Magellan Midstream Evenly Poised

We are maintaining a Neutral recommendation on Magellan Midstream Partners, L.P. (MMP - Analyst Report), a master limited partnership (MLP) that owns and operates a diversified portfolio of energy infrastructure assets.

Tulsa, Oklahoma-based Magellan Midstream delivered a mixed performance for the first quarter of 2012. The partnership missed our earnings per unit projection but was able to beat on revenues.

Magellan Midstream is characterized by a cost effective, low-risk business structure and an attractive energy infrastructure asset base. The partnership’s assets include 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 also established a track record of consistent distribution growth – its current quarterly distribution is 84 cents per unit ($3.36 per unit annualized), up 3.0% sequentially and 9.0% year over year. Management’s aim to reach annual distribution growth of 9% for 2012 and 8% to 10% for 2013 is expected to unlock significant unitholder value.

We believe that lucrative acquisitions and organic growth projects have contributed immensely toward Magellan Midstream’s development. Over the last 8 years, the partnership has invested nearly $2.5 billion for various ventures and takeovers. Currently, the partnership has $680 million of organic growth projects that will likely generate profitable returns for Magellan Midstream in the coming months.

However, MLPs like Magellan Midstream typically depend on equity and debt markets for growth finance. Market turmoil resulting from issues such as the recent subprime crisis, which hinders access to debt/equity markets, are anticipated to impact the partnership’s growth prospects.

Additionally, the activities of Magellan Midstream are directly exposed to refined product demand, which are inherently volatile and subject to complex market forces. Actual demand could differ significantly from our expectations, thereby affecting the partnership’s revenues, cash flows and distributions.

We also remain concerned regarding the 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).

Hence, at current levels, we believe that the partnership has no strong catalyst to push the stock any higher. Magellan Midstream, which operates with other group members such as MarkWest Energy Partners L.P. (MWE - Analyst Report) and Regency Energy Partners L.P. (RGP - Snapshot Report), currently, retains a Zacks #3 Rank, which translates into a short-term Hold rating.