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MPC > SEC Filings for MPC > Form 10-Q on 4-Aug-2014All Recent SEC Filings

Show all filings for MARATHON PETROLEUM CORP

Form 10-Q for MARATHON PETROLEUM CORP


4-Aug-2014

Quarterly Report


Item 2: Management's Discussion and Analysis of Financial Condition and Results
of Operations
Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the unaudited financial statements and accompanying footnotes included under Item 1. Financial Statements and in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2013.
Management's Discussion and Analysis of Financial Condition and Results of Operations includes various forward-looking statements concerning trends or events potentially affecting our business. You can identify our forward-looking statements by words such as "anticipate," "believe," "estimate," "expect," "forecast," "goal," "intend," "plan," "predict," "project," "seek," "target," "could," "may," "should," "would," "will" or other similar expressions that convey the uncertainty of future events or outcomes. In accordance with "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995, these statements are accompanied by cautionary language identifying important factors, though not necessarily all such factors, which could cause future outcomes to differ materially from those set forth in forward-looking statements. For additional risk factors affecting our business, see Item 1A. Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2013.
Corporate Overview
We are an independent petroleum refining, marketing and transportation company. We currently own and operate seven refineries, all located in the United States, with an aggregate crude oil refining capacity of approximately 1.7 million barrels per calendar day. Our refineries supply refined products to resellers and consumers within our market areas, including the Midwest, Gulf Coast and Southeast regions of the United States. We distribute refined products to our customers through one of the largest private domestic fleets of inland petroleum product barges, one of the largest terminal operations in the United States, and a combination of MPC-owned and third-party-owned trucking and rail assets. We currently own, lease or have ownership interests in approximately 8,300 miles of crude oil and refined product pipelines to deliver crude oil to our refineries and other locations and refined products to wholesale and retail market areas. We are one of the largest petroleum pipeline companies in the United States on the basis of total volumes delivered.
Our operations consist of three reportable operating segments: Refining & Marketing; Speedway; and Pipeline Transportation. Each of these segments is organized and managed based upon the nature of the products and services it offers.
• Refining & Marketing-refines crude oil and other feedstocks at our seven refineries in the Gulf Coast and Midwest regions of the United States, purchases ethanol and refined products for resale and distributes refined products through various means, including barges, terminals and trucks that we own or operate. We sell refined products to wholesale marketing customers domestically and internationally, buyers on the spot market, our Speedway business segment and to independent entrepreneurs who operate Marathon® retail outlets;

• Speedway-sells transportation fuels and convenience products in the retail market in the Midwest, primarily through Speedway® convenience stores; and

• Pipeline Transportation-transports crude oil and other feedstocks to our refineries and other locations, delivers refined products to wholesale and retail market areas and includes the aggregated operations of MPLX and MPC's retained pipeline assets and investments.

Executive Summary
Select results for the three and six months ended June 30, 2014 and 2013 are
reflected in the following table.
                                                     Three Months Ended            Six Months Ended
                                                           June 30,                     June 30,
(In millions,
except per share
data)                                                 2014          2013           2014           2013
Income from Operations by segment
Refining & Marketing                              $     1,260     $   903     $    1,622        $ 2,008
Speedway                                                   94         123            152            190
Pipeline Transportation                                    81          58            153            109
Net income attributable to MPC                    $       855     $   593     $    1,054        $ 1,318
Net income attributable to MPC per diluted share  $      2.95     $  1.83     $     3.60        $  4.01

Net income attributable to MPC increased $262 million, or $1.12 per diluted share, in the second quarter of 2014 and decreased $264 million, or $0.41 per diluted share, in the first six months of 2014 compared to the same periods of 2013, primarily due to our Refining & Marketing segment.


