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Marathon Petroleum: 7% Yield and Undervalued Oil Stock

Marathon Petroleum: 7% Yield and Undervalued Oil Stock
(Piotr Swat/Dreamstime)

By Wednesday, 14 October 2020 07:10 PM Current | Bio | Archive

Oil stocks are very much out of favor right now, for multiple reasons.

First, rising production in many of the world’s oil-producing nations has caused a supply glut. And second, the coronavirus pandemic put a huge dent in demand for refined products. Add it all up, and the crash in oil prices has sent many related oil stocks significantly lower over the course of 2020.

But this could be a buying opportunity, particularly for high-quality companies like Marathon Petroleum (MPC) which now yields over 7%. MPC’s high yield makes the stock attractive for investors, even institutional investors such as Knighthead Capital. Income investors willing to take a bit of elevated risk from oil stocks, should take a closer look at MPC shares.

Business Overview

Marathon Petroleum Corp. was spun off from Marathon Oil Corp. (MRO) in 2011. After the acquisition of Andeavor Logistics in October 2018, MPC has become the largest U.S. refiner, with 16 refineries and a refining capacity of 3.1 million barrels per day. It also has a marketing system that includes ~6,800 branded locations, ~3,900 convenience stores (~2,740 are Speedway), and ~1,000 direct dealer locations. In addition, MPC owns a midstream MLP, (MPLX), which has gathering and processing assets as well as pipelines for crude oil and light products. Marathon Petroleum Corp. has a market capitalization of $19 billion.

In early August, Marathon Petroleum reported (8/3/20) financial results for the second quarter of fiscal 2020. The pandemic caused a collapse in the demand for refined products and hence it caused a steep decrease in the refining margin and refinery utilization of MPC. Notably the retail and midstream segments remained resilient and posted essentially flat earnings. The retail segment benefited from higher margins and cost reductions while the midstream segment benefited from its robust, fee-based model and contribution from growth projects. However, the refining segment switched from a profit of $0.9 billion in last year’s quarter to a loss of -$1.6 billion.

As a result, MPC switched from an adjusted profit of $1.73 per share to a loss of -$1.33 per share. Moreover, despite the recovery of the demand for refined products in June and July, MPC still experiences suppressed demand for its products and thus it has decided to idle its Gallup and Martinez refineries indefinitely.

On the bright side, on August 2nd, 2020, MPC announced the sale of its Speedway business to 7-Eleven for $21 billion in cash. The deal includes a 15-year fuel supply agreement for about 7.7 billion gallons of fuel per year. The after-tax proceeds are estimated around $16.5 billion. As this amount is 68% of the market cap of MPC stock, it is certainly of paramount importance. MPC will use the proceeds to reduce its debt pile and enhance its shareholder returns.

Dividend Analysis

The Andeavor acquisition greatly enhanced Marathon’s geographic diversification, and its potential to take advantage of fluctuations in price spreads, and the dynamics of export markets. The acquisition will thus increase the earnings of the company and its resilience during downturns. This will also help add to the sustainability of the dividend payout.

MPC stock has an attractive yield above 7%. And with a projected dividend payout ratio of approximately 51% for 2020, the dividend payout appears secure, provided the demand for refined products continues its steady recovery.

Bob Ciura has worked at Sure Dividend since October 2016. He oversees all content for Sure Dividend and its partner sites. Bob received a Bachelor’s degree in Finance from DePaul University, and an MBA with a concentration in Investments from the University of Notre Dame.

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Oil stocks are very much out of favor right now, for multiple reasons. First, rising production in many of the world's oil-producing nations has caused a supply glut. And second, the coronavirus pandemic put a huge dent in demand for refined products. Add it all up, and the...
marathon petroleum, undervalued, oil, stock
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2020-10-14
Wednesday, 14 October 2020 07:10 PM
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