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Creating a Stable Earnings Portfolio: An Analysis of Marathon Petroleum’s Segments

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Speedway

Marathon Petroleum (MPC) has 2,770 Speedway outlets and 5,600 “Marathon” brand outlets spread across the US. MPC’s Refining segment, through its retail outlets, derives revenue from the sale of refined products and general merchandise to customers.

More demand for refined products usually leads to higher prices and results in better marketing margins. Thus, margins on the sale of fuels are not as stable as margins on the sale of merchandise. In 4Q15, operating income from Speedway fell by 51% over 4Q14 to $135 million. The fall was on account of an inventory valuation adjustment charge of $25 million in addition to a lower light product gross margin, which was partially offset by a rise in merchandise margin.

Creating a Stable Earnings Portfolio: An Analysis of Marathon Petroleum's Segments

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Midstream

MPC’s Midstream segment is anticipating growth from MPLX, its master limited partnership, created by MPC to own, operate, and develop the midstream business of the company. In 4Q15, MPC’s midstream segment’s operating income rose by 22% over 4Q14 to $71 million. This was due to the MarkWest Energy Partners (MWE) merger with MPLX, which came into effect in December 2015. But this higher income from the segment was partially offset by merger transaction costs.

MPC’s peers Phillips 66 (PSX), HollyFrontier (HFC), and Tesoro (TSO) also have strong midstream assets, and the PowerShares Dynamic Large Cap Value ETF (PWV) has ~11% exposure to energy stocks, including MPC, VLO, and PSX.

Expectations

Going forward, MPC expects the midstream segment to contribute a larger portion of EBITDA (earnings before interest, taxes, depreciation, and amortization) in 2020. MPLX also plans to capitalize on MWE’s existing asset base and ongoing projects worth $7.5 billion, which the company expects to execute by 2020.

Meanwhile, MWE has gotten into the business of gathering, processing, and fractionating natural gas. The synergies across MPC, MPLX and MWE, representing $6 billion–$9 billion in capital investments by 2020, are thus expected to provide a more optimal use of the company’s fully integrated downstream network.

MPC’s Midstream and Marketing segments both have growth in the offing, and this will likely provide downside protection to the company’s overall earnings—if lower refining margins continue.

Now let’s take a look at Marathon’s leverage and the role of the MarkWest merger.

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