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Marathon Petroleum Corp (MPC) has 135 years of history in the energy business, a leading integrated downstream energy company, with a large refining capacity of c.2.9mbd in 13 refinery sites throughout the US. MPC also engages in midstream business - transports, stores and distributes crude oil, refined products, including renewable diesel, and other hydrocarbon-based products via refining logistics assets, pipelines, terminals. MPC also operates retail service stations under Marathon and ARCO brands in the US, including District of Columbia, West Coast, Upper Midwest, and Mexico.

Investment Overview

Largest domestic refinery in the US with lower crude procurement cost. MPC is the largest US refinery with total nameplate capacity of c.2.9mbd with 13 refining sites across states. It has advantages over peers as i) MPC owns midstream business engaging in oil transportation network throughout US, and ii) has lower crude procurement cost such as freight as most of crude slate is domestic crude. Additionally, MPC is also one of the largest marketers of renewable fuels in the US where there is the change of State Laws toward the use of renewable fuel. Thanks to the JV with Neste in September, the first phase of the Martinez renewable fuels facility is expected to produce c.48kbd of renewable fuels by the end of 2023.

To see softer earnings momentum in FY24. Earnings growth momentum for MPC is expected to deteriorate y-o-y in FY24 along with industry trends. This is hit by i) expected softer oil prices (via lower expected inventory gains), ii) normalising refining crack spreads (though remaining at healthy level historically where Jet and diesel spreads expected to remain above US$20/bbl - higher than 10-year average), ii) expected high base in FY23, supported by a robust refining spreads and substantial inventory gain. However, we deem the commercialisation of the Martinez facility in late 2023 could partly offset the falling refinery margins.

More sustainable product mix. MPC has less crude procurement cost than peers as c.70% of crude intake is sourced from the domestic market. As a result, MPC can save most of the freight costs which ranges between US$0.80-1.2/bbl. Moreover, MPC utlises less leverage than peers where gross debt to capital ratio went down from 51% in 2020 to 43% in 2022 (vs peer's average of 55-60%). With respect to ESG, MPC is one of the global leading energy companies that obtain "A" rating from MSCI with respect to sustainability. Back in 2011, c.90% of products were produced from petroleum-based fuels. Now the ratio has dropped to c.45% at end of 2022 (the rest is mostly renewable diesel).

Refinery margin to remain healthy despite moderation.

Risks

i) business and operational risks such as disruption of crude supplies, failure of transportation infrastructure, energy price volatility (natural gas and electricity tariff), extreme weather conditions and operational accidents, and ii) legal and regulatory risks such the change of requirement in GHG emissions, environmental protection, wastewater management, and workforce safety.

Despite normalising oil price and refinery margins, we deem they will remain at historically healthy levels in FY24. This is supported by tighter supplies from i) geopolitical tension in the Middle East, ii) larger-than-expected inventory drawdown in major nations, and iii) rising US refinery utilisation rate. MPC, as the US largest domestic refinery, will directly benefit from this.

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DYODD