Marathon Petroleum's (MPC) CEO Gary Heminger on Q2 2014 Results - Earnings Call Transcript

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Marathon Petroleum (NYSE:MPC)

Q2 2014 Earnings Call

July 31, 2014 10:00 am ET

Executives

Timothy T. Griffith - Vice President of Finance & Investor Relations and Treasurer

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

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

Richard D. Bedell - Senior Vice President of Refining

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

Analysts

Edward Westlake - Crédit Suisse AG, Research Division

Jason Smith - BofA Merrill Lynch, Research Division

Paul Y. Cheng - Barclays Capital, Research Division

Douglas Terreson - ISI Group Inc., Research Division

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

Paul I. Sankey - Wolfe Research, LLC

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

Faisel Khan - Citigroup Inc, Research Division

Operator

Welcome to the Marathon Petroleum Corporation's Second Quarter 2014 Earnings Call. My name is Jeanette and I'll be your operator for today's call. [Operator Instructions] Please note that this conference is being recorded.

I will now turn the call over to Tim Griffith. Mr. Griffith, you may begin.

Timothy T. Griffith

Okay. Thank you, Jeanette, and good morning. Welcome to Marathon Petroleum Corporation's second quarter 2014 earnings webcast and conference call. The synchronized slides that accompany this call can be found on our website at marathonpetroleum.com under the Investor Center tab.

On the call today are Gary Heminger, President and CEO; Don Templin, Senior Vice President and CFO; Mike Palmer, Senior Vice President of Supply, Distribution and Planning; Pam Beall, Senior Vice President of Corporate Planning and Government and Public Affairs; and Rich Bedell, Senior Vice President of Refining.

We invite you to read the Safe Harbor statement on Slide #2 and to remind you that we will be making forward-looking statements during the presentation and during the question-and-answer session. Actual results may differ materially from what we expect today. Factors that could cause actual results to differ are included here, as well as in our filings with the SEC.

Now I'm happy to turn the call over to Gary Heminger for opening remarks and highlights. Gary?

Gary R. Heminger

Thanks, Tim, and good morning to everyone. We are pleased to report a very strong quarter. Our focus on top-tier operational performance across the MPC refining, marketing and transportation system has continued to yield excellent results. This quarter, we were able to officially meet consumers' needs and capture higher product price realizations, which demonstrate the value of our integrated system.

I'm especially pleased with our smooth ramp up following the largest concentration of turnaround activity in our company's history, which we executed in the first quarter. I am also very proud of the tremendous response by our team in Garyville, Louisiana, to bring the facility back up to full capacity quickly after it was impacted by a tornado in late May.

Balancing return of capital to shareholders with investments in the business remains a priority. We purchased $459 million of shares in the second quarter. Yesterday, our Board of Directors authorized up to an additional $2 billion of share repurchases through July of 2016, and increased the quarterly dividend to $0.50 per share. During the 12 months ended June 30, we have returned $3.1 billion of capital to shareholders, representing a 13.5% yield against our average share price. This is one of the highest effective yields of any company in our comparator group.

We also have made excellent progress on our strategic priority of growing our higher value to the stable cash flow of businesses, while we continue meaningful return of capital to our shareholders.

In the midstream, we recently exercised our option to acquire a 35% ownership interest in Enbridge Inc.'s Southern Access Extension pipeline project. This investment will position us as an equity owner in a system that will increase our access to an important region for North American crude oil production growth, as well as provide a potential addition to MPLX over time. MPC expects to invest approximately $295 million in the pipeline project that is expected to be completed in mid 2015.

On the retail side, we have received notice from the Federal Trade Commission that it concluded its review of the acquisition of Hess retail operations by our subsidiary, Speedway, which continues to prepare for a closing later this year. We continue to believe that there is significant opportunity to leverage the best of both businesses. Hess fuel sales volume with Speedway's industry-leading merchandise sales per store. We believe this acquisition will be a source of long-term value to MPC and provides for enhanced strategic opportunity for the business over time.

I also want to address an item that is affecting perceptions of our industry: the recently publicized private rulings for limited condensate exports. Unfortunately, the rulings by the Commerce Department are not transparent and have created much uncertainty about exports going forward. We think the market has overreacted to the news that is not clear -- that is not a clear change in policy and an outcome that remains uncertain.

