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Magellan Close to Completing Gulf Coast Pipeline System

Magellan Midstream Partners (NYSE: MMP  ) , the Tulsa-based midstream company, recently said that it is "very close" to completing the construction of an extensive pipeline distribution system serving the U.S. Gulf Coast market.

Once complete, the system will be able to move crude oil from every pipeline terminating in the Houston area, CEO Michael Mears said during a presentation at the Credit Suisse MLP and Energy Logistics Conference in New York on Wednesday.

The company's distribution systems build upon its new West Texas Permian Basin to Houston pipelines, which include the 225,000 bpd Longhorn Pipeline, which went into service in April, and the planned 300,000 bpd BridgeTex Pipeline, which is expected to go into service in mid-2014.

Magellan's distribution system is also connected to pipelines transporting crude oil from the Eagle Ford Shale of South Texas to the Houston area refining hub. The company intends to connect with the southern portion of TransCanada's (NYSE: TRP  ) Keystone XL pipeline, which is expected to begin delivering crude oil from Cushing, Okla., to Nederland, Texas, by late this year.

The U.S. Gulf Coast and the coming deluge of oil
Magellan's distribution system is part of the massive infrastructure build-out currently under way in the U.S. Gulf Coast. For much of the past few years, domestic crude oil has traded at a sizable discount to the global crude oil benchmark, Brent, due primarily to the combination of a rapid surge in domestic production and limited pipeline infrastructure. As a result, a massive glut of oil accumulated at Cushing, the nation's main oil storage hub.

But with at least seven pipeline projects, including Magellan's own Longhorn pipeline, expected to come on line between now and the end of next year, many experts are predicting that the Gulf Coast region will be inundated with oil. Gulf Coast refiners, especially those with the ability to process light, sweet crude – the varietal being pumped from shale plays across the country – are likely to be the main beneficiaries of this coming deluge.

They include Valero (NYSE: VLO  ) , which has refineries in Port Arthur and Texas City; Phillips 66 (NYSE: PSX  ) , which has three Gulf Coast refineries, one in Texas and the other two in Louisiana; Marathon Petroleum (NYSE: MRO  ) , which has two refineries in Texas City; and ExxonMobil (NYSE: XOM  ) , whose Baytown Area petroleum and petrochemical complex, located about 25 miles east of Houston, is the largest in the country.

Two companies to consider
But because not every refiner in the region is equally capable of processing the light, sweet crude oil that is being pumped out from U.S. shale plays, some companies stand to benefit more than others.

Valero is a clear standout, in my opinion. It boasts seven Gulf Coast refineries, of which three are capable of processing light oil. Phillips 66, whose 247,000 bpd Sweeny Refinery in Old Ocean, Texas, which is capable of processing light, low-sulfur crude oil, also stands to benefit.

As a result of improved access to domestic crudes, these companies' profit margins are expected to grow meaningfully over the next few years. According to estimates by Morningstar, Valero's profit margins should average $12.80 a barrel from 2013 to 2017, up from $10.50 in 2011 and 2012, while Phillips 66's margins are expected to increase to $13.50 per barrel, up from $11.40.

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Arjun Sreekumar

Arjun is a value-oriented investor focusing primarily on the oil and gas sector, with an emphasis on E&Ps and integrated majors. He also occasionally writes about the US housing market and China’s economy.

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5/24/2016 4:02 PM
MMP $70.46 Down -0.75 +0.00%
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