Please ensure Javascript is enabled for purposes of website accessibility

How Risky Is Magellan Midstream Partners, L.P.?

By Matthew DiLallo - Jul 18, 2017 at 9:35AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Three key metrics suggest that this MLP is fairly low risk, though those numbers alone don’t mean this investment is risk-free.

Magellan Midstream Partners (MMP 0.27%) operates a relatively low-risk business model since the bulk of its earnings come from an extensive portfolio of fee-based pipelines and storage terminals. However, building that stable portfolio is just one of the steps the company has taken to keep risk at bay. Here's a closer look at how it stacks up against its peers and how its lower risk profile has helped the company overcome obstacles in the past so it could continue paying a growing distribution to investors.

Drilling down into the numbers

Three critical numbers for MLP investors are the percentage of cash flow underpinned by fees, the distribution coverage ratio, and the leverage ratio. Here's how Magellan Midstream Partners' metrics compare to several notable rivals:


Debt-to-Adjusted EBITDA

Current Distribution Coverage Ratio

% of Cash Flow Fee-Based or Regulated 

Enterprise Products Partners (EPD 1.65%)

4.3 times

1.2 times


Magellan Midstream Partners

3.5 times

1.2 times


Plains All American Pipeline (PAA 3.44%)

4.8 times

1.0 times


Williams Partners (NYSE: WPZ)

4.5 times

1.17 times


Data source: Magellan Midstream Partners, Enterprise Products Partners, Plains All American Pipeline, and Williams Partners.

As that chart shows, Magellan Midstream Partners has some of the most conservative metrics in its peer group. Its leverage ratio, for example, is well under 4.0 times, which is considered a safe zone for MLPs. Likewise, the company can currently cover its generous payout with room to spare since it has one of the highest coverage ratios in the group. Those two metrics, when combined with the fact that fee-based contracts underpin about 87% of its cash flow is why the company has one of the best credit ratings among MLPs, tied with Enterprise Products Partners.

That said, if there is one concern with those metrics, it's that fees only underpin 87% of cash flow, which is the lowest in the group. This factor has had an impact on the company in recent years. For example, last year distributable cash flow barely budged despite the completion of several growth projects. Meanwhile, the company was only able to reaffirm its guidance for 2017 even after securing a new contract for a recently completed project because the cash flow from that agreement would only offset the negative impact that weaker-than-expected commodity prices are having on earnings. However, with ample distribution coverage, the company has plenty of cushion to ensure that it can continue paying its distribution even if prices remain weak, which puts its payout on a much more sustainable footing than Plains All American Pipelines since it's just barely covering its distribution. Meanwhile, the company continues investing capital in building more fee-based assets that should further mute its direct exposure to commodity prices. 

Aerial view of an oil terminal in a harbor.

Image source: Getty Images.

Risk mitigation in action

Magellan Midstream Partners' numbers suggest that it shouldn't have any problem maintaining its payout even if it runs into an unexpected issue. That has certainly been the case during the recent oil market downturn since it has been able to not only maintain its payout but has joined Enterprise Products Partners as one of the few MLPs that has continued growing its distribution. 

One reason Magellan has been able to do this is due to its top-notch balance sheet, which has proven to be a competitive advantage during the downturn because it has been able to access capital at a much cheaper rate than rivals. For example, Williams Partners had to offer a 7.85% interest rate to entice investors to buy the $1 billion of 10-year debt it was selling early last year when it needed cash for a looming debt maturity and to finance expansion. Meanwhile, Plains All American Pipeline had to offer an 8% yielding preferred to get the $1.5 billion it needed last year to fund expansion projects. Contrast those rates with the 5% that Magellan locked in when it offered $650 million of 10-year notes early last year so that it could refinance debt and fund growth projects.

Given their much higher capital costs, both Williams Partners and Plains All American Pipelines would go on to slash their payouts by double digits last year to shore up their financial situations. Meanwhile, because Magellan had no problem accessing the capital it needed, it was able to increase its payout by 10% last year and is on pace to grow it by 8% in 2017 and by the same rate in 2018.

Investor takeaway

Magellan Midstream Partners boasts some of the most conservative financial metrics in its peer groups. Those have proven to be a crucial advantage in recent years because they've allowed the company to overcome several obstacles. That history demonstrates to investors that Magellan is a low-risk company that has the financial strength to make it through tough times.


Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Magellan Midstream Partners, L.P. Stock Quote
Magellan Midstream Partners, L.P.
$47.52 (0.27%) $0.13
Plains All American Pipeline, L.P. Stock Quote
Plains All American Pipeline, L.P.
$9.92 (3.44%) $0.33
Enterprise Products Partners L.P. Stock Quote
Enterprise Products Partners L.P.
$23.99 (1.65%) $0.39

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 06/25/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.