Magellan Midstream Partners LP said the combination of low oil prices and decreased U.S. fuel demand related to the coronavirus outbreak could reduce its distributable cash flow by $95 million to $180 million in 2020.
The biggest risk to the key operating metric, known as DCF, comes from margins for blending, which could be reduced by as much as $120 million for the year, general partner Chairman, President and CEO Mike Mears said on a conference call. The company's worst-case outlook forecasts that demand for gasoline and aviation fuel will be 25% below its original 2020 estimates through the second quarter, while the best-case scenario anticipates a return to normal by June. The Tulsa-based petroleum transporter, blender and storage partnership does not anticipate material changes to its "modest" growth capital spending, Mears said.
"Obviously the biggest impact to DCF this year, potentially, is the lower blending margins and tender volumes on our pipelines," Mears said on the March 26 call. "This is directly related to the collapse in crude oil and gasoline pricing."
Demand for fuels has plummeted as much of the world goes into lockdown to prevent the spread of COVID-19, and a crude price glut caused by a Saudi plan to increase production sent prices plunging. Travel bans have reduced the need for aviation fuel, while automobile use has been lowered as many commuters work from home in the U.S. Magellan's fuel networks are located mostly in the center of the U.S., where automobiles are the main form of transportation.
Mears said that each 10% monthly change in refined product demand for gasoline affects DCF by approximately $4.5 million. The company anticipates that each $10 per barrel increase in crude prices would add about $30 million to DCF in 2020. Margins at Magellan's petroleum blending business, which are not hedged, could sink to zero later this year.
"What we've assumed here in the low end ... is based on the current crude oil curve for the fall, which essentially reflects little or no margin available for butane blending," Mears said.
Magellan said it has limited free space available in its storage network as producers and traders fill tanks with product stranded by low demand. Because of already-high storage levels, Mears said the potential incremental DCF from new customer demand is limited to about $7 million to $10 million in 2020. The partnership's three biggest pipelines — Longhorn, BridgeTex and Saddlehorn — are all contracted at more than 75% of capacity for the balance of the year.
In response to the COVID-19 outbreak, most of Magellan's employees are working from home. The company has established health checks at its main pipeline operations centers and split those operations in two in the event that one is affected by the virus. The company has committed to about $400 million in 2020 capital spending, which it will not change. No new projects are planned for 2021.
Despite the challenges, Mears said the partnership is not changing its full-year distribution guidance.
"Given that we believe that many of these DCF variances are short-term in nature, coupled with our balance sheet strength, our strong liquidity position and our very modest capital plan, we feel at this time that maintaining our prior guidance is appropriate," Mears said.