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Ohio-based independent oil refiner and marketer Marathon Petroleum Corporation (MPC - Analyst Report) reported strong first quarter 2012 profits, buoyed by wider refining margins.

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

Marathon Petroleum reported earnings per share of $1.70, blowing away the Zacks Consensus Estimate of $1.27 and significantly above the year-ago period profit of $1.48. Revenues at $20,275.0 million were up 13.5% year over year and also surpassed the Zacks Consensus Estimate of $19,107.0 million.

In a separate announcement, Marathon Petroleum said that it is looking at strategic alternatives for some of its pipeline assets, including the potential formation of a master limited partnership (MLP) by way of an initial public offering.

Segmental Performance

Refining & Marketing: Margins in the refining business increased significantly from the year-earlier levels. The situation was further helped by wider sweet/sour differential.

Marathon Petroleum’s refining and marketing unit earned $943 million during the quarter, compared to profits of $802 million last year – reflecting higher margins and crack spreads.

The company's realized gross refining and marketing margin of $8.36 per barrel was up markedly from last year period's margin of $6.73 per barrel. Total refined product sales volumes were down marginally (by 0.6%) from the year-earlier level to 1,532 thousand barrels per day, while throughput was virtually flat at 1,320 thousand barrels per day.

Speedway: Income from the Speedway retail stations totaled $50 million during the quarter, up from $33 million in the year-ago period. The positive comparison was driven by improved gasoline and distillate gross margin, together with higher merchandise gross margin. However, same-store fuel sales were down by 1.1% year over year.

Pipeline Transportation: Segment profitability for the most recent quarter was $42 million, down 17.7% from the first quarter of 2011, adversely affected by lower equity earnings.   

Capital Expenditure & Balance Sheet

During the quarter, Marathon Petroleum spent $240 million on capital programs (64% on Refining & Marketing). As of March 31, 2012, the company had cash and cash equivalents of $2,205.0 million and total debt of $3,321.0 million, with a debt-to-capitalization ratio of 26%.

Recommendation & Rating

Spun out of parent Marathon Oil Co. in June 2011, Marathon Petroleum is a leading refiner and marketer of petroleum products in the U.S.

We have a long-term Outperform recommendation on the stock. Our bullish investment theme stems from Marathon Petroleum’s scale advantage, impressive asset quality, and an extensive midstream/retail network that diversifies its portfolio and provides more stable revenue streams.

We believe management’s recently approved $2 billion share repurchase program and potential formation of a midstream MLP could further boost shareholder value. Marathon Petroleum’s low debt ratio and hefty cash balance add to the positive sentiment. These factors, coupled with the relatively inexpensive valuation, make the company an attractive investment.

For the short-term, though (1-3 months), Marathon Petroleum currently retains a Zacks #3 Rank (Hold rating).

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