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Marathon Petroleum (NYSE:MPC)

Q3 2013 Earnings Call

October 31, 2013 10:00 am ET

Executives

Pamela K. M. Beall - Vice President of Investor Relations & Government & Public Affairs

Gary R. Heminger - Chief Executive Officer, President, Director and Member of Executive Committee

Donald C. Templin - Chief Financial Officer and Senior Vice President

Garry L. Peiffer - Executive Vice President of Corporate Planning and Investor & Government Relations

C. Michael Palmer - Senior Vice President of Supply Distribution & Planning

Richard D. Bedell - Senior Vice President of Refining

Analysts

Edward Westlake - Crédit Suisse AG, Research Division

Evan Calio - Morgan Stanley, Research Division

Paul Sankey - Deutsche Bank AG, Research Division

Paul Y. Cheng - Barclays Capital, Research Division

Douglas George Blyth Leggate - BofA Merrill Lynch, Research Division

Chi Chow - Macquarie Research

Douglas Terreson - ISI Group Inc., Research Division

Jeffrey A. Dietert - Simmons & Company International, Research Division

Roger D. Read - Wells Fargo Securities, LLC, Research Division

Faisel Khan - Citigroup Inc, Research Division

Allen Good - Morningstar Inc., Research Division

Operator

Welcome to the Third Quarter 2013 Earnings Call. My name is Cliff, and I'll be your operator today. [Operator Instructions] Please note that this conference is being recorded. I would now like to turn the call over to Ms. Pam Beall. Ms. Beall, you may begin.

Pamela K. M. Beall

Yes. Good morning. Thank you, Cliff. Thanks for joining us today on Marathon Petroleum Corporation's 2013 third quarter earnings webcast and conference call. The synchronized slides that accompany this call can be found on our website.

On the call today are Gary Heminger, President and CEO; Garry Peiffer, Executive Vice President of Corporate Planning and Investor and Government Relations; Don Templin, Senior Vice President and Chief Financial Officer; Rich Bedell, our Senior Vice President of Refining; Mike Palmer, Senior Vice President of Supply, Distribution and Planning.

Please read Slide 2. This is our Safe Harbor statement, and it is a reminder that we will be making forward-looking statements during the presentation and during the question-and-answer session. Our actual results may differ materially from what we expect today and factors that could cause actual results to differ are included here, as well as in our filings with the SEC.

Just as a reminder, we will be hosting an Analyst and Investor Day at the Saint Regis Hotel in New York on December 4. If you have not received an invitation and would like to attend, please contact me.

And now, I'll turn the call over to Gary Heminger for opening remarks.

Gary R. Heminger

Thank you, Pam, and good morning to everyone. Thank you for joining us today. The third quarter was challenging for MPC and the entire U.S. refining sector with declining frac spread's, narrowing crude oil differentials and backwardation in the crude market. We believe much of the pressure on industry fundamentals was due to high industry crude runs. Incremental inventories held within the U.S. during the hurricane season also contributed to excess transportation fuel inventories since there were no significant adverse weather impacts this year.

Our assets performed well during the third quarter, and we are pleased with the ongoing integration process at the Galveston Bay refinery. We continue to recognize synergies with Galveston Bay and our other refineries. In addition, we are evaluating further opportunities to unlock the earnings potential of this recently acquired asset.

Our Pipeline Transportation segment provided consistent results for the quarter. We continue to advance organic investments in our midstream businesses that are catalysts for significant growth in the future. In addition to our participation in the recently announced Southern Access Extension project, we are developing a new pipeline project in the Utica Shale region that will initially connect multiple production facilities in Eastern Ohio with our Canton refinery and other MPLX pipelines in the area. This project will complement the existing condensate and crude oil truck unloading facility at Canton and our truck to barge logistics operations at Wellsville, Ohio, that was brought online in October.

Speedway delivered strong performance for the quarter, resulting in more than a 34% increase in income from operations compared to the same quarter last year. This was driven in part as a result of an increase in same-store sales volumes and margins and cost control. Speedway continues its expansion in contiguous markets with construction of new stores in Pennsylvania and Tennessee, as well as its growth in commercial fueling locations for increasing sales of diesel fuel.

Despite the challenging market conditions in our Refining & Marketing segment, we returned $1.2 billion of capital to shareholders through dividends and share repurchases in the 2013 third quarter. We remain confident in our ability to generate cash to continue our balanced approach to investing in value-enhancing investments in the business and returning capital to our shareholders. This confidence was underscored in September when our Board of Directors approved an additional $2 billion share repurchase authorization.

As of the end of September, we have repurchased 17% of our shares since its spinoff in June of 2011. As we look forward to 2014, we are optimistic industry fundamentals will improve. We are encouraged that EPA has acknowledged its renewable volume obligation for 2014 is unworkable. We remain cautiously optimistic that EPA will establish reasonable targets for 2014. We, along with others in the industry, continue to press Congress for a permanent legislative remedy to renewable fuel standards to provide the markets great certainty over future renewable fuel obligations.

Exports of gasoline and distillates continue to provide refiners incremental markets to distribute transportation fuels. Our exports reached a record 245,000 barrels per day for the quarter compared to 124,000 barrels per day during the same quarter last year. The low cost of natural gas and projected increase in supply of North American crude oil will continue to benefit U.S. refiners. In addition, U.S. refiners have the ability to produce a low sulfur refined products being increasingly required around the world. We believe these advantages will continue to provide U.S. Gulf Coast refiners with a global competitive advantage. And it should allow U.S. Gulf Coast refiners to capture growing share of demand for transportation fuels, particularly in Latin America and Europe.

