Business context and reporting period
Marathon Petroleum Corporation (MPC) filed this Form 10-K for the fiscal year ended December 31, 2020. MPC operates a large U.S. refining and marketing business and controls midstream partnership MPLX. Its reportable segments are Refining & Marketing and Midstream. Speedway is presented as discontinued operations following the August 2020 agreement to sell the business to 7-Eleven; the sale had not closed as of the filing date.
The year was heavily affected by COVID-19, travel restrictions, reduced fuel demand and volatile commodity prices. The filing also provides unaudited fourth-quarter results.
Financial and operating highlights
| Metric | 2020 | 2019 |
|---|---|---|
| Sales and other operating revenue | $69.779 billion | $111.148 billion |
| Continuing operations, net of tax | Loss of $11.182 billion | Income of $2.449 billion |
| Net income (loss) attributable to MPC | Loss of $9.826 billion | Income of $2.637 billion |
| Net cash from operating activities | $2.419 billion | $9.441 billion |
| Capital expenditures and investments | $2.754 billion | $5.572 billion |
| Dividends per share | $2.32 | $2.12 |
- Refining & Marketing: Segment operating loss was $5.189 billion, versus income of $2.856 billion in 2019. Refining margin was $8.96 per barrel excluding a $561 million LIFO liquidation charge, and $8.37 per barrel including it; the comparable 2019 margin was $14.77. Net refinery throughput fell to 2.583 million barrels per day from 3.112 million, and crude capacity utilization was 82%, compared with 96%.
- Midstream: Segment income from operations rose to $3.708 billion from $3.594 billion, supported by fee-based earnings, growth projects and lower operating expenses, despite lower revenue and natural gas prices.
- Discontinued operations: Speedway generated $1.205 billion of net income, compared with $806 million in 2019. Higher fuel margins offset lower volumes; same-store gasoline volume declined 20%.
- Impairments and restructuring: MPC recorded $9.741 billion of impairment charges, including $7.394 billion for goodwill, $1.315 billion for equity-method investments and $1.032 billion for long-lived assets. Restructuring expense was $367 million.
- Fourth quarter: Sales were $17.972 billion; net income attributable to MPC was $285 million. Quarterly continuing-operations results were a loss of $980 million, net of tax. The filing’s selected quarterly table reports different consolidated and continuing-operations measures; investors should consult that table and the statements for definitions and reconciliation.
Liquidity, debt and capital allocation
At December 31, MPC reported $7.265 billion of liquidity excluding MPLX, including $6.725 billion of available capacity and $540 million of cash and cash equivalents (the liquidity calculation includes cash classified as held for sale). MPLX reported $4.840 billion of liquidity. Consolidated debt was $32.044 billion before unamortized issuance costs and discounts; the filing separately cites $32.17 billion of borrowed-money and finance-lease obligations. MPC generated $2.419 billion of operating cash flow, including $1.612 billion from discontinued operations; continuing-operations operating cash flow was $807 million. Cash and cash equivalents excluding Speedway were $415 million at year-end.
MPC suspended share repurchases during 2020 and paid $1.510 billion in dividends. It agreed to sell Speedway for $21 billion in cash, subject to closing adjustments and conditions, and estimated after-tax proceeds of approximately $16.5 billion for balance-sheet strengthening and shareholder returns. MPC’s 2021 capital plan was approximately $1.4 billion, excluding MPLX’s plan; MPLX planned approximately $1.0 billion.
Material changes, outlook and risks
- Revenue fell 37% year over year, reflecting lower refined-product volumes and prices. MPC attributed the deterioration in earnings chiefly to weaker refining margins and sales, impairment charges, the LIFO liquidation charge and restructuring costs.
- Management’s stated priorities were to strengthen asset competitiveness, improve commercial performance and lower costs. MPC reduced capital spending by more than $1.4 billion from its initial 2020 plan and reduced forecast operating expenses by more than its $950 million target.
- MPC indefinitely idled the Gallup refinery and planned to convert Martinez to renewable diesel. Dickinson’s renewable diesel facility began ramping up at year-end, with full production targeted by first-quarter 2021. Martinez was envisioned to begin production in the second half of 2022; the board approved the plans in February 2021.
- Principal risks include the duration and economic effects of COVID-19, volatile refining margins, demand shifts from fuel efficiency and alternative vehicles, environmental and climate regulation, operational interruptions, counterparty and cybersecurity risks, leverage and credit ratings, and the completion and expected benefits of the Speedway sale.
- Legal and contingent matters include Dakota Access Pipeline permitting litigation: the pipeline remained operational, but its easement was vacated while an environmental impact statement is prepared. MPC disclosed maximum potential undiscounted payments of approximately $230 million under MPLX’s contingent contribution agreement. Environmental remediation liabilities were $397 million. Management said it could not estimate the ultimate exposure for some proceedings.
- At December 31, 2020, MPC and MPLX were in compliance with their credit covenants. MPC reported a net-debt-to-capitalization covenant ratio of 0.37 to 1.00; MPLX reported debt-to-EBITDA of 3.8 to 1.0. Credit ratings carried negative outlooks. The independent auditor gave unqualified opinions on the financial statements and internal control over financial reporting.
Important facts for investors to verify
- Whether and when the Speedway sale closed, final sale proceeds and adjustments, and the use of proceeds.
- Recovery in refining volumes, margins and utilization, along with any further inventory valuation or impairment charges.
- Execution, permitting, cost and production timing for the Dickinson and Martinez renewable diesel projects and the 2021 capital plans.
- Debt maturities, liquidity availability under lower commodity prices, credit ratings and the sustainability of dividends and any resumed repurchases.
- Developments in Dakota Access permitting and other legal, environmental and regulatory contingencies, including potential cash impacts.