Magellan Midstream Partners, L.P. Teams Up to Deliver Higher-Octane Returns

Magellan Midstream Partners (NYSE: MMP) currently has more than $1 billion of expansion projects under construction that should enter service over the next two years. Most of these projects will deliver exceptionally high returns, with the company targeting a six to eight times multiple of earnings before interest, taxes, depreciation, and amortization (EBITDA), or about a 14% yield on capital at the midpoint. One project, however, stood out because the company only expected a return of 12 times EBITDA on the initial phase. Given the weaker returns of that project, it would make it harder for Magellan to maintain its current distribution growth pace of 8% per year, especially considering that, until recently, it lacked other visible projects coming down the pipeline.

That said, Magellan announced this week that Valero Energy (NYSE: VLO) would join it as a partner to expand that facility further. That deal should improve the overall returns of that project, and when combined with some other recent expansion project announcements, gives investors increasing clarity into the company's ability to continue to grow its distribution after next year.

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Source: Fool.com