Marathon Petroleum Corporation — Q1 2012 Form 10-Q
Business context and reporting period
Reports the three months ended March 31, 2012, with comparison to Q1 2011. MPC operates Refining & Marketing, Speedway retail, and Pipeline Transportation businesses. The company was spun off from Marathon Oil on June 30, 2011; Q1 2011 figures represent the predecessor business and include allocated corporate costs, so comparisons are not fully like-for-like.
Financial and operating highlights
- Revenue: $20.264 billion, up from $17.819 billion. Higher refined-product prices were the principal driver.
- Profit: Operating income was $956 million versus $819 million; net income was $596 million versus $529 million. Diluted EPS was $1.70 versus $1.48. Effective tax rate was 36% in both periods.
- Refining margin: Refining & Marketing gross margin rose to $8.36 per barrel from $6.73. Segment operating income increased to $943 million from $802 million. Refinery throughput was essentially unchanged at 1.320 million barrels per day.
- Other segments: Speedway operating income increased to $50 million from $33 million; Pipeline Transportation declined to $42 million from $51 million, reflecting lower affiliate shipment volumes. Consolidated refined-product sales averaged 1.558 million barrels per day, compared with 1.562 million.
- Cash flow: Operating cash flow was $347 million, down from $915 million, mainly due to a $761 million working-capital use, including higher receivables and lower crude-oil payables. Capital expenditures and investments were $240 million. Cash fell to $2.205 billion from $3.079 billion at year-end.
- Liquidity and debt: Reported liquidity was $5.205 billion: $2.205 billion cash, a $2.0 billion revolving facility, and a $1.0 billion receivables facility, with no borrowings or letters of credit under the facilities. Total debt was $3.321 billion; debt-to-total-capital was 26%. The company reported compliance with debt covenants and investment-grade ratings (Moody’s Baa2; S&P BBB, both stable).
- Margins and costs: The LLS-WTI spread widened to $16.63 per barrel from $13.06, and the sweet/sour differential increased to $13.70 from $12.40. Management estimated the larger Gulf Coast crack spread and wider WTI discount contributed approximately $229 million and $198 million, respectively, to refining gross margin, partly offset by other costs and a reduced contango structure.
Material changes, outlook, and risks
- Management attributed improved earnings primarily to refining margins. Speedway benefited from higher merchandise margins; pipeline earnings weakened as volumes and affiliate income fell.
- The 2012 capital and investment budget was $1.42 billion, excluding capitalized interest. The Detroit refinery upgrading and expansion project was 92% complete, on budget and schedule for construction completion in Q3 2012, with integration expected by year-end; a 70-day turnaround was planned after construction.
- The board authorized up to $2.0 billion of repurchases over two years. An $850 million accelerated repurchase delivered approximately 17.6 million shares in Q1; $1.15 billion remained authorized at quarter-end. The company paid $87 million in Q1 dividends and approved a further $0.25-per-share dividend for payment in June.
- MPC was evaluating a possible midstream MLP, MPLX LP, and said it expected to file an IPO registration statement in Q3 2012 if pursued, subject to board approval and market conditions. Speedway’s proposed purchase of 88 stores in Indiana and Ohio was expected to close by the end of Q2, subject to customary conditions.
- The Catlettsburg refinery labor agreement expired in January. MPC implemented its final offer after reaching impasse; no work stoppage had occurred, but management cited increased risk of a temporary stoppage.
- Unusual items include a $14 million impairment of a prepaid Centennial pipeline tariff due to declining throughput and a $20 million gain from termination of interest-rate swaps, recorded as a debt adjustment to be amortized over the remaining note term.
- A May 4, 2012 settlement concerning the Minnesota asset sale was contingent on the buyer completing an IPO by December 31, 2012. If completed, MPC would be released from margin-support obligations, the buyer’s earnout would be canceled, and MPC would receive $40 million cash and a new $45 million preferred security; otherwise the original terms could remain. Any resulting gain was not recognized in this quarter.
- Risks include volatile crude and refined-product prices, refinery operating and construction risks, lower pipeline shipment volumes, environmental compliance costs, and litigation. The Kentucky attorney general’s case alleges $89 million of customer overcharges in 2005, with additional claims concerning 2011 pricing; an unfavorable outcome could be material. The filing also reports environmental and pipeline enforcement matters and various guarantees.
Most important facts to verify
- Whether refining-margin improvements and the favorable crude-price differentials persist, and how they affect cash generation.
- Working-capital movements, cash conversion, and the company’s ability to fund capital spending, repurchases, dividends, and pension contributions.
- Detroit project completion, cost and schedule, including the planned turnaround and year-end integration.
- Outcome of the Catlettsburg labor negotiations, Kentucky litigation, and environmental or pipeline proceedings.
- Whether the Minnesota settlement conditions are met and whether the proposed midstream MLP or Speedway store acquisition proceeds.
- Comparability of Q1 2011 results with post-spinoff MPC operations, given predecessor allocations and changed related-party classifications.