Why I’m Bullish Again On Marathon Petroleum (NYSE:MPC)


Oil Refinery

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Marathon Petroleum Corporation (MPC) owns 2.9 million barrels per day (BPD) of US oil refining capacity and the majority of a well-integrated midstream partnership.

In mid-2021, MPC sold the Speedway retail assets for $21 billion ($17.2 billion after-tax) and pledged to return $10 billion of the proceeds to shareholders in buybacks. With $7.5 billion of planned buybacks remaining between the beginning of 4Q21 and the end of 2022, MPC’s stock has very significant support and upside potential.

The company also increased planned debt reduction from $2.5 billion to $4.6 billion.

In my prior review, I suggested reassessing the attractiveness of Marathon Petroleum’s stock once plans for the proceeds were better known and realized. Because they now are, and with a healthier post-Covid refining sector, I recommend buying Marathon Petroleum’s stock.

Investors should not confuse Marathon Petroleum with the similarly named (with which it was once integrated) Marathon Oil (MRO), whose business is upstream exploration and production.

Speedway Sale Proceeds Update

In mid-2021, Marathon Petroleum sold its Speedway retail segment to 7-Eleven, Inc. for $21 billion, resulting in $17.2 billion of after-tax cash proceeds. Initially, the company said it expected to repurchase $10 billion of its common stock, reduce long-term debt by $2.5 billion, and later determine uses for the remaining several billion.

By the end of 3Q21, the company repurchased $2.5 billion of stock, leaving it another $7.5 billion in stock buybacks to complete by the end of 2022.

MPC also reduced $2.5 billion of structural debt in earlier quarters and announced plans to reduce another $2.1 billion of structural debt.

Third Quarter 2021 Results

In the third quarter of 2021, Marathon Petroleum reported net income of $694 million or $1.09/share. This compared to a net loss of -$886 million or -$1.36/share for 3Q20. Adjusted EBITDA for the quarter was $2.4 billion compared to $1.0 billion for 3Q20.

Projected 4Q21 crude refinery throughputs were 2.60 million BPD or 90% of the capacity. The 4Q21 sweet/sour mix of crudes was expected to be 52%/48%.

Marathon Petroleum’s Operations

MPC was divided into refining, midstream, and retailing. With the sale of Speedway and because much of its midstream is contained in a separately traded partnership, MPLX LP (MPLX), refining is MPC’s main operational focus. Marathon sells petroleum products to wholesale customers, Speedway-now-7-11, and independent retailers operating under the Marathon, Arco, and other brands.

Marathon Petroleum owns thirteen refineries with a capacity of 2.9 million BPD. It has a strategic review underway for the 68,000 BPD Kenai, Alaska refinery. It also:

*converted a 19,000 BPD Dickinson, North Dakota refinery (not included in the thirteen) to an operating 12,000 BPD renewable diesel facility;

*agreed to a joint venture with ADM (ADM) (75% ADM-25% MPC) to build a $350 million soybean oil processing facility, due for 2023 completion, to supply feedstock for 75 million gallons/year of renewable diesel;

*plans to convert the now-closed 161,000 BPD Martinez, California refinery (also not included in the thirteen) to a 49,000 BPD renewable diesel facility.

Eight of the 13 oil refineries are inland, allowing access to Canadian, Bakken, and Permian crude. The remaining five refineries include two mammoth 550,000+ BPD refineries in Texas and Louisiana, one in Southern California, one in Washington, and the one noted above in Kenai, Alaska.

Union Negotiations

The company is representing the refining industry in negotiations with the 30,000-worker United Steelworkers (USW) union for a new three-year contract. The contract would outline pay, benefits, and other policies to be incorporated in contracts between local unions and plant operators. The current bargaining agreement expires on February 1, 2022. USW has said it will issue a notice to strike if timely progress is not made.

Marathon replaces Shell as the company negotiating on behalf of the industry.

Renewable Diesel—A Reminder

Renewable diesel (RD) is used primarily for the California market due to the financial incentives there.

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% for petroleum diesel. The Department of Energy 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 converting existing facilities to renewable diesel. Marathon has converted its 19,000 BPD Dickinson, North Dakota oil refinery to a 12,000 BPD renewable diesel refinery and ramped up to full capacity.

MPC also expects to convert its Martinez, California refinery to produce 17,000 BPD of renewable diesel by the second half of 2022 and 48,000 BPD by the end of 2023.

Oil Prices and Refining Profitability

WTI-Cushing Oil Price

Chart
Data by YCharts

The January 14, 2022 closing NYMEX futures oil price was $83.82/barrel for WTI at Cushing, RBOB gasoline was $2.419/gallon, and diesel/heating oil was $2.634/gallon (all are for February 2022 delivery). A recent price of WCS or West Canadian Select—one of Marathon’s important crude feedstocks—was about $15/barrel lower than WTI.

The crack spread 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. The trend in the 3-2-1 crack spread, a measure of refining profitability shows recent levels at $20/barrel.

Competitors

Marathon Petroleum is headquartered in Findlay, Ohio. It competes with virtually every US refiner. Total US operable oil refining capacity is 18.1 MMBPD, so Marathon Petroleum’s share is 16%, similar to the US share for Valero (VLO).

Barriers to the US refining industry remain high due to siting issues; the large, fixed cost of capital assets; and a regulated, consumer-facing gasoline (and jet fuel and diesel) business that is highly competitive and much scrutinized. All of Marathon Petroleum’s 2.9 MMBPD of oil refining capacity is domestic.

In renewable diesel, MPC competes with existing or planned refinery conversions and new plants owned by, among others, CVR Energy (CVI), HollyFrontier (HFC) in Cheyenne, Wyoming, Phillips 66 (PSX), and the market leader: the Valero-Darling Ingredients (DAR) joint venture.

Governance

At September 26, 2021, Institutional Shareholder Services ranked Marathon Petroleum’s overall governance as a 10, or very weak, with sub-scores of audit (5), board (5), shareholder rights (9), and compensation (10). In this measurement, a score of 1 represents lower governance risk and a score of 10 represents higher governance risk.

As of September 2021, Marathon Petroleum’s ESG ratings from Sustainalytics were “medium” with a total risk score of 28 (51st percentile). Component parts are environmental risk 15.1, social 6.7, and governance 6.0. Controversy level is 3 (significant) on a scale of 0-5, with 5 as the worst.

At December 31, 2021, shorts were 3.1% of the floated stock. Insider ownership is a small 0.34%.

The company’s beta is 2.08, representing much steeper volatility than might be expected for such a large company but emblematic of the volatility of refining margins as crude oil prices (feedstock costs) keep trending higher. Demand (and product prices) are higher also but not perfectly correlated.

Logistics Partnership

At September 30, 2021, Marathon Petroleum owned 63% of the common units of $32.1 billion master limited partnership, MPLX LP. Its assets are primarily pipelines and terminals. While the partnership yields 8.95%, attractiveness of partnership units is specific to an investor’s tax situation and is not evaluated in this analysis.

A consideration is that Marathon Petroleum operationally integrates the partnership’s midstream assets with its refining assets. Since Marathon Petroleum owns 63% of MPLX, it receives large unit payouts. A potential use for the Speedway cash remains for MPC to buy back more MPLX units.

Financial and Stock Highlights

Marathon Petroleum’s market capitalization at the January 14, 2022 stock closing price of $74.74 per share is $46.0 billion.

The 52-week price range is $42.32-$74.77 per share, so its January 14, 2022 closing price of $74.74 is virtually right at the one-year high (Comparisons to a weak 1H21 will be positive). The company’s…



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