Business Strategy and Outlook| Stephen Ellis |
Magellan’s refined product pipelines are high-quality assets that have contributed to earnings stability as well as steady increases in distributions over time. The pipelines connect refineries to end markets such as gas stations and railroads. As both supply and demand are remarkably steady over time, Magellan has been able to extract modest inflation-linked price increases. However, investment opportunities have been more limited in the refined products segment. As a result, Magellan has invested more than $5 billion largely elsewhere since 2010 and has built up a respectable but ultimately more volatile and lower-quality crude oil pipeline, which now contributes about a third of operating margin. While the competitive intensity of the new businesses is higher than the core refined product pipelines, we’ve been impressed by Magellan’s capital discipline, as the projects have yielded high returns and supported continued distribution growth.