Q4 2020 MPLX LP Earnings Call
[music].
Welcome to the MPLX fourth quarter 2020 earnings call. My name is Amber and I will be your operator for today's call. At this time all participants are in a listen only mode. Later, we will conduct a question and answer session Press Star one on your Touchtone phone to enter the queue. Please.
Please note that this conference is being recorded.
I'll now turn the call over to Kristina Kazarian Kristina you may begin.
Good morning, and welcome to the MPLX fourth quarter 2020 earnings conference call. The slides that accompany this call can be found on our website at MPLX dot com under the investors tab joining me on the call today are Mike Hennigan, Chairman, President and CEO, Pam Beall CFO and other members of the executive team we have.
Got you to read the Safe Harbor statements and non-GAAP disclaimer on slide two 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 now.
With that I'll turn the call over to Mike.
Thanks Kristina.
Good morning, everyone. Thank you for joining our call.
Earlier today, we reported adjusted EBITDA for the fourth quarter of 2020 of $1 $4 billion and full year 2020, adjusted EBITDA of $5 $2 billion considering.
Considering the unprecedented challenges our industry faced throughout 2020, we're proud of the way our performance highlighted the resiliency and stability of our underlying business.
Spite the difficult macro environment, we were able to grow total DCF for 2020 compared to 2019.
Additionally, our results demonstrate our commitment to executing on the priorities, we laid out for the year.
We made strides on optimizing our portfolio announcing the sales of Abilene facility in Corpus Christi, Texas.
On that margin side. This is an example of the continued effort, we're making the focus on the assets that have long term strategic value to the company.
We reduced our capital spend in 2020 by over $700 million from the target. We also took necessary steps to address our long term cost structure, achieving our target to reduce forecasted operating expenses by over $200 million.
These expense reductions were key to offset earnings headwinds, particularly in the <unk> segment, and we believe there will be enduring long term.
Our cost reduction efforts are particularly meaningful when you consider we have not compromise our commitment to safely operating our assets protect the health and safety of our employees and support the communities in which we operate.
As a result of these concerted efforts, we were able to generate excess cash flow for the full year 2020, after self funding our distribution and capital program.
This inflection occurred earlier than our original target of 2021 and gave us the financial flexibility to begin repurchasing units in the fourth quarter of 2020.
Today, we also announced the growth capital outlook for 2021 of $800 million focused on investments in project expected to deliver our highest returns.
This outlook represents a continued reduction in capital spend as we work to high grade our portfolio of investments.
Focusing on projects that achieve robust returns irrespective of the market environment.
We remain committed to strict capital and expense discipline and that discipline combined with EBITDA growing overtime supports our continuing goal of generating excess cash for 2021, providing the opportunity to return incremental capital to our unit holders.
Shifting to slide five I'd like to provide some comments on our responsibilities around sustainability and corporate leadership.
Last quarter, we discussed the publication of our 2020 climate perspectives report highlighting opportunities and strategic planning work the companies engaged in related to climate scenarios.
We also discussed our goal to reduce methane emission intensity in the G&P business.
It's important that we set objectives for the organization to drive our continuous improvement on ESG or.
Our focus on leading and sustainable energy positions us to deliver strong results in this space from lowering the carbon intensity of our operations and products to improving energy efficiency and conserving natural resources, while using innovative technologies to do it. We believe the goals we are setting and are transparent disclosures on how we.
Plan to achieve them position us well for the future.
I'm proud to see some of our team's efforts in the ESG Arena recognized in 2020 with API distinguish pipeline safety award as well as to EPA Energy Star Challenge Awards for energy efficiency.
These accomplishments highlight that at all levels of our business. Our team members are proactive and engaged in ensuring the safety of those in the communities, where we have the privilege to operate and protecting the environment, we all share.
Now, let me turn the call over to Pam to discuss our operational and financial results.
Thanks, Mike and good morning, as Mike mentioned earlier MPLX delivered fourth quarter. Adjusted EBITDA was $1 4 billion and full year EBITDA of $5 2 billion distributable cash flow of $1 2 billion for the fourth quarter provided strong distribution coverage of 1.58 times.
And we ended the year with leverage of three nine times.
Our quick response to the challenging demand environment allowed us to increase our EBITDA by $100 million per the year and.
In the LNR segment, the strength of our underlying contracts and operating expense reductions more than offset the impact of lower volumes in the system.
The gathering and processing segment also benefited from lower operating expenses, partially offsetting the impact of production curtailment in certain basins.
I'm pleased to report that our 2020 results represent the first full year that MPLX has funded both our total capital investments and distributions to our unit holders with $266 million of excess cash flow. After these activities.
During the fourth quarter, we began to implement the board authorized unit repurchase program of up to $1 billion of our outstanding publicly traded common units.
Looking forward, we expect our assets to continue to provide strong cash flow.
