Magellan Midstream Partners, L.P. ( MMP - Analyst Report ) announced plans to enhance the capacity of the crude oil pipeline – Crane-to-Houston – to 225,000 barrels per day (bpd).

The company stated that the recent bidding open season was successful and the pipeline capacity has been fully committed with long-term agreements.

In September 2011, Magellan announced the proceeding to reverse a portion of the Longhorn oil-products pipeline, extending from Houston to El Paso, Texas, and convert it to the crude oil pipeline between Crane, Texas to Houston.

The project was supposed to have a capacity of 135,000 bpd, at an expense of $245 million. Now, with the expanded capacity, the project cost is expected to reach about $375 million.

This expansion initiative was taken in view of the growing industry demand. The company believes that the pipeline will be able to transport oil faster and at a cheaper rate from the West Texas production hub to refineries in Houston and Texas City areas. This network will also ease the current crude oil glut in Cushing, Oklahoma.

Magellan expects to start the pipeline with partial capacity by early 2013 and make it fully operational by mid-2013. However, the project is pending necessary permits and regulatory approvals.

Magellan is also evaluating the option of setting up a new pipeline segment or utilize an existing third-party infrastructure to move crude from Midland, Texas to Crane for delivery to the Houston area. The construction of this new development will likely flare up the expenditure by almost $70 million.

We remain impressed by Magellan’s high-quality and diverse portfolio of midstream assets that generate stable and recurring revenues by way of long-term fee-based contracts.

Over the last few years, the partnership has consolidated its position in the midstream business, through a combination of organic efforts and accretive acquisitions. We remain upbeat regarding Magellan’s acquisition of petroleum storage and pipelines from a subsidiary of BP Plc ( BP - Analyst Report ) .

Despite these positives, we maintain a long-term Neutral rating on the stock, on account of lower-than-expected demand for refined products (which adversely affects pipeline and terminal throughput) and cost overruns on expansion projects (which lead to lower returns).