Q3 2020 MPLX LP Earnings Call
So those proceeds as we generate positive cash in the environment that I'd say that we see today. So I call. It. The base case today is we see buybacks as the preferred vehicle and at the same time, we do see EBITDA growth in our business will naturally reduce our leverage so as Pam has said many times were.
Comfortable at four times.
Over time, we think that will go down as our earnings grow.
But if if conditions dictate something different we will adjust but right now we see unit buybacks as the priority based on where the market is trading and the yield that we have on our units.
Okay great.
We have a follow up question I was just wondering if we can expand on the cost side, a little bit in terms of your close to efforts.
How much of the reduction that's happening at MPC will translate across to MPLX above.
Original target you said earlier this year and has your Capex outlook changed for 2021, I think it was a $1 billion last time, we were updated.
Yeah sure I will take that its Pam so as we mentioned earlier, we're on target to achieve the $200 million of operating expense reductions. This year and then we also announced the reduction in force that was across the enterprise MPC and MPLX and so that portion.
Of the cost reductions associated with separation of part of our workforce.
It will be reflected primarily as we move forward in 2021, so that's incremental to the 200 million that we identified.
Earlier.
And then the other question that you asked about was Capex Capex, we would we will provide an update when we report fourth quarter results, but as you know we've worked hard to reduce our capital spend throughout the year.
We're still targeting about 900 million, which is down about $750 million.
And then we would expect for 2021, although we're not ready to provide some guidance. We would expect 2021 capex will be lower than 2020, as we've been ramping up some some larger projects here. So it will be lower than this year, but we're just not ready quite yet to give you that guidance share.
Yes, I really do appreciate it and if I can sneak one last one on like Jeremy.
We expect to be free cash flow positive after distribution next year, you've had really strong results. This year is there any reason to think that it can't happen this year as well too or is there some seasonality fourq that we should be thinking about.
Well as I mentioned earlier, so there was a question about the outlook and on volumes across the system and the logistics and storage side, we'll we'll follow Mpcs refining volume throughput, so and mpcs forecasting slightly lower throughput for the fourth quarter than the third so so keep that in mind, but.
But to your point, we are turning the corner here on free cash flow, we were negative the first half positive in the third we would expect to be positive in the fourth. So we think we'll be right around a position to maybe be modestly positive for the fourth quarter of 2024 for the full year.
Perfect scenario that might be one of the things that I think we're trying to communicate is we made a commitment to the market that we were going to drive ourselves towards free cash flow and 21.
As you're pointing out we are getting there a little bit early.
I don't want to overplay this though from the standpoint as we you know we got authorization, we expect to continue to execute the plan as you know the size of the public float is it's not a very large number at this point. So I don't want to Overhype. The discussion today, but just really reiterate that we're on track to do what we.
So we were going to do for a long period of time here, it's been multiple quarters in a row, where recent here's where we're headed we're getting there. We're trying to show you that as Pam just said for the full year will be slightly positive as we go into 21, it'll get a little bit more and and I think we're just trying to disclose that you know we made a commitment we.
We're executing on that we're getting to a position where we will finally get to a point of that of that resulting in some buybacks and thats why we got the authorization.
Perfect I really appreciate the color guys.
Take care and have a safety.
Thanks, Eric appreciate it.
Thank you next we'll hear from John Mccain with Goldman Sachs. Your line is open.
Hey, good morning. Thanks for the time just wanted to circle up again on Capex for 2021 appreciate the guidance that it should be lower year over year, but just wondering if you could talk a little bit about what.
That might be the moving pieces there how flexible that number and then really how much does it depend on the pace of the overall recovery.
So John I'll start off and you know Pam can jump in so so we're not quite through our process internally or with the board for 21 were in the middle of that so we're not ready to give any forward guidance in that area. I think what Pam was reiterating is one of our tenants have going forward is we're going to maintain very strict.
Capital discipline, you know as we said we set a goal. This become you know real realize now that won't be free cash flow, we're committed to our distribution as we've said many times you know the market keeps asking us about that but we're committed to that distribution were committed to managing capital in a way that we've raised our hurdle.
