The second quarter was one of the worst periods in history for the energy market. Demand for refined petroleum products fell off a cliff as governments shut down their economies to slow the spread of COVID-19. That had a significant trickle-down effect as many energy companies had to reduce their production capacity, which meant that fewer volumes flowed through to midstream companies like MPLX (MPLX 0.70%).
However, thanks to its business model's overall resilience, the master limited partnership delivered rock steady second-quarter results. Add that to its solid financial profile and the upcoming completion of several expansion projects, and MPLX continues to believe it can maintain its 15%-yielding payout.
Drilling down into MPLX's second-quarter results
|
Metric |
Q2 2020 |
Q2 2019 |
Year-Over-Year Change |
|---|---|---|---|
|
Earnings before interest, taxes, depreciation, and amortization (EBITDA) |
$1.227 billion |
$1.249 billion |
(1.8%) |
|
Distributable cash flow (DCF) |
$1.027 billion |
$1.007 billion |
2% |
|
DCF per unit |
$0.96 |
$0.94 |
2.1% |
|
Distribution coverage ratio |
1.39 times |
1.41 |
(1.4%) |
|
Debt-to-EBITDA ratio |
4.1 times |
3.9 |
5.1% |
Data source: MPLX.
MPLX's earnings and cash flow were virtually unshakable during the second quarter. Fueling this stability amid the storm was its durable and diversified business model:
Data source: MPLX. Chart by the author.
Earnings from MPLX's logistics and storage segment improved by 2.2% year over year. Fueling that growth was marine equipment placed into service and lower operating costs. The company also benefited from a strong foundation of minimum volume commitments, which require customers to pay for a certain amount of capacity even if they don't use the space. Those agreements helped put a firm floor under its earnings during the period as they muted much of the impact of a 15% decline in pipeline volumes. Those lower volumes were the result of all the turmoil in the energy market because of COVID-19.
Meanwhile, earnings in the company's gathering and processing segment slumped 9.3% during the period. The primary issue was lower commodity prices, which forced its producing customers to curtail some of their volumes in the quarter. As a result, MPLX gathered 8% fewer volumes and processed 1% less natural gas. It partially offset that by fractionating 5% more natural gas liquids (NGLs) -- which is a process of separating raw NGLs into pure streams like ethane and propane -- thanks to last year's expansion of the Sherwood complex.
Image source: Getty Images.
A look at what's ahead for MPLX
MPLX has taken action to preserve its financial strength during the current downturn by reducing costs. The company cut its annual operating expenses by $200 million and its maintenance capital by $100 million. The company has also reduced its growth spending by more than $600 million, pushing that budget down to around $900 million. The bulk of that growth funding is going toward its current strategy of creating integrated crude oil and natural gas logistics systems from the Permian Basin to the U.S. Gulf Coast.
MPLX expects to complete the two major projects driving that strategy next year. The Wink-to-Webster oil pipeline should start-up in the first half while the Whistler natural gas pipeline is on track to enter service in the second half. With spending on those projects winding down, and cash flow expected to rise as they begin contributing, MPLX believes it will generate free cash flow in 2021 after covering its current dividend and anticipated capital spending. That gives it the confidence to maintain its big-time payout despite all the turbulence in the energy market.
Meanwhile, MPLX's parent, refining giant Marathon Petroleum (MPC 0.71%), recently announced several noteworthy strategic moves, which could affect its MLP. The highlight was that Marathon agreed to sell its Speedway gas station business to 7-Eleven for $21 billion in cash. That deal will significantly bolster its balance sheet, putting it on a much firmer foundation. Meanwhile, Marathon agreed to purchase MPLX's Western wholesale distribution business in exchange for the redemption of $340 million of its common units currently held by Marathon. That deal will reduce the MLP's unit count and future cash distributions to its parent, which could yield improve dividend coverage.
Proving its durability
MPLX delivered steady results during the second quarter thanks to its strong contract profile. Now it appears increasingly likely that the MLP will be able to maintain its payout over the long haul, especially since it's on track to begin producing free cash after funding growth and its current dividend level next year.
