Magellan Midstream: Profitability And Capital Efficiency


  • Magellan Midstream had a strong uptrend in operating and net margins until the recent industry recession.
  • What could have caused such a softening of margins? Is there anything to be concerned about?
  • In this article, I take an under-the-hood look at the profitability and capital efficiency of the company to find answers to these critical questions.
  • Anyone interested in Magellan Midstream or its peers in the midstream sector may benefit from the gleanings derived from this research.
  • This idea was discussed in more depth with members of my private investing community, The Natural Resources Hub. Start your free trial today »

Megallen Midstream Partners, the leading refined products pipeline operator

Previously, I stated the following after an in-depth examination of the business model of Magellan Midstream Partners, L.P. (NYSE:MMP),

"I believe Magellan commands a considerable sustainable competitive advantage in its core business of the transportation, storage, and distribution of refined petroleum products. Its segments of crude oil and marine storage also have some competitive advantage, but the recent investment spurs in these areas may cause medium-term oversupply."

I concluded that article by saying, "To draw a definitive conclusion, we still have to examine its profitability and capital efficiency." In this article, I will do just that, and I will also derive the implications of my findings in these articles to the investors in Magellan in specific and other midstream players (AMLP) in general.


The operating margin and net margin improved from 2010 through 2015 and then softened in 2016 before entering a holding pattern, which lasted until this day. Such a pattern is especially pronounced after the 2016-2018 years are adjusted for gains made on asset dispositions (Fig. 1).

Fig. 1. The operating and net margins of Magellan, shown with the net margin adjusted for gains on the disposition of assets for 2016, 2017, and 2018. Source: Laurentian Research.

What could have caused such a softening of margins?

Magellan's pricing power in refined products transportation seems to be intact, while the crude oil transportation revenue per barrel has not started to soften until 2018 (Fig. 2). So, the real cause for the decrease in margins in the last few years has to be found in the services ancillary to transportation, including product sales and affiliate management fees. Among the ancillary services, product sales dominate over affiliate management fees with a 33% contribution to total revenue to less than 1%.

Fig. 2. Operating margin per barrel of refined products (upper) or crude oil shipped (lower), reduced

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As a natural resources industry expert with years of successful investing experience, I conduct in-depth research to generate alpha-rich, low-risk ideas for the member of The Natural Resources Hub (TNRH). I focus on identifying high-quality deep values in the natural resources sector and undervalued wide-moat businesses, an investment approach that has proven to be extremely rewarding over the years.

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Disclosure: Besides myself, TNRH is fortunate enough to have multiple other contributing authors who post articles for and share their views with our thriving community. These authors include Silver Coast Research, ..., among others. I'd like to emphasize that the articles contributed by these authors are the product of their respective independent research and analysis.

Disclosure: I am/we are long MMP. 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.

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