MPLX LP (MPLX) made its public debut on Friday, October 26th. Shares of the oil mid-stream pipeline limited partnership ended their first day with gains of 21.8% at $26.80 per share.
The Public Offering
MPLX Limited Partners is a growth-oriented limited partnership formed by Marathon Petroleum Company (MPC). The partnership owns, operates and develops oil, refined products and hydrocarbon based product pipelines. MPLX owns 51.0% in the network of systems, while Marathon Petroleum holds the remainder of the stake in the assets.
MPLX sold 17.3 million shares for $22 a piece. MPLX raised $381 million in gross proceeds in the offering process. Based on the offer price of $22.00, the partnership is valued at $814 million.
The offering is quite a success. The offer price was set above the preliminary $19.00-$21.00 price range set by the firm and its bankers. All shares were sold by the partnership.
In total, 47% of the limited partnership's shares outstanding were offered. At Friday's closing price of $26.80 per share, the firm is valued at $992 million.
The major banks that brought the company public were UBS, Merrill Lynch, Morgan Stanley, J.P. Morgan and Citigroup, among others.
MPLX operates and owns a 51% stake in Pipe Line Holdings, a newly formed entity. The pipeline system includes approximately 962 miles of common carrier crude oil pipelines and approximately 1,819 miles of common carrier product pipelines in the Midwestern of the US. Other assets owned by Pipe Line Holdings include a barge dock in Illinois and crude oil and product storage facilities, among others.
The company reported annual revenues of $410.6 million for 2011. The company reported a net income of $134.0 million for the year. On a pro-forma basis, MPLX generated revenues of $194.2 million for the first six months of 2012. Net income for the first half of 2012 came in at $55.6 million.
MPLX intends to use the $381 million of gross proceeds of the offering to invest $191.6 million in Pipe Line Holdings. Another $72.9 million will be distributed to Marathon Petroleum Company to reimburse the company for some capital expenditures.
The company operates without significant amounts of cash but with $11.6 million in long-term debt. Given the fact that the company sold shares above the offer price, and boosted the size to 17.3 million shares, the company is expected to hold roughly $100 million in cash, for a net cash position of $90 million.
Based on Friday's valuation of $992 million, operating assets are valued at around $900 million.
Based on a full year revenue estimate of $400 million, the market values the firm at roughly 2.2 times annual revenues. Net income could total $120 million, valuing the firm at roughly 7-8 times annual earnings.
As noted above, the offering of MPLX is quite a success. Shares rose 21.8% on their first trading day, ending the week at $26.80. As such, shares are trading some 34% above the midpoint of the initially guided price range. The partnership has an agreement that requires the company to distribute all available cash on a quarterly basis. MPLX intends to make a minimum quarterly distribution of $0.2625 per share, for a current dividend yield of 3.9%.
The sentiment around the offering of MPLX has been very good. Strong demand allowed the partnership to boost the offer price. The partnership closely collaborates with Marathon Petroleum, whose activities generate the majority of revenues for the partnership. The assets owned by Pipe Line Holdings form an integral part of Marathon's distribution capabilities, and the energy company could potentially sell more assets to the partnership.
In recent weeks, more energy limited partnerships have gone public. In September, Summit Midstream Partners (SMLP) had a successful public debut as well. A weak earlier, Susser Petroleum Partners (SUSP) went public.
Limited Partnerships are special investment cases, especially when the fate of the company depends heavily on operations of a related company, in this case Marathon Petroleum. Before investing, investors should consider the tax implications and specific risks to investing in limited partnerships. The current dividend yield of 3.9% of MPLX is rather limited for the partnership.
With interest rates at historically low levels, investors are searching for yield. The yield of the partnership is not very high, yet valuations seem fair based on earnings multiples.
I remain on the sidelines given the high dependence on Marathon Petroleum and the relative low dividend yield.