Elliott Management’s Perspectives On Marathon Petroleum Corporation

Elliott Management’s perspectives on Marathon Petroleum Corporation.

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Elliott Management’s Research

• We have carried out extensive research to understand Marathon’s business across refining, midstream/logistics, and retail and have evaluated in depth whether any benefits to integration exist, including:
  • Conducted over 80 due diligence meetings with current and former refining, logistics, and retail executives and industry experts, including speaking at length with major refiner, midstream, and convenience store peers.
  • Evaluated 1,985 downstream M&A deals extending back to 1990 to determine the impact on crude procurement costs, refinery and logistics utilization, and margins, and spoke at length with former executives and experts involved in these transactions.
  • Mapped the physical locations of all ~2,770 Speedway and ~5,400 Marathon-branded retail locations along with ~15,000 other convenience stores in corresponding markets to analyze footprint overlap and proximity to other outlets for Marathon’s refineries.
  • Analyzed liquidity in Marathon’s end markets for gasoline, encompassing 87 cities across 30 major metropolitan areas, extending back 15 years to quantify challenges to placing product in Marathon’s retail markets.
  • Examined OPIS pricing in each of Marathon’s retail markets to evaluate frequency and magnitude of margin arbitrage opportunities.
  • Conducted extensive analysis with a top consulting firm that found there was no value lost from separating Marathon’s businesses and found multiple levers of additional value if the businesses were operated separately outside its conglomerate structure.
  • Worked with multiple leading corporate law firms to confirm structuring and tax aspects of recommendations.

Marathon’s Board Can Increase Shareholder Value by ~60 – 80+%

• We believe Marathon’s severe undervaluation costs shareholders $14 – 19 billion (~60 – 80+% of equity value).
• Marathon has persistently traded at similar valuation multiples to low-multiple merchant refiners, despite having rapidly grown its high-multiple midstream and retail businesses over the past five years.
• Valuing each of Marathon’s three business segments in line with public peers indicates an equity valuation ~80+% higher than Marathon today. Valuing each business at the lowest multiple or highest yield of any relevant peer indicates a valuation ~50+% higher than today.
• Marathon’s recent announcement of strategic actions around its midstream assets is an encouraging first step but much more can and should be done to unlock value for shareholders.
• We recommend that Marathon:
  • “Drop down” all MLP-qualifying assets to MPLX today.
    • Dropping down assets immediately will remove the cloud of uncertainty weighing on MPLX’s cost of capital, increase Marathon’s GP cash flow to ~$650MM in 2017, and force a revaluation of Marathon.
    • After completing the drops, Marathon will hold after-tax cash proceeds and LP units equivalent to 60+% of Marathon’s current market capitalization. If Marathon exchanges its IDR for additional LP units, the resulting cumulative cash proceeds and publicly traded LP units will be 110+% of its market capitalization. Any valuation for Speedway and refining operations will result in uplift to Marathon’s share price.
    • Delaying drops over three years could cost Marathon shareholders ~$750-900MM in tax inefficiencies.
  • Conduct a full strategic review including the potential tax-free separation into Speedway, RefiningCo, and MidstreamCo.
    • Given the substantial value unlock from separation, we recommend that Marathon reassess whether its current structure maximizes value for shareholders.

Marathon Is Severely Undervalued

Despite Substantially Growing Its Midstream and Retail Businesses…

…Marathon Is Persistently Valued as a Merchant Refiner

Marathon Trades at the Same Multiple as Merchant Refiner Peers

Consolidated Multiples and Marathon’s Expensing of Turnaround Costs, Unlike Peers That Capitalize, Obscures This Valuation Gap

Consolidated multiples are misleading due to large minority interests in much higher-multiple MLPs. Blending MPLX and MPC valuations together obscures MPC’s dramatic undervaluation. Marathon’s accounting treatment of turnaround costs further hides its undervaluation.

Actual EBITDA Multiple Is the True Way to Understand Valuation; Fully Consolidated Multiple Is Greatly Distorted by Including Unowned Portion of High Multiple MLP

See the full PDF below.