Q3 2022 Magellan Midstream Partners LP Earnings Call
Yeah.
Greetings and welcome to the Magellan Midstream partners third quarter earnings call.
During the presentation, all participants will be in a listen only mode.
Afterwards, we will conduct a question and answer session.
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 an operator, Please press star zero.
As a reminder, this conference is being recorded Thursday October 27th 2022.
I would now like to turn the conference over to Aaron Milford CEO .
Please go ahead.
Hello, and thank you for joining us today to discuss magellan's third 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 FCC and form your own opinions about magellan's future performance.
As you saw this morning, we reported third quarter results that beat our EPS guidance, continuing our trend of solid financial performance. So far this year most notably.
Find products transportation revenues exceeded our expectations, primarily due to higher average tariff rates and our commodity margin benefited in part from the basis differential that flipped positive briefly just as the gas liquids blending season began at the end of the quarter.
There were a number of other favorable items, including overall lower expenses that led to our outperformance.
In addition, we announced a one cent increase to our quarterly cash distribution last week.
System with our guidance in general and approach from last year.
Current yield of over 8%.
Our yield remains attractive and we recognize the distribution growth is important to a portion of our investors.
Magellan is proud to continue our trend of increasing the payout to investors each year.
I'll now turn the call over to our CFO , Jeff Holman to briefly review, our third quarter financial results versus the year ago period, then I'll be back to discuss guidance for the remainder of the year before answering your questions.
Thanks Ann.
First I'll note 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.
It exhibits to our earnings release that reconcile these metrics to their nearest GAAP measures.
This morning, we reported third quarter net income of $330 million compared to $237 million in third quarter of 2021.
Adjusted earnings per unit for the quarter, which excludes the impact of commodity related mark to market adjustments was $1 29.
Which as Aaron pointed out exceeded our guidance of $1 15.
DCF for the quarter increased to $290 million up $13 million from last year.
Free cash flow for the quarter was $273 million, resulting in free cash flow after distributions of $58 million.
A detailed description of quarter over quarter variances is available in the earnings release, so as usual I'm just going to touch on a few highlights.
Starting with refined products operating margin of $384 million was 40% higher than the 2021 period, driven primarily by a more favorable commodity environment as well as higher average tariff rates.
Total refined products volumes were slightly lower between periods. The increase in the average transportation rate more than offset this modest volume decline.
The higher average rate was driven primarily by the midyear 2022 increase in our tariffs of about 6% on average.
Just as a reminder, this 6% average increase consists of an eight 7% increase in the 30% of our markets with index rates and an average increase of approximately 5% in our markets deemed where it can be competitive.
In addition rates in the current period benefited from more long haul shipments, which move at higher rates.
The increase in long haul shipments was driven in part by our customers are using the extensive connectivity of our system to satisfy market demand in areas along our network that were impacted by refinery disruptions during the quarter.
Operating expenses for the refining segment decreased during the third quarter of 2022, primarily due to favorable product overages, which reduced operating expense.
You may recall that we discussed product Overages last quarter is an unfavorable item and as we mentioned then they can fluctuate period to period with the operation of the pipeline.
But we generally expect these variances to more or less even out over time as we've recently experienced.
Product margin increased between periods in part due to higher margins and volumes on our gas liquids blending activities are realized blending margins increased year over year to about 75 cents per gallon versus closer to 40 cents per gallon in the prior year period.
In our last couple of calls you've heard us talk about how basis differentials between the mid continent, and New York Harbor have been wider than normal negatively impacting the margins we earn on our blending activities.
Recently, we saw that basis move in the other direction, resulting in a benefit to our realized margins as we kicked off the fall blending season before widening again of late.
In addition to favorable gas liquids blending results, we had significant unrealized gains on futures contracts related to our hedging activities, which favorably impacted operating margin in the current period.
Of course, we ignore these out of period gains on futures contracts in our calculations of DCF for the period to better match their DCF impact with the underlying product sales activity that will occur in future periods.
Turning to our crude oil business third quarter operating margin increased to $127 million nearly 14% higher than in the 'twenty one period.
Longhorn volumes averaged 225000 barrels per day compared to around 240000 in the third quarter of 2021, primarily due to lower committed shipments based on the timing of when our customers have elected to move volumes under their commitments.
Volumes on our Houston distribution system increased versus the prior year period with more tariff shipments, resulting from our recent pipeline connection to our system.
In addition terminal throughput fees increased as a result of more customers electing to move barrels under a simplified pricing structure for our services within the Houston area.
Similarly to last quarter storage revenue declined due to lower utilization and rates as we continue to see general softness in storage demand due to prolonged market market backwardation.
Crude oil product margin benefited from additional crude oil marketing activities in the current period as well as unrealized gains on futures contracts related to our hedging activities.
