Marathon Petroleum Corporation — Q1 2016 Form 10-Q
Business context and reporting period
Unaudited results cover the three months ended March 31, 2016, compared with Q1 2015. MPC operates refining and marketing, Speedway retail, and midstream businesses. MarkWest’s results are included in Midstream following MPLX’s December 2015 acquisition. MPC contributed its inland marine business to MPLX on March 31, 2016, and recast comparable segment information.
Key financial results
| Metric | Q1 2016 | Q1 2015 |
|---|---|---|
| Sales and operating revenue | $12.755 billion | $17.191 billion |
| Income from operations | $75 million | $1.470 billion |
| Net income (loss), consolidated | $(78) million | $903 million |
| Net income attributable to MPC | $1 million; $0.003 per diluted share | $891 million; $1.62 per diluted share |
| Operating cash flow | $327 million | $1.190 billion |
| Capital expenditures and investments | $684 million | $384 million |
- Refining & Marketing reported a $62 million operating loss, versus $1.292 billion operating income. Gross margin fell to $9.98 per barrel from $16.14; the blended LLS 6-3-2-1 crack spread declined to $4.62 per barrel from $9.69. Refinery throughput was 1.774 million barrels per day, down from 1.852 million.
- Speedway operating income was $167 million, approximately flat year over year. Merchandise margin improved, while gasoline and distillate margin weakened.
- Midstream operating income was $167 million versus $90 million, primarily reflecting MarkWest. Results exclude the separately reported $129 million goodwill impairment.
- Cash and cash equivalents were $308 million at quarter-end, down from $1.127 billion at year-end 2015. Total debt was $11.566 billion; debt-to-total-capital was 37%, compared with 38% at year-end. MPC reported $3.234 billion of total liquidity, including cash and available MPC facilities; MPLX facilities are additional.
- Quarterly dividend paid was $0.32 per share, up from $0.25. MPC repurchased $75 million of shares.
Material changes and drivers
- MPC-attributable net income declined $890 million year over year. Management cited sharply lower refining margins, unfavorable crude/feedstock economics and increased turnaround activity. The blended crack spread fell by about half.
- Refined-product sales prices and volumes declined; consolidated sales revenue fell $4.436 billion. Lower prices also reduced reported revenue and working-capital balances.
- Operating cash flow declined $863 million, reflecting lower earnings and a less favorable working-capital change. Investing cash use increased, principally from higher capital spending and affiliate investment.
- MarkWest acquisition accounting included a $241 million reduction in goodwill from purchase-price allocation adjustments. MPLX also recorded a $129 million goodwill impairment after weaker commodity-price outlooks, lower customer capital-spending and production-growth expectations, and higher cost of capital.
Outlook, risks and contingencies
- The filing provides no specific earnings or revenue guidance. MPC reduced expected 2016 capital spending and investments to $3.0 billion, excluding capitalized interest, from its previously approved $4.2 billion plan; Q1 spending and investments were $667 million excluding capitalized interest.
- Management said liquidity was adequate for expected funding needs. MPC and MPLX were in compliance with their respective debt covenants. MPC’s leverage covenant ratio was 0.37 to 1.00 against a maximum 0.65; MPLX’s debt-to-EBITDA ratio was 4.1 to 1.0 against a maximum 5.0 to 1.0.
- Refining profitability remains sensitive to crack spreads, crude differentials, turnaround costs and inventory valuation. Midstream results are exposed to volatile natural-gas and NGL prices, producer activity and project execution. Management noted that a 0.50 percentage-point increase in the discount rate for one Midstream reporting unit could have caused more than $400 million of additional goodwill impairment.
- Environmental remediation liabilities were $166 million. An EPA/DOJ inquiry into MarkWest pipeline and compressor operations in Pennsylvania could lead to penalties, defense costs or operating changes; potential exposure could not be reasonably estimated. Other disclosed matters include Kentucky antitrust and pricing litigation and environmental proceedings; management generally did not expect material adverse effects, while noting outcomes are uncertain.
- Contractual commitments for capital projects and equity-method investments totaled $1.7 billion. The Sandpiper pipeline in-service date was likely delayed from 2017 to early 2019, with costs also potentially increasing. A $1 billion MPLX convertible preferred-unit placement was agreed after quarter-end, with closing expected in May 2016.
Important facts for investors to verify
- Assess the sustainability of refining margins and throughput, including the impact of planned turnarounds and crude differentials.
- Review MPLX/MarkWest leverage, cash distributions, acquisition synergies and further goodwill impairment sensitivity.
- Reconcile the inventory lower-of-cost-or-market reserve: the financial statements and notes report $385 million at March 31, while one MD&A passage states $360 million; the filing text is internally inconsistent.
- Track execution and funding of the revised capital plan, Sandpiper schedule and cost, and remaining Galveston Bay earnout obligations.
- Monitor outcomes and potential financial exposure from the Pennsylvania environmental inquiry and material legal proceedings, which are not fully quantifiable in the filing.