EUR 850.00 For Business Accounts Only

Morningstar | Magellan's Refined Products System Is One of the Highest Quality in the Midstream Space

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. The onus is on Magellan’s growing portfolio of crude oil and marine terminal projects to support ongoing high-single-digit distribution growth, and the partnership is evaluating more than $500 million in organic growth projects. The 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) look reasonably attractive. 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 timing was not bad too as substantial Permian takeaway capacity under construction has pushed down market prices by about 50%. As Permian-Houston differentials have blown out recently because of near-term Permian takeaway constraints, Magellan is capturing these wide differentials via higher spot market shipments on both pipelines.