MPLX (MPLX 1.74%) pays an eye-popping dividend that currently yields 10.3%. Typically, when a payout reaches the double-digit percentages, it's a sign of trouble for the business. However, based on its recent third-quarter earnings report, that doesn't seem to be the case with this midstream energy company.
Instead, the reason its yield has risen to such heights is due to the head-scratching decline in its valuation that has left it one of the cheapest MLPs in the energy sector. That rock-bottom price is leading MPLX to explore ways to boost its value.
Drilling down into MPLX's third-quarter numbers
|
Metric |
Q3 2019 |
Q3 2018 |
Change |
|---|---|---|---|
|
Adjusted EBITDA |
$1.165 billion |
$937 million |
24.3% |
|
Distributable cash flow (DCF) |
$1.027 billion |
$766 million |
34.1% |
|
Distribution coverage ratio |
1.42 |
1.47 |
(3.4%) |
|
Debt-to-EBITDA ratio |
4.0 |
3.8 |
5.3% |
Data source: MPLX.
As that table shows, MPLX's earnings and cash flow have risen sharply over the past year. The main driver of that growth has been the recent acquisition of fellow MLP Andeavor Logistics. In addition, the company benefited from higher volumes of crude oil and refined products traveling across its pipelines, storage systems, and shipping terminals, thanks in part to recently completed expansion projects.
Those factors enabled MPLX to generate enough cash to cover its 10.4%-yielding distribution by 1.42 times, which is well above the 1.2 times factor that represents the comfort zone for most MLPs. And while that's down from 1.47 times in the year-ago period, that decline can be traced in part to the fact that it increased its payout by 6.3% over the past year.
Meanwhile, the company sports a solid balance sheet. While its leverage ratio ticked up in the past year due to the acquisition of Andeavor Logistics, it's still at about 4.0 -- the comfort level for most MLPs. To sum up, MPLX's payout appears to be on rock-solid ground.
Image source: Getty Images.
What MPLX plans to do about its rock-bottom valuation
Since its finances are strong, the company has plenty of flexibility to continue investing in expansion projects. Management expects to spend $2 billion next year on a range of growth-related initiatives. The bulk of that money will go toward advancing its strategy of building an integrated oil and gas logistics infrastructure to move those commodities from the Permian Basin to the Gulf Coast. Among the notable projects it has under construction are the Wink to Webster oil pipeline and the Whistler gas pipeline. Those should give it the fuel to continue growing its distribution.
However, in light of its sagging valuation -- and due to pressure from an activist investor -- MPLX's parent, refining giant Marathon Petroleum (MPC 3.75%), has formed a special committee to "continue to evaluate alternatives to enhance value across its midstream business." Among the options it will likely consider is converting MPLX from an MLP to a corporation. Many of its peers have made this move in recent years to broaden their appeal to investors. Marathon will also likely explore the potential of dropping down the midstream assets that it acquired when it bought Andeavor Logistics' parent last year. Finally, Marathon could evaluate the merits of spinning off its stake in MPLX to its investors.
If Marathon follows through with all the recommendations of the activist investor, it will transform MLPX into an independent midstream corporation with an even larger footprint. That would put it on the same footing as a growing number of its industry peers. These moves could help boost the company's valuation -- its shares are currently trading at a roughly 20% discount compared to its large, independent peers.
Setting the stage for higher returns
MPLX's third-quarter results demonstrated that its 10.3%-yielding payout is on solid ground. In fact, with another $2 billion of expansion-related spending on deck for 2020, this master limited partnership should have no difficulty increasing that already hefty distribution.
The market, however, isn't giving the energy company enough credit for its financial strength and growth potential. So now, it's exploring ways to boost its value. All of that gives MLPX enough potential upside to make its stock look like a screaming buy today.
