Welcome to the Marathon Petroleum Corporation and Endeavour Strategic Combination Webcast and Conference Call.
My name is Shirley, and I'll
be your operator for today's call. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session. Please note that this conference is being recorded.
I would now like to
turn the call over to Kristina Kazarian. Kristina, you may begin.
Welcome to the Marathon Petroleum Corp. And Endeavour strategic combination webcast and conference call. The synchronized slides that accompany this call can be found on the MPC website at marathonpetroleum.com under the Investor Center tab. The slides can also be found on the Endeavor website atendeavor.com under the Investor tab. On the call today are Gary Heminger, Chairman and CEO of Marathon Petroleum Greg Goff, Chairman and CEO of Endeavor Tim Griffith, MPC's Senior Vice President and CFO as well as other members of the MPC 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 and the 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. Investors and security holders are encouraged to read the joint proxy statement and registration statement to be filed with the SEC as well as other relevant documents filed with the SEC.
Now I will turn the call over to Gary Heminger.
Thanks, Christina. Good morning and thank you for joining our call. We are very enthusiastic to introduce the powerful combination of 2 great companies, Marathon Petroleum and Endeavor. Before I begin on Slide 4, let me first welcome Christina Khazarian, who recently joined our team as Vice President of Investor Relations for MPC and MPLX. Christina comes to the role with experience at 2 of Wall Street's premier financial institutions and we look forward to her contributions at MPC.
Turning to this morning's announcement, the combination of MPC and Endeavor creates a leading nationwide integrated energy company. With an initial enterprise value greater than $90,000,000,000 and based on its scale, national footprint and quality businesses, it is well positioned for long term growth and shareholder value creation. In addition to the financial benefits of this combination, we also believe a compelling aspect of this transaction is our alignment on values, including our focus on safety, environmental stewardship and community involvement. We believe MPC supported by this great combination absolutely becomes a must own refining, marketing and midstream company. The asset map on slide 5 illustrates a substantial increase in geographic diversification and scale.
The combination will expand our operations across key markets nationwide, capitalizing on the strong position MPC has historically enjoyed east of the Mississippi with the Western U. S. Presence Andeavor has built over time. In refining, Andeavor's facilities in California, the Mid Continent and the Pacific Northwest nicely complement MPC's existing Gulf Coast and Midwest footprint. We will become the number 1 U.
S. Refiner by capacity and the top 5 refiner globally with throughput capacity of over 3,000,000 barrels per day. We are also very enthusiastic about the opportunities in the marketing business as the company combines MPC's strength with Speedway and the Marathon brand with Endeavor's strong presence in the Western U. S, creating a truly nationwide retail and marketing portfolio of nearly 12,000 locations. For the midstream business, this combination includes 2 customer focused, high quality sponsored MLPs and builds on MPC's strong footprint of the Marcellus, deepens our presence in the Permian and Bakken regions and creates multiple opportunities to expand the logistics platform in all key regions of the U.
S. Slide 6 outlines the highlights of the combination. MPC will acquire all of Endeavor's outstanding shares. This represents a total equity value of $23,000,000,000 and an enterprise value of approximately $36,000,000,000 based on Friday's closing prices. Endeavor shareholders will have the option to elect 1.87 shares of MPC stock or $152.27 in cash, subject to a mechanism that will result in 15% of the transaction being settled in cash.
This represents a premium of 24.4 percent to Endeavor's Friday closing price. After closing, Marathon Petroleum and Andeavor shareholders will own approximately 66% and 34% of the combined company respectively. We are pleased to announce the transaction was unanimously approved by the Boards of Directors of both companies and is expected to close in the second half of twenty eighteen. At close, I will continue as Chairman and Chief Executive Officer of the combined company and Greg Gough will become Executive Vice Chairman and an Executive of MPC. We very much look forward to Greg's leadership and integral involvement in the strategy of the combined company as we integrate and build on this leading platform.
We are also pleased to welcome Greg and 3 other Andeavor Board members to the Marathon Victorian Board of Directors. We will work together over the coming months to identify those new members. The combined business headquarters will be located in Findlay, Ohio and we will maintain an office in San Antonio, Texas. Additionally, at close, MPC will be general partner of both MPLX and Andeavor Logistics as well as the largest holder of limited partner units of each of the partnerships. We are not commenting on any potential structures for MPLX and ANDX today.
Both will operate as separate MLPs until we have evaluated all structural considerations post closing of the transaction of this transaction. Importantly, we expect this transaction will be a cash and value accretive for shareholders generating at least $1,000,000,000 of tangible annual run rate synergies within the 1st 3 years. This $1,000,000,000 is in addition to the expected synergies from Andeavor's Western Refining transaction. We believe the incremental cash generated by the transaction will exceed $5,000,000,000 over the 1st 5 years alone. Slide 7 really lays out the value proposition for the strategic combination.
We expect the transaction to be immediately accretive to earnings and cash flow per share. The expected realization of $1,000,000,000 or more in synergies and strong pro form a cash flow support our view of long term cash flow accretion per share of more than 15%. This growth in earnings and cash flow drives the cash flow multiple to 4.2 times transaction value by 2020. Given our confidence in the business, our Board also authorized an incremental $5,000,000,000 of share repurchases to provide capital flexibility as these expected cash flows are realized over the next several years. This is in addition to the 2018 share repurchase activity we have been and will continue to execute.
As a combined company, we will continue our balanced approach to investing in the business and returning cash to our investors, while maintaining our commitment to an investment grade credit profile. We expect strong through cycle dividend growth of 10% or more. This dividend profile is in addition to the potential value accretion that would result from any incremental share repurchases from this excess cash flow. Now let me turn the call over to Greg to cover a couple of the key elements of the combination.
Thank you, Gary. Slide 8 further highlights the value the strategic combination creates for our shareholders. Each company will bring its best qualities to the strategic combination and together will create truly something special, a premier energy company. We are confident in our ability to drive substantial growth, deliver long term value for our shareholders and achieve on our synergy targets. These synergies are an important component to our additional cash flow generation, which is in excess of $5,000,000,000 in the 1st 5 years.
