Lisa Wilson - Investor Relations Gary Heminger - Chairman and Chief Executive Officer Donald Templin - President Timothy Griffith - Senior Vice President and Chief Financial Officer Mike Hennigan - President MPLX Anthony Kenney - President of Speedway LLC Raymond Brooks - Senior Vice President, Refining.

Kristina Kazarian - Credit Suisse Benny Wong - Morgan Stanley Paul Cheng - Barclays Capital. Phil Gresh - JP Morgan Brad Heffern - RBC Capital Markets Neil Mehta - Goldman Sachs Doug Leggate - Bank of America Merrill Lynch Roger Read - Wells Fargo.

Welcome to the MPC's Fourth Quarter Earnings Call. My name is Illan 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. [Operator Instructions] Please note that this conference is being recorded. I will now turn the call over to Lisa Wilson.

Lisa, you may begin..

Thank you, Jason. Welcome to Marathon Petroleum's Corporation fourth quarter 2017 earnings webcast and conference call. The 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, MPC's Senior Vice President and Chief Financial Officer; Mike Hennigan, President 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 on Slide 3..

Thanks Lisa, and good morning, and thank you for joining our call. We issued two press releases today, our usual fourth quarter earnings announcements and one announcing the completion of our previously announced strategic actions. This morning we report a strong results for the quarter and full year.

The Midstream and Speedway segments each achieved a record full year performance along with a substantial increase in earnings from the Refining & Marketing segment. I will as Don to cover addition highlights for the fourth quarter and full year results.

Before I move to our capital plan, I would like to take a moment to highlight two significant five year milestones for our company. February marks the five year anniversary of our acquisition of Galveston Bay refinery. The accomplishment since this acquisition are impressive.

We have dramatically improved the environmental and safety performance of the refinery and advanced operational excellence all while achieving lower operating expenses.

For example, we have reduced environmental incidence by approximately 80%, achieved numerous processing records including 33 monthly process unit rate records in 2017 alone and cut unplanned downtime in half. We've also lowered operating expenses nearly 25%. It's also been five years since the formation of MPLX.

MPLX has delivered an impressive 20 consecutive quarters of increased cash distributions for unitholders representing a compound annual growth rate of 18.3% over the minimum quarterly distribution established at the partnership's formation. The partnership's asset base and earnings profile have been transformed over this time.

In late 2015, the partnership expanded into midstream natural gas business with the addition of MarkWest. Early last year, we announced a strategic action plan to enhance value for our investors which we completed today.

As part of this strategic actions, we executed dropdowns to MPLX of assets and services that are projected to generate approximately $1.4 billion of annual EBITDA adding high quality fee based streams to MPLX and further diversify the partnership's earnings.

Following the dropdowns, we completed the conversion of MPC's GP economic interest in MPLX into LP units. This conversion provides a clear valuation for MPC's ownership in MPLX.

This combined with the elimination of the partnerships IDR burden creates mutual benefits of positions MPLX extraordinarily well to deliver long term sustainable growth for its unitholders including MPC.

Earlier this year, we're pleased to see Standard & Poor's recognized MPLX's transformation and strong credit profile by upgrading the partnership's credit rate to BBB plus. Looking forward, this morning we announced our 2018 capital investment plans for both MPC and MPLX.

This plan remains focus on strengthening the sustained earnings power of the business through growth and margin enhancing projects as well as expanding our more stable cash flow businesses especially Speedway and MPLX. Our capital plan for MPC for 2018 excluding MPLX is $1.6 billion.

This plan spending includes 950 million for Refining & Marketing, 530 million for Speedway and 100 million to support corporate activities and other investments.

The Refining & Marketing investment plan includes approximately 400 million of growth capital focused on optimizing the Galveston Bay refinery, upgrading residual fuel oils to higher valued products, maximizing distiller production and expanding life product placement flexibility including exports.

With the investments we made in the business, we are well positioned to benefit from the adoption of the low softer international bunker fuel requirement in 2020 commonly referred to as IMO. Our refinery system has de-convergent to pass as well as asphalt production capabilities.

We plan to increase our production of ultra-low sulfur diesel and residual upgrading ahead of IMO through future investments which include the optimization of the Galveston Bay refinery which we referred to as the star project, the diesel maximization project in Garyville, and the Garyville Major expansion.

We expect to invest $530 million in Speedway, $150 million increase from last year's plan and consistent with our commitment to aggressively grow this business and build up as industry leading position. The significant increase is targeted for construction of new stores as well as remodeling and rebuilding existing locations.

MPLX also its capital investment plan for 2018 including $2.2 billion for organic growth and approximately 190 million for maintenance capital.

This robust organic growth plan includes addition of eight processing plans representing nearly 1.5 billion cubic feet per day of incremental processing capacity as well as 100,000 barrels per day of additional fractionation capacity and a prolific Marcellus, Utica and Permian basins.

The remaining growth capital of the partnership has planned for the development of various crude oil of refine products infrastructure include export capacity expansion at our Galveston Bay refinery. As we started the new year, I also wanted to provide some observations on the macro environment we are expecting in 2018.

From a commodity perspective, we are encouraged by a more balanced supply and demand environment which should be supported by crude oil and refined product prices throughout the year. We think that creates a very productive backdrop of refining margins in additional to generating meaningful midstream development opportunities for MPLX.