We believe that our industry has the ability to handle much more of the light shale crude oil and condensate than is processed today. But the investments to do so will not likely be made in the environment of uncertainty that has been created. Whatever the outcome, refiners in the U.S. will continue to have a transportation advantage. Even if the export infrastructure is built, the cost advantage for U.S. refiners will continue to be significant due to proximity to the domestic production.

We are confident the flexibility and optionality in our system positions of MPC -- positions MPC very well in any circumstance. In addition, we continue to believe the return profiles for the condensate splitters under construction at our Canton, Ohio and Catlettsburg refineries will be strong given the geographic proximity of those refineries to the Utica condensate production.

With that, I'll turn it over to Don to review our financial performance for the quarter. Don?

Donald C. Templin

Thanks, Gary. Slide #4 provides earnings, both on an absolute and per share basis. Our second quarter 2014 earnings were $855 million compared to $593 million in the second quarter of 2013. Second quarter 2014 earnings include pretax pension settlement expenses of $5 million, while the second quarter of 2013 included $60 million of such expenses. Earnings per diluted share were $2.95 for the second quarter of 2014. We reported $1.83 per share for the same period last year.

The bridge on Slide 5 shows the change in earnings by segment from the second quarter of 2013 to the second quarter of 2014. The primary driver for the change was the increase in Refining & Marketing segment income, which I will discuss shortly. The corporate and other unallocated item includes a $55 million favorable variance due to pension settlement expenses.

As shown on Slide 6, Refining & Marketing segment income from operations was $1.260 billion in the second quarter of 2014 compared with $903 million in the same quarter last year. The change from 2013 was primarily due to higher product price realizations. That impact is reflected in the $657 million change in Other Gross Margin.

You may recall that the second quarter 2013 product price realizations compared to spot market values were negatively impacted by volatility in the Chicago market and effects of the Renewable Fuel Standard. The effects of the Renewable Fuel Standard were more pronounced in the second quarter last year, causing the average RIN prices to be almost $0.35 higher than they were in the second quarter of this year. The increase in LLS prompt versus delivered also had a favorable impact on earnings that was offset by more narrow LLS to WTI crude differentials and backwardation in the market. Direct operating costs also increased quarter-over-quarter due to additional maintenance costs and higher natural gas prices versus last year.

To help investors better understand the quarter, we've added Slide 7, which provides a sequential earnings walk for our Refining & Marketing segment. The primary drivers for the significant increase in income over the first quarter were higher crack spreads and lower refinery operating expenses. The LLS 6-3-2-1 blended crack spread was $10.40 in the second quarter compared to $7.85 in the first quarter. This added about $568 million in additional earnings. Refinery direct operating costs provide a favorable variance of $398 million, primarily due to lower turnaround costs in the second quarter. The favorable other gross margin variance is primarily due to higher product price realizations.

Turning to Speedway segment results on Slide 8, income from operations was $94 million in the second quarter of 2014 compared with $123 million in the second quarter of 2013. Speedway's light product gross margin was $32 million lower in the second quarter of 2014 compared to the same quarter last year, as gross margin decreased by $0.046 per gallon. Merchandise margin was $224 million in the second quarter of 2014 compared with $212 million in 2013. This $12 million increase was primarily due to higher merchandise sales and margin percentage. The unfavorable $9 million other variance primarily relates to Speedway's operating expenses. Operating expenses were higher during the second quarter of 2014, primarily driven by an increase in the number of stores versus previous-year levels. On a same-store basis, gasoline sales volumes decreased 1.5% and merchandise sales, excluding cigarettes, increased 4.6% in the second quarter of 2014 compared to the second quarter of 2013. Activity in July has been positive with a 1% increase in same-store gasoline sales volumes versus the prior year.

Slide 9 shows changes in our Pipeline Transportation segment income. Income from operations was $81 million in the second quarter of 2014 compared with $58 million in the second quarter of 2013. The increase of $23 million was primarily attributable to higher transportation revenue and pipeline affiliate income. $9 million of the $12 million increase in transportation revenue was attributable to the recognition of deferred transportation credits during the quarter. The remainder was primarily due to higher average tariff rates. The increase in pipeline affiliate income was primarily attributable to our ownership interest in LOOP.

