MPLX Lp (MPLX) Q4 2019 Earnings Report, Transcript and Summary

Welcome to the MPLX Fourth Quarter 2019 Earnings Call. My name is Sheila and I will be the 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. [Operator Instructions]. Please note that this conference is being recorded. I will now turn the call over to Jim Mallamaci. Jim, you may begin.

Good morning and welcome to the MPLX fourth quarter 2019 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. As you know Kristina Kazarian typically hosts this call. I’m doing that today because Kristina is celebrating the arrival of her baby girl, a week-and-a-half ago. Both Kristina and baby Agnes are doing well. 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 I’ll turn over the call to Mike Hennigan for opening remarks and fourth quarter highlights.

Thanks Jim. Good morning and thank you for joining our call. I'm pleased to report that MPLX delivered excellent results with fourth quarter adjusted EBITDA of $1.3 billion and distributable cash flow of $1 billion which provided continued strong distribution coverage of 1.4 times and leverage of 4.1 times. Full-year adjusted EBITDA was $5.1 billion including the results of Andeavor Logistics, supporting the return of capital of approximately $3 billion to our unitholders. MPC’s Board of Directors Midstream Special Committee is advancing its work and we continue to expect MPC’s board to provide an update during the first quarter. We have also continued to progress our slate of high return logistics and storage projects in the Permian to Gulf Coast Corridor. In addition, we’re again updating our 2020 growth capital targets. Last quarter, we guided to a target of approximately $2 billion down from the $2.6 billion estimate when the merger with ANDX came together. We’re now guiding to a target of approximately $1.5 billion for 2020. This reduction shows our continued commitment to high-grade our project portfolio, focusing on the highest returns and maximizing long-term value creation. As our earnings continue to grow, and we continue to be disciplined in our approach to capital investment, we will be targeting positive free cash flow generation after both capital investments and distributions in 2021. This inflection is expected to allow both the funding of our distribution and capital program entirely from internal generated cash flow and provide us improved capital allocation flexibility for unit buybacks or debt reduction. Turning to Slide 4, we can discuss this plan a little more detail. In 2019, our operating cash flow of over $4 billion supports the return of capital of approximately $3 billion to our unitholders. As a result, we funded our growth capital program with retained cash and debt. For several years, we have been committed to funding our growth project portfolio from a combination of debt and operating cash flow. Given our attractive growth capital project portfolio, we have historically funded around 50% of our growth needs with debt. We’ve done so, while maintaining healthy distribution coverage of around 1.4 times, and investment grade leverage of approximately four times. Looking forward, we expect to achieve positive free cash flow net of both capital investments and distributions in 2021. This is expected to be achieved through a combination of continued earnings growth and continued high grading of our capital, our growth capital plan through strict investment discipline. As a result, we believe that we will be positioned to pursue incremental capital allocation opportunities including leverage reduction or unit repurchases, broadening our value creation options, and enhancing long-term flexibility. On Slide 5, you could see the highlights related to further optimization of our growth capital portfolio. As I mentioned last quarter, our first priority following the combination with ANDX was to high-grade the combined capital portfolio. And at that time, we announced the 2020 growth capital target of approximately $2 billion. We've since identified additional opportunities to further streamline our growth capital expenditures focusing on the most attractive returns. We’re now targeting growth capital of approximately $1.5 billion for 2020 and approximately $1 billion for 2021. As you saw on the previous slide, these targeted reductions are an important element of our plan to achieve excess positive cash flow after capital investments and distributions in 2021. We’ll continue to emphasize the growth of our Logistics and Storage segment. Our growth capital will remain focused on advancing our strategy of creating integrated crude oil and natural gas logistics systems from the Permian to the U.S. Gulf Coast. And in our Gathering and Processing business, we will continue planned investments in infrastructure on a just-in-time basis to support the evolving growth plans of our producer customers. As we look forward, we expect slowing volume growth in the Northeast will allow our portfolio of premier assets in the region to continue to deliver positive cash flow, which can be deployed to our other strategic investments especially in the Permian. In 2020, we expect the completion of our Mt. Airy Terminal expansion in our L&S segment along with significant progress for our major Permian projects. As we look forward to 2021, we expect the completion of our crude oil, natural gas, and NGL pipeline projects in the Permian and the generation of cash flow from these assets. Now, let me turn the call over to Pam to discuss our fourth quarter and full-year 2019 operational and financial results.

