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Marathon Petroleum Eyeing Big Growth in its Midstream MLP

Findlay, OH-based Marathon Petroleum Corp. (MPC), a major refiner/retailer, plans a full-court press in the midstream sector through growth in a master limited partnership (MLP) in which it holds a general partner interest.

It intends to be a leading player in the infrastructure build out with the robust domestic energy supplies now being produced, CEO Gary Heminger said last Thursday on a conference call reporting soaring 3Q2014 quarter-over-quarter profits.

Heminger outlined MPC plans to "significantly accelerate the growth" in its partnership, MPLX, with the objective of growing the MLP "substantially, and accelerating the annual distribution rate to an average in the 20% range over the next five years." His outlining of the new strategy came in the midst of reporting 3Q2014 earnings of $672 million ($2.36/share), compared with $168 million (54 cents) for the same period last year.

"As part of this acceleration, the MPC board has authorized sale of its remaining 31% interest in pipeline holdings to MPLX, with the objective of growing MPLX's December 2015 EBITDA [earnings before interest, taxes, depreciation and amortization] to at least $450 million."

Heminger noted that the remaining 31% in pipeline holdings going to MPLX will bring with it an added $80 million in EBITDA for MPC's midstream partnership. He emphasized that MPC's analysis of current North American market dynamics indicates now is the right time for the new strategy.

The new strategy is driven by a combination of substantial growth in domestic oil/gas production resulting in a large midstream build up, closing on the acquisition of the Hess Corp. retail assets to join MPC's Speedway chain of service station/convenience stores, and the market's "failure to recognize" MLPX's total value to MPC, Heminger said.

In response to an analyst's question about future acquisitions in the midstream sector, Heminger said it is too early in implementing the growth strategy to say, and in any event MPC shies away from speculating on future acquisitions, but he did reiterate that the company "expects to be a very big player in the further development of the North American oil and gas transformation and renaissance."

Heminger quickly added that MPC's leadership will include all liquids -- not just oil and refined products. "We're also in the natural gas and the LPG [liquefied petroleum gas] markets," he said. "We have the capacity from an operating and engineering standpoint to operate in all of those different businesses."

He said MPC is going to be "right on the forefront" of this substantial energy development domestically.

In response to another analyst's question, Heminger said MPC intends to keep a strong mix of assets, such as its growing fuel distribution business in Speedway, that can be dropped into an MLP to greatly grow the partnership.

"Just like a production company looks at reserves, we want to keep a very strong reserve base of eligible assets that can be dropped into an MLP, and we also plan to have very strong organic growth from projects within the company, very strong third-party growth, and we continue to be very active looking at projects in and around some of the production fields for gathering systems that could be bolted onto our system."

Overall, Heminger contends that MPC is not embarked on just a "drop down strategy," but is "an aggressive growth strategy as we see the MLP business continuing to consolidate."

Finally, Heminger in opening remarks addressed the sensitive national political question of the United States easing up on its decades-long ban on crude oil exports, noting that there are "market-distorting regulations and conditions [domestically and abroad] that make it difficult and sometimes impossible for the free market to function."

Heminger also said that calls for oil exports often are based on the United States having a glut of light, sweet crude oil, which he called a misconception. "We do not see a 'glut' of light, sweet crude,'" he said. "In fact, there were times during the year when producers could not deliver the volumes they committed to sell us."

Heminger said that MPC and the U.S. refining industry as a whole is "keeping pace" with the production of the U.S. supply.

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