Q3 2021 MPLX LP Earnings Call
Cash flow.
We benefited from lower capital spending strong NGL prices and proceeds from asset optimization efforts.
These tailwind along with solid business performance and cost reduction efforts have combined to result in just over $1 billion of cash flow available for deployment above our current capital spending and distribution requirements.
We've returned $465 million of this capital to unit holders through year to date unit repurchases.
We believe some investors prefer unit repurchases, while others prefer cash return and after several quarters of employee unit repurchases for incremental return of capital today, We announced an increased third quarter distribution of $134 billion.
The increase distribution includes a special distribution amount of about $600 million and a two 5% increase in the partnership space distribution amount, reflecting our confidence in the business.
Special distribution amount is one way to allow all unit holders to immediately recognize the benefit of our strong cash flow this year.
We also believe that distributions can be a more tax efficient way to return capital to unitholders via unit repurchases.
Versus unit repurchases.
For 2021, we have now announced a total of $2 $8 billion of distributions to unit holders on top of $465 million of unit repurchases.
Moving to business updates, we are making progress on our portfolio optimization efforts with our announcement. This morning that we are pursuing strategic alternatives for our Alaskan logistics and storage operations, which could include a sale.
We also advanced our key growth projects in the Permian related to crude natural gas and NGL transportation out of the basin.
The wink to Webster crude pipeline in which MPLX has a 15% ownership interest continues to play segments into service and we expect this activity to continue through the remainder of the year.
Consistent with our focus on projects with lower return risk pipeline system is 100% of its contracted capacity committed with long term minimum volume commitments.
Last quarter, we announced the Whistler natural gas pipeline in which we have a 38% ownership interest was placed in service and it will continue to ramp up through 2022.
This pipeline will provide approximately 2 billion cubic feet per day of incremental natural gas transport capacity to the Gulf coast markets from the Permian Basin.
The Whistler pipeline is also backed by long term minimum volume commitments and we expect volumes to increase throughout 2022.
Finally, the NGL takeaway solution, which will provide 125000 barrels per day of long haul NGL service from the Permian to Sweeny, Texas was placed into service in October.
We continue to pursue opportunities to grow our base business, including expansion of our integrated natural gas and NGL value chain and certain strategic regions and opportunities in support of Mpc's expansion in liquid renewable fuels.
We also continue to evaluate a number of other low carbon energy growth opportunities and are especially focused on those where we can leverage our competitive advantage through technologies that are complementary with our expertise and our asset footprint.
For example, MPLX along with MPC is among the company supporting large scale deployment of carbon capture and storage to help decarbonize industrial facilities in the Houston area.
These collective efforts could safely capture and store approximately 50 million metric tons of Cotwo year by 2030, and about 100 million metric tons by 2040.
Working with our industrial companies and regulators in this energy Rich region is a critical component of assuring long term reliable fuel supplies for sustainable energy diverse future.
Overall, we continue to focus on identifying and efficiently executing high return projects to drive further growth for MPLX, and we expect our growth capital spending to be higher in 'twenty two than 'twenty one.
Shifting to slide four last quarter, we discussed the publication of our sustainability and climate report that highlight the environmental social and governance aspects of our business.
Our focus on leading in 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 targets, we're setting and are transparent disclosures on how we plan to achieve these targets position us well for the future.
On our website, we have recently published our 2020 sustainability highlights.
MPLX is focused on our methane reduction targets through tangible pathways, such as implementing robust eldar monitoring programs, replacing gas driven pneumatic control valves.
Placing compressor arrived packing.
Minimizing emissions from pipeline launches and receivers and optimizing maintenance venting in short we continue to challenge ourselves to lead in sustainable energy by meeting the needs of today, while investing in an energy diverse future that create shared value for all of our stakeholders.
Now, let me turn the call over to John to discuss our operational and financial results for the quarter.
Thanks, Mike and good morning, everyone slide five outlines the third quarter operational and financial performance highlights for our logistics and storage segment.
<unk> segment, adjusted EBITDA increased by $11 million, comparing third quarter 2021 to 2020.
Pipeline volumes were up 17% and terminal volumes were up 13% year over year as the industry rebounded from the pandemic. The benefits of these higher throughput were somewhat offset by the effects of lower marine transportation rates.
Moving on to our gathering and processing segment.
Slide six provides its third quarter operational and financial performance highlights.
