Lisa Wilson - Marathon Petroleum Corp. Gary R. Heminger - Marathon Petroleum Corp. Timothy T. Griffith - Marathon Petroleum Corp. C. Michael Palmer - Marathon Petroleum Corp. Michael J. Hennigan - Marathon Petroleum Corp. Anthony R. Kenney - Marathon Petroleum Corp. Donald C. Templin - Marathon Petroleum Corp. Raymond L. Brooks - Marathon Petroleum Corp..

Neil Mehta - Goldman Sachs & Co. Brad Heffern - RBC Capital Markets LLC Paul Cheng - Barclays Capital, Inc. Chi Chow - Tudor, Pickering, Holt & Co. Securities, Inc. Phil M. Gresh - JPMorgan Securities LLC Doug Leggate - Bank of America Merrill Lynch Spiro M. Dounis - UBS Securities LLC Faisel H. Khan - Citigroup Global Markets, Inc. Justin S.

Jenkins - Raymond James & Associates, Inc. Corey Goldman - Jefferies LLC.

Welcome to the MPC's Second Quarter Earnings Call. My name is Elon, and I will be your operator for today's call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Please note that this conference is being recorded. I will now turn the call over to Lisa Wilson. Lisa, you may begin..

Thank you, Elon. Welcome to Marathon Petroleum Corporation's second quarter 2017 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, Chairman and CEO; Don Templin, President; Tim Griffith, Senior Vice President and Chief Financial Officer; and other members of MPC's executive team. We invite you to read the Safe Harbor statements on slide 2.

It's a reminder that we will be making forward-looking statements during the call 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 there, as well as in our filings with the SEC.

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

Gary?.

Thank you, Lisa, and good morning to everyone. If you please turn to slide 3. Before I begin, let me take the moment to highlight recent changes to our executive team. Don Templin, previously President of MPLX is named President of Marathon Petroleum Corporation, overseeing our refining, supply, distribution and planning and marketing operations.

He also continues to serve as a Director on the MPLX board. Don has been an extraordinary asset to our company and shareholder since we became an independent publicly traded company in 2011, and we look to forward to his continued leadership as president of MPC. We're delighted to welcome Mike Hennigan, who has joined as MPLX president.

Mike has replaced Don and comes to the role of 35 years of industry experience, most recently as President and CEO of Sunoco Logistics Partners, a role he held since 2012. He brings a tremendous depth of experience having led by most successful growth oriented massive limited partnerships in the market.

We are very enthusiastic about Mike's joining and believe his appointment speaks to our commitment to grow our industry leading Midstream platform in MPLX, and drive long-term value for our investors. Moving to our second quarter highlights on slide 4.

We are executing the strategic actions announced earlier this year to further enhance shareholder value. Following the completion of the first of several planned dropdowns in the first quarter, we used substantially all after tax cash proceeds from the transaction, to repurchase shares including $750 million in the second quarter.

We are targeting the dropdown of joint interest ownership in certain pipelines and storage for several of these to MPLX in the third quarter with the proposed transaction currently under evaluation by the MPLX board and as independent complex committee. These assets are projected to generate approximately about $135 million of annual adjusted EBITDA.

Work is also on schedule to prepare the remaining assets for dropdown to MPLX. This is expected to occur no later than the end of the first quarter of 2018. In conjunction with the completion of the dropdowns, we expect to exchange our general partner economic interest with newly issued MPLX common units.

All transactions are subject to market and other conditions as well as requisite approvals. Additionally, a special committee of the board and its independent advisor are continuing to work through the assessment of Speedway and expect to complete this review and recommendation by the end of the third quarter.

Turning to our results for the second quarter. This morning, we reported second quarter earnings of $515 million or $1 per diluted share, including a net charge of $0.03 per diluted share related to estimated losses for litigation matters, partially offset by Sandpiper asset liquidation gains.

We delivered strong operational and financial performance across all segments of the business in the second quarter. Speedway continues to perform very well, reporting its third best quarter ever.

Speedway delivered record second quarter segment income from operations of $239 million, surpassing the previous record set last year by $71 million on a normalized basis. Speedway's exceptional results were driven primarily by higher life products and merchandise gross margins and the outstanding expense control.

Tim will provide some additional color on Speedway's performance shortly. We continue to focus on delivering top tier performance and expect continued growth in Speedway earnings, as we drive marketing enhancement opportunities, build new stores, remodel stores, and rebuild existing locations across our footprint.

We continue to be very encouraged by the attractive investment opportunities that are available to us. Our Midstream segment, which includes the financial results of MPLX, also delivered outstanding performance in the quarter. MPLX reported record second quarter earnings, primarily driven by record process and fractionation volumes.

This includes a 14% increase in processing volume and a 20% increase in fractionation volumes versus prior year. Investment in the partnership's Utica build-out projects, including the newly constructed Harpster-to-Lima pipeline, became fully operational in July. MPLX expanded the capacity of our East Sparta to Heath and Heath to Harpster pipelines.

