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Which Way Will MPC’s Refining Earnings Swing in 1Q17?

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Apr. 18 2017, Published 12:56 p.m. ET

MPC’s Refining earnings in 4Q16

Marathon Petroleum’s (MPC) operating income rose 64% over 4Q15 to $553 million in 4Q16, while the Refining segment’s operating income increased to $219 million in 4Q16 from $179 million in 4Q15. This was due to an inventory (lower cost or market) valuation charge of $345 million levied in 4Q15.

Excluding inventory charges, MPC’s Refining segment earnings fell from 4Q15 to 4Q16. This fall was due to a decline in its gross refining and marketing margin by $1.3 per barrel over 4Q15 to $11.4 per barrel in 4Q16.

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By comparison, peer Valero Energy (VLO) noted a fall in its gross refining margin to $8.2 per barrel in 4Q16, as compared to $10.9 per barrel in 4Q15. Phillips 66 (PSX) and Tesoro (TSO) saw their gross refining margins narrow by $2.9 per barrel YoY and $0.4 per barrel YoY to $6.5 per barrel and $9.5 per barrel, respectively, in 4Q16.

Notably, for exposure to downstream stocks, you can consider the iShares North American Natural Resources ETF (IGE). IGE has ~7% exposure to the sector.

MPC’s refining earnings outlook for 1Q17

According to MPC, a change of one dollar per barrel in the blended LLS 6-3-2-1 crack spread affects its yearly net income by $450 million. Likewise, a change of one dollar per barrel in the sweet-sour and LLS-WTI affects its income by $220 million and $90 million, respectively.

In 1Q17, according to MPC, the blended LLS crack has risen $3.1 per barrel over 1Q16 to $7.7 per barrel. The sweet-sour differential rose $0.07 per barrel YoY (year-over-year) to $6.8 per barrel. The LLS-WTI spread declined marginally YoY to $1.6 per barrel in 1Q17.

Notably, the company’s RIN (renewable identification number) costs, adjusted for gasoline differential, stood at $3 per barrel in 1Q17, which was almost the same level as in 1Q16. Overall, its gross margin indicator stood at $1.41 billion in 1Q17, as compared to its reported gross margin of $1.61 billion in 1Q16. On a quarter-over-quarter basis, the gross margin indicator has declined, implying a likely fall in MPC’s refining earnings.

In the next part, we’ll analyze MPC’s recent stock performance.

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