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Andeavor in Good Shape Going Into Marathon Deal

First-quarter 2018 characterized by store growth, conversions to company-op model

SAN ANTONIO, Texas -- Refiner-marketer Andeavor turned in a strong quarterly performance as it heads into a transformative merger with Marathon Petroleum Corp. Andeavor reported first-quarter 2018 earnings of $164 million, compared to $50 million a year ago.

On April 30, Andeavor and Marathon announced the definitive merger agreement under which Marathon will acquire all of Andeavor's outstanding shares. They expect the transaction, subject to customary closing conditions, including approval by the shareholders of both companies and the receipt of regulatory approval, to close in the second half of 2018.

“We are committed to driving growth in our marketing business by adding new retail sites to the network, placing product into the highest-value branded distribution channels and growing our nonfuels convenience business,” Greg Goff, chairman, president and CEO of Andeavor, said during the company’s earnings call.

The company increased its branded retail store count by 31%, or 787 stations year over year to about 3,300 in the first quarter, mainly as a result of its Western Refining acquisition, the acquisition of 39 Flyers Energy stations in Northern California in July 2017 and the continued execution of the company's organic growth plan, including rebranding and expansion into Mexico.

“We are seeing improvements in the market in the second quarter as we enter the summer driving season and continue to see strong demand for our products across our business,” he said. “Our marketing business organic growth plan execution has resulted in the addition of 45 net-new branded stations in the first quarter, so we continued to make excellent progress.”

The company expects to convert 50 stations from the multisite operator (MSO) model to company operated in the first half of 2018, said Goff. Upon completion of this new group, Andeavor will have converted 100 stations. “These conversions allow us to capture additional nonfuel margins and enhance overall station profitability,” he said.

Andeavor is also supplying fuel to about 82 stations in northwestern Mexico, including 57 under the Arco brand.

“We expect to increase our marketing presence across the entire northern part of Mexico with an estimated 250 to 300 stores planned through 2020,” said Goff. “And we continue to believe there is substantial growth beyond 2020. We remain excited about the growth prospects in our marketing business as we expand our network and convert more stations to company operated, which allows us to capture more value per station.”

Marketing segment operating income was $128 million and segment EBITDA (earnings before interest, taxes, depreciation and amortization) was $152 million in first-quarter 2018. This compares to segment operating income of $133 million and segment EBITDA of $146 million last year.

Overall fuel margins for first-quarter 2018 were 9.1 cents per gallon compared to 9.6 cents per gallon last year, and retail and branded fuel margins were 16.2 cents per gallon compared to 17.4 cents per gallon in 2017. Marketing margins were lower as a result of the lag in street prices increasing relative to the rapidly rising spot market prices during the quarter.

For the first quarter, merchandise margin increased to $50 million from $3 million in 2017 primarily due to the Western Refining acquisition and the conversion of MSO sites to company-owned sites, which allow for the capture of nonfuel margin.

San Antonio-based Andeavor—formerly Tesoro—is an integrated marketing, logistics and refining company. Its retail-marketing system includes about 3,300 stations that market fuel under brands such as Arco, SuperAmerica, Shell, Exxon, Mobil, Tesoro, USA Gasoline and Giant. It also has ownership in Andeavor Logistics LP and its noneconomic general partner. Andeavor operates 10 refineries with a combined capacity of about 1.2 million barrels per day in the midcontinent and western United States.

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