Marathon Petroleum: Handling COVID-19, Strong Potential
Summary
- Marathon Petroleum has an impressive portfolio of assets. The company has made some good decisions in handling COVID-19.
- It has managed to raise a respectable amount of debt at a great interest rate. That means the company can handle the downturn.
- The company pays a respectable dividend rate of near 6%. That, combined with a multiple expansion, will result in strong shareholder returns.
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Marathon Petroleum Corporation (NYSE: NYSE:MPC) is a more than $25 billion petroleum and natural gas exploration company. The company has an impressive portfolio of assets, and it's been focused on handling COVID-19 and growing its cash flow. Its impressive portfolio of assets positions the company to generate strong cash flow during the downturn.
(Marathon Petroleum Assets - Marathon Petroleum)
Business Update
Marathon Petroleum has been focused on updating its business to handle a COVID-19 world.
(Marathon Petroleum Business Update - Company Investor Presentation)
Marathon Petroleum has been focused an addressing the business impacts from COVID-19. It cut capital spending by $1.4 billion, or ~30%, to improve its financial position. At the same time, the company has reduced annual operating expenses by $950 million, resulting in a near-$2.5 billion in financial positioning improvements.
The company is continued to focus on improving its facilities. It has increased its revolver capacity by $1 billion and issued $2.5 billion in senior notes to improve liquidity. We'll discuss Marathon Petroleum's financial position in more detail later, however, the company's rate on these $2.5 billion in notes in late April is impressive.
(Marathon Petroleum Note Issuance - Company Press Release)
Marathon Petroleum issued $1.25 billion in notes at 4.5% due in 2023 and another $1.25 billion in 4.7% notes due 2025. That financial position is significant - being able to get 3-5 year debt at 4.5% in the downturn gives the company the financial position to handle the worst of the downturn. It can handle the recession and continue to perform.
Overall, Marathon Petroleum can handle the worst of the downturn.
1Q 2020 Updates
Marathon Petroleum 1Q 2020 results indicate the strength of the company's financial position.
(Marathon Petroleum 1Q 2020 Results - Company Investor Presentation)
It had a $0.16 / share loss for the quarter, a fairly minimal loss for the company. Marathon Petroleum, however, had the position to handle the downturn - it had just under $1.9 billion in adjusted EBITDA and $1.25 billion in cash from operations. The company paid out almost $400 million of dividends, maintaining its near-6% dividend.
Marathon Petroleum's ability to continue generating significant cash and paying a respectable dividend, even through a GAAP loss, highlights its financial strength. The diversified strength of its business is also highlighted here. The company had balanced retail and midstream EBITDA YoY, while its refining EBITDA collapsed.
The collapse in refining EBITDA is obviously COVID-19-related, however, the company's ability to maintain strength in its other businesses supports its overall cash flow.
Cash Flow Position
It's tough to hide that this wasn't a difficult quarter for the company when taking a look at its cash flow positioning. However, given that this was one of the worst COVID-19-related quarters, the future looks bright.
(Marathon Petroleum Cash Flow - Company Investor Presentation)
Marathon Petroleum saw its "net cash balance" drop by $2.6 billion when you account for the net debt the company has decreased. The difficult quarter, however, highlights abnormally high capital spending - the company's total year capital spending has gone from $4.7 billion to $3.3 billion. That means its remaining quarterly spending will be more like $800 million.
Going forward, as the refining cash flow increases, along with spending cuts, this will help Marathon Petroleum's financial portfolio to increase significantly.
2Q 2020 Outlook
Marathon Petroleum's 2Q 2020 outlook is much more exciting as the company balances out the downturn and looks forward to a recovery.
(Marathon Petroleum 2Q 2020 Results - Company Investor Presentation)
Marathon Petroleum sees respectable merchandise sales with respectable sales volume. The company should see solid revenue per barrel of throughput as volume and the throughput % remains respectable. Keeping roughly 50% volume throughput at a $6.9 / barrel spread and 1.07 million barrels / day throughput should be managed by the company's distribution cost.
