Marathon Petroleum Corporation (MPC) Q1 2012 Earnings Report, Transcript and Summary

Welcome to the Marathon Petroleum Corporation's First Quarter 2012 Earnings Conference Call. My name is Christine, and I will be your operator for today's conference. [Operator Instructions] Please note today's conference is being recorded. I will now turn the call over to Pam Beall. You may begin.

Thank you, Christine. Good morning, everybody, and welcome to Marathon Petroleum Corporation's First Quarter 2012 Earnings Conference Call. The synchronized slides that accompany this call can be found on our website, marathonpetroleum.com. 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. Please 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 and factors that could cause actual results to differ are included here, as well as in our filings with the Securities and Exchange Commission. And now I'll turn the call over to Gary Heminger for opening remarks. Gary?

Thanks, Pam, and good morning to everyone. We had a strong first quarter with $596 million of net income representing a 13% increase over the same quarter last year. Our strong results are primarily due to the improvement in the U.S. Gulf Coast crack spread and our ability to capture value using our extensive logistics assets. Our team executed on our capabilities to increase our throughput of WTI priced crudes, which represented 30% of the crude we refined during the first quarter of 2012, up from 25% in the same quarter of 2011. We are delivering on our commitment to return capital to shareholders through an $850 million accelerated share repurchase program as part of the $2 billion authorization we received earlier this year from our Board of Directors. We have already received the majority of the shares, and we expect to receive the remaining shares over the coming months. Our mission continues to be value creation for our investors incorporating a balance between internal and external investment and a return of capital to shareholders. Our cash balance at quarter end was just over $2.2 billion, supported by strong earnings but down from year end 2011, primarily due to our share repurchase program. In total, we have spent about $950 million on our accelerated share repurchase program and dividends during the first quarter of 2012. Our strong financial position is also reflected in our debt-to-capital ratio of 26%. Upgrades to our Detroit refinery as part of the DHOUP project were approximately 92% complete as of March 31, 2012, and remain on budget and on schedule for completion in the third quarter of this year. Immediately following, there will be a 70-day turnaround to tie in the new units, and we expect the upgraded and expanded refinery to be online by year end. When completed, these upgrades should allow us to lower feedstock cost and capture value from crude oil differentials. We will be able to process an incremental 80,000 barrels per day of heavy Canadian crude and increase Detroit's crude oil refining capacity about 15% to 120,000 barrels per day. We are also moving decisively to position MPC to be able to transport and process the new Utica Shale crude oil and condensate coming online in Eastern Ohio. Initially, the volumes from Utica are being processed at our Canton refinery and as production increases, our Catlettsburg refinery. Our project to construct a permanent truck and loading facility at our Canton refinery will be in service this summer. In addition, we are expanding our transport operations to include crude oil trucking and a truck-to-barge offloading facility. We believe that we can run about 20,000 to 30,000 barrels per day of Utica condensate at our Canton and Catlettsburg refineries with minimal capital improvements. In addition, depending on the quality of Utica crude ultimately produced, we could run an excess of 50% of our crude capacity with Utica crude at our 78,000-barrel per day refinery in Canton and the 233,000-barrel per day plant in Catlettsburg. Our refining engineers continue to study what improvements we can make to increase the amount of Utica crude we can economically refine at those 2 refineries, as well as our nearly 210,000-barrel per day refinery in Robinson, Illinois. Despite challenging market conditions, Speedway also had a strong quarter supported by light product volume and merchandise sales growth. As we have stated often in the past, one of our goals is to increase assured light product sales by expanding our retail -- our Speedway retail operations in an existing and contiguous markets. Speedway's previously announced acquisition of 88 GasAmerica stores along major transportation corridors in Ohio and Indiana will complement its existing 7-state asset base. We anticipate this transaction will be finalized by the end of the second quarter. In a separate announcement earlier today, we reported that our Board of Directors authorized and directed our evaluation team to further explore the formation and initial public offering of a master limited partnership and to prepare a registration statement. If we determine to further pursue an initial public offering of an MLP, the issuer would be a wholly-owned subsidiary MPLX LP. We will contribute a portion of our midstream assets to the MLP and sell a minority interest in the MLP in an initial public offering. Potential MLP would support our strategy to grow our midstream business, initially through a contribution of an interest in certain onshore common carrier pipeline assets located in the Midwest and Gulf Coast regions of the U.S. We will share more information with you as our plans develop to the extent we are permitted by federal securities laws. However, to avail of sales -- ourselves of Safe Harbor Provisions of such laws, we are not in a position to provide additional information or answer questions on our midstream evaluation initiative. As we look forward to the remainder of 2012 and beyond, I want to briefly discuss our view on macro trends that will have an impact on the refining industry. First of all, North American crude oil production continues to outpace the capacity of existing logistical assets to officially move the crude oil to refining markets. While we expect that the logistical assets will eventually be built to close this gap, we continue to believe that select crude oil differentials will be wider for longer than most market observers are expecting. While some changes will occur this year, there is still an abundance of Mid-Continent, Canadian and Permian crudes vying for pipeline space. In addition, the new Utica production is just starting and appears promising for Midwest refiners. The volatile crude oil differentials associated with domestic and Canadian crudes will present opportunities in the market for flexible refiners to capture discounted crude oil. With volatile crude oil spreads, logistics flexibility continues to be one of the keys to long-term success in this business. We believe price advantaged crude and feedstocks along with an abundance of natural gas as a cost-efficient energy source will provide cost advantages for U.S. refiners for some time to come. We estimate that U.S. gasoline demand was down about 1.7% and distillate demand was down approximately 3% in the first quarter of 2012 compared to a year ago. However, Speedway's April month-to-date same-store sales are up approximately 3.7%, which puts our same-store sales about flat year-to-date. Therefore, we expect U.S. gasoline demand to improve throughout 2012 and expect total year 2012 demand to be down less than 1%. Total year distillate demand is expected to improve as well, and we expect it to grow about 0.5% in 2012. We believe that global demand for gasoline and distillates will continue to provide an opportunity to sell products into higher value export markets, including Europe and Latin and South America. We exported 81,000 barrels per day of distillate, primarily from our Garyville refinery during the first quarter of 2012, compared to 66,000 barrels per day in the same quarter last year. We expect to continue playing a significant role in the export markets. We are making investments that will increase our export capability from diesel and gasoline and that will increase diesel production. Now I will turn the call over to Don Templin to provide a more detailed financial update on the first quarter. Don?

