Ohio-based independent oil refiner and marketer Marathon Petroleum Corporation ( MPC - Analyst Report ) reported slightly weaker-than-expected second quarter 2012 profits, hit by lower throughput and decreased pipeline transportation profitability.

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 (adjusted for special items) of $2.53, a penny below the Zacks Consensus Estimate.

However, compared with the year-ago period, Marathon Petroleum’s earnings per share improved by a handsome 10.5% – from $2.29 to $2.53 – on the back of wider refining margins.

Revenues at $20,257.0 million were down 2.6% year over year but managed to surpass the Zacks Consensus Estimate of $19,269.0 million.

Segmental Performance

Refining & Marketing: Margins in the refining business (in Chicago and U.S. Gulf Coast) increased handsomely from the year-earlier levels. The situation was further helped by wider sweet/sour differential.

Marathon Petroleum’s refining and marketing unit earned $1,325.0 million during the quarter, compared to profits of $1,260.0 million last year – reflecting higher margins and crack spreads.

The company's realized gross refining and marketing margin of $11.13 per barrel was up from last year period's margin of $10.78 per barrel. Total refined product sales volumes improved marginally (by 0.6%) from the year-earlier level to 1,571 thousand barrels per day, while throughput was dipped 2.4% year over year to 1,339 thousand barrels per day.

Speedway: Income from the Speedway retail stations totaled $107 million during the quarter, up from $80 million in the year-ago period. The positive comparison was driven by improved gasoline and distillate gross margin, together with higher merchandise gross margin. Same-store fuel sales increased 2.1% year over year.

Pipeline Transportation: Segment profitability for the most recent quarter was $50 million, declining 7.4% from the second quarter of 2011, adversely affected by lower pipeline affiliate earnings.

Capital Expenditure & Balance Sheet

During the quarter, Marathon Petroleum spent $481 million on capital programs (37% on Refining & Marketing and 39% on Speedway). As of June 30, 2012, the company had cash and cash equivalents of $1,895.0 million and total debt of $3,335.0 million, with a debt-to-capitalization ratio of 24%.

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, supported by a Zacks #2 Rank (short-term Buy rating). 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.