Q1 2023 Magellan Midstream Partners LP Earnings Call

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Greetings and welcome to the Magellan Midstream partners first 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 may 4th 20 twenty-three it.

It is now my pleasure to turn the conference over to Aaron Milford C. E. O. Please go ahead.

Hello, and thank you for joining us today to discuss magellan's first 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.

Should review the risk factors and other information discussed in our filings with the SEC and form your own opinions about magellan's future performance.

We are pleased to report the Magellan began 2023 with strong financial results that exceeded our initial guidance is.

This being primarily related to higher than expected commodity profits as improved location differentials in our markets resulted in higher sales prices and we simply had the opportunity to blend additional volumes during the quarter.

Refined transportation revenues were similar to our projections as we expected long haul shipments to continue early this year in both the mid Con and West Texas regions as our extensive pipeline network has provided much needed supply to backfill various refinery turnarounds throughout the heart of our system.

Headline refined shipments may have been lighter than some expected as supply disruptions also impacted the more volatile volume on our supply push South Texas pipeline segment as well.

Which is a relatively nominal impact actual revenues bottomline overall demand remains solid in the core market served by our refined products pipeline system.

I'll now turn the call over to our CFO , Jeff Holman to review a few highlights from our first quarter earnings then I'll be back to discuss our latest outlook for the year before answering your questions.

Thanks Sharon.

First let me note that 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 first quarter net income of $274 million compared.

Compared to a $166 million in first quarter of 2022.

At a high level the year over year increase primarily resulted from higher product margin and <unk>.

Art due to mark to market adjustments on commodity hedges in the current period as well as improved financial results overall from our core fee based transportation and terminal services.

Adjusted earnings per unit for the quarter, which excludes the impact of commodity related mark to market adjustments was $1.32 worth.

As Aaron just mentioned exceeded our guidance of $1 20.

DCF for the quarter increased to $313 million up nearly $48 million from last year, while free cash flow for the quarter was $281 million, resulting in free cash flow after distributions of $68 million.

A detailed description of quarter over quarter variance is available in our earnings release, So as usual I'll just touch on a few highlights starting with refined products first quarter operating margin of $337 million was 101 1 million higher than first quarter 2022, primarily due to higher product margin as well as higher.

Average transportation rates these higher rates for driven largely by the midyear 2022 increase in our tariffs of about 6% on average. In addition, as Aaron mentioned the current period continued to benefit from more long haul shipments, which move at higher rates.

Over the past few quarters, you've heard us talk about refinery outages and how they've benefited us by driving incremental long haul shipments on our system. Thanks to the extensive connectivity of our pipeline network.

This quarter, we again saw a higher proportion of long haul shipments overall compared to first quarter 2022, driven by supply disruptions in the mid continent, and West Texas regions, but we were also impacted by supply disruptions in South, Texas, which decreased our transportation volumes in that area.

This disproportionate decline in volumes on a more supply driven south Texas portion of our system, which as a reminder, moves at a lower rate and in general can experience more volatility compared to the rest of our system contributed to a decrease in our overall refined products volumes without significantly impacting our revenues.

And contributing to a higher average rates.

To put that phenomenon in the context of South Texas volume contributes around 10% of the total volume on our system that only around 1% of the total transportation revenue.

Excluding the South Texas volumes total refined products volumes on the rest of our system were essentially flat year over year.

Roddick margin the largest variance for the quarter increased between periods as a result of favorable results from our gas liquids blending activities, which saw both higher margins and higher sales volume as well as the recognition of unrealized gains on commodity hedges compared to losses in the first quarter of last year.

Our realized blending margins increased year over year to nearly 75 cents per gallon versus closer to 40 cents per gallon in the prior year period.

Sales volumes increased in part because higher blending margins like those we experienced during the quarter generally make more blades profitable, but also as a result of the dedicated efforts by several of our teams.

Currently our operations engineering and commercial organizations to continually improve our processes and identify efficiencies that allow us to capture additional blending opportunities.

Turning to our crude oil business first quarter operating margin increased to $109 million up $6 million from the 'twenty two period.

Longhorn volumes averaged a little over 225000 barrels per day down from about 235000 barrels per day in the first quarter of 2022.

Due to lower marketing affiliate shipments, partially offset by higher third party committed volumes.

Even with lower volumes Longhorn revenue actually increased slightly at the margin. We earned on third party barrels is higher than the margin, we realized our marketing affiliate barrels.

Volumes on our Houston distribution system increase versus the prior year period in part due to higher shipments from a new pipeline connection to began to ramp up in early 2022.

As well as additional shipments related to our <unk> joint futures contract. There was launched early last year.

Similar to what we discussed on the refining side. These shipments move at a lower rate of long haul volumes. So this increased HTS activity resulted in a lower average rate for the segment overall.