Thank you, Mike. Slide 6 provides fourth quarter Logistics and Storage segment highlights. Note that all comparisons being provided reflect the inclusion of the ANDX business acquired by MPC as part of its combination with Andeavor in October of 2018. Total pipeline throughputs averaged 5.1 million barrels per day, relatively consistent with the fourth quarter of 2018. Terminal throughput averaged 3.3 million barrels per day for the quarter, an increase of 4% versus the fourth quarter of 2018. During the fourth quarter, the Whistler natural gas pipeline continued to progress. This 2 Bcf per day capacity project is now approximately 95% committed with minimum volume commitments. The startup is expected in the second half of 2021. The Wink-to-Webster Permian crude oil project in which we have a 15% equity ownership of the joint venture continues as planned and 100% of the contractable capacity is also committed with MVCs. We continue to expect the pipeline system to be in service early 2021. And we're still pursuing a final investment decision for our Permian to Gulf Coast NGL pipeline called BANGL. We continue our commercial work on this opportunity and expect a final investment decision in the near-term. This project is also projected for startup but in late 2021. Lastly, the reversal of MPC’s Capline pipeline which MPLX operates progressed with the completion of the mainline purge in the fourth quarter and additional project activities are progressing per plan. Once reversed, Capline will be capable of supplying discounted Mid-Continent and Canadian crude to St. James, Louisiana, which has a direct connection to MPC’s Garyville refinery. We expect Capline to begin light crude service in mid-2021 and heavy crude service in 2022. Slide 7 provides fourth quarter Gathering and Processing business segment highlights. And again note that all comparisons being provided reflect the inclusion of ANDX businesses acquired by MPC as part of its combination with Andeavor in October of 2018. Fourth quarter gathered, processed, and fractionated volumes increased year-over-year primarily driven by growth in the Marcellus, Utica, and Bakken regions. There's been a lot of discussion related to the volumes in our G&P business in the Marcellus Basin. As you know, these volumes are very dependent on producer activity in the region making it particularly difficult to forecast as producer plans continue to evolve on a real-time basis. For the full-year of 2019, our volumes in the Marcellus and Utica continue to show significant growth with gathered volumes increasing 18%, processed volumes increasing 14%, and fractionated volumes increasing 12% versus full-year of 2018. Despite the challenging macro environment for natural gas, we still expect continued growth in the Northeast as some of our largest customers are significantly hedged through 2021. In the fourth quarter, we placed into service our final two plants 12 and 13, along with the C2 fractionator at the Sherwood processing complex in the Marcellus. In addition, the Tornado processing plant was placed into service in the Permian. These projects collectively added 600 million cubic feet per day of incremental processing capacity. Now turning to our financial highlights on Slide 8. Adjusted EBITDA was $1.3 billion for the fourth quarter of 2019 and full-year adjusted EBITDA was approximately $5.1 billion with approximately two-thirds generated by the Logistics and Storage segments. For the year, we generated $4.1 billion of distributable cash flow, supporting the return of capital of approximately $3 billion to our unitholders and the remainder supported our 2019 organic growth capital program. Turning to the bridge on Slide 9, we show the change in adjusted EBITDA from the fourth quarter of 2018 to the fourth quarter of 2019. The Logistics and Storage segment increased $44 million year-over-year in part driven by increased terminaling throughput. The Gathering and Processing segment increased to $29 million primarily driven by strong growth in gathered processed and fractionated volumes from new assets placed into service over the past year, partially offset by lower commodity prices. On Slide 10, we provide a summary of key financial highlights and select balance sheet information. We ended the year with a leverage ratio of 4.1 times and approximately $4.4 billion of liquidity, including $3.5 billion available on our bank revolver and approximately $900 million 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 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 Mike for some concluding remarks.

Thanks Pam. In 2019, we executed operationally, delivered strong financial results, and continued to high-grade our capital plan, moving those closer to free cash flow after capital investments and distributions. As we begin 2020, we’re focused on executing our business plan and looking forward to the conclusion of the MPC Midstream Special Committee. Now let me turn the call back over to Jim.