Moving on to our crude oil joint ventures.
<unk> volumes were approximately 250000 barrels per day in the third quarter of 22 down from just over 315000 barrels per day in 2021.
Primarily due again to the timing of when our committed shippers have elected to move volumes under their commitments.
While saddle horn volumes averaged a little more than 215000 barrels per day basically in line with the 2021 period.
From an equity earnings perspective, we once again recognized additional deficiency revenue for both the Bridgetex and double Eagle pipelines, which offset lower average rates on saddle horn, resulting in essentially flat equity earnings for the segment. It's.
It is important to note that although this recognition of deficiency revenue at our joint ventures results and higher equity earnings the 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 and recognized by us as DCF at that time.
Moving beyond the individual segments. There are just a few other items I'd like to highlight from a year over year results G&A expense increased between periods, primarily due to higher overall compensation cost due in part to an increase in incentive comp, reflecting our strong results year to date in.
In addition, some miscellaneous non comp related items, including elevated legal and technology costs contributed to the year over year increase.
Other expense was unfavorable primarily due to additional expense recognized during the quarter associated with ongoing legal matters previously disclosed in our SEC filings.
And finally as everyone is aware we sold our independent terminals in June which of course resulted in lower income from discontinued operations.
Moving on to capital allocation balance sheet metrics and liquidity first in terms of liquidity, we continue to have our $1 billion credit facility.
To us through mid 2024.
As of September 30th the face value of our long term debt was still about $5 billion with $29 million of commercial paper outstanding.
Weighted average interest rate on our debt remains about four 4% with our next bond maturity in 2025.
Our leverage ratio at the end of the quarter. It was three three times for compliance purposes, which incorporates the gain we realized on the sale of our independent terminals.
Excluding that gain leverage would have been about three seven times.
After our capital allocation as you've heard us say before we remain committed to maintaining the 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.
We continue we continue to execute on our buyback strategy during the quarter repurchasing $2 7 million units at an average price of about $50 per unit for a total spend of nearly $138 million.
Year to date, we have spent $377 million on unit repurchases, bringing the total since inception to a little under $1 2 billion.
So far in 2022, we have returned a total of over $1 billion to our investors through a combination of unit repurchases and cash distributions.
Including our recently announced distribution, which pays out next month that number will be over $1 2 billion.
We continue to see unit repurchases as an important focus of our ongoing capital allocation efforts and we continue to expect free cash flow after distributions to generally be used to repurchase our equity.
But yes, we are always careful to note the timing price and volume of any unit repurchases will depend on a number of factors, including expected expected expansion capital spending available free cash flow balance sheet metrics legal and regulatory requirements as well as market conditions and the trading price of our equity.
And of course, we remain committed to our long standing four times leverage limit.
And with that I'll call I'll turn the call back over to Ed.
Thank you Jeff.
Based on our results and our expectations for the rest of the year, we are increasing our annual DCF guidance by $10 million to $1 1 billion.
While we were pleased with magellan's performance. So far this year you may have noticed that our new annual guidance did not increase by the full amount of our outperformance during the third quarter like last quarter. We continue to keep our eye on a number of factors, including the volatile commodity environment as well as economic conditions generally.
They have led us to remain somewhat conservative in our expectations for the remainder of the year.
Specific to our commodity activities with.
We've continued to lock in additional hedges over the past few months related to gas liquids blending with.
With 90% of our fall blending currently hedged at margins in excess of <unk> 50 per gallon.
All in we now expect blending margins for the full year 2022 to average around 45 per gallon, which is a bit higher than our previous estimate and consistent with our five year average blending margin.
The primary reason for the annual increase is related to the short term improvement in the basis differential Jeff just discussed.
And we will be paying close attention to further moves in this basis differential as we finish up the year and look ahead to next year.
We've also continued to make significant progress in hedging next year's blending with 50% of our expected 2023 blending now hedged at an average margin of 65 per gallon.
Broken down further we will have 70% of spring 2023 activity hedged at margins of 75 per gallon and have even started to hedge fall 'twenty three activity with.
With about 25% hedged at 55, so far.
This is a bit earlier than usual to hedge out that far.
But margins are attractive so we're locking in prices to the extent theres opportunity and depth in the market to do so.
Moving on to expansion capital, we now expect to spend approximately $90 million in 2022 with $100 million in 2023 and $40 million in 2024 on expansion projects that have already been committed.
The increased estimates primarily related to the recently announced $125 million expansion of our Texas refined products pipeline system from Houston to El Paso.
Which is supported by take or pay commitments from quality Counterparties.
Based on our current construction schedule, we expect the expanded capacity to be available in early 2024.
As usual, we continue to assess new opportunities for infrastructure projects with attractive risk and return profiles. Most recently, we've estimated that around $100 million of expansion capital per year is a reasonable assumption for undefined projects as we continuously analyze and develop value creating projects.
