Description

MPLX is a classic “Value Investors Club” stock in our opinion. Are you interested in a relatively safe 9% tax deferred distribution plus some growth? We believe that MPLX LP can compound for many years.

If MPLX were to trade 7% dividend yield in say late 2026 or ‘27, that would imply a 50% capital appreciation plus we will collect 2-3 years of close to a 10% dividend distribution. We think that MPLX stock could generate close to 75% total return (appreciate plus unit distributions) over the next couple of years!

MPLX is a top long-term investment position for our group and we have added in recent weeks. As mentioned, we expect to own shares for many years. MPLX was last written up by Falcon44 in May of 2018. I believe that it’s a thoughtful report to reference and, obviously, there have been meaningful changes to the Company over the past 6 years. I’ll try to keep this brief but want to provide some quick industry background for perspective.

On ’25 estimates, MPLX is trading 8.6x EBITDA with a 12% free cash flow yield. We expect the company to continue to generate over 9% dividend in 2025 with mid-single digit growth thereafter. We believe the company will continue to grow organically MSD EBITDA and continue to find accretive deals along the way.

Our estimate for EBITDA for 2024 is $6.8 billion and ’25 is $7 billion, which is higher than the Street estimates. At the moment, Street estimates for 2024 for MPLX is $6.64 billion and $6.82 billion in EBITDA for 2025.

MLP Industry (quick primer)

Briefly, Master limited partnerships (MLPs) have an interesting history in the stock market. Here's an overview of the rise and evolution of MLPs. The first was created in 1981 by Apache Corporation. Simply, it combined the interests of 33 oil and gas programs into one publicly traded partnership, allowing investors to easily buy and sell these interests like stocks rather than waiting for the sale of the entire business. Following Apache's success, other oil and gas companies adopted the MLP structure. Real estate companies soon followed, and by the mid-1980s, MLPs had become popular across various industries, including restaurants, hotels, cable TV, and even the Boston Celtics basketball team! The tax advantages and growth captured the attention of the government, which was concerned about potential tax revenue losses. In ‘87, Congress passed the Tax Reform Act, limiting which businesses could be structured as MLPs. The act stipulated that an MLP must earn at least 90% of its gross income from qualifying sources, strictly defined as the transportation, processing, storage, and production of natural resources and minerals.

In recent years, the MLP industry has undergone significant consolidation, with many MLPs being acquired or merging with larger entities. As of mid-2023, there were around 60 publicly traded MLPs, with most of the largest ones operating in the oil and gas midstream (pipeline), of which MPLX is one.

For tax sensitive investors, MLPs are unique. They do not pay taxes at the corporate level. Instead, income, gains, losses, and deductions are passed through to the unitholders, who report these on their individual tax returns. This avoids the double taxation typically seen with corporations. Importantly, distributions received by unitholders are tax-deferred, treated as a return of capital rather than taxable income. This deferral continues until the shareholder sells their MLP units, at which point the difference between the sales price and the adjusted basis is taxed. Note: since investors receive a Schedule K-1, MLPs

are generally not ideal for IRAs or other tax-deferred accounts due to the potential for unrelated business income tax (UBIT).

MPLX: a favorite MLP

MPLX LP is a diversified MLP formed in 2012 by Marathon Petroleum Corporation (MPC) to own, operate, develop, and acquire midstream energy infrastructure assets. The company is engaged in various midstream activities across the value chain.

With a focus on midstream energy industry, focused on transportation, storage, and processing of oil and natural gas products. For those unfamiliar, the midstream sector acts as a bridge between upstream exploration and production activities and downstream refining and distribution operations. Briefly, the midstream industry encompasses various activities, including:

- Gathering and transportation of crude oil and natural gas through pipelines

- Processing of natural gas to remove impurities and separate natural gas liquids (NGLs)

- Fractionation of NGLs into individual components like ethane, propane, and butane

- Storage of crude oil, refined products, and NGLs in terminals and caverns

- Distribution and marketing of refined products and NGLs

Admittedly, the midstream industry is capital-intensive, requiring significant investments in infrastructure such as pipelines, processing plants, storage facilities, and terminals. It plays a vital role in ensuring the efficient movement of energy products from production areas to refineries and end-users.

