Marathon Petroleum Corporation — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015; unaudited. MPC operates refining and marketing, Speedway retail, and pipeline transportation businesses, primarily in the United States.
Key financial metrics
| Metric | Q1 2015 | Q1 2014 / comparison |
|---|---|---|
| Sales and other operating revenues | $17.191 billion | $23.285 billion |
| Income from operations | $1.470 billion | $361 million |
| Net income attributable to MPC | $891 million | $199 million |
| Diluted EPS | $3.24 | $0.67 |
| Operating cash flow | $1.190 billion | $766 million |
| Capital expenditures and investments | $384 million | $371 million |
| Cash and cash equivalents at period end | $2.078 billion | $1.494 billion at Dec. 31, 2014 |
| Total debt | $6.743 billion | $6.637 billion at Dec. 31, 2014 |
| Debt-to-total-capital ratio | 36% | 37% at Dec. 31, 2014 |
Revenue fell 26% year over year, mainly reflecting lower refined-product and crude-oil prices, partly offset by higher sales volumes. Earnings rose sharply as refining margins improved and turnaround and other direct operating costs declined. Refining & Marketing gross margin increased to $16.14 per barrel from $14.46. The filing does not report a consolidated gross-margin percentage.
Segment performance and material changes
- Refining & Marketing: Operating income increased to $1.316 billion from $362 million. Management attributed the improvement chiefly to stronger Gulf Coast and Chicago crack spreads and lower turnaround and direct operating costs. Refinery throughput rose to 1.852 million barrels per day from 1.650 million; utilization was 97% versus 85%.
- Speedway: Operating income increased to $168 million from $58 million. The 2014 Hess retail acquisition expanded stores from 1,482 to 2,753; higher fuel and merchandise margins contributed. Same-store gasoline volume declined 1.2%, while same-store merchandise sales increased 6.2%.
- Pipeline Transportation: Operating income decreased to $67 million from $72 million, despite higher pipeline throughput, primarily due to higher operating expenses and lower affiliate income.
- Q1 2015 net income included a $30 million pretax cost-of-revenues charge from LIFO inventory liquidations. Q1 2014 included $64 million of pension settlement expense, versus $1 million in Q1 2015.
Cash, debt and liquidity
Operating cash flow increased by $424 million year over year, primarily due to higher net income; working-capital changes were a $55 million use of cash, compared with a $125 million source in Q1 2014. Investing activities used $388 million and financing activities used $218 million. Financing included $209 million of share repurchases and $136 million of dividends.
At March 31, MPC reported total liquidity of $5.556 billion: $2.078 billion cash, $2.5 billion available under its revolving credit agreement, and $978 million available under its receivables facility. MPLX had a separate $1 billion revolving facility fully unused. MPC reported compliance with debt covenants and investment-grade ratings with stable outlooks. Its ratio of consolidated net debt to total capitalization under the relevant covenant was 0.30 to 1.00.
Outlook, risks and unusual items
- No specific earnings or revenue guidance is provided. Management said liquidity was adequate for operations and anticipated funding needs. The 2015 capital and investment budget was $2.53 billion, excluding capitalized interest.
- MPC deferred a final investment decision on the proposed Garyville residual-fuel hydrocracker project amid market-condition review. The project has $136 million capitalized to date; abandoning it could result in impairment. Estimated total project cost had been $2.2–$2.5 billion.
- The Galveston Bay refinery labor agreement expired January 31, 2015, and the work stoppage continued; agreements at Canton, Catlettsburg and Texas City were ratified in March and April. Management noted possible operational and project risks from labor availability, outages, costs and delays.
- Management highlighted sensitivity to refining-market differentials and margins: estimated annual after-tax net income sensitivity was $450 million per $1/barrel change in the LLS 6-3-2-1 crack spread, $200 million per $1/barrel change in the sweet/sour differential, and $100 million per $1/barrel change in the LLS-WTI differential. These are sensitivities, not forecasts.
- MPC expected to pay BP approximately $189 million in 2015 under the Galveston Bay acquisition earnout; the agreement allows cumulative payments up to $700 million over six years. Total contractual commitments for capital spending and equity-investee funding were $2.0 billion.
- Environmental remediation liabilities were $177 million. The Kentucky attorney general lawsuit alleges $89 million of customer overcharges in 2005, with additional claims relating to 2011; management did not expect an adverse material effect, but noted an unfavorable resolution could be material. A separate Illinois environmental matter settled in April 2015 for a $95,000 penalty and an air-monitoring project.
- Centennial Pipeline was not shipping product at quarter end; management found no impairment at that date but noted potential future impairment if alternative asset uses are not found. MPC also disclosed a $37 million guarantee of Centennial debt.
- Subsequent events: on April 29, the board approved a two-for-one stock split, expected to trade split-adjusted June 11, 2015, and authorized a proposed marine-business sale to MPLX, subject to approvals and definitive agreements. The board also approved a $0.50-per-share dividend on a pre-split basis.
Important facts for investors to verify
- Whether refining margins and cost advantages persist, given commodity-price and crude-oil differential volatility.
- Operational and financial effects of the continuing Galveston Bay work stoppage and status of labor negotiations.
- Final decision, impairment exposure and expected spending for the Garyville hydrocracker; progress and cost commitments on pipeline projects.
- Actual timing and amount of the BP earnout, and any changes in contingent liabilities, environmental obligations or litigation exposure.
- Post-acquisition Speedway performance, especially same-store fuel volumes, margins and operating expenses; confirm comparability given the Hess acquisition.
- Capital spending, repurchases, dividends, debt maturities and receivables-facility availability if refined-product prices remain low.