© 2024 Alpha Spread Limited. All Rights Reserved.
www.alphaspread.com is not operated by a broker, a dealer, or a registered investment adviser. Under no circumstances does any information posted on www.alphaspread.com represent a recommendation to buy or sell a security. The information on this site, and in its related newsletters, is not intended to be, nor does it constitute, investment advice or recommendations. The information on this site is in no way guaranteed for completeness, accuracy or in any other way. In no event shall Alpha Spread Limited be liable to any member, guest or third party for any damages of any kind arising out of the use of any content or other material published or available on www.alphaspread.com, or relating to the use of, or inability to use, www.alphaspread.com or any content, including, without limitation, any investment losses, lost profits, lost opportunity, special, incidental, indirect, consequential or punitive damages. Past performance is a poor indicator of future performance.
You don't have any saved screeners yet
Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Welcome to the MPC Fourth Quarter Earnings Call. My name is Elan and I will 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 Lisa Wilson. Lisa, you may begin.
Thank you. Welcome to Marathon Petroleum Corporation's Fourth Quarter 2017 Earnings Webcast and Conference Call. The slides that accompany this call can be found on our website at marathonpetroleum.com under the Investor Center tab. On the call today are Gary Heminger, Chairman and CEO; Don Templin, President of MPC; Tim Griffith, MPC's Senior Vice President and Chief Financial Officer; Mike Hennigan, President of MPLX; and other members of MPC's executive team. We invite you to read the safe harbor statements on Slide 2. It's a reminder that we will be making forward-looking statements during the call and during the question-and-answer session. Actual results may differ materially from what we expect today. Factors that could cause actual results to differ are included there as well as in our filings with the SEC. Now I'll turn the call over to Gary Heminger for opening remarks on Slide 3.
Thanks, Lisa, and good morning and thank you for joining our call. We issued 2 press releases today, our usual fourth quarter earnings announcement and one announcing the completion of our previously announced strategic actions. This morning, we reported strong results for the quarter and full year. The Midstream and Speedway segments each achieved record full year performance along with the substantial increase in earnings from the Refining & Marketing segment. I will ask Don to cover additional highlights for the fourth quarter and full year results shortly. Before I move to our capital plan, I would like to take a moment to highlight 2 significant 5-year milestones for our company. February marks the 5-year anniversary of our acquisition of the Galveston Bay refinery. The accomplishments since this acquisition are impressive. We have dramatically improved the environmental and safety performance of the refinery and advanced operational excellence, all while achieving lower operating expenses. For example, we have reduced environmental incidence by approximately 80%; achieved numerous processing records, including 33 monthly process unit rate records in 2017 alone; and cut unplanned downtime in half. We have also lowered operating expenses nearly 25%. It has also been 5 years since the formation of MPLX. MPLX has delivered an impressive 20 consecutive quarters of increased cash distributions for unitholders, representing a compound annual growth rate of 18.3% over the minimum quarterly distribution established at the partnership's formation. The partnership's asset base and earnings profile have been transformed over this time. In late 2015, the partnership expanded into the Midstream natural gas business with the addition of MarkWest. Early last year, we announced the strategic action plan to enhance value for our investors, which we completed today. As part of the strategic actions, we executed dropdowns through MPLX of assets and services that are projected to generate approximately $1.4 billion of annual EBITDA, adding high-quality fee-based revenue streams to MPLX and further diversifying the partnership's earnings. Following the dropdowns, we completed the conversion of MPC's GP economic interest in MPLX into LP units. This conversion provides a clear valuation for MPC's ownership in MPLX. This, combined with elimination of the partnership's IDR burden, creates mutual benefits and positions MPLX extraordinarily well to deliver long-term sustainable growth for all its unitholders, including MPC. Earlier this week, we were pleased to see Standard & Poor's recognize MPLX's transformation and strong credit profile by upgrading the partnership's credit rating to BBB flat. Looking forward, this morning, we announced our 2018 capital investment plans for both MPC and MPLX. This plan remains focused on strengthening the sustained earnings power of the business through growth and margin-enhancing projects, as well as expanding our more stable cash flow businesses, especially Speedway and MPLX. Our capital plan for MPC for 2018, excluding MPLX, is $1.6 billion. This planned spending includes $950 million for Refining & Marketing, $530 million for Speedway and $100 million to support corporate activities and other investments. The Refining & Marketing investment plan includes approximately $400 million of growth capital, focused on optimizing the Galveston Bay refinery, upgrading residual fuel oils to higher-value products, maximizing distillate production and expanding life product placement flexibility, including exports. With the investments we've made in the business, we are well positioned to benefit from the adoption of the low-sulfur international bunker fuels requirement in 2020, commonly referred to as IMO. Our refinery system has deep conversion capacity as well as asphalt production capabilities. We plan to increase our production of ultra-low-sulfur diesel and resid upgrading ahead of IMO through future investments, which include the optimization of the Galveston Bay refinery, which we referred to as the STAR project; the diesel maximization project at Garyville; and the Garyville coker expansion. We expect to invest $530 million in Speedway, $150 million increase from last year's plan and consistent with our commitment to aggressively grow this business and build upon its industry-leading position. This significant increase is targeted for construction of new stores as well as remodeling and rebuilding existing locations. MPLX also announced its capital investment plan for 2018, including $2.2 billion for organic growth and approximately $190 million for maintenance capital. This robust organic growth plan includes the addition of 8 processing plants, representing nearly 1.5 billion cubic feet per day of incremental processing capacity, as well as 100,000 barrels per day of additional fractionation capacity in the prolific Marcellus, Utica and Permian basins. The remaining growth capital of the partnership is planned for the development of various crude oil and refined products infrastructure, including export capacity expansion at our Galveston Bay refinery. As we start the new year, I also wanted to provide some observations on the macro environment we are expecting in 2018. From a commodity perspective, we are encouraged by a more balanced supply-and-demand environment, which should be supportive of crude oil and refined product prices throughout the year. We think this creates a very productive backdrop for refining margins, in addition to generating meaningful midstream development opportunities for MPLX.
