Will MPC Outperform Peers in Q2?



Marathon Petroleum (MPC) plans to post its second-quarter results on August 1. Wall Street analysts expect MPC to post 39% YoY lower earnings in the second quarter. MPC’s refining earnings indicators, the sweet and sour differentials, fell year-over-year in the quarter. However, Wall Street analysts have a favorable opinion on MPC before earnings presumably due to its growth activities.

The stock has risen 16.1% since June 14. Based on MPC’s latest implied volatility, the stock could close 6.9% higher or lower (from its current price level) in the next 16 days until August 1. Also, MPC’s dividend yield stands at 3.9%, higher than many of its peers. However, since May 14, short interest in MPC stock has risen likely due to Wall Street’s weak earnings estimate.

MPC’s first-quarter earnings review

Before we proceed with the second-quarter estimates, we’ll recap Marathon Petroleum’s first-quarter performance.

In the first quarter, Marathon Petroleum’s revenue of $28.6 billion surpassed Wall Street analysts’ estimates. However, MPC’s adjusted EPS of -$0.09 missed analysts’ estimate of $0.05. Special items related to gains, transaction-related costs, and tax adjustments were considered to arrive at adjusted EPS of the company.

MPC’s reported net earnings attributable to its shareholders declined from $37 million in Q1 2018 to -$7 million in Q1 2019. The fall was due to Marathon Petroleum’s higher contribution to noncontrolling interests. But MPC’s net income grew from $235 million in Q1 2018 to $259 million in Q1 2019. A 52% YoY rise in MPC’s operating earnings to $669 million led to an increase in its net income in the first quarter.

MPC’s second-quarter estimates

Wall Street analysts estimate Marathon Petroleum to post EPS of $1.38 in the second quarter, which is about 39% lower than its EPS in the second quarter of 2018. However, Marathon Petroleum’s second-quarter estimated EPS is better than its first-quarter loss. MPC’s revenues are expected to be $33.5 billion in the second quarter, around 49% higher than its revenues in the second quarter of 2018.

Analysts expect peers Valero Energy (VLO), Phillips 66 (PSX), and PBF Energy (PBF) to post 27% YoY, 5% YoY, and 31% YoY lower EPS in the second quarter, respectively. Similarly, they expect Delek US Holdings’ (DK) EPS to fall 29% YoY in the quarter. However, analysts expect HollyFrontier (HFC) to post 11% YoY higher EPS in the second quarter.

Marathon Petroleum’s (MPC) revenues are estimated to rise due to the benefit from the integration of Andeavor. Marathon Petroleum acquired Andeavor in the fourth quarter of 2018. The acquisition has built the largest downstream company in the United States. Analysts expect MPC to generate substantial synergies, earnings, and cash flows. However, MPC’s mixed refining earnings indicator could impact its earnings in the second quarter.

MPC’s first-quarter segmental earnings

Before proceeding with Marathon Petroleum’s (MPC) refining earnings outlook for the second quarter, we’ll review Marathon Petroleum’s earnings in the first quarter of 2019.

Marathon Petroleum’s operating earnings rose due to a rise in its Retail and Midstream earnings because of its integration of Andeavor’s assets. MPC’s Retail earnings rose 79% YoY in the first quarter due to the addition of Andeavor’s retail assets and better retail fuel margins. The company’s Midstream earnings also grew 60% YoY in the first quarter of 2019, due to the contribution of earnings from Andeavor Logistics.

Marathon Petroleum’s Refining and Marketing operating loss stood at $334 million due to narrow oil spreads on medium and heavy crude oils. However, its throughputs rose because of the addition of Andeavor’s refining assets. MPC’s gross refining and marketing margin rose by $0.6 per barrel YoY to $11.2 per barrel in the first quarter.

Peers’ refining margin in the first quarter

In the first quarter, peer Holly Frontier’s (HFC) gross refining margin fell by $0.1 per barrel YoY to $12.7 per barrel. Similarly, Phillips 66’s (PSX) worldwide refining margin fell by $2.1 per barrel YoY to $7.2 per barrel in the first quarter. The company’s refining margins fell in three of its four operating regions, which impacted its overall margin. Valero Energy’s (VLO) gross refining margin fell from $8.7 per barrel in Q1 2018 to $8.0 per barrel in Q1 2019. The fall was due to the decline in oil spreads and gasoline cracks.