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Refining & Marketing segment income from operations increased $357 million in the second quarter and decreased $386 million in the first six months of 2014 compared to the same periods of 2013. The increase in the second quarter was primarily due to more favorable net product price realizations and a higher U.S. Gulf Coast ("USGC") crack spread, partially offset by a narrower Light Louisiana Sweet ("LLS") - West Texas Intermediate ("WTI") crude oil differential and a lower Chicago crack spread. The decrease in the first six months was primarily due to an increase in refinery direct operating costs, a narrower LLS-WTI crude oil differential and a lower sweet/sour crude oil differential, partially offset by more favorable net product price realizations and a higher USGC crack spread. Speedway segment income from operations decreased $29 million in the second quarter and $38 million in the first six months of 2014 compared to the same periods of 2013, primarily due to decreases in our gasoline and distillate gross margin and increases in operating expenses, partially offset by increases in our merchandise gross margin.
Pipeline Transportation segment income from operations increased $23 million in the second quarter and $44 million in the first six months of 2014 compared to the same periods of 2013, primarily due to higher pipeline transportation revenue and increases in equity affiliate income from our investment in LOOP. On February 1, 2013, we acquired from BP the 451,000 barrel per calendar day refinery in Texas City, Texas, three intrastate natural gas liquid pipelines originating at the refinery, four light product terminals, branded-jobber marketing contract assignments for the supply of approximately 1,200 branded sites, a 1,040 megawatt electric cogeneration facility and a 50 thousand barrel per day ("mbpd") allocation of space on the Colonial Pipeline. We refer to these assets as the "Galveston Bay Refinery and Related Assets." We paid $1.49 billion for these assets, which included $935 million for inventory. Pursuant to the purchase and sale agreement, we may also be required to pay BP a contingent earnout of up to an additional $700 million over six years, subject to certain conditions. In July 2014, we paid BP $180 million for the first period's contingent earnout. These assets are part of our Refining & Marketing and Pipeline Transportation segments. Our financial results and operating statistics for the period prior to the acquisition does not include amounts for the Galveston Bay Refinery and Related Assets. See Note 4 to the unaudited consolidated financial statements for additional information on this acquisition.
On May 21, 2014, Speedway entered into a purchase and sale agreement with Hess Corporation to purchase Hess Retail. This acquisition will incorporate all of Hess' retail locations, transport operations and shipper history on various pipelines, including approximately 40 mbpd on Colonial Pipeline. The total consideration is $2.874 billion comprised of a cash purchase price of $2.37 billion, an estimated $230 million of net working capital and $274 million of capital leases. The acquisition is expected to be funded with a combination of debt and available cash and is anticipated to close later this year, subject to customary closing conditions. This acquisition will significantly expand our retail presence from nine to 23 states throughout the East Coast and Southeast and is aligned with our strategy to grow higher-valued, stable cash flow businesses. This acquisition will also enable us to further leverage our integrated refining and transportation operations, providing an outlet for an incremental 200 mbpd of assured sales from our refining system. Effective March 1, 2014, we sold MPLX a 13 percent interest in Pipe Line Holdings for $310 million, increasing MPLX's ownership interest in Pipe Line Holdings to 69 percent. MPLX financed this transaction with $40 million of cash on-hand and $270 million of borrowings on its bank revolving credit agreement. See Note 3 to the unaudited consolidated financial statements for additional information on MPLX.
In March 2014, we acquired from Chevron Raven Ridge Pipe Line Company an additional seven percent interest in Explorer for $77 million, bringing our ownership interest to 25 percent. Due to this increase in our ownership percentage, we now account for our investment in Explorer using the equity method of accounting and report Explorer as a related party. Explorer owns approximately 1,900 miles of refined products pipeline from Lake Charles, Louisiana to Hammond, Indiana.
In 2013, we agreed with Enbridge Energy Partners, L.P. ("Enbridge") to serve as an anchor shipper for the Sandpiper pipeline, which will run from Beaver Lodge, North Dakota to Superior, Wisconsin and is targeted to be operational in early 2016. We also agreed to fund 37.5 percent of the construction of the Sandpiper pipeline project, which is currently estimated to cost $2.6 billion, of which approximately $1.0 billion is our share. We made contributions of $75 million during the first six months of 2014 and have contributed $99 million since project inception. In exchange for our commitment to be an anchor shipper and our investment in the project, we will earn an approximate 27 percent equity interest in Enbridge's North Dakota System when the Sandpiper pipeline is placed into service. Enbridge's North Dakota System currently includes approximately 240 miles of crude oil gathering pipelines connected to a transportation pipeline that is approximately 730 miles long. We will also have the option to increase our ownership interest to approximately 30 percent through additional investments in future system improvements. See Notes 4 and 20 to the unaudited consolidated financial statements.


