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Analysts ponder pros and cons as Marathon Petroleum pursues logistics projects

The performance of Marathon Petroleum Corp. has lagged peers and the broader market since the oil refiner closed on its acquisition of rival Andeavor in October 2018, yet Marathon Petroleum still remains a top pick among analysts as the company pours money into its logistics and storage business.

From Oct. 1, 2018, through Aug. 30, Marathon's stock is down 40.3%, compared to a loss of 30.3% for the S&P 500 Oil & Gas Refining & Marketing index and a 0.06% gain for the S&P 500. But the company outperformed both its peers and the broader market in the week to Aug. 30.

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Through the first half of the year, the company has directed nearly 60% of its capital expenditures toward midstream investments. The company has a 25% stake in the 900,000-barrel-per-day Gray Oak Pipeline that will carry crude oil from West Texas to the Gulf Coast; through its MPLX LP master limited partnership subsidiary, a 15% stake in Wink-to-Webster crude oil pipeline that is expected to carry 1.5 million barrels per day from the Permian Basin to the Texas Gulf Coast; and the Whilstler natural gas pipeline that will move 2 Bcf/d of natural gas from Waha, Texas, to the Agua Dulce area in south Texas.

MPLX president Michael Hennigan told investors Aug. 1 the company has placed increased focus on logistics and storage assets in order to enhance the firm's "integrated value." But analysts say the strategy can weigh on a company's valuation.

"The big change we've seen recently is that investors are looking more and more at refining companies on consolidated valuation and leverage metrics," Tudor Pickering Holt & Co. analyst Matt Blair said Aug. 31. "This means that as refiners invest in midstream, they are not getting the valuation credit from the stable midstream EBITDA, which on a stand-alone basis would trade at greater than 10x EBITDA. It also means that investors are docking refiners for the extra leverage (often 4.0x net leverage) from the MLP, even though the debt is non-recourse."

Meanwhile, others have argued those logistics investments help make Marathon Petroleum an attractive investment.

"[Marathon Petroleum] could casually be viewed as a volatile, economically sensitive, spread-exposed refiner. ... [But] its unparalleled scale and vertical integration create margin and optimization opportunities, support organic expansions, and provide refined product flow assurance," Jefferies analyst Christopher Sighinolfi wrote in a Sept. 3 report, noting that approximately half of the company's consolidated EBITDA comes from outside of the firm's refining segment.

Sighinolfi said Marathon Petroleum's non-refining operations essentially cover its debt service, corporate costs, dividends and non-refining capex. "This leaves refining to sustain itself, pay taxes, and provide fuel for share repurchases," he said. "The weakest annual refining period (2016) since the spin from [Marathon Oil Corp.] saw [more than] $3 [billion] of combined refining EBITDA, ... sufficient to cover its capital needs ... with a meaningful excess left for buybacks."

Tudor Pickering Holt analysts noted Marathon Petroleum's outperformance in the week to Aug. 30 was driven by improving gasoline cracks — the indicative profit of refining crude oil into gasoline — which offset narrowing crude oil discounts.

Given merger-related synergies, distribution growth at MPLX and the coming shift in the petroleum market from tighter marine fuel sulfur regulations, Sighinolfi called Marathon Petroleum stock a "defensive cash-flow powerhouse, optically at odds with its 'refiner' perception."