MPLX's Mad Management's March Against Meager Valuation
Summary
- Management seems determined to lower its yield.
- MPLX's financial health improved significantly last year paying all of its cash needs through operations plus added cash.
- The company's highest priority for its extra cash is/was rebuying stock.
- We expect a modest increase in its dividend later this year or early into next year.
Although the nation's economy suffered last year a deep decline, MPLX (NYSE:MPLX) executed at a high level and achieved its objective for cash flow independence a year earlier than planned. With this goal achieve, exploring what's next is paramount for investors. During the last conference call, the company stated that it has to balance its future cash expenditures between four categories: increased dividends, stock buy backs, capital and leverage reduction. Let's go explore.
Quarterly results
During the February Conference, the company noted a variety of important markers and results. Among those, it reported are:
- Achieved Adjusted EBITDA for the quarter and year at $1.4 billion and $5.2 billion.
- Grew total BcF in 2020 over 2019.
- Achieved its operating expense reduction target of $200 million.
- Generated $1.2 billion in distributable cash or 1.58 times the distribution.
- Ended with a leverage ratio of 3.9 with $3.3 billion left available to borrow.
- Generated an excess of $266 million after all the cash expenses were paid.
- Purchased $33 million worth of stock.
MPLX had a good year in-spite of the uncertainty. It also noted during the conference that it is expecting a gradual increasing EBITDA moving forward. It also plans to reduce its leverage mostly through increasing the denominator. When asked about leverage, Mike Hennigan, CEO, offered, "we've been comfortable with our leverage . . . And we've been running around 4 times for some pretty consistent amount of time." MPLX isn't concerned about using surplus cash toward paying off debt.
The following slide provides a great summary of the quarter and year.
Considering all the circumstances, the company produced an exceptional quarter and year.
So What's On Management's Mind
With MPLX achieving cash neutrality plus, understanding managements concerns and direction is in our view, paramount. The analysts spoke up often during the Q&A directly hitting by asking, what's next?
When asked about forecasting EBIDA for 2021, Pam Beall, the company's CFO, described a range between $4.9 and $5.3 billion with additional cost savings to help offset a minor contractual loss of $100 million. She developed the range using last year's lowest and best quarters. With the company generating almost $300 million in cash last year, management telegraphed that it is in its worse state cash flow neutral and in its best state will generate at least $400 million. When asked about priorities for cash use, Beall explained that some level of uncertainty forces a quarter-to-quarter analysis. Again, for one use, purchasing stock, at yields above 10%, the company felt obligated to buyback. During the call, it seemed clear that management was a little more than frustrated with its stock price. Bluntly, Beall added, "it's been undervalued." Again, management's more than frustrated feelings appear in multiple places. "And right now, we have a DPU yield of around 12%. We got a DCF yield of around 17%. And if the equity is going to trade at that kind of level then our priority in the short-term would obviously be to buy back units."
Since the start of the year, a gradual improvement in stock price is happening. At year's end, the equity traded at $22. On February 2nd, the conference call date, the price closed at near $24. In early April, the price is slightly above $26. With the yearly dividend pegged at $2.75, the yield fell to 10.5% which seems more in management's range.
A final note considering possible tail winds from improving prices in natural gas (NG), Beall stated that it's a very minor help producing $25 million per $0.05 change. It was clear that improving prices might push, but don't expect much.
To help investors better comprehend the possibility for changes in stock pricing with the disappearance from this dogging issue, we included a weekly chart generated using TradeStation software.
The chart defines several points of resistance. Of most interest is the significant region between $26 and $27 followed by the next at $30. Most recently, the price has been trading just into this significant resistance point at $26+. An almost certain well accepted pattern for higher yielding dividend stocks is a natural up cycle heading into dividend paying periods with it dropping in price heading out. With the payment period coming into play over the next 6 weeks, normal trading patterns suggests a continued positive change is forthwith. We are watching this closely, because a break of $26-$27 likely changes the trading range to $26-$30. This new range likely dissipates managements deep frustration with yield allowing them to move on.
Frustration Abounds Or?
Dealing with a final point of frustration, management offered significant in-sight concerning expiring contracts with the once parent, MPC (MPC). Most of those contracts were renewed in 2018. But the company added more, "we fully expect that MPC is going to renew these contracts with MPLX. In many cases, it has no other ingress or egress to its facility. So we fully expect these contracts are going to be renewed, and MPC owns a majority interest of MPLX and gets a lot of cash back from MPLX. So we think it's in the mutual interest of MPC and MPLX to continue the positive relationship that we have enjoyed." It's a compelling argument against what might be a or the only investor worry, in our view, that drove the yield higher.
