One of the sectors of the market that tends to see the most volatility on a short-term basis is energy. The volatility that can drive the prices of energy commodities like crude and natural gas from one extreme to another in a short period of time is something that can make conservative investors pretty nervous about working with stocks in this sector. It can make long-term investing in these stocks pretty challenging, since it takes patience to hold onto a stock through normal ebbs and flows. When a stock’s peaks and valleys shift quickly from one extreme to the next, that patience really gets challenged.
2019 has been an interesting year for energy. Global trade tensions drove crude prices from multiyear highs in both Brent and West Texas light sweet crude almost 50% lower by the end of 2018. From that point, crude rallied back nearly 50% again by the end of April. West Texas Intermediate (WTI) crude, for example, surged from about $43 per barrel to about $66 over that period before trade fears had their way all over again, driving prices throughout the financial markets lower over the course of the month of May. WTI crude found a new low by the beginning of June around $52, and is a little higher from that point now. Trade hasn’t been the only catalyst – the re-imposition by the U.S. of sanctions on Iran, along with the alleged retaliatory attack by Iran on U.S. military assets in the Strait of Hormuz put investors back on edge. This week, the announced nine-month extension of production cuts by OPEC to March of 2020 in an attempt to provide additional price support are having their way, as oil has dipped since the beginning of the week.
Another element that I think is interesting is the difference (also called the spread) in price between similar commodities, like Brent crude versus WTI crude. The U.S. actually imports more oil from outside the U.S. than it uses its own supply, which means that changes in the spread can also have a direct impact on those finished goods.
Oil refining is an industry where that spread makes a big difference in the ability of U.S. refineries to be profitable. A wider spread usually works in favor, since they can get U.S. crude at a bigger discount than they can from overseas. In 2016 when both commodities bottomed, that spread was practically zero, which was one of the dynamics that challenged refinery stocks. The spread started to widen in mid-2017, however and had been running between $8 to $10 per barrel pretty consistently until the beginning of June, when the spread started to narrow. As of this writing, the spread is about $6 per barrel. That’s not good news right now for refiners, including the biggest players like Marathon Petroleum Corp (MPC), who actively use both Brent and WTI crude to differing extents. MPC’s stock has significantly underperformed the rest of the market this year, but it has rallied a little over 12% over the last month and appears to be picking up bullish momentum. Does that make the stock a good buy right now? Check it out.
Fundamental and Value Profile
Marathon Petroleum Corporation is engaged in refining, marketing, retail and transportation businesses in the United States and the largest east of the Mississippi. The Company operates through three segments: Refining & Marketing; Speedway; and Midstream. The Refining & Marketing segment refines crude oil and other feedstocks at the Company’s seven refineries in the Gulf Coast and Midwest regions of the United States. Its Speedway segment sells transportation fuels and convenience products in the retail market in the Midwest, East Coast and Southeast regions of the United States. The Company’s Midstream is engaged in the operations of MPLX LP and certain other related operations. It gathers, processes and transports natural gas, natural gas liquids (NGLs), crude oil and refined products. MPLX is a limited partnership which owns, operates, develops and acquires midstream energy infrastructure assets. MPC has a current market cap of about $37 billion.
Earnings and Sales Growth: Over the last twelve months, earnings decreased by -212.5%, while revenues grew by a little over 50%. The the last quarter, earnings declined almost -104% while sales dropped about -12%. That’s a volatile difference in the company’s earnings pattern from just a few months ago, when earnings and revenues were both higher on both a trailing twelve-month and most recently quarterly basis. The company’s margin profile is very narrow, with Net Income as a percentage of Revenues over the last twelve months at 2.58% and -0.02% in the last quarter.
Free Cash Flow: MPC’s free cash flow is healthy and improving at $3.9 billion over the last twelve months; it was about $2.6 billion in March of this year. That translates to a Free Cash Flow Yield of 10.5%. That also marks an improvement from $1.4 billion in the first quarter of 2018.
Debt to Equity: MPC’s debt to equity is .69, which is generally considered a conservative number. The company’s balance sheet indicates operating profits should be adequate to service their debt, but it also indicates the company’s liquidity is decreasing – about $877 million in the last quarter versus more than $5 billion in the third quarter of 2018 – while debt is increasing. Long-term debt was $29.7 billion in the last quarter versus $18.4 billion in last quarter of 2018. At least a portion of the increase can be explained by MPC’s acquisition in October of last year of competitor Andeavor for $23 billion in cash and stock.
Dividend: MPC’s annual divided is $2.12 per share, which translates to a yield of about 3.89% at the stock’s current price.
Price/Book Ratio: there are a lot of ways to measure how much a stock should be worth; but one of the simplest methods that I like uses the stock’s Book Value, which for MPC is $63.62. That means that the stock’s Price/Book ratio is .85. Their historical Price/Book ratio is 2.32, which suggests that the stock is undervalued by more than 100% right now. By contrast, however the stock is actually trading about 5.6% above its historical Price/Cash Flow ratio.
Technical Profile
Here’s a look at the stock’s latest technical chart.
Current Price Action/Trends and Pivots: The chart above covers the last year of price activity. The red diagonal line traces the stock’s downward trend over that period to its low in June at around $45. That line also informs the Fibonacci retracement lines shown on the right side of the chart. The stock has rallied from that trend low over the last month to a little above $54 as of this writing and is picking up bullish momentum. It also recently broke resistance at around $52, which should now act as support and help give the stock’s short-term upward trend a good new rally point if the price continues to retrace from its high earlier this week at about $56. A new break above $56 should see the stock push to a new high at around $62, where the 38.2% retracement line sits.
Near-term Keys: If you work off of the basis of the stock’s Price/Book ratio, MPC carries a compelling value argument. Projecting a long-term target price above $145 per share is over-optimistic in my view, given that the stock’s all-time high was reached in September of last year at just about $88; however that peak does offer an interesting opportunity if you’re willing to be patient with a stock that has a mostly solid fundamental basis, despite short-term liquidity concerns. From a short-term standpoint, a break above $56 could offer an interesting short-term bullish trade using the stock itself or call options, with a short-term target at around $62 per share. A push below $52 should see the stock test its 52-week low point around $45, which could offer a useful opportunity to short the stock or to buy put options.