Mplx LP Q3 FY2020 Earnings Call

Welcome to the MPLX Third Quarter 2020 Earnings Call. My name is Sheila 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 third 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, CFO; 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 will turn over this call to Mike Hennigan for opening remarks.

Thanks Kristina. Good morning and thank you for joining our call. Earlier today we reported adjusted EBITDA for the third quarter of 2020 of $1.3 billion, a slight increase versus our second quarter 2020 EBITDA. Our performance during the third quarter highlights the stability of our underlying business, the quality of our contracts and our execution on our capital and operating expense reductions to help offset what we knew would be a challenging environment. With our EBITDA growing over time, and our continued emphasis on strict capital discipline, our leverage can naturally be reduced. To that end, we have obtained Board authorization for a unit repurchase program for the repurchase and retirement of up to $1 billion of the company's outstanding publicly traded limited partner common units. By getting Board approval, this program will allow us to make repurchases of our common units at the appropriate time and provide us with an attractive opportunity to return value to our unit holders. A key part of our path to positive cash flows is continued capital spending discipline. We are on track to achieve our 2020 capital reduction of over $700 million, as we continue to focus on opportunities with the most attractive returns. I'd like to provide some comments on our responsibilities around sustainability and corporate leadership. We’ve established two important initiatives to reduce greenhouse gas emissions intensity to 30% below 2014 levels by 2030. First, we've established a 2025 goal to reduce methane emissions intensity from our G&P business to 50% below 2016 levels. Second, we are focusing on conserving and managing our water use. As a result of these efforts, we have reduced freshwater withdrawal intensity by over 10% since 2015, and expect to further reduce it by an additional 10% by 2030. We recently published our 2020 perspectives on climate-related scenarios report. This is the fourth year we've published a TCFD compliant report, which highlights our strategic planning related to climate scenarios. We also published our 2019 sustainability report, which expands on our efforts in environmental, social, and governance aspects of the business. We look forward to continuing our ESG journey and our commitment to stakeholder engagement. We view sustainability as a fundamental process of shared value creation, and how we conduct our business enhances the performance we deliver. Now let me turn the call over to Pam to discuss our third quarter 2020 operational and financial results.

Thanks, Mike. Turning to slide seven, MPLX delivered third quarter adjusted EBITDA of $1.3 billion and distributable cash flow of $1.1 billion, which provided continued strong distribution coverage of 1.44 times. Our results for the quarter highlight the resiliency of our underlying business and execution of our forecasted $200 million of operating cost reductions to help offset a challenging demand environment, allowing us to continue to generate strong cash flow and adjusted EBITDA. For the quarter, we generated positive cash flow after investments in the business and distributions to unitholders. We used this cash to reduce total debt outstanding from the end of the second quarter to the end of the third quarter, and ended the third quarter with leverage of four times. During the quarter, we refinanced our 2021 debt maturities at very attractive rates along with some of our notes due in 2022 and 2024 that carried coupons of 6.25% or higher. Slide eight shows the third quarter Logistics & Storage business segment highlights. Volumes across our pipeline and terminal systems were lower compared with the third quarter of 2019, primarily driven by lower refinery utilization at MPC's refineries. However, we did see a sequential increase in both pipeline and terminal throughputs versus the second quarter of 2020. During the third quarter, the Wink to Webster Permian crude oil pipeline project achieved mechanical completion on the main segment connecting the Permian Basin to Houston, Texas, and is expected to be operational in the fourth quarter. The Whistler natural gas pipeline project also continued to progress and we continue to expect to start up in the second half of 2021. Our Gathering and Processing business segment experienced lower volumes than in the same period last year across most areas, but we remain optimistic in the outlook for recovery in natural gas and NGL demand and price recovery, as recent improvements in futures prices are beneficial for our producer customers.

Thanks, Pam. As we open the call for questions, we ask that you limit yourself to one question plus a follow-up. With that, we will now open the call to questions. Operator?

Thank you. We will now begin the question-and-answer session. Our first question comes from Jeremy Tonet with JPMorgan. Your line is open.

Hi, good morning. Just wanted to start off on how you're going to evaluate the balance between buybacks versus reducing leverage in 2021. Is there a specific leverage bogey we should be thinking about here before you would start buying back units? In the past, you've talked about reducing the number of geographical areas where you operate, through divestitures or JVs, could that factor into the equation here as well?

Jeremy, this is Mike. Business conditions are going to continue to change and we’re going to evaluate it as a dynamic program going forward. What we said in our prepared remarks is that right now with MPLX trading at a 15-plus yield, we see unit buybacks as the preferred option. Over the long term, if we keep our debt flat, then we will see a natural leverage reduction over time as our earnings continue to increase. We just need to make quarterly calls and evaluate what's the best way to deploy our excess cash. Reaching a point of free cash flow after distributions and capex has been our goal, and we anticipate achieving that in 2021.

That's very helpful. Thank you. Regarding Wink to Webster, could you help us understand the ramp up with the first leg online and how we should think about those cash flows increasing this year and next year?

On Wink to Webster, the partners have optimized the capital spending, and portions of the project will come online in 2021. The main segment from Midland to Houston has completed early, and we will start that up soon. As 2021 progresses, we will provide more updates, but we are focused on getting the project up and optimized as soon as possible.

