Pipeline Earnings - Q2 2022 ($EPD $MMP)

[Previously regarding Magellan Midstream Partners (MMP) and Enterprise Products Partners (EPD): Magellan Midstream Reports First-Quarter 2022 Financial Results and Raises 2022 Annual Guidance, Enterprise Product Partners L.P. Reports Q1 2022 Earnings, Pipeline Earnings - 2021, Pipeline Earnings - Q3 2021, Magellan Midstream Partners, L.P..] 

Magellan Midstream Partners (MMP) reported results last week. Highlights from the results and conference call: 

• Earlier this morning, we reported second quarter net income of $354 million compared to $280 million in second quarter 2021. As noted in our press release, these results include a $162 million gain in the current period related to the sale of our independent terminals network, which is reflected in income from discontinued operations and a $70 million gain in the prior period primarily related to the sale of a portion of our interest in the Pasadena marine terminal joint venture. Excluding both of these gains, net income decreased about $18 million quarter-over-quarter.
• Drivers of the increase in transportation and terminals revenue included record high quarterly transportation volumes resulting from additional contributions from our recent Texas expansions and higher South Texas volumes, which moved at a lower rate as well as continued demand recovery from pandemic levels, especially of aviation fuel. For the quarter, total refined products volumes were up 3% versus '21 levels.
• During second quarter 2022, Magellan repurchased nearly 3.9 million of our common units for $190 million, resulting in total repurchases of 21.4 million units for $1.04 billion under our $1.5 billion repurchase program authorized through 2024. 
• As we previously announced, we closed on the sale of our independent terminals network on June 8 and have been actively putting those proceeds to work. Including working capital adjustments, we received a total of $447 million for these assets and deployed $190 million during the second quarter into our equity buyback program, underscoring our commitment to maximizing long-term value for our investors.
• Magellan continues to forecast annual DCF of $1.09 billion for 2022. The recent decline in commodity prices as well as the potential for slightly higher expenses during the second half of the year are currently projected to mostly offset our modest financial outperformance year to date. While management continues to monitor general economic conditions, including inflation and refined products demand, we do not expect a material impact to our annual guidance.
• In terms of high commodity prices and the gives and puts on demand, as we've mentioned many times in the past, gasoline and generally transportation demand is fairly inelastic. I think we were maybe testing that a little bit in early July with the prices we saw upon them. But we haven't, I don't think, broken that inelasticity. I still think it's very inelastic. So even with higher commodity prices, as long as they stay within sort of an expected range, not too extreme, we don't see a lot of commodity risk up -- whether prices are up or down really driving that volume one way or the other unless you get to an extreme, which again, we may have tested in July, but we've come off of those extremes. 
• [Guidance implicitly implies about $100 million more DCF in the second half of this year versus the first half of this year. Just wondering if you could walk through some of the drivers?] The first thing I would note is, one, the tariff increase is in the middle part of the year. The second piece I would note is that there is a seasonality to our business. If you look, we often have because of the timing of the butane blending activity, the fall is usually a more significant activity in the fall than it is in the spring. So there's some seasonality that comes with particularly our blending business. And then also our underlying pipeline has some seasonality to it. So there's some seasonality that's just sort of built in. In many ways, the second half of the year just tends to have more activity and do fundamentally better. So it's higher tariff rates, it's more activity due to seasonality in the back half of the year. 
• If you look at the forward curve for the differential between Midland and Houston or East Houston, the forward curve shows that there should be improving differentials over time. If you look right now what's happening, I wouldn't say that we're seeing dramatic improvements today in that differential, what we can earn today versus what we could earn yesterday, but directionally speaking, the forward curve is pricing in wider differentials, so we would expect those to improve from here. You're right, production continues to grow. As that production grows, it should minimize through time the amount of excess capacity out of the [Permian Basin], which should continue to drive. So it all makes fundamental sense that we should start seeing some higher differentials. I still think that the question is, when are they going to show up where you can actually realize them and start seeing them in the results. And we're just not there yet, but we certainly see the potential for improvement as we look out over 2023 and certainly as into 2024 and beyond.
  

The common carrier pipeline system for refined products that Magellan owns is the longest in the United States, extending approximately 9,800 miles from the Texas Gulf Coast and covering a 15-state area across the central U.S. It has 54 product terminals throughout those states. It is interesting to hear their comments that there was only a mild impact on refined product demand even in July. That is consistent with what we have heard from Valero, but not consistent with the gasoline product demand data that has been put out by the EIA - not since they had a two week data delay in June.

They shipped 143 million barrels of refined products in Q2 2022 versus 139 million in Q2 2021 and 132 million in Q2 2019. Aviation fuel volume has recovered to 8 million barrels this quarter, not quite back to the 10 million in Q2 2019, but a big recovery from 3 million in Q2 2020. Revenue per barrel of refined product shipped is $1.73 vs $1.61 in 2019.

Magellan management has said in the past,

"As we go through an energy transition cycle over the next five or 10-years, it's reasonable to assume that you have more refinery rationalization. And typically speaking for a pipeline company that is a net positive, because it creates incremental transportation opportunities basically to fill the hole that if a refinery closure is creating. And we have a system that's ideally situated for that since we're connected to half the refining capacity in the country. And so, we're not supply constrained in any way. So if we have a refinery close in a certain market, we've got plenty of sufficient supply. And in most cases, sufficient capacity to fill that hole with barrels removed over a longer haul, which is typically a higher tariff. So, I think we do have operating leverage going forward around our refined product system."