Right and in such a way that will have strong discipline around it will generate excess cash as we generate that excess cash if the market continues to trade wherein spend than we think the right use of proceeds is to buyback units. That's that's kind of where we are at this point as to your question on on recovery.
Again, my personal philosophy is you know worry about the things, we can control and not the ones that we don't control, but just to do scenario planning around that I mean, I think theres a lot of good indications.
That the market is you know going back in a in a demand recovery mode from where it was earlier hopefully some of this rhetoric that we're all reading about as far as vaccines coming online sooner rather than later is all good and hopefully you know the the overall us economy will will rebound in 21. The way you know some people are.
We're projecting so yeah, we're just going to have to watch as I was saying in the in the answer to the first question you know business conditions will dictate how and which method and the the.
Pace at which we deployed things, but I think our main message here is you know we're delivering on what we expected we're reaching that point, we're staying disciplined on capital we're staying committed to our distribution and we've reached a point where were starting to have excess funds.
All right. That's helpful. I appreciate that I, just my quick follow up and I'll keep it to two today just on Capex in the quarter. So the year to date number looks like it's coming in a little tight on kind of what your full year 2020, Capex guidance has been so I was just wondering if you kind of frame up really spending.
For the rest of the year and kind of what's happening there and maybe if you're expecting another return of capital from one of the jvs or something like that like it.
Yes, John So I think one of the things that.
There's a little more difficult for us to forecast is change in accrual for capital expenditures and capitalized interest in and so some of those those items are adding to this a number that is a little higher than our targeted 900 million, but if you back out and we give the detail in the press release. So it's.
I think it's the last schedule attached to the press release, if you back those things out you'll see that we're still right on target for it we will have its considerably lower capital spending in the fourth quarter and that is intentional as I mentioned throughout the earlier part of the year, we were wrapping up some larger projects like the mounting retail.
Terminal to the Utica butane expansion and NGL pipeline.
In Appalachia, and we had some other some plants that we're we're being wrapped up so we had capital spending was much greater in the first half of the year. Now also that's part of the reason why we were negative cash flow in the first part of the year, but yeah, you'll see a very significant decline sequentially as we go into the fourth quarter and close out.
The year for growth Capex.
That's helpful. Thank you.
Thank you. Our next question will come from Christine Cho with Barclays. Your line is open.
Thank you if I could actually just maybe take your comments about how we should think about free cash flow generation to the remainder of the year.
Can you give us an idea of how much of the quarter over quarter increase at all and that was due to cost savings and where are you where relatives to nbcs and whether you expect to hit up against any NBC levels next quarter with the volume guidance state they're forecasting SMP.
C level.
So nbcs can always be a part of.
The equation, we have a large number of our contracts and systems that are supported by Mdcs.
And even in periods of time, when we weren't in the kind of the demand shock that we've been experiencing.
We've had some of the benefit of protections from minimum volume commitments and so certainly that's that's always in play Christine in terms of the cost reductions, we probably won't break that out separately for each segment, but certainly cost reductions did play an important part of third second and.
Third quarter.
And we still have some cost reductions to deliver here in the fourth quarter as well.
With respect to that 200 million dollar for 2020 that expectation of <unk> of operating cost reductions. So that's you know that's a significant portion of the benefit that we've been realizing we probably have a little more flexibility on the logistics and storage side of the business than what Weve had on gathering and processing the plan.
So they have installed have you know that a little bit like a mini refinery they have high fixed operating costs and so we have probably experienced more of the cost savings on the logistics and storage side of business than we did in gathering and processing.
Okay got it and then I guess, just you know given the changing landscape for refineries in a post pandemic world. How should we think about the long term cash flow generation of the existing asset against the contribution from growth projects as we think about the natural.
So Steve I think Jim you mentioned from growing EBITDA and should we take your preference to buy back stock today as confidence that you either don't see deterioration in the near to medium term on your assets or that any structural changes will be more than offset with lower capex and continued cost savings.
