May 1, 2020 / 6:59 PM / a month ago

Magellan Midstream hit by diesel demand slump as oil drilling stalls

NEW YORK, May 1 (Reuters) - Magellan Midstream Partners LP said on Friday diesel volumes on its pipelines have declined as drilling activity in the Permian, the biggest shale basin in the country, falters as oil prices plunged due to the coronavirus pandemic.

Rig counts in the Permian, which spans Texas and New Mexico, are expected to decline by 50%, up from the company’s previous estimate of a drop of 30%, Chief Executive Michael Mears said during Magellan’s quarterly earnings call with analysts.

The drop in activity translates to a reduction of about $20 million-$30 million to distributable cash flow for the year, Mears said.

Oil producers, including majors Exxon and Chevron , have been rapidly sidelining Permian drilling equipment since the market started crashing in March.

Global oil demand plunged by about 30% in April as coronavirus-related lockdowns restricted billions of people from traveling around the world.

The oil industry was the fastest-growing customer for middle distillates like diesel between 2009 and 2014, according to the U.S. Energy Information Administration (EIA), accounting for 20% of the total increase in diesel consumption during the five-year drilling boom.

Magellan said it does not currently expect to defer any projects because most of its expansion projects are nearing completion and are supported by long-term agreements.

Construction for Magellan’s West Texas refined products pipeline expansion and new Midland, Texas, terminal are in the final stages, with both projects expected to begin operations in the early third quarter.

Expansion of the Saddlehorn pipeline is in process, with an incremental 100,000 barrels per day (bpd) of capacity expected to be available in late 2020.

Volumes on the company’s BridgeTex pipeline from Midland and Colorado City, Texas, to East Houston, Texas, fell to 407,000 bpd from about 419,000 bpd a year earlier. The average rate per barrel shipped also decreased, Magellan said.

“We do not anticipate spot barrels or any other uncommitted barrels on either BridgeTex or Saddlehorn for the remainder of the year, just given current differentials and the production outlook for the rest of the year, and our forecast assumes that volumes track customer commitments,” Chief Financial Officer Jeff Holman said during the call.

Diluted net income per common unit was $1.26 in the first quarter compared with 91 cents a year earlier. Magellan expects to spend about $400 million in 2020 to complete its current slate of expansion projects, with $155 million of that amount already spent during the first quarter. (Reporting by Devika Krishna Kumar in New York; Editing by Leslie Adler)

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