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Is Magellan Mulling to Sell Stake in Longhorn Pipeline?

Zacks Equity Research

Reportedly, Magellan Midstream Partners, L.P. MMP is contemplating to sell a 35% stake in the Longhorn crude oil pipeline in Texas. The Longhorn Pipeline, having a transportation capacity of 275,000 barrels a day, carries crude from the Permian Basin to refining and export terminals in Houston.

Per Reuters, the partnership is currently marketing the stake to long-term financial investors like infrastructure and pension funds. Last year, Magellan and Plains All American Pipeline LP PAA had collectively sold a 50% interest in the Bridge Tex Pipeline to the midstream arm of Canadian Pension Fund OMERS for $1.4 billion.

The divestment of a stake in the Longhorn pipeline could fetch Magellan as much as $2 billion and help the firm to reduce debt. As we know, Magellan is grappling with a huge debt burden, which restricts financial freedom. As of Mar 31, the firm carried a huge debt load of around $4.3 billion, representing leverage of 63%. Even amid elevated leverage, the partnership expects 2019 capex to be $1.1 billion, which will mark the company’s biggest capital spending in a year. However, this might put a dent in its cash flows. Hence, this divestment could provide some boost to Magellan’s cash flows and financials.

On an encouraging note, the company boasts an impressive history of rewarding investors and has managed to hike dividend for 18 consecutive years. Based on continued strength in earnings expectations, management expects to generate DCF of around $1.18 billion this year (versus the prior forecast of $1.14 billion) and annual distribution growth of 5%.

The firm forecasts higher volumes from Longhorn, Saddlehorn and Bridge Tex projects to fuel earnings in 2019. As such, the firm upwardly revised its full-year earnings forecast from $3.80 a unit to $4.05, boosting investors’ confidence. Large-scale expansion projects, on becoming fully functional within 2019, like Pasadena marine terminal and Houston-to-Hearne pipeline are likely to buoy the firm’s results.

Zacks Rank and Key Picks

Magellan currently carries a Zacks Rank #3 (Hold).

Investors interested in the same industry can consider some better-ranked players like Enterprise Products Partners L.P. EPD and PBF Logistics LP PBFX, both sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Enterprise pulled off a positive earnings surprise in each of the trailing four quarters, with average of 17.03%.

PBF Logistics delivered average positive earnings surprise of 2.04% in the preceding four quarters.

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Magellan Midstream Partners, L.P. (MMP) : Free Stock Analysis Report
PBF Logistics LP (PBFX) : Free Stock Analysis Report
Plains All American Pipeline, L.P. (PAA) : Free Stock Analysis Report
Enterprise Products Partners L.P. (EPD) : Free Stock Analysis Report
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