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Morningstar | Magellan Looks Poised to Return to Consistent Returns in the Years Ahead

Magellan’s refined product pipelines are high-quality assets that have contributed to both earnings stability as well as steady increases in distributions over time. The pipelines connect refineries to end markets such as gas stations and railroads. As both supply and demand is remarkably steady over time, Magellan has been able to extract modest inflation-linked price increases over time. However, the maturity of the marketplace and the emergence of refiner MLPs as competitors for refined product assets, have limited investment opportunities over the past few years. As a result, Magellan has invested more than $5 billion largely elsewhere since 2010, and has now built up a respectable but ultimately more volatile and lower-quality crude oil pipeline and marine storage business, which now contributes about 40% of operating margin. While the competitive intensity of the new businesses is higher than the core refined products pipelines, we’ve been impressed with Magellan’s capital discipline, as its projects have yielded high returns and supported continued distribution growth. 2019 will be a heavy capital-spending year, with $1.3 billion earmarked for growth projects and another $500 million in projects under consideration, supporting growth well beyond 2020. These include expansion of the marine terminal at Pasadena, Texas, and two refined products pipelines. The existing major Permian efforts, including the 275,000 barrels per day Longhorn pipeline--bringing crude from the Permian Basin to the Gulf Coast and BridgeTex (being expanded to 440,000 barrels per day) continue to look reasonably attractive, even as tariffs have declined about 50% recently due to tough competition. The recent sale of a portion of Magellan's stake in BridgeTex obtained a rich multiple, and the cash has been partially applied toward debt reduction to keep leverage reasonable. The BridgeTex sale, the Permian tariff declines, and the cancelation of the stand-alone Delaware pipeline mean that 2019 results will be more muted than originally expected, but beyond 2019, we expect a return to the consistent growth that Magellan has earned a well-deserved reputation for providing.