MPLX Today Represents An Attractive, Though Speculative, Long-Term Income Opportunity

Summary

• There's a lot of risk that conservative high-yield investors need to know about this 15% yielding stock.
• So let's do a thorough review of MPLX's safety, analyzing all the important fundamentals and using the most conservative industry stress test forecasts.
• After all, over the long term, the only thing that matters is our facts and reasoning, which is all that determines safe income and investing success.
• Looking for a portfolio of ideas like this one? Members of iREIT on Alpha get exclusive access to our model portfolio. Get started today »

This article was coproduced with Dividend Sensei.

Midstream investors are understandably confused right now.

MPLX LP (NYSE:MPLX) Soaring Despite Oil Crashing Due to Lack Of Institutional Margin Call Selling:

(Source: Ycharts)

In the last six weeks, MPLX, one of the most hated stocks of the past few years, has rocketed higher, as have most midstream names.

(Source: Ycharts)

However, year-to-date, midstream has been brutalized. This recent bear market is part of a mega crash that has lasted for six years, and at its recent low, on March 18, saw the industry down a staggering 77% with MPLX bottoming at -85% compared to its mid 2015 peak when it was 35% overvalued.

Midstream Peak To Trough

(Source: Ycharts)

What's an investor to make of these insane price moves? As Chuck Carnevale likes to say "stock prices are pathological liars in the short term."

But at the same time, there's a lot of risk that conservative high-yield investors need to know about this 15% yielding stock (whose peak yield on March 18 was 40%).

So let's do a thorough review of MPLX's safety analyzing all the important fundamentals and using the most conservative industry stress test forecasts.

After all, over the long term, the only thing that matters is our facts and reasoning, which is all that determines safe income and investing success.

(Source: imgflip)

So let's look at what MPLX's facts look like today, as best as anyone can know them in these uncertain times.

MPLX Safety Update: 15% Yield Is Safe For Now But Speculative Because Its Sustainability Will Depend On Energy Prices Over The Next Few Years

Here's the safety update about MPLX, using both the latest consensus cash flow estimates as well as stress testing the most conservative analyst forecast.

• DCF payout ratio: 78% vs. 83% safe for midstream (1.2 coverage ratio)

• debt/capital: 53% vs. 60% safe for midstream

• debt/EBITDA: 4.1 vs. 5 or less safe (necessary to maintain investment-grade rating)

• Interest coverage: 3.8 vs 2.5+ safe for midstream

• Credit rating (also a proxy for long-term bankruptcy risk): BBB, negative outlook (about 7.5% 30-year bankruptcy risk)

• Dividend Growth Streak: 7 years

• F score - short-term solvency: 6/9 vs 4+ safe = low short-term insolvency risk

• M score - accounting fraud risk: -2.74 vs -2.22 or less safe = low accounting fraud risk

When it comes to the new advanced accounting metrics we use in the safety model (Piotroski F-score, Altman Z-score, and Beneish M-scores), only the Z-score is inappropriate for midstream, REITs, utilities, yieldCos, and LPs.

That's because of the specific formula that's based on metrics scanned from 10-Qs and 10-Ks. Basically the Z-score works well on most corporations as a proxy for long-term bankruptcy risk, and from 1969 to 1999 predicted 82% to 94% of bankruptcies.

The F-score is the most appropriate advanced metric for midstream and MPLX's 6/9 score is equal to TC Energy's (TRP), and just below Enterprise Products Partners (EPD) and Enbridge's (ENB) 7.

It's also important to stress test all industries likely to see significant cash flow declines in the coming months/years.

Morgan Stanley has the most advanced (and conservative) stress test forecasts I've come across in 30 research reports/notes.

They have revised their model based on the potential for oil to trade negative at times (late in May or June when WTI contracts are expiring).

Here are the results of Morgan's April 22 model which includes a severe stress test scenario of:

• Initial shut-in of 1.25 million bpd US production in Q2

• Shut-in capacity rising to 2 million bpd by mid-2021

• Shut-ins across all shale formations

It should be noted that this is by far the most conservative and severe model from any analyst we've yet seen, which is precisely what makes it a good conservative stress test.

Morgan's base case (not the severe stress test scenario) is for US oil production to fall by 1 million bpd in 2021, about double the rate they expect this year.

Morgan notes that EPD and PAA have both indicated falling throughputs on Permian oil pipelines during recent Texas Regulatory Commission meetings and warns that this increases the risk of Force Majeure (act of god) provisions in long-term contracts being invoked.

