Units of master limited partnership (MLP) MPLX (MPLX -0.07%) have lost roughly a third of their value this year. While 2020 has been challenging for the energy sector, the MLP's operations have held up exceptionally well, as was evident during the third quarter.
MPLX not only plans to continue paying its massive distribution -- which yields almost 16% these days -- but also to start buying back some of its beaten-down units.
Drilling down into MPLX's third-quarter results
|
Metric |
Q3 2020 |
Q3 2019 |
Year-Over-Year Change |
|---|---|---|---|
|
Earnings before interest, taxes, depreciation, and amortization (EBITDA) |
$1.335 billion |
$1.273 billion |
4.9% |
|
Distributable cash flow (DCF) |
$1.067 billion |
$1.027 billion |
3.9% |
|
DCF per unit |
$0.99 |
$0.96 |
3.1% |
|
Distribution coverage ratio |
1.44 times |
1.42 times |
1.4% |
|
Debt-to-EBITDA ratio |
4.0 times |
3.9 times |
0% |
Data source: MPLX.
Despite all the turbulence in the oil market, MPLX's earnings and cash flow improved during the second quarter. The MLP thus generated more than enough cash to cover its big-time dividend.
The company benefited from solid showings from both its business segments:
Data source: MPLX. Chart by the author.
Earnings from logistics and storage grew 5.2% year over year. It benefited from minimum volume commitments on its existing contracts, lower expenses, and completing the Mt. Airy Terminal and Utica butane expansion projects. Those positives helped more than offset lower demand headwinds caused by COVID-19.
Meanwhile, earnings from gathering and processing increased by 4.2%. Higher volumes from new processing plants coming online fueled that growth, more than offsetting the impact of production curtailments and shut-in wells caused by lower oil prices.
Overall, MPLX generated enough cash to cover its distribution and a sizable portion of its capital projects. That helped keep its leverage ratio flat at a comfortable 4.0 times debt-to-EBITDA.
Image source: Getty Images.
A look at what's ahead for MPLX
MPLX is building an integrated oil and natural gas logistics system from the Permian Basin to the Gulf Coast. It owns an equity interest in the Wink to Webster crude oil pipeline, which is on track to start up next year. It also has a stake in the Whistler Pipeline, which will transport natural gas to the Gulf Coast. That project is on track to start service in the second half of next year.
Finally, it recently formed a joint venture to transport natural gas liquids (NGL) from its processing plants in the Permian Basin to an NGL hub in Texas. That venture will primarily use existing infrastructure, keeping capital costs low.
The MLP's integrated system buildout is on track to come online next year. As a result, capital spending will wind down and cash flow should increase. MPLX therefore continues to believe it will produce excess cash flow after paying its distribution and covering its capital expenses next year.
That will give the company more financial flexibility, which it could use to repay debt or return additional cash to shareholders. With that latter option in mind, the company has authorized a $1 billion unit repurchase program to take advantage of its deeply discounted valuation.
The market has thrown in the towel on energy stocks
Because of all the volatility in the energy sector, investors have completely abandoned the space. As a result, pipeline companies like MPLX are trading at ridiculously low valuations when considering their cash flow durability, which has been on full display this year.
The company is planning to start buying back its dirt-cheap units now that it's firmly on track to start generating excess cash. Combine that buyback with its yield, and MPLX could produce some monster total returns if investors start buying energy stocks again.
