MPLX: The 8% Return You Shouldn’t Ignore

Introduction

On August 14, I wrote an article titled “Dividend Darlings: 3 Fantastic Actions to Keep Rain or Shine.” While I never promised to feature three high-yielding dividend stocks, some readers were upset that two stocks had yields below 1%.

While I could start by lecturing on the importance of dividend growth in evaluating dividend yield, I’m going to do things a little differently.

In this article, I will introduce a company that has both high revenue and growth, because it is time to discuss a company with an 8.1% yield, steady growth and a business model with strong secular headwinds.

That company is MPLX LP (NYSE:MPLX). With a market capitalization of $43 billion, it is one of the largest limited partnerships in the North American midstream industry. This also means that “shares” are called “units” and “dividends” are called “distributions”.

My most recent article about this company was written on June 11th when I called the company a “Cash Machine You Shouldn’t Ignore”. Since then, the stock has returned 3.4%, roughly in line with the S&P 500.

In this article, I will update my thesis, using recently released earnings and new developments that bode very well for the stability and growth potential of its distribution.

So let’s get straight to it!

The tailwinds are getting stronger

In a recent article about Canadian midstream giant TC Energy (TRP), we highlighted the comeback of the North American midstream industry. I emphasized.

• Oil and gas production in North America has grown rapidly due to the shale revolution. This required significant investment in new piping systems. Although this paved the way for future profits, many times resulted in midstream companies having negative free cash flow, “forcing” them to borrow money for capital investment and dividends/distributions.
• Because of the high supply growth, oil and gas prices have been subject to a number of steep declines. Although midstream companies are not directly subject to these declines, investors sold stocks midstream because of free cash flowdebt levels and fears that low prices could lead to lower production.

Now, the one the situation is much better. Large infrastructure projects have been completed, which it has created significant free cash flows. Moreover, oil and gas production is still increasing, supported by healthy demand. This creates a sustainable demand for pipeline infrastructure. It also helps most midstream companies they have become more interested in increasing free cash flow than total assets.

This increasingly favorable environment has benefited MPLX, which has returned nearly 170% over the past five years – including distributions.

Although I can’t invest in MPLX due to the complexity facing foreign investors, it has become one of my favorite companies, mainly due to its fantastic asset base and business model.

As we can see below, the company operates two major segments. Logistics and Warehousing (L&S) and Gathering and Processing (G&P). L&S generated about two-thirds of total adjusted EBITDA last year.

Additionally, as we can see below (and in the presentation above), the company has operations in large oil and gas basins, including the Marcellus, Bakken, Rockies, Permian and others.

About 65% of the company is owned by Marathon Petroleum (MPC), one of the largest and most efficient refiners in North America. MPC also accounts for about half of MPLX’s revenue.

Since the spin-off from MPC, MPLX has been an important source of distribution for MPC and a key player in the management of its midstream assets.

Now, it also benefits from increased demand for new pipelines. As already briefly mentioned, the optimal situation for midstream assets is strong. According to Bloomberg, the increasing focus on energy exports has created a situation of high pipeline utilization rates.

Key pipelines carrying Permian barrels to the Port of Corpus Christi are more than 90 percent full, and companies that operate some of those lines say congestion is likely to get worse. By the second half of 2025, pipelines could be 94% or 95% full, researcher East Daley Analytics estimates. – Bloomberg

This bodes well for MPLX, especially as these trends are further supported by continued growth in oil production and strong demand for gasoline and related fuels.

MPLX has both yield and growth

The tailwinds are reflected in MPLX’s financial statements.

In the second quarter of this year, the midstream giant reported an 8% year-over-year increase in adjusted EBITDA and a 7% increase in DCF, which is distributable cash flow. This allowed the company to distribute $0.85 per unit, which translates to a yield of 8.1% with a healthy coverage ratio of 1.6x.

The most recent distribution increase was 9.7%, announced on October 24. As of November 1, 2022, the company is up 9.9%.

These growth rates are absolutely fantastic for a company with an almost double-digit dividend yield.

Since 2020, distributable cash flow has grown by 7.7% per year, allowing quarterly distributions to grow by 7.3% per year during this period.

