Author Topic: MPC - Marathon Petroleum  (Read 11406 times)

Grossbaum

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MPC - Marathon Petroleum
« on: June 19, 2020, 08:58:09 PM »
Here is a preliminary analysis of the valuation of MPC. I think that the current stock price undervalues the combined businesses fairly significantly.

The attached PDF includes the write up with Financials and Graphics from Investor Presentations.

First a brief overview of each business segment:

Retail Segment
There are 2 separate components of the Retail Segment. One is the Speedway business and the other is the Direct Dealer business. Speedway operates 3,881 company owned convenience stores/gas stations. About 60% of the gross profit at the Speedway stores is from fuel margin and 40% of gross profit is from merchandise sales. Operating margin is about 5%. Speedway is currently set to be spun off by Q1 2021. The Direct Dealer business supplies fuel to 1,068 gas stations (mainly ARCO stations in Southern California)  under long-term supply contracts and retains a portion of the fuel margin. This Direct Dealer business was acquired through the 2018 acquisition of Andeavor.

Refining & Marketing Segment
MPC became the largest refiner in terms of domestic throughput capacity, at ~3 mmbbls/d, through its 2018 acquisition of Andeavor. MPC operates 16 refineries across the United States. MPC’s gross profit is the difference between the cost of its input (crude oil) and the price it receives from selling the resulting refined products produced in the refining process. This is known as the crack spread. MPC has a strong and diversified distribution network to sell the refined products it produces.

Midstream Segment
The main asset in this segment is MPC’s ownership in MPLX. A lot of the pipelines MPLX owns are used to either transport crude to MPC owned refineries or transport refined product from MPC owned refineries to end markets for sale. MPLX has 2 segments - 1) Logistics & Storage (L&S) and 2) Gathering & Processing (G&P) . The L&S segment consists mainly of transportation pipelines and terminals for crude oil and refined products, as well as retail distribution assets of refined products (trucks,etc). The G&P segment mainly handles gathering, processing and transportation of natural gas and NGLs. The G&P segment primarily operates in the Marcellus region. L&S makes up about 2/3 of the business and G&P makes up the other 1/3.

Valuation By Segment

Retail Segment
Using a Normalized EBIT for the Speedway business of $1.3b and a valuation of 12x EBIT, the Speedway business may be worth about $15.6b. The WSJ mentioned that 7-Eleven’s parent company was prepared to offer “more than $20b” but that deal was derailed by the pandemic. Marathon previously indicated a value between $15-18b last fall, after announcing spin off plans.

Using a Normalized EBIT for the Direct Dealer business of $0.3b and a valuation of 11x EBIT, the Direct dealer business may be worth about $3.3b EBIT.

In a sale scenario of the Speedway business, there would likely be taxes paid, but would be avoided if MPC went the spinoff route.

ATD/MUSA seem to be valued in the market at ~16.0x/16.5x EBIT, respectively. Preliminary analysis.

Refining Segment

Using a normalized EBIT of $2.4b and a 8x EBIT multiple, the refining segment may be worth $19b.

One question I have is, will the Refining business have significant cash losses this year? And if so how large? My thought is that by 2021 refineries will be back to operating at a high capacity, but perhaps that won’t be the case. Will it take years for earnings to return to 2019 levels?

VLO/HFC seem to be valued in the market at 9.9x/5.0x EBIT, respectively. Preliminary analysis (PSX, the other large domestic refiner has 2 other large segments, which makes it harder to tease out the valuation for just the Refinery business).

Midstream Segment

MPC owns 666m shares of publicly traded MPLX.

Assuming normalized EBIT of $4.8b, and a 8.2x EBIT valuation, MPLX LP would be worth about $39.7b, and net of the debt, the equity would be worth ~$19.0b, or about $21/share. MPC’s proportionate ownership would be worth $14b.

MPLX shares are currently trading at $18.30.

