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MPC - Marathon Petroleum


Grossbaum
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Here is a preliminary analysis of the valuation of MPC. I think that the current stock price undervalues the combined businesses fairly significantly.

 

The attached PDF includes the write up with Financials and Graphics from Investor Presentations.

 

First a brief overview of each business segment:

 

Retail Segment

There are 2 separate components of the Retail Segment. One is the Speedway business and the other is the Direct Dealer business. Speedway operates 3,881 company owned convenience stores/gas stations. About 60% of the gross profit at the Speedway stores is from fuel margin and 40% of gross profit is from merchandise sales. Operating margin is about 5%. Speedway is currently set to be spun off by Q1 2021. The Direct Dealer business supplies fuel to 1,068 gas stations (mainly ARCO stations in Southern California)  under long-term supply contracts and retains a portion of the fuel margin. This Direct Dealer business was acquired through the 2018 acquisition of Andeavor.

 

Refining & Marketing Segment

MPC became the largest refiner in terms of domestic throughput capacity, at ~3 mmbbls/d, through its 2018 acquisition of Andeavor. MPC operates 16 refineries across the United States. MPC’s gross profit is the difference between the cost of its input (crude oil) and the price it receives from selling the resulting refined products produced in the refining process. This is known as the crack spread. MPC has a strong and diversified distribution network to sell the refined products it produces.

 

Midstream Segment

The main asset in this segment is MPC’s ownership in MPLX. A lot of the pipelines MPLX owns are used to either transport crude to MPC owned refineries or transport refined product from MPC owned refineries to end markets for sale. MPLX has 2 segments - 1) Logistics & Storage (L&S) and 2) Gathering & Processing (G&P) . The L&S segment consists mainly of transportation pipelines and terminals for crude oil and refined products, as well as retail distribution assets of refined products (trucks,etc). The G&P segment mainly handles gathering, processing and transportation of natural gas and NGLs. The G&P segment primarily operates in the Marcellus region. L&S makes up about 2/3 of the business and G&P makes up the other 1/3.

 

Valuation By Segment

 

Retail Segment

Using a Normalized EBIT for the Speedway business of $1.3b and a valuation of 12x EBIT, the Speedway business may be worth about $15.6b. The WSJ mentioned that 7-Eleven’s parent company was prepared to offer “more than $20b” but that deal was derailed by the pandemic. Marathon previously indicated a value between $15-18b last fall, after announcing spin off plans.

 

Using a Normalized EBIT for the Direct Dealer business of $0.3b and a valuation of 11x EBIT, the Direct dealer business may be worth about $3.3b EBIT.

 

In a sale scenario of the Speedway business, there would likely be taxes paid, but would be avoided if MPC went the spinoff route.

 

ATD/MUSA seem to be valued in the market at ~16.0x/16.5x EBIT, respectively. Preliminary analysis.

 

Refining Segment

 

Using a normalized EBIT of $2.4b and a 8x EBIT multiple, the refining segment may be worth $19b.

 

One question I have is, will the Refining business have significant cash losses this year? And if so how large? My thought is that by 2021 refineries will be back to operating at a high capacity, but perhaps that won’t be the case. Will it take years for earnings to return to 2019 levels?

 

VLO/HFC seem to be valued in the market at 9.9x/5.0x EBIT, respectively. Preliminary analysis (PSX, the other large domestic refiner has 2 other large segments, which makes it harder to tease out the valuation for just the Refinery business).

 

Midstream Segment

 

MPC owns 666m shares of publicly traded MPLX.

 

Assuming normalized EBIT of $4.8b, and a 8.2x EBIT valuation, MPLX LP would be worth about $39.7b, and net of the debt, the equity would be worth ~$19.0b, or about $21/share. MPC’s proportionate ownership would be worth $14b.

 

MPLX shares are currently trading at $18.30.

 

MPC also owns midstream assets outside of MPLX (a lot of non-consolidated, minority ownerships in pipelines), which are carried at ~$1.0b on the balance sheet. That may or may not reflect an appropriate value of those assets.

 

Corporate Segment

 

Unallocated costs are about $800m per year. MPC is still in the process of getting to an efficient overhead structure after the combination with Andeavor in 2018. I believe the normalized corporate expense will be $650m per year.

