It's not that often that Magellan Midstream Partners (MMP) runs into operational issues that could compromise its ability to generate cash. Last quarter, though, there was one small operational event that could have caused some problems. Fortunately, management was able to put the issue to rest this quarter and produced another set of impressive earnings results.
Let's take a look at Magellan's most recent results and what to make of the situation at the company today.
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Magellan Midstream Partners' results: The raw numbers
| Results | Q1 2017 | Q4 2016 | Q1 2016 |
|---|---|---|---|
| Revenue | $642.1 million | $614.9 million | $519.8 million |
| Adjusted EBITDA | $288.3 million | $338.8 million | $270.1 million |
| EPS | $0.98 | $0.93 | $0.91 |
| Distributable cash flow | $227.6 million | $277.9 million | $205.3 million |
Data source: Magellan Midstream Partners earnings release.
Magellan's results have remained remarkably consistent throughout this downturn. Part of that has to do with the nature of its business -- demand for refined products and marine storage remained constant throughout the downturn -- but it also has to do with the way in which management has structured contracts with customers. With more than 85% of its revenue backed by take-or-pay, fee-based structures, there isn't a whole lot of variability in results.
On occasion, though, the company is able to realize some larger-than-expected gains from its non-fixed-fee services, and that was the case this quarter. Operating margins for its refined product business realized a small bump thanks to a mark-to-market gain of about $50 million.
Overall, though, every business segment improved as new assets for each business came on line compared to this time last year.
DATA SOURCE: MAGELLAN MIDSTREAM PARTNERS EARNINGS RELEASE. CHART BY AUTHOR.
What happened with Magellan Midstream Partners this quarter?
- After a temporary dispute with a customer, Magellan signed a sales contract for its Corpus Christi condensate splitter. In fact, it was able to sign an amicable agreement with its former customer, Trafigura Trading LLC, without having to settle in court. As part of the agreement, Magellan will commit another $30 million to the $300 million project to add additional storage to support the facility.
- The Carr-to-Platteville (Colorado) segment of the Saddlehorn pipeline began operations, and the company started construction on the extension of the pipeline to Cheyenne, Wyoming, to link up with other major Rocky Mountain pipelines.
- Magellan and its joint venture partners completed construction of the initial 700,000 barrels of crude oil storage at the Seabrook Logistics facility. The company plans to build another 1.7 million barrels of storage and connect the facility to Magellan's existing crude oil distribution system in the Houston area.
- Management maintained its guidance for $1 billion in distributable cash flow, as well as 8% distribution growth for both 2017 and 2018.
What management had to say
CEO Michael Mears summed up Magellan Midstream's quarter:
Magellan reported solid financial results in the first quarter of 2017, with higher contributions generated from each of our operating segments. In addition, we recently commenced operations for a number of our joint venture projects, including Seabrook Logistics, which will serve as Magellan's solution to meet the industry's growing need for crude oil marine terminal infrastructure. We remain focused on operating our business in a safe and financially sound manner while continuing to develop additional opportunities to grow our company.
10-second takeaway
With the Corpus Christi condensate splitter contract issue settled, there is very little that investors at Magellan have to worry about. The company has a decent slate of projects coming on line this year to increase cash flow and support further dividend payments, and management has more work lined up over the next few years to maintain Magellan's growth runway.
Based on Magallan's reputation for investing in high-return projects and its prudent capital management, investors should be encouraged by these results and should expect better times ahead.
