Q2 2022 MPLX LP Earnings Call
In this quarter, we advanced several organic growth projects.
And the <unk> segment, we continue to expand long haul natural gas and crude gathering pipeline supporting the growing Permian and Bakken regions.
Specifically in the Permian working with our partners, we continue to progress our natural gas strategy with the expansion of the Whistler pipeline from two Bcf per day to two five Bcf per day, along with laterals into the Midland Basin and Corpus Christi markets.
In the G&P segment, we remain focused on the Permian and Marcellus basins in response to producer demand in the Permian construction advance on our tornado two processing plant, which is expected to come online in the second half of 2022.
We're also planning to build our sixth processing plant in the basin Preakness, two which is expected to be online in the first half of 2024. This.
This will bring our total Permian processing capacity up to one two bcf per day.
And in Marcellus or Smithburg. The F&I has or is expected to come online to meet incremental in basin demand in the third quarter of 2022.
Additionally, we plan to add the Harmon Creek, two processing plant, which we expect to come online in the first half of 2024. This will bring total processing capacity up to six five Bcf per day in the Marcellus.
Our capital allocation framework remains unchanged and year to date, we have returned slightly over $1 6 billion to our unitholders through distributions and unit repurchases.
Today as part of our long term commitment to capital return, we announced an incremental $1 billion unit repurchase authorization.
And with the strength and stability of the business, we will evaluate an increase to our base distribution later in the year.
Shifting to slide four this quarter, we continued to enhance our ESG commitments and disclosures, but the recent publication of both our annual sustainability and perspectives on climate related scenarios report.
We continue to make progress on our 2030 target to reduce methane emissions intensity, 75% from 2016 levels.
Through last year, we've achieved a 47 I'm sorry, 46% reduction further enhancing the lower carbon profile of our natural gas business.
We've also added a biodiversity target to develop sustainable landscapes across 50% of our MPL compatible right of ways are about 10000 acres by the end of 2025.
Through the end of last year, we've already achieved nearly 10% of this target.
We're challenging ourselves to lead in sustainable energy by meeting the needs of today, while investing in energy and 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.
Slide five outlines the second quarter operational and financial performance highlights for our logistics and storage segment.
<unk> segment, adjusted EBITDA increased $19 million when compared to second quarter of 2021% due primarily to higher throughput pipeline volumes were up 6% and terminal volumes were up 4% year over year, driven largely by increased utilization at MPC refineries.
Moving on to our gathering and processing segment on slide six <unk>.
<unk> segment, adjusted EBITDA increased $64 million compared to second quarter of 2021, largely due to higher NGL prices for.
For the quarter NGL prices averaged $1 18 per gallon, which is 43 cents higher than the average from the second quarter of 2021.
Gathered volumes were up 11% due to increased production in the Utica in southwest offset slightly by a decrease in the Marcellus processing volumes were roughly flat as compared to the second quarter of 2021.
Moving to slide seven our second quarter financial results demonstrate the earnings and cash flow resilience Lee resiliency, excuse me and stability of our business.
For the quarter total adjusted EBITDA of $1 5 billion was up 6% from the prior year, while distributable cash flow of $1 2 billion was flat compared to 2021, primarily due to onetime benefits experienced last year.
Free cash flow after distributions increased to $614 million in the second quarter.
This number does include approximately $65 million in asset sales proceeds primarily from the sale of several light product terminals and a $266 million working capital benefit, which we anticipate may largely reverse in the third quarter.
Project related expenses increased nearly $30 million in the quarter, and we anticipate an incremental $40 million increase from <unk> to <unk> and project related expenses.
Looking at other financial highlights for the quarter MPLX declared a second quarter distribution of <unk> 75 cents per unit, resulting in distribution coverage ratio of 169 times.
We ended the quarter with total debt of about $20 billion.
And our leverage ratio of three five times.
Looking forward over the next 12 months, we have roughly we have $2 billion of senior note maturities, which subject to market conditions, we would expect to refinance into long term debt.
After quarter end, we entered into a new 2 billion five year credit facility to replace the previously existing facility. The new credit facility extends to July of 2027.
In closing <unk>.
Given current business conditions, our commitment to strict capital discipline and our continued adoption of our low cost culture, we expect to continue generating strong cash flow.
Enhancing our financial flexibility to invest and grow the business. While also supporting the return of capital to MPLX unitholders.
Now, let me turn the call back over to Christina.
Thanks, Ken as we open the call for questions. We ask that you limit yourself to one question plus a follow up.