In addition to a solid coverage ratio, distribution is protected by a healthy balance sheet. The company ended the quarter with a net leverage ratio of 3.1x and 3.4x without cash.

Although total debt has increased by more than $2 billion since the end of 2022, the company has grown its EBITDA by 12%, allowing it to significantly reduce its balance sheet since the pandemic.

Moreover, it has a well-scaled maturity profile, which adds another layer of safety.

Based on this background, if we dig a little deeper, we find that the company is benefiting from strong production and demand growth in North America.

For example, in the G&P segment, the company’s assets in the Marcellus and Utica Basins saw strong growth, supporting a 7% increase in processing volumes. The company’s Utica assets saw a 52% increase in processing volumes, making the liquids-rich area a key growth driver for the company.

Meanwhile, the Marcellus Basin, MPLX’s largest G&P operations area, reported year-over-year volume increases of 15% for gathering and 5% for processing.

In the L&S segment, the company added adjusted EBITDA of $107 million, supported by 3% higher production of its crude pipelines.

Furthermore, in this segment, the commissioning of the ADCC natural gas pipeline and ongoing projects such as the Preakness II and Secretariat gas processing plants in the Delaware Basin will significantly increase the company’s processing capacity.

According to the company, once the Secretariat plant becomes operational in 2025, its total processing capacity in the Delaware Basin (part of the Permian Basin) will reach 1.4 billion cubic meters per day, placing it in an excellent place to meet growing customer demand.

Speaking of the Permian, this is not only America’s largest oil basin, but also an oil basin with very low break-even prices, allowing producers to produce even when prices are low. It is also the only basin with a steady increase in crude oil production, which requires pipelines.

In this area, MPLX has projects like the Blackcomb pipeline, which connects Permian supply to domestic and export markets along the Gulf Coast—an area with significant growth in demand, as the Bloomberg article I just highlighted shown.

MPLX owns approximately one-third of this project, which is expected to become operational in the second half of 2026.

The company also purchased an additional interest in the BANGL NGL (natural gas liquids) pipeline. It now owns 45% of the project, which is a major asset of the NGL value chain. In the first quarter of 2025, the capacity of this pipeline is expected to be expanded to 250 thousand barrels per day.

This pipeline is another major asset, allowing the Permian to deliver more NGLs to export markets in the Gulf of Mexico.

I have to say that I am absolutely impressed with MPLX’s assets and its ability to benefit from the biggest demand drivers in the midstream industry.

Even better, the rating is still great.

ASSESSMENT

MPLX units are trading at a blended P/OCF (operating cash flow) ratio of 7.6x, below its long-term average of 8.1x (blue line in the chart below).

Using the FactSet data in the chart below, MPLX is expected to grow its OCF per share by 3% this year, followed by potentially 7% and 5% in 2025 and 2026, respectively.

This paves the way for a fair price target of $50, 20% above the current price. It is also $2 higher than the target I gave in my previous article.

As such, the company is in a great position to return nearly 15% annually, including its 8% distribution yield.

Needless to say, I keep to myself Buy rating, believing that MPLX is one of the best income opportunities in the market, supported by both revenue and growth.

Take away

MPLX LP is a standout in the midstream industry, offering both high yield and growth potential.

The company, which has a yield of 8.1%, benefits from strong North American energy infrastructure tailwinds that drive steady growth in distributable cash flow and allow it to maintain a healthy balance sheet.

With key assets in high-demand regions and growth projects underway, MPLX is well positioned for future success.

Therefore, I maintain my Buy rating, confident that MPLX remains one of the best income generating opportunities in the market.

Pros and cons

Pro:

• High yield: MPLX offers an attractive yield of 8.1%, supported by steady distribution growth.
• Strong asset base: The company operates in key oil and gas basins with high demand, providing stable revenue streams and growth opportunities.
• Financial stability: With a solid coverage ratio and manageable debt, MPLX is well positioned for long-term earnings.
• Growth potential: Ongoing projects and expansions in high-demand areas such as the Permian Basin support future growth.

Cons:

• Complex structure: The structure of MPLX, which issues a Form K-1, may prevent some investors from investing, especially non-US investors like myself.
• Cyclical demand: While the company has a low-risk, production-dependent business model, downside risks could put pressure on the share price as lower demand could affect (future) production.