So far in the fourth quarter, Marathon Petroleum’s (MPC) stock price has fallen by 6.0%, according to NYSE data. However, the decline in MPC stock is sharply contrary to peers Valero Energy (VLO) and Phillips 66 (PSX). VLO and PSX have increased by 9.0% and 9.6%, respectively, in the current quarter.
The fall in Marathon Petroleum’s stock price is likely influenced by the uncertainty about the company’s strategic path. In the third quarter, activist shareholder Elliott Management had recommended breaking up the company into three separate entities—refining, midstream, and retail.
In the fourth quarter, MPC decided to spin off its retail arm, Speedway. Plus, the company said it is reviewing its strategic path for midstream assets. To learn more, please read Has MPC Stock Price Underperformed Peers in 2019? Perhaps the markets are getting restless in anticipation of changes in the company.
In such a scenario, let’s estimate the upside potential or downside risk in the stock. We’ll do this by calculating the upper and lower price limits of Marathon Petroleum’s stock price based on its implied volatility.
MPC share forecast until December 31
Implied volatility in Marathon Petroleum stock has fallen by 1.0 percentage points since October 1, the beginning of the quarter. A fall in a stock’s implied volatility usually means that markets are bullish on the stock. Further, MPC’s current implied volatility stands at 31.5%.
To estimate these stock prices, we assumed a normal distribution of prices. This is a bell curve model and a standard deviation of 1. This reflects a 68% probability. Based on these assumptions and current implied volatility, MPC stock could close between $52.90 and $61.30 over the next 20 days ending on December 31. Currently, MPC stock trades at $57.10.
Implied volatility in peers
Like MPC, implied volatilities in its peers have also declined. Respectively, Valero and Phillips 66’s implied volatilities have fallen by 1.9 and 1.4 percentage points since October 1. Currently, their implied volatilities stand at 23.8% and 18.7%, respectively.
Notably, Marathon Petroleum is facing robust refining conditions in the quarter. Refining industry dynamics are changing rapidly in anticipation of IMO 2020.
Plus, refiners that can process sour crude and produce low-sulfur fuel should benefit the most. As refiners have started focusing on the production of low-sulfur marine fuels, the supply of gasoline and other refined products is becoming disrupted. This trend has supported cracks for refined products.
Refiners who can’t process sour crude are demanding more sweet crude oil, which widens the sweet-sour oil spread. As a result of these changing conditions, refining cracks and oil spreads are expanding.
After the integration of Andeavor’s refining assets, Marathon Petroleum has high capacities to face IMO 2020. It has the highest resid upgrade (includes coking, resid hydrocracking, resid deasphalting, and asphalt) and distillate hydrotreating (includes kerosene/jet, diesel, and other distillate desulfurization) capacity among peers. Notably, these capacities allow the company to refine sour crude oil and produce high value low-sulfur refined products.
So, MPC should be able to take advantage of widening cracks and spreads. The improved refining environment should boost MPC’s refining margin and earnings in the quarter. On October 31, Raymond Brooks, EVP of Refining, highlighted this point in MPC’s Q3 earnings call.
Brooks noted, “At our coastal refineries, we have the ability — the capability to bring in high sulfur fuel oil into our facilities and run it through our cokers and when I say capability, we have both the process capability, the coking and reset upgrading. And then, we also have the infrastructure, the ability to receive it.”
To learn more, please read How Strong Is MPC’s Debt and Cash Position?