How fortunate that this newsletter is called MLP Profits and not, say, Nothing But MLPs, or K-1’s or Bust.

It’s made it that much easier over the last three years to recommend not just the many worthwhile MLPs but also a number of the general partners capturing a disproportionate and growing share of MLP income, even when those GPs are organized as taxable corporations.

Where would we be without Williams (NYSE: WMB), SemGroup (NYSE: SEMG) and Western Refining (NYSE: WNR)? Even if we look solely at our first-half results the answer is, not nearly as well off as we are with them.

Today we’re recommending another company that’s cracked the MLP code by marketing some of its assets to yield-seeking outside investors. In many ways, Marathon Petroleum (NYSE: MPC) already does many things an MLP should. Only it’s much, much cheaper.

Since Marathon Pete was spun off from Marathon Oil (NYSE: MRO) four years ago the big crude refiner’s share price has roughly tripled. It’s done so despite the typical volatility of refining profits and notwithstanding MPC’s relatively modest dividend, currently yielding 1.7% annually.


Source: company presentation

That’s because the dividend (reported on form 1099) is a pretty small part of the overall value proposition. Share repurchases have provided a much bigger benefit. Over the 12 months through the end of March, MPC has repurchased 8.6% of its market capitalization, for a total capital return yield of 10.7%. Among its rivals, only Western has been comparably generous.

The spending power comes courtesy of Marathon’s seven refineries, whose maximum throughput of 1.7 million barrels per day makes MPC the third-largest independent U.S. refiner with 9.6% of the domestic processing capacity.


Source: company presentation

These plants have been able to take advantage of discounted U.S. and Canadian crude, cheap natural gas and rapidly increasing U.S. fuel exports.

The refineries are complemented by 2,750 company-owned Speedway filling stations and convenience stores, as well as 5,500 independently owned stations operating under the Marathon brand, all of them benefiting from improved domestic demand and higher margins amid the lower fuel prices prevailing since last autumn.

MPC also owns or has an interest in 8,300 miles of crude and fuel pipeline, 80 product terminals, a fleet of more than 200 inland barges and towboats and 142 product shipping trucks.


Source: company presentation

Some of that midstream infrastructure was spun off almost three years ago into MPLX (NYSE: MPLX), MPC’s affiliated logistics MLP. Thanks to aggressive subsequent sales of MPC assets to MPLX, the latter’s distributions have since grown at a 22% compounded annual rate, allowing MPLX’s unit price to triple from the IPO level by last February. (It’s since pulled back to merely twice the IPO price.)

MPC’s share of MPLX profits was already set to rise dramatically in the coming years as a result of its incentive distribution rights, which by now entitle MPC to 50% of the incremental increase in MPLX’s distributions per unit.

Source: company presentation

As described Monday in MLP Investing Insider, that earnings stream is likely to improve substantially if MPLX completes the mostly-equity merger with MarkWest Energy Partners (NYSE: MWE) it announced this week.

The deal would effectively triple the market capitalization of MPLX and more than quadruple its cash flow, while allowing MPC to skim 50% of all future growth from MarkWest’s assets by means of its incentive distribution rights.

The only price MPC is paying for this bounty is the $675 million it has agreed to contribute as the (tiny) cash component of the buyout. Meanwhile, the present value of the benefit it will receive is easily between two and three times that cost, at the very least.

It’s a massive value transfer from the limited partners of MPLX and MarkWest to Marathon Pete, which of course has a much better track record of rewarding its own shareholders.

After this score, MPC’s vibrant refining business look like a mere excuse to fill MPLX’s pipes. We’re adding Marathon Petroleum to the Aggressive Portfolio. Buy MPC below $70.