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Morningstar | Boosting Our MPLX FVE to $44 from $38.50 After Blowout Quarter; Units Undervalued. See Updated Analyst Note from 05 Nov 2018

After taking a deeper dive into MPLX's quarter and considering its broader slate of projects on deck (including the Permian Gulf Coast, Whistler, and Swordfish pipelines), we are boosting our fair value estimate to $44 per unit from $38.50. Our narrow moat rating is unchanged. MPLX is climbing the ranks to quickly approach the levels of the premier midstream entities. It is one of the few midstream companies we cover that can now claim it is self-funded on the equity side with a coverage ratio above 1.3 times, leverage below 4 times, no incentive distribution rights, and a reasonable pathway toward increasing both EBITDA and distributions over time. Broadly, MPLX has a dominant position for gathering, processing, and fractionation in the Marcellus/Utica region, where we expect significant production growth over the coming years, enabling the firm to lift fees but also add considerable capacity. We consider the units to be undervalued as investors do not appreciate the strength of MPLX's asset network nor its growth prospects with gas production expected to increase significantly.

Beyond that, though, we're impressed by MPLX's creativity in sourcing new pipelines that expand its geographic reach. Both the proposed Whistler and Permian Gulf Coast pipeline serve the Permian Basin, outside MPLX's stronghold in the Marcellus/Utica region, and present new opportunities for MPLX for near-term growth and to source incremental investments. It can be difficult to source new pipelines in a region where the firm doesn't have extensive existing infrastructure, and we think this speaks to the quality of the relationships that MPLX has in place across the industry.

We've made a number of changes to our forecasts. First, pricing for MPLX's refined products pipelines has been sharply higher than expected, as we now expect average pricing to increase about 15% year over year to about $0.85 per barrel by our estimates. We now also assume pricing increases of 7% annually on average over the next few years. This shift is because we think the refined products pipelines located in the Appalachian region directly serving Marathon refineries have strong pricing power, and MPLX continues to add long-haul pipelines with higher tariffs to the mix. Our prior assumptions were $0.74 a barrel average for 2018 and 2% price increases. We assume lower pipeline costs after truing up our forecasts with year-to-date numbers, given the clean quarters reported since the drop-downs were completed.

Second, we've incorporated the latest project announcements around gathering and processing projects (about 1.8 billion cubic feet per day of planned projects) as well as the three previously mentioned pipelines as part of equity income. These additions boosted our capital spending outlook for 2018-20 to $6.2 billion from $4.6 billion.

Third, we've updated our estimate for the minority interest line item for MPLX to its parent Marathon Petroleum to account for the general partner's noneconomic interest in the entity to true up our model to the company's reported results. As a result, our EBITDA forecasts have increased to $3.5 billion, $3.9 billion, and $4.1 billion for 2018-20 from $3.3 billion, $3.5 billion, and $3.7 billion, respectively. We also saw similar increases in distributable cash flow. The increases in EBITDA allowed us to lower our assumptions for debt required over the next few years and eliminated the need for equity issuances to fund its spending program and distributions to unitholders.