Marathon Petroleum

Marathon Petroleum's second-quarter earnings far exceeded market expectations, as the company capitalized on an already favorable market environment with continued strong operating performance. Share repurchases increased to $2.5 billion during the quarter.

Why it matters: Global refining outages—Marathon management placed the figure at 9 mmb/d—are constraining supply and juicing global margins, a rising tide for all. However, Marathon's continued operational improvement is allowing the company to deliver earnings beyond market expectations. Operational excellence was evident in 112% capture rates, 94% utilization, including 100% on the Gulf Coast, and the lowest downtime in a decade. The capture rate was most impressive, and a series of relatively high quarterly prints suggests a structural reset above historical levels. Total shareholder distributions increased to $2.8 billion from $1 billion in the first quarter. Given the current margin outlook, strong balance sheet, and midstream cash flow contribution, we expect repurchase levels to remain high for the remainder of the year.

The bottom line: Our fair value estimate of $186 for narrow-moat Marathon Petroleum leaves its shares significantly overvalued. We don't have an argument with the near-term outlook for continued strong margins, likely to persist into 2027, or the quality of Marathon's operations. However, we see share pricing is materially higher than midcycle margins for the duration of our forecast, which we view as unrealistic. To arrive at today's share price, we would have to increase our midcycle margin assumptions by about 30%. That is still about 50% lower than what benchmark margins are expected to be for full-year 2026, demonstrating the strength of the current market.

BLANK PAGEValero management articulated the bulls' view well on their call: midcycle refining margins will be structurally higher because product crack spreads are now being set by less efficient Northwest European hydroskimming margins rather than historical cracking margins. This is further reinforced by rising carbon credit costs, inflationary pressures on capital and operating expenses, and limited global refining capacity additions. Additionally, the case is bolstered by a bullish outlook for heavy sour crude discounts and persistently low global product inventories relative to resilient transportation fuel demand. For Marathon, this means continued strong earnings for years even if Middle East disruptions are resolved in the near term. Strong operating performance only further bolsters this outlook.

We are increasing our fair value estimate to $236 per share from $186 after updating our near-term margin forecast to reflect the latest market crack spreads, which reflect the impact of the wars in Iran and between Ukraine and Russia. We derive our fair value estimate from a discounted cash flow analysis of the individual segments. We value the ownership stake in MPLX separately. Our valuation remains anchored on a return to midcycle conditions from currently elevated levels by the end of our forecast, leaving our fair value estimate well below current share prices.

Our fair value estimate reflects our updated refining margin deck, which incorporates our long-term outlook for crude differentials. Our long-term outlook for the West Texas Intermediate/Brent differential is $5, and the Light Louisiana Sweet/Brent differential is $1. We assume long-term Gulf Coast refining margins of $15 and adjust capture rates to reflect asset quality and investment.

We project recent per-barrel operating cost improvements to largely hold, and capture rates to continue improving, thanks to ongoing efforts and investments.

Given the level of operating leverage in a refiner, our valuation depends heavily on our assumptions about refining margins. A significant improvement or deterioration in crack spreads—for example, due to more global refinery outages or a recession—could create substantial upside or downside in our valuation. Currently, futures curves imply record-level margins will persist through 2027 and remain high into 2028. We incorporate these higher margins into our forecast, but our fair value estimate remains anchored on a return to midcycle levels by 2029 and beyond. Stronger-than-expected margins would likely lift shares, while demand destruction from high prices or a resumption of disruptions in the Middle East or Russia could weigh on refining margins and, in turn, Marathon's shares.

Marathon's ownership stake in MPLX accounts for about 40% of our fair value estimate, mitigating some of the refining segment's volatility.

Marathon Petroleum earns a Narrow Morningstar Economic Moat Rating thanks to a cost advantage relative to global refiners, driven by access to low-cost feedstock and relatively lower operating costs from low-cost domestic natural gas.

In early 2020, we downgraded Marathon Petroleum’s Moat Rating to None from Narrow after the firm acquired fellow independent refiner Andeavor, which we viewed as dilutive to Marathon’s own cost advantage and unworthy of a narrow moat. After the Andeavor acquisition in late 2018, Marathon Petroleum became a larger, more geographically diverse portfolio with high-complexity facilities in the midcontinent, West Coast, and Gulf Coast. However, in our view, Andeavor’s refinery portfolio was lower quality than Marathon’s and, as such, diluted portfolio quality as it increased its cost position.

