MPC - Marathon Petroleum: Buy Based On Crack Spread Outlook And Financial Position

2023-03-20 15:47:57 ET

Summary

• Marathon Petroleum's return ratios and margin ratios increased significantly in 2022 as gasoline and distillate crack spreads were hiked.
• Gasoline and distillate crack spreads in 2023 are not expected to be as high as in 2022; however, they are expected to be higher than the 5-year average.
• MPC’s payout ratio is about 9%, indicating that the company reinvests more money back into the business. Thus, it could be appealing to growth investors.
• The stock is a buy.

Marathon Petroleum Corporation's ( MPC ) stock price increased by 50% in the past 12 months. In 2022, due to the hiked petroleum products crack spread, the company’s financial results were considerably strong. In 2023, gasoline and distillate prices decreased alongside the drop in crude oil prices, and gasoline and distillate crack spreads are not as high as before. However, they are expected to remain higher than the 5-year average. Thus, I expect MPC to remain highly profitable in 2023, and due to its healthy financial position, I also believe Marathon Petroleum can cover its obligations. The stock is a buy.

Quarterly results

In its 4Q 2022 financial results, MPC reported refining & marketing (R&M) segment income from operations of $3,910 million, compared to $881 million in the same period last year. In the fourth quarter of 2022, driven by higher refining and marketing margins ($28.82 per barrel in 4Q 2022, versus $15.8 per barrel in 4Q 2021), the company’s R&M adjusted EBITDA increased by 199% to $4,631 million. The company’s midstream segment income from operations increased from $1,070 million in 4Q 2021 to $1,088 million in 4Q 2022, and its adjusted EBITDA increased slightly to $1,415 million in 4Q 2022. MPC reported a total adjusted EBITDA of $5,802 million in 4Q 2022, compared with $2,795 million in 4Q 2021. Driven by retroactive tax assessments for prior periods and special compensation expenses, MPC’s corporate expenses decreased by 33% YoY to $173 million in 4Q 2022. In 2022, MPC returned $11.9 billion of capital to shareholders through repurchases and has announced an extra $5 billion share repurchase authorization. Also, the company paid a full-year 2022 dividend of $1.3 billion

“We operated our system at 96% utilization and executed commercially, resulting in $16.4 billion of net cash from operations,” the CEO commented. “Back in November, we increased our quarterly dividend by 30%,” he continued.

The market outlook

In 2022, MPC’s sales and other operating revenues increased to $177 billion from $120 billion in 2021, and its total capital expenditure increased by 40% YoY to $2.8 billion, driven by 66% YoY higher R&M capital expenditures and 46% YoY higher midstream capital expenditures. The company’s crude oil capacity utilization increased from 91% in 2021 to 96% in 2022, and its R&M refined product sales volume increased by 2.5% YoY to 3508 thousand barrels per day (mbpd). According to MPC’s refined product yields, gasoline and distillates accounted for 86% of its total refined product yield in 2022.

According to EIA's short-term energy outlook , U.S. gasoline consumption is expected to increase by 1.6% YoY to 8.9 million barrels per day in 2023 (compared with 8.8 million barrels per day in the previous forecast). Figure 1 shows that gasoline price for resale in the U.S. is expected to decrease by 18.4% YoY from 309 cents per gallon in 2022 to 252 cents per gallon in 2023, and Brent crude oil price is expected to decrease by 18.8% YoY from $94.91 per barrel in 2022 to $77.10 per barrel in 2023. Also, EIA expects diesel fuel for resale to decrease by 20.1% YoY from 361 cents per gallon in 2022 to 286 cents per gallon in 2023. Normally, due to shift to more expensive, summer-grade gasoline and higher gasoline demand, U.S. gasoline crack spread increases from February to June of each year. However, it is important to know that in 2023, EIA expects increasing refining to offset higher demand for gasoline, which causes gasoline crack spread to decrease slightly in the following months.

Also, EIA expects gasoline inventory in the United States to experience a small increase in the next few months. Figure 2 shows that the U.S. motor gasoline crack spread in 2023 is forecasted to be higher than the 2018-2022 average; however, lower than in 2022. Also, it shows that U.S. motor gasoline total inventories in the following months are expected to be higher than the 2018-2022 average, reflecting increasing refining activity and gasoline production (and also still lower gasoline consumption compared to the pre-pandemic levels). As a result of increasing gasoline inventories and lower crude oil prices, EIA estimates retail gasoline prices to continue decreasing into 2024.

