Q2 2023 Magellan Midstream Partners LP Earnings Call
Okay.
Greetings and welcome to the Magellan Midstream partners second quarter earnings conference call during.
During the presentation, all participants will be in a listen only mode. Afterwards, we will conduct a question and answer session. At this time, if you would like to register for 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 today August 3rd 2023.
It is now my pleasure to turn the conference over to Aaron Milford Chief Executive Officer. Please go ahead Sir.
Hello, and thank you for joining us today to discuss magellan's second quarter financial results.
We are 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 and our pending merger with one of them, but actual outcomes could be materially different.
You should review the risk factors and other information discussed in our filings with the SEC and form your own opinions about magellan's future performance as well as our pending merger.
As disclosed in our press release. This morning, Magellan delivered another solid quarter, our second quarter results beat our expectations due to higher contributions from commodity related activities as well as a higher proportion of longer haul shipments and associated higher average tariffs on our refined product system.
I will now turn the call over to our CFO , Jeff Holman to review the highlights from our second quarter earnings then I'll be back to discuss our expectations for the year and our pending merger with one off before answering your questions.
Thanks, Erin first let me note that I'll be making references to certain non-GAAP financial metrics.
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 $239 million compared.
Compared to $354 million in second quarter, 2022, which included a $162 million gain from the sale of our independent terminals network <unk>.
Excluding that prior period gain the year over year increase was driven by higher profits from our commodity related activities as well as the larger contribution 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 23.
Which as Eric just mentioned exceeded our guidance of $1.10.
DCF for the quarter increased to $312 million at nearly $84 million from last year, while free cash flow for the quarter was $271 million.
<unk> and free cash flow after distributions of $59 million.
A detailed description of quarter over quarter variance is available in our earnings release, so as usual I'll just speak to a few highlights starting with refined products. We reported second quarter operating profit of $234 million, which was $67 million higher than second quarter 2022, primarily due to higher average transportation rates.
As well as higher product margin.
Higher average transportation rates were driven largely by the mid year 2022 increase in our tariffs of about 6% on average.
In addition, the current period continue to benefit from more of a long haul shipments, which moved to higher rates in part as a result of ongoing refinery disruptions.
Product margin increased between periods, primarily due to both higher gas liquids blending margins and sales volumes as well as lower unrealized losses in the current period related to our hedging activities.
Our realized blending margins doubled year over year to more than 80 per gallon versus closer to 40 cents per gallon in the prior year period.
Turning to our crude oil business second quarter operating profit was $61 million down 12 million from the 'twenty two period, primarily due to lower revenues from our condensate splitter in part due to lower rates provided for in the splitter extension contract executed last year as well as lower storage revenues in the current period.
Why is transportation revenue increased slightly due to additional volume moved.
Longhorn volumes averaged a little over 245000 barrels per day up from just over 200000 barrels per day in the second quarter of 'twenty two due to higher third party volumes, resulting from additional volume commitments.
Volumes on our Houston distribution system increased versus the prior year period in part due to higher shipments from a new pipeline connection that was ramping up in 2022.
Since these shipments move at a lower rate than long haul volumes. This increased HTS activity resulted in a lower average rate for the segment overall.
Crude oil product margin increased versus the prior year period due to higher contributions from our crude oil marketing activities as well as favorable mark to market adjustments on futures contracts in the current quarter.
Moving onto our crude oil joint ventures, Bridgetex volumes were about 90000 barrels per day in the second quarter of 'twenty three down from approximately 215000 barrels per day in 2022 due to lower volumes from committed shippers.
This volume decrease reflects the low prevailing midland differential and the highly competitive nature of the crude business in general and of the Permian Basin in particular, which we have noted for some time, while again, emphasizing the importance of having take or pay commitments from high quality high quality counterparties.
Saddle Horn volumes reached a new record of about 265000 barrels per day compared to approximately 220000 barrels per day of the year before as a result of higher shipments for both committed and uncommitted shippers.
Just briefly touching on expenses G&A increased by approximately $18 million between periods for our refined and crude segments combined due to higher incentive compensation costs and to approximately $10 million of merger related costs incurred in the second quarter.
In terms of liquidity, we continue to have a $1 billion credit facility available and a quarter and had no borrowings outstanding on our commercial paper program.
As of June 30th the face value of our long term debt remained unchanged at $5 billion with a weighted average interest rate on that debt of about four 4%.
And lastly, our leverage ratio at the end of the quarter was three one times for compliance purposes.
And with that I'll turn the call back over to Ed.
Thank you Jeff.
We continue to anticipate the transaction with one of them will close during the third quarter of this year and remain confident that the value created by this transaction for unit holders is superior to the value of our standalone alternatives, including on an after tax basis.
