Marathon Petroleum: Are Its Refining Earnings Falling?

Marathon Petroleum (MPC) stock has been tumbling in the third quarter. Besides the macro factors like geopolitical tension and oil price uncertainty, the company has been affected by weaker refining conditions, as noted by its indicators.

Marathon Petroleum’s refining earnings indicators point toward the current conditions that it is facing. So, these indicators reflect the likely direction of the company’s refining earnings for the quarter.

Marathon Petroleum’s refining earnings indicators in Q3

Marathon Petroleum’s main refining earnings indicators are the blended crack, the sweet differential, and the sour differential. According to MPC, a rise of $1 per barrel in the blended crack expands its annual net income by $900 million. Plus, a dollar-per-barrel shift in the sour differential and the sweet differential alters its yearly net income by $450 million and $370 million, respectively.

Marathon Petroleum: Are Its Refining Earnings Falling?

In the third quarter so far, the blended crack has fallen by $0.50 per barrel YoY to $13.40 per barrel. This is driven by a fall in the Midcon WTI (West Texas Intermediate) 3-2-1 crack, partly offset by a rise in USGC (US Gulf Coast) LLS (Louisiana Light Sweet) 3-2-1 crack, and WC (West Coast) ANS (Alaska North Slope) 3-2-1 crack.

While Midcon crack has fallen by $1.60 per barrel YoY, USGC and WC cracks have risen by $0.20 per barrel YoY and $0.40 per barrel YoY, respectively. Midcon, USGC, and WC cracks are weighted by 38%, 38%, and 24%, respectively, to arrive at the blended crack. The weights are based on MPC’s region-wise refining capacity.

Further, the prompt sour differential has narrowed by $5.40 per barrel YoY in the quarter. This could impact MPC’s refining earnings. Also, the prompt sweet differential has fallen by $1.90 per barrel YoY.

Overall, across-the-board fall in refining earnings indicators doesn’t sound like good news for the company. So, cracks and spreads could negatively impact Marathon Petroleum’s earnings in the third quarter. However, higher volumes due to the integration of Andeavor could support its refining earnings.

Peers indicators in Q3

MPC’s peers Valero Energy (VLO) and HollyFrontier’s (HFC) refining margin indicators are also showing weakness. Valero’s refining crack indicators have fallen in two of its main operation regions. In the Gulf Coast and Midcon, the indicators have fallen by 1.2% and 6.9%, respectively, YoY in the third quarter.

Further, HollyFrontier’s indicators have fallen in two of its three operating areas. HFC’s index values at Midcon and Rockies have fallen by 7.9% and 13.5% YoY, respectively.

MPC’s Q2 refining earnings

In the second quarter, Marathon Petroleum’s refining earnings fell 12% YoY to $906 million. Lower refining margins drove the fall in its profits. The company’s gross refining and marketing margin fell by $0.20 per barrel YoY to $15.20 per barrel in the second quarter. However, MPC’s second-quarter throughputs rose from 2.0 MMbpd (million barrels per day) last year to 3.1 MMbpd this year.

Peers Valero’s refining margin declined by 14% YoY to $9.60 per barrel. Also, Phillips 66’s (PSX) refining margin fell by $0.90 per barrel YoY to $11.40 per barrel in the second quarter.