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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Welcome to the MPC Sterling (00:00:03) Second Quarter Earnings Call. My name is Elon, and I will be your operator for today's call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Please note that this conference is being recorded.
I will now turn the call over to Kristina Kazarian. Kristina, you may begin.
Welcome to Marathon Petroleum second quarter 2018 earnings webcast and conference call. The synchronized slides that accompany this call can be found on our website at marathonpetroleum.com under the Investor Center tab.
On the call today are Gary Heminger, Chairman and CEO; Tim Griffith, MPC's Senior Vice President and CFO; Don Templin, President of MPC; Mike Hennigan, President of MPLX; as well as other members of MPC's executive team.
We invite you to read the Safe Harbor statements on slide 2. It's a reminder that we will be making forward-looking statements during the call and during the question-and-answer session. Actual results may differ materially from what we expect today. Factors that could cause actual results to differ are included there as well as in our filings with the SEC.
Slide 3 contains additional information related to the proposed transaction with Andeavor. Investors and securityholders are encouraged to read the joint proxy statement and registration statement, as well as other relevant documents filed with the SEC.
Now, I will turn the call over to Gary Heminger for opening remarks on slide 4.
Thanks, Kristina, and good morning to everyone and thank you for joining our call. Earlier today, we reported an outstanding second quarter. Our income from operations was $1.7 billion and we are pleased to report EBITDA of $2.24 billion, which is the highest quarter since MPC became a public company in 2011. The commodity environment and markets in which we operate were volatile this quarter, but our diversified integrated business model created opportunities and our team executed in capturing those opportunities, which drove these extraordinary results.
We often talk about our commitment to creating sustainable long-term value for our shareholders and this quarter was no different. We maintained our focus on operational excellence as well as our disciplined capital strategy, which enabled the return of capital beyond the needs of our business. This quarter, we returned $1.1 billion to our shareholders, including $885 million of share repurchases. As we look to the second half of 2018, we remain very optimistic about the prospects for our business.
Global demand remains strong and inventory levels are moderate, despite recently high refining utilization levels across the U.S. Additionally, crude differentials appear sustainably wider in many of our markets. In particular, as we look at our optionality in crude slate, we see opportunities to maximize usage of WTI-linked crude. The WCS market continues to face logistical constraints relative to production growth which we believe should support attractive differentials for our system to capture.
We continue to optimize our exports at Galveston Bay and Garyville with the objective of maximizing profitability and we are well-positioned to benefit from the adoption of a little softer international bunker fuel regulations in 2020, given the rigid upgrading investments we have made in our business over the last decade. At the same time, we continue to be very enthusiastic about the combination of Marathon Petroleum and Andeavor into a premier, nationwide integrated downstream energy company.
There are tremendous benefits to combining these two powerful businesses which will be well-positioned for long-term growth and shareholder value creation. This combination is expected to generate at least $1 billion of tangible annual gross run rate synergies within the first three years, which is anticipated to drive more than $5 billion of incremental cash generation over the first five years alone.
Our team has made significant progress towards completing the combination. We recently announced the expiration of the waiting period under the Hart-Scott-Rodino Act, and have continued to advance the necessary SEC filings, including filing a Second Amendment to our Form S-4 on July 20 to proceed to our shareholder votes. We continue to expect to close the transaction in the second half of 2018. We believe MPC, supported by this great combination with Andeavor, absolutely becomes a must-own refining, marketing, and midstream company.
Now, let me turn the call over to Don to cover additional highlights for the second quarter and an update on the integration process. Don?
Thanks, Gary. Turning to slide 5, we reported second quarter earnings of $1.06 billion and income from operations of $1.71 billion.
Refining & Marketing delivered strong results with second quarter segment earnings of $1.03 billion, an increase of nearly $463 million over second quarter 2017. We operated exceptionally well throughout the quarter, with record throughput volumes, and we were able to capture wider crude differentials across our system.
Within the Midstream segment, which largely reflects the financial results of MPLX, we reported income from operations of $617 million and achieved record gathered, processed and fractionated volumes, as well as record pipeline throughputs. Our Midstream operations continue to grow, given both their robust organic growth investments, as well as improved utilization of existing assets.
