Magellan Midstream Partners (NYSE: MMP ) has made it clear that its focus will be on Texas' giant Permian Basin for the immediate future. The partnership has two significant pipeline projects that should cart a significant volume of oil out of the play by the middle of 2014: the Longhorn Pipeline reversal and the BridgeTex joint venture with Occidental Petroleum.
There is a lot here for investors to like in these two projects, so let's take a closer look.
The BridgeTex joint venture is a pretty good one on paper. Magellan expects it to generate an eight times EBITDA multiple based on the volume commitments it has in place. Sounds great! But what does that mean exactly?
Investor relations' power points are full of phrases like "8x EBITDA multiple," which simply means the project is expected to cost eight times more than the EBITDA it generates in in a full year of operations. In this case, Magellan is forking over $600 million, so the expected full-year EBITDA generated by the pipeline should be $75 million.
The Longhorn Reversal is an even better deal at three times EBITDA. Magellan will spend $430 million in capital expenditures to reverse this existing pipeline and get the oil flowing west to east, and it can expect first year EBITDA of roughly $143 million.
So, why the disparity between the two Permian projects? Naturally, the cost of building a pipeline from scratch like the BridgeTex is going to set you back much more than simply reversing an existing line like the Longhorn.
Another factor to consider is capacity. A higher capacity line will generate more in earnings, which will drive your EBITDA multiple down. Some of the cap ex on the Longhorn reversal is going toward increasing capacity. In fact, the line is actually already up and running at 225,000 barrels per day (bpd); it is the 50,000 bpd in additional capacity that is slated to come online in 2014.
The BridgeTex venture on the other hand, is looking at a capacity of 300,000 bpd, but it is not yet fully subscribed. Management is looking for "spot barrels" to bring that EBITDA multiple down. Per the partnership's third quarter conference call, spot tariffs on pipelines are higher than contracted rates right now, though they forsake the reliable cash generation that comes along with contract agreements. Long story short, the market will determine if BridgeTex fills up when it comes online, and that in turn will determine its ultimate EBITDA multiple.
So, what does the market look like in the Permian Basin right now? Through September, production was averaging 921,772 barrels per day, according to the Texas Railroad Commission. There is no shortage of activity there, as producers like QEP Resources (NYSE: QEP ) and BreitBurn Energy Partners (NASDAQ: BBEP ) have made moves recently to pick up acreage in the play. Plains All American (NYSE: PAA ) , a midstream outfit along the lines of Magellan, has also announced it will dedicate $400 to $500 million on expansion plans in the Permian.
These announcements have all come within the last two weeks. Clearly, there is no shortage of activity, and there will likely be no shortage of oil. Still, oil prices remain as volatile as ever. As a crude glut builds in Houston, it remains to be seen what will happen to the price of oil in 2014. For now, the eight times EBITDA multiple is what we have to work with on Magellan's BridgeTex pipeline.
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