Marathon Petroleum Corp. (NYSE:MPC)

The period under review demonstrates significant fluctuations in economic profit. Net operating profit after taxes (NOPAT) experienced substantial volatility, beginning with a positive value in 2019, followed by a large negative value in 2020, recovery in 2021 and 2022, and a decline in 2023. Concurrently, the cost of capital exhibited an increasing trend throughout the period, while invested capital generally decreased from 2019 to 2021 before showing a slight increase in 2022 and then decreasing again in 2023.

Economic Profit Trend

Economic profit was negative in 2019, 2020, 2021, and 2023. The largest negative value occurred in 2020, at -20,444 US$ millions. A positive economic profit of 5,795 US$ millions was recorded in 2022, representing a substantial improvement. However, economic profit returned to a negative value in 2023, albeit less severe than in the prior negative years.

NOPAT Analysis

NOPAT decreased significantly from 6,182 US$ millions in 2019 to -10,978 US$ millions in 2020. It then recovered to 6,187 US$ millions in 2021 and increased substantially to 17,951 US$ millions in 2022. A decrease to 10,783 US$ millions was observed in 2023. This volatility in NOPAT is a primary driver of the fluctuations in economic profit.

Cost of Capital Progression

The cost of capital increased steadily from 13.40% in 2019 to 17.59% in 2023. This consistent increase in the cost of capital places greater pressure on generating sufficient returns from invested capital to achieve positive economic profit.

Invested Capital Movement

Invested capital decreased from 82,004 US$ millions in 2019 to 63,579 US$ millions in 2021. It experienced a modest increase to 69,547 US$ millions in 2022, before decreasing again to 63,897 US$ millions in 2023. The reduction in invested capital may reflect strategic decisions regarding asset allocation or divestitures.

The interplay between NOPAT, cost of capital, and invested capital significantly impacted economic profit. While the increase in NOPAT in 2022 allowed for a positive economic profit, the subsequent increase in the cost of capital and decrease in NOPAT in 2023 resulted in a return to negative economic profit. The company’s ability to consistently generate returns exceeding its cost of capital remains a key area for consideration.

The analyzed financial data reveals significant fluctuations in key profitability indicators over the five-year period ending December 31, 2023.

Net Income (Loss) Attributable to MPC

Net income exhibited pronounced volatility. The figure fell from a positive $2,637 million in 2019 to a substantial loss of $9,826 million in 2020, indicating a severe downturn, likely driven by adverse market or operational factors during that year. Recovery occurred in 2021 with net income rising sharply to $9,738 million, surpassing the 2019 level. This upward momentum continued into 2022, reaching a peak of $14,516 million, followed by a decline in 2023 to $9,681 million. Overall, the net income reflected substantial cyclical variation, with a drastic loss followed by strong recovery and subsequent moderation.

Net Operating Profit After Taxes (NOPAT)

NOPAT mirrored the pattern shown by net income, experiencing a significant negative shift in 2020 where it dropped to -$10,978 million from $6,182 million in 2019. The following years saw a robust recovery with NOPAT increasing to $6,187 million in 2021, nearly returning to the 2019 level, and then peaking at $17,951 million in 2022, which notably exceeded prior peaks in both net income and NOPAT. In 2023, NOPAT decreased to $10,783 million, indicating a moderation but remaining well above pre-2020 levels.

These trends suggest that the company was affected by a significant adverse event or market condition in 2020 leading to large losses and negative operating profit. However, the subsequent two years showed a robust rebound and profitability expansion beyond pre-2020 figures, implying possible operational improvements or favorable market conditions. The slight decline in both net income and NOPAT in 2023 could indicate some normalization or emerging challenges following exceptional performance in 2022.

Income Tax Provision (Benefit)

The income tax provision experienced significant volatility over the analyzed period. It started with a positive provision of 1,074 million USD at the end of 2019, followed by a substantial tax benefit of -2,430 million USD in 2020, indicating a reversal or tax credit situation. In 2021, the provision reverted to a modest positive value of 264 million USD. A notable increase occurred in 2022, reaching 4,491 million USD, before declining to 2,817 million USD at the end of 2023. This pattern suggests considerable fluctuations in taxable income or tax planning strategies leading to large swings in tax expense provisions.

Cash Operating Taxes

Cash operating taxes mirrored the overall trend of the income tax provision but with more pronounced changes. The 2019 figure stood at 324 million USD, then sharply decreased to a cash inflow (negative tax payment) of -1,899 million USD in 2020, reflecting adjustments or refunds. In 2021, cash taxes surged to 705 million USD, climbed dramatically to 4,421 million USD in 2022—the peak value in the period—and subsequently dropped to 3,010 million USD in 2023. These fluctuations align with variations in operational profitability and tax settlement timings, indicating an erratic but generally increasing cash tax burden post-2020.

The financial data reveals several key trends in the capital structure and investment base over the five-year period ending in 2023.

Total reported debt & leases

The total reported debt and leases experienced some fluctuations. Initially, it increased from 31,317 million USD in 2019 to a peak of 33,095 million USD in 2020. This was followed by a notable decline in 2021 to 26,904 million USD. Subsequently, a moderate rise occurred over the next two years, reaching 28,501 million USD in 2023. Overall, the debt levels show some volatility but remained below the 2019 level by the end of 2023.

