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Why Units of MPLX Rocketed 55% in April

By Reuben Gregg Brewer - Updated May 7, 2020 at 10:06AM

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The midstream energy partnership's units recovered from a massive downdraft in March, but there are still issues to deal with

What happened

Units of midstream energy partnership MPLX LP (MPLX 0.75%) rose sharply in April, gaining 55% according to data from S&P Global Market Intelligence. That's a huge reversal from March, when the units fell a painful 42%. The broader market followed a similar up-and-down pattern in March and April, but the size of the moves at MPLX were far larger. There's a lot going on.

So what

Master limited partnership MPLX operates in the midstream sector of the energy industry. Broadly speaking, it helps move oil and natural gas from where they are drilled to where they end up getting used. It's generally a fairly stable business. However, COVID-19 has upended the energy market because of a steep drop in demand related to social distancing and the closure of non-essential businesses across the globe. There's a huge glut of oil and related commodities in the system, pushing energy prices sharply lower. March was a particularly bad month for the energy sector and anything related to it, which helps explain why MPLX fell so sharply.

A man looking down over an energy processing facility

Image source: Getty Images.

When investors decided to take a more positive view of the world in April, units of MPLX rebounded. The partnership announced that it was maintaining its quarterly distribution in April, as well, which backed the more positive view investors had taken. And in early May, it reported fairly solid earnings. So, on one level, things appear to be OK for now. But investors shouldn't take the April rally as an all-clear. MPLX has some direct exposure to the oversupply problem via its gathering assets (about a third of adjusted EBITDA in the first quarter). These systems collect natural gas from drilling sites and bring it to processing plants. The partnership took a $3.4 billion impairment charge in the first quarter that was largely related to these assets. Low energy prices are basically leading to material pullbacks on the drilling side of the equation and that means less demand for this piece of MPLX's business. Investors should keep a close eye on what the partnership does here. 

Now what

It's nice to see that MPLX chose to maintain its distribution. Moreover, with distribution coverage of roughly 1.4 times in the first quarter, it has ample breathing room in the face of some near-term adversity. The bigger question is likely to be around growth, which is set to slow as the partnership pulls back on capital spending amid a huge upheaval in the energy sector. It announced a 40% capital spending reduction when it released first-quarter results. Notably, growth has been one of the key reasons to buy MPLX. If that story is changing because of the shifting supply/demand dynamics in the energy sector, then investors should probably step back and reevaluate this partnership and its long-term prospects.    

Reuben Gregg Brewer 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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