As oil and gas production has boomed across the U.S., integrated energy companies have realized that there is a fair bit of money to be made by exploiting the master limited partnership structure that governs many American midstream companies. These outfits – comprised of pipelines, terminals, and processing centers – are tax-advantaged entities that generate substantial income for unitholders, which has also made them popular with investors in the current low-interest environment.
Increasingly, big-name companies like Phillips 66 (NYSE:PSX) and Devon Energy Corp (NYSE:DVN) have announced plans to spin off their midstream assets into MLPs. In order to prepare ourselves for the potential deluge of new midstream spin-offs, let’s take a look at one company that has already executed on this strategy. Today we size up the Marathon Petroleum Corp (NYSE:MPC) MLP spin-off MPLX LP (NYSE:MPLX).
MPLX
All of MPLX’s assets are located in the Midwest, with the exception of one 70-mile pipeline in Louisiana. (Click here to check out the entire interactive asset map.) Stretched between Illinois and western Pennsylvania, MPLX LP (NYSE:MPLX) owns, leases, or has an interest in about 2,800 miles of crude oil and refined products pipeline and 3.1 million barrels of storage capacity. It also runs a barge dock on the Mississippi River and a butane storage cavern in Kentucky.
MPLX exists to serve MPC, which is why its asset footprint mirrors the refiner’s footprint. These assets connect to hubs that are growing increasingly important as more energy pours into the Midwest from the Bakken Shale in North Dakota and the Marcellus and Utica shales in Pennsylvania and Ohio.
Here is a look at the post-IPO performance of both MPC and MPLX:
MPLX Total Return Price data by YCharts
Here we see very little lag in the MPLX LP (NYSE:MPLX) share price after its IPO, while MPC is clearly benefiting immensely from cheap domestic crude.
Mother and child reunion
Investors benefit from these spin-offs, as the chart above shows, but parent companies have much to gain as well. Historically, Marathon Petroleum has accounted for more than 85% of the volumes shipped over MPLX assets. In return, MPC owns the general partner of MPLX, which entitles it to a 2% general partner stake in the MLP, and 100% of the incentive distribution rights. It also holds a 71.6% stake in the limited partner units, with the public holding the remaining 26.4% interest.
Essentially, Marathon pays MPLX to cart its oil around, and then meets MPLX at the bank, laughing, to recollect part of that profit. And despite less than one full quarter as a publicly traded entity, there is profit. MPLX only launched its IPO on Oct. 31, 2012, but its earnings for the last two months of the year looked good:
- Adjusted EBITDA attributable to MPLX of $18.2 million
- Adjusted EBITDA attributable to MPC interest of $16.4 million
- Net income of $13.1 million
- $16.7 million in distributable cash flow
- Prorated cash distribution of $0.1769
- Distribution coverage ratio of 1.25 times
Though its 2.2% yield is low by MLP standards, distributions will grow as MPC continues to drop down assets to MPLX.
