Marathon Petroleum

Moat: 2/5

Understandability: 3/5

Balance Sheet Health: 4/5

Marathon Petroleum Corporation (MPC) is an integrated downstream energy company operating in the US, refining, marketing, and transporting crude oil and refined products.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview: MPC operates through two segments: Refining & Marketing (R&M) and Midstream.

  • Refining & Marketing (R&M): This segment refines crude oil and other feedstocks into petroleum products, such as gasoline, distillates, asphalt, and petrochemicals. The products are then sold in bulk and through various marketing channels, including retail and branded outlets. This segment is sensitive to market dynamics in crude oil and refined products. They face competition from other refiners and are also dependent on general demand for these products.
  • Midstream: This segment is primarily involved in gathering, processing, and transporting crude oil, natural gas, and natural gas liquids (NGLs). Their midstream operations include pipelines, storage facilities, processing plants and export terminals. This segment focuses on providing services for energy transportation and storage, generating revenue from fees and tariffs.

Industry Trends

  • Volatile commodity prices: Crude oil and refined product prices are subject to fluctuations due to global events, economic conditions, and geopolitical factors. These volatility creates uncertainty in the business’s profitability and affects inventory value.
  • Transition to cleaner fuels: Driven by global efforts to reduce carbon emissions, there is a continuing movement towards cleaner fuels and renewable energy sources. This trend is influencing demand patterns and is requiring energy companies to explore alternatives to traditional fuel sources.
  • Evolving market regulations: The energy industry is subject to many regulations related to the environment, workplace safety, and market pricing. These regulations can significantly increase compliance costs, reduce profitability or limit expansion opportunities.

Competitive Landscape

  • Refining Sector: MPC competes with other large refiners and smaller independent companies and integrated energy giants like ExxonMobil, Chevron, and BP. Competition focuses mainly on access to advantaged crude oil, operating costs, scale, and the ability to get production to market.
  • Midstream Sector: In Midstream, competition is also keen, and companies with large pipeline systems, storage and processing facilities, have an edge due to lower costs for larger volumes of transportation. It also comes down to who they are in business with, i.e. strong ties to key customers.
  • Intangibles: MPC does not have strong competitive advantages, based on proprietary technologies or unique distribution, and mostly relies on cost advantages to be competitive. There is reliance on the performance of its refineries, its geographical advantages, and its logistical network. This can, however, be affected by both global and domestic market factors.

Financial Analysis:

  • Revenue Trends: Over the past 3 years, Marathon’s revenue has seen volatility, influenced by the market dynamics of oil and gas. The revenues in 2022 were especially high due to high oil prices resulting from the invasion of Ukraine. Revenue growth is expected to slow down in the long run, according to company leadership.
  • Profitability: MPC’s gross profit margins vary considerably by segment and have shown fluctuations because of external factors (for example, energy price dynamics, refining capacity and cost). In 2023, operating expenses have increased, reducing overall profitability. Both NOPAT and ROIC fell quite dramatically. Even though MPC is trying to become a sustainable high-return business, its profitability does not yet show signs of a wide and sustained moat.
  • Cash flow: In 2023, MPC had positive operating cash flow and negative cash flow from financing and investing. The company uses most of its operating cash flow for capital expenditures to maintain and improve its refining and pipeline infrastructure, and then returns the rest to investors via share buybacks and debt repayment. MPC has stated that its long-term focus is to return a sizable part of its cash flow to its shareholders.

  • Debt: MPC does have a good financial base, with a low leverage ratio. At the same time, the company does not seem to generate more return on invested capital for lower debt leverage. This seems to be mostly in place to manage the volatility in energy and other economic markets.

    Moat Rating: 2/5 MPC has certain cost advantages stemming from its established midstream network and geographic assets which are also used in its downstream operations. However, these are not hard for competitors to copy. MPC’s brand has some strength in its retail outlets, but doesn’t extend further. However, the cyclical nature of oil and gas markets, along with technological changes for newer production processes, will limit the ability of MPC to create a true wide-moat business, as it has limited power over pricing or over its customers and suppliers.

    Risks to the Moat and Business Resilience

    • Geopolitical Instability: Unpredictable global situations can lead to volatile prices, sudden supply disruptions, and trade restrictions. This can harm earnings and also make production more expensive.
  • Regulatory Changes: Shifts in environmental policies and taxation could affect operating costs. This includes regulations on carbon emission and renewable energy mandates. Increased regulation of pipelines, production and trading can also affect overall profitability.
  • Changing Demand: Shifts in demand for different petroleum products could change the profitability of specific production units and could make the business less profitable.
  • High Capital Requirements: The industry requires constant reinvestment to maintain and improve infrastructure and facilities. In times of low profitability, cash flows can fall, creating stress on business viability. Also, high capital expenditure could make debt levels go up.

Understandability: 3/5 The business model is relatively easy to understand, as it is based on refining, marketing, transporting crude oil and natural gas and is part of the energy sector which is more familiar to average investors. However, given the volatility of commodity prices and the complex financial reporting by MPC, it may be challenging for the average investor to deeply understand and anticipate how external factors and management actions could affect future profitability. The complex nature of accounting in the energy sector and the different segments with complicated interdependencies makes it more difficult.

Balance Sheet Health: 4/5 MPC has a strong balance sheet and is mostly financially sound. The leverage is fairly low and the company does not seem to be at any major risk of financial distress. MPC also has decent cash reserves on hand. However, MPC is a cyclical company, and its balance sheet is vulnerable to changes in market dynamics or from a possible future recession. Furthermore, MPC has very little power over both prices of its supplies and sales of its products. For these reasons, MPC’s balance sheet is in good condition but would not be rated as excellent.

Recent Controversies and Problems MPC, along with other petroleum companies, has been under scrutiny by regulators and government officials for their high level of profits in 2022 and 2023. The company has been accused of profiteering. Company leadership has responded by emphasizing its focus on returning cash to investors. They also argued that higher gas prices were due to the war in Ukraine. There is increased public sentiment in a shift away from fossil fuel products which may influence the company negatively. MPC may have to adapt quickly to newer market dynamics and regulations, which could lead to greater costs, including for carbon capture technologies.