Crude oil and refined products MLP Magellan Midstream Partners (MMP) has been great to income-focused investors over the years. In fact, since going public in 2001, the company has increased its distribution 61 times, delivering 12% compound annual growth in the payout over that time frame. Thanks in part to all those increases, the company yields an enticing 5.1%. Meanwhile, the MLP's current target is to boost its payout by 8% in both 2017 and 2018, with that projection supported by $1 billion of high-return growth projects currently underway.
That said, Magellan's ability to keep growing the distribution beyond next year had been uncertain given the expectation that the bulk of its expansion projects would enter service by the end of 2018. However, after recently announcing two new projects, the company now has more fuel, which could enable it to continue growing its payout for a few more years.
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Building a new Permian pipeline on spec
Earlier this week Magellan Midstream Partners announced that it would build an oil pipeline in the Delaware Basin side of the fast-growing Permian Basin. The 60-mile line would run from Wink to Crane, Texas, where it would link up with the company's Longhorn Pipeline. The company expects to spend $150 million to build the 250,000 barrel per day pipeline, which it could expand to 600,000 barrels per day if industry demand warrants a larger size.
There are two things worth noting about this project. First is the expected in-service date of mid-2019. That timing is important because the bulk of the company's current backlog should enter service next year, which means this project would provide it with some incremental cash flow beyond that time frame and could support further distribution growth in late 2019 to early 2020.
One other noteworthy aspect of this project is that Magellan gave the go-ahead without first conducting an open season to secure enough shipper commitments to underpin the investment. That's because the company doesn't believe it will have a problem filling up the pipeline's capacity given the anticipated growth in oil output coming out of the region over the next few years. Furthermore, the company thinks that shippers will like the fact that the line will flow into not only Longhorn -- which gives shippers access to refineries in Houston and Texas City, as well as marine export facilities -- but could also provide service to a new crude line to Corpus Christi that Magellan and others have proposed to build. In other words, that optionality should make this pipeline an easy sell.
The biggest just keeps getting bigger
In addition to that new oil pipeline, Magellan also recently announced plans to expand its refined petroleum products system. Already the longest such system in the country, and the company's biggest moneymaker, Magellan plans to build a new 135-mile pipeline to support incremental demand for refined products in several Texas markets. The company will own that newly-constructed pipeline via a joint venture with Valero Energy (VLO -2.86%). In addition to building that new line with Valero, Magellan will reverse an existing line that will connect with the new segment, providing it with 85,000 barrels per day of incremental capacity to serve local markets, which is a 50% increase.
Furthermore, the company plans to make several other enhancements to its existing pipelines and terminal infrastructure, as well as building more storage capacity and making additional interconnections, including to its new Pasadena, Texas, marine terminal that should start up in early 2019. Overall, the company expects to invest $375 million into these projects, which should be in service by the middle of 2019. And unlike the new oil pipeline, long-term customer commitments support this investment, which means it will provide an immediate boost to cash flow.
It's all starting to add up
When considered alongside the company's upcoming Pasadena Marine Terminal, these projects increase the visibility that Magellan can continue growing its distribution to investors after next year. However, the payout might not keep growing at an 8% clip, given the lower initial return multiple of Pasadena's first phase and the currently speculative nature of the Delaware Basin oil pipeline. Still, these growth projects are a welcome sight for income-focused investors since they should keep the payout heading higher.