With that, I will ask Don Templin to review the quarter results in more detail. Don?

Donald C. Templin

Thanks, Garry. Slide 4 provides earnings and adjusted earnings data both on an absolute and per-share basis. Our third quarter 2013 adjusted earnings were $183 million compared to $1.1 billion of adjusted earnings in the third quarter of 2012. Adjusted earnings per diluted share was $0.59 for the third quarter compared to an exceptionally strong $3.31 during the same period last year. The adjusted third quarter 2013 earnings excluded $23 million pretax for cumulative pension settlement expenses resulting from the level of employee lump-sum retirement distributions occurring in 2013. The adjusted third quarter 2012 earnings excluded $33 million of pretax pension settlement expenses and a $183 million pretax gain on the settlement of items relating to the sale of most of our Minnesota assets in 2010.

The earnings walk on Chart 5 -- on Slide 5, shows by segment, the change in adjusted earnings from the third quarter of 2012 to the third quarter of 2013. The primary driver for the change in our adjusted earnings was the decrease in income from our Refining & Marketing segment, partially offset by an increase in income from our Speedway and Pipeline Transportation segments and lower income taxes.

As shown on Slide 6, Refining & Marketing segment income from operations was $227 million in the third quarter of 2013, compared with just under $1.7 billion in the third quarter of 2012. We've expanded this chart to show both price and volume impasse. The change from 2012 was primarily due to lower crack spreads, narrower crude differentials and lower product price realizations, partially offset by increased volumes due in large part to the acquisition of the Galveston Bay refinery, along with operations at the Detroit refinery.

The unfavorable earnings impacts associated with the lower crack spreads and narrowing crude oil differentials are found in the price columns for the following 4 market metrics: LLS 6-3-2-1 crack, the sweet/sour differential, the LLS to WTI differential and the LLS prompt versus delivered column. All of these indicators utilize spot market values. As a result, differences in our actual product price realizations and our actual crude cost quarter-to-quarter are reflected in the Other Gross Margin column.

So let me make a few comments about each of these items. First, our product price realizations compared to spot market values were lower in the third quarter of this year than in the third quarter of last year, due in part to the impact of renewable identification numbers or RINs. RIN prices averaged approximately $0.085 on a per E10 gallon basis for the third quarter 2013, compared to $0.015 per gallon in the third quarter of 2012. Our cash cost for the RINs we purchased to meet our RFS obligation was approximately $25 million per month for the third quarter of 2013.

We continue to believe that the traditional crack spreads using neat gasoline and distillate spot market values versus the biofuel blends that are actually sold likely overstate refiners' earnings due to the impact of RINs.

Second, our actual crude and feedstock acquisition cost compared to the market indicators were more favorable during the 2013 third quarter than they were in the comparable period last year.

The increase in direct operating costs quarter-over-quarter, is primarily due to the acquisition of the Galveston Bay refinery and is consistent with our guidance. On the next 2 slides, we provide earnings walks for each of our other operating segments.

Slide 7 show Speedway's income from operations was $102 million in the third quarter of 2013 compared with $76 million the third quarter of 2012. Speedway's light product gross margin was $27 million higher in the third quarter of 2013 compared with the third quarter of 2012. This increase was primarily due to a $0.03 per gallon higher gross margin.

Merchandise margin was $224 million in the third quarter of 2013 compared with $217 million during the same period last year. This $7 million increase was primarily due to margin expansion from increasing merchandise and food sales.

On a same-store basis, gasoline sales volumes were up 1% in the third quarter 2013 compared with 2012 third quarter. Speedway's same-store merchandise sales, excluding cigarettes, increased 5.6% over the third quarter last year, which is noteworthy, considering the third quarter last year was up 4.1% from the same quarter in 2011. Speedway's average retail gasoline price during the third quarter of 2013 was $3.44 compared to $3.62 in the same period last year.

Slide 8 shows changes in our Pipeline Transportation segment income. Income from operations was $54 million in the third quarter of 2013 compared with $52 million in the third quarter of 2012. This increase was primarily attributable to an increase in transportation tariffs offset by higher operating expenses and depreciation. A portion of the increase in transportation tariffs is related to the formation of MPLX.

A number of items that made up the unfavorable operating expense variance, the largest of which were costs now incurred by MPLX as a standalone entity.

Slide 9 presents the significant drivers of changes in our cash flow for the third quarter of 2013. At September 30, 2013, our cash balance was just over $2 billion. Operating cash flow before changes in working capital was up $475 million source of cash. As shown on this slide, the primary driver of the reduction in cash balance for the third quarter is the over $1 billion of cash used for share repurchases that Gary Heminger highlighted earlier.

Slide 10 shows that at the end of the third quarter, we had just over $2 billion of cash and approximately $3.4 billion of debt. With EBITDA of almost $4.8 billion during the last 12 months, we continue to be in a very manageable debt position, with leverage of 0.7x EBITDA and a debt to total capital ratio of 23%.

Turning to Slide 11. During the last 12 months, we generated nearly $4.1 billion in cash from operations and $1.3 billion of free cash flow. Over that same period, we returned over $3.3 billion to shareholders through dividends and share repurchases. This was about 2.5x our free cash flow over that period. During the third quarter 2013, we purchased approximately 14 million shares for about $1 billion through open market repurchases. It is our intention to continue returning capital to our shareholders that is not currently needed in the business.

Slide 12 provides outlook information on key operating metrics for MPC for the fourth quarter of 2013. For competitive purposes, those same metrics for the fourth quarter of 2012 are also shown. As you can see, turnaround costs are expected to be substantial in the fourth quarter at approximately $350 million or just over $2 per barrel of total throughput.

