Magellan Midstream: Sellers Are Waiting Eagerly For You Here (NYSE:MMP)

Oil Refinery And Pipeline In Desert During Sunset

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Thesis

Magellan Midstream Partners (NYSE:MMP) reported its Q3 earnings release that outperformed the consensus estimates and its guidance.

MMP benefited from more robust rates, which lifted its transportation revenues, even though storage revenue continued to be tepid, as management attributed to “prolonged market backwardation.”

Robust performance from its forward hedges also helped management raise its guidance on MMP’s distributable cash flow (DCF) for FY22. Even its adjusted EPS (which excludes commodity-related adjustments) was 13% above its previous guidance, benefiting from stronger topline growth.

We assessed that the market had already anticipated a robust earnings report, as MMP staged a bottom in late September. As a result, we glean that the reward-to-risk profile doesn’t seem attractive as MMP closes in against its near-term resistance.

Investors should note that its critical resistance zone has denied buying upside decisively for MMP’s buyers since June 2021. Therefore, unless management increases its distribution markedly higher, we assess that MMP could continue to trade in a predictable and tight consolidation range.

As such, we urge investors to be cautious once more as MMP re-tests its resistance zone. Investors should wait patiently for MMP to retrace closer to its near-term support ($43.6) before adding more positions.

Accordingly, we reiterate our Hold rating on MMP.

Solid Earnings Lifted Magellan’s DCF Guidance For FY22

Magellan Distributable cash flow per share change % consensus estimates

Magellan Distributable cash flow per share change % consensus estimates (S&P Cap IQ)

Management raised its guidance for FY22’s DCF to $1.1B, up $10M from its previous outlook. The revised consensus estimates (neutral) are in line, expecting Magellan to post 2.8% YoY growth in its DCF.

While management has not guided for FY23 yet, it highlighted that it had been actively hedging forward blending as management accentuated:

We’ve also continued to make significant progress in hedging next year’s blending with 50% of our expected 2023 blending now hedged at an average margin of $0.65 per gallon. Broken down further, we have 70% of spring 2023 activity hedged at margins of $0.75 per gallon. Margins are attractive, so we’re locking in prices to the extent there’s opportunity and depth in the market to do so. (Magellan FQ3’22 earnings call)

Hence, management has astutely leveraged the current pricing dynamics to drive more robust DCF growth in FY23. Accordingly, Magellan’s FY23 DCF is estimated to increase by 8.2% YoY.

But, Is It Enough Against A Hawkish Fed?

An analyst on the call suggested management consider lifting its distribution higher as even the 2Y treasury yields reached 4.5% recently.

MMP last traded at an NTM dividend yield of 7.9%. Therefore, investors need to consider whether the risks of investing in MMP at the current yields make sense versus investing in 2Y T-bills, for instance.

As such, we deduce that the relatively lower spread could be putting pressure against the buying upside of MMP. The market is justifiably demanding a higher yield against MMP’s average dividend yields (10Y mean: 6.1%) to justify an investment in MMP.

Notwithstanding, management is confident that the situation would normalize subsequently as it believes that the current spreads are not sustainable. We are also in the Fed pivot camp and believe that the Fed’s rapid rate hikes should help bring down inflation rates significantly over the next couple of years.

Therefore, it should help MMP to improve its buying momentum moving forward.

Is MMP Stock A Buy, Sell, Or Hold?

Chart
Data by YCharts

MMP has performed remarkably for investors in 2022, posting a YTD total return of 21.3%. Notwithstanding, much of its recent gains could be attributed to the price recovery from its September lows, as MMP gained nearly 18% to its October highs.

MMP price chart (weekly)

MMP price chart (weekly) (TradingView)

Therefore, we assess it’s essential for investors to be more circumspect about their entry zones to improve their reward-to-risk profile, given its near-term challenges with a hawkish Fed.

We assessed its near-term resistance of $53.9 has proved to be a robust level that has consistently attracted intense selling pressure in its consolidation zone.

We gleaned that MMP’s recent rapid surge is also not constructive, as it closes in against that critical zone and could potentially re-test it.

Therefore, we urge investors not to jump on the bandwagon now and should wait patiently for a deeper pullback before adding more to positions.

The current support level of the consolidation zone appears to be at the $43.6 level, which has attracted buyers to enter and defend robustly. Hence, investors should wait for a pullback closer to that level before considering adding more. In addition, MMP’s NTM dividend yield of 10.8% at that level is also much more attractive for investors to consider.

As such, we reiterate our Hold rating on MMP.

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