Thanks, Gary. Slide 4 provides net income both on an absolute and per-share basis. Our first quarter 2012 net income of $596 million reflects a $67 million increase from the $529 million we earned in the first quarter of 2011. Earnings per diluted share was $1.70 for the first quarter 2012 compared to $1.48 during the same period last year. I should note that as a result of the accelerated share repurchase program that we initiated in early February, the weighted average number of diluted shares outstanding during the 2012 first quarter was $350 million compared to $358 million used in the first quarter of 2011 calculation. At the end of the quarter, there were just over 340 million common shares outstanding. The waterfall chart on Slide 5 shows by segment the change in net income from the first quarter of 2011 to the first quarter of 2012. The primary driver for the increase in our net income was the increase in refining and marketing segment income, partially offset by higher interest and other corporate expenses and by higher income taxes. Before I move to a discussion of the results of our operating segments, I wanted to comment briefly on the change in interest and other expense and the change in income taxes. The $37 million quarter-over-quarter change in interest and other items primarily relates to the interest expense on our $3 billion in senior notes, the absence of related party interest and the costs associated with being a stand-alone company. The increase in income tax expense is a function of our higher earnings during the 2012 first quarter. Most of the slides I'm using today compare first quarter 2012 to first quarter 2011. Given the volatility in commodity prices, I thought it would be also useful to show certain first quarter 2012 information on an absolute dollar basis as well. Slide 6 shows the primary components that contribute to our refining and marketing gross margin. Using market indicators and our actual volumes, you can see that the crack spread and sweet/sour differential continue to be significant drivers to our income. Our ability to utilize the flexibility in our logistics assets also allowed us to capture value in the discounted domestic crude market. As shown on Slide 7, Refining and Marketing segment income from operations was $943 million in the first quarter of 2012 compared with $802 million in the first quarter of 2011. The change was primarily the result of a higher Refining and Marketing gross margin. We are continuing to use the expanded market indicators provided on our last conference call to explain our change in our Refining and Marketing gross margin this quarter. Where applicable, the changes in market indicators have been applied to MPC actual volumes to arrive at the quarter-over-quarter variances. First, the blended 6-3-2-1 crack spread was $1.98 per barrel higher in the first quarter 2012 than the first quarter 2011, resulting in an estimated favorable variance of $239 million. Although the Chicago crack spread was relatively unchanged from 2011, the Gulf Coast crack spread was substantially higher in 2012 than it was last year. While the sweet/sour differential improved from $12.40 per barrel in the first quarter of 2011 to $13.70 per barrel in the first quarter 2012, we processed less sour crude during the first quarter of 2012. As a result, the estimated quarter-over-quarter variance was down $12 million. WTI-based crudes accounted for approximately 30% of the crude we processed during the 2012 first quarter, 5 percentage points higher than the first quarter of 2011. This increase in volume and an LLS WTI differential that was $3.57 per barrel higher resulted in estimated $198 million favorable gross margin variance between the 2 quarters. The first 3 market indicators I discussed are calculated by reference to an LLS prompt price. Rapid changes in crude prices can cause significant differences between the LLS prompt prices embedded in the market indicators and the actual amount we pay. On average, the delivered LLS crude cost was $0.50 lower than the prompt LLS price during the first quarter of 2012 when compared to the first quarter of 2011. This accounted for an estimated favorable variance of $24 million. Market structure had a significant quarter-over-quarter effect on our gross margin. There was $1.44 per barrel less contango in the NYMEX WTI market structure in the first quarter of 2012 compared to the first quarter 2011. With an estimated unfavorable impact of $115 million. The other gross margin column captures a number of factors that need to be considered when reconciling the market-based metrics to the change in our gross margin. Such items include our actual realized prices, refinery yields, other feedstock cost and crudes slate variances compared to the market indicators. They also include refinery volumetric gains, purchase for resale activity and primary transportation. On the next 2 slides, we provide earnings walks for each of the other operating segments. On Slide 8, Speedway's income from operations was $50 million in the first quarter of 2012 compared with $33 million in the first quarter of 2011. Total light product and merchandise margin increased $25 million quarter-over-quarter. This was primarily due to margin expansion resulting from increasing merchandise and food sale systemwide. It also reflects the impact of the May 2011 acquisition of 23 Gas City stores in the Chicago land area. Slide 9 shows changes in our Pipeline Transportation segment income. Income from operations was $42 million in the first quarter of 2012 compared with $51 million in the first quarter of 2011. This decrease was primarily attributable to a decrease in earnings from pipeline affiliates. Slide 10 presents the more significant drivers of changes in our cash flows for the first quarter of 2012. At March 31, 2012, our cash balance was just over $2.2 billion. Operating cash flow before changes in working capital was a $1.1 billion source of cash. The working capital use of cash of $761 million noted on the slide is primarily due to higher accounts receivable caused by increases at our refined product prices, as well as lower crude oil payable volumes from changes in crude supply. Capital expenditures and investments during the quarter were $316 million, primarily related to the continuing investment in our Detroit Heavy Oil Upgrade Project. As we announced earlier this year, our Board authorized the repurchase of up to $2 billion of our stock over the next 2 years. We executed on that authorization by initiating an $850 million accelerated share repurchase program in early February. As Gary alluded to earlier, this program will be complete in the coming months and we have already received the majority of the shares under the program. Slide 11 provides some summary financial statistics. At the end of the first quarter, we had just over $2.2 billion of cash and approximately $3.3 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 a leverage of 0.7x EBITDA and a debt-to-total capital ratio of 26%. Cash flow continues to be strong as well with $347 million of cash from operations, net of the working capital used I referred to earlier. Slide 12 provides outlook information on key operating metrics for MPC for the second quarter of 2012. For comparative purposes, those same metrics for the second quarter of 2011 are also shown. The April market data document will be published tomorrow on our investor website as well. As you know, we use derivative instruments to float the price of our foreign crude purchases to a date that is closer to the time those crudes are processed at our refineries. We have begun to hedge our foreign cargo purchases using Brent-based derivative contracts instead of WTI-based contracts. Our mission continues to be value creation for our shareholders. We are committed to pursuing opportunities to create near and long-term value. Examples include the return of capital through our share repurchase program and the evaluation of strategic alternatives for our midstream assets. We will be balanced in our approach to capital allocation as we continue to assess the opportunities in front of us. Now I will turn the call back to Pam Beall.