Inventories were more balanced than they have been for several years. On the days of supply basis, including exports, December U.S. gasoline inventories were the lowest they have been since 2006. And U.S. distillate inventories were the lowest since 2013. Additionally, the U.S. crude inventory surplus is largely gone. From a crude-differential perspective, we expect the Brent-WTI spread to be volatile, but to generally trade a couple of dollars on either side of $5 per barrel. This is based on our view that pipelines from Cushing to the Gulf will be relatively full and the differential should generally reflect transportation cost and quality differentials, although always subject to changes due to domestic operating and geopolitical events. We also expect favorable Canadian crude-oil differentials, both heavy and light, over the course of 2018. We believe that pipelines in the U.S. will be full, and incremental barrels of Canadian crude will have to clear by rail. This should keep heavy differentials wider in 2018 than we experienced in 2017. We also believe that global and U.S. macro picture remains solid, and expect a good underlying economic growth will continue to support strong demand for our products. We expect demand from export markets to remain robust. MPC continues to be well positioned to take advantage of export opportunities at both Galveston Bay and Garyville. In the fourth quarter, we exported 314,000 barrels per day or about 17% of our nameplate capacity. Complementing our outlook for the business is the recent tax reform legislation. The reduction in the corporate tax rate is a catalyst for incremental investment in the business. Additionally, the reduction in cash burden on MPC and our high confidence in the long-term cash generation of the business help support our board's decision to increase the regular quarterly dividend by 15% to $0.46 per share earlier this week. During the quarter, we returned $945 million of capital to shareholders, including the $750 million of share repurchases and $195 million in dividends. For the full year, we returned over $3 billion of capital to shareholders via dividends and share repurchases, which were supported in part by proceeds from the dropdown transactions completed during the year. Since MPC became a separate company in 2011, we have returned over $13 billion to shareholders. Importantly, $3.7 billion of that $13 billion was in the form of regularly -- of regular quarterly dividends, which have grown by 26.5% CAGR since MPC became an independent company. Return of capital to shareholders and attend to long-term investments in the business and maintaining an investment-grade credit profile will remain fundamental elements of MPC's capital allocation strategy and will continue to drive a very attractive value proposition for our investors. As I wrap up, I wanted to highlight our recent publication of report -- of a report, called Perspectives, on climate-related scenarios. This document enhances our disclosures around climate-related strategies, risk and opportunities, using the framework recommended by the task force on climate-related financial disclosures. The report has been very well-received by investors and is pointed to as an example for others in the industry to follow. As investors who care about environmental stewardship and the welfare of future generations, we can be proud to invest in MPC. With that, let me turn the call over to Don to cover additional highlights for the fourth quarter. Don?
Thanks, Gary. Turning to Slide 4. We reported fourth quarter earnings of $2 billion or $4.09 per diluted share and full year earnings of $3.4 billion or $6.70 per diluted share. Fourth quarter and full year earnings reflect the net benefit of $1.5 billion related to tax reform. The Midstream segment, which largely reflects the financial results of MPLX, reported record financial results in the fourth quarter and for the full year 2017. This record-setting performance was primarily driven by gathered, processed and fractionated volume growth resulting in high plant utilization. After the closing of today's dropdown and the elimination of IDRs, MPLX is among the largest diversified master limited partnerships in the energy sector, with a very competitive cost of capital going forward. Given its robust portfolio of organic projects in the Marcellus, Utica, Permian and STACK, as well as a diversified suite of logistics assets, we believe MPLX is very well-positioned to be a source of significant long-term value for its unitholders, including MPC. I would encourage you to listen in on the MPLX call at 11:00 a.m. this morning to hear additional color on the partnership's performance and opportunities. Speedway achieved record full year performance in 2017. This was driven by strong earnings from light product sales, an increase of 1.2% in same-store merchandise sales, lower operating expenses and contributions from its travel center joint venture. This is Speedway's sixth straight year of record results and second consecutive year generating $1 billion of annual EBITDA, reinforcing the strategic value of this high-performing, stable cash flow business. Turning to Refining & Marketing. We delivered strong results with full year segment earnings of $2.3 billion, an increase of nearly $1 billion over 2016. We operated exceptionally well throughout the year, and we're able to capture strong crack spreads and wider crude differentials across our system. Additionally, we achieved numerous monthly process unit and production records in the fourth quarter and throughout 2017, including monthly records for crude throughput and gasoline and distillate production. As a result, we are now the second largest refiner in the U.S. on a crude-throughput basis, and Galveston Bay and Garyville are the second- and third-largest refineries, respectively. With that, let me turn the call over to Tim to walk you through the financial results for the fourth quarter and the full year.
