Q2 2022 Magellan Midstream Partners LP Earnings Call
Yeah.
Greetings and welcome to the Magellan Midstream partners second quarter earnings Conference call. During the presentation, all participants will be in a listen only mode.
Later, 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 the operator, Please press star zero.
As a reminder, this conference is being recorded Thursday July 28th 2022 it.
It is now my pleasure to turn the conference over to Aaron Milford, President and CEO . Please go ahead.
Hello, and thank you for joining us today to discuss Magellan's second quarter financial results before getting started we must remind you that management will be making forward looking statements as 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 in our filings with the security and Exchange Commission and form your own opinions about magellan's future performance.
As we previously announced we closed on the sale of our independent terminals at work on June eight and have been actively putting those proceeds to work, including working capital adjustments. We received a total of $447 million for these assets and deployed $190 million during the second quarter into our equity buyback program underscore.
Our commitment to maximizing long term value for our investors.
And today, we continued our trend of solid financial performance with second quarter results, but slightly beat our Apu guidance with that I'll now turn the call over to our CFO , Jeff Holman to briefly review, our second quarter financial results versus the year ago period, then I'll be back to discuss a few more areas of interest before answering.
Two questions.
Thanks Ann.
First let me mention that as usual I'll be making references to certain non-GAAP financial metrics, including operating margin distributable cash flow or DCF and free cash flow and we've included exhibits to our earnings release that reconcile these metrics to their nearest GAAP measures.
Earlier. This morning, we reported second quarter net income of $354 million.
Compared to two and $280 million in second quarter 2021.
As noted in our press release. These results include a $162 million gain in the current period related to the sale of our independent terminals network, which is reflected in income from discontinued operations and a $70 million gain in the prior period, primarily related to the sale of a portion of our interest in the Pasadena Marine.
Terminal joint venture.
Excluding both of these games net income decreased about $18 million quarter over quarter.
Adjusted earnings per unit for the quarter, which excludes the impact of mark to market adjustments was $1.94.
And further excluding the 77 <unk> favorable impact of the gain on the sale of discontinued operations earnings per unit was $1.17 exceeding our guidance for the quarter of $1.12 and I'll remind you that BP guidance. We gave for the quarter did not include the gain on the sale.
DCF for the quarter at $228 million.
It was $40 million lower than last year.
Free cash flow for the quarter was $649 million, resulting in free cash flow after distributions of about 200 $429 million.
A detailed description of quarter over quarter variances is available in the earnings release, we issued this morning, so as usual I'll just touch on a few highlights of the quarter laid results starting with our refined products segment operating margin of $246 million was 8% lower than the 2021 period.
I'll provide more detail shortly but in summary, the resulting decrease between periods was primarily due to an increase in operating expense, which is partially offset by an increase in transportation revenue and product margin.
Drivers of the increase in transportation and terminals revenue, including a record high quarterly transportation volumes, resulting from additional contributions from our recent Texas expansions and higher South, Texas volumes, which move at a lower rate.
As well as continued demand recovery from pandemic levels, especially in aviation fuel for.
For the quarter total refined products volumes were up 3% versus 21 levels.
In addition, our average transportation rates increased year over year due primarily to the mid year 2021 tariff increase while tinder revenue benefited from the more favorable commodity environment.
These benefits more than offset lower storage storage revenue, which similar to last quarter was impacted by lower utilization and rates following recent contract exploration.
As a reminder, the prior periods still benefited from some contracts entered when the market was in steep contango and now those contracts have rolled off while the currently backward dated market has resulted in lower demand for our storage services.
Operating expenses for the refined segment increased during the second quarter 2022.
I'll note that with the exception of power cost, which did increase slightly year over year. Most of the increase for the quarter was not directly related to inflation, but instead represented a couple of other discrete circumstances in particular, we experienced less favorable product overages during the quarter, which reduced operating expense.
Overages and shortages fluctuate period to period with the operation of the pipeline and these fluctuations can have a more pronounced effect in periods of elevated prices, which we saw this quarter.
Additionally, the refined product segment experienced higher property taxes, primarily as a result of recently completed expansion projects.
Product margin was favorable compared to the second quarter of 2021, primarily due to higher gas liquids blending margins and slightly higher volumes are realized margin margins increased year over year to about 40 per gallon versus closer to 35 cents per gallon in the prior year period.
As we noted on last quarter's call basis basis differentials have been wider than normal recently and these wider differentials have offset some of the benefit we otherwise would've expected from our blending business.
