5 Things Marathon Petroleum Corp. Management Wants You to Know

Marathon is benefiting from widening refining margins, and is sending tons of cash back to shareholders.

Sep 3, 2014 at 11:28AM

It's a good time to be an oil refiner, and Marathon Petroleum Corp. (NYSE:MPC) is proof of that. In oil refining, profitability depends very highly on margins. When spreads are wide, refiners rake in the profits. Of course, the downside to this business is that the reverse is also true, and refiners like Marathon suffered last year when margins shrank.

However, things are going very well right now, and this was clear from the company's most recent conference call. Here are a few key items Marathon Petroleum's management discussed in its second-quarter conference call.

Strong performance last quarter

"Our second quarter 2014 earnings were $855 million compared to $593 million in the second quarter of 2013."—Chief Financial Officer Donald C. Templin

This represented 44% growth. Diluted earnings per share soared 61% in the quarter. The primary contributor was great performance in its refining and marketing segment, which makes up almost all of the company's profits. Marathon reaped much higher price realizations this time around.

Integrated structure paying off

"In the midstream, we recently exercised our option to acquire a 35% ownership interest in Enbridge's Southern Access Extension pipeline project."—President and Chief Executive Officer Gary Heminger

Marathon believes this acquisition will gain access to an important region of North American crude oil production growth. The company expects to invest $295 million in the project, which should be completed by the middle of next year. It's clear that the strategy paid off. Marathon Petroleum generated 39% growth in operating profits in its pipeline transportation business last quarter. Management believes its integrated model allows it to reap increased efficiency, which provides some cost control.

Building its retail business

"We continue to believe that there is significant opportunity to leverage the best of both businesses."—Heminger

In addition to expanding into midstream, Marathon is also building its retail operations. This statement pertains to Marathon's acquisition of the retail operations of Hess Corp. and the ensuing integration with Marathon's existing Speedway retail business. Management states that Speedway generates sales per store that place it at the top of the industry.

Solid financial position

"At the end of the second quarter, we had $2.1 billion of cash and just over $3.6 billion of debt."—Templin

Over the past year, Marathon generated $4.3 billion in earnings before interest, taxes, depreciation, and amortization (EBITDA). This has left the company with a rock-solid balance sheet. Marathon's debt-to-total capital ratio stands at just 25%, and the company carries leverage of just 0.8 times EBITDA.

Because of its huge earnings growth, Marathon is flush with cash. In the last 12 months alone, Marathon has generated $3.4 billion in operating cash, and $1.7 billion in free cash flow. Fortunately for shareholders, Marathon management isn't shy about spreading the wealth with investors.

Funneling lots of cash back to shareholders

"Balancing return of capital to shareholders with investments in the business remains a priority."—Heminger

Marathon purchased $459 million of its own shares in the second quarter. On top of that, the company authorized up to an additional $2 billion of share repurchases. Marathon wasn't done there, since it also increased the quarterly dividend to $0.50 per share, which was a 19% raise. During the 12 months ended June 30, Marathon returned $3.1 billion of capital to shareholders.

The Foolish takeaway

Marathon management had almost nothing but great things to say in its most recent conference call with analysts. The business environment for oil refiners is ripe for growth right now, thanks to wide margins. While last year was a difficult one for Marathon Petroleum, it's nothing but smooth sailing this year.

Marathon's separate initiatives to integrate its business into midstream and retail are contributing to earnings as well. This is all resulting in a lot of free cash flow, which the company is using to reward shareholders with dividend increases and huge share buybacks.

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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.

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