Welcome to the MPC second quarter 2019 earnings call. My name is Amber and I'll be your operator for today's call. At this time, all participants are in listen- only mode. Later, we will conduct a question- and- answer session. Press one on your touchtone phone to enter the queue. Please note that this conference is being recorded. I will now turn the call over to Kristina Kazarian. Kristina, you may begin.
Sounds great. Welcome to Marathon Petroleum second quarter 2019 earnings conference call. The slides that accompany the call can be found on our website at marathonpetroleum.com under the Investors tab. On the call today are Gary Heminger, Chairman and CEO, Greg Goff, Executive Vice Chairman, Don Templin, CFO, Mike Hennigan, President of MPLX, as well as other members of the executive team. We invite you to read the safe harbor statements on slide two. 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 results to differ are included there, as well as in our filings with the SEC. I will turn the call over to Gary Heminger for some opening remarks and highlights on slide three.
Thanks, Kristina, and good morning, and thank you for joining our call. Earlier today, we reported adjusted net income of $1.1 billion, or $1.73 per diluted share. This quarter, we executed across all aspects of our integrated business and delivered solid results, generating $2.8 billion of cash from operations. Our impressive cash generation allowed us to return roughly $850 million to our shareholders this quarter, while also funding many key strategic investments, which we expect will continue to enhance our long-term earnings profile. Our team's execution this quarter led to strong synergy capture. Combined with our first quarter results, we have realized $403 million of synergies year to date. Our progress gives us great confidence in achieving our target of up to $600 million of annual gross run rate synergies by year-end 2019, at $1.4 billion by the end of 2021.
Don will provide a detailed update around synergy capture later on the call. Our retail business had an exceptional quarter and demonstrated its ability to capture value. Strong results this quarter reflect the tremendous focus by our team in managing the day-to-day business in conjunction with the integration of the new stores. We have converted over 400 stores since the combination, putting us well on track to achieve our goal of 700 stores by the end of this year. In midstream, we simplified our structure into one public company through high-grade commercial opportunities and progressed an impressive slate of high return projects that are expected to enhance integration across our system. Mike will speak to our execution around new projects as well as provide an update on our overall midstream strategy shortly.
In refining, we achieved strong 97% utilization, executed planned turnaround activity at our Los Angeles and Martinez refineries ahead of schedule and under budget, and advanced strategic initiatives to prepare our system for upcoming IMO 2020 regulations. During the quarter, we progressed the completion of the Garyville crude revamp and coker drum replacement projects. Coker project expected to increase unit capacity by approximately 14% and remains on track to be completed in two phases, the fourth quarter of 2019 and first quarter of 2020. We also finalized plans to optimize our coker feed and reset processing capabilities between refineries and ensure readiness of our blending and storage capabilities near our key coastal export facilities. As we look to the second half of the year, global gasoline and diesel inventories are below their five-year averages.
Gasoline demand remains close to last year's levels, and we expect demand to remain flat throughout the remainder of the year, given the strong U.S. economy and low unemployment levels. On differentials, medium and heavy crude remain compressed from supply constraints and Iranian and Venezuelan sanctions. We believe that refiners with operational flexibility like ours are best suited to manage these dynamics. Investors often ask about the timeframe for the expected pricing uplift from IMO regulations. We continue to believe impacts will emerge in the second half of the year and are starting to see some early indications in the market. First, low sulfur fuel oil markets are showing signs of significant strengthening. Low sulfur to high sulfur spreads are currently at $16 per barrel, and forward pricing indicators are moving towards $30 per barrel as we approach year-end.
This is corroborated by the low sulfur fuel oil retail bunker agreements we have contracted in the Pacific Northwest and are negotiating at Long Beach for the fourth quarter. Additionally, we are obtaining significant upgrades for our low sulfur slurry volumes contracted for the third quarter. Second, high sulfur fuel oil values are weakening, and the market is highly backwardated through year end, with U.S. Gulf Coast down $11 per barrel and Singapore indicating down $18 per barrel. While this is not necessarily a bullish factor for the market, it does show that IMO impacts are becoming more imminent.
We continue to anticipate 1 million- 2 million barrels per day of increased distillate demand globally for the IMO spec change, even considering recent global economic data, which we believe will support an expansion in diesel cracks by $2-$5 per barrel and coker margins improving roughly $10 per barrel as the industry prepares for low sulfur bunker regulations. After nearly a year as a combined business, we have identified opportunities to streamline our business and potentially divest assets to enhance the strength of our overall integrated portfolio and remain disciplined stewards of capital. Proceeds from any divestitures will be used for general purposes, such as investments in high return projects, as well as debt reduction. As this process develops, we intend to provide updates to the market, but much of it will be contingent upon market demand and appropriate pricing for these potential divestitures.
Putting this all together, as we look forward to the remainder of 2019, we expect improving industry dynamics and the benefits of our past investments to support our growing cash flow outlook. Our team remains focused on operational excellence, achieving synergies, and creating long-term shareholder value. Now let me turn the call over to Mike Hennigan, who will provide a strategy update for our midstream segment. Mike?
