Ever since Marathon Petroleum's (NYSE:MPC) IPO back in 2012, the company has gone from being a mid-sized independent oil refiner with some retail holdings to becoming the nation's largest refiner with an extensive network of retail stations and two large logistics subsidiaries. This past quarter was the culmination of that work, as the company completed the acquisition of Andeavor -- formerly Tesoro, Western Refining, and Northern Tier Refining. Based on the most recent results, investors should be pleased that management decided to do this deal.
Let's take a look at Marathon's most recent earnings results and what investors can expect from the refiner in 2019 and beyond.
By the numbers
|Metric||Q4 2018||Q3 2018||Q4 2017|
|Revenue||$32.54 billion||$22.78 billion||$21.23 billion|
|Operating income||$2.01 billion||$1.40 billion||$1.17 billion|
|Net income||$1.19 billion||$737 million||$2.01 billion|
This was the first quarter in which we got to see Marathon Petroleum's results combined with the Andeavor acquisition since the deal was announced back in April, and they were pretty much what investors were hoping for. Even though its earnings were down significantly from this time last year, that's because the company netted a significant one-time gain related to the change in corporate tax rates. And management said that this quarter's result also included $745 million in one-time charges related to fair value accounting standards for oil inventories, early debt extinguishment costs at is subsidiary master limited partnership MPLX LP (NYSE:MPLX), and some merger-related integration costs.
The thing that is truly impressive was the company's jump in operating income. Some of its business segments got shuffled around as part of the merger -- some parts of refining and marketing got moved to retail -- but the takeaway here is that the company is finding success across the board. The company even went out of its way to note that it had already achieved about $160 million in synergies related to the merger, especially in making common crude oil purchases for the combined entity. Management now estimates that it will be able to wring out about $1.4 billion in operational synergies by 2021, up from the initial estimate of $1 billion at the time of the merger announcement.
Management also announced it was increasing its dividend by 15% to $0.53 per share ($2.12 annualized). Based on its capital spending for 2019, it estimates that it will be able to do about $2.5 billion in share repurchases for the year.
What management had to say
Even though the merger is complete, there are still a lot of lingering questions. The biggest question right now is what the company plans to do with its two MLPs, MPLX and Andeavor Logistics (NYSE:ANDX). In all likelihood, Marathon will do a deal to combine them. For now, though, CEO Gary Heminger is keeping rather quiet about what will happen.
With limited turnarounds in 2019, our system is poised to execute in any market environment. These trends coupled with our expected synergy capture and potentially changing dynamics of the low-sulfur fuel market all set the stage to create meaningful benefits across the MPC's integrated and diversified business model. Lastly, we continue to make progress on evaluating all options for the two MLPs. Each of the parties involved have retained advisors and our comments will be limited as we walk through a thorough evaluation process. We will provide an update to investors at the appropriate time.
It should be noted, though, that Marathon said it has no plans to drop down one of Andeavor Logistics largest growth projects -- the Grey Oak pipeline and export terminal. The project was going to be funded by Andeavor and then dropped down to Andeavor Logistics afterward, but this already shows that management is looking at a different path for Andeavor Logistics.
It's a variable refining market, but Marathon is still creating value
Whenever a company does an acquisition or merger as large as Marathon's, there are always lingering questions that the acquiring company can create value from the deal. While it's still very early in the process, it's encouraging that management is already increasing its estimates for operational synergies.
The refining market can swing wildly at any given moment, so it's impossible to say with any confidence what Marathon Petroleum's stock will do this year. The progress it has made on the integration, however, suggests that it will continue to create value through its generous dividend and share repurchases. With its stock trading at a price-to-earnings ratio of 11 and a dividend yield of 3.3%, Marathon's stock looks attractive today.