Marathon Reverses Course, Embraces Activist's Proposals
Our narrow moat rating is unchanged as the firm embraces actions proposed by Elliot Management.
Providing an update on its strategic actions to enhance shareholder value, best idea Marathon Petroleum (MPC) announced it will accelerate the dropdown of the remaining MLP-eligible assets to MPLX, exchange its GP IDR interest for LP units and conduct a strategic review of its Speedway segment. With the announcement, management is reversing course and embracing the actions proposed by Elliot Management in November. Initially, Marathon planned to drop the remaining assets ($1.4 billion in EBITDA) over the course of three years, but will now do so entirely in 2017, assuming tax clearance is achieved. Exchange of the GP IDR interest for LP units will take place once tax clearance and approvals for all dropdowns is received toward year-end 2017. We view both actions positively as they should highlight the midstream value held by Marathon but not recognized by the market. Further, it should simplify the two entities structures, lower MPLX’s cost of capital, and enhance its future distribution growth.
Management plans to provide an update on the review of the Speedway segment by mid-2017 with a tax-free spin-off the most likely outcome. Elliot Management previously argued ownership of Speedway was not adequately reflected in Marathon's share price and that operational benefits of integration were not material enough to justify a combined structure.
While our model reflects management’s prior plan to drop assets over the course of three years, we already incorporated a higher distribution growth rate for MPLX in our last update. We also previously accounted for the value of the GP interest. As a result, neither announcement impacts our fair value estimate. We currently consider Speedway as a consolidated entity, but valuing it separately may result in a modest increase to our fair value estimate. Our narrow moat rating is unchanged.
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Allen Good does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.
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