We have downgraded Findlay, Ohio-based independent oil refiner
Marathon Petroleum Corporation
) shares to Neutral from Outperform purely on valuation grounds,
as we see limited near-term price upside.
The company, in its current form, came into existence following
the 2011 spin-off of Houston, Texas-based
Marathon Oil Corporation
) refining/sales business into a separate, independent and
publicly traded entity. Marathon Petroleum operates in three
segments: Refining and Marketing, Speedway (Retail) and Pipeline
It is the fifth largest domestic refiner with a combined crude
oil processing capacity of approximately 1,193,000 barrels per
day through its portfolio of six 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.
We continue to like Marathon Petroleum for its scale advantage,
impressive asset quality, and an extensive midstream/retail
network. We believe management's recently commenced $2 billion
share repurchase program and the proposed acquisition of
) Texas City refinery could further boost shareholder value.
However, we think the current valuation is fair and adequately
reflects the company's future 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 has pegged its 2012 capital budget at $1.4
billion, up 17% from the amount it invested in 2011 and some $150
million more than previous announcement - quite high by industry
standards. This may adversely affect the company's leverage and
deteriorate its credit metrics. Additionally, the increasing
capital intensity of its operations may result in reduced returns
Considering these factors, our long-term total return expectation
for Marathon Petroleum remains muted. We do not see any
significant price upside for the shares in the next few quarters
and expect the company to grow at a somewhat more conservative
and sustainable pace.
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