Jeremy, it's Pam. Just to add to Mike's comment about the unit repurchase, we're not a distressed seller. We'll be patient and prudent with asset monetization. With a good price environment, we would use proceeds to reduce debt, and if possible, for unit repurchase as well. That's predicated on our leverage and investment-grade credit profile that we prioritize as we evaluate these opportunities.

Thank you for that. I'm curious about the demand recovery trajectory across your systems?

In the Logistics & Storage segment, MPC provides guidance on refining throughput, which is slightly lower for Q4 compared to Q3. On the Gathering and Processing side, while challenging, we've seen reports that are encouraging as producers recover. We're optimistic about natural gas and NGL demand moving forward, particularly in the Marcellus area, where we’re running at very high volumes. The evolving price environment should be beneficial for our producers.

You're welcome.

Thank you. Our next question will come from Shneur Gershuni with UBS. Your line is open.

Hi. I wanted to dig into the buyback question a little more. Given that you are at four times leverage, could you clarify if excess cash will go towards buybacks? Is there a specific percentage allocated?

There’s not a set percentage. We determine the best use of proceeds as we generate positive cash flow. Right now, we see buybacks as the preferred vehicle. Our EBITDA growth will reduce our leverage over time, and we believe maintaining appropriate leverage is important even as we pursue buybacks.

Understood. Can you discuss your cost reductions and how much of MPC’s reductions will translate to MPLX?

We expect to achieve $200 million of operating expense reductions this year, with additional reductions coming from workforce changes. CapEx will be lower in 2021 compared to 2020 as well. This reflects our focus on capital discipline while supporting our business.

Thank you. Do you foresee free cash flow positive in 2020?

We expect to be slightly positive in Q4 and overall for 2020. Our trajectory towards free cash flow in 2021 remains on track, and we aim to improve upon that as we head into the new year.

One of our commitments has been to achieve free cash flow in 2021. We're showing progress, and we want to demonstrate that we're on track to do what we said we would do.

Thanks, everyone.

Thank you. Our next question will come from John Mackay with Goldman Sachs. Your line is open.

Good morning. Could you discuss your expected CapEx for 2021 and any factors affecting that?

We’re not ready to give forward guidance for 2021 CapEx yet, as we’re in the middle of that review process. Our goal is to maintain strict capital discipline while ensuring free cash flow. We want to ensure that as we progress, we are appropriately leveraging our assets.

Thanks. I appreciate your insights. Are you expecting a significant decline in CapEx?

We will see a considerable decline in CapEx for the fourth quarter as we wrap up larger projects. Our spending has been front-loaded this year, and we expect to be on target for our overall goals.

Thank you. Our next question comes from Christine Cho with Barclays. Your line is open.

Thanks. Can you provide insight on free cash flow generation and how much of the quarter-over-quarter increase in L&S was due to cost savings?

Cost reductions played a significant part, and we will continue to work on these through Q4. However, we won’t break it down by each segment specifically. We do rely on MVCs, which provide stability to our cash flows.

Thank you. Given the changes in the refining landscape, how should we think of long-term cash flows from existing assets?

We believe our contracts provide stability even with some changes. Our logistics and processing assets will continue to support MPC's evolving operations as they transition to renewable products. We're confident in the contribution of our logistics assets to cash flow and long-term profitability.

The evolving energy landscape will create opportunities for us as well. Our focus remains on maintaining a competitive edge through cost management as we transition into different service models.

Thanks for your comments on M&A and any updates on the High Plains pipeline proceedings.

The High Plains pipeline case was recently remanded back, and we expect an update by December 15. We believe we have plans to generate similar EBITDA levels even without the contested section of the pipeline.

It’s positive for us that the trespass determination was vacated, and we have alternative strategies to maintain strong cash flows.

Morning, everyone. Any updates on migrating NPC level assets down to MPLX and the potential for asset swaps?

It's not on the front burner right now. Our main focus is on cost optimization and achieving free cash flow. We're also evaluating opportunities that arise in the market.

Understood. Could you comment on the importance of C Corp governance?

We're continuously evaluating the structure of our business. There are pros and cons to a C Corp structure, but right now, we're optimizing cash flows and managing tax implications. The current structure fits our needs well at this time.

Thanks. Any major MVC renewals in 2021 you can highlight?

Most major renewals will be in 2022, but we do have one marine contract renewal in January 2021 where rates will be reset to market rates.

Thanks. Could you also discuss any ongoing ESG efforts?

We remain committed to sustainability and continue to innovate in our operations to reduce environmental impacts. Our initiatives are aimed at achieving long-term objectives within the energy transition framework.

Good morning. Can you clarify the cost reductions from workforce changes going forward?

The cost reductions from workforce changes will be reflected in our future results as we continue to implement our plans effectively.

Thanks for the details. What’s your outlook for CapEx considering Northeast G&P production maintenance?

Ongoing capital support for producers in the Northeast would likely be a couple of hundred million or less. We are focused on being cost-effective in our approach.

Thank you for joining us today and thank you for your interest in MPLX. Should you have any additional questions or would like clarification on any of the topics discussed this morning, members of our team will be available to take your calls. Hope you have a great day.

That does conclude today's conference. Thank you for participating. You may disconnect at this time.