Marathon Petroleum Corporation — Q2 2011 Form 10-Q
Business context and reporting period
Reports the three and six months ended June 30, 2011. MPC operates refining and marketing, Speedway retail, and pipeline transportation businesses. Marathon Oil completed the spin-off on June 30; MPC began regular-way NYSE trading July 1. Results before the spin-off reflect the former RM&T business as a combined entity, including allocations of Marathon Oil corporate costs. Comparisons are also affected by the December 2010 sale of most Minnesota operations, which were included in 2010 results.
Financial and operating highlights
- Q2 revenue and earnings: Sales and other operating revenue was $20.732 billion, up from $15.762 billion. Net income was $802 million versus $405 million; diluted EPS was $2.24 versus $1.13. Income from operations was $1.325 billion versus $636 million.
- First-half results: Sales and other operating revenue was $38.551 billion versus $29.100 billion. Net income was $1.331 billion versus $116 million; diluted EPS was $3.72 versus $0.32. Operating income was $2.144 billion versus $217 million.
- Margins and segments: Refining & Marketing segment income was $1.260 billion in Q2 and $2.062 billion for the half, versus $590 million and $145 million, respectively. Refining gross margin rose to 25.66 cents per gallon in Q2 and 20.90 cents for the half, from 13.06 cents and 4.28 cents. Speedway income was $80 million in Q2 and $113 million for the half; Pipeline Transportation income was $54 million and $105 million.
- Drivers and operating data: Management attributed the refining improvement chiefly to wider WTI discounts to other light crude, wider sweet/sour differentials, and stronger Q2 crack spreads; lower first-half turnaround costs also helped. Refining derivative gains were $234 million in Q2 and $176 million for the first half, compared with $73 million and $50 million. First-half refinery throughput was 8% higher year over year, while Q2 throughput was essentially flat. Speedway same-store gasoline volume declined 5% in Q2 and 2% for the half.
- Cash flow: First-half operating cash flow was $952 million, up from $295 million. Investing activities provided $1.944 billion, largely reflecting $2.404 billion of net redemptions of related-party preferred securities. Financing used $1.392 billion, including repayment of Marathon Oil-related debt and distributions to Marathon Oil. Capital expenditures were $508 million; the separate $74 million store acquisition is excluded from that figure.
- Liquidity and debt: Cash was $1.622 billion at June 30, versus $118 million at year-end; current assets were $10.513 billion and current liabilities $8.549 billion. Total debt was $3.274 billion, including $3 billion of senior notes issued in February; cash-adjusted debt-to-capital was 16%, versus 31% at year-end. The $2 billion revolving facility was undrawn, and MPC reported compliance with its covenants. The filing reports investment-grade ratings of Baa2 and BBB, both stable.
- Other metrics: The first-half effective tax rate was 38%, versus 48%; 2011 included an approximately $20 million adverse impact from state tax-law changes. Total assets were $23.964 billion and equity $8.977 billion at June 30.
Outlook, commentary, risks, and unusual items
- No formal earnings guidance is provided. The 2011 capital and investment budget was $1.38 billion, with Detroit refinery expansion a primary focus. That project was 63% complete and expected to finish in the second half of 2012; management noted construction-related risks and that the budget may change.
- The Board approved a $0.20-per-share dividend payable September 12, 2011. A three-year trade-receivables securitization facility of up to $1 billion was entered into July 1; proceeds from sold receivables are reported as debt. No borrowings under it or the revolving facility were outstanding at August 1.
- Management stated that liquidity should be adequate for operations, investment, dividends, pension contributions, debt maturities, and contingencies, while noting financing availability depends on operating performance, markets, and credit ratings. The filing lists $18.582 billion of contractual cash obligations, including $12.777 billion of purchase obligations.
- Environmental remediation liabilities were $125 million. The company disclosed exposure from Kentucky pricing litigation, MTBE groundwater lawsuits, and environmental proceedings; outcomes or potential losses are uncertain, and some claims could be material. Guarantees include maximum potential payments of $172 million for LOOP/LOCAP financing, $53 million for Centennial, and $25 million for TAME, among other arrangements.
- Other notable items include the spin-off and new standalone cost structure; the former Minnesota assets’ sale; a $21 million first-half tax charge from Michigan legislation; and the absence of the $29 million 2010 maleic-anhydride impairment. MPC said pre-spin corporate expense allocations may not represent costs as a standalone company.
Important facts for investors to verify
- How much of the earnings increase reflects sustainable refinery economics versus volatile commodity differentials and derivative gains.
- Comparability of 2011 and 2010 results given the spin-off, allocated pre-spin costs, and sale of Minnesota assets.
- Progress, remaining cost, and schedule for the Detroit refinery project and delivery against the 2011 capital budget.
- Actual use and terms of the new receivables facility, covenant headroom, and debt-service needs.
- Developments in environmental obligations, pricing litigation, MTBE cases, and guarantees, for which some potential losses are not estimable.