MPLX LP (MPLX - Free Report) is well poised for growth on the back of stable fee-based revenues and upcoming growth projects. However, high debt continues to be a concern.
The firm, with a market capitalization of $16.3 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. The partnership 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 joint venture project will be able to carry oil at a rate of 1.5 million barrel 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 two billion cubic feet of natural gas per day and move 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 the partnership to persistently grow its distributable cash flow (DCF). In 2018, the partnership had generated $2.8 billion in DCF, 70.8% higher than the year-ago level. The partnership has also been successful in increasing DCF by 46.4% to $4.1 billion in 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).
MPLX’s $9-billion acquisition of Andeavor Logistics LP is expected to position its midstream business for long-term success. The acquisition increased MPLX’s footprint in the prolific Permian Basin. As such, the partnership is able to capitalize on high demand for transportation capacity in the region, courtesy of growing network of natural gas pipelines.
Hurdles in Growth Path
However, there are a few headwinds that are impeding the stock’s growth.
As of Dec 31, 2019, the partnership’s total debt was $20.3 billion, while cash and cash equivalent balance was only $15 million. This reflects weakness in MPLX’s balance sheet. The partnership’s significant reliance on debt is reflected in its debt-to-capitalization ratio of 55%, which is much higher than the industry it belongs to. This can hamper the partnership's financial flexibility.
Its total operating expenses skyrocketed from $2,676 million in 2017 to $4,277 million in 2018 and $6,664 million in 2019. Cost of revenues rose almost 36% through 2019 to $1,489 million. The surging costs can hurt the partnership’s bottom line in the coming quarters.
Its 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. Additionally, Marathon Petroleum is reportedly looking to divest some of MPLX’s G&P assets in order to reduce debt burden.
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 2020 earnings per share is $2.47, which indicates a 6.5% increase from the year-ago reported figure. Moreover, its bottom line for 2020 is expected to increase 16.3% year over year.
Stocks to Consider
Some better-ranked players in the energy space are Earthstone Energy, Inc. (ESTE - Free Report) and Phillips 66 Partners LP (PSXP - Free Report) , each having a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Earthstone Energy’s 2020 earnings per share are expected to gain 3.3% year over year.
Phillips 66 Partners’ first-quarter 2020 earnings per share are expected to gain 10% year over year.
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