What: Shares of Marathon Petroleum (NYSE:MPC) declined 11.9% in December in large part to Congress' long-anticipated decision to lift the ban on exporting crude oil. Marathon wasn't the only one to suffer this fate; the entire refining industry declined close to 4.5% on the news.
So what: One of the reasons that this recent decision hit shares of Marathon so hard was because it has been one of the largest beneficiaries of the previous export restrictions. By not allowing domestic crude to be exported, West Texas Intermediate -- the domestic benchmark price for crude -- has been trading at a discount to international crudes. Sometimes that difference was as much as $10 a barrel in recent years. This meant that domestic refiners were enjoying lower feedstock costs and higher margins.
Marathon Petroleum had an even larger advantage than many others because it is one of the nation's largest exporters of refined petroleum products such as gasoline and diesel. By exporting these products from its large refineries in the Gulf of Mexico, it could get premium pricing on products while paying a discounted price on feedstocks. A win-win.
Now that Congress has lifted the ban on crude exports, though, the thinking is that West Texas Intermediate crude will trade at parity or even higher -- it is a better-quality crude than many others -- than international benchmark prices. This, in turn, will cause refining margins to shrink across the industry.
Now what: So Marathon may not be as profitable as it has been in recent quarters as the spread between domestic and international crudes has narrowed, but that doesn't necessarily mean Marathon is headed for a slump. These past few quarters have seen some extremely high refining margins and crude is still selling at multiyear lows. With shares trading at a price-to-earnings ratio of 8.5 times and management looking to buy back shares at a steady rate while the times are good, it may be worth putting Marathon Petroleum on your radar.
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