Marathon Petroleum Corporation — Q3 2016 Form 10-Q
Business context and reporting period. The filing covers the quarter and nine months ended September 30, 2016; financial statements are unaudited. MPC operates refining and marketing, Speedway retail, and midstream businesses, including consolidated MPLX. Results include MarkWest from its December 2015 acquisition. Unless indicated otherwise, amounts below are in millions of dollars.
Financial performance
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Sales and operating revenue | $16,618 | $18,716 | $46,184 | $56,444 |
| Income from operations | $435 | $1,549 | $1,825 | $4,354 |
| Net income attributable to MPC | $145 | $948 | $947 | $2,665 |
| Diluted earnings per share | $0.27 | $1.76 | $1.78 | $4.90 |
| Net cash from operating activities | Not provided for quarter | Not provided for quarter | $2,995 | $3,253 |
| Capital expenditures and investments | Not provided for quarter | Not provided for quarter | $2,232 | $1,482 |
- Margins and segments: Refining & Marketing operating income was $306 in Q3 and $1,324 for nine months, versus $1,434 and $3,907, respectively, in 2015. Its gross margin was $10.75 per barrel in Q3 ($17.27 in 2015) and $11.20 for nine months ($16.08 in 2015). The blended LLS 6-3-2-1 crack spread fell to $8.08 per barrel from $12.18 in Q3.
- Speedway operating income was $209 in Q3 versus $243, and $569 for nine months versus $538. Midstream operating income was $258 in Q3 versus $93, and $626 for nine months versus $286; MarkWest’s inclusion was a principal contributor to growth.
- The nine-month results included a $370 non-cash benefit from reversal of the prior-year lower-of-cost-or-market inventory reserve. Refining & Marketing and Speedway segment results included $345 and $25 of that benefit, respectively.
- Balance sheet and liquidity: At September 30, cash was $709; current assets were $9,545 and current liabilities $6,340. Total debt was $10,566, down from $11,925 at year-end 2015; debt-to-total-capital was 34%, versus 38%. Total liabilities were $22,336 and total assets $43,293. Reported liquidity was approximately $4.95 billion, including cash and MPC facilities; MPLX had an additional $2.0 billion of revolver availability.
- Cash flow and distributions: Operating cash flow was $2,995; investing activities used $2,217 and financing activities used $1,196, producing a $418 decrease in cash. MPC paid $529 in dividends during the nine months ($1.00 per share) and repurchased $177 of stock. The quarterly dividend was $0.36 per share.
Material changes and unusual items
- MPC’s net income attributable to the company fell $803 in Q3 and $1.72 billion for the first nine months year over year. Management primarily attributed the decline to lower refining margins and product-price realizations, with higher turnaround costs; lower product prices also reduced reported revenue.
- Equity-method investment results included a $267 Q3 charge related to the indefinitely deferred Sandpiper pipeline project. The nine-month period also included $89 of impairment related to another equity-method investment. Total equity-method impairment charges were $356 for nine months.
- MPLX recorded $130 of goodwill impairment in the first half of 2016 following weaker commodity outlooks, lower producer spending and production expectations, and higher cost of capital. The filing highlights sensitivity: a 0.50 percentage-point increase in the discount rate used for one reporting unit’s impairment analysis would have implied more than $400 of additional goodwill impairment at that analysis date.
- Net interest expense increased to $141 in Q3 and $420 for nine months, from $70 and $215, respectively, largely reflecting debt assumed in the MarkWest merger. The 2016 nine-month period also included higher depreciation from acquired assets and increased planned refinery turnaround activity.
- Speedway’s Q3 operating income declined amid lower fuel margins and higher depreciation, partly offset by merchandise margin and volume gains. Nine-month income increased, including the $25 inventory-reserve benefit and a $24 retail-location sale gain.
Outlook, commentary and risks
- MPC forecast 2016 capital spending and investments of approximately $3.0 billion, excluding capitalized interest and the anticipated $500 investment in the Bakken Pipeline system. The filing says there had been no material change to the budget since the 10-K; it does not provide explicit full-year earnings guidance.
- Management said liquidity was adequate for operating, capital, debt, dividend, pension and other needs, and stated its intention to maintain an investment-grade credit profile. MPC was within its debt covenant; MPLX also reported covenant compliance.
- On October 27, 2016, MPC announced plans to offer MPLX assets expected to contribute approximately $350 of annual EBITDA by the end of 2017, including an initial potential dropdown of about $235 of annual EBITDA. MPC also identified approximately $1 billion of further potential annual EBITDA for dropdowns within three years, subject to market conditions and approvals, and said it was evaluating ways to highlight the value of its MPLX general-partner interest.
- MPLX’s proposed $500 Bakken Pipeline system investment, expected to provide a 9.1875% indirect interest, remained subject to closing conditions and was expected to close in Q4 2016. MPC also expected to become a committed shipper. The Speedway–Pilot Flying J travel-plaza joint venture was pending customary conditions and regulatory clearances.
- Key exposures include volatile crack spreads, crude differentials, natural gas and NGL prices; refinery outages and maintenance; RIN compliance costs; and potential future inventory valuation changes. RIN expense was $80 in Q3 and $221 for nine months, versus $34 and $151 in 2015.
- Environmental remediation liabilities were $145. MPC disclosed ongoing environmental and other legal matters, including a Kentucky antitrust case and possible enforcement matters involving MarkWest facilities in Pennsylvania; potential losses for certain matters could not be reasonably estimated. Environmental laws may require substantial future spending. The filing also reports guarantees and contingent commitments, including a maximum $491 exposure for Crowley Coastal Partners and $521 of contractual commitments to acquire property, plant and equipment and advance funds to equity-method investees.
Important facts for investors to verify
- Whether refining margins and crack spreads stabilize, and how changes in crude differentials, throughput, turnarounds and product realizations affect earnings.
- Whether the Sandpiper and other equity-method impairments, as well as the MarkWest goodwill valuation assumptions, lead to further charges.
- Completion, valuation, funding and distribution implications of the planned MPLX asset dropdowns and the proposed Bakken Pipeline and Speedway–Pilot Flying J transactions.
- Actual 2016 capital spending versus the approximately $3.0 billion forecast, plus the separate proposed $500 million Bakken investment.
- Developments in environmental enforcement, litigation, guarantees and other commitments that could create material costs or restrictions.