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

Phil M. Gresh - JPMorgan Securities LLC Chi Chow - Tudor, Pickering, Holt & Co. Securities, Inc. Paul Cheng - Barclays Capital, Inc. Brad Heffern - RBC Capital Markets LLC Faisel H. Khan - Citigroup Global Markets, Inc. Corey Goldman - Jefferies LLC Paul Sankey - Wolfe Research LLC Doug Leggate - Bank of America – Merrill Lynch Spiro M.

Dounis - UBS Securities LLC Justin S. Jenkins - Raymond James & Associates, Inc. Ryan Todd - Deutsche Bank Securities, Inc..

Welcome to the MPC's Third 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..

Welcome to Marathon Petroleum Corporation's third 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; Mike Hennigan, President of the general partner of MPLX 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..

Thank you, Lisa, and good morning to everyone. If you please turn to slide 3. Earlier today, we reported strong financial and operational performance across the business with third quarter earnings of $903 million, illustrating the substantial earnings power of our integrated business model.

An important part of our success this quarter was our employees and their dedication to operate our facilities safely and reliably throughout the quarter, and notably under the extremely challenging weather conditions during the recent hurricanes. This focus enabled us to meet the needs of our customers and the market at a critical time.

During Hurricane Harvey, our system did not experience material flooding or damage, but we did operate at a reduced rate at our Galveston Bay Refinery for a few days to enable pipelines, marine vessels and other logistics assets to resume normal operation.

After the storm passed, our team resumed normal refinery production rates rapidly and restarted critical logistics infrastructure, positioning MPC as the first to resume dock shipments to a market in need of supply for recovery efforts.

Also to help supply the markets' needs, we temporarily delayed turnaround activity at our Catlettsburg, Garyville and Robinson refineries. Shortly after Harvey, we were preparing for the landfall of Hurricane Irma.

In preparation for the evacuation of Florida's residents, our logistics team focused on transporting as much fuel as possible to Speedway and Marathon brand locations along the evacuation route, utilizing our trucks, barges, as well as additional third-party assets.

We staged fuel for resupply in strategic locations and we were well-positioned to supply the Florida market as soon it was safe to operate. Within three days of the storm's passing, 98% of our approximately 240 stores – Speedway stores in Florida were operating as were all four of our live product terminals.

We were pleased to be recognized by the state and government officials for our efforts in getting supply into these critical markets. In both hurricanes, our response and recovery efforts went beyond our fence line. MPC along with our employees donated to local municipalities and charities in both Texas and Florida to aid with storm recovery.

MPC volunteers also spent countless hours helping their fellow employees and other flood victims. To our employees, I'm grateful for your contributions to this critical work, and I'm proud of our role in manufacturing and transporting and marketing fuels and other products that millions of people use to make their lives better every day.

Turning to our strategic actions designed to further enhance shareholder value, we have been sharply focused on executing our plan.

Since the beginning of the year, including the third quarter dropdown, we have contributed assets to MPLX with a combined transaction value of $3.065 billion, resulting in consideration of $1.7 billion in after-tax cash proceeds and 32 million MPLX units.

In total for the year, we have returned $2.2 billion to our shareholders, including buybacks and dividends. We expect to repurchase at least $550 million of shares in the fourth quarter. As part of the strategic actions, a full thorough review of Speedway was completed.

As we reported in early September, our board was unanimous in its conclusion that the greatest long-term value for shareholders is optimized with Speedway remaining a fully integrated business within MPC.

Having a strong retail business in Speedway is a valuable differentiator for MPC, and we see significant opportunities for maximizing value creation at Speedway. This will be done by continuing to deliver on past organic investment and through additional investments to grow the business. Looking forward, our strategic plan remains on track.

We have offered the remaining identified dropdown to MPLX and the offer is currently under review by the board's independent conflicts committee. This last dropdown includes refining logistics assets and fuels distribution services, which are projected to generate $1 billion in annual EBITDA.

We expect this dropdown to close in the first quarter of 2018, and we expect additional return of capital to shareholders with the after-tax cash proceeds, consistent with maintaining our investment grade credit profile.

Once the terms of the dropdown are finalized, MPC will immediately initiate the offer of its GP economic interests, including its IDR rights to the partnership in exchange for newly issued LP common units. Both transactions would then close in the first quarter.

The GP transaction will provide a clear valuation for MPC's GP economic interest and is intended to reduce MPLX's cost of capital for the long term. All transactions are subject to market and other conditions, as well as requisite approvals.

In summary, we remain committed to driving shareholder value through execution of our strategic actions and are confident that our value creation plan, combined with our proven operational excellence will further drive substantial long-term shareholder value.

With that, let me turn the call over to Don to cover additional highlights for the third quarter..

Thanks, Gary. We reported third quarter earnings of $903 million or $1.77 per diluted share, with solid operational and financial performance across the business despite the tough operating conditions Gary mentioned earlier. Our Midstream segment, which largely reflects the financial results of MPLX, reported record third quarter earnings.

The outstanding performance in the quarter and the increase over the third quarter of last year was primarily driven by record gathered, processed, and fractionated volumes. MPLX continues to build on its strong footprint in the Marcellus, Permian, and STACK shale plays.

Since the beginning of this year, the partnership has increased its processing capacity in the Northeast by 7%, bringing our total capacity in this region to approximately 5.8 billion cubic feet per day.

The partnership expects to add approximately 1.5 billion cubic feet per day of processing capacity in 2018, with approximately 1.2 billion in the Northeast, and approximately 300 million in the Southwest.