Thanks Mike. 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.

Thank you. We will now begin the question-and-answer session. [Operator Instructions]. Our first question comes from Charlie Barber with J.P. Morgan. Your line is open.

Hey, good morning. I just wanted to start on the 2020 backlog. Can you talk about the drivers to that reduction, just trying to gauge what level of timing versus any projects being removed from the backlog looks like BANGL may have sort of [indiscernible]?

Hi Charlie, this is Mike. What I would tell you give you a little bit of a long answer. So ROIC and investment discipline have always been a high priority for us. At the same time, we've had the goal of getting the free cash flow, but we didn't want to pass on a couple we think are really good opportunities in Wink-to-Webster, Whistler et cetera. Those projects are MVC backed long-term committed fee-based projects. So as a result of that, we just continue to put those in. And as you mentioned, BANGL is still in our program, and I'll talk about that in a second. But the bottom line is we continue to high-grade the portfolio, particularly after the ANDX merger. So as they're going through that process and knowing that we wanted to have a higher ROIC on our portfolio and a lower risk profile, we felt comfortable given an early indication at the last call and now a more firm indication of where we're going to be in 2020 as well as you know some future outlook as to where we think we're going to be in 2021. The main driver here though is we’re looking to put ourselves in that excess free cash flow after distributions, which is about $3 billion. So we feel -- we return a significant amount of our $4 billion of cash flow to unitholders today. But after distributions and after capital, we still want to be in a free cash flow position as quickly as we can to offer more flexibility for unit buybacks or leverage reductions. Hopefully that gives you a good feel for the overall thought process there.

Yes, it does. I guess on the free cash flow side, when you talk about leverage reductions and unit repurchases, can you talk about how you try to prioritize those two and what criteria you have in place to do that?

Well, the most important thing is to get in that position where we have that discussion. So currently, we're not quite there yet. But when we get there, we're going to look at the opportunities of both, we'll see where the unit prices and evaluate it and we'll also look at where we stand from a debt standpoint. So the good news is we want to get there as quickly as we can and then we'll optimize what's the best option for us at that time.

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

Good morning, this is Aga Zmigrodzka dialing in for Shneur Gershuni. Does the MPC board evaluating asset swap between MPC and MPLX as a part of the review and is it why no EBITDA guidance was released today?

Aga, I didn’t hear the second part of that question. But just answering to the first, so the committee is looking more at the overall structure of what we're doing as far as MPLX et cetera. Specifically towards you, I think your question of drops we do have a couple assets that sit at the MPC level that are candidates Gray Oak, South Texas Gateway, Capline that we’ve talked about in the past, but nothing has progressed on those. And our position has been until they're generating cash, it’s a little premature to have a conversation on that. And then I didn't hear your second question.

It was about EBITDA guidance. Is that why we're not giving you the EBITDA guidance today, but it's really just around waiting for the process to play-out with the committee. And then I'll just also add, we mentioned that the producers’ plans are changing on a real-time basis and so some of our key producers have not shared their results for the year and their outlook and their capital spending plan for 2020. So probably around the time that we hear from the Midstream Committee and we’re able to share that update with you, we’ll also be in a better position to have an idea of what the producers think their outlook will be for 2020 as well. Like I said our largest producers are substantially hedged. We do continue to expect some growth and particularly in the Marcellus, but we would expect to provide a little better insight into 2020 when we conclude the process with the Midstream Committee.

Our next question comes from Spiro Dounis with Credit Suisse. Your line is open.

Hey, guys, it's John Mackay on for Spiro. Just a quick one going back to 2020 CapEx. Do you feel at this point, this is as low as you guys can go? Or if let's say the production outlook worsens, could your numbers flex down a little bit more?

Yes, I think it's a pretty good number, John. The biggest challenge we have on hitting it exactly is, a calendar number as opposed to rolling project type numbers. So we're always trying to really estimate where is this going to be at the end of December as it rolls into 2021. But I think that's why we said it's approximately 1.5 could be a little bit in and around that. I don't anticipate that changing a whole lot at this point as we’re obviously getting into the year and getting pretty firm. But there may be as the year progresses a little bit of flex around it, but I'm not expecting a lot.