As we open the call for your questions, we ask that you limit yourself to one question plus a follow-up and then of course, you can prompt again for additional questions as time permits. So with that, I'd like to now open the call to questions. Christine?

[Operator Instructions] The first question comes from Paul Sankey from Deutsche Bank.

Firstly, just sequentially, could you give me an idea -- it was notable that you had a tough quarter in Q4 and this is obviously a good beat of expectations. Could you give us a sense for the impact in the way that you presented on Slide 6 of some of the differential moves, particularly the sweet/sour and the WTI LLS? And also, I'm wondering about market structure because I guess we've got a little bit of kind of a double curve at the moment with a bit of contango and a bit of backwardation.

Paul, this is Don, if you wait one second here.

Okay. I'll flip in the follow-up if you want but Gary, could you talk a bit about export potential and if we could to go back obviously to my recent question, but the other question I had was just about export potential, how big you think the market for distillate exports can be. That's my two.

That's tough to determine how big that actually can go because it all depends on the refining slate in Europe and how refineries run in South and Latin America, but our indicators suggest that the market continues to be very strong for exports and the way that we put out the different cargoes for sale, we're continuing to get a strong response on those cargoes. So it looks like, Paul, it should continue to be strong for the, we think, into the distant future. The other thing is there's a tremendous amount of building and expansion going on in Brazil and some surrounding countries, which is helping as well.

