Marathon Petroleum Corporation — Q2 2018 Form 10-Q
Reporting period: Three and six months ended June 30, 2018. Financial statements are unaudited. MPC operates Refining & Marketing, Speedway retail, and Midstream businesses, primarily through its consolidated ownership of MPLX.
Financial performance and position
- Q2 revenue: $22.12 billion, versus $18.03 billion a year earlier. Net income attributable to MPC: $1.055 billion, versus $483 million; diluted EPS was $2.27 versus $0.93.
- First-half revenue: $40.81 billion, versus $34.17 billion. Net income attributable to MPC: $1.092 billion, versus $513 million; diluted EPS was $2.31 versus $0.98.
- Operating income: $1.711 billion in Q2 and $2.151 billion in the first half, compared with $982 million and $1.273 billion, respectively, in 2017. Net interest and other financial costs rose to $195 million in Q2 and $378 million in the first half.
- Segment income from operations, Q2: Refining & Marketing $1.025 billion (up from $562 million); Speedway $159 million (down from $238 million); Midstream $617 million (up from $332 million). Midstream includes businesses transferred to MPLX in February 2018.
- Margins and operating measures: Refining & Marketing margin was $15.40 per barrel in Q2 versus $11.32; Speedway fuel margin declined to 16.45 cents per gallon from 18.35 cents. Refinery utilization was 99.9%, with record crude throughput of 1.9 million barrels per day.
- Cash flow, first half: Operating cash flow was $2.249 billion, versus $1.961 billion; investing cash outflow was $1.518 billion, versus $2.012 billion; financing cash inflow was $1.258 billion, versus $613 million. Capital expenditures were $1.548 billion.
- Liquidity and debt at June 30: Cash and cash equivalents were $4.999 billion. MPC reported total liquidity of approximately $9.25 billion, including $4.25 billion of available facilities. Consolidated borrowings were $17.801 billion gross, including MPLX debt; reported debt carrying amounts included $26 million due within one year and $17.241 billion of long-term debt. MPC and MPLX were in compliance with their respective debt covenants.
- Shareholder returns: MPC repurchased 31 million shares for $2.212 billion in the first half; $5.98 billion of repurchase authorization remained at June 30. Dividends paid were $0.92 per share for the first half.
Material changes and comparability
- Results improved principally on stronger Refining & Marketing performance and higher Midstream income. Refining benefited from wider crude differentials and favorable Midwest and Gulf Coast crack spreads; higher throughput and lower per-barrel operating costs also helped.
- Speedway income declined because of lower fuel margins, higher labor and benefit costs, accelerated depreciation related to dispenser upgrades, and reduced traffic from storms earlier in the year.
- On February 1, MPC transferred refining logistics assets and fuels distribution services to MPLX for $4.1 billion cash and MPLX units, then exchanged its incentive distribution rights and economic general partner interest for additional MPLX units. The transfers shifted reported segment income from Refining & Marketing to Midstream; prior periods were not recast.
- ASC 606 adoption changed presentation: certain taxes collected for government authorities are now reported net, reducing 2018 revenue by $1.36 billion in Q2 and $2.61 billion in the first half. The 2017 comparatives retain gross presentation, so reported revenue growth is not directly comparable. The adoption did not materially change revenue-recognition patterns.
- The effective income tax rate fell to 19% for Q2 and 17% for the first half, from 30% in both 2017 periods, primarily reflecting the lower U.S. statutory rate under the Tax Cuts and Jobs Act and permanent tax differences.
Outlook, risks, and unusual items
- MPC agreed to acquire Andeavor. The consideration was structured as 1.87 MPC shares or $152.27 cash per Andeavor share, subject to proration, with approximately $3.5 billion expected in cash consideration. At filing, shareholder approvals and other customary closing conditions remained; meetings were scheduled for September 24, 2018. MPC projected approximately $1 billion of annual gross run-rate synergies within three years, but cautioned that savings may be delayed or not fully achieved.
- MPC stated its 2018 capital investment plan, excluding MPLX, was approximately $1.6 billion. MPLX’s plan included $2.2 billion of organic growth capital and about $190 million of maintenance capital. These are plans, not guaranteed outcomes.
- Key risks include merger completion, integration and synergy execution; potential combined-company debt and financing needs; volatile crude, refined product, natural gas and NGL prices; refining margins and Speedway fuel margins; environmental regulation and Renewable Fuel Standard compliance; operating disruptions; and litigation.
- The filing reports six putative class actions challenging merger disclosures; MPC said it considered them without merit. It also describes ongoing litigation, including Kentucky matters, where an adverse outcome could be material in one case, though management did not expect material adverse effects from other identified proceedings.
- Environmental remediation liabilities were $108 million at June 30. The filing also describes guarantees, including potential exposure associated with investees and vessel joint ventures, and $901 million of commitments to acquire property, plant and equipment and fund equity-method investees.
- Capline pipeline volumes fell after competing pipelines began operating. MPC reported no impairment, citing the prospect of reversing the pipeline for southbound crude movements, estimated to begin by the second half of 2022, subject to owner agreement and execution.
- Unusual accounting and financing items include the tax-presentation change, the MPLX asset dropdown and GP/IDR exchange, and MPLX’s $5.5 billion senior-note offering used in part to refinance its $4.1 billion term loan. MPC also incurred approximately $10 million of Andeavor transaction costs in the first half.
Investor verification points
- Review underlying refining margins, crude differentials, RIN costs, and whether Q2’s near-full refinery utilization and throughput can be sustained.
- Separate organic Midstream growth from the February dropdown’s contribution when assessing year-over-year segment comparisons and cash distributions.
- Check the final Andeavor merger terms, closing conditions, financing and integration costs, debt implications, and realization of projected synergies.
- Reconcile revenue trends using the ASC 606 net-of-tax presentation, rather than comparing 2018 reported revenue directly with 2017 gross-presented figures.
- Monitor Speedway fuel margins, same-store fuel volumes, operating expenses, and the effect of dispenser upgrades.
- Assess liquidity, debt maturities, capital spending, share repurchases, guarantees, and the potential outcomes of material legal and environmental contingencies.