Oil price is still extremely favorable for exploration and production activities. Higher upstream activities will possibly boost 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, NuStar Energy LP NS and Crestwood Equity Partners LP CEQP.
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 capacities to store oil, natural gas and petrochemical products. The partnerships are thus providing midstream services to 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 MLPs 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 $75 per barrel. Favorable oil price will probably aid explorers and producers to ramp up upstream activities, which might improve 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 MLPs belonging to the industry also have a minimal oil and gas volume risk. Owing to these factors, pipeline players will continue generating stable fee-based revenues.
Impressive Project Backlog: Many partnerships in the industry have a considerable 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 pay attractive distribution yields. Compared to the overall energy sector, partnerships belonging to the industry have rewarded 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 an 11-stock group within the broader Zacks Oil – Energy sector. The industry currently carries a Zacks Industry Rank #49, which places it in the top 20% 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 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 Outperforms Sector, Underperforms S&P 500
The Zacks Oil and Gas – Pipeline MLP industry has outperformed the broader Zacks Oil – Energy sector, but underperformed the Zacks S&P 500 composite over the past year. The industry has rallied 13% in the past year compared to the rise of 9% of the broader sector and a 14.4% improvement of the S&P 500, respectively.
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 10.23X, lower than the S&P 500’s 13.79X. It is, however, significantly above the sector’s trailing-12-month EV/EBITDA of 2.98X.
Over the past five years, the industry has traded as high as 15.26X, as low as 6.87X, with a median of 10.07X.
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 are among the highest in the midstream space, it can lean on its strong balance sheet to survive market turmoils.
Units of Enterprise Products, carrying a Zacks Rank #3 (Hold), have gained 11.3% so far this year, outpacing the industry’s 10.7% increase, backed by its low-risk business model. Major capital growth projects worth $6.1 billion, currently under construction, have contributed to this price performance.
NuStar Energy LP: NuStar Energy is a well-known player in the midstream space for being the nation’s leading operator of pipeline networks and liquids terminals. This depicts the firm’s stable business model for having significantly lower exposure to commodity price volatility. In the past year, the Zacks #1 Ranked stock has gained 17%, outpacing the industry’s 13% increase.
Crestwood Equity: Crestwood Equity, a well-known midstream energy player, also has a stable business model. The partnership’s midstream operations are centered around several prolific shale resources across the United States. The Zacks #2 Ranked stock has witnessed upward earnings estimate revisions for 2023 over the past 30 days.
Enterprise Products Partners L.P. (EPD): Free Stock Analysis Report
NuStar Energy L.P. (NS): Free Stock Analysis Report
Crestwood Equity Partners LP (CEQP): Free Stock Analysis Report
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