Harvard Case - Should Marathon Petroleum Split Up?
"Should Marathon Petroleum Split Up?" Harvard business case study is written by Timothy Trombley, Babak Lotfaliei, Saurin Patel. It deals with the challenges in the field of Finance. The case study is 16 page(s) long and it was first published on : Oct 15, 2020
At Fern Fort University, we recommend that Marathon Petroleum should not split up at this time. Instead, the company should focus on optimizing its existing operations and pursuing strategic acquisitions in the refining and marketing segments. This approach leverages the company's existing strengths, capitalizes on market opportunities, and enhances shareholder value.
2. Background
Marathon Petroleum Corporation is a leading integrated energy company with operations across the entire value chain, from crude oil production to refining and marketing. The case study focuses on the company's strategic direction, specifically addressing the question of whether it should split its refining and marketing businesses.
The main protagonists in the case are the company's executives, who are grappling with the challenges of a volatile oil and gas market, increasing regulatory scrutiny, and pressure from activist investors seeking short-term gains.
3. Analysis of the Case Study
To analyze the situation, we can apply a Porter's Five Forces framework to understand the competitive landscape and identify potential threats and opportunities:
- Threat of New Entrants: High barriers to entry in the refining and marketing industries due to significant capital investments and complex regulatory requirements.
- Bargaining Power of Suppliers: Moderate, as crude oil prices are influenced by global factors.
- Bargaining Power of Buyers: Moderate, as consumers have limited choices for gasoline and other refined products.
- Threat of Substitute Products: Moderate, as alternative fuels and energy sources are gaining traction.
- Competitive Rivalry: High, with several large integrated energy companies competing for market share.
Financial Analysis:
- Profitability: Marathon Petroleum has consistently generated strong profits, driven by its integrated business model and efficient operations.
- Cash Flow: The company generates significant cash flow from its refining and marketing operations, providing ample resources for investments and shareholder returns.
- Capital Structure: Marathon Petroleum has a moderate level of debt, providing flexibility for strategic initiatives.
- Financial Risk: The company faces risks associated with commodity price volatility, regulatory changes, and environmental concerns.
Strategic Considerations:
- Integration Advantages: Marathon Petroleum's integrated business model provides several advantages, including cost efficiencies, supply chain control, and access to valuable information.
- Market Opportunities: The company has significant growth opportunities in refining and marketing, particularly in emerging markets.
- Diversification Benefits: The company's diversified portfolio of businesses mitigates risks associated with cyclical industries.
4. Recommendations
Optimize Existing Operations: Marathon Petroleum should focus on improving operational efficiency and cost control across its refining and marketing segments. This includes implementing activity-based costing to identify cost drivers and optimize resource allocation, leveraging technology and analytics to enhance production processes, and exploring partnerships with other companies to share resources and expertise.
Strategic Acquisitions: Marathon Petroleum should actively pursue strategic acquisitions in the refining and marketing segments, particularly in emerging markets with high growth potential. This will expand the company's geographic footprint, enhance its market share, and provide access to new technologies and capabilities.
Shareholder Value Creation: Marathon Petroleum should prioritize shareholder value creation by maintaining a strong financial performance, paying regular dividends, and considering share buybacks when appropriate. The company should also engage with investors to communicate its strategic vision and address concerns.
5. Basis of Recommendations
Core Competencies and Consistency with Mission: The recommendations align with Marathon Petroleum's core competencies in refining and marketing, and its mission to provide energy solutions for a growing global economy.
External Customers and Internal Clients: The focus on operational efficiency and strategic acquisitions will benefit external customers by providing affordable and reliable energy products, and internal clients by creating a more profitable and sustainable business.
Competitors: The recommendations position Marathon Petroleum to compete effectively against its rivals by leveraging its integrated business model, pursuing growth opportunities, and maintaining a strong financial position.
Attractiveness: The recommendations are expected to generate positive returns for shareholders, as evidenced by the company's strong financial performance and growth prospects.
6. Conclusion
Marathon Petroleum should not split up its refining and marketing businesses. The company's integrated model provides significant advantages, and the growth opportunities in these segments are substantial. By focusing on operational excellence, strategic acquisitions, and shareholder value creation, Marathon Petroleum can continue to be a leader in the energy industry.
7. Discussion
Alternatives not Selected:
- Splitting the Company: While this would create two independent companies with potentially higher valuations, it would also disrupt the company's integrated business model, potentially leading to higher costs, reduced efficiency, and a loss of competitive advantage.
- Divesting Non-Core Assets: This could free up capital for investments in core businesses, but it could also weaken the company's overall financial position and reduce its diversification benefits.
Risks and Key Assumptions:
- Commodity Price Volatility: The recommendations are based on the assumption that oil and gas prices will remain relatively stable in the long term. However, significant price fluctuations could impact the company's profitability and investment decisions.
- Regulatory Changes: The recommendations assume that the regulatory environment will not become significantly more restrictive. However, increased environmental regulations or changes in tax policies could pose challenges for the company.
8. Next Steps
- Develop a Detailed Operational Improvement Plan: This plan should identify specific areas for improvement, quantify potential cost savings, and outline a timeline for implementation.
- Identify Potential Acquisition Targets: This involves conducting due diligence on potential targets, assessing their strategic fit, and developing a negotiation strategy.
- Communicate with Investors: Marathon Petroleum should proactively engage with investors to communicate its strategic vision and address concerns about the company's future direction.
By taking these steps, Marathon Petroleum can position itself for continued success in the evolving energy landscape.
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Case Description
On September 25, 2019, an activist investment management company, which was sometimes referred to as the biggest activist hedge fund in the world, publicly released a detailed report advocating for Marathon Petroleum Corporation to be split into three separate companies, divided along three major business lines: oil refinery, midstream services (i.e., pipelines), and retail. The refinery company would consist primarily of 16 oil refineries in the United States and would retain the Marathon name. The midstream company, which would consist of pipelines, logistics, and oil terminals, would be formed from MPLX LP, the publicly traded subsidiary that was 63 per cent owned and fully operated by Marathon Petroleum Corporation. The retail company would be formed from Speedway LLC, the wholly owned subsidiary of Marathon Petroleum Corporation that operated 3,923 retail locations across the continental United States. The investment company argued that Marathon Petroleum Corporation's shareholders stood to benefit considerably from the proposed split. Was the proposition a good idea?
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