May re prompt for additional questions as time permits with that operator, we will open the call for questions.
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 Q if youre using a speakerphone you may need to pick up the handset first before pressing the numbers.
Once again, if you have a question. Please press Star then one on your Touchtone phone.
Our first question will come from John <unk> with Goldman Sachs. Your line is open.
Hey, good morning, Thanks for the time and nice to hear from you Mike I wanted to start on just capital allocation at the new buyback authorization, but the buyback number during the second quarter with us a little bit lower than I think most of US expected can you just talk a little bit about how youre thinking about.
About that going forward and balance that against some of your comments on potentially increasing the distribution later in this year.
Yes, John Thanks for your comment I'm going to let John take that one.
Hey, good morning, John Thanks for the question first.
I wouldn't read too much into our activity in the second quarter and nothing about it should be viewed as a deviation from our capital allocation philosophy.
Youll remember in the first quarter, our free cash flow after distributions was less than 100 million, we were coming into a year forecasting higher capital spending and continuing to look at some growth opportunities.
But looking forward right. We ended this quarter with $300 million on the balance sheet and with our incremental $1 billion authorization, we now have <unk>.
Total authorization of $1 2 billion for the repurchase of units. So I think if you look forward in the second half, we would expect to be perhaps more dynamic and opportunistic as we look at unit repurchases.
And of course, all done in line with SEC regs, which from time to time can limit our flexibility.
But overall I think we can continue to anticipate kind of an all of the all of the above approach.
Certainly subject to cash flow growth opportunities and market conditions. So in addition to unit repurchases right, we'll reassess our base distribution.
As we did last year and certainly any change there would be subject to board approval.
We have a supplemental as perhaps a tax efficient tool for capital return.
You might see us maybe holding some level of cash.
As we look to evaluate growth opportunities and really Opportunistically look to return capital. So I think that's the big picture and I'll turn it back to Mike if he wants to add anything.
I think you covered it well.
No that was great really thorough I appreciate the detail there maybe just follow up on kind of underlying fundamental stuff.
Can you talk a little bit about what's going on in the northeast Marcellus processing.
Yes kind of lowest we've seen in a couple of quarters, but Utica kind of bounce back nicely wondering if you can kind of just unpack those two brands.
John This is Greg.
Speak to that question.
<unk>.
We've seen a period of low growth to even flat sort of maintenance drilling in the northeast.
Over the last particularly post post COVID-19 demand destruction era and.
Even a flat year over year number would be would represent.
Quite a bit of drilling in new pads coming online to holdup.
Off that decline.
We have continued to see that production come on probably more of the early ramp has been focused in the crude areas because of the crude pricing levels what drove.
More of the rig activity, so Permian Bakken, but we are now seeing.
Starting to see that activity ramp up.
And we expect to see more of a back half of 2022 volume load.
Early in the year or so.
Some producers have continued to.
To maintain a little bit of growth in some of continuing to decline or not.
Not necessarily maintained so.
That really is the primary explanation.
Okay I appreciate that thanks for your time everyone.
Thanks, John .
Next we will hear from Michael Blum with Wells Fargo. You May proceed.
Thanks.
Everyone.
So.
I wanted to stay on the northeast a little bit.
Unless I'm wrong. This is the first new processing plant you announced in quite a while so.
Just wanted to get your.
Your view on if youre seeing any like really.
Change in the growth rate for volumes in the northeast and then kind of related to that.
Mountain Valley pipeline does get gone do you think that.
So what's your view of kind of based on growth overall, and then specifically anything for MPLX.
Okay.
Yes.
Again as I had mentioned before we do expect to see.
Some ramp up in growth in the northeast beyond what we've seen over the last 18 months.
In terms of the new plant.
Processing plants are really sort of specific to the gathering area in the producers even within an area like like the Marcellus. So we have some plants that are run close or at R. R.
They were very near capacity over the last 18 months.
And some of that.
Art.
Quite at that level overall, we are still at high utilization, but we do see the need.
Over the next 12 to 18 months for more capacity in the specific area, where we're building the Harmon Creek plant.
And Michael This is Mike I'll, just add that with.
Greg has said it's been a constrained area for a while and our anticipation is MVP will get done the shell plant is going to come up as you pointed out we're going to build another processing plant side I think we're finally going to start to see a little bit more growth in the area. That's been somewhat constrained for a little bit as Greg just mentioned.
Great I appreciate that my second question is really probably more strategic in nature.
There's been recently a few.
