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Insiders Are Buying This 10.27% Dividend

GuruFocus.com

MPLX LP (NYSE:MPLX) controls natural gas gathering and processing assets in low-cost United States natural gas basins such as the Marcellus, the Permian and Utica. It also runs storage facilities and pipelines that run into Marathon Petroleum's (NYSE:MPC) refinery complex. Marathon Petroleum is its majority shareholder with a 64% stake.


I'm a shareholder of MPLX, and I think it is currently an amazing opportunity for the folloiwing reasons:

1) It may potentially convert to a C-corp in the future.

2) Marathon Petroleum will potentially decrease its stake, allowing more publci ownership.

3) Its share price is low enough that it is very attractively valued even without any catalyst.

C-corp conversion

Due to the changes to the tax code, the c-corp conversion from MLP or LP is a common theme nowadays. With pipeline companies switching to the c-corp structure, the universe of them is now about evenly divided among MLP's and c-corps. There are benefits and drawbacks to either corporate form. A much-bemoaned drawback of c-corp conversion is the long term tax hit long that shareholders can take.

On the other hand, c-corp conversion can do amazing things for the cost of capital of a corporation, especially in today's markets, where ETF's and indexes are all the rage. A c-corp conversion makes it possible for companies to be included in vehicles such as ETF's and indexes, which really broadens their investor base, causing them to trade at a higher multiple. In other words, the share price can go up without earnings going up. The firm GlobalX explains the phenomenon in more depth below:


"MLP ownership is typically dominated by retail audiences and buyside firms with dedicated MLP strategies due to the attractiveness of high yields and the fact that many institutions are unable to buy MLPs for legal, regulatory, or investment mandate constraints. Foreign investors too, often see limited benefits to MLP investing due to the lack of taxable benefits afforded to US investors. Also restrictive is MLP exclusion from broad market indexes like the S&P 500, which may negatively affect MLPs as the investment landscape continues to shift towards passive investing.

The C-Corp structure avoids many of these structural issues that pertain to MLPs- a key argument for why MLPs should considering converting. This generally means that C-Corps should expect to see greater ownership from institutions, passive fund managers, and foreign firms."



Marathon's ownership

Marathon Petroleum is MPLX its majority owner with more than a 60% stake. Marathon is currently under pressure from activist investor Paul Singer (Trades, Portfolio), who wants to split up the company into three parts. One part would be essentially MPLX. If MPLX starts trading entirely independent from Marathon, that would free up a lot of tradeable shares. For inclusion in ETF's or indexes, it is of vital importance that more than 50% of shares be freely tradeable. Currently, MPLX is rarely ever included in such vehicles because of its limited free float and its MLP structure, but if that changes, we could easily see a sustainable higher multiple.

Valuation

In my opinion, MPLX really deserves to trade at a higher multiple. The entire energy sector is very much out-of-favor, even though pipeline operators are traditionally very stable and infrastructure-like assets. Gurufocus data shows energy is the sector in the S&P 500 (SPY) with the lowest Shiller P/E:

As of Jan. 6, MPLX trades at approximately 11 times forward earnings six times operating cash flow. It also produces a 10.27% dividend.

This dividend is amazing by itself. I'll occasionally take similar numbers even on a low-growth or declining company, but MPLX is actually expanding fairly aggressively. It has been growing revenue by 30% over the past year. It is projected to grow another 30% in the next year as well. These are just projections, but the projection for MPLX is massively greater than those for most of its competitors or peers.

Last but not least, insiders have been buying shares of the stock recently. Multiple insiders are buying after a hiatus that had been ongoing since 2017.

To sum it all up, I really like this stock because of the low valuation, the stable business model, the catalysts in the potential for c-corp conversion, potential decreasing of Marathon's ownership stake and the step-up in insider buyinig.

Disclosure: long MPLX.

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This article first appeared on GuruFocus.