Slide 10 presents the significant drivers of changes in our cash flow for the second quarter of 2014. At June 30, our cash balance was just over $2.1 billion. Operating cash flow, before changes in working capital, was an approximately $1.1 billion source of cash due to the very strong financial performance in the second quarter.

As Gary highlighted, we continued delivering on our commitment to balance investments in the business with return of capital to our shareholders. We repurchased $459 million of shares and paid $122 million of dividends in the second quarter. We also increased our quarterly dividend to $0.50 per share. This increase represents a 32% compound annual growth rate from the dividend level established at the time of the spin in June 2011.

Slide 11 shows that at the end of the second quarter, we had $2.1 billion of cash and just over $3.6 billion of debt. With EBITDA of about $4.3 billion during the last 12 months, we continue to be in a very manageable debt position with leverage of 0.8x EBITDA and a debt-to-total-capital ratio of 25%.

Turning to Slide 12. During the last 12 months, we generated $3.4 billion in cash from operations and $1.7 billion of free cash flow. Over this period, we've returned $3.1 billion to shareholders through dividends and share repurchases or approximately 1.8x our free cash flow. During the second quarter of 2014, we purchased approximately 5 million shares for $459 million through open market purchases.

It is our intention to continue returning capital to our shareholders that is not currently needed to support the operational and investment needs of the business, and we continue to believe share repurchases are the most efficient way to do so. The additional $2 billion board authorization adds to the approximately $700 million remaining on previous share repurchase authorizations and reinforces our commitment to continuing this activity in the future. As Gary indicated and you've heard from us on multiple occasions, maintaining a balance between disciplined investments in the business and returning capital to shareholders continues to be a strategic focus.

Slide 13 provides our outlook for key operating metrics for MPC for the third quarter of 2014. We are planning for third quarter throughput volumes to be comparable to the second quarter of 2014 and down slightly compared to the third quarter last year, due to higher planned maintenance.

Now I will turn the call back over to Tim Griffith.

Timothy T. Griffith

Thanks, Don. [Operator Instructions] With that, Jeanette, we are prepared to open up the call to questions.

Question-and-Answer Session

Operator

[Operator Instructions] And we have a question from Ed Westlake of Crédit Suisse.

Edward Westlake - Crédit Suisse AG, Research Division

Congratulations and thanks for researching the cost advantages of the U.S. refiners. I was actually down at the BIS and they said, "As long as it goes through distillation towers and looks like product we can sell it," which sounds like a refinery to me. So the first question, just a small one, on the Garyville, it seems like the opportunity cost for this [ph] may be lower than you thought. I mean, do you have a number for that?

Donald C. Templin

Ed, we didn't -- we don't have a specific number, I guess. When we -- after the tornado had hit, we'd indicated that the impact on crude throughput would be less than 5%. And the team did an amazing job of getting that fully operational in about 14 or 15 days. So the impact on sort of crude throughputs was not that significant.

Edward Westlake - Crédit Suisse AG, Research Division

And then, great color on the deltas and there's that other gross margin number, which obviously does vary over time. And obviously, thanks for shouting out how bad it was last year, which is some normalization this year. But is there any structural change, do you think, in terms of that contribution from, say, pricing over and above the cracks that you mentioned?

Gary R. Heminger

Ed, this is Gary. I wouldn't say there's a structural change. But if you compare the slides of the price realization, as Don was going to, as compared to Speedway, you can see that there was a change in Speedway's gross margin for the quarter, just illustrates how important our integrated system is and how we can take advantage of the marketplace and that dislocation as illustrated in those 2 slides. So I wouldn't to say it's a structural change, it's we have the ability to go to where the margin is.

Edward Westlake - Crédit Suisse AG, Research Division

Okay. So then my just strategic question was just around the logistics business. Any sort of color or update you can provide in terms of where you see the EBITDA of your overall logistics business standing a few years out? And whether there's any change to your fairly consistent guidance in terms of a steady monetization of that via the MPLX?