As we turn to Slide 9, we have provided our detail of synergies by function and by year and are very confident that we can achieve at least $1,000,000,000 in annual run rate cost and operating synergies within the 1st 3 years. We have spent considerable time and effort identifying and defining these synergies and have clear path forward to achieve these synergies. Let me ask Gary to take over from here
and provide a little more information on these synergies. Gary? Thanks, Greg. Turning to slide 10, we provide some further details on the $1,000,000,000 expected synergies. We expect to generate approximately $255,000,000 in annual run rate synergies from cost efficiencies.
Our plan allows for rapid achievement and delivery of most of these synergies in the 1st calendar year of combined operations. We also forecast procurement efficiencies of approximately $150,000,000 resulting from a targeted 1% to 2% improvement in our combined annual purchasing spend of over $10,000,000,000 3rd and very much in line with the synergies we captured from the Hess transaction, we expect to realize approximately $210,000,000 of synergies across Andeavor's retail network of approximately 1100 company owned or controlled stores. 4th, we project integrated system optimization to generate approximately $165,000,000 of run rate synergies. These earnings enhancements include crude and feedstock optimization as well as an uplift in margin capture. The size and scale of the combined entity magnify the financial impact of even small improvements in cost or margin.
For example, given the 1,000,000,000 barrels of crude we will be buying every year, each $0.01 per barrel improvement in our crude acquisition cost will generate $10,000,000 in earnings. Lastly, we expect to generate approximately $220,000,000 of annual run rate synergies from optimizing our combined refinery operations. Our mutual shared learning and complementary expertise will drive process optimization and enhancement across our combined system. This will also lead to improved execution on capital projects, turnaround work and routine maintenance at the 16 refineries. We are confident we can deliver these synergies given the success we have had at our Galveston Bay complex.
We are also pleased to announce that we have already identified the executives who will lead the integration. Don Templin, currently President of MPC, with the assistance of Lisa Wilson, will lead from the MPC side and Mike Morrison, Senior Vice President of Marketing will lead the Endeavor team in this to be able to drive and deliver the important value to our shareholders of these synergies. Turning to slide 11, and as demonstrated both Marathon Petroleum and Endeavor have a track record of delivering value to their shareholders. As notable, as the value delivery has been at MPC, I also want to applaud Greg and his team who have driven substantial value for their shareholders over the same time period. We fully expect to continue that value creation with a strategic combination, leveraging the combined talent and capabilities of the new company.
Slide 12 highlights just a handful of Marathon Petroleum's recent significant transactions and the delivery on our promises. Earlier this year, we marked the 5 year anniversary of our acquisition of the Galveston Bay refinery and the accomplishments since the acquisition have been impressive. We have dramatically improved the environmental and safety performance of the refinery and advanced operational excellence, all while achieving lower operating expenses. In September of 2014, we acquired more than 1200 retail locations from Hess, increasing Speedway's footprint by 13 states along the Eastern Seaboard. As I mentioned earlier, the successful integration of these locations into Speedway's operating and marketing platforms resulted in synergies in excess of our original expectations.
$210,000,000 was realized compared to our guidance at announcement of $190,000,000 On the midstream side, the asset base and earnings profile of MPLX has been transformed since it was formed just over 5 years ago. In late 2015, the partnership expanded into the midstream natural gas business and the NGL business with the addition of Mark West. In February of this year, we completed our planned accelerated dropdown of businesses to MPLX, which are projected to generate approximately $1,400,000,000 of incremental annual EBITDA to the partnership. Immediately following the dropdowns, we completed the conversion of MPC's general partner interest in MPLX, including its IDRs into newly issued MPLX common units, providing a clear valuation for MPC's ownership in MPLX and removal of the IDR burden on the partnership. Our past successes gives us confidence in our ability to deliver in the future.
As I mentioned earlier, each of our operating segments are strengthened by this combination. As you can see on slide 13, Marathon Petroleum will become the nation's largest refiner with 16 refineries and over 3,000,000 barrels per day of crude throughput. For reference, this also makes us one of the top 5 refiners in the world. We are very enthusiastic about the significant opportunities to scale and geographic diversity of the combined operation creates for our shareholders, including incremental access to advantaged feedstocks and best in class operating capability across a new national system. Turning to slide 14, the addition of Endeavour's California, Pacific Northwest and Mid Con refineries also adds notable diversity to our refining earnings and provides exposure to attractive West Coast market dynamics, which have provided strong margins over the last several years.
Turning to Slide 15, Marathon and Endeavor are both positioned to benefit from changes in the market related to the adoption of the low sulfur international bunker fuels requirement in 2020. We plan to continue investments across the refining platform focused on increasing our production of ultra low sulfur diesel and resid upgrading ahead of IMO. The combination also builds out the diverse and diversifies excuse me, our midstream platform. As shown on slide 16, our midstream portfolio will include being the general partner of 2 high quality MLPs, MPLX and Andeavor Logistics, as well as holding roughly 60% of the LP units in both partnerships. At closing, MPLX and ANDX will remain separate MLPs and our focus over the next several months will be the successful closing of this transaction.
The map on slide 17 illustrates our midstream footprint including the assets of MPLX and Andeavor Logistics. The size and scale of the midstream offering from these 2 MLPs across the key energy producing regions in the U. S. Is impressive. We are especially enthusiastic about our accelerated entry into the Permian Basin.
The addition of Andeavor's crude oil gathering system combined with natural demand at our Galveston Bay refinery allows for full crude oil integration from wellhead to refinery and creates a natural synergy for the business from day 1. This expanded Permian presence also provides future opportunities to invest in long haul pipelines and infrastructure build out to support crude exports as this market continues to evolve and expand out of the Texas Gulf. We are also very encouraged by the opportunities in the Bakken. Andeavor's crude gathering system in this basin aligns very well with MPC's refining demand in the Midwest, while also serving as a feeder into the Dakota Access Pipeline in which MPC holds an equity stake. Slide 18 highlights our retail and marketing opportunities, which are significantly expanded as a result of this combination.
