MPLX - MPLX: This 9% Yielding MLP Is A Winner That Can Keep Growing The Distribution

Summary

• Over the past decade MPLX has returned $23.22 through its distributions and investors would have received 67.28% of their initial investment back through distributions prior to compounding.
• MPLX continues to grow its revenue, adjusted EBITDA, and DCF, which has allowed them to produce $4.98 billion of DCF and provide a 1.6x coverage ratio.
• MPLX has increased its quarterly distribution 30 times over the last 42 quarterly distributions, growing the quarterly distribution by 338.1%.

Since my first article on MPLX LP ( MPLX ) ( can be read here ), MPLX has appreciated by 18.75%, and when the distributions have been accounted for, the total return has been 27.06% compared to 10.09% in the S&P 500. Over the previous 5-years, MPLX hasn’t done much as it declined by -2.9%, falling from around $35 to the high single digits during the covid-crash and back up to $34.46. While I believe the energy infrastructure space is undervalued, it’s normally associated with generating income from distributions or dividends rather than being a prospect for capital appreciation. In 2022 MPLX increased its distribution by 10% and generated $4.98 billion of distributable cash flow ((DCF)) for its investors. While units of MPLX are well off their lows, and up 4.9% over the previous year, I believe that MPLX will continue to be a strong income investment as their ability to provide future distribution increases is strong.

MPLX has been a strong income investment, and there is no reason why this will change

Since the Q1 2013 distribution, MPLX has increased its quarterly distribution by 338.1% from $0.1769 to $0.775 through 30 quarterly distribution increases. Over the past decade, MPLX has generated 42 quarterly dividends and increased the quarterly distribution 71.43% of the time. There was a stagnant period through 2020 and part of 2021, then through part of 2022, but for the most part, MPLX has rewarded unit holders with the majority of its distribution increases occurring on a quarterly basis rather than annually.

Some would look at MPLX’s 10-year chart and immediately write it off as there has been no growth. Over the past decade, MPLX is basically flat as it declined -0.14%. While some investors focus on capital appreciation and growth, there is another side where income investors are perfectly happy with an investment that trades sideways and generates reliable distributable income.

For instance, if you had purchased shares 10 years prior, each share would have cost $34.50. The initial investment per share would have declined by -$0.04, which I would not consider a real loss. While MPLX didn’t produce capital appreciation, it distributed $23.22 of DCF to its unit holders in the form of quarterly distributions. Unitholders would have received 67.28% of their initial investment as distributions if they had taken the income as cash rather than reinvesting and benefiting from the powers of compounding. The best part about MPLX as an income investment is that the generated income was produced through a growing distribution and without selling off shares from the asset base. Investors have received 67.28% of their initial investment and still have their initial unit base, generating a quarterly distribution that has grown 338.10% over the past decade.

For investors who were in a position to reinvest the quarterly distributions, MPLX has been a quintessential example of what can occur through compounding interest in regard to income investing. Based on an investment of $10,000 last decade, you would have been able to purchase 284.01 units of MPLX. At the time of the investment, MPLX’s first distribution was $0.1769, so the projected annual distribution income would have been $0.71 per unit or $200.97 on the unit base. MPLX had generated $23.22 of distributions over the past decade, and by reinvesting these distributions, the unit base would have grown to 591.90 units. MPLX is currently paying a quarterly distribution of $0.78 per unit, which is an annual distribution of $3.10, placing the new projected annual distribution income at $1,834.89.

By reinvesting the distributions, the initial unit base grew by 108.41% (307.89 units) from 284.01 to 591.90. The combination of growing distributions and more units increased the projected annual distribution income by 813.04% as it grew by $1,633.92 from $200.97 to $1,834.89. Today, 18.35% of the initial investment is being generated through distributions on an annual basis prior to distribution growth or compounding being accounted for. If the current distribution remains unchanged, within the next 5-years, over 100% of the initial investment will have been generated through its distributions.

In 2022 MPLX generated $4.98 billion of DCF and returned over $3.5 billion of capital to its unitholders while maintaining a distribution coverage ratio of 1.6x. In 2022 MPLX returned $3 billion through distributions and $500 million through unit repurchases. After the distributions are paid, MPLX still has $1.98 billion of DCF remaining, allowing them to repurchase units, allocate capital toward maintenance and growth projects, and servicing their remaining financial obligations. MPLX has remained committed to its unitholders by returning large amounts of capital and increasing the base distributions. With a 1.6x coverage ratio in DCF, there is no reason why MPLX won’t continue to increase the distributions in the future.

MPLX had a strong 2022 and should continue to generate billions in DCF as the energy landscape sets up well for them

Demand for traditional energy services and MPLX’s operational performance generated record annual pipeline, gathering and processing, and fractionation throughputs in 2022. MPLX’s total revenue increased 15.82% to $11.61 billion, which allowed MPLX to benefit from an increased pool of capital to generate profits in 2022. MPLX’s net income increased 27.83%, DCF increased 4.1%, and Adjusted EBITDA increased 3.87% YoY. MPLX’s total crude and product pipeline throughput volume increased 4%, and its terminal throughput increased 5% YoY. MPLX finished 2022 with $238 million in cash, $2 billion available on its revolving credit facility, and $1.5 billion available through its loan agreement with Marathon Petroleum Corp ( MPC ). Over the years, MPLX’s Adjusted EBITDA has grown and shaved a point off of its leverage ratio, bringing it down to around 3.5x.

MPLX announced that it would allocate $950 million toward its CapEx plans in 2023. $800 million will go toward growth capital projects and $150 million toward maintenance. The growth projects will be in the Marcellus, Permian, and Bakken basins. MPLX is working on new gas processing plants in the Marcellus and Permian basins, then expanding and debottlenecking existing assets. A critical success factor for MPLX in my opinion has been that its total debt has remained relatively consistent, and by growing its business, MPLX has deleveraged its balance sheet considerably. The increased Adjusted EBITDA and DCF have put MPLX in a position where the need to reduce its level of debt isn’t imperative, especially if operational growth continues to occur.

MPLX has established a track record for growing its business, increasing distributions, and deleveraging its balance sheet while allocating capital toward future growth. MPLX provides services that connect the largest basins to major markets throughout the U.S. EIA released its 2022 Annual Energy Outlook and concluded that petroleum and natural gas will remain the most consumed sources of energy in the United States through 2050. The EIA has also projected that by 2050 the global demand for energy will increase by nearly 50%. Based on what the EIA is projecting and the trends that MPLX has established, MPLX can increase the volume of fuel flowing through its network as demand for energy grows, which will translate to additional revenue, Adjusted EBITDA, and DCF.

Conclusion

While MPLX has appreciated by 18.78% since my first article, I still think it’s a strong income investment. MPLX has a phenomenal track record for increasing distributions and generating income for its unit holders. Traditional energy sources such as oil and gas will be with us for decades to come, and with the demand for energy increasing, more fuel will need to travel through energy infrastructure networks such as the one MPLX operates. I believe that MPLX will capitalize on the future growth of oil and gas and be able to deliver larger distributions to their investors. Even if the unit price trades sideways as it has over the previous decade, MPLX can still be a strong income investment.

For further details see: