Marathon Petroleum Stock: Buyback Heavy, Dividend Light (NYSE:MPC)

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 various footprint allows MPC to optimize feedstock and export refined merchandise to the worldwide market. Given the comparatively low price of home pure gasoline 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 elements of the world – one other tailwind for MPC. Nonetheless, regardless of the comparatively bullish macro-environment, it could seem that MPC will proceed to vastly over-emphasize share buybacks, as in comparison with dividends straight into the pockets of its unusual shareholders.

Funding Thesis

The macro funding thesis for the refining corporations is pretty easy. After a giant drop in refined merchandise because of the pandemic, the “opening-up” of the worldwide financial system on account of widespread vaccination, Covid-19 therapies, and the final impression that the world is simply going to should be taught to dwell with the virus, has led to a robust bounce-back in demand. Airline site visitors has introduced again jet-fuel demand, and there may be sturdy demand for diesel within the trucking sector. Meantime, the summer season driving season is prone to be large 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 equipped was up 15.7% over the identical 4-week interval of final 12 months and virtually all the most important airways not too long ago reported sturdy demand going ahead.

Meantime, comparatively low feedstock prices within the US proceed to favor US refiners. That’s particularly the case with regards to producing diesel, since a lot of the sanctioned Russian oil is heavy crude that has the next distillate cut up.

Earnings

For MPC particularly, This fall 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 fall EPS report and slide 11 of the This fall presentation). Different highlights embrace:

• This fall internet earnings of $774 million ($1.27 per diluted share).
• Returned ~$3 billion of capital by way of share buybacks since Oct 31; accomplished ~55% of $10 billion repurchase program by way 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 so far, $700 million is projected for 2022, and $200 million for 2023.

Given the surge in pure gasoline 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 fall convention name, Brian Partee, Senior VP of MPC’s International Clear Merchandise, mentioned:

After which our export growth as properly. We have been actually centered on our growth of our export ebook. And particular to our export ebook, we’re actually centered on extra delivered cargoes. So we’re shifting additional down the worth chain, greater margin seize. So we have had numerous 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 massive inventory buyback plan – enabled MPC to scale back its internet debt to capital ratio to 21%. That mentioned, Speedway was a secure supply of money move and leaves MPC rather more depending on refining & midstream.

Contemplating the big midstream enterprise MPC has through its MPLX (MPLX) MLP, which pays quarterly distributions as much as MPC, the comparatively sturdy value 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 will be seen beneath, MPC is actually “Buyback Heavy, Dividend Gentle”:

Notice that in This fall 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 ebook, the unusual shareholder is getting short-changed right here. That’s particularly the case, in my view, contemplating that the corporate is arguably shopping for again shares in the course of the up-cycle given the 5-year share value chart:

In consequence, the present $2.32/share dividend yields solely 2.6%. That compares to look Phillips 66 (PSX), which pays a $3.68/share annual dividend and yields 4.3%. That mentioned, be aware that shares of MPC have left PSX within the mud over the previous 5-years:

Nonetheless, I feel that’s extra of a purpose 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 large share buybacks: the inventory has gained 66% over the previous 12 months. Nonetheless, the unusual shareholder is incomes a low dividend whereas the corporate vastly 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 greater (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 also be considerably extra diversified than is a Speedway-less MPC: it has a thriving advertising and marketing enterprise and, with CPChem (its 50/50 JV with Chevron (CVX)), a world-class chemical compounds section as properly. 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 compounds segments. That being the case, one would assume PSX deserves the premium that the market is awarding to MPC. That being the case, I price MPC a HOLD.