Morningstar | Magellan Reports Steady 2Q Due to Refined Products Stability and Improved Crude Earnings
Magellan's second-quarter earnings were as expected, as crude-oil-driven earnings from a new condensate splitter startup and incremental contributions from Permian pipelines more than made up for flat results in the refined products business. We plan to maintain our $71 fair value estimate and wide-moat rating. Overall earnings still appear to be on the same trajectory as management guidance and our expectations in terms of 5%-8% growth for both distributable cash flow and distributions per unit over the next few years.Crude oil operating margin increased to $152 million from $106 million, benefiting from the new splitter, new capacity additions, and spot-market shipments at higher rates on the BridgeTex and Longhorn pipeline. Given we expect the currently wide differentials to persist between the Permian and Houston until at least mid-2019, it is not surprising to see Magellan guide toward higher levels of spot shipments on both pipelines, modestly boosting 2018 distributable cash flow guidance for the year by $20 million to $1.1 billion. The revised forecast matches our expectations. Further, Magellan has now signed either two-year extensions or new contracts with terms for up to 10 years for all existing Longhorn customers, which is what'd we expect to see in a wide differential environment.
The refined products segment, excluding mark-to-market future contracts adjustments, reported a gross operating margin that was essentially flat at $178 million. Higher expenses offset higher volumes. Product margin declined to $13 million from $37 million due to mark-to-market hedging losses, but even excluding the impact of hedges, the cash margin declined as well because of higher butane costs. This type of quarterly volatility is normal for the business, in our view.
Magellan Midstream Partners is engaged in the transportation, storage and distribution of refined petroleum products and crude oil. The company's segments are: refined products, which consists of its refined products pipeline system, independent terminals and ammonia pipeline system; crude oil, which comprises crude oil pipelines, condensate splitter and storage facilities and ships crude oil as a common carrier for customers including crude oil producers, end users such as refiners, and marketing and trading companies; and marine storage, which owns and operates marine storage terminals located along coastal waterways.
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