With visibility to strong growth opportunities through a robust portfolio of organic projects and strong distribution coverage, MPLX is well-positioned to be a source of significant long-term value for our investors. Our partnership's value proposition will be further enhanced once the exchange of MPC's GP economic interest is complete.

I would encourage you to listen in on the MPLX call at 11:00 A.M. this morning to hear additional color on the performance and opportunities for the partnership. On the retail side, Speedway continued to deliver top-tier operational and financial results in the quarter, driven by solid light product and merchandise gross margins.

This was despite the challenging weather conditions Gary mentioned earlier. Speedway's new joint venture with Pilot Flying J also favorably impacted results in the quarter.

Speedway's performance and its contribution to MPC is further validation of Speedway's importance to our integrated model, and its ability to generate substantial returns for our shareholders. We will continue to focus resources and capital to Speedway to drive additional value over the long term.

Turning to Refining & Marketing, we operated exceptionally well during the quarter, and we were able to capture strong crack spreads while meeting the needs of our customers and the market during the challenging weather conditions. Refinery throughputs exceeded 2 million barrels per day for the second consecutive quarter.

Additionally, we set multiple refinery production records during the quarter, including record crude throughput in the month of August. I'm also pleased to report that demand for exports continued to be strong in the third quarter.

Between Galveston Bay and Garyville, our exports averaged 331,000 barrels per day, up from second quarter of this year and third quarter of 2016. Exports remain a fundamental component in our refined products distribution and we continue to invest to support additional export capacity in our system.

We are encouraged by improving market fundamentals and prospects for a more balanced supply and demand environment going forward. U.S. demand remains robust in the fourth quarter and into 2018, led by distillate demand growth and a healthy U.S. economic environment. On a days of supply including exports basis, U.S.

gasoline and distillate inventories are now below their five-year averages, and should remain supportive for MPC's refining system as we look into next year. Meanwhile, global oil inventories have declined by more than 300 million barrels in 2017, and we see further progress toward rebalancing continuing into 2018.

With our fully integrated and flexible system, strategically located assets that provide excellent optionality, and a focus on operational excellence, we believe we have a sustainable long-term competitive advantage that drives real value for shareholders over the long term.

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

Thanks, Don. Slide 5 provides earnings on both an absolute and per share basis. For the third quarter of 2017, MPC reported earnings of $903 million or $1.77 per diluted share compared to last year's $145 million or $0.27 per diluted share.

Third quarter 2016 earnings included a $267 million impairment charge or $0.31 per diluted share related to our investment in the canceled Sandpiper Pipeline project. The bridge on slide 6 shows the change in earnings by segment over the third quarter last year.

The walk highlights the significant increase in Refining & Marketing, driven by higher LLS-based blended crack spreads and the ability to maintain high utilization rates. The benefits were partially offset by less favorable product price realizations versus the spot prices in the benchmark crack spread.

Speedway's results were comparable to last year and represented one of the best third quarters in Speedway's history, and I'll provide some additional color on that shortly. The $45 million favorable Midstream variance was primarily due to MPLX's record gathered, processed, and fractionated volumes as compared to last year.

The $251 million favorable variance shown in items not allocated on the walk is due to the absence of the non-cash impairment charge I referenced earlier related to Sandpiper.

Quarterly results were also impacted by $340 million of higher income taxes due to higher earnings and $27 million of allocation of higher MPLX earnings to the publicly held units in the partnership, shown here as a negative variance in non-controlling interests.

Moving to slide 7, our Refining & Marketing segment reported earnings of $1.1 billion in the third quarter, an $845 million increase compared to the same quarter last year.

Looking at our key market metrics, an increase in the LLS-based blended crack spread had a $923 million favorable impact to segment results, primarily due to higher crack spreads and the ability to maintain high refinery utilization rates. The LLS-based blended crack spread was $4.61 higher at $12.69 per barrel in the third quarter.

Strong crack spreads in the quarter were slightly offset by a $73 million unfavorable RIN/CBOB crack adjustment as a result of higher RIN prices. This increase in costs was considered in our pricing decisions and is reflected in the price paid by consumers. As a result, there's an offset in the product portion of 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 an $850 million positive crack spread, but are showing them here separately, given the desire to provide visibility to both factors.

Also, partially offsetting the strong crack spreads was the $207 million unfavorable product variance, as shown as a component of the other gross margin bar on the walk. This was primarily due to less favorable product price realizations versus the spot prices in the benchmark LLS 6-3-2-1 crack spread than was true in the third quarter last year.

Moving forward to the other segments, slide 8 provides the Speedway segment results walk compared to the same period last year. As Gary and Don mentioned, Speedway delivered strong earnings of $209 million and performed exceptionally well during and after Hurricane Irma to supply fuel, food and supplies to those in need.

As a reminder, comparability of Speedway's results to prior-year third quarter is also affected by the transfer of Speedway's travel centers into the newly formed joint venture with Pilot Flying J called PFJ Southeast LLC in the fourth quarter of 2016.

Speedway's share of the results from operations from the joint venture is reflected as 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.

During the quarter, a decrease in light product gross margin had a $20 million unfavorable impact. While Speedway sold nearly 1.5 billion gallons during the quarter, the volumes were down from 2016. Light product gross margin was $0.177 per gallon, a solid result amidst rising crude oil prices during the quarter.