 

Summary Valuation

Refinery & Marketing - $19.0b - 8x EBIT - $2.4b EBIT

Retail Speedway - $15.6b - 12x -$1.3b

Retail Direct Dealer - $3.3b -11x -$0.3b

Midstream - MPLX - $14.0b -8.2x

Midstream - MPC Retained -$1.0b

Corporate -($6.5b) -10x -($0.65b)

Enterprise Value - $46.4b

MPC debt - ($8.8b)

MPC Equity Value - $37.6b

 

MPC Shares out - 650.3

MPC Value / Share - $57.88

 

Current Price - $38.00

Conservative Upside +52%

 

 

MPC_Notes.pdf

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  • 1 month later...
  • 2 weeks later...

How do you think about Phillips 66 in relation to the value prescribed here, particularly given the huge hit to PSXP valuation recently. PSX chemical business is a growth business; whereas refining is not. Flip side is, what does Marathon do with sale proceeds? Good call on valuation, looks like 7/11 paid $4b more than what many were initially offering for Speedway.

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PSX has great management, but MPC has a huge pile of cash coming its way...6% payout seems ultra safe in that respect. MPC just needs to avoid doing anything dumb with the money.

 

Also, PSXP's exposure to DAPL is significant, hence the hit to its price. MPLX's exposure is limited relative to cash flows.

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I was surprised that the stock price didn’t go up more after the Speedway announcement. Here is an updated summary of the components of valuation for MPC, as I see it.

 

Summary Valuation

Refinery & Marketing $19.0b 8x EBIT $2.4b EBIT (2019 EBIT)

Retail Speedway     $16.5b Agreed to sale; net after tax proceeds

Retail Direct Dealer   $3.3b 11x $0.3b

Midstream - MPLX   $12.2b 647m shares @ $18.80 (8/21 price)

Midstream - MPC Retained $1.0b

Corporate           ($5.5b) 10x ($550m) est annual expense

Enterprise Value         $46.5b

MPC debt       ($9.9b)

MPC Equity Value   $36.6b

 

MPC Shares out   650.3

MPC Value / Share $56.30

 

Current Price   $35.50

Conservative Upside 58.6%

 

At the current market value of $23.1b ($35.50/share), the Refining and Marketing business is being valued at about $5.5b on an enterprise basis (IF you assume the other component valuations are “accurate,” which may or may not be a reasonable assumption).

 

The Refining and Marketing business earned $2.4b of operating profit in 2019, so it is being valued at 2.3x EV/ ‘19 EBIT. Perhaps 2019 EBIT is above “normal” earnings. Nonetheless, my guess would be that if someone were to purchase all of the refining business for $5.5b, they would generate a very high return on that investment over time. Perhaps my estimation that the R&M business’s ability to produce meaningful “through the cycle” cash flow is incorrect.

 

I think VLO is the most comparable business to MPC’s refinery operation. They both have refining capacity of about 3mmbbls/day and VLO doesn’t have significant other businesses. It seems like VLO has a lower cost structure than MPC. Nonetheless, the current EV of VLO is $33.5b and MPC’s refining business is being valued at $5.5b. I don’t think the gap should be that big. VLO is currently trading at about 7.9x EV/’19 EBIT.

 

@RadMan24 I haven’t been as focused on PSX because I was of the opinion that it is harder to estimate the valuation the market is putting on its Refining business because of the other businesses PSX is in - compared to VLO which is closer to a pure refinery operation.

 

 

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Another way to look at it—

 

If you subtract the $16.5B cash from your estimated EV you get $30B.

 

EV of the remaining MPC post speedway sale (subtracting $16.5B cash from current EV) becomes < than the market cap of $23B at about $16B. So the upside I see for shareholders post sale to your EV target is north of $80%...

 

FYI Grossbaum's math is correct, mine is wrong: shareholder upside to target EV of $30B ex Speedway post transaction is ~55%, not 80%.

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Newcomer to O&G, but let me see if I understand correctly:

 

MPC Market Cap: $23 billion

MPC Corporate level net debt: $10.6 billion

MPLX Stake: $12.1 billion

Speedway Cash: $16.5 billion

 

This nets out to $5.1 billion. Refining did $2+ billion of EBIT last few years prior to COVID.

 

I'm just going to ignore the direct dealer, ex-MPLX midstream assets, and corporate overhead, let's pretend they all net out to 0.

 

That comes out to 2-3x adjusted EV/EBIT overall.

 

Why is it so damn cheap? Is the assumption that they will blow the $16.5 billion on something dumb? That the Speedway deal will fall apart? Or is it just that refining has always been such an awful business that's going to get even worse thanks to electric cars?

