Last week I added Marathon Petroleum Corp. (NYSE: MPC – $69.83) to the aggressive portfolio, replacing Harris Corp., which is in the process of combining with L3 Technologies.
Marathon – headquartered in Findlay, Ohio – operates through three segments: Refining & Marketing (74% of revenue), Speedway (22%) and Midstream (4%). The company was spun off from Marathon Oil in mid-2011 to separate the once combined company’s drilling operations. It is the nation’s largest oil refiner with a capacity of over 3 million barrels per day at sixteen sites, following its recent $23 billion acquisition of Andeavor (formerly Tesoro Petroleum). Refined products include gasoline, distillates, propane, feed stocks and special products, heavy fuel oil and asphalt. It also sells gasoline to over 5,600 independent dealers under the Marathon name and operates 2,740 Speedway gasoline and convenience store outlets in 22 states; increased by its 2014 acquisition of Hess locations along the east coast. Speedway also owns a 29% joint-venture interest in Pilot Flying J Southeast with 124 travel center locations. The company recently received FTC approval to acquire 75 Express Mart convenience store locations in New York to be re-branded to Speedway. The small Midstream segment owns/leases and operates nearly 4,000 miles of crude oil and common carrier products pipelines.
Strong demand for fuel products in the U.S. and Latin America, plus a sharp rise in U.S. shale-oil production, have helped boost volumes at U.S. refineries. Over the last year, Marathon grew sales 17% and per-share profits 68% delivering a total return to investors of about 15%. Marathon should also be well positioned to sell low-sulfur fuel to shippers attempting to comply with clean-fuel regulations that take effect in 2020. The profit outlook remains upbeat. Marathon earned $3.97 per share in the first three periods of the year (despite an earnings miss in the third quarter on higher costs), which was well above last year’s $2.86 showing. Full-year 2018 total revenue should be about $85 billion compared to $74.7 billion in 2017. And earnings should settle at $5.23 per share vs. $3.83 last year, as the climate for fuel refiners and retailers are likely to remain supportive. Wall Street analysts seem comfortable with MPC earning $7.66 next year, providing a forward price earnings ratio of 9, well below the industry median.
Elsewhere, the company is in good financial shape. At the end of June, Marathon had $5 billion in cash on its balance sheet and roughly $3.5 billion available under various credit facilities. However, this picture will shift as cash and debt issuances from the Andeavor purchase has not been factored in. Management has authorized $5 billion in share buybacks on top of an existing $3 billion authorization slated for completion this year. This in addition to the pledge to keep boosting the dividend, which currently stands at $1.84 per share yielding 2.6%. Therefore, I am looking for well-above average total returns for the shares at the current entry point. In all, MPC should be a nice addition for aggressive investors looking for a position in the energy sector.
In the interest of full disclosure, I maintain a position in Marathon Petroleum.