We are maintaining a Neutral recommendation on Magellan Midstream Partners, L.P. ( MMP ), reflecting its strong portfolio of energy infrastructure assets, capacity expansion plans and a sound liquidity position. These are partially negated by a critical business environment for pipeline operators.
Tulsa, Oklahoma-based Magellan Midstream 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.
During the fourth quarter of 2011, Magellan Midstream performed impressively and posted earnings per unit of $1.02 (excluding mark-to-market commodity-related pricing adjustments), surpassing the Zacks Consensus Estimate of 96 cents and the year-ago adjusted profit of 93 cents. Total revenue of $486.9 million was up 22.2% year over year and was also above our projection of $434.0 million.
Magellan Midstream also raised its fourth quarter 2011 cash distribution by 1.9% sequentially and 7.6% year over year to $0.815 per unit ($3.26 per unit annualized). The cash distribution is up 210% since its initial public offering in the beginning of 2001.
Looking ahead, Magellan Midstream has decided to increase the capacity of the crude oil pipeline - Crane-to-Houston - to 225,000 barrels per day (bpd), considering the growing industry demand. The partnership believes that the pipeline will be able to transport oil faster and at a cheaper rate from the West Texas production hub to refineries in Houston and Texas City areas. This network will also ease the current crude oil glut in Cushing, Oklahoma.
However, keeping in view that MLPs typically depend on equity and debt markets for growth finance, any market turmoil resulting from issues such as the recent subprime crisis, which hinders access to debt/equity markets, will likely impact the partnership's growth prospects.
Moreover, unfavorable regulatory changes by the Federal Energy Regulatory Commission (FERC) would impact the partnership's results. This will also result in increased borrowing costs for Magellan Midstream Partnersand depress the market value of its limited partner units.
We also remain concerned regarding the lower-than-expected demand for refined products (which adversely affects pipeline and terminal throughput) and cost overruns on expansion projects (which lead to lower returns).
Hence, we expect Magellan Midstream to perform on par with other group members such as MarkWest Energy Partners L.P. ( MWE ) and Regency Energy Partners L.P. ( RGP ). Magellan Midstream units currently retain a Zacks #3 Rank, which translates into a short-term Hold rating.