Marathon Petroleum Corporation — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020. MPC is an integrated downstream energy company with Refining & Marketing and Midstream segments; Speedway is classified as discontinued operations following the agreed sale.
Financial results and position
- Revenue: Continuing-operations sales and other operating revenue was $17.4 billion in Q3, down from $27.6 billion a year earlier. For the first nine months, it was $51.8 billion, versus $83.1 billion.
- Profit: Net loss attributable to MPC was $886 million in Q3 ($1.36 per diluted share), compared with net income of $1.10 billion ($1.66 per diluted share) in Q3 2019. For the first nine months, MPC recorded a $10.11 billion loss ($15.58 per diluted share), versus net income of $2.19 billion ($3.28 per diluted share). Q3 continuing-operations loss, net of tax, was $980 million; Speedway contributed $371 million of discontinued-operations income, net of tax.
- Margins and segments: Refining & Marketing reported an operating loss of $1.57 billion in Q3; its margin was $8.28 per barrel excluding the LIFO liquidation charge, or $7.18 including that charge, versus $15.11 a year earlier. Midstream operating income was $960 million, up from $919 million. Refinery throughput fell to 2.536 million barrels per day from 3.156 million.
- Unusual charges and benefits: Q3 included $433 million of impairment expense and $348 million of restructuring expense, partly offset by a $530 million inventory lower-of-cost-or-market (LCM) benefit. Nine-month results included $9.595 billion of total impairments, a $1.185 billion LCM charge and $348 million of restructuring expense. Impairments included $7.394 billion of goodwill, $1.315 billion of equity-method investments and $886 million of long-lived assets.
- Cash flow: Nine-month net cash from operating activities was $1.091 billion, down from $7.032 billion. Continuing operations used $141 million of operating cash; discontinued operations provided $1.232 billion. Investing used $2.824 billion, including $2.330 billion of property, plant and equipment additions. Financing provided $922 million. Cash, cash equivalents and restricted cash for continuing operations ended the period at $620 million.
- Debt and liquidity: Consolidated debt was $32.345 billion at September 30, including $2.5 billion due within one year; long-term debt was $29.377 billion. MPC liquidity excluding MPLX was reported as $8.437 billion, including $7.749 billion of available facility capacity and cash. MPLX reported $4.933 billion of liquidity. MPC and MPLX were in compliance with their stated financial covenants; their senior debt ratings were Baa2/BBB/BBB, each with a negative outlook.
- Balance sheet: Total assets were $84.0 billion and total equity $29.5 billion. Speedway assets and liabilities held for sale were $11.069 billion and $1.713 billion, respectively.
Material changes versus prior year
- COVID-19-related restrictions reduced travel, fuel demand, refined-product prices and refining margins. Q3 refined-product sales volumes fell by 505 thousand barrels per day; average selling prices declined $0.55 per gallon. The nine-month declines were 508 thousand barrels per day and $0.56 per gallon.
- Refining & Marketing shifted from operating income of $989 million in Q3 2019 to an operating loss of $1.569 billion in Q3 2020. Midstream operating income increased modestly, supported by growth projects, lower expenses and stable fee-based earnings.
- MPC agreed to sell Speedway to 7-Eleven for $21 billion in cash, subject to adjustments and closing conditions. The expected closing was in Q1 2021. Speedway’s historical results are presented as discontinued operations; MPC retained its direct-dealer business.
- MPC suspended share repurchases during the period. It paid $1.133 billion in dividends during the first nine months, and declared a Q3 dividend of $0.58 per share.
Outlook, management commentary and risks
- Management said it was on track to exceed its targeted $1.35 billion reduction in 2020 capital spending, to $3.0 billion, and its targeted $950 million reduction in forecast operating expenses. It cited lower throughput, fixed-cost reductions and deferral of certain projects; these are targets, not guarantees.
- MPC indefinitely idled the Gallup and Martinez refineries and approved workforce reductions affecting approximately 2,050 employees. It recorded $348 million of restructuring expense. The company was evaluating conversion of Martinez to renewable diesel, with production expected to begin in 2022 and potential capacity of 48,000 barrels per day in 2023; permitting, engineering and feedstock work were underway.
- Management expected approximately $16.5 billion of after-tax proceeds from the Speedway sale to strengthen the balance sheet and return capital to shareholders. The sale and proceeds remain subject to completion and transaction terms. MPC also agreed to a 15-year fuel-supply arrangement of approximately 7.7 billion gallons annually.
- Key uncertainties include the duration and economic effects of COVID-19, demand and commodity-price volatility, refining margins, possible further impairments, the Speedway sale, and the feasibility and economics of the Martinez conversion. Inventory valuation adjustments may reverse or worsen as prices change.
- Contingencies include climate-related lawsuits with unspecified damages and uncertain outcomes; environmental remediation liabilities of $388 million; and Dakota Access Pipeline litigation and permitting risks. The pipeline remained operational, but MPLX’s maximum potential undiscounted contribution under its contingent equity agreement was approximately $230 million. A BIA trespass order involving the Tesoro High Plains Pipeline, which had demanded shutdown and assessed about $187 million, was vacated; a new decision was required and MPLX was pursuing settlement.
- The filing provides no specific consolidated earnings or revenue guidance. Management cautioned that COVID-19’s effects and recovery timing were uncertain. The company reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether the Speedway sale closed on the expected timetable and the final net proceeds after adjustments, taxes and transaction costs.
- Whether refinery demand, throughput and margins recover, and whether the LCM inventory benefit or further impairments materially affect subsequent results.
- Actual capital and operating-cost reductions, restructuring cash payments, and progress, permits, costs and expected returns for the Martinez renewable-diesel project.
- Debt maturities, refinancing needs, liquidity availability (including the receivables facility’s dependence on eligible receivables), covenant headroom and credit-rating outlooks.
- Developments in Dakota Access and Tesoro High Plains proceedings, climate litigation, environmental remediation and related potential cash exposures.
- The sustainability of dividends and any resumption of MPC share repurchases amid operating cash flow, leverage and the planned use of Speedway sale proceeds.