Since then, much has changed, and we now think Marathon earns a narrow moat, given its portfolio high-grading and operating cost improvements. Management has reduced companywide unit operating costs to levels comparable with narrow-moat peer Valero. Through closure (Gallup) or conversion to biofuels (Dickinson and Martinez) of high-cost refineries and execution of other cost-saving programs, Marathon reduced its per-barrel operating costs to about $5 from about $6 in the wake of the acquisition, a meaningful amount.

Marathon’s portfolio now consists entirely of relatively high-quality refineries with an overall complexity rating of 10.8, on par with peers. The higher the complexity rating, the greater the ability to process lower-quality, lower-cost heavy and sour crude oil into high-value clean products such as gasoline or diesel.

High-complexity refineries like Galveston Bay and Garyville on the Gulf Coast (38% of capacity) can run domestic or imported light or heavy crudes, depending on which offers the greatest discount at the time. Meanwhile, their advantageous position on the Gulf Coast affords greater access to discounted light domestic and Canadian heavy crude, thanks to adding new pipeline capacity to the region. The Galveston Bay distillate hydrotreater project, to be completed by year-end 2027, should further improve the refinery's competitiveness and ability to produce higher-value finished products while generating returns over 20%.

Smaller inland refineries (38% of capacity) scattered throughout the midcontinent can capture transportation discounts associated with domestic light tight oil production due to their proximity to Texas and North Dakota production basins. We expect Marathon to extend its crude advantage, as a key element of its strategy is to integrate its refineries and invest in assets to increase the throughput of advantaged feedstocks from Canada, the Permian, and the Bakken while investing in upgrading capability and conversion capacity.

Meanwhile, the outlook for the California market has improved with recent refinery closures (including Martinez), leaving the state’s supply and demand delicately balanced and supporting higher midcycle margins. The Los Angeles efficiency and modernization project was completed in 2025, improving reliability and lowering costs to boost competitiveness.

In addition to its crude feedstock advantage, Marathon also has a cost advantage from low domestic natural gas prices. While other US refiners realize a similar benefit, refining is a global business, and as a large exporter, Marathon, along with other US refiners, competes constantly with foreign refineries for market share. Depending on the spread between domestic and global natural gas prices, US refiners can realize a cost advantage of $1-$2/bbl compared with European and Asian refineries, based on prices during the last five years. Our midcycle price assumptions imply a persistent advantage for US refiners.

Marathon is also building out a renewable diesel business by converting its Dickinson and Martinez facilities. Marathon completed the Martinez conversion in late 2023, leaving it capable of producing over 900 million gallons annually.

Marathon has partnered with Neste, a European refiner and leader in renewable diesel, in a 50/50 joint venture for the Martinez conversion. This reduces Marathon's capital outlay while adding a more experienced partner for sustainable feedstock sourcing. Access to lower-quality feedstock, such as animal fats or used cooking oil, is central to developing a competitive advantage in renewable diesel production because it costs less and earns higher low-carbon fuel credits. Investing in renewable diesel also addresses the potential destruction of petroleum product demand while reducing carbon intensity and protecting against renewable identification number purchase obligation costs. However, to award it a moat, we need stronger evidence that Marathon can source lower-quality, lower-cost feedstock that generates more low-carbon fuel credits for its Martinez project.

Marathon's master limited partnership, MPLX, has a narrow moat thanks to an efficient scale advantage, demonstrating the quality of its midstream assets. Its large size relative to other refiners’ MLPs is a key differentiator, while MPLX's strong, consistent returns support Marathon’s overall consolidated return on capital and its likelihood of remaining above the cost of capital.

High-complexity facilities in the midcontinent and Gulf Coast position Marathon to capitalize on a variety of discount crude streams, endowing it with a feedstock cost advantage.

Ownership in MPLX provides MPC with a steady stream of cash flow, which funds the dividend, allowing refining to free up cash flow to go toward supporting repurchases.

European refining closures and structurally higher natural gas prices will underpin higher midcycle Atlantic Basin refining margins, benefiting US refiners like Marathon.

Marathon's refineries on the West Coast have higher costs and less cost-advantaged feedstock, while EVs threaten long-term demand more.

MPLX's growth relies heavily on investment in gathering and processing assets, which depends on continued drilling and thus increases its commodity price exposure relative to other refiner MLPs.

Renewable diesel projects diversify away from hydrocarbons but lack a source of low-cost feedstock and thus hold no competitive advantage while growth relies on government support.