While almost every other energy company has been tossed about by the storm that is cheap oil, Magellan Midstream Partners (NYSE:MMP) has had some pretty smooth sailing. A large part of that experience is due to the company's business model, but it also has to do with how management had the discipline to keep from overextending itself during the boom of the past few years.
Now, while in the middle of the market downturn and so many companies around it scaling back, Magellan seems to be ramping up. Here are five quotes from Magellan's CEO that suggest the company is about to become a more aggressive player in the midstream space.
Spending a little more now ...
It's pretty rare as of late to hear that a company in the energy space is increasing its spending, but there are some opportunities that Magellan's management feel are too good to pass up. According to Magellan Midstream CEO Michael Mears:
[W]e have increased our estimates by $200 million to $1.6 billion for projects under construction, with $850 million of that spending in 2015, $700 million in 2016 and another $50 million thereafter to complete our current slate of construction projects. The increase primarily relates to expansion at our Galena Park terminal that we announced last week. These enhancements include the addition of a fifth dock and connectivity of our Houston crude oil distribution system to our Galena Park facility. We expect the dock improvements, which make up the majority of the $115 million spending, to be operational by the end of 2018 and the crude oil connectivity to be complete by the end of 2016.
It's not a huge uptick in spending, but one thing Magellan has proved over the years is that you don't need to spend a lot to get a decent return.
... with more on the way
"While many of the marine opportunities that we are developing are not at a stage that we can discuss yet, examples of those that we can discuss include building additional storage in our Galena Park terminal for use once the new dock is operational and constructing additional tankage and docks at the new 100-acre tract of land that we recently acquired in Corpus Christi," Mears said. "We also continue to assess opportunities to expand various other terminals and pipelines within our portfolio, both on the refined products and crude oil side."
Now that the oil export restrictions have been lifted, it's very possible that Magellan's ports and terminals for refined product export could be fitted to move crude oil as well. While we're still a little uncertain how much crude exports will affect volumes and movement, chances are it will keep Magellan's terminals busy.
Unlike other midstream companies that issue the size of their project backlog, Magellan prefers to not disclose its projects under consideration. One of the reasons, according to Mears, is that it keeps management from needing to allocate capital to projects that may not necessarily be economical at that time:
[T]here's certainly some level of projects in the crude oil space, in particular, that are more likely with higher commodity prices than we have right now. On the other hand, the low crude oil price facilitates some of the projects and opportunities we have on the refined products side. So we haven't tagged this to a specific commodity price environment, and that's one of the reasons why we don't get more specific.
One of the benefits of being on both sides of a refinery is that when the market for one product is weak, the other is rather strong. With strong results from its refined product system, it can shift its spending from one side of the refinery to the other to address the greatest needs of the market.
Stuff is still expensive
Investors across the energy space have pretty much assumed that some industry consolidation would take place as companies put assets up for sale. According to Mears, though, Magellan still hasn't seen the right deal on the table for management to bite:
I'll probably sound like a broken record, but the recent acquisition opportunities we've looked at have continued to surprise us as to what the bid prices have been for some of those versus what we're willing to pay. And so as we've said before and will continue to do, if the value is outside of what we think is appropriate, we'll pass. We're still optimistic that those prices will come down, and we'll have an opportunity on some acquisition opportunities. But right now, at least for us, the sales price on a lot of the assets have been higher than what we're willing to pay.
You would think that by now, companies would be begging to shed some assets for some cash. But it seems that isn't the case. We can probably safely assume that Magellan's management is still assessing potential deals, but don't be surprised if something doesn't materialize soon.
The recent scare in master limited partnerships and midstream companies mostly came about because companies were too aggressive with their payout policies. So when the amount of cash coming in the door started to decline, investors got nervous that distributions would be cut to free up cash to invest in the business. Surprisingly, according to Mears, Magellan is going in the opposite direction:
Well, we've said before that we would feel comfortable with a coverage of around 1.1. We think our business is stable and a 1.1 coverage is more than sufficient for us. We're much higher than that right now, and our intent would be to, over time, to bring that down closer to 1.1. But we're going to do that in a structured way. We're not going to do it all at once. And again, as long as we can continue to grow the business at the pace we're going, that's going to give us quite a bit of fairway to, in time, before we come down to that 1.1 coverage.
Considering the fits and starts that other master limited partnerships have had with distribution coverage ratios in the 1.0-1.1 range as of late, this one is a bit of a surprise. Thanks to Magellan's more conservative payout policies of late, it has been able to retain a decent amount of cash to be reinvested in those development projects, allowing it to avoid dipping too much into the debt or equity markets. While Magellan has shown to have a pretty resilient cash-generating business, there is something to be said about keeping a little extra cash around and avoid raising capital for new projects all the time.
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