Marathon Petroleum's Retail Earnings Soar in Q4 2018 on Andeavor Acquisition

FINDLAY, Ohio — Marathon Petroleum Corp.'s (MPC) acquisition of Andeavor may only have closed on Oct. 1, but the addition of Andeavor's retail assets already helped boost Marathon's retail network, Speedway LLC, in the latest quarter.

"We reported an extraordinary first financial update as a combined company, and we believe these results are an early indication of the tremendous value potential of this powerful combination," Marathon Petroleum Chairman and CEO Gary Heminger said during the company's fourth-quarter 2018 earnings call on Feb. 7.

In total, Findlay-based MPC reported fourth-quarter earnings of $951 million.

"As we review our performance for 2018, it is important to highlight that we have built a culture focused on operational excellence and safety," Heminger said. "We remain committed to a culture of continuous improvement that positions our company to safely grow our earnings and create long-term value for our shareholders."

For the quarter, Marathon reported more than $2 billion of income from operations and adjusted consolidated EBITDA of approximately $4.1 billion, "with our segments performing well," according to Heminger.

"Our expanded, integrated business model created significant opportunities for us to capture value," he added. "We optimized crude purchases and utilized our larger logistics and diversified marketing footprint to place over 70 percent of our gasoline volume on a daily basis."

Broken out by segment, the company's Q4 income from operations was:

• Refining & Marketing: $923 million of segment income from operations, due to high refinery utilization and wide crude differentials.
• Midstream: $889 million of segment income from operations, supported by continued volume growth in underlying businesses. 
• Retail: $613 million of segment income from operations, due to strong merchandise sales and fuel margins.

"Our retail segment had a particularly strong fourth quarter. This included record quarter earnings for [Marathon's] former Speedway segment. While 2018 started slowly for the legacy Speedway business, it ended the year with record EBITDA, driven by strong merchandise sales and fuel margins," the chief executive reported.

"The retail business continues to add significant stability to our overall cash flow profile," he noted, adding that it provides a placement option for Marathon's refining volumes and creates balance for the overall business.

The retail segment's fourth-quarter results were $465 million higher than the same quarter in 2017, primarily related to fuel margins and the addition of Andeavor's retail and direct-dealer operations, according to Tim Griffith, senior vice president and chief financial officer.

Retail's fourth-quarter segment income from operations was $613 million, compared to the $148 million in legacy Speedway-only results in the fourth quarter of 2017.

The retail segment, Griffith noted, now includes the legacy Speedway network and Andeavor's retail and direct-dealer business.

As for other fourth-quarter numbers in the retail segment, the CFO noted that a $204-million fuel volume impact, $193-million increase in operating expenses and $47 million of increased depreciation expense were almost entirely attributable to the addition of the Andeavor operations.

"The improvement in merchandise and fuel margins was largely related to the expanded business, as well as the margin strength across the entire retail platform, as well as higher same-store merchandise sales for the Speedway legacy locations," he said.

Looking at 2019 so far, January started with positive same-store gasoline sales, but was impacted by record-low temperatures in a substantial portion of Marathon's market area.

January same-store gasoline sales in the company's legacy Speedway locations were down 1.5 percent, but Griffith said they are optimistic that volumes will normalize following the weather impacts.

"[Speedway President Tony Kenney] and his team had a phenomenal fourth quarter. ...The year started off a little bit slow, but we saw a ramp-up in merchandise sales, a ramp-up in merchandise margins. But really, for the most part, it was the volume through now total Speedway that we were able to capture very strong margins across the entire sector of Speedway, as well as the direct retail portion of our business was very strong for the quarter," Heminger explained.

When initially exploring the Marathon-Andeavor combination, Heminger said he and former Andeavor CEO Greg Goff (now Marathon's executive vice chairman) identified the retail segment as a bright spot.

"Seventy percent of our volume is going to our retail chains — either the Speedway side, or the Marathon brand, or direct retail — and that helps prop up the refining side, helps prop up the retail side," Heminger said. "While we had very strong margins in the fourth quarter, I wouldn't expect them to continue at that strong of a rate. But as I look toward the first part of [2019], we continue to perform very well across the entire retail sector."

Marathon Petroleum is an integrated, downstream energy company. It operates the nation's largest refining system with more than 3 million barrels per day of crude oil capacity across 16 refineries. Marathon's marketing system includes branded locations across the United States, including Marathon-brand retail outlets.

Enon, Ohio-based Speedway LLC, a Marathon subsidiary, owns and operates retail convenience stores across the U.S.

Marathon also owns the general partner and majority limited partner interests in two midstream companies, MPLX LP and Andeavor Logistics LP, which own and operate gathering, processing and fractionation assets, as well as crude oil and light product transportation and logistics infrastructure.