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Magellan's asset sales, share buybacks set tone for capital restraint

Magellan Midstream Partners LP's announced marine terminals sale and share buyback program exemplify how the pipeline industry should generate and use cash flow in 2020, midstream analysts said.

Magellan plans to sell three terminals outside its core Gulf Coast portfolio for $250 million to Buckeye Partners LP and also repurchase up to $750 million of common units through 2022, the master limited partnership said Jan. 21. The midstream sector has been under pressure from investors and analysts to demonstrate capital restraint while also returning cash to shareholders as slowing oil and gas production growth decreases the need for new infrastructure.

"This is exactly what investors have been asking for the industry to do, which is demonstrate capital flexibility to repurchase units when they are cheap. I hope the rest of the industry follows suit during [first-quarter] earnings," Morningstar's Stephen Ellis said in an email.

Magellan GP LLC President, chairman and CEO Michael Mears had previewed potential non-core asset sales and share buybacks during the company's third-quarter earnings conference call in October 2019, but Credit Suisse analyst Spiro Dounis said in a Jan. 21 note to clients that the repurchase authorization came "sooner than expected."

CBRE Clarion Securities portfolio manager and MLP expert Hinds Howard and analysts at SunTrust Robinson Humphrey agreed that unloading the three terminals and buying back units is a healthy alternative to building more midstream infrastructure.

"Many have lamented [Magellan's] lack of growth projects, but [management] continues to prudently allocate capital, and returning it without levering up should be well received," Howard wrote in a Jan. 21 tweet, while SunTrust analysts called the asset divestments "a concerted effort to create incremental value by means other than growth projects" given that the proceeds "are considerable relative to our estimate for $400 million in growth CapEx in 2020."

As public corporate M&A struggles to regain its footing in the midstream sector, Mizuho analysts had told clients at the end of December 2019 that selling the three terminals in Connecticut, Delaware and Louisiana "would be another example of astute management probing the gap between public and private valuations."

IFM Investors Pty Ltd. completed its take-private buyout of Buckeye Partners in November 2019.

Looking forward, Mizuho added, Magellan may also continue to reduce its stakes Texas crude oil pipelines. The partnership and Plains All American Pipeline LP in 2018 sold a combined 50% interest in BridgeTex Pipeline Co. LLC, and Reuters reported in June 2019 that Magellan was considering selling a 35% interest in its Longhorn crude oil pipeline for up to $2 billion.