Marathon Petroleum (MPC) – Odd Lot Tender Offer – $300 Upside

Current Price: $60

Offer Price: $56 - $63

Upside: $300 (if priced at the upper limit)

Expiration date: 14th of June, 2021

Proxy

 

On the 14th of May, a major US oil refiner and marketer ($35bn market cap) Marathon Petroleum closed its $21bn speedway business sale and subsequently announced $4bn dutch tender offer for c. 10% of outstanding common shares. Price range is set at $56-$63/share offering $300 upside (at the upper limit) with the downside at $400 (if priced at the lower limit). There is an odd-lot provision. It is not clear if the offer will be over subscribed or undersubscribed.

However, there are a few positive points to consider:

  • The offer (at mid-range) offered a limited premium to market prices at the time - MPC was trading within $58-$61/share range during the week prior to the announcement.
  • Subsequently to this tender, MPC intends to authorize another $10bn buyback to purchase shares over the next 12-18 months. The prospect of the company buying 25%+ of its shares in the next 1 - 1.5 years will likely provide a strong share price support after the current tender expires. It might also encourage some MPC shareholders to abstain from tendering now.
  • Directors do not intend to participate in the tender (although they own only 0.4% of MPC).
  • The offer comes at the levels MPC traded before COVID. Other refiners globally have also recovered to pre-Covid levels (see CRAK global refiners ETF).

 

Option Plays

As MPC is a large-cap company, its options market is quite liquid and there might also be a number of ways to play this with options (albeit this adds additional and potentially significant risks). One of the potential trades is selling out of the money (or even outside the tender range) puts or covered calls that expire before the tender does. This would be a bet that MPC continues to trade in the narrow range around the current price or at least within the lower/upper limit range of the tender.

Using June 11th expiration would result in c. $0.5 - $1 / share profit (depending on the selected exercise price) if everything works out as expected and the OTM options expire worthless. However, keep in mind that selling options is inherently very risky - therefore, do your own due diligence before putting up this trade.

 

MPC

The company is the largest oil refiner, marketer and transporter in the U.S. One can find more background on the company in this VIC article here.

Its largest shareholders are index ETF managers:

  • BlackRock - 10.6%;
  • Vanguard - 9.5%;
  • State Street Financial - 5.9%.

1 COMMENT

  1. Ilja

    MPC tender results are out. As MPC shares had been trading above the upper limit over the last couple of weeks, the offer was significantly undersubscribed with only 2.4% of shareholders participating (tender was for 10% of outstanding shares). The final offer price was set at the upper limit of $63/share. The idea is closed with $300 upside for odd-lot shareholders.

    I think there are good chances that a new tender offer with better pricing will be announced shortly – the company now has $3bn left from this tender and an additional $10bn from the previously announced buyback authorization to return to shareholders over the coming 1.5 years. However, as this is a mega-cap company I assume the market is already pricing in these considerations.

    https://www.bamsec.com/filing/119312521190669/2?cik=1510295

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