Profit levels from the refining and marketing businesses are on the rise. Positive crack spreads and wider crude differentials has led to this scenario in the downstream energy market, making Marathon Petroleum Corporation’s (MPC - Free Report) businesses highly profitable and compelling at the moment, which is reflected in its Zacks Rank #2 (Buy).
The company has a promising future ahead, making it a lucrative stock for energy investors. The strength of the stock lies in the reasons discussed below.
Refining and Marketing Excellence
Marathon Petroleum has six refineries, having a combined crude processing capacity of 1.9 million barrels per day, concentrated primarily in the Midwest, Gulf Coast and Southeast regions of the country. Additionally, Marathon Petroleum — through its marketing organization — sells transportation fuels, asphalt and specialty products throughout the country to support commercial, industrial, and retail operations. This segment’s profitability was $892 million in the first half of 2018, up from $492 million in the comparable period of 2017.
Moreover, Marathon Petroleum is expected to come up with high profit in the long term from the refining businesses, once the new regulations of IMO 2020 hit the market. The company has started the upgradation process for its refineries, which will enable it to produce low-sulfur fuel.
High Transportation Capacity
Marathon Petroleum, through the interest it holds in MPLX LP (MPLX - Free Report) , a publicly-traded master limited partnership, has one of the biggest petroleum pipeline networks in the United States. It owns, operates, leases or has an ownership interest in about 10,800 miles of pipeline, consisting of 52 systems spread across 15 states and federal waters. The company transports around 2.2 million barrels of crude oil and petroleum products daily through these pipelines.
Notably, segment profitability was $1.2 billion in the first half of 2018, up from $641 million in the comparable period of 2017. The trend is expected to continue in the coming quarters as well due to constant rise in demand for shipping capacity in the shale plays.
Strategic Inorganic Expansion
Marathon Petroleum's impending acquisition of rival Andeavor is set to expand its foothold in the Permian Basin, thereby creating an enviable retail and marketing portfolio. The company inked a $23.3-billion deal to acquire Andeavor, marking the biggest-ever transaction by an oil refiner, in a bid to become the top independent refiner in the United States. The buyout — expected to close on Oct 1 — will integrate the premier assets of both the companies, bolstering the scale and leadership position of the combined entity in the region.
Dividends & Buybacks
Marathon Petroleum's financial flexibility and a strong balance sheet are real assets. Importantly, the company 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 second quarter, Marathon Petroleum returned $1,100 million of capital to shareholders, including $885 million in share repurchases.
Strong Surprise History:
Marathon Petroleum reported second-quarter 2018 earnings of $2.27, beating the Zacks Consensus Estimate of $1.98 and also improving from $1.03 in the year-ago quarter. Notably, the company beat the Zacks Consensus Estimate in three of the last four reported quarters.
Positive Earnings Estimate Revisions
We believe the positive trend will continue in the coming quarters as well. Over the past 30 days, four analysts have upwardly revised earnings estimates for the third quarter of 2018, while only one has decreased the same for Marathon Petroleum. The Zacks Consensus Estimate for the current quarter has been revised upward from $1.60 per share to $1.68 cents. Moreover, for the full year of 2018, its bottom line is expected to surge 34% to $5.09.
Marathon Petroleum has surged 53.5% in the past year, outperforming the 44.6% collective growth of the stocks belonging to the industry.
Another Stock to Consider
Investors interested in the energy sector can also opt for another top-ranked stock like McDermott International, Inc. , sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Houston, TX-based McDermott is an equipment provider for energy companies. The company’s top line for 2018 is likely to improve 145% year over year. In the last four reported quarters, it delivered an average positive earnings surprise of 101.7%.
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