Welcome to the MPC Sterling Second Quarter Earnings Call. My name is Elan, and I will be your operator for today's call. 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's 2nd quarter 20 18 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 Endeavor. Investors and security holders are encouraged to read the joint 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, Christina, 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 $1,700,000,000 and we are pleased to report EBITDA of $2,240,000,000 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 return of capital beyond the needs of our business. This quarter, we returned $1,100,000,000 to our shareholders, including $885,000,000 of share repurchases. As we look to the second half of twenty eighteen, 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 the low sulfur international bunker fuel regulations in 2020, given the resid 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 Endeavor into a premier nationwide integrated downstream energy company.
There are tremendous benefits to combining these 2 powerful businesses, which will be well positioned for long term growth and shareholder value creation. This combination is expected to generate at least $1,000,000,000 of tangible annual gross run rate synergies within the 1st 3 years, which is anticipated to drive more than $5,000,000,000 of incremental cash generation over the 1st 5 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-four on July 20 to proceed towards shareholder votes. We continue to expect to close the transaction in the second half of twenty eighteen.
We believe MPC, supported by this great combination with Endeavor, absolutely becomes a must own refining, marketing and mystery and company. Now let me turn the call over to Don to cover additional highlights for the 2nd quarter an update on the integration process. Don?
Thanks, Gary. Turning to Slide 5, we reported 2nd quarter earnings of $1,060,000,000 and income from operations of $1,710,000,000 Refining and Marketing delivered strong results with 2nd quarter segment earnings of $1,030,000,000 an increase of nearly $463,000,000 over Q2 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 $617,000,000 and achieved record gathered, processed and fractionated volumes as well as record pipeline throughputs. Our midstream operations continue to grow given both the 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 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 $159,000,000 In the Q2, 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 Q3.
These stores will enhance our existing network and expand our brand presence in key growth markets. The completion of the pending Endeavor 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 1. 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 $1,000,000,000 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 Q2.
Thanks, Don. Slide 6 provides earnings on both an absolute and per share basis. For the Q2 of 2018, we reported earnings of about $1,100,000,000 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 Q2 last year. The walk highlights a significant increase in refining and marketing earnings compared to the Q2 of 2017.
The $463,000,000 favorable variance was driven by positive Midwest and Gulf Coast crack spreads as well as wider WCS and WTI based crude differentials. Speedway's 2nd quarter results were lower than the Q2 last year by 79,000,000 dollars primarily related to lower light product margins and higher expenses. The $285,000,000 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 allocated to segments includes the absence of $886,000,000 of litigation related expense recorded in the Q2 of 2017, offset by approximately $10,000,000 of transactions costs recorded in the Q2 of 2018 related to the pending combination with Andeavor. The higher earnings in MPLX, which includes the impacts of the February drop, resulted in $89,000,000 of increased allocation of MPLX earnings to the publicly held units in the partnership, shown here as a non controlling interest variance.
Turning to Slide 8, our Refining and Marketing segment reported earnings of just over $1,000,000,000 in the Q2 of 2018 compared to $562,000,000 in the same quarter last year. The LLS based blended crack spread had a $243,000,000 favorable variance favorable impact to segment results largely due to lower RIN prices and the resulting higher effective crack. The LOS blended 6.321 crack spread was 6.98 per barrel in the Q2 of 2018 as compared to 5.71 per barrel in the Q2 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 $320,000,000 versus last year.
