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No Value in Spinning Off Speedway: Heminger

With Hess sites fully integrated, single retail network ‘running on all cylinders’

FINDLAY, Ohio -- With the Hess gas stations and convenience stores already rebranded and on their way to being fully integrated into the Speedway retail network, executives at Marathon Petroleum Corp. (MPC) aren’t looking back.

The integration of the 1,245 Hess locations MPC acquired in September 2014 now complete, Speedway CEO Tony Kenney said on MPC’s first-quarter 2016 earnings call on Thursday that his team has been focusing on “capturing synergies,” and that the company has “stopped keeping track separately” of the legacy Speedway stations and the former Hess stations.

Gary Heminger, MPC chairman, president and CEO, said that Kenney’s team has now rebranded all of the stores that were to be rebranded.

“We’re way ahead of the cash flow that we expected from this acquisition, but at the same time, the legacy assets are performing very well, so both sides are running on all cylinders,” he said on the call.

“Last year was a record first quarter for our Speedway business, even before including the retail assets acquired along the East Coast and Southeast, so we were very pleased to see the continuing strong performance in the first quarter of this year,” Timothy Griffith, senior vice president and CFO, said on the call.

That performance again raised the question of a retail spinoff.

“As we look at that question, the answer has to be what we probably think shareholders are valuing Speedway inside of MPC today,” said Heminger. “The [value] is not a number that gives credence to separating the long-term strategic value that we see in having Speedway inside the value system and inside the supply chain system of Marathon. It has always been one of our key value quotients inside Marathon.”

“We’ve gone back and done a lot of work on some other transactions, where a company has spun off their retail, and it appeared to be a pretty small bump in share value that can be eroded for many different reasons across the value chain,” he said. But “we continue to look at it, we continue to analyze it, and I clearly see what the values are that are being garnered inside the retail-only space. We’ll continue to analyze this as we go down the road.”

First-Quarter Financials

MPC reported first-quarter 2016 earnings of $1 million, compared with $891 million in first-quarter 2015. Earnings included charges related to a goodwill impairment recorded by consolidated subsidiary MPLX, and a lower cost or market inventory charge. The company attributed the lower earnings to weak crack spreads, especially in the first two months of the quarter, as well as high turnaround activity.

"Despite weakness in refining margins in the first two months of the year, we saw crack spreads strengthen late in the quarter as gasoline inventories declined and refiners responded to market conditions," said Heminger. “We reported strong financial results from our Speedway and midstream segments, which underscore the value of our ongoing strategic objective to grow the more stable cash-flow segment of our business.”

He said, “Speedway continued its exceptional performance in the first quarter. In addition to higher light-product sales volume, Speedway’s merchandise margin increased in the quarter, reflecting progress toward our goal to generate two-thirds of our profitability from merchandise sales. This approximates the earnings contributions of merchandise sales prior to the acquisition of the East Coast and Southeast [Hess] locations. .... We are focusing on the significant marketing enhancement opportunities at our recently converted retail locations, further optimizing the value of these assets and building out the earnings power of the entire Speedway business.”

“Speedway’s income from operations was consistent with last year’s first quarter at about $167 million,” Griffith said, versus $168 million. “Gasoline and distillate margins were about three cents lower than the first quarter of 2015. This was offset by higher merchandise margins, higher gasoline and distillate sales volumes and a $24 million gain from the sale of a retail location in the quarter.”

Speedway's gasoline and distillate margin decreased to 16.82 cents per gallon in first-quarter 2016, from 19.70 cents per gallon in first-quarter 2015.

“This decline reflects some of the stickiness in price at the retail level, when crude prices move rapidly, as we experienced later in the first quarter,” Griffith said.

“On a same-store basis, gasoline sales volumes increased 1% over the same period last year. Merchandise margins were $19 million higher than the first quarter of 2015 due to overall higher merchandise sales and the higher margins realized on those sales. Merchandise sales in the quarter excluding cigarettes increased 3.1% on a same-store, year-over-year basis, reflecting some of the progress we’re making in merchandising across the entire business,” he said. “In April, we’ve seen an increase in demand of approximately 1.4% increase in same-store gasoline sales volumes compared to last April.”

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