Refining And Midstream Expansion Will Drive Major Upside Over The Next Decade

Catalysts

About Marathon Petroleum

Marathon Petroleum operates a large, integrated refining, marketing, midstream and renewables platform across the United States.

What are the underlying business or industry changes driving this perspective?

• Refining investments at Galveston Bay, Garyville, Robinson and El Paso are aimed at converting lower value inputs into higher value products and improving reliability. These initiatives can support higher utilization, stronger margin capture and, in turn, higher earnings and cash flow.
• Garyville projects that add 30,000 barrels per day of crude throughput and 10,000 barrels per day of export grade premium gasoline capacity are designed to reduce higher cost intermediate purchases and increase exposure to international gasoline demand. This can support refining margins and segment EBITDA once fully online.
• MPLX plans to direct about 90% of US$2.4b of growth capital into Natural Gas and NGL services in the Permian and Marcellus, areas linked to rising LNG exports and power demand. These investments can support mid-teens project returns, Midstream adjusted EBITDA and cash distributions to Marathon Petroleum.
• Exposure to sour crude, including Canadian and Venezuelan barrels when economical, together with the ability to process roughly 50% sour crude across the system, positions the company to benefit from wider sweet sour differentials. This can support refining margins and consolidated earnings.
• Expansion of branded retail marketing, with planned US$250m of investment, is intended to secure long term product placement and improve value capture across the integrated value chain. This can support revenue durability, margin per barrel and free cash flow available for shareholder returns.

Assumptions

How have these above catalysts been quantified?

• This narrative explores a more optimistic perspective on Marathon Petroleum compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts.
• The bullish analysts are assuming Marathon Petroleum's revenue will grow by 4.2% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from 3.0% today to 5.7% in 3 years time.
• The bullish analysts expect earnings to reach $8.6 billion (and earnings per share of $41.4) by about April 2029, up from $4.0 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as $5.0 billion.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 11.9x on those 2029 earnings, down from 16.3x today. This future PE is lower than the current PE for the US Oil and Gas industry at 15.1x.
• The bullish analysts expect the number of shares outstanding to decline by 4.06% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.98%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Large capital projects in refining and Midstream are being pursued with targeted returns of 25% or mid teens. If construction delays, cost overruns, or operational issues at facilities such as Garyville, El Paso, Martinez, or new MPLX projects occur, the company may not achieve the expected uplift in utilization, margin per barrel, or Midstream adjusted EBITDA, which would weigh on earnings and cash flow.
• The long term plan leans heavily on refined product demand staying constructive through the end of the decade, with management citing 1% to 1.2% annual growth in global consumption. A weaker demand trend, faster adoption of alternative transport fuels, or larger and faster ramp up of new Asian and Indian refinery and petrochemical capacity could pressure refining margins and reduce revenue and net margins.
• Roughly 50% of the crude slate is sour and management highlights significant upside from wider sweet sour differentials and access to Canadian and Venezuelan barrels. Any compression in differentials, regulatory or geopolitical setbacks affecting Venezuelan or Canadian supply, or new environmental constraints on heavy crude usage could reduce refining margin capture and segment EBITDA.
• The investment case relies on MPLX as a core cash engine, with natural gas demand anticipated to grow over 15% through 2030 and distribution growth of 12.5% over the next 2 years. If LNG projects, data center driven power demand, or NGL export volumes fall short, MPLX may not sustain these distributions, which would reduce the cash available to fund MPC dividends, capital spending, and share repurchases and could slow earnings growth.
• Management is currently operating under rolling 24 hour extensions with the USW after contract expiry, and discussions are said to be progressing. A labor disruption or a materially higher cost agreement over time would likely increase operating expenses, reduce utilization at key refineries, and put pressure on net margins and earnings.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bullish price target for Marathon Petroleum is $318.81, which represents up to two standard deviations above the consensus price target of $236.61. This valuation is based on what can be assumed as the expectations of Marathon Petroleum's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $331.0, and the most bearish reporting a price target of just $174.0.
• In order for you to agree with the more bullish analyst cohort, you'd need to believe that by 2029, revenues will be $150.5 billion, earnings will come to $8.6 billion, and it would be trading on a PE ratio of 11.9x, assuming you use a discount rate of 7.0%.
• Given the current share price of $223.52, the analyst price target of $318.81 is 29.9% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.