In addition terminal throughput fees increased in part as a result of higher dock activity in the quarter.

We continue to experience an increase in export demand.

Crude oil product margin increased versus the prior year period due to higher contributions from crude oil marketing opportunities that we've seen since mid 2022.

As well as favorable mark to market adjustments on futures contracts in the current quarter.

Moving on to our crude oil joint ventures Bridgetex volumes were just over 140000 barrels per day in the first quarter of 'twenty three down from nearly 285000 barrels a day in 2022 due to lower volumes from committed shippers emphasizing again, the importance of take or pay commitments from quality counterparties that ensure that we.

Get paid regardless of our customers' short term logistics decisions for.

For the full year, we now forecast Bridgetex volumes averaged 140000 barrels per day in line with the activity that we saw in the first quarter.

So I don't want volumes increased to a record level of more than 240000 barrels per day compared to approximately 220000 barrels per day to you before as.

As a result of higher shipments from both committed and uncommitted shippers.

Currently we expect this trend to continue as well and are updating our outlook on settlement volumes to an average of 240000 barrels per day for the full year.

Moving beyond the individual segments. The only other item I wanted to highlight from our quarterly results as G&A, which decreased between periods. You may recall that in the first quarter of last year, we had incremental G&A expense related to our former Ceos retirement. This expense of course did not recover in first quarter of 2023, but that positive variance was mostly offset.

In the current quarter by increased compensation across the organization as well as an increase in technology costs, primarily related to our ongoing automation and optimization efforts.

Moving on to liquidity balance sheet metrics and capital allocation first in terms of liquidity. We continue to have a $1 billion credit facility available and at quarter end had no borrowings outstanding on our commercial paper program.

At March 31, the face value of our long term debt remained unchanged at $5 billion.

With a weighted average interest rate on net debt of about four 4%.

Our leverage ratio at the end of the quarter was three one times for compliance purposes, which still incorporates the gain we realized on the sale of our independent terminals last year.

Excluding that gain leverage would have been about three four times.

As for capital allocation our strategy remains the same as we continue to take a balanced approach using a combination of capital investments cash distributions and equity repurchases all while remaining committed to the financial discipline, we are known for.

During the first quarter, we repurchased one 2 million units at an average price of $53 65 per unit for a total spend of $64 million, bringing.

Bringing the total repurchases since inception to more than 27 million units for over $1 3 billion.

Representing 12%, a 12% reduction in units outstanding.

We continue to see unit repurchases as an important focus of our ongoing capital allocation efforts and continue to expect free cash flow after distributions to generally be used to repurchase our equity.

Of course, we are always careful to note.

<unk> price and volume and unit repurchases will depend on a number of factors as detailed in our earnings release.

Additionally, we remain committed to a strong balance sheet solid investment grade credit rating and our longstanding four times leverage limit, which we believe remains appropriate for Magellan given the nature of our assets and the stability of our business model.

With that I will turn the call back over to Erin.

Thank you Jeff.

For the full year, we have increased our DCF guidance by $40 million 212 $2 billion for 2023.

This increase primarily relates to a higher financial results during the first quarter as well as magellan's updated view on the upcoming mid year tariff adjustments for our refined products pipeline system.

Over the last few quarters, we had indicated our intention to be especially thoughtful in our approach to tariff increases this year in light of the unprecedented level of allowable increases provided by the index in the current inflationary environment.

We have been and will continue to be very methodical in that assessment with our most recent analysis, leading us to conclude the incremental adjustments are warranted for the value proposition offered by our unique pipeline system.

As a result, we currently expect to increase our refined products rates by an all in average of approximately 11% on July one.

We are still finalizing our rate decisions. So do not plan to break out the components of the 11% average rate increase today, but we will provide more detail on our index and market based rates at a later point this year.

For our commodity activities, we've continued to hedge our gas liquids blending with nearly 60% of our fall activity hedged at an expected margin in excess of <unk> 50 per gallon.

Considering our strong year to date results our guidance currently expects an average margin of nearly 65 per gallon for the year, which compares favorably to the 50 <unk> week.

We generated last year and our five year average margin of 45 per gallon.

Coupled with our planned 1% annual distribution growth per unit this year.

We expect distribution coverage in excess of one four times, resulting in $250 million of free cash flow after distributions.

Can be used to reinvest in the business buy back equity or otherwise create additional value for our investors.

Moving on to expansion capital. We currently expect to spend approximately $120 million in 2023 and $40 million in 2024 on expansion capital projects already underway. The 'twenty three spend is $10 million higher than we projected last quarter, primarily related to a new investment we just.

Added for enhanced rail connectivity at our refined products terminal in the Denver area.

This investment is supported by a take or pay customer commitment and expected to generate an EBITDA multiple better than the six to eight times range, we generally target.