Merchandise gross margin also contributed a $12 million unfavorable impact to segment income. Light product and merchandise gross margin on favorable variances are higher than they would have been due to the absence of contributions from the travel centers in 2017, as I already mentioned.

If the travel centers were still in, the net impact would be close to a push for the quarter.

The increase of $32 million shown in the other column of the walk includes Speedway's share of results from the joint venture with Pilot Flying J, as well as lower operating expenses due to the absence of operating expenses in 2017 from the contributed travel centers.

So far in October, we've seen a roughly 1.3% decrease in same-store gasoline sales volumes compared to last October. As a reminder, we continuously endeavor to optimize total gasoline contributions between volume and margin as market conditions adjust. So, we generally do not focus too much on either factor in isolation.

Slide 9 provides the changes in the Midstream segment income quarter-over-quarter. The $53 million favorable variance for MPLX was primarily due to record gathered, processed, and fractionated volumes as compared to last year.

MPLX results were also favorably impacted by earnings from its recently acquired Ozark Pipeline system and the first full quarter of its indirect interest in the Bakken Pipeline System.

The unfavorable variance of $13 million in equity and other affiliates reflects the decline in earnings from pipeline equity investments, primarily related to favorable inventory adjustment recorded in 2016.

As Don mentioned, we would encourage you to listen in on the MPLX call at 11:00 to get more color on the partnership's strong performance in the quarter. Slide 10 presents significant elements of changes to our consolidated cash position in the third quarter.

Cash at the end of the quarter was nearly $2.1 billion, an increase of approximately $600 million from the end of the second quarter. Core operating cash flow before changes to working capital was approximately $1.6 billion source of cash.

Working capital was a $320 million source of cash, primarily due to an increase in crude and refined products prices and the impact of the payment terms differentials. Net debt was $156 million source of cash, which reflects MPLX's use of its revolver during the quarter.

Cash flow reflects net proceeds of $39 million from MPLX's second quarter commitments through its ATM program that settled in the third quarter. No additional common units were issued in this program in the third quarter.

Looking forward, higher earnings and cash flow, combined with a disciplined approach to capital investments, have increased the partnership's capacity to fund organic growth with debt and retained cash and it substantially reduced the need to access the public markets.

Return of capital to shareholders via share repurchase and dividends was $654 million in the quarter.

As Gary referenced, after-tax cash proceeds from this year's dropdowns have been substantially returned via share repurchase activity, including the $452 million of share repurchases in the quarter, and the over $1.6 billion since the beginning of the year. In the fourth quarter, we expect share repurchases of at least $550 million.

Looking forward, we expect cash proceeds from the remaining dropdown to fund substantial return of capital to shareholders, all conducted with a 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 nearly $12.8 billion of total consolidated debt, including approximately $6.8 billion of debt owed by MPLX. Total consolidated debt represented 2.4 times last 12 months adjusted EBITDA on a consolidated basis, or about 1.6 times excluding MPLX.

We continue to show debt-to-EBITDA excluding MPLX as we think it is 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.

Going forward, we'll also provide debt-to-last 12's EBITDA adjusted excluding MPLX with credit for MPLX, MPLX's distribution to MPC, which we think are an appropriate component of MPC's debt service capabilities.

For the third quarter, the ratio on this basis was 1.4 times, although the difference between that ratio without the LP credit is going to grow as the drops are completed. The dropdowns are effectively converting EBITDA into MPLX LP distributions.

Given our control as the general partner, we believe these distributions are highly probable with very low risk of interruption. Over time, MPLX distribution to MPC will provide substantial and fundamental funding to MPC and an important component of MPC's discretionary free cash flow.

Slide 12 provides updated outlook information on key operating metrics for MPC for the fourth quarter of 2017. We are expecting throughput volumes of 1.925 million barrels per day with planned maintenance in the Midwest. Total direct operating costs are expected to be $7.35 per barrel.

We also expect to see an advantage to process lighter crudes in the fourth quarter driven by narrower sweet/sour differentials. Sour crude is estimated to make up 54% of our crude oil throughput for the quarter. The estimated percentage of WTI-priced crude is 26%.

Projected fourth quarter corporate and other unallocated items is estimated at $80 million. With that, let me turn the call back over to Lisa.

Lisa?.

Thanks, Tim. As we open the call for your questions, as a courtesy to all participants, 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 your questions..

Thank you. We will now begin the question-and-answer session. Our first question today is from Phil Gresh from JPMorgan..

Hey, good morning..

Good morning..

First question is just on capital allocation.

We've actually seen some additional C-store assets coming to market recently of decent size, I'm wondering is M&A something you would consider at this point, particularly on the retail side? And operationally, with where you're at, with the Hess integration and things like that, is this something that you'd think about?.

Yes, Phil. This is Gary. We of course think about it and we will do our homework on such opportunities. We've looked at some in the past until we've completed our thorough review of Speedway, we really were not going to act on anything, but it – retail, Midstream continues to be a very strong focus in our path going forward..

So if you were to look at something of a decent size, would that in any way influence your use of proceeds from the dropdowns, or, Tim, with the balance sheet, as you were describing, I mean, it does feel like there's room to be able to do both? Just curious how you think about that?.

Well, first of all, we've always said, we will always maintain an investment grade credit profile.

And then, it just depends on if something makes sense, how big it is – we illustrated that we certainly have the competency to be able to leapfrog markets like we did when we bought Hess when we went to the East Coast and we've been able to integrate the Hess assets very, very well into our system and exceed the synergies that we have planned.

So, it just depends, Phil, on what the size would be. But I don't expect that we will deviate from buying back shares that we've discussed in the past..

