January 19, 2015 Marathon Petroleum Corporation (MPC-NYSE) Current Recommendation SUMMARY DATA NEUTRAL Prior Recommendation Underperform Date of Last Change 01/07/2014 Current Price (01/16/15) $77.56 Target Price $81.00 52-Week High $96.92 52-Week Low $75.79 One-Year Return (%) -6.47 Beta 2.49 Average Daily Volume (sh) 3,055,749 Shares Outstanding (mil) 280 Market Capitalization ($mil) $21,732 Short Interest Ratio (days) 2.15 Institutional Ownership (%) 83 Insider Ownership (%) 1 Annual Cash Dividend $2.00 Dividend Yield (%) 2.58 5-Yr. Historical Growth Rates Sales (%) 12.1 Earnings Per Share (%) 8.0 Dividend (%) 51.6 using TTM EPS 9.5 using 2015 Estimate 10.2 using 2016 Estimate 7.8 Zacks Rank *: Short Term 1 3 months outlook 3 Hold * Definition / Disclosure on last page SUMMARY We are maintaining our Neutral recommendation on Marathon Petroleum shares. We like MPC for its scale advantage, impressive asset quality and extensive midstream/retail network. We believe management s steady dividend increases, ongoing share repurchase program, and acquisition of BP s Texas City refinery could further boost shareholder value. Finally, MPC s purchase of Hess retail biz will expand its fuel trading operations. However, we think the current valuation is fair and adequately reflects the company s future growth prospects. Moreover, Marathon s core business refining is faced with a high degree of volatility, while being capital intensive. This is expected to limit its ability to generate positive earnings surprises. As a result, our longterm total return expectation for Marathon remains muted. Risk Level * Average, Type of Stock Large-Blend Industry Oil Refing&Mktg Zacks Industry Rank * 154 out of 267 ZACKS CONSENSUS ESTIMATES Revenue Estimates (In millions of $) Q1 Q2 Q3 Q4 Year (Mar) (Jun) (Sep) (Dec) (Dec) 2013 23,345 A 25,703 A 26,274 A 24,932 A 100,254 A 2014 23,345 A 26,933 A 25,481 A 22,055 E 97,814 E 2015 21,930 E 21, 930 E 21,678 E 23,803 E 89,341 E 2016 91,855 E Earnings Per Share Estimates (EPU is operating earnings before non-recurring items, but including employee stock options expenses) Q1 Q2 Q3 Q4 Year (Mar) (Jun) (Sep) (Dec) (Dec) 2013 $2.17 A $2.00 A $0.59 A $2.10 A $6.86 A 2014 $0.67 A $3.00 A $2.42 A $1.46 E $7.55 E 2015 $1.04 E $2.91 E $2.61 E $1.07 E $7.63 E 2016 $9.94 E Projected EPU Growth - Next 5 Years % 12 2015 Zacks Investment Research, All Rights reserved. www.zacks.com 10 S. Riverside Plaza, Chicago IL 60606
OVERVIEW Findlay, Ohio-based Marathon Petroleum Corporation (MPC) is a leading independent refiner, transporter and marketer of petroleum products. The company, in its current form, came into existence following the 2011 spin-off of Houston, Texas-based Marathon Oil Corporation s refining/sales business into a separate, independent and publicly traded entity. Marathon Petroleum operates in three segments: Refining and Marketing, Speedway (Retail), and Pipeline Transportation. Refining and Marketing: The unit s operations include seven refineries having a combined crude processing capacity of 1.7 million barrels per day, concentrated primarily in the Midwest, Gulf Coast and Southeast regions of the country. Additionally, Marathon Petroleum through its marketing organization sells transportation fuels, asphalt and specialty products throughout the country to support commercial, industrial and retail operations. This segment contributed bulk of the company s 2013 earnings (almost 85%). Speedway (Retail): Marathon Petroleum also possesses a profitable retail footprint headquartered in Enon, Ohio. Known as Speedway LLC, it is the second biggest chain of company-owned and - operated gasoline and convenience stations in the U.S. Speedway consists of some 2,740 stores in 22 states. Another strong motor fuel brand of the company is Marathon, available in the Midwest and Southeast regions of the U.S. through approximately 5,400 retail outlets operated by independent entrepreneurs in 19 states. Pipeline Transportation: The company s Pipeline Transportation segment which oversees one of the biggest petroleum pipeline networks in the U.S. based on total volume delivered owns, operates, leases or has an ownership interest in about 8,300 miles of pipeline, consisting of 52 systems spread over 15 states and federal waters. Marathon Petroleum transports around 2.2 million barrels of crude oil and petroleum products daily through these