Pro form a, MPC will have a high quality nationwide retail and marketing business with approximately 4,000 company owned and operated locations and approximately 7,800 branded locations. For company owned stores, we plan to leverage Speedway's fully integrated home office, back office and point of sale platforms to drive earnings growth. We see potential for significant synergies through combined best practices and economies of scale throughout our entire retail network, which becomes nationwide in scope. On the marketing side, strong recognized regional brands provide nationwide coverage to our consumers and create additional channels to better serve our jobber, dealer and wholesale customers. We think substantial opportunities exist to capitalize on the footprints both companies have built over time.
Slide 19 shares our approach to capital structure and capital allocation for the combined company, which will be largely consistent with the approach both companies have employed to date. The increased size, scale and diversity supports our commitment to an investment grade credit profile and provides significant financial flexibility for the pro form a entity. Post close, we plan to maintain our capital allocation strategies, including through cycle dividend growth and a capital return orientation, supported by our expectations that the transaction will generate incremental cash flow in excess of $5,000,000,000 over the 1st 5 years alone. The charts at the bottom of the slide provide the pro form a MPC debt to EBITDA on a parent and consolidated basis. The parent metrics on the left remove the impacts of the MLPs from the consolidated metrics.
Both demonstrate strength of the cash flow profile and the implicit leverage reduction this profile provides even before any material synergy achievement. Turning to slide 20, at MPC and Endeavor, we are excited about this combination and the benefits this transaction will bring our shareholders, both current and new. At both companies, our employees' dedication to operational excellence and adherence to a strong set of values have made this transaction possible. We thank all of our employees for the hard work they do every day to provide the fuels and other products that make modern life possible. As a new larger company with a much broader geography, we will be well positioned to continue our important work on even greater scale.
This transaction combines 2 strong companies to create the leading U. S. Refining, marketing and midstream company, building a platform that is well positioned for long term growth and substantial shareholder value creation. We are eager to deliver on the full potential of this powerful and transformative combination and believe the substantial incremental cash flows resulting from the combination makes all of this value creation very tangible for our shareholders. Before we begin taking questions on the transaction, let me turn the call over to Tim Griffith to highlight MPC's 1st quarter earnings, which were also released this morning.
Tim?
Thanks, Gary. Earnings for the Q1 were $37,000,000 or $0.08 per diluted share. We returned over $1,500,000,000 of capital to our shareholders, including $1,300,000,000 of share repurchases, funded primarily by after tax proceeds from the February drop down. So far in 2018, we've accomplished a number of significant milestones, today's transaction notwithstanding. We successfully completed a major turnaround at our Galveston Bay refinery, organically grew our midstream footprint in the Northwest and Permian and announced a definitive agreement to acquire 78 stores store locations that will expand Speedway into key growth markets in Upstate and Western New York.
Looking forward, we are very optimistic about the opportunities for our business. The solid demand backdrop, favorable crude differentials and changing dynamics of the low sulfur fuel market all set the stage to create meaningful benefit across MPC's integrated and diversified business model. We're also pleased to announce that MPC recently received the 2018 ENERGY STAR Partner of the Year Award, recognize our outstanding efforts to increase energy efficiency throughout our business. The business case for energy efficiency is strong and we will continue to seek opportunities to optimize our operations and create long term returns for our shareholders. We hope you'll excuse the quick treatment of our Q1 earnings, but we wanted to ensure there was plenty of time to adjust your questions about the strategic combination with Andeavor.
We would encourage you to read through the earnings press release and slide deck and feel free to contact Christina and IR team if you have questions, including any helpful color on the impact of the drops completed on February 1 and the resulting shift in earnings from the R and M segment to our Midstream segment. I would also encourage you to listen in on the MPLX call, which has been rescheduled to today at 11 am to get an update on the partnership's performance for the Q1 and color on its future opportunities. With that, let me turn the call back over to Kristina.
Thanks, Tim. As we open the call for your questions, as a courtesy to all participants, we ask that you limit yourself to one With that, we will now open the call to questions. Operator?
Thank Our first question comes from Doug Harrissman with Evercore ISI. Your line is open. You may ask your question.
Congratulations, Gary, Greg and teams.
Thanks, Doug.
I have a couple of questions. First, while there's not much geographical overlap as it relates to the 2 refining businesses, I want to see if you would cover some of the key concentration issues as you see them and how becoming the largest refiner in the United States plays into your viewpoint that is if it does?
Well, Doug, you're right. When you look at the maps and you look at the markets, we don't see any concentration whatsoever. We're familiar, of course, with the Mid Continent having owned the St. Paul refinery years ago and we sold that refinery and the related retail assets in order to be able to have the liquidity to be able to separate the company back in 2011. But you're right, no concentration in any regard across the entire footprint of the business.
Okay. And then my second question is that one of your slides indicates that you guys have the highest coking and hydrocracking capacity in the industry pro form a, which is obviously the power alley for IMO 2020. While this appears to be a relevant strategic rationale for the transaction, Gary, you mentioned a minute ago that the competitive position could improve even further in the combined format. So my question is how you think about the pro form a company's position, why future opportunities could be so significant for this upcoming environmental transition in the pro form a format?
Doug, I probably offer 2 or 3 points to your question. I think one is that the geographic location of the new companies refineries position us in very attractive markets that Mike was demonstrated in the slides that were provided. I think the second thing is that the position of that company with like you said with the coking capacity in the key markets as well as significant hydrocracking positions the company extremely well for what people expect to occur when the IMO specs change with regards to diesel crack spreads and the differential between light and heavy crude oils. And so the company's strong capability to optimize that system to participate in the market opportunities, we believe positions us extremely well for the future.
And Doug, on top of that, if you look now at the combined company, we will have the ability Greg has put together a tremendous suite of port assets across the West Coast from Atacortes to San Francisco to LA. And these ports are really the lifeblood to refining out in those markets. And then secondly, if you look in the Gulf Coast with our Galveston Bay refinery, Garyville and some other things that we're working on, We have tremendous port access to the export market or import markets depending on where they may be. The last thing is we have been working over time at Garyville to expand our diesel maximization. Here in the Q1, we just completed one of our big additions at Garyville.
