Value Line is regarded as the best independent research available. More than just recommendations, Value Line provides the rationale behind its picks for greater understanding.
- Don D., California
Coverage Initiation: Marathon Petroleum Corp. (MPC)
Marathon Petroleum Corporation (MPC) was spun off from Marathon Oil (MRO) on July 1, 2011. Shareholders of Marathon Oil received one share of MPC stock for every two shares of MRO stock they owned. The spinoff separated out Marathon Oil’s refining assets, including six refineries, marketing and transportation assets (including towboats and barges, “light products” and asphalt terminals, trucks, and pipelines), and the Speedway chain of gas and convenience stores, into a newly independent entity.
Marathon Petroleum traces it roots back to 1887, when The Ohio Oil Company was founded. Just two years later, John D. Rockefeller’s Standard Oil Trust purchased the company as Rockefeller began to consolidate the oil industry. The Ohio Oil Company again found itself independent in 1911, after President Theodore Roosevelt’s efforts to break the Standard Oil monopoly came to fruition. The company maintained The Ohio Oil Company name through numerous purchases and organizational shifts until 1962 when the company changed its name to Marathon Oil Company. Marathon Oil continued to expand over the next 20 years but was again purchased, this time by United States Steel Corporation, in 1982. Twenty years later, in 2002, USX Corporation (the company formerly known as United States Steel) separated its Marathon Oil business from its steel business, again making Marathon a publicly traded company. Then, less than ten years later, Marathon Petroleum Corp. was spun off from Marathon Oil in 2011.
With a history that goes back over 100 years, Marathon Petroleum clearly has an interesting past that the preceding paragraph can’t possibly capture. Its past is tightly entwined not only with its former parent but also with many important American corporations and historical events. That said, at the time of the separation from Marathon Oil, Marathon Petroleum was, in and of itself, a material company.
At the spin off, the refining and marketing operations consisted of six refineries capable of processing over one million barrels of oil a day and representing 7% of the total refining capacity in the United States. This business segment also sells gasoline to over 5,000 independently owned Marathon gas stations and is home to Marathon’s asphalt operations. In the first quarter of Marathon Petroleum’s operation as a stand-alone company, this group accounted for about 84% of revenues and 92% of income from operations. This business is clearly the driving force behind the company’s results.
The price of oil and demand for refined products, such as gasoline, are important determinants of Marathon’s results. Since Marathon Petroleum does not produce oil, it must purchase this feedstock on the open market, which is often subject to wide price swings. The timing between purchasing oil and selling the products created from the oil can also be an issue, as the price of oil and its distillates are frequently volatile. The refining business is also subject to heavy regulation with regard to the environment and safety, among others.
The remaining portions of the business, the transportation segment (revenues here accounted for less than 1% in the company’s first three month’s of operation and about 3% of income from operations) and the Speedway group (16% of the company’s revenues and approximately 4.5% of its income from operations) are much smaller and, thus, less influential on both the top and bottom lines. That said, these business are subject to similar volume and price issues as the core refining operations are.
Growth for Marathon Petroleum is likely to come from internal projects, such as expanding capacity at its refining operations or opening new Speedway gas stations, and strategic acquisitions. Access to proper financing, be it in the form of internally generated funds or debt and equity financing, is important for supporting such initiatives.
Marathon Petroleum begins its separate life with material and strategically located assets in the Midwest. Although operations are subject to the price vagaries of oil, the company has a solid position and ample prospects for the future. Subscribers interested in more information about Marathon Petroleum Corp., including Value Line’s earnings estimates for the next two years and projections for three to five years hence, should consult The Value Line Investment Survey for our ongoing quarterly coverage. Important late-breaking news will be covered in Supplementary reports.
At the time of this article's writing, the author did not have positions in any of the companies mentioned.