At first glance, downstream hydrocarbon energy specialist Marathon Petroleum ($MPC) hardly seems a compelling investment. Since peaking this year at a closing price of $219.13 on April 5, MPC stock suffered a calamitous decline of 25.5%. Further, the latest fundamental data doesn’t help matters. Nevertheless, astute contrarians may have an upside opportunity on their hands.
Granted, such an outlook does not appear intuitive.
Fundamental Headwinds
The key issue for Marathon Petroleum lies in the broader downstream energy demand dynamics, which have been impacted by several factors:
Economic concerns: Both domestic and global economic challenges weigh heavily on downstream operators. Slowing industrial activity and concerns about a potential recession have limited the demand for refined products, putting pressure on the company’s profitability.
Declining revenue projections: Marathon Petroleum’s projected revenue for fiscal 2024 is $138.36 billion, representing a decline of 7.9% from last year’s figure of $150.31 billion(MarathonPetroleum.com).
Reduced crack spreads: Refining margins have contracted, as seen in the adjusted EBITDA for Marathon’s refining and marketing segment, which fell to $1.97 billion in Q2 2024, compared to $3.16 billion in Q2 2023(Benzinga).
Energy transition risks: Marathon is increasingly competing in a market moving toward renewable energy and electrification, raising questions about long-term demand for hydrocarbon-based fuels. Although the company has ventured into renewable diesel, its core business is still deeply tied to fossil fuels.
Contrarian Opportunities
Despite these headwinds, it’s possible that the bad news has already been priced in. As such, a contrarian perspective could be prudent. Here are some reasons for optimism:
High operational efficiency: In Q2 2024, Marathon’s refineries operated at 97% capacity, a notable increase from 93% last year. This high utilization rate suggests strong operational efficiency and continued demand for its products(Benzinga).
Renewable diesel investments: Marathon is strategically positioning itself in the renewable energy sector, particularly with its Martinez facility, which is set to produce 730 million gallons of renewable diesel annually. As the world pushes toward cleaner energy, this could represent a growth avenue(GuruFocus)(MarathonPetroleum.com).
Strong shareholder returns: Marathon returned $3.2 billion to shareholders in Q2 2024, through both share repurchases and dividends. With $5.8 billion still available for buybacks, this generous capital return policy should continue to support the stock price(
Discounted Value of MPC Stock
From a valuation perspective, MPC stock appears undervalued relative to its industry peers. Even with the projected fiscal 2024 revenue of $138.36 billion (down 7.9% year-over-year), assuming 334.68 million shares outstanding and a closing price of $163.25, MPC is trading at 0.39x forward sales.
This multiple is lower than the downstream industry’s trailing-year average sales multiple of 0.48x(GuruFocus). Furthermore, in the past year, the market previously accepted an average multiple of 0.47x for MPC stock.
The fact that the stock is trading at such a discount to both the historical and industry averages suggests that the market may be overpricing the negativity surrounding the company. For value investors, this represents an opportunity to buy the stock at a discount.
Technical Analysis
From a technical standpoint, MPC stock is currently hovering around a critical support line at $163. This level has previously acted as a floor for the stock, and a bounce from here could signal the start of a recovery. Additionally, looking at the options chain, implied volatility (IV) stands at 31.22%, while historical volatility (HV) is slightly higher at 34.49%.
The implication here is that the market is expecting less volatility moving forward than what has been experienced recently. This may suggest that the major downside moves have already occurred, and the stock could be entering a stabilization phase, further supporting a bullish outlook.
Conclusion
At present, Wall Street is offering investors an attractive deal on Marathon Petroleum. The stock has fallen significantly, but the company’s solid operational performance, strong shareholder returns, and undervaluation relative to industry peers suggest that the worst may be behind it. With technical support holding steady and volatility expected to ease, contrarian investors could find a compelling opportunity in MPC stock.
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