Marathon Petroleum Earnings: Weaker-Than-Expected Earnings Spark Selloff; Long-Term Outlook Intact

Key Morningstar Metrics for Marathon Petroleum

• Fair Value Estimate: $158.00
• Morningstar Rating: ★★★
• Morningstar Economic Moat Rating: Narrow
• Morningstar Uncertainty Rating: Very High

What We Thought of Marathon Petroleum’s Earnings

Marathon Petroleum’s MPC third-quarter earnings fell short of expectations, sending shares lower. Refining results were hindered by weaker capture rates despite costs, throughput, and utilization meeting guidance. The company repurchased $650 million in stock and increased its dividend by 10%.

Why it matters: It’s a rare miss from a firm that has consistently exceeded expectations in continually improving operations. However, the weaker-than-expected quarter is of little consequence to the long-term outlook, as Marathon remains a top-quality operator.

• The relative weakness in the quarter—most refining peers already reported better-than-expected earnings—is unlikely to persist. Capture rates were negatively affected by market conditions that are already reversing, as well as downtime at the resid hydrocracker in Galveston Bay.
• Realized margins increased to $17.60 a barrel from $14.63/bbl last year on a strong market environment. Operating costs increased to $5.59/bbl from $5.23/bbl last year. Capture rates were 96%, but year to date are 102%, compared with 95% a year ago.

The bottom line: Our narrow moat rating and $158 fair value estimate remain unchanged, which assumes a return to midcycle conditions over the long term. The selloff was an overreaction, even as shares look expensive to us. While we see the stock as overvalued, while the current market remains supportive of margins and shareholder returns.

• Repurchases fell during the quarter, but the current market should result in increased repurchases. MPLX increased its payout 12.5% and will continue to do so for a few years, underpinning continued 10% dividend growth at Marathon.
• Like other refiner management teams, Marathon’s management remains upbeat on the current environment, citing strong demand, low inventory levels, and constrained supply as well as improving differentials as reasons margins should remain strong.