MPLX - Strong Markets Signal Likely Strong Results For MPLX

2023-07-25 14:55:11 ET

Summary

• MPLX, a major transportation company, is predicted to have a strong financial quarter.
• An increase in the payout per unit is likely still in the works.
• In March 2023, the company's rating was upgraded from Neutral to Overweight with a price target of $41.

We believe MPLX ( MPLX ), an energy transportation company with a significant portion of its business through Marathon ( MPC ), is likely set for another strong quarter. In March of 2023, JPMorgan (JPM) upped the company rating from Neutral to Overweight placing a price target of $41 on the units showing its bullish belief in the company long-term. Even in markets otherwise stable or declining, companies, because of unique business models, can buck trends. In our view, MPLX likely fits. Being a transportation business, I think the determining factor relies heavily on volumes and less so on upfront commodity prices. Before we look deeper, a reminder follows about our past articles. This article continues our May coverage of MPLX in which we most generally discuss cash and cash flow. Our interest still remains with cash flows and the company's ability in continuing to generate excess flows. At previous excess cash levels, MPLX can and would likely increase the payout. Our interest also extends to timing, something we believe can and will affect the price range and the ability to sell covered calls without risking losing units. Now, let's go estimate the how much. What kind of steel is this thing made of?

MPLX's Businesses

The company consists of two entities , Gathering and Processing (G&P) and Logistics and Storage (L&S). The former involves gathering, separating and transporting natural gas. The latter involves transporting and storing crude oil and crude products.

Starting with Marathon

Our review begins with looking at Marathon's results and guidance at its last quarterly report most in particular guidance. Management for Marathon guided,

"Turning to guidance. On Slide 11, we provide our second quarter outlook. We expect crude throughput volumes of roughly 2.6 million barrels per day, representing utilization of 91%. Utilization is forecast to be higher than the first quarter levels due to planned turnaround activity having a lower impact on crude units in the second quarter."

This is up from 89% in the March quarter. This represents a 2.1% increase quarter of quarter. On a year over year basis, crude throughput will be lower by 300,000 barrels per day or 10%.

Continuing with the Whole L&S System

From the most recent 10-Q for MPLX, we included a portion outlining crude and crude product volumes.

On a year over year basis, these volumes were up 300,000 per day. On the issue of capacity or utilization, MPLX's reports don't address this issue. But overall, the EIA weekly report for last week adds , "Total products supplied over the last four-week period averaged 20.3 million barrels a day, up by 1.0% from the same period last year." A small growth year over year has been typical for crude and crude products during 2023. Investors might expect at least a small increase in volumes.

G&P

Continuing with G&P, last quarter's report included a set of two slides summarizing key portions of this business. The first displays year over year performance.

Notice the dampening effect of the lower liquid prices. In essence, the results were flat.

Continuing, the next slide shows the excess capacity in this business sector.

Growth room exists within the business. Continuing, during the past year, natural gas production is generally flat to slightly higher, quarter over quarter. A factor, contributing to revenue for liquid pricing is crude oil prices. In a quarter over quarter look, crude is down approximately $5 on average, about 7% lower. At the March call, management kindly offered this help,

"As a rough rule of thumb, our annual results are impacted by about $20 million for every $0.05 per gallon change in NGL prices. NGL prices averaged $0.77 per gallon for the quarter, as compared to $1.15 in the first quarter of 2022, resulting in roughly a $40 million unfavorable effect versus the prior year period."

We see another 5 cent plus drop in the June quarter reflecting another $20 plus drop for G&P offset by what appears to be slight production increases. In our view, G&P results might be lower by approximately $15 million or more quarter over quarter.

MPLX March Quarter Results & Cash Usage

We next look at the March quarter results.

• First-quarter net income attributable to MPLX of $943 million and net cash provided by operating activities of $1,227 million, up 14% and 9%, respectively, year over year
• Adjusted EBITDA attributable to MPLX of $1,519 million, up 9% year over year

Management didn't point out any issues with working capital changes. We assume that these will be negligible. Capital expenses are gauged at $950 million for the coming year slightly higher than the $850 million in 2022. Management also announced that major growth projects are targeted for 2024 startup not 2023.

Summing Up the Two Businesses

A summary follows in the next table.

* See above which reflects lower liquids pricing.

In our view, June might be flat to slightly positive with respect to March's strong results.

What Does this Mean for Investors Paydays?

Last March the company spent $800 million on distributions leaving it with $200 million of excess cash after capital expenses (slide 18). We suspect that this balance continued in the 2nd quarter. It is important to note that liquid prices have risen in the September quarter following crude. A continuation of the 25% excess cash, in our view, would signal a coming distribution increase perhaps 10% or $80 million.

From a capital appreciation look, the price target increase noted above signals a shift in trading, if or when achieved, in the unit price range. A chart generated using TradeStation Securities included next illustrates the importance of the change.

A break of the high $30s places a $40-$45 trading in place. A 10% increase in distribution would likely shift upward the trading range. The current rate equals $0.775 per unit per quarter. With a 10% increase, the payout increases to $3.4 per year.

Risks

We view the major risk being associated with virus size economic shutdowns and any demand destruction that follows. Also, weather can and is playing a part in natural gas usage. The ultra warm winter destroyed usage. On the other coin-side, the extreme heat of this summer is increasing usage.

Our belief is that MPLX is still headed for a payout increase sometime this year. It won't be small in percentage. If our estimate is in error, our belief is that its low-balled. L&S could be a lot higher. We continue to rate the units a buy. A note: our reason for owning MPLX resides primarily for payouts. Our buy ratings deal primarily with yields, price vs. payouts. Since our last article, the price range has remained within acceptable returns for ownership. The excess cash might add a bonus.

For further details see: