Marathon Petroleum Corporation — Q3 2014 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2014. MPC operates refining and marketing, retail marketing, and pipeline transportation businesses, primarily in the United States. Financial statements are unaudited.
Financial performance
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Sales and operating revenue, including excise taxes | $25.438bn | $26.256bn | $75.567bn | $75.263bn |
| Operating income | $1.062bn | $301m | $2.792bn | $2.417bn |
| Net income attributable to MPC | $672m | $168m | $1.726bn | $1.486bn |
| Diluted EPS | $2.36 | $0.54 | $5.95 | $4.60 |
| Operating margin, calculated as operating income divided by sales revenue | 4.2% | 1.1% | 3.7% | 3.2% |
For Q3, MPC-attributable net income rose $504m year over year; for the first nine months it rose $240m. Refining & Marketing segment operating income was $971m in Q3 versus $227m, and $2.593bn for nine months versus $2.235bn. Speedway earned $119m in Q3 versus $102m, but $271m for nine months versus $292m. Pipeline Transportation earned $69m in Q3 versus $54m and $222m for nine months versus $163m.
Refining & Marketing gross margin was $14.55/barrel in Q3 versus $9.25, and $15.02/barrel for nine months versus $12.42. Refinery direct operating costs increased to $7.20/barrel in Q3 from $6.33 and to $8.21/barrel for nine months from $6.26, reflecting turnarounds, maintenance, energy, and other manufacturing costs.
Cash flow, balance sheet and capital
- Cash flow, nine months: Operating cash flow was $2.722bn versus $2.050bn; investing cash outflow was $4.024bn versus $2.251bn; financing provided $864m versus a $2.641bn outflow. Cash declined $438m to $1.854bn.
- Capital deployment: Cash capital expenditures were $952m; total capital expenditures and investments, including acquisitions and equity-method contributions, were $4.012bn. The $2.82bn Hess retail acquisition was the principal driver of higher investment spending. MPC repurchased $1.449bn of shares and paid $386m in dividends over nine months.
- Debt and liquidity: Total debt was $6.264bn at September 30, versus $3.396bn at December 31, 2013; debt-to-total-capital rose to 36% from 23%. Reported liquidity was $5.654bn, comprising $1.854bn cash and $3.8bn of available MPC revolving and receivables-facility capacity. MPC reported compliance with its 0.65 debt-to-capital covenant; its ratio was 0.32. Investment-grade ratings were Moody’s Baa2 and S&P BBB, both with stable outlooks.
- Balance sheet: Total assets were $31.705bn versus $28.385bn at year-end 2013; equity was $11.266bn versus $11.332bn. Inventories rose to $5.608bn from $4.689bn.
Material changes and transactions
- On September 30, MPC acquired Hess’s retail locations, transport operations, and pipeline shipper history for approximately $2.82bn. The acquisition added 1,245 stores, expanding Speedway from nine to 22 states, and included approximately 40,000 barrels per day of Colonial Pipeline capacity. The filing says the assets provide an outlet for an incremental 200,000 barrels per day of assured refinery sales. The acquisition was funded with debt and cash; the acquired operations’ results are not included in reported operating results before the closing date.
- MPC issued $1.95bn of senior notes and borrowed $700m under a five-year term loan to help fund the Hess transaction. The notes mature in 2024, 2044 and 2054; the term loan matures in 2019. Debt increased accordingly.
- Q3 refining results benefited from higher Gulf Coast and Chicago crack spreads and more favorable product realizations. For the first nine months, narrowed LLS-WTI and sweet/sour differentials partly offset those benefits. Higher refinery costs also weighed on results.
- Speedway’s Q3 income improved on higher fuel and merchandise margins; nine-month income declined as higher expenses and lower fuel margins outweighed merchandise-margin growth. Pipeline Transportation results improved with higher tariffs, volume-deficiency credits, and affiliate income, partly offset by lower throughput and higher expenses.
Outlook, risks and unusual items
- Management stated that 2014 capital and investment budget was $2.43bn, excluding capitalized interest and the Hess acquisition. It anticipated $750m–$1bn of compliance capital spending from 2014 through 2019 for EPA Tier 3 gasoline sulfur standards.
- Management said liquidity was adequate for operations and expected funding needs, including capital spending, dividends, repurchases, debt maturities, and contingencies. No earnings guidance was provided in the supplied filing text.
- Refining profitability is exposed to crack spreads, crude-oil differentials, product realizations, refinery throughput, and operating costs. MPC warned that easing or lifting the U.S. crude-oil export ban could raise domestic crude prices and adversely affect crack spreads or differentials. Its disclosed estimated annual after-tax net-income sensitivities per $1 change were $450m for the LLS 6-3-2-1 crack spread, $200m for sweet/sour differential, and $85m for LLS-WTI differential; these estimates assume other factors remain unchanged.
- Environmental remediation liabilities were $182m, with $71m of related recoverable-cost receivables. MPC identified a Kentucky consumer-pricing lawsuit alleging $89m of overcharges, plus potential penalties; management believed the ultimate resolution would not have a material adverse effect, while noting an unfavorable outcome could be material. Certain unresolved contingencies could not be reasonably estimated.
- The Galveston Bay refinery acquisition carries contingent consideration of up to $700m over six years; MPC paid $180m in July 2014 and reported a $475m fair-value liability at September 30. Contractual commitments for capital projects and equity-method investees totaled $1.8bn, including $751m for North Dakota Pipeline and $208m for the SAX project.
- Other notable items: a $29m out-of-period prior-year bonus adjustment in Q1, which management said was immaterial; a $90m pension settlement expense for the first nine months; and an $11m impairment of an investment in Q2. A $600m acquisition-related goodwill balance was recorded for Hess retail assets.
Key facts for investors to verify
- How Hess’s acquired stores and related operations contribute to results after closing, including integration costs, synergies, and the final working-capital adjustment and purchase-price allocation.
- Whether refining margins and crude differentials remain supportive, and whether higher maintenance and energy costs persist.
- Debt and liquidity after the acquisition, including the effect of future cash needs, share repurchases, dividends, and the remaining $2.41bn repurchase authorization.
- Actual future payments under the BP earnout and capital commitments for the Sandpiper and SAX pipeline projects.
- Developments in environmental remediation, the Kentucky lawsuit, and Centennial pipeline operations and related impairment or guarantee exposure.