Q2 2019 Earnings Call
Greetings and welcome to the second quarter Magellan Midstream partners earnings call. During your presentation, all participants will be in listen only mode. Afterwards, we'll have 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 you need to reach an operator. Please press star Zero as a reminder, this conference is being recorded today Thursday August 1st 2019, and now it's my pleasure to turn the conference over to Mike Mears Chief Executive Officer. Please go ahead.
All right. Thank you.
Hi, good afternoon, and thank you for joining us today to discuss magellan's second quarter financial results.
Before we get started I remind you that management will be making forward looking statements as defined by the Securities and Exchange Commission.
That's such statements are based on our current judgments regarding 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.
We reported second quarter earnings. This morning that continued magellan's track record of solid financial results with each of our business segments generating higher operating margin than the year ago period.
In addition, after our usual normalization for mark to market commodity adjustments, we exceeded our EPS guidance.
Seven cents per unit or 6%.
This beat was primarily due to incremental revenue from our Texas crude oil pipeline as well as a favorable benefit from a higher commodity price environment.
I'll now turn the call over to our CFO , Jeff Holeman to review Magellan's second quarter financial results in more detail.
Then I'll be back to discuss our latest outlook for 2019 and the status of our larger expansion projects before opening the call to your questions Jeff.
Thank you Mike during my comments today, I will be making references to certain non-GAAP financial metrics, including operating margin and distributable cash flow. We've included exhibits to our earnings release that reconcile these metrics to their nearest GAAP measure.
Earlier. This morning, we reported second quarter net income of $253.7 million or $1.11 per unit on a diluted basis compared to $214.4 million or 94 cents per diluted unit reported for the second quarter of 28.
Excluding the impact of Mark to market activity in the current quarter adjusted diluted earnings per unit was $1.20, which exceeded our guidance for the quarter of $1.13.
Distributable cash flow for the quarter was 314.8 million $48.2 million higher than the 266.6 million reported in second quarter 2018.
Driven by strong results in each of our operating segments.
I will now discuss the performance of each of those segments in turn starting with our refined products segment.
Refined products generated $224.1 million of operating margin in the second quarter of 2019, an increase of $32.7 million over the 2008 period.
Transportation and terminals revenue for the refined products segment increased 15.2 million driven primarily by higher average tariff.
Rates in the current quarter were favorably impacted by the tariff increase of 4.4% implemented in July of last year as well as by longer haul shipments in the mid continent portion of our system and lower volumes on the South Texas portion.
Volumes on the South South, Texas portion of our system moves in rates are much lower than our average tariff rate.
The lower volumes of these shorter haul movements caused our overall average tariff rate per barrel to increase.
These lower volumes on the South Texas portion of our system, which as we have previously described is more of a supply push part of the system contributed to a decrease of about 1% and our overall refined products volumes from second quarter 2018, as well as to fluctuations in our overall product mix as south, Texas saw higher distillate and aviation volumes and lower gasoline volumes versus the prior year period, excluding south Texas refined products demand across our system was relatively unchanged.
We have received a number of questions asking whether we'd experienced an impact from the flooding that occurred in many of our markets during the second quarter.
While we did experience some declines in isolated markets, our commercial operations and engineering teams were able to quickly develop solutions that leverage the flexibility of our system to minimize the potential impact with the result that our overall revenues were essentially an effective.
Operating expenses for the refined products segment increased 2.5 million between periods due primarily to higher asset integrity spending into 2019 quarter as well as lower product gain which reduced operating expenses.
Product margin increased 23.3 million compared to second quarter of 2018, primarily due to higher cash margins on our butane blending business.
As a result of both higher gasoline sales prices and lower butane costs in the current period.
As Mike will discuss in a moment, we continue to expect these higher margins to persist for the remainder of the year.
Refined products equity earnings decreased approximately $4.1 million versus second quarter 2018, primarily due to mark to market losses on hedge positions and our powder Springs joint venture.
Moving now to our crude oil segment.
Second quarter operating margin of $160.3 million was 8.3 million higher than second quarter 2018 crude oil transportation and terminals revenue increased by $17.6 million significant significant part of the increased between periods being driven by storage and dock fees associated with growing volumes at our Steelbrick joint venture. Following the addition of export capabilities at the terminal in August of 2018.
