Magellan Midstream Partners LP (NYSE:MMP)
Wells Fargo Energy Symposium Conference Transcript
December 10, 2013 8:40 AM ET
Mike Mears - President and CEO
John Chandler - Chief Financial Officer
Jeff Holman - Treasurer
Paula Farrell - Director, Investor Relations
Ross Payne - Wells Fargo Securities
Ross Payne - Wells Fargo Securities
Okay. Just a quick announcement, we are going to try to close off the area in the very back, if you guys can move forward in front of these rooftop areas, we would appreciate it.
Our next presenter is Magellan Midstream Partners. Magellan owns and operates the longest network of refined product pipelines in the United States, moving product all the way from Texas to just short of Canada. External assets are extensive across the Mid-Continent and East Coast. With that, we’d like to welcome Mike Mears, President and CEO; John Chandler, CFO; Jeff Holman, Treasurer; and Paula Farrell, Director of Investor Relations. Mike?
Thanks, Ross. Good morning, everyone and welcome. Thank you for your interest in Magellan. We think we have got a very compelling story to tell and we are glad you are here to hear it.
We have the customary forward-looking statements, which I am not going to read. I want to get right in and start talk a little bit about the corporate structure for Magellan. We’d like to highlight its simplicity.
We have no -- we have a general partner that has no economic interest in Magellan, so we have no IDRs. All the cash flow flows through the L.P., gives us a very low cost to capital, which makes us very competitive with regards to both acquisitions, but also with regards to organic capital, makes organic capital projects that much more accretive when you have a low cost to capital.
We also have Directors that are elected by our unitholders, which is unique in the MLP space. And I think that that combination of no general partner and publicly elected unitholders makes us as close to C-Corp as you can get with regards to governance structure in the MLP space.
We’ve got three primary business units, refine products, marine and crude oil. Crude oil is obviously our fastest growing division. Right now it’s only 17% of our operating margin, but it is rapidly growing. I am going to go through each business segment briefly then I’ll talk about the growth projects from there.
Our largest business segment is our refined product segments. As Ross mentioned, it is a longest refined products system in the country, 96 mile, there is 53 terminals attached o the system. There's also approximately 27 terminals, they are not attached to the pipeline system in the Southeast or attached to third-party pipeline systems.
The story here is really volume and tariff. These systems are demand driven. Our income is driven by tariff which we just raised 4.6%. It’s driven by the index, primarily the PTI Index. We just raised that 4.6% in July of 2013. The projection for next year right now is about 4%, so we would expect to raise our tariffs by 4% in July of 2014.
We have a very competitive position with regards to our pipeline systems. One key advantage of this system is it collectivity. It’s connected to approximately 40% of the refining capacity in the country, which gives our shippers significant supply optionality. If you have basis differential moves from Chicago to the Gulf Coast or to Mid-Continent or to the Rockies, our shippers can ship their supply sources accordingly in the way we manage our inventory, for the most part they can do that in a real-time basis, which gives them tremendously flexibility, it give us tremendous competitive advantage in the marketplace and as a matter of fact, our volume this year, year-over-year actually growing as a result I think of our competitive advantage.
The next segment is our marine storage segment. We have got five terminals in this segment. The business model here is little bit different. It’s not primarily throughput driven and storage driven, so we lease our storage long-term for fixed fee.
We have high utilization at these facilities. We have greater than 90% utilization under long-term contracts. That number is actually depressed because we don't count tankers being utilized when it’s down for maintenance. We have routine maintenance. If you take that away our utilization or contracted rates at our terminals is much higher, it’s much higher, it higher than 95%.
And then we have our crude oil segment. I apologize I have to flip pages here, so I can read this, screen back there. Our crude oil segment which is again our rapidly growing segment, we have got a number of key assets here. I am going to talk about the pipeline in Taxes separately, but there are 800 miles of pipes, primarily the Texas pipes.
