Marathon Petroleum Corp (MPC) 2014 Q2 法說會逐字稿

Welcome to the Marathon Petroleum Corporation second-quarter 2014 earnings.

My name is Jeanette 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 Tim Griffith, Mr. Griffith you may begin.

Okay.

Thank you Jeanette and good morning.

Welcome to Marathon Petroleum Corporation's second-quarter 2014 earnings webcast and conference call.

The synchronized slides that accompany this call can be found on our website at marathonpetroleum.com under the Investor Center tab.

On the call today are Gary Heminger, President and CEO; Don Templin, Senior Vice President and CFO; Mike Palmer, Senior Vice President of Supply, Distribution and Planning; Pamela Beall, Senior Vice President of Corporate Planning and Government and Public Affairs; and Rich Bedell, Senior Vice President of Refining.

We invite you to read the Safe Harbor statement on slide 2, it's a reminder that we will be making forward-looking statements during the presentation and during the question and answer session.

Actual results may differ materially from what we expect today.

Factors that could cause actual results to differ are included here as well as in our filings with the SEC.

Now I'm happy to turn the call over to Gary Heminger for opening remarks and highlights.

Thanks, Tim and good morning to everyone.

We are pleased to report a very strong quarter.

Our focus on top-tier operational performance across the MPC refining, marketing, and transportation system, has continued to yield excellent results.

This quarter, we were able to officially meet consumer's needs and capture higher product price utilizations which demonstrate the value of our integrated system.

I'm especially pleased with our smooth ramp up following the largest concentration of turnaround activity in our Company's history which we executed in the first quarter.

I'm also very proud of the tremendous response by our team in Garyville, Louisiana to bring the facility back up to full capacity quickly after it was impacted by a tornado in late May.

Balancing return of capital to shareholders for the investments in the business remains a priority.

We purchased $459 million of shares in the second quarter.

Yesterday, our Board of Directors authorized up to an additional $2 billion of share repurchases through July 2016 and increased the quarterly dividend to $0.50 per share.

During the 12-month ended June 30, we have returned $3.1 billion of capital to shareholders representing a 13.5% yield against our average share price.

This is one of the highest effective yields of any company in our comparator group.

We also have made excellent progress on our strategic priority of growing our higher value to stable cash flow of businesses we continue meaningful return of capital to our shareholders.

In the midstream, we recently exercised our option to acquire a 35% ownership interest in Enbridge Inc.'s Southern Access Extension pipeline project.

This investment will position us as an equity owner in a system that will increase our access to an important region for North American crude oil production growth as well as provide a potential addition to MPLX over time.

MPC expects to invest approximately $295 million in the pipeline project, that is expected to be completed in mid-2015.

On the retail side, we have received notice from the Federal Trade Commission that it concluded its review of the acquisition of Hess Retail operations by our subsidiary Speedway which continues to prepare for a closing later this year.

We continue to believe there is significant opportunity to leverage the best of both businesses, Hess fuel sales volume with Speedway's industry-leading merchandise sales per store.

We believe this acquisition will be a source of long-term value to MPC, and provides for enhanced strategic opportunity for the business over time.

I also want to address an item that has affecting perceptions of our industry.

The recently publicized private rulings for limited condensate exports.

Unfortunately, the rulings by the Commerce Department, are not transparent and have created much uncertainty about exports going forward.

We think the market has over-reacted to the news, that is not a clear change in policy and an outcome that remains uncertain.

We believe that our industry has the ability to handle much more of the light shale crude oil condensate that is processed today but the investment to do so will not likely be made in the environment of uncertainty that has been created.

Whatever the outcome, refiners in the US will continue to have a transportation advantage.

Even if the export infrastructure is built the cost advantage for US refineries will continue to be significant due to proximity to the domestic production.

We are confident the flexibility and optionality in our system positions of MPC -- positions MPC very well in any circumstance.

In addition, we continue to believe the return profiles for the condensate splitters under construction, at our Canton, Ohio and Catlettsburg refineries will be strong given the geographic proximity of those refineries to the Utica condensate production.

With that I'll turn it over to Don to review our financial performance for the corner.

Don.

Thanks, Gary.

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

Our second quarter 2014 earnings were $855 million compared to $593 million in the second quarter of 2013.