Gary, can you just talk a little bit of more about the destinations of your exports? I get the point on the refining performance, but I guess most of your stuff is going to Latin American growth, is that correct?

Well, as we've said and Mike Palmer is here. Mike, why don't you -- Mike handles all of our supply business so I'll let Mike go into the detail.

Yes, Paul. I guess what I would say is that we continue to have a very robust market for distillate exports and frankly, it still continues to be both Europe as well as Latin and South America.

Okay. Is there a sense of the mix or is it just, shall I call it 50-50?

Yes, I think you could probably call it 50-50 today.

Great. And then, just to remind you my first question was, sorry to put you on the spot here, but it was really Slide 6 ...

Yes, I think Don has it for you now.

Sure, Paul. The LLS crack spread in the fourth quarter of 2011 was -- the total was $135 million versus the $323 million. The sweet/sour differential was $53 million. The LLS prompt versus WTI prompt was $461 million. The LLS prompt versus delivered was a negative $179 million. Market structure was $15 million and then the direct operating costs were a negative $689 million.

Is that the indicative gross margin change sequentially?

Those were the absolute dollars.

Okay. So that's the equivalent to Slide 6 or 7?

That was equivalent to Slide 6.

Okay. That's helpful. Great. You don't have it for Slide 7 I guess, do you?

I don't right now.

The next question comes from Doug Terreson from ISI Group.

Gary, in the pipeline business I think you guys have a pretty meaningful interest in the Capline, which I think operated a pretty low utilization until recently and either way, I want to see if we could get an update on the status of that pipeline and while I realize, partner consent may be required, whether or not you guys are thinking about any possibility plans because it seems like it could be a significant earnings opportunity for Marathon Petroleum. So could you just spend a minute on that, please?

Well in fact, let me have Mike Palmer talk about -- you're absolutely right, Doug, we do have a little over 30% ownership in Capline. It's a very big artery to be able to move many crudes from the South to North and -- but let me have Mike Palmer go into that for more detail. Mike?

Yes, it's actually difficult to say a lot. At this point in time that we certainly are well aware of Capline and the low utilization, and there's been a lot of talk about reversing Capline. And certainly, we're well aware of the issues that are associated with that. It's complicated, not only from a partner standpoint but just from the use of the pipeline itself. So we are evaluating it now. We are looking at alternatives to that asset as well as other assets, but there's really not a lot more that we can say at this point in time.

The next question comes from Paul Cheng from Barclays.

Can I have a number of quick balance sheet item, Don? What is the market value of your inventory of [indiscernible] and the long-term debt? And also that if you can tell us -- you're saying that you start moving into the brand hedging. In the second quarter, should we assume that you're pretty much using the brand hedging or that just you just halfway through? If you can give us some estimate of what is the exposure as well as what is your WTI link total exposure at this point?

Okay. Paul, hopefully, I got most of those questions. I think the first one was on the inventory question. Inventory was $6.8 billion above our reported cost.

$6.8?

$6.8 billion.

Okay. And that the long-term debt out of the total debt component?

Long-term debt is almost all of the debt, $3.3 billion. We have very little short-term debt.

Okay. All right. How about on the hedging on that you're moving into plan, are we pretty much all out from WTI or that you're just in the process?

For purposes of our cargo hedges, so the foreign crude purchases we are using Brent derivatives to float that price.

So in the second quarter, you have the Brent WTI differential swing. We should not assume that you will have any meaningful impact in your hedging?

On cargoes, that's correct.

Okay. And then how about the WTI link exposure? I mean I think last quarter you're excluding WC as it was the 28%. What is that at this point?

This is Gary, Paul. We're giving guidance for the second quarter that our WTI will be about 27%, I believe it is.

27%?

I think, I'll hold on to one of the slides here. We got it. Yes. 27% is what the expected WTI price crude runs will average in the second quarter.

Gary, can you remind me what is the first quarter level?

First quarter of this year was right about 30%. We had much lower crude throughputs this quarter, they'll be increasing in the second quarter as such it will be about -- the volume is about the same but the percentage is going down to 27%.

Is there any reason why it's going down?

Just the higher -- the absolute total, the total barrels of crude we're running is higher but the volume of WTI link is about the same.

So the increase of your crude run down in the Gulf Coast, is that the reason?

All over.

We had turnarounds in the first quarter and for whatever reasons, Paul, we just had lower throughputs.

Lower crude throughputs. Total throughputs were fairly consistent with last year.

The next question comes from Blake Fernandez from Howard Weil.

