MPLX LP (NYSE:MPLX) Q1 2024 Earnings Call Transcript

MPLX LP (NYSE:MPLX) Q1 2024 Earnings Call Transcript April 30, 2024

MPLX LP isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Greg Floerke – EVP and COO:

Dave Heppner – SVP, Strategy and Business Development:

Operator: Welcome to the MPLX First Quarter 2024 Earnings Call. My name is Sheila, and I will be your operator for today’s call. [Operator Instructions] Please note that this conference is being recorded. I will now turn the call over to Kristina Kazarian. Kristina, you may begin.

Kristina Kazarian: Good morning, and welcome to the MPLX’s first quarter 2024 earnings conference call. The slides that accompany this call can be found on our website at mplx.com, under the Investor tab. Joining me on the call today are Mike Hennigan, Chairman and CEO; Kris Hagedorn, CFO and other members of the executive team. We invite you to read the safe harbor statements and non-GAAP disclaimer on Slide 2. It’s a reminder that we will be making forward-looking statements during the call and during the question-and-answer session that follows. Actual results may differ materially from what we expect today. Factors that could cause actual results to differ are included there, as well as in our filings with the SEC. With that, I’ll turn the call over to Mike.

Mike Hennigan: Thanks, Kristina. Good morning, and thank you for joining our call. Earlier today, we reported first quarter results. Our business continues to grow and delivered adjusted EBITDA of $1.6 billion and distributable cash flow of $1.4 billion each an 8% increase year-over-year. In line with our commitment to return capital, the growth of MPLX’s cash flow supported the return of $951 million to unitholders. Turning to the macro, United States continues to be a low cost producer of energy fuels needed across the globe. Oil demand is at a record high globally. We expect oil demand to continue to set records into the foreseeable future. Forecasted outlooks for this year estimate 1.2 million to 2 million barrels per day of incremental demand over 2023, primarily driven by the growing need for transportation fuels.

Our expectations on the long-term production outlook in our key basins remains unchanged. In the Northeast, longer laterals are resulting in higher volumes highlighting the strength and opportunities we see across our footprint. We continue to expect volume growth in the Marcellus as well as the Utica, where producers are targeting economically advantaged liquids rich acreage. In the Permian Basin, crude prices remain attractive and associated gas production continues to grow as producers execute drilling and completion activities. In the first quarter, MPLX announced 2 strategic transactions. First, in the Utica, we enhanced our footprint through the acquisition of additional ownership interest in an existing joint venture and the dry gas gathering system.

We have already seen growth in the rich gas window of the Utica and we see new producers moving into the region. Second, MPLX entered into a definitive agreement to combine the Whistler pipeline and the Rio Bravo pipeline project into a newly formed joint venture. The transaction expands MPLX’s natural gas value chain, connects Permian supply to additional Gulf Coast demand and positions MPLX for future growth opportunities. The transaction is subject to required regulatory approvals and other customary closing conditions is expected to close in the second quarter. We remain committed to growing the partnership through our lens of strict capital discipline. In fact, over the last 3 years, MPLX holds a peer leading return on invested capital.

The previously mentioned strategic transactions are a continuation of our approach as we seek to grow the cash flows of the partnership. We believe this is a return on and a return of capital business and we will continue to use our capital allocation framework to evaluate and optimize capital allocation decisions. We’re confident in our ability to grow the partnership and are focused on executing the strategic priorities of strict capital discipline, fostering a low cost culture and optimizing our asset portfolio, all of which are foundational to the growth of MPLX’s cash flows. Now, let me turn the call over to Kris to discuss our growth as well as our operational and financial results of the quarter.

Kris Hagedorn: Thanks, Mike. MPLX’s 2024 capital expenditure outlook of $1.1 billion is unchanged and includes $950 million of growth capital and $150 million of maintenance capital. Our 2024 growth capital outlook is anchored in the Marcellus and Permian basins. Our integrated footprint in these basins is positioned with the partnership with a steady source of opportunities to expand, particularly around our natural gas and NGL asset. We continue growing these operations through organic projects, investments in our Permian joint ventures and bolt on opportunities. In the L&S segment, progress continues on the Agua Dulce to Corpus Christi natural gas pipeline joint venture, which is expected to be in service in the third quarter of 2024.

