Mplx LP Q4 FY2020 Earnings Call

Welcome to the MPLX Fourth Quarter 2020 Earnings Call. My name is Amber, 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 fourth quarter 2020 earnings conference call. The slides that accompany this call can be found on our website at mplx.com, under the Investors tab. Joining me on the call today are Mike Hennigan, Chairman, President and CEO; Pam Beall, CFO; and other members of the executive 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 in our filings with the SEC. Now with that, I'll turn the call over to Mike.

Thanks, Kristina. Good morning, everyone. Thank you for joining our call. Earlier today, we’ve reported adjusted EBITDA for the fourth quarter of 2020 of $1.4 billion and full year 2020 adjusted EBITDA of $5.2 billion. Considering the unprecedented challenges our industry faced throughout 2020, we're proud of the way our performance highlighted the resiliency and stability of our underlying business. Despite the difficult macro environment, we were able to grow total BcF for 2020 compared to 2019. Additionally, our results demonstrate our commitment to executing on the priorities we laid out for the year. We made strides on optimizing our portfolio, announcing the sale of the Javelina facility in Corpus Christi, Texas. While not large in size, this is an example of the continued effort we're making to focus on the assets that have long-term strategic value to the company. We reduced our capital spend in 2020 by over $700 million from the target. We also took necessary steps to address our long-term cost structure achieving our target to reduce forecasted operating expenses by over $200 million. These expense reductions were key to offset earnings headwinds, particularly in the L&S segment, and we believe they will be enduring long term. Our cost reduction efforts are particularly meaningful when you consider we have not compromised our commitment to safely operating our assets, protecting the health and safety of our employees and supporting the communities in which we operate. As a result of these concerted efforts, we were able to generate excess cash flow for the full year 2020 after self-funding our distribution and capital program. This inflection occurred earlier than our original target of 2021 and gave us the financial flexibility to begin repurchasing units in the fourth quarter of 2020. Today, we also announced a growth capital outlook for 2021 of $800 million, focused on investments in projects expected to deliver our highest returns. This outlook represents a continued reduction in capital spend as we work to high-grade our portfolio of investments, focusing on projects that achieve robust returns, irrespective of the market environment. We remain committed to strict capital and expense discipline, and that discipline, combined with EBITDA growing over time, supports our continuing goal of generating excess cash for 2021 and providing the opportunity to return incremental capital to our unitholders. Shifting to Slide 5, I'd like to provide some comments on our responsibilities around sustainability and corporate leadership. Last quarter, we discussed the publication of our 2020 climate perspectives report, highlighting opportunities and strategic planning work the company is engaged in related to climate scenarios. We also discussed our goal to reduce methane emission intensity in the G&P business. It's important that we set objectives for the organization that drive our continuous improvement on ESG. 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 goals we are setting and our transparent disclosures on how we plan to achieve them position us well for the future. I'm proud to see some of our team's efforts in the ESG arena recognized in 2020 with API's Distinguished Pipeline Safety Award as well as 2 EPA Energy Star Challenge awards for energy efficiency. These accomplishments highlight that at all levels of our business, our team members are proactive and engaged in ensuring the safety of those in the communities where we have the privilege to operate and protecting the environment we all share. Now let me turn the call over to Pam to discuss our operational and financial results.

