Last July, Marathon Petroleum (NYSE:MPC) announced it was filing for an IPO to grow its midstream business. The new company, MPLX (NYSE:MPLX) priced in late October and will make its first earnings report later this month. With a number of new midstream companies for investors to choose from, what sets MPLX apart?
The assets and drop-down opportunities
MPLX's assets are located strategically within Marathon Petroleum's own refining and marketing network. MPLX is positioned to provide Marathon with a logistical competitive advantage and initially will rely heavily on Marathon for growth. Its assets include 962 miles of crude oil pipelines, 1,819 of product pipelines, a barge dock, four tank farms, and a butane storage cavern.
One of the most significant near-term opportunities for growth will come from asset drop-downs from Marathon. These assets could include the remaining 49% interest in MPLX's pipeline assets still held by Marathon or other MLP-type assets, such as the company's 83 terminals, 1,900 rail cars, or inland bulk liquid barge fleet. With assets that are strategically located in the Midwest and Gulf Coast, the company has several opportunities to grow beyond just asset drop-downs.
Marathon intends to use MPLX as the primary growth vehicle for its midstream logistics business, which is near prominent and emerging shale plays like the Marcellus, Utica, and Illinois Basin. Marathon is already transporting crude oil and feed stocks from the Utica and stands to benefit from growth from that play.
Growing in the Utica
Producers like Chesapeake Energy (NYSE:CHK) and Gulfport Energy (NASDAQ:GPOR) are investing heavily to grow in the Utica. Just last month Gulfport spent $372 million to acquire 37,000 net acres in the play bringing its position up to 106,000 net acres. Meanwhile Chesapeake has drilled 134 wells in the play but is only experiencing moderate production growth due to midstream constraints. The Utica, like most emerging plays, lacks some of the critical infrastructure of more mature plays to get this new production to market centers. As production growth in the region continues it'll need more midstream infrastructure built.
This is where midstream companies like MarkWest Energy Partners (NYSE:MWE) and MPXL can step forward. MarkWest is already planning to spend more than a half a billion dollars in 2013 to grow its Utica assets in Ohio, while MPXL is evaluating its own organic growth opportunities. By being first movers in the play, these companies will benefit as production grows over time and additional opportunities arise.
In the near term, MPLX will be driven almost entirely by its relationship to Marathon. Its parent company and majority owner has historically accounted for more than 85% of the volumes shipped on MPLX's pipelines. That's doesn't make the company a poor investment choice. It has an attractive coverage ratio, and when combined with its ample liquidity and no initial leverage, MPXL has ample capacity to pursue its myriad of growth opportunities.
Matt DiLallo has no position in any stocks mentioned. The Motley Fool has the following options: Long Jan 2014 $20 Calls on Chesapeake Energy, Long Jan 2014 $30 Calls on Chesapeake Energy, and Short Jan 2014 $15 Puts on Chesapeake Energy. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.