Our capital allocation will continue to focus on fully funding our capital needs and distributions with cash generated from operations, while maintaining an investment grade credit profile and returning excess cash to our unitholders.
We expect to maintain the distribution and the pace of unit repurchases will depend on several factors, including excess cash available alternative investment opportunities and the business and market conditions.
During 2021, we expect to invest approximately $800 million in growth capital and $165 million and maintenance capital.
Slide seven outlines the fourth quarter logistics and storage segment highlights.
Volumes across our pipeline and terminal systems were lower compared with the fourth quarter of 2019, primarily driven by lower utilization at Mpc's refineries.
However, we continued to execute on our operating expense reductions to offset lower throughput during the quarter, we continued to progress our strategy.
Creating an integrated crude oil and natural gas logistics systems from the Permian to the Gulf Coast.
We expect the wink to Webster crude oil pipeline, and which MPLX has an equity interest to continue to place assets in service throughout 2021.
In line with our focus on projects with minimal return risk the pipeline system has 100% of its contracted book capacity committed with minimum volume commitments.
As we progressed construction activities for the Whistler natural gas pipeline, we expect startup of the project in the second half of 2021.
And finally, we continue to work towards an in service date in the second half of the year for the NGL takeaway solutions. As a reminder, this project is an optimized approach compared to the Bangle project as it was originally contemplated.
Largely utilizing existing infrastructure with minimal capital investment by MPLX.
Outside of the Permian, We ran a successful open season for the expansion of the Salt Lake City core pipeline.
With the 11000 barrel per day expansion expected to be completed later this year.
While we're on the topic of our logistics and storage segment I wanted to take a moment to discuss the renewal of the marine contract between MPC and MPLX.
This contract was renewed in January for an additional five year term for the same capacity our boats and barges.
As mentioned on the prior call. The renewal terms include a reset on contracted equipment rates to current market levels.
Based on changes in market rates were estimating a reduction to our marine services EBITDA, it will be less than $100 million or less than 2% of our full year 2020 EBITDA.
We continue to hear concerns from the Investor community regarding MPLX has exposure to contract renewals with our sponsor MPC and.
We'd like to take this opportunity to highlight that many of these assets fit MPLX operates our fit for purpose to M. P. C's business and in most cases, the optimal solution MPC has for its logistics needs.
We fully expect MPC to renew contracts with MPLX as they mature over time.
We do not expect MPC to kind of incremental capital to duplicate system that already exist.
Now moving on to our gathering and processing business Slide eight provides fourth quarter segment highlights.
For the fourth quarter of 2020 gathered volumes were lower than the same period last year across our footprint due to lower dry gas volumes in the Utica a planned outage at the in the Marcellus and production curtailments in other regions.
Processed and fractionated volumes were also low risk than the same period last year, except for the Marcellus were processed volumes increased 8% and fractionated volumes increased 10%.
During the fourth quarter in the Marcellus our processing units continued to run at high utilization rates setting a record six bcf per day in the region.
We also achieved record fractionation volumes of 300000 barrels per day at our hope they'll facility. Following the third quarter completion of an 80000 barrel per day expansion.
In the past, we provided an estimate of the impact to earnings of a five cent move in NGL prices with.
With the planned sale of the Javelina refinery off gas processing facility in Corpus Christi.
We do expect a reduction in our direct commodity price exposure for.
For 2021, we would expect a five cent change in the weighted average NGL basket to have an approximate $20 million annual impact to EBITDA.
While higher NGL prices will have less of a direct impact to MPLX earnings rising NGL prices will have an indirect benefit providing an incentive for producers to shift drilling to rich gas areas, where our processing and fractionation infrastructure can be more highly utilized.
Looking forward to 2021 in the northeast we have opportunities to optimize our plant utilization as we expect producers to pursue modest production growth, while maintaining free cash flow.
We also expect to bring the Smithburg one facility online around the middle of the year.
And we expect to see incremental ethane recovery with improving economics.
On slide nine moving to our fourth quarter.
Financial highlights total LNR segment, adjusted EBITDA was $884 million and the gathering and processing segment contributed $471 million and adjusted EBITDA.
For the quarter, we generated approximately $1 2 billion of distributable cash flow and returned $742 million to our unitholders through distributions. We also repurchased 33 million of publicly held units during the quarter.
The bridge on Slide 10 shows the change in adjusted EBITDA from the fourth quarter of 2019 to the fourth quarter of 2020.
The logistics and storage segment increased $31 million year over year, primarily driven by lower operating expenses and partially offset by decreased pipeline and terminal volumes due to lower utilization at MPC refineries.
The gathering and processing segment increased $5 million benefiting from lower operating expenses and higher processed and fractionated volume in Marcellus.
