MPLX LP (MPLX - Free Report) is well poised for growth on the back of strong U.S. midstream demand and upcoming growth projects. However, high debt continues to be a concern.
The firm, with a market capitalization of $24.7 billion, is engaged in providing a wide range of midstream energy services to upstream energy companies. The partnership owns, operates and develops midstream energy infrastructures and logistics assets, mostly for its parent company Marathon Petroleum Corporation (MPC - Free Report) .
Let’s take a closer look at the factors that substantiate the partnership’s Zacks Rank #3 (Hold).
What’s Favoring the Stock?
MPLX is least exposed to commodity price fluctuations, since the partnership generates stable fee-based revenues from diverse midstream energy assets via long-term contracts. It is well positioned to capitalize on growing demand for fresh midstream assets like pipeline networks, and processing and fractionation units, in order to support increasing volumes of crude oil, natural gas and NGLs in the prolific shale plays in the United States.
The partnership is constructing the Wink-to-Webster (W2W) pipeline that will transport crude to the Texas Gulf coast from the Permian basin, capitalizing on the Permian bottleneck problem. The W2W pipeline will be able to carry oil at a rate of 1.5 million barrels per day and is likely be operational by first-half 2021. Moreover, it made a final investment decision to move forward with the construction of the 42-inch Whistler Pipeline. It will have a transportation capacity of 2 billion cubic feet of natural gas per day and transport gas from Waha Hub in the Permian Basin to Agua Dulce Hub of South Texas. The pipeline is expected to become functional in the summer of 2021. These projects will boost the partnership’s profit levels in the long run.
Strong and stable operations will back it to persistently grow distributable cash flow (DCF). In 2018, the partnership had generated $2.8 billion in DCF, 70.8% higher than the year-ago level. On top of that, it expects to generate respective DCFs of $3.1 billion and $3.5 billion in 2019 and 2020. The partnership also intends to hike its distribution by a penny in each quarter of 2019. The overall picture of DCF and cash distribution is impressive, as reflected in its handsome distribution coverage ratio (distributable cash flow divided by distributions paid). Notably, in 2018, the coverage ratio rose to an attractive level of 1.4 from 2017’s 1.3.
The $9-billion acquisition of Andeavor Logistics LP is expected to position MPLX’s midstream business for long-term success. This acquisition increased MPLX’s footprint in the prolific Permian Basin. As such, the partnership is able to capitalize on transportation capacity constraints in the region, courtesy of its growing network of natural gas pipelines.
Hurdles in Growth Path
As of Sep 30, 2019, the partnership’s total debt was $19.8 billion, while cash and cash equivalent balance was only $41 million. This reflects weakness in MPLX’s balance sheet. The partnership’s significant reliance on debt is reflected in debt-to-capitalization ratio of 52.6%, which is much higher than the industry it belongs to. This can hamper its financial flexibility.
The partnership’s direct operating expenses skyrocketed from $959 million in 2016 to $1.2 billion and $1.9 billion in 2017 and 2018, respectively. Also, total expenses jumped to $4,002 million in the first nine months of 2019 from $2,873 million in the comparable year-ago period. The surging costs can hurt its bottom line in the coming quarters.
The partnership’s G&P operations are primarily based in the Appalachian region, which currently has a weak natural gas pricing scenario. With no significant price improvement in sight, production growth can get affected. This will have a negative effect on MPLX’s gathering and processing volumes from this region. Moreover, the partnership is planning to reduce investment in the segment to 25% of its budget in 2020 from 50% in 2019, which might affect its performance in the coming quarters.
To Sum Up
Despite significant prospects, MPLX’s increasing costs and debt burden are concerning. Nevertheless, we believe that systematic and strategic plan of action will drive its long-term growth.
Which Way are Estimates Headed?
The Zacks Consensus Estimate for 2019 earnings per share is $2.41, which witnessed four downward estimate revisions and one revision in the opposite direction in the past 60 days. Notably, the figure indicates a 5.2% increase from the year-ago reported figure. Moreover, its bottom line for 2020 is expected to increase around 8% year over year.
MPLX LP Price and Consensus
Stocks to Consider
Some better-ranked stocks in the energy sector include Antero Midstream Corporation (AM - Free Report) and Phillips 66 (PSX - Free Report) , each carrying Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Antero Midstream’s bottom-line estimates for the current quarter are expected to skyrocket 120% year over year.
Phillips 66’s 2019 earnings per share have witnessed nine upward estimate revisions and no downward movement in the past 60 days.
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