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Why Magellan Midstream Partners Rallied 10% in May

By Matthew DiLallo – Jun 3, 2020 at 12:08PM

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Despite some challenges, this MLP rebounded last month.

What happened

Units of MLP Magellan Midstream Partners (MMP 2.52%) rose 10% in May, according to data provided by S&P Global Market Intelligence. That rally came even though the company warned investors that it wasn't immune to the downturn in the oil market.

So what

Magellan Midstream Partners reported its first-quarter results in early May. Overall, its earnings and cash flow held up reasonably well: Both declined by less than 4% despite all the turmoil in the oil market.

A dollar bill folded as an arrow that goes down but them back up higher.

Image source: Getty Images.

However, the company warned that plunging oil demand as a result of the COVID-19 outbreak would have an impact on its full-year results. The company estimated that it would only generate between $1 billion and $1.075 billion of cash flow this year, which is enough to cover its 9.2%-yielding distribution by a tight 1.1 to 1.15 times. That's down from its initial view that it would produce $1.2 billion in cash and cover its payout by at least 1.2 times.

Magellan only expects to retain about $75 million to $150 million in excess cash, which is well short of its planned $400 million capital program. That had some investors concerned the company might need to reduce its payout to cover the shortfall. However, thanks to its top-notch credit rating, the MLP was able to secure $500 million in low-cost debt last month despite all the market turbulence. That provided it with the funds to use on various things, including funding capital projects and refinancing existing debt.

Now what

Magellan was able to relieve the pressure on its distribution and valuation by securing new debt financing last month. Its payout seems increasingly likely to survive the current market downturn, especially since demand for oil and refined products has started rebounding as states reopen their economies. That makes it a highly attractive option for yield-seeking investors these days.

Matthew DiLallo has no position in any of the stocks mentioned. The Motley Fool recommends Magellan Midstream Partners. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Magellan Midstream Partners, L.P. Stock Quote
Magellan Midstream Partners, L.P.
$48.90 (2.52%) $1.20

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