When it comes energy stocks, I tend to focus on the legacy exploration and production companies and stocks. They are well-capitalized, are constantly innovating, have great economies of scale and are going to do very well over time. I tend to ignore some of the other players, and that’s been to my detriment. Case in point: Marathon Petroleum Corporation (NYSE: MPC) stock is up about 130% over the past two years. MPC it also just made a major acquisition in the refining arena, so it’s time to take a closer look at MPC stock.
About Marathon Petroleum Corporation
MPC stock has three divisions: Refining & Marketing, Speedway convenience stores and Midstream Operations. On the refining side, it has six refineries that create gasoline, distillates, propane, feed stocks, heavy fuel oil and asphalt. It then markets those refined products to resellers, consumers, retailers, wholesalers, airlines, transportation companies and utilities. It also provides the gasoline for its Speedway stores.
On the Midstream side, it gathers, transports, fractionates, stores, and markets natural gas liquids (NGLs) and transports and stores crude oil and refined products. It has a nice array of assets: 18 asphalt terminals and 61 light products terminals, 2,744 Speedway stores spread out over 21 states, 289 transport trucks, 296 trailers, along with 1,999 leased and 19 owned railcars.
It also owns, leases or has interest in thousands of miles of pipelines: 1,613 miles of common carrier crude pipelines, 2,194 miles of crude oil, 1,917 miles of products pipelines and 228 miles of private products pipelines.
That’s a nice little operation.
Business is Booming
And business is booming. Income from operations in the quarter was $440 million, an increase of $150 million from last year. Refining and marketing had an operational loss $133 million, almost doubling last year’s loss of $70 million. The midstream segment reported $567 million of income from operations and is seeing strong organic growth, thanks to three new processing plants.
Speedway convenience stores contributed $95 million in operational income.
MPC management announced a $20 billion acquisition of Andeavor (NYSE:ANDV), another refining and marketing company. you may not have heard of the company, but you certainly have heard of its gas stations, which operate under the Arco, Shell, Mobil and SuperAmerica brands. It also has about 13 million barrels worth of refined product storage tanks and sells refined products just like MPC does, thanks to its 10 petroleum refineries. ANDV used to be known as Tesoro.
ANDV has just over half $1 billion in cash which, added to MPC stock cash on hand of $4.65 billion, gives the total entity over $5 billion in cash. The combined entity does have close to $25 billion in debt, but neither company is having issues in terms of servicing that debt.
Bottom Line on MPC Stock
While ANDV has never had the most robust free-cash-flow generation, MPC stock has. MPC generated about $4.2 billion of it last year, $1.1 billion the year before, $2 billion the year before that and has been increasing its dividend fairly consistently over the years.
I think, with this acquisition, we have a very interesting play in the refining segment — and quite an impressive footprint as far as gas stations are concerned.
If you’re looking for another type of energy play for your portfolio, this new combined entity under the Marathon Petroleum Corporation stock name is worth considering.
Lawrence Meyers is the CEO of PDL Capital, a specialty lender focusing on consumer finance and is the Manager of The Liberty Portfolio at www.thelibertyportfolio.com. He does not own any stock mentioned. He has 23 years’ experience in the stock market, and has written more than 2,000 articles on investing. Lawrence Meyers can be reached at TheLibertyPortfolio@gmail.com.