Our crude oil transportation volumes also increased in the current period with most of the increase resulted from significantly higher volumes on our Houston distribution system due in large part to the previously mentioned higher seabrook activity.
This significant increase in Houston distribution volumes, which moved at a lower rate than longer haul longhorn shipments was the primary driver of the decline in the average crude oil tariff rate, we reported for our wholly owned assets.
Also contributing to the decrease in average rate between periods was the lower average fares earned on our longhorn pipeline system as a result of contract renewals in October of last year.
Volumes on longhorn averaged approximately 275000 barrels per day compared to a little over 270000 barrels per day in the second quarter of 2018 as we saw continued demand for spot shipments on longhorn and this is in the system ran essentially at or near capacity for the entire quarter. Thanks to excellent performance by our operations and engineering teams.
You may recall that on last quarter's call. We noted our expectation the market differential between Midland and Houston would remain above our spot tariff through the second quarter and increased our annualized long on volume assumption to approximately 265000 barrels.
While differentials have continued to encourage spot shipments to date, we expect differentials to narrow as additional takeaway capacity out of the Permian comes on line.
As a result, we are not currently forecasting spot shipments beyond the third quarter of this year, which would translate into throughput of approximately 270000 barrels per day for 2019 as a whole.
Crude oil segment operating expenses increased $6 million, primarily as a result of higher fees paid to see brick for leased storage and dock services as well as higher maintenance expense related to our Corpus Christi splitter.
Crude oil other operating expense was $6.1 million in second quarter 2019.
Driven primarily by the unrealized mark to market valuation of a basis derivatives agreement. We recently entered into with the joint venture co owners affiliated we entered this agreement contemporaneously with our co owners affiliate entering into an intrastate transportation services agreement with the joint venture.
The terms of this agreement provide for our making or receiving payments from the counterparty based on current crude oil differentials between west, Texas in the Houston Gulf Coast.
Mark to market valuation adjustments related to this agreement are excluded from our calculation of distributable cash flow.
Crude oil equity earnings increased slightly between periods.
Saddlehorn equity earnings were higher at Sullivan volumes averaged approximately 145000 barrels per day compared to approximately 65000 barrels per day in the 2018 period, primarily as a result of higher uncommitted volumes from incentive tariffs in joint tariff arrangement.
As well as contractual step up and committed volumes to approximately 70000 barrels per day in September of 2018.
Seabrook equity earnings also increased driven by the higher volumes.
Facility noted previously.
These increases were offset by lower Bridgetex earnings.
Higher average bridgetex volumes of approximately 425000 barrels per day in the current period compared to approximately 390000 barrels per day in the same period last year were offset by our lower ownership interest in the 2019 period.
Consistent with our remarks regarding spot barrels on longhorn, we now expect spot volumes to continue on bridgetex through the end of the third quarter.
Which would result in an average annual volume for Bridgetex of about 400000 400000 barrels per day.
The annualized figure like our annual average projected for longhorn assumes that only committed volumes are shipped in the fourth quarter of this year.
Finally to wrap up the discussion of our performance by segment, our Marine segment generated $30 million of operating margin in the current quarter, which is an increase of about 1.7 million over the 2018 period.
Revenues were higher primarily due to the timing of maintenance work is pure tanks were out of service in the recent quarter.
These higher revenues were partially offset by higher property tax accruals in the current period.
Equity earnings for the segment were also slightly higher in the second quarter 2019, as the first phase of operations that are past due Pasadena joint venture terminal continued to ramp up.
Moving now to other variances to last year's quarter.
Depreciation amortization and impairment expense increased $9 million compared to second quarter of 2018.
Largely due to the commencement of depreciation on assets recently placed into service as well as higher asset write downs in the current period, including approximately $2.6 million related to the write down of project development costs, which negatively impact DCF.
Gene expense remained essentially flat in 2019 versus the same period in 2008.
Net interest expense was $4.8 million in the current quarter, primarily due to lower debt outstanding and a lower average interest rates compared to the 2018 period.
Our weighted average interest rate was approximately 4.6% during the second quarter and our average outstanding debt was $4.4 billion.