Gary R. Heminger

I would say, first of all, we're still in pretty much the same steady state of, we said, about $800 million left from -- as compared to what we've already dropped down. That does not include the Sandpiper and SAX pipeline, nor does that include Cornerstone that we're working on now. So if you add those in, we're probably into circa $1.2 billion of EBITDA over time. As far as the ratability of drop downs and -- we look at MPLX as a great currency. And we want that currency to be very strong today, and we want it to be very strong as we drop down over many years to come. There certainly have been some other changes in the marketplace that some are employing. That continues to illustrate how important these MLPs and the growth trajectory of MLPs are. We expect to remain at a high level of compounded annual growth and -- which is what we have emphasized quarter-on-quarter, Ed. So we want this currency to be strong today, we want it to be strong tomorrow, and we're going to continue to manage within those parameters.

Edward Westlake - Crédit Suisse AG, Research Division

And vision-wise, I mean the North American infrastructure spend and opportunity set continues to get larger. Just a question, presume you are still looking very hard at additional projects over and above the ones that you mentioned on the call today.

Gary R. Heminger

We certainly are, Ed. As I've said many times, MPLX is going to be a growth vehicle for our midstream, but it's not going to be tied, like it has been historically, just to the volume that MPC moves. So we have the ability, the intellectual capabilities to branch out, whether it would be into NGLs, whether it's into transportation fuels or other opportunities that are eligible earnings for an MLP. We believe we have the capacity to do any.

Operator

And we have a question from Doug Leggate of Bank of America.

Jason Smith - BofA Merrill Lynch, Research Division

It's actually Jason Smith on for Doug. So I just wanted to dig again into your strong catch [ph] rate relative to your peers. It looks like your distillate yield also increased relative to gasoline. Gary, if you can maybe talk about if there's any specific that was driving that, and is that sustainable going forward?

Gary R. Heminger

Let me ask Rich to talk about the distillate yield first.

Richard D. Bedell

Jason other than just optimizing on crude slates, we did finish a hydrocracker project at Garyville in the first quarter, which increased its capacity. The design capacity was to increase it by about 10,000 barrels a day -- excuse me, 20,000 barrels a day. And that was successfully put on stream at the end of the first quarter.

Gary R. Heminger

But I will say, Jason, that we really haven't had any other structural change in the way we're operating.

Jason Smith - BofA Merrill Lynch, Research Division

And to follow up. And I mean, so when you guys bring on the Garyville hydrocracker and some of your other projects, I mean where can you see that distillate yield potentially going to in time?

Gary R. Heminger

Are you talking about the Garyville reset hydrocracker?

Jason Smith - BofA Merrill Lynch, Research Division

Yes.

Gary R. Heminger

The project? Well, first of all, we haven't sanctioned that project. And it won't be until the fourth quarter, early first quarter, that we make our final determination. And we do not have all the engineering complete yet to be able to give you that number. We do expect, if we were to do that, it would add about 25,000 barrels a day of ultra low-sulfur [ph] diesel. But really what that project, and Rich can go into the details of what that project is doing as far as our feedstock slate.

Richard D. Bedell

Yes, I mean, that -- what we call the ROUX project, that reset hydrocracker project. It increases, like Gary said, I think it's about 28,000 barrels a day of distillate. It decreases our gas oil imports, and really, it's just -- it's a project based on the spreads between resid and ULSD.

Jason Smith - BofA Merrill Lynch, Research Division

Follow-up is maybe for Don. Don, so you mentioned that you guys want to keep the buybacks going. But given the retail acquisition and given that you guys have talked about a kind of $500 million to $1.5 billion targeted cash level, how should we think about the pace of buybacks going forward? Should we expect it to potentially slow from this kind of $400 million or $500 million a quarter?

Donald C. Templin

Well, I think, we've consistently said that it's very important for us to maintain our investment grade credit profile. And we've consistently said that we're going to manage the core liquidity, that's the $500 million to $1.5 billion you have referenced there, Jason. I think, we've also had conversations with you all about the fact that our balance sheet, even maintaining a strong investment grade credit profile, could take on incremental leverage. So we would expect that we would fund the acquisition with cash, but we'll also be accessing the debt markets to do that because we do think it's an important part of the investment thesis in MPC to be returning capital to shareholders and we're very confident and our board is very confident, based upon the recent announcement yesterday of the share repurchase authorization, that we can continue to do so.

