How MPC’s Refining Earnings Shaped Up in Q4

Marathon Petroleum (MPC) stock fell marginally by 0.8% in the fourth quarter of 2019. The company was impacted by a fluctuating refining environment and uncertainty regarding its strategic path. While refining conditions are rapidly changing due to IMO 2020, there seems to be uneasiness due to the company’s restructuring exercise. Elliott Management, an activist investor, perhaps inspired the restructuring.

In the third quarter of 2019, Elliott Management had suggested a breakup of MPC. Further, in the fourth quarter, MPC announced the spinoff of its retail arm, Speedway. It also hinted at the upcoming restructuring of the company’s midstream segment. So, the company is evaluating alternatives for its midstream asset base.

Not only MPC stock but also HollyFrontier (HFC) and Delek US Holdings (DK) stocks also fell by 5.5% and 7.6%, respectively, in Q4. However, Valero Energy (VLO) and Phillips 66 (PSX) stocks rose by 9.9% and 8.8%, respectively. In such a mixed environment, let’s analyze how Marathon Petroleum’s refining earnings would have shaped up in the fourth quarter.

MPC’s refining earnings indicators

MPC publishes its refining indicators monthly. The leading indicators are blended crack, prompt sweet differential, and prompt sour differential. These indicators impact the company’s net annual income. A dollar per barrel change in the blended crack, prompt sweet differential, and prompt sour differential changes MPC’s net yearly income by $900 million, $370 million, and $450 million, respectively.

Indicator trends in Q4

In the fourth quarter, MPC’s blended crack rose by $2.2 per barrel year-over-year to $11.6 per barrel. The rise in the cracks was led by a surge in USGC (US Gulf Coast) LLS (Light Louisiana Sweet) 3-2-1 crack and WC (West Coast) ANS (Alaskan North Slope) 3-2-1 crack. The rise was partly offset by a fall in Midcon WTI (West Texas Intermediate) 3-2-1 crack. In the quarter, while Midcon crack fell by 16% year-over-year, USGC and WC cracks rose year-over-year by 97% and 50%, respectively. Midcon, USGC, and WC cracks are weighted in the proportion of 38%, 38%, and 24%, respectively, to calculate the blended crack.

However, prompt sweet differential and prompt sour differential fell by $4.3 per barrel and $4.1 per barrel, respectively, in the quarter.

So, the steep falls in prompt sweet differential, and prompt sour differential could outweigh the rise in the blended crack in the quarter. This points to a likely decline in MPC’s refining earnings in the quarter.

Wall Street’s fourth-quarter estimates

Wall Street analysts expect Marathon Petroleum’s earnings to fall by 46% year-over-year in the fourth quarter. The fall in earnings is quite possible considering the weakness in refining indicators of the company. Not only MPC’s, but also VLO’s, PSX’s, and HFC’s earnings are expected to fall year-over-year by 20%, 50%, and 72%, respectively.

Going forward, IMO 2020 will be playing a significant role in refining industry dynamics. IMO 2020 requires shippers to use low-sulfur fuel from January 2020. So, refiners that can refine sour crude oil to produce low-sulfur fuels will be the largest beneficiaries.

Due to IMO 2020, refining cracks, as well as oil spreads, could widen. This should result in a better margin for refiners. In 2020, Wall Street analysts expect MPC’s earnings to rise by steep 67%. They also forecast Valero’s and Phillips 66’s earnings to increase by 96% and 20%, respectively, in the year.

To sum up, MPC’s refining indicators point at a likely decline in the company’s refining earnings in the fourth quarter of 2019. Further, though MPC’s refining earnings are looking weak in the quarter, they are estimated to rise in 2020. Analysts expect a sharp surge in MPC’s EPS in the current year.

To learn more about Marathon Petroleum’s financial situation, read How Strong Is MPC’s Debt and Cash Position?