Marathon Petroleum Corporation — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; unaudited. MPC operates Refining & Marketing, Speedway and Midstream businesses, with MPLX consolidated. Comparisons are with Q1 2017 unless otherwise noted.
Financial and operating results
| Metric | Q1 2018 | Q1 2017 |
|---|---|---|
| Sales and other operating revenues | $18.694 billion | $16.134 billion |
| Income from operations | $440 million | $291 million |
| Income before income taxes | $257 million | $142 million |
| Net income | $235 million | $101 million |
| Net income attributable to MPC | $37 million | $30 million |
| Diluted EPS attributable to MPC | $0.08 | $0.06 |
| Net cash from operating activities | $(137) million | $1.108 billion |
| Capital expenditures and investments | $748 million | $1.325 billion |
| Dividends per share paid | $0.46 | $0.36 |
- Revenue increased $2.56 billion, but comparison is affected by ASC 606: 2018 revenue excludes $1.25 billion of certain taxes, while 2017 reported those taxes gross. ASC 606 also increased both 2018 revenue and cost of revenue by $117 million for certain Midstream items.
- Operating cash flow fell by $1.245 billion, primarily reflecting a $1.34 billion unfavorable working-capital change. Payables and accrued liabilities decreased $1.455 billion in the cash-flow statement; inventory reductions provided a partial offset.
- Cash and cash equivalents were $4.653 billion at quarter-end, versus $3.011 billion at December 31, 2017. Current assets were $14.525 billion and current liabilities $8.372 billion.
- Reported borrowings totaled $17.807 billion before unamortized debt issuance costs and discounts; long-term debt on the balance sheet was $17.232 billion, with $26 million due within one year. Debt increased largely following MPLX’s $5.5 billion senior-notes issuance. MPC states that MPLX creditors generally have no recourse to MPC’s general credit.
- MPC reported $8.901 billion of liquidity, including $4.651 billion cash (excluding MPLX cash) and $4.250 billion of available MPC facilities. MPLX separately had approximately $2.25 billion available on its revolver. MPC and MPLX reported covenant ratios of 0.07:1.00 and 3.6:1.0, respectively, and compliance with their covenants.
- Effective tax rate was 9%, versus 29%; the lower rate reflected TCJA-related effects and other tax differences. Net income attributable to noncontrolling interests rose to $182 million from $55 million, limiting the increase in income attributable to MPC.
Segment performance and period-over-period changes
- Refining & Marketing: operating loss of $133 million versus a $70 million loss. Refining margin was $10.58 per barrel versus $11.65; throughput rose 12% to 1.905 million barrels per day. The February 1 transfer of refining logistics assets and fuels distribution services to MPLX reduced this segment’s reported results by $181 million. Higher throughput and lower direct operating costs helped, while product realizations and other factors weighed on results.
- Speedway: operating income of $95 million versus $135 million. Fuel sales volume was flat at 1.393 billion gallons; fuel margin was 15.61 cents per gallon versus 15.66 cents. Higher labor and other operating costs, accelerated depreciation from dispenser upgrades, and severe storms that reduced store traffic contributed to the decline.
- Midstream: operating income of $567 million versus $309 million. The $181 million segment benefit from the dropdown, higher gathered, processed and fractionated volumes, and ASC 606 gross presentation contributed to the increase. Natural gas processed rose to 6,629 MMcf/d from 6,132 MMcf/d; NGL fractionation rose to 423 mbpd from 367 mbpd.
- The blended USGC/Chicago LLS 6-3-2-1 crack spread was $7.70 per barrel versus $7.72. Management estimated market-indicator changes added $189 million to Refining & Marketing results year over year, while differences between actual results and those indicators had an estimated negative $166 million impact.
Capital allocation, outlook, risks and unusual items
- On February 1, MPC contributed refining logistics assets and fuels distribution services to MPLX for $4.1 billion cash and MPLX units. MPC also exchanged its IDRs and economic general-partner interest for 275 million MPLX common units. MPC owned 63.6% of MPLX at quarter-end.
- MPC repurchased 19 million shares for $1.327 billion, at an average $68.74 per share. $1.86 billion remained under existing authorizations at March 31. On April 30, the board authorized an additional $5 billion in repurchases.
- Management’s 2018 capital plan was approximately $1.6 billion for MPC excluding MPLX; MPLX’s plan included $2.2 billion of organic growth capital and about $190 million of maintenance capital. No material budget changes were reported. MPC estimated $650 million of Tier 3 fuel-standard spending for 2014–2019, including approximately $400 million in 2018–2019.
- On April 29, 2018, after quarter-end, MPC agreed to acquire Andeavor for stated equity value of $23.3 billion and enterprise value of $35.6 billion. Consideration is structured for an aggregate 85% stock/15% cash mix; closing was expected in the second half of 2018, subject to approvals and other conditions. Management projected approximately $1 billion of annual run-rate cost and operating synergies within three years; these are forward-looking estimates, not assured outcomes.
- Management said liquidity was adequate and reaffirmed its intention to maintain an investment-grade credit profile. The filing gives no earnings or margin guidance for the full year.
- Key exposures include volatile crude, refined-product, natural-gas and NGL prices; refining margins and crude differentials; demand, weather, operating reliability, environmental and regulatory costs (including Renewable Fuel Standard compliance), project execution, credit-market access and litigation. MPC had $112 million accrued for environmental remediation. A MarkWest environmental consent decree entered after quarter-end provides for a $0.6 million penalty and approximately $2.4 million of environmental projects.
- Other contingencies include construction disputes with Westcon, Kentucky litigation and guarantees related to equity-method investees. The filing says some potential losses cannot be reasonably estimated; an unfavorable outcome in the Kentucky emergency-pricing case could materially affect results, although management did not expect a material adverse effect overall.
Investor verification priorities
- Reconcile revenue and cost comparisons for ASC 606’s net-tax presentation and Midstream gross-ups before interpreting growth or margins.
- Assess the sustainability of operating cash flow after the working-capital outflow and the funding of repurchases, dividends and capital spending.
- Review MPLX’s debt, leverage, refinancing profile and distributions separately from MPC’s standalone liquidity and obligations.
- Separate underlying segment trends from the $181 million reporting shift caused by the dropdown, and examine Refining & Marketing’s actual results versus market indicators.
- Verify Andeavor transaction approvals, financing and closing conditions, and track whether the projected synergies and repurchase plans are realized without weakening the investment-grade profile.
- Monitor environmental spending, legal proceedings, guarantees and other contingencies for changes in estimated exposure.