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Focus List: Balancing The Cyclical And The Steady

By Peter Staas on May. 12, 2017

Last week’s swoon in oil prices carried over to some of our favorite midstream names, prompting us to restore MPLX LP to the Focus List after the stock dropped to about $33 per unit.

The partnership increased its quarterly distribution by 3.8 percent sequentially and 6.9 percent year over year; cash flow covered 129 percent of this payout.  Management also reiterated its guidance for 12 to 15 percent distribution growth this year, followed by a double-digit increase in 2018.

Gathering and processing accounted for about two-thirds of MPLX’s operating cash flow in the first quarter.

Acquiring Markwest Energy Partners LP a few years ago gave MPLX the leading gathering and fractionation complex in the Marcellus Shale; much of the MLP’s organic growth opportunities center around this asset base.

In the first quarter, processing volumes at MPLX’s Northeast operations increased 4 percent sequentially and 8 percent year over year. Management expects project start-ups and stepped-up drilling and completion activity this year to drive a 10 to 15 percent improvement in processing volumes, a 3 to 6 percent bump in gathering volumes, and a 15 to 20 percent uptick in fractionated volumes.

Recently amended and extended gathering, processing and fractionation agreements with Range Resources Corp (NYSE: RRC) and a joint venture with Antero Midstream Partners LP (NYSE: AM) to support Antero Resources Corp’s (NYSE: AR) set the stage for growth in coming years.

MPLX’s guidance calls for processing volumes at its assets in the Southwest to grow by 3 to 8 percent this year, driven by Newfield Exploration’s (NYSE: NFX) activity in the STACK play. The partnership also started construction on a second processing plant in the Delaware Basin that can handle up to 200 million cubic feet per day.

Management indicated that MLPX remains open to organic-growth opportunities in West Texas, but indicated that valuation multiples on recent asset sales likely preclude any acquisitions.

During the quarter, MPLX closed a flurry of transactions that expanded its logistics and storage business, headlined by the drop-down of assorted midstream assets serving Marathon Petroleum Corp’s (NYSE: MPC) refinery operations.

These terminals, pipelines and storage facilities operate under long-term contracts. The MLP funded 75 percent of this roughly $2 billion (8 times operating cash flow) deal with debt and the remainder with equity issued to Marathon Petroleum.

Marathon Petroleum plans to drop down the rest of its MLP-qualifying assets to MPLX over the next 12 months or so and exchange its incentive distribution rights in the MLP for common equity. These transactions will result in the gathering and processing and transportation and storage segments each contributing about 50 percent of MPLX’s cash flow.

Additional upside catalysts include organic growth opportunities in the Marcellus Shale and transporting refined products from the Midwest to the East Coast. MPLX’s strong balance sheet and relatively low cost of capital positions the MLP to take advantage of distressed asset sales and perhaps emerge as a consolidator in the midstream space.

During the first quarter, MPLX took advantage of Enbridge Energy Partners LP’s (NYSE: EEP) challenging financial situation to purchase the Ozark pipeline and announce a subsequent expansion of this asset to transport crude oil from the hub in Cushing, Oklahoma, to Marathon Petroleum’s Midwest refineries.

Yet another cash flow shortfall at Plains All-American Pipeline LP (NYSE: PAA) and Energy Transfer Partners LP’s (NYSE: ETP) commitment to issuing equity—a follow-on offering at a distribution yield of 9.2 percent is better than when the MLP sold stock at 13 percent—suggests that MPLX could have ample opportunity to buy complementary assets or participate in joint ventures.

For example, MPLX’s leading processing and fractionation footprint would make the MLP a natural partner for the second phase of Energy Transfer Partners’ Mariner East project, which will provide a much-needed release valve for ethane and propane produced in the Marcellus Shale. Given Energy Transfer Partners’ capital needs and stretched balance sheet, a joint venture would make strategic sense for both parties.

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