In combination with the cornerstone pipeline, these projects create additional fee-based revenue for the partnership and new access for Utica and Marcellus shale producers by moving condensate and natural gasoline through the Midwest.

The partnership is currently constructing additional connectivity and expanding pipelines to provide more optionality for Midwest refiners. In addition to continuing expansion in the Marcellus and Utica, the partnership continues construction of the Argo gas processing plant in the Delaware basin.

In July, the partnership also began construction of an additional gas processing plant to support growth in the STACK shale play of Oklahoma. The new facility, named the Omega plant, is expected to enter service in mid-2018.

MPLX has continued strong financial and operational performance and robust set of growth opportunities clearly demonstrate the substantial and growing value the partnership represents to the total enterprise. We remain confident in MPLX's compelling value proposition to our investors.

I would encourage you to listen in on the MPLX call at 11 o'clock this morning to hear additional color on the performance and opportunities for MPLX. Turning to refining and marketing, we reported solid quarterly results and continue to drive further process and cost efficiencies with the combination of our Galveston Bay and Texas City refineries.

These refineries are now being operated and managed as a single combined refinery and will continue to be a critical part of our world-class Gulf Coast refining capacity. Moving forward, we will simply refer to this complex as the Galveston Bay refinery.

Second quarter results were driven by record crude throughput of approximately 1.9 million barrels per day. After completing turnaround activity in the first quarter our Garyville and the combined Galveston Bay refinery complexes have each demonstrated crude unit run rate capacity of nearly 600,000 barrels per day.

I'm also pleased to report that our Canton refinery has received the VPP Star certification from OSHA, joining in an elite group of companies that demonstrate exemplary occupational safety and health protection. Canton joins MPC's other certified VPP Star Sites including Garyville, Robinson, Detroit and Texas City refineries.

And underscores our unshakable commitment to health, safety and environmental stewardship throughout our operations. As we enter the second half of the year, I also want to provide some observations of the macro environment impacting the business. We believe the global and U.S.

macro picture remains solid and expect the good underlying economic growth will continue to support strong demand for our products, as inventory levels are worked down in the second half of this year and into 2018. Export markets, which have been important to the high utilization of our refineries are expected to remain robust.

Exports remain a fundamental component in our refined products distribution and we continue to invest our support additional export capacity in our system. We think the prospects for more balanced supply and demand environment going forward will be supported what the global refined product markets we serve.

With that, let me turn the call over to Tim to walk through the financial results for the first quarter..

Thanks, Gary. Slide 5 provides earnings on both an absolute and per share basis. For the second quarter of 2017, MPC reported earnings of $515 million or $1 per diluted share.

As Gary mentioned, results included net charge of $0.03 per diluted share related to estimated losses for litigation matters, partially offset by Sandpiper asset liquidation gains.

The $515 million compares to last year's $801 million or a $1.51 per diluted share, which included a net benefit of $0.44 per diluted share related to the reversal of the lower cost or market inventory valuation reserve offset by an impairment of one of MPLX's equity investments.

The bridge on slide 6 shows the change in earnings by segment over the second quarter last year. The walk highlights the decrease in Refining & Marketing offset to some extent by increases in earnings from Speedway and Midstream.

The variance for both Refining & Marketing and Speedway segments include the absence of the $385 million pre-tax benefit to reverse the company's lower cost-to-market inventory valuation reserve reflected in the second quarter of 2016.

$360 million of this benefit in 2016 was included in the Refining & Marketing segment, and $25 million was reflected in the Speedway segment. The $79 million favorable Midstream variance was primarily due to MPLX's record processing and fractionation volumes as compared to last year.

The $51 million favorable variance shown in the items not allocated segments bar on the walk is due to the absence of an impairment of the equity method investment recorded in the second quarter of 2016, and our share of the gain on asset liquidations related to our investment in the cancelled Sandpiper pipeline project, offset by estimated losses related to ongoing litigation matters.

Quarterly results were also impacted by $131 million of lower income taxes and $109 million of increased allocation of higher MPLX earnings to the publicly held units in the partnership; shown here is the negative variance in non-controlling interest. Moving to slide 7.

Our Refining & Marketing segment reported earnings of $562 million in the second quarter compared to approximately $1 billion in the same quarter last year. Looking at our key market metrics, an increase in the LLS-based blended crack spread had a $374 million favorable impact to segment results primarily due to higher U.S. Gulf Coast crack spread.

The LLS-based blended crack spread increased from $7.66 per barrel in 2016 to $9.18 per barrel in the second quarter of this year. This increase was offset by several unfavorable impacts during the quarter. First, higher RIN prices produced a $70 million unfavorable RIN/CBOB crack adjustment.

This increase in cost was considered in our pricing decision and passed on to consumers, thus an equivalent offset resides in the product portion of our other gross margin. As a reminder and consistent with this treatment, we view the LLS crack and RIN/CBOB crack adjustment together as an effective realized crack spread.

We could have simply reflected a $304 million positive crack spread, but are showing them separately here given the desire to provide visibility to both factors on an absolute basis. Second, a narrowing sweet/sour differential had a negative impact on earnings of approximately $93 million versus last year.

