Midstream oil and natural gas partnership Magellan Midstream Partners, L.P.'s (MMP) business is backed by fee-based assets and long-term contracts. It isn't the kind of investment that excites you with swift change, but one that uses small incremental advances to eventually win the investment race. If you are an income investor, you'll want to take a look at what backs that incremental progress and supports the hefty 5.3% distribution yield. Here's what you should be looking at in 2018, which appears as though it will be Magellan Midstream Partners' best year yet.
Spending on growth
One of the key things to understand about Magellan is that it is designed to pass income through to unitholders. The ability to do that is backed by the portfolio of midstream assets the partnership owns. But once an asset is up and running, the big boost to results is largely baked in. In order to keep increasing the distribution it pays, Magellan has to keep expanding its portfolio through the augmenting of its existing assets, new construction, or via acquisitions. This isn't good or bad -- it's simply how midstream partnerships generally operate.
To give you some numbers, the partnership spent $5 billion on growth projects and acquisitions over the past decade. That allowed it to keep upping its distribution every year, with the annual streak now up to 17 years. A long and steady streak of distribution increases is, really, one of the biggest signs of success in the partnership world.
However, equally important is the partnership's prudent approach to growth. On that score, Magellan is one of the least leveraged midstream players, with a debt-to-EBITDA ratio at the low end of the industry. But that's only one piece of the puzzle here. Very often, partnerships use new units to help fund growth plans, which dilutes existing unitholders. But not Magellan.
The partnership hasn't had a material unit sale since 2009 to 2010. In fact, the unit count has been pretty much static for the last five years despite continued investment in the business. That's impressive when you compare it to the 20% increase in units at industry bellwether Enterprise Products Partners L.P. (EPD -0.49%) over the same span. In fact, Enterprise is just now starting to rethink its approach, with the goal of becoming more like Magellan.
But that's the past, what about 2018? Well, Magellan has $1.4 billion worth of capital spending plans spread between 2017 and 2018 that will support its continued growth. Also, a good year is already pretty much baked in.
Setting the stage for success
My positive outlook for 2018 isn't exactly a bold call. In fact, if you step back and look at the timeline here, you'll see that the past and future are going to balance out to support solid business growth in 2018, with a positive effect on 2019, too.
For example, Magellan began commercial operations at a new 50,000 barrels per day condensate splitter at its Corpus Christi terminal in June 2017. This facility is backed by a long-term, fee-based, take-or-pay contract. The timing is what's important. Magellan will see improved results because of this investment in the back half of 2017, but also through the first half of 2018 because the step up in revenue won't arrive until the middle of the year.
Assuming that all of the partnership's operations continue to run smoothly, that means 2018 will be a better year than 2017. But this wasn't the only investment that came on line in 2017. Magellan also started up the HoustonLink 50-50 joint venture with TransCanada and completed a storage project at the Seabrook Logistics joint venture (50-50 with LBC Tank Terminals) during the year. These two projects will add to results in 2017, but will have a spillover effect into 2018 as well because they started within the year, not at the very beginning of it.
So there are already new operating assets that will push 2018 results ahead of 2017's final numbers. Now add to that Magellan's plans for 2018. That includes another pipeline project at the Houston terminal that should be operational in early 2018. Plans also call for the early year completion of a pipeline at the Seabrook project. And a dock expansion at Magellan's Galena Park dock should be finished, too. As these projects come online, they'll support continued growth in 2018, with a spillover effect also benefiting 2019.
Look for another good year in 2018
With all of this construction coming online or nearing completion, you can see why 2018 is set up to be the best year yet for Magellan Midstream Partners. Remember, too, that Magellan isn't just building to build. It either has a customer lined up or it sees enough demand to justify the spending. That's the game plan it's used for years, so success is highly likely with each investment. That will underpin yet another good year in 2018 and beyond. I'm not making a daring call here but merely stating the obvious. If that sounds good to you, then you should do a deep dive today.