At June Thirtyth total long term debt outstanding including $197 million of commercial paper borrowings was also approximately $4.4 billion.
Gain on disposition of assets was 4.6 million higher in second quarter 2019, as a result of the gain on the sale of an active terminal on our refined products pipeline system, while other expense increased $4.7 million as a result of higher pension settlement costs during the current quarter.
Moving briefly to balance sheet metrics and liquidity our leverage ratio for compliance purposes was approximately 2.3 times at the end of the quarter.
Excluding the impact of the gain we realized on the sale of a portion of our interest in Bridgetex in the third quarter of 2018, our leverage ratio would be approximately 2.8 times.
Given that low leverage ratio, we continue to expect to be able to fund all of our current slate of growth projects with retained excess cash flow and debt, while staying well within our long standing four times leverage limit without the need to issue equity.
In terms of liquidity, we continue to maintain our multiyear credit facility with capacity of $1 billion. We recently renewed this facility for a new five year term and in addition added a 500 million 360 40 facility to ensure adequate flexibility in financing our growth program.
I will now turn the call back over to Mike to discuss our guidance for the balance of the year as well as given an update on some of the growth projects we are working.
Thanks, Jeff.
Based on another strong quarter of financial results and our improved outlook for the remainder of the year. We have once again increased our annual DCF guidance for 2019 by $40 million to $1.22 billion.
As Jeff mentioned.
The basis differential between Midland and Houston has remained above the spot rates for the longhorn and Bridgetex pipeline and as a result, our guidance now assumes uncommitted shipments will continue on both of these pipeline systems in the third quarter.
As a reminder, we estimate that the benefit from these uncommitted shipments is about $20 million per quarter based on the spot rates for both longhorn and Bridgetex.
As we have mentioned before we continue to develop crude oil marketing and incentive tariff strategies to maintain uncommitted shipments on our pipeline systems as the basis differential narrows.
The current commodity environment is also expected to be a positive for Magellan, especially in light of the depressed butane prices that favorably benefit our butane blending activities.
We have been actively locking in pricing for the coming fall blending season with about 70% of that expected margin hedged at this point at more favorable pricing that was expected earlier this year.
As a result, we now expect blending margins to average around 55 cents per gallon for the full year compared to 50 cents previously.
Looking further ahead, we are starting to make progress on hedges for our spring 2020 blending season as well.
We are currently seeing margins around 60 cents per gallon with about 70% of the spring 2020 margin hedged.
With our new DCF guidance of 1.22 billion for 2019, and our stated goal of increasing annual distributions by 5% this year.
We expect to generate a very healthy coverage ratio of 1.3 times with almost $300 million of excess cash flow generated to reinvest in our business.
Moving on to expansion capital, we are nearing completion on a number of significant construction projects.
The expanded dock capabilities at our Galena Park Marine terminal are now operational with five docks for a combined 750000 barrels per day per day of capacity now available.
This project took a bit longer than initially expected due to ship channel disruptions in underwater obstructions. So we're pleased pleased to bring the new dock capacity online to provide additional flexibility for our customers at this critical and very busy facility.
We are nearing the completion of our east Houston to Hernan pipeline and remain on target to begin operations at the end of this month for this new refined products pipe segment.
In addition phase two of our new Pasadena joint venture Marine terminal is nearing completion with an additional 4 million barrels of storage and supporting dock and pipeline infrastructure expected to be in service by the end of 2019.
Additional storage and export capabilities at Seabrook are progressing and expected to be operational in early 2020.
Pipeline construction is now underway for our west, Texas refined products pipeline expansion and new Midland terminal, which are both expected to begin service in mid 2020.
So as you can tell we are making excellent progress on these expansion projects that will enhance our service offerings and benefit our future growth.
Further we recently announced expansion of the Saddlehorn pipeline with the corresponding open season closing yesterday.
Based on the initial commitments received we are moving ahead with the 60000 barrel per day expansion at this time.
However, customers committing volumes through this open season process have the option to increase their commitment levels in the near future, which may warrant the full expansion up to 100000 barrels per day of incremental capacity.
The expanded capacity will be achieved by a combination of incremental pumping and storage capabilities with the higher capacity available in late 2020.
