Uncertainties force Magellan Midstream to cut capex budget by $200 million

Tulsa’s Magellan Midstream Partners has grabbed headlines by cutting its capex budget by $200 million this year because of uncertainties about construction of the Permian Gulf Coast pipeline.

The uncertainties arose after Magellan had teamed with Energy Transfer Partners, Delek U.S. Holdings and Marathon Oil to build the multi-billion dollar pipeline. The line was an effort of those involved to transport oil from the Permian Basin to the Gulf Coast region.

Magellan will also trim its 2020 capital outlay by $250 million. As such, Magellan now forecasts 2019 spending to total $1.1 billion. While the Zacks Rank #3 (Hold) partnership owns an attractive portfolio of energy infrastructure assets that generate stable and recurring fee- and tariff-based revenues, delay in project completions and cost overruns are expected to hamper profitability.

As it is, Magellan is facing pressure in crude oil transportation business, wherein operating margin fell more than 8% year over year in the fourth quarter. The segment results were hampered by lower rates on the Longhorn pipeline that carries oil from the Permian basin to Houston. Worryingly, the depressed rates will remain in place until the next adjustment date and therefore act as a drag on the partnership’s revenues.

Nonetheless, the company’s consistent distribution growth bodes well.Markedly, in 2018, the partnership’s distributable cash flow (‘DCF’) grew 8% to a record $1.1 billion. Based on continued strength in earnings expectations, management expects to generate DCF of around $1.14 billion this year and targets annual distribution growth of 5%.