Slide nine provides a summary of key financial highlights and select balance sheet information. We ended the year with a leverage ratio of three nine times approximately $3 3 billion available on our bank revolver and $1 5 billion available on our intercompany facility with MPC.
We intend to maintain our investment grade credit profile, and we expect our leverage to be approximately four times in 2021 and to decline over time with modest growth in EBITDA.
As I mentioned earlier for the first time in the company's history, we generated excess cash after capital and investments capital investments on distributions for the full year of 2020.
The progress made in 2020, our continued capital and expense discipline and growth in EBITDA, we expect to continue generating excess cash flow for 2021, providing financial flexibility to pursue value, creating opportunities for our unit holders, including unit repurchases and now let me turn the call back to Kristina.
Thanks, Pam as we open the call for questions. We ask that you limit yourself to one question plus one follow up we may you may re prompt for additional questions as time permits with that we will now open the line to questions operator.
Thank you we will now begin the question and answer session. If you have a question. Please press Star then one on your Touchtone phone if you wish to be removed from the queue. Please press Star then two if you are using a speakerphone you may need to pick up the handset first before pressing the numbers once again if your other.
<unk>. Please press Star then one on your Touchtone phone.
Our first question comes from share the Shunyi with UBS. Your line is open. Please go ahead.
Hi, good morning, everyone.
Maybe to start off you.
You generated excess free cash flow after distributions in 2019, sorry in 2020 and it looks that way in 2020, what are assuming thats. The plan in 2021 Leverages currently at three nine times I was wondering if you can share with us the order of priorities.
For this excess cash.
Split between say leverage buybacks and.
On distribution increases just wondering if you could sort of rank order the priorities as you think about that excess cash generation on a go forward basis.
Yeah.
Yeah, It's Mike I'll give you some color on that.
First off I would try to remind everybody that it's not a set it and just let it go on forever, we're going to continue to to look at where we stand on each of the parameters and they make decisions more dynamically rather than not.
So we're we've been engineer is we've been comfortable with our leverage on a lot of people have asked us how do you feel about that and we've been running around four times for some pretty consistent amount of time. So we're comfortable there and the way we look at it right at the moment is and we started this just towards the end of the fourth quarter, but we look at where we're trading.
You know where the equity is trading and right now we have a GPU yield of around 12%, we got a DCF yield of around 17% and if the equity is going to trade at that kind of level. Then you know that our priority in the short term would obviously be to buyback units.
We'd love to be able to do all of the above but as you mentioned youre going to have to prioritize as things go on in conditions changed et cetera.
I'd love to be able to.
We have a program that hits the highest priority at the time, but we're going to kind of look at it quarter to quarter or more dynamically and decide what we think is the best use and right now trading at 17% DCF. That's that's probably the highest priority we have right now cause leverages in a good spot market is not rewarding distribution growth.
Right at the moment, but I think some of these things can change over time I think the key for us on I'm, hoping the market is realizing that our goal was to get to free cash flow to put ourselves in this position. We got there a little earlier than we were expecting which was good and at the end of the day I'm, hoping in 2020 as shown on the market that we have.
Pretty consistent earnings Theres been a lot of questions around the stability and the consistency of the earnings. So hopefully the the year is everybody's used the word unprecedented has played itself out and continues as everyone knows we're not through with the pandemic yet, but once we establish post the pandemic I think we're gonna be.
In a mode, where we're going to continue to grow earnings like we've said over time.
When you look at cost cutting that we made is a major effort. This year end and then to your question is will be dynamic and reported out each time, what we think is the best use of that return of capital.
I wouldn't give one last comment that our distribution is still a pretty healthy return of capital.
As is and we've stated many times that we support that distribution. We think it is very solid we think this past year has shown that and then we're going to continue to grow DCF and grow our earnings in and see what the best uses on open that helps you.
No debt.
I really do appreciate the direct cash or actually.
Just as a follow up question.
I don't want to overuse, the word unprecedented but 2020 was.
And certainly in terms of your responses to it would I think about maintenance capital.
Got $165 million I think it's the forecast for this year, what I sort of think about that number or is that kind of the new run rate that you're sort of thinking about other key asset stand today is there any catch up in there that you didn't do in 2020 and that should be lower as we sort of think about 'twenty two.
Assuming that the apples to apples asset profile, just wondering if you can sort of talk about that.
Makeup of that was 65.
Cash scenarios, Pam I'll take that one so in 2019, our maintenance capital is actually about $200 million.
And it dropped significantly last year.
So on a number of factors certainly influencing that one is what was happening just across the space and in terms of.
A lower utilization of our of a refining assets and refining logistics assets at Mpc's refineries. So that was having a sudden day significant influence on the downward pressure on certainly.
With a lot of uncertainties on driving some of those costs lower not made sense. So there is a nice increase that you see in in 2021 of $165 million.
A couple of things to keep in mind.
