Marathon Petroleum Corporation — Q2 2020 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2020. Amounts are in U.S. dollars; financial statement amounts are in millions unless noted. MPC is an integrated refining, retail and midstream company, with midstream operations conducted primarily through its majority-owned MPLX partnership.
Financial results and liquidity
- Q2 revenue: $15.0 billion, down from $33.5 billion in Q2 2019. Operating income was $981 million versus $2.0 billion; consolidated net income was $276 million, but net income attributable to MPC was only $9 million, or $0.01 per diluted share, compared with $1.1 billion, or $1.66 per share.
- First-half results: Revenue was $40.2 billion versus $61.8 billion. MPC reported a net loss attributable to MPC of $9.2 billion, or $14.21 per diluted share, versus net income of $1.1 billion, or $1.63 per share, in 2019. Operating loss was $10.8 billion.
- Major unusual charges and adjustments: First-half impairment charges totaled $9.2 billion: $7.33 billion of goodwill, $1.32 billion of equity-method investments and $517 million of long-lived assets. The six-month results also included a $1.74 billion lower-of-cost-or-market inventory charge. A $1.48 billion inventory valuation benefit in Q2 partially reversed the reserve as prices recovered.
- Cash flow: First-half operating cash flow was negative $230 million, compared with positive $4.25 billion in 2019. Investing cash outflow was $2.08 billion, including $1.91 billion of additions to property, plant and equipment. Financing provided $1.87 billion. Cash and cash equivalents were $1.09 billion at June 30, down from $1.53 billion at year-end.
- Debt and liquidity: Total debt was $32.6 billion at June 30, up from $29.3 billion at December 31, 2019; debt due within one year was $1.72 billion. MPC, excluding MPLX, reported $8.73 billion of total liquidity, including $1.02 billion cash and available facilities. MPLX reported $4.24 billion of liquidity. Both entities were in compliance with their financial covenants.
- Margins and segments: Refining & Marketing reported a Q2 operating loss of $1.62 billion; its margin was $7.13 per barrel versus $15.24 a year earlier. Retail operating income was $494 million, approximately unchanged, while Midstream operating income was $869 million, down $9 million. First-half operating income was $1.01 billion for Retail and $1.77 billion for Midstream; Refining & Marketing recorded a $2.24 billion loss.
- Other metrics: First-half capital expenditures and investments were $1.87 billion versus $2.73 billion in 2019. Interest expense was $730 million for the first half. MPC declared quarterly dividends of $0.58 per share in each of Q1 and Q2; it paid $755 million in dividends during the first half.
Material changes versus the prior comparable period
- COVID-19 restrictions sharply reduced travel, fuel demand and refined-product prices. Q2 refining throughput fell to 2.276 million barrels per day from 3.135 million; crude-oil capacity utilization was 71%, compared with 97%.
- Refining & Marketing margin and profitability deteriorated substantially, despite lower operating costs in aggregate. Retail fuel volumes also fell; same-store gasoline sales volume declined 36.6% in Q2, while higher fuel margins helped support segment income. Midstream earnings were comparatively resilient, supported by fee-based business and reduced operating expenses.
- First-half cash generation weakened substantially, with lower operating results and working-capital use—including a decrease in accounts payable—contributing to negative operating cash flow. MPC issued $2.5 billion of senior notes and used proceeds to repay revolving-credit borrowings; share repurchases were suspended.
- Goodwill fell from $20.0 billion at year-end to $12.7 billion at June 30, primarily because of impairment charges. Total assets declined from $98.6 billion to $84.6 billion, and MPC stockholders’ equity fell from $33.7 billion to $23.7 billion.
Outlook, management commentary and risks
- Cost and capital actions: Management reduced its 2020 capital-spending plan by approximately $1.35 billion to $3.0 billion and targeted approximately $950 million of operating-expense reductions. Share repurchases were temporarily suspended. Management cautioned that COVID-19’s duration and economic effects remained uncertain.
- Refinery actions: In August 2020, after quarter-end, MPC announced it would indefinitely idle the Gallup and Martinez refineries and evaluate options for Martinez, including conversion to renewable diesel. Management warned that changed assumptions or future market conditions could lead to additional impairments.
- Speedway sale: On August 2, 2020, MPC agreed to sell Speedway to 7-Eleven for $21 billion cash, subject to regulatory approvals and other closing conditions, with closing expected in Q1 2021. MPC estimated after-tax proceeds of approximately $16.5 billion, intended for debt reduction and shareholder returns. The transaction includes a 15-year fuel supply agreement; failure to close or realize expected benefits is a stated risk.
- Other strategic change: MPC and MPLX completed a post-quarter-end transfer of the Western wholesale distribution business to MPC in exchange for MPLX’s redemption of units valued at $340 million. MPC said the business would be reported in Refining & Marketing prospectively.
- Market and legal exposures: Risks include continued weak demand, commodity-price and refining-margin volatility, working-capital and liquidity effects, further impairments, credit-rating changes and producer-volume declines. A court order concerning the Dakota Access Pipeline created potential shutdown and contribution exposure for MPLX; an appellate administrative stay was in place as described in the filing. MPLX also appealed a Bureau of Indian Affairs trespass determination seeking approximately $187 million relating to the Tesoro High Plains Pipeline. Environmental remediation liabilities were $412 million; climate-related lawsuits seek unspecified damages.
- Credit and tax: MPC’s and MPLX’s senior debt ratings were investment grade with negative outlooks. The CARES Act contributed to an estimated $1.1 billion tax refund receivable from expected NOL carrybacks, which management expected to realize upon filing its 2020 tax return in the second half of 2021.
Important facts for investors to verify
- Whether demand, refining throughput, crack spreads and inventory prices recover, and whether further inventory adjustments or impairments arise.
- Execution and regulatory approval of the Speedway sale, final proceeds and their allocation between debt repayment and shareholder returns.
- Actual delivery of the announced $950 million operating-cost reductions and $3.0 billion capital-spending plan, alongside safe and reliable operations.
- Liquidity, debt maturities, working-capital trends, covenant headroom and the effect of negative credit-rating outlooks.
- Resolution and financial consequences of the Dakota Access and Tesoro High Plains pipeline matters, and developments in environmental and other contingencies.