Thanks, Mike, and good morning. As Mike mentioned earlier, MPLX delivered fourth quarter adjusted EBITDA of $1.4 billion and full year EBITDA of $5.2 billion. Distributable cash flow of $1.2 billion for the fourth quarter provided strong distribution coverage of 1.58 times, and we ended the year with leverage of 3.9 times. Our quick response to the challenging demand environment allowed us to increase our EBITDA by $100 million for the year. In the L&S segment, the strength of our underlying contracts and operating expense reductions more than offset the impact of lower volumes in the system. The gathering and processing segment also benefited from lower operating expenses, partially offsetting the impact of production curtailment in certain basins. I'm pleased to report that our 2020 results represent the first full year that MPLX has funded both our total capital investments and distributions to our unitholders with $266 million of excess cash flow after these activities. During the fourth quarter, we began to implement the Board-authorized unit repurchase program of up to $1 billion of our outstanding publicly traded common units. Looking forward, we expect our assets to continue to provide strong cash flow. Our capital allocation will continue to focus on fully funding our capital needs and distributions with cash generated from operations, while maintaining an investment-grade credit profile and returning excess cash to our unitholders. We expect to maintain the distribution and the pace of unit repurchases will depend on several factors, including: excess cash available, alternative investment opportunities, and the business and market conditions. During 2021, we expect to invest approximately $800 million in growth capital and $165 million in maintenance capital. Slide 7 outlines the fourth quarter logistics and storage segment highlights. Volumes across our pipeline and terminal systems were lower compared with the fourth quarter of 2019, primarily driven by lower utilization at MPC's refineries. However, we continue to execute on our operating expense reductions to offset lower throughput. During the quarter, we continued to progress our strategy of creating an integrated crude oil and natural gas logistics systems from the Permian to the Gulf Coast. We expect the Wink to Webster crude oil pipeline in which MPLX has an equity interest to continue to place assets in service throughout 2021. In line with our focus on projects with minimal return risk, the pipeline system has 100% of its contractable capacity committed with minimum volume commitments. As we progress construction activities for the Whistler natural gas pipeline, we expect a start-up of the project in the second half of 2021. And finally, we continue to work towards an in-service date in the second half of the year for the NGL takeaway solution. As a reminder, this project is an optimized approach compared to the BANGL project as it was originally contemplated, largely utilizing existing infrastructure with minimal capital investment by MPLX. Outside of the Permian, we ran a successful open season for the expansion of the Salt Lake City core pipeline, with the 11,000 barrel per day expansion expected to be completed later this year. While we're on the topic of our logistics and storage segment, I wanted to take a moment to discuss the renewal of the marine contract between MPC and MPLX. This contract was renewed in January for an additional five-year term for the same capacity of boats and barges. As mentioned on the prior call, the renewal terms include a reset of the contracted equipment rates to current market levels. Based on changes in market rates, we're estimating a reduction to our marine services EBITDA, which will be less than $100 million or less than 2% of our full year 2020 EBITDA. We continue to hear concerns from the investor community regarding MPLX's exposure to contract renewals with our sponsor, MPC, and we'd like to take this opportunity to highlight that many of these assets that MPLX operates are fit-for-purpose to MPC's business and in most cases, the optimal solution MPC has for its logistics needs. We fully expect MPC to renew contracts with MPLX as they mature over time. We do not expect MPC to commit incremental capital to duplicate systems that already exist.

