E Marathon Petroleum Can Offer Double-Digit Annual Returns From Here

Marathon Petroleum (MPC) is a high-beta stock. This means that the stock tends to move at a faster pace than the broad market. The refiner has plunged 30% since early October and is thus now trading at a 52-week low level. In this article, we will analyze why the recent plunge of Marathon Petroleum has presented a great investing opportunity, with the stock being capable of offering double-digit annual returns going forward.

The Reasons Behind The Plunge

The plunge of all the U.S. refiners began in early October and coincided with the peak of the oil price. Since then, the price of oil has plunged from $75 to $48 and domestic refiners have all been under great pressure. The market is afraid that a low oil price signals an economic slowdown in the upcoming quarters, which will adversely affect the demand for refined products and hence the refining margins.

We view these concerns as overblown. A recession has not shown up for nine consecutive years so it can show up at any time. However, it is impossible to time the next recession and numerous investors have missed the longest bull market in history waiting for the next recession to occur. Even if a recession shows up within the next two years, it is not likely to be as severe as the last one.

Moreover, the recent collapse of the oil price is actually a gift for domestic refiners. When the oil price is so low, it significantly increases the demand for refined products and thus provides a strong boost to the refining margins. We have not witnessed this effect yet due to adverse seasonality, as the demand for gasoline is much lower in the winter than in the summer. However, when the winter approaches its end, the refining margins will begin to expand and the market will realize that the prospects for refiners are excellent at the prevailing oil prices.

Another reason behind the plunge of the stocks of U.S. refiners was a WSJ report, which was issued two months ago. According to that report, the U.S. government was trying to postpone the implementation of the new international marine rules in the U.S. According to the new rules, which will come into force in January-2020, all the vessels that sail in international waters will be forced to burn low-sulfur diesel instead of heavy fuel oil. As the former is much more expensive than the latter, the new rules will greatly enhance the refining margins. Therefore, if the government succeeds in its efforts, it will adversely affect the domestic refiners.

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William K. 9 months ago Member's comment

Very interesting, even if I did not understand quite all of it. So probably this is a very good time to buy Marathon.

Dick Kaplan 9 months ago Member's comment

Which part did you not understand?

William K. 9 months ago Member's comment

The motivations for delaying implementation of those new rules. The effect of the new rules was clear, bringing up a question about the actual motivation of the new rules. Was it for reduced emissions or was it for increased refiner profits??