Marathon Runs Out Of Upside, UBS Downgrades

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Marathon Petroleum Corp MPC shares have run up sharply in the year-to-date period, prompting UBS to move to the sidelines. The firm's toned-down view comes despite improved refining fundamentals.

The Analyst 

UBS analyst Spiro Dounis downgraded shares of Marathon Petroleum from Buy to Neutral and increased his price target for the shares from $63 to $65, reflecting stronger refining EBITDA and a lower share count.

The Thesis

Given the year-to-date rally, Marathon's potential upside has become more limited, Dounis said in a Tuesday note. (See Dounis' track record here.)

The upward move is not unwarranted, the analyst said. 

The company is close to winding down a well-executed strategic initiative to unlock value by accelerating dropdowns to its Master Limited Partnership, MPLX LP MPLX, Dounis said. The market has already priced in the one pending dropdown due in the first quarter of 2018, the analyst said. 

MPLX is Dounis' preferred way to access Marathon Petroleum's midstream growth, he said. 

See also: Jon Najarian Sees Unusual Options Activity In Marathon Petroleum, Caesars And Merck

The outlook for refiners has improved over the last quarter, thanks to hurricane-related disruptions that served to deplete the bloated refined product stockpiles, UBS said. The firm sees risks, including the narrowing of the Brent/WTI spread — which stands at $5-$7 per barrel — and the forecasted peak of U.S. gasoline demand in 2018.

UBS increased its 2017 earnings per share estimate from $3.35 to $3.91, reflecting the earnings beat and a persistently wide WIT/Brent difference. The firm also raised its 2018 earnings per share estimate, based on an upward revision to its 2018 refining earnings due to the residual impact of the spread moving into the first quarter of 2018.

"While we lift near-term estimates, we remain cautious on refining earnings longer-term as we expect momentum to lose steam on slower domestic refined product demand growth," Dounis said. 

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The Price Action

Marathon Petroleum shares have advanced a solid 21 percent year-to-date. 

At the time of writing, shares of Marathon Petroleum were down 2 percent at $61.22. 

Related Link:
Wells Fargo Downgrades Marathon Petroleum And Poses A Long-Term Question To Investors 

Photo courtesy of Marathon. 

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Posted In: Analyst ColorDowngradesPrice TargetAnalyst Ratingsmarathon petroleumSpiro DounisUBS
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