Shifting to our gathering and processing business. For the fourth quarter of 2020, gathered volumes were lower than the same period last year across our footprint due to lower dry gas volumes in the Utica, a planned outage in the Marcellus, and production curtailments in other regions. Processed and fractionated volumes were also lower than the same period last year, except for the Marcellus, where processed volumes increased 8% and fractionated volumes increased 10%. During the fourth quarter, in the Marcellus, our processing units continued to run at high utilization rates, setting a record 6 Bcf per day in the region. We also achieved record fractionation volumes of 300,000 barrels per day at our Hopedale facility following the third quarter completion of an 80,000 barrel per day expansion. In the past, we provided an estimate of the impact to earnings of a $0.05 move in NGL prices. With the planned sale of the Javelina refinery off gas processing facility in Corpus Christi, we do expect a reduction in our direct commodity price exposure. For 2021, we would expect a $0.05 change in the weighted average NGL basket to have an approximate $20 million annual impact to EBITDA. While higher NGL prices will have less of a direct impact on MPLX earnings, rising NGL prices will have an indirect benefit, providing an incentive for producers to shift drilling to rich gas areas where our processing and fractionation infrastructure can be more highly utilized. Looking forward to 2021, in the Northeast, we have opportunities to optimize our plant utilization as we expect producers to pursue modest production growth while maintaining free cash flow. We also expect to bring the Smithburg 1 facility online around the middle of the year, and we expect to see incremental ethane recovery with improving economics. On Slide 9, moving to our fourth quarter financial highlights. Total L&S segment adjusted EBITDA was $884 million and the gathering and processing segment contributed $471 million in adjusted EBITDA. For the quarter, we generated approximately $1.2 billion of distributable cash flow and returned $742 million to our unitholders through distributions. We also repurchased $33 million of publicly held units during the quarter. The bridge on Slide 10 shows the change in adjusted EBITDA from the fourth quarter of 2019 to the fourth quarter of 2020. The logistics and storage segment increased $31 million year-over-year, primarily driven by lower operating expenses and partially offset by decreased pipeline and terminal volumes due to lower utilization at MPC refineries. The gathering and processing segment increased $5 million, benefiting from lower operating expenses and higher processed and fractionated volumes in Marcellus. Slide 9 provides a summary of key financial highlights and select balance sheet information. We ended the year with a leverage ratio of 3.9 times, approximately $3.3 billion available on our bank revolver and $1.5 billion available on our intercompany facility with MPC. We intend to maintain our investment-grade credit profile, and we expect our leverage to be approximately 4 times in 2021 and to decline over time with modest growth in EBITDA. As I mentioned earlier, for the first time in the company's history, we generated excess cash after capital investments and distributions for the full year of 2020. With the progress made in 2020, our continued capital and expense discipline and growth in EBITDA, we expect to continue generating excess cash flow for 2021, providing financial flexibility to pursue value-creating opportunities for our unitholders, including unit repurchases. And now let me turn the call back to Kristina.

Thanks, Pam. You may ask for additional questions as time allows. With that, we will now open the line to questions. Operator?

Our first question comes from Shneur Gershuni with UBS. Your line is open. Please go ahead.

To start, you generated excess free cash flow after distributions in 2020, and it appears that will be the case in 2021, assuming that's the plan. Leverage is currently at 3.9 times. Can you share the order of priorities for this excess cash in terms of leverage, buybacks, and distribution increases? I would like to know how you rank those priorities regarding excess cash generation moving forward.

It's Mike here to provide some insight on that. First, I’d like to remind everyone that this is not a set-it-and-forget-it situation. We will continue to evaluate our position on each of the parameters and make decisions in a more dynamic manner. Currently, we are comfortable with our leverage, and many have asked how we feel about it. We've been maintaining around a 4 times leverage for a consistent period. At this moment, we are observing where our equity is trading, and right now, we have a distribution per unit yield of about 12% and a discounted cash flow yield of about 17%. If equity continues to trade at that level, our immediate priority would be to buy back units. While we’d love to accomplish multiple objectives, as conditions change, we’ll need to prioritize accordingly. Ideally, we'd like a program that focuses on the highest priority at any given time, but we will evaluate this on a quarterly basis to determine the best use of our resources. With the current 17% DCF, that’s probably our top priority because our leverage is well-positioned and the market isn’t currently rewarding distribution growth. However, I believe these dynamics can evolve over time. Our goal has been to reach free cash flow to allow us to be in this position, and we reached it a bit sooner than expected, which is positive. I hope 2020 has demonstrated to the market that we have stable and consistent earnings. There have been many questions regarding the steadiness of our earnings, so hopefully, as the year unfolds, we can maintain our course. While we are still navigating the pandemic, I believe once we transition to a post-pandemic environment, we will continue to grow our earnings. We will persist in our cost-cutting initiatives, which have been a major priority this year. To address your question, we will remain flexible and share our views on the optimal use of our return of capital each time. I’d also like to emphasize that our distribution is a solid return of capital, and we have consistently supported it. This past year has proven that, and we will keep working on growing our DCF and earnings while assessing the best course of action moving forward. I hope this provides clarity.

