Marathon Petroleum Corporation — FY 2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017. Although the request references 2017 Q4, this is an annual filing; fourth-quarter figures are identified separately where relevant. MPC operates Refining & Marketing, Speedway retail, and Midstream, primarily through consolidated subsidiary MPLX.
Financial performance and key metrics
| Metric | FY 2017 | FY 2016 |
|---|---|---|
| Sales and other operating revenues | $74.1 billion | $63.3 billion |
| Income from operations | $3.97 billion | $2.38 billion |
| Net income attributable to MPC | $3.43 billion | $1.17 billion |
| Diluted earnings per share | $6.70 | $2.21 |
| Operating cash flow | $6.61 billion | $4.00 billion |
| Cash and cash equivalents at year-end | $3.01 billion | $887 million |
| Dividends per share | $1.52 | $1.36 |
- FY 2017 net income included an approximately $1.5 billion tax benefit from remeasuring deferred tax liabilities after the Tax Cuts and Jobs Act lowered the federal corporate tax rate to 21%. The reported effective tax rate was negative 14%; excluding the tax-law effect, it was 31%.
- Segment operating income: Refining & Marketing $2.32 billion (up from $1.36 billion); Speedway $732 million (approximately flat); Midstream $1.34 billion (up from $1.05 billion). Unallocated items and net interest reduced consolidated results.
- Refining & Marketing margin was $12.60 per barrel versus $11.16; the blended LLS 6-3-2-1 crack spread rose to $9.84 per barrel from $6.96. Refinery throughput averaged 1.944 million barrels per day, up from 1.850 million.
- Speedway operating income was nearly unchanged. Merchandise margin was $1.40 billion, down from $1.44 billion; gasoline and distillate margin per gallon increased to $0.1738 from $0.1656.
- Midstream benefited from higher gathering, processing and fractionation volumes, commodity-price changes, and the Ozark and Bakken pipeline investments. Natural gas processed averaged 6.46 billion cubic feet per day, versus 5.76 billion.
- Capital spending and investments totaled $3.86 billion. Cash additions to property, plant and equipment were $2.73 billion. Share repurchases were $2.37 billion; dividends paid were $773 million.
- Year-end total debt obligations, including MPLX and capital leases, were $13.4 billion, including $7.4 billion of MPLX obligations. MPC reported approximately $7.3 billion of liquidity: $3.01 billion cash plus $4.25 billion of available committed facilities. MPC had no borrowings under its own revolving facilities or receivables facility; MPLX had $505 million drawn on its revolver.
- Reported fourth-quarter 2017 net income attributable to MPC was $2.02 billion and diluted EPS was $4.09, substantially reflecting the tax benefit.
Material changes and notable items
- Net income attributable to MPC increased $2.26 billion year over year, principally due to the one-time tax benefit and stronger Refining & Marketing results. The tax benefit is not a recurring operating gain.
- Sales revenue rose with higher average refined-product prices and increased sales volumes. Refining results improved with stronger crack spreads, partly offset by less favorable product realizations and crude acquisition costs compared with market indicators.
- 2016 included a $370 million non-cash inventory valuation benefit and $486 million of impairment charges on goodwill and equity-method investments; these affected year-over-year comparisons.
- MPC contributed midstream assets to MPLX during 2017 for cash and MPLX units. On February 1, 2018, it completed a further asset dropdown for $4.1 billion cash and approximately 114 million units; MPLX’s IDRs were cancelled in exchange for 275 million additional units. MPC reported ownership of approximately 64% of MPLX units following the transaction. These are post-year-end events.
- Management chose to keep Speedway integrated with MPC, citing integration benefits, cash-flow diversification and support for the investment-grade profile.
Outlook, risks and contingencies
- Management’s 2018 consolidated capital plan was approximately $3.97 billion, including about $950 million for Refining & Marketing, $530 million for Speedway and $2.405 billion for Midstream. MPLX’s plan included approximately $2.2 billion of organic growth capital and $190 million of maintenance capital.
- Key projects include the approximately $1.5 billion Galveston Bay STAR project, scheduled for completion in early 2022, and a roughly $200 million Garyville coker expansion scheduled for 2020. Tier 3 fuel-standard compliance spending was included in the outlook.
- Management stated that liquidity was adequate for planned operations, capital spending, dividends, repurchases and debt requirements, while emphasizing that future results depend on market conditions and execution. MPC intended to continue share repurchases, subject to business and market conditions; $3.19 billion of authorization remained at year-end.
- Major risks include volatile refining margins and crude differentials, feedstock availability and cost, unplanned outages and severe weather, competition and fuel-demand changes, renewable-fuel/RIN compliance costs, environmental regulation, project delays or cost overruns, cyber threats, and changes in producer activity affecting MPLX volumes and distributions.
- Environmental expenditures were $792 million in 2017. Management estimated environmental capital spending of about $370 million in 2018 and $290 million in 2019, while noting regulatory costs and requirements remain uncertain. Remediation liabilities were $114 million, with $45 million of related recovery receivables.
- Pending matters include Kentucky antitrust and consumer-protection litigation, including a separate historical pricing case alleging $89 million of customer overcharges, and construction disputes in which Westcon seeks more than $40 million plus unspecified punitive damages. Management could not estimate potential loss for certain claims; it generally did not expect litigation matters to have a material adverse effect. Environmental settlements disclosed included a $250,000 Canton penalty and an approximately $335,000 pipeline-release penalty settlement in principle.
- Auditors issued an unqualified opinion on the financial statements and internal control over financial reporting; management and the auditor concluded controls were effective as of year-end.
Most important facts for investors to verify
- How much of 2017’s earnings and EPS improvement is attributable to the nonrecurring $1.5 billion tax benefit, versus sustainable operating performance.
- Whether refining margins, crude differentials, product realizations and RIN costs support ongoing Refining & Marketing profitability and cash generation.
- The effect of the 2018 MPLX dropdown and IDR exchange on MPC’s ownership, distributions, leverage, segment reporting and shareholder returns.
- Whether planned capital projects remain on schedule and budget, and whether projected returns justify the substantial growth investment.
- Developments in significant litigation, environmental obligations, and MPLX’s exposure to commodity prices and producer-volume declines.