3 Key Takeaways From Magellan Midstream Partners L.P.'s Earnings

Earlier this week, Magellan Midstream Partners (MMP) produced yet another solid quarterly report in the face of the less-than-stellar oil and gas market. Thanks to new pipelines getting up to full volume capacity and some timely increases in tariffs, Magellan was able to exceed Wall Street expectations. Of all the things that Magellan reported this quarter, here are the three key takeaways individual investors should note from this latest release.

By the numbers
Magellan Midstream Partners posted net income per share on a GAAP basis of $1.10, well above analyst expectations of $0.75 per share based on consensus compiled by S&P Capital IQ. For a master limited partnership like Magellan, though, those per-share income numbers aren't as important as the company's distributable cash flow, which comes in at a very respectable $230 million, a 25% increase from the same quarter last year.

All three of the company's business segments -- refined products, crude oil, and marine storage -- posted better year-over-year results, as seen in the the chart below.

Data source: Magellan Mistream Partners earnings release, author's chart.

The 3 key takeaways

1. The market downturn isn't that big of a deal
The decline oil and gas prices in prices is going to have a different effect on companies at various points in the value chain for oil and gas. In the case of Magellan and many other pipeline companies, though, that impact is rather limited. The fact that many companies charge a contracted fixed fee for use of a pipeline network or to store at a terminal, the real threat to earnings comes from total volume transported rather than the price of that product

This was abundantly clear in Magellan's results this past quarter. In the refined products segment, it raised its contractual tarriff for transport by 4.6% while at the same time increasing volumes by 3%. The same can be said for its other segments, where higher volumes led to better-than-expected results. 

2. Generating excess cash
One of the key differentiators between Magellan and many of its peers in the pipeline space is that it has maintained a more conservative strategy for paying its unitholders. Typically, the company generates several million in cash flow exceeding what it pays out, which gives it an additional form of financing for its new projects. 

This past quarter, cash flow from operations was exceptionally strong to the point that management was able to raise its guidance for distributable cash flow and distribution coverage for the fiscal year 2015. With distributable cash flow now expected to be around $920 million for the year, Magellan's management will be able to deploy about $240 million toward its growth capital projects and reduce its dependence on equity and debt financing, a major plus for unitholders over the long term. 

3. Spending through the cycle
In the days leading up to the company's earnings release, Magellan announced that it would be expanding its capacity at its Galena Park crude oil terminal in the Houston Ship channel. The project will enable it to load larger ships as well as increase their loading capacity of crude or refined products and will increase connectivity for its Houston crude network. 

Perhaps this is reading too much into the tea leaves and I'll admit it is complete speculation, but this and other recent investments seem to suggest the company anticipates more and more crude oil moving out of the Houston area by ship. It may be a sign that it anticipates some revisions to our long-held restrictions of exporting crude oil.

Either way, the $115 million price tag certainly isn't anything that will wow investors who are impressed with large numbers, but it's encouraging to see the company continue to invest in new projects despite the downturn in activity. When the market does turn, these investments should pay off handsomely. 

What a Fool believes
There is an awful lot of predictability in Magellan's earnings. Its fixed-fee model for earnings provides a steady stream of cash flow that gives it the ability to spend through the cycle. Add to that management's more measured approach to paying investors and keeping some cash for growth initiatives and you get one of the better long-term investments in the MLP space you can find. As long as it can keep its transport network filled with products, the company should continue to produce spending earnings reports for many quarters to come.