Analyst Note| Stephen Ellis |
Magellan’s second-quarter results were solid, as its 2021 guidance for distributable cash flow at $1.07 billion remained unchanged. After updating our model, our $52 fair value estimate and wide moat rating remain unchanged. Second-quarter trends for the refined products and crude-oil segments have continued to meet management’s and our expectations, while product sales have outperformed slightly as a result of better blending opportunities in the first half. This benefit is expected to be offset in the second half of the year, given weaker expected margins and the fact that Magellan has now hedged 80% of its exposure.
Magellan’s capital allocation continues to support our Exemplary rating. Growth capital spending is still expected to be $75 million in 2021 demonstrating rigorous investment evaluation, though we expect it to increase to around $200 million in 2022, as Magellan has several small opportunities that we expect it to move forward on. However, asset sales of $271 million in 2021 and another $435 million awaiting regulatory approvals and expected to be completed in 2022 lift free cash flow after distributions to $350 million this year and over $400 million in 2022. The level of free cash flow allows for buying back of units, and Magellan bought back $82 million during the quarter. With leverage at already at reasonable levels, we think there’s considerable scope to continue to buy back units going forward.