Eliminating the Frustration Opens Doors
With very modestly higher stock prices seemingly just around the corner, MPLX may turn its attention for its extra cash use to the other two, dividends and expansion capital.
Last year, the company drastically lowered its capital expenditures, because it chose a different vision, one in our view, more realistic. The energy market is changing with renewable energy sources assuming a higher percentage. This change will happen naturally regardless of government action. Its speed could unfortunately be dramatically increased with unwarranted government meddling. MPLX now plans to spend $800 million during 2021 for growth. The following presentation slide highlights the three major projects slated for completion. The common thread for these projects was "the must" of guaranteed revenue at startup. Each of these, Wink-to-Webster pipeline, Whistler Pipeline and NGL fit this must and will begin adding revenue during the 2021. Since at the call, at least for us, it was unclear how this new revenue played into the company's belief for increasing cash flow, a real possibility might exist for a wider upper EBITDA limit. So we ask, "Is an EBITDA greater than $5.3 now possible?"
With company's policy concerning growth capital investment requiring startup revenue in place, it appears that this recent drastic lowering is a "permanent change." Finally on capital, the company gave investors this important view, "We remain committed to strict capital and expense discipline . . " It seems clear that growth capital spending has been for the foreseeable future, cut.
So we ask, could it be possible that the only real use of excess cash is to increase the dividend? It seems so. Last year, MPLX paid $3.0 billion in dividends. Excess cash north of $400 million represents more than a possible 10% increase. With our belief that the proposed upper EBITDA limit of $5.3 billion is short, possible future dividend increases totaling 15%-20% might happen. We strongly believe that by fall, MPLX's financial circumstances will support small dividend increases, increases incremented in over time. We are very interested in management's decision.
The Risks & Future
No investment comes without risk. The political environment may be the biggest. Even only a few weeks ago, NG was mostly considered a safer fossil fuel investment. A posted column on OilPrice does shatter some of this belief. The editorial asks, "Why Has President Biden Sidelined Natural Gas?" The author's view wonders why the newly released Federal Government energy plan seems to abandon the idea for significant NG usage, one which was a critical campaign promise. For MPLX, NG production is of most importance.
The economy with the virus also adds risk. But, last year's performance offers investors a realtime preview of performance during a very difficult economy. MPLX generated cash above all of its cash expenses.
Even with possible risks, our view remains that this is a good long-term investment. We can't fathom a near-term situation where NG isn't in premium demand. We also acknowledge management's frustration with the markets valuation. Perhaps titling this article, "MPLX's Mad Management's March Against Meager Valuation" is a little over the top, but it stated clearly this very real management disposition. When the valuation issue dissipates, room and ability for dividend increases appears. MPLX will likely become a better payday for the investor.
This article was written by
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.
Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.
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Comments (53)
Remember that if your basis is zero the distributions are taxed as capital gains. And if you do sell you will recognize a bunch of ordinary income (offset by any accumulated passive losses you can use when you exit the position), which can happen if MPLX is bought out or merged for common stock, such as if MPC buys out the public LPs.
That is the current law, but it may not last. The Biden tax plan calls for eliminating the step up in basis on death (although assets would presumably still be valued at current market for inclusion in one's taxable estate). And the amount of capital gain might push one into a bracket (not yet established--during his campaign Biden said $400,000 but I have seen more recent proposals at $200,000) at which capital gains are taxed as ordinary income, and Biden proposes that the top ordinary income rate will be increased to 39.6%.
Also, as houtex points out, depreciation recapture, even after the release of suspended passive activity losses, will also be taxed as ordinary income and may push you into the higher bracket at which capital gains are taxed as ordinary income.
Beware these Biden Administration proposals and Congressional adoption of them.
Elliot Miller
Eye wink!
Mark
MPLX is a partnership, not a corporation. Its equity in in partnership units, nit in stock. It does not pay dividends. As a pass through entity, MPLX pays distributions and allocates partnership losses and earnings and profits subject to Code section 199A. The differences between shares of stock and partnership units, and between corporate dividends and partnership distributions, is very meaningful under the tax law.
Elliot Miller
Yeah, it isn’t as simple as “distributions” or “dividends” as partnerships can be elected to be taxed as corporations. So everything they do will be called “distributions” but that’s not what they are when it comes to tax time. Honestly, people should just be given a little heads up about “this is a partnership for tax — you get a K-1” or “this is a corporation for tax — you don’t get a K-1” and then people can say dividends and shares to their heart’s content. It’s all a bit tiresome.
Keep in mind that one plank of the new tax platform is to eliminate “tax breaks” for fossil fuels, and Section 7704 allowing energy companies to bypass the requirement to be a corporation imposed on other publicly traded companies, is definitely a tax break (hence your comment).
I personally don’t suspect that will change, but I haven’t seen any promises that it won’t.