While dialogues with investors seem to focus more on one basin versus another, we continue to be encouraged by the growth prospects across all of the regions in which we operate, and in particular, by the continued growth prospects in both the Northeast and the Permian.
We encourage you to listen in on the MPLX call at 11:00 AM this morning to hear more about MPLX's performance and the opportunities across the business.
On the retail side, Speedway reported income from operations of $159 million. In the second quarter, gasoline and distillate margins were adversely impacted by the overall rise in crude oil. Our focus continues to be optimizing total gasoline contributions between volume and margin as market conditions adjust.
We are optimistic about the second half of the year for Speedway, as we are expecting to close on the acquisition of 78 store locations in Syracuse, Rochester, and Buffalo, New York in the third quarter. These stores will enhance our existing network and expand our brand presence in key growth markets.
The completion of the pending Andeavor combination will add store location to Speedway's marketing territory, establishing a coast-to-coast presence. With its industry-leading retail position and loyalty program, Speedway is well-situated to expand over this nationwide footprint.
As Gary mentioned, we've made significant progress on our proposed transactions from a regulatory standpoint. At the same time, we've also made substantial progress in our integration planning.
Since we announced this transaction about 12 weeks ago, we've been focused on day one. Our combined teams have worked diligently to identify key best practices across our organization with the goal of developing a bottoms-up plan to achieve our $1 billion annual run rate gross synergy target. We are currently ahead of our baseline integration plan and expect to be ready to go at close.
With that, let me turn the call over to Tim to walk you through the financial results for the second quarter.
Thanks, Don. Slide 6 provides earnings on both an absolute and per share basis. For the second quarter of 2018, we reported earnings of about $1.1 billion, or $2.27 per diluted share compared to the $0.93 we earned last year.
The bridge on slide 7 shows the change in earnings by segment over the second quarter last year. The walk highlights the significant increase in Refining & Marketing as compared to the second quarter of 2017. The $463 million favorable variance was driven by positive Midwest and Gulf Coast crack spreads, as well as wider WCS- and WTI-based crude differentials.
Speedway's second quarter results were lower than the second quarter last year by $79 million, primarily related to lower light product margins and higher expenses.
The $285 million favorable Midstream variance was primarily due to the recent drop of refining logistics and fuels distribution services to MPLX, as well as record gathered, processed and fractionated volumes and record pipeline throughput volumes.
The favorable year-over-year variance in items not allocated to segments includes the absence of $86 million of litigation-related expense recorded in the second quarter of 2017, offset by approximately $10 million of transactions costs recorded in the second quarter of 2018 related to the pending combination with Andeavor.
The higher earnings in MPLX, which includes the impacts of the February drop, resulted in $89 million of increased allocation of MPLX earnings to the publicly held units in the partnership, shown here as the noncontrolling interests variance.
Turning to slide 8, our Refining & Marketing segment reported earnings of just over $1 billion in the second quarter of 2018 compared to $562 million in the same quarter last year. The LLS-based blended crack spread had a $243 million favorable variance – favorable impact to segment results, largely due to the lower RIN prices and the resulting higher effective crack. The LLS blended 6-3-2-1 crack spread was $6.98 per barrel in the second quarter of 2018 as compared to $5.71 per barrel in the second quarter of 2017.
Our ability to take advantage of crude differentials provided substantial benefits in the quarter. The widening sweet/sour differential had a positive effect of approximately $320 million versus last year. The differential increased to $9.46 per barrel in the second quarter of 2018 from $5.48 per barrel in 2017.
The LLS/WTI differential increased to $5.12 per barrel, up from $2.03 per barrel in the second quarter of 2017. This wider differential drove a $180 million benefit based on the WTI-linked crudes on our slate.
