Marathon Petroleum Corp annual report, FY2013

Marathon Petroleum Corporation — FY2013 Form 10-K

Business context and reporting period. This annual filing covers the fiscal year ended December 31, 2013; it is not a standalone fourth-quarter filing. Marathon Petroleum (MPC) operates Refining & Marketing, Speedway retail, and Pipeline Transportation, including its consolidated 73.6% interest in MPLX. Results include the Galveston Bay refinery and related assets acquired from BP on February 1, 2013, so year-over-year comparisons reflect a larger business.

Key financial results

MetricFY2013FY2012
Revenue$100.16 billion$82.24 billion
Income from operations$3.43 billion$5.35 billion
Net income attributable to MPC$2.11 billion$3.39 billion
Diluted EPS$6.64$9.89
Cash provided by operating activities$3.41 billion$4.49 billion
Capital expenditures and investments$2.79 billion$1.46 billion
Cash and cash equivalents at year-end$2.29 billion$4.86 billion
Total debt, including capital leases$3.40 billion$3.36 billion
Debt-to-total-capital ratio23%22%

Revenue increased mainly with higher sales volumes following the Galveston Bay acquisition, partly offset by lower refined-product selling prices. Profitability fell: MPC attributed the decline primarily to narrower crude differentials and lower net product price realizations. Refining & Marketing income from operations was $3.21 billion, down from $5.10 billion; Speedway rose to $375 million from $310 million; Pipeline Transportation was $210 million versus $216 million.

Refining & Marketing gross margin was $13.24 per barrel versus $17.85 in 2012, while direct operating costs rose to $6.70 per barrel from $5.59. The reported segment analysis estimated negative impacts from narrower sweet/sour and LLS-WTI differentials of $1.21 billion and $998 million, respectively, and lower net product price realizations of $593 million; higher throughput was estimated to contribute $2.01 billion positively. Speedway gasoline and distillate gross margin improved to $0.1441 per gallon from $0.1318.

Fourth-quarter data: revenue was $24.90 billion versus $20.69 billion in Q4 2012; income from operations was $1.01 billion versus $1.19 billion; net income attributable to MPC was $626 million versus $755 million; diluted EPS was $2.07 versus $2.24.

Cash, debt, and shareholder returns

Year-end liquidity was reported at $6.09 billion: $2.29 billion cash, a $2.5 billion revolving facility, and a $1.3 billion receivables securitization facility. The facilities were undrawn at year-end; MPLX also had an undrawn $500 million revolver. MPC reported compliance with credit-agreement covenants and a 0.16-to-1.00 consolidated net debt-to-capitalization covenant ratio. Senior unsecured ratings were Moody’s Baa2 (positive outlook) and S&P BBB (stable outlook).

Operating cash flow declined by $1.09 billion year over year, principally reflecting lower net income, partly offset by favorable working-capital changes. Financing cash use included $2.79 billion of share repurchases and $484 million of dividends. The company had repurchased approximately $4.14 billion cumulatively under $6.0 billion of authorizations, leaving $1.86 billion available at year-end. 2013 dividends were $1.54 per share; the board approved a $0.42 quarterly dividend payable in March 2014.

Material changes, outlook, and notable items

  • Acquisition: MPC paid $1.49 billion for the Galveston Bay assets, including $935 million of inventory. The purchase accounting recorded a $625 million contingent-consideration liability at year-end; potential earnout payments are capped at $700 million over six years and depend on crack spreads and throughput.
  • Investment plans: The 2014 capital and investment budget was $2.43 billion, excluding capitalized interest: $1.21 billion for Refining & Marketing, $327 million for Speedway, $760 million for Pipeline Transportation, and $133 million for Corporate and Other. Management also expected three-year investments of approximately $630 million in Refining & Marketing midstream assets, $2.3 billion in Pipeline Transportation, and $925 million in Speedway.
  • Projects and growth: Priorities include processing more Utica condensate and light crude, increasing distillate production and exports, and expanding Speedway. A Garyville residual-fuel hydrocracker remained under evaluation; if pursued, the estimated cost was $2.2–$2.5 billion, with expected completion in 2018. Sandpiper and Southern Access Extension commitments involve substantial future funding; project timing and costs remain subject to construction and approval risks.
  • Unusual and nonrecurring items: The 2012 comparison benefited from a $183 million Minnesota-asset settlement gain, which did not recur in 2013. MPC recorded $95 million of pension settlement expense in 2013. Renewable Identification Number (RIN) costs rose to $264 million from $105 million.
  • Risks and contingencies: Results remain sensitive to refining margins, crude supply and price differentials, outages, seasonality, transportation availability, competition, and environmental and renewable-fuel regulation. Environmental remediation liabilities were $123 million, offset in part by $51 million of state reimbursement receivables. A Kentucky emergency-pricing lawsuit alleges $89 million of customer overcharges; management said it was defending the matter and did not expect an adverse material outcome, while acknowledging an unfavorable resolution could be material. Other guarantees to equity-method investees include maximum potential payments of $172 million for LOOP/LOCAP debt, $42 million for Centennial debt, and $25 million associated with TAME.
  • Reporting controls: The auditor gave an unqualified opinion and reported effective internal control over financial reporting. Certain Galveston Bay controls—covering approximately 1% of consolidated assets, liabilities, and costs and expenses—were excluded pending integration planned for 2014.

Most important facts for investors to verify

  • How much of the 2013 revenue and throughput increase reflects Galveston Bay, and how the refinery performs after acquisition and integration.
  • Whether crude differentials and product realizations recover, and whether higher refining costs and RIN expenses continue to pressure margins.
  • The actual timing, total funding needs, and returns on the 2014 capital program, Sandpiper, Southern Access Extension, and proposed refining projects.
  • The eventual amount and timing of BP earnout payments, and the outcomes of the Kentucky pricing litigation and other material contingencies.
  • Whether cash generation supports planned dividends and buybacks while maintaining liquidity and investment-grade credit ratings.