For investors looking for income investments, few have been as rewarding as MPLX LP (NYSE:MPLX) over the past few years. The stock has had an incredibly high yield and has almost doubled its payout over the past five years. It looks like this incredible growth rate is about to be put on hold, though, as management has decided to prioritize spending on growth over the next couple of years.
Let's look at what happened this past quarter to see why management decided to stress growth spending for the next couple of years and what that will mean for investors over the long haul.
By the numbers
|Metric||Q4 2018||Q3 2018||Q4 2017|
|Revenue||$1.71 billion||$1.71 billion||$1.08 billion|
|Adjusted EBITDA||$911 million||$937 million||$569 million|
|Distributable cash flow||$701 million||$766 million||$445 million|
This fourth-quarter result stands out because growth was muted versus the prior quarter. The company for some time has been delivering large gains compared with the previous sequential quarter. This quarter was muted, though, because it brought on some new gathering and processing assets that were still ramping up to capacity. These assets -- gathering pipelines and natural gas processing facilities -- need to run at high utilization rates to be profitable. Total volumes were up, but the slight decline in utilization rates ate into margins.
The most important thing, though, was that the company's distributable cash flow was more than enough to support its payout and a large chunk of its growth spending. MPLX ended the quarter and the fiscal year with a distribution coverage ratio of 1.32 and 1.36, respectively. Management noted that having that much extra cash at the end of each quarter meant that it didn't have to issue any new shares to fund its extensive growth plans for 2018.
In December, management announced its capital spending plans for 2019 and 2020. MPLX intends to spend $2.2 billion this year and $2 billion in 2020 to complete its current backlog of projects. That includes all three of its major Permian to Gulf Coast pipelines and the construction of a pipeline to export crude oil from its Louisiana Offshore Oil Port (LOOP).
Because it has such an extensive spending plan over the next two years and it's highly likely that it will acquire Andeavor Logistics as part of Marathon Petroleum's acquisition of Andeavor, MPLX management has elected to keep its payout growth modest for some time. It now plans to increase its distribution by a penny each quarter. That's significantly slower than what we have seen but should help to free up cash to pay for these new assets without having to issue new shares.
What management had to say
In the third quarter, MPLX announced it was building the Swordfish crude oil pipeline that would allow the LOOP terminal to export crude more easily. During the company's analyst day presentation back in December, though, it added a new component to this project by announcing it was going to repurpose one of its other pipelines to connect the Swordfish pipe to major crude oil terminals in the Midwest. MPLX president Michael Henigan explained the significance of this project:
A reversed Capline would transport crude oil from Patoka, Illinois, to St. James, Louisiana. The line is expected to have a connection to the Diamond Pipeline, which originates in Cushing and has a connection point to Capline in Collierville, Tennessee. Once the barrels make it to St. James, they can flow onto the Swordfish Pipeline. Swordfish has been designed to transport up to 600,000 barrels per day of crude oil from St. James to Clovelly storage hub, providing shippers with access to storage services, connectivity to other carriers at Clovelly, and vessel loading through the existing Louisiana Offshore Oil Port, which is commonly referred to as LOOP. Both Capline and Swordfish would largely utilize existing pipe in the ground, making these systems attractive options for the region. Importantly, these systems would also be a direct feeder into LOOP, the only existing offshore port in the Gulf Coast that can fill a 2 million barrel VLCC [very large crude carrier] without reverse lightering. In December, LOOP loaded three VLCCs with 6 million barrels in a seven-day period, which highlights this port's ability to meet growing export needs. The planned Capline reversal, Swordfish Pipeline development, and LOOP export connectivity highlights the strategic value MPLX can create.
You can read a full transcript of MPLX's conference call here.
Check out all our earnings call transcripts.
You have to plant before you can harvest
With oil and gas production booming in North America, there are immense opportunities for MPLX and others to invest in moving that product to demand centers, whether that be refineries, petrochemical manufacturing facilities, or exports to international markets. The one drawback to all of these investment opportunities is that it takes a lot of cash to complete these projects, and much of that cash will come from slower payouts to investors. MPLX isn't the only company employing this tactic. Both Enterprise Products Partners and Magellan Midstream Partners have slowed the pace of their distribution growth to fund their massive capital spending plans.
It may end up putting a damper on MPLX's distribution and share price growth over the next couple of years, but it is helping the company grow in a way that doesn't compromise its financials over the long run. For investors who plan to hold on to MPLX's stock for a long time, this is the better path to take than loading up on debt or issuing equity to fund its growth. Once this wave of spending is over, don't be surprised if management opens the tap again for larger payout increases.