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As most of you understand, the merger of Marathon Petroleum (NYSE:MPC) and Andeavor in 2018 created the biggest US refiner with amenities on the Gulf Coast, the Mid-Continent, and the West Coast. Such a broad and geographically numerous footprint allows MPC to optimize feedstock and export refined merchandise to the worldwide market. Given the comparatively low price of home pure fuel as in comparison with a lot of the remainder of the world (and particularly Europe), these exports are at a aggressive benefit. Meantime, sanctions on Russian oil exports are pushing up the value of diesel in lots of components of the world – one other tailwind for MPC. Nevertheless, regardless of the comparatively bullish macro-environment, it might seem that MPC will proceed to significantly over-emphasize share buybacks, as in comparison with dividends immediately into the pockets of its strange shareholders.
Funding Thesis
The macro funding thesis for the refining firms is pretty simple. After an enormous drop in refined merchandise because of the pandemic, the “opening-up” of the worldwide financial system because of widespread vaccination, Covid-19 remedies, and the overall impression that the world is simply going to should be taught to stay with the virus, has led to a robust bounce-back in demand. Airline visitors has introduced again jet-fuel demand, and there’s sturdy demand for diesel within the trucking sector. Meantime, the summer season driving season is prone to be enormous as pent-up residents have a robust need to get out and luxuriate in life.
Certainly, the EIA weekly petroleum report for the week ending April fifteenth confirmed home refinery utilization was 91% – up from the low 70s in the course of the pandemic. Gasoline inventories decreased by 0.8 million barrels final week and at present sit ~3% beneath the 5-year common for this time of 12 months. Distillate gas inventories have been down by 2.7 million barrels final week and are ~20% beneath the 5-year common for this time of 12 months whereas jet gas provided was up 15.7% over the identical 4-week interval of final 12 months and virtually all the most important airways just lately reported sturdy demand going ahead.
Meantime, comparatively low feedstock prices within the US proceed to favor US refiners. That’s particularly the case in terms of producing diesel, since a lot of the sanctioned Russian oil is heavy crude that has a better distillate cut up.
Earnings
For MPC particularly, This autumn refinery utilization was 94%, and the quarter was led by its Gulf Coast refineries – its largest regional capability: USGC margin was up $648 million (+40%) as in comparison with Q3 (see the This autumn EPS report and slide 11 of the This autumn presentation). Different highlights embody:
- This autumn web revenue of $774 million ($1.27 per diluted share).
- Returned ~$3 billion of capital by means of share buybacks since Oct 31; accomplished ~55% of $10 billion repurchase program by means of Jan 31; introduced a brand new, incremental $5 billion repurchase authorization.
- Introduced 2022 MPC standalone capital spending outlook of $1.7 billion; ~50% of development capital for Martinez refinery conversion.
- The Martinez renewable fuels venture is predicted to have a complete price of $1.2 billion; ~$300 million has been spent thus far, $700 million is projected for 2022, and $200 million for 2023.
Given the surge in pure fuel costs in Europe as in comparison with the US, MPC can leverage its Gulf Coast manufacturing for the worldwide export market. Certainly, on the This autumn convention name, Brian Partee, Senior VP of MPC’s International Clear Merchandise, mentioned:
After which our export growth as nicely. We have been actually targeted on our growth of our export guide. And particular to our export guide, we’re actually targeted on extra delivered cargoes. So we’re transferring additional down the worth chain, increased margin seize. So we have had quite a lot of success in rising that line of our enterprise.
Meantime, the Speedway deal is now within the rearview mirror, and the proceeds have – along with the large inventory buyback plan – enabled MPC to scale back its web debt to capital ratio to 21%. That mentioned, Speedway was a steady supply of money circulation and leaves MPC way more depending on refining & midstream.
Contemplating the big midstream enterprise MPC has by way of its MPLX (MPLX) MLP, which pays quarterly distributions as much as MPC, the comparatively sturdy worth of wholesale propane is one other good tailwind:
Shareholder Returns
As talked about earlier, MPC is utilizing the overwhelming majority of the $21 billion in proceeds from the sale of Speedway for inventory buybacks. As could be seen beneath, MPC is actually “Buyback Heavy, Dividend Mild”:
MPC
Notice that in This autumn alone, the $2.742 billion MPC spent on share buybacks was a whopping 7.7x the $354 million the corporate allotted to the dividend. In my guide, the strange shareholder is getting short-changed right here. That’s particularly the case, for my part, contemplating that the corporate is arguably shopping for again shares in the course of the up-cycle given the 5-year share worth chart:
Consequently, the present $2.32/share dividend yields solely 2.6%. That compares to see Phillips 66 (PSX), which pays a $3.68/share annual dividend and yields 4.3%. That mentioned, notice that shares of MPC have left PSX within the mud over the previous 5-years:
Nevertheless, I believe that’s extra of a cause to be bullish on PSX nowadays than it’s to be on MPC.
Abstract & Conclusion
MPC’s inventory has actually benefited from the reopening theme, decrease relative feedstock prices, and big share buybacks: the inventory has gained 66% over the previous 12 months. Nevertheless, the strange shareholder is incomes a low dividend whereas the corporate significantly over-emphasizes inventory buybacks. At this level within the cycle, PSX appears to be like like the higher worth. Not solely is PSX’s dividend yield considerably increased (4.3% versus 2.6%), however PSX’s ahead P/E of 10.6x compares very favorably to that of MPC (12.4x). Meantime, PSX can be considerably extra diversified than is a Speedway-less MPC: it has a thriving advertising enterprise and, with CPChem (its 50/50 JV with Chevron (CVX)), a world-class chemical substances section as nicely. Certainly, PSX is now a lot much less depending on refining than is MPC, with ~50% of normalized EBITDA now coming from its midstream & chemical substances segments. That being the case, one would assume PSX deserves the premium that the market is awarding to MPC. That being the case, I fee MPC a HOLD.
