Marathon Petroleum Corp quarterly report, Q3 FY2011

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Marathon Petroleum Corporation — Form 10-Q Summary

Reporting period: Quarter ended September 30, 2011. Unless otherwise noted, amounts are in millions of dollars. MPC completed its spin-off from Marathon Oil on June 30, 2011 and began regular-way NYSE trading on July 1. Thus, Q3 2011 reflects MPC as a stand-alone company, while year-to-date 2011 combines six months of pre-spin-off RM&T Business results with three months of MPC results. Prior-year results cover the combined business; comparisons are affected by the spin-off and the December 2010 sale of most Minnesota assets.

Financial results and position

  • Q3 revenue and earnings: Sales and operating revenues were $20.614 billion versus $15.870 billion; net income was $1.133 billion versus $277 million. Diluted EPS was $3.16 versus $0.77.
  • Nine-month results: Sales and operating revenues were $59.165 billion versus $44.970 billion; net income was $2.464 billion versus $393 million. Diluted EPS was $6.88 versus $1.10. Management attributed the earnings improvement primarily to higher Refining & Marketing gross margins.
  • Operating performance: Q3 Refining & Marketing segment income was $1.711 billion versus $352 million; Speedway income was $85 million versus $105 million; Pipeline Transportation income was $56 million versus $39 million. Nine-month segment income was $3.773 billion, $198 million and $161 million, respectively.
  • Refining margins: Refining & Marketing gross margin averaged 31.38 cents per gallon in Q3 versus 8.93 cents, and 24.52 cents for nine months versus 5.98 cents. Management cited wider WTI discounts to other light crude, wider sweet/sour differentials, stronger crack spreads and lower turnaround costs.
  • Cash flow: Nine-month operating cash flow was $2.671 billion versus $290 million. Investing activities provided $1.635 billion versus using $462 million, largely reflecting net redemptions of Marathon Oil-related preferred securities. Financing activities used $1.467 billion versus providing $161 million, including repayment of related-party debt, dividends and distributions to Marathon Oil.
  • Liquidity and debt: September 30 cash was $2.957 billion, versus $118 million at December 31, 2010. Total debt was $3.299 billion, including $3.0 billion principal of senior notes and capital leases; cash-adjusted debt-to-capital was 3%. The $2.0 billion revolver and $1.0 billion receivables securitization facility had no borrowings. MPC reported compliance with credit covenants and investment-grade ratings (Moody’s Baa2, S&P BBB; both stable).
  • Balance sheet: Total assets were $25.225 billion and stockholders’ equity was $10.049 billion at September 30. Current assets were $11.669 billion and current liabilities $8.612 billion.
  • Spending and shareholder returns: Nine-month capital expenditures were $813 million; capital expenditures and equity-method investments totaled $820 million, excluding the $74 million store acquisition. Dividends paid were $71 million. The board approved a further $0.25-per-share dividend on October 26, payable December 12, 2011.

Material changes versus comparable periods

  • Higher crude and refined-product prices lifted reported revenue and input costs. Profit growth was driven mainly by improved refining margins, not revenue growth alone.
  • Refining & Marketing segment income rose sharply, while Speedway income declined, principally reflecting the sale of Northern-Tier stores and lower volumes. Pipeline Transportation income increased.
  • Q3 consolidated refined-product sales volume was 1.625 million barrels per day versus 1.681 million; nine-month volume was 1.589 million versus 1.550 million. The comparisons reflect, in part, the Northern-Tier disposition.
  • Stand-alone costs increased corporate and other unallocated expenses; management identified higher information technology, employee benefits, administrative and transition costs, as well as higher incentive compensation.
  • Debt structure shifted from Marathon Oil-related borrowings to $3.0 billion of MPC senior notes issued in February. The related-party credit agreement was terminated at the spin-off.

Outlook, risks and unusual items

  • Capital plan: The 2011 capital and investment budget, including capitalized interest, was $1.38 billion. The principal project is the Detroit refinery heavy-oil upgrading and expansion, reported 73% complete and on schedule for completion in the second half of 2012. Management noted construction, labor, logistics, weather and approval risks.
  • Management outlook: MPC said it believed available cash, operating cash flow and financing access would be adequate for operations, planned spending, dividends, pension contributions, debt maturities and contingencies. No earnings or operating guidance is stated in the supplied filing text.
  • Market exposure: Refining results are sensitive to crude/product price relationships, crack spreads, sweet/sour differentials, feedstock costs, throughput, demand and maintenance. Commodity derivatives are not designated as accounting hedges; management expects physical commodity price movements to mitigate derivative exposure. Q3 derivative gains were $258 million, versus losses of $19 million in Q3 2010.
  • Contingencies: Environmental remediation liabilities were $120 million. The Kentucky pricing lawsuit includes historical and 2011 claims; management said a reasonably possible loss estimate could not be made and an unfavorable outcome could be material. MPC also faces MTBE groundwater lawsuits, which it does not expect to materially affect results, though outcomes remain uncertain. Other disclosed matters include an MPCA proposed penalty exceeding $100,000, a possible EPA flare consent-decree penalty exceeding $100,000, and a PHMSA proposed penalty of approximately $1 million.
  • Guarantees and commitments: Maximum potential undiscounted payments include $172 million for LOOP/LOCAP debt-related agreements, $52 million for Centennial debt, $25 million for TAME bonds and $147 million for other guarantees. Cross-indemnities with Marathon Oil are uncapped and indefinite in certain cases. Contractual cash obligations totaled $18.134 billion, including $12.379 billion of purchase obligations.
  • Spin-off and reporting caveat: Pre-spin-off results include expense allocations from Marathon Oil and may not represent costs MPC would have incurred as a stand-alone company. Transitional services with Marathon Oil were to continue for up to one year.

Investor verification priorities

  1. Separate operating improvement from effects of higher commodity prices, derivative gains, and the different reporting basis after the spin-off.
  2. Track refining margins, crude differentials, throughput, turnaround costs and the durability of unusually strong 2011 Refining & Marketing earnings.
  3. Monitor Speedway same-store volumes and margins, the effect of the Northern-Tier sale, and integration of the 23-store acquisition.
  4. Verify Detroit project cost, schedule and completion progress, and whether the $1.38 billion annual budget remains adequate.
  5. Review liquidity, debt maturities, facility availability, covenant headroom and the cash demands of dividends, pension funding and contractual obligations.
  6. Follow developments in the Kentucky pricing litigation, MTBE matters and environmental proceedings, including any change to management’s loss assessments.