The roughly 50% decline in oil and gas prices since 2014 brought a number of energy stocks down with it. But some within the energy sector have fared better than others.

While many on the upstream side of the oil industry collapsed, well-run midstream MLPs like Magellan Midstream Partners (MMP) remained relatively intact.

On Jan. 24, Magellan raised its quarterly distribution to $0.855 per unit. This payout is a 9% increase from the same quarterly distribution the previous year.

This marked the 59th quarterly dividend increase for the company since its 2001 IPO. The current yield is 4.25%.

Magellan is a Dividend Achiever, a group of 272 stocks with 10+ years of consecutive dividend increases.

You can see the full Dividend Achievers List here.

Magellan hasn’t skipped a beat, even during one of the worst downturns for the oil industry in years. Its vast pipeline network, reliable cash flow, and steady dividend growth have fueled its impressive dividend growth.

Business Model

Magellan owns the longest refined petroleum products pipeline system in the U.S. In all, Magellan’s refined products and crude oil businesses have more than 11,000 miles of pipelines, and 23 terminals.

It has storage capacity for more than 95 million barrels of petroleum products such as gasoline, diesel fuel, and crude oil.

Source: Investor Relations

Its business model is as follows:

• Refined Products (58% of operating profit)
• Crude Oil (32% of operating profit)
• Marine Storage (10% of operating profit)

Magellan has access to nearly half of all refining capacity in the U.S.

Magellan has a key advantage that has insulated it from the downturn in the oil market, which is its fee-based business model.

It operates similarly to a toll road. Instead of relying on the price of oil, as oil producers do, Magellan charges fees based on volumes being transported and stored in its system.

Approximately 85% of Magellan’s annual profit comes from fee-based activities.

Source: December 2016 Investor Meeting, page 7

Magellan experiences less volatility when oil prices decline, which keeps cash flow steady.

MLPs typically report earnings in terms of distributable cash flow, or DCF. This is an alternative non-GAAP measure that describes the company’s cash flow that is available for distribution to holders.

Magellan’s distributable cash flow increased 7% in 2015, and set a record.

Thanks to its high-quality assets and defensive business model, it has also performed well throughout 2016.

Distributable cash flow decreased 2.3% over the first nine months of 2016, to $670 million. However, the decline was largely to an increase in capital spending. Adjusted EBITDA rose 2% through the first three quarters, which is a sign that demand for the company’s services is still strong.

Future cash flow should continue to grow, due to new projects.

Growth Catalysts

MLPs like Magellan count on new projects to fuel growth. The biggest project Magellan completed in 2016 was the Little Rock Pipeline expansion.

Source: December 2016 Investor Meeting, page 9

This project required $200 million of capital spending by Magellan, and has capacity for 75,000 barrels per day.

Moving forward, Magellan has several major projects in the pipeline. It expects to spend $750 million this year and next, on growth capital expenditures.

Source: December 2016 Investor Meeting, page 8

Magellan has a long track record of successful investments, with $4.4 billion placed in organic growth expenditures and acquisitions over the past decade.

The company also enjoys the benefit of access to some of the premier oil-producing fields in the U.S.

For example, Magellan 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.

The projected 33% increase in capacity is a credit to Magellan’s footprint in the Permian Basin, one of a few U.S. oil fields that produces more than 1 million barrels per day. The Permian Basin houses more than half of active drilling rigs in the U.S.

Magellan expects the increased capacity to be available in the second quarter of 2017.

Dividend Analysis

Magellan’s current annualized dividend totals $3.42 per share, which comes out to a 4.2% yield. The company has consistently raised its payout over the past 16 years.

Since its 2001 IPOI, Magellan has increased its dividend by 13% per year, on average.

Source: December 2016 Investor Meeting, page 18

Magellan has enriched investors by delivering a high yield, and achieving double-digit dividend growth each year.

Importantly, Magellan generates enough cash flow to cover its distributions.

If an MLP does not generate DCF above its annualized distribution, it can be a warning sign that the distribution may be unsustainable.

On a per-unit basis, Magellan generated DCF of $2.94 through the first nine months of 2016. For the full year, the company expects DCF to total $5.24 per unit.

Based on its current annualized dividend, Magellan’s payout ratio is 65%. The company distributes slightly less than two-thirds of projected 2016 DCF, which is a healthy payout ratio.

A key factor boosting its dividend sustainability is that the company maintains a healthy balance sheet.

At the end of last quarter, it held a debt-to-EBITDA ratio of 3.2. Magellan has kept its leverage below that of many other MLPs, which got them into trouble when commodity prices sank.

Source: December 2016 Investor Meeting, page 19

Magellan is committed to a maximum leverage ratio of 4 times debt-to-EBITDA. Its modest debt level allows Magellan to raise long-term capital at attractive rates. In September, Magellan issued $500 million of 30-year notes with an interest rate of 4.25%.

Magellan intends to grow its distribution by 8% in 2017. It believes it will maintain a 1.2 distribution coverage ratio for the upcoming year.

One factor helping to secure Magellan’s distribution is that there are no incentive distribution rights. This also leaves more cash flow available for distributions.

Final Thoughts

Investors have had to tread carefully in the energy sector over the past few years. Income investors have been well-served focusing on the best-of-breed MLPs, that do not require a high oil price to pay their dividends.

Magellan’s strong assets and future growth projects should allow the company to continue raising dividends each year.

Its dividend growth potential, combined with its hefty 4.25% yield, make Magellan an attractive selection for income investors.