MPC’s refining earnings outlook for the second quarter

Marathon Petroleum’s (MPC) refining income is affected by the blended crack, the sour differential, and the sweet differential. According to MPC, a dollar-per-barrel change in the blended crack changes its annual net income by $900 million. Also, a dollar-per-barrel change in the sour differential and the sweet differential changes its annual net income by $450 million and $370 million, respectively.

These refining earnings indicators have put up a mixed trend in the second quarter.

In the second quarter, the blended crack rose by $2.3 per barrel YoY to $16.4 per barrel. However, in the second quarter, MPC’s prompt sweet and sour differential fell by $0.6 per barrel YoY and $5.8 per barrel YoY. MPC refined 52% sour crude in the first quarter. As Marathon Petroleum’s blended crack expanded and sweet and sour differentials contracted, its refining earnings could fall marginally in the second quarter.

How MPC stock has performed ahead of earnings

Marathon Petroleum (MPC) stock has risen in the past month. Here, we’ll compare Marathon Petroleum stock returns to the SPDR S&P 500 ETF (SPY), the equity market indicator, and WTI, the benchmark oil.

In the past month, Marathon Petroleum stock has risen by 16.1%. MPC’s peers Phillips 66 (PSX) and HollyFrontier (HFC) have risen 18.4% and 18.7%, respectively, since June 14. Also, Valero Energy (VLO) and PBF Energy (PBF) have increased by 9.7% and 20.2%, respectively, during the same period.

MPC’s correlation with WTI and SPY

WTI has increased by 9.7% in the past month. Now let’s look at the correlation between MPC stock and WTI for the past month. A correlation coefficient between zero and one means a positive relationship, zero states no relationship, and between minus one and zero shows an inverse relationship.

The correlation coefficient of MPC versus WTI stood at 0.40 in the past month. The positive relationship between MPC and WTI show that MPC stock moved in line with WTI. Oil prices are generally the barometer of investors’ sentiments towards the energy sector. Usually, a rise in oil prices positively affects these sentiments. The coefficient value shows that changes in WTI can explain around 40% of the changes in MPC’s stock price.

Similarly, in the past month, the correlation coefficient of MPC versus SPY stood at 0.16, lower than the correlation of MPC versus WTI. The SPDR S&P 500 ETF (SPY), a broader market indicator, has increased by 3.6% since June 14.

Overall, in the past month, WTI rose by 9.7%, more than SPY’s rise of 3.6%. In the same period, MPC had a higher correlation with WTI (0.40) than SPY (0.16). MPC stock has outperformed SPY in the past month.

An expectation of weak Q2 earnings impacted the stock

However, dull second-quarter estimates have partially offset the uptrend in Marathon Petroleum stock. The company is expected to see integration benefits from Andeavor. However, the mixed refining environment could affect the company’s earnings. Marathon Petroleum (MPC) plans to post its second-quarter earnings on August 1.

Marathon Petroleum’s stock forecast

We’ll forecast Marathon Petroleum’s (MPC) stock price range based on its implied volatility for 16 days before its earnings. The implied volatility in Marathon Petroleum has fallen by 3.9 percentage points since June 14 to the current level of 32.8%.

Marathon Petroleum’s stock price range is based on its implied volatility of 32.8%, assuming a normal distribution of prices and one standard deviation. Marathon Petroleum’s stock price could close between $59.5 and $51.9 per share in the next 16 calendar days ending on August 1. The price estimates imply that MPC stock could close 6.9% higher or lower from its current level until earnings.

Peers’ implied volatility trend

Like Marathon Petroleum, the implied volatility in Valero Energy (VLO), Phillips 66 (PSX), and HollyFrontier (HFC) have fallen by 2.7 percentage points, 1.6 percentage points, and 1.3 percentage points, respectively, since June 14. Currently, the implied volatility in Valero, Phillips 66, and HollyFrontier is 26.8%, 22.5%, and 33.4%, respectively.

