Magellan Midstream Partners 4Q15 Results - Key Facts And Trends

| About: Magellan Midstream (MMP)

Summary

The 12% decline in 4Q15 gross operating margin was driven by lower commodity prices and a comparison to the high commodity operating margins achieved in 4Q14.

Fee-based gross margin accounts for the bulk of the total and actually increased in 4Q15 vs. 4Q14.

Coverage ratio remained very strong in 4Q15 despite continued industry headwinds that adversely affected other MLPs.

The importance of MMP’s excess cash flow s magnified in the current environment that imposes a much higher cost of capital on all midstream energy MLPs.

Distributions are projected to increase 10% in 2016 and 8% in 2017 based on large scale projects commencing operations.

This article analyses some of the key facts and trends revealed by 4Q15 results reported by Magellan Midstream Partners L.P. (NYSE:MMP).

MMP is engaged in the transportation, storage and distribution of refined petroleum products and crude oil. Its 3 operating segments are:

  1. Refined Products: this segment primarily transports gasoline and diesel fuels and includes an 9,500-mile refined products pipeline system with 52 terminals, 42 million barrels of storage, as well as 28 independent terminals not connected to MMP's pipeline system, and its 1,100-mile ammonia pipeline system;
  2. Crude Oil: this segment is comprised of ~1,600 miles of crude oil pipelines and storage facilities with an aggregate storage capacity of approximately 21 million barrels; and
  3. Marine Storage: this segment consists of 5 marine terminals located along coastal waterways with an aggregate storage capacity of ~26 million barrels.

Operating margin is a one of the key non-GAAP metric used by management to evaluate performance of its business segments. It includes revenue from affiliates and external customers, operating expenses, cost of product sales and earnings of non-controlled entities. Operating margin by segment for recent quarters is presented in Table 1 below:

Click to enlarge

Table 1: Figures in $ Millions (except per unit amounts and % change). Source: company 10-Q, 10-K, 8-K filings and author estimates.

Commodity-related activities within the Refined Products segment include butane blending and fractionation. Operating margin generated by these activities are, relative to fee-based activities, far more volatile. The 12% decline in gross operating margin in 4Q15 vs. 4Q14 shown in Table 1 is in terms of both absolute dollars and per unit terms. It is largely attributable to the impact of lower commodity prices on commodity-related activities and the high level recorded in 4Q14:

Click to enlarge Table 2: Figures in $ Millions (except per unit amounts and % change). Source: company 10-Q, 10-K, 8-K filings and author estimates.

Fee-based (i.e., derived from fees, tariffs, contractual commitments) gross margin accounts for the bulk of the total and actually increased in 4Q15 vs. 4Q14. The portion derived from commodity-related activities has been declining. It stood at 13% in 4Q15, down from 23.7% in 3Q15 and from 25.1% in 4Q14. In 2015 it decreased to 14.3% from 22.2% in 2014. The decline in 2015 would have been greater but for higher butane blending margins resulting from hedges put in place in 2014, prior to the significant drop in commodity prices.

Distributable Cash Flow ("DCF") is one of the primary measures typically used by a midstream energy master limited partnership ("MLP") to evaluate its operating results. Because there is no standard definition of DCF, each MLP can derive this metric as it sees fit: and because the definitions used indeed vary considerably, it is exceedingly difficult to compare across entities using this metric. Additionally, because the DCF definitions are usually complex, and because some of the items they typically include are non-sustainable, it is important (albeit quite difficult) to qualitatively assess DCF numbers reported by MLPs.

MMP derives DCF as follows:

Click to enlarge Table 3: Figures in $ Millions (except ratios and % change). Source: company 10-Q, 10-K, 8-K filings and author estimates.

Commodity adjustment is a key factor affecting comparability of 4Q15 DCF to 4Q14. As shown in Table 3, the swing in favor of 4Q15 totals $33 million. A comparison of 4Q15 to 4Q14 DCF sustainability should take this into consideration. I will refine my qualitative assessment of EPD's DCF once it provides additional data as part of its Form 10-K.

MMP increased distributions by 15% in 2015. Management is reiterating its previously announced goal of increasing distributions by 10% in 2016 and, for the first time, set a goal (an increase of 8%) for 2017. However, guidance with respect to some operational metrics has been lowered slightly:

Click to enlarge Table 4: Figures in $ Millions (except ratios and number of units). Source: company 10-Q, 10-K, 8-K filings and author estimates.

