1 Energy Merger That Makes Perfect Strategic Sense

Magellan Midstream Partners should think about buying Buckeye Partners.

Jul 3, 2014 at 2:00PM

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.

Mmp Refined Products

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.

Bpl 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:

Mmp Bpl

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.

Do you know this energy tax "loophole"?
Buckeye Partners and Magellan Midstream Partners make a lot of money for their investors thanks to an energy tax "loophole". It's a loophole that you need to take full advantage of as it can put more money into your pocket. You can learn more about it by grabbing our 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.

Matt DiLallo has no position in any stocks mentioned. The Motley Fool recommends Magellan Midstream Partners. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Money to your ears - A great FREE investing resource for you

The best way to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as “binge-worthy finance.”

Feb 1, 2016 at 5:03PM

Whether we're in the midst of earnings season or riding out the market's lulls, you want to know the best strategies for your money.

And you'll want to go beyond the hype of screaming TV personalities, fear-mongering ads, and "analysis" from people who might have your email address ... but no track record of success.

In short, you want a voice of reason you can count on.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich," rated The Motley Fool as the #1 place online to get smarter about investing.

And one of the easiest, most enjoyable, most valuable ways to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as "binge-worthy finance."

Whether you make it part of your daily commute or you save up and listen to a handful of episodes for your 50-mile bike rides or long soaks in a bubble bath (or both!), the podcasts make sense of your money.

And unlike so many who want to make the subjects of personal finance and investing complicated and scary, our podcasts are clear, insightful, and (yes, it's true) fun.

Our free suite of podcasts

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. The show is also heard weekly on dozens of radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable. Rule Breaker Investing and Answers are timeless, so it's worth going back to and listening from the very start; the other three are focused more on today's events, so listen to the most recent first.

All are available for free at www.fool.com/podcasts.

If you're looking for a friendly voice ... with great advice on how to make the most of your money ... from a business with a lengthy track record of success ... in clear, compelling language ... I encourage you to give a listen to our free podcasts.

Head to www.fool.com/podcasts, give them a spin, and you can subscribe there (at iTunes, Stitcher, or our other partners) if you want to receive them regularly.

It's money to your ears.


Compare Brokers