As an income-driven investor always in search of a sustainable mid-to-higher yielding MLP play, I've decided to shift my focus to the oil & gas pipeline sector and highlight several of the reasons why I'm staying long on shares of Magellan Midstream Partners (NYSE:MMP).
#1: Recent Performance & Trend Behavior
On Friday, shares of MMP, which currently possess a market cap of $13.73 billion, a forward P/E ratio of 21.68, and a dividend yield of 3.68% ($2.23), settled at a price of $60.52/share. Based on their closing price of $60.52/share, shares of MMP are trading 1.05% below their 20-day simple moving average, 2.39% above their 50-day simple moving average, and 12.43% above their 200-day simple moving average. These numbers indicate a very slight short-term downtrend, and both a mid-term and long-term uptrend for the stock which generally translates into a moderate buying mode for longer-term investors.
#2: 5-Year Dividend Behavior
Since November 5, 2008, the company has increased its quarterly distribution sixteen times over the last five years (representing an average increase of $0.012/share or 3.65% each time), with the most recent increase having taken place in November of this year. The company's forward yield of 3.68% ($2.23) coupled with its ability to consistently increase its quarterly distribution over last five years, make this particular MLP play a highly considerable option, especially for those who may be in the market for a sustainable stream of quarterly income.
#3: Comparable Dividend Growth
Not only does the company's 3.65% yield and positive dividend behavior make the stock attractive but, from a comparative standpoint, its dividend growth over the last five years versus a number of its peers also makes it quite the considerable income-driven play.
For example, MMP's dividend has grown a solid 58.72% over the past five years whereas the dividend growth of both DCP Midstream Partners (NYSE:DPM) and Regency Energy Partners (NYSE:RGP) has only risen 20% and 5.62%, respectively, over the past five years.
#4: Recapping Q3 and Looking Ahead to Q4
On Thursday, October 31, Magellan Midstream reported EPS of $0.54/share and revenue of $443.84 million for the third quarter. Although these results had missed analysts' EPS estimates by a margin of $0.04/share, the company was able to surpass revenue estimates by a margin of $19.24 million. Some of the more positive notes to come out of the company's earnings announcement included but were not limited to an increase of $28.2 million when it came to company's crude oil operating margin and an increase of $50.9 million when it came to the company's refined products operating margin.
One of the most important things I look for, especially as an income-driven investor, is any significant increase in the company's distributable cash flows from one comparable period to the next. During the third quarter, Magellan Midstream's distributable cash flow was $141.1 million for Q3 2013 or 40% higher than Q3 2012's distributable cash flow of $100.7 million.
Looking ahead to the company's Q4 results, in which analysts are calling for MMP to earn $0.81/share in terms of EPS (which is $0.27/share better than the company had reported during Q3) and $552.95 million in terms of revenue (which is $109.11 million higher than the company had reported during Q3), I think that if the company can demonstrate increases in its crude oil operating margin (in a range of at least $33-to-$38 million) its refined products margin (in a range of least $37-to$42 million)), I see no reason why such estimates can't be met or even exceeded by a considerable amount.
Risk Factors (Most Recent 10-K)
According to the company's most recent 10-K there are a number of risk factors potential investors should consider before establishing a position in Magellan Midstream Partners. These risk factors include but are not limited to the following:
#1 -Decreases in Petroleum Demand
Any sustained decrease in demand for petroleum products in the markets served by the company's pipelines or terminals could result in a significant reduction in the volume of products that MMP transports, stores or distributes, and thereby reduces cash flows and its ability to pay cash distributions. The company's financial results may also be affected by uncertain or changing economic conditions within certain regions, including the challenges that have affected economic conditions in the U.S. over the last several years. If economic and market conditions remain uncertain or adverse conditions persist for an extended period, the company could experience material impacts on its business, financial condition and results from operations.
#2 -Reduced Volatility in Energy Prices
Most of the company's revenues that are earned from leased storage at its storage terminals, and along its pipeline system, are provided for in contracts negotiated with a number of its leased storage customers. Many of those contracts are for multi-year periods and require the company's customers to pay a fixed rate for storage capacity regardless of market conditions during the contract period. Changing market conditions, including changes in petroleum product supply or demand patterns, forward price structure, financial market conditions, regulations, accounting rules or other factors could cause their customers to be unwilling to renew their leased storage contracts with the company when those contracts terminate, or make them willing to renew only at lower rates or for shorter contract periods.
Failure by the company's customers to renew their leased storage contracts on terms and at rates substantially similar to its existing contracts could result in lower utilization of the company's facilities and could cause its leased storage revenues to be more volatile. If Magellan Midstream's customers do not renew such contracts or renew on less favorable terms, the company could earn a return on those investments that is below the cost of financing, which would adversely affect its results of operations, financial position and cash flows.
For those of you who may be considering a position in Magellan Midstream Partners I'd keep a watchful eye on a number of things over the next 12-24 months as each could play a role in both the company's near-term and long-term growth.
For example, near-term investors should focus on the recent performance and trend behavior of the company while longer-term investors should focus on how well the company is able to demonstrate continued growth in both its refined products margins as well as its crude oil margins, especially since any considerable increase in either metric could positively impact long-term operating results.