For quite some time, midstream infrastructure operator MPLX (NYSE:MPLX) has been a rather attractive looking energy stock thanks to its high distribution yield -- currently at 6.8% -- and a strong growth pipeline backed up by a well-financed general partner. This past quarter, the master limited partnership made some game-changing moves that will have a profound impact on its results in 2018 and beyond.
Let's dig into the company's most recent results, then dissect this major deal and how it could change investors' perspective on this stock.
By the numbers
|Metric||Q4 2017||Q3 2017||Q4 2016|
|Revenue||$1.08 billion||$980 million||$848 million|
|Adjusted EBITDA||$569 million||$538 million||$391 million|
|Distributable cash flow||$445 million||$442 million||$318 million|
There weren't a lot of surprises in this earnings release. The company continued to grow at a steady clip thanks to prior dropdowns from parent company Marathon Petroleum (NYSE:MPC), as well as organic growth from its own projects. Also, it's worth noting that MPLX didn't have to deal with all the wonky tax charges or credits that many other companies have this past quarter related to U.S. tax law changes. Because MLPs pass their tax obligations along their shareholders, it didn't have any deferred tax liabilities or assets that needed to be revalued.
One thing that is always rather impressive about MPLX's earnings reports is the company's ability to grow its payout so quickly without compromising its financials. It ended the quarter with a healthy distribution coverage ratio of 1.28 times and a net debt to EBITDA ratio of 3.3 times, even though it has grown its payout by 122% over the past five years.
The big move
While the company's financial report for the quarter looked good, it didn't seem nearly as important as the monumental changes made to the business. As part of a previously scheduled plan, Marathon Petroleum agreed to a deal under which it would dropdown several of its remaining midstream assets, and exchange its general partner stake in MPLX for limited partner units.
No single asset in that dropdown stood out, but it was a large set that included storage tanks, rail and truck loading facilities, barge docks, and gasoline blending and distribution services. All told, this cache of assets will produce about $1 billion in EBITDA annually, for which MPLX paid Marathon $8.1 billion in cash and newly issued units. This also represented the last dropdown of assets Marathon deemed MLP-worthy.
Regarding the change in structure, Marathon's general partner interest in MPLX carried with it incentive distribution rights (IDRs). Those entitled it to a growing percentage of overall distributable cash flow each quarter. While this gave MPLX management an incentive to grow the business quickly, such payments can actually constrict growth as an MLP matures because they increase the cost of capital. In exchange for those incentive distribution rights, MPLX issued common units to Marathon worth $10.1 billion. These two deals increased Marathon's stake in MPLX to 64% of all common units outstanding.
What management had to say
Here's MPLX and Marathon Petroleum CEO Gary Heminger's statement on the recent transactions:
After the closing of today's dropdown and the elimination of IDRs, MPLX is among the largest diversified master limited partnerships in the energy sector with a very competitive cost of capital. With a robust portfolio of organic projects in the Marcellus, Utica, Permian and STACK, which are among the most prolific and economic shale plays in the country, and a diversified suite of logistics assets, we believe MPLX is extraordinarily well-positioned to deliver attractive long-term returns.
What a Fool believes
MPLX has been a great growth stock in the oil and gas midstream sector for a while -- on par with the best names in the business -- and management has done a great job thus far in balancing growth with financial discipline. One thing that was always a slight concern was the ownership structure; Marathon's IDRs meant that the general partner's interests weren't 100% aligned with those of regular investors. Since Marathon had so many assets to dropdown to MPLX, though, that general partner stake wasn't a big deal.
Now that this last dropdown is complete, MPLX had outgrown that general partner/limited partner structure, and needs to source its growth internally. So management made the right decision to change the ownership structures and lower the company's cost of capital.
While it is still a young company, MPLX has all the makings of a good midstream investment. It generates enough excess cash to partially fund its growth plans, has a modest balance sheet, and a good backlog of growth projects. For investors looking to add more exposure to the midstream industry to their portfolios, this is a company to consider.