Marathon Petroleum Corporation (MPC) — Q3 2019 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2019. Amounts are in U.S. dollars; financial statement figures are in millions unless noted. Results include Andeavor only from its October 1, 2018 acquisition date, so year-over-year comparisons are materially affected by the larger business.
Business context
MPC is an integrated downstream energy company with Refining & Marketing, Retail and Midstream segments. It operates 16 refineries with more than 3 million barrels per day of crude capacity; Midstream is conducted primarily through consolidated MPLX. MPLX completed its acquisition of Andeavor Logistics (ANDX) on July 30, 2019.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Sales and operating revenues | $31,043 | $22,988 | $92,857 | $64,171 |
| Income from operations | $2,024 | $1,403 | $4,735 | $3,554 |
| Net income attributable to MPC | $1,095 | $737 | $2,194 | $1,829 |
| Diluted EPS | $1.66 | $1.62 | $3.28 | $3.92 |
| Net cash from operating activities | — | — | $7,032 | $3,431 |
| Capital expenditures and investments | — | — | $4,316 | $2,611 |
Third-quarter MPC-attributable net income rose $358 million, while nine-month net income rose $365 million. Revenue and operating income growth primarily reflect Andeavor’s inclusion and increased volumes. Nine-month diluted EPS declined despite higher net income, in part because weighted-average diluted shares increased to 668 million from 466 million.
Segment income from operations: Q3 Refining & Marketing $883 million, Retail $442 million and Midstream $919 million; nine-month results were $1,455 million, $1,105 million and $2,705 million, respectively. Q3 Refining & Marketing income increased $217 million year over year; nine-month income declined $103 million as higher operating, distribution and depreciation costs offset improved margin. Retail and Midstream benefited substantially from acquired operations.
Margins and operations: Refining & Marketing margin was $14.66 per barrel in Q3 versus $14.25, and $13.72 for nine months versus $13.48. Refinery capacity utilization was 98% in Q3 and 97% year to date; throughput increased to 3.156 million barrels per day in Q3 from 2.032 million. Retail fuel margin was 24.53 cents per gallon in Q3 versus 16.51 cents; same-store gasoline volume fell 2.8% while same-store merchandise sales rose 5.2%.
Cash flow and liquidity: Operating cash flow was $7.032 billion for the first nine months, up $3.601 billion, reflecting improved operating results and favorable working-capital changes. Investing used $4.575 billion and financing used $2.654 billion; cash and cash equivalents ended at $1.525 billion. MPC reported $8.233 billion of liquidity, including $1.484 billion cash and $6.749 billion available under MPC facilities; this excludes MPLX’s separate $3.5 billion revolving capacity. MPC had no revolver borrowings and $1 million of letters of credit. Management stated liquidity was adequate for expected funding needs.
Debt and capital returns: Total debt principal was $29.294 billion at September 30, 2019, versus $27.980 billion at year-end 2018. MPC’s reported consolidated long-term debt carrying amount was $28.282 billion. MPC repurchased $1.885 billion of stock in the first nine months and had $3.02 billion of authorization remaining. Dividends paid were $1.054 billion; the declared quarterly dividend was $0.53 per share. MPC and MPLX were in compliance with their financial covenants; leverage ratios were 0.21-to-1 for MPC’s net debt to capitalization and 3.80-to-1 for MPLX’s debt to EBITDA.
Material changes and unusual items
- Andeavor’s October 2018 acquisition and MPLX’s July 2019 ANDX acquisition changed scale, segment mix, debt, expenses and share count; reported growth is not a like-for-like organic comparison.
- Nine-month results included a $207 million noncash gain from contributing MPC’s Capline pipeline interest to Capline LLC. Refining & Marketing also recorded higher acquired-asset depreciation and operating costs.
- Nine-month transaction-related costs were $147 million, including employee-related costs associated with Andeavor; a $22 million litigation reserve adjustment was also recorded. A $36 million state deferred tax expense was recorded as an out-of-period adjustment related to the acquisition.
- MPC adopted lease accounting effective January 1, 2019, recording approximately $2.8 billion of right-of-use assets and $2.9 billion of lease liabilities at adoption; the filing says adoption did not materially affect income, cash flow or equity.
- MPLX issued $2 billion of floating-rate notes in September and entered a term-loan facility; $500 million of ANDX notes and accrued interest were repaid on October 15, 2019.
Outlook, risks and contingencies
MPC’s 2019 capital plan was approximately $2.8 billion for capital projects and investments, excluding MPLX, capitalized interest and acquisitions; MPLX’s plan was approximately $3.1 billion, comprising $2.8 billion growth and $300 million maintenance capital. MPC said it continuously evaluates and may revise its investment plan. No specific earnings or revenue guidance was provided in the supplied filing text.
On October 31, 2019, MPC announced a proposed tax-free separation of Speedway into a publicly traded company, targeted for completion by year-end 2020, subject to approvals and other conditions. MPC would retain its direct-dealer business. The board also formed a special committee to review potential value-creating options for Midstream; no transaction outcome was assured. Management cited up to approximately $1.4 billion of gross run-rate synergies expected within three years from the Andeavor combination.
On November 1, 2019, Moody’s changed its outlook on MPC and MPLX to negative; S&P and Fitch outlooks remained stable. The filing notes that the planned Speedway separation and Midstream review could contribute to rating changes. Key operating exposures include refining margins and crude differentials, commodity prices, demand, regulation (including renewable fuel requirements), outages, project execution, credit-market access and acquisition synergies.
Environmental remediation liabilities were $447 million at September 30. Climate-related lawsuits seek unspecified damages; MPC said outcomes and potential liability could not be determined. Other pending matters include Kentucky antitrust litigation and Galveston Bay air-permit allegations; the filing does not provide a clear estimate of potential losses for these matters. Contractual commitments to acquire property, plant and equipment and advance funds to equity investees totaled $1.55 billion. MPC disclosed several contingent guarantees, including maximum potential principal payments of $171 million for LOOP/LOCAP, $226 million for Gray Oak and approximately $230 million for the Bakken Pipeline system.
Important facts for investors to verify
- Separate acquired-business effects from underlying performance, particularly for revenues, segment income, margins, costs and EPS.
- Track progress, conditions, costs and potential rating implications of the Speedway separation and Midstream strategic review.
- Assess debt, interest costs, MPLX leverage and refinancing needs alongside the reported liquidity, noting that MPC and MPLX liquidity are distinct.
- Monitor refining margin and crude differential trends, retail same-store fuel volumes, and whether expected Andeavor synergies are realized.
- Review exposure to environmental and legal claims, guarantees, capital commitments and the planned 2019 capital program.