We have another coker expansion that this isn't the 3rd coker, another expansion that will be complete in 2020, where we're increasing the size of the coker drums. And lastly, we've been working for quite some time on the big Galveston Bay or Star expansion. All of these have IMO capabilities to them and all three of these projects are world scale.
Pretty powerful guys. Thanks a lot.
Thanks Doug. Thanks Doug.
Thank you. Our next question comes from Neil Mehta with Goldman Sachs. Your line is open. You may ask your question.
Hey, congratulations on the transaction Greg and Gary. Just wanted to reach out first on the synergies. Just want to confirm those numbers are EBITDA synergies, so they're pretax. And as you look at the synergies, which of these components that you outlined are harder versus easier to achieve? And then specifically, can you talk about the retail side of it?
Because Gary, you've had experience with this with Hess. What are some of the nuts and bolts on the retail side that will help get the 200 there?
Sure. Neil, we're very confident on these synergies. To say which ones are harder or easier, First of all, it's going to take a lot of work to be able to capture these. But from all the work that we've done through the acquisitions we've made and Greg has a powerful team and Greg can speak to how they've captured synergies and all the acquisitions that they've made is that both companies we have under promised and over delivered on our synergies over the last number of years. And both of us have shown that we can execute on major projects.
There will be synergies around the combination that between the combination of the two offices. But I would say some of the key synergies I already talked about in my presentation are around turnarounds, major capital projects, major maintenance projects. That's something in bringing both companies together and using the best practices that we that both of us have employed. In our initial review, there are significant synergies on the refining side. To your question on retail, you're right, we have not only the Hess transaction, but Tony purchased Gas America.
He's made a number of acquisitions over time. The key to and we think very rapid deployment of synergies on retail here are around Speedway's back office. We have one integrated system, one platform that manages the entire store from all the inventory ordering to all labor control to all payroll and to all cash controls. It's all managed through one system. And this is through this integrated platform, it's going to be outstanding way to be able to integrate the Western side of the retail and we are very confident.
You will recall when we did the Hess acquisition, we had stated that in 36 months, is what our agreement was at that time that we would be able to turn these stores into Speedway. We actually accomplished it around 15, 16 months and we're able to rapidly deploy the synergies due to that. And as we go to one platform in the company owned and company operated stores, we are very confident that we will be able capture those synergies very, very quickly. Having the expertise of already managing the Super America stores in Wisconsin and Minnesota, it's kind of a layup for us and that we know the markets very well. We know those stores.
And again, we put this platform. And the other big synergy part of retail that I've talked to Greg a lot about is Speedway has the number one customer loyalty program in all of retail. And day 1 that's going to become available as soon as we employ this platform into the system. And let me have Greg talk about his history of being able to capture synergies overall the transactions he's accomplished.
Yes. And I think, Neil, it's an important question. And I would just add 2 or 3 points to what Gary just stated. The thing that gives me the highest degree of confidence in our ability to deliver the synergies is that we came together with people with deep knowledge in the areas that we've identified the synergies and spent considerable time to identify ideas, quantify those ideas and develop kind of preliminary thoughts about how we would capture those synergies. So from my experience and the way that we worked on this, I personally see a very, very high degree of probability of delivering the synergies with a pretty good sense of urgency.
I think the synergies are underpinned by the strong capability of both companies to go in and make things happen in the business. And the things that we've identified are they're not, in my opinion, a stretch. There are things that fundamentally drive improvements in the base business, whether it be in the retail marketing business, as Gary clearly alluded to, or in doing things we can to strengthen our refining operations. I'm extremely confident in the ability to deliver at least more than $1,000,000,000 in synergies to do it. And I think it's the true value of this combination.
We talked about it as a premier company, but in my view, the capability to execute the business in this industry is what's so important. The power of these two companies opens the door to tremendous synergy capture.
That's great. And my follow-up is just any initial reaction from the ratings agencies on the deal, The balance sheet of MPC as you show on Slide 19 is in relatively good shape with parent debt to EBITDA under 2 times consolidated debt a little bit higher. So here just want your thoughts in terms of how aggressively you can work down the incremental $5,000,000,000 share purchase authorization Or does the incremental leverage associated with the transaction play a restrictive role in your ability to be aggressive around capital allocation?
Yes, Neal, it's Tim. I'll just make some comments on that. And obviously, the agencies will weigh in on their own. I'd invite you to sort of stay tuned on that front. We think that there is some incremental debt that we'll take on to fund the transaction.
We'll probably hit the revolver out of the gate with it. But again, as you saw in the cash flow profile, I mean, there is so much cash flow that is generated from this combination, both on the base earnings of the business as well as in the synergy achievement that Gary and Greg have talked about that we have absolutely no concerns at all that this business is squarely in investment grade territory. And in fact, I think you're going to see us lobbying for an upgrade over time.
And Neil, we did meet with all 3 of the rating agencies at the end of last week to brief them. So as Tim said, they should be reporting soon.
Super. Thanks guys.
Thank you. Our next question comes from Phil Gresh with JPMorgan. You may ask your question.
Yes. Hi, good morning and congratulations, guys.
Thanks Phil.
First question, I know you'll the merger proxy will be out at some point here, but just any color you might be willing to provide about how this bill came to be and why you feel given for each of you, I guess, where you are in the lifecycle for each of your companies, why now is the right time for this transaction?
Hi, Phil. This is Greg. Let me take the first, just offer my thoughts on this. I think over time, Gary and I have always saw the opportunity. And I think when you the map that we have in there kind of gives you the answer.
If you look at that map of the 2 companies and the way they're positioned geographically in the United States and you kind of come to a conclusion that, wow, this is a great opportunity to be able to bring the companies together like that. So over time, there's been conversations about the value of being able to combine the 2 companies. And we've talked this morning so far about lots of reasons to be able to do that. And I kind of look at it and say, why wouldn't you versus saying, why do it? Why wouldn't you do this deal?
And I and you don't come up with any reasons to be quite honest with you. So I think it's just an incredibly powerful combination. I think it's just underpinned by execution, whether it be synergies or just basically running the business, the capability of people to go in and execute the business, whether it be in refining and marketing, logistics and our commercial operations, like Gary said, buying 1,000,000,000 barrels of crude oil every year, it's just a fantastic time. And I would just conclude by one comment. To me, the time is right now because for this industry, the wind is behind our backs.
