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Gurus Bought This Oil & Gas Marketer Spin-off

April 14, 2014 | About:

On Jan. 31, 2011, Marathon Oil Company (MRO) announced the spin off of refining, pipeline and marketing operations. The decision gave birth to Marathon Petroleum (MPC) and was carried out completely by July 1 of the same year. After six months of stable market performance, the stock saw great improvements throughout 2012, before entering a declining trend on the second half of the following year.

Nonetheless, the trend was reverted by the end of the year with a strong performance. Throughout March, stock face value entered a new negative trend giving prospect investors a new opportunity to enter the business. Several gurus anticipated the good moment, and stock transactions reached high volumes during the last quarter of 2013. The new cash injection should have a positive impact on performance if management makes intelligent decisions, unleashing the potential growth.

Adapting to Long-Term Goals

Currently, Marathon Petroleum continues to reshape its portfolio after the spin-off. In line, management announced the acceptance of bids for the North Sea business, and expressed a wish to sell its interest in an offshore Angola block. The proceeds are expected to finance the acquisition of acreage at Eagle Ford in south Texas and expansion of the ongoing share buyback program. Altogether, the transactions will concentrate the portfolio toward higher margin and growth opportunities.

A great initiative by Marathon Petroleum, aimed at increasing market share, is the expansion of its current loyalty card programs. Customers will be treated with a cents-off-per-gallon discount available in the form of gift cards and promotional cards. "We see this as an investment in the core of the Marathon brand network that will provide dividends for many years," said MPC brand marketing director Bill McCleave. The program will be executed through prepaid cards good for a total of 100 gallons, which may be redeemed over multiple fueling transactions at participating locations.

Marathon Petroleum currently carries a “Buy” consensus rating. And since December the stock has only been downgraded by Barclays to “Market Weight”. The change in rating however, is the consequence of an early overestimation. Most importantly, the stock remains well below the consensus target price pushed by analysts of $90.50. This gives room for profit to potential investors.

Moving Along and Forward

Before looking at the high points of Marathon Petroleum, it is worth noting the company has been on a legal row. Oscar Garcia, an employee of Wyatt Field Services, was working on a fare line at the company CPR2 unit. The claimant argues he was misinformed that no special tools or protective equipment was needed. Also, Mr. Garcia accused the company of failing to properly isolate the line.

On the upside, Marathon Petroleum enjoys a strong competitive market positioning thanks to an advantageous operative scale, impressive asset quality, and extensive midstream and retail network. The company is the fourth largest domestic refiner with a combined crude oil processing capacity of approximately 1.7 million barrels per day through its portfolio of seven refineries. Also, the acquisition of BP (BP)’s Texas City refinery strengthen the company’s export business while improving production flexibility.

Currently trading at 12.5 times its trailing earnings, Marathon Petroleum carries a 6% discount to the industry average. Additionally, regular dividend increases and the ongoing share buyback program highlight the company s commitment to create value for shareholders. Most importantly, overall performance has improved year-over-year since the consolidation of the spin-off. However, operating margins remain thin as acquisitions are integrated.

Andreas Halvorsen (Trades, Portfolio) and John Griffin (Trades, Portfolio) are the two largest shareholders, position reached with a single purchase during 2013. With the Peter Lynch earnings line closing in to stock price for the first time, added to a small discount to the industry, this may be the best time for acquiring the stock.

Disclosure: Vanina Egea holds no position in any of the mentioned stocks.

About the author:

Vanina Egea
A fundamental analyst at Lone Tree Analytics

Visit Vanina Egea's Website


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