Mplx LP Q2 FY2020 Earnings Call

Welcome to the MPLX Second Quarter 2020 Earnings Call. My name is Missy 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. Please note that this conference is being recorded. I will now turn the call over to Kristina Kazarian. Kristina, you may begin.

Good morning and welcome to the MPLX second quarter 2020 earnings webcast and conference call. The synchronized slides that accompany this call can be found on mplx.com under the Investors tab. On the call today are Mike Hennigan, President and CEO; Pam Beall, Chief Financial Officer; and other members of the management team. We invite you to read the Safe Harbor statements and non-GAAP disclaimer on Slide 2. 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 our filings with the SEC. Now, I’ll turn over this call to Mike Hennigan for opening remarks.

Thanks Kristina. Good morning and thank you for joining our call. As we expected, the impacts of the COVID-19 pandemic continue to create challenges across our business during the second quarter specifically, significantly lower levels of demand for crude and refined products decreased the need for our Logistics and Storage's services, while production curtailments in response to lower prices pressured the Gathering and Processing systems we operate. In response to this challenging business environment, on our last quarter call, we announced proactive steps to reduce our forecast for 2020 capital spending target by over $700 million and operating expenses by approximately $200 million. The progress we made on the proactive steps we announced in May helped to offset some of the challenges we faced during the quarter. We believe that the underlying business coupled with the steps we have taken has positioned us to continue to generate a stable level of EBITDA to support our goal of achieving positive free cash flow after capital investments and distributions for 2021. Our performance during the second quarter highlights the stability of our underlying businesses, the quality of our contracts and the execution on our identified steps to help offset what we knew would be a challenging environment. Earlier today, we reported adjusted EBITDA for the second quarter of 2020 of $1.2 billion, relatively flat versus our first quarter 2020 EBITDA. Our second quarter EBITDA exhibited less volatility than we estimated primarily due to operating expense reductions that we realized earlier than anticipated in the Logistics and Storage business, whereas our Gathering and Processing segment performed roughly as expected. The other key element of our path to positive free cash has continued capital spending discipline. The process of high grading our capital portfolio has been underway since the combination with ANDX last year, with a growth capital target progressively reduced from about $2.6 billion when the combination closed to our latest 2020 target of about $900 million announced last quarter. We are on track to achieve our 2020 reduction of over $700 million as we continue to focus on opportunities with the most attractive returns. Overall, we continue to target about 75% of our growth capital target towards the Logistics and Storage side of the business and this growth capital spend target remains primarily related to Logistics and Storage projects that were already underway including the Wink-to-Webster crude oil pipeline and the Whistler natural gas pipeline. Capital spending on the Gathering and Processing side continues to be adjusted dynamically to ensure we are bringing infrastructure online just in time to meet our producer customer needs especially in the current environment. I want to take a moment to comment on sustainability and our role as an industry leader. We recently published our 2019 sustainability report highlights of which can be found on Slide 20 in the appendix. The report is greatly expanded this year in terms of content and disclosure, and outlines our commitment to provide information consistent with the many reporting frameworks that are influential in the investment community. As such, the report expands upon our recent efforts in environmental, social and governance aspects of our business. I want to take a moment to touch on recent events that have impacted many places where we live and work. We are committed to promoting diversity and inclusion in our workplace, and in the communities in which we operate. I firmly believe that we all have a role and a responsibility in creating shared value in our communities. Understanding each other starts with meaningful dialogue and ultimately that's how we'll make progress together. Now let me turn the call over to Pam to discuss our quarterly results.

