Marathon Petroleum (MPC) Q2 2020 Earnings Call Transcript

Marathon Petroleum (MPC 0.95%)
Q2 2020 Earnings Call
Aug 03, 2020, 9:30 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Welcome to the MPC second-quarter 2020 earnings call. My name is Sheila, and I will be your operator for today's call. [Operator instructions] Please that this conference is being recorded. I will now turn the call over to Kristina Kazarian.

Kristina, you may begin.

Kristina Kazarian -- Vice President, Investor Relations

Welcome to Marathon Petroleum Corporation's second-quarter 2020 earnings conference call. The slides that accompany this call can be found on our website at marathonpetroleum.com under the Investors tab. Joining me on the call today are Mike Hennigan, CEO; Don Templin, CFO; and other members of the executive team. We invite you to read the safe harbor statements on Slide 2.

We will be making forward-looking statements today. Actual results may differ. Factors that could cause actual results to differ are included there as well as in our SEC filings. With that, I'll turn the call over to Mike.

Mike Hennigan -- Chief Executive Officer

Thanks, Kristina. Good morning, everyone. Thank you for joining our call today. Yesterday, we announced an agreement to sell Speedway to 7-Eleven for $21 billion in cash, demonstrating our commitment to execute on the strategic priorities we outlined earlier this year.

The sale of this business provides certainty around value realization for MPC shareholders. As I've stated before, I believe this is a return of capital business. And the substantial estimated after-tax proceeds of approximately $16.5 billion enables us to both strengthen our balance sheet and return of capital to our shareholders. At the same time, the sale also creates a long-term relationship with 7-Eleven that enhances commercial performance potential through attractive fuel supply agreements and future growth opportunities.

The transaction, which is subject to customary closing conditions, including HSR clearance, is anticipated to close in the first quarter of 2021. If you move on to Slide 4, as a follow-up to our first-quarter earnings call, we are making very difficult decisions to increase profitability, create stronger through-cycle earnings, and drive long-term value creation. Despite the very challenging conditions in today's market, we remain committed to those goals, and we'll continue each quarter to update the market as we progress. We outlined three areas that will be priorities toward achieving our objectives.

First, strengthening the competitive position of our portfolio. We need to be a leader in cost, operating, and financial performance metrics and need to make necessary changes to the portfolio to achieve these objectives. One of our key philosophies is that each asset needs to generate cash back to business. We announced the decision to indefinitely idle our Gallup and Martinez refineries.

Closures as a result of the tough refining business climate ahead of us have been amplified by the impact of the pandemic. At Martinez, we are evaluating repurposing the refinery toward the production of renewable diesel. The facility has the ability to provide up to 48,000 barrels per day of renewable diesel. We have the unique opportunity to take advantage of the strong set of logistics assets for the area and also have three significant processing units that are an ideal fit for making renewable diesel.

These advantages should drive significantly lower capital requirements compared to greenfield investments, and if pursued, enable initial production as early as 2022 with the option to ramp up from there. Second, improve our commercial performance. That entails leveraging our extensive integrated footprint to make improvements in how we select and source raw materials and how we place our products into the various sales channels and geographic markets. Our intent is to keep an eye on what we don't control in terms of the market but really focus on what we can control against any macro environment.

This quarter, I've been encouraged by the team's quick progress shifting our mindset and actions. And third, focus on lowering costs in all aspects of our business and to be disciplined in every dollar spent, addressing risk and return of the business without losing focus on safety and reliability. We're confident we will meet the $950 million expense reduction target for 2020. And in addition, we're on track to lower capital spending by $1.4 billion in 2020 as we previously announced.

We are also implementing plans to structurally lower costs as we look out to 2021 and beyond. Overall as I stated previously, we recognize that we're in a return of capital business, and we need to have an asset base and cost structure that works across all cycles. We're focused on becoming a lower cost, disciplined company that can endure the volatility inherent in this sector, creating value for shareholders that is structural and long term in nature. On Slide 5, I would like to share some of the progress on the tactical initiatives we outlined last quarter, focusing on improvements through our liquidity and actions we have taken to carry our company through the current down cycle.

In late April, we issued $2.5 billion of senior notes and used the proceeds to pay off a portion of the borrowings that were made on our revolver in March and early April. Also, in late April, we enhanced our liquidity position with the addition of a $1 billion 364-day revolver. We have even more borrowing capacity available to us now than we did at the start of the COVID-19 pandemic with over $7.5 billion of financial flexibility available for MPC. At this point, I'd like to turn it over to Don to review the second-quarter results in more detail.

Don Templin -- Chief Financial Officer

Thanks, Mike. Slide 6 provides a summary of our second-quarter financial results. This morning, we reported an adjusted loss per share of $1.33. This adjustment reflects a $1.5 billion pre-tax lower of cost or market inventory benefit.

Adjusted EBITDA was $653 million for the quarter. Cash from operations before working capital changes was a cash source of $172 million. Our dividend payments for the quarter were $378 million. Slide 7 shows the sequential change in adjusted EBITDA from first-quarter 2020 to second-quarter 2020.

Adjusted EBITDA was down approximately $1.2 billion quarter over quarter driven primarily by lower earnings in refining and marketing. Lower throughputs and crack spreads in the second quarter due to the substantial demand destruction from the COVID-19 pandemic significantly impacted R&M earnings. Second-quarter results also included net adjustments of approximately $1.4 billion primarily related to a lower of cost or market inventory benefit, bringing net income for the quarter to $9 million. Moving to our segment results.

Slide 8 shows the change in our midstream EBITDA versus the first quarter of 2020. midstream EBITDA remained relatively stable quarter over quarter despite challenging market conditions. EBITDA decreased $51 million versus the first quarter primarily driven by impacts from the COVID pandemic. These results highlight the ability of the midstream segment's fee-based earnings and our recently implemented cost control measures.

