Business context and reporting period
Marathon Petroleum Corporation (MPC) is an integrated U.S. refining and marketing, retail, and pipeline transportation company. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2015; comparisons are to the same 2014 periods. Results are not necessarily indicative of full-year results. The 2014 comparison is affected by the September 30, 2014 acquisition of Hess retail operations, which contributed to Speedway after that date.
Key financial metrics
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Revenue and other income | $18.76 billion | $25.48 billion | $56.58 billion | $75.76 billion |
| Income from operations | $1.55 billion | $1.06 billion | $4.35 billion | $2.79 billion |
| Net income attributable to MPC | $948 million | $672 million | $2.67 billion | $1.73 billion |
| Diluted EPS | $1.76 | $1.18 | $4.90 | $2.98 |
Revenue includes consumer excise taxes. Lower refined-product prices drove the revenue declines, partly offset by higher sales volumes. In Q3, average refined-product sales prices fell $1.05 per gallon while sales volumes rose 205 thousand barrels per day. MPC’s Q3 blended LLS 6-3-2-1 crack spread increased to $12.18 per barrel from $8.70; Refining & Marketing gross margin rose to $17.27 per barrel from $14.55.
Q3 segment operating income was $1.46 billion for Refining & Marketing, $243 million for Speedway, and $72 million for Pipeline Transportation. Speedway benefited from the acquired Hess locations and improved fuel and merchandise margins. For the nine months, Refining & Marketing income increased to $3.98 billion and Speedway income to $538 million; Pipeline Transportation income was $218 million, compared with $222 million.
Operating cash flow for the first nine months was $3.25 billion, versus $2.72 billion. Investing cash use was $1.43 billion, versus $4.02 billion, largely reflecting the absence of the prior-year Hess acquisition; financing cash use was $1.28 billion, versus $864 million of cash provided in 2014. Cash increased to $2.04 billion from $1.49 billion at year-end 2014. Capital expenditures and investments were $1.48 billion for the nine months.
At September 30, 2015, total debt was $6.69 billion and cash was $2.04 billion; debt-to-total-capital was 34%, down from 37% at year-end 2014. Total current assets were $10.86 billion and current liabilities $7.69 billion. Reported liquidity was $5.36 billion, including cash and available MPC facilities; availability under the receivables facility depends on eligible receivables and was reduced effective October 14, 2015. MPC reported compliance with debt covenants and investment-grade ratings with stable outlooks.
Material changes and unusual items
- Net income attributable to MPC increased $276 million in Q3 and $939 million for the first nine months. Higher refining margins and Speedway results were the primary drivers; lower crude and product prices reduced reported revenue.
- MPC recorded a $144 million impairment after cancelling the planned $2.2 billion Residual Oil Upgrader Expansion at Garyville in response to market conditions.
- Speedway’s results include the Hess retail acquisition; the company cited higher acquired-store volumes and improved margins, with higher operating costs partly offsetting gains.
- The board authorized an additional $2.0 billion of share repurchases in July. MPC repurchased $773 million of shares in the first nine months and had $2.95 billion of authorization remaining at quarter-end. The quarterly dividend was raised to $0.32 per share; nine-month dividends paid were $0.82 per share.
- A two-for-one stock split was completed in June 2015; historical share and per-share amounts are restated.
Outlook, risks and contingencies
MPC’s 2015 capital and investment budget was $2.53 billion, excluding capitalized interest and the proposed $675 million cash contribution to MPLX for the pending merger. Management stated that liquidity was adequate for operations, planned spending, distributions, debt maturities, and contingencies. It also noted that results depend on volatile refining crack spreads, crude-oil differentials, product prices, refinery operations and maintenance, and fuel demand. The filing provides market sensitivities, including an estimated $450 million after-tax annual net-income change for each $1-per-barrel change in the blended crack spread, assuming other factors remain constant.
MPLX agreed to acquire MarkWest Energy Partners in a transaction valued at approximately $13.7 billion, including assumed debt of about $4.6 billion; MPC expected to contribute $675 million. Closing was expected in Q4 2015, subject to approvals and customary conditions. Litigation seeking to block or rescind the transaction was pending. A separate Kentucky antitrust action against an MPC subsidiary had uncertain outcome and no reasonably estimable loss. Environmental remediation liabilities were $166 million; MPC also disclosed substantial guarantees and $1.8 billion of contractual commitments, including future pipeline and vessel contributions and contingent refinery-acquisition consideration. Tier 3 fuel-standard compliance spending was estimated at $750 million to $1 billion for 2014–2019.
Important facts for investors to verify
- Whether refining margins and favorable market conditions persist, and how crude differentials, product prices, and operating costs affect earnings.
- Completion, financing, and integration of the MPLX–MarkWest transaction, including assumed debt, MPC’s cash contribution, and the related litigation.
- Speedway’s post-Hess performance, including same-store fuel and merchandise trends and integration costs.
- Availability of the receivables facility under lower refined-product prices, planned capital spending, and cash uses for repurchases and dividends.
- Potential exposure from environmental matters, litigation, guarantees, the Galveston Bay earnout, and pipeline and vessel commitments.