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Marathon Petroleum Opts for Strategic Dropdown, Gets $8.1B

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Oil refining and marketing giant Marathon Petroleum Corporation (MPC - Free Report) recently announced that it will sell its fuel distribution services and refining and logistics assets to its midstream subsidiary MPLX LP (MPLX - Free Report) for $8.1 billion. The deal is expected to be over by Feb 1, 2018.

Deal Details

Of the $8.1 billion, Marathon Petroleum will receive $4.1 billion in cash. The remaining $4 billion will be in the form of equity of MPLX, comprising 111.6 million common (Limited Partner) units of MPLX along with 2.3 million general partner units, including incentive distribution rights. This will enable Marathon Petroleum to keep 2% general partner interest in its subsidiary.

Per the company, the assets can generate earnings before interest, taxes, depreciation and amortization (EBITDA) of $1 billion per annum. In the third quarter, the company’s Refining and Marketing segment recorded operating income of $1,097 million.

Rationale

While the deal is expected to enrich MPLX's earnings by diversifying it with fee-based stable revenue streams and strengthening the partnership’s distributable cash flow base, Marathon Petroleum is following its strategy of enhancing shareholder value by accelerating dropdowns to MPLX. The increased equity participation in the subsidiary will also help Marathon Petroleum to receive a steady and growing revenue stream.

About Marathon Petroleum

Findlay, OH-based Marathon Petroleum is a leading independent refiner, transporter and marketer of petroleum products. The company, in its current form, came into existence following the 2011 spin-off of Houston, TX-based Marathon Oil Corporation’s refining/sales business into a separate, independent and publicly-traded entity.

Marathon Petroleum's financial flexibility and a strong balance sheet are real assets in this highly unstable economy. As of Sep 30, the company had cash and cash equivalents of $2,088 million and total debt of $12,782 million, with a debt-to-capitalization ratio of 38%.

Importantly, Marathon Petroleum is known for raising dividends since it became a standalone public company in mid-2011. Additionally, it has an active share repurchase program. These highlight the company’s commitment to return more value to shareholders. During the third quarter, Marathon Petroleum returned $654 million of capital to shareholders, including $452 million of share repurchases.

Price Performance

Marathon Petroleum has gained 24.9% year to date compared with 6.6% growth of its industry.

Zacks Rank and Stocks to Consider

Marathon Petroleum has a Zacks Rank #2 (Buy).

Some better-ranked stocks in the oil and energy sector include Braskem S.A. (BAK - Free Report) and Denbury Resources Inc. (DNR - Free Report) . Both stocks sport a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Houston, TX-based ConocoPhillips (COP) is a major global exploration and production company. The company’s sales for 2017 are expected to increase 24.4% year over year. The company delivered an average positive earnings surprise of 152.3% in the last four quarters.

Plano, TX-based Denbury Resources is an oil and gas company. The company’s sales for the fourth quarter of 2017 are expected to increase 4.8% year over year. The company delivered an average positive earnings surprise of 125% in the last four quarters.

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