I appreciate your direct answer. As a follow-up question, I don't want to overuse the word unprecedented, but 2020 was. In terms of maintenance capital, you forecast $165 million for this year. Considering that figure, is that the new run rate you're anticipating given the current status of the assets? Is there any catch-up included that you didn’t address in 2020, and should we expect that number to be lower in 2022, assuming a similar asset profile? I’m curious if you can discuss the components of that $165 million.

Yes, Shneur, it's Pam. I'll take that one. So in 2019, our maintenance capital was actually about $200 million, and it dropped significantly last year. So a number of factors, certainly, influencing that. One is what was happening just across the space and in terms of a lower utilization of our refining assets and refining logistics assets at MPC's refineries. So that was having a significant influence on the downward pressure. And certainly, with a lot of uncertainties driving some of those costs lower, that made sense. So there is a nice increase that you see in 2021 of $165 million. A couple of things to keep in mind, MPC and MPLX both expense out a lot of maintenance. So when you look at our maintenance activities, we, for example, expense API 653 tank work. A lot of companies would capitalize that work. And so we are maintaining our assets in a fashion that will allow us to continue to have reliability and integrity. So don't just look at the maintenance capital and draw conclusions about how well we're maintaining our assets from that metric alone. And then just something else to keep in mind, as part of the ANDX inherited contracts with ANDV, there was a provision where we would be reimbursed for some of the maintenance activity. And so that also is causing the maintenance capital number to be a little bit lower. And over time, as those contracts roll off and that tank work is complete, the maintenance capital related to that activity would certainly increase. The other thing we've mentioned from time to time is the fact that in the gathering and processing segment of the business, those assets are really new. We've spent a tremendous amount of capital, particularly in the Marcellus and Utica. And so the expected maintenance for those assets have been quite low. So it will obviously change over time. It will also be influenced by the assets that are in our portfolio, as MPC continues to evaluate its portfolio as part of its optimization. And so I can't say that this is a fixed run rate, Shneur. I think we're just going to have to give you some guidance as we move forward.

Our next question comes from Jeremy Tonet with JPMorgan. Your line is open. Please go ahead.

Just want to start off with the G&P side of the business here. And it seems like Marcellus processing volumes are continuing to grow, but there's been kind of declines across other basins. And just wondering if you could update us with regards to producer-customer conversations, and I guess, what expectations you have for activity across your G&P footprint this year. Should we expect those declines to continue? Or do you see them kind of abating?

Thank you for the question. We've consistently discussed our expectations for the G&P space, which many have questioned. Overall, we're still very optimistic about the business's future growth in earnings. As you mentioned, our Marcellus and Permian regions are still growing, even though we’ve noticed some declines in other areas. We are currently operating in eight basins, which we plan to optimize eventually, but we haven’t received offers for other assets that we believe may be better suited for other portfolios. For now, we are content to keep those assets to continue generating cash. The key point is our outlook on natural gas is starting to shift positively. There was considerable discussion before the pandemic concerning natural gas being oversupplied by associated gas, but we maintained our different viewpoint, which seems to be playing out as we expected: natural gas will remain a critical factor moving forward. While we anticipate earnings growth, it won't be double-digit, as we've stated before. We don't foresee the strong growth we experienced previously. Producers are reassessing their portfolios to manage their balance sheets and cash flow. This ongoing slow growth model is becoming more evident to investors than it was before. Our activities continue as they have, with some areas not seeing much capital investment, while others remain central to larger companies. As we've noted before, Marcellus and Permian are our core areas where we are experiencing growth, despite some declines in other regions. However, as long as we continue generating cash in those areas, we believe they still contribute positively to the business.

Got it. I wanted to return to the opening remarks regarding the barge contract renewals. Was the $100 million impact in 2021 related to that? Are there any other contract renewals over the next three years that we should consider, which might lead to changes in rates when they are renewed?

