This Oil Stock Plans to Maintain Its 10%-Yielding Dividend

Magellan Midstream Partners (MMP) hasn't been immune to the oil market downturn. The master limited partnership lost more than 30% of its value this year because of the impact the COVID-19 outbreak is having on volumes flowing through its pipelines. Because of that sell-off, Magellan's dividend yield has risen near 10% on concerns it might need to cut its payout as it navigates through these challenging market conditions.

The company, however, believes it can generate more than enough cash to cover its current distribution while also continuing to expand its operations. That was one of the clear takeaways from its first-quarter earnings. 

Drilling down into Magellan Midstream Partners' first-quarter results

Data source: Magellan Midstream Partners.  

The challenging conditions in the oil market started affecting Magellan's results during the first quarter as both its earnings and cash flow slipped a bit year over year. The company's refined products segment, however, delivered solid results overall. Revenue increased by $4.7 million because of higher transportation volumes and rates, fueled in part by the recent completion of the East Houston-to-Hearne pipeline segment. These positives offset lower demand caused by the travel and economic restrictions related to the COVID-19 outbreak as well as reduced drilling activities as a result of lower oil prices.

Revenue in the company's crude oil segment, on the other hand, declined by $6.5 million. That was primarily due to fewer shipments on the Longhorn pipeline as a result of the recent completion of competing pipelines. The company also sold a 10% interest in the Saddlehorn pipeline in February, which affected earnings.

Image source: Getty Images.

A look at what Magellan Midstream Partners sees ahead

Magellan Midstream is adjusting its outlook for this year because of the impact the COVID-19 outbreak is having on demand for refined products, as well as the affect lower oil prices are having on production volumes. The company currently estimates that it will generate between $1 billion and $1.075 billion of distributable cash flow this year. While that's below its initial guidance of $1.2 billion, it will provide the company with enough cash to cover its current distribution rate by 1.1 to 1.15 times. Magellan will maintain that level this year, instead of its initial plan to increase it by 3%. 

The company's forecast suggests it will be able to retain between $75 million and $150 million of excess cash, which will go toward financing its planned $400 million in expansion-related spending. It already funded $155 million of projects during the first quarter and had $139 million of cash on its balance sheet thanks to recent asset sales. Magellan also has one of the lowest leverage ratios and highest credit ratings among MLPs, which provides it with the flexibility to maintain its distribution and fund expansion projects.

While 2020 will be a tighter year for Magellan, it believes its distribution coverage ratio will improve back above its 1.2 targeted level in the future as refined product demand returns to historical levels and commodity prices stabilize. Meanwhile, the company continues to evaluate more than $500 million of additional expansion projects that could drive future growth once market conditions improve.

Standing firm on the payout

Despite all the challenges in the oil market, Magellan Midstream believes it has the balance sheet strength and cash flow stability to withstand this storm. That's giving the company the confidence to maintain its lucrative distribution this year. Meanwhile, it could resume growth in the future as conditions improve, and it sanctions additional expansion projects that boost cash flow.