When the pandemic hit in 2020, the way in which governments responded sent shockwaves through the energy sector. MPLX LP (MPLX +0.86%), a midstream player with material exposure to oil and refined products, chose to hold its distribution steady through that uncertain period. Now that the world is getting back toward some semblance of normal, however, distribution growth has returned. Here's a quick look at the partnership and the safety of its still-generous yield.
Demand decline
The truth is MPLX didn't have a particularly bad year in 2020, as the midstream master limited partnership (MLP) was able to increase both adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) and distributable cash flow. Looking at adjusted EBITDA, its logistics and storage business did a little better in 2020 while its gathering and processing division did a little worse. That makes sense given that drilling slowed down and demand for fuels slid, leaving more in storage.
Image source: Getty Images.
What's most notable, however, is that the MLP's distribution cash flow covered its distribution by a solid 1.46 times for the full year. Still, given the uncertainty around the pandemic, it makes sense that MPLX would look to preserve cash, just in case things got really ugly. Notably, it ended 2019 with roughly $2 billion in capital expenditures and had plans to spend another $2 billion in 2020. That was reduced to $1.5 billion by late January 2020 and ended the year at an even lower $780 million or so.
Clearly, MPLX was pulling back hard in the face of an uncertain market. That austerity continued through the first three quarters of 2021 as well, with spending over that span of around $274 million versus $677 million in the first nine months of 2020. The net benefit of these cash-saving moves, including maintaining the same distribution payout, was the strong distribution coverage of 1.6 times in the third quarter of 2021.
Returning value
That said, with strong coverage, MPLX announced it was inching up its distribution in the back half of 2021. The boost was $0.0175 per unit per quarter, or 2.5%. That's not a huge increase, but it also came with a one-time special distribution of $0.575 per unit. Effectively, investors that stuck around through the standstill got a nice reward for doing so.
Notably, other things have been going on during the partnership's pause in distribution growth. For example, MPLX has also been working on debt reduction, taking consolidated debt from $20.7 billion at the start of 2020 to $19.9 billion at the end of the third quarter of 2021. Along with improvements to adjusted EBITDA, the partnership's consolidated debt-to-adjusted-EBITDA ratio improved from 4.1 to 3.7. In other words, MPLX has become stronger in more than one way over this period.
With distribution coverage of 1.6 times in the third quarter and a decline in leverage, there's no particular reason to believe MPLX's distribution is at risk of being cut. In fact, there's every reason to believe it can continue to be increased from here. To be fair, that will be balanced with other forms of return, like special distributions and unit repurchases, the latter of which it started up in late 2020.
MPLX Financial Debt to EBITDA (TTM) data by YCharts.
Back to (more) normal
There's no question that investors had a right to be concerned about MPLX as 2020 unfolded and leverage was out of line with other midstream names. However, as the world has started to move back toward normal, MPLX's business looks a lot stronger. If you are an income investor considering options in the midstream space and are looking to maximize current income, this high-yield MLP is probably worth a closer look.
