Marathon Petroleum Corporation — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; comparative period is Q1 2016. The interim financial statements are unaudited. MPC operates refining and marketing, Speedway retail, and midstream businesses, including consolidated MPLX.
Financial performance and position
- Revenue: Sales and other operating revenues, including consumer excise taxes, were $16.288 billion, up $3.533 billion year over year. Total revenues and other income were $16.393 billion. Higher refined-product prices were the principal sales driver; sales volumes declined.
- Earnings: Income from operations was $292 million versus $75 million; pretax income was $142 million versus a $67 million loss. Consolidated net income was $101 million versus a $78 million loss. Net income attributable to MPC was $30 million, or $0.06 per diluted share, versus $1 million, or $0.003 per share.
- Segment income from operations: Refining & Marketing recorded a $70 million loss (prior-year loss: $86 million); Speedway earned $135 million (down from $167 million); Midstream earned $309 million (up from $189 million). Segment results and prior-period comparisons reflect recast reporting for certain assets transferred to MPLX.
- Refining metrics: Gross margin was $11.65 per barrel versus $9.87. Total refinery throughput fell to 1.708 million barrels per day from 1.774 million; utilization was 83% versus 89%. Higher crack spreads supported margin, while turnarounds and maintenance raised operating costs.
- Cash flow: Operating cash flow was $1.113 billion versus $330 million, aided by a $687 million favorable working-capital change and improved operating results. Investing cash outflow was $1.356 billion, including the Ozark pipeline purchase and Bakken Pipeline investment. Financing cash inflow was $1.523 billion. Cash increased by $1.280 billion to $2.167 billion.
- Capital spending and investments: Cash additions to property, plant and equipment were $610 million. Reported capital expenditures and investments were $1.325 billion, including $220 million for Ozark and a $500 million Bakken Pipeline investment.
- Debt and liquidity: Total debt was $12.598 billion at quarter-end, up from $10.572 billion at year-end 2016; debt-to-total-capital was 38%, up from 33%. MPC reported $6.152 billion of liquidity, including $1.902 billion cash excluding MPLX and $4.250 billion of available facilities. MPLX separately had $2.0 billion available under its revolving facility. MPC had no commercial paper outstanding; it repaid its remaining $200 million term loan in March.
- Capital returns: MPC repurchased 9 million shares for $420 million at an average $50.15 per share and paid dividends of $0.36 per share, versus $0.32 in Q1 2016. Remaining repurchase authorization was $2.14 billion.
Material changes and notable transactions
- Results improved from the prior-year period, which included a $129 million noncash MPLX goodwill impairment. No impairment expense was recorded in Q1 2017.
- Midstream operating income rose $120 million, reflecting higher processing and fractionation activity and earnings from pipeline and marine investments; comparisons are also affected by the terminal-asset transfer to MPLX.
- Speedway operating income fell $32 million, partly because Q1 2016 included a $24 million gain on a retail-location sale, and because margins and sales declined. Speedway contributed 41 travel plazas to a joint venture in late 2016.
- On March 1, MPC transferred terminal, pipeline and storage assets to MPLX for $2.0 billion of consideration, including $1.5 billion cash and MPLX equity. MPC said the common-control transaction generated no gain or loss.
- MPLX acquired the 433-mile Ozark crude pipeline for approximately $220 million and invested $500 million in a joint venture holding an indirect interest in the Bakken Pipeline system.
Outlook, commentary, and risks
- MPC planned $1.7 billion of 2017 capital spending, excluding MPLX. MPLX revised its organic growth capital range upward to $1.8–$2.0 billion and forecast approximately $150 million of maintenance capital.
- MPC announced plans for further dropdowns to MPLX involving an estimated $1.4 billion of MLP-eligible annual EBITDA, subject to approvals, tax clearance, market conditions, and other conditions. The company also expected a review of Speedway, with an update anticipated by mid-2017. These are forward-looking plans, not completed actions.
- Management said available liquidity and funding sources were adequate for expected needs and stated its intention to maintain an investment-grade credit profile. MPC’s credit ratings were investment grade, with Moody’s showing a negative outlook and Fitch a negative watch; the company cautioned that downgrades could raise borrowing costs or affect financing and operations.
- Key exposures include volatile refining margins and crude differentials, lower refinery throughput and planned maintenance, gasoline and merchandise margins, natural gas and NGL prices, project execution, and environmental and regulatory requirements. Renewable Identification Number expense increased to $97 million from $63 million.
- Environmental remediation liabilities were $129 million. The company disclosed unresolved civil enforcement discussions concerning MarkWest facilities, including an EPA settlement proposal it considered excessive. Four lawsuits allege personal injuries from a 2016 Galveston Bay refinery fire; potential loss could not be reasonably estimated at this stage. The filing also describes other pending litigation and guarantees for investees.
- A $131 million contingent consideration liability related to the Galveston Bay refinery acquisition was paid on April 12, 2017, the final payment under that earnout. A $722 million total commitment figure for capital, investees and contingencies included this amount as of quarter-end.
Important facts for investors to verify
- Whether the improvement in operating cash flow persists: Q1 benefited substantially from working-capital movements.
- How much Midstream growth reflects sustainable underlying performance versus acquisitions, equity investments, and the changed segment presentation.
- Whether refinancing margins and throughput recover, and how planned turnaround costs, RIN costs, and commodity-price movements affect earnings.
- Progress, valuation, funding, approvals, and timing for planned MPLX dropdowns, and the outcome of the Speedway review.
- Debt, leverage, credit-rating outlooks, and the sustainability of buybacks and dividends alongside planned capital investment.
- Developments in the Galveston Bay fire litigation, MarkWest environmental matters, and other disclosed contingencies and guarantees.