Behind Magellan Midstream Partners’ Growing Distributions
Magellan Midstream Partners’ yield
Currently, Magellan Midstream Partners (MMP) is trading at an attractive yield of ~4.9%. Magellan Midstream Partners’ 2Q17 distribution per unit was 2% higher than 1Q17. Magellan Midstream Partners plans to increase its annual distributions 8% for 2017 and 2018. It expects distribution coverage of at least 1.2x for each of the two years. Income investors will likely find Magellan Midstream Partners’ yield attractive with its stable cash flows and strong coverage.
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Magellan Midstream offered higher 2Q17 distribution growth than Enterprise Products Partners (EPD). C-corporation midstream peer Kinder Morgan (KMI) announced a flat 2Q17 dividend. Williams Partners (WPZ) announced flat 2Q17 distributions after a 29% distribution cut in 1Q17.
Magellan Midstream Partners spent ~$345 million in capital expenditures during 1H17. Magellan Midstream Partners has invested $5 billion in the last ten years in acquisitions and expansion projects. It expects to spend $1.6 billion in 2017–2019 on growth projects. Magellan Midstream Partners targets 6x–8x EBITDA (earnings before interest, tax, depreciation, and amortization) for its investments.
In September 2017, Magellan Midstream announced a joint venture with Valero Energy (VLO) for the development of its Pasadena marine terminal. The project is expected to cost $820 million. It will be equally funded by Magellan Midstream Partners and Valero Energy. Phase 1 of the terminal is expected to be operational in 2019, while phase 2 is expected to be operational in 2020.
Distributable cash flows
Magellan Midstream Partners’ 2Q17 distributable cash flow rose 13%—compared to 2Q16. The above graph shows Magellan Midstream Partners’ distributable cash flows and total capital expenditures in the past three years. The right axis shows Magellan Midstream Partners’ per share distribution.
In the next part, we’ll discuss Magellan Midstream Partners’ leverage.