On MPC and MPLX, both expense on a lot of maintenance. So when you look at our maintenance activities. We for example expense API 653 tank work a lot of companies would capitalize that work and so we are maintaining our assets.
In a fashion that will allow us to continue to have a reliability and integrity. So I'd said don't just look at the maintenance capital and draw conclusions about how well, we're maintaining our assets from from that metric alone.
And then just something else to keep in mind as part of the A&D ex inherited contracts with A&D. The there was a provision where we where we would be reimbursed for some of the maintenance activity and so that also is causing the maintenance capital number to be a little bit lower and over time as those contracts.
Tracks roll off and those that tank work is complete the maintenance capital related to that activity would certainly increase the other thing. We've mentioned from time to time is the fact that in the gathering and processing segment of the business. Those assets are really new you know we've spent a tremendous amount of capital, particularly in the Marcellus and Utica.
And so the expected maintenance for those assets has been quite low.
It will obviously change over time it will also be influenced by the assets that are in our portfolio.
As M. P. C continues to evaluate its portfolio as part of its optimization and so I can't say that this is a fixed run rate Shneur I think we're just gonna have to give you some guidance as we move forward.
Perfect really appreciate the color today guys. Thank you very much on I'll jump back in the queue.
Thanks Shneur.
Our next question comes from Jeremy Tonet. Your line is open. Please go ahead with J P. Morgan.
Hi, good morning.
Just wanted to start off with the G&P side of the business here and it seems like a Marcellus processing volumes are continuing to grow but theres been kind of declines across other basins and just wondering if you could update us with regards to producer customer conversations and I guess, what expectations you have for activity across your GMP.
Footprint. This year should we expect those declines to continue or do you see them kind of abating.
Hey, Jeremy it's Mike Thanks for that question, Yeah, one other things that we've talk constantly about as you know the GMP space on what our expectation is because there's a lot of people questioned overall.
And I'll give you a big picture is we still feel really good about the business, we think it's going to grow earnings overtime.
Or as you pointed out our Marcellus and Permian areas are continuing to grow although we have seen some declines in some of the other areas we've been pretty open about.
We're in eight basins today, and we're going to look to optimize that at some point, but the market hasn't been willing to give us the right on.
Offer for that.
Other assets that we think maybe belong in someone else's portfolio. So we're happy to keep them to keep generating cash and proceed in the mode that we've been in.
I think the big takeaway overall is you know.
The expectation of natural gas in our opinion has started to move back towards a positive dynamic theres been a lot of discussion going into the pandemic about where gas was in being overwhelmed by associated gas et cetera, et cetera, we had not been believers in that and you know a lot of people were calling us on the our view there.
But at the same time I think it's kind of played out a little bit as we were expecting which is natural gas is going to be an important dynamic going forward.
The earnings growth, we think will be good but not double digit we've said that many times as well you know we're not expecting the robust growth that was there before so to producers in that space similar to the oil space.
Looking at their portfolios and trying to manage their their balance sheets on their cash flow et cetera. So I think this slow growth model is starting to play itself out a little more are becoming a little more obvious I think to investors than than was in the past. So you know our conversations continue along the same activity that.
We've been saying some areas not going to get a lot of capital deployment. Other areas is kind of core to some of the bigger players.
I've mentioned, many times that our core areas or the Marcellus and the Permian, we're seeing growth in those areas to your point, we're seeing a little bit of decline in the other areas, but as long as we're still kicking off cash in those areas. We still believe it's a contribution to the to the enterprise.
Got it thanks for that and then just wanted to go back to I guess to your opening remarks with regards to the barge contract renewals was that.
$100 million was in 2021 was that was that the impact there and just are there any other kind of contract.
Renewals over the next three years or so that we should be thinking about that.
Could have changes in the rates when they renewed.
Yeah, it's Pam and I'll take that Jeremy So yeah, we said, it's less than $100 million, which is less than 2% of the.
2020 annual EBITDA, and we have a lot of contracts between MPC and MPLX debt.
The largest contracts that had the most EBITDA related to MPLX.
He came about in 'twenty on 18, so they have a long life and those were refining logistics and fuels distribution and keep in mind. The pipeline contracts that we have are all FERC based rates. So we yes, there will be a contracts that come up for renewal there are no other contracts.
That I'm aware of that actually have this kind of an automatic rate reset provision.
Baked into the agreement it's just the way it was structured it was a it was about a five to six year period of time that it was in place and then it just an automatic update on market rates and so it sometimes that's going to be a benefit to N. P. C. Sometimes that'll be in our benefit to MPLX.
As market conditions do change over time, there are rate escalation or fee escalation provisions in those agreements as well.
So just.
Just keep it to keep that kind of thing in mind and as I said in the prepared remarks, we fully expect that M. P. C is going to renew these contracts with MPLX.
