Marathon Petroleum's Returns on Capital: Can Strong Margins Overcome Sub-WACC Performance and Leverage Risks?

Marathon Petroleum faces a core tension this year: its return on invested capital (ROIC) of 7.54% landed below its cost of capital (WACC) at 7.79%, a gap that threatens shareholder value as the company grows. This shortfall suggests capital deployed may not generate sufficient profit to cover financing costs. Compounding the concern, its net debt-to-EBITDA ratio sits at 2.71 – a level considered moderate but notably worse than two-thirds of its industry peers. While not catastrophic leverage, this position limits financial flexibility during downturns.

Yet Marathon carries a significant counterweight: a substantial liquidity cushion. The company generated $8.7 billion in net cash from operations in 2024, demonstrating robust cash generation capability even during the value-creation shortfall. This strength intensified in Q3 2025, with a $2.7 billion cash position and no drawn debt under its credit facility. This buffer provides breathing room to weather periods where refining margins soften or capital needs surge unexpectedly.

This liquidity acts as a critical safety net against the ROIC/WACC gap.

While Marathon rebuilds earnings power to clear that hurdle, the $2.7 billion in cash offers protection against near-term shocks. Investors must weigh the persistent risk of capital misallocation against the company's tangible liquid resources and ability to fund shareholder returns – $10.2 billion was returned to investors in 2024 alone. The balance between these forces will dictate near-term risk exposure.

Margin Strength Tests Cash Flow Flexibility

Q3 2025 refining margins climbed to $17.60 per barrel versus $14.63 in the prior-year period, supporting $3.2 billion in adjusted EBITDA. This represents only a marginal improvement over Q2 2024's $3.4 billion EBITDA reported in Q2 2024, signaling subdued momentum despite higher crack spreads. The company's 2024 cash generation enabled $10.2 billion in shareholder returns as reported in Q4 2024, but 2025's $1.25 billion capital plan now tests liquidity buffers. While operating costs remained contained at $4.97 per barrel, the narrowing EBITDA gap versus earlier-year performance warrants caution. Midstream operations added resilience with 6% year-over-year EBITDA growth to $1.6 billion, yet standalone projects may pressure free cash flow if commodity prices soften.

The $2.7 billion cash position provides a short-term cushion, but sustained capex without margin expansion could strain balance sheet flexibility. Shareholder returns remain constrained by operational discipline, though MPLX distributions are slated to cover dividends. Investors should monitor whether $3.2 billion EBITDA can absorb 2025's $1.25 billion investment without sacrificing payout capacity.

Risk Assessment and Catalyst Thresholds

Marathon Petroleum's 2024 ROIC of 7.54% fell below its WACC of 7.79%, signaling potential value destruction as the company grows. The firm's 2024 net debt-to-EBITDA ratio stood at 2.71, representing moderate leverage but worse than 66% of its peers. Together, these factors amplify vulnerability to market shocks.

Q2 2024 refining margins dropped to $17.37 per barrel from $22.10 a year earlier, reflecting heightened margin volatility that threatens earnings sustainability. This margin compression comes despite Q2 cash reserves of $8.5 billion and $3.2 billion returned to shareholders.

Key downside triggers requiring position reduction include: ROIC persisting below WACC, leverage exceeding 3.0x, or refining margins falling under $15/bbl. With current ROIC below cost of capital and margins approaching the $15 threshold, near-term headwinds could accelerate value erosion.

Upward catalysts that could justify holding include ROIC recovery above 8.0% or net debt/EBITDA falling below 2.5x. These would indicate improving operational efficiency and balance sheet health, reducing execution risks.

The $4.73/bbl margin decline year-over-year demonstrates how quickly commodity exposure can turn negative. While current leverage remains below the 3.0x trigger, its proximity to the threshold requires monitoring alongside margin trends. Any further margin deterioration below $15/bbl would compound existing ROIC and leverage pressures.