Thanks Mike. Turning to Slide 7. I'm pleased to report that MPLX delivered second quarter adjusted EBITDA of $1.2 billion, and distributable cash flow of $1 billion, which provided continued strong distribution coverage of 1.39 times and leverage of 4.1 times. As Mike previously mentioned, the progress we made on the proactive steps we announced in May helped to offset some of the headwinds we faced during the quarter, allowing us to continue to generate strong cash flow and adjusted EBITDA. Slide 8 shows the second quarter Logistics and Storage business segment highlights. A decrease in both pipeline and terminal throughput for the quarter versus the second quarter of 2019 was primarily driven by lower refinery utilization at MPC's refineries. During the second quarter, progress continued on the Permian long-haul pipeline projects in which we have equity interest. The Wink-to-Webster crude oil pipeline and the Whistler natural gas pipeline are expected to be placed in service in the first half and the second half of 2021 respectively. During the quarter, MPLX, along with its partners secured project financing for the Whistler pipeline which was already factored into our reduced 2020 growth capital targets. While we noted last quarter, we were no longer pursuing the construction of the BANGL pipeline, we did indicate that we continued to look for ways to support our producer customers. To that end, we formed a joint venture with WhiteWater Midstream and West Texas Gas to provide NGL takeaway capacity from MPLX and West Texas Gas processing plants in the Permian to Sweeny, Texas. This optimized approach largely utilizes existing infrastructure with limited initial construction. MPLX is contributing existing pipeline laterals and equipment to the joint venture which defers new capital to the out-years. As part of this solution, the joint venture has entered into capacity arrangements from Orla to Sweeny, including an agreement with EPIC Y-Grade Pipeline LP to own an undivided joint interest in EPIC's existing 24-inch NGL pipeline from West Texas to the Eagle Ford basin. Additionally, on July 31, we entered into a redemption agreement with MPC in which we agreed to transfer our Western wholesale distribution business that we acquired as a result of the ANDX acquisition to MPC in exchange for the redemption of $340 million MPLX common units held by MPC. The Western wholesale distribution business was quite different from the fuel distribution business dropped down to MPLX from MPC in 2018. This transaction allows us to simplify MPLX to only one fuels distribution model. Finally, I wanted to share some comments around some of our Bakken assets including our roughly 9% indirect interest in the DAPL pipeline and our full ownership interest in the Tesoro High Plains Pipeline System. Both of these systems are currently facing regulatory and legal challenges. As a small indirect owner of the DAPL pipeline, Energy Transfer, not MPLX is representing the combined interests of the owners in this situation. With regards to the High Plains Pipeline System, we have appealed the Bureau of Indian Affairs trespass determination, which triggers an automatic stay. During this stay, the pipeline would remain operational. In the event that both of these pipelines were to be impacted for any period of time, we estimate a maximum annual EBITDA impact to MPLX of less than $100 million. As we work through these processes, we are committed to respecting the rights of the indigenous groups. Now turning to Slide 9, we provide second quarter Gathering and Processing business segment highlights. Overall, gathered and processed volumes decreased versus the second quarter of 2019, primarily due to producer customer production curtailments and shut-ins, driven by low commodity prices. In the Marcellus and Utica, gathered volumes decreased 1% versus the same period last year, primarily due to weakness in wet gas gathering in the Utica as some producers shifted production to dry gas. In the Marcellus, gathered volumes increased 9%. Processed volumes increased 1% versus the same quarter last year, primarily due to the Marcellus, which remained relatively strong where processed volumes increased 6% higher than the second quarter last year. Fractionated volumes increased over the second quarter of 2019, primarily driven by Sherwood fractionator that came online in the fourth quarter last year. Throughout the year, we have discussions with our producer customers about their processing needs, as well as their production expectations with a goal of bringing on new assets just in time to meet their needs. As a result, during the quarter, we shifted the completion of both Smithburg 1 and Preakness processing plants in the Marcellus and Delaware basins respectively from the second quarter of 2020 to 2021. The Hopedale 5 fractionator is still expected to be placed in service in the third quarter this year. Slide 10, moving to our financial highlights slide. Adjusted EBITDA was $1.2 billion for the second quarter of 2020. Total Logistics and Storage segment adjusted EBITDA was $839 million, while the Gathering and Processing segment contributed $388 million in adjusted EBITDA. For the quarter, we generated approximately $1 billion of distributable cash flow and will return $746 million to our MPLX unitholders for the quarter, which provides distribution coverage of 1.39 times and resulted in $280 million of retained distributable cash flow. The bridge on Slide 11 shows the change in adjusted EBITDA from the second quarter of 2019 to the second quarter of 2020. The Logistics and Storage segment increased $18 million year-over-year. While we experienced lower pipeline and terminal volumes, resulting from lower utilization at MPC refineries, this impact was more than offset by lower operating and project expenses, as well as an increase in earnings from additional marine equipment placed in service. The Gathering and Processing segment decreased $40 million, primarily driven by lower weighted average NGL prices and lower gathered and processed volumes due to production curtailments and shut-ins. On a sequential basis, second quarter EBITDA for both Logistics and Storage and Gathering and Processing segments was down due to lower demand caused by the COVID pandemic and lower commodity prices resulting in producer curtailments, respectively. Slide 12 provides a summary of key financial highlights and select balance sheet information. We ended the quarter with leverage of 4.1 times and ample liquidity with approximately $2.7 billion available on our bank revolver and $1.5 billion available on our intercompany facility with MPC. As we look forward, we expect to continue to grow free cash flow by allocating capital investments to the highest return projects with a long-term strategic focus. This disciplined capital investment approach should allow us to increase our financial flexibility and distribution coverage while maintaining an investment grade credit profile. Now, let me turn the call back over to Kristina.

