Some big news for those readers who pay close attention to the “Oil & Energy Securities Recap” found each month on page 46 of Oil & Energy: on the morning of Monday, April 30, 2018, petroleum refining, marketing, and transportation company Marathon Petroleum Corporation issued the following press release.
“Marathon Petroleum Corp. (NYSE: MPC) and Andeavor (NYSE: ANDV) today announced that they had entered into a definitive merger agreement under which MPC will acquire all of ANDV’s outstanding shares, representing a total equity value of $23.3 billion and total enterprise value of $35.6 billion, based on MPC’s April 27, 2018, closing price of $81.43. ANDV shareholders will have the option to choose 1.87 shares of MPC stock, or $152.27 in cash subject to a proration mechanism that will result in 15 percent of ANDV’s fully diluted shares receiving cash consideration. This represents a premium of 24.4 percent to ANDV’s closing price on April 27, 2018. MPC and ANDV shareholders will own approximately 66 percent and 34 percent of the combined company, respectively. The transaction was unanimously approved by the board of directors of both companies and is expected to close in the second half of 2018, subject to regulatory and other customary closing conditions, including approvals from both MPC and ANDV shareholders. The headquarters will be located in Findlay, Ohio, and the combined business will maintain an office in San Antonio, Texas.
“‘This transaction combines two strong, complementary companies to create a leading U.S. refining, marketing, and midstream company, building a platform that is well-positioned for long-term growth and shareholder value creation,’ said Gary R. Heminger, MPC chairman and chief executive officer. ‘Each of our operating segments are strengthened through this transaction, as it geographically diversifies our refining portfolio into attractive markets, increases access to advantaged feedstocks, enhances our midstream footprint in the Permian basin, and creates a nationwide retail and marketing portfolio that will substantially improve efficiencies and enhance our ability to serve customers.
“‘Importantly, we expect this transaction will be meaningfully accretive for shareholders, generating approximately $1 billion of tangible annual run-rate synergies within the first three years and significantly enhancing our long-term cash flow generation profile,’ said Heminger. ‘Given the confidence in the robust cash flow expected to be generated by the combined business, our board also authorized an incremental $5 billion of share repurchases. As a combined company, we will continue our balanced approach to investing in the business and returning cash to our investors, while maintaining our commitment to an investment-grade credit profile.’
“At closing, Greg Goff, ANDV chairman and chief executive officer, will join MPC as executive vice chairman. As executive vice chairman and an executive of MPC following closing, Goff will provide leadership and be integrally involved in the strategy for the combined company. Goff, along with three other Andeavor directors, will also join the board of directors of Marathon Petroleum. ‘With significantly increased scale, a strong platform for our midstream businesses and a leading nationwide retail and marketing distribution portfolio, the combined company presents tremendous value enhancement and growth opportunities for all shareholders,’ said Goff. ‘This strategic combination provides our shareholders with a premium for their shares and the opportunity to benefit from substantial future value creation at MPC. As the largest refiner by capacity in the U.S., with a best-in-class operating capability and a strong capital structure, the combined company will be exceptionally well-positioned to deliver on its synergy and earnings targets. We look forward to working together to deliver on the full potential of this powerful combination.’
“Heminger and Goff added that MPC and ANDV are not only complementary from operational and financial standpoints, but also share similar core values. They said that both MPC and ANDV have been committed to safety, environmental stewardship, and community involvement. Together, the alignment on these values will enable the combined company to remain an excellent corporate citizen wherever it has the privilege to operate, they added.”
The above release was distributed at 6:00 a.m. EST, and within 15 minutes, several news agencies had already picked up the story.
Bloomberg called the acquisition “the biggest-ever deal for an oil refiner that would create the largest independent fuel maker in the U.S.” The financial publication noted that the combined Marathon-Andeavor company, which will go by the name Marathon, would pass Valero Energy Corp. in refining capacity and Phillips 66 in market capitalization, to become the largest U.S.-based oil refiner by both measurements. Already the second largest in the U.S. by refining capacity, Marathon would become one of the top five biggest refiners in the world once the deal becomes official.
Forbes called the combined company “a refining giant in the U.S. with 15% of the country’s capacity and little geographic overlap to upset regulators.”
