Pipeline operator Magellan Midstream Partners, L.P. (MMP) announced strong second quarter 2012 earnings, aided by higher demand and rates for its services.
The Tulsa, Oklahoma-based oil distributor reported earnings per unit (EPU) of $1.01 (excluding mark-to-market commodity-related pricing adjustments), surpassing the Zacks Consensus Estimate of 87 cents and the year-ago adjusted profit of 91 cents.
Total revenues, at $449.5 million, were up 17.3% year over year but were below the Zacks Consensus Estimate of $458.0 million.
Quarterly Distribution
Recently, Magellan raised its second quarter 2012 cash distribution by 12.2% sequentially and 20.1% year over year to 94.25 cents per unit ($3.77 per unit annualized). The cash distribution is up by a substantial 259% since its initial public offering (:IPO) in the beginning of 2001. Magellan’s new distribution is payable on August 14 to unitholders of record as on August 7, 2012.
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 $176.3 million, up 20.4% year over year. The increase reflects higher transportation and terminals revenues as well as improved product sales, partially offset by increase in operating expenses.
Petroleum Terminals: In the Petroleum Terminals segment, operating margin was $42.7 million, up 20.7% year over year. The improvement reflects the recently acquired/constructed tankage at the partnership’s storage facilities, higher marine terminal rates, as well as decrease in operating expenses, partially offset by lower product margin.
Ammonia Pipeline System: The partnership’s Ammonia Pipeline System reported an operating profit of $4.5 million, significantly higher than the $2.0 million earned in the second quarter of 2011. The positive results can be attributed to higher revenues and lower expenses.
Guidance Raised
Management expects to generate record distributable cash flows of approximately $520 million for the full year (up from the previous guidance of $490 million) and is targeting annual distribution growth of 18% (double from the earlier forecast of 9%). The partnership plans to raise the payout by a further 10% in 2013. Magellan guided toward third quarter and full-year 2012 earnings per unit of 76 cents and $3.90 (up from the previously expected $3.75 per unit), respectively.
The partnership plans to spend approximately $500 million on growth projects in 2012, with expenditures of $200 million thereafter 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.
Rating
Magellan Midstream – which recently announced plans to set up a 400-mile long oil transport pipeline joint venture with Los Angeles, California-based energy firm Occidental Petroleum Corporation (OXY) – currently retain a Zacks #1 Rank, which translates into a short-term Strong Buy rating.
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.
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