<THE DRIP PORTFOLIO>
The final contestant
by Brian Graney
ALEXANDRIA, VA (March 10, 1999) -- Today, Ashland (NYSE: ASH) is the final contestant on The Drip is Right -- our oil and gas company shakedown. But before we break out the champagne glasses and celebrate the end of our initial company-by-company analysis, we need to determine if this firm has what it takes to advance to our next round of consideration.
Description: Besides being the last company on our list, Ashland is also one of the most diversified companies we have looked at during our industry study. The firm's main refining operation dates back to 1924, when its Catlettsburg, Kentucky refinery was the entire downstream arm of Swiss Oil Co. As we noted yesterday, Ashland and USX-Marathon (NYSE: MRO) merged their downstream operations last year, forming Marathon Ashland Petroleum LLC (MAP). Ashland ended up with a 38% stake in MAP, which is now the fourth largest refiner in the U.S.
In fiscal 1997 (before the formation of MAP), Ashland's refining and marketing operations accounted for 53% of total revenues and 45% of operating income. Ashland Chemical, the company's specialty chemical and plastics unit, made up 31% of revenues and 30% of operating income. The remaining portion of the revenues and income pies were split between the company's Valvoline motor oil and quick lube service station business and its APAC asphalt and road construction products unit. In addition, Ashland owns a 55% stake in Arch Coal (NYSE: ACI), the nation's second largest coal producer. That investment accounted for roughly 5% of Ashland's operating income in 1997.
In its corporate structure and diversity of revenue streams, Ashland resembles another downstream pure play we examined during this study -- Sunoco. However, the MAP joint venture is an added twist that makes analyzing Ashland's business a little bit tricky. Our main emphasis is on the company's refining and marketing business, so that will be the focus of our initial glance at the company.
Financials: (Warning: The following is standard Drip Port boilerplate. The next few phrases may induce yawns, daydreaming, and the Internet-related ailment known as "scrolling-eye syndrome.") As we have throughout this study, we will initially focus on only a few key elements: 1) How does the market value the company? 2) How profitable are its operations? 3) How does the company finance those operations? 4) And what does management do with the money that it earns?
Valuation: Our esteemed in-house math whiz, Spanky the Wonder Pooch, will help us determine Ashland's market capitalization and enterprise value. Spanky has some spare time on his paws, seeing that he has already completed digging out the Fool HQ parking lot after yesterday's snowstorm. (We don't call him a Wonder Pooch for nothing, you know.)
Multiplying Ashland's average diluted sharecount of 75 million shares at the end of fiscal Q1 by its recent share price of $42 3/16 gives us a market capitalization of $3.16 billion. Spanky then takes that figure and subtracts the $91 million in cash the company recently reported and adds $1.51 billion in long-term debt to derive an enterprise value of $4.58 billion. That places Ashland toward the lower end of the size spectrum of the companies we have looked at during our study.
Profitability: Since Ashland accounts for its interest in the MAP partnership using the equity accounting method, it's hard for us to independently determine the profitability of the company's refining and marketing operations. Instead, we will rely on the company's own calculations for return on capital employed, or ROCE. Ashland likes to refer to this ratio as return on average capital employed, which suits us just fine.
For fiscal 1998 (ended Sept. 30, 1998), the company said its ROCE was 7.8%, down from 1997's 10.5% and 1996's 8.5%. Those returns are within a percentage point of what we calculated for Marathon from its financial statements yesterday, so we will accept them as a decent proxy for the overall profitability of the MAP partnership. Remember, Marathon's ROCE figures included the company's E&P operations, while Ashland's statistics include the profitability of all of its diverse business units. Despite all the clutter, we are willing to bet that MAP's ROCE by itself was around 7% or 8% last year. That's not horrible, but it's not earth shattering, either.
Leverage: Ashland's $1.51 billion in long-term debt and $2.06 billion in shareholders' equity gives us a long-term debt to equity ratio of 0.73. That may seem pretty high, but we've actually seen higher ratios reported by other companies during our study. Yet, given the 0.80 debt-to-equity ratio we calculated for Marathon yesterday, it's hard to overlook the fact that the MAP partners are pretty darn leveraged.
Use of Cash Flow: Unlike Marathon, Ashland is using some of its cash flow to buy back its shares. Since last August, the company has repurchased 2.4 million shares, or about 3% of its average diluted sharecount at the end of fiscal 1998. The company's board recently authorized the repurchase of 4 million more shares in the months ahead. Ashland's dividend yield is 2.61%, which is high compared to the rest of the S&P 500 but among the lowest of the companies in our study.
Snapshot: Click here for a snapshot of Ashland's financial figures, earnings estimates, and other goodies.
Conclusion: The moment of truth has arrived for Marathon and Ashland. Should the companies join Exxon Mobil, BP Amoco, and Pennzoil-Quaker State in our next round of analysis, or should they receive a nice Drip Port consolation prize and be directed to the exits? (Jeff and I are running out of consolation prizes. Perhaps we can give away Spanky as a parting gift.)
In true Foolish spirit, you get to decide the fates of both Marathon and Ashland. Post your thoughts, opinions, and "thumbs up" or thumbs down" rankings on the Drip Companies message board on the Web over the next few days. Next week, we'll tally the votes and prepare for our next phase of oil and gas analysis.
[To discuss these columns, please visit the Drip Companies message board on the Web.]
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