Thanks, Pam. 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 will now open the call to questions, operator?

Thank you. We will now begin the question-and-answer session. Please limit to one question at a time and follow-up as necessary.

Operator, we're ready for our first question.

First question comes from Shneur Gershuni from UBS. Your line is open.

I was maybe wondering if we can start off with the distribution a little bit. Your second quarter was supposed to be a difficult quarter due to COVID; the results were clearly stronger than expected. At the MPC level, you've sold Speedway, which improved the credit profile of MPC as a counterparty. I was wondering if you can talk about how this all impacts your thoughts around the distribution on a go-forward basis. There have been two questions with investors recently, so I just wonder if you could sort of give us your views, how you're thinking about it and so forth. Thank you.

Thanks, Shneur. This is Mike and thanks for asking that question. I wanted to try and clear up a little bit of confusion after the last quarter on some of my comments, so I appreciate you asking that. First of all, let me state obviously, we've reaffirmed the distribution at the current level. To remind people, I like to ask and get a lot of feedback and perspectives from people. When we have our individual meetings or one-on-ones, I try and feed that back to the market so everybody gets to see the lens in which we're viewing things. I want to be more clear today that the distribution is an important part of MPLX's value proposition. In a period when the refining business is facing significant demand challenges, it's also a very important source of capital that MPC relies on as well. We have not had the external pressures that some of our peers have had who have made changes to their distribution. This quarter especially shows how MPLX has stability in its EBITDA profile. We announced again our decision to support the return of capital to unitholders through the distribution. We feel very strongly that a return of capital is a high priority for us, and that the distribution is staying the same despite some of the challenges that others have had. I hope this helps clarify things.

Now Mike, really appreciate that confirmation there. Maybe I have a few quick follow-ups here. The environment is obviously uncertain, but I think things have definitely changed from where they were back in April and early May. I was wondering, given where current refinery utilizations are today and where congestion is today, how close is MPLX from a pipeline perspective to be at or running above the minimum volume commitment levels?

Yes, Shneur. It's Pam and I'll take that question. So obviously, there were some systems during the second quarter that we were running below minimums. Since we formed MPLX, we have had a few pipelines, systems where we have had deficiency payments and you can see that reflected in the deferred revenue that we report in our earnings and in our Qs and Ks. We've always had a bit of some systems that haven't run as we originally expected they would. But overall, I would say that we expect the volumes would be picking back up here in the third quarter, reflecting a rebound in demand from the trough that we all experienced probably around April.

If I can just slide in one little clarification. With the asset level or asset swap to MPC that you announced today, do you have the trailing 12 months EBITDA or multiple? Is that kind of a strategy that you see going forward, where you may see some asset swaps between the two entities?

Yes, Shneur, this is something that we really had contemplated as a cleanup matter once we closed that combination with ANDX. Just to refresh for those who may not be as familiar with this business, it was dropped down from Western Refining into Western Logistics in 2014, and it was about $40 million of annual EBITDA run rate. There wasn't much growth, if any, in that business. That was the run rate, so that's what you should use for your estimates about how that would impact MPLX.

Next question comes from Jeremy Tonet from JPMorgan. Your line is open.

