Zacks_Analysts' Blog : Magellan Beats EPS, Misses Revenue - Analyst Blog

Pipeline operator Magellan Midstream Partners, L.P. (MMP) announced better-than-expected second quarter 2011 profits, aided by contributions from recently-completed acquisitions and expansion projects.

The Tulsa, Oklahoma-based oil distributor reported earnings per unit (EPU) of 91 cents (excluding mark-to-market commodity-related pricing adjustments), surpassing the Zacks Consensus Estimate of 83 cents and the year-ago adjusted profit of 86 cents.

However, total revenues, at $383.3 million, were down 9.4% year over year and were also below the Zacks Consensus Estimate of $440.0 million. The negative comparisons can be attributed to lower product sales.

Quarterly Distribution

Recently, Magellan 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.

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 $146.4 million, up 9.0% year over year. The increase reflects higher transportation and terminals revenues, improved fees for leased storage, terminal throughput, ethanol blending and additive injection, partially offset by increase in operating expenses.

Petroleum Products Terminals: In the Petroleum Products Terminals segment, operating margin was $35.4 million, almost flat year over year. The recently-acquired tankage at the partnership’s storage facilities, as well as higher ethanol and additive fees were offset by lower throughput volumes and higher operating expenses.

Ammonia Pipeline System: The partnership’s Ammonia Pipeline System reported an operating margin of $2.0 million, up significantly from the $548,000 earned in the second quarter of 2010. The segment results were favorably affected on account of higher shipments, somewhat negated by  the increase in operating expenses.

2011 Guidance

Management expects distributable cash flows of approximately $445 million for the full year (up by $5 million from its previous guidance) and is targeting an annual distribution growth of 7%. Magellan guided towards third-quarter and full-year earnings per unit of 68 cents and $3.45, respectively.

The partnership plans to spend approximately $240 million on growth projects in 2011, with expenditures of $60 million thereafter required to complete these projects. Additionally, the partnership continues to look 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 Atlas Pipeline Partners L.P. (APL), Williams Partners L.P. (WPZ), Sunoco Logistics Partners L.P. (SXL), etc.