As we have mentioned in the past this $100 million estimate is just that an estimate with some years, possibly a little higher other years, possibly below but we don't foresee a material shift to significantly higher organic growth spending levels at this time.
Since we're already planning to spend $100 million next year for currently committed projects. It is likely our expansion spending will ultimately be above that level in 2023, as we bring additional projects across the finish line.
Consistent with our usual approach.
Plan to provide overall financial guidance as well as key assumptions specific to 2023 when.
When we report fourth quarter financial results early next year.
In the meantime, however, I'll end my prepared remarks today, but briefly noting a couple of recent positive developments in our crude oil business.
In particular, we're pleased to receive a new commitment on longhorn.
Right and on terms that we found constructive.
Resulting in 80% of the longhorn capacity being committed beginning next year.
With an average remaining life of six years.
In addition, the customer who has exclusive use of our Corpus Christi condensate splitter recently extended its take or pay agreement for the facility until the end of 2020 for providing additional link to that contract.
We think both of these developments underscore the quality of our assets and the value that our customers see in working with us.
Operator, we're now ready to open the call for questions.
Thank you.
And if you would like to register for a question. Please press the one followed by the four on your telephone.
You will hear a three time problem to acknowledge your request.
If your question has been answered and I would like to withdraw your registration. Please press the one followed by the three.
If you're using a speaker phone please lift your handset before entering a request.
Once again, if you'd like to register a question. Please press the one followed by the four.
One moment please for the first question.
Okay.
And our first question is from the line of Jeremy Tonet with Jpmorgan.
Please go ahead.
Hi, good afternoon.
Good afternoon Jeremy.
Thanks, just wanted to kind of pick.
Pick up a little bit more on capital allocation and all of your comments are very helpful.
Just wondering within the context of rates moving kind of as quickly and sharply as they have recently.
Does this impact your calculus.
Forward or if you could just talk a bit more I guess on on rates and if that changes anything youre thinking.
Well just to clarify your question Jeremy or are you talking about the rates, we charged for pipeline movements or the general interest rate environment and its impact on how we may see our evaluation.
I apologize I met interest rates, specifically I'll save.
Rates for later.
Yes, so as we look at it we keep an eye on what we think fair value of the company is at.
And you know in an increasing rate environment does impact that evaluation and I'm not going to go into all the details of evaluation, but we certainly consider it.
So.
That will continue to weigh into our decision about.
The value, we see in buying units back, but we would certainly consider it.
Got it so implicit youre happy with your leverage ratio.
We need to kind of adjust any of that at this point you're already a good point.
Well I'm not sure it's related to the leverage ratio I think it's important and rates.
And the general environment recall, it's been a long term issue or a 30 year paper.
So in terms of rising rates and an immediate impact on our interest expense and cash flows.
We've essentially paid for that insurance over the last several years. So we just don't see that same headwind given the fixed nature of our written over that and the duration of that debt. So rising interest rates arent going to impact sort of our interest expense or cash flows here over the over the short term with the debt that we have.
That makes perfect sense not everyone takes the same conservative approach to stacking out debt. So thank you. Thank you for that.
And then maybe just for tariffs real quick turning in that direction.
It seems like you're going to have a lot of headroom for rate increases going into next year here not finalized yet, but just how do you think about I guess pacing in the increases whether it's on a multiyear time frame or just any other thoughts on strategy and on tariff rate increases under what's allowed under the indexation methodology.
So you know I think we've spent a little time on this last quarter and I don't I don't think our perspective is changing we wanted to be thoughtful about how we move our race and we're taking the time to really dig into our markets and understand the competitive dynamics of where we are I mean, I always like to remind folks even our index rates.
We have competition there are other service providers in that market. So we have to be cognizant of that so we haven't made any decisions about how we want to pace into or not pace into it.
So I don't have any specifics to add to that Jeremy other than to say, we're going to be thoughtful and in any event as we sit here today.
The rate increases that we're expecting we still think we're going to be quite healthy. The question is going to be around the margin how healthy they are going to be.
That's right that makes sense I'll leave it there. Thank you very much.
Our next question is from the line of Theresa Chen with Barclays. Please.
Please go ahead.
Hello, Thank you for taking my question.
Aaron I'd like to go back to your comment about the annual guidance first relate.
Related to the annual bumps not reflecting the full outperformance of third quarter and the conservatism baked into it and can you elaborate on what exactly do you mean by conservatism, which areas of your business, whether it be refined product volumes our costs I think you could see underperforming.
<unk>.
Fourth quarter.
Well I think the one item I would point you to specifically is just the volatility and the.
That's one.
We have as I mentioned in my comments most of our margin for the fourth quarter already locked in but as we've also talked about in the past we can't really hedge.