Sponsors, which have chosen to buy in their MLP. So.
Just curious if.
To get your latest thoughts on the MPC MPLX relationship and structure, whether it still makes sense from your perspective maintain a separate publicly traded MLP.
Yeah, Michael we get that question often at the MPC call.
Our quick answer is our situations a lot different than many of the others that you've seen roll it up so.
So we're pretty comfortable in the structure that we have today, we still think it's good.
For the marathon family. It works for both as we just talked about in our prepared remarks, we just re up to another 10 years of of asset use between the two entities. So we're pretty comfortable with where we stand and we think it's a good a good structure for us.
Great. Thank you very much.
Youre welcome.
Our next question will come from Brian Reynolds with UBS. Your line is open.
Hi, Good morning, everyone was just curious if you could provide any incremental detail on the island.
Contract extension with MPC.
Do any rates move up or down or are there any other pipeline assets that were previously not included in the agreement that are now in the agreement. Thanks.
Yeah, I'll take that one Brian this is Tim.
So I think youre familiar with the fact that these pipelines are really critical to both the MPLX of stable earnings as well as to Mpc's operations. So as a result, both MPLX and MPC agreed to renew and actually extend the contract for another 10 years Thats pretty significant contract.
But to your question the contract terms were not changed other than extending the contract duration, which does certainly provide more certainty for an extended number of years on these very key systems.
I guess it would be important to keep in mind that.
These specific logistics assets under contract with MPC are indeed fit for purpose and they're integral to the refining and marketing system. So not only does it make.
Operational sense, but the renewal with MPC, certainly made financial sense for both parties.
The last thing I would touch on is that.
While we're talking about this specific contract with MPC, we do have a lot of other systems and so forth and so we continue to focus on maximizing the utilization of all of those systems, including those that serve third parties as well so hopefully that's helpful.
Hey, Brian It's Jon I'd, just might add on to Tim's comments, one of the things that really was part of our thinking around this as well was maybe some questions from investors on the commitment of MPC to MPLX and we think this renewal certainly as.
As evidence of that commitment and just as a reminder, too I think Tim Might've mentioned as well, but these are all largely FERC index based system. So their rates have been moving every year in line in line with with the indices.
Great appreciate it.
That color.
One follow up question is just around any initial thoughts on the potential pipeline reform Bill and then potential impacts in the northeast G&P business I know you briefly touched on it a little bit earlier, but curious if there is any unique opportunities that MPLX would now consider that had previously had.
Kevin It Hasnt met its risk adjusted profile, just given the regulatory uncertainty.
And Brian you're speaking to the inflation reduction act or a different legislation I thought I heard you refer to a different legislation I just want to make sure.
Reduction act effectively beside deal that mentioned, yes, okay.
So obviously.
Pretty long Bill the details were just released and we continue to evaluate it I think a couple of key points for MPLX.
One you see some focus around methane emission and I would say and we've kind of talked about it on the call. Mike commented on some of his prepared remarks, we've been working very hard.
To reduce those emissions.
We feel like right now with the current draft, we don't see a significant impact to our overall system really a benefit of the work we've done to date.
To reduce those emissions.
There may be some opportunities around renewables, but I think we.
We're encouraged but we need to see kind of how that all flows through the final legislation.
And maybe I would just this is Tim I would just add maybe a couple of things from the logistics standpoint, there are some provisions in the current version of it that does increase the 40 <unk> tax credit and that could be supportive of Ccs projects, which we have an interest in and then there is also some provisions for Saf.
Hydrogen production, which could drive some future logistics needs as well if that was part of your question So but as John said, it's early so we're going to continue to monitor it.
No great that covered it I appreciate all the color and then have a great yesterday.
Thank you Brian .
Thank you. Our next question will come from Jeremy Tonet with J P. NOC. Your line is open.
Hi, This is Steven on for Jeremy.
Really just one for me I wanted to see if there is any further updates to matterhorn.
How youre thinking about participating in any further details you can give us there.
Sure. This is Tim I'll take that one.
As we've mentioned before we do believe in the strong growth of the Permian and believe that beyond even the announced expansions of existing pipes, such as Whistler that a couple more pipes are going to be needed over the next five plus years.
Matterhorn is the first of those.
Which is why the partners need.
Project in May.
As for our equity ownership in Matterhorn, that's not been totally finalized yet, but it does currently stand at 5% and so from a monetary standpoint that would that would represent about $30 million of investment.
And then that of course would reflect some level of project financing. So that's.
Relatively small stake here on Matterhorn, but thats.