Yes, it's Pam, and I'll take that, Jeremy. We indicated that it's less than $100 million, which is under 2% of the 2020 annual EBITDA. We have numerous contracts between MPC and MPLX, with the largest ones related to MPLX originating in 2018, and they have a long duration. These contracts pertain to refining logistics and fuels distribution. It's important to note that all our pipeline contracts follow FERC-based rates. While we will have contracts coming up for renewal, I'm not aware of any other agreements that include an automatic rate reset provision like this one. This arrangement was structured for about five to six years, followed by an automatic adjustment based on market rates. Depending on market conditions, this could benefit either MPC or MPLX at different times. There are also rate or fee escalation clauses in those agreements. We anticipate that MPC will renew these contracts with MPLX, particularly since it has limited options for ingress or egress to its facility. MPC holds a majority interest in MPLX and receives significant cash from MPLX. Thus, it is in the best interest of both companies to maintain the positive relationship we have built.

Our next question comes from John Mackay with Goldman Sachs. Your line is open. Please go ahead.

Just maybe I want to circle back on a little bit of what Jeremy was getting into. Can you talk a little bit about the Javelina asset sale? And maybe what the impact to EBITDA it would be? And then just if you take that impact, add in the kind of marine recontracting, just talk about some of the other puts and takes on how you get comfortable with 2021 EBITDA being flat to maybe up a little bit.

Yes, I'm glad to address that, John. The Javelina assets are valuable, and we anticipate closing on them in the first quarter of 2021. However, they don’t align with our long-term strategy. It is primarily a fractionation facility that processes refinery off gas and contributes modestly to EBITDA. Therefore, it won’t significantly influence our outlook for 2021. Regarding our expectations for this year, consider analyzing our weakest quarter, the second quarter, alongside our strongest, the third quarter; this should give you an EBITDA range of approximately $4.9 billion to $5.3 billion. We will also continue to seek cost reductions, which should help mitigate some challenges from the resetting of marine contract rates. The overall performance for 2021 will largely depend on the recovery of volumes for the MPC system and the recovery of production volumes from our producers.

That's really helpful. Maybe just one on CapEx and a follow-up. I mean if we look at the $800 million growth CapEx guidance, it looks like there's still some kind of room in there if we think about what you need to spend on the G&P side and then just what is left on Wink to Webster and Whistler. Just curious if you can kind of talk about where that could move to once those larger projects roll off?

Yes. I think it's premature to talk about where it might move to. Certainly, there could be opportunity for that CapEx to come in lower. And again, I think it's really something that's going to be tied to what we're seeing in the producer community, both on the crude gathering side as well as the gas side of the business. So I think it'd be prudent for us to wait and see how that unfolds throughout the year. But yes, we'll continue to look at all those opportunities where maybe we don't have to spend as much capital as we move through the year. I would say about roughly half of the expected CapEx is going to be on the G&P side of the business and roughly half is going to be on the L&S side of the business. And we do have some completion of some pipeline expansions. Certainly, you mentioned the Whistler project's going to take a little bit more capital in 2021 as we wrap up there. But largely on the G&P side, it's going to be dependent on the macroeconomic outlook and what producers do with the drill bits.

Mike, the other thing I just want to add kind of goes to the question Shneur asked in the beginning is, our whole deployment of capital and return of capital is going to try and be as dynamic as we can be as we go throughout the year. So in a big picture, we say these are about the guidelines that we're giving you. But as we go out through the year before we pull the trigger on any capital spend, where we still have the choice, something that's not already in progress, we're going to continue to look at what's the best use. And like I said, for our equity trades where it is, we'll deploy more capital towards it because in our opinion, it's been undervalued. But we'll compare that versus the choices we have on capital deployment as well as the long-term strategy in supporting the customer base that we have. So hopefully, it will be a little bit more dynamic and a little bit more thoughtful as far as long term. And I really just want to emphasize, we're going to try and use that word strict capital discipline and make that part of our mantra and strict cost discipline and make that part of our mantra. That's some of the things that we're trying to put a little more emphasis on than we have in the past.

