MPLX(NYSE: MPLX) offers investors an eye-popping payout. The master limited partnership (MLP) currently yields 8.4%, several times above the S&P 500's 1.3% dividend yield. The company's ability to increase its already monster yield adds to its appeal. It has grown its payout every year since its formation in 2012, including by 10% in each of the last two years.
The MLP is adding more fuel to its distribution growth engine. It's spending $625 million to acquire the Utica position of fellow MLP Summit Midstream Partners(NYSE: SMLP).
Drilling down into the deal
Summit Midstream Partners has agreed to sell its Summit Midstream Utica subsidiary to MPLX for $625 million in cash. The business owns a 36% interest in Ohio Gathering Company, a 38% interest in Ohio Condensate Company, and several wholly owned assets that serve the Utica and Point Pleasant shale formations in Ohio. These operations include natural gas gathering systems and a condensate stabilization facility. The assets generate steady cash flow backed by long-term, fee-based gathering agreements.
The transaction marks a key turning point for Summit Midstream Partners. The MLP has now concluded its comprehensive strategic review process. Following the deal, it intends to convert from an MLP to a traditional C-Corp and focus on its operations in oilier regions. The transaction will give it the cash to reduce its leverage ratio by 1.5 times, pushing it below 4.0 and toward its 3.5 target. That will give it more flexibility to resume cash distributions to its investors and invest in expanding its operations in its core focus areas.
Meanwhile, the deal will enable MPLX to enhance its operations in the Utica. It has been Summit Midstream's joint venture (JV) partner in Ohio Gathering and Ohio Condensate since 2014. It owns interests in and operates those JVs. The deal will enable it to increase its stakes in those businesses while also picking up Summit's wholly owned assets in the region. Its greater scale should save it money and boost its free cash flow. That will give it more fuel to pay distributions.
Flexing its financial flexibility
Summit Midstream needed to sell these assets to strengthen its financial profile. That provided MPLX with the opportunity to use its financial flexibility to enhance its operations. The MLP ended last year with a 3.3 times leverage ratio, well below the 4.0 times its stable cash flows could support. It also had $1 billion in cash on its balance sheet and significant available credit. The company ended the year with a large cash balance even though it capitalized on another opportunity to consolidate a JV in December. It bought out a partner's remaining 40% interest in a gathering and processing (G&P) JV for $270 million.
MPLX is producing significant excess cash after funding its big-time distribution. Last year, the MLP generated $5.4 billion in net cash from operating activities. It distributed $3.3 billion to investors and spent $1.3 billion on capital projects to maintain and expand its operations. That enabled it to produce $839 million in excess free cash last year, which it used to fund the G&P JV buyout and build up the cash on its balance sheet. Even after funding the Summit deal, it will have significant cash and financial flexibility to continue making acquisitions as other opportunities arise.
On top of acquisitions, MPLX has a solid organic growth engine. It expects to spend about $950 million on organic expansion projects this year. It's building three more natural gas processing plants that should come online through the second half of next year. In addition, it has two large-scale pipeline expansions underway, which should start in the third quarter of 2024 and the first half of next year, respectively.
MPLX's growth drivers and strong financial profile should enable it to continue increasing its high-yielding distribution.
Enhancing its ability to grow the distribution
MPLX is using some of its financial flexibility to enhance its operations in the Utica. That deal will increase its cash flow, giving it more money to grow its high-yielding distribution. Add in its rock-solid financial profile, and it's now an even more compelling option for income-seeking investors.
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Matt DiLallo has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
