MPLX LP (NYSE: MPLX) offers one of the safest 9%+ yields among its energy peers. The company has been generating powerful distributable cash flows and prudently allocating capital, while the most recent dividend hike by 10% should further boost investor confidence towards its coverage. After all, the safest dividend is one that’s just been raised! Being an L.P., MPLX pays out distributions, but “dividend” will be used in this article for convenience purposes.
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Considering that such a massive yield attaches a substantial margin of safety to MPLX’s investment case, combined with the fact that shares appear slightly undervalued, I am bullish on the stock.
Strong Distributable Cash Flows to Sustain MPLX’s Payouts
MPLX’s massive payouts should be sustained by its underlying distributable cash flows rather easily. Let’s examine the company’s most recent performance to get a clear idea about MPLX’s dividend coverage.
MPLX reported robust Q3 results, with its performance being boosted by improving crude and product pipeline volumes, which advanced 5% each. You may notice that the partnership posted record revenues of $3.4 billion, implying a massive 32.8% increase year-over-year. Note that the significant boost in revenues was due to a one-off $533 million non-cash gain on a lease reclassification. Still, operating revenues grew as well.
Adjusted EBITDA, which excludes such extraordinary items and provides a much more accurate view of improvements in operations, came in at $1.47 billion, up 5.7% from $1.39 billion last year, reflecting MPLX’s underlying increase in pipeline volumes. Deducting MPLX’s interest expenses, distributable cash flows after settling the preferred dividends came in at $1.26 billion, a 5.9% gain year-over-year.
Despite MPLX recently hiking its quarterly dividend by 10% to $0.775 per common unit, its underlying distributable cash flows imply a coverage ratio of 1.6x for the quarter – or a payout ratio of 63.5%. That’s a very comfortable payout ratio, considering how massive MPLX’s yield is.
Smart Capital Allocation to Offset a Potential Earnings Decline
MPLX’s management appears to have implemented a smart capital allocation strategy, which should partially offset a potential decline in earnings, moving forward. For Q4, management expects crude throughput volumes of roughly 2.7 million barrels per day, suggesting 93% utilization, lower than Q3 due to scheduled turnaround activity, whose expense is projected to be approximately $430 million during the quarter amid a significant level of activity in the Gulf Coast region. Still, distributable cash flow per share should benefit from unit repurchases.
Deleveraging has been a capital allocation priority for the partnership, with long-term debt declining from $20.5 billion in Q2 2020 to $18.8 billion in Q3 2022. Deleveraging should help reduce interest expenses and/or offset rising interest on existing debt.
Additionally, MPLX has been repurchasing units rapidly, which should help offset DCF/unit if distributable cash flows modestly decline. In fact, Q3 was the company’s most active quarter ever in terms of unit repurchases, which amounted to $180 million. Over the past two years, MPLX has actually reduced its share count by about 5%, which may not sound like a lot, but a 5% reduction in units means tons of savings on future dividends, given how hefty the partnership’s payouts are.
Is MPLX Stock Undervalued?
In my view, MPLX is modestly undervalued at its current price levels. At a forward EV/EBITDA ratio of 9.2x, units are not particularly cheap, but there is certainly room for a subtle valuation expansion. The fact that the partnership is ramping up its repurchases should support this idea, as MPLX’s management team has historically been conservative when it comes to allocating capital.
Admittedly, even though MPLX has been deleveraging, it remains highly indebted. The partnership features a leverage ratio of 3.5x, which may be below its stated target of 4.0x, but it’s still high, even for a midstream company. With rates on the rise, interest expenses may pressure profitability moving forward if deleveraging doesn’t occur fast enough.
Then again, that’s the only negative point that justifies a modest discount on MPLX’s valuation. Considering the company’s multi-year volume commitments, operational excellence, gradual deleveraging, and critical role in the country’s energy infrastructure, I can easily see the stock trading at an EV/EBITDA ratio in the low-double digits, moving forward. Investors are likely to appreciate its high yield and well-covered dividend in the current environment as well, which should further boost interest in the stock.
Is MPLX Stock a Buy, According to Analysts?
Turning to Wall Street, MPLX Stock has a Moderate Buy consensus rating based on five Buys, two Holds, and one Sell assigned in the past three months. At $38.31, the average MPLX price target implies 18.7% upside potential.
Takeaway: One of the Safest High-Yield Energy Stocks
The energy sector features considerably lower yields these days compared to a few years back due to commodity prices skyrocketing and investors rotating away from growth to value names. Few players in the space feature near double-digit yields with ample coverage and disciplined capital management, and MPLX is certainly one of them.
Deleveraging and share repurchases should further improve MPLX’s balance and per-unit economics, sweetening its investment case as we advance as well.