Looking forward, we also expect significant turnaround costs in the first quarter of 2014, estimated to approximate $500 million. The October market data document will be published tomorrow on our investor website.

Our mission continues to be value creation for our shareholders. We are committed to pursuing opportunities to create near and long-term value and believe the returns to our shareholders reflect that focus. We will be balanced and disciplined in our approach to capital allocation as we continue to assess the opportunities in front of us.

And now, I will return the call back to Pam Beall.

Pamela K. M. Beall

Okay. Thank you, Don. [Operator Instructions] With that, I'll open up the call to questions. Cliff?

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Ed Westlake from Crédit Suisse.

Edward Westlake - Crédit Suisse AG, Research Division

My first comment is actually on the MLP, I don't know if you -- I'm sure you've seen the market response to the other transactions that we've seen in the MLP space. I'm thinking Devon and Crosstex being a little bit more aggressive in terms of bringing forward the value of the MLP. Does that change the way you're thinking about your sort of progressive drop-down strategy?

Garry L. Peiffer

Yes, Ed. This is Garry Peiffer. Sure, we're watching all those transactions and activities very closely and considering that, when we set our growth -- annual distribution growth targets, and I think you know in those cases, we just celebrated essentially today, our 1 year anniversary, so we've only been in the MLP space for a relatively short period of time but we watch them all. And that's why I think in the last quarter, we gave a little more definitive guidance to the market when we said that we're projecting annual distribution growth in the 15% to 20% range for at least the next several years, to give a little more specificity, if you will, to what we're expecting and how we're expecting to grow the MLP. So we're definitely watching, aware of and analyzing all those activities.

Edward Westlake - Crédit Suisse AG, Research Division

Okay. And then a specific question on the data pack and the RIN distortions. Obviously RIN prices have pulled back thanks to what it seems like the EPA is looking to do. Have you started to see those distortions versus the data back on the pricing reduce?

Garry L. Peiffer

Yes. This is Garry, again. Yes, definitely. I think yesterday RINs we assessed maybe about $0.25 a gallon per RIN or about $0.025 per E10 gallon. In the third quarter, we averaged closer to about $0.85 or so and that was about the same in the second quarter. So the distortion that you saw in the second and third quarter is obviously less at $0.025 a gallon versus $0.085 a gallon so I think we're getting better clarity of what impact that has on the bottom line. And as you know, we've talked last time, it's really an impact whether you write a check to acquire RIN or you sell at the wholesale level, that effect really comes through financially, no matter which way you go about acquiring your RINs.

Edward Westlake - Crédit Suisse AG, Research Division

So your thought process is that the RIN has been driving these distortions, it's not other factors such as gasoline oversupply, et cetera?

Garry L. Peiffer

Well, I think that's obviously affecting the overall market but I think the distortion, when you try to translate the gross, neat, spot values into a bottom line profit after RINs, that's where the distortion comes in.

Operator

Our next question comes from Evan Calio from Morgan Stanley.

Evan Calio - Morgan Stanley, Research Division

Maybe a follow-up to Ed's question and on a longer-term basis, given your higher multiple MPLX, it translates to a lower yield, it all relates to the parent affiliation with MPC and the drop-down potential there. I mean, do you believe MPLX, over the longer term, is a natural consolidator within the midstream space?

Gary R. Heminger

Evan, this is Gary. Yes, we do and as we continue to follow MPLX and back to Ed's question, certainly, we're following everything that's in the marketplace and as we discussed many times with our logistics assets that we have inside of MPC, as well as the remaining ownership that we have, this -- not the drop-down yet, into MPLX from our initial start of the company, we have much flexibility in many avenues in which we can turn. On top of that, I think it's very important to understand, we're working on many organic opportunities. As we stated when we first started this company, this was not just going to be a drop-down story of MPC assets. We are working very hard and expect to be able to give you some more color when we're together in early December around that strategy. So again, it's not just around MPC, it's what we can do to grow this business and really tee it up for the long-term. And as I said, we'll give you more information on that when we're together in early December.

Evan Calio - Morgan Stanley, Research Division

Okay, perfect. Second question on capital allocation. That was an aggressive buyback in the quarter, as representing a much higher percentage of relative free cash flow. I mean, could you talk about that change? I mean are you making a statement that you believe weaker 3Q conditions are transitory and you're using associated weakness to retire shares? And in addition to the cash that remains on the balance sheet, do you also view MLP-able assets as another potential source of liquidity that could fund a lot of different things, including a buyback? [indiscernible]

Donald C. Templin

Yes. Evan, this is Don. I mean, we have consistently said that we are committed to returning cash that's in excess of the needs of our business and core liquidity needs to our investors, and we've discussed a number of times, our view around sort of our core liquidity needs, including the cash balance that needs to support that core liquidity needs. And the activity that we've been undertaking really in the last 12 to 18 months has been very focused at getting our cash balance down, working it down and returning that excess cash that isn't being deployed to the business to our shareholders. I do think that we have a lot of tools in the future that are available to allow us, in addition to sort of our strong earnings growth profile and what we think we continue to grow in the midstream, MPLX is a great tool and we can generate cash by dropping assets down to support return of capital to shareholders. We have LP units, as you know, that we can monetize if we need to. So I feel great about our ability, over the long term, to continue to return capital to our shareholders in a very disciplined way.

Evan Calio - Morgan Stanley, Research Division

Great. One last, if I might. Just can you provide an update on turnarounds in the quarter? I believe Garry, it was your only asset currently in turnaround. Any update when you expect to exit there or what the -- more of the utilization impact in the quarter might be other than what you already gave as you said was a turnaround of events? I'll leave it there.

