Magellan to Reverse Texas Pipeline - Analyst Blog

Oil pipeline and storage partnership Magellan Midstream Partners L.P. (MMP) has decided to reverse the direction of flow on a section of a south Texas refined petroleum pipeline and start using it to transport crude oil to Houston area refineries. The initiative – which aims to take advantage of the supply glut at the key delivery hub of Cushing, Oklahoma – is likely to be operational within 18 to 24 months.      

Magellan said that it is moving forward with permitting and final engineering plans for the potential reversal of the Houston-to-El Paso pipeline (the former Longhorn Pipeline), which Magellan purchased for about $250 million in 2009. The system – running 700 miles from Houston to El Paso, passing through Central Texas – currently carries about 90,000 barrels per day of refined products (such as gasoline) from Houston to West Texas. 

However, buoyed by recent market dynamics, Magellan has been looking to cash in at the benefits of reversing and switching a portion of the line to send crude to Houston refineries from fields in the Permian Basin of West Texas. The expected reversal of flow – of up to 200,000 barrels per day of crude – has received enough interest from potential shippers, thereby justifying the project.         

According to Magellan, its pipeline system, together with the crude oil distribution system bought last year, would offer the most direct and cost-efficient route to supply West Texas crude oil from new outlets to producers on the Houston Ship Channel and Texas City.

A final decision on the project will be taken by Magellan following the execution of binding agreements, likely to be within the next two months.

Tulsa, Oklahoma-based Magellan Midstream owns and operates a diversified portfolio of energy infrastructure assets. The partnership primarily transports, stores, and distributes refined petroleum products and, to a lesser extent, ammonia.

Magellan units currently retain a Zacks #3 Rank, which translates into a short-term Hold rating. We are also maintaining our long-term Neutral recommendation on the partnership.

We appreciate Magellan's highly stable/recurring cash flows, low cost of capital and strong distribution coverage. Additionally, the partnership – with more than $500 million of potential projects under development – has an attractive growth potential, while maintaining a sound liquidity position.

However, we continue to believe that the operating scenario for pipeline operators will remain critical. Other concerns for Magellan are weak demand for refined products and the slow economic revival. As such, we believe Magellan Midstream's current valuation adequately reflects its fairly balanced risk/reward profile with limited upside potential.

Magellan Midstream competes in the ‘Oil/Gas Production Pipeline MLP' industry with firms like Duncan Energy Partners L.P. (DEP), Enbridge Energy Management LLC (EEQ), etc.