The favorable crude acquisition impacts of approximately $173 million captured in other margin were accentuated by our refinery utilization rate of 99.9% for the quarter, which resulted in a record crude oil throughput of 1.9 million barrels per day, as well as strong volumetric gains in the higher pricing environment. Direct operating costs had a favorable impact of $76 million to segment earnings, mainly due to the absence of costs related to the refining logistics assets that were dropped to MPLX on February 1 and are now reported in the Midstream segment.
These benefits were offset by several factors, including the $219 million unfavorable variance in the product component of other margin, driven primarily by less favorable product price realizations versus spot prices used in the benchmark LLS 6-3-2-1 crack spread. Also offsetting the benefits was a $385 million unfavorable variance in other R&M expenses, primarily due to the fees paid to MPLX related to the businesses that were dropped to MPLX in February. Prior period R&M results were not adjusted to reflect these newly constituted businesses.
Moving to our other segment, slide 9 provides the Speedway segment results walk for the second quarter. Segment income from operations was $159 million, down $79 million from the second quarter of 2017. The year-over-year decrease in segment results was primarily related to lower light product margins and higher expenses. Speedway's gasoline and distillate margin decreased to $0.1645 per gallon in the second quarter of 2018 compared to $0.1835 per gallon in the second quarter of 2017, primarily due to the effects of rising crude oil prices and the lag effect at the retail level.
Operating expenses increased $24 million year-over-year due mainly to higher labor and benefit costs, while depreciation was $8 million higher primarily due to increased investment in the business. The $6 million gain on sale of assets recorded in the second quarter of 2017 also contributed to the difference from the second quarter last year. In July, the merchandise sales have started off strong. We've seen a 5.5% increase in same-store merchandise sales compared to last July, while same-store gasoline sales volumes have decreased about 1.8%.
Slide 10 provides the Midstream segment results for the second quarter. Segment income was $617 million in the second quarter of 2018 compared to $332 million in the same period of 2017. The $328 million variance for MPLX was favorably impacted by $232 million from the earnings of the businesses included in the February 1 dropdown. The rest of the improvements related to record gathered, processed and fractionated volumes, as well as record pipeline throughput volumes. As Don mentioned, we'd encourage you to look at the MPLX's earnings release and join the update call at 11:00 to get more color on the partnership's great performance in the second quarter.
Slide 11 presents the elements of changes in our consolidated cash position for the second quarter. Cash at the end of the quarter was nearly $5 billion, an increase of approximately $346 million from the end of the first quarter. Core operating cash flow before changes to working capital was a $1.8 billion source in the quarter. Working capital was a $544 million source of cash, as higher crude and other payables more than offset a modest inventory build and an increase in receivables for crude oil and refined products in the quarter.
Return of capital to shareholders via share repurchase and dividends totaled $1.1 billion in the quarter, including $885 million of share purchases funded primarily by after-tax cash proceeds from the February dropdown. Looking forward, we remain committed to our disciplined capital strategy and returning capital beyond the needs of the business in a manner consistent with maintaining the company's current investment-grade credit profile.
Slide 12 provides an overview of our capitalization and financial profile at the end of the second quarter. We had approximately $17 billion in total consolidated debt, including nearly $12 billion of debt at MPLX. Total debt represented 2.6 times last 12 months adjusted EBITDA on a consolidated basis, or 1.2 times EBITDA excluding the debt and EBITDA of MPLX. Taking into account the distributions MPC received from MPLX, the same parent level metric was 1 times last 12 months adjusted EBITDA.
We believe this parent level including MPLX distributions look is a more useful way to look at MPC's ongoing debt service capabilities, given the importance and stability of MPLX distributions to MPC going forward. This year and over time, the growing MPLX distributions will provide substantial funding to MPC and will continue to be a fundamental component of MPC's discretionary free cash flow.
Slide 13 provides updated outlook information on key operating metrics for MPC for the third quarter of 2018. We're expecting total throughput volumes of approximately 2 million barrels per day with planned maintenance currently taking place at our Canton refinery and downtime scheduled for the Detroit refinery in September.
Total direct operating costs are expected to be $7 per barrel. As a reminder, total direct operating costs now reflect the reduction of costs associated with the drops. We'd expect the net costs related to MPLX fees reflected in the other column of the R&M walk to be approximately $340 million per quarter on a going forward basis. Sour crude is estimated to make up 53% of our crude oil throughput for the third quarter and WTI-priced crude is estimated to be about 32% of the slate. Corporate and other unallocated items are projected to be $85 million prior to any transactions costs related with the Andeavor combination.
With that, let me turn the call back over to Kristina.
Thanks, Tim. As we open the call for questions, as a courtesy to all participants, we ask that you limit yourself to one question and a follow-up. If time permits, we'll re-prompt for additional questions.
With that, now, we will open the call to questions. Operator?
Thank you. We will now begin the question-and-answer session. Our first question today is from Doug Terreson from Evercore ISI.
Good morning, everybody.
Good morning, Doug. How are you?
I'm doing fine. So, Gary, the S-4s this month provide financial outlooks for both Marathon and Andeavor calculated several different ways. And when you take the most conservative projections in the document and you add in likely merger costs and benefits, it appears that the combined company has an earnings outlook that's way above the consensus, even though, you appear to be using margin projections that are both flat – or close to flat and well-below the forward curve during 2018 to 2021.
So, my question is two-fold. First, is my premise correct on the combined earnings outlook in relation to the Street consensus or is there a more appropriate way to think about that information? And then second, can you confirm that the margin projections that are in the S-4 were utilized to reach those financial projections? In either way, was there a reason that they're conservative, at least in relation to the forward curve, given the fundamental and IMO 2020 outlook? So, two different questions about the S-4 information.
No. Doug, I think you're looking at it right. And recall, the S-4 is not for guidance, it's really for our business plan, budgeting purposes. And yes, that is – those are the numbers that we used in determining the value of the two companies and for the fairness opinion. So, you know our company very well. We've always been very conservative in how we look at things into the future. And it does not necessarily mean that that is the value that we see, and with the IMO coming on and even with some upside potential in crack spreads. So this is not meant for guidance, this was meant to value the two companies.
Sure.
And I would say that based on our outlook – and the other thing, Doug, as you look right now at inventories across the globe, we believe that inventories are in very good shape across the entire globe. And I believe that that's going to lead to upside potential as we get into the third quarter here.
And as we then embark on 2019, which we think is where we're really going to start to see the upswing in the IMO effect. So those are not for guidance, those were for valuation purposes. And of course in December, we're going to have a big Analyst Meeting, and we'll get more granular at that time.
Okay. But it sounds like you're as constructive as ever on the fundamental outlook in refining and the possible positive effects on IMO 2020. Is that a good way to think about it, Gary?
Absolutely, Doug.
Okay. Okay. Thanks a lot.
You bet.
Thank you. Our next question is from Neil Mehta from Goldman Sachs.
Hi. Good morning, Gary and team.
How are you, Neil?
Doing great. So, Gary, just want to get the latest pulse check on the Andeavor transaction. You've been able to spend more time with the assets over the last couple months. What have you learned about the transaction relative to the $1 billion synergy guidance that you outlined? And does the weakness in California refining margins create any pause? Or does the fact that Midland differential, Salt Lake margins are doing well, and typically there's a lot of volatility in California. Does that not really affect the way you think about the intrinsic value of the assets that you're acquiring?
Well, I'll take the latter part of your question first. You're right. California, just like we've recognized here in the Midwest and the Gulf Coast in the second quarter, can be volatile.
But when markets are volatile, if you operate well, have strong operational excellence programs, you can capture the optionality that's available on the marketplace as we just highlighted in the numbers that Tim went over.
So, no, it doesn't change our outlook at all. California is going to have, as they would say in England, swings and roundabout. And it'll continue to have that, but we expect that. Of course, El Paso, Salt Lake, as you said, the Mid-Continent continues to be strong, and we would expect that to continue.
But going back and looking at the integration and as Don reviewed, I would say, we have the bit in our mouth and we're ready to go with this integration. We have the HSR approval, waiting to finalize the S-4 and – but I've not seen any negatives, I've only seen positives.
