Image source: Marathon Petroleum corporate website.
Refining companies in general had a tough start to the year, but Marathon Petroleum (NYSE: MPC) was able to shake off the stench of the first quarter by delivering solid second-quarter earnings. While refining and marketing were helped out a generous bump in refining margins, it was the company's retail and midstream segments that have really impressed as of late.
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Let's take a quick look at Marathon's second-quarter results and what investors should expect in the coming quarter and beyond.
By the numbers
Data source: Marathon Petroleum earnings release.
Considering the rough results last quarter from weak refining margins and high levels of turnaround activity, this quarter's results were a welcome sight. Refining margins were a little weaker than this time last year, but strong enough to generate a decent return. Refining & Marketing make up the bulk of the company's earnings on a quarterly basis, but one trend becoming more apparent in the company's results is a steady increase from its Speedway and Midstream earnings. The gains made in these two segments helped to make up for some of the losses we saw in refining.
Image source: Marathon Petroleum earnings release, author's chart.
If this trend continues, it will be incredibly helpful in smoothing out the company's earnings. Refining earnings are a bit of a feast or famine game from quarter to quarter. A steady stream of cash flow from retail and midstream assets could be very helpful during those lean times.
Catching up on the business side of things
- Refinery utilization rates declined from this time last year but remained at a solid 96% rate. Gross refining margins improved with the market, but total direct operating costs also increasedfrom this time last year to $6.54 per barrel. However, most of that is related to higher turnaround activity and major maintenance.
- On the Speedway and retail side of the business, the company hit on all the marks you'd want to see: higher gasoline volumes, higher gasoline margins, and higher same-store sales & margins for merchandise.
- Marathon's midstream results were driven mostly by the incorporation of MarkWest Energy into MPLX's (NYSE: MPLX) results and its 16% distribution increase. Marathon is the general partner of MPLX and holds incentive distribution rights on the partnership. Compared to the prior quarter, natural gas gathering and processing volumes were down slightly.
- Ever since the acquisition of MarkWest in the fourth quarter of 2015, Marathon has paid down close to $900 million in debt outstanding. The company's debt to capital ratio has declined from 38% to 36% as a result.
- Marathon's board increased its dividend by 12% compared to the prior quarter. Since the company was spun off in 2011, it has increased its dividend by 29% on a compounded annual rate.
From the mouth of management
This quarter's results were much improved from the first quarter, but CEO Mike Herminger believes things will only get better from here as its Midstream investments ramp up and it benefits from the boom times that come with the summer months:
A look at the outlook
It's hard to say exactly what kind of impact we will see from refining margins this quarter, but according to the Scotia Howard Weil weekly refining report, this quarter will likely be a bit weaker than this one. So far in the third quarter, refining margin indicators in Marathon's two most important regions -- the Mid-Continent and Gulf Coast -- have been closer to the first quarter than the second. Marathon expects it will be able to keep its refinery run rates high, but it is still going to have some higher than normal turnaround and maintenance charges per barrel of throughput.
Image source: Marathon Petroleum investor presentation.
What a Fool believes
The big takeaway from this quarter's report is that the company's non-refining business segments are growing at impressive rates and will help to offset the historically lumpy results from refining and marketing. These stable cash flow sources will help the company fund its major capital spending right now and will likely drive greater dividends and share repurchases.
The company's MPLX partnership sounds like it's on much more solid footing than it was a couple of quarters ago, but it will likely still need some help raising funds in the upcoming quarters. It was only two quarters ago that management cut its distribution guidance because of a lack of funding options. So, keep an eye out for any further changes to MPLXs development or payout plans.
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