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Insights at a Glance: MMP Analyst Day Highlights Resilient Business Model

03/27/20 | Michael Laitkep

Yesterday, Magellan Midstream Partners (MMP) updated investors on its business by holding a virtual Analyst Day. Management provided helpful commentary on the outlook for the MLP given the current environment. Today’s Insights at a Glance covers some of the highlights from the presentation, including financial guidance, distributable cash flow (DCF) sensitivity, and contract details.

Throughout the webcast and in the accompanying supplementary presentation, MMP management sought to reassure investors that its long-term commitment to financial discipline and operational execution will allow it to withstand current short-term headwinds resulting from commodity price weakness and the coronavirus. Starting with financial updates, annual distribution guidance for this year was reiterated at 3%, demonstrating the resilience of the payout. Distribution growth guidance was reaffirmed based on the expectation that many of the headwinds modeled in MMP’s DCF sensitivity analysis (discussed more below) are short term in nature. The partnership also believes it is well-positioned due to its balance sheet strength, ample liquidity, and moderate capital spending. In addition to distribution growth, the company plans to continue to repurchase units opportunistically. To date, approximately $202 million in units have been bought back, coming largely before the March 6 OPEC+ meeting. MMP maintained capital expenditure guidance of $400 million for 2020. Current capex is largely dedicated to projects nearing completion, and the partnership does not currently have any capital committed to projects beyond 2020. MMP has sufficient liquidity to meet all forecasted needs and has added flexibility from its $250 million marine terminals sale, which closed on March 20, and full availability on its $1 billion revolver. Leverage is expected to be 3.6x at the midpoint in 2020 – significantly below the long-term target of 4x. Near-term debt maturities are limited to $550 million in senior notes outstanding due in February 2021.

Given legitimate concerns about the dual shocks of coronavirus and commodity price volatility, investors are likely wondering how underlying businesses are being impacted. Management spent some time explaining a sensitivity analysis that shows potential impacts to its 2020 distributable cash flow under a range of assumptions (see slide below). In the most severe scenario presented, MMP sees DCF declining by $180 million, which would represent a net impact of -15% to its $1.2 billion DCF guidance for 2020. Blending and tender volumes are expected to be impacted the most as a result of ongoing price volatility that could make them uneconomic. Assuming the low end of the DCF sensitivity, distribution coverage would decline to an adequate 1.1x.

While commodity prices could remain volatile for some time, MLPs can potentially attract new investors or reassure existing investors by disclosing the resilient nature of their fee-based cash flows and contracts with investment grade counterparties. Magellan’s operations are made up of a high percentage of fee-based and low risk activities, which it expects to comprise 85% or more of operating margin going forward (see slide below). Each of the company’s major crude pipelines (Longhorn, BridgeTex, and Saddlehorn) has 75% or more committed capacity in 2020, indicating only a modest exposure to spot shipments. These same pipelines have an average remaining contract life of more than four years, which lessens concerns around recontracting risk. MMP boasts a strong customer base as 96% of its crude revenues come from investment grade or split-rated customers. Similarly, for storage, terminalling, and leases, revenue is generated from 75% investment grade or split-rated customers. Despite recent difficulties for MLPs, MMP’s update suggests a disciplined approach to operations and financial positioning pays dividends in a challenging macro environment.