Thanks, Don. Slide 5 provides earnings on both an absolute and per share basis for the fourth quarter and for the full year 2017. For the fourth quarter of 2017, MPC reported earnings of $2.02 billion or $4.09 per diluted share compared to last year's $227 million or $0.43 per diluted share. For the full year, earnings were $3.4 billion or $6.70 per diluted share, up from approximately $1.2 billion or $2.21 per diluted share in 2016. As Don referenced, earnings for the fourth quarter and full year included tax benefit of approximately $1.5 billion or $3.04 and $2.93 per diluted share for the fourth quarter and full year, respectively, as a result of remeasuring certain net deferred tax liabilities using the lower corporate tax rate. The bridge on Slide 6 shows the changes in earnings by segment over the fourth quarter last year. Apart from the $1.5 billion benefit resulting from tax reform, the walk highlights the significant increase in Refining & Marketing compared to the same quarter last year. The improvement was driven by higher LLS-based blended crack spreads and high utilization rates in the fourth quarter of 2017. These benefits were partially offset by less favorable product price realizations versus spot prices using the benchmark crack spread. Speedway's fourth quarter results were generally comparable to last year. The increase in life product margins were offset by higher operating expenses and lower merchandise margin in the quarter. The $47 million favorable midstream variance was primarily due to MPLX's record gathered, processed and fractionated volumes as compared to the fourth quarter of last year. Earlier results were also impacted by $205 million of income taxes associated with higher earnings and $47 million of increased allocation of higher MPLX earnings to the publicly held units in the partnership, shown here as the negative variance on noncontrolling interest. Moving to Slide 7. Our Refining & Marketing segment reported earnings of $732 million in the fourth quarter of 2017 compared to $166 million in the same quarter last year. Looking at our key market metrics, an increase in the LLS-based blended crack spread had a $586 million favorable impact to the segment results, primarily due to higher Chicago crack spread. The LLS-based Chicago crack spread increased from $11.08 -- to $11.08 from $6.32 per barrel in 2016, driving our LLS-based blended crack spread to $9.75 per barrel from $7.39 per barrel in the same quarter last year. The Light Louisiana Sweet and Texas intermediate differential widened to $5.64 per barrel, up from $1.30 per barrel in the fourth quarter of 2016. This wider differential drove a $214 million benefit based on the WTI-linked crudes in our slate. These benefits were slightly offset by a $53 million unfavorable RIN/CBOB crack adjustment as a result of higher RIN prices. This increase in cost was considered in our pricing decisions and is reflected in the price paid by consumers. As a result, there is an offset in the product portion of other margin. As a reminder and consistent with this treatment, we view the LLS crack and RIN/CBOB crack adjustment together as an effective realized crack spread. Going forward, we'll collapse these impacts into a single variance factor, which would have shown a net $533 million positive impact in the fourth quarter. Partially offsetting the strong cracks was $113 million unfavorable other margin variance in the quarter, driven primarily by less favorable product price realizations versus the spot prices used in the benchmark LLS 6-3-2-1 crack spread. Slide 8 provides the drivers for the change in Refining & Marketing segment income for the full year. Income from operations was at $2.3 billion in 2017, up $964 million versus 2016. The LLS-based 6-3-2-1 blended crack spread had a nearly $2.3 billion favorable impact on full year segment results, $2.1 billion on an ex-RIN basis, with higher LLS crack spreads in both the Gulf Coast and Chicago markets. The blended crack spreads for the full year increased by $2.88 per barrel to $9.84 per barrel in 2017. The LLS-WTI differential widened to $3.15 per barrel, up from $1.55 per barrel in 2016. This widening had a $250 million benefit on the full year segment earnings. These benefits were partially offset by 3 factors, the largest of which was the $505 million unfavorable variance in other margin. This unfavorable variance was primarily due to lower gasoline and nontransportation fuel product price realizations versus spot prices used in the LLS-based crack spread. This was partially offset by favorable impact in refinery volumetric gain due to higher refined products price environment and increased crude-throughput volumes in 2017. A narrowing contango effect, shown in the market structure column of the walk, resulted in a $350 million unfavorable variance. This is effectively an adjustment of the prompt crude prices used in the benchmark crack to actual crude acquisition cost. This walk also reflects an unfavorable $345 million due to the absence of the LCM reversal that occurred in the second quarter of 2016. Moving to our other segments. Slide 9 provides the Speedway segment results walk for the fourth quarter and full year. As a reminder, comparability of Speedway's 2017 results to prior year's fourth quarter and full year results are affected by the transfer of Speedway's travel centers into a joint venture formed with Pilot Flying J called PFJ Southeast LLC in the fourth quarter of 2016. Since the formation of the joint venture in the fourth quarter of 2016, Speedway share of the results of operations is reflected as income from the equity method investments and is shown in the other column of this walk, while prior activity remains in the light product margin, merchandise margin and other categories. Speedway segment income was $149 million in the fourth quarter of 2017 compared to $165 million in the same period of 2016. The decrease in segment income was primarily due to higher operating expenses and lower merchandise margin. These impacts were partially offset by higher light product margin, which increased to $17.72 per gallon in the fourth quarter, up from $16.17 per gallon in the fourth quarter of 2016. Speedway's income from operations for the full year 2017 was $732 million compared to $734 million in 2016, a record when excluding the LCM benefit recorded in 2016. The increase in full year segment income, excluding the LCM benefit, was primarily due to contributions from the travel center joint venture with Pilot Flying J and lower operating expense, partially offset by lower merchandise margin for the year. In January, we've seen a roughly 1.7% decrease in same-store gasoline sales volumes compared to last January. Speedway same-store