Magellan Earnings: Refined Products Leads the Way While Buybacks Continue

Magellan’s MMP first-quarter results were led by its refined products performance. Overall refined products operating margins improved to $337 million for the quarter compared with $235 million last year, primarily due to materially wider product spreads, but higher rates (a 6% tariff increase was implemented in mid-2022) on the transportation side helped. Refined product volumes actually fell 5% year over year due to third-party supply disruptions on its South Texas pipeline but were flat excluding this event. We expect to maintain our $55 per unit fair value estimate and wide moat rating.

Due in part to the expected 11% tariff increase in July 2023 linked to inflation, Magellan boosted its distributable cash flow guidance $40 million to $1.22 billion, which matches our $1.2 billion forecast well. In the past, Magellan has discussed potentially splitting the sizable increase across two years. With inflationary pressures waning a bit for the oil and gas space in early 2023, it looks like the partnership has decided to push it through, with its language of “all-in average.” We believe it will do so anticipating a far lower increase in 2024 mollifying any customer pushback.

With capital spending levels and distribution increases at minimal levels, excess cash continues to be directed toward unit buybacks. Magellan bought back $64 million of units during the quarter, bringing its total to 27.2 million units at an average price of $49.26 per unit for nearly $1.34 billion since 2020.