Further these favorable gas liquids blending results were partially offset by higher unrealized losses in the current period related to our hedging activities just given the volatility in prices. This year and the fact that we have outstanding hedges through next spring.
Turning to our crude oil business second quarter operating margin was approximately $108 million slightly higher than the 2021 period longhorn volumes averaged a little over 200000 barrels per day compared to 260000 barrels a day in the second quarter of 2021.
Primarily due to the timing of when our committed shippers have elected to move volume under their commitments as well as the expiration of a few of our smaller marketing commitments over the past year, which moved at a lower rate.
Volumes on our Houston distribution system increased versus the prior year period with more tear shipments, resulting from a new pipeline connection to our system.
In addition terminal throughput fees increased as more customers elected to use a simplified pricing structure for our services within the Houston area.
We continue to see growing customer interest in such arrangements with the result that while we have added connections to the HTS and the volume of physical barrels. We move has increased much of the resulting in incremental revenues are showing up as terminal throughput fees, rather than as transportation revenues to get reflected in our transportation.
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Looking briefly at the expenses operating expenses for the crude oil segment increased slightly primarily due to the higher integrity and maintenance spending in particular on the splitter, which has which had a turnaround this quarter, partially offset by lower power costs as a result, but a lower longhorn volumes and our ongoing optimization efforts.
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Moving on to our crude oil joint ventures, Bridgetex volumes were approximately 215000 barrels per day in the second quarter of 22 down from nearly 315000 barrels per day in 'twenty, one due primarily again to the timing of when our committed shippers have elected to move volumes ended their commitments.
We did once again recognized additional deficiency revenue for the Bridgetex pipeline during the quarter, which offset the lower volumes and I'll note that although this recognition of deficiency revenue results in a benefit to equity earnings and associated cash payments were already received from customers in prior periods and our proportionate share of those payments were distributed to us by our joint ventures.
Recognize recognized by us as DCF at that time.
Finally on saddle Horn volumes averaged about 220000 barrels per day about the same as in the 2021 period, albeit at lower rates due to the expiration of the initial contracts in Hawaii late last year.
There are just a few other items I'd like to touch on first I'll note that net interest expense increased slightly primarily due to a higher average debt balance during the quarter that that balance came down somewhat when we received the proceeds from the independent terminal sale and as of June 30, the face value of outstanding debt was $5 billion with a weighted average interest rate on that debt.
We have about four 4%.
Our leverage ratio at the end of the quarter was three three times for compliance purposes, which incorporates the gain we realized on the sale of our independent terminals exclude.
Excluding that gain leverage would have been about three seven times.
And that brings us to the last item I will touch on today, which is capital allocation I wanted to reiterate what I know you've heard us say before we remain committed to maintaining our financial discipline. We are known for while delivering long term value for our investors through a combination of capital investments cash distributions and equity repurchases as already discussed we received.
Proceeds from the sale of our independent terminals network during the second quarter and began actively putting those proceeds to work for our buyback program, we repurchased nearly $2 9 million units in the second quarter at an average purchase price of $48 79 for a total spend of $190 million.
Year to date, we have allocated $240 million senior note repurchases, bringing the total since inception to $1.04 billion.
So far in 2022, we have returned nearly $680 million to our investors through a combination of unit repurchases and cash distributions.
Including our recently announced distribution, which pays out next month that number is closer to $900 million.
Further we continue to see unit repurchases as an important focus of our ongoing capital allocation efforts and as previously stated we currently expect free cash flow after distributions to generally be used to repurchase our equity of.
Of course, as we are always careful to note the timing price and volume of any unit repurchases will depend on a number of factors, including expected expansion capital spending free cash flow available balance sheet metrics legal and regulatory requirements as well as market conditions and the trading price of our equity and in particular.
I'll note that we remain committed to our long standing four times leverage limit.
With that I will turn the call back over to Eric.
Thank you Jeff.
Turning to guidance, we're still projecting annual DCF of $1.09 billion consistent with our previous expectations for 2022.
You may recall that we increased our annual guidance last quarter to capture the benefit of the higher commodity pricing environment to magellan's financial results.
As you look forward from here there are a number of things, we're keeping our eye on including a volatile commodity environment the impact of inflation on our expenses the impact of higher prices on refined product demand as well as general economic conditions.
But we do not expect the material impact from these items to our annual guidance.
Concerning refined products' demand, while we didn't detect any notable demand destruction due to higher fuel prices. During the first half of the year, we did see a little weakness during early July but was.
Declining fuel prices over the last few weeks, it's not yet clear to us that this early July weakness theres a developing trend.
