Magellan Midstream: High Quality, High Yield

Focus: ENERGY

Ari Charney Image Ari Charney Analyst and Associate Editor, Canadian Edge and Personal Finance

Magellan Midstream Partners LP (MMP) is a conservatively managed MLPs that did a superior job of weathering the energy sector’s downturn, observes Ari Charney, editor of Investing Daily's Utility Forecaster.

Recently, energy commodities have been selling off due to fears that OPEC has lost control of the oil market now that U.S. shale producers are running leaner and meaner.

The continuing glut of production has certainly put a ceiling on energy prices. The question now is whether $40 per barrel is the floor, or whether volatile commodity markets could push crude prices even lower.

Nevertheless, such uncertainty gives us another opportunity to pick up a high-quality, conservatively managed master limited partnership at a more reasonable price: Magellan Midstream Partners LP (MMP).

A key part of Magellan’s financial strength is its lack of incentive distribution rights (IDRs). Management had the foresight to eliminate the IDRs and acquire the general partner in a simplification transaction back in 2009.

Without IDRs, Magellan has been able to maintain a comfortable 1.3 times coverage of its quarterly distribution, while growing its payout 14% annually over the past three years.

Magellan also has one of the strongest balance sheets in the industry. Net debt to EBITDA (earnings before interest, taxation, depreciation, and amortization) for many MLPs averages around 4.5 times, while Magellan keeps its leverage at just 3.6 times.

In addition to prudent financial management, Magellan also benefited from having a largely demand-facing business amid a supply-induced crash.

 
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