The majority of our basis risk.
And it's been very volatile as Jeff mentioned in his comments.
As a point in time.
Earlier in October where the typical typical differential would be.
New York Harbor.
Minus.
10.
This year, it's been New York Harbor, minus 30, and sometimes even wider but then we had the complete opposite thing happen where that went from a minus call. It 20.
To a positive 30 or 40 and in some cases higher at moments. So we've got a lot of it's not just that it's wider but it's a lot more volatile.
And to give you some sense.
Nick will move in that basis.
Is worth about.
$10 million on an annual basis to us.
So when you're talking about swings of minus 30 or minus 20% of positive 60, it causes us to be a little cautious about how is that market really going to move in the fourth quarter. So that's one specific thing that I would point to.
The other thing I would point to is just a recognition on our part.
The general economic conditions are important our business has proven through the used to be really resilient even through.
A recessionary times and we expect that resilience to continue but as you get into shorter durations of time and we're trying to provide guidance on what to expect we don't want to ignore that.
There is still some economic uncertainty out there.
If or when that uncertainty actually starts to manifest itself when is that going to occur. So we're trying to be at least recognize that potential as well, but it's not anything specific to volumes, we expect to be higher it's not really that it's really more of the commodity related volatility around basis, and just the general Rex.
Ignition that.
Overall macro economy.
Some uncertainties in it at the moment.
Got it and I'm speaking of macro uncertainty.
As it relates to our refined products business.
What are you seeing in terms of demand just taking into account the quarter over quarter.
The slight decrease in total volumes shipped and it seems to be tracking below the previous annual guide as being 4% above 2021, So I'm curious what you're seeing there.
Well, it's interesting in the schedules, we I think attached to our earnings report if you do the math on total <unk> refined products for year over year year to date were up about 4% versus the 2021 period.
So in terms of volume.
It was down slightly.
Almost zero percent I think if you did the straight math.
Quarter over quarter, but for the year, so far we are up around 4%.
As we as we look at the whole year.
Think we're going to be in that <unk>.
Round that 4%, maybe a little below maybe a little above but I think we're going to be sort of in that range. So from a volume perspective things are tracking and it's holding in there.
One piece of color I would add to the volume.
Yeah.
In the past been talking about coming out of 2020, and post COVID-19 and the growth and as we sit here today and as we look forward I think we've seen probably most of the rebound real quick rebound that we're going to see a rural markets of course rebounded quite.
Quickly and quite significantly, but the markets, we've been waiting to see or a more metropolitan markets. So think of Minneapolis, St. Paul and think of Kansas City think of some of those whose more metropolitan areas and they still seem to be a little behind the pre Covid era.
Volumes, so that just may be with us for a little bit.
Teresa and we're not necessarily giving up hope that it won't get back there, but it just may be over a longer period of time is as many of those cities still sort of get back to normal as defined in 2019, and we can debate, whether we're in a new normal or not but I think thats the reality of where we're at but I think we've seen most of the recovery where we.
To see from the COO.
Covid pre COVID-19 period of time with our metropolitan areas still lagging a little bit, but many of our rural markets are above where they were in.
In 2019 boil it altogether and sorry for the long answer volumes, we expect to still grow year over year.
Got it that's very helpful. Thank you and then for the grades.
And what you saw in the third quarter related to longer haul movements from I imagine the Gulf coast and mid Con.
Due to the refinery.
Supply disruptions would you expect that to continue given the ongoing downtime at Bp's Whiting Toledo.
I think so I mean as long as the refineries and Toledo and widening our down I think there is the potential for us to have to supplant.
With longer haul supply into those markets as we've shown that demand is pretty resilient to seasonal but it's pretty resilient, so that bodes well for us forever and how long that condition exists.
In terms of.
You know.
How how long or to what extent that continues to exist that's yet to be seen markets are fluid and they move around and the longer a condition exists they adapt in different ways, but generally.
That's a positive tailwind for us for as long as it exists.
The refinery is running it.
High 90, 495%.
With inventory levels being fairly low across the country and in our system in anyways.
The market has lost the ability to just respond to short term disruptions and it has to find barrels to match those disruptions from other places so to speak so we think that that bodes well as unpredictable. It is hard to predict if or when further disruptions may occur, but that lack of sort of built in.
You can see that has existed in the past in the market. We think is also a contributor to through time seeing longer hauls, when we see disruptions, but it wasn't just the mid con is that longer hauls out to west, Texas. The Gulf to group movement, obviously, we had longer hauls, but we also have longer hauls within sort of the footprint of our system as as our <unk>.
<unk> and customers adjusted to this new market. So it's really long haul shipments generally in almost all areas of our pipeline system.
Thank you.
Okay.