Theoretically, this might invalidate volume-commitments in contracts, though Salient Midstream (a midstream focused asset manager) has consulted with bankruptcy experts specializing in energy and concluded this risk is relatively low.

Morgan's latest model concludes that the biggest direct growth headwinds over the next few years will involve LPG (liquified petroleum gas), ethane and oil exports, with Energy Transfer (ET) and EPD most affected.

There are also positives with Morgan noting that storage capacity is near capacity (and likely to be 100% full within three weeks).

This will benefit midstream names with large oil storage capacity in this order:

• Enbridge

• Magellan Midstream Partners (MMP)

• Energy Transfer

• Plains All-American Pipeline (PAA)

• Enterprise Products

NGL storage capacity is also expected to benefit

• Enterprise

• Energy Transfer

• ONEOK

Margin capture from shifting differentials are expected to benefit

• Plains

• Energy Transfer

• Enbridge

• Enterprise

Finally, less associated gas production (gas produced along with oil) is expected to most benefit

• Williams Companies (WMB)

• MPLX

This is Morgan's new medium-term EBITDA estimate for midstream.

Morgan is more bearish than most analysts, as seen by its estimates which almost are all below the current consensus EBITDA estimates.

However, Morgan expects relatively stable EBITDA from ET, KMI, MMP, and OKE.

PAA is the only Master List midstream that's expected to see a significant EBITDA decline through 2022 (due to its heavy oil exposure).

ENB, EPD, MPLX, TRP, and WMB are expected to see recoveries in cash flow in 2021 and beyond, even with low oil prices likely persisting for longer.

How low and for how long? While no one can predict oil prices with accuracy, but the WTI futures contracts can give us an idea of what the overall energy market expects in terms of short-, medium-, and long-term oil prices.

(Source: CME)

Each contract represents 1000 barrels of oil.

Note that June WTI contracts have 118,000 volume meaning they represent 118 million barrels of oil that would have to be delivered to Cushing Oklahoma if the contracts remained in existence at the time of expiration.

In reality, the vast majority of WTI contracts (and most futures contracts of all kinds) are bought/sold by speculators. Before expiration buyers and sellers are matched up and the vast majority of contracts cancel out.

But the point is that right now there's a major contango, meaning short-term oil prices are much lower than medium-term contracts. The oil futures market is signaling it expects crude to recover to about $30 by the end of the year.

That's the good news, that crude could double within a few months if economic restarts increase demand for oil and reduce the largest supply glut in history.

The bad news? Lower for longer is what the futures contracts are also pointing to.

• June 2021: $32.32 (3,564 contract volume)

• December 2021: $34.1 (4,761 contract volume)

• June 2022: $35.56 (304 contract volume)

• December 2022: $37.03 (277 contract volume)

• December 2023: $40.00 (43 contract volume)

Now we must remember that futures contract prices change over time, with the longer duration contracts having lower but still high volatility. The longer duration contracts also have very low volumes (99% less than June 2020).

So these are not by any means accurate predictions of where oil prices will be in 2021 and beyond. They are merely the current futures prices indicating what a few traders believe.

But what this data can show us is that the oil market is pessimistic about the price of crude, expecting very low prices to persist due to the long recovery that such a severe recession will likely require.

The good news is that Rystaad energy estimates that at $30 oil by the end of next year, just 170 US oil companies would go bankrupt (out of about 9,600).

The bad news?

(Source: Kansas City Federal Reserve)

The April 2020 survey of energy companies by the Kansas City Fed found that energy executives expect that about 55% of producers would go bankrupt if oil stayed at $40 for over two years.

If oil were to remain at $30 for over two years (through 2023) energy executives expect about 65% of US energy companies would go bankrupt.

$30 oil for that long would likely require a depression, a low but none zero risk right now.

$40 oil for three years? That's a higher risk, given where oil futures contracts are currently trading.

Morgan's base case is that US production will have to decline by 2 million bpd, an estimate that is on the high end of the current analyst range (1.5 million to 2 million bpd).

In that scenario (the stress test case) here are Morgan's estimated debt/EBITDA and payout coverage ratios for major midstreams. Under its stress test scenario, Morgan expects ET and OKE (both 3/5 safety-speculative ratings on the DK Master List) to cut their payouts.

TRGP and PAA already have slashed their payouts (by 50% and 89%, respectively) which is why their coverage ratios under the stress test are so high and skew the median for the industry to 1.8.

Under Morgan's stress test EPD remains very safe with an estimated 2020 coverage ratio (which is expected to climb in 2021 and 2021) bottoming at 1.54.

