Marathon Petroleum Corporation (MPC) reported a third quarter 2020 loss of $1.0 billion or -$1.57/share. The company is targeting reductions of $1.4 billion in capital spending and $950 million in operating expense.
MPC, along with Valero (VLO), is one of the largest independent US refiners. It owns 2.8 million barrels per day (BPD) of U.S. oil refining capacity and a well-integrated midstream business. Marathon Petroleum is selling the Speedway retail business to 7-11’s parent company for $21 billion with a 15-year 500,000 BPD supply agreement. The company is converting two refineries to renewable diesel production with the smaller one slated for December 2020 start-up and has closed a small, high-cost refinery in New Mexico.
Much of its midstream is contained in a separately traded partnership, MPLX LP (MPLX).
Still relatively low-priced despite a 6.1% bump today, MPC offers an attractive dividend yield of 7.4%. Moreover, the all-cash proceeds from Speedway will allow the company to return capital to shareholders as well as increase capital investments and potentially buy back high-yielding MPLX units.
I recommend Marathon Petroleum for its post-pandemic strategic recovery actions, future opportunities resulting from Speedway sale cash, access to low-priced Canadian (and Bakken) crude, geographic diversification, midstream profitability, and renewable diesel projects.
Pre-coronavirus global petroleum and liquids fuels consumption was 100 million BPD. The Energy Information Administration (EIA) estimates global consumption of petroleum and liquid fuels averaged 95.3 million BPD in September. This is up from 85.1 million BPD during 2Q2020.
EIA forecasts global consumption of petroleum and liquid fuels to average 92.8 million BPD for all of 2020 with a projected increase of 6.3 million BPD in 2021.
Third Quarter Results
MPC’s third quarter crude throughput of 2.4 million BPD or 84% of capacity was well ahead of its 2Q20 throughput of 2.165 million BPD or 77%.
The company’s 3Q crude mix was 49% sour and 51% sweet. Operating costs in the Gulf Coast and Mid-Continent region were lower than projected at $3.83/barrel and $4.79/barrel respectively; those in the West Coast region were $10.15/barrel.
Third quarter 2020 net loss attributable to MPC was -$1.0 billion, or -$1.57/share compared to +$1.1 billion or $1.66/share in the third quarter of 2019.
The biggest effect is seen in the giant drop in revenue from $27.6 billion to $17.4 billion.
The 3Q20 net income also includes a net -$525 million of adjustments, specifically:
*-$348 million restructuring expense for the closing/repurposing of three refineries;
*-$433 million of impairments;
*-$256 million for LIFO liquidation;
*+$530 million for inventory valuation adjustment; and
*-$18 million for transaction-related costs.
As shown below, once the noncontrolling interest share (for non-MPC MPLX unitholders) of $257 million is subtracted, 3Q20 net income attributable to MPC was -$1.0 billion.
|MPC Quarterly, $MM||3Q20||3Q19|
|Income/(Loss) from Cont Op||(1,057)||1,680|
|Net Income/(Loss) attributable to MPC||(1,018)||1,095|
Marathon Petroleum recently announced it was laying off staff as part of its cost reduction effort. It has closed the small Gallup and large Martinez refinery indefinitely and is converting the Dickinson refinery and, if all approvals are obtained for the Martinez refinery, to renewable diesel production.
The sale of Speedway in a $21 billion all-cash transaction is expected to result in $16.5 billion of after-tax cash proceeds. While the company will announce the use of cash at the time of the expected first quarter 2021 closing, it plans to repay debt and return capital to shareholders. For example, Marathon Petroleum could buy back up to 37% of MPLX LP units it does not own.
Fourth Quarter Outlook
The company has estimated a few factors for the fourth quarter of 2020:
*refining operating costs of $5.50/barrel; (3Q operating costs averaged $5.32/bbl across the three regions)
*planned refinery turnaround costs of $100 million;
*refinery throughputs of 2.48 million BPD, of which 2.26 million BPD is crude oil, so crude throughput relative to capacity of 80%.
Oil Prices and Refining Margins
WTI-Cushing Oil Price
Left axis is $/bbl. Credit: Macrotrends.net
The November 2, 2020 closing NYMEX futures oil price was $36.45 per barrel for WTI at Cushing, gasoline was $1.044/gallon, and diesel was $1.102/gallon. For WCS, West Canada Select, used for 30% of MPC’s feedstock, the most recent price was considerably lower at $26.19/bbl (on a 10-hour delay).
Oil prices have dropped on news of more virus lockdowns in Europe and Libya’s resumption of production at 1.0 million BPD, up from only 90,000 BPD at the low point.
The trend in the 3-2-1 crack spread, a measure of refining profitability, is shown below, currently under $10/barrel. This number is defined as three barrels of crude subtracted from the sum of 2 barrels of gasoline and one of distillate, and the specific crude used for this calculation is WTI-Cushing. As noted above, some of MPC’s crudes are lower-priced than WTI. The graph below shows the 3-2-1 crack spread over the last year.
The EIA noted – no surprise – a change in crack spread (refining profitability) patterns this year in the 3Q20. Normally, the diesel (ULSD) spread increases between August and September while the gasoline spread (RBOB) declines as winter heating oil picks up and summer driving season abates. Because gasoline production was so choked back, its spread declined less, and because diesel production was larger than normal, its spread did not increase.
Marathon Petroleum’s Oil Refineries and Operations
MPC is now divided into two segments: refining & marketing, and midstream. Due to the sale of its Speedway retail segment to the parent of 7-11 for $21 billion it reports Speedway under discontinued operations and its 1100-station direct dealer business within the refining & marketing segment. As described below, most of its midstream is in a separate partnership, MPLX.