The differential increased to $9.46 per barrel in the Q2 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 Q2 of 2017. This wider differential drove $180,000,000 benefit based on the WTI linked crudes in our slate. The favorable crude acquisition impacts of approximately $173,000,000 captured in other margin were accentuated by our refinery utilization rate of 99.9 percent for the quarter, which resulted in a record crude oil throughput of 1,900,000 barrels per day as well as strong volumetric gains in the higher pricing environment. Direct operating costs had a favorable impact of $76,000,000 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 $219,000,000 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-six thousand two hundred and twenty one crack spread. Also offsetting the benefits was a $385,000,000 unfavorable variance in other R and M expenses, primarily due to the fees paid to MPLX related to the businesses that were dropped to MPLX in February. Prior period R and 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 Q2. Segment income from operations was $159,000,000 down $79,000,000 from the Q2 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 $0.165 per gallon in the Q2 of 2018 compared with $0.185 per gallon in the Q2 of 2017, primarily due to the effects of rising crude oil prices and the lag effect at the retail level. Operating expenses increased $24,000,000 year over year due mainly to higher labor and benefit costs, while depreciation was $8,000,000 higher primarily due to increased investment in the business. The $6,000,000 gain on sale of assets recorded in the Q2 of 2017 also contributed to the difference from the Q2 last year. In July, 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 lines have decreased about 1.8%. Slide 10 provides the Midstream segment results for the 2nd quarter. Segment income was $617,000,000 in the Q2 of 2018 compared to $332,000,000 in the same period of 2017. The $328,000,000 variance for MPLX was favorably impacted by $232,000,000 from the earnings of the businesses included in the February 1 drop down. 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 earnings release and join the update call at 11 to give more color on the partnership's great performance in the 2nd quarter. Slide 11 presents the elements of changes on our consolidated cash position for the 2nd quarter. Cash at the end of the quarter was nearly $5,000,000,000 an increase of approximately $346,000,000 from the end of the Q1. Core operating cash flow before changes to working capital was a $1,800,000,000 source in the quarter. Working capital was a $544,000,000 source of cash as higher crude and other payables more than offset a modest inventory build and increase in receivables for crude oil and refined products in the quarter.
Return of capital to shareholders via share repurchase and dividends totaled $1,100,000,000 in the quarter, including $885,000,000 of share repurchases, 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 Q2. We had approximately $17,000,000,000 in total consolidated debt, including nearly $12,000,000,000 of debt at MPLX. Total debt represented 2.6x last 12 months adjusted EBITDA on a consolidated basis or 1.2x EBITDA excluding the debt and EBITDA of MPLX.
Taking into account the distributions MPC received from MPLX, this 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 Q3 of 2018. We're expecting total throughput volumes of approximately 2,000,000 barrels per day with planned maintenance currently taking place at our Can Refinery and downtime scheduled for 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 would expect the net costs related to MPLX fees reflected in the other column of the R and M walk to be approximately $340,000,000 per quarter on a going forward basis. Sour crude is estimated to make up 53% of our crude oil throughput for the Q3 and WTI priced crude is estimated to be about 32% of the slate. Corporate and other unallocated items are projected to be $85,000,000 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 cost 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 twofold. 1st,
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-four were utilized to reach those financial projections? And either way, was there a reason that they're conservative, at least in relation to the forward curve given the fundamental NIMO 2020 outlook? So two different questions about the S-four information.
No, Doug, I think you're looking at it right. And recall, the S-four is not for guidance. It's really for our business plan, budgeting purposes. And yes, those are the numbers that we used in determining the value of the 2 companies and for the fairness opinion. But as you know our company very well, we have 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 2 companies. And I would say that based on our outlook and the other thing, Doug, is 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 Q3 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.
Our next question is from Neil Mehta from Goldman
Sachs. Hey, 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 of months. What have you learned about the transaction relative to the $1,000,000,000 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 in 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 I would say, in England, swings and roundabouts. And it will 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. We are waiting to finalize the S-four. But I have not seen any negatives. I have only seen positives. And we still have to be very careful upfront 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 we're 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 2 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 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. I'll leave it there.
Sure. When you look at 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, a price elastic market, in a very accelerated crude market, you're going to deal with Speedway and where we set 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.
Yes, Phil. Neil. Oh, is it Neil? Yes, 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 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 of 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 ultra low sulfur diesel as well as the entire distillate fuel stocks are at the bottom, if not below the 5 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 Midwest 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 at the balance of this year, it should put us in a really good position moving into 'nineteen as well.