<unk> segment, adjusted EBITDA increased by $43 million.
Comparing third quarter 2021 to 2020, largely driven by higher NGL prices for.
For the third quarter NGL prices averaged 96 per gallon more than double the 45 per gallon average for the third quarter of last year.
As a reminder, every <unk> change in the NGL basket is worth roughly $20 million to our annual results.
Overall gathered volumes are roughly consistent year over year, while processing and fractionated volumes were each down 2%.
In the Marcellus gathering volumes were up 5% processed volumes decreased 1% and fractionated volumes increased 2% relative to the third quarter of last year.
Across the basins, where we operate we are seeing different levels of activity in response to current market conditions.
In the northeast despite higher natural gas and NGL prices producers continue to focus on strengthening their balance sheets and prioritizing free cash flow over volume growth. Additionally, takeaway capacity constraints have continued to limit production.
However, we are seeing increased activity and volume growth in the Permian and in the Bakken.
Moving to our third quarter financial highlights on slide seven total adjusted EBITDA was $1 4 billion up 4% from the prior year for the reasons, Mike discussed earlier or I discussed earlier and.
And distributable cash flow was $1 2 billion, an increase of almost 12% from the prior year.
We returned 900 million to unit holders with $745 million of distributions paid and $155 million and repurchases of common units held by the public as of September 30th we had about $500 million remaining available under the current $1 billion repurchase authorization.
As Mike discussed today, we declared a quarterly cash distribution of $1 28 per common unit for the third quarter.
Including a base distribution amount of 75 cents per common unit and a special distribution amount of $57.05 per common unit.
Just on our confidence in the business, we increased the base distribution amount by two 5% over the second quarter 2021 distribution.
Distribution will be paid on November 19 to common unit holders of record as of November 12.
The adjusted distribution coverage ratio for the third quarter, excluding the effects of the special distribution amount was $1 six one times.
As we stated on our last call our commitment to lowering our cost structure has resulted in a $300 million structural reduction in our annual operating costs when compared to 2019.
Looking forward, we do expect higher project related expenses in the fourth quarter.
Last quarter, we estimated an increase in project related expenses in the second half of the year of approximately $75 million as compared to our quarterly run rate in the first half of the year.
We experienced some of these higher expenses in our <unk> segment results in the third quarter and based on the expected timing for completion of certain project and maintenance work. We currently expect increased cost of up to $40 million to affect fourth quarter results as compared to the third quarter.
Lastly, as we approach the end of the year, we are lowering our growth capital spending guidance for 2021 by an additional $150 million down to $550 million.
And with expected maintenance capital of about $100 million for the year, our total capital spending and investments for 2021 is expected to be about $650 million.
With our reduced 2021 capital spending forecast, we do anticipate a higher run rate for capital spending in the fourth quarter as compared to the first three quarters of the year.
Looking forward, we continue to pursue growth opportunities in our core business as well as opportunities in energy evolution, which is likely to require greater capital spending and investments in 2022 and 2021.
We will not be commenting on next year's plan capital spending on today's call. We will share guidance for 2022 on next quarter's call.
Slide eight provides a summary of key financial and balance sheet information.
We ended the quarter with total debt of just under $20 billion and a leverage ratio of three seven times.
During the quarter, we redeemed the 1 billion floating rate senior notes due September 22.
Cash and available liquidity, including our intercompany loan with MPC.
We currently have $1 4 billion outstanding on our intercompany loan agreement or.
Our intent is to refinance these borrowings sometime in the future with timing dependent on market and other conditions.
In closing given current business conditions, and our commitment to strict capital discipline discipline and a low cost structure, we expect to continue to generate strong cash flow enhancing our financial flexibility to invest and grow the business. While also providing the opportunity for incremental return of capital to unitholders.
Now, let me turn the call back over to Christina Thanks, John as we open the call for questions. We ask that you limit yourself to one question plus a follow up we may re prompt for additional questions as time permits with that we'll now open the call to questions operator.
Thank you we would now like to 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 youre using a speakerphone you may need to pick up the handset before pressing the numbers. Once again, if you have a question. Please press Star then one on your Touchtone phone.
First question is going to come from Brian Reynolds with UBS. Please go ahead.
Yeah.
Good morning. My first question is around capital capital allocation thought process should we view the special distribution of the faster method of return of capital versus buybacks, given adv limitations and kind of curious where leverage is headed.
