CRAK - Marathon Petroleum: I See Opportunity In This Retracement

2023-06-22 14:38:56 ET

Summary

• Marathon Petroleum Corporation reported a total income of $35.08 billion in the first quarter of 2023, down 8.6% from the same quarter a year ago and down 12.5% sequentially.
• Marathon Petroleum declared a global R&M margin of $26.15 per Bbl based on throughput per region.
• I recommend buying Marathon Petroleum stock between $108 and $110, with potential lower support at $105.75.

Introduction

The independent U.S. refiner and marketer, Ohio-based Marathon Petroleum Corporation ( MPC ), released its first-quarter 2023 results on May 2, 2023.

Note: I have followed MPC quarterly since 2018. This new article updates my article published on February 13, 2023.

1Q23 Results Snapshot

Marathon Petroleum reported a better-than-expected adjusted income of $6.09 per share for the first quarter, compared with $1.49 last year.

Net income was $2,724 million , compared to $845 million in 1Q22. Revenues decreased significantly from $38.38 billion last year to $35.08 billion . The total costs and expenses were $31,016 million compared to $36,668 million last year.

During the first quarter, Marathon Petroleum repurchased $3.18 billion of shares and a further $1.2 billion in April. The company authorized an additional $5 billion share repurchase and has a remaining authorization of $9 billion.

The company's results were clearly boosted by the stronger-than-expected performance of Marathon's key Refining & Marketing segment. (Please see the chart below.)

Stock Performance

Marathon Petroleum has outperformed Phillips 66 ( PSX ), Valero Energy ( VLO ), and VanEck Oil Refiners ETF ( CRAK ). MPC is up 28% YoY.

Investment Thesis

Marathon Petroleum Corporation has continued outperforming the group over the past few months, albeit less pronounced now. The main driver of this solid performance is that the company has strengthened its assets and improved its performance significantly.

Marathon Petroleum also owns a majority stake ( 64.6% ) in a midstream partnership called MPLX LP ( MPLX ).

Most of Marathon's midstream segment is handled by MPLX LP. Therefore, Refining & Marketing, or R&M, is MPC’s main operational segment.

MPC has regularly outperformed MPLX on a one-year basis. On the other hand, MPLX LP is paying a higher dividend yield of 9.21%.

The company has shown exceptional performance in 2022 and is likely to retrace in 2023.

Profit margins went up to the roof, and energy demand is expected to be supportive in 2023 and, more specifically, in 2024. However, oil prices are going down, with disappointing news from China.

Also, analysts are still predicting a recession in the second half of 2023, affecting demand. Thus, it is prudent to trade LIFO for about 50% of your long-term position in case of a steep retracement if the market gets frightened by an increased risk of a painful recession.

Keeping a long-term holding makes sense from an investor's perspective. As shown below, MPC pays a dividend yield of 2.68%, which is not negligible but still a little low compared to its peers, with PSX leading the group.

Revenue, net income, and profit margin compared to Valero Energy and Phillips 66 in 1Q23.

The total shares outstanding diluted has been reduced by 21.3% YoY. Marathon also approved an additional $5 billion share repurchase and has a remaining authorization of $9 billion.

Margins by Region

Marathon Petroleum declared a global R&M margin of $26.15 per Bbl based on throughput per region. Margins dropped by 9.3% QoQ, but are up 70.8% YoY.

Details below:

Marathon Petroleum - Financial History: The Raw Numbers - Ending First Quarter 2023

Source: Company News .

* MPC debt is $6,886 million , and MPLX debt is $20,394 million in 1Q23, with a gross Debt-to-Capital ratio of 45% (consolidated).

Analysis: Earnings Details

1 - Revenues and other income were $35.08 billion in 1Q23

Note: Basic revenues were $34.86 Billion.

Marathon Petroleum reported a total income of $35.08 billion in the first quarter of 2023, down 8.6% from the same quarter a year ago and down 12.5% sequentially.

Net income was $2,724 million or $6.09 per diluted share compared to $845 million in 1Q22, beating analysts' expectations.

The operating income from the Refining & Marketing and the Midstream units totaled $3,032 million and $1,213 million , respectively, exceeding expectations. However, operating income is slowly falling from the record-2Q22.

1.1 - Refining & Marketing

The company reported an operating income of $3,032 million, compared to only $768 million in the same quarter a year ago. The significant improvement was due to higher year-over-year margins and refined product sales that compensated for lower capacity utilization. The refining margin was $26.15 per barrel in 1Q23 , up from $15.31 a year ago.

Throughput increased from 2,833 mbp/d in the year-ago quarter to 2,837 mbp/d. Capacity utilization during the quarter was down to 89% . Finally, operating costs per barrel increased by 8.8% from last year due to the turnaround-related outgo.

Below is the Refinery margins history:

1.2 - Midstream

Marathon Petroleum's general and limited majority partners are MPLX LP. Segment profitability was $1,213 million, up 13.2% from $1,072 in 1Q22. MPLX has underperformed MPC on a one-year basis. However, the company now pays a higher dividend yield than MPC of 9.21%.

CFO Maryann Mannen said in the conference call (emphasis added):

Like many in the industry, several of our refineries were impacted by winter storm Elliot at the end of December. These impacts carried into the first quarter, reducing our crude throughput by 3 million barrels. Winter Storm Elliott and higher planned maintenance in the Gulf Coast region reduced overall refining utilization , which was down 5% to 89%. Sequentially, per barrel margins were lower in all regions compared with the fourth quarter.

2 - 2Q23 Outlook

3 - Free cash flow was $3,600 million in 1Q23

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 $15,523 million , with approximately $3,600 million in 1Q23.

4 - The total debt is $27.28 billion (consolidated) in 1Q23

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

MPLX's debt is $6.886 billion . As shown below, the debt is $27.28 billion on a standalone basis, with a debt-to-capital ratio of 20% and 45% on a consolidated basis. Total cash is $11,452 million (MPC standalone cash was $11,059 million).

Technical Analysis (Short Term) and Commentary

Note: The chart is adjusted for the dividend.

MPC forms an ascending channel pattern, with resistance at $116.1 and support at $109.6.

Ascending channel patterns are generally short-term bullish, moving higher within an ascending range, but these patterns usually form within longer-term downtrends as continuation patterns.

As I said in my preceding article, I expected a retracement in H1 2023, and was spot on. I believe we are not done yet, and more downside should occur.

The overall strategy I suggest in my marketplace, "The Gold And Oil Corner," is to keep a long-term position and use about 50% to trade LIFO while waiting for a higher final price target for your core position between $130 and $135.

The trading strategy is to sell above $116 and $117 with possible higher resistance at $118. I suggest waiting for a retracement between $108 and $110 to accumulate again, with potential lower support at $105.75.

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.

For further details see: