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Why MPC Is Trading at Double Its Historical Average


Nov. 20 2020, Updated 5:31 p.m. ET

MPC trading at double its historical average

Marathon Petroleum (MPC) traded at an average PE (price-to-earnings ratio) of 12.5x from 1Q15 to 1Q17. MPC’s PE ratio rose to 22.9x in 1Q17 from 11.7x in 1Q15 due to a rise in its stock price. MPC’s stock price has risen steeply in the last couple of quarters.

In 4Q16, MPC received an open letter from Elliott Management, one of its largest shareholders, imploring it to unlock potential value via a restructuring exercise. The letter revealed that if MPC were to restructure, its stock value could rise ~60%–80% or more. For more information, read Marathon Petroleum Stock Rose 9.0% on Elliott’s Recommendation.

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Following Elliott Management’s recommendation, MPC unveiled its strategic plan in 1Q17. The company decided to drop down its midstream assets to MPLX (MPLX) and convert its IDRs (incentive distribution rights) to LP (limited partner) units in MPLX. The company also plans to separate its Speedway segment. Further details on the separation should come by mid-2017. For more information, read MPC’s Strategic Plan to Unlock Value: What’s It All About?

Since the open letter was published, MPC stock has risen ~20%. MPC is currently trading at a PE of 23.2x, far above its historical average. Peers Tesoro (TSO), Valero Energy (VLO), and Phillips 66 (PSX) are currently trading at PEs of 13.7x, 14.2x, and 24.4x, respectively.

MPC’s EV-to-EBITDA and price-to-cash flow

From 1Q15 to 1Q17, MPC’s EV-to-EBITDA (enterprise value to earnings before interest, tax, depreciation, and amortization) and price-to-cash flow ratio stood at averages of 6.8x each.

Like its PE ratio, MPC’s EV-to-EBITDA and price-to-cash flow ratios also rose. Marathon Petroleum is currently trading at a 10.4x EV-to-EBITDA and a 5.7x price-to-cash flow, higher than its historical averages.

If you want exposure to big US companies, you can look to the SPDR S&P 500 ETF (SPY) and the SPDR Dow Jones Industrial Average ETF (DIA). Both ETFs have ~6% exposure to energy sector stocks.


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