Marathon Petroleum Corp quarterly report, Q2 FY2017

Marathon Petroleum Corporation — Q2 2017 Form 10-Q

Reporting period: Quarter and six months ended June 30, 2017. Results are unaudited. MPC operates Refining & Marketing, Speedway retail, and Midstream businesses, including its consolidated subsidiary MPLX.

Financial performance and position

Metric	Q2 2017	Q2 2016	Six months 2017	Six months 2016
Revenue and other income	$18.354 billion	$16.790 billion	$34.747 billion	$29.620 billion
Income from operations	$982 million	$1.315 billion	$1.274 billion	$1.390 billion
Net income attributable to MPC	$483 million	$801 million	$513 million	$802 million
Diluted EPS attributable to MPC	$0.93	$1.51	$0.98	$1.51

Segment operating income, Q2: Refining & Marketing $562 million (down from $1.025 billion); Speedway $239 million (up from $193 million); Midstream $332 million (up from $253 million).
Margins and volumes: Refining & Marketing gross margin was $11.32 per barrel versus $12.73. Speedway fuel margin was 18.35 cents per gallon versus 15.49 cents. Refinery crude throughput was 1.864 million barrels per day versus 1.728 million.
Cash flow, first half: Operating cash flow was $1.962 billion versus $2.597 billion; investing cash outflow was $2.012 billion versus $1.496 billion; financing provided $613 million versus using $474 million. Cash increased $563 million to $1.450 billion.
Investment spending: First-half capital expenditures and investments totaled $2.109 billion, including $500 million invested in the Bakken Pipeline system and approximately $220 million for the Ozark pipeline.
Debt and liquidity: June 30 debt was $12.606 billion, versus $10.572 billion at year-end 2016; debt-to-total-capital was 38% versus 33%. MPC reported $5.407 billion of liquidity, including $1.157 billion cash excluding MPLX and $4.250 billion available under MPC facilities. MPLX separately had $293 million cash and about $2.0 billion of revolver availability.
Capital returns: MPC repurchased 23 million shares for $1.170 billion in the first half and paid $0.72 per share in dividends. The board authorized an additional $3.0 billion in repurchases; $4.39 billion remained authorized at June 30. In July, the board approved an 11% dividend increase to $0.40 per quarter.

Material changes and drivers

MPC-attributable net income fell $318 million in Q2 and $289 million in the first half. Refining & Marketing weakness outweighed gains in Midstream and Speedway.
Refining results in 2016 included non-cash inventory valuation benefits of $360 million in Q2 and $345 million for the first half. Excluding that comparison effect, Q2 refining performance was pressured by lower sweet/sour crude differentials and less favorable product realizations, despite improved blended crack spreads.
Midstream gains reflected higher natural gas and NGL processing/fractionation volumes and prices, the Ozark pipeline acquisition, and increased pipeline equity-method earnings. Speedway benefited from higher fuel margins, lower operating expenses, and its Pilot Flying J travel-plaza joint venture.
Revenue growth largely reflected higher refined-product prices and, in Q2, higher sales volumes. Related-party sales also rose following sales to PFJ Southeast.
Debt increased primarily after MPLX issued $2.25 billion of senior notes in February. The proceeds helped fund the March dropdown of terminal, pipeline, and storage assets to MPLX, for $2.0 billion consideration, including $1.5 billion cash.
Operating cash flow declined year over year, mainly from a $469 million unfavorable working-capital change. MPC spent $1.170 billion on repurchases, partly funded by the MPLX dropdown proceeds.

Outlook, commentary, risks, and unusual items

Management expected a second MPLX asset dropdown in Q3 2017 and the remaining identified assets, with approximately $1 billion annual EBITDA, to be dropped down no later than Q1 2018. The broader plan described approximately $1.4 billion of MLP-eligible annual EBITDA, subject to approvals, tax clearance, market conditions, and MPLX review. MPC also expected to exchange its MPLX general-partner economic interests, including IDRs, for MPLX common units.
A board special committee was reviewing Speedway’s business to assess long-term shareholder value; MPC expected to provide an update by the end of Q3 2017. The filing gives no specific earnings guidance.
2017 capital plans included $1.7 billion for MPC excluding MPLX; MPLX forecast $1.8–$2.0 billion of organic growth capital and approximately $150 million of maintenance capital. MPC expected about $160 million of 2017 spending toward Tier 3 fuel standards.
An $86 million Q2 charge related to settlement agreements for four personal-injury lawsuits arising from a 2016 Galveston Bay refinery fire; agreements were signed August 1, subject to court approval. MPC planned to seek recovery from a contractor not party to the settlements.
Environmental remediation liabilities were $128 million. The EPA and Pennsylvania civil matter involving MarkWest remained under discussion; the proposed settlement included about $2.4 million cash and $3.6 million in environmental projects. A separate tanker-rupture matter was resolved for a $150,000 penalty.
MPC disclosed guarantees and other exposures, including maximum potential principal payments of $163 million for Crowley Ocean Partners debt, $139 million for Crowley Blue Water Partners debt, and $172 million under LOOP/LOCAP arrangements. It also reported $595 million in contractual commitments for capital projects and equity-method investees.
Key business risks include volatile refining margins and crude differentials, natural gas/NGL prices and volumes, RIN compliance costs, environmental regulation, refinery maintenance or outages, litigation, project delays/cost overruns, and market conditions affecting planned dropdowns and capital returns. MPC stated it was in compliance with credit covenants; ratings were investment grade, though Moody’s outlook was negative and Fitch placed MPC on negative watch.
After quarter-end, MPC and MPLX replaced revolving credit facilities with new facilities expiring in 2022 (plus MPC’s $1 billion 364-day facility expiring in 2018). MPLX also prepaid its $250 million term loan in July.

Important facts for investors to verify

Whether planned MPLX dropdowns and the general-partner/IDR exchange closed on the expected timetable, at acceptable valuations, and with the anticipated funding mix.
Whether refining margins and crude differentials improve, and how refinery operating costs, turnarounds, and RIN expenses affect results.
Whether Midstream volume and price improvements persist and support MPLX distributions and MPC’s capital-return plans.
The final court approval and payment status of the $86 million settlement, and any recovery from the contractor; also monitor other unresolved litigation and environmental matters.
Debt, liquidity, covenant headroom, and the effect of repurchases, dividends, capital spending, and additional MPLX financing on the investment-grade credit profile.