Marathon Petroleum's (MPC 0.34%) strategy to increase refined product exports to the demanding European and Latin American markets should prove to be a master stroke. Savvy oil and gas investors will realize that U.S. refiners are slowly shifting their focus to international markets -- a move guaranteed to generate solid returns.
Marathon Petroleum's Garyville refinery. Source: company website
Not the best of times ...
For the most part of this year, these refiners haven't been in the good graces of Mr. Market. The narrower average spread between the prices of the internationally traded Brent crude oil and the domestically sourced West Texas Intermediate caused refining margins to plunge. Not surprisingly, that had a telling effect on the bottom lines of U.S. refiners.
... but the smart ones prepare quietly
Instead of dwelling on external market conditions to define their future courses of action, refiners like Marathon, Phillips 66 (PSX +0.64%), and Valero Energy (VLO +0.61%) are proactively making some smart moves. And those include increasing exports to markets where finished petroleum products are priced significantly higher than in the United States.
Today we'll take a look at how Marathon Petroleum is creating value by positioning itself as a major gasoline and diesel exporter.
The marathon efforts are paying off
The Findlay, Ohio-based Marathon has two of its biggest refineries -- the Garyville and the Galveston Bay -- optimized to handle exports . Since the expansion of the Garyville refinery, completed in 2009, exports of light oil products such as diesel and gasoline have grown significantly. Additionally, the February acquisition of the 451,000 barrel-per-day Galveston Bay refinery in Texas -- right off the entrance to the Houston Ship Channel -- came in at just the right time.
To put the growth into perspective, Marathon exported 245,000 barrels per day, or bpd, of refined products in the third quarter -- up from 50,000 bpd from 2010 . That's a staggering 390% growth in less than three years! But that's not the end. Marathon is aiming for potentially export 400,000 bpd by 2018.
Source: Marathon Petroleum Investor Presentation
Why Marathon has the capacity to deliver
One of the biggest advantages that American refineries have over their counterparts in other regions is their fantastic refinery-utilization rates. For instance, Marathon's refineries functioned at a full 100% of its nameplate-refining capacity in 2012 . In the same period, average European and Latin American refinery-utilization rates were only 74% and 73%, respectively . Asia and Africa clocked no better, at 74% and 69%, respectively, according to Marathon. This has resulted in significantly higher demand for gasoline and diesel in Europe, Asia, and Latin America. Not surprisingly, European and Asian countries are among the highest payers at the pump, according to Bloomberg Gas Price Ranking.
U.S. refiners are realizing that shoring up exports is no longer an option but a definite strategy in the otherwise volatile refining and marketing segment. The following chart provides a perspective on the expected growth in light product exports till 2025:
Source: Marathon Petroleum; Energy Information Administration
Another major advantage for Marathon is the relatively high complexity level of its refineries compared to industry peers. As a result, Marathon can easily cater to the growing demand for distillate products, such as diesel -- both in the United States as well as internationally. With an average Nelson Complexity Index of 11.6 , Marathon ranks higher than independent refiners like Phillips 66 and Valero . The greater the complexity, the more varied the product slate. The following chart gives a perspective where Marathon stands against its peers :
|
Refiner |
Nelson Complexity Index |
|---|---|
|
Chevron |
13.4 |
|
ExxonMobil |
13.0 |
|
HollyFrontier |
12.1 |
|
Marathon Petroleum |
11.6 |
|
Phillips 66 |
11.4 |
|
Valero Energy |
11.1 |
|
Tesoro |
9.5 |
Source: Marathon Petroleum Investor Presentation
Foolish thoughts
Marathon Petroleum is positioning itself as a major exporter of gasoline and diesel, which should significantly impact its top-line growth. The growing production of North American crude oil should act as a major catalyst as this is resulting in lower crude-oil prices, and hence, cheaper feedstock for the refiner. With expected lower costs of production, investors should keep an eye on increasing margins as exports increase.