Donald C. Templin

With respect to the utilization impact, our outlook information, that includes the projected crude throughput at the refinery. So that data that we projected forward there includes the volumes or decrease in volumes arising from the turnaround. We don't give specific information on which refinery it is and how long the turnaround lasts.

Operator

Our next question comes from Paul Sankey from Deutsche Bank.

Paul Sankey - Deutsche Bank AG, Research Division

We've done a little work over the past 3 years on crude discounts and I think we buy into the idea, obviously, of a structural discount of U.S. crude to international. Our concern is the product markets, in your case, particularly around Chicago and whether or not we may just end up with an oversupply of product in those internal markets. Gary, can you talk a bit more about how you can mitigate the risk of products oversupply inland U.S. as a way of maintaining excess profit and refining, as opposed to just cheap crudes simply leading to cheap gasoline?

Gary R. Heminger

Right. Well, that's a very delicate situation, as you outlined, Paul. What we could do to mitigate is really a strategy that we have employed for many years. Being one of the larger suppliers into the Midwest PADD II and having pipeline logistics that we can move from PADD III into PADD II and then using our barge system that we also can move products out of PADD II, we optimize every day and we are a big buyer of additional products in the Midwest, as well. And over the years, what we have done to mitigate that is to be able to take advantage of excess -- at times, excess product, mainly gasoline. Distillate is fairly balanced in PADD II, but mainly gasoline. If there's excess product available, we buy it for different turnaround cycles, different maintenance cycles and we can deploy that around the Midwest instead of shipping it up from the South. I'm sure that you have noticed over time that pipeline shipments from the South in various of the big common carrier systems has certainly declined over time and that's because of the way we have tried to resupply some of those markets by using that product in the Midwest. I will agree with you that when you look at the shoulder quarters and especially the inventory that was in place, as I said in my talk earlier, the inventory that was in place over the summer, building for hurricanes just don't build inventory in the Gulf Coast for hurricanes but in the form of either crude or refined products. We moved that up into some of the Midwest terminals, as well. So as that inventory was there and you reduce that inventory and use it up, it's -- I think that is what has caused some of the downturn in the crack spreads over this period of time. But those are the types of things that we have done to try to mitigate and be a leader in the marketplace.

Paul Sankey - Deutsche Bank AG, Research Division

Yes, I guess, it speaks to your integration strategy. The follow-on question which is beyond on the obvious question, which would be on product exports. Can you talk about the dynamics there? How much they're growing, how the outlook looks, and what you're doing to invest in increasing those exports?

Gary R. Heminger

Yes, let's have Mike Palmer talk about this.

C. Michael Palmer

Yes, Paul, and I know you've seen our numbers and obviously, we've been growing these exports considerably, probably more than anybody expected over the last couple of years. And I can tell you that we have no shortage of opportunities to export both distillate and gasoline. Things are looking real good in that area. We are doing things to debottleneck that allow us to export more over the docks. We have an export tank that's coming on at Garyville that will allow us to export gasoline more than we do today. We see this as a core part of our business and we would expect to continue to grow it.

Operator

This question comes from Paul Cheng from Barclays.

Paul Y. Cheng - Barclays Capital, Research Division

Real quick. If I'm looking at in the third quarter, comparing to the market data, it seems like sequential data, the second quarter, your margin capture rate actually is somewhat better. Is there any particular factors that we should be aware?

Garry L. Peiffer

Paul, this is Garry Peiffer. Nothing that strikes me off the top directly. I guess, the one thing that probably has happened is kind of like we talked about earlier in terms of the RINs. I think there's better -- a little bit better understanding of the RINs effect going on between the second quarter and the third quarter, which was similar and the value of those RINs were similar. So I think the market, as you know, it takes a while for it to get a little clarity when you have a sudden shock to the system like when the WTI LLS spreads collapsed or when these RINs kind of enter into the equation and everything takes a little bit of time to recalibrate itself and I think that's going on now. The people understand impact of RINs on spot market prices, on crack spreads and on people's bottom lines. So I think it's more's maybe the market is getting itself a little more acclimated and recalibrated to this new world of -- you have to consider RINs in the calculation of how much you charge and how much you make.

Paul Y. Cheng - Barclays Capital, Research Division

Garry, in the second quarter, one of the factor that you guys point out hurting your reseller stand [ph], rest of the Midwest region where your refinery locate, the porter prices did not move up as much as Chicago, so regional differences. And I think in the third quarter, that still have that issue. So what have you seen so far in the quarter? Have we start to see the reversal that the rest of the Midwest market catch up with the Chicago pricing?

Gary R. Heminger

Paul, this Gary. What we have seen -- and you're right, and I think it goes back to the discussion I had before about mitigating prices due to -- at times, excess supply in PADD II. As we go in now to PADD IV and just looking here at some of the terminal prices, we are seeing a rebound in both gas and distillate pricing so far here in the fourth quarter. And again, it's using up that inventory that was on hand for hurricane and other weather impacts, so we...

Paul Y. Cheng - Barclays Capital, Research Division

Gary, I guess my question is more on that. Let's say if I'm looking at country [ph] or Ohio, is the port of pricing relative to Chicago return back to a more historical level now? Or that they are still being disadvantaged, as what we have seen in the second quarter and perhaps in the third quarter?

Gary R. Heminger

Go ahead, Mike.

C. Michael Palmer

Paul, we're trying to understand what you're asking. Are you asking about wholesale rack prices?