Inventories are more balanced than they have been for several years. On a days of supply basis including exports, December U.S. gasoline inventories were the lowest they have been since 2006 and U.S. distiller inventories were the lowest since 2013. Additionally, the U.S. crude inventory surplus is largely gone.

From a crude differential perspective, we expect the brand WTI spread to be volatile but to generally trade a couple of dollars at either side of $5 per barrel.

These are based on our view that pipe are pushing to the gulf will be relatively fold and the differential should generally reflect transportation cost and quality differentials although always subject to changes due to domestic operating and geopolitical events.

We also expect favorable Canadian crude oil differentials both heavy and light over the course of 2018. We believe that pipelines into the U.S. will be fold and the incremental barrels of Canadian crude will have clear by rail. This should keep every differentials wider in 2018 than we experienced in 2017.

We also believe the global endues macro picture remains solid and expect that good underlying economic growth will continue to support strong demand for our products. We expect demand from export markets to remain robust. MPC continues to be well positioned to take advantage of export opportunities of both Galveston Bay and Garyville.

In the fourth quarter, we exported 314,000 barrels per day or about 17% of our nameplate capacity. Complementing our outlook for the business is a recent tax reform legislation. The reduction of the corporate tax rate is a catalyst for incremental investment in the business.

Additionally, the reduction in the cash burden on MPC and are high confidence in the long term cash generation of the business help support our board's support to increase the regular quarterly dividend by 15% to $0.46 per share earlier this week.

During the quarter, we returned 945 million of capital to shareholders including the $750 million of share repurchases and $195 million in dividends.

For full year, we returned over $3 billion of capital to shareholders via dividends and share repurchases which were supported impart our proceeds from the dropdown transactions completed during the year. Since MPC became a separate company in 2011, we have returned over $13 billion to shareholders.

Importantly, 3.7 of that 13 billion was in the form of regular quarterly dividends which have grown by 26.5% CAGR since MPC became an independent company.

Return of capital to shareholders continued long term investments in the business and maintaining an investment grade credit profile will remain fundamental elements of MPC's capital allocation strategy and will continue to drive a very attractive value proposition for our investors.

As I ramp up, I wanted to highlight our recent publication of a report called Perspectives on Climate Related Scenarios. This document enhances our disclosures around climate related strategies, risk and opportunities using the framework recommended by the taskforce on climate related financial disclosures.

The report has been very well received by investors and as pointed to as an example for others in the industry to follow. As investors who care about environmental stewardship and a welfare of future generations, we can be proud to invest in MPC. With that let me turn the call over to Don to cover additional highlights for the fourth quarter.

Don?.

Thanks Gary. Turning to Slide 4. We reported fourth quarter earnings of $2 billion or $4.09 per diluted share and full year earnings of $3.4 billion or $6.70. Fourth quarter and full year earnings reflect the net benefit of $1.5 billion related to tax reform.

The Midstream segment which largely reflects the financial results of MPLX reported record financial results in the fourth quarter and for the full year 2017. This record setting performance was primarily driven by gathered, processed and fractionated volume growth resulting in high plant utilization.

After the closing of today's dropdown and the elimination of IDRs, MPLX is among the largest diversified master limited partnerships in the energy sector with a very competitive cost of capital going forward.

Given its robust portfolio of organic projects in the Marcellus, Utica, Permian and Stack, as well as a diversified suite of logistics assets, we believe MPLX is very well positioned to be a source of significant long term value for its unitholders including MPC.

I would encourage you to listen in on the MPLX call at 11 AM this morning to hear additional color on the partnerships performance and opportunities. Speedway achieved record full year performance in 2017.

This was driven by strong earnings from light product sales, an increase of 1.2% in same store merchandize sales, lower operating expenses and contributions from its travel center joint venture.

This is Speedway's sixth straight year of record results and second consecutive year generating $1 billion of annual EBITDA reinforcing the strategic value of this high performing, stable cash flow business.

Turning Refining & Marketing, we delivered strong results with full year segment earnings of $2.3 billion, an increase of nearly $1 billion over 2016. We operated exceptionally well throughout the year and we're able to capture strong crack spreads and wider crude differentials across our system.

Additionally, we achieve numerous monthly process units and production records in the fourth quarter and throughout 2017 including monthly records for crude throughput and gasoline and distiller production. As a result, we are now the second largest refinery in the U.S.

on a crude throughput basis and Galveston Bay and Garyville are the second and third largest refineries respectively. With that let me turn the call over to Tim to walk you through the financial results for the fourth quarter and the full year..

Thanks Don. Slide 5 provides earnings on both an absolute and per share basis. For the fourth quarter and for the full year 2017. For the fourth quarter of 2017, MPC reported earnings of $2.02 billion or $4.09 per diluted share compared to last year's $227 million or $0.43 per diluted share.

For the full year earnings were $3.4 billion or $6.70 per diluted share, up from approximately $1.2 billion or $2.21 per diluted share in 2016.

As Don referenced, earnings for the fourth quarter and full year included a tax benefit of approximately $1.5 billion or $3.04 and $2.93 per diluted share for the fourth quarter and full year respectively, as a result of re-measuring certain net differed tax liabilities is using the lower corporate tax rate.