MPC also owns midstream assets outside of MPLX (a lot of non-consolidated, minority ownerships in pipelines), which are carried at ~$1.0b on the balance sheet. That may or may not reflect an appropriate value of those assets.

Corporate Segment

Unallocated costs are about $800m per year. MPC is still in the process of getting to an efficient overhead structure after the combination with Andeavor in 2018. I believe the normalized corporate expense will be $650m per year.

Summary Valuation
Refinery & Marketing - $19.0b - 8x EBIT - $2.4b EBIT
Retail Speedway - $15.6b - 12x -$1.3b
Retail Direct Dealer - $3.3b   -11x -$0.3b
Midstream - MPLX - $14.0b -8.2x      
Midstream - MPC Retained -$1.0b
Corporate -($6.5b) -10x -($0.65b)
Enterprise Value - $46.4b
MPC debt - ($8.8b)
MPC Equity Value - $37.6b

MPC Shares out   - 650.3
MPC Value / Share - $57.88

Current Price - $38.00
Conservative Upside +52%




Maple Fun

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Re: MPC - Marathon Petroleum
« Reply #1 on: June 19, 2020, 09:38:31 PM »
Nice writeup! Have been long since late March. Your mark for refineries a little bit higher than mine 8)

Maple Fun

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Re: MPC - Marathon Petroleum
« Reply #2 on: August 02, 2020, 09:06:07 PM »
Marathon Petroleum Corp. Announces Agreement for $21 Billion Sale of Speedway

Congrats!



RadMan24

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Re: MPC - Marathon Petroleum
« Reply #3 on: August 12, 2020, 09:40:49 PM »
How do you think about Phillips 66 in relation to the value prescribed here, particularly given the huge hit to PSXP valuation recently. PSX chemical business is a growth business; whereas refining is not. Flip side is, what does Marathon do with sale proceeds? Good call on valuation, looks like 7/11 paid $4b more than what many were initially offering for Speedway.

Dalal.Holdings

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Re: MPC - Marathon Petroleum
« Reply #4 on: August 19, 2020, 05:21:12 PM »
PSX has great management, but MPC has a huge pile of cash coming its way...6% payout seems ultra safe in that respect. MPC just needs to avoid doing anything dumb with the money.

Also, PSXP's exposure to DAPL is significant, hence the hit to its price. MPLX's exposure is limited relative to cash flows.
« Last Edit: August 19, 2020, 05:24:06 PM by Dalal.Holdings »

Grossbaum

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Re: MPC - Marathon Petroleum
« Reply #5 on: August 23, 2020, 06:35:50 AM »
I was surprised that the stock price didn’t go up more after the Speedway announcement. Here is an updated summary of the components of valuation for MPC, as I see it.

Summary Valuation
Refinery & Marketing      $19.0b      8x EBIT   $2.4b EBIT (2019 EBIT)
Retail Speedway           $16.5b      Agreed to sale; net after tax proceeds
Retail Direct Dealer        $3.3b      11x      $0.3b
Midstream - MPLX         $12.2b      647m shares @ $18.80 (8/21 price)      
Midstream - MPC Retained   $1.0b
Corporate                    ($5.5b)      10x      ($550m) est annual expense
Enterprise Value              $46.5b
MPC debt               ($9.9b)
MPC Equity Value         $36.6b

MPC Shares out         650.3
MPC Value / Share      $56.30

Current Price            $35.50
Conservative Upside      58.6%

At the current market value of $23.1b ($35.50/share), the Refining and Marketing business is being valued at about $5.5b on an enterprise basis (IF you assume the other component valuations are “accurate,” which may or may not be a reasonable assumption).

The Refining and Marketing business earned $2.4b of operating profit in 2019, so it is being valued at 2.3x EV/ ‘19 EBIT. Perhaps 2019 EBIT is above “normal” earnings. Nonetheless, my guess would be that if someone were to purchase all of the refining business for $5.5b, they would generate a very high return on that investment over time. Perhaps my estimation that the R&M business’s ability to produce meaningful “through the cycle” cash flow is incorrect.