The differential tightened from $691 per barrel in the second quarter of 2016 to $548 per barrel in 2017. Third, a narrowing contango effect, shown in the market structure column of the walk, resulted in the $115 million unfavorable variance.

This is effectively a smaller adjustment of the crude acquisition costs versus the prompt crude prices used in the benchmark crack. Lastly, we experienced a decrease of $223 million in other gross margin in the segment.

Higher actual crude oil and feedstock acquisition costs versus our benchmark basket resulted in a $169 million negative crude variance in addition to a $65 million negative impact, primarily related to lower non-transportation product price realizations and higher purchase RIN costs in the quarter. Moving forward to the other segments.

Slide 8 provides Speedway segment results walk for the second quarter. As Gary mentioned, Speedway delivered record second quarter earnings of $239 million, up about $71 million after excluding the $21 million benefit from the LCM reversal in the second quarter I mentioned just a minute ago.

An increase in light product gross margin had a $31 million favorable impact as margins averaged $0.184 per gallon in the second quarter of 2017, up from $0.155 in 2016 on the nearly 1.5 billion gallons sold in the quarter. Merchandise margin also contributed $2 million favorable impact to segment income.

As a reminder, comparability of Speedway's results to prior year's second quarter was also affected by the transfer of Speedway's travel centers into the newly formed joined venture with Pilot called PFJ Southeast LLC in the fourth quarter of 2016.

Speedway's share of the results of operations from the joint venture is reflected in income from equity method investments and is shown in the other column of this walk, while prior quarter activity remains in light product margin, merchandise margin and other categories.

On a comparable basis, excluding the contribution of these travel centers, improvement in both light product margin and merchandise margin were higher than what is shown in the table.

Similarly, an increase in other income of $38 million includes Speedway's share of the results of the joint venture with Pilot Flying J as well as lower direct operating expenses resulting from the contribution of the centers.

So far in July, we have seen a roughly 2.1% decrease in same-store gasoline sales compared to last July as we continuously strive to optimize total gasoline contributions between volume and margin as market conditions adjust. Slide 9 provides the changes in the Midstream segment of $79 million year-over-year.

The $62 million favorable variance for MPLX was primarily due to record processing and fractionation volumes as compared to last year. Results were also favorably impacted by changes in natural gas and NGL prices, earnings from the recently acquired Ozark Pipeline system, as well as increased earnings from pipeline equity method investments.

Slide 10 provides a significant elements of changes in our consolidated cash position for the second quarter. Cash at the end of the quarter was nearly $1.5 billion, a decrease of approximately $700 million from the end of the first quarter. Core operating cash flow before changes in working capital was about $1 billion source of cash.

Working capital was a $141 million use of cash in the quarter, primarily due to an increase in crude inventories and a decrease in accounts payable and accrued liabilities. Cash flow reflects net proceeds of $286 million from organic equity issuances by MPLX through its ATM program to fund its organic capital program.

Return of capital to shareholders via dividends and share purchases was $936 million in the quarter. As Gary referenced, after tax cash proceeds from the first quarter dropdown had been substantially returned via share repurchase activity including the 750 million of share purchase in the quarter during the year-to-date total to $1.2 billion.

Yesterday, the MPC Board of Directors announced an 11% increase in the quarterly dividend up to $0.40 per share. With this increase, MPC has achieved a 26% annual compound growth rate in the dividend since becoming an independent company six years ago demonstrating continued confidence in the long-term cash generation of the business.

Going forward, we expect cash proceeds from the dropdowns and ongoing LP distributions to fund substantial ongoing return of capital to shareholders, all conducted with the continued focus on maintaining an investment grade credit profile at both MPC and MPLX.

Slide 11 provides an overview of our capitalization and financial profile at the end of the quarter. We had $12.6 billion of total consolidated debt including $6.7 billion of debt at MPLX.

Total consolidated debt-to-book capitalization was about 38% and represented 2.8 times last 12 months adjusted EBITDA on a consolidated basis or about two times when excluding MPLX.

We continue to show debt to EBITDA excluding MPLX as we think it's more useful to show the independent capital structures given the effect of the relatively higher leverage of the growing partnership on MPC's consolidated metrics and our approach to managing capitalization separately.

We're also pleased that in July, the complete replaced its existing bank revolving credit facilities expiring in July 2020 with a new five-year $2.5 billion bank revolving credit facility expiring in July 2022 and a new 364-day $1 billion bank revolving credit facility expiring in July of 2018.

Slide 12 provides updated outlook information on key operating metrics for MPC for the third quarter of 2017. We're expecting throughput volumes of 1.925 million barrels per day with some planned maintenance in the Midwest. Total direct operating costs are expected to be $7.10 per barrel.

Other manufacturing cost on a per barrel basis are expected to be slightly higher than 2016, primarily due to higher forecast and natural gas prices in the same period last year. We expect to see an advantage to process lighter crudes in the third quarter driven by nearly 3,000 differentials.

