Marathon Petroleum Corporation (NYSE:MPC): A Refining Giant Poised for Continued Success

Published on September 24, 2024 | Ticker: MPC

Business Overview

Marathon Petroleum Corporation (NYSE:MPC) is a leading, integrated, downstream energy company that operates the nation's largest refining system. With a strong focus on operational excellence, strategic investments, and disciplined capital allocation, MPC is well-positioned to navigate the evolving energy landscape and deliver superior returns to its shareholders.

MPC's operations are organized into two reportable segments: Refining & Marketing and Midstream. The Refining & Marketing segment refines crude oil and other feedstocks, including renewable feedstocks, at the company's refineries in the Gulf Coast, Mid-Continent, and West Coast regions of the United States. It then purchases refined products and ethanol for resale and distributes refined products, including renewable diesel, through transportation, storage, distribution, and marketing services provided largely by the Midstream segment. The Midstream segment gathers, transports, stores, and distributes crude oil, refined products, including renewable diesel, and other hydrocarbon-based products, principally for the Refining & Marketing segment.

Financials

In the fiscal year 2023, MPC reported annual net income of $9.68 billion, annual revenue of $148.46 billion, annual operating cash flow of $14.12 billion, and annual free cash flow of $12.23 billion. These strong financial results demonstrate the company's ability to generate substantial cash flow and profitability, even in a challenging market environment.

Looking at the company's most recent quarterly performance, MPC reported net income attributable to the company of $937 million, or $2.58 per diluted share, for the first quarter of 2024. This compares to net income attributable to the company of $2.72 billion, or $6.09 per diluted share, in the first quarter of 2023. The decrease in net income was largely due to lower Refining & Marketing margins and higher turnaround costs, partially offset by a decreased provision for income taxes.

Refining & Marketing Segment

MPC's Refining & Marketing segment is a significant driver of the company's overall performance. In the first quarter of 2024, the Refining & Marketing segment generated adjusted EBITDA of $1.87 billion, compared to $3.85 billion in the first quarter of 2023. The decrease was primarily due to lower refinery throughput, as four of the company's largest and most profitable refineries were in turnaround during the quarter, limiting financial performance.

Refining & Marketing margin, which is the difference between the prices of refined products sold and the costs of crude oil and other charge and blendstocks refined, was $18.99 per barrel in the first quarter of 2024, compared to $26.15 per barrel in the first quarter of 2023. This decrease was largely due to narrower crack spreads, which are a measure of the difference between market prices for refined products and crude oil.

Midstream Segment

MPC's Midstream segment, which is primarily conducted through its majority-owned subsidiary MPLX LP, continues to be a significant source of stable and growing cash flow for the company. In the first quarter of 2024, the Midstream segment generated adjusted EBITDA of $1.59 billion, compared to $1.53 billion in the first quarter of 2023.

MPLX remains a strategic asset for MPC, as it provides transportation, storage, distribution, and marketing services to the Refining & Marketing segment under long-term, fee-based commercial agreements. Additionally, MPLX's cash distributions to MPC fully cover the company's dividend and more than half of its planned 2024 capital program.

Capital Allocation and Shareholder Returns

MPC is committed to a disciplined capital allocation framework that prioritizes investing in the business, paying a secure and growing dividend, and returning excess capital to shareholders through share repurchases. In the first quarter of 2024, the company returned $2.5 billion to shareholders through share repurchases and dividends.

Notably, MPC announced an additional $5 billion share repurchase authorization in April 2024, bringing the total remaining authorization to $8.8 billion as of the end of the first quarter. Since May 2021, the company has repurchased 312 million shares, or 48% of the shares outstanding at that time.

Outlook

Looking ahead, MPC remains optimistic about the refining industry's outlook. The company believes that global oil demand will continue to set records throughout the remainder of the decade, driven by the growing need for transportation fuels. At the same time, the company expects global supply to remain constrained, with limited capacity additions in the coming years.

For the second quarter of 2024, MPC is projecting higher refinery throughput volumes of nearly 2.8 million barrels per day, representing utilization of 94%. Planned turnaround expense is expected to be approximately $200 million, with activity primarily in the Mid-Continent region. Operating costs are projected to be $4.95 per barrel, much lower than the first quarter, reflecting the benefit of running the system near full utilization and lower expected operating costs.

Risks and Challenges

While MPC's outlook remains positive, the company faces several risks and challenges that investors should be aware of. These include volatile commodity prices, regulatory changes, environmental compliance costs, and potential disruptions to its operations due to unplanned shutdowns or other events.

Additionally, the company's operations in California are subject to the recently enacted Senate Bill No. 2 (SB X1-2), which authorizes the California Energy Commission to establish a "maximum gross gasoline refining margin" and impose penalties for exceeding the yet-to-be-issued margin cap. The impact of SB X1-2 and any associated regulations on MPC's current or future operations in California remains to be seen.

Conclusion

Marathon Petroleum Corporation is a well-positioned, integrated energy company with a strong track record of operational excellence and financial discipline. The company's focus on strategic investments, disciplined capital allocation, and a growing Midstream business through MPLX provide a solid foundation for continued success. While the company faces some risks and challenges, MPC's management team has demonstrated the ability to navigate the evolving energy landscape and deliver value to its shareholders.

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