Monday, August 19, 2013

Investing in Oil Gas Distribution

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Magellan Midstream Partners (MMP), Zacks Investment Research Rank #1 (Strong Buy), is a publically traded partnership which stores, transports, and distributes petroleum products. This stock is worth exploring given the political chaos in the Middle East, the hunt for yield in the face of rising treasury yields, and the North American energy boom. Further, Magellan is showing strong upward earnings revisions momentum.

A hedge against geopolitical factors:

The social unrest in Egypt and Syria has the chance of spilling into the broader Middle East and supporting a risk premium in the crude oil market. Investing in an energy based asset may help to insult your portfolio against geopolitical risk and higher energy prices. Moreover, the events in the Middle East put a spotlight on the importance of North American energy production and transport. Strong and growing U.S. energy activity is a national security issue.

A healthy and growing payout:

Magellan has a deep history of distribution growth with 44 quarterly increases and a compounded annual growth rate in distribution of 12% between 2001 and Q1 2013. At the same time, it has an attractive distribution yield just below 4.0%. The company recently raised its fiscal year 2013 distributable cash flow by $50 mln to $630 mln.

Magellan’s yield is comfortably above the 10 year treasury yield of about 2.80% and is yielding similar to the Investment Grade iShares Corporate Bond ETF (LQD). A rising payout should help cushion the impact of higher rates on your portfolio.

At a recent conference, the company highlighted that fee based and low risk activities accounted for 85% or more of its operating margin. S&P recently raised Magellan’s credit rating to BBB+ from BBB hinting that credit quality is improving. The company is expected to have a distribution coverage ratio greater than one for the foreseeable future.

A way to capture rising U.S. oil production:

U.S. oil production remains vibrant, and is expected to continuing growing. U.S. production rose 20.5% year over year in the 4-weeks ending August 9th. Production is approximately 7.5 mbd, and the U.S. Energy Information Agency has said U.S. oil production could reach 10 mbd by 2030. There will be plenty of need for transport and storage facilities. The company has been playing up the start of its Longhorn pipeline and its Double Eagle joint venture.

The latest 10-K indicated that Magellan operated 9,600 miles of pipelines through 14 states in the midcontinent region. This enables it to exploit production in North Dakota, Colorado, and Texas. It is offering investors a way to profit from the Permian Basin and Eagle Ford energy formations.

Earnings estimates are rising:

Over the last 30 days, the 2013 Zacks Consensus Earnings per Share Estimate has risen 10% to $2.49, while the 2014 Zacks Consensus Earnings per Share Estimate has increased 5.5% to $2.66. In the past 30 days, estimates have been raised nine times for 2013 and ten times for 2014. There have been no estimate reductions.


Magellan is worth exploring given its strong growth in earnings, healthy payout, and operation in a business with supportive macro fundamentals. You don’t have to travel the earth to find a good investment prospect with Magellan.

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