pipelines. The unit also includes Marathon Petroleum s 73.6% interest in MPLX, a publicly traded master limited partnership that owns, operates, develops and acquires pipelines and other midstream assets. REASONS TO BUY Marathon Petroleum is the fourth largest domestic refiner with a combined crude oil processing capacity of approximately 1.7 million barrels per day through its portfolio of seven refineries. A major advantage for the company is its proprietary access to pipelines, which inhibits lower-cost competitors from supplying Marathon Petroleum's key markets. The purchase of BP Plc's Texas City refinery one of the largest and most complex in the country has helped Marathon Petroleum to solidify its position in the fuel export business, apart from improving production flexibility. Marathon Petroleum is through with its $2.2 billion Detroit Heavy Oil Upgrading Project. The completion of the project on budget and on schedule will not only deliver an extra 80,000 barrels a day of heavy oil processing capacity but also free up capital expenditures and boost the company s free cash flow. The company s financial flexibility and strong balance sheet are real assets in this highly-uncertain period for the economy. Marathon Petroleum remains in excellent financial health, with $3.8 billion in liquidity sources and an investment-grade credit rating. Furthermore, regular dividend increases and the ongoing share buyback program highlight the company s commitment to create value for shareholders. Equity Research MPC Page 2
The $2.87 billion acquisition of the retail arm (including gas stations and pipelines) of integrated energy firm Hess Corp. is seen as a big positive. The transaction, which closed in Sep 2014, will significantly expand Speedway s fuel trading operations in the U.S. east and southeast coast. REASONS TO SELL The refining segment which contributes the bulk of Marathon Petroleum s revenues and earnings is the major driver to the company s results. However, with refiners being buyers of crude, an increase in oil prices can squeeze their profitability. The inherent volatility of the refining business reduces the accuracy and reliability of long-term earnings and revenue estimates. Additionally, results are exposed to unplanned shut-downs that may have a lingering impact. Marathon Petroleum plans to invest roughly $4.0 billion during the 2014 2016 timeframe quite high by industry standards. This may adversely affect the company s leverage and deteriorate its credit metrics. Additionally, the increasing capital intensity of its operations may result in reduced returns going forward. The requirement of policies to reformulate fuel and lower emission from refinery operations make the industry a highly regulated one. As a result, companies like Marathon Petroleum are often forced to divert cash flows to ensure regulatory compliance, which can adversely impact profitability. Any relaxation of the four-decade ban on crude oil exports may eat upon the domestic supply glut fueled by the U.S. fracking revolution and result in oil price increase. Eventually, the domestic and international prices would converge and refinery margins will deteriorate. The U.S. companies (like Marathon Petroleum) which are not allowed to export oil but can ship refined products such as gasoline and diesel will lose the price advantage it has been enjoying of late. RECENT NEWS Fourth Quarter 2014 Results Announcement Marathon Petroleum plans to release its fourth quarter and full year 2014 results on Feb 4, 2015 before the opening bell. VALUATION We like Marathon Petroleum s strong seven-plant refining portfolio and its diversification into retail/midstream business lines, which make the stock potentially more stable. Additionally, the company possesses one of the healthiest balance sheets among peers and a robust free cash flow generating ability. The periodic payout hikes and the ongoing buyback program highlight Marathon Petroleum s commitment to create value for shareholders. Equity Research MPC Page 3
