On Jan 27, 2014, we downgraded Tulsa, Oklahoma-based publicly traded energy pipeline partnership Magellan Midstream Partners, L.P. (MMP) to Neutral from Outperform. Our revised investment thesis is supported by a Zacks Rank #3 (Hold).
Why the Downgrade?
We believe that the firm’s operating scenario will remain critical in the near to medium term. Magellan Midstream is also susceptible to lower-than-expected demand for refined products, commodity price fluctuations and cost overruns on expansion projects.
Detailed Analysis
Magellan Midstream owns an attractive portfolio of energy infrastructure assets that generate stable and recurring fee- and tariff-based revenues. This includes the longest U.S. refined petroleum products pipeline system, access to more than 40% of refining capacity in the continental U.S. along with imports, and 85 petroleum terminals with more than 80 million barrels of storage.
Magellan Midstream has established a track record of consistent distribution growth – its current quarterly distribution 55.75 cents per unit ($2.23 per unit annualized) is up by 325% since its initial public offering (IPO) at the beginning of 2001.
Apart from increasing the capacity of the Crane-to-Houston crude oil pipeline, Magellan Midstream is also involved with a number of collaborations – Double Eagle joint venture pipeline project, along with the associated Corpus Christi storage facility venture. The partnership has also successfully completed additional storage at the Galena Park marine facility, thereby enhancing its overall performance level.
However, the actual amount of cash distributed to Magellan Midstream unitholders may fluctuate and are directly exposed to the partnership’s future operating performance, which is susceptible to movements in margins and throughput volumes. Realized margins and/or volumes could differ significantly from our estimates, thereby affecting Magellan Midstream’s cash distributions.
Moreover, as is the case with other MLPs, results for Magellan Midstream Partners are directly exposed to refined product demand, which are inherently volatile and subject to complex market forces.
Stocks That Warrant a Look
While we expect Magellan Midstream to perform in line with its peers and industry levels in the coming months and advice investors to wait for a better entry point before accumulating units, one can look at Linn Co. LLC (LNCO), Athlon Energy Inc. (ATHL) and Warren Resources Inc. (WRES). These U.S. upstream energy operators – sporting a Zacks Rank #1 (Strong Buy) – have recorded solid growth and have the potential to rise significantly from the current levels.
To read this article on Zacks.com click here.
Get all Zacks Research Reports and be alerted to fast-breaking buy and sell opportunities every trading day.
Be the first to comment