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Morningstar | Magellan and Tallgrass Pursue Attractive Offshore Crude Export Opportunities

Magellan Midstream and Tallgrass recently announced further investments into crude-oil export terminals, which we consider to be wise moves given we expect continued increases in U.S. crude-oil export volumes. U.S. crude-oil exports reached 3 million barrels per day in late June, up from 528,000 bpd last year. Given the small size of the investments, we plan to maintain our fair value estimates and moat ratings for both entities, but we're pleased to see these very high-returning investments, in our view, under development. Both efforts tend to reaffirm our view, though, of Enterprise Products Partners as the early leader here, as it is already exporting substantial volumes of crude oil (802,000 bpd in the second quarter) and just announced a new offshore terminal under development that will be capable of handling 2 million bpd.

Tallgrass' investment is the larger and bolder of the two, assuming customer interest and permits are obtained, which we think is doable. The firm plans to build the Seahorse Pipeline, which will have the capacity to transport 700,000 bpd from Cushing, Oklahoma, to the Gulf Coast. The pipeline will operate as a batch system, allowing barrels to be transported from Tallgrass' Pony Express pipeline, which also uses a batch system from the basin directly to export terminals. The batch system is an attractive option for export customers, as it ensures the quality of the crude is maintained. In contrast, a pipeline that mixes different specifications of crude may meet specified requirements for crude gravity and sulfur content, but be lower quality if measured using a more extensive refinery assay.

The difference can be meaningful, particularly as the U.S. is exporting light crude oil. The oil can be used in Asian and European refineries, which would likely value the extended assay analysis. The U.S. will continue to require heavier crude given its complex refinery slate, meaning its light barrels will be exported while the U.S. continues to import heavy gravity crude. Tallgrass, as part of a joint venture with the Plaquemines Port & Harbor Terminal District, is also building an export terminal that is permitted up to 20 million barrels of storage and be able to handle up to post-Panamax vessels (1 million barrels of oil capacity). Very large crude carrier capacity, or VLCCs, could be added by late 2021 via a pipeline, though we wonder about the efficiency of this effort. It appears that the VLCCs would have to be stationed offshore loading and offloading barrels versus directly connecting to a dock able to operate at a deeper water depth or directly using a offshore loading terminal.

Magellan, as part of a 50/50 venture with LBC Tank Terminals, is pursuing a smaller effort. The venture plans to add 700,000 barrels of storage and 400,000 bpd of dock capacity to the Seabrook Logistics terminal. By 2019, the terminal will have 3.1 million barrels of storage, and about 400,000 bpd of export capacity. Further expansion could take the terminal to 5.5 million barrels of storage capacity and export capacity of 700,000 bpd, and we think this would probably be complete by 2021. The limitation here is the docks can only handle a Suezmax-class vessel (1 million barrels of capacity), whereas the recent Enterprise Products Partners and Tallgrass terminal expansions have the capability to handle VLCC class vessels (2 million barrels of capacity), making them much more economically attractive. Still, with access to Magellan's deep asset network across Houston, obtaining barrels for the terminal shouldn't be an issue.