Marathon Spins Off Downstream

Speedway, Marathon brands now part of new Marathon Petroleum Corp.
HOUSTON -- Two years ago, Marathon Oil Corp. weighed a separation of its upstream and downstream businesses, but decided there were greater synergies keeping the company as one, despite a call by some analysts for the move. One recession later, the company has changed its mind, as reported in a Morgan Keegan/CSP Daily News Flash yesterday.

"Over that two-year period, we've seen a very significant improvement in the global financial markets and the commodity markets that certainly allows us to look forward in these businesses and to see stronger performance and [image-nocss] an enhanced ability to capitalize both companies much better than we could have two years ago," said Marathon Oil president and CEO Clarence P. Cazalot Jr. in a Thursday morning conference call with analysts.

In addition, Marathon was enmeshed in two major expansions in both its upstream and downstream businesses, including the expansion of an oil sands project in Alberta, Canada, and increasing the capacity at its Garyville, La., refinery. "Both projects are largely behind us today, and both companies are better positioned going forward, with a very solid foundation, based on the investments we've made in the past, and so we believe now is indeed the right time to proceed with this transaction."

The new Marathon Petroleum Corp., with headquarters in Findlay, Ohio, will begin operations in July and operate and report as three segments: Refining & Marketing, Pipeline Transportation and the Speedway convenience store chain. Gary Heminger, formerly executive vice president of Marathon Oil's downstream business, and brother of Speedway vice president of marketing Grant Heminger, will serve as president and CEO. Marathon Petroleum, which will be the fifth-largest U.S. refiner with a capacity of 1.1 million barrels per day, is expected to trade on the New York Stock Exchange under the ticker symbol "MPC."As Heminger explained during the conference call, "Our strategy is we want to be able to capture the margin across the value chain." He noted Marathon Petroleum's status as not only the largest asphalt producer in the United States, but also owner of the largest marine petroleum transport system in the country. The company's average crude refining capacity with its six refineries places it just under Chevron Corp. More than one-half of this is located in the Midwest, or PADD II.

About the Speedway c-store chain, which has approximately 1,350 locations in seven Midwestern states, Heminger expressed pride at its performance against other publicly owned retailers. Gasoline volume per store per month averages 167,300 gallons, compared to 115,700 gallons for Susser Petroleum's retail network, he said. Merchandise sales per store per month average $163,300, compared to $132,800 for Susser, a publicly traded chain based in Corpus Christi, Texas.

The future of Speedway has often been called into question by industry observers, who point to the major-oil trend of divesting completely from the retail business. In May 2010, Marathon Oil sold the bulk of Speedway's Minnesota locations--the remnants of its merger with SuperAmerica--to three private-equity firms, in addition to a commissary and midstream assets (click here for previous CSP Daily News coverage). And while the SuperAmerica name appears to have disappeared, Marathon Petroleum's commitment to the retail business sounds unchanged.

"What Speedway allows us to do, along with the Marathon brand, is it allows us to have a very, very strong, assured market for the refining capacity we have, and of course, we try to move the majority of that product through our own pipeline and terminal system," Heminger said.

Tony Kenney will continue as Speedway president, with Thomas Kelley as senior vice president of marketing, overseeing Marathon's 5,100 dealer and jobber sites in 18 states.

Despite being an integrated company, only 5% of Marathon Oil's production capacity ended up at its six refineries, showing that while the upstream and downstream may have shared some synergies, they were not physical in nature.

The upstream business will be keep the Marathon Oil Corp. name and remain headquartered in Houston. Cazalot will lead the corporation, which will operate in the Exploration & Production, Oil Sands Mining and Integrated Gas segments, and trade under the symbol "MRO." Shareholders for Marathon Oil will get one share of MPC for two shares of Marathon.

Cazalot highlighted three main benefits to the spinoff, which is expected to be effective June 30, 2011:

Greater flexibility for the upstream and downstream to make business and operational decisions, and allocate capital and corporate resources to pursue their own strategies.

Improved transparency in financial reporting, making benchmarking against the competition and performance metrics easier for analysts and shareholders. For example, in the past, Speedway's financial performance was rolled into an overall refining and marketing figure. Next week, Marathon Petroleum is expected to report the finances on its three segments.

Ability to attract new talent and keep current high performers. As two separate companies, Marathon Oil and Marathon Petroleum will be better able to align their compensation and incentives with their respective sectors.

Marathon Oil shares rose 8.3% after the announcement, showing the spinoff has strong support within the financial community. Indeed, analysts with Morningstar Inc. suggested that Marathon Oil will become "a more desirable acquisition target because it will be able to pursue its strengths, lower costs of equity and retain talent."

Click herefor additional official details and presentations on the spinoff.

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