And having that momentum and everything is just an excellent time to capture every single benefit that we've identified in this and the opportunities as we move forward like IMO, like Gary specifically identified some opportunities. To me, it's just an incredible opportunity to be able to have the win behind your back instead of in your face to capture this opportunity.
And Phil, we've talked Greg and I spent a lot of time. This just wasn't a knee jerk reaction. Let's go put these companies together. The industrial logic, the business logic is so sound as Greg just illustrated. But on Neil's question just a little bit ago on the amount of synergies and I agree with Greg, we spent the majority of our time in talking about this was what can we deliver on synergies.
And one thing that has been said in many environments about Greg and I is that we have the highest say do ratio on Wall Street. If we say we're going to execute on something, we do it. And that's why, as I said, we're going to under promise and over perform. I too believe the synergies are much greater. What we put in the deck is what we are absolutely confident we can achieve in very short order.
So now is the time and being able to accomplish that. As we step back from the Marathon side and looked going west, and I just look at how Greg has been able to take this suite of assets and really improve on the balance of these assets with the demand in the markets in which they operate. He's done an outstanding job and really positioned us well as a combination on the West Coast. We have never from Marathon side ever operated on the West Coast. But what we do best is that we touch the molecule every step of the way on the supply chain.
That's exactly what Andeavor does. They touch the molecule every step of the way until it's in the consumer's car, then we try to sell them a few things while they're doing that. So that's the powerful combination here is that the 2 companies really emulate each other in how we go to market. So that's how we put it together.
That's very helpful. And yes, I think the percentage of purchases, purchase spending and things like that they laid out was an interesting and not overly aggressive assumption. So my second question would just be around capital spending. Both Marathon and Endeavor have several projects underway. I assume all of those are continuing as planned.
But just wondering if the combination of the 2 entities in any way would change the thinking around projects that you'd want to do or amount of spending that you'd be thinking about?
From a 1st of all, it's going to be business as usual. We will continue with the projects. Both of us will continue with our projects up until closing. And in the refining business, in the pipeline business, those are all long lead projects. So we won't be stopping anything that we've accomplished.
We have ideas. Greg and I've talked a lot about technology and how we want to position the company going forward. I'll let Greg talk about some of the projects that he sees. But there's nothing that we have teed up to say, oh, we're going to go build this project or that project. There's nothing that we haven't already talked to the market about that could be on the drawing board.
So I wouldn't expect that you're going to see some new process unit being built immediately out of the gate. That's not our plan. We're going to be very capital disciplined. As we said here, the juice in this deal is to execute, capture the synergies. We're going to be perfectly positioned as the refining system continues to grow with IMO and our number one goal is how we return capital to shareholders.
So I'll turn it over to Greg and how he sees his business. Yes. I would just kind of echo Gary's comments. We're very focused both companies on delivering what we've already committed to in our plans right now. The beauty is that the combination of the companies with a principle of being very capital disciplined will allow us to look for future opportunities and allocate capital to the best yielding opportunities in the portfolio.
And I think probably the best example is going to be as we approach IMO. I mean the company with the asset base and particularly as Gary just called it touching every molecule on the value chain will allow us to look at ways even maybe small things that people wouldn't think about to capture value. For example, Marathon has a significant presence in the asphalt business and we're just starting to create that. Now we can do that across the country and not only does that impact how we process certain crude oils, but once again it impacts how we take it to the customer. So bottom line for me is that the same rigor and discipline of allocating capital will be for the future company with potentially just a larger suite of opportunities to be effective at creating value.
That's exactly what we're trying to do.
Thanks for the comments and congratulations. Thanks, Bill.
Thank you. And the next question comes from Paul Chen with Barclays. Your line is open. You may ask your question.
Hey, guys. Good morning.
Hi, Paul.
Pretty exciting time to create the 2nd super refiner in the country. So you guys must be excited. Gary, just curious that will you have a timeline when that we'll have a more full slate on the new management team structure coming out soon?
Yes. And a great question, Paul, and probably the top question for the company going forward. And we're going to be very methodical in how we do this. Greg and I have spent a lot of time talking about this. We have already named Don Templin, who is the current President of MPC and Mike Morrison, who is the Senior VP within Endeavor are going to be the 2 leads on this.
All of you know Lisa Wilson from when she ran Investor Relations for us is going to be a key person working with Don and Mike on this as well. There will be a number of others that will be added to the team, but we're going to be very careful, very methodical. In fact, this is day 1. So today starts that, but we aren't going to be quick to make those decisions because we want to make sure this we have one chance to get this right. You can always modify down the road, but we're going to get this right, but we're going to spend a lot of time really working on the structure.
Greg and I overseeing this structure before we make our final decisions. I would expect we'll have this complete in the 3rd quarter.
So sometime in the Q3 that you will already be able
to come out? Great.
And with the substantially expanded geographic reach and also the economy of scale, is there in any shape or form that it will impact how you run your refinery or how you run your logistic?
Well, that will again be part of the integration study that we're going to do. Running 16 refineries is a big task. So certainly, we will look at how we manage, how we organize, whether we set it up in regions or whatever type of segments we end up deciding to do, but 16 refineries will keep anybody up at night. So we will decide that over time. From a logistics standpoint, we have a Andeavor has a very large logistics system, supervisory control data acquisition system, we call that SCADA that manages the pipelines.
We have one as well. Through the integration study. You just don't turn the switch. Those things have to be integrated and really engineered over time. We will plan on how we look at those things.
But when you look at the transportation side of the business, as we said earlier, the MLPs won't come together for some time. That'll be a day 2 issue. But we'll both operate just as we are today until we decide how we're going to go forward in the future. And I'll ask Greg to add anything to those questions.
Yes, Paul. What I would add just two points. 1, we're fortunate that we have a lot of great people that we can create a structure and build on the capability to execute the business. And I think across whether it be refining, logistics, marketing anywhere, even in all of our back office activity, we at Endeavour, we've just completed a state of the art SAP system, which could be a backbone with enhanced technology in that that will add a lot of value for the company going forward. So the structure that we have great people that we can get positioned to execute the business, I think that's fantastic.
