Is U.S. Oil Export Ruling a Threat to Magellan Midstream Partners?

Last week, U.S. federal regulators granted two companies permission to export minimally processed condensate, a form of ultra-light oil. Though spokesmen for both the Commerce Department and the White House said there has been "no change in policy" toward crude oil exports, the ruling was widely seen as a blow to refiners and to companies building condensate splitters -- cheap mini-refineries that separate condensate into readily exportable products such as naphtha, kerosene, and gasoil.

Magellan Midstream Partners (NYSE: MMP  ) is one such company. It plans to construct a $250 million splitter that's expected to be operational in the second half of 2016. Let's take a closer look at what impact the ruling may have on its plans, and what to expect from the company going forward.

Photo credit: Kinder Morgan

Impact from export ruling
Magellan announced in late March that it will build a new 50,000 barrel-per-day, or bpd, condensate splitter near its terminal in Corpus Christi, Texas, under a fee-based, take-or-pay agreement with Trafigura AG, a leading commodities trading house. The project will entail construction of more than1 million barrels of storage, dock improvements, and two additional truck-rack bays at Magellan's terminal, as well as pipelines connecting Magellan's terminal with Trafigura's nearby facility. 

Because the planned splitter is fully supported by a long-term contract with Trafigura, it won't be affected by the new condensate export ruling, according to Magellan spokesman Bruce Heine. In fact, Magellan actually stands to benefit from condensate exports, because exports would likely lead to greater condensate production.

This could result in greater throughput volumes and revenues for its 100,000 bpd Double Eagle Pipeline system, a 50/50 joint venture with Kinder Morgan Energy Partners (NYSE: KMP  ) that ships condensate from south Texas' Eagle ford shale to Magellan's Corpus Christi terminal. "With the [Corpus Christi] terminal's multiple existing ship berths that can accommodate large vessels, we are positioned to serve the export market if it develops," Heine said.

Other planned splitter projects backed by long-term contracts, such as Kinder Morgan's 100,000 bpd facility near the Houston Ship Channel, should also be safe. The first unit of Kinder's splitter is slated to come online in November, and is supported by a long-term, fee-based agreement with BP (NYSE: BP  ) . The company said the export rulings would have "no impact" on the facility.

Magellan's future looks bright
With the recent export ruling currently posing no threat to Magellan's planned condensate splitter, the partnership can focus on completing its $1.1 billion of expansion projects planned through 2016. These projects will boost Magellan's exposure to crude oil infrastructure, which is in extremely high demand in the Gulf Coast region due to a glut of crude oil.

Indeed, 75% of the partnership's expansion projects this year are related to crude oil infrastructure. Two of these projects -- the Longhorn pipeline reversal and BridgeTex pipeline JV with Occidental Petroleum (NYSE: OXY  )  -- will significantly boost Magellan's capacity to deliver crude oil from Texas' Permian Basin to refineries along the Gulf Coast.

Not only will the start-up of these projects drive strong growth in fee-based revenues, but it will also boost Magellan's share of fee-based income, because volumes on these pipelines are backed by long-term, fee-based contracts. By year-end, fee-based, low-risk operations should account for 85% or more of the partnership's operating margin. Led by these projects, Magellan should be able to grow its annual cash distributions by 20% this year, and by 15% in 2015, compared to 12% annual average growth since 2001.

Investor takeaway
With no impact from the new condensate export ruling, and with a strong pipeline of growth projects set to drive much stronger distribution growth, Magellan Midstream may present an attractive opportunity for income-seeking investors. However, with shares trading at a price to cash flow north of 22x after recently hitting an all-time high, I would be cautious about buying in now.

Do you know this energy tax "loophole"?
You already know record oil and natural gas production is changing the lives of millions of Americans. But what you probably haven't heard is that the IRS is encouraging investors to support our growing energy renaissance, offering you a tax loophole to invest in some of America's greatest energy companies. Take advantage of this profitable opportunity by grabbing your brand-new special report, "The IRS Is Daring You to Make This Investment Now!," and you'll learn about the simple strategy to take advantage of a little-known IRS rule. Don't miss out on advice that could help you cut taxes for decades to come. Click here to learn more.

Read/Post Comments (0) | Recommend This Article (5)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 3015784, ~/Articles/ArticleHandler.aspx, 9/1/2015 2:14:53 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

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.

Today's Market

updated 4 hours ago Sponsored by:
DOW 16,528.03 -114.98 -0.69%
S&P 500 1,972.18 -16.69 -0.84%
NASD 4,776.51 -51.82 -1.07%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

8/31/2015 4:04 PM
BP $33.54 Up +0.28 +0.84%
BP p.l.c. (ADR) CAPS Rating: ****
KMP $0.00 Down +0.00 +0.00%
Kinder Morgan Ener… CAPS Rating: *****
MMP $70.57 Down -1.37 -1.90%
Magellan Midstream… CAPS Rating: *****
OXY $73.01 Up +1.17 +1.63%
Occidental Petrole… CAPS Rating: ****