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 processing and storing natural gas. Moreover, the companies have interests in natural gas distribution utilities and thereby serve millions of retail customers across North America.
Let’s take a look at the industry’s three major themes:
Although the price of oil has recovered since late April, the level is still significantly below the early 2020 mark of above $60 per barrel. A suppressed crude pricing scenario has provided little incentives to explorers and producers to produce more of the commodity. In fact, oil and gas resources across the world have been witnessing removal of rigs over the months, suggesting considerable production decline. Lower production is likely to hurt demand for midstream infrastructure assets, comprising pipeline networks and terminals.
Given lower commodity prices, the midstream energy players’ project backlog is likely to decline further, at least in the coming few months, until the world gets a vaccine that could possibly put an end to the coronavirus pandemic. Thus, declining project backlogs will lower the midstream firm’s fee-based revenues.
The consumption of natural gas in the industrial sector is likely to decline since there has been a drop in economic activities owing to the pandemic. With lower consumption, there has likely been a decline in demand for processing and storing natural gas, thereby hurting the midstream firm’s cashflow generation.
Zacks Industry Rank Indicates Bleak Prospects
The Zacks Oil and Gas - Production & Pipelines is a 13-stock group within the broader Zacks Oil - Energy sector. The industry currently carries a Zacks Industry Rank #171, which places it in the bottom 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 gloomy 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.
Before we present a few stocks that you may want to consider, let’s take a look at the industry’s recent stock-market performance and valuation picture.
Industry Outperforms Sector But Lags S&P 500
The Zacks Oil and Gas - Production & Pipelines has outpaced the broader Zacks Oil - Energy Sector but lagged the Zacks S&P 500 composite over the past year.
The industry fell 22.1% over this period as compared with the 34.7% decline of the broader sector and 15.4% improvement of S&P 500.
One-Year Price Performance
Industry’s Current Valuation
On the basis of the trailing 12-month enterprise value-to EBITDA (EV/EBITDA) ratio, which is a commonly used multiple for valuing oil and gas production & pipeline stocks, the industry is currently trading at 9.44X, lower than the S&P 500’s 12.67X. It is, however, above the sector’s trailing-12-month EV/EBITDA of 3.9X.
Over the past five years, the industry has traded as high as 20.8X, as low as 8.44X, with a median of 13.14X.
Trailing 12-Month Enterprise Value-to EBITDA (EV/EBITDA) Ratio
The near-term outlook of midstream energy companies seems gloomy since there have been lesser opportunities for firms to earn additional fee-based revenues with declining project backlogs. Despite the bleak prospects, midstream firms are relatively less exposed to coronavirus-induced oil price volatility since most of the assets are being utilized by shippers for a long term.
Considering the above-mentioned factors and the industry’s current dynamics, we are presenting four stocks which are positioned to grow in the near term, one of which carries a Zacks Rank #2 (Buy), with the rest carrying a Zacks Rank #3 (Hold).You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Pembina Pipeline Corporation (PBA): The company is a leading midstream energy service provider in North America. Over the past 30 days, the #2 Ranked stock has seen upward earnings estimate revisions for 2020.
Price and Consensus: PBA
Kinder Morgan, Inc. (KMI): The company has the largest network of natural gas pipeline in North America that spreads across almost 70,000 miles. Through 2020, the company is likely to see earnings growth of 5.3%. The company, carrying a Zacks Rank #3, has witnessed upward earnings estimate revisions for 2020 over the past 30 days.
Price and Consensus: KMI
DCP Midstream, LP (DCP) is a leading operator of midstream infrastructure properties in America. The Zacks Rank #3 stock has witnessed no revisions in its Zacks Consensus Estimate for 2020 earnings over the past seven days. For 2021, the stock has seen upward revisions for its consensus estimate over the same time frame.
Price and Consensus: DCP
Ultrapar Participacoes SA (UGP): Headquartered in Sao Paulo, Brazil, Ultrapar is a leading distributer of liquefied petroleum gas in the country. The Zacks #3 Ranked stock is likely to see earnings growth of 6.7% in 2020. You can see the complete list of today’s Zacks #1 Rank stocks here.
Price and Consensus: UGP
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