Q1 2021 Magellan Midstream Partners LP Earnings Call
Yeah.
Okay.
Okay.
Greetings and good afternoon, everyone and welcome to the first quarter of 2021 earnings call. During the presentation. All participants will be in listen only mode. Afterwards, we will conduct a question and answer session at that time. If you have a question. Please press the one followed by the four on your telephone if at any time during the conference you need to reach and operate.
Please press Star Zero as a reminder, this conference is being recorded today Thursday April 29th 2021, and is now my pleasure to turn the call over to Mike Mears Chief Executive Officer. Please go ahead.
And Sir.
Yeah.
Alright, well Hello, and thank you for joining us today from our first quarter earnings call before we get started I'll remind you that management will be making forward looking statements.
And that's defined by the Securities and Exchange Commission such statements are based on our current judgments regarding the factors that could impact the future performance of Magellan, but actual outcomes could be materially different.
You should review the risk factors and other information discussed on our filings with the SEC and form your own opinions about magellan's future performance.
With that I am pleased to announce and Magellan started the year with stronger than expected results exceeding our previous EPS guidance by a considerable amount.
And the effects on the midstream industry from the unusually cold weather in February has been and is industry theme for the first quarter of 2020.
Yeah.
And one.
Although some of our assets were inoperable because of the freezing conditions.
Issuance and power issues for about a week during mid February overall overhaul, we recognized a net positive financial impact related to the weather events during the quarter.
These positives included additional refined product throughput on our system due to short term refinery outages.
<unk> improved.
Basis differentials on the sales from our butane blending activities and gains from our power hedging activity.
Yes.
These positives were offset by a lower by lower crude oil volumes, but in total.
Okay.
It'll be about a $25 million favorable impact on a combined basis as a result of these weather events.
Further our outperformance for the quarter was also driven by a number of other positive items, some of which relate to timing of expenses that are expected to occur later in the.
And.
Yes.
Year.
I also would like to touch on our continued.
And portfolio management activity.
Last week, we announced the sale of nearly half of our interest and our Pasadena Marine terminal joint venture.
And as Magellan has demonstrated and the path.
We regularly review both potential investments and our asset portfolio for opportunities to unlock incremental value for our investors.
With this transaction, we were able to monetize a portion of our ownership position.
Mhm.
And at an attractive price.
While retaining a meaningful position and operator ship of this strategic refined product export facility.
And we intend to use the $270 million and proceeds from this transaction consistent with our stated capital allocation priorities, including potential unit repurchase.
And we will continue to have an opportunity.
Participate and future expansion of this facility.
You too.
Yes.
Our CFO, Jeff Holman will now review our financial results in more detail.
<unk> versus the 2020 period.
Okay.
And then I'll be back to discuss our latest outlook for the year before answering your questions.
Thanks, Mike first let me mention that as usual.
Okay.
Joel I'll be making references to certain non-GAAP financial metrics.
And.
Included in operating margin and distributable cash flow or DCF and free cash flow and we've included exhibits to our earnings release that reconcile these metrics.
Tricks to their nearest GAAP measure.
Earlier. This morning, we reported first quarter net income of 221 million.
Okay.
Compared to $288 million and first quarter of 2020.
Adjusted earnings per unit for the quarter.
<unk>.
Which excludes the impact of commodity related mark to market.
Adjusted.
Adjustment was a dollar and <unk>.
And so as Mike pointed out significantly exceeded our guidance for the quarter of 75.
DCF for the quarter of about $277 million.
Yeah.
And approximately 10% lower than first quarter 2012.
Primarily due to lower commodity related profit in the current quarter as well as lower crude oil revenue falling and the exploration of a portion of our longhorn commit.
And.
And then.
And in September of last year.
And.
You can find a detailed description of our quarter over quarter variances and the earnings release, we issued this morning.
Okay.
And so I'm going.
Sure.
To touch on a few highlights and overall themes.
And so on a quarterly performance.
And.
And that's fine products operating margin of $274 million and the <unk>.
And approximately 10% lower than the 2020 period.
Period defined segment transportation revenue was actually up between periods.
Partially offsetting the impact from a sales for marine terminals and early 2020.
And.
Our refined products volumes continue to improve from the pandemic.
Those first quarter volumes did reflect the lingering impacts.
<unk> of COVID-19, 19, and still recovering drilling.
Yes.
And we're not yet significant factors.
Yes.
And the 20th.
And.
Periods of the year volume.
Sure.
And <unk>.
And.
And were partially offset by contributions from our west.
The growth.
East, Texas, which began operations.
Okay.
Yes.
And third in addition refinery outages caused by winter storms during the quarter.
Okay.
<unk> resulted and supply disruptions.
And.
And but our pipeline network is well positioned to accommodate.
And.
And a resulting in incremental throughput on.
And our.
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Our system, making these various factors altogether total refined transportation volumes.
Excluding the impact of the more volatile sales.
Texas of our system.
And.
And for up 1% for the quarter versus first quarter 2020.
Is 9% higher distillate volumes more than offset 4% lower gasoline and <unk>.
And.
10% lower aviation fuel.
Please note that these figures byproduct and I just mentioned.
And.
And inclusive of both our base business.
<unk> and our recently completed growth project.
And.
And finally, I will note debt, including volumes on the South Texas portion of our system, which move at a much lower average.
And so.
Rate total volumes were down about 1%.
And.
<unk>.
Higher average refined transportation rates.
Hello.
<unk> further and offset this slight overall volume decline.
And.
And part two to three 5% average tariff increase.
And.
Greece implemented in July 2020.