Each phase of the expansion costs, approximately $50 million to Saddlehorn, and we would expect to pay our proportionate share of that full amount.
Based on the progress of expansion projects underway. We currently expect to spend $1.1 billion in 2019 with an additional $150 million in 2020 to complete these projects.
You may have noticed that these spending estimates are unchanged from last quarter as lower spending estimates on various projects due to capital efficiencies are offset by the new spending for the first phase of the Saddlehorn expansion and other smaller capital project additions.
Beyond these capital projects. We continue to act actively worked a long list of potential expansion opportunities still tolling well in excess of $500 million.
These potential projects include expansion opportunities in each of our business segments, including the proposed voice or crude oil pipeline for which the open season continues to the end of August .
Specific to Voyager, we have received a number of questions on the likelihood of it moving forward with other announced pipeline projects in the space.
What I can say is that the industry industry has been fully aware of all the potential pipelines that were being proposed throughout our development process and we remain in active discussions with a number of parties who are still very interested in considering our project.
We believe we have an attractive service offering and we will continue to develop this project.
Either as a standalone opportunity or as a part of a more capital efficient solution that we are discussing with a third party.
And even though the void to project has been more public due to the pending open season I can assure you that we are actively pursuing a number of other attractive projects across all of our business units.
At targeted returns in our standard six to eight times EBITDA multiple range.
That now concludes our prepared comments. So operator were now ready to open the call for questions.
Thank you very much and if you would like to register a question. Please press. The one followed by the four on your telephone you will hear raised three Tom prompt towards knowledge or request. If your question has been answered and youd like to withdraw your May press. The one followed by the three once again for questions. Please press. The one followed by the four one moment. Please for the first question.
And our first question is from Jeff Jeremy Tonet with JP Morgan. Please go ahead.
Hi, good afternoon.
Hi, there just.
Start off with the cap structure here and leverage it seems like it's really decreasing hair falling under three times I was wondering if you could just update us on a bit more as his thoughts with regards to you know.
Spending on growth capital versus potentially share buybacks unit buybacks.
Kind of holiday, how all that plays together and also given kind of the elevated prices that private equity seems to be paying for midstream assets versus what.
The public markets are betting that if that factors into your equation at all.
This is Jeff I'll address the first part of that question regarding cap structure.
And then Mike will address the second part of the question.
Regarding private equity.
As I mentioned leverage will be closer up to three times one.
Temporary effect of the Bridgetex gain rolls off which will be the next quarter. So.
That will naturally get a little bit higher and our primary focus in terms of the cap structure is continuing to find good returning projects to finance with the balance sheet capacity that we have and that is that is our focus at this time, there's really no change in that.
And with regards to your question on on private equity.
Market valuations and.
Yes, but obviously they.
Based on some recent transactions indicate that they in some cases are higher than what public valuations are I can tell you that we routinely evaluate and analyze our entire portfolio to optimize it.
And we take that into consideration when we do that analysis.
I don't have anything specific to address with regards to that but if we do we'll let you know, but we routinely make those make those evaluations and determinations.
Thats helpful. Thank you.
Turning to the crude oil segment believe there was a 6.1 million.
Other expense related to mark to market adjustments.
Associate with the basis derivative agreement with the Jvs I Wonder I was just wondering if you could expand a bit more as far as what activity is going on there how large are the volumes.
Well I can tell you that.
Yes, I, probably don't want to disclose much more than what was in our public statements but.
We have entered into an agreement with an affiliate.
A co owner of one of our Jeff joint venture pipelines.
To share in the margin to shipping margins associated with shipments on that pipeline.
But I think Thats all were prepared to say about on track.
I think we are disclosing the volume we have this or we will disclose it in our in our Q. It's the volume is 30000 barrels a day under that contract.
Thats, probably all the details on prepared to go into on the contract at that at this point.
Okay. That's that's helpful. That's it for me thanks.
And the next question is from Tristan Richardson with Suntrust. Please go ahead.
Good afternoon, just curious could you offer an update on the.
$500 million of expansion opportunities and to what extent. These it could appear in 2020, just thinking about the large portfolio.
Projects weighted towards 2019.
Is it reasonable to think 2020, capex may be lower than 2019 levels, even with the opportunities you guys seem funny.
