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Magellan Midstream is Now Outperform

MMP OKS DKL

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On Aug 27, 2013, we upgraded Tulsa, Oklahoma-based publicly traded energy pipeline partnership Magellan Midstream Partners, L.P. (MMP - Analyst Report) to Outperform from Neutral. Our new investment thesis is supported by a Zacks Rank #1 (Strong Buy).

Why the Upgrade?

Magellan Midstream boasts of a 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.

Detailed Analysis

Magellan Midstream owns an attractive portfolio of energy infrastructure assets that generate stable and recurring fee- and tariff-based revenues. This includes the longest U.S. refined petroleum products pipeline system, access to more than 40% of refining capacity in the continental U.S. along with imports, and 85 petroleum terminals with more than 80 million barrels of storage.

Magellan Midstream has established a track record of consistent distribution growth – its current quarterly distribution of 53.25 cents per unit ($2.13 per unit annualized) is up by 306% since its initial public offering (IPO) at the beginning of 2001.

Lucrative acquisitions and organic growth projects have made major contributions toward Magellan Midstream’s development. Over the last 9 years, the partnership has invested nearly $3 billion for various ventures and takeovers. For 2013, the partnership plans to spend approximately $900 million on growth, with expenditures of $320 million thereafter required to complete these projects. Additionally, the partnership continues to look out for more than $500 million of potential growth projects in the earlier stages of development.

Financially, Magellan Midstream’s investment grade credit ratings provide a competitive advantage in accessing capital at reasonable cost. Additionally, with no near-term debt maturities and an $800 million revolver available under credit facility, the partnership is well equipped to face this highly uncertain period for the economy.

Based on the success of the partnership’s high-quality and diverse portfolio of midstream assets, analysts are predicting strong earnings growth for Magellan Midstream over 2013 and 2014. The 2013 Zacks Consensus Estimate of $2.49 represents earnings per unit growth of 23% over 2012. The Zacks Consensus Estimate for the next year is $2.70, corresponding to an impressive 8% growth.

Other Stocks That Warrant a Look

In addition to Magellan Midstream, there are certain other energy pipeline partnerships like Delek Logistics Partners L.P. (DKL - Snapshot Report), Pioneer Southwest Energy Partners L.P. and ONEOK Partners L.P. (OKS - Analyst Report) that offer value and are worth buying now. All these firms sport a Zacks Rank #2 (Buy).
 

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