Magellan Midstream Partners (NYSE: MMP) has been one of the better dividend stocks over the past two decades. The master limited partnership (MLP) has increased its distribution to investors 68 times since its initial public offering in 2001, growing its payout by a 12% compound annual rate over that time. Meanwhile, the company has enough fuel to increase it by another 5% this year.
However, the midstream company's growth outlook beyond the next year isn't as robust as it once was due to the recent cancellation of some pipeline projects. Because of that, it's not clear what will fuel growth beyond 2020 once its current expansions enter service.
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The coming wave of project completions
Magellan Midstream Partners currently expects to invest $1.1 billion on expansion projects this year. That's the biggest capital budget in the company's history and is more than double 2018's spending level.
The MLP currently has several large-scale projects under construction. For example, it's working with refining giant Valero (NYSE: VLO) on a new marine terminal in Pasadena, Texas. The companies finished the first phase this past January and expect to complete the second one by the end of this year, which includes connecting it to Valero's refineries in the region. Magellan is investing $410 million for its share of the 50-50 joint venture. The company is also working on a small expansion of its Seabrook terminal joint venture that should be operational early next year.
Meanwhile, Magellan Midstream is expanding two of its refined-product pipeline systems in Texas. It's investing $425 million to build a 135-mile pipeline from East Houston to Hearne, Texas, that should be operational this August. In addition, it's investing $500 million to build a 140-mile pipeline from Hearne to Alexander, which should start up by the middle of 2020.
These projects should give Magellan Midstream Partners the fuel to continue increasing its distribution to investors each quarter through at least the end of next year.
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While uncertainty looms, opportunities abound
Distribution growth beyond 2020, however, isn't quite as clear. That's because Magellan Midstream Partners currently only expects to spend $150 million on capital projects next year, largely to finish up that second refined-products pipeline expansion. The company initially had more projects lined up for completion in the 2020-to-2021 time frame.
However, it canceled the Wink-to-Crane pipeline that would have helped increase oil transportation capacity in the Permian Basin. On top of that, the company and its partners elected not to move forward with the large-scale Permian Gulf Coast Pipeline. Magellan would have invested about $450 million in that project, which was to be operational by the middle of next year. Instead, another project superseded it, which forced the company and its partners to abandon their pipeline.
While Magellan Midstream's growth backlog beyond this year looks bare, that doesn't mean the company is lacking opportunities. CEO Michael Mears addressed the company's growth prospects on its first-quarter conference call. He said:
Some investors have expressed concern as to what new projects will fuel Magellan's next wave of growth beyond 2020. I can assure you that we remain very active evaluating other potential expansion opportunities, still totaling well in excess of $500 million to cover a variety of refined projects, marine, and crude oil infrastructure opportunities. Our project backlog contains many smaller scale, high-return projects, but we are also evaluating a number of large-scale opportunities that hopefully we can discuss over the next few months.
One of the projects it's working on is the Voyager Crude Oil Pipeline that would move oil from a major storage hub in Oklahoma as well as the fast-growing Permian Basin to the company's terminal in East Houston. This pipeline could start up as soon as early 2021 if Magellan and its partner secure enough shippers. But that could be a challenge since some of its competitors recently approved a project with a similar scope and time frame.
The company and its partners also have the potential to expand both the Pasadena and Seabrook Terminals. At Pasadena, for example, Magellan could invest up to $700 million to increase that facility's storage and export capacity. Meanwhile, its Seabrook joint venture owns enough land to potentially double that facility's storage capacity. Finally, the company could also expand its Saddlehorn pipeline, which moves oil from the Rockies and Bakken production regions to Oklahoma. That expansion, however, is also going up against some competing projects that would offer shippers a similar path to get their oil out of those regions.
It needs to start refilling its growth engine soon
Magellan Midstream Partners is working on a large wave of expansion projects, which will fuel continued distribution increases through at least the end of next year. However, its growth engine could run out of gas after 2020 unless it's able to move forward with some of the opportunities it's currently pursuing. That's why investors should keep a close eye on whether the company can lock up any more growth projects over the next few months, since a failure to do so could eventually cause its distribution growth streak to come to an end.
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