The bridge on Slide 6 shows the changes in earnings by segment over the fourth quarter last year. Apart from the $1.5 billion benefit resulting from tax reform what highlights the significant increase in Refining & Marketing compared to same quarter last year.

The improvement was driven by higher LOS based blended crack spreads and higher utilization rates in the fourth quarter 2017. These benefits were partially offset by less favorable product price realizations versus spot prices used in the benchmark crack spread. Speedways fourth quarter is also were generally comparable to last year.

The increase in light product margins were offset by higher operating expenses and lower merchandize margin in the quarter. The 47 million favorable midstream variance was primarily due to MPLX's record gathered process and factionary volumes as compared to the fourth quarter of last year.

Quarterly results were also impacted by $205 million of income taxes associated with higher earnings and $47 million of increased allocation of higher MPLX earnings to the publically held units in the partnership, shown here is a negative variance in non-controlling interest.

Moving to Slide 7, our Refining & Marketing segment reported earnings of $732 million in the fourth quarter of 2017 compared to $166 million in the same quarter last year.

Looking at our key market metrics, an increase in the LLS-based blended crack spread at a $586 million favorable impact to the segment results, primarily due to higher Chicago crack spread.

The LLS-based Chicago crack spread increased from $11.8 from $6.32 per barrel in 2016, driving our LLS-based blended crack spread to $7.75 per barrel from $7.39 per barrel in the same quarter last year. The Light Louisiana Sweet and Texas Intermediate differential widened to $5.64 per barrel, up from a $1.34 per barrel in the fourth quarter of 2016.

This wider differential drove a $214 million benefit based on the linked crudes in our slate. These benefits were slightly offset by a $53 million unfavorable RIN/CBOB crack adjustment as a result of higher in prices. This increase in costs was considered in our pricing decisions and is reflected in the price paid by consumers.

As a result, there is an offset in the product portion of other margin. As a reminder and concession with its treatment, we view the LLS crack and RIN/CBOB crack adjustment together as an effective realized crack spread.

Going forward, we'll collapse these impacts into a single variance factor which would have shown a net $533 million positive impact in the fourth quarter.

Partial offset in the strong cracks with $113 million unfavorable other margin variance in the quarter driven primarily by less favorable product price realizations versus the spot prices used in the benchmark LLS 6-3-2-1 crack spread. Slide 8, provides the drivers for the change in Refining & Marketing segment income for the full year.

Income from operations of the $2.3 billion in 2017, up $964 million versus 2016. The LLS-based 6-3-2-1 blend crack spread had a nearly $2.3 billion favorable impact on full year segment results, $2.1 billion on an X-written basis with higher cracks present both the Gulf Coast and Chicago markets.

The blend of crack spread for the full year increased by $2.88 per barrel to $9.84 per barrel in 2017. The LLS WTI differential widened to $3.15 per barrel, up from a $1.55 per barrel in 2016. This widening had a $250 million benefit on the full year segment earnings.

These benefits were partially offset by three factors, the largest of which was the $505 million unfavorable variance and other margin. This unfavorable variance was primarily due to lower gasoline and non-transportation fuel product price realizations versus spot price is used in LLS based crack spread.

This was partially offset by favorable impact in refinery value metric again, due to higher refined products price environment and increased crude throughput volumes in 2017. A narrowing continuing effect shown in the market structure come with a walk resulted in a $350 million unfavorable variance.

This is effectively an adjustment of the prime crude price used in the benchmark crack to actual crude acquisition costs. This walk also reflects an unfavorable $345 million due the absence of the LCM reversal that occurred in the second quarter of 2016.

Moving to Other segments, Slide 9 provide the Speedway segment results walk for the fourth quarter and full year.

As a reminder, comparability of Speedways 2017 results to prior year's fourth quarter and full year's result are affected by the transfer of Speedways travel centers into a joint venture formed with Pilot Flying J called PFJ Southeast LLC in the fourth quarter of 2016.

Since the formation of the joint venture in the fourth quarter of 2016, Speedway shared the results of operations is reflected as income from equity method investments and as shown in the other column of this walk. While prior activity remains in the light product margin, merchandise margin and other categories.

Speedway's segment income was $149 million in the fourth quarter of 2017 compared to $165 million in the same period of 2016. The decrease in segment income was primarily due to higher operating expenses and lower merchandise margin.

These impacts are partially offset by higher light product margin which increased to $17.70 per gallon in the fourth quarter, up from $16.17 per gallon the fourth quarter of 2016. Speedways income from operations for the full year 2017 was $732 million compared to $734 million in 2016, a record when excluding the LCM benefit recorded in 2016.

The increase in full year segment income excluding the LCM benefit was primarily due to contributions from the travel center joint venture with Pilot Flying J and lower operating expense, partially offset by lower merchandise margin for the year.

In January, we've seen a roughly 1.7% decrease in same store gasoline sales volumes compared to last January. Speedways same store gasoline sales has been impacted by higher retail prices as crude prices moved higher and impacts from severe winter weather.

As Gary mentioned, the macro picture for 2018 remain solid and we expect a good underlying economic growth will continue to support strong demand for gasoline and distillate over the course of 2018.