And.
Additionally, the supply disruptions I mentioned, just a moment.
And also resulted in incremental longer haul movements.
On our.
And.
Okay.
And further contributing to the higher average.
Average rate per barrel.
Uh huh.
Beyond transportation and terminals revenue, our first quarter refined products financial results.
And.
And.
And I'll find versus 2020 due to lower profitability.
And on a commodity related activity.
Okay.
<unk> margins on our gas liquids blending business.
And.
Business line from about 55 cents per gallon and 2020 to closer to 30 cents, a gallon and first quarter 2020.
Okay.
And one with a total blended volumes also being negatively affected by fewer economic blending opportunities.
And the current quarter.
<unk>.
As a reminder, our first quarter 2020 blending result.
And.
<unk> benefited from hedges put in place and late 2019.
Prior to the commodity price decline and last.
Year on most of the margin and captured and the current period was locked in and prior to the recent.
Sure.
Movement on the prices.
Okay.
Turning to our crude oil business.
Business.
Business first quarter operating margin was approximately $109 million.
<unk> down 9% from the first quarter of 2020.
Our crude oil segment was mainly impacted by lower average tariff rates as well as by lower volume shift.
Yes.
Volumes on longhorn averaged about 235000 barrels per day compared to 275000 barrels per day and.
And the first quarter of 2020.
Yes.
This decrease.
It's partly a result of the impact from recent storms on the operations of our customers.
Sure.
Okay.
In addition, you may recall that some longhorn commitments expired and the fall of 2020.
Yes.
While the resulting decrease and third party ship.
Shipments largely offset by volume is related to our affiliate marketing activities and <unk>.
Margin, we realize on those activities is more reflective of the prevailing differential between the Permian basin and Houston.
Yes.
Houston, which is currently well below the tariff we have been earning on the previous contra.
And.
<unk>.
As a result, our average realized rate per barrel declined during the period.
Yes.
<unk>.
Consistent with the expectations, we had when we provided our.
[music].
Guidance volumes on our Houston distribution.
<unk> system.
And.
And also declined.
Versus the prior year peer.
And again in part due to disruptions caused by the recent winter storms.
And.
Arms change and the way customers contract for.
And then.
<unk> access.
Yes.
And as.
Uh huh.
As we've defaults.
Although we sometimes see volatility and our Acs volumes.
Volumes.
Volumes between quarters, those volumes move significantly lower.
Rates and longer haul longhorn.
Okay.
And ship, which means that their impact on our reported volumes and average rate.
Yes.
And is much greater than their impacts on our actual revenues.
And.
And.
Moving on to our joint ventures.
Yes.
Bridgetex volumes were approximately 300000 barrels per day, and the first quarter of 'twenty.
And.
And we want compared to approximately.
405000 barrels per day, and 2020, driven by a decrease and uncommitted.
And.
And.
Yes.
And that'll horn volumes of approximately 180000 barrels per day.
They were essentially flat between periods.
Period operating expenses were favorable across both business segments during the first quarter of 2021.
And.
Primarily due to lower power costs as.
As you may recall as early as late 2019.
Yes.
And again, focusing on opportunities to realize efficiencies across our business and we formed a team dedicated to those.
<unk> effort.
One of the most significant impacts of that.
Team there has been on the area of power costs.
And.
Costs, where we are seeing significant year over year.
[music].
Savings direct result of the optimization teams efforts.
Yes.
In addition to those efficiency gains.
<unk>, we've had a long standing practice.
Yes.
And.
This hedging a portion of our long haul power expense.
And the recent volatility and power cost.
Cost of hedging activity resulted in gay.
And that will reflect.
<unk> and our quarterly results as lower power.
Expense.
Couple of other quick notes on our year over year result.
G&A expense increased between periods, primarily as a result of higher incentive compensation expense.
Just as a result of on a relative outperformance during the quarter as compared to the prior year period.
Great.
And lastly, net interest expense.
During the current quarter, primarily due to lower capitalized.
[music].
Interest, which reflects the decrease and ongoing construction activity, we're seeing and this lower capital environment.
As of March 31, the face value of our long term debt outstanding was $5 2 billion.
And.
With a weighted average interest rate on that.
And.
Debt of about four 4%.
Sure.
Moving on to capital allocation.
Yes.
<unk> balance sheet metrics and liquidity.
First in terms of liquidity, we continue to have our $1 billion credit facility available to us through mid 2024.
And with $17 million outstanding on our commercial paper program and March 31.
Yes.
And our next bond maturity.
Yes.
And until 2000.
And 25.
[music].
Next I'd like to quickly make a few remarks regarding free cash flow.
Yes.
May have noticed we have added a free cash flow calculation this quarter and the financial schedules accompanying our earnings release.
Sure.
And just based on continued investor interest and the concept and and capital allocation and <unk>.
And.
General and we've calculated free cash flow.
And.
<unk> DCF less expansion capital and including any proceeds from divestitures.
<unk>.
Sure.
For the first quarter of 2020.
Yes.
Free cash flow was approximately 267 million.
And.
Free cash flow after distributions.
Sure.
<unk> and.
$37 million.
And.
Okay.
And finally I'll note that we remain.
And.
So Larry and long term value for our investors.
So on a disciplined combination.
On a quarterly cash distributions.
And.
<unk> capital Investor.
[music].
<unk> and equity repurchases.
Yes.
Sure.
Important part that disciplined approach has been our long standing financial policy.
Okay.
Paul.
Sure.
And times leverage limit.
And which we believe has played an important role.
Sure.
Delivering strong predictable returns to our unit holders over many years.
