Oil refining can be a more volatile business than other areas
of the energy industry. That's because pricing spreads between
domestic West Texas Intermediate crude and international
equivalents can shift sharply in any given period. When these
margins contract, oil refining is a very difficult business, and
corporate profits dry up. This was a significant hurdle last year
for refiners such as
This year, it's an entirely different story. Operating
conditions have improved substantially, and as a result, so have
financial performances across the industry. As you'd expect, the
stock prices of these companies have risen in response to the
Shares of Marathon Petroleum are up approximately 33% over the
past 52 weeks. While that's certainly a great performance, here
are three reasons why the stock could keep rising.
Refining profitability keeps improving
A major reason for Marathon Petroleum's rally over the past year
has been significant improvement in its core refining and
In all, revenue grew 4% to $26.9 billion. Second-quarter
earnings clocked in at $2.95 per diluted share. This represented
61% earnings-per-share growth from the same period of last year.
Refining operating profit surged 39% in the last quarter. This
was crucial for Marathon's performance, since the refining and
marketing segment is the company's biggest by far, accounting for
approximately 92% of total operating profit.
This theme played out across the industry. For example, Valero
Energy produced 45% earnings growth in the last quarter. The
primary contributor was increased refining volumes. Throughput
volumes averaged 2.7 million barrels per day, a nearly 5%
increase year over year. Management attributed this to discounted
North American light crude oil on the U.S. Gulf Coast.
Integrated structure provides stability
Importantly, Marathon's future will likely not be so heavily
reliant on just refining and marketing. The company has a budding
midstream business, which will help smooth results and reduce
some of the volatility when refining conditions decline.
The benefits of this integrated structure are clear. Marathon
Petroleum generated 39% growth in operating profit in its
pipeline transportation business as compared to the second
quarter of 2013. Management believes its midstream pipeline
business helps the overall company maintain operational
flexibility. With an integrated model, Marathon Petroleum can
reap increased efficiency.
The integrated system also allows Marathon to capture higher
product price realizations in key markets, which actually helps
the refining business.
Increasing shareholder rewards
After providing earnings results last quarter, Marathon Petroleum
announced a large increase to its shareholder rewards
initiatives. The company raised its dividend by 19% and increased
its share buyback authorization by $2 billion. This was an
addition to the remaining $709 million in the company's existing
share repurchase plan.
Management is committed to returning a large portion of cash
to investors through both dividends and share repurchases. It has
significantly increased its capital allocation programs since
becoming an independently traded company, and since its 2011
spinoff, management has increased its share buyback authorization
At recent prices, Marathon yields 2.2%, which is about on par
with the broader stock market. However, the company has increased
its dividend by 35% compounded annually since its spinoff,
making the income potential very attractive.
Marathon Petroleum may still have room to run
This is a good time to be an oil refiner. Favorable pricing
spreads have improved margins, which is significantly boosting
profitability for Marathon Petroleum. Earnings per share came in
strong in the last quarter, driven by improving refining and the
company's integrated business model.
Management is sharing the company's success with investors via
a significantly expandedshare repurchase authorization and a
hefty dividend raise. Through these initiatives, Marathon
Petroleum offers compelling cash returns in addition to its stock
Improving refining, the budding transportation business, and
compelling cash returns are three reasons why we could see this
stock march higher.
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3 Reasons Marathon Petroleum Stock Could Rise
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