Given where leverage is headed into 2022 can we see in all of the above return of capital situations similar to what we had seen in 2021. Thanks.
Thanks, Brian This is Mike.
But let me give you a long winded answer hopefully this will give everybody a little bit more color as to why we came out with the return of capital that we did this quarter. So.
So first of all.
At a high level, we still believe that our balance sheet and our commitment to an investment grade rating is paramount.
We think of capital allocation is we're going to take care of our assets that we're going to have sustaining capital is a high priority. We've had a base distribution amount for quite some time here and I just want to point out that that base distribution. You know it was a pretty high payout ratio and we've never cut despite some of the troubles that others have run into but.
Once we get through that then we have capital available for deployment it can be in growth capital and John talked a little bit about that buybacks and additional.
Distribution amount, which we've called a special distribution.
Could increase the base, which we've also done this quarter, we'll talk about that in a second and debt reduction.
I'll start first back with that where we're very comfortable we've said for many many many quarters that we're comfortable that we have stable cash flows and then at a leverage ratio of around four times works for us.
Currently we are a little below that we're running around three seven times. So so we think the balance sheet is in terrific shape, and we generated a lot of cash and the way that I'd like you guys have the takeaway is that capital. That's available for deployment is a dynamic decision that we're gonna make quarter to quarter and it's.
Depending on market conditions, our business needs and what we see in the current environment. Obviously, we've been through a lot over the last year and a half with the pandemic and coming out of it but hopefully the market has seen.
Something that we've been trying to say for a while that we have stable cash flows in the Spanish business, we're generating cash beyond our distribution and sustaining capital needs and now beyond our growth capital needs and we just have an amount that was available for deployment and our view that all unit holders.
To your point, Brian All unit holders will immediately benefit from this special distribution amount as well as us continuing to buyback units as well. We've we've continued that pace now for several quarters in a row. So we're doing a little bit of both and we've also bumped up our base distribution by two 5% as well.
Well so all of those factors come into play, but I guess the biggest takeaway I'd like you to think about is we want to be in a position of financial flexibility, which we've achieved.
And going forward it'll be a dynamic decision based on market conditions business needs and what we're feeling at the time is the best deployment.
For all of our unitholders.
Okay. Thanks for all that color very helpful.
My follow up I was wondering if you could just give some additional color around potential impacts from PPI across the organization from like a revenue generation perspective.
How can the business see an uplift in does it spread across both segments, both LMS and JMP. Thanks.
Yeah, Brian I'm going to let Tim give you some background on that whole PPI situation.
This is Tim and thanks for the question.
Take my mask off here.
While it is true that there is an increase in the index.
That would increase revenue on the FERC regulated assets I think it's really important to understand that this is not a direct flow through to the bottom line.
The whole purpose of the indexes to offset higher costs that we incurred during these inflationary periods.
So for FERC pipelines, we've historically adjusted rates that are in line with what is allowed by FERC as a means to cover these higher cost now most of our non FERC regulated pipelines and storage assets. They also have built in escalators to help offset some of these inflationary cost.
These are not always based on CPI and PPI, sometimes there theyre flat rate adjustments. So that's a little bit of a background on those but I would say for reference.
Only about a third of our logistics and storage EBITDA is generated from FERC regulated assets. So it's really a mix of a lot of different things PPI flat rate adjustments.
Et cetera.
Great I appreciate all the color have a great day.
Hey.
Thank you.
Thank you. Our next question comes from John Mackay from Goldman Sachs. Please go ahead.
Hey, everyone. Good morning, all.
I know youre going to get a couple of follow ups, but I do need to ask one on the special just curious.
If you can think about kind of the size of the special this quarter and just to clarify.
Your comments earlier that this is something that we it.
It might move around but we could still see kind of ratably.
In the future. So this isn't necessarily a one off.
Yeah, John Thanks for that question. So no additional follow up but what I was trying to say to the previous question is it is gonna be a dynamic situation I don't think you should take this as a one off you know that's an important point that youre, bringing up.
We plan to continue to have that financial flexibility and will ebb and flow a little bit on buybacks, you know distribution amounts whether you call them special or whatever term you want to use.
We're also going to be very conscious of whats happening in the business.
