Industry experts are split on whether MPLX LP's potential separation from parent Marathon Petroleum Corp. would benefit the pipeline master limited partnership and its shareholders amid an activist investor's bid to make it an independent entity.
Elliott Management Corp., which owns about 2.5% of Marathon, sent the company's board of directors a letter Sept. 25 calling for the integrated refiner to unlock $39 billion in value by dividing into three companies. One of those would be midstream provider MPLX that focuses on gathering and processing in the Marcellus and Utica shales.
While Elliott's proposal to convert MPLX to a C corporation promises to improve corporate governance and attract more investors, it also appears to raise concerns about the MLP's viability as a stand-alone business should Marathon change the terms for its contracts with the company's fuel distribution segment.
"I'd say it skews to the negative side on the initial look," Credit Suisse Director Spiro Dounis said in an interview, noting that even though investors do prefer C-corps over MLPs — which limit shareholder voting rights and concentrate decision-making power in the C-suite — there is no guarantee that the change would materially enhance MPLX's equity value.

Marathon owned about 62% of MPLX as of July 30, according to an SEC filing, meaning that any movement toward liquidating those shares could put a lot of pressure on the pipeline company's struggling stock price, Dounis added.
MPLX's unit price had dropped 1% in 2019 as of the Sept. 24 market close to settle at $29.96 per share, despite a highly anticipated July 30 merger with Andeavor Logistics LP that analysts had expected to "lift a cloud" over the stock price.
Midstream analysts at CreditSights were also concerned about the risks to the MLP's credit profile and downgraded it to underperform based on Elliott's proposal in part because any changes to MPLX's contracts with Marathon could jeopardize earnings.
"MPLX's pro-forma 4x [debt-to-EBITDA] leverage is much stronger than the mid-to-high range for names trading in a similar range, like [Williams Cos. Inc.] and [Kinder Morgan Inc.], but these names own marquee gas pipeline systems in [Transcontinental Gas Pipe Line Co. LLC] and [Tennessee Gas Pipeline Co.] that are among the most valuable midstream assets in the country," the CreditSights analysts wrote in a Sept. 25 note to clients. "What happens to the unique fuel contracts that [account] for ~15% of MPLX EBITDA if Elliott gets its way? MPLX ... handles ~20 [billion] gallons of fuel distribution volumes for [Marathon/Speedway] and is structured so that [Marathon] retains the fuel inventory risk and working capital costs. This is our primary concern."
Dounis agreed that Marathon would have an incentive to cut the rates that MPLX charges, particularly to lower the refiner's leverage ahead of a potential economic recession. Marathon could instead de-link MPLX from its refining logistics segment by selling the rest of the business as a sort of compromise, Dounis acknowledged, but there is limited interest in Northeast gathering and processing assets, given declining Appalachian gas prices.
On the other hand, a stand-alone MPLX could be better positioned to attract third-party customers, according to Morningstar's Stephen Ellis.
"It will have better access to deal flow [through] peers who might be disinclined to work with the controlled firm," Ellis said in an email. "If MPLX appoints its own management team as part of the spin, then it can advocate better for itself, versus obviously being operated by the same Marathon folks. That's a real plus."
CBRE Clarion Securities portfolio manager and MLP expert Hinds Howard was also confident that a separate MPLX would be "well-received," but said in an email that "there would be long periods of uncertainty before that final outcome was achieved, with large outstanding questions as to how the relationship with [Marathon] would work."
Still, even CreditSights noted that MPLX's expansion in the Permian Basin as a partner in the Gray Oak and Wink-to-Webster crude oil pipeline projects, which are expected to begin delivering supplies to the Texas Gulf Coast at the end of 2019 and during the first half of 2021, respectively, serves as proof that "the idea that MPLX is solely focused on [Marathon's] business is simply false."
Elliott previously made the case for consolidating and simplifying MPLX in 2016 to enhance Marathon shareholder value, which prompted the refiner to drop down assets to the MLP and exchange general partnership interests, including cash distributions that MPLX was required to funnel to its general partner, for newly issued common units of the partnership.
