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Ohio-based independent oil refiner and marketer Marathon Petroleum Corp. (MPC - Analyst Report) reported weak third quarter earnings, pulled down by lower margins on the back of spiraling costs.

The company, in its current form, came into existence following the 2011 spin-off of Houston, Texas-based Marathon Oil Corp’s (MRO - Analyst Report) refining/sales business into a separate, independent, publicly traded entity.

Marathon Petroleum reported earnings per share – adjusted for special items – of 59 cents, underperforming the Zacks Consensus Estimate of 65 cents and way below the year-ago period adjusted profit of $3.31.

However, revenues – at $26,274.0 million – were up 23.6% year over year and also surpassed the Zacks Consensus Estimate of $23,293.0 million, backed by higher fuel sales volumes and throughput.

Segmental Performance

Refining & Marketing: Margins in the refining business decreased significantly from the year-earlier levels. The situation was further compounded by narrower sweet/sour differentials.

Marathon Petroleum’s refining and marketing unit earned $227.0 million during the quarter, compared to profits of $1,691.0 million last year – reflecting lower margins and crack spreads.

The company's realized gross refining and marketing margin of $2.55 per barrel was down markedly from last year period's margin of $13.12 per barrel.

However, Marathon Petroleum’s total refined product sales volumes improved 33.8% from the year-earlier level to 2,148 thousand barrels per day, while throughput was up 39.6% to 1,877 thousand barrels per day.

Speedway: Income from the Speedway retail stations totaled $102.0 million during the quarter, up from $76.0 million in the year-ago period. The positive comparison was driven by improved gasoline and distillate gross margin, together with higher merchandise gross margin. This was partially offset by higher operating expenses.

Marathon Petroleum’s same-store fuel sales were up by 1.0% year over year.

Pipeline Transportation: Segment profitability for the most recent quarter was $54.0 million, up marginally from the $52.0 million achieved during the third quarter of 2012. Earnings were propped up by higher transportation revenue, somewhat negated by a rise in operating and depreciation expenses.

Capital Expenditure, Balance Sheet & Share Repurchase

During the quarter, Marathon Petroleum spent $411.0 million on capital programs (59% on Refining & Marketing). As of Sep 30, 2013, the company had cash and cash equivalents of $2,018.0 million and total debt of $3,403.0 million, with a debt-to-capitalization ratio of 23%.

Moreover, for the reported quarter, Marathon Petroleum returned about $1,200.0 million to shareholders through dividends and share repurchases.

Zacks Rating

Marathon Petroleum currently carries a Zacks Rank #5 (Strong Sell), implying that it is expected to significantly underperform with the broader U.S. equity market over the next 1 to 3 months.

Meanwhile, one can look at Matador Resources Co. (MTDR - Snapshot Report) and Northern Oil & Gas Inc. (NOG - Snapshot Report) as good buying opportunities. These domestic upstream energy operators – sporting a Zacks Rank #1 (Strong Buy) – have solid secular growth stories with potential to rise significantly from current levels.

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