MPLX's would fall to 1.12 under Morgan's stress test, though leverage would peak at 4.3, a still safe level.

MPLX's 3/5 safety-speculative rating is a result of the potential for the payout ratio to climb to 89% (from the current consensus of 78%) this year, which would be above the 83% safety guideline.

The bottom line in the stress test is that

• EPD, ENB, and TRP remain the safest payouts in the industry due to strong combinations of diversified assets, the safest contract profiles, strong balance sheets, excellent liquidity, and industry-leading solvency.

• ET, MPLX, OKE, and WMB are more speculative, with ET, MPLX, and OKE having 3/5 average safety scores.

3/5 safety normally means about 2% recession payout cut risk, based on historical dividend cuts during normal modern era recessions.

(Sources: Moon Capital Management, NBER, Multipl.com)

However, this is no ordinary recession, but the worst in 75 years, and the worst oil crash in history.

Which is why we must now turn to the biggest reason for MPLX being a 3/5 safety-speculative MLP.

Currently, MPLX has a BBB credit rating with, negative outlook rating from Moody's and S&P.

(Source: University of St. Petersburg)

Credit ratings are important qualitative proxies for both long-term (30-year) bankruptcy risk as well as long-term bond default rates.

(Source: S&P)

You can see from the above tables that there's a relatively good correlation between bankruptcy risk and default rate.

You'll also note that my safety model is about 75% focused on balance sheet metrics. That's because no dividends get paid until bondholders do.

Bonds are most senior in any company's capital structure which is why all corporations are so concerned about maintaining investment-grade credit ratings.

That's especially true of highly leveraged industries/sectors such as midstream, REITs, and utilities.

Low cost of capital is essential to long-term profitability and thus the credit rating agencies are one of the most important sources of analysis pertaining to payout safety in this industry.

We have three recent notes from S&P and Moody's so let's review them.

First up is S&P's March 24 industry-wide note reviewing most big midstream names. Note that in March MPLX was rated BBB, stable outlook, and that has since been downgraded to negative.

We are currently reviewing both MPLX and its parent company, Marathon Petroleum Corp. Given current market conditions, we expect that asset sales in this market will be limited. That said, perhaps the most notable credit factor for MPLX is related to its direct and indirect commodity price exposure.

Approximately 35% of MPLX's 2019 EBITDA was tied to its gathering and processing business segment, which also has direct commodity price exposure. As of year-end, the company had over $4.4 billion of liquidity, which positions it well for the medium term. Following the conclusion of our review, we will provide a more detailed update on forecasted 2020 credit ratios." - S&P

While 35% of MPLX's cash flow is from the gathering and processing, just 5% of its actual cash flow is directly affected by commodity prices.

In fact, the decline in associated gas production (an estimated 8 million cubic feet per day) is expected to significantly improve gas prices in the coming years, helping MPLX's Marcellus/Utica gas producer clients.

This is why both Morgan and Salient Midstream (who sold MPLX in March and has now been buying it again) consider MPLX to be among the best positioned to profit from the likely revival of gas prices.

Among G&P exposed midstreams, Morningstar considers MPLX's assets to be some of the best.

We consider MPLX's gathering and processing operations to be moaty, and some of the best G&P assets within our coverage.... Based on what peers have disclosed, and the fact that G&P contracts tend to be similar on a regional basis, we believe it is likely that MPLX has a number of long-term (around 10 years) firm-fixed fee contracts with reservations fees. This dynamic means MPLX's G&P operations resemble a pipeline versus the typical G&P assets under our coverage that operate with less attractive acreage dedication agreements." - Morningstar

But Morningstar's Stephen Ellis warns that while MPLX's distribution is likely to remain sustainable that doesn't mean that its payout won't potentially be cut due to debt maturities coming up in 2020 and 2021.

On the negative side, we think some entities, including MPLX, DCP Midstream, Energy Transfer, and Oneok are under substantial pressure by investors to reduce payouts to more aggressively address high leverage or other business priorities.

To be clear, we think the payouts are financially supportable, given our expectations around business results and the entities' balance sheets, but this environment is potentially offering management sharply higher returns elsewhere, particularly around repurchasing highly discounted debt.

We think MPLX, Oneok, and Williams could prioritize upcoming maturities over their payouts, given their lack of near-term excess cash flow generation if further culling near-term capital spending plans is not feasible.

For DCP and Energy Transfer, we think the focus on preserving liquidity during a period when near-term results will be more challenging than at any time in the energy markets over the last few decades could force a reckoning." - Morningstar

(Source: MPLX 10-K)

MPLX has 19% of its debt maturing in 2021 and 2022, which is the period of time most analysts expect the oil crisis could last.

