Marathon Petroleum, Andeavor Double Down on Refining, Retail

FINDLAY, Ohio, and SAN ANTONIO -- A year ago, it looked like Marathon Petroleum Corp. (MPC) could be on its way out of the convenience-store business.

The industry was waiting to find out whether the company—the third-largest c-store retailer in the United States—would keep or spin off its Speedway retail network. Not only is Marathon keeping Speedway, as the industry learned later in 2017, but it also has doubled down on retail.

Its $23.3 billion acquisition of fellow refiner/retailer Andeavor, announced April 30, will create the nation’s largest refiner by capacity and nearly doubles the size of Marathon's c-store portfolio.

“The combination of MPC and Andeavor creates a leading, nationwide integrated energy company with an initial enterprise value greater than $90 billion,” said Gary Heminger, chairman and CEO of Findlay, Ohio-based MPC, on a conference call about the transaction. “We are eager to deliver on the full potential of this powerful and transformative combination.”

The deal provides a “substantial increase in geographic diversification and scale,” he said. It “will expand our operations across key markets nationwide, capitalizing on the strong position MPC has historically enjoyed east of the Mississippi with the Western U.S. presence Andeavor has built.”

Here are more details and industry reaction to the deal …

Marathon owns six refineries, and Andeavor owns 10. With 16 facilities, the combined company will be the No. 1 U.S. refiner by capacity and a top-five refiner globally, with throughput capacity of more than 3 million barrels per day.

The deal geographically diversifies the new entity’s refining earnings and portfolio into “attractive markets,” the companies said. Andeavor's refineries in California, the mid-continent and the Pacific Northwest complement MPC's existing Gulf Coast and Midwest refining footprint.

The combined company’s midstream business will include two master limited partnerships (MLPs): MPLX LP and Andeavor Logistics. Upon close of the transaction, MPC will own the general partner and be the largest unit holder in each of the MLPs. Both will continue to operate as separate entities until MPC “has evaluated all structural considerations post-closing of the transaction,” Heminger said.

Marathon sells Marathon-brand gasoline through approximately 5,600 independently owned retail outlets in 20 states and the District of Columbia. Enon, Ohio-based Speedway LLC, an MPC subsidiary, owns and operates approximately 2,740 c-stores in 21 states. Speedway ranks No. 3 in CSP's2017 Top 202 list of the largest c-store chains in the United States.

The Andeavor deal follows Speedway’s acquisition in mid-April of 78 Express Mart c-stores from Petr-All Petroleum Corp., Syracuse, N.Y.

Andeavor’s retail marketing system includes more than 3,200 outlets with fuel brands including Arco, SuperAmerica, Shell, Exxon, Mobil, Tesoro, USA Gasoline and Giant. About 1,100 of those are company-owned locations.

Formerly Tesoro Corp., the company changed its name to Andeavor in August 2017 following its $6.4 billion acquisition of El Paso, Texas-based Western Refining Inc. in June 2017.

The combined company will have about 4,000 company-owned and -operated locations and about 7,800 branded retail locations, Heminger said.

“For company-owned stores, we plan to leverage Speedway’s fully integrated home office, back-office and point-of-sale (POS) platforms to drive earnings growth,” he said. “We see potential for significant synergies through combined best practices and economies of scale throughout our entire retail network, which become nationwide in scope.”

For marketing, “strong recognized regional brands provide nationwide coverage to consumers and create additional channels to better serve our jobber, dealer and wholesale customers,” he said. “We think substantial opportunities exist to capitalize on the footprints both companies have built over time.”

The merger also offers the opportunity for nationwide expansion of Speedy Rewards, Speedway’s convenience retail loyalty program, Heminger said.

The boards of both companies have unanimously approved the transaction, which they expect to close in the second half of 2018, subject to regulatory and other customary closing conditions, including approval from both MPC and Andeavor shareholders.

Given the lack of overlap in refining or marketing portfolios, MPC and Andeavor do not expect any regulatory difficulties, executives said.

Heminger will become chairman and CEO of the combined company. Greg Goff, chairman and CEO of San Antonio-based Andeavor, will join MPC as executive vice chairman. Along with three other Andeavor directors, Goff will also join the MPC board.

Don Templin, president of MPC, with the assistance of Lisa Wilson, director of investor relations, will lead the new company from the MPC side. Mike Morrison, senior vice president of marketing for Andeavor, will lead the Andeavor team, Heminger said.

• Morrison is one of CSP's Power 20 Change Makers for 2017.

The headquarters will be located in Findlay, Ohio, Marathon's home base, and the combined business will maintain an office in San Antonio, home base for Andeavor.

"This transaction combines two strong, complementary companies to create a leading U.S. refining, marketing and midstream company, building a platform that is well positioned for long-term growth and shareholder value creation," Heminger said. "Each of our operating segments are strengthened through this transaction, as it geographically diversifies our refining portfolio into attractive markets, increases access to advantaged feedstocks, enhances our midstream footprint in the Permian basin, and creates a nationwide retail and marketing portfolio that will substantially improve efficiencies and enhance our ability to serve customers."

Goff underscored the scale of the merged company.

"As the largest refiner by capacity in the U.S., with a best-in-class operating capability and a strong capital structure, the combined company will be exceptionally well positioned to deliver on its synergy and earnings targets," he said.

Industry watchers found much to like about the he MPC-Andeavor deal.

“It’s brilliant,” Ken Shriber, managing director and CEO of Petroleum Equity Group, Chappaqua, N.Y., told CSP Daily News. “It’s a huge, accretive transaction that has little to no asset overlap and now delivers coast-to-coast coverage.”

He said the combination of companies would absolutely expect to generate shareholder value. In addition to synergies, the fuel margin potential is great. “If you have L.A. Harbor or the West Coast and then New York Harbor or the Gulf Coast, you can pick and choose your flow of product and underlying trades, potentially becoming a big margin help to the new company,” he said, pointing out that “pennies per gallon” can be a major advantage when leveraged over the entire new platform.

“It’s one plus one equals three,” Shriber said. “This is definitely a case where the whole is greater than the sum of its parts.”

Matthew Blair, director of refining research for Tudor Pickering Holt & Co., Houston, said Andeavor is a “big winner” in a deal that is “extremely positive.” For Marathon, big synergies will be key, he said in a report cited by Bloomberg, and regulatory problems should be minimal, “given the disparate geographical markets of each company.”