We are upgrading our long-term recommendation on Magellan Midstream Partners L.P (MMP) to Outperform, based on its better operating results, various growth projects and strong cash distribution level.
Tulsa, Oklahoma-based Magellan Midstream Partners is a master limited partnership that owns and operates a diversified portfolio of energy infrastructure assets, capable of generating stable and recurring fee- and tariff-based revenues.
The partnership performed impressively during the second quarter of 2012, aided by higher demand and rates for its services. Quarterly earnings per unit came in at $1.01 (excluding mark-to-market commodity-related pricing adjustments), striding ahead of the Zacks Consensus Estimate of 87 cents and the year-ago adjusted profit of 91 cents.
Over the last few months, Magellan Midstream entered into a number of alliances to improve its operations. Apart from increasing the capacity of the Crane-to-Houston crude oil pipeline, Magellan Midstream is also engaged in a number of collaborations – Double Eagle joint venture pipeline project, along with the associated Corpus Christi storage facility venture. The partnership is also approaching completion of the storage units at the Tulsa pipeline terminal and Galena Park marine facility.
In early July, Magellan Midstream along with Occidental Petroleum Corporation (OXY) announced its plans to set up a joint venture to build a 400-mile long oil transport pipeline – The BridgeTex.
We also believe that lucrative acquisitions and organic growth projects have contributed immensely toward Magellan Midstream’s development. Over the last 8 years, the partnership has invested nearly $2.5 billion for various ventures and takeovers.
For 2012, the partnership plans to spend approximately $500 million on growth, with expenditures of $200 million thereafter required to complete these projects. Additionally, the partnership continues to look out for more than $500 million of potential growth projects in the earlier stages of development.
Additionally, operating within the energy sector, Magellan Midstream remains highly susceptible to market risks including commodity prices and interest rate. The partnership has adopted the strategy of entering into derivative agreements to control the effects of these risks.
Magellan Midstream has also established a track record of consistent distribution growth – its current quarterly distribution of $0.9425 per unit ($3.77 per unit annualized), up 12.2% sequentially and 20.1% year over year. Management’s aim to reach annual distribution growth of 18% for 2012 and increase the payout by an additional 10% in 2013 is expected to unlock significant unitholder value.
Magellan Midstream currently retains a Zacks #1 Rank, which translates into a Strong Buy rating for a period of one to three months.
MAGELLAN MDSTRM (MMP): Free Stock Analysis Report
OCCIDENTAL PET (OXY): Free Stock Analysis Report
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