FINDLAY, Ohio -- The integration of the Hess gas stations and convenience stores into the Speedway retail network is the company's "No. 1 focus," C. Michael Palmer, Marathon Petroleum Corp. (MPC) senior vice president of supply, distribution and planning, said during the company's third-quarter 2014 earnings call on October 30.
"[As] we transferred ownership and operations from Hess to Speedway, the most important thing was making sure there was no impact to the customer, and I think we have accomplished that," he said. Moving forward, "we're looking to be able to integrate both the Hess and Speedway operations to take advantage of the synergies that are available there."
Tony Kenney, president of Speedway LLC, said, "As far as the opportunity with the assets … the difference in the EBITDA between the Speedway assets and the Hess assets … is due to the difference in the performance inside the store. So from a light-product perspective, Hess had always performed well on the volume and the margin outside. So the opportunity really is upgrading or enhancing the performance inside the store. And what really comes into play there is some of the elements that we bring in terms of some of our merchandising, and specifically, the loyalty program that we've had in place for over 10 years on the Speedway side.
He continued, "We think while leveraging some opportunities in foodservice, general merchandise, in combination with partnerships with our key suppliers and consumer product companies, with our loyalty program is going to give us an opportunity to leverage the traditional Speedway performance into the Hess assets."
MPC president and CEO Gary R. Heminger said that Kenney and his team has identified not only administrative synergies, but also that some procurement strategies were not providing the marketing synergies that they expect due to incremental merchandise sales. By identifying those, "we're way ahead of what our first-year plan was," he said. "We've already identified significantly more than we had expected to achieve in the first year."
And the focus on Hess integration does not mean that the company does not have an organic growth plan for Speedway.
"We're continuing to execute on that," Palmer said. "We're probably going to complete approximately 60 new stores or rebuild openings this year. So we're balancing the focus on both the existing or the base Speedway business as well as the integration, the re-identification and then eventually some remodeling of some of the Hess assets to bring the entire chain together under a common brand."
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MPC reported 2014 third-quarter earnings of $672 million, compared with $168 million for third-quarter 2013. Total income from operations was $1.06 billion in third-quarter 2014, compared with $301 million in third-quarter of 2013. Refining & Marketing segment income from operations was $971 million in third-quarter 2014, compared with $227 million in third-quarter 2013.
Speedway's third-quarter 2014 earnings are a record for the company, it said, excluding the effect of the acquisition of Hess' retail operations. Speedway segment income from operations was $119 million in third-quarter 2014, compared with $102 million in third-quarter 2013. The increase was primarily the result of higher light product and merchandise margins, partially offset by higher operating expenses attributable to an increase in the number of stores. The light product margin increased from 14.04 cents per gallon in third-quarter 2013 to 15.96 cents per gallon in third-quarter 2014.
"The efficiency, flexibility and optionality in our integrated downstream system enabled us to continue capturing opportunities in the markets we serve. Our ability to supply refined products to the markets of greatest value continues to serve consumers and our shareholders well," said Heminger. "Speedway … achieved record results for the quarter. This was particularly impressive because they achieved these results while working to close the Hess retail acquisition, which occurred on September 30. This expansion makes Speedway the largest company-owned convenience store chain in the United States by revenue. Speedway's consistent ability to generate strong merchandise margins in the store will provide great synergies with a strong volume that Hess locations have historically experienced. We are confident we can leverage these potential synergies further as we introduce Speedway's focused merchandising approach to these 1,245 locations."
Findlay, Ohio-based MPC is the nation's fourth-largest refiner. It sells Marathon-brand gasoline through approximately 5,400 independently owned retail outlets across 19 states. Also, Enon, Ohio-based Speedway LLC, an MPC subsidiary, owns and operates the nation's second-largest convenience store chain, now with approximately 2,740 convenience stores in 22 states. MPC also owns, leases or has ownership interests in approximately 8,300 miles of pipeline. Through subsidiaries, MPC owns the general partner of MPLX LP, a midstream master limited partnership (MLP).
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