Slide 9 provides an overview of our Retail segment. Second-quarter EBITDA was $626 million. Due to demand destruction associated with COVID-19, fuel volumes were down approximately 25% from first quarter and approximately 37% year over year. Retail margins of nearly $0.40 per gallon helped support relatively stable quarter-over-quarter segment earnings despite the decline in fuel volumes.

We saw merchandise sales improve from first quarter supported by seasonality. Same-store merchandise sales only decreased 4% year over year despite stay-at-home mandates and the significant fuel demand pressures of the quarter. Within merchandise, declines we experienced across food and soft drinks in the quarter due to lower in-store traffic were largely offset by increased demand for alcohol and cigarettes. Same-store sales, including cigarettes, were essentially flat to last year.

Slide 10 provides an overview of our refining and marketing segment. Performance in this segment reflected three full months of demand destruction associated with the COVID-19 pandemic. Second-quarter adjusted EBITDA was negative $1 billion, a decrease of approximately $1.2 billion versus the first quarter. Margins in all regions were under considerable pressure compared to first-quarter 2020.

Refining and marketing margin was down over $4 per barrel in first quarter and utilization was down 20%. Despite these challenging conditions, the team did an excellent job managing costs through the quarter. Slide 11 presents the elements of change in our consolidated cash position for the second quarter. Cash at the end of the quarter was approximately $1.1 billion.

Operating cash flow before changes in working capital was $172 million in the quarter. Changes in working capital was a $366 million source of cash in the quarter. We saw crude prices increase in May and June, partially reversing some of the previous working capital cash use impacts. Slide 12 highlights the progress we are making to lower our cost structure.

We provided guidance for refining operating costs in May for the second quarter, which included assumptions around targeted cost reductions and throughput of about 2.1 million barrels per day. The guidance of $6.90 per barrel was based on forecast operating expenses of about $1.3 billion, approximately $300 million lower than the first-quarter results. Second-quarter results show that operating expenses came in $64 million better than the already lowered guidance, demonstrating the disciplined approach we are taking with every dollar spent. On Slide 13, we highlight our liquidity position at the end of the second quarter.

Our credit facility availability increased to approximately $7.7 billion at the end of the quarter. As a reminder, in late April we issued $2.5 billion of senior notes. Net proceeds were used to repay a portion of the amounts outstanding on the five-year revolving credit facility. In June, we fully repaid that credit facility.

We believe we've positioned the company with ample liquidity to successfully operate in the current business environment. On Slide 14, we provide our third-quarter outlook, which includes estimated throughput at our facilities based on projected regional demand. We expect total throughput volumes of just over 2.3 million barrels per day, a slight increase from total second-quarter throughput. Planned turnaround costs are projected to be $270 million in the third quarter, which includes hydrocracker turnarounds at our Los Angeles facility, a full plant turnaround in Kenai, and catalyst changes at Galveston Bay and Garyville.

Total operating costs, including major maintenance, are projected to be $6.50 per barrel for the quarter, and distribution costs are projected to be under $1.3 billion. For the retail segment, we expect fuel volumes of approximately 2 billion to 2.2 billion gallons and merchandise sales in the range of $1.7 billion to $1.8 billion. Fuel volumes have begun to recover from second quarter lows. However, there is some demand uncertainty from actions currently being taken to address resurging COVID-19 case rates.

Consistent with the prior quarter, we expect merchandise sales to remain relatively resilient. With that, let me turn the call back over to Mike for some closing remarks.

Mike Hennigan -- Chief Executive Officer

Thanks, Don. I'd like to take a moment to provide some comments on our responsibilities around corporate leadership. We recently published our 2019 Sustainability Report, highlights of which can be found on Slide 18 in the appendix. The report is greatly expanded this year in terms of content and disclosure and outlines our commitment to provide information consistent with the many reporting frameworks that are influential in the investment community.

As such, the report summarizes our comprehensive efforts related to the environmental, social, and governance aspects of our business. On that note, I wanted to touch on recent events that have impacted many of the places where we live and work. At Marathon, we are committed to fostering a diverse and inclusive workplace and to partnering with organizations in the communities where we operate to encourage acceptance, tolerance, and unity. Like many companies, we are charting a path toward greater understanding, listening, and open dialogue.

And we are firmly committed to continuing to make progress in this very important area. With that, let me turn the call back over to Kristina.

Kristina Kazarian -- Vice President, Investor Relations

Thanks, Mike. [Operator instructions] We will now open the line to questions. Operator?

Questions & Answers:

Operator

Thank you. [Operator instructions] Our first question will come from Neil Mehta with Goldman Sachs. Your line is open.

Neil Mehta -- Goldman Sachs -- Analyst

Thank you, and congratulations, Mike, Don, Kristina, team, on the transaction. The first topic is around cash flow. Can you talk about the pieces that go into the tax number that bridge between $21 billion and $16.5 billion? And with the cash, what's the framework around allocating cash, recognizing we'll get more color around this later and thoughts on debt reduction versus buybacks versus special dividends, and then I do have a follow-up.

Mike Hennigan -- Chief Executive Officer

Hey, Neil. Thanks for the comment. First of all, before answering the question on the use of proceeds, let me just make a couple of comments on the deal itself. First of all, we looked at a lot of different structures and a lot of different options and came to the conclusion that this deal creates the most value and the most certainty for our shareholders.

And I just want people to recognize, Speedway is a leader in the company-owned, company-operated business. And 7-Eleven, which currently has a larger franchisee model and a smaller company-owned footprint, will now be able to look to the Speedway employees and benefit from Speedway's expertise in the company-owned model. And the combined entity will be that much stronger going forward, so I think that's important to recognize as part of this deal. OK.

On use of proceeds and capital, I'll make a few comments, and then I'll let Don also touch on the topic. First of all, I've stated previously many times and in prepared remarks that I believe this is a return of capital business. And I've made a statement that we have three key initiatives going on: optimizing the portfolio and evaluating assets for free cash flow generation, improving our commercial performance, and reducing costs. And I think all of these are aimed at returning more capital to shareholders, and this transaction is no different.

