MarkWest Energy Partners LP co-founder and former CEO John Fox has sent a letter to Marathon Petroleum Corp. (MPC) urging against its plans for the accelerated dropdown of refining assets to its midstream partnership, MPLX LP.
Fox, who owns more than 1.5 million MPLX units and 15,900 MPC shares, said the plan would increase costs and "vastly" curb MPLX's shale-related growth prospects.
"There are fundamental flaws and too many questions with Marathon Petroleum Corporation's plan that we believe will destroy long-term value" for both, Fox wrote this week to MPC's board of directors. Fox made follow-on investments in both companies and gained most of his shares when MarkWest Energy merged with MPLX in 2015. He was critical of that deal at the time.
MPC has been working on a plan to increase both shareholder and company value since October. It said earlier this month that it intends to drop down about $1.4 billion of assets to MPLX as soon as possible. The company would drop most of those this year if it can get regulatory approval.
"Driving long-term value for our shareholders has always been and remains a top priority," MPC CEO Gary Heminger said this month when the company released more details about its strategy. "We believe MPC is undervalued in the public markets and have been working diligently to execute the initiatives we announced in late October. And this work positions us to significantly accelerate the dropdown schedule and provide additional clarity on these transactions and other important steps."
MPC said it would drop $600 million of earnings before interest, taxes, depreciation and amortization by the end of this year. The other $800 million -- most of which would be attributed to fuels distribution -- is subject to tax clearance from the Internal Revenue Service. If that is delayed, MPC said, then $200 million would still be dropped to MPLX by the end of 1Q2018. MPC first said in October that it would drop the assets over the next three years, but switched tracks this month to accelerate the plan, offering few specifics about the assets it would give up or the way forward.
Last year, hedge fund Elliott Management, which manages funds that own a combined 4% of the company's stock, urged MPC in a letter to split its midstream, refining and retail businesses into separate companies to realize more value. But Elliott now endorses the accelerated drop, according to MPC.
While Fox said he agrees the company is undervalued and strongly supports part of MPC's plan to exchange its incentive distribution rights (IDR) for MPLX units, he added that the "accelerated dropdown of refining assets hurts long-term MPC value, vastly diminishes growth prospects at MPLX and raises the cost of capital for both." He said MPLX has years of growth ahead with the possibility for high rate-of-return projects. "Incurring debt and unit dilution to buy low return, zero growth refining assets makes no sense for MPLX and places an unnecessary burden on the fully integrated refining assets of MPC."
The proposed dropdown assets, he said, are "core strategic assets" for a refining company to source low cost crude and maximize value of refined products. Fox argued that capital at MPLX should be preserved for growth projects in premiere shale plays such as the Marcellus and Utica and the liquids plays of Oklahoma, and not diluted with the "cyclical" assets of a refining company. He asked the board to consider an IDR elimination plan at a fair price and spin out resulting MPLX units to shareholders.
Moody's changed MPC's outlook to negative from stable after the accelerated plan was announced. The multi-billion dollar merger between MPLX and MarkWest brought together one of the nation's largest processors and fractionators and one of its largest crude refiners. Founded in 2002, MarkWest has grown rapidly with the ascent of shale development, primarily in the Appalachian Basin, where it’s the largest of its peers.