Yep and thanks, Kristina that's a good question and so it's kind of I will give you a kind of a multi part answer and then maybe ask others. If they want to chime in as well, but when we think about some of the significant changes that have taken place said mpcs operations with the idling of the Gallup refinery the Martinez risk.
Binary and the conversion of Dickinson to renewable diesel when we think about some of those renewable products like renewable diesel as you know it's a drop in fuel.
And we can move that fuel in our existing assets. So we'll certainly we'll we'll look forward to as MPC transition some of its fuels and its feedstocks will be equipped to handle those those feedstocks in those fields.
And then as it relates specifically to gallop in Martine as we've talked about the fact that we have we have contracts in place that protect cash flow for a period of time.
Then on Gallup we.
We would expect to actually there to be a for the enterprise little or no change in the cash flow and EBITDA because the <unk> the.
Pipelines that supported moving crude to the refinery.
Now that crude is being transported on a longer haul the Tex new mex pipeline to Midland and so the that the earnings we believe will not be impacted by the shutdown of the Gallup refinery and then at Martinez a combination of things there so again.
When we're protected with agreements for the various assets that were dropped down over time by the legacy endeavor and Andy X systems, we have a minimum volume protection in place and as some contracts go out to December of 2026.
And as MPC continues to move forward with its project there, we're continuing to evaluate the long term opportunities for the logistics assets around that operation.
To be conformed to support Mpcs objectives in that market.
As far as the long term and energy transition a.
We believe that.
Our assets will continue to serve an important role well into the future in terms of delivering crude oil feedstocks and finished products to markets that we believe will continue to require them either.
Even as the space does a transition and then when we talk about energy transition, we could talk about some of the opportunities to convert some of our assets to help support new a new survey.
Services, an operation like moving C O two or and.
Sequestering C O two in caverns and storage facilities.
Now moving hydrogen on pipelines renewable gas on pipelines and those kinds of things so.
Only an opportunity for us.
This industry is has been very resilient overtime, we've adapted to a lot of changes in standards and regulations overtime.
And we believe our assets will continue to be a vital part of delivering energy to those who need it.
Christine It's Mike I'll, just add the Pams comment too to your question.
At the end there they were going to continue to see an evolving energy landscape. Obviously, it's very well known that there's different things occur in different parts of the world you know in the short term one of the priorities that I think it was important for us at MPC and MPLX was to spend a lot of time on our cost structure in that effort.
Continues and we're going to continue to give updates you know quarter to quarter as to how that progresses, but I don't want to lose sight of the point the pan was making it the answer the question. The point that you made at the end of Yours is we do believe and growth is an important part of the story at MPC and MPLX getting the cost structure in line was up.
With a high priority, but then also growing the earnings at both entities over the long term is is also a priority but in a in a very short term with covance hitting him and the uncertainty around you know the the market at least in the last six months or so the higher priority has been you know look.
Liquidity and.
Yeah getting ourselves in a position, where we think we have a structure long term, it's more cost competitive.
Thank you.
You're welcome.
Our next question will come from Michael Blum with Wells Fargo. Your line is open.
Thank you good morning, everyone. So.
So in your prepared remarks, you just you talked about M&A, you're seeing in the upstream space.
My question is really do you see that.
Ultimately moving to the midstream.
Sector, and if so and what are your thoughts in terms of MPLX.
Playing a role there any figures can be more internally focused.
Yeah, Michael I'll start as Pam so.
No.
At the moment, we don't really have a currency that I think would be very effective in consolidation I think consolidation will take place and that certainly will evaluate opportunities as we move forward, but again our priority in the near term is to use our free cash and interest in our balance sheet I'm not use our balance.
Right and keep our data in check here, but use our free cash to buy back a units, but we're not going to be blind to what's happening in the space and we do think that there will be consolidation. So we'll certainly be monitoring that.
You know what that might look like difficult to predict and I'm not saying that we are actively engaging in M&A at this point in time, but certainly we'll keep an eye on on how that unfolds.
Great just a second question just wanted to ask if you had any updates on the proceedings and the high Plains pipeline.
Yeah. So on the high Plains pipeline there was some a recent development and the case was really remanded back the so by December 15th there will be an.
