Marathon Petroleum (NYSE:MPC) has had a wild year with activist investors Elliott Management and DE Shaw seeking a shakeup to unlock value at the company early in the fall. In response, Marathon Petroleum had launched restructuring programs that included plans to spinoff the company's retail operations. However, after Seven & i, the owner of 7-Eleven, ditched its plans to buy Marathon Petroleum's Speedway branded gas stations, the company's shares took a hard fall and are back in value territory at only 0.75x book value with the price around $39.15 per share. For long-term value investors interested in more than a short-term pop from spinoff plans, Marathon Petroleum's highly profitable operations look attractive at a 5.6% dividend yield and 9.9x TTM P/E.
Data by YCharts
A Quick Intro to the Company
With a history dating back to 1887 and the Ohio Oil Company, Marathon Petroleum's 2018 acquisition of Andeavor for around $23B has made the company the largest independent U.S. refiner by capacity. The acquisition also geographically diversified Marathon Petroleum's previously largely mid-western operations to include refineries in Alaska, California, Minnesota, New Mexico, North Dakota, Texas, Utah, and Washington. The company is also partially vertically integrated, operating in the refining, midstream, retail, and industrial products parts of the industry.
Profitable & Growing
Marathon Petroleum's partially vertically integrated operations have allowed the company to achieve an average return on equity (ROE) and return on invested capital (ROIC) of 17.4% and 12.3%, respectively, over the past decade. While the company is cyclical along with the industry, this average level of profitability is well above my rule of thumb of 9% ROIC, allowing me to be confident that Marathon Petroleum is able to maintain and continue to increase its intrinsic value over a business cycle. Over the past decade, the company has never had one unprofitable year, even during the depths of the oil drop in 2016.
Source data from Morningstar
On the growth side, book value per share has grown from $11.51 in 2011 to $51.88 in the past quarter, which when combined with the dividends paid out from equity, yields an average growth of 26.1% annually which further supports the ROE and ROIC averages.
Conservative Financial Leverage
Marathon Petroleum's financial leverage has bounced around a bit over the past decade as the company has made acquisitions with debt and equity. Financial leverage, currently, sits around 2.92x in the latest quarter and it remains relatively unchanged from the 2010 level. This gives me comfort that the company will be able to drive through the next recession with a similar capital structure to what it had back then. 
Source data from Morningstar
Marathon Petroleum does a great job returning cash to shareholders in the form of dividends and share repurchases. Since Marathon Petroleum's 2010 fiscal year, the company has bought back on average 0.9% of its outstanding shares each year as can be seen in the graph above. Adding these share repurchases on top of the current 5.6% yield would imply a total shareholder yield of 6.5%. Best of all is that these share repurchases have not been financed by dramatically changing the capital structure. While financial leverage has increased to around 2.92x in the latest quarter, it remains relatively unchanged from the 2010 level.
Marathon Petroleum issued notable shares in 2018 during the Andeavor acquisition but has already started the repurchases again. If we look at share repurchases from 2010 to 2017 before the Andeavor acquisition, Marathon repurchased 28.5% of their shares outstanding for an average of 2.5% each year.
Great Cash Flow Generation
To get an idea of the sustainability of dividends and share repurchases, we can take a look at what percent of cash flow from operations is available to be returned to shareholders after making the necessary capital expenditures. As can be seen below, Marathon Petroleum does a tremendous job of returning cash flow to shareholders in the form of dividends and share repurchases. With capital expenditures and acquisitions only taking up on average 75% of cash flow from operations over the past decade, this leaves approximately 25% to be returned to investors in the form of dividends and share repurchases. With cash flow from operations of $9.4B last year in the first full year with Andeavor, this 25% would imply free cash flow to shareholders of $2.5B for around a 9.3% free cash flow yield at the current $25.4B market capitalization.
Source data from Morningstar
Take Away
Marathon Petroleum looks like a great value investing opportunity in the current market rut. At a $25.4B market capitalization, the company is worth only a little bit more than its 2018 acquisition of Andeavor. For long-term value investors interested in more than a short-term pop from spinoff plans, Marathon Petroleum's highly profitable operations look attractive at a 5.6% dividend yield and 9.9x TTM P/E.
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