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Summary

  • MPC is poised to benefit from the growth in U.S. and Canadian shale development, and from the lower U.S. natural gas price.
  • After the retreat in its stock price, it is now an excellent opportunity for long-term investment in MPC at a cheap price.
  • MPC has compelling valuation metrics and strong earnings growth prospects; its PEG ratio is extremely low at 0.68.
  • MPC is generating strong free cash flows, and it returns value to its shareholders by stock buyback and by increasing dividend payments.

Marathon Petroleum Corporation (NYSE:MPC) stock fell sharply on June 24, along with the refinery sector, as regulators have decided to allow some exports of ultra-light oil. However, in my opinion, the new regulation will not affect the company. Marathon Petroleum is poised to benefit from the growth in U.S. and Canadian shale development, and from the lower U.S. natural gas price. Marathon Petroleum has compelling valuation metrics and strong earnings growth prospects; hence investors can take advantage of the last drop in its stock price to buy a good-yielding great stock at a cheap price.

The Company

Marathon Petroleum Corporation operates an integrated refining, marketing and transportation system concentrated primarily in the Midwest, Gulf Coast and Southeast regions of the U.S. The company is the nation's fourth largest transportation fuels refiner and largest in the Midwest. MPC became an independent company on July 1, 2011, and launched MPLX LP (NYSE:MPLX), a midstream master limited partnership, on October 26, 2012.

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Source: Investor Presentation - May 2014

Valuation Metrics

The table below presents the valuation metrics of MPC; the data were taken from Yahoo Finance and finviz.com.

Marathon Petroleum's valuation metrics are excellent; the forward P/E is very low at 7.72, and the Enterprise Value/EBITDA ratio is also very low at 6.22.

According to James P. O'Shaughnessy, the Enterprise Value/EBITDA ratio is the best-performing single value factor. In his impressive book "What Works on Wall Street", Mr. O'Shaughnessy demonstrates that 46 years back-testing, from 1963 to 2009, have shown that companies with the lowest EV/ EBITDA ratio have given the best return. Mr. O'Shaughnessy explains that EV/ EBITDA is a better way to assess value-that is, how cheap or expensive it is-than looking at the P/E ratio alone. The EV/ EBITDA is neutral to a company's capital structure and capital expenditures. Stocks that have very high debt levels often have low P/E ratios, but this does not necessarily mean that they are cheap in relation to other securities.

Latest Quarter Results

On May 01, Marathon Petroleum reported its first-quarter 2014 financial results, which missed EPS expectations by $0.23 (21.90%) and beat Street's estimates on revenues.

The company reported 2014 first-quarter earnings of $199 million, or $0.67 per diluted share, compared with $725 million, or $2.17 per diluted share, for the first quarter of 2013. First-quarter 2014 earnings included pretax pension settlement expenses of $64 million, which have historically been excluded in arriving at earnings adjusted for special items.

In the report, MPC President and Chief Executive Officer Gary R. Heminger said:

This quarter we successfully completed major turnarounds at our two largest refineries, Galveston Bay and Garyville. This was our first significant turnaround at Galveston Bay, and we are pleased with the outcome. Along with other maintenance work across our operations, this was the largest quarterly combined turnaround activity in our history. While we had much larger than normal turnaround expenses in the first quarter, we are well-positioned to continue our top-tier operational performance.

Next Quarter Results

Marathon Petroleum will report its second-quarter 2014 financial results on July 31. MPC is expected to post a profit of $2.25 a share, a 15.4% rise from the company's actual earnings for the same quarter a year ago.

Dividend and Share Repurchase

The forward annual dividend yield is at 2.21% and the payout ratio only 31.2%.

Since the company generates lots of cash, has a low debt and the payout ratio is low, there is an excellent chance that the company will continue to raise its dividend payment.

Over the last two years, the company spent more than $3.0 billion in share repurchases.

During the first-quarter, MPC returned $812 million to shareholders, $123 million in the form of dividends and $689 million in share repurchases.

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Source: Investor Presentation - May 2014

Competitors

A comparison of key fundamental data between Marathon Petroleum and its main competitors is shown in the table below.

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The stocks in the group have similar solid fundamentals. However, Marathon Petroleum has the lowest PEG ratio, and the highest average earnings growth estimates among the stocks in the group.

Technical Analysis

The charts below give some technical analysis information.

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Chart: finviz.com

The MPC stock price is 4.55% below its 20-day simple moving average, 10.47% below its 50-day simple moving average and 9.07% below its 200-day simple moving average. That indicates a short-term, mid-term, and a long-term downtrend.

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Chart: TradeStation Group, Inc.