Just wondering to start off with the Martinez and Gallup refinery closures here and should we think about any impacts to MPLX? Is there a certain level of kind of minimum volume commitments here or are there opportunities to modernize the assets to handle future needs or any thoughts you could provide here would be helpful.

Yes, Jeremy. This is Pam. So with respect to the Gallup refinery, we expect no impact to MPLX in terms of the EBITDA as we'll continue to operate the assets in and around the refinery. A significant portion of the earnings related to Gallup for MPLX come from crude gathering and the pipeline system that fed the refinery. But to the extent that crude is not going to Gallup refinery, it will go on the Tex New Mex logistics system down to Midland. We really expect to see no impact to EBITDA as MPC could continue to supply that market with refined products with other means than running the refinery. In relation to the Martinez refinery, MPC will obviously be evaluating the assets that could continue to be used there in support of the renewable diesel conversion that it's valuating, and we will have a much better idea over the long term how those logistics assets around that asset might be utilized. In the meantime, there are agreements in place that require the continuation of minimum volume commitments that extend over an extended period of time.

Thanks for that! And then pivoting over to Gathering and Processing, I was wondering if you could provide a bit of color as far as what you guys are seeing in July. Just trying to get a feeling for what type of recovery you might be seeing, curtailments coming back online or any sense of trends heading into the third quarter here?

Greg, do you want to handle that one?

Yes. Thanks, Mike. Can you hear me?

Yes.

Yes, we have seen some of the curtailed shut-in wells come back online as we've moved out of the second quarter and into July. We were still close to 90% utilization in the Marcellus and not as much curtailment there, probably more in the West, in the crude producing areas and associated gas. As crude prices improved, we have seen some of those wells come back online and the gas along with it. Generally, the dip was in April into May and it's gradually improved since then.

Maybe just clarification, July trends. How does that compare to the first quarter? Is it possible to kind of frame it that way?

Well, first quarter. I think it's generally getting back to levels that were there, and probably not completely in all areas yet, but on a positive direction.

Next question comes from Christine Cho from Barclays. Your line is open.

As the parent thinks about how it wants to use the proceeds from the Speedway sale, how do you guys view a potential role in MPLX, which would enable you guys to retain the cash that's being paid out to the public unitholder? What other factors could play into the decision, whether it's corporate tax rates potentially going up, tax position at the parent, a preference not to have Gathering and Processing assets at the parent, et cetera? Just how you guys are thinking about all that?

Christine, this is Mike. On the previous MPC call, we told investors that we have two priorities for the use of proceeds from the Speedway sale. One is balance sheet and our leverage metrics, and the second is return of capital back to shareholders. I got asked the same question there. We did a pretty exhaustive study on the midstream space with questions similar to what you're asking as far as rolling up or bringing in our LFT back or anything along those lines. We concluded that, because MPC receives a very robust distribution with its ownership percentage in MPLX at $1.8 billion, it didn't make sense to buy in a cash flow stream that we were already getting via the distribution. Our conclusion was that it wouldn't be a value creator for either entity, and that Marathon at the parent level would be much better served by returning that capital to MPC shareholders. That’s our priority right now. Additionally, over the next 5 to 6 months, once we get through the closing, we're going to be doing a study of what's the best efficient and effective means to deal with that use of proceeds. Hopefully that helps.

And then how does the 7.7 billion gallons of fuel per year pie agreement compare to what Speedway has done in past years? Can you just add some more color on how this contract works? What happens if they don't take the 7.7 billion gallons and what sort of upside opportunities do you contemplate?

Yes, good question, Christine. The 7.7 is based on 95% of traditional Speedway volumes, and that's for the entire 15 years. We secured a lot of security for MPLX on the volume commitment there, with slight flexibility. We also have a separate agreement to provide 7-Eleven with their growth profile, as they have a stated position of 20,000 stores that they want to own. So we know there's a lot of growth potential with 7-Eleven. We actually have two separate agreements: one to maintain that base Speedway supply and the other is to open up the potential for increased value for MPLX going forward. Additionally, the integration value that MPC sees translates directly to MPLX as we will be using MPLX assets, terminals, pipes, et cetera. We're going to continue to be the supplier of transportation logistics, so trucking all of that comes together.

