Sometimes there are forces that affect a sector or industry in such a way that it creates a storyline that extends into not merely weeks, or months, but years. These can be positive or negative, but one of the things that I find interesting as an analyst is to look for those threads and try to measure the way they influence the stocks in that industry or sector.
Beyond the global COVID-19 pandemic, there are storylines that don’t get the same kind of attention, but that offer opportunities to identify companies in the U.S. stock market that have offered useful investing opportunities throughout the past year and even longer. The storyline I’m talking about for today is one that extends all the way back into 2018 and specifically impacts the Energy sector.
One of the really interesting segments of the Energy sector is the Oil Storage and Transportation industry. These are companies that deal with the infrastructure that brings crude oil to market, providing the links between explorers and drillers to refiners and ultimately to consumers. Infrastructure primarily includes pipeline and storage facilities – what is commonly referred to as the midstream portion of the energy supply chain. The industry has struggled in the U.S. for more than two years, primarily because shale exploring and drilling companies continued to increase production into 2019 to the point that the capacity of existing pipelines could not keep up with the supply – either for crude or liquified natural gas (LNG). Existing pipeline capacity from many of those areas was dated and limited, which meant that shale companies had to keep large amounts of crude inventory where it was drilled, waiting in storage facilities for transport to the Gulf of Mexico where it is then distributed to end markets (consumers) around the world. That reality kept U.S. shale prices depressed and forced producers to deal with supply delays and look for costly alternative transportation methods.
New projects to expand pipeline capacity began in 2018, and have begun to come online throughout the past year. 2020 saw a once-in-a-generation complication, of course, as demand for crude oil cratered as travel demand – airline or otherwise – plunged in the wake of the global pandemic. Current indications strongly indicate that as economic activity continues to increase in the U.S. – driven in no small part to increasing vaccinations and the general hope that a “return to normal” is finally in sight – that oil demand should increase as well. If the months ahead continue to see an increase of economic activity, including increasing air travel then it does follow that there is plenty of room for oil to move higher, which should be good news for the stocks in the Oil Storage and Transportation industry, which should finally possess the capacity to keep oil flowing from the rich shale areas of the Permian Basin and Bakken Ford region.
Among the stocks that I think represent the best opportunities is MPLX LP (MPLX), a master limited partnership created by Marathon Petroleum Corp (MPC), another large-cap energy stock that I’ve been following for some time. Based on its valuation metrics, MPLX looks like it could be a useful long-term opportunity. What about the company’s fundamentals? Let’s dive in.
Fundamental and Value Profile
MPLX LP is a master limited partnership (MLP) formed by Marathon Petroleum Corporation (MPC) to own, operate, develop and acquire midstream energy infrastructure assets. The Company is engaged in the gathering, processing and transportation of natural gas; the gathering, transportation, fractionation, storage and marketing of natural gas liquids (NGLs), and the gathering, transportation and storage of crude oil and refined petroleum products. Its segments are Logistics and Storage (L&S), and Gathering and Processing (G&P). The L&S segment includes transportation and storage of crude oil, refined products and other hydrocarbon-based products. As of December 31, 2017, the G&P segment operated various natural gas gathering systems that had a combined 5,439 million cubic feet per day (mmcf/d) throughput capacity. As of December 31, 2017, its assets included infrastructure to support MPC, including approximately 2,194 miles of crude oil and refined product pipelines across 17 states. MPLX has a current market cap of about $27.4 billion.
Earnings and Sales Growth: Over the last twelve months, earnings increased by about 14.55%, while revenues were -2.89% lower. in the last quarter, earnings were 3.28% higher while sales were flat, but positive at 0.09%. The company’s margin profile has been volatile this year, as Net Income as a percentage of Revenues in the last quarter was a healthy 30.72% versus -9.51% over the last twelve months. I think the difference is a good reflection of the effect the pandemic has played on the industry, as shutdowns imposed in the early stages closed down business operations of all kinds, including oil production. Increasing production has been difficult as oil demand has remained low while supply was still high, with plenty of crude sitting in storage facilities waiting to be used.
Free Cash Flow: MPLX’s free cash flow is healthy, at about $3.4 billion. That translates to a healthy Free Cash Flow Yield of 12.40% and marks a steady, multiyear improvement from $2.2 billion a year ago. Improvement in this number, this year, is a strong sign of management strength.
Debt to Equity: MPLX’s debt to equity is 1.56, which is higher than I prefer to see; however the company’s balance sheet – strong Net Income in the last quarter along with improving Free Cash Flow – indicates operating profits should be adequate to service their debt. Liquidity is a concern, since their balance sheet shows just $15 million in cash and liquid assets (down from $293 million in June of 2017) versus $19.37 billion in long-term debt.
Dividend: MPLX’s annual divided is $2.75 per share, among the highest in the industry, and which translates to a yield of about 10.42% at the stock’s current price. The remarkable element of the dividend isn’t just its yield, but also the fact that the company increased the dividend in 2020 from $2.71 in 2019.
Price/Book Ratio: there are a lot of ways to measure how much a stock should be worth; but I like to work with a combination of Price/Book and Price/Cash Flow analysis. Together, these measurements provide a long-term, fair value target around $30.50 per share. That means that MPLX is trading at a useful, 15% discount right now, which along with its high dividend yield makes the stock pretty appealing.
Technical Profile
Here’s a look at the stock’s latest technical chart.
Current Price Action/Trends and Pivots: The chart above covers the last year of price activity. The red line traces the stock’s upward trend from a low at around $12 to its high point, reached last month at around $27 and also just a little bit above where the stock currently sits.. It also provides the baseline for the Fibonacci retracement lines shown on the right side of the chart. After hitting a high in June at around $22, the stock drifted lower until October, using support at around $15 as a launching point for the acceleration of the stock’s upward trend that has driven to its current point. Immediate resistance is around $27, with current support just a little below, at around $25.50. A break above $27 should see upside to between $29 and $30, based on the distance between the last resistance break and the latest peak, while a drop below $25 could have downside to anywhere between $23.50 and $22 based on pivot activity at those levels at the beginning of 2021
Near-term Keys: MPLX’s value proposition is interesting, and when you combine that with the stock’s outsized dividend, the fact that it also has useful signs of fundamental improvement working in its favor make it pretty tempting. I am concerned, however about the company’s liquidity, and would prefer to see improvement in that area in the form of increased cash and liquid assets, along with a reduction in its long-term debt before considering the stock for a long-term, value-based investment. If you prefer to work with short-term trading strategies, look for a break above $27 to provide a useful signal to buy the stock or work with call options, using $30 as an early profit target. A drop below $25 would be a strong signal to consider shorting the stock or buying put options, with an eye on $23.50 as a good, early profit target on a bearish trade.