Oil and gas midstream partnership Magellan Midstream Partners (MMP +0.00%) expects big things in 2019. Its current slate of projects under construction is the largest in the company's history, and it expects the bulk of them to be complete in the next six months.
With so much attention going toward these projects, some investors have been worried about what's next. This past quarter, management addressed those concerns and announced another guidance increase for the fiscal year. So, let's dig into the recent results to see what's going on.
Image source: Magellan Midstream Partners.
Magellan Midstream Partners results: The raw numbers
| Metric | Q2 2019 | Q1 2019 | Q2 2018 |
|---|---|---|---|
| Revenue | $701.7 million | $628.9 million | $644.1 million |
| Adjusted EBITDA | $378.3 million | $386.4 million | $338.6 million |
| EPS (diluted) | $1.11 | $0.91 | $0.94 |
| Distributable cash flow | $314.8 million | $318.0 million | $266.5 million |
DATA SOURCE: MAGELLAN MIDSTREAM PARTNERS LP. EPS = EARNINGS PER SHARE.
When it comes to master limited partnerships, cash is king. That is what makes this most recent quarter's results so impressive. Distributable cash flow improved 18% compared to this time last year and management subsequently increased its cash flow guidance for the year.
The big driver for the quarter was its refined product business segment, which benefited from a midyear tariff increase in 2018 of 4.4%. Management also noted that even though total volume shipments were down 1.1%, most of the shipments were longer hauls on the system, which are higher revenue than short deliveries. It's also worth noting that its crude oil segment was a quarterly record despite selling a partial stake in one of its crude pipelines last year.
Data source: Magellan Midstream Partners. Chart by author.
What happened with Magellan Midstream Partners this quarter?
- After a string of project cancellations, Magellan announced an open season to solicit customer interest in expanding and extending its Saddlehorn pipeline. The extension would bring the pipe from Cheyenne, Wyoming to Ft. Laramie, Wyoming, and will grant it better access to producers in the Bakken region. It also wants to expand the total capital pipe capacity from 190,000 to 290,000 barrels per day.
- The open season for its Voyager pipeline remains open and a final investment decision has not yet been announced for the project.
- Management expects to complete construction of several assets in the second half of the year. Operations have begun at its 750,000-barrel-per-day export dock at Galena Park, Texas; its Houston-to-Hearne, Texas, refined products pipeline is in the testing phase; and its marine terminals in Pasadena and Seabrook expect to be completed by early 2020.
- The company's stronger-than-expected fourth-quarter result led management to once again raise its distributable cash flow guidance for the year. It now expects to generate $1.22 billion for the year. Management noted, however, that the additional cash will go toward construction and will not increase its payout more than the planned 5% increase for the year.
What management had to say
Magellan has been one of the best operators and capital allocators in the oil and gas business over the past several years. The one concern that has popped up lately, though, has been what looks like an empty quiver of new projects once the current ones are completed. That has been compounded in recent quarters after a string of project cancellations.
So, on the conference call, CEO Michael Mears wanted to assure investors that management has plenty of future growth in the wings and that he and his team will maintain discipline and invest in high-return projects.
Beyond these capital projects, we continue to actively work a long list of potential expansion opportunities still totaling well in excess of $500 million. These potential projects include expansion opportunities in each of our business segments, including the proposed Voyager crude oil pipeline for which the open season continues till the end of August.
Specific to Voyager, we have received a number of questions on the likelihood of it moving forward with other announced pipeline projects in the space. What I can say is that the industry has been fully aware of all the potential pipelines that were being proposed throughout our development process and we remain in active discussions with a number of parties who are still very interested in considering our project. We believe we have an attractive service offering and we will continue to develop this project, either as a stand-alone opportunity or as a part of a more capital-efficient solution that we are discussing with the third-party. And even though the Voyager project has been more public due to the pending open season. I can assure you that we are actively pursuing a number of other attractive projects across all of our business units at target returns in our standard 6 times to 8 times EBITDA multiple range.
You can read a full transcript of Magellan Midstream Partners' conference call here.
Looking forward
It's worth pointing out that "in excess of $500 million" quote from Mears is boilerplate language that's been used for years on its conference calls and investor presentations. So, it's hard to say exactly what is on the company's plate from here. One potential project it has mentioned before is further expansion of its Pasadena, Texas, terminal. A second phase development of that facility would more than double its crude oil storage and export capacity for about $700 million. Also, it's reasonable to expect the Voyager Pipeline and the Saddlehorn pipeline expansions to be well in excess of that $500 million number.
Bringing all of these projects to fruition would certainly ease any concerns that Magellan's growth days are behind it. Whether all of these projects get the greenlight is the question investors should be looking out for in the coming quarters.
