Marathon Petroleum (MPC) stock rose 8.4% on Wednesday. Elliott Management wrote an open letter to the company. The letter recommended restructuring the organization. The firm said to break up the company into three separate entities—refining, retail, and midstream. Elliott Management thinks that the separation could unlock substantial value in the company.
According to a CNBC report, D.E. Shaw supports Elliott Management’s recommendation. The report said, “Hedge fund D.E. Shaw, which owns a similar-sized stake in Marathon as Elliott, is also supporting the breakup of Marathon, including spinning off Speedway gas stations.”
Elliott’s views on Marathon Petroleum
Elliott Management thinks that Marathon Petroleum is highly undervalued. The firm said that Marathon Petroleum has some of the best-in-class assets in its portfolio. However, the company has undeformed its peers. Marathon Petroleum underperformed Valero Energy (VLO) in the refining sector and Couche-Tard in the retail sector on total shareholder returns. Read Valero or Marathon Petroleum: Which Is a Better Buy? to learn more about a refining stock investment opportunity.
Elliott Management said that Marathon Petroleum’s integrated model isn’t working like the company claims. Overall, Marathon Petroleum thinks that its integrated model delivers substantial synergies. In the second-quarter earnings press release, the company’s chairman and CEO, Gary R. Heminger, said, “We are confident that strengthening business fundamentals throughout the year and the competitive advantages of our integrated business model will both support a growing cash flow profile.”
However, Elliott Management thinks that the company’s business segments are reeling due to internal conflicts, poor governance, and ineffective management. According to Elliott Management, Marathon Petroleum “is massively discounted relative to its intrinsic value.”
The firm said, “Marathon’s discount to the sum-of-the-parts has always been wide. It is now near its widest level after the company decided to doubledown on its integrated strategy with the acquisition of Andeavor. Quite simply, Marathon’s integrated model is not working and will never work.”
Elliott Management said that if the company separates its refining, retail, and midstream businesses, its value could increase from $55 billion to $89 billion. Likewise, operational improvements could increase the company’s value to $115 billion. Elliott Management claims that after separation, the refining and midstream businesses will have enterprise values of about $29 billion and $50 billion, respectively. Also, the retail business will become the “largest US-listed retail operator with numerous accretive growth opportunities.”
Marathon Petroleum’s response
In a press release, the company said, “MPC engages in regular communication with its shareholders and welcomes constructive input related to enhancing shareholder value.” Marathon Petroleum also said, “We will thoroughly evaluate Elliott’s proposal and look forward to continuing our constructive engagement around these issues.”
Marathon Petroleum said that it outperformed SPY on total shareholder returns. Since 2011, the company has returned 254%, while SPY has returned 174%. Notably, the company has returned over $20 billion in the form of dividends and buybacks.
Letter to Marathon Petroleum in 2016
Elliott Management gave the company restructuring suggestions in the past. In 2016, the firm said that Marathon Petroleum should restructure its portfolios and organizational composition to increase shareholder value. Read Elliott’s Recommendation Caused Marathon to Spike: What’s Up? to learn more.
At that time, Marathon Petroleum indicated that it would review the proposal. Later, the company said it wasn’t effective to separate Speedway. Elliott Management said, “It appears that the “Full and Thorough Review” was never serious. Marathon was already nearly 6 months into the process of acquiring Andeavor when the results of its review were announced –a move that further committed Marathon to its integrated model.”
On Wednesday, Marathon Petroleum’s peers rose. Valero Energy (VLO) and Phillips 66 (PSX) rose 0.7% and 1.4%. Meanwhile, HollyFrontier (HFC), PBF Energy (PBF), and Delek US Holdings (DK) rose 2.1%, 1.1%, and 2.3%.
In the current quarter, refining stocks have been reeling due to the volatile equity market and refining conditions. Although some refining crack indicators have improved, the leading indicators are still lagging. To learn more, read Volatile Refining Stocks, Cracks, and SPY in Q3.
However, refiners got relief with a full exemption on biofuel waivers for 2018. The biofuels issue has been impacting refiners for quite some time. To learn more, read Big Biofuels Issue: Trump Meets with Refiners, Senators.