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Magellan counting on crude pipes to take 2017 distributable cash flow past $1B

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Magellan counting on crude pipes to take 2017 distributable cash flow past $1B

Magellan Midstream Partners LP expects to exceed $1 billion of annual distributable cash flow in 2017 on the strength of increased volumes on its crude oil pipelines, Chairman, President and CEO Michael Mears said Feb. 2.

Speaking during Magellan's fourth-quarter 2016 earnings call, Mears said the company believes it will surpass the $1 billion plateau after reporting a net distributable cash flow of $947.5 million for 2016. Mears said the partnership expects its refined products segment to see a volume increase of about 6% in 2017, largely due to growth projects such as its Little Rock pipeline and new connections between Magellan's south Texas and central Texas systems.

"Excluding growth projects, we expect base refined products volume to remain relatively flat between years. Even though the commodity environment has improved over the last year, we remain cautious, for guidance purposes, on demand for distillates in our markets, especially after seeing a decline during 2016," he said. Mears noted that the partnership will increase its tariffs on its refined products pipelines by an average of 2% in mid-2017, but does not expect its overall rate per barrel to change significantly.

Magellan's crude oil segment, Mears said, is projected to carry volumes "consistent with 2016 levels."

"Our Longhorn pipeline remains fully committed, and we expect to average around 260,000 barrels per day again in 2017, with no spot shipments," he said. "We do expect increased volume on our Houston distribution system, primarily due to growth projects such as our recent HoustonLink connection. Including these growth projects, we expect all-in crude oil pipeline volume growth of around 6%."

Mears said Magellan also expects volumes on the BridgeTex pipeline, which runs from the Permian Basin to the Houston Ship Channel, to remain around 215,000 bbl/d. "We expect our committed shippers to move at their 210,000 [bbl/d] commitment levels, and we expect to begin seeing incremental volume through our new Eaglebine origin, which is scheduled to start up next quarter," he said.

A full year of the operating results from the Saddlehorn pipeline, which runs from Colorado to Cushing, Okla., should also increase revenues for Magellan. "Year one commitments averaged 40,000 [bbl/d], and our forecast assumes our customers ship at their minimum commitment levels. The economics of the Saddlehorn pipeline have continued to improve due to lower construction costs and lower operating expenses than originally projected," Mears said.

The Magellan chief executive said the partnership had spent a record $736 million on organic growth projects during 2016, a number that will drop to $550 million this year and $350 million in 2018.

"We have announced plans to increase the scale of Seabrook Logistics, which represents a key asset for our crude oil marine strategy," Mears said. "Phase one of this joint venture is scheduled to come online next quarter and is backed by a long-term import throughput commitment from a Gulf Coast refiner. The recently announced second phase of Seabrook Logistics represents construction of 1.7 million barrels of storage and connectivity to our Houston distribution system, providing attractive optionality for our long-haul crude oil pipeline customers to access the new crude oil export facilities."

Magellan plans to invest a combined $200 million on the second phase of the Seabrook Logistics project and a new pipeline in its Houston distribution system.

"As always, we continue to evaluate well in excess of $500 million of other potential organic growth opportunities," Mears said.

Magellan reported a net income of $213.3 million, or 93 cents per unit, for the fourth quarter of 2016, up from $207.1 million, or 91 cents per unit, for the same period of 2015. The S&P Capital IQ consensus normalized EPS estimate for the fourth quarter of 2016 was 96 cents.