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Magellan Cuts Capex Amid Pipeline Construction Uncertainty

Zacks Equity Research
ONE Gas (OGS) reports strong Q1 results, courtesy of new rates, colder-than-normal weather and customer growth.

Magellan Midstream Partners MMP recently announced plans to trim its capex budget by $200 million in 2019, amid uncertainties surrounding the construction of Permian Gulf Coast pipeline. Notably, Magellan had teamed up with Energy Transfer Partners, Delek U.S. Holdings and Marathon Oil to construct the multi-billion-dollar pipeline project, in a bid to transport oil from Permian Basin to the Gulf Coast region.

Magellan will also trim its 2020 capital outlay by $250 million. As such, Magellan now forecasts 2019 spending to total $1.1 billion. While the Zacks Rank #3 (Hold) partnership owns an attractive portfolio of energy infrastructure assets that generate stable and recurring fee- and tariff-based revenues, delay in project completions and cost overruns are expected to hamper profitability.

As it is, Magellan is facing pressure in crude oil transportation business, wherein operating margin fell more than 8% year over year in the fourth quarter. The segment results were hampered by lower rates on the Longhorn pipeline that carries oil from the Permian basin to Houston. Worryingly, the depressed rates will remain in place until the next adjustment date and therefore act as a drag on the partnership's revenues.

Nonetheless, the company’s consistent distribution growth bodes well.Markedly, in 2018, the partnership’s distributable cash flow ('DCF') grew 8% to a record $1.1 billion. Based on continued strength in earnings expectations, management expects to generate DCF of around $1.14 billion this year and targets annual distribution growth of 5%.

Stocks Worth a Watch

Some better-ranked players in the energy space include Antero Resources Corporation AR, NGL Energy Partners LP NGL and Delek Logistics Partners, LP DKL. While Antero Resources and NGL Energy sport a Zacks Rank #1 (Strong Buy), Delek Logistics carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Antero Resources’ 2019 earnings are likely to grow 11% year over year.

NGL Energy’s 2019 earnings and revenues are likely to surge 226.85% and 44.32%, respectively.

Delek Logistics’ 2019 earnings are expected to grow 20.38% on a year-over-year basis.

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