We have maintained our Neutral recommendation on oil pipeline and storage partnership Magellan Midstream Partners L.P. (MMP) with a price target of $61.
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. In 2010, the partnership’s pipeline volumes comprised 54% gasoline, 34% distillates (which include diesel fuels and heating oil) and 8% Liquefied Petroleum Gas (LPG)/aviation fuel, and 4% crude oil. Magellan conducts its operations in three segments: Petroleum Products Pipeline System, Petroleum Products Terminals, and Ammonia Pipeline System.
We appreciate Magellan’s attractive portfolio of energy infrastructure assets that generate stable and recurring fee- and tariff-based revenues, 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 robust growth potential, and maintains a sound liquidity position.
We also remain upbeat regarding Magellan’s acquisition of petroleum storage and pipelines from a subsidiary of BP plc (BP). Following the acquisition, Magellan owns one of the largest crude oil storages in the Cushing crude oil region and will continue to exploit opportunities necessary for improving the utilization of these assets.
Magellan has established a track record of consistent distribution growth – its current quarterly distribution of 77 cents per unit ($3.08 per unit annualized) is up by 193% since its initial public offering (IPO) at the beginning of 2001.
However, we still believe that the operating scenario for pipeline operators will remain critical, which is a key area of concern, in our view. Magellan is also susceptible to lower-than-expected demand for refined products, commodity price fluctuations and cost overruns on expansion projects.
As of now, we don’t see any obvious catalyst in its business to significantly push the stock price higher. Consequently, we see Magellan Midstream units performing in line with the broader market.
