Magellan Midstream Partners, L.P.
Q2 2018 Earnings Call Transcript
Published:
- Operator:
- Good day, everyone, and welcome to the Magellan Midstream Partners Second Quarter 2018 Earnings Results Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mike Mears, President and Chief Executive Officer. Please go ahead.
- Michael N. Mears:
- Good afternoon and thank you for joining us today for Magellan's Second Quarter Earnings Call. Before we dive into the discussion, I'll remind you that management will be making forward-looking statements as defined by the SEC. Such statements are based on our current judgments regarding the factors that could impact the future performance of Magellan. You should review the risk factors and other information discussed in our filings with the SEC and form your own opinions about Magellan's future performance. With that out of the way, a busy time at Magellan with two significant expansion project (00
- Aaron L. Milford:
- Thank you, Mike. During my comments today, I will be making references to certain non-GAAP financial metrics including operating margin and distributable cash flow. We've included exhibits to our earnings release, to reconcile these metrics to their nearest GAAP measure. This morning, we reported second quarter net income of $214.4 million or $0.94 per unit on a diluted basis, which was higher than the $210.4 million reported for the second quarter of 2017. Excluding the impact of mark-to-market futures contract activity in the current quarter, adjusted diluted earnings per unit of $1.05 exceeded our guidance of $0.95 provided back in May. Distributable cash flow of $266.6 million in the second quarter of 2018 was more than 6% higher than the $250.4 million reported in the second quarter of 2017. I will now move to a discussion of the operating margin performance for each of our business segment. Our refined products segment generated $191.4 million of operating margin in the second quarter of 2018 compared to $214.5 million for the same period in 2017. As we noted in our earnings release, this decline in operating margin between periods resulted from the impact of lower commodity margins, including the impact (04
- Michael N. Mears:
- Thank you, Aaron. Based on our solid start to 2018 and our expectations for the remainder of the year, we have now increased our annual DCF guidance by $20 million to $1.1 billion for 2018. (11
- Operator:
- Thank you. I do have some questions. The first one comes from Theresa Chen from Barclays.
- Theresa Chen:
- Hi there. My first question is related to the Longhorn recontracting. I understand that you're not ready to provide any numerical color around what the new tariff will be, but could you give us a sense of what percentage of the current commitments have elected to extend their initial contracts for two years at current terms versus those who have executed new long-term agreements with you at lower rates? And of the ones that have executed new long-term agreements, can you help us think about what the average duration of that portion is? Are most of them 10 years or are majority 5 to 7? Any color would be great.
- Michael N. Mears:
- Well, I wish I could give you more color. I mean, we've been hesitant to give those details until we complete the open season process. So, I'm not going to give you the percentages or the rates. I can tell you that the terms of the contracts that have been executed, the long-term contracts are in the 7 to 10-year range, that all of the current customers either have signed long-term contracts or two years, extensions. But at this point, since we're still actively negotiating with multiple customers, unfortunately, I can't give you more details on that. We do intend once it's complete to provide more color on where we stand. But unfortunately, I can't do that today.
- Theresa Chen:
- Okay. Turning to the expansion of the western leg of your Texas refined products system. Given recent announcements of projects and feasibility studies by competitors to provide similar services, is the reason why your project was able to be greenlit and get the necessary commitments because of the optionality on the broader system in terms of origins and destinations? And do you think there's enough distillate demand out there for the rest of the announcements to move forward?
- Michael N. Mears:
- Well, the first part of your question, I do think that we have the advantage over some of our competitors in that we have access at the origin to the entire Gulf Coast refining complex and we have access to Mid-Continent refiners with Oklahoma and Kansas refiners. So we've got significant supply optionalities to support commitments. And then we have significant diversity on demand points. We β even though diesel demand in the Permian Basin is the primary driver behind the expansion, with an existing terminal that we have in Odessa and the potential to build in Midland, we also have existing connectivity all the way to El Paso, which connects to pipelines that we own that run to the border to connect to pipelines in Mexico, connections to pipelines going to Arizona and then our own pipeline system up into New Mexico which also happens to fuel two large railroad fueling depots. So we've got significant β a significant network there that I presume is what got our customers comfortable making the commitments they would make. With regards to diesel demand, if (21
- Theresa Chen:
- Got it. And sticking with the Permian theme, in terms of your potential maybe for a long-haul crude pipeline from the Permian (22
- Michael N. Mears:
- Well, that's a very good question. We really are in a position here where the β this happens to be coincidental with (22
- Theresa Chen:
- Thank you very much.
