Marathon eyes downstream split while others hold tight

US independent refiners are touting the value of integrated assets after the country's largest integrated downstream firm said it would consider splitting.

Marathon Petroleum says it will spin off its Speedway retail unit next year and review options for its midstream business and logistics master limited partnership MPLX. The decision breaks up a downstream integrated company stretching from the US Atlantic to the Gulf and the west coast.

Marathon split with independent Marathon Oil in 2011, then bought fellow US firm Hess' retail business, logistics company MarkWest and, lastly, domestic refiner Andeavor to become the largest US independent refiner by capacity last year. Shortly before its takeover of Andeavor, Marathon rejected activist shareholder Elliott Management's entreaties to spin off its retail business, finding "no compelling valuation opportunity" to separate a retail segment that provides stable cash flow and a steady clean fuels outlet for its more volatile refining business.

But Elliott renewed its pitch last month, adding pointed criticism of Marathon's executive leadership. The shareholder argued that the logistics, retail and refining businesses would benefit from focused management and broader marketing opportunities. Marathon's integration obscures the value of its component businesses, it says. Chief executive Gary Heminger, who the board exempted from mandatory retirement last July, will retire next year. Greg Goff, former Andeavor chief executive and Marathon executive vice-chairman, will also retire.

Marathon proposes keeping its wholesale fuels and its Arco business, which has expanded down the west coast into Mexico. It will form a committee to study its midstream business, where the path to a mutually beneficial spin-off is less clear. But it will pursue a tax-free spin-off of its $1.5bn Speedway business after securing a long-term supply contract between the two firms. Marathon attributes the decision to a strategic review that began in January.

Elliott points to Valero, the second-largest US independent refiner by throughput, as a model for what shareholders should expect from a break-up. The US independent spun off its retail segment in 2013 — North American retailer Couche-Tard bought that business a year later. Valero dropped midstream assets into a master limited partnership before re-acquiring the assets last year.

Doubling down

But other US independent refiners are clutching their midstream and retail assets tighter in response. Delek touts the diversity of supply and freedom from third-party tariffs offered by its growing stable of pipelines supplying four US Gulf coast refineries. PBF Energy says it will review its logistics subsidiary and consider whether it should bring the assets back into the parent company.

And Phillips 66 repeatedly emphasised the benefits of integration this week in its first strategic review for analysts in five years. The refiner, formed in a 2012 spin-off from upstream firm ConocoPhillips, adds chemicals businesses and international operations to the familiar integration of retail, midstream and refining. Midstream assets, driven by third-party commitments, connect its refineries to the major North American oil-producing basins. Phillips 66 also plans to add a retail joint venture on the west coast this year.

Fuel marketing deals may not offer much in the highly competitive US Gulf coast or New York Harbor markets. But they support refiners in illiquid markets by offering stable outlets for production, at a time when forecasts suggest US oil product demand has peaked.

"It is a source that allows us to put these refining volumes to bed at good values, rather than showing up at the rack on the spot and taking the lowest price available," Phillips 66 chief executive Greg Garland says.

By Elliott Blackburn