Business context and reporting period
Marathon Petroleum Corporation (MPC) filed this Form 10-K for the fiscal year ended December 31, 2018. It operates Refining & Marketing, Retail and Midstream businesses. Results include Andeavor only from its October 1, 2018 acquisition date, so year-over-year comparisons are not like-for-like. MPC reported 16 refineries with aggregate crude capacity of 3.021 million barrels per calendar day at year-end.
Financial and operating performance
- Revenue: Sales and other operating revenue was $96.5 billion, versus $74.7 billion in 2017. The comparison is affected by the Andeavor acquisition and a new accounting policy presenting certain taxes net of revenue; the policy reduced reported 2018 revenue by $6.66 billion.
- Profit: Operating income rose to $5.57 billion from $4.02 billion. Net income attributable to MPC fell to $2.78 billion from $3.43 billion, and diluted EPS declined to $5.28 from $6.70. The 2017 comparison included a $1.5 billion tax benefit from the Tax Cuts and Jobs Act; 2018 also had higher income attributable to noncontrolling interests.
- Segment operating income: Refining & Marketing earned $2.48 billion (2017: $2.32 billion), Retail $1.03 billion ($729 million), and Midstream $2.75 billion ($1.34 billion). Andeavor contributed only three months to 2018 results, while refining logistics and fuels distribution transferred to MPLX shifted $874 million of segment income from Refining & Marketing to Midstream from February 1, 2018.
- Margins and throughput: Refining & Marketing margin, a company-defined non-GAAP measure, was $11.65 billion versus $8.94 billion. The company estimated market indicator and throughput changes added $3.40 billion to segment operating income, partly offset by an estimated $698 million negative impact from differences including crude acquisition costs and product realizations. Refinery throughput averaged 2.274 million barrels per day versus 1.944 million.
- Cash flow and investment: Operating cash flow was $6.16 billion (2017: $6.61 billion); management cited an unfavorable working-capital change as the main reason for the decline. Investing activities used $7.67 billion, including $3.82 billion for acquisitions. Capital expenditures and investments totaled $4.30 billion, compared with $3.11 billion.
- Debt and liquidity: Debt and capital lease obligations totaled $27.98 billion at year-end, versus $13.42 billion in 2017; this includes MPLX and ANDX obligations. Cash and cash equivalents were $1.69 billion. MPC reported total liquidity of $8.33 billion, including cash and available capacity under its facilities; it had no borrowings under its own revolving facilities or trade receivables facility, apart from $32 million of letters of credit. MPC and both partnerships reported compliance with their credit covenants.
- Shareholder returns: MPC repurchased $3.29 billion of stock and paid $954 million in dividends during 2018. Dividends per share were $1.84, up from $1.52. The board’s announced dividend was $0.53 per share, payable in March 2019.
- Fourth quarter: Unaudited Q4 2018 sales and other operating revenue was $32.33 billion, operating income $2.02 billion, net income attributable to MPC $951 million and diluted EPS $1.35. Andeavor is included in Q4; the revenue comparison also reflects the accounting presentation change.
Material changes versus the prior comparable period
The October 2018 Andeavor acquisition materially expanded MPC’s scale and geographic reach. Consideration was approximately $19.8 billion in MPC shares and $3.5 billion in cash. MPC added 10 refineries, about 1.117 million barrels per day of capacity, retail locations and the ANDX midstream partnership. The acquisition was funded with cash and equity and brought acquired debt and noncontrolling interests into the consolidated group. MPC recorded preliminary acquisition goodwill of $16.3 billion; purchase accounting remained subject to finalization.
Reported operating income improved, but attributable net income and EPS declined because 2017 benefited from the one-time TCJA tax remeasurement and 2018 included greater noncontrolling interests. Debt, assets and goodwill also increased substantially with the acquisition. MPC adopted ASC 606 in 2018; besides net presentation of certain taxes, it increased both revenue and costs by $502 million for specified Midstream items.
Outlook, risks and unusual items
- Synergies and investment: Management expected up to approximately $1.4 billion of gross run-rate Andeavor synergies within three years, targeting realization by the end of 2021. The 2019 capital plan totaled $5.91 billion across MPC, MPLX and ANDX, excluding acquisitions and capitalized interest. Key priorities included refinery optimization, retail integration, and midstream growth projects. MPC cautioned that synergy timing and realization are uncertain.
- Operations and markets: Results are exposed to volatile refining and retail fuel margins, crude/feedstock prices and differentials, commodity demand and seasonality, refinery outages and turnarounds, and reliance on third-party transportation. Management cited record Midstream gathering, processing, fractionation and pipeline throughput volumes in 2018.
- Environmental and regulatory exposure: Environmental capital, operating and remediation expenditures were $957 million in 2018; planned 2019 environmental capital spending was approximately $420 million. Risks include emissions and climate rules, renewable fuel standard and RIN costs, fuel specifications, permitting, remediation and potential climate-related litigation. Costs and effects of several evolving requirements could not be reliably estimated.
- Contingencies: Accrued remediation liabilities were $455 million at year-end, largely increased by Andeavor obligations. MPC disclosed pending Kentucky antitrust and pricing litigation, climate-related suits seeking unspecified relief, and environmental enforcement matters. It said some potential losses could not be estimated; management generally did not expect ordinary environmental proceedings to have a material adverse effect. A long-running Kentucky pricing case could be material if resolved unfavorably, although management did not expect that outcome to materially affect the company.
- Other notable items: The Andeavor merger-related shareholder actions were dismissed as moot after supplemental disclosures, with remaining attorneys’ fees resolved for an amount not material to MPC. MPLX recorded $60 million of debt extinguishment costs on a 2018 note redemption. Adoption of the lease standard in 2019 was expected to recognize $2.5–$3.0 billion of operating lease right-of-use assets and liabilities, without a material income-statement or cash-flow impact.
- Reporting controls: Management and the auditor concluded MPC’s internal control over financial reporting was effective at year-end; Andeavor, representing 27% of consolidated assets and 12% of 2018 revenue, was excluded from the control assessment and audit because of the recent acquisition.
Important facts for investors to verify
- Track realized Andeavor synergies against the up-to-$1.4 billion target, including one-time integration costs and the timeline to achieve them.
- Assess debt, interest expense, maturities and subsidiary-level leverage after the acquisition; distinguish MPC obligations from MPLX and ANDX debt.
- Compare future cash generation with capital spending, dividends and repurchases, accounting for working-capital volatility and the acquired businesses’ full-year contribution.
- Monitor refining margins, crude differentials, RIN compliance costs and Midstream producer volumes; these can materially affect results and cash flows.
- Review final Andeavor purchase accounting, goodwill and acquired environmental liabilities, as well as developments in the disclosed litigation and regulatory matters.