4/28/2016 Reported first-quarter earnings of $1 million
•Results include pretax charges of $0.06 per diluted share related to the impairment of goodwill and the valuation of inventories at the lower of cost or market
•Completed major turnaround activity and refinery light crude upgrade project
•Delivered strong earnings and cash flow from Speedway and Midstream segments
•Returned $244 million to shareholders
•MPLX announced a $1 billion private placement of convertible preferred securities with third-party investors
Marathon Petroleum Corporation reported 2016 first-quarter earnings of $1 million, or less than one cent per diluted share, compared with $891 million, or $1.62 per diluted share, in the first quarter of 2015. First-quarter 2016 earnings include a charge of $0.04 per diluted share related to a goodwill impairment recorded by MPLX LP (NYSE: MPLX), MPC's consolidated subsidiary, and a charge of $0.02 per diluted share to value inventories at the lower of cost or market.
The year-over-year decline in first-quarter earnings was largely attributable to weak crack spreads in the first quarter of 2016 compared with unusually strong first-quarter crack spreads in 2015, as well as higher turnaround activity. "Despite weakness in refining margins in the first two months of the year, we saw crack spreads strengthen late in the quarter as gasoline inventories declined and refiners responded to market conditions," said MPC Chairman, President and Chief Executive Officer Gary R. Heminger.
As part of its turnaround work, MPC commissioned a light crude upgrade project at the company's Robinson, Illinois, refinery to increase its light crude and overall processing capacity by 30,000 and 20,000 barrels per stream day, respectively. This will improve the refinery's flexibility to optimize its crude slate in a variety of market conditions. MPC also implemented additional process improvements and synergy projects at the company's Galveston Bay refinery in Texas City, Texas, in its ongoing efforts to enhance margins at the refinery. "As we completed this substantial turnaround activity ahead of schedule and under budget, our flexible and fully integrated system is well-positioned to take advantage of anticipated strong gasoline demand and a competitive sour crude oil market in the second quarter and throughout the summer driving and asphalt season," Heminger said.
MPC's Speedway retail business and Midstream segment each contributed $167 million of segment income in the first quarter, for a total of $334 million. "Our first-quarter results underscore the importance of our strategy to increase the more stable earnings and cash flow that come from our Speedway and Midstream segments, and we remain committed to growing these parts of the business," Heminger said.
"Speedway continued its exceptional performance in the first quarter," Heminger added. In addition to higher light-product sales volumes, Speedway's merchandise margin increased in the quarter, consistent with its goal to generate two-thirds of its margin from merchandise sales. "We are focusing on the significant marketing enhancement opportunities at our recently converted East Coast and Southeast retail locations to further optimize the value of these assets."
On March 31, MPC completed the contribution of its inland marine business to its sponsored master limited partnership (MLP), MPLX, at a supportive valuation in exchange for MPLX equity. "MPC's near-term support of MPLX in a challenging environment for MLPs is intended to contribute to the long-term value MPLX creates for MPC shareholders," said Heminger. "Our shareholders are expected to benefit through our limited partner and general partner distributions, drop-down proceeds, and the overall value of our equity interest in MPLX.
"We are pleased with MPLX's financial and operational results during the first full quarter following the MarkWest merger," Heminger said. In addition to its strong distributable cash flow generated during the quarter, MPLX commenced operation of one processing plant and one de-ethanizer in the Marcellus Shale in early April, increasing the partnership's total processing capacity by 200 million cubic feet per day and ethane capacity by 10,000 barrels per day. For 2016, MPLX anticipates utilization of its processing facilities in the Marcellus and Utica to average approximately 80 percent as it expects its overall processed gas volumes in the region to increase by approximately 15 percent.
During the quarter, MPLX also facilitated the first delivery of unit trains of propane from its Hopedale, Ohio, fractionation complex, leading the evolution of efficient natural gas liquids marketing from the Marcellus and Utica shales. Over one third of the total U.S. gas rigs in service are in the rich- and dry-gas areas where MPLX operates, and over the last year MarkWest commissioned almost 1.5 billion cubic feet per day of processing capacity to support its customers' growth plans.
In connection with the upgrade project at MPC's Robinson refinery, MPLX also completed an expansion of its Patoka-to-Robinson pipeline, adding 20,000 barrels per day of crude oil supply capacity to the plant.
MPLX announced yesterday its binding agreement for a $1 billion private placement of convertible preferred securities with third-party investors. "The partnership elected to take advantage of very strong investor interest in convertible preferred securities, to privately place $1 billion with a select group of investors," Heminger said. "Originally contemplated as a transaction with MPC, this private placement provides an attractive funding source for the partnership while preserving MPC's capital and financial flexibility. The combination of some opportunistic At-The-Market issuances in the first quarter and this private placement provides for the partnership's anticipated funding needs for the remainder of 2016 and into 2017, enabling MPLX to continue its execution of attractive organic growth projects that will contribute to distributable cash flow and long-term value for the partnership."
