by Aaron Levitt | May 28, 2014 9:33 am
The Hess (HES) Truck is back! Sort of.
If you remember, Hess has been under pressure from activist investors to get “mean & lean” and spin-off or sell underperforming and non-core assets. That’s included much of its downstream and refining portfolio.
The final piece to this has been the firm’s classic green-and-white branded retail service stations. Those stations and their eastern seaboard locations were expected to fetch a pretty penny — with both private equity and other integrated energy firms expected to make big bids.
Well, the wait for a buyer is now over. Refining giant and rival Marathon Petroleum (MPC) has decided to step up and snag Hess’s retail assets.
And while the deal is a boon for HES stock and its bid to become a North American-focused E&P firm, the biggest winner could be MPC stock investors. The deal provides plenty of benefits for Marathon and could set-up a juicy spin-off in the future.
So far, most of the market commentary on Hess’s sale has focused on HES stock and fate of its famous Hess Truck Christmas promotion. However, the real action could be in acquirer Marathon Petroleum. The firm is paying $2.87 billion for HES retail and transport network. That money may actually be a great deal for MPC stock investors in the longer term.
First for that price, MPC is gaining control of 1,256 branded retail stores in 16 states. Those stores dot the East Coast and Southeast. More importantly, they will complement Marathon’s current 1,480 Speedway convenience stores it owns across the U.S. Midwest. Together, the combination of stores will be the largest U.S. chain of convenience stores by revenue. Marathon also sells fuel at 5,200 independent retail outlets. Based on last year’s numbers, the newly joined group will have forma revenue of more than $27 billion.
Aside from that hefty revenue, all those gallons of gas, hot dogs and sodas do have another purpose — namely smoothing out bumpy refining revenue.
Refining petroleum is a game of inches, with thin margins determining profits or loss. WTI-Brent crack spreads continue to soften, which has crimped the record profits that many refiners. But sales from convenience stores are quite stable and pretty resilient. And with margins as high as 90% for widely purchased items such as coffee and sodas, it can make for a pretty stable paycheck for refiners operating the stores.
In the longer term, MPC could setting itself up for larger gains in the years ahead. The potential spinoff of its Speedway/Hess retail division should command a huge multiple as it’s the biggest game in town. Already we’ve seen refiners like Valero (VLO) and Murphy (MUR) spin off their retail networks as CST Brands (CST) and Murphy USA (MUSA) to much success. A spinoff situation could garner plenty of excess cash at MPC.
It could use that cash in another endeavor it now how has access to: The potential for MPC to be a fuel trading and export powerhouse.
Currently, Marathon isn’t known for its trading capacity. But the deal could change that. Included in the purchase is access to sought-after pipelines. This includes 40,000 barrels per day of capacity to Colonial Pipeline. That’s one of the few pipelines that travels from refineries on the Gulf Coast to the Eastern Seaboard. By buying Hess, MPC will now be able to ship an incremental 200,000 barrels per day worth of sales from its refining system.
The deal will also be a boon for fuel exports as MPC will now be able to send diesel fuel towards New York for export towards Europe. The shortened time means potential larger margins for Marathon.
And let’s not forget that any pipeline access or ownership gained in the deal can be “dropped down” to Marathon’s master limited partnership (MLP) subsidiary — MPLX LP (MPLX) — for additional tax savings and profits.
Marathon Petroleum has had a pretty good run since being spun off from energy E&P firm Marathon Oil (MRO). MPC has basically risen around 150% since June of 2011 — triple the return of the S&P 500 in that time. That’s a pretty juicy return, and the firm’s 1.9% dividend yield should only grow in the future.
And even more gains might be in store for longer-term investors. The recent purchase of Hess’s assets could be transformative for the refiner on a number of fronts on number of different pathways. All in all, it’s a big win for MPC stock and its investors.
Shares of MPC stock currently trade for an insanely cheap forward P/E of less than 9. That’s a true bargain, if you consider that cheapness doesn’t include any cost savings or profits from the Hess deal. Add in the potential Speedway spin-off and export/fuel trading gains and you have a one heck of a deal for MPC shareholders.
While the focus has been on HES stock and its iconic trucks, the better bet could be in MPC stock.
As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.
Source URL: http://investorplace.com/2014/05/mpc-hes-hess-mro-mplx/
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