Less than a year after being spun out of the Marathon Oil Corporation (MRO), the Marathon Petroleum Corporation (MPC) is pondering a spin of its own. Talk about moving quickly. Egged on by activist investor Jana Partners (who is also ‘prodding’ McGraw-Hill [MHP]), the company is considering setting up an master limited partnership (MLP) for its pipeline business in order to separate it from the company’s traditional refining operations. The news is somewhat surprising because as recently as November the company had indicated that it wasn’t interested in forming an MLP. Supposedly Jana told executives that new board members might be coming in if no changes are made…so that might have had something to do with the change of heart. One motivation behind the move is the belief that it will unlock additional shareholder value as midstream operations tend to trade at significantly higher multiples than refining businesses.
The refining business is tough and earnings can be very choppy, especially when compared to the almost bond-like midstream operations such as pipelines. That is precisely the reason why InvestorPlace’s Aaron Levitt thinks the MLP might be the more interesting opportunity. In fact, after the 10+% stock price jump post-spin (and $2b buyback) announcement, it is easy to forget that its recent earnings report was ugly and badly missed analyst’s expectations. Not everyone is down on refining though and some people think it makes for a good investment.
It will be interesting to see how these refining companies fare independently, without any other operations smoothing out earnings a bit. There might be a reason so many of these companies were integrated in the first place. Perhaps these moves could lead to industry consolidation? Time will tell, but if the company decides to move forward with an MLP it does not expect to complete a filing before the end of Q2. As always, we will keep you updated in the meantime.
Disclosure: Author holds no position in any stock mentioned.
Does Two Spins A Marathon Make? is a post from Stock Spinoffs – Finding Value in Special Situations. All Rights Reserved.