Our next question is from the line of Keith Stanley with Wolfe Research.
Please go ahead.
Hi, Thank you.
First just the crude product margin for the quarter. So I think it was $27 million.
And there's probably some mark to market type stuff in there, but it's a pretty big number versus history for the company can you can you talk a little about what the opportunity was in Q3 was it just the marketing arm moving volumes, where you had space or was it other types of activities.
Well it was really spread.
Many different activities.
And I think how.
How I would talk about and really encourage you to think about our crude marketing activities is very much an optimization game for us and it's one that relatively speaking we are still fairly new to the crude space and we think that we've been doing it for 10 years, but in the Grand scheme of everyone, who were competing against and how that market has evolved over centuries.
We're still new in many ways. So we're continuing to learn and we're continuing to get better frankly, taking advantage of opportunities that present themselves to us than we have in the past and I think that's going to continue our ability to.
Maximize the value of our assets based on opportunities that present themselves.
Will it always be.
And outperformance by $27 million or whatever I don't know.
The point is as we're working to make sure we're maximizing that value as much as we can and what's driving that value is things like quality differentials, if things like location differentials as things like the combination of quality differentials and location differentials as a lot of different.
Sort of opportunities that present themselves that frankly were just better today than we were even a year ago of being able to capture but theyre going to be unpredictable.
In terms of exactly how they present themselves and we also.
As.
Learning and executing on these opportunities remaining mindful of the quality expectations.
Quality.
Service that our customers expect so we're trying to we're rebalancing our ability to maximize.
The opportunities, we see with the expectations of our customers and what they want to see and as we see opportunities, we're going to try and grab them and we're just getting better at it.
Interesting thanks.
Second question, a big picture one just.
With the IRA passing and Aaron you spent a lot of time at the analyst day.
Kind of going through the data and the details on EV adoption and long term views on impact to the company any updated thoughts you'd share on how you look at the I R. A and some of the benefits for Evs and just updated views on the topics since you've kind of dove into this in detail before.
I'm happy to talk a little bit about it I think at a summary level.
The IRA doesn't.
Change.
Really the views that we expressed back in April of this year and the reason it doesn't change it much.
Is implicit in a lot of our conversations assumed that we would have significant EV.
Subsidy, so that was sort of implicit.
So the fact that there there is not really new information to us and one thing I will say about the evs as the manufacturing requirement and the input requirements in terms of being domestic or are not coming from foreign sources is one that.
It makes getting the full benefit of that.
Incentive more difficult, there's nowhere I think around that it's going to be more difficult for consumers too.
Achieved because the product is kind of the.
Is going to be really hard to meet the thresholds to get it so I could make an argument that the incentives in place or probably more restrictive than.
And then the incentives we thought would be in place when we were talking about is in April .
But that's sort of getting into the minutia of it.
I think the other area about IRA that I would focus on.
Are the incentives for Cotwo sequestration.
The increase the benefit there from the 45 <unk> credits.
From where they were before that's incrementally, making sidoti projects and things like that more competitive or more economic but I'm not sure that it's a game changer in terms of the opportunity set overall much of the cost to capture Cotwo.
If you're really trying to get at the heart of where the emissions are 85 blocks.
With the incentives still really don't Chin that bar in most cases.
I'm not sure that changes our view from April again on on what that opportunity set may look like but it could.
And the margin on very specific projects down the road, but as a general rule probably doesn't move the needle the additional incentives with things like sustainable aviation fuel I think those could be interesting is certainly making it more economic for the producers of renewable diesel to consider taking some of that capacity or adding capacity.
Produce more sustainable aviation fuels, that's net positive, but if I were to put all that together.
I would just say that it's not materially changing.
The views that we had.
In April .
Thank you.
It's probably more than you wanted but.
Our next question is from the line of Brian Keith Satish with Wells Fargo.
Please go ahead.
Thanks, I think if I heard correctly at the end of your prepared remarks, you mentioned signing up of new contracts on longhorn.
I was wondering if you could provide any more details on that how large of a contract and the duration and then I guess, how do you balanced contracting more capacity on longhorn versus waiting for.
Takeaway to tighten in the Permian and maybe contract at a better rate in the 2025 time frame.
Do you have a view that takeaway may not tightened that quickly and Thats why you are kind of contracting now.
Well I'm going to start with your your multi pronged question was the last part which is.
The general thesis of differentials are low right now I wouldn't just wait till it better before you contracted and what I would say is we certainly think about that and how do we balance that with.
Being able to get committed barrels and reduce cash flow risk over the long term.
And Thats the balance in this particular case.
We had a customer where our.
Our views the world overlap in such a way that we thought it was a constructive rate even if you look longer term at the forward curve on the differential which we can all debate whether that forward curve and the differential is accurate or not but if you look at it.
Which we do.
