Marathon, for the Long Run

 | Dec 10, 2012 | 10:20 AM EST
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I reviewed the performance of my portfolio this weekend to plan what changes I want to make to my allocations in 2013. One thing that immediately stood out is how many winners I have in the refinery sector. Valero (VLO), Tesoro (TSO), Marathon Petroleum (MPC) and Phillips 66 (PSX) are some of my biggest winners this year, as the refining sector is one of the best-performing areas so far in 2012.

The refiners have benefited greatly from the huge oil production expansion in the middle of the country, which has allowed them to buy their core input for a discount to world prices. I expect this to continue in 2013. That said, I have lightened my allocation to this sector quite a bit over the last two months, as it seemed prudent to take profits given the huge run-ups in these stocks in 2012.


2012 Refiners
Source: Yahoo!


The one refiner I have kept a full position in, however, is Marathon Petroleum, which operates six refineries in the Gulf Coast and Midwest regions of the U.S.

Six reasons MPC still has upside from $60 a share:

  • The stock is cheap, even after its rise in 2012. MPC goes for just under 7x forward earnings and the market seems to be significantly discounting its growth prospects judging from the five-year projected price/earnings/growth ratio on the stock 0.51.
  • The stock yields 2.4% and MPC has increased its dividend payout 75% since splitting from Marathon Oil (MRO) in June 2011. It has a payout ratio of less than 20%, so dividends still have substantial room to increase in the future.
  • The company has beaten earnings estimates each of the last three quarters and consensus earnings estimates for both 2012 and 2013 have risen by 20% or better in the last three months.
  • Its subsidiary, MPLX LP (MPLX) went public in late October. This master limited partnership operates pipelines and provides an avenue for MPC to drop down its thousands of miles of pipelines and other assets in coming years at good prices. This should allow Marathon Petroleum to pay down debt, increase dividends or buy back additional stock.
  • Marathon's refineries are configured to process large amounts of low-price sour and heavy crude oils. More than half of its current capacity is in the Midwest, close to the lower-priced oil being produced in the region.
  • The company is purchasing BP's (BP) Texas City refinery at a discount. This will add 450,000 barrels per day in refining capacity in the Gulf Coast close to the expanding production from the Eagle Ford and other shale regions.

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