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Why MPC’s Refining and Speedway Segment Operating Earnings Fell

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MPC’s operating earnings

Marathon Petroleum (MPC) posted its 1Q18 earnings on April 30. The company missed its earnings estimate, which we discussed in Marathon Petroleum’s 1Q18 Earnings Miss Estimates. Now let’s look at the earnings on a segmental level.

Marathon Petroleum’s (MPC) operating income rose 51% over 1Q17 to $440 million in 1Q18. Improved midstream earnings drove the rise in operating income.

The refining segment’s operating loss rose from $70 million in 1Q17 to $133 million in 1Q18. The higher loss was due to the dropdown of assets to MPLX (MPLX), MPC’s MLP on February 1, which resulted in the net reduction of $181 million in refining segment earnings and an equivalent rise in midstream earnings. In addition, MPC’s gross refining and marketing margin fell by $1.1 per barrel over 1Q17 to $10.6 per barrel in 1Q18. The fall was majorly due to narrower blended LLS 6-3-2-1 crack. However, refinery utilization stood at 93% in 1Q18 compared to 83% in 1Q17.

However, Marathon Petroleum’s peer Valero Energy (VLO) observed a rise in its gross refining margin from $8.1 per barrel in 1Q17 to $8.4 per barrel in 1Q18. Also, Phillips 66’s (PSX) worldwide refining margin rose by $0.7 per barrel, or 9% YoY, to $9.3 per barrel in 1Q18.

Andeavor’s (ANDV) refining index values have also expanded year-over-year in two of three operating areas, which points towards a possible rise in ANDV’s refining margin in 1Q18 over 1Q17.

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Speedway and midstream segment incomes

In 1Q18, MPC’s operating income from Speedway fell 30% YoY to $95 million. This was due to the decline in light fuel margin, a rise in operating costs due to labor expenses, and accelerated depreciation. The rise in depreciation was due to the modernization of Speedway’s dispenser technology, which is expected to enhance earnings for the segment. Also, traffic at Speedway stores was impacted by storms in the Northeast and Midwest regions.

Meanwhile, the midstream segment’s operating income rose from $309 million in 1Q17 to $567 million in 1Q18 due to the dropdown of assets to the MLP on February 1. Also, midstream earnings rose due to the growth in volumes in natural gas and NGL processing and the fractionating segment. Plus, gathering system throughputs rose in 1Q18 over 1Q17.

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