As we mentioned in our prepared remarks the capital. This year is a little lighter than we would normally think for this business. So and we said, we'll give a little bit more guidance next quarter on where our capital expectation is but at least for this quarter were trying to tell you it's going to be able to higher than where we are this quarter for a lot of reasons. Some of it's timing some of it's <unk>.
Capital discipline that we've employed so so I guess the important point that I'm trying to emphasize and hopefully everybody gets this is that.
We're going to continue in a commodity business that has a lot of ups and downs and variability we're going to continue each and every quarter to evaluate the situation and examine where the business needs are and look at the market conditions and try and make a determination as to what is the best return of capital I I should add that and you've heard me.
Say this in the past I'm a huge believer that there's two parts to this business. There is a return on capital and we very much believe in growing our earnings and this is a growth vehicle for us. So that's an area of emphasis that I don't want to get lost in this whole return of capital, but both return on and return of capital are very important.
To us and we're trying to maximize the impacts of both of those so.
When it comes to return of we're going to look at our base, we're going to look at whether that should get an incremental adjustment, which we did this quarter will continue to evaluate that we'll continue to evaluate how much cash flows that we're generating.
As John mentioned in his prepared remarks, it's been a strong year from a lot of perspectives.
From that standpoint, we generated over $1 billion of cash flow through three quarters, obviously without guidance for the fourth we expect to have a little more on top of that as we as we progress. So it's been a very strong cash flow year. We've returned 455 of unit repurchases, we're going to continue.
<unk> engaged in that program as well, but we thought it was appropriate to have an immediate return to to.
To the unit holders as well.
Hey, guys good morning, John.
Just wanted to emphasize some of Mike's comments, there as well right. There were some a number of items that kind of align for us this year that.
Are things, we're going to have to take a look and understand what those look like in the future. So certainly a broader approach to kind of incremental return of capital when it's available, but again that'll be dependent.
On what the market conditions are at the time, what kind of cash flow, we're generating et cetera. So.
Certainly something we'll continue to look at look at but.
There may be some quarters, where we're not talking about you having the same conversation and other quarters, where we are.
Okay. That's great. Thank you my follow up is.
Kind of makes sense with 22, capex essentially being higher than 'twenty, one just given how far 'twenty one has come down.
Would it be a fair assumption to say that given youre not taking this cash to kind of start pre funding in 2022, capex that while it might be higher it's not going to be.
Dramatically larger number I know youre, not giving specific guidance here, but just trying to think relative basis and.
How to think about funding for it.
Yeah, No John you might have answered it with your last comment right. We'll have guidance for next year on next quarter's call, but certainly.
Trying to.
Make sure when you guys understand the number is going to be higher next year.
If you kind of take the guidance we gave for this year five.
$550 million on growth and 100 for maintenance right that that applies about $202 10, a growth in the fourth quarter and about 50 of maintenance.
Again, some of that's driven by the timing of projects.
As we roll into next year, so certainly higher but not sure those numbers on next quarter's call because part of what happened to US. This year. In addition to really taking a much stricter look around capital discipline.
We would have had some projects that were just deferred as we were coming out of COVID-19 that kind of pushed things later later in the year and into next year. So.
Again looking for higher capital next year, and we'll talk about that on next quarter's call.
Great. Thank you.
Thank you. Our next question comes from Michael Blum from Wells Fargo. Please go ahead. Thanks.
Good morning, everyone.
Wanted to talk a little about the G&P business.
I'm wondering if you're hearing anything in the northeast from your producers I know you mentioned capital being constrained from the pipeline takeaway perspective, do you think that dynamic will change at all with Mountain Valley comes into service and there is a little more taken.
Takeaway in the region with that change.
The drilling activity or do you think that theyre getting.
Producers are just going to continue to return cash to shareholders.
Michael This is Greg <unk>.
Yeah, I think that the <unk>.
<unk>.
Been in free cash flow positive.
Load and and maintenance drilling mode and this is as you know there has been constraints.
As we operate at high levels of utilization, both in processing and in terms of takeaway pipe.
Certainly is.
More residue gas pipeline takeaway capacity becomes available there is that opportunity too.
To increase drilling in volume.
The processing capacity is fairly tight but there is still potential.
Potential there for.
For growth the other thing that.
I would mention is with the shelf.
Cracker Monaco, Pennsylvania scheduled to come online mid next year, we will drive.
Increased recovery of ethane from gas that also will free up capacity and the residue lines and will.