Okay.
And we came into the first quarter of 2020.
And.
One anticipated and that our leverage ratio would likely.
Yes.
We approach that four times.
Limit this.
And just as a result of the impact of the pandemic and lower commodity price environment.
And.
<unk> on the full trailing 12 months period EBITDA.
And then.
And at the end of the first quarter.
And <unk>.
Yes.
And as a result of this expectation.
<unk> relatively elevated leverage.
And <unk>.
<unk>, we did not repurchase any.
And units.
During.
And.
And.
And the board however, the outperformance of the business resulted in our leverage coming and lower than anticipated.
Yes.
And around 385 times.
And.
And for about 375 times as calculated per our credit agreement, which still incorporates and pro forma impact from our recently completed and West Texas pipeline expansion project.
And.
And it reflected and our updated guidance.
Yes.
And we expect trailing 12 month EBITDA to improve over the course of the.
<unk>.
A year and with the proceeds from the.
Recent sale of a partial interest and our Pasadena Marine terminal joint venture.
And.
And.
We should be and are positioned to opportunistically repurchase.
Unit and the coming periods.
We continue to view unit repurchase.
Purchases.
Okay.
And from tool and our efforts to maximize value for our unit holders.
Orders and have nearly $475 million of authorization remaining.
And our existing $750 million repurchase.
Yes.
<unk>.
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And of course, as we have consistently noted and the <unk>.
Yes.
Pat timing price and volume within a unit repurchase.
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<unk> will depend on a number of factor.
And.
<unk>, including our <unk>.
And our cash and capital spending.
Excess cash available balance sheet metrics legal and regulatory requirements.
And then.
And as well as market conditions.
And.
<unk> and the trading price of our equity.
[music].
With that I'll turn the call back over to Mark.
Yes.
Mike discuss updated guidance for the.
[music].
Thanks, Jeff.
Yeah.
We announced this morning, and we have increased our 2021 DCF Guy.
Yes.
<unk> $50 million.
The 1.07 billion.
[music].
This higher guidance as a result of our strong performance during the first quarter as well as a more favorable commodity pricing environment for our gas liquids blending activities.
Our updated guidance also takes into account lower distributions.
<unk> due to the recent sale.
Okay.
Bill of nearly half our interest and the Pasadena terminal joint venture.
Sure.
Many of you have and tracking the forward curve for butane blending margins.
And.
Margins, so youre aware that margins have improved since we provided guidance in early February.
And.
As is typical for this time of the year, we have started locking in our fall blending margins.
Yes.
And with about 30% of expected fall activity hedged so far.
[music].
Based on the improved commodity price.
We now forecast average blending margin.
And as a <unk> 40 per gallon for the year versus the 25 set expectation as we entered.
[music].
As a reminder, the five year average blending margin is about 45 per gallon.
And.
So we are trending back towards a more normal blending.
Okay.
March Magellan is a net buyer of Rins as a result of our butane blending activities.
Yes.
As you May know RIN prices have increased dramatically this year.
Here and we have factored these higher prices.
And our current estimates.
[music].
We have purchased most of our rent obligation related to 2021 and blending activity.
Yes.
<unk> had it all in average price of around 10 cents per gallon.
And.
We currently expect to spend about $30 million for Rins. This year, which is more than double our annual cost over the last few years.
Turning to refined products demand.
And we expect our refined product shipment.
<unk> to be in line with our previous estimates for the.
Okay.
The year with total volume still forecast and forecasted to be 13% higher than last year.
Based on general trends to day.
[music].
Day, our projected continued recovery and travel and economic activities.
Okay.
<unk> and further volume increases.
On our recent Texas.
And.
And.
Texas.
Yeah.
Six of them and months.
Yes.
We expect total gasoline shipments.
And.
And that's 10% higher.
And.
Our distillate, 10% higher and aviation fuel, 25% higher.
And our 2020 volt.
Our overall 2021 refined product shipments.
<unk> are still expected to be about 3%.
And above the more normal demand year, we saw and 20.
And in 19.
[music].
Scott.
We intend to maintain our current quarterly GAAP cash distribution through 2021.
And of course.
And the current number of units outstanding.
And.
And they expect a 1.07 billion DCF guy.
And as a result.
[music].
<unk> and distribution coverage of one 107.
Yeah.
<unk> for the full year, which is approaching our long term annual targets.
And at least one two times.
And so once refined product demand.
And as to historical.
Levels.
[music].
Levels.
As Jeff mentioned, we remain focused on delivering long term value from our <unk>.
<unk>.
Disciplined combination.
Bass and bass distributions equity repurchases.
No.
<unk> and capital.
Okay.
While we continue to assess potential low.
Risk projects to expand our service on.
Offering generate additional value for our investors.
And.
<unk> are projected.
Expansion capital spending currently totals less than a $100 million was $75 million of expected spending in 2021.
Dollars and $15 million and 2022.
Yes.
And to these estimates now include.
Yes.
<unk> a more than 5000 barrel per day expansion of our new Mexico refined products pipeline system.
And.
Following our recent successful open season.
And the additional capacity is expected to be available and mid 2022.
And then.
And is supported by long term committed volumes.
Yes.
While the new Mexico expansion is forecasted to cost less and $20 million.
And.
So we expect to generate a return at the lower and the six to eight times EBITDA multiple we are generally targeting.
We remain committed to Magellan long long standing capital discipline and balance sheet strength.
We expect to generate free cash flow after planned distributions.
<unk> $350 million for the year.
Okay.
Year that will be available for additional investment opportunities and unit repurchases.
