Business context and reporting period
Marathon Petroleum Corporation’s unaudited Form 10-Q covers the three months ended March 31, 2019. MPC operates refining and marketing, retail, and midstream businesses. Results include Andeavor from its October 1, 2018 acquisition; therefore, year-over-year comparisons are not on a like-for-like basis. MPC reported 16 refineries with more than 3 million barrels per day of crude capacity.
Financial performance and liquidity
- Revenue: $28.1 billion, up from $18.7 billion. The increase primarily reflected Andeavor and higher refining sales volumes.
- Earnings: Operating income was $669 million versus $440 million; consolidated net income was $259 million versus $235 million. Net loss attributable to MPC was $7 million, or $0.01 per diluted share, compared with MPC net income of $37 million, or $0.08 per share. Higher interest costs, taxes, and income attributable to noncontrolling interests more than offset improved operating income.
- Cash flow: Operating cash flow was $1.62 billion, compared with cash used of $137 million in Q1 2018. Management attributed much of the improvement to a $1.40 billion year-over-year working-capital swing; Q1 2019 working capital provided $470 million. Investing cash use was $1.52 billion, including $1.24 billion of property additions. Financing used $920 million. Cash, cash equivalents, and restricted cash ended at $908 million.
- Segments: Refining & Marketing recorded a $334 million operating loss, versus a $133 million loss; reported refining margin increased to $11.17 per barrel from $10.58, but narrower crude discounts and weak gasoline margins weighed on results. Retail operating income rose to $170 million from $95 million. Midstream operating income rose to $908 million from $567 million, including $220 million from ANDX.
- Debt and liquidity: Gross debt borrowings were $28.6 billion at quarter-end. MPC reported $7.47 billion of liquidity, including $755 million cash excluding MPLX and ANDX, and $6.72 billion of available MPC facilities. MPC, MPLX, and ANDX were in compliance with their disclosed financial covenants.
- Capital returns: MPC repurchased about 14 million shares for $885 million and paid $354 million in dividends. The quarterly dividend declared was $0.53 per share.
Material changes, outlook, and unusual items
- The Andeavor acquisition materially expanded reported scale and added refining, retail, and midstream operations; it also contributed to higher depreciation, SG&A, and interest expense. Management expects up to approximately $1.4 billion of gross run-rate acquisition synergies within three years; this is an expectation, not a guarantee.
- A $207 million noncash gain arose from exchanging MPC’s Capline pipeline interest for an equity-method investment. Andeavor-related transaction costs were $91 million. A $36 million state deferred-tax expense was recorded as an out-of-period adjustment related to the acquisition.
- On May 8, 2019, MPC announced that MPLX would acquire ANDX in a unit-for-unit merger, expected to close in the second half of 2019 subject to approvals and other conditions. The transaction’s anticipated benefits and completion are uncertain.
- 2019 capital plans included approximately $2.8 billion for MPC projects and investments, excluding MPLX, ANDX, capitalized interest, and acquisitions; MPLX separately planned $2.2 billion of growth and about $200 million of maintenance capital, while ANDX planned $600 million of growth and about $100 million of maintenance capital. Plans may change.
- Key exposures include volatile crude, refined-product, natural-gas and NGL prices; refining margins and differentials; operating disruptions; environmental regulation and remediation; and acquisition integration. Environmental remediation liabilities were $451 million. Climate-related lawsuits seek unspecified damages, and other litigation includes Kentucky matters whose outcomes and potential losses remain uncertain. MPC states some contingency outcomes could be material.
Important facts for investors to verify
- How much of operating cash flow reflects sustainable earnings versus working-capital movements.
- Whether refining margins recover and whether acquisition synergies are realized, including their timing and costs.
- Debt, interest expense, liquidity, and covenant headroom across MPC, MPLX, and ANDX.
- Completion, terms, approvals, and expected effects of the announced MPLX-ANDX merger.
- Potential costs and outcomes of environmental, climate, and other legal contingencies, and the final Andeavor purchase-price allocation.