We also have a strong position in Cushing. We have got over 15 million barrels of storage in aggregate, most of that is in Cushing, third largest crude oil storage provider in Cushing.
We have also got a number of crude oil assets around Cushing and Oklahoma to serve that market and we have got, if you remember our refined products example we have got a substantial network of refined products pipes in that area and we have been looking and have completed some conversions to crude oil and are continuing to look to optimize the use of our pipes in Oklahoma with refined products versus crude oil.
If you look at our cash flow, we are primarily a fee-based business. Approximately 85% of our operating margin year-to-date comes from fee-based services, the largest compound of that being the tariffs on our pipeline system, the second largest compound of being the least storage in our facilities. The commodity-related activities which is comprised by 14% of our operating margin year-to-date is almost entirely our butane blending business.
Butane blending is really an opportunity-driven business. It doesn’t require a lot of capital. We have invested a significant amount of capital to doing this. It’s really just capturing the margin, the seasonal variances primarily between butane and gasoline and when those opportunities exist to blend butane and the gasoline.
This is a business that has actually grown the margin quite considerably over the last three years. With gasoline prices remaining relatively high and butane prices continuing to decline relative to gasoline given the growth in rich gas production in the country. So it seems substantial growth in margin in blending and we expect those margins to remain strong going forward.
If you look at our growth capital spending really since just about time we went public. We spend about $2.9 billion in growth capital, both for acquisitions and organic spending. The green bar is organic spending. The orange bar is our acquisitions you can see, that we really focused on growing organic development and our acquisitions have been tuned far between, in fact, I think if you compare us to our peers, the number of acquisitions we’ve done is probably -- we're probably near the bottom of the list.
I would attribute that not to the fact that we don't look at these assets when they are on the market but we probably are one of the most conservative, disciplined companies in the MLP space when it comes to actually executing on acquisitions. And we think when we look at our unit price performance that served as well.
We really -- we really tried not to overpay for assets. I think we focused on the fact it’s better not to do a deal with the overpay for deal and as a result, you don’t see many, many acquisitions on this chart. But our organic growth has been growing substantially.
We were spending $1.1 billion this year or next year on projects that are under development in construction. We've also got $200 million of acquisition we just completed and I’ll talk about that here in a minute also.
In addition to that not on this chart, we have over $500 million of organic projects under development as we speak that haven’t made it to this chart yet because we haven't decided to proceed with them but they continue to be under development. You can see where our growth is from this chart.
Most of our growth is in crude oil and most of our base business is in refine products. That was really kind of an intentional shift couple of years ago as we look for the growth platform for the company.
About 83% of our current operating margin is refined products. So we are still predominantly refined products business. Refined product is not the highest growth area within the MLP space but it’s also very stable business. And so we think we’ve got really kind of the best of both worlds.
We’ve got a strong stable core -- cash generating core. And we’ve got tremendous growth in crude oil distribution assets to lay on top of that growth. And you can see that in the -- on the pie charts on the right, 75% of that $1.1 billion that I mentioned is underdevelopment is in cruel development projects. 25% is in refine products and actually the biggest portion of that refine products piece are the acquisitions we just completed.
And then of that basket of projects that we’re developing that are in excess of $500 million, 60% of that are crude oil related projects. So that’s really where we focused our growth going forward. And to talk about a couple of those projects, the two biggest ones, certainly are the Longhorn pipeline and our joint venture with BridgeTex.
Longhorn is pipeline we purchased few years ago in refined products service, we -- as the market evolved, we elected to convert that pipeline to crude oil couple of years ago. We had a substantial amount of refine products business and commitments. So we needed to retain that business.
So a lot of the capital that went into the actual conversion of Longhorn was spent to expand our parallel refine products system. So we can continue to move refine products to West Texas. We went for open season a couple of years on this. We were significantly oversubscribed on 225,000 barrels a day of initial capacity.
The project was just put into service, partial service in the second quarter of this year and then late in the third quarter we reached the full 225,000 barrels a day of capacity. Again that's fully committed.
