MPC - Marathon Petroleum: Higher Gasoline And Distillate Sales But Risks

2023-04-25 11:50:37 ET

Summary

• Due to higher demand for gasoline and distillate from European Union, I believe Marathon Petroleum’s sales can increase further.
• MPC’s cash and current ratios were on an increasing path in 2022 and reached 1.76x and 0.59x, respectively, in 4Q 2022.
• The company’s leverage condition is healthy, and the ratios are far lower year over year compared with 4Q 2021.
• The stock is a buy. However, the incremental vehicle electrification and the company’s high debt obligations can hurt MPC’s revenues and put its financial health at risk.

In my previous article on Marathon Petroleum ( MPC ), I mentioned that as gasoline and distillates accounted for 86% of the company’s total refined product yield in 2022, the changes in the U.S. gasoline and distillate consumption, play an important role in MPC’s cash generation potential. In its short-term energy outlook report that was published in March 2023, the EIA forecasted that U.S. gasoline consumption may increase by 1.6% to 8.9 million barrels per day in 2023. Also, the EIA estimated that gasoline price for resale in the U.S. may decrease by 18.4% YoY to 252 cents per gallon in 2023. In its new short-term energy outlook , the EIA didn’t change its estimation for U.S. gasoline consumption. However, in its April report, the EIA expects the gasoline price for resale in U.S. to be 262 cents per gallon in 2023, 10 cents higher than its previous estimation. Moreover, it is important to know that the EIA increased its estimation of WTI crude oil price in 2023 to $79.24 per barrel (compared with $77.10 per barrel in the previous report). Furthermore, in its previous estimation (in March 2023), the EIA estimated diesel fuel for resale in 2023 to be 286 cents per gallon. In its April estimation, the EIA decreased diesel fuel for resale in 2023 to 280 cents per gallon.

In the summer season (April through September), retail gasoline prices in the United States can be higher than in the Winter Season (October through March). Also, as a result of the changing trade patterns due to the war in Ukraine, U.S. exports of petroleum in 2022 increased to a new record. As the trade patterns still continue changing, the higher demand for U.S. refined products from European Union can increase U.S. exports of petroleum products in 2023. Figure 1 shows that the net exports of motor gasoline and distillate fuel oil in the summer of 2023 are expected to be higher than in the summer of 2022. The EIA expects the net exports of gasoline in the United States to increase from 780 thousand barrels per day in 2022 to 810 thousand barrels per day in 2023. Also, due to sanctioned volumes in Europe, U.S. net exports of distillate can increase in 2023. As a result, the distillate fuel inventories in the United States can remain low in 2023. According to Figure 2, U.S. total distillate fuel inventory in 2023 is expected to remain significantly lower than the 5-year average. Thus, MPC's gasoline and distillate sales can increase further in 2023.

Figure 1 – Net exports of motor gasoline and distillate fuel oil in the United States

Figure 2 – U.S. gasoline and distillate inventories

MPC performance outlook

In my previous article, I explained how MPC’s margin and return ratios support a buy rating on the stock. In this thorough section, I analyzed Marathon Petroleum Corporation’s performance outlook across the board of liquidity and leverage ratios. Liquidity ratios are worthy for indicating a good picture of the company’s capability to keep its balance between the ability to safely cover its obligations and improper capital allocations. In this regard, I investigated MPC’s current and cash ratios to be more accurate compared with previous quarters.

As the liquidity ratios have assets on top and liabilities on the bottom, it is paramount to consider the ratios, whether their amount is above 1.0 to analyze if the company is able to face its obligations. It is observable that both cash and current ratios have been on an increasing path during the last year. In minutiae, Marathon Petroleum’s current ratio increased to 1.76x in the fourth quarter of 2022 versus its previous amount of 1.66x in 3Q 2022. Also, it is 3% higher year-over-year compared with its amount of 1.7x in 4Q 2021. Similarly, the company’s cash ratio, which is a stricter and more conservative measure, was 0.52x in 3Q 2022 and reached 0.59x at the end of 2022. This record indicates that about 60% of the company’s liabilities can be paid off directly by its cash and cash equivalents. As a result, the liquidity condition of Marathon Petroleum improved during the preceding year and has a good ability to convert its assets to cash (see Figure 3).

Figure 3 – Liquidity ratios

Furthermore, I analyzed how MPC’s assets and business operations are financed by investigating its leverage ratios. As it indicated, most mentioned ratios had lower levels compared with their prior quarters. After an increase in MPC’s net debt level by 14% to $16.7 billion in the third quarter of 2022, the company decreased its net debt level slightly to $16.1 billion in 4Q 2022. However, the EBITDA level, which works as a good proxy for the cash generation capacity of the company, fall by 14% during the fourth quarter of 2022 and sat at $5.3 billion. Thus, a combination of the decline in both debt and EBITDA led to a 12% increase in debt-to-EBITDA of 3.01x in the fourth quarter of 2022. Notwithstanding a rough increase, the ratio is still far lower than its level in the fourth quarter of 2021 and the first quarter of 2022.

Furthermore, MPC’s asset-to-equity decreased continuously in recent quarters and declined from 3.41x in 3Q 2022 to 3.24x in the last quarter of 2022. Ultimately, the net debt-to-asset ratio measures the financial leverage of the company by indicating what percentage of its assets is financed by net debt. MPC’s ratio was almost the same during the third and fourth quarters of 2022 and was 0.18x. As a result, Marathon Petroleum’s leverage condition depicts its health position and capability to face upcoming risks in the future (see Figure 4).

Figure 4 – MPC’s leverage ratios

Risks

The demand for EV cars continues to increase. Higher demand for cars that use electric, hybrid, and alternative fuels, can decrease the sales of PMC’s petroleum-based transportation fuels to significantly lower levels in the future. The company is trying to move toward renewable businesses. For example, on 8 March 2023, MPC announced the acquisition of 49.9% interest in LF Bioenergy, which is an emerging producer of renewable natural gas in the United States, for $50 million. However, the company needs more capital expenditures on renewable energies to compensate for the negative effect of the increasing vehicle electrification on its revenues.

Moreover, MPC operates and sells a considerable part of its products outside the United States. Thus, the company’s operations and cash flows can be negatively affected by economic and political instability in the markets outside the United States. Besides, the company has a significant debt obligation. Thus, to expand its renewable business, the company’s debt obligations can increase significantly in the future. However, higher debt obligations mean more vulnerability to economic and regulatory conditions, and more limited ability to pay dividends, finance more funds, share repurchases, and capital expenditures.

Summary

Due to strong domestic and foreign demand for petroleum products, and U.S. low inventories, the market condition is favorable for MPC. Also, overall, the company’s financial position improved in 2022, and for now, the company is not facing financial challenges. The stock is a buy. However, there are some risks that should be considered.

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