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In July 2014, we exercised our option to acquire a 35 percent ownership interest in Enbridge Inc.'s SAX pipeline through our investment in Illinois Extension Pipeline. The SAX pipeline will run from from Flanagan, Illinois to Patoka, Illinois and is targeted to be operational in mid 2015. We agreed to fund 35 percent of the estimated $850 million construction costs for the SAX pipeline project, of which approximately $295 million is our share. In July, we made an initial contribution of $69 million to fund our portion of the construction costs for the project.
During the first six months of 2014, we paid $1.15 billion to acquire 13 million common shares through open market share repurchases. The effective average cost was $87.82 per delivered share. At June 30, 2014, we also had agreements to repurchase additional common shares for $12 million, which were settled in early July 2014. As of June 30, 2014, we had an outstanding repurchase authorization of $709 million, which expires in September 2015. On July 30, 2014, our board of directors approved an additional $2.0 billion share repurchase authorization expiring in July 2016. See Note 7 to the unaudited consolidated financial statements.
The above discussion contains forward-looking statements with respect to the pending acquisition of Hess Retail, the estimated construction costs and completion of the Sandpiper and SAX pipeline projects and the share repurchase authorizations. Factors that could affect the pending acquisition of Hess Retail include, but are not limited to, our ability to successfully complete the pending acquisition of Hess Retail, including, without limitation, the satisfaction of customary closing conditions. Factors that could affect the estimated construction costs and completion of the Sandpiper and SAX pipeline projects, include, but are not limited to, availability of materials and labor, unforeseen hazards such as weather conditions, delays in obtaining or conditions imposed by necessary government and third-party approvals and other risks customarily associated with construction projects. Factors that could affect the share repurchase authorizations and the timing of any repurchases include, but are not limited to, business conditions, availability of liquidity and the market price of our common stock. These factors, among others, could cause actual results to differ materially from those set forth in the forward-looking statements.
Overview of Segments
Refining & Marketing
Refining & Marketing segment income from operations depends largely on our Refining & Marketing gross margin and refinery throughputs.
Our Refining & Marketing gross margin is the difference between the prices of refined products sold and the costs of crude oil and other charge and blendstocks refined, including the costs to transport these inputs to our refineries and the costs of purchased products. The crack spread is a measure of the difference between market prices for refined products and crude oil, commonly used by the industry as a proxy for the refining margin. Crack spreads can fluctuate significantly, particularly when prices of refined products do not move in the same relationship as the cost of crude oil. As a performance benchmark and a comparison with other industry participants, we calculate Midwest (Chicago) and USGC crack spreads that we believe most closely track our operations and slate of products. LLS prices and a 6-3-2-1 ratio of products (6 barrels of LLS crude oil producing 3 barrels of unleaded regular gasoline, 2 barrels of ultra-low sulfur diesel and 1 barrel of 3 percent residual fuel oil) are used for these crack-spread calculations.
Our refineries can process significant amounts of sour crude oil, which typically can be purchased at a discount to sweet crude oil. The amount of this discount, the sweet/sour differential, can vary significantly, causing our Refining & Marketing gross margin to differ from crack spreads based on sweet crude oil. In general, a larger sweet/sour differential will enhance our Refining & Marketing gross margin.
Historically, WTI has traded at prices similar to LLS. During 2011 and continuing through the first half of 2013, WTI traded at prices significantly less than LLS, which favorably impacted our Refining & Marketing gross margin. Logistical constraints in the U.S. mid-continent markets and other market factors acted to keep the price of WTI from rising with the prices of crude oil produced in other regions. However, due to a variety of domestic and international market conditions including the growth in pipeline capacity from Cushing, Oklahoma to the Gulf Coast region, the differential between WTI and LLS significantly narrowed during the second half of 2013 with a further narrowing broadly continuing through the first half of 2014. Future crude oil differentials will be dependent on a variety of market and economic factors.


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The following table provides sensitivities showing the estimated change in annual net income due to potential changes in market conditions.

