Marathon Petroleum Corporation — Q2 2013 Form 10-Q
Business context and reporting period. This unaudited filing covers the quarter and six months ended June 30, 2013, compared with the same periods in 2012. MPC operates refining and marketing, Speedway retail, and pipeline transportation businesses, primarily in the Midwest, Gulf Coast, and Southeast. Results include the Galveston Bay refinery and related assets acquired from BP on February 1, 2013.
Key financial metrics
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Sales and other operating revenues | 2013: $25.675 billion; 2012: $20.240 billion | 2013: $49.003 billion; 2012: $40.504 billion |
| Income from operations | 2013: $960 million; 2012: $1.307 billion | 2013: $2.116 billion; 2012: $2.263 billion |
| Net income attributable to MPC | 2013: $593 million; 2012: $814 million | 2013: $1.318 billion; 2012: $1.410 billion |
| Diluted EPS attributable to MPC | 2013: $1.83; 2012: $2.38 | 2013: $4.01; 2012: $4.07 |
| Operating cash flow | Six months: 2013 $1.643 billion; 2012 $616 million | |
| Cash and cash equivalents | $3.069 billion at June 30, 2013, down from $4.860 billion at December 31, 2012 | |
| Total debt | $3.410 billion at June 30, 2013; debt-to-total-capital ratio 22% | |
| Liquidity | $6.569 billion, including cash, undrawn $2.5 billion revolving credit and undrawn $1.0 billion receivables facility |
Reported sales include consumer excise taxes. Q2 and first-half refining and marketing gross margin was $6.18 and $6.99 per barrel, respectively, versus $11.13 and $9.76 in 2012. Speedway and Pipeline Transportation segment operating income increased, but did not offset weaker refining results.
Material changes versus the prior comparable period
- Q2 MPC-attributable net income fell $221 million, while first-half income declined $92 million. Management attributed the decreases mainly to lower refining and marketing gross margins, partly offset by additional volumes from the acquired Galveston Bay refinery.
- Refined product sales volumes rose to 2.135 million barrels per day in Q2 and 2.016 million for the first half, from 1.591 million and 1.574 million, respectively, primarily due to the acquisition. Refining and marketing segment operating income declined to $903 million in Q2 and $2.008 billion for the first half.
- Speedway operating income rose to $123 million in Q2 and $190 million for the first half; Pipeline Transportation operating income rose to $58 million and $109 million. The filing cites improved Speedway fuel and merchandise margins, and higher pipeline tariffs and crude throughput.
- Operating cash flow increased by $1.027 billion for the first half, principally because working capital used less cash than in 2012. Investing cash outflow increased to $1.918 billion, principally reflecting the Galveston Bay acquisition. Financing cash outflow was $1.516 billion, including $1.313 billion of share repurchases and $229 million of dividends.
- First-half diluted EPS decreased less than net income, alongside a lower weighted-average share count following repurchases. MPC repurchased 17 million shares for $1.313 billion during the first half; the reported effective average cost was $80.54 per delivered share.
Outlook, management commentary, risks, and unusual items
- MPC reported a 2013 capital and investment budget of $1.62 billion, excluding capitalized interest and the Galveston Bay purchase price, and said there had been no material change to that budget. Management said liquidity was adequate for operations and expected funding needs; this is not earnings guidance.
- The Galveston Bay transaction included $1.491 billion cash consideration and an earnout of up to $700 million over six years, tied to crack spreads and refinery throughput. The earnout liability was valued at $611 million at June 30, including $190 million current; the $11 million increase from acquisition-date fair value was recorded in cost of revenues. The inventory post-closing adjustment remained unresolved.
- Management highlighted variability in crack spreads, crude differentials, product realizations, RIN compliance costs, refinery maintenance and operating costs, and demand and throughput. RIN purchasing costs were $65 million for Q2 and $107 million for the first half, above the respective 2012 periods. Proposed Tier 3 fuel standards could require material compliance spending, which MPC said it could not yet estimate.
- At June 30, MPC reported $132 million of accrued environmental remediation liabilities. The Kentucky attorney general’s lawsuit alleges $89 million of overcharges in 2005, with additional claims concerning 2011 pricing; MPC is defending the case. The filing says an unfavorable resolution in full could materially affect results, though management did not expect a material adverse effect. MPC also disclosed guarantees and indemnities, including maximum potential debt-related payments of $172 million for LOOP/LOCAP, $44 million for Centennial, and $25 million for TAME.
- Q2 included $60 million of pension settlement expense; the comparable 2012 charge was $83 million. A second-quarter terminal impairment charge was $8 million. The filing also records a $39 million increase to additional paid-in capital from a tax settlement with Marathon Oil, not income.
- On July 31, the board approved a quarterly dividend of $0.42 per share, payable September 10, 2013. On August 1, MPC acquired additional interests in three ethanol companies for $75 million cash; the filing expected to account for them as equity method investments.
Important facts for investors to verify
- Whether refining margins and crude differentials recover, and how product realizations and RIN costs affect MPC’s realized margins.
- Galveston Bay’s contribution to earnings and cash generation, integration and operating costs, final purchase accounting, inventory adjustment, and earnout exposure.
- Whether operating cash flow remains sufficient after working-capital movements, capital spending, dividends, pension contributions, and share repurchases.
- Potential outcomes and financial exposure from the Kentucky pricing litigation, environmental obligations, and guarantees and indemnities.
- Execution of the stated capital budget, continued investment-grade credit profile, and future capital returns; repurchases remain subject to business, market, and liquidity conditions.