Magellan Ends 2011 on Strong Note

Pipeline operator Magellan Midstream Partners, L.P. (MMP - Analyst Report) announced strong fourth quarter 2011 results, aided by the positive effects of higher petroleum prices on its commodity-related activities, as well as contributions from recently-completed acquisitions and expansion projects. These factors more than made up for the weak refined petroleum products demand growth environment.

The Tulsa, Oklahoma-based oil distributor reported earnings per unit (EPU) 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 revenues, at $486.9 million, were up 22.2% year over year and were also above the Zacks Consensus Estimate of $434.0 million.

Quarterly Distribution

Recently, Magellan raised its fourth quarter 2011 cash distribution by 1.9% sequentially and 7.6% year over year to 81.5 cents per unit ($3.26 per unit annualized). The cash distribution is up 210% since its initial public offering (IPO) in the beginning of 2001. Magellan’s new distribution is payable on February 14 to unitholders of record as on February 7, 2012.

Segmental Performance

Petroleum Products Pipeline System: In the Petroleum Products Pipeline System, quarterly operating profits (before affiliate G&A and D&A expenses) were a record $150.2 million, up 13.1% year over year. The increase reflects higher transportation and terminals revenues as well as improved product sales, partially offset by lower gasoline demand and increase in operating expenses.

Petroleum Terminals: In the Petroleum Terminals segment, operating margin was a record $44.8 million, up 19.7% year over year. The improvement reflects the recently acquired/constructed tankage at the partnership’s storage facilities, as well as improved product margin, partially offset by higher operating expenses.

Ammonia Pipeline System: The partnership’s Ammonia Pipeline System reported an operating profit of $3.3 million, significantly higher than the $1.8 million earned in the fourth quarter of 2010. The segment results in the prior-year quarter were adversely affected on account of higher revenues and lower operating expenses.

2012 Guidance

Management expects to generate record distributable cash flows of approximately $480 million for the full year and is targeting annual distribution growth of 9%. Magellan guided towards first-quarter and full-year earnings per unit of 98 cents and $3.75, respectively.

The partnership plans to spend approximately $430 million on growth projects in 2012, with expenditures of $90 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.

Our Recommendation

Magellan Midstream units currently retain a Zacks #3 Rank, which translates into a short-term Hold rating. We are also maintaining our long-term Neutral recommendation on the stock.

We appreciate Magellan’s highly stable/recurring cash flows, 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 attractive growth potential, and maintains a sound liquidity position.

However, we still believe that the operating scenario for pipeline operators will remain critical. Magellan is also susceptible to lower-than-expected demand for refined products, commodity price fluctuations and cost overruns on expansion projects.

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 MarkWest Energy Partners L.P. (MWE - Analyst Report), Enterprise Products Partners L.P. (EPD - Analyst Report), Plains All American Pipeline L.P. (PAA - Analyst Report), etc.