Surging Risks and Shrinking Margins, A Gloom Outlook for the Downstream Energy Titan

What are the underlying business or industry changes driving this perspective?

• Marathon Petroleum Corporation, together with its subsidiaries, operates as an integrated downstream energy company primarily in the United States.
• Global refining supply is expected to increase substantially in the near future, potentially outpacing demand growth and putting pressure on refining margins. This could impact profitability for Marathon Petroleum, especially if new capacity comes online faster or in greater volumes than anticipated, affecting revenue and net margins.
• High planned turnaround expenses, particularly in the first quarter, could temporarily elevate operating costs and reduce throughput volumes, potentially compressing margins and negatively impacting earnings in the short term.
• Regulatory changes, especially on the West Coast, could introduce additional operational costs or require significant capital investment to comply with new environmental standards, impacting net margins and potentially increasing capital expenditure.
• Marathon Petroleum's investments in growth projects and low carbon initiatives, while expected to generate strong returns, carry execution risks. Delays, higher-than-expected costs, or lower-than-forecasted returns could affect earnings and cash flow negatively.
• The company's strategy of returning significant capital to shareholders through dividends and share repurchases, while positive for shareholder returns in the short term, could limit financial flexibility to invest in growth or weather downturns, impacting long-term earnings potential.

How have these above catalysts been quantified?

• Analysts are assuming Marathon Petroleum's revenue will decrease by -3.5% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 6.5% today to 3.4% in 3 years time.
• Analysts expect earnings to reach $4.6 billion (and earnings per share of $15.06) by about April 2027, down from $9.7 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish analysts expecting $5.6 billion in earnings, and the most bearish anlaysts expecting $3.8 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 16.3x on those 2027 earnings, up from 7.6x today. This future PE is greater than the current PE for the US Oil and Gas industry at 9.9x.
• Analysts expect the number of shares outstanding to decline by 5.6% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 8.5%, as per the Simply Wall St company report.

What could happen that would invalidate this narrative?

• The recent executive team changes, focusing on advancing value-creating initiatives and improving the performance across the value chain, could enhance the company's strategic direction, impacting revenue and net margins positively.
• Marathon Petroleum's commitment to paying a secure, competitive, and growing dividend, along with a disciplined growth capital investment strategy, is likely to sustain and possibly enhance shareholder value, affecting earnings positively.
• The strategic investments in refining and marketing, particularly the high-return projects to increase efficiency and reduce costs, could significantly improve the company's competitive positioning and operational efficiency, positively impacting net margins.
• The company's strategic relationship with MPLX and its increasing cash distribution could provide Marathon Petroleum with a stable and growing source of cash flow, supporting Marathon Petroleum's dividend payments and capital investment programs, which in turn could enhance earnings.
• The strong cash flow generation capability emphasized in Marathon Petroleum's strategy, driven by operational excellence, commercial performance improvements, and disciplined capital allocation, suggests potential for sustained revenue growth and profitability enhancements, thus positively affecting earnings.

• The analysts have a consensus price target of $208.47 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 $249.0, and the most bearish reporting a price target of just $142.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $134.4 billion, earnings will come to $4.6 billion, and it would be trading on a PE ratio of 16.3x, assuming you use a discount rate of 8.5%.
  
• Given the current share price of $203.86, the analyst's price target of $208.47 is 2.2% 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.