In many cases it has no other.
In grass or egress to its facilities. So we.
We fully expect these contracts are going to be renewed and an M. P. C owns a majority interest of MPLX and gets a lot of cash back from MPLX. So we think it's up in the mutual interest of MPC and MPLX to continue the positive relationship that we have enjoyed.
Got it that makes sense that's helpful. Thank you.
Our next question comes from John Mackay with Goldman Sachs. Your line is open. Please go ahead.
Hey, good morning, Thanks for taking my questions just maybe on the circle back on a little bit of what Jeremy it's getting into.
Can you talk a little bit about the javelina asset sale and maybe what the impact to EBITDA would be and then just if you take that impact.
And we believe we call exact day.
Talk to us on the other puts and takes on how you get comfortable with.
2021, EBITDA being flat to maybe up a little bit okay.
Yeah, I'm happy to take that one John Javelina assets are good assets, we expect to close on it here in the fourth in the first quarter of 2021. It just didn't really fit our long term plan, it's really a fractionation facility that processes refinery off gas.
It's on the smaller side in terms of EBITDA contribution. So it's not something that's going to make a significant impact.
On our outlook for 2021.
And then in terms of our expectations for 2021, I think you know maybe one way to think about this is if you go back in and just analyze kind of our weakest quarter.
Which was the second quarter, and then annualize our strongest quarter, which was the third quarter.
Youre going to come up with something in the range of $4 nine to $5 3 billion of EBITDA, Okay, and we're going to continue to pursue cost reduction so think about some cost reductions in 2021 on offsetting some of the headwinds associated with other marine contract rate resetting.
So I hope that's helpful to keep in mind and and then you know where 2021 shakes out is isn't really going to depend in large part.
With the recovery on the bridge.
Covering a volume for the MPC system as well as the recovery for producers and their production on it.
That's really helpful. Thank you maybe just one on capex on to follow up.
And if you look at the 800 million dollar growth Capex guidance. It looks like there is still some kind of room in there. If we think about what do you need to spend on the G&P side and then just what is left on.
Wait to Webster and Whistler, just curious if you can kind of talk about <unk>.
Where that could move to once those larger projects roll off.
Yeah.
Sure to talk about where it might move to certainly there could be opportunity for that capex to come in lower and again I think it's really something that's going to be.
To what we're seeing in the producer community both on the crude gathering side as well as the gas side of the business so well.
It would be prudent for us to wait and see how that unfolds throughout the year. So but yes. We will continue to look at all those opportunities where maybe we don't have to spend as much capital.
As we move on move through the year.
I would say about roughly half of the expected capex is going to be on the G&P side of the business and roughly half is going to be on the <unk> side of the business and.
And we have we do have some completion of some pipeline.
Expansion certainly you mentioned the with the Whistler project.
You're going to take a little bit more capital in 2021, as we wrap up there.
But.
Largely on the G&P side, it's going to be dependent on them.
The macroeconomic outlook.
What producers do with the drill bit.
That's great. Thank you very much Mike.
The other thing I, just want to add kind of goes to the question Shneur asked in the beginning is.
Our whole deployment of capital and return of capital is going to try and be as dynamic as we can be as we go throughout the year. So.
Big picture, we say these are about the guidelines that were given you, but as we go out through the year before we pull the trigger on any capital spend where we still have the Detroit something thats not already in progress.
Continue to look at what's the best use and like I said, if our equity trades, where it is you know we will deploy more capital towards it because in our opinion, it's been undervalued.
But we'll compare that versus the other.
Choices, we have on capital deployment as well as the long term strategy and supporting the customer base that we have so so hopefully it'll be a little bit more dynamic in a little bit more thoughtful as as far as long term and I really just want to emphasize we're going to try and use that word strict capital discipline and make that part of our mantra.
Oh and strict cost discipline and that makes that part of our mantra that some other things that we're trying to put a little more emphasis on than we have in the past.
That's really helpful. Thank you.
Youre welcome.
Our next question comes from Michael Blum with Wells Fargo. Your line is open. Please go ahead.
Thanks, Good morning, everyone.
I guess the first question I wanted to ask with just on.
On Wink to Webster and Whistler.
Can you remind us what the duration of those contracts are and the reason I'm asking that as it.
It would seem at this point those pipelines are adding capacity that probably maybe isn't needed right now by the market. So I just wanted to understand how long those cash those are protected.
Hey, good morning, Michael It's Mike So on on those projects. If you recall I'll give you a big picture and then I'll answer your question.
We had stated a couple of years ago that we had significant.
Capital deployment opportunities in three big projects Whistler, and Wink to Webster to you're referencing and then the third was bangle and the issue that we had in front of US is that Whistler and Wink to Webster, We got MVC protection and then to your direct question you know those contracts vary, but you know put them on.