And as always we continue to assess new opportunities to further expand magellan's footprint with logical bolt on projects, while maintaining our long standing commitment to capital discipline.

With that operator, we're now ready to answer your questions.

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One moment please for our first question.

The first question comes from Theresa Chen of Barclays. Please go ahead.

Alright, Thank you for taking my question.

First I'd love to ask about the updated guidance just given the strength in the first quarter as well as the updated tariff increase as of July one it seems like it would imply.

Higher annual earnings bump than what is currently reflected in the new guidance taking into account the seasonality of your assets and such is just a result of conservatism or just how should we think about the cadence through the year.

So if you think about the guidance update the primary buckets or drivers of that current update or which you mentioned is the.

Outperformance in the first quarter.

And then we expect additional incremental.

The rate increase in our refined products business to be round numbers $15 million of.

<unk>.

DCF that was not in our initial guidance so that that adds up to the 40.

So at this point.

It's first quarter performance, we expect to have to be different in the.

The pipeline tariff.

Then the rest of our business, we're still expecting to pretty much performed as we expected.

That's the formula at this point.

Got it.

And as we think about it.

Deep refined product blended tariff for the second quarter and understanding that it has been elevated over the last two quarters due to refinery downtime across your footprint.

Actually seeing.

As I'm sure you well know evidence of a lot of unplanned downtime in pad three and that's typically where you source a lot of your products. So how should we think about the quarter to quarter change in that tariffs as we move into the second quarter before at the inflation kicker comes in on July one.

Well on the quarter to quarter change.

It's shipping.

Shipping longer haul barrels so that drives that average up as you mentioned a lot of those were planned turnarounds.

And you're right you are seeing some more unexpected things that are happening, which generally is still beneficial for us.

So.

It's too early to predict that it's going to be higher quarter over quarter to <unk> over <unk>.

Because of those disruptions, but it is a generally the disruptions are positive for our business.

In the first quarter, just if youre trying to think what Mike.

Unplanned or planned turnaround kind of looked like if you look at the first quarter, we think.

The refinery turnarounds may have contributed $4 $5 million of incremental value.

Value to us. So if you annualize that that's sort of the potential for a year and I don't think we're necessarily out of that band, but the issue for us in trying to guide and plan for it is unpredictable and where it shows up matters, but that hopefully will give you a sense of the magnitude at least in the first quarter.

It gives you a little bit of a guidepost for what the full year or what the second quarter might could benefit from if we see unexpected things happen.

Okay, and if I could just.

Ask a follow up to that last point. So we've seen over 1 million barrels per day of closures since the third quarter of.

2019, and domestic refining capacity would you expect that your refined product tariffs should benefit structurally as a result that this volatility should continue.

As a general trend, yes, we've talked about it in the past it is as refineries close demand doesn't typically change in markets.

As rapidly so for us we should experience some structural benefits from that through time with markets. They move around a lot you know supply patterns change so it's often difficult for us to predict.

Refinery closes in one area, where is it going to come from or what other things might happen, but structurally given the breadth of the supply in our system.

It's usually most efficient for the market to adjust to a closure by using our system.

Thank you.

Thank you.

The next question comes from Jeremy Tonet of Jpmorgan. Please go ahead.

Hi, good afternoon.

Good afternoon Jeremy.

I just wanted to kind of go into the products business a bit more and just given.

Some volatility in the economic environment. The backdrop moving forward here just wondering any updated thoughts you can share with us on product demand trends as you see it across your system and if we do go into recession or things get worse.

How do you think about the sensitivities there.

So as we think about recessions, our refined products business has shown itself through the <unk>.

<unk> really been really resilient.

So it's not like if we move into a recession, we would expect drastic changes in our total volume and the demand as we see it today is is remaining very healthy.

The one product that we move that maybe are more sensitive to recession and others of the diesel versus gasoline diesel seems to be a little more.

Economic Lee sensitive in gasoline, which is driven by daily consumer behavior and that seems to be fairly static through time, even in recessionary environments with gasoline is less sensitive diesel is a little more sensitive, but when you put it all together, we've just really have a resilient business and.

I wouldn't expect there to be a dramatic decrease if we enter a recession then I would also note. We've got history that shows us that once you get on the other side of that recession. It comes back very quickly. So we're watching.

The recession potential, but I, just don't see them material impact.

On our business or volumes.

As a result of it.

Got it that's helpful. Thank you for that.

And maybe pivoting a little bit here just towards Bridgetex, we saw a bit of a step down there I was wondering if you could just kind of remind us I guess what.

The contracting status is there what the outlook for British Texas at this point in time.

Right. So as we think about contracts the contracts exist today extend for another three years as we sit here at this moment. So we've got contracts in place for the next three years and it's about 65% of the total capacity of the line that is committed.