I had a question for you on the buyback program. It sounds like you're largely through the $850 accelerated program. And I'm just trying to understand how we should think about the balance of the $2 billion program after that. In other words, is that going to be kind of ratable repurchases or does that become more opportunistic?

Blake, this is Don. When we complete the program and that program we expect to complete in the next couple of months at the latest, we will evaluate a number of factors, including our cash position and the market. And we will be making a recommendation to our Board around how to continue that -- how to continue or what to do with that share repurchase program. So I would say it will be a fact and circumstance-based decision when this current program expires.

Okay. Fair enough. And then the second question I had was on the retail acquisition. I know you had a target of 70%, I believe, on assured sales. And I'm just curious with this recent 88 store acquisition, do you have an idea of where that puts you with regard to your target?

Well, and Paul, excuse me, Blake, things change on how that product was supplied in the marketplace prior to where it is today. It is only going to change minimally once we get this acquisition complete here in the second quarter.

The next question comes from Jeff Dietert from Simmons & Company International.

Question for Gary or Mike. I know there's a fair amount of volatility experienced in the Chicago product markets this quarter. Could you talk about some of the dynamics that contributed to that volatility and do the flexibility of your system allow you to perhaps do better than what the market indicators suggested was available in that market?

You know I think probably what I could say is that the weakness that you saw in Chicago had a lot to do with the weakness that occurred in the Canadian crude oil pricing during the first quarter. The weather was good, production was high, there was a lot of Canadian crude that was being produced and obviously, those pipes that sit directly on Enbridge pipeline in Chicago have the ability to bring in very cheap crude. And so they continue to run a lot of crude basically and that did cause, it has caused product prices to be relatively cheap. So from our standpoint again, I mean we, as you know, our system is setup such that we have the ability of running Canadian crude as well. So we took advantage of the cheap Canadian crude just like the Chicago refiners did, although we have constraints that perhaps they don't.

It seemed as if, and perhaps there was some winter/summer grade gasoline issue there as well. It got weak and then it rallied sharply, was that part of the issue also?

Yes. That's a phenomena really that we see every year. When you look at the Chicago market it's relatively a thin market and the vapor pressure changes caused volatility pretty much every year.

If I could follow-up on Detroit, you talked about the 70 day turnaround after the completion of the heavy upgrader, is that a complete refinery turnaround? How do you expect that to impact throughput volumes in the fourth quarter?

Yes. Yes, it is a complete refinery turnaround. That's all it will be. We'll be down for that 70-day period of time. We will inspect all units, how things go in and turn around. If we get a few done early, we may start up a few of the small units, but with complete turnaround and tying in of the new systems we're putting in, I would say that we will reengage the systems in a very plant sequence. And I would doubt that you'll see much of the many of the process you going to lose coming up early.

The next question comes from Chi Chow from Macquarie Capital.

Gary, in your prepared remarks, you talked about certain crude spreads potentially staying wide longer-term. Could you expand on that and maybe talk about what specific crudes you're thinking about?

Sure, Chi. And I think we've chatted about this in the past. As we look at the crude going from North to South and West to East, first of all, the Canadian crude and we all know the dynamics in the system is trying to expand the crude systems into the Gulf Coast for Canadian supply. Then you look at the Bakken come down to the Niobrara, eventually to the Permian and Eagle Ford. The Canadian and Bakken and Permian crude as well, all finds its way to the Cushing hub. The initial pipeline that, I understand midmonth here, will be started up. That will be reversed from Cushing to the Gulf Coast, is around 150,000 barrels per day or so, of output. But when you look at the Bakken, and I'm understanding 20,000 to 30,000 barrels per calendar month are being added each month, and you look at the take away capacity from the Bakken, the take away capacity from Canada and then the Cushing barrels, excuse me, the Permian barrels coming into Cushing, we still find that there's going to be a substantial amount of supply available vis-à-vis the amount of export capacity you have out of that Cushing market. And then the other point that I want to make is as you take a look at, at those crudes that eventually may want to find their way to the Gulf Coast, and I think you have a very, very strong competitive force being the Eagle Ford's crude that is continuing to grow each month, and in order to be able to get those crudes and transport those crudes through the Gulf Coast, I see it that you have to go through the Eagle Ford to get there. Therefore, I think it's going to allow differentials to be wider back in those refiners in the Mid-Continent and Midwest that have the ability to take those crudes into the marketplace. They're going to have a transportation differential, a timing differential, and I think you are going to find more competition in the Gulf Coast. And where that competition is really going to play out I believe, is the imported barrel that is coming in as well as some offshore barrels that could come in into the Gulf Coast, either Louisiana corridor or the Houston corridor. I just see for some time that the friction of those barrels that are trying to pass through to the Gulf Coast is still going to be a very, very competitive market, therefore it's going to, as I said before, allow benefits back to Midwest, Mid-Continent refiners.