Said based on our second quarter performance, we believe it's appropriate to update 2023 financial expectations, ignoring future potential merger related costs for Magellan on a standalone basis.
Our revised full year outlook highlights the quality of our assets and the ability of our businesses to continue to drive value through a stronger combined company once the pending merger with one of them is complete.
We now expect to generate $1 two $6 billion of DCF for 2023 on a standalone basis again, excluding merger related costs. This increase reflects better than expected performance during the second quarter and continued strong commodity margins expected for the remainder of the year.
On the commodity front, we have hedged more than three quarters of our forecasted fall 2023 gas liquids blending activity at this point for an average margin of 60 per gallon.
All in our full year 2023 expectations. Currently include an average blending margin of 70 cents per gallon, which compares favorably to the 50, we generated last year and our five year average margin of 45 per gallon.
We've also made excellent progress hedging next spring with more than 70% of spring 2024 hedged at a 65 <unk> margin per gallon.
We have also increased our refined products tariff rates mid year excuse.
Excuse me. We also include our refined product tariff rates consistent with our most recent guidance the.
We increased we increased to 30% of our markets that are subject to the FERC index by 13% and the remaining 70% of our markets by an average of 11%, which equates to an all in average refined products' tariff increase of approximately 11, 5% effective July one.
Turning back to our pending merger with one of them.
We continue to be confident in the strength and durability of Magellan's business and we further believe justice confidently that the value unit holders will receive through our combination with one of his full and fair and that will be difficult to capture this value on our own.
<unk>.
Prior to the announcement of the merger, we consistently and frequently shared our views of Magellan was undervalued.
And in response have repurchased 12% of our outstanding equity since 2020.
The same analysis, we used to conclude that repurchasing MMP equity created value for our unit holders also form the basis for our conclusion that emerging with one O delivers more present value than we could likely realize standalone.
Magellan has always been focused on delivering superior value to unit holders.
Tax considerations are very important to our unit holders and something we've spent a great deal of time, considering especially recently in connection with the pending transaction.
What is clear to us is that the one of the transaction delivers more value to our unit holders the Magellan standalone, even on an after tax basis.
Robert Willens irrespective tax expert reached a similar conclusion.
I would highly encourage you if you haven't done so already to visit maximizing value for MMP unit holders Dot com.
To read Mr. Williams work, along with other information about the pending merger and why we are confident the transaction is in the best interest of unit holders.
We've had the opportunity to speak with many investors analysts employees and customers and overall the feedback has been positive.
We were pleased to see with a lot of investors are coming to understand the rationale of the transaction as we've tried to clarify some of the initial confusion in the market around the tax impact.
And as we and <unk> progress on our integration planning and communicate more detail on anticipated synergies. We are confident investors will become even more excited about the combination.
It is clear that the market is starting to reflect some of the potential value of the combined company.
Trading prices of iron units and one of shares will continue to move around as recently as July 26th one of shares closed at $67 60 per share.
At that price Magellan unitholders would've received a value of $70 eight per unit based on the terms of the transaction.
Really a 27% premium to the market prices were units prior to announcing the merger.
Operator.
We are now ready to answer questions.
Thank you if you would like to register a question. Please press the one followed by the four on your telephone you'll hear about three times so acknowledge your request.
Your question has been answered and you would like to withdraw please press the one and three.
Our first question is from Theresa Chen with Barclays. Please go ahead.
Hi, Thank you for taking my questions.
On the deal itself so the announcement.
Out in the materials that have been released and fun.
Based on public opposition come to holders can you speak to your view on based on also just which inning are you in that related to the education process as opposed to institutional and retail owners.
Well as we as we continue to talk to investors as I said in my prepared remarks overall.
The reception has been positive.
We're spending a lot of time communicating and clarifying frankly is a lot of misunderstanding around the tax impact of this transaction.
And then as we go forward from here, we expect to be talking in.
In more detail about the synergies from the transaction and as we communicate that people are beginning to understand our rationale.
So the inning that we're in to answer the second part of your question. The inning that we're in is I would say that were in the first inning.
We've got a full game ahead of us and.
We are prepared to see it through to the ninth inning, and we think we're going to be successful because of the merits of the deal with.
When accurately communicated we think are very compelling.
Got it and since you have the ballgame ahead of Neil if it is not enough time from now until.
Timber 'twenty one what are the next steps, which you just curious chairman and hold it and then at our data.
Can give us some color about what you expect that would be helpful.
Well first of all we have the shareholder meeting scheduled for September 20, <unk>, We think there's plenty of time.
And that's where we're focused.
Okay. Thank you.
