Its roots in the pipeline business date back more than 80 years. Today, Magellan Midstream Partners LP owns the longest petroleum products system in the U.S., serving more than 40% of the nation’s refining capacity with 9,600 miles of pipelines. The company also owns and operates more than 80 terminals with more than 80 million barrels of storage. It also has a 1,100-mile ammonia system. This strong foundation gives its chief executive an excellent viewpoint on current trends in the midstream.

MIDSTREAM Please talk for a moment about how you entered the pipeline industry and how it has changed during your career.

MEARS I’ve been in this business my entire career. I started with The Williams Cos., which was the predecessor of Magellan, right out of college. I had an engineering degree, started in the engineering department at Williams and slowly moved up through engineering and operations positions. Ultimately, I moved into the commercial side of the business. I just stayed with it.

As far as what’s changed in the industry, two factors have led to an environment in recent years where the industry is much more dynamic. Back in the ’80s and ’90s, the midstream infrastructure business was kind of a sleepy, slow-growth, very stable business. If you fast-forward to today, it’s very dynamic. There are lots of moving parts; lots of changing environments. The renaissance we’re seeing with regard to oil and natural gas production in this country, also the master limited partnership [MLP] structure, makes access to capital easier so these opportunities can be pursued in an efficient manner.

MIDSTREAM What is Magellan’s advantage? What makes it a compelling addition to an investment portfolio?

MEARS Magellan really has a good mix of stable business and strong growth in relatively low-risk businesses. Magellan has always been viewed as a conservative company in the midstream space—and that’s attractive to a number of investors.

When the market is dynamic and people are spending a lot of capital, there’s a class of investors who like to have the reassurance that they’re not overpaying for assets or not overbuilding assets, and we’ve got a long track record of prudence. We’ve got a base business, refined products, that are very stable. It’s very well established, it’s got a long track record of consistent growth that the market recognizes. I think that is reflected in the valuations of our units.

Then you can couple that with the growth projects that we have, primarily in crude oil, which are all very low risk from an investor standpoint and all fully committed, they’re all being built in some of the prime spots with regard to oil production, particularly in the Permian basin.

When you put those two things together—a solid, stable core business and substantial growth that’s relatively in a low-risk environment—that’s very attractive to investors.

MIDSTREAM You’ve had some major asset additions in 2013, including the new Longhorn and Double Eagle startups. Next year, you forecast the BridgeTex project to go online. What has been the biggest challenge in adding these assets to your existing operations?

MEARS These projects are not substantially different from what we do today. The issue is really execution, to get them built on time and on budget—and safely. If you look at the amount of capital we’re spending this year and next year, about $1.3 billion, that’s more than what we’ve spent on growth capital through the entire history of Magellan as a public company—just in these two years. When you’re investing that kind of capital and you’re starting projects of that size, that’s where you can see the challenges in the organization with regard to execution.

MIDSTREAM You mentioned in a recent investor presentation that quality midstream assets are on the market. Do you see further, attractive acquisitions in Magellan’s near future?

MEARS We look at everything that’s on the market and at this point there are quite a few assets available. We have a disciplined approach to acquisitions. Even for assets that we would really like to own, that would fit well into our system and complement our system, we’ve been very disciplined to not overpay. As a result, we’ve lost a lot of bids.

If you compare our acquisition history versus our peers, as far as number of deals done, we’re probably at the bottom of the list. But if you compare our acquisition history versus our peers on the quality and the performance of the acquisitions after purchase, I’d say we’re at the top. And the only way you do that is if you are very disciplined. You must be willing to walk away from quality assets if the price gets too high.

If you take that to the current environment, prices are very high. We’re in a seller’s market for assets, so it’s very aggressive out there. I can tell you that in the investment community, that’s what they want to hear.

MIDSTREAM You recently raised your guidance on distributable cash flow for this year and 2014. You must be positive about the direction of your business, what makes you optimistic?

MEARS We’ve been optimistic about our future for quite some time. We’re generally conservative, though, when it comes to giving guidance. For instance, this year we began transporting West Texas crude oil on our Longhorn Pipeline system. We had a projected schedule for Longhorn when we went into this year. However, we don’t like to give guidance assuming everything works perfectly. We like to give guidance that gives us some margin for error because oftentimes everything doesn’t work perfectly.

As we get further into a year—and this happened with Longhorn—we get to the point of start up and things are working as expected. That gives us the confidence to raise our guidance.