Great. Well, given those thoughts, why would you even consider a reversal of Capline?

Oh, we didn't say that we were considering that. That there are many markets and many ways to look for the markets. And it's clear, Capline is 1 million-barrel per day, kind of rated capacity system, that moves South to the North per day. It is also clear that you would need to ensure that you have supply into the Midwest. I can take you back to late the last decade, where that pipeline was a major supply source in the Midwest refineries. In the event that you were to consider that, you would need to ensure that you have a large pipeline that can still move that type of supply, maybe not 1 million barrels per day, but still move a significant amount of supply South to North if needed. The Canadian production cannot handle everything into the Midwest. So there are many dynamics that go in, Chi, into making or performing that analysis in term of what would be the best way to look at those assets.

Right. And it seems like you do want to keep that optionality open from the Gulf Coast, is what you're saying.

You absolutely need that optionality.

Right. Right. Okay. One final follow-up, I guess, Don, on a couple of details. On the share repurchase program, it's not clear, are you done with the $850 million buyback in the first quarter or is that still ongoing?

We've spent the money, Chi, and that money has been paid to the bank, but the bank is still in the process of purchasing and completing the share repurchase. We received 17.6 million shares to date, and we would expect, given sort of where pricing is currently, that the total shares repurchased will be in the 20 million share range.

Okay. Do you have any guidance on what second quarter average share count would be then?

Well, I mean we have -- there's 340 million shares currently, Chi, and if we would receive the other shares, I mean only a couple million more shares, so I would say 340 million is probably the number I would start with.

The next question comes from Doug Leggate from Bank of America.

It's actually Jason Smith on for Doug. I just had a follow-up on Detroit. Even though the conversion is underway, how do regional discounts we're seeing impact your optimal crude slate? Is it still optimal to run WCS or is it going to be optimal to potentially run light sweet crudes instead?

Good question, Jason. I think when you look at the spreads that we have been seeing in the market for the first quarter, it would still suggest that you want to run a very heavy slate. But the fact is that what we'll do, like we do at all the rest of our refineries, is we will look at the crude oil differentials that exist in the market at any given time, and we will optimize the crude slate such that we will have the highest profitability slate that we can. We still very much believe that it's going to be a heavy slate, but there are times when we may not run all the heavy that we talked about, it'll depend upon the market. The object is to make money not to run heavy crude.

And just can we get an updated view on a consolidation given the cash and the balance sheet, both on the refining and the retail side?

I'm not sure I understand the question, Jason.

Sorry, with the cash on the balance sheet and just given that we know that there's some assets on the market right now. Just your views on -- the kind of bid asked on consolidation?

Oh, okay. Sorry, Jason. We continuously look at all assets that are available and as recognized with our acquisition last year of Gas City and the acquisition soon on GasAmerica. So we continue to look at basically everything that is available and what opportunities are there, but I can't go into any more detail at this time.

Your next question comes from Faisel Khan from Citi.

In your prepared remarks, I think you talked about how you switched all your foreign waterborne crudes over to Brent-based pricing. For the first quarter, how much of your crude was -- your foreign-borne waterborne crude was priced off of WTI?

This is Garry Peiffer. For the first quarter, most of it was based on WTI derivatives, pricing, so essentially all of it in the first quarter, and as Gary mentioned, we're just switching in the second quarter. And if you look at most of April, there hasn't been much of a difference through the first 20 days or so, so fairly minor impact so far as we move to the second quarter.

Okay. Understood. And given the plunging price of ethanol versus gasoline, were there any benefits of blending ethanol into your gasoline pool?

This is Garry again. We're basically at E10 everywhere at the moment, so we're watching the developments on the expansion. But at this time, we have no plans to go beyond E10 in our blending.

Okay. Great. And then just looking at your export volume growth year-over-year, where would you say you had the most growth, which region of the world did you see the most growth year-over-year?

I don't know. I would say, just off the top here without getting into the details, Faisel, that I think it's pretty balanced. If you look at Europe and compare that to South America, Latin America is probably fairly balanced. Gary, just add to...

No, and that's right. We don't have a lot of good details on some of the sales and slide as it is that we sell it domestically and is exported. So we're not really sure exactly where it was, the barrels are actually ending up, anyhow.

Okay. Got you. And then last question for me, the acquisition price for the GasAmerica stores?

We have not made that public.

The next question comes from Rakesh Advani from Credit Suisse.

Just first, I wanted to kind get your view of the Motiva start up on margins and the light/heavy spreads I guess in the short-term and long-term?