However, due to the volatile nature of the refining business, we do not see any significant price upside for Marathon Petroleum shares in the next few quarters. We expect the company to grow at a somewhat more conservative and sustainable pace. This is reflected in our continued Neutral recommendation. Marathon Petroleum s trailing 12-month P/CF multiple is 6.8 compared to the 9.0 average for the peer group and 15.9 for the S&P 500. The company s trailing 12-month EV/EBITDA multiple is 5.8, compared to the industry average of 8.5. Marathon Petroleum s $81 price objective is based on a multiple of 7.1X the trailing twelve-month cash flow. Key Indicators F1 F2 Est. 5-Yr EPU Gr% P/CF 5-Yr High 5-Yr Low Marathon Petroleum Corp. (MPC) 10.2 7.8 12.0 6.8 9.5 17.5 3.6 Industry Average 27.7 16.8 11.8 9.0 27.7 90.3 10.4 S&P 500 15.9 14.9 10.7 15.9 18.3 19.4 12.0 Valero Energy Corp. (VLO) 8.1 5.9 8.2 5.7 6.7 199.8 3.9 Phillips 66 (PSX) 8.9 7.3 11.2 7.7 9.3 16.8 4.6 World Fuel Services Corp. (INT) 13.3 5.0 12.5 14.0 17.1 10.7 Tesoro Corp. (TSO) 10.9 8.6 18.8 10.1 12.3 22.4 4.2 TTM is trailing 12 months; F1 is 2015 and F2 is 2016, CF is operating cash flow P/B Last Qtr. P/B 5-Yr High P/B 5-Yr Low ROE D/E Last Qtr. Div Yield Last Qtr. EV/EBITDA Marathon Petroleum Corp. (MPC) 2.3 2.5 1.0 21.3 0.6 2.6 5.8 Industry Average 2.1 2.1 2.1 12.1 0.2 4.1 8.5 S&P 500 5.1 9.8 3.2 24.8 2.0 Equity Research MPC Page 4
Earnings Surprise and Estimate Revision History Equity Research MPC Page 5
DISCLOSURES & DEFINITIONS The analysts contributing to this report do not hold any shares of MPC. The EPS and revenue forecasts are the Zacks Consensus estimates. Additionally, the analysts contributing to this report certify that the views expressed herein accurately reflect the analysts personal views as to the subject securities and issuers. Zacks certifies that no part of the analysts compensation was, is, or will be, directly or indirectly, related to the specific recommendation or views expressed by the analyst in the report. Additional information on the securities mentioned in this report is available upon request. This report is based on data obtained from sources we believe to be reliable, but is not guaranteed as to accuracy and does not purport to be complete. Because of individual objectives, the report should not be construed as advice designed to meet the particular investment needs of any investor. Any opinions expressed herein are subject to change. This report is not to be construed as an offer or the solicitation of an offer to buy or sell the securities herein mentioned. Zacks or its officers, employees or customers may have a position long or short in the securities mentioned and buy or sell the securities from time to time. Zacks uses the following rating system for the securities it covers. Outperform- Zacks expects that the subject company will outperform the broader U.S. equity market over the next six to twelve months. Neutral- Zacks expects that the company will perform in line with the broader U.S. equity market over the next six to twelve months. Underperform- Zacks expects the company will under perform the broader U.S. Equity market over the next six to twelve months. The current distribution of Zacks Ratings is as follows on the 1129 companies covered: Outperform - 16.0%, Neutral - 77.8%, Underperform 6.0%. Data is as of midnight on the business day immediately prior to this publication. Our recommendation for each stock is closely linked to the Zacks Rank, which results from a proprietary quantitative model using trends in earnings estimate revisions. This model is proven most effective for judging the timeliness of a stock over the next 1 to 3 months. The model assigns each stock a rank from 1 through 5. Zacks Rank 1 = Strong Buy. Zacks Rank 2 = Buy. Zacks Rank 3 = Hold. Zacks Rank 4 = Sell. Zacks Rank 5 = Strong Sell. We also provide a Zacks Industry Rank for each company which provides an idea of the near-term attractiveness of a company s industry group. We have 264 industry groups in total. Thus, the Zacks Industry Rank is a number between 1 and 264. In terms of investment attractiveness, the higher the rank the better. Historically, the top half of the industries has outperformed the general market. In determining Risk Level, we rely on a proprietary quantitative model that divides the entire universe of stocks into five groups, based on each stock s historical price volatility. The first group has stocks with the lowest values and are deemed Low Risk, while the 5 th group has the highest values and are designated High Risk. Designations of Below-Average Risk, Average Risk, and Above-Average Risk correspond to the second, third, and fourth groups of stocks, respectively. Equity Research MPC Page 6