Paul Y. Cheng - Barclays Capital, Research Division

Yes. I mean, what I'm saying is that in the second quarter then you guys pinpoint upon a -- or highlight one of the reason behind why you did not capture as much as what the market indicators suggest is that in the Midwest market, you think that Chicago porter pricing as a benchmark, but that the rest of the Midwest market in the second quarter did not rise up to the same extent. So that there's a regional basis different between the rest of the Midwest and the Chicago pricing. And my question is that the have we seen that trend be worse?

Gary R. Heminger

Yes. I'm sorry, Paul. We now understand your question.

Garry L. Peiffer

And I guess -- this is Garry, again. I guess, in the second quarter, we had pretty sudden increases in prices in the Midwest driven by some turnaround activity primarily, plus compounded by a bit of the confusion related to the RINs. So I think that has been mitigated in the third quarter. And I think as we've looked at the demand, we see demand as being relatively good for gasoline here in the last few months. So I think all those things are translating in a little bit better realization in terms of how much we put in our pocket at the end of the day versus those spot market values, unlike that sudden run-up in the second quarter for Chicago.

Operator

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

Douglas George Blyth Leggate - BofA Merrill Lynch, Research Division

Garry Heminger, you were very early to share your thoughts about the structural discount on crude pricing. I wonder if could just ask you to bring us up-to-date with your latest thoughts and specifically, what I'm thinking is the view that you take as to how the discounts are crossing grades, particularly towards sour grades in the Gulf Coast and how that might perhaps change the way you think about your slate going forward.

Gary R. Heminger

Sure. And you're right, Doug. We've talked about this and maybe we're one of the early ones to come out and chat. Let me turn this over to Mike because Mike has a lot more detail in the crude markets right now. So Mike, if you'll take that question.

C. Michael Palmer

Okay, and Doug, I want to be sure I understand your question. Are you interested about sour spreads in the Gulf Coast?

Douglas George Blyth Leggate - BofA Merrill Lynch, Research Division

Basically. Because it's not just -- obviously, it appears that with LLS with a discount to Brent, that everything that typically trades on the Gulf Coast is not pricing off LLS. I just wanted to get your perspective as to how sustainable you think that may be and how it might change your views to keep yourself going forward.

C. Michael Palmer

Well, again, coming back to this whole LLS situation and I would throw Mars into the same package, I think. One of the things that's happening right now in the Gulf Coast, I mean obviously, you've seen these very wide LLS to Brent spreads. I mean, we're talking $10, $11. And that's -- we think that's pretty unusual right now. And the inventories on the Gulf Coast, the crude inventories are very high. There was a massive amount of turnaround activity that took place. I think there was something like 700,000 barrels a day of refining capacity that was off-line for a period here in October. And that's led to near record-high inventories on the Gulf and I think as a result of that, you've seen LLS spreads that have been extremely wide relative to Brent. We've said for some time that structurally, as the production of the shale plays continues, we've said for some time that we expect LLS to trade at a discount to Brent. And we still believe that and that should be several dollars. So we think that, that's going to be a benefit longer-term. It's probably something that, as these inventories start to come down, you'll probably see this $10, $11 spread start to come back together again. Now LLS and Mars -- and Mars obviously being the sour crude in the Gulf, those 2 have traded in a very similar trade differential over the last several months. It's been that $4.50 to $6.50 kind of level. It hasn't changed very much.

Douglas George Blyth Leggate - BofA Merrill Lynch, Research Division

I appreciate your comments on that. Gary if I could use my follow-up to talk about -- something that doesn't get a lot of attention often as a retail business. As it relates to your growth plans, some time ago, you had mentioned that you were -- you saw a very competitive and attractive business in the Hess retail network. I don't want to be too specific here, but I'm just wondering, how are you feeling currently about expanding your retail business both organically or through acquisition? I'll leave it there.

Gary R. Heminger

Well, as I said earlier in my speech, Doug, we have expanded into both Tennessee and Western Pennsylvania. With our Canton refinery with Utica Shale and moving this product into Western Pennsylvania, especially as you see some of the logistics change from the East Coast that used to bring refined product back to Western Pennsylvania, we have seen a great opportunity to move into that market. And Speedway has done so, same as in Tennessee. So they're expanding those markets as well as continuing to fill in the flanks, if you will, in the current markets in which we have operated. More so with rebuilds stations than with new builds in those states. But we're going to continue to step out with Speedway. I doubt that we will do a leapfrog of several states unless we can do something that has some market density. Your question pertaining to Hess, my compliments to John Hess, he has developed, I think, one of the best looking retail chains across the eastern seaboard. And we'll just continue to see what plays out as they make their strategic decisions on that part. But as I say, my hats off to them. I think they have one of the best looking systems on the East Coast.

Douglas George Blyth Leggate - BofA Merrill Lynch, Research Division

Good fit with Marathon, Gary?

Gary R. Heminger

I'm sorry?

Douglas George Blyth Leggate - BofA Merrill Lynch, Research Division

Would it be a good fit with Marathon?

Gary R. Heminger

I think it would be an excellent fit. We'd be an excellent fit with Speedway. Marathon is the upper side of our business whereas Speedway is the company-owned and operated side. So we'd be a good fit there.

Operator

Our next question comes from Chi Chow from Macquarie Capital.

Chi Chow - Macquarie Research

I got a question on Galveston Bay. Gary, you mentioned this in your remarks but can you talk more about specifics on the opportunities you're undertaking at the plant now that you've had it for 9 months? And in particular, I'm interested in what sort of crude changes you've made so far.

Gary R. Heminger

Sure, Chi. And that's a very fair question. And what we've decided to do, Chi, we have several things to talk about at Galveston Bay. Instead of using the conference or earnings call here to the talk about this, this is going to be one of the primary things we discuss at our meeting in December. So if I could ask your forgiveness to give me 6 weeks and we'll give you a lot more detail. Out of the synergies that we've been able to capture so far, the different crude runs we've been able to change and capture that Mike's group has done and then Rich's group on what some of the opportunities are as we see, to really capture additional, what we see, potential value. That's really going to be one of the centerpieces of our presentation in December.

