Marathon Petroleum Corporation — 2014 Form 10-K
Reporting period: Fiscal year ended December 31, 2014. This is an annual filing, not a standalone quarterly report; fourth-quarter results are noted below. Amounts are in U.S. dollars unless stated otherwise.
Business context
MPC operates seven U.S. refineries and three reportable segments: Refining & Marketing, Speedway retail, and Pipeline Transportation, including consolidated MPLX. The company acquired Hess retail operations and related assets for approximately $2.82 billion on September 30, 2014, substantially expanding Speedway. Its refinery system had crude capacity of 1.731 million barrels per calendar day.
Financial performance and position
| Metric | 2014 | 2013 |
|---|---|---|
| Revenue, including consumer excise taxes | $97.817 billion | $100.160 billion |
| Income from operations | $4.051 billion | $3.425 billion |
| Net income attributable to MPC | $2.524 billion | $2.112 billion |
| Diluted EPS | $8.78 | $6.64 |
| Operating cash flow | $3.110 billion | $3.405 billion |
| Capital expenditures and investments, including acquisitions | $4.738 billion | $2.789 billion |
| Year-end cash and cash equivalents | $1.494 billion | $2.292 billion |
| Year-end debt, including capitalized leases | $6.637 billion | $3.396 billion |
| Debt-to-total-capital ratio | 37% | 23% |
- At year-end, MPC reported $5.274 billion of total liquidity, including cash and $3.780 billion of unused company revolving and receivables-facility capacity. MPLX separately had $385 million drawn on its $1 billion revolving facility.
- Refining & Marketing operating income rose to $3.609 billion from $3.206 billion; Speedway rose to $544 million from $375 million; Pipeline Transportation rose to $280 million from $210 million.
- Refining & Marketing gross margin was $15.05 per barrel, up from $13.24; refinery direct operating costs also increased, to $8.07 per barrel from $6.70.
- Speedway gasoline and distillate gross margin increased to 17.75 cents per gallon from 14.41 cents. Merchandise gross margin was $975 million, up from $825 million.
- Quarter four revenue was $22.250 billion, operating income $1.259 billion, net income attributable to MPC $798 million, and diluted EPS $2.86. In Q4 2013, the corresponding figures were $24.897 billion, $1.008 billion, $626 million, and $2.07.
Changes versus prior year
- Annual revenue declined 2.3%, principally because lower refined-product prices more than offset increased sales volumes and Hess-related merchandise sales. Net income attributable to MPC rose 19.5%.
- Refining results improved with more favorable product realizations and higher Gulf Coast and Chicago crack spreads. Narrower crude-oil differentials and higher turnaround and other operating costs partly offset the improvement.
- Operating cash flow fell $295 million, chiefly due to a $694 million working-capital cash use, including lower accounts payable and higher inventory.
- Debt increased by about $3.24 billion, primarily to finance the Hess acquisition. MPC repurchased $2.131 billion of shares and paid $524 million in dividends during 2014.
- Hess added 1,268 stores to Speedway’s year-end count, taking it to 2,746 locations in 22 states. Acquired operations contributed $113 million of Speedway operating income in 2014, with results included only from the acquisition date.
Outlook, commentary, risks and unusual items
- Management budgeted $2.53 billion of capital and investment spending for 2015: $1.28 billion for Refining & Marketing, $452 million for Speedway, and $659 million for Pipeline Transportation, plus corporate spending as described in the filing. Priorities include Hess-store integration, refinery margin projects, condensate processing, exports, and pipeline investments.
- MPC said it planned to accelerate MPLX’s growth and expected mid-20% average annual distribution growth over five years. This is a forward-looking expectation, not a guarantee.
- The company deferred a final investment decision on a proposed $2.2–$2.5 billion Garyville residual-fuel hydrocracker amid market uncertainty; $90 million had been capitalized, which could be impaired if the project is abandoned.
- MPC estimated $750 million–$1 billion of Tier 3 gasoline-standard compliance capital spending for 2014–2019. Environmental capital spending was expected to be about $250 million in 2015 and approximately $410 million in 2016; actual amounts may vary.
- Key exposures include volatile refining margins and crude differentials, crude supply and transportation disruptions, regulation (including renewable-fuel and emissions rules), project execution, cyber incidents, labor disputes, and acquisition integration. As of February 1, 2015, work stoppages were occurring at Catlettsburg and Galveston Bay; the company said affected refineries continued to operate normally.
- Environmental remediation liabilities were $185 million at year-end, with $67 million of related recoverable-cost receivables. The Kentucky emergency-pricing lawsuit alleges $89 million of overcharges; MPC is defending the case and says an adverse resolution could be material, although management did not expect a material adverse outcome.
- Unusual or notable items include an approximately $240 million favorable Q4 LIFO inventory effect (about $130 million favorable for the full-year comparison); $96 million of 2014 pension settlement expense; and a $478 million year-end fair-value liability for the BP Galveston Bay earnout. MPC paid $180 million of earnout in 2014 and could owe up to $700 million over six years, subject to conditions.
- Management and PwC reported effective internal control over financial reporting, but Hess operations—about 8% of year-end assets and 2% of 2014 revenue and other income—were excluded from the 2014 control assessment pending integration.
Most important facts for investors to verify
- Whether improved refining margins and product realizations persist as crude differentials and market conditions change, and how much of 2014 earnings benefited from LIFO accounting.
- Hess integration progress, acquired-store profitability and synergies, and the scale and timing of the associated debt and capital requirements.
- Actual operating cash generation and liquidity under lower product prices, including the effect of reduced eligible receivables on the securitization facility.
- Progress, costs, financing and returns for MPLX, Sandpiper, SAX, Cornerstone and refinery projects; confirm whether deferred Garyville project costs are recoverable.
- Developments in refinery labor negotiations and stoppages, the Kentucky litigation, remediation obligations, and the remaining BP earnout exposure.