Well I will tell you that there is a wide range of diversity of projects, we're pursuing across all of our business units and some of those projects are more advanced in discussions some of them are less advanced in discussions.
They are not all of the same size.
And.
In some cases smaller projects say in the $100 million range can be just as accretive as larger projects based on.
The quality of the project.
That being said I'm, not really prepared to give any projections as to how many of those will will get contracted in the next six months that will roll into 2020 spending.
And I don't think it would be fair for me to determine whether or not thats could be higher or lower than what our spending is for this year.
I can tell you that the number is large on the number of projects we are developing.
And we.
We would love to get those as.
Contracted in him.
Start working on those as fast as we can but I'm not really going to make a prediction on on how quickly that can happen or really what the success probabilities of each one of those but but.
I think it's important that that you understand that those projects are substantial.
And just for many reasons, we don't want to get into the details of all of them before they actually transpire.
Fair enough and then just to follow up on the 150 million in 2020 that includes only phase one of Saddlehorn and in that 50 million phase one was entirely offset by capital efficiency.
Elsewhere on other projects that.
Hi, good that right yes.
That's correct, but.
But to be clear, it's our share of that $50 million.
That we don't we're not we're a partial owner and so at this point, we're 40% on Saddlehorn. So our capital portion of that is 40% of $50 million.
Right right perfect. Thank you guys very much.
And our next question is from Shneur Gershuni with GBS. Please go ahead.
Hi, good afternoon guys.
And maybe just to clarify Jeremy first question a little bit here.
Are you able to comment.
About the press reports with respect to longhorn potentially being shopped.
Is there a data room open is that in fact accurate on just any color that you can give on that.
I cannot comment on on those reports I mean, I will reiterate what I've said before which is we evaluate.
All of our assets.
As to.
With a mind towards optimizing our portfolio as you'll recall last year, we sold a portion of Bridgetex, which I think was a clear optimization effort on our part and we do and we evaluate.
Really all of our assets routinely by.
Can't comment on that report specifically.
Okay, you can't even confirm if there is a data room open.
No.
Okay.
Just moving on to some questions about quarter.
And some trends.
I was just wondering if you can talk about.
Both butane.
Blending as well as the spot shipments trends.
Butane blending has been fairly strong this year.
You talked about the favorable environment already for hedging for next year and so forth.
Is it just a function of that the environment is ripe and at some point it normalizes and goes away.
Or are you running your business, a little better and then secondly on the spot volumes.
Do you ultimately expect the spot volumes to come down once new capacity comes out of the Permian from from some competing pipes.
Just kind of curious by it.
Do you expect there to be an opportunity for spot volumes and for Q.
In one Qs those pipes come on or or should we think about those spot volumes has been opportunistic this year and go away.
All right a lot of questions. There, let me, let me try to get through them if I Miss one at the end just remind me but.
With regards to butane blending.
First of all first of all I will say, we constantly work to optimize our blending and we've made.
Incremental improvements over time to improve the volume.
Of butane, we can blend into our gasoline pool, so thats a constant process.
And we make incremental.
Strides in that.
Every year.
But in reality with regards to what's happening in the current market. That's not the driver. The driver is the differential between butane and gasoline, which fluctuate obviously in there both driven by different drivers.
They both have separate supply and demand.
Markets, which drive their pricing and so that that that margin fluctuate.
We are in a period of time, where the margin has expanded versus where it was a year ago or two years ago and we're benefiting from that.
Margins right now are substantially lower than they have been.
You go back a number of years ago, so that number bounces around quite a bit.
So I'm not going to predict what they're going to be beyond the second quarter of next year because.
We're not in the business of commodity price projections, but.
But they are on an upward trend and the primary driver on that has been a reduction in butane pricing.
And so we like the pricing that we're seeing now in store locking that in as much as we can.
On the spot margins are the spot movements on our Texas pipelines.
Clearly.
The differentials are expected to.
To drop and narrow over the course of the remainder of this year.
And then remain at lower levels next year with the new pipeline capacity coming online.
I can tell you that in our forecast we have assumed.
No spot volumes.
That doesn't mean, we're accepting that.
As I mentioned, we have a number of things underway to continue to have volumes fill the spot space.
