Morningstar | Marathon Petroleum’s Analyst Day Highlights Future Potential; Shares Undervalued
Marathon Petroleum held its first analyst day since merging with Andeavor on Dec. 4 when 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 the initial $1.0 billion and a 50% free cash flow payout rate in 2019. Nothing in the presentation results in a change to fair value estimate or narrow-moat rating. However, the event serves as a reminder of Marathon’s high-quality asset base and its earnings growth potential and cash-generating capability. After a steep decline in its shares 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. Trading at the widest discount to our fair value estimate, Marathon is our top choice.About half the synergies are in the refining segment with the rest 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. As we’ve previously highlighted, the large repurchase plan brings Marathon’s total cash return yield in line with peer Valero, who sports a higher dividend yield.
For more on refiners see our Sept. 21 report, "Independent Refiners: Laissez les Bons Temps Rouler?"
Marathon Petroleum is an independent petroleum refining and marketing, retail and midstream company. The company's segments include: Refining and Marketing, which refines crude oil and other feedstocks at its refineries, purchases refined products and ethanol for resale and distributes refined products; Retail, which sells transportation fuels and convenience products in the retail market across the U.S.; and Midstream, which transports, stores, distributes and markets crude oil and refined products via refining logistics assets, pipelines, terminals, towboats and barges, gathers, processes and transports natural gas, and gathers, transports, fractionates, stores and markets natural gas liquids.
Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. The company offer an extensive line of products and services for individual investors, financial advisors, asset managers, and retirement plan providers and sponsors.
Morningstar provides data on approximately 530,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 18 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its investment advisory subsidiaries and had approximately $185 billion in assets under advisement and management as of June 30, 2016.
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