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Yes, MPC needs to prove itself. I speculate that we are going to see a 20-30% price jump immediately if the management committed that they won't do any M&A with the speedway cash.

 

Newcomer to O&G, but let me see if I understand correctly:

 

MPC Market Cap: $23 billion

MPC Corporate level net debt: $10.6 billion

MPLX Stake: $12.1 billion

Speedway Cash: $16.5 billion

 

This nets out to $5.1 billion. Refining did $2+ billion of EBIT last few years prior to COVID.

 

I'm just going to ignore the direct dealer, ex-MPLX midstream assets, and corporate overhead, let's pretend they all net out to 0.

 

That comes out to 2-3x adjusted EV/EBIT overall.

 

Why is it so damn cheap? Is the assumption that they will blow the $16.5 billion on something dumb? That the Speedway deal will fall apart? Or is it just that refining has always been such an awful business that's going to get even worse thanks to electric cars?

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Given the valuation, incoming cash, and balance sheet, MPC has a lot less to prove than just about any other energy co out there these days...

 

And yeah, at these prices using cash for buybacks would make the most sense over any M&A for MPC. After all, the divi payout is north of 6% (which is higher payout than the interest on much of their debt) and we’ve already discussed the valuation.

 

7 and i seems very intent on completing the acquisition.

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Well, FWIW, they've outlined debt repayment and return of capital as uses in the initial press release:

 

Certainty of Value for MPC Shareholders: The $21 billion valuation represents a significant value unlock. The 100% cash transaction immediately captures value for MPC shareholders relative to potential valuation risks of other alternatives.

 

Significant After-Tax Cash Proceeds: This transaction is expected to result in after-tax cash proceeds of approximately $16.5 billion. MPC expects to use the proceeds to both repay debt to protect its investment grade credit profile and return capital to shareholders. Specific details will be announced at the time of transaction close.

 

It's weird that the stock didn't move after this announcement, what is the market thinking? $21 billion was even higher than previously projected.

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Well, FWIW, they've outlined debt repayment and return of capital as uses in the initial press release:

 

Certainty of Value for MPC Shareholders: The $21 billion valuation represents a significant value unlock. The 100% cash transaction immediately captures value for MPC shareholders relative to potential valuation risks of other alternatives.

 

Significant After-Tax Cash Proceeds: This transaction is expected to result in after-tax cash proceeds of approximately $16.5 billion. MPC expects to use the proceeds to both repay debt to protect its investment grade credit profile and return capital to shareholders. Specific details will be announced at the time of transaction close.

 

It's weird that the stock didn't move after this announcement, what is the market thinking? $21 billion was even higher than previously projected.

 

I think part of the problem is where do they put the money? You mention debt payments and capital returns, but its almost like PNC - in this environment and outlook, does it make sense to do a value acquisition or just wait and see how this pandemic plays out? The reinvestment options are not appealing, so a capital return/debt repayment option seems to be the best if only option.

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There would be few greater return opportunities outside of retiring some debt and buying back 6% yielding stock at these prices. The Andeavor acquisition was large enough and is still being worked through, so M&A at this point seems overkill outside of maybe anything small and bolt on.

 

You already have a co that is one of the largest refiners in the world with control of a large midstream network. They are closing two refineries themselves. Questionable what the point would be in adding to their already large refinery/midstream footprint at this point.

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Another way to look at it—

 

If you subtract the $16.5B cash from your estimated EV you get $30B.

 

EV of the remaining MPC post speedway sale (subtracting $16.5B cash from current EV) becomes < than the market cap of $23B at about $16B. So the upside I see for shareholders post sale to your EV target is north of $80%...

 

 

FYI Grossbaum's math is correct, mine is wrong: shareholder upside to target EV of $30B ex Speedway post transaction is ~55%, not 80%.

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  • 2 weeks later...

How familiar are you with the refinery industry? Everything I see shows it is a totally shit industry, but this stock is now selling for an adjusted EV/EBIT of like 1-2 if you discount Speedway and MPLX. Has anyone looked at MPLX with regards to valuation? Question - how does its pipelines compare with the ones that Buffett just picked up? It seems like they are mainly for crude oil vs. the nat gas ones that Buffett bought. If crude production plummets, can they be used for NG or no?

 

Long term it's not looking good whatsoever, I think electric vehicles are close to or have reached critical mass and the sales will only accelerate in the years to come. At this valuation, I see it as a really cheap call option on the crack spread.

