Marathon Petroleum Corp quarterly report, Q3 FY2017

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Marathon Petroleum Corporation — Q3 2017 Form 10-Q

Reporting period: Quarter and nine months ended September 30, 2017. Financial statements are unaudited. MPC operates Refining & Marketing, Speedway retail, and Midstream businesses, including consolidated MPLX.

Financial performance

  • Q3 revenue: $19.05 billion, up from $16.62 billion. Income from operations: $1.58 billion versus $435 million. Net income attributable to MPC: $903 million, or $1.77 diluted EPS, versus $145 million, or $0.27 per diluted share.
  • Nine-month revenue: $53.22 billion, up from $46.18 billion. Income from operations: $2.85 billion versus $1.83 billion. Net income attributable to MPC: $1.42 billion, or $2.73 diluted EPS, versus $947 million, or $1.78 per diluted share.
  • Q3 segment income from operations: Refining & Marketing $1.10 billion (prior year $252 million); Speedway $209 million (unchanged); Midstream $355 million (prior year $310 million). Nine-month segment income was $1.59 billion, $583 million and $996 million, respectively.
  • Refining & Marketing gross margin was $14.14 per barrel in Q3 and $12.42 for the first nine months, compared with $10.67 and $11.11. Q3 blended LLS crack spread rose to $12.69 per barrel from $8.08; refinery throughput averaged 2.017 million barrels per day, with 102% crude capacity utilization.
  • Speedway fuel margin was 17.72 cents per gallon in Q3, essentially flat year over year. Midstream throughput and processing volumes increased; Q3 natural gas processed averaged 6,581 MMcf/d versus 5,906 MMcf/d.
  • Cash flow, nine months: operating cash flow $3.86 billion (prior year $3.00 billion); investing cash outflow $2.62 billion; financing cash outflow $47 million. Cash increased $1.20 billion to $2.09 billion. Property, plant and equipment additions were $1.93 billion; reported capital expenditures and investments totaled $2.90 billion.
  • Liquidity: MPC reported $6.34 billion, comprising $2.09 billion cash and $4.25 billion available under its revolving and receivables facilities. MPLX separately had about $1.8 billion of revolving-facility availability and $3 million cash.
  • Debt: total debt was $12.78 billion at September 30, versus $10.57 billion at year-end 2016; debt-to-total-capital was 38%, up from 33%. MPC had no commercial paper or borrowings under its own revolving facilities. MPLX had $420 million drawn on its revolving facility.
  • Dividends paid were $0.40 per share in Q3 and $1.12 per share for the first nine months. MPC repurchased 31 million shares for $1.62 billion during the nine-month period.

Material changes and notable items

  • Q3 earnings improvement primarily reflected higher refining margins and throughput. Midstream income also increased, supported by higher gathering, processing and fractionation volumes; higher natural gas and NGL prices helped the year-to-date comparison.
  • Comparisons with 2016 are affected by prior-year noncash inventory valuation benefits ($370 million consolidated, including $345 million in Refining & Marketing and $25 million in Speedway) and $356 million in nine-month impairment charges, including $130 million of goodwill impairment. These items did not recur in 2017.
  • MPC recorded an $86 million charge in the first half of 2017 for settlements of four personal-injury lawsuits concerning the January 2016 Galveston Bay refinery fire; it is pursuing recovery from a contractor.
  • MPC contributed pipeline and storage assets to MPLX for $1.05 billion of consideration in September, including $420 million cash, and completed a $2.0 billion asset contribution in March. These common-control transactions generated no gain or loss.

Outlook, risks and contingencies

  • MPC said it expected to complete integration of its Galveston Bay and Texas City refineries by year-end 2017. Management reported MPLX organic growth capital spending was expected to be below its previously forecast $1.8–$2.0 billion range; MPLX maintenance capital was forecast at approximately $150 million.
  • MPC planned approximately $550 million of share repurchases in Q4 2017, subject to maintaining an investment-grade profile. Its remaining share repurchase authorization was $3.94 billion.
  • MPC offered MPLX remaining identified dropdown assets with projected annual EBITDA of approximately $1 billion; the transaction and an exchange of MPC’s MPLX general-partner economic interests were expected to close in Q1 2018, subject to approvals, conflicts-committee review and market conditions. The board determined Speedway should remain integrated with MPC.
  • Key sensitivities include refining crack spreads and crude differentials, product demand and realizations, commodity prices, refinery reliability, RIN compliance costs, construction and project execution, environmental regulation, credit markets and litigation. RIN expense rose to $127 million in Q3 and $328 million year to date.
  • Environmental remediation liabilities were $117 million. The MarkWest civil environmental matter remained under negotiation; EPA’s revised proposal included a $1.2 million penalty and approximately $1.6 million in environmental projects. The filing also describes unresolved Kentucky litigation and guarantees for investees; certain outcomes or exposures cannot be estimated clearly.
  • Management said liquidity was adequate and MPC and MPLX were in compliance with their credit covenants. Management cautioned that interim results are not necessarily indicative of full-year results.

Important facts for investors to verify

  • How much of the earnings increase reflects sustainable refining margins and operating performance versus prior-year impairment and inventory-accounting comparisons.
  • Whether proposed MPLX dropdowns and the general-partner interest exchange close on the expected timetable and valuation, and how they are financed.
  • Whether planned repurchases, dividends and capital spending remain consistent with debt levels and the investment-grade objective.
  • Progress on refinery integration, MPLX growth projects and the Speedway/Pilot Flying J joint venture, including underlying volume and margin trends.
  • Developments in the Galveston Bay settlement recovery, environmental proceedings, Kentucky litigation, guarantees and the potential effects of new lease accounting. The filing expects lease recognition to have a material balance-sheet impact.