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:
- The businesses of midstream energy firms are generally not exposed to commodity price fluctuations. This is because pipeline and storage networks are being contracted by shippers for the long term and thus provide steady fee-based revenues.
- There is further impetus from remarkable growth in natural gas and crude oil production in North America. According to the U.S. Energy Information Administration (EIA), oil production in the United States will continue to grow through 2020 owing to ramped up activities in the prolific Permian basin. Natural gas production will also continue to increase over the same time frame, added EIA. Since midstream energy assets connect explorers and producers with refiners and key markets, growing production of the commodities are spurring demand for pipeline and storage assets.
- Mounting global demand for clean energy to curb greenhouse gas emission has given natural gas distribution business a palpable boost. Per EIA, in the United States, natural gas will account for 36% of total electricity generation in 2019, up from last year’s 35%. In 2020, the contribution of natural gas in the domestic market will bump up to 37%, added EIA.
Zacks Industry Rank Indicates Promising Prospects
The Zacks Oil and Gas - Production & Pipelines is a 17-stock group within the broader Zacks Oil - Energy sector. The industry currently carries a Zacks Industry Rank #101, which places it in the top 39% 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 impressive 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 & S&P 500
The Zacks Oil and Gas - Production & Pipelines has outpaced the broader Zacks Oil - Energy Sector as well as the Zacks S&P 500 composite over the past year.
The industry has risen 4.1% over this period against the S&P 500’s fall of 1.3% and the broader sector’s decline of 6.3%.
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 14.7X, higher than the S&P 500’s 10.5X. It is also above the sector’s trailing-12-month EV/EBITDA of 5.2X.
Over the past five years, the industry has traded as high as 23.9X, as low as 10.6X, with a median of 15.6X.
Trailing 12-Month Enterprise Value-to EBITDA (EV/EBITDA) Ratio
Midstream energy firms, belonging to the industry, paid a total of $1.7 billion in dividends through 2018, representing an increase of 28% year over year. Backed by a huge backlog of growth projects along with pipeline, storage and other midstream properties, the companies are well positioned to continue to reward stockholders.
Here, we are presenting five stocks which are positioned to grow in the near term.
SemGroup Corporation (SEMG): With its extensive midstream assets in North America, SemGroup connects refiners with explorers and producers of oil and natural gas. Over the past 60 days, the Zacks Rank #2 (Buy) company has seen the Zacks Consensus Estimate for 2019 bottom line climb to a profit of 28 cents from a loss of 32 cents.
Price and Consensus: SEMG
Ultrapar Participacoes SA (UGP): Headquartered in Sao Paulo, Brazil, Ultrapar is a leading distributer of liquefied petroleum gas in the country. Over the past 60 days, the Zacks #2 Ranked stock has witnessed its Zacks Consensus Estimate for 2019 earnings per share rise by more than 6%. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Price and Consensus: UGP
Enbridge Inc (ENB): The company is the operator of the longest pipeline network of crude in the world. For 2019, the Zacks Consensus Estimate for this Zacks Rank #3 company’s earnings per share has been revised upward from $1.66 to $1.73.
Price and Consensus: ENB
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 2019, this Zacks Rank #3 company is likely to see earnings growth of 12.4%. The company has also witnessed positive earnings estimate revisions for 2019 over the past 60 days.
Price and Consensus: KMI
TransCanada Corporation (TRP): The company’s natural gas pipeline network spreads across 57,100 miles, while the pipelines transporting liquids extends over 3,000 miles. TransCanada, with a Zacks Rank of 1, has witnessed 2019 earnings per share estimate revision to $2.88 from $2.85 over the past 60 days.
Price and Consensus: TRP
Zacks' Top 10 Stocks for 2019
In addition to the stocks discussed above, would you like to know about our 10 finest buy-and-holds for the year?
Who wouldn't? Our annual Top 10s have beaten the market with amazing regularity. In 2018, while the market dropped -5.2%, the portfolio scored well into double-digits overall with individual stocks rising as high as +61.5%. And from 2012-2017, while the market boomed +126.3, Zacks' Top 10s reached an even more sensational +181.9%.
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Ultrapar Participacoes S.A. (UGP) : Free Stock Analysis Report
TransCanada Corporation (TRP) : Free Stock Analysis Report
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Kinder Morgan, Inc. (KMI) : Free Stock Analysis Report
Enbridge Inc (ENB) : Free Stock Analysis Report
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