Marathon Moves Beyond Refining
We like its earnings growth potential and cash-generating ability.
Marathon Petroleum (MPC) held its first analyst day since merging with Andeavor, during which it updated strategic plans and financial targets for the next five years. The key takeaways include an increase in its merger synergy target to $1.4 billion annually, from $1.0 billion initially, and a 50% free cash flow payout rate in 2019. Nothing in the presentation warranted a change to our fair value estimate or narrow economic moat rating. However, the event served as a reminder of Marathon’s high-quality asset base, earnings growth potential, and cash-generating capability. After steep share price declines during the past two months over concerns about IMO 2020 implementation, weakening gasoline margins, and narrowing crude spreads, the refining sector has become more attractive. Of these companies, Marathon is trading at the widest discount to our fair value estimate and is our top choice.
About half the synergies are in the refining segment; the rest are spread over retail, midstream, and corporate, with full realization targeted for year-end 2021. In addition to the synergies, strategic investments that increase upgrading capacity, yield flexibility, and conversion capacity should lead to $1.1 billion in refining earnings growth by year-end 2022. In 2019, management is targeting at least a 50% payout of free cash flow including at least 10% dividend growth and repurchases of $2.5 billion. Management anticipates its current $5.6 billion repurchase authorization being complete by year-end 2020. The large repurchase plan brings Marathon’s total cash return yield in line with peer Valero (VLO), which sports a higher dividend yield.
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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