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Why Did This Industry-Leading Midstream Partnership's Units Fall Nearly 20% in 2018?

Reuben Gregg Brewer, The Motley Fool

What happened

The units of midstream partnership Magellan Midstream Partners (NYSE: MMP) dropped a surprising 19.6% in 2018 according to data provided by S&P Global Market Intelligence. It was something of an up and down year, however. In April, Magellan's units were down 15%. By August, they were back to breakeven. But by October, they were heading in the wrong direction again.

So what

The most surprising aspect of Magellan's unit price drop is that the partnership has been doing well financially. In fact, it raised its full-year guidance a couple of times during 2018. The year was basically another case of Magellan putting up slow and steady results, as it has through most of its long history. It even increased its distribution each quarter, just as it has every other quarter since its IPO in 2001. There was nothing in the company's financial results to suggest the company's long-term outlook had shifted from positive to negative.

A man looking down over an energy processing facility

Image source: Getty Images

Nor was there any industry news that would materially derail the partnership's outlook. Of course, there was the early 2018 Federal Energy Regulatory Commission (FERC) rule change announcement, which sent shares of all midstream partnerships reeling in March. That helps explain Magellan's 15% decline through April. The final tax rule modification issued in July wasn't as bad as expected, however, and the changes were never going to have a major impact on Magellan anyway. In fact, once the final rule was announced, the midstream sector quickly bounced back.   

Looking longer term, onshore U.S. oil and gas production growth has left the country with a glut of oil and a shortage of capacity to move it. That means there's material demand for additional midstream infrastructure, backing Magellan's roughly $1.7 billion in capital spending plans through 2020. That spending should allow for distribution growth of 5% to 8% a year with solid coverage of at least 1.2 times. Basically, Magellan remains the same steady performer that it has always been. 

Which brings this story to the swift and deep end-of-year unit price decline. That drop just happened to coincide with the oil bear market. Based on the continued strength in Magellan's fundamentals, it looks like a case of investors dumping anything related to oil during a period of uncertainty. Wall Street has a habit of throwing the baby out with the bathwater.

Now what

If you are an income investor looking for strong yields from reliable investments, Magellan should be on your short list today. The partnership's yield of nearly 7% is relatively high, and there's nothing to suggest its long-term picture has worsened. The unit price drop at the end of 2018 did sting current unitholders, but it also opened up a buying opportunity for investors who can think long term.

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Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool recommends Magellan Midstream Partners. The Motley Fool has a disclosure policy.