Is MPLX another strong value Pipeline stock?

This week I’ve been turning my attention to an interesting segment of the Energy sector – the Oil Storage and Transportation industry. The last year has been a challenge for the entire industry in the U.S., primarily because shale exploring and drilling companies have been ramping up production – to the point that the capacity of existing pipelines can’t keep up with the supply. That has meant that shale companies have had to keep large amount of crude inventory in the Basin, waiting in storage facilities for transport to the Gulf of Mexico where it is then distributed to end markets around the world. That reality has depressed prices of shale oil coming out of the Basin and forced producers to deal with supply delays and look for costly alternative transportation methods.

New projects to expand pipeline capacity have been underway for more than a year, and appear to be on schedule to come online in the months ahead. That means that the flow of shale oil should increase, and give a lift to WTI prices. That’s good news for the stocks in the industry, many of which are sitting at or near historical lows within extended downward trends. That’s the primary reason I think this industry is a good place to pay attention right now.

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 very compelling 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 $24.8 billion.

Earnings and Sales Growth: Over the last twelve months, earnings decreased by about -1.61%, while revenues increased a little over 33%. in the last quarter, earnings improved almost 11% while sales rose almost 40%. The company’s margin profile is very healthy and stable, as Net Income as a percentage of Revenues in the last quarter was 27.5% versus 28.17% over the last twelve months.

Free Cash Flow: MPLX’s free cash flow is healthy, at $1.55 billion. That translates to a modest Free Cash Flow Yield of 6.22% and marks a steady, multiyear improvement from -$65.8 million in June of 2016.

Debt to Equity: MPLX’s debt to equity is 1.09, which is a little higher than I prefer to see; however the company’s balance sheet – strong Net Income along with improving Free Cash Flow – indicates operating profits should be adequate to service their debt. Liquidity is a bit of a concern, since their balance sheet shows just $41 million in cash and liquid assets (down from $293 million in June of 2017) versus $19.5 billion in long-term debt, which has also increased, from about $6.9 billion at the end of 2017.

Dividend: MPLX’s annual divided is $2.71 per share, among the highest in the industry, and which translates to a yield of about 11.57% at the stock’s current price.

Price/Book Ratio: there are a lot of ways to measure how much a stock should be worth; but one of the simplest methods that I like uses the stock’s Book Value, which for MPLX is $16.91 and translates to a Price/Book ratio of 1.68. The stock’s historical average Price/Book ratio is 3.78, which puts the stock’s long-term target price at about $63.91 per share. A 173% increase might sound unlikely, but the stock was around this level in July of 2015. A more conservative target comes from the stock’s historical Price/Cash Flow ratio, which is currently 77% above the stock’s current level and offers a target price at about $41.50 per share.

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 two years of price activity. The red line traces the stock’s downward trend from August of last year from a peak at around $39.50 per share to its current price at a multiyear low around $23. The stock’s current momentum is strongly bearish, with the price dropping below a previous two-year low around $26 per share. At this point, the next most likely support level is around $16, based on the stock’s bottom from an extended correction that began in February 2015 at around $88 and bottomed a year later at around $16 per share. The stock could stabilize anywhere between its current price a little above $23 and start to rebound; that could give the stock room to rally to about $26, where the next likely resistance level rests. A break above that level could see the stock test the 38.2% Fibonacci retracement line at around $29.50.

Near-term Keys: Given the strength of the stock’s current bearish momentum, I think there is a stronger likelihood the stock should continue to drop; that means that the highest probability short-term trade comes from shorting the stock or working with put options. However, if the stock does find a stabilization point, and manages to pivot anywhere between its current level and its next most likely support at $16, there could be a useful short-term opportunity to buy the stock or work with call options with an eye on $26 as a bullish target. The stock’s fundamentals and value proposition are excellent, which means that even with the currently bearish momentum, MPLX offers an excellent long-term opportunity, with an annual dividend far above the average for stocks in the S&P 500 or even long-term bond yields, and among the highest in the industry. If you aren’t afraid to tolerate some additional near-term price volatility, and are willing to take a long-term view, MPLX could offer a compelling opportunity.


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