What happened

Units of MLPX (MPLX -0.20%) slumped 16.6% in January, according to data provided by S&P Global Market Intelligence. Weighing on the midstream company's valuation was an analyst downgrade and weakening oil prices. 

So what

Credit Suisse downgraded the master limited partnership (MLP) last month from outperform to neutral. The bank also cut its price target from $29 per unit to $25, though that's still well above the recent price of around $19. 

Red numbers on a screen.

Image source: Getty Images.

Two factors drove the downgrade. First, Credit Suisse is concerned that the MLP's parent company, refining giant Marathon Petroleum (MPC 1.07%), might dilute existing MPLX investors as part of its strategic review. It could, for example, drop down its remaining midstream assets in exchange for additional units in the MLP. The second concern is that several of MPLX's customers in the Northeast have had their credit ratings downgraded due to falling gas prices. That increases the risk of bankruptcy, which could disrupt payments to MPLX. 

Conditions in the energy market have grown worse in recent weeks due to fears that the COVID-19 outbreak would hurt the demand for oil. That could have some impact on MLPX since it gathers oil for producers in the Permian Basin. If prices keep falling, its customers might cut their drilling budgets. That could result in lower volumes flowing through its systems, hurting its cash flow. 

Now what

After the sell-off last month, MLPX's distribution yield is now up to 14.4%. It currently generates enough cash to cover that payout by a comfortable 1.4 times, leaving it with a sizable portion of the funds needed to cover its expansion program. Meanwhile, it expects to close the gap by next year as its cash flow keeps rising and capital spending declines. While there is some concern that the continued weakness in the oil and gas markets might affect this outlook, its payout still seems to be on a sustainable foundation.