Virtually no debt maturities in 2020 is likely why MPLX just declared an unchanged $0.6875 distribution.

Whether or not MPLX is able to sustain the payout in 2021 and beyond will depend on how the economic recovery goes in the coming years and what that does for energy prices and the solvency of its key customers.

But that brings us to the second of the three recent notes from credit rating agencies, this one from Moody's in October 2019.

In October 2019, before the oil crash, Moody's downgraded MPLX (and MPC) to Baa2 negative outlook (BBB S&P equivalent).

MPLX's negative outlook reflects the uncertainty around the outcome of MPC's board mandated review of MPLX's operations, asset composition and relationship with MPC. Much of MPLX's Logistics and Supply asset base (66% of MPLX's nine-month EBITDA) is integrated with and strategically supports MPC's 3.0 million barrel per day (bpd) refining system.

Its gathering and processing (G&P) assets are highly exposed to Appalachian natural gas production, which is laboring under the burden of weak natural gas prices. MPLX's outlook could be returned to stable depending on what if any changes are made to the configuration of its asset mix or its strategic relationship with MPC, and presuming its current credit profile remains intact.

MPLX's ratings could be downgraded should debt/EBITDA exceed 4.5x or if there is a deterioration in the stability of MPLX's business profile." - Moody's

MPLX has completed its strategic review and will be keeping its corporate structure intact. That and the expected recovery in Marcellus/Utica gas prices should alleviate Moody's earlier concerns.

And as we've seen from Morgan's stress test, MPLX leverage isn't expected to surpass the 4.5 debt/EBITDA level that Moody's says would result in a downgrade.

MPLX's Baa2 rating reflects the significant portion of its Logistics and Storage asset base that is highly integrated with MPC's refining system, and supported through contracts with MPC.

Through its MarkWest subsidiary, MPLX operates one of the nation's largest natural gas G&P systems, and is the largest midstream operator in the Marcellus and Utica Shale, with a growing presence in the US southwest.

MPLX's G&P net operating margin is substantially supported by fee-based contractual arrangements, limiting its exposure to commodity price volatility. Further supporting MPLX's rating is the strength of its stand-alone financial profile. Its target leverage metric is around 4x debt to EBITDA, which the company has largely maintained; reflecting Moody's standard adjustments, debt leverage at June 30 was 4.25x." - Moody's

Moody's concurs with Morgan and Morningstar that MPLX has little direct commodity exposure courtesy of the long-term and volume committed nature of its contracts.

However, facts are changing fast right now so the most important note is from S&P on April 22.

On April 22, 2020, Marathon Petroleum Corp. announced multiple actions in response to the collapse in refined product demand from the COVID-19 shutdown.

Measures included reducing refinery utilization, deferring capital expenditures, cost reduction initiatives, and drawing $3.5 billion from its revolver to add greater financial flexibility and improve liquidity. When factoring in these measures, we expect 2020 consolidated adjusted leverage to be above 6x, but expect it to improve in 2021 and beyond.

As a result, we are affirming the 'BBB' issuer credit and issue-level ratings on Marathon Petroleum Corp as well as the 'A-2' short-term rating. At the same time, we are affirming the 'BBB' issuer credit and issue-level ratings on MPLX LP. We are revising our outlook on both companies to negative.

The negative outlook reflects our expectation that Marathon will have elevated credit metrics with consolidated leverage above 6x in 2020 under the current down-cycle environment. The negative outlook on MPLX reflects our view that MPLX's credit quality is constrained by the credit quality of its parent." - S&P

About 60% of MPLX's cash flow is from Marathon Petroleum (MPC), America's largest independent refiner. Those are 100% volume-committed contracts with about seven years average duration remaining.

As long as MPC remains solvent MPLX is going to get that revenue giving it good cash flow visibility in the coming years.

However, MPC's short-term outlook is very cloudy due to the impact of the lockdowns.

We expect Marathon's credit metrics to deteriorate from 2019 levels due to the lockdowns resulting from the coronavirus pandemic and the ensuing economic impact and decline in demand.

Since the lockdowns started, limited travel has depressed demand for refined products (i.e. jet fuel and gasoline) and only diesel consumption remains within historical ranges. We expect consolidated leverage to increase above 6x in 2020 as earnings are materially affected by this demand destruction.

We could lower the rating on Marathon if the refining sector were weaker than expected in the latter half of 2020, resulting in 2021 forecast consolidated leverage above 4x. This could also occur if liquidity weakened and the company did not take further steps to improve its liquidity position.