We will increase utilization of.
Our <unk> plant as well so those those things clearly could drive production.
Gas prices and NGL prices are obviously supportive of more for rich gas production, but we are.
So open to what the producers decided to do.
Thanks, I appreciate that second question staying on G&P.
I had sort of an ongoing desire to divest some of your maybe noncore <unk> assets.
I'm wondering in light of commodities moving much higher the last few months, if youre seeing any change in interest there. Thanks.
Yeah, Michael we we still have an overall strategic plan to consider where we think core assets are versus not.
Said many calls that the bid ask has been too wide for us to consider you know I would tell you that you know that bid ask is narrowing.
But at the same time, we are very comfortable still with the assets that we have in place we don't have anything.
I used the term on the front burner.
But if we if we maintain this type of activity in the commodity prices stay where they are and theres a little bit of a renewed interest there than maybe there is a transaction that could occur at some point.
Nothing right now on the Horizon, we're interested but we're also very happy with where our assets are and you know my philosophy has been all of our assets need to generate free cash. We're in that mode. We continue to be in that mode throughout all of the basins that we're in so.
I think overall, we're still happy with the situation, we have but we'd like to optimize the portfolio for the long term if the situation arises, but it's not something that we have to do.
Great. Thank you very much Mike.
Youre welcome Michael.
Thank you. Our next question comes from Theresa Chen. Please go ahead.
Good morning.
Wanted to.
Ask about the cost cadence actually understanding that fourth quarter, we're going to see another.
Quarter over quarter expenses.
Just going to.
Quarterly run rate in 2022 should we expect that to normalize or how should we think about that.
Hey, good morning, <unk>, John Yes, that's definitely similar to some of our maintenance capital it can be a little bit lumpy right and how that kind of happens over the year, which is why we were trying to flag that earlier in the year as well so definitely a higher level in Q4, but that wouldn't imply that we'd be on that run rate going forward.
Understood and <unk> related to the announcement of seeking strategic alternatives for Kenai refinery and the logistics assets at the partnership and can you remind us how much EBITDA contribution at logistics assets actually generate for MPLX currently.
Actually trees, so that's not a number we've disclosed.
Okay. Thank you.
Thank you. Our next question comes from Keith Stanley from Wolfe Research. Please go ahead.
Yeah.
Hi, good morning.
First just.
Just on the Permian strategy are there next steps that you are looking at now that Whistler Wink to Webster and the NGL projects are complete I guess are there other capabilities that are important for the company to add at this point or do you feel like you're in a pretty good place in the Permian.
So this is Tim I'll take that one we continue to be really bullish on the natural gas and the NGL growth I do believe that we're well positioned in.
In the Permian in particular to take advantage of the investments we've made thus far when you look at our Agua Blanca system. When you look at the Oaxaca gas storage. When you look at Whistler and then of course, the NGL solution. I think these are all really solid platforms.
For growth and really to expand off of.
I think you can kind of look further down the value chain you know it could be as far as exports and other stuff that may provide some additional opportunities. So again pretty bullish on natural gas and Ngls in particular, but then Theres also energy evolution ideas as well that can provide growth opportunities.
Okay. Thanks, and then different maybe a little bit of a silly question, but the buyback pace has been just.
Almost exceptionally programmatic with $155 million a quarter for three quarters in a row now.
Is it fair to think that that's sort of your target I would think at this point with the stock at these levels and if the business is steady and is there any technical reason you've been kind of shooting for around that level for three quarters.
Keith It's Mike now, it's it's more.
More coincidence and to be honest with you we.
We run that pace and we were going to change the number just so it wouldn't be the exact same number but pretty much. We had said to ourselves we're going to deploy about this much in that arena.
Obviously did not do a distribution for a couple of quarters and now we decided to pull that trigger.
But overall like I said, it's dynamic we're thinking about it quarter to quarter. We're obviously also looking a little bit into the future. So.
The fact that it turned out to be the exact same number is more coincident then and I'll say designed to be exactly that.
Got it thank you.
Youre welcome.
Thank you and again that is star one if you have a question on the phone.
And I am actually showing no more questions in queue.
Great well, thank you for joining us 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 Investor Relations team will be available to take your calls thank you everybody.
Thank you all for participating in today's conference you may disconnect your lines and enjoy the rest of your day.
Ivy are we off the line.