1 Energy Merger That Makes Perfect Strategic Sense

Magellan Midstream Partners (NYSE: MMP  ) has one of the longest refined products pipelines systems in America. Currently it owns 9,500 miles of pipeline as part of a system that is mainly concentrated in America's midsection. However, it's a system that could get a nice boost by acquiring Buckeye Partners (NYSE: BPL  ) and its equally concentrated system to the east. It's a merger that, quite frankly, makes perfect strategic sense.

Take a look at Magellan Midstream Partners refined products assets and system map.

Source: Magellan Midstream Partners Investor Presentation (link opens a PDF

As I previously noted the system is fairly well concentrated in the Mid-Continent. While Magellan Midstream Partners does have a number of independent refined products terminals in the South, it has nothing to serve the strong eastern U.S. markets.

Now, take a look at Buckeye Partners' pipeline and terminal systems map.

Source: Buckeye Partners Investor Presentation (link opens a PDF

As that map shows, Buckeye Partners has a very strong asset base in the Northeast as well as in the Midwest. Further, like Magellan Midstream Partners, it has a number of independent terminals throughout the South. Finally, it has a growing base of global marine terminals that will play an important role in energy exports.

If Magellan Midstream Partners bought Buckeye Partners, the combined entity would look like this:

Source: Company investor presentations and author calculations.

That's a pretty compelling combination as it would extend Magellan Midstream Partners' refined products pipeline system by 40%, triple its terminals and double the company's refined product and marine storage capacity.

The other really compelling aspect of such a combination is that it would be in an even better position to profit from the shift in the flow of crude oil and refined petroleum products. Both companies have coastal marine storage, with Magellan Midstream Partners owning five storage facilities with 27 million barrels of storage capacity. Meanwhile, Buckeye Partners owns global marine terminals in the New York Harbor as well as in the Caribbean. Combining these assets would enhance the strategic position on Magellan Midstream Partners as it would gain greater access to the export markets for refined petroleum products and possibly crude oil and condensate that's heading to South America, which is currently a prime destination for American refined products.

Another reason such a combination would be compelling is because Buckeye Partners' growth prospects are currently limited by its financial metrics. The company's trailing twelve month leverage ratio is 4.47 times and that ratio has been well over four since 2011. Meanwhile, its distribution coverage ratio is just above 1.0 times leaving the company little margin for error or opportunities for growth. Magellan Midstream Partners, on the other hand, hasn't seen its leverage ratio touch 4.0 times since the first quarter of 2009 and it has one of the highest credit ratings in the sector. Further, its distribution coverage ratio is expected to stay a conservative 1.1 times. By acquiring the smaller Buckeye Partners, Magellan Midstream Partners could use is debt capacity to refinance some of Buckeye Partners debt at lower rates, which when combined with other deal synergies would create a lot of value for investors in both companies.

Investor takeaway
America's energy boom is spurring consolidation among MLPs looking to be in a better strategic position to profit from the boom. These deals also tend to reward investors as synergies fall to the bottom line and yield increased distributions for investors. That's why I think that if Magellan Midstream Partners were to follow its peers and make a big deal, a buyout of rival Buckeye Partners is the one that simply makes the most strategic sense.

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  • Report this Comment On July 03, 2014, at 6:23 PM, AdamGalas wrote:

    I love your "this MLP should buy X" articles. Great ideas that I wouldn't have thought of and always well reasoned.

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