Chi Chow - Macquarie Research

Okay. Gary, you're forgiven on that one. Let me try this one on Galveston Bay. Can you just, from a modeling standpoint, going forward here, how does Galveston Bay now impact the capture rate of your system relative to the historical pattern? Any comments on that end?

Gary R. Heminger

Well, as you know, we have not given individual refining information and our plan is competitively -- and I know there are several of you that -- and probably all of you, that will like us to give individual refining information going forward and we're not -- our plan is at this time, not to do that. I think Garry might have some comments about the capture rate itself.

Garry L. Peiffer

I guess, Chi -- this is Garry Peiffer. What we've given in the way of some market metrics in terms of some moves in crack spreads and sweet/sours, we've incorporated in those calculations, our best estimates of what the Galveston Bay refinery impact is on those metrics. So we try to incorporate those into the metrics we've given already and when crack spreads change $1, we're saying that's roughly a $450 million or $425 million bottom-line effect. And so those all metrics, they all incorporate our best estimate of Galveston Bay.

Gary R. Heminger

And Chi, just a year ago, when we were outlining Galveston Bay and what our plans were, and then we closed that transaction February. I'll leave a little bit forward here and talk about -- we're very pleased with the operation of the plant and how it's performing on a volumetric basis. We've gone in and repaired and really brought this refinery up to our standards in many areas. As I said, this was not a dash that we were entering, this was going to be a journey and this was going to be a longer-term run here. And so that's why we're going to outline for you in December, what some of the opportunities are. But I would say, no surprises. We continue to gather synergies at a faster clip than we had expected and we're very pleased with the asset to date.

Chi Chow - Macquarie Research

Don, on the CapEx budget, are you still at -- I think it was a little over $1.6 billion for 2013, is that still accurate?

Donald C. Templin

Yes, Chi, that's an accurate budget and what we'll do at our December Investor Day, we'll plan to give you the '14 budget, as well, that we have a board meeting coming up where that gets approved and the timing of that meeting was scheduled so that we could communicate the '14 budget to you all.

Chi Chow - Macquarie Research

Okay. Well, that suggests a pretty high capital spend in the fourth quarter. Can you give any details on sort of the components of that spending in 4Q and...

Donald C. Templin

I guess, in terms of your -- I guess, I'd interpret your question, do you think you'll go over your $1.6 billion? I mean, we are not expecting to go over the $1.6 billion. We might come under that $1.6 billion, if that's your question.

Chi Chow - Macquarie Research

Well, no. I was just -- given the spending through third quarter here today, it's just suggesting a significant bump up in the fourth quarter from what I see, so I'm just wondering the components of that spending. And then, maybe if you can reminds us of what your minimum cash balance is that you're comfortable with, you may have mentioned that earlier though.

Donald C. Templin

Yes, in the minimum -- on the core liquidity, I think we've consistently said that we believe that the core liquidity for MPC is somewhere in the $4.5 billion to $5 billion range, and that's currently satisfied by the $2.5 billion revolver, the $1 billion AR securitization and then the cash balance makes up the rest of that commitment. So I think we've said $1 billion to $1.5 billion of cash is what we believe -- is sort of a core component of our balance sheet.

Garry L. Peiffer

And, Chi, this is Garry Peiffer. Regarding the capital, just by the way we've historically constructed things and being here in the Midwest with a lot of sea stores that we're building at the moment, it's fairly traditional that we tend to spend not necessarily half, but a good share of our budget in the fourth quarter finishing up projects that we don't necessarily start in a lot of cases till the second quarter. So I have every confidence that we will spend close to the $1.6 billion, barring some major issue that we're not aware of at this point.

Operator

Our next question comes from Doug Terreson from ISI.

Douglas Terreson - ISI Group Inc., Research Division

Gary, this might be the same question that Chi just asked, but it's a little bit different but if you want to defer, that's fine. But when I think about Galveston Bay and the longer-term perspective there and I guess the questions' really about, has your perspective on the scoped had value longer-term changed? And I asked the question because you guys significantly surpassed everybody's expectations at Garyville during the past 4 or 5 years that [ph] on production growth and capital productivity. So the question is when you think about this longer term, do you sense that there may be a parallel -- I mean I know that the movement continues at Garyville today and performance is fantastic but might we see a similar type of outcome at Galveston Bay whether it be additional debottlenecking or petrochemicals that is over and above some of the things that you commonly talk about when you refer to synergies?

Gary R. Heminger

Well, Doug, that's a very fair question. Again, I want to be very careful that we don't lean too far forward here until we're ready to make a full, sum presentation on Galveston Bay. But let me ask Rich Bedell here to make a few comments.

Richard D. Bedell

Doug, just looking at Galveston Bay, it has a lot of the similarities in that it's got the size, it has the complexity, it has the logistical options, both for all the crudes that are coming into the area and also the logistical options to export products. So in that regard, it has a lot of the same qualities that Garyville has. And I think if we think long term, where we're thinking of having 2 powerhouse Gulf Coast refineries there with a lot of crude, a lot of upgrading capacity and a lot of export potential, and that's our vision.

Douglas Terreson - ISI Group Inc., Research Division

Okay, that's great. We'll look forward to seeing the details in December.

Operator

Our next question comes from Jeff Dietert from Simmons.

