DENVER, Jan. 11, 2017 /PRNewswire/ -- John M. Fox, the co-founder of MarkWest
Hydrocarbon, former CEO, Chairman and Director of MarkWest Energy
GP, L.L.C. ("MarkWest GP"), the general partner of MarkWest Energy
Partners, L.P. ("MarkWest"), and beneficial owner of 1,542,072 MPLX
common units, and 15,900 shares of Marathon Petroleum Corporation
through its merger with MarkWest in 2015 and from follow-on
investments, today released the following open letter to the board
of directors of Marathon Petroleum Corporation (MPC)
outlining how the accelerated dropdown of refining assets
hurts long-term MPC value and vastly diminishes growth prospects at
MPLX.
John Fox is providing this
material for general informational purposes only. None of the
information provided herein is intended to be relied upon as
investment advice. The opinions expressed in this letter are those
of Mr. Fox as of January 11, 2017 and
are subject to change at any time due to changes in market,
economic conditions, or new public information. These opinions are
Mr. Fox's alone, and do not reflect the opinions of any other
member of the Fox family.
The information and opinions contained in this material are
derived from proprietary and non-proprietary sources deemed by Mr.
Fox to be reliable and are not necessarily all-inclusive. Mr. Fox
does not guarantee the accuracy or completeness of this
information. There is no guarantee that any forecasts made by any
party will come to pass. Reliance upon information in this material
is at the sole discretion of the reader.
Mr. Fox has created a website with his materials at:
www.itjustmakessensegary.com
The full text of the letter follows:
January 11, 2017
Board of Directors
Marathon Petroleum Corporation
539 S Main St
FINDLAY, OH 45840-3229
Attention: Gary Heminger,
Chairman, President and Chief Executive Officer
To the Board of Directors of Marathon Petroleum Corporation:
There are fundamental flaws and too many questions with Marathon
Petroleum Corporation's (MPC) January 3,
2017 Plan that we believe will destroy long-term value for
MPC and MPLX.
As you know, I am the co-founder of MarkWest Hydrocarbon, and a
former Chairman, Chief Executive Officer and director of MarkWest
Energy GP, L.L.C. As of this date, through the merger of MPLX and
MarkWest on December 4, 2015, and
from follow-on investment, I am the beneficial owner of 1,542,072
common units of MPLX, LP and 15,900 shares of Marathon Petroleum
Corporation.
As a shareholder of MPC and a unitholder of MPLX, I agree with
you and Elliott Management Corporation's shared opinion that MPC is
undervalued. By eliminating the Incentive Distribution Rights
(IDRs) at MarkWest in 2007, we created tremendous value that
ultimately led to the successful acquisition of MWE by MPLX in
2015. MWE generated a 143.3% total return and grew from a
$1.2 billion market cap to an
$8.6 billion market cap for the
period of September 5, 2007, when the
IDRs were eliminated, to December 4,
2015.
Based on my experience and countless hours my team and I spent
at MWE analyzing the many disincentives associated with the IDRs, I
know first-hand the drag that can be caused by the IDR structure.
As a result, I strongly support Marathon Petroleum Corporation
commitment to exchange its IDRs for LP units in MPLX. However, the
accelerated "dropdown" of refining assets hurts long-term MPC
value, vastly diminishes growth prospects at MPLX and raises the
cost of capital for both.
As I pointed out, I successfully eliminated the IDR burden at
MarkWest and I know these MPLX assets. MPLX has the premier
infrastructure position in the largest emerging gas basin in the
U.S. If it is managed properly, MPLX now has years of growth ahead
with high rate of return projects built on its substantial core
infrastructure. Incurring debt and unit dilution to buy low return,
zero growth refining assets makes no sense for MPLX and places an
unnecessary burden on the fully integrated refining assets of
MPC.
In addition, Moody's has also taken notice of the possible
negative ramifications from this most recent proposal by changing
MPC's outlook to negative from stable. Below is highlighted
commentary from the Moody's press release that aligns with our
opinion of this value destructive plan.
"In a continuation of its focus on enhancing shareholder
value, MPC has proposed a series of transactions between itself and
MPLX intended to fund a substantial, ongoing return of capital to
MPC shareholders, the result of which is leveraging on both a
consolidated and stand-alone basis at MPC," commented Andrew Brooks, Moody's Vice President.
