Elliott Finds Marathon’s Andeavor Endeavors Wanting

(Bloomberg Opinion) -- “Remaking Marathon” is the title of Elliott Management’s slide deck detailing its thoughts on oil refiner Marathon Petroleum Corp. “Unmaking Marathon” would be closer to the mark.

Marathon is the quintessential target for Elliott (or any other activist): a conglomerate built through acquisitions that has struggled to convince the market it can make 1+1=3. Having traded at a premium to its peers just prior to announcing the $29 billion acquisition of West Coast refiner Andeavor, the stock has decoupled notably since the start of this year and now trades at a marked discount:

Marathon also has history with Elliott, which pressed the company to split in 2016 but ultimately settled for the refiner beefing up and simplifying its master limited partnership, MPLX LP, and agreeing to a strategic review of its retail network, Speedway. Rather than shedding Speedway, Marathon doubled down on its integrated model with the Andeavor deal. With the promised synergies translating into a discount rather than a premium for the stock, Elliott is once again pressing for a split. Other activists such as DE Shaw & Co. LP and Third Point LLC also lurk on the shareholder register.

As usual, Elliott touts huge potential gains if Marathon follows its playbook, up to $60 a share, more than double Tuesday’s closing prices and running to a cool $39 billion in market value. That is beyond blue-sky, of course, but the underlying argument is worth considering.

Remaking MPLX as a C-corp and spinning it out is a no-brainer. Marathon’s MLP has a troubled history relating largely to the overpriced acquisition of MarkWest Energy Partners LP in 2015. It currently sports a yield of 9%, which rather undercuts the whole point of having an MLP. Converting it to a C-Corp. would widen the potential pool of investors, an established trend in MLP-land at this point, and for good reasons (see this). Distributing Marathon’s stake of almost two-thirds to shareholders would also remove a big overhang, increase liquidity and put some operating distance between the pipeline owner and its parent.

Speedway would appear to be the real battleground, given Marathon resisted Elliott’s prior call to separate it. Marathon’s argument rested on its cost-saving fit with the refining business, diversification and concerns about the impact of a separation on its taxes and credit rating. In other words, the dis-synergies just weren’t worth it.

The difficulty Marathon faces now rests largely on the fact that since announcing that decision in September 2017, its stock has underperformed both its peers and standalone fuel retail stocks such as Murphy USA Inc. and Canada’s Alimentation Couche-Tard Inc. And having taken on a lot of debt in the meantime to fund the Andeavor deal, Elliott’s proposal to use a Speedway spin-off to delever the refinery business seems likely to stir at least some interest on the part of Marathon’s investors. It’s not a buyback promise, but a cleaner balance sheet could lift some weight off the stock.

Elliott may also see an opportunity here, timing-wise, with CEO and Chairman Gary Heminger up for re-election to the board next year. Next week also happens to mark Greg Goff’s one-year anniversary as executive vice-chairman, having joined after negotiating the sale of Andeavor, where he did a widely respected job as CEO and sold the company at a high price. Most of all, though, Elliott seems to be focused on the gap between the promise of that merger and the lack of tangible reward in Marathon’s stock. That alone should provide impetus for a shake-up. 

To contact the editor responsible for this story: Mark Gongloff at mgongloff1@bloomberg.net

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Liam Denning is a Bloomberg Opinion columnist covering energy, mining and commodities. He previously was editor of the Wall Street Journal's Heard on the Street column and wrote for the Financial Times' Lex column. He was also an investment banker.

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