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Our March 2024 Options Trade: MarkWest Energy Partners MPLX-NYSE

We promised you a trade a month at InTheMoney.capital – but the truth is, we didn’t see a good one in February. But we think we MORE than make up for it with this idea.

Just as a quick housekeeping issue, our January trade with Energy Transfer (ET-NYSE) worked out PERFECTLY—we made the maximum amount possible.  You can review that trade with this link.

Our current trade is quite different than previous trades—it goes out 6 months, to September and it is NOT a covered call trade. We are actually buying a call—with a very low premium. Normally we SELL calls with a very HIGH premium and count on the stock being flat over the month long time frame.

This is a company we know VERY well, and we are both long the stock and long this option trade.

Alright folks, today we’re taking a deep dive on one of the biggest players in the midstream space – MPLX LP (MPLX). This is a massive diversified MLP that Marathon Petroleum (MPC-NYSE) birthed back in 2012 to hold all their pipeline and logistics assets.

(Canadians be aware of your tax implications here. Though on the options trade I did I don’t think that matters.)

This is a Goliath here with over 16,000 miles of crude and refined product pipelines snaking across the country. Add in terminals, storage caverns, marine assets – the whole nine yards. MPLX even has nearly 6 Bcf/day of natural gas gathering systems and processing/fractionation capacity mostly focused on the Marcellus/Utica.

MPLX pulls in serious cash flow with a third coming from the high-growth gathering/processing ops and two-thirds from their rock-solid logistics/storage assets. There’s well over $5 billion in annual EBITDA here.

But what really sets MPLX apart is its ties to refining behemoth Marathon Petroleum. MPC isn’t just the general partner – they flat out own 65% of the LP units! That’s an great alignment of interests driving MPLX’s strategy and expansion.

Marathon is the biggest pure-play refiner in the U.S. with an $88 billion enterprise value and throwing off $14 billion-plus in cash flow. They just extended their pipeline transportation deal with MPLX through 2042!

That stable parent relationship is allowing MPLX to pour around $1 billion annually into high-return projects like new gas plants, fractionation assets, and pipeline expansions. Just look at this pipeline of growth they have coming online over the next few years:

In November, MPLX hiked their quarterly dividend from $.78 per unit to $.85 per unit, providing an 8.4% yield on the current unit price.

Distributable cash flow has increased at a 7.1% CAGR over the past five years while their base distribution increased at a 4.8% CAGR, helping dividend coverage rise to 1.5X. The following slide shows MPLX’s key financial metrics:

 

Despite spending roughly one billion dollars per year on CapEX, MPLX has an big project pipeline:

  • The Harmon Creek II processing plant in the Marcellus will come online in the first quarter of 2024 (200 MMcf/d)
  • The Preakness II processing plant in the Delaware basin will come online in the second quarter of 2024 (200 MMcf/d)
  • The Whistler, Agua Dulce to Corpus Christi o(ADCC) natural gas pipeline, a JV with Cheniere Energy, is being expanded from 2.0 BCF/d to 2.5 BCF/d in the third quarter of 2024
  • The BANGL pipeline, an NGL pipeline system which connects the Delaware and Midland basins of Texas to the fractionation market in Sweeny, Texas will be completed in early 2025
  • The Secretariat processing plant in the Delaware Basin will come online in the second half of 2025 (200 MMcf/d)

Come this fall, investors anticipate MPLX will increase their dividend again – by as much as 10% – and analysts are quite positive on the company.

The units will also benefit from falling inflation and the (eventual) Fed rate cut, which will send the inflation-adjusted yield of MPLX even higher.

Plus, with this stock chart, it’s hard not to be positive!

 

Options Trade

While owning MPLX units gives you a great 8.4% yield and a strong growth profile, today I’ll also talk options – particularly the September $40 call options where I see a really interesting opportunity. On dividend paying stocks, the options pricing models often come up with very low theoretical prices for call options.

In the case of MPLX, the September $40.00 calls are selling at $1.85 today. If you buy one contract – covering 100 shares – it will cost $185 but you will have exposure to $4,050 worth of the underlying MPLX shares. This is very cheap leverage on a high-quality company!

Of course, MPLX shares could fall between now and September and you would lose your entire investment in the options – or $1.85 per contract, but this is the maximum loss you could incur.

If MPLX trades at $43.70 by September, a 7.8% yield – you would double your money. Cha Ching!  If MPLX trades to $45.55, still a reasonable 7.5% yield, you would triple your money. I think you get the point.

The options are a cheap way to get highly levered upside to this midstream juggernaut. With its visible growth runway and recession-proof business model, MPLX is a no-brainer addition to the portfolio here.

I am long 1000 shares at $40.50 and 500 contracts at $40 strike price on the Sept option.

I see a great risk-reward potential here. Understand that the stock, and therefore the option, will likely trade with oil more than natgas, despite its midstream ops mostly natgas.

Nathan Weiss & Keith Schaefer
Co-Founders, In The Money options trading service
Questions or comments? Reach out to us by email at: help@inthemoney.capital

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