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Ohio-based independent oil refiner and marketer Marathon Petroleum Corporation (MPC - Analyst Report) reported slightly better-than-expected third quarter 2012 profits attributable to favorable market conditions and high refining margins in Chicago and the U.S. Gulf Coast.

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 $3.31 in the third quarter of 2012, ahead of the Zacks Consensus Estimate of $3.29.

Compared with the year-ago period, Marathon Petroleum’s earnings per share improved by 4.70% – from $3.16 to $3.31 – on the back of strong refining margins.

Revenues at $21,249.0 million were up 2.9% year over year and surpassed the Zacks Consensus Estimate of $19,653.0 million.

Segmental Performance

Refining & Marketing: Margins in the refining business (in Chicago and the U.S. Gulf Coast) increased from the year-earlier levels.

Marathon Petroleum’s refining and marketing unit earned $1,691.0 million during the quarter, compared with profits of $1,711.0 million in the year-ago period– reflecting higher crude oil costs.

The company's realized gross refining and marketing margin of $13.12 per barrel was a bit down from the year-ago period's margin of $13.18 per barrel. Total refined product sales volumes decreased marginally (by 0.3%) from the year-earlier level to 1,605 thousand barrels per day, while throughput dipped 1.7% year over year to 1,345 thousand barrels per day.

Speedway: Income from the Speedway retail stations totaled $76 million during the quarter, down from $85 million in the year-ago period. The negative comparison was driven by decreased gasoline and distillate gross margin & high expenses, partially offset by higher merchandise gross margin. Same-store fuel sales decreased 3.9% year over year.

Pipeline Transportation: Segment profitability for the most recent quarter was $52 million, declining 7.1% from the third quarter of 2011, adversely affected by lower pipeline affiliate earnings.  

Capital Expenditure & Balance Sheet

During the quarter, Marathon Petroleum spent $360 million on capital programs (50.60% on Refining). As of September 30, 2012, the company had cash and cash equivalents of $3,387.0 million and total debt of $3,349.0 million, with a debt-to-capitalization ratio of 23%.

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 outlook 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.

Marathon Petroleum is almost through with its $2.2 billion Detroit Heavy Oil Upgrading Project. In progress since 2008, the initiative – on budget and on schedule – is expected to finish later this year. The completion of the project will not only deliver an extra 80,000 barrels a day of heavy oil processing capacity but also free up capital expenditures and boost the company’s free cash flow.

Additionally, the company’s proposed purchase of BP Plc's (BP - Analyst Report) Texas City refinery – one of the largest and most complex in the country – will help the company to solidify its position in the fuel export business, apart from improving production flexibility.

Marathon Petroleum is looking at strategic alternatives for some of its pipeline assets, including the potential formation of a master limited partnership by way of an initial public offering. We believe this potential spin-off could further enhance the company’s shareholder worth and valuation.

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