Magellan Midstream (MMP) Evenly Poised

We are maintaining our Neutral recommendation on Magellan Midstream Partners, L.P. (MMP) with a target price of $52.

Tulsa, Oklahoma-based Magellan is a master limited partnership (MLP) that owns and operates a diversified portfolio of energy infrastructure assets. The partnership generates stable and recurring revenues by way of long-term fee-based contracts. Over the last few years, Magellan has consolidated its position in the midstream business, achieved through a combination of organic efforts and accretive acquisitions. It is primarily engaged in crude oil and refined products transportation and storage, with a strong track record for distribution growth.

Magellan recently reported excellent second quarter 2010 results, buoyed by higher rates and improved demand for its transportation services. The partnership reported earnings per unit (EPU) of 86 cents (excluding mark-to-market commodity-related pricing adjustments), comfortably surpassing the Zacks Consensus Estimate of 64 cents and the year-ago profit of 45 cents. Total revenue more than doubled year over year to $423.1 million and easily beat the Zacks Consensus Estimate of $310.0 million.

(Read our full coverage on this earnings report: Magellan Reports Surging Profits)

Importantly, Magellan declared a quarterly distribution of 73.25 cents per unit ($2.93 per unit annualized), representing a 3.2% increase over the year-earlier quarter and 1.7% increase over the first quarter 2010 distribution. The distribution will be paid on August 13 to unit-holders of record on August 6, 2010.

While the partnership’s liquidity position is sound and growth potential is also attractive, we continue to believe that the near- to medium-term outlook for petroleum products expenditure will stay tentative. Another concern for Magellan is the weak demand for refined products that translates into lower pipeline throughputs. Given these headwinds, we believe that Magellan Midstream’s current valuation adequately reflects its fairly balanced risk/reward profile. As such, we see limited upside from current levels.

Magellan units are currently rated as Zacks #3 Rank (‘Hold’), implying that the stock is expected to perform in line with the broader U.S. equity market over the next one to three months. This is supported by our long-term Neutral recommendation.

MAGELLAN MDSTRM (MMP): Free Stock Analysis Report

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