Specific to our commodity activities, we've continued to lock in additional hedges over the past few months related to gas liquids blending with more than 80% of our upcoming fall blending now hedged at margins of nearly 50 cents per gallon all in we still expect blending margins for the current year to average around 40 per gallon.
We have also made significant progress in hedging next year's blending as well with 70% of our expected spring 2023 activity hedged at margins in excess of <unk> 60 per gallon.
As we discussed last quarter, the recent basis differential between Nymex futures hedge contract prices and actual prices for product physically settled in our mid continent region continue to be wider and more volatile than normal which negatively impacts. The overall margin we realized from our blending activities.
If this basis differential which returned to more historical levels, we would expect the margin we realize from future blending activity.
To increase by another five to 10 cents per gallon, including our hedge volumes.
Moving on to expansion capital, we continue to actively pursue additional projects to grow our business in a prudent manner.
Just on projects already committed we now expect to spend approximately $80 million in 2022 on expansion capital. This estimates $10 million higher than last quarter in part due to the addition of a new project to increase our gas gas liquids blending capabilities at our East Houston terminal.
As you may recall, and probably low risk expansion opportunities that meet or exceed our six to eight times EBITDA multiple threshold and in the current environment. We still believe that around $100 million per year is a reasonable assumption for expansion capital spending.
Although not yet included in our spending estimates the open season for the potential expansion of our Texas refined products pipeline to El Paso was previously extended and is currently set to expire tomorrow.
Significant interest has been received from the industry with potential customers simply needing a bit more time to make a final decision and for us to finalize the scope of the project based on any commitments we receive.
Before wrapping up our prepared remarks, I'd like to briefly speak to inflation and tariff rates for a moment knowing that this is a top of debentures.
With our previous guidance, we increased our index rates by the eight 7% allowable by the index earlier this month.
As you May recall reflects about 30% of our refined products markets.
And then the remainder of our markets, we increased tariffs by an average of 5%.
When all in increase of 6% effective July one.
As we have discussed we project these increases to outpace the increases in our expenses for the year in part due to our continued focus on optimization opportunities that ensure we are operating as efficiently as possible, while preserving the safety and integrity of our assets.
Because I think everyone's probably aware the PPI for finished goods metric used for the FERC index is up 15, 5% year to date through June which is the level, we simply haven't seen since the index was established in the early nineties.
As I just noted we typically adjust our refined product tariff rates in the 30% of our markets that follow the index by the allowable FERC index change each year in our baseline expectation is that we will generally continue that approach going forward.
However.
Given current inflated given the current inflation backdrop.
We will be paying close attention to numerous factors between now and July of next year, including competitive conditions and customer dynamics as well as the trajectory of our own costs and.
We will approach next year's rate increases thoughtfully and deliberately.
As always with a view to long term value creation for our unit holders.
With that operator, we are now ready to open the call for questions.
Thank you if you would like to register a question or comment. Please press. The one followed by the four on your telephone.
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The first question comes from Theresa Chen of Barclays. Please go ahead.
Hi, there. Thank you for taking my question and Aaron I wanted to touch first on your comments about inflation and the expected rate increase going into 2023.
Understand that.
30% that is subject to FERC indexation, you have a very deliberate process there.
For the rest of Europe refined products footprint, 70% subject to market rates.
Is there upside risk to that single digit mid single digit.
Our rate increase that you've been able to get for the past few years, given the inflation pressures that we're seeing today.
So when we think about our market rates and our index rates as you mentioned, we have a thoughtful process that we go by market by market and make sure that we're making good long term decisions. When you when you look at the.
The market rates versus the index rates those haven't always followed by the by the same amounts.
And I don't feel like we're tied to you know the market rates needing to follow the index rates.
And the process that we'll go through is looking at those market based rates looking at the competitive dynamics and in making the decision at that time, obviously the issue we didn't raise the market base rates as dramatically as we raised the index rates.
I don't know if that pattern will necessarily continue it may but I think on inflation for us or the general comment I would make is.
We feel that we'll be able to raise our rates.
At.
Right.
That will exceed our cost inflation and through that.
Benefit the question's going to be when we get to July what's the market look like and how much of that benefit are we going to be able to realize.
Does that answer your question Teresa.
Yes. Thank you.
And then on the subject of cost inflation.
On refined products operating expenses this quarter I'm seeing that significant step up can you just remind us what a normalized run rates should be from here.
Our normalized run rate for expenses generally.
Before that refined products and expense lines at 136.
Yeah, I mean this.