Our next question is from Spiro <unk> with Citi. Please go ahead.
Thanks, operator afternoon team.
First question, maybe just to hit on the commodity activities.
Pretty strong this quarter the counter seasonal so just curious if you guys can maybe walk through that a little bit further just seems like maybe you're doing something differently, there to sort of squeeze out those extra margin and I guess as you.
Look forward it sounds like you feel pretty good about the rate ability of that so once again just more detail on how that's working.
Yeah, So let's break it apart into two pieces and talk first about the margin. We've just had a very favorable set up when you look at our gasoline liquids blending.
Margin in the sense that we've had relatively strong gasoline prices and we've had an NGL market has.
<unk> been a little weaker than what you might think and that drives a wider margin available for us. So.
So the margins have just been better.
The basis differential you may recall in the past you've talked about basis being a bit of a headwind for us.
So far this year, it's been less of a headwind than we had anticipated coming in so we're looking at just wider margins gross margins in the first place and then we're also not feeling quite the headwinds on the basis differential that we otherwise expect to lift the margin picture.
And we see that remaining fairly consistent for the rest of the year based on what we see at the moment.
The other parts of the overall performance was just volume, we're just doing as a company a better job of capturing all the opportunities that are available to us.
And part of that process in terms of again, just being better at it. So it's a volume story as well volumes are higher margins wider in the outperformance is a result of both.
Yeah.
Our next question is from the line of Jeremy Tonet with J P. Morgan. Please go ahead.
Hi, good afternoon.
Afternoon.
Good afternoon.
Just wanted to talk about the business a little bit if I could just.
Just curious.
With regards to fundamental trends as far as product demand trends have been materializing.
In your markets across your footprint.
Does that materialize versus expectation, so far and I guess on a go forward look how do you see things kind of normalize from there.
So we're going to have a very stable and healthy business.
You look at.
The second quarter of this year.
Gasoline was down.
It was up it's not unusual for us to see some swings in and.
The commodities were actually moving though we expect demand to stay relatively stable.
And in some areas, we growing especially as we are able to extend our system, we have a pipeline system.
Spansion in West, Texas coming online fully in third and beginning of 2024. So as we think about those opportunities to extend our markets that will provide some growth to us, but the fundamentals we think.
A fairly stable, which means we will have.
A slowly growing volume trend, we think over the immediate period. So we think that sets up very well and just and just highlights.
The consistency.
Of our business going forward, we also outperformed in the quarter as Jeff and I mentioned due to longer haul movements on our pipeline.
That's been a real bright spot for us and it goes longer hauls are primarily driven.
When there are refinery disruptions.
And as refinery disruptions happened since through connected to almost 50% of the refining capacity in the U S.
Just because of the refinery may be suffering some short term headwind.
Headwinds the demand is still there and it has to be served and we tend to move.
Move barrels into those markets to fill those holes when refineries are down so that allows us to see longer haul volumes now.
It's a little unpredictable.
When those longer haul volumes may show up but they do.
And so when you look at a very stable business.
Slight growth through the extension combined with just the Optionality of our system, we're going to have a really.
Stable HIFU.
High performing business and and when you look at the combined company you fast forward to the pro forma company and you think about the strength of our business inside that combined company and the strength of <unk> business and you put those together.
We think it's going to be a really compelling pro forma company.
Got it that's very helpful. There and just want to touch on exports if I could you know, particularly I guess.
Permian crude oil exports between corpus and Houston, how do you see that dynamic playing out over time and any any thoughts I guess on the LPG exports as well to the extent you're able to comment on that.
Yes, I don't have any comments on the LPG side, but on petroleum products generally.
We expect exports to continue to grow from the United States, whether that's refined products or components or a crude oil we just see world demand pulling those resources into that market it needs them.
On crude specifically corpus is still.
The predominant export pour it out of the United States due to its proximity to the Permian and lower cost logistics generally to get into that market as well as the terminal infrastructure. That's there.
We talked in the past about through time.
We expect to fill up from a pipeline capacity into that market. We don't know yet to the extent that capacity will expand it will expand some would expect.
But as Corp has fills.
And as Houston's capabilities continue to evolve we will start seeing more barrels start heading towards Houston through time.
In order to meet that again growing in export demand worldwide.
Got it that's helpful. Thanks, and just one last one on the deal like if I could ask.
I think in response to earlier questions. You said it I think in the early innings here, maybe the first inning, just wondering from the outside as far.
As part of this process is concerned.
How can we see I guess things are progressing as far as getting the vote out there getting people to show up and how things are progressing towards the successful deal what can we see from the outside when do we know where at the seventh inning stretch.
Well I think that's a.