Got it. Okay.

And Gary, if I could just ask one last one, the Capline reversal, I was a bit surprised that the timing that it would take five years and that the capacity would only be 25% of the current northbound capacity, could you talk about that?.

Well, as you know, we have three owners in the system. And this was a – we're very pleased that we were able to get this open season out into the market, we're receiving very, very strong inbounds on consideration for this pipeline.

From an engineering and construction to reverse this pipeline, you are correct, it will not take five years, it's more from a commercial standpoint that the three owners are looking at this. And timing from, as I say, from a commercial side that we've put the open season out in the manner in which we did..

Got it. Okay. Thanks..

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

Great, thanks. Good morning. I guess couple of more questions on Capline.

Maybe it's obvious, but does floating the open season suggest that all three owners are in agreement at this point on repurposing the line? And could you just talk about the strategic rationale for the reversal from MPC standpoint? Are you focused primarily on incremental growth for Midstream or is this developing crude optionality for Garyville?.

Well, Chi, it's both. As you know, this pipeline flowing south to north has the capability depending on the crude slate of running 1 million to 1.2 million barrels per day. Has not – recently been running anywhere near that level.

But if you look at the Eastern Gulf, so everywhere from Baton Rouge refineries through Garyville, I think over to Mississippi, there is a strong desire to have a steady source of heavy crude. And so, the Eastern Gulf does not have that steady source coming down today. So, from a commercial standpoint, it's very important to MPC.

Secondly, it provides a good Midstream source as well and that, as you know, Capline is not yet a part of our MLP, and that's just because the commerciality of that pipeline as it sits today is certainly – is not at a level – at the value level that it should be.

So, as this is reversed down the road, we think that, that pipeline is going to be much more valuable, and then it will be an asset that will be considered for MPLX..

Okay.

To get incremental heavy Canadian barrel to Patoka, would you, MPC, consider locking up line space all the way down from Alberta on one of the trunk lines coming down either Enbridge or maybe KXL...?.

Yeah, let me ask Mike Palmer to handle that, Chi..

Okay..

Yeah, Chi. We don't think that there is going to be any sort of a problem in supplying a reverse Capline. Enbridge has numerous projects, for example, that will get completed in the not too distant future and we think that, that will certainly allow for supply into Capline.

And not only that, I mean, the Keystone base system can be used in order to supply heavy Canadian into reverse Capline as well. So, we – again, we think there's plenty of opportunities to move the heavy Canadian down Capline..

Okay. Thanks, Mike.

And maybe one final question here, does the Capline reversal tie into the potential of converting LOOP for exports, and what would be the targeted export capacity at LOOP that you've talked about in the past?.

Chi, I was just waiting for Mike to finish, and I was going to add in that you've got to think about Capline going beyond just St. James, that it eventually could go all the way back out to LOOP and it could reverse VLCCs out of loop. That study is underway.

Today, we have a capacity of around 800,000 barrels a day of unloading capacity, but that's off of – we have three buoys, and I think we're going to unload two ships simultaneously. But we're – we do not have that study complete yet on – and presumably, it would be heavy crude that we would be looking at exporting.

So when we get that study complete, Chi, we'll be able to share with you – we just don't have all of the engineering done..

Okay..

But certainly would be the long-term plan, which it would be very positive for the Canadian producers, it'd be very positive for the midstream players, and also for all of the Eastern Gulf refiners to be able to have that crude source, and then some to even be able to export if they wished..

Yeah. It's an interesting development. Great. Thanks, Gary. I appreciate it..

You bet..

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

Hey, guys. Good morning..

Good morning, Paul..

That is a very impressive result on the Refining. So, congratulation on that..

Thank you..

Just to – on the – with the IMO 2020, do you plan to make any large refining CapEx related to that? I think at one point several years ago you were contemplating about resid hydrocrack, and then of course that being shared (31:09), just curious there, should we look at any large capital outlay?.

Ray?.

Yeah, this is Ray Brooks. I'll take that question. As far as IMO, yes, we are looking at strategic opportunities for resid upgrading primarily at our Gulf Coast refineries where we've got the STAR project that we've talked about before. The big part of that is upgrading our resid, we've done some of that.

We have some more planned with our resid hydrocracker expansion there. And then at Garyville, you ask about the resid hydrocracker there, we have no plans to pursue that, but we're looking at some opportunistic and quick-hit projects to expand our coking capacity at Garyville.

So, yeah, the IMO is on the horizon for us and we think we've got a couple of good-looking opportunities..

Okay. The second one, just curious that in the first quarter when you got the (32:17) $1 billion EBITDA to the MPLX, $600 million is the wholesale-related margin. I presume that's coming out from the Refining segment.

Is that coming now from the margin side or it's going to be under (32:34) on the other costs? And also that the remaining $400 million, is that already in the Transportation segment or it's also coming now from the Refining?.

Yeah, Paul, this is Tim. I mean, both are effectively in the R&M segment currently. Let's talk about each of them individually. The refining logistics asset is really going to be structured as a sort of a fee-for-capacity arrangement within refining. So that's going to be sort of a charge that will flow back to for Refining.

So that's a straight charge out of the R&M segment that will show up in MPLX once the drops complete.

For the fuels distribution, similarly this is a service contract, a giant service contract that will exist between the parties and elements of it will be in margin, elements will be below the line (33:23) in terms of how it gets reflected, actually I think most of it will actually show up below the line in terms of where it shows up.