We expect two primary uses of proceeds. One is to defend our investment-grade profile, and Don is going to talk about that a little more, and then returning capital to our shareholders. And with respect to return of capital, we know this is an important component of the value realization and we are committed to it. The issue we have right now though, if there wasn't a global pandemic and a global recession in progress, and we had a much clearer picture of refining supply and demand going forward, it'd be much easier to give a little bit more detail.

But between now and the closing date, we're going to continue to evaluate the most efficient and effective means to accomplish it. And we'll provide more specifics at the time of the transaction closing. But let me let Don give a little bit more comments related to this positioning.

Don Templin -- Chief Financial Officer

Yes. Neil, I guess you asked a couple of questions. Maybe let me first talk a little bit because I think it's important, around our consideration of use of proceeds. Let me talk a little bit about how we think about defending our investment-grade credit profile.

So maybe backtrack just a month or two when we had our first-quarter earnings call, liquidity was probably top of mind, and I think we took some very proactive actions to make sure that we had addressed that issue. And as I mentioned on our comments, now we have $7.7 billion or so of available liquidity. So we feel like we're well-positioned, well-situated going forward. As we think about -- as we look ahead, I guess that we believe that an important part of our capital structure is an appropriate level of debt.

We don't think it's efficient in this environment to be underlevered, but we also want to make sure that we're defending our investment-grade credit profile. And as I think about defending our investment-grade credit profile, no one metric or factor drives that consideration. We'll look to a number of inputs that include obviously the lost EBITDA from the Speedway sale, but we'll also consider the steady cash flows we have from our ownership interest in MPLX; our views around mid-cycle and through-cycle EBITDA; the size of our committed credit facilities, which are very significant, and the cash we currently have on our balance sheet, which is $1 billion; our dividend policy going forward; and various metrics such as debt to EBITDA and debt to capital. But I think that all of those things will be a part of the consideration.

And as Mike mentioned, the unprecedented macro-environment makes it difficult right now to be more specific. You did ask a question about tax. And so on that particular topic, our tax basis and the assets that we're selling was just under $4 billion. And so the after-tax proceeds that we're showing in the release, the $16.5 billion, is really predicated on that tax basis.

Neil Mehta -- Goldman Sachs -- Analyst

That's very clear. The follow-up is a bigger-picture question, which is, in many ways, you are losing your most valuable business and you're monetizing it at a great multiple. But can you talk, Mike, about how you think about value creation for here? And what you're left with is MPLX and refining business. How do you drive value out of those two business segments and set up the company over the long term without the stable, ratable cash flow of Speedway?

Mike Hennigan -- Chief Executive Officer

Yes, Neil. It's a good question. Let me make one comment on the Speedway deal relative to that, is we still believe we're going to get the benefit of integration. That's not lost because of the supply agreement that we have and the fact that we'll continue to be using our logistics assets.

But to your broader question, we still have a lot of work to do in the three areas that I keep mentioning. So strengthening the portfolio is going to continue to be a theme that you'll hear from us over time as we continue to look at our assets. We're just getting into the midst of improving our commercial performance. So you'll hear more about that over time as well, as well as the cost structure.

We've given some early indications for 2020 to lower our cost structure by about $950 million, but we have more work to do in that area. So you have a really good question. Where do we go from here? And I just ask you to keep thinking about those three priorities. We're going to continue to report on those.

We're certainly not done from this standpoint. We've looked at obviously a couple of assets in that regard. And obviously, getting the Speedway deal done was a high priority for us. And I think it does put us in a unique position to return capital to shareholders, as Don mentioned, to get the balance sheet in the right order.

So I think we're in a good position relative to the environment that we're in. And we expect that to stay challenged for some time, although we're optimistic that just like all these cycles, we'll get out of it at some point. And we're seeing a slow recovery, which is headed in the right direction, but we're just anticipating that it could take a while to get back to normal.

Neil Mehta -- Goldman Sachs -- Analyst

Thanks, Mike. Appreciate the team.

Mike Hennigan -- Chief Executive Officer

You -- you're welcome Neil. Thanks for the question.

Operator

Thank you. Next, we will hear from Doug Leggate with Bank of America. You may go ahead.

Doug Leggate -- Bank of America Merrill Lynch -- Analyst

Thanks. Good morning, everybody. Let me add my congrats to that great multiple on Speedway. So I have two questions, if I may.

The first one is actually about Martinez and Gallup. I wonder if you could just walk us through the process that got you to the conclusion that you came to. Was there an option, for example, for a sale? Is there an inventory liquidation event that comes out of this? And maybe if you could frame for us what other assets in the portfolio today don't meet that criteria of generating positive cash flow.

Mike Hennigan -- Chief Executive Officer

Yes, Doug. also a very good question. I'll start with Gallup. And like I said in my prepared remarks, these are very difficult decisions for us to contemplate during some really tough times.

I mean COVID has had an impact on many people in many different ways, but it's obviously had a real strong impact on our business and the business and climate that we're seeing going forward, especially with refining supply and demand. And obviously, that's more weighted toward the demand side. But anyway, to answer the question, we had a unique niche in the marketplace there that's essentially been competed away over time. So it's much more difficult for a small refinery to be successful.

But to answer your direct question, we did look to sell the asset. We ran a process, but unfortunately, we did not get something that we could execute on. So absent the process being successful, we thought the next step was to put it in an indefinite idling position but still keep the logistics assets active so that we have some other opportunities from that standpoint and then we'll see how things play itself out. On Martinez, we did not look at a sale, to your question there.

We're pretty excited about the opportunity of reconfiguring the asset into renewable diesel. We've got some more work to do there. And I know we have a lot more detail, but I do want to give you at least the direct answer to your question as to whether we looked at sales. We did at Gallup.

We ran a process, that wasn't successful. We did not at Martinez. So hopefully, that answers that question.