Jeffrey A. Dietert - Simmons & Company International, Research Division

I was hoping I could get you to talk a little bit about the rail strategy. You've obviously got a big logistical footprint existing but you haven't been as aggressive as some of the peers in buying new rail cars and announcing new rail unloading facilities. So your responses seem to be more muted. Are you less excited about the potential for rail than others in the industry or do you believe that people are underestimating the cost or could you talk a little bit about your rail strategy?

C. Michael Palmer

Yes, Jeff. This is Mike Palmer, I'd be happy to do that. We have spent a lot of time doing analysis and really looking at rails. It's not as if we haven't done that. In fact, I can tell you that we have -- we've even experimented with rail. We've brought in both North Dakota crude into the system, we've brought some heavy Canadian into the system by rail. So we've watched it, we've looked at the costs, but I can tell you that it is a high-cost transportation alternative. And maybe one of the reasons that we're a little different than others is that we are pretty well connected by pipeline. And I think that everybody in the industry would agree that with rail, it can't compete with pipe if you have pipe that's connected to your refining system and that's really where we're at. So we always look at it, we can continue to look at it to see if there's any opportunities. But by and large, we are well connected to pipelines and we're kind of committed to that strategy.

Gary R. Heminger

And Jeff, we've previously talked about the SAX extension. We've been public about that and things we're working on as to everyday is to provide a cheaper alternative. And if rail's a cheaper alternative, we certainly were to -- would be investing in that. But where our refineries are and the way we're situated, totally agree with Mike's comments. We're blessed with a very strong midstream system, continue to grow that midstream system and we'll more than likely do that with pipes and possibly barges rather than rail.

Operator

Our next question comes from Roger Read from Wells Fargo.

Roger D. Read - Wells Fargo Securities, LLC, Research Division

I guess maybe following up on the logistics question. Could you give us a little more of an idea maybe of, kind of the volumes you're starting to see in the Utica? I know you've talked historically about maybe being able to use about 30,000 barrels a day of condensate without additional investments in the units there. Are you seeing enough barrels now moving forward with this pipeline that we should expect to see some investments in the units to maybe, expand the number of barrels of condensate or very light oil?

C. Michael Palmer

Roger, this is Mike Palmer again. Yes, the answer is absolutely. We're still very optimistic about the Utica and I think as you know, there have been a lot more wells permitted and drilled and are actually producing and that's have been a result really, of the gas takeaway capacity. That's coming on so we have been ramping up. At Canton today at the truck rack, I think we're bringing in roughly 10,000 barrels a day of mostly condensate. If you look at Catlettsburg, we just brought in our first barge over the Wellsville dock and that will continue. So I think that what we expect is that over -- certainly over '14 and '15, as this gas infrastructure gets hooked up, these wells will come on and we will be ramping up the volume of condensate that we can process at these plants.

Donald C. Templin

And Roger, this is Don. In fact, we have 2 capital projects that we talked about. Condensate, splitters that both Canton and Catlettsburg that get our -- allow us to probably use up to 60,000 barrels a day of condensate. We staged them 1 for completion in '14 and 1 for completion in '15, really to be consistent with our expectations around the increase and the growth in that Utica production.

Roger D. Read - Wells Fargo Securities, LLC, Research Division

Okay. And could you probably go into a little more detail than you want to do, but if you could give us any idea maybe, of the advantage that you're able to achieve on condensate in that part of the country relative to say, other markers, WTI, Syncrude, something like that.

Donald C. Templin

Yes, Roger, we really don't get into the pricing on individual crudes. As you could expect, Utica is a WTI based kind of crude and being a condensate, you're going to get a discount. But we really don't want to share more than that.

Roger D. Read - Wells Fargo Securities, LLC, Research Division

Okay. And I guess my final question, you talked earlier about exports as much as you can or -- I don't remember the exact wording but I was curious, as you look out, say, 2 years, where you think your exports might be versus where your exports are today.

Gary R. Heminger

Well, the big thing, Roger, with our exports, when we built our GME project and started up in '09, we built a brand new dock. At the time, we thought that the dock had a capacity of about 75,000 barrels per day. We've been able to de-bottleneck, we've been able to add some incremental tankage. And in fact, Rich has a big gasoline tank that will done at the end of this year, early part of next year, to even provide us more flexibility. So what we have done is we've been able to de-bottleneck the Garyville docks, using the crude and other product dock space to be able to optimize way beyond what we thought. We have the same thing at Galveston Bay and we're continuing to optimize Galveston Bay and then we have a big study on how sort -- your question is asking number of years down the road. We have a big study on how we can optimize Galveston Bay's dock down the road to be able to get more capacity. So every quarter, the guys tell me we're at capacity and we find ways to get more out of the plants and over the docs. So we will continue to do that.

Roger D. Read - Wells Fargo Securities, LLC, Research Division

If I missed it earlier, did you give an export number for this quarter?

Gary R. Heminger

Yes. We were 245,000 barrels per day for this quarter.

Roger D. Read - Wells Fargo Securities, LLC, Research Division

And the breakdown between gasoline and diesel?

Gary R. Heminger

We don't break that down.

Pamela K. M. Beall

Cliff, do we have another question?

Operator

We do have a question from Faisel Khan from Citigroup.

Faisel Khan - Citigroup Inc, Research Division

Just given your expanded, sort of position in the Gulf Coast and your preference to use pipelines rather than rail, do you think that you need to expand, sort of your pipeline capacity portfolio, your lease capacity and even some of the investments you're making right now? Is there a need for expansion beyond kind of what you're doing or what you have right now?

