On Aug 5, 2013, we retained our Neutral recommendation on
independent oil refiner and marketer
Marathon Petroleum Corp.
). Our investment thesis is supported by a Zacks Rank #3 (Hold).
BP PLC (BP): Free Stock Analysis Report
MARATHON PETROL (MPC): Free Stock Analysis
MARATHON OIL CP (MRO): Free Stock Analysis
RANGE RESOURCES (RRC): Free Stock Analysis
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Why the Reiteration?
Spun out of parent
Marathon Oil Co.
) in 2011, the company's positives include its scale advantage,
impressive asset quality and an extensive midstream/retail
network. We believe management's steady dividend increases, the
ongoing share repurchase program and the recent acquisition of
) Texas City refinery could further boost shareholder value.
However, we think the current valuation is fair and adequately
reflects the company's growth prospects. Moreover, Marathon
Petroleum's core business - refining - is faced with a high
degree of volatility, while being capital intensive. This is
expected to limit its ability to generate positive earnings
Marathon Petroleum 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. A major advantage for the company is its proprietary
access to pipelines, which inhibits lower-cost competitors from
supplying Marathon Petroleum's key markets.
Marathon Petroleum's purchase of BP's Texas City refinery - one
of the largest and most complex in the country - will solidify
the position of the former in the fuel export business, apart
from improving production flexibility.
The Findlay, Ohio-based firm's financial flexibility and strong
balance sheet are real assets in this highly-uncertain period for
the economy. Marathon Petroleum remains in excellent financial
health, with over $3 billion in cash/cash equivalents and an
investment-grade credit rating with a debt-to-capitalization
ratio of 22%. Furthermore, an attractive dividend yield and the
ongoing share buyback program highlight the company's commitment
to create value for shareholders.
However, due to the volatile nature of the refining business, we
do not see any significant price upside for Marathon Petroleum
shares in the next few quarters. We expect the company to grow at
a somewhat more conservative and sustainable pace.
Finally, with refiners being buyers of crude, an increase in oil
prices can squeeze their profitability. As a result, with the
commodity's price hovering around $105 per barrel, we expect
Marathon Petroleum's margins to be negatively impacted due to a
rise in the cost of oil it buys to refined products.
Stocks That Warrant a Look
While we expect Marathon Petroleum to perform in line with its
peers and industry levels in the coming months and advice
investors to wait for a better entry point before accumulating
shares, one can look at
Range Resources Corp.
) as a good buying opportunity. This North American energy
explorer - sporting a Zacks Rank #1 (Strong Buy) - has a solid
secular growth story with potential to rise significantly from