Marathon Petroleum, the refining giant, recently announced its Q1 2024 earnings, boasting strong operational execution and a record-breaking turnaround schedule. While analysts buzzed about margin capture and the new $5 billion share repurchase authorization, a deeper dive into the transcript reveals a less-discussed but potentially explosive story: the accelerating growth of Marathon's midstream segment, MPLX.

Mike Hennigan, Marathon's CEO, subtly highlighted this during the Q1 2024 earnings call, hinting at a future where MPLX's cash distributions could completely cover both Marathon's dividend and capital requirements, leaving a hefty surplus of cash before even a single dollar of refining EBITDA is earned. This "cash before cracking" scenario, as we might call it, could be a game-changer for Marathon investors, signaling a fundamental shift in the company's value proposition.

To understand this potential shift, we need to look at the numbers. Since May 2021, Marathon has been aggressively repurchasing its shares, reducing its share count by nearly 50%. Over the same period, the number of MPLX units owned by Marathon has remained relatively stable. This simple dynamic has drastically altered the equation for Marathon investors. The ratio of MPLX units to Marathon shares has nearly doubled, effectively amplifying the value of MPLX on a per-share basis for Marathon shareholders.

Think of it this way: by owning Marathon stock, you're not only buying into a premier, highly advantaged refining system, but you're also getting a stake in a rapidly growing midstream business through its ownership in MPLX. And that stake, due to the share repurchase strategy, is becoming increasingly valuable with every passing quarter.

The growth of MPLX is not just a happy coincidence. Marathon has been strategically positioning the partnership for success, focusing on attractive growth opportunities, particularly in the Marcellus and Permian basins. The recent completion of the Harmon Creek II gas processing plant and the imminent startup of Preakness II in the Permian, combined with the ongoing construction of the seventh plant, Secretariat, demonstrate this commitment. This aggressive expansion of gas processing capacity underscores Marathon's bullish outlook on natural gas volumes and further fuels MPLX's growth trajectory.

Furthermore, two recent strategic acquisitions by MPLX – one in the Utica Basin and another involving a joint venture combining the Whistler and Rio Bravo pipeline projects – demonstrate Marathon's foresight in building a diversified midstream platform with significant growth potential.

The implications of this "cash before cracking" scenario are profound. It suggests that Marathon is approaching a point where its midstream business alone could become the primary driver of its cash generation, providing a stable and growing base of cash flow that could further enhance its already aggressive shareholder return program.

While the refining business will undoubtedly remain a key component of Marathon's overall strategy, the increasing importance of MPLX could lead to a revaluation of the company. Investors may start to perceive Marathon less as a cyclical refining play and more as a diversified energy company with a robust and growing midstream foundation.

Hypothetical Share Count Reduction vs MPLX Units Owned by Marathon

The following chart illustrates the dynamic between Marathon's aggressive share repurchase program and its stable ownership of MPLX units, highlighting how this amplifies the value of MPLX for Marathon shareholders.

Here's a simple hypothesis: If MPLX's distributions can indeed cover both Marathon's dividend and capital requirements, we could see a scenario where the market starts to assign a higher multiple to Marathon's earnings, reflecting the increased stability and predictability of its cash flow. This revaluation could translate into significant upside for Marathon shareholders, potentially exceeding the returns solely driven by its refining business and share repurchases.

This hypothesis is further supported by the fact that Marathon's management, despite consistently highlighting the importance of cash generation, has refrained from setting specific targets for the breakdown of third-party versus GP-driven cash flows for MPLX. This suggests that the partnership's potential is still being unlocked and that we could see even more aggressive growth and distribution increases in the future.

While other analysts are focusing on the near-term refining outlook and the intricacies of margin capture, Marathon Petroleum's hidden gem – the accelerating growth of MPLX – could be a far more compelling story for investors seeking long-term value creation. By doubling down on MPLX, Marathon is not just mitigating its refining risk, it's building a powerful engine for future growth and shareholder returns. Keep an eye on MPLX's distribution growth in the coming quarters, as it could very well be the key to unlocking significant upside for Marathon shareholders.

"Fun Fact: MPLX's Harmon Creek II gas processing plant, which recently came online, has a processing capacity of 6.5 billion cubic feet per day. That's enough natural gas to meet the daily energy needs of over 2 million homes!"