A good question.
And.
So if we're in the first inning, we have a game plan to reach our investors make sure. We're communicating the merits of this transaction and we're going to execute that game plan.
My expectation is that game plan is going to take us from the first spending all the way to the ninth inning.
And we're not going to let up on that game plan.
We've got the website set up where investors that have questions can go get answers.
Outreach plans.
We're talking to investors that caller, so we're talking to everyone.
All the time between now and we get to our special meeting date. So when I say, we are in the first thing that's.
And this and this metaphor the game that we're in we're in the first thing we're getting started were going to execute our game plan and we're going to execute it all the way to the end of the game and then we're confident if we do that the merits of this transaction will be well understood and we will be successful in getting our vote.
But when will we know if we get to the seventh inning stretch I'm not sure I'm worried about the seventh inning stretch I'm.
I'm worried about getting to the end of the.
Metaphorical game here.
Got it I think I've played out this metaphor enough. Thank you very much for all the information is very helpful.
And our next question is from the line of Keith Stanley with Wolfe Research. Please go ahead.
Hi. Thank you just just one question for me I wanted to follow up on the longer haul movements in some of the refinery disruption impacts so that the average refined products pipeline tariff was was very high for the quarter, even putting the normal.
Normal increase aside it just seem meaningful the impact of some of those longer haul movements, but any any other comment you can make on that and expectations for the balance of the year.
Yes, so if you think of the second quarter and you isolate it.
We estimated that long haul movements positively impacted the quarter.
Second quarter by about $20 million to your point.
It was significant.
Now you also have to consider the refinery disruptions disruption environment in the second quarter you had.
Several refineries down and <unk>.
Texas in particular.
You wouldn't normally expect to have sort of those refineries down at the same time in the manner that they were for as long as they were down so I think it's a bit of a unique.
Event and second quarter that we have to be careful not to extrapolate this to essentially every quarter from here on out but for the second quarter. It was significant as I said $20 million in there.
They are difficult to predict.
The nature of them, what we know is to the extent they occur we generally benefit from them.
Thank you that's helpful.
Sure.
As a reminder, if you would like to register for a question. Please press the one followed by the four.
Our next question is a follow up Tom Spiro Duenez. Please go ahead.
Can you sorry back again, just had one more follow up related to the deal keep our question on it though one I guess curious on the customer side of things.
Sense now where your investors heads are at or going but I'm curious what the customer receptivity has been in the last few months and number two so maybe it's tougher to answer but as you think about the sort of unit held on swap.
Curious if you've been able to garner any sort of consensus on what the broker voting policy is there.
Yeah. So let's take the first question first which is the reaction from our customers what I would I have been hearing as a positive reaction.
It's also important to keep in mind that we value customer service and that Hasnt changed so all throughout this pending merger our customers we've been working really hard to make sure they don't feel.
The difference in how we treat them and what they expect from us so from that perspective, or a customer they're still getting the same service they've always gotten and we expect them to Kenya to continue to get it. So the fact that.
There hasnt been a positive reaction to the deal overall is that our customers are happy and that's because we're continuing to make sure. We do what we need to do make sure. They stay happy so on that front, there's not really a lot of news there quite frankly.
To your question on the swap.
So those that hold units via <unk>.
Swap.
There are.
Some brokers that essentially can facilitate those units being voted it based on the wishes of the holder there are others that do.
Don.
Where people are I don't have I don't know exactly how to break that down for you in terms of what percentage can or cant, but we do know there are swap counterparties that will allow those that hold our units on swap.
To make their interest known and vote accordingly so.
It's a bit of a mixed bag.
So we think total swap ownership just to put it in perspective, there's probably.
Under 10%.
Give or take.
So does that answer your question.
Yeah No no. It does I appreciate you taken a stab at it I know it was a tough one erin so appreciate the color guys I'll leave it there. Thank you.
Yeah, and just to follow up on that <unk>.
Have been folks we know.
On swap that.
Have been moving their positions to make sure. They can vote, we think thats positive so.
Remiss in not mentioning that as well.
Okay. Thanks again guys.
Mr. Melkert there are no further questions at this time, please continue with your presentation or closing remarks.
Thank you for your time today, we remain confident in the strength of Magellan's business and look forward to becoming a valuable contributor to a larger more diversified company following investor approval of our pending merger with <unk>.
And we look forward to continuing our discussions with investors in the coming weeks. We appreciate your continued support and encourage all investors to vote for magellan's pending merger with want to ahead of our special meeting on September 21.
And have a good day.
And that does conclude the conference call for today, we thank you all for your participation and ask that you. Please disconnect your lines.
Okay.
Sure.
[music].