On the 10 plus year environment. So very long term, we will use a rounded number of 10.
As a guidepost for you, but at the end of the day, we have long term commitments, we have MVC protection on it and that's why we went forward with those two projects, that's why wink to Webster and Whistler became part of our mantra on.
On bangle, although we liked the project and although it was.
Is something in our mind it could've been a long term winner for US we did not get MVC protection. The way, we would like to you know from from the customer base. It was not something that they were willing to commit to them. We understand the reasoning, but as a result of that without that long term commitment and out without debt long term MVC.
Our commercial team looked.
It looked at it and kind of rethought, what's the best way to do it and not deploy capital or put that capital at risk in the original intent and we changed that quite a bit down to a much lower capital solution using some existing pipe in partnering with some other players et cetera, and became a win where we were able to satisfy.
By the customer's needs, but not put ourselves at risk on the deployment of capital that wasn't backed as strongly as we would like so so wink to Webster and Whistler ended up where we wanted it to be long term contracts to your question MVC protected and we think theyre going to be terrific projects, we think the modified or smaller bank.
Project is also good.
Not with the original intent was because of the very point, we did not get that long term MVC protected.
A portion of the of the contract does that makes sense is.
Absolutely I appreciate the answer very much.
The second question on how does it just wanted to go back to a comment made during the prepared remarks.
I think you talked about potentially optimizing processing capacity in the northeast. So I just wanted to understand better exactly what you meant by that would you are you considering.
Idling a processing plant.
Is there something else on that comment to understand.
Now it's Pam let me, let me take that one so there clearly are opportunities for us to have higher utilization of some of the other plants that we have and in the northeast.
And some of the pipeline work that we've undertaken over the past couple of years is going to allow us to shift volume. So perhaps there are some opportunities to where we might have really high utilization and we need to shift some volumes to a different location, but that's what we mean about the opportunity to optimize the assets, it's not that we're looking to.
Actually to the extent there was an opportunity that made sense, we'd certainly consider it but we're not looking necessarily at shuttering any plants, but being able to balance volume across the system.
With the investments that we've made and then just you know the best return that we can get on our capital is filling up the plants that we already have in place without allocating capital to new a new edition. So that's the thought there.
Understood. Thank you very much.
Youre welcome.
And next we'll go to Christine Cho with Barclays. Your line is open. Please go ahead.
Thank you good morning, I'm Pam I wanted to maybe start off with I think it was a comment you said in prepared remarks about increased ethane recovery.
And I was just curious is the shell cracker that I think is supposed to start up later this year going to change anything on the fractionation side for you you know, it's more ethane going to get fractionated, rather than getting rejected through your facilities and would that be incremental cash flow or is that already being collected through an M. D C.
Christine it's Mike I'm going to let Greg makes a comment on that.
But before I turn it to him I'll just say one other things in general in the northeast is continuing like I mentioned earlier growth area. We still are very bullish on the Marcellus.
As Pam was trying to answer Michael's question, Theres, a little bit lower utilization in the Utica side of the northeast. So that's where you know we're trying to look to ways that we can optimize that capital on it it's already been deployed.
Overall, we still are pretty bullish the area when you think longer term.
Where do we think the natural gas business is going.
We still think the two core areas that we're in are the important areas to be in for natural gas overall, so from a long term perspective, we still feel real good about it you know the dynamics will change up there and I'll, let Greg give you some comments on on the shelf situation, but you know whether it's shell or some of these other pipelines that are happening over time.
<unk> you know those things will work themselves out because in our view its still a very cost effective area for production of natural gas.
Obviously, I always say you know it doesn't beat associated because that's a different economic but for on purpose gas, we're still believers that new the area that we're in is a good area and as things continue to develop we think we will find the opportunities to grow earnings there Greg Greg do you want to add anything on the shelf question.
Yes.
Thanks, Mike Kristine, Greg Fletcher here.
We currently recover the large majority of the ethane in the basin.
Uh huh.
You mentioned I think previously that debt.
We haven't a purity ethane line that connects all of our processing plants, we actually recover ethane at the processing plants and not centralize the fractionator. So we have a lot of flexibility to.
To recover and then transport on our own line to all the takeaway points currently to the Gulf Coast, Canada East coast on the various pipelines.
As our producer customers.
Continue to do.
To sell ethane into those markets and have commitments into those markets and on other pipelines.
We believe that that likely continues post startup of the shell Monaca cracker, which would require then incremental recovery.
Bethany and is currently being rejected into the residue gas stream at all of these processing plant locations. So therefore, we would expect to see incremental.
Our requirement to recover.
And there's plenty of ethane is still in being rejected that still recoverable, but we would expect to see incremental recovery at our plants we.
We do have capacity in place without adding too.
To recover on behalf of our producer customers and we do that is incremental.
It's on a fee basis in terms of the processing in the pipeline to the delivery points.