Doug Leggate -- Bank of America Merrill Lynch -- Analyst

It does, and I appreciate the candor. Maybe -- I don't know if you want to take the next one, my follow-up as well, Mike, or if you want to throw it to Don. But I'd like to preface the question, but I'm just taking a look at MPLX' stock price or unit price since you did the IPO, I guess, about seven or eight years ago, and it's still trading below that level. I realize the MPLX process is done and dusted, so to speak.

But when you look at the outstanding equity, the amount of cash you just brought in, why would it not make sense to buy in the balance of MPLX given that the incremental cost base still seems to weight on your refining valuation? And I'll leave it there.

Mike Hennigan -- Chief Executive Officer

Yes, Doug. It's another good question. And as you referred to our Midstream study, whether it's bringing it all in or actually looking at the RLFD, Refining Logistics and Fuels Distribution, we went through a pretty exhaustive study, as you're aware and you referenced. And the bottom line is we came to the conclusion that we didn't want to buy in a cash stream that we were already getting with respect to the RLFD.

Marathon has a unique position where we're receiving about $1.8 billion in distributions from MPLX and RLFD is about $1.4 billion of EBITDA. So again, I'm saying we came to that conclusion of why would we buy in that cash stream when we're getting it essentially via distribution and instead use that capital, which would be north of $10 billion in return to MPC shareholders. So that's where we came out on the subset of it. As far as all in, at the end of the day, there is some amount of cash flow that goes to partners on the one side of the fence.

On the other side of the fence, we'd be paying tax to a certain extent, depending on where we think the tax rates will be going forward. So at this point, we do recognize and we are frustrated at the level of equity value that MPLX has. At the same time, we felt and continue to feel that the amount of capital that would be needed to do that at this time makes more sense to return to shareholders as opposed to not. And obviously, we've concentrated a lot on the Speedway unlock of value, and that's kind of where our head is for right now.

And as I mentioned and Don commented as well is we're going to be doing a lot of analysis between now and the close to look at what's the best use of proceeds, but the highlight priorities are the balance sheet and returning capital to shareholders.

Doug Leggate -- Bank of America Merrill Lynch -- Analyst

All right. Again, I appreciate the answer, guys. Thanks.

Mike Hennigan -- Chief Executive Officer

You're welcome, Doug.

Operator

Thank you. Our next question comes from Roger Read with Wells Fargo. Your line is open.

Roger Read -- Wells Fargo Securities -- Analyst

Hey. Thank you. Good morning.

Mike Hennigan -- Chief Executive Officer

Good morning, Roger.I guess maybe to follow up on kind of the whole restructuring in Slide 4 where you've got the three kind of, I guess, guideposts, I'll call it. Where should we think about where you are in the overall sort of evaluating the company, potentially restructuring the company? And this is going to get back to some of the questions already been asked. Do you buy an MPLX? Do you want to buy in a bunch of shares, change the dividend, etc.? But I'm just curious because you couldn't have known for certain about getting a sale of retail done until obviously you signed the papers. Even the cash is still a few months away.

But now that you have certainty of that, how does that maybe affect the way and where are you maybe in terms of progress in doing the evaluation throughout the company on both sort of a current COVID basis and then on a maybe, call it more of a mid-cycle kind of '21, '22 outlook standpoint?

Yes, Roger. So like you said, on the three initiatives, we still have a lot of work to do on the portfolio. To your point, we could not be assured that we would get this deal done. We were very optimistic because we believe Speedway is a really attractive asset out there.

We did get significant interest, and I think we concluded the deal that's in the best interest of ourselves, Speedway and 7-Eleven. As far as the portfolio, though, we still have a lot more work to do, both on the refining side and the logistics side and the G&P side. I mean, there's a lot of activity going on. And the best I can give you is over time, we'll continue to disclose how we're feeling about certain things.

We don't want to get ahead of ourselves in the market, but we want to get to a portfolio. Our goal is to get to a portfolio that generates significant free cash in any environment. And for me personally, I'm going to protect the downside. So knowing that we're going to have the down cycles, we want to make sure the portfolio is very resilient during those times.

As far as the other areas, like I said, we're just starting to make some moves in the commercial area. And that's the one area that I'm probably going to be the least disclosing about just because of the competitive nature. And then the cost structure, I think just keep an eye up for each quarter as we continue to progress. My personal style is not to put out a big number and then try and track against it.

It's more of a try to have continuous improvement and continuing to lower our costs in a lot of different ways and change our philosophy on cost and change our philosophy on capital discipline. So each of those, I think, Roger, each quarter, we'll be able to talk a little bit about how we've made progress in each of those areas. And then hopefully, you'll get to see over time how we're looking to maneuver the company. I hope that makes sense to you.

Roger Read -- Wells Fargo Securities -- Analyst

It does. You're going to make us wait. That's always the hardest thing for us. As a follow-up and I know, Don, you've already tried to address the tax issue, but we've been getting a lot of questions in on it.

And I was just curious, the other refiners for the most part have discontinued ETR guidance because the current environment and the CARES Act had some real impact. So I was just curious, as we think about the $21 billion to $16.5 billion net, are there other things that may flow through here in coming quarters, whether it's going back and capturing prior profit tax payments or something else that might allow you to whittle down the tax impact on the sale?

Don Templin -- Chief Financial Officer

Yes, Roger. In connection with sort of the effective tax rate, I mean, 2020 was an unusual or is going to be an unusual year because as you look at least our book income, we had significant charges related to goodwill, and it has limited deductibility. So our first quarter and then year-to-date effective rate was in the sort of middle teens as a percentage really driven by that. What we spend all of our time doing is really looking hard at our cash tax position.

And as we disclosed in the first quarter and as we will disclose again in our second-quarter 10-Q, we believe that as a result of the CARES Act, we're anticipating that we will have net operating losses in 2020 given the environment and also given the significant capital expenditures that we've made in the past, where we get to take the depreciation deduction when assets are placed in service. So we expect that there will be a significant NOL. And the CARES Act provides that you can carry that back up to five years, and we would expect to carry back NOLs in the years given that five years that have a 35% tax rate. So we think that's a good thing for MPC.