(In millions,
after-tax)
LLS 6-3-2-1 crack spread sensitivity(a) (per $1.00/barrel change)          $      450
Sweet/sour differential sensitivity(b) (per $1.00/barrel change)                  200
LLS-WTI differential sensitivity(c) (per $1.00/barrel change)                      85
Natural gas price sensitivity (per $1.00/million British thermal unit
change)                                                                           125

(a) Weighted 38% Chicago and 62% USGC LLS 6-3-2-1 crack spreads and assumes all other differentials and pricing relationships remain unchanged.

(b) LLS (prompt) - [delivered cost of sour crude oil: Arab Light, Kuwait, Maya, Western Canadian Select and Mars].

(c) Assumes 20% of crude oil throughput volumes are WTI-based domestic crude oil.

In addition to the market changes indicated by the crack spreads, the sweet/sour differential and the discount of WTI to LLS, our Refining & Marketing gross margin is impacted by factors such as:
• the types of crude oil and other charge and blendstocks processed;

• our refinery yields;

• the selling prices realized for refined products;

• the impact of commodity derivative instruments used to hedge price risk; and

• the cost of products purchased for resale.

Refining & Marketing segment income from operations is also affected by changes in refinery direct operating costs, which include turnaround and major maintenance, depreciation and amortization and other manufacturing expenses. Changes in manufacturing costs are primarily driven by the cost of energy used by our refineries, including purchased natural gas, and the level of maintenance costs. Planned major maintenance activities, or turnarounds, requiring temporary shutdown of certain refinery operating units, are periodically performed at each refinery. We had significant planned turnaround and major maintenance activities at our Catlettsburg, Kentucky; Galveston Bay, Texas; Garyville, Louisiana and Robinson, Illinois refineries during the first six months of 2014 compared to activities at our Catlettsburg, Garyville and Galveston Bay refineries during the first six months of 2013.
Speedway
Our retail marketing gross margin for gasoline and distillate, which is the price paid by consumers less the cost of refined products, including transportation, consumer excise taxes and bankcard processing fees, impacts the Speedway segment profitability. Numerous factors impact gasoline and distillate demand, including local competition, seasonal demand fluctuations, the available wholesale supply, the level of economic activity in our marketing areas and weather conditions. Market demand increases for gasoline and distillate generally increase the product margin we can realize.
The gross margin on merchandise sold at convenience stores historically has been less volatile and has contributed substantially to Speedway's gross margin. Approximately two-thirds of Speedway's gross margin was derived from merchandise sales in the second quarter and first six months of 2014. Speedway's convenience stores offer a wide variety of merchandise, including prepared foods, beverages and non-food items.
Pipeline Transportation
The profitability of our pipeline transportation operations primarily depends on tariff rates and the volumes shipped through the pipelines. A majority of the crude oil and refined product shipments on our common carrier pipelines serve our Refining & Marketing segment. The volume of crude oil that we transport is directly affected by the supply of, and refiner demand for, crude oil in the markets served directly by our crude oil pipelines. Key factors in this supply and demand balance are the production levels of crude oil by producers in various regions or fields, the availability and cost of alternative modes of transportation, the volumes of crude oil processed at refineries and refinery and transportation system maintenance levels. The volume of refined products that we transport is directly affected by the production levels of, and user demand for, refined products in the markets served by our refined product pipelines. In most of our markets, demand for gasoline and distillate peaks during the summer driving season, which extends from May through September of each year, and declines during the fall and winter months. As with crude oil, other transportation alternatives and system maintenance levels influence refined product movements.


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Results of Operations
Consolidated Results of Operations
                                              Three Months Ended                      Six Months Ended
                                                    June 30,                               June 30,
(In millions)                            2014         2013       Variance       2014         2013       Variance
Revenues and other income:
Sales and other operating revenues
(including consumer excise taxes)     $ 26,844     $ 25,677     $  1,167     $ 50,129     $ 49,007     $  1,122
Income from equity method investments       57            7           50           92            7           85
Net gain on disposal of assets              11            1           10           12            2           10
Other income                                21           18            3           45           32           13
Total revenues and other income         26,933       25,703        1,230       50,278       49,048        1,230
Costs and expenses:
Cost of revenues (excludes items
below)                                  23,096       22,320          776       43,636       42,354        1,282
Purchases from related parties             130           79           51          289          151          138
Consumer excise taxes                    1,599        1,596            3        3,114        3,054           60
Depreciation and amortization              325          302           23          645          589           56
Selling, general and administrative
expenses                                   316          358          (42 )        662          607           55
Other taxes                                 98           88           10          202          177           25
Total costs and expenses                25,564       24,743          821       48,548       46,932        1,616
Income from operations                   1,369          960          409        1,730        2,116         (386 )
Net interest and other financial
income (costs)                             (48 )        (45 )         (3 )        (94 )        (93 )         (1 )
Income before income taxes               1,321          915          406        1,636        2,023         (387 )
Provision for income taxes                 457          316          141          565          694         (129 )
Net income                                 864          599          265        1,071        1,329         (258 )
Less net income attributable to
noncontrolling interests                     9            6            3           17           11            6
Net income attributable to MPC        $    855     $    593     $    262     $  1,054     $  1,318     $   (264 )

