Analyst Note| Stephen Ellis |
Magellan's first-quarter results were better than management's initial expectations, mainly due to stronger commodity margins due to higher oil and gas pricing and winter storm Uri contributions. Magellan has an extensive system of Texas pipelines for moving hydrocarbons, and the system saw higher volumes and longer-haul movements at presumably higher tariffs during the storm. Overall distributable cash flow still fell to $277 million from $307 million last year, but full-year 2021 guidance was bumped up $50 million to $1.07 billion due to the strong performance in the first quarter. Magellan's expectations around its refined products demand recovery in 2021 remained unchanged at 13%, made up of increases of 13% in gasoline, 10% in distillate, and 25% in aviation fuel. At first glance, we do not expect the change alone to be enough to move our $52 fair value estimate or wide moat ratings. We will maintain our fair value estimate while we incorporate these results into our model.
Magellan recently announced it has sold half of its stake in its Pasadena marine terminal joint venture (it retains 25%) for $270 million. We believe the asset sale was well timed, as previously, Magellan was not generating much in the way of free cash flow to apply to capital returns to shareholders this year, and this now allows for a more substantial return. The terminal, located along the Houston Ship Channel, includes over 5 million barrels of storage, docks, and loading facilities, and could double its capacity. Neither the buyer nor the expected earnings contributions were disclosed, but based on Magellan's recent asset sale history, we expect the price to be a fair to very good one. The asset proceeds are expected to be used to opportunistically return capital to shareholders via buybacks, and the partnership has nearly $475 million remaining on its buyback authorization after not making any purchases during the first quarter.