Mplx LP Q1 FY2022 Earnings Call

Welcome to the MPLX First Quarter 2022 Earnings Call. My name is Elan, and I will be your operator for today's call. Please note that this conference is being recorded. I would now like to turn the call over to Kristina Kazarian. Kristina, you may begin.

Good morning, and welcome to the MPLX First Quarter 2022 Earnings Conference Call. The slides that accompany this call can be found on our website at mplx.com, under the Investor tab. Joining me on the call today are Mike Hennigan, Chairman and CEO; John Quaid, 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. With that, I'll turn it over to Mike.

Thanks, Kristina. Good afternoon, and thank you for joining our call. Earlier today, we reported first quarter results, which continue to demonstrate the cash flow resiliency and stability of our business. We delivered adjusted EBITDA of $1.4 billion, which was up 3% from the prior year, and we returned over $850 million of capital to unitholders through distributions and unit repurchases. Our logistics and storage business benefited from the recovery in consumer demand, and our gathering and processing business benefited from higher NGL prices. This quarter, we also advanced several organic growth projects. In L&S, we progressed crude gathering projects in the Permian and Bakken, as well as a number of smaller expansion and debottlenecking projects. We are investing in our Permian natural gas and NGL takeaway systems, including yesterday's announced expansion of the Whistler pipeline to 2.5 billion cubic feet per day, driven by growing demand from producers. In G&P, our growth capital focus is largely on projects in the Permian, Marcellus, and Bakken basins. In the Permian, our fourth processing plant is ramping up to full capacity and we’re progressing construction of a fifth processing plant, which will take our total capacity in the basin to 1 million cubic feet per day. With higher commodity prices, we are seeing a pickup in producer activity across our focus basins; we will maintain strict capital discipline as we assess these inbounds. Let me also highlight several pipeline contracts that we have with MPC, which are coming up for renewal. Because these pipeline systems are so critical to both MPLX's stable earnings and cash flows and MPC's operations, we are in the process of finalizing agreements to renew and extend them for 10 years and we'll finish papering them up in the next several weeks, well ahead of their scheduled year-end expiration. We believe renewal of our contracts with MPC makes economic and financial sense for both entities. Our logistics assets under contract with MPC are fit for purpose and integral to its refining and marketing system. We also remain focused on maximizing the utilization of all of our logistics assets through business with MPC and third parties. Shifting to Slide 4, we remain focused on leading in sustainable energy by lowering the carbon intensity of our operations and products, improving energy efficiency, and conserving natural resources. Through last year-end, MPLX achieved an approximately 45% reduction in its methane emissions intensity across our natural gas gathering and processing operations. As a result of our progress, in February, we expanded our goals with a new 2030 target to reduce methane emissions intensity by 75%. We are also participating in a project led by Cheniere Energy to further the deployment of advanced monitoring technologies and protocols to reduce greenhouse gas emissions across the midstream sector. As the energy industry evolves, we're working to continuously improve our environmental performance while meeting society's energy needs, focusing on sustainability and positioning ourselves to continue to deliver positive results in an energy-diverse future. Now let me turn the call over to John to discuss our operational and financial results for the quarter.

Thanks, Mike. Slide 5 outlines the first quarter operational and financial performance highlights for our Logistics & Storage segment. L&S segment adjusted EBITDA increased $8 million when comparing first quarter 2022 to first quarter 2021. Pipeline volumes were up 4% and terminal volumes were up 13% year-over-year. The benefits of these higher throughputs were largely offset by environmental costs incurred in the quarter. Moving on to our Gathering and Processing segment on Slide 6. G&P segment adjusted EBITDA increased $33 million compared to first quarter 2021, largely due to higher NGL prices. For the quarter, NGL prices averaged $1.15 per gallon, which is $0.42 per gallon higher than the average in the first quarter of 2021. Overall, gathered volumes were up 4% as compared to the first quarter of 2021, while processing and fractionation volumes were down 1% and 6%, respectively. Focusing on our largest region, the Marcellus, gathered volumes were up 1%, while processing and fractionation volumes decreased 3% and 4%, respectively. In the Marcellus, the changes in processing and fractionation volumes were primarily due to the timing of new production. And looking at the other areas, we saw growth in processing volumes in the Southwest as we've added capacity in the Permian. Moving to Slide 7. Our first quarter financial results demonstrate the earnings and cash flow resiliency and stability of our business. For the quarter, total adjusted EBITDA of $1.4 billion was up 3% from the prior year and distributable cash flow of $1.2 billion was up over 6% from the prior year. As a reminder, while we strive for stable and growing financial results, our operating expenses can fluctuate quarter-to-quarter depending on the timing of various regulatory, maintenance, and other project-related work. As we look forward in 2022, these project-related expenses could be as much as $50 million higher for each of the remaining quarters of the year as compared to the first quarter, as we complete this work over the balance of the year. Looking at other financial highlights for the quarter, MPLX declared a first quarter distribution of $0.7050 per unit, resulting in a distribution coverage ratio of 1.65x for the first quarter. In early March, we issued $1.5 billion of 30-year senior notes, and proceeds from this offering were primarily used to repay amounts borrowed under our intercompany loan with MPC. We ended the quarter with total debt of around $20 billion and a leverage ratio of 3.7x. In closing, given current business conditions, our commitment to strict capital discipline, and our continued adoption of a low-cost culture, we expect to continue generating strong cash flows, 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 Kristina.

