Things Are Looking Up For Marathon Petroleum
By Martin Tillier - Oct 24, 2014, 10:39 AM CDT
When stocks in a sector come under pressure, as has been the case with energy stocks over the last few months, the speed with which an individual stock bounces back when things begin to turn around can tell you a lot. If there are sound fundamental or company specific reasons for a stock to fall with everything else then any bounce back will be somewhat muted initially. Conversely, when something is dragged down with everything else despite decent prospects the snap back can be quite spectacular. When a stock jumps over 15 percent from its lows in less than a week, then, it demands some attention, and that is exactly what happened with Marathon Petroleum Corporation (MPC) in the four trading days from October 16th to the 21st as panic receded and oil prices started to stabilize.
MPC is the refining, transportation and marketing company arm of Marathon and trades separately from Marathon Oil (MRO) which is the production company. In general, refiners are less impacted by falling oil prices than producers. Their profitability depends on the spread between the price of crude oil and the price of the finished products, gasoline and diesel for example. As any motorist can tell you, when oil prices fall rapidly, fuel at the pump is slower to drop in price, so you could even make a case that falling oil prices actually benefit refiners.
Of course, it isn’t that simple. Even if margins do increase slightly as a percentage, a lower selling price for the end product…
When stocks in a sector come under pressure, as has been the case with energy stocks over the last few months, the speed with which an individual stock bounces back when things begin to turn around can tell you a lot. If there are sound fundamental or company specific reasons for a stock to fall with everything else then any bounce back will be somewhat muted initially. Conversely, when something is dragged down with everything else despite decent prospects the snap back can be quite spectacular. When a stock jumps over 15 percent from its lows in less than a week, then, it demands some attention, and that is exactly what happened with Marathon Petroleum Corporation (MPC) in the four trading days from October 16th to the 21st as panic receded and oil prices started to stabilize.
MPC is the refining, transportation and marketing company arm of Marathon and trades separately from Marathon Oil (MRO) which is the production company. In general, refiners are less impacted by falling oil prices than producers. Their profitability depends on the spread between the price of crude oil and the price of the finished products, gasoline and diesel for example. As any motorist can tell you, when oil prices fall rapidly, fuel at the pump is slower to drop in price, so you could even make a case that falling oil prices actually benefit refiners.
Of course, it isn’t that simple. Even if margins do increase slightly as a percentage, a lower selling price for the end product still equates to less profit for the refiner in dollar terms. Over time that will be offset to some degree by increased demand for the now cheaper petroleum products, however, and that is why, even as MPC was dropping, most analysts maintained their buy rating on the stock. According to nasdaq.com, of the 14 major firms that cover the stock, 8 have a “strong buy” or equivalent rating, 3 rate it a “buy”, 3 a “hold” and nobody rates MPC a sell.
Normally that degree of consensus would get a contrarian like me looking for reasons to sell, but the recent overall weakness in the energy sector has left Marathon Petroleum at levels that look cheap by almost any metric. It trades at less than ten times forward earnings with a PEG ratio of around 0.86. A PEG ratio under one is usually considered an indication that a stock is undervalued.
There are reasons why the stock is cheap other than just the general malaise in energy stocks though, and they should be borne in mind. Refiners are also impacted by the spread between oil prices in different markets and as prices in general have fallen, the spread between Brent and WTI crude has narrowed. This was exaggerated last week when Saudi Arabia made it clear that they could live with prices at current levels and had no immediate plans to reduce production, placing even greater pressure on Brent. There is also the fact that part of the drop in the oil price was down to fear of a major slowdown in the global economy, led by Europe, China or both; a scenario with obvious negative implications for petroleum consumption.
To some extent, however, some of these fears have receded in recent days. China’s growth continues to slow, but there is still decent growth and according to the latest numbers the slowdown is most evident in the property sector, while factory output actually increased in the third quarter. The fall in the Brent/WTI spread remains a worry and would be something to keep an eye on, but it is hovering around lows not seen since 2010 and the effect of the Saudis’ decision is fully priced in. The big recent fall in gasoline inventories on strong demand would also suggest that the predictions of doom and gloom for the refiners were somewhat overdone.
Even with all of these factors, though, it seems that MPC has been dragged down with oil related stocks in general to a point where it represents great value. They are a company that makes great profits, has a solid balance sheet and decent growth and offers a dividend yield close to 2.5 percent. In the light of that the stock still looks cheap, even after a dramatic bounce off of the lows.