We could revise the outlook to stable if market dynamics in the refining sector improved quicker than anticipated, resulting in consolidated adjusted leverage improving to below 4x for 2020.

This could also occur if Marathon were able to unlock meaningful value from asset dispositions (i.e. Speedway) and used proceeds to reduce total outstanding leverage." - S&P

As S&P explains, because of being tied to MPC for most of its cash flows, MPLX's credit rating is tied to its sponsor.

We would lower our rating on MPLX if we lowered our rating on Marathon to 'BBB-'. This could occur if the refining sector remained challenging through the latter half of 2020, resulting in 2021 consolidated leverage above 4x. This could also occur if liquidity weakened and the company did not take further steps to improve its liquidity position.

On a stand-alone basis, we could lower our rating on MPLX if the partnership sustained a debt-to-EBITDA ratio above 4.5x and we did not see a clear path for improvement, which could result from lower-than-expected volumes through 2021.

We could revise the outlook to stable if we took a similar rating action on Marathon. This could occur if market dynamics in the refining sector improved quicker than anticipated, resulting in consolidated adjusted leverage improving to below 4x for 2020 or if Marathon unlocked meaningful value from asset dispositions and reduced total outstanding leverage." - S&P

The bottom line is that MPLX's 15% yield is safe for now, but whether it remains that way will depend on the pandemic and whether or not we can sustain the phase 1 restarts that 16 states are currently planning (or have already begun) by May 1.

The Biggest Short-Medium Term Risk To MPLX's Payout Safety

State	Estimated Potential Safe Phase 1 Restart	Last Week's Estimated Safe Restart Date	Estimated Safe Restart Date 2 Weeks Ago	Difference (days) From Last Week	Difference From 2 Weeks Ago
West Virginia	5/10/2020	5/8/2020	5/4/2020	2	6
Hawaii	5/11/2020	5/6/2020	5/4/2020	5	7
North Carolina	5/13/2020	5/11/2020	5/11/2020	2	2
Ohio	5/15/2020	5/14/2020	5/18/2020	1	-3
New Hampshire	5/17/2020	5/16/2020	5/11/2020	1	6
Montana	5/18/2020	5/6/2020	5/4/2020	12	14
Vermont	5/18/2020	5/10/2020	5/4/2020	8	14
Deleware	5/19/2020	5/19/2020	5/18/2020	0	1
Idaho	5/19/2020	5/16/2020	5/11/2020	3	8
Maine	5/19/2020	5/13/2020	5/18/2020	6	1
California	5/20/2020	5/18/2020	5/18/2020	2	2
Illinois	5/20/2020	5/19/2020	5/25/2020	1	-5
Michigan	5/21/2020	5/20/2020	5/18/2020	1	3
Alabama	5/22/2020	5/19/2020	5/18/2020	3	4
Indiana	5/22/2020	5/21/2020	5/25/2020	1	-3
Wisconsin	5/22/2020	5/21/2020	5/18/2020	1	4
Nevada	5/23/2020	5/20/2020	5/18/2020	3	5
Tennessee	5/24/2020	5/20/2020	5/25/2020	4	-1
Louisiana	5/27/2020	5/23/2020	5/18/2020	4	9
Maryland	5/27/2020	6/4/2020	6/8/2020	-8	-12
Virginia	5/27/2020	6/4/2020	6/8/2020	-8	-12
Washington DC	5/27/2020	6/4/2020	6/8/2020	-8	-12
New Jersey	5/28/2020	5/27/2020	6/1/2020	1	-4
New York	5/28/2020	5/27/2020	6/1/2020	1	-4
Pennsylvania	5/28/2020	5/27/2020	6/1/2020	1	-4
Oregon	5/30/2020	5/27/2020	5/25/2020	3	5
Mississippi	5/31/2020	5/29/2020	6/1/2020	2	-1
Washington	5/31/2020	5/28/2020	5/18/2020	3	13
Colorado	6/1/2020	5/26/2020	5/25/2020	6	7
Wyoming	6/1/2020	5/25/2020	5/25/2020	7	7
New Mexico	6/5/2020	5/24/2020	5/18/2020	12	18
Minnesota	6/8/2020	5/31/2020	5/25/2020	8	14
South Carolina	6/14/2020	6/18/2020	6/1/2020	-4	13
Texas	6/15/2020	6/8/2020	6/1/2020	7	14
Connecticut	6/19/2020	6/9/2020	6/1/2020	10	18
Missouri	6/19/2020	6/10/2020	6/1/2020	9	18
Florida	6/21/2020	6/14/2020	6/1/2020	7	20
Kentucky	6/22/2020	6/14/2020	6/8/2020	8	14
Massachusetts	6/22/2020	6/10/2020	6/8/2020	12	14
Rhode Island	6/22/2020	6/10/2020	6/8/2020	12	14
Arkansas	6/28/2020	6/22/2020	6/22/2020	6	6
Georgia	6/29/2020	6/22/2020	6/15/2020	7	14
Kansas	6/29/2020	6/21/2020	6/1/2020	8	28
Iowa	6/30/2020	6/26/2020	6/29/2020	4	1
South Dakota	7/5/2020	6/27/2020	6/22/2020	8	13
Arizona	7/6/2020	6/26/2020	6/8/2020	10	28
Utah	7/6/2020	6/23/2020	6/15/2020	13	21
Nebraska	7/7/2020	7/3/2020	6/29/2020	4	8
North Dakota	7/20/2020	7/19/2020	6/29/2020	1	21
Alaska	NA	5/7/2020	5/11/2020	NA	NA
Oklahoma	NA	6/17/2020	6/15/2020	NA	NA
Average				4.1	7.2

