30 Sep MPLX: Long-Term Potential Of Unlocking The Midstream Value …
Last July, MPLX LP (NYSE: MPLX) closed on its acquisition of Andeavor Logistics LP, becoming one of the largest midstream operators in North America. As a rationale for the combination, management laid out a plan to expand its presence in the Permian midstream value chain by increasing the number of touch points for the MLP. Instead of orphan assets that serve a singular market/customer, an integrated system maximizes revenue capture by controlling the movement of hydrocarbons for maximum value.
Source: MPLX | Investor Center
Midstream Value Chain
Few midstream operators recognize the value in having an integrated midstream value chain. The best among them is Enterprise Products Partners (NYSE: EPD). Instead of reacting to market demand as the shale revolution took off across the country, Enterprise focused its capital on the Permian basin and built out a supply chain to control the processing of raw hydrocarbons until the final product.
This is the same model MPLX intends to emulate by leveraging existing assets in the region. The MLP already possesses gathering and processing systems in the Permian and STACK regions which can supply long-haul pipelines to fulfill downstream opportunities. By taking ownership of the hydrocarbons from the producers at the very first stage, MPLX will be able to provide a stable supply to the pipelines, fractionators, refineries and export terminals downstream.
Of course, a major risk of having an integrated system is the ability to secure adequate supply from producers and subsequently having sufficient demand at the other end. In regards to the first concern, while shale production growth rates have slowed, takeaway demand is still growing and expected to peak towards the end of the next decade. For the second concern, MPLX will be able to depend on its “parent-sponsor” relationship with Marathon Petroleum (NYSE: MPC) to supply MPC refineries with feedstock. In addition to domestic demand, MPLX is expanding its export facilities in the Gulf of Mexico to meet global energy demand.
Source: MPLX | Investor Center
Another key talking point post-acquisition has been for portfolio optimization through asset divestitures. While no concrete plan has been announced, assets that do not align with the strategic priorities in the Permian and Marcellus plays should show up high on the chopping block. Moreover, with MLPs nowadays being frowned upon for issuing equity, freeing up capital this way makes it possible for MPLX to continue its midstream value chain expansion plan described previously.
However, it still remains to be seen how MPLX would decide on the assets to be sold. If MPLX closely aligns with its sponsor, MPC’s needs, it would have a sub-optimal asset footprint. While assets such as its fuel distribution service, marine transportation services and refining logistics are fully supported by MPC on a stable fee-based agreement, much-needed capital can be reallocated if these assets are divested. Assets that rely on a single customer can never really generate the maximum potential return since there isn’t much competition to raise the rates.
Relationship To Sponsor
Having a close economic relationship with a sponsor can have its benefits and its drawbacks. In this case, a plus point would be the stable demand of crude feedstock for MPC’s refineries and downstream retail outlets. MPLX would have preferential treatment to supply MPC, one of the largest refiners in the country. However, as previously alluded to, there is an implicit agreement which forces MPLX to build out infrastructure to support MPC operations even if it may not be in MPLX’s best interest. It definitely does not help when MPC owns two-thirds of MPLX.
As majority owner, MPC was able to appoint its own Chairman and CEO, Gary Heminger to lead MPLX. However, since he would be stretched thin managing both entities, MPLX had hired Michael Hennigan from Sunoco Logistics to run day-to-day operations as President. I have been a great admirer of Mike’s work leading Sunoco prior to its merger with Energy Transfer. During his tenure, Sunoco was able to maintain a distribution coverage of above 1.0x even during the oil market crash in 2016 due to a balanced capital investment growth plan.
I believe MPLX is in the early stages of a growth phase due its continued investment in the Marcellus region and its planned build-out in the Permian. If MPLX continues to invest in alignment with the midstream value chain model, the MLP should be able to maximize revenue generation and reward investors with payout growth. At the moment, MPLX has a pre-acquisition distribution coverage ratio of 1.36x, which should drift a little lower in the next earnings report but well above 1.0x.
In regards to MPLX’s relationship with MPC, this drama has barely begun. Whether the activists have their way or not, I am confident MPLX will still come out on top as continued investment into the business seems to be the priority of both sides. There is definitely more development to come in the upcoming weeks but at the moment, I am open to a BUY rating on MPLX.
Disclosure: I am/we are long EPD. 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.