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How familiar are you with the refinery industry? Everything I see shows it is a totally shit industry, but this stock is now selling for an adjusted EV/EBIT of like 1-2 if you discount Speedway and MPLX. Has anyone looked at MPLX with regards to valuation? Question - how does its pipelines compare with the ones that Buffett just picked up? It seems like they are mainly for crude oil vs. the nat gas ones that Buffett bought. If crude production plummets, can they be used for NG or no?

 

Long term it's not looking good whatsoever, I think electric vehicles are close to or have reached critical mass and the sales will only accelerate in the years to come. At this valuation, I see it as a really cheap call option on the crack spread.

 

It is highly debatable , if you can truly segregate MPLX out from MPC.

 

MPLX crude pipes cannot be reused for NG generally, they are not in the right locations or don’t have the right end points. In some cases it is theoretically possible, but generally speaking , a  competing NG pipe already exists in most cases.

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There are good NG midstream plays out there...EPD is one I’ve lately added (though it has crude pipelines as well).

 

I view refineries and pipelines similar to railways—critical infrastructure that is too difficult (regulations) and/or onerous (expensive) to replace these days. Look at how old most of the refineries in the U.S. are. Look at how difficult it is to get a new pipeline approved in lots of places in U.S. (DAPL, Keystone). This results in moats around existing players, especially in some geographies.

 

These strike me as tollbooth type businesses whose fees should grow with inflation (midstream + refineries) with minimal maintenance capex needs (midstream, not refineries). I’ll take the double digit payout in some cases. Gasoline, jet fuel, diesel, marine fuel, etc are not going away any time soon.

 

MPC, the refiner with the largest U.S. refining capacity, with $16.5B coming its way (will result in over $5B net cash) seems like a safe way to get paid >7% a year even if refining takes some time to come back. Remember that MPLX debtholders do not have recourse to MPC assets.

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How familiar are you with the refinery industry? Everything I see shows it is a totally shit industry, but this stock is now selling for an adjusted EV/EBIT of like 1-2 if you discount Speedway and MPLX. Has anyone looked at MPLX with regards to valuation? Question - how does its pipelines compare with the ones that Buffett just picked up? It seems like they are mainly for crude oil vs. the nat gas ones that Buffett bought. If crude production plummets, can they be used for NG or no?

 

Long term it's not looking good whatsoever, I think electric vehicles are close to or have reached critical mass and the sales will only accelerate in the years to come. At this valuation, I see it as a really cheap call option on the crack spread.

 

It is highly debatable , if you can truly segregate MPLX out from MPC.

 

MPLX crude pipes cannot be reused for NG generally, they are not in the right locations or don’t have the right end points. In some cases it is theoretically possible, but generally speaking , a  competing NG pipe already exists in most cases.

 

It's totally possible to change a pipeline from oil to nat gas. The only difference is extra pump stations and shut off valves. To Spek's point, you have to look at where the pipes are laid. MPLX isn't really near to any of the major NG fields but there aren't many NG alternatives to where MPLX pipes are. Bigger problem for MPLXto try to convert to NG pipelines is that the existing NG pipelines are filling the demand just fine.

 

I think people have given up on oil. I'm no luddite (in fact have only recently closed out my TSLA position) but we are still selling plenty of ICE vehicles. Oil usage growth (yep, growth) is still positive. I would be amazed if we go 100% electric in the next 5 years. 

 

As far as Buffett's acquisition of D pipelines, I think he got a great deal. No idea what's going on with D. I have heard some interesting theories that they are moving to renewables/software company like status (https://news.dominionenergy.com/2020-01-16-Dominion-Energy-Moves-Forward-with-Electric-School-Bus-Program). I don't exactly buy it/understand it especially given their move to extend their nuclear licenses for 80 years (arguable wind/solar can now compete with nuclear on LCOE basis). They sold NG pipes. One of them runs through NY which is basically impossible to replicate.

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So can someone help me understand why the stocks with pipeline exposure have such high yields? The ones i have started following are ENB, TRP and FTC. Each company has a very different business model / assets and current payout ratios are below 80% of FCF. Each appears to be weathering the current storm just fine. All reported and there was zero discussion about dividend cuts.

