Master limited partnerships such as Magellan Midstream Partners L.P. (MMP +0.00%) are largely well insulated against the volatility of commodity prices. However, the pipeline company's first-quarter report showed it does feel some impact as its business has a bit more commodity-related activities than many of its peers. Still, Magellan overcame more of this impact than it expected, which led it to boost its full-year guidance for distributable cash flow.
A look at the numbers
Magellan Midstream's net income fell from $242.6 million in last year's first quarter to just $183.6 million this year. The drop was due to both lower realized commodity prices and the timing of mark-to-market pricing adjustments on its hedging positions. However, the company muted some of this impact with higher contributions from its core fee-based transportation and terminals business.
These fee-based businesses generated a lot of cash for the company. Its distributable cash flow for the quarter was $233.1 million, or $1.03 per unit, which was off from the $253.2 million, or $1.12 per unit, generated in the first quarter of last year. Nonetheless, its distributable cash flow was well above the company's recently increased distribution of $0.7175 per unit, leaving Magellan plenty of room for additional distribution growth.
The biggest culprit in the year-over-year decrease in cash flow was the company's refined products segment. The unit's quarterly operating margin of $183.4 million was $71.6 million lower than in the first quarter of last year. While the segment's operations were solid thanks to slightly higher refined product pipeline volumes and average rates, its operating expenses increased due to less favorable overages, which was a result of significantly lower commodity prices.
Some of the weakness in Magellan's refined product segment was offset by its crude oil segment; the business's operating margin was $84.7 million, which was $21.4 million higher than the same period last year. This was primarily due to increased oil shipments on the company's Longhorn Pipeline, contributions from the Houston oil pipeline the company acquired last November, and the start-up of the BridgeTex pipeline late last year.
Finally, the company's marine storage segment's operating margin was $27.9 million, which was about $500,000 lower than it was last year. Improved utilization and higher average storage rates boosted this segment's revenue, but that was offset by higher costs for asset integrity and asset retirements.
A look ahead
While Magellan's results were down from the previous year, they beat the company's expectations. Because of that, and based on its outlook for the market, the company foresees better than expected earnings results in 2015. Therefore, the company increased its guidance for distributable cash flow by $30 million to $870 million, or $3.83 per unit. That would provide the company with a very strong 1.3 times distribution coverage ratio, which is why it remains committed to increasing the payout by 15% in 2015.
Magellan is also developing several growth projects that should increase its distributable cash flow in the years ahead, leading the company to project a 10% increase to its distribution in 2016. The company is in the final stages of right-of-way and permitting work for its Little Rock pipeline project, which is expected to begin construction later this year and be operational by mid-2016. It also just finalized plans for the Saddlehorn pipeline, which should also start construction later this year and be operational by mid-2016. In addition, the company's new condensate splitter project in Corpus Christi, Texas, is under construction and expected to be operational late next year. These projects represent $1.2 billion in investments to be spent over the next year and a half, which could be bolstered by $500 million of additional growth projects the company is evaluating for future development.
Investor takeaway
While weaker commodity prices dinged Magellan's results, the company's underlying business remains strong thanks to primarily fee-based operations. Those assets continue to throw off a ton of cash, which the company expects to send back to investors via a rapidly growing distribution.