Sour crude is expected to make up 54% of our crude oil throughput in the third quarter. Projected third quarter – I'm sorry – estimated percentage of WTI price crude will be 24%. Projected third quarter corporate and other unallocated items are estimated to be at about €80 million. With that, let me turn the call back to Lisa..

Thanks, Tim. As we open the call for questions, we ask that you limit yourself to one question and a follow-up. If time permits, we will re-prompt for additional questions. With that, we will now open the call to questions.

Elon?.

Thank you. We will now begin the question-and-answer session. Our first question today is from Neil Mehta from Goldman Sachs..

Good morning, team..

Hi, Neil..

Gary, why don't you start off with your latest thinking around the wholesale segment, and just the MLP eligibility of those assets whether PLR is required, and any comments there?.

Yes. We've -- I think pretty well exhausted the work on that question. We're still waiting on a well opinion, but we've become comfortable that we do not need a PLR from the IRS now going forward. Tim, you have anything else to add to that..

Yeah. No. I think that's right, Neil. I think the only other comment is just that the new treasury regulations, which we've been through pretty extensively and with outside counsel all suggested that, our structure works as Gary said, with the caveat that those regulations don't go effective until January 1, 2018.

But as Gary said, our comfort level is high that the structure we have contemplated is going to work in all the qualifying income for the partnership..

That's great. Follow-up question and this is for both you, Tim and Gary, it's just thoughts on other gross margin, it's always a tricky thing to model, but any thoughts in terms of the key drivers in the quarter? And a related question is just on the sweet/sour differential.

Gary, any thoughts you have there in terms of whether this is going to be sustainably lower or to how you see that playing out over the next six months to a year?.

Well, Neil, the – we've tried to provide a little bit more color with regard to what the impacts have been in an actual space, so I think trying to get into a forecasting or predictive mode with regard to what we're going to see on product price realizations is very difficult, depending on the markets.

As we highlighted here for second quarter, big driver was non-transportation fuels in terms of the product realizations and on the crude side, again some higher crude costs than what we see in the benchmark, but I'm not sure we can give any clear guidance as to exactly what will impact that on a going-forward basis..

Yes, I'm going to have Mike Palmer here, Neil, to talk about the sweet/sour differential..

Okay..

Yeah, Neil. I guess what I would say on that is obviously we've talked about this narrowing sweet/sour differential, if you watch the LLS March spread, that it's been coming together for some months now. And I think in the short term that we would expect to see – to continue to see the sweet/sour differential narrow.

But on the other side, I think that we do believe that rebalancing is occurring already, and as that does occur, I think we are going to see more foreign sour come back into the market, which again will allow the sweet/sour to widen.

The other thing I would say is that, if you've been watching the Canadian heavy closely, the Canadian heavy was impacted a little earlier by planned maintenance, unplanned maintenance in the fields. It was also impacted by the Syncrude plant that had a fire that reduced the amount of synthetic available for blending, and it hurt the synthetic.

But as we look forward toward the end of the year, or perhaps early in 2018, there is additional heavy production coming online of the Four Hills project. So we think there will be additional heavy Canadian that will help the spreads as well. So a little longer term, we're pretty constructive on the sweet/sour spreads..

Thanks, guys..

Thank you. Our next question is from Brad Heffern from RBC Capital Markets..

Good morning, everyone. Gary, I was just wondering if you could – Hi. I was just wondering if you could give a little more color on the Speedway review process, I think the original guidance was around mid-year for the results, and then it became late summer, and now it's by the end of the third quarter.

Is there anything that's taking longer as part of that review process?.

Not really, Brad, in fact, I look at late summer and the third quarter has been pretty close to being equal. But anyway, this is not just a simple question on – I've had a lot of questions on the IRS, the PLR, if that's the gating item. The analysis goes much, much deeper than the IRS question and the supply agreement.

We continue to make a very good progress and very detailed analysis, but you have to have a vision where, how the company can compete and what its balance sheet would look like with further steps down the road.

So we're being very methodical in our review and we believe that combined with our board strategic session in September, really will be the combination of that analysis and we'll report then..

Okay. Thanks for that. And then, there have been some press reports talking about a potential reversal of LOOP or not necessarily a reversal but just allowing exports through LOOP.

Is that something that you guys are willing to comment on and is that a meaningful EBITDA potential for MPC?.

Mike?.

Yeah, yes, Brad. It has got some trade press of late. And certainly, from an export standpoint, LOOP does have a unique opportunity and that there are a deepwater port, they've got plenty of storage. They have relatively low investment to allow exports to actually occur, so they are very interested in moving forward with that.

You know, MPC is the shipper, I guess the one thing that we would say is that we recognize the opportunity. The one thing that we're – that we want to watch is that again the primary responsibility of LOOP is to be an import facility and that's extremely important for us in our refineries.

So while we see this opportunity, what we want to do is, we want to work with LOOP to make sure that there is no conflict between its responsibility as an import facility and one as an export facility..

Okay, thanks..

Thank you. Our next question is from the Paul Cheng from Barclays..

Hey, guys, good morning..

Hey, Paul..

I think, this is for both – for Tim.