Operator

And our next question comes from Paul Cheng of Barclays.

Paul Y. Cheng - Barclays Capital, Research Division

Before I ask my question, just want to have a request to Don. As over the next couple of years that the GP speed start to moving up to the high-speed, if possible that you would be really helpful, I think, for all of us, so that we don't have to check so many different 10-Q document, you actually on your press release, to list out what [ph] Is in your GP cash flow, and what is your unit of the LP given that sometime with the job done, you may change?

Donald C. Templin

Okay, Paul, good suggestion. We'll continue -- we think, MPLX, and particularly, the GP, is a real value adder. And so we'll do that in order to make -- highlight that important cash flow.

Paul Y. Cheng - Barclays Capital, Research Division

Yes, 2 questions. First, a simple one. Gary, there's a speculation CITGO may be selling their refining asset. From an M&A standpoint, how you look at your portfolio. You're pretty satisfied or that you think you have more appetite, you want to expand your refining footprint further from your current portfolio?

Gary R. Heminger

Well, I have read this rumor that CITGO might be interested in doing something, but I would say right now, we're pretty satisfied with our footprint.

Paul Y. Cheng - Barclays Capital, Research Division

Okay. The second question, maybe, that's for both Don and Gary. If we're looking at the pace of your job done, comparing to some of your peers, is a formal measure. I think, that's 2 school of thoughts, and given the valuation for the GP is significantly different than any for the LP and the refiner C-corp. And also that from an investment standpoint, is it better off there for you to accelerate substantially on your job done pace so that you will allow the MPLX actually use their own balance sheet for their future organic growth, [indiscernible] instead of using the C-corp, and also, they're seeing the value of the GP grow at a much faster pace.

Gary R. Heminger

Well, Paul, I would say I agree with all of the above. But as I said, we think we have an outstanding currency. That currency has been very valuable today. It gives us the flexibility in the event we want to accelerate. If we need to accelerate for MPC purposes or we want to accelerate for MPLX purposes, we have that tremendous flexibility. But at the end of the day, we want to make sure the currency is valuable going forward. Yes, we have been measured and, yes, we're watching what's going on in the marketplace. But all of your suggestions, I think it was more of a statement than a question. I think all of your suggestions are spot on and is things that we study very, very carefully.

Paul Y. Cheng - Barclays Capital, Research Division

Can I just sneak in with a final question for clarification?

Donald C. Templin

Only for you, Paul.

Paul Y. Cheng - Barclays Capital, Research Division

For the $800 million of the potential job done of the $1.2 billion, are those including the storage tank inside the refinery gate and the barges that you own?

Donald C. Templin

Yes, sir.

Operator

And our next question comes from Doug Terreson of ISI Group.

Douglas Terreson - ISI Group Inc., Research Division

Gary, one of your mantras has been value-added investment and sustained focus on shareholder returns and obviously, the company has delivered in that area. And on this point, I wanted to see if there was some type of generic progress report that we could talk about on Galveston Bay synergy capture and projected capital that were referred to at the recent Analyst Meeting, that is if there is one. You highlighted a couple of slides and I just wanted to see if you could provide somewhat of a generic update as to how happy you are with the outcome there?

Gary R. Heminger

Yes, Doug, and good morning to you as well. We're very, very pleased with Galveston Bay. First of all, it's an outstanding employee base, an outstanding workforce with a great work ethic. Secondly, as we've gone through now about 16, 17 months of operation, we continue to get more and more comfortable with the asset. You recognized it was in our K and will be updated in the Q here. The -- what the earnout was that at the -- the earnout payment to -- that we had to the prior owner was right in line with what we said, which says, the refinery is performing on a financial basis very well. I had stated earlier in our last conference call that this is an important year. We've already finished a major turnaround in the plant where we went in and repaired and really got things up to standards on the -- I will call, the crude side of the equation. And as I said, it's an important year. We still have another big turnaround to complete this year on the aromatic side of the business. Once that is complete, we will have pretty much been through the refinery. Then we're going to go to the low hanging fruit. The preliminary meetings that Rich and his team have had with me suggest there is a lot of low-hanging high-return projects that we can do. So I'm very pleased with the value generation, very pleased with how this positions us in the marketplace. And now with the Hess acquisition and picking up additional Colonial line space, we now have been able to pick up 90,000 barrels a day of Colonial line space, which -- between these 2 transactions, which I think gives us significant advantage to the marketplace to have that assured line space all the way to the East Coast. So, Rich, I don't know if you have anything else to add, but -- operationally, but we are very pleased, Doug.