Got it very helpful. Thank you.
Okay and then.
I I guess on the follow up maybe moving over to you know on that given mpc's plans to expand eastward in terms of placing product into a pipeline via the laurel on Mariner pipes bothering them multiple shutdowns of local east coast refineries.
Is there an opportunity for MPLX, just somehow participate in Mpc's west to East movement, if pipeline becomes a Christian on real short product once demand recovers further.
Hey, Kristina its Mike.
I don't know that there's going to be a capital opportunity for MPLX Theres theres. Some existing assets. I know you are aware of a couple of other competitive assets that are out there that would fill a M.
Mpc's need because they are existing.
There's opportunities for us in regard to tankage and things like that but I don't think youre going to see any large capital expenditure from us to support that need.
We'll see if things change on the dynamic around the market supply and demand changes, but for right now I would tell you that I don't see us putting a lot of capital into that opportunity.
If it were it would probably be around debottlenecking. Some of the pipelines, we already have to make sure that we get the volume.
For those systems that M. P C wants to move eastward.
Got it thanks guys.
Youre welcome Christine.
Our next question comes from Keith Stanley with Wolfe Research. Your line is open. Please go ahead.
Hi, good morning.
I wanted to revisit the re contracting question from earlier, so specifically with the oil pipelines from from the IPO, where the contract expires next year can you say are those in the negotiation there are the new rates negotiated with M. P. C for the oil pipelines or is there a mechanism already.
Set by which the rates with would automatically adjust when when you re contract.
Yeah, it's Pam the overwhelming majority of our pipeline, whether we're talking crude or products or FERC based rates.
So that's really what dictates.
The fees that we will receive on on those pipelines.
And that fluctuates over time with the FERC index changes.
And isn't that PPI.
Okay.
Yeah, So it's really going to be driven by the market rates and FERC rates that are in place today.
Okay.
Okay. So the rates have been changing with the index over this time period already.
Yes, they do they fluctuate each year.
Got it okay.
Second question, just thinking about the recovery in volumes, how can we think about the companys leverage to an eventual recovery in mpc's throughput volumes I'm, just thinking L. N S. EBITDA never really declined much in 2020, because you you offset it with cost cuts, but how can we think about.
Leverage to volumes on the way back up is it is it material as a driver for MPLX or is it pretty modest because of your contract structures.
Well I think as you are.
As you look as you highlighted we were able to mitigate some of the impact on.
On the way down are we.
We'll see some improvements on on the way back up I think it's just really difficult to predict how much that might be and when I think it's going to depend on which areas of the geography MPC sees the most robust recovery. So again, we are just we have a cautious optimism for 2021 and we'll just have.
To wait to see how it plays out.
Thank you.
Our next question comes.
From Tristan Richardson with Trust Securities. Your line is open. Please go ahead.
Hi, good morning, guys.
Appreciate all the comments on 2021.
Maybe just going back to the prior question.
I appreciate the vs.
Outlook for cautious optimism and the parents comments on <unk>, but.
One of your peers is out there and made the comment that they could see 2021, returning to 2019 levels curious.
Do you guys see overall refined product demand.
Recovering to 2019 this year.
Chris It's Mike.
One other things that I tried to tell people is.
On spend a lot of time trying to call exactly where the market is and I spend more time trying to think of the banks of the river. So you know what if it turns out to be a per year as far as recovery relative to the pandemic, what if it does turn out to be more robust like you're you're referencing so.
To me the banks of the river is still pretty wide.
Do we anticipate there could be a positive upside as a result of you know getting past the pandemic in vaccines work on their way through an earlier recovery side I'd say that you know the bull cases, we get a recovery.
Robust and quick and then the bear cases, you know things take a little longer than people expect because the pandemic lingers in the post pandemic activity doesn't recover quite as much so on.
I'm hopeful that it is the the first part is a Pam said, we're cautiously optimistic we can see some of the parameters that would have people feeling that way and then obviously, we hope that's the case.
But on.
Our model, though is to spend more time spent you know, saying what if it's not the case and how do we see this playing out in case.
It turns out to be longer et cetera. So.
On the first of all admit that I I don't know exactly when it's going to recover I hope it is more robust than earlier than later, that's obviously our hope that's why Pam uses the word cautious optimism at.
At the same time, probably our our thinking is let's prepare for the worst and just be prepared in case. This thing takes longer I mean, some of the actual facts as people know is as we got into the back end of December the <unk>.
Pandemic was hitting harder than the cases were spiking up and and we kind of saw a second wave of restrictions in and hopefully those are going to start to come off and I know the new administration has a priority to get vaccination.
Enter into the People's arms as quickly as possible. So there's momentum in the positive side, but you know and there's momentum that cases seem to be coming down and hopefully restrictions will be coming off but.