The company will still lose some money but losses should be half of what they were in the 1Q. As utilization goes upward, Marathon Petroleum's financial results will continue to improve. That continued improvement in its financial results are enough to support increased shareholder rewards.
Capital Spending
The company's new capital spending highlights are visible here.
(Marathon Petroleum Capital Spending - Company Investor Presentation)
Marathon Petroleum has a significant stake in MPLX LP (MPLX), and the subsidiary makes up roughly a third of the company's capital spending plans. That significant ownership is despite the cuts in the capital spending plans. However, it's worth noting that the significant capital spending cuts, along with the spending so far, means the company's capital spending will be lower going forward.
However, it's worth noting that the MPLX holding is incredibly valuable. The company earns more than a billion in cash flow from Marathon Petroleum annually from the dividends and has a stake worth many billions. That provides the company with some liquidity and a significant amount of cash flow, and a strong and sustainable midstream business.
Liquidity Outlook
Marathon Petroleum has a significant amount of liquidity and the financial position to handle the downturn.
(Marathon Petroleum Credit Facility - Company Investor Presentation)
Marathon Petroleum drew $2 billion on its revolving credit facility in March 2020 and drew another $1.5 billion on its revolving credit facility in mid-April 2020. The company issued $2.5 billion in senior notes, allowing it to maintain its liquidity, and secured an additional $1 billion revolving credit facility balancing out what it withdrew.
The company's credit facility means significant liquidity for the downturn. That means the ability to emerge stronger and continue shareholder rewards. Those who invest today will get a respectable dividend and strong appreciation potential.
(Marathon Petroleum Maturities - Company Investor Presentation)
It's also worth highlighting here that Marathon Petroleum's senior note maturities relative to its size is something that's incredibly manageable, as highlighted by the company's minimal net debt outside of MPLX. The company's $6.75 billion in liquidity is enough to cover debt due until the mid-2020s and is actually roughly 60% of its total debt.
The company's overall financial position and manageable debt again support continued strength in its shareholder rewards.
Risks
Marathon Petroleum's risk is actually much lower than that faced by standard oil companies because its risk isn't from oil prices but from a halt in retail volume from a continued shutdown. Fortunately, the United States continues to reopen, and continued reopening means continued volume. We expect that the first and second quarters will be the worst for the company, with a significant recovery. That recovery is affordable by the company's liquidity.
After that recovery, the company's 6% dividend, billions in EBITDA, and overall financial strength will mean strong close to double-digit returns for those who invest today. That, combined with a potential multiple expansion as markets recover, will mean the potential for significant shareholder rewards for those who invest in Marathon Petroleum.
Conclusion
Marathon Petroleum has recently managed to raise a respectable amount of debt at a great interest rate to handle the worst of the downturn. Given that 1Q and 2Q are likely the company's worst quarters, that, combined with the debt raise, means it can easily handle the downturn. The company's interest rate and maturity schedule show that it's well-positioned.
Past that, Marathon Petroleum has an exciting asset portfolio. It's cut capital spending by a respectable amount, while still leaving ample room to position itself for a recovery. The company's MPLX holding continues to pay solid cash, and its diversified asset base means that while refining falters, the other assets remain strong.
Overall, the company's cash generation here makes it a great long-term investment.
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This article was written by
The Value Portfolio specializes in building retirement portfolios and utilizes a fact-based research strategy to identify investments. This includes extensive readings of 10Ks, analyst commentary, market reports, and investor presentations. He invests real money in the stocks he recommends.
He is the leader of the investing group The Retirement Forum with features including: model portfolios, macro overviews, in-depth company analysis and retirement planning information. Learn more.Analyst’s 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.
Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.
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Comments (17)
MPC is NOT a petroleum and natgas exploration company! They do zero exploration They are America's largest refiner, with hugh midstream pipelines and retail gasoline holdings.
