On May 21, Zacks Investment Research downgraded Tulsa, Okla.-based publicly traded energy pipeline partnership, Magellan Midstream Partners L.P. (MMP) to a Zacks Rank #3 (Hold).
Why the Downgrade?
Magellan Midstream primarily transports, stores and distributes refined petroleum products. The results for the partnership are directly exposed to the refined product demand, which is inherently volatile and subject to complex market forces, thereby affecting the partnership’s revenues, cash flows and distributions.
Moreover, although Magellan Midstream owns an attractive portfolio of energy infrastructure assets that generate stable and recurring fee and tariff-based revenues, unfavorable regulatory changes by the Federal Energy Regulatory Commission (FERC) would impact the partnership’s results. This will also increase the borrowing costs of Magellan Midstream and can depress the market value of its limited partner units.
Besides that, Magellan Midstream, like all other master limited partnerships (MLP), typically depends on equity and debt markets for financial growth. Market turmoil resulting from issues such as the recent sub-prime crisis, which hinders access to capital markets, might impact its growth prospects.
Additionally, with the growing popularity of renewable sources of energy such as wind and solar, companies associated with traditional sources of energy are facing tough competition. Although expensive, many customers are opting for these sustainable sources of energy for the environmental-friendly nature. This will likely impact the demand for the partnerships’ services.
Stocks to Consider
In the energy sector, three firms that are expected to significantly outperform the broader U.S. equity market over the next one to three months are CNOOC Ltd. (CEO), InterOil Corporation (IOC) and EPL Oil & Gas Inc. (EPL). All three firms currently retain a Zacks Rank #1 (Strong Buy).
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