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Marathon Petroleum Corp (MPC), and 3 Compelling Reasons to Buy This Oil Company

With the recent rally across the world indices, it has become increasingly difficult to find value plays. Although it may be difficult, it’s not impossible. Shares of Marathon Petroleum Corp (NYSE:MPC) have risen by nearly 130% since the company’s IPO in 2011, and the stock still looks attractive. As a matter of fact, I think it’s one of the best value plays out there. Here are a few reasons to support the claim.

A key acquisition

Last month, Marathon Petroleum purchased BP plc (ADR) (NYSE:BP)‘s Texas City, TX refinery for around $2.4 billion. The deal values its hydrocarbon inventory at $1.1 billion, while only $600 million is to be paid in cash. The remaining $700 million will be collected through refinery margins over the coming years, which effectively lowers the cost of capital for Marathon Petroleum Corp (NYSE:MPC). This makes the profitability of the refinery almost equally essential to BP plc (ADR) (NYSE:BP).

BP has sold over $50 billion worth of its non-core assets over the last couple of years in order to focus on high margin oil production. The massive asset sales suggests that BP plc (ADR) (NYSE:BP) has sold the Texas refinery out of deliberation and not desperation, which further reduces the odds that the Texas refinery could be problematic in the future.

The Texas City refinery is the third-largest refinery in the U.S, and produces 3% of the country’s total petroleum demand. It has a daily production capacity of 475,000 barrels per day, which boosts Marathon Petroleum Corp (NYSE:MPC)’s production capacity by 28%. This leaves ample growth potential for Marathon Petroleum, and allows it to meet rising refining demand without experiencing a need to expand in the coming years.

Investor’s delight

Over the last year, Marathon Petroleum has returned approximately $1.8 billion to its shareholders in the form of share repurchases and dividend payouts. Its board recently authorized another $2 billion for stock buybacks, which leaves about $2.7 billion in pending capital under the share buyback program. At the current stock price, this aggregates to a repurchase of 8.9% of the total outstanding shares, which should boost its current yield of about 1.6% to 1.7%.

When there is not much room to grow, companies often initiate buyback programs to artificially boost their earnings per share. But shares of Marathon Petroleum Corp (NYSE:MPC) have risen by over 110% over the last year, and the current buyback only underscores its board members’ faith and confidence in the company’s future.

Marathon Petroleum has also hiked its dividend payouts aggressively. Since its listing in 2011, it has boosted dividends by 75%. But with a modest yield of approximately 1.6% and a meager payout of 12%, I don’t think its dividend sustainability should be a cause for concern.

Diversified income

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.

Wrap up

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.

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