Notice that the biggest drag on the R&M earnings did not come from price differentials among the various crude feedstocks. These price differentials — Sweet/Sour differential, LLS/WTI differential, and LLS Prompt vs. Delivered — together accounted for a $335 million drop in earnings compared to last year’s second quarter. However, this isn’t enough to overhaul the $640 million income from the LLS crack spread. Marathon still should have witnessed a handsome growth in earnings. Instead, the items, “direct costs”, and “other gross margins” together accounted for a whopping $694 million drag on earnings.
So what are these costs?
It turns out that these items are mostly non-recurring. The $381 direct operating costs were primarily due to the acquisition of the Galveston Bay refinery earlier this year. The 451,000-barrels-per-day refinery off the Houston Ship Channel underwent major renovation to units and infrastructure. This charge was consistent with management’s guidance.
The other $313 million drag was mainly due to a supply shortage at Marathon’s Chicago refinery, and partly due to compliance with the Renewable Fuel Standard. While the supply situation was definitely unexpected, there isn’t reason for me to worry about its recurrence. As far as compliance is concerned, it’ll be beneficial in the long run. Additionally, this $65 million-plus charge is an industry-wide phenomenon.
The potential profits are huge
If we look at the positives, the biggest driver is the refiner’s growing exports. At 190,000 barrels a day, Marathon Petroleum Corp (NYSE:MPC) has recorded the highest exports in its short history. The acquisition of the Galveston Bay has increased exports from 121,000 in the first quarter. On the earnings call, management has indicated that it is investing to further increase exports. As an investor, this is a solid earnings driver that you should be looking for.
Secondly, Marathon’s crude slate is still very attractive. With the acquisition of the Galveston Bay refinery, the company has increased access to the cheaper sour crudes as well as crude oil from North Dakota which is pretty attractively priced. The lack of increased takeaway from the Bakken Shale play means depressed feedstock prices, which should work out to be advantageous to refiners like Marathon.
A Foolish takeaway
All in all, Marathon Petroleum Corp (NYSE:MPC)’s business model looks solid. Investors should also not forget that management returned almost $1 billion to shareholders in the second quarter as dividends or stock buybacks. Marathon’s image of being shareholder friendly should in itself be a driver to share prices. Which is why, appraising this refiner based on a single quarterly earnings report doesn’t make a lot of sense.
The article Is This Oil Stock Presenting a Huge Opportunity Now? originally appeared on Fool.com and is written by Isac Simon.
Fool contributor Isac Simon has no position in any stocks mentioned. The Motley Fool owns shares of Western Refining, Inc. (NYSE:WNR).
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