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Marathon Petroleum (MPC) is a $33.6bn MV ($73.5bn EV, including MLP debt).
o MPC is an integrated refiner, meaning it refines crude (via 16 refineries - 4 West. 10 Mid-Con and 2 huge Gulf coast locations), sells its products via wholesale terminals and retail locations (12k locations-owned, leased, franchised) and generates fees and cash flow from its infrastructure assets via its MLPs (MPLX and ANDX) .
§ Refining assets generate $4bn-$5bn/yr of EBITDA on 3.1k barrels/day
§ Wholesale/retail gas station business should generate about $2bn/year in ebitda
§ MLPs (MPLX/ANDX) generate $5.5bn of EBITDA but are 2/3 owned by MPC and pay tax advantaged dividends to parent MPC.
o C-corp debt is only about $7bn net vs over $7bn of non-MLP cash flow
§ (Refining + retail gas stations)
§ MLP level debt is about $18bn, about 3.75x MLP level ebitda.
o Including MLP dividends from 2/3 ownership of public MLPs ANDX and MPLX, we think MPC will generate close to $6bn of free cash flow (over $9/share of FCF-this exclude MLP capex).
o This FCF is before a massive global environmental change (IMO2020) which will force refining cash flow higher as significantly greater fuel oil and diesel must be created to meet global shipping demand.
§ We believe another $4b-$5bn of Ebitda could be generated in our base case IMO benefit scenario. While this won’t last long, it will require little capital to achieve and will be deployable to share repurchase, dividends or other benefits to shareholders.
· Another positive for MPC was its acquisition of Andeavor in 2018, in a deal announced 4/18 and completed 10/18.
o The deal diversified MPC geographically and we are excited about the synergy opportunity.
o We believe they are running ahead of plan and management expects over $1.4bn of via 1) refining operational, sourcing and capital improvements 2) retail optimization/sourcing/buying and selling 3) corporate.
o $1.4bn of synergies not included in above discussion.
· We believe MPC will generate $6.50/share in FCF in 2019 and well over $10 in 2020. In 2019 alone, we expect the company to return 12% of its float to shareholders via a 4% dividend yield and 8%-9% via share repurchase.
· As we enter the second half of the year, we expect earnings to be revised higher and for investors to recognize the huge cash generation of the business along with that cash returned to shareholders. All of this is before IMO2020, which could end up doubling refining cash flow.
I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.
Catalyst
-We believe MPC will generate $6.50/share in FCF in 2019 and well over $10 in 2020. In 2019 alone, we expect the company to return 12% of its float to shareholders via a 4% dividend yield and 8%-9% via share repurchase.
-When you look at the valuation of peers like Valero and compare the assets that MPC owns, MPC seems mispriced and too cheap. It would not be surprising to see a smart activist get involved at current levels and push for a break-up to realize the HIDDEN value here.
-IMO2020 is a potential catalyst