Our plan would be that we would work on getting our 2020 tax return filed as quickly as we could in 2021 to be able to effect that NOL carryback and the refund that would be associated with that. With respect to the sale of Speedway, obviously, we will continue to evaluate that and we will look for ways to best optimize the tax position. But we thought that it was appropriate for purposes of this announcement to give you the sales price minus the basis times what we believe was a normal tax rate at a relatively statutory rate.

Roger Read -- Wells Fargo Securities -- Analyst

OK. Just one minor follow-up on that in terms of when you file the 2020 return in '21, timing on a refund? That's just my last data point.

Don Templin -- Chief Financial Officer

We believe that that happens relatively quickly, but who knows what the world looks like in 2021, if people are still working from home or still in their offices, Roger. But we believe that that's a relatively rapid transaction -- not -- a rapid result, if you will. So we're going to push really, really hard to get our return filed as quickly as we can. And then we would expect that the refund would manifest itself relatively quickly after that.

Roger Read -- Wells Fargo Securities -- Analyst

Thank you.

Operator

Thank you. Our next question comes from Paul Cheng with Scotiabank. Your line is open.

Paul Cheng -- Scotiabank -- Analyst

Thank you. Good morning, guys.

Mike Hennigan -- Chief Executive Officer

Good morning, Paul.

Paul Cheng -- Scotiabank -- Analyst

I have two questions if I could. I think earlier that you said that it doesn't make sense for you to buy in for the remaining of MPLX. So if the company considered that with far more flexibility with the cash infusion, what is that you may be open to? Do you want to spin off totally the MPLX, whether that is a consideration or do you still conclude after the exhaustive evaluation that you're just going to keep the structure as it is? The second question is related to the Golden Eagle weather, not shutting it. Can you still run the renewable or that is one, the renewable, you need to shut here? And in terms of the renewable, how big is the business that you want that in the long haul for your business? Taking into consideration on one hand, current margin and return are very good; but on the other hand, the barrier of entry is low, and the margin and the demand on essential government mandate.

So how do you view that business long haul? Thank you.

Mike Hennigan -- Chief Executive Officer

OK, Paul. So on the first one, we don't have any other comments other than as I mentioned. We're going to do a lot of analysis. We have some time to look at what's the best thing to do with the proceeds.

But I do want to leave everybody with the priorities that we have are the balance sheet and returning capital. So one of the obvious things that we stated from the beginning with Speedway was we did want to unlock that value realization, and returning capital is a high priority. So I don't want to comment on anything other than those at this point. On your questions on Martinez and renewable, I'm going to turn to Ray in a second, but let me just give a couple of opening comments.

So first off, I think Martinez is in a unique set of circumstances relative to the hardware that exists at the facility, and I'll let Ray talk about that. We are a believer that the renewable positioning is going to be beneficial to us because it aligns with California's low carbon fuel standards. We've also stated MPC has greenhouse gas reduction targets that we want to accomplish throughout the decade. So strategically, this fits with where our thinking is.

And I would just give you a little bit of framework. As we think about capital investment there, and this was the harder decision, the expected capital that we're going to put in for the first phase, assuming we go with this, is about the same amount of capital that we would put into a planned turnaround for the facility. So we really hit a decision point and decided to pivot and look at renewable diesel production as opposed to refined product production. So that's kind of the decision tree if you want to call it that.

There's a lot of details that go into the analysis. So I'm going to let Ray give you a little bit more detail so you understand some of the specifics around Martinez -- its own specifics about the facility.

Ray Brooks -- Executive Vice President, Refining

Thanks, Mike. Paul, just want to give you a framework a little bit that we've actually been looking at Martinez for a long time, essentially ever since we merged with Endeavor. And early on, we evaluated what you suggested, coprocessing for renewable diesel, but those economics weren't nearly as strong as the conversion that we're looking at right now. The key item, and Mike just hit on this, is with the refinery continuing in its current form, is that it has an extremely high-cost structure, and then we have the near-term headwinds with a heavy turnaround spend in the coming year.

So we believe that transitioning Martinez to a renewable diesel plant ultimately creates value for our shareholders, and there are certain unique advantages for this site. Martinez renewable diesel facility can provide up to 48,000 barrels per day of capacity. And we expect the initial production could be online in 2022 and ramping up from there. We are continuing to evaluate in more detail, but the initial analysis looks extremely promising.

Martinez's current complexity presents a capital-efficient project for us given that there are three high-pressure hydroprocessing units. Retrofitting these units will allow for renewable diesel production equal to about one-third of the current refinery's nameplate crude capacity. There are also the existing hydrogen plants, power generation, and extensive inbound and outbound logistics that are all needed to produce renewable diesel. So our intention is to pivot to the production of higher-value, low-carbon intensity diesel for California.

Martinez produces about 54,000 barrels per day of ULSD at full utilization, and the conversion would produce up to 48,000 barrels per day of renewable diesel. I want to emphasize that this is not a grassroots facility, so there is an element of speed of conversion. We believe that we have an early mover advantage, and we believe that there are opportunities for meaningful partnerships with feedstock suppliers. Now we fully understand that the drivers for the economics of this project are not a typical refinery project that there are regulatory drivers.

But at the end of the day, with the unique advantages for Martinez that I talked about earlier, we're just really excited to take this evaluation further.

Paul Cheng -- Scotiabank -- Analyst

Ray and Mike, can you give us some idea that for the company as a whole long term, how big is renewable diesel business that you want to be over your RIN to get your ceiling or do you think that, no, there's no RIN and no ceiling, it depends on the opportunity set? And also, after the Speedway sale, who is going to keep RIN? That's it for me.

Mike Hennigan -- Chief Executive Officer

Yes, Paul. It's Mike. So I don't think we have a targeted number at this point, but I do want to say that we're going to continue to look at the portfolio and make decisions as we go along. Martinez, our priority, as Ray said, is going to be evaluating the different phases here.

