The energy industry did not deliver many big winners in 2014, with most companies keeling over as the price of oil plunged. There were a few exceptions, though, and pipeline specialist Magellan Midstream Partners (NYSE:MMP) became one of them by absolutely thrashing the S&P 500 by more than 20 percentage points.
Even more astounding, Magellan has consistently cranked out market-crushing results for more than a decade. So let's look at what is in Magellan's secret sauce that has allowed this master limited partnership to outperform for as long as it has.
Keeping a low profile
Magellan's management doesn't draw much attention to itself, and has avoided making massive acquisitions or taking on huge projects. Instead, it has focused on making small bolt-on acquisitions and smaller projects to extend its already vast refined petroleum products pipeline network -- by far and away the nation's largest.
Avoiding massive projects and investments has enabled the company to sustain strict capital discipline that helps to boost shareholder returns. Not only has Magellan maintained an investment-grade rating and a very manageable debt profile, but since 2011 (after the 2010 buyout of its general partner) the company has increased its share count by less than 1%, while many of Magellan's peers have needed to dip into the equity markets.
Add this to the company's outstanding ability to generate cash flow well in excess of its distributions, and a distribution payment that has averaged a 13% annual increase over the past 10 years, and you get a very dependable income investment with a bright future ahead.
Steering clear of the oil price bloodbath
It's not 100% clear why Magellan shares would not be as affected by the recent price decline as, say, those of Enterprise Products Partners (NYSE:EPD), as both companies get at least 85% of their gross profit from fee-based contracts that shield them both from oil price swings. But when you look at the companies' share performance on the year, it's pretty clear the massive oil sell-off hurt Enterprise while Magellan went relatively unscathed.
One thing that might be working in Magellan's favor in investors' eyes is that large geographic areas covered by the company's refined products pipelines are considered noncompetitive regions by the Federal Energy Regulatory Commission. This basically means these pipelines operate in regions where there is such little competition that they are regulated like utilities and are guaranteed a certain profit level. In contrast, Enterprise's natural gas liquids pipelines are not regulated in such a way.
Another thing to consider with Magellan is that much of its business is centered around domestic consumption of gasoline. While the price of gas has dropped significantly in the past few months, the actual volume of gasoline consumed hasn't really budged. According to the U.S. Energy Information Administration, a 25%-50% swing in the price of gasoline will only change per capita miles driven by 1%. An inelastic demand for its product allows the company to make better investment decisions down the road.
What a Fool believes
Magellan shareholders had another great year in 2014, even in the face of plunging oil prices that sunk so many companies around it. Thanks to a solid balance sheet, extremely disciplined capital allocation, and a lucrative asset base, Magellan's management was able to increase the company's distribution by 20%. Since so much of the company's revenue is shielded from oil prices, don't be surprised if Magellan can pull off another spectacular year in 2015.
The Motley Fool recommends Enterprise Products Partners and Magellan Midstream Partners. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.