Magellan Midstream Partners (MMP) raised its DCF (distributable cash flow) guidance for 2015 once again on August 6, 2015, by $10 million to $880 million. In May, the MLP had raised its DCF guidance for the year by $30 million to $870 million. MMP’s DCF in 2Q15 was $222.8 million, 14% higher than it was in 2Q14.
On July 23, 2015, Magellan Midstream increased its quarterly cash distribution by 3%, from $0.72 for 1Q15 to $0.74 per unit for 2Q15. This represents the fifty-third distribution increase since the company’s initial public offering in 2001. MMP aims to increase its annual cash distributions by 15% over 2015 and by at least 10% over 2016.
The above graph shows growth in the MLP’s quarterly per unit distribution. It also shows consensus per unit distribution estimates for the third and fourth quarters of 2015.
Magellan’s distribution coverage
Magellan Midstream’s distribution coverage ratio for 2014 was 1.5x. Distribution coverage is the ratio of distributable cash flow, or DCF, to total distributions. With the revised DCF guidance, the company expects its 2015 coverage ratio to be 1.3x.
MMP is targeting a long-term distribution coverage of at least 1.1x. According to the company, the relatively higher ratio in 2014 was to prepare it for the correction in commodity prices.
MMP trades at a distribution yield of 4.3%. In comparison, Enterprise Products Partners (EPD), Plains All American Pipeline (PAA), and Sunoco Logistics Partners (SXL) trade at distribution yields of 5.5%, 7.8%, and 5%, respectively. The Alerian MLP ETF (AMLP) trades at a distribution yield of 7.5%. AMLP and the ETRACS 2xMonthly Leveraged Long Alerian MLP Infrastructure Index ETN (MLPL) each track the Alerian MLP Infrastructure Index (AMZI).
One of the reasons for MMP’s relatively lower distribution yield might be its strong distribution coverage ratio. MMP’s distribution coverage ratio is well above 1x, making it relatively less risky. MMP has announced 53 distribution increases since the company’s initial public offering in 2001. This also explains its comparatively lower yields.
Buckeye Partners (BPL), NuStar Energy (NS), and Enbridge Energy Partners (EEP) are some other MLPs involved in crude oil and refined products transport and storage. Together, these three MLPs form ~12% of the Alerian MLP ETF (AMLP).