MPLX LP

Moat: 3/5

Understandability: 2/5

Balance Sheet Health: 4/5

MPLX LP is a diversified, large-cap master limited partnership formed by MPC in 2012 and operates in the energy infrastructure space. The partnership manages midstream assets and handles crude oil and natural gas gathering, transportation, storage, and distribution with a focus on the US market.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview:

MPLX LP operates primarily in the midstream segment of the energy industry, providing transportation, storage, and processing services for crude oil, natural gas, and refined products. The partnership’s assets include pipelines, gathering systems, terminals, and storage facilities.

  • Revenues: MPLX’s revenues are primarily generated through long-term contracts that are usually structured with take-or-pay provisions, which provide some stability and protection against commodity price fluctuations. Revenue streams are mostly influenced by transportation volumes. Fees for gathering, transportation, processing, and storage make up the bulk of MPLX’s earnings.
  • Geographic Presence: MPLX’s operations primarily focus on the U.S., particularly in shale regions like the Marcellus and Bakken, and transportation and storage assets across the Midwest and Gulf Coast regions.
  • Industry Trends: The energy landscape has been very volatile and unpredictable, with massive supply fluctuations, shifts in commodity demand, increasing focus on renewable sources, and increasing regulatory and political changes around fossil fuel production and transportation, which creates both challenges and opportunities.
  • Competitive Landscape: MPLX competes with a range of other midstream operators and companies, large and small. Competition varies by region and by service offering. Some notable competitors include Enbridge, Kinder Morgan, and Energy Transfer.
  • Differentiation: MPLX is differentiated by their integrated business with both pipeline and terminals, large customer base (including their parent, MPC), stable cash flows generated by take-or-pay contracts, and large network.

Financial Analysis:

  • Revenue and Profitability: Revenue is driven by pipeline throughput and terminal volumes and is therefore dependent on regional energy production. Profits from NGL and other hydrocarbon production account for a smaller percentage, but these are usually higher margin businesses. In their most recent quarter, MPLX reported a 9% growth in operating revenue YoY along with a reduction in operating costs that saw profits increase at a faster clip.

Over the last year MPLX has seen increases in volume, throughput, and margins while cutting costs. This suggests a high operating efficiency and also hints at management’s willingness to prioritize profitability.

  • Capital Spending: They continue to spend capital on growth projects, most notably the Permian and Marcellus, expecting the projects to contribute to growth in the coming year. This increased capital expenditure will lower the current free cash flow but create a better revenue base over the long-term, increasing the moat. The company increased its 2023 expansionary capital expenditure by 10% reflecting a commitment to future growth.
  • Debt: The Debt-to-EBITDA ratio is approximately 4.1x, which is healthy but at the high end of their target level. They are committed to bringing this down while managing capital for growth projects. The long-term debt is more than equity, which is pretty typical for a capital-intensive pipeline business.
  • Distribution MPLX prioritizes returning cash to its unit holders. Management aims for a dividend payout between 50% to 75% which is fairly high. MPLX’s distributions have been relatively consistent and have been raised periodically with increases in cashflows.
  • Valuation: Looking at valuations, the current price-to-earnings is around 10x, and a forward P/E of 10.5x, however, due to fluctuations, these can significantly deviate from a company’s underlying value. A more reliable analysis can be made with a DCF framework, which the company does not offer directly in their financials, or with multiples based on EV/EBITDA, a common approach within the sector, showing an EV/EBITDA multiple of around 9x. In general, MPLX is trading below its historical averages.

Moat Assessment:

MPLX’s moat has multiple sources that create a sustainable advantage.

  • Scale-Based Advantages: MPLX benefits from the sheer size and scale of its infrastructure network, creating a significant barrier to entry for potential competitors. Their large and extensive pipeline network allows them to tap into major energy basins and transport crude oil, natural gas, and refined products across the US.
  • Cost Advantages: MPLX’s long-term take-or-pay contracts offer fairly stable and predictable cash flows, and allow the company to reduce costs per unit of revenue. However, this cost advantage is also based on low transportation costs in specific regions, as well as a stable regulatory regime for the business.
  • Network Effects: As stated before, MPLX has a massive distribution network for both crude and natural gas, allowing them to act as a hub, with an ability to service many counterparties, creating a stronger business advantage as their connections increase.

