Can Marathon Petroleum (MPC) Pull a Surprise in Q1 Earnings?

Independent oil refiner and marketer Marathon Petroleum Corp. MPC is slated to release first-quarter 2018 results before the opening bell on Tuesday, May 1.

In the preceding three-month period, the company delivered a positive earnings surprise of 9.37% on higher refining margin. Specifically, refining margin of $13.12 per barrel increased versus $11.31 a year ago.

As far as earnings surprises are concerned, the Findlay, OH-based downstream operator has a good history. It went past the Zacks Consensus Estimate thrice in the last four reports.

However, things do not look too bright for the company in the quarter under review. In fact, the pessimistic sentiment surrounding the stock can be gauged from the Zacks Consensus Estimate for the first quarter, which moved down 63.4% over the last 30 days.

Let’s delve deep to find out the factors likely to impact Marathon Petroleum’s first-quarter results.

Factors to Consider This Quarter

We expect a more conservative refining outlook to affect the company’s bottom line in the first quarter of 2018. While crack spreads still remain elevated compared to where they were around a year ago, margin estimates have come down from post-Harvey levels.

Gasoline prices jumped to two-year highs in the third quarter in the wake of Hurricane Harvey that struck the U.S. Gulf Coast – home to more than 45% of domestic oil refining capacity – and caused weeks of disruptions, creating supply shortages. With oil prices essentially remaining unaffected, crack spreads soared.

However, capture rates have since come off those lofty levels. This is expected to hamper financial and operational performance of the Refining & Marketing segment – the main contributor to Marathon Petroleum earnings. As it is, the recent oil price rally has made the commodity costlier for refiners and has in turn led to higher input cost.

Consequently, the Zacks Consensus Estimate for the refining segment’s bottom line stands at a loss of $112 million. This is also wider than the year-ago operating loss of $70 million. This will be partly offset by higher sales volumes. The Zacks Consensus Estimate for total refined product sales volume is pegged at 2,300 thousand barrels per day (mbpd), up from the 2,085 mbpd in the year-ago quarter.

Meanwhile, Marathon Petroleum’s Speedway (or Retail) division is also likely to benefit from higher output. We note that the current Zacks Consensus Estimate for the quarterly merchandise sales is $1,142 million, above the $1,127 million reported in the year-ago quarter. Also, we anticipate merchandise gross margin at $326 million, up from the prior year quarter margin of $320 million.

Lastly, we expect the company’s pipeline/midstream segment profitability to reach $469 million, up from $309 million in the first quarter of 2017. Earnings are likely to be buoyed by strength in volumes gathered, processed and fractionated.

What Does Our Model Say?

Our proven model too does not conclusively show that Marathon Petroleum will beat estimates this quarter. That is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) to be able to beat consensus estimates. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

That is not the case here as you will see below.

Zacks ESP: Earnings ESP, which represents the difference between the Most Accurate estimate and the Zacks Consensus Estimate, is -22.51%.

Zacks Rank: Marathon Petroleum is #3 Ranked. Though a Zacks Rank of 3 increases the predictive power of ESP, a negative ESP makes surprise prediction difficult.

We caution against Sell-rated stocks (Zacks Ranks #4 and 5) going into the earnings announcement, especially when the company is seeing negative estimate revisions.

Stocks to Consider

While earnings beat looks uncertain for Marathon Petroleum, here are some firms from the energy space you may want to consider on the basis of our model, which shows that they have the right combination of elements to post earnings beat this quarter:

EOG Resources, Inc. EOG has an Earnings ESP of +4.71% and a Zacks Rank #1. The firm is expected to release earnings on May 3. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

TransCanada Corporation TRP has an Earnings ESP of +2.52% and a Zacks Rank #3. The company is likely to release earnings on Apr 27.

Transocean Ltd. RIG has an Earnings ESP of +2.64% and a Zacks Rank #3. The company is anticipated to release earnings on Apr 30.

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