So, it'll be out of margin, but part of the movement between the segments of R&M and into MPLX..

So, I get that from a simple modeling standpoint, we should not assume the margin capture being changed that much, but that your segment where (33:47) you sell from refining would drop, but not necessarily in the margin?.

And that's right. It should not have an impact on gross margin, but it will have an impact on the segment..

Okay. Thanks..

And I think – Paul, I had mentioned even on the last call that heading into these drops, we'll try to provide some framework about how that will look pro forma for the transactions to sort of help guide your thinking around how best to model it..

Thank you..

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

Good morning, all. I'll start with another macro question. Just thinking about Brent, WTI at this point, it looks like at least in the Midwest you guys are planning to run a lot more WTI in the fourth quarter.

Any thoughts around sort of the sustainability of these $5, $6 spreads going forward and maybe are we at the limit of what you guys can run in terms of WTI in the system?.

Yeah, Brad, this is Mike Palmer. With the Brent and WTI spread now in this $5.50 to kind of $6 area, certainly that has encouraged a lot of U.S. exports to take place, as I'm sure you know. We expect that we'll continue to see a positive Brent TI spread going forward.

But with all the exports taking place, I guess I would believe that we'll start to see that spread come in over the next months. When the spread is wide like it is, what we want to do is, we want to be in a position where we can take in as much of the WTI-based crude as we possibly can, and that's what we do in our optimization process.

So, we're trying to capitalize on all of the WTI-priced crude that we possibly can in the system today. And as we move forward in the future and we get our Ozark expansion completed, that'll open up a considerable amount of additional optionality that we don't have today..

Okay, great. Thanks for that color. And then maybe for Tim. Just on CapEx, you guys haven't revised the budget at this point, but I think it implies like a $1.6 billion spend in the fourth quarter.

Is there any reason to think that you guys are actually going to spend that or is there some sort of big expense that's included in that budget that is in the fourth quarter?.

Well, we're probably a little bit behind what we expected by the end of the third quarter, but we suspect that there will be some catch-up that will occur in the fourth quarter. So again, we're not going to re-guide the capital, but I think you should expect to see some catch-ups that will occur into the end of the year here..

Okay. Thanks a lot..

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

Hi. Thank you. Good morning. Just a follow-up on the IMO regulations.

So when all this sort of high-sulfur fuel oil ends up back in the market and as companies marine buyer (36:53) substitute out that fuel, I mean, where is the stuff going to end up? Can it end up as a feed into your plants as a coker feed, or how do you guys look at that as I guess a feedstock or a product that's trying to get a big discount in the market?.

Ray?.

Yeah. This is Ray. I'll take a first stab at that. Our goal every day is to fill up our resid processing capabilities. And we can do that via couple of different ways, having up the crude slate to take advantage of that, or looking at shrinking our lower-valued sales.

What I will say is, even ahead of IMO, we've taken a lot of steps to reduce our residual fuel sales by increasing our process – existing processing today through our cokers and resid the asphalting units..

Okay..

Mike, do you want to add anything on that or...?.

No. The only other thing I guess that I would add is that, again, we're -we're well set up to look at various opportunities in the world for any resid that's surplus to our system. So, as part of our continuing optimization process, that's exactly what we'll do..

Okay. So my follow-up question is on exports for gasoline and distillate.

Were those numbers lower just simply because of the hurricane impact and the need to sort of keep more barrels at home versus export those volumes?.

Faisel, the 331,000 barrels a day is one of the highest rates that we've ever had. So we are finding the export market to be very attractive and we are moving product to the export market when that is the better alternative than placing it in the domestic market.

But we are – we believe the export market is attractive, we believe we're well situated given our Gulf Coast refineries. And as you well know, we're continuing to invest in upgrading or enhancing the capacity of our exports.

And by 2020, we should be able to have a capacity of over 500,000 barrels a day from those two refineries, Galveston Bay and Garyville..

Okay..

Faisel, if you really look at the macro view here, I want to make sure investors understand this. If you look at gasoline and distillate days of supply, we're at the low end for both products on a five-year average – the low-end of that five-year average on a days supply. I think that's going to continue to provide momentum for light product exports.

It's going to continue to provide balance for domestic inventories. And I think we're really teed up versus – I'll take you back to the same period in 2016 and same period in 2015, when we were mid-fourth quarter with very high inventories coming into the lower demand part of the season, and that was a drag on margins.

Here, days of supply are really strong across – it should be really strong for inventory across both gasoline and distillate, and I think should continue to show strength finishing up the fourth quarter..

Great. Thanks, Gary. Appreciate it..

Thank you. Our next question is from Corey Goldman from Jefferies..

Hey, guys. Just a quick question on the MidCon fleet during the quarter.

Obviously, DAPL, it's still ramping; can you just tell us how that impacted if at all the MidCon refineries in 3Q?.

Yeah, Corey, it's Mike Palmer here. DAPL became operational in June. And obviously what that does for us is it does give us the conduit into Patoka for the North Dakota Light crude. And over the third quarter, I can tell you that we've been ramping up the volumes of North Dakota Light as it has been attractive relative to the alternatives.

So it's – again, it gave us the optionality we needed to take advantage of a well-priced feedstock..

Got you.

And when – sorry – would you expect that ramping to be more I guess ratable? Is that a 4Q event or a 2018 event?.

Well, it's – the pipeline itself is fully operational. So shippers can ship into Patoka or they can ship down to the Gulf Coast, either one. The amount of North Dakota Light that we'll want to bring into our system ourselves will depend upon how it's being priced. So that volume will come up and down depending upon the marketplace and how we optimize..

