Zacks_Analysts' Blog : Magellan Hikes Distribution, Again - Analyst Blog

Pipeline operator Magellan Midstream Partners, L.P. (MMP) raised its second quarter 2011 cash distribution by 2.0% sequentially and 7.2% year over year to 78.50 cents per unit ($3.14 per unit annualized).

The cash distribution is up 199% since its initial public offering (IPO) in the beginning of 2001. Magellan’s new distribution is payable on August 12 to unitholders of record as on August 4, 2011.

Tulsa, Oklahoma-based Magellan Midstream is a master limited partnership (“MLP”) 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. The oil distributor conducts its operations in three segments: Petroleum Products Pipeline System, Petroleum Products Terminals and Ammonia Pipeline System.

The proposed hike in distribution at Magellan is in sync with its goal of raising the annual distribution by 7% in 2011. The partnership has a proven history of distribution growth with 36 quarterly increases since inception.

Magellan Midstream, which is slated to report its second-quarter results on August 3, has bolstered its cash flows recently on the back of benefits from acquired assets and growth projects, escalating demand for petroleum products and improved petroleum prices.

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 Atlas Pipeline Partners L.P. (APL), Williams Partners L.P. (WPZ), NuStar Energy L.P. (NS) etc.