Please ensure Javascript is enabled for purposes of website accessibility

This Oil Giant's Earnings Miss Could Be a Buying Opportunity

By Tyler Crowe – Nov 4, 2018 at 2:04PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Even though Marathon Petroleum slightly missed earnings this past quarter, it's still a great business poised to succeed once it completes its major acquisition.

For the past couple of quarters, Marathon Petroleum (MPC -4.72%) has been posting incredible results as it benefits from a North American oil and gas market working in refiners' favor. While the company still benefited immensely from these trends in the most recent quarter, it wasn't quite as good as in previous quarters, and the company missed lofty analyst expectations.

For investors wanting to look beyond one quarter at a time, the real story worth following is the closing of the deal to acquire Andeavor in October. While the deal didn't make it into this quarter's numbers, you can bet it will have a large impact from here on out. So let's take a brief look at the company's most recent report and see what else we can expect. 

Marathon Petroleum Garryville refinery.

Image source: Marathon Petroleum.

By the numbers

Metric Q3 2018 Q2 2018 Q3 2017
Revenue $22.78 billion $22.44 billion $19.05 billion
EBITDA $2.04 billion $2.31 billion $2.16 billion
Net income $737 million $1.05 billion $903 million
Diluted EPS $1.62 $2.27 $1.67


Refining is a business that rides the market's ups and downs. The prior quarter was about as good as it can get for a refiner with incredibly fat refining margins. By all accounts, this past quarter was pretty good as well, but it didn't quite live up to prior quarters. Marathon also noted that its turnaround and maintenance expenses for the quarter were about $0.50 per barrel higher than this time last year. It sounds like a small amount, but the company refines more than 2 million barrels per day, so over a whole quarter those per-barrel costs add up quickly.

Another thing to keep in mind is that the company completed a major dropdown transaction with subsidiary master limited partnership MPLX LP (MPLX -5.75%) in February. The deal moved about $230 million in operating income from its refining business to its midstream segment. 

MPC operating income by business segment for Q3 2017, Q2 2018, and Q3 2018. Shows decline for refining and speedway partially offset by gains in midstream.

Data source: Marathon Petroleum. Chart by author.

Despite the slight earnings decline, the company still generated $1.2 billion in cash, which allowed it to repurchase $400 million in shares on top of its dividend payments. One thing to keep in mind when looking at these results is that they don't include any contribution from the recent acquisition of Andeavor. The deal closed on Oct. 1, so we'll get a better idea of what the combined company looks like in the fourth quarter. 

What management had to say

For the past few quarters, CEO Gary Heminger has been rather quiet about the Andeavor acquisition, since it was still awaiting regulatory and shareholder approval. Now that the transaction is complete, he was able to explain some of the benefits we can expect from the combined businesses.  

On Oct. 1, we closed on our transaction with Andeavor. Both sets of shareholders demonstrated overwhelming support, as we are now the leading integrated downstream energy company in the U.S.

As we look forward, we see extraordinary potential across our nationwide platform, including over $1 billion of annual run rate synergies within the first three years. Over the first few months, our teams will be diligently working on integrating the business deploying the best practices and aligning the cultures. In just the first month, I'm especially impressed with the enthusiasm and energy of our commercial teams. We're already harvesting synergies and plan to report on our progress regularly starting in 2019.

You can read a full transcript of Marathon Petroleum's conference call.

MPC Chart

MPC data by YCharts

We'll know a lot more in one quarter

Considering all the touted benefits of this integration, management seems to think the Marathon/Andeavor combined business has hit the ground running and will turn out great results in the fourth quarter. From an investor's perspective, though, we'll have to wait and see. Integrating businesses this large will involve a lot of one-time costs that are likely to hit the bottom line this upcoming quarter.

Overall, things are looking up for Marathon Petroleum. The refining market is still working in its favor, and it's still getting respectable results from its Speedway and midstream segments. If it can integrate Andeavor rather painlessly, then the company's most recent stock decline seems unwarranted. While I'd like to see what the results of the combined company look like on paper, there is reason to believe Marathon's stock is a good buy today.

Tyler Crowe owns shares of MPLX LP. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Marathon Petroleum Corporation Stock Quote
Marathon Petroleum Corporation
$91.45 (-4.72%) $-4.53
MPLX LP Stock Quote
$29.33 (-5.75%) $-1.79

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 09/26/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.