Over the past year or so, MLP merger news has been burning up the headlines, with Kinder Morgan, Williams, and Energy Transfer each announcing big merger deals in the past 12 months. When it comes to MLP merger mania, though, one acquisition in particular gets me really excited, to the point that I'm planning on investing my own money based on the deal. On July 13, Marathon Petroleum Corp. (NYSE: MPC) announced it was buying MarkWest Energy Partners (NYSE: MWE) for $15.6 billion, to make it a subsidiary of its own MLP, MPLX LP (NYSE: MPLX).  Here are three reasons the bigger and better MPLX will be one income investment that is on my radar and should be on yours well. 

MarkWest's exceptional asset footprint plus...

Source: MPLX investor presentation.

Markwest is one of America's largest natural gas processors, holding 75% market share in the booming Marcellus and Utica shale, and working hard to expand its capacity even further. 

MPLX, which will leave MarkWest as a stand-alone entity, expects to gain substantial synergies from working with its new subsidiary on investments it already has planned, such as its Cornerstone Pipeline and Utica build-out project. 

MPLX is especially interested in expanding its network of natural gas liquid -- or NGL -- pipelines from the Marcellus and Utica to New York and other East Coast markets, pipelines that MarkWest is already working on.

In fact, one of the best things about this deal is that it combines MarkWest's great working relationships with Marcellus and Utica gas producers with MPLX's growing pipeline capacity. By expanding its transportation base, MPLX will be better able to create a one-stop shop in which gas producers can obtain transportation, processing, fractionation, and storage services, all under long-term, fixed-fee contracts that generate predictable cash flow that's mostly immune to commodity price volatility.   

MPLX's strong relationship with Marathon Petroleum ...
Another outstanding feature of this merger is that it combines MarkWest's incredible growth project potential with Marathon Petroleum's vast access to cheap capital. For example, MarkWest has identified $13.5 billion to $16.5 billion in total investment opportunities that it could pursue over the next five years. On top of that, Marathon Petroleum has a large base of drop down-eligible assets that it can sell to MPLX.

If Marathon Petroleum were to drop down all of its MLP-eligible assets, it would increase MPLX's annual EBITDA by $1.6 billion, a 158% increase over the combined EBITDA of the new, larger MPLX.

Such massive growth means strong increases in distributable cash flow and, most importantly for income investors, exceptional long-term sustainable payout growth. 

... creates exceptional distribution growth ahead
Post-merger, MPLX is guiding for some truly astounding distribution increases over the next few years:

  • 29% in 2015.
  • 25% in 2016 and 2017.
  • 20% in 2018 and 2019.

Combined with its attractive current forward yield of 3.5%, you can see why MPLX is likely to be a market beater. 

However, I'd like to point out that the most powerful aspect of this strong distribution growth isn't substantial capital gains -- though those are also likely -- but the exceptional yield on cost that patient investors can lock in for the long term. Specifically, any units of MPLX you buy today will earn far more than a 3.5% yield in the future. 

Year Management Projected Annual Payout Yield on Cost of Units Bought Today


$1.53 3.1%
2015 $1.97 4%
2016 $2.47 5%
2017 $3.09 6.2%
2018 $3.71 7.5%
2019 $4.45 9%

Source: author calculations based on management payout guidance.

In other words, thanks to this merger, long-term MPLX investors can lock in strong dividend growth out to 2019 on any money invested today. Given that the MLP is likely to continue to grow strongly many years after 2019, I think this makes for a mouthwatering investment opportunity. 

Bottom line: The new MPLX will be a dividend growth powerhouse 
Combining MarkWest] and the already fast growing MPLX -- which has the backing of Marathon Petroleum, America's fourth largest refiner -- is likely to create one of America's premier dividend growth stocks. 

What's more, thanks to the United States' enormous potential for continued growth in shale oil and gas, I'm confident that MPLX's strong distribution growth will continue long beyond its formal payout guidance of 2019.