Richard D. Bedell

Yes, I'll just ditto Gary's comments that we see that the refinery has a lot of upside potential from where it is now. And that's part of our capital budget process, and we're going through those options today. And they become clear as we learn more and more about the facility.

Operator

And our next question comes from Jeff Dietert of Simmons.

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

Jeff Dietert with Simmons. My question is regarding domestic crude price discounts in the back half of the year given continued robust oil production growth, upcoming fall maintenance and belated startups of new pipes into the Gulf Coast. What's your outlook for the back half of the year? I think, the forward curve has got WTI-Brent, over $10 and LLS-Brent to widen out around $7. Do you think that's a reasonable outlook or do you expect wider or narrower?

C. Michael Palmer

Jeff, this is Mike Palmer. I think that when you look at the forward curves that have things widening out a bit, I think that, generally, that does make sense to us. We haven't seen the kind of price signal from the domestic light crude oil that I think really would test refiners to run as much as they possibly could. I do think, as production continues to rise, as the BridgeTex pipeline gets built into Houston, I do think that there is the likelihood that you could see these differentials widen a bit. So what we're seeing in the forward market just generally makes sense to us.

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

And is there a point that you look at between, say, Mars and LLS, at which you really see a move towards lights being economically advantaged over mediums, does it need to get inside of a $3 discount or is there any kind of rule of thumb we can use to think about that?

C. Michael Palmer

No, I don't think I really could give you a rule of thumb. We're running our LPs every day. It really depends upon the product values in the market and which way we go between, say, LLS or Mars. I can tell you that with the recent price action generally over the last, I'll say, 6 months, that it's back and forth between whether you'd want to run LLS or Mars. But that's something we just have to look at every day.

Gary R. Heminger

And Jeff, one other key point. When we look at how much medium sour versus light we run, and it's a point that I make in D.C., it's a point that I make with the financial community, the market is far from saturated of running light sweet crude. We have the ability to run approximately 65% light sweet crude. We only ran approximately 45%, 46% in the quarter. So it's -- every barrel, as you know, is an alternative barrel. So again, that just shows there is tremendous opportunity, but we're always going to choose the most economical barrel.

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

Yes, and in weekly statistics, we're seeing Gulf Coast oil imports coming down and some of the pricing that's visible in the marketplace has increased on oil imports. Are you seeing a shift in your portfolio away from importing oil towards more domestic consumption?

Gary R. Heminger

Well, as I said, every barrel is an alternative barrel. So we're always going to look at what is the most economic barrel for us to purchase, and that's going to set the tone for us every day. As we look across the global supply chain. And again, this issue of condensate exports, I think, really is a sticky wicket in the marketplace today, if you will. Because the lack of transparency and the unknown has changed. I think some people, some foreign suppliers' ideas on how to supply the North American market, it's changed some of the South American suppliers and how they want to supply the North American market. I think it's going to take about 90 days, probably, for that stuff to sort itself out.

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

Public policy through private letter rulings is not a real efficient way of communicating the requirements.

Gary R. Heminger

I echo that.

Operator

And our next question comes from Paul Sankey of Wolfe Research.

Paul I. Sankey - Wolfe Research, LLC

I was extremely impressed that you just made a cricket analogy -- sticky wicket, Gary. Very impressive. I've just got a few follow-ups to the various discussions. Firstly, on the crude exports thing, would you guys have any possible incentive to export crude? And I'm thinking obviously of the LOOP.

Gary R. Heminger

That's something, Paul, that we've looked at as -- LOOP as a part of the infrastructure. But let me kind of share with you how LOOP is built. You have 3 SPMs to unload these ships. Everything flows from the gulf into the shore base. We do not have the capability to bidirectionally flow that. We've looked at it. There's been some consideration, but in order to be able to pay off that investment to bidirectionally load, you would have to have significant volume. So technically, it could be done over time, but you'd have to change everything from the caverns at Galliano and change the flow pattern from Galliano all the way back out to the unloading platform in order to be able to do that, which would be a significant project and very, very costly. But we have looked at it.

