This 11.5%-Yielding Energy Stock Plans to Keep Its Dividend Intact

Oil and refined products master limited partnership Magellan Midstream Partners (MMP) has experienced some effects from this year's downturn in the oil market. However, unlike many of its peers, the energy company hasn't reduced its high-yielding distribution. That's because it entered this period of turbulence in a position of strength. Combine that with the overall durability of its cash flow -- which was on display during the third quarter -- and the MLP believes it can continue maintaining its outsized dividend.

Drilling down into Magellan Midstream Partners' third-quarter results

Data source: Magellan Midstream Partners. 

Weak demand for refined petroleum products and crude oil continued to impact Magellan Midstream Partners during the third quarter. However, its financial results did bounce back sharply compared to the brutal second quarter when Adjusted EBITDA plunged 23.5% year over year, and DCF plummeted by more than a third.

Operating margin from the company's refined products assets declined 11.6% to $239 million, primarily due to the continued impact of COVID-19, which has restricted travel and some activities. Also impacting these earnings was the sale of three terminals earlier this year and the discontinuation of its ammonia pipeline operations late last year.

Meanwhile, the MLP's crude oil operating margin slumped 13.2% to $135.8 million. The company shipped fewer volumes on its Longhorn pipeline due to lower oil prices and increased competition from recently completed systems, which also impacted its marketing income.

Despite the tough quarter, the MLP generated more than enough cash to cover its high-yielding distribution.

Image source: Getty Images.

A look at what's ahead for Magellan Midstream Partners

Given the current pace of the economic recovery, Magellan Midstream estimates that it will generate $1.025 billion of DCF this year. This guidance assumes no additional lockdowns in the U.S. regions it serves. That would provide the MLP with enough cash to cover its payout by about 1.1 times, enabling it to produce roughly $100 million in excess cash.

The company expects to invest $400 million on capital projects this year, $310 million of which it has already spent. It has covered this capital spending with excess cash after paying its distribution and asset sales (it received $250 million for the three refined product terminals and $77.5 million for a 10% interest in the Saddlehorn Pipeline). Because it covered its distribution and capital sending with room to spare, Magellan has maintained its top-tier balance sheet, supported by the highest credit rating among MLPs. The company has used its strong financial profile to take advantage of the more than 40% decline in its unit price by repurchasing $252 million of its units this year.  

Magellan Midstream expects to maintain its current distribution level in 2021. Driving that view is the overall durability of its cash flows, -- which should improve next year as volumes recover -- its strong balance sheet, and the wind-down of its capital spending program. The company expects to finish its last remaining large project -- the 100,000 barrel-a-day expansion of Saddlehorn -- by the end of 2020. As a result, it only anticipates spending about $40 million next year to cover its remaining growth projects. That will give it even more financial flexibility, which it could use to pay down debt or repurchase more of its beaten-down units.

A sustainable double-digit yield

While Magellan Midstream's financial results were weaker during the third quarter, they did bounce back sharply from the second. Given that and the continued recovery in demand, the MLP expects to generate more than enough cash to cover its payout. Add that to its strong balance sheet and the upcoming completion of its last large expansion project, and the MLP believes it can maintain its distribution next year as well. That makes it an attractive option for yield-seeking investors.