• Shares of Marathon Petroleum Corp. (NYSE: MPC) have declined about 21 percent in the last five days, with the share price close to the trough seen in mid-January.
• JP Morgan’s Phil Gresh upgraded Marathon Petroleum from Neutral to Overweight, while maintaining the price target at $61.
• Gresh believes that the stock offers 43 percent return potential, including dividends, while the valuation discount is currently “too attractive to ignore.”

According to the JP Morgan report, the valuation discount could be due to several factors, such as “a challenging 2Q against a backdrop of strong results for peers” as well as concerns related to the deal between MPLX LP (NYSE: MPLX) and Markwest Energy Partners LP (NYSE: MWE).

Analyst Phil Gresh, however, believes that while the Q2 issues are transitory in nature, the MPLX/MWE deal is largely priced into the stock. In fact, Gresh stated that “MPC is a high quality story, with a favorable business mix of refining/logistics/retail and refining geographic mix.”

Marathon Petroleum’s management noted that the company tends to perform better in a more volatile product and/or crude price environment due to Marathon Petroleum’s fully integrated systems. Such volatility is expected in Q3, which bodes well for the company.

“While there is some risk around capture rates from downtime across MPC’s refining system in 3Q, we think that MPC is well positioned to benefit from market volatility. Longer term, we like MPC’s refining geographic mix, given its exposure to Mid-Continent and Gulf Coast regions,” the report went on to say.

With regard to the MPLX/MWE deal, Marathon Petroleum’s stock saw an 8 percent increase on the day that the deal was announced. However, the recent decline in the share price implies that “little to no credit is now being given for the deal in MPC’s shares, either because of fears that the deal won’t close or that MPC will have to contribute more cash,” Gresh stated.

Therefore, Gresh expected limited risk to the stock associated with this deal.

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