I don't I don't know if we've typically given a normalized rate per se, but I would say that this year again I mean, this quarter had a number of unusual or onetime type items.
Again as we went through then.
Our product short as one of the big ones this quarter and property taxes, the expected impact of of Overages in particular is going to be usually a slight positive on average.
But it varies from month to month quarter to quarter, sometimes if you go back over over the years and our transcripts occasionally it's a variance items, sometimes positive sometimes negative and.
When we have high prices it can be a little bit more pronounced.
But so we would expect that to normalize thats not a run rate.
Number of this this quarter at all.
So you'd have to normalize for that for sure and again there were a number of those.
Those onetime type items that contributed to that.
Okay.
Then on the equity earnings and just looking at the step down from last quarter and to your earlier point, Jeff about yeah.
The volume volatility as well as how would you get paid from your equity joint ventures on a distributed basis.
And when would you expect the deficiency revenues to be paid back.
Paid back well.
Just to be clear on the crude side, particularly where we've had those deficiency revenues bridgetex is the one we called out we have received the payments and received the distributions related to those.
To the to the quarter. So that there is and it depends on the particular contracts if theres deficiency like that sometimes there are credits that can be used in the future.
But we've been paid.
And we received Dislocating received distributions related to that.
Thank you.
Sure. Thank you.
The next question comes from Jeremy Tonet of Jpmorgan. Please go ahead.
Hi, good afternoon.
Good afternoon Jeremy.
Just wanted to kind of parse through it a little bit in the quarter here. If you could help us think through if you might be able to quantify the impact of product overages as a headwind versus other cost headwinds.
Yes, Jeremy is area about $50 million.
Got it got it.
And the other cost headwinds I guess, if if overages as kind of a you know.
If MRO.
Other the other costs such as property taxes higher power.
Power costs are these sticky or just wondering Gibson takes for those.
Those costs over time.
Yes directionally.
It's a fair question Directionally, they're not sticky power is probably a little there's a little bit of inflation and power costs.
And the property tax there is a little bit as it relates to our.
Our expansion projects coming online and being assessed at higher values and we hope that sticky because that means I mean is reflective of those assets performing well.
But most of it last year, we had some favorable.
Pre tax.
Impacts actually some true ups from prior year that was in the single digits millions all an effect on the quarter that negative property tax and so I'd say about half of that is probably is thinking about half of it isn't.
And again it just reflects the expansion of our asset base power costs, It's really small small increases at this point, we did have some other favorable power expenses at this time last year, where we are still booking some of the favorability of power hedges, we had in place during the winter storm and some of that showed up in second quarter. So a period over period.
That contributed to a negative variance.
In comparison so.
And that of course, that's not sticky so small digits on on power small digits on taxes and the rest of it is just one time.
Got it that's very helpful. Thanks, I'll leave it there.
Thank you Jeremy Thank you.
The next question comes from Keith Stanley Wolfe Research. Please go ahead.
Hi, good afternoon.
Wanted to start on the approach to buybacks from here, obviously, a lot of progress in Q2.
The cash balances is kind of low now at the end of the quarter because you repaid some of the CP.
Borrowings so thinking about buybacks going forward should should we assume that's tied more to ongoing free cash flow or would you draw a potentially on commercial paper to to buy back stock in the future and then sorry, it's a long winded, but relatedly Moody's about a month ago. They they affirmed your.
We're obviously very good b double a one rating, but there was a line in there about wanting to rebuild headroom under the leverage ceiling is.
That factoring into your thinking at all or is it you know we're under Forex, where we're feeling good about that.
Let's take them in order on the question around.
C P I guess.
Yes, I mean.
Cash is fungible so.
Cash from proceeds come in and we pay down.
That's really just.
Financing decisions in the form of there's really no magic if we borrow.
Now that having paid down CP, if we use the CP to finance repurchases.
It's kind of a wash so.
Yes, we could finance repurchases with CPI would not look to our cash balances and if you look back in history. We've never had a lot of cash to finance our R. R.
Repurchase activity for any stretch of time so.
That's all just financing decisions, it's really going to be driven by other factors like the ones I've mentioned, rather than short term financial considerations like that.
Moody's.
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Is it coming into our thinking no more than the four times leverage limit has always come into our thinking.
We had we've had good dialogue with Moody's they understand what we're doing.
I think if you look on <unk>.
Trailing period and not working in the proceeds then.
Look a little tighter than it looks currently on leverage.
But I think our understanding with them is quite clear we are committed to four times and I think they understand that so.
It's really not changing our thinking.
And I think Theyre just.
Underscoring the importance of that commitment on their side.