Well, my understanding, Rakesh, from what I've read and studied is that as they start up, they will be taking the base plant down for turnarounds. So I think it's going to be sometime probably through the -- into the third quarter before they get the entire system up and running. And then it all depends -- and of course we do not know the information of how they're going to supply their crude or it's going to be heavy crude, medium, light, we don't know the type of slate. So therefore, how that would affect the differentials and then as they come up, how that will change the product prices, I just think is too far out, probably until late second, early third quarter before we would see the effects.

Okay. So I mean I guess if you thought that they were bringing on coking capacity with the implication that you're bringing or taking on heavy crude, then wouldn't that ...

Well, certainly if coking capacity could also mean that you're running a part of a medium slate. It just -- but I would assume you're right, that it will be a heavier crude.

Okay. Just wondering if possible, for the first quarter results in the refining segment, is it possible to get the non-FERC EBITDA contribution from logistics that's in refining?

We don't break it out. No, not at this time.

The next question comes from Cory Garcia from Raymond James.

Just one quick one out of me now that we're through I guess, the seasonal low point in Asphalt demand, do you guys have any color into sort of how that market is shaping up as we move into summer? And also just sort of refresh me on how your Asphalt sells, is it predominantly wholesale versus what we considered more of a I guess assured sales or sort of contracted volumes?

Well, I like your optimism that we're at our low point in Asphalt demand. It's still going to be a struggle for Asphalt this year. As you see the relative price of Asphalt in the $500 plus per ton, it's going to be a challenge for state governments and cities to be able to pay as much as they have in many years past. So let's say I'd like to share your optimism. We've hit the low point and Garry may have a little more detail.

Yes, I think the only thing to add is that as you probably now, both the House and the Senate recently passed a 90-day extension. So these 90-day extensions have really put a bit of a -- cast a lot of uncertainty over what funding is going to be there. So I think you know as Gary suggested, until we get a little more certainty as to what type of federal funding is going to be out there -- and federal state funding accounts about 80% of the total funding for Asphalt. So it's really until we get some resolution at the federal level as to what kind of funding we're going to have, we're just kind of -- it's a bit of a -- it's overshadowing everything else going on that market. So it's still a bit uncertain even considering the federal funding status.

The next question comes from Paul Cheng from Barclays.

Gary, I joined late so I missed your opening remarks, you may have already commented it. So if you do, I apologize. But for the month of April, do you have some same-store sales for gasoline that you can share with us?

Right. For April, month-to-date we're up a little bit over 3.5%. I think it's about 3.7% month-to-date so a very strong turnaround in April versus the first quarter. And the other thing is, when you go back and compare some of the volume first quarter versus last year, and even most of the individual months, we had some pretty strong months in the first quarter last year. So when you look at things on a same-store basis, sometimes you're comparing up yourself against very strong months last year. So as I said in my prepared remarks, that we expect to be after April, about flat year-to-date on gasoline demand with a very strong pickup here in April.

And Gary, does it make any difference in terms of that year-over-year comparison between your Midwest system and your Southeast system?

Well, when we look at same-store, we're only in the Midwest.

I thought you had some down in the Southeast?

No, we do not any longer, Paul. We sold those back in '07, '08 timeframe.

Okay. I see. All right. Wondering, if we're looking at other new shale oil development, a lot of them is actually NGL and also condensate, back on that [ph] should be relatively smaller than people thought. And 2 question in here, Gary, do you guys really can run much of a condensate even in your light sweet crude refinery? And secondly, that if not I could assume, then that will probably going to be long in condensate, do you look at condensate splinter even though that may not be a traditional investment that you guys will make if then an opportunity there?

Well, this is Garry Peiffer. We've been looking at that very closely, and you're right. We think that we can run between Canton and Catlettsburg maybe 20,000 to 30,000 barrels a day of condensate type crude, 20,000 or 30,000 barrels a day between the 2 facilities. But we're also looking at other opportunities around the system to run more condensate and I guess our opinion is that based upon the production forecast for condensate, we think for the foreseeable future, we could have an appetite to use up a lot of what's going to be available for quite a few years in that area. So we're looking at investments to do some of that but we think we have the facilities and we definitely are located in the right spot to be able to run it.

So Garry, you will be able to run it, so you don't really need to build a condensate splinter to take advantage of the potential excess supplies in the market for condensate?

We're looking at alternatives, utilization of existing equipment, new equipment in our facilities and this is both at Canton, Catlettsburg and potentially, Robinson, as ways to use some of the condensate should it become available in the quantities being projected.

How about down in the Gulf Coast? I mean Eagle Ford does produce quite enough condensate and look like Permian Basin, the increase is going to be NGL and condensate also. Any opportunity there?

I think there's a lot of other outlets down there. That's kind of the -- a lot of opportunities for using those types of liquids in the Gulf Coast that we aren't really exploring those for the Texas City or Garyville. So we're strictly focusing on the Midwest, the Utica at the moment.

