Midstream operations have lower exposure to volatility in commodity prices due to the very nature of their business model. This is brightening up the outlook for the Zacks Oil and Gas - Production & Pipelines industry.
Pipeline players are better off than upstream and downstream firms as they are generating stable fee-based revenues from their long-term contracts with shippers. Kinder Morgan, Inc. KMI, The Williams Companies Inc WMB and Transportadora de Gas del Sur S.A. (TGS) are among the frontrunners in the industry.
About the Industry
The Zacks Oil and Gas - Production & Pipelines industry comprises companies that own and operate midstream energy infrastructure assets. The properties consist of extensive pipeline networks that transport crude oil, liquids and natural gas. The midstream energy players are also involved in the processing and storage of natural gas. The companies have interests in natural gas distribution utilities, serving millions of retail customers across North America. Some companies are ramping up investments in renewable energy and power transmission businesses. The firms invested in wind farms, solar energy operations, geothermal projects and hydroelectric facilities. Thus, with a diversified portfolio of renewable energy projects, the companies have room to generate extra cash flows in addition to stable fee-based revenues from the transportation assets.
What's Shaping the Future of Oil & Gas - Production and Pipelines Industry?
Pipeline Demand to Improve: Oil price is trading at more than $85 per barrel. Favorable oil price is helping explorers and producers to continue to 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 companies 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 pipeline companies 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 Dividend Yield: Oil and gas pipeline stocks are paying attractive dividend yields. Compared to the overall energy sector, companies belonging to the industry have been rewarding shareholders with significantly higher dividend 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 Prospects
The Zacks Oil and Gas - Production & Pipelines is a 12-stock group within the broader Zacks Oil - Energy sector. The industry currently carries a Zacks Industry Rank #65, which places it in the top 26% of more than 250 Zacks industries.
The group’s Zacks Industry Rank, which is the average of the Zacks Rank of all the member stocks, indicates rosy near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperforms 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 from 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 Lags Sector, Outperforms S&P 500
The Zacks Oil and Gas - Production & Pipelines industry has lagged the broader Zacks Oil - Energy sector but outperformed the Zacks S&P 500 composite over the past year.
The industry has risen 12.3% over this period compared with a 36% improvement of the broader sector. The S&P 500 has declined 10.3% decline in the said time frame.
One-Year Price Performance
Industry's Current Valuation
Based on the trailing 12-month enterprise value-to EBITDA (EV/EBITDA), which is a commonly used multiple for valuing oil and gas production & pipeline stocks, the industry is currently trading at 13.31X, higher than the S&P 500’s 12.55X. It is also above the sector’s trailing-12-month EV/EBITDA of 3.48X.
Over the past five years, the industry has traded as high as 19.01X, as low as 8.81X and at a median of 13.51X.
Trailing 12-Month Enterprise Value-to EBITDA (EV/EBITDA) Ratio
3 Oil & Gas Pipeline Stocks Leading the Pack
Transportadora de Gas del Sur SA: Transportadora de Gas is responsible for transporting as high as 60% of gas consumed in Argentina. For the transportation of gas, Transportadora de Gas employs its pipeline network spreading across 5,700 miles. TGS is also a leading natural gas processor and carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Price and Consensus: TGS
Kinder Morgan: With its operating interests in oil and gas pipeline networks spread across 83,000 miles, Kinder Morgan is a leading energy infrastructure company in North America. KMI generates most of its earnings from take-or-pay contracts, generating stable fee-based revenues.
Kinder Morgan currently has a Zacks Rank #3 (Hold) and has gained 13.4% in the past year. KMI is poised to grow more on the back of its business model, which is relatively resilient to volume and commodity price risks.
Price and Consensus: KMI
The Williams Companies Inc: The Williams Companies is well poised to capitalize on the mounting demand for clean energy since it is engaged in transporting, storing, gathering and processing natural gas and natural gas liquids.
With its pipeline networks spread across more than 30,000 miles, The Williams Companies connects premium basins in the United States to the key market. With a Zacks Rank of 3 at present, WMB’s assets can meet 30% of the nation’s consumption of natural gas, which is utilized for heating purposes and clean-energy generation.
Price and Consensus: WMB
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