Slide 10 provides changes in the midstream segment income highlighting the $47 million quarter-over-quarter and the $291 million year-over-year improvement in segment earnings. The higher earnings were primarily due to increase in contributions from MPLX.

MPLX results for the fourth quarter and full year were favorably impacted by record gathered processed and factionary volumes as well as contributions from acquired logistics and storage assets in 2017.

As Don referenced earlier a more detailed description of the results for the partnership will be provided in the Marathon's earnings call being at 11 and we encourage you to listen in. Slide 11 presents the elements of changes in consolidate cash position for the fourth quarter.

Cash at the end of the year was just over $3 billion, an increase approximately $923 million for the end of the third quarter. Core operating cash flow before changes in working capital was an approximate $1.4 billion source of cash.

Working capital was a $1.3 billion source of cash in the fourth quarter, primarily due to the impact of higher crude prices and volumes on accounts payable and higher crude liabilities offset by an increase in accounts receivable. Net debt with a $73 million source of cash which represents MPLX's incremental revolver borrowings during the quarter.

Return of capital shareholders by where share repurchase and dividends told $945 million in the quarter including $750 million of share purchases at a weighted average share price of 57.90. As Gary mentioned, on Monday, we announced a 15% increase in the quarterly dividend to $0.46 per share.

This represents a 26.5% compound annual growth rate in the dividend since becoming an independent company six years ago. This accelerated timing and increase reflects the high confidence we have in the long term cash generation of the business. Since beginning of the year.

We've returned over $3 billion of capital to MPC shareholders through dividends and share purchases which were supported in part by proceeds from dropdown transactions during the year.

Looking forward, we expect further return of capital with the after tax proceeds from today's dropdown transaction, all conducted with a continued focus on maintaining an investment grade credit profile at both MPC and MPLX. Slide 12 provides an overview of our capitalization and financial profile at the end of the year.

We're nearly $13 billion of total consolidated debt including approximately $6.9 billion of debt owed by MPLX. Total consolidate debt represents 2.2 times last twelve months adjusted EBITDA on a consolidated basis or about 1.4 times excluding MPLX. This same metrics including distributions MPC received from MPLX in adjusted EBITDA was 1.3 times.

We believe the addition of the distributions from MPLX is a more useful way to look at MPLX's ongoing debt service capabilities given the importance and stability of MPLX distributions MPC going forward.

Beginning this year and over time, the growing MPLX distributions will provide substantial funding to MPC and will be a fundamental component of MPC's discretionary free cash flow.

On Slide 13, we provide the illustrative impact to the Refining & Marketing segment from the drop of the refining logistics assets and fuels distribution services into MPLX. Similar to previous dropdowns, the intersegment earnings associated with the dropdown will be reflected in the Midstream segment.

We are not restating the prior period results and as such prior period results remain in the R&M segment. Importantly, the dropdown of earnings into the Midstream segment will not cause any change to R&M margin.

Direct operating costs will no longer include costs related to the refining logistics assets and the MPLX sees to manage the refining logistics assets as well to provide fuel situation services will be reflected as an increase to other R&M expenses.

We expect a net annual increase in total R&M expenses of approximately $1 billion with the corresponding results to be reflected in the Midstream segment.

For the Midstream segment, we will also provide supplemental volume statistic related to the fuel distribution services, although volume risks of the partnership have been largely mitigated by the fee-for-services contract that underlies the arrangement.

Slide 14 provide updated outlook information and key operating metrics for MPC for the first quarter of 2018. We're expecting throughput volumes of 1.9 million barrels per day with some planned maintenance in the Midwest and Gulf Coast. Total direct operating costs are expected to be 7.90 per barrel.

As I mentioned in the prior slide, direct operating costs will exclude the costs related to the refinery logistics assets being dropped and our guidance here has been adjusted for the dropdown completed today. We'll continue to provide this guidance adjusted for the drop impacts on a going forward basis.

While guidance is not provided for other R&M expenses, for the first quarter, we expect a net increase of fractionally $230 million resulting from today's dropdown which includes the fees paid to MPLX for two of the three months of the first quarter.

Sour crude is estimated to make up 51% of our crude oil throughput for the quarter, down from the first quarter of 2017 as we expect sour crude runs to be impacted by plant maintenance in the Gulf Coast. The estimated percentage of WTI price crude for the first quarter is 28%.

Corporate and other unallocated items which were higher in the fourth quarter due to increase in unallocated corporate costs and employee related expenses are projected be $90 million for the first quarter.

These costs are expected to moderate over the balance of 2018 as we move past some of the employee related expenses specific to the first quarter. Additionally, we've updated MPC's R&M segment price and margin sensitive is appendix on Slide 21. With that, let me turn the call back over to Lisa.

Lisa?.

Thank you, 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 questions..

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question today is from Kristina Kazarian from Credit Suisse..

Good morning, guys..

Good morning, Kristina, welcome back..

Thank you. As you had alluded to in the opening comments the WTI, WCS spreads really widened out.

Can you give a bit more color on the how you guys are thinking about the overall impact on your refining system throughout the year?.

Yes, Kristina. This is Mike Palmer. You're absolutely right. I mean the - what's happening is that the growth in Canadian heavy continues. And for example we've got the big four heels project is just now starting to ramp up. And with that growth in Canadian crude, what refining is that the pipelines that feed the U.S.

systems are full and they're being portioned. So when you look at the numbers, we're very high WCS spreads right now, we do expect those to come down somewhat. But what it really means is that we'll continue to maximize the volume of heavy Canadian that we can move into our system..

