On Wednesday (February 1) Marathon Petroleum Corp. (MPC), the unit that was spun off from Marathon Oil Corp. (MRO), announced that it may itself spin off its pipeline and logistical assets sometime in the second half of 2012. The company, which consists of the downstream operations of Marathon Oil Corp., is under increasing pressure to increase shareholder value, namely by New York-based hedge fund Jana Partners LLC, who currently hold a 5.5% stake in MPC.
Marathon Petroleum Corp. was spun off from the Marathon Oil Corp. last July, taking with it downstream operations. Marathon Oil Corp. maintained all upstream operations in the separation of the two entities. MPC currently operates six refineries in the United States along with roughly 9,600 miles of pipelines and logistical equipment. The company currently has the capacity to refine approximately 1.2 million barrels of crude oil per day. Additionally, it also has a distribution network of a little more than 5,000 outlets (independently owned) in 18 states. Obviously all of this requires an extensive logistical network. It is the 9,600 miles of pipeline and the logistical assets which are under consideration for a separate spin-off into a Master Limited Partnership.
For those of us familiar with a Royalty Trusts the Master Limited Partnership (MLP) is a close cousin. MLPs must derive at least 90% of their income from qualifying sources. In this case the qualifying source would be the transportation of oil. The parent company, in this case MPC, would become the general partner whilst the investors (unit holders) would become the limited partners. The MLP then pays a Quarterly Required Distribution (QRD) that is "free" of corporate income tax. Of course units (i.e. shares) in the MLP remain liquid as they are traded on the open market, thus giving you and me the benefit of liquidity, quarterly income and the gains (or losses) of share-price changes.
To gain somewhat of an idea of what an IPO of MPC's pipeline and logistical assets could look like, if indeed one takes place, we can look for a moment at Tesoro's (TSO) IPO of its downstream assets last April. The IPO opened at $21; at the time of this writing (February 2) Tesoro Logistics (TLLP) was trading at $33.24. For an in-depth analysis of TLLP check out StreetAuthority's very informative article on the company. Considering the growth in utilization of vehicles like Royalty Trusts and Master Limited Partnerships in the energy industry to increase profitability and shareholder value, and looking at the history of Jana Partners as an activist hedge fund that is known for takeovers and forcing spin-offs, an IPO of MPC's downstream assets looks more and more like a certainty rather than a "consideration". Further, if the IPO of Tesoro's downstream operations along with the demands and reputation that Jana is known for are any indicators, MPC's potential IPO of its downstream operations looks to be very attractive.