Marathon Petroleum Will Explore MLP for Pipeline Operations

Published: Feb 01, 2012

By Ryan Dezember and Gina Chon
Of THE WALL STREET JOURNAL


Under pressure from an activist investor, Marathon Petroleum Corp. said Wednesday it will explore spinning off its pipeline operations and will implement a $2 billion share buyback.

The company made the move after activist hedge fund Jana Partners LLC said in January it had taken a 5.5% stake in Marathon, which it viewed as undervalued, according to a January securities filing.

Jana also had discussions with Marathon management, telling company executives there would likely be shareholder support for new board members if Marathon didn't make changes, people familiar with the matter said.

A spokesman for Marathon declined to comment.

Shares of Marathon climbed 7.6% to $41.11 in recent trading, even as the company also reported a fourth-quarter loss larger than analysts had expected.

Marathon Petroleum, of Findlay, Ohio, is one of the largest refiners in the U.S. as measured by capacity and also owns or operates almost 10,000 miles of pipelines, according to its website.

The company's willingness to consider for its pipeline business a new corporate structure, know as an master limited partnership, or MLP, marks an apparent change of heart.

Chief executive Gary Heminger said during an investor conference in November that while he would "never say never" to creating an MLP for the company's pipelines, "today, an MLP is not the direction that we see fits our opportunity the best."

Pipelines generate steady, predictable income that helps cushion Marathon against ebbs in its refining business, Mr. Heminger said.

On Wednesday, Mr. Heminger said the share-repurchase plan and intention to evaluate its pipeline business "demonstrate our commitment to pursuing opportunities to create near- and long-term value for our shareholders."

Jana managing partner Barry Rosenstein said in a statement "we applaud [Marathon management] for stepping up and initiating a plan to unlock tremendous value."

Marathon Petroleum was formed in June after Houston-based Marathon Oil Corp. spun off its refinery business, along with its pipelines, from its exploration operations. The refining business was seen as weighing on the market value of the exploration business.

Since then, some shareholders and analysts have argued for further separation within Marathon Petroleum. Refineries are typically valued at about four to five times earnings before interest, taxes, depreciation and amortization, while pipeline businesses are normally valued at 10 to 11 times Ebitda.

The MLP structure is similar to real-estate investment trusts and is designed to reduce corporate tax liabilities by returning profits to shareholders.

Oil and gas companies use MLPs to retain control over the assets they sell to the partnership while removing them, and their debt, from the company's balance sheets. MLPs also allow the parent company to pocket cash from initial stock offerings and subsequent asset sales to the MLP.

A downside is that the MLPs can take assets that generate steady, predictable revenue off the books of businesses that can have otherwise choppy returns.

Over the last four years, Marathon's annual operating income from pipelines has hovered at around $180 million. Its income from its refining and marketing arms has swung wildly, falling to as low as $452 million in 2009 and reaching nearly $3.6 billion in 2011.

Mr. Heminger said Wednesday that the company would take time to review an MLP's implications on the parent company's credit rating and that maintaining an investment-grade rating for Marathon Petroleum was its "number one financial priority."

The company said that if it were to create an MLP, it wouldn't expect to file for an initial public stock offering before the end of the second quarter.

Marathon reported a net loss of $75 million, or 21 cents a share, compared with a gain of $230 million, or 64 cents, a year earlier.

Jana has pressured other companies to separate business units to realize more value. In May, Jana increased its stake in El Paso Corp. in an effort to break up the natural-gas provider and sell its exploration and production operations.

El Paso later said it would spin off its E&P business, but in October, El Paso said it was selling its entire company to Kinder Morgan Inc. in a $21.1 billion deal. Kinder Morgan is now shopping El Paso's exploration business.

(END) Dow Jones Newswires