We are also progressing the expansion of the BANGL pipeline joint venture to 200,000 barrels per day, which is expected to be completed in the first half of 2025. In the G&P segment, we’re bringing new gas processing plants online to meet increasing customer demand. The Harmon Creek II gas processing plant was placed into service in late February, bringing our Marcellus processing capacity to 6.5 billion cubic feet per day. In the Permian Basin, Preakness II is approaching start up and is expected to be online in May. Additionally, we are progressing Secretariat processing plant, which is expected to be online in the second half of 2025. Once operational, our total processing capacity in the Delaware Basin will be approximately 1.4 billion cubic feet per day.

Outside of these strategic basins, the remainder of our capital plan is mostly comprised of smaller, higher return investments, targeted expansion or debottlenecking of existing assets and projects related to planned increases and producer customer activity. Slide 6 outlines the first quarter operational and financial performance highlights for our Logistics and Storage segment. Adjusted EBITDA increased $72 million, when compared to the first quarter of 2023, primarily driven by higher rates and growth from our equity affiliate. Crude and product pipelines and terminal volumes were down year-over-year, primarily due to MPC’s planned turnaround activity in the first quarter of 2024. Due to the structure of our contracts with MPC, refinery volume changes had limited impact — financial impact to MPLX.

Moving to our Gathering & Processing segment on Slide 7, the G&P segment adjusted EBITDA increased $44 million, compared to the first quarter of 2023, primarily driven by higher volumes. Total gathered volumes were down 2% year-over-year, primarily due to decreased dry cast production in the Utica and scheduled maintenance activities in the Southwest. Processing volumes were up 9% year-over-year, primarily from higher volumes in the Marcellus and Utica, driven by increased customer production. Focusing in on the Marcellus, by far our largest basin of G&P operations, we saw year-over-year volume increases of 10% for gathering and 7% for processing, driven by increased drilling and production growth. Marcellus processing utilization was 92% in the first quarter reflecting the need for our Harmon Creek II processing plant which was placed in service in late February.

Fractionation volumes grew 4% due to higher ethane recoveries and higher processed volumes. Moving to our first quarter financial highlights on Slide 8, total adjusted EBITDA of $1.6 billion and distributable cash flow of $1.4 billion each increased 8% from prior year. During the quarter, MPLX acquired additional ownership interest in existing joint ventures and a dry gas gathering system located in Utica for $625 million contributed $92 million for the repayment of our share of the Bakken Pipeline JV debt due in April. MPLX also returned $951 million to unitholders through $876 million in distributions and $75 million in unit repurchases, ending the quarter with a cash balance of $385 million. As a reminder, the first quarter is typically our lowest quarter for project related expenses.

Like prior years, we anticipate these expenses will increase $30 million to $40 million sequentially in the second quarter, reflecting more favorable weather to undertake project related work. Now, let me hand it back to Mike for some final thoughts.

Mike Hennigan: Thanks, Kris. In closing, MPLX has a strong history of growing the partnership’s cash flows by executing its strategic priorities all while maintaining strict capital discipline. We continue to aim for mid-single-digit growth rate over multiple year periods. And as you can see in our results, we have a strong start again to this year with adjusted EBITDA and DCF, up 8% versus the first quarter of 2023. By deploying capital wisely, controlling our costs and optimizing operations to get the most set of our assets, we’ve grown DCF by nearly 8% on a 3-year compound annual basis. MPLX is a strategic investment for MPC and as they each pursue growth opportunities, the value of this strategic relationship will be in hand.

By advancing our high returns growth project anchored in the Marcellus and Permian basin along with our focus on cost and portfolio optimization, we intend to grow our cash flows allowing us to reinvest in the business and continue to return capital to unitholders. In each of the last two years, we have increased our quarterly distribution 10%. The business is expected to continue to generate significant annual free cash flow after distribution, placing us in a strong position to continue to consistently grow our distribution. Now, let me turn the call back over to Kristina.

Kristina Kazarian: Thanks, Mike. As we open the call for questions, we ask that you limit yourself to 1 question plus a follow-up. We may reprompt for additional questions as time permits. With that, operator, we’re ready.

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Q&A Session

Operator: Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from John Mackay with Goldman Sachs.

John Mackay: I wanted to start on the buyback. I think it was the first since ’22. Maybe spend a minute or 2 just elaborating on whether or not this is a one off or maybe a restart of a more normal cadence? And then also how you’re thinking about balancing this with potential distribution increases in the future?