Understood. Okay.

And maybe just as a follow-up question, given that it's so difficult to track these things with different contract rolls, is there anything that you can talk about from a third-party contract perspective that perhaps could be rolling sometime in 2018 or late 2017 that could find its way toward the MPLX bucket that maybe can put some earnings upside? Just – we don't see a lot of that information in the marketplace, I don't know if there's anything there that you can provide for us..

And, Corey, I just want to make sure I understand that, when you say contracts that are rolling, are you meaning contracts to provide further throughput and pipelines or can you be more definitive on your question?.

Sorry.

Just to the extent you had third-party contracts with other midstream or downstream service providers, is there anything that is expiring in the near term that could perhaps be funneled towards the MPLX bucket?.

I guess – this is Don, Corey. I mean, what we're always doing is, we're looking for opportunities to – if there is a – if we're using a third party to supply MPC and we have an opportunity to supply or move it ourselves, we're always looking to those opportunities.

So I think we've historically been looking at that and certainly Mike Hennigan and his team have been very focused on understanding what are the opportunities to source more of the movements from third parties to MPC-owned – or MPLX-owned logistics..

Great. Thanks, guys..

Yeah..

And your next question is from Paul Sankey from Wolfe Research..

Good morning, all. [Technical Difficulty] (43:39-43:49).

I apologize. We are having technical difficulties with that line. We'll move on to the next one. Our next caller is Doug Leggate from Bank of America..

Hi. Good morning..

Hi, Doug..

Sorry, I was clearing my throat. Good morning.

How is everybody doing? Gary, the comment in the release about the after-tax proceeds from the drop, can you give us an idea of what you think the cost basis of the drop next year would be assuming the $1 billion gets done?.

Doug, it's Tim. We had said even on the announcements in January that using a roughly – sort of 20% tax rate on the drops was probably appropriate. I'm not sure we guide any differently at this point. So you can think about it in those terms, somewhere between there and sort of statutory. So that's probably the range..

Okay.

And maybe just related to that, can you offer some color on the pace of how you would redeploy that cash in terms of buybacks? I guess it wouldn't all be instantaneous, so how would you expect the buybacks to be ratable over next period?.

Well, we'll manage it in a way that we think optimizes our ability to access to market without influencing the price. Again, we'll – this is certainly going to be a big slug of proceeds all at once, so I think we'll evaluate more accelerated forms to see if those make sense.

We've been very successful in open market repurchases and really delivering at or below daily view apps (45:16), so we'll take a look at what makes the more sense at the time..

Okay. Thanks. My last one, guys, is I guess a little more convoluted because it relates to some of the GP drops that have been done by some of your peers. I think in the past you've talked about a kind of target range multiple perhaps something in the 15 – 20 range, the recent drops or the recent conversions have been done a little bit lower than that.

I'm just wondering if you could offer a perspective on that. And related, and Gary, I know, we've talked about this in the past, but it does give a lot of transparency to your ownership of MPLX going forward. But obviously, as you take distributions, your tax basis there would essentially ultimately go to zero over time.

So how should we think about the after-tax value at the MPC level for what is a tax-free entity and as it relates to the public market quote? And I'll leave it there. Thanks..

Sure, Doug. It's Tim. Let me try to take both of those. Your first question with regard to maybe precedent transactions or other GP transactions we see in the marketplace, for one thing, our 15 to 20 that we provided in January was really illustrative. And frankly, that's not where we started on multiples.

We really looked at what would be the appropriate premium of cash flow pro forma for the transactions vis-à-vis what the GP cash flow would have looked like otherwise.

We turned it into a multiple because we know everyone loves to talk about multiples, but the – I guess the thing that is worth pointing out is that the situation that both of the recent transactions that have been done, the situation of the GP and the situation that MPLX's GP finds itself are very different.

And so, it's I think very difficult to compare two transactions and say those multiples should be about the same because it's really not an apples-to-apples comparison. You really have to assess what the cash flow growth profile of those GP distributions will look like on their own sort of at the point the transaction's conducted.

So, again, we're not going to re-guide to ranges or what the value is, I mean that's a process that's in front of us. We'll have all the appropriate dialog with the conflicts committee and the MPLX board.

As we've stressed on multiple occasions and maybe worth repeating again this morning, pro forma for these transactions, MPC will be a substantial holder of LP units.

And really striking a balance on the GP buy-in to make sure that it both illuminates value of the GP and provides an affordable and sensible transaction for the partnership becomes very important, because any action that MPC takes that harms the partnership hurts no one more than MPC.

So, I think we – again, we'll be very careful about striking an appropriate balance on the transaction. And again, we'll share our color on valuation at the appropriate time. I don't think we want to get in front of a process just now. Your second question if I understood, it was really – relates to the tax basis and the distribution that come back.

There is certainly a tax advantage of LP distributions versus GP distributions which are fully taxable from an MPC perspective. So MPC although it will not be afforded the full benefit of the return of capital that LP holders will, is going to get a tax benefit on LP distributions vis-à-vis what would have been available otherwise.

So again, I think as we get closer, we're certainly happy to share some more color around it. We certainly understand the desire and interest in understanding exactly how much of those distributions will be taxable and we'll share some color with you once we get through that transaction and are in a position to give you that guidance..

And that would be really helpful. Thanks, Tim. I appreciate your time. Thanks, guys..

You bet..