Thank you. Our next question is from Phil Gresh from JPMorgan.
Hi, good morning. First question is just, I guess, it's a capital allocation question. As you guys are working intensely on closing the Endeavor 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 refining side, to the extent that there are opportunities in the midstream market, would you be looking closely at these?
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 $1,000,000,000 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 that we'd start using the incremental $5,000,000,000 that you've talked about on a pro form a 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 $5,000,000,000 of authorization from where we sit today, in fact, maybe closer to $6,000,000 So again, that authorization was one that we pursued at the Board around the time of the announcement just as frankly because we know that once these businesses come together, as Don referenced, and I think that we're continuing to 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 where 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's 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 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 look 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 look 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, that was specifically called out as an issue. I think it was labor cost mostly. What if anything can you do to mitigate that?
Is there is it something we need to 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?
Yes. Sure, Gary. Yes, that is actually on the OpEx side, there's really 2 components in there. 1 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. We're having to move hourly rates up in order to track 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 cost too is we continue to add stores to our portfolio. So in the second quarter alone, we added 15 net stores. So that's net of both the new and rebuilds less the close in the store locations. So there's more stores in our portfolio.
And then we're also adding more complex stores as we spend money on remodels, those stores and add foodservice. 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 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 Endeavor. 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 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 dayparts 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 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 need good information in order for you to good decision. So how big is the or then how comparable or incomparable between the two companies?
And 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 clean room and clean teams. So we actually are putting information into a data room, having clean teams look at that data so that on day 1, when we go to close, day 1 in 5 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.
Dawn, 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?
Yes. 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 1, and that's what our teams are focused on.
Our next question is from Manav Gupta from Credit Suisse.
My question is on your Page 99 Amendment number 2 S4. You have synergy CapEx of $98,000,000 in year 1, $226,000,000 in year 2 $240,000,000 in year 3, dropping to 0 in year 4. So if you could give us some idea on which projects do you plan to undertake in year 1 versus year 2 year 3? And why is the CapEx more back end loaded and not front end loaded? So basically, why is year 3 $240,000,000 and year 1 $98,000,000 Why not the other way around?
So yes, so if you look at this is Don again. If you look at our synergy capture, and we were targeting roughly $500,000,000 in year 1, and that escalates or grows into $1,000,000,000 run rate in year 3. So in year 1, 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 back end 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 1 and enhancements to the asset base that we have as we go on into year 23.
Okay. My quick follow-up is when I look at Amendment 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 3rd round of questions at all?
Yes. Manav, this
is Tim. Again, we'll read the tea leaves the same way you do 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.
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 $1,000,000,000 synergy number fully matured 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've matured the synergy opportunity when ultimately you close the deal?
Yes. To use the word mature, of course, we did as much due diligence as we could do. And again, you know how conservative we are and all the discussions I have had with you, how conservative I am that we are going to put out forecasts and numbers that we are very confident that we are going to be able to achieve and beat. So very confident from what we the work we have even done since April 30, very confident in what we have learned, what we continue to see. And I believe that we are 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 Endeavor employees that will become Marathon employees and Marathon employees, we are all in this together and we are 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. So you are going to see us be able to, I think, embark on these very quickly.
I guess what I am 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 will certainly give you more granularity of what we see. At that point in time, we will be through the 1st 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 will wait and see. But I am pretty bullish on how what we are seeing so far.
Thank you. Our next question is from
In your reported product yields for 2018 year to date, you show your refineries 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?
Yes. 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 resid fuel oil do we make and is that going to be problematic in the post IMO world. We make a little bit of 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 LPGAramatics, 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 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.
Yes, this is Mike Palmer. So if you look at Q1 of 'eighteen, 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 2, we were at 311,000 barrels a day, and that was about 29 percent 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 we'll 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.