VLO - Marathon Petroleum: An Impressive Quarter But No Dividend Increase

• Marathon Petroleum reported a total income of $54.24 billion in the second quarter of 2022, up 81.84% from the same quarter a year ago and up 41.4% sequentially.
• The operating income from the Refining & Marketing and the Midstream units totaled $7,134 million and $1.072 billion, respectively, exceeding expectations.
• I suggest waiting for a retracement between $88.5 and $87.5 to accumulate again with potential lower support at $79.15.

Introduction

The independent US refiner and marketer, Ohio-based Marathon Petroleum (MPC), released its second-quarter 2022 results on August 2, 2022.

Note: I have followed MPC quarterly since 2018 with 15 articles and counting. This new article is a quarterly update of my article published on June 23, 2022.

1 - 2Q22 results snapshot

Marathon Petroleum reported a better-than-expected adjusted income of $10.61 per share for the second quarter. Net income was $5,873 million compared to $8,512 million in 2Q21. Revenues increased significantly from $29.83 billion last year to $54.24 billion.

The company's results were positively impacted by a stronger-than-expected performance from the Refining & Marketing and the Midstream segments, with income totaling a whopping $7,134 million and $1,128 million (please see the chart below).

2 - Stock performance

I recommend following the VanEck Vectors Oil Refiners ETF ( CRAK ) for investors interested in the refining sector. Marathon Petroleum has significantly outperformed [[PSX]] and CRAK and is up 57% on a one-year basis. However, it is down from its record established in June. The best performer in this segment is VLO.

3 - Investment thesis

Valero Energy (VLO) has been my long-term first choice in this segment. However, I consider Marathon Petroleum an equal opportunity.

The war in Ukraine and the geopolitical uncertainty we have experienced since the start of 2022 have created perfect conditions for the refiners to thrive and prosper. You will probably agree after reading my article.

Elevated oil prices and supply disruptions have created a favorable environment for the refining world until now. However, this booming commodity cycle is fueling record inflation not seen for decades and prompted the Fed to hike interest rates twice recently by 75-point and potentially another 75-point soon.

The issue is that oil prices have decreased considerably from their peak earlier this year, with the West Texas Intermediate futures falling below $90 per barrel, causing inflation to weaken.

However, the core number is not moving down at the same rate and will create a long time to correct, which may trigger a severe recession that some analysts are predicting before the end of 2022.

This situation threatens the refining world because a recession will significantly affect demand.

Thus, it is prudent to trade LIFO about 30% of your long-term position in case of a steep retracement if the market gets spooked by an imminent recession.

By the way, keeping a long-term holding makes sense because MPC pays a dividend yield of 2.57%, which is not negligible but a little low compared to its peers.

4 - Margins by Region

Marathon Petroleum declared a global R&M margin of $35.54 per Bbl based on throughput per region. Margins were astronomical this quarter.

Details below:

Below is the chart indicating the revenues and the net income for the first quarter for Marathon Petroleum, Valero Energy, and Phillips 66.

Marathon Petroleum - Financials History: The Raw Numbers - First Quarter 2022

Source: Company News

* MPC debt is $6,999 million, and MPLX debt is 19,775 million.

Analysis: Earnings Details

1 - Revenues and other income were $54.24 billion in 2Q22

Note: Basic Revenues were $53,795 million.

Marathon Petroleum reported a total income of $54.24 billion in the second quarter of 2022, up 81.84% from the same quarter a year ago and up 41.4% sequentially. Net income was $5,873 million or $10.95 per diluted share compared to $8,512 million in 2Q21, and adjusted net income was $5.7 billion, or $10.61 per diluted share.

MPC reported adjusted earnings of $10.61 per share, beating analysts' expectations. The operating income from the Refining & Marketing and the Midstream units totaled $7,134 million and $1.072 billion, respectively, exceeding expectations. It was a great quarter. In the press release :

R&M margin was $37.54 per barrel for the second quarter of 2022, versus $12.45 per barrel for the second quarter of 2021. Crude capacity utilization was approximately 100%, resulting in total throughput of 3.1 million barrels per day for the second quarter of 2022. This compares to crude capacity utilization of approximately 94% for the second quarter of 2021, which resulted in total throughput of 2.9 million barrels per day.

