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Marathon (MPC) Benefits From Strong Margins & Fundamentals

Marathon Petroleum MPC — a leading independent refiner, transporter and marketer of petroleum products — offers an opportunity for investors interested in the energy sector. The company also has strong earnings trends to back up its future performance.

This Findlay, OH-based MPC, in its current form, came into existence following the 2011 spin-off of Houston, TX-based Marathon Oil Corporation’s refining/sales business into a separate, independent and publicly-traded entity. It operates primarily in two segments: Refining and Marketing, and Pipeline Transportation (or Midstream).

Let’s discuss the reasons that make Marathon Petroleum an attractive pick:

Macro Tailwinds

Even as fears related to high inflation and slowing growth somewhat cloud the outlook for Oil/Energy, it has remained the best S&P 500 sector over the past year. The space has generated a total return of around 6.2% in the trailing 12 months compared with the S&P 500’s decline of 11.6%. Apart from a relatively constructive fundamental picture, the sector is enjoying support from geopolitical uncertainty amid Russia’s military operations in Ukraine. In March 2022, crude prices surged to multi-year highs of $130 on concerns about supplies from Russia, which is one of the world's largest producers of the commodity.

Agreed, oil has pulled back from those lofty levels, However, the commodity still has enough reasons to stay elevated in the near-to-medium term, with the conflict showing no signs of a quick resolution, the risk of dwindling inventory and the influential oil exporters’ group OPEC sticking to a conservative production profile. While the banking sector turmoil did affect the sector temporarily, the crisis seems to have eased now. Crude also got a leg up and is now trading around $75 after U.S. Federal Reserve signaled an imminent end to interest rate increases.

Solid Rank and VGM Score

Marathon Petroleum is a Zacks Rank #2 (Buy) stock in the Zacks Oil and Gas - Refining & Marketing industry, which carries a Zacks Industry Rank #54 — placing it in the top 22% of around 250 Zacks industries. In addition to the favorable rank, MPC enjoys a Value as well as a Growth Score of A, helping it round out with a VGM Score of A. Our research shows that stocks with a VGM Score of A or B, when combined with a Zacks Rank #1 (Strong Buy) or 2, offer the best upside potential.

Q4 Outperformance

MPC posted robust Q4 results on Jan 31, with earnings per share of $6.65, which comfortably beat the Zacks Consensus Estimate of $5.54 and increased from a profit of merely $1.30 per share in the year-ago period. The company’s bottom line was favorably impacted by the stronger-than-expected performance of its key Refining & Marketing segment. The operating income of the segment totaled $3.9 billion, ahead of the Zacks Consensus Estimate by 38%. To go with the earnings beat, MPC repurchased $1.8 billion of shares during the fourth quarter.

Buying Opportunity Still Exists

After bottoming out (in the mid-to-high teens) during the start of the pandemic, MPC shares have turned it around in style. MPC peaked in January this year at over $136 and has held up reasonably well even as most energy scrips faced significant downward momentum. In fact, Marathon Petroleum is up 56.7% in a year while the markets have gone lower. This powerful uptrend during a down market indicates that investors should start looking at the name to see if its right for their portfolio. With the company still experiencing good market conditions, we believe that Marathon Petroleum stock has enough firepower left to keep chugging along.

 

Zacks Investment Research
Zacks Investment Research


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Analyst Estimates Raised

MPC’s earnings revisions have also trended in the right direction over the past 60 days, as analysts have consistently taken up their numbers. As a matter of fact, the Zacks Consensus Estimate for Marathon Petroleum’s 2023 bottom line has gone up from a profit of $16.50 to $20.31 over the past 60 days, while next year’s number indicates a rise from $9.29 per share to $12.08.

Fundamental Strength

Marathon Petroleum's $23.3 billion acquisition of Andeavor has integrated the premier assets of both the companies, bolstering the scale and leadership position of the combined entity in the United States. As it is, the company’s access to lower-cost crude in the Permian, Bakken and Canada helps it to benefit from the differentials. MPC’s portfolio of midstream operations bodes well too, somewhat reducing its exposure to volatile commodity price fluctuations.

The industry’s improved fundamentals in the form of constrained supply and robust demand for refined products like gasoline have led to rising refining profitability for the players involved. As a reflection of this, Marathon Petroleum’s fourth-quarter refining margin of $28.82 per barrel improved significantly from $15.88 a year ago.

In 2021, Marathon Petroleum sold its Speedway business to Japanese retail group Seven & i Holdings — owner of the 7-Eleven convenience store chain — for $21 billion. Apart from providing Marathon Petroleum with a much-needed cash infusion, the disposal of its Speedway-branded gas stations came with a supply agreement per which Marathon Petroleum will provide about 7.7 billion gallons of gasoline per year to 7-Eleven, thus ensuring a steady revenue stream.

Bottom Line

Given this backdrop, the time seems right to consider buying Marathon Petroleum. While there are some apprehensions that the company may have gotten too far ahead of itself, especially with the inflation-triggered cost increases, the tightness in product demand should keep refining margins elevated moving forward. All these suggest strong long-term cash flows that should support higher price points for its shares.

Other Energy Stocks to Buy

Along with Marathon Petroleum, investors interested in the energy sector might look at operators like NOW Inc. DNOW, CVR Energy CVI and Sunoco LP SUN, each carrying a Zacks Rank #1 (Strong Buy) currently.

You can see the complete list of today’s Zacks #1 Rank stocks here.

NOW beat the Zacks Consensus Estimate for earnings in each of the trailing four quarters. NOW has a trailing four-quarter earnings surprise of 41.3%, on average.

DNOW is valued at around $1.2 billion. NOW has seen its shares edged down 0.6% in a year.

CVR Energy is valued at some $3.3 billion. The Zacks Consensus Estimate for CVR’s 2023 earnings has been revised 3.6% upward over the past 30 days.

CVR Energy, headquartered in Sugar Land, TX, beat the Zacks Consensus Estimate for earnings in each of the trailing four quarters. CVI shares have gained 27.7% in a year.

Sunoco beat the Zacks Consensus Estimate for earnings twice in the trailing four quarters. Sunoco has a trailing four-quarter earnings surprise of 21.6%, on average.

Sunoco is valued at around $4.4 billion. SUN has seen its shares increase 7% in a year.







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