Paul Singer Goes After Marathon Petroleum

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Paul Singer (Trades, Portfolio) founded Elliot Management in 1977. He is well known for taking activist investor stances in underperforming companies (lately the firm is incredibly active on this front). He is also infamous for buying distressed sovereign debt. For instance, after a 15-year battle, he ultimately forced Argentina to make good as a holdout.” data-reactid=”16″>Paul Singer (Trades, Portfolio) founded Elliot Management in 1977. He is well known for taking activist investor stances in underperforming companies (lately the firm is incredibly active on this front). He is also infamous for buying distressed sovereign debt. For instance, after a 15-year battle, he ultimately forced Argentina to make good as a holdout.

Elliott Associates just wrote an activist letter to Marathon Petroleum Corp (NYSE:MPC) on Tuesday and launched a website that it is advertising for through Google (NASDAQ:GOOG)(NASDAQ:GOOGL) adwords. Here are the highlights along with my commentary.

“We are writing to you on behalf of Elliott Associates, L.P. and Elliott International, L.P. (together, ‘Elliott’ or ‘we’), which collectively own common stock and economic equivalents representing approximately a 2.5% economic interest in Marathon Petroleum Corporation (the ‘Company’ or ‘Marathon’), making us one of your largest investors.”

This does make Elliott a top-five shareholder. Shareholders ahead of it are all the major index shops like Blackrock (BLK) and Vanguard.

“The purpose of today’s letter and accompanying presentation is to outline a path forward for Marathon to remedy the Company’s chronic underperformance, to improve its businesses and to unlock significant, sustainable value for its shareholders.”

Unsurprisingly, Elliott wants to unlock sustainable value for shareholders. I like that the letter is clear about intent and structured. This in contrast to the recent Michael Burry letters that are a little vague.

“We are no strangers to Marathon, having followed the Company for years and engaged with the current management extensively regarding our ideas to create value. Unfortunately, while our previous engagement concluded with promises from management and the Board that certain steps would be taken to improve performance, those promises have not been kept. Shareholders continue to suffer, prompting our letter and presentation today.”

Elliott came after Marathon (MRO) at the end of 2016 and called for the separation of the company’s three distinct segments of refining, midstream and retail. It will make this case again. Elliott also seems irritated that instead of separating assets, the company went out and acquired Andeavor.

“The Andeavor transaction created a new, larger and even more complex Marathon structure, which we believe compounded the Company’s historical valuation issues. Since the announcement of the Andeavor transaction in April 2018, Marathon shares have dramatically underperformed peers (-23% vs refining peers, and -95% vs retail peers).”

Activists tend to go after companies that have lagged peers. If there’s something to their case it will be much easier to sway other large shareholders. But Elliott also smells value or they wouldn’t be here:

“We continue to believe Marathon is severely undervalued. Fortunately, there are readily achievable steps by which the Board can unlock more than $22 billion in value for shareholders with no change in the operating assumptions – an increase to today’s stock price of ~61%.”

Merely by spinning out assets to ensure each business line gets awarded an industry multiple, there is 61% upside. But if the company would execute actual business improvements, there could be even further upside:

“Further, we believe that the Board can unlock an incremental $17 billion in value through achieving the operating full potential of Marathon’s world-class asset base – a total potential upside of over 100%.”

There are five main reasons why the fund is demanding these changes:

“Our perspective on the right structure for Marathon is based on five conclusions of our analysis: 1. The current structure will trade at a perpetual discount to the intrinsic value of its parts; 2. There is little to no ‘synergy’ value to retaining the three businesses in Marathon; 3. Each business has the potential for significant upside with independent management; 4. The businesses can be separated and distributed to Marathon shareholders tax efficiently; 5. The modest costs of separation pale in comparison to the billions of value that would be unlocked as a result of the transactions.”

Points one and two seem to be the most important. Usually, businesses that are refocused after being separated from a conglomerate do better. There’s something to this point as well, but it is not as crystal clear that will actually happen compared to points one and two. Points four and five seem relatively minor points.