And we still have to be very careful of front running, and you can't get too detailed until you get the final approvals. But what we have seen to date is very positive, and we're looking at some opportunities just recently that we did not see in the original analysis that we had completed that are certainly upside. So I don't see any negatives from what we've looked at to date, Neil.
Thanks, Gary. And the follow-up is, I always appreciate your views on the macro. And there are two things we've been thinking about a lot lately.
For the first is, gasoline, you cited that same-store sales were down 1.8%. And so I don't know if there was some noise in the numbers or that's some indication of price elasticity. But how you see inventories and the demand picture looking?
And the other is, WCS, where the differentials have widened out again, recognizing that there's some turnaround activity in the Chicago area coming up. So just any thoughts on those two topics would be appreciated, and I'll leave it there.
Sure. When you look at the Speedway same-store predictor to total gasoline demand, that metric has worked very well in kind of a flat, kind of normal market.
I am not alarmed at all by the down 1.8% and that's for – that's month-to-date. In the second quarter, there was some volatility as well. But during that period of time, we've had mainly an up crude market. Recently, crude prices have been off a little bit.
But in a very strong, as you say, the price-elastic market in a very accelerated crude market, you're going to deal with Speedway and where we sit trying to get that cost to the Street and being one of the leaders in trying to get that cost to the Street, it's going to cost you some volume. And – but when things simmer out, I look at where margins are on the Street right now and we're really starting to be able to reap the benefits of the position we have in the retail space. So, that doesn't bother me at all.
Let me ask Mike to talk about – Mike Palmer to talk about the WCS market.
Yeah, Phil.
Actually, it's Neil.
Oh, is it Neil? Yeah. Sorry, Neil. It's – the WCS outlook continues to be really good. And from a big picture standpoint, basically what's happened is that the Canadian producers have done a nice job of increasing production, but they've outrun the capacity of the pipelines and that's – as you know, that's a difficult thing to change. It's going to take some time before the pipelines come on. In the meantime, I think that they've been working with the rails to try and clear volumes, that's fairly expensive. So, as we look forward, we continue to believe that the outlook for heavy Canadian, which WCS is the proxy for, continues to look very good.
And Neil let me – to your point, let me add a couple other points. If you look at the U.S. stocks of both gasoline and diesel, gasoline is pretty much right on line with where we were last year, but after a little softer diesel as well as the entire distillate fuel stocks are at the bottom, if not below the five-year average, which I think bodes very, very well for the business going forward. And if you look at the turnarounds that are planned in the Mid-Continent, Mid-West here in Q2 – Q3, and then as we look at the Gulf Coast turnarounds possibly in Q4, I think inventories are going to remain for both gasoline and distillate, inventories are going to remain in check through the year, which bodes very well for the business. But as we look into 2019 and where we believe inventories will end up with the balance of this year, it should put us in a really good position moving into 2019 as well.
Thank you. Our next question is from Phil Gresh from JPMorgan.
Hi. Good morning.
Hey, Phil.
First question is just – I guess this is kind of an occasion question. As you guys are working intensely on closing the Andeavor acquisition, Gary, would you say that this would preclude you from looking at any other opportunities that might be available? And I'm thinking perhaps on the Midstream side, not necessarily on the refining side, to the extent that there are opportunities in the Midstream market. Would you be looking closely at this?
Well, I would say, Phil, even though we have a very large transaction going, we don't take our eye off of the entire industry and the entire horizon of what's going on in the marketplace. So, yes, we continue to evaluate almost everything that is available and a lot of things that probably aren't available. So, we will look, I wouldn't say that that means that we're running to the finish line with anything at all.
Okay. Second question, another capital allocation, I guess for Tim. I was looking at your 10-Q and your buybacks here in the quarter. It looks like you still have $1 billion left on the existing authorization. Your leverage levels look, as you said, well under control. So, I mean, should we be thinking that you'd probably use up the rest of the authorization this year, and you'd start using the incremental $5 billion that you've talked about on a pro forma basis shortly thereafter or how do you think about that?
