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 energy products like liquified natural gas (LNG) and 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 increased production into 2019 to the point that the capacity of existing pipelines could not keep up with the supply. 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 been coming online throughout the past year and a half. 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. As economic activity has continued to increase in the U.S. this year including for industries like Travel, oil demand has increased and helped energy prices push to levels not seen since 2014. That has been good news for the stocks in the Oil Storage and Transportation industry.
Among the stocks that I like to follow in the Oil Storage and Transportation industry is MPLX LP (MPLX), a master limited partnership created by Marathon Petroleum Corp (MPC), another large-cap energy stock that I’ve followed for some time. This is a stock that has benefited from the increase in crude demand, rising from an October 2020 low at around $15 to a peak about a week ago at nearly $32. It is also a company with some interesting fundamental metrics that indicate solid strength. What about its valuation? Has the stock’s increase in price moved it past the point of useful value? Let’s dive in and try to find out.
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 $31.5 billion.
Earnings and Sales Growth: Over the last twelve months, earnings increased by 21.31%, while revenues grew by nearly 14%. in the last quarter, earnings were 12.12% higher while sales increased by 6.85%. The company’s margin profile is very strong; Net Income as a percentage of Revenues in the last quarter was a healthy 31.34% versus 30.79% over the last twelve months.
Free Cash Flow: MPLX’s free cash flow is very healthy, at about $4.3 billion. That translates to a Free Cash Flow Yield of 13.85% and marks a steady, multiyear improvement from $3.4 billion a year ago, and $2.2 billion in the first quarter of 2020. Improvement in this number is a strong sign of management strength.
Debt to Equity: MPLX’s debt to equity is 1.51, which indicates the company is very highly leveraged; however the 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 $39 million in cash and liquid assets (down from $293 million in June of 2017) versus $18.2 billion in long-term debt.
Dividend: MPLX’s annual divided is $2.82 per share, among the highest in the industry, and which translates to a yield of about 9.12% 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, and $2.75 earlier this year.
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 $33.50 per share. That means that MPLX is trading at a modest, 8% discount right now, with a practical value target at around $27 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 year of price activity. The red line traces the stock’s upward trend from a low at around $15 to its high point, reached about a week ago at around $32 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. Current support is right around $30, with immediate resistance at the last, $32 peak. A push above $32 should have upside to about $34 based on the current distance between support and resistance, while a drop below $30 should have limited downside, with next support sitting around $29.50, and $28.50 below that providing additional support if bearish activity picks up.
Near-term Keys: MPLX’s value proposition isn’t high enough to be useful, but the truth is that the stock’s outsized dividend, along with increasing cash flow and operating strength are still pretty interesting. I would prefer to see the stock retrace its current upward trend somewhere between $28 and $27, however before taking this stock seriously as a useful value-based opportunity. This is company with some holes in its fundamental profile as well, including very limited liquidity, and I would also 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. If you prefer to work with short-term trading strategies, look for a bounce off of support at $30 to provide a useful signal to buy the stock or work with call options, using $32 as an early profit target, and $34 possible if buying activity increases. The stock has limited downside to secondary and even tertiary support levels right now, which makes a bearish trade a very low-probability prospect. A drop below $27.50 would be a strong indication the upward trend is actually reversing, and would act as the best signal to consider shorting the stock or buying put options, with an eye on $26 as an early profit target on a bearish trade.