Investments In Galveston Bay And LA Refinery Will Lead To High-Value Fuel Production

Key Takeaways

• Expansion in renewable diesel and midstream segments, along with strategic capital investments, aims to boost transparency, cash flow, and global market growth.
  
• Focus on high-return projects and disciplined capital allocation seeks to enhance margins, shareholder returns, and competitive positioning.
  
• Regulatory and market pressures, including potential tariffs and changing policies, could negatively impact Marathon Petroleum's refining margins and financial flexibility.

Catalysts

Operates as an integrated downstream energy company primarily in the United States.

• Marathon Petroleum's new segment reporting, including the renewable diesel segment, is expected to provide better insight into financial performance and capital allocation. This could impact earnings by enhancing transparency and comparability.
  
• The Midstream segment, MPLX, has shown consistent growth with a 6% year-over-year increase in adjusted EBITDA and is expected to grow cash flow further in 2025 with new capital projects and expanded natural gas and NGL businesses, which could improve revenues and earnings.
  
• Marathon Petroleum has planned capital investments in projects such as the distillate hydrotreater at Galveston Bay and enhancements at the Los Angeles Refinery, expected to increase margins by producing higher-value fuels with an impressive return on investment. This could drive future net margins.
  
• The expansion of the export terminal and fractionation complex in the Gulf Coast by MPLX is anticipated to generate mid-teen returns and enhance global LPG supply capabilities, potentially driving revenue growth from international markets.
  
• The company’s disciplined capital allocation strategy prioritizes sustaining capital and distribution growth, especially through MPLX, with a focus on high-return investments that could lead to competitive positioning and increased shareholder returns, potentially improving earnings per share.

Marathon Petroleum Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Marathon Petroleum's revenue will decrease by 2.2% annually over the next 3 years.
• Analysts assume that profit margins will increase from 2.5% today to 3.6% in 3 years time.
• Analysts expect earnings to reach $4.6 billion (and earnings per share of $14.3) by about March 2028, up from $3.4 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $6.1 billion in earnings, and the most bearish expecting $2.9 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 11.5x on those 2028 earnings, down from 13.3x today. This future PE is lower than the current PE for the US Oil and Gas industry at 12.7x.
• Analysts expect the number of shares outstanding to decline by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.59%, as per the Simply Wall St company report.

Marathon Petroleum Future Earnings Per Share Growth

Risks

• The potential imposition of tariffs on heavy crude imports could lead to cost increases for Marathon Petroleum, affecting its refining margins and overall profitability.
  
• The regulatory environment, particularly from potential changes in clean energy policies under the new administration, could impact Marathon Petroleum's cost structure and margins, especially if carbon-related costs increase.
  
• The Renewable Diesel segment faces uncertainty due to possible changes in regulatory incentives like the 45Z. This uncertainty could lead to volatility in margins and profitability of the renewable diesel business.
  
• Global refinery capacity additions and competition from international refiners such as Dangote could pressure refining margins and lead to reduced earnings for Marathon Petroleum if not countered by market enhancements.
  
• The requirement to meet regional environmental regulations, such as NOx reduction mandates in California, may incur additional capital and operating expenses, impacting net margins and reducing overall financial flexibility.
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Valuation

• The analysts have a consensus price target of $166.263 for Marathon Petroleum based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $192.0, and the most bearish reporting a price target of just $141.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $130.5 billion, earnings will come to $4.6 billion, and it would be trading on a PE ratio of 11.5x, assuming you use a discount rate of 8.6%.
• Given the current share price of $146.0, the analyst price target of $166.26 is 12.2% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.