[music].
And that now concludes.
And.
Our prepared remarks, so operator, you can open the lines for questions.
Thank you very much ladies and gentlemen, and select to register a question. Please press.
[music].
Followed by the four on your telephone keypad and you won't hear rates to return prompts technology request.
Your question has been answered and you'd like to withdraw from the queue. You May press and one three once again for a questions. Please press. The one followed by the four one moment. Please for the first.
[music].
Our first question comes.
From Theresa Chen.
And with Barclays. Please go.
Sure.
Okay.
Sure.
And for taking my question.
And.
And Mike within your client.
Product pipeline system.
Demand recovery seems.
To be progressing nicely and I wanted to ask about the changes and within the guidance with individual clean product.
Okay.
Product slightly lower.
And gasoline expectations.
Yes.
Versus previous guide.
And.
And higher growth rates, and distillate and jet, but can you talk about what's driving that.
And.
And then.
And.
And then slightly related.
And we hear a lot of anecdotal data about potential pent up demand and.
Yes.
And as it relates to gasoline and as we are on debt cost us summer driving season and people are eager to get on how sector.
And you can walk down for a year.
And.
We've seen.
And any evidence of this and your system yet.
And.
[music].
Well first of all.
And the primary adjustments to our guidance really are informed by what we saw and <unk>.
First quarter.
And.
Order and what by what we're seeing so far and the second quarter.
Yes.
<unk>.
And Theres really no.
Sure.
No.
And.
More magic to it and that we've just kind of extrapolate.
The trends, we're seeing through the rest of the year and.
In relation to our previous forecast as far as.
Okay.
Yes.
Seeing any.
And up demand.
Really hard for us to parse through the data and determine how much of it is.
Okay.
Base demand and how much is pent up demand.
And so I can't really speak to whether we're actually seeing that or not I think.
Our expectations are consistent with what other are predicting is that we are going to see.
And.
Improved gasoline demand as we go through this.
[music].
<unk>.
And.
It's hard for us to.
And.
Finger at direct evidence of that.
At this point.
[music].
Alright.
And then maybe switching gears and.
And.
And on the topic of Pasadena.
And I can.
And you.
Provide some more color about how the sale of <unk>.
Given that Magellan.
Okay.
Yes.
And it's really not a seller of assets and.
And just curious what prompted.
And you to part with half your interest and this one.
And.
One.
And two.
And kind of impact any future phases and additional build out.
Stability and what does that look like.
Mike.
And.
And what.
What's your view on EBIT, just base case for future.
<unk> build.
In light of refining rationalization domestically.
Good day.
Well, thanks for the question and I'd, rather not get into the specifics.
And negotiations that led to this happening as you know.
<unk> also sold a portion of their interest and so.
And all of that was happening simultaneously, what I will say.
Okay.
<unk> is that we.
We believe we got a very good price for our transaction.
And that we routinely look at our entire portfolio and assess whether or not there are assets that we can sell and what we view to be prime.
A premium valuation.
And.
This asset falls into that category of assets, we would look at routinely to do that.
Okay.
So.
Okay.
I think we have historically.
Okay.
<unk>.
Said.
And then.
Third we.
<unk>.
Valuate our portfolio.
And.
So.
To determine what there's value to be had by selling.
And.
We did that a few years ago with Bridgetex, we did that last year with our marine terminals and the northeast.
And now done that with a portion of MB.
And B M D P.
And so.
And we will continue.
And the look at optimizing our.
Okay.
Our portfolio going forward, so I <unk>.
You should view that as more as just part of our.
Yes.
And our routine process to evaluate strategic strategic options with our assets.
Sets and monetize and if we think we can get a premium price.
[music].
Okay and at this point are there other assets and your.
And your portfolio or partial interest and assets.
Asset.
You may likely pruned and further.
[music].
Further.
Well all I'll say is that we regularly look at our assets.
And.
<unk> and evaluate whether or not the market will pay a premium price for them versus.
And.
What.
And against a couple of benchmarks.
And what we think the.
The ongoing value is versus.
Okay.
<unk>.
It's being made and also.
In consideration of what the alternative use.
Hi.
And.
<unk>.
Which most likely.
Yes.
Lee in this environment.
Cool.
And as Tabak equity and whether Thats a good value arbitrage.
And.
Cash.
That's what we're evaluating and so.
And I kind of mentioned, whether or not and we've got specific assets that we're looking at now or will.
And the future.
<unk>, just say that it's a regular part of our.
Our.
[music].
Thank you.
[music].
Our next question is from Jeremy Tonet JP.
Morgan Please go.
[music].
Hi, good afternoon.
Okay.
Good afternoon.
Okay.
And just wanted to kind of follow up I guess.
And then.
Yes.
On the back.
And more directly I.
I guess.
With the capacity here with asset sales.
Yes.
I mean see current levels.
<unk>.
And that's in that.
It makes.
Sense too.
Yes.
Two.
Especially on the buybacks and the near term just trying to get a sense.
Sense for.
And.
And how you think about.
[music] cash.
And.
Paid well.
And again.
And.
Youre asking a question that's probably.
And the more specifics.
I can answer directly what I can tell you.
And.
Is that.
[music].
Unit buybacks are part of our going forward plan and I'm not going to comment on the timing.
<unk>.
The pace of those.
<unk>.
But they are a core part of our.
Our capital allocation.
And.
<unk> strategy going forward.
And.
I can't match and address whether the specific price is a good price or not because.
Yeah.
So I think that would be appropriate, but I can't tell you.
Yes.
[music].
Equity buybacks are as I've, just said to reiterate.