So we've got strong contracts great customers, so from a cash flow perspective.

Feel very comfortable that the volumes are lower and Thats just the decision of as Jeff minute mentioned committed shippers, making different decisions with their marginal barrel.

Most of the shippers frankly, not just ours, but really everyone out of the Permian have multiple commitments and some cases commitments exceed what they're actually producing right now so they have to make a decision whether they move their their marginal barrel, where it's best for them to do that I think youre seeing a bit of a corpus Houston dynamics still present.

Where if it's an export barrel that you are most interested in you'll probably still prefer corpus for now to do that we think that dynamic will change.

Through time, none of us know when but at corpus fills up.

Houston becomes the next logical market.

For those barrels.

So through time, we think that Houston from our perspective is still going to be a preferred market, but as we sit here right now with continuing low differentials.

Shippers are just trying to maximize the value given the deals they've already struck so to speak.

But they're marginal barrels and that's the phenomenon that we're dealing with.

Got it that's very helpful and just one last one if I could sneak it in here just you talked about yet as far as the 11% tariff increase kind of evaluating the system in determining that was appropriate to do.

I was just wondering.

What variables changed in the analysis between I think it was 8% that had been discussed in the past and now 1%. Just wondering if there was any changes in your mind that kind of drove that decision.

I think it's really just.

As we continue to look at the markets that we serve and we've looked at the value proposition, we offer to our shippers and customers.

We did some work obviously before we provided the 8%.

But that work continues and as that work continues we continue to refine it and and as we reach different conclusions will make different decisions and Thats really the result of where we're at now is just continue that work and I would reiterate that work is focused on what is our value proposition to our customers.

What are the market dynamics that are happening, where we expect to happen and we just learn more.

That's it so.

That's driven a higher increase in our tariffs and we're comfortable doing it.

Primarily because we don't think were negatively impacting the overall value proposition of what our pipeline provides our shippers and customers. So it's really just the passage of time and better information and more information frankly.

Got it that's helpful I'll leave it there thanks.

Thank you as a reminder, via the phone lines you May press. The one followed by the Port Register a question or comment once again that does the one followed by the floor. The next question comes from Keith Stanley of Wolfe Research. Please go ahead.

Hi, Thank you.

Sorry to beat the dead horse on the tariff hike.

So 11% hike, even if you did the ceiling raise on the regulated side of 13% I think that's about a 10% increase in the market based areas, which is pretty high versus what you've historically done.

Aaron based on your commentary it sounds a little like what you're saying is the market's evolving the value of your system and it's sort of breath and unique attributes are getting valued more highly in the market and so put another way you kind of have a little more pricing power and how youre looking at your network. These days is that a fair.

Characterization.

I, probably wouldn't put it in the context of pricing power.

Is that I think.

Look what we're.

Figuring out and what we're seeing is that.

The value proposition, we offer our shippers and customers is extremely high when you look at the markets that they want that they can get supply from you looked at the markets. They want to go to you look at the Optionality of the system you look at the way, we can handle the barrels store and move them to just in time nature of our system, that's highly valuable to.

Our shippers and when you also look at.

The markets and the competitive dynamics in the markets.

They have options and alternatives, which they can certainly choose but we think we have the best alternative for most of our shippers and we think even at the higher rates, it's still a really good deal for them.

And so I wouldn't call it pricing power I think it's really just the value of our system to our shippers that we think this tariff increase even in market based rates when looking at the alternatives people have we think is superior.

So we can we can be a little more aggressive on the rates maybe than we have been in the recent past because again, we don't feel like we're harming our value proposition.

To our shippers.

That's helpful.

Separate question just on the updated guidance, just but I'm not sure. If you said this but what are you still using the same assumptions for oil prices and for mid con gasoline basis in the updated guidance. Thanks, Yes. There is the same but roughly the same they are not dramatically different I know the market has been <unk>.

One tool of late especially on the crude side, but the sensitivities, we give you our sensitivities.

But when you look at the year, we haven't seen a need to dramatically change.

Our overall assumptions I think.

I think we mentioned 80.

<unk> dollars per barrel was sort of under underpinning our guidance, that's probably closer to 75 as we look forward. So it was not drastically different.

But it's a little bit different but.

The assumptions are generally consistent.

Yeah.

Thank you.

There are no further questions at this time I'll turn the call back over to you Mr. Milburn for any closing remarks.

Thank you for your time today, we are pleased with the strong start to 2023 and remain confident in magellan's future not only in our increased guidance for the year, but our ability to generate significant cash flow and create investor value for decades to come.

On behalf of our company. We appreciate your continued support of Magellan and look forward to seeing many of you at the EIC Investor Conference in Florida, a few weeks. Thank you.

Thank you. This does conclude the conference 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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