Just 63 days after the close of a transformative purchase of MarkWest Energy Partners, Marathon Petroleum, the General Partner of MPLX LP (ticker: MPLX), is downwardly adjusting its dividend growth plan for the MLP – plans that it made public during the company’s Analyst Day presentation on December 3, 2015.
MPLX, the limited partner of Marathon Oil Corporation (ticker: MPC), closed the acquisition of MarkWest Energy Partners on December 2, 2015, but not without its fair share of hurdles. The valuation of the deal received pushback from MarkWest shareholders, including co-founder John Fox, who called the valuation “pennies on the dollar” and strongly urged fellow MWE unitholders to nix the deal.
A key selling point to MPLX’s offer was providing distribution growth guidance through 2019. In the company’s Q3’15 earnings release, Gary Heminger, President and Chief Executive Officer of Marathon Oil, reiterated previous guidance of a 25% CAGR distribution growth through 2017 and 20% growth in 2018 and 2019 (page 75 in the Analyst Day presentation).
On Second Thought…
That all changed in MPLX’s Q4’15 earnings release on February 3, 2016.
“We are now forecasting distribution growth of 12 to 15 percent for 2016,” said Heminger in a conference call with analysts and investors. “We will assess the distribution growth rate for 2017 later this year and provide guidance around the partnership’s growth expectations at that time.”
Units of MPLX dropped nearly 25% on the news, sinking to an all-time low. This latest downtrend follows a multi-billion dollar mistake involved with the merger negotiations of last year. MWE management and its board of directors failed to negotiate a hard price per unit with Marathon, and units of MPLX lost more than half of their value from the time of the acquisition announcement to the date of the proxy approval. Shares of MWE suffered a 23% destruction of unit price in the same frame, ultimately amounting to a loss of $5.8 billion in shareholder value.
Based on MPLX’s closing price of $30.83 on December 4, 2015, MWE unitholders received total consideration of $39.80 per MWE unit (including a 1.09 share exchange rate and a $6.20/unit cash payment). If you take today’s closing price into consideration, the value of MWE units is only $28.06 apiece. Units of MWE closed at $46.00 on December 1. With today’s closing price, MPLX units are down 68% since the July 10, 2015 announcement to merge with MarkWest.
Reading Between the Lines: G&A Evaluation
Although the MWE/MPLX merger was approved, a noteworthy 42.4% of MWE unitholders voted against the deal. Former CEO John Fox led the charge, reminding the audience that MWE management stood to make an aggregate of $53.8 million if the transaction was consummated. “[This] is simply a ruse, or a Trojan Horse, by MWE’s management to trigger a Golden Parachute for itself,” Fox said in a press release.
Oil & Gas 360® contacted MPC’s investor and media relations departments for information regarding the timing of these payouts, and the company’s decision to reduce the previously promised dividend growth projections, but phone calls were not returned as of publication.
The year-end figures reflected a significant increase in G&A expenses for both MPC and MPLX, as seen below. Keep in consideration that Marathon has laid off roughly 20% of its workforce in the face of the commodity downturn.
G&A Costs (millions)
|Q4’15||Q3’15||% Change||Fiscal 2015||Fiscal 2014||% Change|
The numbers are equally noteworthy when comparing G&A to revenue. For Marathon, its 2015 G&A/revenue percentage was 2.2%. In 2014, that number was only 1.4%. On the MPLX side, the G&A/revenue percentage was 14.8% and 11.8% in 2015 and 2014, respectively.
The MarkWest acquisition represents a distinct change in MPC’s direction. Heminger was quoted in 2015 about adding cash generating assets for the midstream and refining business units. Investors rewarded MPC – between January 1 and June 30, 2015, MPC stock was up 14.2%. MarkWest is 100% natural gas, and its customers have huge natural gas commodity risk exposure. MWE’s reasoning behind the merger was focused on the company having enough capital liquidity to meet its customer’s expansionary plans for plants and pipelines, and with a merger with MPLX, MarkWest and its unitholders would benefit from MPC’s balance sheet.
Here comes the perfect tsunami. Natural gas spending is slowed, and so has the need for more fractionation and processing plants. The market has plenty of propane. MWE could have weathered the storm by adjusting spending to meet current market conditions and worked to remain a leader in its focus area through the downturn. Instead, MWE management found an unsophisticated buyer in MPC/MPLX, agreed to a deal without a stock price floor, and caused an all-out rout for its unitholders, who lost more than 30.5% of its stock price value during the merger process and turned a stock that was well regarded into a painful memory. As expected, investors are going to the message boards putting forth their opinions on today’s news from Marathon.
While the MPLX cut in capex and distribution growth is a reflection of current market conditions, it is also a reflection of MPC’s failure to know what it was buying. The only out for MPC and MPLX with the MWE transaction is for natural gas prices to move up. Punxsutawney Phil showed us that Spring is just around the corner. A new mark in natural gas storage level exiting the winter heating season will apply additional pressure on natural gas producers and on MPC/MPLX.
The question to ponder: “If Marathon can cut its growth estimates for the 2016 MPLX dividend stream in half in under 65 days, and the lower for longer theme for oil and natural gas prices continues, how confident are the unitholders of MPLX that it can meet the lower growth rate or the 2017 to 2019 dividend growth rates of 20% to 25%?”