And Gary briefly touched upon our view of the future is that the capability of the company not only in the quality of the assets and the people, but to be able to use technology to continue to enhance value for the shareholders in every part of the business, whether it be how we do in our refining operations, marketing, logistics. We believe that this capability of this company to be able to use technology to gain advantage is just a great opportunity that we'll be able to unleash with the way we structure the company.
Great. Gary, can I just can you clarify for me earlier, in the company, how about you all going into Speedway and how about in the dropout you're all going into Marathon?
We will continue to evaluate that. We expect Marathon to be probably the top brand as we evaluate and bring all the Western retail assets under one umbrella, but we haven't made that determination. Andeavor has a very strong brand with Arco that is well recognized in the West Coast and down into Mexico. Greg has done an outstanding job in really entering into the Mexico market. So we will determine that we have not been able to go into great detail other than there are a lot of different brands that are flying today.
And we would expect Marathon to be the dominant brand as we look at the branded side of the business going forward. Arco will be a very strong brand as well, but we'll decide on the others as we continue our evaluation.
Thank you.
Our next question comes from Manav Gupta with Credit Suisse. You may ask your question.
Congrats on the deal guys. Both Gary and Greg, you have extensive experience in working with regulators, getting deals done Hess, Western, BP assets from both of you. Where do you
I think if you just look at the process that you go through to obtain approval or something like this that I think Gary mentioned it earlier in one of the comments because there is very, very little to no overlap between the two companies. The process for approval shouldn't be anything unusual. I mean, we don't see anything that we have to deal with that would create any complications to it. So from our both of our experiences of doing something like this, it's we don't say it's easy, but everything that we looked at and the assessments that we've done basically go through the process, let it work its way. That's why we think we'll get approval to close here in the second half of twenty
eighteen. Thanks guys. My follow-up is on Slide 23. You kind of highlight how you will work together to capture the Mexico opportunity. Can you elaborate a little bit on that?
I would just I think the best way to look at that is what Gary said. We've kind of established a position in Mexico, which is really predicated upon taking supply from the United States and selling it directly to the consumers in Mexico, which is what both companies have been doing in the United States, working to manage that molecule like Gary stated earlier with all the way through the value chain. And so we had identified a part of Mexico, which was primarily the northern part of Mexico, which we could go after now with the access from the Gulf Coast into Mexico, it potentially opens up for greater opportunity in Mexico for us. But like Gary mentioned on several other things, it's in the preliminary stages and that's work that we'll do and bring better certainty and it will tie into our capital allocation of how we grow the company from that standpoint, but it's definitely an excellent opportunity.
And Manav, we had in the appendix Slide 23, we did not speak to this, but if you will look at our presentation deck from this morning, Slide 23 does discuss the Mexico opportunities. As you can see, Andeavor is a big supplier to the northwest part of Mexico and we're one of the largest suppliers out of Galveston Bay. We take gasoline and diesel into the eastern side of Mexico. So together, we provide a lot of supply into that market and we'll determine how we expand on that going forward.
Thank you so much guys and congrats on the deals.
Thank you. Thank you.
Thank you. Our next question comes from Blake Fernandez with Scotia Howard Weil. Your line is open. You may ask your question.
Hey, guys. Good morning. Congrats on the deal. I had two questions. Maybe I'll just ask both.
Firstly, when you have a merger of this size, a lot of times you end up with some assets that are kind of cats and dogs and maybe there's some divestiture opportunities. I didn't know if you saw some clear identifiable kind of movements toward maybe selling some assets, which could maybe help some of the balance sheet, not that you have concerns or anything, but could help enhance the balance sheet? So that's the first question. Secondly, Greg, I think you've done a phenomenal job since taking over the company. I was pulling the chart on the stock since you took over and it's amazing.
So congrats to you. I think you're pretty well respected among the investment community. And I guess I'm trying to understand if you could maybe expand a bit on your role going forward. Is it more of scaling back after you've helped integrate the companies? Or do you see this more as kind of longer term succession planning?
And maybe that's more of a question for Gary, but those are the 2 I had. Thanks guys.
Yes, I think the answer
to your first question is that both and Gary can answer this also from his point of view, but the portfolios of both companies the way they are today is I mean we feel we're actually proud of the assets that we own and where they're positioned across the board. And like anyone would expect us to do, we evaluate everything all of the time. And for the most part, it's always been to find opportunities to make it better. We do not see anything today that doesn't fit in the company, but we'll always be on top of it to look at how we continue to improve the company in that. So there's nothing that we could materially do that would impact the balance sheet by selling any assets to the best of my knowledge.
The second question, Blake, around kind of my role is Gary and I have spent a lot of time working on this. We were driven basically to create a great company. We wanted to work together to take the 2 companies and put them together to create a great company. And like I've always said, in this industry, you really have to be a strong operator in all aspects, everything that you do there. And we're very fortunate that not only do we have a lot of great people throughout the whole company, we have great leadership in both companies that we can come together.
And so we made a decision about roles of how we could take the company by working together going forward. And the way that we have structured the company is so that we have clarity for the leadership of the company about the roles. And we believe that the best role that I can play in the company going forward is to really help in certain areas to move the company forward like in the area of technology. We see that as tremendous potential for the company. And to me, the true benefit of that is the resources and the capability of this company puts us in a position that probably neither one of us could have done separately.
And not only can we capture that, but now we can probably capture it with a little bit more velocity than we would have been able to. So my role is to help the company be incredibly successful to create this leading premier fantastic company that we've talked about by working together with all of the other leaders, Gary and everyone else. It's going to take us all. This is a tremendous undertaking. And
I echo exactly what Greg has said and I really look forward. Greg and I have worked together for many years on AFPM and back at API on the downstream committee. So we spent a lot of time together. He's very humble and how he answered the question. But let me tell you, we're going to work together as far as succession planning.
We're not going to talk about that today. That's the Board's job. But I'll tell you that we're going to be arm in arm and taking this company forward and we're only going to do what's best for the shareholders. This isn't about Greg. This isn't about me.
It's what's best for the shareholders.
