Oil and gas prices are still extremely favorable for exploration and production activities. Higher volumes of the commodities are boosting demand for pipeline and storage assets, thereby brightening the outlook for the Zacks Oil and Gas – Pipeline MLP industry.
The partnerships are generating stable fee-based revenues from their long-term contracts with shippers. Having a huge backlog of growth projects, midstream players secure additional cashflows, depicting a stable and low-risk business model. Some of the frontrunners in the industry are Enterprise Products Partners LP EPD, Energy Transfer LP ET and Magellan Midstream Partners, L.P. MMP.
About the Industry
The Zacks Oil and Gas – Pipeline MLP industry comprises master limited partnerships (or MLPs) that primarily transport oil, natural gas, refined petroleum products and natural gas liquids (NGL) to consumers in North America. Apart from transporting the commodities, the partnerships have huge storage capacities to store oil, natural gas and petrochemical products. The partnerships are thus providing midstream services to both producers and consumers of the commodities. From all these transportation and storage assets, the partnerships generate stable fee-based revenues. The services provided by the partnerships entail the gathering and processing of commodities. The integrated midstream energy players also generate cashflows from ownership interests in fractionators and condensate distillation facilities.
What’s Shaping the Future of the Oil & Gas Pipeline MLP Industry?
Pipeline Demand to Improve: Oil price is trading at more than $85 per barrel. Favorable oil price is helping explorers and producers ramp up upstream activities, leading to higher production. This, in turn, is improving demand for crude transportation pipelines of the midstream players.
Stable Fee-Based Revenues: Most pipeline and storage assets are being booked by shippers for the long term, making midstream businesses less vulnerable to volatility in commodity prices. Backed by long-term contracts, the master limited partnerships belonging to the industry also have a minimal oil and gas volume risk. Owing to these factors, pipeline players will continue to generate stable fee-based revenues.
Impressive Project Backlog: Many partnerships in the industry have a huge backlog of growth projects worth billions of dollars. The projects will come online in a few years, securing additional cashflows for the pipeline players.
Attractive Distribution Yield: Oil and gas pipeline stocks are paying attractive distribution yields. Compared to the overall energy sector, partnerships belonging to the industry have been rewarding unitholders with significantly higher distribution yields over the past few years, providing reassurance that the midstream business is relatively more stable than upstream and downstream operations.
Zacks Industry Rank Indicates Bright Outlook
The Zacks Oil and Gas – Pipeline MLP industry is a 11-stock group within the broader Zacks Oil – Energy sector. The industry currently carries a Zacks Industry Rank #84, which places it in the top 32% of more than 250 Zacks industries.
The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates bright near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperform the bottom 50% by a factor of more than 2 to 1.
The industry’s position in the top 50% of the Zacks-ranked industries results forms a positive earnings outlook for the constituent stocks in aggregate. Before we present a few stocks that you may want to consider, let’s look at the industry’s recent stock-market performance and its valuation picture.
Industry Underperforms Sector, Outperforms S&P 500
The Zacks Oil and Gas – Pipeline MLP industry has underperformed the broader Zacks Oil – Energy sector, but outperformed the Zacks S&P 500 composite over the past year. The industry has gained 21% in the past year compared to the rise of 39.5% of the broader sector and a 3.4% decline of the S&P 500, respectively.
One-Year Price Performance
Industry’s Current Valuation
Since midstream-focused oil and gas partnerships use fixed-rate debt for the majority of their borrowings, it makes sense to value them based on the EV/EBITDA (Enterprise Value/ Earnings before Interest Tax Depreciation and Amortization) ratio. This is because the valuation metric takes into account not just equity but also the level of debt. For capital-intensive stocks, EV/EBITDA is a better valuation metric because it is not influenced by changing capital structures and ignores the effect of noncash expenses.
On the basis of the trailing 12-month enterprise value-to EBITDA (EV/EBITDA) ratio, the industry is currently trading at 11.00X, lower than the S&P 500’s 13.38X. It is, however, significantly above the sector’s trailing-12-month EV/EBITDA of 3.41X.
Over the past five years, the industry has traded as high as 15.79X, as low as 6.86X, with a median of 10.87X.
Trailing 12-Month Enterprise Value-to EBITDA (EV/EBITDA) Ratio
3 Oil & Gas Pipeline MLPs Leading the Pack
Enterprise Products Partners LP: Enterprise Products is a leading North American midstream infrastructure provider, generating stable fee-based revenues from its network of NGL, crude oil, natural gas, petrochemicals and refined products pipelines, spreading across more than 50,000 miles. Since Enterprise Products’ credit ratings is among the highest in the midstream space, it can lean on its strong balance sheet to survive any market turmoils.
Units of Enterprise Products, carrying a Zacks Rank #2 (Buy), have gained 24.3% so far this year, backed by its low-risk business model. Major capital growth projects worth $5.5 billion, currently under construction, have contributed to this price performance.
Price and Consensus: EPD
Energy Transfer LP: Energy Transfer has a huge network of midstream properties that comprise intrastate and interstate natural gas transportation and storage assets. Energy Transfer’s midstream business includes transportation assets for crude oil, natural gas liquids (NGL) and refined product. The interstate pipelines of ET, which spread across roughly 26,900 miles, have a throughput capacity of 31 billion cubic feet per day (Bcf/D).
Energy Transfer boasted that 95% of its revenues, derived from interstate pipelines, are based on fixed reservation fees. This signifies business stability and ensures handsome future distributions. Currently, Energy Transfer’s distribution yield is 7.8% versus the energy sector’s 5.04%. In fact, in the past year, the distribution yield of the #3 (Hold) Ranked stock has consistently been higher than the energy sector. You can see the complete list of today’s Zacks #1 Rank stocks here.
Price and Consensus: ET
Magellan Midstream Partners LP: Magellan Midstream has extensive petroleum midstream infrastructures that will be needed in the United States for decades to come. The business model of Magellan Midstream is resilient to commodity price fluctuations and derives stable fee-based revenues.
The cash distribution picture looks bright, with Magellan Midstream depicting a story of more than 20 years of annual distribution growth. With an investment-grade credit rating, Magellan Midstream has a strong balance sheet. The Zacks #3 Ranked stock has an excellent management team focusing consistently on creating long-term wealth for unitholders.
Price and Consensus: MMP
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Enterprise Products Partners L.P. (EPD) : Free Stock Analysis Report
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