Marathon Petroleum: Stock Up 63% In A Year, On Track For Good 2023 Performance (MPC)

Marathon Petroleum Corporation’s (NYSE:MPC) stock price is up 63% since my year-ago review but it is well-positioned for 2023.

Marathon Petroleum owns 2.9 million barrels per day (BPD) of US oil refining capacity and the majority of a well-integrated midstream partnership. It benefits from the barrier to entry of high capital costs.

MPC bought back 30% of its shares in the first nine months of 2022 and likely completed more buybacks in 4Q22.

The company is expected to show good 4Q22 returns, typically a weaker quarter for refiners. With declining oil prices in 2023, upcoming higher 2Q and 3Q demand, lack of Russian diesel exports, advantaged US refining (vs. Europe) and the bump of cash flow from MPLX, I recommend MPC as a buy.

Investors should not confuse Marathon Petroleum with Marathon Oil (MRO), with which it was once integrated. MRO’s business is upstream exploration and production.

Macro

Energy demand worldwide is expected to grow in 2023 and 2024, although the three key variables are the European economies, the Chinese (and other Asian) economies and the trade friction resulting from Russian export sales to non-Western countries rather than Europe.

Another factor is whether or not the US elects to refill the Strategic Petroleum Reserve.

Supply signals are mixed due to a) redirection of Russian oil, gas, and distillate away from Europe, and b) whether OPEC chooses to, or even can, increase its oil production.

And, while December’s inflation rate of 6.5% came in about where expected, the Federal Reserve may continue to raise rates, albeit more slowly: its inflation target is 2.0%.

Gasoline is the largest-volume refining product. Toyota’s CEO has voiced what other automakers won’t: not everyone wants or can afford a new electric vehicle (EV). Just as it became painfully evident in 2022 there were insufficient renewables (and no baseload renewables since renewables are intermittent) to replace Russian gas in Europe, there may be a similar miscalculation about the speed of EV adoption in the US.

Investors should factor in the current administration’s anti-hydrocarbon stance. So, too should the new 1% tax on stock buybacks and the 15% minimum tax for companies making over $1 billion in profits be considered.

Oil Prices And Refining Profitability

As the EIA’s STEO forecast shows, oil prices are expected to drift down in 2023 and 2024.

The January 13, 2023, closing NYMEX futures oil price was $79.86/barrel for WTI at Cushing, RBOB gasoline was $2.53/gallon, and diesel/heating oil was $3.26/gallon. (All are for February 2023 delivery.)A recent price of WCS or West Canadian Select—one of Marathon’s important crude feedstocks—was almost $23/bbl lower than WTI. This difference will shrink as the Keystone Pipeline ramps up. However, MPC gets Canadian crude via Enbridge (ENB), not Keystone.

Moreover, natural gas prices are also lower. Natural gas is a refinery fuel and so also a cost, although not as key as oil feedstock.

The crack spread is defined as three barrels of crude subtracted from the sum of 2 barrels of gasoline and one of distillate, and the specific crude used for this calculation is WTI-Cushing. The trend in the 3-2-1 crack spread, a measure of refining profitability, is shown below, with high levels for most of 2022, above $30/barrel.

For 2023, the EIA predicts gasoline refining margins will fall 29% and diesel refining margins will fall 20%.

Third Quarter 2022 Results And Guidance

Because much of its midstream is contained in a separately traded partnership, MPLX LP (MPLX), refining is MPC’s main operational focus. Marathon sells petroleum products to wholesale customers, to the Speedway business segment, and to independent retailers operating under the Marathon, Arco, and several other brands.

In the third quarter of 2022 MPC reported net income of $4.5 billion or $9.06/share. This compared to a net income of $694 million or $1.09/share for 3Q21. Adjusted EBITDA for the quarter was $6.8 billion compared to $2.4 billion for 3Q21.

MPLX increased its distribution 10%. As majority owner, Marathon Petroleum expects to receive $2 billion annually from MPLX.

Marathon Petroleum increased its own quarterly dividend 30% to $0.75/share.

Projected 4Q22 crude refinery throughputs, including a turnaround at the Garyville, Louisiana refinery, were 2.69 million BPD, or 93% of capacity.

The sweet/sour mix of crudes for the first nine months of 2022 was 52% sweet/48% sour. However, for 4Q22 MPC expected the mix to be 55% sweet/45% sour.

Marathon’s South Texas Asset Repositioning (STAR) project is due online in 2023: it will add 40,000 BPD of heavy crude capacity at the Galveston Bay refinery. Marathon Petroleum estimated the EBITDA benefit of the STAR project at more than $500 million.

Competitors

Marathon Petroleum is headquartered in Findlay, Ohio. It competes with virtually every US refiner. Total US operable oil refining capacity is 17.9 million BPD so Marathon Petroleum’s share is 16%, similar to the US share for Valero (VLO).

Barriers to the US refining industry remain high due to siting issues; the large, fixed cost of capital assets; and a regulated, consumer-facing gasoline (and jet fuel and diesel) business that is highly competitive and much-scrutinized. All of Marathon Petroleum’s 2.9 MMBPD of oil refining capacity is domestic.

While Marathon’s largest refineries are on the US Gulf Coast, investors may note that its Catlettsburg, Kentucky and Canton, Ohio refineries can process oil and condensate produced from the nearby Utica field in Ohio.

In renewable diesel (RD), MPC’s Dakota Prairie Refining has 11% of current RD capacity of 114,000 BPD. For those keeping score at home, US RD capacity is thus only 0.6% of US oil refining capacity.

Dakota Prairie competes with existing plants owned by, among others, HF Sinclair (DINO) in Cheyenne, Wyoming; Phillips 66 (PSX) in Rodeo, California; and the market leader—the Valero-Darling Ingredients (DAR) joint venture, Diamond Green Diesel (DGD). DGD, in Norco, Louisiana, has 64,000 BPD of capacity, or 56% of the current US RD total.

