Magellan, Occidental in Pipeline JV

Pipeline operator Magellan Midstream Partners, L.P. ( MMP - Analyst Report ) along with Los Angeles, California based energy firm Occidental Petroleum Corporation ( OXY - Analyst Report ) announced plans to set up a joint venture to build a 400-mile long oil transport pipeline.

The BridgeTex Pipeline – with a transportation capacity of approximately 278,000 barrels per day of crude oil – will extend from Colorado City, Texas to the Houston Gulf Coast area. Along with this pipeline, Magellan Midstream will also expand its distribution system between East Houston and Texas City.

The pipeline network, pending customary permits and approvals, is slated to come online by mid-2014.

In this regard, the companies are looking for potential buyers interested in obtaining services of the pipeline. Binding commitments from customers will be received till July 11.

Although the financial aspect of the proposed joint venture was not disclosed, Magellan Midstreamwill act as the operator of the project.

Tulsa, Oklahoma-based Magellan Midstream is a master limited partnership that 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.

In mid-March, Magellan Midstream decided to increase the capacity of the crude oil pipeline – Crane-to-Houston – to 225,000 barrels per day (bpd), following a successful bidding open season.

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 expansion projects and accretive acquisitions.

However, we remain concerned about the current operating scenario for pipeline operators. Magellan is also susceptible to lower-than-expected demand for refined products, commodity price fluctuations and cost overruns on various ventures.

Magellan Midstream and Occidental Petroleum 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 both stocks.