The current market capitalization of Magellan is $10.3 billion and enterprise value is $15.3 billion. So far this year, they have generated about $490 million of free cash flow (EBITDA less capex, excluding cash from the sale of the independent terminals network). That annualizes to a 6.4% FCF/EV yield. Their guidance of $1.09 billion of distributable cash flow implies a shareholder yield of 10.6%.

Enterprise Products Partners (EPD) also reported results last week. Highlights from the results and conference call:

• Enterprise reported record net income attributable to common unitholders of $1.4 billion, or $0.64 per unit on a fully diluted basis, for the second quarter of 2022, compared to $1.1 billion, or $0.50 per unit on a fully diluted basis, for the second quarter of 2021.
• Distributable Cash Flow, excluding proceeds from asset sales, increased 30 percent to a record $2.0 billion for the second quarter of 2022 compared to $1.6 billion for the second quarter of 2021. Distributions declared with respect to the second quarter of 2022 increased 5.6 percent to $0.475 per unit, or $1.90 per unit annualized, compared to distributions declared for the second quarter of 2021.
• Capital investments were $383 million in the second quarter of 2022, which included $301 million of growth capital expenditures and $82 million for sustaining capital expenditures. Capital investments were $3.9 billion for the first six months of 2022, which included $3.2 billion for the acquisition of Navitas Midstream, $576 million of growth capital expenditures and $157 million for sustaining capital expenditures.
• Gross operating margin from the NGL Pipelines & Services segment increased 21 percent to a record $1.3 billion for the second quarter of 2022, from $1.1 billion for the second quarter of 2021.
• Gross operating margin from the partnership’s Crude Oil Pipelines & Services segment was $407 million for the second quarter of 2022 compared to $419 million for the second quarter of 2021. Gross operating margin for the second quarters of 2022 and 2021 included non-cash, MTM losses related to hedging activities of $38 million and $10 million, respectively. Total crude oil pipeline transportation volumes increased to 2.2 million BPD in the second quarter of 2022 from 2.0 million BPD for the second quarter of 2021.
• Gross operating margin from Enterprise’s Natural Gas Pipelines & Services segment increased 13 percent to $229 million for the second quarter of 2022 from $202 million for the second quarter of 2021. Total natural gas transportation volumes increased 19 percent to a record 16.8 TBtus/d for the second quarter of 2022 from 14.2 TBtus/d for the second quarter of 2021.
• Gross operating margin for the Petrochemical & Refined Products Services segment increased 29 percent, or $95 million to $421 million for the second quarter of 2022 compared to $326 million for the second quarter of 2021. 
• U.S. energy independence is now more valuable than ever. It is clear that Russia has a strangle hold on Europe. And Russia and China appeared to be aligned in policies that are in direct conflict with Western Values. Fortunately, the U.S. has an abundant energy resource. It is the fact that our crude oil, NGLs, LNG cargos are the only short cycle resources the world has left. We have tremendous hydrocarbons potential, but unfortunately it is squandered in the current political climate that is intent on restricting its development. 
• Appalachia alone has over 25 Bcf a day of production upside, that's more than what Europe imports from Russia. However, this potential is unattainable, not by economics or resource, but by massive amounts of laws and regulations that are vague best and consistently applied and consistently. In addition to being the only short cycle resource the world has, our energy is environmentally superior. It's much cleaner because it comes from shale and it's produced here in the U.S. under environmental and safety standards that are second to none, it’s not oil and gas versus renewable debate as so many make it out to be.
• Enterprise’s view has always been, we are absolutely going to need it all. And what most call energy transition is actually going to be badly needed energy additions that will take place gradually. Oil and gas will be in high demand for decades. People who say otherwise are either extremely naive or have their own agenda. Demonizing fossil fuels, overt restrictions on investments and massive layers of regulation that are designed to keep it in the ground will only creep chaos in the form of ever increasing shortages and high prices.
• Moving on to distributions and buybacks, we declared a distribution of $0.475 per common unit with respect to the second quarter of 2022. This is 5.6% higher than the distribution that we declared for the second quarter of last year. This distribution will be paid next week on August 12 to common unit holders of record as of the close of business on July 29. During the quarter, we also repurchased approximately 1.4 million common units at a cost of $35 million. For the 12 months into June 30, we returned over $4 billion of distributions to limited partners and $235 million of buybacks. So for the last 12 months, our payout ratio compared to adjusted cash flow from operations was 56%. And our payout ratio of adjusted free cash flow after excluding the acquisition, the $3.2 billion acquisition of Navitas Midstream was a payout ratio was 72%.

The current market capitalization of Enterprise is $56 billion and the enterprise value is approximately $85 billion. Their free cash flow for the second quarter was $1.75 billion which annualizes to $7 billion a year, an 8% FCF/EV yield. The company is trading for 10 times this quarter's earnings. 

Pipelines are a kind of hedge against over-production by E&P firms. If they bump up against the pipeline transport capacity in a given location (like the Permian), the pipelines' profits should increase sharply since they are bidding for an inelastic supply.