Thanks, John. With that, Elan, we're ready for questions.

Our first question today is from John McKay from Goldman Sachs. Thanks, John. With that, Elan, we're ready for questions.

Why don't we start with recontracting? It's great to have you on the call, Mike. Since we're at the 10-year anniversary of the IPO, could you share more about the various factors you're considering? How do those contracts operate now? Are we discussing the entire portfolio or focusing on an initial set of pipes? For instance, are you not looking at areas like fuel distribution yet?

John, it's John. Let me start with that and then Mike can add on if he has any additional comments. So in Mike's prepared remarks, what we're really referring to there are the pipeline contracts, right, that would have been part of the initial IPO. So in 2012, here we are in 2022, end of this year those contracts were set to expire. And really based on maybe feedback from investors, there were questions on whether or not we were going to renew these. And again, we've continued to say these are integral assets fit for purpose for MPC. So the parties really kind of discussed this a little bit earlier in the process. That contract would have had two 5-year automatic renewals. We're going ahead and renewing it for 10. So that's how we've handled the pipeline contract. We'll look to future contracts as we move forward. Again, I think you would have heard Mike in his prepared remarks that we think renewing these contracts is beneficial economically and financially for both entities. So Mike, anything you want to add?

Yes, John, it's Mike. I often ask people, is there anything we're doing that we shouldn't be? Or is there anything we're not doing that we should be? And to our surprise, we kept getting some questions around contracts with MPC. Now, as I said in my prepared remarks, it makes financial and economic sense for both entities. So MPC is going to use MPLX assets. It's a given. So we were surprised that people were concerned about that. So our normal cadence, as John just said, would have been when they come up. But since people have asked us about it, we said, “Okay, since it’s a question in people’s mind, we’ll take that question off the table.” MPC and MPLX are going to continue to do business; it’s integral to both entities, and it’s a win-win for both entities.

I’ll follow up with a question about buybacks, but I want to focus more broadly for a moment. The refining environment is quite strong, and in the second quarter, we’ve seen a significant increase in product exports. In the past, you’ve mentioned that lower product exports tend to benefit the MPLX L&S portfolio. Can you elaborate on what the refining landscape might indicate for L&S for the remainder of the year?

John, this is Tim Aydt. I'll take that question. First off, we do see demand for refined products remaining very strong. We expect as well that refiners are going to continue to have high utilization rates, and they're going to try to meet those market needs that are out there today. Our pipeline utilization remains very high, and our terminal volumes are actually in record territory. And I think you've kind of noticed from the past that we have some pretty strong MVCs. So our contract structures are pretty solid. And as a result, we don't really have a lot of, I'd say, it's a muted sensitivity to changes in refinery utilization. So I think that's a little bit on maybe the backdrop. If you talk about maybe the exports a bit, we have a large portfolio of assets, and that includes docks in several locations that support these exports. It could be Garyville, it could be Mount Airy, it could be the Galveston Bay docks, etc. And in general, we don't really expect major swings within L&S revenue based on shifting product patterns. We have a very flexible system that can swing to the pipe in the U.S. Gulf Coast or it can swing to the water, as needed. And again, the MVCs back up several little systems. I think if you look at the crude side, we're similarly well positioned, I would say, to participate on the crude exports. We have the South Texas Gateway, and we have our loop ownership interest, and both of those have those capabilities. So hopefully, that's helpful.

