Marathon Petroleum Corporation — Q2 2016 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2016. The interim financial statements are unaudited. MPC operates refining and marketing, Speedway retail, and midstream businesses, including MPLX and MarkWest.
Financial performance
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Sales and operating revenues | $16.811bn | $20.537bn | $29.566bn | $37.728bn |
| Income from operations | $1.315bn | $1.335bn | $1.390bn | $2.805bn |
| Net income attributable to MPC | $801m | $826m | $802m | $1.717bn |
| Diluted EPS | $1.51 | $1.51 | $1.51 | $3.14 |
| Operating cash flow | Not separately presented for quarter | $2.590bn | $2.184bn | |
| Capital expenditures and investments | Not separately presented for quarter | $1.471bn | $897m |
- Revenue declined primarily because average refined-product sales prices fell $0.43 per gallon in Q2 and $0.47 per gallon for the first half. First-half attributable earnings fell sharply, reflecting weaker refining results and impairment charges.
- Refining & Marketing operating income was $1.080bn in Q2 and $1.018bn for the first half, versus $1.181bn and $2.473bn, respectively, a year earlier. Reported results included noncash inventory lower-of-cost-or-market (LCM) benefits of $360m in Q2 and $345m for the first half; excluding this benefit, management attributed the decline mainly to weaker crack spreads and, for the half-year, higher turnaround costs.
- Refinery gross margin was $12.82 per barrel in Q2 versus $14.84, and $11.44 for the first half versus $15.47. Refinery throughputs were 1.889 million barrels per day in Q2, down from 1.951 million, mainly due to maintenance.
- Speedway operating income rose to $193m in Q2 and $360m for the first half, from $127m and $295m. Excluding a $25m LCM benefit in each period, gains reflected stronger fuel and merchandise margins; first-half results also included a $24m gain on a retail-location sale. Q2 fuel and distillate gross margin was 15.49 cents per gallon versus 13.51 cents.
- Midstream operating income increased to $201m in Q2 and $368m for the first half, from $103m and $193m, mainly reflecting MarkWest results following the December 2015 merger and earnings from pipeline and marine investments.
- Operating cash flow increased by $406m for the first half, despite lower earnings, principally due to a $1.06bn favorable working-capital change. Investing cash use was $1.496bn; financing cash use was $467m.
Balance sheet and liquidity
- At June 30, cash and cash equivalents were $1.754bn; current assets were $10.304bn and current liabilities $6.782bn.
- Total debt was $11.059bn, down from $11.925bn at year-end 2015; the debt-to-total-capital ratio was 36%, versus 38%. Long-term debt on the balance sheet was $11.032bn. MPC reported covenant compliance; its net-debt-to-total-capitalization ratio was 0.30 to 1.00.
- MPC reported $5.012bn of liquidity, including cash and $3.258bn of available company facilities. MPLX separately had approximately $1.99bn of revolving-credit availability. The July 2016 facility amendments reduced receivables-facility capacity to $750m and added a $1bn 364-day revolver alongside the renewed $2.5bn revolver.
- Operating cash flow covered reported capital expenditures and investments for the first half, but cash generation benefited materially from working capital. First-half dividends paid were $339m, or $0.64 per share; the board later approved a $0.36-per-share dividend payable in September.
Material changes, outlook, and risks
- MPLX completed the MarkWest acquisition in December 2015. MPC recorded $130m of goodwill impairment in the first half, primarily in Q1, following weaker commodity-price expectations, reduced producer spending and higher capital costs. One reporting unit’s estimated fair value exceeded carrying value by only about 1.2%; the filing notes a 0.5 percentage-point increase in its discount rate could have produced more than $400m of additional goodwill impairment under the Q1 analysis.
- In Q2, Ohio Condensate-related impairments reduced equity-method investment income by $89m: approximately $58m for MPC’s share of the investee’s fixed-asset impairment and $31m for an additional investment impairment. The filing emphasizes sensitivity of these valuations to forecasts and discount-rate assumptions.
- The $370m year-end 2015 LCM inventory reserve was reversed as market prices recovered; the Q2 reversal and related valuation changes benefited Q2 cost of revenues by $385m. The filing cautions that future price movements could again adversely affect inventory valuation. LIFO inventory liquidations also increased first-half costs by about $54m.
- MPC lowered its expected 2016 capital spending and investment plan from $4.2bn to approximately $3.0bn, excluding capitalized interest and the anticipated $500m Bakken Pipeline investment. It also planned a voluntary $175m pension contribution in Q3. No specific earnings guidance was provided.
- After quarter-end, MPC announced a proposed $500m investment for a 9.1875% indirect interest in the Bakken Pipeline system, subject to closing conditions, and expected to become a long-term shipper. If completed, the transaction is expected to enable cancellation of the Sandpiper funding commitment; MPC had contributed $301m to Sandpiper by June 30 and expects an impairment review that could result in a charge.
- Other risks include refining-margin and commodity-price volatility, turnaround execution, RIN compliance costs, midstream producer activity, and environmental and legal matters. The filing describes an ongoing Pennsylvania federal investigation involving MarkWest facilities, a West Virginia draft air-enforcement order proposing a $425,000 penalty, and a pipeline release investigation with potential penalties; outcomes and potential costs for the Pennsylvania matter were not estimable. Environmental remediation liabilities were $156m.
- Contingent guarantees include exposures tied to marine joint ventures and pipeline affiliates. The filing also reports $1.2bn of contractual commitments, including $131m of refinery earnout, $618m for Sandpiper, and $34m for Crowley Ocean Partners, while noting the Sandpiper amount was expected to be cancelled subject to the Bakken transaction.
Important facts for investors to verify
- How much of reported earnings and refining performance depended on the noncash $385m Q2 inventory valuation benefit, and how margins trend without it.
- Whether refining crack spreads, throughput and turnaround costs improve, and whether Speedway’s margin gains persist.
- MarkWest goodwill and Ohio Condensate valuation assumptions, including sensitivity to commodity prices, producer activity and discount rates.
- Completion and economics of the Bakken investment, cancellation of the Sandpiper commitments, and the outcome of the expected Sandpiper impairment review.
- Liquidity and debt trends, including the impact of lower refined-product prices on receivables-facility availability and the company’s planned capital spending and distributions.
- Developments in environmental enforcement matters, pipeline-release investigations, and guarantee or other contingent exposures.