Magellan Midstream Partners (MMP) is a master limited partnership (MLP) that engages in the transportation, storage, and distribution of refined petroleum products in the United States, notes Ben Reynolds, editor of Sure Retirement.
Magellan’s model is fee-based, meaning it has very small exposure to commodity prices, making it attractive during commodity bear markets. Magellan was founded in 2000, produces about $2.65 billion in annual revenue, and is valued at a market capitalization of $10.2 billion.
Magellan reported second-quarter net income of $280 million on July 29th. Diluted net income per unit was $1.26, or $0.95 per unit excluding the impact of gains on asset sales, nearly double the $0.59 per unit in the year-ago period.
Growth was due to higher-than-expected refined products shipments, higher commodity prices that benefited the partnership’s fractionation activities, and lower expenses due to timing. Distributable cash flow came to $268 million for the quarter, up 28% year-over-year.
We see distributable cash flow (DCF) of $5.00 for 2021. Magellan did note that it expects distributable cash flow to increase over the coming years. With 2021 likely being the bottom of the cycle for Magellan, units are attractively priced with a high distribution yield.
Magellan’s competitive advantage is its fee-based model, which means it is far less exposed to commodity prices than some other commodity-based MLPs. In addition, Magellan has sizable scale in an industry where scale means better margins.
We see growth for Magellan coming from new projects. The company invested $355 million in growth projects last year, with more than $500 million of potential growth projects under consideration.
Buybacks are an additional DCF-per-unit growth catalyst. Magellan is in the midst of a $750 million unit repurchase program, and repurchased $277 million of its units in 2020. We project 3% annual growth in DCF-per-unit for Magellan over the next five years.
We estimate fair value at 12 times DCF-per-unit, but the valuation is currently only at 9.2 times this year’s estimated DCF-per-unit of $5.00. We see outstanding projected total returns of 14.5% annually over the next five years, the result of 3% annual DCF-per-unit growth, the 8.9% distribution yield, and a 5.3% tailwind from valuation gains.