Tim, on a going-forward basis upon the completion of the job done and whatever you decide on Speedway, how will it impact your thinking of the balance sheet and liquidity requirement? Is that changing given altogether that you will have job close to about $2 billion of the EBITDA into the MPLX, so how that may impact one way or the other in terms of your balance sheet and liquidity thinking?.

Well, I think both developments would be certainly important to how we think about capitalization and the amount of leverage and liquidity that the business needs to maintain. We've certainly been actively involved in the planning around what things will look like sort of pro forma for all the drops, the amount of leverage that MPC would sustain.

And we've talked about, I mentioned even as part of my remarks that we really view the capital structures independently and think that the consolidated metrics become less useful, but that becomes very important as the drop-downs play out and obviously a lot of earnings move over to the partnership, which is going to be more leverage.

So, there is undoubtedly consideration of what the capital structure looks like with regard to the drop themselves.

On the Speedway considerations, as Gary said, there is a multitude of considerations on not only what a spun entity looks like, what the remaining MPC would like, and it's hard to imagine that if there were some separation there that there wouldn't be some adjustment to the amount of leverage that MPC would sustain.

But that is very clearly part of the overall analysis and assessment that's going on. I can't tell you exactly where we would target it, but I think it's pretty clear that the amount of leverage that the business without Speedway would be lower than what we could sustain in its current configuration..

Sure.

Just wondering if there is any range of rates or any metric that you can provide preliminary?.

Again, not at this time. I think, as Gary said, as the special committee completes its work, makes its recommendation to the Board, to the extent that it's helpful for people to understand how we thought about it, we will share any and all thoughts about what things could look like.

But I don't think there is anything at this point that I think would be particularly instructive..

The second question in on the second quarter, are we funding margin capture rate? Should we assume that is a reasonable quarter as a baseline or that has some unique circumstances that we need to adjust on a going forward basis? Because I was maybe surprised given that from the first to the second quarter, (31:05) has come down a lot.

So I would have thought your margin capture rate comparing to their first quarter will improve a lot, but it doesn't seems that has been the case..

Yeah, Paul. Again, and I think this is comparable to the question that Neil had asked on sort of other gross margin and product price realizations. Again, also in the second quarter from – on a sequential basis we are about flat.

I don't know that there's anything unique around realizations or effective capture in second quarter that we'd highlight necessarily. So at the same time, I'm not sure I want to call it a normalized quarter either.

But nothing I think that we would call out specifically that is an unusual item that occurred in the second quarter that we would not expect on a run rate basis..

All right. Thank you..

Thank you. Our next question is from Chi Chow from Tudor, Pickering, Holt & Company..

Great. Thank you. Gary, just wondering if you had any thoughts on the situation in Venezuela and do you believe that U.S.

ought to place sanctions on PDVSA, and what impact could that have on the company's crude imports or probably more importantly product export markets?.

Well, let me first ask Mike to comment on what he sees as far as the flow of crude from Venezuela and then I'll comment on the sanctions question..

Yes, Chi. So, obviously the Venezuelan crude coming into the Gulf Coast is important. We participate in that; we certainly buy heavy spot cargos from Venezuela during most months. So, yeah, if that crude was no longer available because of sanctions then we would have to replace that crude from somewhere else.

And while we've had no difficulty replacing the crude that we've lost, that OPEC has cut, again, as we pointed out, I mean the sour crude there's not as much coming into the Gulf as there had been prior to the OPEC cuts, so it would not be favorable..

And this is very hard, Chi, for us to comment on whether or not the government might put sanctions on Venezuela; I don't want to speculate on that. I'll just share that it appears to us that there's tremendous upset and turmoil in the country. We're concerned about the overall heavy supply.

And when you look at the macro in the world, the global supply demand balance and the rapid retreat of inventory here from the first quarter to the second quarter, it appears as though there's going to continue to be some swings of where this crude ends up – its final destination is in the world.

So if there were sanctions by the U.S., I think clearly this crude is going to find the home in other parts of the world, and probably some other heavy crudes would make its way back into the U.S., but more than likely they would be a little more expensive in doing so. But I don't want to speculate on sanctions of Venezuela..

Okay. So I guess Gary what you're saying is that the maybe the heavier crude differential specifically in the U.S.

would tighten further, but you still have – but that may not be the case globally outside the U.S.?.

It may not be the case, I mean, it's taking back the last two years we saw very little heavy crude coming out of Middle East into the U.S. and some of that is changing here recently as different grades are being made available to into different parts of the world.

So it's – their crude will find a home, if there is – if there are sanctions put on them, it will find a home. And I would say if there is any change in the spreads, it is probably going to be short-lived..

Okay.

The second question here, it looks like this PAD 2 to PAD 1 product flow starting to take shape here in the Laurel Pipeline reversal is gaining some clarity, can you discuss anything regarding your volume commitment on that line and whether the company is also pursuing delivering batch product volumes on Mariner East II?.

Yes. We don't want to get in Chi into any commitments if any that we are going to make on Laurel at this time. We think it makes a tremendous sense to reverse that pipeline and to head east, but at this time we can't speak to any commitments..

