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MPLX: Resilient Performance, Growing Capital Returns

MPLX LP (MPLX) is one of the largest diversified master limited partnerships in the midstream energy infrastructure industry. The partnership primarily operates logistics assets and provides fuels distribution services.

MPLX’s assets comprise a network of crude oil and refined product pipelines, an in-land marine business and marine terminals, storage caverns, refinery tanks, as well as natural gas and NGL processing and fractionation facilities.

Units of MPLX have undergone a wild ride over the past few years. In the midst of the COVID-19 pandemic, MPLX’s units lost more than 2/3 of their value amid investors selling off energy securities in bulk. Since then, the energy sector has recovered significantly, while the ongoing war in Ukraine has also substantially favored companies in the space, including those specializing in the logistics field, such as MPLX. Consequently, MPLX units have now climbed even higher from their pre-pandemic levels.

Despite the stock’s turbulent passage, MPLX’s performance has remained robust during this period, while the partnership has continuously rewarded unitholders with lofty levels of capital returns. While MPLX’s valuation has expanded lately amid investors flocking toward securities in the energy sector, I believe that MPLX remains reasonably priced.

For this reason, I am bullish on MPLX.

Recent Performance

MPLX’s latest results continued to demonstrate the ongoing tailwinds in the energy sector, including the growing demand for oil and gas distribution. Specifically, performance was driven primarily by an 18% increase in volumes in its logistics & storage segment and elevated volumes in the gathering & processing division. Accordingly, the company recorded revenues of $2.73 billion, a 21.3% increase year-over-year.

Besides benefiting from increased revenues, management also topped its initial cost reduction goals, easing the partnership’s annual operating expenses by approximately $400 million relative to its 2019 levels. Consequently, MPLX’s profitability metrics have been notably enhanced.

Adjusted EBITDA came in at $1.4 billion, 6.6% higher year-over-year, while distributable cash flows per unit rose 7% to approximately $1.15. Amid robust profitability, the company continued making progress in its deleveraging efforts. Long-term debt declined to $18.0 billion compared to $19.4 billion in the prior-year period. Finally, the partnership ended the quarter with a healthy consolidated debt to an adjusted EBITDA ratio of 3.7x, which continued to improve from 3.9X and 4.1X in 2020 and 2019, respectively.

Distributions & Valuation

Since MPLX’s spin-off from Marathon Petroleum (MPC) in 2012, the partnership has raised its disruptions annually with no exceptions. In fact, distributions have often grown intra-year more than once between various quarters. Its 9-year distribution per unit CAGR currently stands at 13.1%. The latest distribution hike pushed the payout to a quarterly rate of $0.705, suggesting an increase of 2.5% compared to the previous quarter.

A notable difference distinguishing MPLX from the rest of its industry peers is that the partnership enjoys high-quality fee-based cash flows which are backed by minimum volume commitments. This leads to strong revenue generation that doesn’t fluctuate widely during downturns in the energy sector.

Consequently, MPLX was able to sustain healthy distribution coverage even during the pandemic while still growing its distributions per unit. In Q4 of fiscal 2020, distribution coverage was still hovering at a healthy 1.58X despite the challenges at the time. Distribution coverage has now improved further to 1.64X, suggesting that the company should have enough room to continue growing DPS, at least conservatively.

With MPLX once again proving its resilient qualities and the energy sector becoming increasingly attractive lately, investors have started to flock back to the stock, expanding its valuation multiple. Specifically, MPLX units are currently trading at a forward EV/EBITDA of 9.8X. The multiple is notably richer than the forward EV/EBITDA levels between 6X and 8X over the past couple of years. However, I wouldn’t call units overvalued as this multiple is still quite close to the stock’s historical average – let alone being reasonable from a general point of view.

Unit Buybacks

With MPLX’s units trading at a significant discount in the midst of the pandemic, management started to aggressively buy back units. Last year they repurchased a record $630 million worth of units. Besides buybacks themselves having an accretive effect on MPLX’s per-unit metrics, the timing of management’s buybacks was quite remarkable.

With the bulk of unit repurchases occurring when the stock’s yield was hovering in the double-digits, MPLX will now be saving a significant amount of cash that would be used in future distributions for these units.

Further, unit repurchases provide another layer of safety when it comes to distributions, as the partnership would most likely suspend buybacks before messing with payouts.

Wall Street’s Take

Turning to Wall Street, MPLX Stock has a Strong Buy consensus rating based on nine Buys and two Holds assigned in the past three months.

At $36.55, the average MPLX price target implies 9.37% upside potential.

Conclusion

MPLX is one of the most well-managed partnerships amongst its master limited partnership peers. This was demonstrated during the pandemic when MPLX managed to produce resilient cash flows, grow its per-unit distributions, and even take advantage of the opportunity to repurchase its units cheaply, further driving unitholder value.

While the ongoing tailwinds in the energy sector have resulted in the stock’s valuation multiple somewhat expanding, I still believe that MPLX is fairly valued at its current price levels. With its 8.44% yield, active buybacks, and ongoing growth in gathering and processing volumes, MPLX’s investment remains quite attractive, in my view.

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