

But, we do have a strong appetite to grow our retail.

When you add incremental stores, are you gaining operating leverage as you add more stores to that business?

Or, it is just a case of adding incremental sales and earnings per store?

No, we are increasing operating leverage as well as long as it is contiguous to the operations we have today.

That is why I say we find our economics.

It does not benefit us to leapfrog into a market that we don't have density in.

So, yes, we do get operating leverage, and it is because we think we have a very sophisticated, low-cost backroom platform that manages the inventory, manages the stores.

And, Tony Kennedy and his team have, I think, outperformed this market.

When you look at a total margin per gallon or margin per merchandise dollar sold, I think that they stand at -- they're definitely a top-tier performer.

Great, thanks.

If I could just give another quick one on exports.

I believe previously you said -- or it may have been last year -- that exports are pretty evenly split between Europe and Latin America.

Is that still the case?

Or, are you opening up new markets?

Or, has demand shifted from Europe to Latin America or vice versa?

It is hard to say because the manifest that we have, we are loading FOB Garyville or FOB Galveston Bay.

In some cases, we are selling to the end user in both markets.

But, in some cases, we are selling to an aggregator who might be moving it markets that we are not aware of.

I can't say right now what the split is.

Thanks for the color.

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

Thanks for joining us on the call today.

Recognizing that we needed to cut off an hour.

If there are some follow-up questions, please give us a call.

We will be in the office today, that is -- Beth Hunter, Geri Ewing, and myself.

Thank you, everyone.

Thank you, ladies and gentlemen.

This concludes today's conference.

Thank you for participating.

You may now disconnect.