MPC-ANDV Merger Could Create $1 Billion in Synergies



MPC-ANDV merger

Marathon Petroleum (MPC) and Andeavor (ANDV) have agreed to a strategic merger, whereby MPC would acquire ANDV by 2H18, subject to requisite approvals. This merger would create a large refining, midstream, and marketing company with operations throughout the US. Market Realist discussed this merger possibility earlier in Marathon Petroleum to Acquire Andeavor: ANDV Opens 10% Higher. Now let’s look into further details of the benefits from the merger.

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In this part, we’ll discuss the synergies that this merged entity (or pro forma MPC) could create. We’ll then discuss segment-wise (refining, midstream, and marketing) benefits that could benefit pro forma MPC. We’ll then look at the stocks’ reaction, Wall Street analysts’ response to the merger announcement, and the impact of merger news on forward valuations.

Creation of synergies

The merger would create an entity that would have an integrated network of assets spread across the US. The merged entity would be in a position to produce operational synergy to the tune of $1 billion on a yearly run-rate basis within three years of acquisition. This synergy would be generated in five business areas, which include cost elimination, procurement, owned or operated retail outlets, integrated system optimizations, and refining operations.

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The merged entity is expected to achieve around $255 million of synergies from cost efficiencies, which could be rapidly accomplished in the first year of operation. Furthermore, the combined purchases for the company would stand over $10 billion. MPC targets a 1% to 2% improvement in annual purchases leading to procurement efficiencies of around $150 million. Also, ANDV has around 1,100 company-controlled stores, the integration of which could create about $210 million in synergies. MPC created similar synergies during the integration of Hess Retail.

Moreover, optimization of the integrated system could create around $165 million of synergies for the company, which would include improving the purchase of crude oils and feedstock, value chain optimization, Permian and Bakken crude optimization, and increasing throughput on owned assets and systems. Similarly, pro forma MPC would benefit from refining operations process optimization via expertise and technology sharing. Thus, the merger could lead to improvement in execution of capital projects, maintenance work, and turnaround activities.

These synergies would be achieved within three years of the acquisition. Pro forma MPC would produce around $480 million of synergies in year one and about $710 million in year two. After three years, the combined operations could generate around $1 billion of synergies.

Thus, with the potential synergies, pro forma MPC could generate more than $5 billion of incremental cash flows in the first five years.


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