1. 1 - Refining & Marketing: The company reported an operating income of $7,134 million compared to $224 million in the same quarter a year ago. The significant improvement was due to higher year-over-year margins and throughputs. The refining margin was $35.54 per barrel in 2Q22 from $12.45 a year ago.

Below is the Refinery margins history:

1.2 - Midstream:

Marathon Petroleum's general and limited majority partners are MPLX ( MPLX ). Segment profitability was $1,126 million, up 15.3% from $977 in 2Q21. MPLX has largely underperformed MPC on a one-year basis. However, the company is now paying a high dividend yield of 9.35%.

CFO Maryann Mannen said in the conference call :

MPLX remains a source of durable earnings in the MPC portfolio. As MPLX continues to generate free cash flow, we believe it will have the capacity to return significant capital to its unitholders. Today, MPLX announced an incremental $1 billion unit repurchase authorization.

2 - 3Q22 Outlook slightly weakening

CFO Maryann Mannen said in the conference call:

We expect crude throughput volumes of roughly 2.7 million barrels per day representing 94% utilization. Utilization is forecasted to be lower than second quarter due to higher planned turnaround activity. Planned turnaround expense is projected to be approximately $400 million in the third quarter with activity spread across all 3 regions.

3 - Free cash flow was $6,454 million in 2Q22

Note: Generic free cash flow is the cash from operations minus CapEx. The company has a different way of calculating it.

The trailing 12-month free cash flow was $10,140 million, with $6,454 million in 2Q22. The dividend payout ($2.32 per share) is $1.24 billion annually, which is covered by Free cash flow.

The company has not increased the dividend this quarter despite exceptional results, which was disappointing. The company is now focusing on the $15 billion buyback and will reassess the dividend when it is completed. As of May 2021, the company has purchased about 12.1 billion shares at an average price of about $74 per share.

CFO Maryann Mannen said in the conference call:

Our objective has been to complete the $15 billion repurchase program no later than the end of this year. We remain on track to meet this commitment. Upon completion of the program, we will reassess our dividend level.

Also, the company announced a separate and incremental $5 billion share repurchase authorization.

4 - The total debt is $13.46 billion (consolidated) in 2Q22

Note: The graph above indicates the debt on a consolidated basis.

As shown below, the debt is $6.999 billion on a standalone basis, with a debt to capital ratio of 21% and 44% on a consolidated basis. Total cash is $13,319 million (MPC standalone cash was $13,021 million).

On July 7, 2022, MPC entered a new five-year $5 billion revolving credit facility.

Technical Analysis (Short Term) and commentary

Note: The chart is adjusted for the dividend.

MPC forms an ascending triangle pattern with resistance at $96 and support at $88.

The overall strategy that I suggest in my marketplace, "The Gold And Oil Corner," is to keep a long-term position and use about 40% to trade LIFO (see note below) while waiting for a higher final price target for your core position between $114 and $115.

The trading strategy is to sell ~30% above $96 and another 10% above $100. I suggest waiting for a retracement between $88.5 and $87.5 to accumulate again with potential lower support at $79.15.

Note: The LIFO method is prohibited under International Financial Reporting Standards (IFRS), though it is permitted in the United States to generally accepted accounting principles (GAAP). Therefore, only US traders can apply this method. Those who cannot trade LIFO can use an alternative by setting two different accounts for the same stocks, one for the long term and one for short-term trading.

Warning: The TA chart must be updated frequently to be relevant. It is what I am doing in my stock tracker. The chart above has a possible validity of about a week. Remember, the TA chart is a tool only to help you adopt the right strategy. It is not a way to foresee the future. No one and nothing can.

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