Our next question comes from Michael Blum with Wells Fargo. Your line is open. Please go ahead.

I guess the first question I wanted to ask was just on Wink to Webster and Whistler. Can you remind us what the duration of those contracts are? And the reason I'm asking that is it would seem at this point those pipelines are adding capacity that probably maybe isn't needed right now by the market. So I just want to understand how long those cash flows are protected?

Michael, it's Mike. So on those projects, if you recall, I'll give you a big picture, and then I'll answer your question. We had stated a couple of years ago that we had significant capital deployment opportunities in three big projects: Whistler and Wink to Webster, two you're referencing. And then the third was BANGL. And the issue that we had in front of us is that Whistler and Wink to Webster, we got MVC protection. And then to your direct question, those contracts vary, but put them in the 10-plus year environment. So very long-term. We'll use the rounded number of 10 as a guidepost for you. But at the end of the day, we have long-term commitments. We have MVC protection on it. And that's why we went forward with those two projects. That's why Wink to Webster and Whistler became part of our mantra. On BANGL, although we like the project, and although it was something in our mind, it could have been a long-term winner for us. We did not get MVC protection the way we would like to from the customer base. It was not something that they were willing to commit to, and we understand the reasoning. But as a result of that, without that long-term commitment and without that long-term MVC, our commercial team looked at it and kind of rethought what's the best way to do it and not deploy capital or put that capital at risk in the original intent, and we changed that quite a bit down to a much lower capital solution using some existing pipe and partnering with some other players, et cetera, and became a win where we were able to satisfy the customers' needs but not put ourselves at risk on the deployment of capital that wasn't backed as strongly as we would like. So Wink to Webster and Whistler ended up where we wanted it to be, long-term contracts to your question, MVC protected, and we think they're going to be terrific projects. We think the modified or smaller BANGL project is also good. It's just not what the original intent was because of the very point. We did not get that long-term MVC-protected portion of the contract. Does that make sense to you?

Absolutely, I appreciate the answer very much. My second question is about a comment made during the prepared remarks regarding the potential optimization of processing capacity in the Northeast. I would like to better understand what you meant by that. Are you considering idling processing plants, or is there something else I should understand from that comment?

No, it's Pam. Let me respond to that. We see clear opportunities for increased utilization of some of our plants in the Northeast. The pipeline projects we've initiated in recent years will enable us to adjust volumes. There may be situations where we experience high utilization and need to shift some volumes to another location. This is what we mean by optimizing our assets. We're not actively seeking to shut down any plants, but rather aiming to balance volumes throughout the system based on our investments. The best way to maximize our returns is by fully utilizing the plants we have without investing in new ones. That's the idea behind it.

Next, we'll go to Christine Cho with Barclays. Your line is open. Please go ahead.

Pam, I wanted to maybe start off with I think it was a comment you said in prepared remarks about increased ethane recovery. And I was just curious, is the Shell cracker that I think is supposed to start up later this year going to change anything on the fractionation side for you? Is more ethane going to get fractionated rather than getting rejected through your facilities? And would that be incremental cash flow? Or is that already being collected through in MVC?

Christine, it's Mike. I'm going to let Greg make a comment on that. But before I turn it to him, I'll just say, one of the things in general in the Northeast is continuing, like I mentioned earlier, growth area. We still are very bullish in the Marcellus. As Pam was trying to answer Michael's question, there's a little bit lower utilization in the Utica side of the Northeast. So that we're trying to look to ways that we can optimize that capital that's already been deployed. Overall, we still are pretty bullish in the area. When you think longer term, where do we think the natural gas business is going. We still think the 2 core areas that we're in are the important areas to be in for natural gas overall. So from a long-term perspective, we still feel real good about it. The dynamics will change up there, and I'll let Greg give you some comments on the Shell situation. But whether it's shell or some of these other pipelines that are happening, over time, those things will work themselves out because in our view, it's still a very cost-effective area for production and natural gas. Obviously, I always say it doesn't beat associated because that's a different economic. But for on-purpose gas, we're still believers that the area that we're in is a good area. And as things continue to develop, we think we'll find opportunities to grow earnings there. Greg, do you want to add anything on the Shell question?