MPC owns sixteen refineries in total, and
*has closed a 26,000 BPD Gallup, New Mexico refinery indefinitely;
*is converting a 19,000 BPD Dickinson, North Dakota refinery to a 12,000 BPD renewable diesel plant;
*is closing the 161,000 BPD Martinez, California refinery indefinitely and seeking to convert it to a 49,000 BPD renewable diesel plant;
*leaving 13 remaining operation oil refineries with a capacity of 2.8 million BPD.
Eight of these 13 oil refineries are inland, which allows access to Canadian, Bakken, and Permian crude. The remaining five oil refineries include two mammoth 550,000+ BPD refineries in Texas and Louisiana, one refinery in Alaska, one in southern California, and one in Washington. Marathon’s coastal refineries in Louisiana and Texas are also able to receive waterborne crude from around the world.
Although both use the same feedstocks of corn oil, used cooking oil, soybean oil, etc., biodiesel and renewable diesel are not the same. They have different processes and different degrees of applicability: biodiesel can be blended into petroleum diesel at up to 10%; however, renewable diesel can substitute 100% of petroleum diesel. The Department of Energy further explains:
“Renewable diesel and biodiesel are not the same fuel. Renewable diesel is a hydrocarbon produced through various processes such as hydrotreating, gasification, pyrolysis, and other biochemical and thermochemical technologies. It meets ASTM D975 specification for petroleum diesel. Biodiesel is a mono-alkyl ester produced via transesterification. Biodiesel meets ASTM D6751 and is approved for blending with petroleum diesel.”
Several refiners are building or converting refineries to make renewable diesel. Marathon has converted its 19,000 BPD Dickinson, North Dakota oil refinery to a 12,000 BPD renewable diesel facility with corn and soybean oil feedstocks, expected to start up December 2020. The company is also pursuing approvals to convert its shutdown 161,000 BPD Martinez, California refinery to a 48,000 BPD renewable diesel facility.
At present, renewable diesel is primarily sold in the California market due to the financial incentives there.
Barriers to the US refining industry remain high due to siting issues, the large, fixed cost of capital assets, a domestic market that has declined for now, and a regulated, highly-competitive consumer-facing gasoline business. All of Marathon Petroleum’s 2.8 MMBPD of oil refining capacity is domestic.
Total US operable oil refining capacity is 18.6 MMBPD, so the company’s share is 15%.
MPC is based in Findlay, Ohio. In the Midcontinent and Rockies, Marathon Petroleum’s major competitors include BP (BP), HollyFrontier (HFC), Phillips 66 (PSX), and Valero. On the Gulf Coast, Marathon’s competitors are virtually all refiners operating in the US.
At October 31, 2020, Institutional Shareholder Services ranked Marathon Petroleum’s overall governance as a 7, with sub-scores of audit (1), board (8), shareholder rights (9), and compensation (1). In this measurement, a score of 1 represents lower governance risk and a score of 10 represents higher governance risk.
Shorts are 4.7% of the floated stock. Insider ownership is a tiny 0.6%.
Marathon Petroleum’s beta is 2.14, representing steeper volatility than might be expected for such a large company but emblematic of the twin crosscurrents of lower feedstock oil prices but lower petroleum product demand (and prices).
Marathon Petroleum owns much of a master limited partnership, MPLX LP. MPLX assets are primarily pipelines and terminals. While the partnership yields 15%, attractiveness of partnership units is specific to an investor’s tax situation and is not evaluated in this analysis.
Key considerations are that MPC operationally integrates the partnership’s midstream assets with its refining assets and receives hefty unit payouts since as of June 30, 2020 it owns 63% of MPLX.
Financial and Stock Highlights
Marathon Petroleum’s market capitalization at its November 2, 2020 stock closing price of $31.3 per share is $21.4 billion.
The average of analysts’ estimated earnings per share (EPS) for 2021 is negative at -$0.64.
At June 30, 2020, according to its second quarter 10-Q, the company had $52.8 billion in liabilities and $84.6 billion in assets giving Marathon Petroleum a liability-to-asset ratio of 62%.
With a 52-week price range is $15.26-$68.73 per share, its November 2, 2020 closing price of $31.30 is 46% of the one-year high. The company’s one-year target price is $42.71/share putting its closing price at 73% of that level.
MPC pays a dividend of $2.32/share, a yield of 7.4%.
Book value per share is $36.53, above its current market price, indicating negative investor sentiment.
The company’s mean analyst rating is 1.9, or “buy,” from the nineteen analysts who follow it.
Positive and Negative Risks
Investors should consider their demand recovery as well as their oil supply/pricing and petroleum product price expectations (e.g. refining margins) as the factors most likely to affect Marathon Petroleum.
Recommendations for Marathon Petroleum
Marathon Petroleum offers a good 7.4% dividend yield at its current bargain stock price. Moreover, the company will have a $16.5 billion after-tax chunk of cash upon the close of the Speedway sale which can be used for balance sheet strengthening and returns to shareholders.
Access to both competitive inland crudes and global crudes at its coastal refineries will continue to benefit the company’s margins. Its midstream operation and 15-year agreement to supply 7-11 with 500,000 BPD after the sale of Speedway also continue to offer profit opportunities.
Despite the uncertainty of demand recovery, due to Marathon Petroleum’s affordable price, strategic actions in the face of virus-related product demand drop, dividend rate, and prospects, I recommend this well-run large U.S. oil refiner to investors interested in both growth and yield.
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Disclosure: I am/we are long MPC, VLO, BP. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.