Marathon Petroleum Corp quarterly report, Q2 FY2014

Marathon Petroleum Corporation — Q2 2014 Form 10-Q

Reporting period: Three and six months ended June 30, 2014. MPC operates refining and marketing, Speedway retail, and pipeline transportation businesses, primarily in the U.S. Midwest, Gulf Coast, and Southeast.

Financial performance

Metric	Q2 2014	Q2 2013	Six months 2014	Six months 2013
Revenue	$26.844B	$25.677B	$50.129B	$49.007B
Income from operations	$1.369B	$0.960B	$1.730B	$2.116B
Net income attributable to MPC	$855M	$593M	$1.054B	$1.318B
Diluted EPS	$2.95	$1.83	$3.60	$4.01
Operating cash flow	Not stated separately	Not stated separately	$1.644B	$1.643B

Q2 results improved year over year, led by Refining & Marketing; first-half earnings declined despite higher revenue.
Q2 segment income: Refining & Marketing $1.260B (prior year $903M); Speedway $94M ($123M); Pipeline Transportation $81M ($58M). First-half segment income was $1.622B, $152M, and $153M, respectively, versus $2.008B, $190M, and $109M.
Refining & Marketing gross margin was $16.02/barrel in Q2 and $15.28/barrel for the first half, compared with $13.11 and $14.14. Refinery direct operating costs rose to $7.10/barrel and $8.77/barrel, respectively.
Cash and cash equivalents were $2.125B at June 30, versus $2.292B at year-end 2013. Total liquidity was $5.925B, including $3.8B of available MPC revolving and receivables-facility capacity.
Total debt was $3.638B; debt-to-total-capital was 25%, versus 23% at year-end. Total current assets were $13.596B and current liabilities $11.055B.
Capital expenditures and investments were $734M for the first half. Cash dividends paid were $245M; share repurchases used $1.148B. Dividend paid per share was $0.84 for the first half, up from $0.70.

Changes versus prior period

Q2 MPC-attributable net income increased $262M; first-half net income decreased $264M. Q2 refining gains reflected stronger product realizations and a higher Gulf Coast crack spread, partly offset by narrower LLS-WTI differentials and a lower Chicago crack spread.
First-half refining income fell primarily amid higher refinery operating costs and narrower crude differentials. Significant turnarounds included Galveston Bay, Catlettsburg, Garyville, and Robinson.
Speedway income declined in both comparison periods, as weaker fuel margins and higher expenses outweighed improved merchandise margins. Midwest severe weather affected first-quarter operations.
Pipeline Transportation income increased, supported by higher transportation revenue and equity income, particularly from LOOP. Pipeline throughput volumes were lower year over year.
Operating cash flow was essentially flat year over year. First-half investing cash outflow fell to $681M from $1.918B, largely because the 2013 period included the Galveston Bay acquisition.

Outlook, significant items, and risks

MPC’s 2014 capital and investment budget was $2.43B, excluding capitalized interest and the pending Hess Retail acquisition. The company estimated $750M–$1B of Tier 3 gasoline-standard compliance capital spending from 2014 through 2019.
Speedway agreed to acquire Hess Retail for total consideration of $2.874B, including a $2.37B cash price, estimated $230M net working capital, and $274M capital lease obligations. Closing was expected later in 2014, subject to customary conditions; funding was expected from debt and available cash. Management cited retail expansion and an additional 200,000 barrels/day of assured refining-system sales as strategic benefits.
The Galveston Bay acquisition includes contingent earnout payments of up to $700M over six years. MPC paid BP $180M in July 2014 for the first period; the June 30 fair-value liability was $647M.
Management reported $4.2B of contractual commitments, including amounts associated with Hess Retail, the Galveston Bay earnout, and North Dakota Pipeline contributions. MPC also expected approximately $226M of future contributions for its Southern Access Extension investment; the project was targeted to begin operating in mid-2015.
Key business exposures include volatile refining margins and crude differentials, refinery maintenance and outages, commodity prices, environmental requirements, and retail fuel margins. MPC disclosed that a future impairment of its Centennial pipeline investment could occur if weak business conditions persist; Centennial was not shipping product at June 30.
Environmental remediation liabilities were $137M. A Kentucky pricing lawsuit alleges $89M of customer overcharges; management said an unfavorable outcome could be material, while stating it did not expect a material adverse resolution. MPC also agreed to a $2.75M civil penalty and emissions-reduction projects in an EPA motor-fuels matter; the settlement was not yet finalized.
Unusual items included a $69M first-half pension settlement expense and an $11M impairment of an investment. A $29M out-of-period adjustment for prior-year bonus expenses was recorded in Q1; management said its impact was immaterial. Q2 commodity derivative losses were $116M, compared with a $54M gain in Q2 2013.
Management said liquidity was adequate for operating and anticipated funding needs. MPC and MPLX were in compliance with their credit covenants; senior debt ratings were investment grade with stable outlooks. No specific earnings guidance was provided.

Important facts for investors to verify

Whether refining margins, crude differentials, and turnaround costs sustain or reverse the first-half earnings trends.
Completion, financing, integration, and realized benefits of the Hess Retail acquisition, including its effects on debt and liquidity.
Actual Galveston Bay earnout payments and the assumptions underlying the $647M fair-value estimate.
Progress and total funding requirements for Sandpiper, Southern Access Extension, and Tier 3 compliance projects.
Developments in the Kentucky lawsuit, EPA settlement, remediation obligations, and Centennial’s operating outlook.
Future capital allocation: MPC authorized an additional $2B share-repurchase program in July 2014 and declared a $0.50-per-share dividend payable in September.