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Magellan: Top-Tier MLP, Attractive Risk-Adjusted Yield, And The Dangers Of Indexing


  • MLPs are currently a modest 7.50% of the Institutional Income Plus portfolio. Magellan earns the highest weight within that allocation.
  • We'll outline why Megallan is not only an attractive company but is also attractively priced.
  • In line with WER's standard practice, we incorporate education into our first MLP-focused article with the goal that you'll be a little wiser in this area than yesterday.
  • This will include key aspects of MLP analysis and taxation.
  • Looking for a portfolio of ideas like this one? Members of Institutional Income Plus get exclusive access to our model portfolio. Start your free trial today »

Source: Company website

We all know happened to crude oil prices in 2014 and the resulting bankruptcy of a slew of master limited partnerships ("MLPs"), service providers, and upstream oriented energy companies. To start, let's put Magellan Midstream Partners (NYSE:MMP), the focus of this article, up against the popular Alerian MLP Index (AMLP) and see how it performed.

Source: Yahoo Finance and WER

The market had significantly higher confidence in Magellan than its peer group, as the above chart demonstrates. Even more impressive is the fact that Magellan is one of the Alerian MLP's largest holdings (9.98%). A major contributor to the market's confidence is the company's simplified business model.

  • Magellan is an investment grade MLP.
  • Magellan's structure does not incorporate incentive distribution rights ("IDRs"), which are to the detriment of unitholders long term.
  • Not only does Magellan utilize an independent board, but those members are chosen by the limited partner investor base rather than management. Strong corporate governance matters.

Including dividends, Magellan has generated a positive annualized return ~4% since the start of the commodity collapse and energy credit depression, compared to a -6% annualized loss for AMLP. I use depression because energy credits outside of strong investment grade traded lower in the period following the 2014 downturn than during the Great Recession as measured by traditional yield spreads, and many have yet to recover.

Most energy infrastructure master limited partnerships ("MLPs") experienced better financial performance in recent years than the average market participant probably believes given commodity prices. One of those skeptics' primary concerns, however, is potentially justified: even MLPs that managed to do well in the short term will eventually slash distributions if commodity prices remain depressed. Easier said than done, it is nonetheless critical to evaluate the bull and bear thesis thoroughly no matter your personal

Thank you for reading. Please let us know if you have any ideas you'd like us to explore.

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This article was written by

Experienced institutional investors tackle all angles of income investing

Williams Equity Research ("WER") is led by two portfolio managers with 30 years of combined market experience as hedge fund analysts, traders, due diligence officers, and leading complex and alternative investment research for large institutions. The portfolio managers have a CFA, BS in Business, BA in Economics, and MS in Engineering between them as well as numerous security licenses. WER analyzes individual stocks across all asset classes and global markets with a specialization in income, commodities, international stocks, and special situations.

Institutional Income Plus, WER's marketplace service, is its primary focus and applies an institutional quality risk management framework to investment opportunities in REITs, BDCs, dividend stocks, and credit oriented Closed-end funds and interval funds.

Analyst’s Disclosure: I am/we are long VLO, KMI, MMP, PSXP, EPD. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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