Magellan: Bargain Buy in MLPs

09/30/2015 7:00 am EST

Focus: STOCKS

Jason Simpkins

, Outsiders Club

With oil prices in the tank, energy stocks have taken a beating; but if you believe, as I do, that oil prices are at least near their bottom, now would be a good time to start bargain hunting, suggests Jason Simpkins in the Outsider Club.

To be clear, I'm talking about the long game, which means taking an initial position now and adding to it piecemeal over the next year.

And, if you get a stock with a high-yield you can use the dividends to accumulate more shares.

And the best place to find high-yielding energy stocks are among MLPs, in particular, midstream pipeline companies that store and transport oil and gas.

What makes them so appealing, in addition to their lofty yields, is the fact that they get paid on volume. The more fuel they move, the more money they make.

That's important because oil and gas production have remained extremely robust in the face of low prices. Both are currently amid a glut, and rather than crushing production, low commodities prices have buoyed demand.

Of all the MLPs out there, I like Magellan Midstream Partners (MMP). Its assets include a 9,500-mile refined products pipeline system with 53 terminals.

I'm very bullish on the market for refined products, which are made cheaper by low oil prices.

The company also has 1,600 miles of crude oil pipelines and storage facilities with an aggregate storage capacity of 21 million barrels.

Additionally, it has five marine storage terminals with an aggregate capacity of 26 million barrels. That's beneficial because storage is in high demand right now.

Magellan boosted its full-year guidance for distributable cash flow by $10 million to $880 million, ensuring its ability to build on its robust track record of increasing cash distributions.

In July, Magellan raised its quarterly distribution by 16%, to $0.74 per unit. That was the 53rd distribution increase since the company's 2001 IPO.

At  current prices per unit, that equates to a 4.5% yield, which is well ahead of the stock market average (not to mention Treasuries). Better still, there's room for growth.

The average 12-month price target among brokers that cover the stock is $85. That's a near-30% increase from its current level.

The bottom line: Magellan is especially well suited to withstand the downturn in oil prices, its payouts are strong and reliable, and there's a surprising amount of growth potential.

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