An update from.
From the core <unk>.
See if I'm missing anything here.
Yeah. So the trespass determination in the damages are vacated and that's so that's good the matter has been sent back to a regional director.
We do expect any decision by December 15th, but really that's that's all there is we don't have much to share beyond that now just wondering mind people as we stated before we have alternatives to generate a similar level of EBITDA.
As we've generated in the past if for some reason were unable to use that one piece of line.
That was an issue with the tribes.
Michael It's Mike I'll just add.
Obviously, it's a positive development for us as the assistant Secretary issued an order vacating the B. I used trespass Warner.
There is still more to come as as Pam mentioned, but as we previously disclosed as you know we believe that we have alternatives that are you know just as important in this whole process and we'll continue to see how it plays out, but but that's where we stand at this point.
Thank you very much.
You're welcome.
Thank you. Our next question will come from Spiro Dounis with credit Suisse. Your line is open.
Hi, good morning, everyone.
First question is just on the midstream assets still up at the MPC level, both Brio and South Texas Daywear cash flowing now so just wondering if you guys could update us on how you're thinking about migrating those assets down MPLX and if an asset swap is something that could facilitate a transaction there.
Yeah. Its P.M., so I would say at the at the moment, it's kind of a it's not on the front burner for for us across the company, we really have our priorities focused on those items that that Mike has highlighted in optimizing our portfolio, reducing our costs focusing on that.
Commercial aspects of our business really getting our house in order and for MPLX in particular getting to that excess free cash flow that positive cash flow after distributions and after capital investments so that we can.
Commence the program that was authorized by the board to begin repurchasing our units.
Understood.
One question just on the side of things, obviously, you guys continue to make a pretty big push their encouraging to see that but just wondering when it comes to governance at some point does the evaluation of a C Corp governance vehicle become a way to your factor for you.
Spiro its Mike. So you know one of the things that we continue to look at is the structure that we have here.
We certainly understand the argument for a C corp, and the advantages that that would bring from widening the investor base, but as we found in our midstream review you know Theres a lot of cases, where there are pros and cons I've used that term quite a bit and there's knowns and unknowns. Obviously in this particular case.
You know the pro would be to a wider investor base. You know then than in currently in the partnership structure.
But one of the large cons what would be the tax impacts that would do occur both at MPC and two are long term holders. So you know that.
That's one of the main reasons that we have not moved forward on that or the.
The second main reason, obviously is if you're in a C corp mode that you're going to start paying corporate taxes and for US we've looked at that for for an entity that we have today, which is about four.
$4 billion of distributable cash flow rough numbers, you know, even a 21% tax rate that's a significant corporate tax that we would be paying and if you believe that the tax rate could be going up in the future. It's just even that much more so if you're looking at you know 802 billion to 1 billion two or whatever number you want to pick.
You know we haven't felt that it's been worthwhile to consider that in light of the you know the cons, which would be the up upfront tax implications to shareholders as well as the ongoing loss of cash flow that's pretty significant in this regard. So yeah with that said you know we're always constantly evaluating what.
It's the best way for us to try and create value.
Up until now we keep saying the base case that we've been on is still though is still the right path.
We want to get into a into 21 and generate more cash flow and continue to a two.
To emphasize that we think thats the best source of value for us and try and get to a point, where we start to buy units back and if they continue to trade at this kind of level. Then we'll continue to prioritize that as a as the use of that excess cash.
Got it makes sense appreciate the color thanks, Pam like yeah.
You're welcome thanks.
Thank you. Our next question will come from TJ Schultz with RBC capital. Your line is open.
Great. Thanks.
Just first a question on the Mbcs do you have.
Any major contract renewable renewals on on the Nbcs and 2021 and whats the average remaining term.
The mbcs within Allen Us.
So within LNS, Oh, we have long term contracts most of them were put in place the dog.
Those that would be coming up for renewal would be coming up primarily in 2022, So our first dropdown.
Back in 2012 was marathon pipeline assets and those are 10 year contracts. So the majority of those would start.
Coming up for renewal and then in the logistics and storage segment of the business begins.