Associated Press tied news of the acquisition to rising gas and oil prices. According to Energy Information Administration (EIA) data, on April 30, U.S. gasoline prices were up by about five cents for the third consecutive week, making the value of a gallon 44 cents higher than it was at this time last year. Meanwhile, diesel prices were up significantly as well. At $3.16 on April 30, the average price of a gallon of diesel was higher than it had been since the end of 2014. And on the West Coast, where most of Andeavor’s refinery operations are located, diesel prices were higher than anywhere else in the country, at $3.834 per gallon. Riding this wave of rising prices, shares of both Marathon Petroleum Corp. and Andeavor had hit all time highs during the week prior to the merger announcement.
An opinion piece published by The Financial Times framed the deal as a direct challenge to the purported rise of electric vehicles (EVs). While California is known across the country as a leading market for EVs, it is also home to 17 operating petroleum refineries with a combined atmospheric crude oil distillation capacity of 2,006,000 barrels per stream day (B/SD) — more than any other state in the country except for Texas (5,975,900 B/SD) and Louisiana (3,530,355 B/SD). Alan Gelder, vice president, refining, chemicals and oil markets at energy consultancy Wood Mackenzie, was quoted by The Financial Times as calling the move, “a bet, in part, that the Californian market will not electrify as easily as the politics and culture of the state might suggest.”
Following the announcement, shares of Andeavor closed on Monday, April 30 at $138.32, up nearly $16 from the previous Friday. Marathon Petroleum Corp. shareholders fared notably worse as their stock price fell to $74.91, down more than $6 from its Friday, April 27 closing. These market responses were expected, however, as most analysts saw Andeavor coming away from the deal with the better value.
The two companies released their first-quarter earnings reports shortly after the merger was announced. In fact, Marathon Petroleum Corp. issued its Q1 2018 results on the very same day, reporting earnings of $37 million, or $0.08 per diluted share, and income from operations of $440 million.
Although the company reported record Midstream segment income of $567 million, as well as a $7 million increase in earnings over Q1 2017, its Refining and Marketing (R&M) segment reported a loss of $133 million, compared with a loss of $70 million from Q1 2017. However, Marathon said this “decrease in segment results was primarily due to the Feb. 1, 2018, dropdown of refining logistics assets and fuels distribution services to MPLX,” the logistics arm of the business, which accounts for the majority of its Midstream operations.
“The change in segment results also reflects the benefits of increased refinery throughputs, lower direct operating costs and the retroactive enactment of a biodiesel blending tax credit for 2017, offset by lower product price realizations as compared with spot market reference prices,” Marathon reported.
Andeavor, for its part, released first-quarter earnings a full week later, on May 7, 2018. Having acquired major refinery assets from Western Refining the year prior, Andeavor (formerly known as Tesoro Corp.) reported quarterly net earnings of $160 million, or $1.07 per diluted share, and refining operating income of $205 million — up drastically from Q1 2017 net earnings of $50 million and Q1 2017 refining operating income of $34 million.
The company reported a merchandise margin of $50 million, up $47 million from Q1 2017, “primarily due to the Western Refining acquisition and the conversion of MSO sites (multi-site operators) to company owned sites, which allow for the capture of non-fuel margin.”
The company also announced a 2018 dropdown to its logistics arm, Andeavor Logistics, totaling $1.6 to $1.7 billion. “The assets are comprised of Permian and refining logistics assets, the Conan Crude Oil Gathering System, and the Los Angeles Refinery Interconnect Pipeline,” Andeavor reported.
Both Andeavor and Marathon Petroleum included mention of the merger in their respective quarterly earnings reports. Andeavor reiterated that the “transaction is expected to close in the second half of 2018 and is subject to customary closing conditions, including approval by the shareholders of both companies and the receipt of regulatory approval.”
In a conference call held April 30, 2018, Andeavor CEO Greg Goff said that the process for deal approval shouldn’t be unusual, according to a Reuters brief.
Analysts at energy investment and merchant bank Tudor, Pickering, Holt & Co. said in a research note that they “do not foresee any regulatory problems given the disparate geographical markets of each company.”
The latest “Oil & Energy Securities Recap” places Andeavor’s stock value at $140.16 as of May 11, up 26.8% from the prior month’s listing. Marathon Petroleum is not to be confused with Marathon Oil, the company from which it split in 2011.