Not since Marathon Petroleum (NYSE:MPC) was spun off back in 2011 has there been so much activity going on at the corporate level of this business. Not only is it looking to restructure its pipeline subsidiary, but it may even calve off a whole other business segment into a completely new company. On top of all of this, a new presidential administration could cause a lot of changes that could profoundly impact the bottom line. Here are several quotes that cover how all of these things are impacting management's thought process and how investors should interpret this.
Putting a plan together for MPLX
There has been a lot of talk recently about Marathon's plans for its subsidiary partnership MPLX (NYSE:MPLX). For several months, activist investor group Elliot Management has been calling for a shakeup to get more shareholder value out of those midstream assets. In January, management announced a major restructuring plan for MPLX, which CEO Gary Heminger highlighted in his prepared comments:
MPLX also announced its 2017 capital spending and investment plan of $1.4 billion to $1.7 billion for organic growth, plus approximately $100 million for making this capital. About 75% of these growth investments are directed to the development of natural gas and gas liquids infrastructure expansion to support MPLX's producer-customer demand, primarily in the Marcellus region. The remaining growth capital will be for the Utica infrastructure build-out in connection with a recently completed Cornerstone Pipeline; a butane cavern in Robinson, Illinois; and a tank farm expansion in Texas City, Texas.
Additionally, we are executing the strategic actions announced on January 3 to enhance shareholder value. We plan to significantly accelerate the drop-downs of MLP qualifying assets, generating approximately $1.4 billion of annual EBITDA to MPLX as soon as practicable and now planned for 2017. A proposed transaction representing approximately $250 million of this annual EBITDA is already under review by the Conflicts Committee on the MPLX board and is expected to close by the end of the first quarter.
There are lots of opportunities for growth at MPLX, but its current structure has made raising capital rather prohibitive. So along with this large spending plan, Marathon will exchange its incentive distribution rights that come with its general partnership stake for a larger limited partnership stake in the company. Over time, no incentive distribution rights should significantly reduce its cost of capital.
This structural change may not be the only one coming down the pipe, though. According to Heminger, management is also taking a hard look at its retail assets:
[A] special committee of the board has been formed and has selected an independent financial advisor to assist in the full and thorough review of Speedway to ensure optimum value is delivered to shareholders over the long term. We expect to provide an update on the review by mid-2017.
This could go either way, really. The consensus seems to be that Speedway could be spun off into its own entity and Marathon would retain a stake in the business. The benefit to this is it would be a quick jolt of cash from the spin off, but the downside would be that the company wouldn't have the consistent earnings and cash flow it provides when the retail segment is going through a cyclical downturn. Until we get a definitive decision, though, this is all just speculation.
Border taxes won't impact us
Oil refiners are probably the business most likely to see an impact from the proposals from President Trump related to taxes and regulation. One that could be an adverse effect is a border adjustment tax with Mexico, since refiners import a lot of crude from there. According to Heminger, the possibility of these taxes isn't as much of an issue for Marathon as it would be for retail customers. He said:
In the event that it were to be passed, Brad, the refiners is going to be able to pass -- is going to have to be able to pass any incremental cost on to the consumer. And I'm very confident that we'll be able to do that. Just as we did when crude prices were $100 to $147, we passed the price on to the consumer. Now the calculus is really a political calculus on do I think it will be passed? Because that's going to be the concern, trying to pass something through Congress that really is going to increase domestic crude prices at the benefit of the domestic producers to the detriment of the consumer, I think, is something that is going to be difficult. But if it were to pass, we'll be able to -- we'll be flexible.
Tax situation too uncertain
Another hot-button issue with the Trump administration is all the potential changes to taxes. According to CFO Tim Griffith, Marathon is taking a wait-and-see approach because there are potentially so many moving parts here that it's way too soon to determine the impact. Said Griffith:
I think the picture is still a little bit murky in terms of how all the potential reforms play out. I mean, certainly, the reduction and the proposed change in the corporate tax rate, either under the Republican blueprint or the Trump plan, that potentially 20% or 15%, obviously, very helpful and could dramatically lower the cash tax burden of the company. There's also, obviously, a proposal to eliminate interest expense as a deduction. There's a part of the proposal that incorporates immediate expensing of capital. And then, obviously, the border tax adjustment, there's really a pretty complicated set of potential changes that come out and we're trying to look at them as clarity is offered in terms of what the net impact could be on the business and sort of where it plays out. I think a little bit tough to handicap exactly what form it takes.
MPLX standing on its own
One analyst question from the conference call was whether MPLX can expect support from the parent company in terms of financing for the coming year. This was something that was pretty common in 2016 because it was rather hard for MPLX to secure capital. In response, Executive Vice President of MPLX Don Templin said he foresaw MPLX being able to stand on its own this year and why it was possible:
[O]n the $1.7 billion [in capital spending], we would expect to fund out all with MPLX without any support from the parent. You'll recall that in 2016, there was a real focus on capital preservation. The balance sheet and the leverage metrics at MPLX were higher than we wanted them to be and what we were targeting. So we started out with about 4.7x leverage at the beginning of '16. We're down to 3.4x by the end of '16. And we are in a very comfortable position to be able to fund our organic growth through a combination of equity and debt.
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