Thanks, Gary. Turning to slide four, we are pleased to have successfully combined MPLX and Andeavor Logistics into a single entity, creating a leading large-scale diversified midstream company anchored by fee-based cash flows. As is often overlooked, our business mix has evolved to a more stable, long-dated cash flow profile. Logistics & Storage makes up approximately 60% of the cash flows for MPLX, and our incremental capital program is predominantly focused on building out our integrated crude oil and natural gas logistics systems, particularly in the Permian. In addition, we continue to move our capital investments towards the L&S side of the business. At MPLX in 2018, 85% of our capital was directed to the G&P business. In 2019, we moved that ratio to about 50/50. Our expectation in 2020 is to spend the majority of our capital in the L&S business.
When we think about building out our logistics systems, one of our core objectives is to invest in projects that enhance MPC's integrated value. During the quarter, three examples of projects that advanced this integrated strategy are our Whistler, Capline, and Wink to Webster pipelines. On Whistler, MPLX announced the final investment decision on this natural gas pipeline after securing sufficient firm transportation agreements with shippers. This joint venture project is being designed to transport approximately two billion cubic feet per day of natural gas from the Permian Basin to the Agua Dulce area in South Texas. We expect the Whistler system to eventually provide low-cost natural gas to our Galveston Bay refinery. Natural gas is a key input at our refineries, and this project creates a compelling industry solution as well as lowering the overall cost of our system, where we are currently utilizing third-party infrastructure.
We are also pleased to have completed a successful open season for the reversal of the Capline pipeline system. We have sufficient commitments to proceed with this project, and the mainline purge is expected to begin later this quarter. Once reversed, Capline will be capable of supplying discounted Midcontinent and Canadian crude to St. James, Louisiana, which has a direct connection to our Garyville refinery. Capline is expected to begin light crude service in late 2020 with heavy crude service planned for 2022. On the Wink to Webster crude pipeline, MPLX recently signed definitive agreements. A 36-inch diameter pipeline will originate in Wink and Midland and have destination points in the Houston market, including our Galveston Bay refinery. The pipeline is expected to be in service in early 2021.
There are several other partners in the project that have chosen not to disclose their participation at this point, but we expect that disclosure to occur very shortly. The combination of all the partners has made this project highly committed with a very strong return. Expanding third-party business is another way to enhance MPC's enterprise value. Recently, we advanced our JV partnership on the Gray Oak pipeline, which is expected to enhance the stability of our cash flow by pulling in third-party revenue into the enterprise. The Gray Oak pipeline, in which MPC has a 25% equity interest, is another pipeline that will move Permian crude to the Gulf Coast. This project is expected to be placed into service by the end of the year. As we begin our planning process for 2020, we expect to streamline and optimize our capital expenditures.
Prior to the combination, the standalone growth CapEx for MPLX was targeted at around $2 billion, while ANDX's standalone CapEx target was $600 million. We will target spending less than the combined $2.6 billion as we focus towards the highest return projects across the combined portfolio. We anticipate continuing our focus on asset optimization, which could include asset divestitures. With a disciplined approach to capital investing, focus on streamlining and high-grading our portfolio, we believe the midstream business will further enhance the cash flow stability of MPC's integrated system. I'll now turn the call over to Don, who will provide a walkthrough of our financial results.
Thanks, Mike. Slide five provides a summary of our second quarter financial highlights. Adjusted EBITDA, which excludes turnaround costs, was $3.2 billion for the quarter. Operating cash flow before working capital was approximately $2.8 billion. We returned $852 million to shareholders through $352 million of dividends and $500 million of share repurchases. We entered the quarter with 660 million shares outstanding. For the year, we've returned over $2 billion to shareholders.
Based on investor feedback, we have reformatted some of our materials. The most notable changes include a focus on adjusted EBITDA, regional trend highlights, capture rates, sequential comparisons, enhanced guidance, and incremental market metrics. We trust that you will find these helpful. To support continuity, we've also maintained previous materials in the appendix for reference. Slide six shows the $1.6 billion of sequential growth in adjusted EBITDA from first quarter to second quarter, and also a reconciliation to net income. The increase was largely driven by higher retail and refining earnings. Before reviewing the details of each segment, I would like to discuss our synergy capture for the quarter. As shown on slide seven, our team's impressive execution led to strong synergy capture with $270 million of realized synergies in the second quarter. The majority of our synergies were in the Refining & Marketing segment.
Benefits in the quarter included approximately $60 million for the L.A. turnaround as costs came in significantly under budget, and we were able to bring the plant back up eight days ahead of schedule. At the St. Paul and Martinez refineries, we began using lower-cost regenerated catalysts. We were able to take used catalysts from other refineries within our system and redirect them to St. Paul and Martinez, resulting in cost savings for these refineries. Additionally, we started utilizing different catalyst formulations in order to produce higher value products at several of our refineries. Examples where we began realizing benefits in the second quarter include the hydrocracker at Robinson and the cat cracker at Los Angeles. We have also improved gasoline blending capabilities across our refining system to optimize octane specifications and avoid over-blending of higher value components.
In retail, we are starting to see benefits from economies of scale, as well as leveraging back-office systems across our newly converted stores. This has led to optimization of labor hours and reduced operating costs. The $39 million in corporate synergies represents continued cost eliminations, including headcount reductions and contract renegotiations made possible by the combination. Continuing with synergies on slide eight, we have now realized over $400 million of synergies through the first six months of 2019. Over half of the synergies have been driven by cost reductions across the business. We have also reduced our capital spend by approximately $24 million. As Gary mentioned earlier, our execution through the first half of the year gives us confidence in achieving the up to $600 million of annual gross run rate synergies that we outlined for 2019.
