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On May 22, 2014, Speedway LLC − an affiliate of Ohio-based independent oil refiner and marketer Marathon Petroleum Corp. (MPC - Analyst Report) – has entered into a definitive contract with integrated energy firm Hess Corp. (HES - Analyst Report).

Per the agreement, Speedway will purchase the retail and transport operations of Hess Corp for a consideration of roughly $2.87 billion, which will likely be financed with debt and available cash. Following the acquisition, Speedway will be one of the largest gas convenience stores operators along the U.S. East Coast. The transaction is expected to be completed by the end of third quarter 2014, pending regulatory approvals.

Despite being a leading oil refiner, Marathon Petroleum is unable to generate steady and stable cash flows from its refining operations, owing to the inherent volatility of the business. The company foresees significant and more importantly stable cash flows for its shareholders, if it expands its retail operations. Hence, Marathon Petroleum considers the purchase of Hess Corp’s retail business as profitable. Hess Corp will also benefit from the sale as it is divesting its downstream properties to focus primarily on upstream activities.

Marathon Petroleum revealed that the acquisition is expected to expand its retail business from 9 to 23 states in the U.S. east and southeast coast. Moreover, with increased pipeline transportation exposure to more geographic locations, Marathon Petroleum will be able to significantly increase the sales of its refined products.

Marathon Petroleum is the fourth largest domestic refiner with a combined crude oil processing capacity of approximately 1.7 million barrels per day through its portfolio of seven refineries. The company, in its current form came into existence following the 2011 spin-off of Houston, TX-based Marathon Oil Corp’s (MRO - Analyst Report) refining/sales business into a separate, independent, publicly traded entity.

However, the requirement of policies to reformulate fuel and lower emission from refinery operations make the industry a highly regulated one. As a result, Marathon Petroleum is often forced to divert cash flows to ensure regulatory compliance, which can adversely impact its profitability.

Marathon Petroleum currently carries a Zacks Rank #3 (Hold), implying that it is expected perform in line with the broader U.S. equity market over the next one to three months.

Meanwhile, one can look at better-ranked players in the same industry like Global Partners LP (GLP - Snapshot Report). The stock currently sports a Zacks Rank #1 (Strong Buy).
 

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