Well, Phil, I think the approach is going to be consistent. We are – we've been I think pretty disciplined around the notion that to the extent that we've got cash and capital that are beyond the needs of the business, our inclination is to sort of get that back to shareholders. The authorization numbers that you cite, I think might be a little bit stale. I think we're probably north of $5 billion of authorization from where we sit today, in fact maybe closer to $6 billion.
So, again, that authorization was one that we pursued with the board around the time of the announcement just as frankly, because we know that once this business come together, as Don referenced, and I think we're continuing to be feel very good about the incremental cash generation from the combination is going to be substantial. And so, I think a big source of where that cash is going to go is likely going to be back to shareholders and likely in the form of share repurchase. So, I think our approach from here forward frankly is going to remain consistent.
There is – there will be a period of time – I think during the solicitation period, we will be precluded from that activity, but I'd call that a blip in the road as opposed to any sort of structural change. So, I think you should expect to see our approach to be very consistent. I think we've sort of – we believe in that commitment to shareholders that to the extent we've got resources beyond the needs of the business, they should be returned, and I think that will continue to be our approach.
Thank you. Our next question is from Roger Read from Wells Fargo.
Yes. Good morning and congrats on the quarter, really well done on the refining side.
Thanks, Roger.
Just digging in here, I was wondering, Gary, if we could get a little more commentary, maybe dig just a little bit deeper on kind of the outlook here in the back half? I think Q2 is going to be good across the board. Outlook for Q3, margins are a little weaker, which isn't surprising. Last year's Q3 was great. As you look at the turnaround schedule for the industry, I'm guessing that's what gives you the confidence on the positive inventory outlook as we get towards year-end or is there something else you're seeing as well?
No. I just looked at where the inventory is situated today, knowing where the turnarounds are in the Mid-Con, Midwest in Q3. They'll start up in probably early-Q4 down to the Gulf Coast. But inventories are in check across the board, and I think – and you're right, last year, the latter part of Q3 was very, very strong due to the dislocations in the market based on the storms that hit the country. Let's hope and pray that we don't have those storms this year, but – so, we are going to be up against some pretty strong numbers from last year. But nevertheless, inventories are in good shape, turnarounds are to be heavier in Mid-Con, Midwest than probably in the Gulf Coast. I think that bodes well especially when you look at, as I said earlier, on the global macro demand picture, I think that puts us in a very good position, puts the industry in a good position.
Okay, great. Thanks on that. And then my follow-up in the retail business, you cited higher OpEx specifically called out as an issue. I think it was labor costs mostly. What, if anything, can you do to mitigate that? Is there – is it something when you see price increases on the merchandise side or an expansion of margin there or more automation or is this just – it's a function of the business and that's what everyone is dealing with at this point?
All right. Tony, you want to take that?
Yeah. Sure, Gary. Yeah. That is – actually, on the OpEx side, there's really two components in there. One is the wage inflation that we're experiencing as a result of the low unemployment rates that we're seeing in the country now. And that's just putting competition for that labor at the store level for us, and we're having to move hourly rates up in order to attract that labor. And I think to your question, I think what we're focused on is we look at a number of technology investments that we're making both outside and inside our store to become more efficient, so we can reduce the labor costs or control the labor costs to the point where we're competitive in that regard.
And the other factor that's pushing the labor costs too is we continue to add stores to our portfolio. So, in the second quarter alone, we added 15 net stores. So, that's a net of both new and rebuilds less the closing store locations. So, there is more stores in our portfolio. And then, we're also adding more complex stores as we spend money on remodel those stores and add food service, that's going to drive operating costs to perform those functions in a more complex operating environment.
Roger, one of the things that we spoke about back when we talked about the merger with Andeavor is that our labor model and the platform that we've run all of our convenience stores, we're going to be able – in a very short order, be able to transfer and translate that type of technology into the stores when we close Andeavor. It will take some time, but that is one of the key synergies and I think key operating efficiencies that we're going to be able to really transfer into those stores.
And that model or that platform that Speedway has, it manages all the inventory, and if you have a technology that can manage inventory, you don't need people counting things, but it manages all inventory in and out of the store, it manages labor, it manages day parts of labor requirements in the store to hit your peak periods.