At lower differentials in the fourth quarter and beyond.
We have just not put that into our forecast.
At this point for 2019.
Okay and one final question. If I may is kind of a follow up to what Christian was talking about so I mean, you're basically saying the $150 million Capex for 2020 is basically the completion of what Youve F. idea at this point right now but.
You've sort of talked about that you're working on several different projects and so forth.
I kind of pure setting an expectation to low in terms of consensus capex.
For 2020, do you have some sort of magnitude of kind of where you think at a bare minimum 2020 will shake out from spend if you sort of like risk adjusted which ones get across efficient finish line or not I mean are we talking about something thats down 50% from this year because right now obviously, you're down a lot more than that.
Just kind of wondering if you can give any sort of color around is to avoid setting expectations differently.
Well, let me, let me start by saying that.
2019, as a record capital year for us and so.
You are benchmarking or looking forward guidance on 2020 versus a record capital year. So I'll just highlight that distinction.
Before I answer the question.
We were not.
Unfortunately.
I'm not going to give you a direct answer I mean, we tend to be conservative with regards to.
Projecting what projects, we're going to actually be successful.
In reaching F.I.D., and which ones were not and even though we have a number of projects under development as I mentioned earlier, I think theres real danger for us to try to predict how many of those are actually going to be successful and what the capital number could be next year.
I can tell you it.
The range is baked.
I'm going to say that.
Some of those May delay and we don't get them approved until early in 2020 and the capital number for 2020 doesn't grow.
As much as we might hope.
But then again it might and we could have.
A good number and 2020, we just hesitate to make predictions with regards to that.
All right perfect. Thank you very much guys really appreciate the color today.
The next question is from Dennis Coleman Merrill Lynch. Please go ahead.
Yes.
Thanks for taking my question and good afternoon, everyone.
My question I guess, if I can start.
One of the other ways that you single out and really the question is because you singled out in the press release can you talk a little bit about M&A opportunities.
You know on the buy side, what you see there and is that part of sort of vis.
Big range that you're talking about when when you're.
Answering these questions about capex.
We were always active in the M&A market and we participate in.
Just about every process that that hits the market thats in our space.
As you know weve not been successful.
Just based on valuation over the past few years and from our perspective Thats not a bad thing.
When the price gets too high I think there's great discipline to walk away and.
And in not run the risk of actually destroying equity value by overpaying for assets in our view.
That being said when I talk about our backlog of projects. It does not include any M&A everything that I've been referencing is with regards to organic development.
Okay, and again, maybe just to.
Take another swing at trying to take.
Get a bit of a gauge on size.
In terms of the backlog as you think about and look at it today.
Mike is it.
Is it still as big as it was two years ago, I mean does it compare to sort of prior year.
Opportunity set.
Yes.
Okay.
Thanks, Thats all I have.
And ladies and gentlemen, as a reminder for questions. Please first one for our next question is from Keith Stanley with Wolfe Research go ahead.
Hi, good afternoon.
I was wondering if you give an update on interest in corpus export facility at Harbor Island, just any color on where where things are with that.
Well we.
To be clear with regard to the project that we were developed developing independently of Corpus Island.
That project is much further down on our development list were not actively working on an independent project.
At Harbor Island.
That being said, we are evaluating a number of opportunities in corpus Christi.
That would fall into the backlog of projects that I mentioned earlier.
But those opportunities mostly are would be.
Working with other third parties, rather than developing a standalone facility.
Okay.
So separate question you mentioned in your prepared remarks state.
On Voyager you were talking to.
A third party about a more capital efficient option as one of the alternatives can can you say specifically if that's fill ups with the red oak pipeline or if it's another third party that you might be talking to you about capital efficient solutions.
I can't.
Comment on who that is.
But.
We think that Theres, a real potential with this third party to make something work.
But I can't comment at this point as to who that is.
Okay. Thank you.
And gentlemen, those are all the questions. We have for the moment I will turn the call back over to Mr. matters.
Great well those are all great questions.
I appreciate everyone's time and interest in Magellan and have a good afternoon.
And that does conclude our conference call for today, we thank you for your participation everyone have a great rest of your day you may disconnect your line.
Yes.