Magellan Midstream Partners (NYSE:MMP) has developed a reputation for delivering consistent cash flow growth and investing in high-return projects. This past quarter, though, the company hit a few snags that led to management canceling one of its major growth projects.
Let's take a look at what happened this past quarter and whether these results portend more issues in 2019.
Magellan Midstream Partners earnings: The raw numbers
|Metric||Q4 2018||Q3 2018||Q4 2017|
|Revenue||$865.7 million||$638.0 million||$673.3 million|
|Adjusted EBITDA||$374.1 million||$358.7 million||$377.4 million|
|Distributable cash flow||$302.4 million||$281.8 million||$308.3 million|
The good news is that even though the company's distributable cash flow results didn't quite live up to expectations, the company was able to produce considerable revenue growth. Most of those gains came from adjustments to inventory values of commodities, which is a part of fair value accounting standards.
One of the factors behind this quarter's lower results was the sale of an equity stake in the BridgeTex Pipeline. In the third quarter, Magellan sold 20% of its equity share in the pipeline for $354 million.
Management also noted that about $18 million in one-time cash costs negatively impacted results this past quarter. Half of that is for the future shutdown of its ammonia pipeline business, and the other half was a write-off for discontinued capital projects.
What happened with Magellan Midstream Partners this quarter?
- The company elected to cancel the development of a proposed crude oil pipeline. The Wink-to-Crane, Texas, pipeline was a smaller development that was designed to connect to the larger Permian Gulf Coast pipeline it is co-developing with several other midstream companies.
- Magellan has decided to start decommissioning its ammonia pipeline system this year. Management said in the press release that the profitability for the system was low and that demand for anhydrous ammonia was expected to decline.
- The company did start to solicit interest for two other pipelines, though. One would connect crude oil production in Colorado's DJ Basin with its Saddlehorn pipeline, and the other would connect Cushing, Oklahoma, with its Houston-area crude oil network.
- Management declared a distribution to shareholders of $0.9975 per unit. This payout is an 8% increase compared to the same quarter last year and continues Magellan's streak of growing its payout every quarter since it went public in 2001.
What management had to say
After increasing its payout by 8% compared to last year, it looks as though the company will be slowing that payout rate in 2019. Here's Magellan CEO Michael Mears's press release statement on its financial objectives in 2019:
Magellan will continue managing our business in a responsible manner with a focus on creating long-term value for our investors. We believe our stated goal of increasing annual distributions by 5% for 2019 while maintaining annual distribution coverage of at least 1.2 times for the foreseeable future provides a healthy balance of growth, stability, and financial strength during what we expect to be a dynamic period for the energy industry.
The calm before the storm
2019 probably is going to be a transition year for Magellan. The company is spending a lot of money on capital projects this year, and its payout growth is expected to be lower than its historical average. That lower payout is because management wants to retain extra cash to pay for what will be its largest capital spending year on record. 2019's capital spending plan of $1.3 billion is $500 million more than the company has ever spent in a given year.
Beyond 2019 is when things will really start to get interesting, though. All of that spending is for three huge capital projects -- its Permian Gulf Coast pipeline, the Cushing-to-Houston pipeline, and its Seabrook crude oil export terminal -- that will start operations in 2020. Adding these assets to existing operations will likely result in significant increases in cash flow.
For those investors looking to hold onto Magellan for the long term, 2019 will likely be just a blip in an otherwise long upward trajectory.