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Marathon Petroleum Decides Against Speedway Unit Spin-Off

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Oil refining and marketing giant Marathon Petroleum Corporation (MPC - Free Report) recently took a final call regarding retaining its retail network unit — Speedway LLC — as a fully-integrated business within the company. The company had been contemplating the spin-off of Speedway of late due to pressure from hedge fund Elliott Management Corporation. However, the company now plans to retain the convenience store based on a recommendation by an independent special committee.  

Marathon Petroleum had been considering the spin-off to unlock shareholders value, streamline its portfolio and enhance core competencies. It had formed a special committee in January to assess the financial and strategic alternatives of Speedway. However, after a thorough review process, the members of the committee unanimously concluded that holding on to the Speedway unit will help in generating long-term returns for shareholders.

Based in Ohio, Speedway is the second-largest gasoline and convenience store chain in the United States with around 2,730 stores across 21 states. The unit provides support to the company’s earnings in times of high volatility in commodity prices. Having Speedway integrated into its chain of business along with refining operations will lead to ample cost savings. Thus the committee believed that the Speedway spin-off would make the company vulnerable to industry downturns and lead to considerable loss of integration synergies.

The committee estimated that the spin-off would cost Marathon Petroleum $270-$390 million per year and result into long-term deterioration in shareholders’ value. The move would also result in lower dividends and cash flows.

Notably, the talks of Speedway spin-off deteriorated the company’s ratings in January when Moody's Investors Service and Fitch Ratings downgraded the company to negative outlook and negative watch respectively. Given the unstable business environment, it’s important for Marathon Petroleum to maintain solid credit metrics to weather market downturns. The spin-off could have led to increased debt. Thus the decision to retain Speedway stores will position the company for long-term values to the shareholders.

Speedway has been contributing to the company earnings significantly amid the changing dynamics of the oil industry. The segment contributed around 23% of the company's total earnings in 2016. In the recent quarter, income from the Speedway retail stations totaled $239 million, 24% higher than the $193 million earned in the year-ago period. The segment remains primed for solid earnings and growth on healthy merchandise margins. Speedway which is banking on its marketing enhancement opportunities and acquisition synergies, including the retail arm of Hess Corporation (HES - Free Report) , is poised for growth and is expected to deliver a better performance as a separate entity in future.

Marathon Petroleum is committed to accelerate long-term value for investors and is thus engaged in various share buyback programs and drop down transactions lately. The company recently announced that its board has authorized additional share buyback worth $1 billion. The company is likely to purchase $450 million of its shares by the end of the third quarter and additional $550 million by the year end.The decision is in line with the company’s value creation strategy of increasing capital return for shareholders.  Marathon Petroleum has already returned $1.55 billion capital to shareholders in the first half of 2017. The current share buyback program follows the drop down transaction announced by the company a few days back, when it divested some of its pipelines and storage assets worth $1.5 billion to MPLX LP (MPLX - Free Report) . In March, the company divested of some of its terminal, pipeline and storage assets to MPLX for $2.02 billion.

Zacks Rank and Key Pick

Findlay, OH-based Marathon Petroleum is a leading independent refiner, transporter and marketer of petroleum products. Shares of Marathon Petroleum have gained 8% year to date, significantly outperforming the industry’s 5% decline. The company currently carries a Zacks Rank #3 (Hold).

A better-ranked player in the same industry is Galp Energia, SGPS, S.A. (GLPEY - Free Report) which carries a Zacks Rank #2 (Buy).You can see the complete list of today’s Zacks #1 (Strong Buy) Rank stocks here.

Galp Energia expects year-over-year growth of 191.67% in its earnings in 2017.

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