Great. Thanks. And I'll follow-up on that to you.

How you heard that thinking about the return that you will be generating on some of the residual upgrade projects you also talked about the beginning of the call particularly given the benefit of IMO that might be coming?.

Well we look at those projects we've seen high double-digit returns of that we're looking at and that's being very conservative on IMO. We do believe that there are significant upside opportunity with IMO not only of the incremental projects but our base business, but we have not taken any of that upside into the IRR calculations on those projects.

But when we finish, we're going to be able to destroy approximately probably somewhere between 280,000 to 300,000 barrels a day of residual and on a total refining system basis we're going to be up significantly over 700,000 barrels per day of annual distillate production.

So both the residual destruction, our total annual distillate production, we have the ability to swing that between gasoline and distillate when this is complete and we've always set around 8% to 10%, will probably be a little bit higher when we have these projects complete.

But high returns and I think significant upside if the market continues to perform like many of us think it well..

Perfect. Thank you..

Thanks..

Thank you. Our next question is from Benny Wong from Morgan Stanley..

Hi, good morning, guys. Hi Gary.

Just following-up on projects to positioning you guys for IMO, is that $400 million looks like, is there any of that to need to be spent to be completed in 2019 or is it all in 2018 and also beyond that is there any more opportunities that you guys are looking at to further position you for IMO?.

Yes. Let me have Ray Brooks take that question..

Sure. Your question about that positioning for IMO had a 20/20, probably the biggest thing that we have is Gary talked about residual destruction is we have a moderate expansion of our Garyville, Cokers, both Coker units were put in a larger Coke crowns and doing some deep bottleneck.

And that wok will be primarily complete on one Coker Q4 2019 and the other Coker Q1 2020. So right on time there. At our Galveston Bay refinery, we've talked over the years about the Star Project which fits right in with IMO, it's a residual destruction, it's a diesel maximization project.

That project is actually had staged implementation going back a couple years and will have stage implementation going forward all the way out to when it finally complete so be Q1 2022, but I had a IMO they'll be some more implementation there. To follow-up with your other comment about additional projects.

In addition to the CapEx for R&M we always have a backlog of projects that we're are doing some level of engineering and we have some very attractive projects in queue that will continue to re-evaluate given the current market look and potentially bring some more of those projects forward..

Great. Thanks. And for a second question just regarding the LP units you guys will hold after all the strategic transformation here.

Have you guys ever looked at an up-sea structure the something is kind of come across like discussions this was essentially C Corp unit is that something that would make sense at some point or are there any reason that it wouldn't?.

Well Benny, this Tim. We'll continue to evaluate potential structural turn as where we think that makes sense. I don't think there's anything at this point that is absolutely compelling or imminent in terms of the review, but we'll take a look and see if there are such that makes sense.

I think as we've said publicly our intent plan would be to hold these units indefinitely.

I mean we would - they are so important to MPC cash flow that we don't see any situation where those units are not held by MPC but we'll continue to evaluate structure where we think it may make sense, we've looked at other vehicles even for C Corp sleeves that may provide some market access that is tougher in the and not the space but nothing that is required or in terms of our view at this point..

Got it. Thanks guys..

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

Hey, guys. Good morning..

Hi, Paul..

Gary, I just want to make sure I get your number correct, you said in the investment that you guys are making when if you think it sense then you're going to reduce in your we see production by 280,000 to 300,000 barrel today. I was looking at your press release, last year your heavy fuel oil is 37 and 63 so that's only about 100.

Did I get it wrong and also you say production increase 700 or that you say that is up to 700 because in the full year last year your 641, so maybe you can clarify maybe I missed right one you just said?.

Sure. And what I was saying is that in total I was not saying incremental, Paul, I was saying in total that our reserve destruction will grow to by the time we finish these projects in 2019 and 2020, we're going to grow to about 280,000 maybe I said 280,000 to 300,000 by the time we get this done in 2017.

In '17 - let me tell in 2016 it was 240,000 barrels per day, in 2017, we finished a part of the Star Project which took us from that up to about 252,000 barrels per day and the balance would take us up this 280,000 to 300,000 and then that's a residual destruction.

And then in distillate production, in 2017, we were about 640,000 and we're going to go up to about 710,000 to 720,000 when we complete these projects. So in total, the increment is about 60,000 barrels a day of residual destruction incremental and about 110,000 barrels a day or so of incremental distillate..

Okay.

And is that going to have any change in the crude or that will be relatively steady?.

Well, that it all depended on the date - excuse me that the crude prices of the differentials when we get these projects complete. The other thing is that we have the flexibility to run about 70% of medium sours and heavier or 70% sweet. And every day we're going to optimize based on where the crude diffs are.

So we're going to have tremendous flexibility to run a very high medium sour, heavy slate and residual destruction. But if the sweet markets are if you optimize with sweet then will be able to run sweet, but that's the benefit in our system is that we can go either direction..

Gary, you always been the statement for the industry, so any update about the temperature in DC related to the reform RFS, is that any remote sense that we may see something happen?.

