Marathon Petroleum Corporation

MPC Details

Sales of Speedway Completed: Marathon Petroleum Corporation (NYSE: MPC) is a leading, integrated, downstream energy company that operates the nation’s largest refining system. On 14 May 201, the company announced that it has closed the $21 billion sale of Speedway to 7-Eleven, Inc., a wholly owned, indirect subsidiary of Seven & i Holdings Co., Ltd. This sale will help the company in strengthening its competitive position and its balance sheet. In order to return the capital to shareholder, MPC is planning to commence a cash tender offer to purchase up to $4 billion of common stock. On 17 May 2021, 7-Eleven, Inc. signed a definitive agreement to sell 124 Speedway and 7-Eleven sites in the Midwest, Northeast, Florida, and Utah to Anabi Oil.

Redemption of Outstanding 5.125% Senior Notes: In-line with its gold of reducing long-term structural debt, MPC recently announced the redemption of all of the $300 million outstanding aggregate principal amount of its 5.125% senior notes due April 1, 2024.

Q1FY21 Results: For Q1FY21, MPC reported adjusted EBITDA of $1.6 billion, down from $1.9 billion in pcp. Notably, Refining and Marketing business generated positive adjusted EBITDA for the first time since the pandemic began. Further, the company reported net loss of $242 million, down from the loss of $9,234 million in Q1FY20.

Gross Profit Trend (Analysis by Kalkine Group)

Key Risks: The company is exposed to the risks related to the magnitude and duration of the COVID-19 pandemic and its effects, including travel restrictions and business closures. Further, the company is exposed to the risks related to disruption in the supply chain.

Outlook: Looking ahead, the company expects its Martinez facility to produce 17,000 barrels per day of renewable diesel by the second half of 2022, with pre-treatment capabilities coming online in 2023. It is expected that the facility will produce 48,000 barrels per day by the end of 2023.

Valuation Methodology: EV/Sales Multiple Based Relative Valuation (Illustrative)

Source: Analysis by Kalkine Group

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.

Stock Recommendation: Over the last six months, the stock has provided a return of 54.33% and currently trading near the 52-week’s high price of $63.70. On the technical analysis front, the stock has a support level of ~$55.10 and resistance of ~$63.7. We have valued the using EV/Sales multiple based illustrative relative valuation method and arrived at a target price with a correction of low single-digit (in % terms). We believe that the company can trade at a slight discount to its peer mean EV/Sales (NTM trading multiple), considering the negative ROE, negative net margin, and associated key risks. We have taken peers like Chevron Corp (NYSE: CVX), HollyFrontier Corp (NYSE: HFC), PBF Energy Inc (NYSE: PBF), etc. Considering the company’s decent returns in the last six months, current trading level, net losses incurred in Q1FY21, and valuation, we suggest investors to book profit and give a “Sell” rating on the stock at the closing price of $63.26, up by ~0.44% as on 3 June 2021.

MPC Daily Technical Chart, Data Source: REFINITIV 

Frontline Ltd.

FRO Details

Acquisition of Six VLCCs Under Construction: Frontline Ltd. (NYSE: FRO) is mainly involved in the transportation of crude oil and refined products. In May 2021, the company entered into an agreement for the acquisition through resale of six latest generation ECO-type VLCC newbuilding contracts currently under construction at the HHI shipyard in South Korea. This will help the company in increasing exposure to the VLCC market without adding to existing vessel supply. It is expected that five vessels will be delivered during 2022 starting in Q1 and the last vessel in Q1 2023.

Q1FY21 Result Highlights: Despite the challenging operating conditions caused by the COVID-19 pandemic, the company reported operating revenues (net of voyage expenses) of $107 million and net income of $28.9 million for Q1FY21. Reported spot TCEs for VLCCs, Suezmax and LR2 tankers stood at $19,000, $15,200, and $12,000 per day, respectively, during the quarter. As at 31 March 2021, the company had cash of $154 million, down from $190 million as at 31 December 2020.

Q1FY21 Results (Source: Company Reports)

Key Risk: The company is exposed to the risks related to the fluctuations in the demand for oil.  Further, the company is also exposed to the risk related to the fluctuations in currencies and interest rates, general market conditions.

Outlook: For Q2FY21, the company expects spot TCEs to be lower than the TCEs currently contracted due to the impact of ballast days at the end of the second quarter as well as current freight rates. Looking ahead, the company expects promising oil demand figures from Europe, the US, and China. OPEC, EIA, and IEA are expected to maintain their very firm demand growth expectations for the second half of 2021.

Valuation Methodology: EV/Sales Multiple Based Relative Valuation (Illustrative)

Source: Analysis by Kalkine Group

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.

Stock Recommendation: Over the last six months, the stock has provided a return of 36.62% and is currently inclined towards its 52-week’s high price of $9.04. On the technical analysis front, the stock has a support level of ~$7.75 and resistance of ~$8.97. We have valued the using EV/Sales multiple based illustrative relative valuation method and arrived at a target price with a correction of high single-digit (in % terms). We believe that the company can trade at a slight discount to its peer mean EV/Sales (NTM trading multiple), considering the decline in gross margin and net margin; and decrease in cash balance, while also taking into account that the company has been trading at a discount in the past 3-years over its peer average. We have taken peers like Equitrans Midstream Corp (NASDAQ: ETRN), Nordic American Tanker Ltd (NYSE: NAT), Phillips 66 Partners LP (NYSE: PSXP), etc. Considering the company’s decent returns in the last six months, its current trading levels, risks associated with COVID-19 pandemic and valuation, we suggest investors to book profit and give a “Sell” rating on the stock at the closing price of $8.43, down by ~1.98% as on 3 June 2021.

FRO Daily Technical Chart, Data Source: REFINITIV

Note 1: The reference data in this report has been partly sourced from REFINITIV.

Note 2: Investment decision should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the Valuation has been achieved and subject to the factors discussed above.

Disclaimer

The advice given by Kalkine Canada Advisory Services Inc. and provided on this website is general information only and it does not take into account your investment objectives, financial situation and the particular needs of any particular person. You should therefore consider whether the advice is appropriate to your investment objectives, financial situation and needs before acting upon it. You should seek advice from a financial adviser, stockbroker or other professional (including taxation and legal advice) as necessary before acting on any advice. Not all investments are appropriate for all people. The website www.kalkine.ca is published by Kalkine Canada Advisory Services Inc. The link to our Terms & Conditions has been provided please go through them. On the date of publishing this report (mentioned on the website), employees and/or associates of Kalkine do not hold positions in any of the stocks covered on the website. These stocks can change any time and readers of the reports should not consider these stocks as advice or recommendations later.