We put a lot of our commitments towards the western side of the house and its expansion.
Got it Super helpful. There.
Actually if I could just one more just wanted to see with.
Just cost increases if youre seeing any kind of cost pressures right now throughout the business and then with that how much of that is permanent versus how much do you think.
You can optimize again.
So this is this is Tim again, and you're basically referring to.
There is some of the inflation protection that I would I would assume that we have so so ill take that question in that regard.
I'd say that like others, we are certainly seeing some inflationary cost pressures.
Most all of our spend categories quite frankly, and these increases are largely in line with the public indicators for material equipment labor and.
And freight.
We are seeing line pipe and energy cost there may be up a little more significantly.
For example, our fuel and power is up about 15% year on year.
For our pipeline side of the house.
The teams are certainly working hard to help offset these increases by completing more of the work in house, maybe deferring some noncritical work.
And realizing operating efficiencies through the ideas of our workforce.
I think if you are talking more on the capital side much of our 2022 capital spend was contracted previously so early in the year, we didn't see as much impact on our on our capital spend but we do expect that with the increased cost.
Youre going to see that later in the year, we still we still maintain our capital guidance of $700 million and intend to spend that.
And stay within budget.
I would say that the increased cost for capital projects are probably going to show up more significantly.
In 2023, as we are starting to see a lot of rate sheet increases from contractors and other service providers.
So hopefully that gives you a little.
Flair to what we're seeing.
Yeah, that's perfect. Thanks, guys I'll leave it there.
Okay. Thanks, Dave.
Thank you.
Your next question will come from Theresa Chen with Barclays. Your line is open.
Good morning, Thanks for taking my questions and great to hear from you Mike.
So maybe beginning with <unk>.
The demand side of things across LMS, giving to you.
Dental concern following the recent economic data.
Just market worried about recession.
Second quarter utilization of the parent and the volumes at the MLP would indicate that things are going well, but would love to hear your outlook across the demand regent's place.
And since Mike. Thank you for your comment first.
The demand question is obviously, one that we continue to monitor.
And I guess at the end of the day, we're still pretty bullish on what we're seeing across the commodities. It was interesting give you more detail than you probably one fourth of July weekend, which is typically a stronger weekend was not that strong in our system.
And then subsequent to that the rest of July really picked up again, so I think I think the reason we're still constructive as overall, we're still mostly at pre pandemic levels across the system. So we think there's still room to run on the demand side. It's been choppy I guess, if we went it went into the season with Memorial day weekend for us.
In July the bigger weekends that typically show some robust numbers, we didn't really see those but then the other times during the month, we've seen some strong recovery. So I think at the end of the day, we're still pretty constructive.
Overall, we think.
Demand has more to go once we get back.
Back to a normal post pandemic environment.
Inventories are still constructive as you mentioned our whole thought process on the refining side of the house in the second quarter was run as reliably as we could and the margin environment produces much transportation fuel as possible.
And really obviously continue to show the market that we're running a low cost system. So.
Low cost strong reliability, and we will take what the what the market offers as far as margins and right now its hard not just there'll be constructive.
Demand is looking good inventories are low it's still pretty constructive environment for us.
Thank you for that detailed response.
And then turning to.
Contractual freight of your assets.
The contractual nature of your Atlanta assets.
Following the inflation data that we've received thus far and the FERC escalator tracking in that mid teens range can you remind us of the expected inflation tailwind that you have with an LMS and to the extent you can share any.
Color on tap some color around your gathering.
Well that would be great.
Yes. This is Tim I can kick that off.
Your question is really about the inflation protection and so forth that some of our contracts may have.
<unk>.
So we do have some level of inflation protection and almost all of our LMS and GMP contracts.
They range from some of the small fixed escalators up to the variable escalators that are based on either CPA.
CPI PPI or the FERC indexes for those qualifying assets.
For those regulated pipelines, we typically adjust our rates in line with FERC guidance and most of those pipeline saw updated rates go into effect.
On July one.
While we don't really expect to see and we do expect to see an increase in revenue from those rate changes, but we don't expect to see a material change to the EBITDA.
Given that these rate escalators are really meant to cover your increases in cost.
And then maybe just a reminder, as well that.
Lesson about third of the LLS EBITDA is directly tied to the FERC escalator.
Which means that the majority of those are tied again to the fixed escalators or <unk>.
CPI or PPI, so hopefully that's helpful.
Thank you.
Youre welcome.
Thank you.
Again, if you would like to ask a question at this time you can press star one and record your name when prompted.