Net income attributable to MPC increased $262 million in the second quarter and decreased $264 million in the first six months of 2014 compared to the same periods of 2013, primarily due to our Refining & Marketing segment income from operations, which increased $357 million in the second quarter and decreased $386 million in the first six months. The increase in Refining & Marketing segment income from operations in the second quarter was primarily due to more favorable net product price realizations and a higher USGC crack spread, partially offset by a narrower LLS-WTI crude oil differential and a lower Chicago crack spread. The decrease in Refining & Marketing segment income from operations in the first six months was primarily due to an increase in refinery direct operating costs, a narrower LLS-WTI crude oil differential and a lower sweet/sour crude oil differential, partially offset by more favorable net product price realizations and a higher USGC crack spread.
Sales and other operating revenues (including consumer excise taxes) increased $1.17 billion in the second quarter and $1.12 billion in the first six months of 2014 compared to the same periods of 2013, primarily due to an increase in refined product sales prices in the second quarter and higher refined product sales volumes in the first six months.
Income from equity method investments increased $50 million in the second quarter and $85 million in the first six months of 2014 compared to the same periods of 2013, primarily due to increases in income from our ethanol affiliates of $32 million and $61 million, respectively, and increases in income from our pipeline affiliates of $17 million and $24 million, respectively. The increases in income from our ethanol affiliates includes the affects of our acquisition of interests in TAAE, TACE and The Andersons Ethanol Investment LLC in August 2013. The higher income from our pipeline affiliates is primarily due to increases from LOOP, as well as income from Explorer, which is now reflected in our results following our acquisition of an increased ownership interest in this pipeline company.


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Centennial experienced a significant reduction in shipment volumes in the second half of 2011 that has continued through the first six months of 2014. At June 30, 2014, Centennial was not shipping product. As a result, we continued to evaluate the carrying value of our equity investment in Centennial. We concluded that no impairment was required given our assessment of its fair value based on market participant assumptions for various potential uses and future cash flows of Centennial's assets. If current business conditions remain unchanged and the owners of Centennial are unable to find an alternative use for the assets, there could be a future impairment of our Centennial interest. As of June 30, 2014, our equity investment in Centennial was $35 million and we had a $40 million guarantee associated with 50 percent of Centennial's outstanding debt. See Note 20 to the unaudited consolidated financial statements for additional information on the debt guarantee.
Net gain on disposal of assets increased $10 million for both the second quarter and first six months of 2014 compared to the second quarter and first six months of 2013, primarily due to the sale of two terminals.
Other income increased $3 million in the second quarter and $13 million in the first six months of 2014 compared to the same periods of 2013, primarily due to higher gains on sales of Renewable Identification Numbers ("RINs") of $19 million and $30 million, respectively, partially offset by an $11 million impairment of an investment in a company accounted for using the cost method and the absence of dividends received from Explorer, which were recorded as other income in 2013.
Cost of revenues increased $776 million in the second quarter and $1.28 billion in the first six months of 2014 compared to the same periods of 2013. The increases were primarily due to:
• increases in refined product cost of sales of $607 million for the second quarter and $691 million for the first six months, primarily due to higher raw material costs and sales volumes for the second quarter and higher sales volumes partially offset by lower raw material costs for the first six months; and

• increases in refinery direct operating costs, including costs associated with significant turnaround activity at the Galveston Bay refinery, of $153 million, or $1.03 per barrel of total refinery throughput, for the . . .

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