Moving to our segment results, Slide nine shows the change in our midstream EBITDA versus the first quarter 2019. MPLX EBITDA decreased $16 million versus the first quarter. The decrease was primarily due to weather-related unplanned outages such as the Ozark crude oil pipeline, planned maintenance work at the Javelina facility, and declining NGL prices. During the second half of the year, MPLX plans to bring on 600 million cubic feet per day of processing capacity. The plants are being developed on a just-in-time basis to align with expected natural gas volume growth in these regions. Andeavor Logistics EBITDA increased by $7 million versus the first quarter 2019. The increase was primarily driven by higher volumes on the Conan Gathering system, which recently surpassed 200,000 barrels per day of throughput. Slide 10 provides an overview of our retail segment.
Second quarter EBITDA was $623 million, an increase of $327 million versus the first quarter. Retail fuel margins were nearly $0.27 per gallon in the second quarter, reflecting a favorable commodity market and our team's ability to optimize margin dollars. Same-store merchandise sales increased 6.3%, continuing the positive trend we have seen over the last 12 months. Speedway continues to execute its brand expansion strategy through store conversions. As of June 30, we had converted 237 sites in 2019, bringing the total number of conversions since the combination with Andeavor to 407. We remain on track to reach 700 total cumulative store conversions by the end of 2019, including locations in the Southwest and on the West Coast. In July, Speedway closed on its acquisition of 33 NOCO Express convenience stores in the Buffalo, New York area.
The acquisition further expands Speedway's brand presence in this region while supporting MPC's Midwest product placement strategy. It builds upon prior investments to maximize refinery utilization. Slide 11 provides an overview of our Refining & Marketing segment. Second quarter adjusted EBITDA was $1.6 billion, an increase of nearly $1.3 billion versus the first quarter. Margins were up quarter-over-quarter, primarily due to improved crack spreads in all three of our regions. These benefits were partially offset by narrower crude differentials and product realizations. Our MidCon margin improved by nearly $5- $20.21 per barrel for the Second quarter. Our Gulf Coast margin was $9.32 per barrel in the Second quarter, while the West Coast also saw a significant increase to $17.77 per barrel for the quarter. Capture for the quarter was 82% versus our historical average of approximately 90%.
Planned maintenance activity at several refineries on the West Coast and the run-up of gasoline prices versus non-transportation fuels impacted our overall results. Please refer to page 18 in the appendix for some additional details on our capture for the quarter. Refining operating costs, which includes major maintenance, improved by $25 million versus the first quarter. Distribution costs, which are primarily related to transportation and marketing of refined products, including fees paid to MPLX and ANDX, were down $13 million quarter-over-quarter. Page 19 of the appendix provides a more detailed walkthrough of the internal and external fee components included in this cost category. Slide 12 presents the elements of change in our consolidated cash position for the second quarter. Cash at the end of the quarter was approximately $1.2 billion. Operating cash flow before changes in working capital was a $2.8 billion source of cash in the quarter.
Working capital was a $201 million use of cash in the quarter, largely due to the effects of falling commodity prices and the shorter payment terms on refined products compared to crude oil. Return of capital to MPC shareholders via share repurchases and dividends totaled $852 million, with $500 million worth of shares acquired in the quarter. Distributions to public unit holders of MPLX and ANDX were $315 million for the quarter. We remain committed to our long-term goal of returning at least 50% of discretionary free cash flow to investors. At quarter end, we had approximately $28.4 billion of total consolidated debt, including $14 billion of debt at MPLX and $5.2 billion of debt at ANDX.
Total debt represented 2.6 times last 12 months adjusted EBITDA on a consolidated basis, or 1.1 times EBITDA, excluding the debt and EBITDA of the MLPs, but including the distributions received from MPLX and ANDX. On slide 13, we provide our third quarter outlook. We expect total throughput volumes of just under 3.1 million barrels per day. Our operating costs, including major maintenance, are projected to be $5.90 per barrel. Distribution costs are projected to be $1.3 billion, which is consistent with prior quarter guidance. Planned turnaround costs are projected to be $155 million as we have limited activity during the quarter, but we do have some planned maintenance at Gallup and St. Paul. Depreciation and amortization expense is forecasted at $420 million for the quarter. Corporate and other unallocated items are projected to be $190 million for the quarter. This figure includes approximately $40 million in corporate depreciation.
Lastly, I would like to highlight that we have provided outlook information for the retail segment this quarter, including ranges for fuel volume and merchandise sales. We also plan on providing actual fuel margins on a one-month lag as a part of the market data that gets posted on our website at the beginning of each month. Kristina and the rest of the investor relations team will be available after the call to help run through any questions you may have, including the incremental information we have provided. I also remind you that information in the prior format remains in the appendix. With that, let me turn the call back over to Kristina.
Thanks, Don. As we open the call for your questions, as a courtesy to all participants, we ask that you limit yourself to one question and one follow-up. If time permits, we will re-prompt for additional questions. With that, we will now open the call to questions. Operator?
Thank you. We will now begin the question- and- answer session. If you have a question, please press star then one on your touch tone phone. If you wish to be removed from the queue, please press star then two. If you are using a speakerphone, you may need to pick up the handset first before pressing the numbers. Once again, if you have a question, please press star then one on your touch tone phone. Our first question comes from Doug Terreson of Evercore. Your line is open.
Good morning, everybody, and congratulations on solid results.
Thank you, Doug.