Are you have anything specific on Mariner East II batching products as well as NGLs in that line?.

Mike Hennigan is here, let me ask Mike to – he would able to answer that on batching product?.

Yeah. One of the things that energy transport did when they offered Mariner East II was to provide a suite of options as far as shippers to evaluate. The main focus has always been the NGL side of the bucket, but they have offered refined product activity as well.

So that's something that we'll have to evaluate going forward as well as some of our other options..

Okay, great. Thanks, Mike. Welcome to the board by the way..

Thank you..

Thank you. Our next question is from Phil Gresh from JPMorgan..

Hey, good morning. I'll start with a question on Speedway. Tim, you talked about the volumes in July, down 2%, Wondering how that would compare to the overall market, just trying to get an assessment of what we are really seeing out there.

And then secondarily, very strong merchandise margins in the quarter, and wondering what drove that, and how you think about the sustainability?.

Well, Phil, we'll have Tony answer the merchandise. Just let me say while we are down 2% here in this month, what you have to set back and look at is, Speedway and mainly the markets in which they operate, they are the leader in the market.

We've had an upswing in product cost, because of the increase in food cost, therefore it's our responsibility to get that price to the market you know and they lead the market to be able to try to recover those incremental cost.

So in terms of a rapid increase in food prices, which we have seen over the last few weeks, you know, you're going to see an immediate response of the street, as we try to move that cost to the street.

But you know once things equalize that volume comes back to us, because we clearly are the consumer's choice, first choice to buy our products in a normal market. But let me have Tony talk about merchandise and the merchandise margins..

Yeah, there is really a couple of things that's happening inside the store. One is, you know, we continue to focus on high growth, high margin opportunities in the store like food service, like a lot of our general merchandise categories, things that you'd buy in the cold walls.

And so that definitely has a positive effect as we grow our sales we're going to be growing our merchandise margin right along with it. The other factor is that cigarettes continue to be in decline, and cigarettes carry the lowest gross margin inside of our stores.

So you're getting a – we're getting a benefit also from the decline, the overall weighting in margin from the decline in cigarettes and the growth in the higher margin other items that I mentioned..

Got it. Okay. Second question is just the commentary on the buyback. So I just want to clarify. So, it sounds like the buybacks that were completed in the first half of the year largely tie out with the proceeds from the dropdowns that have occurred.

So as we look at the second half of the year and the timing and the amount of the dropdowns being a bit smaller and more pushed likely into early 2018 that we should see probably commensurate slowing the buybacks, really just a timing thing, but just clarify..

Yeah. Phil, I mean, certainly for the $1.2 billion that's been bought back so far this year, I mean you can sort of draw the line between that and the after-tax proceeds from the drop.

So, I think dropdowns will continue, as it has been the case for since we spun the company, we are always looking at what the liquidity position of the company is, and again to the extent that we've got cash flow beyond the needs to support the investment and working capital and short-term needs of the business, our first inclination is to return in the form of share purchase.

So share purchase will continue, they will flex and flow based on the needs of the business at the time, but you will expect to see more, and the pace will adjust as we go forward..

And Tim, just to clarify maybe with Paul's question. The current level of leverage around 2.0 at the parent.

I mean, that that's generally your comfort level, is that correct, or would you be willing to go higher in the current state?.

Yeah. In think in the current configuration, we're about where we think is appropriate given our desire to maintain investment grade credit profile. So we're -- it's I think we're within the ballpark of where we think an appropriate leverage should be for how we sit today..

Okay. Thanks..

You're welcome..

Thank you. Our next question is from Doug Leggate from Bank of America Merrill Lynch..

Thanks. Good morning, everyone and good morning, Gary..

Doug, I've not talked to you for ages, where've you been?.

Nice to talk to you Gary. So my question is kind of going about to the post dropdown outlook for the refining business. And what I'm really thinking here is given the scale of the EBITDA drop when you're done, I have to assume that the sustaining capital for the refining business dropped somewhat as well as those obligations move to the MLP.

Can you give us some idea what that change in sustaining capital is going to look like in terms of the as we think about the free cash flow coming out of refining business? And I've got a follow-up, please..

So, Doug, this is Don, you're right. There will be some sustaining capital or maintenance capital that will flow to MPLX versus being in the refining business.

So if you think about our forecast this year for MPLX that maintenance capital number is about $150 million, some of that is due to new acquisition, so we acquired the Ozark Pipeline that has a component, but a big proportion of that $150 million would be coming out of the refining business and going into MPLX..

That's the number I was looking for. Thank you, Don.

Gary, my follow-up, if I may and I realize this is a little sensitive given the timing but I think you've personally been pretty clear about your views on how you saw Speedway and again I apologize for this one, because it is a bit sensitive, but obviously the activist is going to reduce their position a bit as far as we can tell.

It looks like maybe your review had won the day, but I'm just curious if you could give us your updated thoughts. Do you still feel that the benefits of integration of Speedway outweigh the potential benefits of separation? Again, I realize, you might be limited in what you can say, and I'll leave it there. Thanks..

