Magellan Midstream Partners LP (MMP) shares fell the morning of Friday, Jan. 5, after Credit Suisse initiated the stock at an Underperform due to its high valuation.
Shares of the Tulsa, Okla.-based company were down about 1.2% on lower-than-average trading volume to $72.27 by 12:00 p.m. EST on Friday. Credit Suisse established a $61 price target on the stock.
The team of research analysts at Credit Suisse said Magellan is one of the best-in-class liquids names with a strong, stable business because it is one of the least commodity sensitive names in its midstream coverage. That being said, they noted that the petroleum pipeline company trades at a premium compared to its competitors.
"While valuation has been elevated versus peers historically, we think this premium moderates going forward as more names move toward adopting the self-funding model -- and this is what drives our Underperform rating," wrote the Credit Suisse analysts, including Kristina Kazarlan, in a Jan. 4 research note. "To be clear, we think the fundamental story keeps -- but think a moderation in the multiple is warranted."
The top risk for Magellan is the "dilution of the strong story," through either expensive mergers and acquisitions or poorly-contracted Permian projects, the analysts added.
Refined products and crude systems make up approximately 90% of the business and volatility has been limited through strong contracts, Credit Suisse said. Magellan owns and operates more than 10,000 miles of liquids pipelines through the U.S.
Magellan has been considering the creation of a crude oil marketing affiliate to buy, sell and ship crude oil, but the Federal Energy Regulatory Commission, or FERC, denied their proposal because it would violate the Interstate Commerce Act. Following the decision, Magellan submitted on Dec. 22, 2017, a request for additional clarification from FERC.
It is unclear if Magellan can move forward with creating a marketing affiliate despite the fact that FERC's decision or how adding a marketing business could affect the share price, but Credit Suisse implied that increased volatility would be expected.
In mid-December 2017, TheStreet's Jim Cramer said that Magellan's limited revenue exposure to fossil fuel prices and strong distribution yield make it a core holding in his charitable trust, Action Alerts PLUS.
"Now, 85% of the company's revenues are collected from fees through their tolls and pipelines," Cramer said. "So, although it relates to commodities, it does not have much exposure to fossil fuel prices."
"We do think that the landlocked oil from the Permian will have to use Magellan Midstream and they have the one pipe that has still more room," Cramer continued.
The company's Longhorn pipeline services the Permian Basin; Magellan also proposed a new pipeline to transport crude oil from the Permian and Eagle Ford Basins to destinations in the Corpus Christi and Houston, Texas markets.
In a Jan. 3 note to AAP subscribers, Cramer and his team reiterated their preference in Magellan, as it still has "plenty of room to run," adding that they have no plans to sell at current levels.
Last month, BMO Capital Markets also initiated Magellan, but took the opposite view of Credit Suisse, rating the stock at Outperform with an $80 price target.
There are nine Buys, seven Holds and three Sells on Magellan stock, according to Bloomberg data.
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