We’re in the process of expanding the system by 50,000 barrels to 275,000 barrels. We expect that to be partially operational in the second quarter, fully operational by the third quarter later this year. All of those incremental volumes are also fully committed.
This has turned out to be tremendous projects with regards to return for $430 million combined capital, that’s for the initial conversion and the expansion and it has a multiple of about three times EBITDA multiples. So it’s a tremendous project and again we’re in the fourth quarter, that’s really the first quarter we’re going to starting see the full impact of that project as it’s reached its full capacity.
Not on the sheet, we’re also adding a new origin, two Longhorn’s, it’s about $25 million project that will allow us to really optimize supply coming into Longhorn. There is a lot of production that’s about 75 miles east of the origin at Longhorn. And we are going to allow that production to come in right, plus to the producing fields so that we can have more efficient operation out there.
The second large project we have out of the Permian is our joint venture with Oxy on BridgeTex for 50-50 joint venture partners. Our portion of the capital in this project is $600 million. We have commitments on this pipe. We haven’t disclosed the actual level of commitments, but if all that ships on this pipe are at the committed levels of the eight times EBITDA multiple on the $600 million investment with considerable upside, because we expect the space that’s not committed that will be at this point used by spot shippers. There is a very high likelihood that there is going to be a significant use of that spot capacity.
I will say -- in fact, we just put out a media advisory yesterday that we are contemplating another open season on BridgeTex with regards to the uncommitted space. We haven’t made a final decision on that. But that’s something we may see here in the near future. We are still on track to start the pipeline up in mid-2014 and there is no ramp up period. It will be right at the 300,000 barrels a day capacity when we started out later this year.
If you just look at the Permian, I think we get the question quite a bit is outbound capacity from the Permian being overbuild. We don’t think it is. If you look at the growth projections and this projections a little bit dated, I think the numbers are higher now. But if you look at the growth projection for just the Permian, it’s over a million barrels a day of incremental production between essentially now and 2030.
And then if you look at the announced pipeline project out of the Permian including Longhorn and BridgeTex, it adds up to almost a million barrels a day. So it appears to be somewhat balanced. The wild card there is what’s going to happen at the base business. Obviously, there's about 800,000 barrels a day of existing production in the Permian before this growth started to happen. Some of those barrels are being displaced.
Those barrels had moved to Cushing historically with Mid-con refiners continuing to convert to heavy [BPL] widening I think the latest example that they're prepared to run heavies now at Whiting. You could displace more barrels back into West Texas, which could encourage another pipeline to be built, but we think at this point it’s not overbuild and it's really actually somewhat balanced based on the current production forecast.
This next slide is a busy slide that is just dramatic, which represents our crude oil distribution system along the Houston Ship Channel and Texas City. We really have what we believe is the most comprehensive crude oil distribution system that exist today along the Ship Channel.
We are able to take crude oil, not only from our two projects, Longhorn and BridgeTex but also other inbound pipelines. We are connected to the Seaway system through ECHO. We are contemplating a section to Keystone when they come into Houston and then we are connected to every refinery on the Ship Channel and Texas City, either today or we will be within the next few months once BridgeTex is complete.
We have the ability to move crude oil North and South along these corridors. We also just recently signed a deal to offload railcars. We have a commitment to offload rail cars adjacent to our Galena Park facility and shipped those barrels through our system. So we really have, really unmatched connectivity along the Ship Channel. We just recently acquired a system from Shell about three months ago that will now allow us to take Eagle Ford production up to our East Houston terminal and get into Shell systems to take those barrels further.
So, again, we think we have an unmatched system here. It’s somewhat underutilized today and so the capital has been spent. As more and more domestic crude hits the Gulf Coast, we expect that utilization to come up and we are going to recognize the benefits of that going forward.