All right, thanks Mike. And then just on being free cash flow positive in 2021. How do you guys think about that in the context of potentially FID and BANGL and spending maybe on the fracs as well? And then also how you factor in that to the strategic review? Thanks.

Sure. So first of all on BANGL, we’re still pursuing an FID hopefully in the short-term, we thought we might be there by now. We still feel very good that the industrial logic still holds. We're continuing the commercial work. So we're still feeling good about that. And we told people continually that BANGL is in our capital estimates. So that's the first part of your question. Second part was remind me again, what's the second part was?

The second part is just you've given us kind of formal guidance of being free cash flow positive after distributions in 2021? Is that -- is there any chance that could change after the featured review? Or is that, something we can really focus on for now?

Yes, that's a great question, John. I mean obviously anything that could change out of the strategic review we’ll be announcing later. Right now, we're saying based on the plans that we have, based on the business plan that we have today, we believe very comfortably that we can get ourselves into a good position of free cash flow by managing our capital, et cetera. Anything that comes out of the committee, obviously, we'll have to deal with that one set at a conclusion. But for right now, we're giving you as much guidance as we can based on the capital that we've been trying to update since the ANDX merger and like I said, we gave you a quick update after the last call. And now we feel more firm for 2020 as well as trying to give you some outlook as to where we're driving the portfolio.

[Operator Instructions]. Our next question comes from TJ Schultz with RBC Capital. Your line is open.

Hey, good morning, just on the path to free cash flow in 2021. The lower CapEx is a pretty clear driver. But what are your assumptions on G&P volumes to get there, I understand things are changing on a real time basis, but as a takeaway that you view producers as sufficiently hedged the next couple of years to give you that comfort level in 2021. Or could the producers react differently than you expect now that that could kind of push out getting to that free cash flow level?

Yes, now I'm going to give a little introduction, I'm going to let Greg Floerke who runs our Gathering and Processing give some comments. I mean first of all, I would tell you I've always said everybody to look at these results year-on-year because it's a stair step as this has planned startup. So sequentially it’s hard to get a good feel for the business. And as Pam reported, we started up Sherwood 12 and 13. And as she also reported, several of the largest customers up in the Northeast are Heads, so they're not experiencing the tough macro environment. The number which we think is still pretty meaningful is year-on-year 2019 versus 2018, Marcellus, Utica growth was up 18% in gathering, 14% in processing, and 12% in fractionation. So our view is expectation for it to slow down as the producer customers move in their financial models. But at the same time, we still anticipate some good growth up in that area. So we’re still very bullish on the area. Now I'll let Greg give a couple comments on the specific operations that we got going there.

Yes, following on what -- it’s Greg Floerke, following on Mike’s comments. Yes, we are still seeing growth in the Northeast. The Northeast is a good story because we're, I think I mentioned last quarter; we're over 90% utilization. You'll see that temporarily drop down because we brought two plants online and filled up the remainder of the Sherwood plant side. So we're now moving on to the adjoining Smithburg site and planning on completing that plant bringing it online third quarter. So we do still see strong hedge positions. But if you look at our capacity, we're at a point now where we're just incrementally trying to fill in of gas and capacity that we have left by customer and plant, and I think the takeaway residue lines are in a similar situation. So it's been a really good spot. We're continuing to grow in West Texas. We turned up our Tornado plant earlier this year, and now we've got our Preakness plant planned for later this year. And so we continue to grow volumes and gradually fill those plants in Western Oklahoma as well. Some areas are continuing to climb because the rigs continue to focus more in certain areas. But, yes, I think we're still supportive of growth into that degree. We're also turning up our Hopedale or Fifth Hopedale plant later in the year to account for the corresponding liquid growth.

Okay. Does the 2021 CapEx include another Permian plant?

We hope to continue to grow another as we continue to bring volume on, we're hopeful we'll continue to see growth here but we're not giving, I don't think we're giving guidance yet on our capital plan for 2021.