gasoline sales has been impacted by higher retail prices as crude prices have moved higher and impacts from severe winter weather. As Gary mentioned, the macro picture for 2018 remain solid, and we expect a good underlying economic growth will continue to support strong demand for gasoline and distillate over the course of 2018. Slide 10 provides changes in the Midstream segment income, highlighting the $47 million quarter-over-quarter and the $291 million year-over-year improvement in segment earnings. The higher earnings were primarily due to increase in contributions from MPLX. MPLX results for the fourth quarter and full year were favorably impacted by record gathered, processed and fractionated volumes as well as contributions from acquired logistics and storage assets in 2017. As Don referenced earlier, a more detailed description of the results for the partnership will be provided in the MPLX earnings call beginning at 11:00 a.m., and we encourage you to listen in. Slide 11 presents the elements of changes in consolidated cash position for the fourth quarter. Cash at the end of the year was just over $3 billion, an increase of approximately $923 million from the end of the third quarter. Core operating cash flow, before changes of working capital, was an approximately $1.4 billion source of cash. Working capital was a $1.3 billion source of cash in the fourth quarter, primarily due to the impact of higher crude prices and volumes on accounts payable and higher crude liabilities, offset by an increase in accounts receivable. Net debt was a $73 million source of cash, which represents MPLX's incremental revolver borrowings during the quarter. Return of capital to shareholders, by a way of share repurchases and dividends, totaled $945 million in the quarter, including $750 million of share repurchases, at a weighted average share price of $57.90. As Gary mentioned, that on Monday, we announced a 15% increase in the quarterly dividend to $0.46 per share. This represents a 26.5% compound annual growth rate in the dividends since becoming an independent company 6 years ago. This accelerated timing and increase reflects the high confidence we have in the long-term cash generation of the business. Since the beginning of the year, we've returned over $3 billion of capital to MPC shareholders through dividends and share repurchases, which were supported in part by proceeds from dropdown transactions during the year. Looking forward, we expect further return of capital with the after-tax proceeds from today's dropdown transaction, all conducted with the continued focus on maintaining an investment-grade credit profile at both MPC and MPLX. Slide 12 provides an overview of our capitalization and financial profile at the end of the year. We had nearly $13 billion of total consolidated debt, including approximately $6.9 billion of debt owed by MPLX. Total consolidated debt represents 2.2x last 12 months adjusted EBITDA on a consolidated basis, or about 1.4x excluding MPLX. This same metric, including distributions to MPC received from MPLX in adjusted EBITDA, was 1.3x. We believe the addition of the distributions from MPLX is a more useful way to look at MPLX's ongoing debt service capabilities, given the importance and stability of MPLX distributions to MPC going forward. Beginning this year and over time, the growing MPLX distributions will provide substantial funding to MPC and will be a fundamental component of MPC's discretionary free cash flow. On Slide 13, we provide the illustrative impact to the Refining & Marketing segment from the drop of the refining logistics assets and fuels distribution services into MPLX. Similar to previous dropdowns, the intersegment earnings, associated with the dropdown, will be reflected in the Midstream segment. We are not restating the prior period results, and as such, prior period results will remain in the R&M segment. Importantly, the dropdown of earnings into the Midstream segment will not cause any change to R&M margin. Direct operating cost will no longer include costs related to the refinery -- refining logistics assets and the MPLX fees to manage the refining logistics assets as well as to provide fuels distribution services will be reflected as an increase to other R&M expenses. We expect a net annual increase in total R&M expenses of approximately $1 billion, with the corresponding results to be reflected in the Midstream segment. For the Midstream segment, we will also provide supplemental volumes statistic related to the fuels distribution services, although volume risks to the partnership have been largely mitigated by the fee-for-services contract that underlies the arrangement. Slide 14 provides updated outlook information on key operating metrics for MPC for the first quarter of 2018. We're expecting throughput volumes of 1.9 million barrels per day, with some planned maintenance in the Midwest and Gulf Coast. Total direct operating costs are expected to be $7.90 per barrel. As I mentioned on the prior slide, direct operating cost will exclude the costs related to the refinery logistics assets being dropped and our guidance here has been adjusted for the dropdown completed today. We'll continue to provide this guidance, adjusted for the drop impacts, on the going-forward basis. While guidance is not provided for other R&M expenses, for the first quarter, we expect a net increase of approximately $230 million, resulting from today's dropdown, which includes the fees paid to MPLX for 2 of the 3 months of the first quarter. Sour crude is estimated to make up 51% of our crude oil throughput for the quarter, down from the first quarter of 2017, as we expect sour crude runs to be impacted by planned maintenance in the Gulf Coast. The estimated percentage of WTI price crude for the first quarter is 28%. Corporate and other unallocated items, which were higher in the fourth quarter due to increases in unallocated corporate costs and employee-related expenses, are projected to be $90 million for the first quarter. These costs are expected to moderate over the balance of 2018 as we move past some of the employee-related expenses specific to the first quarter. Additionally, we will be updating MPC's R&M segment price and margin sensitivities in the appendix on Slide 21. With that, let me turn the call back over to Lisa. Lisa?
Thank you, Tim. [Operator Instructions] With that, we will now open the call for questions.
[Operator Instructions] Our first question today is from Kristina Kazarian from Crédit Suisse.
As you guys alluded to in the opening comments, the WTI-WCS spreads really widened out. Can you give a bit more color on the -- or how you guys are thinking about the overall impact on your refining systems throughout the year?
