Marathon Petroleum Corporation — 2015 Form 10-K
Reporting period: Fiscal year ended December 31, 2015. This is an annual report, not a standalone fourth-quarter filing; fourth-quarter figures are included where noted. Amounts are U.S. dollars unless stated otherwise.
Business context
MPC operates seven U.S. refineries and three reportable segments: Refining & Marketing, Speedway retail, and Midstream. The major strategic development was MPLX’s acquisition of MarkWest, completed December 4, 2015, expanding the Midstream business into natural-gas gathering, processing and NGL services. MarkWest results are included only from the acquisition date.
Key financial and operating metrics
| Metric | 2015 | 2014 |
|---|---|---|
| Revenue, including consumer excise taxes | $72.051 billion | $97.817 billion |
| Income from operations | $4.692 billion | $4.051 billion |
| Net income attributable to MPC | $2.852 billion | $2.524 billion |
| Diluted EPS | $5.26 | $4.39 |
| Cash from operating activities | $4.061 billion | $3.110 billion |
| Cash and cash equivalents at year-end | $1.127 billion | $1.494 billion |
| Total debt, including capital leases | $12.475 billion | $6.657 billion |
- Operating income by segment: Refining & Marketing $4.186 billion; Speedway $673 million; Midstream $289 million. These figures include segment-specific items described below.
- Refinery throughput averaged 1.888 million barrels per day; crude throughput was 1.711 million barrels per day. Refining & Marketing gross margin was $15.25 per barrel, versus $15.05 in 2014; refinery direct operating cost was $6.67 per barrel, down from $8.07.
- Speedway merchandise gross margin was $1.368 billion, and gasoline and distillate gross margin was $0.1823 per gallon. Speedway operated 2,766 stores at year-end.
- Capital expenditures and investments before acquisitions were $2.429 billion. Reported total capital expenditures and investments, including acquisitions, were $16.283 billion, substantially reflecting the MarkWest merger.
- Year-end liquidity was approximately $4.295 billion: $1.127 billion cash plus $3.168 billion available under MPC’s revolving credit and receivables facilities. MPLX separately had $877 million drawn on its $2 billion revolving facility.
- Debt-to-total-capitalization was 38%, versus 37% in 2014. MPC and MPLX were in compliance with their disclosed debt covenants; MPLX reported debt-to-EBITDA of 4.6x.
Material changes versus 2014
- Revenue fell $25.766 billion, primarily because lower refined-product prices outweighed higher sales volumes. Net income attributable to MPC nevertheless rose $328 million, and diluted EPS increased $0.87.
- Refining & Marketing operating income increased $577 million, supported by higher crack spreads, favorable market-structure effects on crude acquisition costs, better product realizations relative to spot benchmarks and lower direct operating costs. These benefits were partly offset by unfavorable feedstock costs versus LLS, lower-price effects on volumetric gains and inventory charges.
- Speedway operating income increased $129 million, primarily reflecting a full year of contribution from the Hess retail acquisition and higher light-product margins.
- Midstream operating income increased $9 million; MarkWest contributed only from December 4, while $30 million of merger transaction costs partly offset its contribution.
- Debt increased substantially following the MarkWest merger and related financing. The merger added $2.454 billion of goodwill and $4.567 billion of debt in the preliminary purchase-price allocation.
- Operating cash flow rose $951 million. However, working capital was a $1.02 billion use of cash in 2015.
Outlook, commentary and notable items
- Management expected 2016 capital spending and investments of approximately $3.0 billion, excluding capitalized interest and acquisitions, including about $1.3 billion each for Refining & Marketing and Midstream. The estimate was reduced from a previously approved $4.2 billion plan in light of market conditions and project timing.
- MPC outlined the multiyear, approximately $2 billion STAR program to integrate its Galveston Bay and Texas City refineries and improve processing, product recovery, reliability and low-sulfur fuel output. The company also identified $6 billion–$9 billion of potential Midstream project opportunities, still at early feasibility stages.
- Management reported a $370 million lower-of-cost-or-market inventory valuation charge in 2015 ($345 million in Refining & Marketing and $25 million in Speedway). It warned that a further first-quarter 2016 charge would be required if inventory market values did not recover to year-end levels by March 31, 2016.
- A $144 million impairment followed cancellation of the ROUX residual-oil upgrading project at Garyville. The MarkWest merger generated $36 million of transaction costs. The 2015 LIFO charge was $78 million, compared with a $265 million benefit in 2014.
- Fourth-quarter 2015 revenue was $15.607 billion, income from operations $338 million, and net income attributable to MPC $187 million; the comparable 2014 figures were $22.250 billion, $1.259 billion and $798 million, respectively.
- Important risks include volatile refining margins and crude/product differentials, low oil and gas prices reducing producer activity and Midstream volumes, integration and synergy execution for MarkWest, possible goodwill impairment, environmental and renewable-fuel compliance costs, operational outages, and regulatory or litigation outcomes. The EPA/DOJ investigation of MarkWest pipeline facilities in Pennsylvania could result in penalties, costs or operating changes; the amount could not be reasonably estimated.
- Other contingencies include Kentucky antitrust and pricing litigation, environmental remediation liabilities of $163 million net of disclosed state reimbursement receivables, and guarantees for certain investees and the Crowley Ocean Partners joint venture. Management said it could not estimate a reasonably possible loss for some matters.
- In February 2016, MPC announced a proposed contribution of its inland marine business to MPLX in exchange for MPLX securities, expected to close in the second quarter subject to approvals. Management also flagged potential impairment review of MarkWest-related goodwill if MPLX unit prices or business assumptions weakened.
Investor verification priorities
- Verify the drivers and durability of Refining & Marketing earnings, particularly crack spreads, crude differentials, feedstock costs and the $370 million inventory charge.
- Assess 2016 capital-spending assumptions, STAR and Midstream project economics, and the Sandpiper pipeline’s revised early-2019 target and cost estimate.
- Track MarkWest integration, MPLX leverage and liquidity, expected synergies, and impairment exposure to the $2.454 billion merger goodwill.
- Review debt maturities, subsidiary-level borrowing availability, the $3.0 billion capital plan, and the sustainability of dividends and share repurchases.
- Monitor the Pennsylvania environmental investigation, Kentucky litigation, remediation estimates and outstanding guarantees; several potential exposures are not quantified.
- Note that management and the auditor excluded MarkWest from the 2015 internal-control assessment because it was acquired late in the year; it represented approximately 26% of year-end consolidated assets. The filing says integration into controls was planned for 2016.