Second-quarter 2014 earnings include pretax pension settlement expenses of $5 million while the second-quarter of 2013 included $60 million of such expenses.

Earnings per diluted share were $2.95 for the second quarter of 2014, we reported $1.83 per share for the same period last year.

The bridge on slide 5 shows the change in earnings by segment, from the second quarter of 2013 to the second quarter of 2014.

The primary driver for the change was the increase in refining and marketing segment income which I will discuss shortly.

A corporate and other unallocated item includes a $55 million favorable variance due to pension settlement expenses.

As shown on slide 6, refining and marketing segment income from operations was $1.26 billion the second quarter 2014, compared with $903 million in the same quarter last year.

The change from 2013 was primarily due to higher product price realizations.

That impact is reflected in the $657 million change in other gross margin.

You may recall that the second quarter 2013 product price realizations compared to spot market values were negatively impacted by volatility in the Chicago market and effects of the renewable fuel standard.

The effects of the renewable fuels that are were more pronounced in the second quarter last year causing the average RIN prices to be almost $0.35 higher than they were in the second quarter of this year.

The increase in LLS prompt versus delivered also had a favorable impact on earnings that was offset by more narrow LLS to WTI crude differentials and backwardation in the market.

Direct operating costs also increased quarter-over-quarter due to additional maintenance costs and higher natural gas prices versus last year.

To help investors better understand the quarter, we've added slide 7 which provides a sequential earnings walk for our refining and marketing segment.

The primary drivers for the significant increase in income over the first quarter were higher crack spreads and lower refinery operating expenses.

The LLS 6-3-2-1 blended crack spread was $10.40 in the second quarter compared to $7.85 in the first quarter.

This added about $568 million in additional earnings.

Refinery direct operating costs provide a favorable variance of $398 million primarily due to lower turnaround costs in the second quarter.

The favorable other gross margin variance is primarily due to higher product price realizations.

Turning to Speedway's segment results on slide 8, income from operations was $94 million in the second quarter of 2014, compared with $123 million in the second quarter of 2013.

Speedway's light product gross margin was $32 million lower in the second quarter of 2014, compared to the same quarter last year as gross margin decreased by $0.46 per gallon.

Merchandise margin was $224 million in the second quarter of 2014, compared with $212 million in 2013.

This $12 million increase was primarily due to higher merchandise sales and margin percentage.

The unfavorable $9 million other variance primarily relates to Speedway's operating expenses.

Operating expenses were higher during the second quarter of 2014, primarily driven by an increase in the number of stores versus previous year levels.

On a same-store basis, gasoline sales volumes decreased 1.5% and merchandise sales excluding cigarettes, increased 4.6% in the second quarter of 2014 compared to the second quarter of 2013.

Activity in July has been positive with a 1% increase in same-store gasoline sales volumes, versus the prior year.

Slide 9 shows changes in our Pipeline Transportation segment income.

Income from operations was $81 million in the second quarter of 2014, compared with $58 million in the second quarter of 2013.

The increase of $23 million was primarily attributable to higher transportation revenue, and pipeline affiliate income.

$9 million of the $12 million increase in transportation revenue was attributable to the recognition of deferred transportation credits during the quarter.

The remainder was primarily due to higher average tariff rates.

The increase in pipeline affiliate income was primarily attributable to our ownership interest in LOOP.

Slide 10 presents the significant drivers of changes in our cash flow for the second quarter of 2014.

At June 30 our cash balance was just over $2.1 billion.

Operating cash flow before changes in working capital was an approximately $1.1 billion source of cash due to the very strong financial performance in the second quarter.

As Gary highlighted, we continued delivering on our commitment to balance investments in the business with return of capital to our shareholders.

We repurchased $459 million of shares, and paid $122 million of dividends in the second quarter.

We also increased our quarterly dividend to $0.50 per share, this increase represents a 32% compound annual growth rate from the dividend level established at the time of the spin in June 2011.

Slide 11 shows that at the end of second quarter we had $2.1 billion of cash and just over $3.6 billion of debt.

With EBITDA of about $4.3 billion during the last 12 months, we continue to be in a very manageable debt position with leverage of 0.8 times EBITDA and a debt to total capital ratio of 25%.

Turning to slide 12, during the last 12 months we generated $3.4 billion in cash from operations, and $1.7 billion of free cash flow.

