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Marathon Petroleum Corp (MPC) announced last week on Monday that it will buy a refinery plant from BP in a deal valuing the plant and complementary assets at $598 million. Investors are happy and send shares of Marathon Petroleum up by 5.6% on the day. During the week, Marathon's shares gave up all the gains from Monday as equity markets sold off during the week, and investors took profits in refinery stocks.

The Deal

Marathon Petroleum announced that it would buy BP's Texas Refinery with a capacity of 475,000 barrels per stream, per day. The purchase includes three interstate NGL pipelines, four terminals, retail marketing contract assignments for approximately 1200 branded sites and a 1,040 megawatt co-generation facility.

Marathon will pay a base price of $598 million for the facilities and another $1.2 billion for the inventories. Furthermore Marathon will provide earnout provisions which could reach up to $700 million in six years time.

CEO Gary R. Heminger commented on the deal, "This world-scale refinery and related assets complement our current geographic footprint and align well with out strategic initiative of growing in existing and contiguous markets to enhance our portfolio. This acquisition will provide MPC the opportunity to capture synergies across our existing Gulf Coast operations; optimize commercial and process improvements; expand our retail presence in the Southeast and enhance our ability to sell products into export market."

Marathon Petroleum did not provide financial information for the facility. Based on the calendar day production of 475,000 barrels per day, and the base price of $598 million, Marathon pays around $3.50 per barrel in refining capacity, for on of the largest refineries in the country. The deal seems very cheap. In August, Tesoro (TSO) bought BP's Californian refinery for $175 billion, or the equivalent of $1.80 per barrel in refining capacity. While Tesoro bought the entire facility for $1.17 billion, it re-sold all other facilities besides the refinery for $1 billion to Tesoro Logistics LP (TLLP).

Currently, Marathon Petroleum is the fifth largest refiner of the country with a refining capacity of 1.2 million barrels per day. The latest acquisition will boost its refining capacity to 1.7 million barrels.

Marathon expects to close the deal early in 2013. The company will pay for the acquisition with cash at hand. Furthermore the deal is expected to be accretive to earnings in year one. The proposed agreement is subject to customary closing conditions. No shareholder approval is required.

Valuation

Marathon Petroleum ended its second quarter of 2012 with $1.9 billion in cash and equivalents. The company operates with roughly $3.3 billion in short and long term debt, for a net debt position of $1.4 billion. Financing the latest deal should not provide any difficulties for Marathon.

For the first six months of 2012, the company generated revenues of $40.5 billion. The company reported a net profit of $1.41 billion, or $4.07 per diluted share. At this rate, the company could generate revenues of $80 billion for 2012, on which it could earn around $2.8 billion, or $8.00 per diluted share.

Currently the market values Marathon Petroleum at roughly $18.4 billion. Based on the full year estimates, the market values the firm at 0.2 times annual revenues and 7 times annual earnings.

Currently, Marathon Petroleum pays a quarterly dividend of $0.35 per share, for an annual dividend yield of 2.6%.

Investment Thesis

Year to date, shares of Marathon Petroleum have risen some 63%. Shares steadily rose from $31 in January and almost doubled to $60 earlier in October. Shares have seen a 10% pullback, now exchanging hands at $54 per share.

Between 2008 and 2012, Marathon Petroleum has boosted its revenues from $64.9 billion to some $80 billion. Net profit rose from $1.2 billion in 2008, to an estimated $2.8 billion for 2012.

Marathon reported second quarter operating earnings of $1.3 billion in its refining segment. It refined some 1.34 million barrels per day during the quarter. Based on this simple metric, the 475,000 facility of BP should be able to generate operating profits around $500 million per quarter as the market conditions for US refiners have never been better.

Personally I think that firms like Marathon and Tesoro made stellar deals. Market circumstances are beneficial as a result of the discount of WTI crude versus Brent oil, resulting in booming refining margins in the US. Furthermore BP has been a major seller of US operations, pushing down prices. Both Marathon Petroleum and Tesoro made deals with estimated payback times of less than a year. Even if market conditions normalize, both deals seem to be absolute winners.

I like the deal of Tesoro a little better given the more favorable conditions and the potential of synergies with Tesoro's own adjacent refinery. Hurdles in the regulatory approval process are a risk tough.

Source: Marathon Petroleum - BP Is Handing Out Free Money Again