I think it's hard to tell as to when it will actually occur in and so we're just going to prepare for both scenarios both scenario the barest scenario and look at our our cases and see what we think would play out in both that's the way we we kind of approach it I hope that helps you.
The one wildcard that Mike's hinting at it as well it's just this new variant on the on the virus.
We really don't know what kind of impact that's going to have and so you just while we think that the whole country is starting to.
Turned the corner on this situation. This is a new kind of a wildcard that's been presented so we'll have to see how that plays out.
No I appreciate it. Thank you guys and then just one follow up on on the optimization efforts in the northeast is is there a cost savings number associated with you know.
Pushing volumes to the most productive plants can that be meaningful in the G&P segment. This year.
No I wouldn't suggest that there's some meaningful upside related to that.
It's more of a banking capital deployment and can we optimize the capital that has already been spent so.
If you look at our data we have some areas where the utilization is very high in some areas, where theres opportunity. So were paying was referring to is our commercial and operating teams are looking at.
Is there a way to take advantage of that unused capacity as growth occurs in an area where there is not.
Not excess capacity that's the idea.
Thanks.
Thank you guys very much.
Youre welcome to listen.
Our last question comes from Oslo, All put on your line is open. Please go ahead.
Good morning, everyone. Thanks for taking my question.
First one just around the.
The commentary that you had provided around capital allocation framework very helpful.
The attractive cash flow yield per units.
So compared to debt when you think about new capital projects or expansions, how would you frame the return threshold debt debt your use of internally.
Yeah. It was what I would say yeah. It's a good question, but it's a tough on the answer depending on the project you know aside from just the return, which you're you're mentioning there is a lot of factors that come into place like Michael asked earlier do you have NBC protection, how long is the project.
When the length of the term deals that you have so there's a lot of things that come into play.
Overall, what we've been trying to tell people is we've moved the capital down for two reasons one is.
We wanted to set the bar higher than we have in the past as far as that debt capital discipline, but that's one thing that's driving this and the second is you know where the equity is trading at.
And when we're trading at a 17 ish yield on DCF.
That is something that you can get very quickly with no time lag no capital lag to execute a project no permitting risk no execution risk et cetera et cetera. So you take that for what it is that debt yield and then you compare it to some other projects that.
They may even be better than that longer term and maybe more strategic for us, but that's kind of the process that we kind of go about looking at it.
If we were trading at a at a much more valued equity in our mind.
That dynamic would be a little bit different.
But at least in the short term, while we continue to trade.
These higher yields you know it makes us really looking and I use the word discipline on whether we want to invest the capital or not and and you know this as well as anybody you know when you when you invest capital you put money out for a couple of years before you get cash flows et cetera et cetera.
So you weigh all of that in compare to the environment that we're in now I think the most important takeaway, though is we've been trying to move ourselves into this excess cash flow position. So that we can have this discussion and have this debate. The very first question that was asked was you know.
Growth distribution growth or leverage or buybacks or deploying in projects. So I think it's a it's a good position to begin I'm, hoping 2020 shows stability of earnings and then therefore, we move into this okay. What do we do with the excess cash that we have in and think about what's the best opportunity and what's going on.
The most value on that that's kind of the way we look at it and then those other meetings that we're having internally and we talk about all the opportunities and then and then we're trying to make it as dynamic as possible. So that you know, it's a continuing discussion that'll that'll occur throughout this year and obviously you get to a point, where you want to make a decision and you feel good about that and if it is.
A multi year capital project, we're going to feel good about it if we decided at the time, that's the right thing to do and if it's short term, where we where we buy back units will feel good about that from that perspective as well so very dynamic process a lot of a lot of thought that goes into it.
I know everybody always asks the word return, what's the return threshold, but theres a lot of other factors that go into it as well obviously return being.
One of the most important if not the most important but theres other our other parameters that we also discussed.
Got it.
That's helpful. Mike and my next question as to Pam could you clarify the NGL price sensitivity.
Mentioned earlier after the planned.
Planned sale.
Versus the $23 million for every <unk> <unk> change impact that you have pointed out in the past.
What do you say clarify in the past we yeah, we had a we had given up on.
Rule of thumb, where metrics sensitivity on $23 million in the past so it's a small tweak.
On a material tweak and there are a number of factors that influence that.
But a lot of it has to do with volumes that are related to product sales that we have as part of our percentage of proceeds contracts.
Of which heavily and it is one so it's not just specifically related to have lean up but yeah. It is a small tweak but just wanted to provide you that updated guidance since we provided it in the past.
Got it I'll go back to the transcript on that thank you.
Thank you I'd like to turn the call back over to Kristina Kazarian for closing remarks.
Sounds great. Thank you for joining us today and thank you for your interest in MPLX should you have 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.
Thank you.
Thank you that concludes today's conference. Thank you for participating you may now disconnect.