  • Switching Costs: The company’s logistics assets such as terminals, storage facilities, and gathering and processing plants are essential for the day-to-day operations of many of their customers and hence creates a switching cost that makes them resistant to jumping to competitors, due to operational and financial concerns.

  • Moat Rating: 3/5. While MPLX has some significant advantages, such as size and long-term contracts, the presence of potential new regulations, commodity price fluctuations, and the potential for some contract renegotiations that they must maintain or improve can be a headwind.

Risks to the Moat:

  • Regulatory Risk: MPLX faces potential changes in regulatory policies that could impact their transportation and storage fees, increase compliance costs, and potentially limit their future projects. For example, if the government were to place more restrictions on natural gas production or transportation, this would negatively impact the company.
  • Commodity Price Fluctuations: Fluctuations in commodity prices (crude oil, natural gas, and NGLs) can impact MPLX’s profitability, particularly if these lead to lower production volumes or renegotiations of contracts.
    • Competition: In certain areas and for certain services, competition from other midstream and energy companies can pressure margins and reduce volume, or the need for better-quality contracts.
    • Contractual Risks: MPLX relies on long-term take-or-pay contracts. If the company has to renegotiate some of these contracts, it could affect future margins. There is also counter-party risk with their partners as their partners financial standing is also an important factor.
  • Environmental Regulations: Increased regulations and changes to energy policy to reduce carbon emissions could make current infrastructure less valuable.
  • Project Delays and Cost Overruns: Large midstream infrastructure projects tend to be complex and can be delayed, or could run over budget, reducing profitability.
  • Economic Downturns: A broad economic downturn could decrease oil and gas production and therefore hurt the volume that MPLX generates.

Business Resilience:

MPLX’s contracts are usually long-term and take-or-pay contracts, providing stability even if prices or volumes decline and have a built-in level of inflation adjustment that provides a natural hedge. Their assets are a critical part of the national energy infrastructure and their services remain important even during times of uncertainty, making their revenues resilient. Also, they have a diversified base of revenue, from transportation to storage and to natural gas and its derivatives.

Understandability:

  • Rating: 2/5. Although MPLX operates in an industry that has lots of familiar business terms and concepts, their financials and operations are very complicated, due to accounting requirements for limited partnerships, and the many different contracts and types of assets they operate.

Balance Sheet Health:

  • Rating: 4/5. MPLX has a reasonably strong balance sheet. Their Debt-to-EBITDA is in line with the target, and their interest coverage is good, suggesting that they have the ability to meet their obligations. However, due to their limited access to new equity, their ability to reduce their debt and leverage may be difficult.
  • Debt Metrics: Their average interest rate is currently at 4.2% with an average maturity of around 7 years. However, their debt levels are mostly fixed rate, so the company may not see the immediate benefit of reduced interest rates.
  • Capital Structure: They are mainly financed with debt, with a mix of bonds and credit lines, and minimal equity. Debt is mostly fixed-rate, but there is still some floating rate. They are committed to reducing debt for the next year, but also keeping on growing their business.

Recent Concerns and Management Commentary:

  • High Debt: The company’s debt load has been the source of concern and management is continuing to emphasize deleveraging and generating cash flow so that shareholders get their capital back.
  • Inflation: Although they have contracts with inflation escalators, the rising costs across the board, especially with respect to labor, have been squeezing their margins, and they are starting to incorporate this into their planning.
  • Marcellus and Permian: Growth in the Permian will be primarily tied to increasing capacity on the lines they already operate, while they intend to grow volume in the Marcellus region over the coming year.
  • Permian Volumes: In 2022, the volume of oil shipped on the Permian basin lines were approximately 1.3 million barrels per day.
    • Partnership The company’s partnership agreements give management an increased amount of freedom to grow their operations.

In summary, MPLX LP offers a reasonably steady income stream from its midstream energy infrastructure operations and has a limited economic moat, driven by scale, low costs in many segments, and network effects.