Energy stocks took a beating last week, thanks to mounting signs of oversupply in the crude oil market.
Efforts by OPEC and its allied petroleum-exporting nations to support oil prices through production cutbacks have done little to alleviate the issue. Their power to control global oil prices has been diminishing for a long time and, with the advent of increased production in Texas and America’s oil shale fields, price controls are unlikely to do much.
Yet the glut is not all bad. Indeed, sagging energy stock prices have opened up some interesting opportunities. Marathon Petroleum Corp. (MPC, Financial) is an energy stock with both strong dividends and room for significant capital appreciation.
Yield and growth
Marathon Petroleum is one America’s energy greats. The company refines, transports and sells petroleum across the world. Marathon is a solid income stock, belied by a somewhat modest yield of 3%. When trailing 12-month buybacks and dividends are put together, the yield is over 16%.
Marathon is also making excellent strides toward growth. Diversified across a range of geographies, Marathon is also blessed with a profitable and wel-positioned retail franchise, Speedway. Dynamic positioning and significant growth potential makes Speedway one of the most attractive retail franchises out there.
Realizing synergies
Marathon has not relied on organic growth alone. This year saw a major move in which Marathon acquired Andeavor, a San Antonio-based rival. The $23.3 billion merger was completed in October. Marathon’s leadership justified the buyout, which has turned Andeavor into a wholly owned subsidiary, on a number of counts, including geographic diversification. More importantly, Marathon hopes to wring significant synergies out of the deal.
Marathon is targeting $1 billion in synergies from the merger, which, if realized, would represent a major positive catalyst for the stock price. The merger has only just gone through, but investors should expect Marathon to telegraph its cost-cutting and rationalization efforts publicly. As synergies materialize, Marathon should see some value appreciation.
Verdict
Marathon fell 6% last week to close at $61.73 per share. Shares are down 8% year to date. That suggests considerable upside potential for the stock price alone, making Marathon more than an income play over the relative near term.
A recent note from RBC Capital sums it up well, highlighting the company’s “diversified refining footprint across the Midwest, Rocky Mountains, Gulf Coast and West Coast,” and noting that it enjoys, “the most attractive retail franchise in our coverage universe.” RBC has a price target of $92, a not unreasonable target given the company’s growth potential
Interested investors should listen in on Dec. 4, when Marathon hosts its analyst day. It should reveal progress in the Andeavor synergies, which may well bolster the flagging share price.
Disclosure: No positions.