However, Valero, Phillips 66, and HollyFrontier stock prices have risen 9.7%, 18.4%, and 18.7%, respectively. So, these refining firms’ implied volatilities and stock prices have moved inversely in the past month.

Marathon Petroleum: Analysts’ recommendations before Q2

Now, let’s discuss analysts’ ratings for Marathon Petroleum (MPC).

Among the 17 analysts covering MPC in April, 16 analysts (or 94%) recommended a “buy” or “strong buy” rating. One of the analysts has assigned a “hold” rating on the stock.

Phillips 66 (PSX) and Valero Energy (VLO) are rated as a “buy” by 72% and 84% of the analysts, respectively. Delek US Holdings (DK), HollyFrontier (HFC), and PBF Energy (PBF) are rated as a “buy” by 47%, 18%, and 50% of the analysts, respectively.

Recently, Cowen and Company cut its target price on Marathon Petroleum stock from $65 to $60. Citigroup reduced its target price on the stock from $80 to $58. Marathon Petroleum’s mean target price is $79 per share, which implies a 41% gain from the current level.

Why the “buy” ratings?

Analysts expect Marathon Petroleum’s revenues to rise due to its latest Andeavor acquisition. The acquisition has resulted in high refining capacities, widespread midstream assets, and vast marketing and retail network. The acquisition is also expected to create operational synergies, which could add to MPC’s earnings. The company’s organic capex activities in the refining and midstream segments could further fuel the company’s earnings growth. Analysts expect Marathon Petroleum’s earnings to grow sharply in the next year. Marathon Petroleum’s EPS is expected to touch $7.8 in 2020, implying about 75% annual growth.

Marathon Petroleum’s dividend yield compared to peers

Now, let’s discuss Marathon Petroleum’s (MPC) dividend yield before its second-quarter results.

Marathon Petroleum’s dividend yield is 3.9%. Peer Valero Energy’s (VLO) dividend yield is the highest at 4.3%. PBF Energy’s (PBF) yield is 4.2%, which is more than Marathon Petroleum’s yield. HollyFrontier (HFC), Phillips 66 (PSX), and Delek US Holdings’ (DK) yields are 2.8%, 3.6%, and 2.9%, respectively, less than Marathon Petroleum.

Marathon Petroleum’s dividend payments have been rising over the past few years. In the second quarter, Marathon Petroleum paid a dividend of $0.53 per share, which represents 33% growth from the second quarter of 2017. The dividend was announced on April 24 and paid on June 10.

Path ahead

In 2019, Marathon Petroleum’s annualized dividend per share stands at $2.12, which represents a 15% growth rate for the year. The company aims to grow its dividends 10% annually.

Marathon Petroleum plans to repurchase shares to share the benefits of higher earnings and cash flows. The company aims to return ~50% or more of its discretionary free cash flows to shareholders. In the first quarter, Marathon Petroleum paid $1.2 billion combined towards dividends and share repurchases.

Marathon Petroleum’s short interest before its Q2 earnings

The short interest in MPC has increased from 1.01% on May 14 to the current level of 2.24%. Usually, a rise in the short interest infers an increase in the bearish sentiment for the stock.

The short interest in MPC might have risen due to the expectation of weaker second-quarter earnings. Wall Street analysts expect Marathon Petroleum’s EPS to fall 39% YoY to $1.4 in the second quarter. Although the blended crack has risen in the quarter, sweet and sour differentials have narrowed. Thus, the company’s refining margin and earnings might be lower in the second quarter.

Peers’ short interest

The short interest in PBF Energy (PBF) and Delek (DK) also have risen by 0.03 and 0.91 percentage points, respectively, since May 14 to the current level of 4.22% and 7.78%. However, the short interest in HollyFrontier (HFC) has decreased by 0.46 percentage points to 3.25%. Since May 14, HollyFrontier and Delek stocks have risen 9.6% and 9.5%, respectively, but PBF stock has fallen by 2.2%.

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