Permian Basin crude oil pipeline capacity will outstrip demand for at least three to five more years, Magellan Midstream Partners LP CEO, President and Chairman Michael Mears said.
"There's really low incentive for shippers to commit to long-term contracts" until the market tightens," he said during the master limited partnership's April 29 first-quarter earnings conference call. "You may be able to get short-term contracts secure to lock in short-term pricing, but it's a challenging environment."
Utilization of Permian-to-Gulf Coast pipelines, which have become the biggest moneymaker due to crude oil exports, will drop from approximately 90% at the end of 2019 to about 65% this year, according to CreditSights. If that does not rebound within five years, competition for barrels will be even tougher, Mears said.
"If you go out five years from now, hopefully ... something's been rationalized such that you don't have an acute problem," he said. "But assuming that nothing's changed, you're going to have a very low-tariff environment. ... The rates are going to be very competitive."
While pipeline mergers could "optimize" asset use, Mears said that trend is not likely on the horizon.
"There's a number of challenges currently to get that done. One of those is, many pipelines have existing contracts, and it's difficult to harmonize multiple pipeline systems that all have different contracts with different tariff rates and different conditions into, say, one pipe," the CEO explained.
Enterprise Products Partners LP, however, pursued that structure for its Midland-to-ECHO 3 pipeline by teaming up with the Wink-to-Webster pipeline under development by Exxon Mobil Corp., Plains All American Pipeline LP and other partners that is expected to start up this year. Wink to Webster Pipeline LLC and Enterprise will jointly own Midland-to-ECHO 3, while Enterprise will also take a 29% undivided joint interest in the Wink-to-Webster pipeline, meaning it gets paid only for the capacity it owns and controls where those barrels flow.
"We do our own scheduling; the other partners have no idea whose barrels are on that pipe. Other than turning valves, we operate the thing just like we do our other pipelines," Enterprise co-CEO Jim Teague said in 2020.
Magellan on April 29 reported first-quarter adjusted EBITDA of $344.1 million, a drop from $380.5 million in the prior-year period. The S&P Capital IQ consensus adjusted EBITDA estimate for the first quarter was $319.4 million.
The partnership's distributable cash flow in the first quarter was $276.5 million, a decrease from $306.5 million in the year-ago quarter.
Magellan boosted its 2021 DCF guidance by $50 million to $1.07 billion.