Yes, Doug. I understand your question very clearly, but I'm going to leave the answer to that to – in September, when we finish the work and we will announce to the market, we will call a meeting and announce to the market what our decision is. But it's too early to provide any direction either way.

We've been very clear in all the presentations we've made, all the investor presentations that this is a very fulsome review. And when we make that decision, we don't want any investor to lean one way or the other. And I certainly am not going to provide any direction one way or the other until we finish up.

As I said, we continue to meet with the special committee, they've asked us for some more work to complete that analysis. And we feel very comfortable here at late summer that we'll have that work done and we'll provide our conclusion..

I fully respect your position Gary, I understand the sensitivity. So maybe just clarify one thing for me. I think there may have been some confusion in the market on this.

Are you pursuing a PLR on Speedway as well?.

Tim can handle that..

Yeah, Doug. We are – I mean, this is again part of the information that is important in terms of the overall assessment. So we are in the process, we've had some information request back and forth.

And again that will be a component of the overall assessment, the nature of the relationship, they could be maintained between the entities and certainly an important part that we want to understand what the book ends are. So we'll continue to do that process, and the feedback learned, and garnered from that process will help to inform the view.

But again, as Gary mentioned earlier, that's not the hinge points, that's an important consideration for sure, but there is multitude of factors that going to the assessment.

But we are in a process to answer the question, and an active process of that, again there is we've had information sharing and request back and forth, and that will become part of the overall analysis and set made as the special committee completes its work and makes its recommendation to the full board..

Appreciate the answers, guys. Thank you..

Thank you. Our next question is from Spiro Dounis from UBS..

Hey, good morning, everyone. Thanks for taking the question. I just wanted to ask about the product mix, specifically around gasoline, it looks like last quarter percentage of gasoline as part of the total came down a bit.

Just wondering, if that's how we should model it going forward, if this is a one-time thing? And generally, as you look out to the industry, do you think other refiners are doing the same thing, which maybe explain why we're seeing some pretty good gasoline drops?.

Ray, do you have any comment on that?.

Well, as far as the gasoline ratio of our production, we continue to look at the price at daily, weekly and adjust accordingly.

We're configured the swing between gasoline and distillate?.

Spiro, I'd look at gasoline, I'm glad you asked the question, because I want to get this comment out. If you look at bulk light products gasoline and distillate days of supply, we are now very comfortably within the five-year average, and in both coming close to the low end of the five-year average.

And if you look at it globally, the refined products globally are pretty much at the lower end of the five-year average. Whereas in crude, you've seen a tremendous drop first quarter to second quarter, 50 million-barrel drop in crude, and we expect that to continue.

We have pretty good optics of where the crude market is going over the next 60 days to 90 days, and we're expecting to continue to see those inventories drop. As those inventories drop on the crude side, I think it's also going to affect the make on the refined products side. The key I think refined product to watch is the distillate days of supply.

As we come into the third quarter, the distillate days of supply last year were very high in the industry, and we are at one of the lower tranches of inventory right now, and I think that is going to bolster both distillate and should drag gasoline along with it, albeit gasoline is at pretty close to the low end of the five-year average as well.

So, as Ray said, every day we make that decision every day on whether we maximize gasoline, maximize distillate. We can move in the range of about 8% has generally been our history, one product to the other, and we'll just see where inventories by region stand.

And the other thing, the question I had earlier on Venezuela and exports, the gasoline export market continues to pick up, which is helping the gasoline inventory as we export it into other regions of the world; and all those things we take into discussion when we go forward..

Got it. And actually that segues into my next question. Just in terms of the export market, you've obviously highlighted pretty substantial export capacity in the past. But just wondering if there's any interest in maybe moving beyond the U.S. border either via retail or wholesale. Obviously, it's in the headline that some of your peers are doing that.

Just if there's a first-mover advantage there, or it's just sort of fine where you're at for now?.

Yeah. Where we're positioned in our Galveston Bay refinery, it gives us a great position to be able to supply the new market that is very positive of course as the supply into Mexico. We do not have any logistics advantage to the western side of the country of Mexico, but we certainly do coming in from the Gulf side.

Yes, we are looking at should we get into the wholesale distribution, and whether or not we should even take some of our retail marks down into Mexico, we're considering that very strongly. And as we go forward right now, we think our best investment has been to export into the Gulf side of Mexico, and we've been very successful in doing that.

And the margins that we've been able to pick up certainly have been a benefit to the other areas in the world where we sell our product..

Got it. Really appreciate the color. Thanks, everyone..

Thank you..

Thank you. Our next question is from Faisel Khan from Citigroup..

Yeah. Thanks, good morning. Just a couple of follow-ups..

Hey, Faisel..

Hi, Gary.

On exports, can you just – I think you guys have mentioned off late, I didn't see the numbers, but in terms of gasoline and diesel, what did you do and sort of where is the primary strength in terms of the exports when you guys push that product out of the country?.

Well, Mike can answer that..