Yep. My first question is execution and synergy capture seem to be improving, especially in refining and Speedway, and returns on capital appear to be headed back to the historical trend. This is all good news. On this point, my question regards the opportunity set going forward and specifically, while I realize we're only two quarters into the program, how would you characterize integration opportunities that you've seen so far? Do you sense that they're going to become stronger over time, and if so, in what areas?
Yeah. I'll have Don talk about specific synergies, Doug, but let me just talk overall about integration.
Okay.
We're very pleased where we stand on integration to date, and specifically, when you look through the segments on refining, just listening to Don's presentation here of the turnaround activity we had at Los Angeles and at Martinez. We have some work coming up at St. Paul. What we're seeing across the refining complex is very strong integration. We're developing our team. We've transferred some people from Marathon into some of the legacy Andeavor plants and vice versa. We see that integration and the communication between the refining team coming along very strong. One of the things that we have talked about in the prior quarter, and I've talked to many investors about is, we saw this opportunity with the cat cracker at L.A., that we could bring in a new catalyst, a new technology, and really improve the output and yield of that plant.
Ray can go into it in more detail down the road here. That is really coming to fruition and as we're capturing, and this was a synergy that we had not identified prior to the transaction. I think it just illustrates, Doug, how well things are coming along on the integration. We just presented to our board yesterday a very big project. We have now defined how we're going to go forward with our SAP system at the end of the day. How we're going to integrate all of the accounting and financial data, a big project, but we've completed, we've identified that, and we're now moving forward to be able to get that implemented here over the next 18 months to two years. We'll bring it on in different cycles. I mentioned retail.
A very strong story in retail and to have 400 stores complete to date and very much on target to hit the 700 by the end of the year. We're starting to see the improvement in the stores in the Southwest that we have already converted. We're seeing improvement in the stores up in Minnesota, Wisconsin, that we've converted. Those things that integration, but more so being able to bring in one common platform that manages the stores is a big help in managing your operating costs. Lastly, on the midstream side, it was really a big milestone to close the transaction between ANDX. Mike Hennigan has already outlined the team that they have in place, a very strong team. I congratulate Don Sorensen, who was the president of ANDX, who really did an outstanding job.
Would like to have kept Mike with the team, but he wanted to move on and do some other things. They did a great job as we proceeded in being able to put this transaction together. Let me ask Don to go into some of the synergies in more detail.
Okay.
Yeah, Doug, as I said, we were really pleased with the performance of the team around synergies, $270 million this quarter. We did highlight a couple of one-time synergies. When I think about one-time synergies, the way we've defined that is synergies that we're capturing in 2019, but are unlikely to continue into 2020 or beyond. That $30 million or so is primarily around optimizing Tier 3 gasoline credits. That won't continue past this year. In the refining sector, we did highlight turnaround cost savings during the quarter of about $60 million. Obviously, that won't continue every quarter, but we're going to have turnarounds over the next three years, and we're very confident that our management of those turnarounds will allow us to continue to be able to deliver them on time and on budget.
If I think about the $270 million for the quarter, I take out the one-time $30 million. Then I think about sort of the $60 million that doesn't recur every quarter. That's $180 million for the third quarter, $60 million a month, if you will. If I annualize that $60 million a month, that's why we get really excited about and have conviction around our view that we will get to the synergy target that we communicated at our earnings call.
Sure looks like it, Don.
At Investor Day.
Yep. Okay. Also, Marathon Petroleum is clearly an asset-rich company, especially post the Andeavor transaction, which suggests that divestitures could expedite streamlining and optimization of the portfolio, and this could go on for years to come as well. My question is, while Gary, you talked about this in your comments, could you expand on how you think about this opportunity? Are there areas that are likely to become non-strategic that might not have been before? How significant could proceeds from divestitures be if you chose to pull that lever in coming years?
Sure, Doug. We announced it. You need to be careful when you announce asset divestitures until you have it fully baked, I would say. This has been part of our strategy ever since even before we closed the transaction with Andeavor. To be able to look at assets, as you said, that may be non-strategic, and we're looking across the entire portfolio. It's not just one segment versus another. We are looking across the portfolio. We have identified some assets across the portfolio, and this isn't just a one year or a short-term thing that we're going to do. This was part of our plan all along. We'll provide more data to the investors as we go forward. We've already proceeded with a couple of packages on some assets. It's private at this time, but we will continue on.
This is not a short-term thing, Doug, and your question certainly tees it up correctly.
Okay.
We are an asset-rich company. We'll look at some assets that probably have more value in somebody else's portfolio than ours and proceed accordingly.
Okay. Thanks a lot, guys.
All right, Doug.
Our next question comes from Manav Gupta with Credit Suisse. Your line is open.
First, Gary, Don, Mike, and the rest of the team, thanks a lot for tons of more disclosures and reporting format. They're really helpful to the investment community. Adjusted EBITDA, slide nine on distribution costs, exactly what we needed for modeling MPC better, so thank you for that.
You're welcome.
Yeah, I have two quick questions here, Gary. Due to the lack of heavies, specifically on the Gulf Coast, what we are seeing is a trend towards running more light sweet crude. What that is also doing is creating a lot more naphtha and NGL, which in turn is hitting the capture rate. Your results showed relative insulation from the trend, but we are seeing it in the industry. I'm trying to understand your view on this. If the industry continues to run more and more light crude, will the capture take a hit because of it?
