MPLX LP (MPLX) is one of the most prominent diversified MLPs in the midstream energy infrastructure space. The partnership’s main operations comprise operating logistics assets and providing fuel distribution services.
Specifically, MPLX’s assets comprise a web of crude oil and refined product pipelines, an in-land marine business, storage caverns, refinery tanks, marine terminals, and natural gas and NGL processing facilities.
Following the stock’s plummet in 2020 amid COVID-19’s effects on the energy sector, MPLX units have returned to their pre-pandemic levels as sentiment has been completely reversed. The ongoing invasion of Ukraine has strengthened the demand for crude oil and refined products, benefiting players in the industry, including those focusing on the logistics area, such as MPLX.
Additionally, with inflationary pressures boosting commodity prices, MPLX distributes more valuable assets now, providing it with increased operating leverage (i.e., the ability to negotiate higher rates).
Despite the recent tailwinds in the space, however, what I really appreciate about MPLX is that its performance remained robust even during the midst of the pandemic. While the stock price didn’t reflect this at the time, the partnership continued to generate solid cash flows and aggressively return capital to unitholders.
The ongoing favorable trading environment provides an additional margin of safety to operations, which should reassure investors of the partnership’s future performance, nonetheless.
Accordingly, I am bullish on MPLX.
Latest Results
MPLX’s Q1-2022 results continued to exhibit the ongoing euphoria in the energy sector, with demand for oil and gas distribution growing significantly. In particular, MPLX’s performance was boosted largely by elevated pipeline and terminal volumes, which grew 4% and 13%, respectively. Thus, the partnership posted revenues of $2.61 billion, an 11.6% increase year-over-year.
Adjusted EBITDA grew by a lesser 2.9% to $1.39 billion due to operating expenses increasing as well. Still, it’s a quite solid and welcome gain to the bottom line. Adding back the company’s interest expenses, distributable cash flows after paying the preferred distributions came in at $1.18 billion, a 6.5% increase year-over-year.
The more significant increase compared to adjusted EBITDA was due to interest expenses declining compared to last year, as the company has been deleveraging over the past several quarters. Specifically, long-term debt declined to $18.75 billion from $19.37 billion in the prior-year period.
As a result, the partnership also ended the quarter with a healthier consolidated debt to an adjusted EBITDA ratio of 3.7x. This compares to a ratio of 3.9x last year.
Capital Returns are Getting Heavier
MPLX has a long track record of growing capital returns. Specifically, since MPLX’s separation from Marathon Petroleum (MPC) in 2012, the partnership has hiked its disruptions every year invariably.
Impressively, distributions have regularly grown more than once within a four-quarter period. Further, over the past nine years, distributions per unit have risen at a CAGR of 13.1%. While the most recent distribution hike was by a more humble 2.5% to a quarterly rate of $0.705, it is quite understandable considering that the shares are already attached to a high yield. Units are currently yielding a substantial 10.1%, in particular.
In the present scenario, it makes more sense for the company to execute unit buybacks. With shares trading at a forward EV/EBITDA of 8.9x, the partnership is not only retiring shares on the cheap but doing so at the current dividend yield means that it will be saving substantial amounts of money on future distributions. Hence, focusing on larger buybacks is more meaningful than boosting the actual distributions by a more confident rate these days.
The company repurchased $100 million worth of stock during the quarter, which, combined with the overall buybacks that have taken place since 2019, have resulted in MPLX’s unit count declining by 5.6% during the past three years.
Apart from buybacks having an accretive impact on MPLX’s per-unit metrics, they also equip unitholders with another layer of safety when it comes to distributions, as management would most likely pause buybacks before considering touching with payouts during an unfavorable trading period.
What is worth noting regarding MPLX’s ability to continue producing resilient distributable cash flows and thus capital returns is its high-quality fee-based revenues which are supported by minimum volume commitments.
This results in resilient cash flows that don’t turn volatile when industry trends go south. We saw that happening between 2020 and 2021 when distributions were even increased, as mentioned earlier.
Specifically, in Q4 of Fiscal 2020, which was one of the worst periods for the industry, distribution coverage was still sailing at a comfortable 1.58x. Distribution coverage has now sweetened further to 1.65x, implying that MPLX should have sufficient room to continue hiking its distributions, even if buybacks are likely to be prioritized here.
Wall Street’s Take
Turning to Wall Street, MPLX Stock has a Strong Buy consensus rating based on seven Buys and two Holds assigned in the past three months. At $37.89, the average MPLX price target implies 35.4% upside potential.
Conclusion
MPLX is one of the best-managed partnerships among its MLP counterparts. This was exhibited during the COVID-19 pandemic, when MPLX delivered resilient cash flows, grew its per-unit distributions, and even took advantage of the chance to repurchase its units cheaply, further propelling unitholder value.
With its financials and balance sheet continuing to improve, the stock featuring a near double-digit distribution yield, and units trading at a fair valuation, MPLX’s investment case remains rather appealing, in my view.
