Magellan Midstream's Marketing Affiliate Proposal Denied

Magellan Midstream Partners, L.P.’s (NYSE:MMP) proposal to build a marketing affiliate has been turned down by the U.S. Federal Energy Regulatory Commission (FERC). This affiliate was expected to focus on buying, selling and transporting oil. It was first proposed in November 2016.

Magellan Midstream believes the affiliate would have benefited both the partnership and its clients by focusing on improving operations of its underutilized pipelines. Some of the peers of this energy infrastructure provider have similar marketing affiliates. TransCanada Corporation (TO:TRP) — a Calgary, Canada-based energy infrastructure company — has its marketing affiliate Marketlink LLC. Similarly, Plains All American Pipeline, L.P. (NYSE:PAA) — a Houston, TX-based partnership — has Plains Marketing, L.P.

Reason Behind the Disapproval

Per FERC, the Interstate Commerce Act prevents a firm to charge different rates for the same services to its clients. The proposal from Magellan Midstream would have established an illegal rebate as the proposed transactions show the marketing affiliate desires to offer capacity below cost, thus violating the Act.

Additionally, the proposal sought permission for not publishing the arrangements between the partnership and the subsidiary, which could evade the publication requirements.

About the Partnership

Magellan Midstream is a master limited partnership that owns and operates a diversified portfolio of energy infrastructure assets. This Tulsa, OK-based partnership primarily transports, stores, and distributes refined petroleum products and, to a lesser extent, ammonia. Currently, the partnership performs its operations via three segments — Refined Products, Crude Oil and Marine Storage.

Furthermore, Magellan Midstream has established a track record of consistent distribution growth. It recently announced a distribution of 90.5 cents per unit ($3.62 per unit annualized), 2% higher than the previous payout and 8% higher than the year-ago quarter figure. In 2016, the partnership achieved its annual distribution growth target of 10%. For both 2017 and 2018, Magellan Midstream projects annual distribution growth of at least 8%.

However, Magellan Midstream is facing pressure related to the balance sheet. Over the past five years (2012-2016), long-term debt increased at a CAGR of 14%. Continued rise in project outlays and tough operating environment are the primarily reasons for rise in debt.

While the partnership is taking initiates to reduce its indebtedness, it will take some time to witness a rebound. So far this year, units of Magellan Midstream has lost 12.3% compared with 22.9% decline of the industry it belongs to.

Zacks Rank & Stock to Consider

Magellan Midstream carries a Zacks Rank #3 (Hold). A better-ranked stock in the oil and energy sector is ConocoPhillips (NYSE:COP) sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

ConocoPhillips is a major global exploration and production company. This Houston, TX-based company’s sales for 2017 are expected to increase 24.4% year over year. It also delivered an average positive earnings surprise of 152.3% in the last four quarters.

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