Published by Bob Ciura on March 15th, 2017
The oil price crash of 2015-2016 was a huge blow to the oil and gas industry. It created ripple effects that were felt across the entire energy sector.
Master Limited Partnerships, or MLPs, were among the hardest hit when commodity prices tumbled.
Several oil and gas MLPs cut their dividends. Some went bankrupt altogether.
However, it wasn’t all bad news.
A select few MLPs not only maintained their distributions through the crash, they actually kept on increasing their payouts.
For example, Sunoco Logistics Partners (SXL) and Magellan Midstream Partners (MMP) are both Dividend Achievers, a group of 271 stocks with 10+ years of consecutive dividend increases.
You can see the full Dividend Achievers List here.
Now that the energy sector is slowly recovering, both Sunoco and Magellan should continue to increase their dividends going forward.
This article will compare-and-contrast these two midstream MLP Dividend Achievers.
Both Sunoco and Magellan operate in the midstream space, which means they own and operate oil and gas transportation and storage assets. These assets include pipelines and terminals.
Sunoco and Magellan collect fees to store and transport oil and gas through their asset networks. Their cash flow is based on volumes, rather than the underlying commodity price.
For example, approximately 85% of Magellan’s cash flow comes from fee-based activities.
Source: Evercore ISI Energy Summit Presentation, page 7
This helps them generate steady cash flow, which in turn allows them to continue raising dividends.
Even when oil and gas prices crashed, they maintained their Dividend Achiever status.
Sunoco’s crude oil business involves approximately 5,900 miles of crude oil pipelines, with an aggregate storage capacity of approximately 28 million barrels.
Source: March 2017 Investor Presentation, page 7
Meanwhile, the NGL segment contains approximately 900 miles of pipelines, and terminals that hold approximately 5 million barrels of storage capacity.
Lastly, its refined products segment includes 1,800 miles of refined products pipelines, with approximately 40 active refined products marketing terminals.
Magellan operates more than 11,000 miles of pipelines, along with 23 terminals.
Magellan’s refined products segment generates more than half of its earnings. At the same time, just 13% of the company’s earnings come from commodity-based activities.
Source: Evercore ISI Energy Summit Presentation, page 4
Thanks to their fee-based business models and stable assets, both companies performed well in 2016.
Sunoco generated distributable cash flow, or DCF, of $943 million in 2016, up 7.9% from 2015. However, its DCF per unit declined 11% last year, to $3.09 per unit.
This is because Sunoco’s weighted average diluted units outstanding grew 21% in 2016.
Magellan’s distributable cash flow, rose 0.5% to $948 million last year. DCF per unit inched up from $4.14 to $4.15, as higher volumes and stronger fees offset an increase in units oustanding.
Not only did Magellan perform better last year, it also has a more attractive structure.
Both Sunoco and Magellan are MLPs, but Magellan contains no incentive distribution rights (IDRs).
This helps Magellan maintain a simpler organizational structure, which leads to a lower cost of capital.
And, IDRs are relatively unattractive for MLP investors, because they allow the general partner to a higher proportion of quarterly cash flow and distributions.
Going forward, the biggest growth catalyst for both Sunoco and Magellan is new projects. Midstream companies need to build new pipelines and terminals in order to grow.
Sunoco and Magellan are taking slightly different paths. Sunoco is more aggressive in acquisitions than Magellan.
Sunoco recently announced a $21 billion acquisition of Energy Transfer Partners (ETP).
Importantly, the huge acquisition should not be too much of a strain on Sunoco’s balance sheet. It is an all-stock deal, and Sunoco expects it will be immediately accretive to both DCF and DCF-per-unit.
Sunoco generated $1.2 billion of EBITDA in 2016. At the end of the year, it held $7.3 billion of total debt. This means Sunoco currently trades for a debt-to-EBITDA ratio of 5.93.
This is fairly high, and investors will need to closely monitor the balance sheet, to see if the company’s debt metrics improve from here.
Sunoco has invested heavily in future growth.
One of its most important projects is the Dakota Access Pipeline. This is located in the Bakken field.
Source: March 2017 Investor Presentation, page 21
The huge project has initial capacity for 470,000 barrels per day, and is expandable to 570,000 barrels.
The Bakken region is one of the highest-producing fields in the country. A major project there is very positive for Sunoco’s future growth potential.
Meanwhile, Magellan invested $5 billion in organic growth projects and acquisitions over the past 10 years. The company forecasts $900 million in construction spending this year and next year.
Source: Evercore ISI Energy Summit Presentation, page 8
Magellan has several new projects under development.
It recently came to an agreement with Plains All American (PAA) to expand capacity of the BridgeTex pipeline system from 300,000 barrels per day to 400,000 barrels per day.
Magellan expects the increased capacity to be available in the second quarter of 2017.
In January 2017, Magellan increased its quarterly distribution by 9% from the same quarterly distribution last year.
This was Magellan’s 59th quarterly dividend increase since its initial public offering, in 2001.
Sunoco also has an impressive history of dividend growth. In the fourth quarter of 2016, it passed through its 47th consecutive quarter over quarter distribution increase.
Magellan’s annualized distribution is now $3.42 per unit, which represents a current dividend yield of 4.4%.
This is a strong yield, since the S&P 500 Index on average yields just 2%.
However, Sunoco has a major advantage when it comes to dividend yield. Its annualized dividend payout of $2.08 per unit comes out to a hefty 8.6% yield.
Sunoco’s dividend yield is almost double Magellan’s.
Magellan is much more growth-oriented, while Sunoco has decided to distribute a much larger portion of its annual cash flow.
Sunoco expects to hold a distribution coverage ratio of slightly above 1.0, after its acquisition of ETP closes.
Magellan carried a distribution coverage ratio of 1.21 in 2016.
Magellan expects to increase its dividend by 8% in 2017 and 2018. It has a much higher coverage ratio, which means its dividend likely has more room to grow going forward.
However, Sunoco’s much higher yield gives it the edge.
Magellan and Sunoco are both growing distributable cash flow, and have the potential for future growth thanks to significant new projects.
Magellan has a stronger business model currently, based on its simpler structure (with no IDRs) and its ability to go without dilutive equity issuances.
Sunoco’s transformative acquisition of ETP, along with its massive 8.6% dividend yield, make it the more attractive MLP of the two.