Magellan Midstream a cash flow favorite
The pipeline partnership is supported by exceptional free cash flow and a strong balance sheet.
The lifeblood of a company's ﬁnancial strength is its ability to generate free net cash ﬂow. For this reason, I look at operating cash ﬂow before any investment decisions to get a truer picture of a company’s internal operational strength. I then deduct capital spending to determine the company’s ability to re-invest in its operations (as well as possibly pay dividends and repurchase shares) using only its internal cash ﬂow.
Drilling into my database of energy companies, one such company caught my eye: Magellan Midstream Partners LP (MMP), a pipeline master limited partnership.
Magellan has reported positive free cash ﬂow each quarter since the third quarter of 2009. Indeed, the second quarter produced the ﬁrm's highest net free cash flow ever. Magellan Midstream Partners has a $10 billion market capitalization with a 4.3% dividend yield.
The ﬁrm engages primarily in the transportation, storage and distribution of reﬁned petroleum products in the United States. Magellan also owns and operates storage terminals that have capacity of approximately 36 million barrels.
Its ﬁnancial strengths include growing EBITDA, exceptional free cash ﬂow generation, a strong balance sheet with above average EBITDA-to-interest expense coverage ratio, no general partner incentive distribution rights and very low to insigniﬁcant short interest exposure.
I like Magellan’s outlook as an infrastructure player building pipeline capacity from main oil producing regions like the Permian and Eagle Ford.
The stock is registering positive momentum and resilient technical strength. The attractive dividend yield also provides a ﬂoor of support to the stock.
I recommend buying modest amounts, particularly on any stock pullbacks toward immediate support at $84.03. Place a ﬁrm stop-order limit at $79.10.
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Serious issues like drought and the deterioration of the developed world spell opportunity for this industry leader.
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