Magellan's Net Income Rises - Analyst Blog

Magellan Midstream Partners L.P. ([url=http://www.zacks.com/stock/quote/mmp]MMP[/url]), a master limited partnership (MLP), announced robust fourth quarter results, buoyed by higher transportation tariffs and product gains in the pipeline system. The partnership reported earnings per unit (EPU) of 77 cents, surpassing the Zacks Consensus Estimate by 2 cents. In the year-ago period, Magellan earned 51 cents per unit.

Distribution Maintained

Magellan maintained its quarterly distribution of 71 cents per unit ($2.84 per unit annualized), equal to the third quarter as well as year-ago distribution. The distribution will be paid on Feb 12 to unit-holders of record on Feb 2, 2010. 

Petroleum Products Pipeline System

In the Petroleum Products Pipeline System, quarterly operating margin (operating profits before affiliate G&A and D&A expenses) was a record $113.2 million, up 2.8% year over year. The increase reflected higher average transportation rates, higher fees for incremental storage, and lower operating expenses. These factors were partly offset by an $8.1 million decrease in product margin and lower transportation volumes.

Petroleum Products Terminals

In the Petroleum Products Terminals segment, operating margin was a record $33.5 million, up approximately 40.1% year over year. The positive comparison was on account of the effects of expansion projects at the partnership’s terminals, higher storage rates and improved utilization at the partnership’s marine terminals, which were partly offset by higher operating expenses and lower product margin.

Ammonia Pipeline System

The partnership’s Ammonia Pipeline System reported operating profit of $4.9 million (a quarterly record), as against $2.0 in the fourth quarter of 2008. The segment results were favorably affected on account of higher rates, increased volumes and lower expenses. 

2010 Guidance
 
Management expects distributable cash flows for the full year to be approximately $345 million and is targeting annual distribution growth of 4%. Magellan guided towards first-quarter and full-year earnings per unit of 65 cents and $2.66 respectively. The partnership plans to spend approximately $210 million on growth projects in 2010, with expenditures of $30 million in future years required to complete these projects. Additionally, the partnership continues to look out for more than $500 million of potential growth projects in the earlier stages of development.

Estimate Revisions Trend

It was the company’s 1st positive earnings surprise in the past 4 quarters. Magellan has performed poorly during this period, with its average earnings surprise being -25.0%. This implies that the partnership has missed the Zacks Consensus Estimate by 25.0% over the last four quarters.

However, in the context of the recent fourth quarter outperformance, estimates for the current quarter (first quarter of 2010) have been trending up with the quarterly Zacks Consensus Estimate going up by 8 cents (from 55 cents to 63 cents) in the last 7 days alone. Overall, 6 of the 7 analysts covering the stock raised their projections during that time, with no downward revisions. Despite the positive revisions, the Zacks Consensus Estimate for the March quarter is still below the company guidance of 65 cents.

But the challenging operating scenario for pipeline operators, weak near- to medium-term outlook for petroleum products expenditure and Magellan’s premium valuation continues to temper our view. As such, our short-term recommendation on the stock is Hold (Zacks Rank #3), meaning that Magellan is expected to relatively in line with the overall market during the next 1-3 months. Therefore, the investors should maintain their current position in the stock over this time period.

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