Total MPC stockholders’ equity

Stockholders’ equity showed a declining trend over the period. Starting at 33,694 million USD in 2019, equity sharply decreased to 22,199 million USD in 2020. Although it buoyantly recovered to 26,206 million USD in 2021 and further increased to 27,715 million USD in 2022, equity declined again to 24,404 million USD in 2023. Despite recovery attempts, equity in 2023 remained significantly below the 2019 level, indicating possible challenges affecting retained earnings or other components of equity.

Invested capital

The invested capital consistently trended downward from 82,004 million USD in 2019 to 63,897 million USD in 2023, with intermediate fluctuations. It dropped to 70,186 million USD in 2020 and further to 63,579 million USD in 2021. A recovery occurred in 2022, reaching 69,547 million USD, followed by a decline again to 63,897 million USD in 2023. This pattern suggests variability in capital investment levels or changes in capital employed over the timeframe.

In summary, the data indicates that the company experienced a general reduction in invested capital and equity levels over the five years, paired with fluctuating debt levels that ultimately ended slightly below the initial value. The changes in equity and invested capital might reflect operational or strategic adjustments impacting the capital structure.

The economic spread ratio exhibited significant fluctuations between 2019 and 2023. Initially negative, the ratio demonstrated a substantial decline in 2020 before recovering to positive territory in 2022, and subsequently reverting to a negative value in 2023. This volatility suggests a dynamic relationship between economic profit and invested capital.

Economic Spread Ratio

In 2019, the economic spread ratio was -5.86%. This indicates that the return generated on invested capital was below the cost of that capital. A dramatic decrease was observed in 2020, with the ratio falling to -29.13%, signifying a considerably larger shortfall between returns and the cost of capital. The ratio improved significantly in 2021 to -5.65%, suggesting some recovery in profitability relative to invested capital. A positive value of 8.33% was recorded in 2022, indicating that returns exceeded the cost of capital during that period. However, this positive trend did not persist, as the ratio declined to -0.71% in 2023, indicating a near-breakeven situation or a slight underperformance relative to the cost of capital.

The economic spread ratio’s movement closely mirrors the trends in economic profit. The largest negative economic profit in 2020 corresponded with the most negative economic spread ratio. While economic profit became positive in 2022, the magnitude of the profit was not sufficient to drive a proportionally large positive economic spread ratio, and the subsequent decline in economic profit in 2023 resulted in a return to a negative economic spread ratio.

Invested Capital

Invested capital decreased from US$82,004 million in 2019 to US$70,186 million in 2020, and continued to decline to US$63,579 million in 2021. A modest increase to US$69,547 million was seen in 2022, followed by a decrease to US$63,897 million in 2023. The decreasing trend in invested capital over the period may reflect strategic capital allocation decisions or divestitures, but the fluctuations do not appear to directly correlate with the economic spread ratio’s movements.

The interplay between economic profit and invested capital demonstrates a complex financial performance. While the company achieved positive economic profit in 2022, the overall trend reveals periods of significant underperformance relative to the cost of capital, particularly in 2020 and 2023. Continued monitoring of these metrics is warranted to assess the sustainability of profitability and the efficiency of capital allocation.

The economic profit margin exhibited significant fluctuations between 2019 and 2023. Initially negative, it experienced a substantial decline in 2020 before recovering and then declining again in the most recent period. This analysis details the observed trends in economic profit and its relationship to sales and other operating revenues.

Economic Profit Margin

In 2019, the economic profit margin was -3.87%. This indicates that the company’s economic profit was 3.87% of sales and other operating revenues. A considerable deterioration was observed in 2020, with the margin falling to -29.30%, representing a substantial decrease in economic profit relative to revenue. The margin improved significantly in 2021 to -2.99%, suggesting a recovery in economic profit generation. Further improvement occurred in 2022, reaching a positive 3.27%, indicating the company generated economic profit equivalent to 3.27% of its revenues. However, this positive trend reversed in 2023, with the margin declining to -0.31%, signaling a return to a near-breakeven or slightly negative economic profit position.

Relationship to Sales

Sales and other operating revenues decreased substantially in 2020, from US$123,949 million in 2019 to US$69,779 million. This decline coincided with the largest drop in the economic profit margin. Revenues then rebounded strongly in 2021 and 2022, reaching US$119,983 million and US$177,453 million respectively. While revenues decreased in 2023 to US$148,379 million, they remained above 2019 levels. The economic profit margin’s movement did not consistently track revenue changes; the significant revenue increase in 2022 was accompanied by a move to positive economic profit, but the revenue decrease in 2023 did not result in a similarly large negative shift in the margin.

Economic Profit

Economic profit itself was negative in 2019, 2020, and 2021, at -US$4,803 million, -US$20,444 million, and -US$3,589 million respectively. It turned positive in 2022, reaching US$5,795 million, before becoming negative again in 2023, at -US$457 million. The magnitude of the negative economic profit in 2020 was considerably larger than in the other negative years, aligning with the most substantial decline in the economic profit margin.

Overall, the period demonstrates considerable volatility in economic profit and its margin. While a positive margin was achieved in 2022, the return to a negative margin in 2023 suggests potential challenges in sustaining economic profitability.