Thanks, and just a.
A quick one the refined products volumes. So it sounds like you haven't seen very much at all as far as demand destruction to date. So it is the forecast for the year for refined products volumes still to be up about 4% versus 2021.
So as we think about the whole year, we think we're going to be pretty close to what we thought we'd be at the beginning of the year Theres a lot sort of moving around youre right in that we.
We haven't seen any direct evidence of what I would call any material demand disruption from from from higher prices as I mentioned in my comments.
Early July we saw some weakness but.
That seems to have abated as the.
The pump prices are essentially fallen.
So we don't see that trend continuing so.
And I think we're going to be pretty close to what we had originally thought.
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So I don't think there's going to be any real surprises there generally speaking.
Thank you.
Thank you.
The next question comes from <unk> Satish.
Wells Fargo. Please go ahead.
Thanks, sorry to belabor this point, but on the product Overages I guess I just wanted to be clear was this more of a one time expense because this quarter. I guess, you had maybe a shortfall of product and therefore had to make a payment and it won't continue or.
Is this going to remain kind of a volatile line item due to the higher oil price environment.
Well volatile is probably a little strong, but it does fluctuate and it.
As always fluctuate it that's not new.
And like I say, usually it's not enough to merit.
I mentioned, but it certainly has been many a time before merit I've mentioned, we've had we've had to mention it is we tried to explain branches. So.
I wouldn't expect to hear but I wouldn't be surprised to hear about it. There's nothing unusual. It's just the typical operation of the pipeline is very complicated and very very small amount of the total amount of products we handle.
Okay.
When we settle out within in the months or compare our inventory to our physical inventory it doesn't take very much.
To have an impact, particularly when prices are high so again they.
Specced in value from that.
On a typical year over any stretch of time, its usually a small positive in our favor but month to month. They can vary and so the expected value is a slight positive but that yes, you could it would be expected that we would have.
Continued negative that would be not expected at all.
And often frankly, when youre doing these kind of calculation of positives followed by a negative price versus such that it all kind of evens out.
But that's the way that works.
Don't be surprised if you hear about it again, but it would be surprising to have a string of negatives.
Okay got it that's clear.
And then I'm sorry, if I missed this but just in terms of bridgetex volumes they were down.
Quite a bit in Q2, I think down 20% sequentially, just wondering what's driving that thanks.
Well again the shippers.
On the line have commitments in some cases they have commitments also there's wherever they have their own operations that are just trying to optimize so.
We had some.
Volumes that normally would have been delivered to us in our commitments.
Shipper.
Made other arrangements with during the quarter and or change their patterns of behavior.
But we still get paid and that's the beauty of commitments. So.
It's.
Not something we prefer we prefer to get tenders on that and everything else. So some small impacts on us if they don't ship, but but.
You know thats a pattern thats unusual and we don't expect it to recur obviously, it's a particular set of events.
Circumstances that would cause that we haven't seen it.
And we don't expect we're not projecting it to continue through the year.
Got it thanks.
Thank you.
The next question comes from Neel Mitra of Bank of America. Please go ahead.
Alright, Thanks for taking my question I wanted to refer to a.
Part of the early for the guidance for 2022, where you said the recent decline in commodity prices could offset some of the.
The overages in terms of your budget.
Hit this year.
Just kind of walk through the different line items there so.
Are you kind of referring to our bar butane spreads.
With oil prices coming down I would assume that.
With gasoline prices coming down as well, but that would eliminate some demand destruction and that would be good and then the other part would be the Midland to MH spread.
Whether that's widening or contracting and what youre seeing there and if you could just kind of walk through the puts and takes there.
When you look at commodity sensitivity for the second half of the year.
Yes, so I think you've hit on a key point overall and that is with the commodity markets and the volatility that's going on there there are a lot of puts and takes.
Generally speaking.
Our butane margins are still coming in fairly strong, especially compared to.
Our recent history the volatility on the butane blending margins has been the basis differential between our hedges.
And then when we actually physically settled them and Thats muted what I would say some of the the upside potential that we would have otherwise expected and our butane margins.
So that's one area that as you look at the back half of the year, we're going to be monitoring that basis volatility. Unfortunately.
It's a very difficult risk to efficiently hedge.
If you look at commodity prices more generally on our business outside of butane blending margins.
Higher prices mean higher tender revenues as Jeff mentioned earlier as we look at a year or a long period of time, we are typically on the positive side of gains and losses, such that higher prices drive.
A better performance from that regard so tender deductions, however prices for the net product gains we have those are all tailwind for us.