Thank you. Our next question is from Paul Sankey from Wolfe Research..

Hi guys, can you hear me?.

Hey, Paul, that's much better..

Good, good. I just want to assure you that I was not listening, I didn't bunk off to listen to the Suncor call; I was hanging on your every word..

I thought you were in Australia sipping something good and....

You figured I was in Australia sipping something good, well, I don't know about that. I'm in midtown and I'm drinking coffee. Gary, to look back just to go over the not spinning Speedway. It was interesting that you guys gave a – I think it was a synergy number, but there was a sort of a benefit number associated with retaining Speedway.

Long term, I think you've absolutely made the right decision to do what I think other companies are doing in terms of retaining control of gasoline distribution. Could you just talk a little bit more about that number that you gave, how the committee came up with that, and what goes into it? That was question one.

Question two is a bit of a follow-up to Doug's, but I was wondering if you could – you're relatively very quickly going to get through this dropdown process, where do you see MPC going strategically from that point? One thing that you could talk a little bit about maybe is 2018 CapEx, but also where you see the long-term strategy development from this newly-shaped company? Thank you..

Right, Paul. And if you go back to Speedway, and you're right, we did publish a number of $270 million to $390 million per year, and then – that range is what we see as the integration value..

Right..

And we continue to illustrate it very, very well here. Again, in this quarter, Speedway had one of the best quarters – I think top three quarters that they've ever had. But, that makes up all the ratable movement that we go through our refining system in the Speedway, the value in certain markets that we can glean out of Speedway.

So all-in-all, as we look at Speedway again as borne out in this quarter, very, very strong segment for us, and we continue to see that going forward.

Asking as we complete this drop, where do we see things going? And I I've answered this a little bit earlier that retail and growth in our Midstream is going to continue to be front and center in our strategy.

We think our base refining system is in very, very good shape, and as Ray mentioned, I think we're in very good shape to be able to handle the IMO and be a strong margin taker when this IMO comes to play.

But we look at the organic side of MPLX as being a strong growth element, as well as we look at Speedway as being a strong growth element for our business.

And if you look at MPLX historically, and now that we're coming to the end of the dropdowns, we have a very strong inventory of organic projects, but we're really – I've charged Mike with really increasing our third party business. And for MPLX not to be dependent on just the business coming from MPC, but other third party business.

You look at the linkage that we have between Refining and Midstream and through MPLX, it's great linkage. I look at the assets that are now part of MPLX that were MarkWest and the linkage that we have there, we have great opportunities to be able to move the Northeast NGLs I think to the East Coast eventually.

We have opportunities we believe when Buckeye reverses the Laurel Pipeline to be able to make some movements that will lower cost to consumers in the Pennsylvania and Eastern markets. That movement is all about lowering cost to consumers, which I think can be supplied from PAD 2.

So, we have many opportunities that we're looking at with a very, very strong refining base underlying all of those opportunities..

Right. So I mean, I think in the past you've been skeptical about the attraction of East Coast and West Coast refining.

So it sounds like the refining base is going to be around where it is today give or take, and the growth is going to be as logistics play through the MLP?.

Well, Paul, I believe two things – really three things there, if you look at three segments. There's definitely going to be further consolidation in refining, there's going to be further consolidation in midstream and we're seeing the consolidation happening in retail. So, there are going to be opportunities across.

I'm not discounting that there may not be some opportunity in refining some day. Being upfront here that I don't see anything immediately on the horizon from a consolidation standpoint in refining. But certainly there's a lot of movement going on in midstream and in retail right now.

And I think we have the ability, we've been able to show certainly that big acquisitions – we can execute on acquisitions and we can execute on delivering synergy. So – well, everything has to be at the right price that will be value generating to MPC..

Understood. Thank you, Gary. I'll let someone else have a go. Thank you..

Thanks, Paul..

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

Hey. Good morning, everyone. Thanks for taking the question. Just wanted to tag on to one of Brad's questions from earlier on differentials.

How should we think about the WCS discount widening out from here with I guess Canadian production ramping up later this year? And just more broadly how you're thinking about heavy differentials in 2018 with potential for OPEC maybe ease up on the production cut?.

Yeah, Spiro. Mike Palmer..

Hi, Mike..

Yeah. We're obviously watching the same thing and I think you've probably seen that – well, certainly during 2017, the heavy Canadian differentials have been fairly narrow and there's been – there still has been a lot of demand in the Gulf Coast for those barrels that's helping to drive that differential in.

But with the increase in production that's coming on late this year and into next year, we've already seen those differentials that have started to widen. And again, MPC is in tremendous shape in order to take advantage of that additional supply, both in our Midwest system as well as on the Gulf Coast.

So we do expect to see better heavy crude diffs in 2018 than we did in 2017. From the – when you start looking at the medium sours, generally the OPEC crudes, it's fairly clear that the Saudis and OPEC are working hard to bring the global petroleum back into balance. That's happening, inventories are coming down.

We would expect to see continued pressure on the sour diffs until we get to the point where OPEC starts to put more crude into the market. And as that is the case, then we'll optimize, as we talked about earlier, with sweeter crudes. But the opportunity in 2018 right now – early on certainly looks to be with heavier crudes..

Thanks, Mike.

And then just follow up once again, sort of as you're approaching the end of this accelerated dropdown strategy and IDR exchange, just wondering if you could remind us again how you view at the general partner level – is there any – are there any options on the table to monetizing – I guess it will be a considerable ownership in MPLX? I think at one point, there was discussion of a potential GP spin-out.

