Category: Financial Markets

Business Strategy and Outlook

The combination of Marathon and Andeavor created the U.S.’ largest refiner with facilities in the Midcontinent, Gulf Coast, and West Coast. Through the combination, Marathon planned to leverage this geographically diverse footprint to optimize its crude supply from North America to reduce feedstock cost, while also improving its operating cost structure. It delivered $1.1 billion of a planned $1.4 billion in synergies by year-end 2019, but its focus shifted to capital and cost reductions in 2020 when the pandemic hit. These efforts proved successful with the company delivering over $1 billion in operating expense reductions. In the near term, its focus remains on delivering more cost and capital improvements.

Financial Strength

Cash flow has been sufficient to cover capital spending while allowing for share repurchases and dividend increases in recent years. Based on our current forecast, however, we expect operating cash flow to sufficiently cover capital spending and the dividend. Marathon received $17.2 billion in after-tax proceeds from sale of its Speedway segment in second-quarter 2021. As of the year 2021, it has retired $3.75 billion in debt and repurchased $4.5 billion shares. It plans to repurchase another $5.5 billion shares by year-end 2022 at the latest and repurchase another $5 billion of shares beyond then. 

The large amount of repurchases have reduced the dividend burden, and as such it is expected that  management to return to dividend growth at some point given the company’s strong cash flow. It’s possible management returns to its previous shareholder return target of 50% of discretionary free cash flow including dividend growth and share repurchases. Our fair value estimate to $79 from $68 per share after updating our near-term margin forecast with the latest market crack spreads and incorporating management’s guidance, and the latest financial results.

Bulls Say’s 

• Marathon Petroleum’s high-complexity facilities in the midcontinent and Gulf Coast leave it well-positioned to capitalize on a variety of discount crude streams, endowing it with a feedstock cost advantage. 
• Closure of lower-quality refineries and investment in renewable diesel leaves Marathon in a better competitive position in the long term. 
• Current repurchase plans amount to 20% of the current market cap, with potentially more coming if market conditions remain strong.

Company Profile 

Marathon Petroleum is an independent refiner with 13 refineries in the midcontinent, West Coast, and Gulf Coast of the United States with total throughput capacity of 2.9 million barrels per day. The firm also owns and operates midstream assets primarily through its listed MLP, MPLX.

(Source: Morningstar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.