Business context and reporting period
Marathon Petroleum Corporation (MPC) filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2015. Its businesses are Refining & Marketing, Speedway retail, and Pipeline Transportation, including consolidated MPLX LP. MPC operated seven U.S. refineries with approximately 1.7 million barrels per calendar day of refining capacity. The prior-year comparison does not include the Hess retail operations acquired in September 2014; historical share and per-share amounts reflect the June 2015 two-for-one stock split.
Financial performance and position
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Revenue and other income | $20.581 billion | $26.933 billion | $37.821 billion | $50.278 billion |
| Income from operations | $1.335 billion | $1.369 billion | $2.805 billion | $1.730 billion |
| Net income attributable to MPC | $826 million | $855 million | $1.717 billion | $1.054 billion |
| Diluted earnings per share | $1.51 | $1.48 | $3.14 | $1.80 |
| Net cash from operating activities | Not separately stated | Not separately stated | $2.184 billion | $1.644 billion |
Q2 refining and marketing gross margin was $14.84 per barrel, down from $16.02; first-half margin was $15.47, up from $15.28. Q2 segment income was $1.206 billion for Refining & Marketing, $127 million for Speedway, and $79 million for Pipeline Transportation. First-half segment income was $2.522 billion, $295 million, and $146 million, respectively. Q2 operating income was slightly lower year over year, while first-half operating income and MPC-attributable earnings rose substantially.
First-half capital expenditures were $748 million; capital expenditures and investments totaled $897 million. Cash and equivalents were $1.881 billion at June 30, up from $1.494 billion at year-end. Total debt was $6.698 billion, including $780 million due within one year; the debt-to-total-capital ratio was 35%, versus 37% at year-end. Total equity was $12.290 billion. MPC reported $5.584 billion of total liquidity, comprising cash, $2.5 billion of unused revolving capacity, and $1.203 billion available under the receivables facility. MPLX had a separate $1 billion revolving facility fully available.
Material changes versus the prior comparable period
- Revenue fell 24% in Q2 and 25% in the first half, principally because lower refined-product prices outweighed increased sales volumes. Average refined-product sales prices declined $1.00 per gallon in Q2 and $1.07 in the first half.
- First-half earnings improved on higher U.S. Gulf Coast crack spreads, increased refinery throughput, lower turnaround and other direct operating costs, and higher Speedway contribution. Q2 refining income declined due to weaker gross margin and a $46 million renewable-fuel compliance charge.
- Speedway income increased, aided by stronger merchandise and fuel margins and the Hess locations. Speedway operated 2,755 stores at quarter-end versus 1,492 a year earlier; same-store merchandise sales increased 4.6% in Q2, while same-store fuel volume declined 0.2%.
- Operating cash flow increased $540 million year over year for the first half, primarily reflecting higher net income, partly offset by a less favorable working-capital change. Investing cash use increased to $856 million from $681 million; financing cash use was $941 million versus $1.130 billion.
- Interest and other financial costs increased to $145 million for the first half from $94 million, reflecting borrowing associated with the Hess acquisition and MPLX financing. First-half share repurchases fell to $617 million from $1.148 billion; dividends paid rose to $272 million from $245 million.
Outlook, commentary, risks and unusual items
- MPC gave no consolidated earnings guidance in the supplied filing. Its 2015 capital and investment budget was $2.53 billion, excluding capitalized interest and a planned $675 million contribution to MPLX for its proposed MarkWest transaction.
- After quarter-end, MPLX agreed to acquire MarkWest Energy Partners in a transaction valued at approximately $20 billion, including assumption of about $4.2 billion of debt. MPC expected to contribute $675 million; closing was anticipated in Q4 2015, subject to approvals and customary conditions. The proposed sale of MPC’s marine business to MPLX was indefinitely postponed.
- On July 29, the board authorized an additional $2 billion of share repurchases, bringing total authorizations since 2012 to $10 billion, and approved a quarterly dividend of $0.32 per share, a 28% increase from the first-quarter dividend on a post-split basis.
- MPC deferred a final investment decision on its Garyville residual-fuel hydrocracker project, estimated to cost $2.2–$2.5 billion. $136 million had been capitalized; abandoning the project could result in impairment. The company estimated $750 million–$1 billion of capital spending from 2014–2019 for Tier 3 fuel-standard compliance.
- Unusual and judgment-sensitive items included a $46 million Q2 estimated renewable-fuel-standard compliance charge, approximately $30 million of first-half cost from LIFO inventory liquidations, and a $189 million payment on the Galveston Bay refinery earnout. Remaining earnout fair value was $307 million, with payments subject to performance-based terms and caps.
- Environmental remediation liabilities were $172 million. MPC disclosed a new Kentucky antitrust and consumer-protection lawsuit with unspecified damages and no estimable loss range, as well as ongoing Kentucky pricing litigation. It finalized an EPA consent decree in May 2015 with a $2.9 million civil penalty and other requirements. It also disclosed a lawsuit challenging the proposed MPLX–MarkWest merger.
- Other exposures include $1.7 billion of contractual commitments for capital projects and investees, pipeline-investee guarantees, and potential future impairment of its $36 million Centennial investment if conditions worsen. Commodity-price, refining-margin, operating, project-execution, regulatory, labor and transaction-approval risks may affect results.
Important facts for investors to verify
- Whether the weaker Q2 refining margin and $46 million renewable-fuel compliance charge persist or change, and how actual refinery margins compare with benchmark crack spreads.
- Integration and operating performance of the Hess retail locations, including margin trends, expenses, and same-store sales and fuel volumes.
- Approval, financing, costs, dilution and closing progress of the proposed MPLX–MarkWest merger and the related $675 million MPC contribution.
- Liquidity and debt-service capacity, including the $780 million current debt classification, receivables-facility availability, and capital needs under the 2015 spending program.
- Outcome and potential financial exposure from the Kentucky lawsuits, environmental matters, Galveston Bay earnout, and deferred Garyville project decision.