What: Shares of MPLX (NYSE:MPLX) have declined by 20% by 11:30 a.m. ET today after the company reported earnings. While the earnings numbers remained solid, shares are declining after management announced it was cutting its distribution guidance for 2016.
So what: One of the appeals of MPLX as an investment was the possibility of seeing rapid dividend growth over the next few years. The recent acquisition of MarkWest Energy Partners and strong support from its general partner, Marathon Petroleum (NYSE:MPC), gave it one of the largest backlog of development projects and asset drop-downs in the business. These effects meant that MPLX's management was, as recently as a few weeks ago, guiding for its distribution to grow 24% annually until 2017 and around 20% until 2019.
However, as part of its earnings announcement, CEO and Chairman Gary Heminger said that management was cutting its distribution guidance in half to 12%-15% for the year. It believes that declining share prices and the resulting higher yields have made the cost of capital via equity issuances prohibitively expensive, and will need to rely more on assets for unit exchanges with Marathon Petroleum and debt as its major funding source until it sees a recovery in unit prices.
Now what: This is the master limited partnership dilemma. Investors want to see distribution growth to stick around, but many rely on issuing equity to pay for that growth. Without this source of capital, it makes growth that much harder to attain. Luckily, MPLX has such strong support from Marathon Petroleum and its ability to develop projects itself and drop them down to MPLX. Otherwise, even that 12%-15% distribution growth rate would be hard to come by.
There are some components of MPLX that look promising. It's still generating more than enough cash to cover its current distribution and its balance sheet remains pretty tidy. However, this distribution guidance cut may be the first sign that growth will not be easy in the coming years, and investors should be on the lookout for a longer-term reduction in that distribution guidance.
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