When oil refiner Marathon Petroleum (MPC 1.96%) formed master limited partnership (MLP) MPLX (MPLX 0.88%) in 2012, the main objective was to cash in on its midstream assets by steadily dropping them down to its MLP. That strategy would provide Marathon with cash to buy back its stock and fund expansion projects while giving income-focused investors another high-yielding option.
However, MPLX has rapidly evolved from an MLP dependent on drop-down transactions to a company that can self-sustain its growth. That transformation started in 2015 when it acquired fellow MLP MarkWest Energy, which focused on natural gas gathering and processing. The company has recently entered the next phase of its evolution by signing a series of agreements that will add new long-haul pipelines to its portfolio. Those future additions will provide MPLX with more fuel so that it can continue increasing its high-yielding distribution in the coming years.
Expanding in the Permian
In late July, MPLX announced that it took a series of steps to extend its footprint in the fast-growing Permian Basin. First, the company noted that it signed a deal to provide a privately held oil company with gathering and processing services in the region. Under the terms of the agreements, MPLX would build a new natural gas processing plant, Tornado, as well as some natural gas–gathering infrastructure. The company expects to finish these projects by August of next year.
In addition to that, the company acquired a 10% stake in Agua Blanca, which is a recently finished pipeline that can transport up to 1.4 billion cubic feet of natural gas per day (Bcf/d) from the Permian to an industry hub in Waha, Texas. As part of that deal, Agua Blanca will build a pipeline that will connect it to MPLX's Argo Plant, which started up earlier this year.
The next phase of its evolution
MPLX took these steps so that it would be better positioned to "evolve its business model to include participation in a number of long-haul oil and gas pipelines," according to the company. Those new opportunities have started to emerge over the last couple of months. In early August, the company signed a letter of intent to participate in the joint development of the Whistler Pipeline Project with Targa Resources (TRGP 1.87%), NextEra Energy (NEE 0.09%), and private equity–backed WhiteWater Midstream. The 450-mile pipeline would transport natural gas from Waha to NextEra Energy's market hub in Agua Dulce, Texas, while a smaller pipeline would continue another 170 miles further up the Texas coast.
The partners have secured gas supplies for about three-quarters of Whistler's 2.0 Bcf/d capacity, with some coming from gas processing plants operated by Targa Resources while others would flow down from the Agua Blanca Pipeline. The partners still need to lock up the rest of the pipeline's capacity before they can move forward with the project. However, they anticipate that it could begin operations by the fourth quarter of 2020.
Meanwhile, MPLX took another step forward in early September after the company and its partners -- fellow MLPs Energy Transfer Partners (ETP) and Magellan Midstream Partners (MMP 0.30%) as well as refiner Delek US Holdings -- secured enough shippers to move ahead with construction on the Permian Gulf Coast Pipeline. The 600-mile pipeline will move crude oil from the Permian to the Texas coast. From there, it will flow into Energy Transfer Partners' Nederland terminal as well as Magellan Midstream Partners' East Houston terminal. The partners expect that the system will be in operation by the middle of 2020. It's a crucial project for the industry since there currently isn't enough pipeline capacity to move oil out of the Permian.
By acquiring a stake in one long-haul pipeline and investing in two others under development, MPLX will further diversify its logistics-and-supply segment that mainly supports Marathon Petroleum's refining operations. These agreements could also set the company up for even more growth down the road since production in the Permian is on pace to expand at a rapid rate in the coming years, which will likely drive the need for additional long-haul pipelines as well as other infrastructure farther downstream.
One constant should remain
Throughout its evolution, MPLX has continued to grow its distribution to investors each quarter, with it racking up its 22nd straight increase in July. While the initial fuel supporting this growth ran out when the company acquired the rest of Marathon's midstream assets earlier this year, MPLX has evolved so that it can internally drive growth in the future. In doing so, the company has added enough new fuel sources so that it could potentially continue increasing its payout each quarter through at least 2020. That growth makes it a great income stock to consider buying and holding for the next several years.