Over this period we returned $3.1 billion to shareholders through dividends and share repurchases or approximately 1.8 times our free cash flow.

During the second quarter of 2014, we purchased approximately 5 million shares for $459 million through open market purchases.

It is our intention to continue returning capital to our shareholders that is not currently needed to support the operational and investment needs of the business.

And we continue to believe share repurchases are the most efficient way to do so.

The additional $2 billion Board authorization adds to the approximately $700 million remaining on previous share repurchase authorizations and reinforces our commitment to continuing this activity in the future.

As Gary indicated, and you've heard from us in multiple occasions, maintaining a balance between disciplined investments in the business, and returning capital to shareholders, continues to be a strategic focus.

Slide 13 provides our outlook for key operating metrics for MPC for the third quarter of 2014.

We are planning for third-quarter throughput volumes to be comparable to the second quarter 2014, and down slightly compared to the third quarter last year due to higher planned maintenance.

Now I will turn the call back over to Tim Griffith.

Thanks Don.

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

You may re-prompt for additional questions as time permits.

With that Jeanette, we are prepared to open up the call to questions.

Thank you.

We will now begin the question-and-answer session.

(Operator Instructions)

Ed Westlake, Credit Suisse.

Good morning everyone and congratulations and thanks for researching the cost advantages of the US refiners.

I was actually down the [BIS] and they said as long as it goes through distillation towers and looks like product, we can sell it, which sounds like a refinery to me.

So the first question, just a small one, on the Garyville it seems like the opportunity cost may be lower than you thought, I mean do you have a number for that?

Ed we didn't -- we don't have a specific number I guess.

When we -- after the tornado had hit, we'd indicated that the impact on crude throughput would be less than 5%, and the team did an amazing job of getting that fully operational in about 14 or 15 days.

So the impact on sort of crude throughputs was not that significant.

And then great color on the deltas and there's that other gross margin number which obviously does vary over time.

And obviously thanks for shouting out how bad it was last year which is some normalization this year.

Is there any structural change do you think in terms of that, the contribution from say pricing over and above the cracks that you mention?

Ed this is Gary.

I wouldn't say there's a structural change, but if you compare the slides of the price utilization that is down as compared to Speedway, you can see that there was a change in Speedway's gross margin for the quarter.

It just illustrates how important our integrated system is and how we can take advantage of the marketplace and that dislocation as illustrated in those two slides.

So I wouldn't say it's a structural change, we have the ability to go to where the margin is.

Okay.

So then my just strategic question was just around the logistics business.

Any sort of color or update you can provide in terms of where you see the EBITDA of your overall logistics business standing a few years out?

And, whether there's any change to your fairly consistent guidance in terms of a study monetization of that by the MPLX?

I would say first of all, we're still in pretty much the same steady state of, we'd said about $800 million left as compared to what we've already dropped down.

That does not include the Sandpiper SAX pipeline nor does that include Cornerstone that we're working on now.

So if you add those in we are probably into circa $1.2 billion of EBITDA overtime.

As far as the ratability of drop downs, we look at MPLX as a great currency.

And we want that currency to be very strong today, and we want it to be very strong as we drop-down over many years to come.

There certainly have been some other changes in the marketplace that some are employing that continues to illustrate how important these MLPs and the growth trajectory of MLPs are.

We expect to remain at a high level of compounded annual growth, and which is what we have emphasized quarter on quarter Ed, so we want this currency to be strong today, want it to be strong tomorrow, and we're going to continue to manage within those parameters.

And vision wise, the North American infrastructure spend and opportunities there continues to get larger.

Just a question, presume you are still looking very hard at additional projects over and above the ones that you mentioned on the call today.

We certainly are Ed.

As I said many times, MPLX is going to be a growth vehicle for our midstream but it's not going to be tied like it has been historically just to the volume that MPC moves.

So we have the ability, the intellectual capabilities, to branch out whether it be into NGLs whether it's into transportation fuels or other opportunities that are eligible earnings for MLP.

We believe we have the capacity to do any.

Doug Leggate, Bank of America.

Good morning everyone it's actually Jason Smith on for Doug.

So just wanted to dig again into your strong capture rate relative to your peers, it looks like your distillate yield also increased relative to gasoline.

