Stillwater Capital Advisors that has limited exposure to the energy sector continues to hold Marathon Petroleum (MPC, Financial) according to the latest disclosures. The number of shares has doubled to 235,924 due to the recently announced 2:1 split by the company. While investors can track Stillwater’s latest portfolio changes in Guru Focus Real Time Stock Picks, this article discusses the factors that make Marathon Petroleum worth considering with an investment horizon of 3-5 years. It is important to mention at the onset that Marathon Petroleum stock has surged by 20.7% for YTD15, and I believe that the stock will continue to rally in the coming quarters.
Starting with a brief overview on the company, Marathon Petroleum operates an integrated refining, marketing and transportation system concentrated primarily in the Midwest, Southeast, Northeast and Gulf Coast regions of the U.S. In the refining and marketing segment, the company has seven refineries with 1,731,000 barrels per calendar day (bpcd) total refining capacity.
In the terminals & transportation segment, the company also has 80 owned/operated light products and asphalt terminals, 142 owned transport trucks deliver light products and crude oil, 9 owned and leased inland towboats and 215 owned and leased barges.
In the pipeline transportation segment, owns leases or has ownership interests in approximately 8,300 miles of pipeline, including approximately 2,900 miles owned through MPLX, which is a midstream MLP.
In addition, MPC owns the second-largest company-owned and operated convenience store chain in the U.S., Speedway. The brand currently operates in 2,750 locations in 22 states.
Coming to the factors that make me bullish on Marathon Petroleum for the long term, the first factor is the company’s strong investment in the midstream business that is likely to generate strong long-term cash flows. To put things into perspective, the company is investing $1 to $1.2 billion in Sandpiper, which is scheduled for completion in 2017 and Marathon Petroleum will own 27% to 30% stake in the project. In the Southern Access Extension, the company will be investing $305 million for 35% stake and completion in late 2015. Further, the Cornerstone project is also scheduled for completion in late 2016 and is expected to generate an annual EBITDA of $40 million. As a result of these investments, Marathon Petroleum will be more diversified than being a dominantly R&M company.
In the convenience store chain business, Marathon Petroleum’s acquisition of Hess Retail is an indication of the company’s plan to expand meaningfully in this segment in the coming years. Hess Retail was acquired for a consideration of $2.82 billion and has 1,245 company operated stores. In the coming years, Marathon Petroleum plans to convert these stores into Speedway stores as the latter generates an incremental $17,300 of merchandise margin per store per month. Once all Hess Stores are converted to Speedway, this will result in an incremental $250 million of merchandise margin potential. In terms of EBITDA, Marathon Petroleum expects Hess Stores to generated an annual EBITDA of $365 million by 2017 as compared to $175 million in 2013.
The company’s focus on midstream and convenience store chain segment is evident from the fact that of the $2.5 billion in 2015 capital budget, 35% is allocated to midstream and 18% to speedway with 27% investment being related to refining sustaining capital.
Another EBITDA growth driver for Marathon Petroleum is the company’s 69.5% stake in MPLX LP. In FY14, the adjusted EBITDA attributable to MPLX was $166 million and is expected to expand to $450 million in FY15. This is just an indication of the potential EBITDA growth the MPLX holds and its positive impact on Marathon Petroleum. In line with strong EBITDA growth, the annual LP distribution growth rate has been targeted at mid-20% over the next five years. Investors can therefore also consider exposure to MPLX LP (MPLX, Financial) for strong growth in distribution yield in the coming years. I must add here that Marathon Petroleum will be selling its marine assets to MPLX LP with the asset having an annual EBITDA generation potential of $115 million.
Besides these points related to the company’s growth potential in the coming years, Marathon Petroleum also offers a current dividend of $1 per share and a dividend yield of 1.9%. With increasing EBITDA contribution from the primary segments discussed due to growth capital, I expect the company’s dividend to increase meaningfully in the coming years. Also, considering the EBITDA potential MPLX holds, Marathon Petroleum might be undervalued from a 3-5 year investment horizon.
In conclusion, I believe that investors can still consider exposure to Marathon Petroleum even after a strong upside in the stock in FY15. However, the investment horizon has to be long-term considering the fact that several midstream projects are commencing in 2015-2017. In addition, the full benefit of Hess acquisition will be realized in the next 2-3 years. As mentioned earlier, investors can also consider exposure to the MPLX LP, which has strong distribution growth potential in the coming years.
