Looking for a high-yield vehicle with strong growth? MPLX LP (MPLX) could fit the bill. MPLX has reported robust growth in every quarter of 2018 and in 2017 due to new assets coming online.
They kept the ball rolling in Q1 '19, with more strong growth numbers across the board. This growth was backed by strong throughput volume increases, with Q1 '19 gathering volumes in the northeast up 26%, processing throughput up 18%, and fractionation up 17% vs. Q1 '18.
With DCF up 55.5% over the past four quarters, management was able to achieve 8.21% growth in distributions/unit, and also improved coverage by 9.47%, to a robust 1.39X factor, in spite of the unit count growing by ~20%, after they did an IDR swap deal in 2018, which ultimately lowered MPLX's cost of capital:
Management has raised the quarterly distribution for 25 straight quarters. MPLX should go ex-dividend next in early August. It's yielding 8.36% at its current $31.46 price level. Its next payout should be $.6675.
Like most LPs, MPLX pays in the usual Feb./May/Aug./Nov. cycle.
Its unitholders get a K-1 at tax time.
A Major Deal Closing in 2H 2019:
On May 8, management issued a press release detailing the terms of the deal:
"Marathon Petroleum Corporation (MPC), MPLX LP, and Andeavor Logistics LP (ANDX) today announced that the two midstream companies have entered into a definitive merger agreement whereby MPLX will acquire ANDX in a unit-for-unit transaction at a blended exchange ratio of 1.07x. This represents an equity value of approximately $9 billion and an enterprise value of $14 billion for the acquired entity. The transaction has been unanimously approved by MPLX's and ANDX's respective Conflicts Committees and both Boards of Directors. Subject to the satisfaction of customary closing conditions and receipt of regulatory approvals, the transaction is expected to close in the second half of 2019.
Under the terms of the merger agreement, ANDX public unitholders will receive 1.135x MPLX common units for each ANDX common unit held, representing a premium of 7.3%, and MPC will receive 1.0328x MPLX common units for each ANDX common unit held, representing a 2.4% discount. The blended exchange ratio of 1.07x represents a 1% premium to market." (Source: MPLX site)
Management expects the combined entity to generate $4.1B in annual DCF, which would be a ~41% increase over MPLX's trailing $2.9B DCF amount.
Given ANDX's ~88M unit float, a 1.03 exchange ratio would increase the MPLX unit count by ~91M units, or ~11.5%.
Given the much higher DCF level, they expect the combined entity to achieve 1.4X distribution coverage, on par with the current trailing average of 1.39X.
Management has reiterated its $.01/unit quarterly distribution hikes guidance for 2019.
2019 Guidance and Post-Deal Implied:
Management issued 2019 guidance earlier in the year before the ANDX deal was signed, and is standing by these figures, which call for 12% EBITDA and DCF growth, and ~21% net income growth:
Coupling this with the much smaller 11.5% unit dilution explains the post-deal estimate for continued strong distribution coverage in the 1.4X range, and the estimate of a 4X net debt/EBITDA leverage level.
Taxes - IRA holders may have tax reporting implications if UBTI exceeds $1,000/year. At any rate, you'll get more tax-sheltering benefits from investing in MPLX in a taxable account.
Thus far, we haven't seen any supportive comments from management about a possible C-Corp conversion.
Dilution - Since they pay out the lion's share of their cash flow, LPs must go to the equity and capital markets to fund growth. However, management has previously stated that they don't anticipate a need to issue public equity to fund 2019 organic growth capital.
Debt - MPLX's strong growth in EBITDA has led to lower net debt/EBITDA leverage over the past four quarters, with Q1' 19's figure of 3.77X, vs. 5.07X in Q1 '18.
MPC and MPLX share management, which raises the potential for conflicts of interest. Its corporate governance rules provide for a majority of independent directors on its board. Thus far, we still haven't encountered any adverse deals for MPLX in its dealings with MPC.
Management sees tailwinds for midstream due to continuing strong US growth in crude, natural gas and NGL production, which will require infrastructure to link supply to overseas markets. Producers will need pipelines, export facilities, and processing facilities to obtain full value for their products.
Management has multiple growth projects underway in both its G&P and L&S segments, with four G&P plants due to come online in 2019 and three to do so in 2020.
There are multiple pipelines in the works for completion in 2020 and 2021, in addition to fleet and terminal expansion projects due in 2019 and 2020. There also are plans for a Gulf Coast fractionation facility and an NGL export terminal in 2022:
At 8.81X, MPLX's price/DCF is right in line with other midstream high-yield companies we cover.
Looking forward though, with DCF due to increase by ~40% post-ANDX deal, we may eventually see ttm DCF/unit rising to ~$4.63 by Q3-Q4 2020, which would imply a much lower forward price/DCF valuation of ~6.8X, at the current $31.46 price level.
Its earnings and distribution growth record has led to premium P/book, P/sales, and EV/EBITDA valuations. The market also is not demanding as high of a yield from MPLX as many other midstream firms.
Management has been able to increase the company's ROA, ROE and operating margin significantly over the past four quarters, in addition to decreasing its debt leverage via EBITDA growth.
MPLX'S first maturity isn't until 2022, when its bank revolver comes due.
The company had total liquidity of $2.915B as of 3/31/19, consisting of $1.82B on its credit revolver, $1B on its MPC loan agreement, and $93B in cash.
MPLX's debt is rated investment grade, "stable outlook" by Moody's, Standard & Poor's, and "positive outlook" by Fitch:
MPLX had total liquidity of $2.915B as of 3/31/19, consisting of $1.82B on its credit revolver, $1B on its MPC loan agreement, and $93B in cash.
With so much past and future growth, you'd expect MPLX's price/unit to have soared higher in 2019, but this hasn't been the case. It has trailed the benchmark Alerian MLP ETF (AMLP) and the market so far in 2019, and over the past month, quarter, and year.
That under performance in price has left MPLX nearly 15% below analysts' lowest price target of $37.00, and 19.3% below their $39.00 average price target.
That discount to the lowest price target seems enticing, but if you don't have much faith in analysts' price targets, and you want to hedge your bet on MPLX, maybe consider selling covered calls or cash secured puts.
The option premiums from both of these trades are tax deferred until mid-April 2021, if the positions aren't closed in 2019.
MPLX's January 2020 $33.00 call strike pays $1.15, a bit less than the ~$1.31 in distributions between now and then.
You can see more details on our Covered Calls Table for this trade and over 30 others, all of which are updated throughout each trading day.
The January $30.00 put strike pays $1.45, a bit more than the next two distributions, and it gives you a breakeven of $28.15, which is just below MPLX's 52-week low of $28.32.
Our Cash Secured Puts Table can give you more details for this trade, and over 35 others, all of which are updated throughout each trading day.
We rate MPLX a buy, based upon its well-covered distributions, its ongoing earnings growth, and its future growth prospects.
All tables by DoubleDividendStocks.com, unless otherwise noted.
Disclaimer: This article was written for informational purposes only and is not intended as personal investment advice. Please practice due diligence before investing in any investment vehicle mentioned in this article.
Our Marketplace service, Hidden Dividend Stocks Plus, focuses on undercovered, undervalued income vehicles, and special high yield situations.
We scour the US and world markets to find diversified income opportunities with dividend yields ranging from 5% to 10%-plus, backed by strong earnings.
We publish exclusive articles each week with investing ideas for the HDS+ site that you won't see anywhere else.
Find out now how our portfolio is beating the market in 2019.
Disclosure: I am/we are long MPLX. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: Our legacy service, www.DoubleDividendStocks.com, has featured options selling, combined with high yield vehicles since 2009.