Gary if you can maybe talk about if there's any specific that was driving at?

And is that sustainable going forward?

Let me ask Rick to talk about the distillate yield first.

Jason other than just optimizing on crude slates we did finish a hydrocracker project at Garyville in the first quarter which increased its capacity -- design capacity was to increase it by about 10,000 barrels a day -- excuse me, 20,000 barrels a day.

And that was successfully put on stream at the end of first quarter.

(Multiple speakers)

But I would say Jason that we really haven't had any other structural change.

And that the way we're operating.

And then to follow-up, when you by bring on, I think the Garyville hydrocracker [and other projects] where do you see the distillate yield potentially going to in time?

Are you talking about the Garyville resid hydrocracker?

Yes.

Well, first of all we haven't sanctioned that project and it won't be until the fourth quarter, early first quarter, that we make our final determination and we do not have all the engineering complete yet to be able to give you that number.

Got it.

Okay.

(Multiple speakers)

We do expect if we were to do that it would add about 25,000 barrels a day of [ultra low] sulfur diesel but really what that project and Rich can go into the details of what that project is doing as far as our feedstock slate.

It's what we call the Roux project that (inaudible) hydrocracker project it increases like Gary said, I think it's about 28,000 barrels a day of distillate, it decreases our gas oil imports and really it's just project based on the spreads between resid and ULSD.

Follow-up is really for Don.

Don you mentioned you guys want to keep the buybacks going but given the retail acquisition, given what you guys have talked about, that kind of $500 million to $1.5 billion targeted cash level, how should we think about the pace of buybacks going forward?

Should we expect it to potentially slow from this kind of $400 million to $500 million a quarter.

We've consistently said that it's very important for us to maintain our investment grade credit profile and we've consistently said that were going to manage the core liquidity that the $500 million to $1.5 billion that you have referenced there Jason.

I think we've also had conversations with you all about the fact that our balance sheet even maintaining a strong investment grade credit profile, could take on incremental leverage.

So, we would expect that we would fund the acquisition with cash but will also be accessing the debt markets to do that because we do think it's an important part of the investment pieces in MPC to be returning capital to shareholders and we're very confident and our Board's very confident based upon that recent announcement yesterday of the share repurchase authorization that we can continue to do so.

Thanks guys.

Paul Cheng, Barclays.

Hi guys.

Good morning.

Before I ask my question I just want to [hop] a request [to Don] that over the next couple of years that the GP start to moving up to the high splits if possible that it would be really helpful I think for all of us so that we don't have to check so many different 10-Q documents to on your press release and list out your GP cash flow and your unit of LP given time, that sometime with the drop-down you may change?

Okay Paul good suggestion and we'll continue -- we think MPLX and particularly the GP is a real value adder and we'll do that in order to make highlight that important cash flow.

Two questions.

First a simple one.

Gary, there's a speculation Citco may be selling their [refining assets], from an M&A standpoint, how do you look at your portfolio?

Are you pretty satisfied or do you think you have more appetite and you want to expand your refining footprint further from your current portfolio?

Well I have read this rumor that Citco might be interested in doing something but I would say right now we're pretty satisfied with our footprint.

Okay.

The second question.

Maybe that's for both Don and Gary.

If we are looking at the pace of your drop-down comparing to some of your peers it is far more measure.

I think there's two school of thought and given the evaluation for the GP is significantly different than keyes for the LP and refiner C-Corp.

And also that from an [investment] standpoint is it better off for you to accelerate substantially on your drop-down pace or that you will allow the MPL to use their own balance sheet for their future organic growth project [and stuff] using the C-Corp, and also that seeing the value of the GP grow at a much faster pace?

Paul I would say I would agree with all of the above.

But as I said, we think we have an outstanding currency, that currency has been very valuable today.

Gives us the flexibility in the event we want to accelerate if we need to accelerate for MPC purposes, or we want to accelerate for MPLX purposes we have that tremendous flexibility.

But at the end of the day, we want to make sure the currency is valuable going forward.

Yes we have been measured, and yes we are watching what's going on in the marketplace.

But all of your suggestions, I think it was more of a statement than a question, I think all of your suggestions are spot on and it's things that we study very, very carefully.

Can I just sneak in with a final question for clarification?

Only for you Paul.

Thank you.

For the $800 million of the potential drop down of the $1.2 billion are those including the storage tanks inside the refinery [gate and barges] that you own?

Yes sir.

Okay, thank you.

Doug Terreson, ISI Group.

Good morning everybody.

Gary one of your mantras has been value-added investment and sustained focus on shareholder returns and obviously the company is delivered in that area.

On this point I want to see if there were some type of generic progress report that we could talk about on Galveston-based energy capture and projected capital that we referred to at the recent analyst meeting, that is if there is one?

You highlighted a couple of slides and just wanted to see if you could provide somewhat of a generic update as to how happy you are with the outcome there?

Yes Doug.

And good morning to you as well.

We are very, very pleased with Galveston Bay.

First of all, an outstanding employee base, an outstanding workforce with a great work ethic.

Secondly, as we've gone through now about 16 months, 17 months of operation, we continue to get more and more comfortable with the asset.

You recognized it was in our K and will be updated in the Q here, what the earn out was -- the earn out payments that we had to the prior owner, was right in line with what we said.

Which says, the refinery is performing on a financial basis very well.

I stated earlier, in our last conference call, that this is it important year.

We've already finished a major turnaround in the plant where we went in and repaired and really got things up to standards on, I'll call it the crude side of the equation.

As I said it's an important year, we still have another big turnaround to complete this year on the aromatics side of the business.

Once that is complete, we will have pretty much been through the refinery.

Then we're going to go to the low hanging fruit.

The preliminary meetings that Rich and his team of had with me, suggest there's a lot of low hanging high return projects that we can do.

So I'm very pleased with the value generation, very pleased with how this positions us in the marketplace, and now with the Hess acquisition and picking up additional colonial line space, we now have been able to pick up 90,000 barrels a day of colonial line space which between these two transactions.

Which I think gives us significant advantage to the marketplace to have that assured line space all the way to the East Coast.

So Rich, I don't know if you have anything else to add operationally but we are very pleased Doug.

Yes, I'll just ditto Gary's comments that we see that the refinery has a lot of upside potential from where it is now, and as part of our capital budget process and we're going through those options today and they become clear as we learn more and more about the facility.

Great thanks a lot everybody.

Jeff Dietert, Simmons.

Good morning.

My question's regarding domestic crude price discounts in the back half of the year, given continued robust oil production growth, upcoming fall maintenance, and belated startups of new pipes into the Gulf Coast.

What's your outlook for the back half of the year?

I think the forward curve has got WTI BRENt over $10 and LLS Brent to widen out around $7.

Do you think that's a reasonable outlook or do you expect wider or narrower?

Hi Jeff, this is Mike Palmer.

I think that when you look at the forward curves and have things widening a bit.

I think that generally that does make sense to us.

We haven't seen the kind of price signal from the domestic light crude oil that I think really would test refiners to run as much as they possibly could.

I do think as production continues to rise, as the BridgeTex pipeline gets built into Houston, I do think that there's the likelihood that you could see these differentials widen a bit.

So what we are seeing in the forward market just generally make sense to us.

And is there a point that you look at between say Mars and LLS in which you really see a move towards lights being economically advantaged over mediums?

Does it need to get inside of a $3 discount or is there any kind of rule of thumb we can use to think about that?

No.

I don't really could give you a rule of thumb.

We're running our LPs every day, it really depends upon the product values in the market and which way we go between say, LLS or Mars.

I can tell you that with recent price action generally over the last, oh say six months, that it's back and forth between whether you'd want to run LLS or Mars.

That's something we just have to look at every day.

And Jeff one other key point, when we look at how much medium sour versus light we run, and it's a point that I make in DC, it's a point that I make with the financial community, the market is far from saturated of running light sweet crude.

We have the ability to run approximately 65% light sweet crude.

We only ran approximately 45% to 46% in the quarter so it's every barrel is, as you know, an alternative barrel.

So again, that just shows there's tremendous opportunity but we're always going to choose the most economical barrel.

Yes and in weekly statistics we're seeing Gulf Coast oil imports coming down and some of the pricing that's visible in the marketplace is increased upon oil imports.

Are you seeing a shift in your portfolio away from importing oil towards more domestic consumption?

Well as I said, every barrel is an alternative barrel.

So we're always going to look at what is most economic barrel for us to purchase.