Mike Hennigan: Let me start, because we get that question off and I’ll try and be as clear as I can. First off, it starts with generating cash. You’ve heard in our prepared remarks that our 3-year CAGR is about 8% and our first quarter results on DCF and EBITDA were about 8%. So it starts with generating cash. And then the uniqueness to that cash is we kind of color code the cash into 2 buckets. Those buckets that’s continuing, we think is going to be there through all types of markets and I’ve called that blue bar cash flows. The cash flows that are there intermittent, that could be there sometimes, not sometimes, I call red bar cash flows. So, understanding the type of cash flows that we’ve generated is really important to go into our capital allocation framework.

And the way I think about the red bar, red bar may not be there all the time, but it is a source of equity. Blue bar, I think of as an ongoing cash flow that’s going to support our distribution growth. And we’ve said a bunch of times that our preferred method of returning capital is primarily distribution growth because we primarily drive blue bar cash flows in our system. But having the flexibility with red bar for buybacks is also important to us. So when we put that all together, the way we think of our capital allocation framework is number 1, we’re going to take care of our assets. Number 2 is we’re going to continue to grow our distribution and that’s driven by those blue bar cash flows. Number 3 is we’re going to look to invest and continue to grow earnings.

And hopefully you’ve seen our track record on capital discipline and what it’s done to earnings. We’re very proud of growing this size partnership at about 8% per year over the last 3 years and continued into the first quarter. And then the last piece is our buyback. And although it’s 4th in the capital allocation framework, it’s still a tool that we have at our disposal and we continue to think about when that makes the most sense versus when it doesn’t. So if you think if you step all the way back, we color code the cash flows, we prioritize blue, that’s the way we run our business, stable, continuing cash flows that will be there all the time. Those are more targeted towards distribution. You’ve heard us say we’ve done 10% distribution increases the last few years.

You’ve heard us say we believe we have strong financial capabilities to continue to grow our distribution, but we also have the tool of buybacks when we think it makes sense.

John Mackay: Maybe on just following up on the wanting to continue to invest to grow, so obviously seeing you guys lean a little bit more towards the kind of bolt on deals recently with the 3 announced so far this year. Can you maybe just spend a minute there on general strategy and then maybe how you think about those competing with organic opportunities? And maybe how much capital you’re willing to allocate in that direction?

Mike Hennigan: Let me start off and then I’ll let Greg talk about this recent activity. So in general, over the last couple of years, you’ve seen us mainly driving organic growth. That’s where we see good return projects. Again, I always say they’re not sexy and they’re not big headline projects, but they’re good return projects and we’ve been executing those well and that’s driven growth. But we’re also constantly looking at M&A or inorganic activities. And during this quarter, we were able to make a strategic transaction the Utica and I’ll let Greg talk a little bit about the detail.

Greg Floerke: The Utica is interesting. We’re really excited about what’s going on there right now. We’ve had — we’ve seen a lot of success over the last few years in the dry lean part of the basin near the Ohio River and build out a substantial dry gas gathering system, but the rich gas area has not got as much attention and that now is it’s got a lot of great tailwinds behind it, really excited about it. The main things in the favor of the rich gas are the fact that there’s a light oil window and a condensate window, the fact that right now we have a frac spread that favors liquids whether in the crude oil producing regions or in the NGL heavy regions or like we have in Utica. We also have new drilling technology with long laterals, twice the length of laterals that we probably saw back in the day when the Utica was first developed.

So you get essentially 2 or more wells in terms of lateral length for a proportionally less cost. We also have because of the early build out, we have existing infrastructure, it’s fully integrated with our Marcellus system, it’s connected to the same fractionation, all the same takeaway pipeline. So bottom-line is, we’re bullish about having a system with spare capacity in an area of that now new procurers are moving into existing producers are moving the rigs too. So we’re already seeing that growth. The Summit acquisition allowed us to further buy into this area where we’re really bullish about and we built the entire system and operate it already. So we know it and we know the producers and the opportunities there.

Operator: Next we will hear from Manav Gupta with UBS.

Manav Gupta : My only question here relates to that this Whistler pipeline thing you just recently got involved with the JV, looks very interesting, looks like a very good growth opportunity. Help us understand this project a little more in detail and why would this be a strategic fit for MPLX?

Mike Hennigan: I am going to let Dave give you a little more detail on it. I would tell you in general though, as we’ve been saying, we’re concentrating a lot of our activity in our key basins. And Greg just mentioned a lot of what’s going up in the Northeast and I’ll let Dave talk a little bit about what’s going on down in the Permian.