And you look at what the customer who has wanted to accomplish we overlapped in a way that we think it made sense to do but it's a case by case I'm not sure. It's a general philosophy on our part we're going to lock everything up or we're not going to lock. It up it's very much a case by case deal by deal evaluation on our part and in this case, we thought it made a lot of sense to do so.
Going to the first part of your question in my notes.
My comments I mentioned that the average utilization committed on longhorn beginning in January of 2023 will be around 80%.
So before the contract as we sit here today, we would have told you. It was 75% so it's about <unk>.
A 5% increase on the average overall.
Of course, you also have to think about it where would that utilization be next year and the years after that but.
At the end of the day from where we sit right now we're going from roughly 75% utilized utilize to 80%.
And then if you were to think about the duration of it essentially what's happening is we were at a five year.
Duration six year duration, and we're keeping that same duration essentially going forward. So we're going to get higher utilization essentially committed.
Over roughly a six year period versus if you hadn't gotten at that.
Weighted average term would've gone down probably by about a year just because of the year has passed since we last talked about it so.
So that gives you enough detail, but I just don't want to get in all the detail on the specific contract just suffice to say higher utilization.
For a longer period of time and I think it's really.
It really interesting that we've got our crude contracts generally if you overlay it with the period of time between 24 and 26, one I think most estimates would show capacity tightening.
I like where our contract termination sort of set.
In relation to that tightening.
Okay.
That's very helpful and I, just I guess I wanted to go back to Jeremy's question on rates and the impact on capital return, but I guess I'll just ask it a different way.
Specifically has there been a thought to potentially shift more of the capital return to distribution growth.
Rates are moving higher and now you can get a high single digit yield from a lot of places. So do you feel like your yield is competitive enough in the current environment to attract capital.
I would hope so.
I know I know the yields have gone up but when I look at the absolute yield on our units.
And compare that and risk adjusted versus some of the other higher yielding things that are out there and you truly risk adjusted I think we have a really strong value proposition frankly, and as an MLP, depending on where you're at in your own individual.
Tax status.
Taxing some of those those yields and I think that's an additional benefit to investors in our units and our ability to defer a lot of that yield for some period of time again, depending on on when they're when they come in and where they are at so I think it is extremely attractive.
Frankly, it's probably also worth keeping in mind that the historical spread between treasuries and our yield and corporate.
Borrowing rates and our yield has been.
All time highs recently, they those arent normal.
The norm for the last 20 years those spreads have been a lot narrower than they they were a couple of years ago. Before this recent run up in rates. There is no reason to think that.
What they were before this run up in rates was the proper rate that should hold going forward, it's probably the opposite being is more true.
So this would represent more of a normalization.
So as we think about it in totality the distribution, we think is attractive.
We're going to continue to.
We understand that the important part of our value proposition and at the same time on unit buybacks thats going on retaining remain subject to our views of value and timing and so I don't think it changes that a great deal.
Us.
Got it thank you.
Our next question is from the line of Neel Mitra with Bank of America.
Please go ahead.
Hi, good afternoon.
Wanted to touch on the crude segment.
The second quarter in a row, the longhorn and Bridgetex.
<unk> had lower volume and <unk>.
Collected deficiency revenues, but it seems like the language around it has changed it seems like this time you said timing.
First and second quarter it seem like more volumes were flowing to corpus Christi to.
Generate a higher netback from the export market could you comment on the timing of volumes, there and what you mean by that.
Well I think the timing comment really is meant to.
Encompass.
The fact that our shippers are making different decisions what to do.
What theyre going to do with the barrels coming out of the out of the basin.
And they still have a commitment to us from a revenue perspective, so there isn't going to pay us deficiency or they're going to move the barrels later. So the idea is that we expect them to move the barrels. They are just doing something different with them right now than what we would otherwise expect so that's what drives the timing comment is really we expect the barrels to flow.
They just may flow at a different time or at a later time and their commitment than if you were just ratably sort.
Sort of charting it out and the reason.
Behind why they may be shifting that timing has a desire to go to corpus or take advantage of some other differential that they want to see.
As we look long term.
We think Houston is well positioned in those barrels will want to come back and go to Houston for one reason or another so it's really those both of those items. The timing comment is meant to be as a more general in terms of we expected barrels to flow just at a different point in time than you would have if you put them on ratably and the reason why it's maybe less ratable is because.
<unk> are making different decisions of what theyre doing with the barrel right now.
That clarify it for you.
It does.
And maybe I can ask.
More specific question with your is there any customer on longhorn going from 75% to 80%. You said you had a shared philosophy on.
Right.
Houston market.
Can you can you share what.
That that philosophy is in.
Why do you think the volumes will eventually return back to Houston is kind of the.
The market that.
We should look to.
