The moment that Marathon Petroleum (NYSE:MPC) announced it was acquiring fellow oil refiner Andeavor (NYSE:ANDV) in a massive $23 billion deal, you knew that the market would focus its attention on the deal instead of the company's earnings. That's probably a good thing, considering that Marathon's first quarter results weren't quite as good as we've seen in prior quarters.
Let's take a quick look at Marathon's most recent results, and take the pulse of this Andeavor acquisition, which will likely be the dominant story for the refining industry for a while.
By the numbers
|Metric||Q1 2018||Q4 2017||Q1 2018|
|Revenue||$18.98 billion||$21.24 billion||$16.39 billion|
|EBITDA||$1.04 billion||$1.75 billion||$896 million|
|Net income||$37 million||$2.02 billion||$30 million|
Marathon's last two quarters were absolutely fantastic -- so good, in fact, that they'd be extremely hard for the company to replicate. Refineries need to be shut down from time to time for maintenance, and this quarter we had some of that, as the utilization rate for Marathon's facilities dropped from 101% in the prior quarter to 93% this past quarter. It is by no means a bad number, but high fixed costs associated with refineries mean that every percentage point counts.
Utilization wasn't the only thing that impacted results, though. Another was that Marathon did a significant dropdown transaction with its subsidiary partnership MPLX LP (NYSE:MPLX) that ended up transferring some operating earnings from one part of the business to another. According to management, the dropdown of Marathon's refining logistics assets and fuels distribution services led to a $181 million transfer from its refining and marketing segment and into its midstream segment -- which is Marathon's equity stake in MPLX.
Even with the weaker earnings and cash flow this past quarter, the company still was able to buy back $1.3 billion in shares and pay its dividend with $4.6 billion in cash left on the balance sheet. Debt did increase significantly, but most of it is MPLX's debt and not necessarily a burden on Marathon's own business.
All eyes on the Andeavor merger
Of course, the importance of Marathon's results pales in comparison to the recent announcement that it will spend $23 billion to buy refining peer Andeavor. The combination of the two businesses would create the nation's largest refiner, with the capacity to produce more than 3 million barrels per day, as well as more than 6,000 retail sites across the U.S.
According to management, there are a lot of advantages to this deal, including reducing costs (saving $1 billion in synergies) and better leveraging certain assets -- such as combining Andeavor's gathering assets in the Permian Basin with Marathon's extensive refining capacity on the Gulf of Mexico.
One curious aspect of the deal is that management intends to keep the two subsidiary partnerships -- MPLX and Andeavor Logistics LP (NYSE:ANDX) -- as separate entities instead of merging them into a single business. When this type of deal has happened before, the parent has merged the midstream partnerships. Neither of these businesses have much geographic overlap, though, so perhaps there aren't a lot of efficiencies to be gained from combining the two.
What management had to say
Here's CEO Gary Heminger's press release statement about Marathon's outlook for the refining market and the decision to acquire Andeavor:
Looking forward, we are very optimistic about the opportunities for our business. The solid demand backdrop, favorable crude differentials, and changing dynamics of the low-sulfur-fuel market all set the stage to create meaningful benefits across MPC's integrated and diversified business model.
Additionally, this morning we were excited to announce that MPC entered into a definitive merger agreement to acquire Andeavor. This transaction combines two strong, complementary companies to create a leading U.S. refining, marketing, and midstream company, building a platform that is well-positioned for long-term growth and shareholder value creation.
Buy on the merger?
The refining industry has been consolidating quite a bit in recent years as companies vie for economies of scale, and this Andeavor deal is just the most recent iteration of that process.
On paper, the deal does make some compelling points about reducing costs, and the minimal geographic overlap should diminish any concerns about the deal meeting regulatory hurdles. At the same time, though, shares of Andeavor aren't exactly cheap right now. And Andeavor is still trying to digest its own acquisition of Western Refining, which was digesting Northern Tier Refining (it's truly been a nesting doll of acquisitions lately). That means Marathon is buying a lot of goodwill at a premium, and will take on quite a bit of debt to get it done.
There is also the peculiar nature of having two subsidiary logistics partnerships that will essentially serve the same function. I may be speculating, but I think the merged company will eventually combine the two MLPs down the road, to simplify capital allocation decisions and streamline the business.
The important phrase here is "if the deal gets completed." There's no guarantee, but there aren't a whole lot of reasons regulators could block it. Until it does happen, there isn't much point in fussing over earnings numbers, because they will change drastically.