Yeah.
Sure.
And.
The core part of our capital allocation.
And.
The case strategy.
[music].
That makes.
Okay.
Sent.
And.
Putting here.
And.
Last quarter, you discuss assessing additional renewable fuel opportunity.
And.
And is any updates here.
Is there currently any legislation being considered.
And.
That would.
<unk> opportunities on this.
And then.
And.
We are.
And we're continuing to evaluate renewable opportunities on our CIS.
And.
<unk> with a primary focus.
And on track.
<unk>.
Okay.
Okay.
And.
Yes.
<unk>.
<unk>.
Okay.
Ethanol.
And.
Thats bucket areas.
And.
As I did at the terminals.
All of the biodiesel and our market areas as blended at the terminals or downstream in the market post our terminals and the efforts we're evaluating our two.
And.
Two.
Sure.
To transport those products.
Sure.
<unk>.
Sure.
In the pipe either in a need for them or blended into the fuel.
Which will.
Yes.
The two things and then one that will create transportation opportunity.
Entities for.
Okay.
US and two it's a more efficient weighted.
Yes.
Transport fuel and the market and trucking.
So we're evaluating that I don't have and update on that yet we do think we've got some very promising opportunities with regards to that if you look at pending legislation and our markets.
And.
And.
And number of states that on.
And then.
Our.
Yes.
And that have particularly increased biodiesel blend.
And then mandates under consideration.
Fifth favorably with what our.
And then.
Our strategic goals are with regards to transport and the fuels.
And so on price.
And.
And then.
Got it that's very helpful I'll stop.
Up there.
Okay.
And.
Thank you.
Our next question is from a price Satish Wells Fargo.
And.
Argo.
And.
And.
Hi.
Good afternoon.
And.
And.
When you.
And.
Look at quite a versa.
And.
And as takeaway and the Permian.
And then.
And when do you think there'll be enough of a tightening that you might be able to contracts on your spot.
And.
Pass on Longhorn and.
And tied to this do you think emerging pipelines and the Permian.
And.
And something that.
And.
Good.
<unk>.
Well I think that.
Sure.
First question I think the trajectory before.
Or.
Pipeline capacity and crude oil pipeline capacity gets tight and the Permian.
And.
And in a status quo environment.
As a number of years out.
Okay.
And when I say and number of years.
At least three to five years.
And.
And.
Before you get to any.
And.
Our view based on reasonable growth projections.
<unk> in the basin.
And.
And that's kind of the timeframe we would see.
And.
C.
The EPS.
In this environment.
And.
It's number of years too.
<unk>.
And.
And the future.
Sure.
<unk>, even if the market were.
Yes.
To improve.
<unk>.
The challenge to get.
Get shippers.
<unk>.
Okay.
Yes.
Track to clear line of sight that there is not going to be enough.
Yes.
And that.
And.
And there's really little incentive for.
For shippers to.
Yes.
To commit to long term contracts, you, maybe able to get short term contra.
Okay.
<unk> secured a lock in short term pricing, but.
It's a challenging environment.
As I said for probably the next three to five years to get long term contracts on crude oil pipes, unless something changes and the other things that can change obviously our pipeline conversions.
Or mergers that would optimize the use of the assets.
And.
So.
Whether or not that's going to happen on.
And it sit here and predict them and Theres a number of challenges currently to get that done.
One of those as many pipelines have existing contracts and.
It's difficult to.
To harmonize multiple pipeline systems that all have different contracts with different tariff rates and different conditions.
And to say one pipe.
And there is challenges there to get that debt.
But I'm not saying it's impossible.
And that certainly is one way to reduce.
And the oversupply.
In the basin.
Probably stop stop at that.
Great.
And then just maybe switching gears slightly up and I'm wondering if there's been any thought of increasing your long term coverage target above one two.
I think this level is below some of your peers. So I'm wondering if there's a thought of increasing that over time or do you think its appropriate just based on the capex backlog that you see.
I don't think that Capex backlog really comes into it too much and are thinking one way or the other.
Our coverage ratio, we think is appropriate for our business. Other people may need a different coverage ratio and a lot of them frankly, probably arrived at that ratio by cutting distributions drastically.
Because they were maybe overstretched from whatever the particular reasons, we think it's appropriate for our for our business.
I think I think.
Factors that are going to come into that for us are different and they are for other.
Parties as Jeff mentioned.
And in many cases.
Our peers have cut their distributions to increase their coverage spin.
Specific lead to lower their leverage level.
We don't have that issue so we're not.
<unk> to increase coverage to pay down debt so.
The other reasons why.
And we would allow that coverage level to increase as for instance, we think that equity buybacks are a better use of cash rather than distributions and so we would.
Allow that coverage to grow.
But that may not always be the case, I mean, thats really an evaluation of that point and time, where we may think it's appropriate to to distributed rather than the buyback equity so.
That's really for us what we'll be looking at with regards to coverage ratio.
But we think from a security of the distribution standpoint that one two times is appropriate for the for the.
And the stability of our business.
Great. Thank you.
Our next question is from Tristan Richardson with the Truest. Please go ahead.
Hey, good afternoon guys.
Just a quick one on the model side.
Just thinking about the power costs, you noted how much and the and progress you're optimization team is making how much of that should we think about it is permanent versus perhaps and some dental benefit from the storm.
Well the incident will benefit from the storm is a portion of the $25 million number that we mentioned.
The majority of the benefit we're getting from the power optimization is permanent.
We're changing the way we schedule our pipes.
We are changing the way, we use drag reducer versus electricity, there's a whole host of things that we're doing that.