Let me ask Don to talk about this. Don's been very involved here recently meeting with a number of people in DC. And yes we are very, very involved in this. But let me have done to give you the details on the update..

Sure, Paul. We have consistently believed that the RFS is broken and we need either significant reform or repeal. MPC has always been focused on a long term solution that in our view permanently addresses all the issues and problems with the RFS. Clearly the PES situation recently has that maybe put a little bit more focus on RIMs and the RFS.

But our view is that you need to have a long term solution. And we're actually, fairly optimistic or optimistic about the legislative efforts that are ongoing in Washington D.C.

led by Senator Cornyn and others and we think it will result in a solution that I think has some short term relief but more importantly has a long term solution to RFS eliminating the mandate and allowing our transportation fuels and other transportation fuels to be able to participate in a free market..

Don, Can you elaborate a little bit more in terms of what are changes that you guys think that it may happen?.

Well, I mean we've actually we've been having dialogue with a number of legislators and I guess we have some perspectives on things that we think will work. They've been - I think they need to make sure that they have a solution that works for the energy industry that works for the corn ethanol industry.

So I think there's lots of perspectives that are currently being considered. We are hopeful that we should see legislation in the not too distant future Paul, but I think it's premature for us to try to speculate as to what that will be since a number of legislators are working on that..

And Paul, I can say that we have the right legislators at the table working on this. Senators Cornyn and Cruz along with Grassley and Ernst. Grassley and Ernst being from the Corn Belt states are all very involved. So we're both sides of the table working on this.

And then on the house side, The Chairman, Walden along with our Congressman Shimkus are very, very involved. So they are the right people at the table trying to get this issue off a high center. And I'm fairly confident that we're going to get there this spring..

Thank you..

Thank you. Our next question is from Phil Gresh from JP Morgan..

Yeah. Hi, good morning. First question, I apologize if I missed it, I don't think you started.

Do you have a new effective tax rate guidance that you think about following the tax reform and also perhaps how you might think about cash flow benefits from the tax reform, others have commented on the cashless side actually cash taxes trending below these book tax rates, so any thoughts there?.

Yeah, Phil. We think that the effective tax rate is probably going to be a couple points below statutory in a going forward basis so we sort of guide you in that direction.

We haven't given specific guidance as to the cash tax benefits but we have looked at 2017 sort of as if basis with tax reform and it's something in the order of $400 million to $500 million savings of cash taxes so again we're not giving specific forecast but it's certainly of that order of magnitude as we go forward..

Okay. That's helpful. Thanks. And then the second question would just be around capital allocation of the free cash flow above and beyond understanding capital spending and projects that you've highlighted, as you look at 2018, you think about the buybacks that you've completed in 2017 and where the balance sheet that.

Is 2017 the right order of magnitude we thinking about from a buyback perspective then in this type of market or any color would be helpful?.

Sure. Yeah and again we're not giving specific guidance but what we did indicate is that after tax cash proceeds from the drops which are closing today beyond what any adjustments we need to make to capital structure to support the investment grade credit profile would generally be targeted at some form of shareholder return.

So again I would use that as your guide in terms of what you think the year could be, but it is share purchase continues to be an important vehicle for us to get capital back to shareholders. We think it is very tax efficient and I think you'll continue to see you know substantial activity there..

And how much is the tax and leakage at this point I think you at one point you talk about I think the exact numbers are getting back I guess with the new tax rates?.

Yeah. I think Phil probably the best thing to do would be to just adjust down based on the new tax rates from where we're at in terms of what the absolute leakage around the distributions would be.

We haven't given specific guidance as a lot of allocation work that's got to be done in order to determine what that will look like but I think at a macro level taking the new statutory rates at what we provided before is probably a pretty good starting point..

Okay.

And last one, Gary any thoughts in M&A environment you seems reasonably upbeat on the last call particularly around retail midstream?.

Well, there continues to be opportunities in the midstream. I think the number at the year, I would expect the midstream positions probably to heat up.

We're very bullish on the midstream when you look at the couple of our biggest customers on the production side that they're talking about the big increase and drilling activity over the next couple years. We're bullish on the in the Marcellus, Utica area that we've seen very strong growth in both of those arenas.

On top of that the Permian, overtime, there's been a number of assets put in place I think specifically were put in place eventually to put on the market does a more single one-off type assets. We continue to look at a number of those, but I think both in midstream and in retail, there are going to be some opportunities during 2018..

Thanks, Gary..

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

Good morning, everyone.

Just following-up on Phil's question about taxes, what's the reason that you guys would end up being below the statutory rate, is that just the new higher bonus depreciation?.

Brad, the biggest piece is really the income allocation that we make to the publicly held units and MPLX so that that is even without tax reform there would have been a big impact on the effective tax rate. So that's the biggest driver of that to a couple of point difference between statutory and our effective guidance..

Okay.

So at the corporate level you know excluding that MPLX impact as it just basically modelling you know around the statutory rate?.

That's probably the right way to start it, yeah and that's sort of the marginal statutory rate..

Okay, thanks for the color. And then Gary, you know obviously you've been focused on this value unlocking plan for the past year, 18 months and it's coming to an end year.

Can you talk a little bit about from a corporate strategy standpoint, what we're going to be thinking about for MPC going forward, you know, there going to be a greater focus on Midstream or Speedway or we're going to talking about cash returns, just sort of what's the theme for 2018?.