And Paul, what happens at in the Gulf Coast, first of all, there are more condensate splinters but also the condensate seems to get blended into different systems which cost us just much more infrastructure. And Garry's point are right, and I should have included Utica back in the question that Chi Chow had for me on how we looked at the different crudes, I should have included Utica as well. Because as this production ramps up, and we're -- this production is at the far -- the furthest Eastern part of PADD II, it is -- we don't have any pipelines that run East to West over in PADD II. So this really gives us a great opportunity to be able to run this at those refineries and once we get it on the water, we can take it many places. So to Garry's point, instead of possibly heavying up capital investment, maybe we can use our transportation assets to move it into markets.

Sure. And a final one, Gary, can you tell us that whether you have go union to the data room of BP Texas City?

We, Paul, we don't really comment on what we're looking at or not looking at, so we can't comment.

The next question comes from Evan Calio from Morgan Stanley.

I joined a little late here, sorry, but maybe at risk of getting the last response. Congrats on the strategic update on midstream alternatives. I just had a question. In addition to exploring an IPO, would management consider acquiring an existing publicly traded MLP or GP vehicle assuming the right opportunity presented itself?

This is Garry Peiffer and really, it's kind of the same answer is, we look at a lot of things as ways to enhance the value of our core assets and we really can't comment on what we're doing, but we're looking at a lot of different alternatives all the time.

Perfect. On a, maybe with a faster moving midstream peers in the Utica and in big private acquisition, I mean clearly and a key positioning for MPC. I mean could we see incremental CapEx or investment alternatives in midstream infrastructure in the Utica, at least kind of given the last CapEx guidance in November?

Right, and Evan, and thank you very much for the compliments on our quarter. But as we stated before, we're executing on a permanent to truck rack to Canton. We're looking at a trucking-to-barge operation and those are already in our plans that we've discussed before. If the production grows, like we certainly expect and the producers that we're working with, we have a main trunk line that runs West to East into the Canton area and therefore, we will have a great ability to run a gathering system if that production grows into that main trunk line. So we have many opportunities and I believe we're going to be able to move as fast and as quick and have the flexibility going forward as anyone else.

That's great. Just another question, I know I believe there've been some questions on Capline and I understand it wouldn't make as much sense given the kind of limited number of potentially interested volumes moving looking to move south from the north and a little likely of a tri CAPP reversal. But I mean what are your rights to control any potential reversal? Have there been any discussions there with partners or how are you thinking about that obviously, kind of longer-term? And I apologize if some of that had been answered.

Yes. This is Garry Peiffer again. As you probably know, this is an undivided interest in this pipeline so there's 3 owners and we're all competing with one another to set tariffs in the ship volumes. So we have to be a little bit careful of how we talk about the pipeline. So the bottom line is, we're just 1 of 3 and we have to evaluate this on our interest but we don't control the overall investment in that line.

Got it. Just last small question for me, is can you give me a color on the pretax income that comes from the acquired GasAmerica stores, and I'll leave it at that?

We have not given that level of detail nor we closed the transaction yet.

The next question comes from Chi Chow from Macquarie Capital.

Don, real quick, what's the remaining CapEx on DHOUP and also, have you given any guidance on 2013 CapEx?

We've not given guidance on 2013 CapEx. Remaining CapEx on DHOUP was $370 million for the year.

As of the end of first quarter?

No, I don't know that number from the end of the first quarter.

Okay $370 million at the beginning?

$370 million was the full year. That was included in our full year refining CapEx budget, Chi.

Today's final question comes from Rakesh Advani from Credit Suisse.

I just had a quick last question, when you were mentioning about retail expansions, would you be looking to move back into like the Southeast or in a big way, would that be interested to you or?

Yes, Rakesh. We have stated before we're very interested in continuing to grow both sides of our retail. And I want to make sure when Paul Cheng was asking me about retail, we have the Marathon brand in the Southeast but we don't look at same-store sales in Marathon brand because we don't have the individual store volumes. But we have Speedway just in the Midwest in the Southern state area. But certainly, if we can find the quality and the size of opportunities, we would move -- we would consider that into the Southeast for Speedway and we're continuing, we had an outstanding year last year on the Marathon brand side and growing our business in the Southeast as well, so we're trying to grow both sides of our retail business.

That concludes today's question-and-answer session. Please go ahead with any final remarks.

Thank you, Christine. Thanks to everyone for joining us today and for your interest in Marathon Petroleum. Should you have any additional questions this afternoon, the IR team will be in the office. Give us a call. Thank you.

Thank you for participating in the Marathon Petroleum Corporation's First Quarter 2012 Earnings Conference Call. This concludes the conference for today. You may all disconnect at this time.