Pipeline operator Magellan Midstream Partners, L.P. (MMP) announced strong third quarter 2011 results, aided by contributions from recently-completed acquisitions and expansion projects.
The Tulsa, Oklahoma-based oil distributor reported earnings per unit (EPU) of 79 cents (excluding mark-to-market commodity-related pricing adjustments), surpassing the Zacks Consensus Estimate of 72 cents and the year-ago adjusted profit of 54 cents.
Total revenues, at $435.5 million, were up 7.2% year over year and were also above the Zacks Consensus Estimate of $405.0 million.
Quarterly Distribution
Recently, Magellan raised its third quarter 2011 cash distribution by 1.9% sequentially and 7.4% year over year to 80 cents per unit ($3.20 per unit annualized). The cash distribution is up 205% since its initial public offering (IPO) in the beginning of 2001. Magellan’s new distribution is payable on November 14 to unitholders of record as on November 1, 2011.
Segmental Performance
Petroleum Products Pipeline System: In the Petroleum Products Pipeline System, quarterly operating profits (before affiliate G&A and D&A expenses) were a record $149.1 million, up 34.7% year over year. The increase reflects higher transportation and terminals revenues as well as improved fees for leased storage, partially offset by increase in operating expenses.
Petroleum Products Terminals: In the Petroleum Products Terminals segment, operating margin was a record $40.3 million, up 36.5% year over year. The improvement reflects the recently acquired/constructed tankage at the partnership’s storage facilities, as well as higher ethanol and additive fees, partially offset by lower throughput volumes.
Ammonia Pipeline System: The partnership’s Ammonia Pipeline System reported an operating loss of $1.7 million, narrower than the $7.6 million lost in the third quarter of 2010. The segment results were favorably affected on account of higher revenues and lower operating expenses.
2011 Guidance
Management continues to expect distributable cash flows of approximately $445 million for the full year and is targeting an annual distribution growth of 7%. Magellan guided towards fourth-quarter and full-year earnings per unit of 93 cents and $3.62, respectively.
The partnership plans to spend approximately $240 million on growth projects in 2011, $270 million in 2012, with expenditures of $65 million thereafter required to complete these projects in 2013. Additionally, the partnership continues to look for more than $500 million of potential growth projects in the earlier stages of development.
Our Recommendation
Magellan Midstream units currently retain a Zacks #3 Rank, which translates into a short-term Hold rating. We are also maintaining our long-term Neutral recommendation on the stock.
We appreciate Magellan’s highly stable/recurring cash flows, as well as its low cost of capital and strong distribution coverage. Additionally, the partnership – with more than $500 million of potential projects under development – has attractive growth potential, and maintains a sound liquidity position.
However, we still believe that the operating scenario for pipeline operators will remain critical. Magellan is also susceptible to lower-than-expected demand for refined products, commodity price fluctuations and cost overruns on expansion projects.
As such, we believe Magellan Midstream’s current valuation adequately reflects its fairly balanced risk/reward profile with limited upside potential.
Magellan Midstream competes in the ‘Oil/Gas Production Pipeline MLP’ industry with firms like Atlas Pipeline Partners L.P. (APL), Enterprise Products Partners L.P. (EPD), Plains All American Pipeline L.P. (PAA), etc.
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MAGELLAN MDSTRM (MMP): Free Stock Analysis Report
PLAINS ALL AMER (PAA): Free Stock Analysis Report
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