John, it's Mike. I just wanted to bring to your attention that MPC experienced two outages on the Gulf Coast that affected our business. One was a power outage in Texas City that impacted our Galveston Bay facility, and the other was an unplanned outage at Garyville. I thought it was important to highlight this while discussing the quarterly results.

I just wanted to touch base on processing needs across your footprint, particularly I guess, in Appalachia and the Permian. Appalachia, I'm curious with incremental NGL egress with Mariner East online with the shell cracker coming, do you see more of a move towards the liquids-rich production there? And how could that impact your processing? And similarly, in the Permian, we see tightness in processing there and just wondering, what type of opportunities that might breathe for MPLX?

Greg, do you want to take that one?

Sure. Thanks, Mike. Jeremy, to address your question about Appalachia, we are excited about the Monaca plant, which we've been anticipating. We are currently building our latest de-ethanizer fleet in Smithburg, West Virginia, with plans to have it operational by early third quarter alongside the cracker, which will boost our ethane production capacity by over 300,000 barrels a day. When you consider the four pipelines for transporting ethane from the basin, along with the Monaca facility and the recently completed expansions of Mariner 2 and Mariner 2X that enhance our ethane capacity, along with the rising prices for ethane, it presents a good opportunity for producers to recover more ethane in the basin. As for overall activity, several of our larger producers have publicly stated they are focusing on maintenance and low single-digit growth. Therefore, we expect liquid production for propane and heavier products to remain stable, with the takeaway lines being well-balanced. Moving to the Permian, this area is experiencing significant growth for us as we complete our fifth plant later this year and continue to ramp up utilization in our fourth plant, Preakness, which started operations late last year. Given the current crude and gas prices, we expect continued growth in that region related to takeaway volume. Tim, you might want to add some insights on the downstream aspect of the Permian. I hope that answers your question, Jeremy.

Yes, Jeremy, I would just add that in the Permian region, there are many forecasts predicting an increase in demand of up to 6 Bcf a day by 2028. This will significantly impact both processing and pipeline takeaway capacity. As this develops, you'll see growth in the LNG markets, indicating that continued investments will be necessary in the midstream sector.

Got it. And then just pivoting back towards the contract renewals as you wait out there. Just wondering, how would you say the market today compares to the market when those contracts were first signed? Just wondering if you'd say the market is better or worse than when those rates were first struck.

Jeremy, it's John again. Remember, these are pipeline contracts. A lot of them are going to have base rates or other rates that have been moving, frankly, year-to-year. So maybe a little bit different if you're thinking of our marine contract, which we renewed about a year ago. That would have had a completely different structure than what’s in these pipeline contracts.

Got it. So is it fair to assume no real change in the rates of material size? Is that the right way to think about it?

Well, yes, as I was saying, the rates have already been changing every year based on other factors. So we're really just looking to kind of maintain the terms and lock in a term that we already planned on renewing, so.

Let me just add that most of them are indexed just like many pipelines are. So as John mentioned, it can be indexed to FERC or something else. So over time, there's a changing, but it's still a very market-related rate.

And Mike, it's good to hear you on the call as well. For my first question, I wanted to dig into the capital allocation framework as it relates to MPLX's return of capital strategy. It appears there's roughly $200 million or a little more left on the share buyback authorization. And I was curious if you could share some thoughts around future return of capital, including potential reauthorization of the buyback program or a potential special distribution, similar to what we saw in 3Q of last year.

Brian, it's John. I'll start with that, and then Mike can provide additional comments. Our framework remains the same as before. We aim to maintain a strong balance sheet, invest in the safety and security of our assets and employees, secure our distribution, and identify growth capital opportunities. Regarding any residual capital, we consider how to return it, whether through distributions—base or possibly supplemental—or unit repurchases. This quarter, we generated about $850 million in free cash flow, with a base distribution of $758 million and $100 million in unit repurchases. We’ve assessed our position. I want to reiterate something we mentioned last quarter: don't assume that our programmatic unit repurchases from last year will continue at the same pace this year. We're focused on how to create value for all unitholders, and a supplemental distribution is definitely a tool we can use when considering the return of capital.