Thank you, guys.
Thanks, Mike.
Thank you. Our next question comes from Benny Wong with Morgan Stanley. You may ask your question.
Hi, good morning. Just wondering if you can speak about how you think about the cash returns of the company with the combined entity, particularly with the cash strong cash flow power. I see you're targeting $8,500,000,000 in liquidity, the extent of your buyback. Just wondering if there's a payout target you're also thinking about and how we should think about the pace of buyback growth and as well as dividend growth as well?
Sure, Benny. It's Tim. I'll provide some color on that. I mean, a couple of things I'll just draw your attention to. One is, as we announced this morning, our intent to sort of complete the share repurchases that we sort of had in mind for 2018 continues unfettered.
I mean, we're going to sort of deliver on that right through the pendency period of this transaction exactly as we had laid out. And as Gary said, the SADU ratio is very important to us. So I'll also draw your attention to the fact that this transaction, both with the base earnings part of the business and with synergies, is going to throw off a lot of cash flow. It's no coincidence that our board authorized an additional $5,000,000,000 of share repurchases to afford us the flexibility that as that cash flow comes in, we can sort of actively and effectively redeploy it to shareholders where appropriate. From a dividend perspective, what we highlighted is that we expect sort of 10% plus through cycle growth.
I think that's an intent that we laid out several years ago and our plan would be to continue on that path to the greatest extent possible. So look, we're not going to guide specifically to our activity, but I think you can see from our history and what we've done and the sort of table that is set for us here that shareholders are going to do very well with this transaction.
Great. And just got a quick follow-up on Mexico. And I think you've kind of already answered this, Greg, but just wanted to get a sense of you've already laid out a pretty defined plan in terms of your strategy into Mexico. Just wondering if the new entity will enable to accelerate that plan or does it make sense to kind of stick to the original timeline for now?
Well, there's no question that the new company has a greater resource capability when you combine 2 companies like that. And that, I think, naturally will provide only benefits to how we go about Mexico. I think we just have to spend a little bit of time thinking about how we want to position the company into this, what we can say both companies consider a great opportunity so that we go about it and capture the value and but at the end of the day actually provide good value to the consumers in Mexico because we're really trying to go right to the consumer and take the products that we make in the United States to there. So it won't take us a lot of time, but I think we'll have a very clear direction of the approach that we'll now take with the new company going forward into Mexico. And we'll be able to talk about that at the appropriate time.
Great. Thanks, guys.
Thank you. Our next question comes from Roger Read with Wells Fargo. You may ask your question.
Yes. Good morning and congratulations on the transaction.
Thanks, Roger.
Hey, just to dig into some of the synergies and the cost savings. First off, I was glad to see it didn't include any sort of CapEx. So that definitely ties into your capital discipline side or at least a modest amount of CapEx, I assume? And then the second part, both of your companies are what we would consider 2 of the better run companies in the industry. So as we think about some of the procurement savings, the refinery ops savings, some of the things that will happen in retail, can you give us a little more of idea of maybe what that is and what that will be coming from?
Because if you think about a well run business, it's like where do I find the savings versus if you buy something that's obviously challenged, you have a lot of upside potential?
Sure, Roger. This is Gary. As Greg said earlier, all of our plants we consider to be niche refineries. So we don't have any assets that we think are in need of anything major. But I outlined before, one of the key sides on or synergies on refining operations is our process optimization or opportunities there.
But beyond that and really low hanging fruit is our major capital projects, turnarounds and routine maintenance, our big maintenance projects is that using best practices across the company being able to employ we employ in our major capital projects just like we do routine maintenance, we employ our turnaround model. Our turnaround model has been able to illustrate that we are a top quartile performer in the Solomon and all of the Solomon work that they do with 95% of refineries putting in their data for the Solomon that we're top quartile in all three. There's areas that we really believe we can bring tremendous and very quick synergies to the table. I outlined in detail on the retail side a little bit ago, but the key synergy again that's low hanging fruit is having one single platform that manages your entire operation. That's the key of us competing against anyone in the U.
S. Is that you have a platform that can manage your business and it's really our platform really employs artificial intelligence that takes a tremendous amount of hours and a lot of our competitors to be able to manage their business. Our system manages some of the fundamentals of the business just by having that integrated system. So deploying those immediately, again, it's not big capital, probably $20,000 $25,000 a site and you put in this big integrated system and it manages everything from handling your inventory to ordering for you to with a touch pad paying your people. That's how dynamic that system is.
The procurement side of the business, we've already talked as we went through our due diligence, we had subject matter experts from all of the key components of our businesses talk about these are numbers that Greg and I came up with. We had our subject matter experts sit down and say, here's things we can do. You look at catalysts, you look at chemicals on the refining side, you look at fuel and power. We use some of the same power generators. There's many, many things that we consider to be low hanging fruit is why we are so confident on these synergy numbers.
Yes. And I would just add to what Gary said, two points. One is from both of our experiences, synergies are lots of things. There's not like great big home runs that you hit, but it's capturing all the ideas to bring value across the whole value chain and Gary talked about a couple of them. But I would just add one other one that and it was mentioned briefly earlier is that the value of the 2 companies coming together is for example if you take the Permian, we go right to the wellhead, we collect oil, we build a good, a really nice gathering system, we can support our customers extremely well by giving them good service and cost effective collection of their oil.
And now we'd be able to take that and get it into the refining system, not only into the El Paso refining, but like Gary mentioned earlier, into the Galveston Bay refinery. And that's a true synergy of touching those molecules that was mentioned earlier all the way from the wellhead through the refinery and ultimately to the customer. But it's lots of ideas, Roger. It's just lots of things that where you capture the value.
Okay. Certainly appreciate that. I guess the follow-up kind of along those lines, should we and I know it may be a little premature and you don't want to talk about the MLPs at this point, but should we expect you to become expect you to become maybe a larger presence in the trading side or something like that given now almost entire country regional presence and the ability to move crude and gas around in so many different areas?
We are going to maintain our focus on the business as we do it today. We will identify opportunities, but the logistics companies are just that. They are logistics businesses and it's our intent to protect that we do business over time and opportunities around the commercial part of the business as we've talked about will be the beauty is, is that we have a refining, marketing and logistics business that we can capture the interface between those different segments with how we go about our commercial operations.