As we are all well aware, there is a direct relationship between
growth and yield valuations. With this in mind, dropdowns from MPC
will actually stunt long-term growth at MPLX and may restrict
available capital for high return, high growth and time sensitive
organic investments at MPLX.
Additionally, MPC is primarily focused around a cyclical,
slow-growth refining business while MPLX's organic growth
opportunities are focused primarily around natural gas gathering
and processing – a high-growth business requiring nimble management
focused on customer service and performance.
The proposed dropdown assets are core strategic assets for a
refining company to source low cost crude and maximize value of
refined products thereby maximizing its "crack spread." With these
assets in MPLX's hands, MPC is weaker.
Lastly, Timothy T. Griffith,
Chief Financial Officer and Senior Vice President of MPC, pointed
out on the January 3, 2017 investor
call, "...I don't think we've got any absolute clarity on when that
happens," referring to timing of the $600
million of dropdowns that are tied up in regulatory
clearances. This uncertainty on timing could likely delay or
terminate the IDR elimination plan.
The boards of MPLX, MPC and importantly the MPLX conflicts
committee have a duty to investors to consider the long-term value
destruction and potential inflation of the GP valuation that is
inherent with the plan put forward on January 3, 2017.
There are fundamental questions that need to be answered
definitively.
- How does conveying key refining assets to MPLX, a midstream gas
company, drive long-term value for MPC shareholders?
- How does obligating MPC to future cash payments of $1.4B/year to MPLX, a company with a totally
different mission, drive long-term value for MPC shareholders?
- How does a weaker balance sheet at MPC affect the viability of
the Company for the next downturn?
- For MPLX, why buy zero growth refining assets from MPC, paying
7-9x EBITDA, when you can concentrate on your own organic growth
projects that can be done for 5-6x EBITDA?
- How does obligating MPLX to a debt burden of between
$5B-$6B to own static refining assets
create a growth vehicle for MPLX unitholders?
- How can we be sure that this complex financial engineering
will lower the cost of capital and not lead to value
destruction?
Set MPLX Free
The roadmap to create real value is clear. MPC and MPLX need to
execute the IDR elimination plan immediately at a fair and
transparent price without burdening MPLX with dropdown assets.
After IDR elimination, spin out MPC's current ownership of 87
million MPLX units, plus resulting MPLX units from IDR exchange to
MPC shareholders. We estimate the resulting immediate uplift in
value for MPC shareholders ranges between $20 and $30 per MPC share.
For MPLX, capital is being siphoned away from meaningful growth
opportunities. Without the IDR Burden, MPLX could add assets in
some of America's best resource plays like the Marcellus and
Utica in the Appalachian Basin,
and the SCOOP and STACK plays in Oklahoma.
MPLX in its December 2016 investor
presentation outlines a "Strong base business with robust growth
opportunities" and highlights "Leading the development of Marcellus
and Utica Shale play infrastructure." The company also
outlines forward estimates $1.1 billion to
$1.2 billion and $1.2 billion to $1.6
billion of organic capital investment in 2016 and 2017,
respectively. I know these assets and what they are capable
of when the right financial structure is put behind them and the
right financial structure is one that puts the most cash to work to
grow the business.
I'm asking the board to consider an immediate IDR elimination
plan at a fair and transparent price without burdening MPLX with
dropdown assets and spinning out of resulting MPLX units to MPC
shareholders. Our plan outlines a superior uplift in value for both
MPC and MPLX with lower operational and financial risks and better
growth going forward. At the end of the day, the companies with the
best growth prospects and the lowest cost of capital will win.
It just makes sense!
Sincerely,
John Fox
Any quotation of analysts herein does not necessarily
indicate that such analysts support the views expressed herein, or
indicate that Mr. Fox necessarily agrees with the views of such
analysts. Mr. Fox has not sought or obtained consent from any third
party for the use of previously published information, and any such
statements of information should not be viewed as indicating the
support of such third party for the views expressed by Mr.
Fox.
Contact:
John Fox
johnfox@itjustmakessensegary.com
720-213-6439
www.itjustmakessensegary.com
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SOURCE John M. Fox