Yes, Kristina, this is Mike Palmer. You're absolutely right. I mean, the -- what's happening is that the growth in Canadian heavy continues. And -- for example, we've got the big Fort Hills project, that's just now starting to ramp up. And with that growth in Canadian crude, what you're finding is that the pipelines that feed the U.S. systems are full and they're being apportioned. So when you look at the numbers, we're at very high WCS spreads right now. We do expect those to come down somewhat. But what it really means is that we'll continue to maximize the volume of heavy Canadian that we can move into our system.
Great. And I'll ask a follow-up on that, too. How are you guys thinking about the returns that you will be generating on some of the resid upgrade projects you also talked about at the beginning of the call, particularly given the benefit of IMO that might be coming?
Well, what we look at those projects, Kristina, they're high double-digit returns that we're looking at. And that's being very conservative on IMO. We too believe that there's significant upside opportunity with IMO, not only in the incremental projects, but on our base business, but we have not taken any of that upside into the IRR calculations on those projects. But when we finish, we're going to be able to destroy approximately -- probably somewhere between 280,000 to 300,000 barrels a day of resid. And on a total-refining-system basis, we're going to be up significantly over 700,000 barrels per day of annual distillate production. So both the resid destruction, our total annual distillate production, we have the ability to swing then between gasoline and distillate when this is complete. And we've always said around 8% to 10%. We'll probably be a little bit higher when we get these projects complete. But high returns and I think significant upside if the market continues to perform like many of us think it will.
Our next question is from Benny Wong from Morgan Stanley.
Just following up on the projects to position you guys for IMO. Is that $400 million looks like -- is there any of that to needs to be spent to be completed in 2019? Or is it all in 2018? And also beyond that, is there any more opportunities that you guys are looking at to further position you for IMO?
Yes. Let me have Ray Brooks take that question.
Sure. Your question about the positioning for IMO ahead of 2020, probably the biggest thing that we have is, Gary talked about resid destruction, as we have a moderate expansion of our Garyville cokers, both coker units, where we're putting larger coke crumbs and doing some debottlenecking. That work will be primarily complete on one coker Q4 2019, and the other coker, Q1 2020. So right in time there. At our Galveston Bay refinery, we talked, over the years, about the STAR project, which fits right in with IMO. It's a resid destruction, it's a diesel maximization project. That project has actually had a stage implementation going back to couple of years, and we'll have stage implementation going forward, all the way out to when it finally completes, so it will be Q1 2022. But ahead of IMO, there will be some more implementation there. To follow up with your other comment about additional projects, in addition to the CapEx for R&M, we always have the backlog of projects that we are doing some level of engineering, and we have some very attractive projects in queue that we'll continue to reevaluate, given the current market look and, potentially, bring some more of those projects forward.
Great. And for a second question, just regarding the LP units you guys will hold after all of the strategic transformation here. Have you guys ever looked at an up-sea structure? That's something that's kind of come across my discussions. This was essentially a SEA CORP displacer unit. Is that something that would make sense at some point? Or are there any reasons that it wouldn't?
Well, Benny, this is Tim. We'll continue to evaluate potential structural alternatives where we think they make sense. I don't think there's anything at this point that is absolutely compelling or imminent in terms of the review. But we'll take a look and see if there are structures that make sense. I think, as we've said publicly, our intent and plan would be to hold these units indefinitely. I mean, we would -- they are so important to MPC cash flow that we don't see any situation where those units are not held by MPC, but we'll continue to evaluate structure where we think it may make sense. We've looked at other vehicles even for SEA CORP sleeves that may provide some market access that is tougher in the MLP space. But nothing that is required or imminent in terms of our review at this point.
Our next question is from Paul Cheng from Barclays Capital.
Gary, I just want to make sure I got your number correct. You say, in investment, that you guys are making when everything is said and done you going to reduce your resid production by 280,000 to 300,000 barrel per day. I was looking at your press release. Last year, your heavy fuel oil is 37 and asphalt is 63, so that's only about 100. Did I get it wrong? And also you say, a distillate production increased 700, or that you say that is up to 700? Because in the full year last year, you're 641. So maybe you can clarify. Maybe I misread what you just said.
Sure. And what I was saying is that in total, I was not saying incremental, Paul. I was saying in total that our resid destruction will grow to, by the time we finish these projects in '19 and '20, we're going to grow to about 280,000, maybe. I said 280,000 to 300,000 by the time we get these done. In '17, well, look, let me tell you, in '16, it was 240,000 barrels per day. In '17, we finished a part of the STAR project, which took us from up to about 252,000 barrels per day, and the balance will take us up to this 280,000 to 300,000, and then that's the resid destruction. And then in distillate production, in '17, we were about 640,000, and we're going to go up to about 710,000, 720,000, when we complete these projects. So in total, the increment is about 60,000 barrels a day of resid destruction incremental and about 110,000 barrels a day or so of incremental distillate.
Okay. And how -- is that going to have any change in the crude slate or that will remain relatively steady?
Well, it all depend on the date -- excuse me, the crude prices of the differentials when we get these projects complete. The other thing is, we have the flexibility to run about 70% medium sours and heavier, or 70% sweet. And every day, we're going to optimize based on where the crude diffs are. So we're going to have tremendous flexibility to run a very high medium sour heavy slate and resid destruction. But if the sweet markets are -- if you optimize with sweet, then we'll able to run sweet. But that's the benefit in our system is that we can go either direction.