Sure, Manav, and thank you for your comments on the additional disclosure information that we've provided. We're going to ask Ray Brooks, who runs refining, to take this question as he optimizes our crude slate. Ray?
Sure, Gary. Manav, we fill our crude slate to optimize our process units. When we talk about light crude, this really pulls the reformers into play. We give ranges on our abilities to run light and heavy crude, and this is all based on what the capacity of our reformers is in that regard. Now, having said that, Marathon is a net buyer across the 16 plants of naphtha and another light component, natural gasoline. The reason for this is we have really two octane-generating machines across our system in Garyville and our Robinson refinery because we have multiple high-quality reformers at those facilities. I don't look at light crude as an obstacle. I look at it as an opportunity for us.
That's very good to hear. One quick further question. A couple of days ago, a European refiner had indicated that a reduced demand for high sulfur fuel oil due to IMO won't necessarily weigh on the prices of high sulfur crudes. In MPC's view, is it possible that high sulfur fuel oil price crashes, and it has no impact on Maya and WCS pricing?
I'm going to start off answering that question, too, and then I'm going to allow Rick Hessling to add on. In refining, when we evaluate our crude avails, we do that based on the offered price and the value of the crude in our processes. If the crude has a lot of sour bottoms, which is HSFO, that absolutely comes into our evaluation and what we're willing to pay for the crude. Rick, you want to elaborate on that a little bit more on the crude side?
Sure. Yeah. Hi, Manav. I would say it will have an impact on crude prices, especially like Maya and WCS. When you look at the world, and even though I would say that it's somewhat offset by the lack of Iranian and Venezuelan barrels and OPEC barrels coming in, I will tell you that high sulfur fuel oil, if it's not directly priced into the Maya formula, it has to be accounted for indirectly when we look at the crude makeup of Maya. I think you will see a shift in prices there, and I would also say the same is true for WCS. We'll value that crude based on its dispositions and its crude qualities, and I think rents will move as well, Manav, because it has to be accounted for.
Thanks, guys, and congrats on a great quarter.
Thank you.
Our next question comes from Benny Wong with Morgan Stanley. Your line is open.
Hi, guys. Thanks for taking my question. My first one is really on the West Coast. Recently had the opportunity to host a tour and visit a refinery there. It was impressive to see the level of integration and talent you guys have on the ground. I really wanted to ask about your outlook of the margin environment for the rest of the year, which has been pretty soft recently, and was also hoping you'd be able to talk about your key execution focuses on the West Coast. I think, Gary, you kind of initially touched on the cracker opportunity in L.A. earlier.
Right. Let me have Ray take that, Benny. Let me start off, though, by talking about if you look at the West Coast crack spreads and how the market has fluctuated, there had been some downtime in some refineries early in the second quarter, which resulted in a lot of imports coming in. Ended up having too much inventory on the West Coast. We see that being run down and the inventory situation coming back more into balance now. We think that was a temporary lull in the early part of the second quarter. Specifically your question, Ray will talk about some of the things that we're doing.
Hey, Benny, it was really great to spend some time with you and some of our other investors showcasing some of our Los Angeles assets. Gary did a good job about talking about the margin environment. I want to focus on the refinery. Specifically, we mentioned several times now about the catalyst opportunity on the cat cracker. We want to make sure we optimize the asset down in California, whether it's Los Angeles or Martinez. The early indications from the cat starting up in Los Angeles look very promising versus what we were expecting. As far as areas of execution, there's two words I want to focus on, reliability and cost. From a cost standpoint, we've done a lot of work in the first nine months at both Los Angeles and Martinez doing some planned maintenance work.
We're very proud of our teams on how we were able to pull that ahead of schedule and under budget, both which have cost impacts. Now the focus is on reliability. We've got a clear plan with low maintenance ahead for California, and we want to focus on delivering reliable performance out of both those assets. Reliability and cost is what we're focused on.
Great. That's great detail, guys. My follow-up is really on the demand side. We've seen gasoline consumption kind of have slow start at the beginning of summer, rebound strongly, and then it recently became soft again. Just wondering if you can provide some thoughts on what you're seeing and what you expect, giving your unique perspective from a refinery down to the retail pump. If you can add any thoughts on the distillate side as well, which has been pretty weak lately as well, that'd be great.
Sure, Benny. Let's take gasoline first. You said it right at the beginning of the summer. You recall that the entire MidCon was having a very wet late spring, early part of the summer. It's only been the last month that things have finally dried up and business getting back to normal. We lost a lot of the front end, if you will, discretionary driving that families do across the MidCon early in the vacation season. You're right, we have seen it be stronger until Tropical Storm Barry came about and dumped a lot of weather up the MidCon and a little bit into the Southeast. Today, we're seeing improvement in gasoline demand. As I said earlier in my comments, we think gasoline demand is going to be flat for the balance of the year. The distillate was pretty much the same story.
If you look from Iowa all the way through Ohio, on average, probably only 50% of the agricultural demand came about, and it's because the farmers just could not get in the fields. Again, about 50% of the planting, and then you have cultivating and then eventually harvesting is going to, I think, continue to put some pressure. You look at overall distillate inventories, they're at the lower end. If you look at distillate inventories minus exports, they're at the lower end of the five-year average, which we believe continues to be a positive point for our business going forward. I've indicated that we're starting to see some early contributors to IMO with the incremental demand that we're expecting to see. We still think that distillate in the second half of the year is going to be strong.
That's great thoughts, guys. Thank you very much.