- Michael N. Mears:
- You're welcome.
- Operator:
- And we have another question that comes from Jeremy Tonet from JPMorgan.
- Unknown Speaker:
- Good afternoon. This is Bill (24
- Michael N. Mears:
- Well, you're breaking out there just a little bit on your question. But I think you were asking if this increased guidance is going to change our distribution outlook at all, and at least for 2018, it is not. To the extent that our coverage moves up to above 0.2 times for the year, we're not going to change our distribution coverage. I mean, our distribution growth for this year, really as we look at 2019 and 2020, as we revised those DCF forecasts, which obviously we haven't given guidance on, we'll evaluate exactly what we're going to do in 2019 and 2020. As we said, we've given a range of 5% to 8% in 2020 and we'll make that decision in January. But this point, we're not changing our distribution forecast for 2008 at all, I mean 2018.
- Unknown Speaker:
- Thanks. And then any update on the PDO that you filed with FERC?
- Michael N. Mears:
- We have none. As I mentioned, I think (25
- Unknown Speaker:
- All right. That's helpful. That it's for me. Thank you.
- Michael N. Mears:
- All right. Thanks.
- Operator:
- Our next question is from Josh O'Brien from Jefferies.
- Christopher Paul Sighinolfi:
- Hey guys. It's actually Chris. How are you Mike?
- Michael N. Mears:
- Good.
- Christopher Paul Sighinolfi:
- Just wanted to follow up on a question that β or a topic that came up at your analyst day and then potential IMO effect. I know it was something your team at that time was sort of trying to get a handle on. I think a lot of people are trying to get a handle on it. Just a couple of months have passed, a lot's been said by the refining community. I'm just curious if you have any, I guess, a more refined view of 2019 of the crude system or refined product system?
- Michael N. Mears:
- Well, again I think as we said at the Analyst Day, I mean, our exposure to high sulfur fuel oil terminaling is fairly limited around our system. It's really kind of confined to our Louisiana terminal and our Delaware and to a small extent our terminal in Connecticut. So I mean that has changed, our exposure is pretty (27
- Christopher Paul Sighinolfi:
- Okay. That's very helpful. And I guess to dovetail just on that β on that last question about the FERC process. I mean you had given us a pretty detailed and very helpful interpretation at the Analyst Day. And I'm just curious if anything from the final rules that either enhanced your view or gave you greater confidence. I know you say it's a process I'm just curious if any of the public information that's available changed, any that wasn't in there.
- Michael N. Mears:
- Nothing has changed. The recent ruling and again you were breaking up a little bit too. And I think correct me if I'm wrong when I answer this, but I think you're asking about the income tax allowance issue at the FERC. But nothing in the recent ruling surprised us. In fact it was very consistent with the assumptions we've made all along, especially with regards to the cumulated deferred income taxes. But, so nothing's changed with regards to our view. And it's really, again for liquid declines, going β the impact of this decision is going to be determined when the next index review occurs. And the commission has given really no guidance on that other than clarity on the (29
- Christopher Paul Sighinolfi:
- That's very helpful Mike. Thanks for all the added detail.
- Michael N. Mears:
- Sure.
- Operator:
- Moving on, we have another question that comes from Jerren Holder from Goldman Sachs.