And that's going to set the tone for us every day.

As we look across the global supply chain, and again this issue of condensate exports, I think really is a sticky wicket in the marketplace today.

Because the lack of transparency and the unknown, as changed I think some people's foreign suppliers ideas on how to supply the North American market.

It's changed some of the South American suppliers and how they want to supply the North American market.

I think it's going to take about 90 days probably for that stuff to sort itself out.

Public policy through private letter rulings is not a real efficient way of communicating your requirements.

Thanks for your comments.

I echo that.

Paul Sankey, Wolfe Research.

Hi everyone, hi Gary.

Paul, how are you?

I was just extremely impressed that you made a cricket analogy, sticky wicket, Gary.

I just got a few follow-ups to the various discussions.

Firstly, on the crude export thing, would you guys have any possible incentive to export crude?

And I'm thinking obviously of the loop.

That's something Paul that we've looked at, as loop as a part of the infrastructure, but let me kind of share with you how loop is built.

You have a three SPM to unload the ships.

Everything flows from the Gulf into the shore basin.

We do not have the capability to bi-directionally flow that.

We've looked at it, there's been some consideration but in order to be able to pay off that investment in bi-directionally load you would have to have significant volume.

So, technically it could be done over time, but you would have to change everything from the caverns at Galliano and change the flow pattern from Galliano all the way back out to the unloading platform in order to be able to do that which would be a significant project and very, very costly.

But we have looked at it.

I think it's the only major offloading, onloading potential point in the US right now isn't it, for Deepwater?

Yes it is Paul.

And we'll just see.

I do not believe that we're ever going to see that type of volume that would be required to be able to justify that type of a project.

Certainly not in the condensate exports side, and when you look at the curves long-term of domestic production versus whether or not we should export.

I think the markets are going to suggest in the way the global producers are supplying the market.

I think long-term the global price will suggest that it's going to be very challenging to be able to support those type of economics and that type of investment.

Sure.

A quick follow-up is, did you mention and apologies if you did the product volumes of exports that you had this past quarter?

Paul this is Don.

It was 298,000 barrels a day.

Can we get gasline and distillate?

I'm sorry?

Could you split the gasoline out for us?

Yes, just one second please?

And I'll just follow up quickly rather than dominate the whole call.

I was a bit surprised there was less contribution than I would have anticipated for the sweet sour differential.

Could you just talk a little about that and any outlook?

And I believe you've already addressed some of this on the call.

Any further thoughts on that particular differential which I know you are very sensitive to?

Mike just reviewed the differentials on a prior question.

Mike you want to mention that again?

Yes.

Specifically with regards to the sweet sour differential, Paul I think that during the second quarter when you look at the Canadian heavy for example, we had fairly reasonable differentials, and we expect to see those in the same kind of level going forward.

When you look at the LLS Mars I don't think there was anything that was particularly noteworthy.

I guess, [I was] just looking at the variance as you mentioned on slide 7, but I guess that essentially the differentials were more or less flat with Q1 so that deals with that.

And the gasoline?

Yes, it's 2/3 distillate, 1/3 gasoline, so just over 200,000 barrels a day of distillate and the remainder is gasoline.

Great, thank you all, thank you.

Roger Read, Wells Fargo.

Good morning.

I guess first thing I'd like to maybe get a little bit more clarity on is just comparing your refining margins this year in the second quarter to last year and then just kind of a quick skim across your peer group a much better quarter, relative to your numbers and certainly relative to your peers.

I'm just wondering as you walk through the various items since everybody's dealing with similar volumes of crude and pricing of the crude, was there a hedging impact?

Was there something where you're able to move the crude around better, do you believe it was mostly a geographical event?

I'm just trying to understand the moving parts here, maybe a function of how much down time you had last year in the second quarter where you weren't able to realize as well against expected crack spreads?

Yes I guess, Roger this is Don.

I would say it's more a function of our capability to be able to provide refined product to the markets where it was needed.

And the flexibility that we have with our logistic system including our significant Marine or barge system that allows us to be very flexible in moving product to markets where there's a good demand.

So I think historically you've seen that we've been able to capture good margin from that price realizations compared to spot market prices, and clearly were able to do that this quarter as well.