And as those prices go up or down that potential obviously goes up and down with it.
In terms of high commodity prices and it gives them puts on demand you know as we've mentioned many times in the past gas.
Gasoline and generally transportation demand is fairly inelastic.
I think we were maybe testing that a little bit in early July with the prices we saw upon them but.
But we Havent I don't think broken that elasticity I still think is very inelastic.
So even with higher commodity prices as long as they stay within sort of an expected range and are not too extreme.
See a lot of commodity risk upwards, if prices are up or down really driving up only one way or the other unless you get to an extreme which again you may have tested in July but.
But we've come off of those extremes. So when you put it all together.
We had a really strong or high priced commodity environment that we got obviously, we are going to provide a lot of benefits as those prices have come down some of that benefit is going to be more muted than what we had originally thought it might be.
I mean, it's it's really that simple, but even when you put all that together what I want to reiterate is as our guidance of a $1 billion 90 is still intact. So taking all of that all the puts or takes all the ins and the outs looking at the general economic environment for the back half of the year, we're keeping our eye on those things.
But we think as we sit here right now our guidance and the expectations that we've set are still on the table.
Still what we're going to be able to achieve I think part of the.
The disconnect, which may not be the right word but.
I think we had expectations that had commodity prices stayed where they were at and continue to go higher than we might see more upside than what we've essentially seeing right now.
And it's for the reasons, we just talked about it's the basis.
Differential in it so it's just a lot of puts and takes that are sort of.
It seems like a little bit of a down or in terms of performance to be honest with you, but the reality is we're hitting the expectations were.
Even with all that volatility and we expect to perform well.
Right and if I could follow up on the basis.
Between the New York Harbor.
Con DC when blending margins are higher that that positively correlate to a higher basis or is that.
Something Thats uncorrelated and you can see.
A lower basis and higher margins next year.
Is there what's your thoughts on that.
Yes, I don't think the basis is driven by the outright margin or the outright price it.
It's relative.
So what's been going on in the world and we've been dealing with some really dynamic thing Joe New York Harbor with the events going on in Europe , We think for many months as being bid up higher and higher and higher and when you look at the mid continent, and you look at that that relative trade between New York Harbor being bid up and maybe mid con not being bid up as much it creates a wider basis.
Don't think it's correlated to the margin level or correlated to the absolute price I think it really is a relative.
Phenomena between the two markets one being impacted more so by world events than the other.
In this particular instance, so no I would not say that there are correlated. So you know in my comments, we tried to point out that if that thesis behavior. It goes back to what we think is more normal theres some upside on the table for us as we as we look forward.
But it continues to stay wide.
And it continues to be volatile.
Got it thank you very much.
Thank you.
The next question comes from Michael Christian Mono Pickering Energy partners. Please go ahead.
Hi, good afternoon, everyone.
I wanted to talk about the split or.
If you can frame out how you're thinking about.
Maybe like the re contracting environment and then.
Depending on how that goes maybe like what the sensitivity is.
Yes.
Refined product revenues.
And what that upside or downside could look like.
Well as we sit here today and we look at the splitter.
There's a lot of fundamental value in the splitter, you may recall not to rehash too much but we operate it we have a customer that provides the inputs and takes the outputs and that initial contracts will be up.
For renewal.
Next year.
So.
The question, which is a logical one and what's going to happen in Custer.
Customers still interested we have other folks interested in the splitter, what I would what I'd point to is the fundamental value in that split or that we think.
Provides a lot of comfort for us in terms of it continuing to be an economic and a contributor for US moving forward that may mean that we re contracted with our current customer. It may mean that we would be contract with someone else.
It may mean that we operated potentially.
For ourselves I would say that third option is our least preferred frankly, but it is something that we're thinking about.
In terms of in terms of sensitivities.
We've already sort of built in.
Some views on.
How we think that that could go in our own mind.
And I don't think it's going to be material, one way or the other quite frankly for US we think we've got a good.
Set up here that the contracting of the splitter should become not be a material driver one way or the other in terms of the specific sensitivity for you I don't have a number for you.
Then what I, what I have seen has been fairly immaterial in the aggregate and again, we're pretty confident we're going to get it re contracted or find a different way.
To continue to see value because to be Frank with you I mean.
The splitter is probably the high analysis has ever been when you look at it fundamentally.
Sure Yeah that makes sense.
And then one more if I could revisit.
<unk> on.
On the commercial side.
Hoping you could talk through maybe what that dynamic.
That is driving the volumes down like are customers looking to bring volumes into corpus for maybe like more Brent pricing.
