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Marathon CEO Pushes Back Against Speedway Spin-Off

Investor argues oil company, retailer is 'severely undervalued' and should consider strategic opportunities

NEW YORK -- Marathon Petroleum Corp. is considering strategic opportunities to capture additional value in its stock price, but it is pushing back against one major shareholder's suggestion that the oil company should spin off its retail business, Speedway convenience stores, or any other of its business units.

New York-based Elliott Management Corp. manages funds that collectively own about 4% of Marathon Petroleum common stock, reportedly making it one of the refiner-marketer’s largest shareholders. In a letter this week to Marathon president and CEO Gary Heminger and the board of directors, Quentin Koffey, portfolio manager for Elliott Management, argued that MPC is “severely undervalued” and should consider two specific moves to unlock up to $19 billion in additional shareholder value, as reported in a McLane/CSP Daily News Flash.

Marathon Petroleum, Findlay, Ohio, is the third-largest refiner in the United States, with seven refineries in the Midwest, Southeast and Gulf Coast. It owns the 2,770-store Speedway chain in 22 states, and a midstream segment that includes the MPLX master limited partnership (MLP).

In the letter, Koffey noted that Marathon trades at only around 5.7X EBITDA (earnings before interest, taxes, depreciation and amortization), which puts it around the same valuation of other merchant refiners that operate in the Midwest and Gulf Coast regions. However, Marathon has been able to grow its percentage of EBITDA from stable, nonrefining-related cash flows thanks to acquisitions and capital investment. This should put its valuation more in the territory of peer companies with similar, stable, nonrefining cash flows, or more than 10X EBITDA, according to Elliott Associates.

“Marathon’s undervaluation is most glaring when the value of its three businesses is summed together,” Koffey said in the letter, arguing that public equity market valuations of similar companies support valuations of around $10.5 billion for Speedway, $10.5 billion for MPC’s refining operations and around $26 billion for its midstream holdings, for a total of around $47 billion.

Net of debt, this creates an equity valuation that is more than 80% higher than what Marathon shareholders see today, Elliott Management said.

To address this, the fund recommends two steps:

  1. Immediately drop down all MLP-qualifying assets to MPLX. This, the fund argued, would remove any uncertainty that currently pressures MPLX’s cost of capital.
  2. Consider spinning off Speedway or separating Marathon into three separate, stand-alone businesses—Speedway, refining and midstream operations—to better serve shareholders. Even in a base case where each of the three businesses traded at the lowest multiple of their peers, restructuring MPC could unlock around $12 billion in value, or boost its stock by more than 50%.

“The board should not ask whether Marathon’s current structure merely maximizes the value of Marathon’s refining assets or the flexibility of its refineries,” Elliott Management stated. “Rather, its goal must be to maximize the value of the overall Marathon enterprise.

“To be clear, we are not asking the company to contemplate selling any portion of its business,” it continued. “Rather, we are asking the board to evaluate whether Marathon shareholders would be better served by holding the three businesses separately via tax-free spin-offs to shareholders.”

By doing so, Marathon could see an 80% or greater increase in its stock price.

“Given the 80+% valuation uplift from a tax-free separation of the company’s three businesses, can the company justify remaining integrated?” the letter asked.

In a statement that Marathon shared with CSP Daily News, Heminger said the company agrees with Elliott Management that Marathon’s valuation has “upside.” That said, “We disagree with their letter and presentation.”

Marathon is pursuing its own value-creating actions, he said. These include scheduling several “substantial” dropdowns to MPLX to support its distribution growth and push value to Marathon. Heminger cited tax “and other impediments” to an immediate dropdown, which he said was already discussed with Elliott Management. The company is also considering strategic opportunities to capture the value of Marathon’s general partner interest in MPLX and optimize the cost of capital for MPLX, as well as changing the segment reporting structure of its midstream assets. 

Heminger also pushed back against the idea of spinning off Speedway or any other of Marathon’s businesses.

“We have delivered substantial value through our integrated and diversified model, including our Speedway retail business with its best-in-class EBITDA per store,” he said. Since MPC’s spin-off from Marathon Oil, it has produced a 140% return to shareholders, he noted, or more than $10 billion, and tripled its stable cash flows. 

This echoes Heminger’s comments during Marathon’s last earnings call this past summer, when he said Speedway “will be a continuing source of value” to Marathon and reiterated that the company has no intention of spinning it off.

“Marathon has a strong and longstanding track record of taking aggressive actions to increase shareholder value,” Heminger concluded in his comments on Elliott Management’s proposals. “We are confident our plan will deliver substantial shareholder value and we are moving ahead expeditiously on each of these actions.”

Click here to see Elliott Management’s letter to the Marathon board and click here for the presentation.

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