Marathon Petroleum Corporation — Q3 2013 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2013; comparisons are with the corresponding 2012 periods. MPC operates Refining & Marketing, Speedway retail, and Pipeline Transportation businesses, primarily in the U.S. Midwest, Gulf Coast, and Southeast.
Financial performance
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Revenue and other operating revenue, including excise taxes | $26.253bn | $21.047bn | $75.256bn | $61.551bn |
| Operating income | $301m | $1.895bn | $2.417bn | $4.158bn |
| Net income attributable to MPC | $168m | $1.224bn | $1.486bn | $2.634bn |
| Diluted earnings per share | $0.54 | $3.59 | $4.60 | $7.65 |
| Operating cash flow | Not separately stated | Not separately stated | $2.050bn | $2.449bn |
- Revenue growth mainly reflected higher refined-product volumes after the February 2013 acquisition of the Galveston Bay refinery; lower product prices partly offset the volume increase. Revenue includes consumer excise taxes.
- Refining & Marketing operating income fell to $227m from $1.691bn in Q3 and to $2.235bn from $3.959bn over nine months. Refining and marketing gross margin fell to $2.55/barrel from $13.12/barrel in Q3, and to $5.42/barrel from $10.92/barrel over nine months.
- Speedway operating income rose to $102m from $76m in Q3 and to $292m from $233m over nine months, supported by fuel and merchandise margins. Pipeline Transportation operating income was $54m versus $52m in Q3 and $163m versus $144m over nine months.
- Q3 2012 included a $183m pretax gain related to settlement of the sale of the Minnesota assets; this did not recur in 2013. Pension settlement expense was $23m in Q3 2013 and $83m for the nine-month period.
- Gross margin compression reflected narrower crude oil differentials, lower crack spreads, and product realizations below benchmark spot prices. The acquired refinery increased throughput and sales volumes but had higher manufacturing costs per barrel than MPC’s other refineries.
Cash, debt, and capital allocation
- Cash and cash equivalents were $2.018bn at September 30, down from $4.860bn at December 31, 2012. Nine-month cash use was $2.842bn: operating cash flow of $2.050bn, investing outflow of $2.251bn, and financing outflow of $2.641bn.
- Investing outflows included $1.515bn of acquisitions; capital expenditures and investments were $2.268bn, including the Galveston Bay transaction. Financing included $2.341bn of share repurchases and $358m of dividends paid.
- Total debt was $3.403bn, including $23m due within one year. Debt-to-total-capital was 23%, compared with 22% at year-end. No borrowings or letters of credit were outstanding under MPC’s revolving credit agreements or receivables facility.
- Reported liquidity was $5.518bn, comprising $2.018bn cash, a $2.5bn revolving credit facility, and a $1.0bn receivables securitization facility; MPLX’s undrawn $500m facility was excluded. MPC reported compliance with its debt covenant and investment-grade ratings.
- The board authorized an additional $2bn share-repurchase program in September; $2.31bn remained available at quarter-end. The board approved a $0.42/share dividend on October 30, payable December 10, 2013.
Outlook, risks, and unusual items
- No earnings guidance was provided. MPC’s 2013 capital and investment budget was $1.62bn, excluding capitalized interest and the Galveston Bay purchase price; management reported no material change to the budget and said spending could be revised as conditions warrant.
- The Galveston Bay acquisition included contingent consideration with a September 30 fair value of $606m; the contract permits earnout payments up to $700m over six years, tied to crack spreads and refinery throughput. Changes in estimated fair value affect cost of revenues.
- Refining results remain sensitive to crack spreads, crude differentials, product prices, operating costs, maintenance, and outages. MPC disclosed annual after-tax net-income sensitivities of $425m per $1/barrel change in its LLS crack-spread measure, $225m per $1/barrel change in the sweet/sour differential, and $75m per $1/barrel change in the LLS-WTI differential, assuming other factors are unchanged.
- RIN compliance costs rose to $78m in Q3 and $185m over nine months, versus $4m and $70m, respectively, in 2012, primarily due to higher RIN prices. Proposed Tier 3 gasoline standards could require material compliance spending, which MPC said it could not yet estimate.
- Environmental remediation accruals were $127m. A Kentucky consumer-pricing lawsuit alleges $89m in overcharges, plus penalties; MPC is defending the case and says an unfavorable resolution could be material, while management does not expect a material adverse outcome. A Michigan air-permit enforcement matter could result in a penalty above $100,000.
- Other exposures include guarantees for equity-method investees and environmental and other commitments. Centennial had not shipped product through September; MPC noted potential future impairment of its $30m investment if business conditions persist and no alternative asset use is found.
Key facts for investors to verify
- Whether refining margins and crude differentials recover, and how the acquired Galveston Bay refinery performs relative to its operating-cost profile.
- The timing and ultimate amount of the BP earnout, including the effect of crack spreads and throughput on the recorded liability.
- Cash generation and liquidity after acquisition spending, share repurchases, dividends, and potential pension contributions.
- RIN expense trends and the eventual cost and timing of Tier 3 fuel-standard compliance.
- Developments in the Kentucky litigation, Michigan permit matter, environmental obligations, and Centennial’s operating outlook.