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Marathon Petroleum Hits 52-Week High: What's Driving It?

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Shares of Marathon Petroleum Corporation (MPC - Free Report) have scaled a new 52-week high of $74.92 in yesterday’s trading session, before eventually closing at $72.88, generating a healthy year-to-date rate of more than 10%. The stock displays impressive price movement both in absolute and relative terms. The company has had a great run over a year with its shares rallying in excess of 48%, outperforming its industry’s gain of 22.8% in the same time frame.



This Zacks Rank #3 (Hold) stock has the potential for further price appreciation with long-term earnings growth expectation of 14.49% and looks poised to touch new highs in coming period. You can see the complete list of today’s Zacks #1 Rank (Strong Buy)  stocks here.

The company fared well in 2017, delivering a net income of $3.4 billion and marking a whopping year-over-year surge of more than 192%. Marathon Petroleum — whose peers include HollyFrontier Corp. (HFC - Free Report) and Delek US Holdings, Inc. among others — pulled off an average positive earnings surprise of 182.62% in the trailing four quarters on the back of improved performance in all its segments — Refining, Retail and Midstream.

The company’s strategic initiatives to enhance growth are expected to boost performance in the future. Marathon Petroleum expects to deliver year-over-year growth of 24.21% in its earnings in 2018.

Let’s delve deeper to analyze what’s driving the stock.

Drop-Down Deals Leading to Cash Influx

To accelerate value accretion for shareholders and boost growth, Marathon Petroleum has been actively engaged in drop-down transactions lately. As part of that effort, the company divested some of its terminal, pipeline and storage assets to its midstream subsidiary, MPLX L.P. (MPLX - Free Report) . The $8.1 billion dropdown deal with MPLX that closed last month has resulted in huge cash influx and increased equity participation in the partnership. Moreover, the transaction also ensures the generation of a steady revenue stream for the company.

The cash influx has bolstered the share buyback and dividend programs of the company, boosting investors’ confidence. Marathon Petroleum returned more than $3 billion of capital to its shareholders through dividends and buybacks in 2017. The downstream operator is known for raising dividends since it became a standalone public company in mid-2011. Notably, the dividend hikes and buybacks, since the company's inception, have totaled in excess of $13 billion.

Midstream Segment Set to Growth

In 2017, the MPLX unit generated income of more than $1.3 billion compared with more than $1 billion in 2016. MPLX’s robust portfolio of projects in the Permian, Marcellus and STACK shale plays offers significant growth opportunities. The drop-down deals have enhanced MPLX’s scale and increased its distributable cash flow per unit. It will also enrich its earnings by diversifying it with fee-based stable revenue streams, which will get reflected in the profitability of its parent company in the future.

MPLX’s new Cushing-to-Patoka Expansion project concluded its binding open season late last month and garnered a substantial interest from potential shippers. The expansion process is expected to be over by the second quarter and come online in the third quarter of 2018. Moreover, the expansion project is expected to increase the partnership’s revenue opportunities and augment its distributable cash flow in the long term.

Speedway a Driver

Marathon Petroleum’s retail unit, Speedway — the second largest gasoline and convenience-store chain in the United States — achieved a robust full-year performance in 2017, generating revenues of $19,033 million, up 4.1% from $18,286 million recorded in 2016. The segment remains primed for solid earnings and growth on healthy merchandise margins, and its marketing enhancement opportunities and acquisition synergies, including the retail arm of Hess Corp. (HES - Free Report) .

Notably, Marathon Petroleum intends to make an investment of around $530 million in Speedway in 2018 by the construction of new stores and remodeling the existing ones, thus focusing on organic growth opportunities. Marathon Petroleum intends to strengthen the geographical foothold of its Speedway unit by entering new markets including Georgia, South Carolina and upstate New York. The company believes that the improving market conditions are likely to boost margins and the financial position of the Speedway unit in the coming quarters.

Refining Margins Fuel Income

Operating income from the Refining & Marketing segment surged 71% year over year in 2017. The jump was led by wider crack spread leading to stronger refining margin and higher capacity utilization. Refining margins averaged $12.60 in 2017 against $11.16 in 2016.We expect the margin strength to continue in the near-to-medium term, thus boosting the overall performance of the company.

Other Growth Catalysts

Marathon Petroleum's financial flexibility and strong balance sheet are its real assets.  As of Dec 31, the company had cash and cash equivalents of $3,011 million and a manageable debt-to-capitalization ratio of 38.4%.

The corporate rate cut from 35% to 21% has also benefited the company, reducing its cash burden. Notably, earnings for the fourth quarter and full-year 2017 included a tax benefit of around $1.5 billion.

We expect Marathon Petroleum’s impressive asset quality, extensive midstream/retail network along with its commitment to return more value to investors to keep the stock poised for growth trajectory for the remainder of 2018.  

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