Now that Marathon Petroleum (MPC +1.53%) has committed to a major restructuring program at the behest of activist investors, it's going to be tough to say whether the company is having a good quarter or not. This past quarter's results were mostly a product of the weak refining environment coupled with a lot of scheduled maintenance work at several of Marathon's facilities.
These things will come and go, but what really should have investors' attention is how management handles this ambitious transformation. Let's check in with Marathon's quarterly results and see what kind of progress it has made on this corporate plan.
Image source: Getty Images.
By the numbers
| Results* | Q1 2017 | Q4 2016 | Q1 2016 |
|---|---|---|---|
| Revenue | $16,393 | $17,284 | $12,830 |
| EBITDA | $896 | $1,118 | $746 |
| Net income | $30 | $227 | $1 |
| Earnings per share | $0.06 | $0.43 | -- |
*IN MILLIONS, EXCEPT PER-SHARE DATA. DATA SOURCE: MARATHON PETROLEUM EARNINGS.
Despite what the numbers here may suggest, this wasn't a bad quarter for Marathon. This past quarter, the company undertook an incredibly large amount of turnaround and maintenance work at its refineries. Total refinery utilization rate was just 83%. For most refiners, a utilization rate that low will almost inevitably mean a significant loss.
Based on the current refining market, it would seem that this was an opportune time to shut down and do turnaround work. Petroleum product inventories are high in the U.S. today, so refining margins are quite weak. So shutting down this much refining capacity has the double benefit of preparing its facilities to start producing summer-blend gasoline and helping to lower inventory levels.
Contributions from the company's other business segments -- its Speedway retail arm and its midstream -- helped to offset the effect of those refining losses and higher maintenance costs for the quarter.
DATA SOURCE: MARATHON PETROLEUM EARNINGS RELEASE. CHART BY AUTHOR.
Compared to the prior quarter's release and all of the strategic changes management was planning, this quarter was downright quiet. One big change, though, was that Marathon completed the first of several asset dropdowns in 2017 to its midstream master limited partnership MPLX (MPLX 0.04%). This dropdown was a $2 billion transaction that sent product terminals, storage capacity, pipelines, a crude oil truck unloading facility, and eight natural gas storage caverns to the subsidiary. MPLX funded the deal by issuing $504 million worth of common unit shares to the parent organization and $1.51 billion in cash.
Marathon's management estimates that it will net $9 billion to $11 billion in gains from asset dropdowns to MPLX in the year, either in the form of cash or more common units. On top of that, Marathon will exchange its general partner and incentive distribution rights for a greater common unit stake in the company. This should net another $9 billion to $12 billion to the parent company in shares from MPLX.
The reason for the general partner/IDR exchange for common units is that it will lower the cost of capital for MPLX. At the same time, it will give Marathon a sizable cash injection now that could be deployed in a myriad of ways. That seems to be what the company wants to do after activist investor Elliot Management started causing a ruckus by demanding some strategic changes.
According to management, this isn't the only big move we will see this year. By the middle of the year, it will release its results of a strategic plan for its Speedway business. Elliot is advocating for a spinoff, but no definitive plan has been released.
From the mouth of management
According to CEO Gary Hemminger:
We look forward to the completion of the dropdowns and the exchange of our general partner economic interests for newly issued MPLX common units. These actions are designed to unlock the value inherent in our midstream platform and to provide the ongoing return of capital to shareholders in a manner consistent with maintaining an investment-grade credit profile.
What a Fool believes
I think it's too soon to call whether this plan to move all these assets to MPLX so quickly is a good idea or not. MLPs bringing on large debt loads rapidly doesn't have a great history. Perhaps it will significantly juice returns for Marathon in the short term and result in rapid cash flow growth for MPLX, but it could also limit its options down the road. The same could apply for Speedway, depending on what this strategic review churns out.
Will all this change coming down the pipe, investors are probably best off waiting to see what this company looks like post-strategic review. There is simply too much uncertainty concerning what an investor is buying today to lock in capital over the long term.
