Marathon Petroleum Corporation — Q1 2014 Form 10-Q
Business context and reporting period
Unaudited results for the three months ended March 31, 2014, compared with Q1 2013. MPC operates refining and marketing, Speedway retail, and pipeline transportation businesses, primarily in the U.S. Midwest, Gulf Coast, and Southeast. Its seven refineries had aggregate crude capacity of approximately 1.7 million barrels per calendar day.
Financial and operating highlights
| Metric | Q1 2014 | Q1 2013 |
|---|---|---|
| Sales and other operating revenues | $23.285 billion | $23.330 billion |
| Income from operations | $361 million | $1.156 billion |
| Income before taxes | $315 million | $1.108 billion |
| Net income attributable to MPC | $199 million | $725 million |
| Diluted earnings per share | $0.67 | $2.17 |
| Net cash provided by operating activities | $766 million | $2.079 billion |
| Capital expenditures and investments | $371 million | $1.574 billion |
Refining & Marketing operating income was $362 million, down from $1.105 billion. Speedway income was $58 million, versus $67 million; Pipeline Transportation income rose to $72 million from $51 million. Refining & Marketing gross margin was $14.46 per barrel versus $15.29, while refinery direct operating costs increased to $10.65 per barrel from $6.38. Speedway gasoline and distillate gross margin declined to $0.1156 per gallon from $0.1301.
Cash and cash equivalents were $2.166 billion at March 31, 2014, down from $2.292 billion at year-end. Total debt was $3.659 billion, and debt-to-total-capital was 25%, versus 23% at December 31, 2013. Reported total liquidity was approximately $5.97 billion, including $2.5 billion available under MPC’s revolver and $1.3 billion under its receivables facility. MPLX separately had $230 million of unused capacity under its $500 million revolving facility. MPC reported compliance with its debt covenants.
Material changes and management commentary
- MPC-attributable net income fell $526 million year over year, primarily because of lower Refining & Marketing earnings. Management cited narrower crude differentials and higher turnaround costs, partly offset by improved crack spreads and product realizations.
- The LLS-WTI differential narrowed by $13.83 per barrel and the sweet/sour differential by $3.89. Management estimated adverse segment-income impacts of $397 million and $320 million, respectively. Higher Chicago and Gulf Coast crack spreads partially offset those effects.
- Refinery throughputs were 1.650 million barrels per day versus 1.671 million. Significant turnaround work occurred at Galveston Bay, Garyville, Robinson, and Catlettsburg. Purchased RIN expense rose to $71 million from $43 million.
- Operating cash flow declined $1.313 billion, reflecting a $908 million unfavorable working-capital comparison and lower net income. Inventory rose $1.0 billion from year-end, largely due to higher crude inventory; accounts payable increased $1.08 billion.
- MPC repurchased $689 million of shares, paid dividends of $0.42 per share, and had $1.17 billion remaining under its repurchase authorizations through September 2015. The board approved a further $0.42-per-share dividend payable in June 2014.
Outlook, risks, contingencies, and unusual items
- No earnings guidance was provided. The 2014 capital and investment budget was $2.43 billion, excluding capitalized interest; management said it remained unchanged from the 2013 Form 10-K and would be adjusted as conditions warrant.
- MPC expected to pay BP approximately $178 million in Q2 2014 under the Galveston Bay acquisition earnout. Total potential earnout payments are capped at $700 million over six years; the recorded fair-value liability was $639 million at quarter-end.
- MPC estimated $750 million to $1 billion of capital spending from 2014 through 2019 to comply with Tier 3 gasoline standards.
- Q1 included $64 million of pension settlement expense arising from lump-sum retirement payments and a $29 million out-of-period adjustment for prior-year bonus expenses, which management said was immaterial. The pension settlement charge reduced comparability with Q1 2013.
- Centennial Pipeline was not shipping product. MPC reported a $39 million equity investment and a $41 million guarantee related to its debt; management said impairment could arise if conditions persist and no alternative use for the assets is found.
- Environmental remediation liabilities were $123 million. The Kentucky pricing lawsuit alleges $89 million of customer overcharges, plus penalties and other relief; MPC said it was vigorously defending the case and did not expect a material adverse effect, while acknowledging an unfavorable outcome could be material. The filing also describes guarantees for investees and other commitments, including $854 million of projected North Dakota Pipeline contributions.
Important facts for investors to verify
- Whether refining margins and crude-oil differentials recover, and the effect of future turnaround activity and refinery operating costs.
- Cash conversion and working-capital trends, particularly inventory and accounts payable, alongside the planned capital program, dividends, and share repurchases.
- The timing and amount of Galveston Bay earnout payments, and progress and remaining funding obligations for the Sandpiper/North Dakota pipeline project.
- Centennial’s operating outlook and impairment exposure, plus environmental, litigation, and guarantee exposures.
- Impacts of the new ERP implementation: management reported disclosure controls were effective and noted certain internal controls changed during the quarter.