Gary, you've always been the [ statement ] for the industry. So any update about the temperature in D.C. related to the reform -- the RFS? Is there any [ movements ] that we may see something happen?
Let me ask Don to talk about this. Don's been very involved here recently, meeting with a number of people in D.C. And yes, we are very, very involved in this. But let me have Don give you the details of the updates.
Sure, Paul. We have consistently believed that the RFS is broken, and that we need either significant reform or repeal. MPC has always been focused on a long-term solution that, in our view, permanently addresses all the issues and problems with the RFS. Clearly, the PES situation recently has -- maybe put a little bit more focus on RINs and the RFS. But our view is that you need to have a long-term solution, and we're actually fairly optimistic or optimistic about the legislative efforts that are ongoing in Washington, D.C., led by Senator Cornyn and others. And we think it will result in a solution that, I think, has some short-term relief. But more importantly, has a long-term solution to the RFS eliminating the mandate and allowing our transportation fuels and other transportation fuels to be able to participate in a free market.
Don, can you elaborate a little bit more in terms of what are changes that you guys are -- think that it may happen?
Well, I mean we've actually -- we've been having dialogue with a number of legislators. And I guess, we have some perspectives on things that we think will work. They've been -- I think they need to make sure that they have a solution that works for the energy industry, that works for the corn ethanol industry. So I think there's lots of perspectives that are currently being considered. We are hopeful that we should see legislation in the not-too-distant future, Paul. But I think it's premature for us to try to speculate as to what that will be since a number of legislators are working on that.
And Paul, I can say that we have the right legislators at the table working on this. Senators Cornyn and Cruz, along with Grassley and Ernst, Grassley and Ernst being from the corn-belt states, are all very involved. So we're at both sides of the table working on this. And then on the House side, Chairman Walden, along with Congressman Shimkus, are very, very involved. So they're the right people at the table trying to get this issue off a high center. And I'm fairly confident that we're going to get there this spring.
Our next question is from Phil Gresh from JPMorgan.
First question, I apologize if I missed it, I don't think you said it. Do you have a new effective tax rate guidance that you think about following the tax reform? And also, perhaps, how you might think about cash flow benefits from the tax reform? Others have commented on the cash flow side, obviously, cash taxes trending below these book tax rate, so any thoughts there?
Yes. Phil, we think that the effective tax rate is probably going to be a couple points below statutory in a going-forward basis. So that we sort of guide you in that direction. We haven't given specific guidance as to the cash tax benefits, but we have looked at 2017 on sort of an as-if basis with the tax reform. And it's something in the order of $400 million to $500 million savings of cash taxes. So again, we're not giving specific forecast, but it's certainly of that order of magnitude as we go forward.
Okay, that's helpful. And then second question will just be around capital allocation of the free cash flow, above and beyond, obviously, the capital spending in the projects that you've highlighted. As you look at 2018, you think about the buybacks that you completed in 2017 and where the balance sheet is at. Is 2017 the right order of magnitude to be thinking about from a buyback perspective in this type of market? Or any color would be helpful.
Sure. Yes, and again, we're -- I'm not giving specific guidance. But what we did indicate is that after-tax cash proceeds from the drops, which are closing today, beyond what any adjustments we need to make to capital structure to support the investment-grade credit profile, would generally be targeted at some form of shareholder returns. So again, I would use that as your guide in terms of what you think the year could be. But it has -- share repurchase continues to be an important vehicle for us to get capital back to shareholders. We think it's very tax-efficient, and I think you'll continue to see substantial activity there.
And how much is the tax leakage at this point? I think, at one point, you talked about, I forgot the exact number you've given, but I guess with the new tax rate.
Yes. I think, Phil, probably the best thing to do would be to just adjust down based on the new tax rates from where we're at in terms of what the absolute leakage around the distributions would be. We haven't given specific guidance. There's a lot of allocation work that's got to be done in order to determine what that would look like. But I think, at a macro level, taking the new statutory rates at -- off of what we provided before is probably a pretty good starting point.
Okay. And last one, Gary, any thoughts on the M&A environment? You seemed reasonably upbeat on the last call, particularly around the retail and midstream.
Well, there continues to be opportunities in the midstream. I think there have been a number at the end of the year. I would expect the midstream positions probably to heat up. We're very bullish on the midstream. When you look at a couple of our biggest customers on our production side that are talking about the big increase in drilling activity over the next couple of years, we're bullish in the Marcellus-Utica area. In fact, we've seen very strong growth in both of those arenas. On top of that, the Permian. Over time, there have been a number of assets that were put in place that, I think, specifically were put in place eventually to put on the market, those are more single one-off type assets. We continue to look at a number of those. But I think, both in midstream and in retail, they're going to be some opportunities during 2018.
Our next question is from Brad Heffern from RBC Capital Markets.
Just following up on Phil's question about taxes. What's the reason that you guys would end up being below statutory rates? Is that just for new higher bonus depreciation?
Brad, the biggest piece is really the income allocation that we make to the publicly held units at MPLX. So that is, even without tax reform, that would have been a big impact on the effective tax rate. So that's the biggest driver of that, sort of, couple point difference between statutory and our effective guidance.
Okay. So at the corporate level, excluding that MPLX impact, is it just basically modeling around the statutory rate?
That's probably the right way to start it, yes. And that's sort of the marginal statutory rate.
