Shareholder John Fox urged the oil and gas producer Marathon Petroleum Corp. to lower the cost of curtailing the distributions it receives from its master limited partnership, MPLX LP, which merged in 2015 with a company Fox helmed.
Fox said in a Dec. 5 letter to Marathon's board that while he supports getting rid of incentive distribution rights, or IDRs, which hamstring an MLP's ability to retain cash by requiring it to pay quarterly cash distributions to the general partner, Marathon's proposed 15x to 20x transaction multiple jeopardizes future growth by raising capital costs.
"Every new share that MPLX issues as a result of an inflated IDR valuation puts pressure on current distribution and future growth potential," he wrote.
Fox is a former chairman and CEO of MarkWest Energy Partners LP's general partnership and objected to MarkWest's 2015 merger into MPLX.
Fox cited other midstream MLPs as evidence for revising the multiple. "Based on recent transactions including [Plains All American Pipeline LP] (11.6x), [Andeavor Logistics LP] (13.1x), and [Holly Energy Partners LP] (14.1x), there is a clear precedent for a 12x-14x multiple," he added. "Pro forma MPLX distributions will need to be cut and value destroyed as the additional shares to [Marathon] will strain returns on equity and the associated growth rates."
Marathon, which recently announced that it will drop down $8.1 billion of refining logistics assets and fuels distributions services to MPLX as both entities continue to revamp their capital structures, separately offered to exchange its IDRs for newly issued MPLX common units, improving the MLP's ability to pivot toward a self-funding model for its equity needs.
The IDR issue is not the first time Fox has butted heads with Marathon's leadership. In January, he criticized the company's plain to drop its crude oil terminals and refining businesses into MPLX on the grounds that it would saddle the partnership with exorbitant prices and slow its growth potential. He advocated instead that Marathon pay MPLX "a fair and transparent price" for the IDRs.
"How does obligating MPLX to a debt burden of [$5 billion to $6 billion] to own static refining assets create a growth vehicle for MPLX shareholders?" Fox asked in a Jan. 11 letter. "How can we be sure that this complex financial engineering will lower the cost of capital and not lead to value destruction?"
Marathon pledged to use drop-downs as part of a restructuring plan triggered by activist hedge fund Elliott Management Corp.
Fox said in the Dec. 5 letter that he owns over 1.5 million MPLX common units, less than 1% of MPLX's outstanding stock, and 20,900 shares of Marathon.