I mean if you saw in the difference between [spot] slide 6 and slide 7, slide 6 that $657 million of other gross margin was really a comparative to a quarter where it last year where you had some unusual noise because of RINS and because of volatility in the Chicago market.

One of the reasons we put in slide 7 was we thought it also would demonstrate that $159 million is substantially or predominantly our ability to realize product realizations over spot.

We thought that would help people sort of triangulate if you will, how were doing with that area.

Roger there were no one time hedging gains or anything either.

Yes, so that's what I'm trying to understand.

So basically it's the flexibility in your system and it sounds like to some extent downstream from the refining gate, in terms of where you're able to move the product at a given moment.

I would say definitely downstream from the refining gate.

Okay that's what I was just trying to understand, if it was simply a utilization thing or something more deep and it sounds like it's on the more deep side.

Follow-up question, CapEx you've got this slide there, first of the appendix, and it looks like, if I do the math you've got a huge spend in the Pipeline Transportation side coming up in the back half, and relatively healthy growth in Speedway.

I'm assuming that's X anything going on with the acquisition of Hess's retail business.

Just wondering if you could give us some clarity on what the plans are there?

Yes, I think your presumption is correct it is X Hess acquisition for Speedway.

On the Pipeline Transportation side, we did expect that a good portion of that would be back ended particularly with our investments in SAX and Sandpiper, we expect that we will broadly be at that $2.4 billion by the end of the year, it's just sort of how those dollars are being spent and the timing of when they're being spent Roger.

And any particular projects you could highlight for us in the pipeline?

[In] pipeline transportation SAC and Sandpiper are two of the bigger pieces.

Okay so is it.

I appreciate it.

Thank you.

Faisel Khan, Citigroup.

Thanks and good morning.

Just going back to the other sort of gross margin bucket.

If we go slide 20 were you look at the absolute numbers, the $477 million of other gross margins, I just want to make sure I understand this right.

So you're saying that this is sort of a function of your -- spot to rack margins farther down between your refining gate and your terminals?

Is that it fair assumption?

(Multiple speakers) So Faisel, historically I think when you guys -- when we provide the market metrics that get us to an indicated gross margin, there's always been the difference between that indicated gross margin and our reported gross margin.

That's broadly been I would say in the $200 million to $300 million range.

And in second quarter of 2013 it was under that number due in large part to, of these sort of noise around the RINS and outs affected the spot prices.

So in this quarter, I would say the difference between the $200 million or $300 million you would normally expect to see is the ability to -- the product price, the incremental product price realization that we are able to realize during the quarter.

Is that just a function of basis?

If I look at either nearer harbor or if I look at New York harbor versus Gulf Coast, or sort of the Florida market versus the Gulf Coast, in terms of gasoline and (multiple speakers)

I think some of it is that we're using for example, in the Midwest, the Chicago 6321 crack and our activity in the Midwest, is all over the Midwest including markets that aren't in Chicago.

So we're always -- we think we have a lot of flexibility.

We know we have a lot of flexibility and ability to supply markets and we use that flexibility to make sure that we're optimizing value.

Faisal I would say, it just illustrates the efficiency of our system probably to be able to move to the markets quicker than anyone else.

That's definitely clear from the results.

I'm just trying to figure out if there's things that we can look at in the market quarter to quarter, that might help us sort of gauge how much this other gross margin moves around, but I get it.

I guess following up on this is with the Hess acquisition, how much is this other gross margins do you think is going to change?

That will remain to be seen, but as we said when we roll out the Hess acquisition, it gives us -- it just helps with the efficiency of our system.

Now we'll have nearly 75% assured volume that we know where the volume is going, we picked up tremendous pipeline space on colonial, and other pipelines that have been servicing the Northeast, and some of the southeast markets.

So we think it will be an add-on to our business today.

With the Hess piece how much total capacity will you guys have on colonial after all this is said and done?

I don't think that we've made that public individually.

Okay.

Fair enough there, sorry, I really appreciate the time, thank you.

(Operator Instructions)

Okay Jeanette.

I presume there's no more questions.

We want to thank you for joining us this morning and for your interest in Marathon Petroleum.

Should you have additional questions or would like clarification on any of the topics discussed in the call, Beth Hunter and Geri Ewing will be available to take your calls throughout the day.

Thanks for joining us.

Thank you ladies and gentlemen this concludes today's conference.