Next, we'll go to Roger Read with Wells Fargo. Your line is open.
Yeah, thank you. Good morning. While not one of my questions, I do want to say thanks for the detail and the synergies and congratulations on the progress so far. I'd like to ask you, though, about Tier 3. Obviously, we've heard some comments from other companies about issues with Naphtha and given its low octane component, difficult to get rid of in this market. Just curious how you believe you're set up with Tier 3, if to the extent that you can offer it, maybe how that compares to the industry, and then what you might be able to do in 2020 and beyond in terms of taking advantage of your own system to make more octane or acquire octane cost effectively.
Hey, Roger, this is Ray again. First, we're very well positioned with regards to Tier 3, and I'm going to talk from 2019 standpoint. When we came together with Andeavor, we had the flexibility from a sulfur credit standpoint to optimize that across our 16-plant system. And really for this year, it's allowed us to run a couple refineries more aggressively with regards to octane and sulfur standpoint. Additionally, we have two capital projects, one at Mandan, one at Galveston Bay that will be completing in the next couple months that give us the capability going forward to meet the Tier 3 demand for 2020. Now, your question on octane. In the previous question, I mentioned that we have a lot of octane generation capacity. We will continue to use that.
We feel good with our plan for Tier 3 and don't see an octane imbalance at this point. Okay, great. Thanks. Changing gears a little bit. Crude differentials, all the issues globally we could point to on the heavy side, and then what we've had out of Alberta as well. Just wondering what your outlook for really mostly the heavy crude, but if there's any sort of additional thoughts to add on the WTI side of it as well, just the outlook for the back half of 2019. I guess a little bit tie into, I believe it was Manav's question about the impacts of IMO in terms of heavy versus light or sweet versus sour as we go into the beginning of 2020.
Hi, Roger. This is Rick Hessling. I guess I'll start with heavy crudes on the Canadian side. As a reference, we ran approximately 600,000 barrels a day, combined heavy and light Canadian crude, that's somewhat consistent with what we've ran in the past. When you look at us versus our competitors, I think you'll see that we have incredible pipeline capabilities, we're not married to any one crude. We didn't really have a significant shift change. I would tell you, looking forward from a Canadian perspective, we're bullish. Here recently, within the last week, the mandate again was reduced another 25 a day. You have the potential assignment of the rail contracts, which we believe may be married up with deals with producers that could allow them the flexibility to produce more crude.
If you look at the increase in rail movements month-over-month and the dropping of the Canadian inventories, all this is a positive sign certainly for differentials reaching that $20 a barrel mark on the heavy side. On the WTI side, what I would tell you is you're seeing a little bit of dislocation between WTI and WTI light. We're a buyer of the light. That's a discounted crude that we're running at Galveston Bay and in and throughout our PADD 2 system. We continue to see that dislocation happen. Certainly, I think it's been well-publicized at the end of this year, you're going to see a lot of volatility as the increased pipes come online and the dock capacity struggles to keep up. We'll be watching that volatility as well.
Thanks. Maybe just one little add-on to that. In terms of moving crude out of the U.S., is there any update on your project? I'm trying to remember the exact little place in Louisiana, but down the peninsula there. Any timing updates there?
Hey, Roger. This is Mike Hennigan. Yeah. We continue to progress. LOOP is the name you were looking for. It's Louisiana Offshore Oil Port. We're trying to get more information into the market that explains LOOP's capabilities. It is the only VLCC-capable port in the U.S. today. It has terrific capabilities. We've talked about the capability to load several VLCCs within a week. We anticipate more and more opportunity there going forward, and the LOOP people are trying to get the message out as to what their capabilities are.
Great. Thank you.
You're welcome.
Our next call comes from Paul Cheng of Scotia Howard Weil. Your line is open.
Hey, guys. Good morning.
Hey, Paul. Welcome back.
Thank you.
Welcome.
Two questions. One is related to the IMO, the other one related to the Philadelphia Energy Solutions shutdown and your impact. On the IMO one, Gary and Ray, wondering if you can talk about how easy or how much is your capability to run the high sulfur fuel oil as a feed directly into your coker, and what is the pricing need to be in order to make that economic? Also, if you can talk about your approach how to brand into the VLSFO. Are you intend to use primarily the VGO, or you're trying to attempt directly branding the high sulfur fuel oil?
Along on that, you probably have seen the patent from Exxon and Shell, and just curious that when your legal team, how they look at and how easy or difficult it is for the industry to be able to brand the compliance fuel without infringing those patents?
Okay.
Sure. Paul, I'm going to turn this over to Ray, but I'm glad to see you haven't changed. You were able to get six questions in your first question.
Oh, yeah. It's just three.
I'll turn it over to Ray to answer.
Okay, Paul. I'm going to start off with the patent portion of your question. We are continually monitoring the existing patents in the space. We are applying the appropriate intellectual property analysis and strategies to protect our interests in facilities where we anticipate selling low sulfur fuel oil products. Now, having said that, what I want to emphasize is that this is a small part of our IMO strategy. You really hit on it with the first part of your question where you asked about high sulfur fuel oil into our coker. For us, our IMO strategy, our base plan is resid destruction and asphalt sales. We've invested a lot of money in both of those systems. We look to take advantage of it.