MPLX LP's operations are divided into two main segments:

1. Logistics and Storage (L&S): In this segment, the division is involved in the gathering, transportation, storage, and distribution of crude oil, refined products, and other hydrocarbon-based products. It includes:

   - Crude oil and refined product pipelines

   - Associated storage assets, including tank farms, rail and truck racks, and an export terminal

   - Refining logistics and fuels distribution businesses

   - Terminals, rail facilities, and storage caverns

2. Gathering and Processing (G&P): This segment focuses on the gathering, processing, and transportation of natural gas, as well as the gathering, transportation, fractionation, storage, and marketing of natural gas liquids (NGLs). It encompasses:

   - Natural gas gathering and processing assets

   - NGL fractionation, storage, and marketing facilities

The G&P segment focuses on natural gas gathering, processing, fractionation, and NGL marketing. MPLX's key assets in this area are:

Northeast Operations:

- Kenova Complex (West Virginia): 160 MMcf/d processing capacity 

- Boldman Complex (Kentucky): 70 MMcf/d processing capacity

- Cobb Complex (West Virginia): 65 MMcf/d processing capacity

- Langley Complex (Kentucky): 325 MMcf/d processing capacity

- Siloam Complex (Kentucky): 24 Mbpd fractionation capacity

Southwest Operations:

- Carthage Complex (Texas): Processing and gathering

- Western Oklahoma Complex (Oklahoma): Processing and gathering 

- Hidalgo Complex (Texas): Processing

- Eagle Ford Complex (Texas): Gathering

- Javelina Complex (Texas): Treating, processing, and 29 Mbpd C2+ fractionation capacity

- 40% non-operating interest in Central Oklahoma processing joint venture with Targa Resources (Oklahoma)

The Southwest region has a total gathering capacity of 2.1 Bcf/d and processing capacity of 1.6 Bcf/d across various systems.

MPLX's assets are primarily located in major oil and gas production areas like the Permian Basin, Marcellus/Utica Shale, and other key supply basins, positioning the company to capitalize on energy transportation and processing needs in these regions.

We like MPC and MPLX LP executive Mike Hennigan. With over 35 years of experience in the energy industry, we think he’s a strong leader. Recently, the Company promoted Maryann Mannen to become the new MPC CEO. We like what we hear from her and expect “more of the same” as she takes the helm while Mike will be Chairman.

 Maryann Mannen has highlighted a few key priorities as the incoming CEO of MPLX LP:

1. Advancing MPLX's growth strategy. Mannen stated, "MPLX is well positioned to advance our growth strategy and our disciplined approach to capital allocation." This gives us comfort that her focus will be on executing MPLX's expansion plans, particularly in growth areas like the Marcellus, Utica, and Permian basins where the company has been increasing its midstream footprint.

2. Disciplined capital allocation

Mannen specifically mentioned taking a "disciplined approach to capital allocation", suggesting she will prioritize prudent capital investment decisions to drive unitholder value and returns.

3. Continuing MPLX's momentum

Mannen stated her eagerness to "build upon the momentum we've established" at MPLX, indicating she plans to capitalize on the partnership's recent track record of growth and distribution increases to unitholders.

4. Environmental stewardship

In her role at Marathon Petroleum, Mannen noted her "priorities align with...environmental stewardship". This implies that she will likely emphasize MPLX's sustainability efforts and emissions reduction initiatives as CEO, to satiate the industry’s green objectives.

Obviously, MPLX LP's financial performance is closely tied to its parent company, Marathon Petroleum Corporation (MPC), which contributes a significant portion of its revenue and

cash flows.

During the most recent quarterly report, the company showed EBITDA growth of 8% y/o/y. Further, distributable cashflow as increased 8% y/o/y. Capital returned was $951 million, including $876 million in distributions and $75 million in unit repurchases.

The Company continued to engage in strategic transactions such as the Utica Acquisition. With Utica, MPLX acquired additional ownership interest in an existing joint venture and a dry gas gathering system. Relative to their Whistler and Rio Bravo Pipelines, MPLX entered into a definitive agreement to combine these pipelines into a new joint venture, expanding its natural gas value chain and connecting Permian supply to Gulf Coast demand.

Operationally, the Marcellus and Permian Basins continued to show volume growth, with new gas processing plants coming online to meet increasing demand.

The company reiterated a focus on maintaining strict capital discipline, growing distributions, and evaluating buybacks opportunistically. They continued to increase their quarterly distribution by 10% in each of the last two years and aims to continue this trend.

Specifically on buybacks, MPLX's approach to buybacks is flexible, prioritizing stable cash flows for distribution growth while considering buybacks when appropriate. In terms of bolt-on acquisitions, MPLX continues to be open to both organic growth and strategic M&A activities, with recent transactions in the Utica region showing promising growth potential.

Oil Market Outlook commentary (from the most recent call)

MPLX expected to continue setting records, with forecasts estimating 1.2 million to 2 million barrels per day of incremental demand over 2023. In terms of Production Outlook, they see long-term production in key basins remains strong, with significant opportunities in the Marcellus and Utica regions.

Overall, MPLX LP demonstrated strong financial performance in Q1 2024, with significant growth in EBITDA and distributable cash flow, strategic acquisitions, and a continued focus on returning capital to unitholders. The company remains committed to disciplined capital allocation and growth in key basins.

Important slides from their presentation

Source: MPLX investor relations website

Most recent L&S snapshot:

Most recent G&P snapshot:

The balance sheet:

Note, recently, in Q1 ’24, the Company repurchased $75mm worth of shares. We would note that this is the first buying since the 4^th quarter of 2022. We believe that the Company is quite thought about its balance of investment in high return growth projects and returning excess capital to investors.

MPLX has several key factors that differentiate its business from peers in the midstream energy sector:

1. Strategic relationship with Marathon Petroleum Corporation (MPC).

- MPLX was formed by MPC to own and operate midstream assets, giving it a strategic advantage through its relationship with MPC as a major customer and potential asset dropdowns from MPC.

- A significant portion of MPLX's revenues come from long-term fee-based contracts with MPC, providing stable cash flows.

2. Diversified asset base and integrated operations

- MPLX has a large network of crude oil, refined products and natural gas pipelines, terminals, storage facilities, and natural gas gathering and processing assets across multiple basins.

- This integrated midstream asset base across the value chain provides a competitive advantage and diversification of cash flows.

3. Focus on natural gas gathering and processing

- MPLX is one of the largest natural gas processors in the U.S., facilitating reductions in carbon emissions from coal-to-gas switching.

- The natural gas business, especially in the Marcellus/Utica shale plays, is a key growth area for MPLX compared to some peers.

4. Financial strength and distribution growth

- MPLX has a strong balance sheet with an investment-grade credit rating from S&P.

- The partnership has demonstrated an ability to consistently grow its distributions to unitholders, positioning itself as an attractive investment for income investors.

Growth Prospects

MPLX LP has positioned itself for continued growth through strategic acquisitions and organic expansion projects. In recent years, the company has invested heavily in expanding its natural gas gathering and processing capabilities, as well as its NGL fractionation and export facilities.

This growth strategy aligns with the broader industry trends, as the demand for natural gas and NGLs continues to rise, driven by factors such as increased petrochemical production and the transition towards cleaner energy sources.

We believe that MPLX has several advantages. MPLX's larger scale, diversified asset base, and strong financial performance [1] could give it an advantage in funding and executing growth projects. Many smaller competitors are subscale and this limits their growth capital. Larger players like Energy Transfer LP (which we also like) have comparable growth opportunities, but MPLX's focus on strategic expansions in high-growth areas like natural gas and NGLs help differentiate its growth trajectory.

Conclusion

In summary, MPLX emphasizes its strategic relationship with MPC, diverse midstream asset portfolio, natural gas focus, financial strength supporting distribution growth, and sustainability initiatives as key factors setting it apart from peer companies.

We believe that MPLX has assets that could not and would not be recreated today. We believe that these are assets that Buffett would be excited to own at the right price and we think that you can buy MPLX for a “fair price” in the open market.

Catalyst

Upside to estimates

Accretive acquisitions

Buybacks when appropriate

Continued growth in base business and growth in the dividend

Additional unit buybacks