Click to enlarge

(Sources: IHME, Dividend Kings COVID-19 Forecasting Tool)

Here's the estimated safe phase 1 restart dates for each state per the University of Washington's Institute for Health Metrics & Evaluation or IHME.

The average safe phase 1 restart date estimate has been pushed back by 4.1 days from last week and 7.2 days from the initial estimate two weeks ago.

An MIT study of the effects of lockdowns at city levels during the 1918-1919 Spanish Flu pandemic concludes that lockdowns are actually the best way of achieving stronger long-term economic recoveries.

We find no evidence that cities that acted more aggressively in public health terms performed worse in economic terms,” says Emil Verner, an assistant professor in the MIT Sloan School of Management and co-author of a new paper detailing the findings. “If anything, the cities that acted more aggressively performed better.”

With that in mind, he observes, the idea of a “trade-off” between public health and economic activity does not hold up to scrutiny, places that are harder hit by a pandemic are unlikely to rebuild their economic capacities as quickly, compared to areas that are more intact.

“It casts doubt on the idea there is a trade-off between addressing the impact of the virus, on the one hand, and economic activity, on the other hand, because the pandemic itself is so destructive for the economy,” Verner says.

The study, “Pandemics Depress the Economy, Public Health Interventions Do Not: Evidence from the 1918 Flu,” was posted to the Social Science Research Network as a working paper on March 26." - MIT

(Source: IHME)

Georgia's estimated safe restart date is June 27, and the state chose to enter phase one on April 24.

Thus the best available data we have, from IHME and MIT, indicates that Georgia potentially jumping the gun by nine weeks could result in worse economic results and longer recovery than had it waited and used the Federal Guidelines written mostly by Dr. Anthony Fauci.

According to Google Scholar Fauci, who has been the director of the National Institute of Allergy and Infectious Diseases since 1984, is the third-most cited epidemiologist in history, and the 13th most widely cited scientist of any kind.

In other words, according to academia, Fauci is one of the most brilliant immunologists in history, and likely the leading expert in the entire world about this pandemic.

The states that are going into phase 1 early are doing so against the protocols he's devised for safe restarts which include

• Two weeks of declining daily cases

• Adequate medical capacity to handle a spike in cases (second wave)

• Adequate testing capacity (for contact tracing)

(Source: YCharts)

The expert consensus is that the US needs 300K to 500K daily testing capacity in order to safely enter phase 1 in all states. We're currently at just over 200K daily cases.

Experts also estimate we need 100,000 contact tracers nationwide, to prevent the need for locking down again.

NPR surveyed all 50 states, Puerto Rico and the District of Columbia to ask them how many contact tracers they currently have — and how many they were planning to add if any. We got data for 41 states and the District of Columbia and found they have in total approximately 7,602 workers who do contact tracing on staff now, with plans to surge to a total of 36,587." - NPR

(Source: NPR)

Of the 16 states that are entering phase 1 by May 1st, only North Dakota meets the consensus contact tracer capacity consensus requirement. North Dakota has 66 per 100,000 contact tracers, more than double the expert consensus minimum.

Several states that are going phase 1 on May 1, such as Texas and LA, are planning on hiring a lot more tracers.

