Andeavor Downgraded By Morgan Stanley On Marathon Acquisition

Andeavor ANDV reported its first-quarter results after Monday's market close that featured a top- and bottom-line beat — but prompted Morgan Stanley to drop its bullish stance. 

The Analyst

Morgan Stanley's Benny Wong downgraded Andeavor from Overweight to Equal-weight with an unchanged $145 price target.

The Thesis

Andeavor's "modest beat" in Q1 is attributed mostly to lower D&A that was offset by Midcon and Pacific Northwest gross refining margins, which came in 14 percent below expectations, Wong said in the downgrade note. (See the analyst's track record here.)

Refining adjusting operating income came in at $105 million versus the analyst's estimates of $120 million, while marketing segment operating income of $128 million missed the $132 million Morgan Stanley expected. Logistics adjusted operating income of $188 million missed estimates of $195 million.

The downgrade of Andeavor's stock is due to Marathon Petroleum Corp MPC's acquisition offer of 1.87 Marathon shares or $152.27 in cash for each Andeavor share, Wong said. Due to a 15-percent cash cap on fully diluted shares, the deal translates to 1.59 Marathon shares and $22.84 in cash per Andeavor share; based on Monday's closing prices, this implies an offer of around $143 per share, the analyst said. 

Investors expecting a competing bid may want to revisit their thesis, as companies with sufficient resources to compete in a bidding war have no interest in doing so or would face regulatory problems, Wong said. 

Price Action

Shares of Andeavor were trading down 1.44 percent at the time of publication Tuesday. 

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