Some analysts are echoing activist investor calls for management change at Marathon Petroleum Corp., saying that rather than splitting the company, management and board changes may be enough to assuage investor concerns.
"The most salient arguments raised are about corporate governance, management credibility and business-line autonomy and focus," Jefferies analysts wrote in an Oct. 1 report about Elliott Management Corp.'s proposal to split the integrated refiner into three separate businesses. "We believe these are concerns that can be addressed without separating the company's individual components."
The analysts said "equally integrated and complex peers" such as Phillips 66 trade at "levels approximating [sum-of-the-parts] fair value," and "Marathon's challenges are squarely the result of a trust deficit with its investors, lack of clear leadership at operating levels, and the limited ability of shareholders to [effect] change."
"We could see an immediate $5/share move in the stock if [former Andeavor CEO and current Marathon Petroleum Executive Vice Chairman] Greg Goff was to be installed as CEO with a plan to develop a management bench, probably by moving, or working to move, the company's headquarters from Findlay, Ohio," Mizuho analyst Paul Sankey wrote Sept. 30.
"No one except the existing management of Marathon Petroleum thinks this is a good home city for the world's largest independent refiner," Sankey said. "To that extent, [Marathon Petroleum Chairman and CEO] Gary Heminger is at risk of becoming a victim of his own success. A stunning growth story delivered with remarkable speed; his life's work has outgrown its hometown."
Heminger pushed back against the "grossly misleading" Sept. 26 letter by a pair of activist investor critics demanding that he step down. "[The letter] paints a distorted picture of MPC and the efforts we collectively have taken to put the company on a good track for the future."
Elliott Management's earlier efforts at engagement have had some influence on the strategic direction of the company. The investment manager said it began prodding Marathon to split its businesses in late 2016 but accepted Marathon Petroleum's promise to conduct a simplification transaction with its master limited partnership subsidiary and explore the strategic alternatives for its retail Speedway business instead.
In January 2017, Marathon announced those strategic initiatives as well as a plan to accelerate the three-year timeline for $1.4 billion planned drop-downs of pipeline assets to its master limited partnership subsidiary, MPLX LP. But Marathon's strategic direction changed. In September 2017, Marathon announced it would not spin off its retail business, and nearly eight months later, it announced it would acquire rival refiner Andeavor to become the largest integrated refiner in the U.S. Two months into the integration, executives increased the synergy target by 40% to $1.4 billion in the first three years following the deal's closure.
But analysts have pointed to a series of management missteps since the merger, including the amount of time it took to resolve the combination of legacy MLP subsidiaries MPLX and Andeavor Logistics, the cancellation of an $800 million coker project that some investors interpreted as a profit warning, and a lack of transparency with investors that made it difficult to predict earnings.

Even so, some remain positive on the integrated business model.
"The primary benefits of an integrated model are reduced volatility in results, synergy opportunities, and the mutual-dependency of the various businesses as counterparties," the Jefferies analysts wrote. "We have witnessed numerous corporate splits in our time covering energy companies, almost always motivated by [sum-of-the-parts] value release arguments, and they do not always work."
As an example, Jefferies noted that Marathon Petroleum paid about $7 billion in annualized crude oil sourcing and petroleum distribution fees in the second quarter. "These expenses, combined with other operating expenses, would make the earnings of the refining business highly volatile on a standalone basis, which could in-turn make it difficult for the refining business to achieve the targeted valuation multiple in the long term. … The health of the counterparty may shape sentiment for the midstream player and weigh on its valuation in a way we do not think it would if they remain together and cash is recycled within the family."