Several states that took our survey are making big efforts to shore up their contact tracing workforces. Notable examples include Louisiana and Kentucky, which are both planning to hire 700 people; Texas, which has 1,150 contact tracers and is hiring another 2,850 to start; and Kansas, which plans to bring on 400." - NPR

However, that likely still won't be enough.

Of the places that responded to NPR or have released this information in press releases, only four are positioned to surpass that 30 workers per 100,000 thresholds: the District of Columbia, Michigan, Nebraska, and North Dakota. - NPR

Basically, it appears

• The US lacks adequate testing capacity

• Most states lack contact tracer capacity

• 30% of our states have decided to restart earlier than leading experts say is safe

• MIT study says this could lead to worse economic results (a longer pandemic, and longer-lasting recession with slower recovery)

Don't get me wrong, I'm hoping for the best for all those early phase 1 states.

But we're a data-driven realist because that's the only way to be an intelligent investor.

The reality is the US is facing a very high-risk situation right now and history may look back on this time and conclude

• February was the month of complacency

• March was the month of panic

• April was the month of misplaced hope

• May was the month of mistakes

• June was the month of fear

• July will hopefully be the month of cautious and justified optimism

Anyone who wants to buy MPLX right now should only do so as part of a well-diversified and prudently risk-managed portfolio.

Our recommendation with any speculative rated company is 2.5% or less risk exposure, and if you own more than that then MPLX would be a "hold" for you personally.

However, if you understand the risks and own less than 2.5% MPLX in your portfolio than today's valuation does offer a significant margin of safety and excellent potential for long-term yield and an attractive/reward to risk profile.

Valuation: An Attractive Reward/Risk Profile For Those Comfortable With More Speculative Investments

The way we value a company is by applying the historical multiples the market has applied to it during periods of similar fundamentals (in terms of expected growth rates).

In this case, since we're facing a lot of growth uncertainty, we're being conservative and using the seven-year FAST Graphs time period, which is 100% midstream bear market.

MPLX Valuation Matrix

Metric	Historical Fair Value (7 Year)	2020	2021	2022
5-Year Average Yield	6.73%	$41	$41	$41
Operating Cash Flow	7.6	$29	$29	$27
EBITDA	7.3	$35	$35	$36
EBIT	10.5	$34	$35	$36
Average		$35	$35	$35

Click to enlarge

(Source: F.A.S.T Graphs, FactSet Research)

Applying those very conservative multiples to MPLX's revised consensus estimates for 2020 (they've already fallen in recent weeks) provides a fair value estimate of between $29 and $41, with an average of $35.

This means MPLX is about 45% undervalued and a potential, though speculative, very strong buy.

MPLX Growth Matrix

Metric	2020 Growth Consensus	2021 Growth Consensus	2022 Growth Consensus
Distribution	0%	0%	0%
Operating Cash Flow	-16%	-1%	-7
EBITDA	-5%	1%	3%
EBIT	-11%	2%	3%

Click to enlarge

(Source: F.A.S.T Graphs, FactSet Research)

Analysts expect EBITDA to take a modest hit this year, followed by gradual recoveries over the next two years.

Operating cash flow is expected to decline through 2022 though the peak DCF payout ratio consensus in 2021 is about 81%, still under the 83% safety guideline.

What about MPLX's long-term growth potential? That has fallen in recent weeks, as one might expect when growth project spending plans are being deferred or canceled across the industry.

(Source: MPLX)

MPLX began as a drop-down focused MLP buying assets from MPC which came with long-term contracts.

Now that it's acquired all of Marathon's midstream assets it can only grow organically, which is why growth is expected to be about 3% CAGR going forward.

But to confirm the long-term growth outlook I look at three consensus sources.

• FactSet growth consensus through 2022: -7.6% CAGR (worst oil crash in history)

• FactSet long-term growth consensus: 3.0% CAGR

• Ycharts long-term growth consensus: 3.0% CAGR

• Reuters' five-year growth consensus: 4.5% CAGR

• Realistic growth range: 2% to 6% CAGR

In order to determine the realistic growth range on MPLX, we look at how its historical track record of meeting, beating, or exceeding consensus cash flow estimates.

MPLX has the best long-term track record of exceeding expectations of any stock we know of - 100% of the time it beats by at least 10%.

(Source: F.A.S.T Graphs, FactSet Research)

For two-year forecasts it similarly always beats by 20% or more.

Applying very conservative margins of error I estimate 2% to 6% CAGR growth potential for MPLX.