The other thing I would like to add, for those who have known me in the past, I believe joint venture arrangements can be very successful as well when you get into these types of deals. So managing the capital and achieving a better overall outcome for all parties is something else that we're looking at very hard here. So we're evaluating that approach in general. I think at the end of the day, we think there's some real uniqueness here that should be beneficial.

Ray gave a lot of the technical stuff. I'd say on the commercial side, we're going to talk a little bit about JV opportunities in the future. Managing the capital is one of our main criteria as we want to have strict discipline. So that's another important piece of this.

So I just wanted to make that comment. But I'm also going to let Brian make a comment as well.

Brian Partee -- Senior Vice President, Marketing

Yes. Paul, to your question, the last question that you snuck in there regarding the RIN as it relates to the Speedway separation, just wanted to address that real quick. So I think the first thing to understand and appreciate that we've always had a market-based philosophy and approach to pricing with Speedway. So as a result of the separation, fortunately, due to that historical philosophy, there's really no step change or movement in value shift.

But fundamentally, MPC will be the blender of record in all transactions. So we will possess the RIN and retain the RIN. As it relates to the value of that RIN, that's always driven by market specifics, which is individual market by market and the agreement fully contemplates that. When you talk about a long-term agreement like this, we have to make sure that it's resilient over time, and the agreement fully contemplates this for RINs or anything else frankly in the future.

So I mean that's the way it's going to be handled, an agreement. So I mean I just wanted to make the point and underline and underscore that there is no value shift whatsoever as a result of the transaction on RINs.

Paul Cheng -- Scotiabank -- Analyst

Thank you.

Operator

Thank you. Next, we will hear from Manav Gupta with Credit Suisse. You may proceed.

Manav Gupta -- Credit Suisse -- Analyst

Hey, guys. My question is on the crude sourcing side. During 2Q, medium sours are very tight, but as we move into 3Q, we are seeing Russia and other OPEC countries raise both volumes. So do you expect more discounts from medium sour crudes going in 3Q, which could help your Gulf Coast results in 3Q?

Mike Hennigan -- Chief Executive Officer

Manav, it's Mike. So Rick's not here today, so I'll take a shot at that. He's out of the office today. I mean, in general, we think directionally, the crude market is going to hopefully move toward us with increased production.

As you stated, we're going to have a little bit of recovery in the production side of it, which hopefully will put some pressure on differentials. Right at the moment, as you're very aware, refining crack spreads are still very weak, and it's not been a good environment for refiners. But as I mentioned earlier, we're optimistic but cautious. As recovery continues to progress, hopefully, we'll get to see recovery in refining margins, which we haven't seen yet.

And as crude production continues to progress, to your point, then hopefully, we'll get to see a little bit more opening on those spreads. I would -- Manav, this might be a good opportunity. Let me let Tim and Brian make a comment on where we think we are in demand recovery. So I'd give you a little bit of flavor of how we're seeing the demand side.

So Tim, why don't you start with gasoline, and then Brian can finish up with the portfolio?

Tim Griffith -- President, Speedway LLC

Yes. You bet, Mike. As Don referenced, we've seen a really continuing amount of recovery in gasoline demand since the early April lows in really all regions of the country as many of the states have reopened with probably the greatest strength in the Midwest really through the second quarter. Recovery trends nationwide have slowed more recently with systemwide weighted same-store sales volumes currently down sort of 10% to 15% compared to last year with the East Coast about 5% behind the Midwest and the West Coast another 5% behind that.

So as referenced earlier, we're watching carefully the latest COVID case escalation in multiple regions and the potential for states or counties to back up on the reopening plans. Schools going back to in-person is a significant wild card on the demand side as students at home will have some consequence for the ability of parents to return to their workplaces and getting people back in the road. For what it's worth, we also think the increase in requirements for masks nationwide is a positive for demand as it facilitates increased mobility with more things able to be open, which potentially gets people back on the road to a meaningful extent. We'd much rather see people out on the roads with masks than at home without them.

With that, I'll turn it over to Brian for diesel and jet.

Brian Partee -- Senior Vice President, Marketing

Yes. Thanks, Tim. So to continue on demand, Manav, I can kind of talk about our entire book. So to Tim's point, we see the exit rate for July is down about 10% to 15% overall, so I can echo what Tim's seeing.

Just a couple of regional notes. The one, I guess, downside note on the regionality is in Southwest. So with the resurgence in cases of COVID in the Southwest, we have seen a weakening here over the last several weeks in that particular region. On the bright side, the Midwest and Atlantic Coast both recovered.

And they're down roughly 7% year on year across in total book, which is a really good sign for the Atlantic Coast as everybody knows that we're pretty hard hit up in the New York, New Jersey marketplace. On the diesel side, we hit our low point, just as a reminder, in the early to mid-April. We were off about 22% year on year. We exited July off about 10%.

And to Tim's point on demand profile, we have seen since the 4th of July kind of a sideways motion as it relates to demand. But it's been pretty stable over that period of time, but somewhat in a plateaued manner. The downside regionally, the Great Plains is off 15% to 20%. A lot of that attests with the heavy demands up in the Bakken area that have curtailed as a result of drilling activity up in that market.

And then the upside regionally, Midwest is about 5% off, and we're actually up in the Southeast year on year on the distillate side. Closing out on jet fuel, the second quarter, we are off roughly 34% year on year, a pretty big outperformance relative to the market. A lot of that has to do with our sales mix. We're heavily levered to cargo sales, which saw really strong resurgence really since the COVID outbreak and even before that with online retailing really driving a lot of the demand in the Midwest and also up in the Alaska market.

July, we're actually down year on year in the low teens, so really strong performance by our aviation team. That's really starting to see the fruits of the combination commercially with the Andeavour portfolio and MPC coast to coast. A lot of the jet buyers, they're levered across not only the U.S. but just globally, so really been able to create richer relationships there to drive incremental capture of market share overall.