Thank you, Mike. Christine, this is Greg Floerke. We currently recover most of the ethane in the basin. As previously mentioned, we have a purity ethane line that connects all our processing plants. Ethane is recovered at the processing plants rather than being centralized at a fractionator, giving us significant flexibility to recover and transport it on our own line to various takeaway points, including the Gulf Coast, Canada, and the East Coast, using different pipelines. As our producer customers continue to sell ethane in those markets and maintain commitments on other pipelines, we anticipate this trend will likely continue after the startup of the Shell Monaca cracker. This will necessitate additional recovery of ethane that is currently being rejected into the residue gas stream at our processing facilities. Therefore, we expect an increase in the need for recovery, and there is still a substantial amount of ethane that can be recovered. We have the capacity to do this without additional investments on behalf of our producer customers, and this recovery will be on a fee basis for the processing and the pipeline to the delivery points.

Got it. Very helpful. And then I guess on a follow-up, maybe moving over to L&S. Given MPC's plans to expand eastward in terms of placing product into PADD I via the Laurel or Manor pipes following multiple shutdowns at local East Coast refineries. Is there an opportunity for MPLX to somehow participate in MPC's west to east movement if PADD I becomes increasingly short product once demand recovers further?

Christine, it's Mike. I don't know that there's going to be a capital opportunity for MPLX. There's some existing assets, as I know you're aware of, a couple of other competitive assets that are out there that would fill MPC's need because they are existing. There's opportunities for us in regard to tankage and things like that. But I don't think you're going to see any large capital expenditure from us to support that need. We'll see if things change or if the dynamic around the market supply and demand changes. But for right now, I would tell you that I don't see us putting a lot of capital into that opportunity.

Yes. If it were, it would probably be around debottlenecking some of the pipelines we already have to make sure that we get the volume into those systems that MPC wants to move eastward.

Our next question comes from Keith Stanley with Wolfe Research. Your line is open. Please go ahead.

I wanted to revisit the recontracting question from earlier regarding the oil pipelines from the IPO, which have contracts expiring next year. Can you confirm if those are currently under negotiation? Are the new rates being negotiated with MPC for the oil pipelines, or is there an existing mechanism in place that would automatically adjust the rates upon recontracting?

Yes. It's Pam. The overwhelming majority of our pipelines, whether we're talking crude or products, are FERC-based rates. So that's really what dictates the fees that we'll receive on those pipelines. And that fluctuates over time with the FERC index changes and PPI.

Okay. So, you don't have

No, it's really going to be driven by the market rates and the FERC rates that are currently in place.

Our next question comes from Tristan Richardson with Truist Securities.

I appreciate all the comments on 2021. Going back to the previous question, I would like to hear your cautious optimism outlook and the parent's comments on the first quarter. One of your peers mentioned that they could see 2021 returning to 2019 levels. I'm curious if you see overall refined product demand recovering to 2019 this year.

