We believe that there is a sizable upside in Magellan Midstream stock (NYSE: MMP) at the current price of $37, as it is down by 40% since the beginning of this year. It traded at a pre-Covid high of $58 in February before dropping to the lows of $26 in March. Despite a 2% fall in transportation revenue per barrel for the first six months of 2020, the company’s refined product and crude oil shipped volumes increased by 10% and 30%, respectively. In view of strong fundamentals and declining crude oil inventories, we believe that the stock has sizable growth potential in the near future. Our conclusion is based on our detailed analysis of Magellan Midstream’s stock performance during the current crisis with that during the 2008 recession in an interactive dashboard analysis.
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 51% 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.
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)
Magellan Midstream Partners vs S&P 500 Performance Over 2007-08 Financial Crisis
MMP stock declined from levels of around $9.80 in September 2007 (pre-crisis peak) to levels of around $8.60 in March 2009 (as the markets bottomed out), implying MMP stock lost 11% from its approximate pre-crisis peak. It recovered post the 2008 crisis to levels of about $13 in early 2010 – rising by 44% 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.
Magellan Midstream Partners’ Fundamentals in Recent Years Look Strong
MMP’s Revenues grew by 22% from $2.2 billion in 2015 to $2.7 billion in 2019, driven by rising benchmark prices and transportation fees. Also, the company’s margins expanded from 34% to 37%, resulting in a sizable 24% EPS growth from $3.81 in 2015 to $4.46 in 2019. Moreover, the company’s H1 2020 revenues and EPS increased by 7% and 8.6%, respectively, despite the steep fall in crude oil demand.
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
- July-October 2020: Poor Q2 results and lukewarm Q3 expectations, but continued improvement in demand and a decline in the number of new cases and progress with vaccine development buoy market sentiment
Going by the historical performance and in view of declining crude oil inventories, we believe that the stock can completely recover to pre-Covid levels supported by a strong cash position and improving top line.
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