Paul I. Sankey - Wolfe Research, LLC

I think, it's fair to say it's the only major offloading, onloading potential point in the U.S. right now, isn't it, for deepwater?

Gary R. Heminger

Yes, it is, Paul. And we'll just see -- I don't -- I do not believe that we're ever going to see that type of volume that would be required to be able to justify that type of a project. Certainly, not on the condensate export side. And when you look at the curves, long term, of domestic production versus whether or not we should export, I think, the markets are going to suggest, and the way the global producers are supplying the market, I think, long term, the global price will suggest that it's going to be very challenging to be able to support those type of economics and that type of investment.

Paul I. Sankey - Wolfe Research, LLC

Sure. A quick follow-up is, did you mention -- apologies if you did, the product volumes of exports that you had this past quarter?

Donald C. Templin

Paul, this is Don. It was 298,000 barrels a day.

Paul I. Sankey - Wolfe Research, LLC

Could we get gasoline-disti [ph] split?

Donald C. Templin

I'm sorry.

Paul I. Sankey - Wolfe Research, LLC

Could you split the gasoline out for us?

Donald C. Templin

Yes, just 1 second, please.

Paul I. Sankey - Wolfe Research, LLC

And I'll just follow up quickly rather than dominate the whole call. Obviously, a bit surprised that there was less contribution than I would have anticipated for the sweet/sour differential. Could you just talk a little bit about that and any outlook? I know you have already addressed some of this on the call, but any further thoughts on that particular differential, which I know you're very sensitive to?

Gary R. Heminger

Mike just reviewed the differentials on a prior question. Mike, you want to mention that again?

C. Michael Palmer

Yes. I mean, specifically, with regard to the sweet/sour differential, Paul, I think that -- during the second quarter, I think that when you look at the Canadian heavy, for example, we had fairly reasonable differentials. And we expect to see those in the same kind of level going forward. When you look at the LLS Mars, I don't think there was anything that was particularly noteworthy.

Paul I. Sankey - Wolfe Research, LLC

Yes, I guess then -- no, I'm just looking at the variance as you mentioned on Slide 7, but I guess, essentially, those differentials were more or less flat with Q1. So that deals with that. Okay. And the gasoline?

Donald C. Templin

And Paul, it's 2/3 distillate, 1/3 gasoline. So just over 200,000 barrels a day of distillate and the remainder is gasoline.

Operator

And our next question comes from Roger Read of Wells Fargo.

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

I guess, the first thing I would like to maybe get a little more clarity on. I was just comparing your refining margins this year in the second quarter to last year, and then just kind of a quick skim across your peer group. A much better quarter relative to your numbers, and certainly, relative to your peers. I'm just wondering, as you walk through the various items, since everybody is dealing with the similar volumes of crude and pricing of the crude, was there a hedging impact? Was there something where you're able to move the crude around better? Do you believe it was mostly a geographical event? I'm just trying to understand kind of the moving parts here, maybe a function of how much downtime you had last year in the second quarter where you weren't able to realize as well against expected crack spreads?

Donald C. Templin

Yes, I guess -- Roger, this is Don. I would say it's more a function of our capability to be able to provide refined product to the markets where it was needed and the flexibility that we have with our logistics system, including our significant marine or barge system that allows us to be very flexible in moving product to markets where there is a good demand. So I think, historically, you've seen that we've been able to capture good margin from that -- price realizations compared to spot market prices. And we clearly were able to do that this quarter as well. I mean, if you saw the difference between sort of Slide 6 and Slide 7, Slide 6, that $657 million of other gross margin was really a comparator to a quarter where -- last year, where you had some unusual noise because of RINs and because of volatility in the Chicago market. One of the reasons we put in Slide 7 was we thought it also would demonstrate that $159 million is substantially or predominantly our ability to realize product realizations over spot. And we thought that would help people sort of triangulate, if you will, how we're doing in that area.

Gary R. Heminger

Roger, there were no onetime hedging gains or anything, either.

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

Yes, that's what I'm trying to understand. So basically, it's -- I mean, it's the flexibility in your system and it sounds like to some extent, downstream from the refining gate in terms of where you're able to move the product at a given moment.