Gary R. Heminger

Well, Faisel, there are many pipeline projects being talked about, especially in the Gulf Coast. A lot of people announced projects before they had done sometimes. A lot of competition for pipeline capacity coming out of the Eagle Ford. There's some pipeline reversals and some incremental pipelines being discussed in between LOOP and in the Houston ship channel. The SAX pipeline that we already talked about is going to give us that niche that is missing today to be able to get us to get to more crude eventually down into the Gulf Coast area. So there are many opportunities going, some that we're looking at being investors in through MPLX and some that might just be shipping on. And I'll ask Mike to -- maybe to add a little more color here.

C. Michael Palmer

Yes, Faisel, I guess what I would say too, is that if you look at the plans that various companies have for pipeline activity in the Gulf coast and you think about our Galveston Bay plant, certainly you've seen the pipelines that are being built from the Permian Basin into Houston. The Longhorn reversal, there's another pipeline called BridgeTex that will be coming on next year. There is a lot of capacity for us to utilize in order to bring, for example, the Permian Basin crude into Galveston Bay. The Eagle Ford infrastructure, there's a lot there already, as I'm sure you know, and then it's supplemented with vessels, with barges. And the other thing that you need to think about as well is for example, the big pipelines that are getting built from Canada to come down. Obviously, XL [ph] has not been approved yet. No one knows for sure if it will but Enbridge as a Gulf Coast access project where they're going to build a new piece of pipe from South Chicago down to Cushing. They're going to loop the Seaway line. It provides and a lot of additional capacity into that Houston, Galveston Bay area. And I'm sure that there will be smaller things that we need to do ourselves in the area. But there's some major assets that are being built.

Faisel Khan - Citigroup Inc, Research Division

Okay. Fair enough. Last question for me, and it's just a little more of a controversial question I mean, with all this crude sort of hitting the Gulf Coast by pipeline and sort of production growth continuing to accelerate in the U.S., do you have any -- Gary, do you have any opinions on the crude oil export ban in the U.S. and whether you think there's any chance that something happens to that ban or do you just think that it just stays the same?

Gary R. Heminger

Well, there continues to be discussion, obviously, with the RIN issue and all the work that we've done inside of the beltway on the RIN issue. There's been some discussion at the same time about exporting crude. We'll see. We're really exporting crude today. It just happens to look like refined product and that is the mechanism to export crude today. We'll see where it goes. I think it's more than likely down the road that, that would even be considered. The second thing you look at is if you were to export crude, whether the markets that are really clamoring for types of light sweet crude that are available today. And I think Mike outlined it very well when he was talking about the number of the pipelines in the Eagle Ford to the Permian, trying to get this into the refining suite that uses these types of crudes is really what's going on right now. But we will wait and see what happens on the crude side. There's not a lot of discussion on it right now.

Operator

We have time for one more question. Our question comes from Allen Good from Morningstar.

Allen Good - Morningstar Inc., Research Division

Just a quick one on the retail. Is there any way to gauge your appetite for increasing the size of Speedway. Whether it be a number of stores or percent of the shirt sales or anything along those lines we could sort of get an idea of how far you want to take the acquisition strategy and grow that business?

Gary R. Heminger

Well, Allen, what we have said about Speedway and the Marathon Brand also is that we think it's important to continue to increase the amount of -- our definition is called controlled volume. That's where we can use our pipeline assets, our terminal assets, our refining assets in order to be able to have a steady, gradable movement of that product into the marketplace. And we would like to grow that number, get it back up into the 70% or so range. We used to be at about 65% before we bought Galveston Bay. Granted, we got a number of retail stores or retail supply, I should say, to the Marathon Brand when we bought Galveston Bay. But that number is probably down in the high 50% to 60% type range today. So we have a strong appetite to continue to grow. We think Speedway continues to show very strong return on invested capital-type numbers and expect that into the future. And we think retail in the future is really going to be -- the winners in that market are the ones who are going to have the best back room and the best cost control. And I think Speedway ranks up there in both of those as a top-tier, best-in-class performer. But the amount of capital it's going to take, as I said earlier in my comments, be hard for us to leapfrog markets just to go buy a chain somewhere that does not give us synergies that we have today. But we do have a strong appetite to grow our retail.

Allen Good - Morningstar Inc., Research Division

And when you add incremental stores, are you gaining operating leverage as you add more stores to that business or it's just a case of adding incremental sales and earnings per store?

Gary R. Heminger

No, we're increasing operating leverage, as well. As long as it's contiguous to the operations we have today and that's why I say we find our economics -- it does not benefit us to leapfrog into a market that we don't have density in. So yes, we do get operating leverage and it's because we think we have a very sophisticated, low-cost backroom platform that manages inventory, manages the stores and Tony Kenney and his team have been, I think, have outperformed this market. When you look at a total margin per gallon or margin per merchandise dollars sold, I think that they stand at -- they're definitely a top-tier performer.

Allen Good - Morningstar Inc., Research Division

If I could just -- one quick one on exports. I believe previously you said or may have been last year, that exports are pretty evenly split between Europe and Latin America. Is that still the case or are you opening up new markets or has demand shifted from maybe Europe to Latin America or vice versa?

Gary R. Heminger

It's hard to say because the manifest that we have -- we're loading FOB Garyville or FOB Galveston Bay. In some cases, we're selling to the end-user in both markets but in some cases, we're selling to an aggregator who might be moving it into markets that we're not aware of. So I can't say right now what the split is.

Operator

I would now like to turn the call back over to Pam Beall for closing remarks.

Pamela K. M. Beall

Yes. Thank you, Cliff. And thanks for joining us on the call today, recognizing that we need to cut it off at an hour. If there are some follow-up questions, please give us a call and we'll be in the office today. Beth Hunter, Jerry Ewing and myself. Thanks, everyone.

Operator

Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.

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