Investor inbounds on MPC tend to focus on two items: 1) modeling idiosyncrasies, which we addressed HERE, and 2) potential for a restructuring given underperformance vs peers. On the latter, we see low probability of a Retail separation or a disposal of individual refineries. This leaves the MLP as the focus of potential restructuring, although unlike the 2016-2018 restructuring of the MLP, we do not see much to gain and view the MPC value opportunity as FCF driven, as opposed to a SoP arbitrage.
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We refresh our 2019 global oil supply view after 1Q19 US E&P updates and ex-US supply trends visible in ClipperData. The US component now implies US exit-exit production growth in 2019 between 0.9MM and 1.1MM bpd, vs 0.8-1.0MM bpd from our previous calculation. Year-to-date strength in oil prices remains driven on the supply side by US E&P and OPEC discipline in tandem – US E&P earnings season was thus constructive for oil prices as we approach the physical market upside catalyst in 2020: higher demand for light/sweet crude by refineries seeking to reduce fuel oil production for IMO 2020.
Over the past month, refiners are down 9%, underperforming a 5% decline in the XLE and a 2% decline in the S&P. A general risk-off bias partially explains the underperformance, but outside of global demand growth, refiners have little direct exposure to the China/US trade dispute. Another possible explanation is increasing geo-political risk, particularly in the Middle East, inflating the price of crude oil. Geo-political inflationary effects on crude prices are problematic for refiners because costs de-couple from demand trends. However, if Mid-East and other OPEC tension is a headwind on refiners currently, we note an offset effect from potentially wider US crude differential benefits in the event of a supply shock.
“Adjustment factor” in EIA supply has been very lumpy, swinging from massive unaccounted for crude volume to a negative adjustment last week. This likely reflects large well pad development, shorter haul imports replacing Arabian Gulf volumes, and lumpy exports with China not participating. For this week, we zero out the adjustment factor, but the range of potential outcomes is wide.
MPC shares are down almost 10% since reporting 1Q19 earnings, and we attribute three drivers, two of which are easily addressed: 1) 2Q19 maintenance guide and EPS impact; 2) inference that the Coker 3 project communicates a negative view of IMO 2020; and 3) modeling challenges reconciling heritage ANDV metrics with MPC reporting, which makes expenses look inflated. #1 is a non-recurring issue; #2 is in our view a total misconception, as the Coker project was never related to IMO 2020; #3 requires some elbow grease, and we present a materially reshaped model where valuation drivers are all intact, but expense and margin reporting is squared. These changes solidify our deep-value position on the stock as upside to our target builds.
MPC reported 1Q adjusted EPS of $(0.09), missing consensus of $0.05 and our $0.22 estimate. CFFO ex-working cap was ~4.1B vs consolidated capex of $1.5B and return of cash to shareholders of $1.1B, including $885MM of share repurchase. Variance to our estimate was concentrated in West Coast refining margins, as we did not fully account for maintenance. Earnings were also impacted by $91MM of merger costs although most operating elements were in line, including ~$130MM of reported merger synergies, 67% of which were in the refining segment.
We expect the EIA to report a 2.1MM bbl crude inventory build for the week ended 5/3. That compares to consensus’ 1.2MM bbl build. Our number assumes lower net imports plus stronger refinery utilization w/w. To better calibrate our forecast with what the EIA has been reporting, we are modeling a +550K bpd supply adjustment. Note that each of the last 6 weeks have a had a substantially positive adjustment factor, helping drive the large crude builds we’ve seen recently.
In April gasoline margins continued an expansionary trend, with crack spreads vs Brent at their highest levels since 2017. The trend is evident in all US regions across multiple US crude benchmarks we track (WTI, WCS, Midland, Maya, etc). Diesel margins have been stable at high levels. US refining utilization remains lower than a year ago, while deep global maintenance is evident in lower supplies of refined products on the water, supporting margins.
We expect the EIA to report a 1.6MM bbl crude inventory draw for the week ended 4/26. That compares to consensus’ 1.3MM build. Our number assumes essentially flat imports and refinery runs, but increased exports w/w. We model flat production and zero supply adjustment factor.
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