Is that something that's still on the table or are you kind of view that as off the table right now?.

Yeah, it's Tim. I'm happy to answer that. I mean, I think, as we've talked even in the fall of last year, we were really evaluating all of the paths we could take with the GP. And I think where we landed was that ultimately buying of the GP's economic interest by the partnership in exchange for units was the best path for the partnership.

So I'd say – I guess we always keep an open mind. I think it's highly unlikely we're going to proceed down a different path with regard to that value realization. We think ultimately the exchange for units is the best path there in terms of sort of retaining it.

Now, your second piece of that I think was around liquidation of the units, and I'll tell you that ultimately these units coming back – again, we are effectively taking a pretty big slug of refining earnings and converting it into LP distributions. And those are fundamental to the system.

I mean, those LP distributions-backed MPC will be a very big piece of MPC's discretionary free cash flow. And I don't think we have any intention at any point to liquidate these units. They are a fundamental part of the cash flow of the enterprise. And we would expect to hang on to these units for as long as we can imagine..

Understood. Appreciate the color. Thanks, Tim..

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

Great. Just one from me today, and I think it piggybacks on your recent comment for MPLX, Gary.

I guess with the, let's call it, carnage in the broader midstream space lately, if larger scale M&A opportunities emerge, would MPC be willing to consider waiving the IDRs ahead of the buying, if that were the case?.

I'm not sure I heard the last part of your question correctly. Waiving the IDRs....

Sorry. If there was an MPLX acquisition opportunity and it was large enough that equity were to be involved, would MPC be willing to waive the IDRs that could be associated with that transaction, not saying that one is out there, but just opportunistically..

Okay. I'm sorry, I just didn't hear it properly. That will be a case-by-case basis and we'll review that when the case comes. A very important point that – I'm glad you asked that question – that we really need to emphasize here.

Where we set an MPLX and I use the word carnage in the midstream, we do not believe that – and in fact our numbers will illustrate that we are in a completely different position. We have outstanding coverage and we have outstanding growth targets and opportunities in front of us.

So, we are in a very good shape and a strong balance sheet investment grade. So, we are in very good shape. We continue to have strong coverage and to have very strong growth as we go into the future.

So if there are some opportunities, certainly we're going to take a look at those and see what fits best for our system and fits best for the growth of our unitholders and to continue to build that inventory that certainly supports the coverage in the MLPs..

Perfect. Agree with you 100%, Gary. Thanks for the response..

Thank you. And our final question today is from Ryan Todd from Deutsche Bank..

Great, thanks. Maybe just a couple of quick ones.

On DAPL, can you remind us on expectations for distributions from the JV and maybe perhaps provide some color around recent Bakken differentials and your thoughts on go-forward sustainability?.

So, Ryan, this is Don. We have not given information on the distributions from DAPL, but I can say that to-date it is performing at least as well as the economic expectations that we had when we sanctioned the project and took it to the board. We're very pleased with the results so far..

Okay. Thanks.

And Bakken diffs, any thoughts on how those sustain going forward?.

Bakken diffs, Bakken differentials..

Yeah. The Bakken diffs are something they trade every day at Clearbrook. And you can probably – you can probably find that somewhere in the trade press, Ryan. We continue to buy at Clearbrook, we're buying those at Patoka. I don't think you'll generally find those diffs at Patoka, and I'm not going to share those with you today, but they move around..

And, Ryan, maybe the important point to be made is that the system that we operate has got so much flexibility and optionality that as – if those differentials open up, we'll run more and have got lots of options with regard to our crude system.

So that's – I mean, I think that's probably the point where you want to focus is that we've got the flexibility and optionality every day to sort of identify those best sources of crude for our system, and we'll take action appropriately..

Okay. Thanks. And maybe just a quick – a follow-up. You mentioned that you're trending 1.3% down year-on-year same-store sales in October on gasoline. I know domestic gas demand has been a bit of a conversation all year, but as we reach towards the end of 2017 here, can you give us some thoughts on what you think you're seeing on U.S.

gasoline demand and maybe expectations as you look into 2018?.

You know, Ryan, it's very hard to take gasoline demand off of one month – yeah, we are trending down 1.3% for the month of October, but you have to take into context where crude prices have gone. And being a leader in most of the markets in which we have – which Speedway operates, we are the leader trying to get the incremental cost to the street.

And when that happens, it costs some volume, but then we generally pick that volume up. I would say if you look at the same period last year, yes we're down a little bit, but last year was a very strong year, and we're continuing to hold on to most of that volume increase that came out of 2016 and through 2017.

There's certainly some noise in the third quarter Speedway numbers because of all the storms. And one of the biggest things is people fill up when they have storms come, and they fill up and top all their tanks off with extra storage, wherever they can put it at their homes. And then you have a law to make up for that.

So you're going to see some choppiness and noise over a period of time. So here in October's numbers, I would kind of take those with a grain of salt, just because there's been so much choppiness in the weather patterns in the country.

But I think looking into next year, I think on gasoline demand, I think it's going to be probably flat with 2017, maybe slightly up depending – it's all going to be on where is the ultimate crude price going to be and what that takes the gasoline price to. But I think we would expect to see gasoline up just a little bit next year versus 2017..

Great. Thanks. Very helpful, Gary..

Okay. Thank you for joining us today. And should you have additional questions or would like clarifications on the topics we discussed this morning, Denice Myers, Doug Wendt and I will be available to take your calls. Thank you..

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