Beginning in 2022, we do have one contract our marine contract does come up for renewal in January of 2021 [noise].
Excuse me.
And that is a little more unique among all of our other contracts.
That contract will will be extended.
And renewed however, it does have a feature where we will reach reset the rates a ton market rates for the equipment. That's under contract. So it's a contract it's a fee for capacity so to the extent that we have the equipment in service available and dedicated to MPC we.
Will be paid for that equipment. The rates are set to fluctuate every five years upon contract renewal. So we would expect that there will be a contract renegotiation or on the rates the rates will be reset and the rate reset is really based on what market rates are so that is one that will be up in 2020.
One.
Okay. Thanks.
And then just a follow up on on your answer earlier about asset conversions that that may be possible when considering.
Energy transition and the theme there are any of those.
Considerations, where there has to do a C O two or hydrogen or RMG happy right now or when do you expect those types of conversions to be possible or or to be needed. Thanks [noise].
One of the things that I would I would tell you TJ is you know as we look at this evolution in the energy space I think Pam said it well earlier is you know we're going to continue to look for opportunities.
And where we can participate and make that part of our portfolio going forward <unk>, probably the toughest thing from year end, it's it's an area, where we probably won't give the most disclosures because of the competitive nature of these calls and and not put ourselves in a position where were hurting our either negotiations or the projects that we have been.
Well, we'll try our best to give you some color in this area, but it's also an area that's probably going to frustrate you a little bit is as we kind of keep some of these projects closer to the best but I don't I don't know, Tim if you want to comment at all.
Okay. So this is temporary I would just add that in short we know we're in energy logistics company and we're going to continue to look at all the opportunities, but I think Mike is summarized it well, it's pretty competitive environment. You know, whether we look at a conversion of assets. You know we have we have things that move molecules so well.
Continue to look at what we can put those services to use oh, whether its trucks trains boats pipes, it's all on the table.
Thank you. Our next question will come from Keith Stanley with Wolfe Research. Your line is open.
Hi, Good morning, I wanted to follow up first on the content of the comments on the marine contract.
You give it a sense of current rate versus market rates and then.
My understanding was that a pretty small business I think it was only maybe 100 or 200 million EBITDA if that's in the ballpark.
And then related to that the pipeline contracts that you referenced for 2022 also reset to market at renewal or was that something unique to its marine.
No that's that's unique to the marine business.
And that's because you have your into the right ZIP code in terms of the size of the business. So yeah, it's that and I would say another thing to keep in mind is that the fact that we have put more equipment to work also helps to offset the fact that we would expect the marine rates to come down I would say you know that.
Current market is soft relative to when the contract was first put in place and the prices were first established so.
It's clearly a.
It's clearly if it is but you're in the rights of code for Marine.
Okay, great and second topic the on the buybacks that billion dollar authorizations for the public units can you can you just talk about the reasons for buying and the public units and not I guess buying in any units held by MPC, obviously, it's more impactful for the stock technically but anyway.
Other thoughts or considerations, maybe MPC has no interest in selling back MPLX units just how you came to do the authorization just for the public units. Thanks.
Well, we think it's important to message for investors that MPC does want to hold its ownership interest in MPLX.
And as we use a positive free cash and again after we maintained the distribution, which is important to MPC.
After we that maybe you don't invest in the business like the the capital that's available after investing in the business will be used to buy back public units and that will only serve to increase mpcs ownership interest you know in MPLX, So Oh Wow.
We think that's an important message for investors that MPC continues to value MPLX as an important part of its business long term.
Not only for the distribution today, but for growth opportunities well into the future.
Great. Thank you.
Thank you. Our next question will come from Tristan Richardson with truly Securities. Your line is open.
Hey, good morning, Thanks for all the communication on capital priorities, you've covered a lot of ground here just just one more buyback question. If I may just curious Mike how much does consolidated leverage at the sponsor influence the pace of execution on a buyback.
Versus continuing to just de lever the LP.