Structurally lower our power cost run rate.
That's great and then just.
On the previous question around buybacks I mean I think.
We think of the framework that you guys think about a lot is just cash on cash return but.
Distribution coverage a factor when you think about buyback in other words getting.
And getting to that one two times quicker pulling that target forward Rob.
Other than waiting that the continued demand recovery to progress.
No that's not a driver at all behind our buyback strategy on our buyback strategy as is.
Almost entirely driven by value, we believe that there is value to buy back our equity.
And then we'll buyback correctly.
And because it's a good investment not because it's increasing our distribution coverage.
Very helpful. Greg I appreciate it thank you Mike.
And our next question is from Spiro <unk> Credit Suisse. Please go ahead.
And Mike Hey, Jeff.
First on Capex and the <unk>.
And sort of referenced the backlog I think for 'twenty, one and one point. It was it was $100 million I think you mentioned earlier something below that now.
If all these projects come to fruition just curious when you look at 2022 with $15 million and the Hopper now just curious if you have a similar backlog number you could share in terms of how much that could fill up and then just as we're talking about that thinking about 'twenty one.
So safe to say that $75 million is pretty firm at this point and the year I know you mentioned below 100 million. So just curious if we should still be expecting something small that trickle in and when we could expect to hear about that.
Yeah, So let me be clear on.
And the distinction between what we what we announced and our backlog and so what we announced a $75 million this year and $15 million next year. Those are projects that are already approved and they are under construction.
The backlog, we Didnt mentioned and our.
Notes.
Which which I would define as projects that are potential.
But we're not spending any money on them right now and Theyre not in the forecast. We just gave you that number is a pretty big number still I mean, there's a lot of potential projects out there that we're looking at but when we look at the probability of.
Success on those.
Achieving.
The returns we are interested in.
And.
The low risk capital environment that we're in right now, we're not going to spend money without secure credit worthy commitments.
That's where we're.
Projecting and.
The sense I would give you is that our expectations would be.
Our capital our growth capital budget.
It's probably going to be and the $100 million range.
Per year for the next few years now for this year now that you said, that's just estimate I mean, there is a possibility. Some of these projects. We're looking at can be secured at attractive returns.
Which could move that number and there's also a chance that they want and it would lower that number so.
And I don't want to give a prediction on I'm not trying to forecast 2022, but $100 million is kind of a good rule of thumb.
As far as this year.
Sure. There is the potential that we will approve additional projects this year that would raise the spending.
This year above $75 million, and probably rollover into 'twenty, two and increase the spending in 2022.
And it's likely that if we get any of those done and they're not going to be.
<unk>, adding projects and they are really.
Kind of smaller in scale like the one we just announced or even smaller even though there is still high returning projects. So I think and the last call.
Stated that.
Our expectation is that for the year it wouldn't be higher.
Higher than $100 million for the year, we just said, it's going to be $75 million for the year and I think $100 million for the year is probably still kind of our upper range.
But I just want to caveat that but that's just an estimate and I mean, we're not going to if we have a.
Very attractive high returning low risk project.
And that we're able to secure or not and just use that $100 million as a cap I mean, we will continue to invest and those types of projects is just as we look at the landscape right. Now we think the most likely cases, we're going to be and the $75 million to $100 million range by the end of the year.
Got it that's helpful. Mike Thanks for that.
Second question.
Just curious.
And I noted that their customer behaviors have changed following the storm and that was driving renewed interest and transport other services, obviously youre in a very different business, obviously and the SKU. The same price action to take and we saw on natural gas, but just curious if you've noticed the shift or change and customer interest or behavior. Following the storm.
We have and I mean, I think I think it's a very different.
Experienced through the storm and there was obviously considerable stress.
Stress.
And the natural gas markets.
And I would imagine would lead to the customer is thinking about doing things differently, but.
That didn't happen on the refined products markets, we were able to operate.
Through the winter events are refined products pipe with almost no disruption of any consequence, and so no we're not seeing any any change in customer behavior.
Got it that's all I had.
Thanks for the time guys.
Alright, thank you.
Our next question is from Keith Stanley Wolfe Research. Please go ahead.
Hi, good afternoon.
First question just on the refined products volume outlook.
Is there any way to sort of roughly characterize where you think volumes were versus normal in Q1, and then what the guidance assumes over the balance of the year, just the trajectory of volumes versus normal.
Well I think overall.
Our experienced and the first quarter was consistent with what we expected in total.
It was a little different than what we expected byproduct.
Our diesel volumes were probably a little higher than we expected our gasoline volumes were probably a little lower than expected but in total.
They were consistent with our overall volume and that's what led to tweaking the forward numbers a little bit.
And.
So I don't know if I have any more to add to it and that.
Just a rough sense of accounts.
I would just add to this too.
And I've said this in past calls, but projecting refined product demand.
And this environment is.
<unk> debt, a fool's game, because theres, so many variables debt.
Impact things and for instance, we did talk about this earlier.
Likely that.
Some of the softness we saw on the gasoline demand and the first quarter versus expectations has to do with the weather events.
And that the debt likely affected those numbers somewhat downward we can't quantify that.
But.
It just stands to reason debt.
People were out and about less during the extreme cold weather events and they would've been otherwise, but going forward. When you look at the pace of the vaccinations all the things that are irrelevant to reopening the economy and fully the pace of the vaccinations the spikes in certain states.
On the comfort level that businesses have to bring people back to their offices.
Uh huh.
To a large extent, it's hard to predict debt with great precision.
So I just I'll just highlight that as we talk about forward forecasts.
