MPLX: Back On The Bullish Train Yielding Over 8%

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MPLX LP (NYSE:MPLX) has been one of the midstream operators I was bullish on for some time. In March, I turned neutral as I believed the valuation was getting a bit stretched, but I am turning bullish on MPLX once again. The barriers to entry are immense within the energy infrastructure sector, and MPLX has developed a system that is difficult to replicate, as it’s designed to move millions of barrels of crude and refined products through its pipelines each day. MPLX returned nearly $1 billion to its unitholders through distributions and buybacks during Q1, as it’s operating a high-margin business. Now that we have more economic data, and it looks like the Fed will pivot in September, I believe MPLX is in a prime position to benefit in the 2^nd half of 2024 and throughout 2025. I think investors will get an 11^th year of distribution increases next quarter, and MPLX will continue buying back units on the open market. While MPLX has rebounded from its pandemic lows and has been up just over 20% over the past year, I believe its units will continue to increase, and investors can benefit from capital appreciation while generating a large yield from the growing distribution.

Following up on my previous article about MPLX

In March, I wrote my last article about MPLX (can be read here). I had turned neutral after being bullish, then very bullish on MPLX. While I was becoming more bullish, units of MPLX continued to appreciate in value. Since I turned neutral, MPLX has trailed the market, appreciating 2.39% compared to 7.44% for the S&P 500. I had felt that the valuation was getting a bit stretched, but I am now back on the bullish train. I had discussed that while MPLX was still a strong income-producing asset, there were other opportunities within the energy infrastructure sector that I liked more. After looking at U.S. crude production, how the landscape for energy is changing, and the projections from the supermajors such as Chevron (CVX), I think MPLX is going to have a strong 2^nd half in 2024.

Risks to investing in MPLX

I am bullish on the energy infrastructure sector and MPLX in particular, but there are still reasons to be cautious. There is a tremendous amount of capital trying to deliver breakthroughs in clean energy sources. As technical advances occur, there is a possibility that renewable sources of energy will become more efficient to produce and less expensive to the consumer. If this occurs, it could negatively impact traditional sources of energy, and MPLX could experience a decrease in the amount of fuel moving through its network. There are also political risk factors to consider, as it takes approval from government agencies and local jurisdictions to build traditional energy infrastructure projects. If we see tighter regulation or legislation that halts the delivery of natural gas or crude in some areas, it could also negatively impact MPLX or the amount of capital upstream production companies want to pour into drilling new wells. If the upstream industry gets squeezed, then the flow and storage of energy with MPLX will be impacted. While I believe we will be in an oil bull market for some time, the risks from breakthroughs in renewables and political risk factors should be considered when investing in companies such as MPLX.

The data from upstream producers and government agencies indicate we will need more supply of traditional energy sources, which is bullish for MPLX

The equation is simple: a greater demand for energy will require a larger supply of energy. The A.I. boom is the latest phenomenon that is impacting future energy requirements as more data centers and infrastructure are being built. Amazon (AMZN) recently discussed building 2 data center complexes in Mississippi with an estimated cost of $10 billion to scale its AWS capabilities. Forbes indicated that data centers that power A.I. utilize energy loads similar to those of a small city. When I look at Nvidia Corporation’s (NVDA) forward revenue estimates they are expected to grow by 97.15% YoY in 2024 and then by 33.92% in 2025. There are projections that by 2027 NVDA will ship 1.5 million A.I. server units, which would need 85.4 terawatt hours of electricity to operate at full capacity annually.

The United States is the largest oil and gas producing nation globally, producing 13.25 million bpd, while Russia is the only other country that exceeds 10 million bpd. In the recent International Energy Outlook, the U.S. Energy Information Administration forecasted that GDP will double by 2050 on a worldwide scale, and the energy required to meet the demand is likely to grow by 1/3^rd. The EIA released their Annual Energy Outlook last year, and in all its reference cases they foresee the production of oil and gas expanding through 2050. I started looking at the supermajors and found that their short-term predictions line up with what the EIA is forecasting. Chevron is indicating that their global production guidance will grow by 1/3^rd from the end of 2022 through 2027. Exxon Mobil (XOM) projected they would finish 2024 producing 3.8 Moebd of energy, and this would grow to 4.2 Moebd in 2027.