And if I could just have one more clarification question. On the redemption, how many units were canceled in relation to selling that asset back to MPC?

Yes, Kristina, this is Pam. The number of units redeemed was 18,582,088.

Thank you.

How is that for an estimate to see?

Just so you know how we arrived at that, it was based on the 10 trading days ending at market close on July 27.

Next question comes from Spiro Dounis from Credit Suisse. Your line is open.

I'd like to follow up with Jeremy's question, but also just revisit some of the topics that came up on the MPC call. There was a lot of focus around cost reduction and further optimizing the refinery portfolio beyond Martinez and Gallup. I just wonder to what degree MPLX contributes to that initiative going forward by way of its own asset closures, cost cuts, or even tariff cuts, given that it's one of the main service providers for MPC. Any color on how you're weighing the various stakeholder interests there would be helpful.

Yes, sure. Spiro, first off, the initiatives at MPC some of them directly apply at MPLX. We're trying to lower our cost structure in both entities to be more competitive going forward. Last quarter, we mentioned about $200 million of expense reduction planned for MPLX in 2020. Initially, I said some of that is things we know we can count on and some may come from deferrals. Since our last talk last quarter, we feel confident now that this is more of a structural change. In those areas, expect to see us heavily concentrate on lowering the cost structure. Regarding the discussions between the entities, I believe in win-wins for both MPLX and MPC, and we want both entities to come out in a better position than going into it. We've seen strong integration value providing opportunities for both entities, and we want to continue to capture that and take it to another level. We evaluate both separately and together, trying to see what's best for each entity. As Pam stated, MPC is considering a decision on Martinez that could impact MPLX, but we'll have to see how that plays out. We're still confident that the terminaling and logistics assets are important for Martinez's future valuation. Nonetheless, we continuously evaluate all assets going forward. Regarding the new NGL pipeline announcements, can you give us a sense of what the expected returns look like compared to historical return targets? Sorry if I missed it, but in terms of CapEx required to fund the UJI, is that already factored into your current guidance and what’s the timing for in-service here? Yes, we typically don't provide individual capital or return specifics. But it is in our data that we've given to date. Throughout all this, we're trying to disclose where we think our total capital is.

The construction of the pipeline laterals from the MPLX and WTG processing plants and other initial construction are expected to be complete by the fourth quarter of 2021. The joint venture will initially own a 30% undivided joint interest in the portion of the Epic NGL pipeline. We do have the ability to grow that ownership over time, as the basin recovers. Specifically, the JV will own a share of the Epic 24-inch from Benedum to Gardendale, Texas. Beyond that, there’s construction of the laterals that connect to various points on the Epic pipeline and then follow up with some capacity arrangements to the Sweeny fractionation complex. Overall, it’s a win-win for the JV and our partners.

I want to add, Tim and the rest of the partners did a really good job staying focused on providing the customer service needed for the producers while being innovative and creative in how the project has evolved. Overall, I’m pretty proud of the outcome here, quite capital efficient while providing excellent service for growth in the Permian.

Our next question comes from Ujjwal Pradhan from Bank of America.

Thanks for taking my question. First one on the Tesoro High Plains situation, Pam. Thanks for the color earlier on the potential impact you mentioned around $100 million for both DAPL and Tesoro, I believe. I wanted to clarify that number and also get to what the impact would be, regarding high plains alone. In an adverse scenario, if the decision is upheld, do you expect the system can run in some fashion with just the pipeline being shut and what the overall impact would be?

Yes, Ujjwal. The system itself, aside from the area in dispute, could continue to run and we could continue to maintain a large share of the EBITDA that we enjoy from that system today. We think it is potentially - there is a chance we would have minimal impact just from that particular situation.

I wanted to add to Pam's remarks for clarity. We did file an appeal which triggers an automatic stay, so the current situation remains unchanged. If for some reason — and we believe the likelihood is low — we were to shut down, we would still maintain about 75% of the EBITDA on that system. So the downside is pretty low and we're confident we can find a resolution that works.

That helps, thanks both Pam and Mike on that. And a follow-up on the NGL takeaway. Can you also talk about your returns with your agreement with Epic? There are a couple of loans at that entity. Would those be recourse to you under this agreement?

