01—Abstract
Summary
Summary of the 10-K filed February 29, 2012. Cited figures are marked; the original filing is the authoritative source.
Marathon Petroleum Corporation (MPC) closed its first full year as a standalone public company in 2011, following its June 30, 2011 spinoff from Marathon Oil.
Net income rose to $2.39 billiona ($6.67 per diluted share) from $623 million in 2010, driven almost entirely by Refining & Marketing, whose income from operations jumped to $3.59 billion from $800 million. The refining and marketing gross margin widened to $7.75 per barrel from $2.81, largely because WTI traded at a steep discount to LLS (a $14.04/bbl widening), which management estimates added $1.69 billion to margins. Revenue grew to $78.6 billion, and Speedway and Pipeline Transportation contributed steadier but smaller earnings ($271 million and $199 million).
Balance sheet and capital return actions are a key part of the story. MPC ended 2011 with $3.08 billionb in cash, $3.31 billion of debt (26% of total capitalization), and $6.08 billion of total liquidity, and it holds investment-grade ratings (Baa2/BBB). The board raised the quarterly dividend 25% in October 2011 and in February 2012 authorized up to $2.0 billion of share repurchases over two years, including an initial $850 million accelerated share repurchase.
The 2012 capital budget is $1.42 billionc, with the Detroit heavy oil upgrading project (about 85% complete, due Q3 2012) as the main focus. Investors should weigh the 2011 results as heavily dependent on an unusually wide WTI-LLS spread, which the filing itself notes may not persist, and against this, the company faces ongoing exposure to environmental rules, RFS2 renewable fuel compliance, the Kentucky emergency pricing lawsuit, and tax-sharing indemnities owed to Marathon Oil. The company is also evaluating a possible MLP IPO for certain midstream assets, which is not yet committed.
02—Key points
Key Highlights
- Net income of $2.39 billion ($6.67 per diluted share) in 2011, up sharply from $623 million in 2010, on revenue of $78.6 billion
- Refining & Marketing income from operations rose to $3.59 billion from $800 million; gross margin reached $7.75/bbl vs. $2.81/bbl, aided by a wide WTI discount to LLS
- Strong liquidity: $3.08 billion cash, $6.08 billion total liquidity, and $3.31 billion debt (26% of total capitalization) with investment-grade ratings
- Shareholder returns expanded: quarterly dividend raised 25% in October 2011 and up to $2.0 billion in buybacks authorized over two years, including an $850 million ASR
- Growth investments: $1.42 billion 2012 capital budget, with the $2.2 billion Detroit heavy oil upgrade (85% complete) expected online by year-end 2012
- Speedway expansion via acquisition of 88 GasAmerica stores (announced Feb 2012), plus a possible MLP IPO for midstream assets under evaluation
- Key risks: dependence on volatile crack spreads and crude differentials, RFS2 renewable fuel compliance costs, the Kentucky emergency pricing lawsuit ($89 million alleged overcharges), and uncapped tax indemnities to Marathon Oil
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2011filed February 29, 2012Financial Statements
FY2011 against FY2010
| Line item | FY2011FY2010 | Change |
|---|---|---|
| Revenue | $78.64B$62.49B | +25.8% |
| SG&A Expenses | $1.06B$874.00M | +21.2% |
| Operating Expenses | $75.01B$61.59B | +21.8% |
| Operating Income | $3.75B$1.01B | +270.4% |
| Interest Expense | $164.00M$18.00M | +811.1% |
| Net Income | $2.39B$623.00M | +283.5% |
| EPS (Basic) | $3.35$0.88 | +282.9% |
| EPS (Diluted) | $3.33$0.87 | +283.3% |
| Shares Outstanding (Basic) | 712.00M712.00M | 0.0% |
| Shares Outstanding (Diluted) | 714.00M716.00M | −0.3% |
05—Questions
Frequently Asked Questions
How much of MPC's 2011 earnings growth came from its refining business, and was it sustainable?
Almost all of it. Refining & Marketing income from operations increased $2.79 billion to $3.59 billion, while consolidated net income rose $1.77 billion. Management attributed the gain mainly to the widening WTI-LLS differential, which it estimated added $1.69 billion to margins. The filing notes that WTI traded at a significant discount to LLS during 2011 due to mid-continent logistical constraints, so this benefit depends on market conditions that may not persist.
How strong is MPC's balance sheet after the spinoff?
Solid. At December 31, 2011, MPC had $3.08 billion in cash and $6.08 billion in total liquidity including a $2.0 billion revolver and a $1.0 billion receivables securitization facility, both undrawn. Total debt was $3.31 billion, mostly fixed-rate senior notes issued in February 2011, and the debt-to-total-capital ratio was 26%. Management said it is committed to maintaining an investment-grade profile, with ratings of Baa2 (Moody's) and BBB (S&P).
What is MPC doing with its cash, and what does the capital return program look like?
The board raised the quarterly dividend 25% to $0.25 per share (first paid in 2011 at $0.20 and $0.25) and authorized up to $2.0 billion in share repurchases over two years, announced February 1, 2012. On February 3, 2012, MPC entered an $850 million accelerated share repurchase, receiving 9.986 million shares initially, with full delivery expected by the end of Q3 2012. Repurchases beyond the ASR depend on market conditions and may be discontinued.
What are the biggest risks and open legal or regulatory issues investors should watch?
Key risks include volatile refining margins and crude price differentials, compliance costs under the Renewable Fuel Standard (RFS2) and possible EPA greenhouse gas rules for refineries, and the Kentucky emergency pricing suit alleging $89 million of overcharges in 2005, with a 2011 amendment adding further claims. MPC also faces an MTBE suit by New Jersey and an uncapped indemnity to Marathon Oil for certain pre-spinoff taxes. Management said it cannot estimate a reasonably possible loss for the Kentucky case.
What growth projects and strategic moves are planned for 2012?
The main project is the $2.2 billion heavy oil upgrading and expansion at the Detroit refinery, about 85% complete at year-end 2011, which is expected to add roughly 15 mbpcd of crude capacity and allow processing of Canadian bitumen blends after construction finishes in Q3 2012. Speedway plans to acquire 88 GasAmerica stores in Indiana and Ohio, expected to close by May 2012. MPC is also evaluating a possible IPO of a master limited partnership for certain midstream assets, though no registration statement would be filed before Q2 2012 at the earliest.
06—Continue