Okay. Thanks second second question just.
And the release and you guys have talked about this before having a six to eight times EBITDA multiple.
Our target for growth projects can you remind me how you think about return thresholds for acquisitions.
Relative to that six to eight times multiple and then Relatedly. If you were to consider acquisitions is it more likely you'd look at bolt ons within your kind of core refined products network or would you look more at diversification opportunities.
Well.
I can tell you that our view on acquisitions is fairly conservative as you can.
Since we've done very few.
In recent years.
And I don't know if the six to eight multiple really is applicable to and acquisition.
Depending on what the acquisition is and the nature of what it is you're buying.
But.
We still look to.
Risk appropriate risk.
Compensated returns so if we were buying.
Refined products.
Pipeline of terminal that was a bolt on to our system, where we had a clear line of sight to the value.
We.
The risk around that in our view is lower than say for instance, and building and buying a crude gathering system and in West Texas. So.
We would probably have a lower return threshold that that type of business.
Yes.
So that being said.
Youre right I mean bolt on type of assets would be more attractive.
But we would look at.
And.
Assets and our bolt on and we would look at diversification, but I would tell you.
Just.
But the.
Uh huh.
The M&A market or acquisitions, especially at the asset level or not at the top of our priority list.
At the moment, what we look at things, we evaluate opportunities we determine whether we think we can be competitive with our conservative view to acquisitions and will participate.
But as you know and I keep highlighting our track record.
Yes.
<unk>.
The likelihood we're going to be successful is not extremely high.
And when I say that it sounds like a negative but I can tell you.
When we look back historically the assets, we have evaluated and I'd say historically, the past five or six years.
In hindsight, there's probably not a single asset that we looked at bid on that we wish we had beaten the high bidder and acquired it.
We're actually in the opposite position, we're thankful, we didn't buy it and so that colors, our view and our analysis when we're looking at current assets.
Great. Thank you.
Our next question is from Shneur <unk> UBS. Please go ahead.
Hi, Good afternoon, everyone. Most of my questions have been asked and answered and so I just have a few follow ups to some of the questions that were asked.
I think you had multiple questions with respect to coverage ratio and so forth.
Just to clarify if youre doing buybacks.
And that not naturally improve your coverage ratio and I just wanted to clarify because there seem to be some back and forth on that.
It does but so let me clarify what.
With me and when we talk about the one two times coverage ratio because I think.
Most people are perceiving that as a.
A cap.
And it's not I mean, when we put the one two times really what were.
The way we're looking at that is what level of coverage do we feel comfortable with related to the stability of our business operating at.
In other words, we prefer not to go below that unless there is an extreme dislocation like we saw last year. When we went below that but under normal circumstances, we wouldn't want to go below one two times now that doesn't mean it wouldn't naturally go above one two times, just with the growth and the business.
And.
Historically, when that's happened we've raised our distribution and.
And we've kept that coverage right around that one two times level.
Going forward.
And as our business grows and as we buy back units and the business improves from an EBITDA basis that coverage will grow and it will go above one two times.
In this environment.
The old practice of just raising your distribution.
To keep the coverage near one two times is still an option, but it's not the only option given the valuation of the equity buybacks are now real.
Use of proceeds for capital is diminished obviously that was the other.
Option for the use of excess cash above.
R R.
One two times coverage.
So.
That's the way we think about one two times is what we feel comfortable and we don't really want to go below that too much.
But if we go above it then it's just a matter of what do we do with the available cash above that do we buyback.
Buy back equity to increase the distribution to be invested capital, we don't make that decision based on where we want the coverage to be I mean, if it's at one five times.
And we're still in an environment, where buying back equity is the right choice and we're fine with one five times and we'll buy back equity if we're in an environment, where we think it's better and have raised the distribution will raise the distribution and bring that coverage back down, but all of that will be a point and time analysis.
While it is time to make it.
Right.
To clarify so basically if you buy back 10% of your units your coverage would be 10% higher and then you would have.
And Tonight.
Okay got it.
Yes, Sir.
Caveat, there and in general that's true, but if we sell on asset to buyback units is not one for one because we're reducing right.
Income.
But if it is just from free cash flow above our distributions yes.
Okay, perfect and my follow up question.
You just heard me talk about refined products being above the 2019 level, but there's been a lot of assets that have been added and small cube.
Is there a way to give us and I know this question was asked on on the call during the fourth quarter, but is there a way to give us a kind of like where are your expectations rest with respect to <unk>.
On apples to apples capacity utilization of your system.
And as it sits today on the refined product side with respect to your guidance.
Well at this point and time.
And the reason is there's so many moving parts.
And I think we've tried to explain that and in the last call.
It's possible, perhaps if we get down the road and we get back to two.
Hey.
Stable environment for refined product demand, which I don't know when we'll know we're at that point, but then maybe you can make some comparisons, but when everything's and flex.
Again trying to determine whether a barrel that shipped on our pipeline. That's been expanded is a barrel that would have shipped any way or if it's only shifting because of the commitment.
And is very difficult to.
Determine when the overall demand has dropped so dramatically. So that's a difficult and we have and while we don't try to carve that out.
And also maybe just no. We don't we Wouldnt typically think about that question in terms of capacity utilization on our system because it and network.
That's just not usually the way we would be characterizing that.
First of all and second of all I will say our projections do.
Lola.
And for all products and.
Versus 2019 as at pace.
And then that's improving throughout the year, but it's very difficult to start as we discussed on our last call to parse out base versus growth with any specificity for the reasons, Mike just mentioned.
Alright, perfect I really appreciate that everyone.