It had been strong this past quarter or is there a cushion coal maybe away from Houston that was temporary.
And any color there as to what customers could be looking to do.
Well I think.
Whats happening as a customer you know they have a commitment to us. So they know that if they don't move online they've got to pay deficiency. It.
It may be there are other markets they want to move into a for a short period of time corpus could be one of those.
When I'm looking at the dynamics I'm not sure Cushing would be that market, but the international market of corpus could be where they're making a decision where it's better for me to take it to corpus get a better value pay that efficiency and I'm still net net better off I mean, those are the decisions that they're making so that's an example of potential decisions that are shippers can be making.
But that's also the value to us in terms of the commitments, we still earn the economics that we expected to earn.
I don't think that's necessarily a trend we don't expect that to continue forever.
But there are moments, where they may be making those decisions for sure.
Okay got it and as you as you I know you get paid on it but is your margin better or worse, if they elect for deficiency payments I guess does it does you do you offset the what would be the variable cost.
Yes, I mean generally yes, generally speaking we're going to make more money if they actually move it I mean on tender deductions potential movements downstream different revenue streams that come with it we have a strong preference for folks to move it.
But that's sort of yes, it's better if they move it but if they don't move but it's not like the economics are such that.
Were harmed and a great deal. It's just that we're not earning some of the downstream revenue than we might otherwise earn and we're not earning tender deduct so.
I guess you have to answer your question, specifically the margins probably less if they don't move it but it's not such that we're losing money if they don't move it or its still not a good economic proposition for us and we're not losing a lot we do save a little on prior to your point you mentioned that in the context of long when we did it we did have slightly favorable crude.
Power expenses, partly due to the fact that long run I also add that.
The dynamic this quarter.
Okay got it.
Great. That's all I had I appreciate the color.
Thank you.
Thank you.
The next question comes from James Carreker of U S Capital Advisors. Please go ahead.
Yes.
Hi, Thanks for the question.
I was just wondering if I could talk a little bit about the.
The reaffirmation of guidance.
Implicitly you know.
<unk> is about 100, more 100 million more DCF in the second half of this year versus the first half of this year.
Just wondering if you could walk through some of the drivers obviously, you've got the tariff increases that that hits your life first but you no longer own the independent terminals.
So just I'm just trying to walk through maybe why second half is looking to be so much stronger.
Sure. So first the first thing I would note is one the tariff increases in the middle part of the year. The second piece I would note is that there isn't that there is a seasonality to our business.
Look we often have because of the timing of the butane blending activity.
<unk> is usually a more significant activity in the fall than it is in the spring. So there's some seasonality that comes with particularly our blending business and then also our underlying pipeline has some seasonality to it. So there's there's some seasonality that is just sort of built in that in many ways. The second half of the year.
<unk> tends to have more activity and do fundamentally better so it's higher tariff rates, it's more activity due to seasonality in the back half of the year.
Those are really probably the two primary drivers yeah that the locked in blending margins are a little bit higher as well. So again subject to basis, we expect that to be stronger in the second half of the year there wasn't one.
Okay.
And then just thinking bigger picture about the Permian.
Just wondering if there's any indications about with continued growth on the production volumes. There. When you guys look at forward spreads has there been any improvement.
Even I guess not spot necessarily but looking out to 'twenty three looking out to 'twenty four to the extent that there are transactions happening on those timeframes.
If you look at the forward curve for the for the differential between.
Midland and Houston are east Houston.
The forward curve shows that there should be improving differentials over time.
If you look right now what's happening I wouldn't say that we're seeing dramatic improvements today.
And that differential and what we can earn today versus what we could earn yesterday, but directionally speaking the forward curve pricing and wider differentials. So we would expect those to improve from here.
Right production continues to grow.
That production grows it should you know minimized through time, the amount of excess capacity out of the basin, which should continue to drive so it all makes fundamental sense that we should start seeing some higher differentials I still think that.
The question is when are they what are they going to show up where you can actually realize them.
And start seeing them in the results and we're just not there yet, but we certainly see the potential for improvement as we look out over 2023, and certainly as into 2024 and beyond.
Thank you and then just if I could fit one more in it just seemed like.
The hedge adjustments this quarter.
We're quite a bit bigger than we normally see and obviously that's a symptom of the volatility I'm just wondering if there's anything else there and I know this is.
Nitpicking accounting question, but.
Thought it was interesting the.
The net income adjustment.
