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Why Units of MPLX Tumbled 42.7% in March

By Matthew DiLallo - Apr 6, 2020 at 12:59PM

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A steep plunge in crude oil prices has investors worried about the pipeline company's customers.

What happened

Units of master limited partnership (MLP) MPLX (MPLX -1.10%) cratered 42.7% in March, according to data provided by S&P Global Market Intelligence. Weighing on the midstream company was a nosedive in the price of oil and an update on its strategic review. 

So what

Oil prices tumbled more than 50% last month. That's weighing heavily on the profitability and balance sheets of oil producers. One has already filed for bankruptcy, which has investors worried that several more will follow. 

Red pipelines at an oil storage terminal.

Image source: Getty Images.

The slump in oil prices and the subsequent wave of bankruptcy filings could have a major impact on pipeline company cash flows. Producers have already slashed spending, which will impact the volume of oil and gas gathered by these companies. Meanwhile, bankrupt companies might not be able to pay their bills, which might force pipeline companies to reduce their rates. 

MPLX has some exposure to the first bankruptcy filing, though that company has the cash to continue paying its bills. However, with more likely to come, MPLX might not generate as much cash flow as expected, which could eventually put some pressure on its financial profile. As a result, the company has reportedly put its more volatile gathering and processing business up for sale. It's exploring the partial or full exit of the entity at a valuation of as much as $15 billion. If it finds a buyer willing to pay that price, MPLX will be able to pay down debt, which would increase its financial flexibility. 

Meanwhile, the MLP's parent, refining giant Marathon Petroleum (MPC 2.04%), announced last month that it would maintain its current midstream structure, including remaining the general partner of MPLX. As such, it won't spin off or sell its units, which could have put additional pressure on the valuation. 

Now what

Last month was a challenging one for the energy sector due to crashing crude prices. That slump will likely have a long-term impact on the industry since it will probably cause several more bankruptcy filings. Those could potentially impact MPLX's cash flow, so risk-averse investors might want to hold off on buying MPLX until there's more clarity on how everything will shake out.

Matthew DiLallo has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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Stocks Mentioned

MPLX LP Stock Quote
MPLX LP
MPLX
$32.43 (-1.10%) $0.36
Marathon Petroleum Corporation Stock Quote
Marathon Petroleum Corporation
MPC
$98.62 (2.04%) $1.97

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