Okay. And then, Gary, obviously, you've been focused on this value unlocking plan for the past year, 18 months. And it's coming to an end here. Can you talk a little bit about from a corporate strategy standpoint, what we're going to be thinking about for MPC going forward? Do you know is there going to be a greater focus on Midstream or Speedway or are we going to be talking about cash returns? Just, sort of, what's the theme for 2018?
The answer is yes. I've been very clear in presentations we've made at the end of the year and in our presentation today. We're increasing the capital budget by $150 million in Speedway this year from $380 million to $530 million, a very strong -- and I'll ask Mike Hennigan to talk in a second here about what he sees on the Midstream side, and Tim just answered on return to shareholders. If you look since the beginning of MPC and, specifically, in 2017, very, very strong returns to shareholders both in dividends and in share buybacks. You will continue to see, as Tim just highlighted, a significant amount of the after-tax proceeds that we received from these drops, is going to be available for capital return to shareholders. Beyond that, we see some very strong opportunities. Kristina's first question of the day, very strong opportunities in the refining side, mainly around distillate production in our refineries. And let me ask Mike here to talk about what he's seeing in the Midstream side.
Brad, we're pretty bullish. Our organic capital plan for 2018, if you notice, we've disclosed about $2 billion of capital spend. That comprises 8 processing plants, 6 up in the Marcellus-Utica, as Gary mentioned, 1 in the STACK and 1 in the Permian. So we're in the right locations as far as shale development. We're also going to add a fractionator up in the Marcellus area. We're going to add 2 [ de-effenizers ] up in the Marcellus area, which I think is another opportunity that's starting to reveal itself by staying up in the Northeast. In addition to that, we're expanding our crude pipelines, Ozark up into the Midcontinent as well as Wood River over to Patoka as well. But we have a pretty full-plate execution, it will be a high priority for MPLX in 2018 as far as the identified capital. And then we have a couple of other opportunities that we're working on that will give us some more diversified cash flows. So it's an exciting time to be in midstream and we're trying to get after it.
Our next question is from Neil Mehta from Goldman Sachs.
Gary, on a same-store sales in January, I'm sorry, if I missed that, did you say, they were down 1.7%? Was there anything funky in there if that was the number? Or is that a function of some macro trends that you're seeing in gasoline? And any comments in terms of the gasoline outlook here? Distillate definitely looks very bullish, but just thoughts on the gasoline product side.
Yes. Distillate is very bullish. But Tony can give you more color, but it's -- let's hope it's nonrecurring. But it was -- the tremendous weather issues we had across the entire Southeast, the Southwest had it as well, but mainly the Southeast, all the way up to New York. Near the region where you live. And then we had it across the entire Ohio Valley. But we've had 2 to 3 major ice storms where things just were shut down. I think that proves out, if you look at this week's inventory numbers and the building of crude oil, it's just illustrative of the refineries not being able to run full-out. A number of refineries having temporary blips, mostly due to power outage. But all this kind of works together. So I think it is a very temporary thing. The other thing that Tony can speak to is we've had a very swift rising crude price. And you have to be able to get that price to the Street. So Tony, you want to talk about how many restorations you've seen so far this year?
Gary, I think, the 2 comments you've made is essentially the entire reason the same store is down as we're seeing it so far. Storm's the biggest impact. But as we see this rising-commodity-price environment, our wholesale cost has moved up in line with the rising crude prices. So we, in our efforts to pass that rising cost on to the Street, we do incur some volume impact as a result of trying to move or restore our margins, as we call it, back to the levels where we think appropriate given the environment.
Neil, let me say to your question, and we had this at your conference as well, I think the biggest macro change that you've seen in 2017 is that gasoline demand has outpaced where the expectations of the prognosticators are in the market. So outperformed very nicely in 2017, we would expect that to continue. Distillate continues to outperform. So both of those, with the days of supply being very much in check, both gasoline and distillate, as compared to 5-year average, I think bodes very, very well on a macro standpoint for the refining industry.
I appreciate that, Gary. And one of the other things you've talked about when we caught up a couple of weeks ago was that, you're generally constructive on the oil macro. Those were your views in 2017 as well and you're right. Can you just talk about the broader oil view that you have? And then also talk about as one of the largest buyers -- OPEC buyers here in the U.S., any thoughts on Saudi and OPEC going into a -- through the year in terms of compliance?
Yes. Well, from a macro standpoint, Neil, if you look at the crude inventories, very much in line and looking at just over the last 3 years, a significant, I would say, rebalancing of crude oil across the entire system. So at your conference, we talked about where we think prices will be for the year. And since your conference, I'm even becoming more bullish on where I think crude prices are going to go because of the resilience of the market, how the foreign producers are continuing to, I think, be more constrained about incremental production coming into the market. And I think, on the U.S. production side, there's a very strong view of a -- that they need to be careful on running too fast, too quickly in the marketplace. So I think you're going to see, probably, we'll get north of $70 this year on the crude price, which I think bodes well for the total utilization of refineries. I think it bodes well for the drill bit that's going to satisfy the NGL producers and those markets as well. So I think from a macro standpoint, it's going to be a strong year. Now the caveat to that is when you continue to see an increase in price, you have to get that price to the Street. Going to have to get to the wholesale level as well as the retail level. However, inventories are in check and are in very good shape. And when you look at the first part of the year, I think you're -- we're going to see more turnarounds in the entire refining system and -- we already know some that are scheduled here in PADD II earlier in the year than you would anticipate. And I think that again is going to put a very good balance underlying the refining system. Let me ask Mike to talk here about what he sees as far as OPEC supply coming into the market.