Well I think there's a couple of things happening one I think some of it is going to depend on what do you view about exports.
You just look at the state of play today I don't think Theres any question that if I'm, a producer and all I want to do is export it.
Thats all are interested in doing.
Corpus has some advantages over Houston.
It's a little cheaper to get there of your pipeline.
Some of the terminal capacity is a little more efficient for large scale export.
So it's more cost efficient today to get down to corpus. If all you want to do is exports.
Question is how long is that going to occur and is that really a permanent solution.
And how will Houston evolve through time.
Given that our expectation is that Houston provides you a lot more optionality as a producer into a large refining complex, which corpus has some refining complex there, but not as much as Houston. If you move into Houston, you can also get it over to Louisiana.
Through time, we think exports in Houston are going to continue to become more competitive.
With corpus for exports.
As we look at Houston, and we think about it.
As that market evolves it should again.
Through time pull more barrels to Houston, secondly, we're dealing with a pretty exacerbated condition right now in terms of crude oil market and leasing the world market and needing those exports you can come up with a bunch of different sort of assumptions or beliefs around how long it's going to continue to the extent that it is going to tenure.
But if some of the pressure on exports abate again, we think Houston for the reasons I just mentioned is the more attractive market over the long run.
That's really helpful. If I could ask one last question.
You mentioned the gas liquids blending margin was 75 cents during the third quarter.
And the basis really worked in your favor kind of in September .
Is it fair to say that.
That 75.
Either kind of flat or moving up in Q4.
Right now because youre getting the full advantage of.
The better basis.
Versus Q3, where you only saw it towards the end of the quarter.
I would love to tell you that the basis has not as we speak already flipped back to the other sort of condition. So it was a short lived benefit that really impacted.
A portion of the third quarter that has abated since we've entered the fourth quarter.
So unfortunately, no I can't say that that benefit is going to flow through to the entire full quarter. So.
That's just the reality of it.
Okay, Okay Sir.
Is there anything to be able to track that basis it seemed like.
The mid Con was short.
So.
It was able to attract.
Some product back but.
Is there anything we can look at to maybe.
Try to predict that.
Well, you may not be able to predict perfectly because.
The market is im about to reference will I think give you an indication of a view of things, but the market being volatile it's day to day hour to hour or in some cases in terms of what the basis will be but if youre trying to get a sense for where that base is look at the Nymex New Harbor price.
And look at a platts thank you Sir.
This group three prize and the difference between those two will be indicative of the basis that we're talking about again it won't be perfect. But it is something that you can look at to get a sense for it.
Right right and if youre trying to thank you very much good spaces, yes, and then just to round out if you're trying to do that on a futures basis, you have to be a little careful because the mid continent market is much more of a physical market and it is a futures market, hence why it's difficult to hedge this basis. If they were both futures markets you would have a better more efficient instrument to sort of deal with it but the fact that.
The mid Con is much more of a physical I don't want to call it spot, but right now business compared to Nymex being more of a futures market in most cases.
As we're referring to it.
Does that create some noise and being able to compare those so you just have to make sure you're taking into account time in the futures market dynamic compared to a more physical market dynamic in the mid con.
Got it appreciate all the color.
Our next question is from the line of Gabe Moreen with <unk> Securities.
Please go ahead.
Hey, good afternoon, everyone can I ask about the splitter contract Pam maybe.
Maybe relative or the re up there.
Pension through 24 at a time I guess when the economics for that asset are are pretty healthy to put it mildly.
To what extent that might have been paired with the longhorn contract as well and then also as you look through alternatives to consider a lot of other things for that asset.
It's pretty well positioned at the moment.
Yes, so the longhorn contract and the splitter renewal unrelated.
So that there isn't any interplay there in <unk>.
Terms of the turn to 2024.
It was a term that.
We were happy with frankly going out to 2024, and our customers have been going into 2020 for I think both of US realize the economics are pretty favorable for the splitter right now, but getting a little more term on that was we thought beneficial to us and I also have to highlight that as we've talked about the split in the past that are exclusive.
<unk> had renewal options on the splitter and the economic terms of those options were pretty much set. So what we ended up doing is getting what we expected to get were getting the economic trade that we got and we're getting the term out to 2024, which we found attractive.
In terms of how we think about the split or long term.
We do look at other alternatives is that something that we would be comfortable operating ourselves.
For now we decided that we're very happy.
Our customers staying in it long term is that going to be the case I don't know, we will get down to 2024, and we'll have those discussions at that point in time and figure out where we're at but we were happy to get the additional term as we sit here today, we're happy with our customer.
But we're also not ignoring the long term economics of the splitter either in terms of what it might be able to do for us So maybe.
Maybe we don't want to lock it up for ever so see maybe something changes for now we're pretty happy.
Thanks, Sarah and then maybe if I could just ask a quick one on the El Paso contract where that.
