Earnings Scorecard: Magellan Midstream Partners

| About: Magellan Midstream (MMP)

Earlier this month, Magellan Midstream Partners L.P. (MMP) – a master limited partnership (“MLP”) – announced its financial results for the third quarter ended September 30, 2010.

Now that the analysts have had some time to ponder upon the quarterly performance of Magellan, they are weighing in their estimate revisions. Below we cover the results of the recent earnings announcement, subsequent analyst estimate revisions and Zacks ratings for the outlook.

Earnings Review
On November 2, 2010, Magellan reported marginally weaker-than-expected third quarter results, pulled down by an increase in costs.

The partnership reported earnings per unit (“EPU”) of 54 cents (excluding mark-to-market commodity-related pricing adjustments), a penny below the Zacks Consensus Estimate. However, compared to the third quarter of 2009, Magellan’s earnings per unit posted a 25.6% improvement (from 43 cents to 54 cents), reflecting strong transportation volumes.

Revenues came in at $406.2 million, up 69.4% year-over-year and also beat the Zacks Consensus Estimate of $363 million amid higher product sales.

Importantly, Magellan raised its third quarter 2010 cash distribution by 1.7% sequentially and 4.9% year over year to 74.50 cents per unit (or $2.98 per unit annualized). The cash distribution is up 184% since its initial public offering (“IPO”) at the beginning of 2001.

(Read our full coverage on this earnings report: Magellan Just Misses, Sales Surge)

Agreement of Estimate Revisions
Analysts have a strong positive agreement regarding Magellan’s 2010 and 2011 outlooks. In particular, we see a notable number of estimate revisions over the past 30 days, indicating that revisions were in response to the partnership’s third quarter earnings release.

Out of 8 analysts covering the stock, 6 have revised their estimates for 2010 upward, while none has gone in the opposite direction. Looking to 2011, the trend is more or less similar. Out of 14 analysts, 10 hiked their estimates as against no negative revisions.

Estimates are up for the December quarter of 2010 as well. For the current quarter, 8 of the 14 analysts have increased their estimates over the last 30 days, with no pull-backs.

This uptrend in estimate revisions reflects strong near-term financial results with the expectation that cash flows will be driven by fundamental improvement in the business. We see a consistent stream of earnings, given the strong product pipeline volumes, positive signs of economic recovery, and limited financing overhang.

Magnitude of Estimate Revisions
As a result of the analysts revising estimates upwards over the past 30 days, the Zacks Consensus Estimates for fiscal 2010 and 2011 have both improved by 6 cents each from $2.77 to $2.83 and from $2.93 to $2.99, respectively. Meanwhile, the estimate for the December 2010 quarter is up by 4 cents.

Our Recommendation
We like Magellan’s above-average distribution coverage, stable asset base, and improved cash flow visibility. Additionally, the recently acquired petroleum storage and pipeline assets from the financially troubled U.K. major BP plc (BP) have been performing ahead of management’s initial expectations. The deal will assist Magellan, which is focused largely on refined products logistics, to enhance its crude business.

Buoyed by these developments, Magellan has raised its 2010 distributable cash flow guidance by 3% (from $360 million to $370 million).

However, notwithstanding these bullish factors, Magellan units currently retain a Zacks #3 Rank, which translates into a short-term Hold rating. We are also maintaining our long-term Neutral recommendation on the stock.

Our cautious stance on Magellan Midstream Partners takes into account the challenging operating scenario for pipeline operators. While the partnership’s liquidity position is sound and growth potential is attractive, we continue to believe that the near- to medium-term outlook for petroleum products expenditure will stay tentative. Another concern for Magellan is the weak demand for refined products that translates into lower pipeline throughputs.

Given these headwinds, we believe that Magellan Midstream’s current valuation adequately reflects its fairly balanced risk/reward profile. As such, we see limited upside from current levels.