Yes, Gary, I think you've said it well. I mean, OPEC is doing a great job with their production. Again, Saudi Arabia, kind of the kingpin, they've basically said that they need to continue constraining their full production through 2018. And I think they will. From our standpoint, we've had no problem replacing the term crude out of the Arabian Gulf that is no longer economic to us with other grades. We have tremendous flexibility within our refining system. We can process the very heavy high-sulfur, high-acid crudes that not everyone can. So that's been a positive for us.
Our next question is from Doug Leggate from Bank of America Merrill Lynch.
Gary, the tax cuts and the benefit on your cash flow, how does that change your thinking about a more aggressive step-up in your dividend versus buybacks going forward?
Well, Doug, the -- I think we outlined it before that we see capital investment, some new opportunities in refining, but the further advancement in retail and in our Midstream space, from an investment side, we've been very aggressive in capital return to shareholders in 2017. We accelerated our dividend from July now to early January here and a significant increase in our dividend. So we will continue that type of cadence as we see fit. We've great investment opportunities as well as we have great opportunities and, I think, it's a good investment, we all do here in returning capital to shareholders. So we will continue to stay on top of our game as we look at return of capital to shareholders.
A nice problem to have, for sure. Well, I guess, I really only have one other big-picture question, Gary. And like several of the guys, I wonder if I could take advantage of your macro view. And it really goes back to IMO. And one of the things we're kind of thinking is that there are still some regions of the world that have very low utilization rates. And if diesel margins really improve as much as some folks think they could, my concern, I guess, is that we see a step-up in utilization, for example, in Europe to at the expense of gasoline supply in the Atlantic basin, meaning, we end up oversupplying the gasoline market. I'm just wondering if you -- how much you thought about the scenarios as to how this could ultimately play out in a, let's say, a $70 oil world, which, I guess, also changes the economics for shipping decisions as it always discovers and so on. So I'm just wondering, how -- what are the kind of scenarios you're thinking about best case, worst case for the IMO outcome? And I'll leave it there.
Yes, Doug, we thought about those scenarios as well. One of the things that you have to look at in Europe and starting in the U.K., it's going to happen to other countries in Europe as well. But they're going to become more of a sponge for gasoline going forward. As you know, it's always been historically that they push diesel into the marketplace and those benefits are -- have gone away. So I do think that you're going to see more demand for gasoline. And the other thing is, our exports, if you look at the rate of change of exports from the Gulf Coast, gasoline is becoming more and more prominent in the exports, whether it's to Latin America, South America, West Africa or into Europe. So Europe is still predominantly diesel, but it's going to increase. So yes, we look at those scenarios, and we will continue to watch those very carefully. But right now, I think we are -- I only speak for MPC, we are very, very well-positioned before this IMO change is coming. And if gasoline continues to pick up, that's why we're investing in further distribution capabilities, both at Galveston Bay and Garyville, to be able to take bigger cargoes of gasoline.
Our last question today is from Roger Read from Wells Fargo.
Gary, if we could catch up a little more on the retail since that's where your kind of incremental investments are coming, I'm presuming didn't need the tax reform to make that happen. But with the slower growth we've seen in terms -- I know January weather, but if you look at Q4 right on a per-store basis, retail was down and -- the merchandise, excuse me, was down, and the fuels were down. Is that a function of why you need to repurpose some of the stores or upgrade them, I guess, was the term used? And then as we think about expansion, is that a function of new markets or better locations within existing markets? Just kind of wanted to understand if it's a regional growth story or stepping into a new region. And then the last part of the retail question, since it was asked about Midstream, any retail acquisitions that are possible or look attractive in this environment?
Sure. Tony, you want to take Roger's first question and then, I'll take the last one.
I'd be happy to, Gary. First of all, let me remind you, the comps you're looking at, when you mentioned the trends in the fourth quarter and actually for the full year, remember, we formed this joint venture with Pilot. So we moved sales, margin, expenses out of the detailed categories into an equity earnings components. So you will see some natural variances on those just because of the formation of venture. However, your point's correct. There is some softness in what we look at as transaction counts inside of our store. But again, we think that our plans, the technology investment, our loyalty program, the focus on the consumer that we have, those are all -- and actually the priorities in some of the growth areas in some of the store, that we're investing that capital that Gary mentioned earlier, will be around some high-growth areas like food service, for example, in convenience stores. I think we've got a very good program to continue to grow and invest on the remodel part of that capital that Gary talked about. As far as the newbuilds, rebuilds, our focus is going to continue to be, and we've consistently said this, we're going to be in the footprint of MPC's supply chain. I mean, that's part of the synergies and the value that we have seen over the years, and we continue to tell the market about in terms of the integration benefits of Speedway with MPC's supply. So when you look at our footprint, you look at our foothold in the Midwest and some of the new markets we have on our Eastern markets, those are really good MPC supply areas and, therefore, we want to take advantage of those synergies by investing our stores where we can take advantage of the synergies with supply. And the last point on acquisitions, we don't say anything specific about that. But the industry as a whole, my observation would be is that it's consolidating, their needs to be some consolidation, it's a very fragmented convenience store industry. So I think there's going to be opportunities in the future to look at some acquisitions in our primary footprint.
Thank you for your questions today and your interest in Marathon Petroleum Corporation. Should you have additional questions or would like clarification on topics discussed this morning, Denice Myers, Doug Wendt and I will be available to take your calls. Thank you for joining us.
Thank you. And this does conclude today's conference. You may disconnect at this time.