Yeah. I think the number that we mentioned, Faisel, was the 313,000 barrels a day of total exports. And, yeah, we continue to see very robust demand for both gasoline and for diesel fuel. Latin America tends to be the biggest market for us; that's where the gasoline goes. Mexico, as Gary had mentioned early, Mexico has been buying a lot of gasoline.

In fact, they had a refinery problem that even increased the volume that they needed to bring in. But we've also been successful in exporting diesel fuel to Europe. And many times this is on larger ships that gives them a bit of an advantage. So, yeah, the export market continues to be very robust..

Okay. Great. And then just on the buyback program.

How much is remaining under your current buyback program and you guys have to go back to the board to re-up that number at some point in time?.

Yeah, Faisel, we actually did and we announced in May that we had gotten additional $3 billion reauthorized from the board, so we're well over $4 billion of board authorization to do buybacks.

And again, that was done, we shared this at the time that we announced it really to just enable us to execute the plan that's been laid out without need of going back to the board. So we've got all the capacity we need there..

Okay. Great. Thanks..

Thank you. Our next question is from Justin Jenkins from Raymond James..

Great. Thanks. Good morning, everybody.

I guess maybe starting with the follow up to Brad's question on LOOP, but does adding export capability there bring any other opportunity for organic pipeline growth? And does it do anything to change the equation and all with the Capline?.

Well, LOOP, if you go south to north, that is the main artery that feeds Capline, and it makes a lot of sense long term to be able to reverse Capline and be able to take other cruise down into, down to LOOP and possibly for export down the road.

I think before you look at export, if you'd ever reverse Capline, the first thing that we do, we'll supply the Eastern Gulf refineries from Capline, if you would ever reverse it, that would be the first and most important thing to us.

If you look at what LOOP is considering, basically, it's a very low investment to be able to reverse that pipeline, a few valves, and a few incremental attachments to the buoys to import hoses to be able to put export facilities on the buoys to be able to end up loaded ships.

But I don't see anything at this time as far as incremental pipelines other than the possibilities someday to reverse Capline..

Great. I appreciate that, Gary. And then maybe on the capital allocation front, as my follow-up.

With the dividend increase yesterday things like the plans, healthy and ratable yearly increase, but is there a scenario where some big distribution number coming back from MPLX into MPC, starting in 2018, especially, is there a scenario where we could maybe match the MPC total payout with what's received from MPLX?.

Well, Justin, clearly, we're going to reevaluate dividend policy relative to all of the cash flows that would be available to MPC at any point in time.

So I mean, upon completion of the GP economic interest sale to MPLX and the take back of units, you're looking at an LP distribution stream back in MPC that is clearly going to factor into our thinking around sustainable growth to the MPC-based dividend.

So that, I think the quick answer to your question is, it is undeniably going to be part of our overall assessment and we'll take a look at that at the appropriate time..

Perfect, I appreciate it guys..

Thank you and we do have time for one final question. Our last question today is from Corey Goldman from Jefferies..

Hey, guys. Thanks for squeezing me in here, and I will keep it just a one question here. So it's kind of just a follow-up to Doug's question on Speedway. And I think last call, Gary you were talking about how the drops in the IDR exchange to MPLX were being viewed kind of as a separate matter, pertaining to a possible Speedway separation.

So I was just hoping to get some color in terms of how we're finding this view in that process. And with that the insight about $1.2 billion of turnaround of maintenance expense has occurred over the trailing 12 months.

So I don't know if you can comment whether or not that review is taken to consideration, just the accounting treatment and the differences between MPC and some of its peers, any commentary on that will be appreciated?.

I'm sorry, Corey, but I don't understand your question..

When looking at kind of a possible Speedway separation, do you view this stub refining business, if Speedway were to be separated, as inclusive or exclusive of turnaround and maintenance expense, just given how that treatment in accounting kind of throws off MPC's EBITDA versus its peers, I just don't know how that committee or you guys were viewing that..

Well, if we were to spin-off Speedway, the RemainCo would be refining in midstream and refining would still have to have turnaround on maintenance cost and that would be definitely within the refining side of the business..

Do you view that like the multiple of that?.

Corey, this is Don, I mean. I think that yeah, we are primarily focused on cash flow versus sort of the accounting treatment. We believe that there are some of our competitors that capitalize cost versus we expense those cost, but at the end of the day, the analysis is being done by us by the special committee.

There is a focus on the cash flow generation capability of the entities, all the entities involved in MPC and the different scenarios that Mike developed if there were a Speedway separation or other actions taken.

So, I would say we are not focused sort of on a EBITDA multiple, because one EBITDA has turnaround cost on it, one does not, we're much more focused on sort of the cash flow generation, the capabilities, the leverage metrics that you'd want to maintain that type of thing..

Well that's it, that's really helpful guys. Thanks so much..

Thank you, Corey..

Thank you. And now, I'll turn the call back to Lisa for closing remarks..

Thank you for your interest in Marathon Petroleum Corporation. Should you have additional questions or would like clarification on the topics discussed this morning, Denice Myers, Doug Wendt and I will be available to take your calls. Thank you for joining us this morning. Have a great day..

Thank you. And this does conclude today's conference. You may disconnect at this time..