Why Marathon Petroleum is Committed to a $5 Billion Stock Buyback

Key Points

• Marathon Petroleum management has announced a $5 billion stock buyback program, revealing a bullish outlook. 
• A 100% accurate indicator indicates the energy sector is preparing for a double-digit rally. 
• Warren Buffett likes oil, and Wall Street analysts like it when picking Marathon Petroleum stock.

Most investors are waking up to realize that the market rotation has not only started but is gaining momentum with each trading day. Stanley Druckenmiller started selling out of the technology sector, specifically the artificial intelligence names that seemed to have run their course, to reallocate into bonds and small-cap stocks.

What he may have missed, or at least hasn’t yet announced, is that the energy sector is now set up with a 100% probability of giving investors a massive rally in the coming quarters. Why is there so much certainty about this sector? The infamous yield curve (the spread between 10-year and 2-year U.S. bonds) is now looking to go back into positive after the longest inversion in history. What this means—historically—is an ensuing rally for all things oil and energy.

As an additional confirmation, investors can look to the Oracle himself: Warren Buffett. Buffett started a nine-day buying spree last quarter, and he picked shares of Occidental Petroleum Inc. NYSE: OXY to be his target, eventually owning up to 29% of the company. Today, another name in oil is worthy of investor attention, as insiders are willing to buy up to $5 billion worth of Marathon Petroleum Co. NYSE: MPC.

Wall Street's Take on Marathon Petroleum Stock Today

It isn’t crazy at all, but it’s good enough to get investors to consider a second look into Marathon Petroleum stock. Analysts on Wall Street forecast as much as 10.7% earnings per share (EPS) growth in the following 12 months, but that might fall short of historical performance.

From 2021 to 2022, Marathon Petroleum’s financials show EPS going from $15.3 a share to $28.3 a share, a near-doubling during a time when the price per barrel of oil rose from below $70 to over $100. It now seems that investors are back on the commodity cycle.

Oil prices have struggled to break – and remain – above $80 a barrel, leaving significant upside toward the $100 a barrel projections from analysts at Goldman Sachs. With a higher price per barrel comes much higher EPS growth in Marathon Petroleum, which is above analyst projections today.

Leaning on these bullish tailwinds, those at Jefferies Financial Group saw it fit to slap a $231 a share valuation on Marathon Petroleum stock, daring it to rally by as much as 40.3% from where it trades today. More than that, Panagora Asset Management decided to boost its stakes in the company by 64.1% as of July 2024, netting its investment at $107.4 million today.

Despite all the optimistic evidence, investors can note some bearish capitulation as well, namely Marathon Petroleum stock’s short interest decline of 5.4% over the past month, which opened the way for bulls to come in and take their place.

It now makes more sense for insiders to project and expect a bullish future for Marathon Petroleum stock, which is why setting aside $5 billion to buy back stock was an easy choice.

Marathon Petroleum Stock's Discount Makes Buyback a Smart Move

However, not all buybacks are equal in benefit. Ideally, management will wait for the stock price to be low enough relative to the true value of a stock, which in this case is double-digits above today's price, to allocate capital into buybacks.

There's no need for investors to worry, as Marathon Petroleum stock trades at only 78% of its 52-week high. On a valuation basis, the stock trades at a P/E ratio of 8.2x, significantly below the energy sector's average valuation of 14.7x. Digging deeper, on a price-to-book (P/B) ratio, Marathon Petroleum's 2.0x is also a discount to the sector's 3.3x average.

What sort of benefit can investors expect from these buybacks besides a bullish outlook? Considering that Marathon Petroleum generates a 15.2% return on invested capital (ROIC) rate, this $5 billion reinvested into the company will tap into this growth to beat inflation and the average return of the S&P 500.

One more thing, there is usually a threshold that signals how bullish management is about its business, and it's how much (in percentage terms) the buybacks represent out of the company's market capitalization.

This $5 billion buyback is roughly 8.6% of Marathon Petroleum's $58 billion market capitalization. With the bullish threshold usually 8% to 12%, investors can safely assume that this stock's future could be brighter than it seems.