So you're going to be able to see that efficient model as we put it into the Andeavor stores, I think really be able to drive some gains in the retail into the future.
Thank you. Our next question is from Paul Cheng from Barclays.
Hey, guys. Good morning.
Hi, Paul.
Hey. Gary, on the integration, you guys already done quite a lot, but of course there's a limitation before you close how you can actually really fully cooperate. So what's the extent that how much you can actually do?
And also, have you been able to look at across your IT system, because I mean you'll need good information in order for you to good decision. So how big is the – or that how comparable or incomparable between the two companies? How much work you need to do on those?
Paul, this is Don Templin. So I think the integration activities are moving along very well as I said in our comments.
And one of the things that we're very focused on is delivering the synergies that we articulated when the combination was announced. We think that's a very important part of the value proposition.
And you did rightly point out that there are some limitations on the information that we can look at and the Andeavor folks can look at, because we're still competitors. But one of the things that we're using is we're maximizing to the extent possible cleanroom and clean teams. So we actually are putting information into a data room, having clean teams look at that data, so that on day one – when we go to close day one, in five minutes we can go after synergies.
So we feel very good about the progress that we've made. And obviously, when we have full access to information, that will reveal incremental information that will be valuable to all of our management team in terms of running the business. But we feel like we're making good progress and can go after synergies by using this methodology.
Don, have you guys been able to look at the different computer system, IT information and all that or operating system that you guys do. Is it a lot of similarity or there's a really quite big difference and it's going to take some time for the conversion?
Yeah. So we've been – we've looked at the IT environment. Both companies have invested significantly in IT, because we think that having a strong IT system and excellence around execution is really important. And so we have a plan to – over time, to take our IT systems and to integrate them.
But we don't believe that the existing IT platform at Andeavor or the existing platform at MPC will be an impediment to us operating from day one, and that's what our teams are focused on.
Thank you. Our next question is from Manav Gupta from Credit Suisse.
Thanks, guys. My question is on your page 99, Amendment Number 2, S-4. You have synergy CapEx of $98 million in year-one, $226 million in year-two, and $240 million in year-three, dropping to $0 in year-four. So if you could give us some idea on which projects do you plan to undertake in year-one versus year-two and year-three?
And why is the CapEx more backend loaded and not frontend loaded? So basically, why is year-three $240 million and year-one $98 million? Why not the other way around?
Yeah. So if you look at – this is Don again. If you look at our synergy capture, and we were targeting roughly $0.5 billion in year-one, and that escalates or grows into $1 billion run rate in year-three.
So in year-one, if you looked at sort of the components of the synergies that we are anticipating to achieve, a number of them are around cost synergies and synergies around our sourcing and procurement activities. In the backend of the synergies are typically things related to refining and systems – optimizing our system and also optimizing kind of a ramped-in approach around our retail business.
So those capital expenditures are very much tailored to the type of synergy that we're expecting to capture. Cost and optimization sort of in year-one, and enhancements to the asset base that we have as we go on into year-two and three.
Okay. My quick follow-up is when I look at Amendment Number 2 versus 1, there are only minor differences. It kind of hints to the fact that the second set of questions that you got were not that exhaustive. Is there a strong possibility that you might not get a third round of questions at all?
Yeah. Manav, this is Tim. Again, we'll read the tea leaves the same way you do that that's generally a good sign as the questions decline. I mean, obviously, no telling how the process rolls and it could be that there are some additional questions we get, but I think we feel very good about where we're at in the process. We certainly are eager to hear back from the SEC with regard to the responses that we provided in the Amendment and we'll see. We'll move with all due speed, but I think we're – the signals, and I guess again the signs are generally pretty positive that the list of questions has been getting shorter each time, so.
Thank you. Our next question is from Doug Leggate from Bank of America Merrill Lynch.
Thanks. Good morning, everybody. Good morning, Gary.
Hi, Doug.
