Marathon Petroleum Corporation Earnings: Market Conditions Improving

Marathon Petroleum is seeing price realizations improve in several of its regions, which cements its position as a top-performing refiner.

Aug 14, 2014 at 10:09AM

Oil refiners operate a tough business in an industry prone to a high degree of volatility. Their underlying profits are highly dependent on price realizations. As spreads narrow, profits can fall significantly. However, the other side of the coin is that when operating conditions are good, growth is easily attained.

Last quarter, Marathon Petroleum Corp. (NYSE:MPC) put up impressive numbers. It produced strong growth in its core refining and marketing segment, as well as across other businesses such as its pipeline transportation unit. In fact, its performance was significantly better than that of fellow refiner Phillips 66 (NYSE:PSX).

Here is a rundown of Marathon Petroleum's second-quarter earnings, and the current state of its business conditions.

Growth in all the right places
In all, revenue grew 4% to $26.9 billion. Second-quarter earnings clocked in at $2.95 per diluted share. This represented astounding 61% EPS growth versus the same period last year. One of the biggest reasons for the outsized earnings growth was the very easy comparison period.

As previously mentioned, periods when spreads narrow significantly have a huge effect on refining. This was the case last year, and earnings fell off a cliff for most refiners. In the second quarter last year, Marathon Petroleum's $1.83 per share in diluted earnings represented a 27% year-over-year decline. This demonstrates how volatile refining profitability can be.

Nevertheless, business conditions improved substantially this time around. Operating profits in Marathon Petroleum's core refining and marketing segment jumped 39% during the quarter, to more than $1.2 billion. This was crucial for the entire company, since the refining and marketing segment makes up 92% of the company's total operating profits.

Separately, Marathon Petroleum generated 39% growth in operating profits in its pipeline transportation business. Marathon Petroleum management believes its integrated structure, which includes a midstream pipeline business, helps the overall company keep operational flexibility intact. With an integrated model, Marathon Petroleum can reap increased efficiency, which provides some cost control.

Marathon Petroleum's results compare very favorably to others in its industry. For example, Phillips 66 isn't seeing business conditions firm in its own markets. Adjusted profits fell 6% last quarter and are down 25% over the first half of the year.

One of the reasons for this divergence was higher costs for Phillips 66 in its midstream business. It saw increased maintenance activity for its pipelines last quarter, which resulted in higher costs and lower earnings.

Another key difference is in the revenue split within refining. Phillips 66 has reconfigured its refining business to lean more heavily on distillate. Weaker performance in distillate last quarter couldn't make up for higher volumes.

Along with its earnings release, Marathon Petroleum announced a hefty increase to its shareholder rewards initiatives. The company raised its dividend by 19%, and increased its share buyback authorization by a whopping $2 billion. Clearly, management is equally confident in its prospects going forward.

The market reacts as you'd expect
Over the past year, the market has sent shares of Marathon Petroleum climbing approximately 17%. Since its second-quarter earnings release on July 31, shares are up about 10%. It's clear investors were pleased with Marathon Petroleum's earnings, since a double-digit rise in just a couple of weeks is certainly good performance.

Meanwhile, Phillips 66 shares are up only slightly since it reported its own quarterly earnings on July 30.

Marathon Petroleum is benefiting from improving margins, and a controlled cost structure. Earnings jumped last quarter in its two most important business segments: operating and transportation. Going forward, assuming price realizations stay strong and margins don't substantially contract, there's little reason Marathon Petroleum can't produce another earnings beat.

It will benefit, just as it did in the second quarter this year, from an easy comparison period. Add it all up, and Marathon Petroleum's second-quarter earnings showed pockets of strength in several areas.

Do you know this energy tax "loophole"?
You already know record oil and natural gas production is changing the lives of millions of Americans. But what you probably haven't heard is that the IRS is encouraging investors to support our growing energy renaissance, offering you a tax loophole to invest in some of America's greatest energy companies. Take advantage of this profitable opportunity by grabbing your brand-new special report, "The IRS Is Daring You to Make This Investment Now!," and you'll learn about the simple strategy to take advantage of a little-known IRS rule. Don't miss out on advice that could help you cut taxes for decades to come. Click here to learn more.

Bob Ciura has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

A Financial Plan on an Index Card

Keeping it simple.

Aug 7, 2015 at 11:26AM

Two years ago, University of Chicago professor Harold Pollack wrote his entire financial plan on an index card.

It blew up. People loved the idea. Financial advice is often intentionally complicated. Obscurity lets advisors charge higher fees. But the most important parts are painfully simple. Here's how Pollack put it:

The card came out of chat I had regarding what I view as the financial industry's basic dilemma: The best investment advice fits on an index card. A commenter asked for the actual index card. Although I was originally speaking in metaphor, I grabbed a pen and one of my daughter's note cards, scribbled this out in maybe three minutes, snapped a picture with my iPhone, and the rest was history.

More advisors and investors caught onto the idea and started writing their own financial plans on a single index card.

I love the exercise, because it makes you think about what's important and forces you to be succinct.

So, here's my index-card financial plan:


Everything else is details. 

Something big just happened

I don't know about you, but I always pay attention when one of the best growth investors in the world gives me a stock tip. Motley Fool co-founder David Gardner (whose growth-stock newsletter was rated #1 in the world by The Wall Street Journal)* and his brother, Motley Fool CEO Tom Gardner, just revealed two brand new stock recommendations moments ago. Together, they've tripled the stock market's return over 12+ years. And while timing isn't everything, the history of Tom and David's stock picks shows that it pays to get in early on their ideas.

Click here to be among the first people to hear about David and Tom's newest stock recommendations.

*"Look Who's on Top Now" appeared in The Wall Street Journal which references Hulbert's rankings of the best performing stock picking newsletters over a 5-year period from 2008-2013.

Compare Brokers