Seaport Initiates Coverage of Magellan Midstream as a Buy

Seaport Global Securities initiated coverage of Magellan Midstream Partners (MMP) with a buy rating, saying its refining-focused services are more insulated from the volume declines seen in much of the industry and expansion is underway that could boost distributions.

The investment bank has a price target of $82 for the stock.

The partnership's units closed at $72.05 on Monday and were trading slightly down on Tuesday at $71.83.

Magellan's predecessor Williams Energy Partners LP was formed in 2000 by Williams Cos. (WMB) to hold some of its assets. It's a single entity, having collapsed its general partner/limited partner structure in 2009 that made it easier to understand and gave it a lower cost of capital.

MMP's competitors include Buckeye Partners (BPL) , Enbridge Energy Partners (EEP) , Energy Transfer Partners (ETP) , Enterprise Products Partners (EPD) , NuStar Energy (NS) , Oneok Partners (OKS) , Plains All American Pipeline (PAA) , Spectra Energy Partners (SEP) and Williams Partners (WPZ) , although only Sempra has a comparable distribution coverage (although slightly lower) and debt/equity metric (which is higher), the firm said. Seaport is neutral on both Enterprise and Plains.

Analysts Bo McKenzie and Kathy Yang said about 61% of MMP's operating margin is in its refined products segment, which is largely driven by gasoline, diesel and jet fuel consumption and has insulated it from the throughput declines among many of its peers as U.S. oil production wanes. And while the outlook for the business is roughly flat volumes and tariffs, they expect growth from expansion projects currently underway.

MMP's crude oil business -- which makes up 30% of its operating margin - and marine terminals -- which contribute 9% -- are both growing, with expansion happening at its facilities in Houston and Cushing, Okla.

The analysts say MMP has several expansion opportunities, with $950 million in growth capital expenditures underway and another $500 million of identified further investments. They said its free cash flow over and above this year's capex and a strong balance sheet allow for further accretive capex in the future.

MMP's distributions have been strong, increasing almost every quarter since its initial public offering in 2006, the analysts said. They currently are at $3.21 on an annualized basis, but the analysts expect them to reach $3.32 for this year and even more next year.

They say the company has a good balance sheet, with debt/adjusted Ebitda at 3.2 times, below much of the master limited partnership industry, and expect to it remain below 3.5 times as debt is drawn funding the $950 million in capex that's underway.

Last year activist investor Sandell Asset Management Corp. suggested MMP could be a possible acquirer of SemGroup (SEMG) , along with Plains, Spectra, Enterprise, Kinder Morgan (KMI) and Sunoco Logistics Partners (SXL) .

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