Really, the outlook on August is pretty flat to July. We expect to be some downside of that based on the resurgence in both cases, stay-at-home orders as well as quarantine. And really, the thing we're watching right now as we look at into September is what is demand going to look like in September given that a lot of schools are not returning to normal, people are working from home. So there is definitely a pent-up demand of folks wanting to move around.

So it's a bit of a wild card of what demand is going to look like in September. You can make as good of an upside case as a downside case, so we're watching it closely. And then to circle back to crude, I know you asked about the Gulf Coast. But hopefully, Canadian differentials will start to widen a little bit as more production comes online into that market.

And then on the West Coast, we're starting to see some foreign economic alternatives like Russian grades, Brazilian grades, etc., etc. So it's been pretty tough letting for refiners, and I'm hoping we get a little bit of margin improvement with some of the adjustments of crude production coming on.

Manav Gupta -- Credit Suisse -- Analyst

This is very helpful, sir. I had a very quick follow-up on DAPL. I think you're moving about 50,000 on DAPL to your Midwest and Mid-Con refineries. But I think there are three offsets in Anacortes, St.

Paul Park and Mandan. Can you split up your Bakken usage between DAPL and non-DAPL? I'm just trying to understand, in case DAPL does go down, are there enough offsets to that 50,000 barrels, so you actually may not see an earnings headwind on the refining side?

Mike Hennigan -- Chief Executive Officer

Yes, Manav. That's accurate. So we have a bunch of other alternatives other than DAPL as far as supply. So if DAPL were to not run, we think we have enough alternatives on the supply side, so I think you're right on with your statement.

One comment I would say though on the logistics side with respect to DAPL, as well as another pipeline up in that area, the High Plains Pipeline, I mean MPLX is a 9% owner in DAPL. And then the High Plains Pipeline, if that were to shut down as well as a result of the recent discussions about the BIA looking to have it shut down, I'll give you a couple of comments that I think would be helpful to clear in the market. Number one is we believe on the BIA that an appeal has been filed at this point, which triggers an automatic stay of the shutdown. So we don't think there's anything in the short term because there is an automatic stay.

And then we'll continue to try and advance that discussion to a good conclusion for all parties. On DAPL, obviously, Energy Transfer has taken the lead in that discussion from the legal standpoint, etc. But both of those together, if they were both to shut down on the logistics side, we think the impact to us would be less than $100 million if both entities were to be down. We don't think that's a likelihood case, but I just wanted to give you a little bit of the logistics side of it.

And then to your point on the MPC supply, we think we have enough alternatives that Mandan would be supplied adequately, as well as our pad two refineries.

Manav Gupta -- Credit Suisse -- Analyst

Thank you so much for taking my questions.

Mike Hennigan -- Chief Executive Officer

You're welcome.

Operator

Thank you. Our next question comes from Benny Wong with Morgan Stanley. Your line is open.

Benny Wong -- Morgan Stanley -- Analyst

All right. Good morning, everyone. Thanks for taking my question. My first one was I was wondering if you can provide some color or details around the 15-year supply agreement with 7-Eleven.

Wondering if there's a value you would assign to it. And maybe give us a sense of the opportunities of growth in terms of areas and size there.

Mike Hennigan -- Chief Executive Officer

So I'll give some comments and then I'll let Brian add, Benny. I mentioned earlier, one of the big benefits that we see in the agreement is we maintain a lot of the integration benefit that we see as part of our portfolio. So I mentioned earlier, it's approximately 8 billion gallons for 15 years, so it's a long-term relationship that we're looking forward to with 7-Eleven. And a lot of the integration benefit that we have is providing the logistics service and providing the transportation and trucking services, so we're going to continue to provide those services for 7-Eleven.

So there'll be a benefit to us as far as using our logistics assets, using our trucking services, trying to give them the utmost in terrific service. So I think it's a win-win for both of us. We're going to capture the integrated value as far as the logistics and the supply, and 7-Eleven obviously will capture the margin in the retail business going forward. Another important point is that 7.7 billion holds steady for the whole 15 years, so it's a very long-term relationship.

So that's one component. And then the second component is we plan to work hand in hand with 7-Eleven as they grow out their portfolio. They've had a stated goal to expand to about 20,000 stores. And so we have a second agreement with them that I'll let Brian comment on, which is to continue to supply them beyond the existing Speedway situation.

Brian Partee -- Senior Vice President, Marketing

Yes. Thanks, Mike. Yes. So, Benny, it's a little tricky to talk about the supply agreement commercially for obvious reasons.

But maybe I'd kind of underscore a couple of the guiding principles and tenets to it and hit upon what Mike already mentioned. Really, it's important to note, we have a market-based philosophy. So it's very difficult and tricky to develop a long-term supply arrangement, but we think we've done it. We think this is a really good, solid relationship.

It's a win-win for both parties. If you think about the history of the Speedway portfolio literally growing up over decades in and around the infrastructure, so it's important to us to preserve the integration value operationally associated with that, which we've done so in the contract, at the same time providing a really compelling supply operationally, as well as commercially for 7-Eleven in the transaction. So we think going forward, it's really set up well for both sides from a win-win perspective. And then, Mike, from a growth perspective, historically, we haven't had, I'd say, based on their scale, 7-Eleven haven't had a huge supply relationship with them.

So we think there's opportunity there, especially across the borrower platform that we now have coast to coast to work closely together to find more opportunities. So we think we've started down the right path. We think we've got the commercial construct to get there. And we're excited about the prospects of going forward once we get to the closing table to drive incremental value, not only for MPC, but across both sides of the table.

Benny Wong -- Morgan Stanley -- Analyst

Great. That's very helpful. My follow-up question, a follow-up on your decision on closing Martinez and Gallup, just wanted to get your thoughts on the impacts, especially Martinez on PADD 5. When we get back to more of a normal environment, should we expect that region to flip to be more an importer of product? And what do you think that potentially does to the margin volatility in that region? And also wanted to get a sense in terms of the change in cost structure it brings, and if you think how much the price improvements from a tighter supply might bring to your other assets and potentially offset the normal contributions from these assets.