Had a positive adjustment with respect to the commodity related adjustments, but the adjusted EBITDA from net income to adjusted EBITDA was negative just wondering why those are kind of in opposite directions or any other color on just kind of what happened with derivatives during the quarter.
First there is no other story other than just the volatility in prices.
It's just when you have large moves and just the timing.
The path of hedges, if I can call it that where it depending on when you put your hedges on when he took them off youre going to see more or less of that since some we put on some hedges last fall.
Large swings in some cases, you've got hedges that you've taken off.
You have hedges related to which you've had income impacts in prior periods.
They don't affect current income at all but they do affect Dcs the way, we calculate what we say we're going to match up DCF with wind.
The hedge.
Hedged transactions settle so even though the income statement was impacted in prior periods the.
The adjusted EBITDA will be hit in this period, when we reconcile the Dcs. So there were a little apples and oranges, there definitely related but the pattern between the two is more complicated than I think and you are saying.
Then you can't you would not expect them, there's no reason to expect them to move together.
If that if that makes sense okay.
I appreciate that this.
This is a good example of that where we had if we had losses in the first quarter, let's say on some hedges.
And they affect the first quarter net income that we bring that into a reconciliation for this quarter's DCF because when we settled the trades in this quarter. We said, okay that prior period income hit we're bringing into this period and now reducing EBITDA for those.
That makes sense.
I think so maybe we can follow up offline.
Yeah, that's a hope its a whole course polycom Virgin through.
I appreciate it.
It's not too complicated, but you just have to get into the mindset to trace trace this through there it definitely flows and it all evens out over time, it's just timing.
Thank you as a reminder, via the phone lines you May press. The one followed by the Port registered a question or comment once again that is the one for the next question comes from Michael Lapides of Goldman Sachs. Please go ahead.
Hey, guys. Thanks for taking my question, just curious where in late July obviously, youre doing your planning probably starting that are well into it for next year.
Should we think about capital allocation across.
Gross capex.
And crop across your leverage metrics.
Puts and takes there a little bit and across maybe utilization of the remaining almost I don't know almost half a billion dollar of the unit buyback program do you have outstanding.
<unk>.
At this point, you're it seems so unless something just pops up unlikely that there is a material growth Capex project honey hitting that that would start next year, but just I'll step back and now with Lumpier thoughts.
Well it is on capital allocation, Michael It really is as simple as we say we want to look for projects that create value and grow if we find them and if we don't find them and we think the designer units, we're going to buy it back.
And it's not going to be more complicated than that as I look forward in my comments. We mentioned you know the $100 million per year of expansion Capex capex remaining to be a reasonable assumption, we still think that so as we look forward keeping expansion capital sort of you know.
On average around $100 million based on what we see right now is probably a reasonable assumption.
If you look at our leverage then.
And our four times commitment.
We're gonna still have capacity to buy back units and if you look at our free cash flow, we're going to have the capacity to buy back units and that's what we that's what we will expect to do again, assuming there's still value there.
So I don't know if there's really there's not really more precision I can put on that right now, saying next year's Capex is going to be why therefore, we're only going to buyback Z worth of units we have.
No.
A certain amount of free cash flow, we're not we're not quite in that equation at this moment as we sit here.
We've got room left on our buyback program, we see value, we're going to continue to execute that buyback program. While also.
To the extent, we find growth capital will put deploy it and maximize value through all of those different avenues, but I don't I don't have any specificity to give you beyond what we've already provided.
You used the term as long as you see value a number of times.
How do you and the board kind of figure out Hey, this is the valuation level, where we're happy to be buying back units and hey, this evaluation level, where maybe that's not the most appropriate use of our capital.
Well look we probably do it in a very.
Some of the ways that you all may do it.
We run a discounted cash flow model I'm, not going to get into all of our assumptions.
But we look at what we think the future potential of this company is what I would argue as we do it under a bunch of different scenarios.
And we evaluate those scenarios from a discounted cash flow perspective, and that gives us what I'm going to say a range I wouldn't say that it's point estimate.
But it's a range as an area.
And it's with that analysis that we look at how things are going in the market today and evaluate it that way so.
I think it's a little too complex to have a point estimate it's not so complex that we shouldnt have what we think is a really confident range with a broad set of considerations.
But it's no more complicated than that.
Got it thank you Aaron much appreciate it.
Thank you that was our final question with regard to turn the call back over to you for any closing remarks.
Well. Thank you all for your time today and we continue to appreciate your continued interest in Magellan I Hope you all have a great day.
Thank you. This does conclude the conference call for today, we thank you for your participation and ask that you. Please disconnect. Your lines. Thank you and have a good day.
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