3 Oil & Gas Pipeline Stocks to Gain Despite Industry Challenges
Although the midstream energy business is less exposed to oil and gas price volatility, the Zacks Oil and Gas - Pipeline MLP industry’s outlook is still subjected to uncertainties. Due to conservative capital spending by upstream players, the growth of production volumes could get dented, hurting demand for partnerships’ midstream assets.
Despite the uncertainties, pipeline players are better off than upstream and downstream firms since the partnerships generate stable fee-based revenues from their long-term contracts with shippers. The industry frontrunners include Enterprise Products Partners LP EPD, Energy Transfer LP ET and Plains All American Pipeline LP PAA.
About the Industry
The Zacks Oil and Gas - Pipeline MLP industry comprises master limited partnerships (or MLPs) that are primarily engaged in transporting 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 both producers and consumers of the commodities. The players generate stable fee-based revenues from all those transportation and storage assets. 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?
Soft Pipeline Demand: The consensus among most analysts is that inflation remains elevated, above the target range, leading to energy market volatility. The uncertain inflation outlook may dampen fuel demand, potentially affecting commodity production. Consequently, this would have repercussions on the demand for oil pipeline assets held by the partnerships.
Shift to Renewables: Energy majors will increasingly face challenges in providing sustainable energy to the world while reducing greenhouse gas emissions. Thus, to address the issue of climate change, there will be a gradual shift from fossil fuel to renewable energy. This will lower the demand for the partnerships’ pipeline and storage networks for oil and natural gas.
Explorers’ Conservative Capital Spending: Oil and gas exploration and production companies are facing heightened pressure from investors to focus on stockholders’ returns rather than production. This is hindering the production growth of commodities, thereby denting demand for pipeline and storage assets.
Zacks Industry Rank Indicates Gloomy Outlook
The Zacks Oil and Gas - Pipeline MLP industry is a seven-stock group within the broader Zacks Oil - Energy sector. The industry currently carries a Zacks Industry Rank #161, which places it in the bottom 36% 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 bearish 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.
Before we present a few oil and gas pipeline MLPs that you may want to consider for your portfolio, let’s take a look at the industry’s recent stock market performance and current valuation.
Industry Outperforms Sector & S&P 500
The Zacks Oil and Gas - Pipeline MLP industry has outperformed the broader Zacks Oil - Energy sector and the Zacks S&P 500 composite over the past year. The industry has surged 37.1% in the past year, surpassing the 34.6% growth of the S&P 500 and the 16.9% improvement of the broader sector.
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 11.29X, lower than the S&P 500’s 15.15X. It is, however, significantly above the sector’s trailing 12-month EV/EBITDA of 4.21X.
Over the past five years, the industry has traded as high as 14.04X and as low as 6.69X, with a median of 9.81X.
Trailing 12-Month Enterprise Value-to EBITDA (EV/EBITDA) Ratio
3 Oil & Gas Pipeline MLPs Trying to Survive the Industry Challenges
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 across more than 50,000 miles. Since Enterprise Products has among the highest credit ratings in the midstream space, it can lean on its strong balance sheet to survive any economic turmoils.
Enterprise Products, carrying a Zacks Rank #3 (Hold), has witnessed upward earnings estimate revisions for 2024 in the past 30 days.
Price and Consensus: EPD
Plains All American Pipeline also enjoys stable fee-based revenues banking on its oil and natural gas pipeline network and storage assets. In the past year, the Zacks #3 Ranked stock has gained 51.5%, outpacing the industry’s 35.6% increase. You can see the complete list of today’s Zacks #1 Rank stocks here.
Price and Consensus: PAA
Energy Transfer has a stable business model with its huge pipeline network of natural gas, oil and refined petroleum products across 125,000 miles. The partnership has midstream assets in all the key basins in the United States, thereby generating stable fee-based revenues.
Energy Transfer, carrying a Zacks Rank #2 (Buy), has offered a higher dividend yield than the composite stocks belonging to the industry over the past year. For this year, the partnership has witnessed upward earnings estimate revisions over the past 60 days.
Price and Consensus: ET
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Enterprise Products Partners L.P. (EPD) : Free Stock Analysis Report
Plains All American Pipeline, L.P. (PAA) : Free Stock Analysis Report
Energy Transfer LP (ET) : Free Stock Analysis Report