As far as high sulfur fuel oil, though, we have put infrastructure in several of our refineries to not just process our own internal material at that refinery, but some of the other material from our refineries and then third-party material. To give you an example, we put receiving logistics infrastructure in at Garyville so that we can take Catlettsburg of our ROSE unit pitch down and process in the Garyville coker. Similarly, with our California refineries, we want to have the capability and will have the capability to process material from Anacortes and from Kenai Refinery. Feel real good about that our goal is not to have to sell on a steady state basis, high sulfur fuel oil components.
Now, there's been a lot of discussion about how the low sulfur fuel oil will play out, whether it'll be low sulfur vacuum gas oil blending or ULSD into the pool. A lot of opinions out there, certainly from the sulfur curb blending standpoint, we'll get more bang for our buck with ULSD because it's a much lower sulfur. Having said that, we will do what the market tells us to do. We have the capability to make a lot of ULSD. We also have the capability to pivot and pull sweet LVGO out of our cat crackers if the market says that, and supply that to the market.
Thank you. The second one, Gary, for Philadelphia Energy Solutions bankruptcy, and how that may impact how you run or plan for your Midwest operation?
Sure. Well, let me turn this over to Dave. We just had a big discussion internally yesterday about this. We have many different supply wheels, and as we look at the European arb versus the Gulf Coast arb, and how that is really changing some of the flow of the barrels. I'll turn this over to Dave Whikehart that can get into more detail.
Yeah, this is Dave Whikehart. It appears that the arb has been open from Europe, and we've seen the import volumes on gasoline come into the East Coast, and July might actually turn out to be a highest import volume number probably for the last couple of years. That seems to be the way that the market's responding, at least at this time. Interestingly, what we've seen in terms of impacts to our supply situation is, we've seen demands on the Gulf Coast actually increase. We think it's because these barrels have been directed to the East Coast, and it's really freed up some opportunities for us to use our system to export more out of the Gulf Coast.
Dave, do you have more capability or capacity in the Colonial Pipeline to do it? Does it in any shape or form impacting the planning there?
Yeah, on Colonial, just to comment there. Initially you saw the line space increase in value. I think that with the imports coming in, it's tamped that down a bit. You would think that the shorter position in the Northeast would pull up the line space value, and we would benefit from that given our position there. Just a general response, Gary, concerning us, our daily activities of trying to assess the opportunities to connect our refineries to markets. Looking for those infrastructure investments that'll enhance the return back to the refineries and put those supply options in position. That's an everyday activity for us, and this opportunity is no different.
Thank you.
Our next question comes from Neil Mehta, Goldman Sachs. Your line is open.
Thank you, everyone. Appreciate the incremental disclosure. It goes a long way and congrats on a good quarter here. The first question I had was just on Speedway. It was a really good quarter at Speedway. I guess the big picture strategic question is how is the operational integration going with the West Coast retail assets that you picked up and getting them to same EBITDA per store level as your East Coast footprint? The more tactical question around Speedway is, should we expect the strong financial performance that you saw in Q2 to carry on here in Q3 given what we've seen with crude prices?
Thanks, Neil. It's Tim. On the integration side, things are going along nicely. You've heard about the progress on the conversions, and we will probably in fourth quarter really get out on the West Coast for the conversion. The EBITDA per store per month metric, we'll certainly watch it. For a lot of the locations on the West Coast, they are a little bit different footprints than what we've had in the Midwest, so there could be some variance to what we've seen in the Midwest as we go. Will be a big focus. I think a lot of those locations were really built and designed for fuel volumes, less so for merchandise and for store footprints. We'll certainly evaluate those opportunities to expand that as we go forward. In terms of performance, quarter to quarter, obviously second quarter benefited from fuel margins.
We saw late in the second quarter a little bit of softness in crude prices, and as you know, the retail prices are a little bit sticky, and you saw a little bit of capture in that environment. It'll really be a function of what that price environment and commodity prices look like into third. Certainly from an operating and from a merchandise perspective, we'd expect performance as good or better. Obviously, the synergy capture we reported for the quarter, over $30 million, and that's going to continue to ramp. I mean, a lot of the conversions
Frankly enable that synergy capture. I think we'd expect performance to be as good or better on that front. Fuel margins, we'll see what the commodity price environment affords and what we're able to capture over the course of the quarter.
Neil, as you remember, the way we put the synergy capture together, retail is really going to lag some of the other segments just because the time it takes us to get the stores converted and remerchandised. Again, as Don illustrated, we're ahead of plan within Speedway, but we expect it to have a much stronger cadence here starting in the fourth quarter.
I appreciate it. The follow-up question is, as it relates to the Northeast part of the legacy MarkWest assets and your MPLX business, there are a lot of questions that we're getting about the health of your customers out there and the challenges around NGL prices. Can you help again frame the commodity risk that we're thinking about as we think about this midstream business and how we should get comfortable around some of those risks that might exist out there?
Hey, Neil, this is Mike. Yeah, first off, we're keenly aware of all the rhetoric around the Northeast Appalachia situation. What I think you're seeing from the producers, however, is a response that is positive in moving towards staying within cash flows to make sure that they have a strong financial position. A couple of our largest customers have come out and released their earnings, and they're showing that they are directionally moving towards that mode. What that means for us, however, is a little slower volume up there, but that kind of fits what we're trying to accomplish. One of our goals is to diversify our asset base. We very much like our Northeast position, but we're trying to diversify a little bit more into the Permian and some other assets on the L&S side of the business, the long-haul pipelines that we've talked about previously.
