Analyst Actions: Credit Suisse Revises Estimates for Marathon Petroleum Corp
Share Reaction Demonstrates Dividend Importance; Revising Estimates.
Bottom Line: We ascribe a weak share price reaction to MPC's investor day to a lack of announcement on dividends and MLP's (not that we expected either). Working through the presentation details suggests that our EBITDA forecasts look too low - we raise mid-cycle EBITDA by 8% [we are 17% above 2013 EPS consensus]. We show source of EBITDA self-help in a simple chart in the full report. As the Board consider the likely free cash flow from MPC's competitive advantage, there is room for the dividend to rise.
Self Help Is a Key Offset to Narrowing WTI-LLS Spreads: We believe MPC presented 5 specific areas of EBITDA growth to offset declining WTI-LLS spreads: (1) higher diesel yields, (2) a potential doubling of Canadian heavy crude runs, (3) growth at Speedway, (4) rising Eagleford crude at TX City, (5) Utica crude into Canton and Catlettsburg. MPC could deliver 2014 EBITDA of c$5.2bn, not much lower than 2011 levels (when WTI-LLS spreads blew out). This would place MPC on an EV/EBITDA of just 2.7x.
Further EBITDA Upside Is Possible: Refining competitive advantage is often derived from crude logistics costs. Our WTI-LLS differential of $3/bbl could prove too low - there are $2-3/bbl of incremental costs from the end of Seaway to St. James, LA. Longer term, excess domestic crude production growth could drive an inversion of LLS-Brent. If LLS-Brent does invert, then WTI-Brent could end up in a $8-10/bbl range (versus our $6/bbl mid-cycle), providing EPS upside for WTI related refiners.
A 30% Payout of Mid Cycle Net Income Implies a 6.5% Div Yield with Substantial Free Cashflow Left Over: We believe MPC will progressively increase its payout over time, a key catalyst for this undervalued free cashflow stream (free cash yield is 18% in 2013 at the current share price).
Estimate Revisions: We are revising our 2011/2012/2013 EPS estimates to $8.55/$5.42/$6.82 (from $8.53/$5.45/$7.02) respectively.
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