Marathon Petroleum Corporation — FY2011 Form 10-K
Reporting period: Fiscal year ended December 31, 2011. The filing also reports unaudited fourth-quarter results. MPC became an independent public company in a June 30, 2011 spinoff from Marathon Oil. Prior-period figures represent the predecessor refining, marketing and transportation business, include the Minnesota assets until their December 2010 sale, and may not reflect the costs of operating independently.
Business context and results
MPC operates Refining and Marketing, Speedway retail, and Pipeline Transportation businesses. It had six U.S. refineries with approximately 1.193 million barrels per calendar day of crude capacity at year-end. FY2011 crude throughput was 1.177 million barrels per day.
| Metric | FY2011 | FY2010 |
|---|---|---|
| Revenue | $78.638 billion | $62.487 billion |
| Income from operations | $3.745 billion | $1.011 billion |
| Net income | $2.389 billion | $623 million |
| Diluted earnings per share | $6.67 | $1.74 |
| Cash provided by operating activities | $3.309 billion | $2.217 billion |
| Additions to property, plant and equipment | $1.185 billion | $1.217 billion |
Fourth-quarter 2011 revenue was $19.420 billion; the company reported an operating loss of $158 million, net loss of $75 million and diluted loss per share of $0.21. The filing describes results as seasonal, with the first and fourth quarters generally weaker.
Financial position and segment performance
- Refining and Marketing income from operations rose to $3.591 billion from $800 million. Its reported gross margin increased to $7.75 per barrel from $2.81.
- Management attributed the improvement mainly to wider WTI discounts to other light sweet crudes, stronger crack spreads and wider sweet/sour differentials. It estimated the WTI-LLS differential contributed $1.69 billion of positive refining and marketing gross margin impact.
- Speedway operating income declined to $271 million from $293 million, chiefly reflecting the Minnesota store sale and higher expenses; improved fuel and merchandise margins partly offset the decline. Pipeline Transportation operating income increased to $199 million from $183 million.
- At December 31, cash and cash equivalents were $3.079 billion and total debt, including capital leases, was approximately $3.307 billion. The company reported $6.079 billion of liquidity, including $2.0 billion of unused revolving credit and a $1.0 billion receivables facility; neither facility had borrowings outstanding.
- Debt was 26% of total capitalization; the cash-adjusted debt-to-capital ratio was 2%. Moody’s rated the senior unsecured debt Baa2 and S&P rated it BBB, both with stable outlooks. The company reported compliance with credit facility covenants.
Material changes and notable items
- Net income increased by $1.766 billion year over year, primarily due to refining and marketing margins. Higher commodity prices also lifted sales and input costs, so revenue growth alone does not represent improved profitability.
- MPC issued $3.0 billion of senior notes in February 2011, with maturities in 2016, 2021 and 2041, as it transitioned from Marathon Oil financing. Stand-alone company costs contributed to higher selling, general and administrative expenses.
- Operating cash flow increased, while cash at year-end rose to $3.079 billion from $118 million. Investing cash flow benefited substantially from redemptions of related-party securities; financing cash flow reflected spinoff-related debt repayment and distributions, partly offset by the note issuance.
- The $2.2 billion Detroit refinery heavy-oil upgrading and expansion project was approximately 85% complete at year-end. Construction was expected to finish in the third quarter of 2012, with full refinery integration by year-end.
Outlook, risks and contingencies
- The 2012 capital and investment budget was $1.42 billion, excluding capitalized interest, including $350 million for continued Detroit project spending. Management expected approximately $116 million of capitalized interest, primarily for that project.
- Management planned approximately $240 million in contributions to funded pension plans in 2012. A 2012 quarterly dividend of $0.25 per share was approved. After year-end, the board authorized up to $2.0 billion of share repurchases over two years; an $850 million accelerated repurchase program began in February 2012.
- After year-end, Speedway agreed to acquire 88 convenience stores in Indiana and Ohio, subject to customary closing conditions. MPC also announced it was evaluating strategic alternatives for certain midstream assets, including a possible MLP; no transaction was assured.
- Key business risks include volatile refining margins and crude supply, refinery outages and project execution, seasonality, competition, environmental and fuel regulations, renewable-fuel requirements, and labor negotiations. The filing identifies uncertainty around potential greenhouse-gas and other regulatory costs.
- Material disclosed matters include a Kentucky pricing lawsuit alleging $89 million of customer overcharges, for which management said a reasonably possible loss could not be estimated; one remaining MTBE groundwater case; and several environmental or pipeline enforcement matters. The company reported $117 million of accrued remediation liabilities at year-end, alongside $51 million of recoverable state remediation costs.
- The spinoff creates contingent tax and indemnification exposure to Marathon Oil. The filing states that certain indemnities are uncapped and that potential tax liabilities cannot be precisely quantified; an adverse tax determination could be material.
Important facts for investors to verify
- Whether unusually favorable 2011 crude differentials and refining margins persist, and how sensitive earnings are to margin normalization.
- Fourth-quarter operating and net losses, including their causes and whether they signal a continuing trend or reflect timing and unusual items.
- Detroit project completion, final cost versus the stated $2.2 billion estimate, and expected operating benefits.
- Cash-flow quality and the effects of working capital, related-party security redemptions, capital spending, dividends and repurchases on liquidity.
- Developments in the Kentucky pricing case, environmental enforcement matters, and spinoff-related tax and indemnification exposures.
- Comparability of pre- and post-spinoff results, including Minnesota asset disposition effects and the cost of MPC’s stand-alone operations.