I think VLO is the most comparable business to MPC’s refinery operation. They both have refining capacity of about 3mmbbls/day and VLO doesn’t have significant other businesses. It seems like VLO has a lower cost structure than MPC. Nonetheless, the current EV of VLO is $33.5b and MPC’s refining business is being valued at $5.5b. I don’t think the gap should be that big. VLO is currently trading at about 7.9x EV/’19 EBIT.

@RadMan24 I haven’t been as focused on PSX because I was of the opinion that it is harder to estimate the valuation the market is putting on its Refining business because of the other businesses PSX is in - compared to VLO which is closer to a pure refinery operation.


Dalal.Holdings

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Re: MPC - Marathon Petroleum
« Reply #6 on: August 23, 2020, 07:00:01 AM »
Another way to look at it—

If you subtract the $16.5B cash from your estimated EV you get $30B.

EV of the remaining MPC post speedway sale (subtracting $16.5B cash from current EV) becomes < than the market cap of $23B at about $16B. So the upside I see for shareholders post sale to your EV target is north of $80%...

FYI Grossbaum's math is correct, mine is wrong: shareholder upside to target EV of $30B ex Speedway post transaction is ~55%, not 80%.
« Last Edit: August 30, 2020, 02:46:14 PM by Dalal.Holdings »

Mephistopheles

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Re: MPC - Marathon Petroleum
« Reply #7 on: August 23, 2020, 03:34:16 PM »
Newcomer to O&G, but let me see if I understand correctly:

MPC Market Cap: $23 billion
MPC Corporate level net debt: $10.6 billion
MPLX Stake: $12.1 billion
Speedway Cash: $16.5 billion

This nets out to $5.1 billion. Refining did $2+ billion of EBIT last few years prior to COVID.

I'm just going to ignore the direct dealer, ex-MPLX midstream assets, and corporate overhead, let's pretend they all net out to 0.

That comes out to 2-3x adjusted EV/EBIT overall.

Why is it so damn cheap? Is the assumption that they will blow the $16.5 billion on something dumb? That the Speedway deal will fall apart? Or is it just that refining has always been such an awful business that's going to get even worse thanks to electric cars?
« Last Edit: August 23, 2020, 03:37:06 PM by Mephistopheles »

Maple Fun

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Re: MPC - Marathon Petroleum
« Reply #8 on: August 23, 2020, 04:44:17 PM »
Yes, MPC needs to prove itself. I speculate that we are going to see a 20-30% price jump immediately if the management committed that they won't do any M&A with the speedway cash.

Newcomer to O&G, but let me see if I understand correctly:

MPC Market Cap: $23 billion
MPC Corporate level net debt: $10.6 billion
MPLX Stake: $12.1 billion
Speedway Cash: $16.5 billion

This nets out to $5.1 billion. Refining did $2+ billion of EBIT last few years prior to COVID.

I'm just going to ignore the direct dealer, ex-MPLX midstream assets, and corporate overhead, let's pretend they all net out to 0.

That comes out to 2-3x adjusted EV/EBIT overall.

Why is it so damn cheap? Is the assumption that they will blow the $16.5 billion on something dumb? That the Speedway deal will fall apart? Or is it just that refining has always been such an awful business that's going to get even worse thanks to electric cars?

Dalal.Holdings

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Re: MPC - Marathon Petroleum
« Reply #9 on: August 24, 2020, 07:29:27 AM »
Given the valuation, incoming cash, and balance sheet, MPC has a lot less to prove than just about any other energy co out there these days...

And yeah, at these prices using cash for buybacks would make the most sense over any M&A for MPC. After all, the divi payout is north of 6% (which is higher payout than the interest on much of their debt) and we’ve already discussed the valuation.

7 and i seems very intent on completing the acquisition.
« Last Edit: August 24, 2020, 07:33:26 AM by Dalal.Holdings »