MPLX - Marathon Petroleum's Comfortable Market Position Suggests A Buy On Weakness

2024-01-18 19:53:02 ET

Summary

• Marathon Petroleum reported strong Q3 results, with $4.4B in EBITDA and $8.14 per share of adjusted earnings.
• Management expects strong demand for its products.
• The company's transportation arm, MPLX, generates significant cash and is expected to raise its distribution.
• In the short-term, we expect lower crack spreads to negatively affect performance during the winter.

Marathon Petroleum ( MPC ), North America's largest fossil fuel refiner, sits in a comfortable place being top of the table in EBITDA margin per barrel. Mike Hennigan, CEO, noted, "we start with EBITDA per barrel. We want to make sure we’re generating as much earnings as we can as we run our assets." The purpose is to ensure flexibility for returning shareholder value. Although, we have written from time to time about Marathon , our main interest is in MPLX ( MPLX ), the transportation arm. Writing about Marathon offers us insight into MPLX's future. For investors of Marathon, the company is extremely well managed, but macro circumstances, crack spreads, play major roles in determining results. Those critical parameters fell significantly since the last report. Now, the question for investors has to be will the superior results continue? Shall we walk closer to the corral for a better view.

The Company

Marathon has a storied history that began in Ohio drifted elsewhere and returned to Ohio. It operates the only refinery in Michigan. Its thirteen refineries, scattered across the U.S, give it presence in many markets. The company's mark within the renewable business includes two facilities, a former Calumet Specialty Products ( CLMT ) in Dickenson, North Dakota and a converted fossil refinery in Martinez, California. The later, a 700 million gallon per year renewable diesel plant, was scheduled to become fully operational by the end of last year.

The Last Quarter

Now, let's get into inspecting that stall. Management noted strong results for its 3rd quarter "with global supply tightness supporting refining margins." Diesel cracks lead the way.

For the quarter, the company delivered ,

• $4.4B in EBITDA with 94% on stream time for refining.
• $8.14 per share of adjusted earnings.
• $5.7B in EBITDA for the company in total.
• Used $2.8B for share repurchases. (From early 2021 through today, Marathon repurchased more than 40% of its stock.)
• Averaged 2.8 million barrels per day of crude input.

Guidance for the 4th quarter includes:

• 90% utilization for 2.6 million barrels per day. (Unexpected turnarounds pulled forward are significantly impacting the operation.)

Management noted that two unscheduled outages, at Galveston and Garyville, were headwinds at almost 7 million barrels of crude processing lost. Work scheduled for early 2024 was pulled forward.

Marathon reported strong results expecting it to continue, but outages and lower crack spreads will negatively affect the 4th quarter results.

Going Forward

At the time of the call, management observed strong demand both domestically and globally for all of its products. But several changes happened after the call to change demand. Diesel or distillate demand fell in November and December. Jet fuel remained generally steady. The result, in the next table, shows a precipitous fall in crack spreads. From our own collected data using daily EIA numbers , the results from one area, the Gulf Coast, are dramatic.

The Gulf Coast 2-1-1 spread averaged 10% lower in 2023. Reviewing the 4th quarter year over year shows further losses.

On a year over year basis, the cracks dropped 48%; quarter over quarter, the drop equals 40%. This drop is much greater than in the 3rd quarter year over year change.

The company does use derivatives for hedging prices; thus, its real effect is yet to be determined. We expect a level of weakness comparing both year over year and quarter over quarter.

The Big MPLX Effect

Marathon carries in total $27B of debt, but only $7B of it is with the refiner. MPLX, the independent transportation arm, carries the rest of it, a practice management plans to continue.

MPLX generates a lot of cash paying a strong distribution of which MPC expects to receive $2.2B per year. This cash covers the dividend and greater than half of the capital. Expectations for continued growth in MPLX cash results will likely continue to the raise its distribution.

Dividend

With the strong cash generation, strength with MPLX and already having purchased close to half its stock in two and half years, dividend increases within Marathon must be approaching. What else can management do with the cash? Regarding this issue, management did increase the dividend by 10% requiring only a small amount of the cash. At some point in the next two years, market conditions will force a serious revaluation. Cash for higher, significantly higher dividends, will likely be available.

New Refining Capacity Risks

Beginning in 2024 and continuing through most of the rest of the decade, a significant increase in global refining capacity will come online. Valero , at its last conference, noted that its basically becoming more behind schedule. Yet, margin effecting capacity is coming in China, Mexico, Kuwait, and Nigeria. Totals will equal 1.5 million barrels per day adding to the already 103 million today in operation. Analysts expect a level of margin pressure with this change. One wrote, it could be a tough year .

Marathon's Risks

With Marathon, it is important to distinguish between possible risks, what are and what aren't. MPLX, its transportation arm, pays the MPC dividend and most of the capital. A terrible falling out for long periods of time would be needed to affect the dividend. What, in our view, is at risk, the stock price from lower crack margins. Those key business elements collapsed hard in the 4th quarter and continue to drift in the low $20s. We rate this company a hold until after the call-in late January. GasBuddy posted its projections for 2024 on fossil fuel product pricing and crack spreads. From its report,

"GasBuddy predicts that the highest holiday retail fuel prices next year will be seen on Memorial Day, falling in the range of $3.56-$4.04 per gallon, with May delivering the highest national average for gasoline prices at $3.89 per gallon."

This is up from under $3 on average today.

Conclusion

Marathon faces two risks negatively impacting its 4th quarter results - unplanned refinery outages and a collapse in crack spreads. Also, thus far in the first quarter, cracks remain trapped near 4th quarter averages. We aren't expecting stellar results at the January 30th report. With the stock price having not corrected materially during the last six months, investors might be wise in holding off purchasing until after the results are reported and for any negative effect on the price.

Marathon is an exceptionally well management company and business. It can't change certain negative macro effects. It appears that this winter offers macro weaknesses that could or likely will negatively affect the business. But, as with the oil business, cycles do rule, and an upward cycle seems returning. Remember, a surplus of capacity might also contribute to negative pressures. Again, after the January earnings and the dust settles if any, we would likely re-rate the company a buy. The corral still looks clean and tight going forward.

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