Figure 1 – Energy prices

Figure 2 – Motor gasoline crack spread and total inventories

Furthermore, according to EIA, partly due to the warm start to 2023 and inventory builds at the Amsterdam, Rotterdam, and Antwerp ((ARA)) hub in northwest Europe, the U.S. distillate crack spread decreased by 40 cents per gallon from January to February. However, Figure 3 shows that the U.S. distillate fuel oil crack spread is higher than the 5-year average; however, lower than in 2022. Due to the increased demand for U.S. diesel exports as a result of the war in Ukraine, U.S. diesel inventories in 2023 are expected to remain lower than the 5-year average; however, start increasing with lower U.S. distillate demand and higher refining. The lower crack spreads in 2023 are consistent with MPC’s lower capital expenditures. Figure 4 shows that the company expects its refining & marketing capital expenditures to decrease from $1,508 million in 2022 to $1,250 million in 2023, down 17% YoY.

Figure 3 – Distillate fuel oil crack spread and total inventories

Figure 4 – MPC 2023 capital outlook

MPC performance outlook

To gain valuable insights into the company's financial health, I examined margin and return ratios. Additionally, I compared the ratios to previous quarters to provide more meaningful results. Margin ratios are crucial in assessing a company's ability to convert revenue into profits through various means. Overall, it is evident that Marathon Petroleum had significantly better gross profit, cash flow, and net profit margins in 2022 than at the end of 2021. In minutiae, the company's total revenue increased considerably to over $178 billion in 2022 from $120.5 billion at the end of 2021. Consequently, higher revenue combined with higher profits and cash flow resulted in improved margin ratios at the end of 2022.

MPC experienced a significant increase in its gross profit margin, reaching 0.149 in 2022, compared to 0.087 at the end of 2021. Additionally, the company's cash flow margin rose highly and sat at 0.09 in 2022, compared to its previous amount of 0.04 in 2021. Furthermore, Marathon Petroleum’s net profit margin, which provides a final picture of the company's profitability after all expenses have been accounted for, stayed unchanged at 0.08 in 2022. These positive results indicate that Marathon Petroleum was able to recover successfully from the COVID-19 outbreak and the downturn of 2020, thereby improving its overall profitability conditions. (See Figure 5).

Figure 5 – MPC’s margin ratios

I analyzed MPC’s return on equity and return on assets ratios to assess the company's ability to generate returns for its shareholders. The ROA ratio measures the profit a company generates for each dollar of its assets. After the downturn of 2020, Marathon Petroleum’s ROA ratio recovered and reached 11.4% in 2021. Also, the company’s return on assets ratio improved by 474 bps and sat at 16.15% at the end of 2022. Additionally, the company's return on equity was far higher at 41.37% in 2022 versus its 29% in 2021. The ROE ratio is crucial as it calculates the rate of return on capital invested in the business by shareholders. Ultimately, it is observable that Marathon Petroleum is capable of utilizing its assets and equity to produce a profit for shareholders (see Figure 6).

Figure 6 – MPC’s return ratios

Finally, regarding MPC’s dividend safety, we can see that Marathon Petroleum has a safe payout ratio of 9.17%. Specifically, the dividend payout ratio is the amount of dividend that is paid to investors from its net income. In other words, MPC is distributing about 9% of its net income to shareholders in the form of dividends. Thus, it is reinvesting its money into the business. This attitude helps the company’s growth, thereby being able to generate higher amounts of capital for its shareholders in the future. Albeit an appropriate amount of payout ratio is definitely different by industry, Marathon Petroleum’s payout ratio is attractive for growth investors, who are keener on analyzing the company’s potential to bring profits in the future (see Figure 7).

Figure 7 – MPC’s dividend safety grade

Summary

In this comprehensive article, I analyzed Marathon Petroleum's profitability and liquidity ratios to evaluate the company's ability to generate profits and utilize its assets effectively for investors. MPC’s profitability ratios across the board of margin and return ratios improved considerably in 2022 compared with 2021. In 2023, The gasoline and distillate crack spreads are not expected to be as high as in 2022; however, they are expected to be higher than the 5-year average. The stock is a buy.

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