Magellan Midstream Partners invests significantly in the Permian

Market Realist

Rising production benefits midstream MLPs in the Permian Basin (Part 6 of 8)

(Continued from Part 5)

MMP’s assets and capex in Permian

Magellan Midstream Partners (MMP) has made significant investments in pipelines in the Permian region. It delivers crude oil from the Permian Basin in west Texas to markets along the U.S. Gulf Coast. Most of MMP’s major assets, both current and under construction, are located in the Permian. These include the Longhorn crude oil pipeline and the BridgeTex pipeline, which is still under construction. The pipeline capacity for both of these pipelines is 275,000 bpd (barrels per day) and 300,000 bpd. By 2030, MMP plans to increase the pipelines’ capacities to over 1.1 million barrels per day through new growth projects.

In 2013, MMP spent ~$773 million on growth projects, acquisitions, and investments in non-controlled entities. The recent Permian Basin projects, the Longhorn and BridgeTex pipelines, are expected to complete in mid-2014 and will be a significant source of growth for Magellan. Based on the expansion projects currently under construction, MMP expects to spend $700 million during 2014, with an additional $325 million spent in 2015 and $75 million in 2016 to complete the projects currently in progress.

BridgeTex Pipeline

MMP is also slated to begin operation on the BridgeTex pipeline in the second quarter of 2014. BridgeTex is MMP’s joint venture with Occidental Petroleum (OXY) to deliver crude oil from the Permian Basin to the Houston Gulf refinery region. It’s important to note that OXY is part of the Energy Select Sector SPDR Fund (XLE).

Longhorn pipeline

The Longhorn pipeline, which began operation is April 2013, continues to drive the crude oil volumes higher—averaging 200,000 barrels per day during the first quarter of 2014. Also, MMP received a regulatory approval to increase Longhorn’s capacity to 275,000 barrels per day. It expects to average about 240,000 barrels per day during the second quarter and 250,000 barrels per day during the second half of the year.

MMP management’s views

In the company’s conference call for its 1Q14 earnings, Michael Mears, the chairman and chief executive officer, commented on the company’s outlook in the Permian Basin. He said, “If you look at the long-haul pipeline takeaway capacity from the Permian. It’s our view, at least at this point in time, based on the current production forecasts that if — or I should say, when all of the pipelines that are being built that have been announced are actually completed that there will be adequate takeaway capacity from the Permian Basin to match the production growth. So at this point in time, we’re not envisioning any additional long-haul takeaway capacity from the Gulf. We are, however, looking at opportunities to expand our reach on the origin ends of our pipelines in the Permian Basin and also to expand our capabilities at the destination end, in the market for connectivity to refineries and storage in those markets.”

Midstream Permian companies

The midstream energy companies that engage in the transportation and logistics of crude oil and natural gas have been very active for the past five years as a result of increasing production in the Permian Basin. The master limited partnerships in the midstream space that have benefited the most from the shale boom include Enterprise Products Partners LP (EPD), Sunoco Logistics Partners LP (SXL), Magellan Midstream Partners (MMP), and Energy Transfer Partners (ETP). These are components of the Alerian MLP ETF (AMLP).

Continue to Part 7

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