Seeking Alpha
Cory Renauer, Cory Renauer (10 clicks)
Biotech, healthcare, value, long-term horizon
Profile| Send Message| ()  

Oil prices slipped nearly 2% after TransCanada (TRP) reaffirmed its plans to restart a pipeline this weekend that carries crude from Canada to the Midwest. Nearly all the big oil and gas producers like Exxon Mobil (XOM) and Chevron (CVX) fell along with the broader market on Friday, and should fall further on Saturday's lower oil price data. Midstream pipeline companies are less susceptible to fluctuations in commodity prices than producers, but they're bound to slip a bit as well. Tesoro Logistics LP (TLLP), Magellan Midstream Partners (MMP), and Sunoco Logistics Partners (SXL) are three Midstream operators poised to grow. When the markets open on Monday you should be able to scoop them up at a discount.

About the companies

Tesoro Logistics LP buys up crude oil and refined product logistics assets which it then develops and operates. Its revenues are generated by charging fees for the gathering, terminalling, transporting and storing crude oil and its refined products. It operates assets in the Bakken Shale/Williston Basin area of North Dakota and Montana. It also has eight refined product terminals, storage facilities and short-haul pipelines in the west and midwestern US.

Like Tesoro, Magellan Midstream Partners LP operates a petroleum pipeline system and terminals. The company's petroleum pipeline system extends from the gulf coast refineries to end users across Texas, through the midwest to Colorado and north to Illinois, Wisconsin, Minnesota, and North Dakota. The company also operates an ammonia pipeline system that transports product from facilities in Texas and Oklahoma to terminals in the Midwest.

Sunoco Logistics Partners LP's operations are the most varied of the three. The company owns and operates a logistics business with assets in 29 states throughout the US. It owns refined product pipelines that transport gasoline, heating oil, diesel, jet fuel and liquefied petroleum gases from refineries in the northeast, midwest, and southwest US to markets in New York, New Jersey, Pennsylvania, Ohio, Michigan, Texas and Canada. The company also operates 42 active refined product terminals that contribute to the company's revenues by collecting fees for blending services and terminalling. Sunoco also owns and operates over 5,000 miles of crude oil pipelines in the southwest US. The company also engages in crude oil acquisition and marketing activities using about 170 transport trucks and about 110 unloading facilities.

Profit margins

Tesoro and Magellan have some of the most impressive profit margins in the pipeline industry. Sunoco Logistics is well behind, but they operate in a slightly different arena. Sunoco's acquisition and marketing activities carry far higher operating costs than simply managing pipelines. It has maintained a slim, but steady, profit margin over the past several years.

June 30, 2011

Sept. 30, 2011

Dec. 31, 2011

March 31, 2012

June 30, 2012

Tesoro Logistics

39.15

55.76

40.72

42.67

68.68

Magellan Midstream Partners

26.87

25.31

22.64

18.95

30.66

Sunoco Logistics Partners

3.29

2.84

1.83

2.34

4.01

Tesoro's profit margin of 68% is as high as a software company. I just can't expect it to continue with those incredible numbers. I'll be looking out for its third quarter earnings call. If they can maintain a 68% profit margin, I think I'll be doubling down on that investment.

Return on assets

In order to relate the efficiency of a pipeline operator's management, I like to look at how much profit they are able to squeeze out of every dollar of existing assets. A pipeline operator that spends a heap on a pipeline that is later unused should see a drop in its ROA. Conversely, an operator that carefully picks assets and manages them efficiently should have a much higher ROA.

I am calculating return on assets as the trailing 12 month net income divided by total assets from the most recent quarter. Tesoro Logistics LP's IPO was in late April 2011, so that is why I haven't displayed its ROA numbers for periods before Q2 2012.

June 30, 2011

Sept. 30, 2011

Dec. 31, 2011

March 31, 2012

June 30, 2012

Tesero Logistics LP

NA

NA

NA

NA

27.30

Magellan Midstream Partners

9.24

10.29

10.65

10.58

11.30

Sunoco Logistics Partners

7.95

5.22

5.23

5.85

6.74

Return on equity

A return on equity is the same as a return on assets with an important twist. It takes into account a company's liabilities, most importantly debt. A company with no debt will have a return on equity equal to its return on assets. Tesoro, Magellan, and Sunoco have the best returns on equity in the oil and gas pipelines industry. Essentially, this means that every dollar of yours that Tesoro hangs onto will become about $0.54 in net profits.

June 30, 2011

Sept. 30, 2011

Dec. 31, 2011

March 31, 2012

June 30, 2012

Tesoro Logistics LP

NA

NA

NA

NA

53.66

Magellan Midstream Partners

23.98

26.82

28.33

28.59

30.65

Sunoco Logistics Partners

34.89

22.57

23.28

26.34

29.49

The above table uses trailing 12 month net income and averages the past five quarters of book value of shareholders' equity to calculate ROE. This method is more sensitive to changes in equity that occur from quarter to quarter.

My main concern regarding these three companies is their increasing levels of debt over the past several years. Tesoro took on an additional $68 million of long term debt over Q2 2012 bringing their total to $118 million. Magellan Midstream's debt has more than doubled since 2008 from about $1 to $2.1 billion. Sunoco Logistics' long term debt has also more than doubled over the same time frame, from about $750 million to $1.6 billion.

Dividend yields

June 30, 2011

Sept. 30, 2011

Dec. 31, 2011

March 31, 2012

June 30, 2012

As of Oct. 19 2012

Tesero Logistics LP

0

1.03

1.81

2.74

2.74

3.70

Magellan Midstream Partners

5.03

5.06

4.52

4.38

4.59

4.20

Sunoco Logistics Partners

5.44

5.38

4.09

4.33

4.59

3.80

I'm not so worried about these companies offering yields lower than NuStar Energy's (NS) 8.4%, because their return on equity is so high. Rather than cut a dividend they can clearly offer you a greater return on your money by plugging it back into operations. Kinder Morgan Energy Partners LP (KMP) might be offering a 5.9% yield but they are only returning 13.83% on equity, a number that has been steadily declining since 2009.

Both Magellan and Sunoco move in tandem with the overall market, but the swings are less erratic. This is very important if you consistently use trailing stops as I do. Magellan's beta value is 0.36 and Sunoco's is an extremely low 0.23. I did not include Tesoro's beta value because it has only been trading since April 2011. Personally I like Tesoro best because of its promising return on assets, but any one of these three should provide you with steady returns over the next several years that will most likely beat industry darling Kinder Morgan.

Source: 3 High-Returning Pipeline Operators Poised To Pop