Tristan, it's Mike. I've mentioned that I don't focus too much on pinpointing where the market is at any given moment. Instead, I concentrate on the broader trends. If this year turns out to be a slow recovery compared to the pandemic, or if it's stronger as you suggested, the potential outcomes are still quite broad. We could see a positive upside from moving past the pandemic and as vaccinations are rolled out, which might lead to an earlier recovery. My optimistic scenario is for a rapid and substantial recovery, while the pessimistic view is that it might take longer than expected if the pandemic persists, leading to a slower post-pandemic recovery. I'm hoping for the optimistic scenario, and as Pam indicated, we're cautiously hopeful. There are indicators that support this perspective. However, our approach includes planning for a scenario where the recovery takes longer than anticipated. Admittedly, I can't pinpoint the exact timing of the recovery, but I hope it comes sooner rather than later. That's why Pam uses the term cautious optimism. At the same time, we're preparing for the possibility of a protracted recovery. Notably, as we approached the end of December, the pandemic worsened with rising case numbers and renewed restrictions. Thankfully, those restrictions may soon be lifted, and the new administration is focused on accelerating vaccination efforts. Though there are positive signs like a decline in cases and potential easing of restrictions, it's challenging to predict when these changes will happen. Therefore, we are preparing for both the optimistic and pessimistic scenarios, analyzing our cases to evaluate possible outcomes for each. I hope that clarifies things for you.

I think the one wildcard that Mike's hinting at as well is just this new variant on the virus. We really don't know what kind of impact that's going to have. And so just while we think that the whole country is starting to turn the corner on this situation, this is a new kind of a wildcard that's been presented. So we'll have to see how that plays out.

No. I appreciate it. And then just one follow-up on the optimization efforts in the Northeast. Is there a cost savings number associated with pushing volumes to the most productive plants? Can that be meaningful in the G&P segment this year?

No, I wouldn't suggest that there is some meaningful upside related to that.

It's more about capital deployment and can we optimize the capital that has already been spent. So if you look at our data, we have some areas where the utilization is very high in some areas where there's opportunity. So what Pam was referring to is our commercial and operating teams are looking at, is there a way to take advantage of that unused capacity as growth occurs in an area where there is not excess capacity? That's the idea.

Our last question comes from Ujjwal Pradhan. Your line is open. Please go ahead.

First one, just around the commentary that you have provided around capital allocation framework. Very helpful. You discussed the attractive cash flow yield on the units. So compared to that, when you think about new capital projects or expansions, how would you frame the return threshold that you're using internally?

It's a good question, but it's a challenging one to answer. Depending on the project, besides the return you mentioned, there are many factors involved. For instance, do you have MVC protection? How long is the project? What are the term lengths of your deals? Overall, we've been trying to communicate that we've lowered the capital requirement for two reasons. First, we want to raise our standards concerning capital discipline. Second, it relates to where our equity is trading. With a yield around 17 on DCF, that’s something achievable quickly without time or capital delays, and without permitting or execution risks. You can compare that yield to other projects that might provide better long-term results and could be more strategic for us. If our equity were valued differently, the situation would be different. However, as we currently trade at higher yields, we need to be disciplined about our capital investments. Investing capital means you’re tying up money for several years before seeing cash flows, so we consider our current environment carefully. Importantly, our goal is to position ourselves to generate excess cash flow, allowing for discussions on distribution growth, leverage, buybacks, or project investments. I hope 2020 will showcase stable earnings, leading us to discussions on how to best utilize any excess cash to create the most value. We're having ongoing internal discussions about all opportunities, and we aim to keep our process dynamic. Ultimately, when we reach a decision, whether it's a long-term project or short-term unit buybacks, we want to feel confident in our choices. While return is often the focus, there are many other factors we consider as well.

Got it. That's helpful, Mike. And my next question is to Pam. Could you clarify the NGL price sensitivity you mentioned earlier after the Javelina plant sale versus the $23 million for every $0.05 change impact that you have pointed out in the past?

In the past, we provided a sensitivity metric of $23 million. This is a minor adjustment and not a significant change. Several factors affect this, with much of it linked to product sales volumes in our percent of proceeds contracts, including Javelina. So, while it's related to Javelina, it's not solely about that. I wanted to offer you this updated guidance as we've done previously.

I'd like to turn the call back over to Kristina Kazarian for closing remarks. Sounds great. Thank you for joining us today, 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 team will be available to take your calls. Thank you.

Thank you. That concludes today's conference. Thank you for participating. You may now disconnect.