Management is guiding to 1.2x coverage of distributions in 2016 and 2017 (vs. my estimate of 1.38x in 2015). The guidance assumes an average crude oil price of approximately $35 per barrel for 2016 and $42 for 2017, with each $1 change in the price of crude oil estimated to impact MMP's 2016 financial results by approximately $3 million. Guidance for 2016 also incorporates butane blending margin benefits resulting from hedges put in place in 2015 during higher commodity prices and a 2% tariff reduction midyear affecting ~40% of MMP's refined products system due to a negative PPI index.

Expansion capital spending totaled ~$750 million in 2015 and is budgeted at $900 million in 2016 (including $100 million for completion of projects currently under construction. MMP expects its investments in expansion projects to average 7-9x EBITDA. Based on that, EBITDA would increase by ~$200 million once the full $1.6 billion is placed into service (probably by 2017). This is an 18% increase from the 2015 EBITDA level.

Table 5 provides selected metrics comparing the MLPs I follow based on the latest available TTM results. Of course, investment decisions should be take into consideration other parameters as well as qualitative factors. Though not structured as an MLP, I include KMI as its business and operations make it comparable to midstream energy MLPs.

As of 2/5/16:

Price

Current Yield

TTM

EBITDA

EV / TTM EBITDA

IDR- Adjusted EV/

EBITDA

LT Debt to TTM

EBITDA

1-Year

Total

Return

Buckeye Partners (NYSE:BPL)

$57.14

8.23%

847

13.0

13.0

4.3

-19.11%

Boardwalk Pipeline Partners (NYSE:BWP)

$10.61

3.77%

692

8.8

8.9

5.0

-31.14%

Enterprise Products Partners (NYSE:EPD)

$22.93

6.80%

5,267

13.1

13.1

4.3

-30.69%

Energy Transfer Partners (NYSE:ETP)

$25.72

16.41%

5,636

6.9

8.5

4.7

-50.19%

Kinder Morgan Inc. (NYSE:KMI)

$15.66

3.19%

7,372

10.6

10.6

5.8

-58.31%

Magellan Midstream

$61.44

5.11%

1,172

14.9

14.9

2.9

-22.36%

Targa Resources Partners (NYSE:NGLS)

$13.99

23.59%

1,124

7.0

8.2

4.7

-62.56%

Plains All American Pipeline (NYSE:PAA)

$20.46

13.69%

2,199

8.5

11.3

4.8

-55.04%

Suburban Propane Partners (NYSE:SPH)

$24.58

14.44%

334

7.7

7.7

3.3

-34.75%

Williams Partners (NYSE:WPZ)

$17.75

19.15%

3,795

7.4

9.4

4.6

-55.12%

Alerian MLP Index (AMZX)

9.58%

--42.90%

Click to enlarge

Table 5: Enterprise Value ("EV") and TTM EBITDA figures are in $ Millions. Source: company 10-Q, 10-K, 8-K filings and author estimates.

Note that BPL, EPD, KMI, MMP and SPH are not burdened by general partner incentive distribution rights ("IDRs") that siphon off a significant portion of cash available for distribution to limited partners (typically 48%). Hence multiples of MLPs without IDRs can be expected to be much higher (see Table 5, column 5). In order to make the multiples somewhat more comparable, I added column 6, a second EV/EBITDA column. I derived this column by subtracting IDR payments from EBITDA for the TTM period. Other approaches can also be used to adjust for the IDRs of the relevant MLPs.

Even after adjusting for IDRs, the gap between MMP's multiple and that of some of the other MLPs remains substantial and MMP appears pricey when measured solely by that metric. By various qualitative and other measures, it should receive top marks on. In over four years (since 3Q 2010), MMP has not issued additional partnership units (excluding units issued in connection with compensation arrangements), a significant accomplishment and rare achievement in the MLP universe. Nor does management anticipate needing to issue units in the foreseeable future. This is all the more impressive given that MMP has kept its leverage much lower than most MLPs (currently 2.9x Adjusted EBITDA). Another impressive metric is MMP's net income per unit. Unusual for an MLP, it exceeded distributions per unit in 2015, 2014 and in 2013. Not only that, it did so by a wide margin. MMP has a disciplined management, outstanding track record, superior distribution coverage, lower leverage, an ability to generate significant excess cash from operations, and good growth prospects. For all these reasons, I continue to hold it.

Disclosure: I am/we are long EPD, MMP, ETE, ETP.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.