MPLX (NYSE: MPLX) and its parent company Marathon Petroleum (MPC) announced their third-quarter results on Tuesday. MPLX continues to perform very well, growing its EBITDA at a steady pace. The company also increased its dividend by a further 10%, making its the already high dividend yield reaches an even higher level. Between a safe and high dividend, shareholder-focused parent company, low-cost valuation and buyouts, MPLX looks like one of the best middleman choices available today.
MPLX announced its third quarter results with its publicly traded parent company MPC. Both companies were able to beat estimates on both lines. The MPLX headlines looked like this:
The pace of revenue and the rate of revenue growth have been excellent, but it should be noted that not all of MPLX’s incremental revenue is passed through to its bottom line. Instead, due to the way the business operates, higher commodity prices lead to both higher revenue and higher expenses, so an increase in revenue of 30% and more does not result in a similar rate of growth in earnings or cash flow.
GAAP earnings per share was very high, but that’s not very important for a pipeline company like MPLX. Instead, investors typically focus on metrics such as EBITDA or distributable cash flow, which explain the high non-cash charges that infrastructure players typically incur due to depreciation (which does not reflect not precisely the change in value of these assets). Let’s dive into the details.
MPLX: Solid execution continues
MPLX is a high quality mid-tier company where management knows what they are doing and where capital allocation has not been an issue in the past. This has been the case with some other midstream players, such as Energy Transfer (ET), although this company has also significantly improved its capital allocation strategy.
MPLX was able to increase its EBITDA, which better reflects its underlying business performance to GAAP net income, by 6% year-over-year to $1.47 billion. A 6% earnings growth rate is not exceptional in general, but for an infrastructure player that pays a large dividend, it is a great result, I think. After all, even in a no-growth scenario, a company like MPLX could generate attractive returns through its dividend payouts alone.
Volumes were up 5% for the quarter, compared to a year earlier, as MPLX saw higher volumes in the Permian Basin, while Marcellus volumes were down. Due to the more pronounced increase in activity in the Permian basin of MPLX, overall volumes have nevertheless increased. These volumes are likely to continue to grow, driven by strong transportation demand, as the Permian Basin is the hot spot for generation growth investments in the United States, for example by Exxon Mobil (XOM) and Chevron ( CLC). MPLX is working on expanding the pipeline, as the Whistler pipeline will increase its capacity from 2 billion cubic feet of natural gas per day to 2.5 billion cubic feet of natural gas per day. Whistler is a pipeline that connects the Permian Basin to the Gulf Coast at Agua Dulce, TX. MPLX is not the sole owner of Whistler, so the benefit of increased haul volumes will not fall entirely into MPLX’s pockets, but the business will nonetheless benefit from higher haul capacity which should impact positive on its future earnings and cash generation.
Speaking of cash generation, let’s take a look at MPLX’s cash flow during the quarter. Operating cash flow was $1.04 billion, but may be affected by working capital movements. MPLX’s distributable cash flow, which is adjusted operating cash flow less maintenance capital expenditures, and which reflects what the company could spend sustainably over the long term, totaled $1.26 billion. dollars in the third quarter. This increased 6% year-over-year, in line with the company’s EBITDA growth rate. When we annualize MPLX’s distributable cash flow from the third quarter, we get $5.04 billion – since MPLX is currently valued at $34 billion, the company therefore trades at just 6.7 times its cash flow. distributable cash, resulting in a DCF yield of 14.8%. In other words, MPLX could theoretically pay a dividend of more than 14% at current prices if the company chose not to invest in any growth and if no money was spent on buybacks or reductions. debt.
That’s not what MPLX management chooses, which is a good thing, because some growth spending makes sense when projects offer attractive returns and when execution risk isn’t high, like c This is the case with the expansion of existing assets. Still, the hypothetical scenario shows MPLX’s compelling cash generation relative to how the company is valued, and it also shows the dividend is pretty safe.
MPLX increased its dividend by 10% alongside the earnings announcement, to a new level of $0.775 per share per quarter. This corresponds to an annual dividend payment of $3.10, which translates to a dividend yield of 9.3% at a share price of $33.50. With MPLX having 1.01 billion shares, the dividend thus consumes $3.1 billion per year, compared to $5 billion in distributable cash flow. The dividend is thus covered at the rate of 1.6, which is very solid for a midstream infrastructure player like MPLX. In other words, distributable cash flow could theoretically decline by almost 40% and the dividend would still be covered by the cash the company generates. Combined with the resilient business model that has resulted in strong cash generation even during the pandemic, this high hedge ratio translates to fairly low dividend cut risk I believe, which makes MPLX suitable as an investment stock at came back slept well at night.
Since MPLX does not distribute all of the distributable cash flow it generates, it has excess cash that can be used for other purposes. Some of that is spent on growth capital expenditures, like the aforementioned Whistler pipeline. But MPLX also returns money to its owners through buyouts. The company has repurchased $300 worth of stock so far this year, which equates to about 1% of the company’s stock count (in nine months). If MPLX continues in this way, it will reduce the number of shares by just over 1% per year, giving a small boost to its cash flow per share growth. So if MPLX were to continue to grow its EBITDA by 6% per year, its EBITDA per share could grow by 7% to 8% per year through buyouts, which would be quite attractive. During the third quarter, MPLX accelerated its pace of buyout spending, as it returned $180 million to its owners during the third quarter. That’s just over $700 million annualized, so MPLX could cut its share count by just over 2% per year. That’s, for reference, about half the rate of Apple’s (AAPL) takeovers on average historically, so pretty significant but not an absolute game-changer.
MPLX has not reduced its net debt significantly this year, with net debt declining by only $200 million, to $19.8 billion at the end of the third quarter. However, thanks to the growth in EBITDA, its leverage ratio has fallen from 3.7 a year ago to 3.5 today. Intermediate companies are generally reasonably funded, even with leverage ratios below 4, so an average leverage ratio of 3 is quite strong. There’s no reason to worry about MPLX’s debt, I believe.
MPLX continues to perform well and generously rewards shareholders. Following the dividend increase just announced, the dividend yield once again exceeded 9%. With increased buyout spending, MPLX could generate significant long-term shareholder value.
The dividend is well covered and the shares are trading at an inexpensive valuation – the yield on distributable cash flow is 15% and the company’s enterprise value to EBITDA multiple of 9 is also undemanding. MPLX has seen its shares rise 14% in the past month and 16% so far this year as the broader market is down, so from a time perspective it may not be -be not optimal to buy today. But nonetheless, MPLX looks well-positioned to deliver compelling long-term total returns, primarily thanks to its high, well-hedged dividend.