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Magellan CEO: 'There's real danger' in predicting which growth projects go ahead

Magellan Midstream Partners LP executives declined to offer specifics on potential growth projects totaling "well in excess of $500 million," despite facing questions about whether the company is setting expectations about capital spending in 2020 too low.

"I'm not really prepared to give any projections as to how many of those will get contracted in the next six months that will roll into 2020 spending," President and CEO Michael Mears told analysts during an Aug. 1 earnings call. "And I don't think it would be fair for me to determine whether or not that is going to be higher or lower than what our spending is for this year. I can tell you that the number is large on the number of projects we are developing."

But even as he parried questions, Mears dropped some hints, saying the partnership's backlog of projects remained as big as it was two years ago and referring only to organic development, excluding potential mergers and acquisitions. Mears also said a potential crude export terminal around Corpus Christi, Texas, is "much further down on our development list."

"We're not actively working on an independent project at Harbor Island," Mears said, adding that Magellan is evaluating "a number of opportunities" in Corpus Christi that would mostly involve working with other third parties.

Magellan said it expects to spend $1.1 billion in 2019 on expansion projects that are already underway in a record capital spending year for the partnership, before spending an additional $150 million in 2020 to complete those projects.

Magellan said the $150 million, which is unchanged from previous guidance, includes an expansion for the Saddlehorn pipeline by 60,000 barrels per day with an expected completion date by late 2020. Executives said Saddlehorn, designed to move crude oil and condensate from the DJ and Powder River basins to storage facilities in Cushing, Okla., could be further expanded by up to 100,000 bbl/d.

The partnership, which owns 40% of Saddlehorn Pipeline Co. LLC, would pay a proportional share of the $50 million first-phase expansion.

Mears' reticence in discussing potential expansion projects that are further out on the development horizon came amid market observers' anticipation of slower sectorwide growth. It also followed the proposed Permian to Gulf Coast crude pipeline, a project that Magellan was part of, getting knocked out of the running by a competing pipeline project. In March, a few months after a rival pipeline developed by Exxon, Plains All American Pipeline LP and Lotus Midstream LLC was commercially sanctioned, Magellan said it had lost confidence in the line's viability amid growing concern about overbuilding in the region.

"There's real danger for us to try to predict how many of those are actually going to be successful and what the capital number could be next year," Mears said. "I can tell you the range is big."

Mears also declined to address press reports that Magellan is shopping interest in its Longhorn crude oil pipeline in Texas, which is capable of delivering 275,000 bbl/d of crude from the Permian Basin to refining and export facilities in Houston. "We evaluate really all of our assets routinely, but I can't comment on that report specifically," Mears said.

As a slew of new midstream infrastructure is near the finish line or already up and running, investors have hoped that North American oil and gas pipeline companies would focus on using the returns from those projects to shore up cash reserves as they release second-quarter financial results.

Some analysts also said companies would be rewarded for a free cash flow model — interpreted broadly as cash flow from operations minus capital expenditures — that addresses concerns of generalist investors that could be attracted to the space. Market observers also expected that project additions would continue to provoke unit holders' distaste for capital-intensive infrastructure growth.

Magellan on Aug. 1 reported second-quarter adjusted EBITDA of $378.3 million, an increase from $338.6 million a year earlier. The S&P Global Market Intelligence consensus estimate of adjusted EBITDA was $355.4 million.

The partnership's distributable cash flow for the quarter was $314.8 million, up from $266.6 million a year earlier.

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