Well at the end of last week, crack spreads were back to mid-teen levels. Not great, but better...and the impact on the Marathon Petroleum share price has been very clear since the September lows:
So what to do now? Well, I was struck by a couple of comments on the conference call (with my emphasis added), as well as slides in the presentation deck:
First, the bad news, earnings in Q3 were very weak:
However, pricing has improved during Q4...
'we are seeing a rebound in both gas and distillate pricing
so far here in the fourth quarter. And again, it's using up that inventory that
was on hand for hurricane and other weather impacts'
'we see demand as being relatively good for gasoline here in
the last few months. So I think all those things are translating in a little
bit better realization in terms of how much we put in our pocket at the end of
the day versus those spot market values'
...and this is continuing to give the company confidence to return capital quite aggressively to shareholders (the below is equivalent to c. 14% free cash flow yield):
The share still remains lowly valued using conventional criteria (c. x6s EV/ebit) but the key clearly are the future dynamics of the market. The continued growth of export opportunities for refined oil/gas products is clearly good news. Ultimately though, this comment from my earlier report gives me some hope:
'there is often a seasonality in crack spreads, with the trough often being reached in the Autumn/Winter...So if crack spreads trough before the end of the year...well maybe Marathon Petroleum shareholders can start to dream'
Clearly this process may have started, as noted above. Until the price action stops, I am going to continue running Marathon Petroleum. It may surprise us all how much crack spreads ultimately bounce back.
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