Marathon Petroleum Corporation (NYSE: MPC)
Highlights:
- MPC owns a stable
midstream pipelines business which generates excellent cash flows, with more
than 16% dividend yield.
- Recent sale transaction of Speedway brings in $16.5B cash in net of taxes.
- Remainder of the holding company, MPC’s refineries and storage and pipelines, are selling in the market for less than $2B, which generated more than $2B in operating earnings.
Business
Introduction:
Marathon Petroleum is one
of the largest refiners of petroleum products in US. It owns and controls one
of the largest pipelines companies (MPLX) and it used to own the retail chain ‘Speedway’,
which just got sold to 7-Eleven.
Refinery Operation:
MPC currently owns and
operates 16 refineries in the Gulf Coast, Mid-Continent and West Coast regions
of the United States with an aggregate crude oil refining capacity of 3 million
barrels per day. This division produced more than $2.3B in annual operating
earnings in 2018 and 2019.
Mid-Stream Pipelines:
Along with their own
storage and pipelines, the Midstream segment also consists of MPLX LP (“MPLX”).
MPLX is a diversified, large-cap master limited partnership (“MLP”) formed in
2012 that owns and operates midstream energy infrastructure and logistics
assets, and provides fuels distribution services. MPLX owns more than 17,000
miles of pipelines and more than 33M barrels of storage capacity. This division
produced $3.6B in operating earnings for 2019. MPC owns approximately 63% of
the outstanding MPLX common units. MPC received $1.82B
in dividends from MPLX in 2019.
Speedway Retail:
This is the
marketing/retail end of the operation which got sold to 7-Eleven for $21.5B and expect to receive $16.5B in After tax proceeds.
Conservative
balance sheet:
Cash: ~$1B, Total debt (Q2
2020): $10.6B
Cash proceeds from
Speedway Sale: $16.5B, Net Cash: ~$7B
Operating Earnings of
refinery and Midstream: ~$4.6B
Interest: $400M; Interest
Coverage: 11 times
Net Income: $2.6B
Here is
a snapshot of historical consolidated financial data from the 2019 Annual
report:
The company generated more than $13B in cumulative after-tax profits in the last five years as stated above.
Valuation:
Stock
Price: $31/share; Market Cap: $20.3B (9/11/20); Debt: $10.6B; Cash: $17.6B;
Enterprise Value: $13.3B
P/E:
7.7; EV/EBITDA: 2.25
MPLX
market value of 63% @ 18/share: $11.4B
Refinery
operation: Valued at $2B based on the above.
When
adjusted for net cash and MPLX ownership position, we are paying 1 times
operating earnings for one of the largest refiners in the America.
Catalysts:
·
Cash inflows from the sale of Speedway, debt
payback and cash distribution to shareholders.
·
Some form of normalcy in the derived
petroleum products and hence the crack spread and usage of pipelines flow.
·
Activist fund Elliott management has been
pushing management to increase the value of the company, who was also behind
the sale/separation of Speedway.
·
Attractive valuation relative to their
assets and cash flows.
Risks:
·
General economic downturn may hinder the
growth of the business as the refinery business is cyclical, especially given
the Covid-19 crisis now.
·
If it takes longer to return to some
normalcy, then large losses at refineries may erode the safety of net cash
position.
Summary:
·
Stable business through the ownership of
pipelines combined with cyclical refinery operation.
·
Net Cash business during the downturn to
survive and thrive.
·
Priced very attractive relative to the
current and future potential profits.
Disclosure: I own a
significant position in shares of MPC.
