MPLX (NYSE:MPLX) is getting into a pretty good habit of growing its earnings at a fast clip. This past quarter, the company grew its operating earnings by 23% compared to the prior year, and that's before including acquisitions. This rapid growth pace is giving management loads of cash to reinvest in the business and maintain its streak of growing its payout every quarter.
Here's a look at the company's most recent earnings results, why management is taking a different approach to growth than most other master limited partnerships, and what investors should be monitoring in the coming quarters.
By the numbers
|Metric||Q2 2018||Q1 2018||Q2 2017|
|Revenue||$1.58 billion||$1.42 billion||$916 million|
|Adjusted EBITDA||$867 million||$762 million||$474 million|
|Distributable cash flow||$695 million||$619 million||$387 million|
MPLX has two distinct businesses to them that drive the business in different ways. Its logistics and storage business is mostly the assets that parent company Marathon Petroleum (NYSE:MPC) dropped down to it through various transactions over the past couple of years. This segment will have very consistent results because most of its operations are contracted with Marathon on a fixed fee basis. This part of the business doesn't have extensive growth prospects as Marathon has dropped down all of its eligible midstream assets, but it does serve as a consistent cash engine.
The other side of the business is its natural gas gathering and processing unit, which is largely compiled of assets it acquired as part of the MarkWest Energy Partners deal back in 2015. It is a slightly more volatile business, but the company has a massive backlog of projects to meet the growing need for natural gas infrastructure in hot shale reservoirs such as the Marcellus in Pennsylvania, the Permian Basin in West Texas, and the SCOOP formation in Oklahoma. In 2018 alone, it will add 1.4 billion cubic feet per day of gas processing facilities as well as 100,000 barrels per day of natural gas liquids plants.
The combination of dropdown acquisitions in logistics and organic growth in gathering and processing led to the 79.6% increase in distributable cash flow this past quarter, which also gave the company a distribution coverage ratio (distributable cash flow divided by distributions paid) of 1.37 times. This ratio is much higher than most other midstream master limited partnerships and it is a sign that it can sustain this payout rate for quite some time. Management has noted in the past that it wants to retain high levels of cash so it can invest in some of these growth opportunities without having to frequently go to the debt or equity markets to pay for them.
What management had to say
In MPLX's press release, CEO Gary Heminger noted that there is still a massive opportunity to invest in its gathering and processing business as shale continues to increase across the country. These growth opportunities are why management is still keeping distribution growth muted and electing to plow cash back into the business.
Our team continued to grow the business both by increasing utilization of existing assets as well as executing a robust organic growth plan. The opportunity set remains extensive in the regions where we operate and we are encouraged by industry volume forecasts and the growth prospects in both the Northeast and the Permian basins. As we assess our opportunities, we maintain our commitment to a self-funding base business model with an emphasis toward higher coverage and lower leverage, as we believe this approach will help us to create long-term sustainable shareholder value.
An attractive business, but with a couple of questions on the horizon
After watching numerous master limited partnerships blow up in recent years from trying to grow the business and its payout at high rates, it's refreshing to see a management team acknowledge that you can't do both simultaneously. Instead, MPLX is focusing on developing an extensive portfolio of growth projects and not taking on too much debt to accomplish it. That may mean slower distribution growth in the short run, but it should make it more likely to maintain steady distribution growth over a long period of time.
The two questions for MPLX shareholders is the consistency of its gathering and processing unit and whether Marathon Petroleum will merge it with Andeavor Logistics when it completes its acquisition of Andeavor. Though management has said that it intends to keep MPLX and Andeavor Logistics separate for a while, it's hard to imagine that situation lasting forever since they will end up providing similar or duplicative services to the same parent company. The structure of a future deal will have a big say in the investment thesis of the business.
As far as the gathering and processing unit goes, it's hard to say how that business responds if there is a sharp drop in natural gas prices and production volumes drop. If it can't run its facilities at high utilization rates, cash from operations can dry up quickly. Fortunately, for now, management's high coverage ratio means there is a lot of wiggle room if things go south for a while.
Overall, though, MPLX is looking like a great investment. I personally own shares, and with the stock remaining rather flat despite incredible growth rates, I may consider adding to my position.