There have been a lot of questions surrounding Marathon Petroleum (MPC 2.09%) over the past year. The company has been in the midst of a major restructuring to appease some activist investors, which can always make long-term shareholders a little nervous. After announcing the conclusion of its strategic review, we now have a better idea of what we're buying as investors. If the company's third-quarter earnings are any indication, the value proposition looks compelling.
Here's a look at Marathon's most recent earnings results as well as the conclusions of the company's strategic review.
By the numbers
|Metric||Q3 2017||Q2 2017||Q3 2016|
|Revenue||$19.38 billion||$18.35 billion||$16.46 billion|
|EBITDA||$2.16 billion||$1.64 billion||$1.26 billion|
|Net income||$903 million||$515 million||$145 million|
|Diluted earnings per share||$1.77||$1.00||$0.27|
What a difference a few dollars in refining margins can do for this company. As inventories of refined products dwindled down a bit in the U.S. thanks to exports and the summer driving season, Marathon's refining margin was $14.14 per barrel for the most recent quarter compared to $10.67 per barrel this time last year. This goes to show how much fixed costs play an essential role in the refining business. Once those costs are covered, earnings tend to grow rather quickly afterwards. Of course, Marathon did its part by running its facilities at a high rate -- refinery utilization was 102% of nameplate capacity -- and kept its per barrel operating costs low.
On top of the fantastic refining results, the company's Speedway and midstream segments turned in decent performances as well. The midstream segment, which is almost entirely simply its equity interest in its subsidiary partnership MPLX (MPLX 1.96%), grew in large part from the two asset dropdowns Marathon and MPLX have agreed to in 2017. These dropdowns are all part of Marathon's plan to accelerate its drop down of midstream assets to MPLX in 2017 as well as exchange its general partnership interest in the subsidiary to lower MPLX's cost of capital.
Marathon says that it has one more major dropdown deal left to execute in 2017. Those assets generate about $1 billion in annual EBITDA, and MPLX's board is currently determining a final offer price for those assets. The two most recent dropdowns were valued between 7.5 and 8 times EBITDA to give you an idea of what the final price tag might look like. Marathon has said that it plans to use most of the proceeds of these dropdowns for more share repurchases. Back in the second quarter, the board authorized an additional $3 billion in share repurchases, and management expects to spend at least $550 million in the fourth quarter to buy back stock.
All of this restructuring was at the behest of Elliott Management, which demanded a strategic review about this time last year. As part of that proposal, Elliott suggested that Marathon spin off its Speedway business unit as well. After a lengthy review of the business with an independent group of board members, the company determined that it is still best if Speedway remains part of the business.
What management had to say
After several consecutive quarters of dealing with a challenging refining market, CEO Gary Heminger was finally able to give a more positive outlook for the refining market in general.
We are encouraged by improving market fundamentals and prospects for a more balanced supply-and-demand environment going forward. With our fully integrated and flexible system, strategically located assets that provide excellent optionality, and a focus on operational excellence, we believe we have a sustainable long-term competitive advantage that drives real value for shareholders over the long term. We also believe the execution of the final steps in our strategic actions will be important sources of value and cash flow, further supporting MPC's long-term value proposition for investors.
What a Fool believes
Now that we know Speedway will remain a part of Marathon Petroleum for at least the foreseeable future, it is much easier to get a feel for how this company can perform. Based on this most recent result, there is a lot to like. The company's non-refining business segments provide a stable cash business that will help take the sting out of challenging times in the refining market. Also, the company's propensity to buy back shares in huge chunks means that per-share earnings should continue to grow even if overall profits don't. At the company's current valuation, Marathon Petroleum looks like an attractive stock.