The weekly MACD histogram, a particularly valuable indicator by technicians, is negative at -1.90 and descending, which is a bearish signal (a rising MACD histogram and crossing the zero line from below is considered an extremely bullish signal). The RSI oscillator is at 39.09 which do not indicate oversold or overbought conditions.

Analyst Opinion

Among the 15 analysts covering the stock, four rate it as a Strong Buy, seven rate it as a Buy and four analysts rate it as a Hold.

TipRanks is a website that ranks experts (analysts and bloggers) according to their performance. According to TipRanks, among the analysts covering MPC stock there are ten analysts who have the four or five star rating, eight of them recommend the stock, and two analysts have a Hold rating on the stock.

On July 11, Citigroup's analysts Faisel Khan and Mohit Bhardwaj upgraded Marathon Petroleum to Buy from Neutral-noting that "the market under-appreciates Marathon Petroleum's earnings power following a number of acquisitions, new initiatives in the midstream and pipeline business, and more than $3.0 billion in share repurchases over the last 2 years."

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Source: TipRanks

Major Developments

On May 22, 2014, Marathon Petroleum announced that its subsidiary, Speedway LLC, has signed a definitive agreement with Hess Corporation (NYSE:HES) to acquire Hess Retail Holdings LLC. This transaction incorporates all of Hess` retail locations, transport operations and shipper history on various pipelines, including approximately 40,000 barrels per day (bpd) on Colonial Pipeline. The total consideration is $2.874 billion comprised of a cash purchase price of $2.37 billion, an estimated $230 million of working capital and $274 million of capital leases. The acquisition is expected to be funded with a combination of debt and available cash and is anticipated to close late in the third quarter of 2014, subject to customary closing conditions and regulatory approvals.

In my opinion, Hess acquisition is very positive to the company. According to MPC, This acquisition will be transformative for MPC and Speedway as it will significantly expand its retail presence from nine to 23 states through these premier Hess locations throughout the East Coast and Southeast. MPC's strategy is focused on growing higher-valued, stable cash flow businesses, and this transaction fully supports that objective. The company expects operating and G&A expense synergies of $75 million, and integrating light product supply savings of $45 million.

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Source: Hess Retail Acquisition

Marathon Petroleum's stock fell sharply on June 24, along with the refinery sector as regulators have decided to allow some exports of ultra-light oil. The stock lost 9.0% from $88.98 on June 23, to $80.97 on June 25. However, according to Citigroup, the recent US ruling allowing limited exports of lightly processed oil may permit the equivalent of only 3.6% of US crude to be sold on international markets this year. Exports would give US producers access to niche markets in Asia and Latin America while having only a small impact on the price domestic refiners pay for crude, according to Steve Sawyer, an analyst at FGE, an energy consultancy.

In my opinion, the new regulations will not affect Marathon Petroleum, and investors can take advantage of the last drop in its stock price to buy a good stock at a cheap price. Moreover, according to comments from US officials, the spirit of the law, that hydrocarbon liquids produced in the US must be processed in the US, remains in place, and permits for condensate exports do not constitute a precedent for crude oil.

Marathon Petroleum is well positioned to benefit from the growth in U.S. and Canadian shale development. Most of this oil is traveling through the Mid-Continent and heading toward the Gulf Coast. Marathon Petroleum is a large Gulf Coast refiner (535,000 BPCD capacity), and it is benefiting from the increasing supplies and from the lower feedstocks price. MPC eliminated foreign sweets and increased Canadian Heavy imports; North American crudes increased from 63% to 85%.

Lower-cost North American natural gas also provides a competitive advantage and upgrading opportunities. Significant production from shale basins is expected to keep U.S. natural gas prices low and disconnected from global oil and LNG prices for the foreseeable future. Another growth driver for the company is the higher global distillate demand; distillates (diesel, kerosene, jet fuel) margins are significantly higher than gasoline due to less spare distillates production capacity versus demand.

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Source: Investor Presentation - May 2014

Despite existing low distillate margins, MPC is expecting attractive crude spreads, as shown in the company's chart below.

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Source: Investor Presentation - May 2014

Conclusion

Marathon Petroleum is well positioned to benefit from the growth in U.S. and Canadian shale development. Marathon Petroleum has compelling valuation metrics and strong earnings growth prospects; its PEG ratio is extremely low at 0.68, and its Enterprise Value/EBITDA ratio is also very low at 6.22

Marathon Petroleum is generating strong free cash flows, and it returns value to its shareholders by stock buyback and by increasing dividend payments. All these factors lead me to the conclusion that MPC stock is a long-term smart investment right now.

Source: Why Marathon Petroleum Is A Buying Opportunity In A Good-Yielding Stock