Marathon Petroleum Corporation (MPC) — 2019 Q2 Form 10-Q
Reporting period: Three and six months ended June 30, 2019; unaudited. MPC is an integrated downstream energy company with refining, retail and midstream operations. Results include Andeavor from its October 1, 2018 acquisition date, making comparisons with 2018 materially affected by the acquisition.
Key financial metrics
Amounts in millions except per-share data, percentages and per-barrel measures.
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Sales and operating revenues | $33,547 | $22,317 | $61,814 | $41,183 |
| Income from operations | $2,042 | $1,711 | $2,711 | $2,151 |
| Net income attributable to MPC | $1,106 | $1,055 | $1,099 | $1,092 |
| Diluted EPS | $1.66 | $2.27 | $1.63 | $2.31 |
| Net cash from operating activities | — | $4,245 | $2,249 | |
| Cash and cash equivalents at period end | $1,247 | December 31, 2018: $1,687 | ||
| Total debt borrowings, gross | $28,855 | December 31, 2018: $27,980 |
- Q2 consolidated operating margin was approximately 6.1% of revenue, versus 7.7% in Q2 2018; these ratios are calculated from reported figures and reflect a changed business mix after Andeavor.
- Six-month investing cash outflow was $2.88 billion, including $2.42 billion of additions to property, plant and equipment. Operating cash flow less those additions was $1.83 billion, a simple calculated measure, not a company-reported non-GAAP metric.
- At June 30, MPC reported $7.93 billion of parent-company liquidity: $1.22 billion cash and $6.72 billion available capacity. MPLX and ANDX reported additional available facility capacity of approximately $1.63 billion and $600 million, respectively.
- Balance-sheet current assets were $18.40 billion and current liabilities $14.89 billion. Debt due within one year was $554 million; long-term debt carrying value was $27.85 billion. Total debt borrowings of $28.86 billion are stated before unamortized issuance costs, discounts and current maturities.
Material changes and operating results
- Q2 revenue rose about 50%, largely because Andeavor added refining volumes and operations; MPC said refined-product sales volume increased 1,422 thousand barrels per day. Costs also rose substantially with the enlarged business.
- Q2 net income attributable to MPC increased $51 million, but diluted EPS fell from $2.27 to $1.66 as weighted average diluted shares increased from 464 million to 666 million, principally reflecting shares issued in the Andeavor acquisition. For the first half, MPC-attributable net income was nearly flat while diluted EPS declined from $2.31 to $1.63.
- Q2 segment operating income: Refining & Marketing $906 million versus $1.025 billion; Retail $493 million versus $159 million; Midstream $878 million versus $617 million. Refining & Marketing income was pressured by higher operating, distribution, turnaround and depreciation costs. Retail benefited from acquired operations and stronger fuel and merchandise margins; Midstream benefited from ANDX and MPLX growth.
- Q2 Refining & Marketing margin was $15.24 per barrel versus $15.40; refinery throughput was 3.135 million barrels per day versus 2.038 million. Retail fuel margin rose to 26.66 cents per gallon from 16.45 cents. These comparisons include acquired business in 2019 but not 2018.
- Six-month operating cash flow increased $2.00 billion year over year, supported by operating results and a $658 million favorable working-capital change. Investing outflow increased to $2.88 billion, including higher capital spending and Gray Oak Pipeline-related investment. Financing was a $1.84 billion use of cash, including $1.39 billion of share repurchases, $706 million of dividends and $640 million of distributions to noncontrolling interests.
Outlook, commentary, risks and unusual items
- MPC expected up to approximately $1.4 billion of gross run-rate synergies from the Andeavor acquisition within the first three years. Management cautioned that synergies and transaction benefits may take longer than expected or may not be fully realized.
- MPC’s 2019 capital plan was approximately $2.8 billion, excluding MPLX, ANDX, capitalized interest and acquisitions. Separate plans cited MPLX growth and maintenance capital of $2.2 billion and $200 million, and ANDX of $600 million and $100 million, respectively. Plans could change with conditions.
- On July 30, 2019, after quarter end, MPLX completed its acquisition of ANDX, simplifying the midstream structure into one listed entity. The filing describes expected benefits but provides no quantified post-merger earnings guidance. Management also said portfolio optimization could include asset divestitures, with proceeds potentially used for investment or debt reduction.
- Unusual items included a $207 million noncash gain from the Capline pipeline contribution in the first half; $125 million of first-half transaction-related costs, including Andeavor-related employee obligations; a $22 million litigation reserve adjustment; and $36 million of state deferred tax expense recorded as an out-of-period adjustment.
- Key exposures include volatile crude, refined-product, natural-gas and NGL prices; refining margins and differentials; operating interruptions; environmental regulation and remediation; acquisition integration; and credit-market conditions. Environmental remediation liabilities were $449 million. Climate-related lawsuits sought unspecified damages, and the company said outcomes and potential liabilities could not yet be determined. The filing also lists contingent guarantees and $1.15 billion of contractual commitments for property, plant and equipment and equity-investee funding.
- Management stated it believed liquidity was adequate for operations, investment, dividends, repurchases, debt maturities and contingencies. It reported investment-grade ratings with stable outlooks and compliance with debt covenants at June 30, 2019. No specific consolidated earnings or margin guidance was provided in the supplied filing text.
Important facts for investors to verify
- How much of reported growth and segment performance reflects acquired Andeavor operations versus comparable underlying results, and progress toward the stated synergy target.
- Whether refining margins, operating and turnaround costs, and West Coast refinery performance support sustainable Refining & Marketing profitability.
- Post-merger MPLX leverage, distributions, capital needs and integration benefits, alongside MPC’s debt and liquidity position.
- Cash conversion after capital spending, working-capital volatility, and the sustainability of dividends and share repurchases.
- Developments in environmental remediation, climate and other litigation, guarantees, and the final purchase-accounting adjustments for Andeavor.