To the extent that the Northeast producers live within cash flow, slow down capital a little bit, which is a little slower growth that's been there in the past, that kind of fits what we're trying to accomplish so that we can redeploy capital in another area and still enjoy strong free cash flow generation out of the Northeast. We've been putting a lot of capital to work up in that area, and the fact that if it slows a little bit will put us in a free cash flow generation position. Harvesting cash out of the Northeast and deploying it in other areas is fitting the strategy that we want to accomplish.
Thanks, everyone.
You're welcome.
Our next question comes from Phil Gresh, JP Morgan. Your line is open.
Yes. Hi, good morning. First question, just kind of following up on some of this discussion around the streamlining asset sale opportunities, the opportunities to trim capital spending. How do you think about, Gary, the right long-term level of financial leverage on the balance sheet? Obviously, you have a lot of your debt is at the MLP level. Going back to the Analyst Day, thinking about the $2.5 billion of buybacks that you have committed to and clearly executed on year to date, do you think that there should be some balance sheet priority at all for any potential future cap allocation? Thanks.
Sure. I'm going to ask Don to cover that. One of the things, Phil, as Don mentioned in his comments today, we think the appropriate way to look at the balance sheet leverage for both MPC and MPLX is to bring the distributions, take account of those distributions back into MPC. Don remarked on that in his comments, and let me ask Don to go into more detail here on the leverage.
Phil, I think both on the MLP side and at the corporate level, we're going to defend our investment-grade credit profile. When we think about defending our investment-grade credit profile, what we really look at is the risk around the cash flows and the volatility of those cash flows and the consistency that you have. As we think about that informs our decision about how much leverage we want to have, as we think about the midstream to date, sort of that four times debt to EBITDA leverage has been one that we think is appropriate and continues to support an investment-grade credit profile. If we take a view that the risk changes in the future, I think that will inform our view about how much leverage we want at the MLP.
The same thing as we think about what's going on at a corporate level, I think it's appropriate to really look at MPC and think about sort of the $9 billion of debt it's responsible for, that it's not responsible for the debt of the MLPs. When I think about that $9 billion of debt and our cash flow generation capability, if you take the distributions that we get from the MLP back, it's sort of a 1.1 times kind of leverage metric. We feel very comfortable with that, especially given the really strong performance of Speedway. More than $600 million of EBITDA in the quarter. The cash flow profile, the risk that we think is attendant to that part of the business is what's going to really influence where our leverage goes and how we manage it.
Phil.
Okay. Yeah.
A couple more comments. I stated in my remarks earlier that as we look at optimizing assets, Mike Hennigan has talked about several key projects to high grade his portfolio. We have the opportunity to use some of the proceeds to invest in those higher return projects. We certainly can reduce some debt, if that makes sense, in either side of the business. We have many options and many triggers that we can pull as we look at our capital plan going forward.
Okay. I appreciate that. My follow-up question, Gary, I think a lot of the questions around the macro environment have been demand related. There has been some cautious commentary from one of your European peers talking more supply related, more refineries coming back from turnaround in the second half, perhaps some capacity additions. The offset here, obviously, we had the situation with PES. Just curious how you think about the supply side of the dynamics, and then if I could just quickly layer in the capture rate that you had in the second quarter, I guess this is for Don, the 82% number and the normalized 90% that you've talked about with the lower level of turnarounds for yourself in the second half. Is there any reason to think you shouldn't be able to get back to that normalized run rate? Thank you.
Right. Just an outlook on the market. The West Coast markets today and so far here, well, I really should talk about the latter part of July, are recovering, is probably the proper word. I stated earlier there were some imports on the West Coast that put some pressure on margins. That seems to be cleaning up, and margins are improving on the West Coast. In the MidCon, the same thing. There were a lot of barrels that moved into the MidCon due to some turnarounds. The MidCon margins have improved here recently. The area that has been really lagging this year has been the Gulf Coast and across the entire industry. We're in that period of time that you're going to probably see some dislocations as storms blow through, as you have tropical depression, so on and so forth.
I think third quarter, generally, gets stronger in the Gulf Coast. As Dave just mentioned with the PES closure, how some of the supply wheel is changing is going to take some more barrels from the Gulf Coast up Colonial into the Northeast, as well as some more export volume that's going to go out. I would say all in all, from a macro standpoint, I see margins being slightly positive to where they were in July. Don's going to cover
Capture?
Yeah, your next question.
Yeah, Phil, with respect to capture rate, you're right to point out that in the second quarter, there was turnaround, and that obviously impacted that. The other thing that, just to remind you, is that the correlation between gas prices, gasoline prices, and some of the other products that we sell, so the propanes and the specialties and everything else, that also impacts capture rate. Assuming we get back to sort of a normal correlation between those, then we would expect that our capture rate will be very consistent with our historical rates. If gasoline cracks run up, that's good for our business. If the other commodities don't keep pace with that, I'm not bothered by that because the gasoline cracks have been running up. Capture is important, but we're looking to try to maximize the value from all of the products that we sell.
To the extent that we see something that impacts that, we will try to highlight it to you and communicate it to you in advance.
Okay, thanks.
Great. Well, we've passed a little bit past the operator hour mark. Operator? All right. Well, thank you for your interest in Marathon Petroleum Corporation. Should you have any additional questions or would you like clarification on topics discussed this morning, we will be able to take your calls. Thank you for joining us today.
Thank you. That concludes today's conference. Thank you for participating. You may now disconnect.