Marathon Petroleum Corporation — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013; unaudited. Comparisons are with Q1 2012 unless otherwise noted. MPC operates Refining & Marketing, Speedway, and Pipeline Transportation businesses, primarily in the Midwest, Gulf Coast, and Southeast.
Financial performance and liquidity
- Revenue: Sales and other operating revenues, including consumer excise taxes, were $23.33 billion, up $3.06 billion. Growth primarily reflected higher sales volumes after the February acquisition of the Galveston Bay refinery; lower refined-product selling prices partly offset the increase.
- Earnings: Operating income was $1.16 billion, up $200 million. Net income attributable to MPC was $725 million, up $129 million; diluted EPS was $2.17 versus $1.70. The effective tax rate was 34%, versus 36%.
- Margins: Refining & Marketing segment income increased to $1.105 billion from $943 million, while its reported gross margin declined to $7.92 per barrel from $8.36. Speedway segment income rose to $67 million from $50 million; Pipeline Transportation income rose to $51 million from $42 million.
- Cash flow: Operating cash flow was $2.079 billion, versus $347 million. Management attributed the increase primarily to working capital; working capital provided $1.03 billion in cash, mainly from higher accounts payable and accrued liabilities. Investing used $1.682 billion, including the acquisition; financing used $520 million, including $431 million of share repurchases and $116 million of dividends. Cash declined $123 million to $4.737 billion.
- Balance sheet and liquidity: Total debt was $3.416 billion, including current maturities; debt-to-total-capital was 22%. Cash exceeded total debt by approximately $1.32 billion. Reported liquidity was $8.237 billion, including cash, a $2.5 billion revolving facility, and a $1.0 billion receivables facility; there were no borrowings or letters of credit under those facilities. Total assets were $30.773 billion and equity was $12.412 billion at March 31.
- Capital returns: Quarterly dividends paid were $0.35 per share, versus $0.25. The board authorized a total of $2.65 billion in repurchases through December 2014; $2.22 billion remained available at quarter-end.
Material changes and business developments
- MPC paid $1.491 billion in cash for BP’s Galveston Bay refinery and related assets, including a 451,000-barrel-per-day refinery, pipelines, terminals, marketing contracts, and a cogeneration facility. The acquisition contributed to higher volumes, but the results include the assets only from February 1, 2013; refinery-level acquired revenue and income were not separately available. Pro forma Q1 2013 net income attributable to MPC was $780 million, compared with $464 million pro forma for Q1 2012.
- The acquisition includes contingent consideration with a preliminary fair value of $600 million; potential payments are capped at $700 million over six years, subject to crack spreads and throughput. The estimate is reassessed quarterly, with changes affecting operating income.
- Consolidated refined-product sales volume increased to 1.895 million barrels per day from 1.558 million. Refinery throughput increased to 1.671 million barrels per day from 1.320 million; capacity utilization was 93%, versus 96%.
- Refining results benefited from higher sales volumes and improved Chicago crack spreads and the LLS-WTI differential, but were pressured by lower gross margin per barrel, higher turnaround and operating costs, and a narrower crude acquisition discount. Planned maintenance was significant at Catlettsburg, Garyville, and Galveston Bay.
- Operating cash flow and working capital improved sharply year over year, but the cash-flow increase was substantially driven by balance-sheet timing. Inventory rose to $4.879 billion from $3.449 billion, while accounts payable rose to $8.872 billion from $6.785 billion.
Outlook, risks, and contingencies
- No specific earnings or revenue forecast is provided. The 2013 capital and investment budget was $1.62 billion, excluding capitalized interest and the Galveston Bay purchase price. MPC expected approximately $160 million of additional funded-pension contributions during the remainder of 2013.
- The board approved a $0.35-per-share dividend payable June 10, 2013. Future share repurchases depend on business and market conditions and may be discontinued.
- Results are exposed to refining crack spreads, crude differentials, commodity prices, throughput, operating and turnaround costs, demand, and pipeline volumes and tariffs. Management disclosed estimated annual after-tax net-income sensitivities of $425 million per $1/barrel change in the LLS 6-3-2-1 crack spread, $225 million per $1/barrel change in the sweet/sour differential, and $75 million per $1/barrel change in the LLS-WTI spread, assuming other factors remain unchanged.
- Renewable-fuel compliance costs were $43 million, versus $31 million. Management noted proposed EPA Tier 3 gasoline standards that could require additional compliance investment; the cost was not yet reasonably estimable pending final rules and compliance planning.
- Environmental remediation liabilities were $134 million. MPC also disclosed guarantees for equity-method investee debt, including maximum potential payments of $172 million for LOOP/LOCAP, $45 million for Centennial, and $25 million related to TAME. Contractual cash obligations totaled $28.686 billion, including variable-price purchase commitments and the acquisition earnout.
- A Kentucky attorney general lawsuit alleges $89 million of overcharges during 2005, with additional claims concerning 2011 pricing. MPC is defending the matter; an adverse resolution could be material, although management did not expect a material adverse effect. The filing states some contingencies cannot yet be reasonably quantified.
Important facts for investors to verify
- Whether Galveston Bay’s throughput, margins, operating costs, and integration deliver expected returns, and how the contingent earnout’s fair value changes.
- How much of Q1 operating cash flow reflects sustainable earnings versus working-capital timing, particularly payable, receivable, and inventory movements.
- Refining-margin and turnaround trends, including the impact of crude differentials, fuel and RIN costs, and new environmental requirements.
- Execution of the capital budget, pension contributions, dividends, and remaining repurchase authorization while preserving investment-grade credit quality.
- Developments in the Kentucky litigation, environmental obligations, and guarantees to investees; the filing does not provide clear loss estimates for certain contingencies.