The downturn in the oil market has hit companies related to the production of oil and gas really hard. However, it has had quite the opposite impact on those that are on the demand side of the equation because lower commodity prices fuel incremental demand. That dynamic was on full display when Magellan Midstream Partners (NYSE:MMP) reported its second-quarter results on Tuesday morning.

Magellan Midstream results: The raw numbers

Metric

Q3 2015 Actuals

Q3 2014 Actuals

Growth (YOY)

Net Income

$251.0 million

$198.6 million

26.4%

Distributable Cash Flow

$230.0 million

$183.4 million

25.4%

Net income per unit

$1.10

$0.87

16.1%

Data source: Magellan Midstream Partners, L.P.

What happened with Magellan Midstream this quarter? 
Magellan Midstream benefited from robust demand for refined petroleum products:

  • Magellan's refined product's segment's operating margin was $241.6 million for the quarter, up $41.1 million year over year. That growth was fueled by a 4.6% increase in tariffs, as well as a 3% increase in refined pipeline volumes, due to record gasoline shipments.
  • Its crude oil segment also fueled strong growth with its operating margin at $94.7 million, which was up $24.4 million year over year. Driving this increase were contributions from the acquisition of the Houston crude oil pipeline, higher shipments in the Longhorn and Houston distribution systems, and new leased storage contracts. In addition to that, earnings from the late 2014 start-up of the BridgeTex pipeline also contributed to the year-over-year increase.
  • The company's marine storage operating margin was also strong, growing by $4.6 million, to $32.2 million. Fueling this growth was higher ancillary revenue, as well as lower operating expenses.
  • This across-the-board growth fueled robust growth in distributable cash flow.

What management had to say 
CEO Michael Mears, commenting on the company's results, said:

Magellan generated exceptional results during the third quarter due to record refined products pipeline volumes and continued strong demand for our crude oil transportation and marine storage services... Despite the current challenges facing the energy industry, Magellan's fundamentals have remained strong, our disciplined, predominantly fee-based business model continues to perform well and our solid investment-grade balance sheet provides financial strength for the future.

Magellan is benefiting from two key trends. First, the bulk of its assets are primarily fee-based, which provides a foundation of cash flow no matter what commodity prices do. Further, its business is focused on demand-driven assets, which benefit from lower prices. 

This is a focus that a lot of midstream companies are making these days given the volatility of oil and gas prices, and the impact that has on supply growth. Energy midstream leader Kinder Morgan (NYSE:KMI), for example, really benefited from volume growth in its products pipeline segment this year thanks to higher demand. Because of this, that segment is on pace to deliver year-over-year segment earnings growth above the 29% Kinder Morgan had projected.

This growth is being driven by a 2.5% year-over-year increase in refined product volumes, fueled by a 4.7% increase in diesel volume, and a 6.1% increase in jet fuel volume. This is helping Kinder Morgan offset some of the weakness in its commodity-price-exposed carbon dioxide business.

Looking forward 
Thanks to its strong performance in the quarter, Magellan Midstream is raising its distributable cash flow guidance by $40 million, to $920 million. That is expected to result in a robust 1.35 times coverage ratio for its cash distribution, even with the company remaining committed to growing the payout by 15% this year.

Further, it sees at least 10% growth next year. Clearly, the focus on fees and demand-driven assets is paying off for Magellan.

Matt DiLallo owns shares of Kinder Morgan and has the following options: short January 2016 $32.5 puts on Kinder Morgan and long January 2016 $32.5 calls on Kinder Morgan. The Motley Fool owns shares of and recommends Kinder Morgan. The Motley Fool recommends 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.