MPCs valuations compared to peers
In the previous article, we saw the changes in short interest in Marathon Petroleum (MPC). Now, let’s look at Marathon Petroleum’s forward valuation compared to those of its peers.
Currently, MPC is trading at a forward PE (price-to-earnings) multiple of 12.5x, higher than its peer average of 11.9x. MPC’s peers Phillips 66 (PSX) and Delek US Holdings (DK) are also trading above the average at 12.9x and 14.3x, respectively.
Moving on to EV-to-EBITDA (enterprise value to earnings before interest, tax, depreciation, and amortization), Marathon Petroleum is trading at a forward EV-to-EBITDA of 7.5x, above its peer average of 6.8x. Most of MPC’s peers are trading above the average forward EV-to-EBITDA except for Valero Energy (VLO), Delek US Holdings (DK), and PBF Energy (PBF).
VLO is trading below the average at an EV-to-EBITDA of 6.6x, but Phillips 66 (PSX) is trading above the average at 8.5x. Valero (VLO) has a satisfactory cash flow position and leverage but is bearing the burden of high compliance costs. The purchase of RINs (renewable identification number) quarter-over-quarter is denting the company’s refining earnings.
Looking at Phillips 66, the company has a diversified earnings model aimed at shielding itself from the refining environment’s volatility. Plus, the company is focusing on increasing its steady midstream and marketing segment earnings.
Andeavor (ANDV) is trading below the average forward PE but in line with the average EV-to EBITDA. A few months ago, it was trading at a premium to both its peer averages. However, the fall in its stock price in 1Q18 has led to a dip in ANDV’s valuations.
Why does Marathon Petroleum’s valuation command a premium?
MPC’s restructuring exercise, which is intended to unlock value for stakeholders, is nearing its completion. The restructuring plan broadly includes the dropdown of midstream assets to MPLX LP (MPLX), its MLP, the switch of its economic interest in its GP (general partner) and IDRs (incentive distribution rights) for new MPLX LP units, and the separation of its Speedway, or Retail, segment.
Midstream assets representing ~$250 million worth of EBITDA were dropped down in 1Q17, ~$135 million worth of EBITDA was dropped down in 3Q17, and ~$1.0 billion worth of EBITDA has been dropped down in the current quarter. Also, the plan to separate the Speedway segment was abandoned, as MPC concluded that it could create more value if it stayed integrated within the company. The final step of the IDR exchange is being completed in 1Q18.
The above process could result in the unlocking of potential value in MPC. It’s no surprise that MPC is trading at a premium to both its peer averages.