"MPC maintains its disciplined investment strategy across all segments of the business, balancing investments in value-enhancing projects with returning capital to shareholders over the long term," Heminger said. "Meanwhile, we are committed to maintaining strong liquidity and an investment-grade credit profile through all cycles." During the quarter, MPC returned $244 million of capital to shareholders. In addition, as previously announced, the company reduced its 2016 capital expenditure plan by nearly 30 percent, to $3 billion, from an initial approved plan of $4.2 billion.
MPC is well-positioned to benefit as market conditions improve, said Heminger. "In addition to our financial strength, we have a sustained competitive advantage from our refining system, premier retail assets, and an enhanced logistics and storage network with the addition of the MarkWest assets to MPLX."
Total income from operations was $75 million in the first quarter of 2016, compared with $1.47 billion in the first quarter of 2015.
In the first quarter, segment reporting was revised in connection with the contribution of MPC's inland marine business to MPLX. The results of the inland marine business, as well as MPC's retained investment in an ocean vessel joint venture, are now presented in the Midstream segment. Previously, these results were reported in the Refining & Marketing segment. Comparable prior period information has been recast to reflect this revised segment presentation.
Refining & Marketing
Refining & Marketing segment loss from operations was $62 million in the first quarter of 2016, compared with $1.29 billion of income in the first quarter of 2015. The decrease in the quarter's results compared with first quarter 2015 was primarily due to a $6.16 per barrel decrease in gross margin, resulting from lower crack spreads, unfavorable crude oil and feedstock acquisition costs relative to benchmark Light Louisiana Sweet crude oil and higher direct operating costs related to increased turnaround activity. These decreases were partially offset by more favorable product price realizations and the favorable effects of changes in market structure compared to the spot market reference prices. The Chicago and Gulf Coast Light Louisiana Sweet 6-3-2-1 blended crack spread decreased from $9.69 per barrel in the first quarter of 2015 to $4.62 per barrel in the first quarter of 2016.
Speedway segment income from operations was $167 million in the first quarter of 2016, compared with $168 million in the first quarter of 2015. The results are consistent with first quarter of 2015 as lower light product margins and higher operating expenses were offset by higher merchandise margins, an increase in gasoline and distillate sales volumes, and a $24 million gain from the sale of a retail location. Speedway's light product margin decreased to 16.82 cents per gallon in the first quarter of 2016, from 19.70 cents per gallon in the first quarter of 2015.
Midstream segment income from operations, which includes MPLX as well as other related operations, was $167 million in the first quarter of 2016, compared with $90 million for the first quarter of 2015. The increase was primarily due to operating results from MarkWest following the merger, which was effective Dec. 4, 2015.
Items Not Allocated to Segments
Unallocated expenses of $197 million in the first quarter of 2016 were higher than the first quarter of 2015 as a result of a $129 million non-cash goodwill impairment charge recorded by MPLX, our consolidated subsidiary. The impairment charge resulted from the effects of the continuing low commodity price environment.
Corporate and other unallocated expenses of $67 million in the first quarter of 2016 were $12 million lower than the first quarter of 2015 largely due to a reduction in employee benefit expenses.
Strong Financial Position and Liquidity
On March 31, the company had $308 million in cash and cash equivalents, $2.5 billion available under a revolving credit agreement and $426 million available under its trade receivables securitization facility. Availability under the trade receivables facility is a function of eligible accounts receivable, which will be lower in a sustained lower refined product price environment. The company's liquidity should provide it with sufficient flexibility to meet its day-to-day operational needs and continue its balanced approach to investing in the business and returning capital to shareholders.
On Feb. 26, 2016, MPC established a commercial paper program that allows it to have a maximum of $2 billion in commercial paper outstanding. During the quarter, the company pursued its first issuance of commercial paper under the program. As of March 31, 2016, the company had $188 million of commercial paper outstanding.
About Marathon Petroleum Corporation
MPC is the nation's fourth-largest refiner, with a crude oil refining capacity of approximately 1.8 million barrels per calendar day in its seven-refinery system. Marathon brand gasoline is sold through approximately 5,500 independently owned retail outlets across 19 states. In addition, Speedway LLC, an MPC subsidiary, owns and operates the nation's second-largest convenience store chain, with approximately 2,770 convenience stores in 22 states. MPC owns, leases or has ownership interests in approximately 8,400 miles of crude and light product pipelines and 5,000 miles of gas gathering and natural gas liquids (NGL) pipelines. MPC also has ownership interests in 53 gas processing plants, 13 NGL fractionation facilities and a condensate stabilization facility. Through subsidiaries, MPC owns the general partner of MPLX LP, a midstream master limited partnership. MPC's fully integrated system provides operational flexibility to move crude oil, NGLs, feedstocks and petroleum-related products efficiently through the company's distribution network and midstream service businesses in the Midwest, Northeast, East Coast, Southeast and Gulf Coast regions.