It’s been several weeks since the news originally broke, but
MPLX – MPLX
MPLX 3Q 2020 Results
MPLX had respectably strong 3Q 2020 performance, although that’s impressive given the overall strength of the company’s business.
MPLX 3Q 2020 Results – MPLX Investor Presentation
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MPLX achieved adjusted EBITDA of just over $1.3 billion with DCF of just under $1.1 billion and a 1.44x DCF coverage ratio. The company achieved a dividend yield of more than 12%, and the company’s financial strength is highlighted by massive demand for its debt. For example, the company priced $3 billion in debt just a few months ago at great rates.
The company issued $1.5 billion in 6-year (2026) debt at 1.75% and the same amount of 10-year (2030) debt at 2.65%. Demand for the company’s debt in the current low interest environment is so high that the company could comfortably issue debt and use that to buy back stock, highlighting its dividend strength.
MPLX has remained committed to its dividend, one of the few midstream companies to do so, and it has a 1.44x distribution coverage ratio. That means the company has a near 18% DCF yield. This highlights the company’s massive financial strength that it can use to continue driving long-term shareholder rewards.
Lastly, we hit MPLX’s leverage ratio. We’ll discuss this in more detail, but the company has a mere 4.0x leverage ratio. That means that, unlike many other midstream companies, the company doesn’t need to use its cash to pay down debt.
MPLX Cash Flow
MPLX’s overall financial position means the company has an 80% EBITDA to DCF conversion ratio. That’s impressive with the company’s historically stable cash flow.
MPLX Cash Flow Volatility – MPLX Investor Presentation
MPLX has stable, fee based cash flow with minimum volume commitments to protect cash flow. The company is on track to reduce 2020 forecast operating expenditures by $200 million, which is impressive because it more than makes up for any COVID-19 related EBITDA drop. The company expects to have positive FCF by 2021, highlighting its financial strength.
MPLX does have some more volatility from its G&P segment (~15% drop from 4Q 2019 to 2Q 2020) versus L&S which dropped only ~1.5%. However, the fact that the company’s 3Q 2020 adjusted EBITDA was back to where it was in 4Q 2019 highlights the strength of the company’s cash flow and its impressive ability to recover from COVID-19.
One other sign of MPLX’s strength is the company’s announcement of a unit repurchase program of $1 billion in common units. Given the company has nearly $1.3 billion in post dividend annualized FCF, it can comfortably afford this as it ramps down its growth capital spending for the current environment. Those $1 billion in purchases will save it >$100 million in annual dividends.
MPLX Continued Capital Disciplines
Midstream companies have all realized the same thing in 2020. That massive capital spending programs on growth aren’t always worth it, even in a cheap debt environment. Sometimes it’s important to show you’re undervalued by buying back shares.
MPLX Capital Spending – MPLX Investor Presentation
MPLX is on track to achieve its spending targets with $2.4 billion in 2018 growth capital and $2.6 billion in 2019 growth. The company’s 2020 target is ~$0.9 billion in growth capital, which is near the company’s DCF breakeven. More so, it highlights that the company is still investing ~4-5% of its market capitalization in growth.
The company’s ability to significantly cut its growth capital spending means it has significant room to continue cutting its capital spending. The company’s continued capital discipline highlights its ability to drive long-term shareholder rewards.
MPLX Overall Financial Strength
We discussed MPLX’s manageable leverage above; however, it’s worth still looking at the details of the company’s financial strength.
MPLX Financial Strength – MPLX Investor Presentation
MPLX has nearly $37 billion in total assets and just over $20 billion in total debt, highlighting the company’s strong financial position. It’s one of the few companies with lower debt than market capitalization, and it has minimum preferred equity (<$1 billion worth). The company’s overall financial strength here is quite clear.
However, the company’s financial capacity is significant. The company has nearly $5 billion in remaining capacity under various credit agreements or just under 25% of its market capitalization. The company has already announced share buybacks and we’d like to see the company continue those buybacks to drive substantial rewards.
MPLX’s overall financial strength will allow the company to drive long-term rewards for shareholders.
MPLX has two major sources of risk. The first is the same risk that midstream companies always have, oil prices. The company fundamentally profits from moving around oil and natural gas, and longer term, less capital spending can make it much harder to renew contracts. This is especially clear when taking a look at the company’s G&P spending.
The second risk for the company is much less of a risk for new shareholders, but a risk for those who’ve been invested for much longer. Historically, MLPs pay part of their dividends as a return of capital, meaning the cost basis are lowered. That would mean capital gains taxes on those returns. Technically, that’s not worse than corporation dividend taxes, but it’s still a risk
However, given the reward parameters of the company, we recommend investing for the long run.
MPLX has an impressive portfolio of assets. The company has an incredibly strong financial portfolio with a significant amount of remaining capacity. The company has managed to rapidly cut its growth capital; however, unlike many other midstream companies, the company has a strong enough financial position to avoid needing to pay back debt.
As a result, the company has remained committed to its financial position. It has a continued double-digit dividend yield, and it recently announced a $1 billion share buyback program. Not only does that save the company dividends, it’s a great move for shareholders. MPLX is a valuable long-term investment with its financial strength.
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Disclosure: I am/we are long MPLX. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.