- Jerren Holder:
- Thanks. Good afternoon. On Seabrook Logistics, how should we think about the (30
- Michael N. Mears:
- Well we've got a variety of contracts at Seabrook in place and under development and they're all across the board. But suffice it to say, I mean obviously, there's a storage component of the contracts and there's a throughput fee associated with those contracts. In some cases, there's requirements to move certain volumes through the facility, in some cases, there's not. So I don't know if there's really β I can provide more detail on that, but I can tell you that our expectation at this point is that Seabrook pretty much out of the gate is going to be highly, if not, 100% utilized going forward
- Jerren Holder:
- Any sort of indication, let's say, if everything is fully contracted, meaning storage fully utilized as well as some dock capacity fully utilized, just how low the EBITDA multiple could be?
- Michael N. Mears:
- I don't have that number handy. It's going to be attractive, but we'll have to get back to you. I don't have that handy.
- Jerren Holder:
- Okay.
- Michael N. Mears:
- It's going to be an eight multiple or below.
- Jerren Holder:
- As a base case and, okay.
- Michael N. Mears:
- Correct.
- Jerren Holder:
- Thanks.
- Operator:
- Moving on, we'll take another question from Sharon Lui from Wells Fargo.
- Sharon Lui:
- Hi, good afternoon.
- Michael N. Mears:
- Hey, Sharon.
- Sharon Lui:
- Just inquiring about the expected return on the expansion of your refined products project. Just wondering if there has been, I guess, a change in your expectations.
- Michael N. Mears:
- You're talking about the West Texas refined products expansion?
- Sharon Lui:
- Yes.
- Michael N. Mears:
- Okay. Our expectation is, well, the contracted EBITDA multiple on that expansion is about a seven times multiple on the full $500 million. Now, as I mentioned earlier though, that has significant upside to it. (33
- Sharon Lui:
- Okay. Great. Thanks for the color.
- Operator:
- And you have another question that comes from Elvira Scotto from RBC. Elvira Scotto, your line is open. Please go ahead with your question.
- Elvira Scotto:
- Yeah. Hi. Just a couple of questions. The line was breaking up. Can you repeat what you had hedged for butane blending season of 2019?
- Michael N. Mears:
- Yeah. I'm sorry about that. It's breaking up on our end also. I had said was that we are β for 2018, we're 80% hedged for the fall. In 2019, we are (35
- Elvira Scotto:
- Okay. Great. Thanks for that. And then I know you talked about the Longhorn Pipeline expand sort of β you're not really giving the mix between who's contracted Longhorn versus who's taken the two-year extension. But what's embedded in your guidance with respect to the Longhorn contracts?
- Michael N. Mears:
- Well, we've β that's a tricky way to get me to answer the question. We have an expectation to where we're going to be at the end of this open season based on discussions we've had with shippers. And we've had expectation for our (36
- Elvira Scotto:
- Got it. And then, what do you think is the gating factor that's keeping shipping from signing onto the long terms? I know there's more pipeline capacity coming online, but production out of the basin looks pretty supportive. So what do you think is holding those back?
- Michael N. Mears:
- Oh, I mean, I think that it's really just the competitive market. This is a space that β you have to take it from the context that all of the existing customers have certainty of capacity past two years on Longhorn because they've extended (37
- Elvira Scotto:
- Got it. No, that makes sense. And then just the last one for me, at this point, what's your appetite for M&A? I mean, I know you constantly evaluate M&A opportunities. There seemed to be some interesting crude pipeline and terminal assets out there for sale; so maybe with respect to M&A, what sort of assets do you look at and what do you see out there in terms of asset valuations?
- Michael N. Mears:
- Well, I mean we're β as we've always said, I mean we're not opposed to M&A. I mean even though we don't or haven't done much of it, (39
- Elvira Scotto:
- Got it. Okay. Thanks.
- Operator:
- And it appears there are no further questions at this time.
- Michael N. Mears:
- All right. Well, thank you for your time this afternoon, thank you for your questions and thank you for your interest in Magellan. Have a good afternoon.
- Operator:
- And that does conclude our conference call today. Thank you for your participation. You may now disconnect.
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