MPC - Marathon Petroleum

[Mephistopheles]

Oil and refined products aren't going away for a long time. The problem is that a need for auto fuel may very well decline in the U.S. and Europe in the next 10 years. In the U.S. it accounts for 45% of refinery output. Worldwide, passenger vehicles account for 26% of all oil usage. It only takes a small decline in cap utilization to cause big problems since these refineries are high fixed cost businesses. The other issue is that refining is a global business. It's true there will be no more U.S. refineries, but the world is adding capacity, and fuel can be transported globally.

[Saluki]

This should probably go in a discussion thread about oil tankers, but it's relevant here because the last time we had a glut, a few months ago, it was very profitable for VLCCs and SuezMax operators but very painful for refiners. 

 

https://www.bloomberg.com/news/articles/2020-09-11/oil-traders-snap-up-tankers-in-sign-second-wave-glut-may-be-near

 

It could be that we experience a glut in crude AND a pickup in demand for finished products, assuming more production, in which case there still may be glut of stuff coming in and the bottleneck is the refiners, which could be bullish for refiners.  If there is a glut of the input, it becomes cheaper, and more demand for the output makes it more expensive, so a very nice crack spread. 

 

However, if the expected glut is due to a recession or another wave of the pandemic, that's not good for refiners.

[bizaro86]

This should probably go in a discussion thread about oil tankers, but it's relevant here because the last time we had a glut, a few months ago, it was very profitable for VLCCs and SuezMax operators but very painful for refiners. 

 

https://www.bloomberg.com/news/articles/2020-09-11/oil-traders-snap-up-tankers-in-sign-second-wave-glut-may-be-near

 

It could be that we experience a glut in crude AND a pickup in demand for finished products, assuming more production, in which case there still may be glut of stuff coming in and the bottleneck is the refiners, which could be bullish for refiners.  If there is a glut of the input, it becomes cheaper, and more demand for the output makes it more expensive, so a very nice crack spread. 

 

However, if the expected glut is due to a recession or another wave of the pandemic, that's not good for refiners.

 

Yeah, basically the crack spread is a function of the supply-demand balance for refining capacity.

[Dalal.Holdings]

Took profits on this

[valuebet]

Took profits on this

Hi, what were your thoughts on this one, is it a fair price now?

[Dalal.Holdings]

Took profits on this

Hi, what were your thoughts on this one, is it a fair price now?

 

I was initially excited about the Speedway sale and the cash it would bring. I think the balance sheet will look compelling post close of transaction. However it's hard to determine the fate of refining industry going forward and this is the largest U.S. based refiner. A lot of folks think there is overcapacity in refining. Then you have China ramping up its own capacity. MPC and others are already closing plants.

 

A lot also depends on shale which is plagued by over levered firms...

 

So, you're left with a capital intensive and cyclical business with unclear future. If things perk up though, there will be fat returns to be had.

[Viking]

What i am trying to understand with oil/pipelines is are they in permanent structural decline. Is the move to clean energy going to damage their long term prospects? If so, how fast? 5 years from now? 10 years? Have we seen peak investor demand (for shares)? Will the companies trade at a permanently lower PE as a result.

 

The cigarette industry did very well for investors for decades. But i am not sure if that is the right comparable.

 

Bottom line is oil/pipeline stocks look cheap (still) but are they the new value trap? Certainly looks like the case looking at returns for investors over the past 10 years. But will that remain the case over the next 10 years?

[Dalal.Holdings]

I think that talk of clean energy taking over imminently is overblown. Even the most aggressive forecasts are in decades, not years. Our economies are heavily wired for fossil fuel use for the time being.

 

Some uses of fossil fuels such as air travel, shipping, plastics, heating, fertilizer, cooking, etc are going to be a very hard to displace. Sure, a drop in conventional uses like autos and power generation can dent overall demand and cause prices to tumble in an oversupplied market.

 

However, I think many energy bets already account for this risk. As an investor, you are now getting paid a lot of the cash flows up front rather than having to wait for them far into the future (like with growth/meme stonks). And this is during very low interest rates.

 

In my energy bets, I've shifted more towards nat gas midstream and away from crude or anything upstream/downstream.

 

Nat gas because I invest in U.S. based plays and I think it will be very difficult to reduce American nat gas consumption vs oil consumption which is easier and happening to some extent.

