Oil pipeline and storage partnership Magellan Midstream Partners L.P. (MMP) has purchased the outstanding interest in a joint venture for the construction of 4.25 million barrels of crude oil storage in Cushing, Oklahoma. The project estimated to cost approximately $110 million will start taking delivery of oil in the second quarter and is likely to be fully operational by the end of 2011.
As per Magellan, the firm previously held a 65% stake in the development and is acquiring the remaining interest from undisclosed private investors who had been partial owners in the joint venture. Taking into account the buying cost and Magellan’s full funding of the venture, the partnership has raised its 2011 expansion capital spending estimate to $215 million from its previous estimate of $170 million.
The extra storage capacity is expected to ease the oversupply at the strategic oil hub of Cushing, the delivery location for the main oil futures contract on the New York Mercantile Exchange. In recent times, Cushing has experienced a supply glut due to heavy flows of Canadian crude.
Magellan, which already owns 7.8 million barrels of storage at Cushing – one of the largest capacities in the region will be able to further strengthen its position through this deal.
Tulsa, Oklahoma-based Magellan Midstream 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.
Even though Magellan Midstream has a Zacks #2 Rank (short-term Buy rating) in the short run, we are Neutral on the units in the longer term.
We appreciate Magellan’s highly stable/recurring cash flows, low cost of capital and strong distribution coverage. Additionally, the partnership – with more than $500 million of potential projects under development – has an attractive growth potential, while maintaining a sound liquidity position.
However, we continue to believe that the operating scenario for pipeline operators will remain critical. Other concerns for Magellan are weak demand for refined products and the slow economic revival. As such, we believe Magellan Midstream’s current valuation adequately reflects its fairly balanced risk/reward profile with limited upside potential.
Magellan Midstream competes in the ‘Oil/Gas Production Pipeline MLP’ industry with firms like TC PipeLines L.P. (TCLP), MarkWest Energy Partners L.P. (MWE), etc.
MAGELLAN MDSTRM (MMP): Free Stock Analysis Report
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TC PIPELINES (TCLP): Free Stock Analysis Report
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