That level of detail is something we typically won't disclose. However, I think we find ourselves in a good spot where Epic and WhiteWater are good partners. Overall, I’m optimistic about where we’ve ended up.

And last one, if I may. You have two short-term floating-rate notes issued last year, totaling $2 billion callable beginning in September of this year. Would you consider rolling them over to a longer maturity if it makes sense?

Yes, Ujjwal, it's Pam. We continuously evaluate opportunities in the market to refinance near-term maturities and reload our revolving credit facility. We look closely at that all the time and look to take advantage of opportunities when they present themselves.

Our next question comes from Tristan Richardson from Truist Securities. Your line is open, sir.

Really appreciate all the commentary on RLFT with all the moving parts. I guess just a quick clarification question on maybe a follow-up to a previous inquiry on those 7-Eleven fuel supply agreements. Does that fuel supply agreement sit at MPLX and should we consider that roughly $1.4 billion is not necessarily changed by the terms of that new supply agreement?

Yes. Tristan, this is Pam. All the agreements for fuel distribution exist between MPC and MPLX. MPLX has no agreements directly with Speedway. The agreements that are in place today will continue to be between MPC and MPLX. There could be a potential for MPLX assets to be even more highly utilized as the opportunity expands for 7-Eleven.

And then just a follow-up. Really just a question on Gathering and Processing. I think on the parent call, you mentioned long-term initiatives around logistics and Gathering and Processing with Mike. I think you made a reference to an emphasis on getting to a portfolio that protects downside. Can you talk about what kind of initiatives that could be specific to Gathering and Processing?

Hi Tristan. The context for Gathering and Processing applies to all of our assets. We're undergoing a deliberate evaluation of the portfolio to assess where we think these assets will be for the long term and whether they can contribute to free cash flow generation. I would have told you that pre-COVID, we believed the Northeast Gathering and Processing area would be sustaining and/or experience slight growth. We think that post-COVID, our outlook is quite similar. Nevertheless, we want to conduct a thorough review of all our assets. While some have asked about divesting assets, our answer has consistently been that the current environment is not favorable for divesting Gathering and Processing assets, given low gas prices. We're not going to give the assets away. We aim to create a situation where all of our assets generate free cash.

And our last question comes from Harry Mateer from Barclays. Your line is open.

First one just on leverage. I know the partnership has long targeted debt to EBITDA of around 4 times. I'm just wondering with the broader midstream industry generally pulling leverage targets lower, has anything changed in your mind about that 4 times leverage number being the right one for the partnership? Or are you thinking about migrating that lower over time to maintain the investment grade profile at the parent company when you look at consolidated metrics?

Yes, Harry, this is Pam. We have been right around 4 times and we have also indicated that over the long-term, we think 3.5 times would be a target for us. As we move into free cash flow generation after funding both capital and distributions, one of the increased financial flexibility opportunities we would have would be to reduce debt. It's something we are seeing across the midstream space, and it's directionally lowering debt to provide more financial flexibility. That’s what we have in mind.

Harry, it’s Mike. I’ll just add, our priority is to get to free cash flow, which gives us the optionality and flexibility, as Pam stated. We can then decide whether to reduce debt or use that capital for unit buybacks or other choices. Our priority is to ensure we generate cash beyond the distribution and capital needs.

Thanks for that. And then just as my follow-up. How should we think about the target to be free cash flow positive after distributions next year? Is that something you envision as a corporate objective year-after-year or more just a short-term target with flexibility around that?

Right now, I would say it's more durable. Generating free cash flow is what investors are looking for in today’s marketplace. This will allow us the flexibility position we seek. So we're not thinking of it as a short-term entity but more as a longer-term structural change that has occurred in the midstream space.

Great. And with that, Mike, we have no more questions. Thank you for joining us today and thank you for your interest in MPLX. Should you have additional questions or want clarification on any of the topics discussed this morning, members of our team will be available to help out after this call. Thank you so much, operator, I'll turn it back to you.

Yes, ma'am. Today's call has concluded. You may disconnect at this time and thank you for joining, and have a wonderful day.