So there are pretty much independent trust and you know one of the things that we've said it at the sponsor level is you know when we look at the MPC and MPLX leverage and we want to keep that at around one to one and a half times, obviously, we're in a little bit of a anomaly.
The situation with what's happening with Kobe, but but weve continue to communicate that you know we believe both entities should be and I use the word appropriately levered were.
We're not looking to have you know the entities under Levered were not looking to have them Overlevered. We're looking for an appropriate amount of leverage that is right for each entity.
At the MPLX level, you know, we think four times is a good spot to be overtime, you know Pam and said you.
You know overtime, you, having that drift down a little bit as our earnings grow is good for us in our mind. So midstream space was very consistent stable earnings and hopefully you know the market is seeing that as far as a you know the last couple of quarters. Here you know, we think thats an appropriate levers for the midstream space at the same time.
On the refining space that type of leverage would not be inappropriate level. So thats why weve communicated you know one to one and a half times is what we think is right. There in both entities is very important for us to maintain investment grade credit metrics. We continue to have dialogue with the rating agencies.
Always continue to do that or you know the the ratings that we have at this point, we believe are appropriate for our businesses and and we think the leverage that we have is is important to to maintain that that investment grade profile. So so that's the way we think about them some people ask that.
Question like you're asking now about consolidate it we kind of look at them as two independent businesses and having them appropriately levered is the way we think about it.
Appreciate it thank you guys very much.
Yeah, you're welcome.
Thank you our last question will come from <unk> with Bank of America. Your line is open.
Good morning, everyone. Thanks for taking my questions just two quick clarification ones for me.
You mentioned earlier about the cost reduction from workforce reduction plan.
Thank you the 200 million in Opex reduction. This year are you able to quantify the benefit from that going forward and.
Perhaps high level, how much of the aggregate cost reduction this year will be repeatable next year.
Yeah. It was well not all of the cost reductions that were achieving in 2020, we expect to be on going into the future and we're not providing information yet about the amount that the that the cost reduction equates to four for the in force for the workforce reduction, but you'll be.
Well to see it in our results as we move forward and some of the cost reductions that we've been able to successfully execute here in 2020, you should be able to see that in our detailed financial statements as well. So I would say just continue to monitor our progress and and.
And you should be able to follow it as we move through 2021.
Got it thanks for that Tam and secondly, a clarification on the Capex comments from earlier I. Appreciate the color you ought to share so far but given the improving outlook for the northeast.
Based on your customer conversations perhaps could you share.
We should think about run rate capex for northeast GMP to maintain.
Current production levels.
Yeah. It was well I would I'd say that that's relatively modest relative <unk> you know in comparison to the total capital that we've been spending historically there most of the capital that we spent in 2020, even is related to the NGL pipeline that we completed and we're close to.
Completion, there and then bringing on are preparing to bring on some additional plants and building out that smithburg. One property. So we definitely have a ongoing capital to support the producer customers in the way of a well connects and so forth, but I might my guess is just within the Marcellus that.
That would be you know couple of hundred million or less.
It was well, it's Mike I'm, just going to add that one of the things that I think we've seen as a result of the activities and this year is met many of the MP players are looking at their situation and compared to where they were a couple of years ago looking at a slower growth trajectory, whether it be in the northeast or in the <unk>.
Permian or any other area. So our expectation is the growth pattern that we'll see we'll be at a slower pace consistent with that at the same time I think everybody has seen that one of the things of the recent activities. In 2020 is how natural gas has responded as far as you know price and the expectation going for.
Forward and we think it's still going to be an important part of the energy landscape for it for the long term.
Yeah, we're looking at $3 plus you know natural gas pricing now compared to where we were six months ago and I think there is a a different outlook going forward that also blends into the evolving energy landscape.
Got it thank you, Pat and Mike and congratulations great quarter.
Yes. Thank you.
Thank you I will now turn the call back over to Kristina Kazarian for closing remarks.
Thank you for joining us today and thank you for your interest in MPLX should you have any additional questions or would you like clarification on any of the topics discussed. This morning members of our team will be available to take your calls hope you have a great day.
That does conclude today's conference. Thank you for participating you may disconnect at this time.