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Morningstar | MPLX Reports Strong 3Q Results; We Plan to Modestly Boost Our Fair Value Estimate

MPLX reported strong third-quarter results, and we plan to modestly r aise our $38.50 fair value estimate. The increase is to mainly account for its distributable cash flow and thus ability to fund expansions without relying on equity being above our expectations due to stronger-than-expected pipeline growth. Despite our concerns regarding the high price paid to eliminate the incentive distribution rights earlier this year, it's hard to argue with MPLX's performance. Adjusted EBITDA increased 74% from last year's level to $937 million, and 23% when excluding dropdowns. Aside from dropdowns, growth was more weighted toward the gathering and processing operations than logistics, due to growth in the Marcellus volumes, but we're pleased with both areas.

We're impressed with the firm's slate of projects on deck, including the Permian Gulf Coast pipeline joint venture, which will transport oil to the Gulf Coast from the Permian Basin, as well as the Whistler pipeline, a 2 bcf/d gas pipeline moving gas to Agua Dulce market hub from Waha. Both pipelines are expected to be active in 2020. These projects are perhaps more important for MPLX, in our view, because they highlight its expansion efforts in the Permian Basin, where we expect strong growth, and are outside of MPLX's traditional stronghold in the Marcellus/Utica region. These efforts provide MPLX with additional levers to drive growth while diversifying it geographically in an intelligent way. Finally, we also like the Swordfish pipeline project, which is expected to move 600,000 bpd of crude in 2020 within Louisiana to the LOOP terminal. While this doesn't necessarily address one of LOOP's big disadvantages, which is more limited access to Houston and thus Permian crude than competing terminal projects under consideration, it strikes us an interesting effort.

On the Andeavor Logistics front, Marathon disclosed that it has began to evaluate the entity with the goal of shifting its efforts toward higher distribution coverage, lower leverage, and no equity issuances, in line with MPLX today. Marathon also mentioned that it plans to engage advisors over a transaction between MPLX and Andeavor Logistics, which we see as very likely. We expect MPLX to acquire Andeavor Logistics in fairly short order, perhaps even before the two partnerships' joint analyst day in early December. With Andeavor Logistics' lower-quality asset base compared with MPLX, MPLX will have its work cut out of it. However, MPLX has shown it can be quite creative with its asset portfolio and growth program, so we do think a merger makes sense.