Ask the Investor, As Seen in The Canton Repository
Saturday, December 31, 2016
It might surprise you to know that one of the largest refineries in North America, Marathon Petroleum, is headquartered about two hours away in Findlay, Ohio. Marathon operates seven refineries, one of which is located here in Canton and produces about 93,000 barrels of refined products per day.
In April, Marathon announced they would begin building a pipeline from Cadiz, Ohio to their Canton refinery that will transport light oil. It is estimated that this project alone will cost about $250 million and will create between 300 and 500 new jobs. This is in addition to the estimated 350 employees already in Canton as well as 300 contract workers, according to the company’s website.
The refining business may be uniquely positioned to benefit from President-elect Trump’s pro-energy cabinet. For instance, Secretary of State Rex Tillerson was CEO of Exxon Mobil, and Secretary of Energy will be Texas Governor Rick Perry. Scott Pruitt, the Administrator for the Environmental Protection Agency (EPA), was the State Attorney General of Oklahoma and is somewhat famous for suing the EPA for being too restrictive.
There is no doubt that Trump’s selections will favor oil and gas in North America. Policies will likely increase oil and natural gas supply and may have the potential to break up the recently-announced OPEC agreement.
Additional pipelines will likely be added to connect emerging shale plays to refiners, which will eventually lower the cost to get the oil and gas to market. Pipeline investment will cost hundreds of millions, similar to Marathon’s as discussed above, and will create many new jobs.
I would also expect refiners to benefit from a reduced regulatory burden and lower taxes. Goldman Sachs estimates that large-cap refiners, on average, have cash tax rates around 30%. If Trump’s proposal of 15% corporate tax rates passed Congress, earnings would accelerate substantially.
Marathon Petroleum has an internal goal of growing their midstream business (pipelines) to 40-45% of their overall earnings. Currently, about 10% of earnings are attributable to Midstream and a smaller portion to Speedway gas stations. By 2020, net income should be more diversified and more stable compared to today.
How a company allocates its cash flow is critical to their success. If a company focuses too heavily on high-risk mergers and acquisitions, shareholders could pay the price with long-term share price underperformance and elevated expenses due to synergies that were never realized.
On the other hand, when companies routinely allocate capital to a growing dividend and share repurchases, we are excited to be potential shareholders.
Since June 2011, Marathon has increased their dividend at about 30% per year (through 2015), and the company has repurchased shares totaling $7.24 billion (or almost 28% of the outstanding stock)!
Marathon Petroleum has a track record of being well managed and may be positioned to benefit from Trump’s energy policies.
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