An anticipated oversupply of crude oil pipeline transportation capacity out of the Permian Basin could push some midstream operators to convert their assets to accommodate other fuels, including renewables, Magellan Midstream Partners LP CEO, President and Chairman Michael Mears said.
Utilization of Permian-to-Gulf Coast pipelines, which have become the biggest moneymaker thanks to crude oil exports, will drop from approximately 90% at the end of 2019 to about 65% this year, according to CreditSights, with Plains All American Pipeline LP, Enterprise Products Partners LP and Energy Transfer LP having the most exposure to that trend.
"It's likely if we get into that scenario that participants in the market will start evaluating conversions of their pipes to other services," Mears said during Magellan's Feb. 2 fourth-quarter earnings conference call. "I can tell you, we think about it if the need is there to do that with our pipes. ... If you get into an environment where the margins are so low, all the contracts are gone, you have excess capacity, so everyone's fighting per barrel with extremely low tariffs, then there's going to be a huge incentive for people to look for economic conversions and take capacity out of the market."
To help mitigate fallout from the crude pipeline overbuild, Magellan and Enterprise recently agreed to develop a futures contract to deliver fuel from the Permian Basin to Magellan's East Houston terminal or Enterprise's ECHO terminal.
"One thing we're trying to do to prepare for that, if it happens, is to make Houston the most desirable location for physical barrels by advancing a very liquid futures contract with access to the water," Mears noted.
In the meantime, Magellan is eyeing its own pivot to renewable energy by watching legislation in its Minnesota, Colorado, Iowa and Missouri markets that would raise ethanol mandates or establish biodiesel mandates.
"Those create opportunities for us, either by investing in blending infrastructure at the terminals, particularly for biodiesel because we don't have blending infrastructure at all of our terminals for biodiesel, or for blending for pipeline transportation," Mears said. "There's no market for that today in our market areas, but if states enact low carbon fuel standards, there may be a market for that."
Magellan separately on Feb. 2 reported fourth-quarter 2020 adjusted EBITDA of $340.3 million, down from $433.8 million in the prior-year quarter. The S&P Capital IQ consensus adjusted EBITDA estimate for the fourth quarter of 2020 was $327.2 million.
The partnership's distributable cash flow in the fourth quarter of 2020 was $269.7 million, down from $357.8 million a year earlier.