 

Is the concern:

1.) economic: covid is here for the medium term so economic damage will be large / demand for energy will lag well into 2021 and possibly into 2022

2.) structural: move to electric vehicles will reduce demand long term

3.) balance sheet: companies carry too much debt

4.) political 1: if Democrats are elected no new pipelines will be built (lower growth) and regulation will be increasing (higher costs)

5.) political 2: if Democrats are elected taxes will be increasing

 

I think ‘energy’ has been the worst performing asset class the past decade. It everything in this sector toxic? Or are the pipeline companies, especially those with a focus on natural gas, ok investments? Especially in a yield starved world :-)

 

—————————-

 

Listening to the Marathon Q2 call, management talked about the importance of monetizing assets and returning capital to shareholders. I wonder if we do not see a shift in all energy companies. From ‘growing production’ to ‘harvesting undervalued assets’. Marathon seems to want to shed assets and return the $ to shareholders with Speedway being the first big step. Perhaps we see massive consolidation in all things energy in the coming year, especially if the economy remains in recession well into 2021. Buffett must be licking his chops :-)

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Rise in corporate taxes should not affect MLP unitholders much.

 

If no new pipelines are built, that increases the value of existing pipeline networks (they'll command higher fees).

 

If inflation rises so will the fees they collect. Meanwhile many midstream players have secured fixed low interest rate debt stretching out decades in the current environment...

 

The argument for crude obsolescence in 10 years is very weak. Natural gas utilization in the U.S. is not going away for much longer. Ditto for petrochemicals/plastics (NGLs).

 

Maybe it's the trend to ESG investing? Who knows. I'll jump in though. I think it's much more attractive and sensible than commercial REITs paying 6% or so.

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Well, the price of refiners tend to fluctuate with the difference between what you buy petroleum for and what you sell, the finished products for (the crack spread), which right now is pretty bad:

 

https://www.eia.gov/finance/markets/products/prices.php

 

It's also affected by aggregate demand, which I think is down by 10%. 

 

I'm not going to go link happy in this post, but you can find the info on the EIA website or other place. There are about 1/3 less refineries now than there were in the 1980s, but the amount of refined production is about 50% more than it was in the 1980s.  There are fewer refineries, pushing out more barrells, which means more money for the toll bridge operator.

 

Yes, it's probably impossible to build a new one in the US for environmental reasons, although there is a new refinery in the middle east and one built in china recently, so if you close down a refinery, it's probably closed for good.  That makes existing refineries an okay industry. 

 

Yes, there is debt and you don't control the price of the inputs or outputs, but when the crack spread is favorable, you make money and it won't get competed away by a new entrant.  The better refineries are also able to sell more complex distillates for things like plastics, paints etc. and make a nice return.  Some of these operators also own big stakes in the marketing and distribution which can be operated as a separate business PSX owns a lot of PSXP,  PBF owns a lot of PBFX. 

 

It's a good, not a great business, but a lot of them seem to be selling at attractive valuations compared to the last year.  Buffett used to own over 10% of PSX and would buy whenever it dipped below $80, it's in the high 50s now. Klarman bought PBF in the 20s and sold in the 30s, it's now $6.50.

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Yes, I think getting tainted with being part of the energy sector and ESG trends have hurt the pipeline and refinery stocks,

 

I am conflicted on the refineries and my pick would be PSX over MPC because they have better assets, imo. The knock on refineries is that EV may cause less demand. One doesn’t need the entire demand to collapse, if the demand shrinks faster than supply the margin/ spread pressure may make refining a really bad business long before the business goes entirely away.

Just recall, there was a dark age for refineries when overcapacity and lack of supply from cost advantaged crude was causing low profits for refineries for a long time. It was abundant shale oil that was one of the main reasons the refineries started to do better. So in an indirect way, the fortunes of the refining sector are tied to the shale, Imo.

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Yes, I think getting tainted with being part of the energy sector and ESG trends have hurt the pipeline and refinery stocks,

 

I am conflicted on the refineries and my pick would be PSX over MPC because they have better assets, imo. The knock on refineries is that EV may cause less demand. One doesn’t need the entire demand to collapse, if the demand shrinks faster than supply the margin/ spread pressure may make refining a really bad business long before the business goes entirely away.

Just recall, there was a dark age for refineries when overcapacity and lack of supply from cost advantaged crude was causing low profits for refineries for a long time. It was abundant shale oil that was one of the main reasons the refineries started to do better. So in and indirect way, the fortunes of the refining sector are tied to the shale, Imo.

 

PSX has done well capital allocation wise, and has a great chemicals business. MPC doesn't have that type of exposure. That's the knock on MPC, imo. With that said, business is weak all around, however, petrochemical growth is still a very strong outlook demand wise going forward, despite the covid impact.

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