Magellan Midstream Partners (MMP 0.67%) surprised a few investors during the fourth quarter when it announced it was canceling a proposed pipeline project in the Permian Basin. It was a relatively small project, though, so at first, it didn't seem like a big deal.
Now that the company has canceled a second, much larger project, it makes one wonder why Magellan is backing away from one of the most in-need segments of the oil and gas value chain.
Here's a quick look at Magellan's most recent quarter and how management plans to respond to this recent spate of project cancellations.
Magellan Midstream Partners' results: The raw numbers
|Metric||Q1 2019||Q4 2018||Q1 2018|
|Revenue||$628.9 million||$864.7 million||$678.8 million|
|Adjusted EBITDA||$386.4 million||$374.1 million||$324.4 million|
|Distributable cash flow||$318.0 million||$302.4 million||$258.9 million|
Even though revenue and net income were down compared with this time last year and down considerably from the first quarter, much of those declines were connected to fair value accounting related to some of its inventories of products and some of its contracts.
They really had no impact on what matters at Magellan, which is cash flow. The company's distributable cash flow increased 23% versus this time last year thanks largely to new assets coming on line in its crude oil segment. The fact that growth came from there is even more surprising considering that it sold a portion of its stake in the BridgeTex crude oil pipeline last year.
What happened with Magellan Midstream Partners this quarter?
- After canceling the development of the Crane-to-Wink pipeline in the fourth quarter, Magellan announced that it was pulling out of the proposed Permian-Gulf Coast pipeline joint venture with Energy Transfer, Delek, and MPLX. The company subsequently reduced capital spending for the year to $1.1 billion.
- Magellan did, however, extend the open season for its Voyager pipeline that would transport crude oil from Cushing, Oklahoma, to the Houston area. The extension was granted because many of its potential customers asked if a leg could be added to the pipe that would originate in Midland, Texas.
- To reassure investors, management noted that its other major construction projects -- its Pasadena marine terminal and its Houston-to-Herne, Texas, refined products pipeline -- were well underway.
- The company's results for the quarter were good enough that management increased its 2019 guidance for distributable cash flow to $1.18 billion. Instead of increasing its payout, though, management wants to put that excess cash back into its current slate of construction projects.
What management had to say
Magellan's decision to back out of these recent projects seems strange when the rest of the industry can't seem to sanction projects fast enough. The amount of projects that Magellan has said "no" to lately is enough to make some investors wonder what the company's growth pipeline will look like at the end of this year. On the company's conference call, CEO Michael Mears addressed this question directly:
As you may be aware, our expansion capital spending estimates no longer include the PGC [Permian to Gulf Coast] joint venture pipeline out of the Permian. We made a public statement in late March indicating that due to the competitive and dynamic environment within the Permian, we believe it is unlikely that the stand-alone project initially announced eight months ago will proceed. While this development is unfortunate, we continue to firmly believe the capital discipline is the foundation of Magellan's long-term success.
Some investors have expressed concern as to what new projects will fuel Magellan's next wave of growth beyond 2020. I can assure you that we remain very active evaluating other potential expansion opportunities, still totaling well in excess of $500 million to cover a variety of refined projects, marine, and crude oil infrastructure opportunities. Our project backlog contains many smaller scale, high-return projects, but we are also evaluating a number of large-scale opportunities that hopefully we can discuss over the next few months.
2019 was already set to be a crazy year for Magellan because of its massive capital spending program. Even after pulling out of the PCG pipeline and reducing capital spending by $200 million, 2019 is still slated to be the largest capital commitment in a single year by a long shot.
With Magellan's analyst day coming up soon, it's not hard to imagine management announcing a slew of new projects for 2020 and beyond to make up for losing those two recently canceled projects. With oil and gas production showing no signs of slowing down anytime soon, there are bound to be plenty of opportunities that meet management's requirements for rates of return. So be on the lookout over the next few months for any announcements of new projects.