The answer is yes. You know I've been very clear in the presentations we made at the end of the year and in our presentation today.

And we are increasing the capital budget by $150 million in Speedway this year from 3.80 to 5.30, a very strong - and I'll ask Mike Hennigan to talk in a second here about what he sees on the Midstream side and Tim just answered on our return to shareholders.

If you look since the beginning of MPC and specifically in 2017, very, very strong returns to shareholders both in dividends and share buybacks. You will continue to see as Tim just highlighted a significant amount of the after tax proceeds we received for these drops, it's going to be available for capital return to shareholders.

Beyond that we see some very strong opportunities, Kristina's first question of the day a very strong opportunities in the refining side mainly around distillates production in our refineries. And let ask Mike here to talk about what he is seeing in the Midstream side..

Hey Brad. We're pretty bullish our organic capital plan for 2018 if you noticed we disclosed about $2 billion of capital spend. That comprises eight processing plants, six up in the Marcellus, Utica as Gary mentioned, one in the Stack and one in the Permian. So we're in the right locations as far as shale development.

We're also going to add a fractionator up in the Marcellus area. We are going to add two of euthanizes up in the Marcellus which I think is another opportunity to starting to reveal itself ethane up in the North East. In addition to that, we're expanding crude pipelines Ozark up in the mid-continent as well as Wood River over to Patoka as well.

So we have a pretty full plate, execution will be a high priority for MPLX in 2018 as far as the identified capital. And then we have a couple of other opportunities that we're working on that will give some more diversified cash flows. So it's exciting time to be in Midstream and we're trying to get after it..

Great, thanks for all the color..

Thank you. Our next question is from Neil Mehta from Goldman Sachs..

Good morning, Tim. Thanks for taking the question.

Gary, on same store sales in January, I am sorry if missed that, did you say they were down 1.7%, was there anything funky in there if that was the number or that a function of some macro-trend that you are seeing in gasoline and any comments in terms of the gasoline outlook here distillates definitely looks very bullish but just to start on the gasoline product side?.

Yes, just it is very bullish but and Tony can give you more color but it's - let's hope it's non-recurring but it was the tremendous weather issues we had across the entire southeast, the southwest added as well but mainly the southeast all the way up to New York to region where you live. And then we had it across entire Ohio valley.

But we've had two to three major ice storms and things just we're shutdown. And I think that proves out, if you look at this week's inventory number in the build in crude oil, it's just less of refineries not being able to run, fall out, a number of refineries having temporary blips mostly due to power outage, but all this kind of works together.

I think it is a very temporary thing. The other thing that Tony can speak to is we've had a very swift rising crude price and you have to be able to get that price to the street. So Tony, you want to how many restorations you've seen so far this year..

Hi Gary. I think the two comments you've made is essentially the entire reason the same store is down as we are seeing it so far. Storm is the biggest impact, but as we see this rising commodity price environment, our wholesale cost has moved up in line with the rising crude prices. So in our efforts to pass that rising cost on to the street.

We do incur some volume impact as a result of try to more or restore margins as well call it back to the levels where we think is appropriate given the environment..

Neil, let me say to your question and we had this in conference as well. I need the biggest macro change that you have seen in 2017 is that gasoline demand has outpaced where the expectations of the prognosticators are in the market. So outperformed very nicely in 2017. We would expect that to continue. Distillate continues to outperform.

So both of those with the days of supply being very much in checked both gasoline and distillate as compared to five year average. I think build is very, very well on a macro standpoint for the refining industry..

I appreciate that Gary. One of the other things you talked about when we cut up a couple of weeks ago that you are generally constructive on the oil macro, those are view in 2017 as well and you are right. Can you just talk about the broader oil view that you had and then also talk about as one of the largest buyers OPEC buyers in the U.S.

any thoughts on Saudi and OPEC going into through the year in terms of compliance?.

Yeah, from a macro standpoint Neil, if you look at the crude inventories, very much in line and looking at a just over the last years a significant I would say rebalancing of crude oil across the entire system.

So at your conference, we talked about where we think prices will be for the year and since your conference, I even becoming more bullish on where I think crude prices are going to go because of the resilience of the market, how the oil producers are continuing to I think be more constrained about incremental production coming into the market.

And I think on the U.S. production side, there is a very strong view of that they need to be careful on running too fast, too quickly in the marketplace.

So I think you are going to see probably will get north of 70 this year on the crude price which I think boards well for the total utilization of refineries, they boards well for the drill bit that's going to satisfy the NGL producers and those markets as well. So I think from a macro standpoint, it's going to be a strong year.

Now the caveat to that is when you continue to see an increase in price, you have to get that price to the street, going to have to get to the wholesale level as well as retail level. However, inventories are in check and are in very good shape.

And when you look at the first part of the year, I think they are going to see more turnarounds in the entire refining system and we very - some that are scheduled here in pad 2 earlier in the year than you would anticipate. And I think that again is going to put a very good balance underlying the refining system.

Let me ask Mike to talk here about what he sees as far as OPEC supply coming into the market..

Yeah, Gary, I think you said it well. I mean OPEC is doing a great job with their production. Again Saudi Arabia kind of the king pin they basically said that they need to continue to constraining their full production through 2018. And I think they will.

