MPLX Stock: Energy Play for Looming Recession Supported by 10% Yield

Feverpited

Thesis

MPLX LP (NYSE: MPLX) is a highly profitable midstream company that primarily supports Marathon Petroleum Corporation (MPC). It derives most of its adjusted EBITDA from its Logistics and Warehousing (L&S) segment, which accounted for 67% of MPLX’s adjusted EBITDA in Q2. EBITDA. L&S is also the most profitable segment, with an adjusted EBITDA margin of 41.8%. In addition, the company also has a gathering and processing (G&P) segment which benefited from higher NGL prices and stronger volumes in the second quarter.

It is important for investors not to underestimate the revenue visibility offered by its partnership with MPC. This allowed MPLX to leverage a mutually beneficial relationship, providing strong visibility into contract pricing. Consequently, it provided important assurances to investors on the stability of its profitability. As a result, MPLX should be able to continue to offer investors a stable dividend payout that has returned more than 10% (on an NTM basis) after the recent pullback.

Nonetheless, we would like to remind investors to consider potential demand destruction challenges that could affect the profitability of its G&P segment going forward. Despite this, MPLX’s midstream assets are likely less vulnerable than its upstream and downstream players to underlying energy price volatility. Therefore, we believe MPLX should be able to maintain its strong profitability profile going forward.

Additionally, while MPLX has outperformed the broader market year-to-date, it has significantly underperformed the SPDR Energy ETF (XLE), given its operating model.

Therefore, we believe the market is unlikely to substantially revalue MPLX unless energy prices collapse dramatically, causing significant profitability issues. Moreover, we believe that structural constraints should keep prices relatively high. Therefore, we view the likelihood of such a worst-case scenario as highly unlikely at this time.

With a dividend yield that improved to 10% from its recent decline and robust profitability, we rate MPLX as a buy.

MPLX will not be immune to a recession

Despite the visibility of MPLX’s revenue and revenue model, MPLX is aware of the impact of a recession that could impact its usage. The company also stressed in its second-quarter earnings call that it will monitor developments, although management remains confident. CEO Mike Hennigan said:

The demand issue is obviously one we continue to monitor. And I guess at the end of the day, we’re still pretty bullish on what we see in commodities. We are still mostly at pre-pandemic levels across the system. So we think there is still room to operate on the demand side. The inventories are still constructive. So low cost, high reliability and we’ll take what the market offers in terms of margins. And right now, it’s hard not to be constructive yet. Demand is doing well. Stocks are low. It’s still a pretty constructive environment for us.

(Call on MPLX FQ2’22 results)

MPLX Adjusted EBITDA % Change and Distributable Cash Flow % Change Consensus Estimates

MPLX Adjusted EBITDA % Change and Distributable Cash Flow % Change Consensus Estimates (S&P Cap IQ)

Consensus (bullish) estimates suggest that MPLX’s Adjusted EBITDA growth metrics remain robust through FY23. As a result, the Street is not modeling a marked impact on its profitability, although growth is expected slow from the FY21 recovery. As a result, investors should expect MPLX’s increase in distributable cash flow (DCF) to remain flat, providing stability in their distribution.

MPLX Adj.  EBITDA margins % consensus estimates

MPLX Adj. EBITDA margins % consensus estimates (S&P Cap IQ)

Therefore, MPLX’s Adjusted EBITDA margins are expected to remain stable through the cycle, lending credence to management’s confidence.

We are cautiously optimistic about management’s confidence and believe that MPLX’s long-term contracts should continue to provide stability to its earnings outlook.

Nevertheless, MPLX is not immune to a severe downturn which could have a significant impact on energy prices. However, structural constraints should continue to support price momentum in underlying markets. Therefore, we believe the consensus estimates are credible.

Is MPLX stock a buy, sell or hold?

MPLX Forward Dividend Yield % Consensus Estimates

MPLX Forward Dividend Yield % Consensus Estimates (S&P Cap IQ)

MPLX last traded at an NTM dividend yield of around 10%. Its payouts are expected to remain stable throughout the cycle, given its robust profitability. Therefore, it should continue to provide strong valuation support for MPLX at its current levels.

MPLX NTM EBITDA multiple valuation trend

MPLX NTM EBITDA multiple valuation trend (koyfin)

MPLX’s NTM EBITDA multiple of 8.8x remains well below its 10-year average of 12.4x. However, we infer that the market likely devalued MPLX after the overvalued pre-COVID days.

We think the market remains hesitant about the cyclical performance of the energy market. Coupled with the increasing probability of a recession, we postulate that a short-term revaluation is highly unlikely.

MPLX Price Chart (Weekly)

MPLX Price Chart (Weekly) (TradingView)

We have gleaned that MPLX has remained in a narrow consolidation range since the start of 2022 after its remarkable recovery from its 2020 COVID lows. So whether the consolidation indicates a distribution/accumulation zone remains to be seen.

Nonetheless, investors should note that MPLX’s bullish momentum has weakened further as it appears to be moving away from its medium-term uptrend bias. Therefore, more conservative investors should consider a successful retest of its July lows before adding exposure.

However, we remain confident in MPLX’s operating profitability and strong revenue visibility. Coupled with a relatively well-balanced valuation supported by robust forward dividend yields, it should help mitigate downside volatility. Accordingly, investors are encouraged to view their positions in MPLX from a total return framework.

We rate MPLX as a buy. However, we urge investors to avoid adding near its near-term resistance ($35).

Edward N. Arrington