• Growth potential 2% to 6% CAGR

• Bear market historical P/OCF range: 7 to 8

• Current P/OCF: 4.4

• Implied long-term growth baked into price (Graham/Dodd fair value formula): -8% CAGR

• Operating cash flow yield: 20.2%

• 10-year US Treasury Yield: 0.6%

• Cash flow risk premium: 19.6%

• S&P 20 year average risk premium: 3.7%

• MPLX reward/risk ratio: 19.6%/3.7% = 5.3X average risk premium of S&P 500

• Graham/Dodd/Carnevale recommended cash flow yield (reasonable and sound investments): 6.7%

• Graham/Dodd/Carnevale recommended reward/risk ratio: 6.1% earnings/cash flow yield risk premium/3.7% S&P historical = 1.7

• MPLX reward/risk ratio is 3.1X the recommended amount

MPLX's reward/risk ratio is sky high even after its 130% rally off its lows.

(Source: F.A.S.T Graphs, FactSet Research)

If MPLX grows 1% slower than the lowest long-term consensus estimate (remember it has always beaten by at least 10%) and returns to the low end of its bear market multiple range, then investors could see about 19% CAGR total returns over the coming five years.

(Source: F.A.S.T Graphs, FactSet Research)

If MPLX slightly exceeded Reuters' long-term growth consensus (from 11 analysts) and grows at 6% CAGR over the long term (post-oil crash) then it could potentially deliver 26% CAGR total returns.

(Source: F.A.S.T Graphs, FactSet Research)

Here's the consensus return potential, applying 2022 operating cash estimates to the 7.6 OCF multiple MPLX has averaged during the midstream bear market.

That's how we estimate the 19% to 26% CAGR total return potential Dividend Kings and iREIT subscribers see in the Master List, Research Terminal, and safe midstream list.

Those figures were about 44% to 50% CAGR at MPLX's March 18th bottom, when it bottomed at $6.87 and a 40% yield.

A yield that, barring the recession and oil crisis lasting longer than most analysts expect, will likely remain safe.

Basically, even after a face-ripping rally, MPLX remains an attractive, average quality MLP, though one whose payout safety is more speculative than higher-quality peers like ENB, TRP, and EPD.

As part of a well-diversified and properly risk-managed portfolio, such as 2.5% of your equity portfolio (and 2% or less of the entire portfolio when including bonds/cash) MPLX today represents an attractive, though speculative, long-term income opportunity.

Bottom Line: MPLX 15% Yield Should Survive... If The Pandemic/Recovery Proceeds As Expected

The good news is that the margin call selling pressure of March ($2.5 billion in margin call pressure according to Salient midstream on CEFs) is now past, or appears to be.

Thus midstream appears to have bottomed, as seen by the fact that the industry's stock prices have barely flinched even when crude fell 312% in a single day on April 20.

In fact, MPLX actually went up modestly on the day when oil had its worst day in history.

MPLX Actually Went Up The Worst Day For Oil In History

(Source: Ycharts)

But while MPLX isn't likely to test new lows the issue of its payout safety is a trickier question to answer.

As Morningstar and many analysts have pointed out MPLX's distribution is safe fundamentally speaking thanks to

• Good coverage ratio

• Strong balance sheet

• Modest leverage and high-interest coverage

• $4.4 billion in total liquidity

• FCF self-funding in 2021 and beyond

MPLX is doing everything right to sustain a safe distribution that analysts don't expect to grow or shrink in the coming two years.

However, the world is changing rapidly right now, and whether or not MPLX's stress test results actually hold up will depend on many factors beyond management's control.

• The path of the pandemic

• The path of the economic recovery

• The path of oil prices over the next few years

• The state of the credit markets (and ability to refinance maturing debt in 2021 and beyond at reasonable rates)

MPLX's 15% yield is safe as long as things don't get any worse, and the recession ends on roughly the expected timeline.

At 15% yield and 45% undervalued, MPLX is a classic anti-bubble stock, though more speculative than some conservative investors might like.

The margin of safety is so high that 19% to 26% CAGR total returns over the next five years are possible even after a face-ripping 130% rally off the March 18 lows.

Within a well-diversified and prudently risk-managed portfolio, with a 2.5% or less position size (for the equity portion of the portion) MPLX remains a potentially attractive very strong buy.

We will continue to do so, monitoring the energy/midstream markets closely.

Should MPLX's safety deteriorate further, you'll read about it in a future update article.

Author's note: Brad Thomas is a Wall Street writer, which means he's not always right with his predictions or recommendations. Since that also applies to his grammar, please excuse any typos you may find. Also, this article is free: Written and distributed only to assist in research while providing a forum for second-level thinking.

Analyst’s 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.