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Elliott’s Recommendation Caused Marathon to Spike: What’s Up?

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Elliott’s recommendation for Marathon Petroleum

Marathon Petroleum (MPC) is an American downstream company. It has received a recommendation in the form of an open letter with an accompanying presentation from Elliott Management, one of MPC’s largest shareholders.

Elliott owns about 4.0% of the company’s common stock. The letter recommends that MPC restructure its portfolio and organizational composition to increase value to its shareholders. Let’s take a look at what the open letter is all about.

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What’s in the letter?

Elliott Management believes that Marathon Petroleum is highly undervalued as a single entity. So in order to unlock value, Elliott has proposed that MPC restructure the company.

In the open letter, Quentin Koffey, Elliott Management’s portfolio manager, wrote, “We believe Marathon is severely undervalued and that there are readily available steps by which the Board can unlock $14 – $19 billion in value for shareholders (yielding a ~60 – 80+% increase to today’s stock price).”

Gary R. Heminger, MPC’s chair, president, and chief executive officer, replied, “We agree with Elliott Management that there is upside to our valuation, which we are addressing with the value-creating actions we announced last month, but we disagree with their letter and presentation.”

Stock reaction: MPC and MPLX

On November 21, 2016, MPC had a strong start to the day. It opened at $45.40, which was about 5.0% higher than the previous day’s close. The rise was likely due to the positive news of a potential upside to MPC stock as estimated by Elliott Management.

MPC achieved a high of $47.30 that day and closed at $47.20, about 9.0% higher than the previous day’s close. MPLX (MPLX), MPC’s midstream MLP, which should also benefit from Elliott’s proposal, closed about 4.0% higher on November 21, 2016.

On the same day, MPC’s peers Tesoro (TSO), Valero Energy (VLO), and Phillips 66 (PSX) rose 1.8%, 1.8%, and 1.5%, respectively. For exposure to refining and marketing sector stocks, you can consider the SPDR S&P Oil & Gas Exploration & Production ETF (XOP). XOP has a ~19.0% exposure to the sector.

In the next part of this series, we’ll look more closely at Elliott’s proposal.

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