The combination of the EIA forecasts, the United States operating at its highest production levels in history, and the 2 largest supermajors projecting that their production will increase over the next several years is bullish for MPLX. There are more than 16,000 miles of pipeline throughout MPLX’s network, transporting 5.3 million bpd between crude and refined products. MPLX also has 35.1 million barrels of terminal storage capacity, can process 12 billion cubic feet per day of natural gas, and has the gathering capacity of 9.7 billion cubic feet of natural gas. MPLX owns and operates critical infrastructure that connects many of the largest basins to the Gulf Coast while providing takeaway capacity from multiple areas in Texas. I am bullish again on MPLX after reading through CVX and XOM’s forecasts because as more energy is produced, MPLX should see increased volumes of fuel transported through their system, which should correlate to larger amounts of EBITDA and distributable cash flow (DCF). MPLX is positioned to capitalize on the future energy demand, and it is next to impossible for a new competitor to replicate their infrastructure.

From a financial perspective, MPLX is operating at bullish levels, and I think additional capital will be allocated toward distributions and buybacks

MPLX operates a high-margin business as its efficiency is showcased throughout the financials. In Q1, MPLX generated $2.69 billion in revenue. Their gross profit was $1.55 billion, which allowed MPLX to operate at a 57.79% gross profit margin. MPLX produced $1.64 billion in Adjusted EBITDA, which has a margin of 60.80%. MPLX generated $1.37 billion of DCF, as 50.95% of every dollar generated can technically be distributed to investors. On a bottom-line profitability level, MPLX operates at a 37.37% profit margin as it produced $1.01 billion in net income during Q1. These margins are not a fluke, as they have operated at a 58.09% Adjusted EBITDA and a 48.57% DCF margin in the TTM. While I like many companies within the energy infrastructure sector, MPLX is operating at the largest margins, which is critical to capturing the most profitability from expanding production over the next several years from domestic supermajors.

MPLX is doing a lot with its profitability, and unitholders are benefiting. MPLX has advanced its growth strategy, which includes bringing gathering and processing joint ventures, gathering systems, and processing plants online. In Q1, MPLX’s gathering volumes averaged 6.2 bcf/d, while its processed volumes averaged 9.4 bcf/d, and its fractionated volumes averaged 632,000 bpd per day. After moving 5.3 million bpd throughout its pipelines, MPLX was able to allocate $951 million of capital toward buybacks and distributions. After paying a quarterly distribution of $0.85, MPLX had a coverage ratio of 1.6x in Q1. MPLX was able to direct $75 million to buybacks in Q1 and has $771 million remaining under its current authorization. When I look at how MPLX is operating and its profitability margins, I believe that its investors will continue to be rewarded as MPLX continues to expand its network to capitalize on future opportunities.

MPLX closed a transaction to acquire additional ownership in a dry gas gathering system for $625 million to increase its exposure to the Utica basin. MPLX is expanding in the Permian as they entered into an agreement to combine the Whistler Pipeline and Rio Bravo Pipeline project to increase its natural gas segment. MPLX is also expanding its natural gas liquids (NGLs) and crude gathering pipelines to support the Bakken and Permian Basins. The increase in operations should support elevated levels of activity throughout many of the largest basins. This should increase revenue, and if MPLX is able to maintain its margins, we should see significant growth in the distributions and buybacks.

MPLX has been a cash cow, and unitholders have reaped the benefits for years. The quarterly distribution has grown by 372% from $0.18 to $0.85 since 2013. Over the past 5-years, MPLX has provided a 5.29% average growth rate in its distribution increases. Today, MPLX is paying unitholders $3.40, which is an 8.11% yield. Last year, MPLX increased its distribution by 8.97%, and its quarterly distribution grew from $0.78 to $0.85. We’re heading into the last quarter before MPLX announces another increase to the distribution, and I could see them exceeding $0.90 per unit in Q4 of 2024. MPLX now has the largest yield from its peer group, as the closest peer has a distribution yield of 7.82%. From an income perspective, MPLX has provided a decade of growth, and the yield is significantly larger than the risk-free rate of return. I believe we will see more interest in MPLX as it continues to grow the distribution and increase the amount of revenue it generates going forward.

Conclusion

I believe that MPLX is positioned well for the future as it’s expanding its footprint within the largest basins throughout the country. This should allow MPLX to grow its top line as production increases to meet the growing energy demand. MPLX operates at the highest margins in its peer group and produces a 49% DCF margin, which should lead to additional buybacks and growing distributions. I am turning bullish again on MPLX because of the opportunity to move forward in the oil and gas industry. MPLX has built an infrastructure that is next to impossible to replicate, and its profitability is positioned to expand significantly as the supermajors increase their production. I think there is value to be unlocked, and with another distribution increase on the horizon, investors can benefit from a yield that exceeds the risk-free rate of return as shares climb higher.