Gary, I guess, everybody is really trying to get to the nub of the issue which is, if I may put it this way, to what extent is the $1 billion synergy number would fully matures when you provided that at the time of the deal? Given you've had limited access, obviously, given there's limited things you can say at this point. But I wonder if you could characterize it in terms of how far you think you'd mature the synergy opportunity when ultimately you close the deal?
Yeah. To use the word matured, of course, we did as much due diligence as we could do. And again, you know how conservative we are, and in all of the discussions I've had with you, how conservative I am that we're going to put out – forecast the numbers that we're very confident that we're going to be able to achieve and beat. So, we're very confident from what we've – the work we've even done since April 30, very confident in what we have learned, what we continue to see, and I believe that we're going to see more.
So, I would say, it's mature. I can't today sit down and delineate by month, but I think that we will have a rapid pace of being able to achieve these synergies. And it's incumbent upon both the Andeavor employees that would become Marathon employees and Marathon employees, we're all in this together and we're going to have a program that – to achieve these synergies, everybody in the company is going to be part of that program on how we attempt to achieve these synergies. But you're going to see us be able to, I think, embark on these very quickly.
I guess what I'm really driving at is the December Analyst Day fair to assume there's probably some upside to your assumptions?
Well, we have not prepared that schedule yet for the December Analyst Day, but we'll certainly give you more granularity on what we see, at that point in time, we would be through the first phase of transition to be able to I think really, with confidence, talk about some of the key parts of the synergy. But there could be, Doug, but we'll wait and see, but I'm pretty bullish on how – what we're seeing so far.
Thank you. Our next question is from Matthew Blair from Tudor, Pickering, Holt.
Hey. Good morning, everyone. In your reported product yields for 2018 year-to-date, you show your refinery is producing a 16% allocation to feedstocks and special products. Could you remind us what goes into this bucket? Is it things like high-sulfur VGO or Vacuum Tower Bottoms? And in an IMO world, do you believe this part of your product slate will be advantaged or disadvantaged or perhaps no impact?
Yeah. This is Ray Brooks. Let me take a first stab at that. When you talk about our product slate that we produce, I think you're leading to how much rigid fuel oil do we make and is that going to be problematic in the post-IMO world. We make a little bit of a bunker fuel out of our Galveston Bay refinery. We're looking at ways from an infrastructure standpoint how we, in the next year-and-a-half, can minimize that. So, I don't see that being a huge impact from us. But when you talk about our product slate and I don't know exactly what you're looking at, we've got gasoline, distillate, but then LPG, aromatics, asphalt, coke and pitch products. So, that's a balance of what we're looking at.
Okay. I'll follow-up there. A year ago in 2Q 2017, MPC exported 313,000 barrels a day of light products. Could you provide that number for Q1 2018 and Q2 2018 with the breakout of gasoline versus distillate, and offer any sort of comments on what you're seeing in the export markets? It seems like Mexico has been really quite strong this year on all the refinery downtime they've had.
Yeah. This is Mike Palmer. So, if you look at Q1 of 2018, we were at 265,000 barrels a day of total exports, and that was about 48% gasoline and 51% diesel, just a little bit of asphalt in that number, I think around 1%. And then, in quarter two, we were at 311,000 barrels a day, and that was about 29% gasoline, 67% diesel, and then about 4% other, which again is primarily asphalt I believe, so predominantly light products.
The export market continues to be very good for us, and we continue to optimize our product slates. We did see with Mexico – Mexico, as you know, has brought back Salina Cruz, one of their refineries that was down last year. So, that has certainly had an impact on how much gasoline that they are importing. But across the board, I think in Latin America, things still look very good. And as I say, we continue to optimize the sales of our products and will sell into the bulk markets into the pipelines or export or sell to other domestic customers by cargo.
Thank you.
All right. Well, then operator, if we don't have any other questions in the queue, I'd like to thank everyone for their interest in Marathon Petroleum Corporation. Should you have any additional questions or would like clarifications on topics discussed this morning, we'll be available to take your calls.
And with that, thank you for joining us this morning.
Thank you. And this does conclude today's conference. You may disconnect at this time.