You very much and I'm sure the rest of your afternoon.
Thank you.
And our next question is from Theresa Chen Barclays. Please go ahead.
Hi.
Thank you for allowing me back in the queue I just had a follow up on for Jeff actually related to the cost savings and <unk>.
And this quarter and there were some volatile items and that line item and I just wanted to get a sense of what the.
And our cash run rate and Opex should be going forward. Once you strip out like the gains that were experienced for.
And at the most recent quarter.
Well without getting into too much detail I would say, Mike mentioned, the bucket of around $25 million total impact related to the storm, which was made up of a number of things revenue items and expense items.
Less than half of that was related to expenses.
So if you were looking for one off things related to the storm that I would say that's kind of the.
And the book and I would give you.
But we also had some other onetime items and a quarter I think Mike mentioned that as well.
And we expect some of that to reverse later in the year. So it's a little bit more complicated than that may be worth mentioning as well when we came into the year. We gave a figure of I believe 50 million of lower expenses, we expected versus what would have been the case absent our optimization efforts.
And so those are on pace I would just say that to be realized this year versus what we would have otherwise been so some of the year over year type guidance as you will see incorporate that and the <unk>.
First quarter was reflected on flat.
And our next question is from Michael Cusimano Heikkinen Energy. Please go ahead.
Good afternoon, just one question for me on the crude oil transportation revenue per barrel and thought it was up quarter to quarter and I was just hoping for more details that that was a function of lower Houston distribution volumes or if there any.
And your payments and that number and then also like how do we think about that going forward.
Bear with us for a minute.
Yes, the single biggest variances the change and HTS volumes. So you are right. That's that's really it and as we've tried to point out typically when those those move a lot take and.
Definitely impact that average rate per barrel quite a bit that's why we tried to give a little bit more color by pipe.
Okay and did you all have any deficiency payments and <unk> related to the storm.
Non material that we didn't have anything related to the storm, but otherwise.
They were not material.
Okay. That's helpful. Thank you.
And our last question is Michael <unk> Goldman Sachs. Please go ahead.
Hey, guys. Thank you for taking my question, just curious coming back from the Permian oil pipeline markets.
If we don't see a rationalization of supply or material.
Pickup and production.
How do you think about kind of when you get to that three to five years from now.
How do you think about today over the next year about managing and what the risk would be kind of on the mark to market on and tear ups and kind of closer to what some of the newer pipes are getting and the Buck Buck and a quarter of about 35, a barrel range are you at a stage yet where you have to think about how do I manage my balance.
And in case kind of everybody tariff goes to a buck and a quarter.
Whether it's in year three of your fiber as contracts roll and and.
Not just you it's kind of industry wide.
<unk> got some runway given the contracts you have right now, but I'm just curious about how youre thinking about the long term.
Well that's a good question and first of all I'd say we've been through.
Round of contract renewals on a long and we're already so our rates on longhorn.
And you're already substantially lower than they were under the original contract structure. So we've re rated considerably with regards to that already on and on longhorn.
On Bridgetex.
That risk is there even though.
The GAAP between our contracted rates and kind of the current market well.
But current market I'll set that aside for a second but the range of rates you mentioned.
It's not as large.
As it was on longhorn before we re contracted there's still risk from re rating.
And the fact of the matter is if you get too.
If you fast forward to a point where.
All the contracts on all the pipes have expired.
And you still have material overcapacity, and that's a big assumption again.
If you go out five years from now.
Hopefully the production and the basins come up to a level or something that's been rationalized such that you don't have and acute problem, but assuming that nothing has changed.
Youre going to have a very low tariff environment, and it's real and again, it's not a matter of contract is going to be a matter of.
Spot movements on on <unk>.
And what we're trying to do first of all is to position ourselves.
To get the volume before we even talk about the rate you need to get the volume.
The rates are going to be.
Very competitive there's analysis now that that shows the corp is cheaper to ship to Corpus and is Houston well that's based on current contracts. If there are no contracts in place.
And the rates are all going to be the same I mean everyone's going to be trying to move the barrel to their destination and the rates are all going to be the same and you don't have one that's lower than the other.
And so what we're working on is creating an environment, where shippers prefer to go to Houston.
And there's reasons to go to Houston.
<unk> got a large demand market you have export capability that is sufficient to handle all the pipe capacity to Houston.
Can argue perhaps and it's got a less congested port, but one thing that we announced a few months ago is that we are advancing a futures contract and Houston that we believe will make it and attractive market for traders to ship to them, we don't have anything there.
And it's on that today, but.
It is under development and we hope to have something to announce and the future.
It's still.
And we think it's going to be very attractive with it took place so.
Yeah.
That being said and.
And I Should've mentioned this earlier, we think about rationalization.
Frequently and.
And I don't want to go into too many details on what we're looking at.
And the possibilities for our pipes.
And we evaluate alternatives for optimizing.
Our crude portfolio independent of <unk>.
Partnering with other parties, so that activity is going to go on and over the top.
Talking about a three to five year time horizon.
There is potential for us to find opportunities that make sense too.
To optimize the use of the assets.
All of our peers are certainly doing.
And to the extent that they're successful and doing it and it helps everyone else out so I'll just leave it at that.
Got it thank you much appreciated.
Sure.
And gentlemen, and I will turn the call back over to you for closing remarks.
Alright, well. Thank you everyone for your time of day. Thank you for your interest and Magellan and.
And we will talk to you soon.
And ladies and gentlemen that does conclude our call for today. We thank you all for your participation and have a great rest of your day you may disconnect your lines.
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