Donald C. Templin

Yes, I would say definitely downstream from the refining gate.

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

Okay, that's what I was just trying to understand. If it was simply a utilization thing or something more deep. And it sounds like it's on the more deep side. Follow-up question, CapEx, you've got the slide there first of the Appendix, and it looks like, if I do the math, you've got a huge spend in the Pipeline Transportation side coming up in the back half and a relatively healthy growth in Speedway. I'm assuming that's x anything going on with the acquisition of Hess's retail business. Just wondering if you could give us some clarity on kind of what the plans are there?

Gary R. Heminger

Yes, so I think, your presumption is correct. It is x Hess acquisition for Speedway. On the Pipeline Transportation side, we did expect that a good portion of that would be back-ended, particularly with our investments in SAX and Sandpiper. So we expect that we will broadly be at that $2.4 billion by the end of the year. It's just sort of how those dollars are being spent and the timing of when they're being spent, Roger.

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

And any particular project you could highlight for us in the Pipeline?

Gary R. Heminger

Well, for Pipeline Transportation, SAX and Sandpiper, are 2 of the bigger pieces.

Operator

Our next question comes from Faisel Khan of Citigroup.

Faisel Khan - Citigroup Inc, Research Division

Just going back to the other sort of gross margin bucket. If I go to Slide 20, where you sort of look at the absolute numbers, the $477 million of sort of other gross margins. I just want to make sure I understand this right. So you're saying that this is sort of a function of your sort of spot to rack margins farther down between your refining gate and your terminals, is that a fair assumption in terms of --

Donald C. Templin

Yes. So Faisel, I mean, historically, I think when you guys -- when we provided the market metrics that get us to indicated gross margin, there has always been sort of the difference between that indicated gross margin, and our reported gross margin has broadly been, I would say, in the $200 million to $300 million range. And that in second quarter of '13, it was a -- it was under that number, due in large part to the sort of noise around the RINs and how it impacted the spot prices. So in this quarter, I would say the difference between sort of the $200 million or $300 million that you would normally expect to see is the ability to -- the product price -- incremental product price realization that we were able to realize during the quarter.

Faisel Khan - Citigroup Inc, Research Division

Is that just a function of basis, like if I look at either near New York Harbor or if I look at -- New York Harbor versus like Gulf Coast or sort of the Florida market versus the Gulf Coast in terms of gasoline and also distillate price?

Donald C. Templin

I think some of it is that, we're using, for example, in the Midwest, Chicago, 6-3-2-1 crack, and our activity in the Midwest is all over the Midwest, including markets that aren't in Chicago. So we're always -- we tell -- we think we have a lot of flexibility. We know we have a lot of flexibility in the ability to supply markets, and we use that flexibility to make sure that we're optimizing value.

Gary R. Heminger

Faisel, I would say, it's the -- it just illustrates the efficiency of our system probably to be able to move to the markets quicker than anyone else.

Faisel Khan - Citigroup Inc, Research Division

Yes, I know, and that's definitely clear from the results. I'm just trying to figure out if there's things that we can look at in the market quarter-to-quarter that might help us sort of gauge how much this other gross margin moves around. But I guess, following up on this is, with the Hess acquisition, how much is this other gross margin do you think going to change?

Donald C. Templin

That will remain to be seen. But as we said, when we roll out the Hess acquisition, it gives us -- it just helps with the efficiency of our system. Now we'll have nearly 75% of short volume that we know where the volume is going. We picked up tremendous pipeline space on Colonial, and other pipelines have been servicing the Northeast and some of the Southeast markets. So we think it will be an add-on to our business today.

Faisel Khan - Citigroup Inc, Research Division

With the Hess piece, how much total capacity will you guys have on Colonial after this is all said and done?

Gary R. Heminger

I don't think that we have made that public individually.

Operator

[Operator Instructions]

Timothy T. Griffith

Okay, Jeanette, I presume there are -- with no more questions, we want to thank you for joining us this morning and for your interest in Marathon Petroleum. Should you have additional questions or would like clarification on any of the topics discussed in the call, Beth Hunter and Jerry Ewing will be available to take your calls throughout the day. Thanks for joining us.

Operator

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

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