Our other project in Texas is a Double Eagle project. This is a 50-50 joint venture with Kinder Morgan. This project is just recently in the last two months fully operational, 100,000 barrels a day pipeline that is dedicated to condensate. You can see that the line is build.
If you look at this map, the dark orange is the crude oil rich portion of the Eagle Ford. The lighter orange is the condensate rich region of the Eagle Ford. This system was built through the condensate rich region, and so it’s intended to be dedicated to condensate, that gives us somewhat of a advantage we think, not batching crude through the same system helps preserve the quality of the condensate.
And the destination for Double Eagle is our terminal of Corpus Christi. Our terminal is not part of the joint ventures, so the tanks and the loading fees associated with throughput through Double Eagle are Magellan’s, and not shared with the joint venture. Again, I mentioned this 100,000 barrels a day capacity.
We have commitments for half of that capacity with long-term commitments for half of the capacity. We are in active discussions with third parties as we speak advanced discussions with regards to utilization of the additional capacity we have when we can expand this up to 150,000 barrels a day/
I also mentioned a few months ago that we are looking at condensate splitter in Corpus Christi. We’re still actively doing that. If you look at the condensate production from the Gulf Coast, the projections for the Eagle Ford specifically, there is tremendous amount of condensate there.
The markets for condensate are somewhat limited. It’s pretty much been blended as much as it can be into crude oil. You have some opportunities to move at Canada as a diluent even though it's not a preferred diluent.
In natural gasoline, this is more preferred than condensate. It’s lighter so you need to use less of it. So there's a need to find new markets for the condensate, which is why us and I think the number of other folks were looking at splitters along the Gulf Coast. The products that come out of the splitter are heavy and light naphtha’s jet fuel which can then be exported in the world markets.
We will prefer to find the partner to take the commodity risk associated with a splitter and we’re not in the business of being supposed to what would essentially be a condensate crack spread I suppose as what you call it with regards to splitters. So we’re looking for partner. We’re in advance discussions with regards to putting that together. So hopefully we’ll have something to mention on that in the near future if we’re able to put that together.
The acquisitions mentioned earlier, we bought two pipeline systems from plains. One we closed on July, the other was closed on a couple of weeks ago. The July acquisition was $57 million pipeline from El Paso to Albuquerque, The Rocky Mountain acquisition which occurred November 15, $133 million roughly and you can see where there is at the Rocky’s.
You can see just from a geographic presentation here how well these pipelines fit with our existing systems. There's a lot of opportunity. We think to drive long-haul barrels through our system into these systems.
The customers on these systems are our customers today. So we’re very familiar with them, we’re very familiar with what their objectives are in these markets. So we think this fit well with us. If we did nothing with these assets other then what they had historically been moving, what was a 10x EBITDA acquisition which is nicely accretive on its own.
However, we think there is significant opportunities to grow that overtime. And in fact, in the short period that we’ve own this -- own these, the volumes have modestly exceeded our expectations in the acquisition. We haven't yet gone in there to -- to really develop some of the opportunities that exist. So these are really nice bolt-on acquisition to our refined products system.
We have been talking about crude predominantly. That’s not to say there aren’t opportunities with regards to refined products. One of the consequences of the increased domestic light oil production is it’s made Mid-Continent refiners significantly more competitive. So the Oklahoma and Kansas refiners are enjoying very strong crack spreads even in the winter which historically is when they suffered they -- they reduce their runs during that time and kept the -- market balanced.
But they don’t want to do that today. They want to run their refineries 100% all the time even in the winter when you have lower gasoline demand in particular which creates logistical opportunities for us to be able to move that product out to new markets.
So one thing we've done is we’ve reversed our systems seasonally from Kansas down to Oklahoma and from Oklahoma down into Texas. So that we can take Mid-Continent refined product production and ship it down to Texas. Once we get it down to the Dallas market, it can serve Dallas and we can take it further West into West Texas. We've never done that before. This is the first time in history that product flows have flowed ratably from the Mid-Continent down to Texas.