Great. Thank
you. I
learned long ago, Roger, that our shareholders own us to run the assets, not to do speculative trading.
Well, I'm sorry, I didn't mean speculative. I just meant you would become bigger in that given that you now had a physical footprint, but I appreciate the answer.
No, I know exactly what your question was. I'm just adding a little color.
All right. Thank you.
Thank you. Our next question comes from Ryan Todd with Deutsche Bank. You may ask your question.
Thanks. Maybe as a follow-up to what you were just talking about, Greg and Gary, can you talk about the increased flexibility in the Permian Basin? I mean, how could this potentially shift your strategy in the basin, Greg? And for Gary, what options that could open for Galveston Bay? And then on the midstream side, does this open the opportunity for increased investments that wouldn't have companies, but
it's definitely the combination of the companies, but it's definitely the combination of the 2 companies with strong with a very strong logistics business allows us to go after and find ways that creating a bigger and stronger presence in the Permian that will support not only the logistics business, but also the refining business. So there's no question that the resources, both the people and the financial resources positions to be an awesome competitor in the Permian Basin. I mean, it I think it speaks for itself.
Yes. The Permian is an area that we have been very interested in for quite some time. We have been able to with the acquisition of Mark West, do some processing on the natural gas side and pick up some additional business. But with the strategy that Greg put together with the Conant gathering system, they're long in the gathering and we're short at Galveston Bay every day when you think about our demand every day at Galveston Bay, it's a 600,000 barrel a day refinery. So we're buying about 200,000 barrels a day on the light side of the supply chain.
So there's tremendous value there. And I might add, we have not put that is not in the synergies we have today on an absolute number. This is something that Greg just announced last week, part of the Gray Oak pipeline. So that's going to be a great fit, but we're looking at other opportunities on how we might transfer our crude down into the Galveston Bay area. So I think it's just a long term, a lot of great opportunities.
Great. Thanks. And then maybe, I mean, you guys, the role of IMO has come up a number of times over the course of the call and you've clearly, as a combined entity, you're clearly well positioned for the changes. I mean, as you think about some of the strategic drivers of this deal, I mean, how much does IMO figure in? Would the geographic diversification have been enough on its own previously?
Or would this deal have happened outside of the coming IMO shift?
We did not add anything incrementally for IMO that wasn't already in both of our individual plans going forward. Greg has done a lot of investment. I will let him speak to that. I have already talked about it at Galveston Bay, the STAR project and the two expansions of ultra low sulfur diesel at Garyville. So we're in both of us are way down the path on being prepared for IMO.
So and this the results of IMO or I should say the results the forecast of IMO, that's not what is driving this deal. The value and the entire complexity of the deal and opportunities across all segments of the business are the drivers. But as you said, with almost 800,000 barrels a day of coking hydrocracking capacity pro form a, we're going to set in a great position. And another very important point is that I would say we have the number one position in port assets on the Gulf Coast and the West Coast.
Greg, do you want to add? Yes. I would just add, we've at the heart of what we're doing is to create a premier company. It just so happens that IMO is occurring when we do this. So the neat thing about that is the combined company because of everything we've been talking about here this morning that enhanced capability, the resources, the knowledge, the people, it just puts us in an even better position to address the market when the world goes through the IMO spec change, but it has it's just it's the timing issue.
Great. I appreciate it. Thanks.
Thank you. And our last question today comes from Brad Heffern with RBC Capital Markets. You may ask your question.
Hey, good morning, everyone. Just circling back on Speedway, a lot of Andeavor's assets on the West Coast are the MSO model. So I was wondering if part of the plan and part of the synergies is to add a Speedway C store type offering to those assets?
Brad, this is Greg. I think the there's no question one of the benefits of combining the two companies is to take the incredibly strong position that Marathon has developed with their Speedway business and be able to capture the benefits that Gary's mentioned throughout the presentation today. It's I mean one of the truly synergies is when you can take and combine the two businesses and particularly we're talking about the retail businesses here and bring them together and have a strong platform to be able to grow the business. And our Andeavor retail business, there's no question gets tremendous benefits from the strength of the Speedway business. And it was in our thoughts to be able to improve that business.
It just provides tremendous acceleration with the best retail company in the United States.
Okay. Appreciate that. And then maybe for Gary, obviously, the West Coast is sort of a niche market, probably one of the most difficult markets in the U. S. To operate in.
So obviously, Greg has a lot of expertise, but I'm wondering if you can give your thoughts on the West Coast market and sort of the pluses and minuses of being there?
Yes, Brad. If you go back about 4 or 5 years ago and you look at the margins on the West Coast, we always enjoyed a premium margin in PADD II to the other pads in the U. S. About 4, 5 years ago, that curve started to hurdle the PADD 2 and definitely PADD 3 and it's been able to sustain those margins going forward. As I mentioned earlier, it's all about balance when you look at refining.
One of the keys, again, I go back and look at Solomon studies and look at environmental expenditure and expenditures per equivalent distillation unit, Marathon through its operational excellence programs, the same way as Endeavor always achieved to be a top quartile performer in the scale of the asset in which you're operating. And I believe we're going to be able to bring a tremendous amount of skills to the table to help improve on the operating cost per EDU. The fixed cost per EDU has always been one of our strengths. And that will always be at the forefront of what we're trying to accomplish. We will always invest in safety instrumented systems and the we will invest and give back to the communities in which we operate and that's a key tenant in operating on the West Coast.
Greg and I spent a lot of time talking about this. Our subject matter experts spent a lot of time talking about this. And you will see us continue to invest not in new process capital per se, but in just continuing to improve the assets that are there, the process units that are there and how can you get more out of those systems that we have in place.
Operator, thank you for your interest in Marathon Petroleum and our strategic combination with Endeavor. Should you have additional questions or would like clarifications on topics discussed this morning, the IR team and I will be available to take your calls. Again, thank you for joining us this morning. That concludes the call.
Thank you. And that does conclude today's conference. We thank you for your participation. At this time, you may disconnect your lines.