Magellan Midstream Partners L.P.
) weak third quarter financial results, we have downgraded the
oil pipeline and storage partnership to Neutral from Outperform.
Tulsa, Oklahoma-based Magellan Midstream Partners is a master
limited partnership (MLP) that owns and operates a diversified
portfolio of energy infrastructure assets. The partnership
primarily transports, stores and distributes refined petroleum
products and to a lesser extent, ammonia.
In 2011, the partnership's pipeline volumes comprised 50%
gasoline, 33% distillates (which include diesel fuels and heating
oil), 10% crude oil, and 7% Liquefied Petroleum Gas
(LPG)/aviation fuel. Magellan conducts its operations in three
segments: Petroleum Products Pipeline System, Petroleum Products
Terminals and Ammonia Pipeline System.
On October 31, Magellan Midstream announced dull third quarter
2012 earnings, with poor contributions from the business units.
The oil distributor reported earnings per unit (EPU) of 35 cents
(excluding mark-to-market commodity-related pricing adjustments),
unchanged from the profit of the prior-year quarter. The result,
however, fell shy of the Zacks Consensus Estimate of 44 cents.
Total revenues, at $325.9 million, were down 25.2% year over year
and were also below the Zacks Consensus Estimate of $468.0
We believe that the operating scenario for pipeline operators
will remain critical in the near to medium term. Magellan is also
susceptible to lower-than-expected demand for refined products,
commodity price fluctuations and cost overruns on expansion
However, we acknowledge the partnership's strong portfolio of
energy infrastructure assets, capacity expansion plans and a
sound liquidity position. Other positive attributes include its
investment grade rating and strong track record for distribution
growth. Over the last few years, the partnership has consolidated
its position in the midstream business, achieved through a
combination of organic efforts and accretive acquisitions.
In particular, following Magellan's acquisition of petroleum
storage and pipelines from a subsidiary of British major
) in 2010, the infrastructure asset provider owns one of the
largest crude oil storages in the Cushing region while continuing
to exploit opportunities necessary for improving the utilization
of these assets.
Overall, we think the current valuation is fair and adequately
reflects the partnership's future growth prospects. As a result,
our long-term total return expectation for Magellan Midstream
remains rather muted. We do not see any significant price upside
for the units in the next few quarters and expect the partnership
to grow at a somewhat more conservative and sustainable pace. Our
new long-term Neutral recommendation is supported by a Zacks #3
Rank (short-term Hold rating).
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