We have downgraded Findlay, Ohio-based independent oil refiner and marketer Marathon Petroleum Corporation (MPC) shares to Neutral from Outperform purely on valuation grounds, as we see limited near-term price upside.
The company, in its current form, came into existence following the 2011 spin-off of Houston, Texas-based Marathon Oil Corporation’s (MRO) refining/sales business into a separate, independent and publicly traded entity. Marathon Petroleum operates in three segments: Refining and Marketing, Speedway (Retail) and Pipeline Transportation.
It is the fifth largest domestic refiner with a combined crude oil processing capacity of approximately 1,193,000 barrels per day through its portfolio of six refineries. A major advantage for the company is its proprietary access to pipelines, which inhibits lower-cost competitors from supplying Marathon Petroleum's key markets.
We continue to like Marathon Petroleum for its scale advantage, impressive asset quality, and an extensive midstream/retail network. We believe management’s recently commenced $2 billion share repurchase program and the proposed acquisition of BP Plc’s (BP) Texas City refinery could further boost shareholder value.
However, we think the current valuation is fair and adequately reflects the company’s future growth prospects. Moreover, Marathon Petroleum’s core business – refining – is faced with a high degree of volatility, while being capital intensive. This is expected to limit its ability to generate positive earnings surprises.
Marathon Petroleum has pegged its 2012 capital budget at $1.4 billion, up 17% from the amount it invested in 2011 and some $150 million more than previous announcement – quite high by industry standards. This may adversely affect the company’s leverage and deteriorate its credit metrics. Additionally, the increasing capital intensity of its operations may result in reduced returns going forward.
Considering these factors, our long-term total return expectation for Marathon Petroleum remains muted. We do not see any significant price upside for the shares in the next few quarters and expect the company to grow at a somewhat more conservative and sustainable pace.
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