Strategic Investments In Natural Gas And NGL Assets Spark Revenue And Profit Growth

Key Takeaways

• MPLX's strategy focuses on expanding its natural gas and oil value chain in the Permian Basin, indicating a potential for increased volumes and revenue.
  
• The company's investments in key pipeline and processing assets are expected to foster higher earnings and support its capital return strategy, promising positive impacts on shareholder returns.
  
• MPLX faces risks from rising operating expenses, geographical reliance on production basins, execution risks in growth projects, regulatory changes, and market demand fluctuations for natural gas and NGLs.

Catalysts

Owns and operates midstream energy infrastructure and logistics assets primarily in the United States.

• MPLX is leveraging its wellhead-to-water strategy to enhance its natural gas, NGL, and crude value chain in the Permian Basin, creating opportunities for volume growth and increased revenue.
  
• The company’s investments and acquisitions in strategic assets, like the additional interest in the BANGL NGL pipeline and the Wink to Webster crude oil pipeline, are expected to be immediately accretive, contributing to higher earnings and returns on invested capital.
  
• MPLX is advancing high-return growth projects such as the Blackcomb Natural Gas Pipeline and the expansion of the BANGL NGL pipeline, which are anticipated to drive future growth in cash flow impacting revenue positively.
  
• The completion of the ADCC natural gas pipeline and the Preakness II gas processing plant supports the company's expansion in the Permian and Marcellus basins, increasing processing capacity and contributing to higher volumes and revenue growth.
  
• MPLX’s return on and return of capital strategy, including significant unitholder returns through distributions and share repurchases, coupled with its low leverage and strong coverage, positions the company for continued distribution growth, impacting earnings per share positively.

Assumptions

• Analysts are assuming MPLX's revenue will grow by 2.7% annually over the next 3 years.
• Analysts assume that profit margins will increase from 37.9% today to 39.6% in 3 years time.
• Analysts expect earnings to reach $4.7 billion (and earnings per share of $4.63) by about September 2027, up from $4.2 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 13.5x on those 2027 earnings, up from 11.0x today. This future PE is greater than the current PE for the US Oil and Gas industry at 10.1x.
• Analysts expect the number of shares outstanding to grow by 1.93% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 7.99%, as per the Simply Wall St company report.

Risks

• Rising operating expenses may impact net margins negatively for MPLX as they continue to scale their operations.
  
• The reliance on producer activity in specific basins like the Marcellus, Utica, and Permian could pose a risk to revenue if there's a downturn in drilling and production within these regions.
  
• The substantial investment in growth projects, including the Blackcomb Natural Gas Pipeline and the expansion of the BANGL NGL pipeline, involves execution risk that could affect expected returns and, consequently, earnings.
  
• Regulatory changes or environmental policies may introduce unforeseen challenges in pipeline development and operation, potentially impacting future revenue streams.
  
• Market fluctuations in the demand for natural gas and NGLs could affect volume growth and price, thereby influencing MPLX's earnings and profit margins.

Valuation

• The analysts have a consensus price target of $46.62 for MPLX based on their expectations of its future earnings growth, profit margins and other risk factors.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $11.9 billion, earnings will come to $4.7 billion, and it would be trading on a PE ratio of 13.5x, assuming you use a discount rate of 8.0%.
• Given the current share price of $44.68, the analyst's price target of $46.62 is 4.2% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.