Description

Thesis:

Background:

Bus Des: Has refining, marketing, transport operations in the Midwest, Upper Great Plains, Gulf Coast and Southeast Regions in the US;

• Majority of assets in the Midwest and Pad 2 (highest Midwest exposure relative to other refiners)
• 6 refineries in the US w/1.1M barrels/day throughput capacity
• Large Retail segment with Speedway (4^th largest C-store chain) - 1,350 stores; and Marathon brands - operated independently - 5,100 stores
• Have one of the largest pipeline and terminal networks in the US, primarily located in the midcontinent and Gulf Coast which could be put into an MLP structure (this could be worth $3-$5/share incremental to the share price); although company has been fairly vocal that the integrated network provides distinct advantages - this is not core to the thesis

Thesis

- Major investments completed including Garyville and 2/3 complete with Detroit heavy oil project ($6bn in total capital) and provides built in growth in the future

• The company expanded its refinery in Garyville to 180,000 boepd for $3.8bn (started in 2005 and complete in 2010)
• Detroit Heavy Oil ($2.2bn project - which is 2/3 spent already) - is set to complete in 2012 - will capitalize on Canadian Oil Sands project; $2.2bn project that is targeting modest changes in capacity (+15,000 boepd or 15%) but the improvement is intended to allow the refinery to increase heavy oil feedstock from 20 boepd to 100 boepd. Not that this form of crude typically trades for $20 below regional LLS benchmarks (past five yrs average discount to LLS was $22).

                         o  Incremental EBITDA from being able to increase heavy oil stock (assuming the LLS-WCS of $21) could be as much as $400-                             $500MM when it is fully on stream by the end of 2012

- Retail and Midstream businesses provide stable earnings streams but is not core to the thesis. These businesses provide for approximately $400MM in pretax income annually.

- See US crude differentials as structural and lasting to at least 2013 when the new pipeline is constructed.

• After 30 yrs of flat-to-down production, US onshore oil output is growing from the Bakken and Permian regions, which coupled with Canadian import growth is putting pressure on Mid-Continental differentials. This supply growth at Cushing (production outgrowing takeaway capacity) will keep crude differentials in Mid-Con structurally wider for longer.
• Crude oil production in the interior US could rise 300k bod and Canadian imports could rise by about 200k bod from early this year to late next year. Furthermore, new conversion capacity at refiners in the Midcontinent and Midwest is likely to result in increased heavy crude demand and lower light oil demand. The net result is a basis blowout.
• Note the explosion of the spread started 2011 at $4/bbl and is averaging $15/bbl YTD and is currently around $20/bbl. We have modeled $15/bbl for this year and next year and then going down to $4/bbl in 2013. Some believe the current spread could double to $40 or $50/bbl due to refineries upgrading
•  54% of MRO's refining capacity in PADD II and 60% of PADD II running through WTI-linked or Canadian heavy crudes and is benefiting from this structural supply/demand imbalance

 Financials

• - Share Price: $39.16, Mkt Cap: $14bn, EV: $15.4bn
• - Annual Dividend ($0.80); 2% yield but will likely increase
• - Refining capacity: 1.122Mb/d; 6 refineries with average capacity of 187 mb/d
• - $3bn long term debt at 5.3% interest rate; $1,625MM min cash balance
• - Maint capital around $750 - won't get there until 2013
• - EBITDA (2011E: $4.9bn, 2012E: $5.2bn, 2013E: $3.5bn assumes $15 spread (currently $20) comes in to $4 and in 2013)
• - FCF: 2011E: $2.4bn, 2012E: $2.5bn; 2013: $1.9bn ($300MM benefit from capex coming down despite spread coming in dramatically)

 Catalysts:

• - Earnings announcement- street numbers are too low
• - Management announcement on use of cash flows - e.g. buybacks, dividends, M&A

Catalyst

• - Earnings announcement- street numbers are too low
• - Management announcement on use of cash flows - e.g. buybacks, dividends, M&A