Mike Hennigan -- Chief Executive Officer

So Benny, I'll let Brian make a comment on the balance, and then Ray can make a comment on the cost structure.

Brian Partee -- Senior Vice President, Marketing

Yes, Benny. As it relates to the West Coast balance, I think taking Martinez down is certainly directionally helpful for the balance and that's an obvious statement. Hard to predict though going forward what that actually looks like as we continue to trend out of COVID. But we've been able to optimize and resupply within our network, as well as with some of our trade partners in that marketplace, so directionally positive.

And then on the diesel side, I think Ray hit on it earlier. If you think about the mix of diesel production out of Martinez and what we're replacing with renewable diesel going forward, we think a one for one, but the key there is the renewable diesel is a demand element in the market. So it puts us in a really good position to not be the exporter in the market, to really help penetrate the market with what's being demanded out on the West Coast. So hard to know with complete certainty to predict the future.

But obviously, we feel it's very directionally favorable for the marketplace.

Ray Brooks -- Executive Vice President, Refining

Benny, this is Ray. I'll just talk a little bit on the cost structure. When I talked a little bit earlier about Martinez, I commented that it has a very high-cost structure as a refined product refinery, so that going forward, we'll have a much more streamlined facility with the three hydroprocessing processing units, hydrogen plants and so forth. So we'll have a much lower cost structure on an OPEX standpoint as well as -- I talked earlier about the CAPEX conversion.

So at the end of the day, we really feel that we'll have a cost-advantaged renewable diesel opportunity.

Benny Wong -- Morgan Stanley -- Analyst

Great. Thank you very much, everyone.

Mike Hennigan -- Chief Executive Officer

You're welcome.

Operator

Thank you. Our next question will come from Prashant Rao with Citigroup. Your line is open.

Prashant Rao -- Citi -- Analyst

Good morning. Thanks for taking the question. I wanted to follow up on the West Coast there. With Martinez going down, how do you think about the synergies in having sort of that coastal coverage north to south and PADD 5? Does that increase or change the way the importance of it or change the way that you think about in Anacortes or Kenai in terms of where that fits in the portfolio? And then sort of related to that too, I wanted to ask a follow-up about some of the lower complexity, smaller refineries in the Mid-Con.

But maybe starting on that West Coast synergy question, and then I'll wait for the follow-up.

Brian Partee -- Senior Vice President, Marketing

Yes, Prashant. This is Brian Partee. I mean, absolutely, yes, it's a fundamental shift not only in the West Coast balance but certainly to our book. So as a result, it has a direct impact on how we think about medium and long term about the assets out on the West Coast.

So something in the West Coast system today, it's somewhat akin to what we're used to running in the Midwest with some of the flexibility we have between the plants. And this really just levers that and puts us into a different gear out west, thinking about logistical assets, marine assets, terminal assets, and whatnot to be able to optimize the overall portfolio. We've always run the Midwest as a "system". And the West Coast is largely functioned in a similar manner, and we see this directionally helpful to help us optimize the system overall.

And we believe we've got the logistical capability to do that, and I feel like it puts us in a great position going forward.

Prashant Rao -- Citi -- Analyst

OK. Great. And then just a follow-up on some of the Mid-Continent, broadly speaking, assets, the less complex refineries. You mentioned that the Dickinson conversion is on target.

And I think we've kind of been in the back burner in terms of market view or what we're paying attention to, and so it's good to get an update there. But when you look at some of the other assets that are there, you have a few other sorts of lower complexity, so to speak, smaller refining assets in the Mid-Con. Where do you think that fits to the portfolio longer term, some of those -- in terms of disposal versus conversion or keeping them around as is? Just wanted to get some sense of your thought process around those.

Mike Hennigan -- Chief Executive Officer

Yes, Prashant. Like I said a couple of times here, all the portfolio is going to be evaluated for what we think will be the best long term. You did mention Dickinson. And I'll let Ray give an update so the market has a sense of where that stands.

But I think the takeaway should be, we've obviously looked at several of the assets we have. We have a lot more that we're having discussion about. And then hopefully, like I said, our goal is to get to a point where the portfolio is able to generate cash in all environments. I mean, the one we're in right now is obviously very difficult.

But if we get back to a more normal environment, we want to have a portfolio that's very resilient. So, Ray, do you want to make a comment on Dickinson?

Ray Brooks -- Executive Vice President, Refining

Yes. With all the challenges that we've had with COVID, very, very pleased that we've been able to progress Dickinson right along schedule. And so at this point, we're still targeting before the end of the year to complete construction of a 12,000 barrel a day renewable diesel facility and start up and have product by the end of the year. So that's still trending very well for us.

Prashant Rao -- Citi -- Analyst

OK. Thank you very much for the time.

Mike Hennigan -- Chief Executive Officer

You're welcome, Prashant.

Kristina Kazarian -- Vice President, Investor Relations

And with that, operator, thank you. And thank you, everyone, for your interest in Marathon Petroleum Corporation. Should you have additional questions or would you like clarifications on topics discussed this morning, our team will be available to take your calls. Thank you so much for joining us.

Have a good day.

Operator

[Operator signoff]

Duration: 64 minutes

Call participants:

Kristina Kazarian -- Vice President, Investor Relations

Mike Hennigan -- Chief Executive Officer

Don Templin -- Chief Financial Officer

Neil Mehta -- Goldman Sachs -- Analyst

Doug Leggate -- Bank of America Merrill Lynch -- Analyst

Roger Read -- Wells Fargo Securities -- Analyst

Paul Cheng -- Scotiabank -- Analyst

Ray Brooks -- Executive Vice President, Refining

Brian Partee -- Senior Vice President, Marketing

Manav Gupta -- Credit Suisse -- Analyst

Tim Griffith -- President, Speedway LLC

Benny Wong -- Morgan Stanley -- Analyst

Prashant Rao -- Citi -- Analyst

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