Last year was a tough one for the oil market. Demand for refined products plunged as governments shut down their economies to slow the spread of the COVID-19 outbreak. That market turbulence impacted the operations of MLP Magellan Midstream Partners (NYSE:MMP), which focuses on oil and refined products.

However, thanks to its business model's overall stability and its top-tier balance sheet, Magellan was able to maintain its distribution, which currently yields 9.9%. Meanwhile, with market conditions expected to improve this year, the MLP anticipates maintaining its current payout level again in 2021.

Drilling down into Magellan Midstream Partners' fourth-quarter results

Metric

Q4 2020

Q4 2019

Year-Over-Year Change

Adjusted EBITDA

$340.3 million

$433.8 million

-21.6%

Distributable cash flow (DCF)

$269.7 million

$357.8 million

-24.6%

DCF per unit

$1.20

$1.56

-23.1%

Distribution coverage ratio

1.17 times

1.52 times

-23%

Data source: Magellan Midstream Partners.

The downturn in the oil market continued to impact Magellan Midstream Partners during the fourth quarter, causing its earnings and cash flow to decline by more than 20% year over year. For the full year, the MLP generated $1.35 billion of adjusted EBITDA and $1.04 billion of DCF, down 14.7% and 19.5%, respectively, from 2019.

Lower oil and refined product demand because of the COVID-19 outbreak weighed on its results. The operating margin in the company's refined products business declined by 15.8% in the fourth quarter to $249.6 million because of reduced drilling activity from lower oil prices and the pandemic's impact on refined product demand. The sale of three marine terminals early last year also impacted its results. It partially offset these headwinds with contributions from its recently expanded West Texas Pipelines and higher tariffs on its pipelines. 

Earnings from its crude oil assets were also under pressure last quarter. This segment's operating margin tumbled 28.2% to $109.8 million. The expiration of several higher-priced contracts on its Longhorn Pipeline and lower tariffs on its Houston distribution system impacted results.

However, despite those headwinds, Magellan Midstream generated enough cash to cover its distribution by 1.13 times for the full year. That left it with some excess money to finance a portion of its expansion projects and repurchase common units. It covered the balance with asset sales, enabling it to maintain a strong balance sheet.

An oil storage complex with pipelines.

Image source: Getty Images.

A look at what's ahead for Magellan Midstream Partners

The MLP anticipates that market conditions will improve in 2021 as vaccines get rolled out, fueling a rebound in travel and additional demand for refined products. Magellan estimates gasoline shipments on its systems will increase by 16%, along with an 8% improvement in distillate volumes like diesel and a 20% jump in aviation fuels. This forecast would put total product shipments on its systems 3% above 2019's level as higher gas volumes offset lower aviation fuel demand.

Those improvements should help offset most of the impact of asset sales, lower profits from gas liquids blending activities, and lower contract rates on Longhorn. As a result, Magellan anticipates that it will generate $1.02 billion of distributable cash flow in 2021, about 2.3% lower than last year's level. That's enough cash to cover its distribution with about $100 million to spare.

That excess cash will be more than enough to fund the MLP's anticipated capital spending level of $75 million. When combined with its top-tier balance sheet, Magellan has the financial flexibility to maintain its distribution even if market conditions don't improve as quickly as it anticipates. It also gives it the optionality to continue repurchasing units and make additional investments, such as new expansion projects or acquisitions, if a compelling opportunity arises.

Ideally suited for income-seeking investors

While the downturn in the oil market impacted Magellan Midstream's operations last year, it has enough financial cushioning to maintain its big-time distribution. With market conditions on track to improve this year, its financial strength supports its ability to continue distributing cash to its investors. That stability amid the storm makes it an attractive option for investors seeking a high dividend yield.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.