UKRAINE - 2019/02/06: In this photo illustration, the Magellan Midstream Partners Publicly listed ... [+] company logo seen displayed on a smartphone. (Photo Illustration by Igor Golovniov/SOPA Images/LightRocket via Getty Images)
Amid the broader momentum observed in oil stocks, Trefis believes that Magellan Midstream Partners (NYSE: MMP) has room for more growth due to relatively flat operating profit margin, negligible property impairments, strong cash generation, a single-digit decline in transportation volumes, and reduction in long-term debt obligations in 2020. Saudi-led production curtailments have provided a cushion to falling benchmark prices and supported the finances of upstream, midstream, and downstream operators. As a midstream company, MMP provides fee-based transportation and storage services including pipelines and gathering systems to producers and refiners. Higher U.S. crude oil production coupled with declining inventories are expected to assist the company’s revenues and earnings in 2021. Our interactive dashboard analysis highlights Magellan Midstream Partners’ stock performance during the current crisis with that during the 2008 recession.
Timeline of 2020 Crisis So Far:
- 12/12/2019: Coronavirus cases first reported in China
- 1/31/2020: WHO declares a global health emergency.
- 2/19/2020: Signs of effective containment in China and hopes of monetary easing by major central banks helps S&P 500 reach a record high
- 3/23/2020: S&P 500 drops 34% from the peak level seen on Feb 19, as Covid-19 cases accelerate outside China. Doesn’t help that oil prices crash in mid-March amid Saudi-led price war
- From 3/24/2020: S&P 500 recovers 75% from the lows seen on Mar 23, as the Fed’s multi-billion dollar stimulus package suppresses near-term survival anxiety and infuses liquidity into the system.
MMP Stock Price
In contrast, here’s how MMP and the broader market performed during the 2007/2008 crisis.
Timeline of 2007-08 Crisis
- 10/1/2007: Approximate pre-crisis peak in S&P 500 index
- 9/1/2008 – 10/1/2008: Accelerated market decline corresponding to Lehman bankruptcy filing (9/15/08)
- 3/1/2009: Approximate bottoming out of S&P 500 index
- 1/1/2010: Initial recovery to levels before accelerated decline (around 9/1/2008)
MMP Stock vs S&P 500 Performance Over 2007-08 Financial Crisis
MMP stock declined from levels of around $20 in September 2007 to levels of around $16 in March 2009 (as the markets bottomed out), implying MMP stock lost 20% from its pre-crisis level. It completely recovered post the 2008 crisis to levels of $22 in early 2010 – rising by 36% between March 2009 and January 2010. In comparison, the S&P 500 Index first fell 51% in the wake of the recession before recovering 48% by January 2010.
MMP’s Fundamentals To Improve With Rising Production Volumes and Stable Prices
MMP’s revenues grew by 9% from $2.5 billion in 2017 to $2.8 billion in 2019, supported by growth in crude oil gathering volumes. Improving net margin coupled with lower shares outstanding have led to a 17% jump in earnings per share. Recovery in benchmark prices and growing upstream production volumes have supported finances in recent quarters. With OPEC+ members extending production curtailments until there are clear signal of global macroeconomic rebound, midstream players in the U.S. are likely to benefit from sliding inventories and stable prices.
CONCLUSION
Phases of Covid-19 crisis:
- Early- to mid-March 2020: Fear of the coronavirus outbreak spreading rapidly translates into reality, with the number of cases accelerating globally
- Late-March 2020 onward: Social distancing measures + lockdowns
- April 2020: Fed stimulus suppresses near-term survival anxiety
- May-June 2020: Recovery of demand, with gradual lifting of lockdowns – no panic anymore despite a steady increase in the number of cases
- Since late 2020: Weak quarterly results, but continued improvement in demand and progress with vaccine development buoy market sentiment
Higher U.S. crude oil production coupled with declining inventories are likely to raise demand for midstream operators in 2021. Thus, MMP stock is likely to benefit from rising demand and stable prices.
With MMP stock gaining from the extension of OPEC curtailments, 2020 has created many pricing discontinuities which can offer attractive trading opportunities. For example, you’ll be surprised how the stock valuation for New Jersey Resources vs. World Wrestling Entertainment
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