The other thing that’s happened is the strength of our gasoline-blending business. That business is entirely tied to the margin between butane and gasoline. There has been significant strength in that margin. Gasoline prices have continued to remain relatively high, yet because of all the tremendous growth in the NGL [natural gas liquids] production domestically, the margin between butane and gasoline has widened.

It’s probably too early to call that a structural change but that development also gave us confidence to raise guidance.

MIDSTREAM The rise in conventional shale plays has scrambled operations for much of the pipeline business. How has it impacted the products side?

MEARS You really have to dive down deep to see what’s happening with the growth in crude oil production. With that growth, the most significant thing that has been done is making U.S. refining capacity more profitable and more competitive in the world market.

One outcome of that is the desire for Gulf Coast refiners to export refined products. That’s also partly because of the declining refined product demand in the U.S. But the more competitive those refiners become in the world marketplace because of the abundance of low-priced crude domestically, the more they want to export. That benefits our marine facilities. It increases the value of storage that’s on the water.

The other thing I think is significant—this is probably one that’s less obvious to folks who don’t dive down deep into what happening—is that if you look at land-locked refineries, in Oklahoma or Kansas for instance, their crude oil supply is even cheaper than that on the Gulf Coast. They’re closer to the production.

What does that mean? Historically, what happens is as we go through seasonal demand, ups and downs, particularly gasoline in the Midcontinent, when we get into winter and gasoline-demand declines, those refiners will typically reduce their production rates to meet the demand. And the margins were very low usually in that environment, so they were also incented to reduce runs. There were many years where refiners were losing quite a bit of money, particularly in the winter months, just because demand and margins were so low.

Now you have an environment where crude oil is very low priced, and as a result the margins are strong—even in the winter. Those Midcontinent refineries want to run 100% all the time. If there’s not enough demand in the Midcontinent to consume all production, then those refiners are looking for new outlets for their products, which creates opportunities for us.

MIDSTREAM Long-term demand for gasoline and diesel fuel, the two main products you move, has been changing with gasoline use declining and diesel demand rising. Has that changed your operations?

MEARS It really hasn’t changed our core business significantly. The decline in gasoline has been very gradual. Diesel fuel has been growing, but also it’s relatively gradual. Those aren’t the kind of changes that dramatically affect day-today operations.

These projections, I’ll note, haven’t been correct this year. Our gasoline demand is up and our diesel demand is up even more than we expected. I think that points to the stability of the market.

MIDSTREAM You mentioned your marine terminals, how is that business changing?

MEARS When you talk about marine terminals, you have to be specific because each of the markets is changing. What’s happening in the Northeast is different than what’s happening on the Gulf Coast.

Our biggest terminals are on the Gulf Coast. The two big ones are in Houston and Corpus Christi, Texas. What we’re seeing there, to elaborate on what I said earlier, is continued growth in exports of refined products. The utilization of those facilities continues to remain strong. The value of storage we’re expecting to strengthen over time as people need access to the water.

MIDSTREAM What has changed at the Cushing, Oklahoma, hub? Is the glut subsiding or just moving to the Gulf?

MEARS Obviously the inventory levels at Cushing, at least for right now, are declining. That is just one point in time and that doesn’t necessarily reflect the long-term need for storage in Cushing.

Cushing is going to continue to be a hub. It’s still going to be a location where most of the heavy Canadian flows through. You’ve got a significant amount of light crude that’s still coming into Cushing and will continue to do so. It’s an ideal location to blend crudes. As long as you’ve got unrestricted pipe access from Cushing to the Gulf, which we’re moving toward, it’s going to continue to be a location where people want to store and blend crude oil. It’s much cheaper to lease a tank in Cushing than it is in Houston. If you can manage your business in Cushing, I think a lot of people will stay there.

Part of the reason you’ve seen a big decline lately is the steep backwardation in the market because we have this forecast of significant growth in light and crude oil in the U.S., and it has the potential to over-supply our refining capacity, which will drive prices down. However, this is a point-in-time data point, and we would expect markets to cycle between periods of contango and backwardation as they have historically done.

MIDSTREAM What’s the biggest challenge to the pipeline industry today? How can the industry respond?

MEARS One thing that comes to mind is safety. We’re in an environment today where the industry is absolutely focused on keeping your pipeline safe, which requires capital.

I think the other thing that concerns the industry is the situation in Washington about taxation of MLPs. If that were to change, if Congress for some reason were to eliminate the MLP structure, we think that the amount of investment and our access to capital will certainly be reduced. We’re optimistic that Congress is not going to change things, but that’s certainly an issue we will remain engaged in for the foreseeable future.