 

I stay away from upstream (E&P) because oil and nat gas prices are impossible to predict in the age of shale. I think highly profitable crude or gas prices will be difficult to sustain because shale drillers are not very disciplined and will literally drill until they oversupply the market, causing prices to tumble.

 

I am now shying away from downstream due to the capex heavy, cyclical nature of the biz and other headaches (leverage, unpredictable crack spreads, labor disputes, etc etc).

 

IMO midstream gives exposure to energy without a lot of the headaches. Furthermore, unlike upstream/downstream, a lot of these players have wide moats because it is now very onerous to lay new pipe in the U.S. The upside for investors in midstream will be less than in upstream/downstream however if the entire energy sector turns. However, I believe the downside with midstream is certainly limited and the cash returns relatively attractive in some cases (certainly more so a few months ago).

[SharperDingaan]

Pipelines are great utilities - but only if their feeders can maintain volumes. Hence a preference for gas over oil, as most wells suffer rising gas cuts over their middle years of life. Gas also has fewer environmental issues.

 

As there is more risk with a pipeline, the yield is higher than it would be for an electric, rail, or water utility. Share prices generally move up/down, more than they would for other utilities. Good or bad, depends on your purpose.

 

Structural decline is relative. Todays gas pipeline taking gas from fields, is tomorrows CO2 collector for injection into those now spent fields. Same pipe, new life, but in an entirely different application.

 

Crude is useless without refining, but the reality is that every refinery/sector is secular. Technology, feedstock, and geographic markets change over time, whereas the refinery does not. That 'ancient' Gulf Coast refinery, is just not in the same game as todays new refineries off the Chinese, Arabic, and Indian coasts.

 

As with everything, know what you are investing in.

It will save you a lot of heartache.

 

SD

 

 

[valuebet]

Thank you all for sharing your thoughts, I was also worried about the vagueness of the industry, I'll consider taking the profits

[KJP]

What i am trying to understand with oil/pipelines is are they in permanent structural decline. Is the move to clean energy going to damage their long term prospects? If so, how fast? 5 years from now? 10 years? Have we seen peak investor demand (for shares)? Will the companies trade at a permanently lower PE as a result.

 

For me at least, questions at this level of generality are intractable.  Perhaps you could attack the problem by focusing much further down the funnel.  For example, perhaps you could try to answer a question like this one:  How much gas will the Transco pipeline be transporting in 5 years?  The question is fundamental to any investment Williams.  Trying to answer it will produce a good amount of learning on where gas is produced, where and for what purpose it is used, whether those uses are likely to go away, and, if not, whether there is a viable alternative energy source in the forseeable future. 

 

Bottom line is oil/pipeline stocks look cheap (still) but are they the new value trap? Certainly looks like the case looking at returns for investors over the past 10 years. But will that remain the case over the next 10 years?

 

To take another specific example, what was the valuation (e.g., EV/EBITDA) of Magellan Midstream in July 2014 and what is it today?

[Spekulatius]

What i am trying to understand with oil/pipelines is are they in permanent structural decline. Is the move to clean energy going to damage their long term prospects? If so, how fast? 5 years from now? 10 years? Have we seen peak investor demand (for shares)? Will the companies trade at a permanently lower PE as a result.

 

For me at least, questions at this level of generality are intractable.  Perhaps you could attack the problem by focusing much further down the funnel.  For example, perhaps you could try to answer a question like this one:  How much gas will the Transco pipeline be transporting in 5 years?  The question is fundamental to any investment Williams.  Trying to answer it will produce a good amount of learning on where gas is produced, where and for what purpose it is used, whether those uses are likely to go away, and, if not, whether there is a viable alternative energy source in the forseeable future. 

 

Bottom line is oil/pipeline stocks look cheap (still) but are they the new value trap? Certainly looks like the case looking at returns for investors over the past 10 years. But will that remain the case over the next 10 years?

 

To take another specific example, what was the valuation (e.g., EV/EBITDA) of Magellan Midstream in July 2014 and what is it today?

 

I do think they crude or refined good pipelines are declining assets, but they still got probably 30 years of life in them. What is debatable is the rate of decline and how much profitability they can retain while declining.

Same with refineries , gas stations and to a lesser extend natural gas pipelines, which I think has more life in them.

