Editor’s Note: Ideas from HFI Research is a separate paying subscription service from HFI Research (main). MPLX is a holding in the HFIR Energy Income Portfolio managed by Jon Costello.
By: Jon Costello
MPLX (MPLX) units continue to fit the mold of a ballast portfolio position. When we first invested in them back in April 2021 ($27.27), we viewed them mostly as a yield generator with the kicker of a low growth rate. At the time, the $30 billion market cap company was guiding to $800 million of annual capex. Its return on equity in the low teens implied low-single-digit Adjusted EBITDA growth over the longer term.
Over the past few years, however, we've been pleasantly surprised. MPLX has actually invested closer to $2 billion per year of capex instead of its guidance of closer to $1 billion. The result has been greater than expected Adjusted EBITDA growth, which, in turn, has driven greater than expected distribution growth. In November, MPLX increased its quarterly distribution by 12.5%, its third distribution increase of at least 10% in as many years.
While the company's organic growth capex has indeed tracked around $1 billion, it spent additional capex sums on executing bolt-on acquisitions and increasing its ownership interests in pipelines. The additional capex spending has generated attractive returns on capital while also fortifying the company’s midstream franchise, which now touches 10% of U.S. natural gas production.
We credit MPLX’s former CEO, Mike Hennigan—now the company’s Executive Chairman—for the company’s outstanding performance in recent years. His execution, characterized by regularly under-promising and over-delivering, has caused the units to approach their highest price since the MLP bubble back in 2015. We expect MPLX’s performance to continue under its new CEO, Maryann Mannen.
We remain steadfast holders of MPLX units. Over at least the next three years, we expect mid-to-high single-digit cash flow and distribution growth. The units will remain a ballast in our HFIR Energy Income Portfolio.