Marathon Petroleum Corporation: Losing Money Now With Bleak Outlook

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Marathon Petroleum Corporation (MPC) operates the nation’s largest refining system with more than 3 million barrels per day of crude oil capacity across 16 refineries.

Marathon Petroleum’s marketing system includes branded locations across the United States, including Marathon branded outlets. Speedway LLC, a Marathon Petroleum subsidiary, owns and operates retail convenience stores across the United States. Speedway has been sold to 7-Eleven, and that transaction is expected to close in the first quarter of 2021. Its results are being reported as Discontinued Operations.

MPC also owns the general partner and majority limited partner interest in MPLX LP, a midstream company which owns and operates gathering, processing, and fractionation assets, as well as crude oil and light product transportation and logistics infrastructure.

It reported its third quarter results on November 2nd, and they show an adjusted net loss of $649 million, or -$1.00 per diluted share, compared to adjusted bet income of $1.1 billion, or $1.63 per diluted share in the third quarter of 2019.

The challenges created by COVID continued through the third quarter,” said President and Chief Executive Officer Michael J. Hennigan. “Despite some recovery, global demand for our products and services remains significantly below historical levels, which continues to pressure profitability for both our company and the industry.

As we navigate these challenges, we remain focused on the aspects of our business within our control. First, we strengthened the competitive position of our assets by advancing our investments in renewables. Our Dickinson renewable fuels facility is starting up. With respect to the conversion of our Martinez refinery into a renewable diesel facility, we filed for permits, progressed feedstock supplier discussions, and began detailed engineering activities. Second, we continued working toward a first-quarter 2021 closing for the Speedway sale and remain committed to using the proceeds to strengthen our balance sheet and return capital to shareholders. And third, we took incremental steps to reduce our cost structure, including the implementation of a workforce reduction plan. The difficult decision to reduce our workforce was not made lightly, and we are committed to treating our employees with integrity and respect as we take these necessary steps to position the company for through-cycle resiliency.”

Source: Seeking Alpha.

MPC’s share price closed 6.1% higher on November 2nd, since the loss was less-than-expected. However, the closing price of $31.30 was nevertheless down 51% year-to-date.

MPC reports historical market data on crack spreads, which are proxies for its refinery margins. The “blended” crack spread averaged $5.57/barrel for the third quarter, down from $13.88/barrel from a year ago.

Note: Blended Mid-Con/USGC/West Coast crack spread is weighted 38%/38%/24% based on MPC’s refining capacity by PADD.

During the company’s earnings call, it noted that “while crack spreads improved quarter-over-quarter, margins in all regions remained under pressure, as crude differentials narrowed considerably compared to the second quarter.”

For the fourth quarter outlook, the company:

expects total throughput volumes of just under 2.5 million barrels per day, slightly down from third quarter actual throughput. Distribution costs are expected to be approximately $1.3 billion for the fourth quarter.”

On the conference call, CEO Mike Hennigan stated:

Overall, gasoline and diesel are obviously doing much better than jet fuel. But at the end of the day, this is a commodity business, it’s a margin business. And to your very point, the way that the industry gets itself back into a good position is twofold, is one is demand recovers to the point of post-Coronavirus, whenever that occurs, hopefully vaccines are progressing, as we’ve been reading about. And I’m sure you guys have been reading about, so the expectation for that to occur sooner is great news. And that’ll help on the demand side.”

U.S. Fundamentals

Total U.S. petroleum product demand was off 11.3 % in the four weeks ending October 23rd, and 12.7 % in the year-to-date.

Gasoline demand was off 10.2% in the past 4 weeks, and 13.1% in the year-to-date.

Distillate demand is down 5.2% in the past 4 weeks and 9.2% in the year-to-date.

Jet fuel demand is down 44.3% over the past 4 weeks and 40.3% in the year-to-date.

Due to the collapse in demand, and its incomplete recovery, U.S. refiners had to reduce their utilization rates, given low refinery margins. The 4-week trend is down 14.5% and the year-to-date trend is down 14.0 %.

On a year-over-year basis, crude stocks are 51 million barrels higher…

Gasoline stocks are 6 million barrels higher…

And distillate stocks are 37 million barrels higher.

Looking forward, NYMEX crack spread futures are depressed.

Conclusions

The pandemic has been catastrophic for U.S. oil refiners. And oil demand numbers do not yet point to a recovery that would allow refiners to operate near capacity.

MPC is the largest U.S. refiner and so would be most affected. Furthermore, the future implies more difficulties.

The company’s share price has suffered. But the outlook is not encouraging for an investment at this time.

Disclosure: I/we have no positions in any stocks mentioned, but may initiate a short position in MPC over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.