Magellan Earnings: Healthy Tariff Increases and Better Blending Spreads Improve Near-Term Outlook

Magellan’s MMP second-quarter earnings were quite good, in our view. The partnership benefited from a 6% average mid-2022 tariff increase, higher long-haul shipments that earn improved rates, and better blending opportunities. Second-half 2023 results should benefit from an even stronger 8% average increase, by our estimates. As a result, management increased its 2023 distributable cash flow guidance by $40 million to $1.26 billion. Our fair value estimate, which is based on Oneok’s offer for the partnership, is unchanged at $66 per unit. Similarly, our stand-alone fair value estimate if the deal were to fail (which we see as very unlikely) remains unchanged as well at $55 per unit, as does our wide moat rating.

The Magellan-Oneok merger is likely to close in the third quarter. The shareholder meeting to vote on the deal is scheduled for Sept. 21. We continue to think the outcome remains an excellent one for the vast majority of Magellan unitholders and expect it to close on time. We acknowledge that about a fourth of Magellan unitholders will probably face a sizable tax bill, as Magellan distributions have reduced their cost basis over the years to a very low cost. However, we see this issue as mainly timing (a tax bill now versus later). Considering the premium above our stand-alone fair value estimate, we see Magellan unitholders as essentially realizing considerable upfront value today instead of some distant and more uncertain point in the future. The alternative, assuming the stock trades at our lower fair value estimate, would mean less realized value after taxes for Magellan unitholders.