Marathon Petroleum Corp quarterly report, Q3 FY2018

Marathon Petroleum Corporation — Form 10-Q Summary

Reporting period: Quarter and nine months ended September 30, 2018. The unaudited results cover MPC’s refining and marketing, Speedway retail, and Midstream operations. The Andeavor acquisition closed October 1, 2018, after quarter-end, and is therefore not included in reported operating results.

Financial results and key metrics

Metric	Q3 2018	Q3 2017	Nine months 2018	Nine months 2017
Sales and operating revenues	$22.787 billion	$19.053 billion	$63.599 billion	$53.220 billion
Income from operations	$1.403 billion	$1.577 billion	$3.554 billion	$2.850 billion
Net income attributable to MPC	$737 million	$903 million	$1.829 billion	$1.416 billion
Diluted EPS attributable to MPC	$1.62	$1.77	$3.92	$2.73
Operating cash flow	Not separately provided	Not separately provided	$3.431 billion	$3.867 billion

• Q3 income before taxes was $1.163 billion, versus $1.419 billion. The effective tax rate was 19%, compared with 29%; for the nine months, rates were 18% and 30%.
• Nine-month capital expenditures were $2.389 billion; capital expenditures and investments, including equity-method investments, totaled $2.611 billion. Investing activities used $2.895 billion.
• At September 30, cash and cash equivalents were $4.992 billion. Current assets were $15.873 billion and current liabilities $9.634 billion. MPC reported total liquidity of $8.205 billion, including $4.955 billion of MPC cash, $2.5 billion of available bank credit and $750 million of unused receivables capacity; MPLX facilities are additional.
• Balance-sheet debt comprised $26 million due within one year and $18.423 billion of long-term debt. The debt schedule reported $18.968 billion of total borrowings before unamortized issuance costs, discounts and current maturities. Total liabilities were $32.997 billion.

Changes versus prior comparable periods

• Q3 net income attributable to MPC fell $166 million and diluted EPS declined from $1.77 to $1.62. For the first nine months, MPC-attributable income increased $413 million and diluted EPS rose from $2.73 to $3.92.
• Q3 Refining & Marketing income from operations declined to $666 million from $1.097 billion, primarily reflecting weaker Midwest and Gulf Coast crack spreads. Wider crude differentials provided partial support. Nine-month segment income was $1.558 billion, slightly below $1.589 billion.
• Speedway income from operations decreased to $161 million in Q3 and $415 million for nine months, from $208 million and $581 million. Lower fuel margins and higher operating expenses were key factors. Same-store merchandise sales grew, while same-store gasoline volumes declined.
• Midstream income from operations increased to $679 million in Q3 and $1.863 billion for nine months, compared with $355 million and $996 million. Results benefited from strong pipeline throughput and record gathering, processing and fractionation volumes, as well as the February 2018 contribution of refining logistics and fuels distribution assets to MPLX.
• Operating cash flow decreased $436 million year over year for nine months, largely due to a $1.42 billion unfavorable working-capital swing. Cash increased from $3.011 billion at year-end 2017, supported in part by financing activity.

Comparisons of revenue are affected by MPC’s 2018 adoption of ASC 606 and its election to report certain customer-related taxes net. This reduced reported 2018 revenue by $1.40 billion in Q3 and $4.01 billion for nine months; corresponding taxes were reported gross in 2017. The accounting change did not materially alter revenue recognition patterns.

Outlook, management commentary, risks and unusual items

• MPC expected approximately $1 billion in tangible annual gross run-rate cost and operating synergies from the Andeavor combination within three years. Management cited greater scale, geographic diversification, Permian midstream reach and a broader retail and marketing footprint. This is a forward-looking estimate, not a reported result.
• 2018 capital investment plans, excluding Andeavor and acquisitions, were approximately $1.6 billion for MPC operations outside MPLX and $2.4 billion for MPLX. The filing does not provide consolidated full-year earnings guidance.
• The February 1 dropdown transferred refining logistics and fuels distribution assets to MPLX for $4.1 billion cash and MPLX units; the related GP/IDR exchange issued further MPLX units. The transactions shifted reported segment results between Refining & Marketing and Midstream and contributed to increased MPLX borrowing.
• MPLX issued $5.5 billion of senior notes in February. MPC redeemed $600 million of 2.7% notes due 2018. MPC and MPLX reported compliance with their credit covenants at September 30; the respective leverage ratios were 0.06 to 1.00 and 3.76 to 1.00. Management stated its intention to maintain investment-grade credit quality.
• For nine months, MPC repurchased 36 million shares for $2.612 billion at an average $71.80 per share; $5.58 billion of authorization remained. Dividends were $1.38 per share, up from $1.12.
• Unusual expenses included pension settlement losses of approximately $45 million in Q3 and $47 million for nine months. Environmental remediation liabilities were $104 million at quarter-end. The filing also identifies potential exposure from guarantees, including a maximum $483 million exposure associated with Crowley Coastal Partners, and contractual commitments of $1.03 billion for capital projects and equity-method funding.
• Risks include volatile crude, refined-product and NGL prices; refining margins and differentials; Renewable Fuel Standard compliance costs; operating reliability, project execution and environmental obligations; and integration, synergy and financing risks from Andeavor. The Kentucky antitrust and emergency-pricing cases remain unresolved; management said outcomes and potential losses cannot be determined for certain matters. Andeavor merger disclosure lawsuits were dismissed as moot, with fee issues reserved.
• Following the acquisition, MPC assumed $3.375 billion of Andeavor senior notes. New MPC revolving facilities totaling $6 billion became effective October 1, 2018. The filing also says adoption of the lease accounting standard in 2019 was expected to materially increase recognized right-of-use assets and lease obligations.

Important facts for investors to verify

• Whether the Andeavor integration achieves the stated synergy target and how acquisition financing affects leverage, interest expense and credit ratings.
• How much of Midstream’s reported growth reflects underlying volume and operating performance versus the dropdown and changed segment presentation.
• Whether working capital normalizes and operating cash flow adequately funds capital spending, dividends and repurchases.
• Refining crack spreads, crude differentials, Speedway fuel margins and RIN costs, and their effect on subsequent-period profitability.
• Developments in unresolved litigation, environmental remediation, guarantees and other contractual commitments.