Permian Pipeline And Los Angeles Refinery Upgrades Will Generate Value

Key Takeaways

• Strategic investments in acquisitions and infrastructure projects aim to boost future earnings, enhance energy efficiency, and improve net margins.
  
• Anticipated tighter supply from U.S. and European refinery closures, combined with strong demand, likely supports higher refining margins and profitability.
  
• Regulatory changes, capital investments, and supply issues could pressure margins and earnings, impacting Marathon Petroleum's long-term profitability and competitive landscape.

Catalysts

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

• The strategic investments of over $1 billion in acquisitions by MPLX, including full ownership of the BANGL NGL pipeline, expanding its Permian platform, are anticipated to boost future earnings and midstream growth. This should increase revenues and cash flow from operations.
  
• The completion of significant infrastructure projects at the Los Angeles refinery, expected by the end of the year, aims to enhance energy efficiency and competitiveness, likely improving net margins and contributing to long-term earnings growth.
  
• The anticipated refinery closures in the U.S. and Europe should reduce overall capacity, potentially leading to stronger refining margins by tightening supply. This would contribute to higher future revenue and profitability.
  
• Continued improvement in demand for gasoline, diesel, and jet fuel, combined with low U.S. refined product inventories and lower retail prices, should support stronger seasonal demand and refining margins, positively impacting future revenue and earnings.
  
• The ongoing enhancement of the midstream natural gas and NGL growth strategies, with projects like the distillate hydrotreater at the Galveston Bay refinery, is expected to increase production of higher-value products, thereby improving net margins and supporting earnings growth.

Marathon Petroleum Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Marathon Petroleum's revenue will decrease by 2.9% annually over the next 3 years.
• Analysts assume that profit margins will increase from 1.8% today to 3.4% in 3 years time.
• Analysts expect earnings to reach $4.3 billion (and earnings per share of $16.28) by about May 2028, up from $2.4 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $5.4 billion in earnings, and the most bearish expecting $3.1 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 11.0x on those 2028 earnings, down from 18.5x today. This future PE is lower than the current PE for the US Oil and Gas industry at 11.3x.
• 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 6.94%, as per the Simply Wall St company report.

Marathon Petroleum Future Earnings Per Share Growth

Risks

• The completion of the highest amount of planned turnarounds in history, particularly on the Gulf Coast, resulted in decreased refining utilization, which could negatively impact revenue and net margins if not managed efficiently.
  
• Regulatory uncertainty and changes in regulatory credits, such as those impacting the renewable diesel segment, reduced margins across the industry, potentially affecting overall earnings.
  
• Risks associated with the narrow light-heavy crude differentials due to Canadian producers' maintenance activities could negatively influence refining margins and earnings if OPEC and other factors do not offset supply tightness.
  
• The West Coast region faces a challenging regulatory environment with potential new regulations, impacting the competitive landscape and cost structure, which could pressure net margins and long-term profitability.
  
• The necessity for significant capital investments to comply with emission reduction regulations, as seen at the Los Angeles refinery, could impact future cash flow if the expected improvements do not yield the forecasted returns, affecting earnings and net margins.

Valuation

• The analysts have a consensus price target of $156.018 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 $183.0, and the most bearish reporting a price target of just $135.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $126.3 billion, earnings will come to $4.3 billion, and it would be trading on a PE ratio of 11.0x, assuming you use a discount rate of 6.9%.
  
• Given the current share price of $144.55, the analyst price target of $156.02 is 7.4% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• 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.