From our standpoint, we've had no problem replacing the term crude out of the Arabian Gulf that is no longer economic to us with other grades. We have tremendous flexibility within our refining system we can process the very heavy high sulfur, high acid crudes that not everyone can. So that's been a positive for us..

Thanks, everyone..

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

Thank you. Hi, good morning, everybody. Gary, I think it's the first time you've spoken this year, so happy New Year.

Gary, the tax on the benefit on your cash flow, how does that change you are thinking about a more aggressive step up in your dividend versus buybacks going forward?.

Doug, Happy New Year to you as well. I think we outlined it before that we see capital investment some new opportunities in refining, but the further advancement in retail and in our midstream space from an investment side, we've been very aggressive in capital return to shareholders in 2107.

We accelerated our dividend from July now to early January here and a significant increase in our dividend. So we will continue that type of cadence as we see fit. We have great investment opportunities as well as we have great opportunities. And I think it's a good investment we all do here in returning capital to shareholders.

So we will continue to stay on top of our game as we look to return of capital to shareholders..

A nice one for sure.

I guess I really only have one other the big picture question Gary and like several of the guys over there if I could take advantage of your macro view and it really goes back to IMO and one of the things we're kind of thinking is that there are still some regions of the world with utilization rates and the diesel margins really improve as much as some folks think we could.

My concern I guess is that we see a step up in utilization for example in Europe at the expense of gasoline supply in the Atlantic based meaning we end up what we supply in the gasoline markets.

I was just wondering how much you thought about the scenarios as to how just can alternately play out in let's say at $70 oil world which I guess also changes the economics for shipping, decisions as always discover and so on.

So I am just wondering how - what are the kind of scenarios you're thinking about best case, worst case for the IMO outcome? And I'll it there. Thanks..

Yes, Doug. We thought about those scenarios as well. One of the things that you have to look at in Europe and it is starting in the U.K. it's going to happen so other countries in Europe as well. But they're going to become more of a sponge for gasoline going forward.

As you know it's always been historically that they pushed diesel into the marketplace and those benefits are have gone away. So I do think that you're going to see more demand for gasoline.

And the other thing is our exports, if you look at the rate of change of exports from the Gulf Coast, gasoline is becoming more and more prominent in the exports was to Latin America, South America, West Africa or into Europe. So Europe is still predominantly diesel, but it's going to increase.

So yes, we look at those scenarios and we will continue to watch those very carefully. But right now, I think we are not only speak for MPC, we are very, very well positioned for this IMO changes coming.

And if gasoline continues to pick up that's why we're investing in further distribution of capabilities both in Galveston Bay and Garyville to be able to take bigger cargoes of gasoline..

I appreciate the full answer Gary and congrats on a great year. Thanks again..

Thanks, Doug..

Thank you. We do have time for one final question. Our last question today is from Roger Read from Wells Fargo..

Yeah. Thank you. Good morning..

Hi, Roger..

Hey Gary. Just if we could catch up a little more on the retail since that's where your kind of incremental investments are coming on presuming didn't need the tax reform to make that happen.

But with the slower growth we've seen in terms of I know January weather, but if you look at Q4 right on a per store basis, retail was down and the merchandise excuse me was down, in the fields were down.

Is that a function of why you need to repurpose some of the stores or upgrade them I guess was the term used? And then as we think about expansion is that a function of new markets or better locations within existing markets, just going to understand want to understand if it's a regional growth story or stepping into a new region? And then the last part of the retail question since it was asked about midstream any retail acquisitions that are possible or look attractive in this environment?.

Sure. Tony, you want to take Roger's first questions and I will take rest..

I'd be happy to Gary. First of all let me remind you the comps you're looking at when you mention the trends in the fourth quarter and actually for the full year, remember we formed this joint venture with pilot, so we moved sales margin expenses out of the detailed categories into an equity earnings component.

So you will see some natural variances on those just because of the formation of venture. However, your point is correct there is some softness in what we look at is transaction counts inside of our store.

But again, we think that our plans, the technology investment, our loyalty program, the focus on the consumer that we have, those are all and actually the priorities and some of the growth areas and some of the store that we're investing that capital that Gary mentioned earlier, will be around so high growth areas like food service for example in convenience store.

I think we've got a very good program to continue to grow and invest on the remodel part of that capital that Gary talked about. As far as the new builds, rebuilds, our focus is going to continue to be and we've consistently said this. We're going to be in the footprint of MPC's supply chain.

I mean that's part of the synergies and the value that we have seen over the years that we continue to tell the market about in terms of the integration benefits of Speedway with MPC supply. So when you look at our footprint, you look at our foothold in the Midwest and some of the new markets we have on our eastern markets.

Those are really good MPC supply areas and therefore we want to take advantage of those synergies by investing our stores where we can take advantage of the synergies with supply. And the last point on acquisitions. We don't say anything specific about that.

But the industry as a whole my observation would be is that is consolidating, there needs to be some consolidation, it's a very fragmented convenient store industry, so I think there's going to be opportunities in the future to look at some acquisitions in our primary footprint..

Okay. Great. Thank you and I'll leave it there..

Thank you..

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

Thank you and that's conclude today's conference. You may disconnect at this time..