FINDLAY, Ohio — Marathon Petroleum Corp. (MPC) is taking steps to boost its value to shareholders, and this includes a dropdown plan for the corporation's midstream assets.
"Driving long-term value for our shareholders is a top priority. Despite the steps we have taken to create value for investors, we believe that MPC share price reflects a significant discount to the intrinsic value of our business, particularly as it relates to the valuation prescribed to the general and limited partner ownership interests in MPLX and to the midstream assets we hold directly," said Gary Heminger, chairman, president and CEO of MPC.
His comments came during the Findlay-based company's third-quarter 2016 earnings call Thursday morning.
The first step is "an aggressive dropdown strategy." By the end of 2017, the company plans to offer MPLX assets, contributing a total of approximately $350 million of EBITDA, according to Heminger.
The first dropdown of assets, contributing approximately $235 million of annual EBITDA, is expected to occur by the end of the first quarter. The partnership's plans for funding these dropdowns will likely include transactions with MPC, including the potential for a substantial amount of equity issued to MPC, Heminger explained.
"It is not just a dropdown strategy. We expect to be acquisitive in certain markets where it makes sense for the midstream as well, as we have a very good organic suite of projects to work on," he said. "As we stepped back and I looked at our total midstream business, we felt now was the time to take this very bold, aggressive action."
MPC also intends to execute additional value-enhancing dropdowns totaling an estimated $1 billion of annual EBITDA "as soon as practical, within the next three years," the chief executive said.
"This aggressive dropdown strategy is expected to support increased limited and general partner distributions from MPLX and provide value creation for investors," he stated.
In addition, MPC is evaluating strategic opportunities to highlight and capture the value of its general partner ownership interest in MPLX and optimize the cost of capital for the partnership. The company has retained independent financial advisors to assist with this evaluation. "We will be evaluating a number of alternatives aimed at highlighting the value inherent in the general partner and will provide additional detail to investors once we have determined the path that provides the greatest opportunity to capture this value," said Heminger.
In connection with these steps, MPC plans to evaluate changes to its internal reporting, largely focused on the assets and earnings associated with the future dropdown strategy that are currently reported in the company's refining and marketing segment. As a result of the review, MPC will likely make changes to its segment reporting beginning next year.
"These initiatives are designed to unlock additional value from our robust portfolio of midstream assets, and to further benefit the value-enhancing platform we have established with MPLX. We will continue to analyze our businesses and portfolio to ensure we continue to deliver superior performance and returns consistent with our track record of maximizing shareholder value over the long term," said Heminger, adding MPC "will be moving ahead expeditiously with each of these actions."
A significant portion of the discount in MPC's share price is really reflected in the midstream space, he explained. Speedway LLC is not the catalyst or the driver.
Speedway "continues to perform very well" as indicated in the third quarter, he noted.
Q3 FINANCIAL RESULTS
MPC reported 2016 third-quarter earnings of $145 million, compared with $948 million a year ago. The earnings include a $267-million impairment charge to impair MPC's investment in the Sandpiper Pipeline project due to the withdrawal of regulatory applications for the project.
"The lower earnings this quarter were due in part to lower crack spreads and compressed product price realizations in the refining and marketing segment," Heminger said. "Despite a challenging quarter, we remain optimistic as we move forward into 2017 given signs of the marketing rebalancing and sustained strong demand."
MPC continues to benefit from the diversified nature of its business, with the Speedway LLC and midstream segments contributing more than $450 million of combined segment income in the third quarter.
Speedway, its convenience store arm, delivered strong light products sales volume and record merchandise margin dollars. The higher merchandise margins, according to Heminger, are consistent with its strategy to realize marketing enhancement opportunities.
"Having a strong retail business in Speedway is a valuable differentiator for MPC," he said. "Our integrated structure provides growing, stable cash flows across market cycles, enabling us to return capital to shareholders while reinvesting in value-enhancing growth initiatives."
MPC is the nation's third-largest refiner, and the largest refiner in the Midwest. MPC's refining, marketing and transportation operations are concentrated primarily in the Midwest, Southeast, Northeast and Gulf Coast regions of the United States.
MPC operations are strategically located to serve major markets. They include a seven-plant refining network; a comprehensive terminal and transportation system; and extensive wholesale and retail marketing operations. This includes both the Marathon brand and MPC's wholly owned retail marketing subsidiary, Speedway, the nation's second-largest chain of company-owned and -operated retail gasoline and convenience stores.