Marathon Petroleum Corp (NYSE:MPC) also holds a 71.6% stake in MPLX LP (NYSE:MPLX), a Master Limited Partnership that went public last October. MPLX is primarily a pipeline transportation play, and owns 2,800 miles of oil-and-gas pipelines with ownership interests in over 8,300 miles of pipelines.
The MLP structure saves MPLX LP (NYSE:MPLX) the hassle of double taxation, and it has a modest distribution yield of about 1.9%. The company operates with little or no debt and retains most of its earnings. The reason behind its IPO was to reduce the operational risks and fund its expansion projects without external borrowing.
Its management stated that “MPLX LP (NYSE:MPLX) is well capitalized with [a] $500 million un-drawn revolving credit facility and minimal current debt.” The company has plans to invest $142 million over the next year, most of which would be used to expand its oil pipeline connecting Patoka, Ill to Marathon Petroleum’s refinery in Catlettsburg, Ky.
The mentioned pipeline currently has 256,000 barrels per day capacity, while the Catlettsburg refinery has a refining capacity of nearly 240,000 barrels per day. This expansion would allow the company to expand its refining capacity in the region, which otherwise would have been bottle-necked.
At the current price, shares of Marathon Petroleum Corp (NYSE:MPC) appear undervalued with a forward P/E of 9.1x and PEG of 0.8x. With a meager debt/equity of 29% and a modest current ratio of 1.6x, the company shouldn’t have problems surrounding its debt repayments, which leaves room for dividend hikes in the future.
Going by the current growth prospects, Barclays PLC (ADR) (NYSE:BCS) and Cowen Group have a price target of $120 for Marathon Petroleum, which is still 30% above the current price. I think Marathon Petroleum would be a great stock to buy.
Piyush Arora has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned.