Units of master limited partnership MPLX (NYSE: MPLX) have tumbled about 30% this year, pushing the yield on its distribution up to an eye-popping 14.5%. Weighing on the midstream company are a variety of worries, including the impact of lower oil prices on its volumes and some potential pipeline shutdowns.
However, while the market has some concerns about the sustainability of the energy company's payout, MPLX has full confidence in its ability to maintain the current level. That was one of the key takeaways from the company's second-quarter conference call.
Solid metrics in a tumultuous quarter
MPLX's management team ran through the current state of the company's dividend on the call. CFO Pam Beall noted that MPLX "generated approximately $1 billion of distributable cash flow and will return, for the quarter, $746 million to our MPLX unitholders," adding, "This provides distribution coverage of 1.39 times and resulted in $280 million of retained distributable cash flow." That's an impressive showing, given all the turmoil in the energy market during the quarter.
Because MPLX generated free cash after paying its distribution, it had some funds left over to help cover a portion of its expansion-related investments. That enabled it to end "the quarter with leverage of 4.1 times and ample liquidity with approximately $2.7 billion available on our bank revolver," according to Beall. The company also has $1.5 billion in additional liquidity thanks to its relationship with refining giant Marathon Petroleum (NYSE: MPC). With reasonable leverage and access to credit, MPLX has the financial flexibility to continue funding expansion projects. Thus, it has no current need to reduce its distribution.
Better numbers on tap for next year even if this headwind hits
MPLX expects to invest about $900 million this year on capital projects (which is $600 million below its initial estimate), with most of that money going toward the construction of integrated oil and natural gas logistics systems to move volumes from the Permian Basin to the Gulf Coast. Investment spending should be even lower next year because the company and its partners expect to finish those projects.
As a result, CEO Mike Hennigan stated, "We believe that the underlying business coupled with the steps we have taken have positioned us to continue to generate a stable level of EBITDA to support our goal of achieving positive free cash flow after capital investments and distributions for 2021." That excess cash would give it the flexibility to pay down debt and improve its already solid balance sheet.
It also provides the MLP with some cushion if the courts shut down its two Bakken pipelines. Beall estimated that in a worst-case scenario, there would be a "maximum annual EBITDA impact to MPLX of less than $100 million." For a company that generated $1.2 billion of EBITDA in the second quarter alone, -- which would grow next year as it finishes up its Permian systems -- it can easily withstand this potential impact.
Clearing up any confusion with stronger statements
Given the company's current numbers and outlook, MPLX's management has lots of confidence in the MLP's ability to maintain its payout. That was clear from Hennigan's comments during the call, where he clarified those he made on last quarter's call when he said the board had discussed a reduction. This time he stated:
So we feel very strongly that a return of capital is a high priority for us and that the distribution staying the same despite some of the challenges that others have had, I think, is hopefully showing you some of the stability that we think is in our business. So with that said, sorry, it was confusing to people last time. But we obviously feel strongly about it and have reaffirmed our distribution at the current level.
Those comments make it seem quite clear that the company has no plans to reduce its payout. That's because it highly values returning cash to investors and has no need to deviate from that strategy because it generates stable cash flow and has a strong financial profile.
Seemingly rock-solid despite the storms surrounding it
With so many energy companies cutting their dividends this year, investors have baked in reductions for most others, including MPLX. However, the MLP firmly believes it can maintain its payout thanks to the stability of its cash flow, the strength of its balance sheet, and what's ahead for 2021. Its monster yield should make it through this downturn in one piece, making it a compelling option for income investors.
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