Great. I appreciate all the color. Maybe as just a follow-up on some of the growth project questions as we start to look at 2023 and beyond. You alluded to finishing up your fifth processing plant in the Permian at year end. Maybe could you talk about the potential for your further growth projects, will that include a BANGL pipeline expansion? And when could we see that? And then what are your thoughts around participation in the new greenfield natural gas pipeline out of the Permian post the reannounced Whistler expansion as well?

Yes, I will address that, Brian. You are correct that we announced the expansion of the Whistler pipeline to 2.5 Bcf yesterday. We anticipate much more growth on the natural gas side beyond the Whistler expansion and the other expansions currently being announced. Most forecasts suggest that a second Permian gas pipeline will be necessary by the end of 2025, and another by 2028. Therefore, there are definitely opportunities to seek incremental investments, and we have been clear about our intention to continue exploring the natural gas and NGL value chain. Regarding BANGL, we are still monitoring that. In January, we brought on another partner, Rattler Midstream, which gives us additional dedicated acreage, among other benefits. Over time, we expect to see NGL volumes increase, and we have several cost-effective expansions that we can implement.

And our next question is from Keith Stanley from Wolfe Research.

First, I wanted to ask on the Whistler expansion. So I think the initial project was fully contracted under 10 year terms. Should we expect a similar approach here and then just any thoughts you can give on how to think about the tariff for an expansion and how that might compare to how you would look at a new build overall?

So Keith, this is Tim. I'll start. I may not have all the specific answers to your questions, but as we announced yesterday, we are expanding that. Just for some background in case others have questions, I mentioned in the first quarter that we were evaluating this, and we've concluded that evaluation. It's important to note that the system was originally designed and permitted with potential expansion in mind, making it very capital-efficient without needing new rights of way or redesign. Our compressors are on order, and we expect the expansion to be in service by September 2023. Regarding the contract terms, while I can’t go into specifics, I can say that they are long-term take-or-pay agreements, fee-based, which means they provide very steady cash flows for the joint venture. Overall, being an expansion, it is capital efficient and lower risk, making it a strong investment, but I'll leave it at that.

Okay. Great. And then second one, I just wanted to follow up on volumes in the quarter. So your G&P volumes were down a little bit versus the fourth quarter kind of across the regions. And I feel like we've heard some consistent commentary from others today, especially in Appalachia. But just how are you thinking about volumes over the balance of the year in G&P, both Appalachia and then Southwest also looked like it was down a little bit even with Preakness presumably ramping up a little?

Greg, do you want to take that?

Sure, starting with Appalachia, the Utica has seen a continued decline in processing volume as our focus has shifted to some of the dry lean gas in that area. The gathering in the Utica fluctuates and is most affected by the introduction of new dry lean wells and the timing of those pads. We experienced some weather-related impacts on our processing gathered volumes, which also affected fractionation in the Marcellus. Most of these issues arose in early February due to ice, power outages, and freeze-offs, which significantly impacted the Marcellus. Moving to the West, we have seen continued growth in the Permian Delaware, but there are other areas that have faced challenges due to weather or the timing of pads coming online. For example, the Bakken is still facing weather troubles as well as the Rockies. A key point to note is that weather has a considerable impact on our operations in the first quarter. Additionally, even with a maintenance-level drilling program planned for the year, this does not guarantee stable levels quarter-to-quarter. Many production schedules, influenced by weather, construction, and drilling timelines, tend to be more weighted towards the latter part of the year, resulting in some natural declines associated with the timing of new pads coming online versus the ongoing decline of existing wells.

Just really one, commodity prices are obviously very high right now. We've seen some M&A transactions in the G&P space over the last few months. Just curious, any updates on your long-term initiatives to divest some of your noncore assets? Are you seeing any changes in the market?

Yes, Michael, it's Mike. We don't really have anything new to report there. We had mentioned a while back that we wanted to change our portfolio a little bit, but the market was not at the same place we were. Since that time, we're now looking at currently $8 gas. And I said a couple of times on calls, our basins are generating free cash flow. So even though some of them are not going to get a lot of capital in the future because they're not long-term strategic, in the meantime, though, they're generating free cash. So we're still steadfast in what we believe is the right valuation for the assets. And if others met it, then something could happen. But right now, we don't have anything going in that regard at all.

And I am showing no further questions at this time.

All right. Well, thank you, everyone, for joining us today. If you have any questions that were not answered during the call today, please feel free to reach out afterwards. We're here to help out at any time. Operator, thank you.

Thank you. This does conclude today's conference. You may disconnect at this time.