Our first article titled, MPLX: a special investment, discussed finances and rationale for MPLX (NYSE: MPLX) surprise, at least for us, the distribution. Tracking the company’s use of cash over the coming quarters should give investors insight into whether the special distribution will continue.
Much of the world’s energy independence or dependence is affected by past decisions to abandon fossil sources in hopes of replacing them with renewable energy. A Fox Business Opinion article discussed the depth of the difficulties with European and global energy. Investments in oilfields gave way with rash decisions to achieve net zero emissions. Other decisions, for example, Germany shut down 19 nuclear reactors but failed in its attempts at renewable energy. Now the country is scouring the world for natural gas. England tried wind power reaching 25% of total electricity production, but when the winds stopped the percentage literally dropped to less than 10%. World leaders are now almost desperately back in search of fossil fuel sources, especially natural gas.
MPLX’s business aligns with the world’s energy needs currently in unusual demand. In summary, the company describes itself as “a diversified, growth-oriented master limited partnership formed in 2012 by MPC to own, operate, develop and acquire midstream energy infrastructure assets. We are engaged in the gathering, processing and transportation of natural gas; the collection, transport, fractionation, storage and marketing of NGLs; transportation, storage and distribution of crude oil and refined petroleum products…”.
Understanding and tracking cash flow in the future guides investors in pursuing the special distribution.
Uses of silver
Starting with cash usage, the company has provided investors with the following slide communicating cash usage by priority.
The assessment begins with the first element, maintenance capital, and the third, disciplined growth capital. The next slide shows a spending history for the above two items.
In short, the company expects to increase capital spending by $300 million year-over-year or $75 million (approximately) per quarter. The use of capital, this year, is charged upstream.
From a balance sheet perspective, the company has a debt to cover. Additionally, according to prepared remarks on the call, “At the end of the year, we had approximately $1.5 billion drawn on our intercompany loan agreement with MPC that, subject to market conditions , we plan to opportunistically refinance into long-term debt.” Also in 2022, an additional debt of $500 million is due (slide 11). Leverage stood at 3.7 at the end of the quarter, right in the middle of the company’s target.
Regarding distributions, management has so far set it at $0.70+ per share, unchanged from Q3 2021 (paid in Q4).
Finally, the last bullet, the return of capital, in this case, the redemption of shares; MPLX repurchased $165 million worth of common units. “As of December 31, MPLX had over $300 million under the current $1 billion unit buyback authorization.” Asked about the continuation of excess cash distributions, John Quaid, chief financial officer, said the means, whether through share buybacks or special distributions, had not been discussed with the board. and declined to give further details.
The next two slides, especially the second slide, summarize the cash flows for December and year over year.
It is important to remember that the cash used to pay the $600 million special distribution was generated in recent quarters. With that in mind, the company generated an additional $120 million year-over-year. It also spent $130 million on year-over-year stock buybacks, as per the first slide above.
The company generated additional cash year over year, which it used to purchase additional shares. $300 million of the $1 billion remains to be redeemed, less than a third of the initial authorization. At past conferences, management has said share buybacks are warranted because of the “cheap” market valuation. The stock is now trading in the $30 range, significantly higher than last year. We wonder how much management is willing to spend on share buybacks, especially since leverage is now right in the middle of the company’s objective. We believe share buybacks will dissipate to much more modest levels throughout the year, leaving more cash for other uses including capital and special distribution.
In our view, the continuation of the special distribution lies in management’s ability to place the $1.5 billion debt in the market, plus whatever amount it ultimately decides to spend on buybacks. It seems clear that the additional liquidity will probably come from year to year, which seems proportional to the increase in capital. If so, MPLX will still have the cash available for a special distribution of significant size.
There is always market price risk in bear markets. A decline in stock price also likely increases the amount of cash used for stock buybacks. But, overall, we think a special cast is the most likely outcome.