Yes, we do highlight there will be additional Permian processing, but we haven't given dates on that. We have like some of that on Slide 5 for 2019, 2020 and 2021, we show what we expect will be coming on for L&S and G&P. So if you take a look at that that might be helpful. And then in the Appendix we also list very specific projects and when they're expected to come online. But as we've said before, we expect in the near-term will have a Bcf of processing capacity in the Permian that will yield 125,000 barrels a day of liquids, both would be directed toward our integrated models that we’re building from the Permian to the Gulf Coast. So the dry gas would be feeding Whistler, and the liquids coming off of the plants would be feeding the BANGL project.

Our next question comes from Ujjwal Pradhan with Bank of America. Your line is open.

Hi good morning everyone. This is Jason Fernandez on for Ujjwal.

Good morning.

My question is just dig a little bit deeper on the 2020 CapEx, I know you mentioned that the ROIC was the key driver there but can you sort of discuss if there was a combination of G&P or traditionally of the L&S assets that might have gotten high graded out there, it looks like the ratio of spend is consistent from last quarter step-down?

Yes, a good portion of the reductions from the original plan were in the G&P area but there was also some L&S projects as well that we didn't believe met the ROIC hurdles that we would like for those. So the best way to think of it is we're trying to high-grade ROIC also try and put ourselves in the best risk profile. And like I said earlier is part of the way we look at some of these other projects like Wink-to-Webster and Whistler et cetera that have MVCs long-term MVC projects obviously give us a different risk profile than some of the other types of contracts that end up in the Gathering and Processing area. So it's a continuum. We felt that we needed to give you some indication last quarter after the ANDX combination. So we gave you an initial indication, and at this point, we feel much firmer for 2020. And then the outlook to 2021, as I mentioned, that's been a goal of ours for some time, would have gotten there sooner except for we still believe that if you can deploy capital at some very high returns, like in Wink-to-Webster or Whistler et cetera, we're not going to pass on those opportunities because we think that creates a lot of value for unitholders. But with that in mind, we've been trying to drive the high grading to a point where we think we'll be in a free cash flow position after capital and after distributions. And I try and remind everybody that our return of capital is a pretty significant number of $3 billion out of $4 billion of operating cash flow.

Okay, great. Thanks for the clarity there, very helpful. And then my last question is on 2021, you’ve spoken about a little bit, but can you dive into few of the other variables in terms of how we should think about distribution growth and leverage out into 2021 to hit that free cash flow growth target?

Yes, this is Pam. And I'll just reiterate what I said earlier in terms of guidance, we think we'll be in a better position and don't want to get my mic wasn't on, sorry it's Pam. As I mentioned earlier that we'll be in a much better position to provide some guidance for the outlook once we get on the other side of the Midstream Committee Review process. But with respect to managing -- getting the free cash flow and managing our leverage, we've said that we're comfortable around four times at times it will tick-up above, below four times and that we would be expecting it not to get meaningfully above where it is to what we reported for the end of the year for 4.1. But when we get to free cash flow, the idea is to have a lot of flexibility from a financial point of view to allow us to make what we think would be the right decision at the time whether to increase returns to unitholders, or whether to reduce debt, or use buybacks as a different form of return of capital which seems to be a growing interest from our unitholders. So as Mike said, we return a lot of capital today in the form of distributions. We’ll continue to evaluate as we get to free cash flow, what the right mix is in terms of the capital return and always managing our leverage to an investment grade credit profile.

Thank you. And our last question comes from Vikram Bagri with Jefferies. Your line is open.

Good morning everyone. I wanted small clarification, and I apologize if I've missed it. You've not reached FID on BANGL yet. But I was wondering if it was part of your 2020 capital outlook of $2 billion prior to this reduction in capital? And is it part of 2021 capital plan? And if so, I was wondering what kind of financing assumptions that are embedded into that, that outlook for the pipeline? Thank you.

Yes, Vikram, I did mention that earlier. BANGL is still part of our plans and we still are pursuing FID on that project and it is in our capital plans at this point. We haven't specifically given guidance on the individual project itself other than it is part of the 1.5 in 2020 and the 1.0 in 2021.

Thank you. I will now turn the call back to Mr. Jim Mallamaci for closing remarks.

Thank you for joining us today. And thank you for your interest in MPLX. Should you have 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.

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