However, MPC has a conversion to RD of its Martinez, California refinery underway, and is joint-venturing 50-50 on the plant with Finnish refining and RD company Neste. The plant is expected to come online in the second half of 2023.

Governance

At January 1, 2023, Institutional Shareholder Services ranked Marathon Petroleum’s overall governance as 6, with sub-scores of audit (8), board (1), shareholder rights (9), and compensation (4). In this measurement, a score of 1 represents lower governance risk and a score of 10 represents higher governance risk.

As of August 2022, Marathon Petroleum’s ESG ratings from Sustainalytics were “medium” with a total risk score of 29 (58^th percentile). Component parts are environmental risk 15.9, social 7.0, and governance 5.8. Controversy level is 3 (significant) on a scale of 0-5, with 5 as the worst.

At December 15, 2022, shorts were 3.6% of the floated stock. Insider ownership is a small 0.34%.

*Note on January 4, 2023, TRC Capital Investment made a “mini-tender” offer for 1.5 million shares at $105/share, less than the current market price. MPC has urged stockholders to reject the offer.

The company’s beta is 1.60, representing steeper volatility than the market but reflectingvariability in refining margins as a function of both crude oil prices (feedstock costs) and product prices.

On September 29, 2022, much of Marathon Petroleum’s stock was held by institutions, some of which represents index fund investments that match the overall market. The three largest institutional holders were Vanguard (9.8%), BlackRock (9.2%), and State Street (7.3%).

BlackRock and State Street are signatories to the Net Zero Asset Managers Initiative, a group that, as of December 31, 2022, manages $59 trillion (down from $66 trillion in November 2022) in assets worldwide and which–despite less energy supply due to reduced Russian exports to Europe–limits hydrocarbon investment via its commitment to achieve net zero alignment by 2050 or sooner.

Vanguard has withdrawn from this initiative.

Logistics Partnership

At September 30, 2022, Marathon Petroleum owned 64.6% of the limited partnership units of $34.2 billion master limited partnership, MPLX LP (MPLX). Assets are primarily pipelines and terminals. While the partnership yields 9.1%, attractiveness of partnership units is specific to an investor’s tax situation and are not evaluated in this analysis.

A consideration is that Marathon Petroleum operationally integrates the partnership’s midstream assets with its refining assets. Since Marathon Petroleum owns 64.6% of MPLX it receives large unit payouts as explained previously.

Financial And Stock Highlights

Marathon Petroleum’s market capitalization at the January 13, 2023, stock closing price of $121.93 per share is $57.1 billion.

The 52-week price range is $67.49-$127.62 per share, so the closing price is 96% of the one-year high. The company’s one-year target price is $135.57/share putting the closing price at 90% of that level. Put another way, there is an 11% upside to the average one-year target price.

Trailing twelve months’ earnings per share (EPS) is an extraordinary $22.27 that reflects blowout refining margins in 2022 and the effect of share buybacks.

The average of analysts’ estimated EPS for 2022 is $25.47 and for 2023 is $15.85 for a price-earnings ratio of 4.8 for 2022 and 7.7 for 2023. MPC has beat analysts’ EPS estimates by $0.38-$2.57/share in each of the last four quarters.

Trailing twelve-month returns on assets and equity are both superlative at 11.7% and 38.8%, respectively.

At September 30, 2022, the company had $55.9 billion in liabilities, including long-term debt of $25.6 billion, and $89.7 billion in assets giving Marathon Petroleum a liability-to-asset ratio of 62%.

Note the company’s $27.1 billion of total debt divides as $7.0 billion for MPC and $20.1 billion for MPLX.

Trailing twelve months’ operating cash flow was $15.65 billion and levered free cash flow was $11.2 billion.

Marathon Petroleum pays a dividend of $3.00/share, a yield of 2.5%.

Returns to shareholders have been much higher due to the company’s extensive stock buyback program (30% of outstanding shares, a $15 billion total commitment). On September 30, 2022, Marathon Petroleum had $5 billion left under its current share purchase authorization.

The company’s mean analyst rating is 1.9, or “buy,” from the nineteen analysts who follow it.

Marathon Petroleum will report 4Q22 results January 31, 2023.

Notes On Valuation

Book value per share is $56.08, less than half its current market price, indicating positive investor sentiment.

The EV/EBITDA ratio is a small 3.7, well below the preferred ratio of 10 or less and suggesting MPC stock is a bargain.

Positive And Negative Risks

Potential investors should consider their oil supply/pricing and petroleum product price expectations (e.g. refining margins) as the factors most likely to affect Marathon Petroleum.

Along with EIA’s predictions, simple reversion to the mean suggests likely tighter future margins.

Inflation generally is a negative risk, as is the possibility of a recessionary demand drop or an equity market downdraft.

Recommendations For Marathon Petroleum

While Marathon Petroleum Corporation has seen a large 63% increase in its stock price in the last year, better-than-expected 4Q22 margins create earnings momentum as refiners move into the high-volume second and third quarters of 2023.

The company has a good forward price/earnings ratio of 7.7. Its dividend yield of 2.5% is modest; repurchases boosted yields to investors. The new minimum tax and stock buyback tax may slow MPC.

Marathon has initial RD experience with its Dickinson plant. Partnering with Neste for the larger Martinez plant is beneficial.

The 40,000 BPD STAR expansion of the Galveston Bay refinery benefits MPC, part of its extant stance in oil refining, which has high barriers to entry.

Although refining margins are expected to shrink in 2023, they are doing so from an unusually high level in 2022.

I recommend Marathon Petroleum as a buy to energy investors.