Marathon Petroleum Corporation (NYSE:MPC), the crown jewel of Findlay, Ohio, has had a turbulent few quarters, hitting a high back in July of 2015 at $60.38 a share and falling to a low of $29.24 on February 9th 2016. Since then it has recovered off its low by 26.47% to $36.98 a share as of Monday. In this article I will give brief overview of MPC. I then will cover undervalued and under-appreciated assets at MPC. I will conclude with risks to MPC's business and a brief explanation of my valuation for MPC.
According to MPC's investor relations website:
MPC is the nation's fourth-largest refiner, with a crude oil refining capacity of approximately 1.8 million barrels per calendar day in its seven-refinery system. Marathon brand gasoline is sold through approximately 5,600 independently owned retail outlets across 19 states. In addition, Speedway LLC, an MPC subsidiary, owns and operates the nation's second-largest convenience store chain, with approximately 2,760 convenience stores in 22 states. MPC owns, leases or has ownership interests in approximately 8,300 miles of crude and light product pipelines and 5,000 miles of gas gathering and natural gas liquids (NYSE:NGL) pipelines. MPC also has ownership interests in 51 gas processing plants, 11 NGL fractionation facilities and one condensate stabilization facility. Through subsidiaries, MPC owns the general partner of MPLX LP, a midstream master limited partnership. MPC's fully integrated system provides operational flexibility to move crude oil, NGLs, feedstocks and petroleum-related products efficiently through the company's distribution network and midstream service businesses in the Midwest, Northeast, Southeast and Gulf Coast regions.
Undervalued and Underappreciated Assets
Many investors underestimate the value of MPC's retail assets. Now I am not just talking about from a multiple approach but also from a stability approach. The percentage of operating income contributed from retail assets has grown from 7% in 2011 to 14% in 2015. Few people understand or realize the size, scale, and scoop of MPC's assets. Some have whisper monopolistic characteristics in some markets. MPC has fallen under such lawsuits but has successfully defended itself. The acquisition of Hess has allowed it to expand its retail empire up and down the east coast. Much credit needs to be given to the integration team that was able to transform the Hess stations into the MPC's own Speedway stations well under schedule. In just 5 years MPC has grown retail income from $271 million to $673 million in 2015, almost $700 million if you exclude the $25 million LLM inventory charge. Both gasoline distillates sales and merchandise sales increased year over year. The sales increase was due to a growth in margins. Gasoline and distillates margins grew by 2.7% and merchandise by 3.7%. This growth in margins help decrease the impact of the decline in volume sales of gasoline and distillates. Volume has fallen 4 out of the last 5 years. A continue decline in volume is a major concern. Weakening demand in Asia in the near term and the addition to capacity around the globe also puts pressure on overall volume.
One of the most undervalued assets at MPC is Gary Heminger, President and CEO and a board member of MPC. He has been with Marathon since 1975. Over the course of his career he has served numerous roles from a VP for Emro, the predecessor of Speedway, to a VP of business development to the executive VP of Supply, Transportation, and Marketing. His final role before his current was of executive VP of the Downstream of Marathon Oil (NYSE:MRO) before the split. Essentially Mr. Heminger has served in every major aspect of MPC's business prior to his appoint of his current position in July of 2011. He is the mastermind of the strategy that gave MPC the efficiency, flexibility, optionality to capture opportunities across all markets MPC serves and has created strong financial performance for investors. He is now focusing MPC's efforts to growing the higher value, stable cash-flow min-stream and retail segments while improving refining margins. Under his guidance I am confident MPC will continue to generate strong returns for investors. In the event of his retirement or untimely departure from MPC, I believe it will directly affect MPC's future performance.
There are numerous risks that limit MPC's share price appreciation. These risks include surprisingly strong narrowing of the Brent-WTI spread. Raw material quality that could cause delays in the refining process, including bottlenecks at refineries.
MPC has positioned itself well compared to its competitors. Its geographical refinery diversification and logistic assets and networks allows MPC to capitalize on opportunities that their competitors cannot. They have also heavily invested in their refinery and are able to process large amounts of sour and heavy crudes at lower-cost. My 12-month price range is $45.45-$50.50 per share. This represents a 22-36% upside from Mondays close. This is based off of EPS of $5.05 and a P/E ratio 9-10, which is well within its historic range.
Disclosure: I am/we are long MPC.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.