We expect those volumes to grow overtime seasonally. In the summer, you still want to ship barrels north but in the winter those barrels ship south. So significant long-haul barrels for us with really relatively low capital required to make that happen.
The other opportunity we’re looking at is potential pipeline to Little Rock Arkansas. You can see from our system here, we have a pipeline system that goes to Fort Smith today. That terminal can be supplied through our pipeline system to meet the Gulf Coast refineries or Mid-Continent refiners, Kansas and Oklahoma refiners.
If we extend that line to Little Rock, we can extend those supply sources to Little Rock also. Little Rock today is only supplier from the Gulf. They just had a pipeline system, discontinue diesel service into the markets. So they are short diesel, they also shippers into that market, one access to Mid-Continent refineries in the winter, when the pricing in the Mid-Continent significantly better than the Gulf Coast. Just last week Mid-Continent gasoline prices were $0.20 a gallon, cheaper than Gulf Coast pricing. So there is a -- you get significant price disconnects.
Little Rock, historically, has not had access to that supply. So, we’re in an open season for that, that open season actually closes at the end of this week and hopefully we’ll have something to announce on that in the near future, if we’re able to get the commitment we’re looking for.
Just to close on just some of the financial metrics. We have a strong history of growth with regards to our distribution. This goes back to 2001 when we first were public, 12% annual growth on our distribution. We’re on target for 16% growth this year and we’ve projected guidance for 15% distribution growth for 2014.
We do have very solid investment grade ratings. We are, I think, with one other party, the highest rated MLPs in the space with regards to credit ratings. We are targeting right now $125 million of excess cash flow even with our projected 16% and 15% distribution growth, which gives us about 1.3 times coverage.
And we target our debt-to-EBITDA to be less than four times. You can see we’ve maintained that historically and as of right now we’re about three times debt-to-EBITDA and if you pro forma in Longhorn which has started up or well below three times debt-to-EBITDA.
And with that, I’m out of time, so I will turn it over for questions.
All right. Good morning. And thanks Mike for your comments on the condensates. Are you finding that there is interest on the part of petchem companies in sort of taking some of that risk you were describing or is it still little bit of more of us?
I’d say there is substantial interest, yet, it’s really not petchem companies that are -- that have shown the most interest. I think, if you categorize where most of the interest is, its producers, its traders that take this kind of risk traditionally and its offshore interest, that are interested in the naphthas that you can produce from the condensate, that’s really where the primary interest are.
I see. Thank you.
Mike, can you comment on what, Mike right here.
I can’t, I still see you, oh, over there.
Sorry. Can you comment on what PPI your, what your inflation adjuster was mid 2013 and maybe what your expectations are for ’14?
Right. Our PPI adjuster for this year was 4.6%, which was applied July 1st. Our projection for the July 1st inflator next year right now is about 4%. And just for those of you that aren’t familiar with that, I mean, it’s -- that’s index adjustment that set by the FERC every five years it’s based on PPI. Right now it’s PPI plus 2.65%. So whatever the actual PPI growth is for 2013, you add 2.65% to that and that’s what the tariff index is for next year.
The FERC looks at that every five years, I think, we’ve got two years left on it and then they will reevaluate. And that adder, that 2.65% could go up or down based on what the FERC decides to do in the next analysis.
And Mike on BridgeTex, you commented that that’s eight times multiple, where it is currently with what's committed. Can you comment on what percentage of that capacity is committed to get into the eight times?
Well, we haven’t disclosed that. We’ve got a partner and BridgeTex, they would prefer we don’t disclose that, I mean, we’re normally more open with regards to commitments in capacities but reference to our partner, we haven’t disclosed that.
I would say they are substantial upside though is how it characterized that. There is significant available capacity that’s not committed at this point. They were contemplating doing the open season in and could make a material positive upside at that eight times EBITDA multiple. All right. Thank you for your time and thank you for your interest in Magellan.
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