 

The problem with dealing with those finite live assets is that your upside is capped, but not your downside. They work when bought at the right price, but multiple expansion is unlikely to bail you out, in fact you will more likely have to deal with multiple compression, so make sure that management returns cash aggressively.

[KJP]

 

The problem with dealing with those finite live assets is that your upside is capped, but not your downside. They work when bought at the right price, but multiple expansion is unlikely to bail you out, in fact you will more likely have to deal with multiple compression, so make sure that management returns cash aggressively.

 

I agree.  So I ask myself,  if the cash productivity of the business is likely to be at least stable for the next 5-7 years and a large portion of that cash is going to be returned to me (hopefully in a tax advantaged way), at what present cash yield does the risk of increasingly negative sentiment among other people (as expressed by declining multiples) no longer matter? 

[JRM]

Pipelines are only finite life if they become obsolete.  The majority of NG pipelines in the US were built prior to 1970, and there are 100 year old pipelines still in operation.  The real assets here are the easements and right of way.  Pipelines can be replaced in existing easements in most cases if upgrades or repairs are necessary.  Expansions and new pipelines are more difficult, but I think that makes existing pipes more valuable.

 

EIA expects natural gas to retain 36% of the energy pie in 2050 (the pie will continue to grow).  Then they project NG to start to decline.  I forget who said it, but projections past 5 years are essentially worthless.  Its very possible that the energy transition happens faster or slower than projected.  I'm very confident that NG will be around in a big way in 2030, so it makes it a safe bet (in my opinion).

[Dalal.Holdings]

Midstream plays in my opinion resemble tollroad operators that (if there's a moat and it's hard to build a competing road) can raise prices with inflation at the very least. Low maintenance capex to keep things humming. A risk of leaks, but with natural gas not a big deal compare with crude.

 

Big pipeline network operators have similarities to Class I Railroads like BNSF.

 

Now you just have to hope management doesn't screw it up.

[SharperDingaan]

Best case, how long are your really going to hold a pipeline utility? For most people it is 1-2 yrs at best, and the hold is in anticipation of higher dividends, arising from growth. Utility A (pipeline) vs Utility B (electricity) vs Utility C (busses), etc.

 

You buy a utility when it screws up, and it is forced to cut its dividend 50%+. Investors are bailing in droves, it is available in scale for cents in the dollar - but the underlying monopoly, regulation, and most contracts? nothing really changed. Typically management is turned over, 3-5 yrs later the dividend is restored, share price and cash yield doubles; and you rinse and repeat elsewhere.

 

Not for everyone, but compound returns multiple times higher, for not much additional risk.

 

SD

 

 

 

[Spekulatius]

 

The problem with dealing with those finite live assets is that your upside is capped, but not your downside. They work when bought at the right price, but multiple expansion is unlikely to bail you out, in fact you will more likely have to deal with multiple compression, so make sure that management returns cash aggressively.

 

I agree.  So I ask myself,  if the cash productivity of the business is likely to be at least stable for the next 5-7 years and a large portion of that cash is going to be returned to me (hopefully in a tax advantaged way), at what present cash yield does the risk of increasingly negative sentiment among other people (as expressed by declining multiples) no longer matter?

 

Without really doing any calculation, I would say this may be interesting at a ~10% cash yield.  the negative sentiment or exit multiple shouldn’t matter if you intend to hold the investment until sunset.

 

If you buy an MLP like EPD which would be a good example, selling is not a good option anyways because then you have to pay a lot of taxes because of the reduce cost bases from distributions so in way, you should give hoot about Mr Markets terminal valuation anyways.

[Grossbaum]

 

I am comfortable exiting here around $55/sh.

 

Perhaps some of my earlier valuation estimates will prove conservative and the stock price will continue to increase from here.

 

Each investor's own estimate of value for the refining business could drive large differences in overall valuation for MPC.

 

I will stay tuned, out of interest, to see how MPC ends up deploying the cash proceeds from the Speedway sale.

 

I plan on reinvesting in securities that I think may be more interesting, given current valuations.

 

 

[Dalal.Holdings]

Nice trade. I exited early with less to show for it, pity me.

 

If this is the early innings of reflation, E&P may have more upside than midstream or downstream. However E&P has its own problems (shale driven oversupply, capital intensive, etc).

 

I'm pretty much out of energy at this point.