Expansion of where that stands on the usual six to eight times multiple that you referenced with expansion projects.
Yes, it's going to be in that range, probably the lower end of that range if things work out.
If things work out the way, we expect them to work out it could even be better.
Great. Thanks very much.
Okay.
Our next.
Question is from the line of Michael Cusimano from Pickering Energy Partners. Please go ahead.
Good afternoon, everyone.
Coming into the year I believe you guided refined product transport rates to flat year over year, despite the higher uplift.
And it looks like the average tariff is trending higher than that can you kind of update us on how you see that going forward and if there was conservatism coming in or if it's just trending higher with some of the dislocations you're seeing in the markets.
Well as we.
As we think about and we provide guidance on tariff rates.
There is really a couple of.
Assumptions that we made one is what is going to be our mid year tariff adjustment.
Beginning of the year, we havent made that adjustment yet, but we have some ideas about where we think that's going to come in.
But the second assumption that we're making there is what happens to the supply patterns on our pipeline in other words.
Put it in specific terms, what's the average haul per barrel so to speak on our pipeline system and our approach has often been is we've got a long history of knowing sort of how the how long those pipeline movements are and it's that.
Average haul times, a tariff is what gives us the actual tariff we realized so as we came into the year.
Even with the expected increase mid year on the rate itself.
<unk>.
The average haul wasn't necessarily increasing or changing from our historical patterns.
And that led to if you put that.
In the machine and put those two things together it led to generally a fairly flattish overall expected rate that we would realize hence the guidance. We gave as we sit here today, what we've experienced so far this year some of it due to market disruptions as the length of haul is getting.
Longer than what we thought it would be so now we're getting longer hauls at the higher tariff given the mid year tariff increase and thats, resulting in essentially a higher realized rate.
So that's the.
Detail of guidance, we're not assuming the haul in our system to necessarily kept longer.
In many cases stayed the same or in some cases get a little shorter than.
And what's happened is the opposite is actually getting longer and some of that driven by unforeseen disruptions.
In the markets that we serve with refineries being down so I'll stop there and see if you have any additional comment or question around that.
Yes, no that's very helpful. Eric.
One follow up on that.
Do you think that there had been a structural shift to where that longer call. It like.
More barrel miles in your system continues or is it is it hard to quantify or forecast because.
Yes.
Short term dislocations that we've seen in the market so far.
You know as we as we bring on our expansion for instance to El Paso.
And you compare that haul too our average haul that's a longer haul so that would lead to.
Net net potentially a longer haul in the system as a whole.
Especially as we're going all the way out to El Paso. So I think there may be in some areas some structural shifts.
Could benefit us.
In terms of the disruptions, it's it's hard to predict.
Where disruptions are going to occur what's the nature of the disruption.
The duration of the disruption.
But I think something that would be that we need to keep in mind is that whatever resiliency was built into the system before in terms of inventory levels and then refineries.
Theres less resiliency in the system today.
And then you have things like refineries, just shut down refineries Cheyenne refinery in new Mexico, and as those shut down and we backfill those it leads to a longer haul. So I know this is a long winded answer to say there could be some structural shifts that repeat themselves and up to a longer haul we haven't done all the work to see how we think thats going to.
Take out for <unk> III, but its possible that we do start experiencing some longer hauls.
Then what we had experienced three or four years ago longer haul than what we're experiencing this year I don't know, but certainly over three or four years ago, it's a longer haul.
And then as refinery rationalization and disruptions happen I think we're well positioned to benefit as the <unk>.
<unk>.
But is less predictable.
Okay.
Yes that makes a lot of sense.
And then one more if I can you comment on the metro areas that are somewhat lagging the recovery.
Just wanted to make sure that is.
The metro area as a whole their consumption not specific to your system is that right.
Well in some of these metro systems, where a significant part of the supply into those so.
It may not be.
On the whole, but what we're seeing at least for the share that we supply maybe down a little bit.
But my comments are.
Reflective more of what we're experiencing.
In the metro areas.
Okay.
Great. That's all for me I appreciate the help.
And there are no further questions on the line I'll turn the call back to Erin for any closing remarks.
Well. Thank you all for your time today.
Just to reiterate we're pleased with third quarter financial results as well as a new project to expand our refined products pipeline capabilities El Paso.
We remain focused on finishing the year strong managing our business in a responsible manner and.
And focusing on maximizing the value for our investors over the long term.
So on behalf of Magellan, we appreciate your continued support.
Thank you.
Have a nice day.
That does conclude the conference call for today.
Thank you for your participation and ask that you. Please disconnect your lines.
Sure.
[music].
Okay.
Okay.
[music].
Okay.
Yes.
Okay.
[music].
Sure.
Sure.
[music].
Alright.