Your next question will come from Danny for Neal Dingmann with Truest. Your line is open.
Hey, guys can you going back to the return of capital question can you speak to.
<unk>.
A supplemental distributions.
Versus unit repurchases, we created.
As for our unit holders.
Yes, good morning, Dan and thanks for the question. So again overall right where it is.
Maybe an envious position given the cash regenerating covering our capital plan of 900, and our base distribution of $3 billion, so that gets us to.
Kind of this this fork in the road again.
I think I want to push it back that we continue to kind of see in all of the above approach.
Certainly being opportunistic about unit repurchases.
I mean, the supplemental can be tax efficient, but again as I said, we might look to maybe hold some cash to be a little bit more opportunistic with our return of capital as we continue to evaluate growth opportunities as well so.
That's kind of the framework maybe.
Maybe a little bit bigger question.
Bigger.
Picture than your question, but hopefully thats helpful. Michael No. If you want to add something as well.
I'm just going to add.
As in the past, but I'll, just remind everybody that it's interesting to us then.
Current unitholders have different views on on return of capital some feel very very strongly and buying units back as the preferred way to go and others feel just as strongly that send me a check and.
Our situation as we look at it we try and optimize as John has said and kind of having all of the above approach.
It wasn't too long ago that our yield was trading at 20% in that environment, we're going to buyback units.
Just compelling to do that and then Theres other times, where we're going to look at it and say the supplemental makes sense and we're going to also look at the permanent one so we've tried to differentiate a little bit between what we think is permanent growth in earnings as a result of our capital investments et cetera versus some of these cash flows that we're getting we think are transitory in nature.
Due to the some of the current market conditions and that's why we put those more in the supplemental so.
I think John said, it very well our approach is all of the above.
I think that since the fall.
Investor base that we have because there's a lot of different views from different people and strong views to I would say people are very convicted that <unk> already very strongly that unit buybacks is the way to go and others tell us very very strongly.
Send me a check that's the way I would like to see return of capital. So.
Our approach has been to look at market conditions looked at where we stand as far as our projections evaluate our ability to invest capital because we keep saying it's a return.
Of and return on so we look at both of those and at the end of the day, we're trying to create as much value as we can in the earnings and then we're trying to be as efficient as we can when we're returning it.
Hopefully that gives you a little bit more color.
No. That's very helpful. Thank you that's it for me.
Thank you and our last question will come from Harry Mateer with Barclays. Your line is open.
Hi, Thanks, good morning.
And your first question your leverage is tracking well below the target of four times. You've historically provided so is that four times number still good to use and how should we think about your willingness to use that capacity for like.
This incremental repurchase program accelerated or would that not be something you'd look to do.
Yes, I'll, let John comment, but one thing I do want to remind everybody is we are very comfortable at four times. We've shown a lot of stability in these cash flows but the reason we're at three five times is basically because we've kept that flat and we've and we've grown earnings. So as a result of that we said this for a while that our leverage is going to.
The decrease is a result, so one of the things that we will continue to monitor is as earnings grow, whereas our leverage overall, we don't want to be under levered, but but I think what you've seen over the last couple of years is it changing that we're going to manage the business such that we're going to generate free cash flow invest capital and a more disciplined way.
Such that we're not adding to that so we've been kind of flat that for a while and.
It's why our leverage has been where it has been John .
John do you want to add no now Mike I think I think you said it.
And just to kind of refer back to some of my comments in the remarks as well we've got some maturities coming our way and we're looking to refinance those so.
I think just.
The other kind of thing evident though in line with what Mike was just talking about.
Okay. Thanks, and then that's a good segway John My follow up so you did comment about the senior maturities. One question I've been feeling is just given how fluid the rates market has been.
Curious, how youre thinking about those preferreds that reset to a floating rate early next year.
It would seem to be pretty expensive capital with where rates are heading so have you guys thought about where those fit in the capital structure longer term.
Without a doubt now and I definitely appreciate the question. That's certainly something that's been on our planning as well as were looking forward not just for the senior note maturities, but those series B, you've kind of summarized it well high cost and opportunity to look to.
Manage those when they become callable in February of 'twenty three.
Okay. Thanks very much.
Alright, Julian we don't have any other question. Thank you for joining us today and thank you for your interest in MPLX. If you have any questions that didn't get answered on the call today, alright, or Investor Relations team is here to help any time.
Thank you so much.
Thank you that does conclude today's conference. Thank you for participating you may disconnect at this time.