Magellan Midstream Partners LP executives laid out plans for "disciplined" growth in the coming years, underscoring the need to demonstrate reliable financial performance to improve investor confidence.
"We've continued to hear from our long-term investors that strong distribution coverage remains important to them, especially considering the performance of the energy markets and [master limited partnership] space over the last few years," Magellan CEO Michael Mears said during a Feb. 1 earnings call.
As a result, the partnership plans to maintain a distribution coverage ratio of 1.2x for "the foreseeable future" and to focus on keeping the debt-to-EBITDA ratio below 4x. Investor confidence in the midstream master limited partnership sector has flagged in recent years as low commodity prices dragged down profits and partnerships slashed distributions.
Magellan executives laid out guidance for 2018, 2019 and 2020, noting that they see 2018 as something of a "gap year" in terms of growth prospects. Projects set to come online in the following two years are expected to improve results, they said.
Mears said he expects the partnership's financial strategy to be able to support the planned organic growth strategy. "We ... think that it's prudent to maintain a higher coverage and trend more towards a self-funding model than full distribution of available cash flow," he said. "If you look at the projects we are constructing right now and the projects that we have in our backlog, we feel confident at this point that those can be funded primarily with debt."
Magellan spent more than $540 million on organic growth in construction projects over 2017, and given the projects that are already underway, the partnership plans to spend about $900 million in 2018, the executives said. An additional $375 million is budgeted for 2019 to complete the projects that are in progress, they added. The major projects underway include the Pasadena Marine Terminal and crude and refined-products pipelines in Texas.
"We also continue to evaluate other potential expansion opportunities, still totaling well in excess of $500 million, with future projects under consideration in each of our business lines," Mears said, pointing to a potential expansion of the Pasadena project, crude infrastructure investments in West Texas and Corpus Christi and refined-products pipeline expansions.
Magellan is also keeping its eyes open for promising acquisition opportunities, he said. "As always, price and risk profile are our key considerations, and Magellan intends to maintain its disciplined approach when evaluating not only potential acquisition opportunities, but also construction projects."
Magellan on Feb. 1 reported fourth-quarter 2017 adjusted EBITDA of $377.4 million, up from $338.8 million in the prior-year period. Distributable cash flow in the quarter was $308.3 million, an increase from $277.2 million in the prior-year period.
For the full year, the partnership reported adjusted EBITDA of $1.30 billion, an increase from $1.21 billion a year earlier. Distributable cash flow for the year was $1.02 billion, up from $947.5 million in 2016. Net income came to $869.5 million, compared with $802.8 million the previous year.
