Consumer Energy Report is now Energy Trends Insider -- Read More »

By Lou Gagliardi on May 8, 2013 with no responses

Why Magellan Midstream Partners is a Solid MLP Stock

This week I decided to analyze and recommend an energy company I feel is worthy of investing in. In the coming weeks, as we prepare to launch Energy Trends Finance — a service for investors, executives, and others involved in the energy sector — be sure to look out for similar analyses on companies across the energy industry.

Protect Your Downside

With all the crosscurrents in the markets, Europe in recession, Japan with no economic growth, and the U.S. registering slow GDP growth that keeps energy demand sluggish, and continued high volatility in oil and gas prices, I remain cautious in the energy sector. However, although cautious I am not absent from the market as I do believe that with a diligent and “defensive” investment philosophy one can achieve positive results over the long-term.

(Related: Three Reasons to Invest in Energy Long-Term)

Indeed, as I have outlined in several of my energy trend notes over the last few weeks, I remain bullish long-term in energy equities, as investors will continue to be attracted to energy equities due to long-term structural supply/demand imbalances that will continue to see demand – consumption increasingly outpace production growth.

Invest Defensively for the Long-Term

The key is to pick and choose wisely by not focusing on the overall broader energy market, but to seek out energy stocks that are “infrastructure” related as pipeline MLPs, or niche providers to the energy market as offshore rig providers, deep water drillers and specialty pump and valve flow systems.

In the current market of volatile share price swings, seek out companies with high dividend yields or MLPs with high distribution yields that will protect your downside by providing support to share prices in down turning markets. I’m talking about specialty companies with above average dividend yields, solid balance sheets, low debt, a sound credible and simple business plan, and — most importantly — high growth prospects. And that brings us to our energy investment idea this week: Magellan Midstream Partners LP (NYSE: MMP).

Magellan Midstream Partners LP (MMP)

If you like a company that:

  • has outperformed the broader energy market (XLE) over the last two years;
  • has continually moved higher over the long-term;
  • recorded consistent positive free cash flow since 2007;
  • provides favorable tax treatment on your dividends;
  • a high dividend yield;
  • high growth prospects;
  • a strong balance sheet;
  • and believe infrastructure is underinvested in the U.S. energy sector,

then you should like Magellan Midstream Partners LP (MMP), a master limited partnership or MLP, which due to its capital tax structure has to return 90% of its income to investors.

In a nutshell, MMP transports, stores and distributes petroleum products. It operates the nation’s largest refined petroleum products pipeline, operating in three business segments: petroleum pipeline system, petroleum terminals, and ammonia pipeline system. Its petroleum pipeline system runs roughly 9,600 miles of pipeline and 50 terminals. Its petroleum terminals include storage terminal facilities of which six marine terminals are located along coastal waterways and crude oil storage terminal in Cushing, Oklahoma and 27 inland terminals.

MMP’s recent high visibility project has been the reversal of the Longhorn crude oil pipeline in mid-April from Crane, West Texas in the oil producing Permian Basin directly to Houston refineries. The reversal allows crude oil to be diverted from its previous destination to the oversupplied Cushing, OK storage terminals. The Longhorn pipeline average delivery rate has been approximately 90,000 barrels per day (bpd) from mid-April through the second quarter, and ramping to its full 225,000-bpd capacity in the 3Q of 2013. Due to high shipping capacity demand, the company has indicated it may increase capacity by 50,000 bpd. At an estimated cost of $80 million, the expansion would take a year to 18 months to finish.

The company has noted that continued rapid growth in oil production in the lower U.S. 48, particularly in the Bakken and the Eagle Ford, will require additional pipeline infrastructure to move crude to refineries for processing.

MMP has roughly a $12 billion market capitalization and boasts a 3.80% dividend yield. What drives this stock is its strong positive free cash flow generation — a major financial metric I always pay close attention to when I look at stocks. MMP’s free operating cash flow is before any financing or capital investment spending decisions and that gives one a truer picture of the company’s internal operational strength; its ability to re-invest in its operations through its internal cash flow. Indeed, Magellan has reported positive free cash flow for 22 out of 25 quarters since 2007 through 2012.

MMP free cash flow

(Related: Energy Industry Struggling to Generate Free Cash Flow)

MMP EBITDA

The driver behind cash flow growth is essentially EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) generation, and that has been positive since 3Q 2009. Its financial strengths include a strong balance sheet with above average EBITDA-to-interest expense coverage ratio compared to its peers, no general partner incentive distribution rights, and very low to insignificant short interest exposure.

MMP peers debt interest

MMP has consistently exhibited positive upward momentum above its 50-day and 200-day moving averages over the last two years. Its longer term line of support is 47.49 at its 200-day moving average. Over the last two years on a rolling basis, MMP has outperformed the broader energy sector (XLE).

MMP and XLE Comparison

MMP 2 year performance_50 and 200 day MAVG

Conclusion: I like Magellan’s outlook as an infrastructure player building pipeline capacity from main oil producing regions like the Permian and Eagle Ford. It has a good dividend distribution yield that provides a floor of support to the stock, and has very little short interest. I recommend buying modest amounts particularly on any stock pullbacks toward its long-term line of support at 47.49. Place a firm stop-order limit at 47.00. BUY.

Price Target: 60.00 within the next six months.

Company Information:

Magellan Midstream Partners LP

One Williams Center

Tulsa, OK 74172

918-574-7000

http://www.magellanlp.com